UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
[ ] 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
incorporation or organization) Identification No.)
9149 So. Monroe Plaza Way, Suite B
Sandy, Utah 84070
(Address of principal executive offices, zip code)
(801) 984-0228
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
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 April 10, 2003 was 6,957,919.
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Nevada Chemicals, Inc.
Form 10-Q
Table of Contents
Page No.
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Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 1
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2003 and March 31, 2002 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2003 and March 31, 2002 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosure About Market Risk 7
Item 4. Controls and Procedures 8
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
Certifications 10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEVADA CHEMICALS, INC.
Condensed Consolidated Balance Sheets
(In Thousands)
March 31, 2003
ASSETS (Unaudited) December 31, 2002
-----------------------------------
Current assets:
Cash and cash equivalents $ 8,721 $ 6,612
Short-term investments 2,707 4,026
Receivables 93 99
Prepaid expenses 42 41
Current portion of notes receivable 310 319
-----------------------------------
Total current assets 11,873 11,097
Investment in and advances to joint venture 12,403 12,919
Property and equipment, net 35 38
Notes receivable 386 407
Other assets 232 231
-----------------------------------
$ 24,929 $ 24,692
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities - accounts payable and accrued expenses $ 1,098 $ 1,097
Deferred income taxes 1,524 1,584
-----------------------------------
Total liabilities 2,622 2,681
-----------------------------------
Stockholders' Equity:
Common stock 7 7
Capital in excess of par value 4,291 4,295
Accumulated other comprehensive (loss) income (6) 13
Retained earnings 18,015 17,696
-----------------------------------
Total stockholders' equity 22,307 22,011
-----------------------------------
$ 24,929 $ 24,692
===================================
See accompanying notes to condensed consolidated financial statements
1
NEVADA CHEMICALS, INC.
Condensed Consolidated Statements of Income
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended March 31
2003 2002
-----------------------------------
Revenues:
Equity in earnings of joint venture $ 484 $ 349
Other 186 193
-----------------------------------
Total revenues 670 542
General and administrative expenses 179 215
-----------------------------------
Income before provision for income taxes 491 327
Provision for income taxes 172 119
-----------------------------------
Net income $ 319 $ 208
===================================
Earnings per common share:
Basic $ 0.05 $ 0.03
===================================
Diluted $ 0.04 $ 0.03
===================================
Weighted average number of shares outstanding
Basic 7,059,129 7,210,000
Diluted 7,185,629 7,278,000
See accompanying notes to condensed consolidated financial statements
2
NEVADA CHEMICALS, INC.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Three Months Ended March 31
2003 2002
-----------------------------------
Cash flows from operating activities:
Net income $ 319 $ 208
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3 10
Equity in earnings of joint venture (484) (349)
Changes in assets and liabilities:
Receivables 6 502
Prepaid expenses (1) (1)
Other assets (1) -
Accounts payable and accrued expenses (59) (529)
-----------------------------------
Net cash used in operating activities (217) (159)
-----------------------------------
Cash flows from investing activities:
Distributions from joint venture 1,000 1,000
Net sales (purchases) of short-term investments 1,300 (2,704)
Increase in note receivable - related party - (1,000)
Payments of notes receivable 30 200
-----------------------------------
Net cash provided by (used in) investing activities 2,330 (2,504)
-----------------------------------
Cash flows from financing activities - purchase of
treasury stock (4) (2)
-----------------------------------
Net increase (decrease) in cash 2,109 (2,665)
Cash and cash equivalents, beginning of period 6,612 7,011
-----------------------------------
Cash and cash equivalents, end of period $ 8,721 $ 4,346
===================================
See accompanying notes to condensed consolidated financial statements
3
NEVADA CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The interim financial information of Nevada Chemicals, Inc. (the
"Company") for the three-month periods ended March 31, 2003 and March 31, 2002
included herein is unaudited, and the balance sheet as of December 31, 2002 is
derived from audited financial statements. These condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial statements.
Accordingly, they do not include all the information and disclosures normally
required by accounting principles generally accepted in the United States for
complete financial statements. Such financial information reflects all
adjustments, which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods. These adjustments are of a
normal recurring nature.
