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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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)
(281) 930-0350
(Registrant's telephone number, including area code)
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 [ ]
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's common stock, $.01 par
value per share, as of February 1, 1997 was 6,569,025.
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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
December 31, 1996 and June 30, 1996 1
Consolidated Statements of Operations
Three and Six Months ended Decem-
ber 31, 1996 and December 31, 1995 2
Consolidated Statements of Cash Flows
Six Months ended December 31, 1996
and December 31, 1995 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 15-16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
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THE GNI GROUP, INC. December 31, June 30,
1996 1996
<S> <C> <C>
ASSETS
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CURRENT ASSETS:
Cash and time deposits $ 346,921 $ 1,122,941
Accounts receivable, less allowance of approximately
$16,000 for 12/31/96 and $142,000 for 6/30/96 8,030,908 6,508,680
Inventory 805,528 661,233
Deferred tax asset - current 131,455 400,701
Prepaid expenses and other assets 1,301,793 969,762
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TOTAL CURRENT ASSETS 10,616,605 9,663,317
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PROPERTY, PLANT AND EQUIPMENT 45,744,269 43,829,344
Less accumulated depreciation (13,407,263) (11,682,703)
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NET PROPERTY, PLANT AND EQUIPMENT 32,337,006 32,146,641
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Intangibles 20,243,196 3,938,751
Restricted time deposits 1,606,990 1,495,681
Deferred tax asset 37,044 222,309
Other assets 3,131,910 1,611,519
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TOTAL ASSETS $ 67,972,751 $ 49,078,218
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Accounts payable $ 4,763,508 $ 3,887,395
Accrued liabilities 3,105,735 2,599,503
Federal income taxes payable 370,945 549,256
Notes payable 212,580 --
Current portion of long-term debt 2,495,652 2,620,652
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TOTAL CURRENT LIABILITIES 10,948,420 9,656,806
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Other long-term liabilities 4,236,739 518,804
Long-term debt, less current portion 8,770,652 16,568,478
Senior subordinated notes 18,462,044 --
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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 12/31/96 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 4,719,507 3,064,029
Less cost of treasury stock (40,184 shares) (47,006) (47,006)
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TOTAL STOCKHOLDERS' EQUITY 25,554,896 22,334,130
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,972,751 $ 49,078,218
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</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at December 31, 1996 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)
<TABLE>
<CAPTION>
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THE GNI GROUP, INC. Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
REVENUES $ 10,662,472 $ 9,267,394 $ 20,622,099 $ 18,729,033
COST AND EXPENSES:
Cost of services 6,317,406 5,437,005 12,025,693 11,039,688
Selling, general and administrative 1,155,631 1,135,197 2,265,779 2,264,653
Depreciation and amortization 1,458,864 1,267,268 2,694,532 2,461,423
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TOTAL COST AND EXPENSES 8,931,901 7,839,470 16,986,004 15,765,764
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OPERATING INCOME 1,730,571 1,427,924 3,636,095 2,963,269
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Interest income 17,890 21,652 40,323 40,360
Interest expense 705,138 392,452 1,076,110 736,190
Other income 14,444 40,542 10,671 62,301
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INCOME BEFORE TAX 1,057,767 1,097,666 2,610,979 2,329,740
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Income tax 389,300 407,390 955,500 853,900
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NET INCOME $ 668,467 $ 690,276 $ 1,655,479 $ 1,475,840
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NET INCOME PER COMMON SHARE $ .10 $ .10 $ .25 $ .22
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SHARES USED TO CALCULATE E.P.S. 6,753,633 6,788,039 6,752,865 6,803,939
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</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
2
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
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THE GNI GROUP, INC. Six Months Ended
December 31,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
NET INCOME $ 1,655,479 $ 1,475,840
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 2,694,532 2,461,423
Deferred taxes 454,511 275,602
Gain on sale of asset (7,683) (21,600)
Change in assets and liabilities, net of acquisition:
Increase in accounts receivable (1,522,228) (2,854,098)
Decrease (increase) in inventory (144,295) 126,063
Increase in prepaid expenses and other (332,031) (835,801)
Increase in other assets (1,673,090) (95,831)
Increase in accounts payable 876,112 2,710,069
Increase (decrease) in accrued liabilities (555,133) 119,878
Increase (decrease) in income taxes payable (99,011) 78,298
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,347,163 $ 3,439,843
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Cash flows from investing activities:
Increase in restricted time deposits (111,309) (116,594)
Payment of cash in connection with business
acquisition, net of cash acquired -- (193,132)
Payment of cash in connection with EMPAK transaction (12,000,000) --
Proceeds from sale of asset 15,700 25,457
Purchases of fixed assets (2,344,660) (4,112,136)
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NET CASH USED IN INVESTING ACTIVITIES (14,440,269) (4,396,405)
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Cash flows from financing activities:
Cash proceeds from notes payable 852,144 933,095
Net cash from exercise of stock options 27,332 20,400
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 -- 1,000,000
Principal payments of long-term debt and notes payable (20,562,390) (1,718,096)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 12,317,086 235,399
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NET DECREASE IN CASH AND CASH EQUIVALENTS (776,020) (721,163)
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 $ 346,921 $ 131,207
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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
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THE GNI GROUP, INC. December 31, 1996
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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 December 31, 1996 and the related
Statements of Operations for the three and six month periods ended December 31,
1996 and 1995, and Statements of Cash Flows for the six month period ended
December 31, 1996 and 1995 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 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.
