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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the quarterly period ended June 30, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission File No. 0-10634
---------------------------
Mining Services International Corporation
(Exact Name of Registrant as Specified in Its Charter)
Utah 87-0351702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8805 South Sandy Parkway
Sandy, Utah 84070-6408
(Address of principal executive offices, zip code)
Issuers telephone number: (801) 233-6000
---------------------------
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No ___
The number of shares outstanding of the registrant's par value $0.001
Common Stock as of August 6, 1999 was 7,339,760.
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<PAGE>
Mining Services International Corporation
Index
<TABLE>
<CAPTION>
<S> <C> <C>
Page No.
--------
Part I Financial Information
Item 1. Consolidated Balance Sheet (Condensed) June 30, 1999 and 1
December 31, 1998.
Consolidated Statement of Operations (Condensed) for the three
months ended June 30, 1999 and June 30, 1998. 2
Consolidated Statement of Operations (Condensed) for the six
months ended June 30, 1999 and June 30, 1998. 3
Consolidated Statement of Cash Flows (Condensed) for the six
months ended June 30, 1999 and June 30, 1998.
Condensed Notes to the consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 8
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Financial Statements
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Balance Sheet (Condensed)
June 30, 1999 December 31,1998
ASSETS (Unaudited)
------ --------------- --------------
<S> <C> <C>
Current assets:
Cash $ 366,000 $ 314,000
Receivables, net 5,230,000 6,050,000
Inventories 1,606,000 1,721,000
Prepaid expenses 52,000 126,000
Current portion of related party notes receivable 435,000 435,000
--------------- --------------
Total current assets 7,689,000 8,646,000
Investments in and advances to joint ventures 13,548,000 13,371,000
Property, plant and equipment, net 7,170,000 6,248,000
Goodwill 2,130,000 2,243,000
Related party notes receivable 1,148,000 1,190,000
Other assets 119,000 221,000
--------------- --------------
$ 31,804,000 $ 31,919,000
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,594,000 $ 2,943,000
Current portion of long-term debt 2,118,000 1,154,000
--------------- --------------
Total current liabilities 3,712,000 4,097,000
Long-term debt 1,226,000 1,213,000
Deferred income taxes 2,532,000 2,532,000
--------------- --------------
Total liabilities 7,470,000 7,842,000
--------------- --------------
Stockholders' equity:
Common stock 7,000 7,000
Capital in excess of par value 5,312,000 5,443,000
Cumulative foreign currency translation adjustments (409,000) (242,000)
Retained earnings 19,424,000 18,869,000
--------------- --------------
Total stockholders' equity 24,334,000 24,077,000
--------------- --------------
$ 31,804,000 $ 31,919,000
=============== ==============
See accompanying notes to financial statements
Page 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Operations (Condensed)
(Unaudited)
3 months ended 3 months ended
6/30/99 6/30/98
--------------- --------------
<S> <C> <C>
Revenues:
Net sales $ 6,658,000 $ 5,569,000
Royalties 234,000 307,000
Equity in earnings from joint ventures 570,000 1,598,000
--------------- --------------
7,462,000 7,474,000
Cost and expenses:
Cost of sales 6,430,000 5,519,000
General administrative 689,000 287,000
Research and development 258,000 115,000
--------------- --------------
7,377,000 5,921,000
--------------- --------------
Income from operations 85,000 1,553,000
Other income (expense), net 17,000 9,000
--------------- --------------
Income before provision for income taxes 102,000 1,562,000
Provision for income taxes 35,000 437,000
--------------- --------------
Net income $ 67,000 $ 1,125,000
--------------- --------------
Weighted Average number of shares outstanding
Basic 7,336,000 7,358,000
--------------- --------------
Diluted 7,384,000 7,558,000
--------------- --------------
Net Income per Share
Basic $ .01 $ .15
--------------- --------------
Diluted $ .01 $ .15
--------------- --------------
</TABLE>
See accompanying notes to financial statements
Page 2
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Operations (Condensed)
(Unaudited)
6 months ended 6 months ended
6/30/99 6/30/98
--------------- --------------
<S> <C> <C>
Revenues:
Net sales $ 13,027,000 $ 10,906,000
Royalties 504,000 757,000
Equity in earnings from joint ventures 1,497,000 2,661,000
--------------- --------------
15,028,000 14,324,000
Cost and expenses:
Cost of sales 12,512,000 10,770,000
General administrative 1,267,000 590,000
Research and development 356,000 232,000
--------------- --------------
14,135,000 11,592,000
--------------- --------------
Income from operations 893,000 2,732,000
Other income (expense), net (52,000) 18,000
--------------- --------------
Income before provision for income taxes 841,000 2,750,000
Provision for income taxes 286,000 830,000
--------------- --------------
Net income $ 555,000 $ 1,920,000
--------------- --------------
