-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KtPy/IuWA8TwUsn8y2jBQm4zN7k1SUaQN1iPPsklTK7xfB0C6RViGtWpPTx5LYs0 RoKAB4gkvsU4dytyCj1Jcw== 0000792935-99-000001.txt : 19990114 0000792935-99-000001.hdr.sgml : 19990114 ACCESSION NUMBER: 0000792935-99-000001 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVA NATURAL RESOURCES CORP CENTRAL INDEX KEY: 0000792935 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 841227328 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-15078 FILM NUMBER: 99505791 BUSINESS ADDRESS: STREET 1: 789 SHERMAN ST STREET 2: STE 550 CITY: DENVER STATE: CO ZIP: 80203 BUSINESS PHONE: 3038631997 MAIL ADDRESS: STREET 1: P O BOX 481388 CITY: DENVER STATE: CO ZIP: 80248-1388 10KSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _____________ to_______________ Commission file number 0-15078 NOVA NATURAL RESOURCES CORPORATION (Name of small business issuer in its charter) COLORADO 84-1227328 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 789 Sherman Street, Suite 550 Denver, CO 80203 (Address of principal (Zip Code) executive offices) (303) 863-1997 (Issuer's telephone number) Securities registered under Section 12(b) of the Act: -None- Securities registered under Section 12(g) of the Act: Common Stock, $.10 Par Value (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ] Issuer's revenues for its most recent fiscal year totalled: $62,915. Documents Incorporated By Reference: None Transitional Small Business Disclosure Format Yes_____ No X As of December 31, 1998, the Registrant had outstanding 1,792,267 shares of Convertible Preferred Stock, $1.00 par value, and 6,274,131 shares of Common Stock, $.10 par value, its only classes of voting stock, and $250,000 principal amount of convertible subordinated debentures. Aggregate market value of the 3,279,347 shares of Common Stock owned by Non-affiliates of the Registrant as of January 12, 1999 was $114,777, based on the average of the bid and ask prices on January 12, 1999. All Convertible Preferred Stock is owned by affiliates. PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL DEVELOPMENT OF BUSINESS Nova Natural Resources Corporation (the "Registrant", "Company" or "Nova") was incorporated under Colorado Law on April 1, 1993 and is the surviving company in a merger, effective February 1, 1995, of the Company and Nova Natural Resources Corporation, a Delaware corporation. The merger was effected to change the Company's domicile from Delaware to Colorado and caused no change in the Company's capitalization. The Delaware corporation was the successor to Nova Petroleum Corporation and Power Resources Corporation, which merged in 1986. Prior to that merger, Nova Petroleum Corporation and Power Resources Corporation operated since 1979 and 1972, respectively. BUSINESS DEVELOPMENT Operations In its past three fiscal years, the Company has focused on marketing and selling kaolin clay from its Minnesota kaolin mine, exploring for paper-grade kaolin on leases elsewhere in Minnesota, seeking partners for exploration and development of gold on its properties in Alaska and Colorado and seeking partners for exploratory drilling on two oil and gas prospects in Wyoming. While the Company receives revenues from interests in oil and gas wells in the western United States and owns interests in exploratory oil and gas leases, the Company does not operate any wells. Significant Developments During Fiscal 1998 NovaChek Limited Liability Company In the Spring of 1996, the Company organized NovaChek Limited Liability Company ("NovaChek"), an Idaho Limited Liability Company, which was capitalized by an offering pursuant to Regulation D under the Securities Act of 1933, as amended, principally to fund operations to recover placer gold and related minerals on certain State of Alaska off-shore mining leases held by Nova and located near Nome, Alaska. Nova held a 42% membership interest in NovaChek during 1996. Offering proceeds aggregating $350,000 were received from the sale of 35 Units at $10,000 per Unit (an additional five Units were sold for services). NovaChek was managed by the Company and Chek Technologies and Exploration, LLC ("Chek"), a Nevada limited liability company. The Company served as the administrative manager of NovaChek, including all day-to-day responsibilities not entailing mining activities. Chek served as the field operations manager with responsibility for supervising the mining activity and related matters. Nova's field operations role was primarily geological supervision. The ability to decide on major policy matters was a shared decision with Chek and a number of significant decisions required approval of both parties. The Company and Chek Technologies and Exploration ("Chek") agreed to reduce their interest in NovaChek in order to raise more capital in 1997. The Company's interest was reduced to 35.14%. Each Unit was composed of one membership interest in NovaChek and a convertible debenture issued by the Registrant. The price of each Unit was allocated at $3,750 as a capital contribution to NovaChek and $6,250 for each debenture. Nova also contributed a significant portion of the debenture proceeds as capital for NovaChek. Each debenture provides for interest payments at an annual rate of 10% of the face amount, payable semi-annually; may be converted into the Company's common stock at the rate of one share of stock for each $0.15 of principal; may be redeemed by the Company after March 31, 1998 (holders of $175,000 face amount of the debentures, which includes both affiliates and non-affiliates, agreed in June, 1996 that the Company could call the debentures after September 1, 1996, provided that such `early call' would cause a reduction in the conversion price to $0.10/share and the payment of six months advance interest); and is due on April 1, 2001. No early call has been made by the Company. Nova obtained all of the necessary permits so that NovaChek could conduct the contemplated mining operations on its leases. All of the necessary permits were in place in early June, 1996. During 1996 NovaChek encountered numerous difficulties and delays due to weather and mechanical failure. As a result of all of these difficulties, very limited operations, consisting of approximately 14 hours of intermittent operation of the suction equipment, were conducted in the 1996 season. The Company believed that its experience during the 1996 season would dictate the modifications needed to improve performance in 1997. However, since NovaChek had expended its working capital during 1996 without generating operating revenue, additional funding was needed for the 1997 season. Chek committed to contribute approximately $60,000 of the funds needed, several of the members invested an additional $25,000 in cash, the divers accepted membership interests in lieu of cash payment for a portion of their services, and Chek's attorney also accepted a membership interest in return for certain legal work for NovaChek. These contributions enabled the project to proceed. During the 1997 season the modified dredge was finally launched in June. A total of 142.7 ounces of gold were mined and sold. Production was less than projected due to numerous weather and mechanical problems and a thin layer of densely packed cobble gravel covering the entire area. This "armor" masked the pay zone and made it impossible to limit mining to the area of high grade. The dredge could not efficiently mine the hard packed gravel on the sea floor, and it could not safely operate in the winds which developed on a regular basis. The poor results achieved, lack of funds to continue operations, and low gold prices, combined with the poor operational experience made it impossible to raise additional funds. Consequently, the Managers--Nova and Chek--recommended to the members of NovaChek LLC that the LLC be dissolved, effective December 22, 1997, and its assets liquidated to satisfy its outstanding debts, which were primarily owed to Nova, three members who are also affiliated with Nova (two officers and directors and one director who is not an officer), and one member who is a principal of Chek. The members approved liquidation of NovaChek on December 22, 1997. The liquidation of NovaChek's assets was not sufficient to discharge these debts, and accordingly, Nova wrote down the value of its NovaChek investment and loans on its fiscal 1997 financial statements to $4,000. In November, 1998 the Company received a check for final settlement of the sale of the assets of the LLC. NovaChek, LLC had a total of $21,008 in cash, and loans payable of $153,992 after the liquidation of all the assets of the partnership. Nova received a total of $13,616 in the final settlement, which was significantly less than was owed to the Company. Lease Position Offshore Nome, Alaska Reduced The Company released or sold all 6 of its State of Alaska Offshore Mining leases covering 21,411 acres offshore Nome, Alaska during fiscal 1998. The Company retains a 10% Gross Sales term royalty on portions of 3 of the leases sold to Arctic Whitney, Inc. covering 9,018 acres. The royalty remains in effect until the Company receives a total of $360,000 in royalty revenue from the leases, after which the Company's retained royalty will terminate. Due to extreme weather conditions and mechanical problems, Arctic Whitney, Inc. reported no gold sales for the current fiscal year. The property has not, at this time, generated any funds to Nova, and it is impossible to determine if it will generate any funds to the company in the future. Oil And Gas Operations On November 14, 1996, the Registrant sold at an auction conducted by The Oil & Gas Asset Clearinghouse in Houston, Texas several oil & gas producing assets and leasehold interests, primarily overriding royalty interests in producing oil & gas wells in the Wyoming Overthrust Belt. Proceeds from this sale, effective as of November 1, 1996, net of commissions and direct selling costs paid to the Clearinghouse were $230,257. The Company and Robert McDonald, a Director and the Company's largest shareholder, have been actively seeking industry participation in exploratory drilling on a gas prospect in Wyoming. The Company holds an undivided interest of 50% in this prospect, with the Robert McDonald Trust, of which Mr. McDonald is Trustee, holding the balance of the interest. Another prospect in Wyoming was sold, and the Company collected a prospect fee of $13,750. If the prospect was not drilled or a lease extension granted before December 31, 1997, the leases on this particular prospect would expire. The prospect was not drilled, and the leases expired in December, 1997. The property was put up for auction in 1998, and the company which bought them from Nova was the successful bidder for the property. As a result, Nova retains a 4% overriding royalty interest in any production from the property. However, there is no guarantee that the property will be drilled or that if drilled, that drilling will be successful. Nova has no patents, trademarks, licenses, franchises, or concessions other than certain oil and gas leasehold interests granted by federal, state, and other governmental authorities, and private mineral owners. The Company's oil and gas business is not seasonal except to the extent that weather and market conditions, and certain lease terms can affect oil and gas exploration and production activities. Sale Of Kaolin Mine Pursuant to a contract dated January 25, 1997, the Company sold its cement-grade kaolin mining operation and property (the "Cement Kaolin Mine") near Redwood Falls, Minnesota, to Northern Con-Agg, Inc. A portion of the Cement Kaolin mine was located on lands which were subject to a joint venture between the Company and U. S. Borax Inc. ("Borax"), which was formed in 1993 primarily to explore, develop and produce high quality paper-grade kaolin. No paper-grade kaolin has yet been sold from the joint venture property. Borax released the portion of the paper-grade kaolin property occupied by the Cement Kaolin Mine from the joint venture to permit the Company's sale of the mine to NCA. The Company sold all of its cement-grade kaolin operations to NCA, while retaining its interest in the paper-grade joint venture. NCA will pay a total of $700,000 to the Company for the Cement Kaolin Mine. The Company received $210,420 in 1997, and will receive an aggregate of $350,000 in non-interest bearing semi- annual installments on August 15 and December 15 of each year until August 15, 2001, and a final payment of $125,000 on December 15, 2001. Up to $70,008 of the gross NCA proceeds is payable to Thomas F. Kane, a former director, as part of the Company's purchase of his Common and Preferred Stock, over the same period as the NCA payments. The Company will retain both a mortgage and a security interest covering the property being sold to NCA in order to secure full payment of the purchase price. NCA assumed liability for all existing contracts relating to the property. Purchase of Stock of a Director and Preferred Shareholder During 1996, disputes arose between Thomas F. Kane, then a director, and the other directors of the Company concerning decisions by the other directors and the business operations of the Company. Mr. Kane asserted, inter alia, that the continued operation of the Company was not in the best interests of the owners of the Company's Preferred Stock who, if the Company were liquidated, would receive all of the proceeds in the liquidation after payment to the Company's creditors. Mr. Kane also asserted that continuation of the Company's business would cause the dissipation of assets which otherwise would be distributable to owners of the Company's Preferred Stock upon liquidation. Mr. Kane recommended and proposed that the Company be liquidated and threatened to commence litigation to force the liquidation and dissolution of the Company. The Company's other directors disagreed with Mr. Kane, determined to continue the Company as a going concern and determined to oppose any attempt to liquidate and dissolve the Company. In resolution of these disputes, the Company, Mr. Kane and Brian Spillane, the Company's President and a director, entered into an Agreement(the "Kane Agreement"), dated February 5, 1997, for the purchase of all of Mr. Kane's Common and Preferred Stock. By terms of the Kane Agreement, the Company purchased from Mr. Kane 895,415 shares of his Preferred Stock and 510,342 shares of his Common Stock. All of the stock purchased by the Company was retired upon completion of the purchase. Mr. Spillane purchased from Mr. Kane the rest of his stock: 203,426 shares of Preferred Stock and 115,942 shares of Common Stock. Mr. Spillane paid $50,000 for the stock he purchased from Mr. Kane. The Company paid $150,000 and agreed to pay an amount equal to 12% of the net proceeds from the sale of the Cement Kaolin Mine less $13,992, as and when received by the Company. The Agreement among the Company, Mr. Spillane and Mr. Kane also contained certain releases of claims between and among the parties, and certain other representations. The Colorado Business Corporation Act and the Company's Articles of Incorporation and Bylaws permitted the Company to purchase Mr. Kane's stock without approval of its shareholders so long as certain financial requirements were satisfied. In the opinion of management, these statutory requirements were met. Stock Repurchase The Company decided