U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________.
Commission File Number 33-43423
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------------
(Exact name of small business issuer as
specified in its charter)
DELAWARE 65-0159115
--------------------------------- ---------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
19100 Von Karman Ave, Ste 450
Irvine, CA 92612
----------------------------------------
(Address of principal executive offices)
(949) 553-8002
---------------------------
(Issuer's telephone number)
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 [X] No [ ]
Number of shares outstanding of each of the issuer's classes of common
equity, as of November 19, 2001: 4,245,100 shares of common stock, $0.00067 par
value per share.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONTENTS
--------
Accountant's Review Report 1
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 2
Consolidated Statements of Changes in Stockholders'
Equity for the Nine months ended September 30, 2001 and
Year Ended December 31, 2000 3
Consolidated Statements of Operations for the Three months and Nine
Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Nine months
Ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements as of September 30, 2001
and December 31, 2000 6-15
Accountants' Review Report
--------------------------
To the Board of Directors
NuWay Energy, Inc. and Subsidiaries
We have reviewed the accompanying consolidated balance sheets of NuWay Energy,
Inc. and Subsidiaries as of September 30, 2001, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
three and nine months ended September 30, 2001 and 2000 in accordance with the
Statements for Accounting and Review Services issued by the American Institute
of Certified Public Accountants. All information included in these financial
statements is the representation of the management of NuWay Energy, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The balance sheet for the year ended December 31, 2000 was audited by us and we
expressed an unqualified opinion on it in our report dated March 15, 2001, but
we have not performed any auditing procedures since that date.
Shubitz Rosenbloom & Co., P.A.
Miami, Florida
November 6, 2001
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
----------------------------------------
ASSETS
------
September 30, December 31,
2001 2000
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents $ 1,435,043 $ 4,422,715
Accounts Receivable, Less $150,000
of Allowance for Doubtful Accounts
in 2001 and 2000 1,203,665 1,382,382
Inventory 515,860 539,560
Prepaid Expenses and Other Current Assets 132,345 136,717
------------ ------------
Total Current Assets 3,286,913 6,481,374
------------ ------------
PROPERTY AND EQUIPMENT - NET 3,151,566 3,772,795
------------ ------------
OTHER ASSETS
Deposits 123,473 11,609
Working Interest in Oil and Gas Investment 1,530,582 -
Other Assets 46,776 46,208
------------ ------------
Total Other Assets 1,700,831 57,817
------------ ------------
TOTAL ASSETS $ 8,139,310 $ 10,311,986
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 691,253 $ 190,703
Debentures Payable net of deferred debt
issuance costs of $16,125 and $64,500
in 2001 and 2000 3,483,875 3,435,500
------------ ------------
Total Current Liabilities 4,175,128 3,626,203
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
Total Liabilities 4,175,128 3,626,203
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.00067 Par Value 15,000,000
Shares Authorized, 4,225,000 Shares
Issued, 4,180,100 Shares Outstanding and
44,900 Shares held as Treasury Stock at
September 30, 2001 and 4,221,600 shares
outstanding and 3,400 shares held as
Treasury Stock at December 31, 2000 2,831 2,831
Additional Paid-In Capital 10,993,937 10,993,937
Accumulated Other Comprehensive Income(Loss) (519,972) (560,326)
Retained Earnings (Deficit) (6,387,379) (3,745,424)
Treasury Stock, at cost (125,235) (5,235)
------------ ------------
Total Stockholders' Equity 3,964,182 6,685,783
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,139,310 $ 10,311,986
============ ============
Read accountants' review report and notes to financial statements.
- 2 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND
------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
------------------------------------
Common Stock
----------------- Accumulated
Number Par Additional Other Retained
of Value Paid-In Comprehensive Earnings Treasury Comprehensive
Shares $.00067 Capital Income (Loss) (Deficit) Stock Income (Loss)
--------- ------- ---------- ------------ ------------ ------- -------------
BALANCE JANUARY
1,2000 3,300,000 $ 2,211 $9,919,557 ($415,193) ($ 1,628,601) $ 5,235 $ -
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS - - - ( 145,133) - - ( 145,133)
EXERCISE OF
STOCK OPTIONS 725,000 486 724,514 - - - -
STOCK ISSUED AS
COMPENSATION 200,000 134 349,866 - - - -
NET (LOSS) FOR THE
YEAR ENDED DECEMBER
31, 2000 - - - - ( 2,116,823) - (2,116,823)
--------- ------- ---------- --------- ------------ -------- ---------
BALANCE DECEMBER
31, 2000 4,225,000 2,831 10,993,937 ( 560,326) ( 3,745,424) 5,235
Comprehensive Income
(Loss) For The
Year Ended
December 31, 2000 ($2,261,596)
==========
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS - - - 40,354 - - $ 40,354
Acquisition of 41,500
Shares of Treasury
Stock - - - - - $120,000 -
NET (LOSS) FOR THE
NINE MONTHS ENDED
September 30, 2001 - - - - ( 2,641,955) - ($2,641,955)
--------- ------- ---------- --------- ------------ -------- ---------
BALANCE SEPTEMBER
30, 2001 4,225,000 $ 2,831 $10,993,937 ($ 519,972) ($ 6,387,379) $125,235 -
========= ======= =========== ========== =========== ========
Comprehensive
Income (Loss) For
The Nine Months
Ended September 30,
2001 ($2,601,601)
==========
Read accountants review report and notes to financial statements.
