UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to_______________
Commission file number 0-15078
NOVA NATURAL RESOURCES CORPORATION
(Name of small business issuer in its charter)
COLORADO 84-1227328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 481388
1900 Wazee Street, Suite 305
Denver, CO 80248
(Address of principal (Zip Code)
executive offices)
(303) 293-2902
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
-None-
Securities registered under Section 12(g) of the Act:
Convertible Preferred Stock, $1.00 Par Value
Common Stock, $.10 Par Value
(Title of Class)
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 .
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year aggregated: $1,765,836.
Documents Incorporated By Reference: None
Transitional Small Business Disclosure Format Yes_____ No X
As of December 22, 1995, the Registrant had outstanding 2,687,682 shares of
Convertible Preferred Stock, $1.00 par value, and 6,496,188 shares of Common
Stock, $.10 par value, its only classes of voting stock.
Aggregate market value of the 2,999,498 shares of Common Stock owned by
Non-affiliates of the Registrant as of December 22, 1995 was $179,970 based on
the average of the bid and ask prices on December 22, 1995. All convertible
Preferred Stock is owned by affiliates.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Nova Natural Resources Corporation (the "Registrant", "Company" or
"Nova") was incorporated under Colorado Law on April 1, 1993 to be
the surviving company in the merger effective February 1, 1995 of
the Company and Nova Natural Resources Corporation, a Delaware
Corporation. See "Significant Developments During Fiscal 1995".
BUSINESS DEVELOPMENT
Operations
In its past two fiscal years, the Company has focused on marketing
and selling kaolin clay from its Minnesota kaolin mine, exploring
for paper grade kaolin on leases elsewhere in Minnesota, seeking
partners for exploration and development of gold on its properties
in Alaska and Colorado and seeking partners for exploratory
drilling on two oil and gas prospects in Wyoming. While the
Company receives revenues from interests in oil and gas wells in
the western United States, and holds exploratory oil and gas
leases, the Company does not operate any wells.
Significant Developments During Fiscal 1995
Merger
In July, 1994 Nova Natural Resources Corporation, then known as
NNRC, Inc. ("NNRC") filed a Registration Statement on Form S-4
("the S-4") to register common stock to be issued in effectuation
of a merger to change Nova's State of incorporation from Delaware
to Colorado in order to save the significant annual filing fees
charged by the state of Delaware. Nova Natural Resources
Corporation, the Delaware Corporation, approved the merger by the
written consent of those shareholders controlling 72.7% of its
stock. The approval by written consent alleviates the need for a
shareholders meeting, solicitation of proxies and formal vote by
all shareholders.
The S-4 became effective on February 1, 1995. Appropriate Articles
of Merger were filed with the Secretaries of State of Colorado and
Delaware. Each shareholder of Nova received an equivalent number
of shares of NNRC common and preferred stock. In all respects
other than domicile, NNRC is identical to Nova. After the merger,
the Delaware corporation dissolved, NNRC survived and subsequently
changed its name to Nova Natural Resources Corporation. Filings
will now be made by Nova Natural Resources Corporation, a Colorado
corporation.
Sale of Railcars
In February, 1995, in order to take advantage of a strong market
for gondola type railcars and to obtain needed working capital, the
Company sold its 40 railcars to the David J. Joseph Company, a
nonaffiliated company. The decision to sell the railcars was
necessitated by the Company's liquidity problems and the loss of
one of its two kaolin purchasers. The Company was paid $500,000
for the cars and used the majority of the proceeds to retire the
note payable on the cars. The remainder of the proceeds were used
for capital expenditures relating to its mineral properties and
technical equipment and for general corporate purposes.
Business of the Issuer
Mineral Operations
The Company is currently active in kaolin production and kaolin and
gold exploration. It has no patents, trademarks, licenses,
franchises, or concessions other than certain leasehold interests
granted by federal, state, and other governmental authorities, and
private mineral owners. The Company's mineral business is not
seasonal except to the extent that weather and market conditions
can affect exploration and production; its kaolin mining activities
are dependent upon weather conditions and are generally conducted
between March and November.
Cement Grade Kaolin
The Company owns and operates a kaolin clay mine 1 1/2 miles east
of Redwood Falls, Minnesota. It currently has 69.3 acres permitted
for open pit mining of kaolin which is shipped to Mason City, Iowa
and is used in the manufacture of cement. The Company's permit
allows it to mine up to 250,000 tons of kaolin per year from this
mine. The mining of kaolin from this mine usually occurs between
March and November; kaolin is generally not mined during the winter
months. As calculated by the Company's geologist, the mine
contains approximately 3.25 million tons of economically
recoverable kaolin of a grade suitable for use in the manufacture
of cement. The Company calculates that it can economically operate
this mine for thirteen years if it removes 250,000 tons of kaolin
per year.
Prior to 1992, Nova's cement grade kaolin mine in Minnesota had
been operated by North Western Portland Cement Company, now Holnam,
Inc., which compensated Nova based upon production. In 1992, Nova
terminated the operating contract and undertook its own operation
of the kaolin mine. In order to improve environmental compliance
and enhance operational efficiency, it completed several capital
improvements, including water diversion bars, an additional
settling pond and a new loading facility which supplemented
significant reclamation performed by the prior operator. Nova also
altered contracts with its two principal purchasers to include
transportation and delivery in the purchase price and discontinuing
the prior arrangement of passing title to the kaolin at the mine,
with the cement companies responsible for transportation and
related costs.
In 1992, Holnam, one of the major purchasers of the Company's
kaolin, notified the Company that it would only purchase kaolin on
a year-to-year basis. Holnam indicated that, in future years, it
would award business to the supplier who provided the lowest price.
Based upon its bid for 1994, the Company was awarded a contract by
Holnam for the 1994 mining season. In September, 1994, the Company
again bid for Holnam's business and was notified that Holnam would
not purchase kaolin from Nova during the 1995 mining season and has
been notified by Holnam that they were again outbid for the 1996
business. Also in September, 1994, Nova amended its current
contract with Lehigh Portland Cement Company ("Lehigh") to supply
kaolin to Lehigh's Mason City, Iowa plant through December 31,
1997. See "Management's Discussion and Analysis or Plan of
Operation".
Nova's ability to obtain new purchasers is largely dependent upon
the cost and availability of transportation for kaolin. Because
transportation costs are added to the charge for kaolin, in the
past, Nova has been substantially restricted to markets close to
the mine. In an attempt to remedy some of these problems, in 1993,
Nova purchased forty rail cars to carry kaolin to purchasers. Nova
arranged financing with a commercial lender for the $436,000
purchase of the cars over 48 months at an interest rate of 8.5% per
annum. In order to take advantage of a strong market for this type
of railcar, obtain needed working capital, and due to the loss of
the Holnam business, the Company sold these railcars in February,
1995.
The Company is investigating the possibility of obtaining
additional markets for its product by offering purchasers a
pelletized kaolin product, which the Company believes will offer
certain transportation, handling and utilization advantages, but
will likely cost more than its present bulk kaolin product.
Management believes that the advantages mentioned, particularly
lower transportation and handling costs using pelletized material,
will offset this higher cost. Toward this end, Nova has purchased
and installed equipment to pelletize kaolin. This equipment is
still in the testing stage, and it cannot yet be determined whether
a pelletized product can be manufactured at a cost which will
enable it to be successfully marketed.
Paper Grade Kaolin
In 1990, Nova granted, and later extended, an option to U.S. Borax,
Inc., an unaffiliated mineral development company ("Borax"), to
explore for paper-grade kaolin and other industrial minerals on the
Company's paper grade kaolin prospect (the "Prospect") in
southwestern Minnesota. During the term of the option, Borax
expended approximately $400,000 in combined exploration and land
activities and earned a 50% interest in the Prospect. In August
1992, Borax exercised its option to enter into a joint venture
("the Joint Venture") at which time Borax paid Nova $165,000 for
an additional 15% interest. The joint venture and operating agreement
became effective July 1, 1993. Under this agreement the Company assigned
a 100% working interest in the prospect to Borax in exchange for
the agreement by Borax to pay 100% of the costs of exploring for
and developing paper grade kaolin and other industrial minerals on
property in the prospect. The Company retains a 10% net proceeds
interest in the prospect until Borax has recovered 100% of its
capitalized costs. At that time, the Company has the option to
purchase a 30% working interest by paying Borax an amount equal to
15% of the capitalized costs from April 1, 1993 to the date of
recovery of those costs by Borax.
Exploration activities performed by Borax to date have included
drilling over 150 exploratory core holes on portions of the
properties, bulk sampling, testing and evaluating the quality of
the kaolin contained therein, and the construction and operation of
a small-scale kaolin processing facility. Processed kaolin from
the Joint Venture's property was shipped to paper mills in
Minnesota and Wisconsin, where successful coating tests were
completed. These tests are steps in the evaluation process and
cannot be regarded as any guarantee of commercial feasibility,
however, Nova's managment believes the results of these tests are
encouraging.
Preliminary indications are that kaolin of suitable quality for use
in paper-manufacturing can be produced from the approximately 6,400
acres the Joint Venture has leased in Minnesota, although
considerable additional work remains before it can be stated that
a commercial product can be routinely obtained and marketed
competitively. The Company's management believes that the widely-
spaced drilling which has been completed to date defines a geologic
resource of kaolin more than adequate to support the development of
a commercial enterprise, provided a reasonable portion of that
resource can be converted to reserves by a denser drilling pattern.
Based on the geologic data, Nova believes this can be accomplished,
though it cannot be stated with certainty that this will indeed be
the result.
In order to produce a commercial product, a processing facility
would have to be designed and built, which is likely to cost in
excess of $50 million, and would be designed to operate for a
minimum of twenty years. Nova would incur no cost in the
construction of this facility, nor in the further work which needs
to be done to establish commercial feasibility. The location of
these properties affords a significant transportation advantage
over the current primary source of paper-grade kaolin in Georgia,
since a significant portion of the paper manufacturing plants in
the United States which utilize kaolin are located in the Upper
Midwest, within easy reach of the joint venture's properties.
Although Nova incurs no cost, it also has little control over how
the funds are spent and in what amounts. Expenditures during most
of the past year have been at the "maintenance" level, e.g. no
field operations have been conducted, though Borax has completed a
pre-feasibility study, grinding studies, lab work, and additional
products evaluation as a prelude to potentially expanding the scope
of their operations. Borax has notified the Company that, pending
budget approval by RTZ, Inc., Borax's parent company, additional
drilling is planned during 1996, including close-spaced drilling to
measure reserves. This drilling would be used to design a test pit
or bulk-sampling program to produce feedstock for pilot runs of
kaolin. A pilot plant to be used for this purpose is included in
Borax's budget request.
