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U.S. Securities and Exchange Commission
Washington, D.C. 20549
--------------------------
Form 10-K
(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, 1997.
[ ] 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
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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
---------------------------
Securities registered pursuant to Section 12(b) of
the Act: None Securities registered pursuant to
Section 12(g) of the Exchange Act:
Title of Class
Common Stock, $0.001 Par Value
---------------------------
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-K 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-K
or any amendment to this Form 10-K. [ x ]
Based on the closing sales price of February 27, 1998, the aggregate
market value of the voting stock held by non-affiliates was $25,554,333
(3,650,619 shares estimated to be held by non-affiliates).
The number of shares outstanding of the registrant's par value $0.001
Common Stock as of February 27, 1998 was 7,353,344.
---------------------------
Portions of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on May 20, 1998, which Proxy
Statement will be filed no later than 120 days after the close of Registrant's
fiscal year ended December 31, 1997 as incorporated by reference in Part III of
Annual Report on Form 10K.
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<PAGE>
Mining Services International Corporation
Table of Contents
Part I Page No.
--------
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 8. Financial Statements and Supplementary Data F1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 9
Part III
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and
Management 10
Item 13. Certain Relationships and Related Transactions 10
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 10
<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 mining throughout the world. In addition, its wholly owned subsidiary,
Nevada Chemicals, Inc., 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 gold deposits in the western United
States.
Recent Business Developments
The Company's business 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 and accessories; and (3) 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 regions of the world where
large scale surface mining occurs. The Company has acquired and continues
developing equity positions in international market niches which need
sophisticated solutions for their 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 a
number of international suppliers and government entities continue seeking joint
ventures with the Company for access to the Company's products and related
smaller-scale facilities. Recent developments in the Company's business are
described below.
Cyanco: Early in 1996 Cyanco announced its intent to construct an
additional back-up production facility at its Winnemucca Plant in order to meet
growing market demands for liquid sodium cyanide without the need to purchase
back-up supply. The project was completed and started up in March 1997 on time
and below budget. With the added facility, Cyanco has a production capacity of
at least 85 million pounds of liquid sodium cyanide. Cyanco continues to enhance
its efficiencies and believes it has established itself as a market leader in
quality products and service.
Cyanco is owned by the Company on a 50/50 basis with Degussa
Corporation, the U.S. subsidiary of Degussa A.G., a multinational chemicals and
metals company headquartered in Germany. Because of Degussa's strong market
presence in worldwide marketing of sodium cyanide, Degussa has the primary
marketing role for the joint venture while MSI has the primary production role.
Cyanco has succeeded in having the delivery of a liquid product accepted by the
gold mines and competitors have been forced to market a liquid product in place
of solids in order to compete. Cyanco believes it is the low cost producer in
the Nevada gold market.
During 1997, worldwide gold prices fell to a low of $282.90. The
reduction in prices has had a negative impact on the expansion of gold
production which may continue through 1998. World gold production of 2,402 tons
(up 2.3% from 1996) fell short of gold demand by approximately 1,350 tons in
1997. The deficit was made up from recycled scrap, forward sales from gold
producers and other sales from private investors and central banks. A marketing
plan for cyanide is being implemented to increase market share during this
period of lower gold prices.
MSI Explosives Business: During 1997, the Company continued to develop
and secure partnering arrangements for its mining explosives business worldwide,
to expand its EMGEL(R) packaged explosives business and to secure major
customers in the United States and Canada.
In June 1996, the Company, with its 50% joint venture partner, Norsk
Hydro, a worldwide producer of fertilizers based in Norway, entered into a
contract with Indumil, a government agency of Colombia, to provide explosives to
the Cerrejon Central coal region. An emulsion plant with related delivery
equipment was completed in December 1996. The plant began supplying product in
January 1997 and the project delivered approximately 11,000 tons of bulk
explosives in 1997. The Company has a ten-year contract to supply explosives in
the region. The Colombian government announced during 1997 its intention to
support the construction of needed railroad and terminal facilities for
exporting coal. This should significantly reduce the high cost of transporting
coal now experienced by mining companies exporting coal from Colombia. The
improvements are expected to be completed in the next two or three years which
should pave the way for significantly expanded production in Colombia.
1
<PAGE>
In February 1997, the Company concluded negotiations to extend its
license for HEF(R) and EMGEL(R) technology with Bulk Mining Explosives in South
Africa and expanded the territory to include sub-equatorial countries in Africa
and Madagascar. The license was extended for 11 years with reduced royalty
rates; however, it is projected that the overall impact of the extension will
provide continuing royalties to the Company at approximately the same gross
amount as currently being paid assuming projected increased volume in South
Africa and the expanded territory of the license.
In addition to extending the license agreement, the Company and Bulk
Mining Explosives entered into a 50/50 joint venture to market and produce
explosives in Ghana of West Africa. The joint venture began shipping imported
emulsion from South Africa to build market presence in Ghana during construction
of the emulsion plant. The plant was completed in the Fall of 1997. Although a
loss was sustained in 1997 of approximately $380,000 due to start-up costs and
high costs of imported emulsion, it is expected that the joint venture will be
able to reach profitability in the second half of 1998 as greater amounts of
explosives are produced locally. There are two other major explosives product
competitors in the market and it is expected that prices may be reduced with
increased competition, but the joint venture is attempting to position itself as
the low cost producer of bulk explosives in the expanding mining industry in
Ghana. The expansion of mining in Ghana is based primarily on gold production
which may be negatively impacted should gold prices continue to fall.
The Uzbekistan joint venture, Turon-MSI Ltd., formed in October 1995,
as a 51/49 joint venture between the Company and an Uzbekistan government
controlled entity, "Ammofos," officially opened its explosives plant in October
1997. Annual production of approximately 17,000 tons (based on one shift) is
expected to be achieved in 1998. The joint venture supplies bagged MANFO, an
ammonium nitrate and fuel oil based explosive, for local mines and construction
companies. Because convertibility of local currency to U.S. Dollars is primarily
limited to imports of raw materials and capital items at the present time, the
joint venture is expected to begin marketing a significant amount of its
production in future periods to foreign markets. Shortage of capital in
Uzbekistan and limited convertibility of local currency may continue to limit
the rapid growth potential for explosives in Uzbekistan.
The Company is aggressively marketing its explosive products in the
eastern United States and has essentially completed the expansion of its
EMGEL(R) facilities in West Virginia. In addition, the company has now
developed, based on the prototype facility in West Virginia, a production design
for cost-effective plants to meet additional markets worldwide. The company has
made arrangements with various manufacturers of explosives accessories,
including becoming a base line distributor of Ensign-Bickford, to market in
areas which require the explosives provider to have a complete line of
explosives, including accessories. In 1998 the company expects to provide such
products in the Middle East, Africa, and Mediterrean markets.
Description of Business
Products and Markets: The Company, through its subsidiaries, licensees
and joint ventures, primarily services the surface mining industry. The
Company's products are divided into explosives and related products and liquid
sodium cyanide.
Explosives: The Company's products are used in the blasting operations
of surface mines in base and precious metals, coal and industrial minerals and
construction projects. 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) bulk ammonium nitrate prill,
acquired from third parties, used with HEF(R) and in ANFO, a common explosive
blasting agent used in surface boreholes which is made from a mixture of
ammonium nitrate prill and diesel fuel, (3) explosives and accessories acquired
from third parties, such as boosters, initiators, detonating cord, etc. in order
to fully support the blasting efforts at customer sites, and (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 cartridges 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.
2
<PAGE>
With the addition of packaged explosives, the Company has strengthened
its position for worldwide market production. 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 enter markets where locally produced explosive
products have been unavailable due to cost or inadequate infrastructure.
In the U.S. and Canadian markets, the Company markets and services mine
and construction sites directly for its own account. The U.S. markets are
concentrated in the West Virginia coal belt, the Wyoming, Montana and Colorado
coal belts, western U.S. 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 traditionally licensed its HEF(R) technology directly
to mines or to explosive manufacturers or supply companies in foreign markets.
Currently, the Company has licenses in Africa, Australia, India, Korea, France,
New Zealand and Thailand. The Company plans to continue its licensing activities
in certain geographic areas, but has shifted its marketing focus toward creating
long-term equity positions through strategic alliances with existing suppliers
and government entities in developing countries. Because of inherent economic
and political risks in developing economies, the Company's strategy is to join
with local suppliers or government entities where the company believes that the
alliance will survive periodic political and economic changes because of the
Company's technology and unique services.
