U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________.
Commission File Number 33-43423
NUWAY ENERGY, INC.
----------------------------
(Exact name of small business issuer as
specified in its charter)
DELAWARE 65-0159115
--------------------------------- ---------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
19100 Von Karman Ave, Ste 450
Irvine, CA 92612
----------------------------------------
(Address of principal executive offices)
(949) 553-8002
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the issuer's classes of common
equity, as of June 30, 2002: 8,431,353 shares of common stock, $0.00067 par
value per share.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONTENTS
--------
Accountant's Review Report 1
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 2
Consolidated Statements of Changes in Stockholders'
Equity for the six months ended June 30, 2002
and the year Ended December 31, 2001 3
Consolidated Statements of Operations for the three and
six months Ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the six months
Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements as of
June 30, 2002 and December 31, 2001 6-21
ACCOUNTANTS' REVIEW REPORT
--------------------------
To the Board of Directors of:
NuWay Energy, Inc. and Subsidiaries
We have reviewed the accompanying consolidated balance sheets of NuWay Energy,
Inc. and Subsidiaries as of June 30, 2002, and the related consolidated
statements of operations, changes in stockholders equity and cash flows for the
six months ended June 30, 2002, in accordance with the Statements for Accounting
and Review Services issued by the American Institute of Certified Public
Accountants. All information included in these financial statements is the
representation of the management of NuWay Energy, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
As discussed in Note 11 certain conditions indicates that the company may be
unable to continue as a going concern. The accompanying financial statements do
not include any adjustments to the financial statements that might be necessary
should the company be unable to continue as a going concern.
The balance sheet for the year ended December 31, 2001 was audited by us and we
expressed an opinion on it that was qualified as to the ability of the company
to continue as a going concern, in our report dated April 10, 2002, but we have
not performed any auditing procedures since that date.
Shubitz, Rosenbloom & Co., P.A.
Miami, Florida
August 9, 2002
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEETS
-----------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-------------------------------------------------
ASSETS
------
June 30, December 31,
2002 2001
--------------- --------------
CURRENT ASSETS
Cash and Cash Equivalents $9,725 $440,827
Accounts Receivable, Net of
$25,000 of Allowance for Doubtful Accounts 201,322 234,054
Inventory 448,378 475,291
Notes receivable Officers and Affiliates,
Current Portion 55,623 -
Prepaid Expenses and Other Current Assets 52,950 156,958
Subscriptions Receivable 250,000 -
--------------- --------------
Total Current Assets 1,017,998 1,307,130
--------------- --------------
PROPERTY AND EQUIPMENT - NET 2,577,833 2,360,135
--------------- --------------
OTHER ASSETS
Accounts Receivable Long-Term, Net of Allowance
For Doubtful Accounts of $175,000 in 2002 and
$150,000 in 2001 408,000 450,000
Deposits 45,093 26,693
Notes Receivable - Officers and Affiliates
Net of Current Portion 40,000 440,000
Other Assets 16,253 6,374
--------------- --------------
Total Other Assets 509,346 923,067
--------------- --------------
TOTAL ASSETS $4,105,177 $4,590,332
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $834,782 $985,776
Debentures Payable 150,000 2,400,004
--------------- --------------
Total Current Liabilities 984,782 3,385,780
--------------- --------------
COMMITMENTS AND CONTINGENCIES - -
--------------- --------------
Total Liabilities $984,782 3,385,780
--------------- --------------
STOCKHOLDERS' EQUITY
Common Stock, $.00067 Par Value 15,000,000
Shares Authorized, 8,431,353 Shares Issued
8,386,453 Shares Outstanding and 44,900 Shares
held as Treasury Stock 5,648 3,402
Additional Paid-In Capital 16,707,328 15,137,225
Accumulated Other Comprehensive Income (Loss) (546,183) (544,539)
Retained Earnings (Deficit) (12,919,394) (13,264,532)
Treasury Stock, at cost (127,004) (127,004)
--------------- --------------
Total Stockholders' Equity 3,120,395 1,204,552
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,105,177 $4,590,332
=============== ==============
Read accountants' review report and notes to financial statements.
