PRELIMINARY PROXY MATERIALS
NOVA NATURAL RESOURCES CORPORATION
789 Sherman Street, Suite 550
Denver, Colorado 80203
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PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS
To Be Held June , 1997
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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 Annual
Meeting of Shareholders of the Company to be held on __________,
_____________, 1997, at 10:30 o'clock a.m., Mountain Standard Time,
at the Company's principal offices located at 789 Sherman Street,
Suite 550, Denver, Colorado. This Proxy Statement and the
accompanying form of Proxy were mailed to the Company's
Shareholders on or about ____________, 1997.
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. 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,
Colorado 80203, 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 Annual Meeting and desire to vote in
person. To the Company's knowledge, the Directors of the Company
intend to vote for the election of all nominees and for approval of
the contract between the Company and NCA.
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, the record date for determination of Shareholders
entitled to vote at the Annual Meeting of Shareholders, 5,985,846
shares of the Company's Common Stock and 1,792,267 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 convertible Preferred Stock is entitled to two votes on all
matters voted upon at the Annual 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, to own beneficially more than 5% of the
Company's Preferred Stock and of the Company's Common Stock, its
only classes of issued and outstanding voting securities. Except
as otherwise noted in the footnotes to the table, each person named
has sole voting and investment powers relating to 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.
The following table shows, at May 1, 1997, the shares of the
Company's outstanding Common Stock (5,985,846 shares issued and
outstanding), beneficially owned by each of the officers and
directors of the Company and the shares beneficially owned by all
of the officers and directors as a group. Except as otherwise
noted in the footnotes to the table, each person named has sole
voting and investment powers related to his shares.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Robert E. McDonald 484,851 (1) 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 250,000 shares underlying stock
options held by 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) Does not include options owned by Mr. Parker to purchase
125,000 shares directly from Mr. McDonald, options to
purchase 125,000 shares directly from Ms. McDonald, or
options to purchase 200,000 shares from the Company.
Does not include 41,667 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 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," 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 held by the Company in connection with these cement-grade
mining operations. NCA proposes to continue the current cement-
grade operations of the Company, and has agreed to turn over to the
Company any profits which it may earn during a 21 year period after
the date of closing as a result of sales of kaolin produced from
the property to paper manufacturers. The Company agrees that, if
it or any joint venture of which it is a member sells kaolin to the
cement-industry in Minnesota, Iowa, North Dakota, South Dakota or
Wisconsin during a five year period following the closing, the
Company it will pay to NCA the sum of $30,000 for each year in
which any sale occurs.
NCA will pay a total of $700,000 to the Company for the Cement
Kaolin Mine, including $125,000 in cash at closing, an aggregate of
$450,000 in non-interest bearing semi-annual installments on August
15 and December 15 of each year until August 15, 2001, and a final
payment of $125,000 on December 15, 2001. Up to $70,008 of these
proceeds will be paid to Thomas F. Kane, a former director, as part
of the Company's purchase of his Common and Preferred Stock, over
the same period as the NCA payments. 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 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 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 the shares of Common Stock
of any shareholder who does not vote in favor of the Cement Kaolin
Mine sale and properly asserts his right of appraisal. Management
believes that the conjunction of its Cement Kaolin Mine sale and
its sale of oil and gas overriding royalty interests and purchase
of the stock of Thomas F. Kane (as described below) represent
material events which might prompt a shareholder to sell his Common
Stock if an adequate market for that Stock existed. The Company
also recognizes that the absence of an active trading market
impedes such a sale. As such, management wishes to afford
shareholders who disagree with these decisions or with the
directors' decision to continue operation of the Company the
ability to sell their Common Stock at a price which management
believes is the appropriate market price.
Any shareholder of the Company who wishes to assert his or her
right 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 approved by the
Company's shareholders, no later than ten (10) days after the
effective date of the corporate action creating 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.
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
owners of the Company's Preferred Stock who, if the Company were
liquidated, would receive all of the proceeds in the liquidation
after payment to the Company's creditors. Mr. Kane also asserted
that continuation of the Company's business would cause the
dissipation of assets which otherwise would be distributable to
owners of the Company's Preferred Stock upon liquidation. Mr. Kane
recommended and proposed that the Company be liquidated and
threatened to commence litigation to force the liquidation and
dissolution of the Company. The Company's other directors
disagreed with Mr. Kane, determined to continue the Company as a
going concern and determined to oppose any attempt to liquidate and
dissolve the Company.
In resolution of these disputes, the Company, Mr. Kane and Brian
Spillane, the Company's President and a director, entered into an
Agreement (the "Kane Agreement"), dated February 5, 1997, for the
purchase of all of Mr. Kane's Common and Preferred Stock. 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: 203,426 shares of Preferred
Stock and 115,942 shares of Common Stock. Mr. Spillane paid
$50,000 for the stock he purchased from Mr. Kane. The Company paid
$150,000 and agreed to pay an amount equal to 12% of the net
proceeds from the sale of the Cement Kaolin Mine less $13,992, as
and when received by the Company. 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 Kane
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 purchase
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 over-
concentration 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 re-work 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 just 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 opperations 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
<FN>
See accompanying notes to financial statements.
</FN>
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
<FN>
See accompanying notes to financial statements.
</FN>
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 orebodies or to develop mine areas
substantially in advance of current production are capitalized and
charged to operations on a units-of-production method based upon
the estimated recoverable reserves of the related deposit.
Reclamation takes place concurrently with production and such costs
are expensed as mining costs in the period incurred.
The Company periodically reviews the carrying value of its
properties by comparing the net book value with the estimated
undiscounted future cash flow from the property, which is generally
based upon estimated recoverable reserves utilizing current market
prices and costs. If the net book value exceeds the undiscounted
future cash flow, the Company records 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.