to offer to purchase all of the shares of Common Stock of any shareholder who did not vote in favor of the Cement Kaolin Mine sale and requested such a repurchase. Pursuant to a procedure established by management in a manner similar but not identical to the procedure for dissenter's rights established by the Colorado Business Corporate Act. Management believed that the combination of its Cement Kaolin Mine sale and its sale of oil and gas overriding royalty interests and purchase of the stock of Thomas F. Kane represented material events which might have prompted a shareholder to sell his Common Stock if an adequate market for that Stock existed. The Company recognized that the absence of an active trading market impeded such a sale. As such, management decided to afford shareholders who disagreed with these decisions or with the directors' decision to continue operation of the Company the ability to sell their Common Stock at $.04 per share. Shareholders tendered 44 certificates (a total of 13,700 shares) for redemption in fiscal 1997. In October 1997 (Fiscal 1998) a total of 411,447 shares were tendered for redemption by 2 shareholders, and in March 1998 a final 426 shares were repurchased. Business of the Issuer Mineral Operations The Company sold its cement-grade kaolin mine, effective July 22, 1997. Prior to the mine sale, Nova produced and sold 31,634 metric tons of kaolin to a single customer during fiscal 1997. Pursuant to the contract of sale of the mine, the Company is restricted from selling cement-grade kaolin to its former customers and certain potential customers for a five-year period. The Company presently has no plans to re-enter this business, and is concentrating its efforts on its paper-grade kaolin project in Minnesota. The Company's gold exploration and production activities are currently limited to the retention of a royalty interest in certain of its offshore Nome, Alaska leases. While the Company holds properties for possible future development of limestone products, it has no immediate plans to pursue that business. There is a significant difference between cement-grade kaolin and paper-grade kaolin. Cement-grade kaolin is essentially a low- alkali source of alumina, which is a necessary ingredient in the manufacture of cement, and it is mined and loaded directly onto railcars for delivery to the customer without further processing. Paper manufacture is a highly sophisticated procedure in which an extremely thin layer of kaolin is applied to the surface of paper as a coating while the paper is rotating on a drum at surface speeds of approximately 4,000 feet per minute. The purpose of the kaolin coating is to increase brightness and opacity and improve the printing characteristics of the paper surface. The kaolin must meet stringent brightness, viscosity and other criteria in order to be suitable for coating paper. Unless the raw kaolin has a base level of certain parameters such as brightness, it cannot be rendered suitable by processing for use in paper manufacture. Processing of raw kaolin which meets base-level criteria involves screening to reduce undesirable constituents, magnetic separation, acid treatment and other steps which purify it and render it suitable for use in paper manufacture. These processing steps are expensive, and paper-grade kaolin typically sells for prices in the range of twenty to thirty times the price of the more common cement-grade product. Paper Grade Kaolin In 1990, Nova granted, and later extended, an option to U.S. Borax Inc., an unaffiliated mineral development company which is a wholly-owned subsidiary of London-based Rio Tinto plc("Borax"), to explore for paper-grade kaolin and other industrial minerals on the Company's paper grade kaolin prospect (the "Prospect") in southwestern Minnesota. During the term of the option, Borax expended approximately $400,000 in combined exploration and land activities and earned a 65% interest in the Prospect. In August 1992, Borax exercised its option to enter into a joint venture ("the Joint Venture") at which time Nova was paid an additional $165,000. The joint venture and operating agreement became effective July 1, 1993. Under the operating agreement, the Company assigned a 100% working interest in the prospect to Borax in exchange for the agreement by Borax to pay 100% of the costs of exploring for and developing paper grade kaolin and other industrial minerals on property in the prospect. The Company retained a net proceeds interest in the prospect until Borax recovered 100% of its capitalized costs. At that time, the Company had the option to purchase a 30% working interest by paying Borax an amount equal to 15% of the capitalized costs from April 1, 1993 to the date of recovery of those costs by Borax. Exploration activities performed by Borax on this exploration-stage property to date include drilling 185 exploratory core holes on portions of the properties, bulk sampling, testing and evaluating the quality of the kaolin contained therein, and the construction and operation of a pilot-scale kaolin processing facility. A pilot- scale facility was constructed by Borax and became operational in Georgia during 1996. Processed kaolin from the Joint Venture's property has previously been shipped to paper mills in Minnesota and Wisconsin, where generally successful coating tests were completed. These tests are steps in the evaluation process and cannot be regarded as any guarantee of commercial feasibility, however, the results of these tests are encouraging. Thirty-six of the 185 core holes were drilled in 1996, but only seven of the 1996 cores have been processed, nor have the bulk samples from the last four large-diameter holes been processed. These four samples represent about 20 tons of kaolin from the largest and best-defined deposit. After completing the 1996 drilling program, Borax shipped the cores and bulk samples to Georgia, processed the seven cores, then placed the remaining 29 cores in storage, and ceased active development of the project, citing budget priorities at Rio Tinto. (Results from the seven holes are consistent with the good results obtained from previous drilling in the same area). In late summer, 1997, Borax informed Nova that processing of the cores from the 1996 drilling program would be further deferred, and that Rio Tinto would limit funding to lease maintenance through the end of 1998. Budget priorities on other worldwide projects were taking precedence. Management determined that Borax's plans were unacceptable to Nova, in view of the favorable results of the program, and Nova notified Borax that unless Borax was willing to aggressively pursue the project, Nova desired to immediately open negotiations to replace Borax with a partner who was willing to carry the project forward to commercial realization on a more aggressive schedule. In August 1997, representatives of Nova and Rio Tinto/Borax met in Denver and agreed to propose a termination of the joint venture to Rio Tinto and to Nova's Board of Directors. Terms acceptable to both parties were subsequently negotiated, and a definitive agreement was drafted for signatures. The termination was effective January 1, 1998. Under the settlement agreement, Nova owns an exclusive option until December, 2001, to purchase all of Borax's earned interest in the project for a payment of $300,000. If the payment is not made, Nova must assign the critical leases -- all of which are held by Nova -- to Borax. During the option period, Nova will have full operating rights on the properties. Nova moved the cores and bulk samples to a secure facility under Nova's control in Milledgeville, Georgia in October 1997, and has begun analysis of the results of the 1996 drilling campaign. The Company is seeking a new co-venturer who will agree to implement a more aggressive development program. In the absence of such a co- venturer, Nova will be unable to continue the project on the scale required unless sufficient funding is obtained from other outside sources, the availability of which cannot be assured at this time. In order to produce a commercial product, a processing facility and associated mining facilities would have to be designed and built, the total cost of which, including the exploration and development activities contemplated for the next several years, could reach $45 million. The location of these properties affords a significant transportation advantage over the current primary source of paper- grade kaolin in Georgia, since a significant portion of the paper manufacturing plants in the United States which utilize kaolin are located in the Upper Midwest, within easy reach of the joint venture's properties. Nome Gold In April 1984, Nova acquired a gold prospect located offshore Nome, Alaska. In May 1985, Nova transferred all of its rights and obligations in the Nome Gold Prospect (the "Nome Prospect") to Inspiration Gold, Inc., who later transferred that interest to Western Gold Exploration and Mining Company, Limited Partnership ("WestGold"), a non-affiliated mining entity, and retained a 10%- 17% net profits royalty. During five full seasons of dredging in the Nome Prospect, WestGold recovered approximately 121,000 ounces of gold. Notwithstanding such operations, WestGold was unable to profitably mine this property and Nova did not receive any income pursuant to its net profits royalty interest. In September, 1990, WestGold terminated its operations and returned the project to Nova. At that time, Nova also received a substantial portion of the data gathered by WestGold. The Company retained a former WestGold geologist who catalogued and put the data into a form suitable for use in marketing the Nome Prospect to a new partner. Due to the lack of success in finding a buyer or joint venture partner who would be willing to make an up-front payment to the Company of its historical cost in this property, and the uncertainty as to whether any arrangement entered into would recover those historical costs, for accounting purposes, the Company wrote off its investment in the property in fiscal 1995. However, the Company's efforts to put the property into production continued. Nova initiated mining operations on a portion of the property on a joint-venture basis during 1996, and further operations were conducted in 1997. The managers of NovaChek -- Nova and Chek Technologies -- recommended to the members of NovaChek LLC that the LLC be dissolved and the venture terminated. The termination of the LLC was approved by the members, effective December 22, 1997. The lands subject to the NovaChek LLC sublease reverted to Nova due to NovaChek's failure to fulfill the requirements of the sublease. The Company released or sold all 6 of its State of Alaska Offshore Mining Leases covering 21,411 acres offshore Nome, Alaska during the fiscal year. The Company retains a 10% Gross Sales term royalty on portions of 3 of the leases sold to Arctic Whitney, Inc. covering 9,018 acres. The royalty remains in effect until the Company receives a total of $360,000 in royalty revenue from the leases, after which the Company's retained royalty will be terminated. Due to extreme weather conditions and mechanical problems, Arctic Whitney, Inc. reported no gold sales for the current fiscal year. West Rozell Prospect The Company holds a 50% interest in 1,600 acres of State of Utah oil and gas leases in the Great Salt Lake. The other 50% is held by the Robert E. McDonald Trust. The Company and the Trust have jointly been attempting to interest an industry partner in developing the heavy oil resources known to exist under these leases, which resources were estimated by Amoco Production Company to exceed 90 million barrels in place. Amoco estimated that 1% to 10% of the oil in place might be recoverable. However, Amoco abandoned its effort to put the leases into commercial production using the technology then available, and dropped the leases in 1989. Technology has improved to the point where the outlook for improved recoveries of the oil in place appears favorable. In March 1997 the Company and the Trust entered into an agreement with Roaring River Resources LLC ("Roaring River"), an unaffiliated third party, pursuant to which Roaring River was granted an option to acquire the leases and attempt to put them into production. Roaring River intended to apply technology not previously available to Amoco. The Company and the Trust would each retain a 1.5% overriding royalty if the option was exercised. Roaring River made a payment of $5,000 on April 16, 1997 to maintain the option, however, a further payment of $20,000 scheduled to be made on or before July 15, 1997 to keep the option in effect was not made, and the Company agreed with Roaring River to extend the timing of this payment. The extension expired on September 8, 1997. The Company granted another extension to Roaring River, but now considers the option null and void. The Company would prefer to enter into a new arrangement with Roaring River, if it appears they have the ability to perform, but under the circumstances, Nova must consider an arrangement with other parties. At present, it cannot be determined whether any such arrangement can be made, nor can it be ascertained with certainty when, or if, the properties will be put into production. The leases will expire August 31, 1999 if production has not been established unless an extension can be obtained from the State of Utah. Environmental Regulations Inherent in all mining operations is the obligation to comply with environmental, reclamation, and other applicable state and federal laws and regulations. The Company has obtained those environmental permits, licenses or approvals required for its operations. Management is not aware of any violations of environmental permits, licenses or approvals issued with respect to the Company's operations. In the past, Nova has been involved in extensive hearings regarding the environmental impact of its Minnesota kaolin mine and has voluntarily taken steps to mitigate any environmental impact. While the Company believes it is currently in compliance with all such laws and regulations and is not aware of any current violations, the applicability and impact of, and the Company's obligations under such provisions cannot always be determined with certainty. However, the Company's liability could continue after relinquishment of its interest in its properties, even in the absence of operations. As such, the Company cannot fully determine the extent of its liability or potential liability in connection with these matters. The Company is not currently subject to any pending administrative or judicial enforcement proceedings arising under environmental laws or regulations. Environmental laws and regulations may be adopted in the future which may have an impact upon the Company's operations. The Company cannot now accurately predict or estimate the impact of any such future laws or regulations on its operations. Exploration and Development Arrangements The Company's financial resources are not sufficient to fund significant exploration or development of its mineral properties. Therefore, to evaluate and, if justified, to develop its mineral prospects, Nova typically enters into arrangements under which other companies acquire a portion of the Company's interest in the properties in return for performing necessary activities. The terms of these arrangements