UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to_______________
Commission file number 0-15078
NOVA NATURAL RESOURCES CORPORATION
(Name of small business issuer in its charter)
COLORADO 84-1227328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
789 Sherman Street, Suite 550
Denver, CO 80203
(Address of principal (Zip Code)
executive offices)
(303) 863-1997
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
-None-
Securities registered under Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be
filed by 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 .
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year totalled:
$62,915.
Documents Incorporated By Reference: None
Transitional Small Business Disclosure Format Yes_____ No X
As of December 31, 1998, the Registrant had outstanding 1,792,267
shares of Convertible Preferred Stock, $1.00 par value, and
6,274,131 shares of Common Stock, $.10 par value, its only classes
of voting stock, and $250,000 principal amount of convertible
subordinated debentures.
Aggregate market value of the 3,279,347 shares of Common Stock
owned by Non-affiliates of the Registrant as of January 12, 1999
was $114,777, based on the average of the bid and ask prices on
January 12, 1999. All Convertible Preferred Stock is owned by
affiliates.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Nova Natural Resources Corporation (the "Registrant", "Company" or
"Nova") was incorporated under Colorado Law on April 1, 1993 and is
the surviving company in a merger, effective February 1, 1995, of
the Company and Nova Natural Resources Corporation, a Delaware
corporation. The merger was effected to change the Company's
domicile from Delaware to Colorado and caused no change in the
Company's capitalization. The Delaware corporation was the
successor to Nova Petroleum Corporation and Power Resources
Corporation, which merged in 1986. Prior to that merger, Nova
Petroleum Corporation and Power Resources Corporation operated
since 1979 and 1972, respectively.
BUSINESS DEVELOPMENT
Operations
In its past three fiscal years, the Company has focused on
marketing and selling kaolin clay from its Minnesota kaolin mine,
exploring for paper-grade kaolin on leases elsewhere in Minnesota,
seeking partners for exploration and development of gold on its
properties in Alaska and Colorado and seeking partners for
exploratory drilling on two oil and gas prospects in Wyoming.
While the Company receives revenues from interests in oil and gas
wells in the western United States and owns interests in
exploratory oil and gas leases, the Company does not operate any
wells.
Significant Developments During Fiscal 1998
NovaChek Limited Liability Company
In the Spring of 1996, the Company organized NovaChek Limited
Liability Company ("NovaChek"), an Idaho Limited Liability Company,
which was capitalized by an offering pursuant to Regulation D under
the Securities Act of 1933, as amended, principally to fund
operations to recover placer gold and related minerals on certain
State of Alaska off-shore mining leases held by Nova and located
near Nome, Alaska. Nova held a 42% membership interest in NovaChek
during 1996. Offering proceeds aggregating $350,000 were received
from the sale of 35 Units at $10,000 per Unit (an additional five
Units were sold for services).
NovaChek was managed by the Company and Chek Technologies and
Exploration, LLC ("Chek"), a Nevada limited liability company. The
Company served as the administrative manager of NovaChek, including
all day-to-day responsibilities not entailing mining activities.
Chek served as the field operations manager with responsibility for
supervising the mining activity and related matters. Nova's field
operations role was primarily geological supervision. The ability
to decide on major policy matters was a shared decision with Chek
and a number of significant decisions required approval of both
parties.
The Company and Chek Technologies and Exploration ("Chek") agreed
to reduce their interest in NovaChek in order to raise more capital
in 1997. The Company's interest was reduced to 35.14%. Each Unit
was composed of one membership interest in NovaChek and a
convertible debenture issued by the Registrant. The price of each
Unit was allocated at $3,750 as a capital contribution to NovaChek
and $6,250 for each debenture. Nova also contributed a significant
portion of the debenture proceeds as capital for NovaChek. Each
debenture provides for interest payments at an annual rate of 10%
of the face amount, payable semi-annually; may be converted into
the Company's common stock at the rate of one share of stock for
each $0.15 of principal; may be redeemed by the Company after March
31, 1998 (holders of $175,000 face amount of the debentures, which
includes both affiliates and non-affiliates, agreed in June, 1996
that the Company could call the debentures after September 1, 1996,
provided that such `early call' would cause a reduction in the
conversion price to $0.10/share and the payment of six months
advance interest); and is due on April 1, 2001. No early call has
been made by the Company.
Nova obtained all of the necessary permits so that NovaChek could
conduct the contemplated mining operations on its leases. All of
the necessary permits were in place in early June, 1996.
During 1996 NovaChek encountered numerous difficulties and delays
due to weather and mechanical failure. As a result of all of these
difficulties, very limited operations, consisting of approximately
14 hours of intermittent operation of the suction equipment, were
conducted in the 1996 season.
The Company believed that its experience during the 1996 season
would dictate the modifications needed to improve performance in
1997. However, since NovaChek had expended its working capital
during 1996 without generating operating revenue, additional
funding was needed for the 1997 season. Chek committed to
contribute approximately $60,000 of the funds needed, several of
the members invested an additional $25,000 in cash, the divers
accepted membership interests in lieu of cash payment for a portion
of their services, and Chek's attorney also accepted a membership
interest in return for certain legal work for NovaChek. These
contributions enabled the project to proceed.
During the 1997 season the modified dredge was finally launched in
June. A total of 142.7 ounces of gold were mined and sold.
Production was less than projected due to numerous weather and
mechanical problems and a thin layer of densely packed cobble
gravel covering the entire area. This "armor" masked the pay zone
and made it impossible to limit mining to the area of high grade.
The dredge could not efficiently mine the hard packed gravel on the
sea floor, and it could not safely operate in the winds which
developed on a regular basis.
The poor results achieved, lack of funds to continue operations,
and low gold prices, combined with the poor operational experience
made it impossible to raise additional funds. Consequently, the
Managers--Nova and Chek--recommended to the members of NovaChek LLC
that the LLC be dissolved, effective December 22, 1997, and its
assets liquidated to satisfy its outstanding debts, which were
primarily owed to Nova, three members who are also affiliated with
Nova (two officers and directors and one director who is not an
officer), and one member who is a principal of Chek. The members
approved liquidation of NovaChek on December 22, 1997. The
liquidation of NovaChek's assets was not sufficient to discharge
these debts, and accordingly, Nova wrote down the value of its
NovaChek investment and loans on its fiscal 1997 financial
statements to $4,000.
In November, 1998 the Company received a check for final settlement
of the sale of the assets of the LLC. NovaChek, LLC had a total of
$21,008 in cash, and loans payable of $153,992 after the
liquidation of all the assets of the partnership. Nova received a
total of $13,616 in the final settlement, which was significantly
less than was owed to the Company.
Lease Position Offshore Nome, Alaska Reduced
The Company released or sold all 6 of its State of Alaska Offshore
Mining leases covering 21,411 acres offshore Nome, Alaska during
fiscal 1998. The Company retains a 10% Gross Sales term royalty on
portions of 3 of the leases sold to Arctic Whitney, Inc. covering
9,018 acres. The royalty remains in effect until the Company
receives a total of $360,000 in royalty revenue from the leases,
after which the Company's retained royalty will terminate. Due to
extreme weather conditions and mechanical problems, Arctic Whitney,
Inc. reported no gold sales for the current fiscal year. The
property has not, at this time, generated any funds to Nova, and it
is impossible to determine if it will generate any funds to the
company in the future.
Oil And Gas Operations
On November 14, 1996, the Registrant sold at an auction conducted
by The Oil & Gas Asset Clearinghouse in Houston, Texas several oil
& gas producing assets and leasehold interests, primarily
overriding royalty interests in producing oil & gas wells in the
Wyoming Overthrust Belt. Proceeds from this sale, effective as of
November 1, 1996, net of commissions and direct selling costs paid
to the Clearinghouse were $230,257.
The Company and Robert McDonald, a Director and the Company's
largest shareholder, have been actively seeking industry
participation in exploratory drilling on a gas prospect in Wyoming.
The Company holds an undivided interest of 50% in this prospect,
with the Robert McDonald Trust, of which Mr. McDonald is Trustee,
holding the balance of the interest. Another prospect in Wyoming
was sold, and the Company collected a prospect fee of $13,750. If
the prospect was not drilled or a lease extension granted before
December 31, 1997, the leases on this particular prospect would
expire.
The prospect was not drilled, and the leases expired in December,
1997. The property was put up for auction in 1998, and the company
which bought them from Nova was the successful bidder for the
property. As a result, Nova retains a 4% overriding royalty
interest in any production from the property. However, there is no
guarantee that the property will be drilled or that if drilled,
that drilling will be successful.
Nova has no patents, trademarks, licenses, franchises, or
concessions other than certain oil and gas leasehold interests
granted by federal, state, and other governmental authorities, and
private mineral owners. The Company's oil and gas business is not
seasonal except to the extent that weather and market conditions,
and certain lease terms can affect oil and gas exploration and
production activities.
Sale Of Kaolin Mine
Pursuant to a contract dated January 25, 1997, the Company sold its
cement-grade kaolin mining operation and property (the "Cement
Kaolin Mine") near Redwood Falls, Minnesota, to Northern Con-Agg,
Inc. A portion of the Cement Kaolin mine was located on lands
which were 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 released 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 sold
all of its cement-grade kaolin operations to NCA, while retaining
its interest in the paper-grade joint venture.
NCA will pay a total of $700,000 to the Company for the Cement
Kaolin Mine. The Company received $210,420 in 1997, and will
receive an aggregate of $350,000 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 the gross NCA proceeds is payable 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 assumed liability for all
existing contracts relating to the property.
Purchase of Stock of a Director and Preferred Shareholder
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. 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
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. 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.
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.
Stock Repurchase
The Company decided to offer to purchase all of the shares of
Common Stock of any shareholder who did not vote in favor of the
Cement Kaolin Mine sale and requested such a repurchase. Pursuant
to a procedure established by management in a manner similar but
not identical to the procedure for dissenter's rights established
by the Colorado Business Corporate Act. Management believed that
the combination 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 represented material events which might have
prompted a shareholder to sell his Common Stock if an adequate
market for that Stock existed. The Company recognized that the
absence of an active trading market impeded such a sale. As such,
management decided to afford shareholders who disagreed with these
decisions or with the directors' decision to continue operation of
the Company the ability to sell their Common Stock at $.04 per
share.
Shareholders tendered 44 certificates (a total of 13,700 shares)
for redemption in fiscal 1997. In October 1997 (Fiscal 1998) a
total of 411,447 shares were tendered for redemption by 2
shareholders, and in March 1998 a final 426 shares were
repurchased.
Business of the Issuer
Mineral Operations
The Company sold its cement-grade kaolin mine, effective July 22,
1997. Prior to the mine sale, Nova produced and sold 31,634 metric
tons of kaolin to a single customer during fiscal 1997. Pursuant
to the contract of sale of the mine, the Company is restricted from
selling cement-grade kaolin to its former customers and certain
potential customers for a five-year period. The Company presently
has no plans to re-enter this business, and is concentrating its
efforts on its paper-grade kaolin project in Minnesota. The
Company's gold exploration and production activities are currently
limited to the retention of a royalty interest in certain of its
offshore Nome, Alaska leases. While the Company holds properties
for possible future development of limestone products, it has no
immediate plans to pursue that business.
There is a significant difference between cement-grade kaolin and
paper-grade kaolin. Cement-grade kaolin is essentially a low-
alkali source of alumina, which is a necessary ingredient in the
manufacture of cement, and it is mined and loaded directly onto
railcars for delivery to the customer without further processing.
Paper manufacture is a highly sophisticated procedure in which an
extremely thin layer of kaolin is applied to the surface of paper
as a coating while the paper is rotating on a drum at surface
speeds of approximately 4,000 feet per minute. The purpose of the
kaolin coating is to increase brightness and opacity and improve
the printing characteristics of the paper surface. The kaolin must
meet stringent brightness, viscosity and other criteria in order to
be suitable for coating paper. Unless the raw kaolin has a base
level of certain parameters such as brightness, it cannot be
rendered suitable by processing for use in paper manufacture.
Processing of raw kaolin which meets base-level criteria involves
screening to reduce undesirable constituents, magnetic separation,
acid treatment and other steps which purify it and render it
suitable for use in paper manufacture. These processing steps are
expensive, and paper-grade kaolin typically sells for prices in the
range of twenty to thirty times the price of the more common
cement-grade product.
