U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from N/A to N/A
Commission file number 0-15078
NOVA NATURAL RESOURCES CORPORATION
(Exact name of small business issuer as specified in its charter)
Colorado 84-1227328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
789 Sherman St., Suite 550
Denver, Colorado 80203
(Address of principal executive offices)
(303) 863-1997
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 5,985,836
Transitional Small Business Disclosure Format (Check One):
Yes ; No X
_______________________________________________________________
<PAGE>
PART I. FINANCIAL INFORMATION
NOVA NATURAL RESOURCES CORPORATION
Condensed Balance Sheets (Note 1)
March 31, September 30,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash $ 49,525 $ 79,827
Accounts receivable:
Kaolin operations(Note 5) 0 376,392
Oil and gas operations(Note 2) 13,038 24,867
Other 9,991 31,273
_______ _______
Total 23,029 432,532
Prepaid expenses 3,248 3,941
_______ _______
Total current assets 75,802 516,300
Mineral property interests, net of
accumulated depreciation and
depletion of 92,301 and 88,767(Note 6) 542,417 543,038
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,909,210 and
5,896,408(Note 2) 104,223 260,014
Furniture and technical equipment net
of accumulated depreciation of
132,380 and 131,953 38,852 38,851
Investment in and advances to NovaChek
Limited Liability Company(Note 4) 195,149 136,717
Deposits 51,550 51,000
_______ _______
$ 1,007,993 $ 1,545,920
========= =========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
1997 1996
(unaudited)
Current liabilities:
Accounts payable $ 46,866 $ 282,087
Accrued liabilities 2,083 35,576
_______ _______
Total current liabilities 48,949 317,663
Convertible debentures 250,000 250,000
Note Payable(Note 3) 66,408 0
Discount on Note Payable(Note 3) (20,154) 0
_______ _______
Total long term liabilities 296,254 250,000
Total liabilities 345,203 567,663
_______ _______
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
5,000,000 shares authorized; 2,687,682
shares issued and outstanding in 1996,
1,792,267 in 1997(Note 3) 1,792,267 2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;6,496,188
shares issued and outstanding in 1996,
5,985,846 in 1997(Note 3) 598,585 649,619
Additional paid-in capital(Note 3) 7,204,873 6,454,296
Accumulated deficit (8,932,935) (8,813,340)
__________ __________
Total stockholders' equity 662,790 978,257
Total Liabilities and Stockholders' Equity $1,007,993 $1,545,920
========= =========
See accompanying notes to condensed financial statements.
<PAGE>
<TABLE>
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
REVENUES:
Mineral sales $ 1,913 $ 19,583 $ 193,469 $ 162,091
Oil and gas sales(Note 2) 36,106 58,366 77,722 103,004
________ ________ _______ _______
38,019 77,949 271,191 265,095
EXPENSES:
Mining costs, including
transportation and royalties 4,788 6,119 159,355 101,033
Oil and gas lease operating
including production taxes 27,166 24,247 57,581 56,862
Depletion, depreciation,
and amortization 7,271 16,471 16,763 34,617
Mineral property abandonments 0 0 60 0
General and administrative 102,530 103,012 214,750 195,205
141,755 149,849 448,509 387,717
_______ _______ _______ _______
Operating loss $ (103,736) $ (71,900) $ (177,318)$ (122,622)
========= ======== ======== =======
Other income(expenses):
Share of losses of
NovaChek LLC(Note 4) (5,529) 0 (11,819) 0
Interest income 2,690 1,402 5,866 3,501
Interest expense (4,547) 0 (12,880) 0
Gain on sale of assets(Note 2) 0 0 76,557 0
________ ________ ________ ________
(7,386) 1,402 57,724 3,501
Net loss $ (111,122) $ (70,498) (119,594) (119,121)
Loss per share(Note 7) $ (.02) $ (.01) $ (.02)$ (.02)
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,326,074 6,496,188 6,411,131 6,496,188
========= ========= ========= =========
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Cash Flows (Note 1)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (111,122) $ (70,498) $ (119,594) $ (119,121)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depletion and depreciation 7,271 16,471 16,763 34,618
Gain on sale of assets -- -- (76,557) --
Change in assets and liabilities:
(Increase) decrease in accounts
receivable 23,931 (77,401) 409,503 150,679
(Increase) decrease in prepaid
expenses 2,782 517 693 (3,186)
(Decrease) increase in accounts
payable (19,043) 165,993 (235,221) 44,350
(Increase) decrease in deposits -- 2,058 (550) --
(Decrease) increase in accrued
liabilities (8,334) -- (33,493) --
_______ _______ _______ _______
Net cash provided (used) by
operating activities (104,515) 37,140 (38,456) 107,340
_______ _______ _______ _______
Cash flows from investing activities:
Proceeds from sale of assets -- -- 229,957 --
Investment in Limited Liability Co. (6,206) (150,000) (58,432) (150,000)
Additions to property and
equipment (19,588) (2,691) (13,752) (9,308)
_______ _______ _______ _______
Net cash provided (used) by
investing activities (25,794) (152,691) 157,773 (159,308)
