- - --------------------------------------------------------------------------------
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, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the
transition period from ____________ to ____________
Commission File No. 0-10634
---------------------------
Mining Services International Corporation
(Exact Name of Registrant as Specified in Its Charter)
Utah 87-0351702
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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. [ ]
Based on the closing sales price of March 12, 1999, the aggregate
market value of the voting stock held by non-affiliates was $19,158,000
(3,331,774 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 March 12, 1999 was 7,339,760.
---------------------------
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 19, 1999, which Proxy Statement will be
filed no later than 120 days after the close of Registrant's fiscal year ended
December 31, 1998, are incorporated by reference in Part III of this Annual
Report on Form 10-K.
-------------------------------------------------------------------------------
<PAGE>
Mining Services International Corporation
Table of Contents
Part I Page No.
--------
Item 1. Business 1
Item 2. Properties 4
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 10
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 explosives used in
mining and construction 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 construction
industries. 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 U.S. and International market niches which need effective solutions
for blasting and ore treatment. Recent developments in the Company's business
are described below.
Cyanco: Early in 1996 Cyanco announced its intent to construct a
back-up production facility at its Winnemucca, Nevada 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 an annual production
capacity of at least 85 million pounds of liquid sodium cyanide. Cyanco
continues to enhance its plant efficiencies and develop markets and product
enhancements which maximize the output of the Winnemucca plant.
During 1998, worldwide gold prices continued flat - between $280.00 and
$300.00 per ounce. Gold production in the Company's market area is planned to
remain stable for the foreseeable future. Although prices for sodium cyanide
have been and are likely to remain depressed in the short-run, it is likely that
Cyanco will benefit long-term as prices rebound and Cyanco increases market
share.
MSI Explosives Business: During 1998, the Company continued to develop
and secure partnering arrangements for its mining explosives business worldwide,
to develop its EMGEL(R) packaged explosives business and to secure major
customers in the United States and Canada. In addition, the Company renewed two
significant explosives contracts in the U.S., which over the life of the
contracts will provide in excess of $18 million of revenue. It also added other
contracts directly with mines and made arrangements with certain distributors
through which the Company will market products. The Company also anticipates
that, taken as a whole, its licensees should continue to expand operations
during 1999.
On December 9, 1998, MSI acquired 100% interest in Green Mountain
Explosives, Inc. (GME), an explosives and blasting services company operating in
the New England market. Its 1998 annual sales were approximately $8.5 million,
which the Company believes will continue to grow and represent a major
enhancement to the Company's U.S. market penetration.
In addition, MSI acquired 100% interest in O'Brien Design Associates,
Inc. (ODA), a company located in Charlestown, Rhode Island, which owns
technology and facilities for the production of certain explosive accessories.
This acquisition will enable the Company to add other explosives product lines
necessary for international and domestic long-term growth as an explosives
provider.
During 1998, the Company entered into a joint venture with Norsk Hydro,
the largest fertilizer producer in the world, with whom the Company also has a
joint venture in Colombia, to produce and service bulk explosives operations in
the Kovdor Mining district in Russia. Norsk Hydro purchases fertilizer raw
materials mined at Kovdor, thus providing reasonable assurance that the
Company's joint venture will be able to achieve repatriation of earnings and
convertibility of local currency. The contract is for a period of seven years
and MSI's share of the capital required for the project will approximate
$750,000. Operations are scheduled to begin during the second half of 1999.
1
<PAGE>
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 and began to produce on a regular basis in 1998, producing approximately
10,000 metric tons of bagged ANFO, 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's strategy is to also
market a significant amount of its production in future periods to neighboring
foreign markets. Shortage of capital in Uzbekistan limited full production of
explosives in Uzbekistan during 1998, which is likely to continue during 1999.
The operations were profitable in 1998.
The MSI and Norsk Hydro joint venture in Colombia produced explosives
during 1998 to support the mining of approximately 4 million metric tons of
coal. The Company expects production to be decreased during 1999 due to
curtailed mining, reflecting current lower coal prices in Europe where much of
the Colombian coal is marketed. During 1998, however, the Colombian Government
and certain large coal companies finalized agreements, which will allow the
Company's major customers to have access to much less expensive transportation
and port facilities via railroad. These enhancements should be in place within
the next two years, thus allowing the coal companies to expand production
significantly.
The Company continues making arrangements with various manufacturers of
explosives accessories and has become a base line distributor of
Ensign-Bickford, a major independent accessories supplier, to market in areas
which require the explosives provider to have a complete line of explosives,
including accessories. In 1998 the company also provided such products from
third party suppliers in foreign markets, such as Africa and the Mediterranean.
Description of Business
Products and Markets: The Company, through its subsidiaries, licensees
and joint ventures, primarily services the surface mining and construction
industries. 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 accessories, such as
boosters, initiators and detonating cord 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 stable and the
package or cartridge can be punctured or split without product spills. This
significantly improves the handling characteristics of the explosive and
provides additional safety in transportation, storage and use.
With the addition of packaged explosives, the Company 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. With
the technology and facilities know-how acquired from ODA, the Company will also
be positioned to supply its own explosives accessories to certain niche markets
around the world.
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 New England, 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. Aggregates, 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 licensees in South Africa, Namibia, Australia, India,
2
<PAGE>
Korea and Thailand. The Company plans to continue its licensing activities in
certain geographic areas, but has shifted its marketing focus toward creating
long-term positions of ownership 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 about 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 solid products from distant plants to special tanks
or tankers where the product is dissolved before being discharged 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 is relatively
small compared to those of a wholesale distribution or retail business. A net
loss of such customers, which is not expected to occur, could adversely affect
1999 sales. In most cases the Company has long-term contracts with its customers
(see Note 11 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 all or parts of
its technology to manufacture HEF(R) and EMGEL(R) to companies in South Africa,
Namibia, Australia, 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.
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 the plant's
operation.
Research and Development: Expenditures for technical research and
development for the fiscal years ended December 31, 1998, 1997 and 1996 were
$587,000, $488,000 and $503,000, respectively. The Company actively conducts
research on product improvement and development. The expenditures in each of the
years ending December 31, 1998, 1997 and 1996 were related to the Company's
explosives business. There has not been any customer-sponsored research and
development.
3
<PAGE>
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 except temporarily where import restrictions may occur due to lack
of convertibility or other foreign political or economic factors which may occur
in countries experiencing hard currency shortages or devaluations. 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 ORICA, 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 world market for sodium cyanide
briquette or dry form is dominated by E.I. DuPont Nemours ("DuPont"). There
continue to be opportunities in the worldwide market for liquid sodium cyanide,
however, currently supply of dry product, worldwide, exceeds demand.
Consequently, changes in market share worldwide would likely be met with
resistance from the major suppliers of dry product. Domestically, 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 keep product prices at low levels during 1999 in
the Nevada market.
