----------------------------------------------------------------------
U.S. Securities and Exchange Commission
Washington, D.C. 20549
--------------------------
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the quarterly period ended September 30, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission File No. 0-10634
---------------------------
Mining Services International Corporation
(Exact Name of Registrant as Specified in Its Charter)
Utah 87-0351702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8805 South Sandy Parkway
Sandy, Utah 84070-6408
(Address of principal executive offices, zip code)
Issuers telephone number: (801) 233-6000
---------------------------
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 ___
The number of shares outstanding of the registrant's par value $0.001
Common Stock as of November 6, 1998 was 7,413,560
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<PAGE>
<TABLE>
<CAPTION>
Mining Services International Corporation
Index
<S> <C>
Page No.
Part I Financial Information
Item 1. Consolidated Balance Sheet (Condensed) September 30, 1998 and 1
December 31, 1997.
Consolidated Statement of Operations (Condensed) for the 2
three-months ended September 30, 1998 and September 30, 1997.
Consolidated Statement of Operations (Condensed) for the 3
nine-months ended September 30, 1998 and September 30, 1997.
Consolidated Statement of Cash Flows (Condensed) for the 4
nine-months ended September 30, 1998 and September 30, 1997.
Notes to the Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
Part II Other Information
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K 8
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Financial Statements
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Balance Sheet (Condensed)
September 30, 1998 December 31,1997
ASSETS (Unaudited)
------------------- -----------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $2,913,000 $1,160,000
Receivables, net 5,169,000 4,232,000
Inventories 862,000 830,000
Prepaid expenses 117,000 139,000
Current portion of notes receivable from joint ventures 435,000 435,000
------------------- -----------------------
Total current assets 9,496,000 6,796,000
Property, plant and equipment, net 4,115,000 4,122,000
Investments in joint ventures 14,006,000 12,448,000
Notes receivable from joint ventures 965,000 965,000
Other assets 185,000 370,000
------------------- -----------------------
$28,767,000 24,701,000
=================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Accounts payable and accrued expenses $2,543,000 1,874,000
Deferred income taxes 2,437,000 2,222,000
------------------- -----------------------
Total liabilities 4,980,000 4,096,000
------------------- -----------------------
Shareholders' equity:
Common stock, $.001 par value; 500,000,000 shares
Authorized; 7,413,560 shares issued 7,000 7,000
Capital in excess of par value 5,503,000 5,416,000
Retained earnings 18,277,000 15,182,000
------------------- -----------------------
Total Shareholders' equity 23,787,000 20,605,000
------------------- -----------------------
$28,767,000 24,701,000
=================== =======================
See accompanying notes to financial statements
Page 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Operations (Condensed)
(Unaudited)
3 months ended 3 months ended
9/30/98 9/30/97
------------------ -------------------
Revenues:
<S> <C> <C>
Net sales $ 6,312,000 $ 4,612,000
Royalties and license fee income 283,000 434,000
Equity in earnings from joint ventures 1,463,000 2,111,000
------------------ -------------------
8,058,000 7,157,000
Cost and expenses:
Cost of sales, royalties, and license fees 5,771,000 4,762,000
General and administrative 271,000
281,000
Research and development 206,000 129,000
------------------ -------------------
6,258,000 5,162,000
------------------ -------------------
Income from operations 1,800,000 1,995,000
Other income (expense), net 26,000 6,000
------------------ -------------------
Income before provision for income taxes 1,826,000 2,001,000
Provision for income taxes
Current 482,000 595,000
Deferred 170,000 0
------------------ -------------------
652,000 595,000
------------------ -------------------
Net income $ 1,174,000 $ 1,406,000
================== ===================
Weighted Average number of shares outstanding
Basic 7,368,000 7,345,000
================== ===================
Diluted 7,534,000 7,588,000
================== ===================
Net Income per Share
Basic $ .16 $ .19
================== ===================
Diluted $ .16 $ .18
================== ===================
See accompanying notes to financial statements
Page 2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Operations (Condensed)
(Unaudited)
9 months ended 9 months ended
9/30/98 9/30/97
------------------ -------------------
Revenues:
<S> <C> <C>
Net sales $ 17,219,000 $ 13,789,000
Royalties and license fee income 1,039,000 1,305,000
Equity in earnings from joint ventures 4,124,000 5,463,000
------------------ -------------------
22,382,000 20,557,000
Cost and expenses:
Cost of sales, royalties, and license fees 16,541,000 14,024,000
General and administrative 901,000 952,000
Research and development 438,000 388,000
------------------ -------------------
17,880,000 15,364,000
------------------ -------------------
Income from operations 4,502,000 5,193,000
Other income (expense), net 75,000 42,000
------------------ -------------------
Income before provision for income taxes 4,577,000 5,235,000
Provision for income taxes
Current 1,188,000 1,373,000
Deferred 294,000 0
------------------ -------------------
1,482,000 1,373,000
------------------ -------------------
Net income $ 3,095,000 $ 3,862,000