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>
Six Months Ended
December 31, 1996
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<S> <C>
Provision:
Federal-Current $ 421,689
Federal-Deferred 454,511
State 79,300
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Total $ 955,500
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</TABLE>
The significant components of deferred income tax expense for the six
months ended December 31, 1996 are as follows:
<TABLE>
<S> <C>
Deferred tax expense (exclusive of the effect of the component
listed below) $ 454,511
Increase in beginning-of-the-year balance of the valuation allowance for
deferred tax assets --
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Total deferred tax provision $ 454,511
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</TABLE>
5
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The tax effects of temporary timing differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Amounts deductible when paid 576,706
Accounts receivable, principally due to allowance for doubtful accounts 5,936
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 $ 1,981,256
Less valuation allowance (20,000)
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Net deferred tax assets $ 1,961,256
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Deferred tax liabilities:
Facility and equipment, principally due to differences in depreciation
and capitalized interest $ 1,792,757
Other --
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Total deferred tax liabilities $ 1,792,757
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Net deferred tax asset $ 168,499
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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 SECOND QUARTER COMPARED WITH FISCAL 1996 SECOND QUARTER
Revenues. Revenues for the second quarter of fiscal 1997 were $10,662,472
as compared to $9,267,394 for the comparable period of fiscal 1996, an increase
of $1,395,078, or 15.1%. This increase 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 $640,000, or 15.5%, from the
fiscal 1996 second quarter compared to the fiscal 1997 second 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. The
expected level of revenues, however, was affected by the slower than
anticipated transfer of EMPAK's deepwell disposal customers to the Company's
facility. It was not until mid-November that the bulk of the new deepwell
volumes was transitioned, but substantially all of the business was transferred
by the end of the fiscal 1997 second quarter. Transportation revenues also
increased in the second quarter of fiscal 1997 as compared with the comparable
period in fiscal 1996, an increase of approximately $125,000, or 11.3%. This
increase in transportation revenues was primarily attributable to the increase
in deepwell disposal volumes during the fiscal 1997 period.
Additionally, revenues from the Company's chemical manufacturing and
processing subsidiary, GNI Chemicals Corporation ("GNIC"), increased by
approximately $630,000, or 15.6%, in the second quarter of fiscal 1997 as
compared to the fiscal 1996 period. The Company's GNIC revenues for the fiscal
1997 period were approximately $4,660,000 as compared to $4,030,000 for the
fiscal 1996 period. This increase was a result of an increase in specialty
chemical sales offset by a decrease in chemical manufacturing and processing
revenues. Specialty chemical sales benefitted from the inclusion of the
acetonitrile ("ACE") business for the entire fiscal 1997 period as compared
with only a portion of the fiscal 1996 period. The Company acquired the ACE
business from E. I. du Pont de Nemours & Co. ("DuPont") during the second
quarter of fiscal 1996. As a result, the Company's GNIC revenues included
revenues associated with the ACE acquisition for only approximately half 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 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.
