SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A-1
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2000 Commission File #33-43423
NUWAY ENERGY, INC.
A Delaware Corporation 65-0159115
(IRS Employer Identification Number)
19100 Von Karmon Avenue (949) 553-8002
Irvine, CA 92612 (Telephone Number)
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $0.00067 par value
Warrants, exercisable at $3.00 per share
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $669,651.
Aggregate market value of the voting stock held by non-affiliates,
computed by reference to the average bid and asked prices of such stock, as of
March 8, 2002: $7,158,666.
Number of shares outstanding of the registrant's common stock, as of March
19, 2002: 5,133,883 shares.
LATIN AMERICAN CASINOS, INC.
FORM 10-KSB/A-1
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.................................................. 1
ITEM 2. PROPERTIES................................................ 4
ITEM 3. LEGAL PROCEEDINGS......................................... 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION...................................... 7
ITEM 7. FINANCIAL STATEMENTS...................................... 10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS....................................... 10
ITEM 10. EXECUTIVE COMPENSATION.................................... 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS/COMPLIANCE WITH SECTION 16(b)................ 17
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.......................... 19
i
PART I
ITEM 1. BUSINESS
GENERAL
Latin American Casinos, Inc. (the "Company") operates a slot machine
rental and remanufacturing Company in South and Central America and is involved
in the distribution and sale of its own premium brand cigars in the United
States. The Company was initially organized as Repossession Auction, Inc., a
Florida corporation, in 1989. The Company merged into a Delaware corporation
bearing the same name in 1991. In 1994, the Company changed its name to Latin
American Casinos, Inc. to reflect its entrance into the gaming and casino
business in South and Central America. The Company does business under the name
Latin American Industries, reflecting the diversification of the Company with
the introduction of a premium cigar business. The Company maintains its
principal place of business at 2000 NE 164th Street, North Miami Beach, Florida
33162. Its telephone number is (305)945-9300.
SLOT MACHINE OPERATIONS
The Company concentrates its efforts on the rental of used five reel slot
machines. The Company purchases these machines at a fraction of the cost of new
machines, which are then refurbished at facilities in Latin America for use in
South and Central America. Whereas a new slot machine costs approximately
$10,000, plus duty charges, the used slot machines purchased by the Company cost
approximately $700 each, including freight, duty, and limited refurbishing
expenses. The Company has determined that more extensive refurbishing extends
the working life of each slot machine for up to an additional five years.
Currently, the expected useful life of a used slot machine is five years. Such
additional refurbishing increases the cost of each machine by approximately
$100. This refurbishing in no way impacts any government regulations that could
mandate obsolescence.
The Company entered the gaming and casino industry in Peru in 1994. Since
then, the Company has been engaged in the renting of slot machines to licensed
gaming establishments in various major cities through its wholly owned
subsidiaries in South and Central America. In 1994, the Company formed its
Peruvian subsidiary, in late 1995, the Company formed its Colombian subsidiary,
and in 1997, the Company formed a subsidiary in Nicaragua, which was liquidated
in year 2000.
As of December 31, 2000, approximately 678 slot machines were in operation
in Peru and approximately 324 slot machines were in operation in Colombia. These
machines are installed in, among other establishments, drug stores, pool halls,
bars, restaurants and nightclubs. The Company is in the process of scaling down
it's operations in both Peru and Columbia in order to prepare for the announced
planned merger with Digital Convergence.
The Company has offices in Lima, Peru; and Bogota, and Medellin, Colombia.
Hurricane Mitch adversely affected the Company's operations in Nicaragua,
which were not substantial, in October 1998. The Company liquidated all of its
assets in Nicaragua in the year 2000.
The Company competes with all the major gaming companies in Latin America,
including IGT, Novomatic and Admiral. Many of the companies are more established
and have greater resources. The Company, through its current relationships with
its existing clients believes that it has created in which the impact of
competition from major companies is limited.
SOURCE OF MACHINES
The Company had purchased used slot machines from several vendors in
Australia, including Damlite Pty. Ltd. and Olympic Video Gaming, a subsidiary of
International Gaming Technology. The Company's principal vendor is AJ
Electronics Repairs Pty. Ltd., ("AJ"), an Australian Company which services and
disposes of used slot machines. The loss of any of these suppliers, including
AJ, would not have a material adverse effect on the Company's business due to
the existence of other sources.
REFURBISHING PROCESS
All slot machines purchased were delivered to the Company's warehouses in
Lima, Peru or Bogota, Colombia and were refurbished by the Company's
technicians. Each slot machine is electronically tested for 30 minutes to assure
that it is in correct working order. Defective or worn parts are replaced or
repaired. Once the technician is satisfied that the machine is in proper working
order, the machine is thoroughly cleaned inside and out. At that time, a
computerized printed card that translates the rule of play from English to
Spanish is placed inside the machine in such a way that it can be seen and read
by the slot machine player. Refurbished machines are then placed in service in
the various locations. While the
1
refurbishing does extend the useful life of a used slot machine, this
refurbishing in no way impacts the effect of any possible government regulations
that could mandate obsolescence.
RENTAL OF SLOT MACHINES
The slot machines are rented to licensed individual owner operators under
a rental contract usually for a term of one year or longer. The contract
provisions vary depending on, among other things, the number of slot machines
requested by the renter. All contracts are backed by a personal guarantee for
the first four installment payments from the renter to insure against
non-payment of rental fees in the contract's initial stage. The rental contracts
also provide insurance to cover any loss by fire, theft, vandalism or political
unrest.
GOVERNMENT REGULATION
The governments of Peru, Colombia have regulations governing gaming
activities. Essentially, these regulations establish licensing requirements for
slot machine operations. It is anticipated that new regulations governing the
age and condition of machines will soon be enacted. The Company takes
appropriate steps to verify the licenses of its customers. The Company is in the
process of reviewing it's operations in both Peru and Columbia in order to
prepare for the announced planned merger with Digital Convergence.
The Peruvian government, in October 1996, imposed an excise tax of 200% on
lessees of gaming equipment, including slot machines. The excise tax caused many
of the Company's customers to return their slot machines to the Company rather
than pay the higher tax.
In January 1997, the Company obtained a temporary injunction against the
Peruvian government, prohibiting it from implementing the excise tax of 200%.
The Government has lowered the tax to a more realistic level. It is anticipated
that new regulations governing the age and condition of machines will be enacted
in the coming years. Given this, the Company is evaluating whether to increase
or decrease its slot machine operations in Peru.
The re-imposition of an excise tax of 200% in Peru would adversely affect
future earnings. Accordingly, if the Company were not successful in preventing
the tax, it would reevaluate its position in Peru.
PREMIUM CIGAR OPERATIONS
Beginning in September 1997, the Company directed part of its efforts into
establishing a business of producing, distributing and selling premium cigars
throughout the United States.
World's Best Rated Cigar Company ("World's Best") was formed as a
subsidiary to distribute cigars produced by Claudio Norberto Mercado. Mr.
Mercado resides in Santiago, Dominican Republic, in the Villa Gonzalez region,
the heart of the tobacco-growing valley. In a business arrangement, World's Best
advanced $75,000 to Mr. Mercado to build a cigar factory. World's Best also
advanced the sum of $15,000 to purchase all necessary fixtures to produce
cigars, such as molds, rolling tables, compressors, etc. World's Best holds a
mortgage on the factory to secure these advances. However, the Company
determined that the plan of selling one cigar from one manufacturer was too
limited. Therefore, during the summer of 1998, World's Best entered into
contractual arrangements with five other manufacturers in Nicaragua, Honduras
and the Dominican Republic. All of the manufacturers produce hand made 100%
Cuban seed, long leaf filler premium cigars. The manufacturers are
world-renowned and they manufacture cigars for over 20% of the brand name cigars
currently on the market.
These agreements allow the Company to acquire cigars at a fraction over
their cost and will enable them to be sold at a retail price significantly below
the current retail price for brand name premium cigars. The agreements require
that the manufacturers use high grade long leaf tobacco, hand roll the cigars
utilizing high grade filler and parchment wrapping of a grade selected by the
Company and wrap the cigars individually in cellophane and box them for
shipping. They also require the manufacturers to retain a specified amount of
inventory at all times to satisfy the Company's cigar purchase orders. The
cigars are then transported to the Company's facilities in Miami where they are
shipped to both retail customers and wholesale distributors.
The cigars are marketed through our web site: www.worldsbestrated.com as
well as our toll free number in bundles and boxes of twenty-five from the six
manufacturers. A color-coded cigar ring identifies each of the products of the
six cigar manufacturers. Traffic to the web site and to our toll free number, is
generated by our advertising in both traditional and non-traditional cigar
magazines, newspapers, electronic advertising. Our clients are provided with
literature describing the manufacturer's history, factories and plantations.
This change in sales strategy has resulted in a nearly six-fold increase in
sales and the Company believes this increase can be sustained through the year
2001.
2
Suggested retail pricing on the cigars range from $40.00 for a bundle of
25 panatelas to $50.00 for a bundle of 25 presidentes. The popular Churchill
size has a suggested retail price of $48.00 for a bundle of 25. These prices are
60% to 80% lower than prices charged in tobacco shops for cigars of the same
quality and they include free shipping anywhere in the USA. Substantially all
incurred advertising expenses were paid with barter transactions.
The Company continues to work on establishing relationships with various
distributors in the United States which supply convenience stores, restaurants,
bars and supermarkets with products. While the Company has had limited success
with this strategy, it will continue to attempt to establish these relationship
with companies that have various means of distribution. These relationships
require many meetings and conversations over a protracted period of time. The
Company is committed to pursing these relationships.
EMPLOYEES
The Company currently has a total of 43 full-time employees. The reduction
of 22 employees from the previous year was a result of our operations in
Nicaragua, and downsizing of our technical staff in our other locations. The
Company has four employees in the Miami office: two executives and two in
clerical positions. In Lima, Peru, the Company has five clerical employees in
its business office, including a general manager and 12 service technicians in
its warehouse and remanufacturing plant. In Colombia, the Company employs a
total of seven clerical employees including a general manager in its three
business offices and 15 service technicians in its warehouse and refurbishing
facility.
