_
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange act of 1934
For the quarterly period ended June 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File No. 0-10634
___________________________
Nevada Chemicals, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Utah 87-0351702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9149 So. Monroe Plaza Way, Suite B
Sandy, Utah 84070
(Address of principal executive offices, zip code)
(801) 984-0228
(Registrant's telephone number, including area code)
___________________________
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No__
The number of shares outstanding of the registrant's par value $0.001
Common Stock as of July 31, 2002 was 7,204,140.
_________________________________________________________________________
Nevada Chemicals, Inc.
Table of Contents
Page No.
Part I Financial Information --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 1
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2002 and June 30, 2001 2
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 2002 and June 30, 2001 3
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and June 30, 2001 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosure About Market Risk 9
Part II Other Information
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Certification 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEVADA CHEMICALS, INC.
Condensed Consolidated Balance Sheets
(In Thousands)
June 30, 2002
ASSETS (Unaudited) December 31, 2001
-----------------------------------
Current assets:
Cash and cash equivalents $ 5,250 $ 7,011
Short-term investments 2,719 -
Receivables 882 1,348
Prepaid expenses 49 49
Current portion of notes receivable 815 490
-----------------------------------
Total current assets 9,715 8,898
Investment in and advances to joint venture 12,651 12,603
Property and equipment, net 929 950
Notes receivable 760 965
Other assets 279 245
----------------------------------
$ 24,334 $ 23,661
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities - accounts payable and accrued expenses $ 1,687 $ 1,873
Deferred income taxes 1,474 1,474
----------------------------------
Total liabilities 3,161 3,347
----------------------------------
Stockholders' Equity:
Common stock 7 7
Capital in excess of par value 4,714 5,312
Retained earnings 16,452 15,568
Treasury stock - (573)
----------------------------------
Total stockholders' equity 21,173 20,314
----------------------------------
$ 24,334 $ 23,661
==================================
See accompanying notes to condensed consolidated financial statements
1
NEVADA CHEMICALS, INC.
Condensed Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended June 30
2002 2001
-------------------------------
Revenues:
Equity in earnings of joint ventures $ 698 $ 447
Other 239 102
--------------------------------
Total revenues 937 549
General and administrative expenses 346 142
-------------------------------
Operating income from continuing operations 591 407
Other income - gain on sale of assets 460 -
-------------------------------
Income from continuing operations before
provision for income taxes 1,051 407
Provision for income taxes 375 142
-------------------------------
Income from continuing operations 676 265
Income from discontinued operations, net of
income taxes of $69 - 129
-------------------------------
Net income $ 676 $ 394
===============================
Earnings per common share - basic:
Continuing operations $ 0.09 $ 0.04
Discontinued operations - 0.01
-------------------------------
Total $ 0.09 $ 0.05
===============================
Earnings per common share - diluted:
Continuing operations $ 0.09 $ 0.04
Discontinued operations - 0.01
-------------------------------
Total $ 0.09 $ 0.05
===============================
Weighted average number of shares outstanding
Basic 7,208,000 7,314,000
Diluted 7,409,000 7,314,000
See accompanying notes to condensed consolidated financial statements
2
NEVADA CHEMICALS, INC.
Condensed Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Six Months Ended June 30
2002 2001
-------------------------------
Revenues:
Equity in earnings of joint ventures $ 1,047 $ 650
Other 432 217
-------------------------------
Total revenues 1,479 867
General and administrative expenses 561 373
-------------------------------
Operating income from continuing operations 918 494
Other income - gain on sale of assets 460 -
-------------------------------
Income from continuing operations before
provision for income taxes 1,378 494
Provision for income taxes 494 165
-------------------------------
Income from continuing operations 884 329
Loss from discontinued operations, net of
income tax benefit of $168 - (335)
-------------------------------
Net income $ 884 $ (6)
===============================
Earnings (loss) per common share - basic:
Continuing operations $ 0.12 $ 0.05
Discontinued operations - (0.05)
-------------------------------
Total $ 0.12 $ 0.00
===============================
Earnings (loss) per common share - diluted:
Continuing operations $ 0.12 $ 0.05
Discontinued operations - (0.05)
-------------------------------
Total $ 0.12 $ 0.00
===============================
Weighted average number of shares outstanding
Basic 7,209,000 7,314,000
Diluted 7,361,000 7,314,000
See accompanying notes to condensed consolidated financial statements
3
NEVADA CHEMICALS, INC.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Six Months Ended June 30
2002 2001
-------------------------------
Cash flows from operating activities:
Net income (loss) $ 884 $ (6)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 21 592
Undistributed earnings of joint ventures (1,047) (1,205)
Gain on sale of assets (460) (88)
Deferred income taxes - (11)
Other 125 (78)
Changes in assets and liabilities:
Receivables 466 (839)
Inventories - (79)
Prepaid expenses - 54
Other assets (35) (12)
Accounts payable and accrued expenses (186) 1,102
-------------------------------
Net cash used in operating activities (232) (570)
-------------------------------
Cash flows from investing activities:
Distribution from joint venture 1,000 -
Purchase of short-term investments (2,719) -
Increase in notes receivable (1,000) -
Payments of notes receivable 733 -
Proceeds from sale of assets 460 253
Purchase of property and equipment - (281)
Investment in joint ventures - (15)
-------------------------------
Net cash used in investing activities (1,526) (43)
-------------------------------
Cash flows from financing activities:
Purchase of treasury stock (3) -
Proceeds from debt - 167
Repayment of debt - (329)
-------------------------------
Net cash used in financing activities (3) (162)
-------------------------------
Net decrease in cash (1,761) (775)
Cash and cash equivalents, beginning of period 7,011 2,113
-------------------------------
Cash and cash equivalents, end of period $ 5,250 $ 1,338
===============================
See accompanying notes to condensed consolidated financial statements
4
NEVADA CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The interim financial information for the three-month and six-month
periods ended June 30, 2002, and June 30, 2001, respectively, included herein is
unaudited, and the balance sheet as of December 31, 2001 is derived from audited
financial statements. These condensed consolidated financial statements are
presented in accordance with the requirements for interim financial statements,
and consequently may not include all the disclosures normally required by
generally accepted accounting principles. Such financial information reflects
all adjustments, which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods. These adjustments are of a
normal recurring nature.
