UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] 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 MEDICAL, INC.
(Name of Small Business Issuer in its Charter)
Delaware 65-0159115
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2603 Main Street, Suite 1150, Irvine, CA 92614
--------------------------------------------------
(Address of principal executive offices, Zip Code)
Issuer's telephone number, including area code: (949) 235-8062
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
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)
been subject to such filing requirements for the past 90 days. Yes [ ] No [x ].
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
Issuer's revenue for its most recent fiscal year: $ -0-
-----
The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
December 31, 2003 was $0.04 and as of October 21, 2004 was $0.001.
The number of shares outstanding of the issuer's class of common equity
as of December 31, 2003 was 36,386,486 and as of October 21, 2004 was
51,166,486.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
TABLE OF CONTENTS
PART I
Item 1. Description of Business 3
Item 2. Description of Property 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Common Equity and Related Stockholders Matters 20
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation 25
Item 7. Financial Statements 40
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 40
Item 8A. Controls and Procedures 41
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 42
Item 10. Executive Compensation 45
Item 11. Security Ownership of Certain Beneficial Owners and Management 49
Item 12. Certain Relationships and Related Transactions 50
Item 13. Exhibits and Reports on Form 8-K 54
Item 14. Principal Accountant Fees and Services 59
Signatures 61
Consolidated Financial Statements for the Years Ended
December 31, 2003 and 2002 F-1 - F-34
Exhibits Filed With This Report
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
USE OF FORWARD LOOKING STATEMENTS IN THIS REPORT
This Annual Report on Form 10-KSB (the "Annual Report") contains forward-looking
statements. These forward-looking statements include predictions regarding our
future:
o Business plans;
o Financing plans;
o general and administrative expenses;
o liquidity and sufficiency of existing cash;
o the outcome of pending or threatened litigation; and
o the effect of recent accounting pronouncements on our financial
condition and results of operations.
You can identify these and other forward-looking statements by the use
of words such as "may," "will," "expects," "anticipates," "believes,"
"estimates," "continues," or the negative of such terms, or other comparable
terminology. Forward-looking statements also include the assumptions underlying
or relating to any of the foregoing statements.
Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those
set forth below under the heading "Risk Factors." All forward-looking statements
included in this document are based on information available to us on the date
hereof. We assume no obligation to update any forward-looking statements.
The information contained in this Annual Report is as of December 31,
2003, unless expressly stated otherwise.
OVERVIEW
NuWay Medical, Inc., a Delaware corporation (the "Company") had no
continuing business operations as of December 31, 2003. At this time, the
Company is operating as a public shell and management is seeking merger and
acquisition candidates with ongoing operations.
3
Over the course of several years, the Company has attempted to enter
various businesses through the acquisitions of entities operating ongoing
businesses or technology that needed to be developed and marketed. However, as a
result of various factors, primarily inadequate capital and the inability to
raise financing successfully, these acquisitions could not be properly exploited
and integrated to produce profitable operations by the Company. Management of
the Company has elected to dispose, through sales or other means, these
acquisitions.
The Company also continues to deal with the effects of certain matters
that arose (i) under prior management and (ii) from its business dealings with a
former consultant and principal stockholder of the Company, Mark Roy Anderson.
The Company is a party to two lawsuits, one brought by Flight Options,
Inc. ("Flight Options") as a result of an assignment of contract executed by the
Company's former President, Todd Sanders, and the other brought by the Company's
former chief financial officer, Geraldine Lyons. See "Legal Proceedings".
Mr. Anderson is a former affiliate of the Company and was involved in
the Company from June 2002 until March 2003 through a series of transactions
between the Company and Mr. Anderson or companies affiliated with Mr. Anderson.
See "Related Parties and Certain Transactions". Mr. Anderson became involved
with the Company during a period of transition of management from the Company's
prior management team led by Mr. Sanders and a shift in the Company's business
focus from a variety of businesses in gaming, tobacco and oil and gas, to
healthcare and health-related technology.
In June 2002, Mr. Anderson purchased 1,000,000 shares of the Company's
common stock for $250,000. In July 2002, Med Wireless, Inc. ("Med Wireless"), a
company in which Mr. Anderson was the founder and principal stockholder,
licensed certain medical-related technology to the Company for a 15-year term.
In exchange for the license, the Med Wireless stockholders in the aggregate
received 6,600,000 shares, or approximately 44%, of the Company's then
outstanding common stock. Of that amount, Mr. Anderson and his affiliates
received 2,868,928, or approximately 19%, of the Company's then outstanding
common stock.
Camden Holdings, Inc. ("Camden Holdings"), another company controlled
by Mr. Anderson, was active in the development of the business of Med Wireless,
beginning prior to the acquisition of the Med Wireless technology by the
Company.
In addition, Camden Holdings was actively involved in the Company's
sale-leaseback program of ultrasound machines, which were marketed primarily to
doctors, medical clinics and hospitals. Under this program, the Company
attempted to arrange the purchase of ultrasound machines by investors, who would
4
lease the machines to the Company. In turn, the Company would sub-lease the
ultrasound machines to the end user. Camden Holdings secured purchase orders
from both investors and prospective end-use lessees of the ultrasound machines.
These purchase orders were conditioned upon the Company's ability to secure
financing of its own lease obligations of the ultrasound machines from the
investors. This was not accomplished because the Company lacked the financial
resources and credit to obtain such financing. The Company continued to pursue
attempts to arrange such financing through March 2003.
Also in June 2002, the Company purchased a marketing database of
healthcare providers in the United States from Genesis Healthtech, Inc.
("Genesis"), a wholly-owned subsidiary of Camden Holdings, which was controlled
by Mark Roy Anderson. The total purchase price of $300,000 was satisfied by the
issuance of 666,667 shares of the Company's common stock. The database was
purchased with the intention of marketing the Company's sale-leaseback program
of ultrasound machines. When the Company was unable to make the sale-leaseback
program commercially viable, the marketing database became useless to the
Company.
In order to focus the Company's then-primary business opportunity in
healthcare technology, the Company divested its non-core businesses in gaming,
oil and gas and tobacco, during the period that Mr. Anderson exerted his
influence over the Company. In October 2002, the Company sold its Latin America
gaming businesses, Latin American Casinos Del Peru S.A., a Peruvian corporation,
and Latin American Casinos of Colombia LTDA, a Colombian corporation, to Casino
Venture Partners ("CVP"), another entity controlled by Mr. Anderson.
Also in October 2002, the Company sold its Canadian oil and gas
development businesses, NuWay Resources, Ltd., to Summit Oil & Gas, Inc.
("Summit Oil"), yet another entity which was controlled by Mr. Anderson. In
November 2002, World's Best Rated Cigars, Inc., the Company's wholly-owned
subsidiary, which was engaged in the distribution and sale of premium brand
cigars, was shut down and discontinued. See Note 3 to Notes to Consolidated
Financial Statements and "Certain Parties and Related Transactions".
As a result of all of the foregoing transactions with Mr. Anderson and
companies controlled by Mr. Anderson, the Company believes that Mr. Anderson was
the beneficial owner of an aggregate of 5,777,479 shares, or more than 30%, of
the Company's common stock outstanding as of December 31, 2002, assuming Mr.
Anderson beneficially owned all the shares at the same time. The Company
believes that Mr. Anderson sold some of the shares which were issued pursuant to
the Company's 2002 Consultant Equity Plan (the "2002 Plan"), and as such the
number and percentage of the Company's common stock held by Mr. Anderson at any
one time may have been less than that indicated above. In any event, Mr.
Anderson failed to file any reports with the Securities and Exchange Commission
5
("SEC") on Schedules 13D or 13G, or on Forms 3 or 4, and, therefore, the Company
cannot confirm any of these numbers at any given point in time.
By the end of 2002 and into the beginning of 2003, it had become
apparent to the Company that Mr. Anderson had divergent business objectives to
those of the Company, and the Company had concerns about additional dealings
with Mr. Anderson. In March 2003, the relationship between the Company and Mr.
Anderson reached a climax when the Company severed its business relationships
with Mr. Anderson. At that time, the Company actively supported Dennis Calvert,
the Company's current President, in his purchase of Mr. Anderson's interests in
the Company. New Millennium Capital Partners, LLC, a Nevada limited liability
company ("New Millennium") controlled by Mr. Calvert, purchased the Company's
promissory note in the principal amount of $1,120,000 and an aggregate of
4,182,107 shares of the Company's common stock from various entities controlled
by Mr. Anderson, although the total number of shares purchased is in dispute.
The transaction was executed as part of a plan to remove Mr. Anderson totally
from any involvement in the Company and provide a completely new focus and
direction for the Company under new management led by Mr. Calvert.
Please see "Related Parties and Certain Transactions" for more
information regarding these businesses and the relationship between the Company
and Mark Roy Anderson.
Since March 2003, new management of the Company has struggled to deal
with the following issues, often simultaneously:
o Limited capital resources in a prolonged period of difficulty in the
capital markets, especially for small public companies, creating
severe limitations on the Company's ability to maintain its
reporting obligations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and its business operations
o Trying to exploit technologies or businesses that existed when Mr.
Calvert took the helm of management
o Determining which businesses were worth pursuing and which were not
o Trying to acquire or develop new businesses
o Because of the scarcity of cash on hand, using common stock and
securities convertible into common stock to bring on board
employees, directors, consultants, professional service provides and
advisors
o Because of the scarcity of cash on hand, using common stock and
securities convertible into common stock to acquire businesses
o Dealing with inquiries from the SEC regarding certain practices and
transactions in the Company's past, past including questions raised
about any continued involvement of Mr. Anderson in the ongoing
business of the Company
6
o Dealing with the NASDAQ Qualifications Panel hearing process in May
2003
o Dealing with the delisting of the Company's common stock from the
NASDAQ Small Cap Market
o Dealing with inquiries from the Federal Bureau of Investigations
("FBI") related to any past dealings with Mr. Anderson or his
affiliates
o Dealing with litigation with former officers of the Company and
related litigation stemming from their leadership of the Company
These issues present extraordinary challenges to management as it tries
slowly to turn the situation around. The Company is presently focused primarily
on maintaining the corporate entity, complying with its reporting obligations
under the Securities Exchange Act and seeking new business opportunities,
including without limitation, healthcare and technology businesses. The Company
will need working capital resources to maintain the Company's status and satisfy
its reporting obligations, and to fund other anticipated costs and expenses
during the year ending December 31, 2004 and beyond. The Company's ability to
continue as a going concern is dependent on the Company's ability to raise
capital to, at a minimum, meet its corporate maintenance requirements and
reporting obligations. If the Company is able to acquire an ongoing business
and/or technology that must be exploited, it would need additional capital until
and unless that prospective operation is able to generate positive working
capital sufficient to fund the Company's cash flow requirements form operations.
The Company was initially organized as Repossession Auction, Inc. under
the laws of the State of Florida in 1989. In 1991, the Company merged into a
Delaware corporation bearing the same name. In 1994, the Company's name was
changed to Latin American Casinos, Inc. to reflect its focus on 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 new emphasis on the oil and gas
development industry. During October 2002, the Company's name was changed to
NuWay Medical, Inc. coincident with the divestiture of its non-medical assets
and the retention of new management.
IMPAIRED ASSETS AND DISCONTINUED BUSINESSES.
Med Wireless and PRLS Technologies
Management of the Company deemed it necessary to discontinue the Company's
attempt to develop and market the Med Wireless and Player Record Library System
("PRLS") technologies, because the Company was unable to raise additional funds
to further develop and market those technologies. The Med Wireless technology
consists of software that is compliant with the Health Insurance Portability and
7
Accountability Act ("HIPAA"), to electronically organize, store and
retrieve medical records and medical images. Although the formal decision to
discontinue the operations was made subsequent to December 31, 2003, the
Company's financial statements for the year ended December 31, 2003 reflect a
discontinued operations segment related to the abandonment of the exploitation
of the Med Wireless and PRLS technologies after a charge to impairment in an
amount equal to the remaining net book value of the acquired technology. See
Note 3 to Notes to Consolidated Financial Statements.
Based on the rapid increase in the number of well-capitalized companies
offering competing technologies, as well as the fact that the Company has been
unable to continue funding any technology enhancements or development related to
the Med Wireless technology, management came to believe that the Med Wireless
technology had lost the ability to be a viable competing technology in its
sector and that it was not in the Company's best interest to continue to pursue
the Med Wireless technology. Moreover, management is doubtful if the Med
Wireless technology will be considered of any significant value to a prospective
buyer or licensee of the technology. The Company is attempting to sell this
technology, but expects to realize only nominal net proceeds, if any, for the
technology.
In addition, the Company has abandoned its efforts to market a variety
of products and services to the sports industry with an emphasis on health and
technology related products. In 2003, the Company focused its primary efforts on
developing and marketing PRLS, a technology product that is derived, in part,
from the Med Wireless technology. In December 2002, the Company had established
NuWay Sports, LLC ("NuWay Sports"), to develop and market the PRLS technology.
NuWay Sports is owned 51% by the Company and 49% by former NFL football player
Kenyon Rasheed.
PRLS is a highly specialized electronic medical record and workflow
process software application, designed to address the information technology
needs of the sports industry relating to player health, and create a secure
database for athlete/patient medical data that could be acquired, displayed,
analyzed, interpreted and archived in a completely digital format that is
HIPAA-compliant. With PRLS, player medical data and images (x-rays, CT scans,
MRIs, sonograms, etc.) can be electronically acquired and archived in a digital
format with enough resolution to allow for medical diagnostics. The database of
scanned images and associated data is encoded, encrypted and password protected.
The records are accessible over a private network or the Internet, and can be
displayed, analyzed and interpreted by team doctors and other authorized
officials. The system provides a complete audit trail of keystrokes and a
detailed workflow process for all users.
The Company has entered into discussions for the sale of NuWay Sports
to a party unrelated to the Company or, to its knowledge, to Mark Roy Anderson.
If these negotiations result in a consummated transaction, it is not likely that
the Company would receive any up-front cash payments. It should also be noted
that because Augustine II, LLC (the "Augustine Fund"), a creditor of the
Company, has a lien on the Company's 51% membership interest in NuWay Sports,
they would have to approve any such sale. See "Management's Discussion and
8
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". To the Company's knowledge, the Augustine Fund is not
affiliated with Mr. Anderson or any of his affiliated companies.
During 2003, the Company terminated strategic alliances it had with
Think Tank Systems and Radlink, Inc. Think Tank is a reseller of IBM equipment
and provided computer equipment used in connection with the PRLS technology.
Radlink is a specialized technology provider that converts medical images from a
film based medium to a digital format, and whose services were used in
connection with the PRLS technology.
Ultrasound Machine Sale-Leaseback Program
Under the Company's ultrasound machine sale-leaseback program, the
Company attempted to arrange the purchase of ultrasound machines by investors,
who would lease the machines to the Company. In turn, the Company would
sub-lease the ultrasound machines to the end user. Camden Holdings secured
purchase orders from both investors and prospective end-use lessees of the
ultrasound machines. These purchase orders were conditioned upon the Company's
ability to secure financing of its own lease obligations of the ultrasound
machines from the investors. This was not accomplished because the Company
lacked the financial resources and credit to obtain such financing.
The Company continued to pursue attempts to arrange such financing
through March 2003. Thereafter, the Company focused primarily on the Med
Wireless and PRLS technologies and, after occasional attempts to pursue the
sale-leaseback program through mid-2003, this program was no longer pursued.
The termination of the sale-leaseback program also rendered useless the
marketing database, which the Company had purchased from Genesis, a wholly-owned
subsidiary of Camden Holdings. The database had been purchased with the
intention of marketing the Company's sale-leaseback program of ultrasound
machines.
Please see "Related Parties and Certain Transactions" for more
information regarding these businesses and the relationship between the Company
and Mark Roy Anderson.
ABANDONED ACQUISITION
On January 31, 2004, the Company entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with Premium Medical Group, Inc., a
Florida corporation ("PMG") and PMG's sole stockholders, Eduardo A. Ruiz and
Luis A. Ruiz (the "PMG Stockholders"). Prior to this transaction, there was no
business or other relationship between the Company and its affiliates and PMG or
9
the PMG Stockholders and, to the Company's knowledge, there was no business or
other relationship between PMG or the PMG Stockholders and Mark Roy Anderson.
Pursuant to the Stock Purchase Agreement, the Company agreed to acquire
100% of the shares of PMG from the PMG Stockholders in exchange for 30,000,000
shares of the Company's common stock, subject to certain adjustments. The exact
number of Company Shares to be issued to the PMG Stockholders was subject to
adjustment in the event certain revenue was or was not generated by PMG during
one year following the closing of the transaction. PMG had been organized in
June 2003 to provide medical products to hospitals and medical clinics in South
America, primarily Venezuela. Luis A. Ruiz became a director of the Company in
connection with the transaction.
The parties had a difference in expectations regarding who would be
ultimately responsible for paying for the audit of PMG that was required in
order for the Company to complete its disclosure obligations under the
Securities Exchange Act. Additionally, the Company did not have a sufficient
number of authorized and unissued shares of its common stock to both satisfy its
obligations to the PMG Stockholders and to issue shares of common stock in a
meaningful financing transaction, given the low price per share at which the
Company's common stock trades. The Company lacked the financial resources to
schedule a stockholders' meeting, prepare a proxy statement and solicit proxies
for the purpose of amending its Certificate of Incorporation to increase its
authorized capital stock.
As a result of these and other factors, the Company and PMG never
consolidated their operations, the Company never exercised control over PMG or
its operations and the parties never exchanged stock certificates evidencing
their ownership in each other.
Therefore, the parties entered into discussions and concluded amicably
that it was in the mutual best interest of the respective companies and their
respective stockholders, to rescind the transactions provided for in the Stock
Purchase Agreement and return all parties to their respective positions prior to
the transactions contemplated in the Stock Purchase Agreement.
The parties entered into a Rescission Agreement on October 14, 2004
that provides, in relevant part, that (i) all transactions contemplated by the
Stock Purchase Agreement shall be rescinded as if the Stock Purchase Agreement
had never been executed and delivered; (ii) the parties forever waive all rights
to receive stock in PMG and the Company, as the case may be; (iii) Luis A. Ruiz
shall resign as a director of the Company; and (iv) the Company and PMG shall
file appropriate documents with the Secretary of State of the State of Florida
with respect to the rescission of the exchange of shares provided for in the
Stock Purchase Agreement.
10
EMPLOYEES
At December 31, 2003, the Company employed two full-time employees,
reflecting the reduced operations of the Company at that time.
RISK FACTORS
The Company faces a number of significant risks associated with its
current plan of operations. These include the following:
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES. The
Company has no current operations and, as such, may not be able to overcome
unanticipated difficulties that may be encountered related to the implementation
of its business plan. The Company has a limited operating history, limited
revenue from operations and a history of losses. In addition, because the
Company currently has no operations, the Company faces all of the risks inherent
with a start-up business, including the possibility that the Company cannot
acquire or develop a business that is viable. There is no assurance that, if the
Company does find or develop a business, to acquire, whether such business will
ever be profitable. The Company may also face unforeseen problems, difficulties,
expenses or delays in implementing its business plan.
WE NEED ADDITIONAL FUNDS. If it necessary for the Company to seek to
secure additional funds for any new business, general and administrative
expenses and period reporting requirements, there can be no assurance that such
funds will be available, or will be available on favorable terms. Failure to
secure needed funds will directly impact the Company's ability to maintain its
publicly-traded status and, potentially, the corporate entity itself. While
management has dedicated itself to the efforts to secure needed funds, the
outcome and ultimate success of those efforts is uncertain.
THE COST OF MAINTAINING OUR REPORTING OBLIGATIONS IS HIGH. The Company
is obligated to maintain its periodic public filings and public reporting
requirements, on a timely basis, to remain a public company and maintain its
registration as a listed stock. In order to meet these obligations, the Company
will need to continue to raise capital. If adequate funds are not available to
the Company, it will be unable to comply with those requirements and could cease
to be qualified to have its stock traded in the public market. The Company has a
history of delinquencies in its filing obligations with the Securities and
Exchange Commission.
OUR STOCKHOLDERS FACE POTENTIAL DILUTION IN ANY NEW FINANCING. Any
additional equity that the Company raises would dilute the interest of the
current stockholders and any persons who may become stockholders before such
financing. Given the low price of the Company's common stock, such dilution in
any financing of a meaningful amount, could be substantial.
11
OUR STOCKHOLDERS FACE POTENTIAL ADVERSE EFFECT FROM THE TERMS OF ANY
NEWLY ISSUED PREFERRED STOCK. In order to raise capital to meet expenses or to
acquire a business, the Board of Directors of the Company may issue additional
stock, including preferred stock. Any preferred stock which the Company may
issue may have voting rights, liquidation preferences, redemption rights and
other rights, preferences and privileges. The rights of the holder's of the
Company's Common Stock will be subject to, and in many respect subordinate to,
the rights of the holders of any such preferred stock. Furthermore, such
Preferred Stock may have other rights, including economic rights, senior to the
Company's Common Stock that could have a material adverse effect on the value of
the Company's Common Stock. Preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, can also have the effect of making it more difficult for a third party
to acquire a majority of outstanding voting stock of the Company, thereby
delaying, deferring or preventing a change in control of the Company.
WE HAVE BEEN UNABLE TO OBTAIN A QUORUM AND SCHEDULE A VOTE OF
STOCKHOLDERS TO APPROVE CERTAIN MATERIAL TRANSACTIONS. The Company will be
required to amend its charter to increase the authorized number of shares to
approve a transaction with New Millennium, which is controlled by our President
Dennis Calvert, raise funds or acquire new businesses, which is both costly and
uncertain as to its success. The Company has attempted to secure stockholder
votes for certain corporate actions in the past and has been unable to secure a
quorum. As a result, the Company has been unable to effect certain material
transactions, and this inability to act could threaten the viability of the
Company.
IF WE ACQUIRE OR DEVELOP ANY BUSINESS, WE WILL BE DEPENDENT UPON MARKET
ACCEPTANCE AND COMPETITIVE FACTORS. The success of any business the Company
acquires or develops will be highly dependent upon, among other things, gaining
market acceptance from customers that will use the company's products and
services. More specifically, these factors include how well its products or
services perform (ease of implementation, ease of use by customers, reliability,
and scope of products and services), competitive forces, the level of consumer
demand for products and services offered, the selling prices of its products and
services, and the effectiveness of the Company's marketing activities.
OUR COMMON STOCK IS THINLY TRADED AND LARGELY ILLIQUID. In June 2003,
our common stock was delisted from the NASDAQ SmallCap Market. Our stock
currently trades on the Pink Sheets. The delisting has made it more difficult to
buy or sell our stock and has lead to a significant decline in the frequency of
trades and trading volume. The delisting will likely adversely affect the
Company's ability to obtain financing in the future due to the decreased
liquidity of the Company's shares. There can be no assurance when or if the
Company's stock will be quoted on the OTC Bulletin Board, in light of the public
interest concerns raised by NASDAQ in connection with the delisting of the
Company's shares.
