<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1998
REGISTRATION NO. 333-64307
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
THE GNI GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 76-0232338
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Number) Identification No.)
</TABLE>
2525 BATTLEGROUND ROAD
DEER PARK, TEXAS 77536
(281) 930-0350
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
<TABLE>
<S> <C> <C>
DISPOSAL SYSTEMS, INC. DELAWARE 76-0231600
DISPOSAL SYSTEMS OF CORPUS CHRISTI, INC. DELAWARE 76-0461212
GNI CHEMICALS CORPORATION DELAWARE 76-0237259
RESOURCE TRANSPORTATION SERVICES, INC. DELAWARE 76-0246979
GNI TECHNICAL SERVICES, INC. DELAWARE 76-0581968
GULF NUCLEAR OF LOUISIANA, INC. DELAWARE 76-0231601
(Exact name of registrants as (State or other jurisdiction of (I.R.S. Employer
specified in their charters) incorporation) Identification No.)
</TABLE>
2525 BATTLEGROUND ROAD
P.O. BOX 220
DEER PARK, TEXAS 77536
(281) 930-0350
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
CARL V RUSH, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE GNI GROUP, INC.
2525 BATTLEGROUND ROAD
DEER PARK, TEXAS 77536
(281) 930-0350
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copy to:
DAWN S. BORN
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
1000 LOUISIANA
HOUSTON, TEXAS 77002
(713) 287-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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<PAGE> 2
PROSPECTUS
OFFER TO EXCHANGE 10 7/8% SERIES B SENIOR NOTES DUE 2005,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, FOR ALL OUTSTANDING
10 7/8% SERIES A SENIOR NOTES DUE 2005
$75,000,000
THE GNI GROUP, INC.
THIS EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON
NOVEMBER 20, 1998 UNLESS EXTENDED (THE "EXPIRATION DATE").
---------------------
The GNI Group, Inc. (together with its subsidiaries, "GNI" or the
"Company") hereby offers upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal," and together with this Prospectus, the "Exchange Offer"), to
exchange up to $75,000,000 in aggregate principal amount of its outstanding
10 7/8% Series B Senior Notes due 2005 (the "Exchange Notes"), which have been
registered under the United States Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement (as defined herein) of
which this Prospectus constitutes a part, for an identical principal amount of
its outstanding 10 7/8% Series A Senior Notes due 2005 (the "Restricted Notes";
the Restricted Notes and the Exchange Notes are collectively referred to as the
"Notes"). In connection with the exchange of the Notes, the Subsidiary
Guarantors (as defined herein) shall execute a Notation of Guarantee in the form
filed as Exhibit 4.4 to the Company's Registration Statement on Form S-4 of
which this Prospectus is a part, relating to the Company's obligations under the
Exchange Notes. The form and terms of the Exchange Notes are identical in all
material respects to those of the Restricted Notes, except for certain transfer
restrictions and registration rights relating to the Restricted Notes, and
except for certain liquidated damage provisions associated with such
registration rights. The Exchange Notes and the Restricted Notes are
collectively referred to herein as "Notes." See "Description of the Exchange
Notes" and "the Exchange Offer."
The Company will accept for exchange any and all Restricted Notes that are
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the date the Exchange Offer expires, which will be November 20, unless the
Exchange Offer is extended (the "Expiration Date"). Tenders of the Restricted
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of the Restricted Notes being tendered for exchange. However,
the Exchange Offer is subject to the terms and provisions of the A/B Exchange
Registration Rights Agreement dated as of July 28, 1998 (the "Registration
Rights Agreement") by and among the Company, its subsidiaries, Gulf Nuclear of
Louisiana, Inc., GNI Chemicals Corporation, Disposal Systems, Inc., Resource
Transportation Services, Inc., and Disposal Systems of Corpus Christi, Inc.
(collectively, the "Guarantors"), and CIBC Oppenheimer Corp. (the "Initial
Purchaser"), relating to the Restricted Notes. The Restricted Notes may be
tendered only in denominations of $1,000 and integral multiples thereof. See
"The Exchange Offer."
The Restricted Notes were originally issued and sold on July 28, 1998, to
the Initial Purchaser in a transaction not registered under the Securities Act,
in reliance upon the exemption provided in Section 4(2) of the Securities Act
(the "Initial Offering"). The Initial Purchaser subsequently resold the
Restricted Notes in reliance on Rule 144A of the Securities Act and certain
other exemptions under the Securities Act. Accordingly, the Restricted Notes may
not be reoffered, resold or otherwise pledged, hypothecated or transferred in
the United States unless so registered or unless an exemption from the
registration requirements of the Securities Act is available.
Based on interpretations by the staff (the "Staff") of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action letters issued
to third parties, including Exxon Capital Holdings Corporation, SEC No-Action
Letter (available May 13, 1988), Morgan Stanley & Co. Incorporated, SEC
No-Action Letter (available June 5, 1991) and Shearman & Sterling, SEC No-Action
Letter (available July 2, 1993) (collectively, the "Exchange Offer No-Action
Letters"), the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Restricted Notes may be offered for resale,
resold or otherwise transferred by each holder (other than any holder who is (i)
a broker-dealer who acquires such Exchange Notes directly from the Company for
resale pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act or (ii) any holder who is an "affiliate"
(within the meaning of Rule 405 under the Securities Act) of the Company)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and such holder is not engaged in, and
does not intend to engage in, a distribution of such Exchange Notes and has no
arrangement with any person to participate in a distribution of such Exchange
Notes. By tendering Restricted Notes in exchange for Exchange Notes, each
holder, including, without limitation, any holder who is a broker-dealer, will
represent to the Company and the Guarantors that: (i) it is not an affiliate (as
defined in Rule 405 under the Securities Act) of the Company; (ii) it is
acquiring the Exchange Notes including the Subsidiary Guarantees (as defined
herein), in the ordinary course of its business; and (iii) it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding to
participate in a distribution of such Exchange Notes. If a holder of Restricted
Notes is engaged in or intends to engage in a distribution of Exchange Notes or
has any arrangement or understanding
(Continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF THE RESTRICTED NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this prospectus is October 15, 1998.
<PAGE> 3
(Continued from previous page)
with respect to the distribution of Exchange Notes to be acquired pursuant to
the Exchange Offer, such holder may not rely on the applicable interpretations
of the Staff and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction.
The Exchange Notes will bear interest from November 23, 1998 (the "Closing
Date") at a rate of 10 7/8% per annum, payable semiannually on January 15 and
July 15 of each year commencing January 15, 1999. The Exchange Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after July 15, 2003, at the redemption prices set forth herein, plus accrued and
unpaid interest thereon, if any, to the redemption date. In addition, the
Company, at its option, may redeem at any time prior to July 23, 2001, in the
aggregate up to 25% of the original principal amount of the Exchange Notes at a
redemption price equal to 110.875% of the aggregate principal amount so
redeemed, plus accrued and unpaid interest thereon to the redemption date, with
the Net Proceeds (as defined herein) of one or more Public Equity Offerings (as
defined herein) by the Company; provided that at least 75% of the aggregate
principal amount of the Exchange Notes originally issued remains outstanding
immediately after the occurrence of any such redemption and that any such
redemption occurs within 90 days following the closing of any such Public Equity
Offering. See "Description of the Exchange Notes -- Optional Redemption."
Upon a Change of Control (as defined herein), each holder of the Exchange
Notes will be entitled to require the Company to purchase such holder's Exchange
Notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest thereon to the purchase date. See "Description of
the Exchange Notes -- Change of Control Offer." In addition, the Company will be
obligated in certain instances to make an offer to purchase the Exchange Notes
at a purchase price in cash equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon to the purchase date, with Available Asset
Sale Proceeds (as defined herein). See "Description of the Exchange Notes --
Certain Covenants -- Limitation on Certain Asset Sales."
The Exchange Notes will be general senior unsecured obligations of the
Company ranking pari passu in right of payment with all other existing and
future senior indebtedness of the Company and senior in right of payment to any
subordinated indebtedness of the Company. The Exchange Notes will be
unconditionally guaranteed, on a senior unsecured basis, by the Guarantors. The
Exchange Notes and the Subsidiary Guarantees (as defined herein) will be
effectively subordinated to all secured indebtedness of the Company and the
Guarantors, including indebtedness under the Revolving Credit Facility (as
defined herein) to the extent of the assets securing such indebtedness. As of
June 30, 1998, on a pro forma basis after giving effect to the Recapitalization
(as defined herein), the Company would have had no outstanding secured
indebtedness. See "Capitalization."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes received in exchange for Restricted
Notes where such Restricted Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities. Pursuant to the Registration Rights Agreement, the Company and the
Guarantors have agreed that they will make this Prospectus available to any
Participating Broker-Dealer for a period of time not to exceed one year after
the date on which the Exchange Offer is consummated for use in connection with
any such resale. See "Plan of Distribution."
Neither the Company nor the Guarantors will receive any cash proceeds from
the Exchange Offer. The Company has agreed to pay the expenses of the Exchange
Offer. No underwriter is being utilized in connection with the Exchange Offer.
See "Use of Proceeds."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF RESTRICTED NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
Prior to this Exchange Offer, there has been no public market for the
Restricted Notes. The Exchange Notes constitute new issues of securities with no
established trading market. Any Restricted Notes not tendered and accepted in
the Exchange Offer will remain outstanding. To the extent that Restricted Notes
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered, and tendered but unaccepted, Restricted Notes, could be adversely
affected. Following the consummation of the Exchange Offer, the holders of
Restricted Notes will continue to be subject to the existing restrictions on
transfer, and the Company will have no further obligation to such holders to
provide for the registration under the Securities Act. The Restricted Notes are
included in the Private Offerings, Resale and Trading through Automated Linkages
("PORTAL") market. If such a market were to develop, the Restricted Notes
remaining outstanding or the Exchange Notes could trade at prices that may be
higher or lower than their principal amount. Neither the Company nor any of the
Guarantors intends to apply for listing of the Exchange Notes or the Restricted
Notes on any securities exchange or for quotation of the Exchange Notes or the
Restricted Notes on The Nasdaq Stock Market's National Market or otherwise. The
Initial Purchaser has previously made a market in the Restricted Notes, and the
Company and the Guarantors have been advised that the Initial Purchaser
currently intends to make a market in the Exchange Notes and the Restricted
Notes, as permitted by applicable laws and regulations, after consummation of
the Exchange Offer. The Initial Purchaser is not obligated, however, to make a
market in the Exchange Notes or the Restricted Notes and any such market making
activity may be discontinued at any time without notice at the sole discretion
of the Initial Purchaser. There can be no assurance as to the liquidity of the
public market for the Exchange Notes or Restricted Notes or that any active
public market for the Exchange Notes or Restricted Notes will develop or
continue. If an active public market does not develop or continue, the market
price and liquidity of the Exchange Notes or Restricted Notes may be adversely
affected. See "Risk Factors -- Absence of a Public Market for the Exchange
Notes."
ii
<PAGE> 4
FOR NEW HAMPSHIRE RESIDENTS ONLY
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES
WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY
REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A
FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER CHAPTER 421-B OF
THE NEW HAMPSHIRE STATUTES IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY
SUCH FACT NOR THE FACT THAN AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISION OF THIS PARAGRAPH.
iii
<PAGE> 5
PROSPECTUS SUMMARY
As used in this Prospectus, unless the context indicates otherwise, (i) all
references to "GNI" or the "Company" include The GNI Group, Inc. and its
Subsidiaries (as defined herein) and (ii) "pro forma" means as adjusted to give
effect to the Recapitalization. See "-- The Recapitalization." As used in this
Prospectus, the term "Fiscal" refers to GNI's fiscal year which ends on June 30.
Accordingly, Fiscal 1998 as used herein refers to GNI's fiscal year ended June
30, 1998. Unless otherwise indicated, all industry data relates to the United
States.
THE COMPANY
GNI is the leading operator of commercial deepwells in the United States
and a manufacturer of specialty chemicals. The Company's waste management
business ("Waste Management") provides a broad range of waste management
services which consist of transporting, testing, recovering, treating and
disposing of hazardous and non-hazardous wastes. Waste Management operates two
of the four commercial deepwell facilities accepting third-party hazardous
wastes in the United States. In Fiscal 1998, Waste Management disposed of over
half of the hazardous wastes injected into commercial deepwells. The Company's
facilities are strategically located in the Gulf Coast region in proximity to
the nation's largest concentration of chemical and petrochemical manufacturers.
Management believes that there are no competing commercial deepwells within 250
miles of Waste Management's deepwells. The Company's chemical manufacturing
business ("Specialty Chemicals") manufactures specialty chemicals on a contract
or "tolling" basis for third parties, particularly where waste is a major
by-product. During Fiscal 1997, Specialty Chemicals shifted its focus from
numerous short-term projects to long-term outsourcing contracts with major
chemical manufacturers. As a result of several recently signed long-term
contracts, management believes that Specialty Chemicals' asset utilization will
increase significantly. GNI has manufactured specialty chemicals for nine of the
ten largest chemical and petrochemical producers in the United States. Between
Fiscal 1993 and Fiscal 1998, the Company's revenues increased at an 11.8%
compound annual growth rate ("CAGR"), from $24.5 million to $42.7 million, and
EBITDA (as defined herein) increased at a 16.3% CAGR from $6.1 million to $13.0
million. The Company had Adjusted EBITDA (as defined herein) of $16.0 million in
Fiscal 1998. See "-- Summary Historical and Unaudited Pro Forma Condensed
Consolidated Financial Data."
Waste Management. Waste Management is the leading commercial deepwell
operator in the United States. In Fiscal 1998, Waste Management disposed of
approximately 96.2 million gallons of aqueous wastes, including over half of the
hazardous wastes injected into commercial deepwells in the United States.
Management believes that Waste Management's position as the leading commercial
deepwell operator is based on its state-of-the-art facilities, advanced
treatment and disposal methods and technologies, breadth of permits, strategic
location, strong record of environmental compliance, excellent customer service
and extensive capacity. Waste Management serves over 250 customers including
Arco, DuPont, Elf Atochem, Lyondell, OxyChem and Safety-Kleen. Waste
Management's three deepwells are drilled four to eight thousand feet below the
earth's surface in isolated geologic formations, approximately three-fourths of
a mile below the nearest drinking water. Waste streams injected into Waste
Management's deepwells exclude dioxin-bearing, biological or radioactive wastes
and typically consist of 95% water and 5% waste. Deepwell injection is regulated
by federal, state and local authorities and is regarded by the Environmental
Protection Agency ("EPA") as one of the safest methods of hazardous liquid
disposal. In Fiscal 1998, Waste Management represented 62.5% of GNI's revenues.
Deepwell injection is viewed as a safe, low cost method of hazardous and
non-hazardous waste disposal and is ideally suited, and represents the most
cost-effective disposal alternative, for a broad cross-section of liquid wastes.
According to the EPA, over 9 billion gallons of hazardous liquid wastes were
injected into deepwells in the United States in 1996. Due to environmental
regulations, the permitting process for commercial deepwell operators is time
consuming and costly and serves not only as a barrier to entry but also as a
competitive advantage for those operators, such as the Company, who are fully
permitted and in compliance with regulatory requirements. Management believes
that as a result of the cumbersome permitting process and the significant
capital investment required to construct deepwell facilities, there have been no
new
1
<PAGE> 6
commercial hazardous deepwells drilled in the Gulf Coast region, other than
Waste Management's deepwells, in the last ten years. A significant majority of
the wastes injected into deepwells is handled in-house by chemical
manufacturers. Management believes that in the future such chemical
manufacturers may seek to outsource a greater portion of their waste management
requirements in order to focus on their core competencies and reduce fixed
costs. Management believes that growth in demand for commercial hazardous waste
management services is driven by, among other things, continued industrial
expansion and increasingly stringent regulations regarding waste handling and
disposal.
Specialty Chemicals. GNI manufactures specialty chemicals on a contract or
"tolling" basis for third parties, particularly where waste is a major
by-product. During Fiscal 1997, Specialty Chemicals' strategic focus shifted
from numerous short-term projects to long-term outsourcing contracts with major
chemical manufacturers. Specialty Chemicals' customers include, among others,
Albright & Wilson, Ashland, British Petroleum, Cytec, DuPont and OxyChem.
Management expects that 63.6% and 51.0% of Specialty Chemicals' Fiscal 1999
revenues will be derived from long-term contracts and minimum committed payment
contracts, respectively. Large chemical manufacturers continue to outsource
production in order to focus on research, product development and marketing and
decrease the cost and time-to-market for new products. Several factors make
Specialty Chemicals a desirable outsourcing partner including its: (i) flexible
manufacturing facilities, (ii) experience in manufacturing a wide variety of
complex products, (iii) strong process development capabilities and (iv) ability
to dispose on-site of hazardous waste by-products in a safe and cost-effective
manner. Specialty Chemicals recently has entered into four long-term contracts,
three of which contain minimum committed payment provisions, with major chemical
manufacturers which are expected to contribute $7.7 million of revenues and $3.8
million of EBITDA in Fiscal 1999. See "Business -- Specialty
Chemicals -- Selected Recent Contracts." In Fiscal 1998, Specialty Chemicals
represented 37.5% of GNI's revenues.
Specialty Chemicals' contracts are generally tolling arrangements whereby
the customer provides the raw materials and pays for the finished product on a
per unit basis. As a result of such tolling arrangements, management believes
Specialty Chemicals' revenues and cost of sales are understated when compared to
other specialty chemical manufacturers who purchase the raw materials used in
their production processes. In connection with tolling arrangements, Specialty
Chemicals' customers frequently fund project start-up costs and capital
expenditures needed to begin production. Since the beginning of Fiscal 1993,
Specialty Chemicals has invested $21.3 million in capital expenditures to expand
and upgrade its manufacturing capabilities. In addition, customers funded $5.6
million of capital expenditures over such period and are expected to fund
approximately $5 million of additional capital expenditures in Fiscal 1999.
Management believes that no significant additional capital expenditures will be
required by Specialty Chemicals in Fiscal 1999.
COMPETITIVE STRENGTHS
Leading Market Position. Waste Management is the leading commercial
deepwell operator in the United States and a provider of a broad range of waste
management services. Waste Management operates two of the four commercial
deepwell facilities accepting hazardous wastes in the United States. In Fiscal
1998, Waste Management disposed of approximately 96.2 million gallons of aqueous
wastes, including over half of the hazardous wastes injected into commercial
deepwells in the United States. Waste Management's leadership position is
primarily attributable to its: (i) advanced treatment and disposal methods and
technologies, (ii) breadth of permits, (iii) strategic location, (iv) strong
record of environmental compliance, (v) history of excellent customer service
and (vi) extensive capacity. Waste Management's advanced process development and
treatment capabilities have enabled Waste Management to treat and dispose of
wastes not traditionally considered for deepwell disposal.
Well-Positioned to Capitalize on Outsourcing Trend. According to industry
sources, the outsourcing of specialty chemical manufacturing is a growing trend.
Specialty Chemicals is well positioned to capitalize on this trend due to its:
(i) flexible manufacturing facilities, (ii) experience in manufacturing a wide
variety of complex products, (iii) strong process development capabilities, (iv)
existing customer relationships and (v) ability to dispose on-site of hazardous
waste by-products. Chemical manufacturers outsource the
2
<PAGE> 7
manufacture of certain products to Specialty Chemicals for a variety of reasons,
including: (i) a desire to focus on research, product development and marketing,
(ii) cost savings resulting from GNI's specific process expertise, (iii) GNI's
hazardous waste management expertise, (iv) to increase available production
capacity and (v) the ability to introduce product lines before making the
significant investment required for full production. Specialty Chemicals
recently has entered into four long-term contracts with major chemical
manufacturers, three of whom have formed multi-product alliances with Specialty
Chemicals. See "Business -- Specialty Chemicals -- Selected Recent Contracts."
Integrated Facilities with State-of-the-Art Assets. As a result of the
design and construction of its deepwell facilities, Waste Management has
received permits that enable it to inject a wider variety of waste streams at
faster injection rates than any other commercial deepwell operator in the United
States. Specialty Chemicals' state-of-the-art facilities are designed to
manufacture a broad range of chemicals, employing a variety of production
processes. By combining pilot-scale equipment with large capacity reactors and
separation equipment, Specialty Chemicals can support customer requirements
ranging from product development to full production. Management believes that
GNI's Deer Park, Texas facility is the only site in the United States which
combines specialty chemical manufacturing with commercial deepwell disposal
operations. This dual capability enables Specialty Chemicals to offer customers
a low cost, bundled solution for specialty chemicals manufacturing and on-site
disposal of waste by-products.
Broad Permits, Strong Compliance History. The Company possesses broad
federal, state and local permits to conduct its waste management operations.
Management believes that the length and cost of the permitting process serve as
significant barriers to entry into commercial deepwell operations. Waste
Management's facilities have permits to accept virtually any type of waste,
excluding dioxin-bearing, biological and radioactive wastes. Specialty Chemicals
has permits to handle and manufacture over 500 different chemicals in its Deer
Park facility. The Company believes that its permits and strong record of
environmental and regulatory compliance give it a competitive advantage as its
customers are sensitive to how their wastes and products are handled due to
liability concerns. GNI maintains a strong environmental and regulatory staff
and is in material compliance with all environmental regulations. In addition,
management considers its relations with environmental authorities to be
excellent. Since the Company entered the deepwell disposal business over ten
years ago, it has not received any material assessments or fines from regulatory
authorities.
Strategic Location. GNI's facilities in Deer Park and Corpus Christi, Texas
are strategically located in the Gulf Coast chemical and petrochemical
industrial region. According to the U.S. Department of Commerce, Texas and
Louisiana together account for nearly a quarter of total U.S. chemical
shipments. A substantial portion of the chemical and petrochemical production
facilities in the United States are located within 400 miles of the Company's
facilities. Since nearly half of all chemical and related products shipped in
the United States are transported less than 200 miles, the Company's location
provides a competitive advantage. In addition, management believes that there
are no competing commercial deepwells accepting hazardous wastes within 250
miles of Waste Management's deepwells and the nearest commercial competitor is
capable of disposing of only a fraction of the hazardous waste streams for which
GNI has permits. Management believes Waste Management's locations give the
Company a competitive advantage as waste transportation costs can become
prohibitive.
Experienced Management Team. GNI's executive management averages over 15
years of relevant industry experience. The current management team directed the
Company's entry into the deepwell disposal business in Fiscal 1988, and the
implementation of management's strategy has resulted in the growth of the
Company's revenues from $6.2 million in Fiscal 1988 to $42.7 million in Fiscal
1998. GNI's management team includes 21 engineers and chemists in various
capacities, which enhances GNI's reputation as a process development partner
with both waste management and chemical manufacturing customers. Pro forma for
the Recapitalization, management owns approximately 13.2% of the outstanding
Common Stock (as defined herein) of the Company and approximately 2.0% of the
outstanding Series A Preferred Stock (as defined herein) of the Company. See
"Management" and "Stock Ownership."
