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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED:
JUNE 30, 1996
COMMISSION FILE NUMBER:
0-10735
THE GNI GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0232338
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2525 BATTLEGROUND ROAD
DEER PARK, TEXAS 77536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 930-0350
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ----------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(TITLE OF CLASS)
Indicate by check mark 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 / /.
Indicate by check mark 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. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 20, 1996 was approximately $24,513,473. As of
September 20, 1996, there were 6,565,692 shares of common stock, $0.01 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 Annual Report to Stockholders are
incorporated by reference into Parts I and II.
Portions of the definitive Proxy Statement for the registrant's 1996 Annual
Meeting of Stockholders to be held on October 29, 1996 are incorporated by
reference in Part III of this Form 10-K.
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1996 10-K
PART I
ITEM 1. BUSINESS.
GENERAL
The GNI Group, Inc. ("GNI") provides comprehensive waste management
services that include the treatment, storage, transportation and disposal of
hazardous and non-hazardous liquid and solid industrial waste and by-product
streams, together with specialized chemical manufacturing, recovery and
processing services, to over 300 companies through four subsidiaries. GNI
Chemicals Corporation ("GNIC") manufactures specialty chemicals and serves
customers in the contract manufacturing, waste recovery and toll distillation
segments of the chemical industry. Disposal Systems, Inc. ("DSI") and Disposal
Systems of Corpus Christi, Inc. ("DSCCI") own and operate hazardous and
non-hazardous waste treatment, storage and disposal operations. Resource
Trans-portation Services, Inc. ("RTS") transports hazardous and non-hazardous
waste and chemical products. (GNI, GNIC, DSI, DSCCI and RTS are collectively
referred to herein as the "Company.")
The Company's facilities are situated on an approximately 10.5 acre
site in Deer Park, Texas (collectively referred to as the "Deer Park
Facility"), and an approximately 14.3 acre site in Corpus Christi, Texas (the
"Corpus Facility"). (The Deer Park Facility and the Corpus Facility are
collectively referred to herein as the "Facilities.") Hence, the Company's
Facilities are strategically located in the Gulf Coast chemical and
petrochemical industrial complex, thereby placing the Company's operations in
close proximity to large generators of hazardous and non-hazardous waste
materials. The Company's customers include many Fortune 100 chemical and
petrochemical producers. The Company has various permits and authorizations
enabling it to engage in a wide range of hazardous waste treatment, storage and
disposal operations at its Facilities, including hazardous waste treatment and
storage permits issued by the Texas Natural Resource Conservation Commission
(the "TNRCC") pursuant to the federal Resource Conservation and Recovery Act,
as amended, the state programs authorized thereby, and the regulations
promulgated thereunder (collectively, "RCRA").
Management believes that the Company's Deer Park Facility is one of
only a few commercial facilities in the United States that combines RCRA
permitted regulatory status for the treatment, storage, transportation and
disposal of hazardous and non-hazardous liquid and solid industrial waste and
by-product streams with chemical manufacturing, recovery and processing
capabilities, thus enabling the Company to provide comprehensive resource
recovery and waste management services to a wide array of customers.
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The Company, at its Deer Park Facility, has conducted hazardous waste
management operations for over ten years. On August 27, 1992, the Company
received its final Deer Park RCRA Part B Permit from the TNRCC covering its
hazardous waste management operations at its Deer Park Facility. Under the
Deer Park RCRA Part B Permit, the Company may inject up to 262 million gallons
of waste in its deepwells and store up to approximately 2.9 million gallons and
6,472 drums of hazardous waste at its Deer Park Facility. The Company may also
accept substantially all types of hazardous wastes identified by the United
States Environmental Protection Agency (the "EPA"). The Company conducts its
deepwell injection operations for its two deepwells located at the Deer Park
Facility under permits issued by the TNRCC pursuant to the federal authority
under the Safe Drinking Water Act's underground injection control ("UIC")
program, and under an exemption issued by the EPA pursuant to RCRA, which
allows the injection of certain hazardous wastes that otherwise may be
prohibited from disposal in or on the land, commonly known as "land-banned"
wastes.
Similarly, the Company's Corpus Facility received its combined final
Corpus RCRA Part B Permit and UIC Permit from the TNRCC on June 23, 1987, and
its exemption issued by the EPA pursuant to RCRA, which allows the injection of
"land-banned" wastes. The permits, which were transferred to the Company at
the time of the acquisition of the Corpus Facility from Chemical Waste
Management, Inc. ("CWM") authorize the disposal by deepwell injection of up to
78 million gallons of wastes per year.
The Company's processing capabilities, permits and regulatory status
enable it to receive waste and/or by-product materials and recover valuable
components, and to assist customers in minimizing waste volumes, possibly
claiming recycling credits or exemptions or otherwise reducing their waste
disposal costs. GNIC currently targets four categories of business: (i)
proprietary specialty chemical manufacturing, (ii) custom manufacturing, in
which GNIC manufactures chemical products on behalf of third parties, (iii)
custom processing, in which chemical products are further purified or
processed, and (iv) recycling, in which waste and by-product streams are
accepted, stored and recovered pursuant to the Company's various permits and
operating authorizations. GNIC's custom manufacturing and processing services
are provided primarily to customers requiring third-party manufacturing or
processing due to lack of sufficient capacity to satisfy product development
needs or lack of certain internal production capabilities. The streams
recycled or recovered by GNIC would otherwise generally require disposal as
hazardous waste or are non-hazardous streams generated by customers who
desire to have the materials handled under the stringent requirements
applicable to a RCRA permitted facility.
Management believes that the Company's regulatory status provides it
with a marketing advantage because its disposal, treatment and transportation
capabilities, together with its permits and regulatory status, enable it to
process, handle and dispose of hazardous wastes and other regulated wastes,
by-products and chemicals that many other competitors without such permits are
not authorized to dispose of or process. Management further believes that the
Company's regulatory status is becoming increasingly significant to
liability-sensitive chemical and petrochemical producers, particularly those
that generate materials that, while technically not classified as
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hazardous waste under applicable environmental laws, nonetheless are treated as
such. As a result, management believes the Company's regulatory status,
combined with its expertise in waste processing, disposal and recycling, with
the related efficiencies of on-site waste disposal and strategic site location,
provide an excellent base from which to further grow the Company's specialty
chemical manufacturing, recovery and processing business.
The following chart sets forth, for the fiscal periods indicated, the
dollar amount of consolidated revenues and the percentage of total
consolidated revenues contributed by each product or service provided by the
Company:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage
------- ---------- ------- ---------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GNIC Chemicals 18,065 45.9% $13,246 38.5% $ 5,255 25.4%
Deepwell disposal 12,750 32.4 12,010 35.0 7,837 37.8
Treatment and other disposal 4,345 11.1 5,112 14.9 4,360 21.1
Transportation 4,177 10.6 3,991 11.6 3,250 15.7
------- ----- ------ ----- ------ -----
$39,338 100.0% $34,359 100.0% 20,702 100.0%
======= ===== ====== ===== ====== =====
</TABLE>
HISTORY
The Company is a holding company that conducts business through four
wholly-owned subsidiaries. Originally named Nuclear Environmental Engineering,
Inc., the Company was incorporated as a Texas corporation in 1971 and
reincorporated under its present name as a Delaware corporation in October
1987. From 1971 until 1988, the Company manufactured radioactive sources and
tracers utilized principally in the petroleum, industrial and medical markets.
During 1987 and 1988, in a series of transactions, the Company disposed of its
radiation-related operations and commenced its current waste management
services at its Deer Park Facility through the purchase of the stock of DSI
from United Distribution Systems, Inc. Also in 1988, the Company formed RTS
and commenced its hazardous waste transportation operations. In 1989, the
Company formed Chemical Resource Processing, Inc. and in 1990 commenced its
specialty chemical manufacturing, recovery and processing operations. In 1996,
Chemical Resource Processing, Inc. adopted its current name of GNI Chemicals
Corporation. In 1995, the Company formed DSCCI to acquire the Corpus Facility
from CWM. In each acquisition and disposition, the seller generally retained
responsibility for any liability or obligation relating to the transferred
operations arising from events that occurred or circumstances that existed
prior to the closing of the transaction.
CHEMICAL OPERATIONS
General
GNIC manufactures proprietary chemical products and serves customers
in the contract manufacturing, waste recovery and toll distillation segments of
the chemical industry. GNIC's chemical facility combines a variety of chemical
manufacturing and processing technologies to
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recover valuable organic components from or to process wastes, by-products and
chemicals. These technologies include: stainless steel and glass-lined batch
reaction, batch and continuous distillation, evaporation, adsorption and
absorption. Batch reaction represents chemical synthesis -- the combining of
two or more chemical compounds by means of heat and/or pressure. Distillation
and evaporation utilize heat to separate liquids from solids and close-boiling
liquid components from other liquids. Other technologies, such as adsorption;
absorption; and chemical treatment; neutralization and limited extraction, are
employed to remove compounds not readily separated by heat. The GNIC facility
is designed to achieve fine levels of purity, whether by reaction or separation
of various organic components, while being capable of operating under a wide
range of temperature and pressure conditions, thus maximizing the Company's
flexibility in handling a wide range of wastes, by-products and chemicals.
GNIC primarily services its customers' small to mid-size project needs on a
regional and national basis. A substantial number of GNIC's projects are
recurring and a majority of GNIC's customers are repeat customers.
Substantially all of GNIC's chemical manufacturing, recovery and processing
services are performed on a tolling basis, wherein GNIC accepts materials owned
by its customers and processes these materials for a tolling charge per unit of
incoming or outgoing weight or volume.
As its initial step into specialty chemical manufacturing, on November
14, 1995, the Company acquired the refined acetonitrile business from E. I. du
Pont de Nemours & Company ("DuPont"). Acetonitrile is recovered commercially
as a by-product stream from the manufacture of acrylonitrile, and then sold
both domestically and internationally to customers as a solvent for the
extraction of butadiene and isoprene from crude streams, the production of
pharmaceuticals, use in analytical instrumentation and the synthesis of
photochemicals. The acquisition of this product line takes advantage of the
Company's waste disposal capabilities and is readily integrated into the
existing services sold by the Company's sales force.
The GNIC facility was constructed in multiple phases and was designed
to accommodate integration of various technologies. The first phase was
completed and began operating in the first quarter of fiscal 1991, with the
construction of utilities, basic control systems, material storage, and a
ninety-foot distillation column. In the third quarter of fiscal 1992, GNIC
added a second, smaller, thirty-foot distillation column to the existing
operation. GNIC added a wiped film evaporator to its facility in the first
quarter of fiscal 1994. Also during fiscal 1994, GNIC constructed and placed
into service its first two batch reactors and made a significant number of
other modifications and enhancements to its facility. During fiscal 1995, a
third batch reactor as well as other capital improvements were added to the
facility. This series of expansions has provided it with reaction capabilities
that will enable it to manufacture and process a broad range of high
value-added chemicals, both for customers and for its own account.
Custom Chemical Manufacturing
As part of its chemical operations, GNIC provides custom chemical
manufacturing services to customers by means of organic chemical synthesis for
mainly chemical and petrochemical producers. Often, custom manufacturing
involves the production of a particular chemical for a third
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party who then uses that chemical in the production of a more complex
end-product. Customers who need custom processing services generally do so
because they lack sufficient internal capacity to satisfy product development
needs, lack certain internal production capabilities, or desire to avoid
capital expenditures.
Custom Processing
As part of its chemical operations, GNIC also provides custom chemical
processing services primarily to manufacturers of organic chemicals. In
contrast to manufacturing, which involves combining raw materials to produce a
more complex end-product, custom processing generally involves the purification
of feedstock by separating undesirable components from desirable ones to yield
an end-product that meets the customer's specifications. Customers who need
custom processing services generally do so because they lack sufficient
internal capacity to satisfy product development needs, lack certain internal
production capabilities, or desire to avoid capital expenditures. Furthermore,
custom processing typically produces by-product wastes for disposal, whereas
custom chemical manufacturing may or may not produce by-product wastes.
Recycling
As part of its chemical operation, GNIC provides recycling of organic
components from wastes and by-products. This service assists the Company's
customers in accomplishing their objectives of meeting waste minimization goals
and requirements, by recovering reusable organic components from residual
wastes and by-product streams generated by their operations in a cost-effective
manner. The streams recycled by GNIC generally otherwise require disposal as
hazardous waste, or are non-hazardous streams generated by customers who desire
to have the materials handled under the stringent requirements applicable to a
RCRA permitted facility. The Company's processing and permit capabilities and
regulatory status allow generators to minimize waste volumes, possibly claim
recycling credits or exemptions or otherwise reduce their waste disposal costs.
In particular, customers utilizing the recycling services provided by the
Company may be able to claim credits for pollution prevention efforts in the
EPA reporting requirements covering releases of waste to the environment.
Specialty Chemical Manufacturing
The Company's specialty chemical manufacturing business currently
involves the production of acetonitrile for its own account. Acetonitrile is a
clear, colorless liquid with excellent solvency properties. The product is
miscible with water and many organic solvents, but not miscible with many
saturated hydrocarbons. Acetonitrile is recovered commercially as a by-product
stream from the manufacture of acrylonitrile by the ammoxidation of propylene.
In commercial operations, typical acetonitrile availability on a recovered
basis is roughly 2.5% of acrylonitrile capacity. GNIC further processes and
purifies the acetonitrile contained within this by-product stream to purities
generally in excess of 99.9%.
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WASTE MANAGEMENT SERVICES
General
The waste management market is comprised of a broad spectrum of
treatment and disposal technologies. Prominent among them are: deepwell
disposal, landfill, incineration, disposal via fuels at cement kilns,
biological treatment, and numerous others. The Company, either directly or
indirectly, provides or arranges for the provision of virtually all of these
services to its customers.
Deepwell Disposal
The Company treats and disposes of aqueous wastes generated by its
customers and wastewaters resulting from its processing activities by injection
into its two deepwells located at its Deer Park Facility (the "Deer Park
Deepwells") and its deepwell located at its Corpus Christi Facility (the
"Corpus Deepwell"). The Company is authorized by the TNRCC to inject into them
a total of approximately 340 million gallons of wastes per year. The first
deepwell at the Deer Park Facility commenced operation in 1981. In February
1993, the Company completed construction of its second deepwell at its Deer
Park Facility, which has been in full operation since September 1993. The
Corpus Deepwell has been in operation since 1969 and has been operated by DSCCI
since its acquisition in March 1995.
The wastes generated by the Company's customers result from various
processes, including metal treating, industrial manufacturing, photo
developing, electronic manufacturing, chemical manufacturing, washwaters and
other industrial operations. In fiscal 1996, the Company disposed of
approximately 61.5 million gallons of wastes in its Deer Park Deepwells and
approximately 13.9 million gallons of wastes in its Corpus Deepwell. These
75.4 million gallons represent 22.2% of the capacity of which the Company is
permitted to dispose. Revenues from the Company's deepwell disposal operations
represented approximately 74.6% of the Company's waste management revenues.
The Company's deepwells accept aqueous waste streams, including spent
acids, landfill leachates, rinse water, process water, storm water from
contaminated containment areas, and wastewaters with heavy metals content.
Aqueous wastes resulting from the Company's chemical operation and other
processes also are injected into the Company's deepwells. The Company's
permits allow receipt of most categories of liquid wastes with the exception,
among others, of polychlorinated biphenyls ("PCBs"), dioxins, radioactive
materials and biological wastes. However, operating considerations relating to
solids content and compatibility with other streams and the injection formation
create further practical limits on wastes accepted by the Company for deepwell
injection and require the Company to treat carefully and monitor closely
materials injected into its deepwells. Prior to the injection of any wastes,
the Company's laboratory conducts extensive tests on the wastes to verify that
the materials are compatible with each other and that the resulting injectate
is compatible with the injection system.
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The site of the Company's Deer Park Deepwells was selected for its
favorable geological characteristics for deepwell injection and the absence of
any localized oil and gas production. The underground location at which waste
is discharged from the Deer Park Deepwells is over 7,200 feet below the surface
in a confined geologic formation, and is approximately three-fourths of a mile
below the nearest drinking water aquifer. The geologic formation receiving the
wastes is a vast layer of sand located between confining layers of shale and
clay.
Similarly, the site of the Company's Corpus Deepwell is one that has
favorable geological characteristics for deepwell injection and the absence of
any localized oil and gas production. The underground location at which waste
is discharged from the Corpus Deepwell is over 4,500 feet below the surface in
a confined geologic formation, and there is no overlying drinking water
aquifer. The geologic formation receiving the wastes is a vast layer of sand
located between confining layers of shale and clay.
