Item 1. Business
General
Nevada Chemicals, Inc., a Utah corporation organized in 1979 (the "Company"), supplies chemicals to the gold mining industry in the western United States, primarily through its ownership in Cyanco Company ("Cyanco"). Winnemucca Chemicals, Inc. ("Winnemucca Chemicals"), a wholly owned subsidiary of the Company, has a 50% interest in Cyanco, a non-corporate joint venture engaged in the manufacture and sale of liquid sodium cyanide.
In November 2001, the Company closed the sale of the assets, subsidiaries and certain joint venture interests of its explosives business (the "Explosives Business") to Union Espanola de Explosivos S.A. and certain of its subsidiaries ("UEE"). In connection with this transaction, the name of the Company was changed from Mining Services International Corporation to Nevada Chemicals, Inc.
In addition to income from Cyanco operations, the Company received income during 2002 from the lease of its office building to a subsidiary of UEE through November 2002, proceeds from the sale of the office building in November 2002, proceeds from the sale of the assets of the Company's joint venture in West Africa, principal and interest on short and long term notes receivable from UEE and its subsidiaries, and investment income on the Company's cash and cash equivalents and short-term investments.
Cyanco Joint Venture Interest
Cyanco is a 50/50 joint venture between the Company and Degussa Corporation, a wholly owned subsidiary of Degussa A.G., a German company ("Degussa"), that produces and markets liquid sodium cyanide from its Winnemucca, Nevada plant. Cyanco services the western U.S. gold mining area, primarily located in Nevada, selling sodium cyanide for use in leaching precious metals in mining operations. There are principally two types of products marketed to gold mines for the leaching process: (1) a solid "briquette" sodium cyanide product which requires handling and physical dissolution before use and (2) the type provided by Cyanco, a liquid sodium cyanide which provides for greater personal and environmental safety and comes to the mining customer ready to use. The manufacturing cost for the liquid product is lower than for solid product when drying, handling, re-dissolution and chemical adjustment costs at the mine site are taken into account.
Since the liquid product is shipped by truck from the plant to the mine site in a solution of about 30% sodium cyanide and 70% water, freight costs for liquid sodium cyanide are significant and shipping must be managed carefully, both in terms of cost and safety and environmental protection. Cyanco has a contract for this service with an Omaha, Nebraska company that utilizes dedicated equipment specifically designed for Cyanco. The transportation equipment includes trucks equipped with linked satellite communication systems for security purposes.
With the 1998 addition of a second production unit, Cyanco has an annual liquid sodium cyanide production capacity of approximately 85 million pounds. During 2002, the Company had primary responsibility for Cyanco's production and delivery, and Degussa had primary responsibility for the joint venture's marketing and sales activities.
Over the past five years, the market price of gold hit a low of $252.80 per ounce on July 20, 1999. Subsequent to that date, the price of gold increased steadily beginning in the late spring of 2001 and peaking on February 5, 2003 at $382.10 per ounce. The price of gold has recently decreased, and on March 7, 2003 was approximately $350.00 per ounce. If the price of gold stabilizes at these higher values, the gold mining community may be induced to expand exploration and production activities. In such event, gold production in Cyanco's market area should remain relatively stable or possibly increase in the foreseeable future.
Competition and Purchase of FMC Sodium Cyanide Business
Cyanco historically represented one of three sources of sodium cyanide in the western United States. The world market for briquette or dry-form sodium cyanide is dominated by E.I. DuPont Nemours ("DuPont"). Domestically, Cyanco competed with DuPont and also with FMC Corporation ("FMC"), which has marketed and delivered liquid sodium cyanide in the same geographic area as Cyanco.
In March 2002 Cyanco announced that it had reached agreement with FMC to purchase the commercial and certain distribution assets related to FMC's sodium cyanide business. As a result of this transaction, FMC exited the business, ending its 12-year role as a supplier of sodium cyanide to the Nevada gold mining industry. Cyanco assumed FMC's on-going contractual obligations under its existing sodium cyanide contracts and began supplying these customers in April 2002. The FMC supply contracts acquired by Cyanco are with several key Nevada gold mining operations. According to Cyanco estimates, the business purchased represents approximately 25,000 tons of additional sodium cyanide business for Cyanco during the lifetime of the contracts, which vary from approximately four years to the life of certain gold mines. In addition to the transferred contracts, Cyanco purchased certain equipment including distribution tank trailers and storage tanks.
As a result of the FMC transaction, Cyanco will compete primarily with DuPont to supply sodium cyanide to the Nevada gold mining industry. The Company believes that the important competitive factors in the sodium cyanide market are location, service and quality. However, as gold prices fluctuate, the price of sodium cyanide has become a significant competitive factor. Cyanco has had to meet competitive demands, and has been able to achieve results by being creative and service-oriented and offering competitive pricing.
Dependence on Customers
Since most of Cyanco's cyanide customers are large mining companies, the number of companies it services is relatively small compared to those of a wholesale distribution or retail business. A loss of one or more customers could adversely affect future sales. Such a loss can occur either from the customer switching to another source or from the customer electing to close or suspend a mining operation. However, such losses are not currently expected to occur, since these customers have lower than average operating costs to produce gold, which should allow them to continue producing gold in periods of fluctuating market prices of gold.
Patents, Trademarks and Licenses
In March 1989, Cyanco obtained from Mitsubishi Gas Chemical Company, Inc., a Japanese corporation, in consideration for payment of a one-time license fee, a perpetual license for a patented process and related technical information covering the manufacture of hydrogen cyanide for use in the manufacture of liquid sodium cyanide at the Cyanco plant. The license is a nonexclusive, nonsublicensable and nontransferable right to use the technology at the Cyanco plant, and is materially important to the plant's operation. The Company's historical research and development expenditures were primarily related to the discontinued Explosives Business. However, the Company developed a patent issued during 2000 for the production and transportation of a "wet-cake" cyanide product which may be used by Cyanco in expanding its freight-logical market. There has not been any customer-sponsored research and development.
Raw Materials
Cyanco has historically not experienced significant difficulty in obtaining necessary raw materials used in the manufacture of its products. In the present environment, raw material availability could be impacted for short periods of time, but Cyanco does not expect significant difficulty in obtaining raw materials for the longer term. Cyanco must compete with other markets for a major portion of its raw materials (ammonia, caustic soda, natural gas and electricity). The supplies of these products have been adequate in past years to meet the needs of industrial as well as agricultural and other commercial users. Cyanco has entered into long-term contracts for transportation of natural gas to the Cyanco facility. Cyanco has not had significant difficulty in obtaining the other necessary raw materials since there are alternative sources of supply. Cyanco has experienced, however, wide fluctuations in the cost of raw materials driven by the cost of natural gas, which in turn impacts the price and availability of ammonia and caustic soda. It is Cyanco's intent wherever
possible to continue to pass short-term raw material price fluctuations on to its client base in order to maintain profitability. However, not all of the supply relationships include such cost sharing provisions.
Employees
The Company currently employs two individuals and one part-time consultant at its corporate offices. Cyanco has 28 employees at its plant in Winnemucca, Nevada. The Company and Cyanco consider relations with their employees to be positive.