12
OUR COMMON STOCK IS SUBJECT TO "PENNY STOCK" REGULATIONS THAT MAY
AFFECT THE LIQUIDITY FOR OUR COMMON STOCK. Our common stock is subject to the
rules adopted by the Securities and Exchange Commission that regulate
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks are generally equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ Stock Market, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system).
The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from those rules, deliver a standardized
risk disclosure document prepared by the Securities and Exchange Commission,
which contains the following:
o a description of the nature and level of risk in the market for
penny stocks in both public offerings and secondary trading
o a description of the broker's or dealer's duties to the customer and
of the rights and remedies available to the customer with respect to
violation to such duties or other requirements of Securities' laws
o a brief, clear, narrative description of a dealer market, including
"bid" and "ask" prices for penny stocks and significance of the
spread between the "bid" and "ask" price
o a toll-free telephone number for inquiries on disciplinary actions;
definitions of significant terms in the disclosure document or in
the conduct of trading in penny stocks, and
o such other information and is in such form (including language,
type, size and format), as the Commission shall require by rule or
regulation.
Prior to effecting any transaction in penny stock, the broker-dealer
also must provide the customer the following:
o the bid and offer quotations for the penny stock
o the compensation of the broker-dealer and its salesperson in the
transaction
o the number of shares to which such bid and ask prices apply, or
other comparable information relating to the depth and liquidity of
the market for such stock
o the depth and liquidity of the market for such stock, and
13
o monthly account statements showing the market value of each penny
stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from those rules, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written agreement to
transactions involving penny stocks, and a signed and dated copy of a written
suitably statement. These disclosure requirements may have the effect of
reducing the trading activity in the secondary market for a stock such as our
common stock if it is subject to the penny stock rules.
THE COMPANY, SOME OF ITS DIRECTORS AND ITS OFFICERS FACE RISKS IN
CONNECTION WITH THE CRIMINAL INVESTIGATION OF A FORMER CONSULTANT AND PRINCIPAL
STOCKHOLDER OF THE COMPANY. In or about May 2003, the Company learned through
verbal discussions with representatives of NASDAQ, in preparation for the
Company's pending NASDAQ qualifications hearing, that Mark Roy Anderson had a
criminal background. In or about May and June 2003, the Company was informed in
writing by the United States Attorney's office in Los Angeles, that Mr. Anderson
(i) was the target of a criminal investigation (the "Investigation") pertaining
to the sale of securities by Med Wireless (from which the Company licensed
certain assets in 2002), and (ii) had been convicted of multiple felonies
unrelated to Med Wireless in the 1990s. Mr. Anderson was the founder and
principal stockholder of Med Wireless, and first introduced the concept of
licensing the Med Wireless software application and contracts to the Company in
May 2002.
Dennis Calvert had been approached initially by Mr. Anderson some time
in 1996 to consider entering into a business consulting relationship with
Anderson-controlled entities. Over the period from 1996 to 2001, Mr. Calvert
worked as a consultant periodically with Anderson-related entities for the
purpose of evaluating potential new businesses and potential investment
opportunities being considered by Mr. Anderson and these entities. In June 2002,
Mr. Calvert agreed to become president of Med Wireless, primarily for the
purpose of completing the Med Wireless transaction with the Company. As
consideration for his agreeing to become President of Med Wireless, Mr. Calvert
received 1,327,700 shares of Med Wireless stock from Mr. Anderson's holdings.
These shares were subsequently converted into 600,000 shares of the Company's
common stock pursuant to the terms of the transaction between Med Wireless and
the Company.
On June 28, 2002, Mr. Calvert was appointed president of the Company.
At the same time, Joseph Provenzano, who at that time was an employee of Camden
Holdings, another affiliate of Mr. Anderson, joined the Company's board of
directors. In addition to the Med Wireless transaction, and as disclosed
14
elsewhere in this Annual Report, entities that Mr. Anderson controls, including
Camden Holdings, Genesis, Summit Oil and CVP, invested $250,000 in the Company,
sold the Company additional assets and purchased the Company's previous
operating businesses. See "Related Parties and Certain Transactions".
Although Mr. Anderson never served as an officer or director of the
Company, he served as a consultant to the Company and received consulting fees
in the form of an aggregate 1,241,884 shares of the Company's common stock.
Since December 2002 Mr. Anderson has not been a consultant to the Company and
since March 2003 has not been involved in any way in the Company's operations.
In the purchase agreement between Mr. Anderson, his affiliates and New
Millennium in March 2003 (the "New Millennium Agreement"), Mr. Anderson
represented that he was selling 100% of his stock to New Millennium and would no
longer own any of the Company's stock. Mr. Calvert is the Manager and, together
with his wife, the sole member of New Millennium, and this transaction was
engaged in to eliminate Mr. Anderson as a stockholder of the Company and to
remove him from any involvement in the operations of the Company.
Subsequent to the closing of that transaction, management learned
through the Company's transfer agent that Camden Holdings still owns 340,894
shares of the Company's common stock. The Company and New Millennium believe
that the existence of these 340,894 shares of the Company's common stock owned
by Camden Holdings Inc. is a material breach of the New Millennium Agreement,
and the Company and New Millennium are reviewing their respective legal rights
with regards to this matter.
Technically, under the terms of the New Millennium Agreement, it is
possible that Camden Holdings or Mr. Anderson has the right to reacquire the
shares of the Company's common stock that were sold to New Millennium, if New
Millennium defaults on the promissory note issued by New Millennium to Camden
Holdings to purchase the shares (the "New Millennium Note"). See "Related
Parties and Certain Transactions". The New Millennium Note is purportedly
secured by the purchased shares of the Company's common stock; however, New
Millennium and Mr. Calvert believe that Camden Holdings and Mr. Anderson have
not perfected their security interest in those shares. New Millennium has
defaulted on the New Millennium Note. However, New Millennium believes that
Camden Holdings failed to deliver all the shares of the Company held by Camden
Holdings, and thus breached the terms of their purchase agreement, making the
New Millennium Note void by its terms. In addition, the Augustine Fund is the
pledgee of 2,500,000 of these shares and holds those shares as pledgee.
On or about May 17, 2003, the Company was served by a subpoena issued
by the grand jury impaneled to investigate Mr. Anderson, requesting documents
relating to Mr. Anderson and his affiliates, including Med Wireless, Camden
15
Holdings, Summit Oil and Gas, and Summit Health Care. Additionally, the subpoena
requested information relating to the identity of the Company's officers,
directors, shareholders and consultants (legal, accounting and otherwise), and
that the Company provide copies of its filings and correspondence with the SEC,
the National Association of Securities Dealers and the NASDAQ Stock Market. The
Company cooperated fully with that request by providing the requested
information and intends to continue to cooperate fully with the investigation.
In mid-2003, the Company was also informed by the Assistant United
States Attorney handling the Investigation that, although Dennis Calvert and
Joseph Provenzano are not currently considered "targets" of the Investigation
(and, to their knowledge, are as of the date of the filing of this Annual Report
still not "targets" of the Investigation whereas Mr. Anderson is still a
"target" of the Investigation), until their respective roles, if any, in the
specific events being investigated are determined, they will be considered to be
"subjects" of the Investigation, meaning that their conduct is believed by the
U.S. Attorney's office to be "within the scope" of the grand jury's
investigation.
The Company has learned that private placement memoranda distributed to
Med Wireless investors stated that Dennis Calvert was the president of Med
Wireless as early as 2001, and additionally believes that Mr. Anderson
apparently made a number of similar false representations throughout 2001 and
2002. Mr. Calvert did not approve this disclosure contained in those private
placement memoranda nor in any other form, and has informed the Company that he
was not engaged as the president of Med Wireless until June 2002 and not any
earlier, and that any statements to the contrary are untrue.
Mr. Provenzano joined Camden Holdings in 2001 to assist in its mergers
and acquisitions department, and he worked at Camden Holdings until March 2003.
Both Mr. Calvert and Mr. Provenzano have informed both the Company and, through
their own legal counsel, the Assistant U.S. Attorney, that they intend to
cooperate fully with law enforcement officials in the Investigation.
Although neither the Company nor any of its officers or directors is
currently the target of any criminal investigation, there can be no assurance
that such an investigation will not be undertaken. Additionally, although
neither the Company nor its officers or directors have been contacted by either
the U.S. Attorney's Office, or the FBI regarding the Investigation since June
2003, neither the Company nor its officers and directors can be certain that
such requests will not be made in the future. Furthermore, the ongoing
Investigation has in the past occupied, and may in the future occupy, a
significant amount of time of the Company and Messrs. Calvert and Provenzano,
creating a distraction from the Company's business. The mere existence of the
Investigation, not to mention the outcome thereof, depending upon such outcome,
could have a material adverse effect on the Company.
16
THE COMPANY MAY HAVE VIOLATED CERTAIN SECURITIES LAWS AND IS DELINQUENT
IN ITS SEC FILINGS. While the Company and its management seek to operate fully
within the scope of the law and fulfill any and all regulatory obligations, the
Company has been subject to informal inquiries by the civil enforcement division
of the SEC for possible securities violations in the past, including the acts of
Mark Roy Anderson.
On June 3, 2003 and September 8, 2003, the Company was served with
requests for documentation by the civil enforcement division of the SEC in
connection with a non-public inquiry into possible violations by the Company of
the federal securities laws. Although the request provides that the inquiry
should not be construed as an indication by the SEC that the law has been
violated, there can be no assurance that the Company will not, as a result of
the inquiry, become the target of a formal SEC investigation. The Company cannot
predict the amount of time and resources that management will need to devote to
the inquiry, or the results thereof. In the event the inquiry results in a
formal investigation, such expenditures of time and resources will likely be
significant. In addition, there can be no assurance that stockholders or other
regulatory authorities will not initiate proceedings against the Company and/or
its officers and directors as a result of past securities law violations, if
any, which could have a material adverse effect on the Company. The Company
intends to cooperate fully with the SEC in all aspects of its inquiry.
On or about August 19, 2004, the Company received a "Wells Notice" from
the SEC that the Company is delinquent in its filing of periodic reports with
the SEC and the staff of the SEC may recommend enforcement proceedings be
commenced against the Company. The Company is working diligently to file all
delinquent reports as quickly as possible and as funds become available to
compensate the Company's professional advisors. However, the Company will likely
continue to face close scrutiny of its current and future activities. The
outcome of this matter, including the possibility that the SEC might commence
proceedings against the Company seeking the deregistration of the Company's
stock, could have a material adverse effect on the Company in the future.
ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 2003, the Company maintained its principal place of
business at 23461 South Pointe Drive, Suite 200, Laguna Hills, California 92653.
The lease for the office was on a month-to-month basis, and was cancelable by
either party with sixty days' written notice. Monthly rent was $7,850, payable
in cash or shares of the Company's common stock, valued at the then-current
market price. In 2003, the Company recorded $96,560 of rental expense in
connection with this lease.
On April 1, 2004, the Company terminated this lease. The Company's
offices are currently located at 2603 Main Street, Suite 1150, Irvine,
17
California 92615. The Company currently occupies space from a consultant at no
cost to the Company.
ITEM 3. LEGAL PROCEEDINGS
In June 2002, Geraldine Lyons, the Company's former Chief Financial
Officer, sued the Company and the Company's former president Todd Sanders, for
breach of her employment contract. The lawsuit was brought in the Circuit Court
of the 11th Judicial Circuit in Miami-Dade County in Florida. Ms. Lyons seeks
approximately $25,000 due under the contract and the issuance of 100,000 shares
of common stock, with a guarantee that the stock could be sold by Ms. Lyons for
$300,000. Ms. Lyons alleges that additional funds are due under her employment
contract; that the contract requires the Company guarantee that she can sell for
$300,000 the 100,000 shares of stock the Company is required to issue her; and,
that Mr. Sanders promised to purchase from her 100,000 shares of Company common
stock held by her at the price of $4.00 per share.
The Company has counter-sued Ms. Lyons for breach of fiduciary duty,
fraud, violation of Section 12(a)(2) of the Securities Act of 1933, violation of
Section 517.301 of the Florida Statutes, negligent misrepresentation, conversion
and unjust enrichment resulting from the required restatement of the Company's
financial statements for the years ended December 31, 2000 and December 31,
1999. The restatements corrected the previous omission of certain material
expenses related primarily to compensation expense arising from warrants issued
and repriced stock options, as well as other errors.
The case is ongoing at this time, although it is not being vigorously
prosecuted by Ms. Lyons or the Company, in the Company's case primarily because
the Company currently lacks the resources to do so. While the Company believes
that it has meritorious positions in this litigation, given the inherent nature
of litigation, it is not possible to predict the outcome of this litigation or
the impact it would have on the Company.
In May 2004, the Company was sued by Flight Options, Inc., a jet plane
leasing company, in the Superior Court of Orange County California. The lawsuit
alleges that the Company owes Flight Options approximately $418,300, pursuant to
a five-year lease assigned to the Company by the Company's former president Todd
Sanders, from his corporation, Devenshire Management Corporation. Management of
the Company believes that the assignment of the lease was not properly
authorized or approved by the Company, and that by Mr. Sander's failure to
identify the lease in a December 2002 settlement agreement with the Company, he
breached the terms of that settlement agreement and, pursuant to the settlement
agreement, must indemnify the Company for any losses owed to Flight Options. The
Company has cross-complained against Mr. Sanders for indemnity, and has added
the affirmative claim of breach of fiduciary duty. The case is still in its
initial discovery phase, and the Court recently set the case for trial in
18
April 2005. While the Company believes that it has meritorious positions in this
litigation, given the inherent nature of litigation, it is not possible to
predict the outcome of this litigation or the impact it would have on the
Company.
The Company is party to various other claims, legal actions and
complaints arising periodically in the ordinary course of business. In the
opinion of management, no such matters will have a material adverse effect on
the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 9, 2003, the Company attempted to conduct a stockholder
meeting to approve the 2003 Plan and the conversion of the Company's Promissory
Note in the principal amount of $1,120,000, which note is held by New
Millennium. Dennis Calvert, the Company's President, is the Manager and,
together with his wife, is the sole shareholder of New Millennium The Company
was unable to obtain a quorum at the meeting. The meeting was adjourned to
December 30, 2003, but again the Company was unable to obtain a quorum, and the
Board adjourned the meeting indefinitely. See "Related Parties and Certain
Transactions".
19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since October 31, 1998, the Company's Common Stock and Warrants have
been listed on the NASDAQ Small Cap Market. Since November 22, 2002 the
Company's common stock has traded under the symbol "NMED". The NASDAQ Stock
Market suspended trading of the Company's securities as of March 11, 2002
pending discussion with the Company concerning the Company's restatement of its
financial statements for the years ending December 31, 1999 and 2000. There is
pending litigation against the Company's former Chief Financial Officer
(Geraldine Lyons) regarding this restatement. See "Legal Proceedings". Trading
was reinstated on April 18, 2002.
The Company's common stock was delisted from trading on the NASDAQ
SmallCap Market effective June 10, 2003. The NASDAQ Listing Qualifications Panel
had cited numerous concerns, including:
o filing delinquencies for certain of the Company's periodic reports
filed with the SEC under the Securities Exchange Act of 1934
o violation of NASDAQ Marketplace Rules regarding the New Millennium
Note conversion without a stockholder vote
o violation of NASDAQ Marketplace Rules regarding issuance of
securities to directors, officers and consultants without a
stockholder vote
o the failure to timely file Listing of Additional Shares ("LAS")
forms with NASDAQ
o disclosure practices in the form of press releases and other public
communications about the Company
o lack of independent directors
o concerns about the composition of the Company's audit committee
o failure to maintain the minimum $1 bid price
o failure to maintain the minimum $2.5 million stockholder's equity
o public interest concerns because of the former association of Mark
Royal Anderson with the Company
Following a hearing before the Qualifications Panel requesting waiver
or extension of the time to address and remedy these concerns, the Company
received the Qualifications Panel's written determination letter on June 6,
2003. That determination letter set forth the NASDAQ Qualification Panel's
determination that an exception to the NASDAQ continued listing qualifications
would not be granted due to the Company's failures to timely file periodic
20
reports (including the existing delinquency regarding the required filing of a
Form 10-Q for the quarter ended March 31, 2003), to make accurate and timely
disclosure of material events, to comply with the minimum shareholders' equity
requirement, and to timely file LAS forms. As a separate and additional basis to
deny the Company's request for continued listing, the Panel cited public
interest concerns raised by the gravity of the past disclosure violations and
its belief of the continued significant participation in the Company by Mark Roy
Anderson.
The Company's common stock is currently quoted on the National
Quotation Service Bureau, commonly known as the "pink sheets".
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 through June 10, 2003 and as reported by Historical Stock
Price Reports available at www.yahoo.com thereafter.
Common Stock High/Low Bid Prices:
2002 1st Quarter $2.12 $1.25
2nd Quarter $1.66 $0.23
3rd Quarter $1.00 $0.15
4th Quarter $0.60 $0.13
2003 1st Quarter $0.25 $0.10
2nd Quarter $0.14 $0.08
3rd Quarter $0.09 $0.05
4th Quarter $0.06 $0.04
The closing price for the Company's common stock on December 31, 2003
was $.04 per share and on October 21, 2004 it was $.0008 per share.
As of October 21, 2004, there were approximately 280 registered owners
and of the Company's common stock.
At December 31, 2003, the Company also had the following warrants
outstanding:
o stock purchase warrants to purchase an aggregate 300,000 shares of
the Company's common stock, which warrants had been issued in
private offerings. These warrants permit the holder to purchase
shares of common stock at an exercise price of $1.75 per share
through December 11, 2005.
o stock purchase warrants to purchase 100,000 shares of the Company's
common stock at $0.30 per share, which were granted in 2002 to a
former executive in connection with his resignation.
21
o stock purchase warrants to purchase an aggregate 519,322 shares of
the Company's common stock, which warrants had been issued in
private offerings. These warrants allow for the holder to purchase
shares of common stock at an exercise price of $0.20 per share
through March 7, 2006 (120,000 shares) and April 15, 2006 (399,322
shares).
o stock purchase warrants to purchase an aggregate 6,158,381 shares of
the Company's common stock, which warrants had been issued in a
private offering to the Augustine Fund. These warrants initially
allowed for the holder to purchase shares of common stock at an
exercise price of $0.16 per share through August 10, 2008, but were
re-priced in 2004 (in conjunction with an extension of the financing
provided by Augustine Fund LLC) to $0.035 per share.
o stock purchase warrants to purchase an aggregate 333,333 shares of
the Company's common stock, which warrants had been issued to a
consultant that provided services to the Company. These warrants
allow for the holder to purchase shares of common stock at an
exercise price of $0.06 per share through August 29, 2008.
o unvested stock purchase warrants to purchase an aggregate 2,000,000
shares of common stock at $0.05 a share. If vested, the warrant
would expire on October 29, 2004. The Warrant does not vest, and is
thus not exercisable, unless and until the Holder introduces to the
Company an investor or investors which invest net proceeds in the
Company of at least $250,000 within 3 months of the introduction.
The closing of any such investment shall be in the sole and absolute
discretion of the Company. In order to vest, the investment(s) of at
least $250,000 must be made by May 1, 2004. This condition was not
met, and thus the warrant did not vest and has expired.
DIVIDENDS
The Company has never declared or paid a cash dividend to stockholders.
The board of directors presently intends to retain any earnings which may be
generated in the future to finance Company operations.
EQUITY SECURITIES SOLD WITHOUT REGISTRATION
The Company engaged in the following sales of unregistered securities
during the fiscal year ended December 31, 2003:
In January 2003, the Company issued 62,500 shares of common stock to
William Bossung, former Chief Operating Officer of the Company, in connection
22
with the exercise of options that had previously been issued to Mr. Bossung. The
options were "cashless" and the Company received no proceeds from this exercise.
In March 2003, the Company entered into two Convertible Preferred Stock
and Warrant Purchase Agreements whereby the Company sold an aggregate of 338,022
shares of a newly created series of Preferred Stock, Series A Convertible
Preferred Stock, par value $.00067, to private investors, for a total
consideration of $169,011. Each share of Series A preferred stock is convertible
into one share of the Company's common stock. In addition, for each share of
Series A preferred stock purchased, the investor received a warrant to purchase
one share of common stock at a price of $.20 per share. The Series A preferred
stock may be converted by the holder at any time after six months from the
purchase date and the warrant is exercisable for a period of three years from
the purchase date.
In April 2003, the Company received an additional $110,650 from the
sale of an additional 221,300 shares of Series A Preferred Stock and one share
of common stock, at a price of $.20 per share, to the same investors pursuant to
the same purchase agreements.
In April 2003, the Company issued 200,000 shares of common stock to
Cygni Capital in exchange for services provided the Company.
The Company issued shares of common stock in partial satisfaction of
payment of outstanding notes due certain note holders, John Ianetta and Michael
and Donna Klein. The issuances to these note holders were as follows:
February 2003 John Ianetta was issued 32,103 shares.
December 2003 John Ianetta was issued 500,000 shares.
February 2003 Michael and Donna Klein were issued 63,903 shares.
February 2003 Michael and Donna Klein were issued 125,000 shares.
In September 2003, the Company issued 325,000 shares to Bryan Wolfe and
250,000 shares to Devon Blaine, in exchange for professional services provided
by each of them to the Company.
On October 29, 2003, the Company issued an unvested warrant to an
individual to purchase 2,000,000 shares of common stock at $0.05 a share. The
warrant expired on October 29, 2004. The Warrant was not exercisable unless and
until the Holder introduced to the Company an investor or investors who invested
net proceeds of at least $250,000 within three months of the introduction.
On November 20, 2003, the Company received proceeds of $50,000 in
exchange for a promissory note in which it agreed to pay $65,000 to the investor
90 days from the date of the loan. The Company's CEO and president Dennis
23
Calvert personally guaranteed the note. The Company has paid back $30,000 to the
investor, and is currently in default on the note.
Subsequent to end of the fiscal year ended December 31, 2003, the
Company has engaged in the following sales of unregistered securities during
2004:
The Company issued 30,000,000 shares of common stock to the Premium
Medical Group Shareholders in connection with a transaction in which the Company
acquired the outstanding stock of Premium Medical Group. This transaction has
since been rescinded by the parties. See Note 15 to Notes to Consolidated
Financial Statements.
The Company issued shares of common stock as partial satisfaction of
payment of outstanding notes due certain note holders, John Ianetta and Michael
and Donna Klein. The issuances to these note holders were as follows:
February 2004 John Ianetta was issued 500,000 shares.
February 2004 Michael and Donna Klein were issued 100,000 shares.
