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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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Nevada Chemicals, Inc.
(Exact name of registrant as specified in its charter)
Utah 87-0351702
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9149 So. Monroe Plaza Way, Suite B
Sandy, Utah 84070
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (801) 984-0228
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
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Common Stock, $0.001 Par Value
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Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Based on the closing sales price of March 7, 2003, the aggregate market
value of the Common Stock held by non-affiliates was $9,773,673 (3,215,024
shares estimated to be held by non-affiliates). Shares of the Common Stock
controlled by each officer and director and by each person who may be deemed to
be an affiliate of the registrant have been excluded.
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The number of shares outstanding of the registrant's par value $0.001 Common
Stock as of March 7, 2003 was 7,059,143.
Nevada Chemicals, Inc.
Table of Contents
Part I Page No.
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Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 4
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 10
Item 8. Financial Statements and Supplementary Data 10
Item 9. Disagreements with Accountants on Accounting and Financial
Disclosure 10
Part III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and
Management 14
Item 13. Certain Relationships and Related Transactions 15
Item 14. Controls and Procedures 15
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 15
Signatures 17
Certifications 18
PART I
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.
1
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
2
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. 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. Legal Proceedings
The Company is not a party to any legal proceedings.
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.
3
PART II
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
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High Low
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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.
4
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.
Year Ended December 31,
(in thousands except per share amounts)
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2002 2001 2000 1999 1998
Results of Operations Data (1):
Operating revenues $ 3,912 $ 2,533 $ 2,066 $ 2,880 $ 5,101
Income from continuing
operations before extraordinary
item 2,128 1,007 795 817 2,801
Extraordinary item-extinguishment of debt - - - 1,599 -
Income (loss) from discontinued
operations - (821) (4,826) (1,691) 1,071
Net income (loss) 2,128 186 (4,301) 725 3,872
Earnings (loss) per common
share - diluted:
Income from continuing
operations before extraordinary
item $ 0.29 $ 0.14 $ 0.11 $ 0.11 $ 0.38
Extraordinary item - - - 0.22 -
Income (loss) from discontinued
operations - (0.11) (0.66) (0.23) 0.14
Net income (loss) 0.29 0.03 (0.55) 0.10 0.52
Cash dividends declared per
per common share $ - $ - $ - $ 0.025 $ 0.025
Balance Sheet Data:
Total Assets $24,692 $23,661 $22,590 $29,986 $30,706
Long-term debt - - - - -
Stockholders' equity 22,011 20,314 20,245 24,351 24,077
(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.
5
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.
6
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.
7
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.
8
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.
9
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. 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 F-1 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.
Amounts in thousands 2002 2001
(except per share amounts) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Revenues $ 472 $ 845 $ 1,446 $ 1,149 $ 318 $ 549 $ 860 $ 806
Net income from
continuing operations 208 676 644 600 57 265 292 393
Income (loss) from
discontinued operations - - - - (457) 129 (938) 445
Net income (loss) 208 676 644 600 (400) 394 (646) 838
Earnings (loss) per common
share - diluted:
Continuing operations $ 0.03 $ 0.09 $ 0.09 $ 0.08 $ 0.01 $ 0.04 $ 0.04 $ 0.06
Discontinued operations - - - - (0.06) 0.01 (0.13) 0.06
Net income (loss) 0.03 0.09 0.09 0.08 (0.05) 0.05 (0.09) 0.12
Item 9. Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
10
PART III
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.
11
(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. 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.
Long-Term Compensation
Annual Compensation Restricted Securities
Other Annual Stock Underlying All Other
Salary Bonus Compensation Awards Options Compensation
Name and Position Year $ $ $ (1) $ # $ (2)
Dr. John T. Day 2002 175,000 - 13,776 - - 3,600
President and Chief 2001 175,000 - 21,861 - 30,000 3,600
Executive Officer 2000 175,000 - 14,452 - 49,500 4,155
(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").
12
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.
Shares Options/SARs Options/SARs
Acquired on Value at FY-End (#) at FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable (1)
- ---------------------------------------------------------------------------------------------------
Dr. John T. Day - - 79,500 / - 146,139 / -
(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.
