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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-10634
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Mining Services International Corporation
(Exact name of registrant as specified in its charter)
Utah 87-0351702
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8805 South Sandy Parkway
Sandy, Utah 84070-6408
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (801) 233-6000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, $0.001 Par Value
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Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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 10, 2000, the aggregate
market value of the Common Stock held by non-affiliates was $9,208,906
(3,348,693 shares estimated to be held by non-affiliates). Shares of the Common
Stock held by each officer and director and by each person who may be deemed to
be an affiliate of the registrant have been excluded.
The number of shares outstanding of the registrant's par value $0.001
Common Stock as of March 10, 2000 was 7,314,260.
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Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 19, 2000, which Proxy Statement will be
filed no later than 120 days after the close of Registrant's fiscal year ended
December 31, 1999, are incorporated by reference in Part III of this Annual
Report on Form 10-K.
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Mining Services International Corporation
Table of Contents
Part I Page No.
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Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition 8
and Results of Operation
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 11
Item 8. Financial Statements and Supplementary Data F1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 11
Part III
Item 10. Directors and Executive Officers of the Registrant 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and
Management 12
Item 13. Certain Relationships and Related Transactions 12
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 12
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
noncorporate joint venture with Degussa Huls 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 grow as a worldwide
supplier of niche chemical products and services to the mining and construction
industries. The Company continues to focus on four product lines: (1) bulk
blasting agents, oxidizers, fuels and related raw materials; (2) packaged
explosives; (3) explosives accessories; and (4) liquid sodium cyanide. The
Company is also expanding its ability to deliver its manufactured products with
key related services that the Company believes allow for better margins. The
Company markets for its own account in the United States and Canada and has
licensed its technology 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 that 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 backup
production facility at its Winnemucca, Nevada Plant in order to meet growing
market demands for liquid sodium cyanide without the need to purchase backup
supply. With the added facility, completed in 1997, Cyanco has an annual
production capacity of at least 85 million pounds of liquid sodium cyanide.
During 1998 and 1999, worldwide gold prices continued to be depressed,
ranging between $250.00 and $320.00 per ounce. Gold production in the Company's
market area should remain relatively stable for the foreseeable future as long
as gold prices do not deteriorate. Prices for sodium cyanide have been and are
likely to remain depressed in the short-run. During the first quarter of 2000,
Cyanco successfully acquired the right to supply 100% of the cyanide
requirements to a large gold producer in Nevada, increasing its projected annual
production by approximately 10,000,000 pounds. Though the average forecasted
price per pound of cyanide is lower than previous years, Cyanco has positioned
itself to continue increasing market share in the long run.
MSI Explosives Business: During 1999, the Company continued to develop
and secure partnering arrangements for its mining explosives business worldwide,
to develop its accessories and EMGEL(R) packaged explosives products, and to
secure major customers in the United States and Canada. In September 1999, MSI
acquired a 51% interest in Tennessee Blasting Services, L.L.C. (TBS), a joint
venture engaged in drilling and blasting services in the Tennessee tri-city
areas of Nashville, Knoxville and Chattanooga. The joint venture should add
approximately $7,000,000 to the Company's revenue during 2000.
On December 9, 1998, MSI acquired 100% interest in Green Mountain
Explosives, Inc. (GME), an explosives distribution and blasting services company
operating in the New England market. Its 1999 annual sales were approximately
$8.6 million, which the Company believes will continue to grow and represent a
major enhancement to the Company's U.S. market penetration into distribution,
serving as an outlet of its manufactured products and services.
In 1998, MSI also 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.
During 1999, ODA completed its shock tube production plant and largely completed
its first detonating cord plant. The accessories assembly plant is planned to be
fully operational in 2000. The addition of the accessories products to MSI's
product line should allow MSI to garner better revenue and gross margin from
existing accounts and will provide strategic advantages as it continues to
supply full line explosives, drilling and blasting services to its worldwide
customer base.
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
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Company's joint venture will be able to achieve repatriation of earnings and
convertibility of local currency to U.S. dollars. The contract is for a period
of seven years and MSI's share of the capital required for the project will be
approximately $750,000. The plant is nearing completion and should be fully
operational during the second quarter of 2000.
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 explosives for local mines and construction companies.
Because convertibility of local currency to U.S. dollars was unavailable during
1999, production decreased to approximately 4,400 metric tons. Due to the
current inability to repatriate earnings, the Company has determined to
write-off its investment in Uzbekistan of $1,846,000. The joint venture received
US dollar payments in February and expects payments in March 2000 of
approximately $400,000 for raw materials shipped by the Company to Turon-MSI in
1998 and 1999; however, the Company does not expect to be able to gain US dollar
conversion of profits in the near term.
The Company has committed to continue operations in Uzbekistan, without
committing any new capital investment, and the leading Uzbekistan gold mining
enterprise has committed to the joint venture that it will assist Turon-MSI in
acquiring US dollar conversion for raw materials. So far in 2000 it has
substantially lived up to this commitment. This commitment will enable Turon-MSI
to continue its operations and provide an opportunity to begin exporting
explosives which may provide needed US dollar resources to Turon-MSI allowing it
to proceed on a longer term basis independent the shortage of hard currency.
Assuming US dollar conversion continues for raw material imports, Turon-MSI
should be able to complete its contracts to supply 1,000 metric tons per month
in 2000 and begin exporting to neighboring countries which have hard currency
reserves.
The MSI and Norsk Hydro joint venture in Colombia produced explosives
during 1998 to support the mining of approximately four million metric tons of
coal. The Company's production significantly decreased during 1999 due to
curtailed mining (approximately 1 million tons of coal compared to over three
million tons of coal in previous years), reflecting current lower coal prices in
Europe where much of the Colombian coal is marketed. During 1999, however, the
Company's major coal customer achieved better prices and commitments for its
coal which will allow the Colombian customer to continue investing in less
expensive transportation and port facilities via railroad, thus allowing for
increased production in 2000 to three million tons with the possibility of
increasing its long-term output to 7 - 10 million tons by 2003.
During 1999, the Company's operations in Ghana, a 50/50 joint venture
with Bulk Mining Explosives from South Africa, continued to decline consistent
with the decline in gold production in Ghana as a result of low gold prices.
Accordingly, the investment and loans to the joint venture of approximately
$800,000 were written off in 1999. The continuation of operations as they now
exist in Ghana is unlikely without a dramatic turnaround in gold production.
Accordingly, the Company is considering several options to resolve the problem
of continuing operating losses.
