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, 1999
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
(Registrant'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 has (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:
$37,186.
Documents Incorporated By Reference: None
Transitional Small Business Disclosure Format Yes_____ No X
As of December 31, 1999, the Registrant had outstanding 1,792,267
shares of Convertible Preferred Stock, $1.00 par value, and
9,399,131 shares of Common Stock, $.10 par value, its only classes
of voting stock.
Aggregate market value of the 5,701,225 shares of Common Stock
owned by Non-affiliates of the Registrant as of December 22, 1999
as $148,232, based on the average of the bid and ask prices on
December 22, 1999 as reported on the National Association of
Securities Dealers Electronic Bulletin Board by Bloomberg Financial
Services. All Convertible Preferred Stock is owned by affiliates.
<PAGE>
PART I
Forward-looking Information
This Form 10-KSB contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. For this purpose any statements contained in this Form 10-
KSB that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, words
such as "may", "will", "expect", "believe", "anticipate",
"estimate", or "continue" or comparable terminology are intended to
identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties and actual
results may differ materially depending on a variety of factors,
many of which are not within the Company's control. These factors
include but are not limited to economic conditions generally and in
the industries in which the Company's customers participate;
competition within the Company's industry, including competition
from much larger competitors, absence of capital necessary to
operate, dependence on a few principal assets, environmental risks
and liabilities, transportation availability and fluctuations in
the construction industry. See also "Managements Discussion and
Analysis of Plan of Operation."
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 recent years, the Company focused its activities 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. In fiscal 1997,
the Company sold its kaolin mine, and put its primary focus on
development of its paper-grade kaolin prospect in Minnesota. 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. In fiscal
1999, the Company's primary focus has been on seeking a partner for
the paper-grade kaolin prospect, seeking a drilling partner for its
remaining oil & gas prospect in Wyoming, liquidating its interests
in Alaska, and selling its interests in its producing oil and gas
properties on as prudent a basis as possible.
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. Offering proceeds aggregating $350,000 were
received from the sale of 35 Units at $10,000 per Unit (an
additional five Units were sold for services). Each Unit was
composed of one membership interest in NovaChek and a convertible
debenture issued by the Registrant.
NovaChek was managed by the Company and Chek Technologies and
Exploration, LLC ("Chek"), an unaffiliated 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.
By early June 1996, Nova had obtained all of the necessary permits
so that NovaChek could conduct the contemplated mining operations
on its leases. As a result of numerous difficulties and delays due
to weather and mechanical failure, very limited operations were
conducted in the 1996 season.
The Company believed that its experience during the 1996 season
provided a basis for 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, a dredge built and operated by Chek was
finally launched in June. Production was less than projected due
to numerous weather and mechanical problems and the thin layer of
densely packed cobble gravel that covered the entire area, and only
142.7 ounces of gold were mined and sold. The densely packed
cobble gravel "armor" masked the pay zone and made it impossible to
limit mining to the area of high grade. As a result, the dredge
could not efficiently mine the hard packed gravel on the sea floor,
and could not safely operate in the winds which developed on a
regular basis.
In view of the poor results achieved, lack of funds to continue
operations, and low gold prices, combined with the poor operational
experience, the members approved liquidation of NovaChek in
December 1997. The liquidation of NovaChek's assets was not
sufficient to discharge its debts, which were primarily owed to
Nova, three members who are affiliated with Nova, and one member
who was a principal of Chek. 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.
The convertible debt associated with this project was restructured
in fiscal 1999 (see Item 6. "Management's Discussion and Analysis
or Plan of Operation".)
The Company released or sold to an unaffiliated party, Arctic
Whitney, Inc. 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 covering 9,018 acres. Although this royalty
had a potential maximum royalty amount of $360,000, no royalties
had been received. Realization of any significant amounts was
dependent both on mining success on these leases, and a high enough
gold price to entice the operator to continue mining efforts. In
the Company's judgement, neither of these factors looked favorable,
and accordingly, in August 1999, this royalty interest was sold to
Norm Stiles, of Nome, Alaska for $15,000. The Company retains a
small overriding royalty interest on a portion of its former
leasehold interest. This interest 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. The Company
intends to incur no further costs in connection with these leases.
Significant Developments During Fiscal 1999
Oil And Gas Operations
The Company and Robert McDonald, a Director and the Company's
largest shareholder, have been seeking industry participation in
exploratory drilling on a gas prospect in Wyoming for the past
several years. These efforts were hampered by low oil prices,
which reduced the funds available for exploration, by the
unwillingness of the leaseholder of adjacent acreage to commit in
advance to the terms of a potential farmout and also by a shift in
industry focus out of the Rockies, which reduced the potential
participants. 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. The prospect was not drilled, and the
leases expired in December, 1997. The property was sold at auction
in 1998, and 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.
The Company held small scattered mineral interests aggregating
119.43 net mineral acres in Campbell County, Wyoming. An offer to
lease these interests was received, and in view of the uncertainty
of the timing of drilling on these lands, and the associated risk,
an outright sale of these mineral interests was negotiated. Sales
proceeds of $71,658 were received in December, 1999.
The Company held an interest in the Germundson #1 well in Williams
County, North Dakota. This well was uneconomic, and Nova notified
the operator that the well should be plugged and abandoned, yet the
operator continued to operate the well and bill Nova for operating
costs. In November 1999, Nova assigned its interest in the well
and leasehold rights in return for the operator's agreement to
release Nova from any alleged debts it may owe to the operator
pertaining to the well.
The Company held a 25% working interest in the M.M. Louder No. 1
well and associated acreage in Martin County, Texas. This interest
had been valued by an independent engineer at $21,351 as of October
1, 1999, at a 10% discount rate, assuming no rework or other
capital costs would be incurred throughout the remaining life of
the well. In December 1999, this well developed a hole in the
casing, and the operator informed management that the well should
either be plugged, or an attempt should be made to repair the leak.
The operator recommended repair, at an estimated cost to Nova of
between $6,250 and $12,500. Payout of these costs, should the
repair be successful, which was by no means certain, was estimated
by the independent engineers to take about 3 years. In view of the
risk involved, Nova elected to sell its interest in the well and
acreage to the operator for its share of the estimated net salvage
value of $3,750.
