U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from N/A to N/A
Commission file number 0-15078
NOVA NATURAL RESOURCES CORPORATION
(Exact name of small business issuer as specified in its charter)
Colorado 84-1227328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
789 Sherman Street, Suite 550
Denver, Colorado 80248
(Address of principal executive offices)
(303) 863-1997
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 9,399,131
Transitional Small Business Disclosure Format (Check One):
Yes ; No X
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEET
DECEMBER 31, 1999
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 67,499
Accounts receivable:
Oil and gas 2,784
Other 958
Current maturities of note receivable 77,376
Prepaid expenses and other 5,234
_________
Total current assets 153,851
OIL AND GAS PROPERTIES, at cost
(using the full
cost method of accounting):
Unproved properties not being amortized 11,806
Properties being amortized 5,968,504
_________
5,980,310
Accumulated depreciation, depletion
and amortization (5,953,083)
___________
Net oil and gas properties 27,227
MINERAL PROPERTIES, at cost 186,346
OTHER ASSETS:
Note receivable, net of current maturities 160,286
Furniture and technical equipment,
net of accumulated depreciation
of $127,399 2,104
_______
Total other assets 162,390
_______
TOTAL ASSETS $ 529,814
=======
See accompanying notes to these financial statements.
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEET, CONTINUED
DECEMBER 31, 1999
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 5,358
Accrued expenses 0
_________
Total current liabilities 5,358
_________
LONG TERM DEBT, less current maturities 125,000
_________
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;
9,399,131 shares issued and
outstanding; 939,913
Additional paid-in capital 7,082,491
Accumulated deficit (9,415,215)
___________
Total Stockholders' equity 399,456
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 529,814
=======
See accompanying notes to these financial statements.
<PAGE>
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
______ ______
REVENUES:
Oil and gas sales 10,421 8,787
_________ _________
Total revenues 10,421 8,787
_________ _________
COSTS AND EXPENSES:
Oil and gas production costs 2,909 3,505
Depletion, depreciation, and
amortization 1,022 3,153
General and administrative 39,825 20,023
_________ _________
Total costs and expenses 43,756 26,681
_________ _________
OPERATING LOSS (33,335) (17,894)
OTHER INCOME (EXPENSES):
Interest income 6,938 8,550
Interest expense (3,852) (7,897)
Other income - 6,246
Contract income 15,656 -
Gain on Forgiveness of Debt 30,985 -
Sale of Mineral Rights 71,658 -
_________ ________
121,385 6,899
_________ _________
NET INCOME(LOSS) $ 88,050 $ (10,995)
========== =========
NET INCOME(LOSS) PER SHARE
(Basic and Diluted) $ .01 $ (.00)
========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 9,399,131 6,274,131
========= =========
See accompanying notes to these financial statements
<PAGE>
<TABLE>
<CAPTION>
NOVA NATURAL RESOURCES CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
______ ______
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 88,050 $ (10,995)
Adjustments to reconcile net income(loss) to net cash
used by operating activities:
Gain on sale of mineral rights (71,658) --
Gain on forgiveness of debt (30,985) --
Depletion, depreciation and amortization 1,022 3,153
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 5,518 13,456
Prepaid expenses and other 604 4,658
Deposits -- --
Increase (decrease) in:
Accounts payable (25,645) 3,142
Accrued expenses (2,032) 7,017
_________ ________
Net cash provided by (used in) operating activities (35,126) 20,431
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 84,308 --
Capital expenditures (3,401) (6,259)
Collection of principal on note receivable 40,696 38,425
_________ _________
Net cash provided by (used in) investing activities 121,603 32,166
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (43,841) (45,148)
Proceeds from note payable 22,500 --
_________ ________
Net cash provided by (used in) financing activities (21,341) (45,148)
_________ ________
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 65,136 7,449
_________ ________
CASH AND EQUIVALENTS, at beginning of period 2,363 (1,131)
_________ ________
CASH AND EQUIVALENTS, at end of period $ 67,499 $ 6,318
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 4,898 $ 880
========= ========
<FN>
See accompanying notes to these financial statements.
</FN>
</TABLE>
NOVA NATURAL RESOURCES CORPORATION
Notes to Condensed Financial Statements
Three Months Ended December 31, 1999 and 1998
(1) The condensed financial statements included herein are unaudited. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
have been made which are necessary for a fair presentation of the financial
position of the Company at December 31, 1999 and the results of operations for
the three month period ended December 31, 1999 and 1998. Certain amounts have
been reclassified for comparability with the 1998 presentation. Quarterly
results are not necessarily indicative of expected annual results because of
fluctuations in the price received for oil and gas products, demand for natural
gas, and other factors. For a more complete understanding of the Company's
operations and financial position, reference is made to Management's Discussion
and Analysis of Financial Condition and Results of Operations herein and the
financial statements of the Company, and related notes thereto, filed with the
Company's annual report on Form 10-KSB for the year ended September 30, 1999,
previously filed with the Securities and Exchange Commission.