On February 23, 2004, the Company issued an unvested warrant to Sachi
International, Inc. to purchase up to 3,000,000 shares of common stock at $0.04
a share. The Warrant vests based on the amount of investment proceeds brought to
the Company by the Holder, with 100% vesting if the Holder brings $500,000 in
investment capital. In the event less than $500,000 is invested, the warrant
vests in a pro-rata amount. The closing of any such investment shall be in the
sole and absolute discretion of the Company. Sachi International, Inc., has not
met the conditions to vest the warrant.
In March 2004, the Company issued 200,000 shares to David Wiechert in
exchange for professional services provided to the Company.
In March 2004, the Company issued 3,000,000 shares to three of its four
directors in exchange for services provided to the Company.
All of the above offerings were made in reliance on Rule 506 of
Regulation D and/or Section 4(2) of the Securities Exchange Act.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding future issuance
outstanding options, options, warrants
warrants and rights and rights
Plan category (a) (b) (c)
-------------------------------------- -------------------- ----------------- -----------------------
Equity compensation plans approved by 0 0 0
security holders
Equity compensation plans not approved 0 0 14,541,222
by security holders
Total 0 0 14,541,222
24
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our audited consolidated financial statements and the related notes to the
consolidated financial statements included elsewhere in this report.
This discussion contains forward-looking statements that involve risks
and uncertainties. Such statements, which include statements concerning future
revenue sources and concentration, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed above in Part I, Item 1 and elsewhere in this Form
10-KSB, particularly in "Risk Factors," that could cause actual results to
differ materially from those projected. The forward-looking statements set forth
in this Form 10-KSB are as of December 31, 2003, and we undertake no duty to
update this information.
PLAN OF OPERATIONS
The Company had no continuing business operations as of December 31,
2003. Over the course of several years, the Company has attempted to enter
various businesses through the acquisitions of entities operating ongoing
businesses or technology that needed to be developed and marketed. However, as a
result of various factors, but primarily due to its lack of adequate capital and
the inability to secure financing successfully, these acquisitions could not be
properly exploited and integrated to produce profitable operations by the
Company. Management of the Company has elected to dispose or discontinue through
sales or other means, these acquisitions, including the Company's attempt to
develop and market the 15-year licensing rights acquired from Med Wireless in
July 2002. The Med Wireless technology consists of software that is compliant
with HIPAA, to electronically organize, store and retrieve medical records and
medical images. Although the formal decision to discontinue the operations was
made subsequent to December 31, 2003, the Company's financial statements for the
year ended December 31, 2003 reflect a discontinued operations segment related
to the abandonment of the exploitation of the Med Wireless and PRLS technologies
after a charge to impairment in an amount equal to the remaining net book value
of the acquired technology. See Note 3 to Notes to Consolidated Financial
Statements.
25
Based on the rapid increase in the number of well-capitalized companies
offering competing technologies, as well as the fact that the Company has been
unable to continue funding any technology enhancements or development related to
the Med Wireless technology, management came to believe that the technology had
lost the ability to be a viable competing technology in its sector and that it
was not in the Company's best interest to continue to pursue the Med Wireless
technology. Moreover, management is doubtful if the Med Wireless technology will
be considered of any significant value to a prospective buyer or licensee of the
technology. The Company is attempting to sell this technology, but expects to
realize only nominal net proceeds, if any, for the technology.
In addition, the Company has abandoned its efforts to market a variety
of products and services to the sports industry with an emphasis on health and
technology related products, primarily PRLS. The Company has entered into
discussions for the sale of the Company's majority-owned subsidiary, NuWay
Sports, which was established to market the PRLS technology. The Company has
entered into discussions for the sale of NuWay Sports to a party unrelated to
the Company or, to its knowledge, to Mark Roy Anderson. If these negotiations
result in a consummated transaction, the Company believes it is not likely that
the Company would receive any up-front cash payments. See Note 3 to Notes to
Consolidated Financial Statements.
The Company is presently focused on maintaining the corporate entity
and seeking new business opportunities. The Company will need working capital
resources to maintain the Company's status and to fund other anticipated costs
and expenses during the year ending December 31, 2004 and beyond. The Company's
ability to continue as a going concern is dependent on the Company's ability to
raise capital to, at a minimum, meet its corporate maintenance requirements. If
the Company is able to acquire an ongoing business and/or technology that must
be exploited, it would need additional capital until and unless that prospective
operation is able to generate positive working capital sufficient to fund the
Company's cash flow requirements form operations.
As a result of the dramatic change in direction of the Company's scope
and focus, and the discontinuation of its operating businesses in 2002 and 2003,
comparisons of year-to-year results of operations are not meaningful.
26
ANALYSIS OF FINANCIAL CONDITION
During 2003, the Company recorded an impairment charge related to its
tangible and intangible assets. The Company earned no revenues and generated no
cash from continuing operations.
Cash and Cash Equivalents
Cash and Cash Equivalents increased from $521 as of December 31, 2002 to
$671 at December 31, 2003. During the period from September 1, 2003 to current,
the Company's President, Mr. Calvert, has incurred approximately $140,000 in
costs on behalf of the Company to sustain bare minimum operations. Cash on hand
as of October 1, 2004 was $735. The Company recently received cash totaling
$80,000 from the sale of its common and preferred shares which has been used to
pay for legal and accounting costs associated with the Company's regulatory
reporting requirements.
Furniture, Fixtures and Office Equipment
Furniture, Fixtures and Office Equipment decreased from $28,844 as of
December 31, 2002 to $0 at December 31, 2003. The decrease was due to normal
depreciation totaling $8,552. In addition, on April 1, 2004 the Company closed
its offices and has in storage its Furniture, Fixtures and Office Equipment. As
these items are idle and there is no foreseeable plan of use, management
recorded a write down of the remaining net book value totaling $20,292 as of
December 31, 2003.
Other Assets
Marketing Database
The marketing database decreased from $255,000 as of December 31, 2002
to $0 at December 31, 2003. The decrease is due to normal amortization totaling
$38,250 and the remaining was due to an impairment charge totaling $216,750.
Management had no success in its marketing efforts and its future use was
uncertain and at that time it had not used the marketing database to market any
product or generate any revenue for the Company.
Med Wireless License
The Med Wireless License decreased from $4,090,000 as of December 31,
2002 to $0 at December 31, 2003. The decrease was due to normal amortization
totaling $613,500 and the remaining was due to an impairment charge
totaling $3,476,500. During 2003, primarily as a result of its inability to
secure financing, Nuway was unable to effectively market the product
successfully.
27
Liabilities
Total Current Liabilities increased $522,765 from $2,401,579 as of
December 31, 2002 to $2,924,344, as of December 31, 2003. The increase is due to
(i) an increase of Notes Payable of $470,000 reflecting a loan obtained from the
Augustine Fund totaling $420,000 and the remainder of $50,000 obtained from an
advisory board member; (ii) an increase of Accounts Payable and Accrued Expenses
of $115,000 related to operating expenses incurred but not paid; offset by (iii)
a decrease in Debenture Payable of $25,000 arising from the conversion of
debenture holders of the debentures into equity and (iv) the discount assigned
to the value of the warrants that were attached to the Augustine Fund term loan.
Stockholder's Deficit
Total Stockholders' Deficit increased by $4,896,459 during the year
ending December 31, 2003. The primary reason for the increase is that net loss
totaled $7,622,209. This was offset by the issuance of shares of our common
stock for salary and to compensate consultants to our Company, which increased
Additional Paid in Capital by $2,712,882.
RESULTS OF OPERATIONS - COMPARISON OF THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Revenue
The Company had no revenues from continuing operations during 2003 or
2002. During the last half of 2002, the Company shifted its focus toward the
information technology needs of the sports industry by marketing its PRLS
platform. The Company's subsidiary, NuWay Sports, LLC, marketed this technology
and generated $40,000 of revenue in the first quarter of 2003. This entity is
held for sale; consequently the results of operations related to this subsidiary
have been reclassified in our consolidated Statement of Operations as a Loss
from discontinued operations.
Selling, General and Administration Expense
Selling, and General and Administration expenses were $2,339,264 for
the year ending December 31, 2003, as compared to $2,157,289 for the year ending
December 31, 2002, or a net increase of 8.4%.
The largest components of these expenses were:
a. Salaries and Payroll-related Expenses: These expenses were $329,622
in 2002 versus $322,532 in the current year 2003, a decrease of $7,090 or 2
percent. At the end of 2003, the Company employed 2 full time employees, while
at December 31, 2002 NuWay employed three (3) full-time employees. The Company's
28
only two employees have employment agreements calling for the payment in the
aggregate of $24,900 per month. Both employees have accrued unpaid compensation
totaling $38,300 as of December 31, 2003.
b. Consulting Expense grew in 2003 from $950,532 in 2002 to $1,108,382
in 2003, an increase of 17 percent. This increase is directly related to
management's strategy of using consultants on a project-by-project basis. These
projects included marketing, technological development and administration and
were primarily staffed by independent contractors who were compensated with
Company common stock.
c. Rent expense decreased from $96,560 in 2002 to $70,200 in 2003.
Currently the Company receives rent at no cost from a shareholder.
d. Legal Expenses increased from $302,088 in 2002, to $694,151 in 2003,
an increase of 130 percent. This change is due to the legal assistance required
in 2003 for transactions and or activities such as the maintenance of reporting
requirements, NASDAQ qualifications panel hearing for continued listing, the
need for stock issuances used in lieu of cash to acquire services, as well as
review of proposed acquisitions during 2003.
Expenses Associated With Stock Issued for Services
During 2003 the Company issued 19,248,759 shares to approximately 20
consultants, directors, and employees. Of this total 17,327,753 have been
registered under a stock compensation plan as filed on Form S-8, while the
balance, 1,921,006 shares were unregistered and are restricted in trading. Of
the total issued in 2003, 2,633,590 relate to services performed in 2002 and
16,519,169 relate to 2003. The expenses related to the shares issued for 2002
services in 2003 were recorded in the Company's financial statements for the
year ending December 31, 2002. In 2003 there was $1,554,700 of expenses recorded
related to the issuance of these shares. Of this amount $1,045,600 related to
consulting services, $394,000 related to legal services $63,000 related to
Advisory and Board of Directors expense, $52,100 related to salary expense and
$25,000 to reduce the outstanding debentures.
29
Discontinued Operations
As discussed above and in the notes to our consolidated financial
statements, we disposed of all operating entities and discontinued all
operations. The Company recorded a loss from operations for 2003 of $2,712,940,
as compared to a Net Loss from Continuing Operations for the year ended December
31, 2002 of $1,488,680, for a net increase in loss from operations of 82% from
December 31, 2002 to December 31, 2003.
Net Loss
Net Loss for the year ended December 31, 2003 was $7,622,209 or $0.25
per share compared to a $4,937,097 loss or $.50 per share for the year 2002, for
a net increase of 154% from years 2002 to 2003.
RESULTS OF OPERATIONS - COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenues
During 2001, total revenues (from continuing operations only) were
$3,600, representing rental income earned by the Company. The Company had no
revenues during from continuing operations 2002 as it was engaged in the
development of new medical technology products. During the last half of 2002,
the Company shifted its focus toward the information technology needs of the
sports industry relating to player health. This change in focus led to the rapid
development of the PRLS system, which began to generate revenues in the first
quarter of 2003. Consequently, the results of our prior business line operations
in gaming machine rental, oil and gas development and distribution of cigars
were reclassified in our consolidated statements of operations as "discontinued
operations."
Selling, General and Administration Expense
Selling, general and administrative expenses declined in 2002 by 17 %
to $2,157,289 from $2,600,371 in 2001. Salaries and payroll-related expenses
were $329,622 in 2002 versus $576,041 in the prior year, a decrease of $246,419
or 43 %. This is consistent with the reduction in employment experienced by the
Company after its change in business focus and the divestiture of all operations
other than the new medical technology business. At the end of 2002, the Company
employed 3 full time employees, while at December 31, 2001 the Company employed
32 full-time employees. The principal reason for the decline in headcount from
year to year is the change in business focus and the divestiture of non-medical
operations during 2002.
30
Consulting expense grew significantly in 2002, to $950,532 from
$250,628 in 2001, an increase of 280 %. This increase is directly related to new
management's strategy of maintaining a very low permanent staffing level and
supplementing that with consultants on a project-by-project basis. Further, the
development of new products and technology related to the Company's shift in
business focus required additional staff in the areas of applications
development, sales, marketing and administration. These positions were primarily
staffed by independent contractors who were compensated with shares of the
Company's common stock.
Rent expense decreased by 50 % from $192,543 in 2001 to $96,560 in
2002. This decrease is consistent with the reduced staffing levels as well as
limited requirement for warehouse space.
Legal expenses grew from $108,474 in 2001 to $302,088 in 2002, an
increase of 178 %. This growth is due to the high level of legal assistance
required in 2002 for transactions such as (i) the acquisitions of the marketing
database from Genesis and the Med Wireless technology license, (ii) financing
completed with Camden Holdings, (iii) a major shift in the Company's core
business strategy, (iv) a thorough change in management and (v) the need for
stock issuances used in lieu of cash to acquire services.
Travel and entertainment expense declined by 82 % in 2002 from $500,045
in 2001 to $90,293 in 2002. This decrease is due to a conscious effort on the
part of new management to minimize these expenses as well as a reduced need for
travel due to the divestiture of operations that were remotely located in places
like Latin and South America and Canada.
Expenses Associated With Stock Issued for Services
Expenses associated with stock issued for services grew by 144% in 2002
over 2001, from $405,650 to $987,944. The primary reason for this increase was
that the Company's limited cash position in 2002 caused management to seek other
means of compensating employees and contractors for services performed. The
expenses recorded in 2002 related to payment for legal, consulting and other
services. The fact that the Company was focused on making the transition to a
medical technology business meant that no cash was being received while the
transition was occurring. Of the approximately $988,000 in expenses in 2002,
approximately $500,000 was for legal services, $474,000 was for consultants in
several different fields, and $14,000 related to payment of office rent.
Discontinued Operations
As discussed above and in the notes to our consolidated financial
statements, we disposed of several operations through the sale of two foreign
subsidiaries, Latin American Casinos and NuWay Resources effective October 1,
31
2002, and the cessation of the operations of our World's Best Rated Cigar
Company subsidiary in November 2002. Due to the discontinuance of these
operations, we have reclassified the historical operating results from these
ventures for 2001 and the nine months ended September 30, 2002 and disclosed
such below the results from our continuing operations in our consolidated
statements of operations. These businesses generated losses from operations of
$3,910,193 for the year ended December 31, 2001 and $600,986 through the nine
months ended September 30, 2002. We also recorded a loss on sale and disposal of
the net assets of these businesses of $2,847,431 in the fourth quarter of the
year ended December 31, 2002.
Net Loss
Net loss for the year ended December 31, 2002 was $4,937,097 or $0.50
per share, compared to a $6,652,433 loss or $1.56 per share for the year 2001.
Recent Accounting Pronouncements
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Statement No. 146 requires
companies to recognize costs associated with the exit or disposal of activities
as they are incurred rather than at the date a plan of disposal or commitment to
exit is initiated. Types of costs covered by Statement No. 146 include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, facility closing, or other exit or
disposal activity. Statement No. 146 will apply to all exit or disposal
activities initiated after December 31, 2002. At this time, the Company does not
expect the adoption of the provisions of Statement No. 146 to have a material
impact on the Company's financial results.
In November 2002, the FASB issued Interpretation No. (Interpretation)
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." Interpretation 45
requires certain guarantees to be recorded at fair value. In general,
Interpretation 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party. The initial recognition and measurement
provisions of Interpretation 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. Interpretation 45 also
requires new disclosures, even when the likelihood of making any payments under
the guarantee is remote. These disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The changes required by Interpretation 45 are not expected to have a
material impact on the results of operations, financial position or liquidity of
the Company.
32
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased from $521 last year 2002 to $671 at
December 31, 2003. We had nominal revenues in 2003 and were forced to consume
cash on hand to fund its new operations. Due to our limited liquid resources,
and lack of revenues or any viable means of generating income from operations,
our auditors have included an explanatory paragraph in this report which
expresses substantial doubt about our ability to continue as a going concern.
The Company will be required to raise additional capital to sustain
operations for the next twelve months and is actively seeking investments from
third parties. There is no assurance that the Company will be able to raise
additional capital. It is unlikely that the Company will be able to qualify for
bank debt until such time as the Company is able to demonstrate the financial
strength to provide confidence for a lender.
The Company has relied upon its award plans, the 2002 Consultant Equity
Plan, the 2003 Stock Compensation Plan and the Nuway Medical, Inc. 2004 Equity
Plan, to compensate consultants and employees who have assisted in developing
and executing the Company's business plan. The Company has significantly relied
on these plans to compensate various consultants and personnel, and this
reliance has significantly diluted the loss per share. During 2004, these
issuances have been of questionable benefit in compensating consultants and
employees, as there is little market interest for the Company's stock.
The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. During 2003 and as of September 30, 2004, the Company has limited
liquid and capital resources and management is incurring personal losses while
seeking acquisition opportunities.
Ultimately, the Company's ability to continue as a going concern is
dependent upon its ability to attract new sources of capital, establish an
acquisition or reverse merger candidate with continuing operations, attain a
reasonable threshold of operating efficiencies and achieve profitable
operations.
At December 31, 2003, the Company had no debt obligations requiring
future cash commitments other than as follows: Significant debts at December 31,
2003 included: (i) $420,000 (plus interest) due to Augustine II, LLC (see
immediately below); (ii) $125,000 of convertible debentures, which were further
reduced to $30,000 March 11, 2004, through the issuance of shares of common
stock of the Company, (Note 15), (iii) a loan due to a former advisory board
member equal to $65,000, subsequently reduced to $35,000 in March 2004, and (iv)
a $1,120,000 note payable which was purchased in March of 2003 by New Millennium
33
Capital Partners, LLC, an entity owned and controlled by the Company's president
and his family, plus accrued but unpaid interest. The Company intends to convert
this note payable to equity in the future, upon certain conditions of the
Company, namely the availability of shares within the limits of the Company
Charter, and upon approval of the Board of Directors of the Company and New
Millennium, which has agreed in principal, subject to appropriate regulatory
compliance and approvals as may be required.
Augustine II, LLC Note
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with the Augustine Fund, pursuant to which the Augustine Fund agreed
to lend the Company $420,000, payable in installments of $250,000, $100,000, and
$70,000 (the "Loan"). The Company has received all scheduled installments, and
principal and interest (at an annual rate of 10%) was originally due in full on
February 29, 2004.
The Loan Agreement is subject to certain requirements that the Company
make mandatory prepayments of the Loan from the proceeds of any asset sales
outside of the ordinary course of business, and, on a quarterly basis, from
positive cash flow. In addition, all or any portion of the Loan may be prepaid
by the Company may prepay all or any portion of the Loan at any time without
premium or penalty. The proceeds of the Loan were used by the Company for
working capital.
As additional consideration for making the Loan, the Augustine Fund
received five-year warrants to purchase up to 6,158,381 shares of the Company's
common stock at an exercise price of $0.16 per share. The Company can require
that the warrants be exercised if the Company's shares of common stock trade at
or above $0.60 per share for each trading day within the 30 calendar days prior
to the maturity date of the Loan, trading volume of the shares equals or exceeds
100,000 shares per day during such period, and the shares of the Company's
common stock underlying the warrants have been included in a registration
statement filed with and declared effective by the SEC prior to the maturity
date. If these conditions are not fully satisfied by the maturity date (which
they were not), then the Augustine Fund may, at any time following the maturity
date and so long as the warrants remain exercisable, elect to exercise all or
any portion of the warrants pursuant to a "cashless exercise" provisions to
"cashless exercise" provisions of the warrants.
As security for the Loan, New Millennium, an affiliate of Dennis
Calvert, pledged 2.5 million shares of the Company's common stock owned by New
Millennium, and the Company has granted the Augustine Fund a security interest
in its 51% membership ownership interest in NuWay Sports. As a result, the
Company will need to consent of the Augustine Fund to release its security
interest in NuWay Sports if the Company is able to sell NuWay Sports.
34
Prior to the original maturity date of the Loan, the Company spoke with
representatives of Augustine and advised them that the Company was unable to pay
the amount due under the Loan by the February 29, 2004 maturity date. Augustine
agreed to extend the maturity date of the Loan Agreement to August 2004. In
addition to the extension of the maturity date, Augustine was given to have the
option of having the Loan satisfied in cash or by the conversion of any
remaining principal balance and any accrued interest on the Loan to shares of
the Company's common stock at a 15% discount to market, so long as Augustine's
holdings do not exceed 4.9% of the total issued and outstanding shares of the
Company's common stock at any time. In addition, the warrants held by Augustine
to purchase 6,158,381 shares of the Company's common stock were re-priced to an
exercise price of $.035 per share. Exercise of the warrants is also subject to
the limit that Augustine does not hold more than 4.9% of the issued and
outstanding shares of the Company's common stock. The Company recorded $344,832
of interest expense as of December 31, 2003, of which $23,210 is applied to the
Augustine Note.
Since that time, the Company and Augustine have entered into
negotiations to further extend the maturity date of the Loan and those
negotiations are currently being finalized and the new terms documented. While
the precise terms have not been finalized and are subject to change, the Company
believes that the loan will be extended an additional six months.
Other Items
During 2003, the Company raised $279,661 with the sale of 559,322 of its
Preferred Shares, obtained $420,000 from a term loan and $50,000 from a loan by
an advisory board member. During the later part of 2003 and through 2004, the
Company's President incurred costs on its behalf, which total approximately
$140,000. During 2004 the Company has obtained $30,000 from the sale 5,250,000
shares of common stock and $50,000 from a loan that entitles the holder to
convert the loan into 10,000,000 shares of its Series A Preferred Stock. The
Company has approximately $1,000 cash on hand, which is insufficient to meet
operating expenses for any extended period. Management believes that the Company
will be required to raise additional capital to sustain operations for the next
twelve months and is actively seeking investments through private investors and
investment bankers. There is no assurance that the Company will be able to raise
additional capital. It is unlikely that the Company will be able to qualify for
bank debt until such time as the Company is able to demonstrate the financial
strength to provide confidence for a lender.
Also during 2003, the Company issued 19,248,759 shares to approximately
37 consultants, directors, and employees. Of this total, 17,327,753 shares have
been registered with the SEC, while the balance and 1,921,006 shares, were not
so registered and are "restricted" securities. Of the total number of shares
issued in 2003, 2,633,590 shares relate to services performed in 2002 and
35
16,519,169 shares relate to 2003. The expenses related to the shares issued for
2002 services in 2003 were recorded in the Company's financial statements for
the year ending December 31, 2002. In 2003, there was $1,554,700 of expenses
recorded related to the issuance of these shares. Of this amount $1,045,600
related to consulting services, $394,000 related to legal services $63,000
related to Advisory and Board of Directors expense, $52,100 related to salary
expense and $25,000 to reduce the outstanding debentures.