7
<PAGE> 10
Cost of Services. Cost of services increased as a percent of revenues from
58.7% during the second quarter of fiscal 1996 to 59.2% for the second quarter
of fiscal 1997. In absolute dollar terms, cost of services increased by
approximately $880,000 in conjunction with an increase of approximately
$1,395,000 in revenues. The increase in cost of services in absolute dollars
was primarily attributable to an increase in cost of services at the Company's
GNIC operation in absolute dollar terms in the fiscal 1997 period, which was
primarily the result of additional operating expenses associated with the
internalization of ACE production and building an initial inventory of ACE
finished product by the end of the fiscal 1997 second quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses as a percent of revenues were 10.8% and 12.2%,
respectively, for the second quarter of fiscal 1997 and fiscal 1996. The
decrease in SG&A expenses as a percent of revenues was primarily a result of
higher revenues in the 1997 period. In absolute dollars, SG&A expenses were
approximately $20,000 higher in the fiscal 1997 period compared with the fiscal
1996 period.
Depreciation and Amortization Expenses. Depreciation and Amortization
(D&A) expenses remained the same as a percent of revenues in the second quarter
of fiscal 1996 compared to the second quarter of fiscal 1997, at a level of
13.7%. D&A expenses for the second quarter of fiscal 1997 increased by 15.1%
in absolute dollar terms compared to the second 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, (ii)
the additional D&A expenses associated with the Company's consolidation
transaction with EMPAK which were not present in the fiscal 1996 period, and
(iii) the additional D&A expenses associated with the Company's ACE acquisition
from DuPont in November 1995 which were only present for a portion of the
fiscal 1996 period.
Net Interest Expense. Net interest expense increased in the fiscal 1997
second quarter as compared with the fiscal 1996 second quarter. This increase
was primarily attributable to higher principal balances on the Company's
indebtedness. The increased level of indebtedness was associated with the
capital improvements made by the Company to its facilities and the debt
associated with the Company's recent ACE acquisition and EMPAK consolidation.
Net Income. The Company had net income of $668,467, or $.10 per share, for
the second quarter of fiscal 1997 compared with net income of $690,276, or $.10
per share, for the second quarter of fiscal 1996.
8
<PAGE> 11
FISCAL 1997 SIX MONTHS COMPARED TO FISCAL 1996 SIX MONTHS
Revenues. Revenues for the first six months of fiscal 1997 were
$20,622,099 as compared to $18,729,033 for the comparable period of fiscal
1996, an increase of $1,893,066, or 10.1%. The increase in the Company's
revenues was primarily attributable to an increase in revenues from its GNIC
operation of approximately $1,250,000, or 15.0%, as compared with the first six
months of fiscal 1996. The Company's GNIC revenues for the fiscal 1997 period
were approximately $9,605,000 as compared to $8,355,000 for the fiscal 1996
period. This increase was a result of an increase in specialty chemical sales
offset by a decrease in chemical manufacturing and processing revenues.
Specialty chemical sales benefitted from the inclusion of the ACE business for
the entire fiscal 1997 six month period as compared with only a portion of the
fiscal 1996 period. The Company acquired the ACE business from DuPont during
the latter part of the fiscal 1996 period. As a result, the Company's GNIC
revenues included revenues associated with the ACE acquisition for only
approximately one-fourth of the fiscal 1996 six month 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 six
month 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.
Additionally, revenues from the Company's treatment and disposal operation
increased by approximately $400,000, or 4.8%, from the fiscal 1996 six month
period compared to the fiscal 1997 six month period. Revenues for fiscal 1997
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. The expected level of revenues,
however, was affected by the slower than anticipated transfer of EMPAK's
deepwell disposal customers to the Company's facility. It was not until
mid-November that the bulk of the new deepwell volumes was transitioned, but
substantially all of the business was transferred by the end of the fiscal 1997
period. Transportation revenues also increased in the fiscal 1997 period as
compared with fiscal 1996, an increase of approximately $240,000, or 11.7%.
This increase in transportation revenues was primarily attributable to the
increase in deepwell disposal volumes during the fiscal 1997 period.
9
<PAGE> 12
Cost of Services. Cost of services decreased as a percent of revenues from
58.9% during the first six months of fiscal 1996 to 58.3% for the first six
months of fiscal 1997, in absolute dollar terms, cost of services increased by
approximately $980,000 in conjunction with an increase of approximately
$1,890,000 in revenues. The increase in cost of services in absolute dollars
was primarily attributable to an increase in cost of services at the Company's
GNIC operation in absolute dollar terms in the fiscal 1997 period, which was
primarily the result of additional operating expenses associated with the
internalization of ACE production and building an initial inventory of ACE
finished product by the end of the fiscal 1997 second quarter.
