<PAGE> 1
================================================================================
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 SEPTEMBER 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
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 [ ] No [X]
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 Class A voting common
stock, $.01 par value per share, as of November 1, 1998 was 571,429. There were
no shares outstanding of the registrant's Class B non-voting common stock, $.01
par value per share, as of November 1, 1998.
================================================================================
<PAGE> 2
INDEX
THE GNI GROUP, INC.
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998 1
Consolidated Statements of Operations
Three Months ended September 30, 1998
and September 30, 1997 2
Consolidated Statements of Cash Flows
Three Months ended September 30, 1998
and September 30, 1997 3
Notes to Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 6-12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- - ----------------------------------------------------------------------------------------------------------------------
THE GNI GROUP, INC. September 30, June 30,
1998 1998
ASSETS
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and time deposits $ 540,844 $ 208,257
Accounts receivable, less allowance of approximately $270,000
at 9/30/98 and $229,000 at 6/30/98 8,278,726 7,022,323
Inventory 64,425 478,886
Prepaid expenses and other assets 1,776,977 1,232,555
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 10,660,972 8,942,021
- - ----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT 59,206,377 55,541,764
Less accumulated depreciation (20,999,531) (19,628,867)
- - ----------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 38,206,846 35,912,897
- - ----------------------------------------------------------------------------------------------------------------------
Restricted time deposits 1,470,035 1,451,253
Deferred tax asset, net 3,313,088 360,165
Intangible assets, net 18,202,273 18,193,364
Other assets, net 5,707,099 4,016,866
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 77,560,313 $ 68,876,566
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- - ----------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ -- $ 2,147,826
Accounts payable 5,287,033 3,299,930
Accrued liabilities 5,085,744 2,987,625
Federal income taxes payable -- 190,005
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 10,372,777 8,625,386
- - ----------------------------------------------------------------------------------------------------------------------
Accrued liabilities 2,209,433 2,700,484
Long-term debt, less current portion 77,773,652 32,016,606
Series A preferred stock 18,500,000 --
- - ----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value. Authorized 20,000,000 shares, no shares
outstanding at 9/30/98 and 6,674,709 issued at 6/30/98. -- 66,747
Class A common stock, $.01 par value. Authorized 1,500,000 shares; issued
571,429 shares at 9/30/98 and no shares issued at 6/30/98. 5,714 --
Class B common stock, $.01 par value
Authorized 1,500,000 shares, no shares outstanding at 9/30/98 and no shares
issued at 6/30/98. -- --
Additional paid-in capital 3,994,303 21,156,898
Retained earnings (accumulated deficit) (35,295,566) 4,357,451
Less cost of treasury stock (40,184 shares) -- (47,006)
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (31,295,549) 25,534,090
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 77,560,313 $ 68,876,566
======================================================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at September 30, 1998 is unaudited. The Balance Sheet at
June 30, 1998 has been derived from the audited financial statements at that
date.
