PRELIMINARY PROXY MATERIALS NOVA NATURAL RESOURCES CORPORATION
789 Sherman Street, Suite 550
Denver, Colorado 80203
________________________________________
PROXY STATEMENT
________________________________________
ANNUALP. O. BOX 460748
GLENDALE, COLORADO 80246
720-524-1363
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 28, 2001
November 15, 2001
To the Shareholders of Nova Natural Resources Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Nova
Natural Resources Corporation, a Colorado corporation (the "Company"),
will be held at 3160 Steeles Avenue East, Suite 222, Markham, Ontario,
Canada on the 28th day of December, 2001, at 10:00 a.m., local time,
for the following purposes:
1. To amend the Company's Articles of Incorporation to increase
the number of shares of Common Stock, $.10 par value, the Company is
authorized to issue from 300,000,000 to 816,000,000 shares.
2. To effectuate a reverse split of the Company's Common Stock,
$.10 par value, by issuing 1 new share for each 102 common shares now
held, resulting in a reduction in the number of shares of Common
Stock, $.10 par value, the Company is authorized to issue from
816,000,000 to 8,000,000 shares.
3. To change the name of the Corporation from Nova Natural
Resources Corporation to Nova International Corporation.
4. To approve the Nova Natural Resources Corporation 2001
Non-qualified stock option plan.
5. To approve the actions of management since the December 15,
2000 shareholders' meeting, including the acquisition of Torita
Donghao LLC, and the issuance of up to 57,000,000 shares (558,824
shares on a post-split basis) of Common stock to consultants to
further Corporate objectives.
6. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Owners of Common and Preferred Stock of the Company of record at the
close of business on November 14, 2001, will be entitled to vote at
the meeting.
Whether or not you plan to attend the meeting, please date, sign and
mail the enclosed proxy in the envelope provided. Thank you for your
cooperation.
By Order of the Board of Directors
Edward T. S. Chan
Chief Executive Officer and President
_______________________________________________________________________
PLEASE SIGN AND MAIL THE ENCLOSED PROXY
IN THE ACCOMPANYING ENVELOPE
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES
_______________________________________________________________________
November 15, 2001
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of Nova Natural Resources Corporation on December 28, 2001, at 10:00
a.m., at 3160 Steeles Avenue East, Suite 222, Markham, Ontario,
Canada. We look forward to greeting those shareholders who
are able to attend.
At the meeting, you are being asked to amend the Company's Articles
of Incorporation to increase the number of Shares of Common Stock,
$ .10 par value, the Company is authorized to issue from 300,000,000
to 816,000,000 shares, following which a reverse split of these
shares will be effectuated on the basis of 1 new share of Common for
each 102 shares of Common now held. You will also be asked to
approve a change in the Company's name to Nova International
Corporation, which is more reflective of the location of the
company's sales and manufacturing facilities and the international
nature of the Company's current lines of business. The Company is no
longer in the natural resources business.
Management believes that reverse-splitting the Company's Common stock
is a necessary step toward achieving the goal of gaining a listing of
Company's Common shares on one of the major securities markets. If
this proposal is approved, which is virtually assured, since
Management controls the majority of the Company's shares, those
shareholders who own, in aggregate, one hundred and two (102) or less
common shares on the record date, thus holding one (1) common share
or less after the proposed reverse split, will have such shares
or fractional shares canceled, and will be paid for those shares upon
written request. The written request must be accompanied by the
certificate(s) representing such shares, and must be received by the
Company no later than December 1, 2002. Upon receipt of the written
request and the share certificate(s) the submitting shareholder will
be paid for the share or fractional shares on the basis of ten cents
$0.10) per share for each share held at the record date. The Company
will have no obligation to honor any such requests received after
December 1, 2002. All such shares and fractional shares will be
canceled immediately after the effective date of the reverse split.
Those shareholders holding 103 or more shares of the Company's Common
stock on the record date will hold more than 1 share after the
reverse split. Any shareholder who would then own a fractional share
after aggregating all of the shares held by that shareholder, will
have that fractional share rounded up to one full share.
It is very important that your shares are represented and voted at
the meeting, whether or not you plan to attend. Accordingly, please
sign, date and return your proxy in the enclosed envelope at your
earliest convenience.
Your interest and participation in the affairs of the Company are
greatly appreciated. Thank you for your continued support.
Sincerely,
Edward T. S. Chan
Chief Executive Officer and President
NOVA NATURAL RESOURCES CORPORATION
P. O. BOX 460748
GLENDALE, COLORADO 80246
_______________
PROXY STATEMENT
_______________
SPECIAL MEETING OF SHAREHOLDERS
_______________
To Be Held June , 1997
________________________________________December 28, 2001
_______________
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Nova Natural Resources Corporation (the
"Company") of proxies for use at the Annuala Special Meeting of the Shareholders
of the Company to be held on __________,
_____________, 1997,December 28, 2001, at 10:30 o'clock00 a.m., Mountain StandardLocal
Time, at the Company's principal offices located at 789 Sherman Street,3160 Steeles Avenue East, Suite 550, Denver, Colorado.222, Markham, Ontario,
Canada. This Proxy Statement and the accompanying form of Proxy were
mailed to the Company's Shareholders on or about ____________, 1997.November 20, 2001.
If the accompanying Proxy form (Attachment No. 1) is signed, dated
and returned, the shares represented thereby will be voted in
accordance with the specifications therein. If no choice is
specified, the shares will be voted FOR the election of the five
(5) nominees for Director listed in this Proxy Statement and FOR
approval of the agreement between the Company and Northern Con-Agg,
Inc. ("NCA"), an unaffiliated Minnesota corporation, for the sale
by the Company to NCA of the Company's cement-grade kaolin mine and
related assets, located in Minnesota.proposals 1 through 6. Your
executed Proxy may be revoked at any time before it is exercised by
filing with the Secretary of the Company, 789 Sherman Street, Suite 550, Denver,P. O. Box 460748, Glendale,
Colorado, 80203,80246 a written notice of revocation or a duly executed
Proxy bearing a later date. The execution of the enclosed Proxy will
not affect your right to vote in person should you find it convenient
to attend the AnnualSpecial Meeting and desire to vote in person. To the
Company's knowledge, thethose Directors of the Company who are
identified on the Proxy form, intend to vote for the election of all nominees and for approval of the contract between the Company and NCA.proposals
described herein.
SOLICITATION OF PROXY
The expense of soliciting these Proxies will be borne by the Company.
It is contemplated that the Proxies will be solicited principally
through the use of the mails, but officers and regular employees of
the Company may solicit Proxies personally, by telephone or by
special letter. Although there is no formal agreement to do so, the
Company may reimburse banks, brokerage houses and other custodians,
nominees and fiduciaries for their reasonable expenses of forwarding
Proxy materials to their principals.
VOTING SECURITIES AND PRINCIPAL HOLDERS OF SUCH SECURITIES
On May 1, 1997,November 14, 2001, the record date for determination of the
Shareholders entitled to vote at the AnnualSpecial Meeting of Shareholders,
5,985,846270,832,724 shares of the Company's Common Stock and 1,792,267no shares of the
Company's Convertible Preferred Stock, $1.00 par value, were
outstanding. Each share of Common Stock is entitled to one vote, and
one share of convertibleConvertible Preferred Stock is entitled to two votes on
all matters voted upon at the AnnualSpecial Meeting. The presence, in person
or by proxy, of a majority of the outstanding shares of Common and
Preferred Stock in the aggregate is necessary to constitute a
quorum at the Meeting. Cumulative voting in the election of
Directors is not permitted. Any votes withheld from voting (whether by
abstention, broker non-votes or otherwise) will not be counted and
will have no legal effect on the vote.
The following table sets forth the only persons known to the Company,
as of May 1, 1997,November 14, 2001, to own beneficially more than 5% of the
Company's Preferred Stock and of the Company's Common Stock, its only classesclass of issued and outstanding
voting securities. Except as otherwise noted in the footnotes to the
table, each person named has sole voting and investment powers
relating to such shares.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
Preferred Stock
Robert E. McDonald 794,421(1) 44.32%
P.O. Box 481243
Denver, CO 80248-1243
Karen McDonald 794,420(3) 44.32%
1177 Race, Apt. 801
Denver, CO 80206
Brian B. Spillane 203,426(2) 11.35%
255 S. Eudora
Denver, CO 80222
Common Stock
Robert E. McDonald 484,851(1) 8.10%
P.O. Box 481243
Denver, CO 80248-1243
Karen McDonald 484,850(3) 8.10%
1177 Race, Apt. 801
Denver, CO 80206
Milton O. Childers 431,494(5) 7.21%
179 E. Brown Place
Aurora, CO 80013
James E. Taets 411,427(4) 6.87%
7979 S. Jasmine Circle
Englewood, CO 80112
Brian B. Spillane 514,153(2) 8.59%
255 S. Eudora
Denver, CO 80222
(1) The preferred and common shares are held by the REM Family
Trust, of which Mr. McDonald is the Trustee. Does not include
200,000 shares underlying stock options held by Mr. McDonald.
Includes options held by two officers and directors and one
director of the Company to purchase an aggregate of 561,788
shares of Common Stock directly from Mr. McDonald, all
exercisable at $.10 per share at any time on or before April
3, 2003. Does not include 62,500 shares which would be issued
if Mr. McDonald elects to convert all of his $9,375 principal
amount of convertible subordinated debentures to Common Stock.
(2) Consists of 398,211 shares vested in his account under the
Company's Employee Stock Ownership Plan (the "ESOP"), but does
not include options owned by Mr. Spillane to purchase 250,000
shares directly from Mr. McDonald, options to purchase 250,000
shares directly from Ms. McDonald, or options to purchase
200,000 shares from the Company. Does not include 83,333
shares which would be issued if Mr. Spillane elects to convert
all of his $12,500 principal amount of convertible
subordinated debentures to Common Stock.
(3) The preferred and common shares are held by the Karen McDonald
Trust, of which Ms. McDonald is Trustee. Includes options
held by two officers and one director of the Company to
purchase an aggregate of 561,787 shares of Common Stock
directly from Ms. McDonald, all exercisable at $.10 per share
at any time on or before April 3, 2003. Does not include
62,500 shares which would be issued if Ms. McDonald elects to
convert all of her $9,375 principal amount of convertible
subordinated debentures to Common Stock.
(4) Mr. Taets is a former employee and officer of the Company.
Consists of 411,278 shares vested in his account under the
ESOP and 149 shares owned directly.
(5) Consists of 225,154 shares owned by Mr. Childers, 4,843 shares
held by Mr. Childers' wife and 201,497 shares vested under the
ESOP, but does not include options to purchase 186,789 shares
directly from Mr. McDonald, options to purchase 186,788 shares
from Ms. McDonald, or options to purchase 200,000 shares from
the Company. Does not include 62,500 shares which would be
issued if Mr. Childers elects to convert all of his $9,375
principal amount of convertible subordinated debentures to
Common Stock.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
Preferred Stock
None issued and Outstanding.
Common Stock
Torita Electronic (Hong Kong) LTD 138,612,287 51.2%
Torita Electronic City
North MingZhu Road
Zhuhai, China 519070
Ma Jun 21,324,287 7.9%
Torita Electronic City
North MingZhu Road
Zhuhai, China 519070
Patrick Au, dba CPC Johnsen
Investment Management LLC 23,861,229 8.8%
30 Rawlings Avenue
Richmond Hill, Ontario, Canada L4S 1B5
Frank Alexander 22,000,000 8.1%
539 Southshore Road
Palermo, New Jersey 08223
JTU Inc. 18,126,222 6.7%
311 North Knowles
Winter Park, Florida 32789
The following table shows, at May 1, 1997,November 5, 2001 the shares of the
Company's outstanding Common Stock, (5,985,846 shares issued and
outstanding),$ .10 per value, beneficially
owned or controlled by each of the officers and directors of the
Company and the shares beneficially owned by all of the officers and
directors as a group. Except as otherwise noted in the footnotes to
the table, each person named has sole voting and investment powers
related to his shares.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 484,851
Name of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
Han Zhende 138,612,287 (1) 51.2%
Director
Chris Tse 10,662,484 (2) 3.9%
Director
Edward T. S. Chan 3,918,297 (3) 1.4%
CEO, President and Treasurer and Director
Brian B. Spillane 2,111,128 (4) 0.8%
Secretary and Director
All Directors and Officers
as a group (4 persons) 155,304,196 57.3%
(1) 8.10%
Brian B. Spillane 514,153 (3) 8.59%
James R. Schaff 122,400 (4) 2.04%
Milton O. Childers 431,494 (5) 7.21%
Robert W. Meier 193,178 (6) 3.23%
John R. Parker (7) (2)
All Directors and Officers
as a group (7 persons) 1,746,076 29.17%
(1) See note (1) of the preceding table.
(2) Less than 1%.
(3) See note (2) of the preceding table.
(4) Does not include either 250,000Includes 138,612,287 shares underlying stock
options held by Torita Electronic (Hong Kong)
Ltd. over which Mr. Schaff, or 20,833 shares which would
be issued if Mr. Schaff elects to convert all of his
$3,125 principal amount of convertible subordinated
debentures to Common Stock.
(5) See note (5) of the preceding table.
(6) Does not include 200,000 shares underlying stock options
held by Mr. Meier. Does not include 41,667 shares which
would be issued if Mr. Meier elects to convert all of his
$6,250 principal amount of convertible subordinated
debentures to Common Stock.
(7)Han has voting control. Does not include options
owned by Mr. ParkerHan under the Nova Natural Resources Corporation 2001
Non-qualified Stock Option Plan to purchase 125,0002,330,600 shares
directly fromof the Company's $0.10 par value common stock at $0.11 per share.
(2) Includes 10,662,484 shares held by Trillion Wealth Ltd. which are
beneficially owned by the wife of Mr. McDonald, options to
purchase 125,000 shares directly from Ms. McDonald, or
options to purchase 200,000 shares fromTse, however, Mr. Tse is the
Company.Director of Trillion Wealth Ltd. Does not include 41,667options owned by
Mr. Tse under the Nova Natural Resources Corporation 2001
Non-qualified Stock Option Plan to purchase 2,330,600 shares which would be issued if
Mr. Parker elects to convert his $6,250 principal amount
of convertible subordinated debentures to Common Stock.
APPROVAL OF SALE OF CEMENT-GRADE KAOLIN MINE
Contract For Sale of Cement-Grade Kaolin Mine
Pursuant to a contract dated January 25, 1997, the Company agreed,
subject to shareholder approval, to sell its cement-grade kaolin
mining operations and property (the "Cement Kaolin Mine") near
Redwood Falls, Minnesota, to Northern Con-Agg, Inc., an
unaffiliated Minnesota corporation whose address is 3131 Fernbrook
Lane North, Plymouth, Minnesota 55447 ("NCA"). A portion of the
Cement Kaolin Mine is located on lands which are currently subjectCompany's $0.10 par value common stock at $0.11 per share.
(3) Includes 2,330,700 shares held by Mr. Chan's wife. Does not
include options owned by Mr. Chan under the Nova Natural Resources
Corporation 2001 Non-qualified Stock Option Plan to a joint venture between the Company and U.S. Borax Inc.
("Borax"), which was formed in 1993 primarily to explore, develop
and produce high quality paper-grade kaolin. No paper-grade kaolin
has yet been sold from the joint venture property. Borax has
agreed to release the portionpurchase 4,661,200
shares of the paper-grade kaolin property
occupiedCompany's $0.10 par value common stock at $0.11 per
share.
(4) Does not include options owned by Mr. Spillane under the Cement Kaolin Mine from the joint ventureNova
Natural Resources Corporation 2001 Non-qualified Stock Option Plan to
permitpurchase 2,330,600 shares of the Company's sale of the mine$0.10 par value common
stock at $0.11 per share. Does not include warrants granted to NCA. The Company will be selling
all of its cement-grade kaolin operations to NCA, while retaining
its interest in the paper-grade joint venture. The Cement Kaolin
Mine encompasses 314 acres, and the paper-grade kaolin property
retained by the Company encompasses 4628.59 acres. After the sale
to NCA, ownership of the cement-grade kaolin property will be
separate and distinct from ownership of the paper-grade kaolin
property. Except for the inclusion of an immaterial portion of the
paper grade kaolin prospect in the sale to NCA, the sale will have
no impact on the Company's joint venture with Borax.
Under the terms of the purchase and sale agreement with NCA(the
"NCA Agreement," a copy of which is available upon request), NCA
will acquire approximately 78 fee acres owned by the Company and an
additional 236 acres leased by the Company, as well as the
inventory, equipment, contracts, permits and other personal
property heldMr.
Spillane by the Company in connectionFebruary 2001 to purchase 699,288 shares
of the Company's $0.10 par value common stock at $0.0086 per share.
The amount of these warrants will increase according to terms
specifying dilution protection during the term of the warrants, which
will expire if not exercised, in November 2002. The present amount
of Mr. Spillane's warrants, due to the dilution provisions of the
warrant agreement, is 812,625 shares. Does not include options owned
by Mr. Spillane to purchase 250,000 shares directly from Robert E.
McDonald, a former Director of the Company, at $0.10 per share, and
options owned by Mr. Spillane to purchase 250,000 shares directly
from Karen McDonald, the former spouse of Mr. McDonald, at $0.10 per
share.
The following table shows as of November 14, 2001, the shares of the
Company's Common Stock which would be held by Officers and Directors,
$ .10 par value, assuming full exercise of all options.
Name of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
Han Zhende 140,942,887 (1) 52.0%
Chris Tse 12,993,084 (2) 4.8%
Edward T. S. Chan 8,579,497(3) 3.2%
Brian B. Spillane 5,754,243(4) 2.1%
All Directors and Officers
as a group (4 persons) 62.1%
(1) See Note (1) of the preceding table.
(2) See Note (2) of the preceding table.
(3) See Note (3) of the preceding table.
(4) See Note (4) of the preceding table.
If full conversion of all outstanding options and warrants held by
the Company's Officers and Directors occurred, the Company would have
outstanding 281,644,989 shares of its Common Stock.
AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION
Proposal
The Company's Board of Directors has recommended and proposes that
the Company's Articles of Incorporation be amended to increase the
number of shares of Common Stock, $0.10 par value, the Company is
authorized to issue from 300,000,000 shares, as currently
authorized, to 816,000,000 shares; to effect a reverse split of such
shares on the basis of 1 new share for each 102 shares currently
held; and to change the Company's name to Nova International
Corporation. No other provision of the Company's Articles of
Incorporation will be changed upon approval by the Company's
shareholders of the proposed amendment. Shareholders are also being
asked to approve the Nova Natural Resources Corporation 2001
Non-qualified stock option plan.
Background of the Proposed Amendments
On February 27, 2001, the Company closed a transaction pursuant
to the terms of an Asset Purchase Agreement dated February 9, 2001
(the "Agreement") with these cement-grade
mining operations. NCA proposes to continueTORITA DONGHAO LLC ("Torita Delaware"), a
Delaware Corporation, by which Torita Delaware acquired control of
the current cement-
grade operationsCompany.
Effective at Closing, all of Nova's officers and directors,
except Brian B. Spillane, resigned, as contemplated by the Agreement.
Edward T. S. Chan, CEO of Torita Delaware, thereupon was named
President, Treasurer and a Director of the Company. Mr. Spillane
resigned as President, but remains a Director of the Company, and has agreedwas
appointed its Secretary. In September, 2001, Mr. Han Zhende and Mr.
Chris Tse were appointed Directors of the Company, bringing the
number of Board Members to turn overfour.
Upon effectuation of the Agreement, Torita Electronic (Hong
Kong) Ltd. held 138,612,287 shares of the Registrant's $0.10 par
value common stock, 59.5% of the then-total common shares issued and
outstanding, and therefore became the controlling shareholder of the
Company. Affiliates of Torita Delaware controlled an additional 32%
of the then-issued and outstanding shares. The consideration used to
obtain such control was the acquisition by the Company of 100% of the
business and operating assets of Torita Delaware.
The Company acquired 100% of the business and operating assets
of Torita Delaware in exchange for 213,249,672 of its $0.10 par value
common shares. 2,971,752 shares and a cash consideration were paid
at the Closing to Focus Tech Investments, Inc., which acted as a
finder in the transaction. All shares issued at the Closing are
restricted.
In determining the amount of the consideration, the Company's
Board of Directors considered the Company's limited financial
resources prior to the Company any profitstransaction, the Company's inability to
attract industry partners to fund and operate the Company's principal
assets, the general economic conditions of the industries in which it may earn during a 21 year period after
the date of closing as a result of sales of kaolin produced from
the property to paper manufacturers. The Company agrees that, if
it or any joint venture of which it is a member sells kaolin to the
cement-industry in Minnesota, Iowa, North Dakota, South Dakota or
Wisconsin during a five year period following the closing,
the Company it will pay to NCA the sum of $30,000 for each year in
which any sale occurs.
NCA will pay a total of $700,000 tooperated, and management's determination that the
Company forcould not operate profitably because of a lack of capital
from operations and other sources.
Management concluded that the Cement
Kaolin Mine, including $125,000 in cash at closing, an aggregateCompany would be more valuable,
and the interests of $450,000 in non-interest bearing semi-annual installments on August
15its shareholders would be better served, by the
sale, reassignment, and December 15 of each year until August 15, 2001, and a final
payment of $125,000 on December 15, 2001. Up to $70,008 of these
proceeds will be paid to Thomas F. Kane, a former director, as partabandonment of the Company's purchase of his Commonassets and
Preferred Stock, over
the same period as the NCA payments. See "Purchase of Kane Stock."
The Company will retain both a mortgage and a security interest
covering the property being sold to NCA in order to secure full
payment of the purchase price. NCA will assume liability for all
existing contracts relating to the property, although the Company
will continue to have liability for any conduct before the closing
date and, any contracts not disclosed to NCA. Included among the
contracts assumed by NCA is an agreement with Union Pacific
Railroad which requires the Company to pay the railroad for a
minimum usage of 300 rail cars, whether actually used by the
Company. NCA will assume this obligation and Nova will have no
further liability for railcar usage. The Company believes that it
has disclosed all pertinent contracts to NCA. The Company intends
to secure appropriate lessor consents to eliminate any liability to
the lessor following assignment of the lease.
If NCA expands the current cement-grade mining operations, the
lessor of the Mine Property will have to be relocated from her home
on the property, which recently has been appraised at $25,000.