EFFECTS OF TRANSACTIONS WITH RELATED PARTIES
DUE TO PRESIDENT
In conjunction with the acquisition of the technology license from Med
Wireless, Inc. on August 21, 2002, the Company assumed a $1,120,000 note with
interest at 10% per annum payable by Med Wireless to Summitt Ventures, Inc., a
company controlled by Mark Anderson (Anderson). The note is secured by the
Company's assets and was originally due on June 15, 2003. On March 26, 2003,
Summitt Ventures sold the note, together with 4,182,107 shares of the Company's
common stock, to New Millennium Capital Partners LLC ("New Millennium"), a
limited liability company controlled and owned by the Company's president and
family, in exchange for a $900,000 promissory note issued by New Millennium in
favor of Summitt Ventures. This note is secured by all of the stock of the
Company owned by New Millennium and Mr. Calvert. On March 26, 2003, the
Company's board of directors voted to convert the $1,120,000 note held by New
Millennium into 22,400,000 shares of restricted common stock of the Company (at
a conversion price discounted 37.5% to the then market price of $0.08). New
Millennium agreed to this conversion. Subsequent to the vote by the board to
convert the note, the Company received notification from Nasdaq's Listing
Qualifications Department that converting the note without shareholder approval
violated certain Nasdaq Marketplace Rules. In response to this notification, the
board, with the concurrence of New Millennium, voted to amend its resolution and
withhold issuance of the shares to New Millennium until the Company's
shareholders approved the conversion. This shareholder vote has not taken place
and the shares have not been issued to New Millennium.
New Millennium Capital Partners, LLC, a Nevada limited liability
company owned and controlled by the Company's president and his family as an
investment vehicle was formed in 1999. No individual, entity or party (s)
associated with the Company's business has ever had any ownership interest in
New Millennium and it is an independent company. Mark Anderson, a principal of
those companies that sold and/or licensed certain technologies to the Company,
conditioned the purchase by New Millennium on the Company converting the
promissory note to common stock. The conversion of the note held by New
Millennium is a matter to be brought before the NuWay shareholders at its next
available shareholders meeting.
36
The business purpose of the original decision to convert the note into
equity was to retire $1,120,000 in debt owed by the Company thereby increasing
shareholder equity by that amount and avoiding a default on the note and the
insolvency and possible liquidation of the Company. In arriving at a conversion
price, the board of directors determined that a 37.5% discount to market price
was appropriate based on a number of factors, including that (i) with the
quantity of the shares that would be issued, a block of shares that size could
not be liquidated without affecting the market price of the shares, and (ii) the
shares would be "restricted shares" and could therefore not be sold by New
Millennium in the public markets prior to two years from the date of the
conversion, and thereafter would be subject to the volume and manner of sale
limitations of Rule 144 under the Securities Act of 1933.
To allow time for a shareholder vote with respect to the conversion,
New Millennium agreed to extend the terms of the note, from June 15, 2003 to
October 1, 2003.
At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of
New Millennium, and the Company, through the unanimous action of the Board (with
Mr. Calvert abstaining), agreed that, in light of current market conditions
(namely the significant increase in the trading price of the Company's common
stock since March 26, 2003, the date on which the conversion of the note to
equity was originally approved by the Board, from $0.08 to $0.28 as of June 6,
2003), it would be inequitable for New Millennium to convert the note at the
originally agreed to $0.05 per share price. In this regard, Mr. Calvert, on
behalf of New Millennium, and the Company orally agreed to rescind the agreement
to convert the note. In addition, New Millennium orally agreed with the Company
to extend the maturity date of the note to a first payment due October 1, 2003
in the amount of $100,000 and the balance of the principal due on April 1, 2004,
with interest due according to the original terms of the note (to correspond to
the payment terms of the note made by New Millennium in favor of Summitt), and
furthermore to reduce the Company's obligation on the note to the extent that
New Millennium is able to reduce its obligation on its note with Summitt
Ventures. While the prior holder of the note, Summitt Ventures, purported to
condition New Millennium's purchase on the conversion of the note, Mr. Calvert
has represented to the Company that due to Mr. Anderson's actions (as previously
described by the Company in its Form 10-QSB for the quarter ended March 31,
2003), Mr. Calvert now believes that conversion of the note is no longer a
required term of the agreement between New Millennium and Summitt.
The Company was unable to pay the note at the due date of October 1,
2003. At the board meeting on October 15, 2003, the board determined to put the
issue of conversion of the note to the Company's shareholders at a special
meeting of the shareholders scheduled for December 9, 2003. On November 7, 2003,
a Definitive 14a was filed by the Company with respect to that meeting. The
shareholders meeting was held on December 9, 2003, but adjourned without a vote,
37
as there weren't enough shareholders present to hold a vote. The meeting was
rescheduled for December 30, 2003. At the December 30, 2003 shareholder meeting,
the board was again advised that there was not a quorum, and therefore the vote
could not be held. Because this was the second attempt to obtain a quorum, and
more than 4,000,000 additional shares were required to be voted to obtain a
quorum, the board voted to adjourn the meeting indefinitely. As of January 1,
2004, the loan is in default status and has not been repaid together with
$114,800 in accrued but unpaid interest. The amounts due Anderson by New
Millennium are also in default.
Technically, under the terms of the New Millennium Agreement, it is
possible that Anderson has the right to reacquire the shares of the Company's
common stock that were sold to New Millennium, if New Millennium defaults on the
promissory note issued by New Millennium to Camden Holdings to purchase the
shares. The New Millennium Note is purportedly secured by the purchased shares
of the Company's common stock; however, New Millennium and Mr. Calvert believe
that Anderson have not perfected their security interest in those shares.
Moreover, the Augustine Fund is the pledgee of 2,500,000 of these shares and
holds those shares as pledgee.
New Millennium has informed the Board of Directors that its intent is
to fully convert the Note to stock as soon as is practical in light of the
Company circumstances as they may change in the future to accommodate the
conversion in light of the circumstances at that time.
ABANDONED ACQUISITION
On January 31, 2004, the Company entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with Premium Medical Group, Inc., a
Florida corporation ("PMG") and PMG's sole stockholders, Eduardo A. Ruiz and
Luis A. Ruiz (the "PMG Stockholders"). Prior to this transaction, there was no
business or other relationship between the Company and its affiliates and PMG or
the PMG Stockholders.
Pursuant to the Stock Purchase Agreement, the Company agreed to acquire
100% of the shares of PMG from the PMG Stockholders in exchange for 30,000,000
shares of the Company's common stock, subject to certain adjustments. The exact
number of Company Shares to be issued to the PMG Stockholders was subject to
adjustment in the event certain revenue was or was not generated by PMG during
one year following the closing of the transaction. PMG had been organized in
June 2003 to provide medical products to hospitals and medical clinics in South
America, primarily Venezuela. Luis A. Ruiz became a director of the Company in
connection with the transaction.
The parties had a difference in expectations regarding who would be
ultimately responsible for paying for the audit of PMG that was required in
38
order for the Company to complete its disclosure obligations under the
Securities Exchange Act. Additionally, the Company did not have a sufficient
number of authorized and unissued shares of its common stock to both satisfy its
obligations to the PMG Stockholders and to issue shares of common stock in a
meaningful financing transaction, given the low price per share at which the
Company's common stock trades. The Company lacked the financial resources to
schedule a stockholders' meeting, prepare a proxy statement and solicit proxies
for the purpose of amending its Certificate of Incorporation to increase its
authorized capital stock.
As a result of these and other factors, the Company and PMG never
consolidated their operations, the Company never exercised control over PMG or
its operations and the parties never exchanged stock certificates evidencing
their ownership in each other.
Therefore, the parties entered into discussions and concluded amicably
that it was in the mutual best interest of the respective companies and their
respective stockholders, to rescind the transactions provided for in the Stock
Purchase Agreement and return all parties to their respective positions prior to
the transactions contemplated in the Stock Purchase Agreement.
The parties entered into a Rescission Agreement on October 14, 2004
that provides, in relevant part, that (i) all transactions contemplated by the
Stock Purchase Agreement shall be rescinded as if the Stock Purchase Agreement
had never been executed and delivered; (ii) the parties forever waive all rights
to receive stock in PMG and the Company, as the case may be; (iii) Luis A. Ruiz
shall resign as a director of the Company; and (iv) the Company and PMG shall
file appropriate documents with the Secretary of State of the State of Florida
with respect to the rescission of the exchange of shares provided for in the
Stock Purchase Agreement.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") recently issued
Financial Reporting release No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies" (FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, the Company's most
critical accounting policies include: non-cash transactions and compensation
valuations that affect the total expenses reported in the current period and/or
values of assets received in exchange.
39
The Company has established a policy relative to the methodology to
determine the value assigned to each intangible acquired with or licensed by the
Company and/or services or products received for non-cash consideration of the
Company's common stock. The value is based on the market price of the Company's
common stock issued as consideration, at the date of the agreement of each
transaction or when the service is rendered or product is received, as adjusted
for applicable discounts.
The methods, estimates and judgments the Company uses in applying these
most critical accounting policies have a significant impact on the results of
the Company reports in its financial statements.
ITEM 7. FINANCIAL STATEMENTS.
Our consolidated financial statements as of and for the years ended
December 31, 2003 and 2002 are presented in a separate section of this report
following Item 14 and begin with the index on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As disclosed in our Current Report on Form 8-K filed on April 7, 2003,
as amended on April 10, 2003, we dismissed Shubitz Rosenbloom & Co., PA
("Shubitz") as our principal accounting firm as of March 31, 2003 and we engaged
Haskell & White LLP ("H&W") as our principal accounting firm. H&W was engaged to
audit our consolidated financial statements for the year ended December 31,
2002. The decision to change auditors was approved by our board of directors.
In connection with the audits of the two years ended December 31, 2001,
and during the subsequent period through March 31, 2003, there were no
disagreements with Shubitz 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 Shubitz, would have caused
them to make reference to the subject matter of the disagreement in connection
with its opinion.
As disclosed in our Current Report on Form 8-K filed on September 10,
2004, as amended on September 17, 2003, we dismissed H&W as our principal
accounting firm as of September 9, 2004. As disclosed in our Current Report on
Form 8-K filed on September 16, 2004, we engaged Jeffrey S. Gilbert, CPA
("Gilbert") as our principal accountant. Gilbert was engaged to audit our
consolidated financial statements for the year ended December 31, 2003. The
decision to change auditors was recommended by our audit committee and approved
by our board of directors.
40
During the Company's relationship with H&W, since H&W's initial
engagement as the principal auditors on March 31, 2003, through September 9,
2004, there were no disagreements with H&W, whether or not resolved, on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to H&W's satisfaction, would
have caused it to make reference to the subject matter of the disagreement(s) in
connection with its report on the consolidated financial statements for the year
ended December 31, 2002.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of Dennis Calvert, who serves as both our
Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Annual Report on Form 10-KSB. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. It should be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
(b) Changes in internal control over financial reporting. There was no
change in our internal control over financial reporting that occurred during the
period covered by this Annual Report on Form 10-KSB that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
41
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth information regarding our directors and
the nominees as of September 30, 2004:
NAME AGE POSITION DIRECTOR SINCE
---------------------------- --- ---------------------- --------------
Dennis Calvert President, Chief
41 Executive Officer and 2002
Chairman of the Board
Joseph Provenzano 34 Financial 2002
Officer, Treasurer and
Director
Steven V. Harrison II (1)(2) 44 Director 2003
Gary Cox (1)(2) 43 Director 2003
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
There are no family relationships between any director and any
executive officer of the Company.
DENNIS CALVERT is our President, Chief Executive Officer, Chairman of
the Board, and Interim Chief Financial Officer. Dennis Calvert was appointed a
director in June 2002, and has served as President and Chief Executive Officer
since June 2002, Corporate Secretary from September 2002 until March 2003, and
Interim Chief Financial Officer since March 2003. Mr. Calvert holds a BA degree
in Economics from Wake Forest University, where he was a varsity basketball
player on full scholarship. Mr. Calvert also studied at Columbia University and
Harding University. He was an honor student in high school with numerous
leadership awards. He is also an Eagle Scout.
Mr. Calvert has an extensive entrepreneurial background as an operator,
investor and consultant. From June 2002 to September 2002 he served as president
of Med Wireless, Inc. In 1998 he was a founder, president and board member of
Utelecom Communications, Inc. where he led the acquisition of four companies and
secured a line of credit for $7.5 million. He remains an owner and board member
of that firm. He was an investor and served as a manager of Beep for Free.com,
LLC beginning in the year 2000, a consumer products and technology related
42
company. Mr. Calvert resigned as the manager of Beep For Free.com, LLC in June
2002 and the company ceased operations in December 2002. Mr. Calvert was a
founder and chairman of ZZYZX Technologies, Inc., a company that designed and
produced high tech equipment. ZZYZX was sold in 2001. From 1990 to 1996 Calvert
served as head of mergers and acquisitions for Medical Asset Management, Inc., a
company that acquired and managed medical-related businesses. During his tenure
he participated in more than 50 acquisitions and served in numerous positions
with the Company. Prior, he was a founder and officer of a medical recruiting
and consulting firm named Merritt Hawkins and Associates from 1987 to 1990.
Earlier, he was a top producing sales associate for a leading physician
recruitment firm, Jackson and Coker, Inc. and served as a sales associate for
Diamond Shamrock, Inc. from 1985 to 1986.
JOSEPH PROVENZANO was appointed a director in June 2002 and assumed the
role of Corporate Secretary in March 2003.
Mr. Provenzano heads the Investor Relations effort and manages the
mergers and acquisitions function for NuWay. He began his corporate career in
1988 as a Personnel Manager and Recruiter for First American Travel, a marketing
company in Southern California. He then entered into an entry-level Technician
position within the Commercial and Residential security industry. He left the
industry as a General Manager in the mid 1990's to apply his marketing and sales
training to the logistics industry. He was then employed by two major Southern
California moving and storage companies as head of marketing. He formed his own
marketing company called Pre-Move Marketing Services (PMSA), offering
advertising and direct marketing products for the moving and storage industry,
in 1996. He joined Camden Holdings, Inc., an investment holding company to
manage their mergers and acquisitions department, in mid 2001, and participated
in more than 50 corporate mergers and acquisitions. He was employed there until
March 2003, at which time he became employed full time by the Company. Mr.
Provenzano has participated in organized rodeo and motocross competitions.
STEVEN V. HARRISON II has been a director since March 2003. Mr. Harrison
is the president of Empact, Inc. a consumer products based marketing company.
From 1997 to 2001, he was the founder, president and CEO of In Touch
Communications, Inc., a Competitive Local Exchange Carrier (CLEC), providing
residential and business telephone services within the state of California, with
annual revenue of more than $15 million. During 2001 and 2002 he was an investor
in a number of healthcare and consumer products based companies including Beep
for Free.com, LLC. Mr. Harrison was President of Beep for Free.com, LLC from
June 2002 until it ceased operations in December 2002. From 1991 to 1997, Mr.
Harrison was Chief Executive Officer of Resource Medical Group, Inc., providing
management consultancy services to the healthcare industry assisting hospitals,
Health Maintenance Organizations, clinics, and practice management firms with
medical staff planning and contracting issues, feasibility studies and physician
43
recruitment and retention. Mr. Harrison also played Division I football at
Appalachian State University.
GARY COX has been a director since May 2003. Mr. Cox has more than 10
years in the healthcare field as consultant to hospitals and medical groups. He
started his own firm in 1995 named Resource Medical International and is still
active in that business. He served for more than 10 years with UK firms in sales
and marketing positions prior to beginning his healthcare career. He holds a
technical degree in engineering from Leicester University in England. He was
also a competitive athlete and played for a number of professional soccer
(football) clubs in England in his early career.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a
Compensation Committee.
The Audit Committee meets with management and the Company's independent
public accountants to review the adequacy of internal controls and other
financial reporting matters. Mr. Harrison is Chairman of the Audit committee.
Mr. Cox also serves on the audit committee. The board of directors has not
designated an audit committee financial expert and does not believe that either
member of the Audit Committee would satisfy the current definitional
requirements of SEC rules and regulations to be an audit committee financial
expert.
The Compensation Committee reviews the compensation for all officers
and directors and affiliates of the Company. The Committee also administers the
Company's stock option plan. Mr. Harrison is Chairman of the Compensation
Committee and Mr. Cox serves on the Compensation Committee.
The Board has determined that each of Messrs. Harrison and Cox is
independent as defined under NASDAQ Marketplace rules. In 2003, the staff of
NASDAQ had questioned whether Mr. Harrison was independent, and the NASDAQ
Qualifications Panel discussed those issues with the Company at a hearing held
on May 16, 2003. The determination letter delivered to the Company by the NASDAQ
Qualifications Panel, which resulted in the delisting of the Company's common
stock from the NASDAQ SmallCap Market, stated, "While the Panel acknowledged
that it appears the Company may have regained compliance with the independent
directors and audit committee composition requirements based on the appointment
of Messrs. Cox and Harrison, it [the Panel] determined not to make a finding on
these deficiencies given that the appropriate Nasdaq background checks have not
yet been completed".
The Company continues to believe that Mr. Harrison is independent,
because has no business dealings with the Company other than in his role as
44
board member. However, Mr. Harrison formerly was a partner of Mr. Calvert in a
business named Beep For Free.com, LLC, from which Mr. Calvert resigned as the
managing member in June 2002. Beep For Free.com, LLC ceased operations in
December 2002.
In October 2004, the board of directors adopted a written code of
ethics that applies to its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, certain officers and persons holding 10 % or more of the
Company's common stock to file reports regarding their ownership and regarding
their acquisitions and dispositions of the Company's common stock with the
Securities and Exchange Commission. Such persons are required by SEC regulations
to furnish the Company with copies of all Section 16(a) forms they file.
To our knowledge, based solely upon review of Forms 3, 4, and 5 (and
amendments thereto) and written representations provided to the Company by
executive officers, directors and stockholders beneficially owning 10 % or
greater of the outstanding shares, the Company believes that such persons filed
pursuant to the requirements of the Securities and Exchange Commission on a
timely basis, other than (i) one late report filed by Mr. Calvert, (ii) two late
reports filed by Mr. Provenzano with respect to one transaction, (iii) two late
reports filed by Mr. Harrison with respect to two transactions, (iv) two late
reports filed by Mr. Cox with respect to one transaction and (v) two late
reports filed by New Millennium with respect to one transaction.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the
Company to the chief executive officer and the next four highest paid executive
officers who received compensation in excess of $100,000 (the "Named Executive
Officers") during 2002 and 2003:
45
Annual Compensation Long-term Compensation
Awards Payouts
Securities
Name and Principal Restricted Underlying Other
Position Year Salary Compensation Stock Awards Options/SARs TIP Payouts Compensation
------------------ -------- ------- ------------ ------------ ------------ ----------- ------------
Dennis Calvert, 14,000 4,000,000 (3)
Chief Executive 2002 (1) 14,000
Officer 2003 -- -- -- --
Joseph Provenzano, 1,200,000
Secretary 2003 (2) 10,800 -- -- -- --
---------
(1) Became Chief Executive Officer in June 2002.
(2) Became Secretary in March 2003.
(3) Mr. Calvert was issued 1,000,000 shares on January 9, 2003, and
subsequently returned the shares to the Company. He was also issued
3,000,000 shares on March 18, 2003, and subsequently returned the shares
to the Company.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Dennis Calvert in
December 2002. Mr. Calvert's employment agreement provides for him to be
employed for five years at an annual salary of $168,000. The employment
agreement further provides that Mr. Calvert work with the Company on a full time
basis, that the office be located in Laguna Hills, California, that he receive
annual increases of 10% of his base income, that bonuses will be payable based
on the greater of a performance scale established by the Compensation Committee,
assigned by the board of directors, or 3% of the annual increase in market
capitalization value. The compensation plan includes benefits of a car
allowance, insurance and a standard vacation package. The agreement has certain
minimum performance standards and calls for a severance package equal to one
year's base compensation, plus an additional one half year's compensation for
each year of service beginning in 2003. Standard confidentiality, company
ownership rights to property and assets and arbitration clauses are included in
the agreement.
The Company entered into an employment agreement with Mr. Provenzano in
March 2003. Mr. Provenzano's employment agreement provides for him to be
employed for five years at an annual salary of $130,800. The employment
agreement provides that, at the Company's discretion, the Company may choose to
pay up to $4,900 of Mr. Provenzano's monthly salary in the form of stock in lieu
of cash. Mr. Provenzano is also eligible to receive incentive bonuses, stock
ownership participation and employee related benefits. The employment agreement
further provides that Mr. Provenzano receive annual increases of 5% of his base
income, that bonuses will be payable based on the greater of a performance scale
established by the Compensation Committee, assigned by the board of directors,
or 1.5% of the annual increase in market capitalization value. The compensation
46
plan includes those benefits of car allowance and insurance benefits and a
standard vacation package. The agreement has certain minimum performance
standards and calls for a severance package equal to one year's base
compensation, plus an additional one half year's compensation for each year of
service beginning in 2003. Standard confidentiality, company ownership rights to
property and assets and arbitration clauses are included in the agreement.
OPTIONS GRANTED DURING LAST FISCAL YEAR
No options were granted to the Named Executive Officers during 2003.
EQUITY COMPENSATION PLANS
1994 STOCK OPTION PLAN
In June 1994, the board of directors adopted the 1994 Stock Option Plan
(the "1994 Plan"). The maximum number of shares available for issuance under the
1994 Plan is 1,500,000 shares. The 1994 Plan terminates on June 13, 2004. The
1994 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 1994 Plan. The 1994
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 the fair market value of the Common Stock on the date of
the grant. The exercise price of incentive options granted under the 1994 Plan
to any participant who owns stock equal to 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 price for the Company's common stock
reported by NASDAQ on the date of option grant.
The board of directors may amend the 1994 Plan at any time but may not,
without stockholder 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 stockholder
approval, adopt any amendment, which would increase the maximum number of
shares, which may be issued under the 1994 Plan, 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
1994 Plan increasing the number of shares to be issued thereunder from 1,000,000
to 1,500,000. This amendment was submitted for stockholder approval at the 1998
Annual Meeting and was approved.
