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 June 30, 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)
June 30, September 30,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash $ 3,065 $ 79,827
Accounts receivable:
Kaolin operations 206,311 376,392
Oil and gas operations(Note 2) 6,894 24,867
Other 14,691 31,273
_______ _______
Total 227,896 432,532
Prepaid expenses 1,500 3,941
_______ _______
Total current assets 232,461 516,300
Mineral property interests, net of
accumulated depreciation and
depletion of 97,742 and 88,767(Note 6) 537,890 543,038
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,915,458 and
5,896,408(Note 2) 98,553 260,014
Furniture and technical equipment net
of accumulated depreciation of
132,658 and 131,953 39,746 38,851
Investment in and advances to NovaChek
Limited Liability Company(Note 4) 177,678 136,717
Deposits 51,550 51,000
_______ _______
$ 1,137,878 $ 1,545,920
========= =========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
1997 1996
(unaudited)
Current liabilities:
Accounts payable $ 256,761 $ 282,087
Accrued liabilities 8,333 35,576
_______ _______
Total current liabilities 265,094 317,663
Convertible debentures 250,000 250,000
Note Payable(Note 3) 66,408 0
Discount on Note Payable(Note 3) (19,014) 0
_______ _______
Total long term liabilities 297,394 250,000
Total liabilities 562,488 567,663
_______ _______
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
3,000,000 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;
17,000,000 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 (9,020,335) (8,813,340)
__________ __________
Total stockholders' equity 575,390 978,257
Total Liabilities & Stockholders' Equity $1,137,878 $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 Nine Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
REVENUES:
Mineral sales(Note 5) $ 0 $ 386,163 $ 0 $ 548,254
Oil and gas sales(Note 2) 24,174 52,491 101,895 155,495
Gravel income 0 0 1,914 0
________ ________ _______ _______
24,174 438,654 103,809 703,749
EXPENSES:
Mining costs, including
transportation and royalties 0 313,732 983 414,765
Oil and gas lease operating
including production taxes 12,733 26,335 70,313 83,197
Depletion, depreciation,
and amortization 6,525 21,857 19,754 56,474
Mineral property abandonments 0 0 60 0
General and administrative 97,357 74,430 282,574 269,635
_______ _______ _______ _______
116,615 436,354 373,684 824,071
Operating gain (loss) $ ( 92,441) $ 2,300 $ (269,875)$ (120,322)
========= ======== ======== =======
Other income(expenses):
Share of losses of
NovaChek LLC(Note 4) (17,635) 0 (29,454) 0
Interest income 876 5,472 6,742 8,973
Interest expense (7,391) (8,887) (20,271) (8,887)
Gain on sale of assets(Note 2) 0 0 76,557 0
Other Miscellaneous Income 2,650 0 2,650 0
________ ________ ________ ________
(21,500) (3,415) 36,224 86
Net loss before
Discontinued Operations $ (113,941) $ (1,115) $ (233,651)$ (120,236)
Profit on Discontinued
Operations (Note 5) $ 26,542 0 $ 26,659 $ 0
Net loss $ (87,399) $ (1,115) $ (206,992)$ (120,236)
Loss per share before
Discontinued Operations (.02) (.00) (.04) (.02)
Loss per share(Note 6) $ (.01) $ (.00) $ (.03)$ (.02)
WEIGHTED AVERAGE SHARES
OUTSTANDING 5,985,846 6,496,188 6,269,369 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 Nine months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (87,399) $ (1,115) $ (206,993) $ (120,236)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Mineral property abandonments -- --
Depletion and depreciation 11,967 21,857 28,730 56,474
Gain on sale of assets -- -- (76,557) --
Change in assets and liabilities:
(Increase) decrease in accounts
receivable (204,868) (78,263) 204,636 72,416
(Increase) decrease in prepaid
expenses 1,748 (1,125) 2,441 (4,310)
(Decrease) increase in accounts
payable 209,895 (98,477) (25,326) (54,127)
(Increase) decrease in deposits -- 19,411 (550) 19,411
(Decrease) increase in accrued
liabilities 6,250 -- (27,243) --
_______ _______ _______ _______
Net cash provided (used) by
operating activities (62,407) (137,712) (100,862) (30,372)
_______ _______ _______ _______
Cash flows from investing activities:
Proceeds from sale of assets -- -- 229,957 --
Investment in Limited Liability Co. 17,471 -- (40,962) (150,000)
Additions to property and