The results of operations for the three-month period ended March 31,
2003 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - For purposes of the statement of cash
flows, cash includes all cash and investments with original maturities to the
Company of three months or less.
Short-Term Investments - Investments with scheduled maturities greater
than three months but not greater than one year are recorded as short-term
investments. These investments at March 31, 2003 consisted primarily of
certificates of deposit classified by management as available for sale, and are
recorded at fair value with net unrealized gains or losses reported within
stockholders' equity. Realized gains and losses are included in the statements
of operations.
NOTE 3. INVESTMENT IN JOINT VENTURE
The Company, through its wholly owned subsidiary, Winnemucca Chemicals,
Inc., has a fifty percent interest in Cyanco Company ("Cyanco"), a non-corporate
joint venture engaged in the manufacture and sale of liquid sodium cyanide. The
Company accounts for its investment in Cyanco using the equity method of
accounting. Summarized financial information for Cyanco is as follows (amounts
in thousands):
Three Months Ended March 31
2003 2002
------- -------
Revenues $ 6,453 $ 5,896
Costs and expenses 5,487 5,199
Net income before taxes 967 697
Company's equity in earnings 484 349
4
NOTE 4. PURCHASE AND RETIREMENT OF COMMON 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. These purchases may be
made or suspended by the Company from time to time, without prior notice, based
on market conditions or other factors.
During the three-month periods ended March 31, 2003 and March 31, 2002,
the Company purchased and retired 1,224 and 1,800 shares of its common with a
total cost basis to the Company of $4,000 and $2,000, respectively.
On April 3, 2003, the Company purchased and retired 100,000 shares of
its common stock with a cost basis to the Company of $305,000.
During the three-month period ended March 31, 2002, the Company retired
101,411 shares of treasury stock with a cost basis to the Company of $571,000.
These shares had been acquired in November 2001 from former employees in
connection with the sale of the Company's explosives business.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's operations consist primarily of the Company's
proportionate share of the operating results from its 50% interest in Cyanco
Company, a non-corporate joint venture, management fee income from Cyanco,
investment income earned on cash and cash equivalents and short-term
investments, 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 three-month periods ended March 31, 2003 and 2002
is presented in Note 3 to the Company's condensed consolidated financial
statements.
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.
Results of Operations
Three Months Ended March 31, 2003
- ---------------------------------
Equity in earnings of Cyanco increased $135,000, or 39%, in the three
months ended March 31, 2003 compared to the three months ended March 31, 2002.
Cyanco revenues increased $557,000, or 9%, in the three months ended March 31,
2003 compared to the three months ended March 31, 2002. The increase in revenues
5
is due primarily to the additional volume of sodium cyanide supplied by Cyanco
to customers under contracts acquired from FMC. The increase in revenues was
tempered somewhat by lower sales prices to some customers due to market
pressures. Cyanco costs and expenses increased $288,000, or 6%, in the three
months ended March 31, 2003 compared to the three months ended March 31, 2002.
The increase in operating costs resulted primarily from the increase in variable
manufacturing costs due to a greater volume of sodium cyanide sold. As a result,
Cyanco net income before taxes increased $270,000, or 39%, during the three
months ended March 31, 2003 compared to the three months ended March 31, 2002.
Other revenues decreased $7,000, or 4%, in the three months ended March
31, 2003 compared to the three months ended March 31, 2002. The decrease is due
primarily to no rental income from the Company's office building included in
operations for the three months ended March 31, 2003, offset by an increase in
investment income. Rental income for the three months ended March 31, 2002 was
$35,000. The office building was sold in November 2001.
General and administrative expenses decreased $36,000, or 17%, in the
three months ended March 31, 2003 compared to the three months ended March 31,
2002. Of this decrease, $17,000 is due to the elimination of operating expenses
and depreciation expense of the office building sold in November 2001. In
addition, the Company recovered $16,000 of receivables previously written off
that were assigned back to the Company pursuant to the agreement to sell its
explosives business. This bad debt recovery was recorded as a reduction of
general and administrative expenses during the three months ended March 31,
2003.