Nome Gold
In April 1984, Nova acquired a gold prospect located offshore Nome,
Alaska. In May 1985, Nova transferred all of its rights and
obligations in the Nome Gold Prospect (the "Nome Prospect") to
Inspiration Gold, Inc., who later transferred that interest to
Western Gold Exploration and Mining Company, Limited Partnership
("WestGold"), a non-affiliated mining entity, and retained a 10%-
17% net profits royalty.
During five full seasons of dredging in the Nome Prospect, Westgold
recovered approximately 121,000 ounces of gold. Notwithstanding
such operations, Westgold was unable to profitably mine this
property and Nova did not receive any income pursuant to its net
profits royalty interest.
In September, 1990, Westgold terminated its operations and returned
the project to Nova. At that time, Nova also received a
substantial portion of the data gathered by Westgold. The Company
retained a former WestGold geologist who catalogued and put the
data into a form suitable for use in marketing the Nome Prospect to
a new partner. The Company is currently attempting to sell or
obtain a joint venture partner, and is also considering attempting
to raise the necessary funds to mine the Nome Prospect through a
public or private stock placement or in exchange for an interest in
the Nome Prospect. To date, the Company has not been successful in
its attempts to sell the Nome Prospect, nor does it have any
definitive plans at this time on raising the funds necessary to put
the Nome Prospect into production. Due to the lack of success in
finding a buyer or joint venture partner who would be willing to
make an up-front payment to the Company of its historical cost in
this property, and the uncertainty as to whether any arrangement
entered into will recover those historical costs, for accounting
purposes, the Company has written off its investment in the
property. However, the Company's efforts to put the property into
production continue. Nova is currently evaluating the feasibility
of mining portions of the property on a joint-venture or
partnership basis, on a limited scale, during the 1996 season.
If these efforts are successful, the scope of these operations
could expand in future years.
Querida
The Company owns a 42.22% to 45% interest in a gold prospect in
Custer County, Colorado. An extensive drilling program was
commenced in October, 1993. The results of this drilling program
have been reviewed and the Company has determined further
exploration activities are necessary to define this project. No
further exploration activities have taken place since the 1993
program. The Company will attempt in 1996 to obtain a partner
willing to conduct further drilling and exploration activities.
There is no guarantee that such a partner will be found. The
Company is obligated to pay its share of the escalating advance
royalty ($4,070 in fiscal 1996) due annually on December 15 until
1999, and its share of delay rentals of approximately $2,200
payable annually on the anniversary dates of the three leases which
make up the balance of the prospect. Due to the lack of certainty
as to whether any arrangement entered into will recover Nova's
historical costs in the Querida prospect, for accounting purposes,
the Company has written off its investment in the property.
Environmental Regulations
Inherent in all mining operations is the obligation to comply with
environmental, reclamation, and other applicable state and federal
laws and regulations. The Company has obtained those environmental
permits, licenses or approvals required for its operations.
Management is not aware of any violations of environmental permits,
licenses or approvals issued with respect to the Company's
operations. In the past, Nova has been involved in extensive
hearings regarding the environmental impact of its Minnesota kaolin
mine and has voluntarily taken steps to mitigate any environmental
impact. While the Company believes it is currently in compliance
with all such laws and regulations and is not aware of any current
violations, the applicability and impact of, and the Company's
obligations under such provisions cannot always be determined with
certainty. However, the Company's liability could continue after
relinquishment of its interest in its properties, even in the
absence of operations. As such, the Company cannot fully determine
the extent of its liability or potential liability in connection
with these matters.
The Company currently performs reclamation of its kaolin mine
concurrently with its mining efforts. As an area is mined, it is
reclaimed immediately upon determination that mining in that area
is no longer economically feasible. Further, mining arrangements
with other companies usually provide that the other company is
responsible for reclamation liabilities if they operate the mining
property, or that they share in reclamation liabilities with the
Company in the event that the Company operates the property.
The Company currently has only one mining operation, the cement
grade kaolin mine, in production, and since reclamation occurs
concurrently with mining and since Nova has deposited $50,000 with
Redwood County to cover potential reclamation costs, the Company
believes that it has no significant reclamation liabilities.
Further, the Company is not currently subject to any pending
administrative or judicial enforcement proceedings arising under
environmental laws or regulations. Environmental laws and
regulations may be adopted in the future which may have an impact
upon the Company's operations. The Company cannot now accurately
predict or estimate the impact of any such future laws or
regulations on its operations.
Exploration and Development Arrangements
The Company's financial resources are not sufficient to fund
significant exploration or development of its mineral properties.
Therefore, to evaluate and, if justified, to develop its mineral
prospects, Nova has entered into arrangements under which other
companies acquire a portion of the Company's interest in the
properties in return for performing necessary activities. The terms
of these arrangements generally are dictated by the type of
minerals involved, the extent of prior development, prospective
value of the properties and other diverse factors.
While the Company intends to retain a working interest in its
properties when possible, it has in the past and may from time to
time, sell its entire interest and retain only a royalty or other
income interest to reduce risk and obtain working capital for
exploration and development.
Mineral exploration and development is highly competitive. Success
is dependent on a number of factors including the ability to
identify areas having mineral potential, to acquire leases or other
mineral interests in such areas, and attract sufficient capital to
acquire, explore and develop mineral properties. The minerals
industry is dominated by a number of large companies having
resources far in excess of Nova. The Company's competitors include
mining companies, major oil companies and companies in unrelated
fields making it impossible to estimate the actual number of
competitors. Furthermore, a significant portion of the data
utilized by the Company in making acquisitions is public
information.
Mining permits are required by various state and federal agencies
before mining can be undertaken. There is no assurance that the
necessary permits can be acquired or that the projects would be
economically viable if the permits are acquired.
The Company has no patents, trademarks, licenses, franchises, or
concessions other than certain leasehold interests granted by
federal, state, and other governmental authorities, and private
mineral owners. The Company's mineral business is not seasonal
except to the extent that weather and market conditions can affect
exploration and production; its kaolin mining activities are
dependent upon weather conditions and are generally conducted
between March and November.
Oil and Gas Operations
The principal hydrocarbons currently produced from properties in
which Nova has an interest are crude oil and natural gas. Such
products are sold by or on behalf of the Company to purchasers
located near the wellhead. None of the entities purchasing the
Company's production is an affiliate of the Company.
During fiscal 1995, the Company had three customers which accounted
for approximately 71% of its total oil and gas sales: Scurlock
Permian Corporation (26% of total sales), Chevron U.S.A. (23%) and
Eighty Eight Oil Company (22%). Because purchasers for oil and gas
are generally available and prices paid for oil and gas do not
fluctuate materially from purchaser to purchaser, Nova believes
that the loss of any of these purchasers would not have a
materially adverse effect on its financial status. Although the
Company believes a ready market exists for its hydrocarbon
production, the acquisition, exploration, development, production,
and sale of oil and gas are subject to many factors beyond its
control, including worldwide and domestic economic conditions,
political stability in the Persian Gulf, oil import quotas,
availability of drilling rigs, casing and other equipment and
supplies, proximity to and availability of gas pipelines, supply
and price of competing fuels, and the regulation of prices,
production, transportation, and marketing by certain federal and
state governmental authorities. The source and availability of raw
materials affecting Nova's oil and gas operations is generally
limited to the availability of oil field equipment and supplies,
including tubular steel products and drilling rigs, all of which
currently are in sufficient supply. However, any shortages of or
delays in obtaining such materials could delay drilling or
production activities and adversely affect operations conducted by
Nova or by operators of its properties.
The oil and gas industry is extremely competitive and involves a
high degree of risk. The Company is in competition with "major"
integrated oil and gas companies, other independent oil and gas
companies, and other entities. The Company cannot ascertain the
exact number of its competitors or its relative competitive
position.
Nova's exploration and development activities are subject to all of
the risks and hazards typically associated with such activities.
Among these risks are the necessity of expending large sums of
money to acquire properties and drill exploratory wells which are
usually non-productive or may not generate income sufficient to
repay the cost of drilling. A large number of companies and
individuals, many with financial resources and staffs greater than
those of the Company, are engaged in exploration for and
development of oil and gas. Accordingly, the Company may be at a
competitive disadvantage on its property acquisition activities.
Nova requires working capital to carry lease costs and delay
rentals until arrangements can be negotiated with other entities to
explore and/or develop Nova's oil and gas properties. Consistent
with industry practice, working capital may be generated by the
Company from proceeds of production, sales of properties and
operating fees. At September 30, 1995, the Company did not operate
any of its producing oil and gas properties. However, the Company
does operate a number of exploratory properties, none of which are
currently active.
The nature of Nova's business precludes a backlog of orders. There
is no portion of the Company's business which may be subject to
renegotiation or termination at the election of the Government.
The Company has not engaged in any research and development
activities as those terms are customarily used.
In recent years, the natural gas industry has undergone substantial
changes, principally as the result of gas pipelines withdrawing
from their historical role as merchants and purchasers and
restricting their involvement to transportation. As a result,
producers like Nova increasingly will have to find new purchasers
for their natural gas. Nova is not dependent upon any single
customer for purchases of natural gas.
Nova has no patents, trademarks, licenses, franchises, or
concessions other than certain oil and gas leasehold interests
granted by federal, state, and other governmental authorities, and
private mineral owners. The Company's oil and gas business is not
seasonal except to the extent that weather and market conditions
can affect oil and gas exploration and production activities.
Environmental Regulation
Drilling and production activities are subject to regulation under
federal and state pollution control and environmental laws and
regulation. The Company is subject to a variety of federal, state,
and local environmental laws relating to spillage, noise, air
quality, and disposal of waste products arising from the Company's
operations. Such environmental and conservation laws and
regulations could significantly limit the Company's activities and
increase the costs of exploring and developing its acreage.
Existing as well as future legislation could cause additional
expense, capital expenditures, restrictions and delays in the
development of properties, the extent of which cannot be predicted.
Additional energy taxes, higher patent and permit fees and similar
proposals have been discussed in Congress, but the Company is
unaware at this time of any pending legislation which would
adversely affect its operation.