equipment (2,664) (770) (16,416) (10,078)
_______ _______ _______ _______
Net cash provided (used) by
investing activities 14,807 (770) 172,579 (160,078)
_______ _______ _______ _______
Cash flows from financing activities:
Purchase of Kane stock -- -- (150,000) --
Issuance of debentures -- 46,875 -- 250,000
Issuance of short tern note -- -- -- 100,000
Discount on note payable 1,140 -- 1,521 --
_______ _______ _______ _______
Net cash provided (used) by
financing activities 1,140 46,875 (148,479) 350,000
_______ _______ _______ _______
Increase (decrease) in cash (46,460) (91,607) (76,762) 159,550
Cash beginning of period 49,525 321,977 79,827 70,820
_______ _______ _______ _______
Cash end of period $ 3,065 $ 230,370 $ 3,065 $ 230,370
======= ======= ======= =======
<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 June 30, 1997 and 1996 and the results of operations for
the three and nine month periods ended June 30, 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 discount is amortized over a 54 month period. 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 has
offered to purchase common shares of stock from shareholders who
disagree with the Company's decision to sell its cement-grade
kaolin mine and who wish to exercise dissenter's rights. The
Company will pay $.04 per share.
(4) In April, 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. In order to raise funding for the 1997
mining season, Nova allowed its interest to be diluted, and
currently holds a 35.413% 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 holds an approximate 47.55%
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 is currently attempting to establish mining operations on
a commercial scale at Nome. Although in excess of 130 ounces of
gold have been recovered thus far in the 1997 season, this level of
production is not sufficient to cover operating costs, and it
cannot be determined at this time whether commercial production
levels can be attained. The Company's ability to recover its
investment in NovaChek is dependent upon the results of future
development, including the establishment of commercial production
and including the obtaining of 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 investments nor any such costs that
might result from the outcome of these uncertainties.
The condensed balance sheet and statement of operations of NovaChek
at June 30, 1997 and for the period from January 1, 1997 through
June 30, 1997 are presented below.
BALANCE SHEET OF NOVACHEK
Cash and other assets $ 26,298
Mineral property interests 45,000
Delay Rentals 42,822
Mining and related equipment, net 299,457
________
Total assets $413,577
Accounts payable $107,095
Short term notes payable 39,600
Stockholders' equity 266,882
________
Total liabilities and stockholders'
equity $413,577
STATEMENT OF OPERATIONS OF NOVACHEK
Sales $ 14,518
Other income 61
Marketing expense (385)
Operating expenses (77,156)
________
Net Loss $(62,962)
(5) On July 22, 1997, the Company sold its cement-grade kaolin
mine in Redwood FAlls, Minnesota. The sale was approved by the
Company's 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. The Company operated the mine until
the sale date of July 22, 1997. The Company had sales of $326,725
and expenses of $300,182.64 for the three months ended June 30,
1997. Sales for the nine month period were $518,280 and expenses
were $491,621. See Managements Discussion and Analysis for further
details concerning this transaction.
(6) 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 justify continuing
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, nor may it be able to
enter into a merger with another entity which will
enable it to attain its goals.
RESULTS OF OPERATIONS
The Company realized net losses for the three month period and
nine month period ended June 30, 1997 of $87,399 and $206,992,
respectively, compared to net losses of $1,115 and $120,236 for the
same periods in 1996.
The Company sold its kaolin mine effective July 22, 1997.
Accordingly, no mineral sales have been recorded in the 1997 fiscal
periods, since those sales originated from discontinued kaolin
mining operations. Mineral Sales in the three months and nine
months ended June 30, 1996 were $386,163 and $584,254 respectively.