================== ===================
Weighted Average number of shares outstanding
Basic 7,368,000 7,345,000
================== ===================
Diluted 7,534,000 7,588,000
================== ===================
Net Income per Share
Basic $ .42 $ .53
================== ===================
Diluted $ .41 $ .51
================== ===================
See accompanying notes to financial statements
Page 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Cash Flows (Condensed)
(Unaudited)
9 months ended 9 months ended
9/30/98 9/30/97
------------------- -------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ $3,095,000 $ 3,862,000
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 581,000 478,000
Net (retirements) issuance of common stock 0 (44,000)
Stock compensation expense 3,000 0
Loss (Gain) on disposal of equipment 1,000 (32,000)
(Undistributed)/ distributed earnings in joint ventures (87,000) (2,041,000)
Deferred income taxes 215,000 570,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable (937,000) (645,000)
(Increase) decrease in inventories (32,000) (30,000)
(Increase) decrease in prepaid expenses 22,000 (54,000)
(Increase) decrease in other assets 185,000 (12,000)
Increase (decrease) in accounts payable and accrued expenses 669,000 410,000
------------------- -------------------
Net cash provided by operating activities 3,715,000 2,462,000
------------------- -------------------
Cash flows from investing activities:
Proceeds from the sale of plant and equipment 33,000 451,000
Purchase of plant and equipment (608,000) (1,333,000)
Investment in joint ventures (1,471,000) (1,297,000)
------------------- -------------------
Net cash used in investing activities (2,046,000) (2,179,000)
------------------- -------------------
Cash flows from financing activities:
Issuance of common stock 84,000 0
Net proceeds from operating line of credit 0 33,000
Payment on long-term debt 0 (567,000)
------------------- -------------------
Net cash provided by (used in) financing activities 84,000 (534,000)
------------------- -------------------
Net increase (decrease) in cash 1,753,000 (251,000)
Cash and cash equivalents, beginning of period 1,160,000 732,000
------------------- -------------------
Cash and cash equivalents, end of period $ 2,913,000 $ 481,000
=================== ===================
See accompanying notes to financial statements
Page 4
</TABLE>
<PAGE>
MINING SERVICES INTERNATIONAL
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The interim financial information for the three-months ended September
30, 1998 and the nine-months ended September 30, 1998 included herein is
unaudited and the December 31,1997 Balance Sheet is derived from audited
financial statements; however, such information reflects all adjustments, which
are, in the opinion of management, necessary for a fair statement of results for
the interim periods.
These consolidated financial statements are presented in accordance
with the requirements for Form 10-Q and consequently may not include all the
disclosures normally required by the generally accepted accounting principles or
those normally made in the annual 10-K filing. Financial information relating to
depreciation contained in the Management's Discussion and Analysis of Financial
Condition and Results of Operations are incorporated by reference into these
notes.
The results of operations for the three-month period ended September
30, 1998 and the nine-month period ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Because of the increasing investment of the Company in joint ventures
("JV" or "JV's") which are not consolidated, but accounted for under the equity
method, the following comparative schedule is prepared to clarify and
demonstrate the Consolidated Revenue of the Company during the three-month and
nine-month periods ending September 30, 1998 and 1997. As demonstrated in the
schedule, the Company's consolidated Revenue includes its share of equity in
earnings from JV's:
<TABLE>
<CAPTION>
Non Consolidated Amount MSI's MSI's
Joint Venture Joint Venture Equity Included in Non-JV Consolidated
Sales Net Income MSI MSI Revenue Revenue Revenue
<S> <C> <C> <C> <C> <C> <C>
9 Months 1998 $ 26,755,000 $ 8,248,000 50% $ 4,124,000 $ 18,258,000 $ 22,382,000
9 Months 1997 $ 29,266,000 $ 9,959,000 50% $ 5,463,000 $ 15,094,000 $ 20,557,000
3 Months 1998 $ 9,395,000 $ 2,926,000 50% $ 1,463,000 $ 6,595,000 $ 8,058,000
3 Months 1997 $ 10,198,000 $ 4,222,000 50% $ 2,111,000 $ 5,046,000 $ 7,157,000
Note: MSI does not consolidate revenues from 50% or less controlled joint ventures
</TABLE>
NOTE 3: INVENTORIES
Inventories at September 30, 1998 and December 31, 1997 have been
recorded at the lower of cost or market, cost being determined on the first-in,
first-out (FIFO) method. The composition of inventories at September 30, 1998
and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31,1997
----------------------- ----------------------
<S> <C> <C>
Raw Materials $ 492,000 $ 407,000
Finished Goods $ 370,000 $ 423,000
----------------------- ----------------------
$ 862,000 $ 830,000
======================= ======================
</TABLE>
Page 5
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three-months ended September 30, 1998 vs. 1997
- ----------------------------------------------
Revenues, royalties, and equity in earnings from joint ventures
involved in explosives during the quarter ended September 30, 1998 was
$6,808,000 which represents an increase over the same period in 1997 of
$2,000,000 or 42%. Operating contribution (before taxes and general and
administrative expenses) from explosives increased during the third quarter of
1998 by $453,000 to $687,000 or an increase of 194% compared to that in the
third quarter of 1997.