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- - -----------------------------------------------------------------------------------------
THE GNI GROUP, INC. Three Months Ended
September 30,
1998 1997
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 8,499,118 $ 10,917,257
COST AND EXPENSES:
Cost of services 5,880,222 6,145,858
Selling, general and administrative 2,071,108 1,245,998
Depreciation and amortization 1,936,901 1,728,768
- - -----------------------------------------------------------------------------------------
TOTAL COST AND EXPENSES 9,888,231 9,120,624
- - -----------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (1,389,113) 1,796,633
- - -----------------------------------------------------------------------------------------
Interest income 20,178 26,323
Interest expense 1,597,277 985,541
Other income 2,857 104,015
- - -----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAX (2,963,355) 941,430
- - -----------------------------------------------------------------------------------------
Income taxes (benefit) (933,048) 356,600
- - -----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ (2,030,307) $ 584,830
=========================================================================================
Extraordinary item, net of tax benefit (3,920,936) --
- - -----------------------------------------------------------------------------------------
NET INCOME (LOSS) (5,951,243) 584,830
=========================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
2
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- - ----------------------------------------------------------------------------------------------------------
THE GNI GROUP, INC. Three Months Ended
September 30,
1998 1997
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
NET INCOME (LOSS) $ (5,951,243) $ 584,830
Adjustments to reconcile income to net cash provided
by operating activities:
Depreciation and amortization 1,936,901 1,728,768
Deferred taxes (2,952,923) (2,845)
Write-off of deferred loan costs 1,140,708 --
Debt retirement costs 4,800,103 --
Gain on sale of assets -- (4,500)
Change in assets and liabilities, net of business acquisition:
Increase in accounts receivable (310,311) (676,366)
Decrease in inventory 414,461 106,840
Increase in prepaid expenses and other (502,171) (975,081)
Increase in other assets (1,243) (445,695)
Increase in accounts payable 1,081,326 912,288
Increase in accrued liabilities 1,126,066 60,833
Increase (decrease) in federal income taxes payable (200,000) 310,445
- - ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 581,674 1,599,517
==========================================================================================================
Cash flows from investing activities:
Increase in restricted time deposits (18,781) (10,500)
Payment of cash in connection with
business acquisition (482,353) --
Proceeds from sale of assets -- 4,500
Purchases of fixed assets (3,614,613) (2,019,369)
- - ----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,115,747) (2,025,369)
==========================================================================================================
Cash flows from financing activities:
Cash proceeds from notes payable 702,233 920,782
Net cash from exercise of stock options -- 105,000
Net proceeds from revolving line 2,773,652 --
Purchase of GNI equity (50,727,953) --
Net proceeds from issuance of Senior Notes 72,750,000 --
Equity contribution 22,500,000 --
Deferred loan costs (1,344,478) --
Subordinated notes make-whole premium (3,590,000) --
Merger fees and expenses (3,558,733) --
Principal payments of long-term debt and notes payable (35,638,061) (917,733)
- - ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,866,660 108,049
==========================================================================================================
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 332,587 (317,803)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 208,257 807,387
- - ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 540,844 $ 489,584
==========================================================================================================
</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. September 30, 1998
- - -------------------------------------------------------------------------------
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 September 30, 1998 and the related
Statements of Operations and Cash Flows for the three month periods ended
September 30, 1998 and 1997 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.
ACQUISITIONS
On September 25, 1998, a wholly-owned subsidiary of the Company, GNI
Technical Services, Inc., purchased substantially all of the assets and assumed
certain liabilities of Moheat, Inc. ("Moheat") for cash consideration of
approximately $480,000. Moheat is engaged in the site management and disposal of
hazardous waste, primarily as a contractor to the U.S. government.
MERGER
On July 28, 1998, the Company completed an offering of $75 million of
10.875% Senior Notes due 2005. The net proceeds from the offering, together with
an equity investment in the Company of $22.5 million by 399 Venture Partners,
Inc. and certain members of the Company's management, were used to purchase the
Company's issued and outstanding Common Stock, pay a cash consideration to
holders of options and warrants to purchase Common Stock, repay the existing
bank indebtedness and senior subordinated notes, and pay related fees and
expenses (the "Merger Transactions").
4
<PAGE> 7
Effective July 28, 1998, in connection with the Merger Transactions, the
Company entered into a revolving credit facility with NationsBank, N.A. with
respect to senior secured credit facilities which provides for (i) revolving
loans in the aggregate amount of up to $12.0 million, subject to a borrowing
base formula and certain asset appraisals, with a $3.0 million sublimit for the
issuance of standby and commercial letters of credit and (ii) the Company's
existing $1.5 million automatically renewable, stand-by letter of credit, the
reimbursement obligations of which are guaranteed by WMX Technologies, Inc. The
Revolving Credit Facility has an initial term ending July 31, 2001, with one
year renewal options thereafter.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Pursuant to a Merger Agreement dated February 12, 1998, and amended on June
17, 1998, between the Company and Green I Acquisition Corp. ("Green I"), a
company formed by 399 Venture Partners, Inc. ("399"), Green I merged with and
into the Company, with the Company as the surviving corporation (the "Merger").
