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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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, 2004
[ ] 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 incorporation (I.R.S. Employer
or organization) Identification No.)
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Based on the closing sales price of June 30, 2004, the aggregate market
value of the Common Stock held by non-affiliates was $20,558,000 (3,514,134
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.
The number of shares outstanding of the registrant's par value $0.001
Common Stock as of March 16, 2005 was 6,807,452.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
Nevada Chemicals, Inc.
Annual Report on Form 10-K
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 4
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 4
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 10
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
Item 9A. Controls and Procedures 11
Item 9B. Other Information 12
Part III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and
Management 12
Item 13. Certain Relationships and Related Transactions 12
Item 14. Principal Accountant Fees and Services 12
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 13
Signatures 15
PART I
Item 1. Business
General
Nevada Chemicals, Inc., a Utah corporation organized in 1979 (the
"Company"), is engaged in the single business segment of supplying chemicals to
the gold mining industry in the western United States, primarily through its
ownership in Cyanco Company ("Cyanco"). The Company holds a 50% interest in
Cyanco, a non-corporate joint venture engaged in the manufacture and sale of
liquid sodium cyanide through Winnemucca Chemicals, Inc. ("Winnemucca
Chemicals"), a wholly owned subsidiary of the Company.
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.
The Company's operating revenues consist mainly of earnings from Cyanco
based on the equity method of accounting and management fee income from Cyanco.
In addition to income from Cyanco operations, the Company earned investment
income during 2004 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"). Cyanco produces and markets liquid sodium cyanide from its
Winnemucca, Nevada plant. Cyanco services the western U.S. gold mining industry,
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.
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.
Demand for the sodium cyanide manufactured by Cyanco is dependent on
the level of gold mining activity in the geographic area it services. The level
of gold mining activity is dependent to some extent on the price of gold. Over
the past five years, the market price of gold has generally increased from a low
of $252 per ounce on July 20, 1999 to as high as $454 per ounce on December 2,
2004. Since then, the price of gold has pulled back to $433 per ounce on March
4, 2005. If the price of gold continues at these higher values, the gold mining
community may be induced to expand exploration and production activities. In
such event, the demand for sodium cyanide in Cyanco's market area should remain
relatively stable or possibly increase in the foreseeable future.
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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"). Historically, Cyanco
competed with DuPont and also with FMC Corporation ("FMC"), which marketed and
delivered liquid sodium cyanide in the same geographic area as Cyanco.
Effective April 1, 2002, Cyanco purchased contracts 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.
As a result of the FMC transaction, Cyanco competes 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, quality and price. 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
All of the Company's sales occur within the western United States.
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. During 2004, Cyanco had sales to three
customers representing 39%, 36% and 12% of total sales. A loss of one or more
customers could adversely affect future sales, and may have a material adverse
effect on the Company's results of operations. 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 of customers due to mine
closures 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.
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. The Company does not currently have any
significant research and development activities, and 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 historically entered into long-term contracts for transportation of
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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, primarily driven by the cost of natural gas, which in turn impacts
the price and availability of ammonia and caustic soda. It is Cyanco's intent
wherever possible to continue to pass short-term raw material price fluctuations
on to its client base in order to maintain profitability. However, not all of
the supply relationships include such cost sharing provisions.
Employees
The Company currently employs two individuals and one part-time
consultant at its corporate offices. Cyanco has 31 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. Recently Cyanco has reviewed and increased
security measures in light of potential terrorist activities at chemical
facilities.
Cyanco and other cyanide producers, along with international mining
companies, have voluntarily begun to establish a standard of performance or
procedures for manufacturing, transportation and use of cyanide called the
International Cyanide Management Code ("ICMC"). The purpose of this code is to
provide guidelines for the best available techniques to protect the environment,
employees and the public. Cyanco anticipates that it will be a signatory to this
code when it is adopted.
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.
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.
Cyanco owns its property, consisting of approximately 1,300 acres of
land and manufacturing facilities near Winnemucca, Nevada. These facilities are
considered suitable, and currently provide sufficient capacity to supply
Cyanco's customers.
Item 3. Legal Proceedings
The Company may be subject to legal proceedings arising out of the
normal conduct of its business, which the Company believes will not materially
affect its financial position or results of operations.
3
As previously discussed, Cyanco is a non-corporate joint venture that
is owned 50 percent by Winnemucca Chemicals and 50 percent by Degussa. The Joint
Venture Agreement provides that each joint venture partner has a first right of
refusal to purchase the other partner's interest in the event the other partner
transfers its interest in the joint venture to a third party.
Effective January 1, 2003, Degussa purportedly transferred its 50%
joint venture interest in Cyanco to CyPlus Corporation (CyPlus) as part of a
reorganization of the world-wide mining chemicals business of Degussa AG, a
German corporation and the ultimate parent company of Degussa and CyPlus.
On January 5, 2004, Winnemucca Chemicals filed a complaint in Nevada
State Court, Winnemucca Chemicals, Inc. vs. Degussa Corporation and CyPlus
Corporation (the case was later removed to the United States District Court for
the District of Nevada and is currently pending as Case No. CV-N-04-364-ECR
(RAM)), related to Degussa's purported transfer of its joint venture interest to
CyPlus. Winnemucca Chemicals claims that such transfer was in violation of the
Joint Venture Agreement. The litigation seeks, among other things, to void such
transfer or, alternatively, to enforce Winnemucca Chemicals' rights under the
Joint Venture Agreement arising out of the transfer. This litigation has no
impact on the operations of Cyanco.
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 2004.
PART II
Item 5: Market for the Registrant's Common Equity 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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2003 First Quarter $2.50 $1.30
Second Quarter $4.00 $2.35
Third Quarter $3.15 $2.65
Fourth Quarter $3.39 $2.45
2004 First Quarter $5.97 $4.70
Second Quarter $5.85 $4.91
Third Quarter $6.31 $5.37
Fourth Quarter $7.49 $6.30
On March 16, 2005, the closing quotation for the common stock on NNM
was $6.88 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
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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 16, 2005 was 450, which does not include shareholders whose stock is
held through securities position listings.
