SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------
For the fiscal year ended December 31, 2001 Commission File #33-43423
NUWAY ENERGY, INC.
A Delaware Corporation 65-0159115
------------------------------------
(IRS Employer Identification Number)
19100 Von Karmon Avenue #450 (949) 553-8002
Irvine, CA 92612 ------------------
(Telephone Number)
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $0.00067 par value
Warrants, exercisable at $3.00 per share
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $749,842
Aggregate market value of the voting stock held by non-affiliates,
computed by reference to the average bid and asked prices of such stock, as
March 8, 2002: $7,158,663
Number of shares outstanding of the registrant's common stock, as of
April 9, 2002: 6,470,853 shares.
LATIN AMERICAN CASINOS, INC.
FORM 10-KSB
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.................................................. 1
ITEM 2. PROPERTIES................................................ 3
ITEM 3. LEGAL PROCEEDINGS......................................... 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 4
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION...................................... 5
ITEM 7. FINANCIAL STATEMENTS...................................... 8
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 8
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS....................................... 8
ITEM 10. EXECUTIVE COMPENSATION.................................... 9
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 12
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS/COMPLIANCE WITH SECTION 16(b)................ 14
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.......................... 14
i
PART I
ITEM 1. BUSINESS
GENERAL
NuWay Energy, Inc. (the "Company") formerly Latin American Casinos,
Inc. operates a slot machine rental and remanufacturing Company in South and
Central America and is involved in the distribution and sale of its own premium
brand cigars in the United States. In addition, the Company has entered into the
Oil and Gas industry in Canada via the formation of subsidiaries in Alberta,
Canada, and Nevada, U.S. The Company is a partner with existing oil and gas
operators in the province of Alberta, Canada.
The Company was initially organized as Repossession Auction, Inc., a
Florida corporation, in 1989. The Company merged into a Delaware corporation
bearing the same name in 1991. In 1994, the Company changed its name to Latin
American Casinos, Inc. to reflect its entrance into the gaming and casino
business in South and Central America, and in 2001 the Company changed its name
to NuWay Energy, Inc. to reflect its entrance into the oil and gas industry. The
Company maintains its principal place of business at 19100 Von Karman Ave, Ste
450, Irvine, CA 92612. Its telephone number is (949)553-8002.
SLOT MACHINE OPERATIONS
The Company concentrates its efforts on the rental of used five reel
slot machines. The Company purchases these machines at a fraction of the cost of
new machines, which are then refurbished at facilities in Latin America for use
in South and Central America. Whereas a new slot machine costs approximately
$10,000, plus duty charges, the used slot machines purchased by the Company cost
approximately $700 each, including freight, duty, and limited refurbishing
expenses. The Company has determined that more extensive refurbishing extends
the working life of each slot machine for up to an additional five years.
Currently, the expected useful life of a used slot machine is five years. Such
additional refurbishing increases the cost of each machine by approximately
$100. This refurbishing in no way impacts any government regulations that could
mandate obsolescence.
The Company entered the gaming and casino industry in Peru in 1994.
Since then, the Company has been engaged in the renting of slot machines to
licensed gaming establishments in various major 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,
and in 1997, the Company formed a subsidiary in Nicaragua, which was liquidated
in year 2000.
As of December 31, 2001, approximately 538 slot machines were in
operation in Peru and approximately 330 slot machines were in operation in
Colombia. These machines are installed in, among other establishments, drug
stores, pool halls, bars, restaurants and nightclubs. The Company is in the
process of scaling down it's operations in both Peru and Columbia in order to
prepare for the announced planned merger with Digital Convergence.
The Company has offices in Lima, Peru; and Bogota, Colombia.
Hurricane Mitch adversely affected the Company's operations in
Nicaragua, which were not substantial, in October 1998. The Company liquidated
all of its assets in Nicaragua in the year 2000.
The Company competes with all the major gaming companies in Latin
America, including IGT, Novomatic and Admiral. Many of the companies are more
established and have greater resources. The Company, through its current
relationships with its existing clients believes that it has created in which
the impact of competition from major companies is limited.
SOURCE OF MACHINES
The Company had purchased used slot machines from several vendors in
Australia, including Damlite Pty. Ltd. and Olympic Video Gaming, a subsidiary of
International Gaming Technology. The Company's principal vendor is AJ
Electronics Repairs Pty. Ltd., ("AJ"), an Australian Company which services and
disposes of used slot machines. The loss of any of these suppliers, including
AJ, would not have a material adverse effect on the Company's business due to
the existence of other sources.
1
REFURBISHING PROCESS
All slot machines purchased were delivered to the Company's warehouses
in Lima, Peru or Bogota, Colombia and were refurbished by the Company's
technicians. Each slot machine is electronically tested for 30 minutes to assure
that it is in correct working order. Defective or worn parts are replaced or
repaired. Once the technician is satisfied that the machine is in proper working
order, the machine is thoroughly cleaned inside and out. At that time, a
computerized printed card that translates the rule of play from English to
Spanish is placed inside the machine in such a way that it can be seen and read
by the slot machine player. Refurbished machines are then placed in service in
the various locations. While the refurbishing does extend the useful life of a
used slot machine, this refurbishing in no way impacts the effect of any
possible government regulations that could mandate obsolescence.
RENTAL OF SLOT MACHINES
The slot machines are rented to licensed individual owner operators
under a rental contract usually for a term of one year or longer. The contract
provisions vary depending on, among other things, the number of slot machines
requested by the renter. All contracts are backed by a personal guarantee for
the first four installment payments from the renter to insure against
non-payment of rental fees in the contract's initial stage. The rental contracts
also provide insurance to cover any loss by fire, theft, vandalism or political
unrest.
GOVERNMENT REGULATION
The governments of Peru, Colombia have regulations governing gaming
activities. Essentially, these regulations establish licensing requirements for
slot machine operations. It is anticipated that new regulations governing the
age and condition of machines will soon be enacted. The Company takes
appropriate steps to verify the licenses of its customers. The Company is in the
process of reviewing it's operations in both Peru and Columbia in order to
prepare for the announced planned merger with Digital Convergence.
The Peruvian government, in October 1996, imposed an excise tax of 200%
on lessees of gaming equipment, including slot machines. The excise tax caused
many of the Company's customers to return their slot machines to the Company
rather than pay the higher tax.
In January 1997, the Company obtained a temporary injunction against
the Peruvian government, prohibiting it from implementing the excise tax of
200%. The Government has lowered the tax to a more realistic level. It is
anticipated that new regulations governing the age and condition of machines
will be enacted in the coming years. Given this, the Company is evaluating
whether to increase or decrease its slot machine operations in Peru.
The re-imposition of an excise tax of 200% in Peru would adversely
affect future earnings. Accordingly, if the Company were not successful in
preventing the tax, it would reevaluate its position in Peru.
PREMIUM CIGAR OPERATIONS
Beginning in September 1997, the Company directed part of its efforts
into establishing a business of producing, distributing and selling premium
cigars throughout the United States.
World's Best Rated Cigar Company ("World's Best") was formed as a
subsidiary to distribute cigars produced by Claudio Norberto Mercado. Mr.
Mercado resides in Santiago, Dominican Republic, in the Villa Gonzalez region,
the heart of the tobacco-growing valley. In a business arrangement, World's Best
advanced $75,000 to Mr. Mercado to build a cigar factory. World's Best also
advanced the sum of $15,000 to purchase all necessary fixtures to produce
cigars, such as molds, rolling tables, compressors, etc. World's Best holds a
mortgage on the factory to secure these advances. However, the Company
determined that the plan of selling one cigar from one manufacturer was too
limited. Therefore, during the summer of 1998, World's Best entered into
contractual arrangements with five other manufacturers in Nicaragua, Honduras
and the Dominican Republic. All of the manufacturers produce hand made 100%
Cuban seed, long leaf filler premium cigars. The manufacturers are
world-renowned and they manufacture cigars for over 20% of the brand name cigars
currently on the market.
These agreements allow the Company to acquire cigars at a fraction over
their cost and will enable them to be sold at a retail price significantly below
the current retail price for brand name premium cigars. The agreements require
that the manufacturers use high grade long leaf tobacco, hand roll the cigars
utilizing high grade filler and parchment wrapping of a grade selected by the
Company and wrap the cigars individually in cellophane and box them for
shipping. They also require the manufacturers to retain a specified amount of
2
inventory at all times to satisfy the Company's cigar purchase orders. The
cigars are then transported to the Company's facilities in Miami where they are
shipped to both retail customers and wholesale distributors.
The cigars are marketed through our web site: www.worldsbestrated.com
as well as our toll free number in bundles and boxes of twenty-five from the six
manufacturers. A color-coded cigar ring identifies each of the products of the
six cigar manufacturers. Traffic to the web site and to our toll free number, is
generated by our advertising in both traditional and non-traditional cigar
magazines, newspapers, electronic advertising. Our clients are provided with
literature describing the manufacturer's history, factories and plantations.
This change is sales strategy has resulted in a nearly six-fold increase in
sales and the Company believes this increase can be sustained through the year
2002.
Suggested retail pricing on the cigars range from $40.00 for a bundle
of 25 panatelas to $50.00 for a bundle of 25 presidentes. The popular Churchill
size has a suggested retail price of $48.00 for a bundle of 25. These prices are
60% to 80% lower than prices charged in tobacco shops for cigars of the same
quality and they include free shipping anywhere in the USA. Substantially all
incurred advertising expenses were paid with barter transactions.
The Company continues to work on establishing relationships with
various distributors in the United States who supply convenience stores,
restaurants, bars and supermarkets with products. While the Company has had
limited success with this strategy, it will continue to attempt to establish
these relationship with companies that have various means of distribution. These
relationships require many meetings and conversations over a protracted period
of time. The Company is committed to pursing these relationships.
OIL AND GAS
Beginning in July 2000 the Company directed part of its efforts to the
exploration for and the development of oil and gas properties in Canada. The
Company's exploration and development activities related to oil and gas are
conducted jointly with others. The Company purchased a 30% working interest in
the Superb area of Saskatchewan, Canada and a 20% working interest in the
Altares Gas project in Northeast British Columbia.
The Altares acquisition includes a working interest in a rolling option
on 10,000 acres of land and 20% interest in over 5,700 acres of additional land.