All three deepwells are constructed of specially designed materials
and are equipped with triple-redundant protection systems to enhance their
environmental integrity. For each deepwell, a surface casing extends and is
cemented from the surface to a point along the well below the lowest level at
which potable drinking water is found. A second protective casing extends and
is cemented from the surface to the total depth of the well. Within the second
casing the injection tubing extends from the surface to the injection interval.
Between the injection tubing and the second casing lies an annulus filled with
pressurized brine. Continuous monitoring of the annulus allows for the
detection and prevention of leaks.
Both the Deer Park Deepwells' and the Corpus Deepwell's surface
facilities consist of injection pumps, associated blending and storage tanks,
filters and related transfer pumps, controls and monitoring instruments.
Storage and processing facilities are placed within coated concrete containment
structures to protect soil, groundwater and surface water from accidental
spills. In addition, the Company is required by environmental laws and
regulations to conduct constant monitoring of the deepwells' operating
parameters, including the flow, pressure, acidity, temperature and specific
gravity of the injected wastes.
In April 1990, the Company received an exemption from the EPA that
allows the Company to inject in its Deer Park Deepwells wastes that are
otherwise banned from disposal in or on the land pursuant to RCRA. The Company
obtained the exemption by demonstrating to the EPA, through extensive
examination of well construction and operating parameters, geological data,
waste stream characteristics and mathematical modeling, that there will be no
migration of hazardous substances from the zone into which the wastes are
injected for the lesser of 10,000 years or the period during which they remain
hazardous. The Company's Corpus Deepwell is subject to a similar exemption
that was obtained while the Corpus Deepwell was owned by CWM.
The Company's three deepwells give the Company the ability to provide
continuous disposal services by alternating maintenance of its deepwells and
providing back-up capacity in the event that one deepwell is required to
suspend operations due to mechanical or other difficulties.
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Treatment and Other Disposal
Fuels Blending. The Company blends organic wastes and by-products
with significant energy value, but little economically recoverable components,
into supplemental fuels. The Company processes both liquid and solid materials
received from customers in bulk or drum form in its fuels blending operations.
These materials include spent solvents, paint sludges, petrochemical
manufacturing wastes, and wastes from oil refining. The Company also blends
into fuels the organic wastes resulting from other processing activities at its
Facilities that cannot be recovered economically. The Company mixes these
materials in specially designed tanks to meet the specifications required by
users of supplemental fuels, including their requirements as to energy value
and limitations on chlorine, metals and ash content. The supplemental fuels
market is extremely competitive and the Company provides this service primarily
as an adjunct to its other services.
The liquid wastes and by-products received from customers are
transported to the Company's Facilities in bulk or in drums. The materials
received in bulk typically come from large- and medium-sized industrial
manufacturing companies while those shipped in drums come from both small
quantity generators and larger generators with numerous collection points in
their facilities.
Other Treatment. For wastes and by-products that are not economically
recoverable or suitable for fuels blending, the Company uses a variety of
treatment processes to reduce or eliminate their toxicity and contaminants or
otherwise make them less hazardous or amenable for disposal prior to final
disposition. The Company's current treatment processes fall into three broad
categories: (i) chemical and physical treatment, (ii) biological treatment
and (iii) other disposal.
Chemical and Physical Treatment. The Company receives many wastes and
by-product emulsions consisting of water, oil and various solids. The
Company breaks these mixtures into their separate components through
heating and the addition of various chemicals. The Company then
separates the components, with the oil being blended into fuels and
the water being treated biologically by a non-affiliated company or
disposed of in the Company's deepwells. The solids are filtered from
the water and disposed of in a third party's landfill or incinerator.
In addition, the Company treats various reactive and non-reactive
wastes, such as cyanides, sulfides and mercaptans, with various
chemical treatment technologies. Although chemical and physical
treatment account for only a minor part or the Company's revenues,
management believes that it is important for the Company to offer
these services to customers as part of a comprehensive array of
treatment capabilities.
Biological Treatment. Through a business relationship with a
non-affiliated company, the Company arranges for biological treatment
services for dilute aqueous organic wastes. The biological treatment
capability adds another dimension to the wide range of waste
management services provided by the Company.
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Other Disposal. As an adjunct to its other services, the
Company treats and arranges for the disposal of certain wastes
in incinerators, landfills or other disposal facilities
operated by other businesses. The Company neither owns nor
operates any landfills or incinerators.
Transportation
As an integral part of the Company's services, RTS transports wastes
and by-products for its customers. Historically, a substantial portion of the
Company's revenues contributed by its transportation services have been
attributable to transport of wastes and by-products to and from the Company's
Facilities using RTS vehicles. RTS operates a fleet consisting of 21 tractors
and 32 trailers. Liquid waste is frequently transported in bulk but may also
be transported in drums. Heavier sludges or bulk solids are transported in
sealed, roll-off containers or bulk trailers. RTS has a motor vehicle common
carrier certificate issued by the Interstate Commerce Commission that allows
the Company to transport materials in all 48 states in the continental United
States and currently has state authority from 28 states.
WORKING CAPITAL
The Company's business does not place unusual demands on working
capital. Accordingly, the Company does not carry significant amounts of
inventory at any given time. Standard credit terms are given in most cases by
the Company, and the Company obtains standard credit terms for most of its
purchases.
SEGMENT INFORMATION
The Company considers itself to be engaged in one business segment.
The Company markets its services on an integrated basis, with services in one
area often supporting or leading to services in other areas.
CYCLICALITY AND SEASONALITY
The Company's business is cyclical in nature and its operating results
may be affected by a number of factors, including the spending decisions of the
Company's customers and general economic conditions in the industries served by
the Company. Historically, the results of the Company's waste management
operations have been closely related to the level of general manufacturing
activity and volumes of chemical and petrochemical production, which are highly
cyclical. Given the relatively high fixed-cost component of the Company's
waste management operations and their substantial contribution to the Company's
earnings, relatively minor fluctuations in disposal volumes can create
significant variations in the Company's operating results. Additionally, a
decline in the chemicals or petrochemicals industries could result in a
decrease in the volume of wastes, by-products or chemicals available for
recycling, processing and disposal. These factors generally are beyond the
Company's control, and there can be no assurance that current conditions
influencing the Company's business will continue in the future. In addition,
due to a
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change in any factor affecting its business, the Company's operating results
for a particular quarter may not be indicative of its results for any
subsequent quarter or year.
MARKETING AND CUSTOMERS
The Company provides integrated chemical manufacturing, recovery,
processing, treatment and disposal services to a diverse group of customers on
a repetitive, long-term basis. The Company markets its products and services
on an integrated basis and its services in one area often support or lead to
services in other areas. The Company markets its products and services through
direct customer sales using its executive officers and a 15-person marketing
and sales staff.
The Company's customer base is diverse and includes, among others,
chemical and specialty chemical companies, petrochemical companies, industrial
companies, and other waste management firms that, in most cases, generate
wastes and by-products as part of their ongoing operations and/or require
chemical manufacturing, recovery and processing services. In fiscal 1996, the
Company handled over 2,000 different waste and by-product streams and provided
services for approximately 300 customer facilities. The Company's customers
include many Fortune 100 chemical and petrochemical producers. During fiscal
1996, The Procter & Gamble Manufacturing Company accounted for $4,079,221
(10.4%) of the Company's revenues. During fiscal 1995, The Procter & Gamble
Manufacturing Company and Elf Atochem North America, Inc. accounted for
$5,348,300 (16%) and $3,616,265 (11%), respectively, of the Company's revenues.
However, none of these customers used the Company's services pursuant to a
comprehensive contract, but rather supplied wastes, by-products or chemicals
independently from multiple facility locations, operating subsidiaries or
divisions on multiple occasions and utilized several of the Company's various
services. Historically, the Company's customers that have accounted for more
than 10% of the Company's revenues in a given year have changed from year to
year.
The Company's Facilities are strategically located in the Gulf Coast
chemical and petrochemical industrial complex, where a substantial portion of
the United States chemical and petrochemical production facilities are located
within 300 miles of the Company's Facilities. Chemical and petrochemical
companies are major sources of the Company's wastes, by-products and chemicals.
Accordingly, the Company historically has derived a significant portion of its
revenues from customers whose operations are located in the Gulf Coast region;
however, the number of the Company's customers located in other parts of the
United States has been increasing in recent years. Management believes that
the geographical expansion of the Company's customer base is due in large part
to the Company's chemical operation combined with the regulatory status of its
Facilities.
BACKLOG
The Company's accounting and operating practices dictate that the
maintenance of a backlog is not appropriate. Accordingly, the Company does not
have a recorded backlog as of June 30, 1996.
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CONTRACTING ARRANGEMENTS
The waste management services provided by the Company are typically
performed pursuant to non-exclusive agreements on a project by project basis.
The charges for the services are determined by such factors as the chemical
composition and volume or weight of the wastes, by-products or chemicals
involved, the type of transportation, processing or treatment provided and the
distance to the Company's Facilities. The Company periodically reviews and
adjusts charges for its services. Prior to entering into an agreement with a
customer for waste management services, the Company's specially trained
personnel review a waste profile sheet prepared by the customer that contains
information about the chemical composition of the waste or by-product.
Typically, a representative sample of the waste, by-product or chemical is then
analyzed in the Company's laboratory for the purpose of enabling the Company to
recommend the best method of transportation, treatment or processing or
disposal. Upon arrival at the Company's Facilities, and prior to unloading, a
representative sample of the delivered waste is tested and analyzed to confirm
that it conforms to the customer's waste profile sheet.
The Company provides its chemical manufacturing and processing
services for customers under a variety of arrangements. Substantially all of
the Company's contract manufacturing and processing services are performed on a
tolling or contract basis. In tolling agreements, the Company accepts wastes,
by-products or chemicals owned by its customers and processes these materials
for a tolling charge per pound of incoming or outgoing weight or volume. After
extensive computer simulations, laboratory tests and simulations, and technical
discussions, the Company contracts with its customers to provide finished
product meeting their specifications. The Company also accepts, for a disposal
fee, wastes and by-products from which it recovers valuable components for
resale.
Starting in January 1997, the Company will integrate acetonitrile
production, currently performed by a third party, into the Deer Park Facility.
Acetonitrile is currently sold to customers pursuant to annual supply contracts
or purchase order arrangements.
SOURCES AND AVAILABILITY OF RAW MATERIALS
For most of the custom manufacturing and processing activities of
GNIC, the customer provides the necessary raw materials, if any. In the
Company's proprietary manufacturing operation, most of the necessary raw
materials are readily available and purchased on the open market from several
different chemical producers. The crude, unrefined acetonitrile raw material
stream is provided to the Company by DuPont under a long-term contract.
COMPETITION
The markets for the Company's services are highly specialized and
competitive. The Company competes with many other firms ranging from small
local firms to large national firms. Waste management and disposal firms
include Chemical Waste Management, Inc., Laidlaw Environmental, Inc., Rollins
Environmental Services, Inc., American Ecology, Inc., Malone
11
<PAGE> 13
Services, Inc., and Safety-Kleen Corp. Chemical processing firms include
Howell Hydrocarbons & Chemicals, Inc., KMCO, Inc. and Haltermann Ltd. BP
Chemicals Inc. is the only domestic producer of acetonitrile other than the
Company. Some of the Company's competitors are more established in the
industry and have greater financial, management, marketing and other resources
than the Company. Each of the Company's competitors is able to provide one or
more of the services offered by the Company. Management believes that the
Company's RCRA Part B Permits combined with its GNIC manufacturing and
processing capabilities provides it with a significant competitive advantage
because only a few of its principal chemical competitors have on-site waste
management capabilities and commercial RCRA Part B Permits. The competitive
market also is influenced by the extent to which the companies that generate
waste seek to minimize, process and dispose of the waste themselves.
Management believes that the principal competitive factors in its
targeted markets include the level of compliance with applicable environmental
regulatory requirements, the degree of sophistication and flexibility of the
chemical manufacturing and processing services offered (including the number
and types of wastes, by-products and chemicals capable of being manufactured,
recovered, or processed), the regulatory status and location of the Company's
Facilities, and pricing. Management further believes that the Company competes
favorably with respect to these factors.
ENVIRONMENTAL REGULATION AND SAFETY MATTERS
General
The waste management industry, including the Company, is subject to
extensive and evolving federal, state and local laws and regulations, including
those relating to waste management, resource recovery, employee health and
safety, air emissions, water discharges, environmental affairs, cleanup
liability from current and past waste management and disposal practices, and
chemical products. Governmental authorities, and in some cases third parties,
have the power to enforce compliance with these legal requirements, and
violators are subject to significant civil and criminal sanctions, including
penalties and injunctions.
Both the U.S. Congress and the EPA have been considering proposals
that could significantly re-write many of the environmental requirements
governing the Company's operations and those of its customers. The EPA has
issued rules that expand the set of materials considered hazardous wastes, but
also has been considering proposals that could substantially redefine the
universe of hazardous wastes, the extent to which recycling and reclamation
(such as conducted by the Company) would be regulated, and the extent to which
treatment of certain wastes would be required prior to disposal. There can be
no assurance that the legislative or regulatory process will not have a
material adverse effect on the Company.
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<PAGE> 14
The Company's operations result in air emissions and water discharges.
Those activities are regulated under the programs established by the Federal
Clean Air Act and the Clean Water Act. The Company also generates wastes, and
transports, treats, stores or disposes of its own wastes and those of third
parties, which may be regulated as hazardous or non-hazardous. These
activities are subject to the programs established under RCRA. The Company's
deepwell disposal activities are subject to the underground injection control
("UIC") program established under the federal Safe Drinking Water Act. All of
these activities involve the handling of substances and materials that may be
considered hazardous substances in the event of releases to the environment,
and that may present safety and health considerations in the workplace.
Releases of hazardous substances and environmental cleanups and liability
generally are subject to the provisions of the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA" or
"Superfund"), and workplace conditions are subject to the Occupational Safety
and Health Act ("OSHA") and Emergency Planning and Community Right-to-Know Act
("EPCRA") programs. An analogous state program generally complements each of
these federal programs. The discussion below focuses on these principal areas
of environmental and health and safety regulation.
Hazardous Waste Management
The Federal Resource Conservation and Recovery Act established a
comprehensive regulatory framework for the management of hazardous wastes from
the time they are generated, through each stage of transportation, handling,
treatment and storage, to their ultimate disposal. The Federal statute
provides for states to adopt similar or more stringent programs, so that both
Federal and state requirements may apply to particular activities. Under RCRA
requirements, which are administered in Texas primarily by the TNRCC, before
shipping hazardous wastes to other locations, all regulated generators of
hazardous wastes must receive from the EPA a generator identification number,
must prepare shipments in accordance with detailed regulations, and must
complete a manifest identifying the material being shipped and its destination.
The transporter then must deliver the hazardous wastes in accordance with the
provisions of the manifest and only to an authorized treatment, storage or
disposal facility. Owners and operators of hazardous waste treatment, storage
and disposal facilities are required to obtain permits and to comply with
comprehensive technical standards concerning operation, closure, post-closure
care, and financial assurance as to liability to third parties and the costs of
properly closing the facility after it ceases operation.
To facilitate the processing of permit applications and the issuance
of operating permits, RCRA established a phased permitting process for
hazardous waste management facilities. Pursuant to this process, hazardous
waste treatment, storage and disposal facilities that were in existence when
RCRA regulations went into effect, and which met certain other requirements,
were deemed by operation of law to have attained "interim status". These
facilities and others that subsequently have achieved interim status due to
their handling of newly defined hazardous wastes are authorized to operate
until the issuance of a final operating permit ("Part B Permit"). Both the
Deer Park Facility and the Corpus Facility have received RCRA Part B Permits.
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<PAGE> 15
Federal statutory amendments to RCRA enacted in 1984 substantially
expanded the scope of such act's requirements by, among other things, (1)
providing for the regulation of additional hazardous wastes, (2) imposing
restrictions on the disposal of certain hazardous wastes in or on the land, (3)
prescribing more stringent standards for land disposal facilities, and (4)
requiring corrective action for environmental conditions at facilities applying
for a RCRA operating permit. These statutory restrictions have been implemented
for the most part and apply to the Company and its customers.