-3-
NUWAY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
--------------------- ----------------------
2001 2000 2001 2000
---------- --------- --------- ----------
Revenues
--------
Rental Income $ 109,034 $ 152,609 $ 374,752 $ 557,712
Sales of Cigars 50,995 36,614 122,770 111,846
---------- --------- ---------- ----------
Total Revenues 160,029 189,223 497,522 669,558
---------- --------- ---------- ----------
Costs and Expenses
------------------
Impairment Charges - - 411,071 -
Selling, General & Administration 1,343,890 494,542 2,688,076 1,557,643
Depreciation 36,686 29,685 87,555 91,539
Costs of Cigar Sales 34,628 17,195 77,944 81,646
---------- --------- --------- ----------
Total Cost and Expenses 1,415,204 541,422 3,264,646 1,730,828
---------- --------- --------- ----------
Operating Income (Loss) (1,255,175) ( 352,199) (2,767,124) ( 1,061,270)
-----------------------
Interest Income 23,352 1,668 125,129 27,425
---------- --------- --------- ----------
Income (Loss) Before Income Taxes (1,231,823) ( 350,531) (2,641,955) ( 1,033,845)
Income Taxes (Provision) Benefit - - - -
---------- --------- --------- ----------
Net Income (Loss) ($1,231,823) ($350,531)($2,641,955) ($1,033,845)
========== ========= ========== ==========
Earnings (Loss) Per Common Share and
------------------------------------
Common Share Equivalent - Basic
-------------------------------
and Fully Diluted
-----------------
Common Share Equivalent
Outstanding 4,214,683 3,296,600 4,219,294 3,296,600
========== ========= ========= ==========
Net Income (Loss) ($.29) ($.11) ($.63) ($.31)
========== ========= ========= ==========
Read accountants' review report and notes to financial statements.
-4-
NUWAY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($2,641,955) ($1,033,845)
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Additional officers compensation as a reduction
Of notes receivables officer - 115,000
Depreciation 87,555 91,539
Asset Impairment Charges 411,071 -
Amortization of Deferred Debt Issuance Costs 48,372 -
Loss on Sale of Fixed Assets 14,936 69,867
Changes in Assets - (Increase) Decrease:
Accounts Receivable 178,717 139,114
Prepaid Expenses and Other Current Assets 4,377 39,069
Inventory of Cigars 23,700 75,550
Changes in Liabilities - Increase (Decrease):
Accounts Payable and Accrued Expenses 500,550 (19,468)
----------- -----------
Net Cash Provided by (Used In) Operating
Activities (1,372,679) (523,174)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in oil and gas venture (1,530,582) -
Proceeds on Sale of Fixed Assets 152,561 250,893
Fixed Assets, Other (44,894) (9,070)
Other Assets (112,432) 14,150
Acquisition of Treasury Stock (120,000) -
----------- -----------
Net Cash Provided By (Used by)Investing
Activities (1,655,347) 255,973
----------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 40,354 (174,194)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,987,672) (441,395)
CASH AND CASH EQUIVALENTS - BEGINNING 4,422,715 800,224
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 1,435,043 $ 358,829
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid During the Period for:
Interest $ 6,460 $ 14,592
=========== ===========
Income Taxes, Foreign $ - $ -
=========== ===========
Read accountants' review report and notes to financial statements.
- 5 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
----------------------------------------------
Note 1. Summary of Significant Accounting Policies
------- ------------------------------------------
A Business and Organization
-------------------------
NuWay Energy, Inc. (formerly Latin American Casinos, Inc.) is a
Delaware corporation incorporated on September 19, 1991 (See Note 11).
In 1994, the company entered in the gaming and casino business,
primarily in Peru and other Latin American countries renting casino
type slot machines and other gaming equipment.
In 1994, the company formed a Peruvian subsidiary; in 1995, the company
formed a Colombian subsidiary and in 1997, the company formed a
subsidiary in Nicaragua (which has subsequently been liquidated) that
are in the gaming and casino business in Latin America (See Note 9C).
The operations include the renting of casino slot machines and other
gaming equipment to casino operators. As of September 30, 2001, the
company had originally acquired approximately 8,000 slot machines,
approximately 3,000 of which have been acquired for parts and other
related equipment, at a total cost of $3,818,175 including applicable
costs for transportation, duty and refurbishing (See Note 2).