Employees: The Company employs 95 full time employees in its direct
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 60 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 positive.
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.
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.
4
<PAGE>
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. The land owner normally supplies
water, sewer, electricity and other infrastructure. 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 backup 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.
O'Brien Design Associates owns the lot, office and facilities located
at its principal place of business located at 366 Ross Hill Road, Charlestown,
Rhode Island. It also has adequate access to magazines and testing facilities
for its explosives accessories products.
Green Mountain Explosives built its corporate offices during 1998,
consisting of land, office building and other improvements, located at Gold
Lodge Avenue, Auburn, New Hampshire. It also rents and owns various magazines
near market areas for storage of explosives.
The property and facilities of the Company and its joint ventures,
including Cyanco are deemed adequate and suitable for their respective
operations.
Item 3: Legal Proceedings
The legal proceeding against the Company filed in 1992 concerning
claims of patent infringement in the Federal Court of Canada, Trial Division by
Hanex Products, Inc., Explosives Limited and Bulk Explosives Limited, as
plaintiffs, was dismissed as agreed upon between the Company and the Plaintiffs
on August 20, 1998. All counterclaims filed by the Company were also accordingly
dismissed.
Unrelated to the foregoing proceeding, on August 18, 1998, the Company
waived notice of a patent infringement action filed in the United States
District Court for the District of Utah on or about June 4, 1998 by Hanex
Products, Inc., as plaintiff. The plaintiff alleges that the Company has
infringed certain of its patents regarding the composition of certain bulk
explosives in the United States. The plaintiff is seeking damages plus costs and
attorney's fees resulting from the alleged infringement. On October 13, 1998,
the Company filed its Answer to the Complaint and counter claim, denying the
validity and/or the enforceability of the patents and any infringement thereof.
It also asserted certain counterclaims and affirmative defenses against the
Plaintiff. The management does not believe this action will have a material
effect on the Company.
On March 22, 1999, MSI received a complaint filed on March 10, 1999, in
the Riverside Superior Court, Riverside, California, by Mr. Paul Marlett, an
individual doing business as Marlett Technical Services and Sales. The Plaintiff
alleges the company owes him, as a prior independent contractor, commissions of
approximately $200,000 and claims treble damages due to breach of the Unfair
Practices Act of California. The Company plans to file an Answer denying all
claims with appropriate counterclaims and defenses. Management does not believe
this action will have a material effect on the Company.
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
Stockholder Matters
(a) Price Range of Common Stock. The Company's Common Stock is
traded on NASDAQ and the following table shows the range of high and
low bid prices for the Company's Common Stock for the calendar quarters
indicated. The quotations, obtained from NASDAQ, represent prices in
the over-the-counter market between dealers in securities, do not
include retail markup, markdown or commissions, and do not necessarily
represent actual transactions.
Bid Prices
----------
High Low
---- ----
1998 First Quarter 8.38 6.50
Second Quarter 8.44 6.13
Third Quarter 6.50 4.88
Fourth Quarter 5.63 4.38
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
(b) Approximate number of equity security holders. The
approximate number of record holders of the Company's Common Stock as
of March 12, 1999 was 591 which does not include shareholders whose
stock is held through securities position listings.
(c) Dividends. The Company paid cash dividends of $184,590 or
$.025 per share on December 21, 1998, $146,880 or $.02 per share on
December 19, 1997 and $109,000 or $.015 per share on December 20, 1996.
Payment of dividends is within the discretion of the Company's Board of
Directors and there are no material restrictions that limit the ability
to pay dividends on the Common Stock of the Company. 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%.
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, 1998 were
derived from audited financial statements of the Company and its consolidated
subsidiaries. The financial statements as of and for each of the fiscal years in
the five-year period were audited by Tanner + Co., independent public
accountants. The data set forth 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>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
Operation Results Data: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Revenues 29,865,000 26,969,000 25,172,000 23,278,000 18,555,000
Income from operations 5,819,000 6,400,000 6,084,000 3,332,000 2,269,000
Net Income 3,872,000 5,008,000 4,545,000 2,763,000 1,630,000
Earnings per common
share diluted .52 0.66 0.60 0.37 0.23
Cash dividends declared
per common share .025 0.020 0.015 0.015 0.010
Financial Position Data
Total assets 31,919,000 24,701,000 19,846,000 14,560,000 11,635,000
Long-term debt 1,213,000 - 714,000 513,000 752,000
Deferred gain on sale
and leaseback - - - 84,000 135,000
Stockholder's equity 24,077,000 20,605,000 15,769,000 11,271,000 8,429,000
</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 significance of JV operations underlying the Consolidated
Revenue of the Company during the periods ending December 31, 1998, 1997 and
1996. As demonstrated below, the Company manages significantly more sales than
is reported in "Consolidated Revenue."
<TABLE>
<CAPTION>
Amount MSI's
Joint Joint Venture Included in Non-JV Consolidated
Venture Sales Net Income Co's % MSI Revenue Revenue Revenue
<S> <C> <C> <C> <C> <C> <C>
1998 $37,353,000 $ 9,978,000 50% $4,989,000 $24,876,000 $29,865,000
1997 $38,115,000 $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
</TABLE>
1998 vs. 1997
- - -------------
Consolidated Revenues in 1998 increased 11% over 1997, with JV sales
decreasing 2% and non-JV Revenues up 20%, a $4.1 million increase. A significant
part of the decrease in JV sales was attributable to Cyanco's decrease in 1998
sales of $4.6 million or 15% compared to 1997 sales. Sales in Colombia remained
basically unchanged from those of a year earlier. Sales in Ghana decreased 34%
from those in 1997, but the sales amount is small. In Uzbekistan, sales
increased to $3.5 million representing a 13 fold increase over sales in 1997,
thus overcoming to a large degree the decrease in Cyanco sales.
The Company's share of joint venture net income decreased in 1998 from
that of 1997 by $1.2 million. The Company's equity earnings from Cyanco
decreased by $1.6 million, a decrease of 26%, which is almost entirely due to a
decrease in price since production volume remained relatively constant during
1998 compared to 1997. It is estimated that production volume at Cyanco will
continue at a similar pace for 1999 as that experienced in 1998. The combined
equity earnings from Colombia, Uzbekistan and Ghana increased by approximately
$400,000 during 1998 over that of 1997. However, equity earnings from the joint
ventures in Colombia, Ghana and Uzbekistan may decrease in 1999 if gold and coal
prices decline or continue at current levels. Furthermore, if the current global
financial downturn continues, it is likely to affect earnings negatively since
7
<PAGE>
there may be currency fluctuations impacting convertibility of currencies and
translation accounting negatively impacting the financial statements.