Selling, General and Administrative Expenses. SG&A expenses as a percent
of revenues were 12.1% and 11.0% of revenues, respectively, for the first six
months of fiscal 1996 and fiscal 1997. The decrease in SG&A expenses as a
percent of revenues was primarily a result of higher revenues in the fiscal
1997 period in conjunction with the relative fixed cost nature of these
expenses. In absolute dollars, SG&A expenses were only slightly higher in the
fiscal 1997 period compared with the fiscal 1996 period.
Depreciation and Amortization Expenses. D&A expenses remained the same as
a percent of revenues in the first six months of fiscal 1996 compared to the
first six months of fiscal 1997, at a level of 13.1%. D&A expenses for the
first six months of fiscal 1997 increased by 9.5% in absolute dollar terms
compared to the first six months 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 the first half of calendar 1996, (ii) the
additional D&A expenses associated with the Company's consolidation transaction
with EMPAK at the end of September 1996 which were not present in the fiscal
1996 period, and (iii) the additional D&A expenses associated with the
Company's ACE acquisition from DuPont in November 1995 which were only present
for a portion of the fiscal 1996 period.
Net Interest Expense. Net interest expense increased for the first six
months of fiscal 1997 compared to the first six months of fiscal 1996. This
increase was primarily attributable to higher principal balances on the
Company's indebtedness. The increased level of indebtedness was associated
with the capital improvements made by the Company to its facilities and the
debt associated with the Company's recent ACE acquisition and EMPAK
consolidation.
Net Income. The Company had net income of $1,655,479, or $.25 per share,
for the first six months of fiscal 1997 compared with net income of $1,475,840,
or $.22 per share, for the first six 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 December 31, 1996, the unpaid principal balance
outstanding on the Equipment Line was $5,750,000.
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 $1,391,304 at December 31, 1996.
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 December 31, 1996, the unpaid
principal balance outstanding on the Acquisition Line was $975,000.
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 December 31, 1996, the
unpaid principal balance outstanding on the CWM Note was $1,500,000.
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.
However, 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. The maturity date of the Revolver remained unchanged.
Effective as of October 1, 1996, advances under the Revolver bear interest at
the bank's prime rate of interest. As of December 31, 1996, the Company has an
unpaid principal balance outstanding on the Revolver of $1,650,000.
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.
12
<PAGE> 15
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 six months of fiscal 1997 and fiscal 1996, net cash provided
by operations was approximately $1,347,000 and $3,440,000, respectively. The
significant differences in the components that comprise net cash provided by
operations were: (i) a greater increase in accounts receivable in the fiscal
1996 period compared with the fiscal 1997 period, (ii) an increase in inventory
in the fiscal 1997 period compared with a decrease in inventory for the fiscal
1996 period, (iii) a greater increase in prepaid expenses and other in the
fiscal 1996 period compared with the fiscal 1997 period, (iv) a greater
increase in other assets in the fiscal 1997 period as compared with the fiscal
1996 period, (v) a greater increase in accounts payable in the fiscal 1996
period as compared with the fiscal 1997 period, and (vi) a decrease in accrued
liabilities during the first six months of fiscal 1997 compared with an
increase in fiscal 1996. Item (i) stems from the higher levels of revenues
generated in the fiscal 1997 period as compared with the fiscal 1996 period.
Although revenues increased during both fiscal periods, the rate of increase
was greater during the fiscal 1996 period as compared with fiscal 1997, thus
the increase in accounts receivable was greater during fiscal 1996. Item (ii)
results from the internalization of ACE production during the fiscal 1997
period and the associated build-up of ACE finished product inventory. The
greater increase in prepaid expenses and other, Item (iii), in the fiscal 1996
period compared with fiscal 1997 is primarily a result of differences in the
timing of prepaid expenses. The greater increase in other assets, Item (iv),
in the fiscal 1997 period compared with fiscal 1996 is primarily a result of
deferred costs associated with the senior subordinated notes transaction. The
greater increase in accounts payable, Item (v), during the first six months of
fiscal 1996 was associated with the increased level of capital expenditures
made by the Company during the fiscal 1996 period, as compared with the fiscal
1997 period when accounts payable increased only moderately. And finally, Item
(vi), a decrease in accrued liabilities in the fiscal 1997 period as compared
with an increase in fiscal 1996 was primarily the result of the payment of
costs and expenses in the fiscal 1997 period that had been accrued for in prior
periods.