Pursuant to RCRA's requirements, each of the Company's four operating
subsidiaries has been issued an EPA identification number. The Company's
Facilities also currently operate under RCRA Part B Permits; the Deer Park RCRA
Part B Permit expires in August, 2002 and the Corpus RCRA Part B Permit expires
in June, 1997. The Company is in the process of renewing the Corpus RCRA Part
B Permit. Consistent with RCRA's permitting standards, the RCRA Part B Permits
require the Company to meet certain financial assurance requirements. As of
September 9, 1996, the Company has posted financial assurance for its closure
and post-closure obligations in the aggregate amount of approximately
$1,332,000 covering its Deer Park Facility. Over the next seven years, the
Company will be required to fund an additional approximately $500,000 financial
assurance obligation for its Deer Park Facility. CWM currently has in place
approximately $1,500,000 to satisfy financial assurance obligations for the
Company's Corpus Facility for the next four years. The Company also has
obtained pollution legal liability insurance covering its Facilities in the
aggregate amount of $8,000,000 per year and $4,000,000 per occurrence, subject
to a deductible of $250,000 per occurrence.
The Company's Deer Park RCRA Part B Permit also requires the Company
to proceed diligently with a RCRA Facility Investigation ("RFI") to determine
whether and to what extent any releases of hazardous wastes or constituents to
the environment have occurred from certain of the Company's units used to
manage wastes, and to take appropriate corrective action in the event of any
such release. The Company submitted a proposed RFI workplan to the TNRCC for
approval. The Company has submitted a revised RFI workplan in response to
comments from the TNRCC, but has not received any further response. Although
no determinations as to the requirement for any corrective action can be made
at this time, capital expenditures for corrective action, if required, could
have a material adverse effect on the Company.
Underground Injection
The Federal Safe Drinking Water Act aims to protect public water
supplies and drinking water and, among other things, establishes a UIC program
designed to prevent contamination of groundwaters from injection wells. The
UIC program designates five different classes of injection wells, including a
class for those wells like the three the Company operates, which inject
hazardous waste below any underground sources of drinking water in the vicinity
of the well. Pursuant to the UIC program, which is administered in Texas at
the state level under Federal authority and analogous state law by the TNRCC,
the TNRCC has issued to the Company two permits for the Deer Park Facility and
one permit for the Corpus Facility (the "UIC Permits"). The Corpus Facility's
14
<PAGE> 16
permit is a combined RCRA Part B and UIC permit. Subject to their terms, the
UIC Permits generally authorize the Company until July 1997 to dispose of
aqueous wastes through injection into two deepwells at its Deer Park Facility
and into one deepwell at its Corpus Facility. The Company has posted financial
assurance for the closure of the two deepwells at its Deer Park Facility in the
amount of $320,000, and in the amount of $160,000 for the closure of its one
deepwell at its Corpus Facility.
The land disposal restrictions adopted under the 1984 amendments to
RCRA complement the UIC program requirements and effectively prohibit the
disposal of hazardous wastes in or on the land, such as by deepwell injection,
except in limited circumstances. The RCRA land disposal regulations, however,
provide that such disposal may be allowed by the EPA under a variance or
exemption from the regulations where it can be demonstrated that there will be
no migration of hazardous constituents from the zone into which the wastes may
be injected for the lesser of 10,000 years or the period during which they
remain hazardous.
In April 1990, the EPA issued to the Company an exemption which,
subject to its terms, generally exempts the disposal of certain hazardous
wastes by injection into both of the deepwells at the Company's Deer Park
Facility from the RCRA land disposal prohibitions for seventeen years. The
Corpus Facility also has obtained a similar exemption. These exemptions are
subject to review in 2007 and 2008, respectively.
The exemptions provide that the Company's injection of hazardous
wastes is subject to various conditions, and that non-compliance with the
conditions is grounds for termination of the exemptions. One of the conditions
in the exemptions relates to the specific gravity of the injected wastestream,
and another specifies the types of wastes that may be injected. In June 1995,
the EPA granted a reissuance of the Deer Park Facility's exemption that
expanded the specific gravity parameters and approved the Company's request for
authorization to inject certain newly-designated RCRA waste codes. The Corpus
Facility's exemption was similarly reissued shortly before its transfer to the
Company. On January 16, 1995, the Deer Park Facility received authorization
from the TNRCC to increase its combined annual injection rate for its two
deepwells from 78.8 million gallons to 262.8 million gallons. On June 21,
1995, the EPA approved this increase by virtue of their approval of the Deer
Park Facility's petition reissuance.
Air Emissions
Based on requirements established by the Federal Clean Air Act, the
Company's operations are subject to various Federal and state regulatory
provisions concerning the emission of pollutants to the ambient air. These
requirements include self-implementing regulatory restrictions that apply to
new sources of air emissions or sources of certain pollutants designated as
hazardous, restrictions against sources that may cause ambient air to exceed
certain established national ambient air quality standards, and requirements
for certain facilities to obtain and comply with air emissions permits. On
July 22, 1993, the Company obtained an air permit ("Air Permit") covering its
chemical operations from the TNRCC. The Air Permit encompasses the existing
GNIC subsidiary air
15
<PAGE> 17
emissions sources that, until 1993, operated under various TNRCC permit
exemptions. Additionally, the Company's Air Permit includes an air emissions
construction permit for the planned expansions for its chemical operations.
The Corpus Facility does not have a stand-alone air emissions permit,
but its UIC/RCRA Permit contains emission control requirements.
The 1990 Amendments to the Federal Clean Air Act contain extensive
revisions that provide for increased regulation of air emissions, including
pollutants that may be considered toxic within the meaning of that statute, and
including a requirement for certain facilities to obtain a Federal air
emissions operating permit. The EPA's National Emission Standards for
Hazardous Air Pollutants ("NESHAPs"), including a recent NESHAP that regulates
emissions of various organic substances from certain chemical manufacturing
facilities, also apply to certain activities that may result in the emission of
designated hazardous air pollutants. As the Company expands its operations and
the nature and amount of materials that it handles, or as the EPA adopts
additional rules, the Company may incur additional compliance costs as to these
and other requirements, which could have a material adverse effect on the
Company.
Water Discharges
The Federal Clean Water Act's National Pollutant Discharge Elimination
System ("NPDES") program generally requires a permit for the discharge of
pollutants into surface waters. Analogous state law requires a similar permit.
The Company currently does not operate under a Federal NPDES permit or state
wastewater discharge permit because most process wastewaters generated at the
Company's facilities are managed as hazardous or non-hazardous wastes and
injected in the Company's deepwells. Through a business relationship with a
third party, the Company at times also delivers some wastewaters to the third
party's wastewater treatment facility for treatment and discharge under its
federal NPDES and state wastewater discharge permits. The EPA also adopted
regulations concerning discharges of storm water runoff. On February 8, 1993,
the Company was granted an EPA General Stormwater NPDES Permit for the Deer
Park Facility. The Corpus Facility also has an EPA General Stormwater NPDES
Permit.
Transportation of Hazardous Materials and Waste
The transportation of hazardous materials and wastes is
comprehensively regulated by the EPA under RCRA, by the Federal Department of
Transportation under the Hazardous Materials Transportation Act, and by
corresponding state laws. These regulatory programs require, among other
things, the use of manifests to control the shipment of hazardous wastes, and
special labeling, packaging and placarding for various types of hazardous
materials. The Company operates under a motor vehicle common carrier
certificate issued by the ICC that allows it to transport materials in all 48
states in the continental United States, and currently has state authority from
28 states.
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<PAGE> 18
Superfund
CERCLA authorizes the Federal government to use Federal funds to clean
up facilities at which there has been a release or threatened release of
hazardous substances, or to order persons responsible for such circumstances to
do so. Superfund also allows governmental entities and private parties that
have incurred response costs to recover them from responsible parties. The
statute has been interpreted to create strict, joint and several liability for
the costs of removal and remediation, other necessary response costs, and
damage to natural resources. Liability may be trebled if the responsible party
fails to perform a removal or remedial action ordered under Superfund.
Liability extends to generators of hazardous substances; owners and operators
of facilities, including waste transportation vehicles, from which a release of
hazardous substances occurs; persons who owned or operated such facilities at
the time the hazardous substances were disposed; persons who arranged for the
treatment or disposal of hazardous substances at, or the transportation of
hazardous substances to, a facility; and transporters who selected such
facilities for treatment or disposal of hazardous substances. Like most other
entities involved in the hazardous waste management business, and many
industrial entities, the Company generates, manages, transports and disposes at
third-party facilities, substances that could be considered hazardous
substances under Superfund. Claims under Superfund and analogous state laws
may arise against the Company in the future, although the Company is not aware
that it is currently considered a potentially responsible party for cleanup
costs or damages under Superfund.
Safety and Health
The Company's operations are subject to various regulatory
requirements that arise from federal OSHA, EPCRA, and analogous state
requirements. Among other things, OSHA and EPCRA require that certain employee
exposure to various substances in the workplace, and require that certain
information on hazardous characteristics of materials be communicated to
employees. The Company has implemented a health and safety program that
includes employee training, practices and information. The Company currently
relies for fire protection services on a combination of resources that include
an independent fire water protection system as well as portable fire
extinguishers and foam carts, and membership in the Channel Industries Mutual
Aid organization, which is a formal cooperative assistance arrangement with
other businesses in the area.
Miscellaneous
The GNIC facility is an authorized "distilled spirits plant" under
applicable regulations due to its processing of certain industrial
alcohol-containing substances. The Company has a permit from the federal
Department of the Treasury, Bureau of Alcohol, Tobacco and Firearms for such
operations.
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<PAGE> 19
Predecessor Activities
As a result of the Company's prior involvement in the manufacturing of
radioactive sources and tracers utilized in the petroleum, industrial and
medical markets, the Company has conducted decontamination activities at four
sites. The Company has completed decontamination activities at a previously
leased site in Baton Rouge, Louisiana, which has been released for general use
by the Louisiana Department of Environmental Quality. The Company also has
completed decontamination activities at its approximately 3.1 acre site in
Port Norris, New Jersey, and is waiting for the United States Nuclear
Regulatory Commission to release the site for general use. The Company has
completed decontamination activities at its approximately 4.6 acre site in
Houston, Texas and will be submitting final surveys to the Texas Department of
Health, Bureau of Radiation Control ("BRC") to have the site released for
general use. The Company has elected to use a portion of this property as a
temporary storage facility and has received permission from the BRC to use this
property in this capacity. The Company maintains an approximately 0.5 acre
site in Webster, Texas and is working on a plan to decontaminate that site.
The plan will be submitted to the BRC for approval and the Company intends to
sell this property at some point in the future.
INSURANCE
The Company carries a variety of insurance to cover certain potential
risks of its operations. The Company's insurance includes, among others, the
following: commercial general liability insurance in the aggregate amount of $2
million; products-completed operations insurance in the aggregate amount of $2
million covering various chemical products; property damage insurance in the
aggregate amount of $37.7 million, subject to a deductible of $250,000 per
occurrence (in the event of a flood or earthquake, subject to a $5 million
aggregate limit and a $250,000 deductible); physical loss or damage insurance
on certain crude petroleum, natural gas, products of natural gas and their
products in the aggregate amount of $2 million, subject to a deductible of
$20,000 per occurrence; business interruption insurance covering the Company's
plant and equipment with a combined aggregate limit of $13.1 million, subject
to a deductible of five days per occurrence for business interruption;
commercial umbrella insurance in the amount of $10 million per occurrence and
$10 million in the aggregate, subject to a $10,000 self-insured retention where
applicable; pollution legal liability insurance in the amount of $4 million for
each loss and $8 million in the aggregate, subject to a deductible of $250,000
per loss; contractors' pollution legal liability insurance in the aggregate
amount of $1 million for each loss and $1 million for all losses, subject to a
deductible of $50,000 per loss; automobile liability insurance covering the
Company's fleet of tractors and trailers in the amount of $1 million per
occurrence subject to no deductible; and discontinued products liability
insurance covering certain products manufactured by the Company while still in
the radiation-related products business of $1 million in the aggregate, subject
to a deductible of $5,000 per occurrence. Under some of its insurance
policies, the Company is insured with respect to covered liabilities on a
"claims made" basis rather than an "occurrence" basis. Under claims made
coverage, the Company will be covered only if the policy is in place on the
date the claim is asserted even if the Company carried such insurance on the
date of the event giving rise to the claim. The Company does not carry
physical damage insurance on the over-the-road exposure
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<PAGE> 20
for its fleet of tractors and trailers due to the high cost of such insurance
in relation to the value of such assets.
Although the Company has insurance covering certain of its operations,
such insurance is subject to coverage limits and deductibles, which are
generally described above. In addition, the market for liability insurance for
waste management companies has been constrained in recent years due in large
part to the high losses experienced by insurance companies from environmental
impairment claims. As a result, the premiums and deductible limits of
liability insurance may increase to the point where such insurance is
prohibitively expensive, and certain insurance may become unavailable
altogether. Such developments could cause the Company to be unable to obtain
or maintain certain insurance, which, in turn, could cause the Company not to
comply with regulatory requirements imposed on certain of its operations.
Further, the Company's failure to maintain certain specified types and amounts
of insurance would constitute an event of default under its credit agreement
with a commercial bank. In addition, although management believes that the
Company has sufficient insurance coverage, an uninsured or underinsured claim,
if successful and of sufficient magnitude, could have a material adverse effect
on the Company.
EMPLOYEES
As of July 31, 1996, the Company had 176 employees, of whom 133 are
engaged in operations, 15 in marketing and sales, 22 in administration and
accounting, and 6 in executive management. None of the Company's employees is
subject to a collective bargaining agreement. Management believes that the
Company's relationship with its employees is good.
ITEM 2. PROPERTIES.
The Company owns approximately 10.5 acres of improved land in Deer
Park, Texas and 14.3 acres in Corpus Christi, Texas. The Company conducts
permitted treatment, processing and disposal, and manufacturing activities in
Deer Park, and treatment and disposal activities in Corpus Christi. In Deer
Park, an approximately 6,000 square-foot operations building houses the
Company's treatment and disposal operations, an approximately 3,600 square-foot
operations building houses the Company's chemical operation, an approximately
30,000 square-foot administrative building houses all of the operating
subsidiaries' administrative and sales offices as well as the Company's
executive and general offices, and an approximately 10,000 square-foot
warehouse building is used for general maintenance for all of the Company's
Deer Park operations.
The Company's Corpus Facility is comprised of an approximately 2,500
square-foot administration building housing DSCCI's administration and
accounting offices, and laboratory; an approximately 800 square-foot
maintenance building housing DSCCI's operating activities; and an approximately
3,000 square-foot drum storage building.
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<PAGE> 21
The Company also owns approximately 14.8 acres of unimproved land
adjacent to the Company's Deer Park Facility. Approximately 0.25 acres of the
Company's Deer Park property is leased to DSI Transports, Inc. ("DSIT"), an
unrelated company, under a 99 year lease. Additionally, the Company has a
preferential right to purchase an approximately 9.5 acre tract adjacent to its
Deer Park Facility from DSIT in the event that (1) DSIT offers the parcel for
sale, or (2) DSIT receives a bona fide offer to purchase the parcel that it is
willing to accept. In either case, DSIT must notify the Company of the terms
and conditions of such third-party offer, and the Company has the right to
purchase the parcel from DSIT upon such terms and conditions. The Company
intends ultimately to use the parcel for the expansion of its Deer Park
Facility's operations.
The Company also owns four tracts of land not currently used in its
business: one in Houston, Texas; one in Webster, Texas; one in Port Norris, New
Jersey; and one in Baton Rouge, Louisiana.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition or results of operations. During the Company's
most recent fiscal year, the Company settled the Maxey Flats and Kelly M. Jones
litigations for de minimus amounts.
ODESSA. The State of Texas v. Raymond W. Randolph, et al. (Cause No.
93-07767), was filed on June 29, 1993 in the 201st Judicial District Court of
Travis County, Texas. The State of Texas filed a suit against the Company and
other defendants for removal, remedial action, civil penalties and response
costs associated with cleaning up two contaminated properties located in Ector
and Midland Counties, Texas. The Company has not been served and no answer date
is set. The Company has consulted with the State, but no discovery has
occurred and no trial date has been scheduled. The Company also has been
notified that the TNRCC is engaged in a related administrative action
concerning these sites. The Company is engaged in settlement discussions with
the State of Texas, and plans to vigorously defend these allegations if a
settlement is not reached. Management does not expect that the eventual
outcome of this matter will have a material adverse effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The information on page 28 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference in response to this item.
ITEM 6. SELECTED FINANCIAL DATA.