generally are dictated by the type of minerals involved, the extent of prior development, prospective value of the properties and other diverse factors. While the Company intends to retain a working interest in its properties when possible, it has in the past and may from time to time, sell its entire interest and retain only a royalty or other income interest to reduce risk and obtain working capital for exploration and development. Mineral exploration and development is highly competitive. Success is dependent on a number of factors including the ability to identify areas having mineral potential, to acquire leases or other mineral interests in such areas, and attract sufficient capital to acquire, explore and develop mineral properties. The minerals industry is dominated by a number of large companies having resources far in excess of Nova. The Company's competitors include mining companies, major oil companies and companies in unrelated fields making it impossible to estimate the actual number of competitors. Furthermore, a significant portion of the data utilized by the Company in making acquisitions is public information. Mining permits are required by various state and federal agencies before mining can be undertaken. There is no assurance that the necessary permits can be acquired or that the projects would be economically viable if the permits are acquired. The Company has no patents, trademarks, licenses, franchises, or concessions other than certain leasehold interests granted by federal, state, and other governmental authorities, and private mineral owners, although the Company will have certain licensing rights pursuant to its pending agreement with U.S. Borax to a patent which was granted to Borax in connection with its kaolin processing technology development in support of the joint venture. The Company's mineral business is not seasonal except to the extent that weather and market conditions can affect exploration and production. Oil and Gas Operations The principal hydrocarbons currently produced from properties in which Nova has an interest are crude oil and natural gas. Such products are sold by or on behalf of the Company to purchasers located near the wellhead. None of the entities purchasing the Company's production is an affiliate of the Company. During fiscal 1998, the Company had three customers which accounted for approximately 82% of its total net oil and gas sales: Scurlock Permian Corporation (39% of total oil and gas sales), Burnett Oil Co., Inc. (15%), and Eighty Eight Oil Company (28%). Because purchasers for oil and gas are generally available and prices paid for oil and gas do not fluctuate materially from purchaser to purchaser, Nova believes that the loss of any of these purchasers would not have a materially adverse effect on its financial status. Although the Company believes a ready market exists for its hydrocarbon production, the acquisition, exploration, development, production, and sale of oil and gas are subject to many factors beyond its control, including worldwide and domestic economic conditions, political stability in the Persian Gulf, oil import quotas, availability of drilling rigs, casing and other equipment and supplies, proximity to and availability of gas pipelines, supply and price of competing fuels, and the regulation of prices, production, transportation, and marketing by certain federal and state governmental authorities. The source and availability of raw materials affecting Nova's oil and gas operations is generally limited to the availability of oil field equipment and supplies, including tubular steel products and drilling rigs, all of which currently are in sufficient supply. However, any shortages of or delays in obtaining such materials could delay drilling or production activities and adversely affect operations conducted by Nova or by operators of its properties. The oil and gas industry is extremely competitive and involves a high degree of risk. The Company is in competition with "major" integrated oil and gas companies, other independent oil and gas companies, and other entities. The Company cannot ascertain the exact number of its competitors or its relative competitive position, but does not believe such factors to be of significance. Nova's exploration and development activities are subject to all of the risks and hazards typically associated with such activities. Among these risks are the necessity of expending large sums of money to acquire properties and drill exploratory wells which are usually non-productive or may not generate income sufficient to repay the cost of drilling. A large number of companies and individuals, many with financial resources and staffs greater than those of the Company, are engaged in exploration for and development of oil and gas. Accordingly, the Company may be at a competitive disadvantage on its property acquisition activities. Nova requires working capital to carry lease costs and delay rentals until arrangements can be negotiated with other entities to explore and/or develop Nova's oil and gas properties. Consistent with industry practice, working capital may be generated by the Company from proceeds of production, sales of properties and operating fees. At September 30, 1998, the Company did not operate any of its producing oil and gas properties. However, the Company does operate two exploratory properties. The Company was aggressively marketing two prospects, both in Wyoming, in an endeavor to interest industry partners in funding exploratory drilling efforts on either or both of these prospects. In October, 1997, the Company sold one of these properties to North American Resources, a subsidiary of Montana Power Company for $25,000 (55.56% of which was Nova's interest, the balance being the interest of the Robert E. McDonald Trust) and retained an overriding Royalty interest. The prospect was not drilled, and the leases expired in December, 1997. The property was put up for auction in 1998, and North American Resources was the successful bidder for the property. As a result, Nova retains a 4% overriding royalty interest in the production from the property. However, there is no guarantee that the property will be drilled or that if drilled, that drilling will be successful. The nature of Nova's business precludes a backlog of orders. There is no portion of the Company's business which may be subject to renegotiation or termination at the election of the Government. The Company has not engaged in any research and development activities as those terms are customarily used. In recent years, the natural gas industry has undergone substantial changes, principally as the result of gas pipelines withdrawing from their historical role as merchants and purchasers and restricting their involvement to transportation. As a result, producers like Nova increasingly will have to find new purchasers for their natural gas. Nova is not dependent upon any single customer for purchases of natural gas. On November 14, 1996, the Registrant sold at an auction conducted by The Oil & Gas Asset Clearinghouse in Houston, Texas several oil & gas producing assets and leasehold interests, primarily overriding royalty interests in producing oil & gas wells in the Wyoming Overthrust Belt. Proceeds from this sale, net of commissions and direct selling costs paid to the Clearinghouse were $230,257. The sale was effective as of November 1, 1996. The bulk of the interests were sold to a Denver, Colorado based firm not affiliated with the Company, which was the successful bidder among a group of bidders at the auction for the greater portion of the oil & gas assets and interests referred to above. The net book value of the assets sold represented approximately 10% of the Company's total assets as of September 30, 1996. The majority of the value of the properties sold was related to a single producing well. If a production problem occurred at some point in the future with that well, the value of the Registrant's oil and gas reserves could have declined substantially (although there was no current indication of any problem). The sale was made to eliminate the aforementioned risk, to generate cash to improve the Company's liquidity, and for re-investment of cash in the Company's business. The Company's remaining oil and gas interests are mostly working interest in wells in the latter stages of their lives, with relatively high operating costs. In August of 1998, the Company sold all but one of its working interest wells in the Lindahl field of North Dakota for $8,895. The high operating costs of these wells and the low price of oil combined to make these wells uneconomic. The Company retains other oil and gas interests, but due to the Company's financial position and the unfavorable prices of oil, it may consider selling these properties if the opportunity arises. The Company and Robert McDonald, its Board Chairman, are currently seeking industry participation in exploratory drilling on a prospect in Wyoming, in which the Company holds an undivided interest, with the Robert McDonald Trust, of which Mr. McDonald is Trustee, holding the balance of the interest. Nova has no patents, trademarks, licenses, franchises, or concessions other than certain oil and gas leasehold interests granted by federal, state, and other governmental authorities, and private mineral owners. The Company's oil and gas business is not seasonal except to the extent that weather and market conditions can affect oil and gas exploration and production activities. Environmental Regulation - Oil and Gas Drilling and production activities are subject to regulation under federal and state pollution control and environmental laws and regulation. The Company is subject to a variety of federal, state, and local environmental laws relating to spillage, noise, air quality, and disposal of waste products arising from the Company's operations. Such environmental and conservation laws and regulations could significantly limit the Company's activities and increase the costs of exploring and developing its acreage. Existing as well as future legislation could cause additional expense, capital expenditures, restrictions and delays in the development of properties, the extent of which cannot be predicted. Additional energy taxes, higher patent and permit fees and similar proposals have been discussed in Congress, but the Company is unaware at this time of any pending legislation which would adversely affect its operation. Regulation of Production and Pricing Production and sale of oil and gas are subject to federal and state governmental regulation, which while lessening in recent years, includes limitations on the production of oil and gas by restricting the rate of flow for oil and gas wells below their actual capacity to produce. Restrictions on the purchase prices for natural gas have largely been rescinded by the Natural Gas Decontrol Act of 1989. A phase-out of such regulations was substantially complete by mid-1993. While the effect of such deregulation cannot be determined, the predictability of gas pricing is anticipated to be substantially lessened as a result of such decontrol and changes in the operations of gas pipelines from purchasers to transporters of gas. To the Company's knowledge, as of September 30, 1998, none of the Company's gas reserves were subject to price controls. Employees At September 30, 1998, Nova had no full-time employees. The Company utilizes the services of various consultants and independent contractors with expertise in those fields of interest in which the Company is active. The Company has no contracts with these consultants. ITEM 2. DESCRIPTION OF PROPERTIES PERSONAL PROPERTY The Company's personal property consists of furniture and fixtures and technical equipment, with a total net book value at September 30, 1998 of $856. OFFICE LEASE In February 1997, the Company moved from a much larger office space in the downtown area into smaller space in mid-town, reducing its rental cost almost 50% over the first twelve months of its lease from approximately $2,500 per month to $1,318 per month. The Company's current office lease is a three-year lease effective February 1, 1997. The space consists of 1,517 square feet, and lease payments for the first year of the lease were $15,810. These payments increased to $18,059 during the second year of the lease, and will increase to $18,817 during the final year. OIL AND GAS PROPERTIES All of the Company's oil and gas properties are located within the continental United States. There are no quantities of oil and gas subject to long-term supply or similar agreements with foreign governments or authorities. No major discovery or other favorable or adverse event is believed to have caused a significant change in the estimated proved reserves of the Company subsequent to September 30, 1998 shown in the following sections, which set forth information concerning the Company's interests in oil and gas properties. Proved Reserves and Present Value Information For information concerning the Company's proved reserves and present value information, see "Supplementary Information On Oil And Gas Operations." Estimates of the Company's estimated proved oil and gas reserves and present value of the estimated future net revenues attributable to such reserves for the year ended September 30, 1998 and 1997 are based upon reports by the independent consulting firm of D. J. Low, Inc. The Company files such reports with the Securities and Exchange Commission, pursuant to regulations of that agency which also provides public access to those documents. The Securities and Exchange Commission requires that estimates of reserves, estimates of future net revenues and the present value of estimated future net revenues be based on the assumption that oil and gas prices will remain at current levels (except for gas prices determined by fixed contracts), and that production costs will not escalate in future periods. The present value of estimated future net revenues for fiscal years 1998 and 1997 has not been adjusted for income taxes because significant net operating loss carryforwards exist for income tax and financial reporting purposes. All such estimates have been adjusted for the anticipated costs of developing proved undeveloped reserves. Reserve calculations require estimation of future net recoverable reserves of oil and gas and the timing and amount of future net revenues to be received therefrom. Such estimates are based on numerous factors, many of which are variable and uncertain. Accordingly, it is common for the actual production and revenues to vary from earlier estimates. Estimates made from the first few years of production from a property are not likely to be as reliable as later estimates based on a lengthy production history. Hence, reserve estimates and estimates of future net revenues from production may vary from year to year. The Company has not provided reserve estimates to any federal agency other than the Securities and Exchange Commission. Production, Average Sales Price, and Average Production (Lifting) Costs The following table sets forth oil and gas production (net of all royalties, overriding royalties, and other outstanding interests of other entities) attributable to the Company for the fiscal years ended September 30, 1998 and 1997 and the average sales prices and production costs per unit of production. Years Ended September 30, 1998 1997 Production: Oil (Bbls) . . . . . . . . . . 