Registration No. 333-135023

 

Novastar is registering up to 159,504,127 shares of its common stock (including 23,866,104 shares of common stock which are issuable upon the exercise of options and warrants for the purchase of Thorium Power, Inc. common stock that are being assumed by Novastar) for issuance to the stockholders and option and warrant holders of Thorium Power pursuant to the agreement and plan of merger between Novastar, TP Acquisition Corp., Novastar’s wholly owned subsidiary, and Thorium Power.

 

 

 

 

 

 

 

 

·	the amount, timing and form of consideration to be received by Thorium Power security holders in the merger;

 

·	the anticipated closing date of the merger;

 

·	the anticipated tax treatment of the merger;

 

·	the benefits expected to result from the merger;

 

·	the future business activity, performance and financial condition of Novastar and its subsidiaries following the merger;

 

·	the ability to realize the synergies and other perceived advantages resulting from the merger; and

 

·	the ability to retain key personnel before and after the merger.

 

 

 

 

 

The following is a summary that highlights information contained in this prospectus. This summary may not contain all of the information that may be important to you and it is qualified in its entirety by the more detailed information appearing elsewhere in this document or that is incorporated by reference or attached as Annexes to this document. Page references are included in parentheses to direct you to a more complete description of the items presented in this summary. You may obtain the information incorporated by reference into this prospectus without charge by following the instructions in the section entitled “Where You Can Find More Information” beginning on page 109 of this prospectus. Novastar has supplied all information contained in this prospectus relating to Novastar and TP Acquisition Corp. (“TP Acquisition”) and Thorium Power has supplied all information contained in this prospectus relating to Thorium Power.

 

 

 

 

 

 

 

 

 

 

 

 

·	the market for U.S. and Russian weapons grade plutonium disposition;

 

·	the market for disposition of plutonium in spent nuclear fuel; and

 

·	the market for commercial nuclear fuel.

 

 

 

 

 

 

 

On February 14, 2006, Novastar, its wholly owned subsidiary, TP Acquisition, and Thorium Power entered into a merger agreement, which was amended on June 12, 2006, and again on August 8, 2006 pursuant to which TP Acquisition will merge with and into Thorium Power, with Thorium Power, the surviving corporation, becoming a wholly owned subsidiary of Novastar. The merger is subject to various conditions and rights of termination described in this document and the merger agreement. We have attached a copy of the merger agreement, as amended, as Annex A to this prospectus. We encourage you to read carefully the merger agreement in its entirety because it is the legal document that governs the merger.

 

 

 

·	improved access to capital markets;

 

·	complementary business development plans relating to the promotion of thorium as a fuel for nuclear reactors;

 

·	Novastar’s rights to certain exploration stage properties in Queensland, Australia that may contain thorium deposits and Novastar’s rights to certain properties in Alabama that may contain thorium deposits, other rare earth minerals and platinum group metals;

 

·	the ability to use registered securities to make future acquisitions of assets or businesses;

 

·	increased visibility in the financial community;

 

·	improved transparency of operations; and

 

·	perceived credibility and enhanced corporate image of being a publicly traded company.

 

 

 

·	Thorium Power’s promising technology, business model and prospects for growth and expansion;

 

·	the anticipated increase in Novastar stock value as a result of the merger; and

 

·	the integration resulting from the combination of Novastar’s properties that are prospective for thorium and the need of Thorium Power’s prospective customers to utilize thorium as a raw material for Thorium Power’s nuclear fuel designs.

 

 

Upon consummation of the merger, each share of outstanding Thorium Power common stock (except shares as to which appraisal rights have been properly perfected and shares held by Novastar) shall be converted into the right to receive 25.628 shares of Novastar common stock.

 

 

Exercise Price		Number of shares
$1.00			22.965
$5.00			12.315

 

 

 

 

 

 

 

·	the registration statement of which this prospectus is a part becomes effective;

 

·

the board of directors of Novastar shall have (i) approved the merger agreement and the merger; (ii) amended and restated Novastar’s bylaws; and (iii) amended Novastar’s certificate of incorporation to (A) increase the number of authorized shares of Novastar common stock to 500,000,000 and (B) change the name of Novastar to “Thorium Power Ltd.” and (iii) make other changes as may be mutually agreed upon by the parties;

 

·	Novastar shall have obtained the written consent of the holders of a majority in interest of the Novastar common stock to the amendments to the certificate of incorporation of Novastar described above;

 

·	Seth Grae and Andrey Mushakov shall have entered into employment agreements with Novastar;

 

·	the total number of shares of Thorium Power’s common stock held by dissenting stockholders shall not exceed 10% of the outstanding shares of Thorium Power’s common stock;

 

·	requisite approval of the merger by the Thorium Power stockholders and board of directors;

 

·	receipt of releases from certain persons as the parties may reasonably request; and

 

·	the parties shall have completed their respective due diligence review to their respective satisfaction.

 

 

 

·	the parties will give prompt written notice to each other of any material adverse development causing a breach of any of their representations and warranties;

 

·

Novastar will prepare and file with the SEC a registration statement and any amendment or supplement thereto relating to the merger and a separate registration statement relating to securities to be issued in the merger to affiliates of Novastar or Thorium prior to the merger and shares issued in connection with private placements prior to the merger;

 

 

·	Novastar will furnish to Thorium Power all of its filings to be made with the SEC and all materials to be mailed to Novastar’s stockholders and will solicit comments from Thorium Power;

 

·

the parties will operate only in the ordinary and usual course of business consistent with past practice and will use reasonable commercial efforts to preserve their respective business. In addition, Novastar has agreed not issue any securities to its employees, consultants, advisors or others in consideration for services rendered or to be rendered without the prior written consent of Thorium Power;

 

·	prior to issuing any public announcement or statement with respect to the merger, the parties will, subject to their respective legal obligations, consult with each other and will allow each other to review the contents of any such public announcement or statement and any such filing;

 

·	Thorium Power will use commercially reasonable efforts to cause the holders of its options and warrants that have an exercise price at $5.00 or less to exchange such securities for Novastar common stock pursuant to the merger agreement;

 

·	Novastar will appoint Seth Grae as its Chief Executive Officer and President;

 

·	the parties have agreed not to solicit the submission of merger proposals from any third parties;

 

·	on or before March 31, 2006, Novastar will use commercially reasonable efforts to raise at least $2,750,000 in an equity financing transaction and will invest at least $1,200,000 of such funds in Thorium Power for Thorium Power Common Stock at a price per share of $4.00; and

 

·	Novastar will use commercially reasonable efforts to amend certain mining contracts to which Novastar is a party, such that the only remedy for a breach of obligations by Novastar thereunder is termination of such contracts.

 

 

 

 

·	the board of directors of the receiving party determines in good faith, after receiving the advice of its outside legal counsel, that action is required in order for the board of directors of the party to act in a manner consistent with its fiduciary duties under applicable law,

 

·	the board of directors of the party concludes in good faith, in consultation with its financial advisors, that the Alternative Proposal constitutes a Superior Proposal, and

 

·	the party receives from the person making the proposal a suitable confidentiality agreement.