The information on page 28 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference in response to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information on pages 2 - 6 and 14 - 18 of the Company's 1996
Annual Report to Stockholders is incorporated herein by reference in response
to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information on pages 19 - 28 of the Company's 1996 Annual Report
to Stockholders is incorporated herein by reference in response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information on pages 2 - 7 of the Proxy Statement for the
Company's 1996 Annual Meeting of Stockholders is incorporated herein by
reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information on pages 10 and 11 of the Proxy Statement for the
Company's 1996 Annual Meeting of Stockholders is incorporated herein by
reference in response to this item.
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<PAGE> 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information on pages 2 and 3 of the Proxy Statement for the
Company's 1996 Annual Meeting of Stockholders is incorporated herein by
reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information on pages 2 and 3 of the Proxy Statement for the
Company's 1996 Annual Meeting of Stockholders is incorporated herein by
reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
ITEM 14 (a) (1). LIST OF FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company and its
subsidiaries are incorporated by reference in Item 8 of this report from pages
19 - 28 from the Company's 1996 Annual Report to Stockholders:
Consolidated Statements of Operations - for the fiscal years ended June 30,
1994, 1995 and 1996.
Consolidated Balance Sheets - for the fiscal years ended June 30, 1995 and
1996.
Consolidated Statements of Cash Flows - for the fiscal years ended June 30,
1994, 1995 and 1996.
Consolidated Statements of Stockholders' Equity - for the fiscal years ended
June 30, 1994, 1995 and 1996.
Notes to Consolidated Financial Statements - for the fiscal year ended June 30,
1996.
Independent Auditors' Report - for the fiscal years ended June 30, 1994, 1995
and 1996.
ITEM 14 (a) (2). FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statement schedule of the Company
and its subsidiaries is set forth as schedules attached to this report.
Schedule VIII. Condensed Financial Information of the Company's Valuation and
Qualifying Accounts
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<PAGE> 24
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
ITEM 14 (a) (3). LIST OF EXHIBITS.
The Exhibits filed as a part of this Form 10-K are listed on the
Exhibit Index immediately preceding such Exhibits.
ITEM 14 (b). REPORTS ON FORM 8-K.
Not Applicable.
<PAGE> 25
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
THE GNI GROUP, INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------- -------- ---------- ------
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts: $ 38,893 283,113 (180,351)(1) $ 141,655
----------- ------- --------- ---------
Year ended June 30, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts: $ 39,276 5,000 (5,383)(1) $ 38,893
----------- ------- -------- ---------
Year ended June 30, 1994:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts: $ 49,862 109,670 (120,256)(1) $ 39,276
----------- ------- -------- ---------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
<PAGE> 26
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 26, 1996 The GNI Group, Inc.
Registrant
/s/ Carl V Rush, Jr.
------------------------------
Carl V Rush, Jr.
President and CEO
(Principal Executive Officer)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Carl V Rush, Jr. Director, President September 26, 1996
- --------------------------- and CEO
Carl V Rush, Jr.
/s/ Titus H. Harris, III Executive Vice September 26, 1996
- --------------------------- President, CFO and
Titus H. Harris, III Secretary (Principal
Financial Officer)
/s/ Donna L. Ratliff Treasurer September 26, 1996
- --------------------------- (Principal Account-
Donna L. Ratliff ing Officer)
/s/ Titus H. Harris, Jr. Director, Chairman September 26, 1996
- ---------------------------- of the Board
Titus H. Harris, Jr.
/s/ N. E. Dudney, M.D. Director September 26, 1996
- ------------------------
N. E. Dudney, M.D.
/s/ John W. Lyons, Jr. Director September 26, 1996
- --------------------------
John W. Lyons, Jr.
/s/ F. Oliver Nicklin Director September 26, 1996
- ----------------------------
F. Oliver Nicklin
<PAGE> 27
Exhibit Index
-------------
Exhibit Page
- ------- ----
Number Exhibit Number
- ------ ------- ------
3.1 - Certificate of Incorporation of GNI Acquisition
Company, a Delaware corporation, filed August 26,
1987, Certificate of Merger of GNI Incorporated,
a Texas corporation, merging GNI Incorporated
into GNI Acquisition Company, filed October 28,
1987 (as a result of the merger, the surviving
corporation changed its name to The GNI Group,
Inc.) and Series A Preferred Stock Certificate of
the Designations and the Powers, Preferences and
Rights and the Qualifications, Limitations or
Restrictions which have not been set forth in the
Certificate of Incorporation or any Amendment
thereto. This document is incorporated by
reference to the Company's Registration Statement
No. 33-58784 on Form S-1 filed by the Company on
February 25, 1993, as amended by Amendment No. 1
to Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as
Exhibit "3.1".
3.2 - Bylaws of The GNI Group, Inc., as amended.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on
Form S-1 filed by the Company on February 25,
1993, as amended by Amendment No. 1 to Form S-1
filed by the Company on March 19, 1993, wherein
the Company filed this document as Exhibit "3.2".
4.1 - Certificate of Incorporation of GNI Acquisition
Company, a Delaware corporation, filed August 26,
1987, Certificate of Merger of GNI Incorporated,
a Texas corporation, merging all GNI Incorporated
into GNI Acquisition Company, filed October 28,
1987 (as a result of the merger, the surviving
corporation changed its name to The GNI Group,
Inc.) and Series A Preferred Stock Certificate of
the Designations and the Powers, Preferences and
Rights and the Qualifications, Limitations or
Restrictions which have not been set forth in the
Certificate of Incorporation or any Amendment
thereto. This document is incorporated by
reference to the Company's Registration Statement
No. 33-58784 on Form S-1 filed by the Company on
February 25, 1993, as amended by Amendment No. 1
to Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as
Exhibit "3.1".
4.2 - Bylaws of The GNI Group, Inc., as amended.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on
Form S-1 filed by the Company on February 25,
1993, as amended by Amendment No. 1 to Form S-1
filed by the Company on March 19, 1993, wherein
the Company filed this document as Exhibit "3.2".
<PAGE> 28
4.3 - Form of specimen certificate evidencing the Common
Stock. This document is incorporated by
reference to the Company's Registration Statement
No. 33-58784 on Form S-1 filed by the Company on
February 25, 1993, as amended by Amendment No. 1
to Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as
Exhibit "4.3".
4.4 - Letter dated March 3, 1992 to the Private Placement
Investors. This document is incorporated by reference
to the Company's Registration Statement No. 33-58784 on
Form S-1 filed by the Company on February 25, 1993, as
amended by Amendment No. 1 to Form S-1 filed by the
Company on March 19, 1993, wherein the Company filed this
document as Exhibit "4.4".
4.5 - Series A Preferred Stock Purchase Agreement dated April
22, 1988 by and among The GNI Group, Inc., Environmental
Venture Fund Limited Partnership and The Productivity
Fund. This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on Form
S-1 filed by the Company on February 25, 1993, as amended
by Amendment No. 1 to Form S-1 filed by the Company on
March 19, 1993, wherein the Company filed this document
as Exhibit "4.5".
10.1 - Gulf Nuclear, Inc. 1983 Incentive Stock Option Plan, as
amended. This document is incorporated by reference to
the Company's Registration Statement No. 33-58784 on
Form S-1 filed by the Company on February 25, 1993, as
amended by Amendment No. 1 to Form S-1 filed by the
Company on March 19, 1993, wherein the Company filed this
document as Exhibit "10.1".
10.2 - Form of The GNI Group, Inc. October 27, 1983 Incentive
Stock Option Agreement. This document is incorporated by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on February 25,
1993, as amended by Amendment No. 1 to Form S-1 filed by
the Company on March 19, 1993, wherein the Company filed
this document as Exhibit "10.2".
10.3 - The GNI Group, Inc. 1991 Stock Option Plan, as amended.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on Form S-1
filed by the Company on February 25, 1993, as amended by
Amendment No. 1 to Form S-1 filed by the Company on March
19, 1993, wherein the Company filed this document as
Exhibit "10.3".
10.4 - Form of The GNI Group, Inc. 1991 Incentive Stock Option
Agreement. This document is incorporated by reference to
the Company's Registration Statement No. 33-58784 on Form
S-1 filed by the Company on February 25, 1993, as amended
by Amendment No. 1 to Form S-1 filed by the Company
<PAGE> 29
on March 19, 1993, wherein the Company filed this
document as Exhibit "10.4".
10.5 - Letter dated March 2, 1991 from The GNI Group, Inc. to
Lawrence W. Dickinson. This document is incorporated by
reference to the Company's Registration Statement No. 33-
58784 on Form S-1 filed by the Company on February 25,
1993, as amended by Amendment No. 1 to Form S-1 filed by
the Company on March 19, 1993, wherein the Company filed
this document as Exhibit "10.5".
10.6 - The GNI Group, Inc. 401(k) Plan. This document is
incorporated by reference to the Company's Registration
Statement No. 33-58784 on Form S-1 filed by the Company
on February 25, 1993, as amended by Amendment No. 1 to
Form S-1 filed by the Company on March 19, 1993, wherein
the Company filed this document as Exhibit "10.6".
10.7 - Deed dated July 17, 1987 executed by DSI Properties,
Inc. to Disposal Systems, Inc. This document is
incorporated by reference to the Company's Registration
Statement No. 33-58784 on Form S-1 filed by the Company
on February 25, 1993, as amended by Amendment No. 1 to
Form S-1 filed by the Company on March 19, 1993, wherein
the Company filed this document as Exhibit "10.7".
10.8 - Agreement of Purchase and Sale dated April 28, 1989 by
and between GNI/Disposal Systems, Inc. and DSI
Transports, Inc. This document is incorporate d by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on February 25,
1993, as amended by Amendment No. 1 to Form S-1 filed by
the Company on March 19, 1993, wherein the Company filed
this document as Exhibit "10.8".
10.9 - Asset Purchase Agreement dated May 22, 1984 by and
among Nuclear Systems, Inc., Gamma Industries, Inc.,
Nuclear Systems Export, Inc. and Gulf Gamma, Inc. This
document is incorporated by reference to the Company's
Registration Statement No. 33-58784 on Form S-1 filed by
the Company on February 25, 1993, as amended by Amendment
No. 1 to Form S-1 filed by the Company on March 19, 1993,
wherein the Company filed this document as Exhibit
"10.9".
10.10 - Stock Purchase Agreement dated July 17, 1987 by and
between United Distribution Systems, Inc. and GNI
Incorporated. This document is incorporated by reference
to the Company's Registration Statement No. 33-58784 on
Form S-1 filed by the Company on February 25, 1993, as
amended by Amendment No. 1 to Form S-1 filed by the
Company on March 19, 1993, wherein the Company filed this
document as Exhibit "10.10".
<PAGE> 30
10.11 - Asset Purchase Agreement dated January 8, 1988 by and
among Amersham Corporation, The GNI Group, Inc. and Gamma
Industries, Inc. This document is incorporated by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on February 25,
1993, as amended by Amendment No. 1 to Form S-1 filed by
the Company on March 19, 1993, wherein the Company filed
this document as Exhibit "10.11".
10.12 - Asset Purchase Agreement dated June 17, 1988 by and
among The GNI Group, Inc., Lefco Western Acquisition
Company, Lefco Western, Inc. ("LW") and LW's shareholders,
Lefco Corporation , George Brock, John LeFevre,
Phyllis Brock and Jean Adele LeFevre. This document is
incorporated by reference to the Company's Registration
Statement No. 33-58784 on Form S-1 filed by the Company
on February 25, 1993, as amended by Amendment No. 1 to
Form S-1 filed by the Company on March 19, 1993, wherein
the Company filed this document as Exhibit "10.12".
10.13 - Stock Purchase Agreement dated September 30, 1988 by
and among The GNI Group, Inc., Gulf Nuclear Group, Inc.
("Purchaser"). The Agreement was also executed by the
sole shareholder of the Purchaser, Oxford Interests, Inc.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on Form S-1
filed by the Company on February 25, 1993, as amended by
Amendment No. 1 to Form S-1 filed by the Company on March
19, 1993, wherein the Company filed this document as
Exhibit "10.13".
10.14 - Asset Purchase Agreement dated August 14, 1989 by and
among The GNI Group, Inc., Lefco Western, Inc., Lefco
Corporation, George Brock, John LeFevre and Jean LeFevre.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on Form S-1
filed by the Company on February 25, 1993, as amended by
Amendment No. 1 to Form S-1 filed by the Company on March
19, 1993, wherein the Company filed this document as
Exhibit "10.14".
10.15 - Credit Agreement dated June 30, 1993 by and among The
GNI Group, Inc.; Disposal Systems, Inc.; Resource
Transportation Services, Inc.; Chemical Resource
Processing, Inc., and NationsBank of Texas, N.A. This
document is incorporated by reference to the Company's
1993 Annual Report on Form 10-K filed by the Company on
September 27, 1993, wherein the Company filed this
document as Exhibit "10.17".
10.16 - Construction Note dated March 15, 1990 in the face
amount of $6,621,520 executed by The GNI Group, Inc., as
Maker, payable to the order of NCNB Texas National Bank
(now NationsBank of Texas, N.A.), as Payee. This
document is incorporated by reference to the Company's
Registration
<PAGE> 31
Statement No. 33-58784 on Form S-1 filed by
the Company on February 25, 1993, as amended by Amendment
No. 1 to Form S-1 filed by the Company on March 19, 1993,
wherein the Company filed this document as Exhibit
"10.15".
10.17 - Note A dated June 30, 1993 in the face amount of
$8,000,000, executed by The GNI Group, Inc. and payable
to the order of NationsBank of Texas, N.A. This document
is incorporated by reference to the Company's 1993 Annual
Report on Form 10-K filed by the Company on September 27,
1993, wherein the Company filed this document as Exhibit
"10.17".
10.18 - Note B dated June 30, 1993 in the face amount of
$4,000,000, executed by The GNI Group, Inc. and payable
to the order of NationsBank of Texas, N.A. This document
is incorporated by reference to the Company's 1993 Annual
Report on Form 10-K filed by the Company on September 27,
1993, wherein the Company filed this document as Exhibit
"10.18".
10.19 - Letter Agreement dated January 12, 1993 by and between
The GNI Group, Inc., and MODAR, Inc. This document is
incorporated by reference to the Company's Registration
Statement No. 33-58784 on Form S-1 filed by the Company
on February 25, 1993, as amended by Amendment No. 1 to
Form S-1 filed by the Company on March 19, 1993, wherein
the Company filed this document as Exhibit "10.16".
10.20 - Amendment No. 1 to Credit Agreement dated as of March
15, 1994 by and among The GNI Group, Inc.; Disposal
Systems, Inc.; Resource Transportation Services, Inc.;
Chemical Resource Processing, Inc., and NationsBank of
Texas, N.A. This document is incorporated by reference
to the Company's 1994 Annual Report on Form 10-K filed by
the Company on September 27, 1994, wherein the Company
filed this document as Exhibit "10.20".
10.21 - Second Amendment to Credit Agreement dated as of August
31, 1994 by and among The GNI Group, Inc.; Disposal
Systems, Inc.; Resource Transportation Services, Inc.;
Chemical Resource Processing, Inc., and NationsBank of
Texas, N.A. This document is incorporated by reference to
the Company's 1994 Annual Report on Form 10-K filed by
the Company on September 27, 1994, wherein the Company
filed this document as Exhibit "10.21"
10.22 - Third Amendment to Credit Agreement dated as of
December 31, 1994 by and among The GNI Group, Inc.;
Disposal Systems, Inc.; Resource Transportation Services,
Inc.; Chemical Resource Processing, Inc., and NationsBank
of Texas, N.A. This document is incorporated by reference
to the Company's 1995 Annual Report on Form 10-K filed by
the Company on September 22, 1995, wherein the Company
filed this document as Exhibit "10.22"
<PAGE> 32
10.23 - Asset Purchase Agreement dated as of March 1, 1995 by
and among Disposal Systems of Corpus Christi, Inc.; The
GNI Group, Inc.; Disposal Systems, Inc., and Chemical
Waste Management, Inc. This document is incorporated by
reference to the Company's Current Report on Form 8-K
filed by the Company on March 24, 1995, wherein the
Company filed this document as Exhibit "2.1"
10.24 - Fourth Amendment to Credit Agreement dated as of March
3, 1995 by and among The GNI Group, Inc.; Disposal
Systems, Inc.; Resource Transportation Services, Inc.;
Chemical Resource Processing, Inc.; Disposal Systems of
Corpus Christi, Inc., and NationsBank of Texas, N.A. This
document is incorporated by reference to the Company's
1995 Annual Report on Form 10-K filed by the Company on
September 22, 1995, wherein the Company filed this
document as Exhibit "10.24"
10.25 - Fifth Amendment to Credit Agreement dated as of March
31, 1995 by and among The GNI Group, Inc.; Disposal
Systems, Inc.; Resource Transportation Services, Inc.;
Chemical Resource Processing, Inc.; Disposal Systems of
Corpus Christi, Inc., and NationsBank of Texas, N.A.