When this occurs, NCA will pay the first $25,000 of relocation
costs, Nova will pay 50% of the costs, if any, between $25,000 and
$75,000, and Nova will pay the entire cost, if any, in excess of
$75,000. Shortly following execution of the NCA Agreement, the
Company incurred approximately $5,800 in additional drilling and
analysis costs to meet requests of NCA for additional exploration
data.
Prior to the NCA Agreement, NCA had no relationship to the Company,
its officers or directors. The Company has not secured an
independent opinion concerning the fairness of the consideration to
be paid by NCA, but the Company's officers believe such
consideration to be appropriate based upon the Company's prior net
income from the property, the anticipated kaolin reserves, and the
demand for cement-grade kaolin in the area. There will be no
change in the rights of security holdersmarketing of the Company as a result
of"shell". In this vote, except with respect to the holders of Convertible
Debentures, as described below. The Company is not in default with
respect to obligations under any of its securities.
If shareholder approvalfashion, management
believed that it could obtain for the saleCompany's shareholders a
minority interest in a company with more substantial assets,
operations and prospects. In exchange, such a merger partner would
become a public company, obtain liquidity for its shares, and gain
more ready access to capital markets. The Company's Directors
concluded that Torita Delaware met all of the cement-grade kaolin
mine is not received, Nova will continue to operate the mine as it
hasthese criteria, based on
its assets, earnings, and growth prospects, particularly in the
past and continue to pursue additional customers and
markets for the kaolin. The Company would seek to retain its
current customer and attempt to obtain business from a previous
customer. Any additional customers could not be obtained for the
current mining season. The Company would consider other
alternatives, such as entering into joint venture arrangements for
the marketing and sale of kaolin, possibly with the companygeographical region in which desires to purchase the mine, and/or other companies which supply
materials to the cement industry. If shareholder approval of the
sale is not obtained, approximately $20,000 in transactional costs
will not be recovered.
Potential Impact of the Proposed Sale on the Company's Convertible
Debentures
The Colorado Business Corporation Act (the "Act") requires approval
of the majority of shares voting at a duly noticed and conducted
meeting for the sale of all or substantially all of a corporation's
assets outside of its normal course of business. The Company has
determined that, while the Cement Kaolin Mine is a principal asset,
because the remaining assets and business are not insubstantial and
proceeds of the sale are intended to be used to continue the
Company's business in the same fashion, a shareholder vote is not
required by law. Nonetheless, since the Cement Kaolin Mine sale is
a material transaction, the Company believes that its shareholders
should be informed about and vote upon the approval of that
transaction.it operates. As part of its organization and capitalization of NovaChek Limited
Liability Company, an Idaho limited liability company formed to
develop partdue
diligence activities, the then- President of the Company, accompanied
by the Company's gold prospect in Nome, Alaska,largest shareholder and a second large shareholder
traveled to China, inspected the facilities and assets to be acquired,
and met the personnel responsible for Torita Delaware's operations.
The Company also relied on the Finder to advise the Company as to the
best terms obtainable for this type of transaction.
All of Nova's outstanding convertible preferred stock was
converted into common stock at the Closing. The previous Nova
shareholders hold 16,838,567 shares, the majority of which are
subject to a Stock Transfer Restriction Agreement with a 12-month
term which limits the number of shares which can be sold in any one
month. No shares subject to this Agreement have been offered for
sale or sold. The Company now has a total of 270,832,724 common
shares outstanding resultant from the issuance of shares to three
consultants, its President, and its Counsel. The Company is
contingently liable to issue 20,000,000 additional shares to one of
such consultants based on performance, and subject to shareholder
approval of an aggregate of $250,000 of convertible subordinated
debentures (the "Debentures"). The Debentures require semi-annual
payments of interest and payment of principal and accrued interest
on April 1, 2001. At the option of its holder, each Debenture
matures and is fully payable uponincrease in the Company's "sale, exchange,
base or other dispositionauthorized shares.
Torita Delaware manufactures, markets, and sells electronic
equipment, including computer hardware, computer monitors, television
sets, internet access devices for use with TV sets, digital video
devices (DVD's) and related equipment. Torita Delaware's products
are marketed in southeast Asia. Its production facilities occupy
128,000 square feet in Zhuhai City in the People's Republic of all or substantially allChina
("PRC") and include six manufacturing lines with an annual
production capacity of [its]
assets." Notwithstandingapproximately 1 million PC's, 1 million DVD
devices and 200,000 TV sets. Torita Delaware was formed by
spin-off of two divisions of the Torita Group of the PRC.
The business operations of the Company have continued to be those of
Torita Delaware prior to the Closing. The Company does not operate
in any of the business areas in which it operated prior to Closing.
Accordingly, Management has proposed that the Company's belief thatname be
changed to Nova International Corporation to more clearly reflect the
sale of the
Cement Kaolin Mine is not such an event, upon litigation brought by
a Debenture holder, a court may disagree and order early payment of
the Debentures. Such a payment would have a materially adverse
impact on the Company, require the use of proceeds from the Mine
sale and threaten the ongoing viabilitycurrent operations of the Company.
Vote Upon SaleCommon Stock
The affirmative vote by a majority of all of the shares of Common
and Preferred Stock entitledCompany currently is authorized to vote as of April 1, 1997 is
required for approval of the agreement to sell the Cement Kaolin
Mine. Unless directed otherwise, the Proxy will be voted in favor
of approving the Agreement and effectuating its terms. The
Company's corporate counsel will be present at the meeting but its
independent certified public accountants will not be present.
Rights of Dissenting Shareholders
The Act affords a shareholder of a Colorado corporation the right
to dissent from certain actions requiring shareholder approval and
to require that the corporation purchase the shareholder's stock at
a "fair value" (the "right of appraisal"). If a vote were required
to approve the sale of the Cement Kaolin Mine (which the Company
does not believe), rights of appraisal still would not be available
to dissenting shareholders because of an exemption for Corporations
like Nova whose common stock is owned by more than 2,000
shareholders.
Notwithstanding the absence of a required vote and presence of an
exemption from rights of appraisal provided by the Act, the Company
has decided to offer to purchase all of theissue 300,000,000 shares of
Common Stock, $ .10 per value per share. Holders of any shareholder who does not vote in favor of the Cement Kaolin
Mine sale and properly asserts his right of appraisal. Management
believes that the conjunction of its Cement Kaolin Mine sale and
its sale of oil and gas overriding royalty interests and purchase
of the stock of Thomas F. Kane (as described below) represent
material events which might prompt a shareholder to sell his Common Stock if an adequate marketare
entitled to cast one vote for that Stock existed. The Company
also recognizes thateach share held of record on all
matters submitted to a vote of shareholders and are not entitled to
cumulate votes for the absenceelection of an active trading market
impedes such a sale. As such, management wishes to afford
shareholders who disagree with these decisions or with the
directors' decision to continue operationdirectors. Holders of the Company the
ability to sell their Common
Stock at a price which management
believes isdo not have preemptive rights to subscribe for additional
shares of Common Stock issued by the appropriate market price.
Any shareholderCompany.
Holders of the Company who wishesCommon Stock are entitled to assert his or her
rightreceive dividends as a dissenter must strictly comply with the procedures set
forth in the Act and detailed in Attachment 2. Rights of appraisal may be
asserted as to all, and not less than all, of a dissenter's
shares of stock. Any shareholder who wishes to dissent from the
vote approving the sale of the Cement Kaolin Mine must file a
notice of his or her intention to dissent with the Company prior to
the Annual Meeting and not vote his or her shares in favor of the
resolution approving the sale. If the sale is approveddeclared by the Company's shareholders, no later than ten (10) days after the
effective dateBoard of the corporate action creatingDirectors out of funds legally
available for that purpose, subject to the rights of appraisal, the Company will send a notice to each shareholder who
has timely sent his or her election to assert rights of appraisal
a notice which will state that the corporation action was
authorized; the effective date of the corporation action; an
address at which the Company will receive payment demands; the
place where certificates for shares being sold must be deposited;
supply a form for demanding payment; set the date by which the
Company must receive the payment demand and certificates for the
pertinent shares (which shall not be less than 30 days after the
date of the notice); and provide other pertinent information.
Any shareholder who fails to timely and properly demand payment and
deposit his or her stock certificates will lose these rights of
appraisal. Upon effective date of the sale of the Mine or receipt
of a payment demand, whichever is later, the Company will pay each
dissenter who complied with all prerequisites for payment the fair
value of the dissenter's shares, plus interest from the date of the
Shareholders' vote at a rate determined by statute. The remittance
will be accompanied by the Company's balance sheet at the end of
its most recent fiscal year and statement of income for its last
fiscal year, together with the latest available interim financial
statements, a statement of the Company's estimate of the fair value
of the dissenter's shares and a notice of the dissenter's right to
demand supplemental payment.
"Fair Value" is defined by the Act as "the value of the shares
immediately before the effective date of the corporate action to
which the dissenter objects, including any appreciation or
depreciation in anticipation of the corporate action except to the
extent that exclusion would be inequitable." Fair value imports a
broader approach to valuation than "fair market value". The most
important factors are market value, investment or earnings value
and net asset value. For public companies, like Nova, great weight
is given to the stock's market price. Where the stock is thinly
traded, courts also consider several other elements including book
value, liquidity value, net asset value and capitalized earnings
value. The Company intends to use the bid price for its stock as
the fair value. The most recent bid price is $.05 per share in
February, 1997. Management believes that this price is higher than
any value determined under any other valuation theory. The Company
purchased all the common stock of one of its directors and a
principal shareholder at $.03 per share, less than the bid price of
that stock at the time. See "Purchase of Kane Stock."
Any dissenting shareholder who disagrees with the fair value
determined by the Company, or the Company's calculation of
interest, will have 30 days after the date of mailing of the
Company's remittance to mail to the Company his or her own estimate
of the value of the shares and demand payment of any deficiency.
Any dissenter who fails to timely make such a demand will be
entitled to not more than the fair value remitted by the Company.
If the dissenting shareholder and the Company cannot agree upon the
fair value of the dissenter's shares, the dispute must be settled
by a court in an action commenced within sixty (60) days after the
Company receives the dissenter's demand for payment of a claimed
deficiency. That action must be filed in the District Court for
the City and County of Denver, Colorado.
If the Company fails to initiate such an action to determine fair
value, each dissenting shareholder must bring his or her own
lawsuit to determine that value. The court in an appraisal
proceeding commenced will determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers
appointed by the court. The court will assess the costs against
the Company; except that the court may assess costs against all or
some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under the
Act. The court may also assess the fees and expenses of counsel
and experts for the respective parties, in amounts the court finds
equitable against the Company and in favor of any dissenters if the
court finds the corporation did not substantially comply with the
notice and payment requirements of the Act or against either the
Company or one or more dissenters, in favor of any other party, if
the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by the Act. If the court finds
that the services of counsel for any dissenter were of substantial
benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation,
the court may award to said counsel reasonable fees to be paid out
of the amounts awarded to the dissenters who were benefitted.
TAX TREATMENT OF GAIN ON SALE
The Company has net operating loss carryforwards at September
30, 1996 for federal income tax reporting purposes of approximately
$7,420,000. The Company also has an alternative minimum tax net
operating loss of approximately $8,760,000. Approximately
$1,840,000 of these tax operating losses will expire during the tax
year ending September 30, 1997, with the balance expiring over the
period ending in the year 2011. The sale will result in a taxable
gain of approximately $27,000 per year through fiscal 2002, all of
which will be offset by these federal operating loss carryforwards.
1995 Mineral Property Abandonments
In fiscal 1995, the Company wrote down the value of three of its
mineral properties. These were its Nome, Alaska gold properties,
which were carried on the Company's books at $244,136, its Querida
gold properties in Custer County, Colorado, which were carried on
the Company's books at $63,318, and the Cave Creek gold exploration
prospect, in which the Company had a $1,745 investment. The
aggregate amount of the writedown was $309,199.
The Company's Nome properties consist of 21,411 acres of State of
Alaska mining leases offshore Nome (the "Nome Prospect"). The
Company acquired these leases in 1984, and transferred all of its
rights in the properties to Inspiration Gold, Inc.("Inspiration")
in May 1985. Inspiration later transferred that interest to a
company affiliated with Inspiration, Western Gold Exploration and
Mining Company, Limited Partnership ("WestGold"). Neither of these
entities were affiliated with the Company. The Company retained a
10-17% net profits royalty.
During five seasons of dredging on the Nome Prospect, WestGold
recovered approximately 121,000 ounces of gold, but due to a very
high level of operating costs (the world's largest mining dredge
was used -- which proved to be ill-suited to this application)
WestGold was unable to mine the properties profitably, and the
Company received no income pursuant to its net profits royalty
interest.
In September, 1990, WestGold terminated operations and returned the
properties to Nova. The Company received a substantial portion of
exploration data gathered by WestGold and prior operators of the
property, including drilling results from approximately 3,500
drillholes. Using this and other geologic data developed by its
staff, Nova attempted to sell or joint venture the properties with
an industry partner. Although serious negotiations were conducted
with three different entities over a period of several years, the
Company was unsuccessful in entering into an arrangement which
would recover the Company's historical costs in these properties.
Accordingly, the Company felt that due to the uncertainty of
recovery of these costs, for accounting purposes, Nova's investment
in these properties should be written off. However, the Company
continued its efforts to put the properties into production, and in
1996, formed NovaChek Limited Liability Company to attempt to
establish commercial production on a portion of the properties.
These efforts proved unsuccessful in 1996 due to delays in
completion of construction of the necessary mining equipment. It
is anticipated that mining operations will be initiated by NovaChek
on the properties for the 1997 season.
The Company owns a 42.2% to 45% interest in a gold prospect in
Custer County, Colorado, known as the Querida Prospect. Most of
the balance of the interest is held by Querida Corporation, an
entity controlled by the McDonald Trust. Over a period of years,
the Company entered into various exploration arrangements with
industry partners to explore these properties in an attempt to
identify a commercial gold deposit on the properties. These
arrangements involving drilling, geochemical analyses, and other
exploration methods employed to evaluate the gold potential of the
properties. None of these efforts were successful. In 1993, the
Company commenced its own drilling program on the properties. The
results of this program were inconclusive, and the Company
determined that a partner should be sought to conduct further
exploration. In 1995, due to the lack of certainty as to whether
a partner might be found willing to enter into an exploration
arrangement which would recover the Company's historical costs in
this prospect, for accounting purposes, the Company wrote off its
investment in the properties. Since that time, the Company has
reduced its land position to reduce holding costs. It is intended
to conduct a limited amount of exploratory work in 1997, with the
goal of generating data which, if encouraging as to the potential
of the properties, would be helpful in interesting an industry
partner in financing further exploratory work on the properties.
The Cave Creek Prospect was evaluated for possible acquisition.
Limited exploration activities were conducted on the properties,
which did not indicate sufficient potential for gold to proceed
with the acquisition, and the Company's investment in the prospect
was written off.
1995 Gain on Sale of Assets
The Company purchased 40 railcars in 1993 to use in transporting
kaolin clay to customers from its mine in Minnesota. Although the
ownership of these cars was advantageous during the clay mining
season, the Company was not able to lease the cars during the off
season to other companies on a basis favorable enough to justify
its continued capital investment in the cars. In February, 1995,
in order to take advantage of a favorable market for this type of
railcar, to increase working capital and reduce debt, the Company
sold the railcars to the David J. Joseph Company, a non affiliated
company. The cars had been depreciated on the Company's books to
a value less than the sale price of the railcars, and accordingly,
the Company recorded a gain on sale of assets of $58,663 in fiscal
1995, wholly represented by the excess of the sale price of the
cars over the book value of the cars.
OTHER PERTINENT TRANSACTIONS
Although approval of the Company's shareholders was not required or
sought for two other transactions which have been approved by the
Company's directors and taken by the Company, the Company feels
that information concerning those transactions is appropriate to
the matters to be voted on at the Annual Meeting.
Sale of Oil and Gas Royalty Interests
On November 14, 1996, the Company sold at an auction conducted by
The Oil & Gas Asset Clearinghouse in Houston, Texas several oil &
gas producing assets and leasehold interests, primarily overriding
royalty interests in producing oil & gas wells in the Wyoming
Overthrust Belt. Proceeds from this sale, net of commissions and
direct selling costs paid to the Clearinghouse, were $230,257.
$150,000 of these proceeds was used to purchase stock from Thomas
Kane, a director, as part of the settlement of the Company's
disputes with Mr. Kane. The rest of the proceeds are being used as
operating capital. The sale was effective as of November 1, 1996.
The bulk of the interests were sold to a Denver, Colorado based
firm not affiliated with the Company, which was the successful
bidder among a group of bidders at the auction.
The majority of the value of the properties sold was related to a
single producing well. If a production problem occurred at some
point in the future with that well, the value of the Company's oil
and gas reserves could have declined substantially (although there
was no current indication of any problem). The sale was made to
eliminate that risk, to generate cash to improve the Company's
liquidity, and for re-investment of cash in the Company's business.
The Company retains other oil and gas interests, and presently has
no intention of withdrawing from this business. The Company and
Robert McDonald, a Board member, are currently actively seeking
industry participation in exploratory drilling on two prospects in
Wyoming, in both of which the Company holds an undivided interest,
with the REM Family Trust, of which Mr. McDonald is Trustee,
holding the balance of the interest. No shareholder vote was
required to approve this sale since the properties did not
constitute substantially all of the Company's assets as provided in
the Colorado Business Corporation Act.
Purchase of Kane Stock
During 1996, disputes arose between Thomas F. Kane, then a
director, and the other directors of the Company concerning
decisions by the other directors and the business operations of the
Company. Mr. Kane asserted, inter alia, that the continued
operation of the Company was not in the best interests of the
ownersholders of
the Company's Preferred Stock, who, ifnone of which is currently outstanding.
Holders of Common Stock and Preferred Stock have equal rights to all
dividends declared and paid by the Company were
liquidated, would receive allCompany. In the event of
the proceedsliquidation, holders of Common Stock are entitled to share, pro rata,
in the liquidation
after payment to the Company's creditors. Mr. Kane also asserted
that continuationany distribution of the Company's business would causeassets remaining after payment
of liabilities, subject to the dissipationpreferences and rights of assets which otherwise wouldthe holders
of Preferred Stock. The Company has not paid and has no present plan
to pay dividends, however that plan will be distributablereviewed at least on an
annual basis.
Preferred Stock
The Company is authorized to ownersissue Three Million (3,000,000) shares
of its Class "A" Preferred Stock, $1.00 par value per share,
designated as "Series A Convertible Preferred Stock". and Two Million
(2,000,000) shares of its Class "B" Preferred Stock, $1.00 par value
per share, designated as "Series B Convertible Preferred Stock". No
shares of preferred stock are currently outstanding. The holders of
the Company's Preferred Stock upon liquidation. Mr. Kane
recommendedhave the full right and proposed thatpower to vote
with the Company be liquidated and
threatened to commence litigation to force the liquidation and
dissolutionshareholders of the Company. The Company's other directors
disagreed with Mr. Kane, determinedCommon Stock on all matters on which
the shareholders of Common Stock are entitled to continue the Company as a
going concernvote. Holders of
Preferred Stock are entitled to two (2) votes for each share of
Preferred Stock held and determinedare not entitled to oppose any attempt to liquidate and
dissolve the Company.
In resolution of these disputes, the Company, Mr. Kane and Brian
Spillane, the Company's President and a director, entered into an
Agreement (the "Kane Agreement"), dated February 5, 1997,cumulate votes for the
purchaseelection of alldirectors. Holders of Mr. Kane's Common and Preferred Stock. A copy
of that Agreement is available upon written request to the Company.
By terms of the Kane Agreement, the Company purchased from Mr. Kane
895,415 shares of his Preferred Stock and 510,342 shares of his
Common Stock. All of the stock purchased by the Company was
retired upon completion of the purchase. Mr. Spillane purchased
from Mr. Kane the rest of his stock: 203,426do not have
preemptive rights to subscribe for or to purchase any additional
shares of Preferred Stock and 115,942 shares ofor Common Stock.
Mr. Spillane paid
$50,000 for the stock he purchased from Mr. Kane. The Company paid
$150,000 and agreed to pay an amount equal to 12%Each share of the net
proceeds from the sale of the Cement Kaolin Mine less $13,992, as
and when received by the Company. Alternatively, if the Cement
Kaolin Mine is not sold on or before June 1, 1997, the Company
agreed to pay to Mr. Kane a $.10 per ton royalty, as and when
received by Nova, on sales of kaolin from the Mine up to an
aggregate of $70,008. The Agreement among the Company, Mr.
Spillane and Mr. Kane also contained certain releases of claims
between and among the parties, and certain other representations.
Mr. Kane proposed that the Company purchase his stock for $400,000.
Management felt this price was not justified, and if paid, would
place too severe a financial burden on the Company. Mr. Kane
threatened litigation, which would have destroyed the Company with
no return to any shareholder. Prolonged negotiations resulted in
an agreement to purchase Mr. Kane's stock for a downpayment of
$200,000 ($150,000 of which was paid by the Company and $50,000 was
paid by Mr. Spillane). The amount to be paid would be affected by
the outcome of negotiations then underway for the sale of the
Cement Kaolin Mine, since this affected the book value of the
Company. In order to accommodate this uncertainty, it was agreed
that there would be future payments by the Company of either a
royalty on kaolin sales of $.10 per ton, as such tons are sold and
paid for, or a percentage of the payments received from the sale of
the mine. Mr. Kane felt this percentage should be as high as 20%,
and management felt 10% was the correct figure. In the
negotiations, it was agreed that this percentage would be 12%.
Once a price was determined for all of the stock held by Mr. Kane
and his affiliated entities, it was determined that 466,395 common
shares were controlled by a Trustee of an affiliated entity who
refused to allow the sale of these shares. The withheld shares
were valued by Nova management at $.03 per share, or a total of
$13,992. Since the maximum amount which would have been received
by Mr. Kane pursuant to 12% of the net proceeds of the sale of the
Cement Kaolin Mine would be $84,000 (12% times $700,000) if all of
the stock were purchased, the purchase price was reduced by
$13,992. Accordingly, the maximum future amount to be paid to Mr.
Kane is $70,008 ($84,000 minus $13,992). However, that amount will
be reduced by 12% of expenses of the sale or not less than $65,808.
The Colorado Business Corporation Act and the Company's Articles
of Incorporation and Bylaws permitted the Company to purchase Mr.
