U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE
ACT
For the transition period from N/A to N/A
Commission file number 0-15078
NOVA NATURAL RESOURCES CORPORATION
(Exact name of small business issuer as specified in its
charter)
Colorado 84-1227328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
789 Sherman St., Suite 550
Denver, Colorado 80203
(Address of principal executive offices)
(303) 863-1997
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
5,985,836
Transitional Small Business Disclosure Format (Check One):
Yes ; No X
_______________________________________________________________
<PAGE>
PART I. FINANCIAL INFORMATION
NOVA NATURAL RESOURCES CORPORATION
Condensed Balance Sheets (Note 1)
March 31, September 30,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash $ 49,525 $ 79,827
Accounts receivable:
Kaolin operations(Note 5) 0 376,392
Oil and gas operations(Note 2) 13,038 24,867
Other 9,991 31,273
_______ _______
Total 23,029 432,532
Prepaid expenses 3,248 3,941
_______ _______
Total current assets 75,802 516,300
Mineral property interests, net of
accumulated depreciation and
depletion of 92,301 and 88,767(Note 6) 542,417 543,038
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,909,210 and
5,896,408(Note 2) 104,223 260,014
Furniture and technical equipment net
of accumulated depreciation of
132,380 and 131,953 38,852 38,851
Investment in and advances to NovaChek
Limited Liability Company(Note 4) 195,149 136,717
Deposits 51,550 51,000
_______ _______
$ 1,007,993 $ 1,545,920
========= =========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
1997 1996
(unaudited)
Current liabilities:
Accounts payable $ 46,866 $ 282,087
Accrued liabilities 2,083 35,576
_______ _______
Total current liabilities 48,949 317,663
Convertible debentures 250,000 250,000
Note Payable(Note 3) 66,408 0
Discount on Note Payable(Note 3) (20,154) 0
_______ _______
Total long term liabilities 296,254 250,000
Total liabilities 345,203 567,663
_______ _______
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
5,000,000 shares authorized; 2,687,682
shares issued and outstanding in 1996,
1,792,267 in 1997(Note 3) 1,792,267 2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;6,496,188
shares issued and outstanding in 1996,
5,985,846 in 1997(Note 3) 598,585 649,619
Additional paid-in capital(Note 3) 7,204,873 6,454,296
Accumulated deficit (8,932,935) (8,813,340)
__________ __________
Total stockholders' equity 662,790 978,257
Total Liabilities and Stockholders' Equity $1,007,993 $1,545,920
========= =========
See accompanying notes to condensed financial statements.
<PAGE>
<TABLE>
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
REVENUES:
Mineral sales $ 1,913 $ 19,583 $ 193,469 $ 162,091
Oil and gas sales(Note 2) 36,106 58,366 77,722 103,004
________ ________ _______ _______
38,019 77,949 271,191 265,095
EXPENSES:
Mining costs, including
transportation and royalties 4,788 6,119 159,355 101,033
Oil and gas lease operating
including production taxes 27,166 24,247 57,581 56,862
Depletion, depreciation,
and amortization 7,271 16,471 16,763 34,617
Mineral property abandonments 0 0 60 0
General and administrative 102,530 103,012 214,750 195,205
141,755 149,849 448,509 387,717
_______ _______ _______ _______
Operating loss $ (103,736) $ (71,900) $ (177,318)$ (122,622)
========= ======== ======== =======
Other income(expenses):
Share of losses of
NovaChek LLC(Note 4) (5,529) 0 (11,819) 0
Interest income 2,690 1,402 5,866 3,501
Interest expense (4,547) 0 (12,880) 0
Gain on sale of assets(Note 2) 0 0 76,557 0
________ ________ ________ ________
(7,386) 1,402 57,724 3,501
Net loss $ (111,122) $ (70,498) (119,594) (119,121)
Loss per share(Note 7) $ (.02) $ (.01) $ (.02)$ (.02)
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,326,074 6,496,188 6,411,131 6,496,188
========= ========= ========= =========
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Cash Flows (Note 1)
(Unaudited)
<CAPTION>
Three Months Ended Six
Months Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (111,122) $ (70,498) $ (119,594) $ (119,121)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depletion and depreciation 7,271 16,471 16,763 34,618
Gain on sale of assets -- -- (76,557) --
Change in assets and liabilities:
(Increase) decrease in accounts
receivable 23,931 (77,401) 409,503 150,679
(Increase) decrease in prepaid
expenses 2,782 517 693 (3,186)
(Decrease) increase in accounts
payable (19,043) 165,993 (235,221) 44,350
(Increase) decrease in deposits -- 2,058 (550) --
(Decrease) increase in accrued
liabilities (8,334) -- (33,493) --
_______ _______ _______ _______
Net cash provided (used) by
operating activities (104,515) 37,140 (38,456) 107,340
_______ _______ _______ _______
Cash flows from investing activities:
Proceeds from sale of assets -- -- 229,957 --
Investment in Limited Liability Co. (6,206) (150,000) (58,432) (150,000)
Additions to property and
equipment (19,588) (2,691) (13,752) (9,308)
_______ _______ _______ _______
Net cash provided (used) by
investing activities (25,794) (152,691) 157,773 (159,308)
_______ _______ _______ _______
Cash flows from financing activities:
Purchase of Kane stock (150,000) -- (150,000) --
Issuance of debentures -- 203,125 -- 203,125
Issuance of short tern note -- 100,000 -- 100,000
Discount on note payable 381 -- 381 --
_______ _______ _______ _______
Net cash provided (used) by
financing activities (149,619) 303,125 (149,619) 303,125
_______ _______ _______ _______
Increase (decrease) in cash (279,928) 187,574 (30,302) 251,157
Cash beginning of period 329,453 134,403 79,827 70,820
_______ _______ _______ _______
Cash end of period $ 49,525 $ 321,977 $ 49,525 $ 321,977
======= ======= ======= =======
<FN>
See accompanying notes to condensed financial statements.