Paper Grade Kaolin
In 1990, Nova granted, and later extended, an option to U.S. Borax
Inc., an unaffiliated mineral development company which is a
wholly-owned subsidiary of London-based Rio Tinto plc("Borax"), to
explore for paper-grade kaolin and other industrial minerals on the
Company's paper grade kaolin prospect (the "Prospect") in
southwestern Minnesota. During the term of the option, Borax
expended approximately $400,000 in combined exploration and land
activities and earned a 65% interest in the Prospect. In August
1992, Borax exercised its option to enter into a joint venture
("the Joint Venture") at which time Nova was paid an additional
$165,000. The joint venture and operating agreement became
effective July 1, 1993. Under the operating agreement, the Company
assigned a 100% working interest in the prospect to Borax in
exchange for the agreement by Borax to pay 100% of the costs of
exploring for and developing paper grade kaolin and other
industrial minerals on property in the prospect. The Company
retained a net proceeds interest in the prospect until Borax
recovered 100% of its capitalized costs. At that time, the Company
had the option to purchase a 30% working interest by paying Borax
an amount equal to 15% of the capitalized costs from April 1, 1993
to the date of recovery of those costs by Borax.
Exploration activities performed by Borax on this exploration-stage
property to date include drilling 185 exploratory core holes on
portions of the properties, bulk sampling, testing and evaluating
the quality of the kaolin contained therein, and the construction
and operation of a pilot-scale kaolin processing facility. A pilot-
scale facility was constructed by Borax and became operational in
Georgia during 1996. Processed kaolin from the Joint Venture's
property has previously been shipped to paper mills in Minnesota
and Wisconsin, where generally successful coating tests were
completed. These tests are steps in the evaluation process and
cannot be regarded as any guarantee of commercial feasibility,
however, the results of these tests are encouraging.
Thirty-six of the 185 core holes were drilled in 1996, but only
seven of the 1996 cores have been processed, nor have the bulk
samples from the last four large-diameter holes been processed.
These four samples represent about 20 tons of kaolin from the
largest and best-defined deposit. After completing the 1996
drilling program, Borax shipped the cores and bulk samples to
Georgia, processed the seven cores, then placed the remaining 29
cores in storage, and ceased active development of the project,
citing budget priorities at Rio Tinto. (Results from the seven
holes are consistent with the good results obtained from previous
drilling in the same area).
In late summer, 1997, Borax informed Nova that processing of the
cores from the 1996 drilling program would be further deferred, and
that Rio Tinto would limit funding to lease maintenance through the
end of 1998. Budget priorities on other worldwide projects were
taking precedence.
Management determined that Borax's plans were unacceptable to Nova,
in view of the favorable results of the program, and Nova notified
Borax that unless Borax was willing to aggressively pursue the
project, Nova desired to immediately open negotiations to replace
Borax with a partner who was willing to carry the project forward
to commercial realization on a more aggressive schedule. In August
1997, representatives of Nova and Rio Tinto/Borax met in Denver and
agreed to propose a termination of the joint venture to Rio Tinto
and to Nova's Board of Directors. Terms acceptable to both parties
were subsequently negotiated, and a definitive agreement was
drafted for signatures. The termination was effective January 1,
1998. Under the settlement agreement, Nova owns an exclusive
option until December, 2001, to purchase all of Borax's earned
interest in the project for a payment of $300,000. If the payment
is not made, Nova must assign the critical leases -- all of which
are held by Nova -- to Borax. During the option period, Nova will
have full operating rights on the properties.
Nova moved the cores and bulk samples to a secure facility under
Nova's control in Milledgeville, Georgia in October 1997, and has
begun analysis of the results of the 1996 drilling campaign. The
Company is seeking a new co-venturer who will agree to implement a
more aggressive development program. In the absence of such a co-
venturer, Nova will be unable to continue the project on the scale
required unless sufficient funding is obtained from other outside
sources, the availability of which cannot be assured at this time.
In order to produce a commercial product, a processing facility and
associated mining facilities would have to be designed and built,
the total cost of which, including the exploration and development
activities contemplated for the next several years, could reach $45
million. The location of these properties affords a significant
transportation advantage over the current primary source of paper-
grade kaolin in Georgia, since a significant portion of the paper
manufacturing plants in the United States which utilize kaolin are
located in the Upper Midwest, within easy reach of the joint
venture's properties.
Nome Gold
In April 1984, Nova acquired a gold prospect located offshore Nome,
Alaska. In May 1985, Nova transferred all of its rights and
obligations in the Nome Gold Prospect (the "Nome Prospect") to
Inspiration Gold, Inc., who later transferred that interest to
Western Gold Exploration and Mining Company, Limited Partnership
("WestGold"), a non-affiliated mining entity, and retained a 10%-
17% net profits royalty.
During five full seasons of dredging in the Nome Prospect, WestGold
recovered approximately 121,000 ounces of gold. Notwithstanding
such operations, WestGold was unable to profitably mine this
property and Nova did not receive any income pursuant to its net
profits royalty interest.
In September, 1990, WestGold terminated its operations and returned
the project to Nova. At that time, Nova also received a
substantial portion of the data gathered by WestGold. The Company
retained a former WestGold geologist who catalogued and put the
data into a form suitable for use in marketing the Nome Prospect to
a new partner. Due to the lack of success in finding a buyer or
joint venture partner who would be willing to make an up-front
payment to the Company of its historical cost in this property, and
the uncertainty as to whether any arrangement entered into would
recover those historical costs, for accounting purposes, the
Company wrote off its investment in the property in fiscal 1995.
However, the Company's efforts to put the property into production
continued.
Nova initiated mining operations on a portion of the property on a
joint-venture basis during 1996, and further operations were
conducted in 1997. The managers of NovaChek -- Nova and Chek
Technologies -- recommended to the members of NovaChek LLC that the
LLC be dissolved and the venture terminated. The termination of
the LLC was approved by the members, effective December 22, 1997.
The lands subject to the NovaChek LLC sublease reverted to Nova due
to NovaChek's failure to fulfill the requirements of the sublease.
The Company released or sold all 6 of its State of Alaska Offshore
Mining Leases covering 21,411 acres offshore Nome, Alaska during
the fiscal year. The Company retains a 10% Gross Sales term
royalty on portions of 3 of the leases sold to Arctic Whitney, Inc.
covering 9,018 acres. The royalty remains in effect until the
Company receives a total of $360,000 in royalty revenue from the
leases, after which the Company's retained royalty will be
terminated. Due to extreme weather conditions and mechanical
problems, Arctic Whitney, Inc. reported no gold sales for the
current fiscal year.
West Rozell Prospect
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 Robert E. McDonald Trust. The Company and the Trust have
jointly been attempting to interest an industry partner in
developing the heavy oil resources known to exist under these
leases, which resources were estimated by Amoco Production Company
to exceed 90 million barrels in place. Amoco estimated that 1% to
10% of the oil in place might be recoverable. However, Amoco
abandoned its effort to put the leases into commercial production
using the technology then available, and dropped the leases in
1989. Technology has improved to the point where the outlook for
improved recoveries of the oil in place appears favorable.
In March 1997 the Company and the Trust entered into an agreement
with Roaring River Resources LLC ("Roaring River"), an unaffiliated
third party, pursuant to which Roaring River was granted an option
to acquire the leases and attempt to put them into production.
Roaring River intended to apply technology not previously available
to Amoco. The Company and the Trust would each retain a 1.5%
overriding royalty if the option was exercised. Roaring River made
a payment of $5,000 on April 16, 1997 to maintain the option,
however, a further payment of $20,000 scheduled to be made on or
before July 15, 1997 to keep the option in effect was not made, and
the Company agreed with Roaring River to extend the timing of this
payment. The extension expired on September 8, 1997. The Company
granted another extension to Roaring River, but now considers the
option null and void. The Company would prefer to enter into a new
arrangement with Roaring River, if it appears they have the ability
to perform, but under the circumstances, Nova must consider an
arrangement with other parties. At present, it cannot be
determined whether any such arrangement can be made, nor can it be
ascertained with certainty when, or if, the properties will be put
into production. The leases will expire August 31, 1999 if
production has not been established unless an extension can be
obtained from the State of Utah.
Environmental Regulations
Inherent in all mining operations is the obligation to comply with
environmental, reclamation, and other applicable state and federal
laws and regulations. The Company has obtained those environmental
permits, licenses or approvals required for its operations.
Management is not aware of any violations of environmental permits,
licenses or approvals issued with respect to the Company's
operations. In the past, Nova has been involved in extensive
hearings regarding the environmental impact of its Minnesota kaolin
mine and has voluntarily taken steps to mitigate any environmental
impact. While the Company believes it is currently in compliance
with all such laws and regulations and is not aware of any current
violations, the applicability and impact of, and the Company's
obligations under such provisions cannot always be determined with
certainty. However, the Company's liability could continue after
relinquishment of its interest in its properties, even in the
absence of operations. As such, the Company cannot fully determine
the extent of its liability or potential liability in connection
with these matters.
The Company is not currently subject to any pending administrative
or judicial enforcement proceedings arising under environmental
laws or regulations. Environmental laws and regulations may be
adopted in the future which may have an impact upon the Company's
operations. The Company cannot now accurately predict or estimate
the impact of any such future laws or regulations on its
operations.
Exploration and Development Arrangements
The Company's financial resources are not sufficient to fund
significant exploration or development of its mineral properties.
Therefore, to evaluate and, if justified, to develop its mineral
prospects, Nova typically enters into arrangements under which
other companies acquire a portion of the Company's interest in the
properties in return for performing necessary activities. The terms
of these arrangements generally are dictated by the type of
minerals involved, the extent of prior development, prospective
value of the properties and other diverse factors.
While the Company intends to retain a working interest in its
properties when possible, it has in the past and may from time to
time, sell its entire interest and retain only a royalty or other
income interest to reduce risk and obtain working capital for
exploration and development.
Mineral exploration and development is highly competitive. Success
is dependent on a number of factors including the ability to
identify areas having mineral potential, to acquire leases or other
mineral interests in such areas, and attract sufficient capital to
acquire, explore and develop mineral properties. The minerals
industry is dominated by a number of large companies having
resources far in excess of Nova. The Company's competitors include
mining companies, major oil companies and companies in unrelated
fields making it impossible to estimate the actual number of
competitors. Furthermore, a significant portion of the data
utilized by the Company in making acquisitions is public
information. Mining permits are required by various state and
federal agencies before mining can be undertaken. There is no
assurance that the necessary permits can be acquired or that the
projects would be economically viable if the permits are acquired.
The Company has no patents, trademarks, licenses, franchises, or
concessions other than certain leasehold interests granted by
federal, state, and other governmental authorities, and private
mineral owners, although the Company will have certain licensing
rights pursuant to its pending agreement with U.S. Borax to a
patent which was granted to Borax in connection with its kaolin
processing technology development in support of the joint venture.
The Company's mineral business is not seasonal except to the extent
that weather and market conditions can affect exploration and
production.
Oil and Gas Operations
The principal hydrocarbons currently produced from properties in
which Nova has an interest are crude oil and natural gas. Such
products are sold by or on behalf of the Company to purchasers
located near the wellhead. None of the entities purchasing the
Company's production is an affiliate of the Company.
During fiscal 1998, the Company had three customers which accounted
for approximately 82% of its total net oil and gas sales: Scurlock
Permian Corporation (39% of total oil and gas sales), Burnett Oil
Co., Inc. (15%), and Eighty Eight Oil Company (28%). Because
purchasers for oil and gas are generally available and prices paid
for oil and gas do not fluctuate materially from purchaser to
purchaser, Nova believes that the loss of any of these purchasers
would not have a materially adverse effect on its financial status.
Although the Company believes a ready market exists for its
hydrocarbon production, the acquisition, exploration, development,
production, and sale of oil and gas are subject to many factors
beyond its control, including worldwide and domestic economic
conditions, political stability in the Persian Gulf, oil import
quotas, availability of drilling rigs, casing and other equipment
and supplies, proximity to and availability of gas pipelines,
supply and price of competing fuels, and the regulation of prices,
production, transportation, and marketing by certain federal and
state governmental authorities. The source and availability of raw
materials affecting Nova's oil and gas operations is generally
limited to the availability of oil field equipment and supplies,
including tubular steel products and drilling rigs, all of which
currently are in sufficient supply. However, any shortages of or
delays in obtaining such materials could delay drilling or
production activities and adversely affect operations conducted by
Nova or by operators of its properties.
The oil and gas industry is extremely competitive and involves a
high degree of risk. The Company is in competition with "major"
integrated oil and gas companies, other independent oil and gas
companies, and other entities. The Company cannot ascertain the
exact number of its competitors or its relative competitive
position, but does not believe such factors to be of significance.