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 the 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. The manufacturing cost for the product is
substantially lower than for solid products when handling 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 shipping must be managed carefully both in terms of safety and
environmental protection. Cyanco has contracted this service with Transwood
Inc., an Omaha, Nebraska company which utilizes dedicated equipment specifically
designed for Cyanco. Cyanco renewed its contract with Transwood for an
additional five years commencing March 1, 1995.
There are two competitors in the western liquid market (see discussion
under "Competition"). One of Cyanco's advantages over its competitors is that it
is the only producer of liquid sodium cyanide 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 tankers which allow for dissolution
before discharging into mine site vessels. Cyanco's competitors are limited in
their 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 most of MSI's customers are large
surface mining companies, the number of companies it services are relatively
small compared to those of a wholesale distribution or retail business.
Loss of these customers, which is not expected to occur, could
adversely affect 1998 sales. In most cases the Company has long-term contracts
with its customers (see Note 12 to the Company's financial statements).
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 products 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 has obtained
similar patents in several foreign countries and has licensed the manufacture of
HEF(R) and EMGEL(R) to companies in Africa, Australia, France, New Zealand,
India, Thailand and Korea.
The composition of E-21, the Company's proprietary ingredient upon
which its HEF(R) 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 trademarks are registered in the United States, Canada, South Africa and
several other foreign countries.
3
<PAGE>
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 perpetual 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, 1997, 1996 and 1995 were
$488,000, $503,000 and $478,000, respectively. The Company actively conducts
research on product improvement and development. The expenditures in each of the
years ending December 31, 1997, 1996 and 1995 were related to the Company's
explosives business. There has not been any customer-sponsored research and
development.
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 needs 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.
Long-term contracts for the raw materials required for the production
of liquid sodium cyanide by Cyanco have been obtained. Cyanco has entered into
long-term transportation agreements with Paiute Pipeline and Northwest Pipeline
for transportation services of natural gas to the Cyanco facility. Cyanco has
not had any difficulty in obtaining other necessary raw materials and does not
believe that its business is materially dependent upon any one of its existing
contracts. Alternative sources of supply are available for raw materials at
competitive prices.
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 adversely affect
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 than it does. The Company believes that ORCA, formerly ICI
Explosives, Austin Powder and Dyno Nobel Group are significant competitors in
the industry. Although the competitive position of the Company is not relatively
significant, 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 Markets").
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"). Cyanco's product competes with DuPont and also with FMC 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. However, as gold prices have declined and Cyanco's innovations in
the marketplace have taken effect, liquid sodium cyanide price has become a
significant competitive factor. Cyanco expects that efforts to gain market share
during this period of lower gold prices will continue to adversely affect
product prices during 1998 or until gold prices recover.
Employees: The Company employs 70 full time employees in its U.S. and
Canadian explosives operations. Employment at joint ventures include 28
permanent employees at the Cyanco Plant in Winnemucca, Nevada, 14 local
employees in Colombia, 7 local employees and 1 expatriate employee in Ghana, and
20 local employees in Uzbekistan. In Canada and Uzbekistan, employees belong to
labor unions. The Company and its joint ventures consider relations with their
employees to be very good.
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
preparation for the manufacture and sale of liquid sodium cyanide at the Cyanco
Plant, Cyanco incurred material capital expenditures relating to compliance with
environmental laws and regulations, including expenditures required for
specialty trucks and tankers and development of an emergency response plan in
the event of a spill of hazardous materials. Cyanco's operations are designed
such that no hazardous waste is created during the manufacture of its product.
4
<PAGE>
The Company and Cyanco will continue to be subject to environmental laws, rules
and regulations in their respective operations. Compliance with such laws, rules
and regulations on an ongoing basis is not expected to require additional
material expenditures.
Item 2: Properties
The corporate offices of the Company, built in 1997, are located at
8805 South Sandy Parkway, Sandy, Utah. The corporate facilities consisting of
1.8 acres, an office building and adjacent research and lab facilities, were
constructed by the Company at a cost of approximately $1.2 million.
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. Joint Venture facilities in
Colombia, Uzbekistan and Ghana are located on mine production facilities of a
major customer or leased from third-parties. Water, sewer, electricity and other
infrastructure are normally supplied by the land owner. The Company 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
$15,000 per year. The Company also rents on a month-to-month basis approximately
422 acres in Boone County, West Virginia which it uses for manufacturing
commercial explosives and emulsions. Rent on the property is approximately $500
per month.
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 was expanded in 1997 to include a back-up
production facility having a capacity equal to the capacity of the pre-existing
facility. The combined capacity of the Cyanco plant is now at least 85 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
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. Plaintiffs have sought 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 has been no substantive activity on the suit since 1994.
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 has now settled the law
suit and its share of the proceeds, approximately $190,000 dollars (U.S.), was
paid by the defendants in February 1998.
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.
5
<PAGE>
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. During the fourth quarter of 1996, two
stock distributions were made to shareholders of record increasing the
number of shares outstanding by 26.5%. The stock prices in the first
three quarters of 1996 have been restated on a stock equivalent basis.
_____Bid Prices____
High Low
1997 First Quarter 12.75 10.25
Second Quarter 12.75 9.75
Third Quarter 12.13 9.75
Fourth Quarter 11.58 7.56
1996 First Quarter 8.10 5.24
Second Quarter 15.02 7.22
Third Quarter 11.08 7.02
Fourth Quarter 13.50 9.50
(b) Approximate number of equity security holders. The
approximate number of record holders of the Company's common stock as
of February 27, 1998 was 608 which does not include shareholders whose
stock is held through securities position listings.
(c) Dividends. The Company paid cash dividends of $146,880 or
$.02 per share on December 19, 1997, $109,000 or $.015 per share on
December 20, 1996 and $82,810 or $.015 per share on December 29, 1995.
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. During the fourth quarter
1996, the Company issued stock distributions of 573,910 shares on
October 15, 1996 and 941,799 shares on December 10, 1996. The combined
stock split amounted to 26.5%. On July 21, 1995 the Company issued a 5%
stock dividend or 261,885 shares.
Item 6: Selected Financial Data
The following consolidated selected financial data as of and for each
of the fiscal years in the five-year period ending December 31, 1997 were
derived from audited financial statements of Mining Services International and
its consolidated subsidiaries. The financial statements as of and for each of
the fiscal years in the five-year period were audited by Tanner + Co.,
independent public accountants. The data set forth should be read in conjunction
with the "Management Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's Consolidated Financial Statements and related
Notes.
6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
Operation Results Data: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Operating Revenues 26,969,000 25,172,000 23,278,000 18,555,000 18,776,000
Income from operations 6,400,000 6,084,000 3,332,000 2,269,000 1,987,000
Net Income 5,008,000 4,545,000 2,763,000 1,630,000 1,721,000
Earnings per common
share-assuming dilution 0.66 0.60 0.37 0.23 0.25
Cash dividends declared
per common share 0.020 0.015 0.015 0.010 -
Financial Position Data
Total assets 24,701,000 19,846,000 14,560,000 11,635,000 10,233,000
Long-term debt - 714,000 513,000 752,000 1,081,000
Deferred gain on sale
and leaseback - - 84,000 135,000 -
Stockholder's equity 20,605,000 15,769,000 11,271,000 8,429,000 6,827,000
</TABLE>
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
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 periods ending
December 31, 1997, 1996 and 1995. As demonstrated in the schedule, the Company's
consolidated Revenue includes its share of equity in earnings from the JV's:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Amount MSI's
Joint Joint Venture Included in Non-JV Consolidated
Venture Sales Net Income Co's % MSI Revenue Revenue Revenue
1997 $38,361,000 $12,356,000 50% $6,179,000 $20,790,000 $26,969,000
1996 $31,598,000 $10,610,000 50% $5,305,000 $19,867,000 $25,172,000
1995 $25,300,000 $ 6,212,000 50% $3,106,000 $20,172,000 $23,278,000
</TABLE>
1997 vs. 1996
Consolidated Revenues in 1997 increased 7.2% over 1996, with JV sales
increasing 21.4% and non-JV revenues up 4.0%. A significant part of the increase
in JV sales was attributable to sales of $5,765,000 in Colombia, $512,000 sales
in Ghana and $246,000 in Uzbekistan compared to no sales in those countries in
1996. Cyanco 1997 sales increased by $240,000, or 1%, over those recorded in
1996. Joint venture net income from explosive joint ventures was $74,000,
reflecting a loss of approximately $380,000 in the Ghana joint venture and
earnings of $371,000 income from Colombia and $83,000 from Uzbekistan. MSI
revenues recorded due to business in Colombia during 1997 included equity in
earnings from the JV of $186,000, and direct payments of royalties of $108,000,
technical fees of $289,000, sales of equipment, parts and supplies of $16,000
and interest income of $108,000, for a total of $707,000. Other JV's did not
produce significant revenues other than that recorded from equity in earnings
during 1997.
