-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DKLqIvyNTJQh+ZQ0+Fi1RHvS6qR1Es8WA7bHBNSE4p7diy4OMbmlxsiz7y/D4+79 Y9UvpGtemz9xUlqV+6XfDg== 0001144204-03-003292.txt : 20030624 0001144204-03-003292.hdr.sgml : 20030624 20030623201933 ACCESSION NUMBER: 0001144204-03-003292 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030624 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUWAY MEDICAL INC CENTRAL INDEX KEY: 0000880242 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 650159115 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19709 FILM NUMBER: 03754079 BUSINESS ADDRESS: STREET 1: 23461 SOUTH POINTE DRIVE STREET 2: SUITE 200 CITY: LUGANA, HILLS STATE: CA ZIP: 92653 BUSINESS PHONE: 949-454-9011 MAIL ADDRESS: STREET 1: 23461 SOUTH POINTE DRIVE STREET 2: SUITE 200 CITY: LUGANA, HILLS STATE: CA ZIP: 92653 FORMER COMPANY: FORMER CONFORMED NAME: NUWAY ENERGY INC DATE OF NAME CHANGE: 20010815 FORMER COMPANY: FORMER CONFORMED NAME: LATIN AMERICAN CASINOS INC DATE OF NAME CHANGE: 19960520 FORMER COMPANY: FORMER CONFORMED NAME: REPOSSESSION AUCTION INC DATE OF NAME CHANGE: 19940823 10QSB 1 nuway_10qsb.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________. Commission File Number 33-43423 NUWAY MEDICAL, INC. ------------------- (exact name of small business issuer as specified in its charter) Delaware 65-0159115 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 23461 South Pointe Drive, Suite 200 Laguna Hills, California 92653 ------------------------------------------------------------------ (Address of principal executive offices) (949) 454-9011 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares outstanding of each of the issuer's classes of common equity, as of June 23, 2003: 30,791,911 shares of common stock, $0.00067 par value per share. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements (unaudited) 3 Consolidated Balance Sheets - as of March 31, 2003 and December 31, 2002 3 Consolidated Statements of Operations - for the Three Months Ended March 31, 2003 and March 31, 2002 4 Consolidated Statements of Cash Flows - for the Three Months Ended March 31, 2003 and March 31, 2002 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis 17 Item 3. Controls and Procedures 23 PART II. OTHER INFORMATION Item 2. Changes in Securities 23 Item 3. Defaults Upon Senior Securities 24 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 27 Certifications 28
2 NUWAY MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
ASSETS ------ March 31, December 31, 2003 2002 (unaudited) ------------ ------------ CURRENT ASSETS Cash and Cash Equivalents $ 6,713 $ 521 Accounts Receivable 29,665 -- ------------ ------------ Total Current Assets 36,378 521 ------------ ------------ PROPERTY AND EQUIPMENT - NET 26,706 28,844 ------------ ------------ OTHER ASSETS Marketing Database, net 242,250 255,000 Med Wireless License, net 3,885,500 4,090,000 ------------ ------------ Total Other Assets 4,127,750 4,345,000 ------------ ------------ TOTAL ASSETS $ 4,190,834 $ 4,374,365 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable and Accrued Expenses $ 598,672 $ 1,131,579 Note Payable 1,120,000 1,120,000 Debentures Payable, net 150,000 150,000 ------------ ------------ Total Current Liabilities 1,868,672 2,401,579 ------------ ------------ COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENTS (Notes 9, 10 and 11) STOCKHOLDERS' EQUITY Preferred Stock, $.00067 Par Value, 25,000,000 Shares Authorized, 338,022 and No Shares Issued and Outstanding at March 31, 2003 and December 31, 2002, respectively 226 -- Common Stock, $.00067 Par Value, 100,000,000 Shares Authorized, 28,498,646 and 17,137,727 Shares Issued and Outstanding at March 31, 2003 and December 31, 2002, respectively 19,095 11,483 Additional Paid-In Capital 21,939,916 20,289,936 Retained Earnings (Deficit) (19,510,071) (18,201,629) Treasury Stock at cost, 44,900 shares as of March 31, 2003 and December 31, 2002 (127,004) (127,004) ------------ ------------ Total Stockholders' Equity 2,322,162 1,972,786 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,190,834 $ 4,374,365 ============ ============
3 NUWAY MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002
Three Months Ended March 31, --------------------------------- 2003 2002 ------------ ------------ (unaudited) (unaudited) Sales License of Software $ 34,665 $ -- ------------ ------------ Total Sales 34,665 -- ------------ ------------ Costs and Expenses Selling, General and Administration 1,088,637 618,246 Depreciation, Depletion and Amortization 219,388 2,600 Cancellation of Stock Warrants Previously Expensed -- (1,659,750) ------------ ------------ Total Costs and Expenses 1,308,025 (1,038,904) ------------ ------------ Operating (Loss) Income (1,273,360) 1,038,904 ------------ ------------ Other Income (Expenses) Interest Income -- 6,079 Interest Expense (35,082) -- ------------ ------------ Net Other Income (Expenses) (35,082) 6,079 ------------ ------------ (Loss) Income Before Income Taxes (1,308,442) 1,044,983 Income Taxes (Provision) Benefit -- -- ------------ ------------ Net (Loss) Income from Continuing Operations (1,308,442) 1,044,983 ------------ ------------ Discontinued Operations (Note 2) -- (33,020) ------------ ------------ Net (Loss) Income $ (1,308,442) $ 1,011,963 ============ ============ (Loss) Earnings Per Common Share and Common Share $ (1,308,442) $ 1,011,963 Equivalents Basic and Fully Diluted Common Share Equivalents Outstanding 21,013,109 5,407,502 ============ ============ Net (Loss) Income Per Share $ (0.06) $ 0.19 ============ ============
4 NUWAY MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (unaudited)
Three Months Ended March 31, 2003 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) Income $(1,308,442) $ 1,011,963 Adjustments to Reconcile Net (Loss) Income to Cash Used in Operating Activities: Depreciation, Depletion and Amortization 219,388 2,600 Issuance of Stock for Services and Interest 1,488,807 423,000 Cash Used in Discontinued Operations -- 329,066 Cancellation of Prior Year Warrant Compensation -- (1,659,750) Increase in Accounts Receivable (29,665) -- Increase in Prepaid Expenses and Other Current Assets -- (5,500) Decrease in Accounts Payable and Accrued Expenses (532,907) (109,531) Net Cash Used in Operating Activities -- -- (162,819) (8,152) CASH FLOWS FROM INVESTING ACTIVITIES Cash Used in Discontinued Operations -- (65,168) Increase in Other Assets -- (18,400) ----------- ----------- Net Cash Used in Investing Activities -- (83,568) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of Convertible Debentures -- (50,000) Proceeds from the Sale of Preferred Stock 169,011 -- ----------- ----------- Net Cash Provided by (Used in) Financing Activities 169,011 (50,000) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,192 (141,720) CASH AND CASH EQUIVALENTS - BEGINNING 521 244,344 ----------- ----------- CASH AND CASH EQUIVALENTS - ENDING $ 6,713 $ 102,624 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Period for: Interest $ -- $ -- =========== =========== Income Taxes $ -- $ -- =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSACTIONS Conversion of Debentures $ -- $ 2,050,000 =========== ===========
5 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION a) Principles of Consolidation and Basis of Presentation In the opinion of the management of NuWay Medical, Inc., the accompanying unaudited consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly the consolidated financial position as of March 31, 2003 and 2002; the consolidated results of operations for the three months ended March 31, 2003 and 2002; and the consolidated statements of cash flows for the three months ended March 31, 2003 and 2002. Interim results for the three months ended March 31, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2002 included in the Company's Form 10-KSB, filed in May 2003. The consolidated balance sheets at March 31, 2003 and December 31, 2002 include the accounts of NuWay Medical, Inc. and its joint venture subsidiary, NuWay Sports, LLC ("NuWay Sports") (collectively referred to as the "Company"). NuWay Medical, Inc. owns 51% of NuWay Sports and the remaining 49% is owned by Rasheed & Associates. Operations for NuWay Sports commenced in January 2003. NuWay Medical, Inc. has significant influence on the business operations of NuWay Sports and operations are consolidated. As there is no equity in NuWay Sports, 100% of this entity is absorbed by NuWay Medical. All significant inter-company balances have been eliminated in consolidation. b) Management's Plan The Company had approximately $6,700 of cash on hand at March 31, 2003. On June 13, 2003, the Company received the first installment ($250,000) of a total loan commitment of $420,000 as described in Note 11 below. Notwithstanding this financing, the Company will still need to raise additional capital to sustain operations and implement its growth strategy until such time, if ever, that the Company achieves profitability. As of the date of this filing, the Company was not a party to any agreements to provide such financing. Although the Company is in the process of actively reviewing additional proposals made by private investors and investment bankers, there can be no assurance that the Company will be able to consummate any such transactions on terms satisfactory to the Company, or at all, or if consummated, that such financings will provide the Company with sufficient capital. If the Company is unable to secure additional financing within the next 120 days it would need to significantly curtail and perhaps shut down its operations. It is unlikely that the Company will be able to qualify for bank debt until such time as the Company is able to demonstrate sufficient financial strength to provide confidence for a lender. The Company's shares were delisted effective as of June 10, 2003 from trading on the Nasdaq SmallCap Market. The shares are currently quoted on the pink sheets. Promptly following the filing of this Form 10-QSB with the SEC, the Company expects that its market makers will make application for quotation of the Company's shares on the Over-the-Counter Bulletin Board, although there can be no assurance that these applications will 6 be accepted and the Company will be cleared to trade on the Bulletin Board in light of the public interest concerns raised by Nasdaq in connection with the delisting of the Company's shares. This Nasdaq delisting will make it more difficult to effect trades and is expected to lead to a significant decline in the frequency of trades and trading volume. The delisting will likely adversely affect the Company's ability to obtain financing in the future due to the decreased liquidity of the Company's shares. The Company has not yet determined what impact, if any, that the delisting will have on the proposals from private investors referred to above. Although the primary development of the PRLS system has been completed, management plans on periodically upgrading its PRLS software application through additional research and development, including tailoring its application to the specific needs of its clients as those needs are brought to the Company's attention. The Company may be unable to accomplish the foregoing on a long term basis, however, unless and until the additional financing referred to above is secured. Based on its current business plan, and assuming sufficient financing is obtained, management believes it will be able to generate meaningful sales of its PRLS software application and that it may be able to secure sales or license agreements as early as the third quarter of 2003. The Company's PRLS was introduced by the Company to the marketplace in January 2003 and generated a total of approximately $35,000 in gross revenues during the first quarter of 2003 through the sale of a scaled down version of the product to 18 NFL teams at the 2003 NFL Combine. Pursuant to this transaction, the Company digitized over 60,000 medical images for use by 18 NFL teams in their evaluation of potential draft picks. Management believes that it is already being referred by its customers and prospects as the best of brand for its sports industry focus. The Company is marketing the PRLS to multiple sports leagues and is actively seeking additional vertical market opportunities. There can be no assurance, however, that the Company will be able to secure any further agreements for its product, that such agreements will ever generate meaningful revenue for the Company, or that the Company will be able to successfully capture any such vertical market opportunities. Ultimately, the Company's ability to continue as a going concern is dependent upon its ability to establish and grow a revenue stream, attain a reasonable threshold of operating efficiencies, achieve profitable operations and attract new sources of capital. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. c) Property and Equipment Property and Equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of the respective asset. Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized. When items of property or equipment are sold or retired the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations. 7 d) Impairment of Long-Lived Assets The Company periodically reviews its long-lived assets for potential impairment as required by Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which supercedes previous guidance. As discussed in Note 2, the Company discontinued several operations during the year ended December 31, 2002. e) Revenue Recognition The Company recognizes revenue from its new medical technology business in accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." For hardware sales, revenue would be recognized upon shipment to customers. To date, no such sales have been made. Revenue from the licensing of software products is recognized when a contract is executed (when applicable), all delivery obligations have been met, the fee is fixed or determinable, and collectability is probable. When licenses are sold together with services, in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), license fees are recognized upon delivery, provided that (1) the above criteria have been met, (2) payment of the license fees is not dependent upon the performance of the services, (3) the services do not include significant modifications to the features and functionality of the software, and (4) the services are not essential to the functionality of the software. If revenue is received from software maintenance agreements, it will be recognized ratably over the term of the agreement, as will annual software maintenance charges and upgrade fees be recognized ratably over the period covered. To date, no such revenue has been received by the Company. f) Earnings (Loss) Per Share The Company reports basic and diluted earnings per share (EPS) for common and common share equivalents. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by dividing reported earnings by the weighted average shares outstanding adjusted for all potentially dilutive shares, which include shares issuable upon the exercise of outstanding stock options, warrants and convertible preferred stock using the "if-converted" method. For the three months ended March 31, 2003, the denominator in the diluted EPS computation was the same as the denominator for basic EPS computation due to the antidilutive effect of the warrants and stock options on the Company's net loss. For the comparable quarter in 2002, an additional 186,502 equivalent shares were added for the effect of dilutive shares. 8 For the three months ended March 31, 2003 and March 31, 2002, the computation of basic EPS was as follows:
Three Months Three Months Ended Ended March 31, 2003 March 31, 2002 -------------- -------------- Basic EPS: - ---------- Numerator - Net (Loss) Income from Continuing Operations $ (1,308,442) $ 1,044,983 Denominator - Weighted average shares outstanding 21,013,109 5,407,502 ------------ ------------ (Loss) Income per Share $ (0.06) $ 0.19 ------------ ------------ Numerator - Net (Loss) Income from Discontinued Operations $ -- $ (33,020) Denominator - Weighted average shares outstanding -- 5,407,502 ------------ ------------ (Loss) Income per Share $ -- $ (0.01) ------------ ------------ Numerator - Net (Loss) Income $ (1,308,442) $ 1,011,963 Denominator - Weighted average shares outstanding $ 21,013,109 5,407,502 ------------ ------------ (Loss) Income per Share $ (0.06) $ 0.19 ------------ ------------ Diluted EPS: - ------------ Numerator - Net (Loss) Income from Continuing Operations $ (1,308,442) $ 1,044,983 Denominator - Weighted average shares outstanding 21,013,109 5,594,004 ------------ ------------ (Loss) Income per Share $ (0.06) $ 0.19 ------------ ------------ Numerator - Net (Loss) Income from Discontinued Operations $ -- $ (33,020) Denominator - Weighted average shares outstanding -- 5,594,004 ------------ ------------ (Loss) Income per Share $ -- $ (0.01) ------------ ------------ Numerator - Net (Loss) Income $ (1,308,442) $ 1,011,963 Denominator - Weighted average shares outstanding $ 21,013,109 5,594,004 ------------ ------------ (Loss) Income per share $ (0.06) $ 0.18 ------------ ------------
g) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could differ from those estimates. Estimates are used when accounting for stock-based transactions, uncollectable accounts receivable, asset impairment, depreciation and amortization, and taxes, among others. 9 h) Stock Options and Warrants Issued for Services As permitted under the Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," the Company accounts for its stock-based compensation to employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company provides the pro forma net earnings, pro forma earnings per share, and stock-based compensation plan disclosure requirements set forth in SFAS No. 123. Had compensation cost for options issued under the 1994 Stock Option Plan, as described more fully in Note 6, been determined based upon 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:
Three Months Ended March 31, 2003 2002 ------------------ ---------------- Net (Loss) Income - as reported $ (1,308,442) $ 1,011,963 Deduct: stock based employee compensation expenses determined under fair value based method - - ------------------ ---------------- Net (Loss) Income - pro forma $ (1,308,442) $ 1,011,963 ================== ================ Loss per share - as reported Basic $ (0.06) $ 0.19 ================== ================ Diluted $ (0.06) $ 0.18 ================== ================ Loss per share - pro forma Basic $ (0.06) $ 0.19 ================== ================ Diluted $ (0.06) $ 0.18 ================== ================
For stock issued to consultants and other non-employees for services, the Company records the expense based on the fair market value of the securities as of the date of stock issuance or agreement for such services. i) Reclassifications Certain amounts in the accompanying 2002 financial statements have been reclassified to conform to 2003 presentation, primarily those items having to do with discontinued operations. (See Note 2) NOTE 2. DISCONTINUED OPERATIONS Effective October 1, 2002, the Company sold its oil and gas operations, namely the stock of NuWay Resources Ltd., to Summit Oil and Gas, Inc. The purchase price for the stock was $100,000 less all outstanding liabilities of NuWay Resources, Ltd. As the offsetting liabilities exceeded the purchase price, the Company received no funds. The Company recorded a loss from these operations through September 30, 2002 of $68,650 and a loss of $1,290,948 on disposal. Effective October 1, 2002, the Company sold the stock of its wholly owned casino rental subsidiaries (Latin American Casinos del Peru S.A., and Latin American Casinos of Colombia, LTDA) to Casino 10 Venture Partners, a Nevada partnership. The purchase price for the stock was $300,000 less all outstanding liabilities of the two subsidiaries. As the offsetting liabilities exceeded the purchase price, the Company received no funds. The Company recorded a loss from these operations through September 30, 2002 of $147,247 and a loss of $1,376,733 on disposal. The Company discontinued the operations of World's Best Rated Cigar Company on October 1, 2002 by donating any remaining inventory and terminating all outstanding warehouse lease agreements without penalty. A loss of $385,089 was incurred from these operations until the point of disposal and a loss of $179,750 was recorded upon disposal of the net assets. The results of operations of the Company's oil and gas, casino, and cigar distribution operations have been shown as discontinued operations as follows: Three Months Ended March 31, 2002 ------------------- Revenues $ 260,255 Operating Expenses 294,443 ------------------- Loss from discontinued operations $ (33,020) =================== NOTE 3. PROPERTY AND EQUIPMENT Property and Equipment are summarized as follows:
March 31, December 31, 2003 2002 ------- ------- Furniture, Fixtures & Office Equipment $42,753 $42,753 Less: Accumulated Depreciation 16,047 13,909 ------- ------- Property and Equipment, net $26,706 $28,844 ======= =======
Furniture, fixtures and office equipment are carried at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which is estimated to be five years. NOTE 4. INTANGIBLE ASSETS The Company had the following Intangible Assets at March 31, 2003: a marketing database purchased from Genesis Health Tech, Inc. on June 28, 2002 and certain software technology licensed from Med Wireless, Inc. on August 21, 2002. The database is a comprehensive listing of healthcare providers in the U.S. and represents what the Company believes to be a valuable tool for phone, mail and direct marketing activities related to the Company's new medical technology products. The technology licensed from Med Wireless relates to the movement of medical images and data over the Internet and via handheld wireless devices and is critical to the Company's new Player Record Library System ("PRLS") product as well as potential future products. No amortization was recorded for these intangible assets in 2002 as the Company did not begin to utilize the database nor generate sales of products derived from this technology until 2003. During the first quarter of 2003, the Company began to amortize both assets on a straight-line basis over estimated five year useful lives and a total of $217,250 in amortization expense was recorded for the three month period. 11 In Note 5 to the Company's audited financial statements for the year ended December 31, 2002 appearing in the Company's Form 10-KSB filed May 23, 2003, the Company disclosed the fact that the value of the database was discounted and the discount in the Med Wireless license was increased after discussions with "valuation experts" and the Company's accountants. To clarify this disclosure, it is noted that the discussions with the valuation experts were conducted by the Company's accountants in the course of their audit, and not by the Company, and that these experts did not evaluate or otherwise pass upon the value of the Company's assets (nor has the Company at any time had such an evaluation from a third party expert). NOTE 5. STOCK, STOCK OPTIONS AND WARRANTS During the first quarter of 2003, the Company issued a total of 11,360,919 shares of its common stock for services performed during 2002 and 2003. Expenses totaling $645,648 for 2,633,590 shares issued in January 2003 were accrued in the financial statements for the year ended December 31, 2002. Expenses aggregating $843,000 relating to the balance of the shares issued in the first quarter (8,727,329 shares) were recorded in the three months ended March 31, 2003. Of this first quarter amount, approximately $548,000 represents consulting expense, $259,000 represents legal expenses, and the balance of $36,000 represents compensation, advisory board, and board of director expenses. The Company had the following outstanding convertible securities at March 31, 2003: (a) stock options issued under the 1994 Stock Option Plan to purchase up to 65,000 shares of the Company's common stock (see Note 6); (b) five-year warrants to acquire up to 300,000 shares of common stock at an exercise price of $1.75 per share; (c) a warrant to purchase up to 100,000 shares of common stock at an exercise price of $0.30 per share exercisable through February 23, 2004, issued in 2002 to a former executive of the Company; (d) warrants to purchase up to 225,000 shares of common stock at an exercise price of $1.06, exercisable through June 5, 2003, issued in 1998 to an investment banker who provided services to the Company; and (e) warrants to purchase up to 338,022 shares of common stock at an exercise price of $.20 per share, exercisable for a period of three years, issued in conjunction with the Company's sale of 338,022 shares of Convertible Preferred Stock during the first quarter of 2003, and which are not convertible until six months from the date of issuance (Note 9). At March 31, 2003, the Company also had outstanding 1,725,000 publicly traded warrants (NMEDW) to purchase the Company's common stock at an exercise price of $3.00 per share. The expiration date of these warrants was extended by the Company to December 11, 2003. NOTE 6. INCENTIVE STOCK OPTION PLAN On June 13, 1994, the Company adopted the 1994 Stock Option Plan providing for the issuance of options to purchase up to 1,000,000 shares of the Company's common stock. The term of each option may not exceed ten years from the date of grant (five years for options granted to employees owning more than 10 percent of the outstanding shares of the voting stock of the Company). The 1994 Plan will terminate in June 2004, unless terminated earlier by action of the board of directors. In June 1999, the Company increased the shares allocated under the plan to 1,500,000. 12 At March 31, 2003 and December 31, 2002, the Company had options outstanding and exercisable as follows:
