UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to_______________
Commission file number 0-15078
NOVA NATURAL RESOURCES CORPORATION
(Name of small business issuer in its charter)
COLORADO 84-1227328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 481388
1900 Wazee Street, Suite 305
Denver, CO 80248
(Address of principal (Zip Code)
executive offices)
(303) 293-2902
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
-None-
Securities registered under Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year aggregated: $1,521,350.
Documents Incorporated By Reference: None
Transitional Small Business Disclosure Format Yes_____ No X
As of December 5, 1996, the Registrant had outstanding 2,687,682 shares of
Convertible Preferred Stock, $1.00 par value, and 6,496,188 shares of Common
Stock, $.10 par value, its only classes of voting stock, and $250,000 face
amount of convertible subordinated debentures.
Aggregate market value of the 2,999,498 shares of Common Stock owned by
Non-affiliates of the Registrant as of December 5, 1996 was $164,972 based
on the average of the bid and ask prices on December 10, 1996. All
convertible Preferred Stock is owned by affiliates.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Nova Natural Resources Corporation (the "Registrant", "Company" or
"Nova") was incorporated under Colorado Law on April 1, 1993 to be
the surviving company in the merger effective February 1, 1995, of
the Company and Nova Natural Resources Corporation, a Delaware
corporation. The merger was effected to change the Company's
domicile from Delaware to Colorado and caused no change in the
Company's capitalization. The Delaware corporation was the
successor to Nova Petroleum Corporation and Power Resources
Corporation, which merged in 1986. Nova Petroleum Corporation and
Power Resources Corporation operated since 1979 and 1972,
respectively.
BUSINESS DEVELOPMENT
Operations
In its past three fiscal years, the Company has focused on
marketing and selling kaolin clay from its Minnesota kaolin mine,
exploring for paper-grade kaolin on leases elsewhere in Minnesota,
seeking partners for exploration and development of gold on its
properties in Alaska and Colorado and seeking partners for
exploratory drilling on two oil and gas prospects in Wyoming.
During the past fiscal year, the Company organized, capitalized,
became a member, and served as a manager of a limited liability
company to develop a portion of its offshore Nome, Alaska leases to
recover gold and silver. While the Company receives revenues from
interests in oil and gas wells in the western United States, and
holds exploratory oil and gas leases, the Company does not operate
any wells.
Significant Developments During Fiscal 1996
NovaChek Limited Liability Company
In the Spring of 1996, the Company organized NovaChek Limited
Liability Company ("NovaChek"), an Idaho Limited Liability Company,
which was capitalized by an offering pursuant to Regulation D under
the Securities Act of 1933, as amended, principally to fund
operations to recover placer gold and related minerals on certain
State of Alaska off-shore mining leases held by Nova and located
near Nome, Alaska. Nova holds a 42% membership interest in
NovaChek. Two of Nova's Directors each hold a 1/3 of 1% net
profits interest in one of the leases sub-leased to NovaChek.
Offering proceeds aggregating $350,000 were received from the sale
of 35 Units at $10,000 per Unit (an additional five Units were sold
for services). Each Unit was composed of one membership interest
in NovaChek and a convertible debenture issued by the Registrant.
The price of each Unit was allocated at $3,750 as a capital
contribution to NovaChek and $6,250 for each debenture. Nova
contributed a significant portion of the debenture proceeds as
capital for NovaChek. Each debenture provides for interest
payments at an annual rate of 10% of the face amount, payable semi-
annually; may be converted into the Company's common stock at the
rate of one share of stock for each $0.15 of principal; may be
redeemed by the Company after March 31, 1998 (holders of $175,000
face amount of the debentures, which includes both affiliates and
non-affiliates, agreed in June, 1996 that the Company could call
the debentures after September 1, 1996, provided that such `early
call' would cause a reduction in the conversion price to
$0.10/share and the payment of six months advance interest); and is
due on April 1, 2001. No such early call has been made.
NovaChek is managed by the Company and Chek Technologies and
Exploration, LLC ("Chek"), a Nevada limited liability company. The
Company serves as the administrative manager of NovaChek, including
all day-to-day responsibilities not entailing mining activities.
Chek serves as the field operations manager with responsibility for
supervising the mining activity and related matters. Based on the
experience obtained in the 1996 mining season, management
anticipates that, during 1997, Nova will take a more active role in
regard to field operations. Nova's field operations role during
the 1996 season was primarily geological supervision. The ability
to decide on major policy matters is a shared decision with Chek
and a number of significant decisions require approval of both
parties.
Nova obtained all of the necessary permits so that NovaChek could
conduct the contemplated mining operations on its leases. All of
the necessary permits were in place in early June, 1996.
Chek fabricated and assembled a special-purpose jet-pump suction
dredge to mine portions of two of the State of Alaska offshore
mining leases held by Nova. Nova subleased the shallow rights to
mine these properties (under between 2 and 10 meters of water) to
NovaChek. The initial operations are planned for an area where the
water depth is approximately 5 meters. Divers will operate a hose
equipped with an 8-inch suction nozzle to selectively mine gold-
bearing sand and gravel from the top meter (approximately 3 feet)
of the ocean floor. This material will be pumped to the dredge,
where the sand and gravel will be passed through a trommel to
separate the materials. Larger rocks will be discharged
immediately. Smaller materials will be passed through a sluice to
recover any coarse gold. Material less than 1.8 inches in size
will pass through jigs which will concentrate gold and other heavy
minerals. No chemicals will be used. The concentrate so obtained
will be transported to shore for further concentration before
shipping to a refiner.
The Company anticipated that operations would be conducted over
approximately a 93-day season, depending on the weather. Due to
the adverse weather in Nome, operations can normally take place
from the time the ice goes out in the Spring -- generally late May
- -- until early October. During that period, operations must be
suspended whenever severe weather impacts the Nome area, due to the
risk and operational difficulty of operating when wave heights
reach or exceed approximately three feet. When ice begins to form
in Nome harbor, the risk of continuing operations increases due to
the possibility that the dredge might become trapped in the harbor
ice.
Although it was intended that the barge and ancillary equipment
would be shipped to Nome and operational in June of 1996, the
equipment did not reach Nome until July due to delays in completion
of the fabrication of the barge. Assembly of the dredge, which had
been broken down for shipment, proceeded at a slow pace after it
reached Nome, impeded by severe weather conditions at Nome during
the summer, and by a variety of problems encountered in final
assembly of the dredge and equipment. Most, but not all, of these
problems were solved and testing of the dredge began in late
September. Very limited operations, consisting of approximately 14
hours of intermittent operation of the suction equipment, were
conducted. The early onset of winter weather conditions caused
shutdown of all operations for the season in early October. On
October 9, 1996 the dredge was removed from the water and stored
with all ancillary equipment on land for the winter.
As work progressed on the dredge, sampling of the gold values in
the intended area of operations was conducted. These sampling
operations resulted in defining an area for the initial season
containing approximately 6,000 ounces of a mineralized gold
deposit. A mineralized deposit represents a mineralized body which
has been delineated by appropriate drilling and/or underground
sampling to support a sufficient amount of ounces and average grade
of gold. Under SEC standards, such a deposit does not qualify as
a reserve until a comprehensive evaluation, based upon unit cost,
grade, recoveries and other factors, conclude economic feasibility.
Although gold has been identified on the property by drilling, no
reserves have been defined on the property, since commercial
operations have not been established. The sampling itself
recovered approximately 1.9 ounces of gold. NovaChek's limited
dredging operations recovered an additional 15.1 ounces of gold
over about 14 hours of operation, but since dredging operations
were not continuous, no conclusion can be reached as to the
recovery rates which can be achieved. A recovery rate of
approximately 1 ounce per hour on a sustained basis must be
achieved for the process to be economical, and management believes
this rate may be obtained or exceeded when full operations are
attained. Nova intends to renew those permits required to be
renewed annually (those issued by the State of Alaska), and while
such renewals cannot be guaranteed, it is anticipated that they
will be granted.
A total of 17.0 ounces of gold was shipped to the refiner,
resulting in total revenues to NovaChek of approximately $6,300.
These funds were insufficient to recover all pre-operating and pre-
production costs, and the costs associated with the limited
operations conducted during the 1996 season.
Due to the operational delay, and resultant cost overruns and
limited operating revenues, approximately $150,000 must be raised
by April 1997 to finance additional work on the dredge components
and provide working capital for 1997 operations. The Company is
exploring means of raising such funds, including member loans,
additional member contributions, and the sale of additional
membership interests. Both Nova and Chek may be required to reduce
their ownership in NovaChek and/or their share of anticipated net
production revenues in order to raise these funds. Nova does not
presently intend to contribute additional capital but instead
prefers to elect to reduce its ownership. Nova believes that the
required funds can be raised, but there is no assurance at this
time that these funds will be raised and available and that
operations will be initiated on a timely basis in 1997, nor can
there be any assurance that such operations will be successful. In
the event such funds are not raised, or if raised and the
operations so funded are not successful, it is probable that
NovaChek would be forced to cease operations and dissolve. In that
event, NovaChek's assets would be liquidated, and the proceeds, net
of costs, would be distributed to the members. The leases on which
operations are conducted would remain in Nova, although the absence
of operations may impair Nova's ability to retain the leases.
Nova is presently negotiating with several operators who desire to
initiate mining on certain portions of Nova's properties which are
not contained within the NovaChek sublease, but at this time there
can be no assurance that satisfactory arrangements can be entered
into with these other operators, or that such operations, if
initiated, will be successful.
Sale Of Oil And Gas Royalty Interests
On November 14, 1996, the Registrant sold at an auction conducted
by The Oil & Gas Asset Clearinghouse in Houston, Texas several oil
& 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 paid to the Clearinghouse were
$230,257. 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.
The majority of the value of the properties sold was related to a
single producing well. If a production problem occurred at some
point in the future with that well, the value of the Registrant's
oil and gas reserves could have declined substantially (although
there was no current indication of any problem). The sale was made
to eliminate the aforementioned risk, to generate cash to improve
the Company's liquidity, and for re-investment of cash in the
Company's business. The Company retains other oil and gas
interests, and presently has no intention of withdrawing from this
business. The Company and Robert McDonald, its Board Chairman, are
currently actively seeking industry participation in exploratory
drilling on two prospects in Wyoming, in both of which the Company
holds an undivided interest, with the Robert McDonald Trust, of
which Mr. McDonald is Trustee, holding the balance of the interest.
Nova has no patents, trademarks, licenses, franchises, or
concessions other that certain oil and gas leasehold interests
granted by federal, state, and other governmental authorities, and
private mineral owners. The Company's oil and gas business is not
seasonal except to the extent that weather and market conditions
can affect oil and gas exploration and production activities.
Possible Sale Of Kaolin Mine
The Company is currently negotiating the possible sale of its
present kaolin mine in response to an unsolicited offer to purchase
the mine. The advantage of such a sale would be the generation of
more cash flow over the next twelve months than the Company
presently contemplates it could realize from operation of the mine
over that period, and the assurance of a cash flow from sales
proceeds over the next five years. Presently, the Company has no
assurance that it will be able to contract for kaolin sales beyond
the end of the 1997 calendar year, although it has historically
been able to do so.
There can be no assurance that an agreement can be reached to sell
the mine on a basis acceptable to the Company. In the event such
a sale were to take place, the Company would attempt to reinvest
the proceeds of such a sale in other cash flow-generating assets,
most probably in industrial minerals, in an area of the Country
which offered more ready access to a larger number of markets.
This sale, should it be consummated, will not include the Company's
interest in its paper-grade kaolin joint venture (see Business of
the Issuer - Paper Grade Kaolin).
Business of the Issuer
Mineral Operations
The Company is currently active in kaolin production and kaolin and
gold exploration. It has no patents, trademarks, licenses,
franchises, or concessions other than certain leasehold interests
granted by federal, state, and other governmental authorities, and
private mineral owners, although there are certain patents which
may be granted the Company's partner in its Minnesota paper-grade
exploration program to which the Company may have certain rights.
The Company's mineral business is seasonal to the extent that
weather and market conditions can affect exploration and
production; its kaolin mining and shipment activities are dependent
upon weather conditions and are generally conducted between March
and November.
During the past fiscal year, the Company initiated a placer gold
mining venture on its leases offshore Nome, Alaska. Although
winter operations may be possible, and indeed may offer certain
advantages over operations during the warmer months, the Company
has no current plans to operate in the winter. Accordingly, mining
offshore Nome at present is seasonal and can only take place after
the ice goes out in the Spring -- beginning typically in late May,
and must be discontinued in October, when the onset of cold weather
makes it difficult to operate the gold processing equipment used to
recover the gold, and icing in Nome Harbor increases the risk of
equipment damage.