_______ _______ _______ _______
Cash flows from financing activities:
Purchase of Kane stock (150,000) -- (150,000) --
Issuance of debentures -- 203,125 -- 203,125
Issuance of short tern note -- 100,000 -- 100,000
Discount on note payable 381 -- 381 --
_______ _______ _______ _______
Net cash provided (used) by
financing activities (149,619) 303,125 (149,619) 303,125
_______ _______ _______ _______
Increase (decrease) in cash (279,928) 187,574 (30,302) 251,157
Cash beginning of period 329,453 134,403 79,827 70,820
_______ _______ _______ _______
Cash end of period $ 49,525 $ 321,977 $ 49,525 $ 321,977
======= ======= ======= =======
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
NOVA NATURAL RESOURCES CORPORATION
Notes to Condensed Financial Statements
Six Months Ended March 31, 1997 and 1996
(1) The condensed financial statements included herein are unaudited. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, have been made which are necessary for a fair presentation of the
financial position of the Company at March 31, 1997 and 1996 and the results
of operations for the three and six month periods ended March 31, 1997 and
1996. Certain amounts have been reclassified for comparability with the 1996
presentation. Quarterly results are not necessarily indicative of expected
annual results because of fluctuations in the price received for oil and gas
products, demand for natural gas, kaolin and other factors. For a more
complete understanding of the Company's operations and financial position,
reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations herein and the financial statements of
the Company, and related notes thereto, filed with the Company's annual
report on Form 10-KSB for the year ended September 30, 1996, previously filed
with the Securities and Exchange Commission.
(2) On November 14, 1996, the Registrant sold at an auction conducted by the
Oil & Gas Asset Clearinghouse in Houston Texas several oil and gas producing
assets and leasehold interests, primarily overriding royalty interests in
producing oil & gas wells in the Wyoming Overthrust Belt. Proceeds from this
sale, net of commissions and direct selling costs were $229,957. The gain on
the sale was $76,550. The sale was effective as of November 1, 1996. The
bulk of the interests were sold to a Denver, Colorado based firm not
affiliated with the Company, which was the successful bidder among a group of
bidders at the auction for the greater portion of the oil & gas assets and
interests referred to above.
(3) In December, 1986 the Company issued 2,687,682 shares of Convertible
Preferred Stock to the Company's Chairman and to a principal shareholder in
settlement of $1,700,000 in convertible debentures plus related accrued
interest of $426,682 and $561,000 in bank debt repaid by the Chairman and the
principal shareholder on behalf of the Company. The Preferred Stock is
convertible into 5,375,364 shares of the Company's Common Stock. The
Preferred Shares contain 2 for 1 voting privileges, have a $1.00 liquidation
preference and have no stated dividend rate. In February, 1997 the Company
repurchased 510,342 shares of common stock and 895,415 shares of convertible
preferred stock from a major shareholder in settlement of a dispute for
$150,000 in cash to be paid at closing, and additional payments based on
revenues from either the operation of or the sale of its cement-grade kaolin
mine of up to an aggregate value of $70,008 over a period of years. This
note is a non-interest bearing note. The Company has accounted for this note
as a Note Payable of $66,408 to account for the expenses that will be
subtracted from this note, and a Discount on Note Payable of $20,535 to
account for the present value of the payments of $45,873. The Common Stock
and Preferred Stock were carried on the Company's books at a price higher
than the purchase price. This difference was credited to Additional Paid in
Capital. The Company may also purchase a portion of its common stock in the
event of the sale of its kaolin mine upon the assertion of appraisal rights
by shareholders who dissent from a vote to approve such sale.
(4) On April 1, 1996 the Company organized NovaChek to recover precious
metals from off-shore mining leases located near Nome, Alaska, utilizing a
dredging operation.
The Company contributed mineral leasehold interests and $118,750 in cash for
a 42% voting interest in NovaChek. An additional 4.125% interest in NovaChek
is held by affiliates of the Company. NovaChek is managed by the Company and
Chek Technologies and Exploration, LLC (Chek) which owns a 38.75% interest in
NovaChek. The Company is entitled to receive an annual management fee of
$65,000 from NovaChek. To date, no management fee has been collected or
recorded by the Company.
A number of significant decisions require the approval of both the Company
and Chek. Such decisions include, but are not limited to certain borrowings,
capital expenditures and asset disposals.