 

 

 

 

·	determines in good faith that the Alternative Proposal is a Superior Proposal (and continues to constitute a Superior Proposal after taking into account any modifications proposed by the other parties), and

 

·	after receiving the advice of its outside counsel has concluded in good faith that action is required in order for the board of directors of the party receiving the Alternative Proposal to act in a manner consistent with its fiduciary duties under applicable law,

 

 

 

 

·	by the mutual written consent of the Parties;

 

·	by Novastar or TP Acquisition Corp.,

 

 

·	upon written notice to Thorium Power that any of the conditions have not been fulfilled or waived on or prior to October 31, 2006,

 

·

if there has been a breach by Thorium Power of any representation, warranty or covenant made by it in the merger agreement which has prevented the satisfaction of any condition to the obligations of Novastar and/or TP Acquisition Corp. to effect the closing and such breach has not been cured by Thorium Power or waived by Novastar and TP Acquisition Corp. within 20 business days after all other conditions to closing have been satisfied or are capable of being satisfied,

 

·	if an Alternative Proposal relating to Thorium Power has not been rejected within thirty (30) days after receipt of such a proposal by Thorium Power, or

 

·	if Novastar and/or TP Acquisition Corp. have complied with the provisions of the merger agreement relating to Superior Proposals.

 

·	by Thorium Power;

 

·	upon written notice to Novastar and TP Acquisition Corp. that any of the conditions have not been fulfilled or waived on or prior to October 31, 2006,

 

·

if there has been a breach by Novastar or TP Acquisition Corp. of any representation, warranty or covenant made by it in the merger agreement which has prevented the satisfaction of any condition to the obligations of Thorium Power to effect the closing and such breach has not been cured by Novastar and/or Acquisition Sub or waived by Thorium Power within 20 business days after all other conditions to closing have been satisfied or are capable of being satisfied,

 

·	if an Alternative Proposal relating to Novastar and/or Acquisition Sub has not been rejected within thirty (30) days after receipt thereof by Novastar and/or Acquisition Sub, or

 

·	if Thorium Power has complied with the provisions of the merger agreement relating to a Superior Proposal.

 

·	By any party to the merger agreement if a governmental authority issues an order, decree or ruling or takes any other action permanently restraining, enjoining or otherwise prohibiting the merger and such order, decree, ruling or other action shall have become final and nonappealable.

 

If the merger agreement is terminated by a party as a result of that party's acceptance of a Superior Proposal in accordance with the merger agreement, or as a result of a party not rejecting an alternative proposal within 30 days of receipt of such alternative proposal, then such party shall be obligated to pay a termination fee of $500,000.

 

 

 

 

For federal income tax purposes, the merger will be treated as a “reorganization” under Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). As a result, you generally will not recognize any gain or loss on the conversion of your Thorium Power stock or non-compensatory options or warrants into shares of Novastar stock in the merger for federal income tax purposes. However, you generally will recognize gain to the extent you receive any cash in exchange for your Thorium Power stock.

This summary applies only to United States holders of Thorium Power stock, options and warrants, and is subject to the assumptions and limitations set out in “The Merger Agreement--Material United States Federal Income Tax Consequences,” which should be read for a more detailed discussion. Tax matters are complicated, and the tax consequences of the merger may vary among shareholders. We urge you to contact your own tax advisor for assistance in understanding fully how the merger will affect you.

 

 

 

 

 

 

 

 

 

As of September 20, 2006, Novastar had 160,476,474 shares outstanding, which includes 36,659,837 shares that were issued by Novastar in private placement transactions after the merger agreement was signed. In connection with the merger, Novastar will issue approximately 135.6 million shares of its common stock. Therefore, immediately following the merger there will be approximately 296,000,000 shares outstanding. Novastar is registering the shares to be issued in the merger under this registration statement and it will be registering the shares issued in the above mentioned private placements under a separate registration statement along with the shares to be issued in the merger to affiliates of Novastar or Thorium prior to the merger. The Novastar stock issued in the merger and to the private placement investors will be available for trading in the public market. The additional shares in the market may cause the price of Novastar common stock to decline. Also, if Novastar’s stockholders sell substantial numbers of shares of Novastar common stock in the public market following consummation of the merger, including shares issued on the exercise of outstanding options and warrants, the market price of Novastar common stock could fall. These sales might also make it more difficult for Novastar to sell equity or equity related securities at a time and price that Novastar would deem appropriate. All of the shares of Novastar common stock issued to Thorium Power stockholders in the merger will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended (the “Securities Act”), unless the shares of common stock are held by an “affiliate” of Novastar or Thorium Power prior to the merger, as that term is defined under the Securities Act.

 

 

 

 

 

 

·	potential partners may refrain from entering into agreements with Novastar or Thorium Power;

 

·	employee turnover may increase; and

 

·	Thorium Power, and to a lesser extent, Novastar, may require additional capital, which may not be available on terms attractive to Thorium Power and Novastar, as applicable, or at all.

 

 

 

THE INTEGRATION OF THE NOVASTAR AND THORIUM POWER BUSINESSES MAY BE COSTLY AND THE FAILURE OF MANAGEMENT TO SUCCESSFULLY EFFECT THE INTEGRATION MAY ADVERSELY AFFECT NOVASTAR’S BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. 

 

 

 

Seth Grae is currently the CEO of both Thorium Power and Novastar and he is also a director of both companies; Thomas Graham, Jr. is a director of both companies, the Chairman of Novastar and the interim Secretary of Novastar; and Andrey Mushakov is the Executive Vice President - International Nuclear Operations of Novastar and the Treasurer & Secretary of Thorium Power. In accordance with his employment agreement with Novastar, Mr. Grae receives a portion of his total cash compensation (equal to $275,000 per year plus bonus, in the aggregate) from both Novastar and Thorium Power and equity compensation and other benefits from both companies, for services provided to these companies. In accordance with his employment agreement with Novastar, Mr. Mushakov receives a portion of his total cash compensation (equal to $160,000 per year plus bonus, in the aggregate) from both Novastar and Thorium Power and equity compensation and other benefits from both companies, for services provided to these companies. Mr. Grae, Ambassador Graham, and Mr. Mushakov each have fiduciary duties to both Thorium Power and Novastar and their respective stockholders. The fact that they are officers and/or directors of both parties to the merger agreement creates a conflict of interest. The transactions contemplated by the merger agreement have not been consummated yet and situations will likely arise where Mr. Grae, Ambassador Graham, and Mr. Mushakov will have to make decisions that benefit one party and are a detriment to the other, such as in the interpretation of the merger agreement. For example, Mr. Grae, Ambassador Graham, and Mr. Mushakov could be called upon to interpret provisions in the merger agreement relating to the determination of the merger consideration to be paid to the Thorium Power security holders.

 

Management of both Novastar and Thorium Power will spend a significant amount of their business time on matters relating to the merger, including, the preparation of this registration statement, integration issues, and other matters that are customary in mergers of this type. In addition, Seth Grae, Thomas Graham, Jr. and Andrey Mushakov, who are officers and/or directors of both parties to the merger, will be required to participate in the management of the businesses of both companies pending the merger in addition to devoting their own time and other management resources to action required to complete the merger. At the same time, they must ensure that Novastar is properly administered as a public company, including the compliance with SEC reporting obligations and other requirements. There can be no assurances that the resources of Novastar are adequate to ensure that the business of Novastar and Thorium Power is not neglected as a result of these competing demands.