The Company has received payments pursuant to this sale totaling
$175,000. These payments were received in the fourth quarter of
the fiscal year, and hence are not reflected in financial results
for the fiscal period ended June 30, 1997. Future payments
pursuant to this sale, to be received over the next five years,
will total $525,000. Royalties from gravel sales resulted in
gravel income for the nine months ended June 30, 1997 of $1,914.
There were no gravel sales in either of the three month periods
ended June 30, 1997 and 1996, nor in the nine month 1996 period,
and hence no royalty income from gravel sales was recorded in those
fiscal periods.
Oil and gas sales in the three months ended June 30, 1997
decreased 54% to $24,174 compared to $52,491 in the 1996 three-
month period. For the nine months, oil and gas sales decreased 34%
to $101,895 compared to $155,495 in the 1996 period. The Company
sold several oil & gas producing assets as of November 1, 1996,
primarily overriding royalty interests in producing oil & gas wells
in the Wyoming Overthrust Belt. In addition, the Company sold a
small portion of its oil production in September, 1996. The
decrease in oil and gas sales is primarily attributable to the
lower volume of oil and gas produced net to the Company's interest
as a result of these sales, which more than offset the positive
effect of substantially higher oil and gas prices in the fiscal
periods compared to the comparable periods. The sales volumes and
average sales prices during the periods were as follows:
Three Months Ended
June 30, 1997 June 30,1996
Sales
Oil (bbls) 1,227 2,724
Gas (MCF) 3,163 10,957
Average Sales Price
Oil ($/Bbl) $18.70 $18.41
Gas ($/MCF) $ 1.10 $ 1.22
Nine months Ended
June 30, 1997 June 30, 1996
Sales
Oil (bbls) 4,032 4,764
Gas (MCF) 16,039 35,464
Average Sales Price
Oil ($/Bbl) $19.05 $16.74
Gas ($/MCF) $ 1.41 $ 1.30
Mining costs, including transportation and royalties in the
three month period ended June 30, 1997 were zero, reflecting the
kaolin mine sale, and treatment of kaolin mine costs as
discontinued operations. In the 1996 three month period, these
costs were $313,732, primarily attributable to kaolin mining costs.
Mining costs, including transportation and royalties in the nine
month period were $983 compared to $414,765 for the same period in
1996. All of the costs in the 1997 period are attributable to
gravel royalty costs, with the decrease due almost solely to the
sale of the kaolin mine.
Oil and Gas lease operating expenses including production
taxes decreased $13,602 to $12,733 for the three months ended June
30, 1997 as compared to 1996. In the nine month period, lease
operating expenses decreased $12,884 to $70,313. The decrease os
due primarily to the sale of interests in producing oil & gas wells
in the prior fiscal periods. The majority of the production
interests sold were 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 increased 31% for the
three months ended June 30, 1997 as compared to the same period in
1996. These expenses increased $12,939 for the nine month period.
These increases were primarily due to the expenses associated with
the planned sale of the Company's kaolin mine. Increased legal
expenses and accounting fees were primarily responsible for the
increase in general and administrative expenses in the nine 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 70% to
$6,525 and 65% to $19,754, respectively, in the three and nine
months ended June 30, 1997, compared to $21,857 and $56,474 in the
fiscal 1996 period. This decrease was primarily the result of the
sale of producing assets, which substantially reduced the full-cost
pool, and the reclassification of depreciation on the kaolin mine
as discontinued operations.
The Company's share of losses of NovaChek Limited Liability
Company in the three months and nine months ended June 30, 1997
were $17,635 and $29,454, respectively. NovaChek Limited Liability
Company had not been formed in the 1996 fiscal periods.
Interest income decreased to $876 and $6,742 in the three
months and nine months ended June 30, 1997 respectively, compared
to $5,472 and $8,973 in the 1996 periods, reflecting less cash on
hand invested in short-term obligations. Interest expense in the
three months ended June 30, 1997 decreased slightly from $8,887 to
$7,391 in the 1996 period. Interest expense in the nine months
ended June 30, 1997 increased 128% to $20,271 from $8,887 in the
1996 nine month period due to the issuance of interest-bearing
convertible subordinated debentures in the third quarter of fiscal
1996. There were no debentures outstanding for most of the 1996
fiscal period. A gain on the sale of producing oil and gas assets
of $76,557 was realized in the nine months ended June 30, 1997.