(c) Dividends
During 2004, the Company declared dividends of $.05 per share for the
first quarter and $.06 per share for each of the second, third and fourth
quarters, for an aggregate of $1,157,000. The fourth quarter dividend of
$408,000 was paid in January 2005, and is included in accounts payable and
accrued expenses in the Company's consolidated balance sheet at December 31,
2004.
During 2003, the Company declared dividends of $.05 per share for each
of the second, third and fourth quarters, for an aggregate of $1,021,000. The
fourth quarter dividend of $341,000 was paid in January 2004, and is included in
accounts payable and accrued expenses in the Company's consolidated balance
sheet at December 31, 2003.
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.
(d) Securities authorized for issuance under equity compensation plans
The Company does not have any equity compensation plans that have not
been approved by its shareholders. Under the Company's 1988 Non-Qualified Stock
Option Plan (the "Option Plan"), as amended, a maximum of 1,315,130 common
shares were made available for granting of options to purchase common stock. The
Option Plan, and subsequent material amendments or additions to shares available
for granting options, were previously approved by the shareholders of the
Company. The following table presents information concerning the Option Plan.
Number of Securities
Remaining Available for
Future Issuance Under
Number of Securities Weighted-Average Equity Compensation Plans
to be Issued Upon Exercise Exercise Price of (Excluding Securities Reflected
Plan Category of Outstanding Options Outstanding Options in Column (a))
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(a) (b) (c)
Equity compensation plans
approved by security
holders 208,500 $1.34 614,207
See also Note 10 of the Notes to Consolidated Financial Statements for
further information regarding the Option Plan.
During 2004, the Company did not sell any of its equity securities.
During the fourth quarter of 2004, neither the Company nor any of its
affiliates purchased any equity securities of the Company.
5
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, 2004 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 LC, 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.
Years Ended December 31,
2004 2003 2002 2001 2000
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(in thousands except per share amounts)
Results of Operations Data (1):
Operating revenues and equity in earnings (2) $ 3,657 $ 2,960 $ 3,912 $ 2,533 $ 2,066
Income from continuing
operations 2,415 1,705 2,128 1,007 795
Income (loss) from discontinued
operations - - - (821) (4,826)
Net income (loss) 2,415 1,705 2,128 186 (4,301)
Earnings (loss) per common
share - diluted:
Income from continuing
operations $ 0.35 $ 0.24 $ 0.29 $ 0.14 $ 0.11
Income (loss) from discontinued
operations - - - (0.11) (0.66)
Net income (loss) 0.35 0.24 0.29 0.03 (0.55)
Cash dividends declared per
per common share $ 0 .23 $ 0.15 $ - $ - $ -
Balance Sheet Data:
Total Assets $ 27,761 $ 25,502 $ 24,692 $ 23,661 $ 22,590
Long-term debt - - - - -
Stockholders' equity 22,746 21,897 22,011 20,314 20,245
(1) The sale of the Company's explosives business in 2001 is accounted for as a
discontinued operation, and accordingly, amounts for 2001 and prior years 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 sheets.
(2) Includes the Company's 50% share of the operating results of Cyanco reported
using the equity method of accounting.
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The operations reported in the statements of income 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 and has determined that other factors requiring
consolidation do not exist, 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, 2004, 2003 and 2002 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.
Effective April 1, 2002, Cyanco purchased 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.
Results of Operations
2004 vs. 2003
Equity in earnings of Cyanco increased $610,000, or 24%, in 2004
compared to 2003. Cyanco revenues increased $5,725,000, or 19%, in 2004 compared
to 2003. Increased market prices of gold during 2003 and 2004 have led to
increased mining activities in the area served by Cyanco, resulting in higher
volumes of product sold. Cyanco also realized a higher price per pound for
sodium cyanide sold during 2004. Cyanco costs and expenses increased $4,505,000,
or 18%, in 2004 compared to 2003, primarily due to the higher volumes of product
sold, the increase in certain key raw material costs compared to last year, and
the $1,100,000 charge recorded by Cyanco in 2004 for the impairment of certain
intangible assets acquired from FMC. As a result, Cyanco net income before taxes
increased $1,222,000, or 24%, during 2004 compared to 2003.
Management fee revenue from Cyanco increased to $538,000 in 2004
compared to $451,000 in 2003 due to the increased revenues of Cyanco.
Investment and other income decreased to $193,000 in 2004 compared to
$302,000 in 2003. This decrease is due primarily to less interest income
realized as a result of principal reductions in notes receivable, and lower
investment earning during 2004. The decrease in investment earnings is
attributable to the Company liquidating investments with longer maturities and
greater interest rate risk, and placing funds in highly liquid, variable
interest rate investments that have a lower rate of return.
General and administrative expenses remained nearly constant,
increasing $18,000, or 3% in 2004 compared to 2003.
2003 vs. 2002
Equity in earnings of Cyanco decreased $807,000, or 24%, in 2003
compared to 2002. Cyanco revenues decreased $487,000, or 2%, in 2003 compared to
2002. The decrease in revenues was due to two factors: (1) lower volumes in 2003
resulting from market pressures and (2) certain customers decreasing purchases
during scheduled maintenance of mining facilities in 2003. These decreases in
revenues from lower volumes of product sold were partially offset by the ability
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of the Company to increase sales prices for certain customers with cost plus
pricing arrangements, and from the additional volume of sodium cyanide supplied
by Cyanco to customers under contracts acquired from FMC in April 2002. Cyanco
costs and expenses increased $1,129,000, or 5%, in 2003 compared to 2002,
primarily due to the increase in certain key raw material costs compared to
2002. As a result, Cyanco net income before taxes decreased $1,616,000 or 24%,
during 2003 compared to 2002.
Management fee revenue from Cyanco decreased to $451,000 in 2003
compared to $460,000 in 2002 due to the decreased revenues of Cyanco.
Other operating revenues decreased to $0 in 2003 compared to $136,000
in 2002. The decrease is due to elimination of rental income as a result of the
sale of the Company's office building in November 2002.
Investment and other income increased to $302,000 in 2003 compared to
$270,000 in 2002. The increase in investment earnings is attributable to higher
average balances in cash equivalents and short-term investments in 2003 compared
to 2002, and to an improvement in the rate of return on investments due to
increased diversification of investment securities in 2003.
