U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1943 [No Fee Required]
For the transition period from ____________ to ____________
Commission File No. 0-10634
Mining Services International Corporation
(Name of Small Business issuer in its charter)
Utah 87-0351702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5284 South Commerce Drive, Suite C-244
Salt Lake City, Utah 84107-7930
(Address of principal executive offices, zip code)
Issuers telephone number: (801) 261-5666
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of Class
Check whether the Issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [ x ] No [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ x ]
Issuer's net revenues for its most recent fiscal year were
$23,278,000.
The aggregate market value of the voting stock of the registrant
held by non-affiliates was $24,570,000 (computed using the average bid and
asked prices reported by NASDAQ on March 26, 1996 and 2,808,000 shares
estimated to be held by non-affiliates). Shares of Common Stock held
by each officer and director and each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons are hereby
deemed affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrants par
value $0.001 Common Stock as of March 26, 1996, was 5,531,045.
Transitional Small Business Disclosure Format (check one): Yes No [ x ]
Portions of the Registrant's Information Statement for the Annual
Meeting of Stockholders scheduled to be held on May 23, 1996, which
Information Statement will be filed no later than 120 days after the close
of the registrant's fiscal year ended December 31, 1995, are incorporated
by reference in Part III of this Annual Report on Form 10-KSB.
<COVER PAGE>
PART I
Item 1. Business
General:
Mining Services International Corporation ("MSI" or the "Company")
is a Utah corporation organized in 1979. The Company's primary products
and services include the manufacture, licensing and supply of commercial
mining explosives used in surface mining throughout the world. In addition,
its wholly owned subsidiary, Nevada Chemicals, owns a 50% interest in Cyanco,
a non-corporate joint venture with Degussa Corporation, which manufactures
and sells liquid sodium cyanide used in the extraction of gold from low
grade gold deposits in the western United States.
Recent Business Development
The Company's development strategy is to become a worldwide
supplier of niche chemical products and services to the mining and related
industries through strategic partnering. The Company continues to focus
on three major product lines: (1) bulk blasting agents, oxidizers, fuels
and related raw materials; (2) packaged explosives; (3) and liquid sodium
cyanide. The Company markets for its own account in the United States
and Canada and has licensed the production of its products in established
regions of the world where large scale surface mining occurs. MSI has
built its reputation on providing cost effective solutions for these
large operations. The Company currently is penetrating developing
international market niches which need sophisticated solutions for its
blasting and ore treatment needs but which are generally too small to
support large multi-million dollar plants and facilities. The Company's
expertise and know-how have become recognized worldwide and an increasingly
number of existing international suppliers and government entities are
seeking joint ventures with the Company for access to the Company's
products and related smaller-scale facilities. Recent developments
of the Company's business are described below.
Cyanco: The Company has placed a major focus on strengthening
its liquid sodium cyanide capacity in Nevada through Cyanco, its joint
venture company which is shared on a 50/50% basis with Degussa Corporation,
a wholly owned subsidiary of a multinational chemicals and metals company
headquartered in Germany. Because of Degussa's already strong market
presence in worldwide marketing of sodium cyanide, Degussa has the primary
marketing role to expand the market penetration of Cyanco's product while
MSI has the primary production role. Cyanco has succeeded in having the
delivery of a liquid product overwhelmingly accepted by the gold mines.
MSI and Degussa have increased Cyanco's revenues as follows:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Sodium Cyanide Revenue
in millions of dollars: $4.5 $10.0 $15.2 $19.2 $25.3
MSI and Degussa made substantial contributions of approximately
$1.1 million in 1995, $2.2 million in 1994 and $0.8 million in 1993 to
provide more reliable electricity, to increase capacity from 28 million lbs.
per year to over 40 million pounds per year and to enhance the efficiency of
the plant. These modifications and upgrades are now complete. On
January 9, 1996, Cyanco announced the approval to expend approximately
$8,000,000 for an additional production back-up phase which will meet the
growing demand without the need to purchase back-up supply. At the
completion of the additional production facility, the nominal capacity of the
plant will nearly double.
MSI Explosives Business: The US domestic market for explosives,
while losing ground in the East as more coal production moves to the lower
sulfur deposits in the West, is improving for the Company. MSI was
successful in adding a major construction site contract for the Domenigoni
Valley dam project in California. The project is for approximately 2.5 years
and will contribute approximately $10,000,000 in revenue over the contract
term. During 1995, the Company continued to allocate significant resources
to secure partnering arrangements for its mining explosives business
worldwide, to continue expanding production of its EMGELa packaged explosives
and to secure major customers in Nevada, California and Canada. Instead of
solely relying on licensing MSI's technology to its foreign customer base,
the Company, beginning in 1993 has focused on a longer-term partnering
philosophy in order to secure equity positions in carefully selected foreign
markets. In preparation for this expansion, the Company has begun
production of its EMGELa packaged explosive product line and in February
1996 made a test shipment to a Mediteranean company for use in its local
mining and construction business. With the ability to provide both Bulk
and Packaged explosive products, MSI is poised not only for better U.S.
niche market penetration, but also worldwide expansion in relatively new,
but concentrated mining markets. During late 1994 MSI formed a subsidiary
corporation called West Coast Explosives Ltd., authorized to provide bulk
and packaged explosive products to the expanding Ghana gold mining district
<page 1>
located near the west coast of Africa. During 1995 MSI entered into a
letter agreement with Bulk Mining Services International ("BME") to form a
joint venture in Ghana and extend the License Agreement in South Africa
for an additional five years. BME will be the managing partner in Ghana
with a 62.5% interest and MSI will have a 37.5% interest.
On January 31, 1995 the Company entered into a Constituent
Agreement with Production Association "Ammofos" of Almalyk, the Republic of
Uzbekistan (herein PAA). The Constituent Agreement creates a joint venture,
Turon-MSI Ltd., with the Company 51% interest and PAA 49% interest. PAA is a
chemical company providing fertilizers to the agricultural industry operating
under the control of the Ministry of Chemistry in the Republic of Uzbekistan.
The joint venture became registered on October 13, 1995 and a mobile plant
was shipped to Uzbekistan in December1995. The primary purpose of the joint
venture is to establish a safe and environmentally sound explosives industry
in cooperation with the Ministry of Chemistry for the rapidly expanding
mining ventures in Uzbekistan and for export to the surrounding mining areas.
The Joint Venture plans to begin operations by the fall of 1996.