Weighted Average number of shares outstanding
Basic 7,336,000 7,358,000
--------------- --------------
Diluted 7,384,000 7,558,000
--------------- --------------
Net Income per Share
Basic $ .08 $ .26
--------------- --------------
Diluted $ .08 $ .25
--------------- --------------
</TABLE>
See accompanying notes to financial statements
Page 3
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Cash Flows (Condensed)
(Unaudited)
6 months ended 6 months ended
6/30/99 6/30/98
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 555,000 $ 1,920,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 602,000 377,000
Stock compensation expense 0 3,000
Gain on disposal of equipment (8,000) (6,000)
Distributed/(undistributed) earnings in joint ventures 554,000 376,000
Deferred income taxes 0 124,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable 820,000 73,000
(Increase) decrease in inventories 115,000 (31,000)
(Increase) decrease in prepaid expenses 74,000 62,000
(Increase) decrease in other assets 102,000 (127,000)
Increase (decrease) in accounts payable and accrued expenses (1,349,000) 669,000
--------------- --------------
1,465,000 3,440,000
--------------- --------------
Cash flows from investing activities:
Proceeds from sale of plant and equipment 59,000 6,000
Payments received on notes receivable 100,000
Purchase of plant and equipment (1,462,000) (533,000)
Increase in notes receivable (58,000)
Investment in joint ventures (898,000) (855,000)
--------------- --------------
Net cash used in investing activities (2,259,000) (1,382,000)
--------------- --------------
Cash flows from financing activities:
Issuance of common stock 0 84,000
Retirement of common stock (131,000) 0
Net proceeds from operating line of credit 1,099,000 0
Proceeds from issuance of long-term debt 250,000 0
Payments on long-term debt (372,000) 0
--------------- --------------
Net cash used in financing activities 846,000 84,000
--------------- --------------
Net increase (decrease) in cash 52,000 2,142,000
Cash and cash equivalents, beginning of period 314,000 1,160,000
Cash and cash equivalents, end of second period $ 366,000 $ 3,302,000
--------------- --------------
</TABLE>
See accompanying notes to financial statements
Page 4
<PAGE>
Mining Services International
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The interim financial information for the three months ended June 30,
1999 and the six-months ended June 30, 1999 included herein is unaudited and the
December 31,1998 Balance Sheet is derived from audited financial statements;
however, such information reflects all adjustments, which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
These consolidated financial statements are presented in accordance
with the requirements for Form 10-Q and consequently may not include all the
disclosures normally required by the generally accepted accounting principles or
those normally made in the annual 10-K filing. Financial information relating to
depreciation contained in the Management's Discussion and Analysis of Financial
Condition and Results of Operations are incorporated by reference into these
notes.
The results of operations for the three-month period ended June 30,
1999 and the six month period ended June 30, 1999 are not necessarily indicative
of the results to be expected for the full year.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Because of the significance of the investment of the Company in joint
ventures ("JV" or "JV's") which are not consolidated, but accounted for under
the equity method, the following comparative schedule is prepared to clarify and
demonstrate the Consolidated Revenue of the Company during the three-month and
six-month periods ending June 30, 1999 and 1998. As demonstrated in the
schedule, the Company's consolidated Revenue includes its share of equity in
earnings from JV's:
<TABLE>
<CAPTION>
Non Consolidated Amount MSI's MSI's
Joint Venture Joint Venture Equity Included in Non-JV Consolidated
Sales Net Income MSI MSI Revenue Revenue Revenue
<S> <C> <C> <C> <C> <C> <C>
6 Months 1999 $11,938,000 $2,994,000 50% $1,497,000 $13,531,000 $15,028,000
6 Months 1998 $18,166,000 $5,322,000 50% $2,661,000 $11,663,000 $14,324,000
3 Months 1999 $5,166,000 $1,140,000 50% $ 570,000 $6,892,000 $7,462,000
3 Months 1998 $10,446,000 $3,196,000 50% $1,598,000 $5,876,000 $7,474,000
Note: MSI does not consolidate revenues from 50% or less controlled joint ventures
</TABLE>
NOTE 3: INVENTORIES
Inventories at June 30, 1999 and December 31, 1998 have been recorded
at the lower of cost or market, cost being determined on the first in first out
(FIFO) method. The composition of inventories at June 30, 1999 and December 31,
1998 are as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Raw Materials $ 579,000 $ 707,000
Finished Goods $ 1,027,000 1,014,000
----------- -----------
$ 1,606,000 $ 1,721,000
=========== ===========
Page 5
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three-months ended June 30, 1999 vs. 1998
- -----------------------------------------
Net income from operations decreased 95% from $1,553,000 in the three
months ended June 30, 1998 to $85,000 in the three months ended June 30, 1999.