NovaChek has not commenced dredging operations on a commercial basis, Company
management estimates NovaChek will require approximately $100,000 during
fiscal 1997 to ready the dredge for 1997 operations, and fund operations
through the end of June, which should be sufficient to enable the project to
be self-sufficient, provided commercial gold production can be obtained.
Chek Technologies is investing approximately $60,000 of the needed funds, and
approximately $40,000 of additional funds must be raised. There is no
assurance that these funds can be raised, nor that the dredge can be operated
economically. Accordingly, the Company's ability to recover its investment
in NovaChek is dependent upon the results of future development, including
obtaining financing for such development. The availability of financing and
the results of such future development are not presently determinable.
Accordingly, the financial statements do not include any adjustments relating
to the recoverability of the Company's investment such costs that might
result from the outcome of these uncertainties.
In accordance with the NovaChek revised operating agreement, which must be
approved by a majority of the members, which is expected, the first $250,000
in distributions will be allocated to investors other than the Company and
Chek based upon their relative voting percentages. The next $150,000 in
distributions will be made to the Company. The Company, Chek and remaining
investors will receive 19.13%, 14.2% and 66.67%, respectively, of the next
$500,000 in distributions and 27%, 23% and 50%, respectively, of the
following $500,000 in distributions. After these initial preferential
distributions are made, all subsequent distributions will be allocated based
on voting percentages.
The condensed balance sheet and statement of operations of NovaChek at March
31, 1997 and for the period from January 1, 1997 through March 31, 1997 are
presented below.
BALANCE SHEET OF NOVACHEK
Cash and other assets $ 8,128
Mineral property interests 45,000
Delay Rentals 42,822
Mining and related equipment, net 289,134
________
Total assets $385,084
Accounts payable $102,333
Short term notes payable 39,600
Stockholders' equity 243,151
________
Total liabilities and stockholders'
equity $385,084
STATEMENT OF OPERATIONS OF NOVACHEK
Sales $ 0
Other income 5
Marketing expense 0
Operating expenses (13,170)
________
Net Loss $(13,165)
(5) Kaolin receivables of $376,392 were collected during the quarter ended
December 31, 1997. Due to the seasonal nature of the kaolin business, no
sales were made after this period until April, 1997.
(6) The Company has entered into an agreement for the sale of its kaolin
mine. If the sale is approved by shareholders, the Company will receive a
total of $700,000 for the Cement Kaolin Mine, including $125,000 in cash at
closing, an aggregate of $450,000 in non-interest bearing semi-annual
installments on August 15 and December 15 of each year until August 15, 2001,
and a final payment of $125,000 on December 15, 2001. Up to $70,008 of these
proceeds will be paid to Thomas F. Kane, a former director, as part of the
Company's purchase of his Common and Preferred Stock, over the same period as
the NCA payments. The Company will retain both a mortgage and a security
interest covering the property being sold in order to secure full payment of
the purchase price. See Managements Discussion and Analysis for further
details concerning this transaction.
(7) Net loss per common share is determined by dividing net loss
attributable to common stock by the weighted average number of common shares
outstanding during each period. A fully diluted loss per share is not
computed because conversion of the Preferred Shares mentioned above, and
outstanding options would be antidilutive
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Management's discussion of anticipated future operations contains predictions
and projections which may constitute forward looking statements. The Private
Securities Litigation Reform Act of 1995, including provisions contained in
Section 21E of the Securities & Exchange Act of 1934, provides a safe harbor
for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results of other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following:
(a) The Company may not be able to obtain the additional
funding necessary to continue operations in its Nome
gold prospect and/or the funds actually necessary to
operate that project may be significantly greater than
those anticipated by management.
(b) Borax may determine not to pursue or to substantially
delay pursuing the Company's paper-grade kaolin venture.
(c) The Company may not be able to find industry partners
for its oil and gas and mineral prospects.
(d) Proceeds from the Company's sale of certain assets may
be insufficient to purchase assets which produce income
sufficient to satisfy the Company's working capital needs.
(e) The Company may be unable to purchase, or to purchase
at a profitable price, mineral assets which meet the
Company's operational criteria.
RESULTS OF OPERATIONS
The Company realized net losses for the three month period and six
month period ended March 31, 1997 of $111,122 and $119,954, respectively,
compared to net losses of $70,498 and $119,121 for the same periods in
1996.
Mineral sales, all of which in the three month fiscal period were
royalties on gravel sales, decreased $17,670 to $1,913 for the three months
ended March 31, 1997 compared to mineral sales of $19,583 for the same
period in 1996. The difference between the 1997 period and the 1996 period
is wholly due to a more accurate accrual of gravel sales royalties in the
first three months of fiscal 1997 than in the first three months of the
prior fiscal year. For the six months ended March 31, 1997 and 1996,
mineral product sales were $193,469 and $162,091, respectively. The
increase in the 1997 period reflects higher kaolin sales due to increased
kaolin purchases by the Company's sole customer and more efficient kaolin
shipments than in the comparable fiscal period. Poor railcar turnaround
times in the 1996 period limited the Company's ability to supply customer
needs in that period. This was corrected in the 1997 period. Mining
costs, including transportation and royalties in the 1997 six month period
were higher as a percent of sales than in the 1996 period. Costs increased
at a more rapid rate than prices due to higher transportation costs and
timing differences in the recognition of direct mining costs.