In November 2001, the Company sold its explosives business. As a
result, the explosives business is accounted for as a discontinued operation,
with amounts in the financial statements for the three-month and six-month
periods ended June 30, 2001 restated to reflect discontinued operations
accounting.
The results of operations for the three-month and six-month periods
ended June 30, 2002 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - For purposes of the statement of cash
flows, cash 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 June 30, 2002 consisted primarily of
certificates of deposit classified by management as available for sale, and are
recorded at fair value with net unrealized gains or losses reported within
stockholders' equity. Realized gains and losses are included in the statements
of operations.
NOTE 3. INVESTMENT IN JOINT VENTURE
The Company, through its wholly owned subsidiary, Winnemucca Chemicals,
Inc., has a fifty percent interest in Cyanco Company ("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 as follows (amounts
in thousands):
5
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 7,415 $ 6,751 $ 13,311 $ 13,778
Costs and expenses 6,018 5,831 11,217 12,478
Net income before taxes 1,397 920 2,094 1,300
Company's equity in earnings 698 460 1,047 650
NOTE 4. GAIN ON SALE OF ASSETS
During the quarter ended June 30, 2002, the Company and its joint
venture partner completed the sale of the assets of West Coast Explosives
Limited, a joint venture that manufactures and supplies explosives 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 $460,000, which gain is included in other income for the quarter
ended June 30, 2002.
NOTE 5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the six-month period ended June 30, 2002, the Company retired
104,411 shares of treasury stock with a cost basis to the Company of $576,000.
Of these shares, 101,411 shares had been acquired from former employees in
connection with the sale of the Company's explosives business.
During the six-month period ended June 30, 2002, a note receivable from
an officer of $22,000 was paid in full by the transfer to the Company of 5,709
shares of the Company's common stock. The common shares received from the
officer were subsequently retired.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On November 15, 2001, the Company completed the sale of its explosives
business to Union Espanola de Explosivos ("UEE"). The name of the Company was
changed from Mining Services International Corporation to Nevada Chemicals, Inc.
as part of this transaction. 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 have been presented
as discontinued operations for all periods prior to the sale.
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, amounts from its 50% interest in West Coast Explosives Limited, a joint
venture to manufacture and supply explosives in West Africa, the rental of an
office building in Sandy, Utah, investment income, and related general and
administrative expenses. Since the Company does not own more than 50% of Cyanco,
the financial statements of Cyanco are not consolidated with the financial
6
statements of the Company. In June 2002, the Company and its joint venture
partner completed the sale of the assets of West Coast Explosives Limited, and
the Company received net proceeds from the sale of approximately $460,000.
In March 2002, Cyanco announced that it had reached 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
will exit 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. 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 life of the contracts. 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 Annual Report on
Form 10-K for the year ended December 31, 2000 and Quarterly Reports on Form
10-Q for the quarters ended March 31, 2001 and June 30, 2001.
Results of Operations
Three months ended June 30, 2002
- --------------------------------
Equity in earnings of joint ventures increased $251,000, or 56%, in the
three months ended June 30, 2002 compared to the three months ended June 30,
2001. The increase is due primarily to three factors: the additional volume of
sodium cyanide supplied by Cyanco to customers under contracts acquired from FMC
in March 2002; increased sales to existing customers in response to higher
prices of gold and seasonal variations; and improvement in variable
manufacturing costs as the price of certain key raw material prices decreased.
Other revenues increased $137,000, or 134%, in the three months ended
June 30, 2002 compared to the three months ended June 30, 2001. The increase is
attributable to interest and investment income from the Company's cash
equivalents and short-term investments, and income from the rental of an office
building owned by the Company that commenced in November 2001.