Kane's stock without approval of its shareholders so long as
certain financial requirements were satisfied. In the opinion of
management, these statutory requirements were met.
No Vote to Ratify Prior Transactions
The Company's shareholders are not being asked to ratify the
Company's sale of oil and gas properties or purchase of the KanePreferred Stock and a vote approving the Cement Kaolin Mine sale is not a
vote to approve or ratify either or both of those other
transactions. However, the Company might assert in an action filed
by a shareholder to challenge the sale of the oil and gas
properties and/or the Kane settlement that pertinent statute of
limitations commence no later than receipt of these proxy materials
and that a shareholder's failure to assert dissenters' rights bars
such an action.
Forward-Looking Statements
Management's discussion of anticipated future operations contains
predictions and projections which may constitute forward looking
statements. The Private Securities Litigation Reform Act of 1995,
including provisions contained in Section 21E of the Securities &
Exchange Act of 1934, provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor,
the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from
the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties
that may affect the operations, performance, development and
results of the Company's business include the following:
(a) The Company may not be able to obtain the additional
funding necessary to continue operations in its Nome
gold prospect and/or the funds actually necessary to
operate that project may be significantly greater than
those anticipated by management.
(b) Borax may determine not to pursue or to substantially
delay pursuing the Company's paper-grade kaolin venture.
(c) The Company may not be able to find industry partners
for its oil and gas and mineral prospects.
(d) Proceeds from the Company's sale of certain assets may
be insufficient to purchase assets which produce income
sufficient to satisfy the Company's working capital
needs.
(e) The Company may be unable to purchase, or to purchaseconverted at a profitable price, mineral assets which meet the
Company's operational criteria.
MANAGEMENT'S DISCUSSION OF RECENT AND PROPOSED
ASSET SALES AND OF THE COMPANY'S INTENDED COURSE OF ACTION
No Intent to Liquidate
The Company's proposed sale of its cement-grade kaolin mine, in
combination with its previous sale of significant oil and gas
overriding royalty interests, is not intended by management to
constitute a staged liquidation of the Company. Each transaction
has an independent basis, and both are intended to reduce reliance
on potentially risky assets while providing cash to develop other
Company assets and obtain a greater diversity of producing
properties. The sale of the Company's oil and gas overrides was
undertaken primarily to obviate what management felt was an
overconcentration of reserve value in a single well, caused by a
re-work of that well which significantly increased daily
production, and resulted in a commensurate increase in financial
value. Management did not consider it prudent to continue to hold
a significant portion of the value of its oil and gas reserves in
a single well, and risk a negative impact on its assets if the
benefits of the rework are not lasting.
The Company's sale of the cement-grade kaolin mine is intended to
secure a guaranteed amount of cash flow over the next five years.
Presently, the mine has a contract to sell kaolin only through the
end of 1997, to Lehigh Portland Cement Company, its only customer.
Management expects that Lehigh will offer to renew the contract but
cannot anticipate the terms of that offer or whether such terms
would permit the sale to be profitable. There are a number of
uncertainties regarding the future of the mine, including, but not
limited to, transportation difficulties, the present dependence on
a single customer, and potential market pressures which could act
to reduce margins on future kaolin sales. Management's goal is to
build the assets of the Company, which will require the application
of capital, and to obviate unpredictability of cash flow from the
mine.
Consideration of Other Options for the Mine
Over the past three mining seasons, the Company has averaged
$206,108 in operating income (before the application of
administrative costs and corporate overhead) from its cement-grade
kaolin operations. However, the Company's contract with Lehigh
Portland Cement expires at December 31, 1997, and projected
operating income from the mine in 1997 is considerably below the
average of the past three years, due to increased costs of mining,
royalties and transportation. The Company's continuing efforts to
expand its customer base and obtain markets in a broader
geographical area have not succeeded to date. The Company has
recently bid on kaolin supply to a potential new customer in
Nebraska. However, a supplier in Missouri seems able to supply
this customer's needs with lower cost material in the short term.
However, the ample reserves on the Company's properties and the
Company's ability to supply kaolin with assurance over the long
term may enable the Company to gain foothold in this potential
market. Any such contract would not be as profitable as one with
a purchaser located closer to the mine. Although the Company has
not yet perfected a pelletized product, not determined with
certainty the cost of such a product, management believes the value
added by pelletizing, combined with cost savings in the handling
and storage of the product, could open up additional markets.
Reasons for the Sale
Not withstanding these possibilities, it cannot be guaranteed that
the Company's current contract will be renewed, nor can it be
determined whether the pricing under a new contract will provide
margins similar to those achieved in past years. Management is
concerned that its sole customer cannot be replaced if lost. The
Company believes that margins will be reduced in the future, due to
the inability to pass along increased costs in a more competitive
environment.
In addition, the Company is wholly dependent on rail service to
remain competitive. In the opinion of Nova management, the rail
line which serves the mine is in need of considerable
rehabilitation, and while rail service during the 1996 season,
which was a relatively dry year, was quite good, the rail line is
very susceptible to the deleterious effects of weather, in
particular wet spring conditions and seasonal rainfall, on its
ability to operate reliably and efficiently. The operator of the
rail line -- which purchased the line justany time into two years ago -- has put
the line up for sale, creating uncertainty as to the adequacy of
maintenance should the sale not take place in the near future, as
the owner desires, and uncertainty as to the future rate structure
and maintenance program under a new owner. The Company believes
the risks of disruption in rail service will increase in future
years, unless a costly rehabilitation program is initiated. Such
a program, while increasing the reliability of rail service,
probably would increase rail costs as well. The rail line,
particularly the eastern portion of the line, which is the portion
primarily used by the Company, requires continual maintenance just
to offset the effects of wet weather and the inadequate maintenance
practices of past years. The railbed is deteriorating due to the
effects of age and weather. The majority of the ties are old, and
many are in need of replacement. The extremely harsh winter this
year, followed by Spring floods, exacerbates the situation. An
increase in the cost of rail service would reduce operating
margins, though it is unlikely rail costs would increase
sufficiently to render the mine uneconomic. If the rail line shut
down, kaolin could be trucked to another rail shipping point, but
the costs of trucking would reduce margins to a very low point, or
possibly eliminate operating margins altogether, unless such
increases could be passed along to the customer. Management
believes it is unlikely the rail line would be shut down.
Need to Obtain More Profitable Properties
The major portion of the Company's cash flow over the past several
years has been derived from kaolin sales. In operating the mine
this year, the Company may be required to enter into short-term
borrowing against receivables, as it did in 1996, to offset the
effects of the timing of transportation expenses and the collection
of customer receivables. Since the mine sale proceeds alone are
expected to generate more cash flow over the next two years than
would operation of the mine itself over that period of time, and
since all of the payments to be received from the sale over the
next five years are guaranteed, the sale will produce a source of
predictable capital for use in the development of the Company's
other assets.
Fairness of Sales Price
Management believes the consideration paid by NCA is fair and
appropriate for the following reasons: 1) the Company's present
contract expires at the end of 1997, and there is no assurance it
will be renewed, or if so renewed, whether the price structure of
the contract will prove margins similar to those achieved in the
past; 2) there are substantial uncertainties as to the cost and
availability of reliable rail service over the long term; 3) the
cash flow provided by the sale over the next two years is expected
to be greater than that which would be achieved were the present
contract terms to extend over that period, and future payments are
guaranteed, whereas cash flows from operation of the mine beyond
the end of calendar year 1997 are not guaranteed; 4) the sale
price is substantially greater than the price the Company offered
to sell the mine for several years ago, in response to an
unsolicited request for a price at which the Company would be
willing to sell the mine, which price was rejected as too high by
the potential purchaser; 5) the sales price was arrived at
through arms-length negotiations with a sophisticated purchaser;
and 6) while the Company believes its reserves for reclamation to
be adequate under present law, the costs of reclamation and
environmental remediation in future years is difficult to project
due to the national trend for environmental legislation to place
increasingly costly demands on the mining industry.
Application of Proceeds and Future Operations
The Company will use some of the proceeds from its asset sales for
working capital. Management contemplates applying the majority of
the proceeds to the development of new business and acquisition of
new mineral properties, including (1) an attempt to identify and
acquire on a reasonable basis a kaolin or other similar industrial
minerals mine in a more favorable marketing area, where good
transportation facilities and ready access to numerous markets
provide a more favorable long-term environment in which to operate
and (2) identification of potential acquisition candidates,
ideally, small mineral companies or the mineral operations of
larger companies which could provide immediate cash flow and the
opportunity for future growth. The potential for liquidity
afforded by free-trading stock and an interest in the Nova
properties which offer the potential for significant development,
not otherwise available to the stockholders of potential
acquisition candidates, may facilitate Nova's ability to consummate
such acquisitions.
While management intends to pursue both options, the Company's
current projects in oil and gas exploration, paper-grade kaolin
exploration, and gold exploration will continue to be aggressively
pursued. The Company has two important oil and gas exploration
properties which are ready for immediate drilling, on at least one
of which it believes it can obtain an industry drilling commitment
in 1997. Both are being extensively marketed to the industry. If
either or both of these properties are drilled, and a commercial
discovery is made, the Company will need capital to conduct
development drilling. The mine sale proceeds would provide the
Company with the option to internally finance this development, or
to externally finance it on more favorable terms than would
otherwise be possible. Without liquid capital produced from the
asset sales, the Company's only option would be to further reduce
its interest in what would then be a successful project, which
would not be in its long-term best interests.
The Company's largest exploration project is its paper-grade kaolin
exploration project in southwestern Minnesota, in partnership with
U.S. Borax, Inc. Although the Company has no obligation to
participate financially in this project, Nova has the right to
propose its own program of exploration and to pay its share of that
program. The Company is considering making such a proposal
provided it can reasonably fund that effort if a cost/benefit
analysis is favorable. Management believes that acceleration of
the development of the Company's paper-grade kaolin assets may be
wise since this prospect has more potential than any of the
Company's other properties.
The Company holds 21,000 acres of State of Alaska leases offshore
Nome, Alaska. A portion of this lease position has been dedicated
to NovaChek Limited Liability Company, which was formed in 1996 to
attempt to put the dedicated properties into production. Delays in
construction of the dredge intended to be used to produce gold from
the NovaChek properties resulted in a capital deficiency which,
unless rectified, will prevent production operations from getting
underway for the 1997 mining season. The Company may use a portion
of the proceeds from asset sales, combined with capital from
outside investors, to fund start-up operations on the NovaChek
properties. In addition, the Company is negotiating with two other
entities to place portions of the Company's properties not
dedicated to NovaChek into production at no cost to the Company.
Management believes that the potential for the development of cash
flow from its Nome properties during the 1997 year, while not
assured, is quite good, and management intends to work diligently
toward achieving that goal.
Chek Technologies, which built the dredge and holds a 36%
membership interest in NovaChek Limited Liability Company, has
agreed to fund approximately $60,000 of the capital needed to
initiate operations for the 1997 season. Chek is financing all of
the modifications to the dredge, including fabrication and
installation of the modified parts, and is funding working capital
needed through approximately mid-June. Chek will receive an
increased membership interest in NovaChek in return for providing
this funding, on the same basis as that offered other investors.
Chek personnel have already begun operations in Nome to put the
dredge and associated equipment in good order so that mining
operations can be initiated in early June. While additional monies
may be raised to provide contingency funds for working capital, the
managers have determined that the funds required to initiate mining
operations and carry the project through at least the end of June
are approximately $100,000. Accordingly, the additional amount to
be raised beyond Chek's commitment of $60,000 is $40,000. Nova and
Chek will each reduce their membership interest approximately 7.33%
so that NovaChek may issue that membership interest to investors to
raise the required funds without diluting the membership interests
of the original investors in NovaChek. Since Chek is providing
approximately $60,000 of the needed funds, their interest will
increase, on a net basis. The deadline for raising the
approximately $40,000 is mid-June. While there is no assurance
that these funds will be raised, the Company believes it is a
reasonable assumption that the required funds will be obtained. An
additional amount beyond $40,000 may be raised, if available, to
provide an additional working capital "cushion", however, the
managers believe that a total sum of $100,000 will be sufficient to
determine the economic viability of the NovaChek project.
There is no assurance that NovaChek will be successful in
establishing profitable operations. In the event NovaChek is not
successful, the members shall decide, based on the facts at the
time, whether to continue to attempt to establish profitable
operations, to dissolve NovaChek, or to attempt to sell NovaChek's
assets to an entity which would attempt to continue efforts to
successfully mine the properties, possibly retaining a royalty for
NovaChek. In the event NovaChek were dissolved, Nova would be
required to write off its investment in NovaChek of $189,000 as of
December 31, 1996, less whatever sums Nova could recover from it as
both a creditor and as a member, of its share of the assets of
NovaChek, which would be sold to the highest bidder.
Management has determined that no decrease in value of its
investment in NovaChek has occurred as of September 30, 1996,
December 31, 1996, and after December 31, 1996 since the barge and
all of the equipment was moved to Nome in 1996, the construction of
the barge was completed and the barge was operational at the end of
the 1996 mining season. Operations were then terminated due to the
onset of Winter. Following the end of the season, the barge and
all of the associated equipment was stored for the Winter at Nome.
Modifications (with a cost of less that $10,000 are being
implemented to improve the operational capability of the barge, and
the barge is being readied to initiate mining operations in early
June, 1997. Although there can be no assurance of success,
management has no reason to believe that these mining operations
will not be successful. Sufficient funding has been obtained to
conduct operations through mid-June, and while the provision of
additional funding is not assured, management believes such funding
will be obtained so that operations can be conducted at least
through the end of June, by which time the project should be self-
funding from gold production.
The general escalation in oil and gas prices which took place in
1996 has resulted in a resurgence in exploration activity in the
Rocky Mountain region. As the Company frees up lease acquisition
capital from its present prospects, it intends to acquire
additional prospective acreage in selected areas where it believes
it can put together drilling prospects.
The Company holds a 50% interest in 1,600 acres of State of Utah
oil and gas leases in the Great Salt Lake. The other 50% is held
by the McDonald Trust. The Company and the Trust have jointly been
attempting to interest an industry partner in developing the heavy
oil resources known to exist under these leases, which resources
were estimated by Amoco Production Company to exceed 90 million
barrels in place. Amoco estimated that 1% to 10% of the oil in
place might be recoverable. However, Amoco abandoned its effort to
put the leases into commercial production using the technology then
available, and dropped the leases in 1989.
Neither the Company nor the Trust has the expertise or the
financial ability to develop this heavy oil resource on its own.
In March, 1997, the Company and the Trust entered into an agreement
with Roaring River Resources LLC ("Roaring River"), an unaffiliated
third party, pursuant to which Roaring River was granted an option
to acquire the leases and attempt to put them into production,
using the improved technology now available. As is standard in the
industry, the Company and the Trust will each retain a 1.5%
overriding royalty if the option is exercised. Roaring River made
a payment of $5,000 on April 16, 1997 to maintain the option, and
a further payment of $20,000 must be made on or before July 15,
1997 to keep the option in effect. Roaring River has until
September 8, 1997 to exercise the option. If the option is
exercised, a final payment of $225,000 (of which the Company will
receive half) must be made. Roaring River intends to attempt to
put the properties into production, perhaps as soon as within one
year of completing the acquisition. At present, it cannot be
determined whether the option will be exercised, nor can it be
ascertained with certainty when, or if, the properties will be put
into production.
The Company's ability to continue as a going concern will depend on
its success in developing additional sources of cash flow. As
discussed, the Company will attempt to acquire new cash-flowing
assets in the industrial minerals segment, will evaluate potential
acquisitions or mergers, and may acquire oil and gas production
interests, using the capital derived from the sale of the cement-
grade kaolin mine. If the Company's efforts to obtain industry
drilling commitments on its oil and gas exploration properties are
successful, and commercial production is established on at least
one of these properties, the Company could realize cash flow which
will exceed that of the properties which were sold, particularly as
development proceeds. Sufficient funding has been obtained to
initiate gold production efforts and maintain them through mid-June
on the NovaChek properties, although some additional monies will be
required for additional working capital for NovaChek. This will
enable operations to continue through the end of June, at which
point revenues from gold sales should enable the project to be
self-funding. If commercial gold production can be established in
the 1997 season, the Company should recover at least a portion of,
and perhaps all, of the funds it has advanced to NovaChek, and cash
flow from gold production will have been established.
There is no guarantee of success in any of these projects.
However, the Company's only hope of restoring financial viability
is to continue to pursue the development of its properties by third
parties at minimal cost to the Company and the acquisition of
producing properties which will supply needed cash flow. The
Company will generate more than sufficient cash over the twelve
months ended December 31, 1997 to support its operations during
that period, without any contribution of cash from the drilling
arrangements on any of its oil and gas prospects or from NovaChek.
However, without additional sources of cash flow, the Company will
not generate sufficient cash from operations alone to offset the
cost of operations. Proceeds from drilling arrangements on one or
more of its oil and gas prospects -all of which call for front-end
fees, and/or the establishment of commercial production on the
NovaChek properties, neither of which is assured, would generate
additional cash to be used to offset operating losses and fund the
elements of the Company's business plan.
The asset sales undertaken by the Company have and will reduce
operating risk, provide more assurance of near-term cash flow from
those assets than would otherwise be the case, and increase the
Company's capital in the near term. On a long-term basis,
Management must employ the proceeds from these asset sales in the
development of the Company's remaining assets and to acquire new
assets in order to generate cash flow to support operations and to
offset what would otherwise be the gradual liquidation of the
assets sold were the proceeds of those sales used simply to fund
operating losses. There can be no assurance that Management will
be successful in this endeavor.
NOVA NATURAL RESOURCES CORPORATION
SELECTED FINANCIAL DATA
1992 - 1996
1996 1995 1994 1993 1992
Net Sales 1,508,938 1,672,840 2,282,338 1,337,604 2,463,465
Income (Loss)
from operations (143,673) (421,716) (123,117) (186,169) 93,146
Income (Loss)
per common share
from operations (.02) (.07) (.02) (.03) .02
Total Assets 1,545,920 1,355,691 2,362,062 2,319,505 2,122,381
Long-term
obligations 250,000 0 162,016 271,357 0
Cash Dividends 0 0 0 0 0
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditor's Report
The Board of Directors and Stockholders
Nova Natural Resources Corporation:
We have audited the accompanying balance sheets of Nova Natural Resources
Corporation as of September 30, 1996 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nova Natural Resources
Corporation as of September 30, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and cash flow
deficits from operations which, along with other factors described in Note 2,
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Denver, Colorado
November 27, 1996
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEETS -- SEPTEMBER 30, 1996 AND 1995
ASSETS 1996 1995
Current Assets:
Cash $ 79,827 $ 70,820
Accounts receivable:
Kaolin operations 376,392 251,794
Oil and gas operations 24,867 12,132
Other 31,273 4,101
Prepaid expenses 3,941 1,500
Total current assets 516,300 340,347
Mineral property interests, net
of accumulated depreciation and
depletion of $88,767 and $67,147
in 1996 and 1995, respectively
(note 2) 543,038 562,721
Oil and gas properties (using
the full cost method of
accounting), net of accum-
ulated depletion, depreciation
& amortization, and valuation
allowances of $5,896,408 and
$5,836,300 in 1996 and 1995,
respectively (Notes 3 and 11) 260,014 339,578
Furniture and technical equipment net
of accumulated depreciation
of $131,953 and $126,750 in
1996 and 1995, respectively 38,851 41,634
Investment in and advances to
NovaChek Limited
Liability Company (note 4) 136,717 --
Deposits 51,000 71,411
Total $ 1,545,920 $ 1,355,691
NOVA NATURAL RESOURCES CORPORATION
BALANCE SHEETS (CONTINUED) -- SEPTEMBER 30, 1996 AND 1995
LIABILITIES AND
STOCKHOLDERS' EQUITY 1996 1995
Current liabilities:
Accounts payable $ 282,087 $ 220,289
Accrued liabilities 35,576 13,472
Total current liabilities 317,663 233,761
Convertible debentures (note 5) 250,000 --
Total liabilities 567,663 233,761
Stockholders' equity (note 7):
Convertible preferred stock, $1.00
par value and liquidation
preference; 5,000,000 shares
authorized; 2,687,682 shares
issued and outstanding 2,687,682 2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;
6,496,188 shares
issued and outstanding 649,619 649,619
Additional paid-in capital 6,454,296 6,454,296
Accumulated deficit (8,813,340) (8,669,667)
Total Stockholders' equity 978,257 1,121,930
Commitments and contingencies
(note 9)
$ 1,545,920 $ 1,355,691
See accompanying notes to financial statements.
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
Years Ended September 30,
1996 1995
Revenue:
Mineral sales $ 1,291,131 $ 1,486,287
Oil and gas sales 217,807 186,553
1,508,938 1,672,840
Costs and expenses:
Mining costs, including
transportation and royalties 1,049,387 1,259,307
Oil and gas lease operating,
including production taxes 106,952 92,865
Depletion, depreciation, and
amortization 86,931 87,319
Mineral property abandonments 7,032 309,199
General and administrative 385,593 426,323
1,635,895 2,175,013
Operating loss (126,957) (502,173)
Other income (expenses):
Share of losses of NovaChek
Limited Liability Company (11,437) --
Interest income 11,587 13,081
Interest expense (17,691) (12,540)
Gain on sale of assets -- 58,663
Other 825 21,253
(16,716) 80,457
Net loss $ (143,673) (421,716)
Loss per share (.02) (.07)
Weighted average common shares
outstanding 6,496,188 6,323,971
See accompanying notes to financial statements
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Shares of
convertible Amount
preferred Convertible Shares of Amount
stock preferred common stock Common
issued stock issued stock
Balance, September 30, 1994 2,687,682 $ 2,687,682 6,323,971 $ 632,397
Contribution of stock to
Employee Stock Ownership
Plan -- -- 172,217 17,222
Net loss -- -- -- --
Balance, September 30, 1995 2,687,682 2,687,682 6,496,188 649,619
Net loss -- -- -- --
Balance, September 30, 1996 2,687,682 $ 2,687,682 6,496,188 $ 649,619
See accompanying notes to financial statements.
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Additional Total
paid-in Accumulated stockholders'
capita deficit equity
Balance, September 30, 1994 $6,458,602 $(8,247,951) 1,530,730
Contribution of stock to
Employee Stock Ownership
Plan (4,306) -- 12,916
Net loss -- (421,716) (421,716)
Balance, September 30, 1995 6,454,296 (8,669,667) 1,121,930
Net loss -- (143,673) (143,673)
Balance, September 30, 1996 $6,454,296 $(8,813,340) 978,257
See accompanying notes to financial statements.
