Item 1. DESCRIPTION OF BUSINESS
When used in this Form 10-KSB, the words "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties, including those set forth below under "Risks and Uncertainties," that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. Wellstone expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. This discussion should be read together with the financial statements and other financial information included in this Form 10-KSB.
General
Wellstone Filters, LLC was founded in February, 1998 by Dr. Carla Cerami Hand at Cerami Consulting Company. In connection with its research on diabetes, Cerami Consulting investigated the impact of smoking on diabetes and then decided to investigate the possibility of developing a filter technology that would remove carcinogens without impacting flavor. As a result of their research, Cerami Consulting has filed for US and international patents on the technology and licensed it and related patents to Wellstone LLC for potential commercialization. The US patent has been issued (September 19, 2000, U.S.Patent 6,119,701) and international patents are pending.
The filter technology, referred to internally as 3C904, has been tested by Wellstone LLC in small manufacturing batches. Wellstone LLC has held discussions with several major manufacturers for licensing or supply contracts, but no contracts have been entered into nor are any under negotiation. All testing performed on 3C904 to date have been for developmental purposes only. Use of the technology in cigarettes manufactured for U.S. sale is dependent upon completion of an FTC standardized test for tars, nicotine and carbon monoxide.
On May 25, 2001, Wellstone LLC was acquired by Farallon Corporation, a publicly reporting corporation formed solely to seek for and make an acquisition. Farallon Corporation acquired all of the outstanding membership interests of Wellstone LLC in exchange for 70,000,000 common shares of Farallon Corporation. In addition, Farallon Corporation issued 1,989,400 shares of common stock in cancellation of debt. As a result, there are 78,989,400 shares outstanding. The members of Wellstone LLC own the majority of the combined company. Accordingly, the combination has been accounted for as a reverse acquisition, under which, for accounting purposes, Wellstone LLC is the accounting acquiror, and Farallon Corporation is accordingly the accounting acquiree. As is customary in a reverse acquisition, only the historical financial statements of Wellstone LLC, the accounting acquiror, are presented for periods prior to the acquisition. Farallon Corporation, incorporated in 1994, subsequently changed its name to Wellstone Filters, Inc. References to Wellstone in this prospectus refer to the combined entity.
Risks and Uncertainties
We are still in the Research and Development Stage and have not received any revenues.
Wellstone's activities have been limited to research and development, medical testing and initial marketing. We have not received any revenues or income since inception and we don't know if at all, when we will receive revenues. Wellstone might not be able to find a market for its products, achieve a significant level of sales or attain profitability. . As a result of the significant operating expenses related to start up operations, operating results will be adversely affected if significant sales do not materialize, whether due to competition or otherwise. Wellstone might not be able to obtain required funding, or be able to grow in the future or attain profitability. Wellstone might not be able to implement its business plan in accordance with its internal forecasts or to a level that meets the expectations of investors.
We Are Dependent on the Domestic Tobacco Business, which is contracting.
Substantially all of our revenues are expected to be derived from sales in the United States. The U.S. cigarette business has been contracting in recent years. If the U.S. cigarette market continues to contract, it could adversely affect our potential future sales, operating income and cash flows.
We Need a Strategic Partner to help us enter the market.
The cigarette industry is dominated by relatively few companies. Entry is difficult and less than 2% of filters are outsourced. We can't expect to achieve widespread acceptance of our filter technology without entering into supply agreements with one or more cigarette manufacturers. We might not obtain any supply agreements. Prior to any agreement we need to subject the filter technology to further testing. This testing will be expensive and favorable test results do not guarantee that a supply contract will be entered into. We believe that the commercial use of our filter technology is not only dependent on its safety and efficacy, but also its marketability to consumers, we will need to convince one or more major tobacco companies that using our filter technology will enable it to achieve or maintain profitability or market share.
We don't have any production facilities unless we acquire them or contract out production.
To date we have only manufactured the filter material in small batches. Problems in purchasing equipment, establishing manufacturing facilities and meeting demand can be expected. If we cannot produce filter material or outsource production we cannot obtain sales revenues.
Competition could prevent us from meeting our objectives.
The cigarette industry is highly competitive. We encounter competition from developers of low-carcinogen tobacco and developers of other filter technology, which may have substantially greater financial, manufacturing, marketing and other resources than we do. Another company could develop filter technology similar to ours. Competition will affect our ability to market our product and obtain financing.
Our filter May Not Be Accepted by Smokers.
Our filter may not be accepted ultimately by adult smokers. Adult smokers may decide not to purchase tobacco products made with our filters due to taste or other preferences, and sales of filters with our technology would be adversely affected.
The Cigarette Industry is Subject to Substantial and Increasing Regulation and Taxation and this can only have a negative impact on us.
Various federal, state and local laws limit the advertising, sale and use of cigarettes, and these laws have proliferated in recent years. If this trend continues, it may have material and adverse effects on potential sales, operating income and cash flows. In addition, cigarettes are subject to substantial and increasing excise taxes. Increased excise taxes may result in declines in overall sales volume. This result could adversely affect the market for our product.
The U.S. Food and Drug Administration ("FDA") has promulgated regulations governing the sale and advertising of tobacco products. These regulations are designed primarily to discourage the sale to, and consumption by, adolescents and children. The authority of the FDA to promulgate such regulations was challenged in the federal courts. On March 21, 2000, the United States Supreme Court in a five to four decision held that the Congress has not given the FDA authority to regulate tobacco products as customarily marketed. Given the decision by the Supreme Court it is unclear whether the Congress in the future will act to grant such authority to the FDA, although legislation that would create such authority has already been introduced in Congress. See "Government Regulation."
We might get sued and insurance possibly won't cover our losses.
There are currently several pending legal actions affecting the tobacco industry, including proceedings and claims arising out of the sale, distribution, manufacture, development, advertising, marketing and claimed health effects of cigarettes. We may be named as a defendant in the future as there has been a noteworthy increase in the number of these cases pending. Punitive damages, often in amounts ranging into the hundreds of millions, or even billions of dollars, are specifically pleaded in a number of these cases in addition to compensatory and other damages. We don't yet have any product liability insurance, and if such can be obtained it probably would be very limited in scope of coverage to any claims that tobacco products manufactured by or for us contain any foreign object. Such insurance probably does not cover health-related claims such as those that have been made against the major manufacturers of tobacco products. We do not believe that such insurance currently can be obtained. Accordingly, our inclusion in any of these actions or any future action could have a material and adverse effect on our financial condition.
If we are successful, we might not be able to hire employees and manage a bigger enterprise.