The Company believes its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's executive offices and operating facilities located at 2000
NE 164th Street, North Miami Beach, Florida 33162 are leased for a period of
three years until September 30, 2001, at a monthly rental of $2,500. The
premises consist of approximately 3,300 square feet. The property is in overall
good condition. In addition the Company is obligated for a two-year lease
beginning on February 8, 1999 for warehouse space at a rental of $1400 per
month. This lease was renewed at the same rate for a period of one-year with a
clause, which permits the Company to terminate the lease with three months
notice.
The Company leases a 2,000 square foot business office in San Isidro, a
municipality in Lima, Peru, for $680 per month. The lease terminates in June
2001, with a renewal option. The Company also leases a 10,000 square foot main
warehouse and refurbishing facility in Lima, for $1,200 per month, the lease
terminates on June 2001. The Company is currently negotiating with the landlords
in Lima, Peru for a reduction in rent.
In Bogota, Colombia the Company leases a 4300 square foot combined office
and warehouse facility for $1065 per month. This lease terminates on January 1,
2002. The Company also leases in Bogota an additional 1100 square foot warehouse
for $260 per month. This lease expires May 19, 2001. In Medellin, Colombia the
Company has rented a 2,700 square foot combined office and warehouse for $465.00
per month. This lease expires on February 1, 2002. The Company is currently
negotiating with the landlord in Medellin, Columbia to terminate the lease. The
monthly rent has been converted into U.S. Dollars from Columbian Pesos and as
such it fluctuates based upon the value of the U.S. Dollar in Columbia.
The Company was the lessor of office space and used car lot at 11337 NW
7th Avenue in Miami on a month-to-month basis for $1,200 per month. The property
is leased to an unrelated party. The Company acquired the property as an office
space and used car lot in 1990. This property was converted to a rental property
when the Company exited the used vehicle business and entered the slot machine
business. Over the years, the Company, expended in excess of $100,000 as a
result of environmental concerns on the property. The Company took a charge to
operations in 1999 to reduce the value of this property to its net realizable
value. In March 2001, the Company sold this property and recorded a net loss on
the sale of the property of $64,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant from time to time in claims and lawsuits
arising out of the normal course of its business, none of which have or are
expected to have a material adverse effect on its business, operations,
financial position or corporate liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2000.
3
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
From June 20, 1994 until October 30, 1998, the Company's Common Stock and
Warrants were listed on the NASDAQ Stock Market under the symbol "LACI" and
"LACIW", respectively. Beginning in October 31, 1998, the Company's Common Stock
and Warrants were listed on the NASDAQ Small Cap. The table below represents the
quarterly high and low bid prices for the Company's Common Stock and Warrants
for the last two fiscal years as reported by NASDAQ.
Common Stock High Low
------------ ---- ---
1999
----
January 1 - March 31 1 5/8 27/32
April 1 - June 30 1 1/2 1 1/8
July 1 - September 30 1 3/8 1 1/32
October 1 - December 31 1 1/8 1 1/32
2000
----
January 1 - March 31 1 1/8 1 1/16
April 1 - June 30 1 7/16 1 3/16
July 1 - September 30 1 1/4 1 1/4
October 1 - December 31 1 3/4 1 11/16
Warrants High Low
-------- ---- ---
1999
----
January 1 - March 31 1/4 1/4
April 1 - June 30 3/8 1/4
July 1 - September 30 3/8 5/16
October 1 - December 31 5/16 5/16
2000
----
January 1 - March 31 1/2 5/16
April 1 - June 30 3/8 5/16
July 1 - September 30 7/16 5/16
October 1 - December 31 5/8 7/16
The closing prices for the Common Stock and Warrants on March 28, 2001
were $2.90625 and $.75 respectively.
There were 48 registered owners and approximately 611 beneficial owners of
the Common Stock of the Company as of December 31, 2000. The Company did not
declare a dividend in 1998, 1999 or 2000.
As of December 31, 2000, the Company has outstanding (i) 1,725,000
publicly traded Warrants to purchase one share of the Company's Common Stock at
an exercise price of $3.00 through December 11, 2001, and (ii) 3,300,000 five
year warrants to purchase one common stock at an exercise price of $1.75 per
share through December 11, 2005.
On December 14, 2000 the Company issued and sold $3,500,000 principal
amount of Convertible Debentures to certain accredited investors. The
Convertible Debentures are convertible Debentures are convertible into shares of
Common Stock at a price of $1.75 per share and expires June 13, 2001. The
Convertible Debentures were issued pursuant to the exemption from registration
requirements of the Securities Act of 1933 provided by Section 4(2) of such Act
and Rule 506 promulgated by the Securities and Exchange Commission under that
Section. The Company incurred approximately $64,500 of costs in regard to this
private placement. The debt issuance costs will be amortized over the life of
the debentures. The interest on the debentures is payable either in cash or in
additional shares of common stock, at the discretion of the company. The
conversion price of the debentures was determined by the approximate market
value of the common stock at the date of issuance.
In December 2000 the Company issued private warrants to purchase 3,300,000
shares of common stock at an exercise price of $1.75 per share through December
11, 2005. These warrants were issued in connection with services rendered by
several individuals and entities.
4
In June 1998 the Company issued 225,000 warrants to an investment banker
in exchange for assistance in possible mergers, acquisitions and internal
capital structuring. These warrants were originally exercisable at the closing
bid price of $1.875 as of June 5, 1998, which can be exercised through June 5,
2003. Effective February 8, 2000, the Board of Directors reduced the exercise
price to $1.06, which was the closing price of the stock at that date.
Effective December 31, 1998, the Company ratified the repricing of the
employee stock options to $1.00 per share and simultaneously authorized the
issuance of 85,000 options at an exercise price of $1.00 per share and canceled
10,000 options issued in 1995 at $2.50 per share. Effective February 2000 the
company issued 35,000 options at an exercise price of $1.06 and in December 2000
the company issued 80,000 options at a $1.75 exercise price.
As of December 31, 2000 the Company has agreed to register 135,000 shares
of common stock (pursuant to employment agreements with certain employees of the
Company), 225,000 shares of common stock underlying investment banking warrants
(pursuant to piggy back registration rights contained in these investment
banking warrants), 3,300,000 shares of common stock underlying private warrants
(pursuant to piggy back registration rights contained in these warrants), and
2,120,000 shares of common stock underlying the company's convertible
debentures. As of December 31, 2000 only the aforementioned 225,000 shares of
common stock underlying investment banking warrants could be sold pursuant to
Rule 144 under the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS - 2000 COMPARED TO 1999
Revenues from the rental of slot machines in Peru and Colombia for the
year ended December 31, 2000 decreased by $1,181,000 or (63.8%), to $670,000
from $1,851,000 for the comparable period in 1999. The Company's revenues from
cigar sales were $163,900 for the year ended December 31, 2000 as compared to
sales of $28,000 for the same period in 1999.
The reason for the decrease in revenues was the overall weakness of the
economy in South America. Additionally, the decrease was due in part to
continued concerns over government-mandated obsolescence, political changes,
increased competition, the devaluation of foreign currency as well as the need
to replace machines with newer more modern equipment.
Selling, general, and administrative expenses incurred in the year ended
December 31, 2000 increased $823,500 or 46.5%, to $2,595,200 from $1,771,700 for
the same period in 1999.
The increase in selling, general, and administrative expenses were due to
the costs involved in mergers and acquisitions as well as costs incurred in the
issuance of debentures.
The Company recorded non-recurring expenses of compensation for stock
issued of $350,000, costs associated with the liquidation of Nicaraguan
subsidiary of $162,000 and officer compensation of $115,000 due the former Chief
operating officer, Lloyd Lyons, under his employment agreement. The increase is
also due in part to the increased cost of servicing the older machines and the
cost of employee severance requirements in these countries.
Net (loss) for the year ended December 31, 2000 was ($2,116,800) or
($0.63) per share compared to ($1,506,300) loss or ($0.46) per share for the
same period in 1999. The net loss was attributable to the significant decline in
revenues from slot machine operations and an increase in overhead expenditures
including officer compensation.
Through 2000 the Company expended approximately $1,142,000 on the
establishment of a premium cigar business; additional expenditures for marketing
and personnel are expected in year 2001. The Company expended approximately
$42,000 in 2000 in the cigar business down from $174,000 in 1999 a decrease of
$132,000. There were no costs associated with acquisitions of cigars and related
inventory in 2000, which resulted in the decrease in the expenditures in cigar
operations in year 2000. The Company anticipates that it will generate
significant revenues from this business in year 2001, although the amount of
such revenues is, at this time, impossible to forecast. The effect that this
business will have on the overall profitability of the Company is uncertain.
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
The Company's revenues from the rental of slot machines were $1,851,000
for the year ended December 31, 1999, a decreased of $541,000 (22.6%) from the
year ending December 31, 1998. The decrease was due in part to the concerns over
government mandated obsolescence, political changes, increased competition, as
well as the devaluation of the foreign currency. The Company's revenues from
cigar sales were $28,000 in 1999 and were negligible in 1998.
5
Selling, General and Administrative Expenses incurred in the operation of
the Company's cigar, gaming and casino business for the year ended December 31,
1999 increased as a percentage of revenues from 72% in 1998 to 94% in 1999 from
$1,727,600 to $1,771,700 in 1999.
As a result of the decrease in revenues, without a significant change in
operating expenses, the effect of the increase in Selling, General and
Administrative Expenses, as well as the impairment cost of the Company's gaming,
cigar, and real estate assets, the Company's net loss was ($1,506,000) and
($0.46) per share for the year ended December 31, 1999 compared to net income of
$531,000 or $0.16 per share for the preceding year. As a result of political
changes and government-mandated obsolescence of certain gaming equipment, the
company adjusted previously recorded cost of gaming equipment to its anticipated
net realizable value.