Environmental Compliance
Cyanco is subject to federal, state and local laws regulating the protection of the environment in the handling, storage and shipment of sodium cyanide and related raw materials. In preparation for the manufacture and sale of liquid sodium cyanide at the Cyanco plant, Cyanco incurred material capital expenditures relating to compliance with environmental laws and regulations, including expenditures required for specialty trucks and tankers and development of an emergency response plan in the event of a hazardous materials spill. Cyanco's processes are designed such that no liquid discharge is created during the manufacture of its product. Compliance with such laws, rules and regulations on an ongoing basis is not expected to require additional material capital expenditures in the short-term.
Other Governmental Regulations
Cyanco is subject to various governmental authorities with respect to transportation and handling of hazardous materials. In addition, it is subject to OSHA's Process Safety Management program at the Winnemucca plant. Cyanco has implemented compliance programs, which the Company believes addresses the program objectives and guidelines. Cyanco is regularly inspected by Nevada's regulatory agencies to monitor compliance to Nevada's Chemical Accident Prevention Program (CAPP).
Item 2.
Item 2. Properties
The Company currently leases office facilities comprised of 1,325 square feet and located at 9149 South Monroe Plaza Way, Sandy, Utah under a one year lease agreement.
The property and facilities of Cyanco are deemed adequate and suitable for its operations.
Item 3.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of 2002.
PART II
Item 5:
Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters
(a) Price Range of Common Stock. The common stock of the Company is currently listed on the Nasdaq National Market ("NNM"), under the symbol "NCEM." The following table sets forth the approximate range of high and low closing prices for the common stock of the Company during the periods indicated. The quotations presented reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions in the common stock.
Closing Prices --------------
High Low ---- ---
2001 First Quarter $2.88 $1.34 Second Quarter $1.75 $1.00 Third Quarter $1.40 $ .90 Fourth Quarter $2.08 $1.10
2002 First Quarter $2.50 $1.30 Second Quarter $4.00 $2.35 Third Quarter $3.15 $2.65 Fourth Quarter $3.39 $2.45
On March 7, 2003, the closing quotation for the common stock on NNM was $3.04 per share. As reflected by the high and low prices on the foregoing table, the trading price of the Common Stock of the Company can be volatile with dramatic changes over short periods. The trading price may reflect imbalances in the supply and demand for shares of the Company, market reaction to perceived changes in the industry in which the Company sells products and services, fluctuations in the price of gold, general economic conditions, and other factors. Investors are cautioned that the trading price of the common stock can change dramatically based on changing market perceptions that may be unrelated to the Company and its activities.
(b) Approximate number of equity security holders. The approximate number of record holders of the Company's Common Stock as of March 7, 2003 was 550, which does not include shareholders whose stock is held through securities position listings.
(c) Dividends. The Company paid no dividends for the years ended December 31, 2002, 2001 and 2000. Payment of dividends is within the discretion of the Company's Board of Directors and there are no material restrictions that limit the Company's ability to pay dividends on the Common Stock.
Item 6.
Item 6. Selected Financial Data
The following consolidated selected financial data as of and for each of the fiscal years in the five year period ended December 31, 2002 were derived from audited financial statements of the Company and its consolidated subsidiaries. The financial statements as of and for each of the fiscal years in the five year period were audited by Tanner + Co., independent public accountants. The data set forth below should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related Notes thereto.
(1) The sale of the Explosives Business is accounted for as a discontinued operation, and accordingly, amounts in the financial statements and related notes for all periods have been restated to reflect discontinued operations accounting, including offsetting long-term debt and other liabilities assumed in the sale against the net assets sold on the consolidated balance sheet.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
On November 8, 2001, the shareholders of the Company approved the sale of the Explosives Business pursuant to an Asset Purchase Agreement between the Company and UEE. The Company entered into the agreement on November 30, 2000 and consummated the sale on November 15, 2001. The sale of the Explosives Business is accounted for as a discontinued operation, and accordingly, the operating results for the Explosives Business in the accompanying financial statements for the years ended December 31, 2001 and 2000 have been presented as discontinued operations.
Continuing operations reported in the statements of operations for all periods presented consist primarily of the Company's proportionate share of the operating results from its 50% interest in Cyanco, management fee income from Cyanco, investment income on cash and cash equivalents and short-term investments, and corporate overhead, costs and expenses. Since the Company does not own more than 50% of Cyanco, the financial statements of Cyanco are not consolidated with the financial statements of the Company. Summarized financial information for Cyanco for the years ended December 31, 2002, 2001 and 2000 is presented in Note 11 to the Company's consolidated financial statements. Separate audited financial statements of Cyanco are included in this report as Exhibit 99.1.
In March 2002, Cyanco announced that it had reached an agreement with FMC Corporation ("FMC") to purchase the commercial and certain distribution assets related to FMC's sodium cyanide business. As a result of this transaction, FMC exited the business, ending its role as a supplier of sodium cyanide to the Nevada gold mining industry. Cyanco assumed FMC's on-going contractual obligations under its existing sodium cyanide contracts and began supplying these customers in April 2002. In addition to the transferred contracts, Cyanco purchased certain equipment including distribution tank trailers and storage tanks.
The following discussion of results of operations includes only continuing operations. For discussions of historical results of operations of the discontinued explosives business, refer to the Company's previous annual or quarterly filings for 2001 and 2000.
Results of Operations
2002 vs. 2001
Equity in earnings of joint ventures, all of which was attributable to Cyanco operations, increased $1,253,000, or 61%, in the year ended December 31, 2002 compared to the year ended December 31, 2001. Cyanco revenues increased $865,000, or 3%, in 2002 compared to 2001. The increase in Cyanco revenues is due primarily to the additional volume of sodium cyanide supplied by Cyanco to customers under contracts acquired from FMC and increased sales to existing customers in response to increased mining activity resulting from higher prices of gold. The increase in revenues was tempered somewhat by lower sales prices to some customers due to market pressures and to certain contracts containing cost plus pricing, since the cost of certain key raw materials decreased from levels experienced in 2001. Even with the increase in revenues and resultant production increases, Cyanco costs and expenses decreased $1,641,000, or 6% in 2002 compared to 2001. The decrease in operating costs resulted primarily from improvement in variable manufacturing costs as the cost of certain key raw materials decreased. As a result, Cyanco net income before taxes increased $2,506,000, or 61% during 2002 compared to 2001.
Management fee revenue from Cyanco increased to $460,000 in 2002 compared to $443,000 in 2001 due to the increased revenues of Cyanco.
Other operating revenues increased to $136,000 in 2002 compared to $27,000 in 2001. The increase is attributable to rental income from an office building owned by the Company that commenced in November 2001. The office building was sold in November 2002.
Other income increased to $950,000 in 2002 compared to $86,000 in 2001. The Company realized a total gain on the sale of assets of $680,000 in 2002, of which $220,000 related to the sale of the office building and $460,000 related to the Company's share of proceeds from the sale of the assets of the Company's joint venture in West Africa. The remaining increase in other income in 2002 was attributed to interest and investment income earned on the Company's cash equivalents and short-term investments.