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 three major
categories: (1) Bulk explosives including HEF(R), a proprietary oil-in-water
emulsified oxidizer which enhances the quality and control of the explosion or
blast in order to produce more consistent breakage of ore; and 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; (2) explosives accessories, such as
shock tube initiation systems and detonating cord which will begin being
manufactured from new plant facilities in Rhode Island and Connecticut in 2000;
and (3) 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 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" and
larger "shot" bags using special form and fill machines. A variety of cartridge
diameters and lengths can be produced. As the emulsion is being loaded into the
cartridges and bags, a trace quantity of a cross-linking chemical is added to
the composition which reacts and polymerizes or crosslinks the entire mass into
a soft, rubber-like material. The uniquely crosslinked emulsion is stable and
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the package or cartridge and bags 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 and accessories, 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 in the U.S. and 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, industrial minerals in California and now in the Tennessee area.
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, 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 customers,
suppliers and government entities. Because of inherent economic and political
risks in developing economies, the Company's strategy there is to join with
local suppliers or government entities where the company believes the alliance
will survive periodic political and economic changes.
Sodium Cyanide: The Company's joint venture with Degussa Huls
Corporation 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 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 for 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 an Omaha,
Nebraska company which utilizes dedicated equipment specifically designed for
Cyanco. Cyanco's five-year freight contract, which expired in March 1999, has
been renewed on a month-to-month basis until a long-term contract can be
renegotiated.
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. The Company believes that its 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 explosive and cyanide
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 2000 sales. In most cases the Company has long-term
contracts with such customers (see Note 11 to the Company's financial
statements). With the addition of accessories and packaged products, MSI's
customer base is increasingly made up of a larger base of smaller customers,
particularly in those areas focusing on building materials and construction.
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
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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, India, Thailand and Korea.
The composition of E-21 and the other emulsifier formulations upon
which the Company's HEF(R) emulsion products are based are proprietary
ingredients and are deemed important trade secrets 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, 1999, 1998 and 1997 were
$805,000, $587,000 and $488,000, respectively. The Company actively conducts
research on product improvement and development. The expenditures in each of the
years ending December 31, 1999, 1998 and 1997 were primarily 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 of local currency to hard currency or other foreign political
or economic factors which may occur in countries experiencing capital 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 explosives and related
services and equipment is a highly competitive business. The continuing
cost-cutting measures implemented by owners of mines as the mining industry
consolidates places growing emphasis on lowering explosive prices. This emphasis
continues to adversely affect gross profit margins. 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 global
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"). As the large
mining companies continue consolidating, the Company's strategy is to focus on
niche markets, providing full service and added value to the end users.
Historically the explosives business has experienced low margins and as
consolidation in the Industry continues, pressure on margins is expected to
increase.
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.
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 2000 in the Nevada market.
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Employees: The Company employs 94 full time employees in its direct
explosives operations. Employment at joint ventures include 32 permanent
employees at the Cyanco Plant in Winnemucca, Nevada, 14 local employees in
Colombia, 7 local employees and 2 expatriate employees in Ghana, 60 local
employees in Uzbekistan and 25 employees at Tennessee Blasting Services, LLC,
and approximately 10 employees in Kovdor Russia. 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: 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 laboratory 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. During 1999 construction of the
plant facilities for the Kovdor operation in Russia was begun and will be
completed in 2000. The facility is located on mine property owned by the
project's contract customer. The land owners normally supply 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 $16,000 per year. The Company also rents on a month to
month basis approximately 422 acres in Boone County, West Virginia that it uses
for manufacturing commercial explosives and emulsions. Rent on the property is
approximately $1,800 per month.
Cyanco is the owner of approximately six hundred and forty (640) 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 preexisting facility.
The combined capacity of the Cyanco plant is now at least 85 million pounds per
year.
ODA owns the lot, office and facilities located at its principal place
of business at 366 Ross Hill Road, Charlestown, Rhode Island. In addition,
during 1999, ODA leased land for 15 years at $2,000 per month and is building an
8,400 square foot manufacturing facility for its accessories business in Moosup,
Connecticut for a cost of approximately $150,000. It also has adequate access to
magazines and testing facilities for its explosives accessories products.
GME built its corporate offices during 1998 at a cost of approximately
$240,000, 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 Company is currently
negotiating for additional magazine locations to replace current leases which
expire in June of 2000.
TBS leases approximately 1,000 square feet of office space in Jacksboro
and Nashville, Tennessee at an annual rate of $5,400. It also leases magazines
in areas convenient to its markets in eastern and middle Tennessee.
The property and facilities of the Company and its joint ventures,
including Cyanco are deemed adequate and suitable for their respective
operations.
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Item 3: Legal Proceedings
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 has filed an Answer denying all claims
with counterclaims and defenses. Management does not believe this action will
have a material effect on the Company.
In February 2000, the Company filed Form 8-K, which is herein
referenced, to disclose the continuing litigation with respect to the BLA Trust.
The Form 8-K was filed to report the commencement of an action referred to as
the BLA Investment Irrevocable Trust litigation which was brought by Bryan
Bagley and Lisa Higley, Trustees, against the Company and John T. Day, Lex L.
Udy, Nathan L. Wade and Steven Fleischer, who are directors of the Company. The
complaint was filed on January 20, 2000 in the Third Judicial District Court for
Salt Lake County, Utah. A similar action brought by the Trustees in the Federal
District Court for the District of Utah against the Company was dismissed on
November 18, 1999 for lack of federal court jurisdiction.
The Complaint alleges, among other claims, that (i) the Voting
Agreement, dated August 27, 1997, among the Company, Edward Dallin ("Dal")
Bagley, Carolyn C. Bagley and Amanda Bagley, (the "Voting Agreement") is not
enforceable with respect to certain shares of the common stock of the Company
transferred by Dal Bagley and Carolyn Bagley to the Trust (the Company enforced
the Voting Agreement and voted the shares at the last Annual Meeting held on May
19, 1999), (ii) the Rights Agreement, dated as of May 19, 1999, between the
Company and Zions First National Bank, as rights agent, (the "Rights Agreement")
is invalid and unenforceable, (iii) the Directors have interfered with the
plaintiffs' contractual relations, have breached their fiduciary duties and have
engaged in gross negligence or willful misconduct and (iv) the Company has
breached a contract and an implied covenant of good faith and fair dealing by
refusing to permit the Trust to vote the Shares except in accordance with the
Voting Agreement and by entering into the Rights Agreement. The Complaint seeks
(i) declaratory relief as to the enforceability of the Voting Agreement with
respect to the Shares and the validity of the Rights Agreement, (ii) damages
with respect to the alleged breach of contract and implied covenant of good
faith and fair dealing claims and injunctive relief permitting the voting of the
Shares without regard to the Voting Agreement and preventing the implementation
of the Rights Agreement.