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 Company had no sales of assets in
2003.
General and administrative expenses decreased $617,000 or 49%, in 2003
compared to 2002. This decrease is due primarily to certain significant expenses
in 2002, including $206,000 of compensation expense to two members of the board
of directors, $103,000 each for services and the directors' surrender of all
their outstanding stock options. 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 Company's explosives business. During
2003, the Company recovered $70,000 of the receivables, which was recorded as an
offset to general and administrative expenses. In addition, $62,000 of the
decrease in 2003 was due to the elimination of operating expenses and
depreciation expense associated with the office building sold in November 2002.
Liquidity and Capital Resources
At December 31, 2004, the liabilities of the Company consisted of
current liabilities and deferred income taxes. Current liabilities at December
31, 2004 were comprised of accounts payable and accrued expenses totaling
$2,430,000 and deferred income taxes payable of $2,585,000. Current liabilities
at December 31, 2004 consisted of trade accounts payable of $6,000, dividends
payable of $408,000 and accrued expenses (comprised primarily of accrued income
taxes) of $2,016,000. These current liabilities compare favorably to total
current assets of $16,964,000 at December 31, 2004. Current assets were
comprised primarily of cash and cash equivalents of $15,972,000.
The Company's current strategy is to invest cash in excess of
short-term operating needs in highly liquid, variable interest rate investments
with maturities of 90 days or less. The board of directors of the Company is
currently evaluating alternative uses for the cash of the Company, including
optimizing short-term investment results without exposing the Company to high
levels of market risk, diversification of the Company's business, further
investment in Cyanco, the payment of dividends to shareholders and other
strategies.
Net cash provided by operating activities for 2004 was $211,000
compared to net cash used in operating activities of $(439,000) for 2003. This
decrease in net cash used in operations is due primarily in the reduction of the
Company's current income tax obligations because of the availability of foreign
and other income tax credits and to the increase in deferred income taxes, which
added to the provision for income taxes but did not require a current cash
outlay. Because the Company accounts for its investment in Cyanco using the
equity method, equity in earnings of Cyanco, a non-cash item, is eliminated from
operating activities in the consolidated statements of cash flows, with cash
distributions from Cyanco included in cash flows from investing activities.
8
Net cash provided by investing activities for 2004 was $10,837,000
compared to net cash provided by investing activities of $1,714,000 for 2003. Of
the increase, $5,616,000 is attributable to the change in classification of the
Company's investments to cash and cash equivalents from short-term investments
because of the overall reduction in the maturities of the short-term investments
to 90 days or less. In 2004, the Company received $5,000,000 in distributions
from Cyanco and net collections of notes receivable of $221,000. In 2003, the
Company received $3,000,000 in distributions from Cyanco and net collections of
notes receivable of $319,000. Cash received from investing activities in 2003
was partially offset by the net purchase of short-term investments of
$(1,603,000) and the purchase of property and equipment of $(2,000).
Net cash used in financing activities for 2004 was $(1,500,000)
compared to net cash used in financing activities of $(1,463,000) for 2003. Net
cash used in financing activities in 2004 consisted of the payment of dividends
of $(1,498,000) and $(2,000) for the purchase and retirement of treasury stock.
Net cash used in financing activities in 2003 consisted of the payment of
dividends of $(680,000) and the purchase and retirement of treasury stock of
$(783,000). During 2004, the Company declared dividends of $.05 per share for
the first quarter and $.06 per share for each of the second, third and fourth
quarters. During 2003, the Company declared dividends of $.05 per share for each
of the second, third and fourth quarters. 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 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 purchased and retired 467 and
251,224 common shares in 2004 and 2003, respectively.
The Company's previously filed Canadian income tax returns for the
years 1996 through 2001 are subject to an ongoing audit by the Canada Customs
and Revenue Agency ("CCRA"). To date, CCRA has taken a different position on
certain matters than that taken by the Company. The Company, based on
consultation with its professional tax advisors in Canada, believes that, in
most instances, the facts and circumstances support the position taken by the
Company, and continues discussions with CCRA. The Company believes that amounts
accrued as a portion of income taxes payable at December 31, 2004 will be
adequate for the resolution of the audit by CCRA. However, there can be no
assurance that such costs will not ultimately 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, 2005.
The Company's operations have not been, and are not expected to be,
materially effected by inflation.
Critical Accounting Policies
Our critical accounting policies include the following:
o Investment in Cyanco
o Short-Term Investments
o Accounting for Income Taxes
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 the joint venture agreement. 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.
9
The Company's current assets at December 31, 2004 were comprised
primarily of cash and cash equivalents of $15,972,000. Investments with
scheduled maturities of three months or less are recorded as cash equivalents.
Investments with scheduled maturities of greater than three months but not
greater than one year are recorded as short-term investments. The Company had no
short-term investments meeting this criterion at December 31, 2004. 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 statements of operations.
As discussed above, the Company's previously filed Canadian income tax
returns are subject to an ongoing audit by CCRA. The Company has accrued an
amount at December 31, 2004 that it believes is adequate for the resolution of
the audit by CCRA. However, changes in the assumptions used in this estimate,
including the results of ongoing discussions with CCRA, the length of time
required to complete the audit, and other matters, may result in fluctuations of
the amount accrued.
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, decisions made by Cyanco's customers with respect to the use
or sourcing of sodium cyanide used in their operations, changes in world supply
and demand for commodities, particularly gold, political, environmental,
regulatory, economic and financial risks, major changes in technology which
could affect the mining industry as a whole or which could affect sodium cyanide
specifically, competition, and the continued availability of qualified technical
and other professional employees of the Company and Cyanco. The Company believes
it is taking appropriate actions in order to address these and other factors
previously disclosed; however, some of the risks are outside the control of the
Company, and the actions taken by the Company may not be sufficient to avoid the
adverse consequences of one or more of the risks. Consequently, the actual
results could differ materially from those indicated in the statements made.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
A significant portion of the Company's cash equivalents bear variable
interest rates that are adjusted to market conditions. Changes in market rates
will affect interest earned on these instruments, and potentially the carrying
value of the investments. 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.