47
At December 31, 2003, no options remained outstanding and fully vested,
as follows:
Number of Price Per
Shares Share
---------- ----------------
Options Outstanding at January 1, 2003 65,000 $1.00 - $1.75
Options Outstanding at December 31, 2003 0 $1.00 - $1.75
Options Expired (65,000) $1.00
---------
Options Outstanding at December 31, 2003 0 $1.00 - $1.75
=========
2002 CONSULTANT EQUITY PLAN
In August 2002, the Company's board of directors approved the formation
of the 2002 Consultant Equity Plan (the "2002 Plan"), designed to allow
consultants to be compensated with shares of Company common stock for services
provided to the Company. A total of 1,500,000 shares under the 2002 Plan were
registered with the SEC. The 2002 Plan was amended by the Company's board of
directors in December 2002. A total of 3,500,000 additional shares were
registered with the SEC on a Form S-8 registration statement on December 27,
2002. Approval of the 2002 Plan was not submitted to the vote of the
stockholders. Persons eligible to receive stock awards under the 2002 Plan
included "consultants" that provide bona fide consulting services to the
Company, excluding any services incident to the raising of capital or promotion
or maintenance of a market for the Company's securities.
The 2002 Plan expires ten years from its inception. The 2002 Plan is
administered by a plan committee of two or more members of the board of
directors. The plan committee can award shares or options to purchase shares at
a price in its discretion, so long as the price chosen is not less than 85% of
the fair market value of the underlying shares as of the date of the grant.
From August 2002 through February 2003, the Company issued all but
84,452 of the 5,000,000 shares available under the 2002 Plan to approximately 26
consultants, employees and directors. Beginning in September 2002, Mark Roy
Anderson served as a consultant to the Company pursuant to a written agreement
and received 1,241,884 shares (25.3%) of the 4,915,548 shares of the Company's
common stock that was issued under the 2002 Plan. See "Certain Relationships and
Related Transactions".
2003 STOCK COMPENSATION PLAN
In February 2003, the Company's board of directors approved the 2003
Plan as a means of providing directors, key employees and consultants additional
incentive to provide services to the Company. Both stock options and stock
grants may be made under the 2003 Plan. The 2003 Plan sets aside up to
15,000,000 shares of the Company's common stock for these purposes, which shares
48
were registered with the SEC on a Form S-8 registration statement on February
27, 2003. Approval of the 2003 Plan was not submitted to a vote of the
stockholders. The board of directors administers the 2003 Plan. The 2003 Plan
allows the Board to award grants of shares of the Company's common stock or
options to purchase shares of the Company's common stock. The board of directors
has discretion to set the price of the options, but in no event shall that price
be less than 100% of the fair market value of the shares at the time of the
grant. The board of directors may at any time amend or terminate the 2003 Plan.
The 2003 Plan does not have an expiration date.
From February through September 2003, the Company issued 14,863,230
shares to 27 directors, employees and consultants under the 2003 Plan.
In March 2003, the board of directors approved, and the Company issued,
3,000,000 shares of common stock to Dennis Calvert, President and Chief
Executive Officer of the Company, as consideration for his services. The board
of directors subsequently modified its approval of this issuance to make it
conditioned upon stockholder approval of the transaction because of NASDAQ
Marketplace Rules governing change of control transactions. Mr. Calvert returned
the 3,000,000 shares to the Company. On December 9, 2003, the Company attempted
to conduct a stockholder meeting to approve the terms of the issuance of
3,000,000 shares of the Company's common stock to Dennis Calvert. The Company
was unable to obtain a quorum at the meeting. The meeting was adjourned to
December 30, 2003, but again the Company was unable to obtain a quorum. As of
the date of the filing of this Annual Report, the 3,000,000 shares of the
Company's common stock have not been issued to Mr. Calvert.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of shares of the Company's common stock as of December 31, 2003 by (i)
all stockholders known to the Company to be beneficial owners of more than 5% of
the outstanding common stock; (ii) each director and executive officer of the
Company individually and (iii) all directors and executive officers of the
Company as a group. The Company has chosen to present this information as of
December 31, 2003, because it more accurately reflects the actual voting power
of the following persons as of such date, which is substantially higher than it
is as of the date of the filing of this Annual Report. During 2004, several
issuances of the Company's common stock had the effect of diluting the voting
strength of these persons. See "Market For Common Equity and Related Stockholder
Matters".
49
--------------------------------- ------------------------ ---------------------
Name and Address of Beneficial Amount of Beneficial Percent of Class
Owner (1)(2) Ownership (3)
--------------------------------- ------------------------ ---------------------
Dennis Calvert 4,782,107 (4) 13.1%
--------------------------------- ------------------------ ---------------------
Joseph Provenzano 1,224,936 3.4%
--------------------------------- ------------------------ ---------------------
Steven Harrison 167,043 *
--------------------------------- ------------------------ ---------------------
Gary Cox -0- -0-
--------------------------------- ------------------------ ---------------------
All directors and officers as a 6,174,086 17.0%
group (4 persons)
--------------------------------- ------------------------ ---------------------
* Less than 1%
(1) Except as noted in any footnotes below, each person has sole voting
power and sole dispositive power as to all of the shares shown as beneficially
owned by them.
(2) Unless otherwise indicated, the address for each person is 2603
Main Street, Suite 1150, Irvine, California 92615.
(3) Other than as footnoted below, none of these security holders has
the right to acquire any amount of the shares within sixty days from options,
warrants, rights, conversion privilege, or similar obligations. The amount owned
is based on issued common stock, as well as stock options, which are currently
exercisable.
(4) This amount excludes 30,869,992 shares of the Company's common
stock issuable upon conversion of the NuWay Note. However, the conversion of the
NuWay Note is subject to the prior approval of the Company's stockholders. In
December 2003, the Company attempted to hold a stockholders' vote to approve the
conversion but was unable to obtain a quorum. The shares to be issued in
exchange for the conversion will not be issued until such time as the proper
stockholder approvals can be obtained. New Millennium has agreed to extend the
terms of the NuWay Note indefinitely until such approval is obtained.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH DENNIS CALVERT
New Millennium Capital Partners, LLC Purchase of Common Stock and
Promissory Note from Mark Anderson and Affiliates
In March 2003, New Millennium, which is controlled by our president
Dennis Calvert, purchased the Company's promissory note in the principal amount
of $1,150,000 (the "NuWay Note"), which notes was held by Summitt Ventures, Inc.
("Summitt Ventures"), and purchased an aggregate of 5,000,000 shares of the
Company's common stock from Camden Holdings and Summit Healthcare, Inc. ("Summit
Healthcare") in consideration of the New Millennium Note. Camden Holdings,
50
Summitt Ventures and Summit Healthcare are controlled by Mark Roy Anderson. The
transaction was executed as part of a plan to remove Mr. Anderson totally from
any involvement in the Company and provide a completely new focus and direction
for the Company under management led by Mr. Calvert.
The New Millennium Note is secured by all the shares of the Company's
common stock purchased in the transaction and is further secured by shares of
the Company's common stock personally owned by Mr. Calvert, of which he
currently owns none. The transaction was conditioned, among other things, on the
Company's converting the NuWay Note into shares of the Company's common stock.
The sellers only delivered share certificates representing 4,182,107
shares of the Company's common stock, which certificates were delivered to Mr.
Calvert on April 9, 2003. In the New Millennium Agreement, Mr. Anderson
represented that he was selling 100% of his stock to New Millennium and would no
longer own any of the Company's stock. Subsequent to the closing of that
transaction, management learned through the Company's transfer agent that Camden
Holdings still owns 340,894 shares of the Company's common stock. The Company
and New Millennium believe that the existence of these 340,894 shares of the
Company's common stock owned by Camden Holdings Inc. is a material breach of the
New Millennium Agreement, and the Company and New Millennium are reviewing their
respective legal rights with regards to this matter.
Technically, as a matter of the terms of the New Millennium Agreement,
it is possible that Camden Holdings or Mr. Anderson could reacquire the shares
of the Company's common stock that were sold to New Millennium, should New
Millennium default on the promissory note issued by New Millennium to Camden
Holdings to purchase the shares, which note is secured by the purchased shares
of the Company's common stock
Conversion of NuWay Note to Common Stock
Pursuant to the NuWay Note, the Company owes New Millennium $1,120,000
plus accrued and outstanding interest. On March 26, 2003, the board of directors
of the Company voted to convert the NuWay Note into 22,400,000 shares of common
stock of the Company, reflecting a 37.5% discount to market price. New
Millennium consented to the proposed conversion.
The business purpose of the conversion was to fulfill one of the
conditions to the transaction between New Millennium and Mr. Anderson and his
affiliates, and to retire $1,120,000 in debt owed by the Company with the effect
increasing stockholder equity. The board of directors determined that a 37.5%
discount to market price was appropriate given that (i) the shares into which
the NuWay Note would be convertible would be subject to the one-year holding
period provided by of Rule 144 prior to resale and (ii) even after such holding
period, this large amount of shares could only be resold in the market over a
51
significant period of time in light of the volume limitations of Rule 144 that
would apply to such resales.
The conversion was approved by the Company's non-interested directors.
After receiving advice from the staff of NASDAQ regarding the requirements of
applicable NASDAQ Marketplace Rules, the board of directors made the conversion
of the NuWay Note conditional upon receiving stockholder approval of the
conversion. New Millennium agreed to extend the terms of the NuWay Note from
June 15, 2003 to September 15, 2003, to allow sufficient time for the Company to
obtain the requisite stockholder approval.
On December 9, 2003, the Company attempted to conduct a stockholder
meeting to approve the terms of the conversion of the Company's Promissory Note.
The Company was unable to obtain a quorum at the meeting. The meeting was
adjourned to December 30, 2003, but again the Company was unable to obtain a
quorum, and the conversion has not taken place as of the date of the filing of
this Annual Report.
Since that time, New Millennium has agreed to a further indefinite
extension of the maturity date of the NuWay Note pending stockholder approval of
the transaction. The Company has been unable to schedule such a meeting due to
the delinquent status of its periodic reports with the SEC and limited resources
to plan the meeting.
TRANSACTIONS WITH MARK ROY ANDERSON
During the period from approximately June 2002 through March 2003, the
Company entered into several transactions with entities controlled by Mark Roy
Anderson. These entities are Med Wireless, Genesis, Camden Holdings, Summit
Healthcare, Summitt Ventures, Summit Oil & Gas, Inc. ("Summit Oil") and CVP. The
transactions are listed in chronological order. The Company, nor any of its
directors or officers, has had any communication with Mr. Anderson since May
2003.
Financing Agreement with Camden Holdings, Inc.
During June 2002, as part of a plan introduced to the Company by Mark
Anderson to shift the Company's focus to the medical technology field and bring
in new management, Camden Holdings purchased 1,000,000 shares of the Company's
common stock for $250,000. At the time of the transaction, Camden Holdings,
whose president at the time of the transaction was Mr. Anderson, owned no shares
in the Company, this being the initial transaction between the Company and Mr.
Anderson and his affiliates. After this purchase, the 1,000,000 shares
represented approximately 12.9% of the then-issued and outstanding shares of
the Company's common stock.
52
Genesis Health Tech, Inc.
On June 28, 2002, the Company purchased a database of healthcare
providers in the United States from Genesis, a wholly-owned subsidiary of Camden
Holdings, which was controlled by Mr. Anderson. The total purchase price of
$300,000 was satisfied by the issuance of 666,667 shares of the Company's common
stock. After this purchase, the 1,666,667 shares of the Company's common stock
beneficially owned by Mark Anderson represented approximately 19.8% of the
then-issued and outstanding shares of the Company's common stock.
Med Wireless, Inc.
By way of an agreement dated July 16, 2002 and amended August 21, 2002,
the Company acquired a 15-year, fully paid license to certain technology from
Med Wireless, a company whose founder and principal stockholder was Mark Roy
Anderson. Pursuant to the related license agreement (i) the Company would
license from Med Wireless all of its rights and interest in certain software
applications relating to the movement of medical images and data over the
Internet and via handheld wireless devices as well as customer lists; (ii) Med
Wireless would assign its customers and distribution agreements related to the
licensed intellectual property to the Company; and (iii) the Company would
assume $1,120,000 of outstanding debt (see further discussions below). In
return, the Company agreed to issue to the Med Wireless stockholders an
aggregate of 6,600,000 shares, or approximately 44%, of the Company's common
stock.
Through Camden Holdings and Summit Healthcare, Mr. Anderson received an
additional 2,868,928 shares of the Company's common stock, as a result of the
Med Wireless transaction, which increased Mr. Anderson's beneficial ownership to
4,535,595 shares, or approximately 28.3%, of the Company's common stock at the
time this transaction was approved by the Company's stockholders. Mr. Anderson
also held a minority interest in Med Wireless.
In addition, the Company's current president, Dennis Calvert, was
entitled to receive approximately 9.9% of the stock of Med Wireless and 600,000
shares of the Company's common stock as a result of this transaction. Prior to
this transaction, Mr. Calvert was not a stockholder of Med Wireless.
The transaction was approved by the Board of Directors and the vote of
a majority of the Company's shares of common stock, including the shares held by
Camden Holdings. Stockholders of the Company owning 3,930,183 shares of the
7,761,353 shares then outstanding consented to the transaction with Med
Wireless, including the shares held by Mr. Anderson and his affiliates.
Sale of Casino Operations
53
The Company sold its wholly-owned casino rental subsidiaries, Latin
American Casinos del Peru S.A., and Latin American Casinos of Colombia, LTDA, to
CVP in October 2002. Mark. Anderson was a general partner of CVP at the time of
the transaction. Although the purchase price for the stock was $300,000, less
all outstanding liabilities of the two subsidiaries, the outstanding liabilities
exceeded that amount and the Company received no cash in the sale. The
transaction price was determined as a result of the Company's receiving no
viable suitors, bidders or offers for the stock or assets of the Company's
gaming businesses. The Company's Board of Directors approved this transaction,
but it was not voted upon by the Company's stockholders.
Sale of Oil Operations
The Company entered into an agreement on December 15, 2002 to sell 100%
of the stock of NuWay Resources, Ltd. ("NuWay Resources"), the Company's oil and
gas subsidiary, for $100,000 less outstanding liabilities, to Summit Oil, whose
president at the time of the transaction was Mark Anderson. The Company received
no cash from the sale of the stock, but was able to insure contractually that it
would not retain any liabilities, or incur new liabilities (which had been
increasingly significantly), beyond October 1, 2002. The transaction price was
determined as a result of the Company's receiving no other viable offers for
NuWay Resources or its assets. The Company's board of directors approved the
transaction, but it was not voted upon by the Company's stockholders.
Consultancy Arrangement
Beginning in September 2002, Mark Roy Anderson also served as a
consultant to the Company pursuant to a written agreement and received 1,241,884
shares of the Company's common stock pursuant to the 2002 Plan. The Consultancy
Agreement was terminated in December 2002.
As a result of all of the foregoing transactions, the Company believes
that Mr. Anderson was the beneficial owner of an aggregate of 5,777,479 shares,
or more than 30%, of the Company's common stock outstanding as of December 31,
2002, assuming Mr. Anderson beneficially owned all the shares at the same time.
The Company believes that Mr. Anderson sold some of the shares which were issued
pursuant to the 2002 Plan, and as such the number and percentage of the
Company's common stock held by Mr. Anderson at any one time may have been less
than that indicated above. In any event, Mr. Anderson failed to file any reports
with the SEC on Schedules 13D or 13G, or on Forms 3 or 4, and therefore, the
Company cannot confirm any of these numbers at any given point in time.
ITEM 13. EXHIBITS, REPORTS ON FORM 8-K, AND INDEX TO FINANCIAL STATEMENTS.
54
(a) Index of exhibits:
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment of Certificate of
Incorporation filed 11/26/1991 (9)
3.3 Certificate of Amendment of Certificate of
Incorporation filed 6/24/1994 (9)
3.4 Certificate of Amendment of Certificate of
Incorporation filed 7/22/1999 (10)
3.5 Certificate of Amendment of Certificate of
Incorporation filed 8/31/2001 (1)
3.6 Certificate of Amendment of Certificate of
Incorporation filed 10/30/2002 (2)
3.7 Certificate of Amendment of Certificate of
Incorporation filed 12/26/2002 (2)
3.8 Certificate of Merger merging Repossession Auction,
Inc. (Florida corporation) and Repossession, Inc.
(Delaware corporation) (9)
3.9* Certificate of Designations creating Series A
Preferred Stock
3.10 Bylaws, as amended and restated (2)
4.3 Form of Warrant Agreement (1)
4.4 Form of Warrant dated December 12, 2000 (1)
4.5 Form of 6% Convertible Debenture dated December 14,
2000 (1)
4.6* Form of Warrant to Purchase Common Stock issued to
Preferred Stock investors
4.7* Warrant to Purchase Common Stock issued to Arthur
Lipper
55
4.8 Warrant No. AG-1 to purchase up to 6,158,381 shares
of NuWay Medical, Inc. common stock held by Augustine
II LLC (5)
4.9* Amended and Restated Warrant No. AG-1 to purchase up
to 6,158,381 shares of NuWay Medical, Inc. common
stock held by Augustine II LLC
10.1 Employment Agreement between the Company and Todd
Sanders dated March 2001 (1)
10.2 Employment Agreement between the Company and William
Bossung dated March 2001 (1)
10.3 Employment Agreement between the Company and Dennis
Calvert dated December 11, 2002 (2)
10.4. Employment Agreement between the Company and Joseph
Provenzano dated March 1, 2003 (2)
10.5 Joint Venture Agreement between the Company and
Rasheed & Associates dated December 1, 2002 (2)
10.6 Lease between the Company and BJP Properties Inc.
dated September 15, 2002 for the premises located at
23461 South Pointe Drive, Suite 200, Laguna Hills,
California (2)
10.7 2002 Consultant Equity Plan, as amended on December
27, 2002. (3)
10.8 Convertible Debenture Purchase Agreement dated
December 14, 2001 (1)
10.9 1994 Stock Option Plan (1)
10.10 Asset Purchase Agreement by and among the Company,
Camden Holdings and Genesis Health Tech, dated June
28, 2002 (2)
10.11 License Agreement with Med Wireless Inc. dated August
21, 200 (2).
10.12 Amendment to License Agreement with Med Wireless Inc.
dated September 18, 2002 (2)
56
10.13 Stock and Asset Purchase Agreement by and among the
Company and Summit Oil & Gas, Inc. dated December 15,
2002 (2)
10.14 Stock and Asset Purchase Agreement by and among the
Company and Casino Ventures Partners dated December
15, 2002 (2)
10.15 Asset Purchase Agreement by and Between New
Millennium Capital Partners, LLC, Camden Holdings,
Inc., Summit Healthcare, Inc., Summitt Ventures,
Inc., and Mark Anderson dated December 31, 2002 (2)
10.16 Secured Promissory Note in the face amount of
$1,120,000 (4)
10.17 Secured Term Promissory Note in the face amount of
$900,000 (4)
10.18 Convertible Preferred Stock and Warrant Purchase
Agreement (4)
10.19* Agreement to issue warrant dated February 24, 2003
between NuWay Medical, Inc. and Sachi International,
Inc.
10.20 Term Loan Agreement dated as of June 10, 2003 between
NuWay Medical, Inc. and Augustine II LLC (5)
10.21 Stock Pledge Agreement dated as of June 10, 2003,
between New Millennium and Augustine II LLC (5)
10.22 Stock Pledge Agreement dated as of June 10, 2003,
between NuWay Medical, Inc. and Augustine II LLC (5)
10.23* Promissory Note dated November 20, 2003 between NuWay
Medical, Inc. and James Seay, DDS.
10.24 Promissory Note by NuWay Medical, Inc. in favor of
Augustine II, LLC (5)
57
10.25* Amendment No. 1 to Term Loan Agreement dated as of
March 30, 2004 between NuWay Medical, Inc. and
Augustine II LLC
10.26* Amended and Restated Convertible Term Note by NuWay
Medical, Inc. in favor of Augustine II, LLC
10.27* Consulting Agreement with Mark Roy Anderson
10.28 2003 Stock Compensation Plan (11)
10.29* Convertible Loan Agreement and Note between NuWay
Medical, Inc. and James Burchard
10.30 Conversion Agreement with New Millennium dated
October 16, 2003 (6)
10.31 Stock Purchase Agreement with Premium Medical Group,
Luis Ruiz and Eduardo Ruiz (7)
10.32 Rescission Agreement with Premium Medical Group, Luis
Ruiz and Eduardo Ruiz (8)
14.1* Code of Ethics
21.1* List of Subsidiaries of the Registrant
23.1* Consent of Haskell & White LLP
23.2* Consent of Jeffrey S. Gilbert, CPA
31.1* Certification of Chief Executive Officer and Interim
Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 and Rules 13(a)-14 and
15(d)-14 under the Securities Exchange Act of 1934
32.1* Certification of Chief Executive Officer and Interim
Chief Financial Officer Pursuant to 18 U.S.C. Section
1350.
----------
* Filed herewith
(1) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 2001.
(2) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 2002.
58
(3) Incorporated herein by reference from the Form S-8 filed by the Company on
August 8, 2002, and amended on Form S-8 filed by the Company on December
27, 2002.
(4) Incorporated herein by reference from the Form 8K filed by the Company on
May 1, 2003.
(5) Incorporated herein by reference from the 10-QSB filed by the Company for
the period ending March 31, 2003.
(6) Incorporated herein by reference from the Form 8-K filed by the Company on
October 31, 2003.
(7) Incorporated herein by reference from the Form 8-K filed by the Company on
February 17, 2004.
(8) Incorporated herein by reference from the Form 8-K filed by the Company on
October 15, 2004.
(9) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 1998
(10) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 1999
(11) Incorporated herein by reference from the Form S-8 filed by the Company on
February 27, 2003.
(b) Reports on Form 8-K.
On October 31, 2003, the Company filed a Current Report on Form 8-K in
connection with a change of control transaction involving New Millennium.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table summarizes the fees charged by Shubitz, and H&W,
for certain services rendered to the Company relating to fiscal year 2002, and
Gilbert, for certain services rendered to the Company relating to fiscal year
2003.
Shubitz performed audit and audit-related services relating to the
Company's Quarterly Reports on Form 10-QSB for fiscal year 2002. H&W was
retained by the Company in 2003 to audit the Company's financial statements and
provide audit-related services for fiscal year 2002. Gilbert was retained by the
Company in September 2004 to audit the Company's financial statements and
provide audit-related services for fiscal year 2003. Because of the date of
Gilbert's engagement, he did not commence audit and audit-related services until
September 2004. Accordingly, all of Gilbert's fees were billed and partially
paid during 2004 for the audit of the 2003 fiscal year and are shown in the
column below under "Fiscal Year 2003".
59
AMOUNT BILLED AND PAID
-----------------------------------------
TYPE OF FEE FISCAL YEAR 2002 FISCAL YEAR 2003
----------------- ---------------- ----------------
Audit(1) $63,163 $74,025
Audit-Related(2) 3,499 2,500
Tax(3) -- --
All Other(4) -- 5,705
Total $66,663 $83,230
---------
(1) This category consists of fees for the audit of our annual financial
statements included in the Company's annual report on Form 10-KSB and
review of the financial statements included in the Company's quarterly
reports on Form 10-QSB. This category also includes advice on audit and
accounting matters that arose during, or as a result of, the audit or the
review of interim financial statements, statutory audits required by
non-U.S. jurisdictions and the preparation of an annual "management
letter" on internal control matters.
