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, 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 (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 21, 2004 was 6,807,544.
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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, 2004
and December 31, 2003 1
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2004 and March 31, 2003 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2004 and March 31, 2003 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosure About Market Risk 8
Item 4. Controls and Procedures 9
Part II Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchases
of Equity Securities 9
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEVADA CHEMICALS, INC.
Condensed Consolidated Balance Sheets
March 31, 2004
ASSETS (Unaudited) December 31, 2003
Current assets:
Cash and cash equivalents $ 10,035,000 $ 6,424,000
Short-term investments 2,645,000 5,614,000
Receivables 91,000 94,000
Prepaid expenses 42,000 40,000
Current portion of notes receivable 200,000 221,000
--------------- -----------------
Total current assets 13,013,000 12,393,000
Investment in joint venture 12,292,000 12,428,000
Notes receivable 186,000 186,000
Property and equipment, net 26,000 29,000
Other assets 228,000 228,000
--------------- -----------------
$ 25,745,000 $ 25,264,000
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities - accounts payable and accrued expenses $ 1,925,000 $ 1,635,000
Deferred income taxes 1,732,000 1,732,000
--------------- -----------------
Total liabilities 3,657,000 3,367,000
--------------- -----------------
Stockholders' equity:
Common stock 7,000 7,000
Capital in excess of par value 3,510,000 3,512,000
Accumulated other comprehensive income (loss) (14,000) (2,000)
Retained earnings 18,585,000 18,380,000
--------------- -----------------
Total stockholders' equity 22,088,000 21,897,000
--------------- -----------------
$ 25,745,000 $ 25,264,000
=============== =================
See accompanying notes to condensed consolidated financial statements
1
NEVADA CHEMICALS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31
2004 2003
--------------- -----------------
Revenues and equity in earnings:
Management fee from joint venture $ 122,000 $ 96,000
Equity in earnings of joint venture 864,000 484,000
--------------- -----------------
Total 986,000 580,000
General and administrative expenses 195,000 179,000
--------------- -----------------
Operating income 791,000 401,000
Investment and other income 49,000 90,000
--------------- -----------------
Income before provision for income taxes 840,000 491,000
Provision for income taxes 294,000 172,000
--------------- -----------------
Net income $ 546,000 $ 319,000
=============== =================
Earnings per common share:
Basic $ 0.08 $ 0.05
=============== =================
Diluted $ 0.08 $ 0.04
=============== =================
Weighted average number of shares outstanding:
Basic 6,808,000 7,059,000
Diluted 6,963,000 7,186,000
See accompanying notes to condensed consolidated financial statements
2
NEVADA CHEMICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31
2004 2003
--------------- -----------------
Cash flows from operating activities:
Net income $ 546,000 $ 319,000
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation expense 3,000 3,000
Equity in earnings of joint venture (864,000) (484,000)
Changes in operating assets and liabilities:
Receivables 3,000 6,000
Prepaid expenses (2,000) (1,000)
Other assets - (1,000)
Accounts payable and accrued expenses 290,000 (59,000)
--------------- -----------------
Net cash used in operating activities (24,000) (217,000)
--------------- -----------------
Cash flows from investing activities:
Distributions from joint venture 1,000,000 1,000,000
Net sales of short-term investments 2,957,000 1,300,000
Payments of notes receivable 21,000 30,000
--------------- -----------------
Net cash provided by investing activities 3,978,000 2,330,000
--------------- -----------------
Cash flows from financing activities:
Payment of dividends (341,000) -
Purchase and retirement of treasury stock (2,000) (4,000)
--------------- -----------------
Net cash used in financing activities (343,000) (4,000)
--------------- -----------------
Net increase in cash 3,611,000 2,109,000
Cash and cash equivalents, beginning of period 6,424,000 6,612,000
--------------- -----------------
Cash and cash equivalents, end of period $ 10,035,000 $ 8,721,000
=============== =================
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, 2004 and March 31, 2003
included herein is unaudited, and the balance sheet as of December 31, 2003 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,
2004 are not necessarily indicative of the results to be expected for the full
year.