Significant changes in interest rates could have an impact on the Company's
consolidated financial position and results of operations. Assuming that the
balance of cash and cash equivalents at December 31, 2004 of $15,972,000 was
outstanding during the year, a 1% change in interest rates would result in a
change of annual earnings of approximately $160,000.
The Company has no foreign operations and is currently not exposed to
material risks from changes in foreign currency.
10
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
Consolidated Financial Statements" on Page F-1 for the consolidated financial
statements of the Company included in this report, and the separate financial
statements of Cyanco included as Exhibit 99.1 to this report.
The following table presents selected unaudited quarterly financial
data for each of the four quarters in 2004 and 2003. The selected quarterly
financial data reflects, in the opinion of management, all adjustments necessary
to fairly present the results of operations for such periods. Results of any one
or more quarters are not necessarily indicative of continuing trends. All
amounts, except per share data, are stated in thousands of dollars.
Amounts in thousands 2004 2003
--------------------------------------- ---------------------------------------
(except per share data) Q1 Q2 Q3 Q4 {1} Q1 Q2 Q3 Q4
-- -- -- ------ -- -- -- --
Revenues and equity
in earnings $ 986 $ 1,120 $ 1,233 $ 318 $ 580 $ 486 $ 954 $ 940
Net income 546 620 736 513 319 260 578 548
Earnings per common
share - diluted $ 0.08 $ 0.09 $ 0.10 $ 0.08 $ 0.04 $ 0.04 $ 0.08 $ 0.08
{1} Equity in earnings of Cyanco for the fourth quarter of 2004 was
reduced by a charge of $550,000 related to the impairment of certain
intangible assets of Cyanco.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Based on their evaluations as of December 31, 2004, 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-15(e) and 15d-15(e) 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
over financial reporting 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.
11
Item 9B. Other Information
None
PART III
Item 10 Directors, Executive Officers, Promoters and Control Persons
of the Registrant.
The information required by this Item is contained in our 2005
Definitive Proxy Statement under the headings "Election of Directors" and
"Executive Officers," and is incorporated in this report by reference.
Item 11. Executive Compensation
The information required by this Item is contained in our 2005
Definitive Proxy Statement under the heading "Executive Compensation," and is
incorporated in this report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this Item is contained in our 2005
Definitive Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management," and is incorporated in this report by
reference.
Item 13. Certain Relationships and Related Transactions.
There are no transactions to report under this Item for the year ended
December 31, 2004.
Item 14. Principal Accountant Fees and Services
The information required by this Item is contained in our 2005
Definitive Proxy Statement under the heading "Ratification of Selection of
Independent Public Accountants," and is incorporated in this report by
reference.
12
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 consolidated financial statements of the
Company and the report of independent registered public
accountants required in Part II, Item 8 are included on
pages F-1 to F-19. See the Index to Consolidated
Financial Statements on page F-1.
2. The audited financial statements of Cyanco, a
significant subsidiary reported on the equity method,
and the report of independent registered public
accountants are included as financial statement
schedules to this annual report on Form 10-K as Exhibit
99.1.
No other required financial statement schedules are listed
because they are not applicable or the required information is
shown in the Company's consolidated financial statements or
notes thereto.
3. Exhibits:
3.1 Articles of Amendment and Restatement of the
Articles of Incorporation to restate the articles
of incorporation and to reflect the name change to
Nevada Chemicals, Inc. (incorporated herein by
reference from Form 10-K filed by the Company for
the fiscal year ended December 31, 2001).
3.2 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 1988 Nonqualified Stock Option Plan, as amended
through May 19, 1999 (incorporated by reference
from the Form 10-K filed by the Company for the
fiscal year ended December 31, 1999).
11 Statement re Computation of Per Share Earnings
(included in Notes to Consolidated Financial
Statements contained in this filing).
14 Nevada Chemicals, Inc. Code of Ethics and Business
Conduct (incorporated by reference from the Form
10-K filed by the Company for the fiscal year
ended December 31, 2003).
21 List of Subsidiaries (this filing).
23 Independent Auditors' Consent (this filing).
31.1 Certification of Principal Executive Officer
pursuant to Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (this filing).
31.2 Certification of Principal Financial Officer
pursuant to Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (this filing).
32.1 Certification of Principal Executive Officer
pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (this filing).
13
32.2 Certification of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (this filing).
99.1 The financial statements for the fiscal year ended
December 31, 2004 of Cyanco, a significant
subsidiary reported on the equity method, and the
report of independent registered public
accountants (this filing).
99.2 Press release dated March 17, 2005 (this filing).
(b) The Company did not file any reports on Form 8-K during the
fourth quarter of the year ended December 31, 2004.
14
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 17, 2005
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 17, 2005
- -------------------
Bryan Bagley
/S/ John T. Day President, Chief Executive Officer March 17, 2005
- ------------------ and Director (Principal Executive
John T. Day Officer)
/S/ James Solomon Director March 17, 2005
- --------------------
James Solomon
/S/ Nathan L. Wade Director March 17, 2005
- ---------------------
Nathan L. Wade
/S/ M. Garfield Cook Director March 17, 2005
- -----------------------
M. Garfield Cook
/S/ Dennis P. Gauger Chief Financial Officer and March 17, 2005
- ----------------------- Principal Accounting Officer
Dennis P. Gauger
15
NEVADA CHEMICALS, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Nevada Chemicals, Inc.
We have audited the consolidated balance sheets of Nevada Chemicals, Inc. as of
December 31, 2004 and 2003, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years ended December 31, 2004, 2003
and 2002. 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 the Standards of the Public Company
Accounting Oversight Board of the United States of America. Those standards
require that we plan and perform the audits 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, 2004 and 2003, and the results of its operations and its
cash flows for the years ended December 31, 2004, 2003 and 2002, in conformity
with accounting principles generally accepted in the United States of America.
/s/ TANNER LC
Salt Lake City, Utah
March 2, 2005
F-2
NEVADA CHEMICALS, INC.