If we are successful in obtaining market acceptance for our products, we will be required to manage substantial volume from our customers. To accommodate any such growth and compete effectively, we will be required to attract, integrate, motivate and retain additional highly skilled sales, technical and other employees. We face competition for these people. Our ability to successfully manage such volume also will be dependent on our ability to set up any production operations. We or any person contracted with to produce our filter in commercial quantities might not be able to overcome the challenge of setting up any production operations, and our personnel, systems, procedures and controls might prove inadequate to support our future operations. Any failure to implement and improve our operational, financial and management systems or to attract, integrate, motivate and retain additional employees required by future growth, if any, could have a material and adverse effect on our business and prospects, financial condition and results of operations.
We may not be able to protect our patent against infringement.
Our success in commercially exploiting our proprietary technology depends in large part on our ability to defend our issued patent, to obtain further patent protection for the technology in the United States and other jurisdictions, and to operate without infringing upon the patents and proprietary rights of others. Additionally, we must be able to obtain appropriate licenses to patents or proprietary rights held by third parties if infringement would otherwise occur, both in the United States and in foreign countries. Our primary patent has only issued in the United States and not in foreign jurisdiction. If international patents are not issued, it would adversely affect our competitive advantage, with respect to sales outside the United States.
Patent positions, including our patent positions (owned or licensed) are uncertain and involve complex legal and factual questions for which important legal principles are unresolved. Any conflicts resulting from third party patent applications and patents could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. If patents are issued to other companies that contain competitive or conflicting claims, we may be required to obtain licenses to these patents or to develop or obtain alternative technology. Such licensing agreements, if required, may be unavailable on acceptable terms or at all. If such licenses are not obtained, we could be delayed in or prevented from pursuing the development or commercialization of our products. It is possible that there exists issued or pending patents which conflict with or potentially infringe on our patent.
Litigation which could result in substantial cost may also be necessary to enforce any patents to which we have rights, or to determine the scope, validity and unenforceability of other parties' proprietary rights which may affect our rights. U.S. patents carry a presumption of validity and generally can be invalidated only through clear and convincing evidence. We may also have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of an invention, which could result in substantial cost. Our licensed patents might not be held valid by a court or administrative body or that an alleged infringer would be found to be infringing. The mere uncertainty resulting from the institution and continuation of any technology-related litigation or interference proceeding could have a material and adverse effect on our business and prospects.
We may also rely on unpatented trade secrets and know-how to maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and others. These agreements might be breached or terminated, or we might not have adequate remedies for any breach, and our trade secrets might otherwise become known or be independently discovered by competitors.
If we lose our management it would damage our business.
We depend upon the continued services of our senior management for our continued success. The loss of the Company's Chief Executive Officer, Learned Jeremiah Hand, could have a serious negative impact upon our business and operating results. We do not have an employment agreement with Mr. Hand, and we have not obtained "key-man" life insurance with respect to his life.
Our Auditors have Rendered a Qualified Opinion on our Financial Statements.
Our auditors have qualified their opinion on our financial statements as to our ability to continue as a going concern. If our business is ultimately unsuccessful, the assets on our balance sheet could be worth significantly less than their carrying value and the amount available for distribution to stockholders on liquidation would likely by insignificant.
No cash dividends have or will be paid.
Wellstone has not paid any cash dividends on its capital stock. Wellstone anticipates that its future earnings, if any, will be retained for use in the business, or for other corporate purposes, and it is not anticipated that any cash dividends on its common stock will be paid in the foreseeable future. Investors cannot expect to receive any dividends or other periodic income on their investment.
Penny Stock rules could make it hard to resell your shares.
The Penny Stock rules will apply to the trading of our stock. Wellstone's common stock does not meet the listing requirements for any trading market other than the OTC Bulletin Board. The OTC Bulletin Board may not approve our listing. Consequently, the liquidity of Wellstone's securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of transactions, reduction in security analysts' and the news media's coverage of Wellstone, and lower prices for Wellstone's securities than might otherwise be attained.
In addition, the "penny stock" rules limit trading of securities not traded on NASDAQ or a recognized stock exchange, or securities which do not trade at a price of $5.00 or higher, in that brokers making trades in those securities must make a special suitability determination for purchasers of the security, and obtain the purchaser's consent prior to sale. The application of these rules may make it difficult for shareholders to resell their shares.
Management owns so many shares, it will be difficult to carry out hostile takeovers. This could affect the value of our stock price.
Management owns 54,600,000 shares, or 69% of the outstanding shares. Management is able to elect all the board of directors and otherwise control Wellstone and its operations, and other shareholders will have little, if any control over Wellstone's management. The concentration of control in management will discourage takeover attempts such as tender offers, and the purchase of shares by persons who wish to acquire control of Wellstone. Stockholders will likely not be able to benefit from a rise in share prices which usually accompanies hostile takeovers.
Management devotes little time to our business, has limited experience and may make lots of mistakes.
Management has very limited experience in managing business enterprises. The executive officer of Wellstone is currently devoting about 80% of his time to the business.. See "Management." We also will need to locate and hire additional personnel. We may not be able to find such personnel, especially in an expanding economy or we might not be able to afford to pay market rate salaries or hourly compensation. Management will in all likelihood make mistakes due to inexperience, and this could affect the operating results.
We could change the strategy we outline in this report.
Although we have no current plan to do so, we may change our strategy for the development and marketing of the 3C904 technology in the future. Our business plan might not be effected as set forth herein.
The Tobacco and Cigarette Industry
Annual U.S. sales of cigarettes in 2000 were 420 billion. Approximately 44.5 million adult Americans smoke; worldwide, the figure is estimated to be 1.1 billion people. The market share of five major U.S. cigarette manufacturers in the first half of calendar 2001 was as follows:
U.S. Market Share Phillip Morris Cos., Inc. 50.5% RJ Reynolds 23.6% British American Tobacco Industries Subsidiary of Brown & Williamson 10.5% Lorillard 8.7% Liggett & Meyers 1.9% -------- Total 95.2%
Filters
Almost all cigarettes sold are filtered. Worldwide, 93% of the 5.3 trillion cigarettes sold in 1999 were filtered. Four types of material are used in filters: cellulose acetate (68%), polypropylene (21% primarily in China) pure cellulose (less than 1%), and granular additive filters such as activated charcoal (1%). Activated charcoal filters are efficient having been proven to reduce carcinogenicity. However, activated carbon filters also remove much of the taste and nicotine, and have probably not become more popular due to this reason. In management's opinion, the development of a "safe" or "safer" cigarettes has been slow due to two factors. First, the manufacturers had no interest in developing "safer" cigarettes since to do so would be an admission that smoking was prejudicial to health, which would adversely impact sales and lead to liability. We think this is no longer a factor due to overwhelming consensus that smoking is unhealthy, and the 1996 settlement between the Federal government and the tobacco companies.