</FN>
</TABLE>
NOVA NATURAL RESOURCES CORPORATION
Notes to Condensed Financial Statements
Six Months Ended March 31, 1997 and 1996
(1) The condensed financial statements included herein are
unaudited. In the opinion of management, all adjustments,
consisting of normal recurring accruals, have been made which are
necessary for a fair presentation of the financial position of the
Company at March 31, 1997 and 1996 and the results of operations
for the three and six month periods ended March 31, 1997 and 1996.
Certain amounts have been reclassified for comparability with the
1996 presentation. Quarterly results are not necessarily
indicative of expected annual results because of fluctuations in
the price received for oil and gas products, demand for natural
gas, kaolin and other factors. For a more complete understanding
of the Company's operations and financial position, reference is
made to Management's Discussion and Analysis of Financial Condition
and Results of Operations herein and the financial statements of
the Company, and related notes thereto, filed with the Company's
annualreport on Form 10-KSB for the year ended September 30, 1996,
previously filed with the Securities and Exchange Commission.
(2) On November 14, 1996, the Registrant sold at an auction
conducted by the Oil & Gas Asset Clearinghouse in Houston Texas
several oil and gas producing assets and leasehold interests,
primarily overriding royalty interests in producing oil & gas wells
in the Wyoming Overthrust Belt. Proceeds from this sale, net of
commissions and direct selling costs were $229,957. The gain on
the sale was $76,550. The sale was effective as of November 1,
1996. The bulk of the interests were sold to a Denver, Colorado
based firm not affiliated with the Company, which was the
successful bidder among a group of bidders at the auction for the
greater portion of the oil & gas assets and interests referred to
above.
(3) In December, 1986 the Company issued 2,687,682 shares of
Convertible Preferred Stock to the Company's Chairman and to a
principal shareholder in settlement of $1,700,000 in convertible
debentures plus related accrued interest of $426,682 and $561,000
in bank debt repaid by the Chairman and the principal shareholder
on behalf of the Company. The Preferred Stock is convertible into
5,375,364 shares of the Company's Common Stock. The Preferred
Shares contain 2 for 1 voting privileges, have a $1.00 liquidation
preference and have no stated dividend rate. In February, 1997 the
Company repurchased 510,342 shares of common stock and 895,415
shares of convertible preferred stock from a major shareholder in
settlement of a dispute for $150,000 in cash to be paid at closing,
and additional payments based on revenues from either the operation
of or the sale of its cement-grade kaolin mine of up to an
aggregate value of $70,008 over a period of years. This note is a
non-interest bearing note. The Company has accounted for this note
as a Note Payable of $66,408 to account for the expenses that will
be subtracted from this note, and a Discount on Note Payable of
$20,535 to account for the present value of the payments of
$45,873. The Common Stock and Preferred Stock were carried on the
Company's books at a price higher than the purchase price. This
difference was credited to Additional Paid in Capital. The Company
may also purchase a portion of its common stock in the event of the
sale of its kaolin mine upon the assertion of appraisal rights by
shareholders who dissent from a vote to approve such sale.
(4) On April 1, 1996 the Company organized NovaChek to recover
precious metals from off-shore mining leases located near Nome,
Alaska, utilizing a dredging operation.
The Company contributed mineral leasehold interests and $118,750 in
cash for a 42% voting interest in NovaChek. An additional 4.125%
interest in NovaChek is held by affiliates of the Company.
NovaChek is managed by the Company and Chek Technologies and
Exploration, LLC (Chek) which owns a 38.75% interest in NovaChek.
The Company is entitled to receive an annual management fee of
$65,000 from NovaChek. To date, no management fee has been
collected or recorded by the Company.
A number of significant decisions require the approval of both the
Company and Chek. Such decisions include, but are not limited to
certain borrowings, capital expenditures and asset disposals.
NovaChek has not commenced dredging operations on a commercial
basis, Company management estimates NovaChek will require
approximately $100,000 during fiscal 1997 to ready the dredge for
1997 operations, and fund operations through the end of June, which
should be sufficient to enable the project to be self-sufficient,
provided commercial gold production can be obtained. Chek
Technologies is investing approximately $60,000 of the needed
funds, and approximately $40,000 of additional funds must be
raised. There is no assurance that these funds can be raised, nor
that the dredge can be operated economically. Accordingly, the
Company's ability to recover its investment in NovaChek is
dependent upon the results of future development, including
obtaining financing for such development. The availability of
financing and the results of such future development are not
presently determinable. Accordingly, the financial statements do
not include any adjustments relating to the recoverability of the
Company's investment such costs that might result from the outcome
of these uncertainties.