NUWAY ENERGY, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
------------------------------------
AND FOR THE SIX MONTHS ENDED JUNE 30, 2002
-------------------------------------------
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,
2001 4,225,000 $2,831 $13,796,612 ($560,326) ($6,612,099) $5,235 $-
ADJUSTMENT FOR FOREIGN
CURRENCY 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, 5,078,783 3,403 15,137,225 (544,539) (13,264,532) 127,004
2001
COMPREHENSIVE (LOSS)
FOR THE YEAR
ENDED DECEMBER 31,
2001 $(6,636,646)
=============
STOCK ISSUED FOR
SERVICES 350,000 235 349,265 - - - -
CONVERSION OF
DEBENTURES 1,332,570 893 2,331,705 - - - -
CANCELLATION OF
WARRANTS - - (1,659,750) - 1,659,750 - -
ADDITIONAL SUBSCRIPTION
OF STOCK - SHOWN AS
STOCK SUBSCRIPTION
RECEIVABLE 1,000,000 670 249,330 - - - -
STOCK ISSUED FOR
SOFTWARE 670,000 447 299,553 - - - -
ADJUSTMENT FOR FOREIGN
CURRENCY TRANSACTIONS - - - 1,644 (1,644)
NET (LOSS) FOR THE SIX
MONTHS ENDED JUNE 30,
2002 - - - - ( 1,314,612) - (1,314,612)
----------- ------- ---------- -------------- ------------ ----------- ------------
BALANCE JUNE 30,
2002 8,431,353 $5,648 $16,707,328 ($546,183) $(12,919,394) $127,004
=========== ====== =========== =============== ============ ===========
COMPREHENSIVE INCOME
(LOSS) FOR THE SIX
MONTHS ENDED JUNE 30,
2002 $(1,316,256)
==============
Read accountants' review report and notes to financial statements.
NUWAY ENERGY, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Three Months Ended Six Months Ended
-------------------- ------------------
June 30, June 30,
-------- ---------
2002 2001 2002 2001
------------ ----------- ------------ ------------
Revenue
-------
Rental Income $87,712 $117,383 $183,340 $265,718
Sales of Cigars 25,103 37,859 45,908 71,775
Oil Sales 70,740 - 214,562 -
------------ ----------- ------------ ------------
Total Revenues 183,555 155,242 443,810 337,493
------------ ----------- ------------ ------------
Cost and Expenses
-------------------
Selling, General & Administration 642,903 825,095 1,074,903 1,344,146
Depreciation, Depletion and
Amortization 98,498 34,239 233,674 50,869
Cost of Cigar Sales 14,614 21,932 26,914 43,316
Expenses Associated With
Stock Issued for Services 49,500 - 349,500 -
Oil and Gas Lease Operating Cost 41,778 - 70,736 -
Site Restoration Costs 3,897 - 10,169 -
------------ ----------- ------------ ------------
Impairment Charges - 152,652 - 347,071
------------ ----------- ------------ ------------
Total Cost and Expenses 851,190 1,033,918 1,765,896 1,785,402
------------ ----------- ------------ ------------
Operating Income (Loss) (667,635) (878,676) (1,322,086) (1,447,909)
------------ ----------- ------------ ------------
Other Income (Expenses)
-----------------------
Interest Income 821 45,266 7,474 101,777
------------ ----------- ------------ ------------
Net Other Income (Expenses) 821 45,266 7,474 101,777
------------ ----------- ------------ ------------
Income (Loss) Before Income Taxes ( 666,814) (833,410) (1,314,612) (1,346,132)
Income Taxes (Provision) Benefit - - - -
------------ ----------- ------------ ------------
Net Income (Loss) $(666,814) $(833,410) $(1,312,612) $(1,346,132)
============ =========== ============= ============
Earnings (Loss) Per Common Share
-----------------------------------
and Common Share Equivalent Basic
---------------------------------
and Fully Diluted
------------------
Common Share Equivalent
Outstanding 6,904,644 4,221,600 6,156,073 4,221,600
============ =========== ============= ============
Net Income (Loss)
per share $ (.10) $ (.20) $ (.21) $ (.32)
============ =========== ============= ============
Read accountants' review report and notes to financial statements.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
-----------------------------------------------
2002 2001
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ ( 1,314,612) ($1,346,132)
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 233,674 50,869
Issuance of Stock for Services & Interest 432,094 -
Asset Impairment Charges - 247,071
(Gain) Loss on Sale of Asset - 23,571
Amortization of Deferred Debt Issuance Costs - 32,250
Changes in Assets - (Increase) Decrease:
Accounts Receivable 74,732 95,083
Prepaid Expenses and Other Current Assets 104,008 38,206
Inventory of Cigars 26,913 1,463
Changes in Liabilities - Increase (Decrease):
Accounts Payable and Accrued Expenses (150,993) 332,896
-------------- ----------------
Net Cash Provided by (Used In) Operating
Activities (594,184) (524,723)
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on Sale of Fixed Assets 22,475 188,351
Fixed Assets Increase and Other (173,847) 11,803
Other Assets (28,279) (42,243)
-------------- ----------------
Net Cash Provided By (Used In)Investing
Activities (179,651) 157,911
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of Stockholder loans 344,377 -
-------------- ----------------
Net Cash (Used In) Financing Activities 344,377 -
-------------- ----------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (1,644) 89
-------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (431,102) (366,723)
CASH AND CASH EQUIVALENTS - BEGINNING 440,827 4,422,715
-------------- ----------------
CASH AND CASH EQUIVALENTS - ENDING $9,725 $ 4,055,992
============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
----------------------------------------------------
Cash Paid During the Period for:
Interest $ 2,923 $ 4,696
============== ================
Income Taxes, Foreign $ - $ -
============== ================
Conversion of Debentures to Capital $ 2,250,004 $ -
============== ================
Issuance of Stock for Capitalized
Software Costs $ 300,000 $ -
============== ================
Read accountants' review report and notes to financial statement.