The significant decrease consists primarily of the decrease in contribution from
the Company's JV's in Nevada, Colombia and Uzbekistan (see Note 2) and an
increase in the losses from the Company's West Virginia operation. Cyanco's
contribution to equity in earnings from non-consolidated joint ventures
decreased $606,000 or 47% compared to the same 3-month period in 1998 due to a
decrease in both sales volume and gross margin per unit. The decrease in
Cyanco's sales volume and margin compared to the second quarter of 1998, as well
as the first quarter of 1999, correlate to worsening gold bullion prices during
the second quarter of 1999. However, low gold prices are expected to allow
Cyanco to increase market share as the low-cost producer in the area of the
Nevada gold mines and to position itself well as gold prices recover in the
long-term. Similarly, the Company's JV in Colombia experienced a drop in sales
volumes due to the Company's major coal mine customer curtailing production
while it builds railroad and port facilities to better compete in the current
market for export coal. The decrease in revenue resulted in a decrease in equity
in earnings of $206,000, a decrease of 136%. Again, results are expected to
improve as coal mine production in Colombia strengthens toward the end of the
year and into the year 2000 now that more cost effective infrastructure is put
in place. Due to weakening in Uzbekistan gold and cotton production (the
principal source of that country's hard currency), the Company has experienced
difficulty with the conversion of currency from its JV in Uzbekistan.
Accordingly, the Company has elected not to report revenues or profits earned by
that JV during 1999 year-to-date until hard currency conversion is established.
During the twelve months ended December 31, 1998, the Uzbekistan JV, Turon-MSI,
had revenues of $3,359,000 and net income of $765,000. As a result of not
reporting profits, second quarter 1999 earnings from equity from the JV in
Uzbekistan decreased $180,000 compared to the three months ended June 30, 1998.
Additionally, revenue from royalties decreased $73,000 or 24%. Net
sales revenue for the quarter ended June 30, 1999 was approximately equal to net
sales revenue for the same quarter ended June 30, 1998. However, cost of sales
increased $911,000 or 17% during the period as compared to the same period in
1998. Gross margin (cost of sales divided by total revenue) decreased 12% from
26% for the three-month period ending June 30, 1998 to 14% for the period ended
June 30, 1999. The decrease in margin is largely the result of the decrease in
earnings from JV's along with increased losses at the West Virginia plant. While
the Company's wholly-owned subsidiary, Green Mountain Explosives, Inc., (GME)
largely recovered from its loss in the first quarter of 1999 by increasing sales
and improving its second quarter 1999 gross margin by $386,000 as compared to
the first quarter of 1999, the Company's West Virginia operation had an increase
in losses of $180,000 or 263%, including write-downs in inventory and accounts
receivable, in the three-month period ended June 30, 1999 as compared to the
same period in 1998. GME is expected to achieve planned levels of contribution
by year-end and cost reduction measures implemented at the West Virginia plant
in July 1999 are expected to decrease costs by $300,000 annually. Of the
$402,000 or 140% increase in general administrative expenses for the quarter
ended June 30, 1999 as compared to the quarter ended June 30, 1998, $306,000 or
76% of the increase consists of the general administrative expenses of GME which
was acquired by the Company in December 1998. Expenses related to research and
development increased $143,000 or 124% for the three-month period ended June 30,
1999 as compared to the same period in 1998.
The Company's JV project with Norsk Hydro in Kovdor, Russia is
progressing as planned with plant and specialized mobile equipment now being
shipped to the Russian mine site. Production is expected to begin by late 1999
or early in the year 2000. The Company's wholly-owned subsidiary, O'Brien Design
Associates, Inc. (ODA) is currently testing its accessories production line with
some production on target for year-end 1999. It is expected that in future
periods these operations will continue to add significantly to revenues and
income from operations.
Six-months ended June 30, 1999 vs. 1998
- ---------------------------------------
For the six months ended June 30, 1999, revenues increased $704,000 or
5% as compared to the six months ended June 30, 1998. However, gross margin
decreased $1,038,000 or 29% for the six-month period ended June 30. 1999 as
compared to the six-month period ended June 30, 1998. The principal cause of the
decrease stems from the results of operations during the second quarter 1999 as
explained above. Of the $677,000 or 115% increase in general and administrative
expenses for the six months ended June 30, 1999 compared to the six months ended
June 30, 1998, $527,000 or 78% of the increase is represented by the general
administrative expenses of GME which was acquired in December 1998. Other
Page 6
<PAGE>
expenses increased $73,000 for the six-months ended June 30, 1999 as compared to
the same period in 1998 primarily due interest expense related to the
acquisition of GME in December 1999.
The effective income tax rate for the six-month period ended June 30,
1999 was 34% as compared to 30% for the six-month period ended June 30, 1998.