The relative operating contribution from the explosives business as
compared to the cyanide business for the 3rd quarter of 1998 was 33% from
explosives and 67% from cyanide. During the third quarter of 1997 the relative
percentages for operating contribution were 10% from explosives and 90% from
cyanide.
The Company's strategy to increase the explosives business in terms of
volume and profitability is coming to fruition. While the decrease in volume and
profitability in the cyanide business has materialized during 1998 due to the
continuing weakness in gold prices, the explosives business has increased so
that by the year-end 1998, the Company expects net income before tax, to be
approximately the same for 1998 as compared to 1997.
During the third quarter of 1998, operating contribution from Cyanco,
including management fees and earnings on investments was approximately $1.39
million compared to $1.96 million during the same quarter of 1997, a decrease of
29% due to lower prices. Cyanco, however, has decreased operating expenses and
is poised for a rebound as it aggressively seeks larger market share and better
pricing as gold prices recover.
In addition to decreased profits from Cyanide, the effective tax rate
for the third quarter 1998 was 35% compared to 29% for the same period in 1997.
Consequently, income decreased in the third quarter 1998 to $1.174 million from
$1.406 million in the same quarter of 1997, a decrease of 16.5%
So long as commodity output in major mining areas continues to be a
priority for the producing countries during the current unstable world economy,
the Company expects continued revenues and income growth in the explosives
business domestically as well as internationally. Continued expansion of the
cyanide market through aggressive marketing, cost reduction and product
development should continue to provide the company with substantial growth
opportunities.
Nine-months ended September 30, 1998 vs. 1997
- ---------------------------------------------
The same general impact during the first nine-months of 1998 compared
to the same period of 1997 was experienced as described for the respective third
quarters. The explosives business in terms of operating contribution (income
before taxes and general and administrative expenses) grew from $1.066 million
in 1997 to $1.728 million, an increase of 62%. The operating contribution from
cyanide decreased from $5.079 million to $3.676 million, a decrease of 28%. The
relative operating contribution of explosives compared to cyanide grew from 17%
in 1997 to 32% for the first nine months of 1998. The effective tax rate during
the first nine months of 1997 was 26% compared to 32% in 1998 due to certain
permanent book/tax differences available in 1997. Due to the foregoing, net
income decreased from $3.862 million for the nine-month period of 1997 to $3.095
million for the nine-moths ending September 30, 1998, a decrease of 20%. General
and administrative expenses decreased slightly comparing the first nine-months
of 1997 to that of 1998.
Year 2000 Issue
- ---------------
Management believes the concerns for Year 2000 issues have been
adequately addressed internally during 1998. All material systems used in the
Company, including accounting, manufacturing, facilities and desktop systems,
are being converted to be Year 2000 compliant by the end of 1998. Management is
of the opinion that consequences of Year 2000 issues will not have a material
effect on the company's business, results of operations, or financial condition.
However, no organization, including the company, can control all aspects of
achieving and maintaining Year 2000 compliance. The company plans to monitor the
Year 2000 compliance of the third parties on which the company may rely. There
can be no guarantee that timely conversion, or that a failure to convert by
another company would not have a materially adverse effect on the company's
business, results of operations or financial condition. Management's estimated
cost for assessing and reaching Year 2000 compliance during for 1998 and 1999
should be under $100,000.
Page 6
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company continued to strengthen its financial position during the
first nine months of 1998. Liquidity, measured by its current ratio (current
assets divided by current liabilities) of 3.7 to 1 and total liabilities to
stockholders equity of 0.2 to 1, is very healthy. The Company also has a
revolving line of credit with its bank in Salt Lake City, Utah in the amount of
$2,250,000 bearing interest at the bank's prime rate less 3/4% or LIBOR plus
2.2% and an equipment line of credit of $1,250,000 bearing interest at the
bank's prime rate less 3/4% or LIBOR plus 2.2% secured by equipment. $1,000,000
of the revolving line of credit is available to be used for the increasing
demand for Letters of Credit internationally. On November 6, 1998, the Company
had no balance owing on any of its lines of credit. During the second quarter of
1998 the revolving line of credit was not utilized. There was no interest
expense for the first nine-months of 1998 compared to $32,000 in the first
nine-months of 1997.