Read accountants' review report and notes to financial statement.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
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 as well as other gaming
equipment to casino operators. The Company had originally 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, obsolescence 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 2, 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
$1,186,000 in regard to the cigar operations. Such expenditures have been
included in the accompanying consolidated financial statements as follows:
Cash and cash Equivalents $ -
Accounts Receivable 8,000
Prepaid and Other Current Assets 24,000
Inventory 448,000
Fixed Assets, net of Accumulated Depreciation 32,000
Other Assets 3,000
Aggregate Accumulated Deficit 671,000
-----------
Total Investment $1,186,000
===========
In the year 2001,the Company incorporated NuWay Resources, Inc., 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.
In June,2002, the Company acquired medical software from Camden Holdings, Inc.,
an affiliate, for 670,000 shares of stock valued at approximately $.45 per
share. That affiliate subscribed to an additional 1,000,000 shares of stock at
$.25 per share which at June 30, 2002 has not been paid.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 1. Summary of Significant Accounting Policies (Continue)
-------- ----------------------------------------------
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.
a Peruvian Corporation, Latin American Casinos of Colombia LTDA, a Colombian
Corporation, World's Best Rated Cigars, Inc., Nuway Resources, Inc., a Nevada
Corporation and Nuway Resource of Canada, Ltd., a Canadian Company.
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 in the
business economic environment or a significant change in the volume of
operations, the Company performs an impairment analysis by comparing the
estimated future undiscounted cash flows projected to be generated by the
assets, and if they are less than the asset 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.
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%.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 1 Summary of Significant Accounting Policies (Continued)
------- ----------------------------------------------
D Oil and Gas Operations (Continued)
-------------------------
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 $1,054,000 based on prices at December 31, 2001
of $11.32 per bbl of heavy oil and $3.30 per Mmbtu of gas. The Company
qualified for the exemption in connection of its acquisitions of resource
properties in August and September of 2001.
Ceiling test calculations are based on the Company's reserve report prepared
annually, on December 31, by McDaniel & Associates Consultants, LTD. and do not
reflect current prices which at June 30, 2002 were $17.13 per bbl of heavy oil
and $1.98 per mmbtu for gas.
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.
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 constant 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 reasonably 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.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 1 Summary of Significant Accounting Policies (Continued)
------- ----------------------------------------------
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 income (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 of debentures and excise of options and
warrants are reduced by the number of common shares that are assumed to be
purchased with the proceeds from the exercise of the options and warrants.
During 2001, all warrants, stock options and underwriter's options (Notes 4, 5,
6) were anti-dilutive, and excluded from the computation of basic and diluted
earning (loss) per share.
In the future, if all the convertible debt, warrants, stock options and
underwriting options were exercised or converted, future earnings per share
could be diluted by 2,708,214 additional shares as follows:
Publicly Traded Options 1,725,000
Private Warrants 300,000
Investment Banker Warrants 225,000
Incentive Stock Options 372,500
Debentures 85,714
-----------
2,708,214
===========
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 $11,000 and $238,000 as of June 30, 2002 and
December 31, 2001 for the excess of the deposit liabilities reported by the bank
over the amounts that would have been covered by federal deposit insurance.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF June 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
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.
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 Issued 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 cost as incurred. Included in the statement
of operations is approximately $1,500 and $49,000 advertising expense charged to
operations for the six months ended June 30, 2002 and 2001, respectively.
Substantially all advertising expenses incurred were paid with barter
transactions at published costs.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 2. Property and Equipment
-------- ------------------------
Property and Equipment are summarized as follows:
June 30, December 31,
2002 2001
--------------- -----------------
Software Costs (See Note 1 ) $ 300,000 $ -
Exploration and Development Equipment 1,028,868 933,624
Oil & Gas Properties At Cost 787,954 752,067
Land & Building (See Note 10) 35,000 35,000
Rental Equipment(See Note 10) 974,867 1,039,008
Furniture, Fixtures & Office Equipment 144,239 151,818
Transportation Equipment 9,502 2,862
--------------- -----------------
Total 3,280,430 2,914,379
Less: Accumulated Depreciation 702,597 554,244
--------------- ----------------
Property and Equipment - Net $ 2,577,833 $ 2,360,135
=============== ================
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
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.