Oil and gas sales for the three months and six months ended March 31,
1997 decreased $22,260 and $25,282, respectively, to $36,106 and $77,722
compared to $58,366 and $103,004 for the three months and six months ended
March 31, 1996. The Company sold several oil & gas producing assets as of
November 1, 1996, primarily overriding royalty interests in producing oil
& gas wells in the Wyoming Overthrust Belt. In addition, the Company sold
a small portion of its oil production in September, 1996. The decrease in
oil and gas sales is primarily attributable to the lower volume of oil and
gas produced net to the Company's interest as a result of these sales,
which more than offset the positive effect of substantially higher oil and
gas prices in the fiscal periods compared to the comparable periods. The
sales volumes and average sales prices during the periods were as follows:
Three Months Ended
March 31, 1997 March 31,1996
Sales
Oil (bbls) 1,441 2,724
Gas (MCF) 3,667 17,557
Average Sales Price
Oil ($/Bbl) $19.00 $14.61
Gas ($/MCF) $ 2.30 $ 1.06
Six Months Ended
March 31, 1997 March 31,1996
Sales
Oil (bbls) 2,805 4,764
Gas (MCF) 12,876 28,337
Average Sales Price
Oil ($/Bbl) $19.20 $15.67
Gas ($/MCF) $ 1.49 $ 0.96
Mining costs, including transportation and royalties were $4,788 for
the three months ended March 31, 1997 compared to $6,119 for the same
period in 1996. The decrease is due to timing differences in the accrual
of gravel royalties Mining costs were $159,355 for the six months ended
March 31, 1997 compared to $101,033 for the same period in 1996. The
increase in mining costs in the six months is due to the increase in kaolin
production and sales in the 1997 period. Mining costs were higher as a
percent of sales than in the 1996 period. Kaolin mining costs increased at
a more rapid rate than prices, due to higher transportation costs and
timing differences in the recognition of direct mining costs.
Oil and Gas lease operating expenses including production taxes
increased $2,919 and $719 for the three months and six months ended March
31, 1997 as compared to 1996. The increase is due primarily to increased
workover expenses in the 1997 period. The production sale in November was
a sale of royalty interests, which have a much lower level of associated
production costs than working interest production. Hence, the sale did not
reduce production costs in proportion to the reduction in oil and gas sales
revenue resultant from the sale.
General and administrative expenses decreased slightly for the three
months ended March 31, 1997 as compared to the same period in 1996. These
expenses increased $19,545 for the six month period. The decrease in the
three month period was primarily due to close attention to administrative
overhead expenses, which offset higher legal expenses, primarily those
associated with the planned sale of the Company's kaolin mine. Increased
legal expenses and accounting fees also were primarily responsible for the
increase in general and administrative expenses in the six month period.
Legal expenses were higher due to the negotiations and associated legal
documents required by the planned sale of the Company's kaolin mine, and
connected with the settlement of a dispute with a major shareholder. Both
of these events are non-recurring, and neither impacted the 1996 period.
Accounting expenses were higher in the 1997 period primarily due to audit
work relating to the Company's investment in NovaChek Limited Liability
Company, which had not been formed in the 1996 period.
Depletion, depreciation, and amortization decreased 56% to $7,271 and
52% to $16,763, respectively, in the three months and six months ended
March 31, 1997, compared to $16,471 and $34,617 in the fiscal 1996 period.
This decrease was primarily the result of the sale of producing assets,
which substantially reduced the full-cost pool.
The Company's share of losses of NovaChek Limited Liability Company in
the three months and six months ended March 31, 1997 were $5,529 and
$11,819, respectively. NovaChek Limited Liability Company had not been
formed in the 1996 fiscal periods.