The Company entered into a 10 year technology license agreement with
Unique Gas and Chemical Company in Thailand in April 1994. This license
provided an up front fee with ongoing royalty based on sales of MSI product
in Thailand. Both HEFa and EMGELa technology are included in the license.
Plant and equipment are now being constructed in Thailand by Unique Gas and
Chemical under the direction of MSI for production during 1996.
As the Company maintains its bulk mining position in the major mining
countries of the world, it also invests in worldwide niche mining markets,
primarily in economically and politically more risky environments than those
in the United States. The Company is attempting to manage these increased
risks by partnering with suppliers already operating in the general areas or
with government entities which, according to the IMF and World Bank and other
banking entities, enjoy a risk rating favoring foreign investment. Also the
Company attempts to enter the desired markets with relatively small capital
outlay initially and to position itself as a critical, long-term partner in
the continuing success of the operation. Neither the U.S. government nor
the banking entities mentioned above guarantee or specifically encourage
investment in these areas and the Company has not entered into any
arrangements with any insurer to protect its investment against political or
economic risks other than normal casualty and business risk insurance
normally secured for its U.S. investments. Ghana and Uzbekistan allow for
repatriating profits and will provide some tax benefits for new ventures
within the respective countries. However, there is no guarantee that these
political and economic advantages will continue. Consequently, the Company's
strategy is to recover the costs of its investment in these jurisdictions as
quickly as possible.
Description of Business
Products and Markets: The Company, through its subsidiaries,
licensees and joint ventures, services primarily the surface mining
industry. The products are divided into Explosives and related products
and Liquid Sodium Cyanide.
Explosives: In the Explosives business the Company's products are
used in the blasting operations for surface mines in base and precious
metals, coal and industrial minerals. The explosive products are divided
into four major categories: (1) HEF(R), a proprietary oil-in-water emulsified
oxidizer which enhances the quality and control of the explosion or blast
at the mine in order to produce more consistent breakage of ore,
(2) sale of bulk ammonium nitrate prill used with HEF(R) and in
ANFO, a common explosive blasting agent used in surface boreholes which
is made from the ammonium nitrate prill mixed with number 2 diesel fuel,
(3) third-party explosives and accessories, such as boosters, detonating
cords, etc. in order to fully support the blasting efforts at customers'
mines, and recently (4) Packaged explosives (EMGEL(R)) which are currently
being manufactured at the Company's West Virginia Plant. In September 1993,
the Company was granted a patent on the compositions and methods used to
formulate this unique explosive and has recently introduced EMGEL(R) which is a
water-in-oil type emulsion explosive produced by emulsifying a water
solution of oxidizer salts into a blend of oils. The emulsion is then
packaged into small polyethylene carriages or "chubs" using a special form
and fill machine designed by the Company. A variety of cartridge diameters
and lengths can be produced. As the emulsion is being loaded into the
cartridges a trace quantity of a cross-linking chemical is added to the
composition which reacts with one of the oils and polymerizes or crosslinks
the entire mass into a soft rubber-like material. The uniquely crosslinked
emulsion is very stable and the package or cartridge can be punctured or
split without product spills. This significantly improves the handling
characteristics of the explosive and provides additional safety in
transportation, storage and use.
With the addition of packaged explosives, the Company is prepared
to market into worldwide niche markets. With both HEF(R) and EMGEL(R),
the Company is able to joint venture the technology and manufacturing
plants on a relatively small scale and penetrate markets where freight or
availability of quality products have been unavailable due to cost or
inadequate infrastructure.
<PAGE 2>
In the U.S. and Canadian markets, the Company markets and services
the mine sites directly for its own account. The U.S. markets are
concentrated in the West Virginia coal belt, Wyoming, Montana and Colorado
Coal belts, Western surface gold operations principally in Nevada and
industrial minerals in California. Metals, tar sands and coal mining
operations in western and central Canada are also major markets where the
Company markets for its own account.
The Company has had the policy of marketing its HEF(R) technology by
licensing the technology directly to mines or through existing explosive
manufacturers or supply companies in foreign markets. Currently, the
Company has licenses in South Africa, Australia, Namibia, India, Chile
and Thailand. The Company plans to continue its licensing activities in
certain jurisdictions, but as stated earlier, the Company has undertaken a
major shift of policy toward creating long-term equity positions through
strategic alliances with existing suppliers and government entities in
developing countries. Because there are inherent economic and political
risks in these developing economies, business risks are higher than in
more advanced economies. The Company's strategy is to join with local
suppliers or government entities where there is a substantial probability
that the alliance will survive political and economic changes from
time to time. The intent is to provide terhnology and other unique
services which will build a partnering relationship between the
Company and the foreign market such that its need will be readily apparent
and vital to the viability of the particular market niche.
Sodium Cyanide: The Company's joint venture with Degussa for
producing and marketing liquid sodium cyanide from the Winnemucca, Nevada
plant has concentrated on quality and service. There are principally two
types of products marketed to the gold mines for their heap 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 ready-to-use by the mining customer. In addition to the
hygienic qualities of liquids, the cost for the product is substantially
lower than for solid products when handling costs and chemical adjustment
costs are taken into account.
Since the liquid product is shipped by truck from the plant to the
mine site in a solution of 30% sodium cyanide and 70% water, freight costs
are very significant and must be managed carefully both in terms of safety
and environ-mental protection. Cyanco has proven its ability to provide
quality and cost effective delivery service to its mining customers.
Cyanco has contracted this dedicated service with Transwood Inc., an Omaha,
Nebraska company, formerly known as Herman Brothers. Cyanco renewed its
contract with Transwood for an additional five years commencing
January 1, 1995. At the end of 1995 delivery of liquified products into
the mine operator's tanks comprised over 90% of all cyanide used in our
freight logical market.
One of Cyanco's advantages over its competitors in the liquid
market is that it is the only producer of liquid which is manufactured
completely from raw materials at its plant in the gold district. Other
competitors either ship liquid product by rail to a transfer facility and
then on to the mines by truck or tanker or they ship in their solid products
from distant plants and then have dissolution tanks or special rood tankers
which allow for dissolution before discharging into mine site vessels.
Cyanco's competition is limited in its ability to react quickly to changes
in the market and to technological changes. Cyanco is positioned to
efficiently take advantage of these changes.
Dependence on Customers: Since MSI's customers are relatively
large surface mining companies, the number of companies it services are
relatively small in number compared to those of a wholesale distribution
or retail business. Consequently, the following table is prepared to show
the dependence of the Company on its relatively small number of customers.
Most of the customers, however, are subsidiaries of large multinational
companies with solid credit.