NOVA NATURAL RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended September 30,
1996 1995
Cash flows from operating activities:
Net loss $ (143,673) $ (421,716)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depletion, depreciation and amortization 86,931 87,319
Mineral property abandonments 7,032 309,199
Gain on sale of assets -- (58,663)
Share of losses of NovaChek Limited Liability Company 11,437 --
Convertible debentures issued for services, charged
to general and administrative expense 31,250 --
Contribution of stock to employee stock ownership plan -- 12,916
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (164,505) 166,269
Increase in prepaid expenses (2,441) --
Decrease in deposits 20,411 31,309
Increase (decrease) in accounts payable 61,798 (308,279)
Increase (decrease) in accrued and other liabilities 22,104 (17,220)
Net cash used by operating activities (69,656) (198,866)
Cash flows from investing activities:
Proceeds from sale of assets 25,215 500,000
Investment in and advances to NovaChek Limited
Liability Company (148,154) --
Capital expenditures - mineral properties (8,969) (38,040)
Capital expenditures - oil and gas properties (5,759) (8,316)
Capital expenditures - office and technical equipment (2,420) (42,669)
Net cash provided (used) by investing activities (140,087) 410,975
Cash flows from financing activities:
Principal payments on notes payable 0 (272,072)
Proceeds from notes payable 218,750
Net cash provided (used) by financing activities 218,750 (272,072)
Increase (decrease) in cash and cash equivalents 9,007 (59,963)
Cash, beginning of year 70,820 130,783
Cash, end of year $ 79,827 $ 70,820
Supplemental cash flow information-cash paid for interest $ 16,292 $ 12,785
See accompanying notes to financial statements.
NOVA NATURAL RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Nova Natural Resources Corporation (the Company), has focused on
marketing and selling kaolin clay from its Minnesota kaolin mine,
exploring for paper grade kaolin on leases elsewhere in Minnesota,
seeking partners for exploration and development of gold on its
properties in Alaska and Colorado and seeking partners for
exploratory drilling on two oil and gas prospects in Wyoming.
During the past fiscal year, the Company organized, invested in and
co-manages a limited liability company to develop and mine a
portion of its offshore Nome, Alaska leases to recover precious
metals. The Company does not operate any of its interests in oil
and gas wells, which are principally located in the western United
States.
Accounting Estimates
Preparation of financial statements in conformity with generally
accepted accounting principles requires that management make
certain estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the balance
sheet date as well as the reported amounts of revenues and expenses
during the reporting period. The actual results could differ
significantly from those estimates.
Investment in NovaChek Limited Liability Company
The Company owns an interest in NovaChek Limited Liability Company
(NovaChek) which is accounted for by the equity method. Under the
equity method, the investment has been recorded at cost and is
subsequently adjusted to recognize the Company's share of the
income or losses of NovaChek. Dividends or other distributions are
recorded as a reduction of the investment. Recognition of losses
is limited to the extent of the Company's investment in, advances
to, commitments and guarantees, if any, relating to NovaChek.
Mineral Property Interests
Exploration expenditures are charged to operations in the period
incurred except for expenditures on specified properties having
indicated the presence of a mineral resource with the potential of
being developed into a mine, in which case the expenditures are
capitalized.
Mine development costs incurred to expand the capacity of operating
mines, to develop new ore bodies or to develop mine areas
substantially in advance of current production are capitalized and
charged to operations on a units-of-production method based upon
the estimated recoverable reserves of the related deposit.
Reclamation takes place concurrently with production and such costs
are expensed as mining costs in the period incurred.
The Company periodically reviews the carrying value of its
properties by comparing the net book value with the estimated
undiscounted future cash flow from the property, which is generally
based upon estimated recoverable reserves utilizing current market
prices and costs. If the net book value exceeds the undiscounted
future cash flow, the Company records an impairment. Changes in
the significant estimates and assumptions underlying future cash
flow estimates may have a material effect on the future carrying
value of assets and operating results.
In fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of (FAS 121). The adoption of the provisions of FAS 121
had no impact on the Company's financial statements.
Oil and Gas Properties
The Company follows the "full cost" method of accounting for its
oil and gas properties, in accordance with rules promulgated by the
Securities and Exchange Commission (the SEC). All of the Company's
properties are located within the continental United States. All
costs associated with property acquisition, exploration, and
development activities are capitalized in one cost center (the full
cost pool), including costs of unsuccessful exploration. No gains
or losses are recognized on the sale or abandonment of oil and gas
properties unless the transaction involves the sale of significant
reserves.
Capitalized costs less related accumulated amortization may not
exceed the sum of (1) the present value of future net revenue from
estimated production of proved oil and gas reserves, calculated
using current prices; plus (2) the cost of properties not being
amortized, if any; plus (3) the lower of cost or estimated fair
value of unproved properties included in the costs being amortized,
if any; less (4) income tax effects related to differences in the
book and tax basis of oil and gas properties.
Amortization of the full cost pool is computed using the
units-of-production method based on proved reserves as determined
annually by the Company and independent petroleum engineers. The
provision for depletion, depreciation, and amortization on a per
equivalent barrel basis during fiscal years 1996 and 1995 was $3.83
and $4.17, respectively.
Furniture and Technical Equipment
Furniture and technical equipment are stated at cost and are
depreciated using the straight-line method over estimated useful
lives ranging from three to eight years.
Income Taxes
The Company utilizes an asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities using enacted tax rates expected to apply in the years
in which such temporary differences are expected to be recovered or
settled. A valuation allowance is established for tax assets not
expected to be realized. Changes in tax rates are recognized in
the period of the enactment date.
Loss Per Share
Loss per share is computed by dividing net loss attributable to
common stock by the weighted average number of common shares
outstanding during each period. Common share equivalents including
convertible preferred stock and stock options were not included in
the computation as their effect was anti-dilutive for 1996 and
1995. A fully diluted per share calculation considering stock
which would be issued if the Company's convertible debentures were
converted into common stock is not presented as it is anti-
dilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform with
the 1996 presentation.
(2) UNCERTAINTY OF FUTURE OPERATIONS
The financial statements have been prepared assuming that the
Company will continue as a going concern. Certain factors,
discussed below, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
The Company has suffered recurring losses and cash flow deficits
from operations. At September 30, 1996, the Company has an
accumulated deficit of $8,813,340. In addition, management
estimates the Company's equity affiliate, NovaChek, will require
approximately $150,000 during fiscal year 1997 in order to commence
operations (see note 4). In order to resolve a shareholder
dispute, the Company is considering various alternatives, including
the repurchase of shares held by a certain stockholder.(see note 7)
The Company's liquidity is not sufficient to fund future operating
losses, if any, and the aforementioned investing and financing
commitments. In order to improve liquidity, the Company has sold
or is considering the sale of substantially all of its operating
assets. On November 14, 1996, the Company sold several of its
overriding royalty interests in producing oil and gas wells for net
proceeds of approximately $230,000. In addition, the Company is
considering the sale of its cement grade kaolin mining operations.
The future viability of the Company is dependent on the ultimate
resolution of the matters discussed above and the profitable
operation of NovaChek, which are not presently determinable.
(3) SALE OF OIL AND GAS INTERESTS
On November 14, 1996, the Company sold several oil and gas
producing assets and leasehold interests, primarily overriding
royalty interests in producing oil and gas wells in the Wyoming
Overthrust Belt (an estimated 6,976 BBLS of oil and an estimated
282,127 MCF of gas), effective as of November 1, 1996. Proceeds
from this sale, net commissions and direct selling costs, were
$230,257.
(4) INVESTMENT IN NOVACHEK
On April 1, 1996 the Company organized NovaChek to recover precious
metals from off-shore mining leases located near Nome, Alaska,
utilizing a dredging operation.
The Company contributed mineral leasehold interests and $118,750 in
cash for a 42% voting interest in NovaChek. An additional 4.125%
interest in NovaChek is held by affiliates of the Company.
NovaChek is managed by the Company and Chek Technologies and
Exploration, LLC (Chek) which owns a 38.75% interest in NovaChek.
The Company is entitled to receive an annual management fee of
$65,000 from NovaChek. To date, no management fee has been
collected or recorded by the Company.
A number of significant decisions require the approval of both the
Company and Chek. Such decisions include, but are not limited to,
certain borrowings, capital expenditures and asset disposals.
NovaChek has not commenced dredging operations on a commercial
basis, Company management estimates NovaChek will require
approximately $150,000 during fiscal 1997 to become operational,
and there is no assurance that the dredge can be operated
economically. Accordingly, the Company's ability to recover its
investment in NovaChek is dependent upon the results of future
development, including obtaining financing for such development.
The availability of financing and the results of such future
development are not presently determinable. Accordingly, the
financial statements do not include any adjustments relating to the
recoverability of the Company's investment such costs that might
result from the outcome of these uncertainties.
In accordance with the NovaChek operating agreement, the first
$150,000 in distributions will be allocated to investors other than
the Company and Chek based upon their relative voting percentages.
The next $150,000 in distributions will be made to the Company.
The Company, Chek and remaining investors will receive 30%, 20% and
50%, respectively, of the next $400,000 in distributions, and 35%,
30% and 35%, respectively, of the following $428,575 in
distributions. After these initial preferential distributions are
made, all subsequent distributions will be allocated based on
voting percentages.
The condensed balance sheet and statement of operations of NovaChek
at September 30, 1996 and for the period from April 1, 1996
(inception) through September 30, 1996 are presented below.
BALANCE SHEET OF NOVACHEK
Cash and other assets $ 5,908
Mineral property interests 45,000
Mining and related equipment, net 284,566
Total assets $ 335,474
Accounts payable $ 29,404
Short-term notes payable 33,300
Stockholders' equity 272,770
Total liabilities and stockholders'
equity $ 335,474
STATEMENT OF OPERATIONS OF NOVACHEK
Operating expenses $ (27,648)
Other income 418
Net Loss $ (27,230)
(5) CONVERTIBLE DEBENTURES
On April 1, 1996, the Company issued $250,000 of convertible
debentures. These debentures provide for interest payments at an
annual rate of 10%, payable semi-annually, and are due on April 1,
2001, but are redeemable in common stock by the Company after March
31, 1998. The debentures are convertible into the Company's common
stock at the rate of one share of stock for each $0.15 of
principal, which would result in the issuance of 1,666,667 common
shares if so converted. In June 1996, holders of $175,000 of the
debentures, of which $40,625 of debentures are held by affiliates,
agreed that the Company could redeem such debentures after
September 1, 1996, provided that such early redemption is effected
at $0.10 per common share and the payment of six months advance
interest. No such early redemption has been made to date.
The Company issued $31,250 of the convertible debentures to Chek in
exchange for services that Chek performed for NovaChek, on behalf
of the Company. This amount was charged to general and
administrative expense.
(6) INCOME TAXES
The components of the net deferred tax asset and liabilities at
September 30, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets:
Net operating loss carryforward $ 2,766,438 $ 3,392,118
Less valuation allowance (2,585,379) (3,169,939)
Net deferred tax asset 181,059 222,179
Deferred tax liabilities-
Depletion, depreciation, amortization,
and valuation allowance for income tax
purposes in excess of amounts for
financial statement purposes (181,059) (222,179)
Net deferred tax asset $ -- $ --
The Company has net operating loss carryforwards at September 30,
1996 for federal income tax reporting purposes of approximately
$7,420,000. The Company also has an alternative minimum tax net
operating loss of approximately $8,760,000. Approximately
$1,840,000 of these tax operating losses will expire during the tax
year ending September 30, 1997, with the balance expiring over the
period ending in the year 2011.
(7) STOCKHOLDERS' EQUITY
Preferred Stock
The Company's preferred stock outstanding is convertible into
5,375,364 shares of common stock. The preferred shares contain
2-for-1 voting rights, have a $1.00 liquidation preference and have
no stated dividend rate.
Stock Option Plans
The Board of Directors have approved two stock option plans for the
benefit of Company employees and key personnel. The first plan is
the Nova Natural Resources Corporation 1989 Nonqualified Stock
Option Plan (the "Nonqualified Plan") and the second plan is the
Nova Natural Resources Corporation 1989 Incentive Stock Option
Plan, a qualified plan (the "Incentive Plan"). Both plans include
terms whereby participants are issued options to purchase shares of
the Company's common stock at the market price at the time of
grant. The options are exercisable at the date of grant and expire
five years after the date of grant.
Options granted to employees under both plans who subsequently
terminate employment with the Company are canceled if not exercised
within three months after termination of employment.
A total of 2,000,000 shares have been reserved for issue under the
two plans. Data at September 30, 1996 and 1995 concerning these
two plans is as follows:
Nonqualified Plan
Shares under Option price
option range
Outstanding and exercisable at
September 30, 1994 645,000 $ 0.0625 - 0.18
Canceled during year (25,000) 0.18
Outstanding and exercisable at
September 30, 1995 620,000 0.0625 - 0.105
Canceled during year (20,000) 0.0625
Outstanding and exercisable at
September 30, 1996 600,000 $ 0.105
Incentive Plan
Shares under Option price
option range
Outstanding and exercisable at
September 30, 1994 and 1995 820,000 $ 0.09375 - 0.105
Granted during 1996 50,000 0.05
Canceled during 1996 (220,000) 0.09375 - 0.105
Outstanding and exercisable at
September 30, 1996 650,000 $ 0.05 - 0.105
Stock Ownership Plan
The Company has also established the "Nova Natural Resources
Corporation Employee Stock Ownership Plan" (the ESOP Plan) for all
employees. The ESOP Plan provides for contributions of Company
stock to a trust in an amount determined by the Board of Directors.
The Company's contributions to the Plan during the year ended
September 30, 1995 amounted to 172,217 shares of common stock with
an aggregate value of $12,916. No contribution was made in 1996.
(8) RELATED PARTY TRANSACTIONS
The Company owns interests in various producing and nonproducing
mineral properties with the REM Family Trust ("the Trust"), a trust
in which the Chairman of the Company is the trustee. The Trust
also holds a royalty interest on the Company's cement grade kaolin
property. Royalty expense, under this agreement, was $11,662 and
$14,355 in 1996 and 1995, respectively. The Company and the Trust
jointly own, through various agreements, an interest in a gold
prospect in southern Colorado.
Five directors of the Company and one officer purchased $46,875 of
the Company's debentures and a 4.125% interest in NovaChek during
1996.
(9) COMMITMENTS AND CONTINGENCY
Shareholder Disputes
Disputes have arisen between Thomas Kane, one of the Company's
directors and a principal shareholder, over the Company's
continuing operations and their impact on Mr. Kane's ownership of
shares of the Company's convertible preferred and common stock.
Mr. Kane has expressed his belief that the Company is not viable as
a going concern and should be liquidated. Mr. Kane has asserted
that continued operations would expend resources and waste assets
which would otherwise be distributed to him and to the other two
holders of convertible preferred stock upon the Company's
liquidation. Mr. Kane has threatened to seek court intervention to
preserve assets of the Company for liquidation. Management of the
Company disagrees with Mr. Kane's allegations and does not plan to
liquidate. In order to resolve this dispute, the Company is
considering various alternatives, including the repurchase of
shares held by Mr. Kane. However, resolution of this matter is not
presently determinable. Accordingly, the financial statements do
not include any adjustments that might result from the resolution
of this matter.
Rail Transportation Contract
The Company is obligated under the terms of a contract with one of
its rail transportation suppliers to move at least 300 railcars
during 1997. If the Company does not move at least 300 railcars,
a $120 per railcar penalty for each car less than 300 railcars will
be assessed. Since the Company currently has a contract through
1997 with its kaolin purchaser to purchase kaolin requiring in
excess of 300 railcars, it does not anticipate incurring any
penalties.
Leases
Future minimum rental payments for office facilities under the
remaining terms of noncancelable leases are $19,805 and $17,806,
$18,564 and $7,841 for the fiscal years ending September 30, 1997,
1998, 1999 and 2000, respectively.
Net rental payments charged to expense amounted to $27,194 in 1996
and $20,183 in 1995.
(10) SEGMENT INFORMATION
The Company operates entirely in the United States and principally
in two industries, oil and gas and mining. Information about the
Company's operations in these industries for the years ended
September 30, 1996 and 1995 is as follows:
Year ended September 30, 1996
Oil and Gas Mining Consolidated
Operating revenue $ 217,807 $ 1,291,131 $ 1,508,938
Operating expenses 152,436 1,226,985 1,379,421
Depreciation, depletion and amortization 60,108 21,620 81,728
Total operating expenses 212,544 1,248,605 1,461,149
Income from operations 5,263 42,526 47,789
General corporate expenses (net of
other income and expenses) (162,334)
Share of losses of NovaChek Limited
Liability Company (11,437)
Interest expense (17,691)
Net loss $ (143,673)
Identifiable assets at September 30, 1996 $ 284,881 $ 919,430 $ 1,204,311
Corporate assets 341,609
Total assets at September 30, 1996 $ 1,545,920
Year ended September 30, 1995
Oil and Gas Mining Consolidated
Operating revenue $ 186,553 $ 1,486,287 $ 1,672,840
Operating expenses 132,892 1,777,223 1,910,115
Depreciation, depletion and amortization 67,504 16,263 83,767
Total operating expenses 200,396 1,793,486 1,993,882
Loss from operations (13,843) (307,199) (321,042)
General corporate expenses (net of
other income and expenses) (88,134)
Interest expense (12,540)
Net loss $ (421,716)
Identifiable assets at September 30, 1995 $ 351,710 $ 814,515 1,166,225
Corporate assets 189,466
Total assets at September 30, 1995 $ 1,355,691
Income (loss) from operations is operating revenue less operating expenses, a
portion of general and administrative expenses, and depreciation, depletion
and amortization. Income (loss) from operations excludes general corporate
expenses, share of losses of an equity investee, interest expense and interest
income. Corporate assets primarily include cash, investment and advances in
NovaChek, net furniture and technical equipment, and other assets.
(11) SIGNIFICANT CUSTOMERS AND SUPPLEMENTARY INFORMATION ON OIL AND GAS
OPERATIONS
For the years ended September 30, 1996 and 1995, the Company had one mineral
customer that accounted for 85.6% and 63.1% of total revenue, respectively.
Information related to the Company's oil and gas operations is summarized as
follows:
1996 1995
Capitalized costs:
Unproved properties $ 111,468 106,753
Proved properties 6,044,954 6,069,125
6,156,422 6,175,878
Accumulated depletion,
depreciation, amortization
and valuation allowances (5,896,408) (5,836,300)
$ 260,014 339,578
Costs incurred in oil and gas producing activities are as follows:
1996 1995
Capitalized:
Property acquisition costs $ 5,759 8,316
Development costs $ -- --
Expenses - depletion, depreciation,
and amortization $ 60,108 67,504
Oil and Gas Reserve Information (Unaudited)
The following information presents the Company's estimate of its proved oil
and gas reserves, all of which are located in the Continental United States.
The Company emphasizes that reserve estimates are inherently imprecise and are
expected to change as future information becomes available. The oil estimates
(BBLS) and the natural gas estimates (MCF) as of September 30, 1996 and 1995
have been prepared by an independent firm of petroleum engineers.
1996 1995
(BBLS) (MCF) (BBLS) (MCF)
Proved reserves:
Beginning of year 36,618 276,315 32,305 263,165
Revisions of previous estimates 6,015 133,567 12,948 58,512
Sales of reserves-in-place (2,580) (3,686) -- --
Production (7,675) (48,160) (8,635) (45,362)
End of year 32,378 358,036 36,618 276,315
Proved developed reserves:
Beginning of year 36,618 276,315 32,305 263,165
End of year 32,378 358,036(a) 36,618 276,315
(a) See note 3 for information regarding the sale of approximately 6,976
barrels of oil and 282,127 MCF of gas on November 14, 1996.
Standardized Measure of Discounted Future Net Cash Flows and the
Changes Therein (Unaudited)
The following presentations contain no provision for estimated
future income tax expenses due primarily to net operating loss
carryforwards and tax credits. The standardized measure of
discounted future net cash flows relating to proved oil and gas
reserves at September 30, 1996 and 1995, is as follows:
1996 1995
Future cash in-flows $ 1,252,791 $ 948,375
Future production costs (466,618) (375,219)
Future development costs (5,000) (5,000)
Future net cash flows 781,173 568,156
10% annual discount for estimated
timing of cash flows (291,882) (197,583)
Standardized measure of discounted
future net cash flows $ 489,291 $ 370,573
The following are the principal sources of change in the standardized measure
of discounted future net cash flows during 1996 and 1995:
1996 1995
Standardized measure of discounted future
net cash flows at beginning of year $ 370,573 $ 310,294
Sales of oil and gas produced,
net of production costs (110,855) (93,688)
Sales of reserves-in-place (23,925) --
Net changes in prices and production costs 73,751 12,065
Revisions of previous quantity estimates 153,066 103,710
Accretion of discount 19,758 17,940
Other 6,923 20,252
Standardized measures of discounted future
net cash flows at end of year $ 489,291 $ 370,573
The Company estimates net quantities of proved reserves of oil and
gas and calculates the standardized measure of discounted future
net cash flows using current prices in effect at the time estimates
are made.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OF SEPTEMBER 30, 1996
Liquidity and Capital Resources
The Company has suffered recurring losses and cash flow deficits
from operations. At September 30, 1996, the Company has an
accumulated deficit of $8,813,340. The Company's working capital
increased as of September 30, 1996 to $198,637, compared to working
capital of $106,586 as of September 30, 1995. Total assets
increased to $1,545,920 as of September 30, 1996, as compared to
$1,355,691 as of September 30, 1995. The increase in both working
capital and total assets was attributable primarily to the issuance
of convertible debentures during the year. The increase in total
liabilities from $233,761 in 1995 to $567,663 in 1996 is also due
to the issuance of convertible debentures during the year.
Although working capital increased during the year, there are
uncertainties that may have a significant impact on the Company's
liquidity and which raise substantial doubt about the Company's
ability to continue as a going concern.
The Company's kaolin sales to its only customer reached a record
level in 1996, and only minor rail transportation difficulties were
encountered, which enabled the Company to generate higher levels of
cash flow from kaolin sales for the 1996 season than had been
achieved in 1995. However, the Company did not generate positive
cash flow from operations in 1996. Cash used by operations during
1996 was approximately $70,000.
