<PAGE> 1
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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 MARCH 31, 1998.
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 May 1, 1998 was 6,634,525.
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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, 1998 and June 30, 1997 1
Consolidated Statements of Operations
Three and Nine Months ended March 31, 1998
and March 31, 1997 2
Consolidated Statements of Cash Flows
Nine Months ended March 31, 1998
and March 31, 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 14
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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THE GNI GROUP, INC. March 31, June 30,
1998 1997
ASSETS
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<S> <C> <C>
CURRENT ASSETS:
Cash and time deposits $ 87,380 $ 807,387
Accounts receivable, less allowance of approximately $184,000
for 3/31/98 and $46,000 for 6/30/97 8,592,595 6,449,885
Inventory 308,928 524,436
Federal tax receivable 930,470 930,470
Prepaid expenses and other assets 2,979,768 2,676,172
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TOTAL CURRENT ASSETS
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12,899,141 11,388,350
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PROPERTY, PLANT AND EQUIPMENT
53,568,791 48,768,095
Less accumulated depreciation (18,510,349) (15,473,844)
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NET PROPERTY, PLANT AND EQUIPMENT 35,058,442 33,294,251
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Restricted time deposits 1,436,254 1,386,699
Intangible assets, net 18,591,601 19,788,457
Other assets 3,189,220 2,730,447
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TOTAL ASSETS $ 71,174,658 $ 68,588,204
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Accounts payable $ 1,992,162 2,253,663
Accrued liabilities 3,497,628 2,981,203
Federal income taxes payable 631,700 --
Notes payable 81,719 --
Current portion of long-term debt 2,321,739 2,495,652
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TOTAL CURRENT LIABILITIES 8,524,948 7,730,518
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Accrued liabilities 2,721,534 3,724,674
Long-term debt, less current portion 32,611,679 31,444,724
Deferred income taxes 898,163 800,000
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STOCKHOLDERS' EQUITY:
Non-redeemable convertible preferred stock, $.01 par value.
Authorized 1,000,000 shares; issued 0 shares. -- --
Common stock, $.01 par value.
Authorized 20,000,000 shares; issued 6,674,709 shares
at 3/31/98 and 6,654,709 shares at 6/30/97. 66,747 66,547
Additional paid-in capital 21,156,898 21,052,098
Retained earnings 5,241,695 3,816,649
Less cost of treasury stock (40,184 shares) (47,006) (47,006)
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TOTAL STOCKHOLDERS' EQUITY 26,418,334 24,888,288
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,174,658 $ 68,588,204
==================================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at March 31, 1998 is unaudited. The Balance Sheet at
June 30, 1997 has been derived from the audited financial statements at that
date.
1
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THE GNI GROUP, INC. Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUES $ 11,036,712 $ 10,584,091 $ 32,635,770 $ 31,206,189
COST AND EXPENSES:
Cost of services 6,250,779 5,993,624 18,362,235 18,019,317
Selling, general and administrative 1,279,656 1,251,340 3,821,436 3,517,118
Depreciation and amortization 1,827,552 1,623,483 5,384,523 4,318,015
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TOTAL COST AND EXPENSES 9,357,987 8,868,447 27,568,194 25,854,450
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OPERATING INCOME 1,678,725 1,715,644 5,067,576 5,351,739
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Interest income 22,935 12,980 84,180 53,303
Interest expense 962,053 921,148 2,934,796 1,997,259
Other income 385 196,199 107,155 206,871
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INCOME BEFORE TAX 739,992 1,003,675 2,324,115 3,614,654
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Income tax 299,968 362,800 899,068 1,318,300
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NET INCOME $ 440,024 $ 640,875 $ 1,425,047 $ 2,296,354
=================================================================================================================
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BASIC EARNINGS PER SHARE $ .07 $ .10 $ .21 $ .35
DILUTED EARNINGS PER SHARE $ .06 $ .09 $ .20 $ .33
=================================================================================================================
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AVERAGE SHARES OUTSTANDING-BASIC 6,674,709 6,612,709 6,673,216 6,610,885
AVERAGE SHARES OUTSTANDING-DILUTED 7,221,845 7,235,049 7,218,123 6,900,317
=================================================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
2
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THE GNI GROUP, INC. Nine Months Ended
March 31,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
NET INCOME $ 1,425,047 $ 2,296,354
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 5,384,523 4,318,015
Deferred taxes 98,163 547,613
Gain on sale of asset (4,500) (7,683)
Change in assets and liabilities:
Increase in accounts receivable (2,142,711) (1,617,888)
Decrease in inventory 215,508 144,405
Increase in prepaid expenses and other (303,595) (795,480)
Increase in other assets
(874,410) (1,836,366)
Decrease in accounts payable
(261,502) (2,053,262)
Decrease in accrued liabilities
(486,715) (870,215)
Increase in income taxes payable
631,700 94,691