 

Novastar and Thorium Power have and will incur substantial costs in connection with the merger. These costs primarily relate to the costs associated with the fees of attorneys, accountants and other advisors. If the merger is not completed, Novastar and Thorium Power will have incurred significant costs for which they will have received little or no benefit.

 

RISK FACTORS RELATING TO NOVASTAR 

 

 

Novastar adopted a new business model in mid-2005 to pursue the exploration of thorium and other rare earth minerals and development opportunities, and have a limited operating history in its current form. Since Novastar reorganized our business, its operating costs have exceeded its revenue in each quarter. Novastar incurred cumulative net losses of approximately 17,483,000 from the period June 28 1999 (inception) to June 30, 2006. Novastar may not be able to obtain or maintain any level of revenues in the future. If Novastar is unsuccessful in these efforts, it may never achieve profitability.

 

 

 

 

 

 

 

 

 

 

 

 

·	costs of bringing each property into production, including exploration work, preparation of production feasibility studies and construction of production facilities;

 

·	availability and costs of financing;

 

·	ongoing costs of production;

 

·	market prices for the minerals to be produced;

 

·	environmental compliance regulations and restraints; and

 

·	political climate and/or governmental regulation and control.

 

 

 

NOVASTAR WILL BE SUBJECT TO OPERATING HAZARDS, COMPETITION AND DOWNWARD PRICE FLUCTUATION WHICH MAY ADVERSELY AFFECT NOVASTAR’S FINANCIAL CONDITION. 

 

 

 

 

 

 

 

 

 

 

 

Thorium Power has never realized significant revenues or realized an operating profit. Since its formation, its operating costs have exceeded its revenue in each quarter. Thorium Power incurred a net loss of approximately $12,000 for the six months June 30, 2006, and anticipates a net loss of at least $1,500,000 through the end of 2006; Novastar and Thorium Power anticipate a combined net loss of approximately $14,500,000 through December 31, 2006. The combined company may not be able to obtain or maintain any level of revenues. If the combined company is unsuccessful in these efforts, it may never achieve profitability.

 

 

 

 

THORIUM POWER’S FUEL DESIGNS HAVE NEVER BEEN TESTED IN AN EXISTING COMMERCIAL REACTOR AND ACTUAL FUEL PERFORMANCE, AS WELL AS THE WILLINGNESS OF COMMERCIAL REACTOR OPERATORS AND FUEL FABRICATORS TO ADOPT A NEW FUEL DESIGN, IS UNCERTAIN.

 

Nuclear power research and development entails significant technological risk. New designs must be fabricated, tested and licensed before market opportunities will exist. Thorium Power’s fuel designs are still in the research and development stage and while irradiation testing in a test reactor in Russia (which mimics the operating characteristics of an actual commercial reactor) and thermal-hydraulic experiments have been ongoing for several years, the fuel technology is yet to be tested in an existing commercial reactor. Thorium Power will not be certain about the ability of the fuel it designs to perform in actual commercial reactors until it is able to commercialize its fuel designs. It will also have to establish a relationship with a fuel fabricator to actually produce fuel using its designs. If the Thorium Power fuel designs do not perform as anticipated in commercial use, Thorium Power will not realize revenues from the licensing or other use of its fuel designs. In addition, there are several technical challenges involved in commercializing thorium based fuels. Some of the technical challenges with Thorium Power’s technology identified by the experts at the Kurchatov Institute, Westinghouse, and International Atomic Energy Agency, include:

 

·	Fuel fabrication: The relatively high melting point of thorium oxide will require fuel pellet manufacturing techniques that are different from those currently used for uranium pellets.

 

·	Fuel fabrication: Thorium Power’s fuel rod designs are greater than 3 meters long compared to conventional Russian fuel rods that are 1 meter long. The longer rods will required new equipment and experience making longer extrusions.

 

·	Fuel design: Thorium Power’s “seed-and-blanket” fuel assembly design has a detachable central part which is not in conventional fuel designs.

 

·	Fuel design: Thorium Power’s fuel design includes plutonium-zirconium fuel rods which will operate in a soluble boron environment . Current reactor operating experience is with uranium-zirconium fuel in a boron-free environment.

 

·	Fuel use: Thorium Power’s fuel is expected to be capable of producing more gigawatt days per ton of fuel than is allowed by current reactor licenses, so to gain full economic benefits, reactor operators will have to get regulatory approval.

 

·	Fuel use: Thorium Power’s fuel are expected to produce energy economically for up to 9 years in the reactor core. Current fuel demonstrates the cladding can remain corrosion-free for up to 5 years. Testing is needed to prove corrosion resistance for the longer residence time.

 

·

Fuel reprocessing: The IAEA has identified a number of ways that reprocessing spent thorium fuel will require technologies different from existing uranium fuel reprocessing. Management’s current marketing plans do not assume or depend on the ability to reprocess and recycle spent fuel. Management expects spent thorium fuel will go into long term storage. This is current U.S. Government policy.

 

 

Thorium Power's fuel designs differ significantly in some aspects from the fuel licensed and used today by commercial nuclear power plants. Some of the differences between Thorium Power’s fuels and those currently used include:

 

·	use of thorium instead of only uranium,

 

·	higher uranium enrichment level,

 

·	seed-and blanket fuel assembly design integrating thorium and uranium,

 

·	high burn-up levels of uranium,

 

·	use of metallic seed rods,

 

·	longer residence time of the blanket in the reactor, and

 

·	the ability of Thorium Power’s fuels to dispose of reactor-grade plutonium and/or weapons-grade plutonium through the use of a new fuel design and in reactors that have never used plutonium-bearing fresh fuels.

 

These differences will likely result in more prolonged and extensive review by the U.S. Nuclear Regulatory Commission and other nuclear licensing authorities and customers. Also, the nuclear industry may be hesitant to switch to another fuel with little or no history of successful commercial use because of the need for additional engineering and testing with no guarantee of success as well as investor reluctance to invest in a new technology when viable existing technologies are available.

 

 

Thorium Power’s business model and specifically its thorium/weapons-grade plutonium disposing fuel design is highly dependent upon U.S. and perhaps other government funding and acceptance as a technology appropriate to eliminate U.S. and Russian stockpiles of surplus weapons-grade plutonium. Management believes that participation in this multi-billion dollar market is a critical element in its business modeling. In the past, Thorium Power has faced resistance from some offices within the U.S. Department of Energy (DOE) that support other alternative plutonium disposing technology, particularly mixed plutonium uranium oxide (MOX) fuel designs. Thorium Power has spent a significant amount of funds to gain commercial and market acceptance for its fuel designs. Over the last two years Thorium Power has spent approximately $400,000, in the aggregate, including both cash and the fair market value of equity compensation, on third party service providers in connection with these lobbying efforts. Thorium Power expects to spend significantly more money per year than it has in the past over the next three years on these efforts to gain acceptance. These efforts may not result in funding for Thorium Power or government acceptance of Thorium Power’s technologies for plutonium disposition or other government-funded projects.