Despite the possible flatness to slight decrease in earnings from the
current joint ventures projected for 1999, these joint ventures are
strategically attractive for the Company and will continue to provide steady or
increasing returns on assets over a long period of time. Furthermore, the
addition of the Kovdor joint venture and other direct foreign investments of MSI
through MSIC, CAC, ODA and MSIR, in developing foreign trading in accessories
and raw materials, direct bulk explosive service to mines, royalties, technical
fees and financing gains should continue to increase revenues and earnings in
1999 over those of 1998.
The $4.1 million increase in non-JV revenues is largely made up of
increased sales in the U.S. and Canada aided by sales due to the acquisition of
GME in December 1998. Direct revenues from foreign royalties, technical fees,
interest income on foreign loans, accessories trading and direct bulk explosives
activities in foreign locations represented approximately 8% of the $24.9
million of non-JV revenue. It is expected that consolidated non-JV revenues will
significantly increase in 1999 over those of 1998 due to the acquisition of GME
and the addition of other major U.S. contracts despite the expected winding down
of a major dam project in California later in 1999, for which the Company
supplies explosives.
Consolidated income from operations decreased on a percentage basis
from 23.7 % to 19.5% of revenue comparing 1997 to 1998. The $581,000 decrease in
1998 income from operations can be summarized as a $1.6 million decrease in
Equity Earnings from Cyanco largely offset by an increase of net contributions
and JV earning of $1 million from explosives. The $1 million increase in net
contribution from explosives from 1997 to 1998 included an increase of net
contribution from U.S. and Canada operations of approximately $900,000, an
increase from other foreign related explosives activities of $180,000 and an
increase from explosives JV's of approximately $400,000. This increase of net
contribution at the projects level were partially offset during 1998 by
increases in corporate expenditures in R&D of $100,000 and other development,
general and administrative costs of approximately $380,000.
Raw material costs should be reduced or remain stable during 1999 and
it is expected that there will be no major supply problems except where imports
may be limited by lack of convertibility to hard currency.
Income before provision for income taxes for 1998 was down by 10%
compared to that of 1997. The effective tax rate increased from 25% in 1997 to
35% in 1998 due primarily to the large number of options exercised in 1997 and
the utilization of certain other one-time tax benefits carried over from prior
years. It is expected that during 1999 the income tax rate will continue at an
effective tax rate in excess of 35% due to the non-deductibility of amortization
of goodwill associated with the acquisition of GME.
1997 vs. 1996
- - -------------
Consolidated revenues for the Company showed a 7.2% increase between
1996 and 1997. This was due to the increase of MSI's revenue attributable to its
share of equity earnings from JV's which increase in 1997 was primarily derived
from explosives JV's. Cyanco's 1997 revenues increased only slightly at 1% over
those of 1996.
Net income of $5,008,000 for 1997 increased by approximately $463,000
or 10% over that earned in 1996. Pre-tax earnings increased from $5,960,000 in
1996 to $6,666,000 in 1997 which represents a 12% increase. The effective tax
rate in 1997 was 25% compared to 24% in 1996.
Year 2000 Issue
- - ---------------
Management believes the concerns for Year 2000 issues have been
adequately addressed internally during 1998. All material systems used in the
Company, including accounting, manufacturing, facilities and desktop systems,
are being converted to be Year 2000 compliant by the end of 1999. Management is
of the opinion that consequences of Year 2000 issues will not have a material
effect on the Company's business, results of operations, or financial condition.
However, no organization, including the Company, can control all aspects of
achieving and maintaining Year 2000 compliance. The Company plans to monitor the
Year 2000 compliance of the third parties on which the company may rely. There
can be no guarantee that timely conversion, or that a failure to convert by
another company would not have a materially adverse effect on the Company's
business, results of operations or financial condition. Management's estimated
cost for assessing and reaching Year 2000 compliance during 1998 and 1999 should
be under $50,000. In plants where the processing operations are either
controlled or monitored by computerized systems, the Company plans on having all
operations physically shut down at the end of 1999 and then restarted in the new
year, thus eliminating any chance of an operational failure due Year 2000
issues.
8
<PAGE>
Liquidity and Financial Resources
The Company ended 1998 with a very strong financial position. Cash flow
from operating activities was $3,886,000 during 1998 compared to $3,553,000
during 1997, an improvement of about 9.4%. The current ratio, a measure of
current liquidity, declined during 1998 from 3.6 at the end of 1997 to 2.1 at
the end of 1998. Long-term debt existing at the end of 1998 was approximately
$1.2 million made up primarily of debts relating to the acquisition of GME.
Deferred taxes were increased from $2,222,000 to $2,532,000 reflecting primarily
the increased tax deferral of certain foreign based income and increased
differences between book and tax accumulated depreciation. Receivables by the
end of 1998 had increased $1,818,000 over 1997. This increase was due in part to
delayed payments of royalties, the consolidation of GME, increased sales in the
U.S., and approximately $700,000 from slow paying receivables due from lack of
timely convertibility to hard currency in Uzbekistan. It is expected that
increases of cash flow from operating activities should continue to increase
during 1999.
Net cash used in investing activities increased from $2,356,000 in 1997
to $4,935,000 in 1998, primarily due to an increase in investment in joint
ventures and the acquisitions of ODA and GME. The increase in investment in
joint ventures was primarily due to approximately $725,000 of expenditures in
the Turon-MSI joint venture and $445,000 spent construction of equipment for the
Kovdor project, offset with excess distributions of earnings from joint
ventures. Cash needed for investing activities during 1999 likely will continue
in North American operations, Kovdor and other foreign operations. It is also
anticipated that several announcements will be made during 1999 regarding
additional joint ventures and business arrangements which will require
additional capital. It is expected that cash needed for investment during 1999
will be provided from operations.
The Company has a revolving line of credit with its bank in Salt Lake
City, Utah in the amount of $2,250,000 bearing interest at the bank's prime rate
less 3/4% and an equipment line of credit of $1,250,000 bearing interest at the
bank's prime rate less 3/4% secured by equipment. $1,000,000 of the revolving
line of credit is available to be used for the increasing demand for Letters of
Credit internationally. The Company owed $662,000 on its lines of credit at
December 31, 1998. During 1998 the revolving line of credit was utilized up to
$662,000.
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 where practical and available 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. To date, the Company has
not utilized any hedging activities to minimize exchange risks.
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. These factors include, but are not
limited to, changes in world supply and demand for commodities, political,
environmental, economic and financial risks, especially those associated with
underdeveloped and developing countries, changes in demand for construction
activities, major changes in technology which could affect the mining industry
as a whole or which could affect explosives and sodium cyanide specifically,
competition, the continued availability of highly qualified technical and other
professional employees of the Company who can successfully manage the ongoing
change and growth. The Company believes it is taking appropriate actions in
order to address these and other factors previously disclosed; however, the
actual results could materially differ from those indicated in the statements
made.
9
<PAGE>
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 Disclosure
None.