Explosives: Company % of Sales
Company A 29.15%
Company B 17%
Company C 11.24%
Loss of these customers, which is not expected to occur, could adversely
effect 1996 sales. In most cases the Company has long-term contracts with
its customers.
Patents, Trademarks and Licenses: The Company is the holder of six
U.S. patents, four of which relate to the composition and control of its HEF(R)
and EMGEL(R) emulsion products and two of which relate to methods of delivery
of explosives product at the mine site. These patents, which are not deemed
material to the Company's ability to compete in the explosives business,
expire at various dates beginning in 1999 and ending in 2013. The Company
<PAGE 3>
has obtained similar patents in several foreign countries and has licensed
the manufacture of HEF(R) and EMGEL(R) to six companies in Africa, Australia,
Chile, India, South Africa and Thailand.
The composition of E-21, the Company's proprietary ingredient
upon which its HEFa emulsion product is based, is deemed an important
trade secret by the Company. The Company has also trademarked HEF(R) as a
component of its bulk blasting agent and EMGEL(R) as its crosslinked packaged
emulsion explosive. The trademark is registered in the United States,
Canada and South Africa .
In March 1989, Cyanco obtained from Mitsubishi Gas Chemical Company,
Inc. ("Mitsubishi"), a Japanese corporation, in consideration of payment of
a one-time licensee fee, a license of 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 which is deemed materially important to
operation of the Cyanco Plant.
Research and Development: Expenditures for technical research
and development for the fiscal years ended December 31, 1995 and 1994 were
$480,000 and $275,000, respectively. The Company actively conducts research
on product improvement and development. The expenditures in each of the
years ending December 31, 1995 and 1994 were related to the Company's
explosives business. There has not been any customer-sponsored research
and development. Total expenditures for technical research and development,
market development and losses relating to the pilot emgel plant exceeded
$1,000,000 during 1995.
Raw Materials: The Company has not experienced significant
difficulty in obtaining necessary raw materials used in the manufacture of
its explosives products and does not expect significant difficulty in
obtaining raw materials in the future.
The Company must compete with the agricultural market for a major
portion of its raw materials (ammonium and calcium nitrate). The supplies
of these products have been adequate in past years to meet the need of
industrial, as well as agricultural users. The Company has ensured its
supply of needed materials by entering into several supply agreements with
the manufacturers of these raw materials. The Company does not deem any of
the supply agreements to be a contract upon which its explosives business is
substantially dependent.
Contracts for the raw materials required for the production of
liquid sodium cyanide by Cyanco have also been obtained, and Cyanco has
not had difficulty in obtaining necessary raw materials. Cyanco has
entered into long term firm transportation agreements with Paiute Pipeline
and Northwest Pipeline for transportation services of natural gas to the
Cyanco facility. Cyanco does not believe that its business is materially
dependent upon any one of its existing contracts and that alternative
sources of supply are available for any raw material.
Competition: The manufacture and sale of bulk and packaged
explosives and related equipment is a highly competitive business with
particular emphasis in recent years on price. This emphasis on price
continues to effect gross profit margins because the Company has offered
price reductions in response to lower prices offered by its competitors.
The Company, in its efforts to develop, manufacture and sell its products,
is competing with a number of companies having greater financial resources
and well established relationships in the industry. The Company believes
that ICI Explosives and Dyno Explosives Group are significant competitors
in the industry. The competitive position of the Company is not presently
significant; however, the Company believes its bulk explosives and packaged
products have a number of advantages in product performance and safety over
products of its competitors. (See "Products and Marketing".)
The Cyanco Plant represents one of two sources of delivered
liquid sodium cyanide in the western United States. The market for sodium
cyanide briquette or dry form in the United States is dominated by E.I.
DuPont Nemours ("DuPont"). Degussa with Cyanco product competes with DuPont
and another company which markets delivered liquid sodium cyanide. The Company
believes that the important competitive factors in the liquid sodium cyanide
market are location, service and quality, and that Cyanco's geographical
location in Nevada and its ability to deliver to customers in liquid form
represent important competitive advantages.
<PAGE 4>
Employees: The Company presently employs 50 full time employees
in its explosives business. An additional 23 full time employees are
employed at the Cyanco Plant. The Company and Cyanco considers their
relations with their employees to be very good. Currently, none of the
Company's projects have been unionized nor are there any known threatened
efforts by employees to unionize.
Environmental Regulation: The Company is subject to federal,
state and local laws regulating the protection of the environment in the
handling, storage and shipment of explosives materials. To date, except as
noted below, compliance with these regulations has not required material
expenditures and has not materially affected earnings or the competitive
position of the Company. In connection with preparing to manufacture and
sell 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
spill of hazardous materials. Cyanco's operations are designed such that
no hazardous waste is created during the manufacture of its product. The
Company and Cyanco will continue to be subject to environmental laws, rules
and regulations in their respective operations; however, compliance with
such laws, rules and regulations on an ongoing basis is not expected to
require additional material expenditures. In connection with a fire in
June, 1993 at the Company's plant at Point of Rocks, Wyoming environmental
clean-up was required. The clean-up was not covered by the Company's
insurance and was performed by outside professionals. No known residual
material remains from this incident and government requirements have
been fully satisfied.
Item 2: Properties
The corporate offices of the Company are located at 5284 South
Commerce Drive, Suite C-244, Salt Lake City, Utah, and comprise
approximately 6,885 square feet. The Company's current lease continues
through June 1996 at a monthly rental of $6,885. The Company purchased a
commercial tract of land in May 1994 consisting of approximately 1.8 acres
for the purpose of constructing office and lab facilities in the future.
The property was purchased for approximately $107,000 and property taxes
and insurance will cost approximately $6,000 annually. The Company has
plans to build corporate offices on the property during 1996 with a scheduled
completion date in late fall of 1996. The corporate office building with
adjacent research and lab facilities will be financed with a fifteen-year
fixed rate mortgage with limited escalation clauses at the beginning of the
5th and 10th year. Budgeted construction costs will approximate $800,000 of
which most will be financed by the Company's bank. In the meantime, the
Company believes that the current office space is readily available at
acceptable rates.
The Company manufactures HEF(R) and EMGEL(R) for sale to its mine
customers at facilities located on mine sites or adjacent to mine sites,
typically under leases tied to supply agreements.
The Company also leases a 640-acre site in Tooele County, Utah,
which is equipped with a fully developed test range and explosives magazine
facility. The Company currently leases the property on a year to year basis.