Additionally, the Company reduced the valuation of certain real estate
value in Miami to reflect current market conditions and adjusted its investment
in the cigar operations to account for the slower than expected sales. The total
impairment charge was computed as follows:
Gaming Equipment Asset Impairment Charge $ 1,245,000
Miami Real Estate Impairment Charge 86,000
Reduction of Cigar Investment 169,000
Other 15,000
-----------
Total $ 1,515,000
===========
The gaming equipment impairment charge was based on valuation of
obsolescence and replacement values made by management. Consideration in the
valuation was the decrease in utilization of the gaming equipment due to
decreased volume of operations. The impairment value of the Miami Real Estate
was based on an independent appraisal received and subsequent sale of the
property as further described in Note 13 to the Financial Statements. The
impairment cost of the cigar inventory cost was the result of certain packaging
and tube cost that had been abandoned.
Through 1999 the Company expended approximately $1,100,000 on the
establishment of a premium cigar business; additional expenditures for marketing
and personnel are expected in year 2000. The Company expended approximately
$174,000 in 1999 in the cigar business down from $926,000 in 1998 a decrease of
$752,000. The fact that there were no costs associated with acquisitions of
cigars and related inventory in 1999, accounted for the change. In 1999, an
insignificant amount was spent to acquire additional inventory. The Company
anticipates that it will generate significant revenues from this business in
year 2000, although the amount of such revenues is, at this time, impossible to
forecast. The effect that this business will have on the overall profitability
of the Company is uncertain.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased approximately $3,622,500 or 452%, to
$4,423,000 at December 31, 2000 from $800,000 at December 31, 1999. The increase
is attributable to the issuance of debentures in December 2000, which resulted
in a $3,435,000 net of expenses being received. In addition, stock options were
exercised which resulted in an increase in cash of $725,000.
The Company anticipates that its cash from operations and interest earned
on cash equivalents should be sufficient to meet its cash needs for the next
twelve months.
The Company does not have any commitments for material capital
expenditures.
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects, new products and certain other matters. The words "may", "will",
"expect", "anticipate", "continue", "estimate", "project", "intend" and similar
expressions are intended to identify such forward looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause its actual
results and experience to differ materially from anticipated results and other
expectations that may effect the operations, performance, development and
results of the Company's business, including the following:
1. Changes in government regulations of gaming, such as the excise tax
imposed by Peru, could have an effect on the Company's operations and business.
2. Political factors affecting South and Central America, particularly as
they pertain to currency valuation, could affect the Company's business in ways,
which are difficult to predict.
6
3. The agreements, which the Company has with five of its cigar
manufacturers, are cancelable upon 60 days written notice. One or more such
cancellations could have a material adverse effect on the Company's cigar
operations.
4. The Company's cigar operations are in the final stages with regard to
our marketing plan. This business is subject to all the risks and uncertainties
associated with the commencement of a new enterprise. There can be no assurances
that the Company will be able to successfully penetrate the market, or that its
cigar operations will become profitable.
5. The Company may be required to raise additional funds to expand its
business operations, particularly the cigar business, if it proves successful.
There can be no assurances that the Company will be able to raise such funds,
either through the sale of equity or debt securities or through commercial
sources. The inability to acquire needed capital could have a material adverse
effect on the Company's ability to expand.
6. The Company may be required to expand its infrastructure, including
the hiring of additional personnel in its executive offices. There can be no
assurances that the Company will be able to attract and retain qualified
personnel who will be successful in managing the Company's operations.
7
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements FORM 10-KSB/A-1
------------------------------------------- ---------------
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2000
and 1999 F-2
Consolidated Statements of Changes in Stockholders'
Equity for years ended December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years
ended December 31, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2000 and 1999 F-5
Notes to the Consolidated Financial Statements F-6-16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Todd Sanders 29 Director, President, Chief
Executive Officer
William Bossung 42 Director, Secretary, Chief
Operating Officer
Jose A. Caballero 43 Director
Michael Iscove 49 Director
Dennis R. Barry 61 Director
Directors are elected to an annual term that expires at our Company's
annual meeting of stockholders.
Mr. Sanders joined the Company as a Director and Chief Executive Officer
in October 2000. For the last five years Mr. Sanders has been acting as a
private financier of both public and private ventures. Since 1998 Mr. Sanders
has been the President of Strategic Capital Consultants, Inc., an Orange County,
California based corporate finance and business development consulting company.
Mr. Bossung joined the Company as a Director and Chief Operating Officer
in October 2000. For approximately the last ten years Mr. Bossung has been
President of Alliance Financial Network, Inc. which provides financial
consulting for public and private companies. From early 1995 until mid 1997 Mr.
Bossung was the Director of Corporate Finance for Chadmoore Wireless Group, Inc.
which was subsequently acquired by Nextel.
Mr. Caballero has served on the Board of Directors since April 1994. Mr.
Caballero is the Vice President of Exfi International Corporation, an
advertising and marketing agency that specializes in doing work for companies
that plan to expand their business into Latin America. Mr. Caballero has been
with Exfi International Corporation since 1987.
Mr. Iscove joined the Company in October 2000 as a Director. From June
1995 to date, Mr. Iscove served as the Chairman, President and Chief Executive
Officer of Sirius Corporate Finance Inc.
8
Mr. Barry has been a member of the Board of Directors since June of 1999.
Mr. Barry has been employed as a commercial mortgage broker and real estate
salesman for the past 37 years. He is affiliated with Mortgage Systems, Inc.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than ten percent of a
registered class of our equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of our Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish us with copies of Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were required
during the fiscal year ended December 31, 2000, the Company believes that,
during the year ended December 31, 2000, all of the Company's executive
officers, directors and greater-than-ten percent stockholders complied with all
Section 16(a) filing requirements other than one late report filed by each of
Messrs. Sanders, Bossung, Iscove, Barry, and Caballero.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued during the
last three completed fiscal years ended December 31, 2000 by the Company for
services rendered by the Lloyd Lyons, Chief Executive Officer during those years
(and part of fiscal 2000), and Todd Sanders, Chief Executive Officer for part of
fiscal 2000, and William Bossung, Chief Executive Officer for part of fiscal
2000:
SUMMARY COMPENSATION TABLE
===================================================================================================================
Annual Compensation Long Term Compensation
-------------------------------------------------------------------------------------------------------------------
Awards Payouts
-------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Compen- Stock Options LTIP Compen-
Principal Salary Bonus sation Awards SARs Payouts sation
Position Year $ $ $ $ # $ $
-------------------------------------------------------------------------------------------------------------------
Lloyd 2000 (2) 151,000 -- -- -- -- -- --
Lyons,
Chief 1999 348,000 348,000 [42,000] 650,000 (1) -- --
Executive
Officer 1998 300,000 300,000 -- 650,000 (1) -- --
Todd Sanders, 2000 (3) -- -- -- 100,000 (3) 750,000 (3) -- --
Sanders,
Chief
Executive
Officer
William 2000 (4) -- -- -- 100,000 (4) 750,000 (4) -- --
Bossung,
Chief
Operating
Officer
===================================================================================================================
(1) Options which were re-priced from $2.50 to $1.00 per share.
(2) Including wage continuation payments and outstanding loan from the Company
applied as compensation.
(3) Became Chief Executive Officer in October 2000. Pursuant to an employment
arrangement the Company issued Mr. Sanders 100,000 shares of restricted
Common Stock and warrants to purchase 750,000 shares of Common Stock for
$1.75 per share. Compensation of $175,000 was recorded in regard to this
transaction.
(4) Became Chief Operating Officer in October 2000. Pursuant to an employment
arrangement the Company issued Mr. Bossung 100,000 shares of restricted
Common Stock and warrants to purchase 750,000 shares of Common Stock for
$1.75 per share. Compensation of $175,000 was recorded in regard to this
transaction.
9
OPTION/SAR GRANTS IN LAST FISCAL YEAR
---------------------------------------------------------------------------------------------------------------------
[Individual Grants]
---------------------------------------------------------------------------------------------------------------------
Number of
securities
underlying Percent of total
options/SARs options/SARs granted to Exercise or base price
Name granted (#) employees in fiscal year ($/Sh) Expiration date
---------------------------------------------------------------------------------------------------------------------
Todd Sanders, CEO 750,000 (1) 46.4 1.75 12/11/05
---------------------------------------------------------------------------------------------------------------------
William Bossung, COO 750,000 (1) 46.4 1.75 12/11/05
(1) Reflects private five year warrants issued to the named executive officer
pursuant to an employment agreement with such executive officer.
REPORT ON RE-PRICING OF OPTIONS
The Board of Directors determined that in lieu of awarding a cash bonus
and an increase in his non-accountable expense allowance to Mr. Lyons in
connection with the performance of his duties as the Chief Executive Officer and
Chairman of the Board of the Company, his outstanding stock options would be
re-priced on the same basis as other outstanding stock options which were
similarly re-priced.
The following table sets forth certain information with respect to
outstanding stock options held by the Lloyd Lyons Chief Executive Officer (for
part of 2000) or exercised in 2000.
================================================================================
Number of Securities
Shares Underlying Un-exercised
Name Acquired On Value In-the-Money Options at
(a) Exercise (#) Realized ($) Options at December 31, 2000
--------------------------------------------------------------------------------
Exercisable Un-exercisable Exercisable Un-exercisable
--------------------------------------------------------------------------------
Lloyd Lyons 650,000 162,500 -- --
================================================================================
EMPLOYMENT AGREEMENTS
In January 1997, the Company entered into a five-year employment
agreement with Lloyd Lyons, that provided for an annual salary commencing
January 1997 of $275,000 and increasing $25,000 per annum commencing January 1,
1998. The contract provided for salary continuation for a period of two years
after the death of the officer. In January 2000, Mr. Lyons passed away and
effective August 2, 2000 the Company amended it's employment contract with the
surviving widow (Geraldine Lyons, the Company's Chief Financial Officer and
Secretary) and primary beneficiary of the Estate of the Lloyd Lyons, where-in
the salary continuation clause included in his contract was replaced with a
severance arrangement which requires the Company to pay Geraldine Lyons $100,000
over a one year period commencing on the first month following her termination
from her employment with the Company and upon her termination she is to receive
100,000 shares of common stock pursuant to an amendment to her employment
agreement. The amended employment agreement obligates the company to register
these shares and reimburse her for the difference in the gross proceeds upon the
sale of such shares and $300,000, regardless of the time she holds such shares.
