<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended MARCH 31, 1997
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Commission file number 0-10735
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THE GNI GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 76-0232338
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2525 BATTLEGROUND ROAD, DEER PARK, TEXAS 77536
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(Address of principal executive offices) (Zip Code)
(281) 930-0350
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve 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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's common stock,
$.01 par value, as of May 1, 1997 was 6,572,525.
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INDEX
THE GNI GROUP, INC.
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
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<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 1997 and June 30, 1996 1
Consolidated Statements of Operations
Three and Nine Months ended March 31,
1997 and March 31, 1996 2
Consolidated Statements of Cash Flows
Nine Months ended March 31, 1997 and
March 31, 1996 3
Notes to Consolidated Financial
Statements 4-6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7-14
Part II - OTHER INFORMATION
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Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote
of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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<TABLE>
<CAPTION>
THE GNI GROUP, INC. March 31, June 30,
1997 1996
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<S> <C> <C>
ASSETS
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CURRENT ASSETS:
Cash and time deposits $ 695,117 $ 1,122,941
Accounts receivable, less allowance of approximately
$26,000 for 3/31/97 and $142,000 for 6/30/96 8,126,568 6,508,680
Inventory 516,828 661,233
Deferred tax asset - current 44,275 400,701
Prepaid expenses and other assets 1,765,242 969,762
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TOTAL CURRENT ASSETS 11,148,030 9,663,317
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PROPERTY, PLANT AND EQUIPMENT 47,273,422 43,829,344
Less accumulated depreciation (14,517,365) (11,682,703)
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NET PROPERTY, PLANT AND EQUIPMENT 32,756,057 32,146,641
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Intangibles 19,910,666 3,938,751
Restricted time deposits 1,615,990 1,495,681
Deferred tax asset 31,122 222,309
Other assets 3,169,441 1,611,519
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TOTAL ASSETS $ 68,631,306 $ 49,078,218
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,834,134 $ 3,887,395
Accrued liabilities 3,310,686 2,599,503
Federal income taxes payable 535,647 549,256
Current portion of long-term debt 2,495,652 2,620,652
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TOTAL CURRENT LIABILITIES 8,176,119 9,656,806
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Other long-term liabilities 3,745,706 518,804
Long-term debt, less current portion 11,996,739 16,568,478
Senior subordinated notes 18,516,971 --
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STOCKHOLDERS' EQUITY:
Non-redeemable convertible preferred stock, $.01 par value
Authorized 1,000,000 shares -- --
Common stock, $.01 par value
Authorized 20,000,000 shares; issued 6,612,709 shares
at 3/31/97 and 6,605,876 shares at 6/30/96 66,127 66,059
Additional paid-in capital 20,816,268 19,251,048
Retained earnings 5,360,382 3,064,029
Less cost of treasury stock (40,184 shares) (47,006) (47,006)
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TOTAL STOCKHOLDERS' EQUITY 26,195,771 22,334,130
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,631,306 $ 49,078,218
============ ============
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at March 31, 1997 is unaudited. The Balance Sheet at
June 30, 1996 has been derived from the audited financial statements at that
date.