The investment also includes the farm in fees as well as the capital required to
drill the first two commitment wells on the 10,000 acres.
The Superb area of Saskatchewan includes a working interest in four
existing Waseca heavy oil wells with a combined production rated of
approximately 250 barrels per day. Additionally, the Company has identified
seven infill drilling locations based on geology and 3-D seismic that should
increase field productivity to over 800 barrels per day. The Company plans to
finish drilling as soon as possible. Recent improvements on the property have
been the construction of a central battery and water injection facility to
reduce operating costs and optimize well production.
Employees
The Company currently has a total of 32 full-time employees. The
reduction of 11 employees from the previous year was a result of our operations
in Peru, Miami and Columbia, and downsizing of our technical and clerical staff
in our other locations. The Company has two employees in the Miami office: one
executives and one in clerical position. The Company has three executives and
one secretary in the Irvine, CA Corporate Office. In Lima, Peru, the Company has
five clerical employees in its business office, including a general manager and
five service technicians in its warehouse and remanufacturing plant. In
Colombia, the Company employs a total of five clerical employees including a
general manager in its three business offices and nine service technicians in
its warehouse and refurbishing facility.
The Company believes its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's executive offices and operating facilities located at
19100 Von Karman Avenue, Suite 450, Irvine, CA 92612 and is leased on month to
month for $7,670 per month. In addition the Company is leasing, on a month to
month basis, our Miami Office and warehouse for $1,590 per month.
3
The Company leases a 2,000 square foot business office in San Isidro, a
municipality in Lima, Peru, for $600 per month. The lease terminated in June
2002, with a renewal option. The Company also leases a 10,000 square foot main
warehouse and refurbishing facility in Lima, for $1,000 per month, the lease
terminated on June 2002. The Company is currently negotiating with the landlords
in Lima, Peru for an additional reduction in rent.
In Bogota, Colombia the Company leases a 4300 square foot combined
office and warehouse facility for $865 per month. This lease terminates on
January 1, 2002 and will extend to January 1, 2003. The Company also leases in
Bogota an additional 1100 square foot warehouse for $260 per month. This lease
expires May 19, 2002.
The Company was the lessor of office space and used car lot at 11337 NW
7th Avenue in Miami on a month-to-month basis for $1,200 per month. The property
is leased to an unrelated party. The Company acquired the property as an office
space and used car lot in 1990. This property was converted to a rental property
when the Company exited the used vehicle business and entered the slot machine
business. Over the years, the Company, expended in excess of $100,000 as a
result of environmental concerns on the property. The Company took a charge to
operations in 1999 to reduce the value of this property to its net realizable
value. In March 2001, the Company sold this property and recorded a net loss on
the sale of the property of $64,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant from time to time in claims and lawsuits
arising out of the normal course of its business, none of which have or are
expected to have a material adverse effect on its business, operations,
financial position or corporate liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
From June 20, 1994 until October 30, 1998, the Company's Common Stock
and Warrants were listed on the NASDAQ Stock Market under the symbol "LACI" and
"LACIW", respectively. Beginning in October 31, 1998, the Company's Common Stock
and Warrants were listed on the NASDAQ Small Cap. In August 2001, the Company
changed the symbol of its Common Stock and Warrants to "NWAY" and "NWAYW"
respectively. The table below represents the quarterly high and low bid prices
for the Company's Common Stock and Warrants for the last two fiscal years as
reported by NASDAQ.
Common Stock High Low
------------ ---- ---
2001
----
January 1 - March 31 4.25 2.00
April 1 - June 30 3.15 2.00
July 1 - September 30 3.28 2.10
October 1 - December 31 2.99 1.67
2000
----
January 1 - March 31 1.75 1.03
April 1 - June 30 1.46 1.12
July 1 - September 30 1.81 1.21
October 1 - December 31 2.50 1.59
4
Warrants High Low
-------- ---- ---
2001
----
January 1 - March 31 1.87 .56
April 1 - June 30 1.03 .50
July 1 - September 30 .85 .50
October 1 - December 31 .58 .25
2000
----
January 1 - March 31 .50 .31
April 1 - June 30 .40 .31
July 1 - September 30 .50 .31
October 1 - December 31 .84 .43
The closing prices for the Common Stock and Warrants on March 8, 2002
were $2.14 and $.26 respectively. The Nasdaq Stock Market suspended trading of
the Company's securities as of March 11, 2002.
There were 47 registered owners and approximately 1,227 beneficial
owners of the Common Stock of the Company as of December 31, 2001. The Company
did not declare a dividend in 1999,2000, or 2001.
As of December 31, 2001, the Company has outstanding (i) 1,725,000
publicly traded Warrants to purchase one share of the Company's Common Stock at
an exercise price of $3.00 through December 11, 2002, and (ii) 3,300,000 five
year warrants to purchase one common stock at an exercise price of $1.75 per
share through December 11, 2005. See Section entitled Subsequent Events.
On December 14, 2001 the Company issued and sold $3,500,000 principal
amount of Convertible Debentures to certain accredited investors. The
Convertible Debentures are convertible Debentures are convertible into shares of
Common Stock at a price of $1.75 per share and expires June 13, 2001. The
Convertible Debentures were issued pursuant to the exemption from registration
requirements of the Securities Act of 1933 provided by Section 4(2) of such Act
and Rule 506 promulgated by the Securities and Exchange Commission under that
Section. The Company incurred approximately $64,500 of costs in regard to this
private placement. The debt issuance costs will be amortized over the life of
the debentures. The interest on the debentures is payable either in cash or in
additional shares of common stock, at the discretion of the company. The
conversion price of the debentures was determined by the approximate market
value of the common stock at the date of issuance.
Prior to December 31, 2001 approximately $1,100,000 of debenture
holders converted their debentures into common stock for the value of their
debentures and the accrued interest of $66,000. At December 31, 2001 included in
accounts payable was $144,000 of accrued interest on these debentures. See
Section entitled Subsequent Events.
In December 2000 the Company issued private warrants to purchase
3,300,000 shares of common stock at an exercise price of $1.75 per share through
December 11, 2005. These warrants were issued in connection with services
rendered by several individuals (including our CFO and COO pursuant to
employment agreements) and entities. See Section entitled Subsequent Events.
Effective June, 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, we 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
Jun 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.
At the date issuance and subsequent re-pricing date the warrant price equaled or
exceeded the market value of the corporate stock.
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.
As of December 31, 2001 the Company has agreed to register 135,000
shares of common stock (pursuant to employment agreements with certain employees
of the Company), 225,000 shares of common stock underlying investment banking
warrants (pursuant to piggy back registration rights contained in these
investment banking warrants), 3,300,000 shares of common stock underlying
private warrants (pursuant to piggy back registration rights contained in these
warrants), 2,120,000 shares of common stock underlying the company's convertible
debentures. As of December 31, 2001 the aforementioned 225,000 shares of common
5
stock underlying investment banking warrants and the 2,120,000 shares of common
stock underlying the company's convertible debentures, as well as 300,000 shares
of Common Stock underlying the Company's private Warrants, and 1,725,000 shares
of Common Stock underlying the Company's public Warrants, could be sold pursuant
to Rule 144 under the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS - 2001 COMPARED TO 2000
Revenues from the rental of slot machines in Peru and Colombia for the
year ended December 31, 2001 decreased by $207,873 or (31%), to $461,778 from
$670,000 for the comparable period in 2000. The Company's revenues from cigar
sales were $170,709 for the year ended December 31, 2001 as compared to sales of
$163,900 for the same period in 2000.
The reason for the decrease in gaming revenues was 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, the devaluation of foreign currency as well as the need
to replace machines with newer more modern equipment.
Selling, general, and administrative expenses incurred in the year
ended December 31, 2001 increased $1,377,944 or 53%, to $3,973,143 from
$2,595,200 for the same period in 2000.
The increase in selling, general, and administrative expenses were
incurred primarily due to the expenses of pursuing other business opportunities,
including, but not limited to, oil and gas ventures.
In 2000 the Company recorded non-recurring expenses associated with the
issuance of common stock and warrants as compensation in the amount of
$2,518,500, and costs associated with the liquidation of Nicaraguan subsidiary
of $162,000 and officer compensation of $115,000 due the former Chief Operating
Officer, Lloyd Lyons, under his employment agreement. The increase is also due
in part to the increased cost of servicing the older machines and the cost of
employee severance requirements in these countries.
Net income (loss) for the year ended December 31, 2001 was ($6,652,433)
or ($1.56) per share compared to ($4,699,000) or ($1.40) per share for the same
period in 2000. The net loss was attributable to the significant decline in
revenues from slot machine operations and an increase in overhead expenditures
including officer compensation. In addition, in 2001 the Company reduced its
asset values and has charged current operations with a $3,015,182 asset
impairment charge due to the Company's ongoing valuation as to the utility of
gaming equipment.
Through December 31, 2001 the Company expended approximately $1,196,000
on the establishment of a premium cigar business; additional expenditures for
marketing and personnel are expected in year 2002. The Company expended
approximately $54,000 in 2001 in the cigar business up from $42,000 in 2000 a
increase of $12,000. The Company anticipates that it will generate revenues from
this business in year 2002, although the amount of such revenues is, at this
time, impossible to forecast. The effect that this business will have on the
overall profitability of the Company is uncertain.
RESULTS OF OPERATIONS - 2000 COMPARED TO 1999
The Company's revenues from the rental of slot machines were $670,000
for the year ended December 31, 2000, a decreased of $1,181,000 from the year
ending December 31, 1999. The decrease was due in part to the concerns over
government mandated obsolescence, political changes, increased competition, as
well as the devaluation of the foreign currency. The Company's revenues from
cigar sales were $163,900 in 2000.
Selling, General and Administrative Expenses incurred in the operation
of the Company's cigar, gaming and casino business for the year ended December
31, 2000 from $1,771,700 to $2,595,200 in 2000.
As a result of the decrease in revenues, without a significant change
in operating expenses, the effect of the increase in Selling, General and
Administrative Expenses, as well as the impairment cost of the Company's gaming,
cigar, and real estate assets, the Company's net loss was ($4,699,000) and
($1.40) per share for the year ended December 31, 2000 compared to net income of
$531,000 or $0.16 per share for the preceding year. As a result of political
changes and government-mandated obsolescence of certain gaming equipment, the
company adjusted previously recorded cost of gaming equipment to its anticipated
net realizable value.