PART I. FINANCIAL INFORMATION
NOVA NATURAL RESOURCES CORPORATION
Condensed Balance Sheets (Note 1)
December 31, September 30,
1996 1996
(Unaudited)
ASSETS
Current assets:
Cash $ 329,453 $ 79,827
Accounts receivable:
Kaolin operations 0 376,392
Oil and gas operations(Note 2) 8,922 24,867
Other 38,038 31,273
Total 46,960 432,532
Prepaid expenses 6,030 3,941
Total current assets 382,443 516,300
Mineral property interests, net of
accumulated depreciation and
depletion of 92,301 529,880 543,038
Oil and gas properties(using the full
cost method of accounting), net of
accumulated depletion, depreciation
and amortization and valuation
allowances of 5,902,164(Note 2) 104,646 260,014
Furniture and technical equipment net
of accumulated depreciation of
132,155 38,649 38,851
Investment in and advances to NovaChek
Limited Liability Company(Note 5) 188,943 136,717
Deposits 51,550 51,000
_______ _______
$ 1,296,111 $ 1,545,920
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,909 $ 282,087
Accrued liabilities 10,417 35,576
Total current liabilities 76,326 317,663
Convertible debentures 250,000 250,000
Total liabilities 326,326 567,663
Stockholders' equity:
Convertible preferred stock, $1.00
par value and liquidation preference;
5,000,000 shares authorized; 2,687,682
shares issued and outstanding(Note 3) 2,687,682 2,687,682
Common stock, $.10 par value;
50,000,000 shares authorized;6,496,188
shares issued and outstanding(Note 3) 649,619 649,619
Additional paid-in capital 6,454,297 6,454,296
Accumulated deficit (8,821,813) (8,813,314)
Total stockholders' equity 969,785 978,257
Total Liabilities and Stockholders' Equity 1,296,111 1,545,920
========= =========
See accompanying notes to condensed financial statements.
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Ended
December 31, December 31,
1996 1995
Revenue:
Mineral sales $ 191,556 $ 142,508
Oil and gas sales 41,616 44,638
_________ _________
233,172 187,146
Costs and expenses:
Mining costs, including transportation
and royalties 154,567 94,914
Oil and gas lease operating including
production taxes 30,415 32,615
Depletion, depreciation,
and amortization 9,492 18,146
Mineral property abandonments 60 --
General and administrative 112,220 92,193
_______ _______
306,754 237,868
Operating loss (73,582) (50,722)
Other income(expenses):
Share of losses of NovaChek Limited
Liability Company(Note 5) (6,290) --
Interest income 3,176 2,099
Interest expense (8,333) --
Gain on sale of assets 76,557 --
_______ _______
65,110 2,099
Net loss (8,472) (48,623)
Loss per share (Note 4) .00 (.01)
Weighted average common shares outstanding 6,496,188 6,496,188
See accompanying notes to condensed financial statements.
NOVA NATURAL RESOURCES CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
December 31, December 31,
1996 1995
Cash flows from operating activities:
Net (loss) $ (8,472) $ (48,623)
Adjustments to reconcile net
loss) to net cash provided
by operating activities:
Depletion and depreciation 9,492 18,146
Gain on sale of assets (76,557) --
Change in operating assets and liabilities:
Decrease in accounts receivable 385,572 228,081
(Increase) in prepaid expenses (2,089) (3,703)
(Increase) in deposits (550) (2,058)
(Decrease) in accounts payable (216,178) (108,816)
(Decrease) in accrued liabilities (25,159) (12,827)
Net cash provided by operating
activities 66,059 70,200
Cash flows from investing activities:
Proceeds from sale of assets 229,957 --
Investments in and advances to NovaChek
Limited Liability Company (52,226) --
Capital expenditures-mineral properties 9,624 (6,617)
Capital expenditures-oil and gas
properties (3,788) --
Capital expenditures-office and
technical equipment -- --
Net cash provided (used) by
investing activities 183,567 (6,617)
Cash flows from financing activities:
Principal payments on notes payable -- --
Proceeds from notes payable -- --
Net cash provided (used) by
financing activities -- --
Increase in cash 249,626 63,583
Cash, beginning of year 79,827 70,820
Cash, end of year 329,453 134,403
Supplemental cash flow information -
cash paid for interest -- --
See accompanying notes to condensed financial statements.
NOVA NATURAL RESOURCES CORPORATION
Notes to Condensed Financial Statements
Three Months Ended December 31, 1996 and 1995
(1) The condensed financial statements included herein are unaudited. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, have been made which are necessary for a fair presentation of the
financial position of the Company at December 31, 1996 and 1995 and the
results of operations for the three month period ended December 31, 1996 and
1995. Certain amounts have been reclassified for comparability with the 1995
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. The
Preferred Shares contain 2 for 1 voting privileges, have a $1.00 liquidation
preference and have no stated dividend rate. In February, 1997 the Company
repurchased 510,342 shares of common stock and 895,415 shares of convertible
preferred stock from a major shareholder in settlement of a dispute for
$150,000 in cash to be paid at closing, and additional payments based on
revenues from either the operation of or the sale of its cement-grade kaolin
mine of up to an aggregate value of $70,008 over a period of years. The
Company may also purchase a portion of its common stock in the event of the
sale of its kaolin mine upon the assertion of appraisal rights by
shareholders who dissent from a vote to approve such sale.
(4) Net loss per common share is determined by dividing net loss
attributable to common stock by the weighted average number of common shares
outstanding during each period. A fully diluted loss per share is not
computed because conversion of the Preferred Shares mentioned above, and
outstanding options would be antidilutive.
(5) 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 $118,75 in cash for a
42% voting interest in NovaChek. An additional 4.125% interest in NovaChek
is managed by the Company and Chek Technologies and Exploration, LLC (Chek)
which owns a 38.75% interest in NovaChek. The Company is entitled to receive
an annual management fee of $65,000 from NovaChek. To date, no management
fee has been collected or recorded by the Company.
A number of significant decisions require the approval of both the Company
and Chek. Such decisions include, but are not limited to certain borrowings,
capital expenditures and asset disposals.
NovaChek has not commenced dredging operations on a commercial basis, Company
management estimates NovaChek will require approximately $100,000 during
fiscal 1997 to ready the dredge for 1997 operations, and fund operations
through the end of June, which should be sufficient to enable
the project to be self-sufficient, provided commercial gold production can be
obtained. Chek Technologies is investing approximately $60,000 of the needed
funds, and approximately $40,000 of additional funds must be raised. There
is no assurance that these funds can be raised, nor that the dredge can be
operated economically. Accordingly, the Company's ability to recover its
investment in NovaChek is dependent upon the results of future development,
including obtaining financing for such development. The availability of
financing and the results of such future development are not presently
determinable. Accordingly, the financial statements do not include any
adjustments relating to the recoverability of the Company's investment such
costs that might result from the outcome of these uncertainties.
