SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the
Securities Exchange Act of 1934)
NOVA NATURAL RESOURCES CORPORATION
(Name of Issuer)
NOVA NATURAL RESOURCES CORPORATION
(Name of Person Filing Statement)
Common Stock, No Par Value
(Title of Class of Securities)
669919-10-2
(CUSIP Number of Class of Securities)
Mary F. Mernah
789 Sherman St. #550
Denver, CO 80203
303-863-1997
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of the Person
Filing Statement)
June 13, 1997
(Date Tender Offer First Published, Sent or Given to
Security Holders)
(Fee included in Preliminary Proxy fee Pursuant to
Rule 0-11(a)(2))
This Schedule 13E-4 is filed by Nova Natural Resources
Corporation (the "Company") in connection with a proposed sale by
the Company of its cement-grade kaolin mine in Minnesota. That
sale, a vote of the Company's shareholders to approve the sale and
related matters are described in a Proxy Statement (the "Proxy")
attached to and incorporated in this Schedule as Exhibit 1.
Although dissenter's rights are not required to be offered to the
Company's shareholders, the Company is offering to purchase the
common stock of shareholders who do not vote in favor of the
proposed sale and comply with procedures detailed in the Proxy.
Information incorporated from the Proxy in this schedule is
identified by Proxy page number and substantive heading. This
schedule is filed to provide information concerning the Company's
possible purchase of common stock from such dissent by
Shareholders.
ITEM 1. Security and Issuer
(a) Name and address of the issuer:
Nova Natural Resources Corporation
789 Sherman St. #550
Denver, Colorado 80203
(b) Exact title and amount of securities outstanding:
5,985,846 of Common Stock, No Par Value
(c) Principal market and high and low sales prices: Proxy,
Page 49, under "Market for Common Equity and
Related Stockholder Matters."
(d) Name and address of filer other than the Company: not
applicable.
ITEM 2. Source and Amount of Funds or Other Consideration
(a) Source of the funds for the repurchase of stock from
dissenting shareholders: Proxy, Page 5, under "Source of
Funds."
(b) No funds are expected to be borrowed to fund the
repurchase of such shares: Proxy, Page 5, under "Source
of Funds."
ITEM 3. Purpose of the Tender Offer and Plans or Proposals of the
Issuer or Affiliate
The purpose of the repurchase: Proxy, Page 5, under
"Rights of Dissenting Shareholders."
(a) The Company has no plans for, and the effectuation of
dissenters' rights involve no requirements which would
result in, the acquisition by any person of additional
securities of the issuer: Proxy, Page 6, under "Effects
of Repurchase."
(b) The Company has no plans for, and the exercise of
dissenter's rights will not require any, mergers,
reorganizations, or liquidations involving the Company:
Proxy, Page 6, under "Effects of Repurchase."
(c) The purpose of the dissenter's rights tender is to allow
shareholders who disagree with the sale of the mine to
sell their shares to the Company and to provide a market
for these shares: Proxy, Page 5 , under "Rights of
Dissenting Shareholders."
(d) The Election of Directors: Proxy, Pages 49-50, under
"Election of Directors."
(e) The exercise of dissenter's rights and any share
repurchase will not effect a material change in the
Company's dividend rate: Proxy, Page 6, under "Effects
of Repurchase."
(f) The exercise of dissenter's rights and any share
repurchase will not effect a material change in the
Company's corporate structure: Proxy, Page 6, under
"Effects of Repurchase."
(g) The exercise of dissenter's rights and any share
repurchase will effect no changes in the Company's
charter or bylaws: Proxy, Page 6, under "Effects of
Repurchase."
(h) The tender offer will not cause the Company's securities
to be delisted: Proxy, Page 6, under "Effects of
Repurchase."
(i) The repurchase of shares from dissenting shareholders
will cause no class of equity to become eligible for
termination: Proxy, Page 6, under "Effects of
Repurchase."
(j) The exercise of dissenter's rights and any share
repurchase is not anticipated to suspend the Company's
obligation to file reports pursuant to Section 15(d) of
the Act: Proxy, Page 6, under "Effects of Repurchase."
ITEM 4. Interest in Securities of the Issuer
The only pertinent transaction in the Company's Common Stock
is discussed in the Proxy at pages 7 and 8, under
"Purchase of Kane Stock."
ITEM 5. Contracts, Arrangements, Understandings or Relationships
With Respect to the Issuer's Securities.
The only pertinent contracts regarding the Company's common
stock are options owned by management, as described in the
Proxy on Pages 18 and 19, under "Stockholder's Equity."
ITEM 6. Persons Retained, Employed or to be Compensated.
No persons are to be employed to make solicitations in
connection with this repurchase offer.
ITEM 7. Financial Information.
(a)
(1) Audited financials: Proxy, Pages 9 - 25.
(2) Unaudited financials from the most recent quarterly
report: Proxy, Pages 30 - 40.
(3) Ratio of earnings to fixed charges: Proxy, Page 29,
under "Selected Financial Data."
(4) Book value per share: Proxy, Page 29, under "Selected
Financial Data."
(b) Pro Forma data: Proxy, Pages 43 - 49.
(1) Pro Forma Balance Sheet: Proxy, Pages 44 - 45.
(2) Pro Forma Statement of Income: Proxy, Pages 46 - 47.
(3) Pro Forma book value per share: Proxy, Page 45.
ITEM 8. Additional Information.
(a) Any present, or proposed contracts, arrangements,
understandings or relationships between the issuer and
its executive officers, directors or affiliates:
Proxy, Pages 49 - 50, under "Election of Directors."
(b) Except for compliance by shareholders with the
prerequisites mandated by the Colorado Business
Corporation Act for the effectuation of dissenter's
rights, there are no regulatory requirements
or approvals relating to the tender offer. See
"Rights of Dissenting Shareholders", Proxy, Page 5.
(c) Not applicable.
ITEM 9. Materials to be Filed as Exhibits.
(a) Nova Natural Resources Corporation Preliminary
Proxy.
(b-f) Not applicable
SIGNATURE
After due inquiry and to the best of my knowledge and belief,
I certify that the information set forth statement is true,
complete and correct.
June 13, 1997 /s/ James R. Schaff
James R. Schaff, Secretary/Treasurer
PRELIMINARY PROXY MATERIALS
NOVA NATURAL RESOURCES CORPORATION
789 Sherman Street, Suite 550
Denver, Colorado 80203
________________________________________
PROXY STATEMENT
________________________________________
ANNUAL MEETING OF SHAREHOLDERS
To Be Held July 21 , 1997
________________________________________
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of Nova Natural Resources
Corporation (the "Company") of proxies for use at the Annual
Meeting of Shareholders of the Company to be held on July 21,
1997, at 10:30 o'clock a.m., Mountain Standard Time,
at the Company's principal offices located at 789 Sherman Street,
Suite 550, Denver, Colorado. This Proxy Statement and the
accompanying form of Proxy were mailed to the Company's
Shareholders on or about July 7 , 1997.
If the accompanying Proxy form (Attachment No. 1) is signed, dated
and returned, the shares represented thereby will be voted in
accordance with the specifications therein. If no choice is
specified, the shares will be voted FOR the election of the five
(5) nominees for Director listed in this Proxy Statement and FOR
approval of the agreement between the Company and Northern Con-Agg,
Inc. ("NCA"), an unaffiliated Minnesota corporation, for the sale
by the Company to NCA of the Company's cement-grade kaolin mine and
related assets, located in Minnesota. Your executed Proxy may be
revoked at any time before it is exercised by filing with the
Secretary of the Company, 789 Sherman Street, Suite 550, Denver,
Colorado 80203, a written notice of revocation or a duly executed
Proxy bearing a later date. The execution of the enclosed Proxy
will not affect your right to vote in person should you find it
convenient to attend the Annual Meeting and desire to vote in
person. To the Company's knowledge, the Directors of the Company
intend to vote for the election of all nominees and for approval of
the contract between the Company and NCA.
SOLICITATION OF PROXY
The expense of soliciting these Proxies will be borne by the
Company. It is contemplated that the Proxies will be solicited
principally through the use of the mails, but officers and regular
employees of the Company may solicit Proxies personally, by
telephone or by special letter. Although there is no formal
agreement to do so, the Company may reimburse banks, brokerage
houses and other custodians, nominees and fiduciaries for their
reasonable expenses of forwarding Proxy materials to their
principals.
VOTING SECURITIES AND PRINCIPAL HOLDERS OF SUCH SECURITIES
On
June 27 , 1997, the record date for determination of
Shareholders
entitled to vote at the Annual Meeting of Shareholders, 5,985,846
shares of the Company's Common Stock and 1,792,267 of the Company's
Convertible Preferred Stock, $1.00 par value, were outstanding.
Each share of Common Stock is entitled to one vote, and one share
of convertible Preferred Stock is entitled to two votes on all
matters voted upon at the Annual Meeting. The presence, in person
or by proxy, of a majority of the outstanding shares of Common and
Preferred Stock in the aggregate is necessary to constitute a
quorum at the Meeting. Cumulative voting in the election of
Directors is not permitted. Any votes withheld from voting
(whether by abstention, broker non-votes or otherwise) will not be
counted and will have no legal effect on the vote.
The following table sets forth the only persons known to the
Company, as of June 27 , 1997, to own beneficially more than
5% of the
Company's Preferred Stock and of the Company's Common Stock, its
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 such shares.
Page 1
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
Preferred Stock
Robert E. McDonald 794,421(1) 44.32%
P.O. Box 481243
Denver, CO 80248-1243
Karen McDonald 794,420(3) 44.32%
1177 Race, Apt. 801
Denver, CO 80206
Brian B. Spillane 203,426(2) 11.35%
255 S. Eudora
Denver, CO 80222
Common Stock
Robert E. McDonald 484,851(1) 8.10%
P.O. Box 481243
Denver, CO 80248-1243
Karen McDonald 484,850(3) 8.10%
1177 Race, Apt. 801
Denver, CO 80206
Milton O. Childers 431,494(5) 7.21%
179 E. Brown Place
Aurora, CO 80013
James E. Taets 411,427(4) 6.87%
7979 S. Jasmine Circle
Englewood, CO 80112
Brian B. Spillane 514,153(2) 8.59%
255 S. Eudora
Denver, CO 80222
(1) The preferred and common shares are held by the REM Family
Trust, of 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
if Mr. McDonald elects to convert all of his $9,375 principal
amount of convertible subordinated debentures to Common Stock.
(2) Consists of 398,211 shares vested in his account under the
Company's Employee Stock Ownership Plan (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, or options to purchase
200,000 shares from the Company. Does not include 83,333
shares which would be issued if Mr. Spillane elects to convert
all of his $12,500 principal amount of convertible
subordinated debentures to Common Stock.
(3) The preferred and common shares are held by the Karen McDonald
Trust, of 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 if Ms. McDonald elects to
convert all of her $9,375 principal amount of convertible
subordinated debentures to Common Stock.
(4) Mr. Taets is a former employee and officer of the Company.
Consists of 411,278 shares vested in his account under the
ESOP and 149 shares owned directly.
Page 2
(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, or options to purchase 200,000 shares from
the Company. Does not include 62,500 shares which would be
issued if Mr. Childers elects to convert all of his $9,375
principal amount of convertible subordinated debentures to
Common Stock.
The following table shows, at June 27 , 1997, the shares of
the
Company's outstanding Common Stock (5,985,846 shares issued and
outstanding), 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) 8.10%
Brian B. Spillane 514,153 (3) 8.59%
James R. Schaff 122,400 (4) 2.04%
Milton O. Childers 431,494 (5) 7.21%
Robert W. Meier 193,178 (6) 3.23%
John R. Parker (7) (2)
All Directors and Officers
as a group (7 persons) 1,746,076 29.17%
(1) See note (1) of the preceding table.
(2) Less than 1%.
(3) See note (2) of the preceding table.
(4) Does not include either 250,000 shares underlying stock
options held by Mr. Schaff, or 20,833 shares which would
be issued if Mr. Schaff elects to convert all of his
$3,125 principal amount of convertible subordinated
debentures to Common Stock.
(5) See note (5) of the preceding table.
(6) Does not include 200,000 shares underlying stock options
held by Mr. Meier. Does not include 41,667 shares which
would be issued if Mr. Meier elects to convert all of his
$6,250 principal amount of convertible subordinated
debentures to Common Stock.
(7) 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 if
Mr. Parker elects to convert his $6,250 principal amount
of convertible subordinated debentures to Common Stock.
APPROVAL OF SALE OF CEMENT-GRADE KAOLIN MINE
Contract For Sale of Cement-Grade Kaolin Mine
Pursuant to a contract dated January 25, 1997, the Company agreed,
subject to shareholder approval, to sell its cement-grade kaolin
mining operations and property (the "Cement Kaolin Mine") near
Redwood Falls, Minnesota, to Northern Con-Agg, Inc., an
unaffiliated Minnesota corporation whose address is 3131 Fernbrook
Lane North, Plymouth, Minnesota 55447 ("NCA"). A portion of the
Cement Kaolin Mine is located on lands which are currently subject
to a joint venture between the Company and U.S. Borax Inc.
("Borax"), which was formed in 1993 primarily to explore, develop
and produce high quality paper-grade kaolin. No paper-grade kaolin
has yet been sold from the joint venture property. Borax has
agreed to release the portion of the paper-grade kaolin property
occupied by the Cement Kaolin Mine from the joint venture to permit
the Company's sale of the mine to NCA. The Company will be selling
all of its cement-grade kaolin operations to NCA, while retaining
its interest in the paper-grade joint venture. The Cement Kaolin
Mine encompasses 314 acres, and the paper-grade kaolin property
retained by the Company encompasses 4628.59 acres. After the sale
to NCA, ownership of the cement-grade kaolin property will be
separate and distinct from ownership of the paper-grade kaolin
property. Except for the inclusion of an immaterial portion of the
paper grade kaolin prospect in the sale to NCA, the sale will have
no impact on the Company's joint venture with Borax.
Under the terms of the purchase and sale agreement with NCA(the
"NCA Agreement," a copy of which is available upon request), NCA
will acquire approximately 78 fee acres owned by the Company and an
additional 236 acres leased by the Company, as well as the
inventory, equipment, contracts, permits and other personal
Page 3
property held by the Company in connection with these cement-grade
mining operations. NCA proposes to continue the current cement-
grade operations of the Company, and has agreed to turn over to the
Company any profits which it may earn during a 21 year period after
the date of closing as a result of sales of kaolin produced from
the property to paper manufacturers. The Company agrees that, if
it or any joint venture of which it is a member sells kaolin to the
cement-industry in Minnesota, Iowa, North Dakota, South Dakota or
Wisconsin during a five year period following the closing, the
Company it will pay to NCA the sum of $30,000 for each year in
which any sale occurs.
NCA will pay a total of $700,000 to the Company for the Cement
Kaolin Mine, including $125,000 in cash at closing, an aggregate of
$450,000 in non-interest bearing semi-annual installments on August
15 and December 15 of each year until August 15, 2001, and a final
payment of $125,000 on December 15, 2001. Up to $70,008 of these
proceeds will be paid to Thomas F. Kane, a former director, as part
of the Company's purchase of his Common and Preferred Stock, over
the same period as the NCA payments. See "Purchase of Kane Stock."
The Company will retain both a mortgage and a security interest
covering the property being sold to NCA in order to secure full
payment of the purchase price. NCA will assume liability for all
existing contracts relating to the property, although the Company
will continue to have liability for any conduct before the closing
date and, any contracts not disclosed to NCA. Included among the
contracts assumed by NCA is an agreement with Union Pacific
Railroad which requires the Company to pay the railroad for a
minimum usage of 300 rail cars, whether actually used by the
Company. NCA will assume this obligation and Nova will have no
further liability for railcar usage. The Company believes that it
has disclosed all pertinent contracts to NCA. The Company intends
to secure appropriate lessor consents to eliminate any liability to
the lessor following assignment of the lease.
If NCA expands the current cement-grade mining operations, the
lessor of the Mine Property will have to be relocated from her home
on the property, which recently has been appraised at $25,000.
When this occurs, NCA will pay the first $25,000 of relocation
costs, Nova will pay 50% of the costs, if any, between $25,000 and
$75,000, and Nova will pay the entire cost, if any, in excess of
$75,000. Shortly following execution of the NCA Agreement, the
Company incurred approximately $5,800 in additional drilling and
analysis costs to meet requests of NCA for additional exploration
data.