6
Additionally, the Company reduced the valuation of certain real estate
value in Miami to reflect current market conditions and adjusted its investment
in the cigar operations to account for the slower than expected sales. The total
impairment charge was computed as follows:
Gaming Equipment Asset Impairment Charge $ 1,245,000
Miami Real Estate Impairment Charge 86,000
Reduction of Cigar Investment 169,000
Other 15,000
-----------
Total $ 1,515,000
===========
The gaming equipment impairment charge was based on valuation of
obsolescence and replacement values made by management. Consideration in the
valuation was the decrease in utilization of the gaming equipment due to
decreased volume of operations. The impairment value of the Miami Real Estate
was based on an independent appraisal received and subsequent sale of the
property as further described in Note 13 to the Financial Statements. The
impairment cost of the cigar inventory cost was the result of certain packaging
and tube cost that had been abandoned.
Through 1999 the Company expended approximately $1,100,000 on the
establishment of a premium cigar business; additional expenditures for marketing
and personnel are expected in year 2000. The fact that there were no costs
associated with acquisitions of cigars and related inventory in 1999, accounted
for the change. In 1999, an insignificant amount was spent to acquire additional
inventory. The Company anticipates that it will generate significant revenues
from this business in year 2000, although the amount of such revenues is, at
this time, impossible to forecast. The effect that this business will have on
the overall profitability of the Company is uncertain.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased approximately $3,982,173 to $440,827 at
December 31, 2001 from $4,423,000 at December 31, 2000. This decrease was
attributable in part to $1,675,691 expended in the Company's new oil and gas
operations.
The Company does not anticipate that its cash position should be sufficient
to meet its cash needs for the next twelve months, but is exploring means to
maintain its cash needs.
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 safe
harbor, 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 could have an effect on the
Company's operations and business.
2. Political factors, particularly as they pertain to currency
valuation, could affect the Company's business in ways, which are difficult to
predict.
3. The agreements, which the Company has with five of its cigar
manufacturers, are cancelable upon 60 days written notice. One or more such
cancellations could have a material adverse effect on the Company's cigar
operations.
4. The Company may be required to raise additional funds to
expand its business operations, 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
7
to acquire needed capital could have a material adverse effect on the Company's
ability to expand.
5. The Company may be required to expand its infrastructure,
including the hiring of additional personnel in its executive offices. There can
be no assurances that the Company will be able to attract and retain qualified
personnel who will be successful in managing the Company's operations.
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements FORM 10-KSB
------------------------------------------- -----------
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2001
and 2000 F-2
Consolidated Statements of Changes in Stockholders'
Equity for years ended December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the years
ended December 31, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2001 and 2000 F-5
Notes to the Consolidated Financial Statements F-6-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 26, 2001, Shubitz Rosenbloom & Co., P.A. ("Shubitz")
notified the Company that it has resigned as the Company's independent
accountants. Shubitz' reports on the financial statements for the two most
recent fiscal years ended December 31, 1999 and December 31, 2000 did not
contain an adverse opinion, or a disclaimer of opinion, or was qualified as to
audit scope or accounting principles. Furthermore, during the two most recent
fiscal years and through November 26, 2001, there have been no disagreements
with Shubitz on any matter of accounting principles or practices, financial
statement disclosure or auditing scope and procedures, which disagreements, if
not resolved to the satisfaction of Shubitz, would have caused that firm to make
reference to the subject matter of such disagreements in connection with its
reports.
On January 22, 2002, the Company engaged Hein + Associates LLP
("Hein"), as its independent accountants to audit the Company's financial
statements for its fiscal year ending December 31, 2001. In the Company's two
most recent fiscal years and subsequent interim periods prior to such
engagement, the Company did not (itself or through someone acting on its behalf)
consulted with Hein on any accounting or auditing matter. On March 4, 2002, Hein
resigned as the Company's independent auditors. Hein never commenced an audit,
and therefore never issued an opinion on the Company's year-end financial
statements. During the period from January 22, 2002 (date Hein was engaged)
through the date of Hein ceasing its engagement, the Company did not have any
disagreements with Hein on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Hein would have caused
that firm to make reference to the subject matter thereof in connection with its
report. Hein had not yet commenced audit procedures on the December 31, 2001
financial statements as of the date of their resignation. However, prior to
their resignation, Hein advised the Company that based on their reading of the
December 31, 2000, financial statements, such prior year financial statements
would require restatement. In addition, based upon a preliminary review of an
appraisal of certain assets in South America performed for the Peruvian
government, Hein advised the Company that it appeared likely the South American
assets may be materially impaired.
On March 11, 2002, the Company engaged Shubitz, as its independent
accountants to audit the Company's financial statements for its fiscal year
ending December 31, 2001. Shubitz was formerly the Company's independent
8
accountants until their resignation in November 2001, and as such they had
prepared the Company's financial statements for the two most recent fiscal years
and subsequent interim periods prior to such engagement.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Todd Sanders 30 Director, President, Chief
Executive Officer
William Bossung 43 Director, Secretary, Chief
Operating Officer
Jose A. Caballero 44 Director
Michael Iscove 50 Director
Dennis R. Barry 62 Director
Directors are elected to an annual term that expires at our Company's
annual meeting of stockholders.
Mr. Sanders joined the Company as a Director and Chief Executive
Officer in October 2000. For the last five years Mr. Sanders has been acting as
a private financier of both public and private ventures. Since 1998 Mr. Sanders
has been the President of Strategic Capital Consultants, Inc., an Orange County,
California based corporate finance and business development consulting company.
Mr. Bossung joined the Company as a Director and Chief Operating
Officer in October 2000. For approximately the last ten years Mr. Bossung has
been President of Alliance Financial Network, Inc. which provides financial
consulting for public and private companies. From early 1995 until mid 1997 Mr.
Bossung was the Director of Corporate Finance for Chadmoore Wireless Group, Inc.
which was subsequently acquired by Nextel.
Mr. Caballero has served on the Board of Directors since April 1994.
Mr. Caballero is the Vice President of Exfi International Corporation, an
advertising and marketing agency that specializes in doing work for companies
that plan to expand their business into Latin America. Mr. Caballero has been
with Exfi International Corporation since 1987.
Mr. Iscove joined the Company in October 2000 as a Director. From June
1995 to date, Mr. Iscove served as the Chairman, President and Chief Executive
Officer of Sirius Corporate Finance Inc.
Mr. Barry has been a member of the Board of Directors since June of
1999. Mr. Barry has been employed as a commercial mortgage broker and real
estate salesman for the past 37 years. He is a Vice President with the Mortgage
Corporation of America since 1997.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than ten percent of a
registered class of our equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of our Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish us with copies of Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were required
during the fiscal year ended December 31, 2001, the Company believes that,
during the year ended December 31, 2001, all of the Company's executive
officers, directors and greater-than-ten percent stockholders complied with all
Section 16(a) filing requirements
9
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued during
the last three completed fiscal years ended December 31, 2001 by the Company for
services rendered by the Lloyd Lyons, Chief Executive Officer during those years
(and part of fiscal 2000), and Todd Sanders, Chief Executive Officer, and
William Bossung, Chief Executive Officer:
SUMMARY COMPENSATION TABLE
===================================================================================================================
Annual Compensation Long Term Compensation
-------------------------------------------------------------------------------------------------------------------
Awards Payouts
-------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Compen- Stock Options LTIP Compen-
Principal Salary Bonus sation Awards SARs Payouts sation
Position Year $ $ $ $ # $ $
-------------------------------------------------------------------------------------------------------------------
Lloyd 2000 (2) 151,000 -- -- -- -- -- --
Lyons,
Chief 1999 348,000 348,000 [42,000] 650,000 (1) -- --
Executive
Officer
Todd Sanders, 2000 (3) -- -- -- 100,000 (3) 750,000 (3) -- --
Sanders,
Chief
Executive
Officer
William 2000 (4) -- -- -- 100,000 (4) 750,000 (4) -- --
Bossung,
Chief
Operating
Officer
===================================================================================================================
(1) Options which were re-priced from $2.50 to $1.00 per share.
(2) Including wage continuation payments and outstanding loan from the Company
applied as compensation.
(3) Became Chief Executive Officer in October 2000. Pursuant to an employment
arrangement the Company issued Mr. Sanders 100,000 shares of restricted
Common Stock and warrants to purchase 750,000 shares of Common Stock for
$1.75 per share. In February 2002 Mr. Sanders cancelled and terminated
these warrants.
(4) Became Chief Operating Officer in October 2000. Pursuant to an employment
arrangement the Company issued Mr. Bossung 100,000 shares of restricted
Common Stock and warrants to purchase 750,000 shares of Common Stock for
$1.75 per share. In February 2002 Mr. Bossung cancelled and terminated
these warrants.
The Company did not issue options to any Executive Officers during fiscal
2001.
REPORT ON RE-PRICING OF OPTIONS
The Board of Directors determined that in lieu of awarding a cash bonus
and an increase in his non-accountable expense allowance to Mr. Lyons in
connection with the performance of his duties as the Chief Executive Officer and
Chairman of the Board of the Company, his outstanding stock options would be
re-priced on the same basis as other outstanding stock options which were
similarly re-priced.
The following table sets forth certain information with respect to
outstanding stock options held by the Lloyd Lyons Chief Executive Officer (for
part of 2000) or exercised in 2000.
10
================================================================================
Number of Securities
Shares Underlying Un-exercised
Name Acquired On Value In-the-Money Options at
(a) Exercise (#) Realized ($) Options at December 31, 2000
--------------------------------------------------------------------------------
Exercisable Un-exercisable Exercisable Un-exercisable
--------------------------------------------------------------------------------
Lloyd Lyons 650,000 162,500 -- --
================================================================================
EMPLOYMENT AGREEMENTS
In January 1997, the Company entered into a five-year employment
agreement with Lloyd Lyons, that provided for an annual salary commencing
January 1997 of $275,000 and increasing $25,000 per annum commencing January 1,
1998. The contract provided for salary continuation for a period of two years
after the death of the officer. In January 2000, Mr. Lyons passed away and
effective August 2, 2000 the Company amended it's employment contract with the
surviving widow (Geraldine Lyons, the Company's Chief Financial Officer and
Secretary) and primary beneficiary of the Estate of the Lloyd Lyons, where-in
the salary continuation clause included in his contract was replaced with a
severance arrangement which requires the Company to pay Geraldine 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 obligates 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.