 

 

 

 

THE PRICE OF FOSSIL FUELS OR URANIUM MAY FALL, WHICH WOULD REDUCE THE INTEREST IN THORIUM FUEL BY REDUCING ECONOMIC ADVANTAGES OF UTILIZING THORIUM BASED FUELS AND ADVERSELY AFFECT THE MARKET PROSPECTS FOR THORIUM POWER’S FUEL DESIGNS.

Coal, uranium and crude oil prices are currently at very high levels. Management believes the high cost of these fuels has resulted in increased interest in other sources of energy such as thorium. If prices of traditional energy sources fall, then the demand that the company expects for thorium based fuels may not materialize. A decrease in demand for thorium based fuels would negatively affect Thorium Power’s future operating results.

 

 

Substantially all of Thorium Power’s present research activities are in Russia. Thorium Power’s research operations are subject to various political risks and uncertainties inherent in the country of Russia. If U.S.-Russia relations deteriorate, the Russian government may decide to scale back or even cease completely its cooperation with the United States on various international projects, including in the plutonium disposition program and nuclear power technology development programs. If this happened, Thorium Power's research and development program in Russia could be scaled back or shut down, which could have a significant adverse impact on Thorium Power's ability to execute its business model. Furthermore, the Russian institutes engaged in the Thorium Power project are highly regulated and, in many instances, are controlled by the Russian government. The Russian government could decide that the nuclear scientists engaged in Thorium Power's project in Russia or testing facilities employed in this project should be redirected to other high priority national projects in the nuclear sector which could lead to delays or have some other significant adverse impact on Thorium Power's project.

 

The nuclear power industry is a highly regulated industry. Thorium Power intends to license its fuel designs to nuclear fuel fabricators, who would, in turn, sell the thorium-based nuclear fuel that is produced using Thorium Power’s intellectual property to nuclear generating companies. All nuclear companies are subject to the jurisdiction of the United States Nuclear Regulatory Commission, or its foreign equivalents, with respect to the operation of nuclear reactors, fuel cycle facilities and handling of nuclear materials and technologies. The U.S. Nuclear Regulatory Commission, and its foreign equivalents, subject nuclear facilities to continuing review and regulation covering, among other things, operations, maintenance, emergency planning, security and environmental and radiological aspects of those facilities. These nuclear regulatory bodies may modify, suspend or revoke operating licenses and impose civil penalties for failure to comply with applicable laws and regulations such as the Atomic Energy Act, the regulations under such Act or the terms of such licenses. Possession and use of nuclear materials, including thorium-based nuclear fuel, would require the approval of the United States Nuclear Regulatory Commission or its counterparts around the world and would be subject to monitoring by international agencies.

PUBLIC OPPOSITION TO NUCLEAR POWER COULD INCREASE. 

 

Successful execution of Thorium Power's business model is dependent upon public support for nuclear power in the United States and other countries. Nuclear power faces strong opposition from certain competitive fuels, individuals and organizations. The occurrence of another major, Chernobyl-like, nuclear accident could have a significant adverse effect on public opinion about nuclear power and the favorable regulatory climate needed to introduce new nuclear technologies. Strong public opposition could hinder the construction of new nuclear power plants and lead to an early shut-down of the existing nuclear power plants. Furthermore, nuclear fuel fabrication and the use of new nuclear fuels in reactors must be licensed by the United States Nuclear Regulatory Commission and equivalent foreign governmental authorities. The licensing process includes public hearings in which opponents of the use of nuclear power might be able to cause the issuance of required licenses to be delayed or denied. In fact, since the Chernobyl nuclear accident, no new nuclear power plant has been built and opened in the United States.

MODIFICATIONS TO EXISTING NUCLEAR FUEL CYCLE INFRASTRUCTURE AS WELL AS REACTORS MAY PROVE TOO EXTENSIVE OR COSTLY. 

 

The existing nuclear fuel cycle infrastructure is predominantly based on low-enrichment uranium oxide fuels. Introduction of thorium based fuel designs, which require relatively higher enriched uranium or plutonium as a source of reactivity, into the existing nuclear fuel cycle supply chain would necessitate certain changes to procedures, processes and equipment used by existing nuclear fuel fabrication facilities and nuclear fuel transportation companies. In addition, Thorium Power's nuclear fuel designs rely on fabrication technologies that may be different from the fabrication techniques presently utilized by existing fuel fabricators. In particular, Thorium Power's metallic seed rods must be produced using a co-extrusion fabrication process that was developed in Russia. Presently, most commercial nuclear fuel is produced using a pellet fabrication technology, whereby uranium oxide is packed into small pellets that are stacked and sealed inside metallic tubes. The co-extrusion fabrication technology involves extrusion of a single-piece solid fuel rod from a metallic matrix containing uranium or plutonium seed fuel. While the co-extrusion fabrication process has been successfully used in Russia for decades to produce one-meter long metallic nuclear fuel rods used in nuclear reactors that propel Russian icebreakers, it must be upgraded and tested to demonstrate its ability to produce longer metallic rods (approximately 3.5-meters long for Russian VVER reactors) so that Thorium Power's seed fuel can be consistent with the standard length of fuel rods used in existing commercial reactors. Full-size metallic fuel rods have not yet been produced using this fabrication process, and there are no guarantees that this new fabrication technology will be successful.

Deployment of Thorium Power's nuclear fuel designs into existing commercial reactors may require modifications to existing equipment, refueling and fuel handling procedures, and other processes utilized at existing nuclear power plants. The costs of such modifications are difficult to ascertain. While one of Thorium Power's goals is to make its fuel designs as compatible as possible with the design of existing commercial reactors in order to minimize the extent and cost of modifications that may be required, Thorium Power may not be able to achieve compatibility sufficient to reduce the extent and costs of required modifications enough to make its design economical for reactor operations.

Intellectual property rights are evolving in Russia, trending towards international norms, but are by no means fully developed. Thorium Power works closely with the Kurchatov Institute in Russia to develop some of its intellectual property and so some of its intellectual property rights derive, or are affected by, Russian intellectual property laws. If the application of these laws to Thorium Power’s intellectual property rights proves inadequate, then it may not be able to fully avail itself of its intellectual property and its business model may therefore be impeded.

 

 

The market price of Novastar’s common stock may fluctuate significantly in response to a number of factors, some of which are beyond its control, including:

·	quarterly variations in operating results;

 

·	changes in financial estimates by securities analysts;

 

·	changes in market valuations of other similar companies;

 

·	announcements by Novastar or its competitors of new products or of significant technical innovations, contracts, receipt of (or failure to obtain) government funding or support, acquisitions, strategic partnerships or joint ventures;

 

·	additions or departures of key personnel;

 

·	any deviations in net sales or in losses from levels expected by securities analysts or any reduction in political support from levels expected by securities analysts;

 

·	future sales of common stock; and

 

·	results of analyses of mining and resources assets.

 

 

 

 

 

 

Novastar shares that are eligible for future sale may have an adverse effect on the price of the Novastar stock. As of Stepbember 20, 2006, there were 160,476,474 shares of Novastar common stock outstanding. As of September 20, 2006, about 70 million shares of Novastar common stock were freely tradable without substantial restriction or the requirement of future registration under the Securities Act. The remainder of the Novastar outstanding shares, most of which are held by Novastar’s officers, directors and greater than 5% stockholders, may be sold without registration under the exemption from registration provided by Rule 144 under the Securities Act. In addition, as of August 26, 2006, an additional 18,800,000 shares were subject to outstanding stock options and approximately 23.2 million shares were subject to outstanding investor warrants.