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
THE GNI GROUP, INC. Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUES $ 10,584,091 $ 9,943,422 $ 31,206,189 $ 28,672,455
COST AND EXPENSES:
Cost of services 5,993,624 7,307,381 18,019,317 18,347,069
Selling, general and administrative 1,251,340 1,872,309 3,517,118 4,136,962
Depreciation and amortization 1,623,483 1,114,798 4,318,015 3,576,221
Asset impairment FASB No. 121 -- 6,708,791 -- 6,708,791
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TOTAL COST AND EXPENSES 8,868,447 17,003,279 25,854,450 32,769,043
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OPERATING INCOME (LOSS) 1,715,644 (7,059,857) 5,351,739 (4,096,588)
------------ ------------ ------------ ------------
Interest income 12,980 16,172 53,303 56,532
Interest expense 921,148 414,933 1,997,259 1,151,123
Other income (expense) 196,199 (13,637) 206,871 48,664
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INCOME (LOSS) BEFORE TAX 1,003,675 (7,472,255) 3,614,654 (5,142,515)
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Income tax (benefit) 362,800 (2,542,400) 1,318,300 (1,688,500)
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NET INCOME (LOSS) $ 640,875 $ (4,929,855) $ 2,296,354 $ (3,454,015)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE $ .09 $ (.75) $ .33 $ (.53)
============ ============ ============ ============
SHARES USED TO CALCULATE E.P.S 7,358,115 6,565,233 7,062,539 6,510,628
============ ============ ============ ============
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
2
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
THE GNI GROUP, INC. Nine Months Ended
March 31,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
NET INCOME (LOSS) $ 2,296,354 $ (3,454,015)
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 4,318,015 3,576,221
Impairment of Assets per FASB No. 121 -- 6,708,791
Deferred taxes 547,613 (1,040,748)
Loss (gain) on sale of asset (7,683) (22,469)
Change in assets and liabilities, net of acquisition:
Increase in accounts receivable (1,617,888) (1,847,793)
Decrease (increase) in inventory 144,405 (254,042)
Increase in prepaid expenses and other (795,480) (706,289)
Increase in other assets (1,836,366) (1,158,201)
Increase (decrease) in accounts payable (2,053,262) 2,843,825
Increase (decrease) in accrued liabilities (870,215) 1,166,338
Increase (decrease) in income taxes payable 94,691 (430,000)
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 220,184 $ 5,381,618
============ ============
Cash flows from investing activities:
Increase in restricted time deposits (120,309) (127,922)
Payment of cash in connection with business -- (193,132)
acquisition,
net of cash acquired
Payment of cash in connection with EMPAK transaction (12,000,000) --
Proceeds from sale of asset 15,700 26,326
Purchases of fixed assets (3,873,992) (5,263,829)
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NET CASH USED IN INVESTING ACTIVITIES (15,978,601) (5,558,557)
============ ============
Cash flows from financing activities:
Cash proceeds from notes payable 852,144 933,095
Net cash from exercise of stock options 27,332 28,000
Proceeds from issuance of long-term debt 12,000,000 --
Proceeds from issuance of senior subordinated notes 20,000,000 --
Net proceeds from revolving line -- 1,350,000
Principal payments of long-term debt and notes payable (17,548,883) (2,699,662)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 15,330,593 (388,567)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (427,824) (565,506)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,122,941 852,370
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 695,117 $ 325,864
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</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
3
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE GNI GROUP, INC. March 31, 1997
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All significant intercompany
transactions are eliminated.
The Consolidated Balance Sheet as of March 31, 1997 and the related
Statements of Operations for the three and nine month periods ended March 31,
1997 and 1996, and Statements of Cash Flows for the nine month period ended
March 31, 1997 and 1996 are unaudited; in the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted of normal, recurring items. Interim
results are not necessarily indicative of results for a full year. The
financial statements and Notes are presented as permitted by Form 10-Q and do
not contain certain information included in the Company's Annual Financial
Statements and Notes.
Statement of Cash Flows
For purposes of reporting cash flows, cash and time deposits include cash
on hand and certificates of deposit.
Earnings Per Share
The average number of common and common equivalent shares for 1997 includes
the weighted average number of common shares outstanding 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 were not included in the loss per share computation for 1996 as their
effect was anti-dilutive due to the loss recorded.
EMPAK Agreement
On September 30, 1996, the Company participated in a consolidation with
EMPAK Inc. ("EMPAK"), whereby EMPAK exited the third-party commercial waste
management business and agreed to assist in the transfer of EMPAK's third-party
commercial waste management customers to the Company. EMPAK will continue to
use its facility in Deer Park, Texas for the disposal of its own waste and the
waste of its affiliates and customers of its related businesses. The Company
paid EMPAK the sum of $12,000,000 at closing. Additionally, the Company has
agreed to pay EMPAK $1,200,000 per year for five years in exchange for the use
of EMPAK's deepwell for five years in case of a force majeure at the Company's
facilities, thus allowing the Company to mitigate any business disruption that
may occur should one of its deepwells have operational or mechanical
difficulties.
4
<PAGE> 7
Senior Subordinated Notes
On December 31, 1996, the Company entered into a Note and Warrant Purchase
Agreement (the "Purchase Agreement") with two institutional investors (the
"Purchasers") who purchased, in multiple accounts, (i) $20 million aggregate
principal amount of 12.00% senior subordinated notes due December 31, 2003 and
(ii) warrants entitling the Purchasers to purchase, prior to December 31, 2006,
428,400 shares of the Company's common stock, par value $.01 per share, for an
exercise price of $.01 per share. The notes and the warrants issued pursuant
to the Purchase Agreement (respectively, the "Notes" and the "Warrants") were
issued under Rule 506 of Regulation D of the Securities Act of 1933, as
amended, on December 31, 1996. NationsBanc Capital Markets, Inc. acted as
placement agent. The Company received consideration of $18,462,044 for the
purchase of the Notes and $1,537,956 for the issuance of the Warrants.