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, $425,000 of which has already been received. The
Company received $100,000 in calendar 1999, will receive $50,000 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. The final payment of $125,000 is
pledged to holders of $125,000 in notes associated with the
restructuring of Nova's long-term debt (see Item 6. "Management's
Discussion and Analysis or Plan of Operation".) The Company
retained both a mortgage and a security interest covering the
property sold to NCA in order to secure full payment of the
purchase price. NCA assumed liability for all existing contracts
relating to the property.
Settlement of Amounts Owed on a Contract Payable to a Former
Director and Preferred Shareholder
The Company owed $37,008 to a former Director on a contract payable
in connection with the purchase and retirement of common and
convertible preferred stock, payable in installments of $6,000 in
August and December of each year through August 2001, with a final
payment in December 2001 of $1,008. In March 1999 the Company
reached an agreement with the former Director to accept $18,504 as
payment in full of this long-term obligation. The Company
recognized a gain of $14,652 on this forgiveness of debt.
Settlement of Outstanding Balance Owed for the Transportation of
Kaolin
The Company sold its kaolin mine in Minnesota in July, 1997. More
than a year after the sale, the Company received several freight
bills for kaolin shipments, some of which were inaccurate. These
bills were corrected and paid in full. The Company also received
an invoice in the amount of $16,446.85. This sum was not paid due
to a lack of funds to discharge this obligation. The Company
accrued this and an additional amount, to provide for possible
additional bills which might be received. No such bills were
received, and in November 1999, the Company borrowed $16,446.85 on
its line of credit, and paid this obligation in full. Upon receipt
of these funds, the shipper agreed that this payment discharged in
full all outstanding debt owed to this shipper by the Company. To
its knowledge, the Company owes no other sums in connection with
its former kaolin mine.
Material Subsequent Event
The Company has signed a Letter of Intent with Richlink
International Holdings Limited (Richlink"), a British Virgin
Islands Corporation with its corporate offices in Hong Kong and its
production facilities in Dongguan City, Guangdong Province, the
People's Republic of China, which outlines the terms of a
transaction by which Richlink will acquire control of the Company.
The Letter of Intent, which is subject to the execution of a
definitive acquisition agreement and the completion of satisfactory
due diligence, contemplates the acquisition by the Company of 100%
of the business and operating assets of Richlink in exchange for
that number of shares of common stock of the Company which will
afford Richlink ownership of 88% of the Company's common stock
after completion of the transaction.. Richlink is engaged in the
manufacture and sale of silicone rubber keys and melamine
(artificial porcelain) products. The Letter of Intent contains a
statement by Richlink that Richlink will show net profit under U.S.
generally accepted accounting principles for the 9 months ended
September 30, 1999 of at least $2.4 million.
The Letter of Intent contemplates that after the transaction the
existing Nova shareholders will own 8.5% of the common stock of the
Company and that the entire operating business of the Company,
including all assets and liabilities, will be divested prior to or
at the closing of the transaction, or that other arrangements
acceptable to Richlink will be made. The Company has already begun
the liquidation of its assets and liabilities, and is considering
offering its remaining assets and liabilities for sale at an
advertised auction in order to satisfy the requirements of this
transaction. Members of management currently intend to bid on the
purchase of such assets and liabilities.
The Letter of Intent provides for warrants to be issued
representing 1.5% of the total issued and outstanding common stock
of the Company after the transaction, which are contemplated to be
issued to management.
It is contemplated that Richlink will seek listing for the
Company's shares on the NASDAQ stock market following the closing
of the transaction.
For a period of 90 days from execution of the Letter of Intent, the
Company and Richlink are precluded from soliciting or entering into
any discussions with any other party with respect to the sale of
the Company or the merger of Richlink with, or the purchase of any
other company by Richlink, respectively.
In order to complete the transaction contemplated by the Letter of
Intent, the Company will be required to amend its Articles of
Incorporation to increase its authorized capital. The Company will
seek shareholder approval of the amendment. In addition, the
holders of the Company's promissory notes will be asked to approve
the transfer of the notes and associated receivables, including the
security for the notes, to effect the transaction. Failure to
obtain such approval could result in cancellation of the
transaction.
Shareholders will be asked to approve all of the steps needed to
effect the transaction at a shareholders' meeting contemplated to
be held in the first quarter of calendar year 2000.
Business of the Issuer
Mineral Operations
The Company sold its cement-grade kaolin mine in July 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 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 limited to the retention of a royalty interest in a
minor portion of its offshore Nome, Alaska leases. The Company
formerly held claims for possible future development of limestone
products. These claims have been dropped, and the Company has no
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
Nova initiated an exploration project for high-grade, paper-quality
kaolin in southwestern Minnesota in 1985. Several prospects were
located and leased in 1989. In 1990, U.S. Borax, Inc., an
unaffiliated mineral development company which is a wholly-owned
subsidiary of London based Rio Tinto plc ("Borax") joined Nova to
form a joint venture. Borax assumed the operation and funded a
drilling effort which resulted in completion of 185 core holes from
1990 through 1996. In addition, a large diameter auger was used to
collect bulk samples from eight locations on three seperate kaolin
deposits defined by the core drilling.
The Minnesota kaolin has unique properties which required
considerable research by consultants knowledgeable as to the
characteristics of clay minerals and the technology necessary to
process them before a successful process was developed to produce
acceptable paper pigments. The Paper industry has established very
rigid standards for the kaolin products used in coating and
filling.
After the processing was established, subsequent cores were used to
evaluate deposits and outline potential resources of quality
kaolin.
A small batch plant was built in Georgia in 1992 and bulk samples
were processed for paper coating trials on both laboratory scale
coaters and larger pilot coaters owned and operated by paper
companies located in Minnesota and Wisconsin. The coating trials
were encouraging to the paper companies.
In 1997, Rio Tinto plc reduced funding of the project to lease
maintenance with no indication as to when and if work would resume
to continue exploration and development. At this point Nova
initiated negotiations with Borax to terminate the joint venture.
An agreement was consummated to provide Nova with an exclusive
option to buy back the total ownership of the project for a payment
of $300,000 on or before December 2001. During the option period,
Nova has full operating rights.