Prior to the NCA Agreement, NCA had no relationship to the Company,
its officers or directors. The Company has not secured an
independent opinion concerning the fairness of the consideration to
be paid by NCA, but the Company's officers believe such
consideration to be appropriate based upon the Company's prior net
income from the property, the anticipated kaolin reserves, and the
demand for cement-grade kaolin in the area. There will be no
change in the rights of security holders of the Company as a result
of this vote, except with respect to the holders of Convertible
Debentures, as described below. The Company is not in default with
respect to obligations under any of its securities.
If shareholder approval for the sale of the cement-grade kaolin
mine is not received, Nova will continue to operate the mine as it
has in the past and continue to pursue additional customers and
markets for the kaolin. The Company would seek to retain its
current customer and attempt to obtain business from a previous
customer. Any additional customers could not be obtained for the
current mining season. The Company would consider other
alternatives, such as entering into joint venture arrangements for
the marketing and sale of kaolin, possibly with the company which
desires to purchase the mine, and/or other companies which supply
materials to the cement industry. If shareholder approval of the
sale is not obtained, approximately $20,000 in transactional costs
will not be recovered.
Potential Impact of the Proposed Sale on the Company's Convertible
Debentures
The Colorado Business Corporation Act (the "Act") requires approval
of the majority of shares voting at a duly noticed and conducted
meeting for the sale of all or substantially all of a corporation's
assets outside of its normal course of business. The Company has
determined that, while the Cement Kaolin Mine is a principal asset,
because the remaining assets and business are not insubstantial and
proceeds of the sale are intended to be used to continue the
Company's business in the same fashion, a shareholder vote is not
required by law. Nonetheless, since the Cement Kaolin Mine sale is
a material transaction, the Company believes that its shareholders
should be informed about and vote upon the approval of that
transaction.
As part of its organization and capitalization of NovaChek Limited
Liability Company, an Idaho limited liability company formed to
develop part of the Company's gold prospect in Nome, Alaska, the
Company sold an aggregate of $250,000 of convertible subordinated
debentures (the "Debentures"). The Debentures require semi-annual
payments of interest and payment of principal and accrued interest
on April 1, 2001. At the option of its holder, each Debenture
matures and is fully payable upon the Company's "sale, exchange,
base or other disposition of all or substantially all of [its]
assets." Notwithstanding the Company's belief that the sale of the
Cement Kaolin Mine is not such an event, upon litigation brought by
a Debenture holder, a court may disagree and order early payment of
the Debentures. Such a payment would have a materially adverse
Page 4
impact on the Company, require the use of proceeds from the Mine
sale and threaten the ongoing viability of the Company.
Vote Upon Sale
The affirmative vote by a majority of all of the shares of Common
and Preferred Stock entitled to vote as of June 27 , 1997 is
required for approval of the agreement to sell the Cement Kaolin
Mine. Unless directed otherwise, the Proxy will be voted in favor
of approving the Agreement and effectuating its terms. The
Company's corporate counsel will be present at the meeting but its
independent certified public accountants will not be present.
Rights of Dissenting Shareholders
The Act affords a shareholder of a Colorado corporation the right
to dissent from certain actions requiring shareholder approval and
to require that the corporation purchase the shareholder's stock at
a "fair value" (the "right of appraisal"). If a vote were required
to approve the sale of the Cement Kaolin Mine (which the Company
does not believe), rights of appraisal still would not be available
to dissenting shareholders because of an exemption for corporations
like Nova whose common stock is owned by more than 2,000
shareholders.
Notwithstanding the absence of a required vote and presence of an
exemption from rights of appraisal provided by the Act, the Company
has decided to offer to purchase all of the shares of Common Stock
of any shareholder who does not vote in favor of the Cement Kaolin
Mine sale and properly asserts his right of appraisal. The
procedure for
the Company's purchase of shares, set forth in this section, is
similar
but not identical to the procedure for dissenter's rights
established
by the Act. Management believes that the conjunction of its Cement
Kaolin
Mine sale and its sale of oil and gas overriding royalty interests
and
purchase of the stock of Thomas F. Kane (as described below)
represent
material events which might prompt a shareholder to sell his Common
Stock if an adequate market for that Stock existed. The Company
also recognizes that the absence of an active trading market
impedes such a sale. As such, management wishes to afford
shareholders who disagree with these decisions or with the
directors' decision to continue operation of the Company the
ability to sell their Common Stock at a price which management
believes is the appropriate market price.
Any shareholder of the Company who wishes to assert his or her
right as a dissenter must strictly comply with the procedures set
forth in this section. Rights of appraisal may be asserted as to
all,
and not less than all, of a dissenter's shares of stock. Any
shareholder
who wishes to assert rights of appraisal must not vote his or her
shares in favor of the resolution approving the sale and assure
that
the Company receives a notice of his or her assertion of
dissenter's rights
no later than twenty (20) business days after the Annual Meeting.
The
certificates representing the shares being tendered for purchase by
the
Company must be received by the Company before payment will be
made.
The maximum number of shares which may be purchased by the Company
is
49.9% of the issued and outstanding common stock. A shareholder
may use the
accompanying card to indicate his request for the Company to
repurchase
his stock. If the sale is approved by the Company's shareholders,
no later
than five (5) business days after the receipt of the certificates,
but no
later than December 31, 1997, the Company will mail a payment for
all shares
purchased by the Company. The Company will purchase stock from all
shareholders who properly dissent and tender shares at $.04 per
share.
Because the Company's common stock does not have an active trading
market,
the Company did not use the bid and ask quotations as determinative
of
the purchase price but used the $.03 per share price paid to one of
its
principal shareholders and a director earlier this year. See
"Purchase
of Kane Stock". Because the Company is not strictly following the
provisions of the Act relating to dissenter's rights, it will not
pay
interest on the purchase price (the Act requires interest from the
date
of the Annual Meeting to the purchase date), and will not adopt the
provisions of the Act relating to a procedure judicial review of
whether
the price paid for the shares is a "fair value" for those shares.
Any shareholder who fails to timely and properly demand payment and
deposit his or her stock certificates will lose these rights of
appraisal. A shareholder who has asserted rights of appraisal may
withdraw
his or her claim at any time prior to the last day on which the
demand must
be received by the Company.
SOURCE OF FUNDS
Funds for the repurchase of the securities of those
shareholders who wish to exercise dissenter's rights principally
will be taken from the proceeds of the sale of the Kaolin MIne.
Because the Company cannot determine the number of shares that will
be repurchased, it cannot estimate the aggregate purchase price,
but believes that sale proceeds will far exceed any such amount.
To
the Company's knowledge, no officer, director, or affiliate of the
Company intends to offer their stock for repurchase.
Page 5
EFFECTS OF REPURCHASE
Colorado law requires that all shares repurchased by the
Company
must be retired. The Company has no plans to acquire, and the
effectuation of dissenter's rights will not cause the acquisition
by
any person of, additional securities of the Company, or any
disposition
of securities of the Company other than the repurchase of shares
from the
shareholders who properly assert these rights of appraisal. The
repurchase
will not result in a merger, reorganization, or a liquidation of
the
Company. The dividend policy to the Company, the corporate
structure
of the Company, and the Company's charter and bylaws will be
unchanged
by the effectuation of dissenter's rights. The Company does not
anticipate that so many shareholders will assert rights of
appraisal that
the resultant repurchase of shares will result in the Company's
securities
being delisted or eligible for termination. As such, the Company
will
continue to have an obligation to file reports pursuant to Section
15(d)
of the Act.
TAX TREATMENT OF GAIN ON SALE
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. The sale will result in a taxable
gain of approximately $27,000 per year through fiscal 2002, all of
which will be offset by these federal operating loss carryforwards.
1995 Mineral Property Abandonments
In fiscal 1995, the Company wrote down the value of three of its
mineral properties. These were its Nome, Alaska gold properties,
which were carried on the Company's books at $244,136, its Querida
gold properties in Custer County, Colorado, which were carried on
the Company's books at $63,318, and the Cave Creek gold exploration
prospect, in which the Company had a $1,745 investment. The
aggregate amount of the writedown was $309,199.
The Company's Nome properties consist of 21,411 acres of State of
Alaska mining leases offshore Nome (the "Nome Prospect"). The
Company acquired these leases in 1984, and transferred all of its
rights in the properties to Inspiration Gold, Inc.("Inspiration")
in May 1985. Inspiration later transferred that interest to a
company affiliated with Inspiration, Western Gold Exploration and
Mining Company, Limited Partnership ("WestGold"). Neither of these
entities were affiliated with the Company. The Company retained a
10-17% net profits royalty.
During five seasons of dredging on the Nome Prospect, WestGold
recovered approximately 121,000 ounces of gold, but due to a very
high level of operating costs (the world's largest mining dredge
was used -- which proved to be ill-suited to this application)
WestGold was unable to mine the properties profitably, and the
Company received no income pursuant to its net profits royalty
interest.
In September, 1990, WestGold terminated operations and returned the
properties to Nova. The Company received a substantial portion of
exploration data gathered by WestGold and prior operators of the
property, including drilling results from approximately 3,500
drillholes. Using this and other geologic data developed by its
staff, Nova attempted to sell or joint venture the properties with
an industry partner. Although serious negotiations were conducted
with three different entities over a period of several years, the
Company was unsuccessful in entering into an arrangement which
would recover the Company's historical costs in these properties.
Accordingly, the Company felt that due to the uncertainty of
recovery of these costs, for accounting purposes, Nova's investment
in these properties should be written off. However, the Company
continued its efforts to put the properties into production, and in
1996, formed NovaChek Limited Liability Company to attempt to
establish commercial production on a portion of the properties.
These efforts proved unsuccessful in 1996 due to delays in
completion of construction of the necessary mining equipment. It
is anticipated that mining operations will be initiated by NovaChek
on the properties for the 1997 season.
The Company owns a 42.2% to 45% interest in a gold prospect in
Custer County, Colorado, known as the Querida Prospect. Most of
the balance of the interest is held by Querida Corporation, an
entity controlled by the McDonald Trust. Over a period of years,
the Company entered into various exploration arrangements with
industry partners to explore these properties in an attempt to
identify a commercial gold deposit on the properties. These
arrangements involving drilling, geochemical analyses, and other
exploration methods employed to evaluate the gold potential of the
properties. None of these efforts were successful. In 1993, the
Company commenced its own drilling program on the properties. The
results of this program were inconclusive, and the Company
determined that a partner should be sought to conduct further
exploration. In 1995, due to the lack of certainty as to whether
a partner might be found willing to enter into an exploration
arrangement which would recover the Company's historical costs in
this prospect, for accounting purposes, the Company wrote off its
Page 6
investment in the properties. Since that time, the Company has
reduced its land position to reduce holding costs. It is intended
to conduct a limited amount of exploratory work in 1997, with the
goal of generating data which, if encouraging as to the potential
of the properties, would be helpful in interesting an industry
partner in financing further exploratory work on the properties.
The Cave Creek Prospect was evaluated for possible acquisition.
Limited exploration activities were conducted on the properties,
which did not indicate sufficient potential for gold to proceed
with the acquisition, and the Company's investment in the prospect
was written off.
1995 Gain on Sale of Assets
The Company purchased 40 railcars in 1993 to use in transporting
kaolin clay to customers from its mine in Minnesota. Although the
ownership of these cars was advantageous during the clay mining
season, the Company was not able to lease the cars during the off
season to other companies on a basis favorable enough to justify
its continued capital investment in the cars. In February, 1995,
in order to take advantage of a favorable market for this type of
railcar, to increase working capital and reduce debt, the Company
sold the railcars to the David J. Joseph Company, a non affiliated
company. The cars had been depreciated on the Company's books to
a value less than the sale price of the railcars, and accordingly,
the Company recorded a gain on sale of assets of $58,663 in fiscal
1995, wholly represented by the excess of the sale price of the
cars over the book value of the cars.
OTHER PERTINENT TRANSACTIONS
Although approval of the Company's shareholders was not required or
sought for two other transactions which have been approved by the
Company's directors and taken by the Company, the Company feels
that information concerning those transactions is appropriate to
the matters to be voted on at the Annual Meeting.
Sale of Oil and Gas Royalty Interests
On November 14, 1996, the Company 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.
$150,000 of these proceeds was used to purchase stock from Thomas
Kane, a director, as part of the settlement of the Company's
disputes with Mr. Kane. The rest of the proceeds are being used as
operating capital. 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.
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 Company's oil
and gas reserves could have declined substantially (although there
was no current indication of any problem). The sale was made to
eliminate that 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, a Board member, 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 REM Family Trust, of which Mr. McDonald is Trustee,
holding the balance of the interest. No shareholder vote was
required to approve this sale since the properties did not
constitute substantially all of the Company's assets as provided in
the Colorado Business Corporation Act.
Purchase of Kane Stock
During 1996, disputes arose between Thomas F. Kane, then a
director, and the other directors of the Company concerning
decisions by the other directors and the business operations of the
Company. Mr. Kane asserted, inter alia, that the continued
operation of the Company was not in the best interests of the
owners of the Company's Preferred Stock who, if the Company were
liquidated, would receive all of the proceeds in the liquidation
after payment to the Company's creditors. Mr. Kane also asserted
that continuation of the Company's business would cause the
dissipation of assets which otherwise would be distributable to
owners of the Company's Preferred Stock upon liquidation. Mr. Kane
recommended and proposed that the Company be liquidated and
threatened to commence litigation to force the liquidation and
dissolution of the Company. The Company's other directors
disagreed with Mr. Kane, determined to continue the Company as a
going concern and determined to oppose any attempt to liquidate and
dissolve the Company.
In resolution of these disputes, the Company, Mr. Kane and Brian
Spillane, the Company's President and a director, entered into an
Agreement (the "Kane Agreement"), dated February 5, 1997, for the
purchase of all of Mr. Kane's Common and Preferred Stock. A copy
of that Agreement is available upon written request to the Company.
By terms of the Kane Agreement, the Company purchased from Mr. Kane
895,415 shares of his Preferred Stock and 510,342 shares of his
Page 7
Common Stock. All of the stock purchased by the Company was
retired upon completion of the purchase. Mr. Spillane purchased
from Mr. Kane the rest of his stock: 203,426 shares of Preferred
Stock and 115,942 shares of Common Stock. Mr. Spillane paid
$50,000 for the stock he purchased from Mr. Kane. The Company paid
$150,000 and agreed to pay an amount equal to 12% of the net
proceeds from the sale of the Cement Kaolin Mine less $13,992, as
and when received by the Company. Alternatively, if the Cement
Kaolin Mine is not sold on or before June 1, 1997, the Company
agreed to pay to Mr. Kane a $.10 per ton royalty, as and when
received by Nova, on sales of kaolin from the Mine up to an
aggregate of $70,008. The Agreement among the Company, Mr.
Spillane and Mr. Kane also contained certain releases of claims
between and among the parties, and certain other representations.
Mr. Kane proposed that the Company purchase his stock for $400,000.
Management felt this price was not justified, and if paid, would
place too severe a financial burden on the Company. Mr. Kane
threatened litigation, which would have destroyed the Company with
no return to any shareholder. Prolonged negotiations resulted in
an agreement to purchase Mr. Kane's stock for a downpayment of
$200,000 ($150,000 of which was paid by the Company and $50,000 was
paid by Mr. Spillane). The amount to be paid would be affected by
the outcome of negotiations then underway for the sale of the
Cement Kaolin Mine, since this affected the book value of the
Company. In order to accommodate this uncertainty, it was agreed
that there would be future payments by the Company of either a
royalty on kaolin sales of $.10 per ton, as such tons are sold and
paid for, or a percentage of the payments received from the sale of
the mine. Mr. Kane felt this percentage should be as high as 20%,
and management felt 10% was the correct figure. In the
negotiations, it was agreed that this percentage would be 12%.
Once a price was determined for all of the stock held by Mr. Kane
and his affiliated entities, it was determined that 466,395 common
shares were controlled by a Trustee of an affiliated entity who
refused to allow the sale of these shares. The withheld shares
were valued by Nova management at $.03 per share, or a total of
$13,992. Since the maximum amount which would have been received
by Mr. Kane pursuant to 12% of the net proceeds of the sale of the
Cement Kaolin Mine would be $84,000 (12% times $700,000) if all of
the stock were purchased, the purchase price was reduced by
$13,992. Accordingly, the maximum future amount to be paid to Mr.
Kane is $70,008 ($84,000 minus $13,992). However, that amount will
be reduced by 12% of expenses of the sale or not less than $65,808.
The Colorado Business Corporation Act and the Company's Articles
of Incorporation and Bylaws permitted the Company to purchase Mr.
Kane's stock without approval of its shareholders so long as
certain financial requirements were satisfied. In the opinion of
management, these statutory requirements were met.