3,868 5,181 Gas (Mcf) . . . . . . . . . . 9,518 19,147 Average Sales Prices: Oil (per Bbl) . . . . . . . . $12.18 $18.34 Gas (per Mcf) . . . . . . . . $ 1.41 $ 1.36 Average Production Costs Per Equivalent Barrel Of Oil*. $12.29** $10.78 * Equivalent barrels include oil, condensate and gas. Gas is converted to equivalent barrels on the basis of 6 Mcf per equiva- lent barrel. ** In November, 1996, the Company sold most of its overriding royalty properties, leaving the majority of its production from working interest wells which have higher production costs. Drilling Activity The Company did not participate in any drilling activity during fiscal 1998 or 1997. Approximate Developed Acreage and Productive Oil and Gas Wells The following table identifies productive wells and sets forth an approximation of developed oil and gas acreage in which the Company owned a leasehold interest as of September 30, 1998. Productive Wells (2) Developed Acres (1) Gross (5) Net (6) Gross (3) Net (4) Oil Gas Oil Gas Geographic Area Colorado 320.00 24.10 2 - 0.15 - North Dakota 80.00 20.00 1 - 0.25 - Texas 160.00 40.00 1 - 0.25 - Wyoming 1,131.72 33.84 1 - 0.03 - TOTAL 1,691.72 117.94 5 0 0.68 0 (1) Acreage spaced or assignable to productive wells. (2) Wells either producing or capable of production. (3) An acre in which a working interest is owned. The number of gross acres is the total number of acres in which working interests are owned. (4) When the sum of fractional working interests in gross acres equals one, a net acre is deemed to exist. The number of net acres is the sum of all the fractional working interests owned in gross acres expressed in whole numbers and fractions thereof. (5) A well in which a working interest is owned. The number of gross wells is the total number of wells in which working interests are owned. (6) When the sum of fractional working interests owned in gross wells equals one, a net well is deemed to exist. The number of net wells is the sum of all of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof. Approximate Undeveloped Oil and Gas Acreage The following table sets forth the approximate undeveloped oil and gas acreage in which the Company owned a leasehold interest as of September 30, 1998. Undeveloped Acreage Gross Net Utah 1,600.00 800.00 Wyoming 3,119.29 1,020.64 TOTAL 4,719.29 1,820.64 The Company's leases are primarily federal and fee leases, carry landowner's royalties of at least 12.5% and are subject to overriding royalty interests ranging from 0% to 7.5%. Each lease requires the payment of annual delay rentals ranging from $1 to $5 per acre. A delay rental is the amount paid for the privilege of deferring development of leased acreage, payment of which can be avoided by abandonment of the lease, commencement of development operations, or by obtaining production. Most of the leases will expire at the end of their respective primary terms, unless production has been obtained prior to that date, in which event the lease term will continue until production ceases. The Company will attempt to enter into cost-sharing arrangements to evaluate expiring acreage before the end of the lease terms. From time to time, geologic evaluations and cost considerations may cause the Company to cease paying delay rentals and abandon such leases prior to the expiration of their primary terms. Where justified and within the financial capabilities of the Company, the Company may seek to renew leases on certain expiring acreage. Overriding Royalty Interests in Undeveloped Acreage The following table sets forth, as of September 30, 1998, the Company's overriding royalty interests in undeveloped oil and gas acreage. Net (2) Company's Royalty(1) Royalty Overriding Royalty Acres Acres Interest Texas 640.00 20.00 3.125% Wyoming 497.09 15.19 3.05% TOTAL 1,137.09 35.19 6.175% (1) A royalty acre is a full one-eighth royalty on one acre of land. (2) A net royalty acre is calculated by multiplying the royalty acres by the overriding royalty interest. In November 1996, the Company sold its overriding royalty interests in certain properties in Wyoming, Texas and Colorado, a minor portion of which could be considered undeveloped. The interests sold ranged from 0.2491% to 2.5%. The reduction in gross and net undeveloped acres resultant from this sale is not material. Overriding Royalty Interests in Developed Acreage and Producing Wells The following table sets forth, as of September 30, 1998, the Company's overriding royalty interests in developed oil and gas acreage and producing wells. Company's Gross Net (2) Overriding Royalty Royalty Royalty Royalty Wells Acres(1) Acres Interest Oil Gas Wyoming 632.80 1.59 .25% 0 1 (1) A royalty acre is a full one-eighth royalty on one acre of land. (2) A net royalty acre is calculated by multiplying the royalty acres by the overriding royalty interest. In November 1996, the Company sold its overriding royalty interests in certain producing properties in Wyoming, Texas and Colorado. The interests sold ranged from 0.2491% to 2.5%. The sale reduced the Company's Gross royalty oil wells in Colorado from 3 to none, royalty oil wells in Texas from 2 to none, royalty oil wells in Wyoming from 6 to none, and royalty gas wells in Wyoming from 4 to 1. The Company's royalty acreage in Wyoming decreased to 632 gross acres and 1.59 net acres; and its royalty acreage in Colorado and Texas decreased to zero gross and net acres. UNDEVELOPED MINERAL PROPERTY INTERESTS The Company currently holds a 100% interest, subject to forfeiture if a future payment is not made to its former joint venture partner-U. S. Borax- in a kaolin prospect covering approximately 3,664 acres of leases and lease options located near Redwood Falls, Minnesota. See "Mineral Operations-Paper Grade Kaolin". The Company owns 50% mineral interest in a 160 acre parcel in Weld County, Colorado which is currently leased to Lake Fork Resources, LLC. of Denver, Colorado. This three year, paid up, 15% royalty lease will expire August 15, 2000 unless production of oil or gas is achieved. DEVELOPED MINERAL PROPERTY INTERESTS The Company owned a 100% working interest in 69.3 acres in Redwood County, Minnesota which were permitted for the purposes of mining kaolin clay. This property was sold in July, 1997. See "Sale of Kaolin Mine". ITEM 3. LEGAL PROCEEDINGS During 1998, the Company was involved in a lawsuit against Chevron alleging underpayment of overriding royalties. This lawsuit was settled during the trial by the parties involved. Nova received $6,200 in settlement of this matter in December 1998. As discussed in ITEM 1. DESCRIPTION OF BUSINESS, disputes have arisen between Thomas Kane, one of the Company's directors and a principal shareholder, over the Company's continuing operations and their impact on Mr. Kane's ownership of shares of the Company's convertible preferred stock. Mr. Kane threatened to seek court intervention to preserve assets of the Company for liquidation. The Company's other directors disagreed with Mr. Kane. In resolution of these disputes, the Company, Mr. Kane and Brian Spillane, the Company's President and a director, entered into an Agreement, dated February 5, 1997, for the purchase of all of Mr. Kane's Common and Preferred Stock. The Company has an outstanding balance of $16,447 with Union Pacific Railroad. The Company does not have adequate cash to pay this invoice. The Company offered to pay $1,000 per month until the balance was paid. Union Pacific would not accept this arrangement and has referred the matter to an attorney for collection. The Company knows of no other legal proceedings contemplated or threatened against it. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No shareholder meetings were held in Fiscal 1998. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the over-the-counter market and is listed on the Electronic Bulletin Board under the symbol "NVNU". The following table sets forth the range of high and low closing bid prices of the Common Stock for the years ended September 30, 1998 and 1997, as reported by the National Quotation Bureau, LLC. These prices are believed to be representative of inter-dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions. Bid Price Fiscal 1998 High Low First Quarter $ 0.060 $ 0.030 Second Quarter 0.040 0.020 Third Quarter 0.080 0.020 Fourth Quarter 0.080 0.050 Bid Price Fiscal 1997 High Low First Quarter $ 0.040 $ 0.030 Second Quarter 0.050 0.030 Third Quarter 0.060 0.050 Fourth Quarter 0.080 0.060 The bid and asked prices for the Company's Common Stock on September 30, 1998 were $0.05 and $0.07 respectively, as reported by the National Quotation Bureau, LLC. The number of record holders of the Company's Common Stock as of September 30, 1998 was 4,973. Also outstanding as of September 30, 1998 were options under the Company's employee stock option plans to purchase a total of 3,473,577 shares, of Common Stock. These options are held by a total of nine persons, all but two of whom are officers, directors or employees of Nova, and are exercisable until January, 2003 at $.03 per share. The Company has not paid any dividends on its Common Stock and does not expect to do so in the foreseeable future. The Company intends to employ its cash flow and earnings, if any, in its oil & gas and mineral exploration and development activities and for other working capital needs. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Forward-Looking Statements Management's discussion of anticipated future operations contains predictions and projections which may constitute forward looking statements. The Private Securities Litigation Reform Act of 1995, including provisions contained in Section 21E of the Securities Exchange Act of 1934, provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, the following: (a) The Company may not be able to enter into an agreement with a new partner to assist the Company in carrying its paper-grade kaolin project to the commercial feasibility stage on terms acceptable to Nova. (b) The paper-grade kaolin project may encounter difficulties, currently unforeseen, which will prevent attainment of commercial feasibility. (c) The Company may not be able to find industry partners to develop its oil & gas prospects. (d) Present and anticipated sources of funds may be insufficient to meet the Company's working capital needs. Liquidity and Capital Resources The Company continues to experience a severe cash flow shortage. Unless new financing is secured, and/or an agreement is made to enter into a joint venture on the Company's paper kaolin properties on terms which will provide capital and/or overhead coverage to operate this project, the Company may not be able to continue in business. The Company does not have the present ability to make the interest payment due to its debenture holders at the end of February, 1999. The Company plans to make an offer to its debenture holders to restructure its debt, for which there is no assurance of acceptance. The Company intends to make a non-cash offer to its debenture holders, but it is possible that in order to be successful, such an offer would have to involve a partial payment of principal in cash plus stock for the balance of principal, to fully restructure the debt. At this time, the Company does not have the ability to make any such cash payments, and while it is attempting to secure funding, it does not have a source of such funds and it is not likely that a source can be obtained. In the event the debenture interest is not paid, the debentures will be in default, and the debenture holders can accelerate the full remaining balance on the face amount of the debentures. In that event, the Company may have to seek protection under the bankruptcy laws and proceed with an orderly liquidation of its assets and discharge of its liabilities. In the event an acceptable arrangement can be entered into with its debenture holders to restructure its debt, Management believes that it will have sufficient income to continue its business while it attempts to secure a joint venture partner for its paper kaolin project, sells an interest in such project, secures a merger partner, or secures new financing. During this period, management will continue to forgo salaries as it has done since May, 1998 unless additional funding can be obtained. Management estimates that its operations can continue for up to twelve months in this mode. In the event none of these endeavors are successful, the Company will eventually have to consider liquidation. If the Company is liquidated, trade creditors and the holders of the Company's preferred shares will have first claim on the assets of the Company, and it is unlikely that the common shareholders will receive any consideration for their shares. The Company has suffered recurring losses and cash flow deficits from operations due to the inability of operating cash flows to cover expenses needed to maintain those operations. At September 30, 1998, the Company has an accumulated deficit of $9,445,519. The Company's working capital decreased as of September 30, 1998 to a deficit of $55,343, from working capital of $147,876 as of September 30, 1997. Total assets decreased to $594,967 as of September 30, 1998, from $812,780 as of September 30, 1997. The decrease in both working capital and total assets was attributable primarily to the sale of the Kaolin Mine, the sale of oil and gas assets and the Company's operating loss. The Company's main source of income as it has attempted to find a partner to develop its interest in the Paper Grade Kaolin Project has been the payments from the sale of the Kaolin Mine. The Company realized a loss on its oil and gas production due to the low price of oil and the higher costs of production. The increase in total liabilities from $381,327 in 1997 to $422,430 in 1998 is due to the Company's lack of operating income while it attempts to obtain a partner for the Paper Grade Kaolin Project, and primarily to bank borrowings of $45,148 in 1998. As a result of the operating revenue and working capital decrease during the year, there are uncertainties that may have a significant impact on the Company's liquidity and which raise substantial doubt about the Company's ability to continue as a going concern. The Company sold its Kaolin Mine in July of 1997. This resulted in cash from sales proceeds and the recovery of a reclamation deposit of $225,000 in fiscal 1997. However, the Company did not generate positive cash flow from operations in 1997. Cash used by operations during 1997 was $73,605. In 1998 the cash used by operations was $211,446. The Company's liquidity is primarily dependent on receipt of proceeds from the installment sale of the Company's kaolin mine, income from oil and gas production, the sale of oil and gas wells, and contemplated overhead coverage and management fees in connection with the operation of its paper kaolin project. The Company intends to operate its paper-grade kaolin project with a new partner, and has structured this venture with overhead coverage and fees to cover the expenses of operating this project, but it is not certain that the Company will be successful in entering into an agreement with a partner on the basis needed to cover the costs of such operations. The Company will need to raise additional funds for working capital purposes via the private placement of securities, or some other