The Complaint also purports to bring an action on behalf of the Company
and its shareholders against the Directors for damages in connection with the
alleged claims of breach of fiduciary duties and gross negligence and willful
misconduct. The Company plans to appoint two independent directors, one of which
has been appointed, who will act as a litigation committee to take appropriate
steps to investigate the claims set forth in the Complaint and, with the
Company's legal counsel, recommend such action as is warranted under the
circumstances. The Company's bylaws may obligate the Company to indemnify the
Directors. The Company answered the Complaint on March 17, 2000. As indicated in
its answer, the Company may seek a stay of the litigation pursuant to state laws
pending the results of the Committee's investigations.
The Company believes that this litigation may have a material impact on
the Company's governance issues and may be costly to litigate, but the Company
does not believe the damage claims of the litigation will materially impact the
financial condition of 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.
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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
1999 First Quarter 7.38 4.63
Second Quarter 5.63 4.13
Third Quarter 4.63 2.13
Fourth Quarter 4.50 2.00
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
(b) Approximate number of equity security holders. The
approximate number of record holders of the Company's Common Stock as
of March 10, 2000 was 579 which does not include shareholders whose
stock is held through securities position listings.
(c) Dividends. The Company paid cash dividends of $180,986 or
$.025 per share on December 15, 1999, $184,590 or $.025 per share on
December 21, 1998, $146,880 or $.02 per share on December 19, 1997.
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. The Company
expects that it will continue to make cash dividends.
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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, 1999 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.
Year Ended December 31,
Operation Results Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating Revenues 30,608,000 29,865,000 26,969,000 25,172,000 23,278,000
Income from operations 1,413,000 5,819,000 6,400,000 6,084,000 3,332,000
Net Income 725,000 3,872,000 5,008,000 4,545,000 2,763,000
Earnings per common
share diluted .10 .52 .66 .60 .37
Cash dividends declared
per common share .025 .025 .020 .015 .015
Financial Position Data
Total assets 34,461,000 31,919,000 24,701,000 19,846,000 14,560,000
Long-term debt 4,475,000 1,213,000 - 714,000 513,000
Deferred gain on sale
and leaseback - - - - 84,000
Stockholder's equity 24,351,000 24,077,000 20,605,000 15,769,000 11,271,000
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operation
Results of Operations
Because of the significance of investment by 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 impact of JV operations underlying the Consolidated Revenue of
the Company during the periods ending December 31, 1999, 1998 and 1997. As
demonstrated below, the Company manages significantly more sales than is
reported in "Consolidated Revenue."
Amount MSI's
Joint Joint Venture Included in Non-JV Consolidated
Venture Sales Net Income Co's % MSI Revenue Revenue Revenue
1999 $21,585,000 $ 5,022,000 50% $2,511,000 $28,097,000 $30,608,000
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
1999 vs. 1998
Consolidated revenues increased in 1999 by only 2%; however, the slight
change included a $3.3 million or 14% increase in net sales offset by a $2.5
million or 50% decrease in equity earnings of joint ventures. The increase in
net sales consisted primarily of an increase in sales from GME of $7.6 million
and TBS of $1.5 million, largely offset by a decrease in the sales of the
Company's remaining U.S., Canadian and foreign joint venture explosives
operations of $5.4 million. Most of the $2.5 million decrease in equity earnings
of joint ventures was attributable to a decrease in Cyanco's 1999 earnings, with
the remainder of the decrease resulting from the decrease in equity in the
earnings of Turon-MSI and Cayman Mining Services Limited (CMS).
8
Expectations of increased net sales in 1999 were realized with the
acquisition of GME and subsequently the establishment of TBS. However, the
Company's plans to offset the expected loss of revenues from the completed dam
project in California were delayed until several new projects in the Company's
western division come on line in the first half of 2000. Revenues are also
expected to increase at the Company's packaged emulsion plant resulting from
product improvements and the additional demand for the product by GME and TBS.
ODA should commence commercial production in 2000 resulting in an increase of
revenues from that wholly-owned subsidiary. The consolidation of a full year of
TBS operations will also increase revenues in 2000. Equity in earnings of joint
ventures is also expected to increase in 2000 due to a planned increase in mine
production by one of the primary customers of the Company's Colombian joint
venture. Additionally, the Company's joint venture in Kovdor, Russia is expected
to begin commercial production by the end of the second quarter of 2000.
Cyanco's contribution to equity in earnings of joint ventures has
decreased as volumes and prices for sodium cyanide fell in 1999 in response to
the lowest gold prices in 20 years. Although the Company expects that low gold
prices may cause further erosion of the average sales price for liquid sodium
cyanide, Cyanco's position as the area's low cost producer will allow it to
increase volumes by capturing additional market share. Also, because of current
gold market conditions, the Company was able to negotiate the elimination of
deferred royalty obligations resulting in an extraordinary gain of $1.6 million,
net of taxes.
Consolidated income from operations decreased $4.4 million
from $5.8 million in 1998 to $1.4 million in 1999. The $4.4 million decrease in
consolidated income from operations is attributable to the decrease in equity in
earnings of Cyanco as explained above, combined with a net decrease in
contribution from the Company's explosives operations of $2 million. As a result
of the completion of the dam project in California in the early part of 1999,
combined with decreased coal production by customers in Canada and Colombia,
contribution from the Company's western U.S. and Canadian explosives divisions
and the Company's Colombian joint venture decreased by a total of $1.7 million
when comparing 1999 to 1998. As mentioned above, the inability of the Company's
joint venture in Uzbekistan to purchase raw materials resulted in a decrease in
production. Consequently, contribution from Turon-MSI decreased $400,000 in 1999
as compared to 1998. In analyzing the results of the Company's explosives
operating units above, the general and administrative expenses of GME and TBS
were considered components of the direct contribution from those operating
units. However, for purposes of financial statement disclosure, general and
administrative expenses for the Company include the general and administrative
expenses of GME and TBS, which represent $1.3 million of the $1.6 million
increase in general and administrative expenses in 1999 as compared to 1998.