General and administrative expenses increased $241,000 or 24%, in 2002 compared to 2001. This increase is due primarily to $206,000 of compensation expense incurred in 2002 to two members of the Company's Board of Directors, $103,000 each for services and the directors' surrender of all their outstanding stock options. Also, an additional $214,000 in bad debt expense was recorded in 2002 related to net notes and accounts receivable estimated to be uncollectible by UEE that were assigned back to the Company by UEE pursuant to the terms of the agreement to sell the Explosives Business. The Company will continue to aggressively pursue collection of the assigned receivables.
2001 vs. 2000
Equity in earnings of joint ventures, consisting primarily of the Company's equity in earnings of Cyanco, increased $356,000 or 21% for the year ended December 31, 2001 compared to equity in earnings reported for the year ended December 31, 2000. Cyanco revenues increased $6,806,000, or 30%, in 2001 compared to 2000 as the result of increases in both volume and prices realized with existing customers. Cyanco costs and expenses increased $6,095,000, or 31%, primarily due to the increase in sales volume and due to the increase in the cost of certain key raw materials in 2001. As a result, Cyanco net income before taxes increased $711,000, or 21% during 2001 compared to 2000.
Management fee revenue from Cyanco increased to $443,000 in 2001 compared to $342,000 in 2000 due to the increased revenues of Cyanco.
General and administrative expenses increased $53,000 or 6% in 2001 compared to 2000, with the increase due to costs of relocating to the Company's new office facilities in December 2001, increases in the cost of managing the Cyanco joint venture, and cost of administering the post-closing transition of the sale of the Explosives Business.
Liquidity and Capital Resources
As part of the purchase of the Explosives Business in November 2001, UEE assumed all long-term debt of the Company. During 2002, the Company incurred no new long-term debt. Therefore, at December 31, 2002, the liabilities of the Company consisted only of current liabilities and deferred income taxes. Current liabilities at December 31, 2002 consisted of trade accounts payable of $10,000 and accrued expenses of $1,087,000. These current liabilities compare favorably to total current assets of $11,097,000 at December 31, 2002. Current assets were comprised primarily of cash and cash equivalents of $6,612,000 and short-term investments that are available for sale of $4,026,000.
Cash in excess of short-term operating needs has been invested primarily in interest bearing investment accounts with maturities ranging from 30 days to one year. The Board of Directors of the Company is currently evaluating alternative uses for the cash of the Company, including optimizing short-term investment results, diversification of the Company's business, further investment in Cyanco and its expanding operations, distributions to shareholders and other strategies.
Net cash used in operating activities for the year ended December 31, 2002 was $(1,010,000) compared to net cash used in operating activities of $(791,000) for the year ended December 31, 2001. This increase in net cash used in operations is due primarily to the reduction of accounts payable and accrued expenses of $776,000 in 2002 and compensation expense of $203,000 paid to two members of the Company's Board of Directors.
Net cash provided by investing activities for the year ended December 31, 2002 was $1,032,000 compared to net cash provided by investing activities of $6,536,000 for the year ended December 31, 2001. In 2002, the Company received net proceeds from the sale of its office building of $1,096,000 and net proceeds from the sale of the assets of its West Africa joint venture of $460,000. The Company also received $3,000,000 in distributions from Cyanco and net collections of notes receivable from UEE of $489,000 in 2002. These principal sources of cash from investing activities were offset in 2002 by the purchase of short-term investments of $(4,013,000). In 2001, net cash realized from the sale of the Explosives Business was $5,203,000 ($6,350,000 received net of $1,147,000 included in net assets sold) and distributions received from joint ventures, primarily Cyanco, were $1,442,000. The Company purchased property and equipment totaling $(542,000) in 2001, most of which was purchased prior to the sale of the Explosives Business.
Net cash used in financing activities for the year ended December 31, 2002 was $(421,000) compared to net cash used in financing activities of $(847,000) for the year ended December 31, 2001. The net cash used in financing activities in 2002 consisted of $(421,000) used to purchase treasury stock. In November 2001, the Company's Board of Directors authorized a stock repurchase plan that provides for the purchase of up to 500,000 shares of the Company's currently issued and outstanding shares of common stock. Purchases under the stock repurchase plan may be made from time to time at various prices in the open market, through block trades or otherwise. As part of the stock repurchase program, the Company repurchased and retired 146,797 common shares in 2002. The net cash used in financing activities in 2001 consisted of $(519,000) used to purchase treasury stock and $(328,000) net reduction of debt. Substantially all of the purchase of treasury stock in 2001 was from former officers and employees as part of the sale of the Explosives Business.
The Company has retained all contingent liabilities relating to an ongoing audit by the Canada Customs and Revenue Agency (CCRA) of previously filed tax returns in Canada. In the initial phase of the audit, CCRA has taken a position on certain matters different than that taken by the Company. The Company, based on consultation with its professional tax advisors in Canada, believes that the facts and circumstances support the position taken by the Company and continues discussions and negotiations with CCRA. The Company believes that amounts accrued and included in income taxes payable at December 31, 2002 are adequate for the resolution of the audit by CCRA. However, there can be no assurance that such costs will not exceed the current estimate.
The Company considers its cash resources sufficient to meet the operating needs of its current level of business for the year ending December 31, 2003.
Critical Accounting Policies
Our critical accounting policies include the following:
o Investment in Cyanco o Discontinued Operations o Short-Term Investments
Since the Company does not own more than 50% of Cyanco, the financial statements of Cyanco are not consolidated with the financial statements of the Company. The Company accounts for its investment in Cyanco using the equity method of accounting. Equity in earnings of Cyanco is based on the Company's 50% ownership in Cyanco and is calculated and recognized at the end of each month. Management fees from Cyanco are recognized monthly and are calculated as a percentage of Cyanco revenues based on a management agreement with Cyanco. Summarized financial information for Cyanco is included in Note 11 to the consolidated financial statements of the Company. See also the separate audited financial statements of Cyanco included in this report as Exhibit 99.1.
In November 2001, the Company closed the sale of the assets, subsidiaries and certain joint venture interests of its Explosives Business to UEE. The sale of the Explosives Business is accounted for as a discontinued operation, and accordingly, the operating results for the Explosives Business in the accompanying financial statements for the years ended December 31, 2001 and 2000 have been presented as discontinued operations.
The Company's current assets at December 31, 2002 were comprised primarily of cash and cash equivalents of $6,612,000 and short-term investments of $4,026,000. Investments with scheduled maturities greater than three months but not greater than one year are recorded as short-term investments. The short-term investments are recorded at fair value with net unrealized gains or losses reported in stockholders' equity. Realized gains and losses are included in the consolidated statement of operations.