Immediately following the Merger, each share of GNI common stock was canceled
and converted into the right to receive $7.00 in cash, other than certain shares
held by management and other than shares held by stockholders who were entitled
to, and who perfected their, appraisal rights. Each option and warrant to
purchase GNI common stock outstanding immediately prior to the effective date
was canceled and the holder thereof received $7.00 per share in cash, net of the
applicable option or warrant exercise price. The Company mailed a proxy
statement with respect to the Merger on June 24, 1998 for a stockholders'
meeting on July 23, 1998. On July 23, 1998, a majority of the Company's
stockholders approved the Merger. On July 28, 1998, the Merger became effective.
The Merger was financed by an offering of $75.0 million of 10.875% Senior
Notes due 2005, together with an equity investment in the Company of
approximately $22.5 million by 399 and certain members of GNI's management (the
Merger together with the equity and debt financing arrangements described
herein, the "Recapitalization"). In conjunction with the Recapitalization, the
Company entered into a new $12.0 million senior secured revolving facility (the
"Revolving Credit Facility") with NationsBank, N.A. which is available for
working capital requirements, capital expenditures and other general corporate
purposes and permitted acquisitions, subject to a borrowing base formula and
certain asset appraisals.
RESULTS OF OPERATIONS
FISCAL 1999 FIRST QUARTER COMPARED WITH FISCAL 1998 FIRST QUARTER
Revenues. Revenues decreased by $2.4 million, or 22.1%, from $10.9 million
in the first quarter of Fiscal 1998 to $8.5 million for the comparable period of
Fiscal 1999. This decrease was primarily attributable to (i) a decrease in
revenues from the Company's treatment and disposal operation, and (ii) a
decrease in chemical manufacturing revenues, resulting from the sale of the
Company's acetonitrile business to BP Chemicals Inc. ("BP") as of July 1, 1998
(the beginning of the Fiscal 1999 period). Revenues from the Company's treatment
and disposal operations decreased by approximately $1.7 million, or 24.6%, from
$6.9 million in the Fiscal 1998 first quarter to $5.2 million in the Fiscal 1999
first quarter, primarily due to decreased deepwell disposal volumes. Deepwell
disposal volumes decreased in the Fiscal 1999 period due to several factors: (i)
unusually
6
<PAGE> 9
dry weather conditions for most of the Fiscal 1999 first quarter, (ii) a decline
in the volumes generated by several large deepwell disposal customers compared
with prior periods, and (iii) the loss of certain non-hazardous deepwell
disposal volumes to less costly treatment alternatives. Transportation revenues
also decreased in the first quarter of Fiscal 1999 by approximately $345,000, or
27.0%, from $1.3 million in the first quarter of Fiscal 1998 to $0.9 million in
the comparable period in Fiscal 1999. This decrease in transportation revenues
was primarily attributable to the decrease in deepwell disposal volumes during
the Fiscal 1999 period. Deepwell disposal volumes and revenues should improve
sequentially quarter-to-quarter as weather patterns return to more normal
conditions and as several large deepwell disposal customers' generation of waste
returns to more normal levels.
Chemical manufacturing revenues decreased by approximately $0.7 million, or
17.9%, from $4.0 million in the first quarter of Fiscal 1998 to $3.3 million for
the comparable Fiscal 1999 period. Chemical manufacturing revenues were lower in
the Fiscal 1999 period as compared with the Fiscal 1998 period primarily as a
result of the net effect of the sale of the Company's acetonitrile business to
BP as of July 1, 1998. Net of the effect of the sale of the acetonitrile
business, the rest of the Company's chemical manufacturing revenues increased by
$273,000, or 10.5%, from $2.6 million in the first quarter of Fiscal 1998 to
$2.9 million for the comparable Fiscal 1999 period. However, chemical
manufacturing revenues were below expected levels in the first quarter of Fiscal
1999, principally due to the delay in start-up of the initial campaign for a
major specialty chemical customer. This delay was caused by slippage in the
completion of construction modifications to the Company's facility associated
with this particular project. This delay then led to a second customer's project
slipping into the current (second) quarter instead of the end of the first
quarter.