During the past two years, Nova has contacted numerous mining
companies and several construction companies in an attempt to
establish a new joint venture designed to confirm reserves and
establish mine feasibility. Plans were also prepared for
commercial plant construction to follow mine feasibility. A number
of presentations were made, and several companies initiated
preliminary studies of the project, but none resulted in
negotiations to form such a venture.
The mining industry has not participated in the prosperity of the
U. S. economy during the past three years. In fact, kaolin
products have been selling at flat prices, and kaolin producers
have been competing for limited markets. The Minnesota paper
kaolin project is located near the best market in the country for
the specific projected products, and location is always a most
critical factor when evaluating an industrial mineral operation.
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.
West Rozell Prospect
The Company held a 50% interest in 1,600 acres of State of Utah oil
and gas leases in the Great Salt Lake. The other 50% was held by
the Robert E. McDonald Trust. The Company and the Trust jointly
attempted 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.
Low oil prices prevailed throughout much of the period during which
Nova was attempting to interest a partner in this project. This
fact, and other factors, such as concerns in regard to the
feasibility of processing this heavy oil, doubtless weighed heavily
on the potential partners who evaluated this project, and Nova was
unable to secure a partner to fund the development of this
prospect. The leases expired on August 31, 1999, and Nova has no
plans to attempt to reestablish this lease position.
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, although the Company does not
believe it has any liability in this regard, 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 has entered into and will seek 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.
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 1999, the Company had five customers which accounted
for 100% of its total net oil and gas sales. 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.
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 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. The Company
does not operate any of its producing oil and gas properties.
However, the Company does operate one exploratory property. 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.
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.
Employees
At September 30, 1999, Nova had no paid employees. However, the
President and the Manager of Exploration, both of whom are also
Directors of the Company, have been working full-time, and the
Company's Secretary, Treasurer and Land Manager and the Controller
have been working part-time for the Company, without pay, and
continue to do so.
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, 1999 of $150.
OFFICE LEASE
The Company's current office lease was a three year lease which
terminates February 28, 2000. 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, 1999 shown in
the following sections, which set forth information concerning the
Company's interests in oil and gas properties. However, an adverse
event -- mechanical problems -- which caused the Company to sell
its interest in the M. M. Louder No. 1 (see "Significant
Developments During Fiscal 1999 - Oil and Gas Operations") -- will
result in a reduction in the Company's proved reserves of
approximately 3,600 barrels of oil and 4,500 MCF of gas. The value
of those proved reserves, discounted at 10%, will decrease
approximately $17,200, net of the proceeds from the sale of the
M.M. Louder interest.
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 as/of October 1, 1999 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 1999 and 1998 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, 1999 and 1998 and the average sales prices and
production costs per unit of production.
Years Ended September 30,
1999 1998
Production:
Oil (Bbls) . . . . . . . . . . 2,233 3,868
Gas (Mcf) . . . . . . . . . . 4,967 9,518
Average Sales Prices:
Oil (per Bbl) . . . . . . . . $11.94 $12.18
Gas (per Mcf) . . . . . . . . $ 1.81 $ 1.41
Average Production Costs
Per Equivalent Barrel Of Oil*. $ 6.08** $12.29
* Equivalent barrels include oil, condensate and gas. Gas is
converted to equivalent barrels on the basis of 6 Mcf per equiva-
lent barrel.
**In August 1998, the Company sold its working interest in some of
its highest operating cost properties. The majority of its
production in fiscal 1999 was derived from working interest wells
which have lower production costs, and royalty interests, which are
not subject to operating costs.
Drilling Activity
The Company did not participate in any drilling activity during
fiscal 1999 or 1998.
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, 1999
Productive Wells (2) Developed Acres(1)
Gross (5) Net (6) Gross (3) Net(4)
Oil Gas Oil Gas
Geographic Area
North Dakota 1 - .25 - 80.00 20.00
Texas 1 - .25 - 160.00 40.00
Wyoming 1 - .03 - 1,131.72 33.84
____ ____ ____ ____ ________ ______
TOTAL 3 - .53 - 1,371.72 93.84
(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, 1999.
Undeveloped Acreage
Gross Net
Wyoming 2,799.29 860.64
TOTAL 2,799.29 860.64
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, 1999, 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 657.09 16.79 2.55%
TOTAL 1,297.09 36.79 5.675%
(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, 1999, 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, and Nova received $6,200 in settlement of
this matter in December 1998.
The Company has an outstanding balance of $16,447 with Union
Pacific Railroad. The Company did 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 referred the matter to an attorney for collection.
Nova paid this sum in November 1999, and the Union Pacific
acknowledged that this payment discharged in full all outstanding
debt owed to the Union Pacific.
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 1999.
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, 1999 and 1998, 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 1999 High Low
First Quarter $0.050 $0.0313
Second Quarter 0.030 0.030
Third Quarter 0.030 0.030
Fourth Quarter 0.020 0.0325
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
The bid and asked prices for the Company's Common Stock on
September 30, 1999 were $0.02 and $0.0325 respectively, as reported
by Bloomberg Financial Services.
The number of record holders of the Company's Common Stock as of
September 30, 1999 was 5,322.
Also outstanding as of September 30, 1999 were options under the
Company's employee stock option plans to purchase a total of
3,673,577 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
During and subsequent to the end of fiscal 1999, The Company
undertook actions designed to provide additional working capital
and restructuring its long-term debt. On April 1, 1996, the
Company issued $250,000 of convertible debentures which provided
for interest at an annual rate of 10%, payable semi-annually, were
payable April 1, 2001, and were redeemable in common stock by the
Company after March 31, 1998. The debentures were convertible into
the Company's common stock at the rate of one share of stock for
each $0.15 of principal, as an aggregate of 1,666,667 common shares
if converted. In January, 1999 the Company offered and debenture
holders accepted:
1. Promissory notes in the aggregate amount of 50% of the
face amount of the debentures would be issued to debenture holders,
secured with future receivables from the installment sale of Nova's
cement-grade kaolin mine. The note is due no later than December
31, 2001, and contains the same dilution protection as the
debentures. Interest on the note will be paid at a 10% annual
rate, on August 31st and December 31st of each year, to coincide
with receipt of the installment payments from the sale of the mine.