Cement Grade Kaolin
The Company owns and operates a kaolin clay mine 1 1/2 miles east
of Redwood Falls, Minnesota. It currently has 69.3 acres permitted
for open pit mining of kaolin which currently is shipped by railcar
to Mason City, Iowa and is used in the manufacture of cement. The
Company's permit allows it to mine up to 250,000 tons of kaolin per
year from this mine. The mining of kaolin from this mine usually
occurs between March and November; kaolin is generally not mined
during the winter months. The Company's geologist estimates that
the mine contains approximately 2.2 million tons of proved and
probable kaolin. However, four recent holes drilled in a localized
area of the mine indicated a deterioration in quality at depth at
that location. The Company's geologists believe the quality
deterioration is localized and is not indicative of any broad
quality problem, based on the Company's operational experience in
previous years, but additional drilling must be conducted to verify
this belief. The Company has produced well over 1,000,000 tons of
kaolin from the mine, and the current mine face is approximately
1,600 feet in extent. Localized areas have previously been
encountered where the quality of the clay at depth was not up to
standard, and such localized areas of lower quality kaolin are
likely to be encountered from time to time. Due to mining and
drilling results on the west side of the permitted area, and to
reflect production, the Company has reduced the estimated quantity
of recoverable kaolin from 3.2 million tons (at 9/30/95) to 2.2
million tons (at 9/30/96). There is a considerably greater
quantity of kaolin the Company believes could be produced from its
leased and owned acreage if its present mining permits could be
expanded to encompass additional acreage and the quality is
consistent with customer requirements. The Company believes
permits could be obtained to expand the mine area at such time as
it becomes desirable to do so, but there can be no assurance that
such permits will be granted. The economical recovery of the
Company's kaolin will be dependent on kaolin quality, future mining
and transportation costs and the Company's ability to pass these
costs along to its customer(s) and still retain sufficient margin
to make a reasonable profit. Production in the 1996 fiscal year
totaled less than 100,000 tons.
Prior to 1992, Nova's cement grade kaolin mine in Minnesota had
been operated by North Western Portland Cement Company, now Holnam,
Inc., which compensated Nova based upon production. In 1992, Nova
terminated the operating contract and undertook its own operation
of the kaolin mine. In order to improve environmental compliance
and enhance operational efficiency, it completed several capital
improvements, including water diversion bars, an additional
settling pond and a new loading facility which supplemented
significant reclamation performed by the prior operator. Nova also
altered contracts with its two principal purchasers to include
transportation and delivery in the purchase price, discontinuing
the prior arrangement of passing title to the kaolin at the mine,
with the cement companies responsible for transportation and
related costs.
In 1992, Holnam, one of the major purchasers of the Company's
kaolin, notified the Company that it would only purchase kaolin on
a year-to-year basis. Holnam indicated that, in future years, it
would award business to the supplier who provided the lowest price.
Based upon its bid for 1994, the Company was awarded a contract by
Holnam for the 1994 mining season. The Company has been outbid for
Holnam's business since 1995, and it seems unlikely that the
Company will recapture this business in future years. In
September, 1994, Nova amended its current contract with Lehigh
Portland Cement Company ("Lehigh") to supply kaolin to Lehigh's
Mason City, Iowa plant through December 31, 1997. See
"Management's Discussion and Analysis or Plan of Operation".
Nova's ability to obtain new purchasers is largely dependent upon
the availability of transportation for kaolin at reasonable prices.
Because transportation costs are added to the charge for kaolin, in
the past, Nova has been substantially restricted to markets close
to the mine. In an attempt to remedy some of these problems, in
1993, Nova purchased forty rail cars to carry kaolin to purchasers.
Nova arranged financing with a commercial lender for the $436,000
purchase of the cars over 48 months at an interest rate of 8.5% per
annum. In order to take advantage of a strong market for this type
of railcar, obtain needed working capital, and due to the loss of
the Holnam business, the Company sold these railcars in February,
1995. There are no present plans to acquire Company-owned
railcars, although that possibility will continue to be evaluated
in the light of changing conditions.
The Company is investigating the possibility of obtaining
additional markets for its product by offering purchasers a
pelletized kaolin product, which the Company believes will offer
certain transportation, handling and utilization advantages, but
will likely cost more than its present bulk kaolin product.
Management believes that the advantages mentioned, particularly
lower transportation and handling costs, and easier handling of the
material by customers using pelletized material, may offset this
higher cost. Toward this end, Nova has purchased and installed
equipment to pelletize kaolin. This equipment is still in the
testing stage, and it cannot yet be determined whether a pelletized
product can be manufactured at a cost which will enable it to be
successfully marketed.
The Company is currently negotiating the possible sale of its
present kaolin mine, but there can be no assurance that an
agreement will be reached to sell the mine on a basis acceptable to
the Company. In the event such a sale were to take place, the
Company would attempt to reinvest the proceeds of such a sale in
other cash flow-generating assets, most probably in industrial
minerals, in a different part of the country where access to
industrial minerals markets is more widely available.
Paper Grade Kaolin
In 1990, Nova granted, and later extended, an option to U.S. Borax,
Inc., an unaffiliated mineral development company ("Borax"), to
explore for paper-grade kaolin and other industrial minerals on the
Company's paper grade kaolin prospect (the "Prospect") in
southwestern Minnesota. During the term of the option, Borax
expended approximately $400,000 in combined exploration and land
activities and earned a 65% interest in the Prospect. In August
1992, Borax exercised its option to enter into a joint venture
("the Joint Venture") at which time Nova was paid an additional
$165,000. The joint venture and operating agreement became
effective July 1, 1993. Under this agreement the Company assigned
a 100% working interest in the prospect to Borax in exchange for
the agreement by Borax to pay 100% of the costs of exploring for
and developing paper grade kaolin and other industrial minerals on
property in the prospect. The Company retains a 10% net proceeds
interest in the prospect until Borax has recovered 100% of its
capitalized costs. At that time, the Company has the option to
purchase a 30% working interest by paying Borax an amount equal to
15% of the capitalized costs from April 1, 1993 to the date of
recovery of those costs by Borax.
Exploration activities performed by Borax on this exploration stage
property to date have included drilling over 190 exploratory core
holes on portions of the properties, bulk sampling, testing and
evaluating the quality of the kaolin contained therein, and the
construction and operation of a pilot-scale kaolin processing
facility. A pilot-scale facility was constructed by Borax in
Georgia during 1996, and is now operational. This facility will be
used to test processing methodology and to process bulk samples of
kaolin for further testing. Processed kaolin from the Joint
Venture's property has previously been shipped to paper mills in
Minnesota and Wisconsin, where generally successful coating tests
were completed. These tests are steps in the evaluation process
and cannot be regarded as any guarantee of commercial feasibility,
however, the results of these tests are encouraging.
During the past year, Borax drilled 38 core holes and took bulk
samples at three locations. In addition, Borax has recently
completed a pilot-scale processing facility in Georgia to test
production technology for Minnesota and other kaolins. It is
anticipated that material obtained by bulk-sampling this past
summer will be used as feedstock for pilot runs of kaolin in this
plant. Borax has completed a pre-feasibility study, grinding
studies, lab work, and additional products evaluation as a prelude
to potentially expanding the scope of their operations. Analysis
and evaluation of the cores obtained through the 1996 drilling
program is currently underway.
Preliminary indications are that kaolin of suitable quality for use
in paper-manufacturing exists on portions of the approximately
4,600 acres the Joint Venture has under lease in Minnesota,
although considerable additional work remains before it can be
stated that a commercial product can be routinely obtained and
marketed competitively. The Company's management believes that the
widely-spaced drilling which has been completed to date defines a
geologic resource of kaolin more than adequate to support the
development of a commercial enterprise, provided a reasonable
portion of that resource can be converted to reserves by a denser
drilling pattern. Based on the geologic data obtained thus far,
Nova believes this could be accomplished, though it cannot be
stated with certainty that this will indeed be the result, and
there can be no assurance that Borax will take the steps necessary
to convert these resources into reserves, or even if it is
successful in doing so, to bring this project to commercial
fruition.
In order to produce a commercial product, a processing facility
would have to be designed and built, which is likely to cost in
excess of $50 million, and would be designed to operate for a
minimum of twenty years. Nova would incur no cost in the
construction of this facility, nor in the further work which needs
to be done to establish commercial feasibility. The location of
these properties affords a significant transportation advantage
over the current primary source of paper-grade kaolin in Georgia,
since a significant portion of the paper manufacturing plants in
the United States which utilize kaolin are located in the Upper
Midwest, within easy reach of the joint venture's properties.
Although Nova incurs no cost, it also has little control over how
the funds are spent and in what amounts.
Nome Gold
In April 1984, Nova acquired a gold prospect located offshore Nome,
Alaska. In May 1985, Nova transferred all of its rights and
obligations in the Nome Gold Prospect (the "Nome Prospect") to
Inspiration Gold, Inc., who later transferred that interest to
Western Gold Exploration and Mining Company, Limited Partnership
("WestGold"), a non-affiliated mining entity, and retained a 10%-
17% net profits royalty.
During five full seasons of dredging in the Nome Prospect, WestGold
recovered approximately 121,000 ounces of gold. Notwithstanding
such operations, WestGold was unable to profitably mine this
property and Nova did not receive any income pursuant to its net
profits royalty interest.
In September, 1990, WestGold terminated its operations and returned
the project to Nova. At that time, Nova also received a
substantial portion of the data gathered by WestGold. The Company
retained a former WestGold geologist who catalogued and put the
data into a form suitable for use in marketing the Nome Prospect to
a new partner. Due to the lack of success in finding a buyer or
joint venture partner who would be willing to make an up-front
payment to the Company of its historical cost in this property, and
the uncertainty as to whether any arrangement entered into would
recover those historical costs, for accounting purposes, the
Company wrote off its investment in the property in fiscal 1995.
However, the Company's efforts to put the property into production
continue.
As described in "Significant Developments During Fiscal 1996", Nova
initiated mining operations on a portion of the property on a
joint-venture basis during 1996. These operations were curtailed
due to the onset of Winter before an adequate test of the
technology employed was achieved. The Company intends to resume
these operations next Spring, provided funds can be obtained to do
so. If these efforts are successful, the scope of these operations
could expand in future years. The Company is also in discussions
with several entities interested in initiating small-scale mining
operations on portions of the properties not dedicated to the joint
venture. These discussions may or may not result in additional
mining activities on the properties during 1997. At this point,
these properties must be considered to be in the exploration stage.
Querida
The Company owns a 42.22% to 45% interest in an exploration stage
gold prospect in Custer County, Colorado. An extensive drilling
program was commenced in October, 1993. The results of this
drilling program have been reviewed and the Company has determined
further exploration activities are necessary to define this
project. No further exploration activities have taken place since
the 1993 program. The Company has reached a verbal agreement
with the holder of the most prospective lease to reduce the lease
payment which was due on December 15, 1996 and has not yet been paid.
Assuming the verbal agreement will be replaced by a written agreement,
which the Company expects will be the case, the Company and its co-holders
intend to perform exploratory work on these properties in 1997 in the
approximate amount of $10,000. If the results of this work are favorable,
the Company will then attempt to obtain a partner willing to conduct further
drilling and exploration activities. There is no guarantee that the
results will be favorable, or that such a partner will be found. If the
results are unfavorable, or even if favorable, if a suitable partner
cannot be found, the Company may terminate its interest in this prospect.
Due to the lack of certainty as to whether any arrangement entered into
will recover Nova's historical costs in the Querida prospect, for accounting
purposes, the Company wrote off its investment in the property during the
1995 fiscal year.
Environmental Regulations
Inherent in all mining operations is the obligation to comply with
environmental, reclamation, and other applicable state and federal
laws and regulations. The Company has obtained those environmental
permits, licenses or approvals required for its operations.
Management is not aware of any violations of environmental permits,
licenses or approvals issued with respect to the Company's
operations. In the past, Nova has been involved in extensive
hearings regarding the environmental impact of its Minnesota kaolin
mine and has voluntarily taken steps to mitigate any environmental
impact. While the Company believes it is currently in compliance
with all such laws and regulations and is not aware of any current
violations, the applicability and impact of, and the Company's
obligations under such provisions cannot always be determined with
certainty. However, the Company's liability could continue after
relinquishment of its interest in its properties, even in the
absence of operations. As such, the Company cannot fully determine
the extent of its liability or potential liability in connection
with these matters.