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 3 of the Company's Proxy Statement filed in connection with its
May 19, 1999 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 19, 1999 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 19, 1999 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 19,
1999 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 1998 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-26.
b. Also included as financial statement schedules to the Annual
Report on Form 10-K as Exhibit 99 are:
The financial statements for the fiscal year ended 1998
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.
10
<PAGE>
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.)
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
1998 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, 1998.
<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 30, 1999
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 March 30, 1999
- - ---------------------- of Directors
Edward Neff Bagley
/s/ Lex L. Udy Vice Chairman and Secretary March 30, 1999
- - ---------------------- and Director
Lex L. Udy
/s/ John T. Day President and Chief March 30, 1999
- - ---------------------- Executive Officer
John T. Day and Director (Principal
Executive Officer)
/s/ Nathan L. Wade Director March 30, 1999
- - ----------------------
Nathan L. Wade
/s/ Stephen Fleischer Director March 30, 1999
- - ----------------------
Stephen Fleischer
/s/ Duane W. Moss Chief Financial Officer March 30, 1999
- - ---------------------- and Legal Counsel
Duane W. Moss
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Index to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
Page
----
Independent Auditors' Report F-2
Consolidated balance sheet F-3
Consolidated statement of income F-4
Consolidated statement of stockholders' 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 and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1998, 1997, and 1996. 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 and Subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years ended
December 31, 1998, 1997, and 1996 in conformity with generally accepted
accounting principles.
TANNER + Co.
Salt Lake City, Utah
March 5, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Balance Sheet
(In thousands, except per share amounts)
December 31,
- - ----------------------------------------------------------------------------------------------------------
Assets 1998 1997
------
-----------------------------------
<S> <C> <C>
Current assets:
Cash $ 314 $ 1,160
Receivables, net 6,050 4,232
Inventories 1,721 830
Prepaid expenses 126 139
Current portion of related party notes receivable 435 435
-----------------------------------
Total current assets 8,646 6,796
Investment in and advances to joint ventures 13,371 12,448
Property, plant and equipment, net 6,248 4,122
Goodwill 2,243 -
Related party notes receivable 1,190 965
Other assets 221 370
-----------------------------------
$ 31,919 $ 24,701
-----------------------------------
- - ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,943 $ 1,874
Current portion of long-term debt 1,154 -
-----------------------------------
Total current liabilities 4,097 1,874
Long-term debt 1,213 -
Deferred income taxes 2,532 2,222
-----------------------------------
Total liabilities 7,842 4,096
-----------------------------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.001 par value, 500,000,000 shares
authorized; 7,339,760 and 7,353,344 shares issued
and outstanding, respectively 7 7
Capital in excess of par value 5,443 5,416
Cumulative foreign currency translation adjustments (242) -
Retained earnings 18,869 15,182
-----------------------------------
Total stockholders' equity 24,077 20,605
-----------------------------------
$ 31,919 $ 24,701
-----------------------------------
- - ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Income
(In thousands, except per share amounts)
Years Ended December 31,
- - ----------------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net sales $ 23,414 $ 19,086 $ 18,324
Royalties 1,345 1,581 1,543
Equity in earnings of joint ventures 4,989 6,179 5,305
Other income 117 123 -
-----------------------------------------------------
29,865 26,969 25,172
-----------------------------------------------------
Costs and expenses:
Costs of sales 22,128 18,817 17,523
General and administrative 1,331 1,264 1,062
Research and development 587 488 503
-----------------------------------------------------
24,046 20,569 19,088
-----------------------------------------------------
Income from operations 5,819 6,400 6,084
Other income (expense), net 153 266 (124)
-----------------------------------------------------
Income before provision for income taxes 5,972 6,666 5,960
-----------------------------------------------------
Provision for income taxes:
Current (1,790) (883) (943)
Deferred (310) (775) (472)
-----------------------------------------------------
(2,100) (1,658) (1,415)
-----------------------------------------------------
Net income $ 3,872 $ 5,008 $ 4,545
-----------------------------------------------------
Earnings per common share-basic $ .53 $ .68 $ .63
-----------------------------------------------------
Earnings per common share-diluted $ .52 $ .66 $ .60
-----------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands, except per share amounts)
Years Ended December 31, 1998, 1997 and 1996
- - ----------------------------------------------------------------------------------------------------------
Cumulative
Capital in Notes Foreign
Excess Receivable Currency
Common Stock of Par from Stock Translation Retained
-------------------------
Shares Amount Value Sales Adjustments Earnings Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 5,525,545 $ 6 $ 5,888 $ (509) - $ 5,886 $ 11,271
Shares issued under
stock option plan 228,011 - 459 (280) - - 179
Stock split-up
effected in the
form of a
distribution 1,515,709 1 - - - (1) -
Shares retired for:
Exercise of stock
options (4,618) - (34) - - - (34)
Payment of interest
on notes
receivable (2,670) - (45) - - - (45)
Payment of advances (3,033) - (38) - - - (38)
Cash dividends paid - - - - - (109) (109)
Net income - - - - - 4,545 4,545
--------------------------------------------------------------------------------------
Balance at
December 31, 1996 7,258,944 7 6,230 (789) - 10,321 15,769
Shares issued under
stock option plan 188,841 - 277 - - - 277
Shares retired for:
Exercise of stock
options (16,680) - (163) - - - (163)
Payment of
principal and
interest on notes
receivable (69,959) - (837) 789 - - (48)
Payment of advances (7,802) - (91) - - - (91)
Cash dividends paid - - - - - (147) (147)
Net income - - - - - 5,008 5,008
--------------------------------------------------------------------------------------
Balance at
December 31, 1997 7,353,344 7 5,416 - - 15,182 20,605
- - -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands, except per share amounts)
Continued
- - ----------------------------------------------------------------------------------------------------------
Cumulative
Capital in Notes Foreign
Excess Receivable Currency
Common Stock of Par from Stock Translation Retained
-------------------------
Shares Amount Value Sales Adjustments Earnings Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued for:
Exercise of
stock options 33,407 - 119 - - - 119
Acquisition of
subsidiary 28,009 - 302 - - - 302
Acquisition and
retirement of common
stock (75,000) - (394) - - - (394)
Cash dividends paid - - - - - (185) (185)
Net income - - - - - 3,872 3,872
Comprehensive net
income calculation:
Net income - - - - 3,872 - -
Other comprehensive
income-foreign
currency translation
adjustment, net - - - - (242) - (242)
-----------
Comprehensive income 3,630
--------------------------------------------------------------------------------------
Balance at
December 31, 1998 7,339,760 $ 7 $ 5,443 $ - $ (242) $ 18,869 $ 24,077
--------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Cash Flows
(In Thousands)
Years Ended December 31,
- - ----------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,872 $ 5,008 $ 4,545
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 797 650 593
Provision and reserves for losses on assets 147 2 40
(Gain) loss on disposal of equipment (14) (33) 147
Stock compensation expense 37 22 -
Interest income on common stock notes receivable - (48) (45)
Undistributed earnings of joint ventures (11) (1,136) (2,805)
Deferred income taxes 305 775 472
(Increase) decrease in:
Receivables (1,735) (1,645) 122
Inventories 320 294 (267)
Prepaid expenses 185 (3) (18)
Other assets 157 (291) 71
Increase (decrease) in:
Accounts payable and accrued expenses (174) (42) 159
Deferred gain on sale and leaseback - - (12)
----------------------------------------------
Net cash provided by
operating activities 3,886 3,553 3,002
----------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of plant and equipment 74 85 140
Increase in notes receivable (475) (400) (1,250)
Payments on note receivable 250 250 -
Purchase of plant and equipment (1,189) (2,214) (1,183)
Investment in joint ventures (1,196) (77) (913)
Net cash paid in acquisition (2,399) - -
----------------------------------------------
Net cash used in
investing activities (4,935) (2,356) (3,206)
----------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 700 - 311