In accordance with the NovaChek revised operating agreement, which
must be approved by a majority of the members, which is expected,
the first $250,000 in distributions will be allocated to investors
other than the Company and Chek based upon their relative voting
percentages. The next $150,000 in distributions will be made to
the Company. The Company, Chek and remaining investors will
receive 19.13%, 14.2% and 66.67%, respectively, of the next
$500,000 in distributions and 27%, 23% and 50%, respectively, of
the following $500,000 in distributions. After these initial
preferential distributions are made, all subsequent distributions
will be allocated based on voting percentages.
The condensed balance sheet and statement of operations of NovaChek
at March 31, 1997 and for the period from January 1, 1997 through
March 31, 1997 arepresented below.
BALANCE SHEET OF NOVACHEK
Cash and other assets $ 8,128
Mineral property interests 45,000
Delay Rentals 42,822
Mining and related equipment, net 289,134
________
Total assets $385,084
Accounts payable $102,333
Short term notes payable 39,600
Stockholders' equity 243,151
________
Total liabilities and stockholders'
equity $385,084
STATEMENT OF OPERATIONS OF NOVACHEK
Sales $ 0
Other income 5
Marketing expense 0
Operating expenses (13,170)
________
Net Loss $(13,165)
(5) Kaolin receivables of $376,392 were collected during the
quarter ended December 31, 1997. Due to the seasonal nature of the
kaolin business, no sales were made after this period until April,
1997.
(6) The Company has entered into an agreement for the sale of its
kaolin mine. If the sale is approved by shareholders, the Company
will receive a total of $700,000 for the Cement Kaolin Mine,
including $125,000 in cash at closing, an aggregate of $450,000 in
non-interest bearing semi-annual installments on August 15 and
December 15 of each year until August 15, 2001, and a final payment
of $125,000 on December 15, 2001. Up to $70,008 of these proceeds
will be paid to Thomas F. Kane, a former director, as part of the
Company's purchase of his Common and Preferred Stock, over the same
period as the NCA payments. The Company will retain both a
mortgage and a security interest covering the property being sold
in order to secure full payment of the purchase price. See
Managements Discussion and Analysis for further details concerning
this transaction.
(7) Net loss per common share is determined by dividing net loss
attributable to common stock by the weighted average number of
common shares outstanding during each period. A fully diluted loss
per share is not computed because conversion of the Preferred
Shares mentioned above, and outstanding options would be
antidilutive
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Management's discussion of anticipated future operations contains
predictions and projections which may constitute forward looking
statements. The Private Securities Litigation Reform Act of 1995,
including provisions contained in Section 21E of the Securities &
Exchange Act of 1934, provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor,
the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from
the anticipated results of other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties
that may affect the operations, performance, development and
results of the Company's business include the following:
(a) The Company may not be able to obtain the additional
funding necessary to continue operations in its Nome
gold prospect and/or the funds actually necessary to
operate that project may be significantly greater than
those anticipated by management.
(b) Borax may determine not to pursue or to substantially
delay pursuing the Company's paper-grade kaolin venture.
(c) The Company may not be able to find industry partners
for its oil and gas and mineral prospects.
(d) Proceeds from the Company's sale of certain assets may
be insufficient to purchase assets which produce income
sufficient to satisfy the Company's working capital
needs.
(e) The Company may be unable to purchase, or to purchase
at a profitable price, mineral assets which meet the
Company's operational criteria.
RESULTS OF OPERATIONS
The Company realized net losses for the three month period and
six month period ended March 31, 1997 of $111,122 and $119,954,
respectively, compared to net losses of $70,498 and $119,121 for
the same periods in 1996.
Mineral sales, all of which in the three month fiscal period
were royalties on gravel sales, decreased $17,670 to $1,913 for the
three months ended March 31, 1997 compared to mineral sales of
$19,583 for the same period in 1996. The difference between the
1997 period and the 1996 period is wholly due to a more accurate
accrual of gravel sales royalties in the first three months of
fiscal 1997 than in the first three months of the prior fiscal
year. For the six months ended March 31, 1997 and 1996, mineral
product sales were $193,469 and $162,091, respectively. The
increase in the 1997 period reflects higher kaolin sales due to
increased kaolin purchases by the Company's sole customer and more
efficient kaolin shipments than in the comparable fiscal period.
Poor railcar turnaround times in the 1996 period limited the
Company's ability to supply customer needs in that period. This
was corrected in the 1997 period. Mining costs, including
transportation and royalties in the 1997 six month period were
higher as a percent of sales than in the 1996 period. Costs
increased at a more rapid rate than prices due to higher
transportation costs and timing differences in the recognition of
direct mining costs.