During the fourth quarter of 1997, Cyanco reduced prices to major
customers under cost-plus contracts reflecting lower costs of production. As
gold prices declined during 1997, gold mines in Nevada attempted to reduce costs
to preserve gross margins. Cyanco expects there will be continued pressure on
reducing prices of liquid sodium cyanide during 1998. Also, management does not
expect gold producers to make further significant cut backs or announcements in
gold production in Nevada during 1998 unless gold prices decline further.
Conversely, management expects gold production to increase if gold prices
increase significantly. Consequently, it is expected that Cyanco, while
attempting to increase its market share, may experience flat sales in 1998.
Cyanco is reviewing cost control measures in its operations and administrative
costs.
7
<PAGE>
Sales in Colombia should increase during 1998 due to price increases
obtained on January 1, 1998; however, until the transportation facilities are
established, as discussed in item 1, page 2, production will likely remain at
levels experienced during 1997. Sales in Ghana should increase as the Company's
joint venture seeks to gain more market share in the gold mining districts in
Ghana. Assuming Uzbekistan can stabilize its availability of capital and improve
the convertibility of its local currency for imported raw material, sales at
Turon-MSI Ltd. could improve substantially in Uzbekistan as well. Uzbekistan, to
date, has not been able to consistently provide convertibility for companies
requiring foreign imports and convertibility for repatriating profits is
difficult to obtain without export sales which the Company's JV does not
currently have. The Company plans on developing export sales by using local
profits to invest in capital to support the manufacture of products for export.
MSI, through its wholly owned subsidiaries, also expects to show increased
foreign sales of accessories and other raw materials during 1998. U.S. explosive
sales should also increase over 1997 sales due to eastern U.S. sales of packaged
explosives and improvement in market share in the western U.S. It is expected
that sales in Canada will remain stable through 1998.
Consolidated gross margins decreased on a percentage basis from 11.8 %
to 9.0% comparing 1997 to 1996. This was due primarily to high unit costs of
production at the company's new EMGEL(R) plant in West Virginia reflecting
development and start-up costs. The Company elected to expense all of the
development related costs in 1997 resulting in a loss of approximately $800,000
at the West Virginia plant.
During the first half of 1998, the operations at the West Virginia
plant should reach the breakeven point and be marginally proftitable in 1998. It
is expected that the EMGEL(R) plant prototype and processing know-how garnered
in 1997 can be marketed effectively during 1998 in several market niches
worldwide. Raw material costs should be reduced or remain stable during 1998 and
it is expected that there will be no major supply problems.
Depreciation is primarily included in costs of sales and increased in
1997 by $57,000 over that in 1996 primarily due to the EMGEL(R) plant
improvements made in 1997. Depreciation of the EMGEL(R) plant in future years
will reflect the increased depreciation of the improvements made in 1996 and
1997.
General and administrative costs incurred in 1997 increased by
approximately $202,000 or 19% over those in 1996 primarily due to employee
costs.
Income before provision for income taxes for 1997 was up by 11.9% over
1996 reflecting increased income from continuing operations in 1997 which
improved by $316,000 or 5% over 1996, proceeds from settlement of litigation of
approximately $190,000 and gain on sales of assets and net interest income of
approximately $76,000. The effective tax rate increased from 23.7% in 1996 to
24.9% in 1997. It is expected that during 1998 income from operations will begin
to reflect increases in JV operations in explosives and that gross margins
contributed from U.S. and Canadian explosives business will improve as the West
Virginia operation achieves normal production. This anticipated growth in
earnings will be partially offset by a higher effective tax rate during 1998 as
most of the carried-over tax benefits were used during 1997.
1996 vs. 1995
Total revenues for the Company showed an 8.1% increase between 1995 and
1996. This was due to the increase of MSI's revenue attributable to its share of
equity earnings from JV's which in 1996 was primarily derived from Cyanco. A
major low margin account of MSI was discontinued in the West early in 1996.
Net income of $4,545,000 for 1996 increased by approximately $1,782,000
or nearly 64% over that earned in 1995. Pre-tax earnings increased from
$3,269,000 in 1995 to $5,960,000 in 1996 which represents an 82% increase. The
increases in earnings was due primarily from equity earnings from operations at
Cyanco.
Liquidity and Financial Resources
The Company ended 1997 with the strongest financial position in its
history. Cash flow from operating activities was $3,553,000 during 1997 compared
to $3,002,000 during 1996, an improvement of about 18.4%. The current ratio, a
measure of current liquidity, in the Company improved during 1997 from 2.3 at
the end of 1996 to 3.6 at the end of 1997. Long-term debt existing at the end of
1996 which was primarily made up of certain leases of mobile equipment was
paid-off during 1997. Deferred taxes were increased from $1,447,000 to
$2,222,000 reflecting primarily the increased tax depreciation on the added
plant and equipment at Cyanco and West Virginia. Receivables by the end of 1997
had increased $1,643,000 over 1996. This increase was due in part to delayed
payments of royalties which were received in January 1998 in the amount of
8
<PAGE>
approximately $570,000, $190,000 from settlement of litigation and $883,000
primarily due to slow paying accounts which were substantially brought current
by February 1998. It is expected that increases of cash flow from operating
activities should continue to increase during 1998.
Net cash used in investing activities decreased from $3,206,000 in 1996
to $2,356,000 in 1997. Cash needed for investing activities during 1998 likely
will continue in Ghana, Uzbekistan and in North American operations. It is also
anticipated that several announcements will be made during 1998 regarding
additional joint ventures and business arrangements which will require
additional capital. It is expected that cash needed for investment during 1998
will be provided from operations.
The Company has a bank revolving line-of-credit in the amount of
$2,000,000 bearing interest at the bank's prime rate secured by receivables and
inventory, an equipment line-of-credit of $1,000,000 bearing interest at the
bank's prime rate secured by equipment and a working capital line-of-credit for
$500,000 at the bank's prime rate secured by the corporate office building. Each
line-of-credit matures on May 30, 1998. At the end of 1997 none of the
lines-of-credit were utilized. It is expected that the lines-of-credit will be
renewed during May 1998.
Because of inflation associated with third-world countries where the
Company invests, there exists a substantial risk that the value of investments
in those jurisdictions may erode. Also, the internal balance of payments and
capital shortages in some of those countries, particularly Uzbekistan, may
temporarily limit the ability to convert local currencies into hard currency
necessary for importing raw materials or remitting profits. Management intends
to use appropriate transfer pricing, investments in hedges, loans and other
credit facilities to minimize the risks inherent in doing business in these
countries. The Company continues to pursue its policy of investing with
government entities or stable international and U.S. companies as its partners
to help insure its long-term success.
Inflation and Other Comments
The amounts presented in the financial statements do not provide for
the effect of inflation on the Company's operations or its financial position.
Amounts shown for property, plant and equipment and for costs and expenses
reflect historical cost and do not necessarily represent replacement cost or
charges to operations based on replacement cost. The Company's operations,
together with other sources, are intended to provide funds to replace property,
plant and equipment as necessary. Net income would be lower than reported if the
effects of inflation were reflected either by charging operations with amounts
that represent replacement costs or by using other inflation adjustments.
Within this Annual Report filed on Form 10-K, including this Item 7,
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.
Item 8: 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 9: Changes In and Disagreements With Accountants on Accounting and
Financial Data
None.
9
<PAGE>
PART III
Item 10: 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
page 2 to page 6 of the Company's Proxy Statement filed in connection with its
May 20, 1998 Annual Meeting of Stockholders entitled "Directors and Executive
Officers" and "Compliance with Section 16(a) of the Exchange Act."
Item 11: Executive Compensation
The information required hereunder is incorporated by reference from
page 4 and page 5 of the Company's Proxy Statement filed in connection with its
May 20, 1998 Annual Meeting of Stockholders entitled "Executive Compensation"
and "Director Compensation."
Item 12: Security Ownership of Certain Beneficial Owners and Management
The information required hereunder is incorporated by reference from
page 5 and page 6 of the Company's Proxy Statement filed in connection with its
May 20, 1998 Annual Meeting of Stockholders entitled "Security Ownership of and
Certain Beneficial Owners and Management."
Item 13: Certain Relationships and Related Transactions
The information required hereunder is incorporated by reference from
page 6 of the Company's Proxy Statement filed in connection with its May 20,
1998 Annual Meeting of Stockholders entitled "Certain Relationships and Related
Transactions."