Forward Looking Statements
Within this Annual Report on Form 10-K, including the discussion in this Item 7, there are forward-looking statements made in an effort to inform the reader of management's expectation of future events. These expectations are subject to numerous factors and assumptions, any one of which, could have a material effect on future results. The factors which may impact future operating results include, but are not limited to, decisions made by Cyanco's customers as to the continuation, suspension, or termination of mining activities in the area served by Cyanco, changes in world supply and demand for commodities, particularly gold, political, environmental, regulatory, economic and financial risks, major changes in technology which could affect the mining industry as a whole or which could affect sodium cyanide specifically, competition, and the continued availability of qualified technical and other professional employees of the Company and Cyanco. The Company believes it is taking appropriate actions in order to address these and other factors previously disclosed; however, some of the risks are outside the control of the Company, and the actions taken by the Company may not be sufficient to avoid the adverse consequences of one or more of the risks. Consequently, the actual results could differ materially from those indicated in the statements made.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
A significant portion of the Company's cash equivalents and short-term investments bear variable interest rates that are adjusted to market conditions. Changes in market rates will affect interest earned on these instruments. However, the Company does not utilize derivative instruments to offset the exposure to interest rates. The cash equivalents and short-term investments are placed in a variety of products with different institutions. Changes in the interest rates are not expected to have a material impact on the Company's consolidated results of operations.
The Company has no foreign operations and is currently not exposed to material risks from changes in foreign currency.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company and of Cyanco required by this Item are contained in a separate section of this report. See "Index to Financial Statements" on Page and the separate financial statements of Cyanco included as Exhibit 99.1
The following table presents quarterly financial data for each of the four quarters in the years ended December 31, 2002 and 2001. The amounts have been restated for periods prior to the sale of the Explosives Business on November 15, 2001 to report operating results using discontinued operations accounting.
Item 9.
Item 9. Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10
Item 10 Directors and Executive Officers of the Registrant.
(a) Information regarding the Board of Directors.
All directors are elected at each annual meeting of the Company to terms of one year or until the next annual meeting. Set forth below is the name and age of each of the directors, the positions they hold with the Company, the period during which they have been affiliated with the Company, and certain other biographical information.
E. Bryan Bagley, 39, was appointed a director on June 28, 2000. Since November 2002, Mr. Bagley has been a private investor. From December 1991 to November 2002, Mr. Bagley was a market maker for Wilson-Davis & Company. Prior to that position, he was a trader for Covey & Co. and Bagley Securities. Mr. Bagley graduated from the University of Utah in 1987 with a Bachelor of Science degree in Economics. Mr. Bagley was appointed Chairman of the Board of Directors on December 28, 2001.
Nathan L. Wade, 74, has been a director since June 1989. Since 1953, Mr. Wade has been a director and principal owner of Nate Wade Subaru, 1207 South Main, Salt Lake City, Utah 84111, a Utah automobile dealership for new and used automobiles.
Dr. John T. Day, 63, has been our President and Chief Executive Officer since April 1993. He was one of our founders and, from 1979 to 1993, was Executive Vice President with responsibility for plant design, operations, equipment design and construction, and new product development. Dr. Day was appointed to our Board of Directors on November 10, 1986. Dr. Day obtained a B.S. degree in Chemical Engineering from the University of Utah in 1964 and obtained a Sc.D. degree from MIT in 1972.
James E. Solomon, 53, CPA, was appointed a director in March 2000. Mr. Solomon is owner and chief executive officer of Solomon Advisory Services, a firm that specializes in maximizing value for small to mid-size companies. Mr. Solomon was formerly a financial manager at Exxon Corporation from 1972 to 1980. From 1980 to 1983, Mr. Solomon was Vice President of Farm Management Company, one of the world's largest agricultural companies. Since 1983, Mr. Solomon has been self-employed and is an Adjunct Professor at the Graduate School of Business at the University of Utah and serves as a director of TruDynamics International, Inc.
Frances M. Flood, 46, was appointed as one of our directors on June 28, 2000. From June of 1998 to January 2003, Ms. Flood served as Chief Executive Officer and a director of ClearOne Communications, a publicly-held corporation. Ms. Flood joined ClearOne in October of 1996 as Vice-President of Sales and Marketing and previously served as President of ClearOne, beginning in December of 1997. Prior to joining ClearOne, Ms. Flood was Area Director of Sales and Marketing for Ernst & Young, LLP, an international accounting and consulting firm. Ms. Flood graduated from Thomas Edison State College with a BSBA degree in Banking and Finance. Ms. Flood also serves as a director of Sound Tube, a privately-held company based in Park City, Utah. Ms. Flood resigned from the Board's audit committee in January 2003 and is currently on administrative leave from the Company's Board of Directors.
M. Garfield Cook, 62, was appointed to the Board of Directors in January 2003. Mr. Cook served as Co-Chairman of the Board from April 2000 to December 2001. From 1972 to 1989 Mr. Cook served as a director and President and Chief Executive Officer of IRECO Chemicals, an industrial explosives company. Mr. Cook has served on the boards of a number of corporations involved in the chemicals, explosives, and mining industry. He is a past Chairman of the Institute of Makers of Explosives in Washington, D.C. From 1989 to 1995 Mr. Cook was Chairman of Non-Invasive Medical Technology Corporation, and from 1991 to 1995, he also served as Chairman of In-Line Diagnostics Corporation. Mr. Cook is a graduate of the University of Utah in Physics.
(b) Information regarding Executive Officers.
In addition to Dr. Day, currently the only executive officer is Dennis P. Gauger, CPA, Chief Financial Officer, who has served the Company since November 2001.
Mr. Gauger, 51, is a licensed Certified Public Accountant in Utah and Nevada. He has served several public and private companies as a financial executive, corporate troubleshooter and consultant. Mr. Gauger worked for Deloitte & Touche LLP, an international accounting and consulting firm, for 22 years, including 9 years as an accounting and auditing partner, where he directed domestic and international firm interactions with senior executive management, audit committees, and boards of directors. He has a background in SEC accounting and reporting, mergers and acquisitions, technical accounting issues, financing and operations. He has experience in several industries, including manufacturing, high technology, software, internet, retail and distribution, financial services, hospitality, mining and real estate.
(c) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's executive officers and directors and persons who own more than ten percent of a registered class of the Company's stock, to file reports of initial ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Executive officers, directors and persons who own more than ten percent of the Company's stock, are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company and written representations from the Company's executive officers and directors, the Company believes that all forms required by Section 16(a), including amendments thereto, were timely filed. The Company issues monthly reminders to each executive and director of the Company to help ensure timely filing of reports promulgated under Section 16(a) of the Exchange Act.
Item 11.
Item 11. Executive Compensation
Set forth below is information concerning the annual and long-term compensation for services in all capacities to the Company and its affiliates for the fiscal years ended December 31, 2002, 2001 and 2000 paid to the Chief Executive Officer (the "Named Executive Officer"). No other officers were paid in excess of $100,000 during the fiscal year ended December 31, 2002.
Compensation of Executive Officers
The following table summarizes compensation received by the Named Executive Officer for the three fiscal years ended December 31, 2002, 2001 and 2000.
(1) Includes life and disability insurance premiums paid, medical reimbursement payments and personal mileage on company-owned vehicles.
(2) Includes matching contributions made by the company on behalf of Dr. Day pursuant to the Company's Profit Sharing 401(k) Plan (the "Plan").