This document is incorporated by reference to the
Company's 1995 Annual Report on Form 10-K filed by the
Company on September 22, 1995, wherein the Company filed
this document as Exhibit "10.25"
11 - Statement regarding Calculation of Primary and Fully
Diluted Earnings Per Share.
13 - The GNI Group, Inc. 1996 Annual Report to Stockholders.
21 - Subsidiaries of the Company.
23 - Consent of KPMG Peat Marwick, LLP Independent Certified
Public Accountants.
<PAGE> 1
Exhibit 11
THE GNI GROUP, INC.
CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
EARNINGS (LOSS) PER COMMON
SHARE - PRIMARY:
Net income (loss) $(2,111,518) $3,150,598 $(1,997,474)
=========== ========== ===========
Shares Outstanding:
Average common shares outstanding 6,562,741 5,943,966 5,889,278
Common shares issuable with respect
to common share equivalents with a
dilutive effect:
Assumed exercise of stock options 0 (1) 52,682 0 (1)
Assumed conversion of series A
preferred stock 0 (1) 614,726 0 (1)
----------- ---------- ----------
Average common and dilutive
common shares outstanding 6,562,741 6,611,374 5,889,278
=========== ========== ===========
Net income (loss) per common
share-primary $ (0.32) $ 0.48 $ (0.34)
=========== ========== ===========
EARNINGS (LOSS) PER COMMON
SHARE - ASSUMING FULL DILUTION:
Primary shares outstanding 6,562,741 6,611,374 5,889,278
Additional common shares issuable
assuming full dilution:
Assumed exercise of stock options 0 (1) 158,681 0 (1)
------------ ---------- -----------
Average common and dilutive common
equivalent shares outstanding assuming
full dilution 6,562,741 6,770,055 5,889,278
=========== ========= =========
Net income (loss) per common
share - full dilution $ (0.32) $ 0.47 $ (0.34)
=========== ========= =========
</TABLE>
(1) No exercise assumed due to net loss
<PAGE> 1
THE GNI GROUP, INC.
1996 ANNUAL REPORT
<PAGE> 2
This page is blank with the exception of several icon
representations of lines of business.
<PAGE> 3
Environmental
Integrity
Regulatory Permits
Integrated Services
Strategic Locations
Modern Facilities
Specialty Chemicals
Custom
Manufacturing
Reaction
Distillation
Proprietary
Products
Waste Treatment
and Disposal
Emulsion Processing
Stabilization
Solidification
Fuel Blending
Chemical Recovery
Field Services
Special Projects
Emergency Response
Specialized
Tanker Fleet
Stainless Steel
Carbon Steel
Vacuum
Lined Box Vans
The Company - An Overview
GNI is a company positioned for dynamic growth well into the next century.
The aggressive diversification strategy initiated in 1990 has added substantial
value to the Company in many areas, especially in equipment capabilities,
technologies, markets, and qualified personnel. The early results of these
investments have given only a snapshot view of the full potential of their
anticipated financial rewards to the Company and our stockholders.
Built from the grassroots, GNI Chemicals' plant capabilities have grown
from relatively simple distillation in fiscal 1991 to complex custom manufacture
of high purity specialty chemicals in fiscal 1996. With the completion of
equipment installation and support facilities construction, the focus now is on
achieving higher revenues by optimizing utilization and on increasing earnings
by selectivity of manufacturing projects. The Company's revenues and earnings
were enhanced in fiscal 1996 by the acquisition of the first specialty chemical
to be manufactured and marketed as a proprietary product.
GNI's original waste management business, the deepwell disposal of aqueous
hazardous and non-hazardous waste streams, also has grown substantially during
the past five fiscal years. In response to meeting more of the customer's
requirements for "single sourcing," other important waste management services
have been systematically introduced. And by adding services for which the
existing personnel and equipment were well qualified, the capital investment was
low relative to the financial benefits accruing. A consistent performer,
Environmental Services' revenues have increased by 58 percent since the
beginning of the decade, and the operation has grown to become one of the U.S.'s
premier commercial providers of hazardous waste management services.
Each of GNI's operations is supported by Transportation Services which has
one of the largest fleets of specially lined and vacuum equipped tankers in the
Southwest. The Company's ability to provide customers with transportation of
their chemicals and wastes is an important component of GNI's industry
reputation for outstanding customer service.
1
<PAGE> 4
President's Message
Record Revenues Achieved
This year, more than a passing glance at the financial statements is
required to fully understand GNI's performance in fiscal 1996. A closer view
will reveal major accomplishments made last year that position the Company for
dynamic growth through and beyond the end of the decade.
We achieved record revenues of $39.3 million in 1996, an increase of 14.5
percent over 1995's record $34.4 million. The year ended with the highest
revenues, earnings and earnings per share for a quarter in GNI's history, and we
firmly believe that the results of the fourth quarter are indicative of the
Company's future earnings capability. As we begin fiscal 1997, the momentum that
began building at the end of last year should carry the Company forward on a
course of strong earnings.
1996 Begins on Track
1996 began well in a number of important categories. We reported solid
revenues and earnings in the first six months and this was accomplished in a
more competitive hazardous waste disposal market and during a significant
transition in GNI's chemical manufacturing business. We broadened the
operation's business base by acquiring the first specialty chemical for
manufacture and sale with GNI's own product label.
First Product Acquisition Completed
On November 14, 1995, we reached a critical goal in plans for strategic
growth. With the purchase of E.I. du Pont de Nemours & Co.'s refined
acetonitrile (ACE) business, GNI's already well established base of custom
manufacturing was enlarged in scope, and the Company also took a new place in
the specialty chemicals industry. To facilitate GNI's identification in the
industry, our wholly-owned chemical business was renamed GNI Chemicals
Corporation (GNIC).
The ACE business was immediately profitable. Based upon DuPont's
historical domestic and foreign sales, we had expected ACE to generate an annual
$6 to $7 million in revenues. We are pleased to report that after
2
<PAGE> 5
<TABLE>
<CAPTION>
Accompanying line graph:
Revenues - Fiscal 1988 - 1996
<S> <C>
88 6.2
89 12.5
90 12.7
91 19.4
92 21.5
93 24.5
94 20.7
95 34.4
96 39.3
(In millions $)
</TABLE>
<TABLE>
<CAPTION>
Accompanying bar chart:
Revenues by Operation -
Fiscal 1991 - 1996
Transportation
<S> <C>
91 3.2
92 3.4
93 3.4
94 3.3
95 4
96 4.2
<CAPTION>
Environmental Services
<S> <C>
91 12.1
92 12.9
93 12.5
94 11.8
95 17.2
96 17.1
<CAPTION>
Chemicals
<S> <C>
91 4.1
92 5.2
93 8.6
94 5.3
95 13.2
96 18.1
(In millions $)
</TABLE>
approximately nine months' experience, we remain comfortable with that revenue
baseline. This product is a solid fit with GNIC's technological strengths and
will make a smooth transition into our manufacturing plant when we bring ACE
production in-house January 1, 1997. We continue to seek out and evaluate other
specialty chemical businesses and product lines to acquire and remain
enthusiastic about the potential these opportunities represent for GNIC.
Streamlining Operations
GNIC's performance in 1996 was bolstered by ACE revenues. The year of
transition, however, was marked with making difficult decisions concerning those
customer projects that met our criteria and those that did not. The pending
plant assimilation of ACE necessitated that we redefine production strategies,
and for the short-term, these decisions tended to increase costs and decrease
plant productivity and equipment utilization.
Production levels improved dramatically in the fourth period and resulted
in the highest revenues for a quarter in GNIC's history. As we begin 1997, GNIC
continues to perform well, turning out high quality products which meet customer
specifications and schedules -- and which have good margins. With the goal of
consistently achieving and exceeding the fourth quarter's performance, we are
streamlining operations from top to bottom and being highly selective in the
type of customer specialty chemical manufacturing projects that we accept.
Stellar Performance
The personnel in all areas of GNI's Environmental Services business did an
outstanding job of generating revenues and profit for the Company in 1996.
Business across the entire hazardous waste management industry was more
competitive. This, combined with the lack of rainfall and near-drought
conditions in the Southwest, impacted revenues. A five-year historical review of
the Company's revenues from disposal of contaminated industrial rainwater
revealed the benefit of an average of $1 million per year. In fiscal 1996,
however, only a mere fraction of this amount was generated.
3
<PAGE> 6
Photograph which includes:
Titus H. Harris, Jr., Chairman of the Board
Carl V Rush, Jr., President and Chief Executive Officer
Cindy Dodds, Division Controller
Jim Robbins, Environmental Manager
4
<PAGE> 7
These conditions were offset by additional revenues from our Corpus
Christi, Texas facility, for which there were no comparable revenues in the
first nine months of fiscal 1995. This facility, primarily dedicated to deepwell
disposal, was acquired in March of 1995. Additionally, the market for our
special projects and field services grew substantially in 1996 due to the
satisfaction of many repeat customers who awarded new and expanded projects.
Revenues from Transportation Services were up slightly, benefiting primarily
from service to the Corpus Christi facility and increased business from GNIC
customers.
Accounting Rule Offsets Positive Earnings
GNI adopted FASB Statement No. 121 in the third quarter of fiscal 1996.
This statement, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," was adopted prospectively as of January 1,
1996. It resulted in a non-cash pretax charge of approximately $6.7 million, or
an after-tax charge of approximately $4.4 million, or $.68 per share.
Coincident with the adoption of FASB No. 121, the Company incurred a number of
one-time charges and expenses during the third quarter. On an adjusted basis,
without regard to FASB No. 121 and the one-time charges, earnings per share
would have been approximately $.51 for the year.
Cost Control Effectiveness
Stringent control measures continued to keep costs and expenses in check.
Excluding the previously mentioned one-time costs and expenses incurred during
the third quarter of fiscal 1996, selling, general and administrative expenses
were 11.2 percent of revenues, down from 11.9 percent in 1995. Adjusted cost of
services was 60.2 percent of revenues versus 59.1 percent, for 1996 and 1995,
respectively. The small increase in 1996 was primarily attributable to the
acquisition of the ACE business. ACE production costs and the Company's cost of
services are expected to decline to more typical levels when GNIC brings
production on-site in early calendar 1997 versus the current use of a
third-party manufacturer.
5
<PAGE> 8
The Company's capital expenditures were approximately $6.5 million and
$5.8 million respectively in 1996 and 1995. Our budget plan for fiscal 1997
calls for capital expenditures under $4 million, limited to normal and usual
maintenance requirements. The focus has shifted from constructing to growing and
from investing to bottomline return.
Optimizing Assets
GNI has always been a dynamic company with excellent people -- continually
growing and diversifying by leveraging the Company's inherent strengths. We set
ambitious objectives at the beginning of the decade when we decided to grow
beyond the bounds of hazardous waste management and enter the chemical
processing business and subsequently the specialty chemical manufacturing
business. The degree of our success can be measured by the compound annual
growth rate of 20.8 percent in revenues and 63.6 percent (before FASB No. 121)
in earnings.
Not every objective was met in the past six years, but as a developing
company GNI has come a long way from revenues of $12.6 million and earnings of
$400,000 in 1990. GNI has a lot farther to go with an entirely new set of goals.
We are confident that by taking full advantage of all of our assets and by
adding more as we go, the road will be smoother and on a progressively rising
incline.
Sincerely,
(SIGNATURE)
Carl V Rush, Jr.
President and Chief Executive Officer
September 20, 1996
6
<PAGE> 9
<TABLE>
<CAPTION>
Accompanying line graph:
Revenues, Cost of Services and
S,G&A - Fiscal 1991 - 1996
Revenues
<S> <C>
91 19.4
92 21.5
93 24.5
94 20.7
95 34.4
96 39.3
<CAPTION>
Cost of sales
<S> <C>
91 12.3
92 12.8
93 14.3
94 15.8
95 20.3
96 24.7
<CAPTION>
S, G & A
<S> <C>
91 3.6
92 4.1
93 4
94 4.6
95 4.1
96 5.1
(in millions $)
</TABLE>
Accompanying pie chart: Source of
Revenues - Fiscal 1996
GNI Chemicals $18,100,000
Environmental Services $17,100,000
Transportation Services $4,200,000
Review of Operations - GNI Chemicals
Acquisition Fuels Growth
Without question, the most exciting event in fiscal 1996 was the
acquisition of the first specialty chemical for manufacture and sale with GNI
Chemicals' (GNIC) own product label. In November 1995, the company acquired
DuPont's refined acetonitrile (ACE) business which, on an annual basis, will
increase GNIC's revenues by an estimated $6 to $7 million. Experience gained
from our first seven months of ACE sales substantiates this estimate, and we are
working to increase the business by identifying new applications and exploring
international market opportunities.
Revenues Quadrupled
Returns are coming in from the Company's substantial investment in the
conception, construction and expansions of GNI's chemical manufacturing plant
over the period fiscal 1990-1996. Since beginning commercial production on
July 1, 1990, GNIC's revenues more than quadrupled, increasing from $4.1 million
in fiscal 1991 to $18.1 million in 1996. For the year just ended, the
operation's revenues were up 37 percent over 1995's and accounted for 46 percent
of the Company's total revenues. Contributions to earnings, however, have not
increased at the same rate. Initially, putting an entirely new plant into
commercial production and achieving projected performance levels influenced
earnings. Similarly, the addition of reaction equipment -- a totally different
process -- required time to smooth out procedures and develop the business.
With the addition of the ACE product line, and based upon current conditions
in the industries we serve, earnings growth is expected to accelerate.
GNIC's financial results in the fourth quarter began to reveal the
substantial operating leverage we know is achievable. In the future, by
continuing to employ stringent control of GNIC's operating costs, each margin
point increase will benefit the Company's net income.
We recently implemented a project management program that narrows our
marketing focus and streamlines the way projects are taken from concept to
production. It also allows for the recovery of more of the process design and
development stage costs. The
7
<PAGE> 10
Photo which includes GNI Chemicals personnel:
David Swallow, Executive Vice President and General Manager
Christina Ridge, Sales Engineer
Dave MacDonald, Development Engineer
Kelly Dworaczyk, Plant Manager
8
<PAGE> 11
program should result in significantly improved margins and more consistent
financial performance from GNIC. The program's progression of steps includes
* Selectivity of projects
* Increased equipment utilization * Higher productivity
* Lower operating costs * Efficiency in process design
* Faster equipment turnaround * Less equipment maintenance
* Better margins
Project Criteria Implemented
The transition from a less restrictive project marketing focus influenced
revenues and earnings in the short-term, but the outcome will be a considerably
strengthened GNIC. The experience gained over the past two years from
successfully manufacturing a broad range of specialty chemicals for many of the
Fortune 100 companies further confirmed GNIC's position in the specialty
chemical industry. Customers who are developing entirely new products have been
particularly attracted to GNIC. The technical capabilities and production
capacity of our processing equipment, coupled with the high technical ability
of our process design and development personnel are particularly suited to
this market -- a market with considerable room for growth.
We believe, however, that the best opportunity for growth is in capturing
more long-term, high value-added contract manufacturing business -- and by
acquiring additional chemical businesses or products for GNIC's own account.
Merging Molecules
From the outset, our chemical plant was designed for growth. And grow, it
has -- from the initial and relatively simple practice of separating chemical
components via distillation -- to the practice of building complex organic
chemical molecules via multistage synthesis (or reaction). The addition
of stainless steel and glass lined reactor systems as well as a completely
outfitted process design and development laboratory provided us with the means
to enter the high value specialty chemical manufacturing market. Customers
increasingly take advantage of our plant's integrated process capability.
Their custom manufacturing campaigns often involve complex processes which
utilize several pieces of equipment in different configurations. And when
coupled with our waste handling abilities, GNIC has a unique place in the
market.