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. a. The consolidated financial statements for the fiscal year
ended 1997 of the Company and the report of independent
certified public accountants required in Part II, Item 8 are
included on pages F-1 to F-25.
b. Also included as financial statement schedules to the
Annual Report on Form 10-K are as Exhibit 99 are:
The financial statements for the fiscal year ended 1997
of Cyanco, a significant subsidiary reported on the
equity method, and the report of independent certified
public accountants as exhibit 99.
c. No other required financial statement schedules are
listed because they are not applicable or the required
information is shown in the Company's financial statements or
notes thereto.
2. Exhibits:
3(i) 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-KSB Report filed by the Company
for the fiscal year ended December 31, 1987.)
Articles of Incorporation (Incorporated herein by
reference from Form 10-KSB filed by the Company for
the fiscal year ended December 31, 1985.)
3(ii) Bylaws of the Corporation as amended March 1, 1988.
(Incorporated by reference from the 10-KSB Report
filed by the Company for the fiscal year ended
December 31, 1987.) Bylaws of the Corporation
(Incorporated herein by reference from Form 10-KSB
Report filed by the Company for the fiscal year
ended December 31, 1985.)
10
<PAGE>
4(i) 1988 Nonqualified Stock Option Plan. (Incorporated
by reference from the Form 10-KSB Report filed by
the Company for the fiscal year ended December 31,
1987.)
4(ii) Amendments to 1988 Nonqualified Stock Option Plan.
(Incorporated by reference from the Form S-8 Report
filed by the Company on July 7, 1997.)
10(i) Joint venture (shareholder) agreement between the
Company and Norsk Hydro for joint venture in
Colombia. (Incorporated by reference from the Form
10-KSB Report filed by the Company for the fiscal
year ended December 31, 1996.)
10(ii) Joint venture (shareholder) agreement between the
Company and Omnia Group via Chemical Holding
International Limited. (Incorporated by reference
from the Form 10-KSB Report filed by the Company
for the fiscal year ended December 31, 1996.)
10(iii) Extension of license agreement with Bulk Mining
Explosives via Dawn Holding Company. (Incorporated
by reference from the Form 10-KSB Report filed by
the Company for the fiscal year ended December 31,
1996.)
21 List of Subsidiaries
27 Financial Data Schedule
99 The financial statements for the fiscal year ended
1997 of Cyanco, a significant subsidiary reported
on the equity method, and the report of independent
certified public accountants.
3. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
December 31, 1997
11
<PAGE>
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 6, 1998
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 Board of Directors March 6, 1998
Edward Neff Bagley
/s/ Lex L. Udy Vice Chairman and Secretary and
Lex L. Udy Director March 6, 1998
/s/ John T. Day President and Chief Executive Officer March 6, 1998
John T. Day and Director (Principal Executive
Officer)
/s/ Nathan L. Wade Director March 6, 1998
Nathan L. Wade
/s/ Stephen Fleischer Director March 6, 1998
Stephen Fleischer
/s/ Duane W. Moss Chief Financial Officer and March 6, 1998
Duane W. Moss Legal Counsel
12
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
Report of Tanner + Co. F-2
Consolidated balance sheet F-3
Consolidated statement of income F-4
Consolidated statement of shareholders' equity F-5
Consolidated statement of cash flows F-7
Notes to consolidated financial statements F-8
- --------------------------------------------------------------------------------
F-1
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years ended
December 31, 1997, 1996, and 1995. 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, 1997 and 1996, and the results of
their operations and their cash flows for the years ended December 31, 1997,
1996, and 1995 in conformity with generally accepted accounting principles.
TANNER+Co.
Salt Lake City, Utah
February 23, 1998
F-2
<PAGE>
<TABLE>
<S> <C> <C>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Balance Sheet
December 31,
- -------------------------------------------------------------------------------------------------------------------
Assets 1997 1996
------
-----------------------------------
Current assets:
Cash $ 1,160,000 $ 732,000
Receivables, net 4,232,000 2,589,000
Inventories 830,000 1,124,000
Prepaid expenses 139,000 136,000
Current portion of notes receivable from joint ventures 435,000 250,000
-----------------------------------
Total current assets 6,796,000 4,831,000
Property, plant and equipment, net 4,122,000 2,610,000
Investment in and advances to joint ventures 12,448,000 11,235,000
Notes receivable from joint ventures 965,000 1,000,000
Other assets 370,000 170,000
-----------------------------------
$ 24,701,000 $ 19,846,000
===================================
- ----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,874,000 $ 1,916,000
Current portion of long-term debt - 147,000
-----------------------------------
Total current liabilities 1,874,000 2,063,000
Long-term debt - 567,000
Deferred income taxes 2,222,000 1,447,000
-----------------------------------
Total liabilities 4,096,000 4,077,000
-----------------------------------
Commitments and contingencies - -
Shareholders' equity:
Common stock, $.001 par value, 500,000,000 shares
authorized; 7,353,344 and 7,258,944 shares issued
and outstanding, respectively 7,000 7,000
Capital in excess of par value 5,416,000 6,230,000
Notes receivable from stock sales - (789,000)
Retained earnings 15,182,000 10,321,000
-----------------------------------
Total shareholders' equity 20,605,000 15,769,000
-----------------------------------
$ 24,701,000 $ 19,846,000
===================================
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-3
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Consolidated Statement of Income
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------
Revenue:
Net sales $ 19,086,000 $ 18,324,000 $ 18,893,000
Royalties 1,581,000 1,543,000 1,279,000
Equity in earnings of joint ventures 6,179,000 5,305,000 3,106,000
Other income 123,000 - -
-----------------------------------------------------
26,969,000 25,172,000 23,278,000
-----------------------------------------------------
Costs and expenses:
Costs of sales 18,817,000 17,523,000 18,290,000
General and administrative 1,264,000 1,062,000 1,178,000
Research and development 488,000 503,000 478,000
-----------------------------------------------------
20,569,000 19,088,000 19,946,000
-----------------------------------------------------
Income from operations 6,400,000 6,084,000 3,332,000
Other income (expense), net 266,000 (124,000) (63,000)
-----------------------------------------------------
Income before provision for income taxes 6,666,000 5,960,000 3,269,000
-----------------------------------------------------
Provision for income taxes:
Current (883,000) (943,000) (390,000)
Deferred (775,000) (472,000) (116,000)
-----------------------------------------------------
(1,658,000) (1,415,000) (506,000)
-----------------------------------------------------
Net income $ 5,008,000 $ 4,545,000 $ 2,763,000
=====================================================
Earnings per common share $ .68 $ .63 $ .39
=====================================================
Earnings per common share- assuming dilution $ .66 $ .60 $ .37
=====================================================
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------
Capital in Notes
Excess Receivable
Common Stock of Par from Stock Retained Treasury Stock
------------------------- -------------------------
Shares Amount Value Sales Earnings Shares Amount
--------------------------------------------------------------------------------------
Balance at
January 1, 1995 5,180,728 $ 6,000 $ 4,697,000 $ (469,000)$ ,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 - -
Shares issued under
stock option plan 228,011 - 459,000 (280,000) - - -
Stock split-up effected
in the form of a
distribution 1,515,709 1,000 - - (1,000) - -
Shares retired for:
Exercise of stock
options (4,618) - (34,000) - - - -
Payment of interest on
notes receivable (2,670) - (45,000) - - - -
Payment of advances (3,033) - (38,000) - - - -
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Shareholders' Equity
Continued
- ----------------------------------------------------------------------------------------------------------
Capital in Notes
Excess Receivable
Common Stock of Par from Stock Retained Treasury Stock
------------------------- -------------------------
Shares Amount Value Sales Earnings Shares Amount
--------------------------------------------------------------------------------------
Cash dividends paid - - - - (109,000) - -
Net income - - - - 4,545,000 - -
--------------------------------------------------------------------------------------
Balance at
December 31, 1996 7,258,944 7,000 6,230,000 (789,000) 10,321,000 - -
Shares issued under
stock option plan 188,841 - 277,000 - - - -
Shares retired for:
Exercise of stock
options (16,680) - (163,000) - - - -
Payment of principal
and interest on notes
receivable (69,959) - (837,000) 789,000 - - -
Payment of advances (7,802) - (91,000) - - - -
Cash dividends paid - - - - (147,000) - -
Net income - - - - 5,008,000 - -
--------------------------------------------------------------------------------------
Balance at
December 31, 1997 7,353,344 $ 7,000 $ 5,416,000 $ $15,182,000 - $ -
======================================================================================
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Cash Flows
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------
Cash flows from operating activities:
Net income $ 5,008,000 $ 4,545,000 $ 2,763,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 650,000 593,000 495,000
Provision for losses on accounts receivable 2,000 - (18,000)
(Gain) loss on disposal of equipment (33,000) 147,000 9,000
Stock compensation expense 22,000 - -
Reserve for impairment of long-term assets - 40,000 -
Interest income on common stock notes receivable (48,000) (45,000) (26,000)
Undistributed earnings of joint ventures (1,136,000) (2,805,000) (877,000)
Deferred income taxes 775,000 472,000 116,000