Payments on long-term debt - (714) (182)
Retirement of common stock (394) - (38)
Cash dividend paid (185) (147) (109)
Issuance of common stock 82 92 145
----------------------------------------------
Net cash provided by (used in)
financing activities 203 (769) 127
----------------------------------------------
Net decrease (increase) in cash (846) 428 (77)
Cash, beginning of year 1,160 732 809
----------------------------------------------
Cash, end of year $ 314 $ 1,160 $ 732
----------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
</TABLE>
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
December 31, 1998, 1997, and 1996
- - --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Organization
Mining Services International Corporation (the Company) and its wholly owned
subsidiaries, MSI Chemicals Ltd. (MSIC), Central Asia Chemicals LTD (CAC),
O'Brien Design Associates, Inc.(ODA) which the Company acquired effective
October 30, 1998, Green Mountain Explosives, Inc. (GME) which the Company
acquired effective December 9, 1998, and MSI Russia, L.L.C. (MSIR) which the
Company organized effective October 16, 1998, 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 15.
The acquisitions of ODA and GME were accounted for as purchase transactions.
The Company has 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 the Company 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.
- - --------------------------------------------------------------------------------
F-8
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Organization - Continued
The Company owns a 50% interest in a joint venture in Grand Cayman called Cayman
Mining Services Limited (CMS). CMS owns virtually all of Colombia Mining Supply
and Services Limited (SSMC), a Colombia-based company, which has an agreement to
manufacture and supply mining explosives in Colombia.
The Company also has a joint venture to manufacture and supply explosives in
West Africa. The joint venture operates as a Ghanaian company called West Coast
Explosives Limited (WCE). WCE is wholly owned by West Africa Chemicals Limited
(WAC), a Mauritius company owned 50% by the Company.
MSIR owns a 50% interest in Eastern Mining Services Ltd. (EMS), a Russian
company being registered in Moscow, to manufacture and deliver bulk explosives
in the Kovdor mining district in Russia.
Principles of consolidation
The consolidated financial statements include the accounts of the Company, and
its consolidated subsidiaries. All significant intercompany balances and
transactions have been eliminated.
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 are determined using the straight-line method over the
estimated useful lives of the assets or terms of the lease. Expenditures for
maintenance and repairs are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property, plant and equipment are
reflected in net income.
- - --------------------------------------------------------------------------------
F-9
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Continued
Goodwill
Goodwill reflects the excess of the costs of purchasing GME over the fair value
of the related net assets at the date of acquisition, and is being amortized on
the straight-line basis over 10 years. Amortization of the goodwill will begin
in 1999.
Other Assets
Certain items included in other assets are amortized over five years using the
straight-line method. Amortization expense totaled $4, $4, and $8, in 1998,
1997, and 1996, respectively.
Translation of Foreign Currencies
The cumulative effect of currency translation adjustments are included in
stockholders' equity. These items represent the effect of translating assets and
liabilities of the Company's foreign operations.
Generally for joint ventures, except for Uzbekistan, unrealized gains and losses
resulting from translating foreign companies' assets and liabilities into U.S.
dollars are accumulated in an equity account on the joint venture's balance
sheet, which is reported using the equity method, until such time as the company
is sold or substantially or completely liquidated. Translation gains and losses
relating to operations of companies like Uzbekistan where hyperinflation exists,
are included in equity in earnings from joint ventures.
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-10
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
1. Organization 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, 1998.
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 accounts 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 1997 and 1996 financial statements have been
reclassified to conform with the current year presentation.
- - --------------------------------------------------------------------------------
F-11
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
2. Detail of Certain Balance Sheet Accounts
December 31,
-----------------------------------
1998 1997
-----------------------------------
Receivables:
Trade receivables $ 2,710 $ 2,980
Income tax refund receivable 121 449
Related party receivables (see Note 10) 2,968 622
Other 288 193
Less allowance for doubtful accounts (37) (12)
-----------------------------------
$ 6,050 $ 4,232
-----------------------------------
Inventories:
Raw materials $ 707 $ 407
Finished goods 1,014 423
-----------------------------------
$ 1,721 $ 830
-----------------------------------
Accounts payable and accrued expenses:
Trade payables $ 1,805 $ 1,196
Accrued expenses 1,138 678
-----------------------------------
$ 2,943 $ 1,874
-----------------------------------
3. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
----------------------------------
1998 1997
----------------------------------
Plant equipment and fixtures $ 6,459 $ 4,438
Support equipment and fixtures 5,142 4,740
Office equipment and fixtures 521 474
Vehicles 634 579
Land 107 107
----------------------------------
12,863 10,338
Less accumulated depreciation and
amortization (6,615) (6,216)
----------------------------------
$ 6,248 $ 4,122
----------------------------------
- - --------------------------------------------------------------------------------
F-12
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
4. Related Party Notes Receivable
Notes receivable are comprised of the following:
December 31,
-----------------------------------
1998 1997
-----------------------------------
Unsecured note receivable from
CMS, in annual installments of
$250 and semi-annual interest
payments at the rate of 1.5%
above the six-month LIBOR $ 750 $ 1,000
Unsecured note receivable from
WAC, in annual installments of
$185 and semi-annual interest
payments at the rate of 2%
above the six-month LIBOR 700 400
Notes receivable from officers
of the Company secured by
stock, interest payments due
annually at 1% above the
three-month LIBOR, principal
due in full April 2003 175 -
-----------------------------------
1,625 1,400
Less current portion (435) (435)
-----------------------------------
$ 1,190 $ 965
-----------------------------------
- - --------------------------------------------------------------------------------
F-13
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
5. Long-Term Debt
Long-term debt is comprised of the following:
December 31,
-----------------------------
1998 1997
-----------------------------
Unsecured performance deposit
payable to a company, due in
monthly installments of $16,
including imputed interest at
7%, due on December 9, 2003 $ 785 $ -
Line-of-credit agreement which
allows the Company to borrow a
maximum amount of $2,250 at an
interest rate .75% below the
bank's prime rate, due May 30,
1999 662 -
Notes payable to individuals,
due in monthly installments of
$13, including interest at
12%, secured by property and
equipment, due December 9,
2003 600 -
Construction loan payable in
monthly installments of $2,
including interest at 8.75%,
secured by property, due April
10, 2004 250 -
Unsecured non-compete
agreement payable to an
individual, due in monthly
installments of $1, including
imputed interest at 7%, due
December 9, 2003 57 -
Mortgage note payable to an
individual, due in annual
installments of $4, including
interest at 10%, due October
13, 2003 13 -
-----------------------------
2,367 -
Less current portion (1,154) -
-----------------------------
$ 1,213 $ -
-----------------------------
- - --------------------------------------------------------------------------------
F-14
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
5. Long-Term Debt
Continued
Future maturities of long-term debt are as follows:
Year Ending December 31: Amount
- - ------------------------ -----------------
1999 $ 1,154
2000 265
2001 290
2002 317
2003 341
-----------------
$ 2,367
-----------------
6. Operating Leases
During the year ended December 31, 1998, the Company leased certain vehicles,
property, and equipment under various non-cancelable operating leases. Lease
expense relating the operating leases was approximately $10 for the year ended
December 31, 1998. Future minimum lease payments are as follows:
Year Ending December 31: Amount
- - ------------------------ ------------------
1999 $ 153
2000 124
2001 53
2002 8
------------------
$ 338
------------------
7. Income Taxes
The current provision for income taxes represents U.S. federal income taxes,
taxes withheld on royalties and other foreign income taxes.