In accordance with the NovaChek revised operating agreement, which must be
approved by a majority of the members, which is expected, the first $250,000
in distributions will be allocated to investors other than the Company and
Chek based upon their relative voting percentages. The next $150,000 in
distributions will be made to the Company. The Company, Chek and remaining
investors will receive 19.13%, 14.2% and 66.67%, respectively, of the next
$500,000 in distributions and 27%, 23% and 50%, respectively, of the
following $500,000 in distributions. After these initial preferential
distributions are made, all subsequent distributions will be allocated based
on voting percentages.
The condensed balance sheet and statement of operations of NovaChek at
December 31, 1996 and for the period from April 1, 1996 (inception) through
December 31, 1996 are presented below.
BALANCE SHEET OF NOVACHEK
Cash and other assets $ 5,326
Mineral property interests 45,000
Delay Rentals 42,822
Mining and related equipment, net 292,164
________
Total assets $385,312
Accounts payable $ 29,405
Short term notes payable 39,600
Stockholders' equity 256,316
________
Total liabilities and stockholders'
equity $385,312
STATEMENT OF OPERATIONS OF NOVACHEK
Sales $ 6,474
Other income 437
Marketing expense (310)
Operating expenses (50,285)
________
Net Loss $(43,684)
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
December 31, 1996 and reflects the December 31, 1996 historical balance sheet
of Nova Natural Resources Corporation giving pro forma effect to the Kaolin
mine sale and the Kane stock purchase. The sale of the Oil and Gas assets
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 three months ended December, 31, 1996 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)
December 31, 1996
(unaudited)
December 31, December 31, December 31,
1996 1996 1996
Kane Mine Sale Kane & Mine Sale
Pro Forma Pro Forma Pro Forma
ASSETS
Current assets:
Cash (Notes B and C) $ 179,453 $ 504,453 $ 354,453
Accounts receivable:
Kaolin operations 0 0 0
Oil and gas operations 8,922 8,922 8,922
Other 38,038 38,038 38,038
_______ _______ _______
Total 46,960 46,960 46,960
Prepaid expenses 6,030 6,030 6,030
Total current assets 232,443 557,443 407,443
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) 529,880 95,555 95,555
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) 104,646 104,646 104,646
Furniture and technical equipment net
of accumulated depreciation of
132,155 38,649 38,649 38,649
Investment in and advances to NovaChek
Limited Liability Company 188,943 188,943 188,943
Deposits (Note B) 51,550 1,550 1,550
_______ _______ _______
$ 1,146,111 $ 1,449,482 $1,299,482
========= ========= =========
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA BALANCE SHEETS (NOTE A)
December 31, 1996
(unaudited)
December 31, December 31, December 31,
1996 1996 1996
Kane Mine Sale Kane & Mine Sale
Pro Forma Pro Forma Pro Forma
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,909 $ 65,909 $ 65,909
Accrued liabilities 10,417 10,417 10,417
_______ _______ _______
Total current liabilities 76,326 76,326 76,326
Deferred Gain on Sale(Note B) 0 153,371 153,371
Note Payable(Note C) 66,408 0 66,408
Discount on Note Payable(Note C) (20,535) 0 (20,535)
Convertible Debentures 250,000 250,000 250,000
_______ _______ _______
Total liabilities 372,199 479,697 525,570
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 2,687,682 1,792,267
Common stock, $.10 par value;
50,000,000 shares authorized;5,985,846
shares issued and outstanding(Note C) 598,585 649,619 598,585
Additional paid-in capital(Note C) 7,204,873 6,454,297 7,204,873
Accumulated deficit (8,821,813)(8,821,813) (8,821,813)
_________ _________ _________
Total stockholders' equity 773,912 969,785 773,912
Total Liabilities and Stockholders'
Equity $1,146,111 $1,449,482 $1,299,482
========= ========= =========
<FN>
See accompanying notes to condensed pro forma financial statements.
</FN>
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA STATEMENT OF OPERATIONS(NOTE A)
For the year ended September 30, 1996
(unaudited)
September 30, 1996
Pro Forma Pro Forma Pro Forma Pro Forma
Oil & Gas Kane O&G & Kane Mine Sale
Revenue:
Mineral sales(Note B) $1,291,131 $1,291,131 $1,291,131 $ 66,939
Oil and gas sales(Note D) 153,816 217,807 153,816 217,807
__________ __________ ___________ __________
Total Revenue 1,444,947 1,508,938 1,444,947 284,746
Costs and expenses:
Mining costs,including
trans.and royalties(Note B) 1,049,387 1,049,387 1,049,387 40,163
Oil and gas lease operating
incl. production taxes(Note D) 89,104 106,952 89,104 106,952
Depletion, depreciation,
and amortization (Note B and D) 64,979 86,931 64,979 65,311
Mineral property abandonments 7,032 7,032 7,032 7,032
General and admin.(Note B) 385,593 385,593 385,593 380,765
__________ _________ _________ _________
Total Expenses 1,596,095 1,635,895 1,596,095 600,223
Operating loss (151,148) (126,957) (151,148) (315,477)
Other income(expenses):
Share of losses of NovaChek
Limited Liability Company (11,437) (11,437) (11,437) (11,437)
Interest income(Notes B,C,D) 21,258 5,287 14,958 19,462
Interest expense (17,691) (17,691) (17,691) (17,691)
Gain on sale of assets
(Note B & D) 76,557 0 76,557 58,500
Other 825 825 825 825
_________ ________ ________ ________
Total Other 69,512 (23,016) 63,212 49,659
Net loss (81,636) (149,973) (87,936) (265,818)
Loss per share (Note 4) (.01) (.03) (.02) (.04)
Weighted average common
shares outstanding(Note C) 6,496,188 5,985,836 5,985,836 6,496,188
<FN>
See accompanying notes to condensed pro forma financial statements.