(Increase) decrease in:
Receivables (1,645,000) 122,000 (512,000)
Inventories 294,000 (267,000) (329,000)
Prepaid expenses (3,000) (18,000) 109,000
Other assets (291,000) 71,000 (267,000)
Increase (decrease) in:
Accounts payable and accrued expenses (42,000) 159,000 257,000
Deferred gain on sale and leaseback - (12,000) (51,000)
----------------------------------------------
Net cash provided by
operating activities 3,553,000 3,002,000 1,669,000
----------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of plant and equipment 85,000 140,000 5,000
Increase in notes receivable to joint ventures (400,000) (1,250,000) -
Payments on note receivable from joint venture 250,000 - -
Purchase of plant and equipment (2,214,000) (1,183,000) (840,000)
Investment in joint ventures (77,000) (913,000) -
----------------------------------------------
Net cash used in
investing activities (2,356,000) (3,206,000) (835,000)
----------------------------------------------
Cash flows from financing activities:
Issuance of common stock 92,000 145,000 181,000
Retirement of common stock - (38,000) -
Payments received on notes receivable from stock sales - - 6,000
Proceeds from long-term debt - 311,000 -
Payments on long-term debt (714,000) (182,000) (239,000)
Cash dividend paid (147,000) (109,000) (82,000)
----------------------------------------------
Net cash (used in) provided by
financing activities (769,000) 127,000 (134,000)
----------------------------------------------
Net increase (decrease) in cash 428,000 (77,000) 700,000
Cash, beginning of year 732,000 809,000 109,000
----------------------------------------------
Cash, end of year $ 1,160,000 $ 732,000 $ 809,000
==============================================
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
</TABLE>
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies
Mining Services International Corporation (the Company) and its wholly owned
subsidiaries, MSI Chemicals Ltd., and Central Asia Chemicals LTD (CAC),
(formerly MSI Turon Limited), are primarily engaged in the development,
manufacture and sale of bulk explosives and related support and services. In
addition, Nevada Chemicals, Inc., also a wholly-owned subsidiary, 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 joint ventures of which the
Company owns a 50% or less interest under the equity method of accounting.
Summarized financial information for such joint ventures is included in note 16.
During 1995 the Company entered into an Agreement with Production Association
"Ammofos" of Almalyk, the Republic of Uzbekistan (PAA), a government owned
chemical producer. The Agreement creates a joint venture with MSI and PAA which
operates under a limited liability enterprise organized under Uzbekistan laws.
The enterprise is called Turon-MSI Ltd., in which MSI 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 interest in the joint venture
and PAA has committed to provide the infrastructure of the plant. Although the
Company owns a 51% interest in the share capital, the joint venture is accounted
for under the equity method due to the facts and circumstances of control
related to mutual consent affecting the joint venture in Uzbekistan. As of
December 31, 1997, the Company had expended approximately $869,000 related to
plant and equipment located in Uzbekistan. The plant has produced test shots and
is ready for production pending final governmental approval of the procedures,
safety, and technical issues.
During 1996, the Company entered into an agreement to form a joint venture to
manufacture and supply explosives in Colombia. The joint venture operates as a
Grand Cayman Company called Cayman Mining Services Limited (CMS). The Company
has a 50% interest in CMS which in turn owns virtually all of Colombia Mining
Supply and Services Limited, a Colombia-based company engaged in the
development, manufacture, and sale of bulk explosives in Colombia under the
control of the military. The plant began operations in January 1997.
During 1997, the Company entered into an agreement to form a joint venture to
manufacture and supply explosives in Ghana. The joint venture operates as a
Ghana Company called West Africa Chemical Limited (WAC). The Company has a 50%
interest in WAC, which in turn owns 100% of West Coast Explosives Limited, a
Ghana-based company engaged in the development, manufacture, and sale of bulk
explosives and accessories in West Africa. The plant began operations in late
1997.
- --------------------------------------------------------------------------------
F-8
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies Continued
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.
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. Expenditures for
maintenance and repairs are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property, plant and equipment are
reflected in net income.
Other Assets
Certain items included in other assets are amortized over five years using the
straight-line method. Amortization expense totaled $4,000, $8,000, and $15,000
in 1997, 1996, and 1995, 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 and undistributed earnings from foreign-based joint ventures,
which qualify under certain tax deferral treatment.
Earnings Per Common Share
The computation of earnings per common share is based on the weighted average
number of shares outstanding during the year.
- --------------------------------------------------------------------------------
F-9
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies Continued
Earnings Per Common Share - Continued
The computation of earnings per common share assuming dilution is based on the
weighted average number of shares outstanding during the year plus the weighted
average common stock equivalents which would arise from the exercise of stock
options outstanding using the treasury stock method and the average market price
per share during the year.
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, 1997.
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.
Reclassifications
Certain accounts in the 1996 and 1995 financial statements have been
reclassified to conform with the current year presentation.
- --------------------------------------------------------------------------------
F-10
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Detail of Certain Balance Sheet Accounts
December 31,
----------------------------------
1997 1996
----------------------------------
Receivables:
Trade receivables $ 2,980,000 $ 2,432,000
Less allowance for doubtful accounts (12,000) (10,000)
Income tax refund receivable 449,000 110,000
Related party receivables (see Note 11) 622,000 57,000
Other 193,000 -
----------------------------------
$ 4,232,000 $ 2,589,000
==================================
December 31,
----------------------------------
1997 1996
----------------------------------
Inventories:
Raw materials $ 407,000 $ 421,000
Finished goods 423,000 703,000
----------------------------------
$ 830,000 $ 1,124,000
==================================
December 31,
----------------------------------
1997 1996
----------------------------------
Accounts payable and accrued expenses:
Trade payables $ 1,196,000 $ 1,256,000
Accrued expenses 678,000 660,000
----------------------------------
$ 1,874,000 $ 1,916,000
==================================
- --------------------------------------------------------------------------------
F-11
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Property,Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
----------------------------------
1997 1996
----------------------------------
Plant equipment and fixtures $ 4,438,000 $ 2,843,000
Support equipment and fixtures 4,740,000 4,383,000
Office equipment and fixtures 474,000 416,000
Vehicles 579,000 528,000
Land 107,000 107,000
----------------------------------
10,338,000 8,277,000
Less accumulated depreciation and
amortization (6,216,000) (5,667,000)
----------------------------------
$ 4,122,000 $ 2,610,000
==================================
4. Notes Receivable
Notes receivable from joint ventures are comprised of the following:
December 31,
----------------------------------
1997 1996
----------------------------------
Unsecured note receivable from
CMS, in annual installments of
$250,000 and semi-annual interest
payments at the rate of 1.5% above
the six month LIBOR $ 1,000,000 $ 1,250,000
Unsecured note receivable from WAC,
in annual installments of $185,000 and
semi-annual interest payments at the
rate of 2% above the six month LIBOR 400,000 -
----------------------------------
1,400,000 1,250,000
Less current portion (435,000) (250,000)
----------------------------------
$ 965,000 $ 1,000,000
==================================
- --------------------------------------------------------------------------------
F-12
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Bank Line of Credit
The Company has a bank revolving line-of-credit in the amount of $2,000,000
bearing interest at the bank's prime rate secured by receivables and inventory,
an equipment line of credit of $1,000,000 bearing interest at the bank's prime
rate secured by equipment, and a working capital line of credit for $500,000 at
the bank's prime rate secured by the corporate office building. Each
line-of-credit matures on May 30, 1998 and had no outstanding balance at
December 31, 1997 and 1996.
6. Long-Term Debt
Long-term debt is comprised of the following:
December 31,
----------------------------
1997 1996
----------------------------
Note payable to a bank, in monthly installments
of $552, including interest at 7.5%, secured by
a vehicle $ - $ 5,000
Equipment line-of-credit agreement which
allowed the Company to borrow a maximum
amount of $1,000,000 at an interest rate
equal to the bank's prime rate for
refinanced equipment and the bank's prime
rate plus .5 percent for new equipment
acquisitions. - 709,000
----------------------------
- 714,000
Less current portion - (147,000)
----------------------------
$ $ 567,000
============================
7. Notes Receivable from Stock Sales
During the years ended December 31, 1996 and 1995, certain employees and
officers exercised stock options in exchange for long-term notes, not exceeding
30 months, with interest at the LIBOR plus 1 to 3 percent, adjusted annually.