Upon termination of the employee contract, the company will record additional
compensation at the greater of the then market price of the company's stock or
the guaranteed price stipulated in the contract. The agreement further provides
that Geraldine Lyons remain in the employment of the company for at least four
months following the amendment of the contract. The contract revisions further
provided that the officer loan of Lloyd Lyons in the amount of $115,000 be
recorded as additional compensation, as required by the officer compensation
agreement. The employment agreement with Geraldine Lyons remains intact in all
other regards and obligates the company to provide an annual compensation at the
rate of $46,800 per annum in the year 2000 and $51,480 in the subsequent year.
In January 2000 the company entered into two additional employment
contracts, with President, Jeffrey Felder and President of Latin American
Operations, Angel Garcia, both for the duration of two years and provides that
company be obligated for an aggregate
10
compensation of $115,000 in year 2000 and $126,500 in year 2001. Effective
August 2, 2000 both of these employment contracts were amended to reflect upon
termination from employment these individuals would also be entitled to nine
months of compensation and will receive in the aggregate 35,000 shares of common
stock which the company has agreed to reimburse the respective employees the
difference between the gross proceeds they receive upon sale and $105,000,
regardless of the term the employees hold such shares. Upon termination of the
employee, the company will record additional compensation at the greater of the
market price of the company stock or the guaranteed price stipulated in the
contract.
The company entered into two additional one-year employment agreements
with the Chief Operating Officer, William Bossung and the Chief Executive
Officer, Todd Sanders, whereby the company issued to each 100,000 shares of
stock and warrants to purchase 750,000 shares of common stock at $1.75 per
share. The issuance of the stock was considered compensation in the year 2000.
The issuance of the private warrants were part of the arrangement with the
executive officers of the corporation who also received restricted stock
aggregating 200,000 shares. Compensation was recorded on the arrangement equal
to the then market value of the restricted stock, $350,000.
Other than the incentive bonus plan described above and the stock option
plans described below, as of December 31, 2000, the Company does not have any
contingent forms of remuneration, including any pension, retirement, stock
appreciation, cash or stock bonus, or other compensation plan.
DIRECTOR COMPENSATION
Non-Management directors receive $300 for each meeting attended.
1994 STOCK OPTION PLAN
In June 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "Plan"). The maximum number of shares available for issuance under the Plan
is 1,500,000 shares. The Plan terminates on June 13, 2004. The Plan is designed
to provide additional incentives for Directors and officers and other key
employees of the Company, to promote the success of the business and to enhance
the Company's ability to attract and retain the services of qualified persons.
The Board of Directors administers the Plan. The Plan authorizes the Board of
Directors to grant key employees selected by it, incentive stock options and
non-qualified stock options. The exercise price of shares of Common Stock
subject to options qualifying, as incentive stock options must not be less than
the fair market value of the Common Stock on the date of the grant. The exercise
price of incentive options granted under the Plan to any participant who owns
stock possessing more than 10% of the total combined voting power of all classes
of outstanding stock of the Company must be at least equal to 100% of the fair
market value on the date of grant. Fair market value has been determined to be
the closing sales price for the Company's common stock reported by NASDAQ. In
October 2000 the Board of Directors authorized the issuance of stock options
under the Plan to certain officers and directors of the Company as more fully
set forth in the footnotes to the Security Ownership table in Item 11 below.
INCENTIVE STOCK OPTIONS OUTSTANDING
Amount Price Per Share
------ ---------------
Options Outstanding at January 1, 2000 932,500 1.00
Additional Options Issued 35,000 1.06
Additional Options Issued 80,000 1.75
Options Lapsed (85,000) 1.00
Options Exercised (725,000) 1.00
-------
Options Outstanding at December 31, 2000 237,500
=======
The Board of Directors may amend the Plan at any time but may not, without
shareholder approval, adopt any amendment, which would materially increase the
benefits accruing to participants, or materially modify the eligibility
requirements. The Company also may not, without shareholder approval, adopt any
amendment, which would increase the maximum number of shares, which may be
issued under the Plans, unless the increase results from a stock dividend, stock
split or other change in the capital stock of the Company. In March 1999, the
Board of Directors authorized an amendment to the Plan increasing the number of
shares to be issued thereunder from 1,000,000 to 1,500,000. This amendment was
submitted for shareholder approval at the 1998 Annual Meeting and was approved.
11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding shares of the
Common Stock beneficially owned as of March 28, 2001, by (i) each person or a
group, known to the Company, who beneficially owns more than 5% of the Common
Stock, (ii) each of the Company's directors, and (iii) all executive officers
and directors as a group:
-----------------------------------------------------------------------------------------------------------
Number of Shares
Name Beneficially Owned(1) Percent of Class (1)
-----------------------------------------------------------------------------------------------------------
William Bossung 1,589,403 (2) 14.2%
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Todd Sanders 1,475,117 (3) 13.2%
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Augustine Fund, L.P. 3,121,234 (4) 27.8%
141 W. Jackson, Suite 2182
Chicago, IL 60604
-----------------------------------------------------------------------------------------------------------
M.H. Meyerson & Co. Inc. 982,463 (5) 8.8%
525 Washington Boulevard
Jersey City, NJ 07503
-----------------------------------------------------------------------------------------------------------
Geraldine Lyons 226,024 (6) 2%
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Angel Garcia 75,000 (7) *
Mariscal Sucre 321 Miraflores
Lima, 18 Peru
-----------------------------------------------------------------------------------------------------------
Kenneth Koock 263,750 (8) 2.4%
525 Washington Boulevard
Jersey City, NJ 07503
-----------------------------------------------------------------------------------------------------------
Jose A. Caballero 35,000 (9) *
c/o Latin American Casinos, Inc.
200 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Jeffrey A. Felder 50,092 (10) *
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Dennis R. Barry 30,000 (11) *
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
Michael Iscove 50,000 (12) *
c/o Latin American Casinos, Inc.
2000 NE 164th Street
North Miami Beach, FL 33162
-----------------------------------------------------------------------------------------------------------
All Executive Officers and Directors as a group 3,530,636 31.4% (13)
-----------------------------------------------------------------------------------------------------------
* Less than 1%
(1) Under Rule 13d-3 under the Exchange Act, certain shares may be deemed to
be beneficially owned by more than one person (if, for example, persons
share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of
an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount
of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of
these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily reflect
the person's actual ownership or voting power with respect to the number
of shares of common stock actually outstanding at March 28, 2001.
12
(2) Mr. Bossung is the Chief Operating Officer and a Director of the Company.
Includes 125,000 shares which may be acquired upon exercise of Company's
publicly traded warrants, 200,000 shares which may be acquired upon
conversion of the Company's Convertible Debentures, and 750,000 shares
which may be acquired upon exercise of the Company's private warrants at a
price of $1.75 per share.
(3) Mr. Sanders is the Chief Executive Officer and a Director of the Company.
Includes 125,000 shares which may be acquired upon exercise of Company's
publicly traded warrants, 85,714 shares which may be acquired upon
conversion of the Company's Convertible Debentures, and 750,000 shares
which may be acquired upon exercise of the Company's private warrants at a
price of $1.75 per share.
(4) Based upon filings by Augustine Fund, L.P. with the Securities and
Exchange Commission. Includes 457,143 shares which may be acquired upon
conversion of the Company's Convertible Debentures owned by Augustine
Fund, L.P. Includes 285,714 shares which may be acquired upon conversion
of the Company's Convertible Debentures owned by Brian D. Porter. Includes
28,571 shares which may be acquired upon conversion of the Company's
Convertible Debentures and 45,000 shares which may be acquired upon
exercise of the Company's private warrants owned by David M. Matteson at a
price of $1.75 per share. Mr. Porter and Mr. Matteson are either
controlling members, directors and officers of Augustine Capital, the
general partner of Augustine Fund L.P. Also, includes 750,000 shares which
may be acquired upon exercise of the Company's private warrants at a price
of $1.75 per share owned by Delano Group Securities LLC, which is owned,
controlled and/or managed by certain affiliates of Augustine Fund L.P.
(5) Includes 554,050 shares of stock which may be acquired upon exercise of
the Company's publicly traded warrants, and 103,000 shares of stock which
may be acquired upon exercise of investment banker warrants exercisable at
$1.06 per share.
(6) Includes 10,000 shares which may be acquired upon exercise of Company
options which are exercisable at $1.75 per share, and 41,024 shares of
Common Stock held in trust for grandchildren.
(7) Includes 65,000 shares which may be acquired upon exercise of Company
options which are exercisable at $1.00 per share and 10,000 shares which
may be acquired upon exercise of Company options which are exercisable at
$1.75 per share.
(8) Includes 100,750 shares which may be acquired upon exercise of investment
banker warrants exercisable at $1.06 per share.
(9) Includes 25,000 shares which may be acquired upon exercise of Company
options exercisable at $1.06 per share and 10,000 shares which may be
acquired upon exercise of Company options exercisable at $1.75 per share.
(10) Includes 5,000 shares which may be acquired upon exercise of Company
options exercisable at $1.06 per share and 25,000 shares which may be
acquired upon exercise of Company options exercisable at $1.75 per share.
(11) Includes 5,000 shares which may be acquired upon exercise of Company
options exercisable at $1.06 per share and 25,000 shares which may be
acquired upon exercise of Company options exercisable at $1.75 per share.
(12) Includes 50,000 shares which may be acquired upon exercise of the
Company's private warrants.
(13) Percentage is based upon a total number of shares assuming conversion in
full of the Company's Convertible Debentures, and exercise in full of all
of the Company's publicly traded warrants and private warrants. Also
assumes the exercise of 237,500 of the Company's options into shares of
Common Stock.
13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company advanced $150,000 to Lloyd Lyons, the Chief Executive Officer
in 1993. Mr. Lyons repaid $21,000 during 1994, $4,000 during 1997, $8,000 in
1998 and $2,000 in 1999. All interest charged through December 31, 1999, had
been paid by Mr. Lyons. Interest was being charged at a rate of prime plus 1%
per annum. In August 2000, the note receivable was considered compensation due
to the estate of Mr. Lyons.