Cost of Services. Cost of services increased as a percentage of revenues
from 56.3% in the first quarter of Fiscal 1998 to 69.2% in the first quarter of
Fiscal 1999. Cost of services decreased by approximately $266,000, or 4.3%, from
$6.1 million in the first quarter of Fiscal 1998 to $5.9 million in the first
quarter of Fiscal 1999, reflecting the combination of the relatively fixed
nature of cost of services and the attendant decline in the level of revenues.
Included within the cost of services figure for Fiscal 1999 were non-recurring
personnel reduction costs of approximately $249,000. Excluding these
non-recurring costs would result in cost of services of 66.3% in the first
quarter of Fiscal 1999 compared with 56.3% in the first quarter of Fiscal 1998,
and a decrease in cost of services of approximately $515,000, or 8.4%, from
Fiscal 1998 to Fiscal 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased as a percentage of revenues from
11.4% in the first quarter of Fiscal 1998 to 24.4% in the first quarter of
Fiscal 1999 due primarily to the inclusion in the first quarter of Fiscal 1999
of non-recurring personnel reduction costs and transactions costs of
approximately $232,000 and $673,000, respectively. SG&A increased by
approximately $0.8 million, or 66.2%, from $1.2 million in the first quarter of
Fiscal 1998 to $2.1 million in the first quarter of Fiscal 1999. Excluding these
non-recurring charges, SG&A decreased by $80,000, or 6.4%, from Fiscal 1998 to
Fiscal 1999.
7
<PAGE> 10
Depreciation and Amortization. Depreciation and amortization increased by
approximately $208,000, or 12.0%, from $1.7 million in the first quarter of
Fiscal 1998 to $1.9 million in the first quarter of Fiscal 1999 primarily due to
the capital improvements made by the Company to its facilities in Fiscal 1998.
Net Interest Expense. Net interest expense increased by $0.7 million, 84.1%,
from $0.9 million in the first quarter of Fiscal 1998 to $1.6 million in the
first quarter of Fiscal 1999. This increase resulted from higher average levels
of indebtedness during the Fiscal 1999 period. The higher level of indebtedness
in the Fiscal 1999 period was a result of the issuance of the 10.875% Senior
Notes due 2005 in connection with the recapitalization transaction completed by
the Company on July 28, 1998.
Income (Loss) Before Extraordinary Item. The Company recorded a loss before
extraordinary item of $2.0 million for the first quarter of Fiscal 1999 compared
to income before extraordinary item of $0.6 million for the first quarter of
Fiscal 1998.
Net Income (Loss). The Company recorded a net loss of $5.95 million for the
first quarter of Fiscal 1999 compared to net income of $0.6 million for the
first quarter of Fiscal 1998. The Company recorded an extraordinary charge in
the amount of $3.9 million, net of tax benefit, in connection with the
recapitalization transaction completed by the Company on July 28, 1998.
EBITDA (Earnings Before Interest, Other Income, Income Taxes, Depreciation,
Amortization, and Non-Recurring Items). The Company recorded adjusted EBITDA of
approximately $1.7 million for the first quarter of Fiscal 1999 compared to
EBITDA of approximately $3.5 million for the first quarter of Fiscal 1998. The
Fiscal 1999 adjusted EBITDA figure excluded (i) a $0.7 million charge relating
to expenses of the recapitalization transaction, which closed on July 28, 1998,
and (ii) $0.5 million of personnel costs stemming from a restructuring of the
management and marketing of the Company's waste management business.