</FN>
NOVA NATURAL RESOURCES CORPORATION
CONDENSED PRO FORMA STATEMENT OF OPERATIONS(NOTE A)
For the three months ended December 31, 1996
(unaudited)
December 30, 1996
Pro Forma Pro Forma Pro Forma Pro Forma
Oil & Gas Kane O&G & Kane Mine Sale
Revenue:
Mineral sales(Note B) $ 191,556 $ 191,556 $ 191,556 $ 0
Oil and gas sales(Note D) 31,285 41,616 31,285 41,616
__________ __________ ___________ __________
Total Revenue 222,841 233,172 222,841 41,616
Costs and expenses:
Mining costs,including
trans.and royalties(Note B) 154,567 154,567 154,567 983
Oil and gas lease operating
incl. production taxes(Note D) 26,700 30,415 26,700 30,415
Depletion, depreciation,
and amortization (Note B,D) 8,490 9,492 8,490 5,958
Mineral property abandonments 60 60 60 60
General and admin.(Note B) 112,220 112,220 112,220 105,810
__________ _________ _________ _________
Total Expenses 302,037 306,754 302,037 143,226
Operating loss (79,196) (73,582) (79,196) (101,610)
Other income(expenses):
Share of losses of NovaChek
Limited Liability Company (6,290) (6,290) (6,290) (6,290)
Interest income(Note B,C,D) 5,594 1,601 4,019 5,539
Interest expense (8,333) (8,333) (8,333) (8,333)
Gain on sale of assets(Note B,D) 0 76,557 0 76,557
_________ ________ ________ ________
Total Other (9,029) 63,535 (10,604) 67,473
Net loss (88,225) (10,047) (89,800) (34,137)
Loss per share (.01) 0 (.02) (.01)
Weighted average common
shares outstanding(Note C) 6,496,188 5,985,836 5,985,836 6,496,188
<FN>
See accompanying notes to condensed pro forma financial statements.
</FN>
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
December 31, 1996. The condensed pro forma statements of operations
give effect to the sale of the kaolin mine as of October 1, 1996 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 includes pro
forma adjustments to give effect to the acquisition of the Kane stock
as of December 31, 1996. The condensed pro forma statements of
operations give effect to the acquisition of the Kane stock as of
October 1, 1995.
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 and statements
of operations give effect to the sale of the oil & gas assets as of
November 14, 1996. This is the date of the original sale. 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
December 31, 1996 and to the historical statements of operations for
the three months ended December 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 and present value discount of $112,304, and
deferred gain on sale of $153,371.
2. To adjust revenues to reflect loss of the mineral sales.
3. To adjust expenses to eliminate all expenses related to
the mineral property, including mining costs, DD&A, and
General & Administrative.
4. To increase cash by $50,000 and decrease deposits by
$50,000 to reflect the release of a reclamation bond.
5. To increase interest income to reflect the receipt of
cash from the sale.
6. To adjust gain on sale of assets in the statements of
operations to reflect portion of gain relating to cash
received.
C. PRO FORMA ADJUSTMENTS FOR THE PURCHASE OF THE KANE STOCK
The following pro forma adjustments have been made to the
historical balance sheet of Nova Natural Resources Corporation as of
December 31, 1996 and to the historical statements of operations for
the three months ended December 31, 1996 and for the year ended
September 3, 1996:
1. To reflect the purchase and retirement of 510,340 shares
of Common Stock and 895,415 shares of Convertible
Preferred Stock for $150,000 and note payable of $66,408
less present value discount of $20,535.
2. To reflect an addition to Additional Paid-In Capital as
a result of this transaction of $750,576.
3. To reflect the loss of interest income due to cash paid
to Kane.
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 three months ended December 31, 1996 and for the
year ended September 30, 1996:
1. To adjust revenues to reflect loss of oil and gas sales.
2. To adjust expenses to eliminate all expenses related to
the sold properties including lease operating expense
and DD&A.
3. To reflect interest income on cash received.
4. To reflect gain on sale of assets in year ended
September 30, 1996 and eliminate this gain from the
three months ended December 31, 1996.
MANAGEMENTS DISCUSSION AND ANALYSIS OF CONDENSED PRO FORMA FINANCIAL
STATEMENTS
CONDENSED PRO FORMA BALANCE SHEETS - DECEMBER 31, 1996
LIQUIDITY AND CAPITAL RESOURCES
KANE PRO FORMA
On a pro forma basis, at December 31 cash and current assets both
decreased $150,000 compared to cash and current assets on the
historical basis. Cash decreased to $179,453 and current assets
decreased to $232,443. The decrease resulted from the $150,000 cash
disbursement in connection with the repurchase of the Kane stock.
Total current liabilities remain at $76,326 in both cases, resulting
in a ratio of current assets to current liabilities on a pro forma
basis of 5.05 to 1. This ratio on an historical basis was 5.01 to 1.
Total assets decreased $150,000 on a pro forma basis, reflecting the
cash used to repurchase the Kane stock.
Notes payable increased from zero to $45,873, net of the discount on
notes payable of $20,535 to reflect the present value of the future
payments due to Mr. Kane over the next five years. Total liabilities
increased on a pro forma basis to $372,199 from $326,326 on an
historical basis, solely as a result of the present value of the note
payable to Mr. Kane.
Convertible preferred stock decreased $895,415 on a pro forma basis,
and common stock decreased $51,034, solely due to the retirement of
the preferred and common stock purchased from Mr. Kane. Additional
paid-in capital increased $750,576 to $7,204,873. This is due to the
value of the common and preferred stock on the Company's books which
was purchased from Mr. Kane and retired less the discounted cost of
the purchase. Stockholders' equity decreased $195,873 on a pro forma
basis because of the Company's repurchase of the Kane stock.
Stockholders' equity expressed on a per common share basis, assuming
the convertible preferred stock were all to be converted to common
stock on a two for one basis, increases to $.19 per equivalent common
share on a pro forma basis from $.16 per equivalent common share,
reflecting the anti-dilutive effect of the stock repurchase. Total
liabilities and Stockholders' equity decreased $150,000 on a pro forma
basis, reflecting the combined effect of these events.
