Item 1. Business
General
Nevada Chemicals, Inc. (the "Company") (formerly Mining Services International Corporation) is a Utah corporation organized in 1979. Through November 15, 2001, the Company was engaged in two businesses, the development, manufacture and sale of bulk explosives and related support and services, and the manufacture and distribution of sodium cyanide for the extraction of precious metals. On November 15, 2001, the Company completed 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 retained its fifty percent interest in Cyanco Company ("Cyanco"), a non-corporate joint venture engaged in the manufacture and sale of liquid sodium cyanide, which is held through the Company's wholly owned subsidiary, Winnemucca Chemicals, Inc. ("Winnemucca Chemicals"). The Company also retained its interest in a joint venture to manufacture and supply explosives in West Africa. The joint venture operates as a Ghanaian company called West Coast Explosives Limited ("WCE"). WCE is wholly owned by West Africa Chemicals Limited ("WAC"), a Mauritius company owned 50% by the Company. The joint venture has operated at a net loss from its inception in 1997, and the Company has written off its investment in WAC due to the unlikelihood of realizing profits in this market where the supply of explosives now exceeds demand. The Company and its joint venture partner in WAC are currently seeking a buyer for the assets of the joint venture, and it is expected that the proceeds from the sale of such assets will exceed the liabilities of the joint venture.
Following the sale of the Explosives Business, the primary business of the Company is based on the Company's Cyanco joint venture. In addition, the Company receives income from the lease of its office building to a subsidiary of UEE, principal and interest on short and long term notes receivable from UEE and its subsidiaries, and short-term investment income on the proceeds from the sale of the Explosives Business until such time as the Company's Board of Directors determines alternate uses of such proceeds. The following discussion focuses on the current business activities of the Company. For a discussion of the Company's discontinued Explosives Business see the Company's annual report on Form 10-K for the year ended December 31, 2000.
Cyanco Joint Venture Interest
Cyanco is a 50/50 joint venture between the Company and Degussa Corporation, a wholly owned subsidiary of Degussa A.G., a German company ("Degussa"), that produces and markets liquid sodium cyanide from its Winnemucca, Nevada plant. Cyanco services the Western U.S. gold mining area, primarily located in Nevada, selling sodium cyanide for use in leaching precious metals in mining operations. There are principally two types of products marketed to gold mines for the leaching process: (1) a solid "briquette" sodium cyanide product which requires handling and physical dissolution before use and (2) the type provided by Cyanco, a liquid sodium cyanide which provides for greater personal and environmental safety and comes to the mining customer ready to use. The manufacturing cost for the liquid product is substantially lower than for solid product when drying, handling, re-dissolution and chemical adjustment costs at the mine site are taken into account.
Since the liquid product is shipped by truck from the plant to the mine site in a solution of about 30% sodium cyanide and 70% water, freight costs for liquid sodium cyanide are significant and shipping must be managed carefully, both in terms of cost and safety and environmental protection. Cyanco has a five year contract for this service with an Omaha, Nebraska company which utilizes dedicated equipment specifically designed for Cyanco.
With the 1998 addition of a second production unit, Cyanco has an annual liquid sodium cyanide production capacity of approximately 85 million pounds. The Company has primary responsibility for Cyanco's production and delivery, and Degussa has primary responsibility for the joint venture's marketing and sales activities.
Since 1998, worldwide gold prices have continued to be depressed, ranging between $250.00 and $320.00 per ounce. As of March 15, 2002, the spot trading price for an ounce of gold was approximately $290. If gold prices do not further deteriorate, gold production in Cyanco's market area should remain relatively stable for the foreseeable future.
Competition and Purchase of FMC Sodium Cyanide Business
Cyanco has represented one of three sources of delivered liquid 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"). There continue to be opportunities in the worldwide market for liquid sodium cyanide, although the worldwide supply of dry product currently exceeds demand. Domestically, Cyanco has competed with DuPont and also with FMC Corporation ("FMC"), which has marketed and delivered liquid sodium cyanide in the same geographic area as Cyanco.
In March 2002 Cyanco announced that it had reached agreement with FMC to purchase the commercial and certain distribution assets related to FMC's sodium cyanide business. As a result of this transaction, FMC will exit the business, ending its 12-year role as a supplier of sodium cyanide to the Nevada gold mining industry. Cyanco will assume FMC's on-going contractual obligations under its existing sodium cyanide contracts and is expected to begin supplying these customers on April 1, 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. In addition to the transferred contracts, Cyanco purchased certain equipment including distribution tank trailers and storage tanks.
As a result of the FMC transaction, Cyanco will compete primarily with DuPont to supply sodium cyanide to the Nevada gold mining industry. The Company believes that the important competitive factors in the sodium cyanide market are location, service and quality. However, as gold prices have declined and Cyanco's innovations in the marketplace have taken effect, the price of sodium cyanide has become a significant competitive factor. Cyanco has had to meet competitive demands and has been able to achieve results by being creative and service-oriented.
Dependence on Customers
Since most of Cyanco's cyanide customers are large mining companies, the number of companies it services is relatively small compared to those of a wholesale distribution or retail business. A loss of one or more customers could adversely affect future sales. Such a loss can occur either from the customer switching to another source or from the customer electing to close or suspend a mining operation. However, such losses are not expected to occur, since these customers have lower than average operating costs to produce gold, which should allow them to continue producing gold in the present market.
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. Although the Company has historically conducted research on product improvement and development, the Company's research and development expenditures in each of the past three years were primarily related to the discontinued Explosives Business. However, the Company developed a patent issued during 2000 for the
production and transportation of a "wet-cake" cyanide product which may be used by Cyanco in expanding its freight logical market. There has not been any customer-sponsored research and development.
Raw Materials
Cyanco has historically not experienced significant difficulty in obtaining necessary raw materials used in the manufacture of its products. In the present environment, raw material availability could be impacted for short periods of time, but Cyanco does not expect significant difficulty in obtaining raw materials for the longer term. Cyanco must compete with other markets for a major portion of its raw materials (ammonia, caustic soda, natural gas and electricity). The supplies of these products have been adequate in past years to meet the needs of industrial as well as agricultural users. Cyanco has entered into long-term contracts for transportation of natural gas to the Cyanco facility. Cyanco has not had significant difficulty in obtaining the other necessary raw materials since there are alternative sources of supply. It is Cyanco's intent wherever possible to pass short-term raw material price fluctuations on to its client base in order to maintain profitability.