Interest income increased to $2,690 and $5,866 in the three months and
six months ended March 31, 1997, respectively, compared to $1,402 and
$3,501 in the 1996 periods, reflecting more cash on hand invested in
short-term obligations. Interest expense in the three months and six
months ended March 31, 1997 increased from zero to $4,547 and $12,880,
respectively, due to the issuance of interest-bearing convertible
subordinated debentures in the third quarter of fiscal 1996. There were no
such debentures outstanding in the comparable 1996 fiscal periods. A gain
on the sale of producing oil and gas assets of $76,557 was realized in the
six months ended March 31, 1997. There were no asset sales in the 1996
period.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary source of cash flow during the six months ended
March 31, 1997 was the collection of accounts receivable and proceeds from
the sale of assets. Net proceeds from the sale of oil and gas assets of
$229,957 were realized in the six months ended March 31, 1997. There were
no such asset sales in the 1996 period. Cash used by operations totaled
$38,456 for the six month period ended March 31, 1997 as compared to cash
provided by operations of $107,340 for the same period in 1996. Although
revenues increased $6,096 in the 1997 period, expenses were $60,792 higher,
due primarily to higher mining costs and an increase in general and
administrative costs. Additionally, accounts payable decreased $235,221 in
the 1997 period, compared to an increase in the accounts payable in the
1996 period of $44,350, a difference between the two periods of $279,571,
more than offsetting the $258,824 increase in the collection of receivables
in the 1997 period as compared to the 1996 period. Cash and cash
equivalents for the period decreased $30,302 resulting in cash on hand at
March 31, 1997 of $49,925, compared to cash on hand at March 31, 1996 of
$321,977. The Company purchased 510,342 shares of common stock and 895,415
shares of convertible preferred stock from a major shareholder in
settlement of a dispute for $150,000 in cash (plus additional future
consideration) in the 1997 six month period. No such stock purchase took
place in the 1996 period. In addition, in the 1996 period, the Company
issued $203,125 of convertible subordinated debentures and issued a short
term note for $100,000, which two events, net of a $150,000 investment in
NovaChek Limited Liability Company, were chiefly responsible for the
increase in cash in the 1996 period.
CAPITAL RESOURCES-UTILIZATION OF CAPITAL
For the six month period ended March 31, 1997, the Company reduced
accounts payable by $235,221. Accrued liabilities decreased $33,493.
Additions to property and equipment were $13,752, and investment in and
advances to NovaChek Limited Liability Company were $58,432, resulting in
cash provided by investing activities, net of $229,957 from the sale of
assets, of $157,773. In the comparable period, net cash used by investing
activities was $159,308, primarily due to the $150,000 investment in
NovaChek Limited Liability Company. All funds for capital expenditures for
the remainder of the year are expected to be provided by proceeds from
operation of the kaolin mine until closing of the sale of the mine, from
the sale of the Company's kaolin mine, if approved by the Company's
shareholders, from short-term borrowings, from other operating cash flow,
and from existing cash balances. In connection with the repurchase of
stock from a major shareholder in settlement of a dispute for $150,000 in
cash, additional payments based on revenues from either the operation of or
the sale of the Company's cement-grade kaolin mine of up to an aggregate
value of $70,008 must be paid over a period of years. The Company
anticipates the portion of such payments which may be due in the 1997
fiscal year could amount to approximately $19,000. The Company may also
purchase a portion of its common stock in the event the sale of its kaolin
mine is approved by shareholders, which is likely, by offering shareholders
dissenter's rights. While it cannot be determined in advance how many
shares might be purchased, nor the exact price of such shares, assuming a
purchase price of $.05 per share, and the purchase of from 800,000 to
2,000,000 shares (the number of shares to be purchased will be lowered by
the fact that none of the principals of the Company will be selling any of
their shares),the Company estimates the cost of such repurchase of stock at
between $40,000 and $100,000. It is the Company's present intention to
finance such repurchase from internal cash flow and cash resources, but the
Company may offer to sell preferred and/or common stock in a private
placement to replace all or a portion of these funds and provide additional
capital to acquire new sources of cash flow.
LIQUIDITY
At March 31, 1997, the Company's working capital surplus totaled
$26,853 as compared to a working capital surplus of $198,637 at September
30, 1996. Liquidity for the six months ended March 31, 1997 was provided
by proceeds from the November sale of oil & gas producing assets and
leasehold interests, primarily overriding royalty interests in producing
oil & gas wells in the Wyoming Overthrust Belt and by the collection of
receivables. However, liquidity was reduced by the $150,000 stock
repurchase, the $119,594 operating loss, reductions in accounts payable and
accrued liabilities, by investment in NovaChek Limited Liability Company,
and additions to property and equipment. Both the $150,000 stock
repurchase and the investment in NovaChek are non-recurring events.
Based on cash flow projections through 1997, it is anticipated that
the Company will have adequate cash resources if it continues to operate at
current levels, although short-term borrowings will have to be made due to
timing differences in the payment of kaolin mining costs and the receipt of
payment for kaolin sales. Because the Company has sold a portion of its
oil and gas producing assets, and oil and gas sales from its other
properties continue to decline, and the Company has only one customer for
its kaolin, the cash flow generated by oil, gas and kaolin sales is not
sufficient to generate positive cash flow. In the event the sale of its
kaolin mine takes place, cash resources will be enhanced over the next
twelve months, and further payments pursuant to the sale will be received
over the next five years, although the Company may have to expend a portion
of its cash resources to repurchase all shares tendered pursuant to the
offering of dissenters' rights. The Company has permitted a gravel pit on
two leases in Minnesota. A local contractor mined and marketed the gravel
in 1996 and paid the Company a royalty based on gravel sold. It is
anticipated that further gravel royalties may be realized from this
property in 1997. The Company will aggressively seek other sources of cash
flow in 1997, including the acquisition of assets or of other companies,
mergers, and private and/or public financing.