Included in Rental Equipment is approximately $70,000 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 and recorded an
impairment charge of $2,789,000 on gaming equipment.
Rent expense for the six months ended June 30, 2002 and 2001 were $62,000 and
$74,000, respectively.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 3. Notes Receivable - Stockholders and Affiliates
-------- ---------------------------------------------------
In October, 2001 the Company advanced loans to two companies controlled
respectively 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 June 30,
2002). These notes have been reduced to $55,623 at June 30, 2002 and are
anticipated to be repaid by year end. Accordingly these notes have been
classified as a current asset in the accompanying financial statements.
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%. It is anticipated that the notes will be extended and has been classified as
a non-current asset in the accompanying financial statement.
Note 4. Warrants and Options and Stock Issued for Services
-------- ---------------------------------------------------------
As of June 30, 2002, 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, 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. 1,500,000 of the issuance
of the private warrants and 200,000 shares of restricted stock were issued to
executives of the corporation. Compensation was recorded on the arrangement
equal to the market value of he restricted stock, $350,000. The remaining
warrants, 1,800,000 were issued in connection with service rendered by several
individuals and entries and were valued at $1,991,700 using the Black-Scholes
Options pricing model assuming a 5% interest rate and high volatibility to
underlying stock prices. The 1,500,000 warrants issued to the executives were
valued at the intrinsic value in accordance with APB 25 at $1,620,000. (See Note
6). In year 2002, 3,000,000 of the 3,300,000 warrants issued in year 2000, were
cancelled and approximately $1,660,000 of previously recorded expenses that was
recorded in year 2000 was adjusted against retained earnings.
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. In January, 2002 the Company entered into a consulting engagement
with Barnstable Energy, Inc for consulting services. The Company issued 200,000
shares of common stock pursuant to this agreement and recorded compensation for
services of $300,000. In May, 2002, the Company issued 150,000 shares of stock
valued at $.33 per share, for legal services rendered.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
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 are fully vested.
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.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 6. Incentive Stock Option Plan (Continued)
-------- ------------------------------
Incentive Stock Options Outstanding
--------------------------------------
Amount Price Per Share
------------------------ ---------------
Options Outstanding at January 1, 2000 982,500 $1.00
Additional Options Issued 35,000 $1.06
Additional Options Issued 80,000 $1.75
Options Lapsed (75,000) $1.00
Options Exercised (650,000) $1.00
------------------------
Options Outstanding at December 31, 2001 372,500
And June 30, 2002
========================
All outstanding warrants and non-qualified options and incentive stock
options were exercisable at June 30, 2002.
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
Average
Range Number of Exercise
Year Ending December 31 Low High Shares Price
----- ------- -------- -------
2002 $ 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 1.75 415,000 1.74
---------
Total 2,622,500
=========
No options were granted in 2001 and 2002
The Company adopted the provisions of 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.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND 2001
----------------------------
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 the six months ended June 30, 2001 is $32,250
amortization of deferred debt issuance 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. Through June 30,
2002 an additional $2,250,000 of debentures holder's converted their debentures
into Company stock for the value of their debentures and accrued interest of
$132,000. At June 30, 2002, included in accounts payable is $9,000 of accrued
interest on the remaining debentures payable.
Note 8. Provision of Income Taxes
-------- ----------------------------
As of June 30, 2002, the Company had available for income tax purposes unused
net operating loss carry forwards which may provide future tax benefits of
$11,981,000 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 in that any amount of
tax benefit based on available evidence are not expected to be realized.
Note 9. Commitments and Contingencies
-------- -------------------------------
A Litigation
----------
The Company is a defendant from time to time on claims and lawsuits arising out
of the normal course of its business, none of which are expected to have a
material adverse effect on its business, operations, financial position or
corporate liquidity.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 9. Commitments and Contingencies (Continued)
-------- -------------------------------
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 upon the death of Mr. Lyons 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 obligated 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. Effective October 29, 2001, Mrs.
Lyons tendered her resignation and based upon the terms of her contract,
severance expenses of $350,000 had been recorded in year 2001 with $308,000
included in accounts payable and accrued expenses at June 30, 2002. The
compensation expense recorded in September, 2001 was comprised of $100,000
payable monthly for one year plus the value of 100,000 shares to be issued.