Employees
The Company currently employs two individuals and one part-time consultant at its corporate offices. Cyanco has 28 employees at its plant in Winnemucca, Nevada and the Company's WAC joint venture has one local employee. The Company and the joint ventures in which it participates 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 operations are designed such that no liquid discharge is created during the manufacture of its product. Compliance with such laws, rules and regulations on a ongoing basis is not expected to require additional material capital expenditures in the short-term.
Other Governmental Regulations
Cyanco is subject to various governmental authorities with respect to transportation and handling of hazardous materials. In addition, it is subject to OSHA's Process Safety Management program at the Winnemucca plant. Cyanco has implemented compliance programs, which the Company believes addresses the program objectives and guidelines. Cyanco is regularly inspected by Nevada's regulatory agencies to monitor compliance to Nevada's Chemical Accident Prevention Program (CAPP).
Item 2.
Item 2. Properties
The Company's fully furnished corporate facilities are currently leased to UEE for a period of one year from the sale of the Explosives Business on November 15, 2001. These facilities were constructed in 1997 and are located at 8805 South Sandy Parkway, Sandy, Utah. They consist of 1.8 acres, an office building and adjacent research and laboratory facilities, constructed by the Company at a cost of approximately $1.2 million.
The Company currently leases office facilities located at 9149 South Monroe Plaza Way, Sandy, Utah under a one year lease agreement, with an option to renew for one additional year.
The property and facilities of Cyanco are deemed adequate and suitable for its operations.
Item 3.
Item 3. Legal Proceedings
There are no legal proceedings against the Company other than those of a routine and immaterial nature.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
On November 8, 2001 a special meeting of shareholders was held to consider the approval of the sale of the Explosives Business and to amend the Company's articles of incorporation to change the Company's name to "Nevada Chemicals, Inc." immediately following the consummation of the sale. The results of the shareholder vote were as follows:
On December 28, 2001 the Annual Meeting of Shareholders was held. The shareholders voted, either in person or by proxy, to elect five directors to serve until the next Annual Meeting of Shareholders or until their successors shall be elected and duly qualified and to ratify the appointment of Tanner + Co. to be the Company's independent public accountants for the year ending December 31, 2001. The five directors nominated were Nathan L. Wade, Dr. John T. Day, James E. Solomon, E. Bryan Bagley, and Frances M. Flood. The results of the shareholder vote were as follows:
PART II
Item 5:
Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters
(a) Price Range of Common Stock. The common stock of the Company is currently listed on the Nasdaq National Market ("NNM"), under the symbol "NCEM." The following table sets forth the approximate range of high and low closing prices for the common stock of the Company during the periods indicated. The quotations presented reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions in the common stock.
Closing Prices ----------------------
High Low ---- ---
2001 First Quarter $2.88 $1.34 Second Quarter $1.75 $1.00 Third Quarter $1.40 $ .90 Fourth Quarter $2.08 $1.10
2000 First Quarter $3.687 $2.25 Second Quarter $2.75 $1.625 Third Quarter $2.75 $1.375 Fourth Quarter $2.25 $1.187
On March 15, 2002, the closing quotation for the common stock on NNM was $1.96. As reflected by the high and low prices on the foregoing table, the trading price of the Common Stock of the Company can be volatile with dramatic changes over short periods. The trading price may reflect imbalances in the supply and demand for shares of the Company, market reaction to perceived changes in the industry in which the Company sells products and services, 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 15, 2002 was 570, which does not include shareholders whose stock is held through securities position listings.
(c) Dividends. The Company paid no dividends for the years ended December 31, 2001 and 2000. The Company paid cash dividends of $180,986 or $.025 per share on December 15, 1999. Payment of dividends is within the discretion of the Company's Board of Directors and there are no material restrictions that limit the ability to pay dividends on the Common Stock of the Company. Future dividend payments will be at the discretion of the Company's Board of Directors.
Item 6.
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, 2001 were derived from audited financial statements of the Company and its consolidated subsidiaries. The financial statements as of and for each of the fiscal years in the five year period were audited by Tanner + Co., independent public accountants. The data set forth below should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related Notes thereto.
(1) The sale of the Explosives Business is accounted for as a discontinued operation, and accordingly, amounts in the financial statements and related notes for all periods have been restated to reflect discontinued operations accounting, including offsetting long-term debt and other liabilities assumed in the sale against the net assets sold on the consolidated balance sheet.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
On November 8, 2001, the shareholders of the Company approved the sale of the Explosives Business pursuant to an Asset Purchase Agreement between the Company and UEE. The Company entered into the agreement on November 30, 2000 and consummated the sale on November 15, 2001. The sale of the Explosives Business is accounted for as a discontinued operation, and accordingly, the operating results for the Explosives Business in the accompanying financial statements have been presented as discontinued operations for all periods presented.
Continuing operations reported in the statements of operations for all periods presented consist primarily of the Company's proportionate share of the operating results from its 50% interest in Cyanco, management fee income from Cyanco, amounts from its 50% interest in WAC, and corporate overhead, costs and expenses. Since the Company does not own more than 50% of Cyanco, the financial statements of Cyanco are not consolidated with the financial statements of the Company. Separate financial statements of Cyanco are included in this report as Exhibit 99.
The following discussion of results of operations includes only continuing operations. For discussions of historical results of operations of the discontinued Explosives Business, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001.
Results of Operations
2001 vs. 2000
Equity in earnings of joint ventures, consisting primarily of the Company's equity in earnings of Cyanco, increased $356,000 or 21% for the year ended December 31, 2001 compared to equity in earnings reported for the year ended December 31, 2000. The increase in equity in earnings of Cyanco is the result of increases in both volume and prices in 2001 compared to 2000. Management fees from Cyanco increased $101,000 or 30% for 2001 compared to 2000, because of increased Cyanco revenues.
Total costs and expenses increased $53,000 or 6% in 2001 compared to 2000, with the increase due to costs of relocating to the Company's new office facilities in December 2001, increases in the cost of managing the Cyanco joint venture, and cost of administering the post-closing transition of the sale of the Explosives Business.
2000 vs. 1999
Equity in earnings of joint ventures, consisting primarily of the Company's equity in earnings of Cyanco, decreased $798,000 or 32% for the year ended December 31, 2000 compared to equity in earnings reported for the year ended December 31, 1999. The decrease in equity in earnings of joint ventures is the result of losses from WAC and a decrease in net earnings from Cyanco. Management fees from Cyanco increased $55,000 or 19% for 2000 compared to 1999, because of increased Cyanco revenues.