The agreement further provides that Geraldine Lyons remain in the employment of
the company for at least four months following the amendment of the contract.
The contract revisions further provided that the officer loan of Lloyd Lyons in
the amount of $115,000 be recorded as additional compensation, as required by
the officer compensation agreement. Effective October 29, 2001 Mrs. Lyons
tendered her resignation.
In January 2000 the company entered into two additional employment
contracts, with President, Jeffrey Felder, President of Latin American
Operations, Angel Garcia, 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.
The Company entered into two additional one-year employment agreements
with the Chief Operating Officer, William Bossung and the Chief Executive
Officer, Todd Sanders, whereby the company issued to each 100,000 shares of
stock and warrants to purchase 750,000 shares of common stock at $1.75 per
share. Messrs. Sanders and Bossung terminated and cancelled their respective
warrants in February 2002.
Other than described above and the stock option plans described below,
as of December 31, 2001, the Company does not have any contingent forms of
remuneration, including any pension, retirement, stock appreciation, cash or
stock bonus, or other compensation plan.
DIRECTOR COMPENSATION
Non-Management directors receive $300 for each meeting attended.
1994 STOCK OPTION PLAN
In June 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "Plan"). The maximum number of shares available for issuance under the Plan
is 1,500,000 shares. The Plan terminates on June 13, 2004. The Plan is designed
to provide additional incentives for Directors and officers and other key
employees of the Company, to promote the success of the business and to enhance
the Company's ability to attract and retain the services of qualified persons.
The Board of Directors administers the Plan. The Plan authorizes the Board of
Directors to grant key employees selected by it, incentive stock options and
non-qualified stock options. The exercise price of shares of Common Stock
subject to options qualifying, as incentive stock options must not be less than
11
the fair market value of the Common Stock on the date of the grant. The exercise
price of incentive options granted under the Plan to any participant who owns
stock possessing more than 10% of the total combined voting power of all classes
of outstanding stock of the Company must be at least equal to 100% of the fair
market value on the date of grant. Fair market value has been determined to be
the closing sales price for the Company's common stock reported by NASDAQ. In
October 2000 the Board of Directors authorized the issuance of stock options
under the Plan to certain officers and directors of the Company as more fully
set forth in the footnotes to the Security Ownership table in Item 11 below.
INCENTIVE STOCK OPTIONS OUTSTANDING
Amount Price 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 237,500
========
The Board of Directors may amend the Plan at any time but may not,
without shareholder approval, adopt any amendment, which would materially
increase the benefits accruing to participants, or materially modify the
eligibility requirements. The Company also may not, without shareholder
approval, adopt any amendment, which would increase the maximum number of
shares, which may be issued under the Plans, unless the increase results from a
stock dividend, stock split or other change in the capital stock of the Company.
In March 1999, the Board of Directors authorized an amendment to the Plan
increasing the number of shares to be issued thereunder from 1,000,000 to
1,500,000. This amendment was submitted for shareholder approval at the 1998
Annual Meeting and was approved.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding shares of
the Common Stock beneficially owned as of April 9, 2002, by (i) each person or a
group, known to the Company, who beneficially owns more than 5% of the Common
Stock, (ii) each of the Company's directors, and (iii) all executive officers
and directors as a group:
-----------------------------------------------------------------------------------------------------------
Number of Shares
Name Beneficially Owned(1) Percent of Class (1)
-----------------------------------------------------------------------------------------------------------
William Bossung 851,403 (2) 12.9%
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Todd Sanders 730,260 (3) 11.9%
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Augustine Fund, L.P. 1,621,234 (4) 24.8%
141 W. Jackson, Suite 2182
Chicago, IL 60604
-----------------------------------------------------------------------------------------------------------
M.H. Meyerson & Co. Inc. 945,890 (5) 13.3%
525 Washington Boulevard
Jersey City, NJ 07503
-----------------------------------------------------------------------------------------------------------
Geraldine Lyons 226,224 (6) 3.4%
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Angel Garcia 75,000 (7) 1.1%
Mariscal Sucre 321 Miraflores
Lima, 18 Peru
-----------------------------------------------------------------------------------------------------------
Kenneth Koock 263,750 (8) 4%
525 Washington Boulevard
Jersey City, NJ 07503
-----------------------------------------------------------------------------------------------------------
Jose A. Caballero 35,000 (9) *
c/o Latin American Casinos, Inc.
200 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
12
-----------------------------------------------------------------------------------------------------------
Number of Shares
Name Beneficially Owned(1) Percent of Class (1)
-----------------------------------------------------------------------------------------------------------
Jeffrey A. Felder 50,092 (10) *
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Dennis R. Barry 30,000 (11) *
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Michael Iscove 50,000 (12) *
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
All Executive Officers and Directors as a group 1,821,755 20.8% (13)
-----------------------------------------------------------------------------------------------------------
* Less than 1%
(1) Under Rule 13d-3 under the Exchange Act, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition,
shares are deemed to be beneficially owned by a person if the person has
the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by
such person (and only such person) by reason of these acquisition rights.
As a result, the percentage of outstanding shares of any person as shown in
this table does not necessarily reflect the person's actual ownership or
voting power with respect to the number of shares of common stock actually
outstanding at April 9, 2002.
(2) Mr. Bossung is the Chief Operating Officer and a Director of the Company.
Includes 125,000 shares which may be acquired upon exercise of Company's
publicly traded warrants.
(3) Mr. Sanders is the Chief Executive Officer and a Director of the Company.
Includes 125,000 shares which may be acquired upon exercise of Company's
publicly traded warrants.
(4) Based upon filings by Augustine Fund, L.P. with the Securities and Exchange
Commission. Includes 285,714 shares owned by Brian D. Porter. Includes
28,571 shares and 45,000 shares which may be acquired upon exercise of the
Company's private warrants owned by David M. Matteson at a price of $1.75
per share. Mr. Porter and Mr. Matteson are either controlling members,
directors and officers of Augustine Capital, the general partner of
Augustine Fund L.P.
(5) Includes 554,050 shares of stock which may be acquired upon exercise of the
Company's publicly traded warrants, and 103,000 shares of stock which may
be acquired upon exercise of investment banker warrants exercisable at
$1.06 per share.
(6) Includes 10,000 shares which may be acquired upon exercise of Company
options which are exercisable at $1.75 per share, and 41,024 shares of
Common Stock held in trust for grandchildren.
(7) Includes 65,000 shares which may be acquired upon exercise of Company
options which are exercisable at $1.00 per share and 10,000 shares which
may be acquired upon exercise of Company options which are exercisable at
$1.75 per share.
(8) Includes 100,750 shares which may be acquired upon exercise of investment
banker warrants exercisable at $1.06 per share.
(9) Includes 25,000 shares which may be acquired upon exercise of Company
options exercisable at $1.06 per share and 10,000 shares which may be
acquired upon exercise of Company options exercisable at $1.75 per share.
(10) Includes 5,000 shares which may be acquired upon exercise of Company
options exercisable at $1.06 per share and 25,000 shares which may be
acquired upon exercise of Company options exercisable at $1.75 per share.
(11) Includes 5,000 shares which may be acquired upon exercise of Company
options exercisable at $1.06 per share and 25,000 shares which may be
acquired upon exercise of Company options exercisable at $1.75 per share.
(12) Includes 50,000 shares which may be acquired upon exercise of the Company's
private warrants.
(13) Percentage is based upon a total number of shares assuming conversion in
full of the Company's Convertible Debentures, and exercise in full of all
of the Company's publicly traded warrants and private warrants. Also
assumes the exercise of 237,500 of the Company's options into shares of
Common Stock.
13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company advanced $150,000 to Lloyd Lyons, the Chief Executive
Officer in 1993. Mr. Lyons repaid $21,000 during 1994, $4,000 during 1997,
$8,000 in 1998 and $2,000 in 1999. All interest charged through December 31,
1999, had been paid by Mr. Lyons. Interest was being charged at a rate of prime
plus 1% per annum.
In October 2001 the Company advanced loans to companies controlled by
Todd Sanders (CEO) and William Bossung (COO) in the aggregate amount of $400,000
which is due in October 2006. Interest on these notes are payable quarterly and
computed at the prime rate plus 1% (5.75% at December 31, 2001).
In June 2001 the company advanced $40,000 to Jeffrey Felder. This note
is due on the earlier of the officer's termination or June 2002 and is repayable
as reductions of severance arrangements included in his employment contract.
Interest is payable quarterly and calculated at the prime rate plus 1%.
In December 2000 the Company entered into an agreement with Delano
Group Securities LLC (which is owned, controlled and/or managed by certain
affiliates of Augustine Fund L.P.) to render investment banking, capital
formation, consulting and advisory services. Pursuant to this agreement Delano
received warrants to purchase 1,500,000 shares of Common Stock at a price of
$1.75 per share. These warrants expire on December 11, 2005.
In December 2000 the Company issued and sold $3,500,000 principal
amount of 6% Convertible Debentures. These Convertible Debentures are
convertible into shares of Common Stock at a price of $1.75 per share and mature
on June 13, 2001. The following officers and greater than five percent owners of
Common Stock are owners of the Convertible Debentures: Todd Sanders, Chief
Executive Officer, Director, $150,000 principal amount of Convertible
Debentures; William Bossung, Chief Operating Officer, Director, $350,000
principal amount of Convertible Debentures; John Porter, controlling member,
director or officer of Augustine Capital Augustine Capital, the general partner
of Augustine Fund L.P. a greater than five percent owner, $500,000 principal
amount of Convertible Debentures; David Matteson, controlling member, director
or officer of Augustine Capital Augustine Capital, the general partner of
Augustine Fund L.P. a greater than five percent owner, $50,000 principal amount
of Convertible Debentures; and Augustine Fund, L.P., greater than five percent
owner, $800,000 principal amount of Convertible Debentures.
SUBSEQUENT EVENTS
In February 2002 the holders of 3,000,000 of the Company's private
warrants (including Todd Sanders (CEO) and William Bossung (CFO)) agreed to
terminate and cancel these warrants.