Option/SAR Grants in Last Fiscal Year -------------------------------------
No stock options were granted during the fiscal year ended December 31, 2002.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values --------------------------------------------------------------
The following table sets forth the aggregate value of unexercised options to acquire shares of common stock held by the Named Executive Officer on December 31, 2002. There were no options exercised by the Named Executive Officer during the fiscal year ended December 31, 2002.
(1) Reflects the difference between the exercise price of the options granted and the value of the common stock on December 31, 2002. The closing price of the common stock on December 31, 2001, as reported by NASDAQ was $3.30.
Compensation of Directors
During 2002, the non-employee directors each received monthly payments of $600 as compensation for serving on the Board of Directors, or $7,200 for a full year of service. In addition, the non-employee directors receive $1,000 per Board meeting attended and are reimbursed for time spent on extra Board-approved assignments at a per-diem rate of $1,000 per day. During 2002 no per diem compensation was paid to the current directors. Employee members of the Board of Directors receive no additional compensation for attendance at meetings of the Board of Directors.
During the third quarter of 2002, the Board of Directors of the Company approved a payment of $103,000 each to directors James E. Solomon and Frances M. Flood for services and their surrender of all their outstanding stock options (79,500 options each).
No stock options were granted to directors during the fiscal year ended December 31, 2002.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following tabulation shows, as of March 7, 2003, the number of shares of common stock, par value $0.001, owned beneficially by: (a) all persons known to be the holders of more than five percent (5%) of voting securities, (b) Directors, (c) Named Executive Officer and (d) all of our Officers and Directors as a group:
(1) Unless otherwise indicated, each person identified in the table has sole voting and investment power with respect to the common stock beneficially owned by such person. The total number of outstanding shares included in the computation of percentages is 7,059,143 plus 218,500 options which are exercisable by executives and directors within 60 days. The current directors and officers of the Company not named above, James Solomon, Frances Flood, G. Garfield Cook, and Dennis Gauger, Chief Financial Officer, do not own shares or options to purchase shares in the Company. (2) Includes 1,883,287 shares held by the BLA Irrevocable Investment Trust of which Mr. Bagley is a co-Trustee with a sister, Lisa Higley, and 69,500 options currently exercisable by Mr. Bagley. (3) Includes 79,500 options currently exercisable by Dr. Day. (4) Includes shares held in an IRA account for the benefit of Mr. Wade's spouse and shares held by Mr. Wade's family members residing in his home; also included are 69,500 options currently exercisable by Mr. Wade.
Item 13.
Item 13. Certain Relationships and Related Transactions.
During the year ended December 31, 2002, Dr. John T. Day repaid a loan from the Company with total principal and interest due of $22,838 through the transfer to the Company of 5,709 shares of the Company's common stock. The indebtedness was repaid with the shares at their current market value in accordance with the terms of the original note agreement. The shares were subsequently retired by the Company.
Item 14.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Based on their evaluations as of a date within 90 days of the filing date of this report, the principal executive officer and principal financial officer of the Company have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. The audited financial statements of the Company and the report of independent certified public accountants required in Part II, Item I are included on pages to.
2. Also included as financial statement schedules to this Annual Report on Form 10-K as Exhibit 99.1 are the audited financial statements of Cyanco, a significant subsidiary reported on the equity method, and the report of independent certified public accountants. No other required financial statement schedules are listed because they are not applicable or the required information is shown in the Company's financial statements or notes thereto.
3. Exhibits:
3.1 Amendment to Articles of Incorporation to reflect the one-for-five reverse stock split which became effective June 15, 1987 (Incorporated herein by reference from the Form 10-KSB filed by the Company for the fiscal year ended December 31, 1987.) Articles of Incorporation (Incorporated herein by reference from Form 10-KSB filed by the Company for the fiscal year ended December 31, 1985).
3.2 Amendment to Articles of Incorporation to reflect the name change to Nevada Chemicals, Inc. (Incorporated herein by reference from Form 10-K filed by the Company for the fiscal year ended December 31, 2001).
3.3 Bylaws of the Corporation as amended May 19, 1999 (Incorporated herein by reference from the Form 10-K/A filed by the Company for the fiscal year ended December 31, 2000).
4.1 Amended 1988 Nonqualified Stock Option Plan, amended as of May 19, 1999 (Incorporated by reference from the Form 10-K/A filed by the Company for the fiscal year ended December 31, 2000).
21 List of Subsidiaries (this filing).
23 Independent Auditors' Consent of Tanner + Co. (this filing).
99.1 The financial statements for the fiscal year ended December 31, 2002 of Cyanco, a significant subsidiary reported on the equity method, and the report of independent certified public accountants (this filing).
99.2 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbannes - Oxley Act of 2002 (this filing).
99.3 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbannes - Oxley Act of 2002 (this filing).
(b) The Company did not file any reports on Form 8-K during the fourth quarter of fiscal year 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEVADA CHEMICALS, INC.
/s/ John T. Day ---------------------- John T. Day, President
Date: March 18, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Capacity in Which Signed Date ---------- ------------------------ ----
/s/ Bryan Bagley Chairman of the Board of Directors March 18, 2003 - ------------------- Bryan Bagley
/s/ John T. Day President, Chief Executive Officer March 18, 2003 - ------------------ and Director (Principal Executive John T. Day Officer)
/s/ James Solomon Director March 18, 2003 - -------------------- James Solomon
/s/ Nathan L. Wade Director March 18, 2003 - --------------------- Nathan L. Wade
/s/ G. Garfield Cook Director March 18, 2003 - ----------------------- G. Garfield Cook
/s/ Dennis P. Gauger Chief Financial Officer and March 18, 2003 - ----------------------- Principal Accounting Officer Dennis P. Gauger
CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
I, John T. Day, certify that:
1. I have reviewed this annual report on Form 10-K of Nevada Chemicals, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee or registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
March 18, 2003 /s/ John T. Day - -------------- --------------------------------- (Date) John T. Day, President (principal executive officer)
CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
I, Dennis P. Gauger, certify that:
1. I have reviewed this annual report on Form 10-K of Nevada Chemicals, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee or registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
March 18, 2003 /s/ Dennis P. Gauger - ------------------ ---------------------------------- (Date) Dennis P. Gauger, Chief Financial Officer (principal financial and accounting officer)
Consolidated Financial Statements December 31, 2002 and 2001
NEVADA CHEMICALS, INC. Index to Consolidated Financial Statements
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Page ----
Independent Auditors' Report
Consolidated balance sheet
Consolidated statement of operations
Consolidated statement of stockholders' equity
Consolidated statement of cash flows
Notes to consolidated financial statements
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Nevada Chemicals, Inc.
We have audited the consolidated balance sheet of Nevada Chemicals, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2002, 2001, and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards of the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nevada Chemicals, Inc. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years ended December 31, 2002, 2001, and 2000 in conformity with accounting principles generally accepted in the United States of America.
TANNER + CO.