Oil and gas sales for the three months and six months ended
March 31, 1997 decreased $22,260 and $25,282, respectively, to
$36,106 and $77,722 compared to $58,366 and $103,004 for the three
months and six months ended March 31, 1996. The Company sold
several oil & gas producing assets as of November 1, 1996,
primarily overriding royalty interests in producing oil & gas wells
in the Wyoming Overthrust Belt. In addition, the Company sold a
small portion of its oil production in September, 1996. The
decrease in oil and gas sales is primarily attributable to the
lower volume of oil and gas produced net to the Company's interest
as a result of these sales, which more than offset the positive
effect of substantially higher oil and gas prices in the fiscal
periods compared to the comparable periods. The sales volumes and
average sales prices during the periods were as follows:
Three Months Ended
March 31, 1997 March 31,1996
Sales
Oil (bbls) 1,441 2,724
Gas (MCF) 3,667 17,557
Average Sales Price
Oil ($/Bbl) $19.00 $14.61
Gas ($/MCF) $ 2.30 $ 1.06
Six Months Ended
March 31, 1997 March 31,1996
Sales
Oil (bbls) 2,805 4,764
Gas (MCF) 12,876 28,337
Average Sales Price
Oil ($/Bbl) $19.20 $15.67
Gas ($/MCF) $ 1.49 $ 0.96
Mining costs, including transportation and royalties were
$4,788 for the three months ended March 31, 1997 compared to $6,119
for the same period in 1996. The decrease is due to timing
differences in the accrual of gravel royalties Mining costs were
$159,355 for the six months ended March 31, 1997 compared to
$101,033 for the same period in 1996. The increase in mining
costs in the six months is due to the increase in kaolin production
and sales in the 1997 period. Mining costs were higher as a
percent of sales than in the 1996 period. Kaolin mining costs
increased at a more rapid rate than prices, due to higher
transportation costs and timing differences in the recognition of
direct mining costs.
Oil and Gas lease operating expenses including production
taxes increased $2,919 and $719 for the three months and six months
ended March 31, 1997 as compared to 1996. The increase is due
primarily to increased workover expenses in the 1997 period. The
production sale in November was a sale of royalty interests, which
have a much lower level of associated production costs than working
interest production. Hence, the sale did not reduce production
costs in proportion to the reduction in oil and gas sales revenue
resultant from the sale.
General and administrative expenses decreased slightly for the
three months ended March 31, 1997 as compared to the same period in
1996. These expenses increased $19,545 for the six month period.
The decrease in the three month period was primarily due to close
attention to administrative overhead expenses, which offset higher
legal expenses, primarily those associated with the planned sale of
the Company's kaolin mine. Increased legal expenses and accounting
fees also were primarily responsible for the increase in general
and administrative expenses in the six month period. Legal
expenses were higher due to the negotiations and associated legal
documents required by the planned sale of the Company's kaolin
mine, and connected with the settlement of a dispute with a major
shareholder. Both of these events are non-recurring, and neither
impacted the 1996 period. Accounting expenses were higher in the
1997 period primarily due to audit work relating to the Company's
investment in NovaChek Limited Liability Company, which had not
been formed in the 1996 period.
Depletion, depreciation, and amortization decreased 56% to
$7,271 and 52% to $16,763, respectively, in the three months and
six months ended March 31, 1997, compared to $16,471 and $34,617 in
the fiscal 1996 period. This decrease was primarily the result of
the sale of producing assets, which substantially reduced the
full-cost pool.
The Company's share of losses of NovaChek Limited Liability
Company in the three months and six months ended March 31, 1997
were $5,529 and $11,819, respectively. NovaChek Limited Liability
Company had not been formed in the 1996 fiscal periods.
Interest income increased to $2,690 and $5,866 in the three
months and six months ended March 31, 1997, respectively, compared
to $1,402 and $3,501 in the 1996 periods, reflecting more cash on
hand invested in short-term obligations. Interest expense in the
three months and six months ended March 31, 1997 increased from
zero to $4,547 and $12,880, respectively, due to the issuance of
interest-bearing convertible subordinated debentures in the third
quarter of fiscal 1996. There were no such debentures outstanding
in the comparable 1996 fiscal periods. A gain on the sale of
producing oil and gas assets of $76,557 was realized in the six
months ended March 31, 1997. There were no asset sales in the 1996
period.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary source of cash flow during the six
months ended March 31, 1997 was the collection of accounts
receivable and proceeds from the sale of assets. Net proceeds from
the sale of oil and gas assets of $229,957 were realized in the six
months ended March 31, 1997. There were no such asset sales in the
1996 period. Cash used by operations totaled $38,456 for the six
month period ended March 31, 1997 as compared to cash provided by
operations of $107,340 for the same period in 1996. Although
revenues increased $6,096 in the 1997 period, expenses were $60,792
higher, due primarily to higher mining costs and an increase in
general and administrative costs. Additionally, accounts payable
decreased $235,221 in the 1997 period, compared to an increase in
the accounts payable in the 1996 period of $44,350, a difference
between the two periods of $279,571, more than offsetting the
$258,824 increase in the collection of receivables in the 1997
period as compared to the 1996 period. Cash and cash equivalents
for the period decreased $30,302 resulting in cash on hand at March
31, 1997 of $49,925, compared to cash on hand at March 31, 1996 of
$321,977. The Company purchased 510,342 shares of common stock and
895,415 shares of convertible preferred stock from a major
shareholder in settlement of a dispute for $150,000 in cash (plus
additional future consideration) in the 1997 six month period. No
such stock purchase took place in the 1996 period. In addition, in
the 1996 period, the Company issued $203,125 of convertible
subordinated debentures and issued a short term note for $100,000,
which two events, net of a $150,000 investment in NovaChek Limited
Liability Company, were chiefly responsible for theincrease in cash
in the 1996 period.