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year presentation.
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, 2004 are classified by management as
available for sale. The short-term investments 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 income.
Earnings per Common Share - The computation of basic earnings per
common share is based on the weighted average number of shares outstanding
during the period. The computation of diluted earnings per common share is based
on the weighted average number of shares outstanding during the period 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 period.
The shares used in the computation of the Company's basic and diluted
earnings per share are reconciled as follows:
Three Months Ended March 31
-------------------------------
2004 2003
---- ----
Weighted average number of shares
outstanding - basic 6,808,000 7,059,000
Dilutive effect of stock options 155,000 127,000
------------------------------
Weighted average number of shares
outstanding - diluted 6,963,000 7,186,000
==============================
4
Stock-Based Compensation - For stock options granted to employees, the
Company utilizes the footnote disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 encourages entities to adopt a fair-value based method of
accounting for stock options or similar equity instruments. However, it also
allows an entity to continue measuring compensation cost for stock-based
compensation using the intrinsic-value method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. The Company has elected to continue to apply the provisions of APB 25
and provide pro forma footnote disclosures required by SFAS No. 123 as
applicable. The pro forma footnote disclosures required by SFAS No. 123 were not
applicable during the periods presented as no options were granted or vested
during the periods presented.
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
-----------------------------
2004 2003
---- ----
Revenues $ 8,120,000 $ 6,453,000
Costs and expenses 6,392,000 5,487,000
Net income before taxes 1,728,000 967,000
Company's equity in earnings 864,000 484,000
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, 2004 and March 31, 2003,
the Company purchased and retired 375 and 1,224 shares of its common with a
total cost basis to the Company of $2,000 and $4,000, respectively.
NOTE 5. DIVIDENDS
In March 2004, the Company declared a cash dividend of $.05 per share
on a total of 6,807,544 outstanding shares of record as of March 25, 2004,
payable on April 8, 2004. As of March 31, 2004, dividends payable of
approximately $340,000 were included in accounts payable and accrued expenses in
the accompanying condensed consolidated balance sheet.
5
In January 2004, the Company paid dividends of approximately $341,000
which were declared in December 2003.
NOTE 6. FOREIGN INCOME TAXES
The Company has retained all contingent liabilities relating to an
ongoing audit by the Canada Customs and Revenue Agency ("CCRA") of previously
filed income tax returns in Canada. 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 the
facts and circumstances generally support the position taken by the Company, and
continues discussions and negotiations with CCRA. The Company believes that
amounts accrued and included in income taxes payable at March 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.
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, and corporate overhead, costs and expenses. Cyanco produces and
markets liquid sodium cyanide from its Winnemucca, Nevada plant for use in the
gold mining industry. 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
three-month periods ended March 31, 2004 and 2003 is presented in Note 3 to the
Company's condensed consolidated financial statements.
Results of Operations
Three Months Ended March 31, 2004
- ---------------------------------
Equity in earnings of Cyanco increased $380,000, or 79%, in the three
months ended March 31, 2004 compared to the three months ended March 31, 2003.
Cyanco revenues increased $1,667,000, or 26%, in the three months ended March
31, 2004 compared to the three months ended March 31, 2003. Increased market
prices of gold during the first quarter of 2004 resulted in 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 the first quarter of 2004. Cyanco's costs and expenses increased
$905,000, or 16%, in the three months ended March 31, 2004 compared to the three
months ended March 31, 2003. The increase in operating costs resulted primarily
from the increase in variable manufacturing costs due to a greater volume of
sodium cyanide sold and a small increase in the cost of raw materials. As a
result, Cyanco's net income before taxes (on a 100% basis) increased $761,000,
or 79%, during the three months ended March 31, 2004 compared to the three
months ended March 31, 2003.
6
Management fee income from Cyanco increased $26,000, or 27%, in the
three months ended March 31, 2004 compared to the three months ended March 31,
2003 due to the increase in Cyanco's revenues discussed above, upon which the
management fee is computed.
Investment and other income decreased $41,000, or 46%, in the three
months ended March 31, 2004 compared to the three months ended March 31, 2003.