Salt Lake City, Utah February 5, 2003
NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts)
December 31, 2002, 2001, and 2000 - --------------------------------------------------------------------------------
1. Organization Organization and Nevada Chemicals, Inc. (the Company), primarily through Significant its ownership in Cyanco Company (Cyanco), supplies Accounting chemicals to the gold mining industry in the United Policies States. Winnemucca Chemicals, Inc. (Winnemucca Chemicals), a wholly owned subsidiary of the Company, has a fifty percent interest in Cyanco, a non-corporate joint venture engaged in the manufacture and sale of liquid sodium cyanide. The Company accounts for its investment in Cyanco using the equity method of accounting. Summarized financial information for Cyanco is included in Note 11.
In November 2001, the Company closed the sale of the assets, subsidiaries and certain joint venture interests of its explosives business to Union Espanola de Explosivos S.A. and certain of its subsidiaries (UEE). The explosives business is accounted for as a discontinued operation in the financial statements for the years ended December 31, 2001 and 2000.
Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents includes all cash and investments with original maturities to the Company of three months or less.
Short-term Investments Investments with scheduled maturities greater than three months but not greater than one year are recorded as short-term investments. These investments at December 31, 2002 consisted primarily of certificates of deposits at various financial institutions, and are classified by management as available for sale. The short-term investments are recorded at fair value with net unrealized gains or losses reported in stockholders' equity. Realized gains and losses are included in the statement of operations.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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1. Organization Property, Plant and Equipment and Property, plant and equipment are recorded at cost, less Significant accumulated depreciation. Depreciation is computed using Accounting the straight-line method over the estimated useful lives Policies of the assets. Expenditures for maintenance and repairs Continued are expensed when incurred and betterments are capitalized. Gains and losses on sale of property, plant and equipment are reflected in net income.
Translation of Foreign Currencies Prior to the sale of the explosives business, the cumulative effect of currency translation adjustments was included in stockholders' equity. These items represent the effect of translating assets and liabilities of the Company's foreign operations. Subsequent to the sale of the explosives business, the Company had no material foreign operations.
Revenue Recognition The Company's revenues consist mainly of earnings from Cyanco based on the equity method of accounting and management fees from Cyanco. Equity from earnings in Cyanco is based on the Company's 50% ownership in Cyanco and is calculated and recognized at the end of each month. Management fees from Cyanco are recognized monthly based on a management agreement with Cyanco.
Income Taxes Deferred income taxes are provided in amounts sufficient to give effect to temporary differences between financial and tax reporting, principally related to depreciation and undistributed earnings from joint ventures, which qualify under certain tax deferral treatment.
Stock - Based Compensation At December 31, 2002, the Company has stock-based employee compensation plans, which are described more fully in Note 10. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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1. Organization Stock - Based Compensation - Continued The following and table illustrates the effect on net income and earnings Significant per share if the Company had applied the fair value Accounting recognition provisions of FASB Statement No. 123, Policies "Accounting for Stock-Based Compensation," to Continued stock-based employee compensation.
For the Year Ended December 31, -------------------------------------------- 2002 2001 2000 --------------------------------------------
Net income (loss) - as $ 2,128 $ 186 $ (4,031) reported
Deduct: total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects - (76) (362) --------------------------------------------
Net income (loss) - pro forma $ 2,128 $ 110 $ (4,393) --------------------------------------------
Earnings per share: Basic - as reported $ .30 $ .03 $ (.55) Basic - pro forma $ .30 $ .02 $ (.60)
Diluted - as reported $ .29 $ .03 $ (.55) Diluted - pro forma $ .29 $ .02 $ (.60) --------------------------------------------
No options were granted in 2002.
The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
December 31, -------------------------------------------- 2002 2001 2000 --------------------------------------------
Expected dividend yield $ - $ - $ .01 Expected stock price volatility - 62% 53% Risk-free interest rate - 4.66% 6% Expected life of options - 2 years 3-5 years
The weighted average fair value of options granted during 2001 and 2000 are $.45 and $.73, respectively.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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1. Organization Earnings Per Common Share and The computation of earnings per common share is based on Significant the weighted average number of shares outstanding during Accounting the year. Policies Continued The computation of earnings per common share assuming dilution is based on the weighted average number of shares outstanding during the year plus the weighted average common stock equivalents which would arise from the exercise of stock options outstanding using the treasury stock method and the average market price per share during the year. For 2000, common stock equivalents were not included in the diluted earnings (loss) per share calculation because the effect would have been anti-dilutive.
The shares used in the computation of the Company's basic and diluted earnings (loss) per share are reconciled as follows:
2002 2001 2000 --------------------------------------------
Weighted average number of shares outstanding - basic 7,174,000 7,301,000 7,314,000 Dilutive effect of stock options 153,000 32,000 - --------------------------------------------
Weighted average number of shares outstanding, assuming dilution 7,327,000 7,333,000 7,314,000 --------------------------------------------
Concentration of Credit Risk At December 31, 2002, financial instruments which potentially subjected the Company to concentration of credit risk consisted primarily of cash and cash equivalents, short-term investments and receivables. Short-term investments consisted primarily of federally insured certificates of deposit at several financial institutions. Receivables consisted primarily of management fees from Cyanco and accrued interest on notes receivable. Management does not believe significant credit risk exists for these receivables at December 31, 2002.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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1. Organization Concentration of Credit Risk - Continued and The Company maintains its cash and cash equivalents in Significant bank deposit accounts which, at times, may exceed Accounting federally insured limits. The Company has not Policies experienced any losses in such accounts and believes it Continued is not exposed to any significant credit risk on cash and cash equivalents.
Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement requires the classification of gains or losses from the extinguishments of debt to meet the criteria of APB Opinion No. 30 "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" before they can be classified as extraordinary in the income statement. As a result, companies that use debt extinguishment as part of their risk management cannot classify the gain or loss from that extinguishment as extraordinary. The statement also requires sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The Company does not expect the adoption of SFAS 145 to have a material impact on its financial position or future operations.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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1. Organization Recent Accounting Pronouncements - Continued and In June 2002, the FASB issued Statement No. 146, Significant "Accounting for Costs Associated with Exit or Disposal Accounting Activities." This standard, which is effective for exit Policies or disposal activities initiated after December 31, Continued 2002, provides new guidance on the recognition, measurement and reporting of costs associated with these activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date a company commits to an exit or disposal plan. The adoption of SFAS No. 146 by the Company is not expected to have a material impact on the Company's financial position or future operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123," which is effective for all fiscal years ending after December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based employee compensation under SFAS No. 123 from intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25. SFAS 148 also changes the disclosure requirement of SFAS 123, requiring a more prominent disclosure of the pro-forma effect of the fair value based method of accounting for stock-based compensation. The adoption of SFAS No. 148 by the Company did not have any impact on the Company's financial position or operations for the year ended December 31, 2002 and is not expected to have any impact on future operations.
Reclassifications Certain amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform with classifications adopted in the current year.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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2. Short-Term Investments Cost Market Value ----------------------------------
Certificates of deposit $ 3,884 $ 3,897
Other 129 129 ----------------------------------
4,013 4,026
Net unrealized gains 13 - ----------------------------------
Total $ 4,026 $ 4,026 ----------------------------------
The certificates of deposits are issued by several banks and are individually federally insured up to $100 per certificate. All short-term investments at December 31, 2002 have scheduled maturities within one year. No realized gains or losses on short-term investments were recorded during 2002.