CAPITAL RESOURCES-UTILIZATION OF CAPITAL
For the six month period ended March 31, 1997, the Company
reduced accounts payable by $235,221. Accrued liabilities
decreased $33,493. Additions to property and equipment were
$13,752, and investment in and advances to NovaChek Limited
Liability Company were $58,432, resulting in cash provided by
investing activities, net of $229,957 from the sale of assets, of
$157,773. In the comparable period, net cash used by investing
activities was $159,308, primarily due to the $150,000 investment
in NovaChek Limited Liability Company. All funds for capital
expenditures for the remainder of the year are expected to be
provided by proceeds from operation of the kaolin mine until
closing of the sale of the mine, from the sale of the Company's
kaolin mine, if approved by the Company's shareholders, from
short-term borrowings, from other operating cash flow, and from
existing cash balances. In connection with the repurchase of stock
from a major shareholder in settlement of a dispute for $150,000 in
cash, additional payments based on revenues from either the
operation of or the sale of the Company's cement-grade kaolin mine
of up to an aggregate value of $70,008 must be paid over a period
of years. The Company anticipates the portion of such payments
which may be due in the 1997 fiscal year could amount to
approximately $19,000. The Company may also purchase a portion of
its common stock in the event the sale of its kaolin mine is
approved by shareholders, which is likely, by offering shareholders
dissenter's rights. While it cannot be determined in advance how
many shares might be purchased, nor the exact price of such shares,
assuming a purchase price of $.05 per share, and the purchase of
from 800,000 to 2,000,000 shares (the number of shares to be
purchased will be lowered by the fact that none of the principals
of the Company will be selling any of their shares),the Company
estimates the cost of such repurchase of stock at between $40,000
and $100,000. It is the Company's present intention to finance
such repurchase from internal cash flow and cash resources, but the
Company may offer to sell preferred and/or common stock in a
private placement to replace all or a portion of these funds and
provide additional capital to acquire new sources of cash flow.
LIQUIDITY
At March 31, 1997, the Company's working capital surplus
totaled $26,853 as compared to a working capital surplus of
$198,637 at September 30, 1996. Liquidity for the six months ended
March 31, 1997 was provided by proceeds from the November sale of
oil & gas producing assets and leasehold interests, primarily
overriding royalty interests in producing oil & gas wells in the
Wyoming Overthrust Belt and by the collection of receivables.
However, liquidity was reduced by the $150,000 stock repurchase,
the $119,594 operating loss, reductions in accounts payable and
accrued liabilities, by investment in NovaChek Limited Liability
Company, and additions to property and equipment. Both the
$150,000 stock repurchase and the investment in NovaChek are
non-recurring events.
Based on cash flow projections through 1997, it is
anticipated that the Company will have adequate cash resources if
it continues to operate at current levels, although short-term
borrowings will have to be made due to timing differences in the
payment of kaolin mining costs and the receipt of payment for
kaolin sales. Because the Company has sold a portion of its oil
and gas producing assets, and oil and gas sales from its other
properties continue to decline, and the Company has only one
customer for its kaolin, the cash flow generated by oil, gas and
kaolin sales is not sufficient to generate positive cash flow. In
the event the sale of its kaolin mine takes place, cash resources
will be enhanced over the next twelve months, and further payments
pursuant to the sale will be received over the next five years,
although the Company may have to expend a portion of its cash
resources to repurchase all shares tendered pursuant to the
offering of dissenters' rights. The Company has permitted a gravel
pit on two leases in Minnesota. A local contractor mined and
marketed the gravel in 1996 and paid the Company a royalty based on
gravel sold. It is anticipated that further gravel royalties may
be realized from this property in 1997. The Company will
aggressively seek other sources of cash flow in 1997, including the
acquisition of assets or of other companies, mergers, and private
and/or public financing.