means, the success of which cannot be determined in advance. In order to improve liquidity, on November 14, 1996, the Company sold several oil and gas producing assets and leasehold interests, primarily overriding royalty interests in producing oil and gas wells for proceeds of $230,257, which is net of commissions and direct selling costs. The proceeds of these sales were devoted to working capital, used to offset operating losses, and reinvested in the Company's business, with the goal of developing additional sources of revenue, earnings and asset growth. Primary use of these funds has been in the Company's efforts to market its remaining oil and gas prospects, and to conduct necessary activities in connection with its paper-grade kaolin project. The Company has been conducting limited examination of cores, and processing raw kaolin from the 1996 drilling program on its paper kaolin properties, analyzing the data from seven years of exploration and development work on this project, and preparing to market the project to the industry to bring in a new partner who will assist Nova in aggressively pursuing the further development of this project. Year 2000 Management does not believe the Company has a year 2000 problem since the bulk of its computing is performed on MacIntosh machines, and the PC which it does use for its accounting will be obsolete and its software will be replaced prior to the year 2000. The cost of replacing this equipment is not expected to be material. A PC is used for mapping and ore reserve computations, but the work done on this machine will not be affected by the year 2000 problem. Nova's business is not materially dependent on suppliers who may have year 2000 problems. Results of Operations The Company realized a net loss of $271,581 for the year ended September 30, 1998, compared to a net loss in the 1997 fiscal period of $360,598. Both oil and gas sales and mineral sales decreased substantially, reflecting the sale of a significant portion of the Company's producing oil & gas assets, and the sale of the Company's kaolin mine. Both mining costs and oil & gas operating costs also declined due to these sales. General and administrative costs decreased $176,415 or 40% to $259,337 for the year ended September 30, 1998 over the same period in 1997. This decrease was the result of non-recurring increased legal and accounting fees due to the Kane dispute and the asset sales, and due to the fact that the Company had ceased paying salaries in June. The Company's share of NovaChek losses in fiscal 1997 was $181,720. There were no losses attributable to NovaChek in 1998. Operations of NovaChek were unprofitable, and NovaChek was dissolved, effective December 22, 1997. Interest income was up in fiscal 1998 to $39,924, compared to $17,378 in the 1997 period. This is due to the increased imputed interest on the note receivable from Northern Con-Agg on which interest was imputed for the entire year in 1998 and only for part year in 1997. Revenues Mineral sales from kaolin in 1998 declined to $584 from $700,707 in fiscal 1997. Due to the sale of the Kaolin Mine in July 1997, the Company did not operate the mine at all in fiscal 1998. Gravel royalties decreased to $1,320 in 1998 from $4,414 in 1997. The Company collected royalties on the sale of gravel from land leased by the Company pursuant to an arrangement with a third party, which mined and sold the gravel. The gravel interests were sold in 1998 for $10,000. This was chiefly responsible for the decline in the 1998 mineral sales figures. Oil and gas sales decreased $63,157 or 51% for the year ended September 30, 1998 as compared to the same period in 1997. This decrease is attributable to the sale of the Company's Overriding Royalty Interests in November, 1996, the sharp decrease in the price of oil, and the sale of some of the Company's working interest wells in 1998. A comparison of production and prices in 1998 and 1997 is as follows: 1998 1997 Sales Volume Oil (bbls) 3,868 5,181 Gas (MCF) 9,518 19,147 Average Sales Price Oil (bbls) $12.18 $18.34 Gas (MCF) $ 1.41 $ 1.36 The Company realized a one-time gain on the sale of its oil & gas production interests of $76,557 in 1997. Other revenue for the year ended September 30, 1997 consisted primarily of revenue received from an option on West Rozell Point of $2,500, and an $800 lease bonus on an oil property in which the Company had an interest. Other revenue in 1998 was $450, consisting of a refund and a payment on a small property in Colorado. Expenses Because of the sale of the Company's kaolin mine in 1997, mining costs from kaolin operations, including transportation and royalties, were $603,335 in fiscal 1997 compared to $0 in the 1998 period. Gravel royalties declined from $983 in fiscal 1997 to $0 in fiscal 1998. The Company sold its gravel rights in the beginning of 1998 to the company which mines and sells the gravel. Oil & gas lease operating costs, including production taxes declined 26% in fiscal 1998 to $67,030 from $90,276. Oil and gas production costs did not decline as sharply as oil & gas sales since the majority of the oil & gas assets sold by the Company were royalties, and these have a very low cost since there is no deduction for operating costs from royalty payments. Depreciation, depletion and amortization dropped 55% from $28,367 in 1997 to $12,892 in 1998. This was primarily resultant from the sale of oil & gas assets, although normal production decline also contributed, and to the sale of the cement kaolin mine. General and administrative expenses decreased $176,415 or 40% to $259,337 for the year ended September 30, 1998 over the same period in 1997. The decrease was the result of increased legal and accounting fees due to the Kane dispute and the asset sales, in particular, the sale of the kaolin mine, and printing and mailing costs associated with obtaining shareholder approval of the mine sale in 1997 and to the Company's discontinuing salaries in 1998. Interest expense increased 12% or $3,493 to $31,655 in fiscal 1998 compared to fiscal 1997. The interest expense of $31,655 in fiscal 1998 resulted from interest payments on a short-term working capital loan, and the $250,000 of convertible subordinated debentures. Commitments The Company's current office lease is a three-year lease effective February 1, 1997. The space is 1,517 square feet, and lease payments for the first year of the lease were $15,810. These payments increased to $18,059 during the second year of the lease, and will increase to $18,817 during the final year. Impact of Inflation Due to the Company's size and the uncertainties normal in its lines of business, the impact of inflation on the Company's operations is negligible. New Accounting Standards Statement of Financial Accounting Standards 130 (FAS 130) "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, FAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that displays with the same prominence as other financial statements. Statement of Financial Accounting Standards 131 (FAS 131) "Disclosure About Segments of an Enterprise and Related Information" establishes standards on the way that public companies report financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas, and major customers. FAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. FAS 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Management has been unable to fully evaluate the impact, if any, the standards may have on the future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of these standards. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITOR'S REPORT The Board of Directors Nova Natural Resources Corporation Denver, Colorado We have audited the accompanying balance sheet of Nova Natural Resources Corporation as of September 30, 1998, and the related statements of operations, stockholders' equity, and cash flows for the years ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nova Natural Resources Corporation as of September 30, 1998, and the results of its operations and its cash flows for the years ended September 30, 1998 and 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses and cash flow deficits from operations which, along with other factors described in Note 2, raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. HEIN + ASSOCIATES LLP Denver, Colorado November 24, 1998 NOVA NATURAL RESOURCES CORPORATION BALANCE SHEET SEPTEMBER 30, 1998 ASSETS 1998 CURRENT ASSETS: Cash and equivalents $ 462 Accounts receivable: Oil and gas 4,022 Other 16,037 Current maturities of note receivable 67,929 Prepaid expenses and other 5,984 _________ Total current assets 94,434 OIL AND GAS PROPERTIES, at cost (using the full cost method of accounting): Unproved properties not being amortized 11,806 Properties being amortized 5,986,639 _________ 5,998,445 Accumulated depreciation, depletion and amortization (5,946,334) ___________ Net oil and gas properties 52,111 MINERAL PROPERTIES, at cost 165,657 __________ OTHER ASSETS: Note receivable, net of current maturities 278,359 Deposits and Other 3,550 Furniture and technical equipment, net of accumulated depreciation of $66,029 856 _______ Total other assets 282,765 _______ TOTAL ASSETS $ 594,967 See accompanying notes to these financial statements. LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Note Payable $ 45,148 Current maturities of long-term debt 9,185 Accounts payable 45,928 Accrued expenses 49,516 _________ Total current liabilities 149,777 _________ LONG TERM DEBT, less current maturities 272,653 _________ COMMITMENTS AND CONTINGENCIES (Notes 1, 2 and 9) STOCKHOLDERS' EQUITY Convertible preferred stock, $1.00 par value; 3,000,000 shares authorized; 1,792,267 shares issued and outstanding, liquidation preference $1,792,267 1,792,267 Common stock, $.10 par value; 17,000,000 shares authorized; 6,200,379 shares issued and outstanding; 627,413 Additional paid-in capital 7,198,376 Accumulated deficit (9,445,519) ___________ Total Stockholders' equity 172,537 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 594,967 See accompanying notes to these financial statements. NOVA NATURAL RESOURCES CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, ______________________ 1998 1997 ______ ______ REVENUES: Mineral sales: Kaolin $ 584 $ 700,707 Gravel Royalties 1,320 4,414 Oil and gas sales 61,011 124,168 _________ _________ Total revenues 62,915 829,289 _________ _________ COSTS AND EXPENSES: Mining costs: Kaolin operations -- 603,335 Gravel royalties -- 983 Oil and gas production costs 67,030 90,276 Depletion, depreciation, and amortization 12,892 28,367 Impairment of oil & gas properties 20,000 -- Mining property abandonment costs 6,938 1,742 General and administrative 259,337 435,752 _________ _________ Total costs and expenses 366,197 1,160,455 _________ _________ OPERATING LOSS (303,282) (331,166) OTHER INCOME (EXPENSES): Equity in losses of NovaChek LLC -- (181,720) Interest income 39,924 17,378 Interest expense (31,655) (28,162) Gain on sale of assets 22,982 159,566 Other 450 3,506 _________ ________ 31,701 (29,432) _________ _________ NET LOSS $ (271,581) $ (360,598) ========== ========= NET LOSS PER SHARE (.05) (.06) ========== ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,806,000 6,185,000 ========= ========= See accompanying notes to these financial statements
NOVA NATURAL RESOURCES CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1998 AND 1997 CONVERTIBLE PREFERRED STOCK COMMON STOCK SHARES AMOUNT SHARES AMOUNT _________ _________ _________ ________ BALANCES, October 1, 1996 2,687,682 $ 2,687,682 6,496,188 $ 649,619 Purchase and retirement of preferred and common stock: Former director (895,415) (895,415) (510,342) (51,034) Other -- -- (13,700) (1,370) Contribution of stock to employee stock ownership plan -- -- 228,233 22,823 Net loss -- -- -- -- _________ _________ ________ _______ BALANCES, September 30, 1997 1,792,267 $ 1,792,267 6,200,379 $ 620,038 Purchase and retirement of common stock -- -- (411,873) (41,187) Contribution of stock to employee stock ownership plan -- -- 485,625 48,562 Issuance of common stock options to consultants for services -- -- -- -- Net loss -- -- -- -- _________ _________ _________ ________ BALANCES, September 30, 1998 1,792,267 $ 1,792,267 6,274,131 $ 627,413 See accompanying notes to these financial statements.
NOVA NATURAL RESOURCES CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998 AND 1997 ADDITIONAL TOTAL PAID-IN ACCUMULATED STOCKHOLDERS' CAPITAL DEFICIT EQUITY BALANCES, October 1, 1996 $6,454,296 $(8,813,340) $ 978,257 Purchase and retirement of preferred and common stock: Former director 742,532 -- (203,917) Other 822 -- (548) Contribution of stock to employee stock ownership plan (4,564) -- 18,259 Net loss -- (360,598) (360,598) _________ __________ __________ BALANCES, September 30, 1997 $7,193,086 $(9,173,938) $ 431,453 Purchase and retirement of common stock 24,714 -- (16,473) Contribution of stock to employee stock ownership plan (24,281) -- 24,281 Issuance of common stock options to consultants for services 4,857 -- 4,857 Net loss -- (271,581) (271,581) _________ _________ _________ BALANCES, September 30, 1998 $7,198,376 $(9,445,519) $ 172,537 See accompanying notes to financial statements.
NOVA NATURAL RESOURCES CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, ___________________ 1998 1997 ______ ______ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (271,581) $ (360,598) Adjustments to reconcile net loss to net cash used by operating activities: Depletion, depreciation and amortization 12,892 28,367 Impairment of oil and gas properties 20,000 -- Gain on sale of assets (22,982) (159,566) Equity in losses of NovaChek LLC -- 181,720 Contribution of stock to employee stock ownership plan 24,281 18,259 Fair value of stock options granted to consultants 4,857 -- Changes in operating assets and liabilities: Decrease (increase) in: Accounts receivable 17,440 408,648 Prepaid expenses and other 5,778 (7,821) Deposits (3,550) 51,000 Increase (decrease) in: Accounts payable 14,020 (260,154) Accrued expenses (12,601) 26,540 _________ ________ Net cash used in operating activities (211,446) (73,605) _________ _________ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 31,813 355,000 Investment in and advances to NovaChek LLC 4,000 (49,003) Capital expenditures (56,754) (43,933) Collection of principal on note receivable 61,629 46,885 _________ _________ Net cash provided by investing activities 40,688 308,949 _________ _________ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable (56,200) -- Principal payments on long-term debt (7,939) (5,687) Purchase and retirement of common and preferred stock (16,473) (159,000) Proceeds from notes payable 101,348 -- _________ ________ Net cash provided by (used in) financing activities 20,736 (164,687) _________ ________ NET INCREASE(DECREASE)IN CASH AND EQUIVALENTS (150,022) 70,657 CASH AND EQUIVALENTS, at beginning of year 150,484 79,827 ________ ________ CASH AND EQUIVALENTS, at end of year $ 462 $ 150,484 ========= ======== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 31,916 $ 25,311 ========= ======== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Note receivable for sale of Kaolin property $ -- $ 454,802 ========= ========= Note payable for purchase and retirement of common and preferred stock $ -- $ 45,465 ========= ========= See accompanying notes to these financial statements.