In March 2002, the company announced it had signed a definitive
security exchange agreement to acquire Omega Music Group, LLC. The consummation
of the transactions is conditional upon, among other things, the legal,
financial and business due diligence by all partners involved.
In March 2002 the Nasdaq Stock Market halted trading of the Company's
securities due to a request for information.
In March 2002 the Company restated its financial statements through the
filing of an amendment to its annual report for the year ended December 31,
2000, and quarterly reports for the quarters ended, March 31, 2001, June 30,
2001, and September 30, 2001.
In April 2002 an aggregate of $3,350,000 of the Company's Convertible
Debentures has been converted into shares of the Company's Common Stock as per
the terms of the Debentures.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of exhibits as required by Item 601 of Regulation S-B.
14
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Articles of Incorporation (Delaware), as amended
3.2 Certificate of Merger Merging Repossession Auction,
Inc. (Florida corporation) and Repossession Auction,
Inc. (Delaware corporation)
3.3 Bylaws
3.4 Certificate of Amendment to Certificate of Incorporation
4.3 Form of publicly traded Warrant Agreement
4.4 Form of private warrant dated December 12, 2000
4.5 Form of 6% Convertible Debenture dated December 14, 2000
4.6 Form of Amendment to 6% Convertible Debenture.
4.7 Amendment to Publicly Traded Warrant
10.3 Employment Agreement between the Company and Lloyd
Lyons dated January 1, 1997(1)
10.4 1994 Stock Option Plan
10.5 Lease dated September 9, 1998 between Company and Oska
Partnership re: executive offices.
10.6 Agreement dated July 12, 1998 with Tabacelera
Panamericano Y Del Caribe S.A. (with certain portions
omitted pursuant to Rule 24b-2)
10.7 Agreement dated July 20, 1998 with Tabacos DeOriente
(with certain portions omitted pursuant to Rule 24b-2)
10.8 Agreement dated July 20, 1998 with Tabacos Del Caribe
(with certain portions omitted pursuant to Rule 24b-2)
10.9 Agreement dated July 12, 1998 with Tacunisa (with
certain portions omitted pursuant to Rule 24b-2)
10.10 Agreement dated July 12, 1998 with Tabanica, S.A. (with
certain portions omitted pursuant to Rule 24b-2)
10.11 Form of Employment Agreement between the Company and
Todd Sanders dated March 2001
10.12 Form of Employment Agreement between the Company and
William Bossung dated March 2001
10.13 Form of Agreement between the Company and Delano Group
Securities LLC dated December 2000
10.14 Form of Convertible Debenture Purchase Agreement dated
December 14, 2001
21.1 List of Newly Formed Subsidiaries
99.1 Loan Agreement with Alliance Financial Network, Inc. dated
October 2001
99.2 Loan Agreement with Devenshire Management Corporation
dated October 2001
99.3 Promissory Note dated August 2001
99.4 Sale and Conveyance Agreement (Superb, Saskatchewan) dated
August 2001
99.5 Notice of Assignment (Superb, Saskatchewan) dated August
2001
15
Exhibit No. Description of Exhibit
----------- ----------------------
99.6 Transfer of Specified Undivided Interest In Agreement
(Superb, Saskatchewan) dated August 2001
99.7 Sale and Conveyance Agreement (Altares, British Columbia)
dated September 2001
99.8 Partial Assignment and Novation Agreement (Altares,
British Columbia) September 2001
99.9 Notice of Assignment (Altares, British Columbia) dated
September 2001
(b) Reports on Form 8-K
Form 8-K dated October 29, 2001. Item 5.
Form 8-K dated November 16, 2001. Item 5.
Form 8-K dated December 3, 2001. Item 4.
16
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
AUDIT REPORT
------------
AS OF DECEMBER 31, 2001
-----------------------
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONTENTS
--------
Independent Auditor's Report F-1
Consolidated Balance Sheets as of December 31, 2001
and December 31, 2000
Consolidated Statements of Changes in Stockholders' F-2
Equity for the years ended December 31, 2001 and 2000
Consolidated Statements of Operations for the years F-3
Ended December 31, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the years
Ended December 31, 2001 and 2000 F-5
Notes to Consolidated Financial Statements as of December 31, 2001
and December 31, 2000 F-6-23
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors of:
NuWay Energy, Inc. (F/K/A Latin American Casinos, Inc.) and Subsidiaries
We have audited the accompanying consolidated balance sheet of NuWay Energy,
Inc. and Subsidiaries as of December 31, 2001 and 2000 the related consolidated
statements of operations, changes in stockholder's equity and cash flows for the
years ended. These consolidated financial statements are the responsibility on
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 NuWay
Energy, Inc. and subsidiaries as of December 31, 2001 and 2000 the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As discussed in note 10 to the financial statements the company reduced its
asset values and has charged current operations with a $3,015,182 asset
impairment charge.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in note 13 to
the financial statements the company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
Shubitz Rosenbloom & Co., P.A.
Miami, Florida
April 10, 2002
F-1
NuWay ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
ASSETS
------
December 31, December 31,
2001 2000
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents $ 440,827 $ 4,422,715
Accounts Receivable, Net of
$25,000 of Allowance for Doubtful Accounts
in 2001 and 2000 234,054 732,382
Inventory 475,291 539,560
Prepaid Expenses and Other Current Assets 156,958 136,717
------------ ------------
Total Current Assets 1,307,130 5,831,374
------------ ------------
PROPERTY AND EQUIPMENT - NET 2,360,135 3,708,795
------------ ------------
OTHER ASSETS
Accounts Receivable Long-Term, Net of Allowance
For Doubtful Accounts of $150,000 in 2001 and
$125,000 in year 2000 450,000 650,000
Deposits 26,693 11,609
Notes Receivable - Officers and Affiliates 440,000 --
Other Assets 6,374 46,208
------------ ------------
Total Other Assets 923,067 707,817
------------ ------------
TOTAL ASSETS $ 4,590,332 $ 10,247,986
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 985,776 $ 190,703
Debentures Payable, net of deferred debt issuance
costs of $64,500 in year 2000 2,400,004 3,435,500
------------ ------------
Total Current Liabilities 3,385,780 3,626,203
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
Total Liabilities 3,385,780 3,626,203
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.00067 Par Value 15,000,000
Shares Authorized, 4,225,000 Shares Issued
4,221,600 Shares Outstanding and 3,400 Shares
held as Treasury Stock 3,402 2,831
Additional Paid-In Capital 15,137,225 13,796,612
Accumulated Other Comprehensive Income (Loss) (544,539) (560,326)
Retained Earnings (Deficit) (13,264,532) (6,612,099)
Treasury Stock, at cost (127,004) (5,235)
------------ ------------
Total Stockholders' Equity 1,204,552 6,621,783
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,590,332 $ 10,247,986
============ ============
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
F-2
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
----------------------------------------------
Common Stock
--------------------------- Accumulated
Number Par Additional Other Retained Comprehensive
of Value Paid-In Comprehensive Earnings Treasury Income
Shares $.00067 Capital Income (Loss) (Deficit) Stock (Loss)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE JANUARY 1, 2000 3,300,000 $ 2,211 $ 10,203,732 $ (415,193) $ (1,912,776) $ 5,235 --
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS -- -- -- (145,133) -- -- (145,133)
WARRANTS ISSUED IN
EXCHANGE FOR SERVICE -- -- 1,991,700 -- -- -- --
COMPENSATION EXPENSE ON
VARIABLE OPTIONS PLAN -- -- 491,700 -- -- -- --
COMPENSATION ON RE-PRICING
OF STOCK OPTIONS -- -- 34,900 -- -- -- --
EXERCISE OF
STOCK OPTIONS 725,000 489 724,514 -- -- -- --
STOCK ISSUED AS
COMPENSATION 200,000 134 349,866 -- -- -- --
NET (LOSS) FOR THE
YEAR ENDED DECEMBER
31, 2000 -- -- -- -- (4,699,323) -- (2,116,823)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31 2000 4,225,000 $ 2,831 $ 13,796,612 ($ 560,326) ($ 6,612,099) $ 5,235 --
COMPREHENSIVE (LOSS)
FOR THE YEAR ENDED
DECEMBER 31, 2000 -- -- -- -- -- -- ($ 2,261,956)
ADJUSTMENT FOR FOREIGN
CURRENT TRANSACTIONS -- -- -- 15,787 -- -- 15,787
STOCK ISSUED FOR
SERVICES 187,500 126 405,524 -- -- -- --
REPRICING ON VARIABLE
OPTION PLAN -- -- (230,460) -- -- -- --
TREASURY STOCK -- -- -- -- -- 121,769 --
CONVERSION OF
DEBENTURES 666,283 446 1,165,549 -- -- -- --
NET (LOSS) FOR THE
YEAR ENDED
DECEMBER 31, 2001 -- -- -- -- $ (6,652,433) -- $ (6,652,433)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 2001 $ 5,078,783 $ 3,403 $ 15,137,225 $ 544,539 $ 13,264,532 $ 127,004
============ ============ ============ ============ ============ ============
COMPREHENSIVE (LOSS)
FOR THE YEAR
ENDED DECEMBER 31, 2001 $ (6,636,646)
============
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
F-3
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
----------------------------------------------
2001 2000
----------- -----------
Revenue
-------
Rental Income $ 461,778 $ 669,651
Sales of Cigars 170,709 163,886
Oil Sales 117,355 --
----------- -----------
Total Revenues $ 749,842 $ 833,537
----------- -----------
Cost and Expenses
-----------------
Selling, General & Administration 3,973,143 2,595,199
Depreciation, Depletion and Amortization 176,098 268,462
Cost of Cigar Sales 119,409 119,183
Expenses Associated With Options
Stocks Issued for Services and Warrants 175,064 2,518,500
Lease Operating Costs 71,245 --
Site Restoration Costs 7,664 --
Impairment Charges 3,015,182 64,000
----------- -----------
Total Cost and Expenses $ 7,537,805 $ 5,565,344
----------- -----------
Operating Income (Loss) (6,787,963) (4,731,807)
----------- -----------
Other Income (Expenses)
-----------------------
Interest Income 135,530 35,957
----------- -----------
Net Other Income (Expenses) 135,530 35,957
----------- -----------
Income (Loss) Before Income Taxes (6,652,433) (4,695,850)
Income Taxes (Provision) Benefit (--) (3,473)
----------- -----------
Net Income (Loss) ($6,652,433) ($4,699,323)
=========== ===========
Earnings (Loss) Per Common Share and
------------------------------------
Common Share Equivalent Basic And
---------------------------------
Fully Diluted
-------------
Common Share Equivalent Outstanding 4,255,903 3,367,200
=========== ===========
Net Income (Loss) per share ($ 1.56) ($ 1.40)
=========== ===========
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
F-4
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
----------------------------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($6,652,433) ($4,699,323)
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Off Set of Officers Notes Receivable and Accrued
Compensation -- 115,000
Depreciation, Depletion and Amortization 176,098 268,462
Issuance of Stock for Services & Interest 471,650 350,000
Asset Impairment Charges 3,015,182 64,000
Issuance of Warrants And Options
Accounted for As Compensation and Repricing
Of Options (230,462) 2,518,500
Loss on Property in Nicaragua -- 219,505
Amortization of Deferred Debt Issue Costs 64,500 --
Changes in Assets - (Increase) Decrease:
Accounts Receivable 698,328 303,641
Prepaid Expenses and Other Current Assets (20,241) 75,712
Inventory of Cigars 64,269 105,612
Changes in Liabilities - Increase (Decrease):
Accounts Payable and Accrued Expenses 795,073 (947)
Foreign Income Tax Payable -- --
----------- -----------
Net Cash Provided by (Used In) Operating
Activities (1,618,036) (679,838)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on Sale of Fixed Assets -- 358,206
Fixed Assets Increase (1,842,620) (50,960)
Other Assets 24,750 (20,283)
Account of Treasury Stock (121,769) --
Issuance of Notes Receivable to Officers
And Affiliates (440,000) --
----------- -----------
Net Cash Provided By (Used In)Investing
Activities (2,379,639) 286,963
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Expenditures incurred in connection with
Private Placement -- (64,500)
Issuance of Debentures -- 3,500,000
Exercise of Stock Options -- 725,000
----------- -----------
Net Cash Provided From Financing Activities -- 4,160,500
----------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 15,787 (145,133)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,981,888) 3,622,492
CASH AND CASH EQUIVALENTS - BEGINNING 4,422,715 800,223
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 440,827 $ 4,422,715
---------------------------------- =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
--------------------------------------------------
Cash Paid During the Period for:
Interest $ -- $ --
=========== ===========
Income Taxes, Foreign $ -- $ 3,473
=========== ===========
Conversion of Debentures to Capital $ 1,165,995 $ --
=========== ===========
See Independent Auditor's Report
The accompany notes are an integral part of this statement.