Total costs and expenses decreased $587,000 or 38% in 2000 compared to 1999, with the decrease due primarily to a loss from impairment of WAC assets of $776,000 in 1999. The WAC joint venture has operated at a loss since inception in 1997, and in 1999, the Company wrote off its investment in the joint venture. The Company and its joint venture partner are currently seeking a buyer for the assets of this joint venture. The increase in other costs and expenses is due primarily to increases in the cost of managing the Cyanco joint venture.
Liquidity and Capital Resources - -------------------------------
As part of the purchase price of the Explosives Business, UEE assumed all long-term debt of the Company. Therefore, at December 31, 2001 current liabilities of the Company consisted only of trade accounts payable of $665,000 and accrued expenses of $1,208,000. Long-term liabilities consisted only of deferred income taxes of $1,474,000. Current assets totaled $8, 898,000 including cash of $7,011,000. The Company received cash of $6,350,000 from the sale of the Explosives Business in November 2001.
Cash in excess of short-term operating needs has been invested primarily in interest bearing investment accounts with maturities ranging from 30 days to one year. The Board of Directors of the Company is currently evaluating alternative uses for the cash of the Company, including optimizing short-term investment results, diversification of the Company's business, further investment in Cyanco and its expanding operations, distributions to shareholders and other strategies.
Net cash used in operating activities for the year ended December 31, 2001 was $(791,000) compared to net cash provided by operations of $840,000 for the year ended December 31, 2000. This decrease is due primarily to the significant expenses paid in 2001 in connection with the sale of the Explosives Business.
Net cash provided by investing activities for the year ended December 31, 2001 was $6,536,000 compared to net cash used in investing activities of $(1,360,000) for the year ended December 31, 2000. This increase is principally due to the net cash realized from the sale of the Explosives Business in 2001of $5,203,000 ($6,350,000 received net of $1,147,000 included in net assets sold). In addition, the Company purchased property and equipment totaling $(2,945,000) in 2000 compared to $(542,000) in 2001 as such purchases were limited in 2001 pending the completion of the sale of the Explosives Business.
Net cash used in financing activities for the year ended December 31, 2001 was $(847,000) compared to net cash provided by financing activities of $1,658,000 for the year ended December 31, 2000. The net cash used in financing activities in 2001 consisted of $(519,000) used to purchase treasury stock and $(328,000) net reduction of debt. Substantially all of the purchase of treasury stock in 2001 was from former officers and employees as part of the sale of the Explosives Business. Net cash provided by financing activities for the year ended December 31, 2000 was $1,658,000 resulting entirely of net increases in debt. As indicated above, all long-term debt was assumed by UEE in the sale of the Explosives Business in November 2001.
In order to complete the assignment to a UEE subsidiary of a lease for property leased by the Company as of the closing date of the sale of the Explosives Business (November 15, 2001), the Company agreed to clean up, remediate and repair the contamination caused to the property by the Explosives Business. Included in accrued expenses at December 31, 2001 are amounts that the Company believes will be sufficient to cover remaining testing and cleanup costs. However, there can be no assurance that such costs will not exceed the current estimate.
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. The Company believes that amounts accrued and included in income taxes payable at December 31, 2001 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.
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 on which, could have a material effect on future results. The factors which may impact future operating
results include, but are not limited to, decisions made by Cyanco's customers as to the continuation, suspension, or termination of mining activities in the area served by Cyanco, changes in world supply and demand for commodities, particularly gold, political, environmental, regulatory, economic and financial risks, major changes in technology which could affect the mining industry as a whole or which could affect sodium cyanide specifically, competition, and the continued availability of qualified technical and other professional employees of the Company and Cyanco. The Company believes it is taking appropriate actions in order to address these and other factors previously disclosed; however, the actual results could differ materially from those indicated in the statements made.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Prior to the sale of the Explosives Business, the Company was exposed to market risk from changes in foreign currency and implemented certain procedures to minimize such risk. However, after the sale, the Company is currently not exposed to material risks from changes in foreign currency, and does not hold any investments specifically to hedge against foreign currency fluctuations.
All debt with variable interest rates was assumed by UEE in the sale of the Explosives Business.
A significant portion of the Company's cash equivalents and short-term investments bear variable interest rates that are adjusted to market conditions. Changes in market rates will affect interest earned on these instruments. However, the Company does not utilize derivative instruments to offset the exposure to interest rates. The cash equivalents and short-term investments are placed in a variety of products with different institutions. Changes in the interest rates are not expected to have a material impact on the Company's results of operations.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company and of Cyanco required by this Item are contained in a separate section of this report. See "Index to Financial Statements" on Page and the separate financial statements of Cyanco included as Exhibit 99.
The following table presents quarterly financial data for each of the four quarters in the years ended December 31, 2001 and 2000. The amounts have been restated for periods prior to the sale of the Explosives Business on November 15, 2001 to report operating results using discontinued operations accounting.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III --------
Item 10
Item 10 Directors and Executive Officers of the Registrant.
(a) Information regarding the Board of Directors.
All directors are elected at each annual meeting of the Company to terms of one year or until the next annual meeting. Set forth below is the name and age of each of the directors, the positions they hold with the Company, the period during which they have been affiliated with the Company, and certain other biographical information.
E. Bryan Bagley, 38, was appointed a director on June 28, 2000. Since November 1991, Mr. Bagley has been a market maker for Wilson-Davis & Company, 39 W. Market Street, Salt Lake City, Utah 84111. Prior to his current position, he was a securities trader for over ten years with increasing responsibilities at Covey & Co., Bagley Securities and Wilson-Davis & Company. Mr. Bagley graduated from the University of Utah in 1987 with a Bachelor of Science degree in Economics. Mr. Bagley was appointed Chairman of the Board of Directors on December 28, 2001.
Nathan L. Wade, 73, has been a director since June 1989. Since 1953, Mr. Wade has been a director and principal owner of Nate Wade Subaru, 1207 South Main, Salt Lake City, Utah 84111, a Utah automobile dealership for new and used automobiles. Mr. Wade was appointed Chairman of the Board of Directors on January 21, 2000 and served in such capacity until December 28, 2001.
Dr. John T. Day, 62, has been our President and Chief Executive Officer since April 1993. He was one of our founders and, from 1979 to 1993, was Executive Vice President with responsibility for plant design, operations, equipment design and construction, and new product development. Dr. Day was appointed to our Board of Directors on November 10, 1986. Dr. Day obtained a
B.S. degree in Chemical Engineering from the University of Utah in 1964 and obtained a Sc.D. degree from MIT in 1972.