(2) Represents services that are normally provided by the independent auditors
in connection with statutory and regulatory filings or engagements for
those fiscal years, aggregate fees charged for assurance and related
services that are reasonably related to the performance of the audit and
are not reported as audit fees. These services include consultations
regarding Sarbanes-Oxley Act requirements, various SEC filings and the
implementation of new accounting requirements.
(3) Represents aggregate fees charged for professional services for tax
compliance and preparation, tax consulting and advice, and tax planning.
(4) Represents aggregate fees charged for products and services other than
those services previously reported.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 15, 2004 NuWay Medical, Inc.
By: /s/ Dennis Calvert
-------------------------------
Dennis Calvert, President,
Chief Executive Officer and
Interim Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated:
NAME TITLE DATE
---- ----- ----
/s/ Dennis Calvert
--------------------------- Chairman of the Board, Chief November 15, 2004
Dennis Calvert Executive Officer, President
and Interim Chief Financial
Officer
/s/ Joseph Provenzano
--------------------------- Director November 15, 2004
Joseph Provenzano
/s/ Steven V. Harrison II
--------------------------- Director November 15, 2004
Steven V. Harrison II
/s/ Gary Cox
--------------------------- Director November 15, 2004
Gary Cox
61
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm -
Jeffrey S. Gilbert, CPA F-2
Report of Independent Registered Public Accounting Firm -
Haskell & White LLP F-3
Consolidated Balance Sheets as of December 31, 2003 and
December 31, 2002 F-4
Consolidated Statements of Operations for the years
ended December 31, 2003 and 2002 F-5
Consolidated Statements of Changes in Stockholders'
Deficit for the years ended December 31, 2003 and 2002 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 2003 and 2002 F-8
Notes to Consolidated Financial Statements F-10 - F-34
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
NuWay Medical, Inc.
I have audited the consolidated balance sheet of NuWay Medical, Inc.
and Subsidiary (the "Company") as of December 31, 2003 and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audit.
I conducted my audit in accordance with standards Of the Public
Company Accounting Oversight Board (United States). Those standards require that
I plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, I express no
such opinion. An audit also 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. I believe my audit provides a reasonable basis for my
opinion.
In my opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of NuWay Medical, Inc. and Subsidiary as of December 31, 2003 and the
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Notes 1 and 3 to the consolidated financial
statements, the Company during 2003 discontinued it remaining operations.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has limited liquid
resources, recurring losses, and is seeking to implement its business plan,
which requires the Company to acquire or develop a business. These matters raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 1. The consolidated
financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
/s/ JEFFREY S. GILBERT
Los Angeles, California
October 26, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
NuWay Medical, Inc. (F/K/A NuWay Energy, Inc.)
We have audited the accompanying consolidated balance sheet of NuWay Medical,
Inc. and subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NuWay Medical, Inc.
and subsidiaries as of December 31, 2002, and the results of their operations
and their cash flows for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in notes 1 and 4 to the consolidated financial statements, the
Company exited several business lines during 2002 through the sale of interests
in subsidiaries and the discontinuance of operations.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has limited liquid resources,
recurring losses from operations and is seeking to implement its business plan
with a new industry focus. These matters raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ HASKELL & WHITE LLP
HASKELL & WHITE LLP
Irvine, California
May 12, 2003
F-3
NUWAY MEDICAL, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents $ 671 $ 521
------------ ------------
Total Current Assets 671 521
------------ ------------
PROPERTY AND EQUIPMENT, NET -- 28,844
------------ ------------
OTHER ASSETS
Marketing Database -- 255,000
Med Wireless License -- 4,090,000
------------ ------------
Total Other Assets -- 4,345,000
------------ ------------
TOTAL ASSETS $ 671 $ 4,374,365
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,256,475 $ 1,131,579
Notes Payable 1,605,000 1,120,000
Discount on Note, Net (62,131) --
Debentures Payable, Net 125,000 150,000
------------ ------------
Total Current Liabilities 2,924,344 2,401,579
------------ ------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
STOCKHOLDERS' EQUITY
Convertible Preferred Series A, $.00067 Par Value, 25,000,000
Shares Authorized, 559,322 and No Shares Issued and
Outstanding at December 31, 2003 and 2002, respectively 375 --
Common Stock, $.00067 Par Value, 100,000,000 Shares
Authorized, 36,386,486 and 17,137,727 Shares Issued
at 2003 and 2002, respectively 23,976 11,483
Additional Paid-In Capital 23,002,818 20,289,936
Accumulated Deficit (25,823,838) (18,201,629)
Treasury Stock, at cost, 44,900 Shares Held as of December
31, 2003 and 2002 (127,004) (127,004)
------------ ------------
Total Stockholders' (Deficit) Equity (2,923,673) 1,972,786
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'S EQUITY $ 671 $ 4,374,365
============ ============
The accompanying footnotes are an integral part of these consolidated financial
statements
F-4
NUWAY MEDICAL, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDING DECEMBER 31, 2003 AND 2002
Year Ending December 31,
2003 2002
------------ ------------
Revenue
Rental Income $ -- $ --
------------ ------------
Total Revenues -- --
------------ ------------
Costs and Expenses
Selling, General and Administration 2,339,264 2,157,289
Depreciation, Depletion and Amortization 8,552 9,938
Expenses Associated With Stock Issued for Services 987,944
Cancellation of Prior Year Warrant Compensation (1,659,750)
Impairment of Property, Plant and Equipment 20,292 --
------------ ------------
Total Costs and Expenses 2,368,108 (1,495,421)
------------ ------------
Loss from operations (2,368,108) (1,495,421)
------------ ------------
Other Income and Expense
Interest Expense (344,832) (45,026)
Other Income -- 51,767
------------ ------------
Net Other Income (344, 832) 6,741
------------ ------------
Loss Before Income Taxes (2,712,940) (1,488,680)
Provision for Income Taxes (Benefit) -- --
------------ ------------
Net Loss from Continuing Operations (2,712,940) (1,488,680)
------------ ------------
Loss from Discontinued Operations
(Includes $651,750 of depreciation and amortization expense
and $3,693,250 of impairment charge of intangible assets) (4,909,269) --
Loss from Discontinued Operations -- (3,448,417)
------------ ------------
Net Loss $ (7,622,209) $ (4,937,097)
============ ============
Loss Per Common Share - Basic and Diluted
Loss per share from Continuing Operations $ (0.09) $ (0.15)
============ ============
Loss per share from Discontinued Operations $ (0.16) $ (0.35)
============ ============
Net Loss per Share $ (0.25) $ (0.50)
============ ============
Weighted Average Common Share Equivalents Outstanding 30,466,628 9,791,396
============ ============
The accompanying footnotes are an integral part of these consolidated financial
statements
F-5
NUWAY MEDICAL, INC AND SUBSIDIARY`
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDING DECEMBER 31, 2003 AND 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 DECEMBER 31, 2001 5,078,783 $ 3,402 15,137,225 $ (544,539) $(13,264,532) $(127,004) --
CONVERSION OF DEBENTURES 1,332,570 893 2,331,705
STOCK ISSUED FOR INTANGIBLES 666,667 447 254,553
STOCK ISSUED FOR LICENSE OF
MED WIRELESS SOFTWARE 6,600,000 4,422 2,965,578
REALIZED LOSS OF FOREIGN
CURRENCY TRANSACTIONS 544,539 544,539
WARRANTS ISSUED UNDER
EMPLOYMENT AGREEMENT 25,000
STOCK ISSUED UNDER
COMMON STOCK
PURCHASE AGREEMENT 1,000,000 670 249,330
NET LOSS FOR THE YEAR
ENDED DECEMBER 31, 2002 (4,937,097) (4,937,097)
------------ ----------- ------------ -------------- -------------- ----------- --------------
BALANCE DECEMBER 31, 2002 17,137,727 11,483 20,289,936 -- (18,201,629) (127,004) (4,392,558)
------------ ----------- ------------ -------------- -------------- ----------- --------------
The accompanying footnotes are an integral part of these consolidated financial
statements
F-6
NUWAY MEDICAL, INC AND SUBSIDIARY`
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDING DECEMBER 31, 2003 AND 2002
Preferred Stock Common Stock
------------------------- ------------------------- Accumulated
Number Par Number Par Additional Other Retained
of Value of Value Paid-In Comprehensive Earnings
Shares $.00067 Shares $.00067 Capital Income (Loss) (Deficit)
------------ ----------- ------------ ----------- ------------ ------------- ----------
SALE OF PREFFERED STOCK 559,322 375
STOCK ISSUED FOR SERVICES 18,623,759 12,478 2,687,898
CONVERSION OF
DEBENTURES 625,000 14 24,984
NET LOSS FOR THE YEAR
ENDED DECEMBER 31, 2003 (7,622,209)
--------- --------- ------------ ---------- ------------ ----------- -------------
BALANCE DECEMBER 31, 2003 559,322 $ 375 36,386,486 $ 23,976 $23,002,818 $ -- $(25,823,838)
========= ========= ============ ========== ============ =========== =============
Comprehensive
Treasury Income
Stock (Loss)
--------- -------------
SALE OF PREFFERED STOCK
STOCK ISSUED FOR SERVICES
CONVERSION OF
DEBENTURES
NET LOSS FOR THE YEAR
ENDED DECEMBER 31, 2003 (7,622,209)
----------- -------------
BALANCE DECEMBER 31, 2003 $(127,004) $ (7,622,209)
=========== =============
The accompanying footnotes are an integral part of these consolidated financial
statements
F-7
NUWAY MEDICAL, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING DECEMBER 31, 2003 AND 2002
Years Ended December 31,
---------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(7,622,209) $(4,937,097)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation, Depletion and Amortization 660,302 9,938
Issuance of Stock for Services 2,175,459 987,944
Cancellation of prior year warrant compensation -- (1,659,750)
Impairment of Intangible Assets 3,693,250 --
Write Down of Idle Furniture, Fixtures and Office Equipment 20,292 --
Loss on disposal of Discontinued Operations -- 3,448,417
Realized Loss of Foreign Currency Translation -- 544,539
Issuance of Warrants as Compensation -- 25,000
Amortization of Discount on Note 183,499 --
Decrease in Prepaid Expenses and Other Current Assets -- 163,332
Increase in Accounts Payable and Accrued Expenses 154,896 287,371
----------- -----------
Net Cash Used In Operating Activities (734,511)
(1,130,306)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Decrease in Notes Receivable to Officers and Affiliates from
Severance Packages -- 440,000
----------- -----------
Net Cash Used In Investing Activities -- 440,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds Received From Term Loans 470,000 --
Proceeds from Sale of Preferred Stock 279,661 --
Proceeds from Sale of Securities -- 250,000
----------- -----------
Net Cash Provided By Financing Activities 734,661 250,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 150 (440,306)
CASH AND CASH EQUIVALENTS - BEGINNING 521 440,827
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 671 $ 521
=========== ===========
The accompanying footnotes are an integral part of these consolidated financial
statements
F-8
NUWAY MEDICAL, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING DECEMBER 31, 2003 AND 2002
Years Ended December 31,
---------------------------
2003 2002
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
Cash Paid During the Period for:
Interest $ -- $ --
=========== ===========
Income Taxes $ -- $ --
=========== ===========
Conversion of Debentures and Accrued Interest to Capital $ 25,000 $ 2,332,598
=========== ===========
Issuance of Stock for Capitalized Assets:
Database Purchase in Exchange for Common Stock $ -- $ 255,000
=========== ===========
License Rights from Med Wireless Inc. in Exchange for Common Stock
valued at $2,970,000 and the assumption of $1,120,000 Note Payable $ -- $ 4,090,000
=========== ===========
The accompanying footnotes are an integral part of these consolidated financial
statements
F-9
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
Note 1. Business and Organization
Outlook
As of December 31, 2003, the Company had no continuing business operations. Any
value perceived in the Company is speculative in nature and intangible in value.
The Company is operating as a public shell and its business operations consist
of management seeking merger and acquisition candidates with ongoing operations.
These consolidated financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. During 2003
and as of September 30, 2004, the Company had limited liquid and capital
resources while seeking acquisition opportunities.
During 2003, the Company raised $279,661 with the sale of 559,322 shares of its
Preferred Stock, and obtained a $425,000 term loan and a $50,000 loan. During
the latter part of 2003 and through 2004, the Company's president incurred costs
on the Company's behalf, which totaled approximately $140,000. During 2004, the
Company has obtained $25,000 from the sale of 5,000,000 shares of common stock,
$5,000 for a note convertible into 250,000 common shares, and $50,000 for a note
convertible into 10,000,000 shares of preferred stock. As of December 31, 2003,
the Company had approximately $1,000 in cash, which is insufficient to meet
operating expenses for any reasonable period of time. The Company will be
required to raise additional capital to sustain operations for the next twelve
months and is actively seeking investments from external sources. There is no
assurance that the Company will be able to raise additional capital. It is
unlikely that the Company will be able to qualify for bank debt until such time
as the Company is able to demonstrate the financial strength to provide
confidence for a lender.
The Company has relied upon its stock award plans, the 2002 Consultant Equity
Plan, the 2003 Stock Compensation Plan and the Nuway Medical, Inc. 2004 Equity
Plan, to compensate consultants and employees who have assisted in developing
and executing the Company's business plan. The Company has significantly relied
on these plans to compensate various consultants and personnel, and this
reliance has significantly diluted the loss per share. During 2004, these
issuances have been of questionable benefit in compensating consultants and
employees, as there is little market interest for the Company's stock.
Ultimately, the Company's ability to continue as a going concern is dependent
upon its ability to attract new sources of capital, establish an acquisition or
reverse merger candidate with continuing operations, attain a reasonable
threshold of operating efficiencies and achieve profitable operations. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Organization
F-10
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
NuWay Energy, Inc., a Delaware corporation (formerly known as Latin American
Casinos, Inc.), changed its name to NuWay Medical Inc. (NuWay) in October 2002.
The name change reflected the Company's operating focus after it acquired a
15-year licensing right to certain medical technology from Med Wireless, Inc. in
July 2002. (See Note 3.) The Med Wireless software is a HIPAA (Health Insurance
Portability and Accountability Act) compliant technological solution to
electronically organize, store, and retrieve medical records and medical images.
To market this licensing right, the Company formed NuWay Sports Medicine
Ventures, LLC (subsequently renamed NuWay Sports LLC), in which it holds a 51%
membership interest, in December 2002. Although formed in 2002, the subsidiary
did not become begin operations until 2003. NuWay Sports developed the Player
Record Library System (PRLS), which is a derivative product of the Med Wireless
technology. PRLS is a secure database for athlete/patient medical data that can
be acquired, displayed, analyzed, interpreted, and archived in a completely
digital format, which has been customized for the sports industry. NuWay Sports
generated $40,000 in revenue during the first quarter of 2003 and entered into
negotiating for the possible use of the product with several professional sports
leagues and individual professional sport clubs. However, these negotiations did
not result in a transaction and the Company has had little success in generating
ongoing revenue. As of September 2004, NuWay Sports had ceased marketing the
PRLS system as a result of inadequate capital, marketing resources, and market
competition. The PRLS system has not developed into a profitable operation and
the Company is attempting to sell its licensing rights and PRLS product, but
does not have any offers with tangible value.
In addition, the Company pursued a business opportunity related to an ultrasound
machine sale-leaseback program. The business opportunity came about as a result
of the Med Wireless License transaction with the Company, but no cost associated
with this business opportunity was recorded on the books of the Company. Under
this program, the Company attempted to arrange the purchase of ultrasound
machines by investors, who would lease the machines to the Company. In turn, the
Company would sub-lease the ultrasound machines to the end user. The Company
secured purchase orders from both investors and prospective end-use lessees of
the ultrasound machines. These purchase orders were conditioned upon the
Company's ability to secure financing of its own lease obligations of the
ultrasound machines from the investors. This was not accomplished because the
Company lacked the financial resources and credit to obtain such financing. The
Company continued to pursue attempts to arrange such financing through March
2003. After March 2003, the Company focused primarily on the Med Wireless and
PRLS technologies and, after occasional attempts to pursue the sale-leaseback
program through mid-2003, this ultrasound program was no longer pursued.
With the change in management in October 2002, the Company sold, or discontinued
operations of, its four wholly-owned subsidiaries at October 1, 2002: (i) NuWay
Resources, Ltd., which conducted oil and gas exploration activities, primarily
in western Canada; (ii) Latin American Casinos del Peru, S.A., (iii).Latin
American Casinos of Colombia LTDA, which were both engaged in the rental of slot
machines and other gaming equipment to casino operators in Latin America and,
(iv) World's Best Rated Cigars, Inc., a marketer of premium cigars at discounted
F-11
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
prices in the United States. World's Best Rated Cigars was dissolved and the
other three subsidiaries were sold in their entirety to third parties controlled
by Mark Roy Anderson, a former consultant and principal stockholder of the
Company. The sale of these operating segments was completed without recourse as
all liabilities and remaining assets were transferred to the purchaser in lieu
of any cash. The Company recorded a loss on disposal of these entities of
$3,448,417. (See Note 4)
Note 2. Summary of Significant Accounting Policies
a) Principles of Consolidation
Management intends to sell NuWay Sports, LLC. Therefore as of December
31, 2003 revenues and expenses related to NuWay Sports, LLC have been
reclassified from continuing operations to a Loss from Discontinued
Operations. (Note 4) There are no other subsidiaries.
The consolidated balance sheet at December 31, 2002 includes the accounts
of NuWay Medical, Inc. and NuWay Sports, LLC. The Company has significant
influence of the business operations of NuWay Sports and operations are
consolidated. All significant inter-company balances have been eliminated
in consolidation. Operations for NuWay Sports LLC were not significant
for the period from inception to December 31, 2002. The consolidated
statements of operations and cash flows for the year ended December 31,
2002 include the results of the activities of the subsidiaries mentioned
in Note 1 above up to the date of disposal. (Note 3)
b) Property and Equipment
On April 1, 2004 the Company closed its offices and has in storage its
furniture, fixtures and office equipment. As these items are idle and
there is no foreseeable plan of use, management recorded a write down of
the remaining net book value totaling $20,292 as of December 31, 2003.
Any gain from the sale of these items would not have a material affect on
these financial statements. While in use during 2003, depreciation was
provided on a straight-line basis over the estimated useful life of the
respective asset. Maintenance and repairs are charged to expense as
incurred. There were no major renewals or betterments.
c) Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for potential
impairment as required by Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." As discussed in Note 3, the Company
recorded an impairment charge totaling $3,693,250, and $651,750 of
depreciation and amortization charges resulting in a combined total for
Loss from Discontinued Operations of $4,909,269, as reflected in its
Statement of Operations for the year ended December 31, 2003.
F-12
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
d) Subsidiary and Technology Held for Sale
The Company is attempting to sell its majority-owned subsidiary, NuWay
Sports and the Med Wireless technology. Thus, as of December 31, 2003 the
Company has reflected on its Statement of Operations a loss from
Discontinued Operations of $4,909,269 related to the Med Wireless
technology and its investment in NuWay Sports, LLC. (Note 3) There are
minimal future costs expected to be incurred to sell this subsidiary or
the technology and, in accordance with FASB issued Statement No. 146
"Accounting for Costs associated with the exit or disposal activities",
any costs will be expensed as incurred.
e) Discontinued Operations-2002
As discussed in Note 4, the Company discontinued several operations
during the year ended December 31, 2002. The Company recorded a loss of
$3,448,417 during the fourth quarter of 2002 when these operations were
discontinued.
f) Earnings (Loss) Per Share
The Company reports basic and diluted earnings per share (EPS) for common
and common share equivalents. Basic EPS is computed by dividing reported
earnings by the weighted average shares outstanding. Diluted EPS is
computed by adding to the weighted average shares the dilutive effect if
stock options and warrants were exercised into common stock. For the
years ended December 31, 2003 and 2002, the denominator in the diluted
EPS computation is the same as the denominator for basic EPS due to the
anti-dilutive effect of the warrants and stock options on the Company's
net loss.
For the years ended December 31, 2003 and 2002, the computation of basic
EPS is as follows:
2003 2002
------------- ------------
Numerator - net loss from
continuing operations $ 2,712,940 $ 1,488,680
Denominator - weighted shares
outstanding 30,466,628 9,791,396
------------- ------------
Loss per share $ (0.09) $ (0.15)
============= ============
F-13
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
2003 2002
------------- ------------
Numerator - net loss from
discontinued operations $ 4,909,269 $ 3,448,417
Denominator - weighted shares
outstanding 30,466,628 9,791,396
------------- ------------
Loss per share $ (0.16) $ (0.35)
============= ============
2003 2002
------------- ------------
Numerator - net loss $ 7,622,209 $ 4,937,097
Denominator - weighted shares
outstanding 30,466,628 9,791,396
------------- ------------
Loss per share $ (0.25) $ (0.50)
============= ============
g) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 stock-based
transactions, uncollectible accounts receivable, asset depreciation and
amortization, and taxes, among others.
h) Stock Options and Warrants issued for Services
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," and related
interpretations. The Company provides the pro forma net earnings, pro
forma earnings per share, and stock based compensation plan disclosure
requirements set forth in SFAS No. 123.
Had compensation cost for options issued under the 1994 Stock Option
Plan, as described more fully in Note 7, 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:
F-14
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
2003 2002
-------------- ---------------
Net Loss - as reported $(7,622,209) $(4,937,097)
Deduct: stock-based employee
compensation expenses determined
under fair value based method -- 10,021
Net Loss - pro forma $(7,622,209) $(4,947,118)
-------------- ---------------
Loss per share - as reported --
Basic and Diluted $(0.25) $(0.50)
============== ===============
Loss per share - pro forma
Basic and Diluted $(0.25) $(0.51)
============== ===============
For stock issued to consultants and other non-employees for services, the
Company records the expense based on the fair market value of the
securities as of the date of the stock issuance.
i) Advertising
The Company expenses all advertising costs as incurred. Included in the
Statement of Operations is approximately $4,500 and $13,000 of
advertising expense charged to operations for the years ended December
31, 2003 and 2002, respectively. During 2003, substantially all
advertising expenses to promote the Company's PRLS product, marketed
through NuWay Sports, were paid through issuance of shares of the
Company's common stock.
j) Non-Cash Transactions
The Company has established a policy relative to the methodology to
determine the value assigned to each intangible acquired with or licensed
by the Company and/or services or products received for non-cash
consideration of the Company's common stock. The value is based on the
market price of the Company's common stock issued as consideration, at
the date of the agreement of each transaction or when the service is
rendered or product is received, as adjusted for applicable discounts.