F-5
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 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. In 1994, the company
entered in the gaming and casino business, primarily in Peru and other
Latin American countries renting casino type slot machines.
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 that are in the gaming and casino business in
Latin America (See Note 9C). The operations include the renting of
casino slot machines to casino operators. The company had acquired in
total approximately 8,000 slot machines and related parts. It had been
the company's policy to capitalize all cost necessary to place the
equipment on rental which included transportation, duty and
refurbishing costs. In year 2001 as a result of deteriorating market
conditions, obsolesance of the slot machines and a mandate by the
Peruvian Government, a valuation of all gaming equipment was performed
and as a result as further discussed in note 10, an asset impairment
charge was recorded.
In September 1997, the company incorporated World's Best Rated Cigar
Company (World) as a wholly-owned subsidiary of NuWay Energy, Inc. to
distribute quality cigars. Is 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 at December 31,
2001, the company had expended approximately $1,196,000 in regard to
the cigar operations. Such expenditures have been included in the
accompanying consolidated financial statements as follows:
Cash and cash Equivalents $ 23,000
Accounts Receivable 5,000
Prepaid and Other Current Assets 33,000
Inventory 475,000
Fixed Assets, net of Accumulated Depreciation 35,000
Other Assets 3,000
Aggregate Accumulated Deficit 622,000
------------
Total Investment $ 1,196,000
============
In year 2001 the company incorporated NuWay Resources, Inc., as a
Nevada Corporation and NuWay Resources of Canada, Ltd., a Canadian
Company, both wholly owned subsidiaries of NuWay Energy, Inc. These
corporations were formed to pursue opportunities in the oil and gas
exploration industry, with its principal activity in the exploration,
development and product of oil and gas properties in Western Canada.
See Independent Auditor's Report.
F-6
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
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 American Casinos, Inc.
S.A.) a Peruvian Corporation, Latin American Casinos of Colombia LTDA,
a Colombian Corporation, Latin American Casinos of Nicaragua, World's
Best Rated Cigars, Inc., NuWay Resources, Inc., a Nevada Corporation
and NuWay Resources of Canada, Ltd., a Canadian Company. Latin American
Casinos of Nicaragua ceased operations.
All material inter-company 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 betterment's 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. Whenever there
is a change in events or circumstances, the Company performed an
impairment analysis by comparing the future undiscounted cash flows and
if they are less than the carrying amount, an impairment charge is
recorded to reduce the assets to its estimated fair value. In addition,
the company periodically reviews the costs associated with undeveloped
oil and gas properties and mineral rights to determine whether they are
likely to be recovered, when such costs are not likely to be recovered,
such costs are transferred to the depletable pool of oil and gas cost.
See Independent Auditor's Report.
F-7
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 1 Summary of Significant Accounting Policies (Continued)
------ ------------------------------------------
D Oil and Gas Operations
----------------------
Substantially all of the company's exploration and development
activities related to oil and gas are conducted jointly with others and
accordingly the financial statements reflect only the Company's
proportionate interest in such activities.
The net carrying cost of the company's oil and gas properties in
producing cost centers is limited to an estimated recoverable amount.
This amount is the aggregate of future net revenues from proved
reserves and the costs of undeveloped properties, net of impairment
allowance, less future general and administrative costs, financing
costs and income taxes. Future net revenues are calculated using year
end prices that are not escalated or discounted. For Canadian GAAP
future net revenues are undiscounted, whereas, for U.S. GAAP future net
revenues are discounted at 10%.
In conducting its ceiling test evaluation the Company followed
generally accepted accounting standards which provided for a two-year
exemption from write-down where the purchase price of reserves had been
determined on a basis which provided a higher amount than the ceiling
test value, and where the excess was not considered to represent a
permanent impairment in the ultimate recoverable amount. If the two
year exemption had not been used, the Company would have taken a
write-down of $845,000 based on prices at December 31, 2001 of $11.316
per bbl of heavy oil and $3.301 per Mmbru of gas. The Company qualified
for the exemption in connection of its acquisitions of resource
properties in August and September of 2001.
Gains or losses are not recognized upon disposition of oil and gas
properties unless crediting the proceeds against accumulated costs
would result in a change in the rate of depletion of 20% or more.
Future site restoration cost for working interest properties are being
provided on a unit of production basis. The provision is based on
current cost of complying with existing legislation and industry
practice for site restoration and abandonment. The estimated cost of
abandoning carried interest wells are not included in future site
restoration cost. This cost would be paid by the working interest
partners and charged to the carried interest account.
See Independent Auditor's Report.
F-8
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 1 Summary of Significant Accounting Policies (Continued)
------ ------------------------------------------
E 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 cost with the inception of the
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.
The Company recognizes revenue on its working and royalty interest
properties from the production of oil and gas in the period the oil and
gas are sold, net of royalty payments due.
Revenue under carried interest agreements is recorded in the period
when the net proceeds become receivable and collection is reasonable
assured. Under the carried interest agreements the Company records oil
and gas revenues net of operating and capital cost incurred by the
working interest participants. The time the net revenues become
receivable and collection is reasonably assured depends on the terms
and conditions of the relevant agreements and the practices followed by
the operator. As a result, net revenues may lag the production month by
one or more months.
F 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.
G Income (Loss) Per Common Share
------------------------------
Basic earnings per common share and common share equivalents 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
underwriter's options (Note 5, 6, 7) were anti-dilutive, and excluded
from the computation of basic and diluted earning (loss) per share. In
the future the convertible debt, and these warrants, stock options, and
underwriting options could be dilutive and as such future earnings per
share could be diluted by 6,941,213 additional shares.
H 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 $238,000 and
$4,320,000 as of December 31, 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.
See Independent Auditor's Report.
F-9
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
I 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.
J 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).
K Inventories
-----------
Inventory of cigars and related material are stated at the lower of
average cost or market. The company has in excess of one year supply of
cigar inventory but believes it can sell the entire inventory within
one year at a normal gross profit.
L Valuation of Company's Stock Options and Warrants
-------------------------------------------------
As permitted under the Statement of Financial Accounting Standards No.
123 (SFAS No. 123), Accounting for Stock-Based Compensation, the
Company accounts for its stock-based compensation to employees in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issured to Employees. As such,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. Certain pro forma net income and EPS disclosures for employee
stock options grants are also included in the notes to the financial
statements as if the fair value method as defined in SFAS No 123 had
been applied. Transactions in equity instruments with non-employees for
goods or services are accounted for by the fair value method.
M Advertising
-----------
The company expenses all advertising costs as incurred. Included in the
statement of operations is approximately $111,000 and $110,000
advertising expense charged to operations for the years ended December
31, 2001 and 2000, respectively. Substantially all advertising expenses
incurred were paid with barter transactions.
N Reclassifications
-----------------
Certain amounts reported in prior financial statements have been
reclassified to conform to current classification. In that regard
accounts receivable that are in litigation and may take more that one
year to collect have been reclassified as a long-term asset instead of
a current asset.
See Independent Auditor's Report.
F-10
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
O Restatements
------------
The Company had restated its previously issued financial statement for
the year ended December 31, 2000 for the following adjustments:
1. Recognition of an additional impairment loss on the sale of
the Miami Property, $64,000.
2. Adjustment of beginning additional paid in Capital an retained
earnings deficit for expense account with options and warrants
issued in 1998, $284,175.
3. Adjustment of current earnings and additional paid in capital
for the cost of warrants issued, compensation expenses on
variable option plan and compensation received on repricing of
stock option $2,518,500 issued in years 1999 and 2000.