- - --------------------------------------------------------------------------------
F-15
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
7. Income Taxes
Continued
The provision for income taxes is different than amounts which would be provided
by applying the statutory federal income tax rate to income before provision for
income taxes for the following reasons:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Federal income tax provision
at statutory rate $ (2,030) $ (2,266) $ (2,026)
Stock options - 525 585
Life insurance and meals (12) 2 (1)
Other (58) 81 27
-------------------------------------------
$ (2,100) $ (1,658) $ (1,415)
-------------------------------------------
Deferred tax assets (liabilities) are comprised of the following:
December 31,
-----------------------------
1998 1997
-----------------------------
Depreciation $ (2,547) $ (2,177)
Deferred income (327) (45)
Foreign tax credit carryforward 342 -
-----------------------------
$ (2,532) $ (2,222)
-----------------------------
8. Stock Dividend and Split-up
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 these changes.
- - --------------------------------------------------------------------------------
F-16
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
9. Supplemental Cash Flow Information
During the year ended December 31, 1998, the Company purchased subsidiaries in
exchange for cash, common stock, and debt, and recorded net assets from the
acquisition as follows:
Fair value of assets acquired $ 5,616
Libilities assumed and debt issued (2,915)
Common stock issued (302)
-----------------
Net cash paid $ 2,399
-----------------
During the year ended December 31, 1997, officers and shareholders retired
common stock with a market value of $1,091 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.
o The Company capitalized retained earnings of $1 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
in order to pay interest on notes receivable from stock sales.
o The Company refinanced long-term debt in the amount of $413 and reduced
deferred gain on sale lease backs in exchange for long-term debt of $72.
Actual amounts paid for interest and income taxes are as follows:
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
Interest $ 16 $ 35 $ 77
-----------------------------------------------------
Income taxes $ 1,965 $ 766 $ 500
-----------------------------------------------------
- - --------------------------------------------------------------------------------
F-17
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
10. Related Party Transactions
The Company performs certain functions for Cyanco for which it receives a fee,
the fee is offset against costs of sales. Fees totaled $326, $474, and $420, for
the years ended December 31, 1998, 1997, and 1996, respectively.
At December 31, 1998 and 1997, the Company had receivables of $2,968 and $622,
respectively, from joint ventures (see Note 1).
As of December 31, 1998 and 1997, the Company had notes receivable from joint
ventures of $1,450 and $1,400, respectively (see Note 4).
As of December 31, 1998, the Company had notes receivable from officers of the
Company for $175, (see Note 4).
At December 31, 1998 and 1997, the Company recognized interest income of $117
and $123, respectively, related to notes receivable from joint ventures.
During the year ended December 31, 1998 and 1997, the Company recognized
revenues of approximately $686 and $690, respectively, from joint ventures,
related to royalties, services provided, and the sale of manufacturing products.
11. Major Customers and Foreign Operations
Sales to major customers which exceeded 10% of net sales are as follows (in
thousands):
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
Company A $ 4,844 $ 4,474 $ -
Company B $ 3,855 $ 4,271 $ 4,184
Company C $ 2,781 $ 1,937 $ -
Company D $ - $ - $ 3,919
Management believes that the loss of any one customer would not have a material
adverse effect on the Company's consolidated operations.
- - --------------------------------------------------------------------------------
F-18
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
11. Major Customers and Foreign Operations
Continued
The Company has operations in the United States, Canada, other foreign
locations, and equity in earnings of joint ventures. The following is a summary
of operations by geographic region:
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
Revenue:
United States $ 18,648 $ 16,300 $ 14,807
Canada 4,134 4,362 5,060
Other foreign 2,094 128 -
Equity in earnings of JV 4,989 6,179 5,305
---------------------------------------------
Total revenues $ 29,865 $ 26,969 $ 25,172
---------------------------------------------
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
Income from Operations:
United States $ 1,580 $ 1,009 $ 1,811
Canada 660 359 533
Other foreign 204 (21) -
Equity in earnings of JV 4,989 6,179 5,305
Corporate Expenses (1,614) (1,126) (1,565)
---------------------------------------------
Total income from
operations $ 5,819 $ 6,400 $ 6,084
---------------------------------------------
December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
Identifiable Assets:
United States $ 13,864 $ 9,878 $ 5,796
Canada 733 702 1,257
Other foreign 2,807 1,257 524
Investments/advances to
JV's 14,515 12,864 12,269
---------------------------------------------
Total identifiable assets $ 31,919 $ 24,701 $ 19,846
---------------------------------------------
- - --------------------------------------------------------------------------------
F-19
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
12. Non-Qualified Stock Option Plan
Under the Non-Qualified Stock Option Plan (the Option Plan), as amended in 1988,
1990, 1992, 1993 and 1998, a maximum of 1,315,130 options may be granted to
purchase common stock at prices generally not less than the fair market value of
common stock at the date of grant. Under the Option Plan, grants of
non-qualified options may be made to selected officers and key employees without
regard to any performance measures. The options may be immediately exercisable
or may vest over time as determined by the Board of Directors. However, the
maximum term of an option may not exceed ten years. Options may not be
transferred except by reason of death, with certain exceptions, and termination
of employment accelerates the expiration date of any outstanding options to 30
days from the date of termination.