Regulation of Production and Pricing
Production and sale of oil and gas are subject to federal and state
governmental regulation, which while lessening in recent years,
includes limitations on the production of oil and gas by
restricting the rate of flow for oil and gas wells below their
actual capacity to produce. Restrictions on the purchase prices
for natural gas have largely been rescinded by the Natural Gas
Decontrol Act of 1989. A phase-out of such regulations was
substantially complete by mid-1993. While the effect of such
deregulation cannot be determined, the predictability of gas
pricing is anticipated to be substantially lessened as a result of
such decontrol and charges in the operations of gas pipelines from
purchasers to transporters of gas. As of September 30, 1995,
substantially all of the Company's gas reserves were not subject to
price control.
Employees
At September 30, 1995, Nova had five full-time employees. The
Company also utilizes the services of various consultants and
independent contractors with expertise in those fields of interest
in which the Company is active. The Company has no contracts with
these consultants.
ITEM 2. DESCRIPTION OF PROPERTIES
PERSONAL PROPERTY
The Company's personal property consists of furniture and fixtures
and technical equipment, with a total net book value at September
30, 1995 of $41,634.
OFFICE LEASE
The Company extended its current office and storage lease for an
additional three years effective February 1, 1994, under which the
Company leases approximately 2,000 square feet of office space at
a cost of approximately $19,400 in 1996 and $6,500 in 1997.
OIL AND GAS PROPERTIES
All of the Company's oil and gas properties are located within the
continental United States. There are no quantities of oil and gas
subject to long-term supply or similar agreements with foreign
governments or authorities.
No major discovery or other favorable or adverse event is believed
to have caused a significant change in the estimated proved
reserves of the Company subsequent to September 30, 1995. The
following sections set forth information concerning the Company's
interests in oil and gas properties.
Proved Reserves and Present Value Information
For information concerning the Company's proved reserves and
present value information, see "Supplementary Information On Oil
And Gas Operations." Estimates of the Company's estimated proved
oil and gas reserves and present value of the estimated future net
revenues attributable to such reserves for the year ended September
30, 1995 and 1994 are based upon reports by the independent
consulting firm of D.J. Low, Inc. The Company files such reports
with the Securities and Exchange Commission, pursuant to
regulations of that agency which also provides public access to
those documents.
The Securities and Exchange Commission requires that estimates of
reserves, estimates of future net revenues and the present value of
estimated future net revenues be based on the assumption that oil
and gas prices will remain at current levels (except for gas prices
determined by fixed contracts), and that production costs will not
escalate in future periods. The present value of estimated future
net revenues for fiscal years 1995 and 1994 has not been adjusted
for income taxes because significant net operating loss
carryforwards exist for income tax and financial reporting
purposes. All such estimates have been adjusted for the
anticipated costs of developing proved undeveloped reserves.
Reserve calculations require estimation of future net recoverable
reserves of oil and gas and the timing and amount of future net
revenues to be received therefrom. Such estimates are based on
numerous factors, many of which are variable and uncertain.
Accordingly, it is common for the actual production and revenues
later received to vary from earlier estimates. Estimates made from
the first few years of production from a property are not likely to
be as reliable as later estimates based on longer production
history. Hence, reserve estimates and estimates of future net
revenues from production may vary from year to year. The Company
has not provided reserve estimates to any federal agency other than
the Securities and Exchange Commission.
Production, Average Sales Price,
and Average Production (Lifting) Costs
The following table sets forth oil and gas production (net of all
royalties, overriding royalties, and other outstanding interests of
other entities) attributable to the Company for the fiscal years
ended September 30, 1995 and 1994 and the average sales prices and
production costs per unit of production.
Year Ended September 30,
1995 1994
Production:
Oil (Bbls) . . . . . . . . . . 8,635 10,443
Gas (Mcf) . . . . . . . . . . 45,362 47,299
Average Sales Prices:
Oil (per Bbl) . . . . . . . . $15.27 $13.15
Gas (per Mcf) . . . . . . . . $ .98 $ 1.34
Average Production Costs
Per Equivalent Barrel Of Oil*. $ 5.79 $ 5.38
* Equivalent barrels include oil, condensate and gas. Gas is
converted to equivalent barrels on the basis of 6 Mcf per equiva-
lent barrel.
Drilling Activity
The Company did not participate in any drilling activity during
fiscal 1995 or 1994.
Approximate Developed Acreage and
Productive Oil and Gas Wells
The following table identifies productive wells and sets forth an
approximation of developed oil and gas acreage in which the Company
owned a leasehold interest as of September 30, 1995.
<TABLE>
<CAPTION>
Productive Wells (2)
Developed Acres (1) Gross (5) Net (6)
Geographic Area Gross (3) Net (4) Oil Gas Oil Gas
<S> <C> <C> <C> <C> <C> <C>
Colorado 480.00 72.00 3 - 0.19 -
North Dakota 840.80 168.63 8 - 1.33 -
Texas 410.19 102.55 2 - 0.50 -
Wyoming 2,213.76 227.04 5 - 0.47 -
TOTAL 3,944.75 570.22 18 0 2.49 0
</TABLE>
(1) Acreage spaced or assignable to productive wells.
(2) Wells either producing or capable of production.
(3) An acre in which a working interest is owned. The number of
gross acres is the total number of acres in which working
interests are owned.
(4) When the sum of fractional working interests in gross acres
equals one, a net acre is deemed to exist. The number of net
acres is the sum of all the fractional working interests owned
in gross acres expressed in whole numbers and fractions
thereof.
(5) A well in which a working interest is owned. The number of
gross wells is the total number of wells in which working
interests are owned.
(6) When the sum of fractional working interests owned in gross
wells equals one, a net well is deemed to exist. The number
of net wells is the sum of all of the fractional working
interests owned in gross wells expressed as whole numbers and
fractions thereof.
Approximate Undeveloped Oil and Gas Acreage
The following table sets forth the approximate undeveloped oil and
gas acreage in which the Company owned a leasehold interest as of
September 30, 1995.
Undeveloped Acreage
Gross Net
Utah 1,600.00 800.00
Wyoming 5,279.28 2,042.95
TOTAL 6,879,28 2,842.95
The Company's leases are primarily federal and fee leases, carry
landowner's royalties of at least 12.5% and are subject to
overriding royalty interests ranging from 0% to 7.5%. Each lease
requires the payment of annual delay rentals ranging from $1 to $5
per acre. A delay rental is the amount paid for the privilege of
deferring development of leased acreage, payment of which can be
avoided by abandonment of the lease, commencement of development
operations, or by obtaining production.
Many of the leases will expire at the end of their respective
primary terms, unless production has been obtained prior to that
date, in which event the lease term will continue until production
ceases. The Company will attempt to enter into cost-sharing
arrangements to evaluate expiring acreage before the end of the
lease terms. From time to time, geologic evaluations and cost
considerations may cause the Company to cease paying delay rentals
and abandon such leases prior to the expiration of their primary
terms. Where justified and within the financial capabilities of
the Company, the Company may seek to renew leases on certain
expiring acreage.
Overriding Royalty Interests in Undeveloped Acreage
The following table sets forth, as of September 30, 1995, the
Company's overriding royalty interests in undeveloped oil and gas
acreage.
Gross Net (1) Company's
Royalty Royalty Overriding Royalty
Acres Acres Interest
Wyoming 2,759.29 124.18 4.5%
(1) A net royalty acre is calculated by dividing the gross royalty
acres by 12.5% and multiplying the result of that calculation
by the overriding royalty interest.
Overriding Royalty Interests in Developed Acreage
and Producing Wells
The following table sets forth, as of September 30, 1995, the
Company's overriding royalty interests in developed oil and gas
acreage and producing wells.
<TABLE>
<CAPTION>
Company's Gross
Gross Net (1) Overriding Royalty
Royalty Royalty Royalty Wells
Acres Acres Interest Oil Gas
<S> <C> <C> <C> <C> <C>
Colorado 354.50 35.72 1.08% to 1.26% 3 -
Texas 400.00 47.75 1.16% to 1.5625% 4 -
Wyoming 4,552.75 238.29 .13% to 4.0% 8 3
TOTAL 5,307.25 321.76 15 3
</TABLE>
(1) A net royalty acre is calculated by dividing the gross
royalty acres by 12.5% and multiplying the result of that
calculation by the overriding royalty interest.
UNDEVELOPED MINERAL PROPERTY INTERESTS
The Company currently owns a 10% net proceeds interest in a kaolin
prospect covering approximately 6,402 acres of leases and lease
options located near Redwood Falls, Minnesota. An exploration
partner has acquired a 100% working interest in these leases and
options. See "Mineral Operations-Paper Grade Kaolin".
DEVELOPED MINERAL PROPERTY INTERESTS
The Company owns a 100% working interest in 69.3 acres in Redwood
County, Minnesota, 30.5 acres of which are permitted for the
purposes of mining kaolin clay. The Company estimates that
approximately 3,250,000 tons of recoverable kaolin are contained in
the current mine. However, since the Company cannot accurately
project future kaolin demand, mining costs, and other factors, it
is not possible to determine how much of this tonnage will actually
be mined. See "Mineral Operations - Cement Grade Kaolin".
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party, nor is any of its property subject, to
any pending legal proceedings. The Company knows of no legal
proceedings contemplated or threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The vote on the merger of Nova and NNRC was done by written consent
of those shareholders controlling a majority of Nova's shares as
per Delaware law.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market
and is listed on the Electronic Bulletin Board under the symbol
"NOVA". The following table sets forth the range of high and low
closing bid prices of the Common Stock for the year ended September
30, 1995 and 1994, as reported by the National Quotation Bureau.
These prices are believed to be representative of inter-dealer
prices, without retail markup, markdown, or commissions, and may
not necessarily represent actual transactions.
Bid Price
Fiscal 1994 High Low
First Quarter $ 3/16 $ 1/8
Second Quarter 3/16 1/32
Third Quarter .09 1/32
Fourth Quarter 1/16 .02
Fiscal 1995 High Low
First Quarter $ 1/8 $ .02
Second Quarter 1/8 1/32
Third Quarter .11 .02
Fourth Quarter .06 .02
The bid and asked prices for the Company's Common Stock on
September 30, 1995, were $.05 and $.10, respectively, as provided
by the National Quotation Bureau, Inc.
The number of record holders of the Company's Common Stock as of
September 30, 1995 was 5,525.