Inflation did not have a material impact on the Company's revenues or income
for either the first quarter of Fiscal 1999 or Fiscal 1998. Further, it is not
expected that inflation will have a material impact during the upcoming quarters
for either the Company's revenues or income.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of Fiscal 1999 the Company provided approximately $0.6
million in net cash from operations compared with approximately $1.6 million for
the Fiscal 1998 period. This decrease of approximately $1.0 million was
attributable to several factors, some of which were offsetting: (i) a net loss
in the Fiscal 1999 period as compared with net income in the Fiscal 1998 period,
(ii) a larger increase in the Company's deferred tax asset in the Fiscal 1999
period as compared with the Fiscal 1998 period, (iii) the write-off of deferred
loan costs and the incurrence of debt retirement costs in the Fiscal 1999
period, in each case without a corresponding expense in the
8
<PAGE> 11
Fiscal 1998 period, (iv) a smaller increase in accounts receivable in the Fiscal
1999 period compared with the Fiscal 1998 period, (v) a larger decrease in
inventory for the Fiscal 1999 period as compared with the Fiscal 1998 period,
and (vi) a larger increase in accrued liabilities for the first quarter of
Fiscal 1999 compared with the Fiscal 1998 period. Items (ii) and (iii) above
relate to the Recapitalization that closed during the first quarter of Fiscal
1999. As a part of the accounting treatment for the Recapitalization, the
Company's deferred tax asset increased by approximately $3.0 million and
existing deferred loan costs as well as debt retirement costs were written-off.
With respect to item (iv), accounts receivable increased in the Fiscal 1999
period, primarily as a result of an acquisition of a waste management firm that
closed in late September. Excluding the acquired business' accounts receivable,
the rest of the Company's accounts receivable would have decreased slightly,
which is in line with the revenue generated by the Company compared with the
preceding fiscal quarter. Item (v) relates to the decrease in inventory for the
Fiscal 1999 period and results from the sale of the Company's acetonitrile
business to BP Chemicals Inc. (BP) effective as of July 1, 1998. As a part of
the sale, the Company's acetonitrile inventory was also sold to BP. Item (vi),
accrued liabilities, experienced a greater increase in the Fiscal 1999 period as
compared with the Fiscal 1998 period, primarily the result of accrued interest
expense associated with the Senior Notes, coupled with no such corresponding
accrued expense in the Fiscal 1998 period.
During the first quarter of Fiscal 1999 and Fiscal 1998, the Company's net
cash used in investing activities was $4.1 million and $2.0 million,
respectively. For Fiscal 1999, the main components were the cash payment of
approximately $480,000 made for a business acquisition during the period and
capital expenditures during the fiscal first quarter. The Company's capital
expenditures during the first quarter of Fiscal 1999 and Fiscal 1998 were
approximately $3.6 million and $2.0 million, respectively. In the first quarter
of Fiscal 1999, capital expenditures included approximately $1.0 million spent
to bring the Company's facilities into compliance with new environmental
regulations regarding air emissions. These regulatory-related capital
expenditures represent a continuation of projects originally anticipated to be
completed by the end of the Company's Fiscal 1998. Also during the first quarter
of Fiscal 1999, the Company incurred customer-related capital expenditures of
approximately $1.7 million, approximately $400,000 of which related to the Navy
contract to blend and recycle a fuel mixture as a subcontractor to Battelle
Memorial Institute. This capital will be recovered over the life of the Navy
contract. The balance of the customer-related capital expenditures were incurred
on behalf of a major specialty chemical customer and represented a slippage in
the completion of construction modifications to GNI's chemical plant for this
particular project, which was originally anticipated to be completed by the end
of the Company's Fiscal 1998. The capital expenditures incurred for this plant
modification will be recovered over the term of the particular contract. During
the Fiscal 1998 period, capital expenditures were primarily related to general
improvements to the Company's specialty chemical and treatment and disposal
facilities. For the first quarter of Fiscal 1999, the Company's financing
activities provided net cash of approximately $3.9 million compared with
approximately $100,000 in the Fiscal 1998 period. For the Fiscal 1999 period,
the main components of financing activities were the various financing steps
that comprised the Recapitalization.