In January, 2000, the Company entered into two additional employment contracts,
both for the duration of two years and provides that the 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 individually and 750,000 warrants to
purchase additional common stock at $1.75 per shares, individually, in March
2002, 1,500,000 warrants to purchase additional common stock were cancelled
(Note 4). In June, 2002, the Board of Directors authorized the payment of
officers compensation for each of the officers at $12,000 per month retroactive
to October, 2001. Included in Selling, General and Administrative Expenses are
$216,000 of salaries in regard to this arrangement for the six months ended June
30, 2002.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 9. Commitments and Contingencies (Continued)
-------- -------------------------------
C Foreign Assets
---------------
The accompanying consolidated balance sheets for the period ended June 30, 2002,
includes assets relating to the Company's slot machine operations in Peru and
Colombia of $733,000 and $685,000 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
Revenue from rental operations is entirely earned in Columbia and Peru.
The assets of the oil and gas operations, which aggregate approximately
$1,455,000 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.
D Lease Commitment
-----------------
As at June 30, 2002, all operating leases for corporate facilities are either
short term leases or have expired and are being continued on a month to month
basis.
E Contractual Commitment
-----------------------
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 within 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.
Note 10 Impairment Loss
-------- ----------------
In 2001, the Company recorded an impairment loss as a result of the
obsolescence of parts used in the gaming equipment and reduction of values of
the utility of the gaming equipment.
Note 11 Going Concern
-------- --------------
The Company has accumulated net losses of $12,919,000 through June 30,
2002, and has a history of deficiency of operating cash flows and losses from
operations. 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, reduce expenses, raise additional capital, and
considering the sale of certain oil well assets to generate sufficient cash to
sustain operating overhead. The financial statements do not include any
adjustments that might be necessary if the company is unable to continue as a
going concern.
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 12 Operating Segments
-------- -------------------
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 12 Operating Segments
-------- -------------------
For the Six Months Ended June 31, 2002
---------------------------------------------------
Cigar Oil Gaming
Total Operations & Gas Equipment Unallocated
--------- ---------- ---------- ----------- -----------
Revenues $443,810 $45,908 $214,562 $183,340 $ -
--------- ---------- ---------- ------------ -----------
Cost & Expenses
-----------------
Cost of Product
Sold 26,914 26,914 - - -
Direct Overhead
Cost 442,419 65,920 98,484 278,015 -
Allocated
Overhead Cost 713,389 51,450 240,465 205,474 216,000
Depreciation &
Depletion 233,674 3,602 211,009 13,863 5,200
Expenses Assoc.,
With Options,
Warrants, and
Stock Issued
For Services 349,500 - - - 349,500
--------- ---------- ---------- ------------ -----------
Total Cost and
-----------------
Expenses 1,765,896 147,886 549,958 497,652 570,700
--------- --------- ---------- ---------- ------------ -----------
Operating
------------
Income(Loss) ($1,322,086) ($101,978) ($ 335,396) ($314,012) ($570,700)
------------ --------- ---------- ---------- ------------ -----------
Total Assets $3,855,000 $515,000 $1,455,000 $1,418,000 $ 467,000
============== ========== =========== ========== ============ =============
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 12 Operating Segments (Continued)
-------- -------------------
For the Six Months Ended June 30, 2001
---------------------------------------------
Cigar Oil Gaming
Total Operations & Gas Equipment Unallocated
---------- ----------- ----------- ---------- -------------
Revenues $337,493 $71,775 $ - $265,718 $ 0
---------- ----------- ----------- ---------- -------------
Cost & Expenses
------------------
Cost of Product
Sold 43,316 43,316 0 0 0
Direct Overhead
Cost 577,374 81,085 0 496,289 0
Allocated
Overhead Cost 766,772 163,070 0 603,702 0
Depreciation and
Depletion 50,869 5,202 0 42,167 3,500
Asset Impairment
Charges 347,071 0 0 347,071 0
---------- ----------- ----------- ---------- -------------
Total Cost and
----------------
Expenses 1,785,402 292,673 0 1,489,229 3,500
--------- ---------- ----------- ----------- ---------- -------------
Operating
----------
Income(Loss)($1,447,909) ($220,898) ($0)($1,223,511) ($3,500)
---------- ----------- ----------- ---------- -------------
Total Assets $9,267,000 $ 687,000 $ - $4,467,000 $4,114,000
=========== =========== =========== =========== =============
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 13 Oil and Gas Producing Activities
-------- ------------------------------------
The following information includes estimates which are subject to rapid and
unanticipated change. The Company cautions 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 are as follows:
Proved reserves:
Oil Gas
(bbls) (mcf)
---------- ---------
June 30, 2002 122,500 70,700
---------- ---------
Proved developed reserves
June 30, 2002 122,500 70,700
---------- ---------
Results of Oil and Gas Operations
---------------------------------
Income:
Oil Sales $ 214,562
----------
Cost and expenses:
Lease operating cost 70,736
Depletion, depreciation amortization 211,009
Site restoration costs 10,169
----------
291,917
----------
Net loss from operations ($ 77,352)
==========
Capitalized cost of oil and gas activities:
Acquisition costs $ 787,982
Exploration 314,827
Development 634,041
Read accountants' review report.