Although intensified effort toward product improvement contributed to the 1999
increase in research and development costs, the establishment of a more
resilient packaged emulsion product allowed the Company to reduce losses from
its West Virginia plant by approximately $200,000, and strengthened expectations
of realizing long-term benefit from the research through increased revenues from
packaged emulsions. Income from operations is expected to increase in 2000 as
the expected increase in revenues materialize. The Company incurred interest
expense of $190,000 versus $153,000 of interest income that the Company earned
in 1998.
In 1999, other income and expense includes the write-off of $2.6
million of the Company's investments in West Africa Chemicals Limited (WAC) and
Turon-MSI of $800,000 and $1.8 million, respectively, including a $700,000 note
receivable from WAC. Although the Company expects to receive payment for raw
materials and supplies it sells to its joint venture in Uzbekistan, due to
deteriorating conditions observed in the later part of 1999 the Company now
considers the probability of converting profits from Turon-MSI into hard
currency to be remote. Additionally, depressed gold prices and an over supply of
explosives products in Ghana have deterred WAC in obtaining market share
sufficient to sustain profitable operations in the long-term and have combined
to cause continuing losses. Accordingly, the Company determined in the last
quarter of 1999 that it was necessary to write off the respective investments.
Future recognition of income or loss from these equity method joint ventures
will occur as cash is either received or disbursed.
1998 vs. 1997
Consolidated revenues increased $2.9 million from $27 million in 1997
to $29.9 million in 1998. Non-JV revenues increased $4.1 million, largely due to
increased sales in the U.S. and Canada as well as the acquisition of GME, while
equity in earnings from joint ventures decreased by $1.2 million primarily due
to a decrease in equity in earnings from Cyanco.
9
Income from operations decreased $581,000 in 1998 as compared to 1997.
The decrease resulted primarily from the decrease in the Company's equity in
earnings of Cyanco offset by $1 million in net contribution from the Company's
explosives operations. Because certain tax benefits that had been carried
forward to and utilized in 1997 were not available to offset taxable income in
1998, the effective tax rate for the Company increased from 25% in 1997 to 35%
in 1998, thus further decreasing net income from $5,008,000 in 1997 to
$3,872,000 in 1998.
Liquidity and Financial Resources
The Company retains a strong financial position and was able to
increase stockholders' equity during 1999 in spite of difficult market
conditions experienced in the mining industry. The Company's current ratio
increased from 2.1 to 1 at the end of 1998 to 3.6 to 1 at the end of 1999, due
in part to the consolidation of TBS combined with the conversion of the
Company's primary line of credit to a long-term financial instrument, which is
reflective of the Company's increased use of its line of credit to fund
investments.
Although net income was $3,147,000 lower in 1999 as compared to 1998,
net cash provided by operating activities was only $1,592,000 lower in 1999 than
it was in 1998 due primarily to an increase in distributed earnings of Cyanco to
the Company in the amount of $1,490,000. As stated above, in January and
February of 2000 the Company received U.S. Dollar payments of approximately
$400,000 for raw material shipments previously made to Turon-MSI. However, the
Company has agreed to use approximately $200,000 of the cash received in
granting credit for importing raw materials into Uzbekistan to allow operations
there to continue. While the government has supported Turon-MSI with conversion
commitments for the new credit, such commitments are subject to adverse economic
conditions in Uzbekistan.
Net cash used in investing activities decreased $1,033,000 from
$4,935,000 in 1998 to $3,902,000 in 1999. However, cash used for the purchase of
plant and equipment increased $2,782,000 primarily due to the consolidation of
$1,716,000 of TBS assets and the construction of ODA's accessories manufacturing
facilities of $957,000.
In September of 1999 the Company entered into a credit agreement with a
major U.S. bank for a $4.5 million credit facility with features that allow for
borrowings for equipment of up to $1.25 million and for letters of credit of up
to $1 million. This new line of credit carries an interest rate of prime minus
1%. Because this credit facility matures August 31, 2001, it has been classified
as long-term debt, which is the primary cause of the reduction in the Company's
current portion of long-term debt of $681,000 from 1998 to 1999. TBS also had a
$40,000 line of credit at an interest rate of prime plus 2% which was fully
utilized at December 31, 1999 and was paid off in January 2000. As of December
31, 1999, the Company owed $2,916,000 on its lines of credit. During 1999, the
Company had utilized up to $2,947,000 of its lines of credit.
Net cash provided by financing activities increased by $2,066,000 from
$203,000 in 1998 to $2,269,000 in 1999. The consolidation of TBS accounted for
$764,000 of the increase, while $250,000 of the increase resulted from the
conversion of a facility construction loan to mortgage financing. The remainder
of the increase is largely attributable to the net increase in the Company's
line of credit facilities of $2,213,000. Whereas operating cash flows were
sufficient to fund such needs in prior years, during 1999 the Company relied
more heavily on its lines of credit to finance working capital requirements and
asset purchases, as contemplated in the structure of the credit agreement
entered into by the Company in September 1999.
In management's opinion, the capital resources of the Company are
adequate to finance its business activity in the ordinary course of business
assuming that the political, financial, and economic environment continue
favorable to the mining industry at large. However, the Company anticipates
being oriented toward investment in the current industry consolidation and
therefore may need to obtain additional capital resources to fund such an
investment strategy.
Because of inflation associated with the economies of underdeveloped
countries where the Company invests, there exists a substantial risk that the
value of investments in those jurisdictions may continue to erode. Additionally,
as has been the case with the Company's investment in Uzbekistan, the internal
balance of payment and capital shortages in some of those countries may 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.
10
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 7A: Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in foreign currency
and interest rates. The Company manufactures and sells some of its products in
Colombia, Ghana, Uzbekistan and Canada. It also purchases products for raw
materials and for resale from additional foreign markets such as Australia and
India. In addition, the Company licenses its technology in other foreign
countries such as South Africa, India, Korea, and Namibia. Approximately 10% of
the Company's consolidated revenue is generated from foreign markets; however,
as explained in the Management's Discussion and Analysis of Operation, the
Company's sales in joint ventures are not reported in consolidated revenues and
the percentage of the Company's business in foreign countries will likely remain
significant. The Company manages its risk of foreign currency rate changes by
maintaining foreign currency bank accounts in currencies in which it regularly
transacts business and by maintaining hard currency accounts to which dollar
denominated contracts are credited. Most of the sales and purchase contracts are
denominated in US dollars except in Ghana and Uzbekistan where the investments
have now been written off. None of the license royalty payment obligations are
denominated in US dollars and are thus subject to the risks of currency rate
changes. All excess cash balances are immediately transferred to US dollar
accounts to the extent possible. Option contracts to hedge foreign currency
transactions are not used by the Company. The Company does not enter into
derivative contracts for trading in speculative purposes. Changes in the
currency rate are not expected to have a material impact on the Company's
results of operations currently. However, once the Company's joint venture in
Kovdor begins operations, sales contracts will be paid in local currency, though
pegged to a dollar denominated price. It is likely that sales receipts and
leasing contract receipts may be subject to significant time delay in converting
them from local currency to US dollars. Accordingly, equity in earnings from
that joint venture may be subjected to more currency exchange risk than is
experienced by the Company in other foreign joint ventures. It is not expected
that currency rate hedging transactions will be used in 2000.