3
<PAGE> 8
BUSINESS STRATEGY
Management believes that the Company's growth in revenues and profitability
in the future will result from the successful implementation of its business
strategy, the key elements of which are as follows:
Leverage State-of-the-Art Facilities. Management believes that the
significant investments made by the Company in recent years to upgrade and
expand its facilities combined with the complementary nature of its Waste
Management and Specialty Chemicals operations provide the Company with the
opportunity to achieve significant operating leverage and efficiencies. The
Company intends to continue to increase its asset utilization by: (i) entering
into additional long-term contracts to manufacture specialty chemicals for major
chemical manufacturers, (ii) offering customers bundled specialty chemical
manufacturing and waste disposal capabilities and (iii) developing technologies
and processes that expand the types of waste streams, including non-hazardous
wastes, its deepwells can accept.
Enter Into Long-Term Chemical Manufacturing Contracts. Management intends
to continue its focus on entering into new, and expanding existing, long-term
contracts for specialty chemical manufacturing. Specialty Chemicals recently has
entered into four long-term contracts (which average in excess of three years)
with major chemical customers. The Company's relationships with three of these
customers have evolved into multi-product alliances. Management anticipates that
three additional long-term contracts will be signed by the end of calendar 1998.
These seven contracts are expected to generate approximately $11.4 million and
$5.6 million of revenues and EBITDA, respectively, in Fiscal 1999.
Pursue Complementary Business Opportunities. Management intends to pursue
business opportunities that utilize both its chemical manufacturing and waste
disposal capabilities by entering into chemical manufacturing contracts for
processes that produce significant wastes. Management believes that in-house
waste disposal capabilities substantially enhance the economies of
waste-intensive chemical processing, providing the Company with a unique
opportunity to leverage its complementary facilities and offer customers a low
cost bundled specialty chemical and waste management solution.
Expand Chemical Manufacturing Alliances. Specialty Chemicals intends to
continue to benefit from the outsourcing trend in the chemical manufacturing
industry by capitalizing on the low-cost flexible manufacturing capabilities
provided by its state-of-the-art facilities, growing reputation in the industry
and ability to dispose of waste by-products. Specialty Chemicals seeks to expand
its existing customer relationships and add new customers by emphasizing to
customers the benefits associated with outsourcing to GNI the manufacture of
specialty chemicals which include: (i) the ability to focus on research, product
development and marketing, (ii) cost savings resulting from GNI's specific
process expertise, (iii) GNI's ability to dispose on-site of hazardous wastes,
(iv) an increase in available production capacity and (v) the ability to
introduce product lines before making the significant investment required for
full production.
Capitalize on Unique Commercial Waste Management Facilities. GNI intends to
continue to capitalize on the strategic location and permit status of Waste
Management's facilities by continuing to develop technologies and processes that
expand the type of waste streams, including non-hazardous wastes streams, its
existing deepwell and surface treatment facilities can accept. Management
believes that Waste Management's three deepwells can accommodate a significantly
broader range and higher volume of waste streams without significant additional
fixed costs.
Grow Through Selective Acquisitions. The Company intends, and is actively
seeking, to make strategic acquisitions of complementary businesses in order to:
(i) add new customers, (ii) acquire compatible technologies, (iii) increase its
geographic reach and (iv) achieve economies of scale. Management utilizes strict
criteria to evaluate business acquisition possibilities, including existing
customer relationships, geographic location, process expertise, synergies and
return on investment. The Company is currently participating in the bidding
process for, or is in discussions, with potential targets concerning
acquisitions or combinations, although no agreements have been reached.
4
<PAGE> 9
RECENT DEVELOPMENTS
On July 10, 1998, the Company was awarded a non-exclusive contract to blend
and recycle a mixture of gasoline, polystyrene and benzene for the U.S. Navy.
The Company will be a subcontractor to Battelle Memorial Institute ("Battelle"),
the primary U.S. Navy contractor for the project. During the 25-month term of
the subcontract, Waste Management could recycle up to approximately 3.4 million
gallons of the fuel mixture and up to approximately 2.5 million pounds of
shredded aluminum canisters.
THE RECAPITALIZATION
Pursuant to an Agreement and Plan of Merger dated February 12, 1998 between
the Company and Green I Acquisition Corp., a Delaware corporation ("Green I")
formed by 399 Venture Partners, Inc. ("399"), as amended by the First Amendment
to Agreement and Plan of Merger dated June 17, 1998 (the "Merger Agreement"),
Green I merged with and into the Company, with the Company as the surviving
corporation (the "Merger" and together with the equity contribution and debt
financing arrangements described below and the application of the net proceeds
therefrom, the "Recapitalization"). Immediately following the Merger, each share
of common stock of GNI, $.01 par value per share ("GNI Common Stock"), was
canceled and converted into the right to receive $7.00 in cash, payable to the
holder thereof, other than 75,509 shares (the "Rollover Shares") of GNI Common
Stock held by certain members of management, and other than shares held by
stockholders who were entitled to, and who perfected their, appraisal rights, if
any. Each option to purchase GNI Common Stock that was outstanding immediately
prior to the Effective Date was canceled and the holder thereof received a cash
payment on the terms set forth in the Merger Agreement. Each 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 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 net proceeds to GNI from the Offering, approximately $71.6 million
(after deducting the Initial Purchaser's discount and expenses related to the
Offering), together with an equity investment in the Company of approximately
$22.5 million by 399 and certain members of GNI's management (the "Equity
Contribution"), were used to fund the Recapitalization. The Company has obtained
from NationsBank, N.A. ("NationsBank") a new $12.0 million senior secured
revolving credit facility (the "Revolving Credit Facility"), which is available,
subject to a borrowing base formula and certain asset appraisals, for working
capital requirements, capital expenditures and other general corporate purposes
and permitted acquisitions. See "Description of the Revolving Credit Facility."
5
<PAGE> 10
The sources and uses of funds in connection with the Recapitalization as of
the closing date (July 28, 1998) are set forth below (dollars in thousands):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Notes offered hereby...................................... $75,000
Equity Contribution....................................... 22,500
-------
Total sources..................................... $97,500
=======
USES OF FUNDS:
Purchase price of GNI equity, net(a)...................... $51,256
Repayment of existing debt:
Bank debt.............................................. 14,623
Existing Senior Subordinated Notes..................... 20,000
Make-whole premium -- Existing Senior Subordinated
Notes................................................. 3,590
Other debt............................................. 750
Accrued interest....................................... 350
General corporate purposes................................ 81
Estimated transaction fees and expenses(b)................ 6,850
-------
Total uses........................................ $97,500
=======
</TABLE>
- ---------------
(a) Net of the proceeds to the Company from the exercise of all options and
warrants to purchase GNI Common Stock.
(b) Includes advisory fees totaling $2.5 million paid by the Company to several
independent third-party financial advisors.
THE EXCHANGE OFFER
Registration Rights
Agreement.................. The Restricted Notes were sold by the Company to
the Initial Purchaser on July 23, 1998, pursuant to
a Purchase Agreement dated July 23, 1998 (the
"Purchase Agreement"). Pursuant to the Purchase
Agreement, on July 28, 1998, the Company, the
Guarantors and the Initial Purchaser entered into
the Registration Rights Agreement, which among
other things, grants the holders of the Restricted
Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy certain
obligations of the Company under the Registration
Rights Agreement. See "The Exchange Offer."
The Exchange Offer......... The Company and the Guarantors are offering to
exchange (the "Exchange Offer") up to $75,000,000
aggregate principal amount of 10 7/8% Series B
Senior Notes due 2005 (the "Exchange Notes") for up
to $75,000,000 aggregate principal amount of its
outstanding 10 7/8% Series A Senior Notes due 2005
issued in reliance upon an exemption from
registration under the Securities Act (the
"Restricted Notes"). The terms of the Exchange
Notes will be substantially identical in all
respects (including principal amount, interest
rate, maturity and ranking) to the terms of the
Restricted Notes for which they may be exchanged
pursuant to the Exchange Offer, except that (i) the
Exchange Notes will be freely transferable by
holders thereof except as provided herein (see "The
Exchange Offer -- Terms of the Exchange" and
"-- Terms and Conditions of the Letter of
Transmittal") and (ii) the Exchange Notes will be
issued without any covenant regarding registration
under the Securities Act.
6
<PAGE> 11
Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Restricted Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than any
holder which is (i) an "affiliate" of the
Registrants within the meaning of Rule 405 under
the Securities Act, (ii) a broker-dealer who
acquired Restricted Notes directly from a
Registrant or (iii) broker-dealers who acquired
Restricted Notes as a result of market making or
other trading activities) without compliance with
the registration and prospectus delivery provisions
of the Securities Act provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged
in, and do not intend to engage in, and have no
arrangement or understanding with any person to
participate in, a distribution of such Exchange
Notes.
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Restricted
Notes being tendered for exchange.
Resale of Exchange Notes... Based on interpretations by the Staff of the
Commission, as set forth in Exchange Offer
No-Action Letters issued to third parties, the
Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for the
Restricted Notes may be offered for resale, resold
or otherwise transferred by each holder thereof
(other than any holder who is (i) a broker-dealer
who acquires such Exchange Notes directly from the
Company for resale pursuant to Rule 144A under the
Securities Act or any other available exemption
under the Securities Act or (ii) any holder who is
an "affiliate" (within the meaning of Rule 405 of
the Securities Act) of the Company) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business and such
holder is not engaged in, and does not intend to
engage in, a distribution of such Exchange Notes
and has no arrangement with any person to
participate in a distribution of such Exchange
Notes. By tendering the Restricted Notes in
exchange for the Exchange Notes, each holder,
including, without limitation, any holder who is a
broker-dealer, will represent to the Company and
the Guarantors that: (i) it is not an affiliate (as
defined in Rule 405 under the Securities Act) of
the Company; (ii) it is acquiring the Exchange
Notes including the Subsidiary Guarantees (as
defined herein) in the ordinary course of its
business; and (iii) it is not engaged in, and does
not intend to engage in, and has no arrangement or
understanding to participate in, a distribution of
the Exchange Notes. If a holder of Restricted Notes
is engaged in or intends to engage in a
distribution of the Exchange Notes or has any
arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired
pursuant to the Exchange Offer, such holder may not
rely on the applicable interpretations of the Staff
and must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any secondary resale
transaction. Each Participating Broker-Dealer that
receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus meeting the
requirements of the Securities Act in connection
with any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
7
<PAGE> 12
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection
with resales of Exchange Notes received in exchange
for Restricted Notes where such Restricted Notes
were acquired by such Participating Broker-Dealer
as a result of market-making activities or other
trading activities. The Company and the Guarantors
have agreed that they will make this Prospectus
available to any Participating Broker-Dealer for a
period of time not to exceed one year after the
date on which the Exchange Offer is consummated for
use in connection with any such resale. See "Plan
of Distribution." To comply with the securities
laws of certain jurisdictions, it may be necessary
to qualify for sale or register the Exchange Notes
prior to offering or selling such Exchange Notes.
The Company and the Guarantors have agreed,
pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein,
to register or qualify the Exchange Notes for offer
or sale under the securities or "blue sky" laws of
such jurisdictions as may be necessary to permit
consummation of the Exchange Offer.
Consequences of Failure to
Exchange Restricted
Notes.................... Upon consummation of the Exchange Offer, subject to
certain exceptions, holders of Restricted Notes who
do not exchange their Restricted Notes for Exchange
Notes in the Exchange Offer will no longer be
entitled to registration rights and will be
entitled to sell the Restricted Notes only pursuant
to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
laws. See "Risk Factors -- Risk Factors Relating to
the Notes -- Consequences of Failure to Exchange"
and "The Exchange Offer -- Terms of the Exchange
Offer."
Expiration Date............ 5:00 p.m., New York City time, on November 20,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
Interest on the Exchange
Notes...................... The Exchange Notes will accrue interest at the
applicable per annum rate set forth on the cover
page of this Prospectus, from (i) the later of (A)
the last interest payment date on which interest
was paid on the Restricted Notes surrendered in
exchange therefor or (B) if the Restricted Notes
are surrendered for exchange on a date subsequent
to the record date for an interest payment date to
occur on or after the date of such exchange and as
to which interest will be paid, the date of such
interest payment or (ii) if no interest has been
paid on the Restricted Notes, from the Issue Date
(as defined herein) of such Restricted Notes.
Interest on the Exchange Notes is payable on
January 15 and July 15 of each year, commencing
January 15, 1999.
Conditions to the Exchange
Offer...................... The Exchange Offer is not conditioned upon any
minimum principal amount of Restricted Notes being
tendered for exchange. However, the Exchange Offer
is subject to certain customary conditions, which
may, under certain circumstances, be waived by the
Company and the Guarantors. See "The Exchange
Offer -- Conditions." Except for the requirements
of applicable federal and state securities laws,
there are no federal or state regulatory
requirements to be complied with or obtained by the
Company or the Guarantors in connection with the
Exchange
8
<PAGE> 13
Offer. The Company reserves the right to terminate
or amend the Exchange Offer at any time prior to
the Expiration Date upon the occurrence of any such
condition.
Procedures for Tendering
Restricted Notes......... Each holder of Restricted Notes wishing to accept
the Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Restricted Notes to be exchanged and any
other required documentation to the Exchange Agent
(as defined herein) at the address set forth herein
or effect a tender of Restricted Notes pursuant to
the procedures for book-entry transfer as provided
for herein. See "The Exchange Offer -- Procedures
for Tendering" and "-- Book Entry Transfer."
Guaranteed Delivery
Procedures................. Holders of Restricted Notes who wish to tender
their Restricted Notes and whose Restricted Notes
are not immediately available or who cannot deliver
their Restricted Notes and a properly completed
Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date may
tender their Restricted Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders of Restricted Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Restricted
Notes, a written or facsimile transmission notice
of withdrawal must be received by the Exchange
Agent at its address set forth herein under "The
Exchange Offer -- Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Restricted
Notes and Delivery of
Exchange Notes........... Subject to certain conditions, any and all
Restricted Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date will be accepted for
exchange. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer --
Terms of the Exchange Offer." Any Restricted Notes
not accepted for any reason will be returned
without expense to the tendering holders thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer.
Effect on Holders of
Original Notes............. As a result of the making of the Exchange Offer,
and upon the acceptance of exchange of all validly
tendered Restricted Notes pursuant to the terms of
this Exchange Offer, the Company and the Guarantors
will have fulfilled a covenant contained in the
terms of the Restricted Notes and the Registration
Rights Agreement, and, accordingly, the holders of
the Restricted Notes will have no further
registration or other rights under the Registration
Rights Agreement. See "Restricted Notes
Registration Rights." Holders of the Restricted
Notes who do not tender their Restricted Notes in
the Exchange Offer will continue to hold such
Restricted Notes and will be entitled to all rights
and limitations
9
<PAGE> 14
applicable thereto under the Indenture dated as of
July 28, 1998, among the Company, the Guarantors
and United States Trust Company of New York, as
Trustee (the "Trustee"), relating to the Restricted
Notes and the Exchange Notes (the "Indenture"). All
indentured, and tendered but unaccepted, Restricted
Notes will continue to be subject to the
restrictions on transfer provided for in the
Restricted Notes and the Indenture. To the extent
that Restricted Notes are tendered and accepted in
the Exchange Offer, the trading market, if any, for
the Restricted Notes could be adversely affected.
See "Risk Factors -- Consequences of Failure to
Exchange."
Certain Tax
Considerations............. The exchange of Exchange Notes for Restricted Notes
will not be considered a sale or exchange or
otherwise a taxable event for federal income tax
purposes. See "Certain U.S. Federal Tax
Considerations."
Exchange Agent............. United States Trust Company of New York is serving
as exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
Fees and Expenses.......... All expenses incident to consummation of the
Exchange Offer and compliance with the Registration
Rights Agreement will be borne by the Company. See
"The Exchange Offer -- Fees and Expenses."
Use of Proceeds............ There will be no cash proceeds payable to the
Company or the Guarantors from the issuance of the
Exchange Notes pursuant to the Exchange Offer. The
proceeds from the sale of the Restricted Notes were
used to fund the Recapitalization. See "Use of
Proceeds" and "The Recapitalization."
SUMMARY OF TERMS OF EXCHANGE NOTES
The Exchange Offer relates to the exchange of up to $75 million aggregate
principal amount of Restricted Notes for up to an equal aggregate principal
amount of Exchange Notes. The Exchange Notes will be entitled to the benefits of
the same Indenture that governs the Restricted Notes and that will govern the
Exchange Notes. The form and terms of the Exchange Notes are the same in all
material respects as the form and terms of the Restricted Notes, except that the
Exchange Notes have been registered under the Securities Act and therefore will
not bear legends restricting the transfer thereof and except that the Exchange
Notes will not receive the benefit of certain provisions of the Indenture
relating to registration rights. See "Description of the Exchange Notes."
Maturity Date.............. July 15, 2005.
Interest Rate and Payment
Dates...................... The Exchange Notes will bear interest at a rate of
10 7/8% per annum. Interest will be payable
semi-annually on each January 15 and July 15,
commencing January 15, 1999.
Guarantee.................. The Company's payment obligations under the
Exchange Notes are jointly and severally guaranteed
by the Guarantors.
Optional Redemption........ The Exchange Notes will be redeemable at the option
of the Company, in whole or in part, at any time on
or after July 15, 2003, at the redemption prices
set forth herein, plus accrued and unpaid interest
thereon to the redemption date. In addition, the
Company, at its option, may redeem at any time
prior to July 15, 2001, in the aggregate up to 25%
of the original principal amount of the Exchange
Notes at a redemption price equal to 110.875% of
the aggregate principal amount so redeemed, plus
accrued and unpaid interest thereon to the
redemption date, with the Net Proceeds of one or
more Public Equity Offerings by
10
<PAGE> 15
the Company; provided that at least 75% of the
aggregate principal amount of the Exchange Notes
originally issued remains outstanding immediately
after the occurrence of any such redemption and
that any such redemption occurs within 90 days
following the closing of any such Public Equity
Offering. See "Description of the Exchange Notes --
Optional Redemption."
Change of Control.......... Upon the occurrence of a Change of Control (as
defined herein) each holder of Exchange Notes will
have the right to require the Company to repurchase
all or any part of such holder's Exchange Notes at
a price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid
interest. See "Description of the Notes -- Change
of Control Offer." There can be no assurance that,
in the event of a Change of Control, the Company
would have sufficient funds to repurchase all of
the Exchange Notes tendered. See "Risk
Factors -- Change of Control Offer."
Asset Sale Proceeds........ The Company will be obligated in certain instances
to make an offer to purchase the Exchange Notes at
a purchase price in cash equal to 100% of the
principal amount thereof plus accrued and unpaid
interest thereon to the Purchase Date, with
Available Asset Sale Proceeds (as defined herein).
See "Description of Exchange Notes -- Certain
Covenants -- Limitation on Certain Asset Sales."
Subordination.............. The Exchange Notes will be general unsecured
obligations of the Company and will be subordinated
in right of payment to all existing and future
Senior Debt (as defined herein) of the Company. The
Exchange Notes will rank pari passu with any
present and future senior subordinated indebtedness
of the Company and will rank senior to all other
subordinated indebtedness of the Company. See
"Description of the Exchange Notes."
Certain Covenants.......... The Indenture under which the Exchange Notes will
be issued will contain certain covenants that limit
the ability of the Company and its Restricted
Subsidiaries to, among other things, incur
additional indebtedness, pay dividends or make
certain other restricted payments, consummate
certain asset sales, enter into certain
transactions with affiliates, incur indebtedness
that is subordinate in right of payment to any
Senior Debt and senior in right of payment to the
Exchange Notes, incur liens, impose restrictions on
the ability of a Restricted Subsidiary to guarantee
the payment of any indebtedness of the Company or
any indebtedness of any other Restricted
Subsidiary, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of
the assets of the Company. See "Description of the
Exchange Notes -- Certain Covenants."
USE OF THE PROCEEDS
There will be no cash proceeds payable to the Company or the Guarantors
from the issuance of the Exchange Notes pursuant to the Exchange Offer. The
proceeds from the sale of the Restricted Notes were used to fund the
Recapitalization. See "Use of Proceeds" and "The Recapitalization."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Exchange Notes.
11
<PAGE> 16
SUMMARY HISTORICAL AND UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The summary historical consolidated financial data set forth below with
respect to the five fiscal years in the period ended June 30, 1998 have been
derived from the audited consolidated financial statements of the Company. The
summary unaudited pro forma condensed consolidated financial data of the Company
set forth below are based on the historical consolidated financial statements of
the Company, as adjusted to give effect to the Recapitalization. The unaudited
pro forma statement of operations and other financial data for the year ended
June 30, 1998 give effect to the Recapitalization, as if it had occurred as of
July 1, 1997. The unaudited pro forma balance sheet data give effect to the
Recapitalization, as if it had occurred as of June 30, 1998. The pro forma
adjustments are based upon available information and upon certain assumptions
that management believes are reasonable. The pro forma financial data do not
purport to represent what the Company's actual results of operations or actual
financial position would have been if the Recapitalization had occurred on such
dates or to project the Company's results of operations or financial position
for any future period or date. The information in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Historical and Pro Forma Consolidated
Financial Data," "Unaudited Pro Forma Consolidated Financial Statements" and the
Company's consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
The adjusted financial data set forth below, which were not determined in
accordance with generally accepted accounting principles ("GAAP"), give effect
to certain additional adjustments which management believes are relevant in
evaluating the historical and future operating performance of the Company. In
Fiscal 1998, the adjusted financial data give effect to: (i) the Company's entry
into a multi-year contract (the "BP Contract") with BP Chemicals Inc. ("BP") to
sell crude acetonitrile through June 30, 2008, and to produce refined
acetonitrile through June 30, 2000, (ii) the Company's entry into two additional
long-term outsourcing contracts with major chemical manufacturers, which contain
minimum committed payment provisions and (iii) the elimination of certain costs
associated with being a public company as a result of the Recapitalization.
These additional adjustments assume that on July 1, 1997: (i) the Specialty
Chemicals contracts had been executed and production thereunder had commenced
and (ii) the Recapitalization had occurred. The adjusted financial data should
not be viewed as indicative of the actual results of the Company had the
transactions and events giving rise thereto occurred at the beginning of the
period presented and there can be no assurance that the Company will be able to
achieve such results in the future. The adjusted financial data presented below
should be read in conjunction with the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Specialty Chemicals -- Selected Recent Contracts."
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------
YEAR ENDED JUNE 30, PRO FORMA
----------------------------------------------- YEAR ENDED
1994 1995 1996 1997 1998 JUNE 30, 1998
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $20,702 $34,359 $39,339 $40,727 $42,717 $ 42,717
Cost of services............... 15,783 20,319 24,662 25,110 24,540 24,540
Gross profit................... 4,919 14,040 14,677 15,617 18,177 18,177
Selling, general and
administrative.............. 4,609 4,090 5,058 5,559 6,387 6,387
Depreciation and
amortization................ 3,056 4,102 4,820 5,989 7,247 7,500
Operating income (loss)........ (2,746) 5,848 (1,910) 4,069 4,543 4,290
</TABLE>
12
<PAGE> 17
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------
YEAR ENDED JUNE 30, PRO FORMA
----------------------------------------------- YEAR ENDED
1994 1995 1996 1997 1998 JUNE 30, 1998
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(a)...................... $ 310 $ 9,950 $10,024 $10,727 $13,027 $ 13,027
Adjusted EBITDA(b)............. -- -- -- -- -- 16,012
Interest expense............... 290 1,143 1,587 2,970 3,888 8,436(c)
Capital expenditures........... 11,405(d) 5,827 6,455 5,570 7,718 7,718
Ratio of Adjusted EBITDA to
interest expense............ -- -- -- -- -- 1.9x
Ratio of total debt to Adjusted
EBITDA...................... -- -- -- -- -- 4.7x
BALANCE SHEET DATA:
Cash and time deposits................................................ $ 208 $ 585
Working capital, as adjusted(e)....................................... 2,256 2,357
Total assets.......................................................... 68,877 71,554
Total debt............................................................ 34,164 75,000
Series A Redeemable Preferred Stock................................... -- 18,500
Stockholders' equity (deficit)........................................ 25,534 (31,023)
</TABLE>
- ---------------
(a) EBITDA is defined as earnings before interest, other income, income taxes
(benefit), depreciation and amortization and non-recurring items.