NUWAY ENERGY, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
-----------------------------------------
Note 13 Oil and Gas Producing Activities Continued
-------- ------------------------------------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserve quantities during
The following period:
Future cash inflows $1,631,000
Future development and production cost 921,000
----------
710,000
Future income tax expense* -
----------
Future net cash flows 710,000
10% annual discount (53,000)
----------
Standardized measure of discounted
future net cash flows $ 657,000
==========
*Reflects total tax pools for the period to June 30, 2002 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, under-appreciated capital
costs and earned depletion of $1,559,000.
Current prices used in the above estimates were based upon selling prices at the
wellhead at January 1, 2002 less the historical quality and price differentials
for each respective field as follows:
Oil - Hardisty Heavy ($CDN./bbl)(In U.S. $) $ 11.831
Gas - Alberta average @ Field gate $CDN./Mmbm) (In US$) $ 3.458
Current cost was based upon estimates made by consulting engineers at December
31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
--------------------------------------------------------------------------------
OPERATION
---------
General
-------
The Company entered the gaming and casino industry in Peru in 1994. Since
January 1995, the Company has been engaged in the renting of slot machines and
other gaming equipment to licensed gaming establishments in various cities
through its wholly owned subsidiaries in South and Central America. In 1994, the
Company formed its Peruvian subsidiary, and in late 1995 the Company formed its
Colombian subsidiary.
As of June 30, 2002, the Company had approximately 538 machines under
rental contracts in Peru and Colombia.
The Company in this segment concentrates its efforts on the rental of used
five reel slot machines. These machines were purchased at a fraction of the cost
of new machines and are refurbished for use in South and Central America.
Whereas a new slot machine would cost approximately $10,000 plus additional
charges for duty, the used slot machines cost approximately $700 each including
freight, duty, and refurbishing expenditures.
In September 1997, the Company incorporated World's Best Rated Cigar
Company, as a wholly owned subsidiary, to distribute premium cigars. It was
originally intended that the company would acquire quality cigars from six
manufacturers and market them at "off price" through large retail chains. In
February 2000, the marketing strategy was modified to include selling directly
to consumers through our web site, www.worldsbestrated.com, and our toll free
number. Substantially all advertising expense incurred is paid with barter
transactions.
Beginning in July 2001 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.
Future trends
--------------
Over the next four quarters, we intend to shift our business focus away
from the gaming equipment and cigar industries, and toward the medical
technology and healthcare services industries. The reason for this is the Board
of Directors believes the healthcare sector represents a significant business
opportunity for Nuway, and current management has the experience to take
advantage of current market conditions in this sector. Accordingly, we have
entered into two agreements with two companies operating in the healthcare
industry, both of which we believe will be beneficial to enacting our new
business plan. The first agreement, dated June 27, 2002, is with Camden
Holdings, Inc., a diversified holding company with interests in many industries,
including the healthcare industry. According to the terms of this agreement, we
are to receive a financing of $250,000 in exchange for 1,000,000 shares of our
restricted common stock. Shareholder consent was not required for the agreement.
The second agreement, dated June 28, 2002, is an asset purchase agreement with
Genesis Health Tech, Inc., a wholly-owned subsidiary of Camden Holdings. We
intend to purchase a comprehensive database of healthcare providers throughout
the U.S., in exchange for 666,667 shares of our restricted common stock. Both
the Camden agreement and the Genesis agreement will result in one individual
receiving 24% interest in our company. This agreement has been approved by the
Board, and a majority of the stockholders have consented to the transaction. The
closing of this transaction remains subject to our compliance with Regulation
14C of the Securities and Exchange Act of 1934, as amended, and NASDAQ
regulations, including all requisite filings.