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NET CASH PROVIDED BY OPERATING ACTIVITIES 3,681,508 220,184
==========================================================================================
Cash flows from investing activities:
Increase in restricted time deposits (49,555) (120,309)
Payment of cash in connection with EMPAK transaction -- (12,000,000)
Proceeds from sale of asset 4,500 15,700
Purchases of fixed assets (5,536,221) (3,873,992)
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NET CASH USED IN INVESTING ACTIVITIES (5,581,276) (15,978,601)
==========================================================================================
Cash flows from financing activities:
Cash proceeds from notes payable 920,782 852,144
Net cash from exercise of stock options 105,000 27,332
Proceeds from issuance of long term debt -- 12,000,000
Proceeds from issuance of senior subordinated debt
and warrants -- 20,000,000
Net proceeds from revolving line 2,700,000 --
Principal payments of long-term debt and notes payable (2,546,021) (17,548,883)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,179,761 15,330,593
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (720,007) (427,824)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 807,387 1,122,941
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87,380 $ 695,117
==========================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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THE GNI GROUP, INC. March 31, 1998
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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 March 31, 1998 and the related
Statements of Operations for the three and nine month periods ended March 31,
1998 and 1997, and Statements of Cash Flows for the nine month period ended
March 31, 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.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 requires all companies whose capital structures include
convertible securities and options to make a dual presentation of basic and
diluted earnings per share. The new standard became effective beginning with the
Company's third quarter ending on March 31, 1998. Prior period amounts have been
restated to conform with the presentation requirements of SFAS No. 128. For all
periods presented, net earnings are the same for the calculation of both basic
and diluted earnings per share.
4
<PAGE> 7
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, 1998
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<S> <C>
Provision:
Federal-Current $ 692,015
Federal-Deferred 98,163
State 108,890
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Total $ 899,068
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</TABLE>
The significant components of deferred income tax expense for the nine
months ended March 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax expense (exclusive of the effect of the component
listed below) $ 98,163
Increase in beginning-of-the-year balance of the valuation allowance for
deferred tax assets --
- -----------------------------------------------------------------------------------------------
Total deferred tax provision $ 98,163
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</TABLE>
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, 1998 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Amounts deductible when paid 354,287
Accounts receivable, principally due to allowance for doubtful accounts 68,114
Compensated balances, principally due to accrual for financial
reporting purposes 85,718
Alternative minimum tax credit carryforward 1,205,560
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Total deferred tax assets $ 1,713,679
Less valuation allowance (20,000)
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Net deferred tax assets $ 1,693,679
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Deferred tax liabilities:
Facility and equipment, principally due to differences in depreciation
and capitalized interest $ 2,591,842
Other --
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Total deferred tax liabilities $ 2,591,842
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Net deferred tax liability $ 898,163
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</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS-
FISCAL 1998 THIRD QUARTER COMPARED WITH FISCAL 1997 THIRD QUARTER
Revenues. Revenues for the third quarter of fiscal 1998 were $11,036,712 as
compared to $10,584,091 for the comparable period of fiscal 1997, an increase of
$452,621, or 4.3%. This increase was primarily attributable to (i) an increase
in the Company's chemical manufacturing and processing revenues, and (ii) an
increase in the Company's transportation revenues. Revenues from the Company's
chemical manufacturing and processing subsidiary, GNI Chemicals Corporation
("GNIC"), increased by approximately $129,000, or 3.1%, in the third quarter of
fiscal 1998 as compared to the fiscal 1997 period. The Company's GNIC revenues
for the fiscal 1998 period were approximately $4,322,000 as compared to
$4,193,000 for the fiscal 1997 period, primarily the result of higher specialty
chemical sales partially off-set by lower chemical manufacturing and processing
revenues compared with the third quarter of fiscal 1997. Specialty chemical
sales were higher in the fiscal 1998 third quarter as a result of operational
difficulties experienced by GNIC in last year's fiscal third quarter associated
with the internalization of acetonitrile ("ACE") production. Until December 31,
1996 (the end of last year's fiscal second quarter), ACE had been produced by an
outside processor. The fluctuation in GNIC's custom manufacturing and processing
revenues is primarily due to customer decisions related to timing of projects.