Also outstanding as of September 30, 1995 were options under the
Company's employee stock option plans to purchase a total of
1,440,000 shares, or 22.2% of the issued and outstanding shares, of
Common Stock. These options are held by a total of eight persons,
seven of whom are officers, directors or employees of Nova, and are
exercisable at various times until April, 1999 at a range of $.0625
to $.105 per share.
The Company has not paid any dividends on its Common Stock and does
not expect to do so in the foreseeable future. The Company intends
to employ its cash flow and earnings, if any, in its oil, gas and
mineral exploration and development activities and for other
working capital needs.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
As described in "Significant Developments During Fiscal 1995", the
absence of sufficient sources of working capital prompted the
Company to sell its 40 railcars in February, 1995. The proceeds
from this sale, net of payment of the note payable, enabled the
Company to meet its fixed working capital needs during fiscal 1995
as well as pay for capital expenditures incurred on its mineral
properties. Proceeds from the sale of the railcars also were
applied to purchase equipment to be used to pelletize kaolin.
Pelletized offers certain transportation, handling, and utilization
advantages, but will likely cost more than the current bulk
product. Management believes that the advantages mentioned,
particularly lower rail and handling costs using pelletized
material, will offset this cost. This equipment is still in the
testing stage and it cannot yet be determined whether a pelletized
product can be manufactured at a cost which will enable it to be
successfully marketed. The loss of kaolin sales to Holnam for both
the 1995 and 1994 mining seasons has adversely affected the
Company's liquidity and was principally the cause of the net cash
deficiency from operations of $308,922 for the year ended September
30, 1995. During fiscal year 1995, management salaries were
reduced by 35% and other general and administrative expenses were
reduced or eliminated. Management believes that normal sources of
internal liquidity, sales of oil, gas and kaolin, will not be
sufficient to meet its fixed working capital needs, i.e., lease
operating expenses, general and administrative expenses and delay
rentals. The Company is currently evaluating the efficacy as well
as the feasibility of selling all or a portion of its oil and gas
royalty interests in order to meet these working capital needs. If
it is unable to do so, expenses will be further reduced by, among
other methods, personnel reductions. The Company does not have any
sources of external liquidity at this time.
The independent auditor's report indicates that, because of
recurring losses and other factors described in Note 2 to the
Company's Financial Statements, there is substantial doubt about
the Company's ability to continue as a going concern. The
financial statements have been prepared assuming that the Company
will continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and
classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of
this uncertainty.
The Company's liquidity is primarily dependent upon its ability to
obtain and retain customers for the purchase of its cement grade
kaolin. The Company has been able to secure a multi-year purchase
contract with only one of its two principal purchasers, an
arrangement which has been amended to extend through December,
1997. The year-to-year nature of purchases by the other principal
purchaser makes long-range planning difficult. In bidding for
purchase contracts, the Company must tender a bid low enough to
obtain the contract but not so low as to be unprofitable. While
the quality of the Company's kaolin is competitive, transportation
costs limit the geographic area for potential purchasers. The
Company continues to explore ways to reduce such costs or otherwise
expand its sales region.
Kaolin sales are governed principally by the strength of the
construction industry, transportation and other factors beyond the
Company's control. While other materials may be substituted for
kaolin, the Company knows of no more cost efficient substitute at
this time.
Results of Operations
Due primarily to decreased mineral and oil and gas sales and a
write-down of its Querida and Nome mineral properties, the Company
realized a net loss of $421,716 for the year ended September 30,
1995. Decreased oil and gas sales and a write-down of the Querida
mineral property for the year ended September 30, 1994, were the
primary reasons the Company realized a net loss of $123,117.
Revenues
Mineral sales decreased $565,285 or 28% for the year ended
September 30, 1995 as compared to 1994 as the Company had one
customer for the 1995 mining season instead of two as in 1994.
In February, 1994 the Company received $21,767 from Chevron in
settlement for pricing and tax adjustments from 1982 to 1992.
Factoring out these adjustments, oil and gas sales decreased
$22,446 or 10% for the year ended September 30, 1995 as compared to
the same period in 1994. This decrease was attributed primarily to
oil sales declines from the North Rainbow Ranch Unit, which offset
higher oil prices received, and a significant decrease in the price
of gas. A comparison of production and prices in 1995 and 1994 is
as follows:
1995 1994
Sales Volume
Oil (bbls) 8,635 10,443
Gas (MCF) 45,362 47,299
Average Sales Price
Oil (bbls) $15.27 $13.15
Gas (MCF) $ .98 $ 1.34
Interest income decreased $63,659 for the year ended September 30,
1995 as compared to 1994 due to interest of $69,187 received from
Chevron on price and tax adjustments from 1982 to 1992.
Gain on the sale of railcars was from the sale of the Company's
railcars in February, 1995.
Revenue from oil and gas property operations consists of fees
received as compensation for supervision during exploration
activities and are based on the number of days the Company
supervises these exploration activities. These fees amounted to
$1,821 for the year ended September 30, 1994. There were no fees
received in 1995.
Other revenue for the year ended September 30, 1995 consisted of
revenue received from the rental of the railcars prior to their
sale, $19,021, and grain sales, $2,232. Other revenue in 1994 was
received from grain sales.
Expenses
Mining costs decreased $432,025 or 26% for the year ended September
30, 1995 as compared to 1994 due to the reduction in sales caused
by having only one customer for the 1995 season rather than two
customers as in 1994.
Lease operating expenses ("LOE"), including production taxes
decreased $5,757 or 6% for the year ended September 30, 1995 as
compared to 1994 due to decreased oil and gas sales coupled with
lower costs in North Rainbow Ranch. A portion of the decrease was
offset by increases in production taxes in the Whitney Canyon
Field.
Depletion, depreciation and amortization ("DD&A") decreased $71,733
or 45% for the year ended September 30, 1995 as compared to 1994
due to the sale of the railcars and reduced DD&A on oil and gas
properties.
The Company performs an annual review of its mineral properties and
reduces the carrying value of those properties on which it feels it
cannot realize a reasonable return on its investment or cannot
further develop. In fiscal 1995, due to the lack of success in
finding a buyer or joint venture partner willing to make an up-
front payment to the Company of its historical cost in the Nome
Gold Prospect ("Nome"), and the lack of certainty as to whether any
arrangement entered into will recover these historical costs, for
accounting purposes, the Company wrote off its investment in Nome.
However, the Company's efforts to put this property into production
continue. Nova is currently evaluating the feasibility of mining,
on a limited scale, portions of the property on a joint-venture or
partnership basis during the 1996 season. If these efforts are
successful, the scope of these operations could expand in future
years. Further, due to the lack of certainty as to whether any
arrangement entered into will recover Nova's historical costs on
the Querida Gold Prospect, for accounting purposes, the Company has
written off the balance of the prospect. In 1994, it provided an
impairment allowance for the carrying value of the Querida Gold
Prospect of $60,668 or approximately 50% of its carrying value.
General and administrative expenses decreased $12,719 or 3% for
the year ended September 30, 1995 over the same period in 1994 due
to lower payroll and related costs. It is anticipated that these
costs will decrease in fiscal 1996 due to salary reductions and
other cost saving measures.
Interest expense was incurred in 1995 and 1994 on the $436,000 debt
incurred to purchase railroad rolling stock. This expense totaled
$12,540 and $29,695 for the years ended September 30, 1995 and
1994, respectively. This debt was retired upon the sale of the
rolling stock in February, 1995.
Commitments
The Company signed a three-year office lease extension effective
February 1, 1994. The Company has leased approximately 2,000
square feet of office and storage space at a cost of approximately
$26,000 over the remaining term of the lease. The Company is also
obligated under the terms of the contract with one of its rail
transportation suppliers to move at least 300 cars during the 1995
and 1996 mining seasons. If the Company does not move at least 300
cars, a $120 per car penalty for each car less than 300 cars will
be assessed. Since the Company currently has a contract through
December 31, 1997, with its current kaolin purchaser to purchase
kaolin in excess of 300 cars, it does not anticipate paying any
penalties.
Impact of Inflation
The Company has attempted to counteract the effects of inflation by
reducing operating costs to the extent possible. The prices Nova
has been receiving for its oil and gas products have fluctuated
over the past two years but are not expected to increase
significantly in the near future.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of (SFAS 121)
was issued in March, 1995, by the Financial Accounting Standards
Board. It requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS
121 is required to be adopted for fiscal years beginning after
December 15, 1995. Adopting this statement by the Company is not
expected to have a significant effect on the financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), was issued by the
Financial Accounting Standards Board in October, 1995. SFAS 123
establishes financial accounting and reporting standards for stock-
based employee compensation plans as well as transactions in which
an entity issues its equity instruments to acquire goods or
services from non-employees. This statement defines a fair value
based method of accounting for employee stock option or similar
equity instrument, and encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Entities electing to remain with
the accounting in Opinion 25 must make proforma disclosures of net
income and, it presented, earnings per share, as if the fair value
based method of accounting defined by SFAS 123 had been applied.
SFAS 123 is applicable to fiscal years beginning after December 15,
1995. The Company currently accounts for its equity instruments
using the accounting prescribed by Opinion 25. The Company does
not currently expect to adopt the accounting prescribed by SFAS
123; however, the Company will include the disclosures required by
SFAS 123 in future financial statements.