Non-recurring items are comprised of: (i) $1,237 of charges in Fiscal 1998
principally related to the forgiveness by the Company of certain
indebtedness of certain executives of the Company (see Note 6 to the
consolidated financial statements of the Company), (ii) $443 of one-time
severance and personnel-related costs in Fiscal 1997 associated with
certain management changes during the same period in connection with the
shift in Specialty Chemicals' focus from numerous short-term projects to
long-term outsourcing contracts, (iii) $226 of legal and investment banking
fees associated with the Company's discussions with a third party regarding
a possible business combination in Fiscal 1997, (iv) a non-cash charge in
Fiscal 1996 of approximately $6,709 resulting from an impairment loss
related to certain assets of the Company (see Note 1 to the consolidated
financial statements of the Company) and (v) in Fiscal 1996, $405 of
one-time charges and expenses related to operations. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operating activities and other combined income or cash flow statement data
prepared in accordance with GAAP or as a measure of the Company's
profitability or liquidity. The Company's calculation of EBITDA may not be
consistent with similarly captioned amounts used by other companies.
(b) The adjusted financial data presented reflect certain additional
adjustments which management believes are relevant in evaluating the
historical and future operating performance of the Company. The following
additional adjustments are based on estimates and assumptions made and
believed to be reasonable by the Company but that are inherently uncertain
and subject to change. The following calculation should not be viewed as
indicative of actual or future results. The following table reflects the
effect of these items on EBITDA:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
JUNE 30, 1998
-------------
<S> <C>
EBITDA...................................................... $13,027
Adjustments:
BP Contract(i)............................................ 1,636
Recently signed Specialty Chemicals contracts(ii)......... 999
Elimination of certain costs associated with being a
public company......................................... 350
-------
Total additional adjustments...................... 2,985
-------
Adjusted EBITDA............................................. $16,012
=======
</TABLE>
13
<PAGE> 18
- ---------------
(i)On June 5, 1998, the Company entered into a multi-year contract with BP
to sell crude acetonitrile through June 30, 2008 and to produce refined
acetonitrile through June 30, 2000. The production of refined
acetonitrile has been assumed to be evenly distributed over the period
during which BP is obligated to pay minimum processing and capacity
rights fees. Included in the annual average adjustment for the initial
two year period is approximately $2,000 of EBITDA related to minimum
committed payment amounts reflecting fees payable to the Company for
product processing and capacity reservation.
(ii)
During Fiscal 1997, Specialty Chemicals shifted its focus from numerous
short-term projects to long-term outsourcing contracts with major
chemical manufacturers. In addition to the BP Contract, Specialty
Chemicals recently has entered into two long-term contracts which
contain minimum committed payment provisions, with major chemical
manufacturers.
(c) Reflects an interest rate of 10 7/8% on the Notes. Includes approximately
$280 of other interest expense comprised primarily of the accretion of the
Company's discounted payment obligation in connection with the EMPAK Inc.
("EMPAK") assistance agreement.
(d) Includes approximately $8,800 of capital expenditures in connection with
the Company's expansion and upgrade of Specialty Chemicals' facilities.
(e) Working capital, as adjusted, is defined as total current assets excluding
cash and time deposits less total current liabilities excluding the current
portion of long-term debt.
14
<PAGE> 19
RISK FACTORS
Prospective investors in the Exchange Notes should carefully consider the
following factors, in addition to the other information set forth in this
Prospectus, before making an investment in the Exchange Notes offered hereby.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Restricted Notes who do not exchange their Restricted Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Restricted Notes as set forth in the legend
thereon as a consequence of the issuance of the Restricted Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Restricted Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not intend to register the Restricted Notes under the
Securities Act. In addition, any holder of Restricted Notes who tenders in the
Exchange Offer for the purpose of participating in the distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. To
the extent that Restricted Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Restricted
Notes could be adversely affected.
ABSENCE OF PUBLIC MARKET
The Restricted Notes are included in the PORTAL market. Prior to this
Exchange Offer, there has been no public market for the Exchange Notes. If such
a market were to develop, the Exchange Notes could trade at prices that may be
higher or lower than their principal amount. Neither the Company nor any of the
Guarantors intends to apply for listing of the Exchange Notes on any securities
exchange or for quotation of the Exchange Notes on The Nasdaq Stock Market's
National Market or otherwise. The Initial Purchaser has previously made a market
in the Restricted Notes, and the Company and the Guarantors have been advised
that the Initial Purchaser currently intends to make a market in the Exchange
Notes, as permitted by applicable laws and regulations, after consummation of
the Exchange Offer. The Initial Purchaser is not obligated, however, to make a
market in the Restricted Notes or the Exchange Notes and any such market making
activity may be discontinued at any time without notice at the sole discretion
of the Initial Purchaser. There can be no assurance as to the liquidity of the
public market for the Exchange Notes or that any active public market for the
Exchange Notes will develop or continue. If an active public market does not
develop or continue, the market price and liquidity of the Exchange Notes may be
adversely affected.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
GNI is highly leveraged. As of June 30, 1998, on a pro forma basis, after
giving effect to the Recapitalization, GNI would have had total indebtedness of
$75.0 million and a stockholders' deficit of $31.0 million. On a pro forma
basis, after giving effect to the Recapitalization, earnings would have been
inadequate to cover fixed charges by $4.0 million in Fiscal 1998. Furthermore,
subject to certain restrictions contained in the Revolving Credit Facility and
the Indenture, GNI and its Subsidiaries will be permitted to incur additional
indebtedness in the future. See "Capitalization," "Description of the Exchange
Notes -- Certain Covenants" and "Description of the Revolving Credit Facility."
The degree to which the Company is leveraged could have important
consequences to holders of the Exchange Notes, including but not limited to the
following: (i) increasing the difficulty for the Company to satisfy its
obligations with respect to the Exchange Notes, (ii) increasing the Company's
vulnerability to adverse general economic and industry conditions, (iii)
limiting the Company's ability to obtain additional financing to fund future
working capital, capital expenditures and other general corporate requirements,
(iv) requiring the dedication of a substantial portion of the Company's cash
flow from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to
15
<PAGE> 20
fund working capital, capital expenditures, or other general corporate purposes,
(v) limiting the Company's flexibility in planning for, or reacting to, changes
in its operations and (vi) placing the Company at a competitive disadvantage
compared to less leveraged competitors. In addition, the Indenture and the
Revolving Credit Facility will contain financial and other restrictive covenants
that will limit the ability of the Company to, among other things, borrow
additional funds. Failure by the Company to comply with such covenants could
result in an event of default which, if not cured or waived, could result in the
acceleration of the Company's obligations under the Exchange Notes and the
Revolving Credit Facility. In addition, the degree to which the Company is
leveraged could prevent it from repurchasing all of the Exchange Notes tendered
to it upon the occurrence of a Change of Control. See "-- Change of Control
Offer" and "Description of the Revolving Credit Facility."
The Company's ability to make scheduled payments of principal of or
interest on, or to refinance, its indebtedness (including the Exchange Notes),
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 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, including the
Exchange Notes, or to fund its other liquidity needs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES
GNI's cash flow and, consequently, its ability to service debt, including
the Exchange Notes, is dependent upon the earnings of its Subsidiaries and the
payment of funds by its Subsidiaries to GNI in the form of loans, dividends or
otherwise. However, the Indenture requires all Restricted Subsidiaries (as
defined herein) to guarantee the Exchange Notes. In the event of a bankruptcy,
liquidation or reorganization of a Subsidiary, holders of any Unrestricted
Subsidiaries' (as defined herein) indebtedness will have a claim to the assets
of such Unrestricted Subsidiaries that is senior to GNI and the Guarantor's
interest in such assets. Any right of GNI to participate in any distribution of
the assets of any of the non-Guarantor Subsidiaries upon the liquidation,
reorganization or insolvency of such Subsidiary (and the consequent right of the
holders of the Exchange Notes to participate in the distribution of those
assets) is subject to the prior claims of creditors (including trade creditors)
and preferred stockholders, if any, of such non-Guarantor Subsidiary, except to
the extent that GNI has a claim against such non-Guarantor Subsidiary as a
creditor of such non-Guarantor Subsidiary. Moreover, the payment of dividends
and the making of loan advances to GNI by its Subsidiaries is subject to
restrictive covenants in agreements entered into by certain of such
Subsidiaries, including the Revolving Credit Facility, and may be restricted
upon an event of default thereunder. On the date of the closing of the Exchange
Offering, all of GNI's Subsidiaries will be deemed Restricted Subsidiaries and
Guarantors.
SECURED INDEBTEDNESS; EFFECTIVE SUBORDINATION
Holders of any secured indebtedness of GNI or its Subsidiaries will have
claims that are prior to the claims of the holders of the Exchange Notes with
respect to the assets securing such other indebtedness. Notably, GNI and the
Guarantors are parties to the Revolving Credit Facility which is secured by
liens on substantially all of GNI's and its Subsidiaries' assets. The Exchange
Notes will be effectively subordinated to all such secured indebtedness to the
extent of the assets securing such indebtedness. In the event of any
distribution or payment of the assets of GNI in any foreclosure, dissolution,
winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders
of secured indebtedness will have a prior claim to the assets of GNI and its
Subsidiaries that constitute their collateral. Holders of the Exchange Notes
will participate ratably with all holders of unsecured indebtedness of GNI that
is deemed to be of the same class as the Exchange Notes, and potentially with
all other general creditors of GNI, based upon the respective
16
<PAGE> 21
amounts owed to each holder or creditor, in the remaining assets of GNI. In any
of the foregoing events, there can be no assurance that there would be
sufficient assets to pay amounts due on the Exchange Notes. As a result, holders
of Exchange Notes may receive less, ratably, than holders of secured
indebtedness. As of June 30, 1998, on a pro forma basis after giving effect to
the Recapitalization, GNI and its Subsidiaries would have had no outstanding
secured indebtedness. Up to $11.5 million would have been available for
borrowing under the Revolving Credit Facility, subject to pending asset
appraisals. The Indenture permits, subject to certain limitations, the
incurrence of additional secured indebtedness by GNI and its Subsidiaries in the
future.
RESTRICTIVE DEBT COVENANTS
The Indenture and the Revolving Credit Facility restrict, among other
things, the Company and its Subsidiaries' ability to incur additional
indebtedness, incur liens, pay dividends and make certain other restricted
payments, issue stock of Wholly Owned Restricted Subsidiaries, create dividend
or other payment restrictions on Restricted Subsidiaries, make investments,
consummate certain asset sales, enter into certain transactions with affiliates,
merge or consolidate with any other person, or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of the assets of the
Company. See "Description of the Exchange Notes -- Certain Covenants" and
"Description of the Revolving Credit Facility." The Revolving Credit Facility
also requires the Company to maintain specified financial ratios and satisfy
certain financial condition tests. The Company's ability to meet those financial
ratios and tests can be affected by events beyond its control, and there can be
no assurance that the Company will meet those tests. A breach of any of these
covenants could result in a default under the Revolving Credit Facility and the
Indenture. Upon the occurrence of an event of default under the Revolving Credit
Facility, the lenders could elect to declare all amounts outstanding under the
Revolving Credit Facility, together with accrued interest, to be immediately due
and payable. If the Company were unable to repay those amounts, the lenders
could proceed against the collateral granted to them to secure that
indebtedness. Substantially all of the assets of GNI and each of its
Subsidiaries are pledged as security under the Revolving Credit Facility. If the
indebtedness under the Revolving Credit Facility were to be accelerated, there
can be no assurance that the assets of the Company would be sufficient to repay
in full the indebtedness thereunder and the other indebtedness of the Company,
including the Exchange Notes. See "-- Change of Control Offer" and "Description
of the Revolving Credit Facility."
NEW LONG-TERM CONTRACTS
The Company has recently entered into four long-term outsourcing contracts
to manufacture specialty chemicals for major chemical manufacturers which it
estimates will produce $7.7 million of additional revenues and $3.8 million of
EBITDA in Fiscal 1999. This is based on the Company's estimate of the production
volumes and fee structures under such contracts. However, there can be no
assurance as to any future level of revenues or profitability resulting from any
existing or newly acquired contracts. Likewise, there can be no assurance that
the Company will retain or renew existing long-term contracts or enter into
additional long-term contracts.
FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS
The Company's operations are subject to numerous and continually evolving
federal, state and local laws, regulations and policies that govern
environmental protection, zoning and other matters. If existing regulatory
requirements change, the Company may, among other things, be required to make
significant unanticipated capital and operating expenditures. Although the
Company believes that it is presently in material compliance with applicable
laws and regulations, there can be no assurance that it will be deemed to be in
compliance in the future. Government authorities may seek to impose fines and
penalties on the Company or to revoke or deny the issuance or renewal of
operating permits for failure to comply with applicable laws and regulations.
Under such circumstances, the Company might be required to curtail or cease
operations or conduct site remediation until a particular problem is remedied,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, if the Company's operations
17
<PAGE> 22
resulted in the release of hazardous substances, the Company could incur
liability under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 ("CERCLA" or "Superfund"). See "Business -- Environmental
Regulation and Safety Matters."
ENVIRONMENTAL REGULATION AND SAFETY MATTERS
Environmental Compliance. As noted above, the Company's operations are
subject to extensive and evolving federal, state and local laws and regulations
on environmental and health and safety matters. Governmental authorities, and in
some cases third parties, have the power to enforce compliance with these laws
and regulations, and violators may be subject to significant civil and criminal
sanctions, including penalties and injunctions. There can be no assurance that
the Company's operations or activities will not result in civil or criminal
enforcement actions or private actions, mandatory clean-up requirements relating
to current or past waste management and disposal practices, revocation of
permits or licenses required to operate the Company's business, denial of
applications for future permits, requirements to curtail operations or to
install additional pollution-control equipment, or significant fines, penalties
or damages, any of which could have a material adverse effect on the Company. In
addition, the imposition of stricter environmental laws or regulations affecting
the Company's business, or more stringent interpretations of or enforcement
policies with respect to such laws and regulations, could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business -- Environmental Regulation and Safety Matters."
Regulatory Status of Facilities. The Company is required to maintain
governmental permits and authorizations for various aspects of its operations,
the loss of any one of which could have a material adverse effect on the
Company. Once obtained, the Company's permits and authorizations are subject to
modification, suspension, revocation or non-renewal under certain circumstances.
The Company's applications for initial issuance, modification and renewal of
permits and authorizations must be approved by government authorities, typically
following public notice and, in certain instances, public hearings. There can be
no assurance that the Company will be able to obtain all necessary permits and
authorizations in the future or maintain and renew its current permits. The
Company's failure to obtain, maintain or renew any such permit or authorization
on acceptable terms could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's current
RCRA Part B Permit for the Deer Park facility requires the Company to undertake
a RCRA Facility Investigation ("RFI") and, if necessary, appropriate corrective
action with respect to certain areas of the Deer Park facility. The Company has
completed the RFI for its Deer Park facility, filed final reports with the Texas
Natural Resource Conservation Commission ("TNRCC") on July 28, 1998, and is
awaiting TNRCC approval. The costs of the Deer Park RFI were not material. The
Company's Corpus Christi RCRA Part B Permit (as defined herein) was renewed on
September 25, 1998 by the TNRCC. A similar requirement is included in the
renewed Corpus Christi RCRA Part B Permit. There can be no assurances that the
costs associated with the mandatory RFI or any required corrective action with
regard to the Corpus Christi facility will not have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company has submitted its renewal application for its Deer Park UIC Permit (as
defined herein) to the TNRCC. On September 23, 1998, the comment period for such
renewal application ended. There can be no assurance that the Deer Park UIC
Permit will be renewed on commercially acceptable terms or at all. See "Business
- -- Environmental Regulation and Safety Matters."
Potential Liability for Operations. The Company's services include the
generation, transportation, storage, processing, treatment and disposal of
materials that are or may be considered hazardous or toxic under applicable
environmental or health and safety laws. The Company is exposed to the potential
risk that it could release toxic or harmful substances into the environment,
with potential to cause injuries and damage to the Company's employees and
properties, and to other persons and properties located in the vicinity of the
Company's facilities. The Company also sends wastes to others for disposal at
their sites and, therefore, could be liable for releases or clean-up of
hazardous materials from those sites. Further, the Company's proximity to other
chemical and petrochemical processing and storage facilities exposes the
Company's employees and properties to the potential risk of injury and damage
caused by others. From time to time the Company may be subject to claims by its
employees, government authorities or other third parties for personal injury or
18
<PAGE> 23
property damage due to their exposure to hazardous or toxic materials, or for
environmental clean-up costs. Although the Company maintains various insurance
coverages for its operations, including pollution legal liability insurance,
there can be no assurance that such insurance will cover any particular
environmental liability imposed on the Company or that environmental claims
against the Company will not have a material adverse effect on its business,
results of operations and financial condition. See "-- Expense and Limited
Availability of Insurance," "Business -- Environmental Regulation and Safety
Matters," and "Business -- Insurance Matters."
Reliance on Environmental Regulation. The Company's waste management
business has benefitted substantially from the increased government regulation
of waste management. If government authorities were to relax the laws and
regulations pertaining to the handling of wastes or their interpretations of or
enforcement policies with respect to such laws and regulations, such
developments could have a material adverse effect on the Company. See
"Business -- Environmental Regulation and Safety Matters."
Prior Operations. The Company at one time was involved in the manufacturing
of low-level radioactive sources and tracers utilized principally in the
petroleum, industrial and medical markets. Applicable regulations of the federal
Nuclear Regulatory Commission ("NRC") and analogous state agencies required the
Company to conduct decommissioning activities at four sites. There can be no
assurance that the relevant regulatory agencies will not impose additional or
more stringent decontamination requirements that could have a material adverse
effect on the Company. Management believes that the estimated cost of
decommissioning activities does not exceed the value of the four sites. There
can be no assurance, however, that these estimates accurately reflect the
ultimate costs or proceeds associated with these properties. See "Business --
Properties," "Business -- Environmental Regulation and Safety Matters," and "The
Company -- History."
Superfund. CERCLA authorizes the federal government to use federal funds to
clean up facilities at which there has been a release or threatened release of
hazardous substances, or to order persons responsible for such circumstances to
do so. Superfund also allows government entities and private parties that have
incurred response costs to recover them from responsible parties. The statute
has been interpreted to create strict, joint and several liability for the costs
of removal and remediation, other necessary response costs, and damage to
natural resources. Liability may be trebled if the responsible party fails to
perform a removal or remedial action ordered under Superfund. Liability under
CERCLA may extend to: generators of hazardous substances; owners and operators
of facilities, including waste transportation vehicles, from which a release of
hazardous substances occurs; persons who owned or operated such facilities at
the time the hazardous substances were disposed of; persons who arranged for the
treatment or disposal of hazardous substances at, or the transportation of
hazardous substances to, a facility; and transporters who selected such
facilities for treatment or disposal of hazardous substances. Like most other
entities involved in the hazardous waste management business, and many
industrial entities, the Company generates, manages, transports and disposes at
third-party facilities, substances that could be considered hazardous substances
under Superfund. Claims under Superfund and analogous state laws may arise
against the Company in the future, although the Company is not aware that it is
currently considered by the EPA a potentially responsible party for cleanup
costs or damages under Superfund. See "Business -- Environmental Regulation and
Safety Matters."
DEPENDENCE ON KEY OPERATIONS
The Company derives a significant portion of its revenues and cash flow
from its deepwell waste injection operations and related services. Accordingly,
continued broad acceptance of deepwell waste injection is critical to the
Company's future success. If demand for deepwell waste injection is reduced by
technological change, competition, regulatory change, political or community
pressure or other factors, including a change in public sentiment concerning the
Company's deepwell waste injection operations or deepwells generally, the
Company's business, financial condition and results of operations and its
ability to achieve sufficient cash flow to service its indebtedness, including
the Exchange Notes, will be materially adversely affected. See
"Business -- Waste Management."
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<PAGE> 24
CYCLICALITY OF INDUSTRIES SERVED; FLUCTUATIONS IN OPERATING RESULTS
The markets served by the Company's businesses are cyclical in nature and
the Company's operating results may be affected by a number of factors,
including the spending decisions of the Company's customers and general economic
conditions in the industries served by the Company, changes in customer
manufacturing processes, and waste minimization and recycling efforts of the
Company's customers. These factors generally are beyond the Company's control.
Given the relatively high fixed-cost component of the Company's operations,
relatively minor fluctuations in revenues could result in significant variations
in the Company's operating results. The Company's operating results for a
particular quarter may not be indicative of its results for any subsequent
quarter or year. See "Business -- Marketing and Customers."
EXPENSE AND LIMITED AVAILABILITY OF INSURANCE
Although the Company has insurance covering its operations, such insurance
is subject to coverage limits and deductibles. An uninsured or underinsured
claim against the Company that is successful and sufficient in magnitude could
have a material adverse effect on the Company. In addition, in view of the
general constraint in the market in recent years for liability insurance for
waste management companies, the premiums and deductibles of liability insurance
could increase to the point where such insurance is prohibitively expensive, and
certain insurance could become unavailable altogether. Such developments could
cause the Company to be unable to obtain or maintain certain insurance, which,
in turn, could cause the Company not to comply with regulatory requirements
imposed on certain of its operations. Further, the Company's failure to maintain
certain specified types and amounts of insurance would constitute an event of
default under the Revolving Credit Facility. See "Business -- Insurance
Matters."
RISKS RELATED TO POTENTIAL FUTURE ACQUISITIONS
With respect to its core operations, the Company evaluates acquisition
opportunities from time to time. Currently, the Company is participating in the
bidding process for, or is in discussions with, potential targets concerning
acquisitions or combinations, although no agreements have been reached. To the
extent the Company consummates acquisitions in the future, there can be no
assurance that the Company will be able to maintain or improve the operating
results of any such acquisitions. Furthermore, if the Company completes any such
future acquisitions, it will encounter various associated risks including the
possible inability to integrate an acquired business into the Company's
operations, increased leverage and debt service requirements, diversion of
management's attention and anticipated problems or liabilities, some or all of
which could have a material adverse effect on the Company's financial condition
and results of operations.