Number of Shares Price Per Share ------------------ ---------------------- Options Outstanding at December 31, 2002 65,000 $ 1.00 - $1.75 Options Issued - Options Expired - Options Exercised - ------------------ ---------------------- Options Outstanding at March 31, 2003 65,000 $ 1.00 - $1.75 ================== ======================
All outstanding stock options were fully exercisable at March 31, 2003. NOTE 7. NOTE PAYABLE In conjunction with the acquisition of the technology license from Med Wireless, Inc. on August 21, 2002, the Company assumed a $1,120,000 note with interest at 10% per annum payable by Med Wireless to Summitt Ventures, Inc. The note is secured by the Company's assets and was originally due on June 15, 2003. On March 26, 2003, Summitt Ventures sold the note, together with 4,182,107 shares of the Company's common stock, to New Millennium Capital Partners LLC ("New Millennium"), a limited liability company controlled and owned in part by the Company's CEO and president, Dennis Calvert, in exchange for a $900,000 promissory note issued by New Millennium in favor of Summitt Ventures. This note is secured by all of the stock of the Company owned by New Millennium and Mr. Calvert. On March 26, 2003, the Company's board of directors voted to convert the $1,120,000 note held by New Millennium into 22,400,000 shares of restricted common stock of the Company (at a strike price discounted 37.5% to the then market price of $0.08). New Millennium agreed to this conversion. Subsequent to the vote by the board to convert the note, the Company received notification from Nasdaq's Listing Qualifications Department that converting the note without shareholder approval violated certain Nasdaq Marketplace Rules. In response to this notification, the board, with the concurrence of New Millennium, voted to amend its resolution and withhold issuance of the shares to New Millennium until the Company's shareholders approved the conversion. This shareholder vote has not taken place as of the filing of this report, and the shares have not been issued to New Millennium. The business purpose of the original decision to convert the note into equity was to retire $1,120,000 in debt owed by the Company thereby increasing shareholder equity by that amount and avoiding a default on the note and the insolvency and possible liquidation of the Company. In arriving at a conversion price, the board of directors determined that a 37.5% discount to market price was appropriate based on a number of factors, including that (i) with the quantity of the shares that would be issued, a block of shares that size could not be liquidated without affecting the market price of the shares, and (ii) the shares would be "restricted shares" and could therefore not be sold by New Millennium (an affiliate of the Company) in the public markets prior to two years from the date of the conversion, and thereafter would be subject to the volume and manner of sale limitations of Rule 144 under the Securities Act of 1933. To allow time for a shareholder vote with respect to the conversion, New Millennium agreed to extend the terms of the note 90 days, from June 15, 2003 to September 15, 2003. 13 At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of New Millennium, and the Company, through the unanimous action of the Board (with Mr. Calvert abstaining), agreed that, in light of current market conditions (namely the significant increase in the trading price of the Company's common stock since March 26, 2003, the date on which the conversion of the note to equity was originally approved by the Board, from $0.08 to $0.28 as of June 6, 2003), it would be inequitable for New Millennium to convert the note at the originally agreed to $0.05 per share price. In this regard, Mr. Calvert, on behalf of New Millennium, and the Company orally agreed to rescind the agreement to convert the note. In addition, New Millennium orally agreed with the Company to extend the maturity date of the note to a first payment due October 1, 2003 in the amount of $100,000 and the balance of the principal due on April 1, 2004, with interest due according to the original terms of the note (to correspond to the payment terms of the note made by New Millennium in favor of Summitt), and furthermore to reduce the Company's obligation on the note to the extent that New Millennium is able to reduce its obligation on its note with Mr. Anderson. While the prior holder of the note, Summitt Ventures, purported to condition New Millennium's purchase on the conversion of the note, Mr. Calvert has represented to the Company that due to Mr. Anderson's actions he now believes that conversion of the note is no longer required. As a result of the elimination of the conversion feature of the note, the shareholders of the Company will not be asked to approve the conversion terms as was previously contemplated by the Company. NOTE 8. CONVERTIBLE DEBENTURES In December 2000, the Company, through a private placement, issued $3,500,000 principal amount of 6 percent Convertible Debentures to several investors. These debentures were originally due June 13, 2001 and their maturity date was subsequently extended to December 13, 2001. They are convertible into common stock at a price of $1.75 per share. The interest on the debentures is payable either in cash or shares of common stock, at the discretion of the Company. During 2001, $1,100,000 of the debentures plus accrued interest were converted into 666,283 shares of the Company's common stock. During 2002, $2,250,000 of the remaining debentures plus accrued interest were converted into 1,332,570 shares of common stock. In December 2002 the Company received a notice from the remaining two debenture holders requesting conversion of the remaining outstanding $150,000 of debentures. The notice provided that, as a condition to conversion, the certificates representing the shares issuable upon conversion of the debentures would need to be delivered to the holders prior to the end of 2002. Pursuant to the request, and to complete the conversion, the Company issued to the holders 96,006 shares of common stock. The actual certificates representing the shares, however, were not delivered to the holders until the first quarter of 2003. These holders refused acceptance of the shares, claiming that because the actual certificates representing the shares were not delivered in 2002 as specified in the conversion notice, the conversion was invalid and the debentures would therefore remaining outstanding and continue to accrue interest until repaid in full. These holders have now demanded full payment on their $150,000 of debentures (plus accrued interest). Although the Company's financial statements reflect the $150,000 of debentures as still being outstanding, the Company disputes the individuals' claim that the conversion was invalid and intends to vigorously defend against any action that might be brought by the debenture holders to collect thereon. NOTE 9. CONVERTIBLE PREFERRED STOCK During the first quarter of 2003, the Company entered into two Convertible Preferred Stock and Warrant Purchase Agreements whereby the Company sold an aggregate of 338,022 shares of a newly created series of Preferred Stock, Series A Convertible Preferred Stock, par value $.00067, for a total consideration of $169,011. Each share of the Series A Preferred Stock is convertible into one 14 share of the Company's common stock. In addition, each share of preferred sold entitles the purchaser to one warrant to purchase one share of common stock at a price of $0.20 per share. Using the Black-Scholes pricing model, the Company estimated the fair value of these warrants to be approximately $35,000, and such amount has been netted in additional paid in capital on the March 31, 2003 consolidated balance sheet. The Series A Preferred Stock may be converted by the holder at any time after six months from the purchase date and the warrant is exercisable for a period of three years from the purchase date. Pursuant to the two agreements executed in the first quarter 2003, the Company received an additional $110,650 from the sale of 221,300 additional shares of Series A Preferred Stock in April 2003. NOTE 10. COMMITMENTS AND CONTINGENCIES Litigation During 2002, Ms. Geraldine Lyons, the Company's former Chief Financial Officer, sued the Company for breach of her employment contract. The lawsuit is venued in the Circuit Court of the 11th Judicial Circuit in Miami-Date County in the State of Florida and was initiated by the filing of a complaint in June 2002. The principal parties in the case are Ms. Lyons, the Company, and the Company's former president Todd Sanders. Ms. Lyons alleges that $25,000 is due to her under her employment contract; that the contract requires the Company guarantee that she can sell for $300,000 the 100,000 shares of stock the Company is required to issue her; and, that Mr. Sanders promised to purchase from her for $4.00 per share 100,000 shares of stock held by her. The Company has counter-sued Ms. Lyons for breach of fiduciary duty, fraud, violation of section 12(a)(2) of the 1933 Securities Act, violation of section 517.301 of the Florida Statutes, negligent misrepresentation, conversion, and unjust enrichment resulting from the restatement of the Company's financial statements for the years ended December 31, 2000 and December 31, 1999 that the Company believes was required as a result of her activities. The restatements corrected the previous omission of certain material expenses related primarily to compensation expense arising from warrants issued and repriced stock options, as well as other errors. The case is ongoing at this time. The Company intends to vigorously defend its actions and pursue its affirmative claims to the fullest extent possible. Management does not expect that this case will have a material adverse effect on the Company's financial position. See Note 8 for a discussion of a claim relating to the conversion of the Company's 6% Convertible Debentures. Employment Agreements In December 2002, the Company entered into a five-year employment agreement with the Company's current President, Dennis Calvert. His agreement calls for a base monthly income of $14,000 plus performance bonuses and employee related benefits. Mr. Calvert serves as President, Chief Executive Officer, Interim CFO and Chairman of the Board. In March 2003, the Company entered into a five-year employment agreement with Joseph Provenzano who serves the Company as Secretary, Board Member and Senior Executive reporting to Mr. Calvert. His agreement calls for him to receive not less than $10,900 per month in salary plus incentive bonuses, stock ownership participation and employee related benefits. At the Company's discretion, the Company may choose to pay up to $4,900 of this monthly salary with stock in lieu of cash. 15 Lease Commitment The Company is obligated on a month-to-month office lease at its California facility. This lease requires monthly rentals of $7,850. All other leases are of short duration or are on a month-to-month arrangement. Rent expense for the three months ended March 31, 2003 and the year ended December 31, 2002 was approximately $23,550 and $192,500, respectively. Stock-based Commitments The Company currently utilizes the services of a number of consultants who are compensated with shares of common stock. While each agreement can generally be terminated with a 15 day notice, the Company may be obligated to issue additional shares to the consultants. NOTE 11. SUBSEQUENT EVENTS ISSUANCE OF S-8 SHARES: Between April 1 and June 2, 2003, the Company issued a total of 5,820,000 shares of common stock pursuant to a registration statement on Form S-8, to consultants for services performed, which included 600,000 shares issued to Mr. Harrison, a member of the board of directors, for his services as a director. In addition to these shares, in March 2003, Dennis Calvert, the Company's CEO and president, was granted 3,000,000 shares of common stock under the Company's 2003 Stock Compensation Plan as a bonus for services rendered by Mr. Calvert to the Company. Following this issuance, however, Mr. Calvert returned the shares to the Company pending a shareholder vote to approve or disapprove the issuance. Mr. Calvert and the Company have since agreed not to seek shareholder approval for the issuance and to rescind the issuance in its entirety. Mr. Calvert and the compensation committee of the Board of Directors plan to negotiate an alternative bonus arrangement with Mr. Calvert (which could be in the form of cash, shares of stock, or a combination thereof). The amount and timing of such bonus has not yet been determined. In addition, the Board recently agreed to issue Gary Cox 200,000 shares of common stock as consideration for his agreeing to serve as a director of the Company. NASDAQ DELISTING: The Company's shares were delisted effective as of June 10, 2003 from trading on the Nasdaq SmallCap Market. The shares are currently quoted on the pink sheets. Promptly following the filing of this Form 10-QSB with the SEC, the Company expects that its market makers will make application for quotation of the Company's shares on the Over-the-Counter Bulletin Board, although there can be no assurance that these applications will be accepted and the Company will be cleared to trade on the Bulletin Board in light of the public interest concerns raised by Nasdaq in connection with the delisting of the Company's shares. This Nasdaq delisting will make it more difficult to effect trades and is expected to lead to a significant decline in the frequency of trades and trading volume. The delisting will likely adversely affect the Company's ability to obtain financing in the future due to the decreased liquidity of the Company's shares. The Company has not yet determined what impact, if any, that the delisting will have on the proposals from private investors referred to above. RECENT FINANCING: Pursuant to a Term Loan Agreement ("Loan Agreement") dated as of June 10, 2003 between the Company and Augustine II, LLC ("Augustine"), Augustine agreed to loan the Company $420,000, payable in installments of $250,000, $100,000, and $70,000 (the "Loan"). The Company received the first installment of $250,000 on June 13, 2003. The second installment of $100,000 is scheduled to be paid to the Company on July 1, 2003, with the balance payable to the Company on August 1, 2003. 16 Principal and interest (at an annual rate of 10%) are due in full on February 29, 2004, subject to certain requirements that the Company make mandatory prepayments of the Loan from the proceeds of any asset sales outside of the ordinary course of business, and, on a quarterly basis, from positive cash flow. In addition, all or any portion of the Loan may be prepaid by the Company at any time without premium or penalty. The proceeds of the Loan will be used by the Company for working capital, including the costs associated with registering with the SEC, on behalf of Augustine, the resale of the shares of the Company's common stock underlying the warrants described below (the "Augustine Registration Statement"). As additional consideration for making the Loan, Augustine received five year warrants to purchase up to 6,158,381 shares of the Company's common stock, at an exercise price of $.16 per share. The Company can require that the warrants be exercised if the Company's shares trade at or above $.60 per share for each trading day within the 30 calendar days prior to the maturity date of the Loan, trading volume of the shares equals or exceeds 100,000 shares per day during such period, and the Augustine Registration Statement has been declared effective by the SEC prior to the maturity date. If these conditions are not fully satisfied by the maturity date, then Augustine may, at any time following the maturity date and so long as the warrants remain exercisable, elect to exercise all or any portion of the warrants pursuant to the "cashless exercise" provisions of the warrants. As security for the Loan, New Millennium (an affiliate of Mr. Calvert) has pledged 2.5 million shares of the Company's common stock owned by New Millennium, and the Company has granted Augustine a security interest in its ownership interest in the Company's subsidiary, NuWay Sports, LLC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS INTRODUCTION AND FORWARD LOOKING STATEMENTS. The following discussion and analyses should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report. The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other sections of this Form 10-Q, contain "forward looking statements" within the meaning of Rule 175 under the Securities Act of 1933, as amended, and Rule 3b-6 under the Securities Act of 1934, as amended, including statements regarding, among other items, the Company's business strategies, continued growth in the Company's markets, projections, and anticipated trends in the Company's business and the industry in which it operates. The words "believe," "expect," "anticipate," "intends," "forecast," "project," and similar expressions identify forward-looking statements. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements, including, among others, the following: the Company's ability to raise additional financing or generate revenue sufficient to sustain the Company's operations, demand for the Company's products, competitive pricing pressures, changes in the market price of technologies used in the Company's products, the level of expenses incurred in the Company's operations, the scope, duration and results of the SEC's inquiry into the Company, the possibility that such inquiry will 17 result in a formal investigation of the Company by the SEC, the possibility that the Company or its officers and directors will become the subject of criminal proceedings, the possibility that stockholders or regulatory authorities may initiate proceedings against the Company and/or its officers and directors as a result of any past securities law violations, the possibility that the Company's securities will not become eligible for quotation on the OTC Bulletin Board, and the effect of the Company's recent Nasdaq delisting on the liquidity of the Company's stock and its ability to raise equity capital. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained herein will in fact transpire or prove to be accurate. The Company disclaims any intent or obligation to update "forward looking statements." OVERVIEW NuWay Medical, Inc. recently began to offer medical and health related technology products and services with an initial focus on the health and information software technology needs of the sports industry. The Company's primary product is its Player Record Library System ("PRLS"), a highly specialized electronic medical record and workflow process software application designed to address the information technology needs of the sports industry relating to player health including the need for technology that facilitates compliance with the Health Insurance Portability and Accountability Act ("HIPAA"). The Company markets its PRLS through its subsidiary NuWay Sports, LLC, a joint venture formed in December 2002 and owned 51% by the Company and 49% by several former National Football League (NFL) players. NuWay Sports recently sold the scaled down version of its PRLS to several NFL teams and is promoting its service to other NFL teams, the NFLitself, the NFL Trainers Association, the NFL Players Association and the NFL Player Safety Council. NuWay Sports also plans to market its PRLS to teams, leagues, and player associations in the National Basketball Association (NBA), Major League Baseball (MLB), and other sports such as hockey, soccer, boxing, motor sports, and entertainment sports. The Company believes PRLS would benefit not only professional sports leagues and participants, but also collegiate programs and in some cases, high school athletic programs. The following discussion compares the quarters ended March 31, 2003 and March 31, 2002. Due to the recent complete material change in the Company's business focus and operations, this discussion will not address the discontinued operations in the areas of oil and gas exploration, cigar distribution, and gaming equipment rentals which constituted the majority of the Company's operations during the first half of 2002. ANALYSIS OF FINANCIAL CONDITION The Company had approximately $6,700 of cash on hand at March 31, 2003, which is insufficient to meet the Company's operating expenses. As of the date of this filing, the Company had received a loan commitment of $420,000 (with actual receipt of $250,000) as described in the "Recent Financing" section below. The Company needs to raise additional capital to sustain operations and implement its growth strategy until such time, if ever, that the Company achieves profitability. As of the date of this report, the Company was not a party to any agreements to provide such financing. Although the Company is in the process of actively reviewing additional proposals made by private investors and investment bankers, there can be no assurance that the Company will be able to consummate any such transactions on terms satisfactory to the Company, or at all, or if consummated, that such financings will provide the Company with sufficient capital. If the Company is unable to secure additional financing within the next 120 days it would need to significantly curtail 18 and perhaps shut down its operations. It is unlikely that the Company will be able to qualify for bank debt until such time as the Company is able to demonstrate sufficient financial strength to provide confidence for a lender. The Company's shares were delisted effective as of June 10, 2003 from trading on the Nasdaq SmallCap Market. The shares are currently quoted on the pink sheets. Promptly following the filing of this Form 10-QSB with the SEC, the Company expects that its market makers will make application for quotation of the Company's shares on the Over-the-Counter Bulletin Board, although there can be no assurance that these applications will be accepted and the Company will be cleared to trade on the Bulletin Board in light of the public interest concerns raised by Nasdaq in connection with the delisting of the Company's sha. This Nasdaq delisting will make it more difficult to effect trades and is expected to lead to a significant decline in the frequency of trades and trading volume. The delisting will likely adversely affect the Company's ability to obtain financing in the future due to the decreased liquidity of the Company's shares. The Company has not yet determined what impact, if any, that the delisting will have on the proposals from private investors referred to above. Although the primary development of the PRLS system has been completed, management plans on periodically upgrading its PRLS software application through additional research and development, including tailoring its application to the specific needs of its clients as those needs are brought to the Company's attention. The Company may be unable to accomplish the foregoing on a long term basis, however, unless and until the financing referred to above is secured. Based on its current business plan, and assuming sufficient financing is obtained, management believes it will be able to generate meaningful sales of its PRLS software application and that it may be able to secure sales or license agreements as early as the third quarter of 2003. The Company's PRLS was introduced by the Company to the marketplace in January 2003 and generated a total of approximately $35,000 in gross revenues during the first quarter of 2003 through the sale of a scaled down version of the product to 18 NFL teams at the 2003 NFL Combine. Pursuant to this transaction, the Company digitized over 60,000 medical images for use by 18 NFL teams in their evaluation of potential draft picks. Management believes that it is already being referred by its customers and prospects as the best of brand for its sports industry focus. The Company is marketing the PRLS to multiple sports leagues and is actively seeking additional vertical market opportunities. There can be no assurance, however, that the Company will be able to secure any further agreements for its product, that such agreements will ever generate meaningful revenue for the Company, or that the Company will be able to successfully capture any such vertical market opportunities. Based on its current business plan, management anticipates that the Company will need to add additional staff over the next 12 months. Although it only had three full time employees as of June 23, 2003, the Company also relies on at least 12 consultants who work on behalf of the Company. The Company intends to add some of these consultants to its full time staff as employees and add additional staff members on an as needed basis. Based on its anticipated growth in revenues, and subject to the availability of additional financing the Company expects to add up to approximately 20 full time employees before the end of 2003. 