9
<PAGE> 12
Photo which includes Environmental Services personnel:
Rick Bashlor, Maintenance Manager
Warren Norris, Sales Manager
Frank Harris, Director of Operations
Zelner Houchin, Manager, Corpus Christi, Texas facility
10
<PAGE> 13
Environmental Services and Transportation Services
Strategy Reaps New Customers
The Environmental Services business accounted for slightly more than 43
percent of GNI's revenues in fiscal 1996, or just over $17 million. This
business encompasses a broad range of integrated hazardous waste management
services for which GNI is uniquely qualified, and it has been a consistent
performer throughout the decade. Since fiscal 1990, this operation's revenues
have increased 58 percent and geographical market reach has more than doubled.
Environmental Services' revenues remained relatively unchanged in 1996 compared
with 1995 despite the anomaly of a significant decrease in volumes of
contaminated industrial rainwater disposal due to drought or near drought
conditions over most of the southwest U.S.
During 1996 GNI's two Texas waste management facilities, Deer Park and
Corpus Christi, handled waste from 24 of the 48 contiguous states and counted
many of the Fortune 100 chemical and petrochemical companies across the nation
as customers. The business growth has emanated from the success of a multifold
plan to penetrate more of the vast U.S. waste management market for new
customers and to broaden the range of services which would meet the changing
needs of current customers. The positive financial impact of the program is
expected to be substantial in the long-term.
Giving Customers Options
Included in the Company's acquisition of the Corpus Christi disposal
facility near the end of fiscal 1995 was a railcar loading/unloading site. This
allows us to provide secure transport of customer wastes direct to GNI by
railcar or over-the-road using our fleet of power units and specially lined
tankers. Our ability to offer customers integrated services that include
transportation has consistently given the Company a competitive edge in the
market. Revenues from the transportation operation were up slightly in 1996 from
1995, primarily from business generated by GNIC and the Corpus Christi facility.
Flexibility Promotes Competitiveness
We continually monitor and analyze our customers' plant processes and
industry trends for the products they manufacture. This is essential in
identify-
11
<PAGE> 14
ing shifts, and sometimes reversals, as early as possible in order that we can
alter our marketing strategies and services accordingly. Operational flex-
ibility and customer responsiveness are two of the principal reasons that GNI
has been able to retain its place among the recognized leaders in the hazardous
management industry.
Proactive Regulatory Compliance
A record of outstanding regulatory compliance and environmental integrity
is the third principal reason that GNI is so often the vendor of choice for
customers who, by federal mandate, remain forever accountable for their
hazardous wastes no matter what its disposition (otherwise known as "cradle to
grave" accountability). Management's highest commitment is to proactive
regulatory compliance and to the health and safety of personnel. During fiscal
1996 approximately $1 million was spent on capital improvements in and
maintenance of our waste treatment and processing facilities. A substantial
amount of this was used to meet new far-reaching air emission control
regulations which are expected to become effective in the near future.
Remaining the Vendor of Choice
The hazardous waste management industry continues to undergo consolidation
as some of the larger companies divest that part of their business and as
smaller companies are impacted by the cost of complying with new government
regulations and obtaining insurance coverage. This trend is providing GNI with
interesting growth opportunities, but it is also putting some downward pressure
on pricing. We have been able to hold our own in a challenging market by
maintaining an unmatched level of customer support and service.
Price is not always the factor that decides who gets the business, but we
still focus on reducing the customer's waste disposal costs in every possible
way. This often comes as a surprise to new customers, but we want the long-term
business. Although the industry does not embrace Customer Alliances or
Partnering as other industries do, GNI has been effective in establishing strong
customer relationships which result in a large amount of repeat business and
additional business from more than one segment of the customer's multifaceted
plant operations.
12
<PAGE> 15
Financial Review
Contents
Financial Analysis 14
Quarterly Financial Data 18
Financial Statements 19
Notes to Financial Statements 23
Independent Auditors' Report 27
Quarterly Stock Data 28
Five-Year Financial Data 28
Officers and Directors 29
Corporate Information 29
13
<PAGE> 16
Financial Analysis
- --------------------------------------------------------------------------------
Results of Operations
Fiscal 1996 Compared with Fiscal 1995
Revenues
Revenues for fiscal 1996 were $39,338,642 as compared with $34,358,725 for
fiscal 1995, an increase of $4,979,917, or 14.5%. This increase was primarily
attributable to an increase in revenues from the Company's chemical
manufacturing and processing subsidiary, GNI Chemicals Corporation ("GNIC").
Revenues from GNIC's operation for fiscal 1996 were approximately $18,065,000 as
compared to approximately $13,195,000 for fiscal 1995, an increase of
approximately 36.9%. This increase was primarily attributable to two factors:
(i) the specialty chemical sales derived from the acquisition of E.I. du Pont de
Nemours & Company's ("DuPont") refined acetonitrile business, and (ii) an
increase in manufacturing and processing revenues resulting from additional
processing equipment that was placed into service during the third quarter of
fiscal 1995. The Company's remaining revenue increased slightly from fiscal 1995
to fiscal 1996, approximately 0.5%. Deepwell disposal revenues increased
approximately 6.2% from fiscal 1995 to fiscal 1996, benefiting from the
acquisition of a second deepwell disposal facility located in Corpus Christi,
Texas during the third quarter of fiscal 1995. The increase in deepwell disposal
revenues was achieved in spite of the near-drought conditions in much of the
Company's market area which reduced demand for deepwell disposal of rainfall
related wastewater. The increase in deepwell disposal services contributed to an
increase in the Company's transportation services of approximately 4.7% from
fiscal 1995 to fiscal 1996. The Company's other treatment and disposal business
experienced a decline in revenues of approximately 15.8% from fiscal 1995 to
fiscal 1996 primarily the result of stronger field services and special projects
revenues generated in fiscal 1995 as compared with fiscal 1996. Field service
and special projects business is sporadic in nature and therefore revenue
generation in this component of other treatment and disposal can vary from year
to year.
Cost of Services
Cost of services increased as a percent of revenues from 59.1% in fiscal 1995 to
62.7% in fiscal 1996. In absolute dollar terms, cost of services increased by
approximately $4,343,000 in support of approximately $4,980,000 in additional
revenues. This increase was primarily attributable to three factors: (i) an
increase in the Company's GNIC cost of services, which was primarily the result
of the additional costs associated with the operating equipment placed in
service during fiscal 1995; (ii) an increase in the Company's deepwell disposal
cost of services for the last quarter of fiscal 1995 as compared with all of
fiscal 1996 as a result of the second deepwell disposal facility which was
acquired during the third quarter of fiscal 1995; and (iii) the Company recorded
a number of one-time charges and expenses during the third quarter of fiscal
1996 with no such charges and expenses having been recorded in fiscal 1995.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expenses increased as a percent of
revenues, from 11.9% in fiscal 1995 to 12.9% in fiscal 1996. In absolute
dollars, SG&A expenses increased 23.6% from fiscal 1995 to fiscal 1996. This
increase was primarily attributable to a number of one-time charges and expenses
incurred by the Company during the third quarter of fiscal 1996 with no such
charges and expenses having been recorded in fiscal 1995.
Depreciation and Amortization
Depreciation and Amortization expenses represented 12.3% of revenues in fiscal
1996 compared with 11.9% of revenues in fiscal 1995. In absolute dollars,
Depreciation and Amortization expenses increased approximately $718,000 from
fiscal 1995 to fiscal 1996 primarily due to (i) the depreciation associated with
capital equipment placed into service during fiscal 1995, and (ii) two
acquisitions made by the Company--one in late fiscal 1995 and the other during
fiscal 1996.
Adoption of FASB No. 121
Effective January 1, 1996, the Company adopted FASB No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ",
which requires that an impairment loss be recognized whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. As a result of the adoption of FASB No. 121, the Company recognized
a non-cash pretax charge against earnings of approximately $6.7 million.
14
<PAGE> 17
Net Interest Expense
Net interest expense was higher for fiscal 1996 compared to fiscal 1995. This
increase was primarily attributable to higher principal balances on the
Company's indebtedness and a higher rate of interest on that indebtedness during
fiscal 1996. The increased level of indebtedness was associated with (i) capital
improvements made by the Company to its facilities during fiscal 1996, and (ii)
acquisitions of the Corpus Christi, Texas treatment, storage and disposal
facility, and a specialty chemical product business.
Net Income (Loss)
The Company had a net loss of $2,111,518, or a loss of $.32 per share, in fiscal
1996 compared with net income of $3,150,598, or $.47 per share, in fiscal 1995.
The Company's adoption of FASB No. 121 impacted the net loss figure for fiscal
1996 by approximately $4.4 million after tax, or approximately $.67 per share.
Fiscal 1995 Compared with Fiscal 1994
Revenues
Revenues for fiscal 1995 were $34,358,725 as compared to $20,702,369 for fiscal
1994, an increase of $13,656,356, or 66.0%. This increase in revenues was
primarily attributable to an increase in revenues from the Company's GNIC
operation. The Company's revenues from its GNIC operation for fiscal 1995 were
approximately $13,195,000 as compared to approximately $5,255,000 for fiscal
1994, an increase of approximately 151.1%. This increase was primarily
attributable to the increase in revenues derived from the additional processing
equipment that was placed into service during the last quarter of fiscal 1994
and the third quarter of fiscal 1995, combined with the underutilization of the
GNIC plant during approximately the last ten months of fiscal 1994. The
continued underutilization in fiscal 1994 was primarily a result of the lead
time required to develop and efficiently execute on replacement business for the
capacity committed to two major projects that were unexpectedly canceled during
the first quarter of fiscal 1994. The Company's remaining revenue increased from
fiscal 1994 to fiscal 1995, an increase of approximately 37.0%. The Company's
deepwell disposal revenues benefited from the acquisition of a second deepwell
disposal facility located in Corpus Christi, Texas during the third quarter of
fiscal 1995. In addition to the acquisition, deepwell disposal revenues at the
Company's Deer Park, Texas facility benefited from an overall increase of 39% in
volume received, primarily the result of additional waste streams from certain
new customers. This increase in deepwell disposal services contributed to an
increase in demand for the Company's other treatment and disposal services and
transportation services from existing customers.
Cost of Services
Cost of services decreased as a percent of revenues from 76.2% in fiscal 1994 to
59.1% in fiscal 1995. In absolute dollar terms, cost of services increased by
approximately $4,536,000 in support of approximately $13,656,000 in additional
revenues. The increase in cost of services was primarily attributable to an
increase in the Company's GNIC cost of services, which was primarily the result
of the additional costs associated with the operating equipment placed in
service at the end of fiscal 1994 and during fiscal 1995. Also, the Company's
deepwell disposal cost of services increased in fiscal 1995 as compared with
fiscal 1994, primarily as a result of the second deepwell disposal facility
which was acquired during the third quarter of fiscal 1995.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expenses decreased as a percent of
revenues, from 22.3% in fiscal 1994 to 11.9% in fiscal 1995. The decrease in
SG&A expenses as a percent of revenues was primarily a result of higher revenues
for fiscal 1995, in conjunction with a moderate dollar decrease in these
expenses. In absolute dollars, SG&A expenses decreased 11.2% from fiscal 1994 to
fiscal 1995. This decrease was primarily attributable to factors present in
fiscal 1994, but not in fiscal 1995: (i) personnel expenses associated with the
departure of the Company's former Chief Operating Officer, and (ii) increased
legal expenses associated primarily with the Company's involvement in several
nuisance lawsuits.
Depreciation and Amortization
Depreciation and Amortization expenses represented 11.9% of revenues in fiscal
1995 as compared to 14.8% of revenues in fiscal 1994. In absolute dollars,
Depreciation and Amortization expenses increased approximately 34.2% from fiscal
1994 to fiscal 1995 primarily due to the depreciation associated with capital
equipment placed into service during fiscal 1995.
15
<PAGE> 18
Net Interest Expense
Net interest expense was higher for fiscal 1995 compared to fiscal 1994. This
increase was primarily attributable to a higher level of indebtedness associated
with the capital expansion of the Company's facilities during fiscal 1995 as
compared with fiscal 1994. Also, additional levels of indebtedness were incurred
during fiscal 1995 in connection with the Company's acquisition of the
treatment, storage and disposal facility located in Corpus Christi, Texas.
Net Income (Loss)
The Company had net income of $3,150,598, or $.47 per share, in fiscal 1995
compared with a net loss of $1,997,474, or a loss of $.34 per share, in fiscal
1994.
Liquidity and Capital Resources
The Company continuously evaluates opportunities for growth and development.
Management expects that future revenue growth will be dependent upon a
corresponding increase in the fixed assets and working capital used by the
Company. Historically, the Company has financed its growth through funds
generated from operations, borrowings under various credit arrangements with a
commercial bank, and the private placements of shares of Common Stock and Series
A Preferred Stock. As of March 26, 1993, the Company effected the public
offering of 1,214,000 shares of common stock at a price of $8.25 per share,
resulting in proceeds of approximately $9.5 million before the deduction of
offering costs. The proceeds were used to construct certain additions to the
Company's GNIC facility, to reduce indebtedness, and for general corporate
purposes. Management believes that the Company's existing cash balances, funds
generated from operations, and borrowings under available credit arrangements
will be sufficient to meet the Company's current capital requirements. In order
to finance the future growth and development of the Company, the Company will
require, and from time to time evaluates alternative sources of, additional
capital.
Effective as of June 30, 1993, the Company amended and restated its credit
agreement ("Credit Agreement") with a commercial bank to provide for the
addition of an $8,000,000 advancing equipment line of credit ("Equipment Line").
The Credit Agreement includes a $6,621,520 term loan ("Term Loan") and a
$4,000,000 revolving credit line ("Revolver"). The credit facility is
collateralized by substantially all of the assets of the Company and its
subsidiaries, including the stock of its subsidiaries.
The Credit Agreement restricts the Company from incurring additional
indebtedness, prohibits the Company from making any changes to its capital
structure or dividend payments without prior approval of the bank, requires the
maintenance of minimum working capital, minimum tangible net worth, and maximum
debt-to-tangible net worth and debt coverage ratios, and contains other
provisions and restrictive covenants that management believes are customary.
The Equipment Line has been utilized to fund capital expenditures of the
Company. Effective as of October 1, 1994, the Equipment Line bears an interest
rate of either 0.25% above the bank's prime rate of interest or 2.75% above
LIBOR, at the Company's election. The Equipment Line had a two year advancing
period through October 31, 1995. As provided for in the Credit Agreement, on
October 31, 1994 funds advanced over the previous 12 months converted to a
four-year term loan. Upon its conversion to a term loan, quarterly principal
payments of $250,000 plus interest are required, with a balloon at maturity. At
the time of conversion and thereafter, the Company has the option to fix the
interest rate. As of June 30, 1996, the unpaid principal balance outstanding on
the Equipment Line was $6,250,000.
The Term Loan represents borrowings that were originally used by the Company to
finance the construction of the Company's GNIC facility, which was completed in
the first quarter of fiscal 1991. The Term Loan bears interest at a fixed rate
of 8.44%, matures December 1, 1998 and requires quarterly principal payments of
$173,913. The unpaid principal balance of the Term Loan totaled $1,739,130 at
June 30, 1996.
Effective as of March 3, 1995, the bank and the Company amended the Credit
Agreement to provide an additional $2,000,000 in term debt ("Acquisition Line")
that was used for the acquisition of Chemical Waste Management, Inc.'s ("CWM")
waste treatment, storage and disposal facility located in Corpus Christi,
16
<PAGE> 19
Texas. The Acquisition Line has a five-year maturity and bears an interest rate
of either 0.25% above the bank's prime rate of interest or 2.75% above LIBOR, at
the Company's election. Quarterly principal payments of $200,000 plus interest
were required for the first year, then quarterly payments of $75,000 plus
interest are required until maturity. As of June 30, 1996, the unpaid principal
balance outstanding on the Acquisition Line was $1,125,000.
In connection with the acquisition of its Corpus Christi, Texas facility, CWM
took back a note in the principal amount of $2,000,000 as part of the
consideration ("CWM Note"). The CWM Note has a maturity of five years and bears
interest at the rate of 10% per year. The first year of the CWM Note is
interest-only; thereafter, quarterly principal payments of $125,000 plus accrued
interest are required until maturity. As of June 30, 1996, the unpaid principal
balance outstanding on the CWM Note was $1,875,000.