No Vote to Ratify Prior Transactions
The Company's shareholders are not being asked to ratify the
Company's sale of oil and gas properties or purchase of the Kane
Stock, and a vote approving the Cement Kaolin Mine sale is not a
vote to approve or ratify either or both of those other
transactions. However, the Company might assert in an action filed
by a shareholder to challenge the sale of the oil and gas
properties and/or the Kane settlement that pertinent statute of
limitations commence no later than receipt of these proxy materials
and that a shareholder's failure to dissent from the action and
demand
the Company's purchase of his stock bars such an action.
Page 8
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
Page 9
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEETS -- SEPTEMBER 30, 1996 AND 1995
ASSETS 1996 1995
Current Assets:
Cash $ 79,827 $ 70,820
Accounts receivable:
Kaolin operations 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
Page 10
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEETS (CONTINUED) -- SEPTEMBER 30, 1996 AND 1995
LIABILITIES AND
STOCKHOLDERS' EQUITY 1996 1995
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
See accompanying notes to financial statements.
Page 11
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
Years Ended September 30,
1996 1995
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
See accompanying notes to financial statements
Page 12
<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>
<PAGE>
<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>
Page 13
<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.
Page 14
</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 ore bodies 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.
Page 15
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
Page 16
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
Page 17
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:
1996
1995
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 $ -- $
--
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:
Page 18
Nonqualified Plan
Shares under Option price
option range
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
Incentive Plan
Shares under Option price
option range
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
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.
Page 19
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>
Page 20
<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
Page 21
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.
1996
1995
(BBLS) (MCF)
(BBLS) (MCF)
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
(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:
1996
1995
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
The following are the principal sources of change in the
standardized measure
of discounted future net cash flows during 1996 and 1995:
1996
1995
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
Page 22
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OF SEPTEMBER 30, 1996
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 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
Page 23
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.
Page 24
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.
Forward-Looking Statements
Management's discussion of anticipated future operations contains
predictions and projections which may constitute forward looking
statements. The Private Securities Litigation Reform Act of 1995,
including provisions contained in Section 21E of the Securities &
Exchange Act of 1934, provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor,
the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from
the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties
that may affect the operations, performance, development and
results of the Company's business include the following:
(a) The Company may not be able to obtain the additional
funding necessary to continue operations in its Nome
gold prospect and/or the funds actually necessary to
operate that project may be significantly greater than
those anticipated by management.
(b) Borax may determine not to pursue or to substantially
delay pursuing the Company's paper-grade kaolin venture.
(c) The Company may not be able to find industry partners
for its oil and gas and mineral prospects.
(d) Proceeds from the Company's sale of certain assets may
be insufficient to purchase assets which produce income
sufficient to satisfy the Company's working capital
needs.
(e) The Company may be unable to purchase, or to purchase
at a profitable price, mineral assets which meet the
Company's operational criteria.
MANAGEMENT'S DISCUSSION OF RECENT AND PROPOSED
ASSET SALES AND OF THE COMPANY'S INTENDED COURSE OF ACTION
No Intent to Liquidate
The Company's proposed sale of its cement-grade kaolin mine, in
combination with its previous sale of significant oil and gas
overriding royalty interests, is not intended by management to
constitute a staged liquidation of the Company. Each transaction
has an independent basis, and both are intended to reduce reliance
on potentially risky assets while providing cash to develop other
Company assets and obtain a greater diversity of producing
properties. The sale of the Company's oil and gas overrides was
undertaken primarily to obviate what management felt was an
overconcentration of reserve value in a single well, caused by a
re-work of that well which significantly increased daily
production, and resulted in a commensurate increase in financial
value. Management did not consider it prudent to continue to hold
a significant portion of the value of its oil and gas reserves in
a single well, and risk a negative impact on its assets if the
benefits of the rework are not lasting.
The Company's sale of the cement-grade kaolin mine is intended to
secure a guaranteed amount of cash flow over the next five years.
Presently, the mine has a contract to sell kaolin only through the
end of 1997, to Lehigh Portland Cement Company, its only customer.
Management expects that Lehigh will offer to renew the contract but
cannot anticipate the terms of that offer or whether such terms
would permit the sale to be profitable. There are a number of
uncertainties regarding the future of the mine, including, but not
limited to, transportation difficulties, the present dependence on
a single customer, and potential market pressures which could act
to reduce margins on future kaolin sales. Management's goal is to
build the assets of the Company, which will require the application
Page 25
of capital, and to obviate unpredictability of cash flow from the
mine.
Consideration of Other Options for the Mine
Over the past three mining seasons, the Company has averaged
$206,108 in operating income (before the application of
administrative costs and corporate overhead) from its cement-grade
kaolin operations. However, the Company's contract with Lehigh
Portland Cement expires at December 31, 1997, and projected
operating income from the mine in 1997 is considerably below the
average of the past three years, due to increased costs of mining,
royalties and transportation. The Company's continuing efforts to
expand its customer base and obtain markets in a broader
geographical area have not succeeded to date. The Company has
recently bid on kaolin supply to a potential new customer in
Nebraska. However, a supplier in Missouri seems able to supply
this customer's needs with lower cost material in the short term.
However, the ample reserves on the Company's properties and the
Company's ability to supply kaolin with assurance over the long
term may enable the Company to gain foothold in this potential
market. Any such contract would not be as profitable as one with
a purchaser located closer to the mine. Although the Company has
not yet perfected a pelletized product, not determined with
certainty the cost of such a product, management believes the value
added by pelletizing, combined with cost savings in the handling
and storage of the product, could open up additional markets.
Reasons for the Sale
Not withstanding these possibilities, it cannot be guaranteed that
the Company's current contract will be renewed, nor can it be
determined whether the pricing under a new contract will provide
margins similar to those achieved in past years. Management is
concerned that its sole customer cannot be replaced if lost. The
Company believes that margins will be reduced in the future, due to
the inability to pass along increased costs in a more competitive
environment.
In addition, the Company is wholly dependent on rail service to
remain competitive. In the opinion of Nova management, the rail
line which serves the mine is in need of considerable
rehabilitation, and while rail service during the 1996 season,
which was a relatively dry year, was quite good, the rail line is
very susceptible to the deleterious effects of weather, in
particular wet spring conditions and seasonal rainfall, on its
ability to operate reliably and efficiently. The operator of the
rail line -- which purchased the line just two years ago -- has put
the line up for sale, creating uncertainty as to the adequacy of
maintenance should the sale not take place in the near future, as
the owner desires, and uncertainty as to the future rate structure
and maintenance program under a new owner. The Company believes
the risks of disruption in rail service will increase in future
years, unless a costly rehabilitation program is initiated. Such
a program, while increasing the reliability of rail service,
probably would increase rail costs as well. The rail line,
particularly the eastern portion of the line, which is the portion
primarily used by the Company, requires continual maintenance just
to offset the effects of wet weather and the inadequate maintenance
practices of past years. The railbed is deteriorating due to the
effects of age and weather. The majority of the ties are old, and
many are in need of replacement. The extremely harsh winter this
year, followed by Spring floods, exacerbates the situation. An
increase in the cost of rail service would reduce operating
margins, though it is unlikely rail costs would increase
sufficiently to render the mine uneconomic. If the rail line shut
down, kaolin could be trucked to another rail shipping point, but
the costs of trucking would reduce margins to a very low point, or
possibly eliminate operating margins altogether, unless such
increases could be passed along to the customer. Management
believes it is unlikely the rail line would be shut down.
Need to Obtain More Profitable Properties
The major portion of the Company's cash flow over the past several
years has been derived from kaolin sales. In operating the mine
this year, the Company may be required to enter into short-term
borrowing against receivables, as it did in 1996, to offset the
effects of the timing of transportation expenses and the collection
of customer receivables. Since the mine sale proceeds alone are
expected to generate more cash flow over the next two years than
would operation of the mine itself over that period of time, and
since all of the payments to be received from the sale over the
next five years are guaranteed, the sale will produce a source of
predictable capital for use in the development of the Company's
other assets.
Fairness of Sales Price
Management believes the consideration paid by NCA is fair and
appropriate for the following reasons: 1) the Company's present
contract expires at the end of 1997, and there is no assurance it
will be renewed, or if so renewed, whether the price structure of
the contract will prove margins similar to those achieved in the
past; 2) there are substantial uncertainties as to the cost and
availability of reliable rail service over the long term; 3) the
cash flow provided by the sale over the next two years is expected
to be greater than that which would be achieved were the present
Page 26
contract terms to extend over that period, and future payments are
guaranteed, whereas cash flows from operation of the mine beyond
the end of calendar year 1997 are not guaranteed; 4) the sale
price is substantially greater than the price the Company offered
to sell the mine for several years ago, in response to an
unsolicited request for a price at which the Company would be
willing to sell the mine, which price was rejected as too high by
the potential purchaser; 5) the sales price was arrived at
through arms-length negotiations with a sophisticated purchaser;
and 6) while the Company believes its reserves for reclamation to
be adequate under present law, the costs of reclamation and
environmental remediation in future years is difficult to project
due to the national trend for environmental legislation to place
increasingly costly demands on the mining industry.
Application of Proceeds and Future Operations
The Company will use some of the proceeds from its asset sales for
working capital. Management contemplates applying the majority of
the proceeds to the development of new business and acquisition of
new mineral properties, including (1) an attempt to identify and
acquire on a reasonable basis a kaolin or other similar industrial
minerals mine in a more favorable marketing area, where good
transportation facilities and ready access to numerous markets
provide a more favorable long-term environment in which to operate
and (2) identification of potential acquisition candidates,
ideally, small mineral companies or the mineral operations of
larger companies which could provide immediate cash flow and the
opportunity for future growth. The potential for liquidity
afforded by free-trading stock and an interest in the Nova
properties which offer the potential for significant development,
not otherwise available to the stockholders of potential
acquisition candidates, may facilitate Nova's ability to consummate
such acquisitions.
While management intends to pursue both options, the Company's
current projects in oil and gas exploration, paper-grade kaolin
exploration, and gold exploration will continue to be aggressively
pursued. The Company has two important oil and gas exploration
properties which are ready for immediate drilling, on at least one
of which it believes it can obtain an industry drilling commitment
in 1997. Both are being extensively marketed to the industry. If
either or both of these properties are drilled, and a commercial
discovery is made, the Company will need capital to conduct
development drilling. The mine sale proceeds would provide the
Company with the option to internally finance this development, or
to externally finance it on more favorable terms than would
otherwise be possible. Without liquid capital produced from the
asset sales, the Company's only option would be to further reduce
its interest in what would then be a successful project, which
would not be in its long-term best interests.
The Company's largest exploration project is its paper-grade kaolin
exploration project in southwestern Minnesota, in partnership with
U.S. Borax, Inc. Although the Company has no obligation to
participate financially in this project, Nova has the right to
propose its own program of exploration and to pay its share of that
program. The Company is considering making such a proposal
provided it can reasonably fund that effort if a cost/benefit
analysis is favorable. Management believes that acceleration of
the development of the Company's paper-grade kaolin assets may be
wise since this prospect has more potential than any of the
Company's other properties.
The Company holds 21,000 acres of State of Alaska leases offshore
Nome, Alaska. A portion of this lease position has been dedicated
to NovaChek Limited Liability Company, which was formed in 1996 to
attempt to put the dedicated properties into production. Delays in
construction of the dredge intended to be used to produce gold from
the NovaChek properties resulted in a capital deficiency which,
unless rectified, will prevent production operations from getting
underway for the 1997 mining season. The Company may use a portion
of the proceeds from asset sales, combined with capital from
outside investors, to fund start-up operations on the NovaChek
properties. In addition, the Company is negotiating with two other
entities to place portions of the Company's properties not
dedicated to NovaChek into production at no cost to the Company.
Management believes that the potential for the development of cash
flow from its Nome properties during the 1997 year, while not
assured, is quite good, and management intends to work diligently
toward achieving that goal.
Chek Technologies, which built the dredge and holds a 36%
membership interest in NovaChek Limited Liability Company, has
agreed to fund approximately $60,000 of the capital needed to
initiate operations for the 1997 season. Chek is financing all of
the modifications to the dredge, including fabrication and
installation of the modified parts, and is funding working capital
needed through approximately mid-June. Chek will receive an
increased membership interest in NovaChek in return for providing
this funding, on the same basis as that offered other investors.
Chek personnel have already begun operations in Nome to put the
dredge and associated equipment in good order so that mining
operations can be initiated in early June. While additional monies
may be raised to provide contingency funds for working capital, the
managers have determined that the funds required to initiate mining
operations and carry the project through at least the end of June
are approximately $100,000. Accordingly, the additional amount to
Page 27
be raised beyond Chek's commitment of $60,000 is $40,000. Nova and
Chek will each reduce their membership interest approximately 7.33%
so that NovaChek may issue that membership interest to investors to
raise the required funds without diluting the membership interests
of the original investors in NovaChek. Since Chek is providing
approximately $60,000 of the needed funds, their interest will
increase, on a net basis. The deadline for raising the
approximately $40,000 is mid-June. While there is no assurance
that these funds will be raised, the Company believes it is a
reasonable assumption that the required funds will be obtained. An
additional amount beyond $40,000 may be raised, if available, to
provide an additional working capital "cushion", however, the
managers believe that a total sum of $100,000 will be sufficient to
determine the economic viability of the NovaChek project.
There is no assurance that NovaChek will be successful in
establishing profitable operations. In the event NovaChek is not
successful, the members shall decide, based on the facts at the
time, whether to continue to attempt to establish profitable
operations, to dissolve NovaChek, or to attempt to sell NovaChek's
assets to an entity which would attempt to continue efforts to
successfully mine the properties, possibly retaining a royalty for
NovaChek. In the event NovaChek were dissolved, Nova would be
required to write off its investment in NovaChek of $189,000 as of
December 31, 1996, less whatever sums Nova could recover from it as
both a creditor and as a member, of its share of the assets of
NovaChek, which would be sold to the highest bidder.
Management has determined that no decrease in value of its
investment in NovaChek has occurred as of September 30, 1996,
December 31, 1996, and after December 31, 1996 since the barge and
all of the equipment was moved to Nome in 1996, the construction of
the barge was completed and the barge was operational at the end of
the 1996 mining season. Operations were then terminated due to the
onset of Winter. Following the end of the season, the barge and
all of the associated equipment was stored for the Winter at Nome.
Modifications (with a cost of less that $10,000 are being
implemented to improve the operational capability of the barge, and
the barge is being readied to initiate mining operations in early
June, 1997. Although there can be no assurance of success,
management has no reason to believe that these mining operations
will not be successful. Sufficient funding has been obtained to
conduct operations through mid-June, and while the provision of
additional funding is not assured, management believes such funding
will be obtained so that operations can be conducted at least
through the end of June, by which time the project should be self-
funding from gold production.
The general escalation in oil and gas prices which took place in
1996 has resulted in a resurgence in exploration activity in the
Rocky Mountain region. As the Company frees up lease acquisition
capital from its present prospects, it intends to acquire
additional prospective acreage in selected areas where it believes
it can put together drilling prospects.
The Company holds a 50% interest in 1,600 acres of State of Utah
oil and gas leases in the Great Salt Lake. The other 50% is held
by the McDonald Trust. The Company and the Trust have jointly been
attempting to interest an industry partner in developing the heavy
oil resources known to exist under these leases, which resources
were estimated by Amoco Production Company to exceed 90 million
barrels in place. Amoco estimated that 1% to 10% of the oil in
place might be recoverable. However, Amoco abandoned its effort to
put the leases into commercial production using the technology then
available, and dropped the leases in 1989.
Neither the Company nor the Trust has the expertise or the
financial ability to develop this heavy oil resource on its own.
In March, 1997, the Company and the Trust entered into an agreement
with Roaring River Resources LLC ("Roaring River"), an unaffiliated
third party, pursuant to which Roaring River was granted an option
to acquire the leases and attempt to put them into production,
using the improved technology now available. As is standard in the
industry, the Company and the Trust will each retain a 1.5%
overriding royalty if the option is exercised. Roaring River made
a payment of $5,000 on April 16, 1997 to maintain the option, and
a further payment of $20,000 must be made on or before July 15,
1997 to keep the option in effect. Roaring River has until
September 8, 1997 to exercise the option. If the option is
exercised, a final payment of $225,000 (of which the Company will
receive half) must be made. Roaring River intends to attempt to
put the properties into production, perhaps as soon as within one
year of completing the acquisition. At present, it cannot be
determined whether the option will be exercised, nor can it be
ascertained with certainty when, or if, the properties will be put
into production.