SALE OF THE COMPANY'S KAOLIN MINE
Pursuant to a contract dated January 25, 1997, the Company
agreed, subject to shareholder approval, to sell its cement-grade
kaolin mining operations and property (the "Cement Kaolin Mine")
near Redwood Falls, Minnesota, to Northern Con-Agg, Inc., an
unaffiliated Minnesota corporation. A portion of the Cement Kaolin
Mine is located on lands which are currently subject to a joint
venture between the Company and U.S. Borax Inc. ("Borax"), which
was formed in 1993 primarily to explore, develop and produce high
quality paper-grade kaolin. No paper-grade kaolin has yet been
sold from the joint venture property. Borax has agreed to release
the portion of the paper-grade kaolin property occupied by the
Cement Kaolin Mine from the joint venture to permit the Company's
sale of the mine to NCA. The Company will be selling all of its
cement-grade kaolin operations to NCA, while retaining its interest
in the paper-grade joint venture. The Cement Kaolin Mine
encompasses 314 acres, and the paper-grade kaolin property retained
by the Company encompasses 4628.59 acres. After the sale to NCA,
ownership of the cement-grade kaolin property will be separate and
distinct from ownership of the paper-grade kaolin property. Except
for the inclusion of an immaterial portion of the paper grade
kaolin prospect in the sale to NCA, the sale will have no impact on
the Company's joint venture with Borax.
Under the terms of the purchase and sale agreement with NCA
(the "NCA Agreement"), NCA will acquire approximately 78 fee acres
owned by the Company and an additional 236 acres leased by the
Company, as well as the inventory, equipment, contracts, permits
and other personal property held by the Company in connection with
these cement-grade mining operations. NCA proposes to continue the
current cement-grade operations of the Company, and has agreed to
turn over to the Company any profits which it may earn during a 21
year period after the date of closing as a result of sales of
kaolin produced from the property to paper manufacturers. The
Company agrees that, if it or any joint venture of which it is a
member sells kaolin to the cement-industry in Minnesota, Iowa,
North Dakota, South Dakota or Wisconsin during a five year period
following the closing, the Company it will pay to NCA the sum of
$30,000 for each year in which any sale occurs.
NCA will pay a total of $700,000 to the Company for the Cement
Kaolin Mine, including $125,000 in cash at closing, an aggregate of
$450,000 in non-interest bearing semi-annual installments on August
15 and December 15 of each year until August 15, 2001, and a final
payment of $125,000 on December 15, 2001. Up to $70,008 of these
proceeds will be paid to Thomas F. Kane, a former director, as part
of the Company's purchase of his Common and Preferred Stock, over
the same period as the NCA payments. The Company will retain both
a mortgage and a security interest covering the property being sold
to NCA in order to secure full payment of the purchase price. NCA
will assume liability for all existing contracts relating to the
property, although the Company will continue to have liability for
any conduct before the closing date and, any contracts not
disclosed to NCA. Included among the contracts assumed by NCA is
an agreement with Union Pacific Railroad which requires the Company
to pay the railroad for a minimum usage of 300 rail cars, whether
actually used by the Company. NCA will assume this obligation and
Nova will have no further liability for railcar usage. The Company
believes that it has disclosed all pertinent contracts to NCA. The
Company intends to secure appropriate lessor consents to eliminate
any liability to the lessor following assignment of the lease.
If NCA expands the current cement-grade mining operations, the
lessor of the Mine Property will have to be relocated from her home
on the property, which recently has been appraised at $25,000. When
this occurs, NCA will pay the first $25,000 of relocation costs,
Nova will pay 50% of the costs, if any, between $25,000 and
$75,000, and Nova will pay the entire cost, if any, in excess of
$75,000. Shortly following execution of the NCA Agreement, the
Company incurred approximately $5,800 in additional drilling and
analysis costs to meet requests of NCA for additional exploration
data.
Prior to the NCA Agreement, NCA had no relationship to the
Company, its officers or directors. The Company has not secured an
independent opinion concerning the fairness of the consideration to
be paid by NCA, but the Company's officers believe such
consideration to be appropriate based upon the Company's prior net
income from the property, the anticipated kaolin reserves, and the
demand for cement-grade kaolin in the area. There will be no
change in the rights of security holders of the Company as a result
of this vote, except with respect to the holders of Convertible
Debentures, as described below. The Company is not in default with
respect to obligations under any of its securities.
If shareholder approval for the sale of the cement-grade
kaolin mine is not received, Nova will continue to operate the mine
as it has in the past and continue to pursue additional customers
and markets for the kaolin. The Company would seek to retain its
current customer and attempt to obtain business from a previous
customer. Any additional customers could not be obtained for the
current mining season. The Company would consider other
alternatives, such as entering into joint venture arrangements for
the marketing and sale of kaolin, possibly with the company which
desires to purchase the mine, and/or other companies which supply
materials to the cement industry. If shareholder approval of the
sale is not obtained, approximately $20,000 in transactional costs
will notbe recovered.
Potential Impact of the Proposed Sale on the Company's Convertible
Debentures
The Colorado Business Corporation Act (the "Act") requires
approval of the majority of shares voting at a duly noticed and
conducted meeting for the sale of all or substantially all of a
corporation's assets outside of its normal course of business. The
Company has determined that, while the Cement Kaolin Mine is a
principal asset, because the remaining assets and business are not
insubstantial and proceeds of the sale are intended to be used to
continue the Company's business in the same fashion, a shareholder
vote is not required by law. Nonetheless, since the Cement Kaolin
Mine sale is a material transaction, the Company believes that its
shareholders should be informed about and vote upon the approval of
that transaction.