Independent Auditor's Report
The Board of Directors and Stockholders
Nova Natural Resources Corporation:
We have audited the accompanying balance sheets of Nova Natural
Resources Corporation as of September 30, 1995 and 1994, and the
related statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Nova
Natural Resources Corporation as of September 30, 1995 and 1994,
and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has suffered
recurring losses from operations which along with other factors
described in Note 2 raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
KPMG Peat Marwick LLP
Denver, Colorado
November 21, 1995
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEETS -- SEPTEMBER 30, 1995 AND 1994
ASSETS 1995 1994
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 70,820 $ 130,783
Accounts receivable:
Kaolin sales 251,794 409,134
Oil and gas sales 12,132 14,030
Other 884 7,591
Joint interest participants 3,217 3,541
Prepaid expenses 1,500 1,500
Total current assets 340,347 566,579
Deposits 71,411 102,720
Oil and gas properties (using
the full cost method of
accounting), net of accum-
ulated depletion, depreciation
& amortization, and valuation
allowances of $5,836,300 and
$5,768,796 in 1995 and 1994,
respectively (Notes 7 & 9) 339,578 398,766
Mineral property interests, net
of accumulated depletion and
allowance of $67,147 & $111,552
in 1995 & 1994, respectively 562,721 850,143
Railroad rolling stock, net
of accumulated depreciation
of $54,463 (Note 3) -- 441,337
Furniture and technical equipment net
of accumulated depreciation
of $126,750 and $123,198 in
1995 and 1994, respectively 41,634 2,517
Total $ 1,355,691 $ 2,362,062
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEETS (CONTINUED) -- SEPTEMBER 30, 1995 AND 1994
LIABILITIES AND
STOCKHOLDERS' EQUITY 1995 1994
<S> <C> <C>
Current liabilities:
Accounts payable $ 220,289 $ 528,568
Accrued Liabilities 13,472 27,725
Short term portion of
notes payable (Note 3) -- 110,056
Advances from drilling partners -- 2,967
Total current liabilities 233,761 669,316
Note payable (Note 3) -- 162,016
Total liabilities 233,761 831,332
Stockholders' equity (Note 5):
Convertible preferred stock, $1.00
par value; 5,000,000 shares
authorized; 2,687,682 shares
issued and outstanding 2,687,682 2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;
6,496,188 and 6,323,971
shares issued in 1995 and
1994, respectively 649,619 632,397
Additional paid in capital 6,454,296 6,458,602
Accumulated deficit (8,669,667) (8,247,951)
Net stockholders' equity 1,121,930 1,530,730
Commitments and contingencies
(Note 11)
Total $ 1,355,691 $ 2,362,062
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
Years Ended September 30,
1995 1994
<S> <C> <C>
Revenue:
Mineral sales (Note 6) $ 1,486,287 $ 2,051,572
Oil and gas sales (Note 6) 186,553 230,766
Interest income 13,081 76,740
Gain on sale of railcars 58,663 --
Revenue from operating oil and
gas properties -- 1,821
Other 21,253 721
Total revenue 1,765,837 2,361,620
Operating, general and administrative expenses:
Mining costs, including transportation
and royalties 1,259,307 1,691,332
Lease operating, including production taxes 92,865 98,622
Depletion, depreciation, and amortization 87,319 159,052
Mineral property abandonments 309,199 66,994
General and administrative 426,323 439,042
Interest expense 12,540 29,695
Total expenses 2,187,553 2,484,737
Net loss $ (421,716) $ (123,117)
Loss per share $ (.07) $ (.02)
Weighted average shares outstanding 6,323,971 6,035,155
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
Shares of
convertible
preferred Convertible Shares of
stock preferred common stock Common
issued stock issued stock
<S> <C> <C> <C> <C>
Balance, September 30, 1993 2,687,682 $2,687,682 6,023,936 $ 602,394
Contribution of stock to
Employee Stock Ownership
Plan -- -- 285,035 28,503
Issuance of stock for
services -- -- 15,000 1,500
Net loss -- -- -- --
Balance, September 30, 1994 2,687,682 2,687,682 6,323,971 632,397
Contribution of stock to
Employee Stock Ownership
Plan -- -- 172,217 17,222
Net loss -- -- -- --
Balance, September 30, 1995 2,687,682 $2,687,682 6,496,188 $ 649,619
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
Additional
paid-in Accumulated
capital deficit
<S> <C> <C>
Balance, September 30, 1993 $6,459,897 $(8,124,834)
Contribution of stock to
Employee Stock Ownership
Plan (2,495) --
Issuance of stock for
services 1,200 --
Net loss -- (123,117)
Balance, September 30, 1994 6,458,602 (8,247,951)
Contribution of stock to
Employee Stock Ownership
Plan (4,306) --
Net loss -- (421,716)
Balance, September 30, 1995 $6,454,296 $(8,669,667)
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended September 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (421,716) $ (123,117)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depletion, depreciation and amortization 87,319 159,052
Contribution of stock to ESOP 12,916 26,008
Mineral property abandonments 309,199 66,994
Gain on sale of railcars (58,663) --
Issuance of common stock for services -- 2,700
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 166,269 (102,608)
Decrease in prepaid expenses -- 7,746
Decrease (increase) in deposits 31,309 (911)
Increase (decrease) in current liabilities (435,555) 238,086
Net cash provided (used) by operating activities (308,922) 273,950
Cash flows from investing activities:
Proceeds from sale of oil and gas properties -- 3,750
Proceeds from sale of railcars 500,000 --
Capital expenditures - oil and gas properties (8,316) (49,284)
Capital expenditures - mineral properties (38,040) (153,436)
Capital expenditures - railcars -- (15,769)
Capital expenditures - office and technical equipment (42,669) (1,500)
Net cash provided (used) by investing activities 410,975 (216,239)
Cash flows used by financing activities:
Principal payments on note payable (162,016) (101,119)
Decrease in cash and cash equivalents (59,963) (43,408)
Cash and cash equivalents, beginning of year 130,783 174,191
Cash and cash equivalents, end of year $ 70,820 $ 130,783
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
NOVA NATURAL RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by Nova
Natural Resources Corporation (the "Company") in preparing and
presenting its financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments with
original maturities to the Company of three months or less.
Oil and Gas Properties
The Company follows the "full cost" method of accounting for its
oil and gas properties, in accordance with rules promulgated by the
Securities and Exchange Commission ("SEC"). All costs associated
with property acquisition, exploration, and development activities
are capitalized in one cost center (the "full cost pool"),
including internal costs that can be identified with those
activities, and costs of unsuccessful exploration. No gains or
losses are recognized on the sale or abandonment of oil and gas
properties unless the transaction involves the sale of significant
reserves. All of the Company's properties are located within the
continental United States.
Capitalized costs less related accumulated amortization may not
exceed the sum of (1) the present value of future net revenue from
estimated production of proved oil and gas reserves, calculated
using current prices; plus (2) the cost of properties not being
amortized, if any; plus (3) the lower of cost or estimated fair
value of unproved properties included in the costs being amortized,
if any; less (4) income tax effects related to differences in the
book and tax basis of oil and gas properties.
Amortization of the full cost pool is computed using the
units-of-production method based on proved reserves as determined
annually by the Company and independent petroleum engineers. The
provision for depletion, depreciation, and amortization on a per
equivalent barrel basis during fiscal years 1995 and 1994 was $4.17
and $5.38, respectively.
Mining Properties
Acquisition and exploration costs associated with mineral
properties are capitalized pending determination of commercially
exploitable reserves. Proceeds from sale of interests in mineral
properties are credited against these capitalized costs.
Expenditures related to unsuccessful exploration activities are
expensed. If the property is determined to have commercial ore
deposits capable of production, development costs are capitalized
and amortized as the ore is produced. Reclamation takes place
concurrently with production and costs are expensed as mining costs
in the year that they occur. When a property is determined to be
noncommercial, nonproductive, or impaired in value, any unamortized
costs in excess of the estimated net realizable value are expensed.
Railroad Rolling Stock
Railroad rolling stock was stated at cost and was depreciated using
the straight-line method over an estimated useful life of fifteen
years. This asset was sold to a nonaffiliated third party in
February, 1995.
Furniture and Technical Equipment
Furniture and technical equipment are stated at cost and are
depreciated using the straight-line method over estimated useful
lives ranging from three to eight years.
Income Taxes
The Company utilizes the asset and liability method of accounting
for income taxes, as set forth in Financial Accounting Standards
No. 109, Accounting for Income Taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities using enacted tax
rates expected to apply in the years in which such temporary
differences are expected to be recovered or settled. Changes in
tax rates are recognized in the period of the enactment date.
A valuation allowance equal to the amount of the net tax asset has
been established at September 30, 1995, as it is more likely than
not that the tax asset will not be realized. No income tax benefit
was recognized for operating losses incurred in 1995 and 1994 due
to the uncertainty of realization.
Differences between financial statement income (loss) and tax
income (loss) are represented primarily by intangible drilling and
completion costs and property abandonments. These costs are
deducted currently for federal income tax purposes and deferred for
financial statement purposes. Full cost pool adjustments are
deducted for financial statement purposes and are not currently
deductible for tax purposes. Because of cumulative operating
losses, no deferred income taxes have been recorded.
Loss Per Share
Loss per share is computed by dividing net loss attributable to
common stock by the weighted average number of common shares and
common share equivalents outstanding during each period. Common
share equivalents include, convertible preferred stock and dilutive
effects of stock options using the treasury stock method, which
were antidilutive for 1995 and 1994.
Reclassification
Certain amounts have been reclassified for comparibility with the
1995 presentation.
(2) CURRENT OPERATIONS
The financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered
recurring losses from operations and has, as described below, lost
a major customer for 1996. These matters raise substantial doubt
about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
The Company's liquidity is primarily dependent upon its ability to
secure customers for the purchase of its cement grade kaolin. In
September 1995, the Company was again notified that Holnam, Inc.,
one of the major purchasers of the Company's kaolin, would not
purchase kaolin during the 1996 mining season. The Company
believes that liquidity will be adversely affected by the loss of
kaolin sales, and normal sources of internal liquidity will not be
sufficient to meet its fixed working capital needs.
Due to concerns about the Company's cash flow, management salaries
were reduced by 35% during fiscal year 1995. The Company intends
to further reduce general and administrative expenses. The Company
is attempting to sell certain of its mineral and oil and gas
properties. If the Company is unable to sell these properties or
otherwise acquire additional capital, it will be necessary to
further reduce costs. The Company does not anticipate incurring
significant additional working capital obligations.
(3) NOTE PAYABLE
In February, 1993, the Company purchased forty railcars which were
used to transport kaolin clay from the Company's operating mine.
The Company financed $436,000 of the cost over 48 months at an
interest rate of 8.5% per annum. These railcars were sold in
February, 1995 and both the short and long term portion of notes
payable were paid-in-full.
(4) INCOME TAXES
The components of the net deferred tax assets and liabilities at
September 30, 1995 and 1994, computed in accordance with SFAS No.
109 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 3,392,118 $ 2,970,832
Other -- 28,900
Total gross deferred tax
assets 3,392,118 2,999,732
Less valuation allowance (3,169,939) (2,783,487)
Net deferred tax assets 222,179 216,245
Deferred tax liabilities
depletion, depreciation,
amortization, and valuation
allowance for income tax
purposes in excess of amounts
for financial statement purposes (222,179) (216,245)
Net deferred tax liabilities $ -- $ --
</TABLE>
The Company has net operating loss carryforwards at September 30,
1995 for federal income tax reporting purposes of approximately
$8,930,000. The Company also has an alternative minimum tax net
operating loss of approximately $8,640,000. Approximately
$3,450,000 of these losses will expire during 1996 and 1997, with
the balance expiring over the period ending in the year 2010. The
net change in the valuation allowance for the year ended September
30, 1995 was $386,452.