Income Taxes
The provision for income taxes related to continuing operations in the
consolidated statements of operations is summarized below (unaudited):
<TABLE>
<CAPTION>
Nine Months Ended
March 31, 1997
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<S> <C>
Provision:
Federal-Current $ 662,387
State-Current 108,300
Federal/State-Deferred 547,613
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Total $1,318,300
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</TABLE>
The significant components of deferred income tax expense for the nine
months ended March 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax benefit (exclusive of the effect of
the component listed below) $ 547,613
Increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets --
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Total deferred tax benefit $ 547,613
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</TABLE>
5
<PAGE> 8
The tax effects of temporary timing differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
March 31, 1997 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Amounts deductible when paid $ 531,683
Accounts receivable, principally due to allowance for doubtful accounts 9,632
Compensated balances, principally due to accrual for financial
reporting purposes 67,196
Alternative minimum tax credit carryforward 1,331,418
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Total deferred tax assets $ 1,939,929
Less valuation allowance (20,000)
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Net deferred tax assets $ 1,919,929
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Deferred tax liabilities:
Facility and equipment, principally due to differences in depreciation,
capitalized interest $ 1,844,532
Other --
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Total deferred tax liabilities $ 1,844,532
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Net deferred tax asset $ 75,397
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</TABLE>
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS-
FISCAL 1997 THIRD QUARTER COMPARED WITH FISCAL 1996 THIRD QUARTER
Revenues. Revenues for the third quarter of fiscal 1997 were $10,584,091
as compared to $9,943,422 for the comparable period of fiscal 1996, an increase
of $640,669, or 6.4%. This increase was primarily attributable to (i) an
increase in revenues from the Company's treatment and disposal operation and
(ii) an increase in chemical manufacturing and processing revenues offset by a
decrease in specialty chemical sales. Revenues from the Company's treatment
and disposal operation increased by approximately $695,000, or 15.6%, from the
fiscal 1996 third quarter compared to the fiscal 1997 third quarter. Revenues
from the fiscal 1997 period benefitted from increased deepwell disposal volumes
resulting from the Company's consolidation transaction with EMPAK, which closed
on September 30, 1996, whereby EMPAK exited the third-party commercial deepwell
disposal business and agreed to assist in the transfer of EMPAK's third-party
commercial deepwell disposal customers to the Company. Transportation revenues
also increased in the third quarter of fiscal 1997 as compared with the
comparable period in fiscal 1996, an increase of approximately $128,000, or
11.5%. This increase in transportation revenues was primarily attributable to
the increase in deepwell disposal volumes during the fiscal 1997 period.
Revenues from the Company's chemical manufacturing and processing
subsidiary, GNI Chemicals Corporation ("GNIC"), decreased by approximately
$182,000, or 4.2%, in the third quarter of fiscal 1997 as compared to the
fiscal 1996 period. The Company's GNIC revenues for the fiscal 1997 period
were approximately $4,193,000 as compared to $4,375,000 for the fiscal 1996
period. This decrease was primarily a result of a decrease in specialty
chemical sales offset by an increase in chemical manufacturing and processing
revenues during the period. Specialty chemical sales were lower in the fiscal
1997 period as compared with the fiscal 1996 period primarily as a result of
operational difficulties associated with the internalization of acetonitrile
("ACE") production. Until December 31, 1996, ACE had been produced by an
outside processor. Additionally, downward pressure on ACE pricing during the
period contributed to a decrease in specialty chemical sales. GNIC's chemical
manufacturing and processing revenues were higher in the fiscal 1997 period as
compared with the fiscal 1996 period primarily as a result of capacity that was
allocated to a large customer that was unexpectedly not utilized in the fiscal
1996 period.