In December 2000 the Company entered into an agreement with Delano Group
Securities LLC (which is owned, controlled and/or managed by certain affiliates
of Augustine Fund L.P.) to render investment banking, capital formation,
consulting and advisory services. Pursuant to this agreement Delano received
warrants to purchase 1,500,000 shares of Common Stock at a price of $1.75 per
share. These warrants expire on December 11, 2005.
In December 2000 the Company issued and sold $3,500,000 principal amount
of 6% Convertible Debentures. These Convertible Debentures are convertible into
shares of Common Stock at a price of $1.75 per share and mature on June 13,
2001. The following officers and greater than five percent owners of Common
Stock are owners of the Convertible Debentures: Todd Sanders, Chief Executive
Officer, Director, $150,000 principal amount of Convertible Debentures; William
Bossung, Chief Operating Officer, Director, $350,000 principal amount of
Convertible Debentures; John Porter, controlling member, director or officer of
Augustine Capital Augustine Capital, the general partner of Augustine Fund L.P.
a greater than five percent owner, $500,000 principal amount of Convertible
Debentures; David Matteson, controlling member, director or officer of Augustine
Capital Augustine Capital, the general partner of Augustine Fund L.P. a greater
than five percent owner, $50,000 principal amount of Convertible Debentures; and
Augustine Fund, L.P., greater than five percent owner, $800,000 principal amount
of Convertible Debentures.
For more information concerning transactions between us and related
parties, see Note 13 of the Notes to the Financial Statements.
14
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of exhibits as required by Item 601 of Regulation S-B.
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Articles of Incorporation (Delaware), as amended
3.2 Certificate of Merger Merging Repossession Auction,
Inc. (Florida corporation) and Repossession Auction,
Inc. (Delaware corporation)
3.3 Bylaws
4.3 Form of publicly traded Warrant Agreement
4.4 Form of private warrant dated December 12, 2000
4.5 Form of 6% Convertible Debenture dated December 14, 2000
10.3 Employment Agreement between the Company and Lloyd
Lyons dated January 1, 1997(1)
10.4 1994 Stock Option Plan
10.5 Lease dated September 9, 1998 between Company and Oska
Partnership re: executive offices.
10.6 Agreement dated July 12, 1998 with Tabacelera
Panamericano Y Del Caribe S.A. (with certain portions
omitted pursuant to Rule 24b-2)
10.7 Agreement dated July 20, 1998 with Tabacos DeOriente
(with certain portions omitted pursuant to Rule 24b-2)
10.8 Agreement dated July 20, 1998 with Tabacos Del Caribe
(with certain portions omitted pursuant to Rule 24b-2)
10.9 Agreement dated July 12, 1998 with Tacunisa (with
certain portions omitted pursuant to Rule 24b-2)
10.10 Agreement dated July 12, 1998 with Tabanica, S.A. (with
certain portions omitted pursuant to Rule 24b-2)
10.11 Form of Employment Agreement between the Company and
Todd Sanders dated March 2001
10.12 Form of Employment Agreement between the Company and
William Bossung dated March 2001
10.13 Form of Agreement between the Company and Delano Group
Securities LLC dated December 2000
10.14 Form of Convertible Debenture Purchase Agreement dated
December 14, 2001
27.1 Financial Data Schedule
(1) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 1997.
(b) Reports on Form 8-K
10/4/00 Change in Control of Registrant and Other Events
11/17/00 Other Events
12/14/00 Other Events
15
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
AUDIT REPORT
------------
AS OF DECEMBER 31, 2000
-----------------------
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
CONTENTS
--------
Independent Auditor's Report F-1
Consolidated Balance Sheets as of December 31, 2000
and December 31, 1999 F-2
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years
Ended December 31, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years
Ended December 31, 2000 and 1999 F-5
Notes to Consolidated Financial Statements as of December 31, 2000
and December 31, 1999 F-6-17
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors of:
NuWay Energy, Inc. (F/K/A Latin American Casinos, Inc.) and Subsidiaries
We have audited the accompanying consolidated balance sheet of Latin American
Casinos, Inc. and Subsidiaries as of December 31, 2000, and 1999 the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for the years ended. These consolidated financial statements are the
responsibility on the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Latin
American Casinos, Inc. and subsidiaries as of December 31, 2000 and 1999 the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in note 10 to the financial statements the company reduced its
asset values and has charged current operations with $1,515,000 asset impairment
costs.
Shubitz Rosenbloom & Co., P.A.
Miami, Florida
March 15, 2001
(Except As To Note 1 N,
Whose Date is March 12, 2002)
F-1
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
ASSETS
------
December 31, December 31,
2000 1999
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents $ 4,422,715 $ 800,223
Accounts Receivable, Less
$150,000 of Allowance for Doubtful Accounts
in 2000 and 1999 1,382,382 1,591,399
Inventory 539,560 645,172
Prepaid Expenses and Other Current Assets 136,717 212,429
------------ ------------
Total Current Assets 6,481,374 3,249,223
------------ ------------
PROPERTY AND EQUIPMENT - NET 3,708,795 4,568,008
------------ ------------
OTHER ASSETS
Financing Arrangement Receivable -- 94,624
Deposits 11,609 11,609
Note Receivable - Stockholder -- 115,000
Other Assets 46,208 25,925
------------ ------------
Total Other Assets 57,817 247,158
------------ ------------
TOTAL ASSETS $ 10,247,986 $ 8,064,389
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 190,703 $ 191,650
Debentures Payable, net of deferred debt issuance
costs of $64,500 3,435,500 --
------------ ------------
Total Current Liabilities 3,626,203 191,650
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
Total Liabilities 3,626,203 191,650
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.00067 Par Value 15,000,000
Shares Authorized, 4,225,000 Shares Issued
4,221,600 Shares Outstanding and 3,400 Shares
held as Treasury Stock 2,831 2,211
Additional Paid-In Capital 13,796,612 10,203,732
Accumulated Other Comprehensive Income (Loss) (560,326) (415,193)
Retained Earnings (Deficit) (6,612,099) (1,912,776)
Treasury Stock, at cost (5,235) (5,235)
------------ ------------
Total Stockholders' Equity 6,621,783 7,872,739
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,247,986 $ 8,064,389
============ ============
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
F-2
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
----------------------------------------------
COMMON STOCK
---------------------------- ACCUMULATED
NUMBER PAR ADDITIONAL OTHER RETAINED
OF VALUE PAID-IN COMPREHENSIVE EARNINGS
SHARES $.00067 CAPITAL INCOME(LOSS) (DEFICIT)
------ ------- ---------- ------------- ---------
BALANCE JANUARY
1,1999 3,300,000 $ 2,211 $10,203,732 ($ 517,151) ($ 406,484)
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS - - - 101,958 -
NET LOSS OF
THE YEAR ENDED
DECEMBER 31, 1999 - - - - (1,506,292)
--------- ----------- ----------- ----------- -----------
BALANCE DECEMBER
31, 1999 3,300,000 2,211 10,203,732 (415,193) (1,912,776)
COMPREHENSIVE
INCOME (LOSS)
FOR THE YEAR ENDED
DECEMBER 31,1999 - - - - -
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS - - - (145,133) -
WARRENTS ISSUED IN
EXCHANGE FOR SERVICE - - 1,991,700 - -
COMPENSATION EXPENSE ON
VARIABLE OPTIONS PLAN - - 491,700 - -
COMPENSATION ON RE-PRICING
OF STOCK OPTIONS - - 34,900 - -
EXERCISE OF
STOCK OPTIONS 725,000 489 724,514 - -
STOCK ISSUED AS
COMPENSATION 200,000 134 349,866 - -
NET (LOSS) FOR THE
YEAR ENDED DECEMBER
31, 2000 - - - - (4,699,323)
--------- ----------- ----------- ----------- -----------
BALANCE MARCH 31,
2000 4,225,000 $ 2,831 $13,796,612 ($ 560,326) ($6,612,099)
========= =========== =========== =========== ===========
Comprehensive Income
For The Years Ended
December 31, 2000 - - - - -
READ ACCOUNTANTS REVIEW REPORT AND NOTES TO FINANCIAL STATEMENTS
F-3
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (continued)
----------------------------------------------------------
Treasury Comprehensive
Stock Income(Loss)
-------- -------------
BALANCE JANUARY 1, 1999 $ 5,235 $ -
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS - 101,958
NET LOSS OF
THE YEAR ENDED
DECEMBER 31, 1999 - (1,506,292)
----------- ----------
BALANCE DECEMBER 31, 1999 5,235 -
COMPREHENSIVE
INCOME (LOSS)
FOR THE YEAR ENDED
DECEMBER 31, 1999 ($1,404,334)
===========
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS - (145,133)
WARRENTS ISSUED IN
EXCHANGE FOR SERVICE - -
COMPENSATION EXPENSE ON
VARIABLE OPTIONS PLAN - -
COMPENSATION ON RE-PRICING
OF STOCK OPTIONS - -
EXERCISE OF
STOCK OPTIONS - -
STOCK ISSUED AS
COMPENSATION - -
NET (LOSS) FOR THE
YEAR ENDED DECEMBER
31, 2000 - (2,116,823)
=========== ==========
BALANCE MARCH 31, 2000 $ 5,235 $ -
Comprehensive Income
For The Years Ended
December 31, 2000 - ($2,261,956)
===========
READ ACCOUNTANTS REVIEW REPORT AND NOTES TO FINANCIAL STATEMENTS
F-3
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
----------------------------------------------
2000
2000 1999
---- ----
Revenue
Rental Income $ 669,651 $ 1,851,062
Sales of Cigars 163,886 28,009
----------- -----------
Total Revenues $ 833,537 $ 1,879,071
----------- -----------
Cost and Expenses
Selling, General & Administration 2,595,199 1,771,763
Depreciation 268,462 197,187
Cost of Cigar Sales 119,183 22,407
Expenses Associated With Options and Warrants 2,518,500 --
Impairment Charges 64,000 1,515,000
Total Cost and Expenses $ 5,565,344 $ 3,506,357
----------- -----------
Operating Income (Loss) (4,731,807) (1,627,286)
----------- -----------
Other Income (Expenses)
-----------------------
Interest Income 35,957 109,458
Net Other Income (Expenses) 35,957 (109,548)
----------- -----------
Income (Loss) Before Income Taxes (4,695,850) (1,517,828)
Income Taxes (Provision) Benefit (3,473) 11,536
----------- -----------
Net Income (Loss) ($4,699,323) ($1,506,292)
Earnings (Loss) Per Common Share and
Common Share Equivalent Basic And
Fully Diluted
Common Share Equivalent Outstanding 3,367,200 3,296,000
=========== ===========
Net Income (Loss) per share ($ 1.40) ($ .46)
=========== ===========
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
F-4
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
----------------------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($ 4,699,323) ($ 1,506,292)
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Off Set of Officers Notes Receivable and Accrued
Compensation 115,000 --
Depreciation 268,462 197,187
Issuance of Stock Accounted for As Compensation 350,000 --
Impairment Charges 64,000 761,350
Issuance of Warrants and Options
Accounted for As Compensation 2,518,500 --
Loss on Property in Nicaragua 219,505 --
Changes in Assets - (Increase) Decrease:
Accounts Receivable 303,641 (269,269)
Prepaid Expenses and Other Current Assets 75,712 (21,953)
Inventory of Cigars 105,612 80,437
Changes in Liabilities - Increase (Decrease):
Accounts Payable and Accrued Expenses (947) (56,439)
Foreign Income Tax Payable -- (28,707)
------------ ------------
Net Cash Provided by (Used In) Operating
Activities (679,838) (843,686)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on Sale of Fixed Assets 358,206 --
Fixed Assets, Other (50,960) (28,811)
Other Assets (20,283) 2,989
------------ ------------
Net Cash Provided By (Used by)Investing
Activities 286,963 (25,822)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Expenditures incurred in connection with
Private Placement (64,500) --
Issuance of Debentures 3,500,000 --
Exercise of Stock Options 725,000 --
------------ ------------
Net Cash Provided From Financing Activities 4,160,500 --
------------ ------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (145,133) 101,958
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,622,492 (767,550)
CASH AND CASH EQUIVALENTS - BEGINNING 800,223 1,567,773
------------ ------------
CASH AND CASH EQUIVALENTS - ENDING $ 4,422,715 $ 800,223
--------------------------------------------------- ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
---------------------------------------------------
Cash Paid During the Period for:
Interest $ -- $ --
============ ============
Income Taxes, Foreign $ 3,473 $ 28,707
============ ============
See Independent Auditor's
Report The accompany notes are an integral
part of this statement.