The Company currently performs reclamation of its kaolin mine
concurrently with its mining efforts. As an area is mined, it is
reclaimed immediately upon determination that mining in that area
is no longer economically feasible. The Company recontours the
mined ground, replaces the topsoil (which is stockpiled when the
area is initially stripped of overburden), reseeds and plants trees
and other plants indigenous to the area. Further, mining
arrangements with other companies usually provide that the other
company is responsible for reclamation liabilities if they operate
the mining property, or that they share in reclamation liabilities
with the Company in the event that the Company operates the
property.
The Company currently has only one mining operation, the cement
grade kaolin mine, in production, and since reclamation occurs
concurrently with mining and since Nova has deposited $50,000 with
Redwood County to cover potential reclamation costs, the Company
believes that it has no significant reclamation liabilities. The
mining operations contemplated by NovaChek offshore Nome, Alaska,
are not expected to require any reclamation. Further, the Company
is not currently subject to any pending administrative or judicial
enforcement proceedings arising under environmental laws or
regulations. Environmental laws and regulations may be adopted in
the future which may have an impact upon the Company's operations.
The Company cannot now accurately predict or estimate the impact of
any such future laws or regulations on its operations.
Exploration and Development Arrangements
The Company's financial resources are not sufficient to fund
significant exploration or development of its mineral properties.
Therefore, to evaluate and, if justified, to develop its mineral
prospects, Nova has entered into arrangements under which other
companies acquire a portion of the Company's interest in the
properties in return for performing necessary activities. The terms
of these arrangements generally are dictated by the type of
minerals involved, the extent of prior development, prospective
value of the properties and other diverse factors.
While the Company intends to retain a working interest in its
properties when possible, it has in the past and may from time to
time, sell its entire interest and retain only a royalty or other
income interest to reduce risk and obtain working capital for
exploration and development.
Mineral exploration and development is highly competitive. Success
is dependent on a number of factors including the ability to
identify areas having mineral potential, to acquire leases or other
mineral interests in such areas, and attract sufficient capital to
acquire, explore and develop mineral properties. The minerals
industry is dominated by a number of large companies having
resources far in excess of Nova. The Company's competitors include
mining companies, major oil companies and companies in unrelated
fields making it impossible to estimate the actual number of
competitors. Furthermore, a significant portion of the data
utilized by the Company in making acquisitions is public
information. Mining permits are required by various state and
federal agencies before mining can be undertaken. There is no
assurance that the necessary permits can be acquired or that the
projects would be economically viable if the permits are acquired.
The Company has no patents, trademarks, licenses, franchises, or
concessions other than certain leasehold interests granted by
federal, state, and other governmental authorities, and private
mineral owners, although the Company may have certain rights
pursuant to its joint venture with U.S. Borax to patent(s) which
may be granted to Borax in connection with its processing
technology development in support of the joint venture. The
Company's mineral business is not seasonal except to the extent
that weather and market conditions can affect exploration and
production; its kaolin mining activities are dependent upon weather
conditions and are generally conducted between March and November.
Oil and Gas Operations
The principal hydrocarbons currently produced from properties in
which Nova has an interest are crude oil and natural gas. Such
products are sold by or on behalf of the Company to purchasers
located near the wellhead. None of the entities purchasing the
Company's production is an affiliate of the Company.
During fiscal 1996, the Company had three customers which accounted
for approximately 73% of its total oil and gas sales: Scurlock
Permian Corporation (21% of total oil and gas sales), Chevron
U.S.A. (31%) and Eighty Eight Oil Company (21%). Because
purchasers for oil and gas are generally available and prices paid
for oil and gas do not fluctuate materially from purchaser to
purchaser, Nova believes that the loss of any of these purchasers
would not have a materially adverse effect on its financial status.
Although the Company believes a ready market exists for its
hydrocarbon production, the acquisition, exploration, development,
production, and sale of oil and gas are subject to many factors
beyond its control, including worldwide and domestic economic
conditions, political stability in the Persian Gulf, oil import
quotas, availability of drilling rigs, casing and other equipment
and supplies, proximity to and availability of gas pipelines,
supply and price of competing fuels, and the regulation of prices,
production, transportation, and marketing by certain federal and
state governmental authorities. The source and availability of raw
materials affecting Nova's oil and gas operations is generally
limited to the availability of oil field equipment and supplies,
including tubular steel products and drilling rigs, all of which
currently are in sufficient supply. However, any shortages of or
delays in obtaining such materials could delay drilling or
production activities and adversely affect operations conducted by
Nova or by operators of its properties.
The oil and gas industry is extremely competitive and involves a
high degree of risk. The Company is in competition with "major"
integrated oil and gas companies, other independent oil and gas
companies, and other entities. The Company cannot ascertain the
exact number of its competitors or its relative competitive
position, but does not believe such factors to be of significance.
Nova's exploration and development activities are subject to all of
the risks and hazards typically associated with such activities.
Among these risks are the necessity of expending large sums of
money to acquire properties and drill exploratory wells which are
usually non-productive or may not generate income sufficient to
repay the cost of drilling. A large number of companies and
individuals, many with financial resources and staffs greater than
those of the Company, are engaged in exploration for and
development of oil and gas. Accordingly, the Company may be at a
competitive disadvantage on its property acquisition activities.
Nova requires working capital to carry lease costs and delay
rentals until arrangements can be negotiated with other entities to
explore and/or develop Nova's oil and gas properties. Consistent
with industry practice, working capital may be generated by the
Company from proceeds of production, sales of properties and
operating fees. At September 30, 1996, the Company did not operate
any of its producing oil and gas properties. However, the Company
does operate a number of exploratory properties. None of these are
currently under active exploration, but the Company is aggressively
marketing two prospects, both in Wyoming, in an endeavor to
interest industry partners in funding exploratory drilling efforts
on either or both of these prospects.
The nature of Nova's business precludes a backlog of orders. There
is no portion of the Company's business which may be subject to
renegotiation or termination at the election of the Government.
The Company has not engaged in any research and development
activities as those terms are customarily used.
In recent years, the natural gas industry has undergone substantial
changes, principally as the result of gas pipelines withdrawing
from their historical role as merchants and purchasers and
restricting their involvement to transportation. As a result,
producers like Nova increasingly will have to find new purchasers
for their natural gas. Nova is not dependent upon any single
customer for purchases of natural gas.
On November 14, 1996, the Registrant sold at an auction conducted
by The Oil & Gas Asset Clearinghouse in Houston, Texas several oil
& 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 paid to the Clearinghouse were
$230,257. 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. The net book
value of the assets sold represented approximately 10% of the
Company's total assets as of September 30, 1996.
The majority of the value of the properties sold was related to a
single producing well. If a production problem occurred at some
point in the future with that well, the value of the Registrant's
oil and gas reserves could have declined substantially (although
there was no current indication of any problem). The sale was made
to eliminate the aforementioned risk, to generate cash to improve
the Company's liquidity, and for re-investment of cash in the
Company's business. The Company retains other oil and gas
interests, and presently has no intention of withdrawing from this
business. The Company and Robert McDonald, its Board Chairman, are
currently actively seeking industry participation in exploratory
drilling on two prospects in Wyoming, in both of which the Company
holds an undivided interest, with the Robert McDonald Trust, of
which Mr. McDonald is Trustee, holding the balance of the interest.
Nova has no patents, trademarks, licenses, franchises, or
concessions other than certain oil and gas leasehold interests
granted by federal, state, and other governmental authorities, and
private mineral owners. The Company's oil and gas business is not
seasonal except to the extent that weather and market conditions
can affect oil and gas exploration and production activities.
Environmental Regulation
Drilling and production activities are subject to regulation under
federal and state pollution control and environmental laws and
regulation. The Company is subject to a variety of federal, state,
and local environmental laws relating to spillage, noise, air
quality, and disposal of waste products arising from the Company's
operations. Such environmental and conservation laws and
regulations could significantly limit the Company's activities and
increase the costs of exploring and developing its acreage.
Existing as well as future legislation could cause additional
expense, capital expenditures, restrictions and delays in the
development of properties, the extent of which cannot be predicted.
Additional energy taxes, higher patent and permit fees and similar
proposals have been discussed in Congress, but the Company is
unaware at this time of any pending legislation which would
adversely affect its operation.
Regulation of Production and Pricing
Production and sale of oil and gas are subject to federal and state
governmental regulation, which while lessening in recent years,
includes limitations on the production of oil and gas by
restricting the rate of flow for oil and gas wells below their
actual capacity to produce. Restrictions on the purchase prices
for natural gas have largely been rescinded by the Natural Gas
Decontrol Act of 1989. A phase-out of such regulations was
substantially complete by mid-1993. While the effect of such
deregulation cannot be determined, the predictability of gas
pricing is anticipated to be substantially lessened as a result of
such decontrol and changes in the operations of gas pipelines from
purchasers to transporters of gas. To the Company's knowledge, as
of September 30, 1996, none of the Company's gas reserves were
subject to price controls.
Employees
At September 30, 1996, Nova had four full-time employees. The
Company also utilizes the services of various consultants and
independent contractors with expertise in those fields of interest
in which the Company is active. The Company has no contracts with
these consultants.
ITEM 2. DESCRIPTION OF PROPERTIES
PERSONAL PROPERTY
The Company's personal property consists of furniture and fixtures
and technical equipment, with a total net book value at September
30, 1996 of $38,851.
OFFICE LEASE
The Company's current office lease, under which the Company leases
approximately 2,000 square feet of office space at a cost of
approximately $27,900 in 1996, expires effective January 31, 1997.
The Company has entered into a three-year lease on new office
space, effective February 1, 1997. The new space is 1,517 square
feet, and the lease payments for the first year of the lease will
be $15,810.
OIL AND GAS PROPERTIES
All of the Company's oil and gas properties are located within the
continental United States. There are no quantities of oil and gas
subject to long-term supply or similar agreements with foreign
governments or authorities.
No major discovery or other favorable or adverse event is believed
to have caused a significant change in the estimated proved
reserves of the Company subsequent to September 30, 1996 except for
the sale of certain interests -- primarily overriding royalty
interests -- in Wyoming, Texas and Colorado. The effect of this
sale is shown in the following sections, which set forth
information concerning the Company's interests in oil and gas
properties.
Proved Reserves and Present Value Information
For information concerning the Company's proved reserves and
present value information, see "Supplementary Information On Oil
And Gas Operations." Estimates of the Company's estimated proved
oil and gas reserves and present value of the estimated future net
revenues attributable to such reserves for the year ended September
30, 1996 and 1995 are based upon reports by the independent
consulting firm of D. J. Low, Inc. The Company files such reports
with the Securities and Exchange Commission, pursuant to
regulations of that agency which also provides public access to
those documents.
The Securities and Exchange Commission requires that estimates of
reserves, estimates of future net revenues and the present value of
estimated future net revenues be based on the assumption that oil
and gas prices will remain at current levels (except for gas prices
determined by fixed contracts), and that production costs will not
escalate in future periods. The present value of estimated future
net revenues for fiscal years 1996 and 1995 has not been adjusted
for income taxes because significant net operating loss
carryforwards exist for income tax and financial reporting
purposes. All such estimates have been adjusted for the
anticipated costs of developing proved undeveloped reserves.
Reserve calculations require estimation of future net recoverable
reserves of oil and gas and the timing and amount of future net
revenues to be received therefrom. Such estimates are based on
numerous factors, many of which are variable and uncertain.
Accordingly, it is common for the actual production and revenues
later received to vary from earlier estimates. Estimates made from
the first few years of production from a property are not likely to
be as reliable as later estimates based on a lengthy production
history. Hence, reserve estimates and estimates of future net
revenues from production may vary from year to year. The Company
has not provided reserve estimates to any federal agency other than
the Securities and Exchange Commission.
Production, Average Sales Price,
and Average Production (Lifting) Costs
The following table sets forth oil and gas production (net of all
royalties, overriding royalties, and other outstanding interests of
other entities) attributable to the Company for the fiscal years
ended September 30, 1996 and 1995 and the average sales prices and
production costs per unit of production.
Years Ended September 30,
1996 1995
Production:
Oil (Bbls) . . . . . . . . . . 7,675 8,635
Gas (Mcf) . . . . . . . . . . 48,160 45,362
Average Sales Prices:
Oil (per Bbl) . . . . . . . . $19.96 $15.27
Gas (per Mcf) . . . . . . . . $ 1.34 $ 0.98
Average Production Costs
Per Equivalent Barrel Of Oil*. $ 4.67 $ 3.92
* Equivalent barrels include oil, condensate and gas. Gas is
converted to equivalent barrels on the basis of 6 Mcf per equiva-
lent barrel.
