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.
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,
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.
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.
Item 2:
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:
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:
Item 4: Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year.
PART II
Item 5:
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:
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.
Item 7:
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."
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
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.
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.
Item 8:
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.
Item 9:
Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10:
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:
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:
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:
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:
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 to.
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.
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.
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
MINING SERVICES INTERNATIONAL CORPORATION Index to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
Page ----
Independent Auditors' Report
Consolidated balance sheet
Consolidated statement of income
Consolidated statement of stockholders' equity
Consolidated statement of cash flows
Notes to consolidated financial statements
- - --------------------------------------------------------------------------------
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
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.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
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 ----------------------------------
- - --------------------------------------------------------------------------------
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 -----------------------------------
- - --------------------------------------------------------------------------------
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 $ - -----------------------------
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
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 -----------------------------------------------------
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
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 ---------------------------------------------
- - --------------------------------------------------------------------------------
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 -----------------------------------
- - --------------------------------------------------------------------------------
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 ----------------------------------------------
- - --------------------------------------------------------------------------------
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 - - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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 -----------------------------------------
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------