Information regarding the Option Plan is summarized below:
Number of Option Price
Options Per Share
-----------------------------------
Outstanding at January 1, 1996 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
Granted 46,950 2.96-11.30
Exercised (33,266) 5.00-7.56
Expired (14,546) 4.12-5.00
-----------------------------------
Outstanding at December 31, 1998 359,747 $ 3.93-11.30
-----------------------------------
- - --------------------------------------------------------------------------------
F-20
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
12. Non-Qualified Stock Option Plan
Continued
Options exercisable and available for future grant are as follows:
December 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
Options exercisable 76,816 41,832 72,706
Options available for
grant 230,261 276,051 271,866
13. Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the financial
statements. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1998, 1997,
and 1996 consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share amounts):
Years Ended December 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
Net Income - as reported $ 3,872 $ 5,008 $ 4,545
Net Income - pro forma $ 3,961 $ 4,919 $ 4,465
Earnings per share - as reported $ .52 $ .66 $ .60
Earnings per share - pro forma $ .51 $ .65 $ .59
----------------------------------------------
- - --------------------------------------------------------------------------------
F-21
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
13 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,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Expected dividend yield $ .02 .02 .01
Expected stock price
volatility 33% 48% 49%
Risk-free interest rate 5% 5.25% 4.5%
Expected life of options 3 years 3 years 3 years
-------------------------------------------
The weighted average fair value of options granted during 1998, 1997, and 1996
are $1.20, $3.41, and $2.97, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Remaining Number
Number Contractual Weighted Exercisable Weighted
Range of Outstanding at Life Average at Average
Exercise Prices 12/31/98 (Years) Exercise Price 12/31/98 Exercise Price
- - --------------------------------------------------------------------------------
$ 2.96 to 4.09 305,497 6.4 $ 3.62 26,566 $ 3.04
5.00 to 5.51 38,750 3.1 5.04 34,750 2.94
7.56 to 11.30 15,500 1.1 10.36 15,500 10.36
- - --------------------------------------------------------------------------------
$ 2.96 to 11.30 359,747 5.8 $ 4.06 76,816 $ 3.77
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
F-22
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
14. Earnings Per Share
Financial accounting standards require companies to present basic earnings per
share (EPS) and diluted earnings per share along with additional informational
disclosures. Information related to earnings per share is as follows (in
thousands, except per share amounts):
Years Ended
December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Basic EPS:
Net income available to common
stockholders $ 3,872 $ 5,008 $ 4,545
-----------------------------------------
Weighted average common shares 7,368 7,342 7,193
-----------------------------------------
Net income per share $ .53 $ .68 $ .63
-----------------------------------------
Diluted EPS:
Net income available to common
stockholders $ 3,872 $ 5,008 $ 4,545
-----------------------------------------
Weighted average common shares 7,492 7,614 7,556
-----------------------------------------
Net income per share $ .52 $ .66 $ .60
-----------------------------------------
- - --------------------------------------------------------------------------------
F-23
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
15. Significant Unconsolidated Affiliates
Summarized financial information for significant unconsolidated affiliates of
the Company, are as follows:
December 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
Result for year:
Gross revenues $ 37,353 $ 38,115 $ 31,598
Gross profit $ 14,365 $ 16,048 $ 13,928
Net income $ 9,978 $ 12,273 $ 10,610
Year-end financial
position:
Current assets $ 10,415 $ 8,567 $ 7,219
Non-current assets $ 24,998 $ 22,945 $ 18,990
Current liabilities $ 4,256 $ 4,106 $ 3,473
Non-current liabilities $ 5,323 $ 4,559 $ 2,443
16. 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, 1998, 1997, and 1996 was $48, $37, and $25, respectively.
- - --------------------------------------------------------------------------------
F-24
<PAGE>
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Continued
- - --------------------------------------------------------------------------------
17. 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, 1998, 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.
18. 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, 1998
and 1997, had an outstanding balance of $2,442 and $2,443, respectively.
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.
19. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.
- - --------------------------------------------------------------------------------
F-25
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% owned
Turon-MSI Ltd., an Uzbekistan Limited Liability Company 51%
Central Asia Chemicals Limited (previously Turon-MSI
Ltd.), a Grand Cayman 100% Company
Cayman Mining Services Limited, a Grand Cayman company 50%
Suministros y Servicios Mineros de Colombia,
Ltda., a Colombian limited liability company,
a 99.999% subsidiary of Cayman Mining Services
Ltd.
Mining Capital Resources Ltd. , a Grand Cayman
company, a wholly owned subsidiary of Cayman
Mining Services Limited
MSI Chemicals Limited, a Grand Cayman company 100%
West Africa Chemicals Limited, a Mauritius company 50%
West Coast Explosives Ltd., a Ghanaian
company, a wholly owned subsidiary of West
Africa Chemicals Limited
MSI Russia Ltd., a Nevada limited liability company 100%
Eastern Mining Services Ltd., a Russian
limited liability company, a 50% owned
subsidiary of MSI Russia Ltd..
O'Brien Design Associates, Inc., a Delaware Corporation 100%
Green Mountain Explosives, Inc., a Maine Corporation 100%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MINING
SERIVCES INTERNATIONAL CORPORATION FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 314,000
<SECURITIES> 0
<RECEIVABLES> 2,710,000
<ALLOWANCES> 37,000
<INVENTORY> 1,721,000
<CURRENT-ASSETS> 8,646,000
<PP&E> 12,863,000
<DEPRECIATION> 6,615,000
<TOTAL-ASSETS> 31,919,000
<CURRENT-LIABILITIES> 4,097,000
<BONDS> 1,213,000
0
0
<COMMON> 7,000
<OTHER-SE> 24,070,000
<TOTAL-LIABILITY-AND-EQUITY> 31,919,000
<SALES> 23,414,000
<TOTAL-REVENUES> 30,034,000
<CGS> 22,128,000
<TOTAL-COSTS> 24,046,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,000
<INCOME-PRETAX> 5,972,000
<INCOME-TAX> 2,100,000
<INCOME-CONTINUING> 3,872,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,872,000
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.52
</TABLE>
<PAGE>
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, 1998 and 1997, and the related statements of income, joint venture capital,
and cash flows for the years ended December 31, 1998, 1997, and 1996. 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, 1998 and 1997, and the results of its operations and its cash flows for the
years ended December 31, 1998, 1997, and 1996, in conformity with generally
accepted accounting principles.
TANNER + Co.