The Company's ability to continue as a going concern will depend on
its success in developing additional sources of cash flow. As
discussed, the Company will attempt to acquire new cash-flowing
assets in the industrial minerals segment, will evaluate potential
acquisitions or mergers, and may acquire oil and gas production
interests, using the capital derived from the sale of the cement-
grade kaolin mine. If the Company's efforts to obtain industry
drilling commitments on its oil and gas exploration properties are
successful, and commercial production is established on at least
one of these properties, the Company could realize cash flow which
will exceed that of the properties which were sold, particularly as
development proceeds. Sufficient funding has been obtained to
initiate gold production efforts and maintain them through mid-June
on the NovaChek properties, although some additional monies will be
required for additional working capital for NovaChek. This will
Page 28
enable operations to continue through the end of June, at which
point revenues from gold sales should enable the project to be
self-funding. If commercial gold production can be established in
the 1997 season, the Company should recover at least a portion of,
and perhaps all, of the funds it has advanced to NovaChek, and cash
flow from gold production will have been established.
There is no guarantee of success in any of these projects.
However, the Company's only hope of restoring financial viability
is to continue to pursue the development of its properties by third
parties at minimal cost to the Company and the acquisition of
producing properties which will supply needed cash flow. The
Company will generate more than sufficient cash over the twelve
months ended December 31, 1997 to support its operations during
that period, without any contribution of cash from the drilling
arrangements on any of its oil and gas prospects or from NovaChek.
However, without additional sources of cash flow, the Company will
not generate sufficient cash from operations alone to offset the
cost of operations. Proceeds from drilling arrangements on one or
more of its oil and gas prospects -all of which call for front-end
fees, and/or the establishment of commercial production on the
NovaChek properties, neither of which is assured, would generate
additional cash to be used to offset operating losses and fund the
elements of the Company's business plan.
The asset sales undertaken by the Company have and will reduce
operating risk, provide more assurance of near-term cash flow from
those assets than would otherwise be the case, and increase the
Company's capital in the near term. On a long-term basis,
Management must employ the proceeds from these asset sales in the
development of the Company's remaining assets and to acquire new
assets in order to generate cash flow to support operations and to
offset what would otherwise be the gradual liquidation of the
assets sold were the proceeds of those sales used simply to fund
operating losses. There can be no assurance that Management will
be successful in this endeavor.
NOVA NATURAL RESOURCES CORPORATION
SELECTED FINANCIAL DATA
1992 - 1996
1996 1995 1994 1993
1992
Net Sales 1,508,938 1,672,840 2,282,338 1,337,604
2,463,465
Income (Loss)
from operations (143,673) (421,716) (123,117) (186,169)
93,146
Income (Loss)
per common share
from operations (.02) (.07) (.02) (.03)
.02
Total Assets 1,545,920 1,355,691 2,362,062 2,319,505
2,122,381
Long-term
obligations 250,000 0 162,016 271,357
0
Cash Dividends 0 0 0 0
0
3/31/97 1996 1995
Book value .17 .24 .21
Earnings:Fixed Charges 0 0 0
Page 29
PART I. FINANCIAL INFORMATION
NOVA NATURAL RESOURCES CORPORATION
Condensed Balance Sheets (Note 1)
March 31, September
30,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash $ 49,525 $
79,827
Accounts receivable:
Kaolin operations(Note 5) 0
376,392
Oil and gas operations(Note 2) 13,038
24,867
Other 9,991
31,273
_______
_______
Total 23,029
432,532
Prepaid expenses 3,248
3,941
_______
_______
Total current assets 75,802
516,300
Mineral property interests, net of
accumulated depreciation and
depletion of 92,301 and 88,767(Note 6) 542,417 543,038
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,909,210 and
5,896,408(Note 2) 104,223
260,014
Furniture and technical equipment net
of accumulated depreciation of
132,380 and 131,953 38,852
38,851
Investment in and advances to NovaChek
Limited Liability Company(Note 4) 195,149
136,717
Deposits 51,550
51,000
_______
_______
$ 1,007,993 $
1,545,920
=========
=========
Page 30
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September
30,
1997 1996
(unaudited)
Current liabilities:
Accounts payable $ 46,866 $
282,087
Accrued liabilities 2,083
35,576
_______
_______
Total current liabilities 48,949
317,663
Convertible debentures 250,000
250,000
Note Payable(Note 3) 66,408
0
Discount on Note Payable(Note 3) (20,154)
0
_______
_______
Total long term liabilities 296,254
250,000
Total liabilities 345,203
567,663
_______
_______
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
5,000,000 shares authorized; 2,687,682
shares issued and outstanding in 1996,
1,792,267 in 1997(Note 3) 1,792,267
2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;6,496,188
shares issued and outstanding in 1996,
5,985,846 in 1997(Note 3) 598,585
649,619
Additional paid-in capital(Note 3) 7,204,873
6,454,296
Accumulated deficit (8,932,935)
(8,813,340)
__________
__________
Total stockholders' equity 662,790
978,257
Total Liabilities and Stockholders' Equity $1,007,993
$1,545,920
=========
=========
See accompanying notes to condensed financial statements.
Page 31
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Ended Six
Months Ended
March 31, March 31, March 31,
March 31,
1997 1996 1997
1996
________ ________ ________
________
REVENUES:
Mineral sales $ 1,913 $ 19,583 $ 193,469
$ 162,091
Oil and gas sales(Note 2) 36,106 58,366 77,722
103,004
________ ________ _______
_______
38,019 77,949 271,191
265,095
EXPENSES:
Mining costs, including
transportation and royalties 4,788 6,119 159,355
101,033
Oil and gas lease operating
including production taxes 27,166 24,247 57,581
56,862
Depletion, depreciation,
and amortization 7,271 16,471 16,763
34,617
Mineral property abandonments 0 0 60
0
General and administrative 102,530 103,012 214,750
195,205
141,755 149,849 448,509
387,717
_______ _______ _______
_______
Operating loss $ (103,736) $ (71,900) $ (177,318)$
(122,622)
========= ======== ========
=======
Other income(expenses):
Share of losses of
NovaChek LLC(Note 4) (5,529) 0 (11,819)
0
Interest income 2,690 1,402 5,866
3,501
Interest expense (4,547) 0 (12,880)
0
Gain on sale of assets(Note 2) 0 0 76,557
0
________ ________ ________
________
(7,386) 1,402 57,724
3,501
Net loss $ (111,122) $ (70,498) (119,594)
(119,121)
Loss per share(Note 7) $ (.02) $ (.01) $ (.02)$
(.02)
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,326,074 6,496,188 6,411,131
6,496,188
========= ========= =========
=========
See accompanying notes to condensed financial
statements.
Page 32
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Cash Flows (Note
1)
(Unaudited)
Three Months Ended
Six Months Ended
March 31, March 31,
March 31, March 31,
1997 1996
1997 1996
________ ________
________ ________
<S> <C> <C>
<C> <C>
Cash flows from operating activities:
Net income (loss) $ (111,122) $ (70,498)
$ (119,594) $ (119,121)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depletion and depreciation 7,271 16,471
16,763 34,618
Gain on sale of assets -- --
(76,557) --
Change in assets and liabilities:
(Increase) decrease in accounts
receivable 23,931 (77,401)
409,503 150,679
(Increase) decrease in prepaid
expenses 2,782 517
693 (3,186)
(Decrease) increase in accounts
payable (19,043) 165,993
(235,221) 44,350
(Increase) decrease in deposits -- 2,058
(550) --
(Decrease) increase in accrued
liabilities (8,334) --
(33,493) --
_______ _______
_______ _______
Net cash provided (used) by
operating activities (104,515) 37,140
(38,456) 107,340
_______ _______
_______ _______
Cash flows from investing activities:
Proceeds from sale of assets -- --
229,957 --
Investment in Limited Liability Co. (6,206) (150,000)
(58,432) (150,000)
Additions to property and
equipment (19,588) (2,691)
(13,752) (9,308)
_______ _______
_______ _______
Net cash provided (used) by
investing activities (25,794) (152,691)
157,773 (159,308)
_______ _______
_______ _______
Cash flows from financing activities:
Purchase of Kane stock (150,000) --
(150,000) --
Issuance of debentures -- 203,125
-- 203,125
Issuance of short tern note -- 100,000
-- 100,000
Discount on note payable 381 --
381 --
_______ _______
_______ _______
Net cash provided (used) by
financing activities (149,619) 303,125
(149,619) 303,125
_______ _______
_______ _______
Increase (decrease) in cash (279,928) 187,574
(30,302) 251,157
Cash beginning of period 329,453 134,403
79,827 70,820
_______ _______
_______ _______
Cash end of period $ 49,525 $ 321,977
$ 49,525 $ 321,977
<FN> =======
======= ======= =======
See accompanying notes to condensed financial
statements.
</FN>
</TABLE>
Page 33
NOVA NATURAL RESOURCES CORPORATION
Notes to Condensed Financial Statements
Six Months Ended March 31, 1997 and 1996
(1) The condensed financial statements included herein are
unaudited. In
the opinion of management, all adjustments, consisting of normal
recurring
accruals, have been made which are necessary for a fair
presentation of the
financial position of the Company at March 31, 1997 and 1996 and
the results
of operations for the three and six month periods ended March 31,
1997 and
1996. Certain amounts have been reclassified for comparability with
the 1996
presentation. Quarterly results are not necessarily indicative of
expected
annual results because of fluctuations in the price received for
oil and gas
products, demand for natural gas, kaolin and other factors. For a
more
complete understanding of the Company's operations and financial
position,
reference is made to Management's Discussion and Analysis of
Financial
Condition and Results of Operations herein and the financial
statements of
the Company, and related notes thereto, filed with the Company's
annual
report on Form 10-KSB for the year ended September 30, 1996,
previously filed
with the Securities and Exchange Commission.
(2) On November 14, 1996, the Registrant sold at an auction
conducted by the
Oil & Gas Asset Clearinghouse in Houston Texas several oil and gas
producing
assets and leasehold interests, primarily overriding royalty
interests in
producing oil & gas wells in the Wyoming Overthrust Belt. Proceeds
from this
sale, net of commissions and direct selling costs were $229,957.
The gain on
the sale was $76,550. The sale was effective as of November 1,
1996. The
bulk of the interests were sold to a Denver, Colorado based firm
not
affiliated with the Company, which was the successful bidder among
a group of
bidders at the auction for the greater portion of the oil & gas
assets and
interests referred to above.
(3) In December, 1986 the Company issued 2,687,682 shares of
Convertible
Preferred Stock to the Company's Chairman and to a principal
shareholder in
settlement of $1,700,000 in convertible debentures plus related
accrued
interest of $426,682 and $561,000 in bank debt repaid by the
Chairman and the
principal shareholder on behalf of the Company. The Preferred
Stock is
convertible into 5,375,364 shares of the Company's Common Stock.
The
Preferred Shares contain 2 for 1 voting privileges, have a $1.00
liquidation
preference and have no stated dividend rate. In February, 1997 the
Company
repurchased 510,342 shares of common stock and 895,415 shares of
convertible
preferred stock from a major shareholder in settlement of a dispute
for
$150,000 in cash to be paid at closing, and additional payments
based on
revenues from either the operation of or the sale of its
cement-grade kaolin
mine of up to an aggregate value of $70,008 over a period of years.
This
note is a non-interest bearing note. The Company has accounted for
this note
as a Note Payable of $66,408 to account for the expenses that will
be
subtracted from this note, and a Discount on Note Payable of
$20,535 to
account for the present value of the payments of $45,873. The
Common Stock
and Preferred Stock were carried on the Company's books at a price
higher
than the purchase price. This difference was credited to
Additional Paid in
Capital. The Company may also purchase a portion of its common
stock in the
event of the sale of its kaolin mine upon the assertion of
appraisal rights
by shareholders who dissent from a vote to approve such sale.
(4) On April 1, 1996 the Company organized NovaChek to recover
precious
metals from off-shore mining leases located near Nome, Alaska,
utilizing a
dredging operation.
The Company contributed mineral leasehold interests and $118,750 in
cash for
a 42% voting interest in NovaChek. An additional 4.125% interest
in NovaChek
is held by affiliates of the Company. NovaChek is managed by the
Company and
Chek Technologies and Exploration, LLC (Chek) which owns a 38.75%
interest in
NovaChek. The Company is entitled to receive an annual management
fee of
$65,000 from NovaChek. To date, no management fee has been
collected or
recorded by the Company.
A number of significant decisions require the approval of both the
Company
and Chek. Such decisions include, but are not limited to certain
borrowings,
capital expenditures and asset disposals.
NovaChek has not commenced dredging operations on a commercial
basis, Company
management estimates NovaChek will require approximately $100,000
during
fiscal 1997 to ready the dredge for 1997 operations, and fund
operations
through the end of June, which should be sufficient to enable the
project to
be self-sufficient, provided commercial gold production can be
obtained.
Chek Technologies is investing approximately $60,000 of the needed
funds, and
approximately $40,000 of additional funds must be raised. There is
no
assurance that these funds can be raised, nor that the dredge can
be operated
economically. Accordingly, the Company's ability to recover its
investment
in NovaChek is dependent upon the results of future development,
including
obtaining financing for such development. The availability of
financing and
the results of such future development are not presently
determinable.
Accordingly, the financial statements do not include any
adjustments relating
to the recoverability of the Company's investment such costs that
might
result from the outcome of these uncertainties.
Page 34
In accordance with the NovaChek revised operating agreement, which
must be
approved by a majority of the members, which is expected, the first
$250,000
in distributions will be allocated to investors other than the
Company and
Chek based upon their relative voting percentages. The next
$150,000 in
distributions will be made to the Company. The Company, Chek and
remaining
investors will receive 19.13%, 14.2% and 66.67%, respectively, of
the next
$500,000 in distributions and 27%, 23% and 50%, respectively, of
the
following $500,000 in distributions. After these initial
preferential
distributions are made, all subsequent distributions will be
allocated based
on voting percentages.
The condensed balance sheet and statement of operations of NovaChek
at March
31, 1997 and for the period from January 1, 1997 through March 31,
1997 are
presented below.
BALANCE SHEET OF NOVACHEK
Cash and other assets $ 8,128
Mineral property interests 45,000
Delay Rentals 42,822
Mining and related equipment, net 289,134
________
Total assets $385,084
Accounts payable $102,333
Short term notes payable 39,600
Stockholders' equity 243,151
________
Total liabilities and stockholders'
equity $385,084
STATEMENT OF OPERATIONS OF NOVACHEK
Sales $ 0
Other income 5
Marketing expense 0
Operating expenses (13,170)
________
Net Loss $(13,165)
(5) Kaolin receivables of $376,392 were collected during the
quarter ended
December 31, 1997. Due to the seasonal nature of the kaolin
business, no
sales were made after this period until April, 1997.
(6) The Company has entered into an agreement for the sale of its
kaolin
mine. If the sale is approved by shareholders, the Company will
receive a
total of $700,000 for the Cement Kaolin Mine, including $125,000 in
cash at
closing, an aggregate of $450,000 in non-interest bearing semi-annual
installments on August 15 and December 15 of each year until August
15, 2001,
and a final payment of $125,000 on December 15, 2001. Up to
$70,008 of these
proceeds will be paid to Thomas F. Kane, a former director, as part
of the
Company's purchase of his Common and Preferred Stock, over the same
period as
the NCA payments. The Company will retain both a mortgage and a
security
interest covering the property being sold in order to secure full
payment of
the purchase price. See Managements Discussion and Analysis for
further
details concerning this transaction.
(7) Net loss per common share is determined by dividing net loss
attributable to common stock by the weighted average number of
common shares
outstanding during each period. A fully diluted loss per share is
not
computed because conversion of the Preferred Shares mentioned
above, and
outstanding options would be antidilutive.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Management's discussion of anticipated future operations contains
predictions
and projections which may constitute forward looking statements.
The Private
Securities Litigation Reform Act of 1995, including provisions
contained in
Section 21E of the Securities & Exchange Act of 1934, provides a
safe harbor
for forward-looking statements. In order to comply with the terms
of the
safe harbor, the Company notes that a variety of factors could
cause the
Company's actual results and experience to differ materially from
the
anticipated results of other expectations expressed in the
Company's forward-
looking statements. The risks and uncertainties that may affect
the
Page 35
operations, performance, development and results of the Company's
business
include the following:
(a) The Company may not be able to obtain the additional
funding necessary to continue operations in its Nome
gold prospect and/or the funds actually necessary to
operate that project may be significantly greater than
those anticipated by management.
(b) Borax may determine not to pursue or to substantially
delay pursuing the Company's paper-grade kaolin venture.
(c) The Company may not be able to find industry partners
for its oil and gas and mineral prospects.
(d) Proceeds from the Company's sale of certain assets may
be insufficient to purchase assets which produce income
sufficient to satisfy the Company's working capital
needs.
(e) The Company may be unable to purchase, or to purchase
at a profitable price, mineral assets which meet the
Company's operational criteria.