NOVA NATURAL RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - Nova Natural Resources Corporation (the Company), has focused on exploring for paper grade kaolin on leases in Minnesota, seeking partners for exploration and development of gold on its properties in Alaska and seeking partners for exploratory drilling on a natural gas prospect in Wyoming. The Company does not operate any of its interests in oil and gas wells, which are principally located in the western United States. Use of Estimates - The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The actual results could differ from those estimates. The Company's financial statements are based on a number of estimates, including the allowance for doubtful accounts, the selection of estimated useful lives of property and equipment, and realization of the carrying value of long-lived assets. It is reasonably possible that estimates affecting the realization of long-lived assets could materially change in the forthcoming year and such revisions could be material. Cash Equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Investment in NovaChek Limited Liability Company - The Company owned an interest in NovaChek Limited Liability Company (NovaChek LLC) which was accounted for by the equity method. Under the equity method, the investment was recorded at cost and subsequently adjusted to recognize the Company's share of the income or losses of NovaChek LLC. Dividends or other distributions were recorded as a reduction of the investment. Recognition of losses was limited to the extent of the Company's investment in, advances to, commitments and guarantees, if any, relating to NovaChek LLC. Mining Properties - Exploration expenditures are charged to operations in the period incurred except for expenditures on specified properties having indicated the presence of a mineral resource with the potential of being developed into a mine, in which case the expenditures are capitalized. Mine development costs incurred to expand the capacity of operating mines, to develop new orebodies or to develop mine areas substantially in advance of current production are capitalized and charged to operations on a units-of-production method based upon the estimated recoverable reserves of the related deposit. Reclamation takes place concurrently with production and such costs are expensed as mining costs in the period incurred. The Company periodically reviews the carrying value of its properties by comparing the net book value with the estimated undiscounted future cash flow from the property, which is generally based upon estimated recoverable reserves utilizing current market prices and costs. If the net book value exceeds the undiscounted future cash flow, the Company records a provision for impairment. Changes in the significant estimates and assumptions underlying future cash flow estimates may have a material effect on the future carrying value of assets and operating results. At September 30, 1998 the Company has an investment of approximately $160,000 in a single mineral property located in Minnesota. If the Company is not successful in attracting an industry partner to develop this property, it will be necessary to return the Company's interest in the property to U. S. Borax. If an industry partner is located to develop the property, it will be necessary to pay $300,000 by January 1, 2002 to acquire the ownership interest of U.S. Borax. Even if an industry partner is found, there is no assurance that commercial feasibility will be reached. Oil and Gas Properties - The Company follows the "full cost" method of accounting for its oil and gas properties, in accordance with rules promulgated by the Securities and Exchange Commission (the SEC). All of the Company's properties are located within the continental United States. All costs associated with property acquisition, exploration, and development activities are capitalized in one cost center (the full cost pool), including costs of unsuccessful exploration. No gains or losses are recognized on the sale or abandonment of oil and gas properties unless the transaction involves the sale of significant reserves. Capitalized costs less related accumulated amortization may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves, calculated using current prices; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Amortization of the full cost pool is computed using the units-of-production method based on proved reserves as determined annually by the Company and independent petroleum engineers. The provision for depletion, depreciation, and amortization on a per equivalent barrel basis during fiscal years 1998 and 1997 was $2.15 and $2.18, respectively. Furniture and Technical Equipment - Furniture and technical equipment is stated at cost and is depreciated using the straight-line method over estimated useful lives ranging from three to eight years. Income Taxes - The Company accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates. Earnings Per Share - Net loss per common share is presented in accordance with the provisions of Statements of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128 replaces the presentation of primary and fully diluted earnings per share (EPS), with a presentation of basic EPS and diluted EPS. Under FAS 128, basic EPS excludes dilution for potential common shares and is computed by dividing the net loss by the weighted average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue the common stock were exercised or converted into common stock and resulted in the issuance of common stock. Basic and diluted EPS are the same in 1998 and 1997 as all potential common shares were antidilutive. Stock-Based Compensation - The Company accounts for stock-based compensation for employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's common stock at the measurement date (generally, the date of grant) over the amount an employee must pay to acquire the stock. In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (FAS 123). FAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value. Companies that do not adopt the fair value accounting rules must disclose the impact of adopting the new method in the notes to the financial statements. Transactions in equity instruments with non- employees for goods or services must be accounted for by the fair value method. The Company has elected not to adopt the fair value accounting prescribed by FAS 123 for employees, but is subject to the related disclosure requirements. Impact of Recently Issued Accounting Standards - Statement of Financial Accounting Standards 131 (FAS 131) "Disclosures About Segments of an Enterprise and Related Information" establishes standards on the way that public companies report financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas, and major customers. FAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. FAS 131 is effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Management has been unable to fully evaluate the impact, if any, of this standard on future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. Reclassifications - Certain amounts in the 1997 financial statements have been reclassified to conform with the 1998 presentation. These reclassifications had no effect on the 1997 net loss. (2) UNCERTAINTY OF FUTURE OPERATIONS The financial statements have been prepared assuming that the Company will continue as a going concern. Certain factors, discussed below, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company has suffered recurring losses and cash flow deficits from operations. At September 30, 1998, the Company has an accumulated deficit of $9,446,000. At September 30, 1998, the Company has a working capital of $55,000 and stockholders' equity of $173,000. Accordingly, the Company's current capital resources are not sufficient to fund continued operating losses. In order to improve liquidity, the Company has sold a substantial portion of the Company's operating assets. The future viability of the Company is dependent upon the ability of the Company to obtain additional equity or debt financing and to ultimately achieve profitable operations. (3) SALE OF ASSETS: On November 14, 1996, the Company sold several oil and gas producing assets and leasehold interests, primarily overriding royalty interests in producing oil and gas wells in the Wyoming Overthrust Belt (an estimated 6,976 bbls of oil and an estimated 282,127 mcf of gas), effective as of November 1, 1996. Proceeds from this sale, net of commissions and direct selling costs, were $230,257. The Company recognized a gain on sale of $76,557 related to this transaction. In July 1997, the Company obtained shareholder approval to close the sale of its cement-grade Kaolin mine, including certain mineral leases and technical equipment. The Company received cash at closing of $125,000 and the purchaser executed a note which provided for installments of $50,000 in August and December of each year through August 2001 and a final installment of $125,000 in December 2001. Payments under the note are collateralized by the property and equipment conveyed to the purchaser. The Company imputed interest at 10% to arrive at the present value of the note of $454,801 on the closing date. The Company recognized a gain of $83,009 on this transaction. Management estimates that fair value of the note receivable is approximately equal to the carrying value at September 30, 1998. (4) INVESTMENT IN NOVACHEK LLC On April 1, 1996 the Company organized NovaChek LLC to recover precious metals from off-shore mining leases located near Nome, Alaska, utilizing a dredging operation. The Company contributed mineral leasehold interests and $118,750 in cash for a 42% voting interest in NovaChek LLC. An additional 4.125% interest in NovaChek LLC was held by affiliates of the Company. NovaChek LLC was managed by the Company and Chek Technologies and Exploration, LLC (Chek) which owned a 38.75% interest in NovaChek LLC. The Company was entitled to receive an annual management fee of $65,000 from NovaChek LLC. However, no management fee was ever collected or recorded by the Company. During fiscal 1997, NovaChek LLC commenced dredging operations but management determined that it was not possible to operate economically. In December 1997, the managers of NovaChek LLC decided to liquidate the LLC by the end of 1997 and they determined that the net realizable value of NovaChek LLC's assets would not be sufficient to satisfy all of the liabilities. Accordingly, NovaChek LLC recorded a provision for impairment of $334,721 during the quarter ended September 30, 1997. The condensed statements of operations of NovaChek LLC for the year ended September 30, 1997 is presented below. 1997 ______ Gold and silver sales $ 45,850 Operating expenses (140,405) Impairment expense (334,721) _________ Net loss $(429,276) ========== (5) DEBT FINANCING: Note Payable - At September 30, 1998, the Company has a note payable to a bank with an outstanding principal balance of $45,148. The note provides for interest at a variable rate (10.25% at September 30, 1998) and the outstanding balance was due and repaid in December, 1998. This loan is collateralized by land that is owned by an officer and director of the Company. Long-Term Debt - On April 1, 1996, the Company issued $250,000 of convertible debentures. These debentures provide for interest payments at an annual rate of 10%, payable semi-annually, and are due on April 1, 2001, but are redeemable in common stock by the Company after March 31, 1998. The debentures are convertible into the Company's common stock at the rate of one share of stock for each $0.15 of principal, which would result in the issuance of 1,666,667 common shares if so converted. In June 1996, holders of $175,000 of the debentures, of which $40,625 of debentures are held by affiliates, agreed that the Company could redeem such debentures after September 1, 1996, provided that such early redemption is effected at $0.10 per common share and the payment of six months advance interest. No such early redemption has been made to date. Management believes the fair value of the convertible debentures was approximately $125,000 at September 30, 1998. The following is a summary of long-term debt as of September 30, 1998: Convertible debentures $250,000 Contract payable in connection with purchase and retirement of common and convertible preferred stock, interest imputed at 10%, payable in installments of $6,000 in August and December of each year through August 2001, final payment of $1,008 due in December 2001. 31,838 ________ Total 281,838 Less current maturities (9,185) _________ Long-term debt, less current maturities $272,653 Aggregate maturities required on long-term debt at September 30, 1998, are as follows: Year Ending September 30, 1999 $ 9,185 2000 10,124 2001 261,553 2002 976 ________ $281,838 ======== (6) INCOME TAXES The components of the net deferred tax asset and liabilities at September 30, 1998 and 1997 are as follows: 1998 1997 Deferred tax assets- Net operating loss carryforward $ 1,940,000 $ 2,152,000 Less valuation allowance (1,913,000) (2,069,000) __________ __________ Net deferred tax asset 27,000 83,000 Deferred tax liabilities- Depletion, depreciation, amortization, and valuation allowance for income tax purposes in excess of amounts for financial statement purposes (27,000) (83,000) __________ _________ Net deferred tax asset $ -- $ -- =========== ========= The Company has net operating loss carryforwards at September 30, 1998 for federal income tax reporting purposes of approximately $5,200,000. These carryforwards expire in varying amounts through 2018. The valuation allowance decreased by $156,000 during the current year mainly due to expiring net operating loss carryforwards. (7) STOCKHOLDERS' EQUITY Preferred Stock - The Company's preferred stock outstanding is convertible into 3,584,534 shares of common stock. The preferred shares contain 2-for-1 voting rights, have a $1.00 liquidation preference and have no stated dividend rate. Stock Option Plans - The Company has approved three stock option plans for the benefit of Company employees and key personnel. The first plan is the Nova Natural Resources Corporation 1989 Nonqualified Stock Option Plan (the "1989 Nonqualified Plan") and the second plan is the Nova Natural Resources Corporation 1989 Incentive Stock Option Plan, a qualified plan (the "Incentive Plan"). Both plans include terms whereby participants are issued options to purchase shares of the Company's common stock at the market price at the time of grant. The options are exercisable at the date of grant and expire five years after the date of grant. Options granted to employees under both plans who subsequently terminate employment with the Company are canceled if not exercised within three months after termination of employment. Pursuant to these plans, no options were permitted to be granted after 1994. No options were outstanding under either of these plans as of September 30, 1998. Activity in the stock option plans for the years ended September 30, 1998 and 1997 is as follows
Incentive Plan Non-qualified Plan Weighted Weighted Average Average Number of Exercise Price Number of Exercise Price Shares Per Share Shares Per Share Outstanding, October 1, 1996 600,000 $ .105 600,000 $ .104 Expired -- -- (200,000) .063 ________ _______ Outstanding, September 30, 1997 600,000 .105 400,000 .105 Cancelled (600,000) .105 (400,000) .105 ________ _______ Outstanding, September 30, 1998 -- -- ======== =======