James E. Solomon, 52, CPA, was appointed a director in March 2000. Mr. Solomon is owner and chief executive officer of Solomon Advisory Services, a firm that specializes in maximizing value for small to mid-size companies. Mr. Solomon was formerly a financial manager at Exxon Corporation from 1972 to 1980. From 1980 to 1983, Mr. Solomon was Vice President of Farm Management Company, one of the world's largest agricultural companies. Since 1983, Mr. Solomon has been self-employed and is an Adjunct Professor at the Graduate School of Business at the University of Utah and serves as a director of TruDynamics International, Inc., a company based in Scottsdale, Arizona, as well as Yearbook Interactive, Inc., a company based in Salt Lake City, Utah.
Frances M. Flood, 45, was appointed as one of our directors on June 28, 2000. Since June of 1998, Ms. Flood has served as Chief Executive Officer and a director of ClearOne Communications, a publicly-held corporation. Ms. Flood joined ClearOne in October of 1996 as Vice-President of Sales and Marketing and, prior to her current positions, served as President of ClearOne since December of 1997. Prior to joining ClearOne, Ms. Flood was Area Director of Sales and Marketing for Ernst & Young, LLP, an international accounting and consulting firm. Ms. Flood graduated from Thomas Edison State College with a BSBA degree in Banking and Finance. Ms. Flood also serves as a director of Sound Tube, a privately-held company based in Park City, Utah.
(b) Information regarding Executive Officers.
In addition to Dr. Day, currently the only executive officer is Dennis P. Gauger, CPA, Chief Financial Officer.
Mr. Gauger, 50, is a licensed Certified Public Accountant in Utah and Nevada. He has served several public and private companies as a financial executive, corporate troubleshooter and consultant. Mr. Gauger worked for Deloitte & Touche LLP, an international accounting and consulting firm, for 22 years, including 9 years as an accounting and auditing partner, where he directed domestic and international firm interactions with senior executive management, audit committees, and boards of directors. He has an extensive background in SEC accounting and reporting, initial public offerings, mergers and acquisitions, technical accounting issues, financing and operations. He has experience in several industries, including manufacturing, high technology, software, internet, retail and distribution, financial services, hospitality, mining and real estate.
(c) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires the Company's executive officers and directors and persons who own more than ten percent of a registered class of the Company's stock, to file reports of initial ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Executive officers, directors and persons who own more than ten percent of the Company's stock, are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company and written representations from the Company's executive officers and directors, the Company believes that all forms required by Section 16(a), including amendments thereto, were timely filed. The Company issues monthly reminders to each executive and director of the Company to help ensure timely filing of reports promulgated under Section 16(a) of the Exchange Act.
Item 11.
Item 11. Executive Compensation
Set forth below is information concerning the annual and long-term compensation for services in all capacities to the Company and its affiliates for the fiscal years ended December 31, 2001, 2000 and 1999 paid to the Chief Executive Officer. In addition, information is also included for two additional officers who are no longer officers of the Company but were paid in excess of $100,000 during the period of their employment in the fiscal year ended December 31, 2001, which ended November 15, 2001 (together with the Chief Executive Officer, the "Named Executive Officers"). In connection with the sale of the Explosives Business to UEE on November 15, 2001, all executive officers other than Dr. Day terminated their employment with the Company and surrendered to the Company all previously issued stock options.
Compensation of Executive Officers
The following table summarizes compensation received by the Named Executive Officers for the three fiscal years ended December 31, 2001, 2000 and 1999.
(1) Includes all cash and non-cash bonuses paid on a discretionary basis by the Board of Directors as recommended by the Compensation Committee of the Board of Directors. In the case of Dr. Day, the grant of a $100,000 bonus was not paid in 1999, but was paid in 2000; the right to payment was solely at the discretion of Dr. Day.
(2) Includes life and disability insurance premiums paid on behalf of Dr. Day and medical reimbursement payments and personal mileage on company-owned vehicles on the part of the Named Executive Officers.
(3) Includes matching contributions made by the company on behalf of the Named Executive Officers pursuant to the Company's Profit Sharing 401(k) Plan (the "Plan").
(4) Includes amounts paid to Mr. Moss and Mr. Reddick to purchase their shares of common stock of the Company of $107,212 and $95,916, respectively.
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information concerning stock options granted during 2001 to the Named Executive Officers.
(1) A total of 170,000 options were granted in 2001 to Directors of the Company. Dr. Day is the only employee who is also a Director.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values
The following table sets forth the aggregate value of unexercised options to acquire shares of common stock held by the Named Executive Officers on December 31, 2001. There were no options exercised by the Named Executive Officers during the fiscal year ended December 31, 2001.
(1) Reflects the difference between the exercise price of the options granted and the value of the common stock on December 31, 2001. The closing price of the common stock on December 31, 2001, as reported by NASDAQ was $1.57.
Compensation of Directors
During 2001, the non-employee directors each received monthly payments of $600 as compensation for serving on the Board of Directors, or $7,200 for a full year of service. In addition, the non-employee directors receive $1,000 per Board meeting attended and are reimbursed for time spent on extra Board-approved assignments at a per-diem rate of $1,000 per day. During 2001 no per diem compensation was paid to the current directors. Employee members of the Board of Directors receive no additional compensation for attendance at meetings of the Board of Directors.
Former directors, James W. Sight and Garfield Cook, chose not to stand for election to the Company's Board of Directors for the year 2001. For outstanding service as outside independent directors, the Board awarded these two individuals a bonus for their nearly two years of service to the Company. Garfield Cook served as co-chairman of the Board, directed the review of the BLA Trust litigation and served as lead negotiator with the managers who were terminated in connection with the sale of the Company's Explosives Business. Mr. Cook received a total of $103,000, or an average of $51,500 per year. James Sight served as the lead negotiator in the sale of the Explosives Business to UEE and he received a total of $160,000, or approximately $80,000 per year for his services. The negotiations with UEE extended over 18 months. These gentlemen also surrendered to the Company the stock options previously granted to them.