Salt Lake City, Utah
January 26, 1999
<PAGE>
<TABLE>
<CAPTION>
CYANCO COMPANY
Balance Sheet
(In Thousands)
December 31,
- - ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Assets
<S> <C> <C>
Current assets:
Cash $ 2,183 $ 2,929
Accounts receivable, net 2,436 2,421
Inventories 1,014 938
Prepaid expenses 174 240
-----------------------------------
Total current assets 5,807 6,528
Property, plant and equipment, net 19,114 19,963
Other assets, net 601 630
-----------------------------------
$ 25,522 $ 27,121
-----------------------------------
- - ----------------------------------------------------------------------------------------------------------
Liabilities and Joint Venture Capital
Current liabilities - accounts payable and accrued expenses $ 1,398 $ 2,103
-----------------------------------
Deferred royalty 2,422 2,443
-----------------------------------
Commitments and contingencies - -
Joint venture capital 21,702 22,575
-----------------------------------
$ 25,522 $ 27,121
-----------------------------------
- - ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CYANCO COMPANY
Statement of Income
(In Thousands)
Years Ended December 31,
- - ----------------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 27,141 $ 31,596 $ 31,181
Other 104 242 417
-----------------------------------------------------
27,245 31,838 31,598
-----------------------------------------------------
Costs and expenses:
Cost of sales 16,498 17,791 17,670
General and administrative 1,641 1,765 3,265
Interest - - 53
-----------------------------------------------------
18,139 19,556 20,988
-----------------------------------------------------
Net income $ 9,106 $ 12,282 $ 10,610
-----------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CYANCO COMPANY
Statement of Joint Venture Capital
(In Thousands)
Years Ended December 31, 1998, 1997, and 1996
- - ----------------------------------------------------------------------------------------------------------
Nevada
Chemicals, Degussa
Inc. Corp. Total
-----------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 7,239 $ 7,411 $ 14,650
Distributions (2,500) (2,500) (5,000)
Capital contributions 33 - 33
Net income 5,305 5,305 10,610
-----------------------------------------------------
Balance, December 31, 1996 10,077 10,216 20,293
Distributions (5,000) (5,000) (10,000)
Net income 6,141 6,141 12,282
-----------------------------------------------------
Balance, December 31, 1997 11,218 11,357 22,575
Distributions (5,000) (5,000) (10,000)
Capital contributions 21 - 21
Net income 4,553 4,553 9,106
-----------------------------------------------------
Balance, December 31, 1998 $ 10,792 $ 10,910 $ 21,702
-----------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CYANCO COMPANY
Statement of Cash Flows
(In Thousands)
Years Ended December 31,
- - ----------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,106 $ 12,282 $ 10,610
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,188 1,441 1,903
Loss on disposal of equipment - 1 -
(Increase) decrease in:
Accounts receivable (15) 906 73
Inventories (76) (55) (121)
Prepaid expenses 66 18 (53)
(Decrease) increase in accounts payable
and accrued expenses (705) (1,370) 835
----------------------------------------------
Net cash provided by
operating activities 9,564 13,223 13,247
----------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (310) (3,106) (5,125)
Decrease (increase) in other assets - 61 (21)
----------------------------------------------
Net cash used in
investing activities (310) (3,045) (5,146)
----------------------------------------------
Cash flows from financing activities:
Payments on long-term debt - - (1,903)
Distributions to joint venture
participants (10,000) (10,000) (5,000)
----------------------------------------------
Net cash used in
financing activities (10,000) (10,000) (6,903)
----------------------------------------------
Net (decrease) increase in cash (746) 178 1,198
Cash, beginning of year 2,929 2,751 1,553
----------------------------------------------
Cash, end of year $ 2,183 $ 2,929 $ 2,751
----------------------------------------------
- - ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
</TABLE>
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
1. Organization 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 (in
thousands) $29, $47, and $83, in 1998, 1997 and 1996, respectively.
- - --------------------------------------------------------------------------------
5
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
Continued
- - --------------------------------------------------------------------------------
1. Organization 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, 1998
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 prior years financial statements 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,
------------------------------------
1998 1997
------------------------------------
Accounts receivable (in thousands):
Trade receivables $ 2,436 $ 2,424
Less allowance for doubtful
accounts - (3)
------------------------------------
$ 2,436 $ 2,421
------------------------------------
Inventories (in thousands):
Raw materials $ 822 $ 741
Finished goods 192 197
------------------------------------
$ 1,014 $ 938
------------------------------------
Accounts payable and accrued expenses (in thousands):
Trade payables $ 1,050 $ 1,738
Accrued expenses 70 303
Due to joint venture participants 278 62
------------------------------------
$ 1,398 $ 2,103
------------------------------------
- - --------------------------------------------------------------------------------
7
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
Continued
- - --------------------------------------------------------------------------------
3. Property, Plant and Equipment
Property, plant and equipment is comprised of the following (in thousands):
December 31,
-----------------------------------
1998 1997
-----------------------------------
Plant $ 25,438 $ 24,190
Machinery and equipment 1,702 1,610
Land 463 463
Vehicles 286 220
Office equipment and fixtures 186 158
Construction in progress 17 1,141
-----------------------------------
28,092 27,782
Less accumulated depreciation
and amortization (8,978) (7,819)
-----------------------------------
$ 19,114 $ 19,963
-----------------------------------
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,
1998 and 1997.
5. Deferred Royalty
The Company has a 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 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 (the initial amount of the royalty
agreement) less royalties previously 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.
- - --------------------------------------------------------------------------------
8
<PAGE>
CYANCO COMPANY
Notes to Financial Statements
Continued
- - --------------------------------------------------------------------------------
5. Deferred Royalty
continued
No amount is due under this agreement for 1998. The amount due under this
agreement for the 1997 production was approximately $21,000 which was paid in
1998 by Nevada Chemicals.
6. Related Party Transactions
Related party transactions consist of the following (in thousands):
Years Ended December 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
Sales to a joint venture
partner (see note 7) $ 27,141 $ 31,596 $ 31,181
Raw materials purchased
from a joint venture partner $ - $ 568 $ 2,443
Management fees, cost
reimbursements and other
fees paid to the joint venture
partners included in selling,
general and administrative
expenses $ 820 $ 948 $ 951
Amounts payable to a joint
venture partner included in
accounts payable $ 70 $ 62 $ 87
Lease payment to a joint
venture partner $ 53 $ 62 $ 18
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 on May 23, 2000, 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 (in thousands) $28, $33,
and $29, during 1998, 1997 and 1996, respectively.
9. Supplemental Cash Flow Information
Years Ended December 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
Amounts paid for interest
(in thousands) $ - $ - $ 79
----------------------------------------------
During the years ended December 31, 1998 and 1996, the Company reduced its
deferred royalty and increased its joint venture capital for royalty payments
made by Nevada Chemicals Inc., of (in thousands) $21 and $33, respectively.
10. 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, 1998, 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.
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
to 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