The Company's liquidity is primarily dependent upon its ability to
obtain and retain customers for the purchase of its cement grade
kaolin. The Company has been able to amend and extend its purchase
contract with its purchaser through December 1997 for price and
production requirements similar to fiscal 1996.
The Company is currently attempting to get commitments from the
industry to drill two of the Company's exploratory prospects in
Wyoming, one primarily an oil prospect, and the other a gas
prospect. Dependent on its success in getting industry
participation in the drilling of these two prospects, the Company
will attempt to acquire other drillable prospects for its future
exploration efforts.
In March 1996, the Company negotiated a six-month working capital
loan from the family of one of its directors at an annual interest
rate of 10% in the amount of $100,000 to make up for cash shortages
caused by the timing of kaolin sales expenses and revenues.
Typically, the cost of transporting kaolin is billed to the Company
and must be paid in advance of the receipt of payment by the
Company of kaolin sales proceeds, resulting in a cash shortfall
during the early part of the season which is alleviated as the
season progresses. This loan was repaid in full in September 1996
out of operating cash flow. Additionally, the Regulation D
offering described in "Significant Developments During Fiscal 1996"
was completed, and although this offering was primarily undertaken
to fund the proposed mining operations at Nome, Alaska, a portion
of the offering proceeds was dedicated to Nova's working capital.
Results of Operations
The Company realized a net loss of $143,673 for the year ended
September 30, 1996. Oil and gas sales were higher, but mineral
sales decreased. However, for the mining season as a whole --
which extends past the end of the fiscal year -- mineral sales were
considerably improved from the previous fiscal year. The effect of
those improved mineral sales levels will not be recorded until
fiscal 1997. Mining costs decreased, tracking the lower level of
sales, as did general and administrative costs, reflecting
economies implemented in the Company's cost reduction program, and
mineral property abandonments dropped to just over $7,000 from the
previous year's $309,199, but these factors were insufficient to
allow the Company to realize a profit. Contributing to the loss
was a $11,437 loss from the Company's investment in NovaChek.
Due primarily to decreased mineral and oil and gas sales and a
write-down of its Querida and Nome mineral properties, the Company
realized a net loss of $421,716 for the year ended September 30,
1995.
Revenues
Mineral sales decreased $195,156 or 13% for the year ended
September 30, 1996 as compared to 1995, although mineral sales for
the full mining season -- which extends past the end of the fiscal
year -- were substantially greater than in those for the 1995
mining season. The increased mineral sales for the season resulted
from an increase in kaolin prices and an increase in tons of kaolin
shipped. The Company had one customer for the 1996 mining season,
as in 1995. The Company's ability to transport kaolin by rail
improved considerably in 1996, and shipments were able to be spaced
over the entire mining season, which matched customer needs on a
more timely basis than in 1995.
Oil and gas sales increased $31,254 or 17% for the year ended
September 30, 1996 as compared to the same period in 1995. This
increase is attributable primarily to higher prices. Oil
production declined 11% but oil prices increased 30%, which more
than offset the production decline. Both production and the price
of gas increased. These factors combined to generate the higher
oil and gas sales. A comparison of production and prices in 1996
and 1995 is as follows:
1996 1995
Sales Volume
Oil (bbls) 7,675 8,635
Gas (MCF) 48,160 45,362
Average Sales Price
Oil (bbls) $19.96 $15.27
Gas (MCF) $ 1.34 $ 0.98
The Company sold its railcars in fiscal 1995, realizing a one-time
gain on the sale of $58,663.
Other revenue for the year ended September 30, 1995 consisted of
revenue received from the rental of the railcars prior to their
sale, $19,021, and grain sales, $2,232. Other revenue of $825 in
1996 was primarily realized from grain sales.
Expenses
Mining costs decreased $209,920 or 17% for the year ended September
30, 1996 as compared to 1995. This decrease was primarily due to
lower kaolin shipments in the 1996 period. A further factor
impacting mining costs was the payment of gravel royalties to a
lessor. The Company collects royalties on the sale of gravel from
land leased by the Company pursuant to an arrangement with a third
party, which mines and sells the gravel. The Company retains a
portion of such royalties and remits the major portion to the
lessor. No gravel royalties were required to be paid during the
previous fiscal year.
Lease operating expenses ("LOE"), including production taxes
increased $14,087 or 15% for the year ended September 30, 1996 as
compared to 1995 due to increased oil and gas sales coupled with
higher costs in some of the Company's wells as these wells approach
the end of their operating lifetime.
Depletion, depreciation and amortization ("DD&A") decreased $388
for the year ended September 30, 1996 as compared to 1995 due to
reduced DD&A on oil and gas properties, consistent with the 11%
decline in oil production.
General and administrative expenses decreased $40,730 or 10% for
the year ended September 30, 1996 over the same period in 1995 due
to lower payroll and related costs. The lower payroll costs
reflect both a reduction in staff and a reduction in staff
salaries.
Interest expense was incurred in 1995 on the debt incurred to
purchase railroad rolling stock. This expense totaled $12,540 for
the year ended September 30, 1995. This debt was retired upon the
sale of the rolling stock in February, 1995. The interest expense
of $17,691 in fiscal 1996 resulted from interest payments on a
short-term working capital loan, since retired, and the $250,000 of
convertible subordinated debentures issued in connection with the
Regulation D offering described in "Significant Developments during
Fiscal 1996".
Commitments
The lease on the Company's office space expires January 31, 1997.
Remaining payments for the 4-month balance of the lease are
estimated to total $9,764. The Company has signed a new three-year
office lease in a different location effective February 1, 1997.
The Company has leased approximately 1550 square feet of office
space -- a reduction of 22% from its previous space -- at a cost of
approximately $15,810 over the first year of the lease term. The
Company is also obligated under the terms of the contract with one
of its rail transportation suppliers to move at least 300 cars
during the 1997 mining season. If the Company does not move at
least 300 cars, a $120 per car penalty for each car less than 300
cars will be assessed. Since the Company currently has a contract
through December 31, 1997, with its current kaolin purchaser to
purchase kaolin in excess of 300 cars, it does not anticipate
paying any penalties.
Impact of Inflation
Due to the Company's size and the uncertainties normal in its lines
of business, the impact of inflation on the Company's operations is
negligible.
New Accounting Standards
Statement of Financial Accounting Standards No. 123, Accounting for
Stock--Based Compensation (FAS No. 123), is required to be adopted
by the Company in the year ended September 30, 1997. Pursuant to
the provisions of FAS No. 123, the Company will continue to account
for transactions with its employees pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Therefore, this statement is not expected to have a
material effect on the Company's financial position or its results
of operations when adopted.
PART I. FINANCIAL INFORMATION
NOVA NATURAL RESOURCES CORPORATION
Condensed Balance Sheets (Note 1)
March 31, September 30,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash $ 49,525 $ 79,827
Accounts receivable:
Kaolin operations(Note 5) 0 376,392
Oil and gas operations(Note 2) 13,038 24,867
Other 9,991 31,273
_______ _______
Total 23,029 432,532
Prepaid expenses 3,248 3,941
_______ _______
Total current assets 75,802 516,300
Mineral property interests, net of
accumulated depreciation and
depletion of 92,301 and 88,767(Note 6) 542,417 543,038
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,909,210 and
5,896,408(Note 2) 104,223 260,014
Furniture and technical equipment net
of accumulated depreciation of
132,380 and 131,953 38,852 38,851
Investment in and advances to NovaChek
Limited Liability Company(Note 4) 195,149 136,717
Deposits 51,550 51,000
_______ _______
$ 1,007,993 $ 1,545,920
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
1997 1996
(unaudited)
Current liabilities:
Accounts payable $ 46,866 $ 282,087
Accrued liabilities 2,083 35,576
_______ _______
Total current liabilities 48,949 317,663
Convertible debentures 250,000 250,000
Note Payable(Note 3) 66,408 0
Discount on Note Payable(Note 3) (20,154) 0
_______ _______
Total long term liabilities 296,254 250,000
Total liabilities 345,203 567,663
_______ _______
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
5,000,000 shares authorized; 2,687,682
shares issued and outstanding in 1996,
1,792,267 in 1997(Note 3) 1,792,267 2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;6,496,188
shares issued and outstanding in 1996,
5,985,846 in 1997(Note 3) 598,585 649,619
Additional paid-in capital(Note 3) 7,204,873 6,454,296
Accumulated deficit (8,932,935) (8,813,340)
__________ __________
Total stockholders' equity 662,790 978,257
Total Liabilities and Stockholders' Equity $1,007,993 $1,545,920
========= =========
See accompanying notes to condensed financial statements.
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
________ ________ ________ ________
REVENUES:
Mineral sales $ 1,913 $ 19,583 $ 193,469 $ 162,091
Oil and gas sales(Note 2) 36,106 58,366 77,722 103,004
________ ________ _______ _______
38,019 77,949 271,191 265,095
EXPENSES:
Mining costs, including
transportation and royalties 4,788 6,119 159,355 101,033
Oil and gas lease operating
including production taxes 27,166 24,247 57,581 56,862
Depletion, depreciation,
and amortization 7,271 16,471 16,763 34,617
Mineral property abandonments 0 0 60 0
General and administrative 102,530 103,012 214,750 195,205
141,755 149,849 448,509 387,717
_______ _______ _______ _______
Operating loss $ (103,736) $ (71,900) $ (177,318)$ (122,622)
========= ======== ======== =======
Other income(expenses):
Share of losses of
NovaChek LLC(Note 4) (5,529) 0 (11,819) 0
Interest income 2,690 1,402 5,866 3,501
Interest expense (4,547) 0 (12,880) 0
Gain on sale of assets(Note 2) 0 0 76,557 0
________ ________ ________ ________
(7,386) 1,402 57,724 3,501
Net loss $ (111,122) $ (70,498) (119,594) (119,121)
Loss per share(Note 7) $ (.02) $ (.01) $ (.02)$ (.02)
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,326,074 6,496,188 6,411,131 6,496,188
========= ========= ========= =========
See accompanying notes to condensed financial statements.
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Cash Flows (Note 1)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
________ ________ ________ ________
Cash flows from operating activities:
Net income (loss) $ (111,122) $ (70,498) $ (119,594) $ (119,121)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depletion and depreciation 7,271 16,471 16,763 34,618
Gain on sale of assets -- -- (76,557) --
Change in assets and liabilities:
(Increase) decrease in accounts
receivable 23,931 (77,401) 409,503 150,679
(Increase) decrease in prepaid
expenses 2,782 517 693 (3,186)
(Decrease) increase in accounts
payable (19,043) 165,993 (235,221) 44,350
(Increase) decrease in deposits -- 2,058 (550) --
(Decrease) increase in accrued
liabilities (8,334) -- (33,493) --
_______ _______ _______ _______
Net cash provided (used) by
operating activities (104,515) 37,140 (38,456) 107,340
_______ _______ _______ _______
Cash flows from investing activities:
Proceeds from sale of assets -- -- 229,957 --
Investment in Limited Liability Co. (6,206) (150,000) (58,432) (150,000)
Additions to property and
equipment (19,588) (2,691) (13,752) (9,308)
_______ _______ _______ _______
Net cash provided (used) by
investing activities (25,794) (152,691) 157,773 (159,308)
_______ _______ _______ _______
Cash flows from financing activities:
Purchase of Kane stock (150,000) -- (150,000) --
Issuance of debentures -- 203,125 -- 203,125
Issuance of short tern note -- 100,000 -- 100,000
Discount on note payable 381 -- 381 --
_______ _______ _______ _______
Net cash provided (used) by
financing activities (149,619) 303,125 (149,619) 303,125
_______ _______ _______ _______
Increase (decrease) in cash (279,928) 187,574 (30,302) 251,157
Cash beginning of period 329,453 134,403 79,827 70,820
_______ _______ _______ _______
Cash end of period $ 49,525 $ 321,977 $ 49,525 $ 321,977
======= ======= ======= =======
See accompanying notes to condensed financial statements.
NOVA NATURAL RESOURCES CORPORATION
Notes to Condensed Financial Statements
Six Months Ended March 31, 1997 and 1996
(1) The condensed financial statements included herein are unaudited. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, have been made which are necessary for a fair presentation of the
financial position of the Company at March 31, 1997 and 1996 and the results
of operations for the three and six month periods ended March 31, 1997 and
1996. Certain amounts have been reclassified for comparability with the 1996
presentation. Quarterly results are not necessarily indicative of expected
annual results because of fluctuations in the price received for oil and gas
products, demand for natural gas, kaolin and other factors. For a more
complete understanding of the Company's operations and financial position,
reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations herein and the financial statements of
the Company, and related notes thereto, filed with the Company's annual
report on Form 10-KSB for the year ended September 30, 1996, previously filed
with the Securities and Exchange Commission.
(2) On November 14, 1996, the Registrant sold at an auction conducted by the
Oil & Gas Asset Clearinghouse in Houston Texas several oil and gas producing
assets and leasehold interests, primarily overriding royalty interests in
producing oil & gas wells in the Wyoming Overthrust Belt. Proceeds from this
sale, net of commissions and direct selling costs were $229,957. The gain on
the sale was $76,550. The sale was effective as of November 1, 1996. The
bulk of the interests were sold to a Denver, Colorado based firm not
affiliated with the Company, which was the successful bidder among a group of
bidders at the auction for the greater portion of the oil & gas assets and
interests referred to above.
(3) In December, 1986 the Company issued 2,687,682 shares of Convertible
Preferred Stock to the Company's Chairman and to a principal shareholder in
settlement of $1,700,000 in convertible debentures plus related accrued
interest of $426,682 and $561,000 in bank debt repaid by the Chairman and the
principal shareholder on behalf of the Company. The Preferred Stock is
convertible into 5,375,364
shares of the Company's Common Stock. TheShares of Preferred Shares contain 2 for 1 voting privileges, have a $1.00 liquidation
preference and have no stated dividend rate. In February, 1997Stock are
not entitled to cumulative dividends, but are entitled to receive
dividends on the Company
repurchased 510,342same basis as holders of shares of common stock and 895,415 shares of convertible
preferred stock from a major shareholder in settlement of a dispute for
$150,000 in cash to be paid at closing, and additional payments based on
revenues from either the operation of or the sale of its cement-grade kaolin
mine of up to an aggregate value of $70,008 over a period of years. This
note is a non-interest bearing note. The Company has accounted for this note
as a Note Payable of $66,408 to account for the expenses that will be
subtracted from this note, and a Discount on Note Payable of $20,535 to
account for the present value of the payments of $45,873. The Common Stock
and Preferred Stock were carried on the Company's books at a price higher
than the purchase price. This difference was credited to Additional Paid in
Capital. The Company may also purchase a portion of its common stock inStock.
In the event of the saledissolution, liquidation or winding up of its kaolin mine upon the assertion of appraisal rights
by shareholders who dissent from a vote to approve such sale.
(4) On April 1, 1996 the Company,
organized NovaChek to recover precious
metals from off-shore mining leases located near Nome, Alaska, utilizing a
dredging operation.
The Company contributed mineral leasehold interests and $118,750 in cash for
a 42% voting interest in NovaChek. An additional 4.125% interest in NovaChek
is held by affiliatesthe holders of the Company. NovaChek is managed by the Company and
Chek Technologies and Exploration, LLC (Chek) which owns a 38.75% interest in
NovaChek. The Company isPreferred Stock shall be entitled to receive an annual management fee of
$65,000 from NovaChek. To date, no management fee has been collected or
recorded by the Company.
A number of significant decisions require the approval of both the Company
and Chek. Such decisions include, but are not limited to certain borrowings,
capital expenditures and asset disposals.
NovaChek has not commenced dredging operations on a commercial basis, Company
management estimates NovaChek will require approximately $100,000 during
fiscal 1997 to ready the dredge for 1997 operations, and fund operations
through the end of June, which should be sufficient to enable the project to
be self-sufficient, provided commercial gold production can be obtained.
Chek Technologies is investing approximately $60,000 of the needed funds, and
approximately $40,000 of additional funds must be raised. There is no
assurance that these funds can be raised, nor that the dredge can be operated
economically. Accordingly, the Company's ability to recover its investment
in NovaChek is dependent upon the results of future development, including
obtaining financing for such development. The availability of financing and
the results of such future development are not presently determinable.
Accordingly, the financial statements do not include any adjustments relating
to the recoverability of the Company's investment such costs that might
result from the outcome of these uncertainties.
In accordance with the NovaChek revised operating agreement, which must be
approved by a majority of the members, which is expected, the first $250,000
in distributions will be allocated to investors other than the Company and
Chek based upon their relative voting percentages. The next $150,000 in
distributions will be made to the Company. The Company, Chek and remaining
investors will receive 19.13%, 14.2% and 66.67%, respectively, of the next
$500,000 in distributions and 27%, 23% and 50%, respectively, of the
following $500,000 in distributions. After these initial preferential
distributions are made, all subsequent distributions will be allocated based
on voting percentages.
The condensed balance sheet and statement of operations of NovaChek at March
31, 1997 and for the period from January 1, 1997 through March 31, 1997 are
presented below.
BALANCE SHEET OF NOVACHEK
Cash and other assets $ 8,128
Mineral property interests 45,000
Delay Rentals 42,822
Mining and related equipment, net 289,134
________
Total assets $385,084
Accounts payable $102,333
Short term notes payable 39,600
Stockholders' equity 243,151
________
Total liabilities and stockholders'
equity $385,084
STATEMENT OF OPERATIONS OF NOVACHEK
Sales $ 0
Other income 5
Marketing expense 0
Operating expenses (13,170)
________
Net Loss $(13,165)
(5) Kaolin receivables of $376,392 were collected during the quarter ended
December 31, 1997. Due to the seasonal nature of the kaolin business, no
sales were made after this period until April, 1997.
(6) The Company has entered into an agreement for the sale of its kaolin
mine. If the sale is approved by shareholders, the Company will receive a
total of $700,000 for the Cement Kaolin Mine, including $125,000 in cash at
closing, an aggregate of $450,000 in non-interest bearing semi-annual
installments on August 15 and December 15 of each year until August 15, 2001,
and a final payment of $125,000 on December 15, 2001. Up to $70,008 of these
proceeds will be paid to Thomas F. Kane, a former director, as part of the
Company's purchase of his Common and Preferred Stock, over the same period as
the NCA payments. The Company will retain both a mortgage and a security
interest covering the property being sold in order to secure full payment of
the purchase price. See Managements Discussion and Analysis for further
details concerning this transaction.
(7) Net loss per common share is determined by dividing net loss
attributable to common stock by the weighted average number of common shares
outstanding during each period. A fully diluted losspar
value per share, is not
computed because conversiontogether with all dividends thereon accrued or in
arrears, out of the Preferred Shares mentioned above, and
outstanding options would be antidilutive
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Management's discussion of anticipated future operations contains predictions
and projections which may constitute forward looking statements. The Private
Securities Litigation Reform Act of 1995, including provisions contained in
Section 21E of the Securities & Exchange Act of 1934, provides a safe harbor
for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results of other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following:
(a) The Company may not be able to obtain the additional
funding necessary to continue operations in its Nome
gold prospect and/or the funds actually necessary to
operate that project may be significantly greater than
those anticipated by management.
(b) Borax may determine not to pursue or to substantially
delay pursuing the Company's paper-grade kaolin venture.
(c) The Company may not be able to find industry partners
for its oil and gas and mineral prospects.
(d) Proceeds from the Company's sale of certainany assets may
be insufficient to purchase assets which produce income
sufficient to satisfy the Company's working capital needs.
(e) The Company may be unable to purchase, or to purchase
at a profitable price, mineral assets which meet the
Company's operational criteria.
RESULTS OF OPERATIONS
The Company realized net losses for the three month period and six
month period ended March 31, 1997 of $111,122 and $119,954, respectively,
compared to net losses of $70,498 and $119,121 for the same periods in
1996.
Mineral sales, all of which in the three month fiscal period were
royalties on gravel sales, decreased $17,670 to $1,913 for the three months
ended March 31, 1997 compared to mineral sales of $19,583 for the same
period in 1996. The difference between the 1997 period and the 1996 period
is wholly due to a more accurate accrual of gravel sales royalties in the
first three months of fiscal 1997 than in the first three months of the
prior fiscal year. For the six months ended March 31, 1997 and 1996,
mineral product sales were $193,469 and $162,091, respectively. The
increase in the 1997 period reflects higher kaolin sales due to increased
kaolin purchases by the Company's sole customer and more efficient kaolin
shipments than in the comparable fiscal period. Poor railcar turnaround
times in the 1996 period limited the Company's ability to supply customer
needs in that period. This was corrected in the 1997 period. Mining
costs, including transportation and royalties in the 1997 six month period
were higher as a percent of sales than in the 1996 period. Costs increased
at a more rapid rate than prices due to higher transportation costs and
timing differences in the recognition of direct mining costs.
Oil and gas sales for the three months and six months ended March 31,
1997 decreased $22,260 and $25,282, respectively, to $36,106 and $77,722
compared to $58,366 and $103,004 for the three months and six months ended
March 31, 1996. The Company sold several oil & gas producing assets as of
November 1, 1996, primarily overriding royalty interests in producing oil
& gas wells in the Wyoming Overthrust Belt. In addition, the Company sold
a small portion of its oil production in September, 1996. The decrease in
oil and gas sales is primarily attributable to the lower volume of oil and
gas produced net to the Company's interest as a result of these sales,
which more than offset the positive effect of substantially higher oil and
gas prices in the fiscal periods compared to the comparable periods. The
sales volumes and average sales prices during the periods were as follows:
Three Months Ended
March 31, 1997 March 31,1996
Sales
Oil (bbls) 1,441 2,724
Gas (MCF) 3,667 17,557
Average Sales Price
Oil ($/Bbl) $19.00 $14.61
Gas ($/MCF) $ 2.30 $ 1.06
Six Months Ended
March 31, 1997 March 31,1996
Sales
Oil (bbls) 2,805 4,764
Gas (MCF) 12,876 28,337
Average Sales Price
Oil ($/Bbl) $19.20 $15.67
Gas ($/MCF) $ 1.49 $ 0.96
Mining costs, including transportation and royalties were $4,788 for
the three months ended March 31, 1997 compared to $6,119 for the same
period in 1996. The decrease is due to timing differences in the accrual
of gravel royalties Mining costs were $159,355 for the six months ended
March 31, 1997 compared to $101,033 for the same period in 1996. The
increase in mining costs in the six months is due to the increase in kaolin
production and sales in the 1997 period. Mining costs were higher as a
percent of sales than in the 1996 period. Kaolin mining costs increased at
a more rapid rate than prices, due to higher transportation costs and
timing differences in the recognition of direct mining costs.