On November 19, 2001, the Board of Directors approved the issuance of 40,000 stock options each to Mr. Solomon and Ms. Flood and 30,000 stock options each to Messrs. Wade, Day and Bagley. The options have an exercise price of $1.21, equal to the market price existing on the date of grant, and are immediately exercisable for a period of five years.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following tabulation shows, as of March 15, 2002, the number of shares of common stock, par value $0.001, owned beneficially by: (a) all persons known to be the holders of more than five percent (5%) of voting securities, (b) Directors, (c) Named Executive Officers and (d) all of our Officers and Directors as a group:
Amount and Natures of Beneficial ownership (1) ------------------------ Name and Address of Beneficial Owner Shares Percent
E. Bryan Bagley ----------------------------- 2,141,034(2) 28.2% 1470 Arlington Dr. Salt Lake City, UT 84103
Dr. John T. Day --------------------------- 618,304(3) 8.1% 5 Dawn Hill Sandy, Utah 84092
Edward N. Bagley Estate --------------------- 583,280 7.7% 8987 St. Ives Drive Los Angeles, California 90069
Dr. Lex L. Udy ---------------------------- 560,906(4) 7.4% 4597 Ledgemont Drive Salt Lake City, Utah 84124
Nathan L. Wade -------------------------- 292,822(5) 3.9% 1207 South Main Street Salt Lake City, Utah 84111
All Officers and Directors as a group (6 persons) ---------------------- 3,211,160(6) 42.3%
________________________________________________________________________________
(1) Unless otherwise indicated, each person identified in the table has sole voting and investment power with respect to the common stock beneficially owned by such person. The total number of outstanding shares included in the computation of percentages is 7,210,069, plus 377,500 options which are exercisable by executives and directors within 60 days. The current directors and officers of the Company not named above, James Solomon, Frances Flood, and Dennis Gauger, Chief Financial Officer, do not own shares in the Company. All of the officers serving the Company during 2001, with the exception of Dr. John T. Day, were terminated as part of the sale of the explosives business to UEE on November 15, 2001. These officers have relinquished all rights to the stock options previously granted. (2) Includes 1,883,287 shares held by the BLA Irrevocable Investment Trust of which Mr. Bagley is a co-Trustee with a sister, Lisa Higley, and 69,500 options currently exercisable by Mr. Bagley. (3) Includes 79,500 options currently exercisable by Dr. Day. (4) Includes shares owned solely by Dr. Udy's wife and shares in a family limited partnership. (5) Includes shares held by a partnership of which Mr. Wade is a partner, shares held in an IRA account for the benefit of Mr. Wade's spouse and shares held by Mr. Wade's family members residing in his home; also included are 69,500 options currently exercisable by Mr. Wade. (6) Includes 79,500 options currently exercisable by each of Directors James Solomon and Frances Flood.
Item 13.
Item 13. Certain Relationships and Related Transactions.
On April 10, 1998, the Company provided Dr. John T. Day a five-year loan of $75,000 at LIBOR 30-day rate plus 1% adjusted annually each year on the anniversary date. Interest is payable annually with principal due on the date of maturity. The loan is secured with shares of common stock of the Company owned by Dr. Day, and the outstanding principal balance on the loan as of December 31, 2001 was $22,097, with accrued interest of $168.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. The audited financial statements of the Company and the report of independent certified public accountants required in Part II, Item I are included on pages to.
2. Also included as financial statement schedules to this Annual Report on Form 10-K as Exhibit 99 are the audited financial statements of Cyanco, a significant subsidiary reported on the equity method, and the report of independent certified public accountants. No other required financial statement schedules are listed because they are not applicable or the required information is shown in the Company's financial statements or notes thereto.
3. Exhibits:
3.1 Amendment to Articles of Incorporation to reflect the one-for-five reverse stock split which became effective June 15, 1987 (Incorporated herein by reference from the Form 10-KSB filed by the Company for the fiscal year ended December 31, 1987.) Articles of Incorporation (Incorporated herein by reference from Form 10-KSB filed by the Company for the fiscal year ended December 31, 1985.
3.2 Amendment to Articles of Incorporation to reflect the name change to Nevada Chemicals, Inc. (this filing).
3.3 Bylaws of the Corporation as amended May 19, 1999 (Incorporated herein by reference from the Form 10-K/A filed by the Company for the fiscal year ended December 31, 2000).
4.1 Amended 1988 Nonqualified Stock Option Plan, amended as of May 19, 1999 (Incorporated by reference from the Form 10-K/A filed by the Company for the fiscal year ended December 31, 2000).
10.1 Asset Purchase Agreement dated November 30, 2000, as amended, (Incorporated herein by reference from the Company's Definitive Proxy Statement on Form 14A filed by the Company on October 9, 2001).
21 List of Subsidiaries (this filing).
99 The financial statements for the fiscal year ended December 31, 2001 of Cyanco, a significant subsidiary reported on the equity method, and the report of independent certified public accountants (this filing).
(b) The Company filed a report on Form 8-K on November 30, 2001 reporting the sale of its Explosives Business to UEE.
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 29, 2002
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.
NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Consolidated Financial Statements December 31, 2001 and 2000
NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Index to Consolidated Financial Statements
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Page ----
Independent Auditors' Report
Consolidated balance sheet
Consolidated statement of operations
Consolidated statement of stockholders' equity
Consolidated statement of cash flows
Notes to consolidated financial statements
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Nevada Chemicals, Inc.
We have audited the consolidated balance sheet of Nevada Chemicals, Inc. and Subsidiaries (formerly Mining Services International Corporation) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2001, 2000, and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards of the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nevada Chemicals, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000, and 1999 in conformity with accounting principles generally accepted in the United States of America.
TANNER + CO.
Salt Lake City, Utah February 25, 2002
NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts)
December 31, 2001, 2000, and 1999 - --------------------------------------------------------------------------------
1. Organization Organization and Through November 15, 2001, Nevada Chemicals, Inc. (the Significant Company), formerly Mining Services International Accounting Corporation, and its wholly owned and majority owned Policies subsidiaries were primarily engaged in the development, manufacture and sale of bulk explosives and related support and services. On November 15, 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 to Nevada Chemicals, Inc.
Winnemucca Chemicals, Inc. (Winnemucca Chemicals), a wholly owned subsidiary of the Company, has a fifty percent interest in Cyanco Company (Cyanco), a non-corporate joint venture engaged in the manufacture and sale of liquid sodium cyanide. Subsequent to the sale of the Explosives Business, the Company will continue to own and operate its interest in Cyanco. The Company accounts for its investment in Cyanco using the equity method of accounting. Summarized financial information for Cyanco is included in Note 12.