3. Detail of Certain Balance Sheet Accounts December 31, ------------------------------ 2002 2001 ------------------------------
Receivables: Income tax refunds receivable $ - $ 1,240 Related party receivables (see Note 9) 52 37 Other 47 71 ------------------------------
$ 99 $ 1,348 ------------------------------
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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3. Detail of Certain Balance Sheet Accounts Continued December 31, ------------------------------ 2002 2001 ------------------------------ Accounts payable and accrued expenses: Trade payables $ 10 $ 665 Income taxes payable (see Note 14) 1,040 924 Other accrued expenses (see Note 14) 47 284 ------------------------------
$ 1,097 $ 1,873 ------------------------------
4. Notes Notes receivable are comprised of the following at Receivable December 31:
2002 2001 -------------------------------
Unsecured note receivable from UEE, in annual installments of $200 plus interest at 8.5% $ 587 $ 1,000
Unsecured note receivable from a subsidiary of UEE, paid in full in January 2002 with interest at a defined average rate - 200
Unsecured note receivable from a subsidiary of UEE, in monthly installments of $10 including interest at 6.5% 139 229
Notes receivable from officers of the Company - 26 -------------------------------
726 1,455 Less current portion (319) (490) -------------------------------
$ 407 $ 965 -------------------------------
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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4. Notes In connection with the sale of the explosives business, Receivable any receivables, less an agreed upon reserve of $153, Continued that had not been collected within 240 days of the closing date (November 15, 2001) were to be offset against the note receivable from UEE in the reverse order of maturity. During the year ended December 31, 2002, the note receivable from UEE was reduced by $214 for net uncollected notes and accounts receivable assigned back to the Company by UEE. The Company will continue to aggressively pursue collection of the assigned receivables. Bad debt expense of $214 was included in general and administrative expenses for 2002.
5. Property, Property, plant and equipment consists of the following: Plant and Equipment December 31, ------------------------------- 2002 2001 -------------------------------
Buildings, plant equipment and fixtures $ - $ 942 Office equipment and fixtures 20 20 Vehicles 34 34 Land - 107 -------------------------------
54 1,103 Less accumulated depreciation and amortization (16) (153) -------------------------------
$ 38 $ 950 -------------------------------
6. Gain on Sale During the year ended December 31, 2002, the Company of Assets sold its office building for approximately $1,170 and realized a gain of $220, which gain is included in gain on sale of assets.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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6. Gain on Sale During the year ended December 31, 2002, the Company and of Assets its joint venture partner completed the sale of the Continued assets of West Coast Explosives Limited, a joint venture in West Africa. Previously, the Company wrote off its investment in this joint venture, including a note receivable, due to the joint venture's continuing operating losses. The Company's share of net cash proceeds from the sale of assets was approximately $460, which gain is included in gain on sale of assets.
7. Income Taxes The current provision for income taxes represents U.S. federal income taxes, taxes withheld on royalties and other foreign income taxes.
The benefit (provision) for income taxes is different than amounts which would be provided by applying the statutory federal income tax rate to income from continuing operations before income taxes for the following reasons:
Years Ended December 31, --------------------------------------------- 2002 2001 2000 ---------------------------------------------
Federal income tax (provision) at statutory rate $ (1,406) $ (593) $ (408) Life insurance and meals 1 (4) (23) Other (73) - 122 ---------------------------------------------
$ (1,478) $ (597) $ (309) ---------------------------------------------
Total income tax benefit (provision) consists of the following:
Current $ (1,368) $ (1,177) $ (663) Deferred (110) 580 354 ---------------------------------------------
$ (1,478) $ (597) $ (309) ---------------------------------------------
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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7. Income Taxes Deferred tax assets (liabilities) are comprised of the Continued following:
December 31, ---------------------------------- 2002 2001 ----------------------------------
Depreciation and amortization $ (3,117) $ (3,049) Foreign tax and other credit carryforwards 1,523 1,575 Other 10 - ----------------------------------
$ (1,584) $ (1,474) ----------------------------------
8. Supplemental Actual amounts paid for interest and income taxes are as Cash Flow follows: Information Years Ended December 31, ---------------------------------------------- 2002 2001 2000 ----------------------------------------------
Interest $ - $ 519 $ 509 ----------------------------------------------
Income taxes $ 470 $ 508 $ 127 ----------------------------------------------
During the year ended December 31, 2002:
o The Company retired 102,391 shares of treasury stock acquired in 2001 with a cost of $573.
o A note receivable from an officer of $23 was repaid by receipt by the Company of 5,709 shares of the Company's common stock valued at $23, which stock was subsequently retired.
During the year ended December 31, 2001:
o The Company reclassified accounts receivable of $229 to a note receivable due from UEE
o The Company reclassified interest receivable of $110 which was previously recorded as part of a note receivable from UEE to accounts receivable
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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8. Supplemental o In connection with the sale of its explosives Cash Flow business the Company repurchased common stock Information from a former officer in exchange for partial Continued repayment of a note receivable of $54
o The Company paid certain accrued expenses to an officer in exchange for forgiveness of a note receivable of $6
o The Company sold equipment to a joint venture in exchange for accounts receivable of $125
o As described in Note 16, the Company sold its explosives business to UEE in 2001. The following table summarizes the assets and liabilities sold, consideration received, and loss recognized on the sale:
Assets Sold and Liabilities Assumed by UEE
Receivables, net $ 6,468 Inventories 2,154 Other current assets 208 Investments in and advances to joint ventures 2,117 Property, plant and equipment, net 6,143 Notes receivable from joint ventures 1,070 Other assets 279 Accounts payable and accrued expenses (7,340) Notes payable (6,278) ----------------
Net assets sold 4,821
Consideration Received
Notes receivable and accrued interest received 1,310 Net cash received (net of $1,147 sold) 5,203 ----------------
Gain before expenses of sale and income tax effect 1,692
Expenses directly related to the sale (1,847) Provision for income taxes (301) ----------------
Loss recognized on sale $ (456) ----------------
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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9. Related Party During the year ended December 31, 2002, a note Transactions receivable from an officer of $23 was repaid through the transfer to the Company of 5,709 shares of the Company's common stock. The indebtedness was repaid with the shares at their current market value in accordance with the terms of the original note agreement.
The Company performs certain functions for Cyanco for which it receives a fee. Fees totaled $460, $443 and $342 for the years ended December 31, 2002, 2001, and 2000, respectively.
At December 31, 2002 and 2001, the Company had receivables of $52 and $37, respectively, due from Cyanco.
As of December 31, 2001, the Company had notes receivable from officers of the Company of $26 (see Note 4).
During the year ended December 31, 2002, the Company paid $103 each to two board members for services and the director's surrender of all their outstanding stock options.
As compensation for services rendered in connection with the sale of the explosives business in November 2001, the Company agreed to pay $160 and $103 to two former board members. $50 was paid to one former board member in 2001 and the remaining amounts were paid in January 2002.
