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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, 1997.
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 [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, 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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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 1997 and June 30, 1997 1
Consolidated Statements of Operations
Three and Six Months ended Decem-
ber 31, 1997 and December 31, 1996 2
Consolidated Statements of Cash Flows
Six Months ended December 31, 1997
and December 31, 1996 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
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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 13-14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
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THE GNI GROUP, INC. December 31, June 30,
1997 1997
ASSETS
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CURRENT ASSETS:
Cash and time deposits $ 385,002 $ 807,387
Accounts receivable, less allowance of approximately $129,000
for 12/31/97 and $46,000 for 6/30/97 7,925,714 6,449,885
Inventory 522,913 524,436
Federal tax receivable 930,470 930,470
Prepaid expenses and other assets 3,358,623 2,676,172
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TOTAL CURRENT ASSETS 13,122,722 11,388,350
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PROPERTY, PLANT AND EQUIPMENT 51,659,337 48,768,095
Less accumulated depreciation (17,383,618) (15,473,844)
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NET PROPERTY, PLANT AND EQUIPMENT 34,275,719 33,294,251
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Restricted time deposits 1,419,729 1,386,699
Intangible assets, net 18,989,838 19,788,457
Other assets 2,966,986 2,730,447
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TOTAL ASSETS $ 70,774,994 $ 68,588,204
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Accounts payable $ 2,487,313 $ 2,253,663
Accrued liabilities 3,134,130 2,981,203
Federal income taxes payable 458,192 ---
Notes payable 326,877 ---
Current portion of long-term debt 2,495,652 2,495,652
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TOTAL CURRENT LIABILITIES 8,902,164 7,730,518
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Accrued liabilities 3,212,585 3,724,674
Long-term debt, less current portion 31,806,752 31,444,724
Deferred income taxes 875,183 800,000
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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 12/31/97 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 4,801,671 3,816,649
Less cost of treasury stock (40,184 shares) (47,006) (47,006)
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TOTAL STOCKHOLDERS' EQUITY 25,978,310 24,888,288
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,774,994 $ 68,588,204
===============================================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at December 31, 1997 is unaudited. The Balance Sheet
at June 30, 1997 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,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUES $ 10,681,801 $ 10,662,472 $ 21,599,058 $ 20,622,099
COST AND EXPENSES:
Cost of services 5,965,599 6,317,406 12,111,456 12,025,693
Selling, general and administrative 1,295,782 1,155,631 2,541,780 2,265,779
Depreciation and amortization 1,828,203 1,458,864 3,556,971 2,694,532
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TOTAL COST AND EXPENSES 9,089,584 8,931,901 18,210,207 16,986,004
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OPERATING INCOME 1,592,217 1,730,571 3,388,851 3,636,095
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Interest income 34,923 17,890 61,245 40,323
Interest expense 987,202 705,138 1,972,743 1,076,110
Other income 2,756 14,444 106,770 10,671
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INCOME BEFORE TAX 642,694 1,057,767 1,584,123 2,610,979
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Income tax 242,500 389,300 599,100 955,500
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NET INCOME $ 400,194 $ 668,467 $ 985,023 $ 1,655,479
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NET INCOME PER COMMON SHARE $ .06 $ .10 $ .14 $ .25
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SHARES USED TO CALCULATE E.P.S. 7,201,073 6,753,633 7,218,353 6,752,865
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</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
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THE GNI GROUP, INC. Six Months Ended
December 31,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
NET INCOME $ 985,023 $ 1,655,479
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 3,556,971 2,694,532
Deferred taxes 75,183 454,511
Gain on sale of asset (4,500) (7,683)
Change in assets and liabilities, net of acquisition:
Increase in accounts receivable (1,475,830) (1,522,228)
Decrease (increase) in inventory 1,523 (144,295)
Increase in prepaid expenses and other (682,449) (332,031)
Increase in other assets (510,913) (1,673,090)
Increase in accounts payable 233,649 876,112
Decrease in accrued liabilities (359,162) (555,133)
Increase (decrease) in income taxes payable 458,192 (99,011)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,277,687 1,347,163
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Cash flows from investing activities:
Increase in restricted time deposits (33,030) (111,309)
Payment of cash in connection with EMPAK transaction --- (12,000,000)
Proceeds from sale of asset 4,500 15,700
Purchases of fixed assets (3,465,448) (2,344,660)
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NET CASH USED IN INVESTING ACTIVITIES (3,493,978) (14,440,269)
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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 1,500,000 ---
Principal payments of long-term debt and notes payable (1,731,876) (20,562,390)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 793,906 12,317,086
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (422,385) (776,020)
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 $ 385,002 $ 346,921
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</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE GNI GROUP, INC. December 31, 1997
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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, 1997 and the related
Statements of Operations for the three and six month periods ended December 31,
1997 and 1996, and Statements of Cash Flows for the six month period ended
December 31, 1997 and 1996 are unaudited; in the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted of normal, recurring items. Interim
results are not necessarily indicative of results for a full year. The
financial statements and Notes are presented as permitted by Form 10-Q and do
not contain certain information included in the Company's Annual Financial
Statements and Notes.