Drilling Activity
The Company did not participate in any drilling activity during
fiscal 1996 or 1995.
Approximate Developed Acreage and
Productive Oil and Gas Wells
The following table identifies productive wells and sets forth an
approximation of developed oil and gas acreage in which the Company
owned a leasehold interest as of September 30, 1996.
<TABLE>
<CAPTION>
Productive Wells (2)
Developed Acres (1) Gross (5) Net (6)
Gross (3) Net (4) Oil Gas Oil Gas
Geographic Area
<S> <C> <C> <C> <C> <C> <C>
Colorado 480.00 72.00 3 - 0.19 -
North Dakota 840.80 168.63 8 - 1.33 -
Texas 410.19 102.55 2 - 0.50 -
Wyoming 2,213.76 227.04 5 - 0.47 -
TOTAL 3,944.75 570.22 18 0 2.49 0
</TABLE>
(1) Acreage spaced or assignable to productive wells.
(2) Wells either producing or capable of production.
(3) An acre in which a working interest is owned. The number of
gross acres is the total number of acres in which working
interests are owned.
(4) When the sum of fractional working interests in gross acres
equals one, a net acre is deemed to exist. The number of net
acres is the sum of all the fractional working interests
owned in gross acres expressed in whole numbers and fractions
thereof.
(5) A well in which a working interest is owned. The number of
gross wells is the total number of wells in which working
interests are owned.
(6) When the sum of fractional working interests owned in gross
wells equals one, a net well is deemed to exist. The number
of net wells is the sum of all of the fractional working
interests owned in gross wells expressed as whole numbers and
fractions thereof.
Approximate Undeveloped Oil and Gas Acreage
The following table sets forth the approximate undeveloped oil and
gas acreage in which the Company owned a leasehold interest as of
September 30, 1996.
Undeveloped Acreage
Gross Net
Utah 1,600.00 800.00
Wyoming 5,279.28 2,042.95
TOTAL 6,879.28 2,842.95
The Company's leases are primarily federal and fee leases, carry
landowner's royalties of at least 12.5% and are subject to
overriding royalty interests ranging from 0% to 7.5%. Each lease
requires the payment of annual delay rentals ranging from $1 to $5
per acre. A delay rental is the amount paid for the privilege of
deferring development of leased acreage, payment of which can be
avoided by abandonment of the lease, commencement of development
operations, or by obtaining production.
Most of the leases will expire at the end of their respective
primary terms, unless production has been obtained prior to that
date, in which event the lease term will continue until production
ceases. The Company will attempt to enter into cost-sharing
arrangements to evaluate expiring acreage before the end of the
lease terms. From time to time, geologic evaluations and cost
considerations may cause the Company to cease paying delay rentals
and abandon such leases prior to the expiration of their primary
terms. Where justified and within the financial capabilities of
the Company, the Company may seek to renew leases on certain
expiring acreage.
Overriding Royalty Interests in Undeveloped Acreage
The following table sets forth, as of September 30, 1996, the
Company's overriding royalty interests in undeveloped oil and gas
acreage.
Gross Net (1) Company's
Royalty Royalty Overriding Royalty
Acres Acres Interest
Wyoming 2,759.29 124.18 4.5%
(1) A net royalty acre is calculated by dividing the gross
royalty acres by 12.5% and multiplying the result of that
calculation by the overriding royalty interest.
In November 1996, the Company sold its overriding royalty interests
in certain properties in Wyoming, Texas and Colorado, a minor
portion of which could be considered undeveloped. The interests
sold ranged from 0.2491% to 2.5%. The reduction in gross and net
undeveloped acres resultant from this sale is not material.
Overriding Royalty Interests in Developed Acreage
and Producing Wells
The following table sets forth, as of September 30, 1996, the
Company's overriding royalty interests in developed oil and gas
acreage and producing wells.
<TABLE>
<CAPTION>
Company's Gross
Gross Net (1) Overriding Royalty
Royalty Royalty Royalty Wells
Acres Acres Interest Oil Gas
<S> <C> <C> <C> <C> <C>
Colorado 354.50 35.72 1.08% to 1.26% 3 -
Texas 400.00 47.75 1.16% to 1.5625% 2 -
Wyoming 4,312.75 161.49 0.13% to 4.0% 6 4
TOTAL 5,067.25 244.96 11 4
</TABLE>
(1) A net royalty acre is calculated by dividing the gross
royalty acres by 12.5% and multiplying the result of that
calculation by the overriding royalty interest.
In November 1996, the Company sold its overriding royalty
interests in certain producing properties in Wyoming, Texas and
Colorado. The interests sold ranged from 0.2491% to 2.5%. The
sale reduced the Company's Gross royalty oil wells in Colorado
from 3 to none, royalty oil wells in Texas from 2 to none,
royalty oil wells in Wyoming from 6 to none, and royalty gas
wells in Wyoming from 4 to 2. The Company's royalty acreage in
Wyoming decreased to 632 gross acres and 25.3 net acres; and its
royalty acreage in Colorado and Texas decreased to zero gross and
net acres.
UNDEVELOPED MINERAL PROPERTY INTERESTS
The Company currently owns a 10% net proceeds interest in a kaolin
prospect covering approximately 4,700 acres of leases and lease
options located near Redwood Falls, Minnesota. An exploration
partner has acquired a 100% working interest in these leases and
options. See "Mineral Operations-Paper Grade Kaolin".
DEVELOPED MINERAL PROPERTY INTERESTS
The Company owns a 100% working interest in 69.3 acres in Redwood
County, Minnesota which are permitted for the purposes of mining
kaolin clay. Due to mining and drilling results on the west side
of the permitted area, and to reflect production, the Company has
reduced the estimated quantity of proved and probable kaolin from
3.2 million tons (at 9/30/95) to 2.2 million tons (at 9/30/96).
See "Mineral Operations - Cement Grade Kaolin".
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party, nor is any of its property subject to
any legal proceedings. During fiscal 1996, the Company filed suit
against the lessor of its office space, claiming excessive common
area maintenance charges were being assessed pursuant to its office
lease. The landlord paid the Company approximately $5,700 in full
settlement of the dispute, and the suit was dismissed, with
prejudice.
As discussed in ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION, disputes have arisen between Thomas Kane, one of
the Company's directors and a principal shareholder, over the
Company's continuing operations and their impact on Mr. Kane's
ownership of shares of the Company's convertible preferred stock.
Mr. Kane has threatened to seek court intervention to preserve
assets of the Company for liquidation. The Company's other
directors disagree with Mr. Kane and currently intend to oppose any
attempt to liquidate the Company. In order to resolve this
dispute, the Company is considering various alternatives, including
the repurchase of shares held by Mr. Kane. However, resolution of
this matter is not presently determinable.
The Company knows of no other legal proceedings contemplated or
threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market
and is listed on the Electronic Bulletin Board under the symbol
"NVNU". The following table sets forth the range of high and low
closing bid prices of the Common Stock for the year ended September
30, 1996 and 1995, as reported by the National Quotation Bureau.
These prices are believed to be representative of inter-dealer
prices, without retail markup, markdown, or commissions, and may
not necessarily represent actual transactions.
Bid Price
Fiscal 1996 High Low
First Quarter $ 0.050 $ 0.040
Second Quarter 0.040 1/32
Third Quarter 0.040 0.035
Fourth Quarter 0.035 0.020
Fiscal 1995 High Low
First Quarter $ 1/8 $ 0.020
Second Quarter 1/8 1/32
Third Quarter 0.110 0.020
Fourth Quarter 0.060 0.020
The bid and asked prices for the Company's Common Stock on
September 30, 1996, were $0.03 and $0.08, respectively, as provided
by the National Quotation Bureau, Inc.
The number of record holders of the Company's Common Stock as of
September 30, 1996 was 5,483.
Also outstanding as of September 30, 1996 were options under the
Company's employee stock option plans to purchase a total of
1,250,000 shares, or 19.2% of the issued and outstanding shares, of
Common Stock. These options are held by a total of seven persons,
all of whom are officers, directors or employees of Nova, and are
exercisable at various times until April, 1999 (as to 1,200,000
shares) and February, 2001 (as to 50,000 shares) at a range of
$0.05 to $0.105 per share.
The Company has not paid any dividends on its Common Stock and does
not expect to do so in the foreseeable future. The Company intends
to employ its cash flow and earnings, if any, in its oil & gas and
mineral exploration and development activities and for other
working capital needs.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
The Company has suffered recurring losses and cash flow deficits
from operations. At September 30, 1996, the Company has an
accumulated deficit of $8,813,340. The Company's working capital
increased as of September 30, 1996 to $198,637, compared to working
capital of $106,586 as of September 30, 1995. Total assets
increased to $1,545,920 as of September 30, 1996, as compared to
$1,355,691 as of September 30, 1995. The increase in both working
capital and total assets was attributable primarily to the issuance
of convertible debentures during the year. The increase in total
liabilities from $233,761 in 1995 to $567,663 in 1996 is also due
to the issuance of convertible debentures during the year.
Although working capital increased during the year, there are
uncertainties that may have a significant impact on the Company's
liquidity and which raise substantial doubt about the Company's
ability to continue as a going concern.
The Company's kaolin sales to its only customer reached a record
level in 1996, and only minor rail transportation difficulties were
encountered, which enabled the Company to generate higher levels of
cash flow from kaolin sales for the 1996 season than had been
achieved in 1995. However, the Company did not generate positive
cash flow from operations in 1996. Cash used by operations during
1996 was approximately $70,000.
The Company's liquidity is primarily dependent upon its ability to
obtain and retain customers for the purchase of its cement grade
kaolin. The Company has been able to amend and extend its purchase
contract with its purchaser through December 1997 for price and
production requirements similar to fiscal 1996.
The Company is currently negotiating the possible sale of its
cement grade kaolin mine in response to an unsolicited purchase
offer. The Company is considering the sale of its interest in the
cement grade kaolin reserves and certain mining equipment. This
sale, if consummated with the purchaser, would be subject to
approval by the Company's Board of Directors and the shareholders.
Disputes have arisen between Thomas Kane, one of the Company's
directors and a principal shareholder, over the Company's
continuing operations and their impact on Mr. Kane's ownership of
shares of the Company's convertible preferred and common stock.
Mr. Kane has expressed his belief that the Company is not viable as
a going concern and should be liquidated. Mr. Kane has asserted
that continued operations would expend resources and waste assets
which would otherwise be distributed to him and to the other two
holders of convertible preferred stock upon the Company's
liquidation. Mr. Kane has threatened to seek court intervention to
preserve assets of the Company for liquidation. The Company
disagrees with Mr. Kane's allegations and does not plan to
liquidate the Company. In order to resolve this dispute, the
Company is considering various alternatives, including the
repurchase of shares held by Mr. Kane.
Management estimates the Company's equity affiliate, NovaChek, will
require approximately $150,000 during fiscal 1997 in order to
commence dredging operations on a commercial basis, including
working capital for the first month of operations. The Company is
currently attempting to raise the required capital, and may reduce
its equity interest in NovaChek in order to do so without expending
Company funds. However, there is currently no assurance that these
funds can be secured. 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 financial statements do not include any
adjustments relating to the recoverability of the Company's
investment that might result from the outcome of these
uncertainties.
In order to improve liquidity, the Company sold a portion of its
working interest production during the fiscal year after receiving
an unsolicited purchase offer from the operator of $25,215.
Additionally, on November 14, 1996, the Company sold several oil
and gas producing assets and leasehold interests, primarily
overriding royalty interests in producing oil and gas wells for
proceeds of $230,257, which is net of commissions and direct
selling costs. The proceeds of these sales will be devoted to
working capital, and reinvested in the Company's business, with the
goal of developing additional sources of revenue, earnings and
asset growth. Furthermore, the Company is considering the sale of
substantially all of its operating assets, with the intent of
reinvesting the proceeds of such a sale in similar assets better
situated relative to the marketability of industrial minerals
products.
The Company is currently attempting to get commitments from the
industry to drill two of the Company's exploratory prospects in
Wyoming, one primarily an oil prospect, and the other a gas
prospect. Dependent on its success in getting industry
participation in the drilling of these two prospects, the Company
will attempt to acquire other drillable prospects for its future
exploration efforts.