Consolidated Balance Sheets
December 31,
ASSETS 2004 2003
-------------------- ---------------------
Current assets:
Cash and cash equivalents $ 15,972,000 $ 6,424,000
Short-term investments - 5,614,000
Receivables 76,000 94,000
Prepaid expenses 730,000 278,000
Current portion of notes receivable 186,000 221,000
-------------------- ---------------------
Total current assets 16,964,000 12,631,000
Investment in joint venture 10,547,000 12,428,000
Notes receivable - 186,000
Property and equipment, net 12,000 29,000
Other assets 238,000 228,000
-------------------- ---------------------
$ 27,761,000 $ 25,502,000
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities - accounts payable and accrued expenses $ 2,430,000 $ 1,873,000
Deferred income taxes 2,585,000 1,732,000
-------------------- ---------------------
Total liabilities 5,015,000 3,605,000
-------------------- ---------------------
Commitments and contingencies
Stockholders' equity:
Common stock; $.001 par value, 500,000,000 shares
authorized, 6,807,452 and 6,807,919 shares issued
and outstanding 7,000 7,000
Capital in excess of par value 3,510,000 3,512,000
Accumulated other comprehensive loss - (2,000)
Retained earnings 19,229,000 18,380,000
-------------------- ---------------------
Total stockholders' equity 22,746,000 21,897,000
-------------------- ---------------------
$ 27,761,000 $ 25,502,000
==================== =====================
See accompanying notes to consolidated financial statements
F-3
NEVADA CHEMICALS, INC.
Consolidated Statements of Income
Years Ended December 31,
2004 2003 2002
------------------- -------------------- -----------------
Revenues and equity in earnings:
Management fee from joint venture $ 538,000 $ 451,000 $ 460,000
Equity in earnings of joint venture 3,119,000 2,509,000 3,316,000
Other - - 136,000
------------------- -------------------- -----------------
Total 3,657,000 2,960,000 3,912,000
General and administrative expenses 657,000 639,000 1,256,000
------------------- -------------------- -----------------
Operating income 3,000,000 2,321,000 2,656,000
------------------- -------------------- -----------------
Other income:
Investment and other income 193,000 302,000 270,000
Gain on sale of assets - - 680,000
------------------- -------------------- -----------------
Total other income 193,000 302,000 950,000
------------------- -------------------- -----------------
Income before provision for income taxes 3,193,000 2,623,000 3,606,000
Provision for income taxes 778,000 918,000 1,478,000
------------------- -------------------- -----------------
Net income $ 2,415,000 $ 1,705,000 $ 2,128,000
=================== ==================== =================
Earnings per common share:
Basic $ 0.35 $ 0.25 $ 0.30
=================== ==================== =================
Diluted $ 0.35 $ 0.24 $ 0.29
=================== ==================== =================
Weighted average number of shares outstanding:
Basic 6,808,000 6,879,000 7,174,000
Diluted 6,968,000 7,016,000 7,327,000
See accompanying notes to consolidated financial statements
F-4
NEVADA CHEMICALS, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002
Capital Accumulated
Common Stock In Excess Other
----------------------- of Par Comprehensive Retained Treasury
Shares Amount Value Income (Loss) Earnings Stock Total
------------ ---------- -------------- ----------------- -------------- ------------ ---------------
Balance, January 1, 2002 7,314,260 $7,000 $5,312,000 $ - $15,568,000 $ (573,000) $20,314,000
Comprehensive net
income calculation:
Net income - - - - 2,128,000 - 2,128,000
Net unrealized gains on
investments - - - 13,000 - - 13,000
---------------
Comprehensive income - - - - - - 2,141,000
---------------
Purchase and retirement
of treasury stock (255,117) - (1,017,000) - - 573,000 (444,000)
------------ ---------- -------------- ----------------- -------------- ------------ ---------------
Balance, December 31,
2002 7,059,143 7,000 4,295,000 13,000 17,696,000 - 22,011,000
Comprehensive net
income calculation:
Net income - - - - 1,705,000 - 1,705,000
Net unrealized losses on
investments - - - (15,000) - - (15,000)
---------------
Comprehensive income - - - - - - 1,690,000
---------------
Dividends declared - - - - (1,021,000) - (1,021,000)
Purchase and retirement
of treasury stock (251,224) - (783,000) - - - (783,000)
------------ ---------- -------------- ----------------- -------------- ------------ ---------------
Balance, December 31,
2003 6,807,919 7,000 3,512,000 (2,000) 18,380,000 - 21,897,000
Comprehensive net
income calculation:
Net income - - - - 2,415,000 - 2,415,000
Net unrealized gains on
investments - - - 2,000 - - 2,000
---------------
Comprehensive income - - - - - - 2,417,000
---------------
Dividends declared - - - - (1,566,000) (1,566,000)
Purchase and retirement
of treasury stock (467) - (2,000) - - - (2,000)
------------ ---------- -------------- ----------------- -------------- ------------ ---------------
Balance, December 31,
2004 6,807,452 $7,000 $3,510,000 $ - $19,229,000 $ - $22,746,000
============ ========== ============== ================= ============== ============ ===============
See accompanying notes to consolidated financial statements
F-5
NEVADA CHEMICALS, INC.
Consolidated Statements of Cash Flows
Years Ended December 31,
2004 2003 2002
----------------- ---------------- -----------------
Cash flows from operating activities:
Net income $ 2,415,000 $ 1,705,000 $ 2,128,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 17,000 11,000 36,000
Provision for losses on assets - - 223,000
Equity in earnings of joint venture (3,119,000) (2,509,000) (3,316,000)
Gain on sale of assets - - (680,000)
Deferred income taxes 853,000 148,000 110,000
(Increase) decrease in:
Receivables 18,000 5,000 1,243,000
Prepaid expenses 248,000 1,000 8,000
Other assets (10,000) 3,000 14,000
Increase (decrease) in accounts payable and
accrued expenses (211,000) 197,000 (776,000)
----------------- ---------------- -----------------
Net cash provided by (used in) operating activities 211,000 (439,000) (1,010,000)
----------------- ---------------- -----------------
Cash flows from investing activities:
Distributions from joint venture 5,000,000 3,000,000 3,000,000
Net sales (purchases) of short-term investments 5,616,000 (1,603,000) (4,013,000)
Proceeds from sale of assets - - 1,556,000
Increase in notes receivable - - (1,000,000)
Payments on notes receivable 221,000 319,000 1,489,000
Purchase of property and equipment - (2,000) -
----------------- ---------------- -----------------
Net cash provided by investing activities 10,837,000 1,714,000 1,032,000
----------------- ---------------- -----------------
Cash flows from financing activities:
Payment of dividends (1,498,000) (680,000) -
Purchase and retirement of treasury stock (2,000) (783,000) (421,000)
----------------- ---------------- -----------------
Net cash used in financing activities (1,500,000) (1,463,000) (421,000)
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 9,548,000 (188,000) (399,000)
Cash and cash equivalents, beginning of year 6,424,000 6,612,000 7,011,000
----------------- ---------------- -----------------
Cash and cash equivalents, end of year $ 15,972,000 $ 6,424,000 $ 6,612,000
================= ================ =================
See accompanying notes to consolidated financial statements
F-6
NEVADA CHEMICALS, INC.