The methods, estimates and judgments the Company uses in applying these
most critical accounting policies have a significant impact on the
results of the Company reports in its financial statements.
k) Recent Accounting Pronouncements
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Statement No. 146 requires
companies to recognize costs associated with the exit or disposal of
activities as they are incurred rather than at the date a plan of
disposal or commitment to exit is initiated. Types of costs covered by
Statement No. 146 include lease termination costs and certain employee
F-15
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
severance costs that are associated with a restructuring, discontinued
operation, facility closing, or other exit or disposal activity.
Statement No. 146 will apply to all exit or disposal activities initiated
after December 31, 2002.
In November 2002, the FASB issued Interpretation No. (Interpretation) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." Interpretation
45 requires certain guarantees to be recorded at fair value. In general,
Interpretation 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed
party based on changes in an underlying that is related to an asset,
liability, or an equity security of the guaranteed party. The initial
recognition and measurement provisions of Interpretation 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Interpretation 45 also requires new disclosures, even
when the likelihood of making any payments under the guarantee is remote.
These disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The changes
required by Interpretation 45 are not expected to have a material impact
on the results of operations, financial position or liquidity of the
Company.
Note 3. Impairment of Intangible Assets and Discontinued Operations - 2003
During the third quarter of 2003, management conducted an impairment analysis of
its two intangible assets, a marketing database purchased from Genesis Health
Tech, Inc. and the Med Wireless software technology license acquired from Med
Wireless, Inc. Both of those entities were controlled by Mark Roy Anderson.
These two assets were listed on the Company's financial statements for the
period ending June 30, 2003 at values of $229,500 and $3,681,000, respectively.
With respect to the marketing database, management had no success in its
marketing efforts and its future use was uncertain and at that time it had not
used the marketing database to market any product or generate any revenue for
the Company, and has thus determined to record a 100% impairment of that asset
in the amount of $216,750.
With respect to the Med Wireless license, management analyzed the sales
prospects of its PRLS system (which is a derivative product based upon the
technology licensed from Med Wireless) to the various professional and
collegiate sports organizations. It evaluated the successes the Company's NuWay
Sports subsidiary had in its sales efforts, and the revenue from projected
future sales, and determined to record an impairment charge to the recorded
value of the Med Wireless license of $1,649,594. This amount was calculated
projecting sales over a three year period (calendar years 2004, 2005 and 2006),
factoring in the costs of sales and the product costs, discounting projected net
revenue to their present value using a 7.5% interest factor, and further
discounts of the Company's projections for uncertainties relative to the timing
of acceptance of this technology.
F-16
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
It was stated in the Company's Quarterly Report on Form 10-QSB for the period
ended September 30, 2003 that management did not believe that further impairment
of the Med Wireless license would be necessary. However, due to the lack of
capital to sustain marketing, product development, and operational needs, the
Company was unable to obtain significant sales and had not met any projected
results. In addition, the Company is attempting to sell the NuWay Sports
subsidiary that was marketing the PRLS system. In light of these circumstances,
management determined that the book value of the license would not exceed the
expected discounted cash flows of its sales projections. Thus management has
recorded an additional impairment charge of $1,826,906 in the fourth quarter of
the year ending December 31, 2003. For the fiscal year ending December 31, 2003,
the Company recorded a total impairment charge of $3,693,250. Of this amount,
$216,750 was related to the impairment of the marketing database and the
remaining $3,476,500 related to the Med Wireless license. The Company recorded
an impairment charge totaling $3,693,250, and $651,750 of depreciation and
amortization charges related to the technology acquired in 2002.
The book value of the Company's intangible assets as of December 31, 2003 is
zero.
The Company had the following intangible assets at December 31, 2002: a
marketing database purchased from Genesis Health Tech, Inc. on June 28, 2002 and
certain software technology licensed from Med Wireless, Inc. on August 21, 2002.
Management had determined the value assigned to each of these intangibles based
on the market price of the Company's common stock at the date of agreement of
each transaction, as adjusted for applicable discounts. No amortization was
recorded for these intangible assets in 2002, as the Company did not begin to
utilize the database or generate sales of products derived from this technology
until 2003.
F-17
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
During the quarter ended September 30, 2002, management valued the marketing
database at the fair market value of shares issued. On the date of issuance, the
NASDAQ closing price for the Company's common stock was $.45 per share,
resulting in a valuation of $300,000 for the 666,667 shares issued. Similarly,
the license agreement was valued at the value of the assumed note ($1,120,000)
plus $3,500,000, or $.53 per share, which is a discount of approximately 10% to
the closing price of the stock on the date of issuance ($.60). The discount of
10% was applied to the value of the stock to reflect the restricted nature of
the common stock issued and the inherent lack of marketability associated with
the issuance of such a significant block.
Management determined that because of the Company's limited financial resources
and increased competition, it would discontinue operations of NuWay Sports and
any effort to exploit the Med Wireless license, including development and
marketing of the product. The Company faces increased competition from other
more established companies with more human resources and capital recourses to
market their competing products. While PRLS is narrowly defined in its
application to the sports industry, management believes the technology related
to the PRLS and the Med Wireless license could be expanded by others to serve
corporate, government or health provider markets. However, the Company is unable
to adequately support the continued development and marketing of the product to
take advantage of those potential markets. Because NuWay Sports was able to
demonstrate its application with the NFL in the past, the underlying asset and
its potential for future deployment has potential value to an entity desiring
and capable of exploiting the pursuit of those customers. Therefore, management
is actively seeking to sell NuWay Sports.
The consolidated statement of operations for the year ended December 31, 2003
reflects a discontinued operations segments related to the abandonment of the
exploitation of the Med Wireless technology after a charge to impairment in an
amount equal to the remaining net book value related to 2002 acquired
technology. The aggregate of impairment and depreciation and amortization was
$4,345,000. Although the formal decision to discontinue the operations was made
subsequent to December 31, 2003, management of the Company believes that this
presentation appropriately reflects the current activity and status of the
Company.
Note 4. Discontinued Operations - 2002
SALES OF ASSETS NOT IN THE ORDINARY COURSE OF BUSINESS
During 2002, the Company divested its businesses to focus on developing the PRLS
technology that was developed as a derivative product from the acquisition of
the Med Wireless technology. These divested businesses included a slot machine
rental and remanufacturing subsidiary in South and Central America, the
distribution and sale of premium brand cigars, and an oil and gas development
subsidiary in Canada. The stock of both the slot machine rental subsidiaries
(Latin American Casinos Del Peru S.A., a Peruvian corporation and Latin American
Casinos of Colombia LTDA, a Colombian corporation), and the oil and gas
subsidiary, NuWay Resources, Ltd., were sold to third parties controlled by Mark
Roy Anderson, a former consultant and principal stockholder of the Company,
effective October 1, 2002. The cigar business was shut down and discontinued
effective November 30, 2002. A description of the discontinued operations is as
follows:
F-18
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
LATIN AMERICAN CASINOS SUBSIDIARIES - HISTORY AND SALE
The Company entered the gaming and casino industry in Peru in 1994. Since
January 1995, the Company had been engaged in the renting of slot machines and
other gaming equipment to licensed gaming establishments in various cities
through its wholly-owned subsidiaries Latin American Casinos Del Peru S.A., a
Peruvian corporation and Latin American Casinos of Colombia LTDA, a Colombian
corporation. In 1994, the Company formed its Peruvian subsidiary, and in late
1995 the Company formed its Colombian subsidiary.
The Company had concentrated 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 were refurbished for use in South and Central America. As of
September 30, 2002, the Company had approximately 300 machines under rental
contracts in Peru and Colombia.
On December 15, 2002, the Company entered into an agreement to sell 100 percent
of the stock of the Latin American Casinos subsidiaries, with an effective date
of October 1, 2002. The Company realized no cash from the sale of those
operating units, but was able to contractually insure that the Company would
retain no liabilities related to this business after October 1, 2002. As a
result of the sale, the Company recorded a loss of $1,376,733 during the fourth
quarter of 2002.
WORLD'S BEST RATED CIGAR COMPANY - HISTORY AND SALE
In September 1997, the Company incorporated World's Best Rated Cigar Company, as
a wholly-owned subsidiary, to distribute premium cigars within the United
States. During November 2002, the Company discontinued operations and disposed
of the remaining inventory and other assets. A loss of $179,750 was recorded in
the fourth quarter of 2002 as a result of this disposal.
NUWAY RESOURCES, LTD. - HISTORY AND SALE
Beginning in July 2001, the Company directed part of its efforts to oil and gas
exploration and development in Canada. Through its wholly-owned subsidiary NuWay
Resources, Ltd., a Nevada corporation, 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 subsidiary's
ownership interests in the oil fields were characterized as "minority" ownership
working interests. This classification meant that the controlling owners, who
were parties unaffiliated with the Company, would direct future development and
capital expenditures and losses. Despite that lack of control, the Company
continued to be obligated to share in the costs on a pro-rata basis.
While these properties had proven reserves of oil and natural gas, the
controlling owners ultimately found the extraction and processing of the natural
reserves had become too difficult and too costly to continue. Neither project
had generated positive cash flow to the Company after considering the cost of
development and administrative and management expenses. Furthermore, neither
F-19
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
project had any expectation of generating positive cash flow to the Company for
the foreseeable future, and as a working interest owner, the Company would be
liable for the cost of continued development, maintenance and re-drilling
efforts. The managing owners of the properties have significant ownership
interests in other oil and gas projects and they had communicated to management
their intent to invest their resources in other projects, rather than focus on
these properties.
In September 2002, the Company publicly announced that it intended to spin off
the oil and gas subsidiary, NuWay Resources, Inc. into a separate public
company. At that time, the Company began negotiations with the senior ownership
party in Canada to determine the value and explore the feasibility of such a
plan. At the same time, the Company began a process to determine if additional
energy-related assets could be acquired by the subsidiary as part and parcel to
the spin-off. Management was notified during these negotiations (in the fourth
quarter) that the senior management partner intended to redirect their business
focus away from these assets and into more lucrative properties. The
uncertainties as to the future disposition of the assets, as well as uncertainty
of the potential for additional capital call provisions and thus unknown future
liabilities, made the planned spin-off unworkable.
NuWay entered into an agreement on December 15, 2002 with Summit Oil and Gas,
Inc., a company controlled by Mark Roy Anderson, a former consultant and
principal stockholder of the Company, to sell the stock of NuWay Resources, Ltd.
for $100,000 less outstanding liabilities. The Company realized no cash from the
sale of these operating units, but was able to contractually insure that it
would not retain any liabilities beyond October 1, 2002. In conjunction with the
sale of these operations, the Company recorded a loss of $1,290,948 during the
fourth quarter of 2002.
The results of operations of the Company's oil and gas, casino, and cigar
distribution operations have been shown as discontinued operations. The results
of operations for the discontinued operations for the years ended December 31,
2002 are as follows:
2002
-------------
Revenues $ 629,415
Operating expenses 1,230,401
Asset impairment charges --
-------------
Loss from discontinued operations
prior to disposal (600,986)
Loss on disposal of discontinued
operations (2,847,431)
-------------
Loss from discontinued operations $ (3,448,417)
=============
Note 5. Property and Equipment
On April 1, 2004 the Company closed its offices and has in storage its
furniture, fixtures and office equipment. As these items are idle and there is
no foreseeable plan of use, management recorded a write down of the remaining
balance net book value totaling $20,292 as of December 31, 2003.
F-20
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
During 2002, furniture, fixtures and office equipment are carried at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets, which is five years.
See Note 3 for discussion of operations discontinued during 2002, at which time
the Company's remaining assets, except for certain furniture, fixtures and
office equipment in its corporate offices, were sold or disposed of in
connection with the cessation of the related operations. This represents the
only remaining property and equipment as of December 31, 2002.
2003 2002
------------ ------------
Furniture, Fixtures & Office Equipment $ 42,753 $ 42,753
Less: Accumulated Depreciation 22,461 13,909
Less: Write Down of Idle Equipment 20,292 --
------------ ------------
Property and Equipment, net $ -- $ 28,844
============ ============
Note 6. Warrants
During 2003, the Company issued warrants to purchase a total of 7,011,036 shares
of common stock on the following terms: (i) 120,000 shares to an investor in
connection with a purchase of the Company's preferred stock, at a price of $0.20
per share, which expires March 7, 2006 (ii) 399,322 shares to investors in
connection with a purchase of the Company's preferred stock, at a price of $0.20
per share, which expires April 15, 2006 (Note 9); (iii) 6,158,381 shares to an
investor in connection with a loan to the Company, originally at a price of
$0.16 per share, which price adjusted to $0.035 per share in connection with an
extension of the loan repayment obligation, which expires June 10, 2008 (Note
10); (iv) 333,333 shares to a consultant in connection with consulting services,
at a price of $0.06 per share, which expires August 29, 2008. The compensation
expense related to (iv) above is immaterial.
On October 29, 2003, the Company issued an unvested warrant to an individual to
purchase 2,000,000 shares of common stock at $0.05 a share. The warrant expired
on October 29, 2004. The Warrant was not exercisable unless and until the Holder
introduced to the Company an investor or investors which invest net proceeds in
the Company of at least $250,000 within three months of the introduction. This
condition was not satisfied and the warrant expired unvested.
F-21
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
In August 2002, the Company issued a warrant to purchase 100,000 shares of
common stock at $0.30 per share to a former executive in connection with his
resignation from the Company. The Company recorded compensation expense of
$25,000 based on the difference between the exercise price and the market price
at the date of issuance. These warrants expired unexercised February 23, 2004.
In December 2000, the board of directors authorized the issuance of 3,300,000
private five-year stock warrants to acquire common stock at $1.75 per share.
1,500,000 of these warrants as well as 200,000 shares of restricted stock were
issued to the then existing executive officers. Compensation expense was
recorded equal to the market value of the restricted stock, $350,000. The
remaining warrants were issued to consultants and the executive officers for
services and were valued at $1,991,700 using the Black-Scholes option pricing
model using a 68.3% volatility factor and an interest-free interest factor of
5.8%. This amount was originally recorded as expense in December 2000. In
February 2002, 3,000,000 of the 3,300,000 warrants issued in year 2000 were
cancelled and $1,659,750 of expenses previously recorded in year 2000 was
reversed in accordance with the provisions of Accounting Principles Board
Opinion No. 25. The remaining 300,000 warrants expire in 2005.
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 capital structuring. The duration of the contract is for five
years. In consideration for these services, the Company granted warrants to
purchase an aggregate of 225,000 shares of common stock at the closing bid price
of $1.875 as of June 5, 1998. Effective February 8, 2000, the board of directors
reduced the exercise price to $1.06, which was the closing price of the stock on
that date. These warrants expired unexercised in June 2003.
Note 7. Stock Compensation Plans
1994 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. In June 1999, the Company increased the
shares allocated to the plan to 1,500,000. 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 percent of the outstanding shares of the voting
stock of the Company). The 1994 Plan terminated in June 2004.
At December 31, 2003 and 2002, the Company had options outstanding and
exercisable as follows:
F-22
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
Number of Price Per
Shares Share
----------- ---------------
Options Outstanding at December 31, 2001 237,500 $1.00 - $1.75
Options Issued --
Options Exercised --
Options Expired (172,500) $1.00
-----------
Options Outstanding at December 31, 2002 65,000 $1.00 - $1.75
Options Issued --
Options Exercised --
Options Expired (65,000) $1.00 - $1.75
-----------
Options Outstanding at December 31, 2003 --
===========
All outstanding stock options and warrants were fully exercisable at December
31, 2003. The following shows the years in which these options and warrants will
expire:
Employee Stock
Investment Banker Options and
Private Warrants Warrants Warrants
------------------------- ------------------------ --------------------
Range of Prices $0.06 to $1.75 $1.06 $0.30 to $1.75
---------------
Expired in 2003 -- 225,000 65,000
To Expire in 2004 -- -- 100,000(1)
To Expire in 2005 300,000 -- --
------------------------- ------------------------- ------------------------ --------------------
To Expire in 2006 559,322 -- --
------------------------- ------------------------- ------------------------ --------------------
To Expire in 2008 6,491,714 -- --
------------------------- ------------------------- ------------------------ --------------------
(1) See note 6
The Company also had 1,725,000 publicly traded warrants to purchase the
Company's common stock at an exercise price of $3.00 per share which expired
unexercised on December 11, 2003.
2002 CONSULTANT EQUITY PLAN
In August of 2002, the board approved the formation of the 2002 Consultant
Equity Plan designed to allow consultants to be compensated with shares of
Company common stock for services provided to the Company. A total of 5,000,000
shares were registered under this plan with the Securities and Exchange
Commission (the "SEC") during 2002. The Board amended this plan in December
2002. Approval of this plan was not submitted to the vote of the shareholders.
Persons eligible to receive stock awards under this plan included "consultants"
that provide bona fide consulting services to the Company, excluding any
services incident to the raising of capital or promotion or maintenance of a
market for the Company's securities. The plan is set to expire 10 years from its
inception. A plan committee of two or more members of the Board administers the
plan. The plan committee can award shares or options to purchase shares at a
F-23
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
price in its discretion, so long as the price chosen is not less than 85% of the
fair market value of the underlying shares as of the date of the grant.
At December 31, 2002, there were 2,636,000 of unrestricted shares that were
issued in January 2003 for services performed in 2002. Of this amount, 1,200,000
shares were issued to executive officers and the remaining balance was issued to
various individuals for consulting, legal and accounting services. Compensation
and consulting expense equal to the market value of the stock at the date of
issuance totaling $645,000 was accrued in December 2002.
From August 2002 through February 2003, the Company issued all but 84,452 of the
5,000,000 shares available under this plan to approximately 26 consultants,
employees and directors. Part of this issuance was a grant of 1,000,000 shares
to Mr. Dennis Calvert, president and CEO of the Company, as consideration for
his services. Those 1,000,000 shares were issued in January of 2003, but were
returned by Mr. Calvert to the Company for cancellation that same month.
2003 STOCK COMPENSATION PLAN
On February 14, 2003, the board of directors approved the Company's 2003 Stock
Compensation Plan as a means of providing directors, key employees and
consultants' additional incentive to provide services for the Company. Both
stock options and stock grants may be made under this plan. The Plan sets aside
up to 15,000,000 shares of the Company's common stock for these purposes, which
were registered with the SEC. Approval of this plan was not submitted to the
vote of the shareholders. The Board administers this plan. The plan allows the
Board to award grants of common shares or options to purchase common shares. The
board has discretion to set the price of the options, but in no event shall that
price be less than 100% of the fair market value of the shares at the time of
the grant. The Board may at any time amend or terminate the plan. It does not
expire on its terms.
During 2003, the Company issued 19,248,759 shares to approximately 37
consultants, directors, and employees. Of this total, 17,327,753 have been
registered with the SEC, while the balance of 1,921,006 shares, were not
registered and are restricted securities. Of the total issued in 2003, 2,633,590
relate to services performed in 2002 and 16,519,169 relate to 2003. The expenses
related to the shares issued for 2002 services in 2003 were recorded in the
Company's financial statements for the year ending December 31, 2002. In 2003
there was $1,554,700 of expenses recorded related to the issuance of these
shares. Of this amount $1,045,600 related to consulting services, $394,000
related to legal services, $63,000 related to Advisory and Board of Directors
expense, $52,100 related to salary expense, and $25,000 related to the reduction
of the outstanding debentures.
At December 31, 2003, there were 900,000 unrestricted shares held, to be issued
when the Company is in compliance with its regulatory filings. All of these
shares are to be issued and the consulting expense related to these share totals
F-24
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
$81,000 and is included in the Accounts Payable and Accrued Expenses as of
December 31, 2003 .
The board of directors approved a grant of 3,000,000 shares of stock pursuant to
the Company's 2003 Stock Compensation Plan to Mr. Dennis Calvert, president and
CEO of the Company, as consideration for his services. Those 3,000,000 shares
were issued in March 2003. The board of directors subsequently modified its
approval of this issuance to make it conditioned upon stockholder approval of
the transaction because of NASDAQ Marketplace Rules governing change of control
transactions. Mr. Calvert returned those 3,000,000 shares to the Company and
they are not included in the above-described issuance.
Note 8. Sale of Preferred Shares
During the year ended December 31, 2003, the Company entered into two
Convertible Preferred Stock and Warrant Purchase Agreements whereby the Company
sold an aggregate of 559,322 shares of a newly created series of Preferred
Stock, Series A Convertible Preferred Stock, par value $.00067, for a total
consideration of $279,661. Each share of the Series A Preferred Stock is
convertible into one share of the Company's common stock. In addition, for each
share of preferred stock sold, the purchaser received one warrant to purchase
one share of common stock at a price of $0.20 per share. Using the Black-Scholes
pricing model, the Company estimated the fair value of these warrants to be
approximately $35,000, and such amount has been netted in additional paid in
capital on the December 31, 2003 consolidated balance sheet. The Black Scholes
calculation assumed a discount rate of approximately five percent, volatility of
180 percent, and no dividends. The Series A Preferred Stock may be converted by
the holder, at any time after six months from the purchase date and the warrant
is exercisable for a period of three years from the purchase date. These
Preferred Shares shall vote with the holders of the outstanding shares of Common
Stock and not as a separate class or series.
The holders of outstanding shares of Series 2003 Convertible Preferred Stock
(which may be referred to as the "Series 2003 Preferred Stock") shall be
entitled to receive in any fiscal year, dividends, if, when and as declared by
the Board of Directors, out of any assets at the time legally available
therefore in cash at a rate equal to 7% per share, per annum, of the original
liquidation preference of $2.00 per share, subject to adjustment as provided
herein. There have been no dividends declared by the Board of Directors of the
Company.
Note 9. Convertible Debentures
In December 2000, the Company, through a private placement, issued $3,500,000
principal amount of 6 percent Convertible Debentures to several investors. These
debentures were originally due June 13, 2001 and their maturity date was
subsequently extended to December 13, 2001. They are convertible into common
stock at a price of $1.75 per share. The interest on the debentures is payable
either in cash or shares of common stock, at the discretion of the Company.
During 2001, $1,100,000 of the debentures plus accrued interest was converted
F-25
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
into 666,283 shares of the Company's common stock. During 2002, $2,250,000 of
the remaining debentures plus accrued interest was converted into 1,332,570
shares of common stock.
In December 2002 the Company received a notice from the remaining two debenture
holders (the "Remaining Debenture Holders") requesting conversion of the
remaining outstanding $150,000 of debentures. The notice provided that, as a
condition to conversion, the certificates representing the shares issuable upon
conversion of the debentures would need to be delivered to the Remaining
Debenture Holders prior to the end of 2002. Pursuant to the request, and to
complete the conversion, the Company issued to the Remaining Debenture Holders
96,006 shares of common stock and promptly notified the Remaining Debenture
Holders' counsel and the Company's transfer agent of the approval and
ratification of the issuance. However, the actual certificates representing the
shares were not delivered to the Remaining Debenture Holders until the first
quarter of 2003. The Remaining Debenture Holders then refused acceptance of the
shares, claiming that because the actual certificates representing the shares
were not delivered in 2002 as specified in the conversion notice, the conversion
was invalid and the debentures would therefore remaining outstanding and
continue to accrue interest until repaid in full. The Remaining Debenture
Holders then demanded full payment on their $150,000 of debentures (plus accrued
interest).