In March 1996, the Company negotiated a six-month working capital loan
from the family of one of its directors at an annual interest rate of
10% in the amount of $100,000 to make up for cash shortages caused by the
timing of kaolin sales expenses and revenues. Typically, the cost
of transporting kaolin is billed to the Company and must be paid in
advance of the receipt of payment by the Company of kaolin sales
proceeds, resulting in a cash shortfall during the early part of
the season which is alleviated as the season progresses. This loan
was repaid in full in September 1996 out of operating cash flow.
Additionally, the Regulation D offering described in "Significant
Developments During Fiscal 1996" was completed, and although this
offering was primarily undertaken to fund the proposed mining operations
at Nome, Alaska, a portion of the offering proceeds was dedicated to
Nova's working capital.
Results of Operations
The Company realized a net loss of $143,673 for the year ended
September 30, 1996. Oil and gas sales were higher, but mineral
sales decreased. However, for the mining season as a whole --
which extends past the end of the fiscal year -- mineral sales were
considerably improved from the previous fiscal year. The effect of
those improved mineral sales levels will not be recorded until
fiscal 1997. Mining costs decreased, tracking the lower level of
sales, as did general and administrative costs, reflecting
economies implemented in the Company's cost reduction program, and
mineral property abandonments dropped to just over $7,000 from the
previous year's $309,199, but these factors were insufficient to
allow the Company to realize a profit. Contributing to the loss
was a $11,437 loss from the Company's investment in NovaChek.
Due primarily to decreased mineral and oil and gas sales and a
write-down of its Querida and Nome mineral properties, the Company
realized a net loss of $421,716 for the year ended September 30,
1995.
Revenues
Mineral sales decreased $195,156 or 13% for the year ended
September 30, 1996 as compared to 1995, although mineral sales for
the full mining season -- which extends past the end of the fiscal
year -- were substantially greater than in those for the 1995
mining season. The increased mineral sales for the season resulted
from an increase in kaolin prices and an increase in tons of kaolin
shipped. The Company had one customer for the 1996 mining season,
as in 1995. The Company's ability to transport kaolin by rail
improved considerably in 1996, and shipments were able to be spaced
over the entire mining season, which matched customer needs on a
more timely basis than in 1995.
Oil and gas sales increased $31,254 or 17% for the year ended
September 30, 1996 as compared to the same period in 1995. This
increase is attributable primarily to higher prices. Oil
production declined 11% but oil prices increased 30%, which more
than offset the production decline. Both production and the price
of gas increased. These factors combined to generate the higher
oil and gas sales. A comparison of production and prices in 1996
and 1995 is as follows:
1996 1995
Sales Volume
Oil (bbls) 7,675 8,635
Gas (MCF) 48,160 45,362
Average Sales Price
Oil (bbls) $19.96 $15.27
Gas (MCF) $ 1.34 $ 0.98
The Company sold its railcars in fiscal 1995, realizing a one-time
gain on the sale of $58,663.
Other revenue for the year ended September 30, 1995 consisted of
revenue received from the rental of the railcars prior to their
sale, $19,021, and grain sales, $2,232. Other revenue of $825 in
1996 was primarily realized from grain sales.
Expenses
Mining costs decreased $209,920 or 17% for the year ended September
30, 1996 as compared to 1995. This decrease was primarily due to
lower kaolin shipments in the 1996 period. A further factor
impacting mining costs was the payment of gravel royalties to a
lessor. The Company collects royalties on the sale of gravel from
land leased by the Company pursuant to an arrangement with a third
party, which mines and sells the gravel. The Company retains a
portion of such royalties and remits the major portion to the
lessor. No gravel royalties were required to be paid during the
previous fiscal year.
Lease operating expenses ("LOE"), including production taxes
increased $14,087 or 15% for the year ended September 30, 1996 as
compared to 1995 due to increased oil and gas sales coupled with
higher costs in some of the Company's wells as these wells approach
the end of their operating lifetime.
Depletion, depreciation and amortization ("DD&A") decreased $388
for the year ended September 30, 1996 as compared to 1995 due to
reduced DD&A on oil and gas properties, consistent with the 11%
decline in oil production.
General and administrative expenses decreased $40,730 or 10% for
the year ended September 30, 1996 over the same period in 1995 due
to lower payroll and related costs. The lower payroll costs
reflect both a reduction in staff and a reduction in staff
salaries.
Interest expense was incurred in 1995 on the debt incurred to
purchase railroad rolling stock. This expense totaled $12,540 for
the year ended September 30, 1995. This debt was retired upon the
sale of the rolling stock in February, 1995. The interest expense
of $17,691 in fiscal 1996 resulted from interest payments on a
short-term working capital loan, since retired, and the $250,000 of
convertible subordinated debentures issued in connection with the
Regulation D offering described in "Significant Developments during
Fiscal 1996".
Commitments
The lease on the Company's office space expires January 31, 1997.
Remaining payments for the 4-month balance of the lease are
estimated to total $9,764. The Company has signed a new three-year
office lease in a different location effective February 1, 1997.
The Company has leased approximately 1550 square feet of office
space -- a reduction of 22% from its previous space -- at a cost of
approximately $15,810 over the first year of the lease term. The
Company is also obligated under the terms of the contract with one
of its rail transportation suppliers to move at least 300 cars
during the 1997 mining season. If the Company does not move at
least 300 cars, a $120 per car penalty for each car less than 300
cars will be assessed. Since the Company currently has a contract
through December 31, 1997, with its current kaolin purchaser to
purchase kaolin in excess of 300 cars, it does not anticipate
paying any penalties.
Impact of Inflation
Due to the Company's size and the uncertainties normal in its lines
of business, the impact of inflation on the Company's operations is
negligible.
New Accounting Standards
Statement of Financial Accounting Standards No. 123, Accounting for
Stock--Based Compensation (FAS No. 123), is required to be adopted
by the Company in the year ended September 30, 1997. Pursuant to
the provisions of FAS No. 123, the Company will continue to account
for transactions with its employees pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Therefore, this statement is not expected to have a
material effect on the Company's financial position or its results
of operations when adopted.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditor's Report
The Board of Directors and Stockholders
Nova Natural Resources Corporation:
We have audited the accompanying balance sheets of Nova Natural
Resources Corporation as of September 30, 1996 and 1995, and the
related statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Nova
Natural Resources Corporation as of September 30, 1996 and 1995,
and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has suffered
recurring losses and cash flow deficits from operations which,
along with other factors described in Note 2, raise substantial
doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Denver, Colorado
November 27, 1996
<TABLE>
<CAPTION>
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEETS -- SEPTEMBER 30, 1996 AND 1995
ASSETS 1996 1995
<S> <C> <C>
Current Assets:
Cash $ 79,827 $ 70,820
Accounts receivable:
Kaolin opperations 376,392 251,794
Oil and gas operations 24,867 12,132
Other 31,273 4,101
Prepaid expenses 3,941 1,500
Total current assets 516,300 340,347
Mineral property interests, net
of accumulated depreciation and
depletion of $88,767 and $67,147
in 1996 and 1995, respectively
(note 2) 543,038 562,721
Oil and gas properties (using
the full cost method of
accounting), net of accum-
ulated depletion, depreciation
& amortization, and valuation
allowances of $5,896,408 and
$5,836,300 in 1996 and 1995,
respectively (Notes 3 and 11) 260,014 339,578
Furniture and technical equipment net
of accumulated depreciation
of $131,953 and $126,750 in
1996 and 1995, respectively 38,851 41,634
Investment in and advances to
NovaChek Limited
Liability Company (note 4) 136,717 --
Deposits 51,000 71,411
Total $ 1,545,920 $ 1,355,691
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEETS (CONTINUED) -- SEPTEMBER 30, 1996 AND 1995
LIABILITIES AND
STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
Current liabilities:
Accounts payable $ 282,087 $ 220,289
Accrued liabilities 35,576 13,472
Total current liabilities 317,663 233,761
Convertible debentures (note 5) 250,000 --
Total liabilities 567,663 233,761
Stockholders' equity (note 7):
Convertible preferred stock, $1.00
par value and liquidation
preference; 5,000,000 shares
authorized; 2,687,682 shares
issued and outstanding 2,687,682 2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;
6,496,188 shares
issued and outstanding 649,619 649,619
Additional paid-in capital 6,454,296 6,454,296
Accumulated deficit (8,813,340) (8,669,667)
Total stockholders' equity 978,257 1,121,930
Commitments and contingencies
(note 9)
$ 1,545,920 $ 1,355,691
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
Years Ended September 30,
1996 1995
<S> <C> <C>
Revenue:
Mineral sales $ 1,291,131 $ 1,486,287
Oil and gas sales 217,807 186,553
1,508,938 1,672,840
Costs and expenses:
Mining costs, including
transportation and royalties 1,049,387 1,259,307
Oil and gas lease operating,
including production taxes 106,952 92,865
Depletion, depreciation, and
amortization 86,931 87,319
Mineral property abandonments 7,032 309,199
General and administrative 385,593 426,323
1,635,895 2,175,013
Operating loss (126,957) (502,173)
Other income (expenses):
Share of losses of NovaChek
Limited Liability Company (11,437) --
Interest income 11,587 13,081
Interest expense (17,691) (12,540)
Gain on sale of assets -- 58,663
Other 825 21,253
(16,716) 80,457
Net loss $ (143,673) (421,716)
Loss per share (.02) (.07)
Weighted average common shares
outstanding 6,496,188 6,323,971
<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Shares of
convertible Amount
preferred Convertible Shares of Amount
stock preferred common stock Common
issued stock issued stock
<S> <C> <C> <C> <C>
Balance, September 30, 1994 2,687,682 $ 2,687,682 6,323,971 $ 632,397
Contribution of stock to
Employee Stock Ownership
Plan -- -- 172,217 17,222
Net loss -- -- -- --
Balance, September 30, 1995 2,687,682 2,687,682 6,496,188 649,619
Net loss -- -- -- --
Balance, September 30, 1996 2,687,682 $ 2,687,682 6,496,188 $ 649,619
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Additional Total
paid-in Accumulated stockholders'
capita deficit equity
<S> <C> <C> <C>
Balance, September 30, 1994 $6,458,602 $(8,247,951) 1,530,730
Contribution of stock to
Employee Stock Ownership
Plan (4,306) -- 12,916
Net loss -- (421,716) (421,716)
Balance, September 30, 1995 6,454,296 (8,669,667) 1,121,930
Net loss -- (143,673) (143,673)
Balance, September 30, 1996 $6,454,296 $(8,813,340) 978,257
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (143,673) $ (421,716)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depletion, depreciation and amortization 86,931 87,319
Mineral property abandonments 7,032 309,199
Gain on sale of assets -- (58,663)
Share of losses of NovaChek Limited Liability Company 11,437 --
Convertible debentures issued for services, charged
to general and administrative expense 31,250 --
Contribution of stock to employee stock ownership plan -- 12,916
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (164,505) 166,269
Increase in prepaid expenses (2,441) --
Decrease in deposits 20,411 31,309
Increase (decrease) in accounts payable 61,798 (308,279)
Increase (decrease) in accrued and other liabilities 22,104 (17,220)
Net cash used by operating activities (69,656) (198,866)
Cash flows from investing activities:
Proceeds from sale of assets 25,215 500,000
Investment in and advances to NovaChek Limited
Liability Company (148,154) --
Capital expenditures - mineral properties (8,969) (38,040)
Capital expenditures - oil and gas properties (5,759) (8,316)
Capital expenditures - office and technical equipment (2,420) (42,669)
Net cash provided (used) by investing activities (140,087) 410,975
Cash flows from financing activities:
Principal payments on notes payable 0 (272,072)
Proceeds from notes payable 218,750
Net cash provided (used) by financing activities 218,750 (272,072)
Increase (decrease) in cash and cash equivalents 9,007 (59,963)
Cash, beginning of year 70,820 130,783
Cash, end of year $ 79,827 $ 70,820
Supplemental cash flow information-cash paid for interest $ 16,292 $ 12,785
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
NOVA NATURAL RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Nova Natural Resources Corporation (the Company), has focused on
marketing and selling kaolin clay from its Minnesota kaolin mine,
exploring for paper grade kaolin on leases elsewhere in Minnesota,
seeking partners for exploration and development of gold on its
properties in Alaska and Colorado and seeking partners for
exploratory drilling on two oil and gas prospects in Wyoming.
During the past fiscal year, the Company organized, invested in and
co-manages a limited liability company to develop and mine a
portion of its offshore Nome, Alaska leases to recover precious
metals. The Company does not operate any of its interests in oil
and gas wells, which are principally located in the western United
States.