COMPETITION
The markets for the Company's services are highly specialized and
competitive. The Company competes with many other firms ranging from small local
firms to large national firms, some of which are more established in the
industries in which the Company participates and have greater financial,
management, marketing and other resources than the Company. The competitive
market is also influenced by the extent to which the companies that generate
wastes and chemical by-products seek to minimize, process and dispose of the
wastes and by-products themselves. To remain competitive, the Company must
continue to conduct its operations in an environmentally safe and secure manner
and at competitive prices. The Company's inability to continue to compete
effectively in any of these areas could have a material adverse effect on its
financial condition and results of operations. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
Development of the Company's business and operations is dependent upon the
efforts and talents of its executive officers and technical personnel. The loss
of the services of one or more of these individuals or the inability of the
Company to retain or recruit experienced executive officers or technical
personnel could adversely affect the Company's financial condition, liquidity
and results of operations. Certain general terms of an employment arrangement
with Mr. Rush have been proposed, although no formal employment agreement
20
<PAGE> 25
has been executed. Pro forma after giving effect to the Recapitalization,
management owns approximately 13.2% of the outstanding Common Stock of the
Company and approximately 2.0% of the outstanding Series A Preferred Stock. See
"Management" and "Stock Ownership."
DEPENDENCE ON THIRD-PARTY DISPOSAL
The Company utilizes other disposal companies to dispose of certain wastes,
principally solid wastes, generated by its customers and its own operations that
cannot be injected into the Company's deepwells. Substantial price increases for
the disposal of solid waste, curtailment of disposal capacity or direct
competition by such companies could have a material adverse effect on the
business, results of operations and financial condition of the Company.
CONTROL OF THE COMPANY
399 and certain members of management of GNI (collectively, the
"Stockholders") beneficially own all of the voting common stock of the Company.
The Stockholders have entered into a Stockholders Agreement governing the
decisions to be made by the Stockholders after the consummation of the
Recapitalization. As a result, the Stockholders will have the power to direct
the affairs of the Company and are able to determine the outcome of all matters
required to be submitted to stockholders for approval, including the election of
a majority of the directors and the amendment of the Company's Certificate of
Incorporation. See "Stock Ownership."
CHANGE OF CONTROL OFFER
In the event of a "Change of Control" of the Company, each holder of
Exchange Notes will be entitled to require the Company to purchase all or a
portion of such holder's Exchange Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest thereon and
Liquidated Damages, if any, to the purchase date. See "Description of the
Exchange Notes -- Change of Control Offer." If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient funds to
pay the purchase price for all Exchange Notes tendered by the holders thereof,
and such failure would result in an event of default under the Indenture. In
addition, a Change of Control would constitute a default under the Revolving
Credit Facility and is otherwise restricted by the Revolving Credit Facility. If
GNI's obligations under the Revolving Credit Facility or any other secured
indebtedness of GNI or its Subsidiaries were accelerated due to a default
thereunder, the lenders thereunder would have a priority claim, relative to the
holders of the Exchange Notes, on the proceeds from the sale of the collateral
securing such indebtedness.
FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Guarantor, at the time it incurred the indebtedness evidenced by the
Exchange Notes or its Subsidiary Guarantee, (i) (a) was or is insolvent or
rendered insolvent by reason of such occurrence or (b) was or is engaged in a
business or transaction for which the assets remaining with the Company or such
Guarantor constituted unreasonably small capital or (c) intended or intends to
incur, or believed or believes that it would incur, debts beyond its ability to
pay such debts as they mature, and (ii) the Company, or such Guarantor, received
or receives less than reasonably equivalent value or fair consideration for the
incurrence of such indebtedness, then the Exchange Notes or the relevant
Subsidiary Guarantee could be voided, or claims in respect of the Exchange Notes
or such Subsidiary Guarantee could be subordinated to all other debts of the
Company or such Guarantor, as the case may be. In addition, under these
circumstances the payment of interest and principal in respect of the Exchange
Notes by the Company or by a Guarantor pursuant to a Subsidiary Guarantee could
be voided and required to be returned to the person making such payment, or to a
fund for the benefit of the creditors of the Company or such Guarantor, as the
case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor
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<PAGE> 26
would be considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and mature or
(ii) it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company and the Guarantors each believes that it is not
insolvent, does not have unreasonably small capital for the business in which it
is engaged and has not incurred debts beyond its ability to pay such debts as
they mature. There can be no assurance, however, as to what standard a court
would apply in making such determinations or that a court would agree with the
Company's or the Guarantors' conclusions in this regard.
THE COMPANY
GNI conducts its waste management and specialty chemical manufacturing
operations through five operating subsidiaries. Disposal Systems, Inc. ("DSI")
and Disposal Systems of Corpus Christi, Inc., ("DSCCI") subsidiaries of GNI,
combine to form the largest commercial deepwell operator in the United States.
Through its Resource Transportation Services, Inc. subsidiary ("RTS"), the
Company transports hazardous and non-hazardous wastes and chemical products and
through its GNI Technical Services, Inc. subsidiary ("GTS"), the Company manages
and administers government contracts. DSI, DSCCI, RTS and GTS are referred to
collectively as "Waste Management." The Company manufactures specialty chemicals
through its GNI Chemicals Corporation subsidiary ("Specialty Chemicals" or
"GNIC").
HISTORY
The GNI Group, Inc. is a holding company that conducts business through
five wholly-owned subsidiaries. The Company was incorporated as a Texas
corporation in 1971 and reincorporated under its present name as a Delaware
corporation in October 1987. From 1971 until 1988, the Company manufactured
low-level radioactive sources and tracers utilized principally in the petroleum,
industrial and medical markets. During 1987 and 1988, in a series of
transactions, the Company disposed of its radiation-related operations and
commenced its current waste management services at its Deer Park facility
through the purchase of the stock of DSI from United Distribution Systems, Inc.
Also in 1988, the Company formed RTS and commenced its hazardous waste
transportation operations. In 1989, the Company formed Chemical Resource
Processing, Inc. and, in 1990, commenced its specialty chemical manufacturing,
recovery and processing operations. In 1996, Chemical Resource Processing, Inc.
adopted its current name of GNI Chemicals Corporation. In 1995, the Company
formed DSCCI to acquire the Corpus Christi facility from Chemical Waste
Management, Inc. ("CWM"). In each acquisition and disposition, the seller
generally retained responsibility for any liability or obligation relating to
the transferred operations arising from events that occurred or circumstances
that existed prior to the closing of the transaction. GTS was formed in
September, 1998, to acquire substantially all of the assets of Moheat, Inc., a
company engaged in hazardous waste removal and the administration and management
of government contracts.
The Company's executive offices are located at 2525 Battleground Road, Deer
Park, Texas 77536-0220 and its telephone number is (281) 930-0350.
USE OF PROCEEDS
There will be no cash proceeds payable to the Company or the Guarantors
from the issuance of the Exchange Notes pursuant to the Exchange Offer. The
proceeds from the sale of the Restricted Notes were approximately $71.6 million,
and were used to fund the Recapitalization. See "The Recapitalization."
22
<PAGE> 27
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1998 (i) on a historical basis and (ii) on a pro forma
basis after giving effect to the Recapitalization as if it had occurred on June
30, 1998. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Conditions and Results of Operations," "Description of
the Revolving Credit Facility" and the consolidated financial statements of the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------
ACTUAL PRO FORMA(A)
------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and time deposits...................................... $ 208 $ 585
======= =========
Long-term debt:
Existing bank credit facilities........................... $14,623 $ --
Revolving Credit Facility(b).............................. -- --
Exchange Notes offered hereby............................. -- 75,000
Existing Senior Subordinated Notes........................ 18,791(c) --
Other debt................................................ 750 --
------- ---------
Total long-term debt.............................. 34,164 75,000
------- ---------
Series A Cumulative Redeemable Preferred Stock.............. -- 18,500
Stockholders' equity (deficit):
Common stock, $.01 par value per share.................... 67 6
Additional paid-in capital................................ 21,157 3,994
Retained earnings (deficit)............................... 4,357 (35,023)(d)
Less cost of treasury stock............................... (47) --
------- ---------
Total stockholders' equity (deficit).............. 25,534 (31,023)
------- ---------
Total capitalization.............................. $59,698 $ 62,477
======= =========
</TABLE>
- ---------------
(a) As adjusted to give effect to the Recapitalization. The estimated sources
and uses of funds for the Recapitalization, assuming it had occurred as of
June 30, 1998, are as follows:
<TABLE>
<S> <C>
Sources of Funds:
Exchange Notes offered hereby............................. $75,000
Equity Contribution....................................... 22,500
-------
Total sources....................................... $97,500
=======
Uses of Funds:
Purchase price of GNI equity, net......................... $51,256
Repayment of existing debt................................ 35,373
Payment of make-whole premium............................. 3,543
Payment of accrued interest............................... 101
General corporate purposes................................ 377
Payment of estimated transaction fees and expenses(1)..... 6,850
-------
Total uses.......................................... $97,500
=======
</TABLE>
(1) Includes $3,409 of costs related to the Merger.
(b) As of June 30, 1998, on a pro forma basis after giving effect to the
Recapitalization and approximately $0.5 million of outstanding letters of
credit, the Company would have up to $11.5 million available under the
Revolving Credit Facility, subject to pending asset appraisals. In
addition, the Company had $1.5 million of outstanding letters of credit
under the WMX Letter of Credit (as defined herein).
(c) Net of a discount of $1,209 related to the value allocated to warrants
issued in connection therewith.
(d) Retained earnings (deficit) reflects the following adjustments:
<TABLE>
<S> <C>
Purchase and retirement of GNI equity, net.................. $30,079
Payment of make-whole premium............................... 3,543
Payment of Merger costs..................................... 3,409
Write-off of discount on Existing Senior Subordinated
Notes..................................................... 1,209
Write-off of existing debt issuance costs................... 1,140
</TABLE>
23
<PAGE> 28
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The selected historical consolidated financial data set forth below with
respect to the five fiscal years in the period ended June 30, 1998 have been
derived from the Company's audited consolidated financial statements. The
statement of operations data for Fiscal 1994 and 1995 and the balance sheet data
for Fiscal 1994, 1995 and 1996 have been derived from audited consolidated
financial statements of the Company not set forth in this Prospectus. The
unaudited pro forma statement of operations and other financial data for the
year ended June 30, 1998 give effect to the Recapitalization, as if it had
occurred as of July 1, 1997. The unaudited pro forma balance sheet data give
effect to the Recapitalization, as if it had occurred as of June 30, 1998. The
pro forma adjustments are based upon available information and upon certain
assumptions that management believes are reasonable. The pro forma financial
data do not purport to represent what the Company's actual results of operations
or actual financial position would have been if the Recapitalization had
occurred on such dates or to project the Company's results of operations or
financial position for any future period or date. The information in this table
should be read in conjunction with "Prospectus Summary -- Summary Historical and
Unaudited Pro Forma Condensed Consolidated Financial Data," "Unaudited Pro Forma
Consolidated Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------- PRO FORMA
YEAR ENDED JUNE 30, YEAR ENDED
----------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1998
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $20,702 $34,359 $39,339 $40,727 $42,717 $ 42,717
Cost of services................................. 15,783 20,319 24,662 25,110 24,540 24,540
Gross profit..................................... 4,919 14,040 14,677 15,617 18,177 18,177
Selling, general and administrative.............. 4,609 4,090 5,058 5,559 6,387 6,387
Depreciation and amortization.................... 3,056 4,102 4,820 5,989 7,247 7,500
Operating income (loss).......................... (2,746) 5,848 (1,910) 4,069 4,543 4,290
Interest expense................................. 290 1,143 1,587 2,970 3,888 8,436(a)
Other income(b).................................. 43 331 100 194 119 119
Income (loss) before tax......................... (2,993) 5,036 (3,397) 1,293 774 (4,027)
Income taxes (benefit)........................... (996) 1,885 (1,285) 540 233 (1,369)
Income (loss) before extraordinary item.......... $(1,997) $ 3,151 $(2,112) $ 753 $ 541 $ (2,658)
OTHER FINANCIAL DATA:
EBITDA(c)........................................ $ 310 $ 9,950 $10,024 $10,727 $13,027 $ 13,027
Adjusted EBITDA(d)............................... -- -- -- -- -- 16,012
Capital expenditures............................. 11,405(e) 5,827 6,455 5,570 7,718 7,718
Ratio of Adjusted EBITDA to interest expense..... -- -- -- -- -- 1.9x
Ratio of total debt to Adjusted EBITDA........... -- -- -- -- -- 4.7x
Ratio of earnings to fixed charges(f)............ -- 4.8x -- 1.4x 1.2x --
BALANCE SHEET DATA:
Cash and time deposits........................... $ 683 $ 852 $ 1,123 $ 807 $ 208 $ 585
Working capital, as adjusted(g).................. 2,185 2,386 1,504 5,346 2,256 2,357
Total assets..................................... 38,184 46,079 49,078 68,588 68,877 71,554
Total debt....................................... 12,650 16,485 19,189 33,940 34,164 75,000
Series A Redeemable Preferred Stock.............. -- -- -- -- -- 18,500
Stockholders' equity (deficit)................... 21,267 24,418 22,334 24,888 25,534 (31,023)
</TABLE>
- ---------------
(a) Reflects an interest rate of 10 7/8% on the Notes. Includes approximately
$280 of other interest expense comprised primarily of the accretion of the
Company's discounted payment obligation in connection with the EMPAK
assistance agreement.
(b) Includes interest income.
(c) EBITDA is defined as earnings before interest, other income, income taxes
(benefit), depreciation and amortization and non-recurring items.
Non-recurring items are comprised of: (i) $1,237 of charges in Fiscal 1998
principally related to the forgiveness by the Company of certain
indebtedness of certain executives of the Company (see Note 6 to the
consolidated financial statements of the Company),
24
<PAGE> 29
(ii) $443 of one-time severance and personnel-related costs in Fiscal 1997
associated with certain management changes during the same period in
connection with the shift in Specialty Chemicals' focus from numerous
short-term projects to long-term outsourcing contracts, (iii) $226 of legal
and investment banking fees associated with the Company's discussions with
a third party regarding a possible business combination in Fiscal 1997,
(iv) a non-cash charge in Fiscal 1996 of approximately $6,709 resulting
from an impairment loss related to certain assets of the Company (see Note
1 to the consolidated financial statements of the Company) and (v) in
Fiscal 1996, $405 of one-time charges and expenses related to operations.
EBITDA should not be considered in isolation or as a substitute for net
income, cash flows from operating activities and other combined income or
cash flow statement data prepared in accordance with GAAP or as a measure
of the Company's profitability or liquidity. The Company's calculation of
EBITDA may not be consistent with similarly captioned amounts used by other
companies.
(d) The adjusted financial data presented reflect certain additional
adjustments which management believes are relevant in evaluating the
historical and future operating performance of the Company. The following
additional adjustments are based on estimates and assumptions made and
believed to be reasonable by the Company but that are inherently uncertain
and subject to change. The following calculation should not be viewed as
indicative of actual or future results. The following table reflects the
effect of these items on EBITDA:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
JUNE 30, 1998
-------------
<S> <C>
EBITDA...................................................... $13,027
Adjustments:
BP Contract(i)............................................ 1,636
Recently signed Specialty Chemicals contracts (ii)........ 999
Elimination of certain costs associated with being a
public company......................................... 350
-------
Total additional adjustments...................... 2,985
-------
Adjusted EBITDA............................................. $16,012
=======
</TABLE>
(i)On June 5, 1998, the Company entered into a multi-year contract
with BP to sell crude acetonitrile through June 30, 2008 and to
produce refined acetonitrile through June 30, 2000. The production
of refined acetonitrile has been assumed to be evenly distributed
over the period during which BP is obligated to pay minimum
processing and capacity rights fees. Included in the annual average
adjustment for the initial two year period is approximately $2,000
of EBITDA related to minimum committed payment amounts reflecting
fees payable to the Company for product processing and capacity
reservation.
(ii)
During Fiscal 1997, Specialty Chemicals shifted its focus from
numerous short-term projects to long-term outsourcing contracts
with major chemical manufacturers. In addition to the BP Contract,
Specialty Chemicals recently has entered into two long-term
contracts which contain minimum committed payment provisions, with
major chemical manufacturers.
(e) Includes approximately $8,800 of capital expenditures in connection with
the Company's expansion and upgrade of Specialty Chemicals' facilities.
(f) Earnings are defined as earnings before income taxes (benefit) and fixed
charges. Fixed charges are defined as the sum of: (i) interest expense,
(ii) amortization of deferred financing costs and (iii) the portion of
operating lease rental expense that is representative of the interest
factor (deemed to be one-third). Earnings were inadequate to cover fixed
charges by approximately $3,500 in Fiscal 1994 and approximately $5,200 in
Fiscal 1996. In addition, on a pro forma basis after giving effect to the
Recapitalization, earnings would have been inadequate to cover fixed
charges by approximately $4,000 in Fiscal 1998.
(g) Working capital, as adjusted, is defined as total current assets excluding
cash and time deposits less total current liabilities excluding the current
portion of long-term debt.
25
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements of the
Company are based on the audited consolidated financial statements of The GNI
Group, Inc. appearing elsewhere in this Prospectus, as adjusted to illustrate
the effects of the Recapitalization. The unaudited pro forma statement of
operations for the year ended June 30, 1998 gives effect to the
Recapitalization, as if it had occurred as of July 1, 1997. The unaudited pro
forma balance sheet gives effect to the Recapitalization, as if it had occurred
as of June 30, 1998. The pro forma adjustments are based upon available
information and upon certain assumptions that management believes are
reasonable. The unaudited pro forma financial statements do not purport to
represent what the Company's actual results of operations or actual financial
position would have been if the Recapitalization had occurred on such dates or
to project the Company's results of operations or financial position for any
future period or date.
26
<PAGE> 31
THE GNI GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
GNI PRO FORMA
CONSOLIDATED ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
Cash and time deposits.................................... $ 208,257 $ 40,835,568(a) $ 584,630
(4,751,447)(b)
(101,235)(c)
(6,850,000)(e)
18,500,000(f)
4,000,000(g)
(51,256,513)(h)
Accounts receivable, net.................................. 7,022,323 7,022,323
Inventory................................................. 478,886 478,886
Federal tax receivable.................................... -- --
Prepaid expenses and other current assets................. 1,232,555 1,232,555
------------ ------------
Total current assets............................. 8,942,021 9,318,394
Property, plant and equipment............................. 55,541,764 55,541,764
Less accumulated depreciation............................. (19,628,867) (19,628,867)
------------ ------------
Net property, plant and equipment................ 35,912,897 35,912,897
Restricted time deposits.................................. 1,451,253 1,451,253
Deferred tax asset, net................................... 360,165 360,165
Intangible assets, net.................................... 18,193,364 18,193,364
Other assets, net......................................... 4,016,866 (1,140,707)(d) 6,317,659
3,441,500(e)
------------ ------------ ------------
Total assets..................................... $ 68,876,566 $ 2,677,166 $ 71,553,732
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt....................... 2,147,826 (2,147,826)(a) --
Accounts payable........................................ $ 3,299,930 $ 3,299,930
Accrued liabilities..................................... 2,987,625 $ (101,235)(c) 2,886,390
Federal income taxes payable............................ 190,005 190,005
------------ ------------
Total current liabilities........................ 8,625,386 6,376,325
Accrued liabilities....................................... 2,700,484 2,700,484
Long-term debt, less current portion...................... 32,016,606 42,983,394(a) 75,000,000
Deferred income taxes, net................................ -- --
------------ ------------
Total liabilities................................ 43,342,476 84,076,809
Series A cumulative redeemable preferred stock............ -- 18,500,000(f) 18,500,000
Stockholders' equity (deficit):
Common stock............................................ 66,747 (66,747)(h) 5,714
5,714(g)
Additional paid-in capital.............................. 21,156,898 (21,156,898)(h) 3,994,286
3,994,286(g)
Retained earnings....................................... 4,357,451 (4,751,447)(b) (35,023,077)
(1,140,707)(d)
(3,408,500)(e)
(30,079,874)(h)
Less cost of treasury stock............................. (47,006) 47,006(h) --
------------ ------------
Total stockholders' equity (deficit)............. 25,534,090 (31,023,077)
------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit)...................................... $ 68,876,566 $ 2,677,166 $ 71,553,732
============ ============ ============
</TABLE>
27
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Reflects the payment of existing bank credit facilities and other debt in
the amount of $15,372,826, Existing Senior Subordinated Notes in the amount
of $18,791,606 and the issuance of the Notes offered hereby in the amount
of $75,000,000.
(b) Reflects the payment of the make-whole premium of $3,543,053 and discounted
interest of $1,208,394 associated with the payment of the Existing Senior
Subordinated Notes. Such expense will be recognized as an extraordinary
item in the first quarter of the Company's fiscal year ending June 30,
1999.
(c) Reflects the payment of accrued interest on existing debt.
(d) Reflects the write-off of existing debt issuance costs. Such expense will
be recognized in the first quarter of the Company's fiscal year ending June
30, 1999.
(e) Represents the payment of estimated transaction fees and expenses
associated with the Recapitalization (including $3,408,500 of costs related
to the Merger) in the amount of $6,850,000.
(f) Reflects the issuance of $18,500,000 of Series A Cumulative Redeemable
Preferred Stock.
(g) Represents the equity contribution from the issuance of 39,121 shares of
Class A common stock, 456,799 shares of Class B common stock and the
Rollover Shares.
(h) Represents the net effect of the purchase and retirement of GNI equity.
28
<PAGE> 33
THE GNI GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
GNI PRO FORMA
CONSOLIDATED ADJUSTMENTS PRO FORMA
------------ ----------- -----------
<S> <C> <C> <C>
Revenues.......................................... $42,716,800 $42,716,800
Cost and expenses:
Cost of services................................ 24,539,508 24,539,508
Selling, general and administrative............. 6,387,746 6,387,746
Depreciation and amortization................... 7,247,027 $ 252,514(a) 7,499,541
----------- -----------
Total cost and expenses................. 38,174,281 38,426,795
----------- -----------
Operating income.................................. 4,542,519 4,290,005
Interest expense.................................. (3,887,531) (4,548,944)(b) (8,436,475)
Other income...................................... 119,461 119,461
----------- -----------
Income (loss) before tax................ 774,449 (4,027,009)
Income taxes (benefit)............................ 233,647 (1,602,830)(c) (1,369,183)
----------- -----------
Net income (loss)....................... 540,802 (2,657,826)
Preferred stock dividends......................... -- 2,220,000(d) 2,220,000
----------- ----------- -----------
Net income (loss) available to common
shareholders.......................... $ 540,802 $(5,418,628) $(4,877,826)
=========== =========== ===========
OTHER FINANCIAL DATA:
EBITDA(f)......................................... $13,026,546 $13,026,546
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(a) Reflects the net increase in amortization as a result of capitalizable
costs incurred in connection with the Recapitalization.
(b) Reflects the interest expense on the Notes and the elimination of
historical interest expense on existing bank credit facilities, Senior
Subordinated Notes and other debt.
(c) Represents the tax benefit applicable to the pro forma adjustments applied
at the federal statutory rate.
(d) Represents the payment of dividends on Series A Cumulative Redeemable
Preferred Stock.
(e) EBITDA is defined as earnings before interest, other income, income taxes
(benefit), depreciation and amortization and non-recurring items.
Non-recurring items are comprised of $1,237,000 of charges in Fiscal 1998
principally related to the forgiveness by the Company of certain
indebtedness of certain executives of the Company (see Note 6 to the
consolidated financial statements of the Company). EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operating activities and other combined income or cash flow statement data
prepared in accordance with GAAP or as a measure of the Company's
profitability or liquidity. The Company's calculation of EBITDA may not be
consistent with similarly captioned amounts used by other companies.
29
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Except as otherwise indicated, the following discussion relates to the
Company on a historical basis without giving effect to the Recapitalization.