(5) STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Preferred Stock outstanding is convertible into
5,375,364 shares of Common Stock. The Preferred Shares contain
2-for-1 voting rights, have a $1.00 liquidation preference and have
no stated dividend rate.
If full conversion of all outstanding Convertible Preferred Stock
and the options described below occurred, the Company would have
outstanding 13,311,552 shares of its Common Stock.
Stock Option Plans
The Board of Directors have approved two stock option plans for the
benefit of Nova employees and key personnel. The first plan, the
Nova Natural Resources Corporation 1989 Nonqualified Stock Option
Plan (the "Nonqualified Plan") includes terms whereby key personnel
are issued options to purchase shares of the Company's Common Stock
at the market price at the time of grant. The options vest and are
exercisable in increments as specified by the Board of Directors at
the date of grant and expire five years after the date of grant.
Unexercised options, both vested and unvested portions, granted to
key personnel who subsequently terminate association with the
Company, are cancelled upon termination. The second plan, the Nova
Natural Resources Corporation 1989 Incentive Stock Option Plan, a
qualified plan (the "Incentive Plan"), includes terms whereby key
employees are issued options to purchase shares of the Company's
Common Stock at the market price of the stock on the date of grant.
The options vest and are exercisable over a five-year period.
Options, both vested and unvested portions, granted to employees
who subsequently terminate employment with the Company are
cancelled if not exercised within three months after termination of
employment.
A total of 2,000,000 shares have been reserved for issue under the
two plans. Data at September 30, 1995 and 1994 concerning these
two plans is as follows:
<TABLE>
<CAPTION>
Nonqualified Plan
1995 1994
<S> <C> <C>
Outstanding, beginning of year 645,000 670,000
Granted during year -- 625,000
Cancelled during year (25,000) (650,000)
Outstanding and exercisable,
end of year 620,000 645,000
Price per share $.0625 - $.18 $.0625 - $.18
<CAPTION>
Incentive Plan
1995 1994
<S> <C> <C>
Outstanding, beginning of year 820,000 320,000
Granted during year -- 800,000
Cancelled during year -- (300,000)
Outstanding and exercisable,
end of year 820,000 820,000
Price range per share $.09375 - $.105 $.09375 - $.105
</TABLE>
Stock Ownership Plan
The Company has also established the "Nova Natural Resources
Corporation Employee Stock Ownership Plan" (the "Plan") for all
employees. The Plan provides for annual contributions of Company
stock to a trust in an amount determined by the Board of
Directors. The Company's contributions to the Plan during the
fiscal years ended September 30, 1995 and 1994 amounted to stock
with an aggregate value of $12,916 and $26,008, respectively.
(6) SIGNIFICANT CUSTOMERS
For the years ended September 30, 1995 and 1994, the Company had
three customers which accounted for 71% and 78% of the Company's
oil and gas sales, respectively. For the years ended September 30,
1995 and 1994, the Scurlock Permian Company accounted for 25.8% and
21.2%, respectively; Chevron U.S.A. accounted for 22.9% and 35.8%,
respectively; and Eighty-Eight Oil Company accounted for 22.2% and
21.2%, respectively. No other customer accounted for over 10% of
oil and gas sales.
Further, for the years ended September 30, 1995 and 1994, the
Company had two customers which together accounted for 100% of the
Company's mineral sales, Holnam, Inc. and Lehigh Portland Cement
Company ("Lehigh").
(7) RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company (either individually
or through other companies under their direct control) participate
in many of the wells drilled by the Company. The Company also owns
interests in various producing and nonproducing mineral properties
with the REM Family Trust ("the Trust"), a trust in which the
Chairman of the Company is the trustee.
The Company and the Trust jointly owned property on the Company's
cement grade kaolin property in Redwood Falls, Minnesota. On
September 1, 1991, the Trust exchanged all of its rights, title and
interest in this property in exchange for a $.15 per ton royalty on
all kaolin sold from the property. The exchange of this interest
was negotiated between the Trust and Nova and no third party
evaluation was sought. No additional compensation costs were
incurred as a result of this transaction.
The Company and the Trust jointly own, through various agreements,
an interest in a gold prospect in southern Colorado and various oil
and gas property interests.
Pursuant to an overriding royalty plan established by the Company,
a management committee may grant an overriding royalty interest
(not to exceed 2% of 100%) in a specific property or prospect to
key employees who contribute significantly to the selection,
acquisition, development, and continued operation of such
properties. No overriding royalty interests were awarded during
1995 and 1994.
(8) SEGMENT INFORMATION
The Company operates entirely in the United States and principally
in two industries, oil and gas and mining. Operations in both
industries comprise acquisition, exploration, development, and
production of oil and gas or mineral properties.
Information about the Company's operations in these industries for
the years ended September 30, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1995
Oil and Gas Mining Consolidated
<S> <C> <C> <C>
Operating revenue $ 186,553 $ 1,486,287 $ 1,672,840
Operating expenses 156,814 1,866,932 2,023,746
Depreciation, depletion and amortization 67,504 17,787 85,291
Total operating expenses 224,318 1,884,719 2,109,037
Loss from operations (37,765) (398,432) (436,197)
General corporate income (net of
other expenses) 27,021
Interest expense (12,540)
Net Loss $ (421,716)
Identifiable assets at September 30, 1995 $ 339,578 $ 562,721 $ 902,299
Corporate assets 453,392
Total assets at September 30, 1995 $ 1,355,691
<CAPTION>
Year ended September 30, 1994
Oil and Gas Mining Consolidated
<S> <C> <C>
Operating revenue $ 230,766 $ 2,051,572 $ 2,282,338
Operating expenses 164,179 2,095,951 2,260,130
Depreciation, depletion and amortization 97,150 55,149 152,299
Total operating expenses 261,329 2,151,100 2,412,429
Loss from operations (30,563) (99,528) (130,091)
General corporate income (net of
other expenses) 36,669
Interest expense (29,695)
Net loss $ (123,117)
Identifiable assets at September 30, 1994 $ 398,766 $ 1,291,480 $ 1,690,246
Corporate assets 671,816
Total assets at September 30, 1994 $ 2,362,062
</TABLE>
Loss from operations is total revenue less operating and general
administrative expenses, excluding corporate expenses.
Identifiable assets by industry are those assets that are used by
the Company's operations in each industry.
(9) SUPPLEMENTARY INFORMATION ON OIL AND GAS OPERATIONS
The information on the Company's oil and gas operations for the
years ended September 30, 1995 and 1994, as shown in this schedule
is based on the full-cost method of accounting, as defined by the
Securities and Exchange Commission (SEC), and is presented in
conformity with the disclosure requirements of the SEC and
Statement of Financial Accounting Standards (SFAS) No. 69
Disclosures about Oil and Gas Producing Activities.
Information related to the Company's oil and gas operations is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Capitalized costs:
Unproved properties $ 106,753 $ 155,834
Proved properties 6,069,125 6,011,728
6,175,878 6,167,562
Accumulated depletion,
depreciation, amortization
and valuation allowances (5,836,300) (5,768,796)
$ 339,578 $ 398,766
<CAPTION>
Costs incurred in oil and gas producing activities are as follows:
1995 1994
<S> <C> <C>
Capitalized:
Property acquisition costs $ 8,316 $ 49,284
Development costs $ -- $ --
Expenses - depletion, depreciation,
and amortization $ 67,504 $ 97,150
</TABLE>
Oil and Gas Reserve Information (Unaudited)
The following information presents the Company's estimate of its
proved oil and gas reserves, all of which are located in the
Continental United States. The Company emphasizes that reserve
estimates are inherently imprecise and are expected to change as
future information becomes available. The oil estimates (BBLS) and
the natural gas estimates (MCF) as of September 30, 1995 and 1994
have been prepared by an independent firm of petroleum engineers.
<TABLE>
<CAPTION>
1995 1994
(BBLS) (MCF) (BBLS) (MCF)
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year 32,305 263,165 36,721 253,677
Revisions of previous estimates 12,948 58,512 6,027 56,787
Extensions, discoveries, and
other additions -- -- -- --
Sales of reserves-in-place -- -- -- --
Production (8,635) (45,362) (10,443) (47,299)
End of year 36,618 276,315 32,305 263,165
Proved developed reserves:
Beginning of year 32,305 263,165 36,721 253,677
End of year 36,618 276,315 32,305 263,165
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows and the
Changes Therein (Unaudited)
The following presentations contain no provision for estimated
future income tax expenses due primarily to net operating loss
carryforwards and tax credits. The standardized measure of
discounted future net cash flows relating to proved oil and gas
reserves at September 30, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Future cash in-flows $ 948,375 $ 854,554
Future production costs (375,219) (359,858)
Future development costs (5,000) (5,000)
Future net cash flows 568,156 489,696
10% annual discount for estimated
timing of cash flows (197,583) (179,402)
Standardized measure of discounted
future net cash flows $ 370,573 $ 310,294
</TABLE>
The following are the principal sources of change in the standardized measure
of discounted future net cash flows during 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Standardized measure of discounted future
net cash flows at beginning of year $ 310,294 $ 433,139
Sales & transfers of oil and gas produced,
net of production costs (93,688) (132,144)
Sales of reserves-in-place -- --
Net changes in prices and production costs 12,065 (99,579)
Extensions, discoveries, and improved
recovery, less related costs -- --
Revisions of previous quantity estimates 103,710 83,115
Changes in estimated future development costs 415
Development costs incurred during the period
that reduced future development costs -- --
Accretion of discount 17,940 24,041
Net change in income taxes -- --
Other 20,252 1,307
Standardized measures of discounted future
net cash flows at end of year $ 370,573 $ 310,294
</TABLE>
The Company estimates net quantities of proved reserves of oil and
gas and calculates the standardized measure of discounted future
net cash flows using current prices in effect at the time estimates
are made.