The rent on the property is approximately $12,000 per year.
The Company leases approximately 422 acres in Boon County, West
Virginia which it uses for manufacturing commercial explosives and emulsions
and for storing and maintaining related trucks, equipment and plant
facilities and for other related purposes. Rent on the property is
approximately $6,000 per year. Renewal of the lease is available on a
month-to-month basis. The Company is in negotiations with the new owner
either to purchase or re-lease the property on a longer term basis.
Cyanco is the owner of approximately five-hundred fifty (550)
acres located near Winnemucca, in Humboldt County, Nevada, upon which the
Cyanco Plant is located. The Cyanco plant is being expanded to include a
back-up production facility having an equal capacity to the existing facility
which is currently rated at a nominal capacity of 36 million pounds per year.
The property and facilities of the Company and Cyanco are deemed
adequate and suitable for their respective operations.
Item 3: Legal Proceedings
In December 1992 the Company was named as a defendant in an action
filed in the Federal Court of Canada, Trial Division, by Hanex Products, Inc.,
Explosives Limited and Bulk Explosives Limited, as plaintiffs. The plaintiffs
<PAGE 5>
allege that they are the owner, licensee and sublicensee, respectively, of a
patent covering a blasting or explosive composition and that the Company is
manufacturing, selling and supplying explosive compositions (various HEF(R)
blends) in Canada which infringe claims of the patent owned or utilized by
defendants. Plaintiffs are seeking a declaration of the patent's validity,
an injunction restraining the Company from making or selling its explosive
composition, damages or an accounting of the Company's profits, whichever is
greater, and for costs. In February 1993 the Company filed a Defense to
plaintiff's Statement of Claim denying the validity or enforceability of the
patent and any infringement thereof, asserting that plaintiffs lack standing
to bring the action and requesting that the action be dismissed. There was
no substantive activity on the suit in 1995.
On January 18, 1993 the Company filed in Court of Queens Bench of
Alberta, Canada an action against Rayco Steel, Ltd. and Nebojsa Vasic for
negligence and breach of contract. The claim by the Company is in connection
with the collapse of a Company owned silo located at the Company's operations
at Suncor near Fort McMurray, Alberta, Canada. The Company seeks damages in
an amount exceeding $400,000 (U.S.). The defendants have responded and
denied liability. Discovery is being pursued currently in preparation of
trial. There has been no trial date set.
Item 4: Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year.
PART II
Item 5: Market for the Registrant's Common Stock and Related Security Holder
Matters
(a) Price Range of Common Stock. The Company's common stock is traded
on NASDAQ and the following table shows the range of high and low bid prices
for the Company's common stock for the calendar quarters indicated. The
quotations, obtained from NASDAQ, represent prices in the over-the-counter
market between dealers in securities, do not include retail markup, markdown
or commissions, and do not necessarily represent actual transactions.
Bid Prices
----------
High Low
---- ---
1995 First Quarter $3.69 $2.75
Second Quarter 4.50 3.25
Third Quarter 5.50 3.75
Fourth Quarter 6.34 4.25
1994 First Quarter $3.00 $2.13
Second Quarter 2.88 2.50
Third Quarter 3.25 2.13
Fourth Quarter 3.13 2.38
(b) Approximate number of equity security holders. The approximate
number of record holders of the Company's Common Stock as of March 26, 1996
was 605, which does not include shareholders whose stock is held through
securities position listings.
(c) Dividends. The Company paid cash dividends on its common stock
in the amount of $82,810 for stockholders of record on November 30, 1995.
The dividend of $0.15 per share was paid on December 29, 1995. A cash
dividend of $51,087 or $.01 per share was paid in 1994. Payment of dividends
is within the discretion of the Company's Board of Directors and there are
no restrictions that limit the ability to pay dividends on the Common Stock
of the Company. On July 21, 1995 the Company issued a 5% stock dividend or
261,885 shares to shareholders of record on June 30, 1995.
<PAGE 6>
Item 6: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Revenues of the Company are a result of primarily two major sales
divisions of the Company's business:
(1) Explosives and (2) Cyanide. Cyanide sales are not reportable under the
Equity Method of accounting; however, in order to properly explain the
operations of the Company, the following table is presented to show a
comparison of Revenue of the Company for the years ended December 31, 1995
and December 31, 1994:
MSI's Cyanco Income MSI Explosives
------------------- --------------
Cyanco Cyanco Co's % Included in Revenue Total
Sales Income MSI Revenue Revenue
--------- ---------- ------- ----------- -------- --------
1995 25,300,000 $6,212,000 50% $3,106,000 $20,172,000 23,278,000
1994 19,202,000 $3,842,000 50% $1,921,000 $16,634,000 18,555,000
Total revenues for the Company show a 25% increase between 1994 and 1995.
This was primarily due to expanded sales in the Western U.S. and Canadian
operations by over $3,000,000 and an increase of MSI's revenue attributable
to its share of income from Cyanco of approximately $1,100,000. Licensing
income remained relatively stable for 1995 compared to 1994.
Net income of the Company increased by $1,133,000 or nearly 70%
from 1994 to 1995. Most of this increase was due to increased net income
from Cyanco. Operating contributions from explosives was approximately
$2,000,000 during 1995, but costs for business develpment and technical
research and development was approximately $851,000, an increase over 1994
expenditures of $400,000. Assuming political, economic and financial
conditions remain stable world-wide explosive income should significantly
increase during 1996 due to new contracts at Domenigoni and in anticipated
international sales, and should increase in Cyanide due to increasing prices
and demand reflecting the strenthening of gold prices. The Company does not
expect any significant change in the availabiity of raw materials and is
unaware of any known adverse raw material changes in supplies or pricing
which may adversely affect the Company's operations in the near future.
Liquidity and Capital Resources
The primary source for the Company's financial resources is from
operations. The Company maintained a revolving credit facility with its bank
in Salt Lake City, Utah in the amount of $1,400,000. At year end 1995, the
revolving credit was unutilized. The Company also had a long-term note to
its bank in the amount of $461,606 bearing an interest rate of 7.75% per
annum. See the notes to the Company's financial statements for more details.
In February of 1996 the Company negotiated and acquired new credit facilities
with another bank which consists of a revolving annual line of credit for
$1,500,000 bearing interest at the bank's prime rate and an equipment line
of credit with a term of five years in the amount of $1,000,000 bearing
interest at prime plus 1/2 of 1%. Net Cash provided from operations increased
from $1,334,000 during 1994 to $1,699,000 in 1995. This increase was largely
due to increased cash distributions from Cyanco. As Cyanco continues to
expand its market, its increased volume should continue to provide more than
$2,000,000 cash annually to the Company. However, during 1996 it is
anticipated that cash distributions from Cyanco will be minimized due to the
capital requirements for the back-up facilities to be constructed during 1996.