Note 2. Property and Equipment
------- ----------------------
Property and Equipment are summarized as follows:
December 31, December 31,
2001 2000
---------- ----------
Exploration and Development Equipment $ 933,624 $ --
Oil & Gas Properties At Cost 752,067 --
Land & Building (See Note 10) 35,000 271,363
Rental Equipment(See Note 10) 1,039,008 4,197,282
Leasehold Improvements -- 26,027
Furniture, Fixtures & Office Equipment 151,818 141,914
Transportation Equipment 2,862 48,510
---------- ----------
Total 2,914,379 4,685,096
Less: Accumulated Depreciation 554,244 976,301
---------- ----------
Property and Equipment - Net $2,360,135 $3,708,795
========== ==========
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
Depletion is provided on cost accumulated in producing cost centers
including production equipment using the unit of production method. For
purposes of the depletion calculation, gross proved oil and gas
reserves as determined by outside consultants are converted to a common
unit of measure on the basis of their approximate relative energy
content.
See Independent Auditor's Report.
F-11
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 2. Property and Equipment (Continued)
------- ----------------------
Included in Rental Equipment in year 2000 is approximately $3,000,000
of parts and supplies purchased or obtained from other machines
previously disassembled for parts. In year 2001 as a result of market
conditions and obsolescence the company reviewed all costs associated
with its gaming equipment operations and have determined that
approximately $70,000 of workable parts represented a fair value as
replacement part cost. As further discussed in note 10 the company
recorded an impairment charge of $2,789,000 on gaming equipment.
Rent expense for the years ended December 31, 2001 and 2000 were
$188,000 and $92,000, respectively.
The company had leased the land and building it owned in Miami prior to
its sale for $1,200 per month, on a month to month basis (See Note 10).
Note 3. Notes Receivable - Stockholders and Affiliates
------- ----------------------------------------------
The company advanced $150,000 to one of the stockholders in 1993. The
stockholder repaid $21,000 during 1994, $4,000 during 1997, $8,000 in
1998 and $2,000 in 1999. All interest charged through December 31,
1999, has been paid by the stockholder. Interest was being charged at a
rate of prime plus 1% per annum. In August 2000, the note receivable
was forgiven and additional compensation due to the Estate of the
shareholder was recorded.
In October 2001 the company advanced loans to two companies controlled
respectively by Todd Sanders (CEO) and William Bossung (CFO) in the
aggregate amount of $400,000 which is due in October 2006. Interest on
these notes are payable quarterly and computed at the prime rate plus
1% (5.75% at December 31, 2001). Included in the statement of
operations is $5,400 of accrued interest income on these notes.
In June 2001 the company advanced $40,000 to another officer. This note
is due on the earlier of the officer's termination or June 2002 and is
repayable as reductions of severance arrangements included in his
employment contract (See Note 9B). Interest is payable quarterly and
calculated at the prime rate plus 1%. Interest on this note has been
paid through December 31, 2001.
Note 4. Warrants and Options and Stock Issued for Services
------- --------------------------------------------------
As of December 31, 2000, 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, which has
been extended to December 11, 2002. 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.
The issuance of the private warrants were part of the arrangement with
the executive officers of the corporation who also received restricted
stock aggregating 200,000 shares, compensation was recorded on the
arrangement equal to the market value of the restricted stock,
$350,000. The remaining warrants were issued for service and were
valued at $1,991,700 using the Black-Scholes option pricing model. This
amount has been recorded in the statement of operations in year 2000.
In year 2002 3,000,000 of the 3,300,000 warrants issued in year 2000
were cancelled and approximately $1,650,000 of corporation's expenses
that was recorded in year 2000 will be reversed in year 2002 (See Note
12).
See Independent Auditor's Report.
F-12
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 4. Warrants and Options and Stock Issued for Services (Continued)
------- --------------------------------------------------
In year 2001 the company issued or was committed to issue 187,500
shares of stock for services. Expenses were recorded based on the value
of the stock, which ranged from $2.51 per share to $1.98 per share, for
a total consideration of $405,524.
Note 5. 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, Latin American Casinos, Inc. 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.
These warrants vest and become irrevocable as follows: 75,000 warrants
with signing of the agreement, 75,000 warrants 180 days after the
signing of the agreement and an additional 75,000 warrants 365 days
after the signing of the agreement. At the date of issuance and the
subsequent re-pricing date the warrant price equaled or exceeded the
market value of the common stock. The incremental value of the
re-priced warrants over the current value of the warrants before the
repricing was approximately $35,000, using the fair values calculated
with the Black-Scholes option pricing model. This amount is recorded in
the statement of operations in year 2000.
Note 6. 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 Independent Auditor's Report.
F-13
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 6. Incentive Stock Option Plan (Continued)
------- ---------------------------
Incentive Stock Options Outstanding
-----------------------------------
Amount Price Per Share
-------- ---------------
Options Outstanding at January 1, 2000 and
2001 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, 2001 237,500
========
All outstanding warrants and non-qualified options and incentive stock
options were exercisable at December 31, 2001.
The following table shows the years in which all of the company's
options and warrants (as discussed in Notes 4, 5 and 6) will expire:
Weighted
Range Average
---------------- Number of Exercise
Year Ending December 31 Low High Shares Price
------- ------- --------- --------
2001 $ 3.00 $ 3.00 1,725,000 $ 3.00
2002 1.00 1.00 172,500 1.00
2003 1.00 1.00 310,000 1.00
2004 -- -- -- --
Thereafter 1.06 1.75 3,415,000 1.74
---------
Total 5,622,500
=========
Incentive Stock Options Outstanding
-----------------------------------
The weighted average fair value of options granted during fiscal 2000
was $1.07 per share. All options were granted at an exercise price that
equaled the market price. No options were granted in year 2001.
The Company adopted the provisions so SFAS No. 123, Accounting for
Stock Based Compensation, effective for fiscal year 1997 for all
issuances of stock options to non-employees of the Company. The Company
will continue to apply APB Opinion No. 25 (Opinion 25), Accounting for
Stock Issued to Employees for all issuances stock options to its
employees. In June 1999, the Company adopted the Financial Accounting
Standards Board Interpretation Number 44, which requires re-priced
options be re-measured for expenses based on the quarter end stock
price. Expenses are also re-measured upon exercise for the options. The
Company recorded an additional expense of approximately $490,000 in
year 2000 and a reduction of expenses of $230,000 in year 2001.
See Independent Auditor's Report.
F-14
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 6. Incentive Stock Option Plan (Continue)
------- ---------------------------
Had compensation cost for the Plan been determined based upon the fair
value at the grant date for options granted consistent with the
provision of SFAS 123, the Company's net loss and net loss per share
would have been reduced to the pro forma amounts indicated below:
2001 2000
-------------- --------------
Net income - as reported $ (6,652,433) $ (4,699,323)
Net income - pro forma $ (6,652,433) $ (6,429,924)
Loss per share - as reported:
Basic and Diluted $ (1.56) $ (1.40)
Loss per share - pro forma:
Basic and Diluted $ (1.56) $ (1.90)
The fair value of each option granted under the Plan was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
2000
-------------
Risk - free interest $ 5.80%
Expected life 5 years
Expected volatility 68.19%
Expected dividend --
Note 7. 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 which had been subsequently extended
to December 13, 2001 and are Convertible into common stock at an
exercise price of $1.75 per share. The company incurred approximately
$64,500 of costs in regard to this private placement and the debt
issuance costs were amortized over the life of the debentures. Included
as part of selling general and administration expenses in the statement
of operations for year 2001 is $64,500 amortization of deferred debt
issue cost. The interest on the debentures is payable either in cash or
in additional shares of common stock, at the discretion of the company.
The conversion price of the debentures was determined by the
approximate market value of the common stock at the date of issuance.
Prior to December 31, 2001 approximately $1,100,000 of debenture
holders converted their debentures into common stock for the value of
their debentures and the accrued interest of $66,000. At December 31,
2001 included in accounts payable was $144,000 of accrued interest on
these debentures (See Note 12).
Note 8. Provision of Income Taxes
------- -------------------------
As of December 31, 2001 the company had available for income tax
purposes unused net operating loss carry forwards which may provide
future tax benefits of $10,666,000 expiring through the year 2016. 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 provision based for foreign operations.
See Independent Auditor's Report.
F-15
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
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.
B Employment Agreements
---------------------
In January 1997, the company entered into a five year employment
agreement with Lloyd Lyons which provided in part that in the event of
either a merger, consolidation, sale or conveyance of substantially all
the assets of the company which results in the discharge of Mr. Lyons,
he would be entitled to 200% of the balance of payments remaining under
the contract. The contract provided the salary continuation for a
period of two years after the death of the officer. In January 2000,
Mr. Lyons passed away and effective August 2, 2000 the company amended
its employment contract with the surviving widow and primary
beneficiary of the Estate of Lloyd Lyons, where-in the salary
continuation clause included in his contract was replaced with a
severance arrangement which requires the company to pay the spouse
$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 termination of the employee 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
contract revisions further provided that the officer loan of $115,000
be recorded as additional compensation as required by the officer
compensation agreement. Effective October 29, 2001 Mrs. Lyons tendered
her resignation and based upon the terms of her contract severance
payments of $350,000 had been recorded with $333,000 included in
accounts payable and accrued expenses.
See Independent Auditor's Report.
F-16
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 9. Commitments and Contingencies (Continued)
------- -----------------------------
In January 2000 the company entered into two additional employment
contracts, 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 will 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 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 to each 100,000 shares of stock and 750,000
warrants to purchase additional common stock at $1.75 per shares (See
Note 12).
C Foreign Assets
--------------
The accompanying consolidated balance sheets for the period ended
December 31, 2001, includes assets relating to the company's slot
machine operations in Peru and Colombia of $893,000 and $774,000
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 Peru the government periodically requires
companies to revalue its assets based on many factors, including, age
of equipment and future cash flow capability. The company engaged an
independent appraisal company to revalue all gaming equipment, a copy
of such report was made available to the Peruvian government. As
further discussed in note 10, an asset impairment charge was recorded
to adjust all gaming equipment to the fair market value as determined
by the independent appraisal report.
Revenue from rental operations is entirely earned in Columbia and Peru.
The assets of the oil and gas operations, which aggregate approximately
$1,783,000 are entirely in Canada. All revenue from oil and gas is
earned in Canada.
Approximately $300,000 of the company's inventory of cigars is being
stored in South America, awaiting instructions for delivery to the
Miami distribution facility.
See Independent Auditor's Report.
F-17
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 9. Commitments and Contingencies (Continued)
------- -----------------------------
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 a 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.