Accounting Estimates
Preparation of financial statements in conformity with generally
accepted accounting principles requires that management make
certain estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the balance
sheet date as well as the reported amounts of revenues and expenses
during the reporting period. The actual results could differ
significantly from those estimates.
Investment in NovaChek Limited Liability Company
The Company owns an interest in NovaChek Limited Liability Company
(NovaChek) which is accounted for by the equity method. Under the
equity method, the investment has been recorded at cost and is
subsequently adjusted to recognize the Company's share of the
income or losses of NovaChek. Dividends or other distributions are
recorded as a reduction of the investment. Recognition of losses
is limited to the extent of the Company's investment in, advances
to, commitments and guarantees, if any, relating to NovaChek.
Mineral Property Interests
Exploration expenditures are charged to operations in the period
incurred except for expenditures on specified properties having
indicated the presence of a mineral resource with the potential of
being developed into a mine, in which case the expenditures are
capitalized.
Mine development costs incurred to expand the capacity of operating
mines, to develop new orebodies or to develop mine areas
substantially in advance of current production are capitalized and
charged to operations on a units-of-production method based upon
the estimated recoverable reserves of the related deposit.
Reclamation takes place concurrently with production and such costs
are expensed as mining costs in the period incurred.
The Company periodically reviews the carrying value of its
properties by comparing the net book value with the estimated
undiscounted future cash flow from the property, which is generally
based upon estimated recoverable reserves utilizing current market
prices and costs. If the net book value exceeds the undiscounted
future cash flow, the Company records an impairment. Changes in
the significant estimates and assumptions underlying future cash
flow estimates may have a material effect on the future carrying
value of assets and operating results.
In fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of (FAS 121). The adoption of the provisions of FAS 121
had no impact on the Company's financial statements.
Oil and Gas Properties
The Company follows the "full cost" method of accounting for its
oil and gas properties, in accordance with rules promulgated by the
Securities and Exchange Commission (the SEC). All of the Company's
properties are located within the continental United States. All
costs associated with property acquisition, exploration, and
development activities are capitalized in one cost center (the full
cost pool), including costs of unsuccessful exploration. No gains
or losses are recognized on the sale or abandonment of oil and gas
properties unless the transaction involves the sale of significant
reserves.
Capitalized costs less related accumulated amortization may not
exceed the sum of (1) the present value of future net revenue from
estimated production of proved oil and gas reserves, calculated
using current prices; plus (2) the cost of properties not being
amortized, if any; plus (3) the lower of cost or estimated fair
value of unproved properties included in the costs being amortized,
if any; less (4) income tax effects related to differences in the
book and tax basis of oil and gas properties.
Amortization of the full cost pool is computed using the
units-of-production method based on proved reserves as determined
annually by the Company and independent petroleum engineers. The
provision for depletion, depreciation, and amortization on a per
equivalent barrel basis during fiscal years 1996 and 1995 was $3.83
and $4.17, respectively.
Furniture and Technical Equipment
Furniture and technical equipment are stated at cost and are
depreciated using the straight-line method over estimated useful
lives ranging from three to eight years.
Income Taxes
The Company utilizes an asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities using enacted tax rates expected to apply in the years
in which such temporary differences are expected to be recovered or
settled. A valuation allowance is established for tax assets not
expected to be realized. Changes in tax rates are recognized in
the period of the enactment date.
Loss Per Share
Loss per share is computed by dividing net loss attributable to
common stock by the weighted average number of common shares
outstanding during each period. Common share equivalents including
convertible preferred stock and stock options were not included in
the computation as their effect was anti-dilutive for 1996 and
1995. A fully diluted per share calculation considering stock
which would be issued if the Company's convertible debentures were
converted into common stock is not presented as it is anti-
dilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform with
the 1996 presentation.
(2) UNCERTAINTY OF FUTURE OPERATIONS
The financial statements have been prepared assuming that the
Company will continue as a going concern. Certain factors,
discussed below, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
The Company has suffered recurring losses and cash flow deficits
from operations. At September 30, 1996, the Company has an
accumulated deficit of $8,813,340. In addition, management
estimates the Company's equity affiliate, NovaChek, will require
approximately $150,000 during fiscal year 1997 in order to commence
operations (see note 4). In order to resolve a shareholder
dispute, the Company is considering various alternatives, including
the repurchase of shares held by a certain stockholder.(see note 7)
The Company's liquidity is not sufficient to fund future operating
losses, if any, and the aforementioned investing and financing
commitments. In order to improve liquidity, the Company has sold
or is considering the sale of substantially all of its operating
assets. On November 14, 1996, the Company sold several of its
overriding royalty interests in producing oil and gas wells for net
proceeds of approximately $230,000. In addition, the Company is
considering the sale of its cement grade kaolin mining operations.
The future viability of the Company is dependent on the ultimate
resolution of the matters discussed above and the profitable
operation of NovaChek, which are not presently determinable.
(3) SALE OF OIL AND GAS INTERESTS
On November 14, 1996, the Company sold several oil and gas
producing assets and leasehold interests, primarily overriding
royalty interests in producing oil and gas wells in the Wyoming
Overthrust Belt (an estimated 6,976 BBLS of oil and an estimated
282,127 MCF of gas), effective as of November 1, 1996. Proceeds
from this sale, net commissions and direct selling costs, were
$230,257.
(4) INVESTMENT IN NOVACHEK
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 $150,000 during fiscal 1997 to become operational,
and there is no assurance 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 operating agreement, the first
$150,000 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 30%, 20% and
50%, respectively, of the next $400,000 in distributions, and 35%,
30% and 35%, respectively, of the following $428,575 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 September 30, 1996 and for the period from April 1, 1996
(inception) through September 30, 1996 are presented below.
BALANCE SHEET OF NOVACHEK
Cash and other assets $ 5,908
Mineral property interests 45,000
Mining and related equipment, net 284,566
Total assets $ 335,474
Accounts payable $ 29,404
Short-term notes payable 33,300
Stockholders' equity 272,770
Total liabilities and stockholders'
equity $ 335,474
STATEMENT OF OPERATIONS OF NOVACHEK
Operating expenses $ (27,648)
Other income 418
Net Loss $ (27,230)
(5) CONVERTIBLE DEBENTURES
On April 1, 1996, the Company issued $250,000 of convertible
debentures. These debentures provide for interest payments at an
annual rate of 10%, payable semi-annually, and are due on April 1,
2001, but are redeemable in common stock by the Company after March
31, 1998. The debentures are convertible into the Company's common
stock at the rate of one share of stock for each $0.15 of
principal, which would result in the issuance of 1,666,667 common
shares if so converted. In June 1996, holders of $175,000 of the
debentures, of which $40,625 of debentures are held by affiliates,
agreed that the Company could redeem such debentures after
September 1, 1996, provided that such early redemption is effected
at $0.10 per common share and the payment of six months advance
interest. No such early redemption has been made to date.
The Company issued $31,250 of the convertible debentures to Chek in
exchange for services that Chek performed for NovaChek, on behalf
of the Company. This amount was charged to general and
administrative expense.
(6) INCOME TAXES
The components of the net deferred tax asset and liabilities at
September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 2,766,438 $ 3,392,118
Less valuation allowance (2,585,379) (3,169,939)
Net deferred tax asset 181,059 222,179
Deferred tax liabilities-
Depletion, depreciation, amortization,
and valuation allowance for income tax
purposes in excess of amounts for
financial statement purposes (181,059) (222,179)
Net deferred tax asset $ -- $ --
</TABLE>
The Company has net operating loss carryforwards at September 30,
1996 for federal income tax reporting purposes of approximately
$7,420,000. The Company also has an alternative minimum tax net
operating loss of approximately $8,760,000. Approximately
$1,840,000 of these tax operating losses will expire during the tax
year ending September 30, 1997, with the balance expiring over the
period ending in the year 2011.
(7) STOCKHOLDERS' EQUITY
Preferred Stock
The Company's preferred stock outstanding is convertible into
5,375,364 shares of common stock. The preferred shares contain
2-for-1 voting rights, have a $1.00 liquidation preference and have
no stated dividend rate.
Stock Option Plans
The Board of Directors have approved two stock option plans for the
benefit of Company employees and key personnel. The first plan is
the Nova Natural Resources Corporation 1989 Nonqualified Stock
Option Plan (the "Nonqualified Plan") and the second plan is the
Nova Natural Resources Corporation 1989 Incentive Stock Option
Plan, a qualified plan (the "Incentive Plan"). Both plans include
terms whereby participants are issued options to purchase shares of
the Company's common stock at the market price at the time of
grant. The options are exercisable at the date of grant and expire
five years after the date of grant.
Options granted to employees under both plans who subsequently
terminate employment with the Company are canceled if not exercised
within three months after termination of employment.
A total of 2,000,000 shares have been reserved for issue under the
two plans. Data at September 30, 1996 and 1995 concerning these
two plans is as follows:
<TABLE>
<CAPTION>
Nonqualified Plan
Shares under Option price
option range
<S> <C> <C>
Outstanding and exercisable at
September 30, 1994 645,000 $ 0.0625 - 0.18
Canceled during year (25,000) 0.18
Outstanding and exercisable at
September 30, 1995 620,000 0.0625 - 0.105
Canceled during year (20,000) 0.0625
Outstanding and exercisable at
September 30, 1996 600,000 $ 0.105
</TABLE>
<TABLE>
<CAPTION>
Incentive Plan
Shares under Option price
option range
<S> <C> <C>
Outstanding and exercisable at
September 30, 1994 and 1995 820,000 $ 0.09375 - 0.105
Granted during 1996 50,000 0.05
Canceled during 1996 (220,000) 0.09375 - 0.105
Outstanding and exercisable at
September 30, 1996 650,000 $ 0.05 - 0.105
</TABLE>
Stock Ownership Plan
The Company has also established the "Nova Natural Resources
Corporation Employee Stock Ownership Plan" (the ESOP Plan) for all
employees. The ESOP Plan provides for contributions of Company
stock to a trust in an amount determined by the Board of Directors.
The Company's contributions to the Plan during the year ended
September 30, 1995 amounted to 172,217 shares of common stock with
an aggregate value of $12,916. No contribution was made in 1996.
(8) RELATED PARTY TRANSACTIONS
The Company owns interests in various producing and nonproducing
mineral properties with the REM Family Trust ("the Trust"), a trust
in which the Chairman of the Company is the trustee. The Trust
also holds a royalty interest on the Company's cement grade kaolin
property. Royalty expense, under this agreement, was $11,662 and
$14,355 in 1996 and 1995, respectively. The Company and the Trust
jointly own, through various agreements, an interest in a gold
prospect in southern Colorado.
Five directors of the Company and one officer purchased $46,875 of
the Company's debentures and a 4.125% interest in NovaChek during
1996.
(9) COMMITMENTS AND CONTINGENCY
Shareholder Disputes
Disputes have arisen between Thomas Kane, one of the Company's
directors and a principal shareholder, over the Company's
continuing operations and their impact on Mr. Kane's ownership of
shares of the Company's convertible preferred and common stock.
Mr. Kane has expressed his belief that the Company is not viable as
a going concern and should be liquidated. Mr. Kane has asserted
that continued operations would expend resources and waste assets
which would otherwise be distributed to him and to the other two
holders of convertible preferred stock upon the Company's
liquidation. Mr. Kane has threatened to seek court intervention to
preserve assets of the Company for liquidation. Management of the
Company disagrees with Mr. Kane's allegations and does not plan to
liquidate. In order to resolve this dispute, the Company is
considering various alternatives, including the repurchase of
shares held by Mr. Kane. However, resolution of this matter is not
presently determinable. Accordingly, the financial statements do
not include any adjustments that might result from the resolution
of this matter.
Rail Transportation Contract
The Company is obligated under the terms of a contract with one of
its rail transportation suppliers to move at least 300 railcars
during 1997. If the Company does not move at least 300 railcars,
a $120 per railcar penalty for each car less than 300 railcars will
be assessed. Since the Company currently has a contract through
1997 with its kaolin purchaser to purchase kaolin requiring in
excess of 300 railcars, it does not anticipate incurring any
penalties.
Leases
Future minimum rental payments for office facilities under the
remaining terms of noncancelable leases are $19,805 and $17,806,
$18,564 and $7,841 for the fiscal years ending September 30, 1997,
1998, 1999 and 2000, respectively.
Net rental payments charged to expense amounted to $27,194 in 1996
and $20,183 in 1995.