 

 

 

 

 

 

 

 

 

		YEAR ENDED  JUNE  30, 2006			YEAR ENDED JUNE 30, 2005			YEAR ENDED JUNE 30, 2004
Historical - Novastar:
Basic income (loss) per share					$	($0.05	)	$	0.00
Diluted net income (loss) per share					$	($0.05	)	$	0.00
Book value per share		$	(0.12	)	$	0.00		$	(0.02	)
		$	(0.12	)
			0.00

		SIX MONTHS ENDED  JUNE 30, 2006			YEAR ENDED DECEMBER 31, 2005			YEAR ENDED DECEMBER 31, 2004
Historical - Thorium Power:
Basic loss per share					$	(0.23	)	$	(0.30	)
Diluted loss per share					$	(0.23	)	$	(0.30	)
Book value per share		$	(0.25	)	$	(0.23	)	$	(0.18	)
		$	(0.25	)
		$	0.14

		PRO FORMA AS  OF JUNE 30, 2006			PRO FORMA AS OF JUNE 30, 2005			PRO FORMA AS  OF JUNE 30, 2004
Pro Forma
Basic and Diluted loss per share:
Including effect of subsequent stock issuance (a)
					$	(0.01	)	$	0.00
Pro Forma Book value per share (b)		$	(0.06	)		—			—
Historical book value per share					$	0.00		$	0.00
		$	(0.02	)
		$	0.00

(a)    For pro forma loss per share, including effect of subsequent stock issuance, Novastar’s historical shares of common stock outstanding were increased for the additional 36,659,837 shares issued in the private placement in May 2006 and for the 135,638,023 shares issued to Thorium Power pursuant to the merger agreement.

 

(b)    Book Value per share is computed using the adjusted equity of Novastar after the adjustments for subsequent events and elimination adjustments outlined in the unaudited consolidated pro forma balance sheet as of June 30, 2006, submitted with this registration statement.

 

 

 

 

FISCAL YEAR		QUARTER ENDING			HIGH			LOW
2006			June 30, 2006		$	0.74		$	0.43
			March 31, 2006		$	0.88		$	0.19
			December 31, 2005		$	0.28		$	0.14
			September 30, 2005		$	0.29		$	0.13
2005			June 30, 2005		$	0.22		$	0.077
			March 31, 2005		$	0.22		$	0.09
			December 31, 2004		$	0.29		$	0.07
			September 30, 2004		$	0.04		$	0.017

 

 

THORIUM POWER. Thorium Power common stock is not publicly traded, and market price information is therefore not available.

 

 

 

Thorium Power has never declared or paid any cash dividends on its common stock and has no intention of paying cash dividends in the foreseeable future.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

l

Following the merger, the combined company will be a public reporting company. The combined company will be able to use registered securities to effect acquisitions of assets and possibly businesses in the future. Thorium Power being a public company will result in increased visibility in the financial community. Status as a public reporting company will also result in improved transparency of operations and a perceived credibility and enhanced corporate image of being a publicly traded company.

 

l

Thorium Power’s existing stockholders will benefit from holding the publicly traded Novastar shares with an increase in the liquidity of their investments in Thorium Power.

 

 

l

Novastar had an existing base of institutional stockholders that were already involved in Novastar and, accordingly, had a reason to support Novastar and the proposed business combination.

 

l

The Thorium Power board of directors believes that the merger will be viewed favorably by private equity investors and will enhance the combined company’s ability to obtain private equity investment, both due to the prospect of a public trading market resulting from the merger and from the credibility and contacts of Novastar and its advisors in the investment community. In fact, following the execution of the merger agreement, Thorium Power received private equity financing in the aggregate amount of approximately $1,000,000 from investors other than Novastar, some of whom were introduced to Thorium Power by Novastar and its advisors. In addition, since signing the merger agreement, Novastar has raised in excess of $15 million in financing through private placements of its equity securities. This equity investment allowed Novastar to pay off its outstanding liabilities and still retain capital resources that will be available to the combined company after the merger is closed, and the Thorium Power board of directors believes that such financing would have been very difficult or impossible to obtain had the merger not been contemplated.

 

l

As part of the transaction, Seth Grae was to become Chief Executive Officer of Novastar, and existing Novastar management would not have a continuing leadership role.

 

l

The Thorium Power board of directors believes that Novastar’s investment in Thorium Power during the period preceding execution of the merger agreement, in an aggregate amount of approximately $600,000 was a concrete signal of Novastar’s commitment to Thorium Power’s goals, which would continue to the stockholders following the merger.

 

l

The board of directors believes that Thorium Power’s access to capital markets will be better once Thorium Power is merged with Novastar, a public company.

 

l

Merging with a public company may be a more efficient way of becoming publicly traded.

 

l

Novastar’s rights to certain exploration stage properties in Queensland, Australia that may contain thorium deposits and Novastar’s rights to certain properties in Alabama that may contain thorium deposits, other rare earth minerals and platinum group metals.

 

 

 

 

 

 

l

Thorium Power has technology that Novastar believes is promising and Novastar believes that Thorium Power’s business model is sound and that Thorium Power has good growth and expansion prospects.

 

l

Novastar believes that the merger of the two companies will create synergies that will benefit the stockholders of the combined company.

 

l

The Novastar board of directors believes that the merger will be viewed favorably by private equity investors and will enhance the combined company’s ability to obtain private equity investment, both due to the prospect of a public trading market resulting from the merger and from the credibility and contacts of Novastar and its advisors in the investment community. Since signing the merger agreement, Novastar has raised in excess of $15 million in financing through private placements of its equity securities. This equity investment allowed Novastar to pay off its outstanding liabilities and still retain capital resources that will be available to the combined company after the merger is closed, and the Novastar board of directors believes that such financing would have been very difficult or impossible to obtain had the merger not been contemplated.

 

Effective April 2, 2006, Charles Merchant and Paul C. Carter each resigned from Novastar board of directors, and Seth Grae, Thomas Graham, Jr., and Cornelius J. Milmoe each became directors of Novastar.

 

 

APPOINTMENT OF THORIUM POWER EXECUTIVE OFFICERS BY NOVASTAR 

 

 

 

 

 

Andrey Mushakov has been the Treasurer of Thorium Power since April 2002 and Treasurer and Secretary of Thorium Power since July 2003. On July 27, 2006, Mr. Mushakov entered into an employment and stock option agreement with Novastar. Under the employment agreement, Mr. Mushakov was appointed as the Executive Vice President - International Nuclear Operations. Pursuant to the employment agreement, Novastar has agreed to pay Mr. Mushakov an annual salary of $160,000 for performing the duties described in the agreement. In addition, Novastar issued to Mr. Mushakov, pursuant to the agreement, 1,500,000 shares of restricted stock and granted Mr. Mushakov 2,250,000 non-qualified stock options with a term of ten years at an exercise price of $0.49 per share. On July 27, 2006, 234,375 options vested and the remaining 2,015,625 options will vest in equal monthly installments. The 1,500,000 shares of restricted stock vest immediately on issuance, but 750,000 may not be directly or indirectly sold, transferred or otherwise disposed of for a period of one year and the remaining 750,000 for a period of two years, except for sales, transfers or other dispositions made to family members for estate planning purposes or pursuant to a qualified domestic relations order. Mr. Mushakov owns options to purchase a total of 37,500 shares of Thorium Power common stock. Upon consummation of the merger, Mr. Mushakov will own 1,500,000 shares of Novastar common stock and 3,211,050 options to purchase shares of Novastar common stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise Price			Number of shares
$1.00			22.965
$5.00			12.315

 

 

 

 

 

 

 

 

 

 

SETH GRAE. Mr. Grae, age 43, was named the Chief Executive Officer and President of Novastar on March 17, 2006, and effective April 2, 2006, became a director of Novastar.