10. Non-Qualified Under the 1987 Non-Qualified Stock Option Plan (the Stock Option Option Plan), as amended in 1988, 1990, 1992, 1993, 1998 Plan and 1999, a maximum of 1,315,130 shares were made available for granting of options to purchase common stock at prices generally not less than the fair market value of common stock at the date of grant. Under the Option Plan, grants of non-qualified options may be made to selected officers and key employees without regard to any performance measures. The options may be immediately exercisable or may vest over time as determined by the Board of Directors. However, the maximum term of an option may not exceed ten years. Options may not be transferred except by reason of death, with certain exceptions, and termination of employment accelerates the expiration date of any outstanding options to 30 days from the date of termination.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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10. Non-Qualified In connection with the sale of the explosive business to Stock Option UEE on November 15, 2001, substantially all employees Plan terminated their employment with the Company and Continued surrendered to the Company all previously issued stock options. The Company's president and CEO and continuing members of the board of directors retained their stock options.
Information regarding the Option Plan is summarized below:
Option Number of Price Per Options Share -----------------------------------
Outstanding at January 1, 2000 352,747 $ 1.38 - 11.30 Granted 376,000 1.44 - 2.31 Exercised - - Expired / forfeited - - -----------------------------------
Outstanding at December 31, 2000 728,747 1.38 - 11.30 Granted 170,000 1.21 Exercised - - Expired / forfeited (521,247) 1.38 - 11.30 -----------------------------------
Outstanding at December 31, 2001 377,500 1.21 - 2.31 Granted - - Exercised - - Expired / forfeited (159,000) 1.21 - 1.44 -----------------------------------
Outstanding at December 31, 2002 218,500 $ 1.21 - 2.31 -----------------------------------
Options exercisable and available for future grant are as follows:
December 31, ---------------------------------------------- 2002 2001 2000 ----------------------------------------------
Options exercisable 218,500 377,500 524,510 Options available for grant 604,207 445,207 93,960
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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10. Non-Qualified The following table summarizes information about stock Stock Option options outstanding at December 31, 2002: Plan Continued Options Outstanding Options Exercisable ------------------------------------------------------------------ Weighted Average Number Remaining Weighted Number Weighted Range of Outstanding Contractual Average Exercisable Average Exercise At Life Exercise At Exercise Prices 12/31/02 (Years) Price 12/31/02 Price ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
$ 2.31 10,000 .32 $ 2.31 10,000 $ 2.31 1.44 118,500 2.59 1.44 118,500 1.44 1.21 90,000 3.89 1.21 90,000 1.21 ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
$ 1.21-2.31 218,500 3.11 1.38 218,500 1.38 -------------------------------------------------------------------------------
11. Significant The Company accounts for its 50% ownership interest in Unconsolidated Cyanco using the equity method of accounting. Summarized Affiliates financial information of Cyanco, a significant unconsolidated affiliate of the Company, is as follows:
December 31, ---------------------------------------------- 2002 2001 2000 ----------------------------------------------
Results for year: Gross revenues $ 30,632 $ 29,767 $ 22,961 Gross profit $ 8,757 $ 5,905 $ 4,747 Net income, before extraordinary item $ 6,632 $ 4,126 $ 3,415
Company's 50% equity in earnings $ 3,316 $ 2,063 $ 1,707
Year-end financial position: Current assets $ 6,613 $ 7,831 Non-current assets $ 20,133 $ 16,946 Current liabilities $ 2,525 $ 1,746 Non-current liabilities $ 558 $ -
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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12. Profit Sharing The Company has a defined contribution profit sharing Plan plan, which is qualified under Section 401(K) of the Internal Revenue Code. The plan provides retirement benefits for employees meeting minimum age and service requirements. Participants may contribute a percentage of their gross wages, subject to certain limitations. The plan provides for discretionary matching contributions, as determined by the Board of Directors, to be made by the Company. The discretionary amount contributed to the plan by the Company for the years ended December 31, 2002, 2001, and 2000 was $4, $106 and $80, respectively.
13. Fair Value of The Company's financial instruments consist of cash and Financial cash equivalents, short-term investments, receivables, Instruments notes receivable, and payables. The carrying amount of cash, receivables, and payables approximates fair value because of the short-term nature of these items. The carrying amount of short-term investments is based on market price and notes receivable approximates fair value as the individual borrowings bear interest which approximate market rates.
14. Commitments Taxes and The Company has retained all contingent liabilities Contingencies relating to the current ongoing audit by the Canada Customs and Revenue Agency (CCRA) of previously filed tax returns in Canada. In the initial phase of the audit, CCRA has taken a position on certain matters different than that taken by the Company. The Company, based on consultation with its professional tax advisors in Canada, believes that the facts and circumstances support the position taken by the Company and continues discussions and negotiations with CCRA. The Company believes that amounts accrued and included in income taxes payable at December 31, 2002 are adequate for the resolution of the audit by CCRA. However, there can be no assurance that such costs will not exceed the current estimate.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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14. Commitments Litigation and The Company is subject to legal proceedings arising out Contingencies of the normal conduct of its business, which the Company Continued believes will not materially affect its financial position or operating results.
15. Sale of Sale of Explosives Business Explosives The Company completed the sale of its explosives Business business to UEE on November 15, 2001. As a result, the explosives business is accounted for as a discontinued operation, and accordingly, amounts in the financial statements and related notes for 2001 and 2000 have been restated to reflect discontinued operations accounting. Summarized operating results of the explosives business are shown in the table below.
As consideration for the explosives business, subject to certain adjustments, (i) the Company received $6.35 million cash; (ii) UEE and its subsidiaries assumed notes and accrued interest payable to the Company totaling approximately $1.3 million, the first of which, in the principal amount of $1.0 million, will be paid in equal annual installments over five years beginning in July of 2002, and the second of which, in the principal amount of $200, was paid in January 2002; (iii) UEE assumed essentially all of the Company's liabilities associated with the explosives business in the approximate amount of $13.6 million. Expenses of the sale were approximately $1.8 million, including $431 recognition of foreign currency translation adjustment. After giving effect to an estimated $301 income tax provision from the sale, the Company recognized a loss from the sale of $456.
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NEVADA CHEMICALS, INC. Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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15. Sale of Operating results of the disposed explosives business Explosives were as follows Business Continued 2001 2000 ----------------------------------
Revenues $ 36,945 $ 37,064 -------------------------------
Costs and expenses: Cost of sales 34,099 34,475 General and administrative 3,123 3,732 Impairment of assets - 4,990 Other expenses 302 1,069 -------------------------------
37,524 44,266 ------------------------------- Loss before income taxes and minority interest (579) (7,202)
Income tax benefit 214 1,879 -------------------------------
Loss before minority interest (365) (5,323)
Minority interest in loss - 497 -------------------------------
Net loss $ (365) $ (4,826) -------------------------------
As part of the sale of the explosives business, the Company purchased a total of 101,191 shares of its common stock from certain of its former officers and employees for total consideration of $571. These common shares were retired in 2002.
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