The Company's cash equivalents and short-term investments and its outstanding
debt bear variable interest rates. The rates are adjusted to market conditions.
Changes in the market rate effects interest earned and paid by the Company. The
Company does not use derivative instruments to offset the exposure to changes in
interest rates. Changes in the interest rates are not expected to have a
material impact on the Company's results of operations.
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.
11
PART III
Item 10: Directors andExecutive Officers of the Registrant
The information required hereunder is incorporated by reference from
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 19, 2000 "Election of Directors," "Executive
Officers" and "Executive Compensation."
Item 11: Executive Compensation
The information required hereunder is incorporated by reference from
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 19, 2000 "Election of Directors," "Executive
Officers" and "Executive Compensation."
Item 12: Security Ownership of Certain Beneficial Owners and Management
The information required hereunder is incorporated by reference from
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 19, 2000 "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
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 19, 2000 "Certain Relationships and Related
Transactions."
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. a. The consolidated financial statements for the fiscal year
ended 1999 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 100 are:
The financial statements for the fiscal year ended 1999
of Cyanco, a significant subsidiary reported on the
equity method, and the report of independent certified
public accountants.
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:
3.2 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.)
3.4 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.)
12
3.5 Bylaws of the Corporation as amended May 19, 1999.
4.1 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.)
4.2 Amendments to 1988 Nonqualified Stock Option Plan.
(Incorporated by reference from the Form S-8 Report
filed by the Company on July 7, 1997.)
4.3 Amended 1988 Nonqualified Stock Option Plan,
amended as of May 19, 1999.
10.1 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.)
10.2 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.)
10.3 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
1999 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, 1999.
13
SIGNATURES
Section 13 or 15(d) of the Securities Exchange Act of 1934, 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, 2000
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/ Nathan L. Wade Chairman of the Board of Directors March 30, 2000
- -------------------------
Nathan L. Wade
/s/ Lex L. Udy Vice Chairman and Director March 30, 2000
- -------------------------
Lex L. Udy
/s/ John T. Day President, Chief Executive Officer March 30, 2000
- ------------------------- and Director (Principal Executive Officer)
John T. Day
/s/ Stephen Fleischer Director March 30, 2000
- -------------------------
Stephen Fleischer
/s/ James Solomon Director March 30, 2000
- -------------------------
James Solomon
/s/ Duane W. Moss Chief Financial Officer, General Counsel March 30, 2000
- ------------------------- and Secretary
Duane W. Moss
/s/ Wade Newman Controller March 30, 2000
- -------------------------
Wade Newman
14
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Financial Statements
December 31, 1999 and 1998
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
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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1999, 1998, and 1997. 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, 1999 and 1998, and
the results of their operations and their cash flows for the years ended
December 31, 1999, 1998, and 1997 in conformity with generally accepted
accounting principles.
TANNER+CO.
Salt Lake City, Utah
March 3, 2000
F-2
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Balance Sheet
(In thousands, except share amounts)
December 31,
- ----------------------------------------------------------------------------------------------------------
Assets 1999 1998
------ -----------------------------------
Current assets:
Cash $ 975 $ 314
Receivables, net 6,605 6,050
Inventories 1,807 1,721
Prepaid expenses 112 126
Current portion of related party notes receivable 250 435
-----------------------------------
Total current assets 9,749 8,646
Investment in and advances to joint ventures 12,736 13,371
Property, plant and equipment, net 9,165 6,248
Goodwill, net 2,018 2,243
Related party notes receivable 633 1,190
Other assets 160 221
-----------------------------------
$ 34,461 $ 31,919
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity Current liabilities:
---------------------------------------------------------
Accounts payable and accrued expenses $ 2,257 $ 2,943
Current portion of long-term debt 473 1,154
-----------------------------------
Total current liabilities 2,730 4,097
Long-term debt 4,475 1,213
Deferred income taxes 2,408 2,532
-----------------------------------
Total liabilities 9,613 7,842
-----------------------------------
Minority interest 497 -
-----------------------------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.001 par value, 500,000,000 shares
authorized; 7,314,260 and 7,339,760 shares issued
and outstanding, respectively 7 7
Capital in excess of par value 5,312 5,443
Cumulative foreign currency translation adjustments (381) (242)
Retained earnings 19,413 18,869
-----------------------------------
Total stockholders' equity 24,351 24,077
-----------------------------------
$ 34,461 $ 31,919
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Income
(In thousands, except share amounts)
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------
Revenue:
Net sales $ 26,752 $ 23,414 $ 19,086
Royalties 1,154 1,345 1,581
Equity in earnings of joint ventures 2,511 4,989 6,179
Other income 191 117 123
-----------------------------------------------------
30,608 29,865 26,969
-----------------------------------------------------
Costs and expenses:
Costs of sales 25,497 22,128 18,817
General and administrative 2,893 1,331 1,264
Research and development 805 587 488
-----------------------------------------------------
29,195 24,046 20,569
-----------------------------------------------------
Income from operations 1,413 5,819 6,400
Other income (expense):
Impairment of assets (2,622) - -
Other, net (190) 153 266
-----------------------------------------------------
Income (loss) before provision for
income taxes minority interest,
and extraordinary item (1,399) 5,972 6,666
-----------------------------------------------------
Benefit (provision) for income taxes:
Current 426 (1,790) (883)
Deferred 124 (310) (775)
-----------------------------------------------------
550 (2,100) (1,658)
-----------------------------------------------------
Income (loss) before minority
interest and extraordinary
item (849) 3,872 5,008
Minority interest in income (25) - -
-----------------------------------------------------
Income before extraordinary item (874) 3,872 5,008
Extraordinary item - extinguishment of
deferred obligation (net of $823 of taxes) 1,599 - -
-----------------------------------------------------
Net income $ 725 $ 3,872 $ 5,008
-----------------------------------------------------
Earnings per common share-basic $ .10 $ .53 $ .68
-----------------------------------------------------
Earnings per common share-diluted $ .10 $ .52 $ .66
-----------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
Years Ended December 31, 1999, 1998 and 1997