MINE SALE PRO FORMA
On a pro forma basis, at December 31 cash and current assets both
increased $175,000 compared to cash and current assets on the
historical basis. Cash increased to $504,453 and current assets
increased to $557,443. The increase resulted from the $125,000 down
payment on the sale of the mine plus the recovery of a $50,000
reclamation deposit, the liability for which is assumed by the
purchaser. Note receivable net of discount on note receivable
increased to $462,696 on a pro forma basis, reflecting future payments
due from the mine sale, discounted to present value using a 10%
discount rate. There were no notes receivable on the historical
basis. Mineral property interests decrease to $95,555 on a pro forma
basis from $529,880 on the historical basis, reflecting a reduction in
mineral property interests equal to the book value of the mine, less
depreciation and depletion. Deposits decrease $50,000 on a pro forma
basis as compared to the historical basis because of the pro forma
elimination of the $50,000 reclamation deposit, no longer required
upon completion of sale of the mine. Net of all of these events,
total assets on a pro forma basis increase $153,371 to $1,449,482.
Total current liabilities remain at $76,326 in both cases, resulting
in a ratio of current assets to current liabilities on a pro forma
basis of 7.3 to 1. This ratio on an historical basis was 5.01 to 1.
Deferred gain on sale of the mine increased to $153,371, reflecting
the gain on the mine sale which will be recognized in future years as
the installment payments are received. Total liabilities and
Stockholders' equity on a pro forma basis increased $153,371 to
$1,449,482, reflecting the deferred gain on the sale of the mine.
KANE AND MINE SALE PRO FORMA
On a pro forma basis, at December 31 cash and current assets both
increased $25,000 compared to cash and current assets on the
historical basis. Cash increased to $354,453 and current assets
increased to $407,443. The increase resulted from the $125,000 down
payment on the sale of the mine plus the recovery of a $50,000
reclamation deposit (the liability for which is assumed by the
purchaser) less the $150,000 paid to repurchase the Kane Stock. Note
receivable net of discount on note receivable increased to $462,696 on
a pro forma basis, reflecting future payments due from the mine sale,
discounted to present value using a 10% discount rate. There were no
notes receivable on the historical basis. Mineral property interests
decrease $434,325 to $95,555 on a pro forma basis from $529,880 on the
historical basis, reflecting a reduction in mineral property interests
equal to the book value of the mine, less depreciation and depletion.
Deposits decrease $50,000 on a pro forma basis as compared to the
historical basis because of the pro forma elimination of the $50,000
reclamation deposit, no longer required upon completion of sale of the
mine. Net of all of these events, total assets on a pro forma basis
increased $3,371 to $1,299,482.
Total current liabilities remain at $76,326 in both cases, resulting
in a ratio of current assets to current liabilities on a pro forma
basis of 5.34 to 1. This ratio on an historical basis was 5.01 to 1.
Deferred gain on sale of the mine increased to $153,371, reflecting
the gain on the mine sale which will be recognized in future years as
the installment payments are received. Notes payable increased from
zero to $45,873, net of the discount on notes payable of $20,535 to
reflect the present value of the future payments due to Mr. Kane over
the next five years. Total liabilities increased on a pro forma basis
to $525,570 from $326,326 on an historical basis, as a result of the
deferred gain on the mine sale plus the present value of the note
payable to Mr. Kane.
Convertible preferred stock decreased $895,415 on a pro forma basis,
and common stock decreased $51,034, solely due to the retirement of
the preferred and common stock purchased from Mr. Kane. Additional
paid-in capital increased $750,576 to $7,204,873. This is due to the
value of the common and preferred stock on the Company's books which
was purchased from Mr. Kane and retired less the discounted cost of
the purchase. Stockholders' equity decreased $195,873 on a pro forma
basis because of the Company's repurchase of the Kane stock.
Stockholders' equity expressed on a per common share basis, assuming
the convertible preferred stock were all to be converted to common
stock on a two for one basis, increases to $.19 per equivalent common
share on a pro forma basis from $.16 per equivalent common share,
reflecting the anti-dilutive effect of the stock repurchase. Total
liabilities and Stockholders' equity on a pro forma basis increased
$3,371 to $1,299,482, net of the effect of the above elements.
CONDENSED PRO FORMA STATEMENTS OF OPERATIONS - YEAR ENDED SEPTEMBER
30, 1996
The presentation shows the statements of operations on a pro forma
basis for the oil & gas asset sale alone, the Kane stock repurchase
alone, and the mine sale alone.
OIL & GAS ASSET SALE
The Company realized a net loss of $81,636 or $.01 per common share on
a pro forma basis for the year ended September 30, 1996, compared to a
loss on the historical basis of $143,673 or $.02 per common share.
Oil & gas sales on a pro forma basis declined 29% to $153,816 compared
to historical basis oil & gas sales of $217,807, as a result of the
oil & gas production sale.
Costs and expenses on a pro forma basis decreased $39,800 to
$1,596,095 from $1,635,895 on the historical basis. The sale of the
oil & gas production is wholly responsible for the decline in costs
and expenses. Lease operating costs declined $17,848 and
depreciation, depletion and amortization decreased $21,952. Costs
other than those associated with oil & gas sales were equal for both
the pro forma basis and the historical basis, resulting in a 19%
increase in operating loss on a pro forma basis to $151,148 from an
operating loss on the historical basis of $126,957. A gain on the
sale of the production of $76,557 and an increase in interest income
of $9,671 resultant from the additional cash on hand from the sale
resulted in a reduced loss on a pro forma basis of $81,636. Other
income items in both periods are identical.
KANE STOCK REPURCHASE
The Company realized a net loss of $149,973 or $.03 per common share
on a pro forma basis for the year ended September 30, 1996, compared
to a loss on the historical basis of $143,673 or $.02 per common
share. A reduction in interest income of $6,300 resultant from a
decrease in cash on hand net of the Kane stock repurchase was
responsible for the increased loss.
Weighted average common shares declined 510,352 shares on a pro forma
basis, due solely to the repurchase of the Kane stock.
OIL & GAS ASSET SALE AND KANE STOCK REPURCHASE COMBINED
The Company realized a net loss of $87,936 or $.02 per common share on
a pro forma basis for the year ended September 30, 1996, compared to a
loss on the historical basis of $143,673 or $.02 per common share.