(2) Net loss per common share is determined by dividing net loss attributable
to common stock by the weighted average number of common shares outstanding
during each period. Potential common shares, including convertible preferred
stock, stock options, and convertible debentures were not included in the
computation of diluted earnings per share as their effect was anti-dilutive for
1999 and 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Management's discussion of anticipated future operations contains
predictions and projections which may constitute forward looking
statements. The Private Securities Litigation Reform Act of 1995,
including provisions contained in Section 21E of the Securities Exchange
Act of 1934, provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, the Company notes that
a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results 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, or otherwise
fund this project on an interim basis.
(b) The paper-grade kaolin project may encounter difficulties, currently
unforeseen, which will prevent attainment of commercial feasibility, or the
Company may return the properties to U.S. Borax.
(c) The Company may not be able to find industry partners to evaluate its
oil & gas prospects. Low oil and gas prices have resulted in reduced
exploration budgets, which have made it much more difficult to put together
drilling arrangements on exploratory prospects than has previously been the
case.
(d) Present and anticipated sources of funds may be insufficient to meet
the Company's working capital needs.
(e) The Company may not be able to complete its contemplated transaction
with Richlink International Holdings, Limited ("Richlink"), as described in
the Company's Form 10-KSB for the year ended September 30, 1999, and its
report on Form 8-K, previously filed with the Securities and Exchange
Commission.
(f) If the contemplated transaction with Richlink is not completed, there
is no assurance that the Company can complete a similar transaction with
another entity.
RESULTS OF OPERATIONS
The Company realized net income for the first quarter of fiscal 2000,
the three month period ended December 31, 1999 of $88,050 compared to a net
loss of $10,995 for the same period in 1998. A $30,985 gain on forgiveness
of debt, coupled with the sale of mineral rights in the amount of $71,658
was responsible for the profit, both of which events are non-recurring, and
leave the Company with few assets. General and Administrative costs were
higher in the fiscal 2000 quarter, reflecting the partial resumption of
salaries to $14,500, an employee bonus, and increased legal expenses
compared with the comparable period. Oil and gas production costs declined
due to the sale of some of the Company's properties. Oil and gas revenues
were higher due to substantially increased prices for both oil and gas.
Depletion was lower, reflecting lower oil production and an increased
reserve base due to an expansion of economic limits resultant from higher
prices.
Oil and gas sales for the three months ended December 31, 1999
increased $1,634 or 19% to $10,421 compared to $8,787 for the three months
ended December 31, 1998. The increase in oil and gas sales is primarily
attributable to the higher prices for both oil and gas. The Company
produced a lower volume of oil net to the Company's interest due to the
sale of some of the Company's production during the 1999 quarter, as well
as normal production decline. Gas production increased, reflecting higher
prices, which encouraged the operators of wells in which the Company has an
interest to increase production. The Board of Directors has decided to
cease its minerals operations and offer for sale its remaining minerals
interests, oil and gas interests and other assets in order to facilitate
the planned transaction with Richlink, or, should the Richlink transaction
not be completed, a similar transaction with another entity, if possible.
The sales volumes and average sales prices during the quarterly periods
were as follows:
Three Months Ended
December 31, December 31,
1999 1998
Sales
Oil (bbls) 425 620
Gas (MCF) 556 350
Average Sales Price
Oil $ 20.86 $ 7.86
Gas $ 2.77 $ 1.88
Oil and Gas production costs decreased 17% or $596 for the three
months ended December 31, 1999 as compared to 1998. The decrease is
primarily attributable to the lower oil production volume and a greater
percentage of production represented by royalties, which are not subject to
well operating costs.
General and administrative expenses increased 99% or $19,802 to
$39,825 for the three months ended December 31, 1999 as compared to the
same period in 1998. Chiefly responsible was the partial resumption of
salaries to $14,500, an employee bonus, and increased legal expenses
compared with the comparable period.
Depletion, depreciation, and amortization decreased 68% to $1,022 in
the three months ended December 31, 1999 as compared to $3,153 in the
1998 fiscal period. This decrease was the result of an increase in
reserves due to the effect of higher prices on the economic limits of wells
in which the Company holds an interest, and lower oil production.
Interest income decreased to $6,938 in the three months ended December
31, 1999, compared to $8,550 in 1998. The decrease is due to the accrued
interest on the note receivable from the sale of the cement grade kaolin
mine. Since a portion of this installment note was collected during the
past year, the remaining principal is less, and thus the accrued interest
at December 31, 1999 is proportionally smaller. Interest expense in the
quarter decreased 51% to $3,852 in the three months ended December 31,
1999, compared to $7,897 in 1998 due to the reduction in the amount
outstanding on a on a line of credit made possible by the sale of mineral
interests and by a $125,000 reduction in long term debt, which resulted in
lower interest payments. The balance on the line of credit was fully paid
prior to December 31, 1999.