Cost of Services. Cost of services decreased as a percent of revenues from
73.5% during the third quarter of fiscal 1996 to 56.6% for the third quarter of
fiscal 1997. In absolute dollar terms, cost of services decreased by
approximately $1,314,000 in conjunction with approximately $641,000 of
additional revenues. This decrease is primarily the result of a number of
one-time charges and expenses incurred by the Company during the fiscal 1996
third quarter, with no such corresponding one-time charges in the fiscal 1997
period.
7
<PAGE> 10
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses as a percent of revenues were 11.8% and 18.8%,
respectively, for the third quarter of fiscal 1997 and fiscal 1996. In
absolute dollars, SG&A expenses were approximately $621,000 lower in the fiscal
1997 period compared with the fiscal 1996 period. The increased level of SG&A
expenses in the fiscal 1996 third quarter as compared with the comparable
period in fiscal 1997 is primarily a result of a number of one-time charges and
expenses incurred during the fiscal 1996 third quarter, and no such
corresponding one-time charges in the fiscal 1997 period.
Depreciation and Amortization Expenses. Depreciation and Amortization
("D&A") expenses increased as a percent of revenues from 11.2% in the third
quarter of fiscal 1996 to 15.3% in the third quarter of fiscal 1997. D&A
expenses for the third quarter of fiscal 1997 increased by 45.6% in absolute
dollar terms compared to the third quarter of fiscal 1996 due primarily to (i)
the additional D&A expenses resulting from the capital improvements made by the
Company to its facilities during calendar 1996, and (ii) the additional D&A
expenses associated with the Company's consolidation transaction with EMPAK
which were not present in the fiscal 1996 period.
FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Effective January 1, 1996, the Company
adopted FASB No. 121 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 pre-tax charge against earnings of $6.7
million during the fiscal 1996 period, with no such corresponding charge in the
fiscal 1997 period.
Net Interest Expense. Net interest expense increased in the fiscal 1997
third quarter as compared with the fiscal 1996 third quarter. This increase
was primarily attributable to higher principal balances on the Company's
indebtedness and a higher rate of interest on that indebtedness during the
fiscal 1997 period. The increased level of indebtedness was associated with
(i) capital improvements made by the Company to its facilities during calendar
1996, and (ii) the debt associated with the Company's recent ACE acquisition
and EMPAK consolidation. The rate of interest was higher in the fiscal 1997
period as compared with the fiscal 1996 period primarily as a result of the
Senior Subordinated Notes placement as of December 31, 1996 that bear interest
at the annual interest rate of 12.00%.
Net Income (Loss). The Company had net income of $640,875, or $.09 per
share, for the third quarter of fiscal 1997 compared with a net loss of
$4,929,855, or a loss of $.75 per share, for the third quarter of fiscal 1996.
The Company's adoption of FASB No. 121 impacted the net loss figure for the
fiscal 1996 third quarter by approximately $4.4 million after-tax or
approximately $.68 per share.
8
<PAGE> 11
FISCAL 1997 NINE MONTHS COMPARED TO FISCAL 1996 NINE MONTHS
Revenues. Revenues for the first nine months of fiscal 1997 were
$31,206,189 as compared to $28,672,455 for the comparable period of fiscal
1996, an increase of $2,533,734, or 8.8%. The increase in the Company's
revenues was primarily attributable to (i) an increase in revenues from the
Company's treatment and disposal operation and (ii) an increase in specialty
chemical sales offset by a decrease in chemical manufacturing and processing
revenues. Revenues from the Company's treatment and disposal operation
increased by approximately $1,098,000, or 8.6%, from the fiscal 1996 first nine
month period compared to the fiscal 1997 period. Revenues from the fiscal 1997
period benefitted from increased deepwell disposal volumes resulting from the
Company's consolidation transaction with EMPAK, which closed on September 30,
1996. Transportation revenues also increased in the first nine months of
fiscal 1997 as compared with the comparable period in fiscal 1996, an increase
of approximately $370,000, or 11.6%. This increase in transportation revenues
was primarily attributable to the increase in deepwell disposal volumes during
the fiscal 1997 period.