13
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:
Amount and Nature of
Beneficial Ownership (1)
-------------------------------------
Name and Address of Beneficial Owner Shares Percent
E. Bryan Bagley
1470 Arlington Dr.
Salt Lake City, Utah 84103 2,141,034 (2) 29.4%
Dr. John T. Day
5 Dawn Hill
Sandy, Utah 84092 597,068 (3) 8.2%
Edward Dallin Bagley
2350 Oakhill Drive
Salt Lake City, Utah 84124 539,441 7.4%
Dr. Lex L. Udy
4597 Ledgemont Drive
Salt Lake City, Utah 84124 529,309 7.3%
Nathan L. Wade
1207 South Main Street
Salt Lake City, Utah 84111 255,767 (4) 3.5%
All Officers and Directors as
a group (7 persons) 2,993,869 41.1%
- -------------------------------------------------------------------------------------------------------------
(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.
14
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. 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. 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 F-1 to F-23.
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).
15
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.
16
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
17
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)
18
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)
19
Consolidated Financial Statements
December 31, 2002 and 2001
NEVADA CHEMICALS, INC.
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
----
Independent Auditors' Report F-2
Consolidated balance sheet F-3
Consolidated statement of operations F-4
Consolidated statement of stockholders' equity F-5
Consolidated statement of cash flows F-6
Notes to consolidated financial statements F-7
- --------------------------------------------------------------------------------
F-1
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
F-2
NEVADA CHEMICALS, INC.
Consolidated Balance Sheet
(In thousands, except share amounts)
December 31,
- ----------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 6,612 $ 7,011
Short-term investments 4,026 -
Receivables 99 1,348
Prepaid expenses 41 49
Current portion of notes receivable 319 490
---------------------------------
Total current assets 11,097 8,898
Investment in and advances to joint ventures 12,919 12,603
Property, plant and equipment, net 38 950
Notes receivable 407 965
Other assets 231 245
---------------------------------
$ 24,692 $ 23,661
---------------------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities - accounts payable and accrued expenses $ 1,097 $ 1,873
Deferred income taxes 1,584 1,474
---------------------------------
Total liabilities 2,681 3,347
--------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 500,000,000 shares
authorized, 7,059,143 and 7,314,260 shares issued,
2002 and 2001, respectively 7 7
Capital in excess of par value 4,295 5,312
Accumulated other comprehensive income 13 -
Retained earnings 17,696 15,568
Treasury stock, 102,391 shares at cost in 2001 - (573)
---------------------------------
Total stockholders' equity 22,011 20,314
---------------------------------
$ 24,692 $ 23,661
---------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-3
NEVADA CHEMICALS, INC.
Consolidated Statement of Operations
(In thousands, except share and per share amounts)
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------
Revenue:
Management fee from joint venture $ 460 $ 443 $ 342
Equity in earnings of joint ventures 3,316 2,063 1,707
Other 136 27 17
---------------------------------------------
3,912 2,533 2,066
General and administrative expenses 1,256 1,015 962
---------------------------------------------
Operating income from continuing operations 2,656 1,518 1,104
Other income:
Gain on sale of assets 680 - -
Other income 270 86 -
---------------------------------------------
Total other income 950 86 -
---------------------------------------------
Income from continuing operations before
provision for income taxes 3,606 1,604 1,104
Provision for income taxes (1,478) (597) (309)
---------------------------------------------
Income from continuing operations 2,128 1,007 795
Discontinued operations:
Loss from discontinued operations of explosives
business, net of income tax benefit of $214 in 2001
and $1,879 in 2000 - (365) (4,826)
Loss on disposal of explosives business, including
income taxes of $301 - (456) -
---------------------------------------------
Net income (loss) $ 2,128 $ 186 $ (4,031)
---------------------------------------------
Earnings (loss) per common share - basic:
Continuing operations $ .30 $ .14 $ .11
Discontinued operations - (.11) (.66)
---------------------------------------------
Total $ .30 $ .03 $ (.55)
---------------------------------------------
Earnings (loss) per common share - diluted:
Continuing operations $ .29 $ .14 $ .11
Discontinued operations - (.11) (.66)
---------------------------------------------
Total $ .29 $ .03 $ (.55)
---------------------------------------------
Weighted average number of shares outstanding:
Basic 7,174,000 7,301,000 7,314,000
---------------------------------------------
Diluted 7,327,000 7,333,000 7,314,000
---------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
NEVADA CHEMICALS, INC.
Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
Years Ended December 31, 2002, 2001, and 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Capital in Accumulated
Common Stock Excess Other
------------------ of Par Comprehensive Retained Treasury
Shares Amount Value Income Earnings Stock Total
---------------------------------------------------------------------------------
Balance at January 1, 2000 7,314,260 $ 7 $ 5,312 $ (381) $ 19,413 $ - $ 24,351
Comprehensive net income calculation:
Net loss - - - - (4,031) - (4,031)
Foreign currency translation adjustment, net - - - (75) - - (75)
---------
Comprehensive loss - - - - - (4,106)
---------------------------------------------------------------------------------
Balance at December 31, 2000 7,314,260 7 5,312 (456) 15,382 - 20,245
Comprehensive net income calculation:
Net income - - - - 186 - 186
Foreign currency translation adjustment, net - - - 456 - - 456
---------
Comprehensive income - - - - - - 642
---------
Purchase of treasury stock - - - - - (573) (573)
---------------------------------------------------------------------------------
Balance at December 31, 2001 7,314,260 7 5,312 - 15,568 (573) 20,314
Comprehensive net income calculation:
Net income - - - - 2,128 - 2,128
Net unrealized gains on investments - - - 13 - - 13
---------
Comprehensive income - - - - - - 2,141
---------
Purchase and retirement of treasury stock (255,117) - (1,017) - - 573 (444)
---------------------------------------------------------------------------------
Balance at December 31, 2002 7,059,143 $ 7 $ 4,295 $ 13 $ 17,696 $ - $ 22,011
---------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
NEVADA CHEMICALS, INC.
Consolidated Statement of Cash Flows
(In Thousands)
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 2,128 $ 186 $ (4,031)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 36 941 1,595
Provision and reserves for losses on assets 223 - 222
Loss on sale of discontinued explosives business - 456 -
Loss (gain) on disposal of assets (680) (223) 1
Equity in earnings of joint ventures (3,316) (3,276) (2,245)
Impairment of assets - - 4,990
Recognition of cumulative foreign currency
translation adjustment - 456 -
Deferred income taxes 110 (580) (354)
(Increase) decrease in:
Receivables 1,243 161 (1,711)
Inventories - 94 (441)
Prepaid expenses 8 (45) (100)
Other assets 14 (131) (233)
Increase (decrease) in:
Accounts payable and accrued expenses (776) 1,170 3,644
Minority interest - - (497)
---------------------------------------------
Net cash (used in) provided by
operating activities (1,010) (791) 840
---------------------------------------------
Cash flows from investing activities:
Net cash received from sale of discontinued
explosives business - 5,203 -
Proceeds from the sale of assets 1,556 253 35
Increase in notes receivable (1,000) - (500)
Payments on notes receivable 1,489 180 47
Purchase of property, plant and equipment - (542) (2,945)
Distributions from joint venture 3,000 1,442 2,000
Investment in joint venture - - 3
Purchase of short-term investments (4,013) - -
---------------------------------------------
Net cash provided by (used in)
investing activities 1,032 6,536 (1,360)
---------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt - 250 2,241
Payments of long-term debt - (578) (583)
Purchase and retirement of treasury stock (421) (519) -
---------------------------------------------
Net cash (used in) provided by
financing activities (421) (847) 1,658
--------------------------------------------
Net increase (decrease) in cash (399) 4,898 1,138
Cash and cash equivalents, beginning of year 7,011 2,113 975
---------------------------------------------
Cash and cash equivalents, end of year $ 6,612 $ 7,011 $ 2,113
---------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6
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.
- --------------------------------------------------------------------------------
F-7
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-8
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-9
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-10
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-11
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-12
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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
------------------------------
- --------------------------------------------------------------------------------
F-13
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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
-------------------------------
- --------------------------------------------------------------------------------
F-14
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-15
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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)
---------------------------------------------
- --------------------------------------------------------------------------------
F-16
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
F-17
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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)
----------------
- --------------------------------------------------------------------------------
F-18
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-19
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
F-20
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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 $ -
- --------------------------------------------------------------------------------
F-21
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-22
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
F-23
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
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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F-24