Nova's exploration and development activities are subject to all of
the risks and hazards typically associated with such activities.
Among these risks are the necessity of expending large sums of
money to acquire properties and drill exploratory wells which are
usually non-productive or may not generate income sufficient to
repay the cost of drilling. A large number of companies and
individuals, many with financial resources and staffs greater than
those of the Company, are engaged in exploration for and
development of oil and gas. Accordingly, the Company may be at a
competitive disadvantage on its property acquisition activities.
Nova requires working capital to carry lease costs and delay
rentals until arrangements can be negotiated with other entities to
explore and/or develop Nova's oil and gas properties. Consistent
with industry practice, working capital may be generated by the
Company from proceeds of production, sales of properties and
operating fees. At September 30, 1998, the Company did not operate
any of its producing oil and gas properties. However, the Company
does operate two exploratory properties. The Company was
aggressively marketing two prospects, both in Wyoming, in an
endeavor to interest industry partners in funding exploratory
drilling efforts on either or both of these prospects. In October,
1997, the Company sold one of these properties to North American
Resources, a subsidiary of Montana Power Company for $25,000
(55.56% of which was Nova's interest, the balance being the
interest of the Robert E. McDonald Trust) and retained an
overriding Royalty interest. The prospect was not drilled, and the
leases expired in December, 1997. The property was put up for
auction in 1998, and North American Resources was the successful
bidder for the property. As a result, Nova retains a 4% overriding
royalty interest in the production from the property. However,
there is no guarantee that the property will be drilled or that if
drilled, that drilling will be successful.
The nature of Nova's business precludes a backlog of orders. There
is no portion of the Company's business which may be subject to
renegotiation or termination at the election of the Government.
The Company has not engaged in any research and development
activities as those terms are customarily used.
In recent years, the natural gas industry has undergone substantial
changes, principally as the result of gas pipelines withdrawing
from their historical role as merchants and purchasers and
restricting their involvement to transportation. As a result,
producers like Nova increasingly will have to find new purchasers
for their natural gas. Nova is not dependent upon any single
customer for purchases of natural gas.
On November 14, 1996, the Registrant sold at an auction conducted
by The Oil & Gas Asset Clearinghouse in Houston, Texas several oil
& gas producing assets and leasehold interests, primarily
overriding royalty interests in producing oil & gas wells in the
Wyoming Overthrust Belt. Proceeds from this sale, net of
commissions and direct selling costs paid to the Clearinghouse were
$230,257. The sale was effective as of November 1, 1996. The bulk
of the interests were sold to a Denver, Colorado based firm not
affiliated with the Company, which was the successful bidder among
a group of bidders at the auction for the greater portion of the
oil & gas assets and interests referred to above. The net book
value of the assets sold represented approximately 10% of the
Company's total assets as of September 30, 1996.
The majority of the value of the properties sold was related to a
single producing well. If a production problem occurred at some
point in the future with that well, the value of the Registrant's
oil and gas reserves could have declined substantially (although
there was no current indication of any problem). The sale was made
to eliminate the aforementioned risk, to generate cash to improve
the Company's liquidity, and for re-investment of cash in the
Company's business. The Company's remaining oil and gas interests
are mostly working interest in wells in the latter stages of their
lives, with relatively high operating costs. In August of 1998,
the Company sold all but one of its working interest wells in the
Lindahl field of North Dakota for $8,895. The high operating costs
of these wells and the low price of oil combined to make these
wells uneconomic.
The Company retains other oil and gas interests, but due to the
Company's financial position and the unfavorable prices of oil, it
may consider selling these properties if the opportunity arises.
The Company and Robert McDonald, its Board Chairman, are currently
seeking industry participation in exploratory drilling on a
prospect in Wyoming, in which the Company holds an undivided
interest, with the Robert McDonald Trust, of which Mr. McDonald is
Trustee, holding the balance of the interest.
Nova has no patents, trademarks, licenses, franchises, or
concessions other than certain oil and gas leasehold interests
granted by federal, state, and other governmental authorities, and
private mineral owners. The Company's oil and gas business is not
seasonal except to the extent that weather and market conditions
can affect oil and gas exploration and production activities.
Environmental Regulation - Oil and Gas
Drilling and production activities are subject to regulation under
federal and state pollution control and environmental laws and
regulation. The Company is subject to a variety of federal, state,
and local environmental laws relating to spillage, noise, air
quality, and disposal of waste products arising from the Company's
operations. Such environmental and conservation laws and
regulations could significantly limit the Company's activities and
increase the costs of exploring and developing its acreage.
Existing as well as future legislation could cause additional
expense, capital expenditures, restrictions and delays in the
development of properties, the extent of which cannot be predicted.
Additional energy taxes, higher patent and permit fees and similar
proposals have been discussed in Congress, but the Company is
unaware at this time of any pending legislation which would
adversely affect its operation.
Regulation of Production and Pricing
Production and sale of oil and gas are subject to federal and state
governmental regulation, which while lessening in recent years,
includes limitations on the production of oil and gas by
restricting the rate of flow for oil and gas wells below their
actual capacity to produce. Restrictions on the purchase prices
for natural gas have largely been rescinded by the Natural Gas
Decontrol Act of 1989. A phase-out of such regulations was
substantially complete by mid-1993. While the effect of such
deregulation cannot be determined, the predictability of gas
pricing is anticipated to be substantially lessened as a result of
such decontrol and changes in the operations of gas pipelines from
purchasers to transporters of gas. To the Company's knowledge, as
of September 30, 1998, none of the Company's gas reserves were
subject to price controls.
Employees
At September 30, 1998, Nova had no full-time employees. The
Company utilizes the services of various consultants and
independent contractors with expertise in those fields of interest
in which the Company is active. The Company has no contracts with
these consultants.
ITEM 2. DESCRIPTION OF PROPERTIES
PERSONAL PROPERTY
The Company's personal property consists of furniture and fixtures
and technical equipment, with a total net book value at September
30, 1998 of $856.
OFFICE LEASE
In February 1997, the Company moved from a much larger office space
in the downtown area into smaller space in mid-town, reducing its
rental cost almost 50% over the first twelve months of its lease
from approximately $2,500 per month to $1,318 per month. The
Company's current office lease is a three-year lease effective
February 1, 1997. The space consists of 1,517 square feet, and
lease payments for the first year of the lease were $15,810. These
payments increased to $18,059 during the second year of the lease,
and will increase to $18,817 during the final year.
OIL AND GAS PROPERTIES
All of the Company's oil and gas properties are located within the
continental United States. There are no quantities of oil and gas
subject to long-term supply or similar agreements with foreign
governments or authorities.
No major discovery or other favorable or adverse event is believed
to have caused a significant change in the estimated proved
reserves of the Company subsequent to September 30, 1998 shown in
the following sections, which set forth information concerning the
Company's interests in oil and gas properties.
Proved Reserves and Present Value Information
For information concerning the Company's proved reserves and
present value information, see "Supplementary Information On Oil
And Gas Operations." Estimates of the Company's estimated proved
oil and gas reserves and present value of the estimated future net
revenues attributable to such reserves for the year ended September
30, 1998 and 1997 are based upon reports by the independent
consulting firm of D. J. Low, Inc. The Company files such reports
with the Securities and Exchange Commission, pursuant to
regulations of that agency which also provides public access to
those documents.
The Securities and Exchange Commission requires that estimates of
reserves, estimates of future net revenues and the present value of
estimated future net revenues be based on the assumption that oil
and gas prices will remain at current levels (except for gas prices
determined by fixed contracts), and that production costs will not
escalate in future periods. The present value of estimated future
net revenues for fiscal years 1998 and 1997 has not been adjusted
for income taxes because significant net operating loss
carryforwards exist for income tax and financial reporting
purposes. All such estimates have been adjusted for the
anticipated costs of developing proved undeveloped reserves.
Reserve calculations require estimation of future net recoverable
reserves of oil and gas and the timing and amount of future net
revenues to be received therefrom. Such estimates are based on
numerous factors, many of which are variable and uncertain.
Accordingly, it is common for the actual production and revenues to
vary from earlier estimates. Estimates made from the first few
years of production from a property are not likely to be as
reliable as later estimates based on a lengthy production history.
Hence, reserve estimates and estimates of future net revenues from
production may vary from year to year. The Company has not
provided reserve estimates to any federal agency other than the
Securities and Exchange Commission.
Production, Average Sales Price,
and Average Production (Lifting) Costs
The following table sets forth oil and gas production (net of all
royalties, overriding royalties, and other outstanding interests of
other entities) attributable to the Company for the fiscal years
ended September 30, 1998 and 1997 and the average sales prices and
production costs per unit of production.
Years Ended September 30,
1998 1997
Production:
Oil (Bbls) . . . . . . . . . . 3,868 5,181
Gas (Mcf) . . . . . . . . . . 9,518 19,147
Average Sales Prices:
Oil (per Bbl) . . . . . . . . $12.18 $18.34
Gas (per Mcf) . . . . . . . . $ 1.41 $ 1.36
Average Production Costs
Per Equivalent Barrel Of Oil*. $12.29** $10.78
* Equivalent barrels include oil, condensate and gas. Gas is
converted to equivalent barrels on the basis of 6 Mcf per equiva-
lent barrel.
** In November, 1996, the Company sold most of its overriding
royalty properties, leaving the majority of its production from
working interest wells which have higher production costs.
Drilling Activity
The Company did not participate in any drilling activity during
fiscal 1998 or 1997.
Approximate Developed Acreage and
Productive Oil and Gas Wells
The following table identifies productive wells and sets forth an
approximation of developed oil and gas acreage in which the Company
owned a leasehold interest as of September 30, 1998.
Productive Wells (2)
Developed Acres (1) Gross (5) Net (6)
Gross (3) Net (4) Oil Gas Oil Gas
Geographic Area
Colorado 320.00 24.10 2 - 0.15 -
North Dakota 80.00 20.00 1 - 0.25 -
Texas 160.00 40.00 1 - 0.25 -
Wyoming 1,131.72 33.84 1 - 0.03 -
TOTAL 1,691.72 117.94 5 0 0.68 0
(1) Acreage spaced or assignable to productive wells.
(2) Wells either producing or capable of production.
(3) An acre in which a working interest is owned. The number of
gross acres is the total number of acres in which working
interests are owned.
(4) When the sum of fractional working interests in gross acres
equals one, a net acre is deemed to exist. The number of net
acres is the sum of all the fractional working interests
owned in gross acres expressed in whole numbers and fractions
thereof.
(5) A well in which a working interest is owned. The number of
gross wells is the total number of wells in which working
interests are owned.
(6) When the sum of fractional working interests owned in gross
wells equals one, a net well is deemed to exist. The number
of net wells is the sum of all of the fractional working
interests owned in gross wells expressed as whole numbers and
fractions thereof.
Approximate Undeveloped Oil and Gas Acreage
The following table sets forth the approximate undeveloped oil and
gas acreage in which the Company owned a leasehold interest as of
September 30, 1998.
Undeveloped Acreage
Gross Net
Utah 1,600.00 800.00
Wyoming 3,119.29 1,020.64
TOTAL 4,719.29 1,820.64
The Company's leases are primarily federal and fee leases, carry
landowner's royalties of at least 12.5% and are subject to
overriding royalty interests ranging from 0% to 7.5%. Each lease
requires the payment of annual delay rentals ranging from $1 to $5
per acre. A delay rental is the amount paid for the privilege of
deferring development of leased acreage, payment of which can be
avoided by abandonment of the lease, commencement of development
operations, or by obtaining production.
Most of the leases will expire at the end of their respective
primary terms, unless production has been obtained prior to that
date, in which event the lease term will continue until production
ceases. The Company will attempt to enter into cost-sharing
arrangements to evaluate expiring acreage before the end of the
lease terms. From time to time, geologic evaluations and cost
considerations may cause the Company to cease paying delay rentals
and abandon such leases prior to the expiration of their primary
terms. Where justified and within the financial capabilities of
the Company, the Company may seek to renew leases on certain
expiring acreage.
Overriding Royalty Interests in Undeveloped Acreage
The following table sets forth, as of September 30, 1998, the
Company's overriding royalty interests in undeveloped oil and gas
acreage.
Net (2) Company's
Royalty(1) Royalty Overriding Royalty
Acres Acres Interest
Texas 640.00 20.00 3.125%
Wyoming 497.09 15.19 3.05%
TOTAL 1,137.09 35.19 6.175%
(1) A royalty acre is a full one-eighth royalty on one acre of
land.
(2) A net royalty acre is calculated by multiplying the royalty
acres by the overriding royalty interest.