Notes to Consolidated Financial Statements
Note 1: Organization and Significant Accounting Policies
Organization - Nevada Chemicals, Inc. (the "Company"), through its
ownership in Cyanco Company ("Cyanco"), supplies chemicals to the gold mining
industry in the United 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.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, and its consolidated subsidiary. All
significant inter-company balances and transactions have been eliminated.
Cash and Cash Equivalents - For purposes of the consolidated statements
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. Management classified these investments at December 31, 2003 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 consolidated statements of income.
Property and Equipment - Property and equipment are recorded at cost,
less accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Expenditures for
maintenance and repairs are expensed when incurred and betterments are
capitalized. Gains and losses on the sale of property and equipment are included
in the consolidated statements of income.
Revenue Recognition - The Company's revenues and equity in earnings
consist mainly of earnings from Cyanco based on the equity method of accounting
and management fees from Cyanco. Equity in net 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 fee income from Cyanco is recognized monthly based
on the Cyanco joint venture agreement.
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 amortization, undistributed earnings
from joint ventures, which qualify under certain tax deferral treatment, and
foreign tax credits.
F-7
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Stock-Based Compensation - The Company has a stock-based employee
compensation plan, which is described more fully in Note 10. The Company
accounts for that plan 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 for the years ended December 31, 2004, 2003 and 2002, as no stock options
were granted under the plan during these years. Options outstanding at December
31, 2004 had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant, and were fully vested on the date
of grant. Because no options were granted during the periods presented, no
pro-forma presentation of the effect on net income and earnings per share
assuming the Company applied the fair value recognition provisions of Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation is presented.
Earnings Per Common Share - The computation of basic earnings per
common share is based on the weighted average number of shares outstanding
during the year.
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.
The shares used in the computation of the Company's basic and diluted
earnings per share are reconciled as follows:
Years Ended December 31
2004 2003 2002
-------------- -------------- --------------
Weighted average number of shares
outstanding - basic 6,808,000 6,879,000 7,174,000
Dilutive effect of stock options 160,000 137,000 153,000
------------- --------------- --------------
Weighted average number of shares
outstanding, assuming dilution 6,968,000 7,016,000 7,327,000
============= =============== ==============
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of cash
and cash equivalents and receivables.
The Company maintains its cash and cash equivalents in accounts that,
at times, may exceed federally insured limits or in accounts that are not
insured. The Company has not experienced material losses in such accounts, and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
F-8
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Receivables consist 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, 2004.
Cyanco's customer base consists primarily of mining companies in the
Western United States. Since most of Cyanco's 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, and may cause a material adverse
effect on Cyanco's results of operations. Although Cyanco is directly affected
by the economic health of the mining industry, management does not believe
significant credit risk exists at December 31, 2004. In addition, Cyanco has
purchase commitments with suppliers of certain raw materials covering various
time periods and containing various pricing arrangements. Management believes
alternative sources of the raw materials are available in the event that the
suppliers are unable to meet Cyanco's raw material needs.
Use of Estimates - 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. Certain of these key
estimates include income taxes payable and deferred income taxes. Differences in
these estimates and actual results could be material to the Company's financial
position and results of operations.
Recent Accounting Pronouncements - In December 2004, the Financial
Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS")
No. 123(R), Share-Based Payment, an amendment of FASB Statements No. 123 and 95.
FAS No. 123(R) replaces FAS No. 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
This statement requires companies to recognize the fair value of stock options
and other stock-based compensation to employees prospectively beginning with
fiscal periods beginning after June 15, 2005. This means that the Company will
be required to implement FAS No. 123(R) no later than the quarter beginning July
1, 2005. The Company currently measures stock-based compensation in accordance
with APB Opinion No. 25 as discussed above. The Company anticipates adopting the
modified prospective method of FAS No. 123(R) on July 1, 2005. The impact on the
Company's financial condition or results of operations will depend on the number
and terms of stock options outstanding on the date of change, as well as future
options that may be granted.
In December 2004, the FASB issued FAS 153, Exchanges of Nonmonetary
Assets. This Statement amends the guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions. That statement is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
F-9
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The Company has not historically entered into a significant
level of nonmonetary transactions, and therefore does not expect that this
standard will materially impact is financial position or results of operations.
In March 2004, the FASB approved the consensus reached on the EITF
(Emerging Issues Task Force) Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The objective of EITF
03-1 is to provide guidance for identifying impaired investments. EITF 03-1 also
provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In October 2004, the FASB delayed the recognition and
measurement provisions of EITF 03-1 until implementation guidance is issued,
which is expected to be in early 2005. The disclosure requirements are effective
for annual periods ending after June 15, 2004, and remain in effect. The Company
has adopted EITF 03-1 disclosure requirements, and does not believe the impact
is material to the Company's overall financial position or results of
operations.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN
46), which was issued in January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity ("VIE").
As of the effective date of FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before February 1, 2003 to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities. Public companies must apply
either FIN 46 or FIN 46R immediately to entities created after January 31, 2003
and no later than the end of the first reporting period that ends after March
15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated
financial position, results of operations or cash flows.
Reclassifications - Certain amounts in the prior years' financial
statements have been reclassified to conform with the current year presentation.