During 1997, all notes receivable and related interest were paid through the
retirement of common stock.
- --------------------------------------------------------------------------------
F-13
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Income Taxes
The current provision for income taxes represents federal income taxes and
includes taxes withheld on royalties by foreign countries.
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:
Years Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
Federal income tax provision
at statutory rate $ (2,266,000)$ (2,026,000)$ (1,111,000)
Stock options 525,000 585,000 124,000
Change in valuation allowance - - 517,000
Life insurance and meals 2,000 (1,000) (18,000)
Other 81,000 27,000 (18,000)
-----------------------------------------
$ (1,658,000)$ (1,415,000)$ (506,000)
=========================================
Deferred tax assets (liabilities) are comprised of the following:
December 31,
----------------------------
1997 1996
----------------------------
Depreciation $ (2,177,000)$ (1,987,000)
Deferred income (45,000) -
Income tax credit carryforwards - 519,000
Other - 21,000
----------------------------
$ (2,222,000 $ (1,447,000)
============================
9. Stock Dividend and Split-up
On July 21, 1995, the Company declared a 5% stock dividend to shareholders of
record as of June 30, 1995. On July 21, 1995, the Company issued 261,885 shares
of common stock in conjunction with this dividend. Accordingly, amounts equal to
the fair market value (based on quoted market prices) of the additional shares
issued have been charged to retained earnings and credited to common stock and
additional paid-in capital.
- --------------------------------------------------------------------------------
F-14
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Dividend and Split-up Continued
On October 15, 1996 and December 10, 1996, the Company declared a 10% and 15%
stock split-up effected in the form of a distribution, to all shareholders of
record as of September 20, 1996 and December 10, 1996, respectively. On October
15, 1996 and December 10, 1996, the Company issued 573,910 and 941,799 shares of
common stock, respectively, in conjunction with these stock split-ups.
Accordingly, amounts equal to the par value of the shares issued have been
charged to retained earnings and credited to common stock.
Earnings per common share, weighted average shares outstanding, and all stock
option activity have been restated retroactively to reflect the stock dividend
and the stock split-up effected in the form of a distribution.
10. Supplemental Cash Flow Information
During the year ended December 31, 1997, officers and shareholders retired
common stock with a market value of $1,091,000 in order to exercise stock
options, pay notes receivable, related interest, and advances.
During the year ended December 31, 1996:
o The Company issued common stock in exchange for long-term notes receivable
of $280,000.
o The Company capitalized retained earnings of $1,000 due to the issuance of
a 10% and 15% stock split-up effected in the form of a distribution.
o Officers and shareholders retired common stock with a market value of
$117,000 in order to pay interest on notes receivable from stock sales.
o The Company refinanced long-term debt in the amount of $413,000 and reduced
deferred gain on sale leasebacks in exchange for long-term debt of $72,000.
- --------------------------------------------------------------------------------
F-15
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Supplemental Cash Flow Information Continued
During the year ended December 31, 1995:
o The Company retired treasury stock by reducing capital in excess of par
value by $90,000.
o The Company issued common stock in exchange for long-term notes receivable
of $46,000.
o The Company capitalized retained earnings of $1,080,000 due to the issuance
of a 5% stock dividend.
o A shareholder retired common stock with a market value of $20,000 in order
to exercise stock options.
o Officers/shareholders retired common stock with a market value of $26,000
in order to pay interest on notes receivable from stock sales.
Actual amounts paid for interest and income taxes are as follows:
Years Ended December 31,
---------------------------------------------------
1997 1996 1995
---------------------------------------------------
Interest $ 35,000 $ 77,000 $ 74,000
===================================================
Income taxes $ 766,000 $ 500,000 $ 495,000
===================================================
11. Related Party Transactions
The Company performs certain functions for Cyanco for which it receives a fee.
The Company records the fee as an offset to costs of sales. These fees totaled
$474,000, $420,000, and $357,000 for the years ended December 31, 1997, 1996,
and 1995, respectively.
At December 31, 1997 and 1996, the Company had receivables of $622,000 and
$57,000, respectively, from joint ventures (see Note 2).
As of December 31, 1997 and 1996, the Company had notes receivable from joint
ventures of $1,400,000 and $1,250,000, respectively (see Note 4).
- --------------------------------------------------------------------------------
F-16
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Related Party Transactions Continued
During the year ended December 31, 1997
o The Company recognized revenues of approximately $690,000 from joint
ventures, related to royalties, services provided, and the sale of
manufacturing products.
o The Company recognized interest income of $123,000 related to notes
receivable from joint ventures.
12. Major Customers and Foreign Operations
Sales to major customers which exceeded 10 percent of net sales are as follows:
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Company A $ 4,474,000 $ - $ -
Company B $ 4,271,000 $ 4,184,000 $ 3,483,000
Company C $ 1,937,000 $ - $ 2,268,000
Company D $ - $ 3,919,000 $ 5,882,000
Management believes that the loss of any one customer would not have a material
adverse effect on the Company's consolidated operations.
The Company has operations in the United States, Canada, and equity in earning
of joint ventures. The following is a summary of operations by geographic
region:
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Revenue:
United States $ 16,305,000 $ 14,807,000 $ 15,801,000
Canada $ 4,362,000 $ 5,060,000 $ 4,371,000
Equity in earnings of JV $ 6,179,000 $ 5,305,000 $ 3,106,000
-------------------------------------------
Total revenues $ 26,846,000 $ 25,172,000 $ 23,278,000
===========================================
- --------------------------------------------------------------------------------
F-17
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Major Customers and Foreign Operations Continued
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Income from Operations:
United States $ 1,492,000 $ 1,811,000 $ 1,623,000
Canada $ 359,000 $ 533,000 $ 259,000
-------------------------------------------
$ 1,851,000 $ 2,344,000 $ 1,882,000
Equity in earnings of JV $ 6,179,000 $ 5,305,000 $ 3,106,000
Corporate expenses $ (1,753,000 $ (1,565,000 $ (1,656,000)
-------------------------------------------
Total income from operations $ 6,277,000 $ 6,084,000 $ 3,332,000
===========================================
Identifiable Assets:
United States $ 9,083,000 $ 5,796,000 $ 5,325,000
Canada $ 895,000 $ 1,257,000 $ 1,532,000
Other areas $ 302,000 $ 524,000 $ 290,000
-------------------------------------------
$ 10,280,000 $ 7,577,000 $ 7,147,000
-------------------------------------------
Investments in and
advances to joint venture$ 14,421,000 $ 12,269,000 $ 7,413,000
-------------------------------------------
Total identifiable assets $ 24,701,000 $ 19,846,000 $ 14,560,000
===========================================
13. 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.
- --------------------------------------------------------------------------------
F-18
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Non-Qualified Stock Option Plan Continued
Information regarding the Option Plan is summarized below:
Number of Option Price
Options Per Share
----------------------------------
Outstanding at January 1, 1995 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
Granted 120,368 .82-8.00
Exercised (228,011) .96-8.00
Expired (7,875) 2.26
----------------------------------
Outstanding at December 31, 1996 537,592 .82-4.55
Granted 17,657 9.75-11.30
Exercised (188,841) .82-3.80
Expired (5,799) 3.80
----------------------------------
Outstanding at December 31, 1997 360,609 $ 2.96-11.30
==================================
Options exercisable and shares available for future grant are as follows:
December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
Options exercisable 41,832 72,706 212,110
Shares available for grant 276,051 271,866 193,800
- --------------------------------------------------------------------------------
F-19
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123) which established financial accounting and reporting standards for
stock-based compensation. The new standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Company has opted for the latter
approach. Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1997, 1996,
and 1995 consistent with the provisions of SFAS No. 123, the Company's results
of operations would have been reduced to the pro forma amounts indicated below:
Years Ended December 31,
--------------------------------------------
1997 1996 1995
--------------------------------------------
Net Income - as reported $ 5,008,000 $ 4,545,000 $ 2,763,000
Net Income - pro forma $ 4,919,000 $ 4,465,000 $ 2,649,000
Earnings per share - as reported$ .66 $ .60 $ .37
Earnings per share - pro forma $ .65 $ .59 $ .36
--------------------------------------------
- --------------------------------------------------------------------------------
F-20
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Stock-Based Compensation Continued
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31,
----------------------------------------------
1997 1996 1995
----------------------------------------------
Expected dividend yield $ .02 $ .0125 $ .0125
Expected stock price
volatility 48% 49% 49%
Risk-free interest rate 5.25% 4.5% 4.5%
Expected life of options 3 years 3 years 2-10 years
----------------------------------------------
The weighted average fair value of options granted during 1997, 1996, and 1995
are $3.41, $2.97, and $2.38 respectively.