There were no such asset sales in the 1996 period.
Profits on discontinued kaolin mining operations of $26,542
and $26,659 were realized in the three and nine month periods ended
June 30, 1997, respectively.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary source of cash flow during the nine
months ended June 30, 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
nine month period. There were no such asset sales in the 1996
period. A gain on the sale of these assets of $76,557 decreased
cash provided by operating activities. Accounts receivable
decreased $204,636 in the 1997 nine month period, and depreciation
and depletion was $28,730 in the 1997 period. Cash used by
operations totaled $100,862 for the 1997 nine month period as
compared to cash used by operations of $30,372 for the same period
in 1996. The greatest impact on the Company's cash position was
the $150,000 purchase of the stock held by Thomas Kane. Cash and
cash equivalents for the period decreased $76,762 resulting in cash
on hand at June 30, 1997 of $3,065, compared to cash on hand at
June 30, 1996 of $230,370. The Company purchased 510,342 shares of
common stock and 895,415 shares of convertible preferred stock from
Mr. Kane in settlement of a dispute for $150,000 in cash (plus
additional future consideration) in the 1997 nine month period. No
such stock purchase took place in the 1996 period. In addition, in
the 1996 period, the Company issued $250,000 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 nine month period ended June 30, 1997, the Company
reduced accounts payable by $25,326. Accrued liabilities decreased
$27,243. Additions to property and equipment were $16,416, and
investment in and advances to NovaChek Limited Liability Company
were $40,962, resulting in cash provided by investing activities,
net of $229,957 from the sale of assets, of $172,579. In the
comparable period, net cash used by investing activities was
$160,078, 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 proceeds from the sale of the Company's kaolin mine,
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 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 is also purchasing a portion of its common stock
pursuant to an offer to purchase shares for $.04/share, primarily
to reduce the number of small shareholders, who are costly to
service. While it has not yet been determined exactly how many
shares will be purchased, the Company estimates the cost of such
repurchase of stock will be less than $25,000. 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 June 30, 1997, the Company's working capital deficit
totaled $32,633 as compared to a working capital surplus of
$198,667 at September 30, 1996. Liquidity for the nine months
ended June 30, 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 $206,993 operating loss, reductions in accounts payable and
accrued liabilities, by investment in NovaChek Limited Liability
Company, and additions to property and equipment. The sale of oil
& gas assets, 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. 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 sold its kaolin mine, the cash flow generated by oil &
gas is not sufficient to generate positive cash flow. Cash
resources will be enhanced over the next twelve months from the
proceeds of the sale of the kaolin mine, and further payments
pursuant to the sale will be received over the next five years,
although the Company will expend a portion of its cash resources to
repurchase all shares tendered pursuant to the stock purchase
offering. 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 has sold 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 has secured 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.
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.
Sale Approved by Shareholder Vote
The affirmative vote by a majority of all of the shares of
Common and Preferred Stock entitled to vote as of May 1, 1997 was
received, representing approval of the agreement to sell the Cement
Kaolin Mine.
FUTURE TRENDS
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, including (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 one of
these, the underlying leases will expire at the end of the calendar
year if undrilled. 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 Company's largest exploration project is its paper-grade
kaolin exploration project in southwestern Minnesota, in
partnership with U.S. Borax, Inc. Although the Company has no
obligation to participate financially in this project, Nova has the
right to propose its own program of exploration and to pay its
share of that program. The Company is considering making such a
proposal provided it can reasonably fund that effort if a
cost/benefit analysis is favorable. Management believes that
acceleration of the development of the Company's paper-grade kaolin
assets may be wise since this prospect has more potential than any
of the Company's other properties.
The Company holds 21,000 acres of State of Alaska leases
offshore Nome, Alaska. A portion of this lease position has been
dedicated to NovaChek Limited Liability Company, which was formed
in 1996 to attempt to put the dedicated properties into production.
Delays in construction of the dredge intended to be used to produce
gold from the NovaChek properties resulted in a capital deficiency
which, unless rectified, would have prevented production operations
from getting underway for the 1997 mining season.