As part of its organization and capitalization of NovaChek
Limited Liability Company, an Idaho limited liability company
formed to develop part of the Company's gold prospect in Nome,
Alaska, the Company sold an aggregate of $250,000 of convertible
subordinated debentures (the "Debentures"). The Debentures require
semi-annual payments of interest and payment of principal and
accrued interest on April 1, 2001. At the option of its holder,
each Debenture matures and is fully payable upon the Company's
"sale, exchange, base or other disposition of all or substantially
all of [its] assets." Notwithstanding the Company's belief that
the sale of the Cement Kaolin Mine is not such an event, upon
litigation brought by a Debenture holder, a court may disagree and
order early payment of the Debentures. Such a payment would have
a materially adverse impact on the Company, require the use of
proceeds from the Mine sale and threaten the ongoing viability of
the Company.
Vote Upon Sale
The affirmative vote by a majority of all of the shares of
Common and Preferred Stock entitled to vote as of May 1, 1997 is
required for approval of the agreement to sell the Cement Kaolin
Mine.
Rights of Dissenting Shareholders
The Act affords a shareholder of a Colorado corporation the
right to dissent from certain actions requiring shareholder
approval and to require that the corporation purchase the
shareholder's stock at a "fair value" (the "right of appraisal").
If a vote were required to approve the sale of the Cement Kaolin
Mine (which the Company does not believe), rights of appraisal
still would not be available to dissenting shareholders because of
an exemption for Corporations like Nova whose common stock is owned
by more than 2,000 shareholders.
Notwithstanding the absence of a required vote and presence of
an exemption from rights of appraisal provided by the Act, the
Company has decided to offer to purchase all of the shares of
Common Stock of any shareholder who does not vote in favor of the
Cement Kaolin Mine sale and properly asserts his right of
appraisal. Management believes that the conjunction of its Cement
Kaolin Mine sale and its sale of oil and gas overriding royalty
interests and purchase of the stock of Thomas F. Kane (as described
below) represent material events which might prompt a shareholder
to sell his Common Stock if an adequate market for that Stock
existed. The Company also recognizes that the absence of an active
trading market impedes such a sale. As such, management wishes to
afford shareholders who disagree with these decisions or with the
directors' decision to continue operation of the Company the
ability to sell their Common Stock at a price which management
believes is the appropriate market price.
"Fair Value" is defined by the Act as "the value of the shares
immediately before the effective date of the corporate action to
which the dissenter objects, including any appreciation or
depreciation in anticipation of the corporate action except to the
extent that exclusion would be inequitable." Fair value imports a
broader approach to valuation than "fair market value". The most
important factors are market value, investment or earnings value
and net asset value. For public companies, like Nova, great weight
is given to the stock's market price. Where the stock is thinly
traded, courts also consider several other elements including book
value, liquidity value, net asset value and capitalized earnings
value. The Company intends to use the bid price for its stock as
the fair value. The most recent bid price is $.05 per share in
February, 1997. Management believes that this price is higher than
any value determined under any other valuation theory. The Company
purchased all the common stock of one of its directors and a
principal shareholder at $.03 per share, less than the bid price of
that stock at the time.
FUTURE TRENDS
Kaolin sales are seasonal in nature and the mining of kaolin
is dependent on favorable weather conditions, demand by cement
companies for this product, and other factors over which the
Company has no control. The Company has a sales contract with a
cement company which expires in December, 1997. The fact that the
Company has only one purchaser for its kaolin has had and will
continue to have a significant negative impact on the Company's
cash flow and operations. In addition, the short line railroad
which directly serves the mine is in need of rehabilitation to
increase the reliability of the line and make it less susceptible
to weather delays. There is no such rehabilitation planned at
present. However, rehabilitation of this line has been needed for
a number of years, and an acceptable level of service has been
maintained on the line through normal maintenance procedures. This
rail line has been offered for sale by the owner/operator, and the
level of service which will be offered by the new owner, should a
sale take place, cannot be determined.
The Company will use some of the proceeds from its asset sales
for working capital. Management contemplates applying the majority
of the proceeds to the development of new business and acquisition
of new mineral properties, includiong (1) an attempt to identify
and acquire on a reasonable basis a kaolin or other similar
industrial minerals mine in a more favorable marketing area, where
good transportation facilities and ready access to numerous markets
provide a more favorable long-term environment in which to operate
and (2) identification of potential acquisition candidates,
ideally, small mineral companies or the mineral operations of
larger companies which could provide immediate cash flow and the
opportunity for future growth. The potential for liquidity
afforded by free-trading stock and an interest in the Nova
properties which offer the potential for significant development,
not otherwise available to the stockholders of potential
acquisition candidates, may facilitate Nova's ability to consummate
such acquisitions.
While management intends to pursue both options, the Company's
current projects in oil and gas exploration, paper-grade kaolin
exploration, and gold exploration will continue to be aggressively
pursued. The Company has two important oil and gas exploration
properties which are ready for immediate drilling, on at least one
of which it believes it can obtain a drilling commitment in 1997.