19 During the latter half of 2002, the Company was focused on implementing its new business, generated no revenues, and thus received no cash from operations and had negative working capital. The Company's PRLS generated approximately $35,000 in gross revenues during the first 60 days of its introduction to the marketplace in the first quarter of 2003, through the sale of a scaled down version of the product to the 2003 NFL Combine. Consequently, current assets increased from $521 at December 31, 2002 to $36,378 at March 31, 2003. Other Assets declined from $4,345,000 at December 31, 2002 to $4,127,750 at March 31, 2003. The decrease of $217,250 or 5 percent, related to amortization of our intangible assets. Current liabilities declined from $2,401,579 at December 31, 2002 to $1,868,672 at March 31, 2003. The decrease of $532,907 or 22 percent all related to a reduction in accounts payable and accrued expenses. Such obligations were satisfied by cash payments and the issuance of the Company's common stock. Total stockholders' equity grew by 18 percent to $2,322,162 at March 31, 2003. This increase was due to the sale of Series A Preferred Stock, which generated net proceeds to the Company of $169,011, and the issuance of the Company's common stock to compensate consultants and others, net of the effect of the quarter ended March 31, 2003 net loss of $1,308,442. STATUS OF $1,120,000 NOTE IN FAVOR OF NEW MILLENNIUM In conjunction with the acquisition of the technology license from Med Wireless, Inc. on August 21, 2002, the Company assumed a $1,120,000 note with interest at 10% per annum payable by Med Wireless to Summitt Ventures, Inc. The note is secured by the Company's assets and was originally due on June 15, 2003. On March 26, 2003, Summitt Ventures sold the note, together with 4,182,107 shares of the Company's common stock, to New Millennium Capital Partners LLC ("New Millennium"), a limited liability company controlled and owned in part by the Company's CEO and president, Dennis Calvert, in exchange for a $900,000 promissory note issued by New Millennium in favor of Summitt Ventures. This note is secured by all of the stock of the Company owned by New Millennium and Mr. Calvert. On March 26, 2003, the Company's board of directors voted to convert the $1,120,000 note held by New Millennium into 22,400,000 shares of restricted common stock of the Company (at a strike price discounted 37.5% to the then market price of $0.08). New Millennium agreed to this conversion. Subsequent to the vote by the board to convert the note, the Company received notification from Nasdaq's Listing Qualifications Department that converting the note without shareholder approval violated certain Nasdaq Marketplace Rules. In response to this notification, the board, with the concurrence of New Millennium, voted to amend its resolution and withhold issuance of the shares to New Millennium until the Company's shareholders approved the conversion. This shareholder vote has not taken place as of the filing of this report, and the shares have not been issued to New Millennium. The business purpose of the original decision to convert the note into equity was to retire $1,120,000 in debt owed by the Company thereby increasing shareholder equity by that amount and avoiding a default on the note and the insolvency and possible liquidation of the Company. In arriving at a conversion price, the board of directors determined that a 37.5% discount to market price was appropriate based on a number of factors, including that (i) with the quantity of the shares that would be issued, a block of shares that size could not be liquidated without affecting the market price of the shares, and (ii) the shares would be "restricted shares" and could therefore not be sold by New Millennium (an affiliate of the Company) in the public markets prior to two years from the date of 20 the conversion, and thereafter would be subject to the volume and manner of sale limitations of Rule 144 under the Securities Act of 1933. To allow time for a shareholder vote with respect to the conversion, New Millennium agreed to extend the terms of the note 90 days, from June 15, 2003 to September 15, 2003. At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of New Millennium, and the Company, through the unanimous action of the Board (with Mr. Calvert abstaining), agreed that, in light of current market conditions (namely the significant increase in the trading price of the Company's common stock since March 26, 2003, the date on which the conversion of the note to equity was originally approved by the Board, from $0.08 to $0.28 as of June 6, 2003), it would be inequitable for New Millennium to convert the note at the originally agreed to $0.05 per share price. In this regard, Mr. Calvert, on behalf of New Millennium, and the Company orally agreed to rescind the agreement to convert the note. In addition, New Millennium orally agreed with the Company to extend the maturity date of the note to a first payment due October 1, 2003 in the amount of $100,000 and the balance of the principal due on April 1, 2004, with interest due according to the original terms of the note (to correspond to the payment terms of the note made by New Millennium in favor of Summitt), and furthermore to reduce the Company's obligation on the note to the extent that New Millennium is able to reduce its obligation on its note with Mr. Anderson. While the prior holder of the note, Summitt Ventures, purported to condition New Millennium's purchase on the conversion of the note, Mr. Calvert has represented to the Company that due to Mr. Anderson's actions he now believes that conversion of the note is no longer required. As a result of the elimination of the conversion feature of the note, the shareholders of the Company will not be asked to approve the conversion terms as was previously contemplated by the Company. RECENT FINANCING Pursuant to a Term Loan Agreement ("Loan Agreement") dated as of June 10, 2003 between the Company and Augustine II, LLC ("Augustine"), Augustine agreed to loan the Company $420,000, payable in installments of $250,000, $100,000, and $70,000 (the "Loan"). The Company received the first installment of $250,000 on June 13, 2003. The second installment of $100,000 is scheduled to be paid to the Company on July 1, 2003, with the balance payable to the Company on August 1, 2003. Principal and interest (at an annual rate of 10%) are due in full on February 29, 2004, subject to certain requirements that the Company make mandatory prepayments of the Loan from the proceeds of any asset sales outside of the ordinary course of business, and, on a quarterly basis, from positive cash flow. In addition, all or any portion of the Loan may be prepaid by the Company at any time without premium or penalty. The proceeds of the Loan will be used by the Company for working capital, including the costs associated with registering with the SEC, on behalf of Augustine, the resale of the shares of the Company's common stock underlying the warrants described below (the "Augustine Registration Statement"). As additional consideration for making the Loan, Augustine received five year warrants to purchase up to 6,158,381 shares of the Company's common stock, at an exercise price of $.16 per share. The Company can require that the warrants be exercised if the Company's shares trade at or above $.60 per share for each trading day within the 30 calendar days prior to the maturity date of the Loan, trading volume of the shares equals or exceeds 100,000 shares per day during such period, and the Augustine Registration Statement has been declared effective by the SEC prior to the maturity date. If these conditions are not fully satisfied by the maturity date, then Augustine may, at any time following the maturity date and so long as the warrants remain exercisable, elect to exercise all or 21 any portion of the warrants pursuant to the "cashless exercise" provisions of the warrants. As security for the Loan, New Millennium (an affiliate of Mr. Calvert) has pledged 2.5 million shares of the Company's common stock owned by New Millennium, and the Company has granted Augustine a security interest in its ownership interest in the Company's subsidiary, NuWay Sports, LLC. RESULTS OF OPERATIONS - COMPARISON OF THE QUARTERS ENDED MARCH 31, 2003 AND 2002 Revenues During the three months ended March 31, 2002, there were no revenues from continuing operations compared to $35,000 of revenue in the three months ended March 31, 2003 as a result of the sale of a scaled down version of the Company's PRLS product to 18 NFL teams at the 2003 NFL Combine. During the last half of 2002, the Company changed its business to addressing the information technology needs of the sports industry. This change led to the development of the Company's PRLS. Consequently, the results of our prior business line operations in gaming machine rental, oil and gas development and distribution of cigars were reclassified in our consolidated statements of operations as "discontinued operations." Selling, General and Administration Expense ("SG&A") During the three months ended March 31, 2003, SG&A increased by 76 percent to $1,088,637 from $618,246 for the three months ended March 31, 2002. The largest components of these expenses were: a. Salaries and Payroll-Related Expenses: These expenses were $54,000 for the three months ended March 31, 2003 versus $75,000 in the first quarter of 2002, a decrease of $21,000. This decrease reflects the Company's reduced headcount and its reliance on agreements with outside consultants to serve as additional staff in a variety of areas. b. Consulting Expense increased significantly for the three months ended March 31, 2003, to $548,000 from $300,000 for the three months ended March 31, 2002, an increase of 83 percent. This increase is directly related to new management's strategy of maintaining a very low permanent staffing level and supplementing that with consultants on a project-by-project basis. Further, the development of new products and technology related to the Company's change of business required additional staff in the areas of applications development, sales, marketing and administration. These positions were primarily staffed by independent contractors who were compensated with shares of the Company's common stock. c. Legal Expenses increased from $50,000 for the three months ended March 31, 2002 to $259,000 for the three months ended March 31, 2003, an increase of 418 percent. This increase was due to the high level of legal assistance required in 2003 for matters such as (i) addressing NASDAQ compliance issues (ii) a major shift in the Company's core business, and (iii) numerous stock issuances. During the three months ended March 31, 2003, the Company issued an aggregate of 11,360,919 shares of its common stock. Of these shares, 2,633,590 shares were issued as consideration for $645,648 of obligations previously incurred and 8,727,329 shares were issued as consideration for $843,159 of services provided to the Company during the quarter. 22 Discontinued Operations As discussed above and in the notes to our consolidated financial statements, the Company disposed of several operations through the sale of two foreign subsidiaries, Latin American Casinos and NuWay Resources effective October 1, 2002, and the cessation of the operations of our World's Best Rated Cigar Company subsidiary in November 2002. Due to the discontinuance of these operations, the Company has reclassified the historical operating results from these ventures for the three months ended March 31, 2002 and disclosed such results below the results from continuing operations in our consolidated statements of operations. These businesses generated losses from operations of $33,020 for the three months ended March 31, 2002. Net Loss Net loss for the three months ended March 31, 2003 was $1,308,442 or $.06 per share compared to a Net income $1,011,963 or $.19 per share for the three months ended March 31, 2002. Besides the significant growth in total costs and expenses, the net loss per share was affected by the larger number of weighted average common share equivalents outstanding at March 31, 2003 vs. 2002 (21,013,109 at March 2003 vs. 5,407,502 at March 2002). ITEM 3. CONTROLS AND PROCEDURES a) Evaluation of disclosure controls and procedures. Within the 90 days prior to March 31, 2003, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-14 under the Securities and Exchange Act of 1934 ("Exchange Act"). This evaluation was done under the supervision and with the participation of the Company's president and CEO. Based upon that evaluation, it was concluded that the Company's disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy the Company's disclosure obligations under the Exchange Act. b) Changes in internal controls. There were no significant changes in the Company's internal controls or in its factors that could significantly affect those controls since the most recent evaluation of such controls. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES Sale of Preferred Stock and Warrants: On March 7, 2003, the Company entered into two Convertible Preferred Stock and Warrant Purchase Agreements whereby the Company sold an aggregate of 338,022 shares of a newly created series of Preferred Stock, Series A Convertible Preferred Stock, par value $.00067, to accredited private investors, for a total consideration of $169,011. Each share of the Preferred Series A stock is convertible into one share of NuWay common stock. In addition, each share of preferred sold entitles the purchaser to a warrant to 23 purchase one share of common stock at a price of $.20 per share. The Preferred may be converted by the holder at any time after six months from the purchase date and the warrant is exercisable for a period of three years from the purchase date. The Company received an additional $110,650 from the sale of an additional 221,300 shares of Series A Preferred Stock in April 2003 from the same investors pursuant to the same purchase agreements. The above offerings were exempt from registration pursuant to Rule 506 of Regulation D by the fact that: a). The sales were made to sophisticated or accredited investors, as defined in Rule 502; b). The Company gave each purchaser the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which the Company possessed or could acquire without unreasonable effort or expense that was necessary to verify the accuracy of information furnished; c). At a reasonable time prior to the sale of securities, the Company advised the purchasers of the limitations on resale in the manner contained in paragraph Rule 502(d)2 of Regulation D; d). Neither the Company nor any person acting on its behalf sold the securities by any form of general solicitation or general advertising; and e). The Company exercised reasonable care to assure that the purchasers of the securities were not underwriters within the meaning of Section 2(11) of the Act in compliance with Rule 502(d). ISSUANCE OF S-8 SHARES: Between April 1 and June 2, 2003, the Company issued a total of 5,820,000 shares of common stock pursuant to a registration statement on Form S-8, to consultants for services performed, which included 600,000 shares issued to Mr. Harrison, a member of the board of directors, for his services as a director. In addition to these shares, in March 2003, Dennis Calvert, the Company's CEO and president, was granted 3,000,000 shares of common stock under the Company's 2003 Stock Compensation Plan as a bonus for services rendered by Mr. Calvert to the Company. Following this issuance, however, Mr. Calvert returned the shares to the Company pending a shareholder vote to approve or disapprove the issuance. Mr. Calvert and the Company have since agreed not to seek shareholder approval for the issuance and to rescind the issuance in its entirety. Mr. Calvert and the compensation committee of the Board of Directors plan to negotiate an alternative bonus arrangement with Mr. Calvert (which could be in the form of cash, shares of stock, or a combination thereof). The amount and timing of such bonus has not yet been determined. ITEM 3. DEFAULTS UPON SENIOR SECURITIES In December 2000, the Company, through a private placement, issued $3,500,000 principal amount of 6 percent Convertible Debentures to several investors. These debentures were originally due June 13, 2001 and their maturity date was subsequently extended to December 13, 2001. They are convertible into common stock at a price of $1.75 per share. The interest on the debentures is payable either in cash or shares of common stock, at the discretion of the Company. During 2001, $1,100,000 of the debentures plus accrued interest were converted into 666,283 shares of the Company's common stock. During 2002, $2,250,000 of the remaining debentures 24 plus accrued interest were converted into 1,332,570 shares of common stock. In December 2002 the Company received a notice from the remaining two debenture holders requesting conversion of the remaining outstanding $150,000 of debentures. The notice provided that, as a condition to conversion, the certificates representing the shares issuable upon conversion of the debentures would need to be delivered to the holders prior to the end of 2002. Pursuant to the request, and to complete the conversion, the Company issued to the holders 96,006 shares of common stock. The actual certificates representing the shares, however, were not delivered to the holders until the first quarter of 2003. These holders refused acceptance of the shares, claiming that because the actual certificates representing the shares were not delivered in 2002 as specified in the conversion notice, the conversion was invalid and the debentures would therefore remaining outstanding and continue to accrue interest until repaid in full. These holders have now demanded full payment on their $150,000 of debentures (plus accrued interest). Although the Company's financial statements reflect the $150,000 of debentures as still being outstanding, the Company disputes the individuals' claim that the conversion was invalid and intends to vigorously defend against any action that might be brought by the debenture holders to collect thereon. ITEM 5. OTHER INFORMATION The Company was recently informed that a former significant shareholder, consultant, and creditor of the Company is the target of a criminal investigation (the "Investigation") pertaining to the sale of securities by Med Wireless, Inc. (from which the Company licensed certain assets in 2002), and had been convicted of multiple felonies unrelated to Med Wireless in the 1990's. This individual, Mr. Mark Anderson, was the founder, promoter and president of Med Wireless, and first introduced the concept of licensing the Med Wireless software application and contracts to the Company in May 2002. In June 2002, Dennis Calvert agreed to become president of Med Wireless and as consideration for his agreeing to so act received the right to receive shares of Med Wireless (which shares were subsequently converted into 600,000 shares of the Company's common stock pursuant to the terms of the license to the Company of the Med Wireless technology). On June 28, 2002, Mr. Calvert was appointed president of the Company. Joseph Provenzano, an employee of Camden Holdings (an Anderson-controlled entity), joined the Company's board of directors at that time. In addition to the Med Wireless transaction, and as disclosed in the Company's Form 10-KSB filed on May 23, 2003, entities that Mr. Anderson controls (including Camden Holdings, Genesis Health Tech, Summit Oil & Gas, and Casino Venture Partners) invested $250,000 in the Company, sold the Company additional assets, and purchased the Company's two failing operating divisions. Although he never served as an officer or director of the Company, Mr. Anderson served as a consultant and received a total of 1,241,884 shares of the Company's common stock in the form of consulting fees. As previously disclosed by the Company, Mr. Anderson is no longer a consultant, or, to the Company's knowledge, a shareholder of the Company; he is in no way involved in the Company's operations, and currently exerts no influence over any of the Company's affairs. In the future, however, it is possible that Mr. Anderson could reacquire the shares of the Company's common stock sold to New Millennium Capital Partners LLC (an entity controlled and owned in part by Dennis Calvert), should New Millennium default on the note held by Mr. Anderson (through his controlled entities). For a description of the terms of this note, please see the discussion in Part I, Item 2, under the heading "Status of $1,120,000 Note in favor of New Millennium" above. The Company was recently served by a subpoena issued by the grand jury impaneled to investigate Mr. Anderson, requesting documents relating to Mr. Anderson and his affiliated companies (including Med Wireless, Camden Holdings, Summit Oil and Gas, and Summit 25 Health Care). Additionally, the subpoena requested information relating to the identity of the Company's officers, directors, shareholders and consultants (legal, accounting and otherwise), and that the Company provide copies of its filings and correspondence with the SEC, the NASD and Nasdaq. The Company intends to fully cooperate with the investigation and has provided the requested documentation. The Company was also informed by the Assistant United States Attorney handling the Investigation that although Dennis Calvert (a significant shareholder and Chairman of the Board and CEO of the Company) and Joseph Provenzano (a director and officer of the Company) are not currently considered "targets" of the Investigation, that, until their respective roles, if any, in the specific events being investigated are determined, they will be considered to be "subjects" of the Investigation, meaning that their conduct is believed by the U.S. attorney's office to be "within the scope" of the grand jury's investigation. The Company has learned that private placement memorandums distributed to Med Wireless investors indicated that Dennis Calvert was the president of Med Wireless as early as 2001. Mr. Calvert has informed the Company that he was not engaged to act as the president of Med Wireless until June 2002 (primarily for the purpose of completing the Med Wireless transaction with the Company) and not any earlier, and that any representation to the contrary is untrue. Mr. Provenzano joined Camden Holdings in 2001 to assist in its mergers and acquisitions department, working there until March 2003. Both Mr. Calvert and Mr. Provenzano have informed the Company and, through legal counsel, the Assistant U.S. Attorney, that they intend to fully cooperate with law enforcement officials in the Investigation. Although neither the Company nor any of its officers or directors are currently the target of any criminal investigation, there can be no assurance that such an investigation will not be undertaken. The fact of such an investigation, or the results thereof, could have a material adverse effect on the Company. The Company intends to continue to fully cooperate with all law enforcement agencies as they move forward in the Investigation. On June 3, 2003, the Company was served with a request for documentation by the civil enforcement division of the SEC in connection with a non-public inquiry into possible violations by the Company of the federal securities laws. Although the request provides that the inquiry should not be construed as an indication by the SEC that the law has been violated, there can be no assurance that the Company will not, as a result of the inquiry, become the target of a formal SEC investigation. The Company cannot predict the amount of time and resources that management will need to devote to the inquiry, or the results thereof. In the event the inquiry results in a formal investigation, such expenditures of time and resources will likely be material. In addition, there can be no assurance that stockholders or regulatory authorities will not initiate proceedings against the Company and/or its officers and directors as a result of past securities law violations, if any, which could have a material adverse effect on the Company. The Company intends to fully cooperate with the SEC in all aspects of its inquiry. 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A) EXHIBITS EXHIBIT. DESCRIPTION OF EXHIBIT - -------- ---------------------- 4.1 Form of Convertible Preferred Stock and Warrant Purchase Agreement 10.1 Term Loan Agreement dated as of June 10, 2003 between NuWay Medical, Inc. and Augustine II, LLC 10.2 Warrant No. AG-1 to purchase up to 6,158,381 shares of NuWay Medical, Inc. common stock held by Augustine II, LLC 10.3 Stock Pledge Agreement dated as of June 10, 2003, between New Millennium and Augustine II, LLC 10.4 Stock Pledge Agreement dated as of June 10, 2003, between NuWay Medical and Augustine II, LLC 10.5 Promissory Note by NuWay Medical, Inc. in favor of Augustine II, LLC 20.1 Definitive Information Statement on Form 14c filed February 5, 2003 regarding the shareholder meeting 99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the three months ended March 31, 2003. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: June 23, 2003 NUWAY MEDICAL, INC. By: /s/ Dennis Calvert, President, ---------------------------------- Chief Executive Officer, and Interim Chief Financial Officer 27 CERTIFICATIONS I, Dennis Calvert, certify that: 1 I have reviewed this quarterly report on Form 10-QSB of NuWay Medical, Inc.; 2 Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3 Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4 The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5 The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6 The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 23, 2003 /s/ - ------------------------- Dennis Calvert, President, Chief Executive Officer Interim Chief Financial Officer 28 EX-4.1 3 ex4-1.txt Exhibit 4.1 CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT THIS CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made as of ________ by and between NuWay Medical, Inc., a Delaware corporation (the "Company"), and _____________________ (the "Purchaser"). RECITALS WHEREAS, the Company desires to sell to Purchaser and Purchaser desires to purchase from the Company NuWay Medical, Inc. shares of the Company's Convertible Preferred Stock (the "Convertible Preferred Stock") at a price of $.50 per share, with one Warrant per share purchased; said Warrant(s) shall be exercisable at .20 cents per Warrant, no sooner than six (6) months from the date of issuance expiring at the end of Three (3) years and callable by the Company if it's Common Stock trades at or above .35 cents for ten consecutive trading days. Subject to the terms and conditions of this Agreement and the other documents or instruments contemplated hereby. NOW, THEREFORE, the parties hereto hereby agree as follows: AGREEMENT Section 1. Sale and Issuance of Convertible Preferred Stock. Subject to the terms and conditions of this Agreement, the Company has authorized the sale and issuance (the "Issuance") to Purchaser of the Convertible Preferred Stock. At the Closing (as defined in Section 2.1), the Company shall sell to Purchaser, and Purchaser shall purchase from the Company, the Convertible Preferred Stock at a purchase price of $.50 per share, to include One Warrant for each share purchased, exercisable at $ .20 cents with six month piggy-back registration rights. The Warrant will be exercisable for a term of Three (3) years, at which point the Warrant may be extended or called in by the Company. The holders of the Preferred shall have the right to convert the Preferred, at the option of the holder, after sic months into shares of Common Stock of the Company, at the rate of one share of Preferred for each share of Common Stock subject to proportional adjustments made for capital reorganizations, stock splits, reclassifications, etc. The Convertible Preferred Stock and the Warrants are being offered separately and not as units, and each is separately transferable The total purchase price is $.50 PER SHARE MULTIPLIED BY THE NUMBER OF SHARES PURCHASED (the "Purchase Price"), subject to the terms and conditions of this Agreement. Section 2. The Closing. 2.1 The Closing. The closing of the Issuance to Purchaser (the "Closing") shall take place simultaneously with the execution and delivery of this Agreement at the offices of the Company. 2.2 Actions at the Closing. (a) At the Closing, or within Ninety (90) days, the Company shall deliver to Purchaser a stock certificate representing the Convertible Preferred Stock. In addition, The Company will issues applicable Warrant certificates. In the absence of the issuance of any certificate due, this agreement shall serve as evidence of ownership. (b) At the Closing, Seller shall execute and deliver to the Company payment equal to Fifty Cents ($.50) per share multiplied by the number of shares purchased in cash. (c) Schedule A attached ("Schedule A"), describes the amount of investment by purchaser, as may be amended from time to time. Section 3. Representations and Warranties of the Company. The Company hereby represents and warrants to Purchaser as follows: 3.1 Organization. The Company is duly organized, validly existing and in good standing under the laws of the State of Delaware and is qualified to conduct its business as a foreign corporation in each jurisdiction where the failure to be so qualified would have a material adverse effect on the Company. 3.2 Authorization of Agreement, Etc. The execution, delivery and performance by the Company of this Agreement, and all other documents or instruments contemplated hereby or thereby have been duly authorized by all requisite corporate action by the Company; and this Agreement has been duly executed and delivered by the Company. Each of the Documents when executed and delivered by the Company, constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting creditors' rights and remedies generally, and subject as to enforceability to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). 3.3 Capitalization. The authorized capital stock of the Company consists of (i) 100,000,000 shares of common stock, of which approximately 23,000,000 shares are issued and outstanding, and (ii) 25,000,000 shares of preferred stock, none of which are issued or outstanding. Section 4. Representations and Warranties of Purchaser. Purchaser hereby represents and warrants to the Company as follows: 4.1 Authorization of the Documents. Purchaser has all requisite power and authority (corporate or otherwise) to execute, deliver and perform this Agreement, and each other document or instrument contemplated hereby or thereby and the transactions contemplated thereby, and the execution, delivery and performance by Purchaser of the Documents have been duly authorized by all requisite action by Purchaser and each such Document, when executed and delivered by Purchaser, constitutes a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). 4.2 Not an Affiliate; No Prior Investment. Purchaser is neither an officer, director nor "affiliate" (as that term is defined in Rule 405 of the Securities Act of 1933, as amended (the "Securities Act"). Neither Purchaser nor any of its affiliates owned in the aggregate five percent (5%) or greater percentage of Company common stock at or prior to the Closing Date. 4.3 Investment Intent. This Agreement is made with Purchaser in reliance upon Purchaser's representations to the Company, evidenced by Purchaser's execution of this Agreement, that Purchaser is acquiring the Convertible Preferred Stock for investment for Purchaser's own accounts, not as nominee or agent, and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). 4.4 Convertible Preferred Stock Not Registered. Purchaser understands and acknowledges that the offering of Convertible Preferred Stock pursuant to this Agreement will not be registered under the Securities Act on the grounds that the offering and sale of securities contemplated by this Agreement are exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that the Company's reliance upon such exemption is predicated upon Purchaser's representations set forth in this Agreement. Purchaser understands and acknowledges that the Convertible Preferred Stock must be held indefinitely unless the Convertible Preferred Stock is subsequently registered under the Securities Act or an exemption from such registration is available.(See section 1. Sale and Issuance of Convertible Preferred Stock). 4.5 Knowledge and Experience. Purchaser (i) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of Purchaser's prospective investment in the Common Stock; (ii) has the ability to bear the economic risk of Purchaser's prospective investment; (iii) has been furnished with and has had access to such information as Purchaser has considered necessary to verify the accuracy of the information supplied; (iv) has had all questions which have been asked by Purchaser satisfactorily answered by the Company; and (v) has not been offered the Convertible Preferred Stock by any form of advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any such media. 4.6 Not Organized to Purchase. Purchaser has not been organized for the purpose of purchasing the Convertible Preferred Stock. Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. 4.7 Holding Requirements. Purchaser understands that if the Company does not have a registration statement covering the Convertible Preferred Stock under the Securities Act in effect when Purchaser decides to sell the Convertible Preferred Stock, Purchaser may be required to hold the Convertible Preferred Stock subject to piggy-back registration rights. Purchaser also understands that any sale of the Convertible Preferred Stock that might be made by Purchaser in reliance upon Rule 144 under the Securities Act may be made only in limited amounts in accordance with the terms and conditions of that rule. 4.8 Legend. Purchaser understands that each certificate representing the Convertible Preferred Stock shall be stamped or otherwise imprinted with a legend in the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE HYPOTHECATED OR DISTRIBUTED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT, OR (B) PURSUANT TO A VALID EXEMPTION FROM SUCH REGISTRATION UNDER THE ACT AND UNDER THE SECURITIES LAW OF ANY STATE AND UPON RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT ANY SUCH SALE IS IN COMPLIANCE WITH, OR NOT SUBJECT TO, THE ACT AND STATE SECURITIES LAWS." Where applicable, the Company shall remove such legend so as to facilitate the sale of such shares, if and to the extent applicable, pursuant to Rule 144 under the Act, provided (in the case of Rule 144 sales) that if Purchaser requests such removal, the Company shall have provided such documentation as the Company and its transfer agent shall reasonably require in connection therewith. Section 5. Indemnification. Purchaser hereby agrees to indemnify and defend (with counsel acceptable to the Company) the Company and its officers, directors, employees and agents and hold them harmless from and against any and all liability, loss, damage, cost or expense, including costs and reasonable attorneys' fees, incurred on account of or arising from: (i) Any breach of or inaccuracy in Purchaser's representations, warranties or agreements herein; (ii) Any action, suit or proceeding based on a claim that any of Purchaser's representations and warranties were inaccurate or misleading, or otherwise cause for obtaining damages or redress from the Company or any officer, director, employee or agent of the Company under the Securities Act. Registration Rights. Section 6. The Purchaser in this offering will be granted the following "piggy-back" registration rights: (a) Whenever the Company shall propose to file a registration statement under the Securities Act on a form which permits the inclusion of the Shares for resale (the "Registration Statement"), it will give written notice to each Purchaser in this offering at least fifteen (15) business days prior to the anticipated filing thereof, specifying the approximate date on which the Company proposes to file the Registration Statement and the intended method of distribution in connection therewith, and advising the holder of the Shares (the "Shareholder") of his right to have any or all of the Shares then held by him included among the securities to be covered by such registration statement (the "Piggy-Back Rights"). (b) Subject to Section (d) and Section (e) hereof, in the event that the Shareholder has and shall elect to utilize the Piggy-Back Rights, the Company shall include in the Registration Statement the number of the Shares identified by the Shareholder in a written request (the "Piggy-Back Request") given to the Company not later than ten (10) Business Days prior to the proposed filing date of the Registration Statement. The Shares identified in the Piggy-Back Request shall be included in the Registration Statement on the same terms and conditions as the other shares of Common Stock included in the Registration Statement. (c) Notwithstanding anything in this Agreement to the contrary, the Shareholder shall not have Piggy-Back Rights with respect to (i) a registration statement on Form S-4 or Form S-8 or Form S-3 (with respect to dividend reinvestment plans and similar plans) or any successor forms thereto, (ii) a registration statement filed in connection with an exchange offer or an offering of securities solely to existing stockholders or employees of the Company, (iii) a registration statement filed in connection with an offering by the Company of securities convertible into or exchangeable for Common Stock, and (iv) a registration statement filed in connection with private placement of securities of the Company (whether for cash or in connection with an acquisition by the Company or one of its subsidiaries). (d) If the lead managing underwriter selected by the Company for an underwritten offering for which Piggy-Back Rights are requested determines that marketing or other factors require a limitation on the number of shares of Common Stock to be offered and sold in such offering, then (i) such underwriter shall provide written notice thereof to each of the Company and the Shareholders, and (ii) there shall be included in the offering, first, all shares of Common Stock proposed by the Company to be sold for its account (or such lesser amount as shall equal the maximum number determined by the lead managing underwriter as aforesaid) and, second, only that number of Shares requested to be included in the Registration Statement by the Shareholder that such lead managing underwriter reasonably and in good faith believes will not substantially interfere with (including, without limitation, adversely affect the pricing of) the offering of all the shares of Common Stock that the Company desires to sell for its own account. (e) Nothing contained in this Section shall create any liability on the part of the Company to the Shareholder if the Company for any reason should decide not to file a Registration Statement for which Piggy-Back Rights are available or to withdraw such Registration Statement subsequent to its filing, regardless of any action whatsoever that the Shareholder may have taken, whether as a result of the issuance by the Company of any notice hereunder or otherwise. (f) As a condition to providing Piggy-Back Rights, the Company may require each Shareholder to furnish to the Company in writing such information regarding the proposed distribution by such Shareholder as the Company may from time to time reasonably request. (g) Except as set forth below, the Company shall bear all expenses of the Registration Statement. Each Shareholder will be individually responsible for payment of his own legal fees (if the selling security holder retains legal counsel separate from that of the Company), underwriting fees and brokerage discounts, commissions and other sales expenses incident to any registration hereunder. Section 7. Successors and Assigns. This Agreement shall bind and inure to the benefit of the Company, Purchaser and their respective successors and assigns. Section 8. Final Agreement; Entire Agreement. This Agreement and the other writings and agreements referred to in this Agreement or delivered pursuant to this Agreement are the final agreements between the parties and contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, written and oral, signed or unsigned, among the parties with respect thereto. Section 9. Notices. All notices, demands and requests of any kind to be delivered to any party in connection with this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered or if sent by internationally-recognized overnight courier or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: if to the Company, to: NuWay Medical, Inc. 23461 South Pointe Dr. suite 200 Laguna Hills, CA. 92653 Attention: Dennis Calvert if to the Purchaser, to: --------------------------- --------------------------- --------------------------- --------------------------- or to such other address as the party to whom notice is to be given may have furnished to the other parties to this Agreement in writing in accordance with the provisions of this Section 10. Any such notice or communication shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of internationally-recognized overnight courier, on the next business day after the date when sent and (iii) in the case of mailing, on the third business day following that on which the piece of mail containing such communication is posted. Section 10. Amendments. This Agreement may not be modified or amended, or any of the provisions of this Agreement waived, except by written agreement of the Company and Purchaser. Section 11. Governing Law; Waiver of Jury Trial. All questions concerning the construction, interpretation and validity of this Agreement shall be governed by and construed and enforced in accordance with the domestic laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether in the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. In furtherance of the foregoing, the internal law of the State of California will control the interpretation and construction of this Agreement, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily or necessarily apply. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR ANY DOCUMENTS RELATED HERETO. Section 12. Submission to Jurisdiction. Any legal action or proceeding with respect to this Agreement may be brought in the courts of the State of California and the United States of America located in the City of Los Angeles, California and, by execution and delivery of this Agreement, the Company hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Purchaser hereby irrevocably waives, in connection with any such action or proceeding, any objection, including, without limitation, any objection to the venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. Purchaser hereby irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at its address as set forth herein. Section 13. Severability. It is the desire and intent of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the law and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, in the event that any provision of this Agreement would be held in any jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Section 14. Independence of Agreements, Covenants, Representations and Warranties. All agreements and covenants hereunder shall be given independent effect so that if a certain action or condition constitutes a default under a certain agreement or covenant, the fact that such action or condition is permitted by another agreement or covenant shall not affect the occurrence of such default, unless expressly permitted under an exception to such covenant. In addition, all representations and warranties hereunder shall be given independent effect so that if a particular representation or warranty proves to be incorrect or is breached, the fact that another representation or warranty concerning the same or similar subject matter is correct or is not breached will not affect the incorrectness of or a breach of a representation and warranty hereunder. The exhibits and any schedules attached hereto are hereby made part of this Agreement in all respects. Section 15. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart of this Agreement shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. Facsimile counterpart signatures to this Agreement shall be acceptable and binding. Section 16. Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 17. Preparation of Agreement. The Company prepared this Agreement solely on its behalf. Each party to this Agreement acknowledges that: (i) the party had the advice of, or sufficient opportunity to obtain the advice of, legal counsel separate and independent of legal counsel for any other party hereto; (ii) the terms of the transactions contemplated by this Agreement are fair and reasonable to such party; and (iii) such party has voluntarily entered into the transactions contemplated by this Agreement without duress or coercion. Each party further acknowledges that such party was not represented by the legal counsel of any other party hereto in connection with the transactions contemplated by this Agreement, nor was he or it under any belief or understanding that such legal counsel was representing his or its interests. Each party agrees that no conflict, omission or ambiguity in this Agreement, or the interpretation thereof, shall be presumed, implied or otherwise construed against any other party to this Agreement on the basis that such party was responsible for drafting this Agreement. (REST OF PAGE LEFT INTENTIONALLY BLANK) IN WITNESS WHEREOF, each of the undersigned has duly executed this Common Stock Purchase Agreement as of the date first written above. COMPANY: NUWAY MEDICAL, INC., a Delaware corporation By: ---------------------------------------- Name: Dennis Calvert Title: President PURCHASER: [name] By: ---------------------------------------- Name: Title: EX-10.1 4 ex10-1.txt TERM LOAN AGREEMENT Dated as of June 10, 2003 This TERM LOAN AGREEMENT (this "Agreement") is entered into between NUWAY MEDICAL, INC., a corporation organized under the laws of the state of Delaware (the "Borrower"), and AUGUSTINE II, LLC, a limited liability company formed under the laws of the State of Delaware (the "Lender"). Capitalized terms used herein shall have the meanings ascribed to such terms in Section 8 of this Agreement. In consideration of the mutual covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby agree as follows: SECTION 1. LOAN SECTION 1.1. TERM LOAN. Subject to the terms and conditions of this Agreement, the Lender agrees to make loans to the Borrower, and the Borrower agrees to borrow from the Lender, in the aggregate principal amount of four hundred thirty thousand dollars ($420,000) (collectively, the "Term Loan"). The principal shall be loaned as follows: $250,000 on the date hereof, or as soon thereafter as reasonably practicable, $100,000 on July 1, 2003 and the balance on August 1, 2003. The Lender hereby agrees to make such loans to the Borrower on the dates so indicated, with such payments to be made in immediately available funds via wire transfer or cashiers checks. SECTION 1.2. TERM NOTE. The Term Loan shall be evidenced by a promissory note (the "Term Note"), substantially in the form of Exhibit A, with appropriate insertions, dated the date hereof, payable to the order of the Lender and in the initial principal amount of $250,000. The Term Note shall be revised to reflect the additional loan installments required to be made hereunder as and when such loans are made. The Term Loan shall be due and payable on FEBRUARY 29, 2004 or at an earlier date as provided in Section 3.2 hereof (the "Term Loan Maturity Date"). SECTION 2. INTEREST AND FEES SECTION 2.1. INTEREST. The Borrower agrees to pay interest on the unpaid principal amount of the Term Loan from time to time outstanding hereunder at the following rates per year, compounded monthly (with the result that the interest accrued during each month is added to the principal amount of the Term Loan and subsequent interest shall be calculated in the same manner on the increased principal amount of the Term Loan): (a) before maturity of the Term Loan, whether by acceleration or otherwise, at the rate per annum equal to ten percent (10%). (b) after the maturity of the Term Loan, whether by acceleration or otherwise, until paid, at a rate per annum equal to fifteen percent (15%). SECTION 2.2. INTEREST PAYMENT DATE. Accrued interest shall be paid in full on the Term Loan Maturity Date. SECTION 2.3. BASIS OF COMPUTATION. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days, including the date the Term Loan is made and excluding the date the Term Loan or any portion thereof is paid or prepaid. SECTION 3. PAYMENTS AND PREPAYMENTS SECTION 3.1. PAYMENTS. (a) Place of Payment. All payments of principal, interest, fees and other amounts payable hereunder, shall be made to the Lender at its office at 141 West Jackson Boulevard, Suite 2182, Chicago, Illinois 60604. (b) Form of Payment. All payments of principal and interest shall be made by wire transfer to the Lender. SECTION 3.2. PREPAYMENT. (a) Optional Prepayment. The Borrower may from time to time prepay the Term Loan or any portion thereof without premium or penalty. (b) Mandatory Prepayment. (i) Within thirty (30) days following the last day of each calendar quarter during the term of this Agreement, the Borrower shall make a prepayment of the Term Loan equal to the Borrower's net income before depreciation for such calendar quarter, less the ordinary operating expenses paid by the Borrower as well as its taxes payable during that period, all as determined in accordance with GAAP, up to the total amount then due under the Term Loan. (ii) Within ten (10) days of the occurrence of any of the following events, the Borrower shall make a prepayment of the Term Loan in an amount equal to the proceeds received by the Borrower, in each case up to the total amount then due under the Term Loan, from: (A) the sale of any of the Borrower's assets outside the ordinary course of business; and (B) any insurance payouts or condemnation awards payable by reason of theft, loss, destruction, damage, taking or any 2 other similar event with respect to any property or assets of the Borrower (provided, however, so long as no Event of Default or Unmatured Event of Default has occurred and is continuing the Borrower may use such insurance payouts or condemnation awards within thirty (30) days after receipt by the Borrower to replace any such property with property performing the same or similar function). SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Lender to make the Term Loan, the Borrower represents and warrants to the Lender that (except in each case as otherwise disclosed in the Borrower's filings with the SEC and except with respect to any matters with respect to the delisting of the Borrower's shares from the Nasdaq): SECTION 4.1. ORGANIZATION. The Borrower is a corporation existing and in good standing under the laws of the State of Delaware; each of its subsidiaries is a corporation, limited liability company or partnership duly existing and in good standing under the laws of the state of its formation; the Borrower and each of its subsidiaries are duly qualified, in good standing and authorized to do business in each jurisdiction where, because of the nature of their activities or properties, such qualification is required, except where the failure to be so qualified would not have a material adverse effect on the Borrower's business, financial condition or results of operations (a "Material Adverse Effect"); and the Borrower and each of its subsidiaries have the power and authority to own their properties and to carry on their businesses as now being conducted. SECTION 4.2. AUTHORIZATION; NO CONFLICT. The borrowings hereunder, the execution and delivery of this Agreement, the Term Note and the Warrant and the performance by the Borrower of its obligations under this Agreement, the Term Note and the Warrant are within the Borrower's corporate powers, have been authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required) and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Borrower or any subsidiary or of any agreement binding upon the Borrower or any subsidiary. SECTION 4.3. FINANCIAL STATEMENTS. The Borrower's audited consolidating and consolidated financial statements as at December 31, 2002, copies of which have been furnished to the Lender, have been prepared in conformity with GAAP applied on a basis consistent with that of the preceding fiscal year, and accurately present the financial condition of the Borrower and its subsidiaries as at such dates and the results of their operations for the respective periods then ended. Since the date of those financial statements, no material, adverse change in the business, properties, assets, operations, conditions or prospects of the Borrower or any subsidiary has occurred. There is no known contingent liability of the Borrower or any subsidiary which is not reflected in such financial statements. SECTION 4.4. TAXES. The Borrower and its subsidiaries have filed or caused to be filed all federal, state and local tax returns which are required to be filed, and have paid or have caused to be paid all taxes as shown on such 3 returns or on any assessment received by them, to the extent that such taxes have become due, except as follows: Borrower has not filed its annual report with the Delaware Secretary of State, and owes to the State of Delaware approximately $6,400 in taxes for fiscal year 2002. SECTION 4.5. LIENS. None of the assets of the Borrower or any subsidiary thereof are subject to any mortgage, pledge, title retention lien, or other lien, encumbrance or security interest. SECTION 4.6. ADVERSE CONTRACTS. Neither the Borrower nor any of its subsidiaries is a party to any agreement or instrument or subject to any charter or other corporate restriction, nor is it subject to any judgment, decree or order of any court or governmental body, which may have a material and adverse effect on the business, property, assets, operations, conditions or prospects of the Borrower and its subsidiaries taken as a whole or on the ability of the Borrower to perform its obligations under this Agreement, the Term Note or the Warrant. Neither the Borrower nor any of its subsidiaries has, nor with reasonable diligence should have had, knowledge of or notice that it is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any such agreement, instrument, restriction, judgment, decree or order. SECTION 4.7. REGULATION U. The Borrower is not engaged principally in, nor is one of the Borrower's important activities, the business of extending credit for the purpose of purchasing or carrying "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereinafter in effect. SECTION 4.8. LITIGATION AND CONTINGENT LIABILITIES. No litigation (including derivative actions), arbitration proceedings or governmental proceedings are pending or threatened against the Borrower or any of its subsidiaries which would (singly or in the aggregate), if adversely determined, have a material and adverse effect on the business, properties, assets, operations, conditions or prospects of the Borrower or any subsidiary. SECTION 5. COVENANTS Until all obligations of the Borrower hereunder and under the Term Note are paid and fulfilled in full, the Borrower agrees that it shall, and shall cause each of its subsidiaries to, comply with the following covenants, unless the Lender consents otherwise in writing: SECTION 5.1. CORPORATE EXISTENCE, MERGERS, ETC. The Borrower and each subsidiary shall preserve and maintain its corporate existence, rights, franchises, licenses and privileges, and will not liquidate, dissolve, or merge, or consolidate with or into any other corporation, or sell, lease, transfer or otherwise dispose of all or a substantial part of its assets (except those assets sold in the ordinary course of its business), except that: (a) Any subsidiary may merge or consolidate with or into the Borrower or any one or more wholly-owned subsidiaries; and 4 (b) Any subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to the Borrower or one or more wholly-owned subsidiaries. SECTION 5.2. INSPECTION. The Borrower and each subsidiary shall permit the Lender and its agents at any time during normal business hours to inspect their properties and to inspect and make copies of their books and records, provided that the Lender agrees to enter into confidentiality agreements with respect to the foregoing. SECTION 5.3. USE OF PROCEEDS. (a) Use of Proceeds. The Borrower shall use the proceeds from the Term Loan solely for operating costs, including but not limited to, employee salaries and costs associated with filing and obtaining SEC effectiveness of the registration statement relating to the Lender's resale of the Common Stock underlying the warrants issued by the Borrower on this date to Lender. (b) Margin Regulations. Neither the Borrower nor any subsidiary shall use or permit any proceeds of the Term Loan to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying any margin stock" within the meaning of Regulations U or X of the Board of Governors of the Federal Reserve System, as amended from time to time. (c) Tender Offers and Going Private. Neither the Borrower nor any subsidiary shall use (or permit to be used) any proceeds of the Term Loan to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended, or any regulations or rulings thereunder. SECTION 5.4. COMPLIANCE WITH LAW. The Borrower and each of its subsidiaries shall comply in all material respects with all laws and regulations (whether federal, state or local and whether statutory, administrative, judicial or otherwise) and with every lawful governmental order or similar action (whether administrative or judicial) applicable to it, except in each case as would not have a Material Adverse Effect. SECTION 5.5. AFFILIATE TRANSACTIONS. Not enter into any transaction with an affiliate, except for transactions in the ordinary course of business pursuant to the reasonable requirements of the Borrower's or each subsidiaries' business and upon fair and reasonable terms no less favorable to the Borrower or the subsidiaries than the Borrower or the subsidiaries would obtain in a comparable arms-length transaction. SECTION 6. CONDITIONS OF LENDING The obligation of the Lender to make the Term Loan is subject to the following conditions precedent: SECTION 6.1. DOCUMENTATION. In addition to the conditions precedent set forth in Section 6.2 and Section 6.3, the obligation of the Lender to make the Term Loan is subject to the conditions precedent that the Lender shall have 5 received all of the following, each duly executed and dated a date acceptable to the Lender, in form and substance satisfactory to the Lender and its counsel, at the expense of the Borrower, and in such number of signed counterparts as the Lender may request (except for the Term Note, of which only the original shall be signed): (a) Agreement. This Agreement; (b) Note. The Term Note; (c) Resolution. A copy of a resolution of the Board of Directors of the Borrower authorizing or ratifying the execution, delivery and performance, respectively, of this Agreement, the Term Note, the Warrant and the other documents provided for in this Agreement, certified by the secretary or assistant secretary of the Borrower; (d) Pledge Agreements. Duly executed pledge agreements in form and substance satisfactory to the Lender (a "Pledge Agreement") by (i) New Millennium Capital Partners, LLC (a "Pledgor") in favor of the Lender, together with stock powers executed in blank, pledging all of its ownership interest in the pledged capital stock of the Borrower, and (ii) by Borrower (a "Pledgor") in favor of the Lender, pledging all of its ownership interest in NuWay Sports, LLC, a California limited liability company; (e) UCC Financing Statements. Such duly executed financing statements and other documents together with such other acts and things as the Lender may have required to establish and maintain a valid lien and security interest in the collateral described in the Pledge Agreement; (f) Warrant. A duly executed warrant in form and substance satisfactory to the Lender by the Borrower in favor of the Lender (the "Warrant"); and (g) Miscellaneous. Such other documents and certificates as the Lender may request. SECTION 6.2. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. (a) Representations and Warranties. At the date of the Term Loan, the Borrower's representations and warranties set forth herein shall be true and correct in all material respects as at such date with the same effect as though those representations and warranties had been made on and as at such date. (b) No Default. At the time of the Term Loan, and immediately after giving effect to the Term Loan, the Borrower shall be in compliance with all the terms and provisions set forth herein on its part to be observed or performed, and no Event of Default or Unmatured Event of Default shall have occurred and be continuing at the time of the Term Loan, or would result from the making of the Term Loan. SECTION 6.3. NO MATERIAL ADVERSE CHANGE. No material adverse change in, or effect on, (a) the business, assets, properties, operations, condition or 6 prospects of the Borrower or any of its subsidiaries or (b) the ability of the Borrower to perform its obligations under this Agreement, the Term Note or the Warrant, in all cases whether due to a single circumstance or event or an aggregation of circumstances or events, shall have occurred. SECTION 7. DEFAULT SECTION 7.1. EVENTS OF DEFAULT. Each of the following occurrences is hereby defined as an "Event of Default": (a) Nonpayment. The Borrower shall fail to make any payment of principal, interest, or other amounts payable hereunder when and as due; or (b) Default under Related Documents. Any default, event of default, or similar event shall occur or continue under any instrument, document, note, agreement, or guaranty delivered to the Lender in connection with the Term Loan (including without limitation the Term Note, the Pledge Agreements and the Warrant), or any such instrument, document, note, agreement, or guaranty shall not be, or shall cease to be, enforceable in accordance with its terms; or (c) Cross-Default. There shall occur any default or event of default, or any event which might become such with notice or the passage of time or both, or any similar event, or any event which requires the prepayment of borrowed money or the acceleration of the maturity thereof, under the terms of any evidence of indebtedness or other agreement issued or assumed or entered into by the Borrower, any of its subsidiaries or the Pledgor or under the terms of any indenture, agreement or instrument under which any such evidence of indebtedness or other agreement is issued, assumed, secured or guaranteed, in each case in respect of an amount that exceeds $100,000, and such event shall continue beyond any applicable period of grace; or (d) Dissolutions, etc. The Borrower, any subsidiary or the Pledgor shall fail to comply with any provision concerning its existence or any prohibition against dissolution, liquidation, merger, consolidation or sale of assets; or (e) Warranties. Any representation, warranty, schedule, certificate, financial statement, report, notice or other writing furnished by or on behalf of the Borrower, any of its subsidiaries or the Pledgor to the Lender is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified; or (f) ERISA. (i) Institution of any steps by the Borrower or any subsidiary to terminate a Plan if as a result of such termination the Borrower or such subsidiary could be required to make a contribution to such Plan, or could incur a liability or obligation to such Plan, in either case in excess of $100,000; (ii) a contribution failure occurs with respect to any plan sufficient to give rise to a lien under Section 302(f) of ERISA with respect to any Plan; (iii) there shall occur any withdrawal or partial withdrawal from a Multiemployer Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Plans as a result of such withdrawal (including any outstanding withdrawal liability that the Borrower or any 7 subsidiary and any ERISA Affiliate have incurred on the date of such withdrawal) exceeds $100,000; or (iv) any "reportable" event shall occur under ERISA in respect of any employee benefit plan maintained for employees of the Borrower or any subsidiary; or (g) Litigation. Any suit, action or other proceeding (judicial or administrative) commenced against the Borrower, any of its subsidiaries, or any Pledgor or with respect to any assets of the Borrower, such subsidiary or such Pledgor, shall threaten to have a material and adverse effect on the asset, condition (financial or otherwise) or future operations of the Borrower, such subsidiary or such Pledgor; or a final judgment or settlement in excess of $100,000 in excess of insurance shall be entered in, or agreed to in respect of, any such suit, action or proceeding; or (h) Noncompliance with this Agreement. The Borrower shall fail to comply in any material respect with any provision hereof, which failure does not otherwise constitute an Event of Default, and such failure shall continue for ten (10) days after the occurrence of such failure; or (i) Pledge Agreement. The Pledge Agreement shall be repudiated or become unenforceable or incapable of performance; any Person other than the Lender shall obtain a security interest or lien in the collateral pledged pursuant to the Pledge Agreement; any court shall determine that the Lender does not have a first priority perfected security interest in the collateral pledge pursuant to the Pledge Agreement; or (j) Warrant. A default by the Borrower in the observance or performance of any of the covenants or conditions contained in the Warrant or the Warrant shall cease to be in full force and effect or the Borrower shall so state in writing; or (k) Bankruptcy. Any bankruptcy, insolvency, reorganization, arrangement, readjustment, liquidation, dissolution, or similar proceeding, domestic or foreign, is instituted by or against the Borrower, any of its subsidiaries or any Pledgor, or the Borrower, any of its subsidiaries or the Pledgor shall take any step toward, or to authorize, such a proceeding; or (l) Insolvency. The Borrower, any of its subsidiaries or the Pledgor shall become insolvent, generally shall fail or be unable to pay its debts as they mature, shall admit in writing its inability to pay its debts as they mature, shall make a general assignment for the benefit of its creditors, shall enter into any composition or similar agreement, or shall suspend the transaction of all or a substantial portion of its usual business. SECTION 7.2. REMEDIES. Upon the occurrence of any Event of Default set forth in subsections (a)-(k) of Section 7.1 and during the continuance thereof, the Lender or any other holder of the Term Note may declare the Term Note and any other amounts owed to the Lender to be immediately due and payable, whereupon the Term Note and any other amounts owed to the Lender shall forthwith become due and payable. Upon the occurrence of any Event of Default set forth in 8 subsections (l)-(m) of Section 7.1, the Term Note and any other amounts owed to the Lender shall be immediately and automatically due and payable without action of any kind on the part of the Lender or any other holder of the Term Note. The Borrower expressly waives presentment, demand, notice or protest of any kind in connection herewith. The Lender shall promptly give the Borrower notice of any such declaration, but failure to do so shall not impair the effect of such declaration. No delay or omission on the part of the Lender or any holder of the Term Note in exercising any power or right hereunder or under the Term Note shall impair such right or power or be construed to be a waiver of any Event of Default or any acquiescence therein, nor shall any single or partial exercise of any power or right hereunder preclude other or further exercise thereof, or the exercise of any other power or right. SECTION 8. DEFINITIONS SECTION 8.1. GENERAL. As used herein: (a) "affiliate" of any Person means (a) any Person that, directly or indirectly, is in control of, is controlled by, or is under common control with such Person, (b) any Person who is a director or officer (i) of such Person, (ii) of any subsidiary of such Person or (iii) of any Person described in clause (a) above or (c) in the case of a trust, its protectors or trustees, any Person who is or has been a beneficiary thereof, or any Person who is or has been able to appoint a beneficiary thereof. For purposes of this definition, control of a Person shall mean the power, direct or indirect (i) to vote 25% or more of the securities having ordinary voting power for the election of directors of such Person, whether by ownership of securities, contract, proxy or otherwise, or (ii) to direct or cause the direction of the management and policies of such Person, whether by ownership of securities, contract, proxy or otherwise. (b) "Agreement" shall have the meaning set forth in the Preamble. (c) "Borrower" shall have the meaning set forth in the Preamble. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (f) "ERISA Affiliate" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as such Borrower or is under common control (within the meaning of Section 414(c) of the Code) with the Borrower. (g) "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect on the date of this Agreement, consistently applied. (h) "Lender" shall have the meaning set forth in the Preamble. 9 (i) "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate as a "contributing sponsor" (within the meaning of Section 4001(a)(13) of ERISA). (j) "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. (k) "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, other entity or government (whether federal, state, county, city, municipal, local, foreign, or otherwise, including any instrumentality, division, agency, body or department thereof). (l) "Plan" means any plan, program or arrangement which constitutes an "employee benefit plan" within the meaning of Section 3(3) of ERISA and which is maintained or contributed to by the Borrower or its ERISA Affiliates for the benefit of their employees, including former employees. (m) "Pledge Agreement" shall have the meaning set forth in Section 6.1(d). (n) "Pledgor" shall have the meaning set forth in Section 6.1(d). (o) "subsidiary" means any corporation, partnership, joint venture, trust, or other legal entity of which the Borrower owns directly or indirectly 50% or more of the outstanding voting stock or interest, or of which the Borrower has effective control, by contract or otherwise. (p) "Term Loan" shall have the meaning set forth in Section 1.1. (q) "Term Loan Maturity Date" shall have the meaning set forth in Section 1.2. (r) "Term Note" shall have the meaning set forth in Section 1.2. (s) "Unmatured Event of Default" means an event or condition which would become an Event of Default with notice or the passage of time or both. (t) "Warrant" shall have the meaning set forth in Section 6.1(f). Except as and unless otherwise specifically provided herein, all accounting terms in this Agreement shall have the meanings given to them by GAAP and shall be applied and all reports required by this Agreement shall be prepared, in a manner consistent with the audited financial statements referred to in Section 4.3. 10 SECTION 8.2. APPLICABILITY OF SUBSIDIARY AND AFFILIATE REFERENCES. Terms hereof pertaining to any subsidiary or affiliate shall apply only during such times as the Borrower has any subsidiary or affiliate. SECTION 9. MISCELLANEOUS SECTION 9.1. WAIVER OF DEFAULT. The Lender may, by written notice to the Borrower, at any time and from time to time, waive any Event of Default or Unmatured Event of Default, which shall be for such period and subject to such conditions as shall be specified in any such notice. In the case of any such waiver, the Lender and the Borrower shall be restored to their former position and rights hereunder and under the Term Note, respectively, and any Event of Default or Unmatured Event of Default so waived shall be deemed to be cured and not continuing; but no such waiver shall extend to or impair any right consequent thereon or to any subsequent or other Event of Default or Unmatured Event of Default. SECTION 9.2. NOTICES. All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been given or made when deposited in the mail, postage prepaid, addressed: (a) if to the Lender to 141 West Jackson Boulevard, Suite 2182, Chicago, Illinois 60604, Attention: John T. Porter, telecopy No. (312) 427-5396, (b) if to the Borrower to 23461 South Pointe, Suite 200, Laguna Hills, California 92653, Attention: Dennis Calvert, telecopy No. (949) 454-9066, copy to John R. Browning, Esq, telecopy No. (949) 770-8666. or to such other address as may be hereafter designated in writing by the respective parties hereto. SECTION 9.3. NONWAIVER; CUMULATIVE REMEDIES. No failure to exercise, and no delay in exercising, on the part of the Lender of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of the Lender herein provided are cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.4. SURVIVAL OF AGREEMENTS. All agreements, representations and warranties made herein shall survive the delivery of the Term Note and the making of the Term Loan. SECTION 9.5. SUCCESSORS. This Agreement shall, upon execution and delivery by the Borrower and acceptance by the Lender, become effective and shall be binding upon and inure to the benefit of the Borrower, the Lender and their respective successors and assigns, except that the Borrower may not transfer or assign any of its rights or interest hereunder without the prior written consent of the Lender. SECTION 9.6. CAPTIONS. Captions in this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions 11 hereof. References herein to Sections or provisions without reference to the document in which they are contained are references to this Agreement. SECTION 9.7. SINGULAR AND PLURAL. Unless the context requires otherwise, wherever used herein the singular shall include the plural and vice versa, and the use of one gender shall also denote the others where appropriate. SECTION 9.8. COUNTERPARTS. This Agreement may be executed by the parties on any number of separate counterparts, and by each party on separate counterparts; each counterpart shall be deemed an original instrument; and all of the counterparts taken together shall be deemed to constitute one and the same instrument. SECTION 9.9. FEES. The Borrower agrees to pay or reimburse the Lender for all costs and expenses of enforcing this Agreement, the Term Note, the Pledge Agreement or the Warrant, or preserving its rights hereunder or under any document or instrument executed in connection herewith (including legal fees and reasonable time charges of attorneys who may be employees of the Lender, whether in or out of court, in original or appellate proceedings or in bankruptcy). SECTION 9.10. CONSTRUCTION. This Agreement, the Term Note, the Pledge Agreement, the Warrant and any other document or instrument executed in connection herewith shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of Illinois and shall be deemed to have been executed in the State of Illinois. SECTION 9.11. SUBMISSION TO JURISDICTION; VENUE. To induce the Lender to make the Term Loan, as evidenced by the Term Note and this Agreement, the Borrower irrevocably agrees that, subject to the Lender's sole and absolute election, all suits, actions or other proceedings in any way, manner or respect, arising out of or from or related to this Agreement, the Term Note, the Pledge Agreement, the Warrant or any document executed in connection herewith, shall be subject to litigation in courts having sites within Illinois. The Borrower hereby consents and submits to the jurisdiction of any local, state or federal court located within said city and state. The Borrower hereby waives any right it may have to trial by jury, to transfer or change the venue of any suit, action or other proceeding brought against the Borrower by the Lender in accordance with this Section 9.11, or to claim that any such proceeding has been brought in an inconvenient forum. [SIGNATURE PAGE FOLLOWS] 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. NUWAY MEDICAL, INC. By: --------------------------------------------- Its: -------------------------------------------- AUGUSTINE II, LLC By: AUGUSTINE CAPITAL MANAGEMENT, L.L.C., its manager By: --------------------------------------------- Its: -------------------------------------------- EX-10.2 5 ex10-2.txt Exhibit 10.2 THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES ACT OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACTS COVERING THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACTS. NUWAY MEDICAL, INC. WARRANT TO PURCHASE COMMON STOCK June 10, 2003 WARRANT NO. AG-1 THIS CERTIFIES THAT, for value received, AUGUSTINE II, LLC, a limited liability company formed under the laws of the State of Delaware (the "Holder"), is entitled to subscribe for and purchase from NUWAY MEDICAL, INC., a corporation organized under the laws of the state of Delaware (the "Company"), commencing at the time periods prescribed herein and ending at 5:00 p.m. Chicago, Illinois time on the fifth (5th) calendar anniversary of the date hereof, 6,158,381 shares (the "Shares") of common stock, par value, $0.00067, of the Company (the "Common Stock"). The exercise price for each Share subject to this Warrant (the "Warrant Price") is equal to $0.16. The number of Shares and the Warrant Price are subject to adjustment from time to time as provided in Section 5 of this Warrant, however the number of shares that are issued or potentially issued to the Holder shall never be equal to or exceed 20% of the issued and outstanding common shares as of the date of this agreement, which is equal to 30,791,911. This Warrant is issued in connection with and as consideration for the funds received by the Company set forth on the face of the Term Note dated the date hereof and issued by the Company in favor of the Holder, which Term Note has been issued pursuant to that certain Term Loan Agreement dated the date hereof between the Company and the Holder. Three million six hundred sixty-five thousand seven hundred three (3,665,703) warrants are exercisable upon funding by Holder of the first installment pursuant to the Term Loan Agreement. One million four hundred sixty-six thousand two hundred eighty-one (1,466,281) shall not be exercisable unless and until the Holder funds the second installment of $100,000 pursuant to the Term Loan Agreement (it being understood that in event that the Holder fails to fund the installment required by the Term Loan Agreement within ten (10) days following the funding date prescribed therein, the right to exercise this warrant in relation to such shares is cancelled). The balance of the warrants (one million twenty-six thousand three hundred ninety-seven (1,026,397)) shall not be exercisable until the Holder funds the final installment pursuant to the Term Loan Agreement (it being understood that in event that the Holder fails to fund the installment required by the Term Loan Agreement within ten (10) days following the funding date prescribed therein, the right to exercise this warrant in relation to such shares is cancelled). 