In November 1996, the Company sold its overriding royalty interests
in certain properties in Wyoming, Texas and Colorado, a minor
portion of which could be considered undeveloped. The interests
sold ranged from 0.2491% to 2.5%. The reduction in gross and net
undeveloped acres resultant from this sale is not material.
Overriding Royalty Interests in Developed Acreage
and Producing Wells
The following table sets forth, as of September 30, 1998, the
Company's overriding royalty interests in developed oil and gas
acreage and producing wells.
Company's Gross
Net (2) Overriding Royalty
Royalty Royalty Royalty Wells
Acres(1) Acres Interest Oil Gas
Wyoming 632.80 1.59 .25% 0 1
(1) A royalty acre is a full one-eighth royalty on one acre of
land.
(2) A net royalty acre is calculated by multiplying the royalty
acres by the overriding royalty interest.
In November 1996, the Company sold its overriding royalty interests
in certain producing properties in Wyoming, Texas and Colorado.
The interests sold ranged from 0.2491% to 2.5%. The sale reduced
the Company's Gross royalty oil wells in Colorado from 3 to none,
royalty oil wells in Texas from 2 to none, royalty oil wells in
Wyoming from 6 to none, and royalty gas wells in Wyoming from 4 to
1. The Company's royalty acreage in Wyoming decreased to 632 gross
acres and 1.59 net acres; and its royalty acreage in Colorado and
Texas decreased to zero gross and net acres.
UNDEVELOPED MINERAL PROPERTY INTERESTS
The Company currently holds a 100% interest, subject to forfeiture
if a future payment is not made to its former joint venture
partner-U. S. Borax- in a kaolin prospect covering approximately
3,664 acres of leases and lease options located near Redwood Falls,
Minnesota. See "Mineral Operations-Paper Grade Kaolin".
The Company owns 50% mineral interest in a 160 acre parcel in Weld
County, Colorado which is currently leased to Lake Fork Resources,
LLC. of Denver, Colorado. This three year, paid up, 15% royalty
lease will expire August 15, 2000 unless production of oil or gas
is achieved.
DEVELOPED MINERAL PROPERTY INTERESTS
The Company owned a 100% working interest in 69.3 acres in Redwood
County, Minnesota which were permitted for the purposes of mining
kaolin clay. This property was sold in July, 1997. See "Sale of
Kaolin Mine".
ITEM 3. LEGAL PROCEEDINGS
During 1998, the Company was involved in a lawsuit against Chevron
alleging underpayment of overriding royalties. This lawsuit was
settled during the trial by the parties involved. Nova received
$6,200 in settlement of this matter in December 1998.
As discussed in ITEM 1. DESCRIPTION OF BUSINESS, disputes have
arisen between Thomas Kane, one of the Company's directors and a
principal shareholder, over the Company's continuing operations and
their impact on Mr. Kane's ownership of shares of the Company's
convertible preferred stock. Mr. Kane threatened to seek court
intervention to preserve assets of the Company for liquidation.
The Company's other directors disagreed with Mr. Kane. In
resolution of these disputes, the Company, Mr. Kane and Brian
Spillane, the Company's President and a director, entered into an
Agreement, dated February 5, 1997, for the purchase of all of Mr.
Kane's Common and Preferred Stock.
The Company has an outstanding balance of $16,447 with Union
Pacific Railroad. The Company does not have adequate cash to pay
this invoice. The Company offered to pay $1,000 per month until
the balance was paid. Union Pacific would not accept this
arrangement and has referred the matter to an attorney for
collection.
The Company knows of no other legal proceedings contemplated or
threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No shareholder meetings were held in Fiscal 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market
and is listed on the Electronic Bulletin Board under the symbol
"NVNU". The following table sets forth the range of high and low
closing bid prices of the Common Stock for the years ended
September 30, 1998 and 1997, as reported by the National Quotation
Bureau, LLC. 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 1998 High Low
First Quarter $ 0.060 $ 0.030
Second Quarter 0.040 0.020
Third Quarter 0.080 0.020
Fourth Quarter 0.080 0.050
Bid Price
Fiscal 1997 High Low
First Quarter $ 0.040 $ 0.030
Second Quarter 0.050 0.030
Third Quarter 0.060 0.050
Fourth Quarter 0.080 0.060
The bid and asked prices for the Company's Common Stock on
September 30, 1998 were $0.05 and $0.07 respectively, as reported
by the National Quotation Bureau, LLC.
The number of record holders of the Company's Common Stock as of
September 30, 1998 was 4,973.
Also outstanding as of September 30, 1998 were options under the
Company's employee stock option plans to purchase a total of
3,473,577 shares, of Common Stock. These options are held by a
total of nine persons, all but two of whom are officers, directors
or employees of Nova, and are exercisable until January, 2003 at
$.03 per share.
The Company has not paid any dividends on its Common Stock and does
not expect to do so in the foreseeable future. The Company intends
to employ its cash flow and earnings, if any, in its oil & gas and
mineral exploration and development activities and for other
working capital needs.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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, but are not limited to,
the following:
(a) The Company may not be able to enter into an
agreement with a new partner to assist the Company
in carrying its paper-grade kaolin project to the
commercial feasibility stage on terms acceptable to
Nova.
(b) The paper-grade kaolin project may encounter
difficulties, currently unforeseen, which will prevent
attainment of commercial feasibility.
(c) The Company may not be able to find industry partners
to develop its oil & gas prospects.
(d) Present and anticipated sources of funds may be
insufficient to meet the Company's working capital
needs.
Liquidity and Capital Resources
The Company continues to experience a severe cash flow shortage.
Unless new financing is secured, and/or an agreement is made to
enter into a joint venture on the Company's paper kaolin properties
on terms which will provide capital and/or overhead coverage to
operate this project, the Company may not be able to continue in
business.
The Company does not have the present ability to make the interest
payment due to its debenture holders at the end of February, 1999.
The Company plans to make an offer to its debenture holders to
restructure its debt, for which there is no assurance of
acceptance. The Company intends to make a non-cash offer to its
debenture holders, but it is possible that in order to be
successful, such an offer would have to involve a partial payment
of principal in cash plus stock for the balance of principal, to
fully restructure the debt. At this time, the Company does not
have the ability to make any such cash payments, and while it is
attempting to secure funding, it does not have a source of such
funds and it is not likely that a source can be obtained.
In the event the debenture interest is not paid, the debentures
will be in default, and the debenture holders can accelerate the
full remaining balance on the face amount of the debentures. In
that event, the Company may have to seek protection under the
bankruptcy laws and proceed with an orderly liquidation of its
assets and discharge of its liabilities.
In the event an acceptable arrangement can be entered into with its
debenture holders to restructure its debt, Management believes that
it will have sufficient income to continue its business while it
attempts to secure a joint venture partner for its paper kaolin
project, sells an interest in such project, secures a merger
partner, or secures new financing. During this period, management
will continue to forgo salaries as it has done since May, 1998
unless additional funding can be obtained. Management estimates
that its operations can continue for up to twelve months in this
mode. In the event none of these endeavors are successful, the
Company will eventually have to consider liquidation. If the
Company is liquidated, trade creditors and the holders of the
Company's preferred shares will have first claim on the assets of
the Company, and it is unlikely that the common shareholders will
receive any consideration for their shares.
The Company has suffered recurring losses and cash flow deficits
from operations due to the inability of operating cash flows to
cover expenses needed to maintain those operations. At September
30, 1998, the Company has an accumulated deficit of $9,445,519.
The Company's working capital decreased as of September 30, 1998 to
a deficit of $55,343, from working capital of $147,876 as of
September 30, 1997. Total assets decreased to $594,967 as of
September 30, 1998, from $812,780 as of September 30, 1997. The
decrease in both working capital and total assets was attributable
primarily to the sale of the Kaolin Mine, the sale of oil and gas
assets and the Company's operating loss. The Company's main source
of income as it has attempted to find a partner to develop its
interest in the Paper Grade Kaolin Project has been the payments
from the sale of the Kaolin Mine. The Company realized a loss on
its oil and gas production due to the low price of oil and the
higher costs of production. The increase in total liabilities from
$381,327 in 1997 to $422,430 in 1998 is due to the Company's lack
of operating income while it attempts to obtain a partner for the
Paper Grade Kaolin Project, and primarily to bank borrowings of
$45,148 in 1998. As a result of the operating revenue and working
capital decrease 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 sold its Kaolin Mine in July of 1997. This resulted in
cash from sales proceeds and the recovery of a reclamation deposit
of $225,000 in fiscal 1997. However, the Company did not generate
positive cash flow from operations in 1997. Cash used by
operations during 1997 was $73,605. In 1998 the cash used by
operations was $211,446.
The Company's liquidity is primarily dependent on receipt of
proceeds from the installment sale of the Company's kaolin mine,
income from oil and gas production, the sale of oil and gas wells,
and contemplated overhead coverage and management fees in
connection with the operation of its paper kaolin project. The
Company intends to operate its paper-grade kaolin project with a
new partner, and has structured this venture with overhead coverage
and fees to cover the expenses of operating this project, but it is
not certain that the Company will be successful in entering into an
agreement with a partner on the basis needed to cover the costs of
such operations. The Company will need to raise additional funds
for working capital purposes via the private placement of
securities, or some other means, the success of which cannot be
determined in advance.
In order to improve liquidity, on November 14, 1996, the Company
sold several oil and gas producing assets and leasehold interests,
primarily overriding royalty interests in producing oil and gas
wells for proceeds of $230,257, which is net of commissions and
direct selling costs. The proceeds of these sales were devoted to
working capital, used to offset operating losses, and reinvested in
the Company's business, with the goal of developing additional
sources of revenue, earnings and asset growth. Primary use of
these funds has been in the Company's efforts to market its
remaining oil and gas prospects, and to conduct necessary
activities in connection with its paper-grade kaolin project.
The Company has been conducting limited examination of cores, and
processing raw kaolin from the 1996 drilling program on its paper
kaolin properties, analyzing the data from seven years of
exploration and development work on this project, and preparing to
market the project to the industry to bring in a new partner who
will assist Nova in aggressively pursuing the further development
of this project.
Year 2000
Management does not believe the Company has a year 2000 problem since the
bulk of its computing is performed on MacIntosh machines, and the PC
which it does use for its accounting will be obsolete and its
software will be replaced prior to the year 2000. The cost of
replacing this equipment is not expected to be material. A PC is used for
mapping and ore reserve computations, but the work done on this
machine will not be affected by the year 2000 problem. Nova's
business is not materially dependent on suppliers who may have year
2000 problems.
Results of Operations
The Company realized a net loss of $271,581 for the year ended
September 30, 1998, compared to a net loss in the 1997 fiscal
period of $360,598. Both oil and gas sales and mineral sales
decreased substantially, reflecting the sale of a significant
portion of the Company's producing oil & gas assets, and the sale
of the Company's kaolin mine. Both mining costs and oil & gas
operating costs also declined due to these sales. General and
administrative costs decreased $176,415 or 40% to $259,337 for the
year ended September 30, 1998 over the same period in 1997. This
decrease was the result of non-recurring increased legal and
accounting fees due to the Kane dispute and the asset sales, and
due to the fact that the Company had ceased paying salaries in
June. The Company's share of NovaChek losses in fiscal 1997 was
$181,720. There were no losses attributable to NovaChek in 1998.
Operations of NovaChek were unprofitable, and NovaChek was
dissolved, effective December 22, 1997. Interest income was up in
fiscal 1998 to $39,924, compared to $17,378 in the 1997 period.
This is due to the increased imputed interest on the note
receivable from Northern Con-Agg on which interest was imputed for
the entire year in 1998 and only for part year in 1997.
Revenues
Mineral sales from kaolin in 1998 declined to $584 from $700,707
in fiscal 1997. Due to the sale of the Kaolin Mine in July 1997,
the Company did not operate the mine at all in fiscal 1998. Gravel
royalties decreased to $1,320 in 1998 from $4,414 in 1997. The
Company collected royalties on the sale of gravel from land leased
by the Company pursuant to an arrangement with a third party, which
mined and sold the gravel. The gravel interests were sold in 1998
for $10,000. This was chiefly responsible for the decline in the
1998 mineral sales figures.