RESULTS OF OPERATIONS
The Company realized net losses for the three month period and
six
month period ended March 31, 1997 of $111,122 and $119,954,
respectively,
compared to net losses of $70,498 and $119,121 for the same periods
in
1996.
Mineral sales, all of which in the three month fiscal period
were
royalties on gravel sales, decreased $17,670 to $1,913 for the
three months
ended March 31, 1997 compared to mineral sales of $19,583 for the
same
period in 1996. The difference between the 1997 period and the
1996 period
is wholly due to a more accurate accrual of gravel sales royalties
in the
first three months of fiscal 1997 than in the first three months of
the
prior fiscal year. For the six months ended March 31, 1997 and
1996,
mineral product sales were $193,469 and $162,091, respectively.
The
increase in the 1997 period reflects higher kaolin sales due to
increased
kaolin purchases by the Company's sole customer and more efficient
kaolin
shipments than in the comparable fiscal period. Poor railcar
turnaround
times in the 1996 period limited the Company's ability to supply
customer
needs in that period. This was corrected in the 1997 period.
Mining
costs, including transportation and royalties in the 1997 six month
period
were higher as a percent of sales than in the 1996 period. Costs
increased
at a more rapid rate than prices due to higher transportation costs
and
timing differences in the recognition of direct mining costs.
Oil and gas sales for the three months and six months ended
March 31,
1997 decreased $22,260 and $25,282, respectively, to $36,106 and
$77,722
compared to $58,366 and $103,004 for the three months and six
months ended
March 31, 1996. The Company sold several oil & gas producing
assets as of
November 1, 1996, primarily overriding royalty interests in
producing oil
& gas wells in the Wyoming Overthrust Belt. In addition, the
Company sold
a small portion of its oil production in September, 1996. The
decrease in
oil and gas sales is primarily attributable to the lower volume of
oil and
gas produced net to the Company's interest as a result of these
sales,
which more than offset the positive effect of substantially higher
oil and
gas prices in the fiscal periods compared to the comparable
periods. The
sales volumes and average sales prices during the periods were as
follows:
Three Months Ended
March 31, 1997 March
31,1996
Sales
Oil (bbls) 1,441
2,724
Gas (MCF) 3,667
17,557
Average Sales Price
Oil ($/Bbl) $19.00
$14.61
Gas ($/MCF) $ 2.30 $
1.06
Six Months Ended
March 31, 1997 March
31,1996
Sales
Oil (bbls) 2,805
4,764
Gas (MCF) 12,876
28,337
Average Sales Price
Oil ($/Bbl) $19.20
$15.67
Gas ($/MCF) $ 1.49 $
0.96
Page 36
Mining costs, including transportation and royalties were
$4,788 for
the three months ended March 31, 1997 compared to $6,119 for the
same
period in 1996. The decrease is due to timing differences in the
accrual
of gravel royalties Mining costs were $159,355 for the six months
ended
March 31, 1997 compared to $101,033 for the same period in 1996.
The
increase in mining costs in the six months is due to the increase
in kaolin
production and sales in the 1997 period. Mining costs were higher
as a
percent of sales than in the 1996 period. Kaolin mining costs
increased at
a more rapid rate than prices, due to higher transportation costs
and
timing differences in the recognition of direct mining costs.
Oil and Gas lease operating expenses including production
taxes
increased $2,919 and $719 for the three months and six months ended
March
31, 1997 as compared to 1996. The increase is due primarily to
increased
workover expenses in the 1997 period. The production sale in
November was
a sale of royalty interests, which have a much lower level of
associated
production costs than working interest production. Hence, the sale
did not
reduce production costs in proportion to the reduction in oil and
gas sales
revenue resultant from the sale.
General and administrative expenses decreased slightly for the
three
months ended March 31, 1997 as compared to the same period in 1996.
These
expenses increased $19,545 for the six month period. The decrease
in the
three month period was primarily due to close attention to
administrative
overhead expenses, which offset higher legal expenses, primarily
those
associated with the planned sale of the Company's kaolin mine.
Increased
legal expenses and accounting fees also were primarily responsible
for the
increase in general and administrative expenses in the six month
period.
Legal expenses were higher due to the negotiations and associated
legal
documents required by the planned sale of the Company's kaolin
mine, and
connected with the settlement of a dispute with a major
shareholder. Both
of these events are non-recurring, and neither impacted the 1996
period.
Accounting expenses were higher in the 1997 period primarily due to
audit
work relating to the Company's investment in NovaChek Limited
Liability
Company, which had not been formed in the 1996 period.
Depletion, depreciation, and amortization decreased 56% to
$7,271 and
52% to $16,763, respectively, in the three months and six months
ended
March 31, 1997, compared to $16,471 and $34,617 in the fiscal 1996
period.
This decrease was primarily the result of the sale of producing
assets,
which substantially reduced the full-cost pool.
The Company's share of losses of NovaChek Limited Liability
Company in
the three months and six months ended March 31, 1997 were $5,529
and
$11,819, respectively. NovaChek Limited Liability Company had not
been
formed in the 1996 fiscal periods.
Interest income increased to $2,690 and $5,866 in the three
months and
six months ended March 31, 1997, respectively, compared to $1,402
and
$3,501 in the 1996 periods, reflecting more cash on hand invested
in
short-term obligations. Interest expense in the three months and
six
months ended March 31, 1997 increased from zero to $4,547 and
$12,880,
respectively, due to the issuance of interest-bearing convertible
subordinated debentures in the third quarter of fiscal 1996. There
were no
such debentures outstanding in the comparable 1996 fiscal periods.
A gain
on the sale of producing oil and gas assets of $76,557 was realized
in the
six months ended March 31, 1997. There were no asset sales in the
1996
period.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary source of cash flow during the six
months ended
March 31, 1997 was the collection of accounts receivable and
proceeds from
the sale of assets. Net proceeds from the sale of oil and gas
assets of
$229,957 were realized in the six months ended March 31, 1997.
There were
no such asset sales in the 1996 period. Cash used by operations
totaled
$38,456 for the six month period ended March 31, 1997 as compared
to cash
provided by operations of $107,340 for the same period in 1996.
Although
revenues increased $6,096 in the 1997 period, expenses were $60,792
higher,
due primarily to higher mining costs and an increase in general and
administrative costs. Additionally, accounts payable decreased
$235,221 in
the 1997 period, compared to an increase in the accounts payable in
the
1996 period of $44,350, a difference between the two periods of
$279,571,
more than offsetting the $258,824 increase in the collection of
receivables
in the 1997 period as compared to the 1996 period. Cash and cash
equivalents for the period decreased $30,302 resulting in cash on
hand at
March 31, 1997 of $49,925, compared to cash on hand at March 31,
1996 of
$321,977. The Company purchased 510,342 shares of common stock and
895,415
shares of convertible preferred stock from a major shareholder in
settlement of a dispute for $150,000 in cash (plus additional
future
consideration) in the 1997 six month period. No such stock
purchase took
place in the 1996 period. In addition, in the 1996 period, the
Company
issued $203,125 of convertible subordinated debentures and issued
a short
term note for $100,000, which two events, net of a $150,000
investment in
NovaChek Limited Liability Company, were chiefly responsible for
the
increase in cash in the 1996 period.
Page 37
CAPITAL RESOURCES-UTILIZATION OF CAPITAL
For the six month period ended March 31, 1997, the Company
reduced
accounts payable by $235,221. Accrued liabilities decreased
$33,493.
Additions to property and equipment were $13,752, and investment in
and
advances to NovaChek Limited Liability Company were $58,432,
resulting in
cash provided by investing activities, net of $229,957 from the
sale of
assets, of $157,773. In the comparable period, net cash used by
investing
activities was $159,308, primarily due to the $150,000 investment
in
NovaChek Limited Liability Company. All funds for capital
expenditures for
the remainder of the year are expected to be provided by proceeds
from
operation of the kaolin mine until closing of the sale of the mine,
from
the sale of the Company's kaolin mine, if approved by the Company's
shareholders, from short-term borrowings, from other operating cash
flow,
and from existing cash balances. In connection with the repurchase
of
stock from a major shareholder in settlement of a dispute for
$150,000 in
cash, additional payments based on revenues from either the
operation of or
the sale of the Company's cement-grade kaolin mine of up to an
aggregate
value of $70,008 must be paid over a period of years. The Company
anticipates the portion of such payments which may be due in the
1997
fiscal year could amount to approximately $19,000. The Company may
also
purchase a portion of its common stock in the event the sale of its
kaolin
mine is approved by shareholders, which is likely, by offering
shareholders
dissenter's rights. While it cannot be determined in advance how
many
shares might be purchased, nor the exact price of such shares,
assuming a
purchase price of $.05 per share, and the purchase of from 800,000
to
2,000,000 shares (the number of shares to be purchased will be
lowered by
the fact that none of the principals of the Company will be selling
any of
their shares),the Company estimates the cost of such repurchase of
stock at
between $40,000 and $100,000. It is the Company's present
intention to
finance such repurchase from internal cash flow and cash resources,
but the
Company may offer to sell preferred and/or common stock in a
private
placement to replace all or a portion of these funds and provide
additional
capital to acquire new sources of cash flow.
LIQUIDITY
At March 31, 1997, the Company's working capital surplus
totaled
$26,853 as compared to a working capital surplus of $198,637 at
September
30, 1996. Liquidity for the six months ended March 31, 1997 was
provided
by proceeds from the November sale of oil & gas producing assets
and
leasehold interests, primarily overriding royalty interests in
producing
oil & gas wells in the Wyoming Overthrust Belt and by the
collection of
receivables. However, liquidity was reduced by the $150,000 stock
repurchase, the $119,594 operating loss, reductions in accounts
payable and
accrued liabilities, by investment in NovaChek Limited Liability
Company,
and additions to property and equipment. Both the $150,000 stock
repurchase and the investment in NovaChek are non-recurring events.
Based on cash flow projections through 1997, it is
anticipated that
the Company will have adequate cash resources if it continues to
operate at
current levels, although short-term borrowings will have to be made
due to
timing differences in the payment of kaolin mining costs and the
receipt of
payment for kaolin sales. Because the Company has sold a portion
of its
oil and gas producing assets, and oil and gas sales from its other
properties continue to decline, and the Company has only one
customer for
its kaolin, the cash flow generated by oil, gas and kaolin sales is
not
sufficient to generate positive cash flow. In the event the sale
of its
kaolin mine takes place, cash resources will be enhanced over the
next
twelve months, and further payments pursuant to the sale will be
received
over the next five years, although the Company may have to expend
a portion
of its cash resources to repurchase all shares tendered pursuant to
the
offering of dissenters' rights. The Company has permitted a gravel
pit on
two leases in Minnesota. A local contractor mined and marketed the
gravel
in 1996 and paid the Company a royalty based on gravel sold. It is
anticipated that further gravel royalties may be realized from this
property in 1997. The Company will aggressively seek other sources
of cash
flow in 1997, including the acquisition of assets or of other
companies,
mergers, and private and/or public financing.
The Company used $150,000 of the proceeds from the sale of its
overriding
royalty interests to purchase the shares of common and preferred
stock held by
Thomas Kane. The rest of the proceeds from the sale of the royalty
interests
were added to working capital. Up to $70,008 in additional funds
will be
required in connection with the purchase of Mr. Kane's stock over
the next five
years, (an estimated $19,000 in fiscal 1997). These amounts will
be funded
from operating cash flow, working capital, and cash payments from
the sale of
the cement-grade kaolin mine, as needed.
Management contemplates applying the majority of the proceeds
from the sale
of the cement-grade kaolin mine to the development of new business
and the
acquisition of new mineral properties, including (1) an attempt to
identify and
acquire on a reasonable basis a kaolin or other similar industrial
minerals mine
in a more favorable marketing area, where good transportation
facilities and
ready access to numerous markets provide a more favorable long-term
environment in which to operate and (2) identification of potential
acquisition
candidates, ideally small mineral companies or the mineral
operations of
larger companies which could provide immediate cash flow and the
opportunity
for future growth. The potential for liquidity afforded by
free-trading stock
Page 38
and an interest in Nova properties which offer the potential for
significant
development, not otherwise available to the stockholders of
potential
acquisition candidates, may facilitate Nova's ability to consummate
such
acquisitions. The majority of the $700,000 in proceeds of the sale
of the
cement-grade kaolin mine and the recovery of $50,000 in reclamation
deposits
will be used to replace the cash flow which would otherwise have
been
provided by continued operation of the kaolin mine and to offset
cash flow
deficits. Since cash proceeds from the mine sale to be received in
the calendar
year ended December 31, 1997 plus reclamation recoveries will
amount to
$275,000, with the balance to be received over the five years ended
December
31, 2001, the Company may be required to borrow against these
future cash
receivables or establish a payment schedule coincident with receipt
of these
funds in order to acquire new assets.
The general escalation in oil and gas prices which took place
in 1996 has
resulted in a resurgence in exploration activity in the Rocky
Mountain region.
As the Company frees up lease acquisition capital from its present
prospects,
it intends to acquire additional prospective acreage in selected
areas where it
believes it can put together drilling prospects.
The Company holds a 50% interest in 1600 acres of State of
Utah oil and gas
leases in the Great Salt Lake. The other 50% is held by the
McDonald Trust.
The Company and the Trust have jointly been attempting to interest
an industry
partner in developing the heavy oil resources known to exist under
these
leases, which resources were estimated by Amoco Production Company
to
exceed 90 million barrels in place. Amoco estimated that 1% to 10%
of the oil
in place might be recoverable. However, Amoco abandoned its effort
to put the
leases into commercial production using the technology then
available, and
dropped the leases in 1989.
Neither the Company nor the Trust has the expertise or the
financial
ability to develop this heavy oil resource on its own. In March,
1997, the
Company and the Trust entered into an agreement with Roaring River
Resources
LLC (Roaring River"), an unaffiliated third party, pursuant to
which Roaring
River was granted an option to acquire the leases and attempt to
put them into
production, using the improved technology now available. The
Company and the
Trust will each retain a 1.5% overriding royalty if the option is
exercised.
Roaring River made a payment of $5,000 on April 16, 1997 to
maintain the
option, and a further payment of $20,000 must be made on or before
July 15,
1997 to keep the option in effect. Roaring River has until
September 8, 1997
to exercise the option. If the option is exercised, a final
payment of $225,000
(of which the Company will receive half) must be made. At present,
it cannot
be determined whether the option will be exercised, nor can it be
ascertained
with certainty when, or if, the properties will be put into
production.
The Company's ability to continue as a going concern will
depend on its
success in developing additional sources of cash flow. As
discussed,
the Company will attempt to acquire new cash-flowing assets in the
industrial
minerals segment, will evaluate potential acquisitions or mergers,
and may
acquire oil and gas production interests, using the capital derived
from the
sale of the cement-grade kaolin mine. The Company may also attempt
to raise
capital through a private placement of stock. If the Company's
efforts to
obtain industry drilling commitments on its oil and gas exploration
properties
are successful, and commercial production is established on at
least one of
these properties, the Company could realize cash flow exceeding
that of the oil
and gas properties which were sold, particularly as development
proceeds.
NovaChek has raised sufficient funding to initiate gold production
efforts
and maintain them through at least mid-June on the NovaChek
properties, and is
very close to raising monies required to continue through the end
of June, at
which point revenues from gold sales should enable the project to
be
self-funding, if the mining effort proves successful. If
commercial gold
production can be established in the 1997 season, the Company
should recover at
least a portion of, and perhaps all, of the funds it has advanced
to NovaChek,
and cash flow from gold production will have been established.
There is no guarantee of success in any of these projects.
The Company's
plan to restore financial viability is to continue to pursue the
development
of its properties by third parties at minimal cost to the Company
and to
vigorously pursue the acquisition of producing properties which
will supply
needed cash flow. The Company will generate more than sufficient
cash over the
twelve months ended March 31, 1998 to support its operations during
that
period, without any contribution of cash from the drilling
arrangements on any
of its oil and gas prospects or from NovaChek. However, without
additional
sources of cash flow, the Company will not generate sufficient cash
from
operations alone to offset the cost of operations. Although the
Company can
internally fund the monies needed to repurchase stock pursuant to
the offer
of dissenter's rights, the capital so used may be replaced by the
proceeds of
a private placement, in order to assure that working capital is
adequate.
Proceeds from the exercise of the option granted to sell its
working interest
in its Great Salt Lake prospect, and/or drilling arrangements on
one or more of
its oil and gas prospects -- all of which call for front-end fees,
and/or the
establishment of commercial production on the NovaChek properties,
none of which
events are assured, would generate additional cash to be used to
offset
operating losses and fund the elements of the Company's business
plan.