During 1998, the Board of Directors adopted the 1998 Nonqualified Stock Option Plan (the "1998 Plan") whereby 4,500,000 shares were reserved for issuance. The 1998 Plan provides that the exercise price of the options should be equal to the market price of the Company's common stock on the date of grant and the options expire five years after the date of grant. No options may be granted under the 1998 Plan after January 2003. For the year ended September 30, 1998, the Company granted options for 200,000 shares to consultants and 3,273,577 shares to officers, directors and employees of the Company. All of the options are vested and exercisable at $.03 per share. If not previously exercised, all of the options expire in January, 2003. Pro Forma Stock-Based Compensation Disclosures - The Company applies APB Opinion 25 and related interpretations in accounting for stock options which are granted to employees. Accordingly, no compensation cost is recognized for grants of options to employees if the exercise prices were not less than the market value of the Company's common stock on the measurement dates. The Company did not grant any stock options in 1997. For 1998, if compensation cost had been determined based on the fair value at the measurement dates consistent with the method of FAS 123, the Company's net loss and loss per share would have been changed to the pro forma amounts indicated below. Net loss: As reported $ (271,581) Pro forma (363,181) Net loss per common share: As reported $ (.05) Pro forma (.06) For purposes of the above pro forma amounts, the weighted average fair value of options granted to employees for the years ended September 30, 1998 was $.028 per share. The fair value of each employee option granted in 1998 was estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted average assumptions: Expected volatility 207% Risk-free interest rate 5.6% Expected dividends 0% Expected terms (in years) 3.0 Stock Ownership Plan - The Company has also established the "Nova Natural Resources Corporation Employee Stock Ownership Plan" (the ESOP Plan) for all employees. The ESOP Plan provides for contributions of Company stock to a trust in an amount determined by the Board of Directors. The Company's contributions to the Plan during the year ended September 30, 1997 amounted to 228,233 shares of common stock with an aggregate value of $18,259. For the year ended September 30, 1998, the Company's contributions to the Plan amounted to 485,625 shares with an aggregate value of $24,281. (8) RELATED PARTY TRANSACTIONS The Company owns interests in various producing and non-producing mineral properties with the REM Family Trust ("the Trust"), a trust in which the Chairman of the Company is the trustee. The Trust also held a royalty interest on the Company's cement grade kaolin property. Royalty expense, under this agreement, was $0 and $3,309 in 1998 and 1998, respectively. In April, 1997 the Company received a check for $5,000 as an option payment on the West Rozell Oil and Gas Prospect. The Company and the Trust each own 50% of this property. The company paid the Trust $2,500 for its interest in this prospect. The Company and the Trust also share ownership in two other oil & gas prospects in Wyoming. (9) COMMITMENTS AND CONTINGENCY Shareholder Dispute - Through fiscal 1996, the Company was involved in a dispute with Thomas Kane, a director and principal shareholder of the Company. Mr. Kane had expressed his belief that the Company was not viable as a going concern and should be liquidated in order to protect his interests as a holder of the Company's convertible preferred stock. In February 1997, the Company and Mr. Kane settled this dispute whereby the Company agreed to purchase 895,415 shares of convertible preferred stock and 510,342 shares of common stock from Mr. Kane. A principal shareholder, officer, and director of the Company also agreed to purchase for $50,000 from Mr. Kane 203,426 shares of convertible preferred stock and 115,942 shares of common stock as part of the agreement. The Company's share of the purchase price was $150,000 in cash and up to $70,008 in additional consideration based on a percentage of revenues from either the operation or sale of the Company's cement grade Kaolin mine. The present value of this obligation was $45,465 and the remaining balance is included in long- term debt in the accompanying balance sheet. In connection with the agreement with Mr. Kane, he resigned as a member of the Board of Directors and stock options for 200,000 shares were cancelled. During fiscal 1997, the Company offered to purchase common shares from shareholders desiring to sell for $.04 per share. Through September 30, 1997, the Company purchased and retired 13,700 shares for $548. During fiscal 1998, an additional 411,873 shares were purchased for $16,473 and retired. Leases - Future minimum rental payments for office facilities under the remaining terms of noncancelable leases are $18,564, and $7,841 for the fiscal years ending September 30, 1999 and 2000, respectively. Net rental payments charged to expense under all operating leases amounted to $15,670 in 1998 and $21,607 in 1997. (10) INDUSTRY SEGMENTS AND MAJOR CUSTOMER Segment Information - The Company conducts all of its operations within the United States, which consist principally of oil and gas exploration and production and mining. There are no sales or other transactions between these two business segments. Presented below is information concerning the Company's business segments for the years ended September 30, 1998 and 1997: 1998 1997 REVENUE: Oil and gas $ 61,011 $ 124,168 Mining 1,904 705,121 ________ _________ $ 62,915 $ 829,289 ======== ========= OPERATING INCOME (LOSS): Oil and gas $ (77,729) $ (48,112) Mining (45,034) (143,805) General corporate activities (180,519) (139,249) _________ _________ $ (303,282) $ (331,166) ========= ========== DEPRECIATION AND DEPLETION: Oil and gas $ 11,710 $ 18,216 Mining - 8,975 General corporate activities 1,182 1,176 ________ _______ $ 12,892 $ 28,367 ========= ======= IDENTIFIABLE ASSETS, net: Oil and gas $ 56,133 $ 108,192 Mining 527,982 531,990 General corporate activities 10,852 172,598 _________ _________ $ 594,967 $ 812,780 ========= ========= CAPITAL EXPENDITURES INCURRED: Oil and gas $ 4,251 $ 12,985 Mining 55,003 29,356 General corporate activities - 1,600 _________ _________ $ 59,254 $ 43,941 ========= ========= Major Customer - For the year ended September 30, 1997, the Company had one mining customer that accounted for 72.0% of total revenue. (11) DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES: All oil and gas operations of the Company and its subsidiaries are conducted in the United States. Capitalized costs relating to oil and gas producing activities are as follows: September 30, 1998 1997 Unproved properties not being amortized $ 11,806 $ 33,750 Properties being amortized: Unproved properties 116,898 90,703 Proved properties 5,869,741 5,891,554 _________ _________ 5,998,445 6,016,007 Accumulated depreciation, depletion and amortization (5,946,334) (5,914,624) __________ _________ $ 52,111 $ 101,383 ========== ========= Costs incurred in oil and gas producing activities, whether capitalized or expensed, during the years ended September 30, 1998 and 1997 are as follows: 1998 1997 _________ _________ Acquisition costs $ - $ - ========= ========= Exploration costs $ 4,251 $ 12,986 ========= ========= Development costs $ -- $ -- ========= ========= Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) - Proved oil and gas reserves are the estimated quantities of crude oil and natural gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells and existing equipment and operating methods. However, reserve information should not be construed as the current market value of the Company's oil and gas reserves or the costs that would be incurred to obtain equivalent reserves. Reserve calculations involve the estimation of future net recoverable reserves of oil and gas and the timing and amount of future net revenues to be received therefrom. These estimates are based on numerous factors, many of which are variable and uncertain. Accordingly, it is common for the actual production and revenues to vary from earlier estimates. Reserve estimates for recently drilled wells and undeveloped properties are subject to substantial upward or downward revisions after drilling is completed and a production history obtained. Hence, reserve estimates and estimates of future net revenues from production may be subject to substantial revision from year to year. Reserve information presented herein is based on reports prepared by independent petroleum engineers. Set forth below is the unaudited summary of the changes in the net quantities of the Company's proved oil (bbls) and natural gas (mcf) reserves for the years ended September 30, 1998 and 1997: 1998 1997 (bbls (mcf) (bbls (mcf) Proved reserves-beginning of year 22,973 62,463 32,378 358,036 Revisions of previous estimates 979 17,999 2,752 5,701 Sales of reserves-in-place (8,150) (40,697) (6,976) (282,127) Production (3,868) (9,518) (5,181) (19,147) Proved reserves-end of year 11,934 30,247 22,973 62,463 ====== ======= ====== ======= Proved developed reserves: Beginning of year 22,973 62,463 32,378 358,036 ====== ======= ====== ======= End of year 11,934 30,247 22,973 62,463 ====== ====== ====== ======= Standardized Measure of Discounted Future Net Cash Flows (Unaudited) - The following presentations contain no provision for estimated future income tax expenses due primarily to net operating loss carryforwards and tax credits. The standardized measure of discounted future net cash flows relating to proved oil and gas reserves at September 30, 1998 and 1997, is as follows: 1998 1997 Future cash in-flows $ 189,241 $ 433,301 Future production costs (126,211) (294,614) Future development costs - (5,000) _________ _________ Future net cash flows 63,030 133,687 10% annual discount for estimated timing of cash flows (22,725) (35,047) _________ _________ Standardized measure of discounted future net cash flows $ 40,305 $ 98,640 ========= ========= The following are the principal sources of change in the standardized measure of discounted future net cash flows during 1998 and 1997: 1998 1997 Standardized measure of discounted future net cash flows at beginning of year $ 98,640 $ 489,291 Sales of oil and gas produced, net of production costs 6,019 (33,892) Sales of reserves-in-place (53,680) (301,413) Net changes in prices and production costs (11,115) (75,536) Revisions of previous quantity estimates and other (14,344) (8,998) Changes in development costs 4,921 -- Accretion of discount 9,864 29,188 ________ _______ Standardized measures of discounted future net cash flows at end of year $ 40,305 $ 98,640 ======== ======= The Company estimates net quantities of proved reserves of oil and gas and calculates the standardized measure of discounted future net cash flows using current prices in effect at the end of each fiscal year. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 5, 1997, the Company received a letter from KPMG Peat Marwick LLP ("KPMG") that the client-auditor relationship between the Company and KPMG had ceased, effective May 2, 1997. This event was preceded by a conversation between the Company's President and the KPMG Partner in charge of the Company's account to the effect that due to the Company's need to reduce costs, it would be necessary for the Company to look into engaging a smaller accounting firm, which might be able to offer more cost-effective services. In September, 1997 the Company engaged the firm of Hein + Associates LLP to audit the Company's financial statements as of September 30, 1997. The Company has engaged Hein + Associates LLP to audit the Company's 1998 Financial Statements. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors The directors of the Company are set forth in the following table: Name and Positions Served as Held With the Company Age Director Since John R. Parker, Chairman of the Board (1) 52 April 22, 1986 Robert E. McDonald,(2) 70 April 22, 1986 Brian B. Spillane, President and Chief Executive Officer (3) 62 April 22, 1986 Milton O. Childers Exploration Manager 70 April 22, 1986 Robert W. Meier (2) 62 April 22, 1986 (1) Chairman of the Board since February 17, 1997. (2) Member of the Executive Committee. (3) President and Chief Executive Officer since April 1, 1989. All directors are elected to serve until the next annual meeting or until retirement or resignation. There is no family relationship between any director of the Company and any other director or executive officer. The following paragraphs set forth an account of the business experience of each of the Company's directors and executive officers, including his principal occupation and employment. Mr. McDonald is currently a consulting geologist and oil and gas explorationist. He is also engaged in agricultural and real estate pursuits. He was President of Nova Natural Resources Corporation from its inception until his resignation on April 1, 1989. He served as Chairman of the Board from inception until February 17, 1997. He continues to serve as a member of the Board of Directors. From January 1, 1984 to September, 1986, he was President and Chairman of the Board of Nova Petroleum Corporation, a predecessor to the Company. He graduated from the University of Kansas in 1951 with a B.S. degree in Geology. Mr. McDonald has published several papers relating to oil and gas geology in the Rocky Mountain area. Mr. Spillane became President and Chief Executive Officer of the Company effective April 1, 1989. Prior to that time he was an independent consultant to the oil, gas and minerals industry. From February, 1982 to November, 1987, he was employed as Executive Vice President of Barrett Resources Corporation, a publicly held oil and gas exploration company, where his duties primarily involved mergers, acquisitions, and capital financing in addition to involvement in other operations. He graduated from the University of Detroit in 1961 with a B.S. in Mechanical Engineering and holds a M.S. in Mechanical Engineering from San Diego State University. He is a Registered Professional Engineer (mechanical) in California. Dr. Childers was President, Treasurer, and Director of Power Resources Corporation until the merger in 1986 of Power Resources Corporation into Nova Natural Resources Corporation, and holds B.S. and M.A. degrees in geology from the University of Wyoming and a Ph.D. degree in geology from Princeton University. Dr. Childers was an independent consulting geologist in the Denver, Colorado area from 1986 to 1992 when he became the Company's Exploration Manager. He became the Vice President of Exploration of the Company in January, 1993, and continues in that capacity. Mr. Meier served as President and Chairman of the Board of Nova Petroleum Corporation from May 1979 to January 1, 1984. From 1984 to 1989 he was an independent consulting geologist. From 1989 to 1994 he was Project Geologist for Dames & Moore, specializing in the disposal of hazardous waste materials. He is currently retired, but occasionally works as a consulting geologist. He graduated from Northern Illinois University in 1961 with a B.S. degree in Geology and in 1964 received an M.S. degree in Geology from Southern Methodist University. Mr. Meier is a member of the American Association of Petroleum Geologists and is a certified member of the Association of Professional Geological Scientists. Mr. Parker is currently a real estate developer in Vermont. Prior to this activity he was a registered investment councilor with McRae Capital Management in Morristown, New Jersey. Prior to joining McRae, Mr. Parker worked as an independent financial consultant to various companies and as a general partner in an investment banking firm. Mr. Parker is also a director of several investment companies associated with the Capstone Group in Houston, Texas. He graduated from St. Lawrence University in 1969 with a B.S. in Psychology and holds a P.M.D. from Harvard Graduate School of Business Administration. Mr. Parker has served as Chairman of the Board since February 17, 1997. No directors of the Company receive compensation as directors, although certain expenses incurred for Company business may be reimbursed. Executive Officers The following table sets forth the executive officers of the Company: Name and Officer Age Served as Officer Since Brian B. Spillane President and Chief Executive Officer 62 April 1, 1989 James R. Schaff Secretary and Treasurer Manager of Lands 43 May 2, 1996 Milton O. Childers Vice President of Exploration, and Assistant Secretary 70 January 22, 1993 An account of the business experience during at least the past five years of Mr. Schaff is as follows (for Messrs. Spillane and Childers, see "Directors"): Mr. Schaff assumed his position as Nova's Land Manager on April 1, 1994, and was appointed Secretary and Treasurer of the Company on May 2, 1996. From 1981 until 1990, he was an independent consultant for various major and independent companies in the oil and gas industry. From 1990 to 1994, he consulted principally for Nova and U. S. Borax Inc. in mining-related land affairs. He graduated from Rocky Mountain College in 1981 with a B.S. degree in Business Administration-Economics. He is a Certified Professional Landman (CPL) and an active member of the American Association of Professional Landmen (AAPL), the Rocky Mountain Association of Mineral Landmen (RMAML) and the Rocky Mountain Mineral Law Foundation. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation of the Chief Executive Officer, the Exploration Manager and the Land Manager of the Company as of September 30, 1998, 1997, and 1996 for services in all capacities to the Company. Summary Compensation Table Long Term Compensation Annual Compensation Awards Name and Salary Restricted Stock Options Principal Position Year $ Award ($)* # Brian B. Spillane 1998 32,250 8,063 600,000 CEO 1997 51,600 5,160 -- 1996 50,120 -- -- Milton O. Childers 1998 31,500 7,875 473,577 Exploration V.P. 1997 50,400 5,040 -- 1996 50,240 -- -- James R. Schaff Secretary/Treasurer 1998 31,125 7,781 550,000 Manager of Lands 1997 49,800 4,980 -- 1996 48,930 -- -- *ESOP contribution Option Grants in Last Fiscal Year Individual Grants % of Total Options Options Granted Exercise or Granted/ to Employees Base Price Expiration Name (Expired) in Fiscal Year ($/sh) Date Brian B. Spillane 800,000 17% $.03 1/30/03 Brian B. Spillane (200,000) - .105 4/01/99 Milton O. Childers 673,577 13% .03 1/30/03 Milton O. Childers (200,000) - .105 4/01/99 James R. Schaff 750,000 26% .03 1/30/03 James R. Schaff (200,000) - .105 4/01/99 Mary F. Mernah 150,000 5% .03 1/30/03 Robert E. McDonald 300,000 11% .03 1/30/03 Robert E. McDonald (200,000) - .105 4/01/99 John R. Parker 300,000 11% .03 1/30/03 John R. Parker (200,000) - .105 4/01/99 Robert Meier 300,000 11% .03 1/30/03 Robert Meier (200,000) - .105 4/01/99 Charles P. Klass 100,000 3% .03 1/30/03 David Rath 100,000 3% .03 1/30/03 Employee Stock Option Plans The Company had two stock option plans for the benefit of Company employees and key personnel. The first plan was the Nova Natural Resources Corporation 1989 Non-qualified Stock Option Plan (the "Non-qualified Plan") and the second plan was the Nova Natural Resources Corporation 1989 Incentive Stock Option Plan, a qualified plan (the "Incentive Plan"). Both plans expired in 1994. In February 1996, the Company granted nonqualified options for 50,000 shares to an officer. These options were exercisable at $.05 per share for five years and were not granted pursuant to either of the stock option plans discussed above. In December 1997, the Board of Directors and the officer agreed to cancel these options. In January, 1998 the Board of Directors approved the Nova Natural Resources Corporation Nonqualified Stock Option Plan. A total of 4,500,000 shares of the Company's Common Stock have been reserved for issuance under the terms of the two Plans. Employee Stock Ownership Plans The Board of Directors and the stockholders of the Company have also adopted the Nova Natural Resources Corporation Employee Stock Ownership Plan ("ESOP") for the benefit of its full-time employees, including its officers and directors. Only employees who have reached the age of 21 and have completed one year of Company service are eligible to participate in this plan. With respect to each plan year, the Company may contribute cash or Common Stock of the Company to a trust in such amounts as the Board of Directors deems advisable. Contributions may not exceed the lesser of 25% of the participant's total annual compensation or $30,000. Any cash contributions are to be used primarily by the trustee to purchase shares of Common Stock of the Company, which, in addition to shares of Common Stock of the Company contributed by the Company, are allocated to the accounts of all participants in the ratio that the total annual compensation (not in excess of $150,000) of each participant bears to the total compensation of all participants in such year. The plan does not allow contributions by participants. Each participant's right to the stock allocated to his account is fully vested after three years of service. Nonetheless, a participant's benefits will be fully vested if his employment terminates by reason of death or upon his reaching 65. If a participant incurs a break in service (passage of one plan year in which the employee works 500 or fewer hours), his benefits are forfeited to the extent they have not vested. All forfeitures are allocated among the remaining participants in the same manner as the annual contribution. Distributions under the plan are to commence no later than 60 days after the last day of the year in which the participant reaches age 65 or, if later, the plan year in which the participant terminates employment with the Company. The distribution will consist of the Company's Common Stock. Any distributions are payable in a lump sum or, if the participant elects, in annual or monthly installments. Each participant is entitled to direct the trustee as to the manner in which any stock allocated to his account is voted. The trustee is empowered to vote any stock which has not been allocated in a manner which, in the judgement of the Board of Directors, represents the participants' best interests. As of September 30, 1998, 597,086, 254,030 and 395,747 shares have been allocated to accounts of Messrs. Spillane, Schaff, and Childers, respectively. No other current officers or directors of Nova are currently eligible to participate in the plan. A total of 485,625 shares were contributed to the plan in 1998. In 1997, 228,233 shares were contributed. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Principal Shareholders The following table sets forth the only persons known to the Company, as of September 30, 1998, to own beneficially more than 5% of the Company's Common Stock, $.10 par value, or the Company's Convertible Preferred Stock, $1.00 par value, the Company's only classes of issued and outstanding voting securities. Except as otherwise noted in the footnotes to the table, each person named has sole voting and investment powers relating to his shares. Name and Address Amount and Nature of Percent of Beneficial Owner Beneficial Ownership of Class Preferred Stock Robert E. McDonald 794,421 (1) 44.3% P.O. Box 6323 Denver, CO 80206-6323 Karen McDonald 794,420 (2) 44.3% 2575 Corte Casitas Carlsbad, CA 92009 Brian B. Spillane 203,426 (5) 11.4% 789 Sherman St., Ste. 550 Denver, CO 80203 Common Stock Robert E. McDonald 484,851 (1) 7.73% P.O. Box 6323 Denver, CO 80206-6323 Karen McDonald 484,850 (2) 7.73% 2575 Corte Casitas Carlsbad, CA 92009 James R. Schaff 314,337 (3) 5.01% 789 Sherman St. #550 Denver, CO 80203 Milton O. Childers 625,744 (4) 9.97% 17939 E. Brown Place Aurora, CO 80013 Brian B. Spillane 713,028 (5) 11.37% 255 S. Eudora Denver, CO 80222 (1) The preferred and common shares are held by the REM Family Trust, in which Mr. McDonald is the Trustee. Does not include 300,000 shares underlying stock options held by Mr. McDonald. Includes options held by two officers and directors and one director of the Company to purchase an aggregate of 561,788 shares of common stock directly from Mr. McDonald, all exercisable at $.10 per share at any time on or before April 3, 2003. Does not include 62,500 shares which would be issued were Mr. McDonald to elect to convert his $9,375 face amount of convertible subordinated debentures to common stock. (2) The preferred and common shares are held by the Karen McDonald Trust, in which Ms. McDonald is Trustee. Includes options held by two officers and one director of the Company to purchase an aggregate of 561,787 shares of common stock directly from Ms. McDonald, all exercisable at $.10 per share at any time on or before April 3, 2003. Does not include 62,500 shares which would be issued were Ms. McDonald to elect to convert her $9,375 face amount of convertible subordinated debentures to common stock. (3) Consists of 254,030 shares vested in his account under the Esop plan. Does not include 750,000 shares underlying stock options held by Mr. Schaff, nor does it include 20,833 shares which would be issued were Mr. Schaff to elect to convert his $3,125 face amount of convertible subordinated debentures to common stock. (4) Consists of 225,154 shares owned by Mr. Childers, 4,843 shares held by Mr. Childers' wife and 395,747 shares vested under the ESOP, but does not include options to purchase 186,789 shares directly from Mr. McDonald, options to purchase 186,788 shares from Ms. McDonald, or options to purchase 673,577 shares from the Company. Does not include 62,500 shares which would be issued were Mr. Childers to elect to convert his $9,375 face amount of convertible subordinated debentures to common stock. (5) Consists of 597,086 shares vested in his account under the ESOP, but does not include options owned by Mr. Spillane to purchase 250,000 shares directly from Mr. McDonald, options to purchase 250,000 shares directly from Ms. McDonald, or options to purchase 800,000 shares from the Company. Does not include 83,333 shares which would be issued were Mr. Spillane to elect to convert his $12,500 face amount of convertible subordinated debentures to common stock. The following table shows, at September 30, 1998, the shares of the Company's outstanding Common Stock, $.10 par value (6,274,131 shares), beneficially owned by each of the officers and directors of the Company and the shares beneficially owned by all of the officers and directors as a group. Except as otherwise noted in the footnotes to the table, each person named has sole voting and investment powers related to his shares. Name of Amount and Nature of Percent Beneficial Owner Beneficial Ownership of Class Robert E. McDonald 484,851 (1) 7.73% Brian B. Spillane 713,028 (3) 11.37% James R. Schaff 314,337 (4) 5.01% Milton O. Childers 625,744 (5) 9.97% Robert W. Meier 193,178 (6) 3.08% John R. Parker -- (7) (2) All Directors and Officers as a group (7 persons) 2,331,138 37.16% (1) See note (1) of the preceding table. (2) Less than 1%. (3) See note (5) of the preceding table. (4) See note (3) of the preceding table. (5) See note (4) of the preceding table. (6) Does not include 300,000 shares underlying stock options held by Mr. Meier. Does not include 41,667 shares which would be issued were Mr. Meier to elect to convert his $6,250 face amount of convertible subordinated debentures to common stock. (7) Does not include options owned by Mr. Parker to purchase 125,000 shares directly from Mr. McDonald, options to purchase 125,000 shares directly from Ms. McDonald, or options to purchase 300,000 shares from the company. Does not include 41,667 shares which would be issued were Mr. Parker to elect to convert his $6,250 face amount of convertible subordinated debentures to common stock. The following table shows as of September 30, 1998, the shares of the Company's Common Stock which would be held by Officers and Directors, $.10 par value, assuming full conversion of the Preferred Stock, full exercise of all options, and full conversion of convertible subordinated debentures. Name of Amount and Nature of Percent Beneficial Owner Beneficial Ownership of Class Robert E. McDonald 1,874,404 12.50% Brian B. Spillane 2,503,213 16.69% James R. Schaff 1,085,170 7.24% Milton O. Childers 1,735,398 11.57% Robert W. Meier 534,845 3.57% John R. Parker 591,667 3.95% All Directors and Officers as a group (7 persons) 8,324,697 55.52% If full conversion of all outstanding shares of convertible preferred stock, options, and convertible subordinated debentures occurred, the Company would have outstanding 14,998,909 shares of its Common Stock. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain of the Company's directors and officers have participated directly or indirectly in the past and may continue to participate, from time to time in the future, in oil, gas and mineral prospects in which the Company has an interest. All such participation has been and will continue to be on terms no less favorable to the Company than it can obtain from unaffiliated persons. In April, 1997 the Company received a check for $5,000 as an option payment on the West Rozell Oil and Gas Prospect. The Company and the Trust each own 50% of this property. The company paid the Trust $2,500 for its interest in this prospect. In November, 1997 the Company received a check for $25,000 as a prospect fee for an oil prospect in Wyoming. The Company owned 55% of the prospect with the Trust owning the remaining 45%. The Company paid the Trust $11,250 for its interest in this prospect. If the prospect was not drilled or a lease extension granted before December 31, 1997, the leases on this particular prospect would expire. The prospect was not drilled, and the leases expired in December, 1997. The property was put up for auction in 1998, and the company which bought them from Nova was the successful bidder for the property. As a result, Nova and the Trust retain a 4% overriding royalty interest in any production from the property. However, there is no guarantee that the property will be drilled or that if drilled, that drilling will be successful. The Company and the Trust also share ownership in one gas prospect in Wyoming. Messrs. McDonald and Spillane guaranteed and collateralized a line of credit in the amount of $100,000 on behalf of the Company during calendar year 1998. The Company paid the fees and interest on this loan, and it was repaid from the proceeds of the installment payments received by the Company in August and December, 1998. At September 30, 1998, the balance outstanding on this loan was $45,148, and the maximum amount borrowed was approximately $78,000. The loan was fully paid by the Company in December 1998. Messrs. McDonald and Spillane received no consideration of any kind in return for guaranteeing and collateralizing this loan facility. There have been no other significant transactions between the Company and officers or directors of the Company during the fiscal year ended September 30, 1998. See also "Item 10. Executive Compensation". PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) (3) Exhibits The following Exhibits are filed herewith pursuant to Rule 601 of the Regulation S-K or are incorporated by reference to previous filings. Exhibit Table No. Document Reference (2) Articles of Incorporation and By-Laws (a) (3) Instruments defining the right of security holders, including indentures N/A (5) Voting trust agreement N/A (6) Material contracts not in ordinary course of business N/A (7) Material foreign patents N/A (a) Filed with Registration Statement No. 33-5520 (under the Securities Act of 1933) and incorporated herein by this reference. (b) The following documents were filed and are incorporated herein: Description of Document and Filing (i) Convertible Preferred Stock Purchase Agreement filed with Form 10-Q dated December 31, 1986. (ii) Nova Natural Resources Corporation 1987 Non-qualified Stock Option Plan and 1987 Incentive Stock Option Plan. (iii) Report on Form 8-K date of report March 4, 1997. (iv) Report on Form 8-K, date of report May 5, 1997. (v) Report SC 13E4, date of report June 13, 1997. (vi) Report on form 8-K, date of report October 9, 1997. (vii) No 8-K's were filed in the last quarter of fiscal 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Nova Natural Resources Corporation has duly caused this Annual Report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized, in Denver, Colorado on this 13th day of January, 1999. NOVA NATURAL RESOURCES CORPORATION (Registrant) By:/s/ Brian B. Spillane Brian B. Spillane, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Robert E. McDonald Director 01-13-99 Robert E. McDonald /s/ Brian B. Spillane President, Chief 01-13-99 Brian B. Spillane Executive Officer /s/ James R. Schaff Secretary and Treasurer 01-13-99 James R. Schaff /s/ Milton O. Childers Director 01-13-99 Milton O. Childers /s/ John R. Parker Chairman of 01-13-99 John R. Parker the Board /s/ Robert W. Meier Director 01-13-99 Robert W. Meier EX-27 2
5 12-MOS SEP-30-1998 SEP-30-1998 462 0 87,988 0 0 94,434 6,230,987 6,012,363 594,967 149,777 250,000 0 1,792,267 627,413 (2,247,143) 594,967 62,915 126,271 0 366,197 0 0 31,655 (271,581) 0 (271,581) 0 0 0 (271,581) (.05) (.06)
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