During the first six months of fiscal 1997 and fiscal 1996, the Company's
net cash used in investing activities was approximately $14,440,000 and
$4,396,000, 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 six months of fiscal 1997
and fiscal 1996, were approximately $2,345,000 and $4,112,000, respectively.
Capital expenditures for fixed assets during the first six 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.
13
<PAGE> 16
Cash decreased by approximately $776,000, primarily the result of capital
expenditures made by the Company during the fiscal 1997 period. Accounts
Receivable increased by approximately $1,522,000 during the first six months of
fiscal 1997, primarily as a result of higher revenues during the fiscal 1997
period. Prepaid Expenses and Other Current Assets and Notes Payable increased
by approximately $332,000 and $213,000, respectively, during the first six
months of fiscal 1997, primarily as a result of the renewal of the Company's
various annual insurance coverages during the fiscal 1997 period. Intangibles,
Accrued Liabilities, and Other Long-Term Liabilities increased by approximately
$16,304,000, $506,000, and $3,718,000, respectively, during the first six
months of fiscal 1997, primarily as a result of the EMPAK consolidation
transaction that closed on September 30, 1996. Other Assets increased by
approximately $1,520,000 during the first six months of fiscal 1997, primarily
as a result of the deferred costs associated with the senior subordinated notes
transaction. Accounts Payable increased by approximately $877,000 during the
first six months of fiscal 1997, primarily as a result of capital expenditures
made during the fiscal 1997 period. Long-Term Debt, Less Current Portion
decreased by approximately $7,797,000, Senior Subordinated Notes increased by
approximately $18,462,000, 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
(c) 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.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company for
the fiscal year ended June 30, 1996, was held on
October 29, 1996.
The following matters were voted upon and approved by
the stockholders:
(a) The election of five persons to serve on the
Company's Board of Directors until the next
annual meeting or until their successors are
elected and qualified. Those persons were:
N.E. Dudney, M.D., Titus H. Harris, Jr., John
W. Lyons, Jr., F. Oliver Nicklin, and Carl V
Rush, Jr.
Votes For: 4,225,885 Votes Against: 9,640 Abstained: -0-
15
<PAGE> 18
(b) The ratification of the appointment of KPMG
Peat Marwick as the Company's independent
auditors for the fiscal year ending June 30,
1997.
Votes For: 4,231,485 Votes Against: 2,800 Abstained: 1,240
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) On October 1, 1996, the Company filed a current
report on Form 8-K, dated October 1, 1996, in respect
to the Company's EMPAK consolidation transaction. On
September 30, 1996, the Company participated in a
consolidation with 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. The information was
reported under Item 5. Other Events.
16
<PAGE> 19
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: February 13, 1997 /s/ Carl V Rush, Jr.
---------------------------- -------------------------------------
Carl V Rush, Jr.
President and CEO
Date: February 13, 1997 /s/ Donna L. Ratliff
---------------------------- -------------------------------------
Donna L. Ratliff
Treasurer
(Principal Accounting Officer)
17
<PAGE> 20
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 346,921
<SECURITIES> 0
<RECEIVABLES> 8,030,908
<ALLOWANCES> 16,000
<INVENTORY> 805,528
<CURRENT-ASSETS> 10,616,605
<PP&E> 45,744,269
<DEPRECIATION> 13,407,263
<TOTAL-ASSETS> 67,972,751
<CURRENT-LIABILITIES> 10,948,420
<BONDS> 0
<COMMON> 66,127
0
0
<OTHER-SE> 25,488,769
<TOTAL-LIABILITY-AND-EQUITY> 67,972,751
<SALES> 20,622,099
<TOTAL-REVENUES> 20,622,099
<CGS> 12,025,693
<TOTAL-COSTS> 16,986,004
<OTHER-EXPENSES> (50,994)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,076,110
<INCOME-PRETAX> 2,610,979
<INCOME-TAX> 955,500
<INCOME-CONTINUING> 1,655,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,655,479
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