Capital expenditures during 1995 decreased by approximately $600,000 over that
spent in 1994. During 1995 non-capitalizable expenditures for business
development, primarily in overseas projects, increased by approximately
$400,000 over that spent during 1994.
Due to the continued development of international joint ventures
such as Ghana and Uzbekistan, the Company projects capital needs will increase
in 1996 over those in 1995. The Company estimates that approximately
$1,000,000 will be spent by MSI in start-up joint ventures and overseas.
Additional capital requirements for start-up of the Domenigoni project in
California will require approximately $500,000. In addition other research
and development and business development costs should approximate $500,000
during 1996. Cash flow from operations likely will be adequate to cover
these costs in addition to repaying long-term debt and lease commitments of
approximately $300,000 in 1996. The Company's new revolving credit and
equipment facility will be adequate to provide for working capital and capital
spending fluctuations in the ongoing capital needs of current projects, but
it is anticipated that the Company will acquire additional lines and letters
of credit to provide for the financing of its major foreign operations.
<page 7>
Because of the political and capitalization risks associated with
third-world countries, there exists a substantial risk that money invested in
those jurisdictions may erode due to the inflationary economies which exist.
Also, the internal balance of payments and capital shortages existing in those
countries may limit the ability to convert receivables into hard currency.
In addition, there exists substantial political risk that could negatively
impact the ability to repatriate the Company's profits and investments;
however, the recent past and current environments appear to be positive for
foreign investors. Management intends to use transfer payments, loans and
other credit facilities to minimize the risks inherent in doing business in
less developed countries and to joint venture its enterprises with local
governments or strong financial partners to ameliorate the effect of higher
business risks while positioning for long-term benefit from world wide
application of the Company's various technologies.
In management's opinion, the capital resources of the Company are
adequate to finance its business activity in the short term as well as the
long term assuming the current political, financial and economic environment
continues. In the long term, the results of operations and the liquidity of
the Company's resources could be impacted by factors such as market acceptance
of new and developing products, increased competitive pressures, instability
of local and international policies, capital availability, taxation, inflation,
and balance of payments. Consequently, the Company cannot determine the
ultimate effect that current products and strategies will have on long-term
net sales, earnings or stock price.
Item 7: Financial Statements
The Financial Statements of the Company called for by this Item are
contained in a separate section of this report. See "Index to Financial
Statements" on Page F-1.
Item 8: Changes In and Disagreements With Accountants on Accounting and
Financial Data
None.
PART III
Item 9: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required hereunder is incorporated by reference
from the sections of the Company's Information Statement filed in connection
with its May 23, 1996 Annual Meeting of Stockholders entitled "Directors and
Executive Officers" and "Compliance with Section 16(a) of the Exchange Act."
Item 10: Executive Compensation
The information required hereunder is incorporated by reference
from the sections of the Company's Information Statement filed in connection
with its May 23, 1996 Annual Meeting of Stockholders entitled "Executive
Compensation" and "Director Compensation."
Item 11: Security Ownership of Certain Beneficial Owners and
Management
The information required hereunder is incorporated by reference from
the sections of the Company's Information Statement filed in connection with
its May 23, 1996 Annual Meeting of Stockholders entitled "Security Ownership
of and Certain Beneficial Owners and Management."
Item 12: Certain Relationships and Related Transactions
The information required hereunder is incorporated by reference from
the sections of the Company's Information Statement filed in connection with
its May 23, 1996 Annual Meeting of Stockholders entitled "Certain Relationships
and Related Transactions."
<page 8>
Item 13: Exhibits and Reports on Form 8-K
(a) Exhibits
No. Page No. Description
- -------------------------------------------------------------------------------
1. Articles of Incorporation and Bylaws. (Incorporated
herein by reference from Form 10-K Report filed by
the Company for the fiscal year ended December 31,
1985.)
2. Amendment to Articles of Incorporation to reflect the
one-for-five reverse stock split which became
effective June 15, 1987. (Incorporated by
reference from the Form 10-K Report filed by the
Company for the fiscal year ended December 31, 1987).
3. Bylaws of the Corporation as amended March 1, 1988.
(Incorporated by reference from the Form 10-K Report
filed by the Company for the fiscal year ended
December 31, 1987).
4. Loan Agreement. (Incorporated herein by reference
from Form 10-K Report filed by the Company for the
fiscal year ended December 31, 1985.)
5. Amendment and Modification to Loan Agreement.
(Incorporated by reference from the Form 10-K Report
filed by the Company for the fiscal year ended
December 13, 1987.)
6. 1988 Nonqualified Stock Option Plan. (Incorporated by
reference from the Form 10-K Report filed by the
Company for the fiscal year ended December 31, 1987.)
7. Description of Executive Medical Reimbursement Plan.
(Incorporated by reference from the Form 10-K Report
filed by the Company for the fiscal year ended
December 31,1987.)
8. Committed Revolving Credit Facility from Dresdner
Bank, AG.to Cyanco, dated July 8, 1993.
(Incorporated by reference from the Form 10-Q Report
filed by the Company on November 11, 1993.)
9. Letter on certifying accountant. (Incorporated by
reference from the Form 8-K/A Report filed by the
Company on December 7, 1993.)
10. List of Subsidiaries
11. Constituency Agreement and Charter for MSI-Turon Ltd.
<page 9>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MINING SERVICES INTERNATIONAL CORPORATION
/s/ John T. Day
- ------------------------------
John T. Day, President
Date: March 26, 1996
- -----------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures Capacity in Which Signed Date
/s/ Edward Neff Bagley Chairman of the March 26, 1996
Edward Neff Bagley Board of Directors
/s/ Lex L. Udy Vice Chairman and March 26, 1996
Lex L. Udy Secretary and Director
/s/ John T. Day President and Chief March 26, 1996
John T. Day Chief Executive Officer
and Director (Principal
Executive Officer)
/s/ Edward Dallin Bagley Director March 26, 1996
Edward Dallin Bagley
/s/ Nathan L. Wade Director March 26, 1996
Nathan L. Wade
/s/ Duane W. Moss Chief Financial Officer March 26, 1996
Duane W. Moss and legal counsel
<page 10>
MINING SERVICES
INTERNATIONAL CORPORATION
Index to Consolidated Financial Statements
Page
----
Report of Tanner & Co. F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Shareholder's Equity F-5
Consolidated Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
<page 11>
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Mining Services International Corporation
We have audited the consolidated balance sheet of Mining Services
International Corporation as of December 31, 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for
the years ended December 31, 1995 and 1994. 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. 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 Mining
Services International Corporation as of December 31, 1995, and the results
of their operations and their cash flows for the years ended December 31,
1995 and 1994 in conformity with generally accepted accounting principles.