We also intend to enter into a third agreement with Med Wireless, Inc.,
which has developed a number of wireless applications for the healthcare
industry. These technologies are primarily based on allowing high-resolution
transfer of diagnostic-quality images, including ultrasound, over the Internet
and intranet networks. We intend to license the entire suite of products, and
enter into two distribution agreements for the sale of these products once
licensed. We have received approval for the general terms of the license
agreement, and authorization for the officers to negotiate the final terms of a
license agreement with Med Wireless, by a majority of the shareholders, such
agreement to be subject to final approval of the terms by the Board. The general
terms of the 15-year license agreement provide for the issuance of 33,000,000
shares of our restricted common stock, which will result in Med Wireless owning
44% of our outstanding shares after giving effect to the transaction. Two
affiliated parties, each with minority interests in our company, also own
minority interests in Med Wireless either directly or indirectly. The two
parties combined control 52.3% of Med Wireless, although the two parties do not
have any oral or written agreement to act in concert in any respect. After
approval by the Board, the closing of this transaction will be subject to
compliance with Regulation 14C and NASDAQ regulations, including all requisite
filings.
All transactions have been and continue to be conducted at arms-length
terms, and all shares received were and will be valued at fair market price as
determined by our trading price.
We intend to divest ourselves of the gaming equipment and cigar industries
when and if such opportunities arise which result in a transaction value that
is beneficial to the company and its shareholders. Any such transaction will be
conducted at arms-length and for fair value. We do not currently have any such
transactions proposed or pending.
Results of Operations
-----------------------
The six-month period ended June 30, 2002 as compared to the six-month period
--------------------------------------------------------------------------------
ended June 30, 2001
----------------------
Revenues
--------
Revenues from the gaming equipment operations in Peru and Colombia for the
six-month period ended June 30, 2002 decreased by $82,378 or 31%, to
$183,140 from $265,718 for the comparable period in 2001. This decrease was
the result of an overall weakness of the economy in South America, political
changes and increased competition in the industry. The company also experienced
the effects of government-mandated obsolescence in Peru, which required us to
retire 523 machines from our inventory. We also significantly reduced marketing
and advertising expensing, in view of our decision to discontinue operations in
this business.
Revenues from cigar sales for the six months ended June 30, 2002 were
$71,775, a decrease of $25,867 or 36% for the same period in 2001. We also
significantly reduced marketing and advertising expensing, in view of our
decision to discontinue operations in this business.
Revenues from our oil and gas operations for the six months ended June 30,
2002 was $214,562. The company did not have any oil and gas activities in the
corresponding period in 2001.
Capital Expenditures
---------------------
There were no capital expenditures for the gaming equipment operations for
the six-month period ended June 30, 2002, which is equivalent to the capital
expenditures of the same period ended 2001.
Capital expenditures for the cigar business were zero for the six months
ended June 30, 2002, as compared to zero for the six months ended June 30, 2001.
Capital expenditures for the oil and gas business were zero for the six
months ended June 30, 2002, as compared to zero for the six months ended June
30, 2001.
Selling, General and Administrative Expenses
------------------------------------------------
Selling, general, and administrative expenses incurred in the six months
ended June 30, 2002 decreased $269,243 or 20%, to $1,074,903 from
$1,344,146 for the same period in 2001. This reduction is due to our reduction
in marketing and advertising expenses for our cigar and gaming equipment
industries, as well as our 10% reduction in staff in our Miami operations.
Net Profit (Loss)
-------------------
Net loss for the six months ended June 30, 2002 was ($1,312,612), as
compared to ($1,346,132) for the comparable period ended 2001, representing a
decrease of $33,520 in net loss. This reduction is the result of our reduction
of costs in selling, general and administrative expenses, discussed above.
The three-month period ended June 30, 2002 as compared to the three-month
---------------------------------------------------------------------------
period ended June 30, 2001
-----------------------------
Revenues
--------
Revenues from the gaming equipment operations in Peru and Colombia for the
three-month period ended June 30, 2002 decreased by $29,671 or 25%, to $87,712
from $117,383 for the comparable period in 2001. In addition to overall
economic weakness in South America, increased competition and forced retirement
of a number of our machines, this reduction was the result of significantly
reduced marketing and advertising expensing, in view of our decision to
discontinue operations in this business.
Revenues from cigar sales the three months ended June 30, 2002 were
$37,859, a decrease of $12,756 or 34% for the same period in 2001. This
reduction was the result of our significantly reduced marketing and advertising
expensing, in view of our decision to discontinue operations in this business.
Revenues from our oil and gas operations for the three months ended June
30, 2002 was $70,740. The company did not have any oil and gas activities in
the corresponding period in 2001.
Capital Expenditures
---------------------
There were no capital expenditures for the gaming equipment operations for
the three month period ended June 30, 2002, which is equivalent to the capital
expenditures of the same period ended 2001.
Capital expenditures for the cigar business were zero for the three months
ended June 30, 2002, which is equivalent the capital expenditures of the same
period ended 2001.