Therefore, GNIC's custom manufacturing and processing revenues may vary from
quarter to quarter. GNIC's strategy is to foster long-term relationships in its
manufacturing and processing business, thereby minimizing the quarter to quarter
effects of customer timing decisions.
Revenues from the Company's treatment and disposal operation increased by
approximately $51,000, or 1.0%, from the fiscal 1997 third quarter compared to
the fiscal 1998 third quarter. Although deepwell disposal revenues were lower in
the fiscal 1998 third quarter as compared to the comparable fiscal 1997 period,
deepwell disposal volumes were higher. As a result, the average price per gallon
was lower in the fiscal 1998 third quarter as compared with the fiscal 1997
third quarter. Pricing for deepwell disposal has been firm to higher on a
stream-by-stream basis; however, the mix of streams received for deepwell
disposal in the fiscal 1998 period favored the lower priced, higher volume
streams as compared with the fiscal 1997 period. Other treatment and disposal
revenues were higher in the fiscal 1998 third quarter as compared with the
fiscal 1997 third quarter. Transportation revenues also increased in the third
quarter of fiscal 1998 as compared with the comparable period in fiscal 1997, an
increase of approximately $273,000, or 21.9%. This increase in transportation
revenues was primarily attributable to the increase in deepwell disposal volumes
during the fiscal 1998 period.
6
<PAGE> 9
Cost of Services. Cost of services remained the same as a percent of
revenues, 56.6% during the third quarter of both fiscal 1997 and fiscal 1998. In
absolute dollar terms, cost of services increased by approximately $257,000 in
support of an increase of approximately $453,000 in revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses as a percent of revenues were 11.6% and 11.8%,
respectively, for the third quarter of fiscal 1998 and fiscal 1997. SG&A
expenses for the third quarter of fiscal 1998 increased by only 2.3% in absolute
dollar terms compared to the third quarter of fiscal 1997.
Depreciation and Amortization Expenses. Depreciation and Amortization (D&A)
expenses increased as a percent of revenues from 15.3% in the third quarter of
fiscal 1997 to 16.6% in the third quarter of fiscal 1998. D&A expenses for the
third quarter of fiscal 1998 increased by 12.6% in absolute dollar terms
compared to the third quarter of fiscal 1997 due primarily to the additional D&A
expenses resulting from the capital improvements made by the Company to its
facilities during calendar 1997.
Net Interest Expense. Net interest expense was approximately the same for
both the fiscal 1998 and fiscal 1997 third quarters. Both the level of
indebtedness and the rate of interest were approximately the same in each year's
fiscal third quarter.
Net Income. The Company had net income of $440,024, or $.06 per diluted
share, for the third quarter of fiscal 1998 compared with net income of
$640,875, or $.09 per diluted share, for the third quarter of fiscal 1997.
FISCAL 1998 NINE MONTHS COMPARED TO FISCAL 1997 NINE MONTHS
Revenues. Revenues for the first nine months of fiscal 1998 were $32,635,770
as compared to $31,206,189 for the comparable period of fiscal 1997, an increase
of $1,429,581, or 4.6%. This increase was primarily attributable to (i) an
increase in revenues from the Company's treatment and disposal operation,
off-set by (ii) a decrease in chemical manufacturing and processing revenues.