March 13, 1996
F-2
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Balance Sheet
December 31, 1995
ASSETS
------
Current assets:
Cash $ 809,000
Receivables, net 2,711,000
Inventories 857,000
Prepaid expenses 118,000
-------
Total current assets 4,495,000
Property, plant and equipment, net 2,532,000
Investment in joint venture 7,171,000
Other assets 362,000
---------
$14,560,000
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,717,000
Current portion of long-term debt 176,000
---------
Total current liabilities 1,893,000
Long-term debt 337,000
Deferred income taxes 975,000
Deferred gain on sale and leaseback 84,000
--------
Total liabilities 3,289,000
---------
Commitments and contingencies -
Shareholders' equity:
Common stock, $.001 par value, 500,000,000
shares authorized; 5,525,545 shares issued 6,000
Capital in excess of par value 5,888,000
Notes receivable from stock sales (509,000)
Retained earnings 5,886,000
---------
Total shareholders' equity 11,271,000
----------
$14,560,000
==========
See accompanying notes to consolidated financial statements.
F-3
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Income
Years Ended
December 31,
--------------
1995 1994
Revenues:
Net sales $18,893,000 15,459,000
Royalties 1,279,000 1,175,000
Equity in earnings of joint venture 3,106,000 1,921,000
---------- ----------
23,278,000 18,555,000
Costs and expenses:
Cost of sales 18,290,000 15,174,000
Selling, general and administrative 1,104,000 837,000
Research and development 478,000 275,000
---------- ---------
19,872,000 16,286,000
---------- ----------
Income from operations 3,406,000 2,269,000
Other income (expense):
Interest expense (74,000) (94,000)
Other expense (63,000) 77,000
----------- ---------
Income before provision for income taxes 3,269,000 2,252,000
Provision for income taxes:
Current (390,000) (80,000)
Deferred (116,000) (542,000)
---------- ---------
Net income $ 2,763,000 1,630,000
========== ==========
Earnings per common and common equivalent share $.49 .31
=== ===
Weighted average number of common and common
equivalent shares 5,642,436 5,312,970
========= =========
See accompanying notes to consolidated financial statements.
F-4
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 1995 and 1994
<TABLE>
Capital Notes
in Receivable
Excess From
Common Stock of Par Stock Retained Treasury Stock
Shares Amount Value Sales Earnings Shares Amount
------ ------- -------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
at
January
1, 1994 4,739,978 $5,000 4,206,000 - 2,706,000 (72,000) (90,000)
Shares
issued
under
stock
option
plan 440,750 1,000 491,000 (469,000) - - -
Dividends
paid - - - - (51,000) - -
Net income - - - - 1,630,000 - -
Balance at
December
31,
1994 5,180,728 6,000 4,697,000 (469,000) 4,285,000 (72,000) (90,000)
Shares
issued
under
stock
option
plan 166,390 - 247,000 (46,000) - - -
Payments
made on notes
receivable
from stock
sales - - - 6,000 - - -
Stock
dividends
paid 261,885 - 1,080,000 - (1,080,000) - -
Treasury
stock
retired (72,000) - (90,000) - - 72,000 90,000
Shares
retired in
payment
of interest
on notes
receivable(6,332) - (26,000) - - - -
Shares
retired to
exercise
stock
options (5,226) - (20,000) - - - -
Shares
surrendered 100 - - - - - -
Cash
dividends
paid - - - - (82,000) - -
Net income - - - - 2,763,000 - -
Balance at
December 31,
1995 5,525,545 $6,000 5,888,000 (509,000) 5,886,000 - -
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Cash Flows
<TABLE>
Years Ended
December 31,
---------------
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $2,763,000 1,630,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 495,000 626,000
Provision for losses on accounts receivable (18,000) (19,000)
Stock compensation expense - 11,000
Loss on disposal of equipment 9,000 (43,000)
Gain on sale and leaseback - (140,000)
Interest income on common stock notes receivable (26,000) -
Undistributed earnings of joint venture (877,000) (721,000)
Deferred income taxes 116,000 542,000
Changes in assets and liabilities:
(Increase) decrease in receivables (512,000) 49,000
Increase in inventories (329,000) (93,000)
Decrease (increase) in prepaid expenses 109,000 (131,000)
Increase (decrease) in accounts payable and
accrued expenses 257,000 (538,000)
(Decrease) increase in deferred
gain on sale and leaseback (51,000) 135,000
(Increase) decrease in other assets (267,000) 26,000
--------- --------
Net cash provided by operating activities 1,669,000 1,334,000
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of plant and equipment 5,000 606,000
Purchase of plant and equipment (840,000 (1,438,000)
--------- ---------
Net cash used in investing activities (835,000) (832,000)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 181,000 12,000
Payments received on notes receivable from stock sales 6,000 -
Payments on long-term debt (239,000) (399,000)
Cash dividends paid (82,000) (51,000)
--------- ---------
Net cash used in financing activities (134,000) (438,000)
--------- ---------
Net increase in cash 700,000 64,000
Cash, beginning of year 109,000 45,000
------- -------
Cash, end of year $ 809,000 109,000
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) Summary of Business and Significant Accounting Policies
Mining Services International Corporation (the Company) and its
wholly owned subsidiaries, MSI - Fabrication, Mine Chemical Services, Inc.
(MCS), Mining Services West Virginia, Inc., and Nevada Chemicals, Inc.,
(Nevada Chemicals), are primarily engaged in the development, manufacture and
sale of bulk explosives and related support and delivery equipment. In
addition, Nevada Chemicals has a fifty percent interest in Cyanco Company
(Cyanco), a non-corporate joint venture, which is engaged in the manufacture
and sale of liquid sodium cyanide. The financial statements reflect the
investment in Cyanco under the equity method of accounting. Summarized
financial information for Cyanco is included in note 12.
During 1995 the Company entered into an Agreement with Production
Association "Ammofos" of Almalyk, the Republic of Uzbekistan (PAA). The
Agreement creates a joint venture with the Company and PAA which is a
chemical company providing fertilizers to the agricultural industry operating
under the control of the Ministry of Chemistry in the Republic of Uzbekistan.