In July 2001 the company formed a Nevada and Canadian subsidiary to
enter into the field of oil and gas exploration. In August and
September 2001 these subsidiaries purchased working interests in two
different projects in Canada.
B Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of the company and its wholly-owned subsidiaries, Latin American
Casinos Del Peru S.A. (formerly known as Latin America Casinos, Inc.
S.A.) a Peruvian Corporation and Latin American Casinos of Colombia
LTDA, a Colombian Corporation. Effective September 23, 1997, The
company incorporated World's Best Rated Cigar Company (World) as a
wholly-owned subsidiary of NuWay Energy, Inc. to distribute quality
cigars. It was originally intended that the company would market
premium cigars at "off price", and would acquire quality cigars from
six South American producers and market them through large retail
chains, initially on a consignment basis. The cigar operations have
been slower than originally anticipated and as of September 30, 2001,
the company had expended approximately $1,190,000 in regard to the
cigar operations. Such expenditures have been included in the
accompanying consolidated financial statements as follows:
Cash and cash Equivalents $ 5,000
Accounts Receivable 35,000
Prepaid and Other Current Assets 5,000
Inventory 516,000
Fixed Assets, Net of Accumulated Depreciation 68,000
Other Assets 3,000
Aggregate Accumulated Deficit 558,000
----------
Total Investment $1,190,000
==========
In year 2001 the company incorporated NuWay Resource, Inc., a Nevada Corporation
and NuWay Resources of Canada, Ltd., a Canadian Company. These corporations were
formed to pursue opportunities in the oil and gas exploration industry.
Read accountants' review report.
- 6 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
As of September 30, 2001 the company has invested approximately
$1,850,000 in NuWay Resources, Inc. and NuWay Resources of Canada, Ltd.
Such expenditures have been included in the accompanying financial
statement as follows:
Cash and Cash Equivalents $ 294,000
Working interest in an oil and gas venture 1,531,000
Aggregate Accumulated Deficit 25,000
----------
Total Investment $1,850,000
As of September 30, 2001 the working interest is the oil and gas
venture has not generated any cash flow; however, the company
anticipates cash flows to be generated in the forth quarter.
All material intercompany transactions, balance and profits have been
eliminated.
C Property and Equipment
----------------------
Property and Equipment are stated at cost. Depreciation is provided on
accelerated and straight-line methods over the estimated useful lives
of the respective assets. Maintenance and repairs are charged to
expense as incurred; major renewals and betterments are capitalized.
When items of property or equipment are sold or retired, the related
cost and accumulated depreciation are removed from the accounts and any
gain or loss is included in the results of operations. The company
records a charge to operations for an impairment loss when the carrying
amount of an asset exceeds its fair value based on the available
circumstance including current replacement values.
D Revenue Recognition
-------------------
Revenue is recognized monthly on the rental of slot machines as the
slot machines are placed in service. Typical rental arrangements for
slot machines are for one year or less in duration with consistent rent
income earned over the life of the lease. As a general rule the company
does not incur any significant direct costs with the inception of a
lease. All leasing expense, payroll and maintenance of equipment are
charged to operations as incurred. Revenue on the sale of cigars are
recorded when customer orders are shipped. The cost of cigar sales
represents the direct cost of the product sold.
E Statement of Cash Flows
-----------------------
For purposes of this statement, the company considers all liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
Read accountants' review report.
- 7 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
F Income (Loss) Per Common Share
------------------------------
Basic earnings per common share and common share equivalent were
computed by dividing net (loss) by the weighted average number of
shares of common stock outstanding during the period. Fully diluted
earnings per share was calculated based on the assumption that the
increase in the number of common shares assumed outstanding on
conversion are reduced by the number of common shares that are assumed
to be purchased with the proceeds from the exercise of the incentive
stock options. During 2001 and 2000 all warrants, stock options and
underwriters warrants (Notes 4, 5, 6, 7) were anti-dilutive, and
excluded from the computation of basic and diluted earnings (loss) per
share. In the future, these warrants, stock options, and underwriter
warrants could be dilutive and as such future earnings per share could
be diluted by 7,607,496 additional shares.
G Significant Concentration of Credit Risk
----------------------------------------
The company has concentrated its credit risk for cash by maintaining
deposits in banks located within the same geographic region. The
maximum loss that would have resulted from risk totaled $1,297,000 and
$4,320,000 as of September 30, 2001 and December 31, 2000 for the
excess of the deposit liabilities reported by the bank over the amounts
that would have been covered by federal deposit insurance.
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
H Use of Estimates
----------------
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, the disclosure of contingent assets and liabilities at the
date of the financial statements, and revenues and expenses during the
period reported. Actual results could differ from those estimates.
Estimates are used when accounting for uncollectible accounts
receivable, obsolescence, equipment depreciation and amortization,
taxes, among others.