SALE OF THE COMPANY'S KAOLIN MINE
Pursuant to a contract dated January 25, 1997, the Company agreed,
subject to shareholder approval, to sell its cement-grade kaolin mining
operations and property (the "Cement Kaolin Mine") near Redwood Falls,
Minnesota, to Northern Con-Agg, Inc., an unaffiliated Minnesota
corporation. A portion of the Cement Kaolin Mine is located on lands which
are currently subject to a joint venture between the Company and U.S. Borax
Inc. ("Borax"), which was formed in 1993 primarily to explore, develop and
produce high quality paper-grade kaolin. No paper-grade kaolin has yet
been sold from the joint venture property. Borax has agreed to release the
portion of the paper-grade kaolin property occupied by the Cement Kaolin
Mine from the joint venture to permit the Company's sale of the mine to
NCA. The Company will be selling all of its cement-grade kaolin operations
to NCA, while retaining its interest in the paper-grade joint venture. The
Cement Kaolin Mine encompasses 314 acres, and the paper-grade kaolin
property retained by the Company encompasses 4628.59 acres. After the sale
to NCA, ownership of the cement-grade kaolin property will be separate and
distinct from ownership of the paper-grade kaolin property. Except for the
inclusion of an immaterial portion of the paper grade kaolin prospect in
the sale to NCA, the sale will have no impact on the Company's joint
venture with Borax.
Under the terms of the purchase and sale agreement with NCA (the "NCA
Agreement"), NCA will acquire approximately 78 fee acres owned by the
Company and an additional 236 acres leased by the Company, as well as the
inventory, equipment, contracts, permits and other personal property held
by the Company in connection with these cement-grade mining operations.
NCA proposes to continue the current cement-grade operations of the
Company, and has agreed to turn over to the Company any profits which it
may earn during a 21 year period after the date of closing as a result of
sales of kaolin produced from the property to paper manufacturers. The
Company agrees that, if it or any joint venture of which it is a member
sells kaolin to the cement-industry in Minnesota, Iowa, North Dakota, South
Dakota or Wisconsin during a five year period following the closing, the
Company it will pay to NCA the sum of $30,000 for each year in which any
sale occurs.
NCA will pay a total of $700,000 to the Company for the Cement Kaolin
Mine, including $125,000 in cash at closing, an aggregate of $450,000 in
non-interest bearing semi-annual installments on August 15 and December 15
of each year until August 15, 2001, and a final payment of $125,000 on
December 15, 2001. Up to $70,008 of these proceeds will be paid to Thomas
F. Kane, a former director, as part of the Company's purchase of his Common
and Preferred Stock, over the same period as the NCA payments. The Company
will retain both a mortgage and a security interest covering the property
being sold to NCA in order to secure full payment of the purchase price.
NCA will assume liability for all existing contracts relating to the
property, although the Company will continue to have liability for any
conduct before the closing date and, any contracts not disclosed to NCA.
Included among the contracts assumed by NCA is an agreement with Union
Pacific Railroad which requires the Company to pay the railroad for a
minimum usage of 300 rail cars, whether actually used by the Company. NCA
will assume this obligation and Nova will have no further liability for
railcar usage. The Company believes that it has disclosed all pertinent
contracts to NCA. The Company intends to secure appropriate lessor
consents to eliminate any liability to the lessor following assignment of
the lease.
If NCA expands the current cement-grade mining operations, the lessor
of the Mine Property will have to be relocated from her home on the
property, which recently has been appraised at $25,000. When this occurs,
NCA will pay the first $25,000 of relocation costs, Nova will pay 50% of
the costs, if any, between $25,000 and $75,000, and Nova will pay the
entire cost, if any, in excess of $75,000. Shortly following execution of
the NCA Agreement, the Company incurred approximately $5,800 in additional
drilling and analysis costs to meet requests of NCA for additional
exploration data.
Prior to the NCA Agreement, NCA had no relationship to the Company,
its officers or directors. The Company has not secured an independent
opinion concerning the fairness of the consideration to be paid by NCA, but
the Company's officers believe such consideration to be appropriate based
upon the Company's prior net income from the property, the anticipated
kaolin reserves, and the demand for cement-grade kaolin in the area. There
will be no change in the rights of security holders of the Company as a
result of this vote, except with respect to the holders of Convertible
Debentures, as described below. The Company is not in default with respect
to obligations under any of its securities.