Certain of the statements in this section are forward-looking in nature and,
accordingly, are subject to many risks and uncertainties. See "Special Note
Regarding Forward-Looking Information" and "Risk Factors." The following
discussion should be read in conjunction with "Prospectus Summary -- Summary
Historical and Unaudited Pro Forma Condensed Consolidated Financial Data,"
"Selected Historical and Pro Forma Consolidated Financial Data" and the
consolidated financial statements of the Company and notes thereto included
elsewhere in this Prospectus.
The audited historical financial information of the Company is not directly
comparable on a year to year basis due to (i) the Company's consolidation
transaction with EMPAK which closed on September 30, 1996, pursuant to which
EMPAK ceased accepting third-party wastes for deepwell disposal and agreed to
assist in the transfer of its third-party deepwell customers to the Company and
(ii) the acquisition on November 14, 1995 of E.I. du Pont de Nemours and
Company's ("DuPont") refined acetonitrile business. In addition, pursuant to its
strategy to focus on long-term outsourcing arrangements with major chemical
manufacturers, on June 5, 1998, the Company entered into a multi-year contract
to sell crude acetonitrile to, and produce refined acetonitrile for, BP.
Pursuant to this "take-or-pay" contract, the Company will sell a minimum amount
of crude acetonitrile to BP and receive fees for product processing and capacity
reservation to produce refined acetonitrile for BP. As a result, the Company
will no longer manufacture acetonitrile for its own account which will result in
a significant decrease in inventories.
In Fiscal 1998, the Company had capital expenditures of $7.7 million which
included $4.6 million spent to bring the Company's facilities into compliance
with new environmental regulations regarding air emissions. Management believes
that no significant additional capital expenditures will be required by the
Company in Fiscal 1999 and that annual maintenance capital expenditures will be
approximately $2 million.
During Fiscal 1997, Specialty Chemicals' strategic focus shifted from
numerous short-term projects to long-term outsourcing contracts with major
chemical manufacturers. Specialty Chemicals recently has entered into four
long-term contracts, three of which contain minimum committed payment
provisions, with major chemical manufacturers which are expected to contribute
$7.7 million of revenues and $3.8 million of EBITDA in Fiscal 1999. See
"Business -- Specialty Chemicals -- Selected Recent Contracts." The Company's
relationships with three of these customers have evolved into multi-product
alliances.
Specialty Chemicals' contracts are generally tolling arrangements whereby
the customer provides the raw materials and pays for the finished product on a
per unit basis. As a result of such tolling arrangements, management believes
Specialty Chemicals' revenues and cost of services are understated when compared
to other specialty chemical manufacturers who purchase the raw materials used in
their production processes. In connection with tolling arrangements, Specialty
Chemicals' customers frequently fund project start-up costs and capital
expenditures needed to begin production. Certain of Specialty Chemicals'
long-term outsourcing contracts contain provisions such as minimum production
requirements, product processing fees, capacity reservation fees and monthly
rental fees. Specialty Chemicals' focus on long-term outsourcing contracts is
expected to improve management's ability to schedule production runs and result
in less turnaround time. Revenues associated with the disposal by Waste
Management of waste by-products generated during Specialty Chemicals'
manufacturing and processing activities are recognized by Specialty Chemicals.
Non-Recurring Charges. In the fourth quarter of Fiscal 1998, the Company
recorded non-recurring charges totaling approximately $1.2 million, related
principally to the forgiveness of loans made by the Company to certain
executives and cash payments to such executives representing the personal income
tax obligation associated with such loan forgiveness. In the fourth quarter of
Fiscal 1997, the Company recorded non-recurring charges of: (i) approximately
$443,000 comprised primarily of severance and personnel related costs associated
with certain management changes in connection with the shift in Specialty
Chemicals' focus
30
<PAGE> 35
from short-term projects to long-term outsourcing contracts, and (ii)
approximately $226,000 of legal and investment banking fees associated with the
Company's discussions with a third party relating to a possible business
combination. In Fiscal 1996, the Company recorded one-time charges and expenses
of approximately $405,000 related to operations.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires that an impairment loss be recognized whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. During Fiscal 1996, the Company recognized a non-cash pre-tax
charge against earnings of approximately $6.7 million for impaired assets
related principally to the Company's wiped film evaporator equipment and certain
real estate assets.
Debt Refinancing and Recapitalization Charges. In connection with the
Recapitalization, the Company refinanced substantially all of its existing
indebtedness. In connection with such debt refinancing, the Company paid a
make-whole premium of approximately $3.6 million to holders of the Existing
Senior Subordinated Notes. This make-whole premium, together with approximately
$1.1 million of existing debt issuance costs, will be reflected as extraordinary
charges in the Company's first quarter of fiscal year ending June 30, 1999.
Inflation. Inflation did not have a material impact on the Company's
revenues or income in either Fiscal 1998 or Fiscal 1997. Further, it is not
expected that inflation will have a material impact during Fiscal 1999 for
either the Company's revenues or income.
The following chart sets forth the revenues and the percentage of total
revenues contributed by each of the Company's businesses for the last three
fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Waste Management:
Deepwell disposal............... $12,750 32.4% $15,944 39.1% $16,913 39.6%
Treatment and other disposal.... 4,345 11.1 3,358 8.2 4,356 10.2
Transportation.................. 4,179 10.6 4,705 11.6 5,410 12.7
------- ----- ------- ----- ------- -----
Total Waste
Management............ 21,274 54.1 24,007 58.9 26,679 62.5
Specialty Chemicals............... 18,065 45.9 16,720 41.1 16,038 37.5
------- ----- ------- ----- ------- -----
Total Revenues.......... $39,339 100.0% $40,727 100.0% $42,717 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Revenues
Revenues increased by $2.0 million, or 4.9%, from $40.7 million in Fiscal
1997 to $42.7 million in Fiscal 1998. Revenues from the Company's waste
treatment and disposal operations increased by $2.0 million, or 10.2%, from
$19.3 million in Fiscal 1997 to $21.3 million in Fiscal 1998 due to increased
deepwell disposal volumes resulting from the Company's consolidation transaction
with EMPAK, which closed on September 30, 1996, whereby EMPAK exited the
third-party commercial deepwell disposal business and agreed to assist in the
transfer of EMPAK's third-party commercial deepwell customers to the Company.
Transportation revenues also increased in Fiscal 1998 by approximately $0.7
million, or 15.0%, from $4.7 million in Fiscal 1997 to $5.4 million in Fiscal
1998. This increase in transportation revenues was primarily attributable to the
increase in deepwell disposal volumes during Fiscal 1998.
Chemical manufacturing revenues decreased by approximately $0.7 million, or
4.1%, from $16.7 million in Fiscal 1997 to $16.0 million in Fiscal 1998 due to
customer decisions related to timing of projects. As a result, chemical
manufacturing revenues varied from quarter to quarter. The Company's strategy is
to enter into long-term contracts with its chemical manufacturing customers in
order to minimize the effects of
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<PAGE> 36
customer timing decisions. To this end, the Company recently has entered into
four long-term contracts, three of which contain minimum committed payment
provisions, with major chemical manufacturers.
Cost of Services
Cost of services decreased as a percentage of revenues from 61.7% in Fiscal
1997 to 57.4% in Fiscal 1998 due to increased asset utilization and
approximately $2.0 million of additional revenues. Cost of services decreased by
approximately $0.6 million, or 2.3%, from $25.1 million in Fiscal 1997 to $24.5
million in Fiscal 1998, reflecting the impact of cost control measures.
Selling, General and Administrative
S,G&A increased as a percentage of revenues from 13.6% in Fiscal 1997 to
15.0% in Fiscal 1998 due primarily to the inclusion in the fourth quarter of
Fiscal 1998 of non-recurring charges, totaling approximately $1.2 million,
related principally to the forgiveness of loans made by the Company to certain
executives of the Company and cash payments to such executives representing the
personal income tax obligation associated with such loan forgiveness. In the
fourth quarter of Fiscal 1997, the Company recorded non-recurring charges of:
(i) approximately $443,000, comprised mainly of severance and personnel related
costs associated with certain management changes and (ii) $226,000 of legal and
investment banking fees associated with the Company's discussions with a third
party relating to a possible business combination. S,G&A increased by
approximately $0.8 million, or 14.9%, from $5.6 million in Fiscal 1997 to $6.4
million in Fiscal 1998. Excluding non-recurring charges, S,G&A remained
relatively flat in Fiscal 1998 when compared with Fiscal 1997.
Depreciation and Amortization
Depreciation and amortization increased by $1.2 million, or 21.0%, from
$6.0 million in Fiscal 1997 to $7.2 million in Fiscal 1998 primarily due to (i)
the capital improvements made by the Company to its facilities in Fiscal 1998
and (ii) the inclusion in Fiscal 1998 of a full year of additional depreciation
and amortization expense associated with the Company's consolidation transaction
with EMPAK.
Net Interest Expense
Net interest expense increased by $0.9 million, or 32.7%, from $2.9 million
in Fiscal 1997 to $3.8 million in Fiscal 1998. This increase resulted from
higher average levels of indebtedness combined with a higher average interest
rate on such indebtedness during Fiscal 1998. The higher level of indebtedness
in Fiscal 1998 was a result of the additional debt used to fund the EMPAK
consolidation transaction that closed in the first quarter of Fiscal 1997 and
the issuance of the Existing Senior Subordinated Notes. The average interest
rate was higher in Fiscal 1998 as compared to Fiscal 1997 primarily as a result
of the inclusion in Fiscal 1998 of a full year's interest on the Existing Senior
Subordinated Notes.
Net Income
The Company had net income of $0.5 million, or $0.08 per diluted share, in
Fiscal 1998 compared with net income of $0.8 million, or $0.11 per diluted
share, in Fiscal 1997.
FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues
Revenues increased by $1.4 million, or 3.5%, from $39.3 million in Fiscal
1996 to $40.7 million in Fiscal 1997. This increase was primarily attributable
to an increase in revenues from the Company's deepwell disposal operations and
an increase in acetonitrile sales partially offset by a decrease in other
contract chemical manufacturing revenues. Revenues from the Company's waste
treatment and disposal operations increased by $2.2 million, or 12.9%, from
$17.1 million in Fiscal 1996 to $19.3 million in Fiscal 1997. Revenues in Fiscal
1997 benefitted from increased deepwell disposal volumes resulting from the
Company's
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<PAGE> 37
consolidation transaction with EMPAK which closed on September 30, 1996.
Transportation revenues also increased by approximately $0.5 million, or 12.6%,
from $4.2 million in Fiscal 1996 to $4.7 million in Fiscal 1997. This increase
in transportation revenues was primarily attributable to the increase in
deepwell disposal volumes during Fiscal 1997.
Chemical manufacturing revenues decreased by approximately $1.4 million, or
7.4%, from $18.1 million in Fiscal 1996 to $16.7 million in Fiscal 1997. In
Fiscal 1997, specialty chemical sales benefitted from the inclusion of the
acquisition of DuPont's refined acetonitrile ("ACE") business which was
completed in the second quarter of Fiscal 1996. However, contract chemical
manufacturing revenues were lower in Fiscal 1997 as compared with Fiscal 1996,
which was primarily due to: (i) the running of a trial campaign of ACE in the
Company's manufacturing facility during the first half of Fiscal 1997 which
utilized capacity that was then not available for third-party processing, (ii)
the internalization of ACE production into the Company's chemical manufacturing
facility and related start-up inefficiencies during the third quarter of Fiscal
1997 and (iii) delays in receiving raw materials from two different chemical
customers necessary for their custom processing projects during the fourth
quarter of Fiscal 1997.
Cost of Services
Cost of services decreased as a percentage of revenues from 62.7% in Fiscal
1996 to 61.7% in Fiscal 1997 due to the inclusion of approximately $405,000 of
one-time charges and expenses related to operations during the third quarter of
Fiscal 1996. Cost of services increased by approximately $448,000, or 1.8%, from
$24.7 million in Fiscal 1996 to $25.1 million in Fiscal 1997, reflecting
approximately $1.4 million in additional revenues.
Selling, General and Administrative
S,G&A increased as a percentage of revenues from 12.9% in Fiscal 1996 to
13.6% in Fiscal 1997. S,G&A increased by approximately $0.5 million, or 9.9%,
from $5.1 million in Fiscal 1996 to $5.6 million in Fiscal 1997. This increase
was primarily attributable to the following non-recurring charges recorded in
the fourth quarter of Fiscal 1997: (i) approximately $443,000 comprised mainly
of severance and personnel related costs associated with certain management
changes and (ii) approximately $226,000 of legal and investment banking fees
associated with the Company's discussions with a third party regarding a
possible business combination.
Depreciation and Amortization
Depreciation and amortization increased by $1.2 million, or 24.3%, from
$4.8 million in Fiscal 1996 to $6.0 million in Fiscal 1997 primarily due to: (i)
the capital improvements made by the Company to its facilities in Fiscal 1997
and (ii) the Company's consolidation transaction with EMPAK.
Adoption of SFAS No. 121
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires that an impairment loss be recognized whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. During Fiscal 1996, the Company recognized a non-cash pre-tax
charge against earnings of approximately $6.7 million. The total impairment loss
recognized by the Company primarily related to the following: (i) various
parcels of real estate which exceeded their fair market value and (ii) the
carrying value of the Company's wiped film evaporator and associated equipment
which exceeded the value of expected future cash flows expected to be generated
by such equipment.
Net Interest Expense
Net interest expense increased by $1.4 million, or 89.5%, from $1.5 million
in Fiscal 1996 to $2.9 million in Fiscal 1997. This increase was primarily
attributable to higher average levels of indebtedness and a higher average
interest rate on such indebtedness during the last half of Fiscal 1997. The
increased level of indebtedness was associated with (i) capital improvements
made by the Company to its facilities and (ii) the
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<PAGE> 38
debt associated with the Company's ACE acquisition and EMPAK consolidation
transaction. The average interest rate was higher in the last half of Fiscal
1997 as compared with Fiscal 1996 primarily as a result of the inclusion of
interest on the Company's 12% Senior Subordinated Notes due 2003 which were
issued on December 31, 1996.
Net Income (Loss)
The Company had net income of approximately $0.8 million, or $0.11 per
diluted share, in Fiscal 1997 compared with a net loss of $2.1 million, or a
loss of $0.33 per diluted share, in Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 1998 the Company provided approximately $8.3 million in net cash
from operations compared with approximately $2.5 million for Fiscal 1997. This
increase of approximately $5.8 million was attributable to several factors, some
of which were offsetting: (i) higher net income, after giving effect to non-cash
depreciation and amortization expenses and deferred taxes, in Fiscal 1998 than
in Fiscal 1997, (ii) a decrease in prepaid expenses and other current assets for
Fiscal 1998 compared with an increase in Fiscal 1997 and (iii) an increase in
accounts payable during Fiscal 1998 compared with a decrease in Fiscal 1997. The
higher level of depreciation and amortization in Fiscal 1998 as compared with
Fiscal 1997 was primarily a result of the inclusion of a full year's
depreciation and amortization associated with the Company's EMPAK consolidation
transaction, which closed in the first quarter of Fiscal 1997.
In Fiscal 1998 and Fiscal 1997, the Company's net cash used in investing
activities was $8.4 million and $17.8 million, respectively. In Fiscal 1997, the
primary use of cash was the payment of $12.0 million in connection with the
EMPAK consolidation transaction. The Company's capital expenditures in Fiscal
1998 and Fiscal 1997 were approximately $7.7 million and $5.6 million,
respectively. In Fiscal 1998, capital expenditures included approximately $4.6
million spent to bring the Company's facilities into compliance with new
environmental regulations regarding air emissions. Management believes that no
significant additional capital expenditures will be required by the Company in
Fiscal 1999 and that annual maintenance capital expenditures will be
approximately $2 million. In Fiscal 1997 capital expenditures were primarily
related to general improvements to the Company's chemical manufacturing and
waste treatment and disposal facilities.
In Fiscal 1998, the Company's net cash used in financing activities was
$0.5 million compared with net cash provided of $14.9 million in Fiscal 1997. In
Fiscal 1997, the largest source of financing was the net cash proceeds from the
issuance of the Existing Senior Subordinated Notes.
Primarily as a result of the Company's capital expenditures made during
Fiscal 1998, (i) cash balances decreased approximately $0.6 million during the
period and (ii) net fixed assets increased by $2.6 million during the period.
During Fiscal 1998, accounts receivable increased by $0.6 million, primarily as
a result of the increased level of revenues generated during the period. During
Fiscal 1998, accounts payable increased by $1.0 million, primarily as a result
of capital expenditures made by the Company. Accrued liabilities decreased by
$1.0 million during Fiscal 1998 as a result of scheduled payments made to EMPAK
in connection with the Assistance Agreement whereby EMPAK acts as the Company's
back-up deepwell facility under certain circumstances. Primarily as a result of
the timing differences between book and tax accruals during Fiscal 1998, (i)
federal income tax receivable increased, (ii) the provision for deferred income
tax decreased and (iii) deferred tax assets increased.
In connection with the Recapitalization, the Company entered into the
Revolving Credit Facility. As of June 30, 1998, on a pro forma basis after
giving effect to the Recapitalization and to approximately $0.5 million of
outstanding letters of credit, the Company would have had up to $11.5 million
available under the Revolving Credit Facility, subject to pending asset
appraisals. 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 provides the Lender (as defined herein) with financial
statements for the quarter ending September 30, 1998, amounts borrowed under the
Revolving Credit Facility will 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 will be subject to reduction based upon the
Company's Interest Coverage Ratio (as defined in the Revolving Credit Facility).
The Revolving
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<PAGE> 39
Credit Facility contains standard financial and restrictive covenants for
facilities of this type. See "Description of the Revolving Credit Facility."
The Company's ability to make scheduled payments of principal of or
interest on, or to refinance, its indebtedness (including the Exchange Notes),
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, including
the Exchange Notes, or to fund its other liquidity needs.
WORKING CAPITAL
The Company's business does not place unusual demands on working capital.
Accordingly, the Company does not carry significant amounts of inventory at any
given time. Specialty Chemicals' contracts are generally tolling arrangements
whereby the customer provides the raw materials and pays for the finished
product on a per unit basis. On June 5, 1998, the Company entered into the BP
Contract. As a result, the Company will no longer manufacture acetonitrile for
its own account which will result in a significant decrease in inventories.
Standard credit terms are given in most cases by the Company, and the Company
obtains standard credit terms for most of its purchases.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"). SFAS 128 establishes new standards for computing and presenting earnings
per share ("EPS") amounts for companies with publicly held common stock or
potential common stock. The new standards require the presentation of both basic
and diluted EPS amounts for companies with complex capital structures. Basic EPS
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period, and
excludes the effect of potentially dilutive securities (such as options,
warrants and convertible securities) which are convertible into common stock.
Dilutive EPS reflects the potential dilution from such convertible securities.
SFAS 128 is effective for periods ended after December 15, 1997. The Company has
adopted the requirements of SFAS 128 in its financial statements for the year
ended June 30, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
standards for the reporting and display of comprehensive income in a company's
financial statements. Comprehensive income includes all changes in a company's
equity accounts (including net income or loss) except investments by, or
distributions to, the company's owners. Items which are components of
comprehensive income (other than net income or loss) include foreign currency
translation adjustments, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities. The
components of comprehensive income must be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997. The Company
believes that the adoption of this statement will not have a material impact on
the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 establishes standards for the way that public companies
report, in their annual financial statements, certain information about their
operating segments, their products and services, the geographic area in which
they operate and their major customers. The Company believes that the adoption
of this statement will not have a material impact on the Company's financial
statements, as the Company considers itself to be in one business segment.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. The
Company
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<PAGE> 40
believes that the adoption of this statement will not have a material impact on
the Company's financial statements.
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 of 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.
The Company is completing a plan to evaluate the effect of the Year 2000
problem on the Company's most significant customers and suppliers, and thus
indirectly on the Company. This evaluation is expected to be complete by
December 31, 1998. At this time, the Company has not assessed the potential
adverse effect on the Company with respect to customers and suppliers.
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.
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<PAGE> 41
BUSINESS
GENERAL OVERVIEW
GNI is the leading operator of commercial deepwells in the United States
and a manufacturer of specialty chemicals. Waste Management provides a broad
range of waste management services which consist of transporting, testing,
recovering, treating and disposing of hazardous and non-hazardous wastes. Waste
Management operates two of the four commercial deepwell facilities accepting
third-party hazardous wastes in the United States. In Fiscal 1998, Waste
Management disposed of over half of the hazardous wastes injected into
commercial deepwells. The Company's facilities are strategically located in the
Gulf Coast region in proximity to the nation's largest concentration of chemical
and petrochemical manufacturers. Management believes that there are no competing
commercial deepwells within 250 miles of Waste Management's deepwells. Specialty
Chemicals manufactures specialty chemicals on a contract or "tolling" basis for
third parties, particularly where waste is a major by-product. During Fiscal
1997, Specialty Chemicals shifted its focus from numerous short-term projects to
long-term outsourcing contracts with major chemical manufacturers. As a result
of several recently signed long-term contracts, management believes that
Specialty Chemicals' asset utilization will increase significantly. GNI has
manufactured specialty chemicals for nine of the ten largest chemical and
petrochemical producers in the United States. Between Fiscal 1993 and Fiscal
1998, the Company's revenues increased at an 11.8% CAGR, from $24.5 million to
$42.7 million, and EBITDA increased at a 16.3% CAGR from $6.1 million to $13.0
million. The Company had Adjusted EBITDA of $16.0 million in Fiscal 1998.
COMPETITIVE STRENGTHS
Leading Market Position. Waste Management is the leading commercial
deepwell operator in the United States and a provider of a broad range of waste
management services. Waste Management operates two of the four commercial
deepwell facilities accepting hazardous wastes in the United States. In Fiscal
1998, Waste Management disposed of approximately 96.2 million gallons of aqueous
wastes, including over half of the hazardous wastes injected into commercial
deepwells in the United States. Waste Management's leadership position is
primarily attributable to its: (i) advanced treatment and disposal methods and
technologies, (ii) breadth of permits, (iii) strategic location, (iv) strong
record of environmental compliance, (v) history of excellent customer service
and (vi) extensive capacity. Waste Management's advanced process development and
treatment capabilities have enabled Waste Management to treat and dispose of
wastes not traditionally considered for deepwell disposal.
Well-Positioned to Capitalize on Outsourcing Trend. According to industry
sources, the outsourcing of specialty chemical manufacturing is a growing trend.
Specialty Chemicals is well positioned to capitalize on this trend due to its:
(i) flexible manufacturing facilities, (ii) experience in manufacturing a wide
variety of complex products, (iii) strong process development capabilities, (iv)
existing customer relationships and (v) ability to dispose on-site of hazardous
waste by-products. Chemical manufacturers outsource the manufacture of certain
products to Specialty Chemicals for a variety of reasons, including: (i) a
desire to focus on research, product development and marketing, (ii) cost
savings resulting from GNI's specific process expertise, (iii) GNI's hazardous
waste management expertise, (iv) to increase available production capacity and
(v) the ability to introduce product lines before making the significant
investment required for full production. Specialty Chemicals recently has
entered into four long-term contracts with major chemical manufacturers, three
of whom have formed multi-product alliances with Specialty Chemicals.