The asset sales undertaken by the Company have and will reduce
operating
risk, provide more assurance of near-term cash flow from those
assets than
would otherwise be the case, and increase the Company's capital in
the near
Page 39
term. On a long-term basis, Management must employ the proceeds
from these
asset sales in the development of the Company's remaining assets
and to
acquire new assets in order to generate cash flow to support
operations and to
offset what would otherwise be the gradual liquidation of the
assets sold were
the proceeds of those sales used simply to fund operating losses.
There can be
no assurance that Management will be successful in this endeavor.
SALE OF THE COMPANY'S KAOLIN MINE
Pursuant to a contract dated January 25, 1997, the Company
agreed,
subject to shareholder approval, to sell its cement-grade kaolin
mining
operations and property (the "Cement Kaolin Mine") near Redwood
Falls,
Minnesota, to Northern Con-Agg, Inc., an unaffiliated Minnesota
corporation. A portion of the Cement Kaolin Mine is located on
lands which
are currently subject to a joint venture between the Company and
U.S. Borax
Inc. ("Borax"), which was formed in 1993 primarily to explore,
develop and
produce high quality paper-grade kaolin. No paper-grade kaolin has
yet
been sold from the joint venture property. Borax has agreed to
release the
portion of the paper-grade kaolin property occupied by the Cement
Kaolin
Mine from the joint venture to permit the Company's sale of the
mine to
NCA. The Company will be selling all of its cement-grade kaolin
operations
to NCA, while retaining its interest in the paper-grade joint
venture. The
Cement Kaolin Mine encompasses 314 acres, and the paper-grade kaolin
property retained by the Company encompasses 4628.59 acres. After
the sale
to NCA, ownership of the cement-grade kaolin property will be
separate and
distinct from ownership of the paper-grade kaolin property. Except
for the
inclusion of an immaterial portion of the paper grade kaolin
prospect in
the sale to NCA, the sale will have no impact on the Company's
joint
venture with Borax.
Under the terms of the purchase and sale agreement with NCA
(the "NCA
Agreement"), NCA will acquire approximately 78 fee acres owned by
the
Company and an additional 236 acres leased by the Company, as well
as the
inventory, equipment, contracts, permits and other personal
property held
by the Company in connection with these cement-grade mining
operations.
NCA proposes to continue the current cement-grade operations of the
Company, and has agreed to turn over to the Company any profits
which it
may earn during a 21 year period after the date of closing as a
result of
sales of kaolin produced from the property to paper manufacturers.
The
Company agrees that, if it or any joint venture of which it is a
member
sells kaolin to the cement-industry in Minnesota, Iowa, North
Dakota, South
Dakota or Wisconsin during a five year period following the
closing, the
Company it will pay to NCA the sum of $30,000 for each year in
which any
sale occurs.
NCA will pay a total of $700,000 to the Company for the Cement
Kaolin
Mine, including $125,000 in cash at closing, an aggregate of
$450,000 in
non-interest bearing semi-annual installments on August 15 and
December 15
of each year until August 15, 2001, and a final payment of $125,000
on
December 15, 2001. Up to $70,008 of these proceeds will be paid to
Thomas
F. Kane, a former director, as part of the Company's purchase of
his Common
and Preferred Stock, over the same period as the NCA payments. The
Company
will retain both a mortgage and a security interest covering the
property
being sold to NCA in order to secure full payment of the purchase
price.
NCA will assume liability for all existing contracts relating to
the
property, although the Company will continue to have liability for
any
conduct before the closing date and, any contracts not disclosed to
NCA.
Included among the contracts assumed by NCA is an agreement with
Union
Pacific Railroad which requires the Company to pay the railroad for
a
minimum usage of 300 rail cars, whether actually used by the
Company. NCA
will assume this obligation and Nova will have no further liability
for
railcar usage. The Company believes that it has disclosed all
pertinent
contracts to NCA. The Company intends to secure appropriate lessor
consents to eliminate any liability to the lessor following
assignment of
the lease.
If NCA expands the current cement-grade mining operations, the
lessor
of the Mine Property will have to be relocated from her home on the
property, which recently has been appraised at $25,000. When this
occurs,
NCA will pay the first $25,000 of relocation costs, Nova will pay
50% of
the costs, if any, between $25,000 and $75,000, and Nova will pay
the
entire cost, if any, in excess of $75,000. Shortly following
execution of
the NCA Agreement, the Company incurred approximately $5,800 in
additional
drilling and analysis costs to meet requests of NCA for additional
exploration data.
Prior to the NCA Agreement, NCA had no relationship to the
Company,
its officers or directors. The Company has not secured an
independent
opinion concerning the fairness of the consideration to be paid by
NCA, but
the Company's officers believe such consideration to be appropriate
based
upon the Company's prior net income from the property, the
anticipated
kaolin reserves, and the demand for cement-grade kaolin in the
area. There
will be no change in the rights of security holders of the Company
as a
result of this vote, except with respect to the holders of
Convertible
Debentures, as described below. The Company is not in default with
respect
to obligations under any of its securities.
Page 40
If shareholder approval for the sale of the cement-grade
kaolin mine
is not received, Nova will continue to operate the mine as it has
in the
past and continue to pursue additional customers and markets for
the
kaolin. The Company would seek to retain its current customer and
attempt
to obtain business from a previous customer. Any additional
customers
could not be obtained for the current mining season. The Company
would
consider other alternatives, such as entering into joint venture
arrangements for the marketing and sale of kaolin, possibly with
the
company which desires to purchase the mine, and/or other companies
which
supply materials to the cement industry. If shareholder approval
of the
sale is not obtained, approximately $20,000 in transactional costs
will not
be recovered.
Potential Impact of the Proposed Sale on the Company's Convertible
Debentures
The Colorado Business Corporation Act (the "Act") requires
approval of
the majority of shares voting at a duly noticed and conducted
meeting for
the sale of all or substantially all of a corporation's assets
outside of
its normal course of business. The Company has determined that,
while the
Cement Kaolin Mine is a principal asset, because the remaining
assets and
business are not insubstantial and proceeds of the sale are
intended to be
used to continue the Company's business in the same fashion, a
shareholder
vote is not required by law. Nonetheless, since the Cement Kaolin
Mine
sale is a material transaction, the Company believes that its
shareholders
should be informed about and vote upon the approval of that transaction.
As part of its organization and capitalization of NovaChek
Limited
Liability Company, an Idaho limited liability company formed to
develop
part of the Company's gold prospect in Nome, Alaska, the Company
sold an
aggregate of $250,000 of convertible subordinated debentures (the
"Debentures"). The Debentures require semi-annual payments of
interest and
payment of principal and accrued interest on April 1, 2001. At the
option
of its holder, each Debenture matures and is fully payable upon the
Company's "sale, exchange, base or other disposition of all or
substantially all of [its] assets." Notwithstanding the Company's
belief
that the sale of the Cement Kaolin Mine is not such an event, upon
litigation brought by a Debenture holder, a court may disagree and
order
early payment of the Debentures. Such a payment would have a
materially
adverse impact on the Company, require the use of proceeds from the
Mine
sale and threaten the ongoing viability of the Company.
Vote Upon Sale
The affirmative vote by a majority of all of the shares of
Common and
Preferred Stock entitled to vote as of June 27 , 1997 is
required for
approval of the agreement to sell the Cement Kaolin Mine.
FUTURE TRENDS
Kaolin sales are seasonal in nature and the mining of kaolin
is
dependent on favorable weather conditions, demand by cement
companies for
this product, and other factors over which the Company has no
control. The
Company has a sales contract with a cement company which expires in
December, 1997. The fact that the Company has only one purchaser
for its
kaolin has had and will continue to have a significant negative
impact on
the Company's cash flow and operations. In addition, the short
line
railroad which directly serves the mine is in need of
rehabilitation to
increase the reliability of the line and make it less susceptible
to
weather delays. There is no such rehabilitation planned at
present.
However, rehabilitation of this line has been needed for a number
of years,
and an acceptable level of service has been maintained on the line
through
normal maintenance procedures. This rail line has been offered
for sale
by the owner/operator, and the level of service which will be
offered by
the new owner, should a sale take place, cannot be determined.
The Company will use some of the proceeds from its asset sales
for
working capital. Management contemplates applying the majority of
the
proceeds to the development of new business and acquisition of new
mineral
properties, includiong (1) an attempt to identify and acquire on a
reasonable
basis a kaolin or other similar industrial minerals mine in a more
favorable
marketing area, where good transportation facilities and ready
access to
numerous markets provide a more favorable long-term environment in
which to
operate and (2) identification of potential acquisition candidates,
ideally,
small mineral companies or the mineral operations of larger
companies which
could provide immediate cash flow and the opportunity for future
growth. The
potential for liquidity afforded by free-trading stock and an
interest in the
Nova properties which offer the potential for significant
development, not
otherwise available to the stockholders of potential acquisition
candidates,
may facilitate Nova's ability to consummate such acquisitions.
While management intends to pursue both options, the Company's
current
projects in oil and gas exploration, paper-grade kaolin
exploration, and gold
exploration will continue to be aggressively pursued. The Company
has two
important oil and gas exploration properties which are ready for
immediate
drilling, on at least one of which it believes it can obtain a
drilling
commitment in 1997. Both are being extensively marketed to the
industry. If
either or both of these properties are drilled, and a commercial
discovery is
made, the Company will need capital to conduct development
drilling. The mine
sale proceeds would provide the Company with the option to
internally finance
Page 41
this development, or to externally finance it on more favorable
terms than
would otherwise be possible. Without liquid capital produced from
the asset
sales, the Company's only option would be to further reduce its
interest in
what would then be a successful project, which would not be in its
long-term
best interests.
The prices the Company receives for its oil and gas products
continue
to fluctuate, although current prices are generally higher than
those
obtained last year. The Company's largest producing oil field, the
North
Rainbow Ranch Unit, produces a heavy, sour crude. The price paid
for this
crude is significantly less than for a higher quality crude. Since
most of
the Company's oil sales are from this field, and it is in the
latter stages
of its lifetime, when production is decreasing, it takes a
significant
increase in oil prices for oil sales to increase. In addition,
much of the
company's gas is sold on the spot market and such sales are subject
to both
price and market demand fluctuations.
Sufficient funding has been obtained to initiate gold
production
efforts on the NovaChek properties for the 1997 season, although
approximately $40,000 in additional monies will be required for
additional
working capital for NovaChek to fund the project through the end of
June,
after which time, if the project is successful, revenues from gold
sales
should enable the project to fund working capital needs from
internal cash
flow. Most of the additional $40,000 in funding has been arranged,
and it
appears likely all or most of the additional monies needed will be
obtained.
If commercial gold production can be established in the 1997
season, the
Company could recover at least a portion of, and perhaps all, of
the funds
it has advanced to NovaChek, and cash flow from gold production
will have
been established. It cannot be determined at this time whether
NovaChek
Limited Liability Company's gold mining operations will be
successful. If
commercial operations can be established on this property, the
Company
should be able to generate cash flow from this investment in future
years,
the level of which cannot be determined with certainty until such
operations have been established and maintained for a reasonable
period of
time.
In March, 1997, the Company and the McDonald Trust entered
into an
agreement with Roaring River Resources LLC ("Roaring River"), an
unaffiliated
third party, pursuant to which Roaring River was granted an option
to acquire
1600 acres of leases in the Great Salt Lake. The Company and the
Trust will
each retain a 1.5% overriding royalty if the option is exercised.
If the
option is exercised, the total payments to Nova and the Trust will
be
$250,000.
RESIGNATION OF INDEPENDENT ACCOUNTANTS
On May 5, 1997, KPMG Peat Marwick LLP ("KPMG") notified the
Company
that KPMG was withdrawing as auditor for the Company, effective May
2,
1997.
There have been no disagreements between the Company and KPMG
during
the period for which KPMG served as the Company's auditors.
Company management felt that the Company should seek the
services of
a smaller firm, which could offer the Company more cost-effective
accounting services.
At this time, the Registrant has not engaged a new auditor,
but
expects to do so expeditiously.
Page 42
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA FINANCIAL STATEMENTS
The following unaudited condensed pro forma balance sheet
assumes that
the sale of the kaolin mine and the purchase of the Kane stock
occurred on
March 31, 1997 and reflects the March 31, 1997 historical balance
sheet of
Nova Natural Resources Corporation giving pro forma effect to the
Kaolin mine
sale. The sale of the Oil and Gas assets and the purchase of the
Kane stock
were included in the historical financials. The unaudited pro
forma balance
sheet should be read in conjunction with the historical statements
and
related notes of Nova Natural Resources Corporation.
The following unaudited condensed pro forma statements of
operations for
the six months ended March, 31, 1997 and for the year ended
September 30,
1996 assumes that the sale of the kaolin mine, the purchase of the
Kane
stock, and the sale of the oil and gas assets occurred on October
1, 1995.
The pro forma results of operations are not necessarily indicative
of the
results of operations that would actually have been attained if the
transactions had occurred as of October 1, 1995. These statements
should be
read in conjunction with the hstorical statements and related notes
of Nova
Natural Resources Corporation.
Page 43
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA BALANCE SHEETS (NOTE A)
March 31, 1997
(unaudited)
March 31, March 31,
March 31,
1997 1997
1997
Historical Mine Sale Mine
Sale
Adjustments Pro
Forma
ASSETS
Current assets:
Cash (Notes B and C) $ 49,525 $ 175,000 $
224,525
Accounts receivable:
Kaolin operations 0
0
Oil and gas operations 13,038
13,038
Other 9,991
9,991
_______
_______
Total 23,029
23,029
Prepaid expenses 3,248
3,248
_______
_______
Total current assets 75,802
250,802
Note Receivable(Note B) 0 575,000
575,000
Discount on Note Receivable(Note B) 0 (112,304)
(112,304)
Mineral property interests, net of
accumulated depreciation and
depletion of 92,301 (Note B) 542,417 (434,325)
108,092
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,902,164 (Note D) 104,223
104,223
Furniture and technical equipment net
of accumulated depreciation of
132,155 38,852
38,852
Investment in and advances to NovaChek
Limited Liability Company 195,149
195,149
Deposits (Note B) 51,550 (50,000)
1,550
_______ _______
_______
$ 1,007,993 $ 153,371
$1,161,364
========= =========
=========
Page 44
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA BALANCE SHEETS (NOTE A)
March 31, 1997
(unaudited)
March 31, March 31,
March 31,
1997 1997
1997
Historical Mine Sale
Mine Sale
Adjustments Pro
Forma
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 46,866 $
46,866
Accrued liabilities 2,083
2,083
_______
_______
Total current liabilities 48,949
48,949
Deferred Gain on Sale(Note B) 0 153,371
153,371
Note Payable(Note C) 66,408
66,408
Discount on Note Payable(Note C) (20,154)
(20,154)
Convertible Debentures 250,000
250,000
_______ _______
_______
Total liabilities 345,203 153,371
498,574
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
5,000,000 shares authorized; 1,792,267
shares issued and outstanding(Note C) 1,792,267
1,792,267
Common stock, $.10 par value;
50,000,000 shares authorized;5,985,846
shares issued and outstanding(Note C) 598,585
598,585
Additional paid-in capital(Note C) 7,204,873
7,204,873
Accumulated deficit (8,932,935)
(8,932,935)
_________
_________
Total stockholders' equity 662,790
662,790
Total Liabilities and Stockholders'
Equity $1,007,993 $ 153,371
$1,161,364
========= =========
=========
Pro forma book value per share .17
.19
See accompanying notes to condensed pro forma financial
statements.
Page 45
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA STATEMENT OF OPERATIONS(NOTE A)
For the year ended September 30, 1996
(unaudited)
September
30, 1996
1996 Oil & Gas Oil & Gas
Kane Mine Sale 1996
Historical Adjustments Pro Forma
Adjustments Adjustments Pro Forma
<S> <C> <C> <C>
<C> <C> <C>
Revenue:
Mineral sales(Note B) $1,291,131 $ $1,291,131 $
$ (1,224,192) $ 66,939
Oil and gas sales(Note D) 217,807 (63,991) 153,816
153,816
__________ __________ ___________
__________ _______
Total Revenue 1,508,938 (63,991) 1,444,947
(1,224,192) 220,755
Costs and expenses:
Mining costs,including
trans.and royalties(Note B) 1,049,387 1,049,387
(1,009,224) 40,163
Oil and gas lease operating
incl. production taxes(Note D) 106,952 (17,848) 89,104
89,104
Depletion, depreciation,
and amortization (Note B and D) 86,931 (21,952) 64,979
(21,620) 43,359
Mineral property abandonments 7,032 7,032
7,032
General and admin.(Note B) 385,593 385,593
(4,828) 380,765
__________ _________ _________
_________ _______
Total Expenses 1,635,895 (39,800) 1,596,095
(1,035,672) 560,423
Operating loss (126,957) (151,148)
(339,668)
Other income(expenses):
Share of losses of NovaChek
Limited Liability Company (11,437) (11,437)
(11,437)
Interest income(Notes B,C,D) 11,587 11,587
11,587
Interest expense (17,691) (17,691)
(17,691)
Other 825 825
825
_________ ________
________
Total Other (16,716) (16,716)
(16,716)
Net loss (143,673) (167,864)
(356,384)
Loss per share (Note 4) (.02) (.03)
(.06)
Weighted average common
shares outstanding(Note C) 6,496,188 6,496,188
(510,342) 5,985,846
<FN>
See accompanying notes to condensed pro
forma financial statements.