- ----------------------------------------------------------------------------------------------------------
Cumulative
Capital in Notes Foreign
Common Stock Excess Receivable Currency
--------------------- of Par from Stock Translation Retained
Shares Amount Value Sales Adjustments Earnings Total
---------------------------------------------------------------------------------
Balance at
January 1, 1997 7,258,944 $ 7 $ 6,230 $ (789) - $ 10,321 $ 15,769
Net income - - - - - 5,008 5,008
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)
---------------------------------------------------------------------------------
Balance at
December 31, 1997 7,353,344 7 5,416 - - 15,182 20,605
Comprehensive net
income calculation:
Net income - - - - - 3,872 3,872
Other comprehensive
income-foreign
currency
translation
adjustment, net - - - - (242) - (242)
--------
Comprehensive income 3,630
--------
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)
---------------------------------------------------------------------------------
Balance at
December 31, 1998 7,339,760 7 5,443 - (242) 18,869 24,077
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
Continued
- ---------------------------------------------------------------------------------------------------------
Cumulative
Capital in Notes Foreign
Common Stock Excess Receivable Currency
--------------------- of Par from Stock Translation Retained
Shares Amount Value Sales Adjustments Earnings Total
---------------------------------------------------------------------------------
Balance at
December 31, 1998 7,339,760 7 5,443 - (242) 18,869 24,077
Comprehensive net
income calculation:
Net income - - - - - 725 725
Other comprehensive
income-foreign
currency translation
adjustment, net - - - - (139) - (139)
--------
Comprehensive income 586
--------
Acquisition and
retirement of common
stock (25,500) - (131) - - - (131)
Cash dividends paid - - - - - (181) (181)
---------------------------------------------------------------------------------
Balance at
December 31, 1999 7,314,260 $ 7 $ 5,312 $ - $ (381) $ 19,413 $ 24,351
---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
MINING SERVICES INTERNATIONAL CORPORATION
Consolidated Statement of Cash Flows
(In Thousands)
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------
Cash flows from operating activities:
Net income $ 725 $ 3,872 $ 5,008
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,318 797 650
Provision and reserves for losses on assets 66 147 2
Gain on disposal of equipment (11) (14) (33)
Stock compensation expense - 37 22
Interest income on common stock notes receivable - - (48)
Distributed (undistributed) earnings of joint
ventures 1,490 (11) (1,136)
Impairment of assets 2,622 - -
Extraordinary item - extinguishment of deferred
obligation (2,422) - -
Deferred income taxes (124) 305 775
(Increase) decrease in:
Receivables (692) (1,735) (1,645)
Inventories (86) 320 294
Prepaid expenses 8 185 (3)
Other assets 61 157 (291)
Increase (decrease) in:
Accounts payable and accrued expenses (686) (174) (42)
Minority interest 25 - -
---------------------------------------------
Net cash provided by
operating activities 2,294 3,886 3,553
---------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of plant and equipment 62 74 85
Increase in notes receivable (58) (475) (400)
Payments on note receivable 100 250 250
Purchase of plant and equipment (3,971) (1,189) (2,214)
Investment in joint ventures (507) (1,196) (77)
Net cash paid in acquisition - (2,399) -
Capital contribution from minority interest 472 - -
---------------------------------------------
Net cash used in
investing activities (3,902) (4,935) (2,356)
---------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 3,890 700 -
Payments on long-term debt (1,309) - (714)
Retirement of common stock (131) (394) -
Cash dividend paid (181) (185) (147)
Issuance of common stock - 82 92
---------------------------------------------
Net cash provided by (used in)
financing activities 2,269 203 (769)
---------------------------------------------
Net increase (decrease) in cash 661 (846) 428
Cash, beginning of year 314 1,160 732
---------------------------------------------
Cash, end of year $ 975 $ 314 $ 1,160
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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, MSI Russia, L.L.C. (MSIR) which the Company
organized effective October 16, 1998, and MSI International Holding Company,
Ltd. (MSI IHC), 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 Company also owns 51% of
Tennessee Blasting Services, L.L.C (TBS), which was established September 1,
1999. TBS provides drilling, blasting and explosives resale services and its
accounts are included in the Company's consolidated financial statements,
including accounts which represent the minority interest. 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 these joint ventures is included in note 15.
The acquisitions of ODA and GME were accounted for as purchase transactions.
- --------------------------------------------------------------------------------
F-8
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Organization - Continued
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 through MSI IHC 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. Effective
December 28, 1999, MSI transferred its ownership of Turon - MSI Ltd. to MSI IHC.
Due to difficulty in obtaining conversion of profits to hard currency, the
Company determined in the fourth quarter of 1999 to write-off its investment in
Turon - MSI. The Company will now recognize income or loss only as cash is
either received or disbursed.
MSIR owns a 50% interest in Eastern Mining Services Ltd. (EMS), a Russian
company registered in Moscow, to manufacture and deliver bulk explosives in the
Kovdor mining district in Russia.
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. CMS also owns 100% of
Mining Capital Resources Ltd., which leases plant and equipment to EMS for its
Russian operations.
- --------------------------------------------------------------------------------
F-9
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Organization - Continued
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 through MSI IHC. In the
fourth quarter of 1999, the Company wrote-off its investment in WAC, including a
note receivable, due to the unlikelihood of realizing profits in this market
where explosives supply now exceeds demand. Similar to its investment in Turon -
MSI, Ltd., the Company will only recognize income or loss as cash is either
received or disbursed. Effective December 28, 1999, the Company transferred its
ownership in WAC to MSI IHC.
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-10
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except 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 goodwill began January 1,
1999. At December 31, 1999, accumulated amortization and amortization expense
was $225,000. The Company did not have Goodwill during the years ended December
31, 1998 and 1997.
Other Assets
Certain items included in other assets are amortized over five years using the
straight-line method. Amortization expense totaled $4, $4, and $4, in 1999,
1998, and 1997, 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, 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 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.
- --------------------------------------------------------------------------------
F-11
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Earnings Per Common Share
The computation of earnings per common share is based on the weighted average
number of shares outstanding during the year.
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, 1999.
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.