(10) SUPPLEMENTAL INFORMATION ON MINERAL PROPERTIES
Mineral acquisition costs are those costs incurred in acquiring a
property for exploration and include lease bonuses, lease rentals,
and land services costs. Exploration costs are those incurred in
connection with probing an area of likely mineralization for
specific deposits. Exploration may be conducted before or after
the acquisition of mineral rights. Exploration costs are
capitalized until exploration as been determined to be unsuccessful
at which point they are charged against earnings. Development
costs are incurred once it is determined that mineral reserves
exist and can be commercially recovered. They end upon the
commencement of commercial production. A summary of the Company's
capitalized acquisition, exploration and development costs for the
years ended September 30, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Kaolin mine
Acquisition $ 60,896 $ 60,896
Development 465,194 456,420
Nome gold property
Acquisition -- 142,687
Development -- 79,817
Querida gold property
Acquisition -- 80,518
Development -- 40,819
Kaolin paper prospect
Acquisition 65,875 65,875
Development 35,714 34,663
Other miscellaneous prospects
Acquisition 540 --
Development 1,649 --
629,868 961,695
Less accumulated depletion and
valuation allowance (67,147) (111,552)
$ 562,721 $ 850,143
</TABLE>
Kaolin Mine
The Company's kaolin mine is located in Redwood Falls, Minnesota.
The Company currently has a 100% working interest in approximately
69 acres permitted for the purpose of mining kaolin clay. Kaolin
is used, in this case, in the manufacture of cement.
Nome Gold Property
The Company has a 100% working interest in 21,411 acres offshore at
Nome, Alaska. Nova is currently attempting to sell the property or
obtain a joint venture partner to put up the funds necessary to
develop the property. Due to the lack of success in finding a
buyer or joint venture partner who would be willing to make an up-
front payment to the Company of its historical cost in this
property, and the lack of certainty as to whether any arrangement
entered into will recover those historical costs, for accounting
purposes, the Company has written off its investment in the
property.
Querida Gold Property
The Company owns a 42.22% interest in a gold prospect in Custer
County, Colorado. Due to the lack of certainty as to whether any
arrangement entered into will recover Nova's historical costs in
the Querida prospect, for accounting purposes, the Company has
written off its investment in the property.
Kaolin Paper Project
Effective July 1, 1993, the Company entered into a Joint Venture
and Operating Agreement ("the Agreement") with an unaffiliated
mineral development company ("the UMDC"). The Agreement assigned
a 100% working interest in the Company's paper grade kaolin
prospect (the "Prospect") in southwestern Minnesota in exchange for
the agreement by the UMDC to pay 100% of the costs of exploring for
and developing paper grade kaolin and other industrial minerals on
property in the Prospect. The Company retains a 10% net proceeds
in the Prospect until the UMDC has recovered 100% of its
capitalized costs. At that time, the Company has the option to
purchase a 30% working interest by paying the UMDC an amount equal
to 15% of the capitalized costs from April 1, 1993 to the date of
recovery of those costs by the UMDC.
Since the Company has only one mining operation, the kaolin mine,
in production, and since reclamation occurs concurrently with
mining, no reclamation liabilities have been recorded. Further,
the Company is not currently subject to any pending administrative
or judicial enforcement proceedings arising under environmental
laws or regulations.
(11) COMMITMENTS AND CONTINGENCY
Rail Transportation Contract
The Company is obligated under the terms of the contract with one
of its rail transportation suppliers to move at least 300 cars
during 1995 and at least 300 cars during 1996. If the Company does
not move at least 300 cars, a $120 per car penalty for each car
less than 300 cars will be assessed. Since the Company currently
has a contract through 1997 with its kaolin purchaser to purchase
in excess of 300 cars, it does not anticipate paying any such
penalties.
Leases
Future minimum rental payments for office facilities under the
remaining terms of a noncancelable lease are $19,400 and $6,500 for
the years ending September 30, 1996 and 1997, respectively.
Net rental payments charged to expense amounted to $20,183 in 1995
and $19,687 in 1994.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors
The directors of the Company are set forth in the following table:
Name and Other Positions Served as
Held With the Company Age Director Since
Robert E. McDonald, Chairman of the
Board (1) (2) 67 April 22, 1986
Brian B. Spillane, President and
Chief Executive Officer (3) 59 April 22, 1986
Milton O. Childers 67 April 22, 1986
Thomas F. Kane (2) 55 April 22, 1986
Robert W. Meier (2) 59 April 22, 1986
John R. Parker 49 April 22, 1986
(1) Chairman of the Board since April 22, 1986.
(2) Member of the Executive Committee.
(3) President and Chief Executive Officer since April 1, 1989.
All directors are elected to serve until the next annual meeting or
until retirement or resignation. There is no family relationship
between any director of the Company and any other director or
executive officer. The following paragraphs set forth an account
of the business experience of each of the Company's directors and
executive officers, including his principal occupation and
employment.
Mr. McDonald is currently a consulting geologist and oil and gas
explorationist. He is also engaged in agricultural and real estate
pursuits. He was President of Nova Natural Resources Corporation
from its inception until his resignation on April 1, 1989. He
continues to serve as Chairman of the Board of the Company. From
January 1, 1984 to September, 1986, he was President and Chairman
of the Board of Nova Petroleum Corporation, a predecessor to the
Company. He graduated from the University of Kansas in 1951 with
a B.S. degree in Geology. Mr. McDonald has published several
papers relating to oil and gas geology in the Rocky Mountain area.
Mr. Spillane became President and Chief Executive Officer of the
Company effective April 1, 1989. Prior to that time he was an
independent consultant to the oil, gas and minerals industry. From
February, 1982 to November, 1987, he was employed as Executive Vice
President of Barrett Resources Corporation, a publicly held oil and
gas exploration company, where his duties primarily involved
mergers, acquisitions, and capital financing in addition to
involvement in other operations. He graduated from the University
of Detroit in 1961 with a B.S. in Mechanical Engineering and holds
a M.S. in Mechanical Engineering from San Diego State University.
He is a Registered Professional Engineer (mechanical) in
California.
Dr. Childers was President, Treasurer, and Director of Power
Resources Corporation until the merger in 1986 of Power Resources
Corporation into Nova Natural Resources Corporation, and holds B.S.
and M.A. degrees in geology from the University of Wyoming and a
Ph.D. degree in geology from Princeton University. Dr. Childers
was an independent consulting geologist in the Denver, Colorado
area from 1986 to 1992 when he became the Company's Exploration
Manager. He became the Vice President of Exploration of the
Company in January, 1993, and continues in that capacity.
From 1972 until 1994 Mr. Kane was founder and Chairman of Printon
Kane, Inc., an institutional investment banking firm. In 1994 he
joined International Telephone Group as Chairman. He is a graduate
of Fordham University and for over ten years he has been an
investor in various oil and gas projects.
Mr. Meier served as President and Chairman of the Board of Nova
Petroleum Corporation from May 1979 to January 1, 1984. From 1984
to 1989 he was an independent consulting geologist. From 1989 to
1994 he was Project Geologist for Dames & Moore, specializing in
the disposal of hazardous waste materials. He is currently
retired, but occasionally works as a consulting geologist. He
graduated from Northern Illinois University in 1961 with a
B.S. degree in Geology and in 1964 received an M.S. degree in
Geology from Southern Methodist University. Mr. Meier is a member
of the American Association of Petroleum Geologists and is a
certified member of the Association of Professional Geological
Scientists.
Mr. Parker is currently a real estate developer in Vermont. Prior
to this activity he was a registered investment councilor with
McRae Capital Management in Morristown, New Jersey. Prior to
joining McRae, Mr. Parker worked as an independent financial
consultant to various companies and as a general partner in an
investment banking firm. Mr. Parker is also a director of several
investment companies associated with the Capstone Group in Houston,
Texas. He graduated from St. Lawrence University in 1969 with a
B.S. in Psychology and holds a P.M.D. from Harvard Graduate School
of Business Administration.
No directors of the Company receive compensation as directors,
although certain expenses incurred for Company business may be
reimbursed.
Executive Officers
The following table sets forth the executive officers of the
Company:
Name and Officer Age Served as Officer Since
Brian B. Spillane
President and Chief
Executive Officer 59 April 1, 1989
James E. Taets
Vice President, Secretary
and Treasurer 40 April 22, 1986
Milton O. Childers
Vice President of Exploration,
and Assistant Secretary 67 January 22, 1993
An account of the business experience during at least the past five
years of Mr. Taets is as follows (for Messrs. Spillane and
Childers, see "Directors"):
Mr. Taets was Treasurer and Controller of Nova Petroleum
Corporation from September, 1982 to April, 1986, at which time he
became Vice President, Secretary and Treasurer of the Company. He
graduated from Augustana College in 1977 with a degree in
Accounting and Business Administration.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation of the Chief Executive Officer and Exploration Manager
of the Company as of September 30, 1995, 1994, and 1993 for
services in all capacities to the Company.
Summary Compensation Table
Long Term Compensation
Annual
Compensation Awards
Name and Salary Restricted Stock Options
Principal Position Year $ Award ($)* #
Brian B. Spillane 1995 67,939 45,292 -
CEO 1994 79,829 7,983 200,000
1993 75,000 18,750 -
Milton O. Childers 1995 66,160 44,107 -
Exploration V.P. 1994 76,578 7,859 200,000
1993 72,000 18,000 -
*ESOP contribution
Option Grants in Last Fiscal Year
Individual Grants
% of Total
Options Options Granted Exercise or
Granted/ to Employees Base Price Expiration
Name (Expired) in Fiscal Year ($/sh) Date
Brian B. Spillane -- -% -- -
Milton O. Childers -- -% -- -
Employee Stock Option Plans
Under the terms of the Nova Natural Resources Corporation 1989
Nonqualified Stock Option Plan (the "Nonqualified Plan"), key
personnel are issued options to purchase shares of the Company's
Common Stock at the market price at the time of the award. The
options are exercisable over a five year period in increments as
specified by the Board of Directors. Upon termination of
association with the Company, unexercised options, both vested and
unvested, are cancelled.
Also available to employees and management is the Nova Natural
Resources Corporation 1989 Incentive Stock Option Plan, a qualified
plan (the "Incentive Plan"). Under the terms of the Incentive
Plan, options to purchase shares of the Company's Common Stock are
issued to key employees at the market price of the stock on the
date of issue. The options are exercisable over a five year period.
Options, both vested and unvested portions, granted to employees
who subsequently terminate employment with the Company are
cancelled if not exercised within three months after termination of
employment.