1. Method of Exercise; Payment; Issuance of New Warrant. The purchase right represented by this Warrant may be exercised by the Holder, in whole or in part, subject to the limitation set forth below, and from time to time, by (i) the surrender of this Warrant (with a notice of exercise in the form attached hereto as Exhibit A, duly executed) at the principal office of the Company and (ii) the payment to the Company, by check or wire transfer of funds to an account specified in writing by the Company, of an amount equal to the aggregate Warrant Price (provided, however, this clause (ii) shall not be applicable if the Holder is making a cashless exercise pursuant to Section 2 of this Warrant). The Shares so purchased, representing the aggregate number of shares specified in the executed Exhibit A, shall be delivered to the Holder within a reasonable time, not exceeding five (5) business days, after this Warrant shall have been so exercised. Upon receipt by the Company of this Warrant at the office of the Company, in proper form for exercise and, unless a cashless exercise is being made in accordance with Section 2 of this Warrant, accompanied by the amount equal to the aggregate Warrant Price, the Holder shall be deemed to be the holder of record of the Shares issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Shares shall not then be actually delivered to the Holder. Notwithstanding anything else herein to the contrary, the Holder shall not have the right, and the Company shall not have the obligation, to exercise all or any portion of the Warrants if and to the extent that the issuance to the Holder of shares of Common Stock upon such exercise of the Warrants would result in the Holder being deemed the "beneficial owner" of 5% or more of the then outstanding shares of Common Stock of the Company within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of such Shares, deliver to the Holder a new Warrant evidencing the right to purchase the remaining Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant which shall then be returned to Holder. 2. Exercise. The Holder shall pay the Warrant Price to the Company for each Warrant that it exercises if as of the Term Loan Maturity Date (a) the registration statement to be filed by the Company with the Securities and Exchange Commission (the "SEC") to register the Holder's re-sale of the Common Stock underlying the Warrant has been declared effective by the SEC; (b) the closing bid price of the Common Stock of the Company as published in Bloomberg for each trading day within the thirty calendar days prior to the Term Loan Maturity Date has equaled or exceeded $0.60 per share; and (c) the volume of trading of the Common Stock of the Company as published in Bloomberg for each trading day within the thirty calendar days prior to the Term Loan Maturity Date has equaled or exceeded 100,000 shares. If all of such conditions are not fully satisfied by the Term Loan Maturity Date, then in lieu of exercising this Warrant by payment in cash or check, the Holder may elect to pay the Warrant Price by reducing the number of Shares issuable upon exercise of this Warrant in accordance with the following formula: X = Y(A-B) --------- A Where: X = the number of Shares to be issued to the Holder. Y = the number of Shares requested to be exercised under this Warrant. A = the Fair Market Value of one (1) Share of Common Stock as of the date such Warrant is exercised. B = the Warrant Price. - 2 - "Fair Market Value" of the Company's Common Stock means the average of the closing bid prices of the Common Stock as published in Bloomberg for the ten trading days prior to the date of determination of fair market value. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable, and free from all preemptive rights, taxes, liens and charges with respect to the issue thereof; provided, however, that the Company shall not be required to pay any transfer taxes with respect to the issue of shares in any name other than that of the registered holder hereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. The Company shall at all times take all such action and obtain all such permits or orders as may be necessary to enable the Company lawfully to issue such Common Stock as duly and validly issued, fully paid and nonassessable shares upon exercise in full of this Warrant. 4. Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Fair Market Value of such Shares. 5. Adjustment. This Warrant shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the date hereof effect a subdivision of the outstanding Common Stock, the Warrant Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the date hereof combine the outstanding Common Stock, the Warrant Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time after the date hereof shall make or issue a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Warrant Price shall be decreased as of the time of such issuance, by multiplying the Warrant Price by a fraction: (x) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance; and (y) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance plus the number of shares of Common Stock issuable in payment of such dividend or distribution. (c) Adjustment of Number of Shares. Upon each adjustment of the Warrant Price pursuant to either Section 5(a) or 5(b) of this Warrant, the number of shares of Common Stock purchasable upon exercise of this Warrant shall be adjusted to the number of shares of Common Stock, calculated to the nearest one hundredth of a share, obtained by multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment upon the exercise of the Warrant by the Warrant Price in effect prior to such adjustment and dividing the product so obtained by the new Warrant Price. - 3 - (d) Adjustment for Reclassification, Exchange and Substitution. If the Common Stock issuable upon the exercise of this Warrant are changed into the same or different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination provided for in Section 5(a) above, a dividend or distribution provided for in Section 5(b) above, or a reorganization, merger, consolidation or sale of assets, provided for in Section 5(e) below), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of stock and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares of Common Stock for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change. (e) Reorganization, Mergers, Consolidations or Sales of Assets. If at any time or from time to time there is a capital reorganization of the Common Stock (other than a subdivision or combination provided for in Section 5(a) above, a dividend or distribution provided for in Section 5(b) above, or a reclassification or exchange of shares provided for in Section 5(d) above) or a merger or consolidation of the Company with or into another entity, or a sale of all or substantially all of the Company's properties and assets to any other person or entity, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities, money or property of the Company, or of the successor entity resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. The Company shall not effect any reorganization, merger, consolidation or sale unless prior to the consummation thereof each entity or person (other than the Company) that may be required to deliver any cash, securities or other property upon the exercise of this Warrant shall assume, by written instrument delivered to the Holder, the obligation to deliver to the Holder such cash, securities or other property as in accordance with the foregoing provisions the Holder may be entitled to receive. The foregoing provisions of this Section 5(e) shall similarly apply to successive reorganizations, mergers, consolidations and sales. (f) Adjustment of Warrant Price for Matching Purposes. (i) In the event that the Company shall issue Common Stock or rights, warrants, options or convertible or exchangeable securities entitling the holder thereof to subscribe for or purchase, convert into or exchange for Common Stock, in any such case at a price per share less than $0.16, then the Warrant Price in effect immediately prior to such earliest date shall be adjusted so that the Warrant Price shall equal the price determined by multiplying the Warrant Price in effect immediately prior to such earliest date by the fraction: (x) whose numerator shall be the number of shares of Common Stock outstanding on such date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the then applicable Warrant Price (such amount, with respect to any such rights, warrants, options or convertible or exchangeable securities, determined by multiplying the total number of shares subject thereto by the exercise price of such rights, warrants, options or convertible or exchangeable securities and dividing the product so obtained by the then applicable Warrant Price), and (y) whose denominator shall be the number of shares of Common Stock outstanding on such date plus the number of additional shares of Common Stock to be issued or distributed or receivable upon exercise of any such right, warrant, option or convertible or exchangeable security. Such adjustment shall be made successively whenever any such Common Stock, rights, warrants, options or convertible or exchangeable securities are issued or distributed. In determining whether any rights, warrants or options entitle the holders to subscribe for or purchase shares of Common Stock at less than - 4 - $0.16, and in determining the aggregate offering price of shares of Common Stock so issued or distributed, there shall be taken into account any consideration received by the Company for such Common Stock, rights, warrants, options, or convertible or exchangeable securities. If any right, warrant, option or convertible or exchangeable security to purchase or acquire Common Stock, the issuance of which resulted in an adjustment in the Warrant Price pursuant to this subsection (i) shall expire and shall not have been exercised, the Warrant Price shall immediately upon such expiration be recomputed to the Warrant Price which would have been in effect had the adjustment of the Warrant Price made upon the issuance of such right, warrant, option or convertible or exchangeable security been made on the basis of offering for subscription, purchase or issuance, as the case may be, only of that number of shares of Common Stock actually purchased or issued upon the actual exercise of such right, warrant, option or convertible or exchangeable securities. (ii) No adjustment in the Warrant Price shall be required unless the adjustment would require an increase or decrease of at least 1% in the Warrant Price then in effect; provided, however, that any adjustments that by reason of this Section 5(f) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5(f) shall be made to the nearest cent or nearest 1/100th of a share. (iii) Notwithstanding anything to the contrary set forth in this Section 5(f), no adjustment shall be made to the Warrant Price upon (A) the issuance of shares of Common Stock pursuant to any compensation or incentive plan for officers, directors, employees or consultants of the Company, or (B) the issuance of Common Stock upon the conversion or exercise of the options, warrants or rights of the Company outstanding as of the date hereof. (g) No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this Section and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company will not issue any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon the voluntary or involuntary dissolution, liquidation or winding up of the Company. (h) Notice of Adjustments. Whenever this Warrant shall be adjusted pursuant to this Section 5, the Company shall make a certificate signed by an officer of the Company setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the new Warrant Price and the type or the number of Shares purchasable after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail, postage prepaid) to the Holder. 6. The Company's Obligation to Make Payments. (a) Dividends and Distributions. In the event the Company at any time or from time to time after the date hereof shall make or issue a dividend or other distribution, whether payable in cash, securities or other property of the Company, with respect to any of its capital stock for which an adjustment is not made pursuant to Section 5 of this Warrant, then and in each such event, the Company shall concurrently make a cash payment to the Holder equal to the product of (i) the quotient obtained by dividing (x) the amount of cash plus the fair value of any property or securities distributed by (y) the number of shares of Common Stock outstanding on the record date for such dividend or distribution and (ii) the number of Shares on such record date. - 5 - (b) Redemption of Capital Stock. In the event the Company at any time or from time to time after the date hereof shall repurchase or redeem any of its capital stock or any rights, including without limitation, options, warrants or other convertible or exchangeable securities, to acquire such capital stock, then and in each such event, the Company shall concurrently make a cash payment to the Holder equal to the product of (i) the quotient obtained by dividing (x) the aggregate amount of cash and the aggregate fair value of any property paid out by the Company in connection with any such repurchase or redemption by (y) the number of shares of Common Stock outstanding on a fully diluted basis immediately after such repurchase or redemption and (2) the number of Shares. 7. Notice of Record Date. In the event: (1) that the Company declares a dividend (or any other distribution) on any of its capital stock (including without limitation, its Common Stock); (2) that the Company repurchases or redeems any of its capital stock (including without limitation, its Common Stock) or any rights to acquire such capital stock; (3) that the Company subdivides or combines its outstanding shares of Common Stock; (4) of any reclassification of the Common Stock, or of any consolidation, merger or share exchange of the Company into or with another entity, or of the sale of all or substantially all of the assets of the Company; (5) of the involuntary or voluntary dissolution, liquidation or winding up of the Company; or (6) of any offer of its Common Stock or any rights to acquire such Common Stock for consideration paid per share of Common Stock less than the Warrant Price then in effect. then the Company shall notify the Holder at least 30 days prior to the date specified in (A), (B) or (C) below, in writing stating: (A) the record date of such dividend, distribution, repurchase, redemption, subdivision or combination, or, if a record is not to be taken, the date as to which the holders of Common Stock of record to be entitled to such dividend, distribution, repurchase, redemption, subdivision or combination are to be determined; (B) the date on which such reclassification, consolidation, merger, share exchange, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up; or (C) the date on which such offering of its Common Stock or any rights to acquire such Common Stock for consideration paid per share of Common Stock less than the Warrant Price is expected to become consummated. - 6 - 8. Compliance with Securities Act; Disposition of Warrant or Common Stock. (a) Compliance with Securities Act. The Holder, by acceptance hereof, agrees that this Warrant and the Shares to be issued upon exercise hereof are being acquired for investment and that such Holder will not offer, sell or otherwise dispose of this Warrant or any Common Stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the "Act"). All Shares issued upon exercise of this Warrant (unless registered under the Act or sold or transferred pursuant to Rule 144 promulgated under the Act) shall be stamped or imprinted with a legend in substantially the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES ACTS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACTS COVERING THIS SECURITY OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACTS." (b) Disposition of Warrant or Shares. Subject to the terms and conditions of this Warrant and applicable securities laws, this Warrant and the rights represented by this Warrant may be transferred, assigned or pledged, in whole or in part with prior written notice to the Company. Any transfer shall be accompanied by the Notice of Transfer form attached hereto as Exhibit B. 9. Rights as Shareholders. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 10. Representations and Warranties. The Company represents and warrants to the Holder as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms; (b) The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; (c) The rights, preferences, privileges and restrictions granted to or imposed upon the Shares and the holders thereof are as set forth in the Company's Articles of Incorporation; (d) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Articles of Incorporation or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and, except for consents that have already been obtained by the Company, do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any federal, state or local government authority or agency or other person; and (e) Capitalization. As of the date of this Warrant the capitalization of the Company is as follows: - 7 - (i) Common Stock. A total of 100,000,000 authorized shares of Common Stock, of which 30,791,911 shares were issued and outstanding. All of such outstanding shares are validly issued, fully paid and non-assessable. No shares of the Common Stock are held in the Company's treasury. (ii) Preferred Stock. A total of 25,000,000 authorized shares of Preferred Stock, of which 559,322 shares were issued and outstanding. (iii) Options, Warrants, Reserved Shares. Except as disclosed in the Form 10-KSB for the period ended December 31, 2002 filed by the Company, or the Form 10-QSB filed by the Company (or provided to the Holder if not filed) for the period ended March 31, 2003, there are no outstanding options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock or any securities convertible into or ultimately exchangeable or exercisable for any shares of the Company's capital stock. No shares of the Company's outstanding capital stock, or stock issuable upon exercise, conversion or exchange of any outstanding options, warrants or rights, or other stock issuable by the Company, are subject to any rights of first refusal or other rights to purchase such stock (whether in favor of the Company or any other person), pursuant to any agreement, commitment or other obligation of the Company. 11. Registration Rights. If the Company proposes to file any registration statement under the Act (other than Form S-8), with respect to an offering of any equity securities, then the Company shall give the Holder written notice of such proposed filing as soon as practicable (but in no event less than thirty (30) days before the anticipated initial filing date of such registration statement), and such notice shall offer the Holder the opportunity to register such number of Shares as the Holder shall request (the "Piggyback Shares"). The Company shall bear all costs of registering the Piggyback Shares, except for underwriting discounts or commissions if the registration statement relates to an underwritten offering. Any registration rights granted by this paragraph expire when shares issued pursuant to this Warrant Agreement are eligible for sale under Rule 144(k) of the Securities Act of 1933. 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered to the applicable party at its address specified opposite its signature below, or at such other address as shall be designated by such party in a written notice to the other. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied or cabled or sent by overnight courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier. 14. Descriptive Headings. The descriptive headings of the several sections of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 15. Governing Law. THIS WARRANT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. - 8 - 16. Binding Effect on Successors. This Warrant shall be binding upon any entity succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise, and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the Holder. 17. Severability. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 18. Lost Warrants or Stock Certificates. The Company covenants to the Holder that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. [Signature Page Follows] - 9 - IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and delivered by its duly authorized officer on the day and year first above written. NUWAY MEDICAL, INC. By: ------------------------------------------ Name: ________________________ Title: ________________________ Address: 23461 South Pointe, Suite 200 Laguna Hills, California 92653 Attention:________________ Facsimile:________________ ACKNOWLEDGED AND ACCEPTED: AUGUSTINE II, LLC By: AUGUSTINE CAPITAL MANAGEMENT, L.L.C., its manager By: ----------------------------------------- Name: John T. Porter Title: President Address: 141 West Jackson Boulevard, Suite 2182 Chicago, Illinois 60604 Attention: John T. Porter Facsimile: (312) 427-5396 - 10 - EXHIBIT A NOTICE OF EXERCISE TO: NUWAY MEDICAL, INC. (1) The undersigned hereby elects to purchase __________ shares of Common Stock of NUWAY MEDICAL, INC. pursuant to the terms of the attached Warrant, and, unless such Warrant allows the exercise to be "cashless," tenders herewith payment of the Warrant Price for such shares in full. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: ---------------------------------------- (Name) ---------------------------------------- (Name) (3) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ---------------------------------------- (Name) ---------------------------------------- (Address) ---------------------------------------- (Signature) ---------------------------------------- (Date) EXHIBIT B NOTICE OF TRANSFER (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________________________________ the right represented by the attached Warrant to purchase __________ shares of the Common Stock of NUWAY MEDICAL, INC., to which the attached Warrant relates, and appoints _____________________ as Attorney to transfer such right on the books of NUWAY MEDICAL, INC., with full power of substitution in the premises. Dated: ----------------------------- ---------------------------------------- (Signature must conform in all respects to the name of the Holder as specified on the face of the Warrant) ---------------------------------------- ---------------------------------------- (Address) Signed in the presence of: ------------------------------------ EX-10.3 6 ex10-3.txt Exhibit 10.3 PLEDGE AGREEMENT Dated as of June 10, 2003 This Pledge Agreement (as modified from time to time, this "Agreement") has been executed by NEW MILLENNIUM CAPITAL PARTNERS, LLC, a Nevada limited liability company, as debtor ("Debtor"), in favor of AUGUSTINE II, LLC, an Delaware limited liability company ("Secured Party"). In consideration of Secured Party making a term loan to NuWay Medical, Inc. ("Borrower") under that certain Term Loan Agreement dated as of even date herewith entered into between Borrower and Secured Party (as amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement) and under the Term Note executed by Borrower in connection with the Loan Agreement, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor agrees as follows: 1. PLEDGE. Debtor hereby assigns, pledges, hypothecates, delivers, sets over and transfers to Secured Party and grants to Secured Party a continuing security interest in the following, in each case whether certificated or uncertificated, whether now owned or hereafter acquired, wherever located (any or all of such, the "Collateral"): (a) The securities listed on Exhibit A attached hereto. (b) With respect to any Collateral referred to in (a), but without limiting (a): (i) all stock powers, certificates and instruments; and (ii) all replacements, substitutions, interest, cash and stock dividends, distributions, warrants, options, and other rights and amounts paid, accrued, received, receivable, or distributed with respect thereto from time to time. (c) With respect to the foregoing, all products and proceeds thereof, including without limitation insurance proceeds and payments under the Securities Investor Protection Act of 1970, as amended. 2. LIABILITIES. The Collateral shall secure the payment and performance of all obligations and liabilities of Borrower to Secured Party under the Loan Agreement and the Term Note and of Debtor hereunder (the "Liabilities"). 3. REPRESENTATIONS. Debtor hereby represents and warrants to Secured Party that: (a) Debtor's exact legal name is as set forth in the preamble to this Agreement; Debtor's type of organization and jurisdiction of organization are as set forth in the preamble to this Note; Debtor's organizational identification number assigned to it by the secretary of state of the state where Debtor is organized is LLC10358-1999; Debtor's place of business or, if Debtor has more than one place of business, Debtor's chief executive office is located at the address set forth next to its signature line to this Agreement; and Debtor has never been organized in any jurisdiction other than the jurisdiction set forth in the preamble to this Agreement. During the five (5) years and six months prior to the date of this Agreement Debtor has not been known by any legal name different from the one set forth in the preamble to this Agreement nor has Debtor been the subject of any merger, consolidation, or other organizational reorganization. (b) Debtor is existing and in good standing under the laws of its state of organization, is duly qualified, in good standing and authorized to do business in each jurisdiction where failure to do so might have a material adverse impact on the consolidated assets, condition or prospects of Debtor; the execution, delivery and performance of this Agreement and all related documents and instruments are within Debtor's powers and have been authorized by all necessary limited liability company action. (c) To the best of Debtor's knowledge, the execution, delivery and performance of this Agreement have received any and all necessary governmental approval, and do not and will not contravene or conflict with any provision of law or of the operating agreement or of the articles of organization of Debtor or any agreement affecting Debtor or its property. (d) The Collateral is duly and validly authorized and issued, non-assessable, fully paid and paid for, issued and outstanding, and Debtor is the legal and equitable owner of the Collateral, with the right to pledge, assign and deliver the Collateral to secure the Liabilities and do or cause to be done all other actions provided for or referenced in this Agreement, free and clear of all liens, claims, encumbrances and security interests of any nature except any in favor of Secured Party. (e) Sale of the Collateral by Secured Party is not prohibited or regulated by any federal or state law or regulation or any agreement binding upon Debtor and requires no registration or filing with, or consent or approval of, any governmental body, regulatory authority or securities exchange. (f) No financing statement, notice of judgment, or any similar instrument (unless filed on behalf of Secured Party) covering any of the Collateral is on file in any public office. 4. APPOINTMENT OF SUB-AGENTS; REGISTRATION IN NOMINEE NAME. (a) The Secured Party shall have the right to appoint one or more sub-agents for the purpose of retaining physical possession of any certificates or instruments representing or evidencing the Collateral. In addition, Secured Party shall at all times have the right to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations for any purpose consistent with its performance of this Agreement. (b) For the better perfection of Secured Party's rights in and to the Collateral and to facilitate implementation of such rights, Debtor shall, upon written request of Secured Party, cause all the certificates, notes, documents and other instruments evidencing, representing or otherwise comprising the Collateral to be registered or otherwise put into the name of Secured Party or a nominee or nominees of Secured Party subject only to the revocable voting rights specified herein. (c) Debtor hereby consents and agrees that the issuers of, or any depository, registrar, transfer agent or similar party for any of, the Collateral shall be entitled to accept the provisions hereof as conclusive evidence of the right of Secured Party to effect any transfer pursuant hereto, notwithstanding any notice or direction to the contrary heretofore or hereafter given by Debtor or any other person to any such issuer or any such depository, registrar, transfer agent or similar party. 5. VOTING RIGHTS. Upon the occurrence and during the continuance of an Event of Default, any and all voting or similar rights with respect to the Collateral shall be exercisable only by Secured Party. 2 6. COVENANTS OF DEBTOR. Debtor agrees that so long as this Agreement remains in effect, it will: (a) Promptly deliver any cash, securities or other property received with respect to the Collateral, whether as proceeds of the disposition thereof, dividends with respect thereto, or otherwise, to be held by Secured Party or Bailee as Collateral. Notwithstanding the foregoing, until Secured Party notifies Debtor to the contrary or an Event of Default occurs, Debtor may continue to receive regular cash dividends and interest payments on the Collateral. (b) Defend the Collateral against the claims and demands of all persons other than Secured Party and promptly pay all taxes, assessments, and charges upon the Collateral, and not sign (or permit to be signed) any documents creating or perfecting a lien upon or security interest in any of the Collateral except in favor of Secured Party, or otherwise create, suffer, or permit to exist any liens or security interests upon any Collateral other than in favor of Secured Party. (c) Keep at its address for notices set forth under or opposite its signature hereto its records concerning the Collateral, which records shall be of such character as will enable Secured Party to determine at any time the status of the Collateral; furnish to Secured Party such information concerning the Collateral as Secured Party may from time to time reasonably request; and permit Secured Party from time to time to inspect, audit, and make copies of, and extracts from, all records and all other papers in the possession of Debtor pertaining to the Collateral. (d) Make appropriate entries upon its financial statements and its books and records disclosing Secured Party's security interest in the Collateral. (e) Provide to Secured Party from time to time such financial statements of and other information concerning the Collateral and Debtor as Secured Party shall reasonably request. (f) Not sell, transfer, grant an option or similar right with respect to, or otherwise dispose of or agree to dispose of any Collateral or any interest therein. 7. EVENTS OF DEFAULT. The occurrence or continuance of any of the following shall constitute an "Event of Default": (a) failure to pay, when and as due, any principal and interest or other amounts payable hereunder or in connection with any of the Liabilities; or (b) failure to comply with or perform any agreement or covenant of Debtor contained herein; or (c) any default, event of default, or similar event shall occur or continue under the Loan Agreement or the Term Note, and shall continue beyond any applicable notice, grace or cure period set forth in the Loan Agreement or Term Note, respectively; or (d) any representation, warranty, schedule, certificate, financial statement, report, notice, or other writing furnished by or on behalf of Debtor to Secured Party is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified; or 3 (e) this Agreement shall be repudiated or shall become unenforceable or incapable of performance in accord with its terms; or (f) Debtor shall grant or any Person (other than Secured Party) shall obtain a security interest in any of the Collateral, or shall file any financing statement purportedly covering any Collateral; Debtor or any other Person shall perfect (or attempt to perfect) such a security interest; a court shall determine that Secured Party does not have a first-priority security interest in any of the Collateral or in any other assets constituting security for the Liabilities, enforceable in accord with this Agreement (as to the Collateral) or the related collateral documents (as to such other assets). 8. DEFAULT REMEDIES. (a) Upon the occurrence and during the continuance of any Event of Default, Secured Party may exercise any rights and remedies under this Agreement, the Loan Agreement, the Term Note and any related document or instrument (including without limitation any pertaining to Collateral), and at law or in equity. (b) If any Event of Default shall have occurred and be continuing, then, in addition to having the right to exercise any rights and remedies of a secured party upon default under the Uniform Commercial Code in effect in the State of Illinois or in any state where any Collateral is located, Secured Party may, in its sole discretion: (i) without being required to give any prior notice to Debtor apply the cash (if any) then held by it hereunder, toward the Liabilities in such order as Secured Party shall determine in its sole discretion; and (ii) if there shall be no such cash or the cash so applied shall be insufficient to pay all obligations in full, sell the Collateral, or any part thereof, at any public or private sale, for cash, upon credit or for future delivery, as Secured Party shall deem appropriate. The Secured Party shall be authorized at any such sale (to the extent it deems it advisable to do so, in its sole discretion) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral then being sold for their own account for investment and not with a view to the distribution or resale thereof, and upon consummation of any such sale Secured Party shall have the right to assign, transfer and deliver to the purchaser(s) thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Debtor, and Debtor hereby waives (to the extent permitted by law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. To the extent that notice of sale shall be required to be given by law, Secured Party shall give Debtor at least ten days' written notice of Secured Party's intention to make any such public or private sale or sales. Secured Party shall not be obligated to make any sale of Collateral if it shall determine not to do so, regardless of the fact that notice of sale of Collateral may have been given. Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by Secured Party until the sale price is paid by the purchaser thereof, but Secured Party shall not incur any liability in case any such purchaser shall fail to take up and pay for the Collateral so sold; in the case of any such failure, such Collateral may be sold again upon like 4 notice. As an alternative to exercising the power of sale herein conferred upon it, Secured Party may proceed by a suit at law or in equity to foreclose this Agreement and to sell the Collateral, or any portion thereof, pursuant to a judgment or decree of a court of competent jurisdiction. The proceeds of sale of Collateral sold pursuant hereto shall be applied by Secured Party in such order as it shall determine. (c) Secured Party may, by written notice to Debtor, at any time and from time to time, waive any Event of Default or Unmatured Event of Default, which shall be for such period and subject to such conditions as shall be specified in any such notice. In the case of any such waiver, Secured Party and Debtor shall be restored to their former position and rights hereunder, and any Event of Default or Unmatured Event of Default so waived shall be deemed to be cured and not continuing; but no such waiver shall extend to or impair any subsequent or other Event of Default or Unmatured Event of Default. No failure to exercise, and no delay in exercising, on the part of the Secured Party of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of Secured Party herein provided are cumulative and not exclusive of any rights or remedies provided by law. 9. POWERS OF SECURED PARTY. Secured Party may, from time to time, at its option (but shall have no duty to): (a) perform any agreement of Debtor hereunder that Debtor shall have failed to perform; (b) take any other action which Secured Party deems necessary or desirable for the preservation of the Collateral or Secured Party's interest therein and the carrying out of this Agreement, including without limiting the generality of the foregoing: (i) any action to collect or realize upon the Collateral; (ii) the discharge of taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral; or (iii) the discharge or keeping current of any obligation of Debtor having effect on the Collateral; or (iv) receiving, endorsing and collecting all checks and other orders for the payment of money made payable to Debtor representing any dividend, interest payment or other distribution payable or distributable in respect of the Collateral or any part thereof, and to give full discharge for the same; (c) file, or cause to be filed, photocopies or carbon copies of any financing statement respecting any right of Secured Party in the Collateral, and any such photocopy or carbon copy of the signature of Debtor on such photocopy or carbon copy shall be deemed an original for purposes of such filing. Debtor hereby authorizes Secured Party to sign financing statements on Debtor's behalf to be filed in all jurisdictions in which such authorization is permitted; and (d) (without limiting any other provision hereof) request that any uncertificated securities or deposits constituting Collateral hereunder be delivered to it in definitive form. Upon receipt of such request from Secured Party, Debtor will immediately take all steps (including, without limitation, the payment by Debtor of all costs and expenses of issuance and transfer) required to cause such uncertificated securities or deposits to be issued and delivered in definitive form to Secured Party, together with any and all documents (executed in blank) required to effect the transfer of definitive securities or deposits in definitive form to Secured Party. The parties expressly agree that such securities or deposits when issued in definitive form shall continue to constitute Collateral for purposes of this Agreement. Debtor hereby appoints Secured Party as Debtor's attorney-in-fact, which appointment is and shall be deemed to be irrevocable and coupled with an interest, for purposes of performing acts and signing and delivering any 5 agreement, document, or instrument, on behalf of Debtor in accordance with this Section. Debtor immediately will reimburse Secured Party for all expenses so incurred by Secured Party, together with interest thereon at the interest rates specified in the Loan Agreement. 10. FURTHER ASSURANCES. Debtor agrees to do (or cause to be done) such further acts and things, and to execute and deliver (or cause to be executed and delivered) such additional conveyances, assignments, agreements, and instruments, as Secured Party may at any time request in connection with the administration or enforcement of this Agreement or related to the Collateral or any part thereof or in order better to assure and confirm unto Secured Party its rights, powers and remedies hereunder. 11. OBLIGATIONS UNCONDITIONAL; WAIVER OF DEFENSES. Debtor irrevocably agrees that no fact or circumstance whatsoever which might at law or in equity constitute a discharge or release of, or defense to the obligations of, a guarantor or surety shall limit or affect any obligations of Debtor under this Agreement or any document or instrument executed in connection herewith. Without limiting the generality of the foregoing: (a) Secured Party may at any time and from time to time, without notice to Debtor, take any or all of the following actions without affecting or impairing the liability of Debtor on this Agreement: (i) renew or extend time of payment of the Liabilities; (ii) accept, substitute, release or surrender any security for the Liabilities; and (iii) release any person primarily or secondarily liable on the Liabilities. (b) No delay in enforcing payment of the Liabilities, nor any amendment, waiver, change, or modification of any terms of any instrument which evidences or is given in connection with the Liabilities, shall release Debtor from any obligation hereunder. The obligations of Debtor under this Agreement are and shall be primary, continuing, unconditional and absolute (notwithstanding that at any time or from time to time all of the Liabilities may have been paid in full), irrespective of the value, genuineness, regularity, validity or enforceability of any documents or instruments respecting or evidencing the Liabilities. In order to hold Debtor liable or exercise rights or remedies hereunder, there shall be no obligation on the part of Secured Party, at any time, to resort for payment to any other person or to any other security for the Liabilities. Secured Party shall have the right to enforce this Agreement irrespective of whether or not other proceedings or steps are being taken against any other property securing the Liabilities or any other party primarily or secondarily liable on any of the Liabilities. (c) Debtor irrevocably waives presentment, protest, demand, notice of dishonor or default, notice of acceptance of this Agreement, notice of any loans made, extensions granted or other action taken in reliance hereon, and all demands and notices of any kind in connection with this Agreement or the Liabilities. (d) Debtor waives any claim or other right which Debtor might now have or hereafter acquire against any person primarily or contingently liable on the Liabilities or that arises from the existence or performance of Debtor's obligations under this Agreement, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim or remedy of Secured Party against any person or any other collateral security for the Liabilities, which Secured Party now has or hereafter acquires, however arising. 6 12. NOTICES. All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been given or made five business days after a record has been deposited in the mail, postage prepaid, or one business day after a record has been deposited with a recognized overnight courier, charges prepaid or to be billed to the sender, or on the day of delivery if delivered manually with receipt acknowledged, in each case addressed or delivered if to Secured Party to its address indicated next to its signature line below and if to Debtor to its address indicated next to its signature line below, or to such other address as may be hereafter designated in writing by the respective parties hereto by a notice in accord with this Section. 13. MISCELLANEOUS. This Agreement and any document or instrument executed in connection herewith shall be governed by and construed in accordance with the internal law of the State of Illinois, and shall be deemed to have been executed in such state. Unless the context requires otherwise, wherever used herein the singular shall include the plural and vice versa, and the use of one gender shall also denote the others. Captions herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof; references herein to Sections or provisions without reference to the document in which they are contained are references to this Agreement. This Agreement shall bind Debtor, its successors and assigns, and shall inure to the benefit of Secured Party, its successors and assigns, except that Debtor may not transfer or assign any of its rights or interest hereunder without the prior written consent of Secured Party. Debtor agrees to pay upon demand all expenses (including without limitation attorneys' fees, legal costs and expenses, in each case whether in or out of court, in original or appellate proceedings or in bankruptcy) incurred or paid by Secured Party or any holder hereof in connection with the enforcement or preservation of its rights hereunder or under any document or instrument executed in connection herewith. 14. WAIVER OF JURY TRIAL, ETC. DEBTOR HEREBY IRREVOCABLY AGREES THAT, SUBJECT TO SECURED PARTY'S SOLE AND ABSOLUTE ELECTION, ALL SUITS, ACTIONS OR OTHER PROCEEDINGS WITH RESPECT TO, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT OR INSTRUMENT EXECUTED IN CONNECTION HEREWITH SHALL BE SUBJECT TO LITIGATION IN COURTS HAVING SITUS WITHIN OR JURISDICTION OVER COOK COUNTY, ILLINOIS. DEBTOR HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN OR HAVING JURISDICTION OVER SUCH COUNTY, AND HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO REQUEST OR DEMAND TRIAL BY JURY, TO TRANSFER OR CHANGE THE VENUE OF ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT BY SECURED PARTY IN ACCORDANCE WITH THIS PARAGRAPH, OR TO CLAIM THAT ANY SUCH PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. [Signature Page Follows] 7 IN WITNESS WHEREOF, Debtor has executed this Agreement as of the date first written above. NEW MILLENNIUM CAPITAL PARTNERS, LLC By: --------------------------------------- Name: ------------------------------------ Title:____________________________________ Address: ------------------------- Attention:________________ Facsimile:________________ ACCEPTED: AUGUSTINE II, LLC By: AUGUSTINE CAPITAL MANAGEMENT, L.L.C., its manager By: ------------------------------------- Name: John T. Porter Title: President Address: 141 West Jackson Boulevard, Suite 2182 Chicago, Illinois 60604 Attention: John T. Porter Facsimile: (312) 427-5396 8 EXHIBIT A SECURITIES Stock Certificate No. No. of Shares ----- --------------- ------------- NuWay Medical, Inc. 2,500,000 9 EX-10.4 7 ex10-4.txt Exhibit 10.4 PLEDGE AGREEMENT Dated as of June 10, 2003 This Pledge Agreement (as modified from time to time, this "Agreement") has been executed by NUWAY MEDICAL, INC., a Nevada corporation, as debtor ("Debtor"), in favor of AUGUSTINE II, LLC, a Delaware limited liability company ("Secured Party"). In consideration of Secured Party making a term loan to Debtor under that certain Term Loan Agreement dated as of even date herewith entered into between Debtor and Secured Party (as amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement) and under the Term Note executed by Debtor in connection with the Loan Agreement, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor agrees as follows: 1. PLEDGE. Debtor hereby assigns, pledges, hypothecates, delivers, sets over and transfers to Secured Party and grants to Secured Party a continuing security interest in the following, in each case whether certificated or uncertificated, whether now owned or hereafter acquired, wherever located (any or all of such, the "Collateral"): (a) The securities listed on Exhibit A attached hereto. (b) With respect to any Collateral referred to in (a), but without limiting (a): (i) all stock powers, certificates and instruments; and (ii) all replacements, substitutions, interest, cash and stock dividends, distributions, warrants, options, and other rights and amounts paid, accrued, received, receivable, or distributed with respect thereto from time to time. (c) With respect to the foregoing, all products and proceeds thereof, including without limitation insurance proceeds and payments under the Securities Investor Protection Act of 1970, as amended. 