During the three months ended December 31, 1999, the Company realized
income from outside contract work by one of its employees. There was no
such income in the comparable period. This contract income yields no net
income to the Company.
In the period ended December 31, 1999, the Company settled debts which
resulted in a gain on forgiveness of debt of $30,985. In addition, taking
advantage of a burgeoning gas play, the Company sold mineral rights for
$71,658 during the period which it carried at no value on its books. No
such items were recorded in the comparable period. These are non-recurring
events.
Other income in the period ended December 31, 1998 consisted of $6,246
in proceeds received from the settlement of a lawsuit. There was no such
item in the comparable period. No lawsuits remain outstanding.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary sources of cash flow during the three months
ended December 31, 1999 were proceeds from the sale of a mineral interest,
a gain on the forgiveness of debt, the collection of accounts receivable,
proceeds from oil and gas sales, and collection of principal on the note
receivable associated with the sale of the kaolin mine. Cash used by
operations totaled $35,126 for the three month period ended December 31,
1999 as compared to cash provided by operations of $20,431 for the same
period in 1998. The increase in cash and cash equivalents for the period
was $65,136 resulting in cash on hand at December 31, 1999 of $67,499
compared to cash on hand at December 31, 1998 of $6,318. In the 1999
period, cash on hand was enhanced by the proceeds from asset sales.
CAPITAL RESOURCES-UTILIZATION OF CAPITAL
For the three month period ended December 31, 1999 the Company
decreased accounts payable by $25,645. Collection of principal on the note
receivable was $40,696 and proceeds from asset sales were $84,308,
resulting in cash provided by investing activities of $121,603. In the
comparable period, net cash provided by investing activities was $32,166.
All funds for capital expenditures for the remainder of the year are
expected to be provided by operating cash flow, from property or asset
sales, and from existing cash balances.
LIQUIDITY
At December 31, 1999, the Company's working capital totaled $148,493
as compared to working capital of $3,424 at September 30, 1999. Liquidity
for the three months ended December 31, 1999 was provided by the sale of a
net mineral interest, the collection of principal on a note receivable and
the forgiveness of debt, however, liquidity was reduced by a reduction in
accounts payable and capital expenditures.
Based on present cash flow projections, and in view of the Board of
Director's decision to sell the Company's assets and cease its minerals
operations, it is not anticipated that the Company will be required to
borrow funds in fiscal 2000.
PREPAYMENT OF RECEIVABLE FROM SALE OF KAOLIN MINE
The Company had possessed a promissory note from the 1997 installment
sale of its kaolin mine in the amount of $275,000. These funds were to be
received in three payments of $50,000 each in August and December of 2000,
and in August of 2001. The final payment in the amount of $125,000 was due
in December 2001.
The Company offered this receivable to the purchaser of the mine for
prepayment, and a price of $200,000 was agreed to. Management felt this to
be an appropriate price in consideration of the time value of money, the
risk inherent in the receipt of these payments over the remaining
installment term, and the fact that receipt of these funds would allow the
Company to eliminate its $125,000 in long-term debt and the interest cost
associated with this debt. Elimination of the debt will position the
Company to proceed with the Richlink transaction and comply with the terms
of the Letter of Intent pursuant to that transaction, as described in the
Company's filing on Form 10-KSB and on Form 8-K. Should the Company not
proceed with the Richlink transaction, this step will facilitate the
Company's ability to enter into a similar transaction (see 'Future
Trends"). This payment was received February 4, 2000, and the Promissory
Note associated with the sale of the Company's kaolin mine was marked "paid
in full" and returned to the purchaser of the mine.
REDEMPTION OF NOTES OUTSTANDING
The Company previously had debt outstanding in the form of Convertible
Subordinated Debentures in the Principal Amount of $250,000. The Company
made an offer to all of the holders of its Convertible Subordinated
Debentures to restructure this debt during the 1999 fiscal year, offering
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
$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 holders
of the Debentures. During fiscal 1999, Nova issued to the Debentureholders
3,125,000 common shares, and notes for $125,000, and thereupon cancelled
its Convertible Subordinated Debentures. The notes have a due date of
December 31, 2001, and 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. Interest has been paid
on the notes through December 31, 1999.