I Foreign Currency Translation
----------------------------
For most international operations, assets and liabilities are
translated into U.S. dollars at year-end exchange rates, and revenues
and expenses are translated at average exchange rates prevailing during
the year. Translation adjustments, resulting from fluctuations in
exchange rates are recorded as a separate component of shareholders'
equity, as other comprehensive income (loss).
J Inventories
-----------
Inventory of cigars and related material are stated at the lower of
average cost or market.
K Valuation of Company's Stock Options and Warrants
-------------------------------------------------
Based on the volatility of the company's stock price it is the
company's policy not to record compensation upon the issue of options
and warrants. No compensation was recorded with re-pricing of options
and warrants due to the fact that the re-priced options and warrants
exceeded the market value of the stock, the high volatility of the
price of the common stock and the consistent corporate losses.
Read accountants' review report.
- 8 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- -------------------------------------------
L Advertising
-----------
The company expenses all advertising costs as incurred. Included in the
statement of operations is approximately $100,000 and $73,000
advertising expense charged to operations for the nine months ended
September 30, 2001 and 2000, respectively. Substantially all
advertising expenses incurred were the result of barter transactions.
M Reclassifications
-----------------
Certain amounts reported in prior financial statements have been
reclassified to conform to current classifications.
Note 2. Property and Equipment
------- ----------------------
Property and Equipment are summarized as follows:
September 30 December 31,
2001 2000
----------- -----------
Land & Building (See Note 10) $ 75,000 $ 335,363
Rental Equipment(See Note 10) 3,818,175 4,197,282
Leasehold Improvements 19,894 26,027
Furniture, Fixtures & Office Equipment 185,008 141,914
Transportation Equipment 2,844 48,510
---------- -----------
Total 4,100,921 4,749,096
Less: Accumulated Depreciation 949,355 976,301
---------- ------------
Property and Equipment - Net $ 3,151,566 $ 3,772,795
=========== ============
The estimated useful lives of property and equipment, is as follows:
Rental Equipment 5-7 years
Special Use Buildings 10 years
Commercial Buildings 30 years
Leasehold Improvements 7 years
Furniture, Fixtures and Office Equipment 5-7 years
Transportation Equipment 5 years
Included in Rental Equipment is approximately $3,000,000 of parts and
supplies purchased or obtained from other machines previously
disassembled for parts.
Rent expense for the three and nine months ended September 30, 2001
were $167,000 and $55,000, respectively. Rent expense for the three and
nine months ended September 30, 2000 were $70,000 and $22,000,
respectively.
The company had leased the land and building it owned in Miami for
$1,200 per month, on a month to month basis. The property was sold in
2001 (See Note 10).
Read accountants' review report.
- 9 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 3. Warrants and Options
------- --------------------
At June 30, 2001 the company has outstanding 1,725,000 five year
publicly traded warrants that were issued as part of the company's
initial public offering to purchase one share of the company's common
stock at an exercise price of $3.00 by December 11, 2001. In December
2000 the Board of Directors authorized the issuance of an additional
3,300,000 private five year stock warrants to acquire common stock at
$1.75 per share (See Note 7). The issuance of a portion of the private
warrants (1,500,000) were part of the arrangement with the executive
officers of the corporation who each also received 100,000 shares of
restricted common stock. Compensation had been recorded on the
arrangement equal to the market value of the total restricted common
stock issued of 200,000 shares at $1.50 per share, $350,000, in year
2000.
Note 4. Investment Banker Warrants
------- --------------------------
Effective June 5, 1998, the company contracted with an investment
banker to provide on a non-exclusive basis to the company assistance in
possible mergers, acquisitions and internal capital structuring. The
duration of the contract is for five years. In consideration for these
services, the company granted warrants to purchase an aggregate of
225,000 shares of common stock at the closing bid price of $1.875 as of
June 5, 1998, which can be exercised through June 5, 2003. Effective
February 8, 2000, the Board of Directors reduced the exercise price to
$1.06, which was the closing price of the stock at that date (See Note
7). At the date of issuance and subsequent re-pricing date the warrant
price equaled or exceeded the market value of the corporate stock.
Based on the volatility of the price of the common stock and the
consistent corporation losses no value was recorded upon the issue of
the warrants or subsequent re-pricing of warrants.