Integrated Facilities with State-of-the-Art Assets. As a result of the
design and construction of its deepwell facilities, Waste Management has
received permits that enable it to inject a wider variety of waste streams at
faster injection rates than any other commercial deepwell operator in the United
States. Specialty Chemicals' state-of-the-art facilities are designed to
manufacture a broad range of chemicals, employing a variety of production
processes. By combining pilot-scale equipment with large capacity reactors and
separation equipment, Specialty Chemicals can support customer requirements
ranging from product development to full production. Management believes that
GNI's Deer Park facility is the only site in the United States which combines
specialty chemical manufacturing with commercial deepwell disposal opera-
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<PAGE> 42
tions. This dual capability enables Specialty Chemicals to offer customers a low
cost, bundled solution for specialty chemicals manufacturing and on-site
disposal of waste by-products.
Broad Permits, Strong Compliance History. The Company possesses broad
federal, state and local permits to conduct its waste management operations.
Management believes that the length and cost of the permitting process serve as
significant barriers to entry into commercial deepwell operations. Waste
Management's facilities have permits to accept virtually any type of waste,
excluding dioxin-bearing, biological and radioactive wastes. Specialty Chemicals
has permits to handle and manufacture over 500 different chemicals in its Deer
Park facility. The Company believes that its permits and strong record of
environmental and regulatory compliance give it a competitive advantage as its
customers are sensitive to how their wastes and products are handled due to
liability concerns. GNI maintains a strong environmental and regulatory staff
and is in material compliance with all environmental regulations. In addition,
management considers its relations with environmental authorities to be
excellent. Since the Company entered the deepwell disposal business over ten
years ago, it has not received any material assessments or fines from regulatory
authorities.
Strategic Location. GNI's facilities in Deer Park and Corpus Christi are
strategically located in the Gulf Coast chemical and petrochemical industrial
region. According to the U.S. Department of Commerce, Texas and Louisiana
together account for nearly a quarter of total U.S. chemical shipments. A
substantial portion of the chemical and petrochemical production facilities in
the United States are located within 400 miles of the Company's facilities.
Since nearly half of all chemical and related products shipped in the United
States are transported less than 200 miles, the Company's location provides a
competitive advantage. In addition, management believes that there are no
competing commercial deepwells accepting hazardous wastes within 250 miles of
Waste Management's deepwells and the nearest commercial competitor is capable of
disposing of only a fraction of the hazardous waste streams for which GNI has
permits. Management believes Waste Management's locations give the Company a
competitive advantage as waste transportation costs can become prohibitive.
Experienced Management Team. GNI's executive management averages over 15
years of relevant industry experience. The current management team directed the
Company's entry into the deepwell disposal business in Fiscal 1988, and the
implementation of management's strategy has resulted in the growth of the
Company's revenues from $6.2 million of revenues in Fiscal 1988 to $42.7 million
in Fiscal 1998. GNI's management team includes 21 engineers and chemists in
various capacities, which enhances GNI's reputation as a process development
partner with both waste management and chemical manufacturing customers.
Management owns approximately 13.2% of the outstanding Common Stock of the
Company and approximately 2.0% of the outstanding Series A Preferred Stock. See
"Management" and "Stock Ownership."
BUSINESS STRATEGY
Management believes that the Company's growth in revenues and profitability
in the future will result from the successful implementation of its business
strategy, the key elements of which are as follows:
Leverage State-of-the-Art Facilities. Management believes that the
significant investments made by the Company in recent years to upgrade and
expand its facilities combined with the complementary nature of its Waste
Management and Specialty Chemicals operations provide the Company with the
opportunity to achieve significant operating leverage and efficiencies. The
Company intends to continue to increase its asset utilization by: (i) entering
into additional long-term contracts to manufacture specialty chemicals for major
chemical manufacturers, (ii) offering customers bundled specialty chemical
manufacturing and waste disposal capabilities and (iii) developing technologies
and processes that expand the types of waste streams, including non-hazardous
wastes, its deepwells can accept.
Enter Into Long-Term Chemical Manufacturing Contracts. Management intends
to continue its focus on entering into new, and expanding existing, long-term
contracts for specialty chemical manufacturing. Specialty Chemicals recently has
entered into four long-term contracts (which average in excess of three years)
with major chemical customers. The Company's relationships with three of these
customers have
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<PAGE> 43
evolved into multi-product alliances. Management anticipates that three
additional long-term contracts will be signed by the end of calendar 1998. These
seven contracts are expected to generate approximately $11.4 million and $5.6
million of revenues and EBITDA, respectively, in Fiscal 1999.
Pursue Complementary Business Opportunities. Management intends to pursue
business opportunities that utilize both its chemical manufacturing and waste
disposal capabilities by entering into chemical manufacturing contracts for
processes that produce significant wastes. Management believes that in-house
waste disposal capabilities substantially enhance the economies of
waste-intensive chemical processing, providing the Company with a unique
opportunity to leverage its complementary facilities and offer customers a low
cost bundled specialty chemical and waste management solution.
Expand Chemical Manufacturing Alliances. Specialty Chemicals intends to
continue to benefit from the outsourcing trend in the chemical manufacturing
industry by capitalizing on the low-cost flexible manufacturing capabilities
provided by its state-of-the-art facilities, growing reputation in the industry
and ability to dispose of waste by-products. Specialty Chemicals seeks to expand
its existing customer relationships and add new customers by emphasizing to
customers the benefits associated with outsourcing to GNI the manufacture of
specialty chemicals which include: (i) the ability to focus on research, product
development and marketing, (ii) cost savings resulting from GNI's specific
process expertise, (iii) GNI's ability to dispose on-site of hazardous wastes,
(iv) an increase in available production capacity and (v) the ability to
introduce product lines before making the significant investment required for
full production.
Capitalize on Unique Commercial Waste Management Facilities. GNI intends to
continue to capitalize on the strategic location and permit status of Waste
Management's facilities by continuing to develop technologies and processes that
expand the type of waste streams, including non-hazardous wastes streams, its
existing deepwell and surface treatment facilities can accept. Management
believes that Waste Management's three deepwells can accommodate a significantly
broader range and higher volume of waste streams without significant additional
fixed costs.
Grow Through Selective Acquisitions. The Company intends, and is actively
seeking, to make strategic acquisitions of complementary businesses in order to:
(i) add new customers, (ii) acquire compatible technologies, (iii) increase its
geographic reach and (iv) achieve economies of scale. Management utilizes strict
criteria to evaluate business acquisition possibilities, including existing
customer relationships, geographic location, process expertise, synergies and
return on investment. The Company is currently participating in the bidding
process for, or is in discussions with, potential targets concerning
acquisitions or combinations, although no agreements have been reached.
OPERATIONS
The following chart sets forth selected information with respect to each of
the Company's businesses:
<TABLE>
<CAPTION>
PRIMARY SELECTED PRIMARY FISCAL 1998
BUSINESS INDUSTRIES SERVED CUSTOMERS SERVICES REVENUES
-------- ----------------- --------- -------- -----------
(THOUSANDS)
<S> <C> <C> <C> <C>
Waste Management........ Chemicals, AMD, Arco, DuPont, Elf Deepwell injection of $26,679
petrochemicals, metals, Atochem, Lyondell, hazardous and non-
electronics, waste Safety-Kleen hazardous aqueous
management wastes, organic waste
disposal, solidification
and solid waste
disposal, waste
transportation
Specialty Chemicals..... Chemicals, Albright & Wilson, Reaction, distillation, $16,038
petrochemicals Ashland, BP, Cytec, evaporation, extraction,
DuPont, OxyChem waste management
</TABLE>
WASTE MANAGEMENT
Industry Overview
The United States hazardous waste management market is comprised of a broad
spectrum of treatment and disposal methods and technologies, including landfill
disposal, incineration, deepwell disposal, fuels
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blending, biological treatment and numerous others. The appropriate method of
waste treatment or disposal is typically determined by four major factors: the
nature of the waste, regulatory guidelines, cost and the availability of the
various waste treatment or disposal alternatives.
Landfill disposal is used to dispose of hazardous wastes that have been
stabilized and non-hazardous wastes that are in solid form. Landfills are
typically operated by commercial waste management service providers. Landfills
are typically located on or near the earth's surface. According to industry
reports, there were approximately 21 commercial hazardous landfill facilities in
the United States in 1996 and approximately 2.6 million tons of waste were
disposed of in landfills in 1996, approximately 77% of which was hazardous.
Management believes landfills are a less desirable method of land-based disposal
than deepwell injection due to the fact that landfills are often located above
drinking water aquifers.
Incineration is used to dispose of hazardous and non-hazardous wastes that
are in both solid and liquid forms. Incinerators are operated by commercial
waste management service providers. Industry reports estimate that there were
approximately 25 hazardous waste incinerators in the United States in 1996 and
that over approximately 0.8 million tons of waste were disposed of in such
incinerators in 1996, virtually all of which was hazardous. Incineration is
viewed as a safe waste disposal method although it results in significant air
emissions, and residual ash which must be disposed of in landfills.
Fuels blending involves blending and disposing of hazardous organic liquid
wastes. These wastes are typically used as fuel by industrial companies and
cement kilns. Industry reports estimate that there were 92 such facilities in
the United States in 1996 and 270 million gallons of waste were blended and
disposed of as fuels in 1996, approximately 80% of which was hazardous.
Biological treatment, including wastewater treatment, is used to dispose of
both hazardous and non-hazardous aqueous wastes. Wastewater treatment is viewed
as a safe, cost-effective method of aqueous waste disposal, but can result in
the discharge of trace amounts of contaminants into surface water. Biological
treatment is conducted by both commercial waste management service providers and
municipalities.
Deepwell injection is viewed as a safe, low cost method of hazardous and
non-hazardous waste disposal and is ideally suited for and represents the most
cost-efficient disposal alternative for a broad cross-section of liquid wastes.
Deepwells are operated by commercial deepwell operators, industrial
companies on a captive basis, and municipalities. According to the EPA, there
were approximately 500 Class I deepwells in the United States in 1996. Of these,
approximately 160 deepwells had permits to accept hazardous wastes. The EPA
estimates that approximately 9 billion gallons of hazardous liquid wastes were
injected into these deepwells in 1996. Management estimates that only eight of
the commercial deepwells, including the Company's three deepwells, have permits
necessary to receive third-party hazardous wastes. An EPA study found that
injecting wastes in Class I deepwells is safer than landfill disposal, storing
such waste in tanks or incineration.
Commercial deepwell operators are regulated by numerous federal, state and
local entities and frequently have their facilities audited by
liability-sensitive customers. To conduct deepwell operations, commercial
operators require numerous permits that are costly and time-consuming to obtain.
In addition, environmental regulations are becoming increasingly strict with
respect to the handling, treatment and disposal of wastes. Furthermore, the
capital investment required to construct surface facilities and deepwells
capable of handling a wide variety of wastes is significant. As a result,
management believes that there are significant barriers to entry into the
commercial deepwell disposal business.
Deepwell Disposal
Waste Management is the leading commercial deepwell operator in the United
States. In Fiscal 1998, Waste Management disposed of approximately 96.2 million
gallons of aqueous wastes, including over half of the hazardous wastes injected
into commercial deepwells in the United States. Management believes that Waste
Management's position as the leading commercial deepwell operator is based on
its strong record of state-of-the-art facilities, advanced treatment and
disposal methods and technologies, breadth of permits, strategic location,
strong record of environmental compliance, excellent customer service and
extensive
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capacity. Waste Management serves over 250 customers including Arco, DuPont, Elf
Atochem, Lyondell, OxyChem and Safety-Kleen. Waste Management's three deepwells
are drilled four to eight thousand feet below the earth's surface in isolated
geologic formations, approximately three-fourths of a mile below the nearest
drinking water. Waste streams injected into Waste Management's deepwells exclude
dioxin-bearing, biological or radioactive wastes and typically consist of 95%
water and 5% waste. Deepwell injection is regulated by federal, state and local
authorities and is regarded by the EPA as one of the safest methods of hazardous
liquid disposal. In Fiscal 1998, Waste Management represented 62.5% of GNI's
revenues.
Deepwell injection is viewed as a safe, low cost method of hazardous and
non-hazardous waste disposal and is ideally suited, and represents the most
cost-effective disposal alternative, for a broad cross-section of liquid wastes.
According to the EPA, over 9 billion gallons of hazardous liquid wastes were
injected into deepwells in the United States in 1996. Due to environmental
regulations, the permitting process for commercial deepwell operators is time
consuming and costly and serves not only as a barrier to entry but also as a
competitive advantage for those operators, such as the Company, who are fully
permitted and in compliance with regulatory requirements. Management believes
that as a result of the cumbersome permitting process and the significant
capital investment required to construct deepwell facilities, there have been no
new commercial hazardous deepwells drilled in the Gulf Coast region, other than
Waste Management's deepwells, in the last ten years. A significant majority of
the wastes injected into deepwells is handled in-house by chemical
manufacturers. Management believes that in the future such chemical
manufacturers may seek to outsource a greater portion of their waste management
requirements in order to focus on their core competencies and reduce fixed
costs. Management believes that growth in demand for commercial hazardous waste
management services is driven by, among other things, continued industrial
expansion and increasingly stringent regulations regarding waste handling and
disposal.
Waste Management treats and disposes of aqueous wastes generated by its
customers and waste waters resulting from its waste processing activities by
injection into its Deer Park and Corpus Christi deepwells. The Company is
authorized by the TNRCC to inject into its deepwells a total of approximately
340 million gallons of hazardous wastes per year. The first deepwell at the Deer
Park facility commenced operations in 1981. In February 1993, the Company
completed construction of its second deepwell at its Deer Park facility, which
has been in full operation since September 1993. The Corpus Christi deepwell has
been in operation since 1969 and has been operated by Waste Management since its
acquisition by the Company in March 1995.
The wastes generated by the Company's customers result from various
processes, including chemical and petrochemical manufacturing, metal treating,
electronics manufacturing, industrial manufacturing, photo developing and other
industrial operations. In Fiscal 1998, the Company disposed of approximately
96.2 million gallons of wastes in its deepwells, which represents 28.3% of the
annual capacity of which the Company has permits to dispose. In Fiscal 1998,
revenues from the Company's deepwell disposal operations represented
approximately 63.4% of Waste Management's revenues.
Waste Management's deepwells accept aqueous waste streams, including spent
acids, landfill leachates, rinse water, process water, storm water from
contaminated containment areas, and waste water with heavy metals content.
Aqueous wastes resulting from Specialty Chemicals' operations and other wastes
generated at the Company's facilities also are injected into Waste Management's
deepwells. The Company's permits allow receipt of most categories of liquid
wastes with the exception of dioxin-bearing, biological and radioactive wastes.
However, operating considerations create practical limits on wastes accepted by
Waste Management for deepwell injection and require Waste Management to treat
carefully and monitor closely materials injected into its deepwells for: (i)
solids content, (ii) organics content, (iii) compatibility with other waste
streams and (iv) characteristics of the injection formations. Prior to the
receipt of new wastes into its facilities, Waste Management's laboratory
conducts extensive tests on such wastes to verify that they are compatible with
existing wastes and that the injectate is suitable for injection.
The site of the Deer Park deepwells was selected for its favorable
geological characteristics for deepwell injection and the absence of any
localized oil and gas production. The underground location at which waste is
discharged from the Deer Park deepwells is over 7,300 feet below the earth's
surface in an isolated geologic
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formation, and is approximately three-fourths of a mile below the nearest
drinking water aquifer. The geologic formation receiving the wastes is a vast
layer of sand located between confining layers of shale and clay.
Similarly, the site of the Corpus Christi deepwell was selected for its
favorable geological characteristics for deepwell injection and the absence of
any localized oil and gas production. The underground location at which waste is
discharged from the Corpus Christi deepwell is over 4,500 feet below the earth's
surface in an isolated geologic formation, and there is no overlying drinking
water aquifer. The geologic formation receiving the wastes is a vast layer of
sand located between confining layers of shale and clay.
All three of Waste Management's deepwells are constructed of specially
designed materials and are equipped with triple-redundant protection systems to
enhance their environmental integrity. For each deepwell, a surface casing
extends, and is cemented, from the earth's surface down to a point along the
well bore below the lowest level at which potable drinking water is found. A
second protective casing extends, and is cemented, from the earth's surface to
the bottom of the well. Within the second casing the injection tubing extends
from the earth's surface to the waste injection zone. Pressurized brine fills a
space between the injection tubing and the second casing. Continuous monitoring
of the pressurized brine allows for the detection and prevention of leaks. In
the event of a leak in the injection tubing, the pressurized brine would force
the waste stream to remain in the injection tubing until such leak was repaired.
Both of Waste Management's surface facilities consist of injection pumps,
associated blending and storage tanks, filters, transfer pumps, controls and
monitoring instruments. Storage and processing facilities are placed within
coated concrete containment structures to protect soil, groundwater and surface
water from accidental spills. In addition, the Company is required by
environmental laws and regulations to conduct constant monitoring of the
deepwells' operating parameters, including the flow, pressure, acidity,
temperature and specific gravity of the injected wastes. The Company monitors
its deepwell operations continuously through the use of advanced computer
systems and regular safety inspections of its surface facilities. The
comprehensive nature of Waste Management's surface facilities combined with the
breadth of its permits differentiate Waste Management's capabilities from those
of an industrial company's captive deepwells and enable Waste Management to
accept the broadest possible range of wastes from third parties.
In 1990, Waste Management received exemptions from the EPA that allow it to
inject "land-banned" wastes in its Deer Park and Corpus Christi deepwells. Waste
Management obtained the exemption by demonstrating to the EPA, through extensive
examination of well construction and operating parameters, geological data,
waste stream characteristics and mathematical modeling, that there will be no
migration of hazardous substances from the zone into which the wastes are
injected for the lesser of 10,000 years or the period during which they remain
hazardous.
Waste Management's three deepwells give the Company the ability to provide
continuous waste disposal services by alternating maintenance of its deepwells
and providing back-up capacity in the event that one deepwell is required to
suspend operations due to mechanical or other difficulties. In addition, in
September 1996, the Company entered into an agreement with a third party to
provide back-up deepwell capacity in the event of a force majeure at the
Company's facilities.
Treatment and Other Disposal
Fuels Blending. Waste Management blends organic wastes and by-products with
significant energy value, but little economically recoverable components, into
fuel supplements. Waste Management processes both liquid and solid materials
received from customers in bulk or drum form in its fuels blending operations.
These materials include spent solvents, paint sludges, petrochemical
manufacturing wastes, and wastes from oil refining. Waste Management also blends
into fuels the organic wastes resulting from other processing activities at its
facilities that cannot be recovered economically. Waste Management mixes these
materials in specially designed tanks to meet the specifications required by
users of supplemental fuels, including their requirements as to energy value and
limitations on chlorine, metals and ash content. The supplemental fuels market
is extremely competitive and Waste Management provides this service primarily as
an adjunct to its other services.
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Other Treatment. For wastes and by-products that are not economically
recoverable or suitable for fuels blending, Waste Management uses a variety of
treatment processes to reduce or eliminate their toxicity and contaminants or
otherwise make them less hazardous or amenable for disposal prior to final
disposition. Waste Management's current treatment processes fall into three
broad categories: (i) chemical and physical treatment, (ii) biological treatment
and (iii) other disposal.
Chemical and Physical Treatment. Waste Management receives many wastes and
by-product emulsions consisting of water, organic compounds and various solids.
Waste Management breaks these mixtures into their separate components through
heating and the addition of various chemicals. Waste Management then separates
the components, with the organic compounds being blended into fuels and the
water being treated biologically by a third party or disposed of in Waste
Management's deepwells. The solids are filtered from the water and disposed of
in a third party's landfill or incinerator. In addition, Waste Management treats
various reactive and non-reactive wastes, such as cyanides, sulfides and
mercaptans, with various chemical treatment technologies. Although chemical and
physical treatment account for only a minor part of Waste Management's revenues,
management believes that it is important for Waste Management to offer these
services to customers as part of a comprehensive array of treatment
capabilities.
Biological Treatment. Through a business relationship with a third party,
Waste Management arranges for the biological treatment of aqueous and organic
wastes. The biological treatment capability adds another dimension to the wide
range of services provided by Waste Management.
Other Disposal. As an adjunct to its other services, Waste Management
treats and arranges for the disposal of certain wastes typically not suitable
for any of Waste Management's disposal processes in incinerators, landfills or
other disposal facilities operated by other businesses. Waste Management neither
owns nor operates any landfills or incinerators.
Transportation
As an integral part of its services, Waste Management transports wastes and
by-products for its customers. A substantial portion of Waste Management's
transportation revenues are attributable to transport of wastes and by-products
to and from its facilities. Waste Management operates a fleet consisting of 20
tractors and 47 trailers, the majority of which are leased. The Company believes
it maintains adequate insurance for all of its vehicles. See "-- Insurance
Matters." Since the Company's current management team has been in place, Waste
Management's transportation vehicles have not been involved in any material
traffic incidents. Liquid waste is frequently transported in bulk but may also
be transported in drums. Heavier sludges or bulk solids are transported in
sealed, roll-off containers or bulk trailers. Waste Management has a motor
vehicle common carrier certificate issued by the Interstate Commerce Commission
that allows Waste Management to transport materials in all 48 states in the
continental United States.
Recent Contract
On July 10, 1998, the Company was awarded a non-exclusive contract to blend
and recycle a mixture of gasoline, polystyrene and benzene for the U.S. Navy.
The Company will be a subcontractor to Battelle, the primary U.S. Navy
contractor for the project. During the 25-month term of the subcontract, Waste
Management could recycle up to approximately 3.4 million gallons of the fuel
mixture and up to approximately 2.5 million pounds of shredded aluminum
canisters.
SPECIALTY CHEMICALS
Industry Overview
The chemical manufacturing industry in the United States consists of
companies that manufacture basic chemicals from organic and inorganic raw
materials, further process basic chemicals into chemical intermediates and
finished products and/or manufacture finished goods through processes which are
primarily chemically based. The chemical manufacturing industry in the United
States is a cornerstone industry, producing chemicals which are used in
agricultural applications, pharmaceutical products and in the
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production of plastics, automobile components, household products and in
virtually every other manufacturing industry.
Total chemical manufacturing industry shipments in the United States
increased by approximately $77 billion between 1993 and 1997 at a CAGR of 5.7%
from approximately $315 billion to approximately $392 billion. The principal
drivers of this growth have been pharmaceuticals, man-made fibers, plastics and
resins, and household products.
According to industry sources, almost a quarter of all chemical products
manufactured are sold to other chemical producers for use as the building blocks
of more sophisticated or complex chemicals ("Custom Chemicals"). The size of the
Custom Chemicals manufacturing market in the United States was approximately $20
billion in 1997.
Outsourcing is rapidly becoming the dominant source of business for Custom
Chemicals manufacturers. Chemical manufacturers have multiple reasons for
outsourcing their production, including but not limited to: (i) custom
manufacturers' expertise in particular processes or synthesis that can yield
manufacturing cost savings, (ii) their desire to focus on research, product
development and marketing, (iii) the relatively low initial project start-up
costs and (iv) the increase of available production capacity.
Chemical Manufacturing
GNI manufactures specialty chemicals on a contract or "tolling" basis for
third parties, particularly where waste is a major by-product. During Fiscal
1997, Specialty Chemicals' strategic focus shifted from numerous short-term
projects to long-term outsourcing contracts with major chemical manufacturers.