Management agreed to recommend to the shareholders at the next
shareholder's meeting that the notes be convertible into common
stock at $0.04 per share and that sufficient shares be authorized
to permit such conversion.
2. Shares of Nova restricted common stock were issued for the
remaining 50% of principal of the debentures at $00.04 per share.
3. The debentures were not called.
As a result of the acceptance of this offer, the Company's long
term debt was reduced by $125,000. Common stock was increased by
3,125,000 shares. The Company booked a $71,615 expense in
connection with the conversion due to the difference in the fair
value of the original conversion price and the new conversion
price.
Subsequent to the end of the fiscal year, the Company sold its net
mineral interests in Campbell County, Wyoming for $71,658. These
interests had not been carried at any significant value on the
Company's balance sheet. Upon receipt of these funds, the Company
paid in full its outstanding short-term bank loan of $43,000.
Effective 10/1/99, the Company transferred its interest in a well
and leasehold interest in North Dakota to the operator in full
satisfaction of alleged debt owed to that operator. The Company
had previously informed the operator that this well was uneconomic
and should be plugged.
In November 1999, the Company paid a former shipper of kaolin from
its kaolin mine $16,446.85, which had been invoiced a year after
the mine had been sold, paying this obligation in full. Upon
receipt of these funds, the shipper agreed that this payment
discharged in full all outstanding debt owed to this shipper by the
Company. To its knowledge, the Company owes no other sums in
connection with its former kaolin mine.
Effective 12/1/99, the Company sold its interest in a well and
leasehold in Texas for $3,750. The net result of these subsequent
events was an increase in cash on hand of $32,408, a reduction in
current liabilities of $75,675, and a reduction in the value of the
Company's reserves, net of production since 9/30/99, of
approximately $16,750.
The Company has not paid its contract personnel, who are the former
employees of the Company, although they have continued to discharge
their duties on behalf of the Company. The Company intends to make
payments to these individuals as its financial abilities permit,
but has not accrued any amounts for this purpose on its balance
sheet.
The Company continues to experience a severe cash flow shortage.
As was stated in this report for the fiscal year ended September
30, 1998, unless new financing were secured, and/or an agreement
were made to enter into a joint venture on the Company's paper
kaolin properties on terms which would provide capital and/or
overhead coverage to operate this project, the Company might not be
able to continue in business. Neither of these events have
occurred, and the Company previously indicated that it intended to
explore all avenues whereby it could create value for its
shareholders, including mergers.
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, 1999, the Company had an accumulated deficit of $9,503,263.
The Company's working capital was a positive $3,424 as of September
30, 1999, compared to a working capital deficit of $55,343 as of
September 30, 1998. The improvement in working capital was
primarily attributable to a substantial reduction in current
liabilities due to a $23,806 reduction in Note Payable and a
$30,384 reduction in Accounts Payable, both resulting from the
Company's improved cash position during the year, which enabled the
Company to reduce its bank debt and apply cash toward payables
which were at a lower level due to the Company's successful efforts
to reduce expenses.
Total assets decreased to $521,768 as of September 30, 1999, from
$594,967 as of September 30, 1998. The decrease in total assets
was attributable primarily to the collection of notes receivable
connected with the 1997 sale of the Kaolin Mine, and to a lesser
extent to a reduction in net oil and gas properties and lower
current assets. 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 decrease in total liabilities from $422,430 in 1998 to $210,360
in 1999 is due primarily to the restructuring of the Company's
long-term debt and a substantial decrease in current liabilities,
including reduced bank borrowings as compared to the fiscal 1998
balance sheet date, which was effected by proceeds from asset
sales, a continual effort to reduce operating expenses, and
improved oil & gas operating results due primarily to higher gas
prices coupled with greatly reduced operating costs as the sales
mix shifted more heavily toward royalty income, which is more
profitable. As a result of the operating revenue decrease during
the year, and the continued Net Loss, there are uncertainties that
may have a significant impact on the Company's liquidity and which
raise substantial doubt about the Company's ability to continue as
a going concern.
The Company's liquidity is primarily dependent on receipt of
proceeds from the installment sale of the Company's kaolin mine,
income from oil and gas production, and the sale of oil and gas
wells and other assets. 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, and there are
no current discussions with such a partner. To continue
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.
The Company has been conducting limited examination of cores, and
processing raw kaolin for the 1996 drilling program on its paper
kaolin properties, analyzing the data from seven years of
exploration and development work on this project, and marketing
this project to the industry in the attempt to bring in a new
partner who will assist Nova in aggressively pursuing the further
development of this project. These marketing efforts have been
hampered by the current malaise in the mining industry, which
limits both the ability and the will of mining companies to take on
new projects.
Debt Restructuring
The Company had debt outstanding in the form of Convertible
Subordinated Debentures in the Principal Amount of $250,000.
Interest was payable semi-annually on these debentures at the rate
of 10% per annum. They were convertible into common shares at a
conversion price of $.15 per share, and were due and payable,
unless redeemed sooner by the Corporation, on April 1, 2001. An
interest payment in the amount of $12,500 was due on February 28,
1999. The Company did not have sufficient funds to make this
interest payment, which, if not made, would cause the debentures to
be in default, upon which event the entire unpaid and unredeemed
balance of the Principal Amount and all interest accrued and
unpaid, at the election of the holder, would become immediately due
and payable, subject to a curative period and other provisions.
The Company made an offer to all of the holders of its Convertible
Subordinated Debentures to restructure this debt. The Company
offered to exchange restricted common shares of the Corporation for
50% of the Principal Amount (i.e. $125,000), at a price per share
of $.04, and to replace the other 50% of the Principal Amount with
notes secured by a portion of a $125,000 installment payment
relating to the sale of its kaolin mine to be received in December
2001. This offer was accepted by all of the Debenture holders.
The notes have a due date of December 31, 2001, and will pay
interest at 10% per annum, with payments to be made on August 31
and December 31 of each year, to coincide with the receipt of
installment payments from the mine sale. No interest payment was
made on February 28, 1999. However, the August 31, 1999 interest
payment included interest computed at an annual rate of 10% on
$125,000 of notes, as if the notes had been outstanding from
September 1, 1998. The Company has sufficient funds on hand to
make the interest payment due on December 31, 1999 and intends to
do so.