Liquidity and Capital Resources
At March 31, 2003, the liabilities of the Company consisted of current
liabilities and deferred income taxes. Current liabilities at March 31, 2003
consisted of accounts payable and accrued expenses totaling $1,098,000,
comprised primarily of accrued income taxes. These current liabilities compare
favorably to total current assets of $11,873,000 as of March 31, 2003. Current
assets are comprised primarily of cash and cash equivalents of $8,721,000 and
short-term investments that are available for sale of $2,707,000.
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 continuing a
stock buy-back program, 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 three months ended March
31, 2003 was $(217,000) compared to net cash used in operating activities of
$(159,000) for the three months ended March 31, 2002. The increase in cash used
in operating activities during the first three months of 2003 is primarily due
to the reduction of accounts payable and accrued expenses of $59,000 in the
first three months of 2003.
Net cash provided by investing activities for the three months ended
March 31, 2003 was $2,330,000 compared to net cash used in investing activities
of $(2,504,000) for the three months ended March 31, 2002. During the first
6
three months of 2003, the Company received a $1,000,000 distribution from
Cyanco, $1,300,000 net proceeds from the sale of short-term investments and
$30,000 from the collection of notes receivable. The use of cash in the first
three months of 2002 is attributable to purchases of short-term investments of
$2,704,000 and an advance to Cyanco of $1,000,000, offset by the receipt of a
$1,000,000 distribution from Cyanco and $200,000 from the collection of notes
receivable. The advance to Cyanco was repaid with interest within a period of
two months.
Net cash used in financing activities for the three months ended March
31, 2003 and 2002 consisted of $(4,000) and $(2,000), respectively, used to
purchase and retire shares of the Company's common stock.
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 accounts payable and accrued
expenses at March 31, 2003 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 next twelve months.
Forward Looking Statements
Within this Quarterly Report on Form 10-Q, there are forward-looking
statements made in an effort to inform the reader of management's expectation of
future events. These expectations are subject to numerous factors and
assumptions, any one of which could have a material effect on future results.
The factors which may impact future operating results include, but are not
limited to, decisions made by Cyanco's customers as to the continuation,
suspension or termination of mining activities in the area served by Cyanco,
changes in world supply and demand for commodities, particularly gold;
political, environmental, regulatory, economic and financial risks; major
changes in technology which could affect the mining industry as a whole or which
could affect sodium cyanide specifically; competition; and the continued
availability of qualified technical and other professional employees of the
Company and Cyanco. The Company believes it is taking appropriate actions in
order to address these and other factors previously disclosed; however, some of
the risks are outside the control of the Company, and the actions taken by the
Company may not be sufficient to avoid the adverse consequences of one or more
of the risks. Consequently, the actual results could differ materially from
those indicated in the statements made.
Item 3. Quantitative and Qualitative Disclosure 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
7
interest rates are not expected to have a material impact on the Company's
consolidated results of operations.
Item 4. 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 II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002
Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002
2. Reports on Form 8-K:
The Company filed a report on Form 8-K dated February 26, 2003
reporting the temporary suspension of trading of the Company's
common stock in connection with a change in the outside
administration and record keeping company for the Nevada
Chemicals, Inc. Profit Sharing 401 (k) Plan.
8
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
NEVADA CHEMICALS, INC.
----------------------
(Registrant)
April 17, 2003 /s/ John T. Day
- ------------------ ----------------
(Date) John T. Day, President (principal
executive officer)
April 17, 2003 /s/ Dennis P. Gauger
- -------------- ---------------------
(Date) Dennis P. Gauger,
Chief Financial Officer (principal
financial and accounting officer)
9
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 quarterly report on Form 10-Q of Nevada
Chemicals, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
10
6. The registrant's other certifying officer and I have indicated in
this quarterly 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.
April 17, 2003 /s/ John T. Day
- -------------- ----------------
(Date) John T. Day, President (principal
executive officer)
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
I, Dennis P. Gauger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nevada
Chemicals, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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):
11
(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 quarterly 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.
April 17, 2003 /s/ Dennis P. Gauger
- -------------- ---------------------
(Date) Dennis P. Gauger,
Chief Financial Officer (principal
financial and accounting officer)
12