 

Mr. Grae is the President, the Chief Executive Officer and a director of Thorium Power. Mr. Grae has played an active role in all business activities of Thorium Power since its inception in 1992. Mr. Grae led the efforts that resulted in Thorium Power’s project at the Kurchatov Institute becoming one of the first grant recipients from the United States Department of Energy (“DOE”) for nuclear non-proliferation-related work in Russia. He is a member of the board of directors of the Bulletin of the Atomic Scientists and has served as co-chair of the American Bar Association’s Committee on Arms Control and Disarmament. As a former member of the board of directors of the Lawyers Alliance for World Security, Mr. Grae helped advise on the drafting of nuclear export control regulations in China and Belarus, and he participated in consultations with the government of India on nuclear power and weapons. On a pro bono basis, he represented refuseniks, who were nuclear scientists, in securing exit visas from the Soviet Union. Mr. Grae obtained his B.A. from Brandeis University cum laude, J.D. from American University, LL.M. in International Law with honors from Georgetown University and M.B.A. from Georgetown University. He has been admitted to the bars of New York, Connecticut, and Florida (all now inactive).

 

THOMAS GRAHAM, JR. Ambassador Graham, age 72, became the Interim Secretary and a director of Novastar on April 2, 2006, and chairman of the board of directors on April 4, 2006.

 

Ambassador Graham is one of the world’s leading experts in nuclear non-proliferation. He is Chairman of the Board of the Cypress Fund for Peace and Security. Ambassador Graham has served as a senior U.S. diplomat involved in the negotiation of every major international arms control and non-proliferation agreement for the past 35 years, including the Strategic Arms Limitations Talks (SALT), Strategic Arms Reduction Talks (START Treaties), Anti-Ballistic Missile (ABM) Treaty, Intermediate Nuclear Forces (INF) Treaty, Nuclear Non-Proliferation Treaty (NPT), Conventional Armed Forces in Europe (CFE) Treaty and Comprehensive Test Ban Treaty (CTBT). In 1993, Ambassador Graham served as the Acting Director of the U.S. Arms Control and Disarmament Agency (ACDA), and for seven months in 1994 served as the Acting Deputy Director. From 1994 through 1997, he served as the Special Representative of the President of the United States for Arms Control, Non-Proliferation and Disarmament, and in this capacity successfully led U.S. government efforts to achieve the permanent extension of the NPT. He also served for 15 years as the general counsel of ACDA. Ambassador Graham worked on the negotiation of the Chemical Weapon Convention and the Biological Weapons Convention. He drafted the implementing legislation for the Biological Weapons Convention and managed the Senate approval of the ratification of the Geneva Protocol banning the use in war of chemical and biological weapons. He is also Chairman of the Board of Mexco Energy Corporation, an oil and gas exploration company listed on the American Stock Exchange (stock ticker symbol MXC). Ambassador Graham received an A.B. in 1955 from Princeton and a J.D. in 1961 from Harvard University. He is a member of the Kentucky, the District of Columbia and the New York Bars and is a member of the Council on Foreign Relations. He chaired the Committee on Arms Control and Disarmament of the American Bar Association from 1986-1994. Ambassador Graham received the Trainor Award for Distinction in Diplomacy from Georgetown University in 1995.

 

 

CORNELIUS J. MILMOE. Mr. Milmoe, age 59, became a director of Novastar on April 2, 2006 and he was appointed the Chief Operating Officer of Novastar on April 4, 2006.

 

 

 

 

 

 

Title		Name		Pre-Merger Affiliation
Chief Executive Officer, President and Director		Seth Grae		Thorium Power
Chief Operating Officer and Director		Cornelius J. Milmoe		Novastar
Interim Secretary and Director		Thomas Graham, Jr.		Thorium Power
Executive Vice President - International Nuclear Operations		Andrey Mushakov		Thorium Power
Treasurer and Acting Chief Financial Officer		Larry Goldman		Neither Company

 

LARRY GOLDMAN. Mr. Goldman became the Treasurer and Acting Chief Financial Officer of Novastar on June 13, 2006.

 

Mr. Goldman is a certified public accountant with over 20 years of auditing, consulting and technical experience as a partner in a mid-size New York City based accounting firm, working with a wide variety of companies, assisting them in streamlining their operations and increasing profitability. Prior to joining Novastar, Mr. Goldman worked as the Chief Financial Officer, Treasurer and Vice President of Finance of WinWin Gaming, Inc. (OTCBB: WNWN), a multi-media developer and publisher of sports, lottery and other games. Prior to joining WinWin, in October 2004, Mr. Goldman was a partner at Livingston Wachtell & Co., LLP and had been with that firm for the past 19 years. Mr. Goldman is also an independent director and audit committee chairman of Winner Medical Group Inc. (OTCBB: WMDG.OB), a China based manufacturer of medical disposable products and surgical dressings. Mr. Goldman has extensive experience in both auditing and consulting with public companies, and has experience providing accounting and consulting services to the Asian marketplace, having audited several Chinese public companies.

 

ANDREY MUSHAKOV. Mr. Mushakov became the Executive Vice President - International Nuclear Operations of Novastar on July 27, 2006. For information regarding Mr. Mushakov see “THORIUM POWER’S MANAGEMENT.”

 

 

 

 

·	organization, standing, corporate power and similar corporate matters;

 

·	authorization, execution, deliver and enforceability of the merger agreement;

 

·	valid issuance of Novastar common stock;

 

·	capital structure;

 

·	accuracy of financial statements and other information;

 

·	absence of certain adverse changes;

 

·	absence of litigation not previously disclosed;

 

·	absence of liabilities or claims not previously disclosed;

 

·	timely filing of all required tax returns;

 

·	delivery of all requested information;

 

·	material contracts;

 

·	whether any brokers were retained in connection with the merger transaction;

 

·	status of employees and compliance with labor laws;

 

·	compliance with the federal securities laws and the accuracy of all information filed with the SEC;

 

·	compliance with environmental laws; and

 

·	absence of any untrue statement of a material fact.

 

 

·	organization, standing, corporate power and similar corporate matters;

 

·	authorization, execution, deliver and enforceability of the merger agreement;

 

·	capital structure;

 

 

·	accuracy of financial statements and other information;

 

·	absence of certain adverse changes;

 

·	absence of litigation not previously disclosed;

 

·	absence of liabilities or claims not previously disclosed;

 

·	timely filing of all required tax returns;

 

·	delivery of all requested information;

 

·	material contracts;

 

·	no brokers;

 

·	status of employees and compliance with labor laws;

 

·	compliance with environmental laws; and

 

·	absence of any untrue statement of a material fact.