Second, an effective filter (such as activated charcoal) also is likely to remove that substance in tobacco smoke which makes smoking a pleasurable or addictive habit - nicotine.
Cigarette manufacturers produce their own filters, or purchase from outside manufacturers, principally Baumgartner, Ltd. with $226 million filter sales in 1999, and Filtrona Richmond, Inc. with $100 million in filter revenue in 1999.
Another device used to enhance filter performance is to make perforations around the base of the filter for ventilation. The introduction of air dilutes the smoke, but this device can be circumvented by the smoker by covering the perforations with the fingers.
Harmful components of tobacco smoke
Tobacco smoke is comprised of atmospheric and other gases, particulate matter, and hundreds of chemical compounds. Tar is condensed tobacco smoke. Nicotine is the addictive substance in tobacco smoke. In the doses found in cigarette smoke carbon monoxide reduces the blood's ability to carry oxygen. Known carcinogens include benzene, 2-napthylamine, 4-amino byphenyl and radioactive polonium-210. Potential carcinogens include N-nitrosodiethylamine, N-nitrosopyrrolidine, benzoapyrene, N-nitrosodieth aholomine and cadmium..
Our filters removes most carcinogens
Our filter material works by trapping nucleophiles in tobacco or produced during combustion. 250 milligrams of the filter material is inserted into a compartment in a cellulose acetate filter. We found through testing that more than 250 mg requires excess inspiratory force.
Our filter material is the subject of U.S. Patent 6,119,701, "Methods, agents and devices for removing nucleophilic toxins from tobacco and tobacco smoke", issued September 19, 2000, to Anthony Cerami, a shareholder, and stockholders and officers, Dr. Carla Cerami Hand M.D./Ph.D. and Dr. Peter Ulrich Ph.D. Compounds in the filter material include periodate-oxidated (dialdeyhde) devivaties of the polysaccarides cellulose, starch and agarose. A 15-30 mesh of dustfree granules is then bound into a matrix of agarose, cellulose, chitosan dextran and/or polyvinylpryrolidon, regranulated and inserted into conventional cellulose acetate filters.
We do not intend to market the filter separately, nor do we intend to market directly to consumers. Rather, we intend to sell filters directly to manufacturers to be integrated into the final cigarette, or to license the technology to them.
Wellstone has also developed a next generation granular formulation of 3C904, suitable for insertion in a filter cavity such as employed for activated charcoal filters. This compound has been found to reduce levels of tested carcniogins by 24% with 50 milligrams of the new material. Our current research and development efforts are focused on developing selecvtivity We anticipate that the next formulation of #C904 will be ready for testing by April 15, 2004.
Results of In-house Testing.
The patent developers have tested the 3C904 filter technology in a biopharmaceuticals laboratory, using standard cigarette filter material (cellulose acetate) containing the compound. However, these tests, although indicative that 3C904 removes a measurable level of other harmful substances, cannot be taken to imply that any specific level of reduction will occur in production cigarettes. Variables such as the mix of tobacco used, manufacturing additives, and FTC testing methodology will all cause variations in the actual percentage of harmful materials removed.
The Ames test is a standard test used to measure mutagenicity by exposing the smoke (filtered and unfiltered) to a strain of Salmonella bacteria. The Ames test demonstrated that the 3C904 filter removed a majority of mutagens compared to the control cigarette.
The Greiss test measures nitrosamines, which are contained in cigarette smoke and believed to be carcinogenic. With the 250 milligram level of concentration of 3C904 in the Wellstone filter a majority of the nitrosamines were removed.
Taste is highly subjective. We need to conduct, whether ourselves or through independent testing organizations, consumer taste tests to determine whether our filter will be accepted by consumers.
Marketing
We have engaged in preliminary discussions with several manufacturers in the tobacco industry. We think that an independent cigarette test will be necessary in order to proceed further with negotiations with any manufacturer. This test will cost an estimated $15,000. We hope that following successful completion of the additional tests, we can interest one of the bigger manufacturers to make an equity investment in us and/or guarantee minimum purchases of our product. Without such an alliance we think entry into the market will not be possible. Even if our filter technology continues to be proven effective, we think that its success depends on whether or not smokers will be perceived to value a filter that removes nearly all carcinogens. Manufacturers have demonstrated some interest in "healthier" cigarettes. See "Competition."
International Markets; Acquisitions
Wellstone is investigating the international potential of its proprietary compound, especially in Europe and Asia where smoking levels are much higher than in the United States and Canada. We are also considering one or more acquisitions if such can be synergistic with our current business, but no agreements have been reached for any acquisitions.
Manufacturing, Property and Employees
The material requires commercially available equipment for its manufacture. If we manufacture the material ourselves, we will need to rent initially 3,000 square feet of manufacturing facility, and require 3 manufacturing employees.
Currently we don't intend to produce any filters other than for testing purposes. However, it would be possible to produce ourselves, and we intend to establish a prototype manufacturing facility.
We have no employees now other than our officers and one clerical person, which spend most of their time working for affiliated companies, and our Director of Research, who devotes full time. . If we obtain funding we intend to hire 2 persons for sales, 3 for manufacturing and 2 for administration.
Competition
Our technology faces competition, but we think that our technology competes favorably because it reduces carcinogens while retaining taste and a significant level of nicotine. There are five principal potential competitors known to us, but more competitors or new technologies could arise at any time. None of them has any significant level of sales and there has never existed any market for special purpose filters.
RJ Reynolds introduced its Eclipse cigarette in 1998. Eclipse purports to be safer because it primarily heats rather than burns tobacco, greatly reducing second hand smoke, and leaves no ashes, stains or odor. RJR advertised that smoking Eclipse cigarette might reduce the risk of cancer, chronic bronchitis, and emphysema. The American Lung Association and American Heart Association disagree with those claims. Eclipse is being marketed through the internet and limited retail sales.
Star Scientific, under a strategic agreement with Brown & Williamson, produces nitrosamine-free tobacco. Star cures tobacco using microwave radiation instead of heat. According to Star's Annual Report on Form 10-K for the year ended December 31, 2000, the use of more than 3% of Star-cured tobacco in a cigarette results in unacceptable taste. Star is also developing a filter that removes only one toxic agent. In the year ended December 31, 2000 Star's net sales were $223 million.
Sekaps Bio Filter uses activated charcoal integrated with cow's blood. Over 40 million of these filters are employed each year, primarily in Russia and Europe. We believe that all or almost all of the BioFilter's efficacy results from its activated charcoal components, and in our opinion this filter shares the defects of activated charcoal filters in general, of adversely affecting taste.