A total of 2,000,000 shares of the Company's Common Stock have been
reserved for issuance under the terms of the two Plans. At
September 30, 1995, options to purchase 600,000 shares of Common
Stock had been issued to the Company's Directors under the
Nonqualified Plan and another 20,000 shares had been issued to non-
directors; under the Incentive Plan, options to purchase 820,000
shares had been issued, including, 200,000 each to Messrs.
Spillane, Childers and Taets. None of the options issued under the
Plan were exercised during 1995.
Employee Stock Ownership Plans
The Board of Directors and the stockholders of the Company have
also adopted the Nova Natural Resources Corporation Employee Stock
Ownership Plan ("ESOP") for the benefit of its full-time employees,
including its officers and directors.
Only employees who have reached the age of 21 and have completed
one year of Company service are eligible to participate in this
plan. With respect to each plan year, the Company may contribute
cash or Common Stock of the Company to a trust in such amounts as
the Board of Directors deems advisable. Contributions may not
exceed the lesser of 25% of the participant's total annual
compensation or $25,000. Any cash contributions are to be used
primarily by the trustee to purchase shares of Common Stock of the
Company, which, in addition to shares of Common Stock of the
Company contributed by the Company, are allocated to the accounts
of all participants in the ratio that the total annual compensation
(not in excess of $100,000) of each participant bears to the total
compensation of all participants in such year. The plan does not
allow contributions by participants.
Each participant's right to the stock allocated to his account is
fully vested after three years of service. Nonetheless, a
participant's benefits will be fully vested if his employment
terminates by reason of death or upon his reaching 65. If a
participant incurs a break in service (passage of one plan year in
which the employee works 500 or fewer hours), his benefits are
forfeited to the extent they have not vested. All forfeitures are
allocated among the remaining participants in the same manner as
the annual contribution.
Distributions under the plan are to commence no later than 60 days
after the last day of the year in which the participant reaches age
65 or, if later, the plan year in which the participant terminates
employment with the Company. The distribution will consist of the
Company's Common Stock. Any distributions are payable in a lump
sum or, if the participant elects, in annual or monthly
installments.
Each participant is entitled to direct the trustee as to the manner
in which any stock allocated to his account is voted. The trustee
is empowered to vote any stock which has not been allocated in a
manner which, in the judgement of the Board of Directors,
represents the participants' best interests.
As of September 30, 1995, 398,211, 411,278 and 201,497 shares have
been allocated to accounts of Messrs. Spillane, Taets, and
Childers, respectively. No other current officers or directors of
Nova are currently eligible to participate in the plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Principal Shareholders
The following table sets forth the only persons known to the
Company, as of September 30, 1995, to own beneficially more than 5%
of the Company's Common Stock, $.10 par value, or the Company's
Convertible Preferred Stock, $1.00 par value, the Company's only
classes of issued and outstanding voting securities. Except as
otherwise noted in the footnotes to the table, each person named
has sole voting and investment powers relating to his shares.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
Preferred Stock
Thomas F. Kane 1,098,841 40.88%
39 Prospect Hill Avenue
Summit, New Jersey 07901
Robert E. McDonald 794,421 (1) 29.56%
P.O. Box 481243
Denver, CO 80248-1243
Karen McDonald 794,420 (3) 29.56%
1457 High
Denver, CO 80218
Common Stock
Thomas F. Kane 1,092,679 (2) 16.82%
39 Prospect Hill Avenue
Summit, New Jersey 07901
Robert E. McDonald 484,851 (1) 7.46%
P.O. Box 481243
Denver, CO 80248-1243
Karen McDonald 484,850 (3) 7.46%
1457 High
Denver, CO 80218
Milton O. Childers 431,494 (5) 6.64%
179 E. Brown Place
Aurora, CO 80013
James E. Taets 411,427 (4) 6.33%
P.O. Box 481104
Denver, CO 80248
Brian B. Spillane 398,211 (6) 6.13%
255 S. Eudora
Denver, CO 80222
(1) The preferred and common shares are held by the REM Family
Trust, in which Mr. McDonald is the Trustee. Does not
include 200,000 shares underlying stock options held by
Mr. McDonald. Includes options held by three officers and
one director of the Company to purchase an aggregate of
636,788 shares of common stock directly from Mr. McDonald,
all exercisable at $.10 per share at any time on or before
April 3, 2003.
(2) Consists of 466,395 shares held by Printon Kane and Co., a
Delaware Corporation in which Mr. Kane was a principal
stockholder and Chairman of the Board, and 50,761 shares held
by Kane Holding, Inc. and 575,523 shares owned by Mr. Kane
personally. Does not include 200,000 shares underlying stock
options held by Mr. Kane. Includes options held by three
officers to purchase an aggregate of 1,023,576 shares of
common stock directly from Mr. Kane. These options are
exercisable at $.10 per share at any time on or before April
3, 2003.
(3) The preferred and common shares are held by the Karen
McDonald Trust, in which Ms. McDonald is Trustee. Includes
options held by three officers and one director of the
Company to purchase an aggregate of 636,787 shares of common
stock directly from Ms. McDonald, all exercisable at $.10 per
share at any time on or before April 3, 2003.
(4) Consists of 411,278 shares vested in his account under the
ESOP and 149 owned directly, but does not include options to
purchase 200,000 shares directly from the Company, options to
purchase 75,000 shares directly from Mr. McDonald, options to
purchase 75,000 shares directly from Ms. McDonald, or options
to purchase 150,000 shares directly from Mr. Kane.
(5) Consists of 225,154 shares owned by Mr. Childers, 4,843
shares held by Mr. Childers' wife and 201,497 shares vested
under the ESOP, but does not include options to purchase
186,789 shares directly from Mr. McDonald, options to
purchase 186,788 shares from Ms. McDonald, options to
purchase 373,576 shares directly from Mr. kane, or options to
purchase 200,000 shares from the Company.
(6) Consists of 398,211 shares vested in his account under the
ESOP, but does not include options owned by Mr. Spillane to
purchase 250,000 shares directly from Mr. McDonald, options
to purchase 250,000 shares directly from Ms. McDonald,
options to purchase 500,000 shares directly from Mr. Kane or
options to purchase 200,000 shares from the Company.
The following table shows, at September 30, 1995, the shares of the
Company's Common Stock, $.10 par value, beneficially owned by each
of the officers and directors of the Company and the shares
beneficially owned by all of the officers and directors as a
group. Except as otherwise noted in the footnotes to the table,
each person named has sole voting and investment powers related to
his shares.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 484,851 (1) 7.46%
Brian B. Spillane 398,211 (3) 6.13%
James E. Taets 411,427 (4) 6.33%
Milton O. Childers 431,494 (5) 6.64%
Thomas F. Kane 1,092,679 (6) 16.82%
Robert W. Meier 193,178 (7) 2.97%
John R. Parker -- (8) (2)
All Directors and Officers
as a group (7 persons) 3,011,840 46.35%
(1) See note (1) of the preceding table.
(2) Less than 1%.
(3) See note (6) of the preceding table.
(4) See note (4) of the preceding table.
(5) See note (5) of the preceding table.
(6) See Note (2) of the preceding table.
(7) Does not include 200,000 shares underlying stock options
held by Mr. Meier.
(8) Does not include options owned by Mr. Parker to purchase
125,000 shares directly from Mr. McDonald, options to
purchase 125,000 shares directly from Ms. McDonald, or
options to purchase 200,000 shares from the company.
The following table shows as of September 30, 1995, the shares of
the Company's Common Stock, $.10 par value, assuming full
conversion of the Preferred Stock and full exercise of all options.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 1,636,904 12.30%
Brian B. Spillane 1,598,211 12.01%
James E. Taets 991,427 7.45%
Milton O. Childers 1,378,647 10.36%
Thomas F. Kane 2,466,785 18.53%
Robert W. Meier 393,178 2.95%
John R. Parker 250,000 1.88%
All Directors and Officers
as a group (7 persons) 8,715,152 65.48%
If full conversion of all outstanding shares of convertible
preferred stock and options occurred, the Company would have
outstanding 13,311,552 shares of its Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the Company's directors and officers have participated
directly or indirectly in the past and may continue to participate,
from time to time in the future, in oil, gas and mineral prospects
in which the Company has an interest. All such participation has
been and will continue to be on terms no less favorable to the
Company than it can obtain from unaffiliated persons.
The Company and the Chairman of the Board jointly owned property on
the Company's cement grade kaolin property in Redwood Falls,
Minnesota. In 1992, the Company purchased the Chairman's interest
in this property for a $.15 per ton royalty on all kaolin removed
from that portion of the mine. The Company has determined that the
amount received by the Chairman of the Board in 1995 and 1994 is
not material.
There have been no other significant transactions between the
Company and officers or directors of the Company during the fiscal
year ended September 30, 1995. See also "Item 10. Executive
Compensation".
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601
of the Regulation S-K or are incorporated by reference to previous
filings.
Exhibit
Table No. Document Reference
(2) Articles of Incorporation and By-Laws (a)
(3) Instruments defining the right of
security holders, including indentures N/A
(5) Voting trust agreement N/A
(6) Material contracts not in ordinar
course of business N/A
(7) Material foreign patents N/A
(a) Filed with Registration Statement No. 33-5520 (under the
Securities Act of 1933) and incorporated herein by this
reference.
(b) The following documents were filed and are incorporated
herein:
Description of
Document and Filing
(i) Convertible Preferred Stock Purchase Agreement filed
with Form 10-Q dated December 31, 1986.
(ii) Nova Natural Resources Corporation 1987 Nonqualified
Stock Option Plan and 1987 Incentive Stock Option Plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Nova Natural Resources Corporation
has duly caused this Annual Report on Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized, in
Denver, Colorado on this 22nd day of December, 1995.
NOVA NATURAL RESOURCES CORPORATION
(Registrant)
By:/s/ Brian B. Spillane
Brian B. Spillane, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature Title Date
/s/ Robert E. McDonald Chairman of 12-22-95
Robert E. McDonald the Board
/s/ Brian B. Spillane President, Chief 12-22-95
Brian B. Spillane Executive Officer
/s/ James E. Taets Vice President, 12-22-95
James E. Taets Secretary and Treasurer
/s/ Milton O. Childers Director 12-22-95
Milton O. Childers
/s/ John R. Parker Director 12-22-95
John R. Parker
/s/ Thomas F. Kane Director 12-22-95
Thomas F. Kane
/s/ Robert W. Meier Director 12-22-95
Robert W. Meier
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