In addition, the Company retained its interest in a joint venture to manufacture and supply explosives in West Africa. The joint venture operates as a Ghanaian company called West Coast Explosives Limited (WCE). WCE is wholly owned by West Africa Chemicals Limited (WAC), a Mauritius company owned 50% by the Company. In the fourth quarter of 1999, the Company wrote off its investment in WAC, including a note receivable, due to continuing sustained losses and the unlikelihood of realizing profits in this market where explosives supply now exceeds demand. The Company will only recognize income or loss from this investment as cash is either received or disbursed.
Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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1. Organization Cash Equivalents and For purposes of the statement of cash flows, cash Significant includes all cash and investments with original Accounting maturities to the Company of three months or less. Policies Continued Property, Plant and Equipment Property, plant and equipment are recorded at cost, less accumulated depreciation. Depreciation and amortization on capital leases and property, plant and equipment are determined using the straight-line method over the estimated useful lives of the assets or terms of the lease. Expenditures for maintenance and repairs are expensed when incurred and betterments are capitalized. Gains and losses on sale of property, plant and equipment are reflected in net income.
Translation of Foreign Currencies Prior to the sale of the Explosives Business, the cumulative effect of currency translation adjustments was included in stockholders' equity. These items represent the effect of translating assets and liabilities of the Company's foreign operations.
Generally for joint ventures, unrealized gains and losses resulting from translating foreign companies' assets and liabilities into U.S. dollars were accumulated in an equity account on the joint venture's balance sheet, which was reported using the equity method, until such time as the joint venture is sold or substantially or completely liquidated. Translation gains and losses relating to operations of joint ventures where hyperinflation exists were included in equity in earnings from joint ventures.
Subsequent to the sale of the Explosives Business, the Company had no material foreign operations.
Revenue Recognition The Company's revenues consist mainly of earnings from Cyanco based on the equity method of accounting and management fees from Cyanco. Equity from earnings in Cyanco is based on the Company's 50% ownership in Cyanco and is calculated and recognized at the end of each month. Management fees from Cyanco are recognized monthly based on a management agreement with Cyanco.
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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1. Organization Income Taxes and Deferred income taxes are provided in amounts sufficient Significant to give effect to temporary differences between Accounting financial and tax reporting, principally related to Policies depreciation and undistributed earnings from joint Continued ventures, which qualify under certain tax deferral treatment.
Earnings Per Common Share The computation of 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. For 2000, common stock equivalents were not included in the diluted earnings (loss) per share calculation because the effect would have been anti-dilutive.
The shares used in the computation of the Company's basic and diluted earnings (loss) per share are reconciled as follows:
2001 2000 1999 ----------------------------------------
Weighted average number of shares outstanding - basic 7,301,000 7,314,000 7,324,000 Dilutive effect of stock options 32,000 - 51,000 ----------------------------------------
Weighted average number of shares outstanding, assuming dilution 7,333,000 7,314,000 7,375,000 ----------------------------------------
Concentration of Credit Risk At December 31, 2001, financial instruments which potentially subjected the Company to concentration of credit risk consisted primarily of cash and receivables. Receivables consisted primarily of amounts on deposit or receivable from United States or Canadian federal tax authorities. Management does not believe significant credit risk exists for these receivables at December 31, 2001.
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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1. Organization The Company maintains its cash in bank deposit accounts and which, at times, may exceed federally insured limits. Significant The Company has not experienced any losses in such Accounting accounts and believes it is not exposed to any Policies significant credit risk on cash and cash equivalents. Continued Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform with classifications adopted in the current year.
2. Sale of Sale of Explosives Business Explosives On November 8, 2001, the shareholders of the Company Business voted in favor of the sale of the Company's Explosive Business pursuant to an Asset Purchase Agreement between the Company and UEE. The Company entered into the agreement on November 30, 2000 and consummated the sale on November 15, 2001. As a result, the Explosives Business is accounted for as a discontinued operation, and accordingly, amounts in the financial statements and related notes for all periods shown have been restated to reflect discontinued operations accounting. Summarized operating results of the Explosives Business are shown in the table below.
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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2. Sale of As consideration for the Explosives Business, subject to Explosives certain adjustments, (i) the Company received $6.35 Business million cash; (ii) UEE and its subsidiaries assumed Continued notes and accrued interest payable to the Company totaling approximately $1.3 million, the first of which, in the principal amount of $1.0 million, will be paid in equal annual installments over five years beginning in July of 2002, and the second of which, in the principal amount of $200, was paid in January 2002; (iii) UEE assumed essentially all of the Company's liabilities associated with the Explosives Business in the approximate amount of $13.6 million. Expenses of the sale were approximately $1.8 million, including $431 recognition of foreign currency translation adjustment. After giving effect to an estimated $301 income tax provision from the sale, the Company recognized a loss from the sale of $456.
Operating results of the disposed Explosives Business are as follows:
2001 2000 1999 -----------------------------------------------
Revenues $ 36,945 $ 37,064 $ 27,728 -----------------------------------------------
Costs and expenses: Cost of sales 34,099 34,475 25,424 General and administrative 3,123 3,732 2,193 Impairment of assets - 4,990 1,846 Other expenses 302 1,069 995 -----------------------------------------------
37,524 44,266 30,458 -----------------------------------------------
Loss before income taxes and minority interest (579) (7,202) (2,730)
Income tax benefit 214 1,879 1,064 -----------------------------------------------
Loss before minority interest (365) (5,323) (1,666)
Minority interest in (income) loss - 497 (25) -----------------------------------------------
Net loss $ (365) $ (4,826) $ (1,691) -----------------------------------------------
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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2. Sale of As part of the sale of the Explosives Business, the Explosives Company purchased a total of 101,191 shares of its Business common stock from certain of its former officers and Continued employees for total consideration of $571.
Impairment of assets related to discontinued operations:
o Based on the estimated sales proceeds and the net book value of the assets to be sold at the time the Asset Purchase Agreement with UEE was signed, it was determined that the Company would recognize a loss of approximately $4,990 upon the sale. Accordingly, as of December 31, 2000, based upon SFAS 121, the Company recognized an estimated impairment of $1,794 related to goodwill, $3,086 related to property plant and equipment, and $110 related to its investment in and advances to joint ventures.
o During the year ended December 31, 1999, the Company evaluated the carrying value of certain investments in and advances to joint ventures of the Explosives Business based upon projected future cash flows, the circumstances and location of its investments and its ability to recover its investments in cash or any other negotiable asset. Based on this evaluation and in accordance with SFAS 121, the Company recorded an aggregate non-cash expense of $1,846 for the impairment of investment in and advances to foreign joint ventures.