F-5
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 1. Summary of Significant Accounting Policies
------- ------------------------------------------
A Business and Organization
-------------------------
Latin American Casinos, Inc. (formerly Repossession Auction, Inc.)
is a Delaware corporation incorporated on September 19, 1991. In
1994, the company entered in the gaming and casino business,
primarily in Peru and other Latin American countries renting
casino type slot machines.
In 1994, the company formed a Peruvian subsidiary; in 1995, the
company formed a Colombian subsidiary and in 1997, the company
formed a subsidiary in Nicaragua that are in the gaming and casino
business in Latin America (See Note 9C). The operations include
the renting of casino slot machines to casino operators. As of
December 31, 2000, the company had acquired approximately 8,000
slot machines, approximately 3,000 of which have been acquired for
parts and other related equipment, at a total cost of $4,197,282
including applicable costs for transportation, duty and
refurbishing (See note 10).
B Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the company and its wholly-owned subsidiaries, Latin
American Casinos Del Peru S.A. (formerly known as Latin American
Casinos, Inc. S.A.) a Peruvian Corporation, Latin American Casinos
of Colombia LTDA, a Colombian Corporation, and Latin American
Casinos of Nicaragua. Effective September 23, 1997, the company
incorporated World's Best Rated Cigar Company (World) as a
wholly-owned subsidiary of Latin American Casinos, Inc., to
distribute quality cigars. In addition, Premium Cigar
Manufacturers (Premium) was incorporated in 1998 as a wholly-owned
subsidiary of Latin American Casinos, Inc. It was originally
intended that World would market premium cigars at "off price",
whereas Premium will acquire quality cigars from six South
American producers and market them through large retail chains,
initially on a consignment basis Premium Cigar has subsequently
been administratively dissolved Operations of these subsidiaries
have been slower than originally anticipated. As of December 31,
2000, the company had expended approximately $1,142,000 in regard
to the cigar operations. Such expenditures have been included in
the accompanying consolidated balance sheet as follows:
Cash $ 2,000
Accounts Receivable 55,000
Prepaid and Other Current Assets 17,000
Inventory 540,000
Fixed Assets, Net of Accumulated Depreciation 75,000
Other Assets 3,000
Aggregate Accumulated Deficit 450,000
----------
Total Investment $1,142,000
==========
All material intercompany transactions, balance and profits have
been eliminated.
See Independent Auditor's Report.
F-6
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
C Property and Equipment
----------------------
Property and Equipment are stated at cost. Depreciation is
provided on accelerated and straight-line methods over the
estimated useful lives of the respective assets. Maintenance and
repairs are charged to expense as incurred; major renewals and
betterment's are capitalized. When items of property or equipment
are sold or retired, the related cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in
the results of operations. Whenever there is a change in events or
circumstances, the Company performances an impairment analysis by
comparing the future undiscounted cash flows are less than the
carrying amount, and impairment charge is recorded to reduce the
assets to its estimated fair value.
D Revenue Recognition
-------------------
Revenue is recognized monthly on the rental of slot machines as
the slot machines are placed in service. Typical rental
arrangements for slot machines are for one year or less in
duration with consistent rent income earned over the life of the
lease. As a general rule the company does not incur any
significant direct cost with the inception of the lease. All
leasing expense, payroll and maintenance of equipment are charged
to operations as incurred. Revenue on the sale of cigars are
recorded when customer orders are shipped. The cost of cigar sales
represent the direct cost of the product sold.
E Statement of Cash Flows
-----------------------
For purposes of this statement, the company considers all liquid
investments purchased with an original maturity of three months or
less to be cash equivalents.
F Income (Loss) Per Common Share
------------------------------
Basic earnings per common share and common share equivalent were
computed by dividing net (loss) by the weighted average number of
shares of common stock outstanding during the period. Fully
diluted earnings per share was calculated based on the assumption
that the increase in the number of common shares assumed
outstanding on conversion are reduced by the number of common
shares that are assumed to be purchased with the proceeds from the
exercise of the incentive stock options. During 2000 and 1999 all
warrants, stock options and underwriter's options (Note 5, 6, 7)
were anti-dilutive, and excluded from the computation of basic and
diluted earning (loss) per share. In the future the convertible
debt, and these warrants, stock options, and underwriting options
could be dilutive and as such future earnings per share could be
diluted by 7,607,496 additional shares.
G Significant Concentration of Credit Risk
----------------------------------------
The company has concentrated its credit risk for cash by
maintaining deposits in banks located within the same geographic
region. The maximum loss that would have resulted from risk
totaled $4,320,000 and $697,000 as of December 31, 2000 and
December 31, 1999 for the excess of the deposit liabilities
reported by the bank over the amounts that would have been covered
by federal deposit insurance.
See Independent Auditor's Report.
F-7
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
H Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and revenues
and expenses during the period reported. Actual results could
differ from those estimates. Estimates are used when accounting
for uncollectible accounts receivable, obsolescence, equipment
depreciation and amortization, taxes, among others.
I Foreign Currency Translation
----------------------------
For most international operations, assets and liabilities are
translated into U.S. dollars at year-end exchange rates, and
revenues and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments, resulting
from fluctuations in exchange rates are recorded as a separate
component of shareholders' equity, as other comprehensive income
(loss).
J Inventories
-----------
Inventory of cigars and related material are stated at the lower
of average cost or market.
K Valuation of Company's Stock Options and Warrants
-------------------------------------------------
As permitted under the Statement of Financial Accounting Standards
No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation,
the Company accounts for its stock-based compensation to employees
in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issured to Employees.
As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded
the exercise price. Certain pro forma net income and EPS
disclosures for employee stock options grants are also included in
the notes to the financial statements as if the fair value method
as defined in SFAS No 123 had been applied. Transactions in equity
instruments with non-employees for goods or services are accounted
for by the fair value method.
L Advertising
-----------
The company expenses all advertising cost as incurred. Included in
the statement of operations is approximately $110,000 and $17,000
advertising expense charged to operations for the years ended
December 31,2000 and 1999, respectively. Substantially all
incurred advertising expenses were paid with barter transactions.
M Reclassifications
-----------------
Certain amounts reported in prior financial statements have been
reclassified to conform to current classification.
See Independent Auditor's Report.
F-8
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
------- ------------------------------------------
N Restatements
------------
The Company has restated its previously issued financial
statements for the years ended December 31, 2000 and 1999 for the
following adjustments:
1. Recognition of impairment loss on the sale of Miami Property
$64,000.
2. Adjustment of beginning additional paid in Capital and
retained earnings deficit for expense account with options and
warrants issued in 1998, $284,175.
3. Adjustment of current earnings and additional paid in capital
for the cost of warrants issued, compensation expenses on
variable option plan and compensation received on repricing of
stock option $2,518,500.
Note 2. Property and Equipment
------ ----------------------
Property and Equipment are summarized as follows:
December 31, 1999 December 31, 2000
----------------- -----------------
Land & Building (See Note 10) $ 335,363 $ 335,363
Rental Equipment(See Note 10) 4,197,282 4,715,798
Leasehold Improvements 26,027 26,027
Furniture, Fixtures & Office
Equipment 141,914 185,327
Transportation Equipment 48,510 158,592
Total 4,749,096 5,421,107
Less: Accumulated Depreciation 976,301 853,099
----------- -----------
Property and Equipment - Net $ 3,772,795 $ 4,568,008
=========== ===========
The estimated useful lives of property and equipment, is as
follows:
Rental Equipment 5-7 years
Special Used Buildings 10 years
Commercial Buildings 30 years
Leasehold Improvements 7 years
Furniture, Fixtures and Office Equipment 5-7 years
Transportation Equipment 5 years
Included in Rental Equipment is approximately $3,000,000 of parts
and supplies purchased or obtained from other machines previously
disassembled for parts.