Statement of Cash Flows
For purposes of reporting cash flows, cash and time deposits include cash
on hand and certificates of deposit.
Earnings Per Share
The average number of common and common equivalent shares 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.
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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, 1997
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<S> <C>
Provision:
Federal-Current $ 458,192
Federal-Deferred 75,183
State 65,725
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Total $ 599,100
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</TABLE>
The significant components of deferred income tax expense for the six
months ended December 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax expense (exclusive of the effect of the component
listed below) $ 75,183
Increase in beginning-of-the-year balance of the valuation allowance for
deferred tax assets --
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Total deferred tax provision $ 75,183
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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
December 31, 1997 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Amounts deductible when paid 417,873
Accounts receivable, principally due to allowance for doubtful accounts 47,781
Compensated balances, principally due to accrual for financial
reporting purposes 87,049
Alternative minimum tax credit carryforward 1,021,850
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Total deferred tax assets $ 1,574,553
Less valuation allowance (20,000)
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Net deferred tax assets $ 1,554,553
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Deferred tax liabilities:
Facility and equipment, principally due to differences in depreciation
and capitalized interest $ 2,429,736
Other --
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Total deferred tax liabilities $ 2,429,736
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Net deferred tax liability $ 875,183
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</TABLE>
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS-
FISCAL 1998 SECOND QUARTER COMPARED WITH FISCAL 1997 SECOND QUARTER
Revenues. Revenues for the second quarter of fiscal 1998 were $10,681,801
as compared to $10,662,472 for the comparable period of fiscal 1997, an
increase of $19,329, or 0.2%. 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,
primarily the result of lower specialty chemical sales. Revenues from the
Company's treatment and disposal operation increased by approximately $258,000,
or 5.1%, from the fiscal 1997 second quarter compared to the fiscal 1998 second
quarter. 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 not
present in the fiscal 1997 period. Transportation revenues also increased in
the second quarter of fiscal 1998 as compared with the comparable period in
fiscal 1997, an increase of approximately $24,000, or 2.0%. This increase in
transportation revenues was primarily attributable to the increase in deepwell
disposal volumes during the fiscal 1998 period.
Revenues from the Company's chemical manufacturing and processing
subsidiary, GNI Chemicals Corporation ("GNIC"), decreased by approximately
$262,000, or 5.6%, in the second quarter of fiscal 1998 as compared to the
fiscal 1997 period. The Company's GNIC revenues for the fiscal 1998 period
were approximately $4,398,000 as compared to $4,660,000 for the fiscal 1997
period, primarily the result of lower specialty chemical sales compared with
the second quarter of fiscal 1997. Chemical manufacturing and processing
revenues in the fiscal 1998 period were higher than in last year's period.
Additionally, GNIC's custom manufacturing and processing revenues were
approxi-mately $428,000 higher than the previous quarter (the first quarter of
fiscal 1998). The fluctuation in GNIC's 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.
Cost of Services. Cost of services decreased as a percent of revenues from
59.2% during the second quarter of fiscal 1997 to 55.9% for the second quarter
of fiscal 1998. In absolute dollar terms, cost of services decreased by
approximately $352,000 in conjunction with an increase of approximately $19,000
in revenues.