Note 5. Incentive Stock Option Plan
------- ---------------------------
On June 13, 1994, the Board of Directors adopted the 1994 Stock Option
Plan in which the aggregate number of shares for which options may be
granted under the Plan shall not exceed 1,000,000 shares. The term of
each option shall not exceed ten years from the date of granting (five
years for options granted to employees owning more than 10% of the
outstanding shares of the voting stock of the company). The 1991 plan
became effective on September 30, 1991 and was terminated in March,
1999. The 1994 plan became effective on June 13, 1994 and will
terminate in June, 2004, unless terminated earlier by action of the
Board of Directors. In December, 1995, the company authorized the
issuance under the 1994 Stock Option Plan of 492,500 options at an
exercise price of $2.50 per share to various officers and employees. On
March 6, 1997 the company authorized the issuance of an additional
415,000 options at an exercise price of $2.50 to various officers and
employees. In June, 1999, the company increased the shares allocated to
the plan to 1,500,000. Effective December 31, 1998, the company
ratified the repricing of the employee stock options to $1.00 per share
and simultaneously authorized the issuance of 85,000 options at an
exercise price of $1.00 per share and canceled 10,000 options issued in
1995 at $2.50 per share. Effective February, 2000 the company issued
35,000 options at an exercise price of $1.06 and in December, 2000 the
company issued 80,000 options at a $1.75 exercise price.(See Note 7)
Read accountants' review report.
- 10 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 5. Incentive Stock Options Outstanding (Continued)
------- -----------------------------------
Price
Amount Per Share
------ ---------
Options Outstanding at January 1, 2000 $ 932,500 $1.00
Additional Options Issued 35,000 $1.06
Additional Options Issued 80,000 $1.75
Options Lapsed ( 85,000) $1.00
Options Exercised ( 725,000) $1.00
---------
Options Outstanding at December 31, 2000
and September 30, 2001 $ 237,500
==========
Note 6. Debentures
------- ----------
In December 2000 the company, through a private placement issued
$3,500,000 principle amount of 6% convertible debentures. These
debentures were due June 13, 2001 and were extended to December 13,
2001 and are convertible into common stock at an exercise price of
$1.75 per share. Included in accounts payable and accrued expenses in
the accompanying financial statements is approximately $184,000 of
accrued interest on these debentures. The interest on these debentures
are payable either in cash or in additional shares of common stock, at
the discretion of the company (see Note 7). The company incurred
approximately $64,500 of costs in regard to this private placement. The
debt issuance costs are being amortized over the life of the
debentures. Included as part of selling general & administration
expenses in the statement of operations for the three and nine months
ended September 30, 2001 is $16,125 and $48,375 amortization of
deferred debt issuance costs.
Note 7. SEC Registration Statement
------- --------------------------
In July 2001 the company filed a registration statement with the
Securities and Exchange Commission to register 7,229,608 shares of
common stock of the corporation. These shares represent substantially
all the convertible shares outstanding from options, warrants and
debentures. In addition, certain shareholders have included in the
registration legend stock they currently own. The estimated cost
incurred with the registration statement, has been included as part of
selling, general and administration expenses in the accompanying
statements.
Note 8. Provision of Income Taxes
------- -------------------------
As of September 30, 2001 the company had available for income tax
purposes unused net operating loss carryforwards which may provide
future tax benefits of $6,425,000 expiring through the year 2021. No
valuation allowance has been provided for unremitted foreign profits.
No provision had been provided for deferred taxes in the accompanying
financial statements. The current provision for taxes, if any, are
based on tax provisions of foreign operations.
Note 9. Commitments and Contingencies
------- -----------------------------
A Litigation
----------
The company is a defendant from time to time on claims and lawsuits
arising out of the normal course of its business, none of which are
expected to have a material adverse effect on its business, operations,
financial position, or corporate liquidity.
Read accountants' review report.
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NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 9. Commitments and Contingencies (Continued)
------- -----------------------------
B Employment Agreements
---------------------
In January 1997, the company entered into a five year employment
agreement with Lloyd Lyons, the company's Chief Executive Officer at
the time, which provided for an annual salary commencing January, 1997
of $275,000. The agreement provided that in the event of either a
merger, consolidation, sale or conveyance of substantially all the
assets of the company which results in his discharge, he would be
entitled to 200% of the balance of payments remaining under the
contract. The contract provided for the salary continuation for a
period of two years after the death of Mr. Lyons. In January 2000, Mr.
Lyons passed away and effective August 2, 2000 the company amended its
employment contract with his surviving widow and primary beneficiary of
his Estate (Geraldine Lyons, the company's Chief Financial Officer and
Secretary) where-in the salary continuation clause included in his
contract was replaced with a severance arrangement which requires the
company to pay Mrs. Lyons $100,000 over a one year period commencing on
the first month following her termination from her employment with the
company and upon her termination she is to receive 100,000 shares of
common stock pursuant to an amendment to her employment agreement. The
amended employment agreement will obligate the company to register
these shares and reimburse her for the difference in the gross proceeds
upon the sale of such shares and $300,000, regardless of the time she
holds such shares. Upon Mrs. Lyons termination, the company will record
additional compensation at the greater of the then market price of the
company stock or the guaranteed price stipulated in her contract. The
agreement further provides that Mrs. Lyons remain in the employment of
the company for at least four months following the amendment of her
contract. The contract revisions further provided that Mr. Lyons loan
of $115,000 be recorded as additional compensation, as required by the
officer compensation agreement. Effective October 31, 2001 Mrs. Lyons
tendered her resignation (See note 11).