Rent expense for the years ended December 31, 2000 and 1999 were
$92,000 and $113,000, respectively.
The company leases the land and building it owns in Miami for
$1,200 per month, on a month to month basis (See Note 11).
See Independent Auditor's Report.
F-9
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 3. Note Receivable - Stockholder
------ -----------------------------
The company advanced $150,000 to one of the stockholders in 1993.
The stockholder repaid $21,000 during 1994, $4,000 during 1997,
$8,000 in 1998 and $2,000 in 1999. All interest charged through
December 31, 1999, has been paid by the stockholder. Interest was
being charged at a rate of prime plus 1% per annum. In August
2000, the note receivable was forgiven and additional compensation
due to the Estate of the shareholder was recorded.
Note 4. Warrants and Options
------ --------------------
As of December 31, 2000, the company has outstanding 1,725,000
five year publicly traded warrants that were issued as part of the
company's initial public offering to purchase one share of the
company's common stock at an exercise price of $3.00 by December
11, 2001. In December 2000 the board of directors authorized the
issuance of an additional 3,300,000 private five year stock
warrants to acquire common stock at $1.75 per share. The issuance
of the private warrants were part of the arrangement with the
executive officers of the corporation who also received restricted
stock aggregating 200,000 shares, compensation was recorded on the
arrangement equal to the market value of the restricted stock,
$350,000. The remaining warrants were issued for service and were
valued at $1,800,000 using the Black-Scholes option pricing model.
This amount has been recorded in the statement of operations.
Note 5. Investment Banker Warrants
------ --------------------------
Effective June 5, 1998, the company contracted with an investment
banker to provide on a non-exclusive basis to the company
assistance in possible mergers, acquisitions and internal capital
structuring. The duration of the contract is for five years. In
consideration for these services, Latin American Casinos, Inc.
granted warrants to purchase an aggregate of 225,000 shares of
common stock at the closing bid price of $1.875 as of June 5,
1998, which can be exercised through June 5, 2003. Effective
February 8, 2000, the Board of Directors reduced the exercise
price to $1.06, which was the closing price of the stock at that
date. These warrants vest and become irrevocable as follows:
75,000 warrants with signing of the agreement, 75,000 warrants 180
days after the signing of the agreement and an additional 75,000
warrants 365 days after the signing of the agreement. At the date
issuance and subsequent re-pricing date the warrant price equaled
or exceeded the market value of the corporate stock. The
incremental value of the re-priced warrants over the current value
of the warrants before the repricing was approximately $35,000,
using the fair values calculated with the Black-Scholes option
pricing model. This amount is recorded in the statement of
operations.
See Independent Auditor's Report.
F-10
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 6. Incentive Stock Option Plan
------ ---------------------------
On June 13, 1994, the Board of Directors adopted the 1994 Stock
Option Plan in which the aggregate number of shares for which
options may be granted under the Plan shall not exceed 1,000,000
shares. The term of each option shall not exceed ten years from
the date of granting (five years for options granted to employees
owning more than 10% of the outstanding shares of the voting stock
of the company). The 1991 plan became effective on September 30,
1991 and was terminated in March, 1999. The 1994 plan became
effective on June 13, 1994 and will terminate in June, 2004,
unless terminated earlier by action of the Board of Directors. In
December, 1995, the company authorized the issuance under the 1994
Stock Option Plan of 492,500 options at an exercise price of $2.50
per share to various officers and employees. On March 6, 1997 the
company authorized the issuance of an additional 415,000 options
at an exercise price of $2.50 to various officers and employees.
In June, 1999, the company increased the shares allocated to the
plan to 1,500,000.
Effective December 31, 1998, the company ratified the repricing of
the employee stock options to $1.00 per share and simultaneously
authorized the issuance of 85,000 options at an exercise price of
$1.00 per share and canceled 10,000 options issued in 1995 at
$2.50 per share. Effective February 2000 the company issued 35,000
options at an exercise price of $1.06 and in December 2000 the
company issued 80,000 options at a $1.75 exercise price.
Incentive Stock Options Outstanding
-----------------------------------
Amount Price Per Share
------ ---------------
Options Outstanding at January 1, 1999 and
2000 932,500 $1.00
Additional Options Issued 35,000 $1.06
Additional Options Issued 80,000 $1.75
Options Lapsed ( 85,000) $1.00
Options Exercised ( 725,000) $1.00
---------
Options Outstanding at December 31, 2000 237,500
=========
All outstanding warrants and non-qualified options are incentive
stock options were exercisable at December 31, 2000.
The following table shows the years in which all of the company's
options and warrants (as discussed in Notes 4, 5 and 6) will
expire:
Weighted
Range Average
-------------------- Number of Exercise
Year Ending December 31 Low High Shares Price
-------- -------- --------- --------
2001 $ 3.00 $ 3.00 1,725,000 $ 3.00
2002 1.00 1.00 172,500 1.00
2003 1.00 1.00 310,000 1.00
2004 - - - -
Thereafter 1.06 1.75 3,415,000 1.74
---------
Total 5,622,500
=========
See Independent Auditor's Report.
F-11
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Incentive Stock Options Outstanding (continued)
-----------------------------------
The weighted average fair value of options granted during fiscal
2000 was $1.07 per share. All options were granted at an exercise
price that equaled the market price.
The Company adopted the provisions so SFAS No. 123, Accounting for
Stock Based Compensation, effective for fiscal year 1997 for all
issuances of stock options to non-employees of the Company. The
Company will continue to apply APB Opinion No. 25 (Opinion 25),
Accounting for Stock Issued to Employees for all issuances stock
options to its employees. In June 1999, the Company adopted the
Financial Accounting Standards Board Interpretation Number 44,
which requires re-priced options be re-measured for expenses each
quarter based on the quarter end stock price. Expenses are also
re-measured upon exercise for the options. The Company recorded no
expenses and $491,900 of expenses as a result of the
aforementioned accounting in 1999 and 2000, respectively.
Had compensation cost for the Plan been determined based upon the
fair value at the grant date for options granted consistent with
the provision of SFAS 123, the Company's net loss and net loss per
share would have been reduced to the pro forma amounts indicated
below:
2000 1999
----------- ----------
Net income - as reported $(4,699,323) $(506,292)
Net income - pro forma $(6,429,924) $(506,292)
Loss per share - as reported:
Basic and Diluted $ (1.40) $ (.46)
Loss per share - pro forma:
Basic and Diluted $ (1.90) $ (.46)
The fair value of each option grant under the Plan is estimated on
the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
2000
------
Risk - free interest $ 5.80%
Expected life 5 years
Expected volatility 68.19%
Expected dividend -
Note 7. Debentures
------ ----------
In December 2000, the company, through a private placement issued
$3,500,000 principle amount of 6% Convertible Debentures. These
debentures were due June 13, 2001 which had been subsequently
extended to December 13, 2001 and are Convertible into common
stock at an exercise price of $1.75 per share. The company
incurred approximately $64,500 of costs in regard to this private
placement. The debt issuance costs will be amortized over the life
of the debentures. The interest on the debentures is payable
either in cash or in additional shares of common stock, at the
discretion of the company. The conversion price of the debentures
was determined by the approximate market value of the common stock
at the date of issuance.
See Independent Auditor's Report.
F-12
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 8. Provision of Income Taxes
------ -------------------------
As of December 31, 2000 the company had available for income tax
purposes unused net operating loss carry forwards which may
provide future tax benefits of $3,783,000 expiring in the year
2015. No valuation allowance has been provided for unremitted
foreign profits. No provision had been provided for deferred taxes
in the accompanying financial statements. The current provision
for taxes, if any, are based on tax provision based for foreign
operations.
Note 9. Commitments and Contingencies
------ -----------------------------
A Litigation
----------
The company is a defendant from time to time on claims and
lawsuits arising out of the normal course of its business, none of
which are expected to have a material adverse effect on its
business, operations, financial position or corporate liquidity.
B Employment Agreements
---------------------
In January 1997, the company entered into a five year employment
agreement with Lloyd Lyons which provided for an annual salary
commencing January, 1997 of $275,000 and increasing at $25,000 per
annum commencing January 1, 1998. The 1999 increase had been
waived. The agreement provided for an adjustment in salary to
reflect increases, but not decreases, in the consumer price index.
The agreement further provided that in the event of either a
merger, consolidation, sale or conveyance of substantially all the
assets of the company which results in the discharge of Mr. Lyons,
he would be entitled to 200% of the balance of payments remaining
under the contract. Further, the agreement provided that an annual
bonus shall be at the discretion of the Board of Directors. The
contract provided the salary continuation for a period of two
years after the death of the officer. In January 2000, Mr. Lyons
passed away and effective August 2, 2000 the company amended its
employment contract with the surviving widow and primary
beneficiary of the Estate of Lloyd Lyons, where-in the salary
continuation clause included in his contract was replaced with a
severance arrangement which requires the company to pay the spouse
$100,000 over a one year period commencing on the first month
following her termination, from her employment with the company
and upon her termination she is to receive 100,000 shares of
common stock pursuant to an amendment to her employment agreement.
The amended employment agreement will obligate the company to
register these shares and reimburse her for the difference in the
gross proceeds upon the sale of such shares and $300,000,
regardless of the time she holds such shares. Upon termination of
the employee contract the company will record additional
compensation at the greater of the market price of the company
stock or the guaranteed price stipulated in the contract. The
agreement further provides that the spouse remain in the
employment of the company for at least 4 months following the
amendment of the contract. The contract revisions further provided
that the officer loan of $115,000 be recorded as additional
compensation as required by the officer compensation agreement,
the employment agreement with the spouse remains intact in all
other regards and obligates the company to provide an annual
compensation at the rate of $46,800 per anum in the year 2000 and
$51,480 in the subsequent year.
See Independent Auditor's Report.