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<PAGE> 9
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses as a percent of revenues were 12.1% and 10.8%,
respectively, for the second quarter of fiscal 1998 and fiscal 1997. SG&A
expenses for the second quarter of fiscal 1998 increased by 12.1% in absolute
dollar terms compared to the second quarter of fiscal 1997.
Depreciation and Amortization Expenses. Depreciation and Amortization
(D&A) expenses increased as a percent of revenues from 13.7% in the second
quarter of fiscal 1997 to 17.1% in the second quarter of fiscal 1998. D&A
expenses for the second quarter of fiscal 1998 increased by 25.3% in absolute
dollar terms compared to the second 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 increased in the fiscal 1998
second quarter as compared with the fiscal 1997 second quarter. This increase
resulted from roughly the same 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 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 $400,194, or $.06 per share, for
the second quarter of fiscal 1998 compared with net income of $668,467, or $.10
per share, for the second quarter of fiscal 1997.
FISCAL 1998 SIX MONTHS COMPARED TO FISCAL 1997 SIX MONTHS
Revenues. Revenues for the first six months of fiscal 1998 were
$21,599,058 as compared to $20,622,099 for the comparable period of fiscal
1997, an increase of $976,959, or 4.7%. 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 and specialty chemical sales. Revenues from the Company's
treatment and disposal operation increased by approximately $1,998,000, or
22.9%, from the fiscal 1997 six month period compared to the fiscal 1998 six
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 not
present in the fiscal 1997 period. Transportation revenues also increased in
the first six months of fiscal 1998 as compared with the comparable period in
fiscal 1997, an increase of approximately $216,000, or 9.4%. 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
$1,237,000, or 12.9%, in the first six months of fiscal 1998 as compared to the
fiscal 1997 period. The Company's GNIC revenues for the fiscal 1998 period
were approximately $8,368,000 as compared to $9,605,000 for the fiscal 1997
period, primarily the result of lower chemical manufacturing and processing
revenues compared with the first six months of fiscal 1997. Additionally,
specialty chemical sales in the fiscal 1998 period were lower than in last
year's period. The fluctuation in GNIC's 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
58.3% during the first six months of fiscal 1997 to 56.1% for the first six
months of fiscal 1998. In absolute dollar terms, cost of services increased by
approximately $86,000 in support of approximately $977,000 of additional
revenues.
Selling, General and Administrative Expenses. SG&A expenses as a percent
of revenues were 11.0% and 11.8% of revenues, respectively, for the first six
months of fiscal 1997 and fiscal 1998. SG&A expenses for the first six months
of fiscal 1998 increased by 12.2% in absolute dollar terms compared to the
first six months of fiscal 1997.
Depreciation and Amortization Expenses. D&A expenses increased as a
percent of revenues, from 13.1% in the first six months of fiscal 1997 to 16.5%
in the first six months of fiscal 1998. D&A expenses for the first six months
of fiscal 1998 increased by 32.0% in absolute dollar terms compared to the
first six months of fiscal 1997 due primarily to (i) the capital improvements
made by the Company to its facilities during the first half of 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 six
months of fiscal 1998 compared to the first six 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 middle of 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 $985,023, or $.14 per share, for
the first six months of fiscal 1998 compared with net income of $1,655,479, or
$.25 per share, for the first six 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 working
capital, minimum tangible net worth, and maximum debt-to-tangible net worth and
debt coverage ratios, and contains other provisions and restrictive covenants
that management believes are customary.
The Equipment Line has been utilized to fund capital expenditures of the
Company. Effective as of October 1, 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, 1997, the unpaid principal balance
outstanding on the Equipment Line was $4,750,000.
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 $695,652 at December 31, 1997.
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 December 31, 1997, the unpaid
principal balance outstanding on the Acquisition Line was $675,000.
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 December 31, 1997, the
unpaid principal balance outstanding on the CWM Note was $1,000,000.
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. Most recently, 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. Although the
maturity date of the Revolver remained unchanged, the Company and the bank are
in discussions regarding extending the maturity date and other matters.
Effective as of October 1, 1996, advances under the Revolver bear interest at
the bank's prime rate of interest. As of December 31, 1997, the Company has an
unpaid principal balance outstanding on the Revolver of $8,500,000.