Oil and gas sales decreased $63,157 or 51% for the year ended
September 30, 1998 as compared to the same period in 1997. This
decrease is attributable to the sale of the Company's Overriding
Royalty Interests in November, 1996, the sharp decrease in the
price of oil, and the sale of some of the Company's working
interest wells in 1998. A comparison of production and prices in
1998 and 1997 is as follows:
1998 1997
Sales Volume
Oil (bbls) 3,868 5,181
Gas (MCF) 9,518 19,147
Average Sales Price
Oil (bbls) $12.18 $18.34
Gas (MCF) $ 1.41 $ 1.36
The Company realized a one-time gain on the sale of its oil & gas
production interests of $76,557 in 1997.
Other revenue for the year ended September 30, 1997 consisted
primarily of revenue received from an option on West Rozell Point
of $2,500, and an $800 lease bonus on an oil property in which the
Company had an interest. Other revenue in 1998 was $450,
consisting of a refund and a payment on a small property in
Colorado.
Expenses
Because of the sale of the Company's kaolin mine in 1997, mining
costs from kaolin operations, including transportation and
royalties, were $603,335 in fiscal 1997 compared to $0 in the 1998
period. Gravel royalties declined from $983 in fiscal 1997 to $0
in fiscal 1998. The Company sold its gravel rights in the
beginning of 1998 to the company which mines and sells the gravel.
Oil & gas lease operating costs, including production taxes
declined 26% in fiscal 1998 to $67,030 from $90,276. Oil and gas
production costs did not decline as sharply as oil & gas sales
since the majority of the oil & gas assets sold by the Company were
royalties, and these have a very low cost since there is no
deduction for operating costs from royalty payments.
Depreciation, depletion and amortization dropped 55% from $28,367
in 1997 to $12,892 in 1998. This was primarily resultant from the
sale of oil & gas assets, although normal production decline also
contributed, and to the sale of the cement kaolin mine. General
and administrative expenses decreased $176,415 or 40% to $259,337
for the year ended September 30, 1998 over the same period in 1997.
The decrease was the result of increased legal and accounting fees
due to the Kane dispute and the asset sales, in particular, the
sale of the kaolin mine, and printing and mailing costs associated
with obtaining shareholder approval of the mine sale in 1997 and to
the Company's discontinuing salaries in 1998.
Interest expense increased 12% or $3,493 to $31,655 in fiscal 1998
compared to fiscal 1997. The interest expense of $31,655 in fiscal
1998 resulted from interest payments on a short-term working
capital loan, and the $250,000 of convertible subordinated
debentures.
Commitments
The Company's current office lease is a three-year lease effective
February 1, 1997. The space is 1,517 square feet, and lease
payments for the first year of the lease were $15,810. These
payments increased to $18,059 during the second year of the lease,
and will increase to $18,817 during the final year.
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 130 (FAS 130)
"Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, FAS
130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive
income be reported in a financial statement that displays with the
same prominence as other financial statements.
Statement of Financial Accounting Standards 131 (FAS 131)
"Disclosure About Segments of an Enterprise and Related
Information" establishes standards on the way that public companies
report financial information about operating segments in annual
financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures
regarding products and services, geographic areas, and major
customers. FAS 131 defines operating segments as components of a
company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
FAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Management has been
unable to fully evaluate the impact, if any, the standards may have
on the future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of these standards.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Nova Natural Resources Corporation
Denver, Colorado
We have audited the accompanying balance sheet of Nova Natural
Resources Corporation as of September 30, 1998, and the related
statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 1998 and 1997. 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 audit 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, 1998, and the
results of its operations and its cash flows for the years ended
September 30, 1998 and 1997, 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.
HEIN + ASSOCIATES LLP
Denver, Colorado
November 24, 1998
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
1998
CURRENT ASSETS:
Cash and equivalents $ 462
Accounts receivable:
Oil and gas 4,022
Other 16,037
Current maturities of note receivable 67,929
Prepaid expenses and other 5,984
_________
Total current assets 94,434
OIL AND GAS PROPERTIES, at cost
(using the full
cost method of accounting):
Unproved properties not being amortized 11,806
Properties being amortized 5,986,639
_________
5,998,445
Accumulated depreciation, depletion
and amortization (5,946,334)
___________
Net oil and gas properties 52,111
MINERAL PROPERTIES, at cost 165,657
__________
OTHER ASSETS:
Note receivable, net of current maturities 278,359
Deposits and Other 3,550
Furniture and technical equipment,
net of accumulated depreciation
of $66,029 856
_______
Total other assets 282,765
_______
TOTAL ASSETS $ 594,967
See accompanying notes to these financial statements.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note Payable $ 45,148
Current maturities of long-term debt 9,185
Accounts payable 45,928
Accrued expenses 49,516
_________
Total current liabilities 149,777
_________
LONG TERM DEBT, less current maturities 272,653
_________
COMMITMENTS AND CONTINGENCIES (Notes 1, 2 and 9)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1.00
par value; 3,000,000 shares
authorized; 1,792,267 shares
issued and outstanding,
liquidation preference $1,792,267 1,792,267
Common stock, $.10 par value;
17,000,000 shares authorized;
6,200,379 shares issued and
outstanding; 627,413
Additional paid-in capital 7,198,376
Accumulated deficit (9,445,519)
___________
Total Stockholders' equity 172,537
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 594,967
See accompanying notes to these financial statements.
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30,
______________________
1998 1997
______ ______
REVENUES:
Mineral sales:
Kaolin $ 584 $ 700,707
Gravel Royalties 1,320 4,414
Oil and gas sales 61,011 124,168
_________ _________
Total revenues 62,915 829,289
_________ _________
COSTS AND EXPENSES:
Mining costs:
Kaolin operations -- 603,335
Gravel royalties -- 983
Oil and gas production costs 67,030 90,276
Depletion, depreciation, and
amortization 12,892 28,367
Impairment of oil & gas properties 20,000 --
Mining property abandonment costs 6,938 1,742
General and administrative 259,337 435,752
_________ _________
Total costs and expenses 366,197 1,160,455
_________ _________
OPERATING LOSS (303,282) (331,166)
OTHER INCOME (EXPENSES):
Equity in losses of NovaChek LLC -- (181,720)
Interest income 39,924 17,378
Interest expense (31,655) (28,162)
Gain on sale of assets 22,982 159,566
Other 450 3,506
_________ ________
31,701 (29,432)
_________ _________
NET LOSS $ (271,581) $ (360,598)
========== =========
NET LOSS PER SHARE (.05) (.06)
========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 5,806,000 6,185,000
========= =========
See accompanying notes to these financial statements
<PAGE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
_________ _________ _________ ________
<S> <C> <C> <C> <C>
BALANCES, October 1, 1996 2,687,682 $ 2,687,682 6,496,188 $ 649,619
Purchase and retirement of
preferred and common stock:
Former director (895,415) (895,415) (510,342) (51,034)
Other -- -- (13,700) (1,370)
Contribution of stock to
employee stock ownership plan -- -- 228,233 22,823
Net loss -- -- -- --
_________ _________ ________ _______
BALANCES, September 30, 1997 1,792,267 $ 1,792,267 6,200,379 $ 620,038
Purchase and retirement of
common stock -- -- (411,873) (41,187)
Contribution of stock to
employee stock ownership plan -- -- 485,625 48,562
Issuance of common stock options
to consultants for services -- -- -- --
Net loss -- -- -- --
_________ _________ _________ ________
BALANCES, September 30, 1998 1,792,267 $ 1,792,267 6,274,131 $ 627,413
<FN>
See accompanying notes to these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
<S> <C> <C> <C>
BALANCES, October 1, 1996 $6,454,296 $(8,813,340) $ 978,257
Purchase and retirement of
preferred and common stock:
Former director 742,532 -- (203,917)
Other 822 -- (548)
Contribution of stock to
employee stock ownership plan (4,564) -- 18,259
Net loss -- (360,598) (360,598)
_________ __________ __________
BALANCES, September 30, 1997 $7,193,086 $(9,173,938) $ 431,453
Purchase and retirement of
common stock 24,714 -- (16,473)
Contribution of stock to
employee stock ownership plan (24,281) -- 24,281
Issuance of common stock options
to consultants for services 4,857 -- 4,857
Net loss -- (271,581) (271,581)
_________ _________ _________
BALANCES, September 30, 1998 $7,198,376 $(9,445,519) $ 172,537
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
SEPTEMBER 30,
___________________
1998 1997
______ ______
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (271,581) $ (360,598)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depletion, depreciation and amortization 12,892 28,367
Impairment of oil and gas properties 20,000 --
Gain on sale of assets (22,982) (159,566)
Equity in losses of NovaChek LLC -- 181,720
Contribution of stock to employee stock ownership plan 24,281 18,259
Fair value of stock options granted to consultants 4,857 --
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 17,440 408,648
Prepaid expenses and other 5,778 (7,821)
Deposits (3,550) 51,000
Increase (decrease) in:
Accounts payable 14,020 (260,154)
Accrued expenses (12,601) 26,540
_________ ________
Net cash used in operating activities (211,446) (73,605)
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 31,813 355,000
Investment in and advances to NovaChek LLC 4,000 (49,003)
Capital expenditures (56,754) (43,933)
Collection of principal on note receivable 61,629 46,885
_________ _________
Net cash provided by investing activities 40,688 308,949
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (56,200) --
Principal payments on long-term debt (7,939) (5,687)
Purchase and retirement of common and preferred stock (16,473) (159,000)
Proceeds from notes payable 101,348 --
_________ ________
Net cash provided by (used in) financing activities 20,736 (164,687)
_________ ________
NET INCREASE(DECREASE)IN CASH AND EQUIVALENTS (150,022) 70,657
CASH AND EQUIVALENTS, at beginning of year 150,484 79,827
________ ________
CASH AND EQUIVALENTS, at end of year $ 462 $ 150,484
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 31,916 $ 25,311
========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Note receivable for sale of Kaolin property $ -- $ 454,802
========= =========
Note payable for purchase and retirement of
common and preferred stock $ -- $ 45,465
========= =========
<FN>
See accompanying notes to these financial statements.
</FN>
</TABLE>
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Nova Natural Resources Corporation (the Company),
has focused on exploring for paper grade kaolin on leases in
Minnesota, seeking partners for exploration and development of gold
on its properties in Alaska and seeking partners for exploratory
drilling on a natural gas prospect in Wyoming. The Company does
not operate any of its interests in oil and gas wells, which are
principally located in the western United States.
Use of Estimates - The preparation of the Company's financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. The actual results could differ from those
estimates.
The Company's financial statements are based on a number of
estimates, including the allowance for doubtful accounts, the
selection of estimated useful lives of property and equipment, and
realization of the carrying value of long-lived assets. It is
reasonably possible that estimates affecting the realization of
long-lived assets could materially change in the forthcoming year
and such revisions could be material.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or
less to be cash equivalents.
Investment in NovaChek Limited Liability Company - The Company
owned an interest in NovaChek Limited Liability Company (NovaChek
LLC) which was accounted for by the equity method. Under the
equity method, the investment was recorded at cost and subsequently
adjusted to recognize the Company's share of the income or losses
of NovaChek LLC. Dividends or other distributions were recorded as
a reduction of the investment. Recognition of losses was limited
to the extent of the Company's investment in, advances to,
commitments and guarantees, if any, relating to NovaChek LLC.
Mining Properties - Exploration expenditures are charged to
operations in the period incurred except for expenditures on
specified properties having indicated the presence of a mineral
resource with the potential of being developed into a mine, in
which case the expenditures are capitalized.
Mine development costs incurred to expand the capacity of operating
mines, to develop new orebodies or to develop mine areas
substantially in advance of current production are capitalized and
charged to operations on a units-of-production method based upon
the estimated recoverable reserves of the related deposit.
Reclamation takes place concurrently with production and such costs
are expensed as mining costs in the period incurred.
The Company periodically reviews the carrying value of its
properties by comparing the net book value with the estimated
undiscounted future cash flow from the property, which is generally
based upon estimated recoverable reserves utilizing current market
prices and costs. If the net book value exceeds the undiscounted
future cash flow, the Company records a provision for 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.
At September 30, 1998 the Company has an investment of
approximately $160,000 in a single mineral property located in
Minnesota. If the Company is not successful in attracting an
industry partner to develop this property, it will be necessary to
return the Company's interest in the property to U. S. Borax. If
an industry partner is located to develop the property, it will be
necessary to pay $300,000 by January 1, 2002 to acquire the ownership
interest of U.S. Borax. Even if an industry partner is found, there
is no assurance that commercial feasibility will be reached.
Oil and Gas Properties - The Company follows the "full cost" method
of accounting for its oil and gas properties, in accordance with
rules promulgated by the Securities and Exchange Commission (the
SEC). All of the Company's properties are located within the
continental United States. All costs associated with property
acquisition, exploration, and development activities are
capitalized in one cost center (the full cost pool), including
costs of unsuccessful exploration. No gains or losses are
recognized on the sale or abandonment of oil and gas properties
unless the transaction involves the sale of significant reserves.