General and administrative expenses increased $204,000, or 143%, in the
three months ended June 30, 2002 compared to the three months ended June 30,
2001. This increase is due to $125,000 in bad debt reserves recorded during the
second quarter of 2002 related to possible uncollectible accounts and notes
receivable transferred back to the Company by UEE pursuant to the terms of the
agreement to sell the Company's explosives business to UEE. Additional expenses
were also incurred during the second quarter of 2002 for the Company's 2002
annual meeting, including related professional fees. The 2001 annual meeting was
held in the fourth quarter of 2001.
Six months ended June 30, 2002
- ------------------------------
Equity in earnings of joint ventures increased $397,000, or 61%, in the
six months ended June 30, 2002 compared to the six months ended June 30, 2001.
7
The increase is due to those factors discussed above for the three months ended
June 30, 2002, including the additional volume of sodium cyanide supplied by
Cyanco to customers under contracts acquired from FMC.
Other revenues increased $215,000 or 99% in the six months ended June
30, 2002 compared to the six months ended June 30, 2001. The increase is
attributable to interest and investment income from the Company's cash
equivalents and short-term investments, and income from the rental of the office
building that commenced in November 2001.
General and administrative expenses increased $188,000 or 50% in the
six months ended June 30, 2002 compared to the six months ended June 30, 2001.
General and administrative expenses remained at approximately the same level in
the first quarter of 2002 compared to the first quarter of 2001. The increase in
general and administrative expenses during the second quarter of 2002 compared
to the second quarter of 2001 is due to $125,000 in bad debt reserves recorded
during the second quarter of 2002 and additional costs relating to the Company's
annual meeting held during the second quarter of 2002, as further discussed
above.
Liquidity and Capital Resources
All long-term debt, the Company's line of credit and substantially all
accounts payable and accrued expenses were assumed by UEE in the sale of the
Company's explosives business. As a result, as of June 30, 2002, current
liabilities consist only of accounts payable and accrued expenses of $1,687,000.
These current liabilities compare favorably to total current assets of
$9,715,000 as of June 30, 2002. Current assets are comprised primarily of cash
and cash equivalents of $5,250,000 and short-term investments that are available
for sale of $2,719,000. The Company received cash of $6,350,000 from the sale of
its explosives business in November 2001.
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 six months ended June 30,
2002 was $(232,000) compared to net cash used in operating activities of
$(570,000) for the six months ended June 30, 2001. The net decrease in cash used
in operating activities during the first six months of 2002 is primarily the
result of the exclusion of the discontinued explosives business during the
current year.
Net cash used in investing activities for the six months ended June 30,
2002 was $(1,526,000) compared to net cash used in investing activities of
$(43,000) for the six months ended June 30, 2001. The use of cash in the first
six months of 2002 is attributable to purchases of short-term investments of
$2,719,000, offset by the receipt of a $1,000,000 distribution from Cyanco,
payments of notes receivable of $733,000 and proceeds from the sale of assets of
$460,000.
Net cash used in financing activities for the six months ended June 30,
2002 consisted of $(3,000) used to purchase treasury stock. Net cash used in
financing activities for the six months ended June 30, 2001 consisted of net
debt repayments of $(162,000). As indicated above, all debt was assumed by UEE
in the sale of the explosives business.
8
Forward Looking Statements
Within this Quarterly Report on Form 10-Q, 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, the
actual results could differ materially from those indicated in the statements
made.
Item 3. 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
results of operations.
9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 1, 2002, the Annual Meeting of Shareholders was held. The
shareholders voted, either in person or by proxy, to elect five directors to
serve until the next Annual Meeting of Shareholders or until their successors
shall be elected and duly qualified and to ratify the appointment of Tanner +
Co. to be the Company's independent public accountants for the year ending
December 31, 2002. Directors nominated were E. Bryan Bagley, Nathan L. Wade, Dr.
John T. Day, James E. Solomon, Frances M. Flood, Lex Udy and John Seigfried. The
results of the shareholder vote were as follows:
Five directors receiving most votes:
Nathan L. Wade 5,358,228
E. Bryan Bagley 5,358,028
Frances M. Flood 5,358,028
James E. Solomon 5,356,837
Dr. John T. Day 5,355,655
For Against Abstain
Ratification of the appointment of
Tanner + Co. as independent
public accountants
5,410,069 353 468
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits - none
2. Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter
ended June 30, 2002.
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
NEVADA CHEMICALS, INC.
----------------------
(Registrant)
August 6, 2002 /s/ John T. Day
- -------------- -----------------------
(Date) John T. Day, President
August 6, 2002 /s/ Dennis P. Gauger
- -------------- -----------------------
(Date) Dennis P. Gauger,
Chief Financial Officer
11
CERTIFICATION
In connection with the accompanying Form 10-Q of Nevada Chemicals, Inc.
for the quarter ended June 30, 2002, the following officers of Nevada Chemicals,
Inc., hereby certify that, to the best of their knowledge and belief:
1- such Form 10-Q fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2- the information contained in such Form 10-Q fairly presents, in
all material respects, the financial condition and results of
Nevada Chemicals, Inc.
By: /s/ John T. Day
----------------
John T. Day, President and Chief Executive Officer
/s/ Dennis P. Gauger
---------------------
Dennis P. Gauger, Chief Financial Officer
Date: August 6, 2002
12