Revenues from the Company's treatment and disposal operation increased by
approximately $2,049,000, or 14.8%, from the fiscal 1997 nine month period
compared to the fiscal 1998 nine month period. Revenues from the fiscal 1998
period benefitted from increased deepwell disposal volumes resulting from the
Company's consolidation transaction with EMPAK Inc. ("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 customers to the Company. The EMPAK transaction provided for
a 90-day customer transition period; thus, the full effect of the EMPAK
transaction was present for only the last one-third of the fiscal 1997 period.
Transportation revenues also increased in the first nine months of fiscal 1998
as compared with the comparable period in fiscal 1997, an increase of
approximately $489,000, or 13.8%. This increase in transportation revenues was
primarily attributable to the increase in deepwell disposal volumes during the
fiscal 1998 period.
7
<PAGE> 10
Revenues from the Company's chemical manufacturing and processing
subsidiary, GNI Chemicals Corporation ("GNIC"), decreased by approximately
$1,108,000, or 8.0%, in the first nine months of fiscal 1998 as compared to the
fiscal 1997 period. The Company's GNIC revenues for the fiscal 1998 period were
approximately $12,690,000 as compared to $13,798,000 for the fiscal 1997 period,
primarily the result of lower chemical manufacturing and processing revenues
compared with the first nine months of fiscal 1997. The fluctuation in GNIC's
custom manufacturing and processing revenues is primarily due to customer
decisions related to timing of projects. Therefore, GNIC's custom manufacturing
and processing revenues may vary from period to period. GNIC's strategy is to
foster long-term relationships in its manufacturing and processing business,
thereby minimizing the effects of customer timing decisions.
Cost of Services. Cost of services decreased as a percent of revenues from
57.7% during the first nine months of fiscal 1997 to 56.3% for the first nine
months of fiscal 1998. In absolute dollar terms, cost of services increased by
approximately $344,000 in support of approximately $1,430,000 of additional
revenues.
Selling, General and Administrative Expenses. SG&A expenses as a percent of
revenues were 11.3% and 11.7% of revenues, respectively, for the first nine
months of fiscal 1997 and fiscal 1998. SG&A expenses for the first nine months
of fiscal 1998 increased by 8.7% in absolute dollar terms compared to the first
nine months of fiscal 1997.
Depreciation and Amortization Expenses. D&A expenses increased as a percent
of revenues, from 13.8% in the first nine months of fiscal 1997 to 16.5% in the
first nine months of fiscal 1998. D&A expenses for the first nine months of
fiscal 1998 increased by 24.7% in absolute dollar terms compared to the first
nine months of fiscal 1997 due primarily to (i) the capital improvements made by
the Company to its facilities during calendar 1997, and (ii) the additional D&A
expenses associated with the Company's consolidation transaction with EMPAK
which were not present for the entire fiscal 1997 period.
Net Interest Expense. Net interest expense increased for the first nine
months of fiscal 1998 compared to the first nine months of fiscal 1997. This
increase resulted from a higher weighted average level of principal balances on
the Company's indebtedness combined with a higher rate of interest on that
indebtedness during the fiscal 1998 period. The higher level of indebtedness is
a result of the additional debt used to fund the EMPAK transaction that closed
during the fiscal 1997 period. The rate of interest was higher in the fiscal
1998 period as compared with the fiscal 1997 period primarily as a result of the
Senior Subordinated Notes placement as of December 31, 1996 bearing interest at
the rate of 12.00%.
Net Income. The Company had net income of $1,425,047, or $.20 per diluted
share, for the first nine months of fiscal 1998 compared with net income of
$2,296,354, or $.33 per diluted share, for the first nine months of fiscal 1997.
8
<PAGE> 11
Inflation did not have a material impact on the Company's revenues or income
for either the fiscal 1998 or 1997 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.
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 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 term 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 tangible
net worth and debt coverage ratios, and contains other provisions and
restrictive covenants that management believes are customary.
The Equipment Line has been utilized to fund capital expenditures of the
Company. Effective as of October 1, 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, 1998, the unpaid principal balance outstanding on
the Equipment Line was $4,500,000.