Revenues from the Company's GNIC operation increased by approximately
$1,069,000, or 8.4%, in the first nine months of fiscal 1997 as compared to the
fiscal 1996 period. The Company's GNIC revenues for the fiscal 1997 period
were approximately $13,798,000 as compared to $12,729,000 for the fiscal 1996
period. Specialty chemical sales benefitted from the inclusion of the ACE
business for the entire fiscal 1997 nine month period as compared with only
approximately half of the fiscal 1996 period. The Company acquired the ACE
business from DuPont at the midway point of the fiscal 1996 period. The
balance of the Company's GNIC revenues were lower in the fiscal 1997 period as
compared with the fiscal 1996 period, primarily the result of (i) the running
of a trial campaign of ACE in the GNIC plant during the first part of the
fiscal 1997 period which utilized capacity that was then not available for
third-party processing, and (ii) the internalization of ACE production into the
GNIC plant from an outside processor by a December 31st contract expiration
deadline. Priority was given to building an initial inventory of ACE finished
product that would meet contracted customer supply commitments without
interruption. As a result, certain scheduled toll distillation runs, and their
related revenues, were shifted into January. This led to an increase in these
revenues during the last portion of the fiscal 1997 period compared with the
fiscal 1996 period; however, not for the entire nine months.
Cost of Services. Cost of services decreased as a percent of revenues from
64.0% during the first nine months of fiscal 1996 to 57.7% for the first nine
months of fiscal 1997, in absolute dollar terms, cost of services decreased by
approximately $328,000 in conjunction with an increase of approximately
$2,534,000 in revenues. This decrease is primarily the result of a number of
one-time charges and expenses incurred by the Company during the last one-third
of the fiscal 1996 period, with no such corresponding one-time charges in the
fiscal 1997 period.
9
<PAGE> 12
Selling, General and Administrative Expenses. SG&A expenses as a percent
of revenues were 14.4% and 11.3% of revenues, respectively, for the first nine
months of fiscal 1996 and fiscal 1997. In absolute dollars, SG&A expenses were
approximately $620,000 lower in the fiscal 1997 period compared with the fiscal
1996 period. The increased level of SG&A expenses in the fiscal 1996 first
nine months period as compared with the comparable period in fiscal 1997 is
primarily a result of a number of one-time charges and expenses incurred during
the last one-third of the fiscal 1996 period, and no such corresponding
one-time charges in the fiscal 1997 period.
Depreciation and Amortization Expenses. D&A expenses increased as a
percent of revenues from 12.5% in the first nine months of fiscal 1996 to 13.8%
in the first nine months of fiscal 1997. D&A expenses for the fiscal 1997
period increased by 20.7% in absolute dollar terms compared to the fiscal 1996
period due primarily to (i) the additional D&A expenses resulting from the
capital improvements made by the Company to its facilities, and (ii) the
additional D&A expenses associated with the Company's consolidation transaction
with EMPAK which were present for approximately two-thirds of the fiscal 1997
period and not present at all in the fiscal 1996 period.
FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Effective January 1, 1996, the Company
adopted FASB No. 121 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 pre-tax charge against earnings of $6.7
million during the last one-third of the fiscal 1996 period, with no such
corresponding charge in the fiscal 1997 period.
Net Interest Expense. Net interest expense increased in the first nine
months of fiscal 1997 as compared with the fiscal 1996 period. This increase
was primarily attributable to higher principal balances on the Company's
indebtedness and a higher rate of interest on that indebtedness during the
last one-third of the fiscal 1997 period. The increased level of indebtedness
was associated with (i) capital improvements made by the Company to its
facilities, and (ii) the debt associated with the Company's recent ACE
acquisition and EMPAK consolidation. The rate of interest was higher in the
last one-third of the fiscal 1997 period as compared with the fiscal 1996
period primarily as a result of the Senior Subordinated Notes placement as of
December 31, 1996 that bear interest at the annual interest rate of 12.00%.
Net Income. The Company had net income of $2,296,354, or $.33 per share,
for the first nine months of fiscal 1997 compared with a net loss of
$3,454,015, or a loss of $.53 per share, for the first nine months of fiscal
1996.
Inflation did not have a material impact on the Company's revenues or
income for either the fiscal 1997 or 1996 periods. Further, it is not expected
that inflation will have a material impact during the upcoming quarters for
either the Company's revenues or income.
10
<PAGE> 13
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 of 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 senior subordinated notes
as well as shares of Common Stock and Series A Preferred Stock. As of December
31, 1996, the Company entered into an agreement with two institutional
investors who purchased $20 million aggregate principal amount of 12.00% senior
subordinated notes, together with warrants to purchase 428,400 shares of the
Company's Common Stock. The proceeds were used to repay a bridge loan with a
commercial bank utilized primarily by the Company to fund the EMPAK
consolidation transaction. 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 net
worth, maximum total-liabilities-to-net worth, maximum cash flow leverage,
interest 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, 1996, the Equipment Line bears interest at
the bank's prime rate of interest. 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 March 31, 1997, the unpaid principal balance outstanding
on the Equipment Line was $5,500,000.