The Company invests excess cash in 7-day nontaxable municipal
high-grade securities with the expectation to utilize much of this resource in
growth opportunities. Joint Ventures distributed $4,037,000 cash and had equity
earnings of $4,124,000 resulting in $87,000 of undistributed earnings. Property,
plant and equipment at September 30, 1998 was $10,533,000 compared to
$10,046,000 at September 30, 1997. Accumulated depreciation at September 30,
1998 was $6,418,000 compared to $6,043,000 at September 30, 1997. Research and
development costs increased $77,000 for the three months ended and $50,000 for
the nine-months ended September 30, 1998 compared to the research and
development costs for the same periods ending September 30, 1997. The increase
in accounts receivable and accounts payable is due to the increased sales of
explosives.
If the current world economic situation remains unstable with weakening
foreign currencies compared to the U.S. dollar, the Company may continue to be
faced with lack of free convertibility in relatively under capitalized
countries, such as Uzbekistan. Cash resources held within a country which does
not allow for ready conversion is subjected to extended exchange rate risks as
well. The company actively seeks to have its sales and supply contracts
denominated in dollars to minimize such risks wherever possible
Within this Quarterly Report filed on Form 10-Q, including this Item 2,
there are forward-looking statements made in an effort to inform the reader of
factors and results which, in management's opinion, are likely to have an
ongoing material effect on the Company. The actual results and factors could
materially differ from those indicated in the statements made.
In management's opinion, the capital resources of the Company are
adequate to finance its business activity assuming the political, financial, and
economic environment is stable. In the long-term, the results of operations and
the liquidity of the Company's resources could be impacted by factors such as
political risks, capital availability, changes in taxation, inflation, and
foreign exchange. Consequently, the Company cannot determine the ultimate effect
that current products and strategies will have on long-term net sales, earnings,
or stock price.
Page 7
<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The legal proceeding against the Company filed in 1992 concerning
claims of patent infringement in the Federal Court of Canada, Trial Division by
Hanex Products, Inc., Explosives Limited and Bulk Explosives Limited, as
plaintiffs, was discontinued on August 20, 1998. All counter claims filed by the
Company were also discontinued on the same date.
Unrelated to the foregoing discontinuance, on August 18, 1998, the Company
waived notice of a patent infringement action filed in the United States
District Court for the District of Utah on or about June 4, 1998 by Hanex
Products, Inc., as plaintiff. The plaintiff alleges that the Company has
infringed certain of its patents regarding the composition of certain bulk
explosives in the United States. The plaintiff is seeking any damages plus costs
and attorneys fees resulting from the alleged infringement. On October 13, 1998,
the Company filed its Answer to the Complaint and counter claim, denying the
validity and/or the enforceability of the patents and any infringement thereof.
It also asserted certain counter-claims and affirmative defenses against the
Plaintiff. The management does not believe this action will have a material
effect on the Company.
Item 6: Exhibits and Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
September 30, 1998 or during the period covered by this report. No additional
exhibits have been filed as part of this report.
Page 8
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MINING SERVICES INTERNATIONAL CORPORATION
-----------------------------------------
(Registrant)
/s/ Lex L. Udy
-------------------------------------
November 6, 1998 Lex L. Udy
----------------
(Date) Vice Chairman and Secretary
/s/ Duane W. Moss
-------------------------------------
Duane W. Moss
Chief Financial Officer
Page 9
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE COMPANY AS FILED IN ITS 10Q (ITEM 8) FOR THE QUARTER
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,913,000
<SECURITIES> 0
<RECEIVABLES> 5,181,000
<ALLOWANCES> 12,000
<INVENTORY> 862,000
<CURRENT-ASSETS> 9,496,000
<PP&E> 10,533,000
<DEPRECIATION> 6,418,000
<TOTAL-ASSETS> 28,767,000
<CURRENT-LIABILITIES> 2,543,000
<BONDS> 0
0
0
<COMMON> 7,000
<OTHER-SE> 23,780,000
<TOTAL-LIABILITY-AND-EQUITY> 28,767,000
<SALES> 17,219,000
<TOTAL-REVENUES> 22,382,000
<CGS> 16,541,000
<TOTAL-COSTS> 17,880,000
<OTHER-EXPENSES> (75,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,577,000
<INCOME-TAX> 1,482,000
<INCOME-CONTINUING> 3,095,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,095,000
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.41
</TABLE>