Both are being extensively marketed to the industry. If either or
both of these properties are drilled, and a commercial discovery is
made, the Company will need capital to conduct development
drilling. The mine sale proceeds would provide the Company with
the option to internally finance this development, or to externally
finance it on more favorable terms than would otherwise be
possible. Without liquid capital produced from the asset sales,
the Company's only option would be to further reduce its interest
in what would then be a successful project, which would not be in
its long-termbest interests.
The prices the Company receives for its oil and gas products
continue to fluctuate, although current prices are generally higher
than those obtained last year. The Company's largest producing oil
field, the North Rainbow Ranch Unit, produces a heavy, sour crude.
The price paid for this crude is significantly less than for a
higher quality crude. Since most of the Company's oil sales are
from this field, and it is in the latter stages of its lifetime,
when production is decreasing, it takes a significant increase in
oil prices for oil sales to increase. In addition, much of the
company's gas is sold on the spot market and such sales are subject
to both price and market demand fluctuations.
Sufficient funding has been obtained to initiate gold
production efforts on the NovaChek properties for the 1997 season,
although approximately $40,000 in additional monies will be
required for additional working capital for NovaChek to fund the
project through the end of June, after which time, if the project
is successful, revenues from gold sales should enable the project
to fund working capital needs from internal cash flow. Most of the
additional $40,000 in funding has been arranged, and it appears
likely all or most of the additional monies needed will be
obtained. Ifcommercial gold production can be established in the
1997 season, the Company could recover at least a portion of, and
perhaps all, of the funds it has advanced to NovaChek, and cash
flow from gold production will have been established. It cannot be
determined at this time whether NovaChek Limited Liability
Company's gold mining operations will be successful. If commercial
operations can be established on this property, the Company should
be able to generate cash flow from this investment in future years,
the level of which cannot be determined with certainty until such
operations have been established and maintained for a reasonable
period of time.
In March, 1997, the Company and the McDonald Trust entered
into an agreement with Roaring River Resources LLC ("Roaring
River"), an unaffiliated third party, pursuant to which Roaring
River was granted an option to acquire 1600 acres of leases in the
Great Salt Lake. The Company and the Trust will each retain a 1.5%
overriding royalty if the option is exercised. If the option is
exercised, the total payments to Nova and the Trust will be
$250,000.
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 ares, 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 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 term. On a long-term basis,
Management must employ the proceeds from these asset sales in the
development of the Company's remaining assets and to acquire new
assets in order to generate cash flow to support operations and to
offset what would otherwise be the gradual liquidation of the
assets sold were the proceeds of those sales used simply to fund
operating losses. There can be no assurance that Management will
be successful in this endeavor.
RESIGNATION OF INDEPENDENT ACCOUNTANTS
On May 5, 1997, KPMG Peat Marwick LLP ("KPMG") notified the
Company that KPMG was withdrawing as auditor for the Company,
effective May 2,1997.
There have been no disagreements between the Company and KPMG
during the period for which KPMG served as the Company's auditors.
Company management felt that the Company should seek the
services of a smaller firm, which could offer the Company more
cost-effective accounting services.
At this time, the Registrant has not engaged a new auditor,
but expects to do so expeditiously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None
(b) Form 8-K. Reports on Form 8-K were filed November 14,
1996, on March 4, 1997, and on May 5, 1997 and are
incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf of the undersigned thereunto duly authorized.
NOVA NATURAL RESOURCES CORPORATION
Date: May 15, 1997 By: /s/ Brian B. Spillane
Brian B. Spillane,
President, Director, and
Chief Executive Officer
Date: May 15, 1997 By: /s/ James R. Schaff
James R. Schaff,
Secretary-Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
SEP-30-1997
<PERIOD-END> MAR-31-1997
MAR-31-1997
<CASH> 49525
49525
<SECURITIES> 0
0
<RECEIVABLES> 23029
23029
<ALLOWANCES> 0
0
<INVENTORY> 0
0
<CURRENT-ASSETS> 75802
75802
<PP&E> 6819383
6819383
<DEPRECIATION> 6133891
6133891
<TOTAL-ASSETS> 1007993
1007993
<CURRENT-LIABILITIES> 48949
48949
<BONDS> 250000
250000
0
0
1792267
1792267
<COMMON> 598585
598585
<OTHER-SE> (1728062)
(1728062)
<TOTAL-LIABILITY-AND-EQUITY> 1007993
1007993
<SALES> 38019
271191
<TOTAL-REVENUES> 40709
353614
<CGS> 0
0
<TOTAL-COSTS> 138951
460328
<OTHER-EXPENSES> 0
0
<LOSS-PROVISION> 0
0
<INTEREST-EXPENSE> 12880
12880
<INCOME-PRETAX> (111122)
(119594)
<INCOME-TAX> (111122)
(119594)
<INCOME-CONTINUING> (111122)
(119594)
<DISCONTINUED> 0
0
<EXTRAORDINARY> 0
0
<CHANGES> 0
0
<NET-INCOME> (111122)
(119594)
<EPS-PRIMARY> (.02)
(.02)
<EPS-DILUTED> (.01)
(.01)
</TABLE>