Note 10 Asset 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. The $64,000 loss had been recorded as an
impairment charges in the restated financial statement for year 2000.
In addition, the company recorded a reduction in value for certain slot
machine parts of $194,000 and recorded gaming equipment impairment cost
of $100,000. The impairment cost 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. As a result of
political changes and Peruvian government mandated review of
obsolescence in November 2001 the company engaged an independent
appraisal company to evaluate all the gaming equipment in Peru. The
Company utilized this evaluation to revalue all of its gaming equipment
and recorded an asset impairment loss of $2,689,000 for all gaming
equipment. The impairment loss was the result of obsolescence and
utilization of available equipment for needed parts and the
deterioration of anticipated future cash flows from the older
equipment. The cigar factory owned in Niagara was reduced in value to
the estimated replacement value, as determined by local authorities
the impairment charges aggregated $32,000.
2001 2000
---------- ----------
Gaming Equipment $2,789,182 $ --
Write down of Spare Parts 194,000 --
Reduction in Value of Cigar Factory 32,000 --
Miami Real Estate -- 64,000
---------- ----------
$3,015,182 $ 64,000
========== ==========
In addition, the company changed current operations with additional bad
debt expenses after obtaining updated information from its attorney in
Peru. Included in general and administrative expenses are approximately
$200,000 of additional bad debt write-offs.
See Independent Auditor's Report.
F-18
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 11 Quarterly Interim Financial Information (Unaudited)
------- ---------------------------------------
The company recorded the following expenses in the last quarter of the
year which unduly burdened the loss incurred during that quarter.
o Bad Debt Expenses $ 200,000
o Compensation for Stock Issued 406,000
o Impairment Charge 2,668,000
----------
$3,274,000
==========
Note 12 Subsequent Event
------- ----------------
In January 2002, the company entered into a consulting agreement with
Barnstable Energy Inc. for consulting services for three years. The
company is obligated under this arrangement to issue 200,000 shares of
common stock.
In February 2002, the company entered into an agreement with Avalon
Capital, Inc. (AVA) whereby AVA will use its best efforts to find a
merger candidate for the company. If a merger is consummated with-in a
year of introduction AVA will be entitled a finders fee equal to 3% of
the value of the aggregate number of shares outstanding after the
merger, on a fully diluted basis.
In March 2002, the company announced it had signed a definitive
security exchange agreement to acquire Omega Music Group, LLC. The
Consummation of the transactions is conditional upon, among other
things, the legal, financial and business due diligence by all partners
involved.
As of April 10, 2002 $3,350,000 principal amount of debentures have
been converted into additional common stock.
In March 2002, 3,000,000 of the 3,300,000 warrants issued in year 2000
were cancelled and approximately $1,650,000 of compensation expensed in
year 2000 will be reversed in year 2002.
Note 13 Going Concern
------- -------------
The company has incurred net losses of $6,652,433 and $4,699,323 in
years 2001 and 2000, respectively, and as of December 31, 2001 the
company's current liabilities exceeded its current assets by
approximately $2,000,000. As of April 10, 2002, substantially all
convertible debentures and the accrued interest there-on have been
converted into common stock of the company, removing the factor of
current liabilities exceeding current assets. These factors create an
uncertainty about the company's ability to continue as a going concern.
Management of the company is developing a plan to reduce current
liabilities by converting debentures into additional stock, reducing
expenses and considering the sale of certain oil well assets to
generate sufficient cash to sustain operating overhead. The financial
statements do not include any adjustment that might be necessary if the
company is unable to continue as a going concern.
See Independent Auditor's Report.
F-19
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 14 Operating Segments
------- ------------------
For the Year Ended December 31, 2001
-----------------------------------------------------------------------
Cigar Oil Gaming
Total Operations & Gas Equipment Unallocated
----------- ----------- ----------- ----------- -----------
Revenues $ 749,942 $ 170,709 $ 117,355 $ 461,778 $ --
-------- ----------- ----------- ----------- ----------- -----------
Cost & Expenses
---------------
Cost of Product
Sold $ 119,409 $ 119,409 $ -- $ -- $ --
Direct Overhead
Cost 1,359,730 191,258 94,900 1,073,572 --
Allocated
Overhead Cost 2,692,322 613,042 421,617 1,657,663 --
Depreciation &
Depletion 176,098 -- 159,673 10,316 6,109
Expenses Assoc.,
With Options,
Warrants, and
Stock Issued
For Services 175,064 -- -- -- 175,064
Asset Impairment
Charges 3,015,182 31,556 -- 2,983,626 --
----------- ----------- ----------- ----------- -----------
Total Cost and
Expenses 7,537,805 955,265 676,190 5,725,177 181,173
----------- ----------- ----------- ----------- -----------
Operating
Income(Loss) ($6,787,963) ($ 784,556) ($ 558,355) ($5,263,399) ($ 181,173)
----------- ----------- ----------- ----------- -----------
Total Assets $ 4,590,000 $ 574,000 $ 1,783,000 $ 1,667,000 $ 556,000
=========== =========== =========== =========== ===========
See Independent Auditor's Report.
F-20
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 14 Operating Segments (Continued)
------- ------------------
For the year Ended December 31, 2000
-----------------------------------------------------------------------
Cigar Oil Gaming
Total Operations & Gas Equipment Unallocated
----------- ----------- ----------- ----------- -----------
Revenues $ 833,537 $ 163,886 $ -- $ 669,651 $ --
-------- ----------- ----------- ----------- ----------- -----------
Cost & Expenses
---------------
Cost of Product
Sold $ 119,183 $ 119,183 $ -- $ -- $ --
Direct Overhead
Cost 1,154,226 166,080 -- 988,146 --
Expenses Assoc.,
With Options
Warrants 2,518,500 -- -- -- 2,518,500
Allocated
Overhead Cost 1,440,973 283,317 -- 1,157,656 --
Depreciation and
Depletion 268,462 11,364 -- 250,385 6,713
Asset Impairment
Charges 64,000 -- -- -- 64,000
----------- ----------- ----------- ----------- -----------
Total Cost and
Expenses 5,565,344 579,944 -- 2,396,187 2,589,213
----------- ----------- ----------- ----------- -----------
Operating
Income(Loss) ($4,731,807) ($ 416,058) ($ --) ($1,726,536) ($2,589,213)
----------- ----------- ----------- ----------- -----------
Total Assets $10,248,000 $ 692,000 -- $ 4,753,000 $ 4,803,000
=========== =========== =========== =========== ===========
The company allocates indirect overhead expenses to specific segments
in proportion to the revenues earned by the segment. All revenue from
gaming equipment and the related assets are in South America where as
all revenue and a majority of the assets of the cigar operations are in
the United States.
See Independent Auditor's Report.
F-21
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 15 Oil and Gas Producing Activities (Unaudited)
------- --------------------------------
The following information includes estimates which are subject to rapid
and unanticipated change. The Company causations that the discounted
future net cash flows from proved oil and gas reserves are not an
indication of the fair market value of the Company's oil and gas
properties or the future net cash flows expected to be generated from
the properties. The discounted future net cash flows do not include the
fair market value of exploratory properties and probable or possible
oil and gas reserves. Also, the estimates do not consider the effect of
future changes in oil and gas prices, development, sit restoration and
production costs, and possible changes in tax and royalty regulations.
The prescribed discount rate of 10% may not appropriately reflect
future interest rates.
All amounts below except for cost, acreage, wells drilled and present
activities relate to Canada. McDaniel & Associates Consultants Ltd.,
Independent consultants, provided oil and gas reserve data and the
information relating to cash flows.
Estimated net quantities of proved oil and gas reserves at January 2,
2002 are as follows:
Proved reserves:
Oil Gas
(bbls) (mcf)
December 31, 2001 140,000 70,700
--------- ---------
Proved developed reserves
December 31, 2001 140,000 70,700
--------- ---------
Results of Oil and Gas Operations
---------------------------------
Income:
Oil Sales $117,355
---------
Cost and expenses:
Lease operating cost 71,245
Depletion, depreciation amortization 159,673
Site restoration costs 7,664
---------
238,582
---------
Net loss from operations $(121,227)
=========
Capitalized cost of oil and gas activities:
Acquisition costs $ 752,067
Exploration 376,845
Development 556,779
See Independent Auditor's Report.
F-22
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2001 AND 2000
--------------------------------
Note 15 Oil and Gas Producing Activities (Unaudited) continued
------- --------------------------------
Standardized measure of discounted future net cash flows Relating to
proved oil and gas reserve quantities during The following period:
Future cash inflows $1,636,000
Future development and production cost 914,000
----------
Future income tax expense* $ --
----------
Future net cash flows 722,000
10% annual discount (53,000)
Standardized measure of discounted future net cash flows: $ 669,000
==========
*Reflects total tax pools for the period 2001 that may be used to
offset oil and gas income. The tax pools are comprised of carry forward
of exploration, development and lease acquisition costs,
underappreciated capital costs and earned depletion of $1,655,000 for
2001.
Current prices used in the above estimates were based upon selling
prices at the wellhead at January 1, 2002 less the historical quality
and price differentials for each respective field as follows:
Oil - Hardisty Heavy ($CDN./bbl)(In U.S. $) $ 11.316
Gas - Alberta average @ Field gate $CDN./Mmbm) (In U.S. $) $ 3.301
Current cost was based upon estimates made by consulting engineers at
the end of the period.
See Independent Auditor's Report.
F-23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, NuWay Energy, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NUWAY ENERGY, INC.
By: /s/ TODD SANDERS
-------------------------------------
Todd Sanders, President
Date: April 12, 2002
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
NuWay Energy, Inc., and in the capacities and on the 11th day of April, 2002.
/s/ TODD SANDERS
-------------------------------------
Todd Sanders, President, Chief
Executive Officer, Director
/s/ WILLIAM BOSSUNG
-------------------------------------
William Bossung, Secretary, Chief
Operating Officer, Director
/s/ JOE TAWIL
-------------------------------------
Joe Tawil, Acting Chief Financial
and Accounting Officer
/s/ JOSE A. CABALLERO
-------------------------------------
Jose A. Caballero, Director
/s/ DENNIS R. BARRY
-------------------------------------
Dennis R. Barry, Director
/s/ MICHAEL ISCOVE
-------------------------------------
Michael Iscove, Director