Having negotiated the prepayment of the promissory note whose proceeds
secured payments of these notes, on January 31, 2000, the Company exercised
its right to call the notes for redemption. All of the notes will be
redeemed on March 1, 2000, pursuant to the terms of the notes, unless
individual noteholders agree to early redemption, in which case those who
agree will be paid principal plus interest based on a redemption date five
days following receipt of their written request for early redemption. The
notes are not convertible into common stock. The Company has offered early
redemption since the interest it pays the noteholders is greater than the
interest it can earn on the funds. Redemption will result in payments by
the Company of approximately $126,000.
Nova's officers and Directors hold $23,438 or 18.8% of the principal
amount of these notes, which they acquired on identical terms as those not
affiliated with the Company.
ISSUANCE OF STOCK FOR SERVICES
The Company has not paid or otherwise compensated its employees since
mid-1998, except for bonuses totalling $10,000 and salary for one employee
who performed work for a third party, for which the Company was paid, and
then in turn paid the employee. Nevertheless, all of the employees have
continued to discharge their duties. ESOP contributions cannot be made if
there are no salaries upon which to base them. The Board of Directors
issued restricted common shares to Brian B. Spillane, President, in the
amount of 800,000 shares, for services and in recognition of Mr. Spillane's
personal guarantee of the Company's line of credit and his providing
collateral for such line of credit over the past 2 years, for which he
received no compensation. Milton O. Childers, Vice President of
Exploration, Assistant Secretary and Director was issued 675,000 shares of
restricted common stock; James R. Schaff, Secretary, Treasurer and Manager
of Lands, was issued 755,000 shares, and Mary Mernah, Controller, was
issued 355,000 shares. Robert E. McDonald, Director, for services and in
recognition of Mr. McDonald's personal guarantee of the Company's line of
credit along with Mr. Spillane over the past 2 years, for which he received
no compensation, was issued 365,000 shares. John R. Parker, Chairman and
Director, in return for services to the Company, including assistance in
obtaining drilling participants and participants in a financing, for which
he received no compensation, was issued 345,000 shares. Robert W. Meier,
Director, in return for services to the Company for which he received no
compensation, was issued 315,000 shares. The Board also granted 105,000
shares to two consultants to the Company who have worked only for out-of-
pocket expenses. All of these individuals agreed to cancel the options
which had been granted to them under the Company's 1998 Nonqualified Stock
Option Plan. A total of 3,855,000 shares were issued, effective January 6,
2000, and a total of 3,673,577 shares underlying stock options were
canceled. The Company has no stock options outstanding. Total Shares
outstanding on a fully diluted basis are 16,838,655.
FUTURE TRENDS
The Company has reduced its overhead substantially over the past two
years, and further reductions would be difficult to achieve without
impairing the Company's ability to operate efficiently, manage its assets
and pursue its objectives. Management previously stated its objective to
pursue those avenues which offered the best value for its shareholders,
including mergers or acquisitions. As discussed in the Company's report on
Form 10-KSB for the fiscal year ended September, 30, 1999, the Company has
signed a Letter of Intent with Richlink International Holdings, Limited
which outlines the terms of a transaction by which Richlink will acquire
control of the Company. The Letter of Intent contemplates 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. As
disclosed in the Company's report on Form 10-KSB for fiscal 1999, sale of
the Company's assets and discharge of its liabilities is proceeding.
Members of management may bid on such assets, but no bid from management
will be accepted unless it exceeds that of outside parties, unless no
offers of purchase from outside parties can be obtained. No such sales to
members of management have taken place.
There is no assurance that the Richlink transaction will be completed,
nor that if completed, it will be done so according to the terms of the
Letter of Intent. A Definitive Agreement is being negotiated, but has not
yet been finalized. The Board of Directors has determined that it is in
the best interests of the shareholders to cease operations and complete the
Richlink transaction, or should that transaction not be completed, to seek
to complete a similar transaction on the best possible terms.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibit 27, Financial Data Schedule (Submitted only in
electronic format.
(b) Report on Form 8-K dated December 29, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of
the undersigned thereunto duly authorized.
NOVA NATURAL RESOURCES CORPORATION
Date: February 11, 2000 By: /s/ Brian B. Spillane
Brian B. Spillane,
President, Director, and
Chief Executive Officer
Date: February 11, 2000 By: /s/ James R. Schaff
James R. Schaff,
Secretary-Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 67,499
<SECURITIES> 0
<RECEIVABLES> 81,118
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 153,851
<PP&E> 6,296,159
<DEPRECIATION> (6,080,482)
<TOTAL-ASSETS> 529,814
<CURRENT-LIABILITIES> 5,358
<BONDS> 125,000
0
1,792,267
<COMMON> 939,913
<OTHER-SE> (2,332,724)
<TOTAL-LIABILITY-AND-EQUITY> 529,814
<SALES> 10,421
<TOTAL-REVENUES> 135,658
<CGS> 3,931
<TOTAL-COSTS> 43,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,852
<INCOME-PRETAX> 6,938
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,938
<EPS-BASIC> .01
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