- --------------------------------------------------------------------------------
F-12
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
2. Detail of Certain Balance Sheet Accounts
December 31,
-----------------------------
1999 1998
-----------------------------
Receivables:
Trade receivables $ 2,254 $ 2,710
Income tax refund receivable - 121
Related party receivables (see Note 10) 4,337 2,968
Other 117 288
Less allowance for doubtful accounts (103) (37)
-----------------------------
$ 6,605 $ 6,050
-----------------------------
Inventories:
Raw materials $ 737 $ 707
Finished goods 1,070 1,014
-----------------------------
$ 1,807 $ 1,721
-----------------------------
Accounts payable and accrued expenses:
Trade payables $ 1,422 $ 1,805
Accrued expenses 835 1,138
-----------------------------
$ 2,257 $ 2,943
-----------------------------
- --------------------------------------------------------------------------------
F-13
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
3. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
-----------------------------------
1999 1998
-----------------------------------
Plant equipment and fixtures $ 9,501 $ 6,459
Support equipment and fixtures 5,586 5,142
Office equipment and fixtures 537 521
Vehicles 642 634
Land 107 107
-----------------------------------
16,373 12,863
Less accumulated depreciation
and amortization (7,208) (6,615)
-----------------------------------
$ 9,165 $ 6,248
-----------------------------------
4. Related Party Notes Receivable
Notes receivable are comprised of the following:
December 31,
-----------------------------------
1999 1998
-----------------------------------
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 $ 750
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
and June 2004 133 175
- --------------------------------------------------------------------------------
F-14
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
4. Related Party Notes Receivable Continued
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
-----------------------------------
883 1,625
Less current portion (250) (435)
-----------------------------------
$ 633 $ 1,190
-----------------------------------
5. Long-Term Debt
Long-term debt is comprised of the following:
December 31,
-------------------------
1999 1998
-------------------------
Line of credit agreements which
allows the Company to borrow a
maximum amount of $4,540 at rates
ranging from the bank's prime rate
minus 1% to the bank's prime rate
plus 2%, due March 23, 2000 and
August 31, 2001 $ 2,916 $ -
Unsecured performance deposit
payable to a company, due in monthly
installments of $16, including
imputed interest at 7%, due on
December 9, 2003 649 785
- --------------------------------------------------------------------------------
F-15
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
5. Long-Term Debt Continued
Notes payable to financial
institutions, due in monthly
installments of $16, including
interest ranging from 7.35% to
9.75%, secured by property 563 -
Notes payable to individuals,
due in monthly installments of
$13, including interest at 12%,
secured by property and equipment,
due December 9, 2003 507 600
Construction loan payable in monthly
installments of $2, including interest
at 8.75%, secured by property, due
April 10, 2004 241 250
Unsecured non-compete agreement
payable to an individual, due
in monthly installments of $1,
including imputed interest at 7%,
due December 9, 2003 47 57
Mortgage note payable to an
individual, due in annual installments
of $2, including interest at 10%,
due October 13, 2003 13 13
Loan payable to a Company, due in
monthly installments of $2, including
interest at 9.5%, secured by property,
due August 1, 2000 12 -
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 - 662
-------------------------
4,948 2,367
Less current portion (473) (1,154)
-------------------------
$ 4,475 $ 1,213
-------------------------
- --------------------------------------------------------------------------------
F-16
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
5. Long-Term Debt Continued
Future maturities of long-term debt are as follows:
Year Ending December 31: Amount
- ------------------------ -----------------
2000 $ 473
2001 3,323
2002 487
2003 468
2004 197
-----------------
$ 4,948
-----------------
6. Operating Leases
During the year ended December 31, 1999, the Company leased certain vehicles,
property, and equipment under various non-cancelable operating leases. Lease
expense relating the operating leases was approximately $160 for the year ended
December 31, 1999. Future minimum lease payments are as follows:
Year Ending December 31: Amount
- ------------------------ ------------------
2000 $ 146
2001 70
2002 24
2003 4
------------------
$ 244
------------------
- --------------------------------------------------------------------------------
F-17
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
7. Income Taxes
The current provision for income taxes represents U.S. federal income taxes,
taxes withheld on royalties and other foreign income taxes.
The benefit (provision) for income taxes is different than amounts which would
be provided by applying the statutory federal income tax rate to (loss) income
before benefit (provision) for income taxes for the following reasons:
Years Ended December 31,
-------------------------------------------
1999 1998 1997
-------------------------------------------
Federal income tax benefit
(provision) at statutory rate $ 476 $ (2,030) $ (2,266)
Stock options - - 525
Life insurance and meals 6 (12) 2
Other 68 (58) 81
-------------------------------------------
$ 550 $ (2,100) $ (1,658)
-------------------------------------------
Deferred tax assets (liabilities) are comprised of the following:
December 31,
-----------------------------------
1999 1998
-----------------------------------
Depreciation $ (2,912) $ (2,547)
Deferred income (216) (327)
Write-off of worthless securities 600 -
Foreign tax credit carryforward 120 342
-----------------------------------
$ (2,408) $ (2,532)
-----------------------------------
- --------------------------------------------------------------------------------
F-18
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
8. Impairment of Assets
During the year ended December 31, 1999, the Company evaluated the carrying
value of its investments in and advances to joint ventures based upon projected
future cash flows. Based on this evaluation the Company recorded an aggregate
non-cash expense for the impairment as follows:
Investment in and advances to foreign
joint ventures $ 1,922
Related party notes receivable from foreign
joint ventures 700
-----------------
$ 2,622
-----------------
At December 31, 1999 and 1998, equity in earnings of joint ventures included
approximately $140 and $43, respectively, of interest income relating to the
impairment.
9. Supplemental Cash Flow Information
During the year ended December 31, 1998, 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.
Actual amounts paid for interest and income taxes are as follows:
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
Interest $ 211 $ 16 $ 35
-----------------------------------------------------
Income taxes $ 801 $ 1,965 $ 766
-----------------------------------------------------
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 $287, $326, and $474, for
the years ended December 31, 1999, 1998, and 1997, respectively.
At December 31, 1999 and 1998, the Company had receivables of $4,337, and $2,968
respectively, from joint ventures (see Notes 1 and 2).
- --------------------------------------------------------------------------------
F-19
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
10. Related Party Transactions Continued
As of December 31, 1999 and 1998, the Company had notes receivable from joint
ventures of $750, and $1,450 respectively (see Note 4).
As of December 31, 1999, the Company had notes receivable from officers of the
Company for $133, (see Note 4).