In January 2000 the company entered into two additional employment
contracts, with the company president and the officer in charge of
Latin American Operations, both for the duration of two years and
provides that company be obligated for an aggregate compensation of
$115,000 in year 2000 and $126,500 in year 2001. Effective August 2,
2000 both of these employment contracts were amended to reflect upon
termination from employment these individuals would also be entitled to
nine months of compensation and will receive in the aggregate 35,000
shares of common stock which the company has agreed to reimburse the
respective employees the difference between the gross proceeds they
receive upon sale and $105,000, regardless of the term the employees
hold such shares. Upon termination of the employee's contract the
company will record additional compensation at the greater of the
market price of the company stock or the guaranteed price stipulated in
the contract.
The company entered into two additional one-year employment agreements
with the Chief Operating Officer and the Chief Executive Officer,
requiring the company issue 100,000 shares of stock and 750,000
warrants to purchase additional common stock at $1.75 per share,
individually. Compensation was recorded on the arrangement equal to the
then market value of the restricted stock, $350,000, in year 2000.
Read accountants' review report
- 12 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 9. Commitments and Contingencies (Continued)
------- -----------------------------
C Foreign Assets
--------------
The accompanying consolidated balance sheets include assets relating to
the company's slot machine rental operations in Peru and Colombia of
$3,200,000 and $970,000, respectively. Although these countries are
considered politically and economically stable, it is possible that
unanticipated events in foreign countries could disrupt the company's
operations. In that regard, the company was informed that in Peru an
excise tax has been instituted effective October 1, 1996, on the leases
of gaming equipment. The company with others in the industry negotiated
with the appropriate governmental agencies and have had the excise tax
significantly curtailed. In addition, a significant portion of the
company's inventory in cigars is being stored in South America awaiting
instructions to deliver them to the Miami location. Revenue from rental
operations is entirely earned in Colombia and Peru. In addition, the
consolidated balance sheets include assets relating to the company's
Canadian investment in a working interest in oil and gas operations of
approximately $1,850,000.
D Lease Commitment
----------------
The company had been obligated for a three year lease for its Miami
office premises, which expired in September, 2001 and required monthly
rent of $2,500. This lease has not been renewed. In addition, the
company was obligated for a two year lease for its warehouse space, at
a monthly rent of $1,400. This lease expired; however, the company has
negotiated an arrangement whereby the original term of the lease
remains intact and can be terminated by either party with three month
notification. The company is also obligated for an office lease at its
California facility. This lease requires monthly rentals of $7,670
through March, 2002. All other leases are of short duration or are on a
month to month arrangement. Future minimum payments required as of
September 30, 2001 on all non-cancelable leases in effect that are one
year in duration or longer, are as follows:
Year Amount
---- ------
2001 $ 23,010
2002 23,010
--------
Total $ 46,020
========
Read accountants' review report
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NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 10. Impairment Charges
-------- ------------------
In March 2001, the company sold its Miami property for an aggregate
consideration of $139,000 and recorded an additional loss on
disposition of $64,000. In addition, the company recorded a reduction
in value for certain slot machine parts of $194,000 and recorded gaming
equipment impairment costs of $100,000. The impairment costs associated
with the sale of the Miami property is a result of prior environmental
costs which had been capitalized and unanticipated closing costs on the
sale. The impairment costs associated with gaming equipment parts was
the result of non usable parts previously recorded as part of slot
machine fixed asset costs on the accompanying balance sheet. The
impairment costs on the gaming equipment of $100,000 was the result of
management's on-going valuation as to the utility of gaming equipment
in conjunction with decreased volume of operations.
In February, 2001 the company announced that it had entered into a non
binding letter of intent to merge with Digital Convergence Corporation,
a privately held California company. The merger discussions were
terminated in May, 2001 and the company recorded $52,000 as an
additional asset impairment cost.
Note 11. Subsequent Event
-------- ----------------
Effective October 29, 2001 Mrs. Lyons resigned her position as Acting
Chief Financial Officer and Secretary of the company, and the company
named Joseph Tawil as acting Chief Financial Officer and William
Bossung as Secretary. On such date the Company also named Todd Sanders
as President of the Company and Jeffrey Felder was named President of
Cigar and Casino Operations. Based upon the terms of her contract
severance payments of $350,000 have been accrued in the accompanying
financial statement and will be paid monthly at the rate of $8,333 per
month. In addition, her contract requires that she receive 100,000
shares of stock. Upon issuance of the stock the company will record
additional compensation equal to the then fair market value of the
stock. In the accompanying financial statement the stock value was
accrued at 2.50 per share.
Read accountants' review report.