Capitalized costs less related accumulated amortization may not
exceed the sum of (1) the present value of future net revenue from
estimated production of proved oil and gas reserves, calculated
using current prices; plus (2) the cost of properties not being
amortized, if any; plus (3) the lower of cost or estimated fair
value of unproved properties included in the costs being amortized,
if any; less (4) income tax effects related to differences in the
book and tax basis of oil and gas properties.
Amortization of the full cost pool is computed using the
units-of-production method based on proved reserves as determined
annually by the Company and independent petroleum engineers. The
provision for depletion, depreciation, and amortization on a per
equivalent barrel basis during fiscal years 1998 and 1997 was $2.15
and $2.18, respectively.
Furniture and Technical Equipment - Furniture and technical
equipment is stated at cost and is depreciated using the
straight-line method over estimated useful lives ranging from three
to eight years.
Income Taxes - The Company accounts for income taxes under the
liability method, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates.
Earnings Per Share - Net loss per common share is presented in
accordance with the provisions of Statements of Financial
Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS
128 replaces the presentation of primary and fully diluted earnings
per share (EPS), with a presentation of basic EPS and diluted EPS.
Under FAS 128, basic EPS excludes dilution for potential common
shares and is computed by dividing the net loss by the weighted
average number of common shares outstanding for the year. Diluted
EPS reflects the potential dilution that could occur if securities
or other contracts to issue the common stock were exercised or
converted into common stock and resulted in the issuance of common
stock. Basic and diluted EPS are the same in 1998 and 1997 as all
potential common shares were antidilutive.
Stock-Based Compensation - The Company accounts for stock-based
compensation for employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options
granted to employees is measured as the excess, if any, of the
quoted market price of the Company's common stock at the
measurement date (generally, the date of grant) over the amount an
employee must pay to acquire the stock.
In October 1995, the Financial Accounting Standards Board issued a
new statement titled "Accounting for Stock-Based Compensation" (FAS
123). FAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options,
and other equity instruments to employees based on fair value.
Companies that do not adopt the fair value accounting rules must
disclose the impact of adopting the new method in the notes to the
financial statements. Transactions in equity instruments with non-
employees for goods or services must be accounted for by the fair
value method. The Company has elected not to adopt the fair value
accounting prescribed by FAS 123 for employees, but is subject to
the related disclosure requirements.
Impact of Recently Issued Accounting Standards - Statement of
Financial Accounting Standards 131 (FAS 131) "Disclosures About
Segments of an Enterprise and Related Information" establishes
standards on the way that public companies report financial
information about operating segments in annual financial statements
and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. FAS 131 defines
operating segments as components of a company about which separate
financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate
resources and in assessing performance. FAS 131 is effective for
financial statements for periods beginning after December 15, 1997
and require comparative information for earlier years to be
restated. Management has been unable to fully evaluate the impact,
if any, of this standard on future financial statement disclosures.
Results of operations and financial position, however, will be
unaffected by implementation of this standard.
Reclassifications - Certain amounts in the 1997 financial
statements have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on the 1997
net loss.
(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, 1998, the Company has an
accumulated deficit of $9,446,000. At September 30, 1998, the
Company has a working capital of $55,000 and stockholders' equity
of $173,000. Accordingly, the Company's current capital resources
are not sufficient to fund continued operating losses. In order to
improve liquidity, the Company has sold a substantial portion of
the Company's operating assets. The future viability of the
Company is dependent upon the ability of the Company to obtain
additional equity or debt financing and to ultimately achieve
profitable operations.
(3) SALE OF ASSETS:
On November 14, 1996, the Company sold several oil and gas
producing assets and leasehold interests, primarily overriding
royalty interests in producing oil and gas wells in the Wyoming
Overthrust Belt (an estimated 6,976 bbls of oil and an estimated
282,127 mcf of gas), effective as of November 1, 1996. Proceeds
from this sale, net of commissions and direct selling costs, were
$230,257. The Company recognized a gain on sale of $76,557 related
to this transaction.
In July 1997, the Company obtained shareholder approval to close
the sale of its cement-grade Kaolin mine, including certain mineral
leases and technical equipment. The Company received cash at
closing of $125,000 and the purchaser executed a note which
provided for installments of $50,000 in August and December of each
year through August 2001 and a final installment of $125,000 in
December 2001. Payments under the note are collateralized by the
property and equipment conveyed to the purchaser. The Company
imputed interest at 10% to arrive at the present value of the note
of $454,801 on the closing date. The Company recognized a gain of
$83,009 on this transaction. Management estimates that fair value
of the note receivable is approximately equal to the carrying value
at September 30, 1998.
(4) INVESTMENT IN NOVACHEK LLC
On April 1, 1996 the Company organized NovaChek LLC 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 LLC. An additional
4.125% interest in NovaChek LLC was held by affiliates of the
Company. NovaChek LLC was managed by the Company and Chek
Technologies and Exploration, LLC (Chek) which owned a 38.75%
interest in NovaChek LLC. The Company was entitled to receive an
annual management fee of $65,000 from NovaChek LLC. However, no
management fee was ever collected or recorded by the Company.
During fiscal 1997, NovaChek LLC commenced dredging operations but
management determined that it was not possible to operate
economically. In December 1997, the managers of NovaChek LLC
decided to liquidate the LLC by the end of 1997 and they determined
that the net realizable value of NovaChek LLC's assets would not be
sufficient to satisfy all of the liabilities. Accordingly,
NovaChek LLC recorded a provision for impairment of $334,721 during
the quarter ended September 30, 1997.
The condensed statements of operations of NovaChek LLC for the year
ended September 30, 1997 is presented below.
1997
______
Gold and silver sales $ 45,850
Operating expenses (140,405)
Impairment expense (334,721)
_________
Net loss $(429,276)
==========
(5) DEBT FINANCING:
Note Payable - At September 30, 1998, the Company has a note
payable to a bank with an outstanding principal balance of $45,148.
The note provides for interest at a variable rate (10.25% at
September 30, 1998) and the outstanding balance was due and repaid
in December, 1998. This loan is collateralized by land that is
owned by an officer and director of the Company.
Long-Term Debt - On April 1, 1996, the Company issued $250,000 of
convertible debentures. These debentures provide for interest
payments at an annual rate of 10%, payable semi-annually, and are
due on April 1, 2001, but are redeemable in common stock by the
Company after March 31, 1998. The debentures are convertible into
the Company's common stock at the rate of one share of stock for
each $0.15 of principal, which would result in the issuance of
1,666,667 common shares if so converted. In June 1996, holders of
$175,000 of the debentures, of which $40,625 of debentures are held
by affiliates, agreed that the Company could redeem such debentures
after September 1, 1996, provided that such early redemption is
effected at $0.10 per common share and the payment of six months
advance interest. No such early redemption has been made to date.
Management believes the fair value of the convertible debentures
was approximately $125,000 at September 30, 1998.
The following is a summary of long-term debt as of September 30,
1998:
Convertible debentures $250,000
Contract payable in connection with purchase and
retirement of common and convertible preferred
stock, interest imputed at 10%, payable in
installments of $6,000 in August and December
of each year through August 2001, final payment
of $1,008 due in December 2001. 31,838
________
Total 281,838
Less current maturities (9,185)
_________
Long-term debt, less current maturities $272,653
Aggregate maturities required on long-term debt at September 30,
1998, are as follows:
Year Ending September 30,
1999 $ 9,185
2000 10,124
2001 261,553
2002 976
________
$281,838
========
(6) INCOME TAXES
The components of the net deferred tax asset and liabilities at
September 30, 1998 and 1997 are as follows:
1998 1997
Deferred tax assets-
Net operating loss carryforward $ 1,940,000 $ 2,152,000
Less valuation allowance (1,913,000) (2,069,000)
__________ __________
Net deferred tax asset 27,000 83,000
Deferred tax liabilities-
Depletion, depreciation, amortization,
and valuation allowance for income tax
purposes in excess of amounts for
financial statement purposes (27,000) (83,000)
__________ _________
Net deferred tax asset $ -- $ --
=========== =========
The Company has net operating loss carryforwards at September 30, 1998 for
federal income tax reporting purposes of approximately $5,200,000. These
carryforwards expire in varying amounts through 2018. The valuation
allowance decreased by $156,000 during the current year mainly due to
expiring net operating loss carryforwards.
(7) STOCKHOLDERS' EQUITY
Preferred Stock - The Company's preferred stock outstanding is convertible
into 3,584,534 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 Company has approved three 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
"1989 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. Pursuant to these plans, no options were permitted to be
granted after 1994. No options were outstanding under either of these
plans as of September 30, 1998. Activity in the stock option plans for the
years ended September 30, 1998 and 1997 is as follows
<TABLE>
<CAPTION>
Incentive Plan Non-qualified Plan
Weighted Weighted
Average Average
Number of Exercise Price Number of Exercise Price
Shares Per Share Shares Per Share
<S> <C> <C> <C> <C>
Outstanding, October 1, 1996 600,000 $ .105 600,000 $ .104
Expired -- -- (200,000) .063
________ _______
Outstanding, September 30, 1997 600,000 .105 400,000 .105
Cancelled (600,000) .105 (400,000) .105
________ _______
Outstanding, September 30, 1998 -- --
======== =======
</TABLE>
During 1998, the Board of Directors adopted the 1998 Nonqualified Stock
Option Plan (the "1998 Plan") whereby 4,500,000 shares were reserved for
issuance. The 1998 Plan provides that the exercise price of the options
should be equal to the market price of the Company's common stock on the
date of grant and the options expire five years after the date of grant.
No options may be granted under the 1998 Plan after January 2003.
For the year ended September 30, 1998, the Company granted options for
200,000 shares to consultants and 3,273,577 shares to officers, directors
and employees of the Company. All of the options are vested and
exercisable at $.03 per share. If not previously exercised, all of the
options expire in January, 2003.
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options
which are granted to employees. Accordingly, no compensation cost is
recognized for grants of options to employees if the exercise prices were
not less than the market value of the Company's common stock on the
measurement dates. The Company did not grant any stock options in 1997.
For 1998, if compensation cost had been determined based on the fair value
at the measurement dates consistent with the method of FAS 123, the
Company's net loss and loss per share would have been changed to the pro
forma amounts indicated below.
Net loss:
As reported $ (271,581)
Pro forma (363,181)
Net loss per common share:
As reported $ (.05)
Pro forma (.06)
For purposes of the above pro forma amounts, the weighted average fair
value of options granted to employees for the years ended September 30,
1998 was $.028 per share. The fair value of each employee option granted
in 1998 was estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions:
Expected volatility 207%
Risk-free interest rate 5.6%
Expected dividends 0%
Expected terms (in years) 3.0
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,
1997 amounted to 228,233 shares of common stock with an aggregate value of
$18,259. For the year ended September 30, 1998, the Company's
contributions to the Plan amounted to 485,625 shares with an aggregate
value of $24,281.
(8) RELATED PARTY TRANSACTIONS
The Company owns interests in various producing and non-producing mineral
properties with the REM Family Trust ("the Trust"), a trust in which the
Chairman of the Company is the trustee. The Trust also held a royalty
interest on the Company's cement grade kaolin property. Royalty expense,
under this agreement, was $0 and $3,309 in 1998 and 1998, respectively.
In April, 1997 the Company received a check for $5,000 as an option payment
on the West Rozell Oil and Gas Prospect. The Company and the Trust each
own 50% of this property. The company paid the Trust $2,500 for its
interest in this prospect. The Company and the Trust also share ownership
in two other oil & gas prospects in Wyoming.
(9) COMMITMENTS AND CONTINGENCY
Shareholder Dispute - Through fiscal 1996, the Company was involved in a
dispute with Thomas Kane, a director and principal shareholder of the
Company. Mr. Kane had expressed his belief that the Company was not viable
as a going concern and should be liquidated in order to protect his
interests as a holder of the Company's convertible preferred stock. In
February 1997, the Company and Mr. Kane settled this dispute whereby the
Company agreed to purchase 895,415 shares of convertible preferred stock
and 510,342 shares of common stock from Mr. Kane. A principal shareholder,
officer, and director of the Company also agreed to purchase for $50,000
from Mr. Kane 203,426 shares of convertible preferred stock and 115,942
shares of common stock as part of the agreement. The Company's share of
the purchase price was $150,000 in cash and up to $70,008 in additional
consideration based on a percentage of revenues from either the operation
or sale of the Company's cement grade Kaolin mine. The present value of
this obligation was $45,465 and the remaining balance is included in long-
term debt in the accompanying balance sheet. In connection with the
agreement with Mr. Kane, he resigned as a member of the Board of Directors
and stock options for 200,000 shares were cancelled.