The joint venture will operate under a limited liability enterprise organized
under a charter similar in effect to the Articles of Incorporation in U.S.
jurisdictions. The enterprise is called Turon-MSI Ltd., in which the Company
holds a 51% interest and PAA holds a 49% interest. MSI has committed to
supply plant and equipment along with its technological know-how in return
for its controlling interest in the joint venture. As of December 31, 1995,
there had been no operations and the Company had expended approximately
$220,000 related to plant and equipment located in Uzbekistan.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company, and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
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.
Inventories
Inventories are recorded at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) method.
F-7
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(1) Summary of Business and Significant Accounting 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 is determined using the straight-line method over the
estimated useful lives of the assets or terms of the lease which range from
three to seven years. 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 operations.
Other Assets
Certain items included in other assets are amortized over five years
using the straight-line method. Amortization expense totaled $15,000 and
$17,000 in 1995 and 1994, respectively.
Revenue Recognition
Revenue is recognized upon shipment of product or performance of
services.
Income Taxes
Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax reporting,
principally related to depreciation.
Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share is computed using
the weighted average number of common and common equivalent shares
outstanding during the year. Common equivalent shares consist of the
Company's common stock issuable upon exercise of stock options, determined
using the treasury stock method. Fully diluted earnings per share
is the same or not materially different than primary earnings per share, and
accordingly, is not presented.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its
customers. Accordingly, the Company performs ongoing credit evaluations of
its customers and maintains allowances for possible losses which, when
realized, have been within the range of management's expectations.
The Company's customer base consists primarily of mining companies.
Although the Company is directly affected by the well-being of the mining
industry, management does not believe significant credit risk exists at
December 31, 1995.
F-8
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(1) Summary of Business and Significant Accounting Policies - Continued
Concentration of Credit Risk - Continued
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced
any losses in such account and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with 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.
(2) Detail of Certain Balance Sheet Accounts
Receivables:
Trade receivables $2,383,000
Less allowance for doubtful accounts (10,000)
Income tax refund receivable 338,000
---------
$2,711,000
=========
Inventories:
Raw materials $ 391,000
Finished goods 466,000
---------
$ 857,000
=========
Accounts payable and accrued expenses:
Trade payables $1,575,000
Accrued expenses 142,000
---------
$1,717,000
=========
F-9
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(3) Property, Plant and Equipment
Property, plant and equipment consists of the following:
Support equipment and fixtures $ 4,589,000
Plant equipment and fixtures 2,690,000
Office equipment and fixtures 478,000
Vehicles 720,000
Land 107,000
----------
8,584,000
Less accumulated depreciation
and amortization (6,052,000)
----------
$ 2,532,000
==========
(4) Bank Line-of-Credit
The Company has a bank line-of-credit agreement which allows the
Company to borrow a maximum amount of $1,400,000 at an interest rate equal to
the bank's prime rate plus 1.25 percent. The line-of-credit matures on May
11, 1996, is secured by receivables, inventory and intangibles and had no
outstanding balance at December 31, 1995. The maximum balance outstanding
under the agreement during 1995 was $425,000.
(5) Long-Term Debt
Long-term debt at December 31, 1995, is comprised of the following:
Note payable to a bank in monthly installments
of $15,118, including interest at 7.75%,
secured by equipment, accounts receivable,
inventory and intangible assets $ 462,000
F-10
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(5) Long-Term Debt - Continued
Deferred compensation arrangement due in monthly
installments of $5,500, including imputed
interest at 11% through March, 1996 25,000
Notes payable to banks, in aggregate monthly
installments of $2,023, including interest at
rates ranging from 7.1% and 12.5%, secured
by vehicles 26,000
------
513,000
Less current portion (176,000)
---------
Long-term debt $ 337,000
=========
Future maturities of long-term debt are as follows:
1996 $176,000
1997 189,000
1998 148,000
-------
$513,000
=======
None of the Company's financial instruments are held for trading
purposes. The Company estimates that the fair value of all financial
instruments at December 31, 1995, does not differ materially from the
aggregate carrying values of its financial instruments recorded in
the accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgement is necessarily required in
interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
(6) Deferred Gain on Sale and Leaseback
During 1994, the Company entered into several agreements for the
sale and leaseback of several vehicles. The Company has guaranteed the
vehicles projected future fair market sales values of approximately $84,000,
to the lessor upon the termination of the leases. The leases are classified
as operating leases and expire in 1997.
F-11
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(6) Deferred Gain on Sale and Leaseback - Continued
The book values of the vehicles of approximately $418,000 have been
removed from the balance sheet, and the gains realized on the sales of
approximately $140,000 have been deferred and are being credited to income as
rent expense adjustments over the lease terms. Rentals on these leases was
$186,000 and $61,000 for 1995 and 1994, respectively.
Future minimum lease payments for these and other operating leases
are as follows:
1996 $231,000
1997 170,000
1998 19,000
-------
$420,000
=======
Rental expense on expired and unexpired operating leases for 1995
and 1994 was $313,000 and $163,000, respectively.
(7) Notes Receivable from Stock Sales
During the years ended December 31, 1995 and 1994, certain officers
exercised stock options in exchange for long-term notes, which bear interest
at the LIBOR rate plus 1 percent and are adjusted annually. The notes are
collateralized by the stock issued upon exercise of the stock options.
Interest is payable annually and principal is due on or before December,
1997, for the options exercised during 1995 and July, 1999, for the options
exercised during 1994.
(8) Income Taxes
The current provision for income taxes primarily represents income
taxes on royalty income earned in foreign countries and alternative minimum tax.
F-12
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(8) Income Taxes - Continued
The provision for income taxes is different than amounts which would
be provided by applying the statutory federal income tax rate to income
before provision for income taxes for the following reasons:
Year Ended
December 31,
----------------
1995 1994
Federal income tax provision at statutory rate $(1,111,000) (766,000)
Stock options 124,000 -
Change in valuation allowance 517,000 82,000
Life insurance and meals (18,000) (21,000)
Other (18,000) 83,000
----------- --------
$ (506,000) (622,000)
=========== =========
At December 31, 1995, the Company has net operating loss, investment
tax credit and foreign tax credit carryforwards available to offset future
taxable income and taxes payable as follows:
Net Investment Foreign
Operating Tax Tax
Expiration date: Loss Credit Credit
--------- ---------- --------
1996 $ - 7,000 65,000
1997 - 63,000 111,000
1998 - 22,000 123,000
1999 - 6,000 164,000
2000 - 19,000 173,000
2001 - - -
2005 - - -
2006 340,000 - -
--------- --------- -------
$340,000 117,000 636,000
========= ========= =======
The investment tax credit carryforwards are reported net of the 35
percent reduction required by the Tax Reform Act of 1986. If certain
substantial changes in the Company's ownership should occur, there would be
an annual limitation on the amount of carryforwards which can be utilized.