F-10
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Note 2: Short-Term Investments
The Company had no short-term investments at December 31, 2004. All
short-term investments at December 31, 2003 had scheduled maturities within one
year. Net realized losses on short-term investments were $63,000 and $44,000 for
the years ended December 31, 2004 and 2003, respectively. No realized gains or
losses on short-term investments were recorded in 2002.
Short-term investments at December 31, 2003 were comprised of the
following:
Cost Market Value
------------------- ---------------------
Certificates of deposit $ 191,000 $ 189,000
Managed bond funds 2,624,000 2,624,000
U.S. government securities 697,000 697,000
Corporate paper 1,503,000 1,503,000
Other 601,000 601,000
------------------- ---------------------
5,616,000 5,614,000
Net unrealized gains (losses) (2,000) -
------------------- ---------------------
$ 5,614,000 $ 5,614,000
=================== =====================
Note 3: Detail of Certain Balance Sheet Accounts
December 31
2004 2003
------------------ -----------------
Receivables:
Related party (Note 9) $ 44,000 $ 53,000
Accrued interest receivable 32,000 41,000
----------------- ------------------
$ 76,000 $ 94,000
================= ==================
Accounts payable and accrued expenses:
Accounts payable - trade $ 6,000 $ 15,000
Income taxes payable (Note 14) 2,000,000 1,481,000
Dividends payable 408,000 341,000
Other accrued expenses 16,000 36,000
----------------- ------------------
$ 2,430,000 $ 1,873,000
================= ==================
F-11
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Note 4: Notes Receivable
Notes receivable are comprised of the following:
December 31
2004 2003
-------------------------------
Unsecured note receivable due July 2005
with interest at 8.5% $ 186,000 $ 386,000
Other - 21,000
-------------------------------
$ 186,000 $ 407,000
Less current portion 186,000 221,000
-------------------------------
Long-term portion $ - $ 186,000
===============================
The unsecured note receivable resulted from the Company's sale of its
explosives business in November 2001. In connection with that sale, any
receivables, less an agreed upon reserve of $153,000, that had not been
collected within 240 days of the closing date (November 15, 2001) were to be
offset against the note receivable in the reverse order of maturity. During
2002, the note receivable from UEE was reduced by $214,000 for net uncollected
notes and accounts receivable assigned back to the Company by UEE. Bad debt
expense of $214,000 was included in general and administrative expenses for
2002. During 2004 and 2003, as a result of the Company's collection efforts, the
Company collected $20,000 and $70,000 of the receivables, which was recorded as
a reduction of general and administrative expenses.
Note 5: Property and Equipment
Property and equipment consist of the following:
December 31
2004 2003
------------------- ---------------------
Office furniture and fixtures $ 22,000 $ 22,000
Vehicles 34,000 34,000
------------------- ---------------------
56,000 56,000
Less accumulated depreciation (44,000) (27,000)
------------------- ---------------------
$ 12,000 $ 29,000
=================== =====================
F-12
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Note 6: Dividends
During 2004, the Company declared dividends of $.05 per share for the
first quarter and $.06 per share for each of the second, third and fourth
quarters, for an aggregate of $1,566,000. The fourth quarter dividend of
$409,000 was paid in January 2005, and is included in accounts payable and
accrued expenses at December 31, 2004.
During 2003, the Company declared dividends of $.05 per share for
each of the second, third and fourth quarters, for an aggregate of $1,021,000.
The fourth quarter dividend of $341,000 was paid in January 2004, and is
included in accounts payable and accrued expenses at December 31, 2003.
Note 7: Income Taxes
The current provision for income taxes primarily represents U.S.
federal 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
2004 2003 2002
--------------- ------------------ ------------
Federal provision at statutory rate $ (1,086,000) $ (1,023,000) $ (1,406,000)
Life insurance and meals (8,000) (4,000) 1,000
Tax exempt interest income 32,000 33,000 -
Change in valuation allowance 270,000 12,000 -
Other 14,000 64,000 (73,000)
--------------- --------------- ---------------
$ (778,000) $ (918,000) $ (1,478,000)
=============== =============== ===============
The total income tax benefit (provision) consists of the following:
Years Ended December 31
2004 2003 2002
--------------- --------------- --------------
Current $ 75,000 $ (770,000) $ (1,368,000)
Deferred (853,000) (148,000) (110,000)
--------------- --------------- ---------------
$ (778,000) $ (918,000) $ (1,478,000)
=============== =============== ===============
F-13
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Deferred tax assets (liabilities) are comprised of the following:
December 31
2004 2003
--------------- -------------
Deferred tax assets:
Foreign tax and other credit carryforwards $ 1,343,000 $ 3,084,000
Other 10,000 10,000
Less valuation allowance (1,343,000) (1,613,000)
-------------- --------------
10,000 1,481,000
Deferred tax liabilities - depreciation and
amortization (2,595,000) (3,213,000)
-------------- --------------
$(2,585,000) $(1,732,000)
============== ==============
The Company has provided a valuation allowance for deferred tax assets
attributed to foreign tax and other credit carryforwards because of uncertainty
regarding their realization.
Note 8: Supplemental Consolidated Statements of Cash Flows Information
Amounts paid for income taxes were $153,000, $580,000, and $470,000 in
2004, 2003 and 2002, respectively. The Company paid no interest in 2004, 2003
and 2002.
During 2004:
o The Company declared a dividend in December, which was paid in
January 2005, increasing accounts payable and accrued expenses and
reducing retained earnings by $409,000.
o The Company reclassified prepaid income taxes, increasing prepaid
expenses and increasing accounts payable and accrued expenses by
$700,000.
During 2003:
o The Company declared a dividend in December, which was paid in
January 2004, increasing accounts payable and accrued expenses and
reducing retained earnings by $341,000.
During 2002:
o The Company retired 102,391 shares of treasury stock acquired in
2001 with a cost of $573,000.
F-14
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
o A note receivable from an officer of $23,000 was repaid by receipt
by the Company of 5,709 shares of the Company's common stock
valued at $23,000, which stock was subsequently retired.
Note 9: Related Party Transactions
The Company performs certain management functions for Cyanco for which
it receives a fee. Management fees totaled $538,000, $451,000, and $460,000 for
2004, 2003 and 2002, respectively.