9
<PAGE> 12
During the first quarter of Fiscal 1999, accounts receivable increased by
approximately $1.3 million and accounts payable increased by approximately $2.0
million, in each case primarily the result of the Company's Moheat acquisition,
which closed on September 25, 1998. Capital expenditures made during the first
quarter of Fiscal 1999 also had an impact on the level of accounts payable and
on the level of net fixed assets. Inventory levels declined during the first
quarter of Fiscal 1999, primarily as a result of the sale of the Company's
acetonitrile business to BP Chemicals Inc. effective as of July 1, 1998. As a
result of the completion of the Recapitalization on July 28, 1998: (i) deferred
tax asset increased by approximately $3.0 million, (ii) other assets increased
by approximately $1.7 million, (iii) long-term debt increased by approximately
$45.8 million, (iv) series A preferred stock increased by approximately $18.5
million, (v) additional paid-in capital decreased by approximately $17.2
million, and (vi) retained earnings decreased by approximately $39.6 million.
During the first quarter of Fiscal 1999, Accrued liabilities increased by
approximately $2.1 million, primarily as a result of accrued interest expense in
connection with the 10.875% Senior Notes due 2005.
Effective July 28, 1998, the Company entered into a revolving credit
facility with NationsBank, N.A. ("Lender") with respect to senior secured credit
facilities which provides for revolving loans in the aggregate amount of up to
$12.0 million, subject to a borrowing base formula and certain asset appraisals,
with a $3.0 million sublimit for the issuance of standby and commercial letters
of credit (the "Revolving Credit Facility"). Availability under the Revolving
Credit Facility is calculated based on a borrowing base formula tied to (i) 85%
of eligible accounts receivable plus (ii) an amount based on the Company's fixed
assets. Amounts borrowed under the Revolving Credit Facility will be due in full
on July 31, 2001, unless extended. Until the Company provided the Lender with
financial statements for the quarter ended September 30, 1998, amounts borrowed
under the Revolving Credit Facility bear interest, at the option of the Company,
at either (i) the Lender's Base Rate plus 1.00% or (ii) LIBOR plus 2.75%.
Thereafter, such applicable margins are subject to reduction based upon the
Company's Interest Coverage Ratio (as defined in the Revolving Credit Facility.)
The Revolving Credit Facility contains standard financial and restrictive
covenants for facilities of this type. As of September 30, 1998, the Company's
Revolving Credit Facility had an outstanding balance of approximately $2.8
million and approximately $0.5 million of letters of credit outstanding, leaving
approximately $7.9 million of availability.
The Company's ability to make scheduled payments of principal of and
interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures, will depend on its future performance, which is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond its control. Based upon the Company's current level of operations,
management believes that cash flow from operations and available cash, together
with available borrowings under the Revolving Credit Facility, will be adequate
to meet the Company's liquidity needs for the next several years. However, there
can be no assurance that the Company's businesses will generate sufficient cash
flow from operations, or that future borrowings will be available under the
Revolving Credit Facility in an amount sufficient to enable the Company to
service its indebtedness, or to fund its other liquidity needs.
10
<PAGE> 13
YEAR 2000
Background. The Year 2000 issue refers to the inability of certain
date-sensitive computer chips, software and systems to recognize a two-digit
date field as belonging to the 21st century. Many computer software programs, as
well as certain hardware and equipment containing date-sensitive data, were
structured to utilize a two-digit date field. Accordingly, these programs may
not be able to properly recognize dates in the year 2000 and later, which could
result in significant system and equipment failures. This is a significant issue
for most if not all companies, with far reaching implications, some of which
cannot be anticipated or predicted with any degree of certainty. The Company
recognizes that it must take action to ensure that its operations will not be
adversely impacted by Year 2000 software failures.
The Company's State of Readiness. An initial systems survey of the Company
was completed in April, 1998 and revealed that several of the Company's
administrative applications and plant systems possess Year 2000 problems. The
Company has implemented a remediation plan to address the issues in a timely
manner. The cost of bringing the evaluated systems into compliance is estimated
to be between $125,000 and $150,000, including all software upgrade fees and
implementations.