- 14 -
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 30, 2001, AND DECEMBER 31, 2000
-----------------------------------------------
Note 12. Operating Segments Three And Nine Months Ended September 30, 2001
-------- -----------------------------------------------------------------
Three Months Ended September 30, 2001
-------------------------------------
Cigars Gaming Oil &
Total Operations Equipment Gas Unallocated
----------- ----------- ----------- ----------- -----------
Revenues $ 160,029 $ 50,995 $ 109,034 $ 0 $ 0
-------- ----------- ----------- ----------- ----------- -----------
Costs &
-------
Expenses
--------
Cost of Product
Sold 34,628 34,628 0 0 0
Direct Overhead
Cost 327,536 64,631 237,467 25,438
Allocated Overhead
Costs 1,016,394 279,949 739,445 0 0
Depreciation 36,686 2,601 29,485 0 4,600
Assets Impairment
Costs 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total Costs
and Expenses 1,415,244 378,809 1,006,397 25,438 4,600
----------- ----------- ----------- ----------- -----------
Operating
Income (Loss) ($1,255,215) ($ 327,814) ($ 897,363) ($ 25,438) ($ 4,600)
=========== =========== =========== =========== ===========
Nine Months Ended September 30, 2001
------------------------------------
Cigars Gaming Oil &
Total Operations Equipment Gas Unallocated
----------- ----------- ----------- ----------- -----------
Revenues $ 497,522 $ 122,770 $ 374,752 $ 0 $ 0
-------- ----------- ----------- ----------- ----------- -----------
Costs &
-------
Expenses
--------
Cost of Product
Sold 77,944 77,944 0 0 0
Direct Overhead
Cost 904,910 145,716 733,756 25,438 0
Allocated
Overhead
Cost 1,783,166 440,019 1,343,147 0 0
Depreciation 87,555 7,803 71,652 0 8,100
Assets Impairment
Cost 411,071 0 347,071 0 64,000
----------- ----------- ----------- ----------- -----------
Total Costs
and Expenses 3,264,646 671,482 2,495,626 25,438 72,100
----------- ----------- ----------- ----------- -----------
Operating
Income Loss ($2,767,124) ($ 548,712) ($ 120,874) (25,438) ($ 72,100)
=========== =========== =========== =========== ===========
Total Assets $ 8,139,310 $ 631,010 $ 4,347,895 $ 1,824,662 $ 1,335,743
=========== =========== =========== =========== ===========
The company allocates indirect overhead expenses to specific segments
in proportion to the revenues earned by that segment.
Through September 30, 2001 the company has not earned any revenues from
its oil and gas venture: however, it anticipates that it will begin
earning revenue from oil and gas in the last quarter of the year.
Read accountants' review report.
- 15 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
General
-------
In August 2001 Latin American Casinos, Inc., changed its name to NuWay
Energy, Inc. to reflect the new direction of the Company. The Company has
entered the oil and gas industries in Canada via the formation of subsidiaries
in Alberta Canada and Nevada U.S. The Company is continuing to explore potential
acquisitions in the energy field without disturbing its current business
operations.
In 2001 the Company formed two subsidiaries, NuWay Resources, Inc., a
Nevada Corporation, and NuWay Resources of Canada, Ltd., a Canadian company. As
of September 30, 2001 the Company has invested approximately $1,850,000 in these
subsidiaries.
In August 2001 the Company, through it's Canadian Subsidiary, purchased
a 30% working interest from Westlinks Resources Ltd in the Superb area of
Saskatchewan, Canada. In September 2001, the Company, through it's Canadian
Subsidiary, purchased a 20% working interest from Westlinks Resources, Ltd's
Altares gas project in Northeast British Columbia.
Since January 1995, the Company has been engaged in the renting of slot
machines and other gaming equipment to licensed gaming establishments in various
cities through its wholly owned subsidiaries in South and Central America. In
1994, the Company formed its Peruvian subsidiary in late 1995 the Company formed
its Colombian subsidiary.
As of September 30, 2001, the Company had approximately 950 machines
under rental contracts in Peru and Colombia.
The Company currently concentrates its efforts on the rental of used
slot machines. These machines were purchased at a fraction of the cost of new
machines and are refurbished for use in South and Central America. Whereas a new
slot machine would cost approximately $10,000 plus additional charges for duty,
the used slot machines cost approximately $700 each including freight, duty, and
refurbishing expenditures.
In September 1997, the Company incorporated World's Best Rated Cigar
Company, as a wholly owned subsidiary, to distribute premium cigars. It was
originally intended that the company would acquire quality cigars from six
manufacturers and market them at "off price" through large retail chains. In
February 2000, the marketing strategy was modified to include selling directly
to consumers through our web site, www.worldsbestrated.com, and our toll free
number.
Results of Operations
---------------------
Revenues from the rental of slot machines in Peru and Colombia for the
three months ended September 30, 2001 decreased by $43,500 or 29%, to $109,000
from $152,600 for the same period in 2000. The Company's revenues from cigar
sales were $51,000 in the third quarter of 2001 as compared to sales of $36,600,
an increase of 39% for the same period in 2000.