Liquidity and Capital Resources
- -------------------------------
The Company has been able to maintain its strong balance sheet with a
current ratio (current assets divided by current liabilities) of 2.07 to 1 and
total liabilities to stockholders equity of 0.30 to 1 as of June 30, 1999,
compared to a current ratio of 2.11 to 1 and total liabilities to stockholders
equity of 0.33 to 1 as of December 31, 1998. The Company has completed
negotiations with a major U.S. bank for a $4.5 million line of credit facility
with sub-features that allow for borrowings for equipment of up to $1.25 million
and for letters of credit of up to $1 million. This new line of credit will
carry a lower interest rate and will include more favorable terms than the
existing line of credit. The Company also reclassified $250,000 of a short-term
construction loan for a GME facility to a long-term mortgage note. Most of the
$820,000 decrease in accounts receivable is the result of payments made to the
Company by JV's against international trade sales which were recorded at the
later part of 1998; some of the decrease came from write-downs related to
product credits given to customers. The $1,349,000 decrease in accounts payable
and accrued expenses is principally the result of delayed payments against the
cost of the international trade sales referred to above, as well as payments
made in 1999 to certain other vendors which were accrued in the later part of
1998. Some of the decrease in accounts payable and accrued expenses comes from a
decrease in income taxes payable related to lower profits. Through the extension
of credit at the JV level for supplies and services rendered by the JV partners,
the Company was able to fund $322,000 of expansion of its Kovdor, Russia JV
project. The Company used cash from Cyanco and its explosives operations to
purchase $234,000 of fixed assets at GME (principally delivery trucks), $391,000
for two specialized emulsion vehicles for explosives operations, as well as
$481,000 to continue the construction of ODA's production line. These purchases
represent $1,428,000 of the $1,462,000 of purchases of plant and equipment for
the six-month period ended June 30, 1999. The $225,000 increase in depreciation
and amortization and the $372,000 increase in payments on long-term debt for the
six months ended June 30, 1999 as compared to the same period in 1998 are
principally due to the acquisition of GME.
In management's opinion, the capital resources of the Company are
adequate to finance its business activity assuming that the political,
financial, and economic environment continue favorable to the mining industry at
large. Recent falling gold prices have weakened the cash flow expectations from
Cyanco in the short-term and weak export coal prices have weakened near-term
cash flow expectations for the Colombian and Canadian operations. Due to weak
commodity prices world-wide, some of the underdeveloped countries in which the
Company operates may continue having problems maintaining hard currency
reserves, such as in Uzbekistan and Ghana, which rely heavily on hard currency
inflow from gold exports. Consequently, the Company may need to rely on
short-term lines of credit more than it has in the past few years. In the long
term, the results of operations and the liquidity of the Company's resources
should be strengthened as the mining industry rebounds from the current-cycle
lows; however, the Company could continue being impacted by factors such as
political risks, capital availability, changes in taxation, inflation, and
foreign exchange fluctuations. Consequently, the Company cannot determine the
ultimate effect that current products and strategies will have on long-term net
sales, earnings, or stock price.
Page 7
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended June
30, 1998 or during the period covered by this report. However, on May 19, 1999
the Board of Directors declared a dividend of common stock purchase rights; as a
result, a Form 8-K was filed on July 21, 1999 disclosing the Board action. No
additional exhibits have been filed as part of this report.
Page 8
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MINING SERVICES INTERNATIONAL CORPORATION
-----------------------------------------
(Registrant)
/s/ Lex L. Udy
----------------------------------
August 13,1999 Lex L. Udy
--------------
(Date) Vice Chairman and Secretary
/s/ Duane W. Moss
---------------------------------
Duane W. Moss
Chief Financial Officer
Page 9
<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-Q (ITEM 8)
FOR THE QUARTER ENDED JUNE 30,1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 366,000
<SECURITIES> 0
<RECEIVABLES> 5,267,000
<ALLOWANCES> 37,000
<INVENTORY> 1,606,000
<CURRENT-ASSETS> 7,689,000
<PP&E> 14,193,000
<DEPRECIATION> 7,023,000
<TOTAL-ASSETS> 31,804,000
<CURRENT-LIABILITIES> 3,712,000
<BONDS> 1,226,000
0
0
<COMMON> 7,000
<OTHER-SE> 24,327,000
<TOTAL-LIABILITY-AND-EQUITY> 31,804,000
<SALES> 13,027,000
<TOTAL-REVENUES> 15,028,000
<CGS> 12,512,000
<TOTAL-COSTS> 14,135,000
<OTHER-EXPENSES> (28,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,000
<INCOME-PRETAX> 841,000
<INCOME-TAX> 286,000
<INCOME-CONTINUING> 555,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555,000
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