The Green Ball cigarette filter is manufactured by 3DSD. The Green Ball filter must be purchased separately and attached by the user to the cigarette. According to Green Ball's website, the cost is $4.99 for five filters and Green Ball is sold by mail order or in Silicon Valley at a chain of drug stores. To our knowledge Green Ball sales are not significant. 3DSD claims that its filter removes 90% of the nicotine and 75% of tar.
Immulabs Sensi Filter removes several toxic gases (hydrogen cyanide and acrolein) without apparently effecting taste. The filter is expensive, but the main competitive disadvantage compared to 3C904 is that the Sensi Filter does not remove carcinogens. Since the FTC does not test cigarettes for the removal of toxic gases, only tar and nicotine, we believe that Immulabs will have difficulty marking marketing claims about the relative safety of this filter. Immulabs has no revenues, does not yet own the technology and recently disclosed that the technology acquisition is disputed by the Seller.
Intellectual Property
The technology fundamental to Wellstone is protected under U.S. Patent number 6,119,701, entitled "Methods, agents and devices for removing nucleophilic toxins from tobacco and tobacco smoke," by Cerami et al., and issued to the Cerami Consulting Corporation. This patent was filed on February 13, 1998, and approved on September 19, 2000. Therefore, Wellstone has controlling rights to the technology on which it is based until February 13, 2018, according to current U.S. Patent law.
Legal Proceedings.
Wellstone is not a party to any pending legal proceeding.
Governmental Regulation
The manufacture and sale of cigarettes and other tobacco products and of pharmaceutical products are subject to extensive federal and state governmental regulation in the United States and by comparable authorities in many foreign countries. These national agencies and other federal, state and local entities regulate, among other things, research and development activities and the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of tobacco products.
There are multiple bills pending before the Congress and in several state legislatures which, if enacted, would significantly change the United States tobacco industry. Some of these federal bills contain provisions which would provide substantial federal government funds for smoking cessation programs and products, as well as incentives to tobacco companies and others to produce less harmful or reduced-risk tobacco products. We are unable to predict what effect, if any, these provisions, if enacted, would have on our technology.
The FDA has promulgated regulations governing the sale and advertising of tobacco products designed primarily to discourage the sale to, and consumption by, adolescents and children. The authority of the FDA to promulgate such regulations was challenged in the federal courts. A federal District Court upheld the FDA's authority to promulgate such regulations but ruled that certain of the regulations restricting advertising were invalid as violative of the constitutional right of free speech. On appeal, the United States Court of Appeals for the Fourth Circuit affirmed portions of the District Court opinion that held the FDA could not regulate tobacco advertising and ruled that the executive branch of the United States government, in particular the FDA, does not have any authority to regulate tobacco products generally. The federal government appealed the Appeals Court's ruling and the matter was heard by the United States Supreme Court in late 1999. On March 21, 2000, the Supreme Court in a five to four decision held that Congress has not given the FDA authority to regulate tobacco products as customarily marketed. Given the decision by the Supreme Court it is unclear whether the Congress will act to grant such authority to the FDA, although legislation that would create such authority has already been introduced in Congress.
The requirements for health warnings on cigarettes are governed by the Federal Cigarette Labeling and Advertising Act ("Labeling Act"). The Labeling Act imposes labeling and advertising requirements on the manufacturers, packagers and importers of cigarettes and requires any company wishing to sell cigarettes within the United States to submit a plan to the Federal Trade Commission explaining how it will comply with the warning label display requirements.
The sale of tobacco products is subject to taxation in all fifty states. In addition, some states permit municipalities to impose an additional sales tax, and many municipalities do so. The state and municipal sales taxes are imposed upon wholesalers and/or retailers but not manufacturers or suppliers of components such as filters and therefore we have no liability for such taxes. In addition, cigarettes are subject to substantial and increasing excise taxes. The federal excise tax on cigarettes rose from $.24 per pack in 1999 to $.34 in 2000, and to $.39 in 2002. Additionally, state excise taxes range from $.025 per pack in Virginia to $.87 per pack in California. These taxes could adversely affect cigarette sales in the future and our potential revenues.
Product Liability
In the United States, there have been numerous and well-publicized lawsuits against the largest manufacturers of cigarettes and other tobacco products initiated by state and municipal governmental units, health care providers and insurers, individuals (for themselves and on a class-action basis) and by others. The legal theories underlying such lawsuits are varied, but are generally based upon one or more of the following: (1) manufacturer defendants have deceived consumers about the health risks associated with tobacco product consumption; (2) such defendants knew or should have known about various harmful ingredients of their products and failed to adequately warn consumers about the potential harmful effects of those ingredients; and (3) such defendants knew of the addictive attributes of nicotine and have purposefully manipulated their product ingredients so as to enhance the delivery of nicotine.
Even though we intend only to license or supply filters which make cigarettes less prejudicial to health, Wellstone could still be liable for personal injury to consumers. Even if we believe such lawsuits are without merit, the cost of defense or settlement of lawsuits could be substantial.
Item 2.
Item 2. DESCRIPTION OF PROPERTY
Until September 3, 2003, we rented a minimal amount of office and a lab room of 1,200 square feet space of an affiliate, Kenneth Warren Institute. Since October 1, 2003 we have been using office space provided by our chief executive officer at no cost until significant operations commence the utilization of space is minimal. The cost of the facilities at the Warren Institute was $1,400 per month which was accrued from January 2002 to September 30, 2003. We also use lab space provided under agreement with our director of research as part of his compensation.
Item 3.
Item 3. LEGAL PROCEEDINGS
Not Applicable.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.
PART II
Item 5.
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Stock has traded on the OTC Bulletin Board under the symbol WLSF since May, 2003. . The high and low closing bid prices for the common stock were as follows:
Quarter Ended High Low
December 31, 2003 $ .60 $.36 September 30, 2003 $.53 $.20 June 30, 2003 $.04 $.00
All share information is adjusted for stock splits and stock dividends.
(b) Holders
As of December 31, 2004, there were approximately 167 record holders of Company common stock.
(c) Dividends
The Company has not paid any dividends on its common stock. The Company currently intends to retain any earnings for use in its business, and therefore does not anticipate paying cash dividends in the foreseeable future. (d) Equity Compensation Plans
Wellstone has no equity compensation plans at this time.
Item 6.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
We have never received revenues from operations. Currently our operations are being funded by shareholder advances and a financing agreement with a private investment fund controlled by a related party. . These shareholder advances totaled $100,415 as of December 31, 2003, $29,200 as of December 31, 2001 and $45,272 as of December 31, 2002. See "Item 12 - Certain Transactions." Until we can enter into contracts with one or more strategic partners, we will continue to have limited operations. On January 2, 2004, we entered into a funding agreement with Arrakis Select Fund, a private investment fund controlled by a brother of our Chief Executive Officer under which agreement Arrakis Select Fund agreed to satisfy Wellstone's funding requirements for 90 days (renewable for additional 90 day periods), in exchange for common stock valued at the closing bid price of the common stock as of the 15th day of the month in which the funding was made. Through March 25, 2004 Wellstone had received $45,000 from Arrakis, and 77,695 restricted shares are due to be issued to Arrakis., Wellstone has been informed that the agreement will be renewed for 90 additional days on April 1, 2004.