Revenues from the rental of slot machines in Peru and Colombia for the
nine months ended September 30, 2001 decreased by $182,900 or 33%, to $374,800
from $557,700 for the comparable period in 2000. The Company's revenues from
cigar sales were $122,800 for the nine months ended September 30, 2001 as
compared to sales of $111,800 for the same period in 2000 or an increase in
revenues of 10%.
As of September 30, 2001, the Company's interest in oil and gas
ventures has not generated any revenue; however, the company anticipates
revenues will be generated in the forth quarter.
The decrease in slot machine revenue was the result of the overall
weakness of the economy in South America. Additionally, the decrease was due in
part to continued concerns over government-mandated obsolescence, political
changes, increased competition as well as the devaluation of foreign currency.
-16-
Selling, general, and administrative expenses incurred in the quarter
ended September 30, 2001 increased $849,400 or 172%, to $1,343,900 from $494,600
for the same period in 2000. Selling, general, and administrative expenses
incurred for the nine months ended September 30, 2001 increased $1,130,400 or
73%, to $2,688,000 from $1,557,600 for the same period in 2000.
The increase in expenses are due in part to the increased cost of
servicing the older machines, fees and costs associated with exploring new
ventures and acquisitions, rent expenses for the new California offices,
business development costs, and significant travel expenditures related to the
oil and gas ventures.
Net (loss) for the three months ended September 2001 was ($1,231,800)
or ($0.29) per share compared to ($350,500) loss or ($0.11) per share for the
same period in 2000. Net (loss) for the nine months ended September 30, 2001 was
($2,642,000) or ($0.63) per share compared to ($1,033,900) or $0.31 per share
for the same period in 2000.
The increase in net loss was attributable to the significant decline in
revenues from slot machine operations and an increase in overhead expenditures,
costs associated with exploring new ventures and acquisitions, as well as
certain non-recurring expenses for the rescinded merger and asset impairment
costs.
Through September 30, 2001 the Company expended approximately
$1,190,000 on the establishment of a premium cigar business; minor additional
expenditures for marketing and personnel are expected throughout the year 2001.
No additional costs associated with acquisitions of new cigars and related
inventory occurred in year 2001. In 2001 an insignificant amount was spent to
acquire additional inventory.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents decreased approximately $2,987,700 or 73%, to
$1,435,000 at September 30, 2001 from $4,422,700 at December 31, 2000. The
decrease is attributable to costs and expenses associated with oil and gas
acquisitions, the poor results of operations in both our slot machine and cigar
operations and the increase in corporate overhead expenditures.
The Company anticipates that its cash flow from operations and interest
earned on cash equivalents, as well as significant revenues anticipated from
it's oil and gas operations will be sufficient to meet its cash needs for the
next twelve months. The Company does not have any commitments for material
capital expenditures.
Forward Looking Statements
--------------------------
From time to time, the Company may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects, new products and certain other matters. The words "may", "will",
"expect", "anticipate", "continue", "estimate", "project", "intend" and similar
expressions are intended to identify such forward looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safeharbor,
the Company notes that a variety of factors could cause its actual results and
experience to differ materially from anticipated results and other expectations
that may effect the operations, performance, development and results of the
Company's business, including the following:
1. Changes in government regulations of gaming, tobacco, and oil and gas
exploration could have an effect on the Company's operations and business.
2. Political factors affecting Canada, and South and Central America,
particularly as they pertain to currency valuation, could affect the
Company's business in ways, which are difficult to predict.
3. The Company's proposed venture into oil and gas exploration is subject to
all the risks and uncertainties associated with the commencement of a new
enterprise and those
-17-
associated with oil and gas exploration including: operating hazards,
drilling risks and fluctuations in the price of oil and gas. There can be
no assurances that the Company will be able to successfully penetrate the
market, or that this operation will become profitable.
4. The Company may be required to raise additional funds to expand its
business operations, particularly the Company's proposed venture into oil
and gas exploration, if it proves successful. There can be no assurances
that the Company will be able to raise such funds, either through the sale
of equity or debt securities or through commercial sources. The inability
to acquire needed capital could have a material adverse effect on the
Company's ability to expand.
EXHIBITS AND FORM 8-K
Form 8-K Item 5 dated August 15, 2001. Form 8-K Item 5 dated August 28,
2001. Form 8-K Item 5 dated September 25, 2001.
Pursuant to the requirements of the Securities and Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NuWay Energy, Inc.
Date: November 19, 2001 /s/ TODD SANDERS
-----------------------------------------
Todd Sanders, President and CEO
Date: November 19, 2001 /s/ JOSEPH TAWIL
-----------------------------------------
Joseph Tawil, Acting Chief Financial
Officer
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