9
<PAGE> 12
The Term Loan represents borrowings that were originally used by the Company
to finance the construction of the Company's GNIC facility, which was completed
in the first quarter of fiscal 1991. The Term Loan bears interest at a fixed
rate of 8.44%, matures December 1, 1998, and requires quarterly principal
payments of $173,913. The unpaid principal balance of the Term Loan totaled
$521,739 at March 31, 1998.
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
were required for the first year, then quarterly payments of $75,000 plus
interest are required until maturity. As of March 31, 1998, the unpaid principal
balance outstanding on the Acquisition Line was $600,000.
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 was
interest-only; thereafter, quarterly principal payments of $125,000 plus accrued
interest are required until maturity. As of March 31, 1998, the unpaid principal
balance outstanding on the CWM Note was $875,000.
Effective as of November 3, 1995, the bank and the Company amended the
Credit Agreement (i) to extend the maturity date of the Revolver to October 31,
1997 and (ii) to increase the total commitment amount of the Revolver from
$4,000,000 to $10,000,000. The Revolver is used by the Company for working
capital and other general corporate purposes. 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. Then,
effective 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. Most recently, effective as of November
25, 1997, the maturity date of the Revolver extended to October 31, 1999.
Effective as of October 1, 1996, advances under the Revolver bear interest at
the bank's prime rate of interest. As of March 31, 1998, the Company has an
unpaid principal balance outstanding on the Revolver of $9,700,000.
10
<PAGE> 13
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
("Term Note"). The Term Note was used by the Company (i) to fund the $12,000,000
EMPAK transaction that closed on September 30, 1996; and (ii) to transfer the
flat amount of $3,000,000, referred to in item (c) above, from the Revolver's
borrowing base calculation. The Term Note carried an interest rate equal to the
bank's prime rate of interest. On December 31, 1996, the Company repaid the Term
Note 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 in the paragraph 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 1993, 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. As of March 31, 1998, the outstanding balance on
the Notes reflected on the Company's Balance Sheet was $18,736,679.
For the nine months of fiscal 1998 the Company provided approximately
$3,682,000 in net cash from operations compared with approximately $220,000 for
the fiscal 1997 period. This increase of approximately $3,462,000 was
attributable to several factors, some of which were off-setting: (i) lower net
income in the fiscal 1998 period as compared with the fiscal 1997 period, (ii) a
higher level of D&A expenses in the fiscal 1998 period as compared with the
fiscal 1997 period, (iii) a larger increase in deferred taxes in the fiscal 1997
period than in the fiscal 1998 period, (iv) a larger increase in other assets in
the fiscal 1997 period than in the fiscal 1998 period, (v) a larger decrease in
accounts payable for the fiscal 1997 period than in the fiscal 1998 period, and
(vi) a larger increase in federal income taxes payable during the fiscal 1998
period than in the fiscal 1997 period. The higher level of D&A expenses in the
fiscal 1998 period as compared with the fiscal 1997 period was primarily a
result of the additional D&A expenses associated with the Company's recent EMPAK
consolidation transaction. Other assets increased to a greater extent during the
fiscal 1997 period as compared with fiscal 1998, primarily as a result of the
deferred costs associated with the senior subordinated notes transaction that
closed during the fiscal 1997 period.
During the first nine months of fiscal 1998 and fiscal 1997, the Company's
net cash used in investing activities was $5,581,000 and $15,979,000,
respectively. For fiscal 1997, the main component was the cash payment of
$12,000,000 made during the fiscal 1997 period in connection with the EMPAK
consolidation transaction. The Company's capital expenditures during the first
nine months of fiscal 1998 and fiscal 1997 were approximately $5,536,000 and
$3,874,000, respectively. Capital expenditures for fixed assets for both of the
fiscal 1998 and
11
<PAGE> 14
fiscal 1997 periods were primarily related to general improvements to the
Company's GNIC and treatment and disposal facilities. For the first nine months
of fiscal 1998, the Company's financing activities provided approximately
$1,179,800 compared with approximately $15,330,600 in the fiscal 1997 period.