In June 2003, the Remaining Debenture Holders filed suit in the Orange County
Superior Court against the Company claiming it breached the debenture agreement
by failing to honor the terms of the notice of conversion. The Company and the
Remaining Debenture Holders then entered into a settlement agreement in which
the Remaining Debenture holders would convert the debentures into common stock
equal to approximately $70,000. The settlement agreement called for conversion
into stock over a period of three months. The Company had partially satisfied
the obligations under this agreement as of December 31, 2003, and further
satisfied its obligations in 2004.
Note 10. Loan Agreement
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with Augustine II, LLC ("Augustine"), pursuant to which Augustine
agreed to loan the Company $420,000, payable in installments of $250,000,
$100,000, and $70,000 (the "Loan"). The Company received all scheduled
installments, and principal and interest (at an annual rate of 10%) were
originally due in full on February 29, 2004. Augustine, however, agreed to
extend the maturity date of the Loan Agreement to August 2004. In addition to
the extension of the maturity date, Augustine was given the option of having the
Loan satisfied in cash or by the conversion of any remaining principal balance
and any accrued interest on the Loan to shares of the Company's common stock at
a 15% discount to market, so long as Augustine's holdings do not exceed 4.9% of
the total issued and outstanding shares of the Company's common stock at any
time. Since that time, the Company and Augustine have entered into negotiations
to further extend the maturity date of the Loan and those negotiations are
currently being finalized and the new terms documented. While the precise terms
F-26
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
have not been finalized and are subject to change, the Company believes that the
loan will be extended an additional six months. The Company recorded $23,210 of
interest expense as of December 31, 2003. The Loan Agreement is subject to
certain requirements that the Company make mandatory prepayments of the Loan
from the proceeds of any asset sales outside of the ordinary course of business,
and, on a quarterly basis, from positive cash flow. In addition, the Company may
prepay all or any portion of the Loan at any time without premium or penalty.
The proceeds of the Loan were used by the Company for working capital.
As additional consideration for making the Loan, Augustine received five year
warrants to purchase up to 6,158,381 shares of the Company's common stock at an
exercise price of $0.16 per share. The Company can require that the warrants be
exercised if the Company's shares trade at or above $0.60 per share for each
trading day within the 30 calendar days prior to the maturity date of the Loan,
trading volume of the shares equals or exceeds 100,000 shares per day during
such period, and the shares of the Company's common stock underlying the
warrants have been included on a registration statement filed with and declared
effective by the SEC prior to the maturity date. If these conditions are not
fully satisfied by the maturity date, then Augustine may, at any time following
the maturity date and so long as the warrants remain exercisable, elect to
exercise all or any portion of the warrants pursuant to the "cashless exercise"
provisions of the warrants. Using the Black-Scholes pricing model, the Company
allocated approximately $245,000 of the Loan proceeds to the warrants and
$175,000 to the note payable, which allocations were made on a pro rata basis
based on the fair value of the warrants. The Black Scholes calculation assumed a
discount rate of approximately four percent, volatility of 257 percent and no
dividends. Given that the warrants were issued in conjunction with Loan
Agreement, such fair value represents an effective discount on the debt and will
be amortized over the term of the loan. Amortization of this discount for the
quarter ended December 30, 2003 was approximately $183,500 and is recorded as
effective interest expense in the accompanying consolidated statement of
operations. In conjunction with the extension of the maturity date of the Loan
from February 2004 to August 2004, the warrants held by Augustine to purchase
6,158,381 shares of the Company's common stock were re-priced to an exercise
price of $.035 per share.
As security for the Loan, New Millennium (an affiliate of Mr. Calvert) pledged
2.5 million shares of the Company's common stock owned by New Millennium, and
the Company has granted Augustine a security interest in its ownership interest
in the Company's subsidiary, NuWay Sports, LLC.
The sale of NuWay Sports, which is being negotiated by the Company with an
unrelated third party, is subject to the consent and release of the Augustine
collateral held in NuWay Sports, LLC. Should the Augustine group choose to
decline their approval, the proposed sale of NuWay Sports, LLC would not be able
to be consummated by the Company. Discussions have occurred in which the
Augustine Group has indicated that they would release the security interest in
the NuWay Sports, LLC, and replace the stock held as collateral for additional
collateral from Nuway as the parties agree. Those discussions cannot be
concluded until the proposed sale of NuWay Sports, LLC is more definitive.
F-27
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
Note 11. Other Loan
On November 20, 2003, the Company received $50,000 in exchange for a promissory
note in which it agreed to pay $65,000 to the lender 90 days from the date of
the loan. The Company's president personally guaranteed the note. As of March 1,
2004, the Company, through a cash payment by the Company's president on its
behalf, has paid back $25,000 to the lender. The note is currently past due.
Note 12. Provision for Income Taxes
Any deferred tax assets have been subjected to a 100% valuation allowance, as
management is unable to determine that it is more likely than not that such will
be realized.
Due to changes in the Company's ownership through various issuance of common
stock during 2002 and 2003, the utilization net operating loss carryforwards may
be subjected to annual limitations under provisions of the Internal Revenue
Code. Such limitations could result in the permanent loss of a portion of the
net operating loss carry forwards. The Company has not yet evaluated the status
of its net operating loss carry forwards and may not do so until such time as
the Company expects operating profits.
The Company has not filed its 2002 and 2003 Federal and State Income tax
returns. Management of the Company does not feel that it will have a material
impact on the financial condition of the Company.
Note 13. Related Party Transactions
DUE TO PRESIDENT
In conjunction with the acquisition of the technology license from Med Wireless,
Inc. on August 21, 2002, the Company assumed a $1,120,000 note with interest at
10% per annum payable by Med Wireless to Summitt Ventures, Inc., a company
controlled by Mark Roy Anderson. The note is secured by the Company's assets and
was originally due on June 15, 2003. On March 26, 2003, Summitt Ventures sold
the note, together with 4,182,107 shares of the Company's common stock, to New
Millennium Capital Partners LLC ("New Millennium"), a limited liability company
controlled and owned by the Company's president and family, in exchange for a
$900,000 promissory note issued by New Millennium in favor of Summitt Ventures.
This note is secured by all of the stock of the Company owned by New Millennium
and Mr. Calvert. On March 26, 2003, the Company's board of directors voted to
convert the $1,120,000 note held by New Millennium into 22,400,000 shares of
restricted common stock of the Company (at a conversion price discounted 37.5%
to the then market price of $0.08). New Millennium agreed to this conversion.
Subsequent to the vote by the board to convert the note, the Company received
notification from NASDAQ's Listing Qualifications Department that converting the
note without shareholder approval violated certain NASDAQ Marketplace Rules. In
F-28
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
response to this notification, the board, with the concurrence of New
Millennium, voted to amend its resolution and withhold issuance of the shares to
New Millennium until the Company's shareholders approved the conversion. This
shareholder vote has not taken place and the shares have not been issued to New
Millennium.
New Millennium Capital Partners, LLC, a Nevada limited liability company
partially owned and controlled by the Company's President and his family as an
investment vehicle was formed in 1999. No individual, entity or party (s)
associated with the Company's business has ever had any ownership interest in
New Millennium and it is an independent company. Mark Anderson, a principal or
controlling stockholder of those companies, conditioned the purchase by New
Millennium on the Company converting the promissory note to common stock. The
conversion of the note held by New Millennium is a matter to be brought before
the NuWay shareholders at its next available shareholders meeting.
The business purpose of the original decision to convert the note into equity
was to retire $1,120,000 in debt owed by the Company thereby increasing
shareholder equity by that amount and avoiding a default on the note and the
insolvency and possible liquidation of the Company. In arriving at a conversion
price, the board of directors determined that a 37.5% discount to market price
was appropriate based on a number of factors, including that (i) with the
quantity of the shares that would be issued, a block of shares that size could
not be liquidated without affecting the market price of the shares, and (ii) the
shares would be "restricted shares" and could therefore not be sold by New
Millennium (an affiliate of the Company) in the public markets prior to two
years from the date of the conversion, and thereafter would be subject to the
volume and manner of sale limitations of Rule 144 under the Securities Act of
1933.
To allow time for a shareholder vote with respect to the conversion, New
Millennium agreed to extend the terms of the note, from June 15, 2003 to October
1, 2003.
At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of New
Millennium, and the Company, through the unanimous action of the Board (with Mr.
Calvert abstaining), agreed that, in light of current market conditions (namely
the significant increase in the trading price of the Company's common stock
since March 26, 2003, the date on which the conversion of the note to equity was
originally approved by the Board, from $0.08 to $0.28 as of June 6, 2003), it
would be inequitable for New Millennium to convert the note at the originally
agreed to $0.05 per share price. In this regard, Mr. Calvert, on behalf of New
Millennium, and the Company orally agreed to rescind the agreement to convert
the note. In addition, New Millennium orally agreed with the Company to extend
the maturity date of the note to a first payment due October 1, 2003 in the
amount of $100,000 and the balance of the principal due on April 1, 2004, with
interest due according to the original terms of the note (to correspond to the
payment terms of the note made by New Millennium in favor of Summitt), and
furthermore to reduce the Company's obligation on the note to the extent that
New Millennium is able to reduce its obligation on its note with Summitt
Ventures. While the prior holder of the note, Summitt Ventures, purported to
condition New Millennium's purchase on the conversion of the note, Mr. Calvert
F-29
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
has represented to the Company that due to Mr. Anderson's actions, Mr. Calvert
now believes that conversion of the note is no longer a required term of the
agreement between New Millennium and Summitt.
The Company was unable to pay the note at the due date of October 1, 2003. At
the board meeting on October 15, 2003, the board determined to put the issue of
conversion of the note to the Company's shareholders at a special meeting of the
shareholders scheduled for December 9, 2003. On November 7, 2003, the Company
with respect to that meeting filed a Definitive 14a. The shareholders meeting
was held on December 9, 2003, but adjourned without a vote, as there were not
enough shareholders present to hold a vote. The meeting was rescheduled for
December 30, 2003. At the December 30, 2003 shareholder meeting, the board was
again advised that there was not a quorum, and therefore the vote could not be
held. Because this was the second attempt to obtain a quorum, and more than
4,000,000 additional shares were required to be voted to obtain a quorum, the
board voted to adjourn the meeting indefinitely. As of January 1, 2004, the loan
is in default status and has not been repaid together with $114,800 in accrued
but unpaid interest. The amounts due to Mr. Anderson by New Millennium are also
in default.
Technically, under the terms of the New Millennium Agreement, it is possible
that Mr. Anderson has the right to reacquire the shares of the Company's common
stock that were sold to New Millennium, if New Millennium defaults on the
promissory note issued by New Millennium to Camden Holdings to purchase the
shares. The New Millennium Note is purportedly secured by the purchased shares
of the Company's common stock; however, New Millennium and Mr. Calvert believe
that Mr. Anderson has not perfected his security interest in those shares.
Moreover, the Augustine Fund is the pledgee of 2,500,000 of these shares and
holds those shares as pledgee.
Note 14. Commitments and Contingencies
a) Litigation
The Company is a defendant from time to time in litigation arising out of the
normal course of its business, none of which is expected to have a material
adverse effect on its business, operations, financial position or corporate
liquidity.
During 2002, Ms. Geraldine Lyons, the Company's former Chief Financial Officer,
sued the Company for breach of her employment contract. The lawsuit was brought
in the Circuit Court of the 11th Judicial Circuit in Miami-Dade County in of
Florida and was initiated by the filing of the complaint in June 2002. The
principal parties in the case are Ms. Lyons, the Company, and the Company's
former president Todd Sanders. The amount at issue in her affirmative claim is
the sum of approximately $25,000 due under the contract, and the issuance of
100,000 shares of common stock, with a guarantee that the stock could be sold by
Ms. Lyons for $300,000. Ms. Lyons alleges that additional funds are due under
her employment contract; that the contract requires the Company guarantee that
she can sell for $300,000 the 100,000 shares of stock the Company is required to
F-30
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
issue her; and, that Mr. Sanders promised to purchase from her 100,000 shares of
Company common stock held by her at the price of $4.00 per share. The Company
has counter-sued Ms. Lyons for breach of fiduciary duty, fraud, violation of
section 12(a)(2) of the 1933 Securities Act, violation of section 517.301 of the
Florida Statutes, negligent misrepresentation, conversion, and unjust enrichment
resulting from the required restatement of the Company's financial statements
for the years ended December 31, 2000 and December 31, 1999. The restatements
corrected the previous omission of certain material expenses related primarily
to compensation expense arising from warrants issued and repriced stock options,
as well as other errors. The case is ongoing at this time. The Company intends
to vigorously defend its actions and pursue its affirmative claims to the
fullest extent possible. Management does not expect that this case will have a
material adverse effect on the Company's financial position.
In December 2002, the Company settled an outstanding lawsuit filed by Devenshire
Management Corp., a company owned by the Company's former president Todd
Sanders. The settlement involved no payment of cash by the Company, and resolved
all issues relating to the Company's obligation to remove restrictive legends
from stock owned by Devenshire. As part of this settlement the Company agreed to
defend, but not indemnify, Mr. Sanders in the Lyons lawsuit described
immediately above.
In May 2004, the Company was sued by Flight Options, Inc., a jet plane leasing
company, in California Superior Court of Orange County California. The lawsuit
alleges that the Company owes Flight Options approximately $418,300, pursuant to
a five-year lease assigned to the Company by the Company's former president's
corporation, Devonshire Management Corporation. Management of the Company
believes that the assignment of the lease was not properly authorized or
approved by the Company, and that because the former president failed to
identify the lease in a December 2002 settlement agreement with the Company, he
breached the terms of that settlement agreement and, pursuant to the settlement
agreement, must indemnify the Company for any losses owed to Flight Options. The
Company has cross-complained against Mr. Sanders for indemnity, and has added
the affirmative claim of breach of fiduciary duty. The case is still in its
initial discovery phase, and the Court recently set the case for trial in April
2005While the Company believes that it has meritorious positions in the
litigation, given the inherent nature of litigation, it is not possible to
predict the outcome of this litigation or the impact it would have on the
Company.
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 a merger,
consolidation, sale or conveyance of substantially all the assets of the Company
which resulted in the discharge of Mr. Lyons, he would be entitled to 200
percent of the balance of payments remaining under the contract. The contract
provided salary continuation for a period of two years after his death. In
January 2000, Mr. Lyons passed away and effective August 2, 2000 the Company
amended its employment contract with his widow and primary beneficiary of his
estate, whereby the salary continuation clause included in his contract was
F-31
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
replaced with a severance arrangement that requires the Company to pay Mrs.
Lyons $100,000 over a one year period commencing on the first month following
the termination of her employment with the Company. Furthermore, 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. Effective October 29, 2001 Mrs.
Lyons tendered her resignation and based upon the terms of her severance
agreement, expenses of $350,000 had been recorded of which $308,000 is included
in accounts payable and accrued expenses at December 31, 2002 and 2003.
In January 2000 the Company entered into employment contracts with two
additional individuals, 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 so that, upon the termination of employment of these
individuals, they would receive nine months continuation of compensation and
35,000 shares of common stock. The Company has agreed to reimburse the
respective employees the difference between the gross proceeds they receive upon
sale of the stock and $105,000; regardless of the term the employees hold such
shares.
In December of 2002, The Company entered into a five-year employment agreement
with the Company's current president, Dennis Calvert. His agreement calls for a
base monthly income of $14,000 plus performance bonuses and employee related
benefits. He serves as president, Chief Executive Officer, Interim CFO and
Chairman of the Board.
In March 2003, the Company entered into a five-year employment agreement with
Joseph Provenzano. Mr. Provenzano serves the Company as Secretary, Board Member
and Senior Executive reporting to Mr. Calvert. His agreement calls for him to
receive not less than $10,900 per month in salary plus incentive bonuses, stock
ownership participation and employee related benefits. At the Company's
discretion, the Company may choose to pay up to $4,900 of this monthly salary
with stock in lieu of cash.
c) Lease Commitment
The Company was obligated on a month-to-month office lease at its California
facility. This lease required monthly rentals of $7,850. All other leases are of
short duration or are on a month-to-month arrangement. Rent expense for December
31, 2002 and 2003 was $96,560 and $70,200 respectively. The lease was terminated
in April 2004.
d) Stock-Based Commitments
The Company currently utilizes the services of a number of consultants who are
compensated with shares of common stock. While each agreement can generally be
terminated with a 15-day notice, the Company may be obligated to issue
additional shares to the consultants. (Note 15).
F-32
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
Note 15. Subsequent Events
ISSUANCE OF S-8 SHARES:
NUWAY MEDICAL, INC. 2004 EQUITY PLAN
On March 10, 2004, the board of directors approved the Company's 2004 Equity
Plan as a means of providing directors, key employees and consultants additional
incentive to provide services for the Company. Both stock options and stock
grants may be made under this plan. The Plan sets aside up to 20,000,000 shares
of the Company's common stock for these purposes, which were registered with the
SEC. Approval of this plan was not submitted to the vote of the shareholders.
The Board administers this plan. The plan allows the Board to award grants of
common shares or options to purchase common shares. As plan administrator, the
board has sole discretion to set the price of the options. The Board may at any
time amend or terminate the plan. It does not expire on its terms.
During 2004, the Company issued 9,780,000 shares to 16 consultants, directors,
and employees. Of this total 5,680,000 have been registered with the SEC, while
the balance, 3,500,000 shares were not registered and are restricted securities.
Of the total issued in 2004, 1,026,000 shares relate to services performed in
2003 and 5,379,000 shares relate to 2004. The effect of the shares issued for
2003 services in 2004 was accrued in the Company's financial statements for the
year ending December 31, 2003. In 2004 there was $275,400 of expenses recorded
related to the issuance of these shares. Of this amount $120,000 related to
consulting services, $5,400 related to legal services, $60,000 related to Board
of Directors expense, and $90,000 related to salary expense. In 2004 there was
also 600,000 shares issued to the debenture holders eliminating the remainder
due under the Debenture Payable.
ABANDONED ACQUISITION
On January 31, 2004, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with Premium Medical Group, Inc., a Florida
corporation ("PMG") and PMG's sole stockholders, Eduardo A. Ruiz and Luis A.
Ruiz (the "PMG Stockholders"). Prior to this transaction, there was no business
or other relationship between the Company and its affiliates and PMG or the PMG
Stockholders.
Pursuant to the Stock Purchase Agreement, the Company agreed to acquire 100% of
the shares of PMG from the PMG Stockholders in exchange for 30,000,000 shares of
the Company's common stock, subject to certain adjustments. The exact number of
Company Shares to be issued to the PMG Stockholders was subject to adjustment in
the event certain revenue was generated by PMG during one year following the
closing of the transaction. PMG had been organized in June 2003 to provide
medical products to hospitals and medical clinics in South America, primarily
Venezuela. Luis A. Ruiz became a director of the Company in connection with the
transaction.
F-33
NUWAY MEDICAL, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2003 AND 2002
The parties had a difference in expectations regarding who would be ultimately
responsible for paying for the audit of PMG that was required in order for the
Company to complete its disclosure obligations under the Securities Exchange
Act. Additionally, the Company did not have a sufficient number of authorized
and unissued shares of its common stock to both satisfy its obligations to the
PMG Stockholders and to issue shares of common stock in a meaningful financing
transaction, given the low price per share at which the Company's common stock
trades. The Company lacked the financial resources to schedule a stockholders'
meeting, prepare a proxy statement and solicit proxies for the purpose of
amending its Certificate of Incorporation to increase its authorized capital
stock.
As a result of these and other factors, the Company and PMG never consolidated
their operations, the Company never exercised control over PMG or its operations
and the parties never exchanged stock certificates evidencing their ownership in
each other.
Therefore, the parties entered into discussions and concluded amicably that it
was in the mutual best interest of the respective companies and their respective
stockholders, to rescind the transactions provided for in the Stock Purchase
Agreement and return all parties to their respective positions prior to the
transactions contemplated in the Stock Purchase Agreement.
The parties entered into a Rescission Agreement on October 14, 2004 that
provides, in relevant part, that (i) all transactions contemplated by the Stock
Purchase Agreement shall be rescinded as if the Stock Purchase Agreement had
never been executed and delivered; (ii) the parties forever waive all rights to
receive stock in PMG and the Company, as the case may be; (iii) Luis A. Ruiz
shall resign as a director of the Company; and (iv) the Company and PMG shall
file appropriate documents with the Secretary of State of the State of Florida
with respect to the rescission of the exchange of shares provided for in the
Stock Purchase Agreement.
In September of 2004, the Company received a total of $25,000 from two
individual investors in exchange for the issuance of 5,000,000 shares of its
common stock.
In October 2004, the Company received a total of $50,000 from an outside
investor for the purchase of a convertible note. The note can be converted into
10,000,000 shares of its Series A Preferred stock. The shares of preferred stock
are convertible into common stock on a one for one basis. The Company agreed to
offer Piggyback Registration rights with these common shares. In addition, the
Company agreed to repurchase the preferred shares, at the investor's sole
discretion, after the end of one year at a price equal to 110% of the investment
amount. The Company's president further personally guaranteed the repurchase
terms.
F-34
EXHIBIT INDEX
Exhibit No. Description of Exhibit
---------- ----------------------
3.9 Certificate of Designations creating Series A Preferred Stock
4.6 Form of Warrant to Purchase Common Stock issued to Preferred
Stock investors
4.7 Warrant to Purchase Common Stock issued to Arthur Lipper
4.9 Amended and Restated Warrant No. AG-1 to purchase up to
6,158,381 shares of NuWay Medical, Inc. common stock held by
Augustine II LLC
10.19 Agreement to issue warrant dated February 24, 2003 between
NuWay Medical, Inc. and Sachi International, Inc.
10.23 Promissory Note dated November 20, 2003 between NuWay Medical,
Inc. and James Seay, DDS.
10.25 Amendment No. 1 to Term Loan Agreement dated as of March 30,
2004 between NuWay Medical, Inc. and Augustine II LLC
10.26 Amended and Restated Convertible Term Note by NuWay Medical,
Inc. in favor of Augustine II, LLC
10.27 Consulting Agreement with Mark Roy Anderson
10.29 Convertible Loan Agreement and Note between NuWay Medical,
Inc. and James Burchard
14.1 Code of Ethics
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Haskell & White LLP
23.2 Consent of Jeffrey S. Gilbert, CPA
31.1 Certificationof Chief Executive Officer and Interim Chief
Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rules 13(a)-14 and 15(d)-14
under the Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer and Interim Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350.