</FN>
</TABLE>
Page 46
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA STATEMENT OF OPERATIONS(NOTE A)
For the six months ended March 31, 1997
(unaudited)
March 31, 1996
1997 Oil & Gas Oil & Gas
Mine Sale 1997
Historical Adjustments Pro Forma
Adjustments Pro Forma
<S> <C> <C> <C>
<C> <C>
Revenue:
Mineral sales(Note B) $ 193,469 $ $ 193,469
$ (191,556) $ 1,913
Oil and gas sales(Note D) 77,722 (10,331) 67,391
67,391
__________ __________ ___________
_________ _______
Total Revenue 271,191 (10,331) 260,860
(191,556) 69,304
Costs and expenses:
Mining costs,including
trans.and royalties(Note B) 159,355 159,355
(153,584) 5,771
Oil and gas lease operating
incl. production taxes(Note D) 57,581 (3,715) 53,866
53,866
Depletion, depreciation,
and amortization (Note B,D) 16,763 (1,002) 15,761
(3,534) 12,227
Mineral property abandonments 60 60
60
General and admin.(Note B) 214,750 214,750
(6,410) 208,340
__________ _________ _________
_________ _______
Total Expenses 448,509 (4,717) 443,792
(163,528) 280,264
Operating loss (177,318) (182,932)
(210,960)
Other income(expenses):
Share of losses of NovaChek
Limited Liability Company (11,819) (11,819)
(11,819)
Interest income(Note B,C,D) 5,866 5,866
5,866
Interest expense (12,880) (12,880)
(12,880)
Gain on sale of assets 76,557 76,557
76,557
_________ ________
_______
Total Other 57,724 57,724
57,724
Net loss (119,594) (125,208)
(153,236)
Loss per share (.02) (.02)
(.02)
Weighted average common
shares outstanding(Note C) 6,411,131 6,411,131
6,411,131
<FN>
See accompanying notes to condensed pro
forma financial statements.
</FN>
</TABLE>
Page 47
NOVA NATURAL RESOURCES CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
On January 25, 1997, Nova Natural Resources Corporation
agreed, subject
to shareholder approval, to sell its cement-grade kaolin mining
operations and
property near Redwood Falls, Minnesota to Northern Con-Agg, Inc
(NCA), a
Minnesota Corporation. NCA will pay a total of $700,000 to the
Company for
the cement-grade kaolin assets, including $125,000 in cash at
closing,
$450,000 in semi-annual installments until August 15, 2001, and a
final
payment of $125,000 on December 15, 2001.
The accompanying condensed pro forma balance sheet includes
pro forma
adjustments to give effect to the sale of the kaolin mine as of
March 31,
1997. The condensed pro forma statements of operations give effect
to the
sale of the kaolin mine as of October 1, 1995 and exclude the
results of
operations of the kaolin mine for the respective periods presented.
During 1996, disputes arose between Thomas F. Kane, then a
director, and
the other directors of the Company concerning decisions by the
directors and
the business operations of the "Company." In resolution of these
disputes,
the Company, Mr. Kane, and Brian Spillane, the Company's President
and a
director, entered into an Agreement (the "Kane Agreement"), dated
February 5,
1997, for the purchase of all of Mr. Kane's Common and Preferred
Stock. By
terms of the Kane Agreement, the Company purchased from Mr. Kane
895,415
shares of his Preferred Stock and 510,342 shares of his Common
Stock. All of
the stock purchased by the Company was retired upon completion of
the
purchase. Mr.Spillane purchased from Mr. Kane 203,426 shares of
Mr. Kane's
Preferred Stock and 115,942 shares of his Common Stock. Mr.
Spillane paid
$50,000 for the stock he purchased from Mr. Kane. The Company paid
$150,000
and agreed to pay an amount equal to 12% of the net proceeds from
the sale of
the Cement Kaolin Mine less $13,992, as and when received by the
Company.
Alternatively, if the Cement Kaolin Mine is not sold on or before
June 1,
1997, the Company agreed to pay to Mr. Kane a $.10 per ton royalty,
as and
when received by Nova, on sales of kaolin from the Mine up to an
aggregate of
$70,008.
The accompanying condensed pro forma balance sheet does not
include any
adjustments for the purchase of the Kane stock. This purchase is
included in
the historical figures. The condensed pro forma statements of
operations for
the year ended September 30, 1996 gives effect to the reduced
number of shares
outstanding. The condensed pro forma statements of operations for
the six
months ended March 31, 1997 do not have any adjustments as the
purchase is
included in the historical figures.
On November 14, 1996, The Company 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 accompanying condensed pro forma balance sheet does not
have any
adjustments for the sale of the Oil & Gas assets as these figures
are included
in the historical figures. The condensed pro forma statements of
operations
give effect to the sale as of October 1, 1995.
B. PRO FORMA ADJUSTMENTS FOR THE SALE OF THE KAOLIN MINE
The following pro forma adjustments have been made to the
historical
balance sheet of Nova Natural Resources Corporation as of March 31,
1997 and
to the historical statements of operations for the six months ended
March 31,
1997 and for the year ended September 30, 1996:
1. To record installment sale of the mine, including receipt
of $125,000
at closing, note receivable of $575,000, present value
discount of
$112,304, and deferred gain on sale of $153,371. The
present value
discount was calculated using an imputed interest rate of
10%. This
interest rate is based on the fact that the Company issued
Convertible Debentures in 1996 with a 10% interest rate.
2. To decrease mineral property interests by $434,325 which
was the
book value of the kaolin mine.
3. To adjust revenues to reflect loss of the mineral sales of
$191,556.
4. To adjust expenses to eliminate all expenses related to
the mineral
property, including mining costs of $153,584, DD&A of
$3,534, and
General & Administrative expenses of $6,410.
Page 48
5. To increase cash by $50,000 and decrease deposits by
$50,000 to
reflect the release of a reclamation bond.
C. PRO FORMA ADJUSTMENTS FOR THE PURCHASE OF THE KANE STOCK
The following pro forma adjustments have been made to the
historical
statements of operations of Nova Natural Resources Corporation for
the year
ended September 30, 1996:
1. To decrease the weighted average common shares by 510,342
to reflect
the repurchase of the Kane common stock.
D. PRO FORMA ADJUSTMENTS FOR THE SALE OF OIL & GAS ASSETS
The following pro forma adjustments have been made to the
historical
statements of operations of Nova Natural Resources Corporation for
the six
months ended March 31, 1996 and for the year ended September 30,
1996:
1. To adjust revenues to reflect loss of oil and gas sales of
$10,331.
2. To adjust expenses to eliminate all expenses related to
the sold
properties including lease operating expense of $3,715,
and DD&A
of $1,002.
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 1997 High Low
First Quarter $ 0.040 $ 0.030
Second Quarter 0.050 0.030
Third Quarter 0.060 0.050
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
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.
ELECTION OF DIRECTORS
Unless directed otherwise, the Proxy will be voted in favor of
electing the
five (5) persons listed below to serve as Directors of the Company
until the
next Annual Meeting and until their successors are qualified and
elected. All
of the nominees are now serving as Directors and were elected by
Shareholders.
Thomas F. Kane, who was elected as a Director in the last election
of
Directors, resigned as a Director effective February 17, 1997, as
part of the
purchase of all of his shares of Common and Preferred Stock of the
Company.
See "Purchase of Kane Stock." The Directors have determined not to
fill the
vacancy caused by Mr. Kane's resignation. If any nominee becomes
unavailable
for election prior to the meeting, the holders of the Proxies will
vote for
the election of another qualified person (up to a total of five
directors).
Name and Position Served as
Held With the Company Age Director Since
Robert E. McDonald (2) 68 April 22, 1986
Page 49
Brian B. Spillane, President and 60 April 22, 1986
Chief Executive Officer (3)
Milton O. Childers 68 April 22, 1986
Exploration Manager and Assistant
Secretary
Robert W. Meier (2) 60 April 22, 1986
John R. Parker, Chairman of the 50 April 22, 1986
Board(1)
(1) Chairman of the Board since February 17, 1997.
(2) Member of the Executive Committee.
(3) President and Chief Executive Officer since April 1, 1989.
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 resigned as Chairman of the Board of the
Company
effective February 17, 1997. 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 an 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 Manager of Exploration of the
Company in
January, 1993, and continues in that capacity. He also now serves
as
Assistant Secretary.
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 became Chairman of the Board on February 17, 1997. He
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.
Page 50
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
Exploration Manager and
Assistant Secretary 68 January 22, 1993
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
1981until 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.
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 for the years ended 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
CEO 1996 50,120 -- --
1995 67,939 3,397 --
1994 79,829 7,983 200,000
Milton O. Childers
Exploration Manager 1996 50,240 -- --
and Assistant 1995 66,160 3,308 --
Secretary 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 2,475 200,000
*ESOP contribution
Page 51
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 (-0- in 1996); under the
Incentive Plan,
options to purchase 650,000 shares had been issued (-0- in 1996).
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.
Page 52
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.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Any shareholder who wishes to submit a proposal for inclusion in
the Company's
proxy statement and proxy form for its next annual meeting must
assure that
any such proposal is received by the Company on or before December
30, 1997.
ANNUAL REPORT TO SECURITIES AND EXCHANGE COMMISSION
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND
EXCHANGE
COMMISSION ON FORM 10-KSB MAY BE OBTAINED WITHOUT CHARGE BY ANY
BENEFICIAL
OWNER OF THE COMPANY'S COMMON STOCK UPON A WRITTEN REQUEST
ADDRESSED TO JAMES
SCHAFF, SECRETARY, NOVA NATURAL RESOURCES CORPORATION, 789 SHERMAN
STREET,
SUITE 550, DENVER, COLORADO 80203.
Page 53
NOVA NATURAL RESOURCES CORPORATION
789 Sherman Street, Suite 550, Denver, Colorado 80203
PROXY This Proxy is Solicited on Behalf of the Board of
Directors.
The undersigned hereby appoints Brian B. Spillane and Robert
McDonald as
Proxies, each with the power to appoint his substitute, and hereby
authorizes
them to represent and to vote, as designated below, all the shares
of Common
Stock of Nova Natural Resources Corporation held on record by the
undersigned
on June 27 , 1997, at the annual meeting of shareholders to be
held on
July 21, 1997 of any adjournment thereof.
=================================================================
1. ELECTION OF DIRECTORS
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all
nominees listed
below
(INSTRUCTION: To withhold authority to vote for any
individual nominee
strike a line through the nominees's name in
the list
below.)
Robert E. McDonald, Brian B. Spillane, Milton O. Childers,
Robert W. Meier, John R. Parker
2. PROPOSAL TO APPROVE THE SALE OF THE COMPANY'S CEMENT-GRADE
KAOLIN MINE
FOR AGAINST ABSTAIN
3. I WISH TO EXERCISE MY DISSENTERS RIGHTS
YES NO
=================================================================
4. In their discretion, the Proxies are authorized to vote upon
such other
business as may properly come before the meeting.
This proxy when properly executed will be voted in the manner
directed herein
by the undersigned stockholder. If no direction is made, this
proxy will be
voted for Proposals 1 and 2.
Please sign exactly as name appears below. When shares are held by
joint
tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such.
If a
corporation, please sign in full corporate name by President or
other
authorized officer. If a partnership, please sign in partnership
name by
authorized person.
DATED:__________________________, 1997. _________________________
Signature
_________________________
Signature if held jointly
[Please mark, sign, date and return the Proxy card promptly using
the enclosed
envelope.]
Page 54
June 30, 1997
TO THE SHAREHOLDERS OF NOVA NATURAL RESOURCES CORPORATION:
As you can see from the enclosed proxy materials, Nova Natural
Resources
Corporation (the "Company"), has undertaken several significant
transactions
and undergone substantial change in the last twelve months. The
Company has
sold a significant oil and gas property, settled a dispute with one
of its
principal shareholders and director by purchasing all of his Common
and
Preferred Stock, and entered into an agreement to sell its
cement-grade kaolin
mine. All of these transactions, reasons for undertaking them and
their
impact on the Company's financial posture and future plans are
described in
the enclosed proxy materials. We urge you to read those materials
carefully
and call us with any questions.
We are informed by our counsel that the Company was not required by
the
Colorado Business Corporations Act to obtain shareholder approval
for the sale
of the oil and gas prospect and purchase of stock from its
principal
stockholder and may not be required to obtain shareholder approval
of the sale
of the Company's cement-grade kaolin mine. Management believes,
however, that
sale of the cement-grade kaolin mine is a decision which has a
significant
impact on the status and future of the Company and should be
considered by the
shareholders. More importantly, management understands that a
shareholder
could take issue with any or all of these decisions and with the
general
direction of the Company but be unable to liquidate his investment
in the
Company because of the absence of an active trading market in the
Company's
stock. For that reason, and although the Company is not required
by law to
offer dissenter's rights, the Company is offering to purchase all
of the
shares of stock owned by any shareholder who does not vote in favor
of the
sale of the cement-grade kaolin mine and who wishes to liquidate
his
investment at
$.04 per share . If, for any reason, you wish
to take
advantage of this offer, read the enclosed materials carefully and
follow
the directions concerning rights of appraisal.
If you wish to exercise your dissenters rights and sell your stock
to the
Company, you must strictly comply with the procedures set forth in
the
"Rights of Dissenting Shareholders" section of the proxy
materials.
To exercise these rights, you must
1. NOT VOTE IN FAVOR OF THE SALE OF THE CEMENT KAOLIN MINE
2. RETURN THE ENCLOSED PROXY OR OTHERWISE INDICATE
YOUR INTENT TO OBTAIN APPRAISAL RIGHTS PRIOR TO TWENTY
(20) BUSINESS DAYS AFTER THE ANNUAL MEETING.
If the sale is approved by the Company's shareholders, the Company
will
transmit the purchase price without interest no later
than
five (5) business days after receipt of your certificate, but not
later
than December 31, 1997.
We thank you for your years of support and urge you to call with
any
questions.
Sincerely,
NOVA NATURAL RESOURCES CORPORATION
Brian B. Spillane
Page 55
7-113-101. Definitions
For purposes of this article:
(1) "Beneficial shareholder', means the beneficial owner of
shares held in
a voting trust or by a nominee as the record
shareholder.
(2) "Corporation" means the issuer of the shares held by a
dissenter
before the corporate action, or the surviving or
acquiring domestic
or foreign corporation, by merger or share exchange of
that issuer.
(3) "Dissenter" means a shareholder who is entitled to
dissent from
corporate action under section 7-113-102 and who
exercises that
right at the time and in the manner required by part 2
of this
article.
(4) "Fair value", with respect to a dissenter's shares, means
the value
of the shares immediately before the effective date of
the
corporate action to which the dissenter objects,
excluding any
appreciation or depreciation in anticipation of the
corporate
action except to the extent that exclusion would be
inequitable.
(5) "Interest" means interest from the effective date of the
corporate
action until the date of payment, at the average rate
currently
paid by the corporation on its principal bank loans or,
if none,
at the legal rate as specified in section 5-12-101,
C.R.S.
(6) "Record shareholder" means the person in whose name the
shares are
registered in the records of a corporation or the
beneficial owner
of shares that are registered in the name of a nominee
to the
extent such owner is recognized by the corporation as
the
shareholder as provided in section 7-107-204.
(7) "Shareholder" means either a record shareholder or a
beneficial
shareholder.