Oil and Gas lease operating expenses including production taxes
increased $2,919 and $719 for the three months and six months ended March
31, 1997 as compared to 1996. The increase is due primarily to increased
workover expenses in the 1997 period. The production sale in November was
a sale of royalty interests, which have a much lower level of associated
production costs than working interest production. Hence, the sale did not
reduce production costs in proportion to the reduction in oil and gas sales
revenue resultant from the sale.
General and administrative expenses decreased slightly for the three
months ended March 31, 1997 as compared to the same period in 1996. These
expenses increased $19,545 for the six month period. The decrease in the
three month period was primarily due to close attention to administrative
overhead expenses, which offset higher legal expenses, primarily those
associated with the planned sale of the Company's kaolin mine. Increased
legal expenses and accounting fees also were primarily responsible for the
increase in general and administrative expenses in the six month period.
Legal expenses were higher due to the negotiations and associated legal
documents required by the planned sale of the Company's kaolin mine, and
connected with the settlement of a dispute with a major shareholder. Both
of these events are non-recurring, and neither impacted the 1996 period.
Accounting expenses were higher in the 1997 period primarily due to audit
work relating to the Company's investment in NovaChek Limited Liability
Company, which had not been formed in the 1996 period.
Depletion, depreciation, and amortization decreased 56% to $7,271 and
52% to $16,763, respectively, in the three months and six months ended
March 31, 1997, compared to $16,471 and $34,617 in the fiscal 1996 period.
This decrease was primarily the result of the sale of producing assets,
which substantially reduced the full-cost pool.
The Company's share of losses of NovaChek Limited Liability Company in
the three months and six months ended March 31, 1997 were $5,529 and
$11,819, respectively. NovaChek Limited Liability Company had not been
formed in the 1996 fiscal periods.
Interest income increased to $2,690 and $5,866 in the three months and
six months ended March 31, 1997, respectively, compared to $1,402 and
$3,501 in the 1996 periods, reflecting more cash on hand invested in
short-term obligations. Interest expense in the three months and six
months ended March 31, 1997 increased from zero to $4,547 and $12,880,
respectively, due to the issuance of interest-bearing convertible
subordinated debentures in the third quarter of fiscal 1996. There were no
such debentures outstanding in the comparable 1996 fiscal periods. A gain
on the sale of producing oil and gas assets of $76,557 was realized in the
six months ended March 31, 1997. There were no asset sales in the 1996
period.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary source of cash flow during the six months ended
March 31, 1997 was the collection of accounts receivable and proceeds from
the sale of assets. Net proceeds from the sale of oil and gas assets of
$229,957 were realized in the six months ended March 31, 1997. There were
no such asset sales in the 1996 period. Cash used by operations totaled
$38,456 for the six month period ended March 31, 1997 as compared to cash
provided by operations of $107,340 for the same period in 1996. Although
revenues increased $6,096 in the 1997 period, expenses were $60,792 higher,
due primarily to higher mining costs and an increase in general and
administrative costs. Additionally, accounts payable decreased $235,221 in
the 1997 period, compared to an increase in the accounts payable in the
1996 period of $44,350, a difference between the two periods of $279,571,
more than offsetting the $258,824 increase in the collection of receivables
in the 1997 period as compared to the 1996 period. Cash and cash
equivalents for the period decreased $30,302 resulting in cash on hand at
March 31, 1997 of $49,925, compared to cash on hand at March 31, 1996 of
$321,977. The Company purchased 510,342 shares of common stock and 895,415
shares of convertible preferred stock from a major shareholder in
settlement of a dispute for $150,000 in cash (plus additional future
consideration) in the 1997 six month period. No such stock purchase took
place in the 1996 period. In addition, in the 1996 period, the Company
issued $203,125 of convertible subordinated debentures and issued a short
term note for $100,000, which two events, net of a $150,000 investment in
NovaChek Limited Liability Company, were chiefly responsible for the
increase in cash in the 1996 period.
CAPITAL RESOURCES-UTILIZATION OF CAPITAL
For the six month period ended March 31, 1997, the Company reduced
accounts payable by $235,221. Accrued liabilities decreased $33,493.
Additions to property and equipment were $13,752, and investment in and
advances to NovaChek Limited Liability Company were $58,432, resulting in
cash provided by investing activities, net of $229,957 from the sale of
assets, of $157,773. In the comparable period, net cash used by investing
activities was $159,308, primarily due to the $150,000 investment in
NovaChek Limited Liability Company. All funds for capital expenditures for
the remainder of the year are expected to be provided by proceeds from
operation of the kaolin mine until closing of the sale of the mine, from
the sale of the Company's kaolin mine, if approved by the Company's
shareholders, from short-term borrowings, from other operating cash flow,
and from existing cash balances. In connection with the repurchase of
stock from a major shareholder in settlement of a dispute for $150,000 in
cash, additional payments based on revenues from either the operation of or
the sale of the Company's cement-grade kaolin mine of up to an aggregate
value of $70,008 must be paid over a period of years. The Company
anticipates the portion of such payments which may be due in the 1997
fiscal year could amount to approximately $19,000. The Company may also
purchase a portion of its common stock in the event the sale of its kaolin
mine is approved by shareholders, which is likely, by offering shareholders
dissenter's rights. While it cannot be determined in advance how many
shares might be purchased, nor the exact price of such shares, assuming a
purchase price of $.05 per share, and the purchase of from 800,000 to
2,000,000 shares (the number of shares to be purchased will be lowered by
the fact that none of the principals of the Company will be selling any of
their shares),the Company estimates the cost of such repurchase of stock at
between $40,000 and $100,000. It isremaining after the
Company's present intention to
finance such repurchase from internal cash flowdebts have been paid in full and cash resources, but the
Company may offer to sell preferred and/before any payment is made
or common stock in a private
placement to replace all or a portion of these funds and provide additional
capital to acquire new sources of cash flow.
LIQUIDITY
At March 31, 1997, the Company's working capital surplus totaled
$26,853 as compared to a working capital surplus of $198,637 at September
30, 1996. Liquidityassets set apart for the six months ended March 31, 1997 was provided
by proceeds from the November sale of oil & gas producing assets and
leasehold interests, primarily overriding royalty interests in producing
oil & gas wells in the Wyoming Overthrust Belt and by the collection of
receivables. However, liquidity was reduced by the $150,000 stock
repurchase, the $119,594 operating loss, reductions in accounts payable and
accrued liabilities, by investment in NovaChek Limited Liability Company,
and additions to property and equipment. Both the $150,000 stock
repurchase and the investment in NovaChek are non-recurring events.
Based on cash flow projections through 1997, it is anticipated that
the Company will have adequate cash resources if it continues to operate at
current levels, although short-term borrowings will have to be made due to
timing differences in the payment of kaolin mining costs and the receipt of
payment for kaolin sales. Because the Company has sold a portion of its
oil and gas producing assets, and oil and gas sales from its other
properties continue to decline, and the Company has only one customer for
its kaolin, the cash flow generated by oil, gas and kaolin sales is not
sufficient to generate positive cash flow. In the event the sale of its
kaolin mine takes place, cash resources will be enhanced over the next
twelve months, and further payments pursuant to the sale will be received
over the next five years, although the Company may haveholders of Common Stock.
The Articles of Incorporation provide protection to expend a portionholders of
its cash resources to repurchase all shares tendered pursuant to the
offering of dissenters' rights. The Company has permitted a gravel pit on
two leases in Minnesota. A local contractor mined and marketed the gravel
in 1996 and paid the Company a royalty based on gravel sold. It is
anticipated that further gravel royalties may be realized from this
property in 1997. The Company will aggressively seek other sources of cash
flow in 1997, including the acquisition of assetsPreferred Stock against mergers or of other companies,
mergers, and private and/or public financing.
The Company used $150,000 of the proceeds from the sale of its overriding
royalty interests to purchase the shares of common and preferred stock held by
Thomas Kane. The rest of the proceeds from the sale of the royalty interests
were added to working capital. Up to $70,008 in additional funds will be
required in connection with the purchase of Mr. Kane's stock over the next
five years, (an estimated $19,000 in fiscal 1997). These amounts will be
funded from operating cash flow, working capital, and cash payments from the
sale of the cement-grade kaolin mine, as needed.
Management contemplates applying the majority of the proceeds from the
sale of the cement-grade kaolin mine to the development of new business and
the acquisition of new mineral properties, including (1) an attempt to
identify and acquire on a reasonable basis a kaolin or other similar
industrial minerals mine in a more favorable marketing ares, where good
transportation facilities and ready access to numerous markets provide a more
favorable long-term environment in which to operate and (2) identification of
potential acquisition candidates, ideally small mineral companies or the
mineral operations of larger companies which could provide immediate cash flow
and the opportunity for future growth. The potential for liquidity afforded
by free-trading stock and an interest in Nova properties which offer the
potential for significant development, not otherwise available to the
stockholders of potential acquisition candidates, may facilitate Nova's
ability to consummate such acquisitions. The majority of the $700,000 in
proceeds of the sale of the cement-grade kaolin mine and the recovery of
$50,000 in reclamation deposits will be used to replace the cash flow which
would otherwise have been provided by continued operation of the kaolin mine
and to offset cash flow deficits. Since cash proceeds from the mine sale to
be received in the calendar year ended December 31, 1997 plus reclamation
recoveries will amount to $275,000, with the balance to be received over the
five years ended December 31, 2001, the Company may be required to borrow
against these future cash receivables or establish a payment schedule
coincident with receipt of these funds in order to acquire new assets.
The general escalation in oil and gas prices which took place in 1996 has
resulted in a resurgence in exploration activity in the Rocky Mountain region.
As the Company frees up lease acquisition capital from its present prospects,
it intends to acquire additional prospective acreage in selected areas where
it believes it can put together drilling prospects.
The Company holds a 50% interest in 1600 acres of State of Utah oil and
gas leases in the Great Salt Lake. The other 50% is held by the McDonald
Trust. The Company and the Trust have jointly been attempting to interest
an industry partner in developing the heavy oil resources known to exist
under these leases, which resources were estimated by Amoco Production Company
to exceed 90 million barrels in place. Amoco estimated that 1% to 10% of the
oil in place might be recoverable. However, Amoco abandoned its effort to put
the leases into commercial production using the technology then available, and
dropped the leases in 1989.
Neither the Company nor the Trust has the expertise or the financial
ability to develop this heavy oil resource on its own. In March, 1997, the
Company and the Trust entered into an agreement with Roaring River Resources
LLC (Roaring River"), an unaffiliated third party, pursuant to which Roaring
River was granted an option to acquire the leases and attempt to put them into
production, using the improved technology now available. The Company and the
Trust will each retain a 1.5% overriding royalty if the option is exercised.
Roaring River made a payment of $5,000 on April 16, 1997 to maintain the
option, and a further payment of $20,000 must be made on or before July 15,
1997 to keep the option in effect. Roaring River has until September 8, 1997
to exercise the option. If the option is exercised, a final payment of
$225,000 (of which the Company will receive half) must be made. At present,
it cannot be determined whether the option will be exercised, nor can it be
ascertained with certainty when, or if, the properties will be put into
production.
The Company's ability to continue as a going concern will depend on its
success in developing additional sources of cash flow. As discussed,
the Company will attempt to acquire new cash-flowing assets in the industrial
minerals segment, will evaluate potential acquisitions or mergers, and may
acquire oil and gas production interests, using the capital derived from the
sale of the cement-grade kaolin mine. The Company may also attempt to raise
capital through a private placement of stock. If the Company's efforts to
obtain industry drilling commitments on its oil and gas exploration properties
are successful, and commercial production is established on at least one of
these properties, the Company could realize cash flow exceeding that of the
oil and gas properties which were sold, particularly as development proceeds.
NovaChek has raised sufficient funding to initiate gold production efforts
and maintain them through at least mid-June on the NovaChek properties, and is
very close to raising monies required to continue through the end of June, at
which point revenues from gold sales should enable the project to be
self-funding, if the mining effort proves successful. If commercial gold
production can be established in the 1997 season, the Company should recover
at least a portion of, and perhaps all, of the funds it has advanced to
NovaChek, and cash flow from gold production will have been established.
There is no guarantee of success in any of these projects. The Company's
plan to restore financial viability is to continue to pursue the development
of its properties by third parties at minimal cost to the Company and to
vigorously pursue the acquisition of producing properties which will supply
needed cash flow. The Company will generate more than sufficient cash over
the twelve months ended March 31, 1998 to support its operations during that
period, without any contribution of cash from the drilling arrangements on any
of its oil and gas prospects or from NovaChek. However, without additional
sources of cash flow, the Company will not generate sufficient cash from
operations alone to offset the cost of operations. Although the Company can
internally fund the monies needed to repurchase stock pursuant to the offer
of dissenter's rights, the capital so used may be replaced by the proceeds of
a private placement, in order to assure that working capital is adequate.
Proceeds from the exercise of the option granted to sell its working interest
in its Great Salt Lake prospect, and/or drilling arrangements on one or more
of its oil and gas prospects -- all of which call for front-end fees, and/or
the establishment of commercial production on the NovaChek properties, none of
which events are assured, would generate additional cash to be used to offset
operating losses and fund the elements of the Company's business plan.
The asset sales undertaken by the Company have and will reduce operating
risk, provide more assurance of near-term cash flow from those assets than
would otherwise be the case, and increase the Company's capital in the near
term. On a long-term basis, Management must employ the proceeds from these
asset sales in the development of the Company's remaining assets and to
acquire new assets in order to generate cash flow to support operations and to
offset what would otherwise be the gradual liquidation of the assets sold were
the proceeds of those sales used simply to fund operating losses. There can
be no assurance that Management will be successful in this endeavor.
SALE OF THE COMPANY'S KAOLIN MINE
Pursuant to a contract dated January 25, 1997, the Company agreed,
subject to shareholder approval, to sell its cement-grade kaolin mining
operations and property (the "Cement Kaolin Mine") near Redwood Falls,
Minnesota, to Northern Con-Agg, Inc., an unaffiliated Minnesota
corporation. A portion of the Cement Kaolin Mine is located on lands which
are currently subject to a joint venture between the Company and U.S. Borax
Inc. ("Borax"), which was formed in 1993 primarily to explore, develop and
produce high quality paper-grade kaolin. No paper-grade kaolin has yet
been sold from the joint venture property. Borax has agreed to release the
portion of the paper-grade kaolin property occupied by the Cement Kaolin
Mine from the joint venture to permit the Company's sale of the mine to
NCA. The Company will be selling all of its cement-grade kaolin operations
to NCA, while retaining its interest in the paper-grade joint venture. The
Cement Kaolin Mine encompasses 314 acres, and the paper-grade kaolin
property retained by the Company encompasses 4628.59 acres. After the sale
to NCA, ownership of the cement-grade kaolin property will be separate and
distinct from ownership of the paper-grade kaolin property. Except for the
inclusion of an immaterial portion of the paper grade kaolin prospect in
the sale to NCA, the sale will have no impact on the Company's joint
venture with Borax.
Under the terms of the purchase and sale agreement with NCA (the "NCA
Agreement"), NCA will acquire approximately 78 fee acres owned by the
Company and an additional 236 acres leased by the Company, as well as the
inventory, equipment, contracts, permits and other personal property held
by the Company in connection with these cement-grade mining operations.
NCA proposes to continue the current cement-grade operationsconsolidations of the Company and
has agreed to turn over to the Company any profits which it
may earn during a 21 year period after the date of closing as a result of
sales of kaolin produced from the property to paper manufacturers. The
Company agreesprovide that, if it or any joint venture of which it is a member
sells kaolin to the cement-industry in Minnesota, Iowa, North Dakota, South
Dakota or Wisconsin during a five year period following the closing, the
Company it will pay to NCA the sum of $30,000 for each year in which any
sale occurs.
NCA will pay a total of $700,000 to the Company for the Cement Kaolin
Mine, including $125,000 in cash at closing, an aggregate of $450,000 in
non-interest bearing semi-annual installments on August 15 and December 15
of each year until August 15, 2001, and a final payment of $125,000 on
December 15, 2001. Up to $70,008 of these proceeds will be paid to Thomas
F. Kane, a former director, as part of the Company's purchase of his Common
and Preferred Stock, over the same period as the NCA payments. The Company
will retain both a mortgage and a security interest covering the property
being sold to NCA in order to secure full payment of the purchase price.
NCA will assume liability for all existing contracts relating to the
property, although the Company will continue to have liability for any
conduct before the closing date and, any contracts not disclosed to NCA.
Included among the contracts assumed by NCA is an agreement with Union
Pacific Railroad which requires the Company to pay the railroad for a
minimum usage of 300 rail cars, whether actually used by the Company. NCA
will assume this obligation and Nova will have no further liability for
railcar usage. The Company believes that it has disclosed all pertinent
contracts to NCA. The Company intends to secure appropriate lessor
consents to eliminate any liability to the lessor following assignment of
the lease.
If NCA expands the current cement-grade mining operations, the lessor
of the Mine Property will have to be relocated from her home on the
property, which recently has been appraised at $25,000. When this occurs,
NCA will pay the first $25,000 of relocation costs, Nova will pay 50% of
the costs, if any, between $25,000 and $75,000, and Nova will pay the
entire cost, if any, in excess of $75,000. Shortly following execution of
the NCA Agreement, the Company incurred approximately $5,800 in additional
drilling and analysis costs to meet requests of NCA for additional
exploration data.
Prior to the NCA Agreement, NCA had no relationship to the Company,
its officers or directors. The Company has not secured an independent
opinion concerning the fairness of the consideration to be paid by NCA, but
the Company's officers believe such consideration to be appropriate based upon the Company's prior net income from the property, the anticipated
kaolin reserves, and the demand for cement-grade kaolinissuance of stock dividends on Common Stock
or changes in the area. There
will be no change in the rightsnumbers of security holders of the Company as a
result of this vote, except with respect to the holders of Convertible
Debentures, as described below. The Company is not in default with respect
to obligations under any of its securities.
If shareholder approval for the sale of the cement-grade kaolin mine
is not received, Nova will continue to operate the mine as it has in the
past and continue to pursue additional customers and markets for the
kaolin. The Company would seek to retain its current customer and attempt
to obtain business from a previous customer. Any additional customers
could not be obtained for the current mining season. The Company would
consider other alternatives, such as entering into joint venture
arrangements for the marketing and sale of kaolin, possibly with the
company which desires to purchase the mine, and/or other companies which
supply materials to the cement industry. If shareholder approval of the
sale is not obtained, approximately $20,000 in transactional costs will not
be recovered.
Potential Impact of the Proposed Sale on the Company's Convertible
Debentures
The Colorado Business Corporation Act (the "Act") requires approval of
the majority of shares voting at a duly noticed and conducted meeting for
the sale of all or substantially all of a corporation's assets outside of
its normal course of business. The Company has determined that, while the
Cement Kaolin Mine is a principal asset, because the remaining assets and
business are not insubstantial and proceeds of the sale are intended to be
used to continue the Company's business in the same fashion, a shareholder
vote is not required by law. Nonetheless, since the Cement Kaolin Mine
sale is a material transaction, the Company believes that its shareholders
should be informed about and vote upon the approval of that transaction.
As part of its organization and capitalization of NovaChek Limited
Liability Company, an Idaho limited liability company formed to develop
part of the Company's gold prospect in Nome, Alaska, the Company sold an
aggregate of $250,000 of convertible subordinated debentures (the
"Debentures"). The Debentures require semi-annual payments of interest and
payment of principal and accrued interest on April 1, 2001. At the option
of its holder, each Debenture matures and is fully payable upon the
Company's "sale, exchange, base or other disposition of all or
substantially all of [its] assets." Notwithstanding the Company's belief
that the sale of the Cement Kaolin Mine is not such an event, upon
litigation brought by a Debenture holder, a court may disagree and order
early payment of the Debentures. Such a payment would have a materially
adverse impact on the Company, require the use of proceeds from the Mine
sale and threaten the ongoing viability of the Company.
Vote Upon Sale
The affirmative vote by a majority of all of the shares of Common and
Preferred Stock entitled to vote as of May 1, 1997 is required for approval
of the agreement to sell the Cement Kaolin Mine.
Rights of Dissenting Shareholders
The Act affords a shareholder of a Colorado corporation the right to
dissent from certain actions requiring shareholder approval and to require
that the corporation purchase the shareholder's stock at a "fair value"
(the "right of appraisal"). If a vote were required to approve the sale of
the Cement Kaolin Mine (which the Company does not believe), rights of
appraisal still would not be available to dissenting shareholders because
of an exemption for Corporations like Nova whose common stock is owned by
more than 2,000 shareholders.
Notwithstanding the absence of a required vote and presence of an
exemption from rights of appraisal provided by the Act, the Company has
decided to offer to purchase all of theoutstanding shares of Common Stock, of any
shareholder who does not vote in favor of the
Cement Kaolin Mine sale and
properly asserts his right of appraisal. Management believes that the
conjunctionformula for converting Preferred Stock into Common Stock shall be
changed. The Company is required to reserve out of its Cement Kaolin Mine sale and its sale of oil and gas
overriding royalty interests and purchase of the stock of Thomas F. Kane
(as described below) represent material events which might prompt a
shareholder to sell his Common Stock if an adequate market for that Stock
existed. The Company also recognizes that the absence of an active trading
market impedes such a sale. As such, management wishes to afford
shareholders who disagree with these decisions or with the directors'
decision to continue operation of the Company the ability to sell their
Common Stock at a price which management believes is the appropriate market
price.
"Fair Value" is defined by the Act as "the value of the shares immediately
before the effective date of the corporate action to which the dissenter
objects, including any appreciation or depreciation in anticipation of the
corporate action except to the extent that exclusion would be inequitable."
Fair value imports a broader approach to valuation than "fair market
value". The most important factors are market value, investment or
earnings value and net asset value. For public companies, like Nova, great
weight is given to the stock's market price. Where the stock is thinly
traded, courts also consider several other elements including book value,
liquidity value, net asset value and capitalized earnings value. The
Company intends to use the bid price for its stock as the fair value. The
most recent bid price is $.05 per share in February, 1997. Management
believes that this price is higher than any value determined under any
other valuation theory. The Company purchased all the common stock of one
of its directors and a principal shareholder at $.03 per share, less than
the bid price of that stock at the time.