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
---------------------------------------------------------------
Weighted
Average
Remaining Number
Number Contractual Weighted Exercisable Weighted
Range of Outstanding at Life Average at Average
Exercise Prices 12/31/97 (Years) Exercise Price 12/31/97 Exercise Price
- ----------------------------------------------------------------------------
$ 2.96 to 3.95 292,226 7.4 $ 3.50 13,283 $ 2.96
4.09 to 4.55 53,383 5.8 4.21 13,549 4.55
10.25 to 11.30 15,000 2.0 10.46 15,000 10.46
- ----------------------------------------------------------------------------
$ 2.96 to 11.30 360,609 6.9 $ 3.90 41,832 $ 6.16
============================================================================
- --------------------------------------------------------------------------------
F-21
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which
requires companies to present basic earnings per share (EPS) and diluted
earnings per share, instead of the primary and fully diluted EPS as previously
required. The new standard also requires additional informational disclosures,
and makes certain modifications to the previously applicable EPS calculations
defined in Accounting Principles Board No. 15. The new standard is required to
be adopted by all public companies for reporting periods ending after December
15, 1997, and requires restatement of EPS for all prior periods reported. During
the year ended December 31, 1997, the Company adopted this standard.
Earnings per share information in accordance with SFAS 128 is as follows:
Year Ended December 31, 1997
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------------
Net income $ 5,008,000
Less preferred stock
dividends -
---------------
Basic EPS
Income available to
common stockholders 5,008,000 7,342,000 $ .68
=============
Effect of Dilutive Securities
Stock options - 272,000
-------------------------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 5,008,000 7,614,000 $ .66
=============================================
- --------------------------------------------------------------------------------
F-22
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Earnings Per Share Continued
Year Ended December 31, 1996
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------------
Net income $ 4,545,000
Less preferred stock
dividends -
---------------
Basic EPS
Income available to
common stockholders 4,545,000 7,193,000 $ .63
=============
Effect of Dilutive Securities
Stock options - 363,000
-------------------------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 4,545,000 7,556,000 $ .60
=============================================
Year Ended December 31, 1995
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------------
Net income $ 2,763,000
Less preferred stock
dividends -
---------------
Basic EPS
Income available to
common stockholders 2,763,000 7,047,000 $ .39
-------------
Effect of Dilutive Securities
Stock options - 334,000
-------------------------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 2,763,000 7,381,000 $ .37
=============================================
- --------------------------------------------------------------------------------
F-23
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Significant Unconsolidated Affiliates
Summarized financial information for significant unconsolidated affiliates of
the Company, are as follows:
December 31,
--------------------------------------------
1997 1996 1995
--------------------------------------------
Result for year:
Gross revenues $ 38,115,000 $ 31,598,000 $ 25,300,000
Gross profit $ 16,048,000 $ 13,928,000 $ 9,238,000
Net income $ 12,273,000 $ 10,610,000 $ 6,212,000
Year-end financial position:
Current assets $ 8,567,000 $ 7,219,000 $ 5,920,000
Non-current assets $ 22,945,000 $ 18,990,000 $ 15,747,000
Current liabilities $ 4,106,000 $ 3,473,000 $ 4,541,000
Non-current liabilities $ 4,559,000 $ 2,443,000 $ 2,476,000
17. 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 amount contributed to the plan by the Company for the years ended
December 31, 1997, 1996, and 1995 was $37,000, $25,000, and $25,000,
respectively.
18. Fair Value of Financial Instruments
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, 1997, 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.
- --------------------------------------------------------------------------------
F-24
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
19. Commitments and Contingencies
The Company has agreed to indemnify its joint venture partner for any amounts
paid by Cyanco under a deferred royalty agreement, which at December 31, 1997
and 1996, had an outstanding balance of $2,443,000.
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, product 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.
- --------------------------------------------------------------------------------
F-25
<PAGE>
Mining Services International
Exhibit 21
List of Subsidiaries
Name of Subsidiary Ownership %
- --------------------------- ---------------
Nevada Chemicals, Inc., a Nevada corporation 100%
Cyanco, unincorporated joint venture of Nevada Chemicals, Inc. 50%
Turon-MSI Ltd., an Uzbekistan limited liability company 51%
Central Asia Chemicals Limited (previously Turon-MSI Ltd.), a Grand
Cayman company 50%
Cayman Mining Services Limited, a Grand Cayman company 50%
MSI Chemicals Limited, a Grand Cayman company 100%
West Africa Chemicals Limited, a Mauritius company 50%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE COMPANY AS FILED IN ITS 10-K (ITEM 8) FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996 AND IS QUALIFIED ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,160,000
<SECURITIES> 0
<RECEIVABLES> 2,980,000
<ALLOWANCES> 12,000
<INVENTORY> 830,000
<CURRENT-ASSETS> 6,796,000
<PP&E> 10,338,000
<DEPRECIATION> 6,216,000
<TOTAL-ASSETS> 24,701,000
<CURRENT-LIABILITIES> 1,874,000
<BONDS> 0
0
0
<COMMON> 7,000
<OTHER-SE> 20,598,000
<TOTAL-LIABILITY-AND-EQUITY> 24,701,000
<SALES> 19,086,000
<TOTAL-REVENUES> 26,969,000
<CGS> 18,817,000
<TOTAL-COSTS> 20,569,000
<OTHER-EXPENSES> (266,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,000
<INCOME-PRETAX> 6,666,000
<INCOME-TAX> 1,658,000
<INCOME-CONTINUING> 5,008,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,008,000
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Joint Venture Participants
of Cyanco Company
We have audited the accompanying balance sheet of Cyanco Company as of December
31, 1997 and 1996, and the related statements of income, joint venture capital,
and cash flows for the years ended December 31, 1997, 1996, and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Cyanco Company as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years ended December 31, 1997, 1996, and 1995, in conformity with generally
accepted accounting principles.
TANNER+Co.
Salt Lake City, Utah
January 27, 1998
<PAGE>
CYANCO COMPANY
Balance Sheet
December 31,
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
1997 1996
-----------------------------------
Assets
Current assets:
Cash $ 2,929,000 $ 2,751,000
Accounts receivable, net 2,421,000 3,327,000
Inventories 938,000 883,000
Prepaid expenses 240,000 258,000
-----------------------------------
Total current assets 6,528,000 7,219,000
Property, plant and equipment, net 19,963,000 18,252,000
Other assets, net 630,000 738,000
-----------------------------------
$ 27,121,000 $ 26,209,000
===================================
- ----------------------------------------------------------------------------------------------------------
Liabilities and Joint Venture Capital
Current liabilities - accounts payable and accrued expenses $ 2,103,000 $ 3,473,000
-----------------------------------
Deferred royalty 2,443,000 2,443,000
-----------------------------------
Commitments and contingencies - -
Joint venture capital 22,575,000 20,293,000
-----------------------------------
$ 27,121,000 $ 26,209,000
===================================
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
1
</TABLE>
<PAGE>
CYANCO COMPANY
Statement of Income
Years Ended December 31,
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------
Revenues:
Net sales $ 31,596,000 $ 31,181,000 $ 25,203,000
Other 242,000 417,000 97,000
-----------------------------------------------------
31,838,000 31,598,000 25,300,000
-----------------------------------------------------
Costs and expenses:
Cost of sales 17,791,000 17,670,000 16,062,000
General and administrative 1,765,000 3,265,000 2,915,000
Interest - 53,000 111,000
-----------------------------------------------------
19,556,000 20,988,000 19,088,000
-----------------------------------------------------
Net income $ 12,282,000 $ 10,610,000 $ 6,212,000
=====================================================
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
2
</TABLE>
<PAGE>
CYANCO COMPANY
Statement of Joint Venture Capital
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Nevada
Chemicals, Degussa
Inc. Corp. Total
-----------------------------------------------------
Balance, January 1, 1995 $ 6,362,000 $ 6,555,000 $ 12,917,000
Distributions (2,250,000) (2,250,000) (4,500,000)
Capital contributions 21,000 - 21,000
Net income 3,106,000 3,106,000 6,212,000
-----------------------------------------------------
Balance, December 31, 1995 7,239,000 7,411,000 14,650,000
Distributions (2,500,000) (2,500,000) (5,000,000)
Capital contributions 33,000 - 33,000
Net income 5,305,000 5,305,000 10,610,000
-----------------------------------------------------
Balance, December 31, 1996 10,077,000 10,216,000 20,293,000
Distributions (5,000,000) (5,000,000) (10,000,000)
Net income 6,141,000 6,141,000 12,282,000
-----------------------------------------------------
Balance, December 31, 1997 $ 11,218,000 $ 11,357,000 $ 22,575,000
=====================================================
- ------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
</TABLE>
<PAGE>
CYANCO COMPANY
Statement of Cash Flows
Years Ended December 31,
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------
Cash flows from operating activities:
Net income $ 12,282,000 $ 10,610,000 $ 6,212,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,441,000 1,903,000 1,608,000
Loss on disposal of equipment 1,000 - 3,000
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable 906,000 73,000 (1,662,000)
Increase in inventories (55,000) (121,000) (336,000)
Decrease (increase) in prepaid expenses 18,000 (53,000) (37,000)
(Decrease) increase in accounts payable
and accrued expenses (1,370,000) 835,000 600,000
----------------------------------------------
Net cash provided by
operating activities 13,223,000 13,247,000 6,388,000
----------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (3,106,000) (5,125,000) (1,046,000)
Decrease (increase) in other assets 61,000 (21,000) (156,000)
----------------------------------------------
Net cash used in
investing activities (3,045,000) (5,146,000) (1,202,000)
----------------------------------------------
Cash flows from financing activities:
Deferred royalties - - (2,000)
Payments on long-term debt - (1,903,000) (621,000)
Distributions and payments to joint venture
participants (10,000,000) (5,000,000) (4,500,000)
----------------------------------------------
Net cash used in
financing activities (10,000,000) (6,903,000) (5,123,000)
----------------------------------------------
Net increase in cash 178,000 1,198,000 63,000
Cash, beginning of year 2,751,000 1,553,000 1,490,000
----------------------------------------------
Cash, end of year $ 2,929,000 $ 2,751,000 $ 1,553,000
==============================================
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
</TABLE>
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies Organization
Cyanco Company (the Company) is the owner and operator of a liquid sodium
cyanide manufacturing facility located in Humboldt County, Nevada. The Company
operates within the mining industry.