Management agreed to recommend to the shareholders at the next
shareholders meeting that shares sufficient to allow conversion of
these notes to common shares at a conversion price of $.04 per
share be authorized. The Company would have the right to call the
notes prior to the due date, and the holders of such notes would
have the right to either be paid cash and accrued interest or
convert the notes to common shares. The holders would also have
the right to exercise this conversion privilege at any time
subsequent to approval of such conversion rights and prior to the
due date of the note.
Nova issued 3,125,000 common shares, and another 3,125,000 such
shares would be issuable should 1) shareholders authorize
sufficient shares to provide for conversion of the $125,000
principal amount of the notes into common stock, and 2) should all
of the holders of the notes elect to so convert. In addition, the
Company's debt has been reduced by $125,000 and the annual interest
cost has been reduced to $12,500 from $25,000. The acceptance of
this offer has resulted in substantial dilution. Common shares
outstanding on a fully-diluted basis have increased from
approximately 15,000,000 shares to approximately 16,460,000 shares.
Nova's officers and Directors held $46,875 or 18.8% of the
Principal Amount of the debentures, which they acquired on
identical terms as those not affiliated with the Company. All of
the officers and directors holding such debentures agreed to accept
the Company's offer, were issued 585,935 shares of common stock and
hold notes aggregating $23,438.
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 believed 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 $57,744 for the year ended
September 30, 1999, compared to a net loss in the 1998 fiscal
period of $271,581. Oil and gas sales decreased substantially,
reflecting the sale of a significant portion of the Company's
producing oil & gas assets, normal production decline, and lower
oil prices. Gas prices increased, but production volumes,
reflecting the producing asset sales, dropped 48%, more than
offsetting a 28% increase in gas prices. No gravel royalties were
recorded during the year since the Company's gravel royalty
interest was previously sold to an unaffiliated third party. Oil
and gas production costs also declined due to these sales as well
as a greater portion of production revenues was accounted for by
royalty interests, which have very low operating costs.
General and administrative costs decreased $91,419 or 35% to
$167,918 for the year ended September 30, 1999 compared to the same
period in 1998. This decrease was primarily the result of the fact
that the Company paid no salaries in the 1999 Fiscal Year, as well
as a continual effort to reduce expenses.
Revenues
Mineral sales from kaolin were non-existent in fiscal 1999, and
very low in 1998, reflecting the sale of the Kaolin Mine in 1997.
No gravel royalties were recorded in fiscal 1999, compared to
$1,320 in 1998. The Company previously had 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 elimination of mineral sales in the
1999 fiscal period.
Oil and gas sales decreased $23,825 or 39% for the year ended
September 30, 1999 as compared to the same period in 1998. This
decrease is attributable to the sale of a portion of the Company's
working interest production, and a decline in the price of oil. A
comparison of production and prices in 1999 and 1998 is as follows:
1999 1998
Sales Volume
Oil (bbls) 2,233 3,868
Gas (MCF) 4,967 9,518
Average Sales Price
Oil (bbls) $11.94 $12.18
Gas (MCF) $ 1.81 $ 1.41
Other income for the year ended September 30, 1999 consisted
primarily of revenue received from contract land work for third
parties of $19,419, a gain on the sale of assets of $29,652, and
other income of $32,922, derived from the reclassification of lease
operating expenses and the proceeds of a lawsuit.
Interest income declined in fiscal 1999 to $31,329 compared to
$39,924 in the 1998 period. This is due to reduced imputed
interest on the note receivable from Northern Con-Agg, due to the
reduced amount of this receivable.
Expenses
Oil & gas lease production costs including production taxes
declined 72% in fiscal 1999 to $18,625 from $67,030. Oil and gas
production costs declined more sharply than oil & gas sales since
the majority of the oil & gas assets sold by the Company were
working interests. Accordingly, the production mix shifted more to
the royalty side, and royalty production has a very low cost since
there are no deductions for operating costs from royalty payments.
Depreciation, depletion and amortization dropped 46% from $12,892
in 1998 to $6,923 in 1999. This primarily resulted from the sale
of oil & gas assets, although normal production decline also
contributed. General and administrative expenses decreased $91,419
or 35% to $167,918 for the year ended September 30, 1999 compared
to the same period in 1998. This decrease primarily resulted from
the elimination of employee salaries, as well as the Company's
expense reduction program.
Interest expense decreased 53% or $16,869 to $14,786 in fiscal 1999
compared to fiscal 1998, chiefly because the Company was not
required to borrow as much against its line of credit in fiscal
1999 as in the previous fiscal year, as well as the restructuring
of the Company's long-term debt, which reduced the interest paid on
that debt.
Impairment and abandonment costs were zero in fiscal 1999, compared
to a total of $26,938 in fiscal 1998. No properties were impaired
or abandoned in the 1999 fiscal period.
Commitments
The Company's current office lease is a three-year lease which
expires at the end of February, 2000. Lease payments during the
balance of the lease, from October 1, 1999 through February 2000
will amount to $10,128.
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, 1999, and the related
statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 1999 and 1998. 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, 1999, and the
results of its operations and its cash flows for the years ended
September 30, 1999 and 1998 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 8, 1999
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
1999
CURRENT ASSETS:
Cash and equivalents $ 2,363
Accounts receivable:
Oil and gas 4,647
Other 2,807
Current maturities of note receivable 74,874
Prepaid expenses and other 4,093
_________
Total current assets 88,784
OIL AND GAS PROPERTIES, at cost
(using the full
cost method of accounting):
Unproved properties not being amortized 11,806
Properties being amortized 5,953,179
_________
5,964,985
Accumulated depreciation, depletion
and amortization (5,932,306)
___________
Net oil and gas properties 32,679
MINERAL PROPERTIES, at cost 193,122
__________
OTHER ASSETS:
Note receivable, net of current maturities 203,485
Deposits and Other 3,550
Furniture and technical equipment,
net of accumulated depreciation
of $66,029 148
_______
Total other assets 207,183
_______
TOTAL ASSETS $ 521,768
See accompanying notes to these financial statements.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note Payable $ 21,342
Accounts payable 15,544
Accrued expenses 48,474
_________
Total current liabilities 85,360
LONG TERM DEBT 125,000
COMMITMENTS AND CONTINGENCIES (Notes 1, 2 and 8)
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; 939,913
Additional paid-in capital 7,082,491
Accumulated deficit (9,503,263)
___________
Total Stockholders' equity 311,408
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 521,768
See accompanying notes to these financial statements.