The Term Loan represents borrowings which 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
totalled $1,217,391 at March 31, 1997.
11
<PAGE> 14
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,
Texas. The Acquisition Line has a five-year maturity and bears interest at the
bank's prime rate of interest. Quarterly principal payments of $200,000 plus
interest are required for the first year, then quarterly payments of $75,000
plus interest are required until maturity. As of March 31, 1997, the unpaid
principal balance outstanding on the Acquisition Line was $900,000.
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 March 31, 1997, the unpaid
principal balance outstanding on the CWM Note was $1,375,000.
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. From November 3, 1995 until
September 23, 1996, the amount drawn under the Revolver could 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
would have been reduced to $0 beginning December 31, 1996 and thereafter.
Then, effective as of September 23, 1996, the bank and the Company again
amended the Credit Agreement (i) to decrease the total commitment amount of the
Revolver from $10,000,000 to $7,000,000; (ii) to remove the flat amount
concept, item (c) above, from the borrowing base limitation calculation, and
(iii) to provide for a $15,000,000 term loan more fully described in the
following paragraph. And most recently, effective as of March 18, 1997, the
bank and the Company again amended the Credit Agreement (i) to increase the
total commitment amount of the Revolver from $7,000,000 to $15,000,000; and
(ii) to remove the concept of a borrowing base limitation. Therefore,
effective as of March 18, 1997, the Company has availability on the entire
$15,000,000. Although the maturity date of the Revolver remained unchanged,
the Company and the bank are in discussions regarding extending the maturity
date and other matters. Effective as of October 1, 1996, advances under the
Revolver bear interest at the bank's prime rate of interest. As of March 31,
1997, the Company has an unpaid principal balance outstanding on the Revolver
of $5,500,000.
12
<PAGE> 15
Effective as of September 23, 1996, the bank and the Company amended the
Credit Agreement to provide an additional term note in the amount of
$15,000,000 ("Bridge Loan"). The Bridge Loan was used by the Company (i) to
fund the $12,000,000 EMPAK consolidation transaction that closed on September
30, 1996; and (ii) to transfer the flat amount of $3,000,000, referred to in
item (c) in the paragraph above, from the Revolver's borrowing base
calculation. The Bridge Loan carried an interest rate equal to the bank's
prime rate of interest. On December 31, 1996, the Company repaid the Bridge
Loan in its entirety with a portion of the proceeds from the Company's
$20,000,000 aggregate principal amount of 12.00% senior subordinated notes with
warrants, as more fully described below.
On December 31, 1996, the Company entered into a Note and Warrant Purchase
Agreement (the "Purchase Agreement") with two institutional investors who
purchased $20 million aggregate principal amount of 12.00% senior subordinated
notes, together with warrants to purchase 428,400 shares of the Company's
Common Stock. The notes and the warrants issued pursuant to the Purchase
Agreement (respectively, the "Notes" and the "Warrants") were issued under Rule
506 of Regulation D of the Securities Act of 1933, as amended, on December 31,
1996. NationsBanc Capital Markets, Inc. acted as placement agent. The Company
received consideration of $18,462,044 for the purchase of the Notes and
$1,537,956 for the issuance of the Warrants.
For the first nine months of fiscal 1997 and fiscal 1996, net cash provided
by operations was approximately $220,000 and $5,382,000, respectively. The
significant differences in the components that comprise net cash provided by
operations were: (i) net income in the fiscal 1997 period compared with a net
loss in the fiscal 1996 period, (ii) a non-cash asset impairment charge in the
fiscal 1996 period compared with no such charge in the fiscal 1997 period,
(iii) an increase in deferred taxes in the fiscal 1997 period compared with a
decrease in the fiscal 1996 period, (iv) a decrease in accounts payable in the
fiscal 1997 period as compared with an increase in the fiscal 1996 period, (v)
a decrease in accrued liabilities during the first nine months of fiscal 1997
compared with an increase in fiscal 1996, and (vi) an increase in income taxes
payable in fiscal 1997 compared with a decrease in the fiscal 1996 period.