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 ("Term Note"). The Term Note was
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<PAGE> 13
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 December 31, 1997, the
outstanding balance on the Notes reflected on the Company's Balance Sheet was
$18,681,752.
For the six months of fiscal 1998 the Company provided approximately
$2,278,000 in net cash from operations compared with approximately $1,347,000
for the fiscal 1997 period. This increase of approximately $931,000 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 other assets in the fiscal 1997
period than in the fiscal 1998 period, (vi) a larger increase in accounts
payable for the fiscal 1997 period than in the fiscal 1998 period, and (v) an
increase in federal income taxes payable during the fiscal 1998 period compared
with a slight decrease 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 at the end of the fiscal 1997 period. The increase in
accounts payable during the fiscal 1997 period was primarily a result of the
increase in the level of capital expenditures made by the Company during the
fiscal 1997 period.
During the first six months of fiscal 1998 and fiscal 1997, the Company's
net cash used in investing activities was $3,494,000 and $14,440,000,
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
six months of fiscal 1998 and fiscal 1997 were approximately $3,465,000 and
$2,345,000, respectively. Capital expenditures for fixed assets for both of the
fiscal 1998 and fiscal 1997 periods were primarily related to general
improvements to the Company's GNIC and treatment and disposal facilities. For
the first six months of fiscal 1998, the Company's financing activities
provided approximately $794,000 compared with approximately $12,317,000 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 on the last day of the fiscal 1997 period.
11
<PAGE> 14
Primarily as a result of the Company's capital expenditures made during the
first six months of fiscal 1998, (i) cash balances decreased approximately
$422,000 during the period, and (ii) net fixed assets increased by
approximately $981,000 during the period. During the first six months of
fiscal 1998, accounts receivable increased by approximately $1,476,000,
primarily as a result of the increased level of revenues generated during the
period. During the first six months of fiscal 1998, Prepaid expenses and other
current assets increased by approximately $683,000 and Notes payable increased
by approximately $327,000, each primarily as a result of the renewal of the
Company's various annual insurance coverages during the fiscal 1998 period.
Federal income taxes payable increase during the fiscal 1998 period as a result
of the net income earned during the period.
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
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
The annual meeting of stockholders of the
Company for the fiscal year ended June 30,
1997, was held on October 28, 1997.
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., Carl V Rush, Jr. and G. Stacy Smith.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstain
--------- ------------- -------------
<S> <C> <C> <C>
Dudney 4,529,136 895,533 -0-
Harris 5,400,936 23,733 -0-
Lyons 5,401,336 23,333 -0-
Rush 4,975,536 449,133 -0-
Smith 5,149,336 275,333 -0-
</TABLE>
13
<PAGE> 16
(b) The ratification of the appointment of KPMG Peat Marwick,
LLP as the Company's independent auditors for the
fiscal year ending June 30, 1998.
Votes For: 5,400,571 Votes Against: 17,608 Abstained: 6,490
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
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: February 13, 1998 /s/ Carl V Rush, Jr.
------------------------------- ---------------------------------------
Carl V Rush, Jr.
President and CEO
Date: February 13, 1998 /s/ Donna L. Ratliff
------------------------------- ---------------------------------------
Donna L. Ratliff
Treasurer
(Principal Accounting Officer)
15
<PAGE> 18
Exhibit Index
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 385,002
<SECURITIES> 0
<RECEIVABLES> 8,054,956
<ALLOWANCES> 129,242
<INVENTORY> 522,913
<CURRENT-ASSETS> 13,122,722
<PP&E> 51,659,337
<DEPRECIATION> 17,383,618
<TOTAL-ASSETS> 70,774,994
<CURRENT-LIABILITIES> 8,902,164
<BONDS> 0
0
0
<COMMON> 66,747
<OTHER-SE> 25,911,563
<TOTAL-LIABILITY-AND-EQUITY> 70,774,994
<SALES> 21,599,058
<TOTAL-REVENUES> 21,599,058
<CGS> 12,111,456
<TOTAL-COSTS> 18,210,207
<OTHER-EXPENSES> (168,015)
<LOSS-PROVISION> 90,000
<INTEREST-EXPENSE> 1,972,743
<INCOME-PRETAX> 1,584,123
<INCOME-TAX> 599,100
<INCOME-CONTINUING> 985,023
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 985,023
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