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30,
______________________
1999 1998
______ ______
REVENUES:
Mineral sales:
Kaolin $ - $ 584
Gravel Royalties - 1,320
Oil and gas sales 37,186 61,011
_________ _________
Total revenues 37,186 62,915
_________ _________
COSTS AND EXPENSES:
Oil and gas production costs 18,625 67,030
Depletion, depreciation, and
amortization 6,923 12,892
Impairment of oil & gas properties - 20,000
Mining property abandonment costs - 6,938
General and administrative 167,918 259,337
_________ _________
Total costs and expenses 193,466 366,197
_________ _________
OPERATING LOSS (156,280) (303,282)
OTHER INCOME (EXPENSES):
Contract income 19,419 -
Interest income 31,329 39,924
Interest expense (14,786) (31,655)
Gain on sale of assets 29,652 22,982
Other 32,922 450
_________ ________
98,536 31,701
_________ _________
NET LOSS $ ( 57,744) $ (271,581)
========== =========
NET LOSS PER SHARE(Basic and diluted) (.01) (.05)
========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 8,106,000 5,806,000
========= =========
See accompanying notes to these financial statements
<PAGE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
_________ _________ _________ ________
<S> <C> <C> <C> <C>
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
Debt Conversion -- -- 3,125,000 312,500
Net Loss -- -- -- --
_________ _________ __________ ________
BALANCES, September 30, 1999 1,792,267 $1,792,267 9,399,131 $939,913
<FN>
See accompanying notes to these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
<S> <C> <C> <C>
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
Debt Conversion (115,885) -- 196,615
Net Loss -- (57,744) (57,744)
_________ _________ _________
BALANCES, September 30, 1999 $7,082,491 $(9,503,263) $ 311,408
<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,
___________________
1999 1998
______ ______
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (57,744) $ (271,581)
Adjustments to reconcile net loss to net cash
from operating activities:
Depletion, depreciation and amortization 6,923 12,892
Induced conversion of debentures 71,615 --
Impairment of oil and gas properties -- 20,000
Gain on sale of assets -- (22,982)
Contribution of stock to employee stock ownership plan -- 24,281
Fair value of stock options granted to consultants -- 4,857
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 12,605 17,440
Prepaid expenses and other 1,891 5,778
Deposits -- (3,550)
Increase (decrease) in:
Accounts payable (30,384) 14,020
Accrued expenses (1,042) (12,601)
_________ ________
Net cash used in operating activities 3,864 (211,446)
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets -- 31,813
Investment in and advances to NovaChek LLC -- 4,000
Capital expenditures (14,248) (56,754)
Collection of principal on note receivable 67,929 61,629
_________ _________
Net cash provided by investing activities 53,681 40,688
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable and long term debt (136,548) (64,139)
Purchase and retirement of common and preferred stock -- (16,473)
Proceeds from notes payable 80,904 101,348
_________ ________
Net cash provided by (used in) financing activities (55,644) 20,736
_________ ________
NET INCREASE(DECREASE)IN CASH AND EQUIVALENTS 1,901 (150,022)
CASH AND EQUIVALENTS, at beginning of year 462 150,484
________ ________
CASH AND EQUIVALENTS, at end of year $ 2,363 $ 462
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 15,827 $ 31,916
========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Convertible debentures converted to common stock $ 125,000 $ --
========= ========
<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 Colorado and seeking partners for
exploratory drilling on two oil and gas prospects 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.
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, 1999 the Company has an investment of
approximately $188,000 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 an
equivalent barrel basis during fiscal years 1999 and 1998 was $3.07
and $2.15, 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 share is presented in accordance
with the provisions of Statements of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. SFAS No.128 replaces the
presentation of primary and fully diluted earnings per share (EPS),
with a presentation of basic EPS and diluted EPS. Under SFAS
No.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 1999 and 1998 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 SFAS No.123, "Accounting for Stock-Based
Compensation". SFAS No.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 No.123 for
employees, but is subject to the related disclosure requirements.
(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 from operations. At
September 30, 1999, the Company has an accumulated deficit of approximately
$9,500,000 and has minimalcash and working capital. 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:
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, 1999.
(4) DEBT FINANCING:
Note Payable - At September 30, 1999, the Company has a bank line-
of-credit of $100,500 with an outstanding principal balance of
$21,342. The note provides for interest at prime rate plus 2%
(total of 10.25% at September 30, 1999). This loan is
collateralized by land that is owned by an officer and director of
the Company and is guaranteed by the officer and director.
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, 1999.
In January 1999, the Company offered the debenture holders the
following proposal:
A. Fifty percent of the face amount of the debentures will be
secured with future receivables from the installment sale
of Nova's cement-grade kaolin mine. An escrow account will be
set up for this purpose. The note will be due no later than
December 31, 2001, and would have the dilution protection
contained in the present debentures. Interest on the note will
be paid at a 10% annual rate. These payments would be made on
August 31 and December 31 of each year, to coincide with
receipt of the installment payments from the sale of the mine.
Management agreed to recommend to the shareholders at the next
shareholders at the next shareholder's meeting that the notes
be convertible into common stock at $0.04 per share and that
sufficient shares be authorized to permit such conversion.
B. Shares of Nova Common stock would be issued for the remaining
50% of the face amount of the debentures at $0.04 per share.
C. The offer would expire March 31, 1999 unless extended by the
Company. The offer was accepted by 100% of the debenture
holders. As a result, the Company's long-term debt was
reduced by $125,000 to $125,000. Common stock was increased
by 3,125,000 shares. The Company booked a $71,615 expense in
connection with the conversion due to the difference in the
fair value of the original conversion price and the new
conversion price.
The Company owed $37,008 to a former director on a contract payable
in connection with the purchase and retirement of common and
convertible preferred stock, payable in installments of $6,000 in
August and December of each year through August 2001, with a final
payment in December 2001 of $1,008. In March 1999, the Company
reached an agreement with the former director to accept $18,504 as
payment in full of this long-term obligation. The Company
recognized a gain of $14,652 on this forgiveness of debt.