Oil & gas sales on a pro forma basis declined 29% to $153,816 compared
to historical basis oil & gas sales of $217,807, as a result of the
oil & gas production sale.
Costs and expenses on a pro forma basis decreased $39,800 to
$1,596,095 from $1,635,895 on the historical basis. The sale of the
oil & gas production is wholly responsible for the decline in costs
and expenses. Lease operating costs declined $17,848 and
depreciation, depletion and amortization decreased $21,952. Costs
other than those associated with oil & gas sales were equal for both
the pro forma basis and the historical basis, resulting in a 19%
increase in operating loss on a pro forma basis to $151,148 from an
operating loss on the historical basis of $126,957. A gain on the
sale of the production of $76,557 and a net increase in interest
income of $3,371 resultant from the additional cash on hand from the
sale net of the cash used for the Kane stock repurchase resulted in a
reduced loss on a pro forma basis of $87,936. Other income items in
both periods are identical. Weighted average common shares declined
510,352 shares on a pro forma basis, due solely to the repurchase of
the Kane stock, resulting in an increase in the loss per common share
on a pro forma basis to $.02 from $.01 on the historical basis.
MINE SALE
The Company realized an 85% increase in net loss on a pro forma basis
for the year ended September 3, 1996 to $265,818 compared to a net
loss of $143,673 for the same period on the historical basis. Oil and
gas sales are identical in both presentations, but mineral sales on a
pro forma basis decreased $1,224,192 to $66,939, compared to
historical basis mineral sales of $1,291,131. The sale of the kaolin
mine as reflected in the pro forma presentation eliminates most of the
mineral sales in that presentation. The net effect of these events is
an 81% decline in revenues in the pro forma period to $284,746 from
$1,508,938 on the historical basis.
Costs and expenses on a pro forma basis decreased 63% to $600,223 from
$1,635,895 on the historical basis, since mining costs, including
transportation and royalties, of $1,009,224 are eliminated and such
costs are only $40,163 on the pro forma basis. Oil and gas lease
operating costs are identical in both presentations, but depletion,
depreciation, and amortization decreased 25% from $86,931 to $65,311
in the pro forma period, and general and administrative costs
decreased $4,828 from $385,593 to $380,765 in the pro forma period,
both reflecting a deduction in costs associated with operation of the
kaolin mine. The operating loss increased 148% in the pro forma
period, compared to the historical period, to $315,477 from $126,957,
primarily reflecting the absence of an operating income contribution
from the kaolin mine. Interest income increased 68% to $19,462 on a
pro forma basis from $11,587 on the historical basis. A gain
recognized on the sale of the kaolin mine of $58,500, combined with
the increased interest income was insufficient to overcome the effect
of the reduction in kaolin income, resulting in the increased loss on
a pro forma basis.
CONDENSED PRO FORMA STATEMENTS OF OPERATIONS - THREE MONTHS ENDED
DECEMBER 31, 1996
The presentation shows the statements of operations on a pro forma
basis for the oil & gas asset sale alone, the Kane stock repurchase
alone, and the mine sale alone for the three-month period.
OIL & GAS ASSET SALE
The Company realized a net loss of $88,225 or $.01 per common share on
a pro forma basis for the three months ended December 31, 1996,
compared to a loss on the historical basis of $8,472 or no cents per
common share. Oil & gas sales on a pro forma basis declined 25% to
$31,285 compared to historical basis oil & gas sales of $41,616, as a
result of the oil & gas production sale.
Costs and expenses on a pro forma basis decreased $4,717 to $302,037
from $306,754 on the historical basis. The sale of the oil & gas
production is wholly responsible for the decline in costs and
expenses. Lease operating costs declined $3,715 and depreciation,
depletion and amortization decreased $1,002. Costs other than those
associated with oil & gas sales were equal for both the pro forma
basis and the historical basis, resulting in an 8% increase in
operating loss on a pro forma basis to $79,196 from an operating loss
on the historical basis of $73,582. A gain on the sale of the
production of $76,557 in the historical three months was non-recurring
and there was no such gain in the pro forma basis three months.
Interest income increased $2,418 to $5,594 in the pro forma three
month period due to the additional cash on hand from the sale, but in
the absence of the $76,582 non-recurring gain, the net loss on the pro
forma period increased to $88,225 from $8,472.
KANE STOCK REPURCHASE
The Company realized a net loss of $10,047 on a pro forma basis for
the three months ended December 31, 1996, compared to a loss on the
historical basis for the three-month period of $8,472. A reduction in
interest income of $1,575 resultant from a decrease in cash on hand
net of the Kane stock repurchase was responsible for the increased
loss.
Weighted average common shares declined 51,352 shares on a pro forma
basis, due solely to the repurchase of the Kane stock.
OIL & GAS ASSET SALE AND KANE STOCK REPURCHASE COMBINED
The Company realized a net loss of $89,800 or $.02 per common share on
a pro forma basis for the three months ended December 31, 1996,
compared to a loss on the historical basis of $8,472 or no cents per
common share. Oil & gas sales on a pro forma basis declined 25% to
$31,285 compared to historical basis oil & gas sales of $41,616, as a
result of the oil & gas production sale.
Costs and expenses on a pro forma basis decreased $4,717 to $302,037
from $306,754 on the historical basis. The sale of the oil & gas
production is wholly responsible for the decline in costs and
expenses. Lease operating costs declined $3,715 and depreciation,
depletion and amortization decreased $1,002. Costs other than those
associated with oil & gas sales were equal for both the pro forma
basis and the historical basis, resulting in an 8% increase in
operating loss on a pro forma basis to $79,196 from an operating loss
on the historical basis of $73,582. A gain on the sale of the
production of $76,557 in the historical three months was non-recurring
and there was no such gain in the pro forma basis three months. A net
increase in interest income of $843 was realized resultant from the
additional cash on hand from the sale net of the cash used for the
Kane stock repurchase but in the absence of the $76,582 non-recurring
gain, the net loss in the pro forma period increased to $89,800 from
$8,472 in the historical presentation. Other income items in both
periods are identical. Weighted average common shares declined
510,352 shares on a pro forma basis, due solely to the repurchase of
the Kane stock, resulting in an increase in the loss per common share
on a pro forma basis to $.02 from no cents on the historical basis.