For the fiscal 1997 period, the largest source of financing was the net cash
proceeds from the issuance of the senior subordinated notes during the fiscal
1997 period.
Primarily as a result of the Company's capital expenditures made during the
first nine months of fiscal 1998, (i) cash balances decreased approximately
$720,000 during the period, and (ii) net fixed assets increased by approximately
$1,764,000 during the period. During the first nine months of fiscal 1998,
accounts receivable increased by approximately $2,143,000, primarily as a result
of the increased level of revenues generated during the period. Federal income
taxes payable increased during the fiscal 1998 period as a result of the net
income earned during the period. Accrued liabilities decreased by approximately
$1,003,000 during the fiscal 1998 period as a result of scheduled payments made
to EMPAK in connection with the Assistance Agreement whereby EMPAK acts as the
Company's back-up facility under certain circumstances.
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.
12
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 27, 1998, a complaint purporting to state a class
action was filed in the Delaware Court of Chancery (Case
Number 16211-NC) by William Chaffin and Marcia Chaffin,
alleged to be stockholders of the Company, on behalf of
themselves and all others similarly situated, against the
Company and its directors. The plaintiffs allege that the
proposed merger of Green I Acquisition Corporation, an
affiliate of 399 Venture Partners, Inc., into the Company (the
"Merger") is wrongful, unfair and harmful to the Company's
stockholders, that the proposed consideration of $7.00 in cash
per share is not the result of arms-length negotiations or
based upon any independent valuation of the current or
projected value of the Company, and that the directors of the
Company have conflicts of interest and have violated their
fiduciary and other common law duties owed to the plaintiffs
and other members of the class. The complaint seeks to enjoin
the Merger and an unspecified amount of damages, in addition
to payment of attorneys' fees and reimbursement of expenses.
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.
13
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
The following Current Reports on Form 8-K have been filed
during the quarter ended March 31, 1998:
1. Current Report on Form 8-K dated January 23, 1998,
reporting an event under "Item 5. Other Events," filed
with the Securities and Exchange Commission on January
23, 1998.
2. Current Report on Form 8-K dated February 12, 1998,
reporting under "Item 1(b). Changes in Control of
Registrant," filed with the Securities and Exchange
Commission on February 13, 1998.
3. Form 8-K/A, Amendment No. 1 to Current Report on Form
8-K, as filed with the Securities and Exchange Commission
on February 27, 1998, amending the exhibits filed with
the Current Report on Form 8-K dated February 12, 1998,
originally filed with the Securities and Exchange
Commission on February 13, 1998.
4. Current Report on Form 8-K dated February 27, 1998,
reporting an event under "Item 5. Other Events," filed
with the Securities and Exchange Commission on March 9,
1998.
14
<PAGE> 17
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, 1998 /s/ Carl V Rush, Jr.
---------------------- ----------------------
Carl V Rush, Jr.
President and CEO
Date: May 14, 1998 /s/ Donna L. Ratliff
---------------------- ----------------------
Donna L. Ratliff
Treasurer
(Principal Accounting Officer)
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 87,380
<SECURITIES> 0
<RECEIVABLES> 8,592,595
<ALLOWANCES> 184,000
<INVENTORY> 308,928
<CURRENT-ASSETS> 12,899,141
<PP&E> 53,568,791
<DEPRECIATION> 18,510,349
<TOTAL-ASSETS> 71,174,658
<CURRENT-LIABILITIES> 8,524,948
<BONDS> 0
0
0
<COMMON> 66,747
<OTHER-SE> 26,351,587
<TOTAL-LIABILITY-AND-EQUITY> 71,174,658
<SALES> 32,635,770
<TOTAL-REVENUES> 32,635,770
<CGS> 18,362,235
<TOTAL-COSTS> 27,568,194
<OTHER-EXPENSES> (191,335)
<LOSS-PROVISION> 145,000
<INTEREST-EXPENSE> 2,934,796
<INCOME-PRETAX> 2,324,115
<INCOME-TAX> 899,068
<INCOME-CONTINUING> 1,425,047
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,425,047
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