FUTURE TRENDS
Kaolin sales are seasonal in nature and the mining of kaolin is
dependent on favorable weather conditions, demand by cement companies for
this product, and other factors over which the Company has no control. The
Company has a sales contract with a cement company which expires in
December, 1997. The fact that the Company has only one purchaser for its
kaolin has had and will continue to have a significant negative impact on
the Company's cash flow and operations. In addition, the short line
railroad which directly serves the mine is in need of rehabilitation to
increase the reliability of the line and make it less susceptible to
weather delays. There is no such rehabilitation planned at present.
However, rehabilitation of this line has been needed for a number of years,
and an acceptable level of service has been maintained on the line through
normal maintenance procedures. This rail line has been offered for sale
by the owner/operator, and the level of service which will be offered by
the new owner, should a sale take place, cannot be determined.
The Company will use some of the proceeds from its asset sales for
working capital. Management contemplates applying the majority of the
proceeds to the development of new business and acquisition of new mineral
properties, includiong (1) an attempt to identify and acquire on a reasonable
basis a kaolin or other similar industrial minerals mine in a more favorable
marketing area, where good transportation facilities and ready access to
numerous markets provide a more favorable long-term environment in which to
operate and (2) identification of potential acquisition candidates, ideally,
small mineral companies or the mineral operations of larger companies which
could provide immediate cash flow and the opportunity for future growth. The
potential for liquidity afforded by free-trading stock and an interest in the
Nova properties which offer the potential for significant development, not
otherwise available to the stockholders of potential acquisition candidates,
may facilitate Nova's ability to consummate such acquisitions.
While management intends to pursue both options, the Company's current
projects in oil and gas exploration, paper-grade kaolin exploration, and gold
exploration will continue to be aggressively pursued. The Company has two
important oil and gas exploration properties which are ready for immediate
drilling, on at least one of which it believes it can obtain a drilling
commitment in 1997. Both are being extensively marketed to the industry. If
either or both of these properties are drilled, and a commercial discovery is
made, the Company will need capital to conduct development drilling. The mine
sale proceeds would provide the Company with the option to internally finance
this development, or to externally finance it on more favorable terms than
would otherwise be possible. Without liquid capital produced from the asset
sales, the Company's only option would be to further reduce its interest in
what would then be a successful project, which would not be in its long-term
best interests.
The prices the Company receives for its oil and gas products continue
to fluctuate, although current prices are generally higher than those
obtained last year. The Company's largest producing oil field, the North
Rainbow Ranch Unit, produces a heavy, sour crude. The price paid for this
crude is significantly less than for a higher quality crude. Since most of
the Company's oil sales are from this field, and it is in the latter stages
of its lifetime, when production is decreasing, it takes a significant
increase in oil prices for oil sales to increase. In addition, much of the
company's gas is sold on the spot market and such sales are subject to both
price and market demand fluctuations.
Sufficient funding has been obtained to initiate gold production
efforts on the NovaChek properties for the 1997 season, although
approximately $40,000 in additional monies will be required for additional
working capital for NovaChek to fund the project through the end of June,
after which time, if the project is successful, revenues from gold sales
should enable the project to fund working capital needs from internal cash
flow. Most of the additional $40,000 in funding has been arranged, and it
appears likely all or most of the additional monies needed will be obtained.
If commercial gold production can be established in the 1997 season, the
Company could recover at least a portion of, and perhaps all, of the funds
it has advanced to NovaChek, and cash flow from gold production will have
been established. It cannot be determined at this time whether NovaChek
Limited Liability Company's gold mining operations will be successful. If
commercial operations can be established on this property, the Company
should be able to generate cash flow from this investment in future years,
the level of which cannot be determined with certainty until such
operations have been established and maintained for a reasonable period of
time.
In March, 1997, the Company and the McDonald Trust entered into an
agreement with Roaring River Resources LLC ("Roaring River"), an unaffiliated
third party, pursuant to which Roaring River was granted an option to acquire
1600 acres of leases in the Great Salt Lake. The Company and the Trust will
each retain a 1.5% overriding royalty if the option is exercised. If the
option is exercised, the total payments to Nova and the Trust will be
$250,000.
RESIGNATION OF INDEPENDENT ACCOUNTANTS
On May 5, 1997, KPMG Peat Marwick LLP ("KPMG") notified the Company
that KPMG was withdrawing as auditor for the Company, effective May 2,
1997.
There have been no disagreements between the Company and KPMG during
the period for which KPMG served as the Company's auditors.
Company management felt that the Company should seek the services of
a smaller firm, which could offer the Company more cost-effective
accounting services.
At this time, the Registrant has not engaged a new auditor,authorized
but expects to do so expeditiously.
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA FINANCIAL STATEMENTS
The following unaudited condensed pro forma balance sheet assumes that
the sale of the kaolin mine and the purchase of the Kane stock occurred on
March 31, 1997 and reflects the March 31, 1997 historical balance sheet of
Nova Natural Resources Corporation giving pro forma effect to the Kaolin mine
sale. The sale of the Oil and Gas assets and the purchase of the Kane stock
were included in the historical financials. The unaudited pro forma balance
sheet should be read in conjunction with the historical statements and related
notes of Nova Natural Resources Corporation.
The following unaudited condensed pro forma statements of operations for
the six months ended March, 31, 1997 and for the year ended September 30, 1996
assumes that the sale of the kaolin mine, the purchase of the Kane stock, and
the sale of the oil and gas assets occurred on October 1, 1995. The pro forma
results of operations are not necessarily indicative of the results of
operations that would actually have been attained if the transactions had
occurred as of October 1, 1995. These statements should be read in
conjunction with the historical statements and related notes of Nova Natural
Resources Corporation.
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA BALANCE SHEETS (NOTE A)
March 31, 1997
(unaudited)
March 31, March 31, March 31,
1997 1997 1997
Historical Mine Sale Mine Sale
Adjustments Pro Forma
ASSETS
Current assets:
Cash (Notes B and C) $ 49,525 $ 175,000 $ 224,525
Accounts receivable:
Kaolin operations 0 0
Oil and gas operations 13,038 13,038
Other 9,991 9,991
_______ _______
Total 23,029 23,029
Prepaid expenses 3,248 3,248
_______ _______
Total current assets 75,802 250,802
Note Receivable(Note B) 0 575,000 575,000
Discount on Note Receivable(Note B) 0 (112,304) (112,304)
Mineral property interests, net of
accumulated depreciation and
depletion of 92,301 (Note B) 542,417 (434,325) 108,092
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,902,164 (Note D) 104,223 104,223
Furniture and technical equipment net
of accumulated depreciation of
132,155 38,852 38,852
Investment in and advances to NovaChek
Limited Liability Company 195,149 195,149
Deposits (Note B) 51,550 (50,000) 1,550
_______ _______ _______
$ 1,007,993 $ 153,371 $1,161,364
========= ========= =========
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA BALANCE SHEETS (NOTE A)
March 31, 1996
(unaudited)
March 31, March 31, March 31,
1997 1997 1997
Historical Mine Sale Mine Sale
Adjustments Pro Forma
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 46,866 $ 46,866
Accrued liabilities 2,083 2,083
_______ _______
Total current liabilities 48,949 48,949
Deferred Gain on Sale(Note B) 0 153,371 153,371
Note Payable(Note C) 66,408 66,408
Discount on Note Payable(Note C) (20,154) (20,154)
Convertible Debentures 250,000 250,000
_______ _______ _______
Total liabilities 345,203 153,371 498,574
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
5,000,000 shares authorized; 1,792,267
shares issued and outstanding(Note C) 1,792,267 1,792,267
Common stock, $.10 par value;
50,000,000 shares authorized;5,985,846
shares issued and outstanding(Note C) 598,585 598,585
Additional paid-in capital(Note C) 7,204,873 7,204,873
Accumulated deficit (8,932,935) (8,932,935)
_________ _________
Total stockholders' equity 662,790 662,790
Total Liabilities and Stockholders'
Equity $1,007,993 $ 153,371 $1,161,364
========= ========= =========
See accompanying notes to condensed pro forma financial statements.
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA STATEMENT OF OPERATIONS(NOTE A)
For the year ended September 30, 1996
(unaudited)
September 30, 1996
1996 Oil & Gas Oil & Gas Kane Mine Sale 1996
Historical Adjustments Pro Forma Adjustments Adjustments Pro Forma
Revenue:
Mineral sales(Note B) $1,291,131 $ $1,291,131 $ $ (1,224,192) $ 66,939
Oil and gas sales(Note D) 217,807 (63,991) 153,816 153,816
__________ __________ ___________ __________ _______
Total Revenue 1,508,938 (63,991) 1,444,947 (1,224,192) 220,755
Costs and expenses:
Mining costs,including
trans.and royalties(Note B) 1,049,387 1,049,387 (1,009,224) 40,163
Oil and gas lease operating
incl. production taxes(Note D) 106,952 (17,848) 89,104 89,104
Depletion, depreciation,
and amortization (Note B and D) 86,931 (21,952) 64,979 (21,620) 43,359
Mineral property abandonments 7,032 7,032 7,032
General and admin.(Note B) 385,593 385,593 (4,828) 380,765
__________ _________ _________ _________ _______
Total Expenses 1,635,895 (39,800) 1,596,095 (1,035,672) 560,423
Operating loss (126,957) (151,148) (339,668)
Other income(expenses):
Share of losses of NovaChek
Limited Liability Company (11,437) (11,437) (11,437)
Interest income(Notes B,C,D) 11,587 11,587 11,587
Interest expense (17,691) (17,691) (17,691)
Other 825 825 825
_________ ________ ________
Total Other (16,716) (16,716) (16,716)
Net loss (143,673) (167,864) (356,384)
Loss per share (Note 4) (.02) (.03) (.06)
Weighted average common
shares outstanding(Note C) 6,496,188 6,496,188 (510,342) 5,985,846
See accompanying notes to condensed pro forma financial statements.
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA STATEMENT OF OPERATIONS(NOTE A)
For the six months ended March 31, 1996
(unaudited)
March 31, 1996
1997 Oil & Gas Oil & Gas Mine Sale 1997
Historical Adjustments Pro Forma Adjustments Pro Forma
Revenue:
Mineral sales(Note B) $ 193,469 $ $ 193,469 $ (191,556) $ 1,913
Oil and gas sales(Note D) 77,722 (10,331) 67,391 67,391
__________ __________ ___________ _________ _______
Total Revenue 271,191 (10,331) 260,860 (191,556) 69,304
Costs and expenses:
Mining costs,including
trans.and royalties(Note B) 159,355 159,355 (153,584) 5,771
Oil and gas lease operating
incl. production taxes(Note D) 57,581 (3,715) 53,866 53,866
Depletion, depreciation,
and amortization (Note B,D) 16,763 (1,002) 15,761 (3,534) 12,227
Mineral property abandonments 60 60 60
General and admin.(Note B) 214,750 214,750 (6,410) 208,340
__________ _________ _________ _________ _______
Total Expenses 448,509 (4,717) 443,792 (163,528) 280,264
Operating loss (177,318) (182,932) (210,960)
Other income(expenses):
Share of losses of NovaChek
Limited Liability Company (11,819) (11,819) (11,819)
Interest income(Note B,C,D) 5,866 5,866 5,866
Interest expense (12,880) (12,880) (12,880)
Gain on sale of assets 76,557 76,557 76,557
_________ ________ _______
Total Other 57,724 57,724 57,724
Net loss (119,594) (125,208) (153,236)
Loss per share (.02) (.02) (.02)
Weighted average common
shares outstanding(Note C) 6,411,131 6,411,131 6,411,131
See accompanying notes to condensed pro forma financial statements.
NOVA NATURAL RESOURCES CORPORATION
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
On January 25, 1997, Nova Natural Resources Corporation agreed, subject
to shareholder approval, to sell its cement-grade kaolin mining operations and
property near Redwood Falls, Minnesota to Northern Con-Agg, Inc (NCA), a
Minnesota Corporation. NCA will pay a total of $700,000 to the Company for
the cement-grade kaolin assets, including $125,000 in cash at closing,
$450,000 in semi-annual installments until August 15, 2001, and a final
payment of $125,000 on December 15, 2001.
The accompanying condensed pro forma balance sheet includes pro forma
adjustments to give effect to the sale of the kaolin mine as of March 31,
1996. The condensed pro forma statements of operations give effect to the
sale of the kaolin mine as of October 1, 1995 and exclude the results of
operations of the kaolin mine for the respective periods presented.
During 1996, disputes arose between Thomas F. Kane, then a director, and
the other directors of the Company concerning decisions by the directors and
the business operations of the "Company." In resolution of these disputes,
the Company, Mr. Kane, and Brian Spillane, the Company's President and a
director, entered into an Agreement (the "Kane Agreement"), dated February 5,
1997, for the purchase of all of Mr. Kane's Common and Preferred Stock. By
terms of the Kane Agreement, the Company purchased from Mr. Kane 895,415
shares of his Preferred Stock and 510,342 shares of his Common Stock. All of
the stock purchased by the Company was retired upon completion of the
purchase. Mr.Spillane purchased from Mr. Kane 203,426 shares of Mr. Kane's
Preferred Stock and 115,942 shares of his Common Stock. Mr. Spillane paid
$50,000 for the stock he purchased from Mr. Kane. The Company paid $150,000
and agreed to pay an amount equal to 12% of the net proceeds from the sale of
the Cement Kaolin Mine less $13,992, as and when received by the Company.
Alternatively, if the Cement Kaolin Mine is not sold on or before June 1,
1997, the Company agreed to pay to Mr. Kane a $.10 per ton royalty, as and
when received by Nova, on sales of kaolin from the Mine up to an aggregate of
$70,008.
The accompanying condensed pro forma balance sheet does not include any
adjustments for the purchase of the Kane stock. This purchase is included in
the historical figures. The condensed pro forma statements of operations for
the year ended September 30, 1996 gives effect to the reduced number of shares
outstanding. The condensed pro forma statements of operations for the six
months ended March 31, 1997 do not have any adjustments as the purchase is
included in the historical figures.
On November 14, 1996, The Company sold at an auction conducted by the Oil
& Gas Asset Clearinghouse in Houston, Texas several oil & gas producing assets
and leasehold interests, primarily overriding royalty interests in producing
oil & gas wells in the Wyoming Overthrust Belt. Proceeds from this sale, net
of commissions and direct selling costs paid to the Clearinghouse were
$230,257. The sale was effective as of November 1, 1996.
The accompanying condensed pro forma balance sheet does not have any
adjustments for the sale of the Oil & Gas assets as these figures are included
in the historical figures. The condensed pro forma statements of operations
give effect to the sale as of October 1, 1995.
B. PRO FORMA ADJUSTMENTS FOR THE SALE OF THE KAOLIN MINE
The following pro forma adjustments have been made to the historical
balance sheet of Nova Natural Resources Corporation as of March 31, 1996 and
to the historical statements of operations for the six months ended March 31,
1996 and for the year ended September 30, 1996:
1. To record installment sale of the mine, including receipt of $125,000
at closing, note receivable of $575,000, present value discount of
$112,304, and deferred gain on sale of $153,371. The present value
discount was calculated using an imputed interest rate of 10%. This
interest rate is based on the fact that the Company issued
Convertible Debentures in 1996 with a 10% interest rate.
2. To decrease mineral property interests by $434,325 which was the
book value of the kaolin mine.
3. To adjust revenues to reflect loss of the mineral sales of $191,556.
4. To adjust expenses to eliminate all expenses related to the mineral
property, including mining costs of $153,584, DD&A of $3,534, and
General & Administrative expenses of $6,410.
5. To increase cash by $50,000 and decrease deposits by $50,000 to
reflect the release of a reclamation bond.
C. PRO FORMA ADJUSTMENTS FOR THE PURCHASE OF THE KANE STOCK
The following pro forma adjustments have been made to the historical
statements of operations of Nova Natural Resources Corporation for the year
ended September 30, 1996:
1. To decrease the weighted average common shares by 510,342 to reflect
the repurchase of the Kane common stock.
D. PRO FORMA ADJUSTMENTS FOR THE SALE OF OIL & GAS ASSETS
The following pro forma adjustments have been made to the historical
statements of operations of Nova Natural Resources Corporation for the six
months ended March 31, 1996 and for the year ended September 30, 1996:
1. To adjust revenues to reflect loss of oil and gas sales of $10,331.
2. To adjust expenses to eliminate all expenses related to the sold
properties including lease operating expense of $3,715, and DD&A
of $1,002.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market and is
listed on the Electronic Bulletin Board under the symbol "NVNU". The
following table sets forth the range of high and low closing bid prices of
the Common Stock for the year ended September 30, 1996 and 1995, as reported
by the National Quotation Bureau. These prices are believed to be
representative of inter-dealer prices, without retail markup, markdown, or
commissions, and may not necessarily represent actual transactions.
Bid Price
Fiscal 1996 High Low
First Quarter $ 0.050 $ 0.040
Second Quarter 0.040 1/32
Third Quarter 0.040 0.035
Fourth Quarter 0.035 0.020
Fiscal 1995 High Low
First Quarter $ 1/8 $ 0.020
Second Quarter 1/8 1/32
Third Quarter 0.110 0.020
Fourth Quarter 0.060 0.020
The bid and asked prices for the Company's Common Stock on September 30, 1996,
were $0.03 and $0.08, respectively, as provided by the National Quotation
Bureau, Inc.
ELECTION OF DIRECTORS
Unless directed otherwise, the Proxy will be voted in favor of electing the
five (5) persons listed below to serve as Directors of the Company until the
next Annual Meeting and until their successors are qualified and elected. All
of the nominees are now serving as Directors and were elected by Shareholders.
Thomas F. Kane, who was elected as a Director in the last election of
Directors, resigned as a Director effective February 17, 1997, as part of the
purchase of all of his shares of Common and Preferred Stock of the Company.
See "Purchase of Kane Stock." The Directors have determined not to fill the
vacancy caused by Mr. Kane's resignation. If any nominee becomes unavailable
for election prior to the meeting, the holders of the Proxies will vote for
the election of another qualified person (up to a total of five directors).
Name and Position Served as
Held With the Company Age Director Since
Robert E. McDonald (2) 68 April 22, 1986
Brian B. Spillane, President and 60 April 22, 1986
Chief Executive Officer (3)
Milton O. Childers 68 April 22, 1986
Exploration Manager and Assistant
Secretary
Robert W. Meier (2) 60 April 22, 1986
John R. Parker, Chairman of the 50 April 22, 1986
Board(1)
(1) Chairman of the Board since February 17, 1997.
(2) Member of the Executive Committee.
(3) President and Chief Executive Officer since April 1, 1989.
There is no family relationship between any director of the Company and any
other director or executive officer. The following paragraphs set forth an
account of the business experience of each of the Company's directors and
executive officers, including his principal occupation and employment.
Mr. McDonald is currently a consulting geologist and oil and gas
explorationist. He is also engaged in agricultural and real estate pursuits.
He was President of Nova Natural Resources Corporation from its inception
until his resignation on April 1, 1989. He resigned as Chairman of the Board
of the Company effective February 17, 1997. From January 1, 1984 to
September, 1986, he was President and Chairman of the Board of Nova Petroleum
Corporation, a predecessor to the Company. He graduated from theUniversity of
Kansas in 1951 with a B.S. degree in Geology. Mr. McDonald has published
several papers relating to oil and gas geology in the Rocky Mountain area.
Mr. Spillane became President and Chief Executive Officer of the Company
effective April 1, 1989. Prior to that time he was an independent consultant
to the oil, gas and minerals industry. From February, 1982 to November,
1987, he was employed as Executive Vice President of Barrett Resources
Corporation, a publicly held oil and gas exploration company, where his duties
primarily involved mergers, acquisitions, and capital financing in addition to
involvement in other operations. He graduated from the University of Detroit
in 1961 with a B.S. in Mechanical Engineering and holds an M.S. in Mechanical
Engineering from San Diego State University. He is a Registered Professional
Engineer (mechanical) in California.
Dr. Childers was President, Treasurer, and Director of Power Resources
Corporation until the merger in 1986 of Power Resources Corporation into Nova
Natural Resources Corporation, and holds B.S. and M.A. degrees in geology
from the University of Wyoming and a Ph.D. degree in geology from Princeton
University. Dr. Childers was an independent consulting geologist in the
Denver, Colorado area from 1986 to 1992 when he became the Company's
Exploration Manager. He became Manager of Exploration of the Company in
January, 1993, and continues in that capacity. He also now serves as
Assistant Secretary.
Mr. Meier served as President and Chairman of the Board of Nova Petroleum
Corporation from May 1979 to January 1, 1984. From 1984 to 1989 he was an
independent consulting geologist. From 1989 to 1994 he was Project Geologist
for Dames & Moore, specializing in the disposal of hazardous waste materials.
He is currently retired, but occasionally works as a consulting geologist.
He graduated from Northern Illinois University in 1961 with a B.S. degree in
Geology and in 1964 received an M.S. degree in Geology from Southern Methodist
University. Mr. Meier is a member of the American Association of Petroleum
Geologists and is a certified member of the Association of Professional
Geological Scientists.
Mr. Parker became Chairman of the Board on February 17, 1997. He is currently
a real estate developer in Vermont. Prior to this activity, he was a
registered investment councilor with McRae Capital Management in Morristown,
New Jersey. Prior to joining McRae, Mr. Parker worked as an independent
financial consultant to various companies and as a general partner in an
investment banking firm. Mr. Parker is also a director of several investment
companies associated with the Capstone Group in Houston, Texas. He graduated
from St. Lawrence University in 1969 with a B.S. in Psychology and holds a
P.M.D. from Harvard Graduate School of Business Administration.
No directors of the Company receive compensation as directors, although
certain expenses incurred for Company business may be reimbursed.
Executive Officers
The following table sets forth the executive officers of the Company:
Name and Officer Age Served as Officer Since
Brian B. Spillane
President and Chief
Executive Officer 60 April 1, 1989
James R. Schaff
Secretary and Treasurer
Manager of Lands 41 May 2, 1996
Milton O. Childers
Exploration Manager and
Assistant Secretary 68 January 22, 1993
Mr. Schaff assumed his position as Nova's Land Manager on April 1, 1994, and
was appointed Secretary and Treasurer of the Company on May 2, 1996. From
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.