During fiscal 1997, the Company offered to purchase common shares from
shareholders desiring to sell for $.04 per share. Through September 30,
1997, the Company purchased and retired 13,700 shares for $548. During
fiscal 1998, an additional 411,873 shares were purchased for $16,473 and
retired.
Leases - Future minimum rental payments for office facilities under the
remaining terms of noncancelable leases are $18,564, and $7,841 for the
fiscal years ending September 30, 1999 and 2000, respectively. Net rental
payments charged to expense under all operating leases amounted to $15,670
in 1998 and $21,607 in 1997.
(10) INDUSTRY SEGMENTS AND MAJOR CUSTOMER
Segment Information - The Company conducts all of its operations within the
United States, which consist principally of oil and gas exploration and
production and mining. There are no sales or other transactions between
these two business segments. Presented below is information concerning the
Company's business segments for the years ended September 30, 1998 and
1997:
1998 1997
REVENUE:
Oil and gas $ 61,011 $ 124,168
Mining 1,904 705,121
________ _________
$ 62,915 $ 829,289
======== =========
OPERATING INCOME (LOSS):
Oil and gas $ (77,729) $ (48,112)
Mining (45,034) (143,805)
General corporate activities (180,519) (139,249)
_________ _________
$ (303,282) $ (331,166)
========= ==========
DEPRECIATION AND DEPLETION:
Oil and gas $ 11,710 $ 18,216
Mining - 8,975
General corporate activities 1,182 1,176
________ _______
$ 12,892 $ 28,367
========= =======
IDENTIFIABLE ASSETS, net:
Oil and gas $ 56,133 $ 108,192
Mining 527,982 531,990
General corporate activities 10,852 172,598
_________ _________
$ 594,967 $ 812,780
========= =========
CAPITAL EXPENDITURES INCURRED:
Oil and gas $ 4,251 $ 12,985
Mining 55,003 29,356
General corporate activities - 1,600
_________ _________
$ 59,254 $ 43,941
========= =========
Major Customer - For the year ended September 30, 1997, the Company had one
mining customer that accounted for 72.0% of total revenue.
(11) DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES:
All oil and gas operations of the Company and its subsidiaries are
conducted in the United States. Capitalized costs relating to oil and gas
producing activities are as follows:
September 30,
1998 1997
Unproved properties not being amortized $ 11,806 $ 33,750
Properties being amortized:
Unproved properties 116,898 90,703
Proved properties 5,869,741 5,891,554
_________ _________
5,998,445 6,016,007
Accumulated depreciation, depletion and
amortization (5,946,334) (5,914,624)
__________ _________
$ 52,111 $ 101,383
========== =========
Costs incurred in oil and gas producing activities, whether capitalized or
expensed, during the years ended September 30, 1998 and 1997 are as follows:
1998 1997
_________ _________
Acquisition costs $ - $ -
========= =========
Exploration costs $ 4,251 $ 12,986
========= =========
Development costs $ -- $ --
========= =========
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) - Proved
oil and gas reserves are the estimated quantities of crude oil and natural
gas, which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed oil and gas
reserves are those expected to be recovered through existing wells and
existing equipment and operating methods. However, reserve information
should not be construed as the current market value of the Company's oil
and gas reserves or the costs that would be incurred to obtain equivalent
reserves. Reserve calculations involve the estimation of future net
recoverable reserves of oil and gas and the timing and amount of future net
revenues to be received therefrom. These estimates are based on numerous
factors, many of which are variable and uncertain. Accordingly, it is
common for the actual production and revenues to vary from earlier
estimates.
Reserve estimates for recently drilled wells and undeveloped properties are
subject to substantial upward or downward revisions after drilling is
completed and a production history obtained. Hence, reserve estimates and
estimates of future net revenues from production may be subject to
substantial revision from year to year. Reserve information presented
herein is based on reports prepared by independent petroleum engineers.
Set forth below is the unaudited summary of the changes in the net
quantities of the Company's proved oil (bbls) and natural gas (mcf)
reserves for the years ended September 30, 1998 and 1997:
1998 1997
(bbls (mcf) (bbls (mcf)
Proved reserves-beginning of year 22,973 62,463 32,378 358,036
Revisions of previous estimates 979 17,999 2,752 5,701
Sales of reserves-in-place (8,150) (40,697) (6,976) (282,127)
Production (3,868) (9,518) (5,181) (19,147)
Proved reserves-end of year 11,934 30,247 22,973 62,463
====== ======= ====== =======
Proved developed reserves:
Beginning of year 22,973 62,463 32,378 358,036
====== ======= ====== =======
End of year 11,934 30,247 22,973 62,463
====== ====== ====== =======
Standardized Measure of Discounted Future Net Cash Flows (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, 1998 and 1997, is
as follows:
1998 1997
Future cash in-flows $ 189,241 $ 433,301
Future production costs (126,211) (294,614)
Future development costs - (5,000)
_________ _________
Future net cash flows 63,030 133,687
10% annual discount for estimated
timing of cash flows (22,725) (35,047)
_________ _________
Standardized measure of discounted
future net cash flows $ 40,305 $ 98,640
========= =========
The following are the principal sources of change in the standardized measure
of discounted future net cash flows during 1998 and 1997:
1998 1997
Standardized measure of discounted future
net cash flows at beginning of year $ 98,640 $ 489,291
Sales of oil and gas produced,
net of production costs 6,019 (33,892)
Sales of reserves-in-place (53,680) (301,413)
Net changes in prices and production costs (11,115) (75,536)
Revisions of previous quantity estimates and other (14,344) (8,998)
Changes in development costs 4,921 --
Accretion of discount 9,864 29,188
________ _______
Standardized measures of discounted future
net cash flows at end of year $ 40,305 $ 98,640
======== =======
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 end of each
fiscal year.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On May 5, 1997, the Company received a letter from KPMG Peat
Marwick LLP ("KPMG") that the client-auditor relationship between
the Company and KPMG had ceased, effective May 2, 1997.
This event was preceded by a conversation between the Company's
President and the KPMG Partner in charge of the Company's account
to the effect that due to the Company's need to reduce costs, it
would be necessary for the Company to look into engaging a smaller
accounting firm, which might be able to offer more cost-effective
services.
In September, 1997 the Company engaged the firm of Hein +
Associates LLP to audit the Company's financial statements as of
September 30, 1997. The Company has engaged Hein + Associates LLP
to audit the Company's 1998 Financial Statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors
The directors of the Company are set forth in the following table:
Name and Positions Served as
Held With the Company Age Director Since
John R. Parker, Chairman of the
Board (1) 52 April 22, 1986
Robert E. McDonald,(2)
70 April 22, 1986
Brian B. Spillane, President and
Chief Executive Officer (3) 62 April 22, 1986
Milton O. Childers
Exploration Manager 70 April 22, 1986
Robert W. Meier (2) 62 April 22, 1986
(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.
All directors are elected to serve until the next annual meeting or
until retirement or resignation. There is no family relationship
between any director of the Company and any other director or
executive officer. The following paragraphs set forth an account
of the business experience of each of the Company's directors and
executive officers, including his principal occupation and
employment.
Mr. McDonald is currently a consulting geologist and oil and gas
explorationist. He is also engaged in agricultural and real estate
pursuits. He was President of Nova Natural Resources Corporation
from its inception until his resignation on April 1, 1989. He
served as Chairman of the Board from inception until February 17,
1997. He continues to serve as a member of the Board of Directors.
From January 1, 1984 to September, 1986, he was President and
Chairman of the Board of Nova Petroleum Corporation, a predecessor
to the Company. He graduated from the University of Kansas in 1951
with a B.S. degree in Geology. Mr. McDonald has published several
papers relating to oil and gas geology in the Rocky Mountain area.
Mr. Spillane became President and Chief Executive Officer of the
Company effective April 1, 1989. Prior to that time he was an
independent consultant to the oil, gas and minerals industry. From
February, 1982 to November, 1987, he was employed as Executive Vice
President of Barrett Resources Corporation, a publicly held oil and
gas exploration company, where his duties primarily involved
mergers, acquisitions, and capital financing in addition to
involvement in other operations. He graduated from the University
of Detroit in 1961 with a B.S. in Mechanical Engineering and holds
a M.S. in Mechanical Engineering from San Diego State University.
He is a Registered Professional Engineer (mechanical) in
California.
Dr. Childers was President, Treasurer, and Director of Power
Resources Corporation until the merger in 1986 of Power Resources
Corporation into Nova Natural Resources Corporation, and holds B.S.
and M.A. degrees in geology from the University of Wyoming and a
Ph.D. degree in geology from Princeton University. Dr. Childers
was an independent consulting geologist in the Denver, Colorado
area from 1986 to 1992 when he became the Company's Exploration
Manager. He became the Vice President of Exploration of the
Company in January, 1993, and continues in that capacity.
Mr. Meier served as President and Chairman of the Board of Nova
Petroleum Corporation from May 1979 to January 1, 1984. From 1984
to 1989 he was an independent consulting geologist. From 1989 to
1994 he was Project Geologist for Dames & Moore, specializing in
the disposal of hazardous waste materials. He is currently
retired, but occasionally works as a consulting geologist. He
graduated from Northern Illinois University in 1961 with a B.S.
degree in Geology and in 1964 received an M.S. degree in Geology
from Southern Methodist University. Mr. Meier is a member of the
American Association of Petroleum Geologists and is a certified
member of the Association of Professional Geological Scientists.
Mr. Parker is currently a real estate developer in Vermont. Prior
to this activity he was a registered investment councilor with
McRae Capital Management in Morristown, New Jersey. Prior to
joining McRae, Mr. Parker worked as an independent financial
consultant to various companies and as a general partner in an
investment banking firm. Mr. Parker is also a director of several
investment companies associated with the Capstone Group in Houston,
Texas. He graduated from St. Lawrence University in 1969 with a
B.S. in Psychology and holds a P.M.D. from Harvard Graduate School
of Business Administration. Mr. Parker has served as Chairman of
the Board since February 17, 1997.
No directors of the Company receive compensation as directors,
although certain expenses incurred for Company business may be
reimbursed.
Executive Officers
The following table sets forth the executive officers of the
Company:
Name and Officer Age Served as Officer Since
Brian B. Spillane
President and Chief
Executive Officer 62 April 1, 1989
James R. Schaff
Secretary and Treasurer
Manager of Lands 43 May 2, 1996
Milton O. Childers
Vice President of Exploration,
and Assistant Secretary 70 January 22, 1993
An account of the business experience during at least the past five
years of Mr. Schaff is as follows (for Messrs. Spillane and
Childers, see "Directors"):
Mr. Schaff assumed his position as Nova's Land Manager on April 1,
1994, and was appointed Secretary and Treasurer of the Company on
May 2, 1996. From 1981 until 1990, he was an independent
consultant for various major and independent companies in the oil
and gas industry. From 1990 to 1994, he consulted principally for
Nova and U. S. Borax Inc. in mining-related land affairs. He
graduated from Rocky Mountain College in 1981 with a B.S. degree in
Business Administration-Economics. He is a Certified Professional
Landman (CPL) and an active member of the American Association of
Professional Landmen (AAPL), the Rocky Mountain Association of
Mineral Landmen (RMAML) and the Rocky Mountain Mineral Law
Foundation.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation of the Chief Executive Officer, the Exploration
Manager and the Land Manager of the Company as of September 30,
1998, 1997, and 1996 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 ($)* #
Brian B. Spillane 1998 32,250 8,063 600,000
CEO 1997 51,600 5,160 --
1996 50,120 -- --
Milton O. Childers 1998 31,500 7,875 473,577
Exploration V.P. 1997 50,400 5,040 --
1996 50,240 -- --
James R. Schaff
Secretary/Treasurer 1998 31,125 7,781 550,000
Manager of Lands 1997 49,800 4,980 --
1996 48,930 -- --
*ESOP contribution
Option Grants in Last Fiscal Year
Individual Grants
% of Total
Options Options Granted Exercise or
Granted/ to Employees Base Price Expiration
Name (Expired) in Fiscal Year ($/sh) Date
Brian B. Spillane 800,000 17% $.03 1/30/03
Brian B. Spillane (200,000) - .105 4/01/99
Milton O. Childers 673,577 13% .03 1/30/03
Milton O. Childers (200,000) - .105 4/01/99
James R. Schaff 750,000 26% .03 1/30/03
James R. Schaff (200,000) - .105 4/01/99
Mary F. Mernah 150,000 5% .03 1/30/03
Robert E. McDonald 300,000 11% .03 1/30/03
Robert E. McDonald (200,000) - .105 4/01/99
John R. Parker 300,000 11% .03 1/30/03
John R. Parker (200,000) - .105 4/01/99
Robert Meier 300,000 11% .03 1/30/03
Robert Meier (200,000) - .105 4/01/99
Charles P. Klass 100,000 3% .03 1/30/03
David Rath 100,000 3% .03 1/30/03
Employee Stock Option Plans
The Company had two stock option plans for the benefit of Company employees
and key personnel. The first plan was the Nova Natural Resources Corporation
1989 Non-qualified Stock Option Plan (the "Non-qualified Plan") and the
second plan was the Nova Natural Resources Corporation 1989 Incentive Stock
Option Plan, a qualified plan (the "Incentive Plan"). Both plans expired in
1994. In February 1996, the Company granted nonqualified options for 50,000
shares to an officer. These options were exercisable at $.05 per share for
five years and were not granted pursuant to either of the stock option plans
discussed above. In December 1997, the Board of Directors and the officer
agreed to cancel these options.