If we enter into strategic alliances for the development of our product, we expect we will need additional funding depending on the terms of the agreement. Wellstone does not have any arrangements or understandings with respect to any capital raising. If we fail to raise these funds we will be unable to develop our business plan or obtain any revenues.
We are currently producing small quantities of test filters for marketing and testing. Initially it is more cost and time effective to produce filters by hand. However, in the future we may need to establish a prototype manufacturing facility. We can then better determine our production costs and feasible levels of production. This will cost about $300,000.
We intend to hire three persons to assist in marketing our filter technology. We will also have significant general and administrative expenses for salary, legal and regulatory expenses.
We hope that after testing and marketing 3C904 we will be able to obtain a supply contract with one or more cigarette or filter manufacturers, but it might take significantly more time than one year. We might also never be able to sell 3C904 in significant quantities. The terms of any supply contract have not been determined and will depend on negotiations.
We do not have any agreements or understandings with respect to sources of capital. We have not identified any potential sources.
Information included in this report includes forward looking statements, which can be identified by the use of forward-looking terminology such as may, will, expect, anticipate, believe, estimate, or continue, or the negative thereof or other variations thereon or comparable terminology. The statements in "Item 1 - Business, Risks and Uncertainties" and other statements and disclaimers in this prospectus constitute cautionary statements identifying important factors, including risks and uncertainties, relating to the forward-looking statements that could cause actual results to differ materially from those reflected in the forward-looking statements.
We are a development stage company as that term is defined in paragraphs 8 and 9 of SFAS No. 7. Our activities to date have been limited to seeking capital; seeking supply contracts and development of a business plan. Our auditors have included an explanatory paragraph in their report on our financial statements, relating to the uncertainty of our business as a going concern, due to our lack of operating history or current revenues, its nature as a start up business, management's limited experience and limited funds. We do not believe that conventional financing, such as bank loans, is available to us due to these factors. Management believes that it will be able to raise the required funds for operations from one or more future offerings, and to be able to effect our business plan. However, Management believes that Wellstone's ability to raise significant amounts of financing, including the $3 million required as set forth above, will be dependent on favorable capital markets and also on obtaining either a small supply contract or other validation of our technology by an independent source, and other risks inherent in the business as discussed under the caption "Risk Factors" may affect the outcome of Management's plans.
Item 7.
Item 7. FINANCIAL STATEMENTS
Wellstone's financial statements are appended to the end of this report.
Item 8.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 8a. CONTROLS AND PROCEDURES
Not applicable.
Item 9.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The members of the Board of Directors of Wellstone serve until the next annual meeting of stockholders, or until their successors have been elected. The officers serve at the pleasure of the Board of Directors. The following are the directors, executive officers and key employees of Wellstone.
Jere E. Goyan 72 Chairman Learned Jeremiah Hand 45 Chief Executive and Financial Officer and Director John Smart, PhD 56 Director of Research
Jere E. Goyan, Chairman
Dr. Jere E. Goyan, 72, has served as Chairman of the Company since January 2003. Dr. Goyan has served as President of Goyan and Hart Associates since January 1999. Dr. Goyan served as President and Chief Operating Officer of Alteon, Inc., a pharmaceutical company, from 1993 to 1998. From 1979 to 1981, Dr. Goyan served as Commissioner of the Food and Drug Administration. Dr. Goyan is currently Dean Emeritus and Professor Emeritus of the School of Pharmacy, University of California, San Francisco where he was Dean from 1967 to 1992 and a Professor from 1956 to 1992. Dr. Goyan is a member of numerous associations and served as President of the American Association of Colleges of Pharmacy in 1978 and of the American Association of Pharmaceutical Scientists in 1990. He has received meritorious awards, including from the University of California, San Francisco, the American Pharmaceutical Association, the Department of Health and Human Services. Dr. Goyan is the Chairman of the Board of SciClone Pharmaceuticals, a biopharmaceutical firm, and a director of Emisphere Technologies, Inc., a biopharmaceutical company, PharmQuest Corporation, a drug development company, Penwest Pharmaceuticals Co., a drug delivery technology company, Boehringer Ingelheim Pharmaceuticals Corporation and Slil Pharmaceuticals, an early-stage drug discovery company. Dr. Goyan obtained a Bachelor of Science degree from the School of Pharmacy, University of California, San Francisco and a PhD. in Pharmaceutical Chemistry from the University of California, Berkeley.
Learned Jeremiah Hand, Chief Executive Officer
Mr. Hand joined Wellstone in March, 2000. From March 2000 to December 2003 he was employed by Warren Pharmaceuticals, Inc. as its Vice President - Chief Operating Officer. From January 2000 to December 2003 he was Executive Director of the Kenneth S. Warren Institute, a non-profit medical research facility. In 1999 he founded HFC, a private seed venture capital corporation, which has made many internet and biotechnology related investments and is a founder of Medibuy.com. In March 2000 Mr. Hand began to devote a significant portion of his time to Wellstone. He now dedicates approximately 80% of his time to Wellstone. From 1994 to 1999, he served as Vice President at Morgan Stanley Dean Witter. He has a BA cum laude from Amherst College.
John Smart, Director of Research
Dr. John E. Smart joined Wellstone in October of 2003 as Vice President, Research. His expertise in protein purification and characterization have led to the cloning, manufacturing and clinical testing of several biotechnology-based therapeutic agents. His corporate positions include VP of Research at Emisphere Technologies, Inc., in Westchester County, New York; VP of Research at Creative BioMolecules in Hopkinton, Massachusetts; Director of Biological Chemistry and Protein Chemistry at Hoffmann-La Roche in Nutley, New Jersey; and Director of Protein Chemistry, at Biogen in Cambridge, Massachusetts.
Dr. Smart's academic affiliations include Senior Investigator and Director of Protein Chemistry at Cold Spring Harbor Laboratory in Cold Spring Harbor, New York; Scientific Staff Member in the Department of Cell Regulation at The Imperial Cancer Research Fund in London; and Postdoctoral Fellow at Stanford University and California Institute of Technology, where he earned his Ph.D. in Biochemistry and Physical Chemistry. He received an undergraduate degree from Ohio State University in Ornamental Horticulture and Plant Physiology. Dr. Smart was a member of the National Science Foundation's Instrumentation and Instrument Development Review Panel and was appointed to the Industrial Advisory Board for the University of Connecticut Biotechnology Center. He has authored or co-authored 52 articles in world-class journals and currently has twelve US patents pending along with the associated foreign counterparts.