(10) SEGMENT INFORMATION
The Company operates entirely in the United States and principally
in two industries, oil and gas and mining. Information about the
Company's operations in these industries for the years ended
September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1996
Oil and Gas Mining Consolidated
<S> <C> <C> <C>
Operating revenue $ 217,807 $ 1,291,131 $ 1,508,938
Operating expenses 152,436 1,226,985 1,379,421
Depreciation, depletion and amortization 60,108 21,620 81,728
Total operating expenses 212,544 1,248,605 1,461,149
Income from operations 5,263 42,526 47,789
General corporate expenses (net of
other income and expenses) (162,334)
Share of losses of NovaChek Limited
Liability Company (11,437)
Interest expense (17,691)
Net loss $ (143,673)
Identifiable assets at September 30, 1996 $ 284,881 $ 919,430 $ 1,204,311
Corporate assets 341,609
Total assets at September 30, 1996 $ 1,545,920
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, 1995
Oil and Gas Mining Consolidated
<S> <C> <C> <C>
Operating revenue $ 186,553 $ 1,486,287 $ 1,672,840
Operating expenses 132,892 1,777,223 1,910,115
Depreciation, depletion and amortization 67,504 16,263 83,767
Total operating expenses 200,396 1,793,486 1,993,882
Loss from operations (13,843) (307,199) (321,042)
General corporate expenses (net of
other income and expenses) (88,134)
Interest expense (12,540)
Net loss $ (421,716)
Identifiable assets at September 30, 1995 $ 351,710 $ 814,515 1,166,225
Corporate assets 189,466
Total assets at September 30, 1995 $ 1,355,691
</TABLE>
Income (loss) from operations is operating revenue less operating expenses, a
portion of general and administrative expenses, and depreciation, depletion and
amortization. Income (loss) from operations excludes general corporate
expenses, share of losses of an equity investee, interest expense and interest
income. Corporate assets primarily include cash, investment and advances in
NovaChek, net furniture and technical equipment, and other assets.
(11) SIGNIFICANT CUSTOMERS AND SUPPLEMENTARY INFORMATION ON OIL AND GAS
OPERATIONS
For the years ended September 30, 1996 and 1995, the Company had one mineral
customer that accounted for 85.6% and 63.1% of total revenue, respectively.
Information related to the Company's oil and gas operations is summarized as
follows:
1996 1995
Capitalized costs:
Unproved properties $ 111,468 106,753
Proved properties 6,044,954 6,069,125
6,156,422 6,175,878
Accumulated depletion,
depreciation, amortization
and valuation allowances (5,896,408) (5,836,300)
$ 260,014 339,578
Costs incurred in oil and gas producing activities are as follows:
1996 1995
Capitalized:
Property acquisition costs $ 5,759 8,316
Development costs $ -- --
Expenses - depletion, depreciation,
and amortization $ 60,108 67,504
Oil and Gas Reserve Information (Unaudited)
The following information presents the Company's estimate of its proved oil and
gas reserves, all of which are located in the Continental United States. The
Company emphasizes that reserve estimates are inherently imprecise and are
expected to change as future information becomes available. The oil estimates
(BBLS) and the natural gas estimates (MCF) as of September 30, 1996 and 1995
have been prepared by an independent firm of petroleum engineers.
<TABLE>
<CAPTION>
1996 1995
(BBLS) (MCF) (BBLS) (MCF)
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year 36,618 276,315 32,305 263,165
Revisions of previous estimates 6,015 133,567 12,948 58,512
Sales of reserves-in-place (2,580) (3,686) -- --
Production (7,675) (48,160) (8,635) (45,362)
End of year 32,378 358,036 36,618 276,315
Proved developed reserves:
Beginning of year 36,618 276,315 32,305 263,165
End of year 32,378 358,036(a) 36,618 276,315
</TABLE>
(a) See note 3 for information regarding the sale of approximately 6,976
barrels of oil and 282,127 MCF of gas on November 14, 1996.
Standardized Measure of Discounted Future Net Cash Flows and the
Changes Therein (Unaudited)
The following presentations contain no provision for estimated
future income tax expenses due primarily to net operating loss
carryforwards and tax credits. The standardized measure of
discounted future net cash flows relating to proved oil and gas
reserves at September 30, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Future cash in-flows $ 1,252,791 $ 948,375
Future production costs (466,618) (375,219)
Future development costs (5,000) (5,000)
Future net cash flows 781,173 568,156
10% annual discount for estimated
timing of cash flows (291,882) (197,583)
Standardized measure of discounted
future net cash flows $ 489,291 $ 370,573
</TABLE>
The following are the principal sources of change in the standardized measure
of discounted future net cash flows during 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Standardized measure of discounted future
net cash flows at beginning of year $ 370,573 $ 310,294
Sales of oil and gas produced,
net of production costs (110,855) (93,688)
Sales of reserves-in-place (23,925) --
Net changes in prices and production costs 73,751 12,065
Revisions of previous quantity estimates 153,066 103,710
Accretion of discount 19,758 17,940
Other 6,923 20,252
Standardized measures of discounted future
net cash flows at end of year $ 489,291 $ 370,573
</TABLE>
The Company estimates net quantities of proved reserves of oil and
gas and calculates the standardized measure of discounted future
net cash flows using current prices in effect at the time estimates
are made.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors
The directors of the Company are set forth in the following table:
Name and Positions Served as
Held With the Company Age Director Since
Robert E. McDonald, Chairman of the
Board (1) (2) 68 April 22, 1986
Brian B. Spillane, President and
Chief Executive Officer (3) 60 April 22, 1986
Milton O. Childers
Exploration Manager 68 April 22, 1986
Thomas F. Kane (2) 56 April 22, 1986
Robert W. Meier (2) 60 April 22, 1986
John R. Parker 50 April 22, 1986
(1) Chairman of the Board since April 22, 1986.
(2) Member of the Executive Committee.
(3) President and Chief Executive Officer since April 1, 1989.
All directors are elected to serve until the next annual meeting or
until retirement or resignation. There is no family relationship
between any director of the Company and any other director or
executive officer. The following paragraphs set forth an account
of the business experience of each of the Company's directors and
executive officers, including his principal occupation and
employment.
Mr. McDonald is currently a consulting geologist and oil and gas
explorationist. He is also engaged in agricultural and real estate
pursuits. He was President of Nova Natural Resources Corporation
from its inception until his resignation on April 1, 1989. He
continues to serve as Chairman of the Board of the Company. From
January 1, 1984 to September, 1986, he was President and Chairman
of the Board of Nova Petroleum Corporation, a predecessor to the
Company. He graduated from the University of Kansas in 1951 with
a B.S. degree in Geology. Mr. McDonald has published several
papers relating to oil and gas geology in the Rocky Mountain area.
Mr. Spillane became President and Chief Executive Officer of the
Company effective April 1, 1989. Prior to that time he was an
independent consultant to the oil, gas and minerals industry. From
February, 1982 to November, 1987, he was employed as Executive Vice
President of Barrett Resources Corporation, a publicly held oil and
gas exploration company, where his duties primarily involved
mergers, acquisitions, and capital financing in addition to
involvement in other operations. He graduated from the University
of Detroit in 1961 with a B.S. in Mechanical Engineering and holds
a M.S. in Mechanical Engineering from San Diego State University.
He is a Registered Professional Engineer (mechanical) in
California.
Dr. Childers was President, Treasurer, and Director of Power
Resources Corporation until the merger in 1986 of Power Resources
Corporation into Nova Natural Resources Corporation, and holds B.S.
and M.A. degrees in geology from the University of Wyoming and a
Ph.D. degree in geology from Princeton University. Dr. Childers
was an independent consulting geologist in the Denver, Colorado
area from 1986 to 1992 when he became the Company's Exploration
Manager. He became the Vice President of Exploration of the
Company in January, 1993, and continues in that capacity.
From 1972 until 1994 Mr. Kane was founder and Chairman of Printon
Kane, Inc., an institutional investment banking firm. In 1994 he
joined International Telephone Group as Chairman. He is a graduate
of Fordham University and for over ten years he has been an
investor in various oil and gas projects.
Mr. Meier served as President and Chairman of the Board of Nova
Petroleum Corporation from May 1979 to January 1, 1984. From 1984
to 1989 he was an independent consulting geologist. From 1989 to
1994 he was Project Geologist for Dames & Moore, specializing in
the disposal of hazardous waste materials. He is currently
retired, but occasionally works as a consulting geologist. He
graduated from Northern Illinois University in 1961 with a B.S.
degree in Geology and in 1964 received an M.S. degree in Geology
from Southern Methodist University. Mr. Meier is a member of the
American Association of Petroleum Geologists and is a certified
member of the Association of Professional Geological Scientists.
Mr. Parker is currently a real estate developer in Vermont. Prior
to this activity he was a registered investment councilor with
McRae Capital Management in Morristown, New Jersey. Prior to
joining McRae, Mr. Parker worked as an independent financial
consultant to various companies and as a general partner in an
investment banking firm. Mr. Parker is also a director of several
investment companies associated with the Capstone Group in Houston,
Texas. He graduated from St. Lawrence University in 1969 with a
B.S. in Psychology and holds a P.M.D. from Harvard Graduate School
of Business Administration.
No directors of the Company receive compensation as directors,
although certain expenses incurred for Company business may be
reimbursed.
Executive Officers
The following table sets forth the executive officers of the
Company:
Name and Officer Age Served as Officer Since
Brian B. Spillane
President and Chief
Executive Officer 60 April 1, 1989
James R. Schaff
Secretary and Treasurer
Manager of Lands 41 May 2, 1996
Milton O. Childers
Vice President of Exploration,
and Assistant Secretary 68 January 22, 1993
An account of the business experience during at least the past five
years of Mr. Schaff is as follows (for Messrs. Spillane and
Childers, see "Directors"):
Mr. Schaff assumed his position as Nova's Land Manager on April 1,
1994, and was appointed Secretary and Treasurer of the Company on
May 2, 1996. From 1981 until 1990, he was an independent
consultant for various major and independent companies in the oil
and gas industry. From 1990 to 1994, he consulted principally for
Nova and U. S. Borax Inc. in mining-related land affairs. He
graduated from Rocky Mountain College in 1981 with a B.S. degree in
Business Administration-Economics. He is a Certified Professional
Landman (CPL) and an active member of the American Association of
Professional Landmen (AAPL), the Rocky Mountain Association of
Mineral Landmen (RMAML) and the Rocky Mountain Mineral Law
Foundation.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation of the Chief Executive Officer, the Exploration
Manager and the Land Manager of the Company as of September 30,
1996, 1995, and 1994 for services in all capacities to the Company.
Summary Compensation Table
Long Term Compensation
Annual
Compensation Awards
Name and Salary Restricted Stock Options
Principal Position Year $ Award ($)* #
Brian B. Spillane 1996 50,120 -- --
CEO 1995 67,939 3,397 --
1994 79,829 7,983 200,000
Milton O. Childers 1996 50,240 -- --
Exploration V.P. 1995 66,160 3,308 --
1994 76,578 7,658 200,000
James R. Schaff
Secretary/Treasurer 1996 48,930 -- 50,000
Manager of Lands 1995 52,456 2,623 --
1994 24,750 2,475 --
*ESOP contribution
Option Grants in Last Fiscal Year
Individual Grants
% of Total
Options Options Granted Exercise or
Granted/ to Employees Base Price Expiration
Name (Expired) in Fiscal Year ($/sh) Date
Brian B. Spillane -- - -- -
Milton O. Childers -- - -- -
James R. Schaff 50,000/ 100 $0.05 2001
(20,000) -- -- -
Employee Stock Option Plans
Under the terms of the Nova Natural Resources Corporation 1989
Nonqualified Stock Option Plan (the "Nonqualified Plan"), key
personnel are issued options to purchase shares of the Company's
Common Stock at the market price at the time of the award. The
options are exercisable over a five year period in increments as
specified by the Board of Directors. Upon termination of
association with the Company, unexercised options, are canceled.
Also available to employees and management is the Nova Natural
Resources Corporation 1989 Incentive Stock Option Plan, a qualified
plan (the "Incentive Plan"). Under the terms of the Incentive
Plan, options to purchase shares of the Company's Common Stock are
issued to key employees at the market price of the stock on the
date of issue. The options are exercisable over a five year period.
Options, granted to employees who subsequently terminate employment
with the Company are canceled if not exercised within three months
after termination of employment.