F-13
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 9. Commitments and Contingencies (Continued)
------ -----------------------------
In January 2000 the company entered into two additional employment
contracts, both for the duration of two years and provides that
company be obligated for an aggregate compensation of $115,000 in
year 2000 and $126,500 in year 2001. Effective August 2, 2000 both
of these employment contracts were amended to reflect upon
termination from employment these individuals will be entitled to
nine months of compensation and will receive in the aggregate
35,000 shares of common stock which the company has agreed to
reimburse the respective employees the difference between the
gross proceeds they receive upon sale and $105,000, regardless of
the term the employees hold such shares. Upon termination of the
employee contract the company will record additional compensation
at the greater of the market price of the company stock or the
guaranteed price stipulated in the contract.
The company entered into two additional one-year employment
agreements with the Chief Operating Officer and the Chief
Executive Officer requiring the company issue 100,000 shares of
stock individually and 750,000 warrants to purchase additional
common stock at $1.75 per shares, individually (see notes 4 & 12).
The issuance of the private warrants were part of the arrangement
with the executive officers of the corporation who also received
restricted stock aggregating 200,000 shares. Compensation was
recorded on the arrangement equal to the market value of the
restricted stock, $350,000.
C Foreign Assets
--------------
The accompanying consolidated balance sheets for the period ended
December 31, 2000, includes assets relating to the company's slot
machine operations in Peru and Colombia of $3,537,000 and
$1,281,000 respectively. Although these countries are considered
politically and economically stable, it is possible that
unanticipated events in foreign countries could disrupt the
company's operations. In that regard, the company was informed
that in Peru an excise tax has been instituted effective October
1, 1996, on the leases of gaming equipment. The company with
others in the industry negotiated with the appropriate
governmental agencies and have had the excise tax significantly
curtailed. In addition, a significant portion of the company's
inventory in cigars is being stored in South America awaiting
instructions to deliver them to the Miami location. Revenue from
rental operations is entirely earned in Colombia and Peru. In
October, 1998, Nicaragua suffered the effects of hurricane "Mitch"
and ceased operations in Nicaragua. In the year 2000 the company
had decided to liquidate all remaining assets in Nicaragua and
included in operating expense is $75,000 as compensation the fair
value of the assets retained by an employee of the Nicaraguan
subsidiary. The compensation is included as part of the selling
general and administrative expenses in the accompanying report. In
addition, $87,000 of asset impairment costs were recorded for the
physical deterioration and theft of other assets in Nicaragua.
See Independent Auditor's Report.
F-14
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 9. Commitments and Contingencies (Continued)
------ -----------------------------
D Lease Commitment
----------------
The company's Miami office is obligated for a three year lease for
its premises, which expires in September, 2001 and requires
monthly rent of $2,500. In addition, the company is obligated for
a two year lease for warehouse space at a monthly rent of $1,400.
Future minimum payments required as of December 31, 2000 on all
non-cancelable leases in effect that are one year in duration or
longer, are as follows:
Total Miami Faculty Warehouse Faculty
----- ------------- -----------------
Year 2001 $39,300 $ 22,50 $ 16,800
Year 2002 16,800 - 16,800
------- -------- --------
Total $56,100 $ 22,500 $ 33,600
======= ========= =========
All other leases are less than 12 month in duration or are on a
month to month basis.
Note 10 Sublease Agreement and Financing Arrangement
------- --------------------------------------------
In 1994, the company had subleased the used car and truck lot and
a portion of the office space in Miami, Florida to an unrelated
party for the operation of a used car business. The company was
owed $114,460. The outstanding balance was collateralized by
inventory, equipment, accounts receivable and was personally
guaranteed by the sub lessee's stockholder. As of May 1, 1995, the
sub lessee abandoned the property without notice. Management has
concluded its attempt at recovering the amounts due under the
financing arrangement. The receivable that had been shown as a
long-term and was substantially reserved for non-collection. In
year 2000 after all legal remedies were exhausted the account and
related reserves were removed from the books and records.
Note 11 Impairment Charges
------- ------------------
In the fourth quarter of 1999, as a result of the death of both
its founder and its Chief Financial Officer, the company initiated
a review of the company's operation on a country by country basis.
As a result of political changes and government mandated
obsolescence of certain gaming equipment, the company adjusted
previously recorded cost of gaming equipment to its anticipated
net realizable value. Additionally, the company reduced the
valuation of certain real estate value in Miami to reflect current
market conditions and adjusted its investment in the cigar
operations to account for the slower than expected sales. The
total impairment cost were computed as follows.
1999 2000
----------- --------
Gaming Equipment Asset Impairment Charge $ 1,245,000 $ 64,000
Miami Real Estate Impairment Charge 86,000 -
Reduction of Cigar Investment 169,000 -
Other 15,000 -
----------- --------
Total $ 1,515,000 $ 64,000
=========== ========
See Independent Auditor's Report.
F-15
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 11 Impairment Charges(Continued)
------- ------------------
The gaming equipment impairment cost in 1999 was based on
valuation of obsolescence and replacement values made by
management. Consideration in the valuation was the decrease in
utilization of the gaming equipment due to decreased volume of
operations. The impairment value of the Miami Real Estate was
based on an independent appraisal received and subsequent sale of
the property as further described in Note 13. The impairment cost
of the cigar inventory cost was the result of certain packaging
and tube cost that had been abandoned.
Note 12 Quarterly Interim Financial Information (Unaudited)
------- ----------------------------------------
The company recorded the following expenses in the last quarter of
the year which unduly burdened the loss incurred during that
quarter.
o Expense Associated With Options And
Warrants $2,518,500
o Compensation for Stock Issued $ 350,000
o Liquidation and Incremental Cost
incurred in Nicaragua (Note 9) 162,000
o Impairment Charge 64,000
----------
$3,094,500
Note 13 Subsequent Event
------- ----------------
In February, 2001 the company announced that it had entered into a
non binding letter of intent to merge with Digital Convergence
Corporation, a privately held California company. Digital
Convergence is a provider of E-business software products and
consulting services. The letter of intent contemplates a tax free
exchange of stock and is subject to definitive negotiated merger
agreement which has not been completed. Upon the completion of the
merger it is anticipated that the current operations of Latin
America Casinos, Inc., will be reviewed to determine the future
course of the company. The company has deferred $37,500 cost
incurred in connection with this merger and included such cost as
part of the other assets. It is contemplated that if the merger is
consummated the acquisition will be recorded as a "purchase" and
the deferred cost will be allocated to the purchase price of the
acquired assets.
In January, 2001 the company entered into a contract to sell its
Miami property for a total consideration of $145,000 and record in
year 2000 an asset impairment loss of $64,000.
See Independent Auditor's Report.
F-16
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
Note 14 Operating Segments
------- ------------------
For The Year Ended December 31, 2000
---------------------------------------------------------------------------
Cigar Gaming
Total Operations Equipment Unallocated
----- ---------- --------- -----------
Revenues $ 833,537 $ 163,886 $ 669,651 $ 0
-------- ------------ ------------ ------------ ------------
Cost & Expenses
---------------
Cost of Product Sold 119,183 119,183 0 0
Direct Overhead Cost 1,154,226 166,080 988,146 0
Expenses Associated
With Options
Warrants 2,518,500 -- -- 2,518,500
Allocated Overhead
Cost 1,440,973 283,317 1,157,656 0
Depreciation 268,462 11,364 250,385 6,713
Asset Impairment Cost 64,000 0 0 64,000
------------ ------------ ------------ ------------
Total Cost and Expenses 5,565,344 579,944 2,396,187 2,589,213
----------------------- ------------ ------------ ------------ ------------
Operating Income (Loss) ($ 4,731,807) ($ 416,058) ($ 1,726,536) ($ 2,589,213)
---------------------- ------------ ------------ ------------ ------------
Total Assets $ 10,248,000 $ 692,000 $ 4,753,000 $ 4,803,000
------------ ============ ============ ============ ============
The company allocates indirect overhead expenses to specific
segments in proportion to the revenues earned by the segment.
For The Year Ended December 31, 2000
---------------------------------------------------------------------------
Cigar Gaming
Total Operations Equipment Unallocated
----- ---------- --------- -----------
Revenues $ 1,879,071 $ 28,009 $ 1,851,062 $ -
-------- ------------ ------------ ------------ ------------
Cost & Expenses
---------------
Cost of Product Sold 22,407 22,407 - -
Direct Overhead Cost 1,018,671 106,560 912,111 -
Allocated Overhead
Cost 753,092 11,225 741,867 -
Depreciation 197,187 10,461 172,726 14,000
Asset Impairment Cost 1,515,000 169,000 1,245,000 101,000
------------ ------------ ------------ ------------
Total Cost and Expenses 3,506,367 319,653 3,071,704 115,000
----------------------- ------------ ------------ ------------ ------------
Operating Income (Loss) ($ 1,627,286) ($ 291,644) ($ 1,220,642) ($ 115,000)
---------------------- ============ ============ ============ ============
Total Assets $ 8,064,000 $ 797,000 $ 6,601,000 $ 666,000
------------ ============ ============ ============ ============
The company allocates indirect overhead expenses to specific segments in
proportion to the revenues earned by the segment. All revenue from gaming
equipment and the related assets are in South America where as all revenue and a
majority of the assets of the cigar operations are in the United States.
See Independent Auditor's Report.
F-17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, NuWay Energy, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NUWAY ENERGY, INC.
By: /s/ Todd Sanders
-------------------------------------
Todd Sanders, President
Date: March 19, 2002
------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
NuWay Energy, Inc., and in the capacities and on the 19th day of March, 2002.
/s/ TODD SANDERS
-----------------------------------------
Todd Sanders, President, Chief Executive
Officer, Director
/s/ WILLIAM BOSSUNG
-----------------------------------------
William Bossung, Secretary, Chief
Operating Officer, Director
/s/ JOE TAWIL
-----------------------------------------
Joe Tawil, Acting Chief Financial
and Accounting Officer
/s/ JOSE A. CABALLERO
-----------------------------------------
Jose A. Caballero, Director
/s/ DENNIS R. BARRY
-----------------------------------------
Dennis R. Barry, Director
/s/ MICHAEL ISCOVE
-----------------------------------------
Michael Iscove, Director