At December 31, 1999 and 1998, the Company recognized interest income of $191
and $117 respectively, related to notes receivable from joint ventures.
During the year ended December 31, 1999 and 1998, the Company recognized
revenues of approximately $206 and $686 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:
Years Ended December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
Company A $ 4,638 $ - $ -
Company B $ - $ 4,844 $ 4,474
Company C $ - $ 3,855 $ 4,271
Company D $ - $ 2,781 $ 1,937
Management believes that the loss of any one customer would not have a material
adverse effect on the Company's consolidated operations.
- --------------------------------------------------------------------------------
F-20
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except 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,
---------------------------------------
1999 1998 1997
---------------------------------------
Revenue:
United States $ 23,253 $ 18,648 $ 16,300
Canada 2,849 4,134 4,362
Other foreign locations 1,995 2,094 128
Equity in earnings of JV 2,511 4,989 6,179
---------------------------------------
Total revenues $ 30,608 $ 29,865 $ 26,969
---------------------------------------
Years Ended December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
Income from Operations:
United States $ 1,119 $ 1,580 $ 1,009
Canada 381 660 359
Other foreign (326) 204 (21)
Equity in earnings of JV 2,511 4,989 6,179
Corporate Expenses (2,272) (1,614) (1,126)
---------------------------------------
Total income from operations $ 1,413 $ 5,819 $ 6,400
---------------------------------------
December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
Identifiable Assets:
United States $ 17,456 $ 13,864 $ 9,878
Canada 876 733 702
Other foreign 1,188 2,807 1,257
Investments/advances to
JV's 14,941 14,515 12,864
---------------------------------------
Total identifiable assets $ 34,461 $ 31,919 $ 24,701
---------------------------------------
- --------------------------------------------------------------------------------
F-21
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
12. Non-Qualified Stock Option Plan
Under the 1987 Non-Qualified Stock Option Plan (the Option Plan), as amended in
1988, 1990, 1992, 1993, 1998 and 1999, a maximum of 1,315,130 shares were made
available for granting of options 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, 1997 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
Granted 7,500 3.00 - 5.06
Exercised (5,500) 4.72 - 5.06
Expired (9,000) -
---------------------------------
Outstanding at December 31, 1999 352,747 $ 3.00 - 11.30
---------------------------------
- --------------------------------------------------------------------------------
F-22
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
12. Non-Qualified Stock Option Plan Continued
Options exercisable and available for future grant are as follows:
December 31,
-------------------------------------------
1999 1998 1997
-------------------------------------------
Options exercisable 113,815 76,816 41,832
Options available for grant 469,960 230,261 276,051
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 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:
Years Ended December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
Net Income - as reported $ 725 $ 3,872 $ 5,008
Net Income - pro forma $ 622 $ 3,961 $ 4,919
Diluted earnings per share -
as reported $ .10 $ .52 $ .66
Diluted earnings per share -
pro forma $ .08 $ .51 $ .65
-----------------------------------------
- --------------------------------------------------------------------------------
F-23
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except 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,
------------------------------------------
1999 1998 1997
------------------------------------------
Expected dividend yield $ .02 $ .02 $ .02
Expected stock price volatility 52% 33% 48%
Risk-free interest rate 6% 5% 5.25%
Expected life of options 0 - 3 years 3 years 3 years
------------------------------------------
The weighted average fair value of options granted during 1999, 1998, and 1997
are $.28, $1.20, and $3.41, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
-----------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/99 (Years) Price 12/31/99 Price
- -------------------------------------------------------------------------------
$ 2.96 - 4.09 307,497 5.33 3.59 13,000 $ 10.37
$ 5.00 - 5.51 37,750 2.09 5.04 31,250 5.05
$ 7.56 - 11.30 7,500 .51 10.36 69,565 3.08
- -------------------------------------------------------------------------------
$ 1.38 - 11.30 352,747 4.79 4.25 113,815 $ 4.45
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-24
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except 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:
Years Ended
December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
Basic EPS:
Net income available to common
stockholders $ 725 $ 3,872 $ 5,008
---------------------------------------
Weighted average common 7,324,000 7,368,000 7,342,000
shares
---------------------------------------
Net income per share $ .10 $ .53 $ .68
---------------------------------------
Diluted EPS:
Net income available to common
stockholders $ 725 $ 3,872 $ 5,008
---------------------------------------
Weighted average common 7,375,000 7,492,000 7,614,000
shares
---------------------------------------
Net income per share $ .10 $ .52 $ .66
---------------------------------------
- --------------------------------------------------------------------------------
F-25
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
15. Significant Unconsolidated Affiliates
Summarized financial information for significant unconsolidated affiliates of
the Company, are as follows:
December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
Result for year:
Gross revenues $ 21,585 $ 37,353 $ 38,115
Gross profit $ 7,449 $ 14,365 $ 16,048
Net income $ 5,385 $ 9,978 $ 12,273
Year-end financial
position:
Current assets $ 5,545 $ 10,415 $ 8,567
Non-current assets $ 20,893 $ 24,998 $ 22,945
Current liabilities $ 3,024 $ 4,256 $ 4,106
Non-current liabilities $ 1,500 $ 5,323 $ 4,559
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, 1999, 1998, and 1997 was $79, $48, and $37, respectively.
17. Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, payables, and
notes payable the carrying amount of cash, receivables, and payables
approximates fair value because of the short-term nature of these items. The
carrying amount of the notes payable approximates fair value as the individual
borrowings bear interest at floating market interest rates.
- --------------------------------------------------------------------------------
F-26
MINING SERVICES INTERNATIONAL CORPORATION
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
18. Commitments and Contingencies
The Company is subject to various claims and legal proceedings arising in the
ordinary course of business activities. In addition, the Company and certain
directors of the Company have been named in complaints related to: alleged
violations of laws and fiduciary duties related to the voting of shares,
decisions regarding certain corporate transactions and the adoption of a Stock
Rights Plan. The Company believes that this litigation may have a material
affect on the Company's governance issues and may be costly to litigate, but the
Company does not believe the damage claims of this litigation or any other
pending matters will materially impact the financial condition of the Company.
19. Extraordinary Item
During the year ended December 1999, Cyanco negotiated the extinguishment of a
deferred royalty obligation. Accordingly, the Company paid $58 in cash to
terminate the indemnification of Cyanco under the deferred royalty agreement.
The result was an extraordinary gain of $1,599 after providing for income taxes
of $823.
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