A total of 2,000,000 shares of the Company's Common Stock have been
reserved for issuance under the terms of the two Plans. At
September 30, 1996, options to purchase 600,000 shares of Common
Stock had been issued to the Company's Directors under the
Nonqualified Plan (620,000 in 1995); under the Incentive Plan,
options to purchase 650,000 shares had been issued (820,000 in
1995), including, 200,000 each to Messrs. Spillane and Childers
and 250,000 to Mr. Schaff. None of the options issued under the
Plan were exercised during 1996 or 1995.
Employee Stock Ownership Plans
The Board of Directors and the stockholders of the Company have
also adopted the Nova Natural Resources Corporation Employee Stock
Ownership Plan ("ESOP") for the benefit of its full-time employees,
including its officers and directors.
Only employees who have reached the age of 21 and have completed
one year of Company service are eligible to participate in this
plan. With respect to each plan year, the Company may contribute
cash or Common Stock of the Company to a trust in such amounts as
the Board of Directors deems advisable. Contributions may not
exceed the lesser of 25% of the participant's total annual
compensation or $30,000. Any cash contributions are to be used
primarily by the trustee to purchase shares of Common Stock of the
Company, which, in addition to shares of Common Stock of the
Company contributed by the Company, are allocated to the accounts
of all participants in the ratio that the total annual compensation
(not in excess of $150,000) of each participant bears to the total
compensation of all participants in such year. The plan does not
allow contributions by participants.
Each participant's right to the stock allocated to his account is
fully vested after three years of service. Nonetheless, a
participant's benefits will be fully vested if his employment
terminates by reason of death or upon his reaching 65. If a
participant incurs a break in service (passage of one plan year in
which the employee works 500 or fewer hours), his benefits are
forfeited to the extent they have not vested. All forfeitures are
allocated among the remaining participants in the same manner as
the annual contribution.
Distributions under the plan are to commence no later than 60 days
after the last day of the year in which the participant reaches age
65 or, if later, the plan year in which the participant terminates
employment with the Company. The distribution will consist of the
Company's Common Stock. Any distributions are payable in a lump
sum or, if the participant elects, in annual or monthly
installments.
Each participant is entitled to direct the trustee as to the manner
in which any stock allocated to his account is voted. The trustee
is empowered to vote any stock which has not been allocated in a
manner which, in the judgement of the Board of Directors,
represents the participants' best interests.
As of September 30, 1996, 398,211, 62,093 and 201,497 shares have
been allocated to accounts of Messrs. Spillane, Schaff, and
Childers, respectively. No other current officers or directors of
Nova are currently eligible to participate in the plan. No ESOP
contribution was made for 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Principal Shareholders
The following table sets forth the only persons known to the
Company, as of September 30, 1996, to own beneficially more than 5%
of the Company's Common Stock, $.10 par value, or the Company's
Convertible Preferred Stock, $1.00 par value, the Company's only
classes of issued and outstanding voting securities. Except as
otherwise noted in the footnotes to the table, each person named
has sole voting and investment powers relating to his shares.
Name and Address Amount and Nature of
Percent
of Beneficial Owner Beneficial Ownership of
Class
Preferred Stock
Thomas F. Kane 1,098,841 40.88%
c/o ITG, Inc.
1500 Mt. Kemble Ave, 2nd Floor
Morristown N.J. 07901
Robert E. McDonald 794,421 (1) 29.56%
P.O. Box 481243
Denver, CO 80248-1243
Karen McDonald 794,420 (3) 29.56%
1177 Race St. Apt. 801
Denver, CO 80206
Common Stock
Thomas F. Kane 1,092,679 (2) 16.82%
c/o ITG, Inc.
1500 Mt. Kemble Ave, 2nd Floor
Morristown, N.J. 07901
Robert E. McDonald 484,851 (1) 7.46%
P.O. Box 481243
Denver, CO 80248-1243
Karen McDonald 484,850 (3) 7.46%
1177 Race St. Apt 801
Denver, CO 80206
Milton O. Childers 431,494 (5) 6.64%
179 E. Brown Place
Aurora, CO 80013
James E. Taets 411,427 (4) 6.33%
7979 So. Jasmine Circle
Englewood, Colo. 80112
Brian B. Spillane 398,211 (6) 6.13%
255 S. Eudora
Denver, CO 80222
(1) The preferred and common shares are held by the REM Family
Trust, in which Mr. McDonald is the Trustee. Does not include
200,000 shares underlying stock options held by Mr. McDonald.
Includes options held by two officers and directors and one
director of the Company to purchase an aggregate of 561,788
shares of common stock directly from Mr. McDonald, all
exercisable at $.10 per share at any time on or before April 3,
2003. Does not include 62,500 shares which would be issued
were Mr. McDonald to elect to convert his $9,375 face amount of
convertible subordinated debentures to common stock.
(2) Consists of 466,395 shares held by Printon Kane and Co., a
Delaware Corporation in which Mr. Kane was a principal
stockholder and Chairman of the Board, and 50,761 shares held
by Kane Holding, Inc. and 575,523 shares owned by Mr. Kane
personally. Does not include 200,000 shares underlying stock
options held by Mr. Kane. Includes options held by two
officers to purchase an aggregate of 873,576 shares of common
stock directly from Mr. Kane. These options are exercisable at
$.10 per share at any time on or before April 3, 2003.
(3) The preferred and common shares are held by the Karen McDonald
Trust, in which Ms. McDonald is Trustee. Includes options held
by two officers and one director of the Company to purchase an
aggregate of 561,787 shares of common stock directly from Ms.
McDonald, all exercisable at $.10 per share at any time on or
before April 3, 2003. Does not include 62,500 shares which
would be issued were Ms. McDonald to elect to convert her
$9,375 face amount of convertible subordinated debentures to
common stock.
(4) Mr. Taets is a former employee of the Company. Consists of
411,278 shares vested in his account under the ESOP and 149
owned directly.
(5) Consists of 225,154 shares owned by Mr. Childers, 4,843 shares
held by Mr. Childers' wife and 201,497 shares vested under the
ESOP, but does not include options to purchase 186,789 shares
directly from Mr. McDonald, options to purchase 186,788 shares
from Ms. McDonald, options to purchase 373,576 shares directly
from Mr. Kane, or options to purchase 200,000 shares from the
Company. Does not include 62,500 shares which would be issued
were Mr. Childers to elect to convert his $9,375 face amount of
convertible subordinated debentures to common stock.
(6) Consists of 398,211 shares vested in his account under the
ESOP, but does not include options owned by Mr. Spillane to
purchase 250,000 shares directly from Mr. McDonald, options to
purchase 250,000 shares directly from Ms. McDonald, options to
purchase 500,000 shares directly from Mr. Kane or options to
purchase 200,000 shares from the Company. Does not include
83,333 shares which would be issued were Mr. Spillane to elect
to convert his $12,500 face amount of convertible subordinated
debentures to common stock.
The following table shows, at September 30, 1996, the shares of the
Company's outstanding Common Stock, $.10 par value (6,496,188
shares), beneficially owned by each of the officers and directors
of the Company and the shares beneficially owned by all of the
officers and directors as a group. Except as otherwise noted in
the footnotes to the table, each person named has sole voting and
investment powers related to his shares.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 484,851 (1) 7.46%
Brian B. Spillane 398,211 (3) 6.13%
James R. Schaff 122,400 (4) 1.88%
Milton O. Childers 431,494 (5) 6.64%
Thomas F. Kane 1,092,679 (6) 16.82%
Robert W. Meier 193,178 (7) 2.97%
John R. Parker -- (8) (2)
All Directors and Officers
as a group (7 persons) 2,723,013 41.92%
(1) See note (1) of the preceding table.
(2) Less than 1%.
(3) See note (6) of the preceding table.
(4) Does not include 250,000 shares underlying stock options
held by Mr. Schaff, nor does it include 20,833 shares
which would be issued were Mr. Schaff to elect to convert
his $3,125 face amount of convertible subordinated
debentures to common stock.
(5) See note (5) of the preceding table.
(6) See Note (2) of the preceding table.
(7) Does not include 200,000 shares underlying stock options
held by Mr. Meier.
(8) Does not include options owned by Mr. Parker to purchase
125,000 shares directly from Mr. McDonald, options to
purchase 125,000 shares directly from Ms. McDonald, or
options to purchase 200,000 shares from the company. Does
not include 41,667 shares which would be issued were Mr.
Parker to elect to convert his $6,250 face amount of
convertible subordinated debentures to common stock.
The following table shows as of September 30, 1996, the shares of
the Company's Common Stock which would be held by Officers and
Directors, $.10 par value, assuming full conversion of the
Preferred Stock, full exercise of all options, and full conversion
of convertible subordinated debentures.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 1,774,404 12.00%
Brian B. Spillane 1,681,544 11.37%
James R. Schaff 393,233 2.66%
Milton O. Childers 1,441,147 9.75%
Thomas F. Kane 2,616,785 17.70%
Robert W. Meier 434,845 2.94%
John R. Parker 491,667 3.32%
All Directors and Officers
as a group (7 persons) 8,833,625 59.73%
If full conversion of all outstanding shares of convertible
preferred stock, options, and convertible subordinated debentures
occurred, the Company would have outstanding 14,788,219 shares of
its Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the Company's directors and officers have participated
directly or indirectly in the past and may continue to participate,
from time to time in the future, in oil, gas and mineral prospects
in which the Company has an interest. All such participation has
been and will continue to be on terms no less favorable to the
Company than it can obtain from unaffiliated persons.
The Company and the Chairman of the Board jointly owned property on
the Company's cement grade kaolin property in Redwood Falls,
Minnesota. In 1992, the Company purchased the Chairman's interest
in this property for a $.15 per ton royalty on all kaolin removed
from that portion of the mine. The Company has determined that the
amount received by the Chairman of the Board in 1996 and 1995 is
not material.
Messrs. McDonald, Spillane, Childers, Meier, Parker, and Schaff
purchased one and one-half, two, one and one-half, one, one, and
one and one-half Units respectively (7.5 total, at a cost of
$75,000), in the Company's Regulation D offering described in
"Significant Developments in Fiscal 1996". These Units were
purchased at the identical price paid by non-affiliated third
persons.
There have been no other significant transactions between the
Company and officers or directors of the Company during the fiscal
year ended September 30, 1996. See also "Item 10. Executive
Compensation".
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601
of the Regulation S-K or are incorporated by reference to previous
filings.
Exhibit
Table No. Document Reference
(2) Articles of Incorporation and By-Laws (a)
(3) Instruments defining the right of
security holders, including indentures N/A
(5) Voting trust agreement N/A
(6) Material contracts not in ordinary
course of business N/A
(7) Material foreign patents N/A
(a) Filed with Registration Statement No. 33-5520 (under the
Securities Act of 1933) and incorporated herein by this reference.
(b) The following documents were filed and are incorporated
herein:
Description of
Document and Filing
(i) Convertible Preferred Stock Purchase Agreement filed
with Form 10-Q dated December 31, 1986.
(ii) Nova Natural Resources Corporation 1987 Nonqualified
Stock Option Plan and 1987 Incentive Stock Option Plan.
(iii) Report on Form 8-K date of report April 12, 1996.
(iv) Report on Form 8-K, date of report November 14, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Nova Natural Resources Corporation
has duly caused this Annual Report on Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized, in
Denver, Colorado on this 20th day of December, 1996.
NOVA NATURAL RESOURCES CORPORATION
(Registrant)
By:/s/ Brian B. Spillane
Brian B. Spillane, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature Title Date
/s/ Robert E. McDonald Chairman of 12-20-96
Robert E. McDonald the Board
/s/ Brian B. Spillane President, Chief 12-20-96
Brian B. Spillane Executive Officer
/s/ James R. Schaff Secretary and Treasurer 12-20-96
James R. Schaff
/s/ Milton O. Childers Director 12-20-96
Milton O. Childers
/s/ John R. Parker Director 12-20-96
John R. Parker
Thomas F. Kane Director
/s/ Robert W. Meier Director 12-20-96
Robert W. Meier
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 79,827
<SECURITIES> 0
<RECEIVABLES> 432,532
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 516,300
<PP&E> 6,959,031
<DEPRECIATION> 6,117,128
<TOTAL-ASSETS> 1,545,920
<CURRENT-LIABILITIES> 317,663
<BONDS> 0
0
2,687,682
<COMMON> 649,619
<OTHER-SE> (2,359,044)
<TOTAL-LIABILITY-AND-EQUITY> 1,545,920
<SALES> 1,508,938
<TOTAL-REVENUES> 1,521,350
<CGS> 0
<TOTAL-COSTS> 1,250,302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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</TABLE>