Specialty Chemicals' customers include, among others, Albright & Wilson,
Ashland, British Petroleum, Cytec, DuPont and OxyChem. Management expects that
63.6% and 51.0% of Speciality Chemicals' Fiscal 1999 revenues will be derived
from long-term contracts and minimum committed payment contracts, respectively.
Large chemical manufacturers continue to outsource production in order to focus
on research, product development and marketing and decrease the cost and
time-to-market for new products. Several factors make Specialty Chemicals a
desirable outsourcing partner including its: (i) flexible manufacturing
facilities, (ii) experience in manufacturing a wide variety of complex products,
(iii) strong process development capabilities and (iv) ability to dispose
on-site of hazardous waste by-products in a safe and cost-effective manner.
Specialty Chemicals recently has entered into four long-term contracts, three of
which contain minimum committed payment obligations, with major chemical
manufacturers which are expected to contribute $7.7 million of revenues and $3.8
million of EBITDA in Fiscal 1999. In Fiscal 1998, Specialty Chemicals
represented 37.5% of GNI's revenues.
Specialty Chemicals' contracts are generally tolling arrangements whereby
the customer provides the raw materials and pays for the finished product on a
per unit basis. As a result of such tolling arrangements, management believes
Specialty Chemicals' revenues and cost of sales are understated when compared to
other specialty chemical manufacturers who purchase the raw materials used in
their production processes. In connection with tolling arrangements, Specialty
Chemicals' customers frequently fund project start-up costs and capital
expenditures needed to begin production. Since the beginning of Fiscal 1993,
Specialty Chemicals has invested $21.3 million in capital expenditures to expand
and upgrade its manufacturing capabilities. In addition, customers funded $5.6
million of capital expenditures over such period and are expected to fund
approximately $5 million of additional capital expenditures in Fiscal 1999.
Management believes that no significant additional capital expenditures will be
required by Specialty Chemicals in Fiscal 1999.
Specialty Chemicals manufactures products for customers in the contract
manufacturing, waste recovery and toll distillation segments of the chemical
industry. Specialty Chemicals' facilities combine a variety of chemical
manufacturing and processing technologies to recover valuable organic components
from or to process wastes, by-products and chemicals. These technologies
include: stainless steel and glass-lined batch reaction, batch and continuous
distillation, evaporation, adsorption and absorption. Batch reaction represents
chemical synthesis, which is the combining of two or more chemical compounds by
means of heat and/or pressure. Distillation and evaporation utilize heat to
separate liquids from solids and close-boiling liquid components from other
liquids. Other technologies -- such as adsorption, absorption, and chemical
treatment,
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neutralization and limited extraction -- are employed to remove compounds not
readily separated by heat. Specialty Chemicals' facilities are designed to
achieve high levels of purity, whether by reaction or separation of various
organic components, while being capable of operating under a wide range of
temperature and pressure conditions, thus maximizing Specialty Chemicals'
flexibility in handling a variety of chemicals. Specialty Chemicals' facilities
have been designed to be extremely versatile and allow for rapid reconfiguration
between product runs. In addition, by virtue of having its deepwell operations,
the Company is well positioned to process materials that create large volumes of
waste during manufacturing.
Specialty Chemicals' facilities were constructed in multiple phases and
were designed to accommodate integration of various technologies. The first
phase was completed and began operating in the first quarter of Fiscal 1991,
with the construction of utilities, basic control systems, material storage, and
a ninety-foot distillation column. In the third quarter of Fiscal 1992,
Specialty Chemicals added a second, smaller, thirty-foot distillation column to
the existing operation. Specialty Chemicals added a wiped film evaporator in the
first quarter of Fiscal 1994 to complement its distillation capabilities. Also
during Fiscal 1994, Specialty Chemicals constructed and placed into service its
first two batch reactors and made a significant number of other modifications
and enhancements. During Fiscal 1995, a third batch reactor as well as other
capital improvements were added. During Fiscal 1996, the Company added a fourth
and fifth reactor. This series of expansions has provided Specialty Chemicals
with reaction capabilities that enable it to manufacture and process a broad
range of specialty chemicals.
Selected Recent Contracts
Pursuant to its strategy to enter into long-term outsourcing contracts with
major chemical manufacturers, Specialty Chemicals recently has entered into four
such contracts, three of which contain minimum committed payment obligations.
Certain of these contracts are governed by secrecy agreements that prohibit the
disclosure of the party to the contract and the product manufactured thereunder.
Generally, Waste Management provides waste management services in connection
with these contracts. The following is a brief description of these contracts:
Effective June 22, 1998, Specialty Chemicals entered into a contract with a
subsidiary of an international chemical company to process paper coating
chemicals for a minimum of 225 days over the three year term of the agreement.
In connection with the agreement, Specialty Chemicals has agreed not to produce,
manufacture or sell the product which is the subject of this agreement for a
period of 15 years following termination of the agreement. Management estimates
that the agreement will contribute $3.0 million and $1.4 million of revenues and
EBITDA, respectively, in Fiscal 1999.
On June 5, 1998, Specialty Chemicals entered into a contract pursuant to
which the Company will sell its crude acetonitrile supply (11.0 million pounds
per year minimum) to BP until June 30, 2008 and will manufacture refined
acetonitrile for BP for a minimum of 13 months beginning July 1, 1998 and ending
on June 30, 2000. The obligation of BP to purchase 11.0 million pounds of crude
acetonitrile supply is a "take or pay" obligation, not subject to "force
majeure" conditions. The Company has a corresponding purchase obligation for
crude acetonitrile with DuPont, under a supply agreement with a parallel term.
Management expects that this supply and processing agreement will contribute
approximately $3.2 million and $1.6 million of revenues and EBITDA,
respectively, in Fiscal 1999.
Effective May 21, 1998, Specialty Chemicals entered into a non-exclusive
contract with a Fortune 50 company to process an estimated minimum of 600,000
pounds annually (1.2 million pounds maximum) of a mist and dust suppressant
product, through December 31, 2001. Although there is no minimum processing
obligation, management estimates that the agreement will contribute
approximately $0.9 million and $0.5 million of revenues and EBITDA,
respectively, in Fiscal 1999.
Effective May 14, 1998, Specialty Chemicals entered into a contract with an
international chemical company to process a minimum of 2.3 million pounds of
agricultural and household product intermediates through December 31, 1999. In
connection with the agreement, Specialty Chemicals has agreed to source certain
raw materials. Management estimates that the agreement will contribute
approximately $0.7 million and $0.3 million of revenues and EBITDA,
respectively, in Fiscal 1999.
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In most cases, these contracts may be terminated by either party in the
event that the other party materially breaches its obligations under the
agreement. In addition, except with regard to BP's take-or-pay obligation, these
agreements permit that the obligation of either party may be suspended by such
party in the event that the other party is unable to perform its obligations due
to (i) certain extraordinary events, such as fire, explosion, national emergency
or request or recommendation of any governmental authority or (ii) the delay of
a subcontractor of either party, so long as such delay is beyond the control and
without the fault or negligence of such party and such goods or services are not
available from another source in sufficient time to meet the requirements of the
agreement. In most cases, if such event continues for a specified period of time
(typically 90 days), the affected party may immediately terminate the agreement
without liability on its part. In certain cases, Specialty Chemicals may be
required to reimburse customer in the event that equipment outages result in
specified processing delays (to the extent that such delays are unavoidable).
Custom Chemical Manufacturing and Processing
Specialty Chemicals provides custom chemical manufacturing services to
customers by means of organic chemical synthesis principally for chemical and
petrochemical producers. Often, custom manufacturing involves the production of
a particular chemical for a third party who then uses that chemical in its
manufacturing process. Custom manufacturing generally includes the synthesis of
more complex chemicals from raw materials. Products manufactured under custom
manufacturing agreements are used in a variety of industries, including
pharmaceuticals, electronics, mining, automotive and household products. In
contrast to manufacturing, which involves combining raw materials to produce a
more complex end-product, custom chemical processing generally involves the
purification of chemical feedstock by separating undesirable components from
desirable ones to yield an end-product that meets the customer's specifications.
Customers who use Specialty Chemicals' manufacturing or processing services
generally do so because they lack sufficient internal capacity to satisfy
product development needs or lack certain internal production capabilities and
desire to avoid capital expenditures required to add such capacity or
capability.
Recycling
Specialty Chemicals provides recycling of organic components from wastes
and by-products. This service assists customers in accomplishing their
objectives of meeting waste minimization goals and requirements by recovering in
a cost-effective manner reusable organic components from residual wastes and
by-product streams generated by their operations. The streams recycled by
Specialty Chemicals generally otherwise require disposal as hazardous wastes, or
are non-hazardous streams generated by customers who desire to have the
materials handled under the stringent requirements applicable to a RCRA
permitted facility. The Company's processing capabilities and permits and
regulatory status allow customers to minimize waste volumes, possibly claim
recycling credits or exemptions or otherwise reduce their waste disposal costs.
In particular, customers utilizing the recycling services provided by Specialty
Chemicals may be able to claim credits for pollution prevention efforts under
the EPA reporting requirements covering releases of waste to the environment.
Under various government regulations such as Superfund Amendments and
Reauthorization Act 313, industry participants are required to submit an annual
Toxic Release Inventory to the EPA describing the disposition of "chemical
releases" from facilities. If these chemicals are recycled, that volume is not
considered a release. Chemicals recovered under recycling agreements include
specialty amines, carrier solvents and plastic feedstocks.
MARKETING AND CUSTOMERS
The Company provides integrated chemical manufacturing, recovery,
processing and treatment and a comprehensive range of waste management services
to approximately 275 customers in the United States. The Company markets its
services on an integrated basis and its services in one area often support or
lead to revenues in other areas. The Company markets its services through direct
customer sales using its executive officers and a 14-person marketing and sales
staff. All of Specialty Chemicals' marketing and sales personnel have technical
degrees.
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The Company's customer base is diverse and includes, among others,
chemical, petrochemical, industrial, and other waste management companies that,
in most cases, generate wastes and by-products as part of their ongoing
operations and/or require chemical manufacturing, recovery and processing
services. Specialty Chemicals provides its customers with a low cost, bundled
solution for specialty chemical manufacturing and on-site waste by-product
disposal. In Fiscal 1998, the Company handled approximately 1,000 different
waste streams and provided its services to approximately 400 customer
facilities. GNI has manufactured specialty chemicals for nine of the ten largest
chemical and petrochemical producers in the United States. During Fiscal 1998,
no single customer accounted for greater than 10% of the Company's consolidated
revenues. Waste Management's customers include Arco, DuPont, Elf Atochem,
Lyondell, OxyChem and Safety-Kleen. Specialty Chemicals' customers include
Albright & Wilson, Ashland, British Petroleum, Cytec, DuPont and OxyChem.
The Company's facilities are strategically located in the Gulf Coast region
in proximity to the nation's largest concentration of chemical manufacturers.
Accordingly, the Company derives a significant portion of its revenues from
customers whose operations are located in the Gulf Coast region; however, the
number of the Company's customers located in other parts of the United States
has been increasing in recent years. Management believes that the geographical
expansion of the Company's customer base is due in large part to leveraging its
strong reputation in both the deepwell and chemical sectors.
COMPETITION
The markets for the Company's services are highly specialized and
competitive. The Company competes with many other firms ranging from small local
firms to large national firms. Waste management and disposal firms include
Chemical Waste Management, Laidlaw Environmental and American Ecology. Chemical
processing firms include SpecialtyChem, Cedar Chemical and KMCO. Some of the
Company's competitors are more established and have greater financial,
management, marketing and other resources than the Company. Each of the
Company's competitors is able to provide one or more of the services offered by
the Company. The Company believes that its permits and strong record of
environmental and regulatory compliance give GNI a competitive advantage when
marketing to its customers, who are sensitive to how their wastes and products
are handled due to liability concerns. The competitive market also is influenced
by the extent to which companies that generate waste seek to minimize, process
and dispose of such waste themselves.
Management believes that the principal competitive factors in its markets
include the level of compliance with applicable environmental regulatory
requirements, the degree of sophistication and flexibility of the chemical
manufacturing and processing services offered (including the number and types of
wastes, by-products and chemicals capable of being manufactured, recovered, or
processed), the regulatory status and location of the Company's facilities, and
pricing. Management further believes that the Company competes favorably with
respect to these factors. Management believes there are no competing commercial
deepwells accepting hazardous wastes within 250 miles of Waste Management's
deepwells and the nearest commercial deepwell competitor can only dispose of a
fraction of the waste streams for which GNI has permits.
CONTRACTING ARRANGEMENTS
Services provided by Waste Management are typically performed pursuant to
non-exclusive agreements. The charges for Waste Management services are
determined by such factors as the chemical composition and volume or weight of
the wastes, by-products or chemicals involved, the type of transportation,
processing or treatment provided and the distance from the customer's facilities
to the Company's facilities. Waste Management typically reviews and adjusts
charges for its services annually. Prior to entering into an agreement with a
customer for its waste management services, Waste Management's specially trained
personnel review a waste profile sheet prepared by the customer that contains
information about the chemical composition of the waste or by-product.
Typically, a representative sample of the waste, by-product or chemical is then
analyzed in Waste Management's laboratory for the purpose of enabling it to
recommend the best method of transportation, treatment, processing or disposal.
Upon arrival at Waste Management's
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facilities, and prior to unloading, a representative sample of the delivered
waste is tested and analyzed to confirm that it conforms to the customer's waste
profile.
During Fiscal 1997, Specialty Chemicals shifted its focus from numerous
short-term projects to long-term outsourcing contracts, certain of which contain
minimum committed payment obligations, with major chemical manufacturers. In
addition, the Company continues to do business with chemical manufacturing
customers on a batch by batch basis, which in many instances has resulted in
recurring revenues to the Company. Substantially all of Specialty Chemicals'
contract manufacturing and processing services are performed on a tolling or
contract basis. In tolling agreements, the customer provides the raw materials
and pays for the finished product on a per unit basis. As a result of these
tolling arrangements, management believes Specialty Chemicals' revenues and cost
of sales are understated when compared to other specialty chemical manufacturers
who purchase the raw materials used in their production processes. After
extensive computer simulations, laboratory tests and simulations, and technical
discussions, Specialty Chemicals' contracts with its customers to provide
finished product meeting their specifications. Specialty Chemicals also accepts,
for a disposal fee, wastes and by-products from which it recovers valuable
components for resale. See "-- Selected Recent Contracts."
PERMITS
The Company has various permits and authorizations enabling it to engage in
a wide range of hazardous waste treatment, storage and disposal operations at
its facilities, including hazardous waste treatment and storage permits issued
by the TNRCC pursuant to the Federal Resource Conservation and Recovery Act, as
amended, the state programs authorized thereby, and the regulations promulgated
thereunder (collectively, "RCRA"). See "Risk Factors -- Environmental Regulation
and Safety Matters -- Regulatory Status of Facilities." Management believes that
the Company's Deer Park facility is the only commercial facility in the United
States that combines RCRA permitted regulatory status for the treatment,
storage, transportation and disposal of hazardous and non-hazardous liquid and
solid industrial wastes and by-product streams with chemical manufacturing,
recovery and processing capabilities, thus enabling the Company to provide
comprehensive resource recovery and waste management services to a wide array of
customers.
On August 27, 1992, the Company received its final RCRA Part B Permit from
the TNRCC covering its hazardous waste management operations at its Deer Park
facility. Under the Deer Park RCRA Part B Permit, the Company may store up to
approximately 3.4 million gallons and approximately 7,000 drums of hazardous
waste at any one time at its Deer Park facility. The Company may also accept for
treatment, storage and disposal substantially all types of hazardous wastes
identified by the EPA, excluding dioxin-bearing, biological and radioactive
wastes. The Company conducts its deepwell injection operations for its two
deepwells located at the Deer Park facility under permits issued by the TNRCC on
July 14, 1987 pursuant to federal authority under the Safe Drinking Water Act's
Underground Injection Control ("UIC") program, and under an exemption issued by
the EPA pursuant to RCRA, which allows the injection of certain hazardous wastes
that otherwise may be prohibited from disposal in or on the land, commonly known
as "land-banned" wastes. Under the Company's Deer Park UIC Permits, the Company
may inject up to 262 million gallons of hazardous wastes in its Deer Park
deepwells annually. Similarly, the Company's Corpus Christi facility received
its renewed RCRA Part B Permit from the TNRCC on September 25, 1998 and received
its renewed UIC Permit from the TNRCC on June 5, 1998, and its exemption issued
by the EPA pursuant to RCRA, which allows the injection of "land-banned" wastes.
Under the Company's Corpus Christi UIC Permit, the Company may inject up to 78
million gallons of hazardous wastes in its Corpus Christi deepwell annually. See
"-- Environmental Regulation and Safety Matters -- Underground Injection" and
"-- Environmental Regulation and Safety Matters -- Hazardous Waste Management."
The Company's processing capabilities, permits and regulatory status enable
it to receive waste and by-product materials and recover valuable components
therefrom, and to assist customers in minimizing waste volumes, and possibly
claiming recycling credits or exemptions or otherwise reducing such customers'
waste disposal costs.
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The Company possesses broad federal, state and local permits to conduct its
waste management operations. Management believes that the length and cost of the
permitting process serve as a significant barrier to entry into commercial
deepwell operations. The Company's waste facilities are permitted to accept
virtually any type of waste, excluding dioxin-bearing, biological and
radioactive wastes. Specialty Chemicals is permitted to handle and manufacture
over 500 different chemicals in its Deer Park facility. The Company believes
that its permits and strong record of environmental and regulatory compliance
give GNI a competitive advantage when marketing to its customers, who are
sensitive to how their wastes and products are handled due to liability
concerns. Management believes the Company has a unique combination of permits
and expertise in waste processing, disposal and recycling which give the Company
a competitive edge when marketing to customers.
ENVIRONMENTAL REGULATION AND SAFETY MATTERS
General. The waste management industry is subject to extensive and evolving
federal, state and local laws and regulations, including those relating to waste
management, resource recovery, employee health and safety, air emissions, water
discharges, environmental affairs, cleanup liability from current and past waste
and hazardous substance management and disposal practices, and chemical
products. Governmental authorities, and in some cases third parties, have the
power to enforce compliance with these legal requirements and violators are
subject to significant civil and criminal sanctions, including penalties and
injunctions.
Both the U.S. Congress and the EPA have been considering proposals that
could significantly rewrite many of the environmental requirements governing the
Company's operations and those of its customers. The EPA has issued rules that
expand the set of materials considered hazardous wastes, but also has been
considering proposals that could substantially redefine the universe of
hazardous wastes, the extent to which recycling and reclamation (such as is
conducted by the Company) would be regulated, and the extent to which treatment
of certain wastes would be required prior to disposal, among others. There can
be no assurance that the legislative or regulatory process will not have a
material adverse effect on the Company.
The Company's operations result in air emissions and water discharges.
Those activities are regulated under the programs established by the Federal
Clean Air Act and the Clean Water Act. The Company also generates wastes, and
transports, treats, stores or disposes of its own wastes and those of third
parties, which may be regulated as hazardous or non-hazardous. These activities
are subject to the programs established under RCRA. The Company's deepwell
disposal activities are subject to the UIC program established under the Federal
Safe Drinking Water Act. All of these activities involve the handling of
substances and materials that may be considered hazardous substances in the
event of releases to the environment and that may present safety and health
considerations in the workplace. Releases of hazardous substances and
environmental cleanups and liability generally are subject to the provisions of
CERCLA and workplace conditions are subject to the Occupational Safety and
Health Act ("OSHA") and the Emergency Planning and Community Right-to-Know Act
("EPCRA"). An analogous state program generally complements each of these
federal programs. The discussion below focuses on these principal areas of
environmental and health and safety regulation.
Hazardous Waste Management. RCRA established a comprehensive regulatory
framework for the management of hazardous wastes from the time they are
generated, through each stage of transportation, handling, treatment and
storage, to their ultimate disposal. The federal statute provides for states to
adopt similar or more stringent programs, so that both federal and state
requirements may apply to particular activities. Under RCRA requirements, which
are administered in Texas primarily by the TNRCC, before shipping hazardous
wastes to other locations, all regulated generators of hazardous wastes must
receive from the EPA a generator identification number, must prepare shipments
in accordance with detailed regulations, and must complete a manifest
identifying the material being shipped and its destination. The transporter then
must deliver the hazardous wastes in accordance with the provisions of the
manifest and only to an authorized treatment, storage or disposal facility.
Owners and operators of hazardous waste treatment, storage and disposal
facilities are required to obtain permits and to comply with comprehensive
technical standards concerning operation, closure, post-closure care, and
financial assurance as to liability to third parties and the costs of properly
closing the facility after it ceases operation.
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To facilitate the processing of permit applications and the issuance of
operating permits, RCRA established a phased permitting process for hazardous
waste management facilities. Pursuant to this process, hazardous waste
treatment, storage and disposal facilities that were in existence when RCRA
regulations went into effect, and which met certain other requirements, were
deemed by operation of law to have attained "interim status." These facilities
and others that subsequently have achieved interim status due to their handling
of newly defined hazardous wastes are authorized to operate until the issuance
of a final operating permit (a "Part B Permit"). Waste Management's facilities
are all operating under RCRA Part B Permits.
Federal statutory amendments to RCRA enacted in 1984 substantially expanded
the scope of such Act's requirements by, among other things: (i) providing for
the regulation of additional hazardous wastes, (ii) imposing restrictions on the
disposal of certain hazardous wastes in or on the land, (iii) prescribing more
stringent standards for land disposal facilities and (iv) requiring corrective
action for environmental conditions at facilities applying for a RCRA operating
permit. These statutory restrictions have been implemented for the most part and
apply to the Company and its customers.
Pursuant to RCRA's requirements, each of the Company's five operating
subsidiaries has been issued an EPA identification number. The Company's
facilities also currently operate under RCRA Part B Permits. The Deer Park RCRA
Part B Permit expires in August 2002 and its Corpus Christi RCRA Part B Permit
expires in September 2008. Since the time when the original Corpus Christi
permit was issued, all RCRA Part B Permits have become subject to an RFI to
determine the extent of any releases of hazardous wastes or constituents to the
environment and to undertake appropriate corrective action with respect to any
such releases. Accordingly, an RFI is incorporated into the Corpus Christi RCRA
Part B Permit. The Company's RCRA Part B Permit for the Corpus Christi facility
requires the Company to submit an RFI Plan within 60 days after September 25,
1998, the date that the permit was granted. There can be no assurances that the
costs associated with the RFI or any required corrective action will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Consistent with RCRA's permitting standards, the RCRA Part B Permits
require the Company to meet certain financial assurance requirements. As of May
1998, the Company has posted financial assurance for its closure and
post-closure obligations in the aggregate amount of approximately $1.4 million
covering its Deer Park facility. CWM's parent, WMX Technologies, Inc., currently
guarantees the Company's $1.5 million letter of credit issued to the TNRCC to
satisfy financial assurance obligations for the Company's Corpus Christi
facility. After March 15, 2000, the Company will have to post the requisite
financial assurance itself. The Company also has obtained pollution legal
liability insurance covering its facilities in the aggregate amount of $12.0
million and $4.0 million per occurrence, subject to a deductible of $50,000 per
occurrence, except for site cleanup which has a $200,000 deductible.