In January, 1998 the Board of Directors approved the Nova Natural Resources
Corporation Nonqualified Stock Option Plan. A total of 4,500,000 shares of
the Company's Common Stock have been reserved for issuance under the terms of
the two Plans.
Employee Stock Ownership Plans
The Board of Directors and the stockholders of the Company have also adopted
the Nova Natural Resources Corporation Employee Stock Ownership Plan ("ESOP")
for the benefit of its full-time employees, including its officers and
directors.
Only employees who have reached the age of 21 and have completed one year of
Company service are eligible to participate in this plan. With respect to
each plan year, the Company may contribute cash or Common Stock of the
Company to a trust in such amounts as the Board of Directors deems advisable.
Contributions may not exceed the lesser of 25% of the participant's total
annual compensation or $30,000. Any cash contributions are to be used
primarily by the trustee to purchase shares of Common Stock of the Company,
which, in addition to shares of Common Stock of the Company contributed by
the Company, are allocated to the accounts of all participants in the ratio
that the total annual compensation (not in excess of $150,000) of each
participant bears to the total compensation of all participants in such year.
The plan does not allow contributions by participants.
Each participant's right to the stock allocated to his account is fully
vested after three years of service. Nonetheless, a participant's benefits
will be fully vested if his employment terminates by reason of death or upon
his reaching 65. If a participant incurs a break in service (passage of one
plan year in which the employee works 500 or fewer hours), his benefits are
forfeited to the extent they have not vested. All forfeitures are allocated
among the remaining participants in the same manner as the annual
contribution.
Distributions under the plan are to commence no later than 60 days after the
last day of the year in which the participant reaches age 65 or, if later,
the plan year in which the participant terminates employment with the
Company. The distribution will consist of the Company's Common Stock. Any
distributions are payable in a lump sum or, if the participant elects, in
annual or monthly installments.
Each participant is entitled to direct the trustee as to the manner in which
any stock allocated to his account is voted. The trustee is empowered to
vote any stock which has not been allocated in a manner which, in the
judgement of the Board of Directors, represents the participants' best
interests.
As of September 30, 1998, 597,086, 254,030 and 395,747 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. A total of 485,625 shares were
contributed to the plan in 1998. In 1997, 228,233 shares were contributed.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Principal Shareholders
The following table sets forth the only persons known to the Company, as of
September 30, 1998, to own beneficially more than 5% of the Company's Common
Stock, $.10 par value, or the Company's Convertible Preferred Stock, $1.00
par value, the Company's only classes of issued and outstanding voting
securities. Except as otherwise noted in the footnotes to the table, each
person named has sole voting and investment powers relating to his shares.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
Preferred Stock
Robert E. McDonald 794,421 (1) 44.3%
P.O. Box 6323
Denver, CO 80206-6323
Karen McDonald 794,420 (2) 44.3%
2575 Corte Casitas
Carlsbad, CA 92009
Brian B. Spillane 203,426 (5) 11.4%
789 Sherman St., Ste. 550
Denver, CO 80203
Common Stock
Robert E. McDonald 484,851 (1) 7.73%
P.O. Box 6323
Denver, CO 80206-6323
Karen McDonald 484,850 (2) 7.73%
2575 Corte Casitas
Carlsbad, CA 92009
James R. Schaff 314,337 (3) 5.01%
789 Sherman St. #550
Denver, CO 80203
Milton O. Childers 625,744 (4) 9.97%
17939 E. Brown Place
Aurora, CO 80013
Brian B. Spillane 713,028 (5) 11.37%
255 S. Eudora
Denver, CO 80222
(1) The preferred and common shares are held by the REM Family
Trust, in which Mr. McDonald is the Trustee. Does not
include 300,000 shares underlying stock options held by Mr.
McDonald. Includes options held by two officers and
directors and one director of the Company to purchase an
aggregate of 561,788 shares of common stock directly from Mr.
McDonald, all exercisable at $.10 per share at any time on or
before April 3, 2003. Does not include 62,500 shares which
would be issued were Mr. McDonald to elect to convert his
$9,375 face amount of convertible subordinated debentures to
common stock.
(2) The preferred and common shares are held by the Karen
McDonald Trust, in which Ms. McDonald is Trustee. Includes
options held by two officers and one director of the Company
to purchase an aggregate of 561,787 shares of common stock
directly from Ms. McDonald, all exercisable at $.10 per share
at any time on or before April 3, 2003. Does not include
62,500 shares which would be issued were Ms. McDonald to
elect to convert her $9,375 face amount of convertible
subordinated debentures to common stock.
(3) Consists of 254,030 shares vested in his account under
the Esop plan. Does not include 750,000 shares underlying
stock options held by Mr. Schaff, nor does it include
20,833 shares which would be issued were Mr. Schaff to
elect to convert his $3,125 face amount of convertible
subordinated debentures to common stock.
(4) Consists of 225,154 shares owned by Mr. Childers, 4,843
shares held by Mr. Childers' wife and 395,747 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 673,577 shares from the Company. Does not include
62,500 shares which would be issued were Mr. Childers to
elect to convert his $9,375 face amount of convertible
subordinated debentures to common stock.
(5) Consists of 597,086 shares vested in his account under the
ESOP, but does not include options owned by Mr. Spillane to
purchase 250,000 shares directly from Mr. McDonald, options
to purchase 250,000 shares directly from Ms. McDonald, or
options to purchase 800,000 shares from the Company. Does
not include 83,333 shares which would be issued were Mr.
Spillane to elect to convert his $12,500 face amount of
convertible subordinated debentures to common stock.
The following table shows, at September 30, 1998, the shares of the
Company's outstanding Common Stock, $.10 par value (6,274,131
shares), beneficially owned by each of the officers and directors
of the Company and the shares beneficially owned by all of the
officers and directors as a group. Except as otherwise noted in
the footnotes to the table, each person named has sole voting and
investment powers related to his shares.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 484,851 (1) 7.73%
Brian B. Spillane 713,028 (3) 11.37%
James R. Schaff 314,337 (4) 5.01%
Milton O. Childers 625,744 (5) 9.97%
Robert W. Meier 193,178 (6) 3.08%
John R. Parker -- (7) (2)
All Directors and Officers
as a group (7 persons) 2,331,138 37.16%
(1) See note (1) of the preceding table.
(2) Less than 1%.
(3) See note (5) of the preceding table.
(4) See note (3) of the preceding table.
(5) See note (4) of the preceding table.
(6) Does not include 300,000 shares underlying stock options
held by Mr. Meier. Does not include 41,667 shares which
would be issued were Mr. Meier to elect to convert his
$6,250 face 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 300,000 shares from the company. Does
not include 41,667 shares which would be issued were Mr.
Parker to elect to convert his $6,250 face amount of
convertible subordinated debentures to common stock.
The following table shows as of September 30, 1998, the shares of
the Company's Common Stock which would be held by Officers and
Directors, $.10 par value, assuming full conversion of the
Preferred Stock, full exercise of all options, and full conversion
of convertible subordinated debentures.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 1,874,404 12.50%
Brian B. Spillane 2,503,213 16.69%
James R. Schaff 1,085,170 7.24%
Milton O. Childers 1,735,398 11.57%
Robert W. Meier 534,845 3.57%
John R. Parker 591,667 3.95%
All Directors and Officers
as a group (7 persons) 8,324,697 55.52%
If full conversion of all outstanding shares of convertible
preferred stock, options, and convertible subordinated debentures
occurred, the Company would have outstanding 14,998,909 shares of
its Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the Company's directors and officers have participated
directly or indirectly in the past and may continue to participate,
from time to time in the future, in oil, gas and mineral prospects
in which the Company has an interest. All such participation has
been and will continue to be on terms no less favorable to the
Company than it can obtain from unaffiliated persons.
In April, 1997 the Company received a check for $5,000 as an option
payment on the West Rozell Oil and Gas Prospect. The Company and
the Trust each own 50% of this property. The company paid the
Trust $2,500 for its interest in this prospect.
In November, 1997 the Company received a check for $25,000 as a
prospect fee for an oil prospect in Wyoming. The Company owned 55%
of the prospect with the Trust owning the remaining 45%. The
Company paid the Trust $11,250 for its interest in this prospect.
If the prospect was not drilled or a lease extension granted before
December 31, 1997, the leases on this particular prospect would
expire.
The prospect was not drilled, and the leases expired in December,
1997. The property was put up for auction in 1998, and the company
which bought them from Nova was the successful bidder for the
property. As a result, Nova and the Trust retain a 4% overriding
royalty interest in any production from the property. However,
there is no guarantee that the property will be drilled or that if
drilled, that drilling will be successful. The Company and the
Trust also share ownership in one gas prospect in Wyoming.
Messrs. McDonald and Spillane guaranteed and collateralized a line
of credit in the amount of $100,000 on behalf of the Company during
calendar year 1998. The Company paid the fees and interest on this
loan, and it was repaid from the proceeds of the installment
payments received by the Company in August and December, 1998. At
September 30, 1998, the balance outstanding on this loan was
$45,148, and the maximum amount borrowed was approximately $78,000.
The loan was fully paid by the Company in December 1998. Messrs.
McDonald and Spillane received no consideration of any kind in
return for guaranteeing and collateralizing this loan facility.
There have been no other significant transactions between the
Company and officers or directors of the Company during the fiscal
year ended September 30, 1998. See also "Item 10. Executive
Compensation".
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601
of the Regulation S-K or are incorporated by reference to previous
filings.
Exhibit
Table No. Document Reference
(2) Articles of Incorporation and By-Laws (a)
(3) Instruments defining the right of
security holders, including indentures N/A
(5) Voting trust agreement N/A
(6) Material contracts not in ordinary
course of business N/A
(7) Material foreign patents N/A
(a) Filed with Registration Statement No. 33-5520 (under the
Securities Act of 1933) and incorporated herein by this reference.
(b) The following documents were filed and are incorporated
herein:
Description of
Document and Filing
(i) Convertible Preferred Stock Purchase Agreement filed
with Form 10-Q dated December 31, 1986.
(ii) Nova Natural Resources Corporation 1987 Non-qualified
Stock Option Plan and 1987 Incentive Stock Option Plan.
(iii) Report on Form 8-K date of report March 4, 1997.
(iv) Report on Form 8-K, date of report May 5, 1997.
(v) Report SC 13E4, date of report June 13, 1997.
(vi) Report on form 8-K, date of report October 9, 1997.
(vii) No 8-K's were filed in the last quarter of fiscal 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Nova Natural Resources Corporation
has duly caused this Annual Report on Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized, in
Denver, Colorado on this 13th day of January, 1999.
NOVA NATURAL RESOURCES CORPORATION
(Registrant)
By:/s/ Brian B. Spillane
Brian B. Spillane, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature Title Date
/s/ Robert E. McDonald Director 01-13-99
Robert E. McDonald
/s/ Brian B. Spillane President, Chief 01-13-99
Brian B. Spillane Executive Officer
/s/ James R. Schaff Secretary and Treasurer 01-13-99
James R. Schaff
/s/ Milton O. Childers Director 01-13-99
Milton O. Childers
/s/ John R. Parker Chairman of 01-13-99
John R. Parker the Board
/s/ Robert W. Meier Director 01-13-99
Robert W. Meier
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