Capital expenditures for the oil and gas business were zero for the three months
ended June 30, 2002, which is equivalent the capital expenditures of the same
period ended 2001.
Selling, General and Administrative Expenses
------------------------------------------------
Selling, general, and administrative expenses incurred in the three months
ended June 30, 2002 decreased $182,192 or 22%, to $642,903 from $825,095 for
the same period in 2001. This reduction is due to our reduction in marketing and
advertising expenses for our cigar and gaming equipment industries, as well as
our 10% reduction in staff in our Miami operations.
Net Profit (Loss)
-------------------
Net loss for the three months ended June 30, 2002 was ($666,814), or
($0.10) per share on a fully diluted basis, as compared to ($833,410), or
($0.20) per share on a fully diluted basis for the comparable period ended 2001,
representing a decrease of $166,596, or $0.10 per share, in net loss. This
reduction is the result of our reduction of costs in selling, general and
administrative expenses, discussed above.
Liquidity and Capital Resources
----------------------------------
Cash and cash equivalents decreased approximately $92,899 to $9,725 at
June 30, 2002 from $102,624 at March 31, 2001. The decrease is attributable to
overhead expenditures higher than operating revenues, and the continued slow
growth of the cigar operations and increase of oil and gas operations.
The company has $55,623 outstanding in loans to companies controlled by
related parties. Please refer to our discussion in note 3 to our financial
statements. The notes are payable quarterly, and accrue interest at prime plus
1% (5.75% at June 30, 2002). The company anticipates full repayment of this
loan by the end of 2002.
The company has an outstanding loan of $40,000 to Jeffrey Felder, the
current president of our cigar subsidiary, and formerly an officer of the
company. The note was payable quarterly, and accrued interest at prime plus 1%,
and matured on October 29, 2001, the termination date of the officer. The
company anticipates full repayment of this note by the end of 2002.
In December 2000, the company offered a private placement of $3,500,000 in
principal amount of 6% Convertible Debentures, which are convertible into common
stock at an exercise price of $1.75 per share. These debentures were due June
13, 2001, and were subsequently extended to December 13, 2001. $150,000 of
these debentures remain unconverted and outstanding, with accrued interest of
$9,000. These notes are currently under default, and the company is negotiating
the terms of settlement with the noteholders. Please refer to our discussion in
note 7 to our financial statements.
Part II
--------
Defaults of Senior Securities
--------------------------------
As of December 13, 2001, the company has been in default on its 6%
convertible debentures. The current amount in default is $150,000, not
including $9,000 of accrued interest due. Please refer to our discussion in
"Management's Discussion and Analysis - Liquidity and Capital Resources," and
note 7 to our financial statements.
Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
The agreement with Genesis Health Tech, Inc. was submitted to and approved by a
majority of the shareholders in final form in a written consent taken without a
meeting, as permitted by Nuway's By-Laws, on June 28, 2002. The agreement with
Med Wireless, Inc. has been submitted to and approved by a majority of the
shareholders in general form on August 12, 2002.
Exhibits and Reports on Form 8-K
-------------------------------------
Exhibits
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3.1 Articles of Incorporation (Delaware), as amended (1)
3.2 Certificate of Merger Merging Repossession Auction, Inc. (Florida
corporation) and Repossession Auction, Inc. (Delaware
corporation)(1)
3.3 Bylaws (1)
3.4 Certificate of Amendment to Certificate of Incorporation (1)
4.1 Form of publicly traded Warrant Agreement (1)
4.2 Form of private warrant dated December 12, 2000 (1)
4.3 Form of 6% Convertible Debenture dated December 14, 2000 (1)
4.4 Form of Amendment to 6% Convertible Debenture (1)
4.5 Amendment to Publicly Traded Warrant (1)
10.1 Share Purchase Agreement with Camden Holdings, dated June 27, 2002
15.1 Letter on unaudited interim financial statements (2)
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
________________
(1) Previously filed on Form 10-KSB for the fiscal year ended December 31,
2001.
(2) Incorporated into financial statements filed herein.
Forms 8-K
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Financial statements representing a preliminary balance sheet for the quarter
ended March 31, 2002 were filed on May 6, 2002 on Form 8-K in compliance with
NASDAQ requirements.
Signatures
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In accordance with the requirements of the Securities and Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NuWay Energy, Inc.
Date: August 15, 2002 /s/ Dennis Calvert
------------------------------
By: Dennis Calvert
President
Date: August 15, 2002 /s/ Joe Tawil
------------------------------
By: Joe Tawil
Acting Chief Financial Officer
and Chief Accounting Officer