Executive Compensation
The following table sets forth information concerning the compensation of the
Chief Executive Officer, the Exploration Manager and the Land Manager of the
Company for the years ended September 30, 1996, 1995, and 1994 for services
in all capacities to the Company.
Summary Compensation Table
Long Term Compensation
Annual
Compensation ___________Awards
Name and Salary Restricted Stock Options
Principal Position Year $_____ Award ($)* #
Brian B. Spillane
CEO 1996 50,120 -- --
1995 67,939 3,397 --
1994 79,829 7,983 200,000
Milton O. Childers
Exploration Manager 1996 50,240 -- --
and Assistant 1995 66,160 3,308 --
Secretary 1994 76,578 7,658 200,000
James R. Schaff
Secretary/Treasurer 1996 48,930 50,000
Manager of Lands 1995 52,456 2,623 --
1994 24,750 2,475 200,000
*ESOP contribution
Option Grants in Last Fiscal Year
Individual Grants
% of Total
Options Options Granted Exercise or
Granted/ to Employees Base Price Expiration
Name (Expired) in Fiscal Year ($/Sh) Date
Brian B. Spillane -- -- -- --
Milton O. Childers -- -- -- --
James R. Schaff 50,000/ 100 $0.05 2001
(20,000)
Employee Stock Option Plans
Under the terms of the Nova Natural Resources Corporation 1989 Nonqualified
Stock Option Plan (the "Nonqualified Plan"), key personnel are issued options
to purchase shares of the Company's Common Stock at the market price at the
time of the award. The options are exercisable over a five year period in
increments as specified by the Board of Directors. Upon termination of
association with the Company, unexercised options are canceled.
Also available to employees and management is the Nova Natural Resources
Corporation 1989 Incentive Stock Option Plan, a qualified plan (the
"Incentive Plan"). Under the terms of the Incentive Plan, options to purchase
shares of the Company's Common Stock are issued to key employees at the market
price of the stock on the date of issue. The options are exercisable over a
five year period. Options granted to employees who subsequently terminate
employment with the Company are canceled if not exercised within three months
after termination of employment.
A total of 2,000,000 shares of the Company's Common Stock have been reserved
for issuance under the terms of the two Plans. At September 30, 1996, options
to purchase 600,000unissued shares of Common Stock, had beenshares sufficient to assure the
complete conversion of all issued to the Company's
Directors under the Nonqualified Plan (-0- in 1996); under the Incentive Plan,
options to purchase 650,000and outstanding shares had been issued (-0- in 1996). None of the
options issued under the Plan were exercised during 1996 or 1995.
Employee Stock Ownership PlansPreferred
Stock.
Transfer Agent
The Board of Directors and the stockholders of the Company have also adopted
the Nova Natural Resources Corporation Employee Stock Ownership Plan ("ESOP")transfer agent 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 theis MCM Stock Transfer 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, 1996, 398,211, 62,093 and 201,497 shares have been
allocated to accounts of Messrs. Spillane, Schaff, and Childers, respectively.
No other current officers or directors of Nova are currently eligible to
participate in the plan. No ESOP contribution was made for 1996.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Any shareholder who wishes to submit a proposal for inclusion in the Company's
proxy statement and proxy form for its next annual meeting must assure that
any such proposal is received by the Company on or before December 30, 1997.
ANNUAL REPORT TO SECURITIES AND EXCHANGE COMMISSION
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-KSB MAY BE OBTAINED WITHOUT CHARGE BY ANY BENEFICIAL
OWNER OF THE COMPANY'S COMMON STOCK UPON A WRITTEN REQUEST ADDRESSED TO
JAMES SCHAFF, SECRETARY, NOVA NATURAL RESOURCES CORPORATION, 789 SHERMAN
STREET, SUITE 550, DENVER, COLORADO 80203.
NOVA NATURAL RESOURCES CORPORATION
789 Sherman990 Logan Street, Suite 550,401, Denver, Colorado 80203
PROXY This Proxy is Solicited on Behalf of the Board of Directors.
The undersigned hereby appoints Brian B. Spillane and Robert McDonald as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of Common
Stock of Nova Natural Resources Corporation held on record by the undersigned
on May 1, 1997, at the annual meeting of shareholders to be held on ____________
of any adjournment thereof.
=================================================================
1. ELECTION OF DIRECTORS
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all
nominees listed below
INSTRUCTION: To withhold authority to vote for any individual nominee
strike a line through the nominees's name in the list
below.)
Robert E. McDonald, Brian B. Spillane, Milton O. Childers,
Robert W. Meier, John R. Parker
2. PROPOSAL TO APPROVE THE SALE OF THE COMPANY'S CEMENT-GRADE
KAOLIN MINE
FOR AGAINST ABSTAIN
3. I WISH TO EXERCISE MY DISSENTERS RIGHTS
YES NO
=================================================================
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this proxy will be
voted for Proposals 1 and 2.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
DATED:__________________________, 1997. _________________________
Signature
_________________________
Signature if held jointly
[Please mark, sign, date and return the Proxy card promptly using the
enclosed envelope.]
May , 1997
TO THE SHAREHOLDERS OF NOVA NATURAL RESOURCES CORPORATION:
As you can see from the enclosed proxy materials, Nova Natural Resources
Corporation (the "Company"), has undertaken several significant transactions
and undergone substantial change in the last twelve months. The Company has
sold a significant oil and gas property, settled a dispute with one of its
principal shareholders and director by purchasing all of his Common and
Preferred Stock, and entered into an agreement to sell its cement-grade kaolin
mine. All of these transactions, reasons for undertaking them and their
impact on the Company's financial posture and future plans are described in
the enclosed proxy materials. We urge you to read those materials carefully
and call us with any questions.
We are informed by our counsel that the Company was not required by the
Colorado Business Corporations Act to obtain shareholder approval for the sale
of the oil and gas prospect and purchase of stock from its principal
stockholder and may not be required to obtain shareholder approval of the
sale of the Company's cement-grade kaolin mine. Management believes, however,
that sale of the cement-grade kaolin mine is a decision which has a
significant impact on the status and future of the Company and should be
considered by the shareholders. More importantly, management understands that
a shareholder could take issue with any or all of these decisions and with the
general direction of the Company but be unable to liquidate his investment in
the Company because of the absence of an active trading market in the
Company's stock. For that reason, and although the Company is not required by
law to offer dissenter's rights, the Company is offering to purchase all of
the shares of stock owned by any shareholder who does not vote in favor of the
sale of the cement-grade kaolin mine and who wishes to liquidate his
investment at a market price. If, for any reason, you wish to take advantage
of this offer, read the enclosed materials carefully and follow the directions
concerning rights of appraisal.
If you wish to exercise your dissenters rights and sell your stock to the
Company, you must strictly comply with the procedures set forth in Attachment 2.
To exercise these rights, you must
1. NOT VOTE IN FAVOR OF THE SALE OF THE CEMENT KAOLIN MINE
2. RETURN THE ENCLOSED PROXY CARD WITH YOUR INTENT TO DISSENT SO
INDICATED PRIOR TO THE ANNUAL MEETING.
If the sale is approved by the Company's shareholders, the Company will
contact you with the necessary materials to enable you to follow through on
your decision.
We thank you for your years of support and urge you to call with any
questions.
Sincerely,
NOVA NATURAL RESOURCES CORPORATION
Brian B. Spillane
7-113-101. Definitions
For purposes of this article:
(1) "Beneficial shareholder', means the beneficial owner of shares held
in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring domestic
or foreign corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 7-113-102 and who exercises that
right at the time and in the manner required by part 2 of this
article.
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate
action to which the dissenter objects, excluding any appreciation
or depreciation in anticipation of the corporate action except to
the extent that exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently
paid by the corporation on its principal bank loans or, if none,
at the legal rate as specified in section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name the shares are
registered in the records of a corporation or the beneficial owner
of shares that are registered in the name of a nominee to the
extent such owner is recognized by the corporation as the
shareholder as provided in section 7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
7-113-102. Right to dissent
(1) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's
shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is
a party if:
(I) Approval by the shareholders of that
corporation is required for the merger by
section 7-111-103 or 7-111-104 or by the
articles of incorporation, or
(II) The corporation is a subsidiary that is
merged with its parent corporation under
section 7-111-104;
(b) Consummation of a plan of share exchange to which
the corporation is a party as the corporation
whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other
disposition of all, or substantially all, of the
property of the corporation for which a
shareholders' vote is required under section
7-112-102(1); and
(d) Consummation of a sale, lease, exchange, or other
disposition of all, or substantially all, of the
property of an entity controlled by the
corporation if the shareholders of the corporation
were entitled to vote upon the consent of the
corporation to the disposition pursuant to section
7-112-102(2).
(1.3) A shareholder is not entitled to dissent and obtain
payment, undersubsection (1) of this section, of the
fair value of the shares of any class or series of
shares which either were listed on a national
securities exchange registered under the federal
"Securities Exchange Act of 1934", as amended, or on
the national market system of the national association
of securities dealers automated quotation system, or
were held of record by more than two thousand
shareholders, at the time of:
(a) The record date fixed under Section 7-107-107 to
determine the shareholders entitled to receive
notice of the shareholders' meeting at which
the corporate action is submitted to a vote;
(b) The record date fixed under Section 7-107-104 to
determine shareholders entitled to sign writings
consenting to the corporate action; or
(c) The effective date of the corporate action if the
corporate action is authorized other than by a
vote of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this
section shall not apply if the shareholder will receive
for the shareholder's shares, pursuant to the corporate
action, any-thing except:
(a) Shares of the corporation surviving the
consummation of the plan of merger or share
exchange;
(b) Shares of any other corporation which at the
effective dateof the plan of merger or share
exchange either will be listed on a national
securities exchange registered under the federal
"Securities Exchange Act of 1934", as amended, or
on the national market system of the National
Association of Securities Dealers Automated
Quotation System, or will be held of record by
more than two thousand shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares
or cash in lieu of fractional shares.
(2.5) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's
shares in the event of a reverse split that reduces the number
of shares owned by the shareholder to a fraction of a share or to
scrip if the fractional share or scrip so created is to be acquired
for cash or the scrip is to be voided under section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate
action to the extent provided by the bylaws or a resolution of the
board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the
corporate action creating such entitlement unless the action
is unlawful or fraudulent with respect to the shareholder or the
corporation.
7-113-103. Dissent by nominees and beneficial owners
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if
the record shareholder dissents with respect to all shares
beneficially owned by any one person and causes the corporation to
receive written notice which states such dissent and the name,
address, and federal taxpayer identification number, if any, of each
person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a record shareholder under this subsection
(1) are determined as if the shares as to which the record
shareholder dissents and the other shares of the record shareholder
were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the
shares held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive
the record shareholder's written consent to the dissent not
later than the time the beneficial share-holder asserts
dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all
shares beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record share-
holder dissents with respect to the shares held by any
one or more beneficial shareholders, each such
beneficial shareholder must certify to the corporation
that the beneficial shareholder and the record shareholder
or record shareholders of all shares owned beneficially by the
beneficial shareholder have asserted, or will timely assert,
dissenters' rights as to all such shares as to which there is
no limitation on the ability to exercise dissenters' rights.
Any such requirement shall be stated in the dissenters' notice
given pursuant to section 7-113-203.
7-113-201. Notice of dissenters' rights
(1) If a proposed corporate action creating dissenters'
rights under section 7-113-102 is submitted to a vote
at a shareholders' meeting, the notice of the meeting
shall be given to all shareholders, whether or not
entitled to vote. The notice shall state that
shareholders are or may be entitled to assert
dissenters' rights under this article and shall be
accompanied by a copy of this article and the
materials, if any, that, under articles 101 to 117 of
this title, are required to be given to shareholders
entitled to vote on the proposed action at
the meeting. Failure to give notice as provided by this
subsection (1) shall not affect any action taken at the
shareholders' meeting for which the notice was to have
been given, but any shareholder who was entitled to
dissent but who was not given such notice shall not be
precluded from demanding payment for the shareholder's
shares under this article by reason of the
shareholder's failure to comply with the provisions of
section 7-113-202(1).
(2) If a proposed corporate action creating dissenters'
rights under section 7-113-102 is authorized without a
meeting of shareholders pursuant to section 7-107-104,
any written or oral solicitation of a shareholder to
execute a writing consenting to such action
contemplated in section 7-107-104 shall be accompanied
or preceded by a written notice stating that
shareholders are or may be entitled to assert
dissenters' rights under this article, by a copy of
this article, and by the materials, if any, that, under
articles 101 to 117 of this title, would have been
required to be given to shareholders entitled to
vote on the proposed action if the proposed action were
submitted to a vote at a shareholders' meeting.
Failure to give notice as provided by this subsection (2) shall
not affect any action taken pursuant to section 7-107-104
for which the notice was to have been given, but
any shareholder who was entitled to dissent but who was
not given such notice shall not be precluded from
demanding payment for the shareholder's shares under
this article by reason of the shareholder's failure to
comply with the provisions of section 7-113-202(2).
7-113-202. Notice of intent to demand payment
(1) If a proposed corporate action creating dissenters'
rights under section 7-113-102 is submitted to a vote
at a shareholders' meeting and if notice of dissenters'
rights has been given to such shareholder in connection
with the action pursuant to section 7-113-201(1), a
shareholder who wishes to assert dissenters' rights
shall:
(a) Cause the corporation to receive, before the vote
is taken, written notice of the shareholder's
intention to demand payment for the shareholder's
shares if the proposed corporate action is
effectuated; and
(b) Not vote the shares in favor of the proposed
corporate action.
(2) If a proposed corporate action creating dissenters'
rights under section 7-113-102 is authorized without a
meeting of shareholders pursuant to section 7-107-104
and if notice of dissenters' rights has been given to
such shareholder in connection with the action pursuant
to section 7-113-201(2), a shareholder who wishes to
assert dissenters' rights shall not execute a writing
consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of
subsection (1) or (2) of this section is not entitled
to demand payment for the shareholder's shares under
this article.
7-113-203. Dissenters' notice
(1) If a proposed corporate action creating dissenters'
rights under section 7-113-102 is authorized, the
corporation shall give a written dissenters' notice
to all shareholders who are entitled to demand payment for
their shares under this article.
(2) The dissenters' notice required by subsection (1) of
this section shall be given no later than ten days
after the effective date of the corporate action
creating dissenters' rights under section 7-113-102
and shall:
(a) State that the corporate action was authorized and
state the effective date or proposed effective
date of the corporate action;
(b) State an address at which the corporation will
receive payment demands and the address of a place
where certificates for certificated shares must
be deposited;
(c) Inform holders of uncertificated shares to what
extent transfer of the shares will be restricted
after the payment demand is received;
(d) Supply a form for demanding payment, which form
shall request a dissenter to state an address to
which payment is to be made;
(e) Set the date by which the corporation must receive
the payment demand and certificates for certificated
shares, which date shall not be less than thirty days
after the date the notice required by subsection (1)
of this section is given;
(f) State the requirement contemplated in section 7-
113-103(3), if such requirement is imposed; and
(g) Be accompanied by a copy of this article.
7-113-204. Procedure to demand payment
(1) A shareholder who is given a dissenters' notice
pursuant to section 7-113-203 and who wishes to assert
dissenters' rights shall, in accordance with the
terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand,
which may be the payment demand form contemplated
in section 7-1 13-203(2)(d), duly completed, or
may be stated in another writing; and
(b) Deposit the shareholder's certificates for
certificated shares.
(2) A shareholder who demands payment in accordance with
subsection (1) of this section retains all rights of a
share holder, except the right to transfer the shares,
until the effective date of the proposed corporate
action giving rise to the shareholder's exercise of
dissenters' rights and has only the right to receive
payment for the shares after the effective date of such
corporate action.
(3) Except as provided in section 7-113-207 or 7-113-
209(1)(b), the demand for payment and deposit of
certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the
shareholder's share certificates as required by the
date or dates set in the dissenters' notice is not
entitled to payment for the shares under this article.
7-113-205. Uncertificated shares
(1) Upon receipt of a demand for payment under section 7-113-204
from a shareholder holding uncertificated
shares, and in lieu of the deposit of certificates
representing the shares, the corporation may restrict
the transfer thereof.
(2) In all other respects, the provisions of section 7-113-204
shall be applicable to shareholders who own uncertificated shares.
7-113-206. Payment
(1) Except as provided in section 7-113-208, upon the
effective date of the corporate action creating
dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-
204, whichever is later, the corporation shall pay each
dissenter who complied with section 7-113-204, at the
address stated in the payment demand, or if no such
address is stated in the payment demand, at the address
shown on the corporation's current record of
shareholders for the record shareholder holding the
dissenter's shares, the amount the corporation
estimates to be the fair value of the dissenter's
shares, plus accrued interest.
(2) The payment made pursuant to subsection (1) of this
section shall be accompanied by:
(a) The corporation's balance sheet as of the end of
its most recent fiscal year or, if that is not
available, the corporation's balance sheet as
the end of a fiscal year ending not more than
sixteen months before the date of payment, an
income statement for that year, and, if the
corporation customarily provides such statements
to shareholders, a statement of changes in
shareholders' equity for that year and a statement
of cash flow for that year, which balance sheet
and statements shall have been audited if the
corporation customarily provides audited financial
statements to shareholders, as well as the latest
available financial statements, if any,
for the interim or full-year period, which financial
statements need not be audited;
(b) A statement of the corporation's estimate of the
fair value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand
payment under section 7-113-209; and
(e) A copy of this article.
7-113-207. Failure to take action
(1) If the effective date of the corporate action creating
dissenters' rights under section 7-113-102 does not
occur within sixty days after the date set by the
corporation by which the corporation must receive the
payment demand as provided in section 7-113-203, the
corporation shall return the deposited certificates and
release the transfer restrictions imposed on
uncertificated shares.
(2) If the effective date of the corporate action creating
dissenters' rights under section 7-113-102 occurs more
than sixty days after the date set by the corporation
by which the corporation must receive the payment
demand as provided in section 7-113-203, then the
corporation shall send a new dissenters' notice, as
provided in section 7-113-203, and the provisions of
sections 7-113-204 to 7-113-209 shall again be
applicable.
7-118-208. Special provisions relating to shares acquired after announcement
of proposed corporate action
(1) The corporation may, in or with the dissenters' notice
given pursuant to section 7-113-203, state the date of
the first announcement to news media or to shareholders
of the terms of the proposed corporate action creating
dissenters' rights under section 7-113-102 and state
that the dissenter shall certify in writing, in or with
the dissenter's payment demand under section 7-113-204,
whether or not the dissenter (or the person on whose
behalf dissenters' rights are asserted) acquired
beneficial ownership of the shares before that date.
With respect to any dissenter who does not so certify
in writing, in or with the payment demand, that the
dissenter or the person on whose behalf the dissenter
asserts dissenters' rights acquired beneficial
ownership of the shares before such date, the
corporation may, in lieu of making the payment provided
in section 7-113-206, offer to make such payment if the
dissenter agrees to accept it in full satisfaction of
the demand.
(2) An offer to make payment under subsection (1) of this
section shall include or be accompanied by the
information required by section 7-113-206(2).
7-113-209. Procedure if dissenter is dissatisfied with payment or
offer
(1) A dissenter may give notice to the corporation in
writing of the dissenter's estimate of the fair value
of the dissenter's shares and of the amount
of interest due and may demand payment of such estimate,
less any payment made under section 7-113-206, or reject the
corporation's offer under section 7-113-208 and demand
payment of the fair value of the shares and interest
due, if:
(a) The dissenter believes that the amount paid under
section 7-113-206 or offered under section 7-113-
208 is less than the fair value of the shares or
that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under
section 7-113-206 within sixty days after the date
set by the corporation by which the corporation
must receive the payment demand; or
(c) The corporation does not return the deposited
certificates or release the transfer restrictions
imposed on uncertificated shares as required
section 7-113-207(1).
(2) A dissenter waives the right to demand payment under
this section unless the dissenter causes the corporation
to receive the notice required by subsection (1) of this
section within thirty days after the corporation made or
offered payment for the dissenter's shares.
7-113-301. Court action
(1) If a demand for payment under section 7-113-209 remains
unresolved, the corporation may, within sixty days
after receiving the payment demand, commence
proceeding and petition the court to determine the fair
value of the shares and accrued interest. If the
corporation does not commence the proceeding within the
sixty-day period, it shall pay to each dissenter
whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in
subsection (1) of this section in the district court
of the county in this state where the corporation's
principal office is located or, if the corporation has
no principal office in this state, in the district
court of the county in which its registered office is
located. If the corporation is a foreign corporation
without a registered office, it shall commence the
proceeding in the county where the registered office of
the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain
unresolved parties to the proceeding commenced under
subsection (2) of this section as in an action against
their shares, and all parties shall be served with a
copy of the petition. Service on each dissenter shall
be by registered or certified mail, to the address
stated in such dissenter's payment demand, or if no
such address is stated in the payment demand, at the
address shown on the corporation's current record of
shareholders for the record shareholder holding the
dissenter's shares, or as provided. by law.
(4) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) of this section is
plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and
recommend a decision on the question of fair value. The
appraisers have the powers described in the order
appointing them, or in any amendment to such order. The
parties to the proceeding are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding commenced
under subsection (2) of this section is entitled to
judgment for the amount, if any, by which the court
finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the corporation,
or for the fair value, plus interest, of the
dissenter's shares for which the corporation elected to
withhold payment under section 7-113-208.
7-113-302. Court costs and counsel fees
(1) The court in an appraisal proceeding commenced under
section 7-113-301 shall determine all costs of the
proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The
court shall assess the costs against the corporation;
except that the court may assess costs against all or
some of the dissenters, in amounts the court finds
equitable, to the extent the court finds the dissenters
acted arbitrarily, vexatiously, or not in good faith in
demanding payment under section 7-113-209.
(2) The court may also assess the fees and expenses of
counsel and experts for the respective parties, in
amounts the court finds equitable:
(a) Against the corporation and in favor of any
dissenters if the court finds the corporation did
not substantially comply with the requirements of
part 2 of this article; or
(b) Against either the corporation or one or more
dissenters, in favor of any other party, if the
court finds that the party against whom the fees
and expenses are assessed acted arbitrarily,
vexatiously, or not in good faith with respect to
the rights provided by this article.
(3) If the court finds that the services of counsel for any
substantial benefit to other dissenters similarly situated,
and that the fees for those services should not be assessed
against the corporation, the court may award to said counsel
reasonable fees to be paid out of the amounts awarded
to the dissenters who were benefitted.80203.