Code of Ethics
Wellstone has not adopted a code of ethics which applies to the chief executive officer, or principal financial and accounting officer, because of our level of operations at this time.
Audit Committee Financial Expert
Wellstone does not have an audit committee. The entire board of directors. Wellstone does not have a financial expert on its audit committee, because of the difficulty encountered by all small public companies in obtaining outside board members. We cannot predict when, if ever, we will be able to attract a person to the board of directors who is a financial expert.
Item 10.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation of Wellstone's executive officers and directors during each of the last three fiscal years. The remuneration described in the table does not include the cost to Wellstone of benefits which may be furnished to the named executive officers, including premiums for health insurance and other benefits provided to such individual that are extended in connection with the conduct of Wellstone's business. The value of such benefits cannot be precisely determined, but the executive officers named below did not receive such other compensation in the years set forth below.
Until we obtain at least $800,000 in funding, officers will devote most of their time to other employment and will serve without compensation. Upon receipt of at least $800,000 in funding, Mr. Hand will devote 80% of his time to Wellstone. Expected annual compensation following receipt of such funding is $300,000 to Mr. Hand, all or part of which may be accrued and unpaid if cash is not available.
In connection with his appointment to the Board of Directors of Wellstone in January 2003, Dr. Goyan was granted incentive stock options to purchase 175,000 shares of common stock for $.0014 per share. The above options were granted under Wellstone's 1994 Stock Option Plan.
Item 11.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information relating to the beneficial ownership of Company common stock as of the date of this prospectus by (I) each person known by Wellstone to be the beneficial owner of more than 5% of the outstanding shares of common stock (ii) each of Wellstone's directors and executive officers, and (iii) the Percentage After Offering assumes the sale of all shares offered. Unless otherwise noted below, Wellstone believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. For purposes hereof, a person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or the conversion of convertible securities. Each beneficial owner's percentage ownership is determined by assuming that any warrants, options or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof, have been exercised.
Name and Address Common Stock Percentage
Jere E. Goyan(1)(2) 175,000 *
Learned Jermiah Hand(1) 54,600,000 43.1% Carla Cerami Hand, MD,PhD(1) 54,600,000 43.1%
Anthony Cerami, PhD(1) 9,800,010 12.5%
All officers and directors as a group (2 persons) 5,635,000 71.2%
(1) The business address of each of these persons is 121 Farrington Avenue, Tarrytown, New York, 10591. Ms. Cerami Hand and Mr. Learned Jeremiah Hand are wife and husband. The 54,600,000 shares listed as beneficially owned by Mr. Learned Jeremiah Hand include 46,900,000 shares which are controlled by Carla Cerami Hand, as stated below. Mr. Hand disclaims beneficial ownership of such 46,900,000 shares. Ms. Cerami is the sole shareholder of Cerami Consulting and the shares listed as held by her in the above table include 39,200,000 shares held of record by Titratable Holdings, Ltd., which is controlled by __, 7,700,000 shares held via a trust, and 7,700,000 shares controlled by Learned Jeremiah Hand. She disclaims beneficial ownership of the 7,700,000 shares controlled by Learned Jeremiah Hand. Such 7,700,000 shares stated as controlled by Mr. Hand are held through a family limited partnership controlled by him. Dr. Anthony Cerami is the father of Carla Cerami Hand. (2) Includes options to purchase 175,000 shares of common stock.
Item 12.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an Agreement and Plan of Reorganization dated May 25, 2001, Wellstone Filters, Inc., a Delaware corporation formerly known as Farallon Corporation ("Wellstone") acquired all of the outstanding membership interests of Wellstone LLC in exchange for 10,000,000 shares of Wellstone's Common Stock. In addition, Wellstone issued 284,200 shares of common stock to a stockholder of Farallon in cancellation of debt of $2,842. Immediately following the transaction (including 1,000,000 shares outstanding prior to May 25, 2001) there are 11,284,200 shares outstanding. The terms of the acquisition were determined between the parties, who are related in that Learned Jeremiah Hand, the CEO of Wellstone, LLC, is the brother of Jehu Hand, the founder and president of Farallon. Prior to the acquisition, Wellstone LLC and Farallon had no affiliation or relationship.
Carla Cerami Hand or Cerami Consulting Corporation have loaned various amounts to Wellstone for its capital requirements, as follows. The loans are due on demand, bear interest at 8% per annum and are represented by promissory notes. As of December 31, 2003, $10,991 had accrued as interest on these notes, none of which had been paid.
Date Lender Amount
06/23/1999 Cerami Consulting Corp. $ 500.00 07/10/1998 Cerami Consulting Corp. $ 6,700.00 01/03/2000 Carla Cerami $ 7,000.00 03/03/2000 Cerami Consulting Corp. $ 15,000.00 08/11/03 Carla Cerami $ 20,000.00
In June 2003 an entity controlled by Learned Hand loaned $10,000 to Wellstone under an 8% promissory note due on demand. In the fiscal years ended December 31, 2003 and 2002, Ms. Cerami Hand and/or Mr. Learned Hand advanced $8,899 and $16,072, respectively, on behalf of Wellstone for its corporate expenses. The Warren Institute, affiliated with the above officers, provides office space and a 1,200 square foot lab to Wellstone at a cost of $1,400 per month from January 2002 to Speptember 30, 2003, all of which has been accounted for as a contribution to capital by the controlling stockholders. Such amounts are not represented by any promissory note and bear no interest.
WELLSTONE FILTERS, INC. (A Development Stage Company) Consolidated Financial Statements December 31, 2003 and 2002
INDEPENDENT AUDITORS' REPORT
To the Members of Wellstone Filters, Inc.
We have audited the accompanying consolidated balance sheet of Wellstone Filters, Inc. (a development stage company), as of December 31, 2003 and the related consolidated statements of operations and stockholders' deficit, and cash flows for the two years then ended and the period from June 26, 1998 (date of inception) to December 31, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Wellstone Filters, Inc. (a development stage company), as of December 31, 2003 and the results of their operations and their cash flows for the two years then ended and the period from June 26, 1998 (date of inception) to December 31, 2003, in conformity with generally accepted accounting principles of the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's revenue generating activities are not in place, the Company has incurred a loss and has a working capital deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah March 18, 2004
WELLSTONE FILTERS, INC. (A Development Stage Company) Consolidated Balance Sheet
December 31, 2003
Assets
Current assets: Cash $ 3,109
Total current assets 3,109
Furniture and equipment, net 7,211
$ 10,320 Liabilities and Stockholders' Deficit
Current liabilities: Accounts payable $ 25,389 Related party accounts payable 30,224 Accrued interest on related party notes payable 10,991 Related party notes payable 59,200
Total current liabilities 125,804
Commitments and contingencies
Stockholders' deficit: Preferred stock, $.001 par value, 1,000,000 shares authorized; no shares issued and outstanding - Common stock, $.001 par value, 80,000,000 shares authorized; 78,989,400 shares issued and outstanding 78,989 Additional paid-in capital (49,489) Accumulated deficit (144,984)
Total stockholders' deficit: (115,484)
$ 10,320
See accompanying notes to consolidated financial statements.