Sufficient funding was obtained to initiate gold production
efforts on the NovaChek properties for the 1997 season, but initial
results have not been up to expectations, and unless gold
recoveries improve, the NovaChek project may have to be terminated.
It cannot be determined at this time whether NovaChek Limited
Liability Company's gold mining operations will be successful.
The Company is negotiating with two other entities to place
portions of the Company's Nome properties not dedicated to NovaChek
into production at no cost to the Company.
The Company holds a 50% interest in 1,600 acres of State of
Utah oil and gas leases in the Great Salt Lake. The other 50% is
held by the McDonald Trust. The Company and the Trust have jointly
been attempting to interest an industry partner in developing the
heavy oil resources known to exist under these leases, which
resources were estimated by Amoco Production Company to exceed 90
million barrels in place. Amoco estimated that 1% to 10% of the
oil in place might be recoverable. However, Amoco abandoned its
effort to put the leases into commercial production using the
technology then available, and dropped the leases in 1989.
Technology has improved to the point where the outlook for improved
recoveries of the oil in place appears favorable.
In March, 1997, the Company and the 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 the leases and attempt to put them
into production, using the improved technology now available. The
Company and the Trust will each retain a 1.5% overriding royalty if
the option is exercised. Roaring River made a payment of $5,000 on
April 16, 1997 to maintain the option, and a further payment of
$20,000 was due on or before July 15, 1997 to keep the option in
effect. This payment has not been made, and the parties have
agreed verbally to extend this time period. Roaring River has
until September 8, 1997 to exercise the option. If the option is
exercised, a final payment of $245,000 (of which the Company will
receive half) must be made, unless these terms are modified into
production, perhaps as soon as within one year of completing the
acquisition. At present, it cannot be determined whether the
option will be exercised, nor can it be ascertained with certainty
when, or if, the properties will be put into production.
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 from 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, 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.
The Company's ability to continue as a going concern will
depend on its success in developing additional sources of cash
flow. As discussed, the Company will attempt to acquire new cash-
flowing assets in the industrial minerals segment, will evaluate
potential acquisitions or mergers, and may acquire oil and gas
production interests, using the capital derived from the sale of
the cement-grade kaolin mine. The Company may also attempt to
raise capital through a private placement of stock. If the
Company's efforts to obtain industry drilling commitments on its
oil and gas exploration properties are successful, and commercial
production is established on at least one of these properties, the
Company could realize cash flow exceeding that of the oil and gas
properties which were sold, particularly as development proceeds.
There is no guarantee of success in any of these projects.
The Company's plan to restore financial viability is to continue to
pursue the development of its properties by third parties at
minimal cost to the Company and to vigorously pursue the
acquisition of producing properties which will supply needed cash
flow. The Company will generate more than sufficient cash over the
twelve months ended June 30, 1998 to support its operations during
that period, without any contribution of cash from the drilling
arrangements on any of its oil and gas prospects or from NovaChek.
However, without additional sources of cash flow, the Company will
not generate sufficient cash from operations alone to offset the
cost of operations. Although the Company can internally fund the
monies needed to repurchase stock pursuant to the offer of
dissenter's rights, the capital so used may be replaced by the
proceeds of a private placement, in order to assure that working
capital is adequate. Proceeds from the exercise of the option
granted to sell its working interest in its Great Salt Lake
prospect, and/or drilling arrangements on one or more of its oil
and gas prospects -- all of which call for front-end fees, and/or
the establishment of commercial production on the NovaChek
properties, none of which events are assured, would generate
additional cash to be used to offset operating losses and fund the
elements of the Company's business plan.
The asset sales undertaken by the Company have and will reduce
operating risk, provide more assurance of near-term cash flow from
those assets than would otherwise be the case, and increase the
Company's capital in the near term. On a long-term basis,
Management must employ the proceeds from these asset sales in the
development of the Company's remaining assets and to acquire new
assets in order to generate cash flow to support operations and to
offset what would otherwise be the gradual liquidation of the
assets sold were the proceeds of those sales used simply to fund
operating losses. There can be no assurance that Management will
be successful in this endeavor.
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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