Net assets of discontinued operations as of December 31, 2000 consisted of the following:
Cash $ 1,161 Receivables, net 6,322 Inventories 2,248 Other assets 1,724 Investments in and advances to joint ventures 1,345 Property, plant and equipment, net 6,700 Accounts payable and accrued expenses (5,610) Notes payable (6,606) ------------
Net assets of discontinued operations $ 7,284 ------------
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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3. Detail of Certain Balance Sheet Accounts December 31, ----------------------------- 2001 2000 -----------------------------
Receivables: Trade receivables $ - $ 498 Income tax refunds receivable 1,240 1,014 Related party receivables (see Note 9) 37 73 Other 71 64 -----------------------------
$ 1,348 $ 1,649 -----------------------------
Accounts payable and accrued expenses: Trade payables $ 665 $ 291 Income taxes payable (see Note 15) 924 - Other accrued expenses (see Note 15) 284 - -----------------------------
$ 1,873 $ 291 -----------------------------
4. Notes Notes receivable are comprised of the following at Receivable December 31:
2001 2000 --------------------------
Note receivable from UEE, in annual installments of $200 plus interest at 8.5% $ 1,000 $ -
Note receivable from a subsidiary of UEE, paid in full in January 2002 with interest at a defined average rate 200 -
Note receivable from a subsidiary of UEE, monthly installments of $10 including interest at 6.5% 229 -
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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4. Notes Receivable Continued
Notes receivable from officers of the Company secured by stock, interest payments due annually at 1% above the three-month LIBOR, principal due in full April 2003 and June 2004 26 86 --------------------------
1,455 86
Less current portion (490) - --------------------------
$ 965 $ 86 --------------------------
5. Property, Property, plant and equipment consists of the following: Plant and Equipment December 31, -------------------------- 2001 2000 --------------------------
Buildings, plant equipment and fixtures $ 942 $ 942 Office equipment and fixtures 20 3 Vehicles 34 42 Land 107 107 --------------------------
1,103 1,094
Less accumulated depreciation and amortization (153) (147) --------------------------
$ 950 $ 947 --------------------------
6. Income The current provision for income taxes represents U.S. Taxes federal income taxes, taxes withheld on royalties and other foreign income taxes.
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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6. Income The benefit (provision) for income taxes is different Taxes than amounts which would be provided by applying the Continued statutory federal income tax rate to income from continuing operations before income taxes for the following reasons:
Years Ended December 31, ------------------------------------------- 2001 2000 1999 -------------------------------------------
Federal income tax (provision) at statutory rate $ (593) $ (408) $ (492) Life insurance and meals (4) (23) (22) Other - 122 - -------------------------------------------
$ (597) $ (309) $ (514) -------------------------------------------
Total income tax benefit (provision) consists of the following:
Current $ (1,177) $ (663) $ (638) Deferred 580 354 124 -------------------------------------------
$ (597) $ (309) $ (514) -------------------------------------------
Deferred tax assets (liabilities) are comprised of the following:
December 31, ---------------------------- 2001 2000 ----------------------------
Depreciation and amortization $ (3,049) $ (3,311) Deferred income - (556) Write-down of impaired assets - 1,151 Foreign tax credit carryforward 1,575 438 Other - 224 ----------------------------
$ (1,474) $ (2,054) ----------------------------
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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7. Impairment During the year ended December 31, 1999, the Company of Assets evaluated the carrying value of its investments in and advances to the WAC joint venture based upon projected future cash flows, the circumstances and location of its investments and its ability to recover its investments in cash or any other negotiable asset. Based on this evaluation, and in accordance with SFAS 121, the Company recorded an aggregate non- cash expense for the impairment as follows:
Investment in and advances to foreign joint ventures $ 76 Related party notes receivable from foreign joint ventures 700 --------------
$ 776 --------------
8. Supplemental Actual amounts paid for interest and income taxes are as Cash Flow follows: Information Years Ended December 31, ----------------------------------------------------- 2001 2000 1999 -----------------------------------------------------
Interest $ 519 $ 509 $ 211 -----------------------------------------------------
Income taxes $ 508 $ 127 $ 801 -----------------------------------------------------
During the year ended December 31, 2001:
o The Company reclassified accounts receivable of $229 to a note receivable due from UEE
o The Company reclassified interest receivable of $110 which was previously recorded as part of a note receivalbe from UEE to accounts receivable
o In connection with the sale of its Explosives Business the Company repurchased common stock from a former officer in exchange for partial repayment of a note receivable of $54
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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8. Supplemental o The Company paid certain accrued expenses to an Cash Flow officer in exchange for forgiveness of a note Information receivable of $6 Continued o The Company sold equipment to a joint venture in exchange for accounts receivable of $125
o As described in Note 2, the Company sold its Explosives Business to UEE. The following table summarizes the assets and liabilities sold, consideration received, and loss recognized on the sale:
Assets Sold and Liabilities Assumed by UEE --------------------------------------------------------
Receivables, net $ 6,468 Inventories 2,154 Other current assets 208 Investments in and advances to joint ventures 2,117 Property, plant and equipment, net 6,143 Notes receivable from joint ventures 1,070 Other assets 279 Accounts payable and accrued expenses (7,340) Notes payable (6,278) -----------------
Net assets sold 4,821
Consideration Received --------------------------------------------------------
Notes receivable and accrued interest received 1,310 Net cash received (net of $1,147 sold) 5,203 -----------------
Gain before expenses of sale and income tax effect 1,692
Expenses directly related to the sale (1,847) Provision for income taxes (301) -----------------
Loss recognized on sale $ (456) -----------------
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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9. Related Party The Company performs certain functions for Cyanco for Transactions which it receives a fee. Fees totaled $443, $342 and $287 for the years ended December 31, 2001, 2000, and 1999, respectively.
At December 31, 2001 and 2000, the Company had receivables of $36 and $33, respectively, from Cyanco, $1 and $23, respectively from employees, and $0 and $17, respectively, from WAC.
As of December 31, 2001 and 2000, the Company had notes receivable from officers of the Company of $26 and $86, respectively (see Note 4).
As compensation for services rendered in connection with the sale of the Explosives Business, the Company agreed to pay $160 and $103 to two board members. $50 was paid to one board member in 2001 and the remaining amounts were paid in January 2002.