WELLSTONE FILTERS, INC. (A Development Stage Company) Consolidated Statement of Operations
Cumulative Years Ended Amounts December 31, Since 2003 2002 Inception
Revenues $ $ $
General and administrative expenses 69,280 32,573 133,869
Interest expense 3,414 2,460 11,115
Loss before income taxes (72,694) (35,033) (144,984)
Income tax benefit
Net loss $ (72,694) $ (35,033) $ (144,984)
Net loss per share - basic and diluted $ $ -
Weighted average shares - basic and diluted 62,109,000 56,421,000
See accoumpanying notes to consolidated financial statements
See accoumpanying notes to consolidated financial statements
WELLSTONE FILTERS, INC. (A Development Stage Company) Consolidated Statement of Cash Flows
Cumulative Years Ended Amounts December 31, Since 2003 2002 Inception
Cash flows from operating activities: Net loss $ (72,694) $ (35,033) $ (144,984) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 3,005 951 3,956 Rental expense forgiven by officer and board member 12,600 16,800 29,400 Increase in accounts payable 11,643 8,560 25,389 Increase in related party accounts payable 14,152 19,057 Increase in accrued interest on related party notes payable 10,991 Decrease in deferred offering costs -
Net cash used in operating activities (27 (56,191)
Cash flows from investing activities- -
Cash flows from financing activities: Members contribution of equity 100 Proceeds from related party notes payable 30 59,200
Net cash provided by financing activities 30 59,300
Net increase (decrease) in cash and cash equiv 3,109
Cash and cash equivalents at beginning of year -
Cash and cash equivalents at end of year $ 3 $ $ 3,109
See accoumpanying notes to consolidated financial statments
WELLSTONE FILTERS, INC. (A Development Stage Company) Consolidated Financial Statements December 31, 2003 and 2002
Notes to Consolidated Financial Statements
December 31, 2003
1. Organization and Summary of Significant Accounting Policies
Organization
Wellstone Filters, LLC (Wellstone) was organized as a Delaware limited liability company on February 17, 1998 (date of inception).
On May 25, 2001, Wellstone Filters, Inc. (formerly Farallon Corporation) (the "Registrant") acquired Wellstone pursuant to an Agreement and Plan of Reorganization (the Agreement), dated as of May 25, 2001.
The Registrant acquired all of the outstanding membership interest of Wellstone, in exchange for 10,000,000 shares of the Registrant's common stock. In addition, the Company issued 284,200 shares of common stock in cancellation of debt. At that point in time there were 11,284,000 shares outstanding.
The stockholders of Wellstone, after the acquisition, owned the majority of the combined company. Accordingly, the combination has been accounted for as a reverse acquisition whereby, for accounting purposes, Wellstone is the accounting acquirer and Registrant is the accounting acquiree. Registrant and Wellstone are collectively referred to as (the Company). The Company has adopted a December 31 year end. The financial statements from inception through May 25, 2001, are those of Wellstone, LLC, the accounting acquirer. Subsequent to May 25, 2001, the financial statements reflect the consolidated position and operations of Registrant and Wellstone.
The Company is engaged in the development and marketing of a proprietary cigarette filter technology; however, the Company has not commenced planned principal operations and has not recognized any revenues related to such planned operations. Accordingly, the Company is considered as a develpmental stage company as defined in SFAS No. 7.
Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
Furniture and Equipment Furniture and equipment are carried at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets of 5 years. As of December 31, 2003, furniture and equipment consist of the following:
Office furniture $ 4,178
Computer equipment 6,989
11,167
Accumulated depreciation (3,956)
$ 7,211
Income Taxes Income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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.
Stock-Based Compensation The Company accounts for stock options granted to employees under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost is recognized in the financial statements, when options granted under those plans have an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The Company granted 175,000 stock options with an exercise price of $.01 per share, immediately vested, to a board member during 2003. No other stock options were granted during the years ended December 31, 2003 and 2002 and for the period from February 17, 1998 (date of inception) to December 31, 2003.
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation - Continued
The following table illustrates the effect on net (loss) earnings per share if the Company had applied the fair value recognition provision of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Years Ended December 31,
2003 2002
Net loss, as reported $ (72,694) $ (35,033)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
(330) -
Pro forma net (loss) income $ (73,024) $ (35,033)
(Loss) earnings per share:
Basic and diluted - as reported $ - $ -
Basic and diluted - pro forma $ - $ -
Concentration of Credit Risk The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
Loss Per Common and Common Equivalent Share
The computation of basic loss per common share is computed using the weighted average number of common shares outstanding during the period.
Principles of Consolidation
The consolidated financial statements include the accounts of the Registrant and its wholly-owned subsidiary, Wellstone. All significant intercompany transactions have been eliminated in consolidation.
2. Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company is a development stage company and has not had revenues from operations. In addition, the Company has a deficit in working capital and stockholders' equity, and has incurred losses. These conditions raise substantial doubt about the ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company's ability to continue as a going concern is subject to the attainment of profitable operations and / or obtaining necessary funding from outside sources. The Company intends to raise funds through the sale of equity securities. There can be no assurance the Company will be successful in such efforts.
3. Related Party Transactions
The related party notes payable of $59,200 at December 31, 2003, consist of loans from officers of the Company. The amounts are unsecured, bearing interest at 8% and are due on demand. Accrued interest on the notes was $10,991 at December 31, 2003.
Related party accounts payable include $30,224 due to an officer of the Company and the brother of an officer of the Company for corporate expenses and purchases of furniture and equipment which were funded by such individuals on the Company's behalf.
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
4. Supplemental Cash Flow Information
No amounts were paid for interest or income taxes during the period from February 17, 1998 (date of inception) to December 31, 2003.
During the years ended December 31, 2003 and 2002, the Company recorded a contribution of capital of $12,600 and $16,800, respectively, for the use of office space provided by an officer and board member of the Company. The arrangement for the use of office space was mutually terminated on September 30, 2003.
During the year ended December 31, 2002, the Company acquired furniture and equipment in exchange for an increase in related party accounts payable of $11,167.