 

 

 

 

·	the parties will use their commercially reasonable efforts to take all action and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by the merger agreement;

 

·	the parties are entitled to have full access to all premises, properties, personnel, books, records (including tax records), contracts, and documents of or pertaining to the other parties;

 

·	the parties will give prompt written notice to the other parties of any material adverse development causing a breach of any of their representations and warranties;

 

·

Novastar will prepare and file with the SEC this registration statement on Form S-4 and any amendment or supplement thereto, in addition to a separate registration statement relating to securities to be issued in the merger to affiliates of Novastar or Thorium prior to the merger and shares issued in connection with private placements prior to the merger. The parties have agreed to use their commercially reasonable efforts to have such registration statements declared effective by the SEC as promptly as practicable after the filing. Thorium Power has agreed to cooperate with Novastar in the preparation of these registration statements, which includes, among other things, the delivery to Novastar of such audited financial statements as are required by the rules and regulations of the SEC for inclusion in the registration statement;

 

 

·

subject to the terms and conditions of the merger agreement, Thorium Power has agreed to proceed diligently and in good faith to, as promptly as practicable, obtain all required consents, make any other filings with and give any other notices to governmental entities or any other public or private third parties required to consummate the merger;

 

·	Novastar must furnish to Thorium Power all of their filings to be made with the SEC and all materials to be mailed to Novastar’s stockholders and will solicit comments from Thorium Power;

 

·

the parties will operate only in the ordinary and usual course of business consistent with past practice and will use reasonable commercial efforts to preserve their respective business. In addition, Novastar has agreed not issue any securities to its employees, consultants, advisors or others in consideration for services rendered or to be rendered without the prior written consent of Thorium Power;

 

·	prior to issuing any public announcement or statement with respect to the merger, the parties will, subject to their respective legal obligations, consult with each other and will allow each other to review the contents of any such public announcement or statement and any such filing;

 

·	Thorium Power will use commercially reasonable efforts to cause the holders of its options and warrants that have an exercised price at $5.00 or less to exchange such securities for Novastar common stock pursuant to the merger agreement;

 

·	Novastar will appoint Seth Grae as its Chief Executive Officer and President;

 

·	the parties have agreed not to solicit the submission of merger proposal from any third parties;

 

·	on or before March 31, 2006, Novastar will use commercially reasonable efforts to raise at least $2,750,000 in an equity financing transaction and will invest at least $1,200,000 of such funds in Thorium Power for Thorium Power Common Stock at a price per share of $4.00; and

 

·	Novastar will use commercially reasonable efforts to amend certain contracts to which Novastar is a party, such that the only remedy for a breach of obligations by Novastar thereunder is termination of such contracts.

 

 

 

 

·	the accuracy of all representations and warranties;

 

·	the performance and compliance with all covenants, agreements and conditions;

 

·	the delivery of certificates, documents and legal opinions; and

 

·	the ability to complete the merger under applicable state laws.

 

 

·	this registration statement must become effective and no stop order suspending the effectiveness of this registration statement can be issued or remain in effect;

 

·

the board of directors of Novastar must approve (i) the merger agreement and the merger; (ii) amended and restated bylaws; and (iii) an amendment to Novastar’s Certificate of Incorporation to (a) increase the number of authorized shares of Novastar Common Stock to 500,000,000, (b) change the name of Novastar to “Thorium Power Ltd.” and (iii) make other changes as may be mutually agreed upon by the parties;

 

·	Novastar shall have obtained the written consent of the holders of a majority in interest of the Novastar Common Stock to the amendments to the Certificate of Incorporation of Novastar;

 

·

all directors of Novastar shall have resigned from their positions as directors and the persons designated by Thorium Power shall comprise the entire board of Novastar. In addition, Novastar shall have filed an information statement that complies with Rule 14f-1 of the Securities Exchange Act of 1934;

 

·	Seth Grae and Andrey Mushakov shall have entered into an employment agreement with Novastar;

 

·	the total number of shares of Thorium Power common stock held by dissenting stockholders shall not exceed 10% of the outstanding shares of its common stock;

 

·	holders of Thorium Power options and warrants that have an exercise price at $5.00 or less shall have agreed to exchange their securities for Novastar Common Stock in accordance with the merger agreement;

 

·	requisite approval of the merger by Thorium Power’s stockholders and board of directors;

 

 

·	receipt of releases from certain persons as the parties may reasonably request;

 

·

absence of any occurrence, event, incident, action, failure to act, or transaction since the date hereof which has had or is reasonably likely to cause a material adverse effect (financial or otherwise) on the business, assets, liabilities, condition, property, prospects or results of operations of the other party; and

 

·	the parties shall have completed their respective due diligence review of each other.

 

 

·	the board of directors of the receiving party determines in good faith, after receiving the advice of its outside legal counsel, that action is required in order for the board of directors of the party to act in a manner consistent with its fiduciary duties under applicable law,

 

·	the board of directors of the party concludes in good faith, in consultation with its financial advisors, that the Alternative Proposal constitutes a Superior Proposal, and

 

·	the party receives from the person making the proposal a suitable confidentiality agreement.

 

 

 

·	determines in good faith that the Alternative Proposal is a Superior Proposal (and continues to constitute a Superior Proposal after taking into account any modifications proposed by the other parties), and

 

·	after receiving the advice of its outside counsel has concluded in good faith that action is required in order for the board of directors of the party receiving the Alternative Proposal to act in a manner consistent with its fiduciary duties under applicable law,

 

 

 

 

·	By the mutual written consent of the Parties.

 

·	By Novastar or TP Acquisition Corp.,

 

·	upon written notice to Thorium Power that any of the conditions have not been fulfilled or waived on or prior to October 31, 2006,

 

·

if there has been a breach by Thorium Power of any representation, warranty or covenant made by it in the merger agreement which has prevented the satisfaction of any condition to the obligations of Novastar and/or TP Acquisition Corp. to effect the closing and such breach has not been cured by Thorium Power or waived by Novastar and TP Acquisition Corp. within 20 business days after all other conditions to closing have been satisfied or are capable of being satisfied,

 

·	if an Alternative Proposal relating to Thorium Power has not been rejected within thirty (30) days after receipt of such a proposal by Thorium Power, or

 

·	if Novastar and/or TP Acquisition Corp. have complied with the provisions of the merger agreement relating to Superior Proposals.

 

·	By Thorium Power,

 

·	upon written notice to Novastar and TP Acquisition Corp. that any of the conditions have not been fulfilled or waived on or prior to October 31, 2006,

 

·

if there has been a breach by Novastar or TP Acquisition Corp. of any representation, warranty or covenant made by it in the merger agreement which has prevented the satisfaction of any condition to the obligations of Thorium Power to effect the closing and such breach has not been cured by Novastar and/or Acquisition Sub or waived by Thorium Power within 20 business days after all other conditions to closing have been satisfied or are capable of being satisfied,

 

 

·	if an Alternative Proposal relating to Novastar and/or Acquisition Sub has not been rejected within thirty (30) days after receipt thereof by Novastar and/or Acquisition Sub, or

 

·	if Thorium Power has complied with the provisions of the merger agreement relating to a Superior Proposal.