(5) INCOME TAXES
The components of the net deferred tax asset and liabilities at
September 30, 1999 and 1998 are as follows:
1999 1998
Deferred tax assets-
Net operating loss carryforward $ 1,650,000 $ 1,940,000
Less valuation allowance (1,620,000) (1,913,000)
__________ __________
Net deferred tax asset 30,000 27,000
Deferred tax liabilities-
Depletion, depreciation, amortization,
and valuation allowance for income tax
purposes in excess of amounts for
financial statement purposes (30,000) (27,000)
__________ _________
Net deferred tax asset $ -- $ --
=========== =========
The Company has net operating loss carryforwards at September 30, 1999 for
Federal income tax reporting purposes of approximately $4,400,000. These
carryforwards expire in varying amounts through 2019. The valuation
allowance decreased by $293,000 during the current year mainly due to
expiring net operating loss carryforwards.
(6) 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 two stock option plans for
the benefit of Company employees and key personnel. The first plan is the
Nova Natural Resources Corporation 1989 Nonqualified Stock Option Plan (the
"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, 1999. Activity in the 1989 stock option plans
for the years ended September 30, 1999 and 1998 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, September 30, 1997 600,000 .105 400,000 .105
Cancelled (600,000) .105 (400,000) .105
________ _______
Outstanding, September 30, 1998 -- --
Outstanding, September 30, 1999 -- --
======== =======
</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 and
the options expire five years after the date of grant. No options may be
granted under the 1998 Plan after January 2003.
Following is a summary of activity under the 1998 plan for the years ended
September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Weighted
Number Average Expiration
of Shares Exercise Price Date
Per Share
__________ _______________ ___________
<S> <C> <C> <C>
Outstanding, October 1, 1997 -- -- --
Granted:
Consultants 200,000 .03 1/03
Employees 3,273,577 .03 1/03
_________
Outstanding, September 30, 1998 3,473,577 .03
Granted:
Employee 200,000 .03 8/04
_________
Outstanding, September 30, 1999 3,673,577 .03
</TABLE>
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. 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.
Year Ended September 30,
1999 1998
_____ ______
Net loss:
As reported $ (57,744) $ (271,581)
Pro forma $ (63,288) (363,181)
Net loss per common share:
As reported (.01) $ (.05)
Pro forma (.01) (.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 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Year Ended September 30,
1999 1998
_____ _____
Expected volatility 200% 207%
Risk-free interest rate 6.0% 5.6%
Expected dividends 0% 0%
Expected terms (in years) 3.0 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,
1998 amounted to 485,625 shares of common stock with an aggregate value of
$24,281.
(7) 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 $0 in 1999 and 1998, respectively.
(8) 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 $7,841 for the fiscal years
ending September 30, 2000. Net rental payments charged to expense under
all operating leases amounted to $17,590 in 1999 and $15,670 in 1998.
(9) 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, 1999 and
1998:
1999 1998
REVENUE:
Oil and gas $ 37,186 $ 61,011
Mining -- 1,904
________ _________
$ 37,186 $ 62,915
======== =========
OPERATING INCOME (LOSS):
Oil and gas $ 12,589 $ (77,729)
Mining -- (45,034)
General corporate activities (168,869) (180,519)
_________ _________
$ (156,280) $ (303,282)
========= ==========
DEPRECIATION AND DEPLETION:
Oil and gas $ 5,972 $ 11,710
General corporate activities 951 1,182
________ _______
$ 6,923 $ 12,892
========= =======
IDENTIFIABLE ASSETS, net:
Oil and gas $ 32,679 $ 56,133
Mining 474,969 527,982
General corporate activities 14,120 10,852
_________ _________
$ 521,768 $ 594,967
========= =========
CAPITAL EXPENDITURES INCURRED:
Oil and gas $ 13,460 $ 4,251
Mining 27,465 55,003
General corporate activities 243 --
_________ _________
$ 41,168 $ 59,254
========= =========
(10) 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,
1999 1998
Unproved properties not being amortized $ 11,806 $ 11,806
Properties being amortized:
Unproved properties 118,602 116,898
Proved properties 5,834,577 5,869,741
_________ _________
5,964,985 5,998,445
Accumulated depreciation, depletion and
amortization (5,932,306) (5,946,334)
__________ _________
$ 32,679 $ 52,111
========== =========
Costs incurred in oil and gas producing activities, whether capitalized or
expensed, during the years ended September 30, 1999 and 1998 are as follows:
1999 1998
_________ _________
Acquisition costs $ - $ -
========= =========
Exploration costs $ $ 4,251
========= =========
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 with
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, 1999 and 1998:
1999 1998
(bbls (mcf) (bbls (mcf)
Proved reserves-beginning of year 11,934 30,247 22,973 62,463
Revisions of previous estimates 1,451 (8,547) 979 17,999
Sales of reserves-in-place -- -- (8,150) (40,697)
Production (2,233) (4,967) (3,868) (9,518)
______ ______ ______ ______
Proved reserves-end of year 11,152 16,733 11,934 30,247
====== ======= ====== =======
Proved developed reserves:
Beginning of year 11,934 30,247 22,973 62,463
====== ======= ====== =======
End of year 11,152 16,733 11,934 30,247
====== ====== ====== =======
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, 1999 and 1998, is
as follows:
1999 1998
Future cash in-flows $ 243,819 $ 189,241
Future production costs (137,058) (126,211)
Future development costs -- --
_________ _________
Future net cash flows 106,761 63,030
10% annual discount for estimated
timing of cash flows (32,093) (22,725)
_________ _________
Standardized measure of discounted
future net cash flows $ 74,668 $ 40,305
========= =========
The following are the principal sources of change in the standardized measure
of discounted future net cash flows during 1999 and 1998:
1999 1998
Standardized measure of discounted future
net cash flows at beginning of year $ 40,305 $ 98,640
Sales of oil and gas produced,
net of production costs (18,560) 6,019
Sales of reserves-in-place -- (53,680)
Net changes in prices and production costs 50,425 (11,115)
Revisions of previous quantity estimates and other (1,532) (14,344)
Changes in development costs -- 4,921
Accretion of discount 4,030 9,864
________ _______
Standardized measures of discounted future
net cash flows at end of year $ 74,668 $ 40,305
======== =======
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.