MINE SALE
The Company's net loss on a pro forma basis for the three months ended
December 31, 1996 tripled to $34,137 compared to a net loss of $8,472
for the same period on the historical basis. Oil and gas sales are
identical in both presentations, but mineral sales on a pro forma
basis decreased to zero, compared to historical basis mineral sales of
$191,556. The sale of the kaolin mine as reflected in the pro forma
presentation eliminated the mineral sales in that presentation. The
net effect of these events is an 82% decline in revenues in the pro
forma period to $41,616 from $233,172 on the historical basis.
Costs and expenses on a pro forma basis decreased 53% to $143,226 from
$306,754 on the historical basis, since mining costs, including
transportation and royalties, of $153,584 are eliminated and such
costs are only $983 on the pro forma basis. Oil and gas lease
operating costs are identical in both presentations, but depletion,
depreciation and amortization decreased 37% from $9,492 to $5,958 in
the pro forma period, and general and administrative costs decreased
$6,410 from $112,220 to $105,810 in the pro forma period, both
reflecting a reduction in costs associated with operation of the
kaolin mine. The operating loss increased 38% in the pro forma
period, compared to the historical period, to $101,610 from $73,582,
primarily reflecting the absence of an operating income contribution
from the kaolin mine. Interest income increased 74% to $5,539 on a
pro forma basis from $3,176 on the historical basis. Net of these
events, the net loss on a pro forma basis increased to $34,137
compared to a net loss of $8,472 for the same period on the historical
basis.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR PERIOD ENDING DECEMBER 31, 1996
RESULTS OF OPERATIONS
The Company realized an operating loss for the three month period
ended December 31, 1996 of $73,582 compared to an operating loss of
$50,722 for the same period in 1995. A one-time gain on the sale of
oil and gas assets of $76,557 reduced the net loss for the 1996 period
to $8,472 compared to a net loss of $48,623 for the same period in
1995.
Mineral product sales increased $49,048 to $191,556 for the three
months ended December 31, 1996 compared to mineral sales of $142,508
for the same period in 1995. The Company's customer for its kaolin
clay purchased more kaolin in the 1996 period that in the prior year's
period, when lengthy rail turn-around times limited the Company's
ability to deliver the quantity of kaolin desired by the customer.
Turn-around times returned to normal in the 1996 period.
Oil and gas sales for the three months ended December 31, 1996
decreased $3,022 to $41,616 compared to $44,638 for the three months
ended December 31, 1995. 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. 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 this sale, which more than offset the positive effect of
higher oil and gas prices in the quarter compared to the comparable
quarter,and normal production decline. The Company's future oil and
gas production volumes will be at a substantially reduced level as a
result of this sale unless new production can be brought on stream
from as yet undrilled properties, which is speculative. The sales
volumes and average sales prices during the periods were as follows:
Three Months Ended
December 31, December 31,
1996 1995
Sales
Oil (bbls) 1,283 2,040
Gas (MCF) 615 9,711
Average Sales Price
Oil $ 19.41 $ 15.39
Gas $ 1.17 $ 1.01
Mining costs including transportation and royalties were $154,567
for the three months ended December 31, 1996 as compared to $94,914
for the same period in 1995. The increase is due to higher
transportation and mining costs associated with the higher volume of
production and sales in 1996 as compared to 1995, and to timing
differences in the billing of transportation costs.
Lease operating expenses including production taxes decreased
$2,200 for the three months ended December 31, 1996 as compared to
1995. The decrease is primarily attributable to the lower production
volume in the 1996 period as a result of the production sale.
General and administrative expenses increased $20,027 for,the
three months ended December 31, 1996 as compared to the same period in
1995. This increase was primarily due to higher legal expenses
associated with the possible sale of the Company's kaolin mine, as
well as legal costs incurred in connection with the repurchase of
common and preferred stock from a major shareholder, both one-time
events. Accounting expenses were also higher, due primarily to the
need to review the Company's share of the results of operations of
NovaChek Limited Liability Company ("NovaChek"), which did not exist
in the 1995 period.
Depletion, depreciation, and amortization decreased 48% to $9,492
in the three months ended December 31, 1996 as compared to $18,146 in
1995. 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 in the three months
ended December 31, 1996 were $6,290. NovaChek had not been formed in
the 1995 period. The Company will record additional losses in future
periods from its interest in NovaChek unless NovaChek is able to
establish profitable operations, which cannot be determined at this
time.
Interest income increased to $3,176 in the three months ended
December 31, 1996, compared to $2,099 in 1995, reflecting more cash on
hand invested in short-term obligations. Interest income will decline
in future periods due to the investment of cash in the repurchase of
stock. The Company may also invest cash in assets which are expected
to generate cash flow in the future, but which are likely to result in
a net cash outlay in the short term. Interest expense in the quarter
increased to $8,333 due to the issuance of interest-bearing
convertible subordinated debentures earlier in the fiscal year. There
were no such debentures outstanding in the 1995 period.
A gain of $76,557 on the one-time sale of producing assets was
recorded in the 1996 period. There was no such sale in the 1995
quarter.
CAPITAL RESOURCES-SOURCES OF CAPITAL
The Company's primary source of cash flow during the three months
ended December 31, 1996 were the collection of accounts receivable,
and proceeds from the non-recurring sale of oil & gas properties.
Cash provided by operations totaled $66,059 for the three month period
ended December 31, 1996 as compared to cash provided by operations of
$70,200 for the same period in 1995. The increase in cash and cash
equivalents for the period was $249,626 resulting in cash on hand at
December 31, 1996 of $329,453, compared to cash on hand at December
31, 1995 of $134,403.