During the year ended December 31, 2001 the Company issued 284,200 shares of common stock in settlement of $2,842 of debt.
5. Income Taxes
The provision for income taxes differs from the amount computed at federal statutory rates as follows:
Years Ended December 31,
2003 2002
Income tax benefit at statutory rate $ 27,000 $ 10,000
Other 2,000 -
Change in valuation allowance (29,000) (10,000)
$ - $ -
Deferred tax assets (liabilities) are comprised of the following at December 31, 2003:
Net operating loss carryforward $ 41,000
Valuation allowance (41,000)
$ -
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
5. Income Taxes (continued)
As of December 31, 2003, the Company had net operating losses of approximately $113,000 which begin to expire in 2016. If substantial changes in the Company's ownership should occur, there would be an annual limitation of the amount of net operating loss carryforwards which could be utilized. The ultimate realization of these carryforwards is due, in part, on the tax law in effect at the time of future events which cannot be determined.
6. Capital Stock
Preferred Stock
The Company has authorized 1,000,000 shares of preferred stock, $.001 par value, with such rights, preferences and designations and to be issued in such series as determined by the Board of Directors. No shares are issued and outstanding at December 31, 2003.
Common Stock On January 31, 2003, the Certificate of Incorporation was amended to increase the number of authorized shares from 20,000,000 to 80,000,000. The par value is $.001.
Stock Split and Stock Dividend A five for one stock split was approved on July 9, 2003 and subsequently effected on July 19, 2003. The stock split resulted in the issuance of an additional 45,136,800 of common stock.
On September 15, 2003 a four tenths for one stock dividend was declared and subsequently issued on September 30, 2003. The total number of shares issued equaled 22,568,400 bringing the total number of shares outstanding to 78,989,400.
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
6. Capital Stock (continued)
Amended and Restated 1994 Stock Option Plan
On April 1, 1994, the Company adopted the 1994 Stock Option Plan. The plan provides for the granting of awards of up to 2,000,000 shares of common stock to officers, directors, employees, advisors, and employees of other companies that do business with the Company as non-qualified stock options. The Stock Option Committee of the Board of Directors determines the option price, which cannot be less than the fair market value at the date of the grant or 110% of the fair market value if the recipient of the grant holds 10% or more of the Company's common stock. The price per share of shares subject to a Non-Qualified option cannot be less than 85% of the fair market value. Options granted under the plan will typically expire ten years from the date of the grant (five years if the recipient of the grant holds 10% or more of the Company's common stock on the date of the grant) or three months after termination of employment. The plan was amended and restated in 2003 for technical updates to confirm with law. As of December 31, 2003 175,000 options were outstanding. On January 31, 2003 non-qualified options to purchase 175,000 shares of common stock at $.0014 per share were granted to a director.
7. Recent Accounting Pronouncements
In November 2002, the EITF reached a consenses on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for certain arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Isue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on operating results or financial condition of the Company.
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
7. Recent Accounting Pronouncements (continued)
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, Accounting for Derivatives and Hedging Activities. SFAS 149 is generally effective for derivative instruments, including derivative instruments embedded in certain contracts, entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the operating results or financial condition of the Company.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and euqity and requires that those instruments be classified as liabilities in statemetns of financial posiiton. Previously, many of those financial instruments were classified as equtiy. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, FASB Staff Position 150-3 was issued, which indefinitely deferred the effective date of SFAS 150 for certain mandatory redeemable non-controlling interests. As the Company does not have any of these financial instruments, the adoption of SFAS 150 did not have any impact on the Company's consolidated financial statements.
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
7. Recent Accounting Pronouncements (continued)
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R") (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity thoguh means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN 46), which was issued in January 2003. Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (VIE). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after January 31, 2003 and no later than the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated financial position, results of operations or cash flows.
In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 revises or rescinds portions of the interpretive guidance included in Topic 13 of the condification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and the SEC rules and regulations. The adoption of SAB 104 did not have a material effect on the Company's results of operations or financial condition.
WELLSTONE FILTERS, INC. (A Development Stage Company) Notes to Consolidated Financial Statements
8. Subsequent Events
On January 2, 2004, the Company entered into a funding agreement with a related party controlled by the brother of an officer of the Company to fund certain capital requirements of the Company. As of March 1, 2004, $45,000 had been received by the Company pursuant to this agreement. The Company is obligated to issue restricted shares of common stock at a price per share equal to 80% of the bid price of the common stock on the 15th day of the preceding month.
On January 1, 2004, the Company issued non-qualified options to purchase 1,600,000 shares at $.01 per share to a scientific advisor.
PART IV
Item 13.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits of the Company are included herein.
2. Plan of acquisition, reorganization, arrangement, liquidation or succession.
2.1. Agreement and Plan of Reorganization, dated February May 25, 2001, between the Registrant and Wellstone LLC.(2)
3. Certificate of Incorporation and Bylaws
3.1. Articles of Incorporation(1) 3.2 Articles of Amendment(2) 3.3 Bylaws(1)
10. Material Contracts
10.1 Stock Option Plan(1) 16.1 Letter from Thurman, Shaw & Co., LC.(3)
21. Subsidiaries of the small business issuer-None.
(1) Incorporated by reference to the Company's Registration Statement on Form 10-SB, file no. 0-28161. (2) Incorporated by reference to the Company's Current Report on Form 8-K, dated May 25, 2001. (3) Incorporated by reference to the Company's Current Report on Form 8-K dated August 6, 2001. (b) Reports on Form 8-K.
Not Applicable.
Item 14.
Item 14. Controls and Procedures.
Not Applicable
Item 15.
Item 15. Principal Accountant Fees and Services.
Audit Fees
Our principal accountants, Tanner + Company, billed us $3,700 and $5,200 for audit fees and review of quarterly filings in the fiscal years ended December 31, 2003 and 2002, respectively.
Less than 50% of the hours expended by our auditors on the audit for the year ended December 31, 2003 were performed by persons' other than Tanner + Company's permanent full time employees.
There were $3,700 $0 and $0, respectively paid in audit related fees, tax fees and all other fees to Tanner + & Company during the year ended December 31, 2003.
Audit Committees pre-approval policies and procedures.
We do not have an audit committee. Our engagement of Tanner & Company was approved by the Board of Directors. No services described in Item 9(e)(2) through 9(e)(4) of Schedule 14A were performed by our auditors.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized March 30, 2004.
WELLSTONE FILTERS, INC.
By:/s/ Learned Jeremiah Hand Learned Jeremiah Hand CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on March 29, 2004.
By: /s/Learned Jeremiah Hand CEO, Chief Financial Officer and Director Learned Jeremiah Hand (principal executive accounting and financial officer)
By: /s/Jere Goyan Chairman Jere Goyan