7-113-102. Right to dissent
(1) A shareholder, whether or not entitled to vote, is
entitled to
dissent and obtain payment of the fair value of the
shareholder's
shares in the event of any of the following corporate
actions:
(a) Consummation of a plan of merger to which the
corporation is
a party if:
(I) Approval by the shareholders of that
corporation
is required for the merger by section 7-111-103
or
7-111-104 or by the articles of incorporation,
or
Page 72
(II) The corporation is a subsidiary that is merged
with
its parent corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which
the
corporation is a party as the corporation whose
shares
will be acquired;
(c) Consummation of a sale, lease, exchange, or other
disposition of all, or substantially all, of the
property
of the corporation for which a shareholders' vote is
required
under section 7-112-102(1); and
(d) Consummation of a sale, lease, exchange, or other
disposition of all, or substantially all, of the
property
of an entity controlled by the corporation if the
shareholders
of the corporation were entitled to vote upon the
consent of
the corporation to the disposition pursuant to
section
7-112-102(2).
(1.3) A shareholder is not entitled to dissent and obtain
payment, under
subsection (1) of this section, of the fair value of the
shares of
any class or series of shares which either were listed on
a national
securities exchange registered under the federal
"Securities
Exchange Act of 1934", as amended, or on the national
market system
of the national association of securities dealers
automated
quotation system, or were held of record by more than two
thousand
shareholders, at the time of:
(a) The record date fixed under Section 7-107-107 to
determine the
shareholders entitled to receive notice of the
shareholders'
meeting at which the corporate action is submitted
to a vote;
(b) The record date fixed under Section 7-107-104 to
determine
shareholders entitled to sign writings consenting to
the
corporate action; or
(c) The effective date of the corporate action if the
corporate
action is authorized other than by a vote of
shareholders.
(1.8) The limitation set forth in subsection (1.3) of this
section shall
not apply if the shareholder will receive for the
shareholder's
shares, pursuant to the corporate action, any-thing
except:
Page 73
(a) Shares of the corporation surviving the consummation
of
the plan of merger or share exchange;
(b) Shares of any other corporation which at the
effective date
of the plan of merger or share exchange either will
be listed
on a national securities exchange registered under
the federal
"Securities Exchange Act of 1934", as amended, or on
the
national market system of the National Association
of
Securities Dealers Automated Quotation System, or
will be held
of record by more than two thousand shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or
cash in
lieu of fractional shares.
(2.5) A shareholder, whether or not entitled to vote, is
entitled to
dissent and obtain payment of the fair value of the
shareholder's
shares in the event of a reverse split that reduces the
number
of shares owned by the shareholder to a fraction of a
share or to
scrip if the fractional share or scrip so created is to
be acquired
for cash or the scrip is to be voided under section
7-106-104.
(3) A shareholder is entitled to dissent and obtain payment
of the fair
value of the shareholder's shares in the event of any
corporate
action to the extent provided by the bylaws or a
resolution of the
board of directors.
(4) A shareholder entitled to dissent and obtain payment for
the
shareholder's shares under this article may not challenge
the
corporate action creating such entitlement unless the
action
is unlawful or fraudulent with respect to the shareholder
or
the corporation.
7-113-103. Dissent by nominees and beneficial owners
(1) A record shareholder may assert dissenters' rights as to
fewer than
all the shares registered in the record shareholder's
name only if
the record shareholder dissents with respect to all
shares
beneficially owned by any one person and causes the
corporation to
receive written notice which states such dissent and the
name,
address, and federal taxpayer identification number, if
any, of each
person on whose behalf the record shareholder asserts
dissenters'
rights. The rights of a record shareholder under this
subsection
(1) are determined as if the shares as to which the record
shareholder dissents and the other shares of the record
shareholder
were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as
to the
shares held on the beneficial shareholder's behalf only
if:
Page 74
(a) The beneficial shareholder causes the corporation to
receive
the record shareholder's written consent to the
dissent not
later than the time the beneficial share-holder
asserts
dissenters' rights; and
(b) The beneficial shareholder dissents with respect to
all
shares beneficially owned by the beneficial
shareholder.
(3) The corporation may require that, when a record
shareholder dissents
with respect to the shares held by any one or more
beneficial
shareholders, each such beneficial shareholder must
certify to the
corporation that the beneficial shareholder and the
record
shareholder or record shareholders of all shares owned
beneficially
by the beneficial shareholder have asserted, or will
timely assert,
dissenters' rights as to all such shares as to which
there is no
limitation on the ability to exercise dissenters' rights.
Any such
requirement shall be stated in the dissenters' notice
given pursuant
to section 7-113-203.
7-113-201. Notice of dissenters' rights
(1) If a proposed corporate action creating dissenters'
rights under
section 7-113-102 is submitted to a vote at a
shareholders' meeting,
the notice of the meeting shall be given to all
shareholders,
whether or not entitled to vote. The notice shall state
that
shareholders are or may be entitled to assert dissenters'
rights
under this article and shall be accompanied by a copy of
this
article and the materials, if any, that, under articles
101 to 117
of this title, are required to be given to shareholders
entitled to
vote on the proposed action at the meeting. Failure to
give notice
as provided by this subsection (1) shall not affect any
action taken
at the shareholders' meeting for which the notice was to
have
been given, but any shareholder who was entitled to
dissent but who
was not given such notice shall not be precluded from
demanding
payment for the shareholder's shares under this article
by reason of
the shareholder's failure to comply with the provisions
of section
7-113-202(1).
(2) If a proposed corporate action creating dissenter's
rights under
section 7-113-102 is authorized without a meeting of
shareholders
pursuant to section 7-107-104, any written or oral
solicitation of
a shareholder to execute a writing consenting to such
action
contemplated in section 7-107-104 shall be accompanied or
preceded
by a written notice stating that shareholders are or may
be entitled
Page 75
to assert dissenters' rights under this article, by a
copy of this
article, and by the materials, if any, that, under
articles 101 to
117 of this title, would have been required to be given
to
shareholders entitled to vote on the proposed action if
the proposed
action were submitted to a vote at a shareholders'
meeting.Failure
to give notice as provided by this subsection (2) shall
not affect
any action taken pursuant to section 7-107-104 for which
the notice
was to have been given, but any shareholder who was
entitled to
dissent but who was not given such notice shall not be
precluded
from demanding payment for the shareholder's shares under
this
article by reason of the shareholder's failure to comply
with the
provisions of section 7-113-202(2).
7-113-202. Notice of intent to demand payment
(1) If a proposed corporate action creating dissenters'
rights under
section 7-113-102 is submitted to a vote at a
shareholders' meeting
and if notice of dissenters' rights has been given to
such
shareholder in connection with the action pursuant to
section 7-113-
201(1), a shareholder who wishes to assert dissenters'
rights shall:
(a) Cause the corporation to receive, before the voteis
taken,
written notice of the shareholder's intention to
demand payment
for the shareholder' shares if the proposed
corporate action
is effectuated; and
(b) Not vote the shares in favor of the proposed
corporate action.
(2) If a proposed corporate action creating dissenters'
rights under
section 7-113-102 is authorized without a meeting of
shareholders
pursuant to section 7-107-104 and if notice of
dissenters' rights
has been given to such shareholder in connection with the
action
pursuant to section 7-113-201(2), a shareholder who
wishes to assert
dissenters' rights shall not execute a writing consenting
to the
proposed corporate action.
(3) A shareholder who does not satisfy the requirements of
subsection
(1) or (2) of this section is not entitled to demand
payment for the
shareholder's shares under this article.
7-113-203. Dissenters' notice
Page 76
(1) If a proposed corporate action creating dissenters'
rights under
section 7-113-102 is authorized, the corporation shall
give a
written dissenters' notice to all shareholders who are
entitled to
demand payment for their shares under this article.
(2) The dissenters' notice required by subsection (1) of
this section shall be given no later than ten days after
the
effective date of the corporate action creating
dissenters' rights
under section 7-113-102 and shall:
(a) State that the corporate action was authorized and
state the
effective date or proposed effective date of the
corporate
action;
(b) State an address at which the corporation will
receive payment
demands and the address of a place where
certificates for
certificated shares must be deposited;
(c) Inform holders of uncertificated shares to what
extent transfer
of the shares will be restricted after the payment
demand is
received;
(d) Supply a form for demanding payment, which form
shall request
a dissenter to state an address to which payment is
to be made;
(e) Set the date by which the corporation must receive
the payment
demand and certificates for certificated shares,
which date
shall not be less than thirty days after the date
the notice
required by subsection (1) of this section is given;
(f) State the requirement contemplated in section
7-113-103(3), if
such requirement is imposed; and
(g) Be accompanied by a copy of this article.
7-113-204. Procedure to demand payment
(1) A shareholder who is given a dissenters' notice pursuant
to section
7-113-203 and who wishes to assert dissenters' rights
shall,
in accordance with the terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand,
which may
be the payment demand form contemplated in section
7-113-
203(2)(d), duly completed, or may be stated in
another writing;
and
Page 77
(b) Deposit the shareholder's certificates for
certificated
shares.
(2) A shareholder who demands payment in accordance with
subsection (1)
of this section retains all rights of a share holder,
except the
right to transfer the shares, until the effective date of
the
proposed corporate action giving rise to the
shareholder's exercise
of dissenters' rights and has only the right to receive
payment for
the shares after the effective date of such corporate
action.
(3) Except as provided in section 7-113-207 or
7-113-209(1)(b), the
demand for payment and deposit of certificates are
irrevocable.
(4) A shareholder who does not demand payment and deposit the
shareholder's share certificates as required by the date
or dates
set in the dissenters' notice is not entitled to payment
for the
shares under this article.
7-113-205. Uncertificated shares
(1) Upon receipt of a demand for payment under section
7-113-204 from a
shareholder holding uncertificated shares, and in lieu of
the
deposit of certificates representing the shares, the
corporation may
restrict the transfer thereof.
(2) In all other respects, the provisions of section
7-113-204 shall be
applicable to shareholders who own uncertificated shares.
7-113-206. Payment
(1) Except as provided in section 7-113-208, upon the
effective date of
the corporate action creating dissenters' rights under
section
7-113-102 or upon receipt of a payment demand pursuant to
section
7-113-204, whichever is later, the corporation shall pay
each
dissenter who complied with section 7-113-204, at the
address stated
in the payment demand, or if no such address is stated in
the
payment demand, at the address shown on the corporation's
current
record of shareholders for the record shareholder holding
the
dissenter's shares, the amount the corporation estimates
to be the
fair value of the dissenter's shares, plus accrued
interest.
(2) The payment made pursuant to subsection (1) of this
section shall be
accompanied by:
Page 78
(a) The corporation's balance sheet as of the end ofits
most recent
fiscal year or, if that is not available, the
corporation's
balance sheet as of the end of a fiscal year ending
not more
than sixteen months before the date of payment, an
income
statement for that year, and, if the corporation
customarily
provides such statements to shareholders, a
statement of
changes in shareholders' equity for that year and a
statement
of cash flow for that year, which balance sheet and
statements
shall have been audited if the corporation
customarily provides
audited financial statements to shareholders, as
well as the
latest available financial statements, if any, for
the interim
or full-year period, which financial statements need
not be
audited;
(b) A statement of the corporation's estimate of the
fair value of
the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand
payment under
section 7-113-209; and
(e) A copy of this article.
7-113-207. Failure to take action
(1) If the effective date of the corporate action creating
dissenters'
rights under section 7-113-102 does not occur within
sixty days
after the date set by the corporation by which the
corporation must
receive the payment demand as provided in section
7-113-203, the
corporation shall return the deposited certificates and
release the
transfer restrictions imposed on uncertificated shares.
(2) If the effective date of the corporate action creating
dissenters'
rights under section 7-113-102 occurs more than sixty
days after the
date set by the corporation by which the corporation must
receive
the payment demand as provided in section 7-113-203, then
the
corporation shall send a new dissenters' notice, as
provided in
section 7-113-203, and the provisions of sections
7-113-204 to 7-113
-209 shall again be applicable.
7-118-208. Special provisions relating to shares acquired after
announcement
of proposed corporate action
Page 79
(1) The corporation may, in or with the dissenters'
noticegiven pursuant
to section 7-113-203, state the date of the first
announcement to
news media or to shareholders of the terms of the
proposed corporate
action creating dissenters' rights under section
7-113-102 and
state that the dissenter shall certify in writing, in or
with the
dissenter's payment demand under section 7-113-204,
whether or not
the dissenter (or the person on whose behalf dissenters'
rights are
asserted) acquired beneficial ownership of the shares
before that
date. With respect to any dissenter who does not so
certify
in writing, in or with the payment demand, that the
dissenter or the
person on whose behalf the dissenter asserts dissenters'
rights
acquired beneficial ownership of the shares before such
date, the
corporation may, in lieu of making the payment provided
in section
7-113-206, offer to make such payment if the dissenter
agrees to
accept it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this
section shall
include or be accompanied by the information required by
section
7-113-206(2).
7-113-209. Procedure if dissenter is dissatisfied with payment or
offer
(1) A dissenter may give notice to the corporation in writing
of the
dissenter's estimate of the fair value of the dissenter's
shares
and of the amount of interest due and may demand payment
of such
estimate, less any payment made under section 7-113-206,
or reject
the corporation's offer under section 7-113-208 and
demand payment
of the fair value of the shares and interest due, if:
(a) The dissenter believes that the amount paid under
section 7-113
-206 or offered under section 7-113-208 is less than
the fair
value of the shares or that the interest due was
incorrectly
calculated;
(b) The corporation fails to make payment under section
7-113-206
within sixty days after the date set by the
corporation by
which the corporation must receive the payment
demand; or
(c) The corporation does not return the deposited
certificates or
release the transfer restrictions imposed on
uncertificated
shares as required by section 7-113-207(1).
Page 80
(2) A dissenter waives the right to demand payment under this
section
unless the dissenter causes the corporation to receive
the notice
required by subsection (1) of this section within thirty
days after
the corporation made or offered payment for the
dissenter's shares.
7-113-301. Court action
(1) If a demand for payment under section 7-113-209 remains
unresolved,
the corporation may, within sixty days after receiving
the payment
demand, commence a proceeding and petition the court to
determine
the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the
sixty-day
period, it shall pay to each dissenter whose demand
remains
unresolved the amount demanded.
(2) The corporation shall commence the proceeding described
in
subsection (1) of this section in the district court of
the county
in this state where the corporation's principal office is
located
or, if the corporation has no principal office in this
state, in the
district court of the county in which its registered
office is
located. If the corporation is a foreign corporation
without a
registered office, it shall commence the proceeding in
the county
where the registered office of the domestic corporation
merged into,
or whose shares were acquired by, the foreign corporation
was
located.
(3) The corporation shall make all dissenters, whether or not
residents
of this state, whose demands remain unresolved parties to
the
proceeding commenced under subsection (2) of this section
as in an
action against their shares, and all parties shall be
served with a
copy of the petition. Service on each dissenter shall be
by
registered or certified mail, to the address stated in
such
dissenter's payment demand, or if no such address is
stated in the
payment demand, at the address shown on the corporation's
current
record of shareholders for the record shareholder holding
the
dissenter's shares, or as provided. by law.
(4) The jurisdiction of the court in which the proceeding is
commenced
under subsection (2) of this section is plenary and
exclusive. The
court may appoint one or more persons as appraisers to
receive
evidence and recommend a decision on the question of fair
value. The
appraisers have the powers described in the order
appointing them,
or in any amendment to such order. The parties to the
proceeding are
entitled to the same discovery rights as parties in other
civil
proceedings.
Page 81
(5) Each dissenter made a party to the proceeding commenced
under
subsection (2) of this section is entitled to judgment
for the
amount, if any, by which the court finds the fair value
of the
dissenter's shares, plus interest, exceeds the amount
paid by the
corporation, or for the fair value, plus interest, of the
dissenter's shares for which the corporation elected to
withhold payment under section 7-113-208.
7-113-302. Court costs and counsel fees
(1) The court in an appraisal proceeding commenced under
section 7-113
-301 shall determine all costs of the proceeding,
including the
reasonable compensation and expenses of appraisers
appointed by the
court. The court shall assess the costs against the
corporation;
except that the court may assess costs against all or
some of the
dissenters, in amounts the court finds equitable, to the
extent the
court finds the dissenters acted arbitrarily,
vexatiously, or not
in good faith in demanding payment under section
7-113-209.
(2) The court may also assess the fees and expenses of
counsel and
experts for the respective parties, in amounts the court
finds
equitable:
(a) Against the corporation and in favor of any
dissenters if
the court finds the corporation did not
substantially comply
with the requirements of part 2 of this article; or
(b) Against either the corporation or one or more
dissenters, in
favor of any other party, if the court finds that
the party
against whom the fees and expenses are assessed
acted
arbitrarily, vexatiously, or not in good faith with
respect to
the rights provided by this article.
(3) If the court finds that the services of counsel for any
dissenter
were of substantial benefit to other dissenters similarly
situated,
and that the fees for those services should not be
assessed against
the corporation, the court may award to said counsel
reasonable fees
to be paid out of the amounts awarded to the dissenters
who were
benefitted.
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