Embedded Technology. The Company has focused its assessments to date on the
information technology systems. To date the Company's assessments indicate that,
due to the nature of the Company's operations, the non-information technology
systems (i.e. embedded technology such as microcontrollers) do not represent a
significant area of risk relative to Year 2000 readiness. The Company's
operations do not include capital intensive equipment with embedded
microcontrollers.
Contingency Plan. The Company has not, to date, implemented a Year 2000
contingency plan. As explained above, the Company has initiated action to
identify and resolve Year 2000 problems. The Company will develop and implement
a contingency plan in the event the Company's present course of action to solve
the Year 2000 problem should fall behind schedule.
The cost and time estimated for the Year 2000 problem are based on the
Company's best estimates. There can be no guarantee that these estimates will be
achieved and that planned results will be achieved. Risks include, but are not
limited to, the retention of internal and external resources dedicated to the
problem and the timely delivery of software corrections from external vendors.
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.
11
<PAGE> 14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q including
any forecasts, projections and descriptions of revenues and cash flows expected
to be generated pursuant to long-term outsourcing to manufacture specialty
chemicals for major chemical customers, anticipated cost savings and synergies
referred to herein including any statements contained herein regarding the
development or possible assumed future results of operations, markets for the
Company's services, regulatory developments, any statements preceded by,
followed by or that include the words "believes," "expects," "may," "estimates,"
"will," "should," "intends," "regarded to be," "plans," or "anticipates," or
similar expressions, or the negative thereof, and other statements regarding
matters that are not historical facts, are or may constitute forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995). Because such statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. The risks and uncertainties that may cause actual
results to differ include, among others, effectiveness of management's
strategies and decisions, general economic conditions, risks associated with
acquisitions, fluctuations in operating results, changes in applicable federal,
state and local laws and regulations, especially environmental regulations,
alternate and emerging technologies, competition and pricing pressures,
overcapacity in the waste management industry, the Company's ability to deal
Year 2000 issues, and uncertainties of litigation. As a result of these factors,
among others, the Company's revenues and cash flow could vary significantly from
quarter to quarter, and past financial performance should not be considered a
reliable indicator of future performance. No assurance can be given that these
are all of the factors that could cause actual results to vary materially from
the forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on the Company's behalf
are expressly qualified in their entirety by the cautionary statements set forth
or referred to above in this paragraph. Investors are cautioned not to place
undue reliance on such statements, which speak only as of the date hereof. The
Company undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events, except as may be
required by federal securities laws.
12
<PAGE> 15
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.
13
<PAGE> 16
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: November 16, 1998 /s/ Carl V Rush, Jr.
--------------------------- ------------------------------
Carl V Rush, Jr.
President and CEO
Date: November 16, 1998 /s/ Donna L. Ratliff
--------------------------- ------------------------------
Donna L. Ratliff
Treasurer
(Principal Accounting Officer)
14
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 540,844
<SECURITIES> 0
<RECEIVABLES> 8,278,726
<ALLOWANCES> (270,000)
<INVENTORY> 64,425
<CURRENT-ASSETS> 10,660,972
<PP&E> 59,206,377
<DEPRECIATION> (20,999,531)
<TOTAL-ASSETS> 77,560,313
<CURRENT-LIABILITIES> 10,372,777
<BONDS> 75,000,000
18,500,000
0
<COMMON> 5,714
<OTHER-SE> (31,301,263)
<TOTAL-LIABILITY-AND-EQUITY> 77,560,313
<SALES> 8,499,118
<TOTAL-REVENUES> 8,499,118
<CGS> 5,880,222
<TOTAL-COSTS> 9,888,231
<OTHER-EXPENSES> (23,035)
<LOSS-PROVISION> 40,000
<INTEREST-EXPENSE> 1,597,277
<INCOME-PRETAX> (2,963,355)
<INCOME-TAX> (933,048)
<INCOME-CONTINUING> (2,030,307)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,920,936)
<CHANGES> 0
<NET-INCOME> (5,951,243)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