If shareholder approval for the sale of the cement-grade kaolin mine
is not received, Nova will continue to operate the mine as it has in the
past and continue to pursue additional customers and markets for the
kaolin. The Company would seek to retain its current customer and attempt
to obtain business from a previous customer. Any additional customers
could not be obtained for the current mining season. The Company would
consider other alternatives, such as entering into joint venture
arrangements for the marketing and sale of kaolin, possibly with the
company which desires to purchase the mine, and/or other companies which
supply materials to the cement industry. If shareholder approval of the
sale is not obtained, approximately $20,000 in transactional costs will not
be recovered.
Potential Impact of the Proposed Sale on the Company's Convertible
Debentures
The Colorado Business Corporation Act (the "Act") requires approval of
the majority of shares voting at a duly noticed and conducted meeting for
the sale of all or substantially all of a corporation's assets outside of
its normal course of business. The Company has determined that, while the
Cement Kaolin Mine is a principal asset, because the remaining assets and
business are not insubstantial and proceeds of the sale are intended to be
used to continue the Company's business in the same fashion, a shareholder
vote is not required by law. Nonetheless, since the Cement Kaolin Mine
sale is a material transaction, the Company believes that its shareholders
should be informed about and vote upon the approval of that transaction.
As part of its organization and capitalization of NovaChek Limited
Liability Company, an Idaho limited liability company formed to develop
part of the Company's gold prospect in Nome, Alaska, the Company sold an
aggregate of $250,000 of convertible subordinated debentures (the
"Debentures"). The Debentures require semi-annual payments of interest and
payment of principal and accrued interest on April 1, 2001. At the option
of its holder, each Debenture matures and is fully payable upon the
Company's "sale, exchange, base or other disposition of all or
substantially all of [its] assets." Notwithstanding the Company's belief
that the sale of the Cement Kaolin Mine is not such an event, upon
litigation brought by a Debenture holder, a court may disagree and order
early payment of the Debentures. Such a payment would have a materially
adverse impact on the Company, require the use of proceeds from the Mine
sale and threaten the ongoing viability of the Company.
Vote Upon Sale
The affirmative vote by a majority of all of the shares of Common and
Preferred Stock entitled to vote as of May 1, 1997 is required for approval
of the agreement to sell the Cement Kaolin Mine.
Rights of Dissenting Shareholders
The Act affords a shareholder of a Colorado corporation the right to
dissent from certain actions requiring shareholder approval and to require
that the corporation purchase the shareholder's stock at a "fair value"
(the "right of appraisal"). If a vote were required to approve the sale of
the Cement Kaolin Mine (which the Company does not believe), rights of
appraisal still would not be available to dissenting shareholders because
of an exemption for Corporations like Nova whose common stock is owned by
more than 2,000 shareholders.
Notwithstanding the absence of a required vote and presence of an
exemption from rights of appraisal provided by the Act, the Company has
decided to offer to purchase all of the shares of Common Stock of any
shareholder who does not vote in favor of the Cement Kaolin Mine sale and
properly asserts his right of appraisal. Management believes that the
conjunction of its Cement Kaolin Mine sale and its sale of oil and gas
overriding royalty interests and purchase of the stock of Thomas F. Kane
(as described below) represent material events which might prompt a
shareholder to sell his Common Stock if an adequate market for that Stock
existed. The Company also recognizes that the absence of an active trading
market impedes such a sale. As such, management wishes to afford
shareholders who disagree with these decisions or with the directors'
decision to continue operation of the Company the ability to sell their
Common Stock at a price which management believes is the appropriate market
price.
"Fair Value" is defined by the Act as "the value of the shares immediately
before the effective date of the corporate action to which the dissenter
objects, including any appreciation or depreciation in anticipation of the
corporate action except to the extent that exclusion would be inequitable."
Fair value imports a broader approach to valuation than "fair market
value". The most important factors are market value, investment or
earnings value and net asset value. For public companies, like Nova, great
weight is given to the stock's market price. Where the stock is thinly
traded, courts also consider several other elements including book value,
liquidity value, net asset value and capitalized earnings value. The
Company intends to use the bid price for its stock as the fair value. The
most recent bid price is $.05 per share in February, 1997. Management
believes that this price is higher than any value determined under any
other valuation theory. The Company purchased all the common stock of one
of its directors and a principal shareholder at $.03 per share, less than
the bid price of that stock at the time.
FUTURE TRENDS
Kaolin sales are seasonal in nature and the mining of kaolin is
dependent on favorable weather conditions, demand by cement companies for
this product, and other factors over which the Company has no control. The
Company has a sales contract with a cement company which expires in
December, 1997. The fact that the Company has only one purchaser for its
kaolin has had and will continue to have a significant negative impact on
the Company's cash flow and operations. In addition, the short line
railroad which directly serves the mine is in need of rehabilitation to
increase the reliability of the line and make it less susceptible to
weather delays. There is no such rehabilitation planned at present.