Effective as of November 3, 1995, the bank and the Company amended the Credit
Agreement (i) to extend the maturity date of the Revolver to October 31, 1997
and (ii) to increase the total commitment amount of the Revolver from $4,000,000
to $10,000,000. The Revolver is used by the Company for working capital and
other general corporate purposes. The amount drawn under the Revolver may not
exceed a borrowing base limitation equal to the sum of (a) 80% of the Company's
consolidated accounts receivable plus (b) the lesser of 50% of the Company's
product inventory, or $500,000; plus (c) the flat amount of $3,250,000 until
April 30, 1996 when such amount was reduced by $200,000 per quarter, and then
reduced to $0 beginning December 31, 1996 and thereafter. Effective as of
October 1, 1994, advances under the Revolver bear interest at either the bank's
prime rate of interest or 2.75% above LIBOR, at the Company's election. As of
June 30, 1996, the Company has an unpaid principal balance outstanding on the
Revolver of $8,200,000.
For fiscal 1996 the Company provided $8,161,000 in net cash from operations
compared with approximately $6,688,000 for fiscal 1995. This increase of
approximately $1,473,000 was attributable to several factors, some of which were
off-setting: (i) a net loss in fiscal 1996 compared with net income in fiscal
1995, (ii) the non-cash FASB No. 121 recorded in fiscal 1996, (iii) a
significant decrease in deferred taxes in fiscal 1996 compared with an increase
for fiscal 1995, (iv) an increase in inventory for fiscal 1996 compared with a
decrease for fiscal 1995, (v) a decrease in a federal income tax receivable in
fiscal 1995 with no such receivable in fiscal 1996, (vi) an increase in accounts
payable for fiscal 1996 compared with a slight decrease for fiscal 1995, and
(vii) an increase in accrued liabilities for fiscal 1996 compared with a
decrease for fiscal 1995.
During fiscal 1996 and fiscal 1995, the Company's capital expenditures were
$6,455,000 and $5,827,000, respectively. Capital expenditures for fixed assets
for both fiscal 1996 and fiscal 1995 primarily consisted of additional
processing equipment at the Company's GNIC facility and general improvements to
the Company's treatment, storage and disposal facility.
For fiscal 1996, the Company used $1,118,000 in financing activities compared
with approximately $165,000 in fiscal 1995. For fiscal 1996, the largest source
of financing was the net cash proceeds of $1,350,000 from advances on the
Company's revolving bank line. Also in fiscal 1996, net long-term debt and notes
payable were reduced by approximately $3,429,000. For fiscal 1995, the largest
source of financing was the net cash proceeds of $1,500,000 from advances on the
Company's revolving bank line. Also in fiscal 1995, net long-term debt and notes
payable were reduced by approximately $2,479,000.
Accounts receivable increased approximately $908,000 from fiscal 1995 to fiscal
1996, primarily as a result of the Company's higher revenues during fiscal 1996
compared with fiscal 1995. Inventory increased by approximately $575,000 from
fiscal 1995 to fiscal 1996 as a result of finished product associated with the
recently acquired refined acetonitrile business not present at the end of fiscal
1995. Net fixed assets in 1996 decreased by approximately $3,427,000 from 1995,
primarily as the result of FASB No. 121. The Current and Deferred long-term tax
assets for fiscal 1996 are both primarily the result of the adoption of FASB No.
121. Contract rights of $3,938,751 in fiscal 1996 were primarily the result of
the specialty chemical product acquisition from DuPont in fiscal 1996.
17
<PAGE> 20
Accounts payable in 1996 were approximately $2,022,000 higher than in 1995,
primarily resulting from the increased level of capital expenditures and the
14.5% increase in revenues.
Dividend Policy
The Company does not pay any cash dividends on its common stock and does not
have any plans to do so in the future. The Company intends to continue a policy
of retaining income for use in its business.
Statement No. 123
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock Based Compensation" in October 1995, which establishes financial
accounting and reporting standards for stock based on employee compensation
plans including, stock purchase plans, stock options, restricted stock and stock
appreciation rights. The Company has elected to continue accounting for stock
based on compensation under Accounting Principles Board Opinion No. 25. The
disclosure requirements of SFAS No. 123 will be effective for the Company's
financial statements begining July 1, 1996. Management does not believe that the
implementation of SFAS No. 123 will have a material effect on its financial
statements.
Quarterly Financial Data (Unaudited) THE GNI GROUP, INC.
- --------------------------------------------------------------------------------
Summarized quarterly financial data for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Fiscal 1996 Quarters First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $9,461,639 $9,267,394 $ 9,943,422 $10,666,187
Operating income (loss) 1,535,345 1,427,924 (7,059,857)(a) 2,186,907
Net income (loss) 785,564 690,276 (4,929,855) 1,342,497
Net income (loss) per share $ .12 $ .10 $ (.75) $ .20
(a)Includes a $6,708,791 asset impairment loss.
<CAPTION>
Fiscal 1995 Quarters First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $7,621,812 $8,905,240 $ 8,492,103 $ 9,339,570
Operating income 713,693 1,639,354 1,617,007 1,877,453
Net income 270,567 864,076 913,783 1,102,172
Net income per share $ .04 $ .13 $ .16 $ .14
</TABLE>
Income (loss) per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly income (loss) per share in 1996
does not equal the total loss per share because of the computation of weighted
average shares for each of the quarters as compared with the weighted average
shares calculation for the full year.
18
<PAGE> 21
Consolidated Balance Sheets THE GNI GROUP, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and time deposits $ 1,122,941 $ 852,370
Accounts receivable, less allowance of approximately
$142,000 in 1996 and $39,000 in 1995 6,508,680 5,601,191
Inventory 661,233 86,388
Deferred tax asset - current 400,701 -
Prepaid expenses and other assets 969,762 596,146
- ---------------------------------------------------------------------------------------------------------
Total current assets 9,663,317 7,136,095
- ---------------------------------------------------------------------------------------------------------
Property, plant and equipment 43,829,344 47,036,702
Less accumulated depreciation (11,682,703) (11,462,567)
- ---------------------------------------------------------------------------------------------------------
Net property, plant and equipment 32,146,641 35,574,135
- ---------------------------------------------------------------------------------------------------------
Contract rights 3,938,751 -
Restricted time deposits 1,495,681 1,350,071
Deferred tax asset 222,309 -
Other assets 1,611,519 2,018,575
- ---------------------------------------------------------------------------------------------------------
Total assets $ 49,078,218 $ 46,078,876
- ---------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,887,395 $ 1,865,210
Accrued liabilities 2,599,503 1,479,563
Federal income taxes payable 549,256 553,036
Current portion of long-term debt 2,620,652 2,620,652
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 9,656,806 6,518,461
- ---------------------------------------------------------------------------------------------------------
Accrued liability 518,804 -
Long-term debt, less current portion 16,568,478 13,864,130
Deferred income taxes - 1,278,639
- ---------------------------------------------------------------------------------------------------------
Stockholders' equity:
Non-redeemable convertible, Series A preferred stock, $.01 par value.
Authorized 1,000,000 shares; issued 0 shares in 1996 and 234,375 in 1995 - 2,344
Common stock, $.01 par value.
Authorized 20,000,000 shares; issued 6,605,876 shares in 1996 and
6,130,126 shares in 1995. 66,059 61,300
Additional paid-in capital 19,251,048 19,225,461
Retained earnings 3,064,029 5,175,547
Less cost of treasury stock (40,184 shares) (47,006) (47,006)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 22,334,130 24,417,646
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 49,078,218 $ 46,078,876
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
19
<PAGE> 22
Consolidated Statements of Operations THE GNI GROUP, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $39,338,642 $34,358,725 $20,702,369
Costs and expenses:
Cost of services 24,661,876 20,319,147 15,783,442
Selling, general and administrative 5,057,467 4,090,178 4,608,460
Depreciation and amortization 4,820,189 4,101,893 3,056,467
Asset impairment 6,708,791 - -
- ----------------------------------------------------------------------------------------------------------
Total costs and expenses 41,248,323 28,511,218 23,448,369
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) (1,909,681) 5,847,507 (2,746,000)
- ----------------------------------------------------------------------------------------------------------
Interest income 81,058 73,519 73,132
Interest expense (1,586,641) (1,142,529) (289,851)
Other income (expense) 18,317 257,861 (30,306)
- ----------------------------------------------------------------------------------------------------------
Income (loss) before tax (3,396,947) 5,036,358 (2,993,025)
Income taxes (benefit) (1,285,429) 1,885,760 (995,551)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $(2,111,518) $ 3,150,598 $(1,997,474)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per common share
and dilutive equivalent common share $ (.32) $ .47 $ (.34)
- ----------------------------------------------------------------------------------------------------------
Shares used to calculate earnings (loss) per share 6,562,741 6,770,055 5,889,278
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
20
<PAGE> 23
Consolidated Statements of Stockholders' Equity THE GNI GROUP, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year $ 2,344 $ 3,125 $ 3,125
Conversion to common stock (234,375 shares in 1996
and 78,125 shares in 1995) (2,344) (781) -
- ----------------------------------------------------------------------------------------------------------
Balance at end of year - 2,344 3,125
- ----------------------------------------------------------------------------------------------------------
Common stock:
Balance at beginning of year 61,300 59,739 58,298
Conversion of preferred stock (468,750 shares in 1996
and 156,250 shares in 1995) 4,688 1,561 -
Exercise of stock options (7,000 shares in 1996
and 144,080 shares in 1994) 71 - 1,441
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 66,059 61,300 59,739
- ----------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 19,225,461 19,226,242 18,485,227
Preferred stock conversion (2,344) (781) -
Public offering of common stock - - (570)
Exercise of stock options 27,931 - 545,712
Compensatory stock options - - 50,400
Tax benefit from stock options - - 145,473
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 19,251,048 19,225,461 19,226,242
- ----------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 5,175,547 2,024,949 4,022,423
Net income (loss) (2,111,518) 3,150,598 (1,997,474)
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 3,064,029 5,175,547 2,024,949
- ----------------------------------------------------------------------------------------------------------
Treasury stock, at cost:
Balance at beginning of year (47,006) (47,006) (47,006)
- ----------------------------------------------------------------------------------------------------------
Balance at end of year (47,006) (47,006) (47,006)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity $22,334,130 $24,417,646 $21,267,049
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
21
<PAGE> 24
Consolidated Statements of Cash Flows THE GNI GROUP, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,111,518) $3,150,598 $(1,997,474)
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation and amortization 4,820,189 4,101,893 3,056,467
Asset impairment 6,708,791 - -
Deferred taxes (1,901,649) 544,720 (380,512)
Loss (gain) on sale of assets (16,143) (53,083) 32,807
Non-cash compensation expense - - 50,400
Change in assets and liabilities, net of acquisition:
Increase in accounts receivable (907,490) (1,412,183) (69,348)
Decrease (increase) in inventory (274,411) 484,190 (409,872)
Decrease (increase) in federal income tax receivable - 575,755 (575,755)
Increase in prepaid expenses and other (373,616) (177,486) (2,233)
Increase in other assets (424,825) (438,447) (187,431)
Increase (decrease) in accounts payable 2,022,186 (187,940) (195,971)
Increase (decrease) in accrued liabilities 644,028 (640,973) 263,309
Increase (decrease) in income taxes payable (24,064) 741,040 (136,436)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 8,161,478 6,688,084 (552,049)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease (increase) in restricted time deposits (145,610) (137,512) 163,753
Payment of cash in connection with
business acquisition, net of cash acquired (4,043,132) (2,538,138) -
Proceeds from sale of assets 20,000 149,393 86,441
Purchases of fixed assets (6,454,513) (5,827,190) (11,405,374)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,623,255) (8,353,447) (11,155,180)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash proceeds from notes payable 933,095 814,115 -
Cash proceeds from public offering of
common stock, net of offering costs - - (570)
Net cash from exercise of stock options 28,000 - 547,153
Net proceeds from revolving line 1,350,000 1,500,000 1,500,000
Proceeds from issuance of long-term debt 3,850,000 2,000,000 8,000,000
Principal payments of long-term debt and notes payable (3,428,747) (2,479,273) (725,158)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,732,348 1,834,842 9,321,425
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 270,571 169,479 (2,385,804)
Cash and cash equivalents at beginning of year 852,370 682,891 3,068,695
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $1,122,941 $ 852,370 $ 682,891
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
22
<PAGE> 25
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
THE GNI GROUP, INC.
June 30, 1996
Significant Accounting Policies
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of The GNI Group,
Inc. and its subsidiaries (the "Company"), all of which are wholly-owned.
Certain amounts presented in prior years have been reclassified to conform to
current year presentation. All significant intercompany transactions are
eliminated.
Industry
The GNI Group, Inc. is headquartered in Deer Park, Texas with operations in Deer
Park and Corpus Christi, Texas. The Company provides comprehensive waste
management services through the treatment, storage, transportation and disposal
of hazardous and non-hazardous liquid and solid industrial waste and by-product
streams, together with specialized chemical manufacturing, recovery and
processing services, to over 300 companies.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciation is provided
on a straight line method over the estimated useful lives of the assets. The
estimated useful lives for financial statement purposes are as follows:
- --------------------------------------------------------------------------------
Well and surface facility 5 to 15 years
Processing facility 5 to 15 years
Buildings and improvements 5 to 30 years
Machinery and equipment 3 to 5 years
Furniture and fixtures 3 to 5 years
- --------------------------------------------------------------------------------
Maintenance and repairs are charged to expense while improvements and
betterments are depreciated over the life of the asset.
The Company capitalizes interest costs as part of the cost of constructing
facilities and equipment. Interest costs of $58,253, and $243,219 were
capitalized in 1995, and 1994 respectively. No interest costs were capitalized
in 1996.
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers' financial
condition. Receivables generally are due within 30 days. Credit losses relating
to customers have been minimal.
Inventories
Inventories are stated at the lower of cost or market using the average cost
method.
Restricted Time Deposits
Restricted time deposits represent funds pledged in connection with financial
assurance requirements for the Company's various operating permits.
Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare this balance sheet in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
Earnings Per Share
The average number of common and dilutive equivalent common shares for 1995
includes the weighted average number of common shares outstanding, shares
issuable assuming conversion of the non-redeemable convertible preferred stock
and shares issuable pursuant to the assumed exercise of stock options (by
application of the treasury stock method). Primary and fully diluted earnings
per share are equivalent due to the insignificance of other dilutive securities.
Stock options and non-redeemable convertible preferred stock were not included
in the loss per share computation for 1996 and 1994 as their effect was
anti-dilutive due to the loss recorded.
Income Taxes
The asset and liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Fair Value of Financial Instruments
The estimated fair value of long-term debt is not materially different from
carrying value for financial statement purposes.
23
<PAGE> 26
Adoption of FASB No. 121
Effective as of January 1, 1996, the Company adopted FASB No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." FASB No. 121 requires that an impairment loss be recognized whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
A review of the Company's assets determined that certain assets were impaired.
The total impairment loss recognized by the Company primarily related to the
following: a) various parcels of real estate exceeded their fair value based on
current market conditions; and b) the carrying value of the Company's wiped film
evaporator and associated equipment exceeded the value of expected future cash
flows. An impairment loss on various smaller assets was recognized due to
regulatory changes and changes in the manner in which the assets are being used.
As a result of the adoption of FASB No. 121, the Company recognized a non-cash
pre-tax charge against earnings of approximately $6.7 million.
Property, Plant and Equipment
Property, plant and equipment is comprised of the following at June 30, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 714,357 $ 1,079,913
Well, surface and processing facility 35,084,808 36,210,044
Buildings and improvements 3,062,186 5,043,838
Machinery and equipment 2,641,465 2,908,262
Furniture, fixtures and other 874,342 906,849
Construction in progress 1,452,186 887,796
- --------------------------------------------------------------------------------
Total property, plant and equipment $43,829,344 $47,036,702
- --------------------------------------------------------------------------------
</TABLE>
Acquisitions
On November 14, 1995 the Company completed the purchase of certain assets of E.
I. du Pont de Nemours and Company's ("DuPont") refined acetonitrile business.
These assets included certain intangible personal property, inventory and
contractual rights. As part of this transaction, DuPont entered into a long-term
license agreement with respect to certain intellectual property, a long-term
supply agreement pursuant to which DuPont will supply the Company with the raw
material stream from which refined acetonitrile is produced and a long-term
covenant not to compete. The Company funded the entire consideration with
additional borrowings provided by a commercial bank.
The following summarized, unaudited pro-forma results of operations for the
years ended June 30, 1996 and 1995, assume the acquisition occurred as of the
begining of the respective periods.