Items (i), (ii), and (vi) relate to each other inasmuch as the net loss in the
fiscal 1996 period resulted from the asset impairment charge recorded in fiscal
1996, with no such charge in the fiscal 1997 period. Also, the net income in
fiscal 1997 led to an increase in income taxes payable while the net loss in
fiscal 1996 led to a decrease. Item (iii) also results from the asset
impairment charge in the fiscal 1996 period. The fiscal 1996 loss led to a
decrease in deferred taxes for the fiscal 1996 period while positive net income
for the fiscal 1997 period led to an increase in deferred taxes for the fiscal
1997 period. Item (iv), the decrease in accounts payable in fiscal 1997
compared with an increase during fiscal 1996 is primarily a result of a
decrease in the level of capital expenditures during the fiscal 1997 period.
Item (v), the decrease in accrued liabilities in fiscal 1997 compared with an
increase during fiscal 1996 is primarily a result of the actual payment in the
fiscal 1997 period of expenses previously accrued for in connection with the
third party ACE processing contract which expired on December 31, 1996.
13
<PAGE> 16
During the first nine months of fiscal 1997 and fiscal 1996, the Company's
net cash used in investing activities was approximately $15,979,000 and
$5,559,000, respectively. For fiscal 1997, the main component was the cash
payment of $12,000,000 in connection with the EMPAK consolidation transaction.
The Company's capital expenditures during the first nine months of fiscal 1997
and fiscal 1996, were approximately $3,874,000 and $5,264,000, respectively.
Capital expenditures for fixed assets during the first nine months of both
fiscal 1997 and fiscal 1996 were primarily related to general improvements and
additions to the Company's GNIC facility and general improvements to its
treatment and disposal facilities.
Cash decreased by approximately $428,000, primarily the result of capital
expenditures made by the Company during the fiscal 1997 period. Accounts
Receivable increased by approximately $1,618,000 during the first nine months
of fiscal 1997, primarily as a result of higher revenues during the fiscal 1997
period. Intangibles, Accrued Liabilities, Other Long-Term Liabilities, and
Senior Subordinated Notes, increased by approximately $15,972,000, $711,000,
$3,227,000, and $18,517,000, respectively, during the first nine months of
fiscal 1997, primarily as a result of the EMPAK consolidation transaction that
closed on September 30, 1996. Other Assets increased by approximately
$1,557,000 during the first nine months of fiscal 1997, primarily as a result
of the deferred costs associated with the senior subordinated notes
transaction. Accounts Payable decreased by approximately $2,053,000 during the
first nine months of fiscal 1997, primarily as a result of a lower level of
capital expenditures made during the fiscal 1997 period. Long- Term Debt, Less
Current Portion decreased by approximately $4,571,000, and Additional Paid-In
Capital increased by approximately $1,565,000, respectively, during the fiscal
1997 period primarily as a result of the financing utilized by the Company to
fund the EMPAK consolidation transaction.
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.
14
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GNI GROUP, INC.
Date: May 14, 1997 /s/ Carl V Rush, Jr.
---------------------------- -------------------------------------
Carl V Rush, Jr.
President and CEO
Date: May 14, 1997 /s/ Donna L. Ratliff
---------------------------- -------------------------------------
Donna L. Ratliff
Treasurer
(Principal Accounting Officer)
16
<PAGE> 19
INDEX TO EXHIBITS
EX-27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 695,117
<SECURITIES> 0
<RECEIVABLES> 8,152,568
<ALLOWANCES> 26,000
<INVENTORY> 516,828
<CURRENT-ASSETS> 11,148,030
<PP&E> 47,273,422
<DEPRECIATION> 14,517,365
<TOTAL-ASSETS> 68,631,306
<CURRENT-LIABILITIES> 8,176,119
<BONDS> 0
0
0
<COMMON> 66,127
<OTHER-SE> 26,129,644
<TOTAL-LIABILITY-AND-EQUITY> 68,631,306
<SALES> 31,206,189
<TOTAL-REVENUES> 31,206,189
<CGS> 18,019,317
<TOTAL-COSTS> 25,854,450
<OTHER-EXPENSES> (260,174)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,997,259
<INCOME-PRETAX> 3,614,654
<INCOME-TAX> 1,318,300
<INCOME-CONTINUING> 2,296,354
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,296,354
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