However, rehabilitation of this line has been needed for a number of years,
and an acceptable level of service has been maintained on the line through
normal maintenance procedures. This rail line has been offered for sale
by the owner/operator, and the level of service which will be offered by
the new owner, should a sale take place, cannot be determined.
The Company will use some of the proceeds from its asset sales for
working capital. Management contemplates applying the majority of the
proceeds to the development of new business and acquisition of new mineral
properties, includiong (1) an attempt to identify and acquire on a reasonable
basis a kaolin or other similar industrial minerals mine in a more favorable
marketing area, where good transportation facilities and ready access to
numerous markets provide a more favorable long-term environment in which to
operate and (2) identification of potential acquisition candidates, ideally,
small mineral companies or the mineral operations of larger companies which
could provide immediate cash flow and the opportunity for future growth. The
potential for liquidity afforded by free-trading stock and an interest in the
Nova properties which offer the potential for significant development, not
otherwise available to the stockholders of potential acquisition candidates,
may facilitate Nova's ability to consummate such acquisitions.
While management intends to pursue both options, the Company's current
projects in oil and gas exploration, paper-grade kaolin exploration, and gold
exploration will continue to be aggressively pursued. The Company has two
important oil and gas exploration properties which are ready for immediate
drilling, on at least one of which it believes it can obtain a drilling
commitment in 1997. Both are being extensively marketed to the industry. If
either or both of these properties are drilled, and a commercial discovery is
made, the Company will need capital to conduct development drilling. The mine
sale proceeds would provide the Company with the option to internally finance
this development, or to externally finance it on more favorable terms than
would otherwise be possible. Without liquid capital produced from the asset
sales, the Company's only option would be to further reduce its interest in
what would then be a successful project, which would not be in its long-term
best interests.
The prices the Company receives for its oil and gas products continue
to fluctuate, although current prices are generally higher than those
obtained last year. The Company's largest producing oil field, the North
Rainbow Ranch Unit, produces a heavy, sour crude. The price paid for this
crude is significantly less than for a higher quality crude. Since most of
the Company's oil sales are from this field, and it is in the latter stages
of its lifetime, when production is decreasing, it takes a significant
increase in oil prices for oil sales to increase. In addition, much of the
company's gas is sold on the spot market and such sales are subject to both
price and market demand fluctuations.
Sufficient funding has been obtained to initiate gold production
efforts on the NovaChek properties for the 1997 season, although
approximately $40,000 in additional monies will be required for additional
working capital for NovaChek to fund the project through the end of June,
after which time, if the project is successful, revenues from gold sales
should enable the project to fund working capital needs from internal cash
flow. Most of the additional $40,000 in funding has been arranged, and it
appears likely all or most of the additional monies needed will be obtained.
Ifcommercial gold production can be established in the 1997 season, the
Company could recover at least a portion of, and perhaps all, of the funds
it has advanced to NovaChek, and cash flow from gold production will have
been established. It cannot be determined at this time whether NovaChek
Limited Liability Company's gold mining operations will be successful. If
commercial operations can be established on this property, the Company
should be able to generate cash flow from this investment in future years,
the level of which cannot be determined with certainty until such
operations have been established and maintained for a reasonable period of
time.
In March, 1997, the Company and the McDonald Trust entered into an
agreement with Roaring River Resources LLC ("Roaring River"), an unaffiliated
third party, pursuant to which Roaring River was granted an option to acquire
1600 acres of leases in the Great Salt Lake. The Company and the Trust will
each retain a 1.5% overriding royalty if the option is exercised. If the
option is exercised, the total payments to Nova and the Trust will be
$250,000.
RESIGNATION OF INDEPENDENT ACCOUNTANTS
On May 5, 1997, KPMG Peat Marwick LLP ("KPMG") notified the Company
that KPMG was withdrawing as auditor for the Company, effective May 2,
1997.
There have been no disagreements between the Company and KPMG during
the period for which KPMG served as the Company's auditors.
Company management felt that the Company should seek the services of
a smaller firm, which could offer the Company more cost-effective
accounting services.
At this time, the Registrant has not engaged a new auditor, but
expects to do so expeditiously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None
(b) Form 8-K. Reports on Form 8-K were filed November 14, 1996, on
March 4, 1997, and on May 5, 1997 and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of
the undersigned thereunto duly authorized.
NOVA NATURAL RESOURCES CORPORATION
Date: May 15, 1997 By: /s/ Brian B. Spillane
Brian B. Spillane,
President, Director, and
Chief Executive Officer
Date: May 15, 1997 By: /s/ James R. Schaff
James R. Schaff,
Secretary-Treasurer
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