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $41,294,642 $40,755,725
Net income (loss) (2,177,591) 3,181,303
Net income (loss) per common share (.33) .47
- --------------------------------------------------------------------------------
</TABLE>
On March 10, 1995 the Company completed the acquisition of Chemical Waste
Management, Inc.'s ("CWM" or the "Seller") waste treatment, storage and disposal
facility in Corpus Christi, Texas for $4.5 million. The consideration paid
consisted of $500,000 in cash, a $2 million note payable to a commercial bank
and a $2 million note payable to the Seller. The $2 million note payable to the
Seller is a non-cash financing activity. The acquisition was accounted for by
the purchase method, and therefore, the results of operations have been included
in the Company's consolidated statements since the date of acquisition.
Non-Redeemable Convertible Series A
Preferred Stock
As of June 30, 1996, the Company does not have any shares of preferred stock
outstanding. The Company had outstanding at June 30, 1995, 234,375 shares of
Series A Preferred Stock, $.01 par value per share. Each share of the preferred
stock was convertible, at the option of the preferred stockholders, into two
shares of common stock. The preferred stock was sold to two investment groups
who together had the right to name two directors to the Board of Directors. In
the event that the investment groups' representation on the Board of Directors
would have fallen below two directors, other than by voluntary resignation, the
groups had the right to sell the preferred stock back to the Company at the
greater of current market value or $4 per preferred share.
24
<PAGE> 27
Long-Term Debt and Credit Facilities
As of June 30, 1996 and 1995, long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Note payable to bank secured
by certain land and equipment
at a fixed annual rate of
interest of 8.44% with
quarterly principal
installments of $173,913 plus
interest through December
1998. The facility contains
restrictive covenants
including, among others,
minimum tangible net worth
requirements, and restrictions
relating to investments,
purchases and sales of assets,
and payment of dividends. $1,739,130 $ 2,434,782
$10,000,000 revolving line of
credit, secured by the
Company's qualifying accounts
receivable and certain
inventory, interest at the
lending bank's prime rate of
interest or LIBOR plus 2.00%
(8.25% at June 30, 1996), due
in full October 31,1997. 8,200,000 3,000,000
Note payable to bank at the
lending bank's prime rate of
interest plus 0.25% or LIBOR
plus 2.75% (8.24% at June 30,
1996) with a fixed rate option
available. Quarterly payments
of interest plus principal
based on an 8-year
amortization are required with
a balloon at maturity on
October 31, 1998. Line is
secured by first lien deed of
trust and direct assignment of
all assets. 6,250,000 7,250,000
Note payable totalling
$2,000,000 relating to the
acquisition of the Corpus
Christi, Texas facility at the
lending bank's prime rate of
interest plus 0.25% or LIBOR
plus 2.75% (8.24% at June 30,
1995). Quarterly payments of
$200,000 plus interest are
required for the first year,
then quarterly principal
payments of $75,000 plus
interest are required
thereafter. 1,125,000 1,800,000
Note payable to Chemical Waste
Management, Inc. bearing an
interest rate of 10% relating
to acquisition of Corpus
Christi, Texas facility.
Quarterly interest payments
only are required for the
first year, then quarterly
principal payments of $125,000
plus accrued interest until
maturity in 2000. 1,875,000 2,000,000
- --------------------------------------------------------------------------------
Total long-term debt 19,189,130 16,484,782
Less amounts classified as current 2,620,652 2,620,652
- --------------------------------------------------------------------------------
Long-term portion $16,568,478 13,864,130
- --------------------------------------------------------------------------------
</TABLE>
The aggregate annual maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending June 30 Amount
- ------------------------------------------------------------------
<S> <C>
1997 $ 2,620,652
1998 10,695,652
1999 2,147,826
2000 3,725,000
- ------------------------------------------------------------------
Total $19,189,130
- ------------------------------------------------------------------
Interest paid during the years ended June 30, 1996, 1995, and 1994 amounted to
$1,448,214, $1,249,075, and $424,655 respectively.
Income Taxes
The provision for income taxes in the consolidated statements of operations is
summarized below.
1996 1995 1994
- ----------------------------------------------------------------------
Provision:
Federal-Current $ 625,722 $1,153,036 $(469,566)
Federal-Deferred (1,794,151) 484,769 (560,815)
State (117,000) 247,955 34,830
- ----------------------------------------------------------------------
Total $(1,285,429) $1,885,760 $ (995,551)
- --------------------------------------------------------------------------------
The provision for income taxes varied from the amount computed by applying the
U.S. federal statutory rate as a result of the following:
1996 1995 1994
- --------------------------------------------------------------------------------
Tax at statutory rate $(1,154,962) $1,712,362 $(1,017,629)
State income tax, net of
federal income tax
benefit (77,000) 163,650 22,988
Other (53,467) 9,748 (910)
- --------------------------------------------------------------------------------
Income tax provision $(1,285,429) 1,885,760 $ (995,551)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and tax liabilities at June 30, 1996 and 1995 are
presented below:
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Amounts deductible when paid $719,011 $247,168
Accounts receivable, principally due
to allowance for doubtful accounts 52,370 14,378
Compensated absences, principally
due to accrual for financial
reporting purposes 81,430 69,008
Alternative minimum tax credit
carryforwards 1,331,418 1,331,418
- --------------------------------------------------------------------------------
Total gross deferred tax assets 2,184,229 1,661,972
Less valuation allowance (20,000) (20,000)
- --------------------------------------------------------------------------------
Net deferred tax assets 2,164,229 1,641,972
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Facility and equipment, principally
due to differences in depreciation
and capitalized interest 1,541,219 2,920,611
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,541,219 2,920,611
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $623,010 $(1,278,639)
- --------------------------------------------------------------------------------
</TABLE>
There was no change in the valuation allowance for the years ended June 30, 1996
and 1995. Federal income taxes paid during the years ended June 30, 1996, 1995
and 1994 were $500,000, $600,000, and $135,000 respectively.
25
<PAGE> 28
Stock Option Plan
Under the Company's 1991 Stock Option Plan (1991 Plan), 400,000 shares were
originally approved for issuance. An additional 200,000 shares were approved for
issuance by the Compensation Committee of the Board of Directors and the
stockholders of the Company, bringing the total number of shares available for
grant to 600,000. The 1991 Plan provides for both qualified incentive stock
options and non-qualified stock options. To date, all options that have been
granted under the 1991 Plan are qualified incentive stock options. The 1991 Plan
requires that qualified options may not be granted at prices less than fair
market value on the dates of the grants and the options may not be outstanding
for a period longer than ten years from the date the options are granted.
Under the Company's 1995 Management Equity Incentive/Stock Option Plan (1995
Plan), 500,000 shares were approved for issuance by the Compensation Committee
of the Board of Directors. The 1995 Plan provides for both qualified incentive
stock options and non-qualified stock options. To date, all options that have
been granted under the 1995 Plan are qualified incentive stock options. The 1995
Plan requires that qualified options may not be granted at prices less than fair
market value on the dates of the grants and the options may not be outstanding
for a period longer than ten years from the date the options are granted.
Transactions for the three years ended June 30, 1996 related to all plans are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding on July 1 711,300 408,800 534,380
Granted 100,500 402,500 22,400
Exercised (prices ranging from
$1.50 to $6.00 per share) (7,000) - (144,080)
Canceled (1,200) (100,000) (3,900)
- ---------------------------------------------------------------------------------------
Options outstanding at June 30 803,600 711,300 408,800
- ---------------------------------------------------------------------------------------
Options price range at
June 30 $4.00-$6.69 $4.00-$6.00 $4.00-$6.00
Options exercisable at
June 30 539,767 487,966 392,133
Options available for
grant at June 30 282,700 382,000 184,500
- ---------------------------------------------------------------------------------------
</TABLE>
Statement No. 123
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock Based Compensation" in October 1995, which establishes financial
accounting and reporting standards for stock based on employee compensation
plans including, stock purchase plans, stock options, restricted stock and stock
appreciation rights. The Company has elected to continue accounting for stock
based on compensation under Accounting Principles Board Opinion No. 25. The
disclosure requirements of SFAS No. 123 will be effective for the Company's
financial statements begining July 1, 1996. Management does not believe that the
implementation of SFAS No. 123 will have a material effect on its financial
statements.
Major Customers
The Company considers itself to be engaged in one business segment. The Company
markets its services on an integrated basis with its services in one area often
supporting or leading to projects in other areas. The following table sets forth
those major customers whose revenues exceed 10% of the Company's total revenues:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer A 10% 16% *
Customer B * * 11%
Customer C * 11% 10%
- --------------------------------------------------------------------------------
* Less than 10% of consolidated revenues.
</TABLE>
These customers have multiple facility locations and divisions which utilize one
or more of the various services offered by the Company. The loss of any one of
these major customers could have a material adverse effect on the financial
condition or the results of operations of the Company. However, management
believes that the Company has a strong relationship with each of these major
customers and moreover does not anticipate the loss of any of these major
customer's business in the near future.
26
<PAGE> 29
Governmal Regulations
The Company is required to obtain governmental permits and authorizations which
are subject to suspension, revocation, modification, denial or non-renewal under
certain circumstances for various aspects of its operations. Although management
believes that such developments will not occur, the Company's failure to obtain
or renew any such permit or authorization or to obtain acceptable permit
conditions could have a material adverse effect on the Company.
Commitments and Contingencies
The Company and its subsidiaries have cancelable and non-cancelable lease
contracts covering certain equipment. Minimum rental commitments under these
leases are $609,036, $554,077, $465,709, $289,184, and $127,322 for the years
ending June 30, 1997 to 2001, respectively. Rental expense was $691,788,
$437,036, and $635,500 for the years ended June 30, 1996, 1995, and 1994,
respectively.
On June 29, 1993 a suit was filed by the State of Texas against the Company and
other defendants for removal, remedial action, civil penalties, and response
costs associated with cleaning up two contaminated properties located in Ector
and Midland Counties, Texas. The Company has been notified that the TNRCC is
engaged in a related administrative action concerning these sites. The Company
is engaged in settlement discussions with the State of Texas, and plans to
vigorously defend these allegations if a settlement is not reached. Management
does not expect that the eventual outcome of this matter will have a material
adverse effect on the financial condition or results of operations of the
Company.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition or results of operations. Further, during the
Company's most recent fiscal year, the Company settled the Maxey Flats and Kelly
M. Jones litigations for de minimus amounts.
Report of Independent Auditors
- --------------------------------------------------------------------------------
The Board of Directors
The GNI Group, Inc.
We have audited the accompanying consolidated balance sheets of The GNI Group,
Inc. and subsidiaries (the "Company") as of June 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The GNI Group, Inc.
and subsidiaries as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
August 6, 1996
27
<PAGE> 30
Selected Consolidated Financial Data THE GNI GROUP, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands except per share and share amounts)
Revenues $ 39,339 $ 34,359 $ 20,702 $ 24,481 $ 21,467
Operating income (loss) (1,910)(a) 5,848 (2,746) 4,046 2,542
Income (loss) before tax (3,397) 5,036 (2,993) 3,775 1,641
Net income (loss) (2,112) 3,151 (1,997) 2,346 950
Net income (loss) per $ (.32) $ .47 $ (.34) $ .42 $ .20
Weighted average shares 6,562,741 6,770,055 5,889,278 5,619,059 4,721,458
- ----------------------------------------------------------------------------------------------------------
Working capital $ 7 $ 618 $ 1,402 $ 3,402 $ 211
Total assets 49,078 46,079 38,184 31,259 21,345
Long-term debt less current maturities 16,568 13,864 11,185 3,150 4,644
Stockholders' equity 22,334 24,418 21,267 22,522 10,764
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a)Operating income for fiscal 1996 includes a non-cash charge of approximately
$6.7 million resulting from the adoption of FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." After
tax the net charge was approximately $4.4 million, or $0.68 per share.
Quarterly Stock Data
- --------------------------------------------------------------------------------
The GNI Group, Inc.'s Common Stock is listed on the NASDAQ National Market, and
trades under the symbol GNUC. The following table presents the high and low
sales prices for the Company's Common Stock for each quarter of fiscal 1996 and
1995 as reported by the NASD.
<TABLE>
<CAPTION>
Fiscal 1996 High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
First 8 1/8 6 3/8
Second 7 5/16 6
Third 7 1/4 4 1/4
Fourth 6 1/8 4 1/4
<CAPTION>
Fiscal 1995 High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
First 4 1/2 3
Second 5 3 5/8
Third 6 1/2 3 3/4
Fourth 8 1/4 5 3/4
</TABLE>
At July 1, 1996, there were approximately 401 stockholders of record of the
Company's Common Stock.
Dividend Policy
- --------------------------------------------------------------------------------
The Company does not pay any cash dividends on its Common Stock and does not
have any plans to do so in the future. The Company intends to continue a policy
of retaining income for use in its business.
28
<PAGE> 31
OFFICERS AND DIRECTORS
- --------------------------------------------------------------------------------
EXECUTIVE MANAGEMENT
Carl V Rush, Jr.
President and Chief Executive Officer
Dawn S. Born
Vice President and General Counsel
Titus H. Harris, III
Chief Financial Officer and Secretary
Donna L. Ratliff
Treasurer and Assistant Secretary
W.R. "Bill" Reeves, Jr.
Vice President
Environmental and Regulatory Affairs
David A. Swallow
Executive Vice President and General Manager
GNI Chemicals Corporation
BOARD OF DIRECTORS
(1,2,3,4) Titus H. Harris, Jr.
Chairman of the Board
The GNI Group, Inc.
Chairman of the Board
Harris Webb & Garrison, Inc.
Investment Banking Firm
Houston, Texas
(2,4) Newton E. Dudney, M.D.
Physician
League City, Texas
(1,2,3) John W. Lyons, Jr.
Attorney-at-Law
Texas City, Texas
(1,2,3,4) F. Oliver Nicklin
President
First Analysis Corporation
Securities Research and Investment Firm
Chicago, Illinois
(3) Carl V Rush, Jr.
President and Chief Executive Officer
The GNI Group, Inc.
(1) Audit Committee
(2) Compensation Committee
(3) Executive Committee
(4) Nominating Committee
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Bracewell & Patterson, LLP
Houston, Texas
AUDITORS
KPMG Peat Marwick LLP
Houston, Texas
REGISTRAR AND TRANSFER AGENT
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
212-936-5100
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 8:30 a.m. on Tuesday,
October 29, 1996 at the Four Seasons Hotel, 1300 Lamar Street, Houston, Texas.
FORM 10-K
A copy of the Company's 1996 Form 10-K as filed with the Securities and Exchange
Commission is available without charge to stockholders who request it by writing
to the Stockholder Relations Department at the address below.
CORPORATE HEADQUARTERS
The GNI Group, Inc.
2525 Battleground Road
P.O. Box 220
Deer Park, Texas 77536
713-930-0350
<PAGE> 32
THE GNI GROUP, INC.
2525 Battleground Road
P.O. Box 220
Deer Park, Texas 77536
713-930-0350
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Company
<TABLE>
<CAPTION>
Percent of Voting
Name State of Incorporation Stock Owned
- ---- ---------------------- -----------
<S> <C> <C>
Gulf Nuclear of Louisiana, Inc.(1) Delaware 100
Disposal Systems, Inc. Delaware 100
Resource Transportation Services, Delaware 90
Inc.(2)
GNIC Chemicals Corporation3 Delaware 100
Disposal Systems of Corpus Delaware 100
Christi, Inc.
</TABLE>
- --------------------
(1) Formerly Gamma Industries, Inc. The inventory and certain
fixed assets of this subsidiary were sold to Amersham Corporation on
January 8, 1988.
(2) As of September 19, 1988 the remaining 10% of the outstanding
capital stock of Resource Transportation Services, Inc. has been
owned by Disposal Systems, Inc., a wholly-owned subsidiary of the
Company.
(3) Formerly Treatment Technologies, Inc and Chemical Resource
Processing, Inc.
<PAGE> 1
Exhibit 23
Independent Auditors' Consent
The Board of Directors
The GNI Group, Inc.:
We consent to the incorporation by reference in the registration statement on
Form S-8 of The GNI Group, Inc. of our report dated August 6, 1996, relating to
the consolidated balance sheets of The GNI Group, Inc. and subsidiaries as of
June 30, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1996, and our report dated August 6, 1996 relating to
the consolidated financial statement schedule for each of the years in
the three-year period ended June 30, 1996, which reports are included in
or incorporated by reference in the June 30, 1996 annual report on Form 10-K
of The GNI Group, Inc.
KPMG Peat Marwick LLP
Houston, Texas
September 25, 1996