CAPITAL RESOURCES-UTILIZATION OF CAPITAL
For the three month period ended December 31, 1995, the Company
reduced accounts payable by $216,178. Proceeds from the sale of
properties were $235,793, and investment in and advances to NovaChek
Limited Liability Company were $52,226, resulting in cash generated by
investing activities of $183,567. In the comparable period, net cash
used by investing activities was $6,617. All funds for capital
expenditures for the remainder of the year are expected to be provided
by operating cash flow, from property or asset sales, if any, and from
existing cash balances. All funds for capital expenditures for the
remainder of the year are expected to be provided by operating cash
flow, from property or asset sales, if any, and from existing cash
balances. The Company has agreed to repurchase 510,342 shares of
common stock and 895,415 shares of convertible preferred stock from a
major shareholder in settlement of a dispute for $150,000 in cash to
be paid at closing, and additional payments based on revenues from
either the operation of or the sale of its cement-grade kaolin mine of
up to an aggregate of $70,008 over a period of years. The Company may
also purchase a portion of its common stock in the event of the sale
of its kaolin mine upon the assertion of appraisal rights by
shareholders who dissent from a vote to approve such sale. It is the
Company's present intention to finance these events from internal cash
flow and cash resources, but the Company may offer to sell preferred
and/or common stock in a private placement to replace all or a portion
of these funds and provide additional capital to acquire new sources
of cash flow. Regardless of whether any such sale of stock takes
place, the Company will endeavor to acquire cash-flow generating
assets to replace the cash flow formerly provided by the kaolin mine,
the success of which endeavors cannot be predicted.
LIQUIDITY
At December 31, 1996, the Company's working capital surplus
totaled $306,117 as compared to a surplus of $198,637 at September 30,
1996. Liquidity for the three months ended December 31, 1996 was
provided by the sale of several oil & gas producing assets and
leasehold interests, primarily overriding royalty interests in
producing oil & gas wells in the Wyoming Overthrust Belt, and by
operations; however, liquidity was reduced by reductions in accounts
payable, accrued liabilities and prepaid expenses and by investment in
NovaChek Limited Liability Company.
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. Because the Company has sold a portion of
its oil & 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 further
enhanced over the next twelve months, and further payments pursuant to
the sale will be received over the next five years, on a guaranteed
basis. Cash flow in the 1997 fiscal year would exceed that expected
to be generated from the Company's single contracted customer for its
kaolin mine, but future payments would provide a lesser amount of cash
flow than in 1997. The Company presently has no contracts for its
kaolin mine which extend past December 31, 1997. The Company has
permitted a gravel pit on two leases in Minnesota. A local contractor
mined and marketed the gravel in 1996 and will pay 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 in both
industrial minerals and oil and gas projects, where risk is low to
moderate.
FUTURE TRENDS (ASSUMING THE SALE OF THE KAOLIN MINE)
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 is currently being offered for sale by the
owner/operator, and should such a sale take place, the level of
service which will be offered by the new owner cannot be determined.
The prices the Company receives for its oil and gas products will
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 from 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, 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.
It cannot be determined at this time whether NovaChek Limited
Liability Company will be successful in raising the funds necessary to
initiate gold mining operations on its property in Alaska, nor can it
be determined whether these operations, if so initiated, will be
successful. If commercial operations can be established on this
property, the Company will 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 two or
more seasons.
The Company has reduced its overhead substantially over the past
two years, and further reductions would be difficult to achieve
without impairing the Company's ability to operate efficiently, manage
its assets and pursue its growth objectives. Nova Natural Resources
Corporation intends to explore all avenues whereby it can strengthen
its balance sheet, develop its assets, acquire additional assets and
add to its ability to generate revenues, achieve profitability, and
create value for its shareholders, including the acquisition of assets
or of other companies, mergers, and private and/or public financing.
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 the University of Kansas in 1951 with a
B.S. degree in Geology. Mr. McDonald has published several papers
relating to oil and gas geology in the Rocky Mountain area.
Mr. Spillane became President and Chief Executive Officer of the
Company effective April 1, 1989. Prior to that time he was an
independent consultant to the oil, gas and minerals industry. From
February, 1982 to November, 1987, he was employed as Executive Vice
President of Barrett Resources Corporation, a publicly held oil and
gas exploration company, where his duties primarily involved mergers,
acquisitions, and capital financing in addition to involvement in
other operations. He graduated from the University of Detroit in 1961
with a B.S. in Mechanical Engineering and holds 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 600,000 shares of Common Stock had been
issued to the Company's Directors under the Nonqualified Plan (-0- in
1996); under the Incentive Plan, options to purchase 650,000 shares
had been issued (-0- in 1996). None of the options issued under the
Plan were exercised during 1996 or 1995.
Employee Stock Ownership Plans
The Board of Directors and the stockholders of the Company have also
adopted the Nova Natural Resources Corporation Employee Stock
Ownership Plan ("ESOP") for the benefit of its full-time employees,
including its officers and directors.
Only employees who have reached the age of 21 and have completed one
year of Company service are eligible to participate in this plan.
With respect to each plan year, the Company may contribute cash or
Common Stock of the Company to a trust in such amounts as the Board of
Directors deems advisable. Contributions may not exceed the lesser of
25% of the participant's total annual compensation or $30,000. Any
cash contributions are to be used primarily by the trustee to
purchase shares of Common Stock of the Company, which, in addition to
shares of Common Stock of the Company contributed by the Company, are
allocated to the accounts of all participants in the ratio that the
total annual compensation (not in excess of $150,000) of each
participant bears to the total compensation of all participants in
such year. The plan does not allow contributions by participants.
Each participant's right to the stock allocated to his account is
fully vested after three years of service. Nonetheless, a
participant's benefits will be fully vested if his employment
terminates by reason of death or upon his reaching 65. If a
participant incurs a break in service (passage of one plan year in
which the employee works 500 or fewer hours), his benefits are
forfeited to the extent they have not vested. All forfeitures are
allocated among the remaining participants in the same manner as the
annual contribution.
Distributions under the plan are to commence no later than 60 days
after the last day of the year in which the participant reaches age 65
or, if later, the plan year in which the participant terminates
employment with the Company. The distribution will consist of the
Company's Common Stock. Any distributions are payable in a lump sum
or, if the participant elects, in annual or monthly installments.
Each participant is entitled to direct the trustee as to the manner in
which any stock allocated to his account is voted. The trustee is
empowered to vote any stock which has not been allocated in a manner
which, in the judgement of the Board of Directors, represents the
participants' best interests.
As of September 30, 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 Sherman Street, Suite 550, 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
February 28, 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
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, under subsection (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 date of 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 of
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 by
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 a
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
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.