The Company is a non-corporate joint venture. Nevada Chemicals, Inc. (Nevada
Chemicals), a wholly-owned subsidiary of Mining Services International
Corporation (MSI) owns a 50 percent interest in the joint venture, and Degussa
Corporation (Degussa) owns a 50 percent interest in the joint venture.
The joint venture agreement also provides that each party has a first right of
refusal to purchase the other party's interest in the event of withdrawal of one
of the parties.
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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less accumulated
depreciation. Depreciation on property, plant and equipment, other than the
sodium cyanide plant, is determined using the straight-line method over the
estimated useful lives of the assets which range from three to ten years.
Depreciation on the sodium cyanide plant is determined using the
units-of-production method. 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 current operations.
Other Assets
Included in other assets are amounts relating to a payment for the license of
certain technology and deferred costs associated with the sodium cyanide
manufacturing facility. Amortization of these costs is determined using the
units-of-production method. Amortization expense of other assets totaled
$47,000, $83,000, and $58,000 in 1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
5
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
Continued
- ------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies Continued
Revenue Recognition
Revenue is recognized upon shipment of the product.
Income Taxes
The joint venture is not subject to federal income taxes since all income tax
effects accrue directly to the joint venture participants.
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. The Company has a
distribution agreement with Degussa, which requires Degussa to indemnify the
Company against any credit risk from receivables.
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.
The Company's customer base consists primarily of mining companies in the
Western United States. 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, 1997.
Use of Estimates in the Preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassification
Certain amounts in the financial statements for 1996 and 1995 have been
reclassified to conform with the current year presentation.
- --------------------------------------------------------------------------------
6
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
Continued
- ------------------------------------------------------------------------------
2. Detail of Certain Balance Sheet Accounts
December 31,
------------------------
1997 1996
------------------------
Accounts receivable:
Trade receivables $ 2,424,000 $ 3,330,000
Less allowance for doubtful
accounts (3,000) (3,000)
------------------------
$ 2,421,000 $ 3,327,000
========================
Inventories:
Raw materials $ 741,000 $ 716,000
Finished Goods 197,000 167,000
------------------------
$ 938,000 $ 883,000
========================
Accounts payable and accrued expenses:
Trade payables $ 1,738,000 $ 2,624,000
Accrued expenses 303,000 762,000
Due to joint venture
participants 62,000 87,000
------------------------
$ 2,103,000 $ 3,473,000
========================
- --------------------------------------------------------------------------------
7
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
Continued
- ------------------------------------------------------------------------------
3. Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
December 31,
------------------------
1997 1996
------------------------
Land $ 463,000 $ 463,000
Plant 24,190,000 17,720,000
Machinery and equipment 1,610,000 1,590,000
Office equipment and fixtures 158,000 111,000
Vehicles 220,000 170,000
Construction in progress 1,141,000 4,662,000
------------------------
27,782,000 24,716,000
Less accumulated depreciation
and amortization (7,819,000) (6,464,000)
------------------------
$ 19,963,000 $18,252,000
========================
4. Bank-Line of Credit
The Company has a bank line-of-credit agreement which allows the Company to
borrow a maximum amount of $7,000,000 at an interest rate equal to the bank's
LIBOR plus .5%. The line-of-credit matures on July 8, 1999, is secured by
guarantees from Degussa and MSI and had no outstanding balance at December 31,
1997 and 1996.
5. Deferred Royalty
The Company has a $2,500,000 royalty agreement which calls for the Company to
pay a royalty on the first 28,000,000 pounds of sodium cyanide produced in the
original plant. The royalty is computed as the amount of one-half cent per pound
for each pound of sodium cyanide sold on annual gross sales above $12,500,000
and less than $15,000,000 and one cent per pound for each pound of sodium
cyanide sold on annual gross sales above $15,000,000. The Company has the option
to buy out the royalty agreement at any time for $2,500,000 less royalties paid.
The Company's joint venture agreement provides for payments made under the
royalty agreement to be specifically allocated to Nevada Chemicals as a
reduction of their allocable income or distribution of assets upon dissolution
or sale of the Company.
The amount due under this agreement for the 1997 production was approximately
$20,000, which was paid by Nevada Chemicals subsequent to the year ended
December 31, 1997.
- --------------------------------------------------------------------------------
8
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
Continued
- ------------------------------------------------------------------------------
6. Related Party Transactions
Years Ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
Sales to joint venture partner
(see note 7) $31,596,000 $31,181,000 $25,203,000
Raw materials purchased
from joint venture partner $ 568,000 $ 2,443,000 $ 3,354,000
Management fees, cost
reimbursements and other
fees paid to joint venture
partners included in selling,
general and administrative
expenses $ 948,000 $ 951,000 $ 761,000
Amounts payable to joint
venture partner included in
accounts payable $ 62,000 $ 87,000 $ 839,000
Lease payment to joint
venture partner $ 62,000 $ 18,000 $ 23,000
7. Distribution Agreement
The Company has entered into an agreement with Degussa which provides for
Degussa to act as the exclusive (with certain exceptions) distributor of the
Company's products.
Consequently, substantially all of the Company's revenues and trade receivables
are from Degussa. The agreement expires in May 1998, but may be renewed for
subsequent terms subject to approval of both of the joint venture partners.
- --------------------------------------------------------------------------------
9
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
Continued
- ------------------------------------------------------------------------------
8. Profit Sharing Plan
The Company has adopted a defined contribution profit sharing plan which
qualifies 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 Company made contributions of $33,000 to the plan
during 1997, $29,000 during 1996, and $16,000 during 1995.
9. Fair Value of Financial Instruments
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, 1997, 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.
10. Supplemental Cash Flow Information
Years Ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
Amounts paid for interest $ - $ 79,000 $ 123,000
===============================
During the years ended December 31, 1996 and 1995, the Company reduced its
deferred royalty and increased its joint venture capital for royalty payments
made by Nevada Chemicals Inc., of $33,000 and $21,000, respectively.
11. Commitments and Contingencies
The Company provides medical benefits for its employees under a plan which is
partially self-funded by the Company.
The Company has entered into long-term transportation agreements for natural gas
at its plant. The terms of these agreements provide for the supplier to provide
natural gas to the plant site and for the Company to purchase certain minimum
quantities of such gas per year. The term of the agreement is for ten years
beginning in February 1990.
- --------------------------------------------------------------------------------
10
<PAGE>