2. LIABILITIES. The Collateral shall secure the payment and performance of all obligations and liabilities of Debtor to Secured Party under the Loan Agreement and the Term Note and of Debtor hereunder (the "Liabilities"). 3. REPRESENTATIONS. Debtor hereby represents and warrants to Secured Party that: (a) Debtor's exact legal name is as set forth in the preamble to this Agreement; Debtor's type of organization and jurisdiction of organization are as set forth in the preamble to this Note; Debtor's place of business or, if Debtor has more than one place of business, Debtor's chief executive office is located at the address set forth next to its signature line to this Agreement; and Debtor has never been organized in any jurisdiction other than the jurisdiction 10 set forth in the preamble to this Agreement. During the five (5) years and six months prior to the date of this Agreement Debtor has not been known by any legal name different from the one set forth in the preamble to this Agreement nor has Debtor been the subject of any merger, consolidation, or other organizational reorganization. (b) Debtor is existing and in good standing under the laws of its state of organization, is duly qualified, in good standing and authorized to do business in each jurisdiction where failure to do so might have a material adverse impact on the consolidated assets, condition or prospects of Debtor; the execution, delivery and performance of this Agreement and all related documents and instruments are within Debtor's powers and have been authorized by all necessary limited liability company action. (c) To the best of Debtor's knowledge, the execution, delivery and performance of this Agreement have received any and all necessary governmental approval, and do not and will not contravene or conflict with any provision of law or of the operating agreement or of the articles of organization of Debtor or any agreement affecting Debtor or its property. (d) The Collateral is duly and validly authorized and issued, non-assessable, fully paid and paid for, issued and outstanding, and Debtor is the legal and equitable owner of the Collateral, with the right to pledge, assign and deliver the Collateral to secure the Liabilities and do or cause to be done all other actions provided for or referenced in this Agreement, free and clear of all liens, claims, encumbrances and security interests of any nature except any in favor of Secured Party. (e) Sale of the Collateral by Secured Party is not prohibited or regulated by any federal or state law or regulation or any agreement binding upon Debtor and requires no registration or filing with, or consent or approval of, any governmental body, regulatory authority or securities exchange. (f) No financing statement, notice of judgment, or any similar instrument (unless filed on behalf of Secured Party) covering any of the Collateral is on file in any public office. 4. APPOINTMENT OF SUB-AGENTS; REGISTRATION IN NOMINEE NAME. (a) The Secured Party shall have the right to appoint one or more sub-agents for the purpose of retaining physical possession of any certificates or instruments representing or evidencing the Collateral. In addition, Secured Party shall at all times have the right to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations for any purpose consistent with its performance of this Agreement. (b) For the better perfection of Secured Party's rights in and to the Collateral and to facilitate implementation of such rights, Debtor shall, upon written request of Secured Party, cause all the certificates, notes, documents and other instruments evidencing, representing or otherwise comprising the Collateral to be registered or otherwise put into the name of Secured Party or a nominee or nominees of Secured Party subject only to the revocable voting rights specified herein. (c) Debtor hereby consents and agrees that the issuers of, or any depository, registrar, transfer agent or similar party for any of, the Collateral shall be entitled to accept the provisions hereof as conclusive evidence of the right of Secured Party to effect any transfer pursuant hereto, notwithstanding any notice or direction to the contrary heretofore or hereafter given by Debtor or any other person to any such issuer or any such depository, registrar, transfer agent or similar party. 5. VOTING RIGHTS. Upon the occurrence and during the continuance of an Event of Default, any and all voting or similar rights with respect to the Collateral shall be exercisable only by Secured Party. 2 6. COVENANTS OF DEBTOR. Debtor agrees that so long as this Agreement remains in effect, it will: (a) Promptly deliver any cash, securities or other property received with respect to the Collateral, whether as proceeds of the disposition thereof, dividends with respect thereto, or otherwise, to be held by Secured Party or Bailee as Collateral. Notwithstanding the foregoing, until Secured Party notifies Debtor to the contrary or an Event of Default occurs, Debtor may continue to receive regular cash dividends and interest payments on the Collateral. (b) Defend the Collateral against the claims and demands of all persons other than Secured Party and promptly pay all taxes, assessments, and charges upon the Collateral, and not sign (or permit to be signed) any documents creating or perfecting a lien upon or security interest in any of the Collateral except in favor of Secured Party, or otherwise create, suffer, or permit to exist any liens or security interests upon any Collateral other than in favor of Secured Party. (c) Keep at its address for notices set forth under or opposite its signature hereto its records concerning the Collateral, which records shall be of such character as will enable Secured Party to determine at any time the status of the Collateral; furnish to Secured Party such information concerning the Collateral as Secured Party may from time to time reasonably request; and permit Secured Party from time to time to inspect, audit, and make copies of, and extracts from, all records and all other papers in the possession of Debtor pertaining to the Collateral. (d) Make appropriate entries upon its financial statements and its books and records disclosing Secured Party's security interest in the Collateral. (e) Provide to Secured Party from time to time such financial statements of and other information concerning the Collateral and Debtor as Secured Party shall reasonably request. (f) Not sell, transfer, grant an option or similar right with respect to, or otherwise dispose of or agree to dispose of any Collateral or any interest therein. 7. EVENTS OF DEFAULT. The occurrence or continuance of any of the following shall constitute an "Event of Default": (a) failure to pay, when and as due, any principal and interest or other amounts payable hereunder or in connection with any of the Liabilities; or (b) failure to comply with or perform any agreement or covenant of Debtor contained herein; or (c) any default, event of default, or similar event shall occur or continue under the Loan Agreement or the Term Note, and shall continue beyond any applicable notice, grace or cure period set forth in the Loan Agreement or Term Note, respectively; or (d) any representation, warranty, schedule, certificate, financial statement, report, notice, or other writing furnished by or on behalf of Debtor to Secured Party is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified; or 3 (e) this Agreement shall be repudiated or shall become unenforceable or incapable of performance in accord with its terms; or (f) Debtor shall grant or any Person (other than Secured Party) shall obtain a security interest in any of the Collateral, or shall file any financing statement purportedly covering any Collateral; Debtor or any other Person shall perfect (or attempt to perfect) such a security interest; a court shall determine that Secured Party does not have a first-priority security interest in any of the Collateral or in any other assets constituting security for the Liabilities, enforceable in accord with this Agreement (as to the Collateral) or the related collateral documents (as to such other assets). 8. DEFAULT REMEDIES. (a) Upon the occurrence and during the continuance of any Event of Default, Secured Party may exercise any rights and remedies under this Agreement, the Loan Agreement, the Term Note and any related document or instrument (including without limitation any pertaining to Collateral), and at law or in equity. (b) If any Event of Default shall have occurred and be continuing, the Secured Party shall first take all reasonable steps to liquidate the 2,500,000 shares of common stock of Debtor which have been pledged to the Secured Party by New Millennium Capital Partners, LLC. If, and only if, the proceeds of the sale of such stock does not satisfy the Liabilities, then and only then, in addition to having the right to exercise any rights and remedies of a secured party upon default under the Uniform Commercial Code in effect in the State of Illinois or in any state where any Collateral is located, Secured Party may, in its sole discretion: (i) without being required to give any prior notice to Debtor apply the cash (if any) then held by it hereunder, toward the Liabilities in such order as Secured Party shall determine in its sole discretion; and (ii) if there shall be no such cash or the cash so applied shall be insufficient to pay all obligations in full, sell the Collateral, or any part thereof, at any public or private sale, for cash, upon credit or for future delivery, as Secured Party shall deem appropriate. The Secured Party shall be authorized at any such sale (to the extent it deems it advisable to do so, in its sole discretion) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral then being sold for their own account for investment and not with a view to the distribution or resale thereof, and upon consummation of any such sale Secured Party shall have the right to assign, transfer and deliver to the purchaser(s) thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Debtor, and Debtor hereby waives (to the extent permitted by law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. To the extent that notice of sale shall be required to be given by law, Secured Party shall give Debtor at least ten days' written notice of Secured Party's intention to make any such public or private sale or sales. Secured Party shall not be obligated to make any sale of Collateral if it shall determine not to do so, regardless of the fact that notice of sale of Collateral may have been given. Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be 4 retained by Secured Party until the sale price is paid by the purchaser thereof, but Secured Party shall not incur any liability in case any such purchaser shall fail to take up and pay for the Collateral so sold; in the case of any such failure, such Collateral may be sold again upon like notice. As an alternative to exercising the power of sale herein conferred upon it, Secured Party may proceed by a suit at law or in equity to foreclose this Agreement and to sell the Collateral, or any portion thereof, pursuant to a judgment or decree of a court of competent jurisdiction. The proceeds of sale of Collateral sold pursuant hereto shall be applied by Secured Party in such order as it shall determine. (c) Secured Party may, by written notice to Debtor, at any time and from time to time, waive any Event of Default or Unmatured Event of Default, which shall be for such period and subject to such conditions as shall be specified in any such notice. In the case of any such waiver, Secured Party and Debtor shall be restored to their former position and rights hereunder, and any Event of Default or Unmatured Event of Default so waived shall be deemed to be cured and not continuing; but no such waiver shall extend to or impair any subsequent or other Event of Default or Unmatured Event of Default. No failure to exercise, and no delay in exercising, on the part of the Secured Party of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of Secured Party herein provided are cumulative and not exclusive of any rights or remedies provided by law. 9. POWERS OF SECURED PARTY. Secured Party may, from time to time, at its option (but shall have no duty to): (a) perform any agreement of Debtor hereunder that Debtor shall have failed to perform; (b) take any other action which Secured Party deems necessary or desirable for the preservation of the Collateral or Secured Party's interest therein and the carrying out of this Agreement, including without limiting the generality of the foregoing: (i) any action to collect or realize upon the Collateral; (ii) the discharge of taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral; or (iii) the discharge or keeping current of any obligation of Debtor having effect on the Collateral; or (iv) receiving, endorsing and collecting all checks and other orders for the payment of money made payable to Debtor representing any dividend, interest payment or other distribution payable or distributable in respect of the Collateral or any part thereof, and to give full discharge for the same; (c) file, or cause to be filed, photocopies or carbon copies of any financing statement respecting any right of Secured Party in the Collateral, and any such photocopy or carbon copy of the signature of Debtor on such photocopy or carbon copy shall be deemed an original for purposes of such filing. Debtor hereby authorizes Secured Party to sign financing statements on Debtor's behalf to be filed in all jurisdictions in which such authorization is permitted; and (d) (without limiting any other provision hereof) request that any uncertificated securities or deposits constituting Collateral hereunder be delivered to it in definitive form. Upon receipt of such request from Secured Party, Debtor will immediately take all steps (including, without limitation, the payment by Debtor of all costs and expenses of issuance and transfer) required to cause such uncertificated securities or deposits to be issued and delivered in definitive form to Secured Party, together with any and all documents (executed in blank) required to effect the transfer of definitive securities or deposits in definitive form to Secured Party. The parties expressly agree that such securities or deposits when issued in definitive form shall continue to constitute Collateral for purposes of this Agreement. 5 Debtor hereby appoints Secured Party as Debtor's attorney-in-fact, which appointment is and shall be deemed to be irrevocable and coupled with an interest, for purposes of performing acts and signing and delivering any agreement, document, or instrument, on behalf of Debtor in accordance with this Section. Debtor immediately will reimburse Secured Party for all expenses so incurred by Secured Party, together with interest thereon at the interest rates specified in the Loan Agreement. 10. FURTHER ASSURANCES. Debtor agrees to do (or cause to be done) such further acts and things, and to execute and deliver (or cause to be executed and delivered) such additional conveyances, assignments, agreements, and instruments, as Secured Party may at any time request in connection with the administration or enforcement of this Agreement or related to the Collateral or any part thereof or in order better to assure and confirm unto Secured Party its rights, powers and remedies hereunder. 11. OBLIGATIONS UNCONDITIONAL; WAIVER OF DEFENSES. Debtor irrevocably agrees that no fact or circumstance whatsoever which might at law or in equity constitute a discharge or release of, or defense to the obligations of, a guarantor or surety shall limit or affect any obligations of Debtor under this Agreement or any document or instrument executed in connection herewith. Without limiting the generality of the foregoing: (a) Secured Party may at any time and from time to time, without notice to Debtor, take any or all of the following actions without affecting or impairing the liability of Debtor on this Agreement: (i) renew or extend time of payment of the Liabilities; (ii) accept, substitute, release or surrender any security for the Liabilities; and (iii) release any person primarily or secondarily liable on the Liabilities. (b) No delay in enforcing payment of the Liabilities, nor any amendment, waiver, change, or modification of any terms of any instrument which evidences or is given in connection with the Liabilities, shall release Debtor from any obligation hereunder. The obligations of Debtor under this Agreement are and shall be primary, continuing, unconditional and absolute (notwithstanding that at any time or from time to time all of the Liabilities may have been paid in full), irrespective of the value, genuineness, regularity, validity or enforceability of any documents or instruments respecting or evidencing the Liabilities. In order to hold Debtor liable or exercise rights or remedies hereunder, there shall be no obligation on the part of Secured Party, at any time, to resort for payment to any other person or to any other security for the Liabilities. Secured Party shall have the right to enforce this Agreement irrespective of whether or not other proceedings or steps are being taken against any other property securing the Liabilities or any other party primarily or secondarily liable on any of the Liabilities. (c) Debtor irrevocably waives presentment, protest, demand, notice of dishonor or default, notice of acceptance of this Agreement, notice of any loans made, extensions granted or other action taken in reliance hereon, and all demands and notices of any kind in connection with this Agreement or the Liabilities. (d) Debtor waives any claim or other right which Debtor might now have or hereafter acquire against any person primarily or contingently liable on the Liabilities or that arises from the existence or performance of Debtor's obligations under this Agreement, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim or remedy of Secured Party 6 against any person or any other collateral security for the Liabilities, which Secured Party now has or hereafter acquires, however arising. 12. NOTICES. All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been given or made five business days after a record has been deposited in the mail, postage prepaid, or one business day after a record has been deposited with a recognized overnight courier, charges prepaid or to be billed to the sender, or on the day of delivery if delivered manually with receipt acknowledged, in each case addressed or delivered if to Secured Party to its address indicated next to its signature line below and if to Debtor to its address indicated next to its signature line below, or to such other address as may be hereafter designated in writing by the respective parties hereto by a notice in accord with this Section. 13. MISCELLANEOUS. This Agreement and any document or instrument executed in connection herewith shall be governed by and construed in accordance with the internal law of the State of Illinois, and shall be deemed to have been executed in such state. Unless the context requires otherwise, wherever used herein the singular shall include the plural and vice versa, and the use of one gender shall also denote the others. Captions herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof; references herein to Sections or provisions without reference to the document in which they are contained are references to this Agreement. This Agreement shall bind Debtor, its successors and assigns, and shall inure to the benefit of Secured Party, its successors and assigns, except that Debtor may not transfer or assign any of its rights or interest hereunder without the prior written consent of Secured Party. Debtor agrees to pay upon demand all expenses (including without limitation attorneys' fees, legal costs and expenses, in each case whether in or out of court, in original or appellate proceedings or in bankruptcy) incurred or paid by Secured Party or any holder hereof in connection with the enforcement or preservation of its rights hereunder or under any document or instrument executed in connection herewith. 14. WAIVER OF JURY TRIAL, ETC. DEBTOR HEREBY IRREVOCABLY AGREES THAT, SUBJECT TO SECURED PARTY'S SOLE AND ABSOLUTE ELECTION, ALL SUITS, ACTIONS OR OTHER PROCEEDINGS WITH RESPECT TO, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT OR INSTRUMENT EXECUTED IN CONNECTION HEREWITH SHALL BE SUBJECT TO LITIGATION IN COURTS HAVING SITUS WITHIN OR JURISDICTION OVER COOK COUNTY, ILLINOIS. DEBTOR HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN OR HAVING JURISDICTION OVER SUCH COUNTY, AND HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO REQUEST OR DEMAND TRIAL BY JURY, TO TRANSFER OR CHANGE THE VENUE OF ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT BY SECURED PARTY IN ACCORDANCE WITH THIS PARAGRAPH, OR TO CLAIM THAT ANY SUCH PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. [Signature Page Follows] 7 IN WITNESS WHEREOF, Debtor has executed this Agreement as of the date first written above. NUWAY MEDICAL, INC. By: -------------------------------------------- Name: ----------------------------------------- Title: ----------------------------------------- Address: ------------------------- ------------------------- Attention:________________ Facsimile:________________ ACCEPTED: AUGUSTINE II, LLC By: AUGUSTINE CAPITAL MANAGEMENT, L.L.C., its manager By: ------------------------------------- Name: John T. Porter Title: President Address: 141 West Jackson Boulevard, Suite 2182 Chicago, Illinois 60604 Attention: John T. Porter Facsimile: (312) 427-5396 8 EXHIBIT A SECURITIES Membership Interests Amount -------------------- ------ NuWay Sports, LLC 100% of NuWay Medical, Inc.'s membership interests in NuWay Sports, LLC, which represents 51% of the issued and outstanding membership interests in NuWay Sports, LLC. 9 EX-10.5 8 ex10-5.txt Exhibit 10.5 EXHIBIT A TERM NOTE $ 420,000 Chicago, Illinois June 10, 2003 FOR VALUE RECEIVED, NUWAY MEDICAL, INC., a corporation organized under the laws of the state of Delaware ("Borrower"), promises to pay to the order of AUGUSTINE II, LLC, a limited liability company formed under the laws of the State of Delaware (hereafter, together with any subsequent holder hereof, called "Lender"), at its office 141 West Jackson Blvd., Suite 2182, Chicago, Illinois 60604, or at such other place as Lender may direct, the principal sum of FOUR HUNDRED TWENTY THOUSAND United States Dollars ($420,000) (the "Loan"), payable in full on February 29, 2004 or at an earlier date as provided in Section 3.2 of the Term Loan Agreement (as defined hereinafter). Borrower agrees to pay interest on the unpaid principal amount from time to time outstanding hereunder on the dates and at the rate or rates as set forth in the Term Loan Agreement. Payments of both principal and interest are to be made in immediately available funds in lawful money of the United States of America, or in Common Stock of the Borrower as set forth in the Term Loan Agreement. This Note evidences indebtedness incurred under a Term Loan Agreement dated as of the date hereof executed by and between Borrower and Lender (and, if amended, restated or replaced, all amendments, restatements and replacements thereto or therefor, if any) (the "Term Loan Agreement"), to which Term Loan Agreement reference is hereby made for a statement of its terms and provisions, including without limitation those under which this Note may be paid prior to its due date or have its due date accelerated. This Note and any document or instrument executed in connection herewith shall be governed by and construed in accordance with the internal law of the State of Illinois, and shall be deemed to have been executed in the State of Illinois. Unless the context requires otherwise, wherever used herein the singular shall include the plural and vice versa. This Note shall bind Borrower successors and assigns, and shall inure to the benefit of Lender, its successors and assigns, except that Borrower may not transfer or assign any of its rights or interest hereunder without the prior written consent of Lender. Borrower agrees to pay upon demand all expenses (including without limitation reasonable attorneys' fees, legal costs and expenses, and time charges of attorneys who may be employees of Lender, in each case whether in or out of court, in original or appellate proceedings or in bankruptcy) incurred or paid by Lender or any holder hereof in connection with the enforcement or preservation of its rights hereunder or under any document or instrument executed in connection herewith. Borrower expressly and irrevocably waives presentment, protest, demand and notice of any kind in connection herewith. IN WITNESS WHEREOF, the parties have caused this Term Note to be duly executed as of the day and year first above written. NUWAY MEDICAL, INC. By: --------------------------------------- Title: ------------------------------------ 2 EX-99.1 9 ex99_1.txt EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of NuWay Medical, Inc. (the "Company") on Form 10-QSB for the three months ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. A signed original of this written statement required by Section 906 has been provided to NuWay Medical, Inc. and will be retained by NuWay Medical, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----