10. Non-Qualified Under the 1987 Non-Qualified Stock Option Plan (the Stock Option Option Plan), as amended in 1988, 1990, 1992, 1993, 1998 Plan and 1999, a maximum of 1,315,130 shares were made available for granting of options to purchase common stock at prices generally not less than the fair market value of common stock at the date of grant. Under the Option Plan, grants of non-qualified options may be made to selected officers and key employees without regard to any performance measures. The options may be immediately exercisable or may vest over time as determined by the Board of Directors. However, the maximum term of an option may not exceed ten years. Options may not be transferred except by reason of death, with certain exceptions, and termination of employment accelerates the expiration date of any outstanding options to 30 days from the date of termination.
In connection with the sale of the Explosive Business to UEE on November 15, 2001, substantially all employees terminated their employment with the Company and surrendered to the Company all previously issued stock options. The Company's president and CEO and continuing members of the board of directors retained their stock options.
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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10. Non-Qualified Information regarding the Option Plan is summarized Stock Option below: Plan Continued Number of Option Price Options Per Share --------------------------------
Outstanding at January 1, 1999 359,747 $ 1.38 - 11.30 Granted 7,500 3.00 - 5.06 Exercised (5,500) 4.72 - 5.06 Expired (9,000) 2.26 - 5.22 --------------------------------
Outstanding at December 31, 1999 352,747 1.38 - 11.30 Granted 376,000 1.44 - 2.31 Exercised - - Expired - - --------------------------------
Outstanding at December 31, 2000 728,747 1.38 - 11.30 Granted 170,000 1.21 Exercised - - Expired / Forfeited (521,247) 1.38 - 11.30 --------------------------------
Outstanding at December 31, 2001 377,500 $ 1.21 - 2.31 --------------------------------
Options exercisable and available for future grant are as follows:
December 31, ------------------------------------------- 2001 2000 1999 -------------------------------------------
Options exercisable 377,500 524,510 113,815 Options available for grant 445,207 93,960 469,960
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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11. Stock-Based The Company has adopted the disclosure-only provisions Compensation of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized in the financial statements. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
Years Ended December 31, ----------------------------------------- 2001 2000 1999 -----------------------------------------
Net Income - as reported $ 186 $ (4,031) $ 725 Net Income - pro forma $ 110 $ (4,393) $ 622
Diluted earnings per share - as reported $ .03 $ (.55) $ .10 Diluted earnings per share - pro forma $ .02 $ (.60) $ .08 -----------------------------------------
The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
December 31, ---------------------------------------- 2001 2000 1999 ----------------------------------------
Expected dividend yield $ - .01 $ .02 Expected stock price volatility 62% 53% 52% Risk-free interest rate 4.66% 6% 6% Expected life of options 2 years 3-5 years 0 - 3 years ----------------------------------------
The weighted average fair value of options granted during 2001, 2000, and 1999 are $.45, $.73, and $.28, respectively.
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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11. Stock-Based The following table summarizes information about stock Compensation options outstanding at December 31, 2001: Continued Options Outstanding Options Exercisable ----------------------------------------------------------------- Weighted Average Number Remaining Weighted Number Weighted Range of Outstanding Contractual Average Exercisable Average Exercise at Life Exercise at Exercise Prices 12/31/00 (Years) Price 12/31/00 Price - -------------------------------------------------------------------------------
$ 2.31 10,000 1.32 $ 2.31 10,000 $ 2.31 1.44 197,500 3.59 1.44 197,500 1.44 1.21 170,000 4.89 1.21 170,000 1.21 - -------------------------------------------------------------------------------
$1.21 - 2.31 377,500 4.11 $ 1.36 377,500 $ 1.36 - -------------------------------------------------------------------------------
12. Significant Summarized financial information of Cyanco, a Unconsolidated significant unconsolidated affiliate of the Company, are Affiliates as follows:
December 31, --------------------------------------------- 2001 2000 1999 ---------------------------------------------
Results for year: Gross revenues $ 29,767 $ 22,961 $ 19,346 Gross profit $ 5,905 $ 4,747 $ 6,609 Net income, before extraordinary item $ 4,126 $ 3,415 $ 5,366
Year-end financial position: Current assets $ 7,831 $ 5,161 Non-current assets $ 16,946 $ 17,892 Current liabilities $ 1,746 $ 2,148 Non-current liabilities - -
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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13. Profit Sharing The Company has a defined contribution profit sharing Plan plan, which is qualified under Section 401(K) of the Internal Revenue Code. The plan provides retirement benefits for employees meeting minimum age and service requirements. Participants may contribute a percentage of their gross wages, subject to certain limitations. The plan provides for discretionary matching contributions, as determined by the Board of Directors, to be made by the Company. The discretionary amount contributed to the plan by the Company for the years ended December 31, 2001, 2000, and 1999 was $106, $80, and $79, respectively.
14. Fair Value of The Company's financial instruments consist of cash, Financial receivables, notes receivable, and payables. The Instruments carrying amount of cash, receivables, and payables approximates fair value because of the short- term nature of these items. The carrying amount of the notes receivable approximates fair value as the individual borrowings bear interest which approximate market rates.
15. Commitments In connection with the sale of the Explosives Business, and any receivables, less an agreed upon reserve of $153, Contingencies that have not been collected within 240 days of the closing date (November 15, 2001) will be offset against the Company's note receivable from UEE in the reverse order of maturity. Based on the Explosives Business' history of receivables collection, the Company does not expect such receivables required to be offset against the note receivable to be significant. The Company will aggressively pursue collection of any receivables offset pursuant to this agreement.
In order to complete the assignment to a UEE subsidiary of a lease for property leased by the Company as of the closing date of the sale of the Explosives Business (November 15, 2001), the Company agreed to clean up, remediate and repair the contamination caused to the property by the Explosives Business. Based on initial testing performed by an engineering firm, the Company believes that amounts accrued at December 31, 2001 will be sufficient to cover remaining testing and cleanup costs. However, there can be no assurance that such costs will not exceed the current estimate.
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NEVADA CHEMICALS, INC. (Formerly Mining Services International Corporation) Notes to Consolidated Financial Statements (In thousands, except share amounts) Continued
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15. Commitments The Company has retained all contingent liabilities and relating to the current ongoing audit by the Canada Contingencies Customs and Revenue Agency (CCRA) of previously filed Continued 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. The Company believes that amounts accrued and included in income taxes payable at December 31, 2001 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.
16. Extraordinary During the year ended December 1999, the Company Items negotiated the extinguishment of a deferred royalty obligation. Accordingly, the Company paid $58 in cash to terminate the indemnification of Cyanco under the deferred royalty agreement. The result was an extraordinary gain of $1,599 after providing for income taxes of $823.
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