This decrease is due primarily to less interest income realized as a result of
principal reductions in notes receivable during calendar year 2003, and lower
investment earnings during the first three months of 2004.
General and administrative expenses increased $16,000, or 9%, in the
three months ended March 31, 2004 compared to the three months ended March 31,
2003. This increase is due primarily to increases in professional fees in 2004.
Liquidity and Capital Resources
At March 31, 2004, the liabilities of the Company consisted of current
liabilities and deferred income taxes. Current liabilities at March 31, 2004
consisted of accounts payable and accrued expenses totaling $1,925,000,
including dividends payable of $340,000, with the remainder comprised primarily
of accrued income taxes. These current liabilities compare favorably to total
current assets of $13,013,000 as of March 31, 2004. Current assets are comprised
primarily of cash and cash equivalents of $10,035,000 and short-term investments
that are available for sale of $2,645,000.
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 continues to evaluate
alternative uses for the cash of the Company, including the payment of dividends
to stockholders, optimizing short-term investment results, diversification of
the Company's business, further investment in Cyanco, and other strategies.
Net cash used in operating activities for the three months ended March
31, 2004 was $(24,000) compared to net cash used in operating activities of
$(217,000) for the three months ended March 31, 2003. The improvement in cash
used in operating activities during the first three months of 2004 is primarily
due to the reduction of accounts payable and accrued expenses of $59,000 in the
first three months of 2003 compared to an increase in accounts payable and
accrued expenses of $290,000 in the first three months of 2004.
Net cash provided by investing activities for the three months ended
March 31, 2004 was $3,978,000 compared to net cash provided by investing
activities of $2,330,000 for the three months ended March 31, 2003. During the
first three months of 2004, the Company received a $1,000,000 distribution from
Cyanco, $2,957,000 net proceeds from the sale of short-term investments and
$21,000 from the collection of notes receivable. By comparison, during the first
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.
Net cash used in financing activities for the three months ended March
31, 2004 was $(343,000) comprised of dividends paid of $(341,000) and purchase
and retirement of shares of the Company's common stock of $(2,000). Net cash
used in financing activities for the three months ended March 31, 2003 was
$(4,000) to purchase and retire shares of the Company's common stock.
7
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, 2004 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 and
energy-related raw materials such as natural gas, ammonia, caustic soda and
electricity; Cyanco's ability to successfully compete in its marketplace;
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; 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 and
potentially the market value of the principal of these instruments. 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
may have a material impact on the Company's investment income, but not on the
Company's consolidated results of operations.
8
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Based on their evaluations as of March 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchase of Equity
Securities
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. Through March 31, 2004, the
Company purchased 399,596 common shares under this plan, including 375 shares
purchased during the quarter ended March 31, 2004.
Information concerning the 2004 stock repurchases is set forth below.
(d) Maximum Number
(c) Total Number of (or Approximate
Shares (or Units) Dollar Value) of
Purchased as Part Shares (or Units)
of Publicly that May Yet Be
(a) Total Number of (b) Average Price Announced Purchased Under
Shares (or Units) Paid per Share Plans or the Plans or
Period Purchased (or Unit) Programs Programs
Month #1: January 1
through 31, 2004 none -- -- 100,779
Month #2: February 1
through 29, 2004 110 $5.90 110 100,669
Month #3: March 1
through 31, 2004 265 $5.90 265 100,404
9
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
Exhibit 31.1 - Certification of principal executive officer
pursuant to Rule 13a -14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of principal financial officer
pursuant to Rule 13a -14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 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
Exhibit 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
Exhibit 99.1 - Press Release Dated April 21, 2004
2. Reports on Form 8-K
None
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
NEVADA CHEMICALS, INC.
-----------------------
(Registrant)
April 21, 2004 /s/ John T. Day
- ------------------ ----------------
(Date) John T. Day, President (principal
executive officer)
April 21, 2004 /s/ Dennis P. Gauger
- -------------- ---------------------
(Date) Dennis P. Gauger,
Chief Financial Officer (principal
financial and accounting officer)
11