PART III
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGEworking
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) 53 April 22, 1986
Robert E. McDonald,(2) 71 April 22, 1986
Brian B. Spillane, President and
Chief Executive Officer (3) 63 April 22, 1986
Milton O. Childers
Exploration Manager 71 April 22, 1986
Robert W. Meier (2) 63 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 63 April 1, 1989
James R. Schaff
Secretary and Treasurer
Manager of Lands 44 May 2, 1996
Milton O. Childers
Vice President of Exploration,
and Assistant Secretary 71 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 9. 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,
1999, 1998, and 1997 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 ($)* #
Brian B. Spillane 1999 0 0 0
CEO 1998 32,250 8,063 600,000
1997 51,600 5,160 0
Milton O. Childers 1999 0 0 0
Exploration V.P. 1998 31,500 7,875 473,577
1997 50,400 5,040 --
James R. Schaff 1999 0 0 0
Secretary/Treasurer 1998 31,125 7,781 550,000
Manager of Lands 1997 49,800 4,980 0
*ESOP contribution
Option Grants in Last Fiscal Year
Individual Grants
% of Total
Options Options Granted Exercise or
Granted/ to Employees Base Price Expiration
Name (Expired) in Fiscal Year ($/sh) Date
Mary F. Mernah 200,000 100% .03 8/01/04
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, 1999, 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. Since there were no salaries paid in
fiscal 1999, no shares were contributed to the plan in 1999. A total of
485,625 shares were contributed to the plan in 1998.
ITEM 10. 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, 1999, 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 602,038 (1) 6.41%
P.O. Box 6323
Denver, CO 80206-6323
Karen McDonald 602,037 (2) 6.41%
2575 Corte Casitas
Carlsbad, CA 92009
James R. Schaff 353,400 (3) 3.76%
789 Sherman St. #550
Denver, CO 80203
Milton O. Childers 742,931 (4) 7.90%
17939 E. Brown Place
Aurora, CO 80013
Brian B. Spillane 869,276 (5) 9.25%
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. Includes 117,187 shares which were
issued to Mr. McDonald in August 1999 upon his acceptance of
an offer by the Company to cancel $9,375 of convertible
subordinated debentures, and replace them with 117,187 shares
of common stock and a secured note in the amount of $4,687.50.
(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. Includes 117,187
shares which were issued to Ms. McDonald in August 1999 upon
her acceptance of an offer by the Company to cancel $9,375
of convertible subordinated debentures, and replace them with
117,187 shares of common stock and a secured note in the amount
of $4,687.50.
(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. Includes 39,063 shares
which were issued to Mr. Schaff in August 1999 upon his
acceptance of an offer by the Company to cancel $3,125 of
convertible subordinated debentures, and replace them with
39,063 shares of common stock and a secured note in the
amount of $1,562.50.
(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. Includes 117,187
shares which were issued to Mr. Childers in August 1999 upon
his acceptance of an offer by the Company to cancel $9,375
of convertible subordinated debentures, and replace them
with 117,187 shares of common stock and a secured note in the
amount of $4,687.50.
(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. Includes
156,248 shares which were issued to Mr. Spillane in August 1999
upon his acceptance of an offer by the Company to cancel
$12,500 of convertible subordinated debentures, and replace
them with 117,187 shares of common stock and a secured note in
the amount of $6,250.
The following table shows, at September 30, 1999, the shares of the
Company's outstanding Common Stock, $.10 par value (9,399,131
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 602,038 (1) 6.41%
Brian B. Spillane 869,276 (3) 9.25%
James R. Schaff 353,400 (4) 3.76%
Milton O. Childers 742,931 (5) 7.90%
Robert W. Meier 271,303 (6) 2.89%
John R. Parker 78,125 (7) (2)
All Directors and Officers
as a group (7 persons) 2,917,073 31.00%
(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. Includes 78,125 shares which were
issued to Mr. Meier in August 1999 upon his acceptance of
an offer by the Company to cancel $6,250 of convertible
subordinated debentures, and replace them with 78,125
shares of common stock and a secured note in the amount
of $3,125.
(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.
Includes 78,125 shares which were issued to Mr. Parker in
August 1999 upon his acceptance of an offer by the Company
to cancel $6,250 of convertible subordinated debentures,
and replace them with 78,125 shares of common stock and a
secured note in the amount of $3,125.
The following table shows as of September 30, 1999, 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, and full exercise of all options.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 1,929,092 11.58%
Brian B. Spillane 2,576,128 15.47%
James R. Schaff 1,103,400 6.62%
Milton O. Childers 1,790,085 10.75%
Robert W. Meier 571,303 3.43%
John R. Parker 628,125 3.77%
All Directors and Officers
as a group (7 persons) 8,598,133 51.60%
If full conversion of all outstanding shares of convertible
preferred stock, options, and convertible subordinated debentures
occurred, the Company would have outstanding 16,657,242 shares of
its Common Stock.
ITEM 11. 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 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 $100,500 on behalf of the Company during
calendar year 1999. 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 1999 and in full from
the proceeds of the sale of a net mineral interest in December
1999. At September 30, 1999, the balance outstanding on this loan
was $21,242, and the maximum amount borrowed was approximately
$49,400. The loan facility matures on January 30, 2000, but the
Company does not expect to draw down any additional funds. 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, 1999. See also "Item 10. Executive
Compensation".
PART IV
ITEM 12. 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 1999.
(viii) Report on Form 8-K, date of report December 29, 1999.
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 28th day of December, 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 12-29-99
Robert E. McDonald
/s/ Brian B. Spillane President, Chief 12-29-99
Brian B. Spillane Executive Officer
/s/ James R. Schaff Secretary and Treasurer 12-29-99
James R. Schaff
/s/ Milton O. Childers Director 12-29-99
Milton O. Childers
/s/ John R. Parker Chairman of 12-29-99
John R. Parker the Board
/s/ Robert W. Meier Director 12-29-99
Robert W. Meier
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