At December 31, 2004 and 2003, the Company had receivables of $44,000
and $53,000, respectively, due from Cyanco.
During 2002, the Company paid $103,000 each to two board members for
services and the directors' surrender of all their outstanding stock options.
During 2002, a note receivable from an officer of $23,000 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.
Note 10: Non-Qualified Stock Option Plan
Under the 1988 Non-Qualified Stock Option Plan (the Option Plan), as
amended, 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-15
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Information regarding the Option Plan is summarized below:
Number of Option Price
Options per Share
----------------- ------------------
Outstanding at January 1, 2002 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
Granted - -
Exercised - -
Expired / forfeited (10,000) 2.31
----------------- ------------------
Outstanding at December 31, 2003 208,500 1.21 - 1.44
Granted - -
Exercised - -
Expired / forfeited - -
----------------- ------------------
Outstanding at December 31, 2004 208,500 $1.21 - $1.44
================= ==================
Options exercisable and available for future grant are as follows:
Years Ended December 31
2004 2003 2002
------------------------------------------
Options exercisable 208,500 208,500 218,500
Options available for grant 614,207 614,207 604,207
The following table summarizes information about stock options
outstanding at December 31, 2004:
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Range of December 31, Contractual Exercise At December 31, Exercise
Exercise Prices 2004 Life (Years) Price 2004 Price
- ------------------- ------------------ ------------------ ------------------ ------------------- ------------------
$1.44 118,500 .59 $1.44 118,500 $1.44
$1.21 90,000 1.89 $1.21 90,000 $1.21
F-16
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Note 11: Significant Unconsolidated Affiliate
The Company accounts for its 50% ownership interest in Cyanco using
the equity method of accounting. Summarized financial information of Cyanco, a
significant unconsolidated affiliate of the Company, is as follows:
Years Ended December 31
2004 2003 2002
-------------------------------------------
Results for the year:
Gross revenues $ 35,842,000 $ 30,117,000 $ 30,632,000
Gross profit 9,935,000 7,221,000 8,757,000
Net income 6,238,000 5,016,000 6,632,000
Company's 50% equity in earnings $ 3,119,000 $ 2,509,000 $ 3,316,000
Year-end financial position:
Current assets $ 6,575,000 $ 7,244,000 $ 6,613,000
Non-current assets 15,609,000 18,782,000 20,133,000
Current liabilities 3,267,000 3,100,000 2,525,000
Non-current liabilities - 247,000 558,000
Note 12: Profit Sharing Plan
The Company has a defined contribution profit sharing 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 was $6,000, $5,000,
and $4,000 for 2004, 2003 and 2002, respectively.
Note 13: Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash
equivalents, receivables, notes receivable and accounts payable. The carrying
amount of cash and cash equivalents, receivables and accounts payable
approximates fair value because of the short-term nature of these items. The
carrying amount of notes receivable approximates fair value as the individual
borrowings bear interest which approximate market rates for similar instruments.
F-17
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Note 14: Commitments and Contingencies
Foreign Income Taxes - The Company's previously filed Canadian income
tax returns for the years 1995 through 2001 are subject to an ongoing audit by
the Canada Customs and Revenue Agency ("CCRA"). To date, CCRA has taken a
different position on certain matters than that taken by the Company. The
Company, based on consultation with its professional tax advisors in Canada,
believes that, in most instances, the facts and circumstances support the
position taken by the Company, and continues discussions with CCRA. The Company
believes that amounts accrued as a portion of income taxes payable at December
31, 2004 will be adequate for the resolution of the audit by CCRA. However,
there can be no assurance that such costs will not ultimately exceed the current
estimate.
Litigation - The Company may be subject to legal proceedings arising
out of the normal conduct of its business, which the Company believes will not
materially affect its financial position or results of operations.
Cyanco is a non-corporate joint venture owned 50 percent by Winnemucca
Chemicals and 50 percent by Degussa Corporation (Degussa). The Joint Venture
Agreement provides that each joint venture partner has a first right of refusal
to purchase the other partner's interest in the event the other partner
transfers its interest in the joint venture to a third party.
Effective January 1, 2003, Degussa purportedly transferred its 50%
joint venture interest in Cyanco to CyPlus Corporation (CyPlus) as part of a
reorganization of the world-wide mining chemicals business of Degussa AG, a
German corporation and the ultimate parent company of Degussa and CyPlus.
On January 5, 2004, Winnemucca Chemicals filed a complaint in Nevada
State Court (the case was later removed to the United States District Court for
the District of Nevada) related to Degussa's purported transfer of its joint
venture interest to CyPlus. Winnemucca Chemicals claims that such transfer was
in violation of the Joint Venture Agreement. The litigation seeks, among other
things, to void such transfer or, alternatively, to enforce Winnemucca
Chemicals' rights under the Joint Venture Agreement arising out of the transfer.
This litigation has no impact on the operations of the Cyanco.
Note 15: Gain on Sale of Assets
During 2002, the Company sold its office building for approximately
$1,170,000 and realized a gain of $220,000, which gain is included in gain on
sale of assets in the accompanying consolidated statements of income.
F-18
Nevada Chemicals, Inc.
Notes to Consolidated Financial Statement
(Continued)
Also in 2002, the Company and its joint venture partner completed the
sale of the 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 $460,000, which gain is included in gain on sale of assets in the
accompanying consolidated statements of operations.
Note 16: Significant Fourth Quarter Adjustments
During the fourth quarter of 2004, Cyanco completed an impairment
analysis of certain of its intangible assets using projected discounted cash
flows from the intangible assets. Based on the impairment analysis, Cyanco
concluded that the intangible assets were impaired. Accordingly, Cyanco
recognized a non-cash impairment expense of $1,100,000 in the fourth quarter of
2004. The Company's share of this impairment expense of $550,000 reduced the
Company's reported equity in earnings of joint venture in the fourth quarter of
2004.
During the fourth quarter of 2004, the Company reduced the estimated
income tax rate used for 2004 financial reporting purposes from approximately
35% used during the first three quarters of 2004 to an estimated annual rate of
24%, resulting in an income tax benefit for the quarter of $252,000. The
reduction in the 2004 income tax rate resulted principally from the availability
of foreign tax credits during 2004.
F-19