 

·	By any party to the merger agreement if a governmental authority issues an order, decree or ruling or takes any other action permanently restraining, enjoining or otherwise prohibiting the merger and such order, decree, ruling or other action shall have become final and nonappealable.

 

If the merger agreement is terminated by a party as a result of that party's acceptance of a Superior Proposal in accordance with the merger agreement, or as a result of a party not rejecting an alternative proposal within 30 days of receipt of such alternative proposal, then such party shall be obligated to pay a termination fee of $500,000.

 

 

 

 

 

 

·	an individual citizen or resident of the United States;

 

·	a corporation (including an entity other than a corporation which is treated as a corporation for U.S. federal income tax purposes), a partnership or a limited liability company, that is created or organized in or under the laws of the United States or any political subdivision thereof;

 

·	an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

·

a trust if, in general, a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or a trust in existence on August 20, 1996 if such trust has elected to continue to be treated as a U.S. person and met certain other requirements.

 

 

 

 

·

the Code;

 

·	current, temporary and proposed Treasury regulations promulgated under the Code;

 

·	the legislative history of the Code;

 

·	current administrative interpretations and practices of the Internal Revenue Service (the “IRS”), including its practices and policies as expressed in private letter rulings, which are not binding on the IRS except with respect to a taxpayer that receives such a ruling; and

 

·	court decisions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Upon completion of the merger, holders of Thorium Power common stock who did not consent to the adoption of the merger agreement and who follow the procedures specified in Section 262 of the Delaware General Corporation Law or DGCL within the appropriate time periods will be entitled to have their shares of Thorium Power common stock appraised by the Delaware Court of Chancery and to receive the “fair value” of such shares in cash as determined by such court in lieu of the consideration that such stockholders would otherwise be entitled to receive pursuant to the merger agreement.

 

On April 12, 2006, Thorium Power distributed an information statement to its stockholders that informed the Thorium Power stockholders of the annual meeting that occurred on April 26, 2006. The information statement also notified the stockholders of Thorium Power that stockholders of Thorium Power holding the requisite number of shares to approve the merger signed a written consent that approved the merger agreement and the transactions contemplated thereby. The meeting was held solely for informational purposes and no vote was taken at the meeting. The information statement included detailed instructions about how to exercise appraisal rights. Stockholders who intended to exercise appraisal rights were required to submit written notice of this intent to Thorium Power prior to May 2, 2006, the twentieth day following the mailing of the information statement to the Thorium Power stockholders.

 

 

 

 

 

 

 

 

 

 

Novastar expects to generate revenues in the future through the sale of thorium, platinum group metals and other rare earth minerals, but we have not done so to date.

 

 

 

 

 

 

 

 

 

·	industrial super alloys used in the aerospace and nuclear industries

 

·	crystals manufactured for the production of lasers

 

·	the refining of petroleum products

 

·	in magnetic refrigeration technology

 

·	as catalysts used in the manufacture of fuel-cells

 

 

·	in cellular phones and other wireless equipment

 

·	magnetic plastic technology used in computer data memory devices

 

·	fiber-optic lines and to color, polarize and polish glass

 

·	the creation of high temperature superconductors

 

·	catalytic converters for the automotive industry

 

 

 

·	Payroll expenses and related fringe benefits increased $116,436 due to the hiring of additional key management and staff. Novastar increased its payroll and related fringe benefits costs in its first fiscal quarter ended September 30, 2006, as it has hired an additional 6 employees.

·

Professional fees expense increased approximately $672,000 due primarily to legal fees incurred in connection with the upcoming merger with Thorium Power, Inc. and financing activities. Novastar anticipates that its legal fees will decrease once it is able to complete the merger with Thorium Power, Inc., unless it engages in other financing or acquisition activities.

·	Travel, business development, and public relations expense increased $93,385. Novastar anticipates that its travel, business development and public relations expense will increase as it continues to promote its business and seek other opportunities in the Nuclear Industry.

·	Consulting expense increased $3,466,600, which included costs associated with finance, geological work, government advocacy work, technical advisory board, and international advisory board.

·

Stock Based Compensation was $4,949,729, which included stock and stock option grants to Novastar executive officers and advisory board members. Novastar implementation of SFAS No. 123R (a modification to the existing standard - SFAS No. 123) in 2006 (see notes to the financial statements), changed the way it accounts for Stock-Based Compensation in 2006, and required Novastar to record expenses for equity instruments for which it would not have been required to report under SFAS No. 123.

·

Novastar incurred a net impairment loss of $670,544 on the mineral property acquisition costs, as it wrote off the entire amounts expended to acquire the rights to mine properties in Alabama and Australia. This impairment was based on management's assesment of future projected undiscounted and discounted cash flows from the properties.

·	Mineral exploration costs increased $394,516 due to Novastar’s exploration activities in its mining operations.

·	Director and officer liability insurance expense increased $91,506 due to liability insurance related to the merger agreement

 

 

·	Novastar recorded a warrant liability in the amount of $3,678,278 for the fair value of warrants accruing under a Registration Rights Agreement entered into on May 4, 2006. The change in the fair value of the warrants, from May 4, 2006 to June 30, 2006 was a loss recorded of $139,220.

Cash Flows - Fiscal Year Ended June 30, 2006 and 2005

 

·	Increased overhead expenses attributable to the addition of key management and staff.

·	Payroll expenses and related fringe benefits increased $116,436 due to the hiring of additional key management and staff. Novastar increased its payroll and related fringe benefits costs in its first fiscal quarter ended September 30, 2006, as it has hired an additional 6 employees.

·

Professional fees expense increased $672,000 due primarily to legal fees incurred in connection with the upcoming merger with Thorium Power, Inc. and financing activities. Novastar anticipates that its legal fees will decrease once its is able to complete the merger with Thorium Power, Inc., unless it engages in other financing or acquisition activities.

·	Travel, business development, and public relations expense increased $93,385. Novastar anticipates that its travel, business development and public relations expense will increase as it continues to promote its business and seek other opportunities in the Nuclear Industry.

·	Other general and administrative expenses increased $358,000, which consisted primarily of insurance expense, other office expenses., which were offset by a payable due to Thorium Power Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		AS OF MARCH 31			AS OF DECEMBER 31
		2006			2005			2004
BALANCE SHEET DATA
Cash and cash equivalents		$	528,213		$	283			462
Working capital			298,568			(982,278	)		(844,196	)
Total Assets			1,032,356			246,556			247,718
Long-term debt			12,657			14,818			0
Stockholders’ equity			524,323			(757,103	)		(603,746	)

 

 

 

 

 

 

 

Line Item		12/31/05			12/31/04			Increase (Decrease)			Percentage Increase (Decrease)
Revenues			-			-			-			-
Operating Expenses		$	760,558		$	947,779		$	(214,221	)		(34.4	)%
Other Expenses (Income)		$	(54	)	$	(105	)	$	(51	)		(49	)%
Net Loss		$	760,504		$	974,674		$	(214,170	)		(21.9	)%
Loss per common share		$	0.23		$	0.30		$	(0.07	)		23.3	%

 

This decrease in loss per common share is primarily attributed to a significant reduction in general and administrative expenses due to lower marketing and depreciation expenses.