F-13
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(8) Income Taxes - Continued
Deferred tax assets (liabilities) at December 31, 1995 are comprised
of the following:
Depreciation $(2,073,000)
Net operating loss carryforward 116,000
Alternative minimum tax carryforward 436,000
Investment and foreign tax
credit carryforwards 753,000
Valuation allowance (206,000)
Other (1,000)
------------
$ (975,000)
============
(9) Supplemental Cash Flow Information
During the year ended December 31, 1995:
- The Company retired treasury stock by reducing capital in
excess of par value by $90,000.
- The Company issued common stock in exchange for long-term
notes receivable of $46,000.
- The Company capitalized retained earnings of $1,080,000
due to the issuance of a 5% stock dividend.
- A shareholder retired common stock with a market value of
$20,000 in order to exercise stock options.
- Officers/shareholders retired common stock with a market
value of $26,000 in order to pay interest on notes
receivable from stock sales.
During the year ended December 31, 1994:
- The Company acquired equipment in exchange for long-term
debt of $70,000.
- The Company issued common stock in exchange for long-term
notes receivable of $469,000.
F-14
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(9) Supplemental Cash Flow Information - Continued
Actual amounts paid for interest and income taxes are as follows:
Year Ended
December 31,
-----------------
1995 1994
---- ----
Interest $ 74,000 95,000
====== ======
Income taxes $495,000 51,000
======= ======
(10) Major Customers and Export Sales
The Company is primarily engaged in the development and manufacture
of mining chemicals, including bulk explosives and sodium cyanide, and
related equipment.
Sales to major customers which exceeded 10 percent of net sales are
as follows:
Year Ended
December 31,
-------------
1995 1994
---- ----
Company A $5,882,000 4,341,000
Company B 3,483,000 2,672,000
Company C 2,268,000 2,423,000
Export sales to unaffiliated customers were $4,371,000 and
$2,847,000 in 1995 and 1994, respectively. All major export sales were made
to Canada.
F-15
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(11) Non-Qualified Stock Option Plan
Under the Non-Qualified Stock Option Plan (the Option Plan), as
amended in 1988, 1990, 1992 and 1993, a maximum of 1,315,130 options may be
granted 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.
Information regarding the Option Plan is summarized below:
Number of Option Price
Options Per Share
--------- ------------
Outstanding at December 31, 1994 492,000 .75-2.38
Granted 354,400 3.57-5.75
Exercised (166,390) 2.81-4.88
Expired (26,900) 1.19-2.38
----------
Outstanding at December 31, 1995 653,110 $.96-5.75
==========
Options exercisable and shares available for future grant are as
follows:
December 31,
-------------
1995 1994
---- ----
Options exercisable 212,110 404,000
Shares available for grant 193,800 169,500
F-16
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(12) Significant Unconsolidated Affiliate
Summarized financial information for Cyanco, a significant
unconsolidated affiliate of the Company, is as follows:
December 31,
------------
1995 1994
---- ----
Results for year:
Gross revenues $25,300,000 19,202,000
Gross profit $ 9,238,000 6,333,000
Net income $ 6,212,000 3,842,000
Year-end financial position:
Current assets $ 5,920,000 3,822,000
Noncurrent assets $15,747,000 16,156,000
Current liabilities $ 4,541,000 2,659,000
Noncurrent liabilities $ 2,476,000 4,402,000
(13) Related Party Transactions
The Company performs certain administrative functions for Cyanco for
which it receives a management fee. The Company records the management fee
as an offset to selling, general and administrative expenses. These
management fees totaled $357,000 and $279,000 during 1995 and 1994,
respectively.
At December 31, 1995, the Company currently has a receivable of
$45,000 from Cyanco.
(14) Profit Sharing Plan
The Company has a defined contribution profit sharing plan which is
qualified under Section 401(K) of the Internal Revenue Code. The plan
provides retirement benefits for employees meeting minimum age and service
requirements. Participants may contribute up to 20 percent 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 amounts contributed to the plan by the
Company during 1995 and 1994 were $25,000 and $26,000, respectively.
F-17
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements - Continued
(15) Commitments and Contingencies
The Company and its joint venture partner have guaranteed notes
payable with a balance of $1,900,000 at December 31, 1995 on behalf of
Cyanco. The Company has also agreed to indemnify its joint venture partner
for any amounts paid by Cyanco under a deferred royalty agreement, which at
December 31, 1995, had an outstanding balance of $2,476,000.
The Company may become or is subject to investigations, claims or
lawsuits ensuing out of the conduct of its business, including those related
to environmental safety and health, roduct liability, commercial transactions
etc. The Company is currently not aware of any such items which it believes
could have a material adverse affect on its financial position.
(16) Subsequent Events
The Company has entered into preliminary agreements to form new
joint ventures with other entities for the manufacture and marketing of its
products. Management estimates that if these agreements are finalized
during 1996 they may require an aggregate of approximately $1,500,000 of
capital expenditures during 1996.
(17) Effect of Recently Issued Financial Accounting Standards
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123
defines a fair value based method of accounting for an employee stock option.
Fair value of the stock option is determined considering factors such as the
exercise price, the expected life of the option, the current price of the
underlying stock and its volatility, expected dividends on the stock, and the
risk-free interest rate for the expected term of the option. Under the fair
value based method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period. A
company may elect to adopt SFAS No. 123 or elect to continue accounting for
its stock option or similar equity awards using the intrinsic method, where
compensation cost is measured at the date of grant based on the excess of the
market value of the underlying stock over the exercise price. If a company
elects not to adopt SFAS No. 123, then it must provide pro forma disclosure
of net income and earnings per share, as if the fair value based method had
been applied.
SFAS No. 123 is effective for transactions entered into for fiscal
years that begin after December 15, 1995. Pro forma disclosures for entities
that elect to continue to measure compensation cost under the old method must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994. It is currently anticipated that the Company will
continue to account for stock-based compensation plans under the intrinsic
method and therefore, SFAS No. 123 will have no effect on the Company's
consolidated financial statements.
F-18
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