The Deer Park RCRA Part B Permit also requires the Company to proceed
diligently with an RFI to determine whether and to what extent any releases of
hazardous wastes or constituents to the environment have occurred from certain
of the Company's units used to manage wastes, and to take appropriate corrective
action in the event of any such release. The Company's RFI Plan for the Deer
Park facility has been approved by the TNRCC and was completed pending approval
by the TNRCC of the final report submitted by the Company to the TNRCC on July
28, 1998. Capital expenditures for corrective action were not material.
Underground Injection. The Federal Safe Drinking Water Act aims to protect
public water supplies and drinking water and, among other things, establishes a
UIC program designed to prevent contamination of ground waters from land-based
disposal, including deepwell injection. The UIC program designates five
different classes of injection deepwells, including a class for those deepwells
like the three the Company operates, which inject hazardous waste below any
underground sources of drinking water in the vicinity of the deepwell. Pursuant
to the UIC program, which is administered in Texas at the state level under
federal authority and analogous state law by the TNRCC, the TNRCC has issued to
the Company two permits for the Deer Park facility and one permit for the Corpus
Christi facility. Subject to their terms, the Deer Park UIC Permits generally
authorize the Company until July 1997 to dispose of aqueous wastes through
injection into two deepwells at its Deer Park facility. The Company is generally
authorized to dispose of aqueous wastes through injection into one deepwell at
its Corpus Christi facility subject to the terms of its UIC Permit
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renewed in June 1998 until June 2008. The Company has submitted applications for
renewal for the Deer Park UIC Permits to the TNRCC and is currently operating
under these permits in renewal. The Company's draft permits for its Deer Park
deepwells have been completed and sent to the Office of the Chief Clerk of the
TNRCC by the TNRCC Staff with a recommendation for approval. The Deer Park draft
UIC Permits were subject to public notice and comment, which period ended
September 23, 1998. Management believes that the Company's Deer Park UIC Permits
will be renewed in due course, although there can be no assurance that this will
occur. The Company has posted financial assurance for the closure of the two
deepwells at its Deer Park facility in the amount of $320,000, and in the amount
of $160,000 for the closure of its one deepwell at its Corpus Christi facility.
The land disposal restrictions adopted under the 1984 amendments to RCRA
complement the UIC program requirements and effectively prohibit the disposal of
hazardous wastes in or on the land, such as by deepwell injection, except in
limited circumstances. The RCRA land disposal regulations, however, provide that
such disposal may be allowed by the EPA under a variance or exemption from the
regulations where it can be demonstrated that there will be no migration of
hazardous constituents from the zone into which the wastes may be injected for
the lesser of 10,000 years or the period during which they remain hazardous.
In April 1990, the EPA issued to the Company an exemption which, subject to
its terms, generally exempts the disposal of certain hazardous wastes by
injection into both of the deepwells at the Company's Deer Park facility from
the RCRA land disposal prohibitions for seventeen years. The Corpus Christi
facility also has obtained a similar exemption. These exemptions are subject to
review in 2007 and 2008, respectively.
The exemptions provide that the Company's injection of hazardous wastes is
subject to various conditions, and that non-compliance with the conditions is
grounds for termination of the exemptions. One of the conditions in the
exemptions relates to the specific gravity of the injected waste stream, and
another specifies the types of wastes that may be injected. In June 1995, the
EPA granted a reissuance of the Deer Park facility's exemption that expanded the
specific gravity parameters and approved the Company's request for authorization
to inject certain newly-designated RCRA waste codes. The Corpus Christi
facility's exemption was similarly reissued shortly before its transfer to the
Company, although the approval for the newly-designated RCRA waste codes was
granted after that time. On January 16, 1995, the Deer Park facility received
authorization from the TNRCC to increase its combined annual injection rate for
its two deepwells up to 262.8 million gallons. On June 21, 1995, the EPA
approved this increase by virtue of its approval of the Deer Park facility's
petition reissuance.
Air Emissions. Based on requirements established by the Federal Clean Air
Act, the Company's operations are subject to various federal and state
regulatory provisions concerning the emission of pollutants to the ambient air.
These requirements include self-implementing regulatory restrictions that apply
to new sources of air emissions or sources of certain pollutants designated as
hazardous, restrictions against sources that may cause ambient air to exceed
certain established national ambient air quality standards, and requirements for
certain facilities to obtain and comply with air emissions permits. On July 22,
1993, Specialty Chemicals obtained an air permit ("Air Permit") from the TNRCC
covering its chemical operations. The Air Permit encompasses the Specialty
Chemicals' air emissions sources that, until 1993, operated solely under various
TNRCC permit exemptions. Additionally, Specialty Chemicals' Air Permit includes
an air emissions construction permit for expansions of its chemical operations.
The Deer Park facility is considered a major source of air emissions and will be
required to submit an application for a Title V Operating Permit pursuant to the
1990 Amendments to the Federal Clean Air Act in due course. At this point, the
Company has not identified any reasons for the Title V permit to include any
conditions that will have a material adverse effect on the Company.
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The Corpus Christi facility does not have a stand-alone air emissions
permit, but both its UIC Permit and its draft RCRA Part B Permit contain
emission control requirements. Likewise, the Deer Park RCRA Permit contains
emissions control requirements, and the facility also has a state standard air
permit for its thermal oxidizer.
The 1990 Amendments to the Federal Clean Air Act contain extensive
revisions that provide for increased regulation of air emissions, including
pollutants that may be considered toxic within the meaning of that statute. The
EPA's National Emission Standards for Hazardous Air Pollutants ("NESHAPs"),
including a recent NESHAP that regulates emissions of various organic substances
from certain chemical manufacturing facilities, also apply to certain activities
that may result in the emission of designated hazardous air pollutants. As the
Company expands its operations and the nature and amount of materials that it
handles, or as the EPA adopts additional rules, the Company may incur additional
compliance costs as to these and other requirements, which could have a material
adverse effect on the Company.
Water Discharges. The Federal Clean Water Act's National Pollutant
Discharge Elimination System ("NPDES") program generally requires a permit for
the discharge of pollutants into surface waters. Analogous state law requires a
similar permit. The Company has obtained a waste water discharge permit from the
TNRCC for the Deer Park facility. Most process waste waters generated at the
Company's facilities are managed as hazardous or non-hazardous wastes and
injected in the Company's deepwells. Through a business relationship with a
third party, the Company at certain times also delivers some waste waters to the
third party's waste water treatment facility for treatment and discharge under
its Federal NPDES and state waste water discharge permits. The EPA also has
adopted regulations concerning discharges of storm water runoff, and the Company
has been granted EPA General Stormwater NPDES permits for its Deer Park and
Corpus Christi facilities.
Transportation of Hazardous Materials and Waste. The transportation of
hazardous materials and wastes is comprehensively regulated by the EPA under
RCRA, by the Federal Department of Transportation under the Hazardous Materials
Transportation Act, and by corresponding state laws. These regulatory programs
require, among other things, the use of manifests to control the shipment of
hazardous wastes, and special labeling, packaging and placarding for various
types of hazardous materials. The Company operates under a motor vehicle common
carrier certificate issued by the ICC that allows it to transport materials in
all 48 states in the continental United States. The Company also operates under
numerous state authorizations relating to transportation generally and the
transportation of hazardous wastes and hazardous substances specially, depending
on the state in question.
Superfund. CERCLA authorizes the federal government to use federal funds to
clean up facilities at which there has been a release or threatened release of
hazardous substances, or to order persons responsible for such circumstances to
do so. Superfund also allows government entities and private parties that have
incurred response costs to recover them from responsible parties. The statute
has been interpreted to create strict, joint and several liability for the costs
of removal and remediation, other necessary response costs, and damage to
natural resources. Liability may be trebled if the responsible party fails to
perform a removal or remedial action ordered under Superfund. Liability extends
to generators of hazardous substances; owners and operators of facilities,
including waste transportation vehicles, from which a release of hazardous
substances occurs; persons who owned or operated such facilities at the time the
hazardous substances were disposed; persons who arranged for the treatment or
disposal of hazardous substances at, or the transportation of hazardous
substances to, a facility; and transporters who selected such facilities for
treatment or disposal of hazardous substances. Like most other entities involved
in the hazardous waste management business, and many industrial entities, the
Company generates, manages, transports and disposes at third-party facilities,
substances that could be considered hazardous substances under Superfund. Claims
under Superfund and analogous state laws may arise against the Company in the
future, although the Company is not aware that it is currently considered by the
EPA a potentially responsible party for cleanup costs or damages under
Superfund.
Toxic Substances Control. Certain of Specialty Chemicals' services are
regulated under the Federal Toxic Substances Control Act, primarily involving
record-keeping and reporting.
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Safety and Health. The Company's operations are subject to various
regulatory requirements that arise from Federal OSHA, EPCRA, and analogous state
requirements. Among other things, OSHA and EPCRA require that certain employee
exposure to various substances in the workplace, and that certain information on
hazardous characteristics of materials, be communicated to employees. The
Company has implemented a health and safety program that includes employee
training, practices and information. The Company currently relies for fire
protection services on a combination of resources that include an independent
fire water protection system as well as portable fire extinguishers and foam
carts, and membership in the Channel Industries Mutual Aid organization, which
is a formal cooperative assistance arrangement with other industries in the
area.
Predecessor Activities. As a result of the Company's prior involvement in
the manufacturing of low-level radioactive sources and tracers utilized in the
petroleum, industrial and medical markets, the Company has conducted
decommissioning activities at four sites not currently used in its primary
operations. The Company has completed decommissioning activities at a previously
leased site in Baton Rouge, Louisiana, which has been released for general use
by the Louisiana Department of Environmental Quality. The Company also has
conducted decommissioning activities at its approximately 3.1 acre site in Port
Norris, New Jersey. The Company has commenced implementation of an Action Plan
approved by the Nuclear Regulatory Commission to address remaining contamination
on the site and to complete the decommissioning process. The Company has
conducted decommissioning activities at its approximately 4.6 acre site in
Houston, Texas and will be submitting final surveys to the Texas Department of
Health, Bureau of Radiation Control ("BRC") to have the site released for
general use. The Company has elected to use a portion of this property as a
temporary storage facility for radioactive materials, and has received
permission from the BRC to use this property in this capacity. The Company
maintains an approximately 0.5 acre site in Webster, Texas and is developing a
plan to decommission that site. The plan will be submitted to the BRC for
approval and the Company intends to sell this property at some point in the
future. Management believes that the fair value of these four sites will exceed
the costs incurred in connection with decommissioning such sites.
INSURANCE MATTERS
The Company carries a variety of insurance to cover certain potential risks
of its operations. The Company's insurance includes, among others, the
following: commercial general liability insurance in the aggregate amount of
$2.0 million; products-completed operations insurance in the aggregate amount of
$2.0 million covering various chemical products; property damage insurance in
the aggregate amount of $60.0 million, subject to a deductible of $100,000 per
occurrence; physical loss or damage insurance on certain crude petroleum,
natural gas, products of natural gas and their products in the aggregate amount
of $2.0 million, subject to a deductible of $10,000 per occurrence; business
interruption insurance covering the Company's plant and equipment with a
combined aggregate limit of $16.5 million, subject to a deductible of fifteen
days per occurrence for business interruption; commercial umbrella insurance in
the amount of $25.0 million per occurrence and $25.0 million in the aggregate,
subject to a $10,000 self-insured retention where applicable; pollution legal
liability insurance in the amount of $4.0 million for each loss and $12.0
million in the aggregate, subject to a deductible of $50,000 per occurrence
except for site clean-up which has a $200,000 deductible; contractors' pollution
legal liability insurance in the aggregate amount of $1.0 million for each loss
and $1.0 million for all losses, subject to a deductible of $50,000 per loss;
automobile liability insurance covering the Company's fleet of tractors and
trailers in the amount of $1.0 million per occurrence subject to no deductible;
and discontinued products liability insurance covering certain products
manufactured by the Company while still in the radiation-related products
business of $1.0 million in the aggregate, subject to a deductible of $5,000 per
occurrence. Under some of its insurance policies, the Company is insured with
respect to covered liabilities on a "claims made" basis rather than an
"occurrence" basis. Under claims made coverage, the Company will be covered only
if the policy is in place on the date the claim is asserted even if the Company
carried such insurance on the date of the event giving rise to the claim. The
Company self-insures its fleet of tractors and trailers for physical damage on
over-the-road exposure.
Although the Company has insurance covering certain of its operations, such
insurance is subject to coverage limits and deductibles, which are generally
described above. In addition, the market for liability
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insurance for waste management companies has been constrained in recent years
due in large part to the high losses experienced by insurance companies from
environmental impairment claims. As a result, the premiums and deductible limits
of liability insurance may increase to the point where such insurance is
prohibitively expensive, and certain insurance may become unavailable
altogether. Such developments could cause the Company to be unable to obtain or
maintain certain insurance, which, in turn, could cause the Company not to
comply with regulatory requirements imposed on certain of its operations.
Further, the Company's failure to maintain certain specified types and amounts
of insurance would constitute events of default under the Revolving Credit
Facilities. In addition, although management believes that the Company has
sufficient insurance coverage, an uninsured or underinsured claim, if successful
and of sufficient magnitude, could have a material adverse effect on the
Company.
EMPLOYEES
As of September 15, 1998, the Company had 177 employees, of whom 140 are
engaged in operations, 17 in administration and accounting, 14 in marketing and
sales, and 6 in executive management. None of the Company's employees is subject
to a collective bargaining agreement. Management believes that the Company's
relationship with its employees is good.
PROPERTIES
The Company owns approximately 10.5 acres of land in Deer Park, Texas and
14.3 acres in Corpus Christi, Texas. The Company conducts permitted treatment,
processing and disposal, and manufacturing activities in Deer Park, and
treatment and disposal activities in Corpus Christi. In Deer Park, a 6,000
square-foot building houses the Company's treatment and disposal operations, a
3,600 square-foot building houses the Company's chemical operations, a 30,000
square-foot building houses all of the administrative and sales offices as well
as the Company's executive and general offices, and a 10,000 square-foot
building is used for general maintenance for all of the Company's Deer Park
operations.
The Company's Corpus Christi facility is comprised of a 2,500 square-foot
building containing its administration and accounting offices, and laboratory; a
800 square-foot maintenance building containing its operating activities; and a
3,000 square-foot drum storage building.
The Company also owns approximately 14.8 acres of land adjacent to the
Company's Deer Park facility. Approximately 0.25 acres of the Company's Deer
Park property is leased to DSI Transports, Inc. ("DSIT"), an unrelated company,
under a 99-year lease. In addition, the Company has a preferential right to
purchase an approximately 9.5 acre tract adjacent to its Deer Park facility from
DSIT in the event that (i) DSIT offers the parcel for sale, or (ii) DSIT
receives a bona fide offer to purchase the parcel that it is willing to accept.
In either case, DSIT must notify the Company of the terms and conditions of such
third-party offer, and the Company has the right to purchase the parcel from
DSIT upon such terms and conditions. The Company intends ultimately to use the
parcel for the expansion of its Deer Park facility.
The Company owns four tracts of land not significant to its business,
including properties in Houston, Texas, Webster, Texas, Port Norris, New Jersey
and Baton Rouge, Louisiana. The Company intends to sell the Port Norris, New
Jersey and Baton Rouge, Louisiana properties in the future.
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition or results of operations.
On February 27, 1998, a complaint ("Original Complaint") purporting to
state a class action was filed in the Delaware Court of Chancery by William
Chaffin and Marcia Chaffin, alleged to be stockholders of GNI, on behalf of
themselves and all others similarly situated, against GNI and its directors. In
the Original Complaint, the plaintiffs allege that the Merger is wrongful,
unfair and harmful to holders of GNI Common Stock, that the proposed
consideration of $7.00 per share is not the result of arms-length negotiations
or based
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upon any independent valuation of the current or projected value of GNI, 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 Original Complaint sought to enjoin the Merger and an
unspecified amount of damages, in addition to payment of attorneys' fees and
reimbursement of expenses. On June 5, 1998, the plaintiffs filed an amended
class action complaint (the "Amended Complaint"). The Amended Complaint adds
allegations purportedly based on information set forth in the Company's original
filing of preliminary proxy materials, filed with the Commission on April 16,
1998. In addition, the Amended Complaint (i) names Titus H. Harris, III as a
defendant, (ii) does not name Mr. Lyons as a defendant and (iii) eliminates the
request to enjoin the Merger which was set forth in the Original Complaint. On
September 17, 1998, the plaintiffs submitted to the Court (with the defendants'
approval) another amended class action complaint ("Second Amended Complaint").
The Court approved the filing of the Second Amended Complaint on September 17,
1998, and it was served on defendants' attorneys on September 22, 1998. The
Second Amended Complaint is based on information set forth in the Company's
definitive proxy statement, filed on June 23, 1998 with the Commission. The
Second Amended Complaint (i) does not name Titus H. Harris, III as a defendant,
and (ii) corrected certain factual allegations. The Second Amended Complaint
alleges that the individual defendants violated their fiduciary duties of
loyalty and care, requests that the Merger be rescinded, or alternatively, that
rescissory damages be awarded, and that damages (including attorneys' fees and
costs) be awarded against the individual defendants. The Company believes it has
meritorious defenses and intends to vigorously defend itself against this claim.
The Company is obligated to advance the defense costs (including attorneys'
fees) incurred by the individual defendants in this litigation, and has certain
indemnification obligations to the individual defendants in connection with this
litigation.
On August 31, 1995, Odilia Benavidez and other owners of property near
Waste Management's Corpus Christi deepwell, filed suit against the Company and
Chemical Waste Management, Inc., a prior owner of the Corpus Christi deepwell,
in the 94th Judicial District Court, Nueces County, Texas (Cause No. 95-4698-c),
seeking injunctive relief and alleging property damage with respect to material
injected into the Corpus Christi deepwell. The number of claimants is
approximately 530 individuals. Management does not believe that the plaintiffs
will succeed in their claims nor that this litigation will have a material
adverse effect on the Company's operations, cash flow or consolidated financial
position.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF GNI
Following the Merger, the Board of Directors (the "Board") of GNI, as the
surviving corporation consists of five members including: (i) up to two
designated by the 399 Stockholders (as defined herein), initially Richard M.
Cashin, Jr. and Joseph M. Silvestri, (ii) a member of management, initially Mr.
Carl V Rush, Jr., to be designated by the Management Stockholders (as defined
herein), and (iii) up to two individuals determined to be disinterested
directors pursuant to the terms of the Stockholders' Agreement (as defined
herein), initially Gavin J. Parfit and John Mowbray O'Mara.
The following table sets forth certain information with respect to the
persons who are executive officers and/or members of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Carl V Rush, Jr................ 43 President and Chief Executive Officer and Director
Titus H. Harris, III........... 38 Executive Vice President, Chief Financial Officer
and Secretary
Donna L. Ratliff............... 51 Treasurer and Assistant Secretary
Richard M. Cochrane............ 38 Vice President and General Manager, Specialty
Chemicals
W.R. Reeves, Jr................ 50 Vice President -- Environmental and Regulatory
Affairs
John Mowbray O'Mara............ 71 Director
Gavin J. Parfit................ 50 Director
Richard M. Cashin, Jr.......... 45 Director
Joseph M. Silvestri............ 37 Director
</TABLE>
Carl V Rush, Jr. has been a director and President of the Company since
1987 and Chief Executive Officer since 1989. From 1985 to 1987, he was Vice
President -- Finance and Administration of the Company. Prior to joining the
Company, Mr. Rush was self-employed as a financial and management consultant
from 1983 to 1985. From 1980 to 1983, he served in various management positions
with Booker Oil Services, a petroleum services company. Mr. Rush earned his BBA
and his MBA in Finance, each from Texas Christian University.
Titus H. Harris, III has been Chief Financial Officer of the Company since
1990, Executive Vice President since 1989 and Secretary since 1987. From 1985 to
1989, he was a Vice President of the Company. From 1984 to 1985, Mr. Harris was
a financial consultant to CRB Investments, Inc., a leveraged buy-out firm. Mr.
Harris earned his BA in Economics from Washington & Lee University and his MBA
from the Graduate School of Business of the University of Chicago. Mr. Harris
has announced his intention to resign from his positions with the Company
effective November 30, 1998.
Donna L. Ratliff has been Treasurer of the Company since 1985 and Assistant
Secretary since 1987. From 1984 to 1985, Ms. Ratliff was Controller of Santa Fe
Supply Co., a wholesale picture framing supply and distribution company. From
1979 to 1984, Ms. Ratliff was Secretary and Treasurer of Gill Services, Inc., a
petroleum services company.
Richard M. Cochrane has been with the Company since July 1990 and has
served as Vice President and General Manager of GNI Chemicals Corporation since
April 1997. Between July 1990 and April 1997, Mr. Cochrane held various
marketing and operations positions in GNIC and DSI. Prior to joining the
Company, Mr. Cochrane held various engineering and management positions with
ChemLink Petroleum Company and Kaiser Aluminum and Chemical Company. Mr.
Cochrane earned a BS in Engineering in Chemical Engineering from Vanderbilt
University.
56
<PAGE> 61
W.R. Reeves, Jr. been Vice President -- Environmental and Regulatory
Affairs of the Company since 1990. Prior to assuming his current position, Mr.
Reeves was Vice President -- Sales and Marketing of DSI from 1985 to 1990. From
1983 to 1985, Mr. Reeves was employed by DSI as a Sales Representative. From
1981 to 1983, Mr. Reeves was Manager of Cleanup Operations for CECOS
International, Inc., a subsidiary of Browning-Ferris Industries, Inc. Mr. Reeves
earned his BS in Biology and his MS in Environmental Sciences, each from McNeese
State University.
John Mowbray O'Mara has been a director of the Company since the
consummation of the Merger. Mr. O'Mara has been a management consultant since
1993. From 1990 to 1993, Mr. O'Mara served as Chairman of the Executive
Committee of Quality Care Systems, Inc., a provider of computer-based "expert"
medical cost containment systems. From 1988 to 1989, Mr. O'Mara served as
Chairman of the Board and Chief Executive Officer of Global Natural Resources,
Inc. Prior to 1988, Mr. O'Mara spent 22 years as an investment banker, serving
most recently as Managing Director for Chase Investment Bank, a subsidiary of
Chase Manhattan Bank, N.A. Mr. O'Mara is a director of Baldwin & Lyons, Inc.,
The Midland Company and Plantronics, Inc.
Gavin J. Parfit has been a director of the Company since the consummation
of the Merger. Mr. Parfit has been Chief Executive Officer of Delta Terminal
Services, Inc. since 1995. He has also been Chief Executive Officer of Queen
City Terminals, Inc. since 1996. Mr. Parfit is also a Trustee of the Turtle Bay
Music School.
Richard M. Cashin, Jr. has been a director of the Company since the
consummation of the Merger. Mr. Cashin has been employed by Citicorp Venture
Capital, Ltd. ("CVC") since 1980, and has been President of CVC since 1994. Mr.
Cashin is a director of Levitz Furniture Incorporated, Furnishings
International, Inc., Euramax and Titan Wheel International, as well as numerous
private companies.
Joseph M. Silvestri has been a director of the Company since the
consummation of the Merger. Mr. Silvestri has been employed by CVC since 1990
and has been a Vice President of CVC since 1995. Mr. Silvestri also serves as a
director on the boards of Euramax International PLC, JTM Industries, Glenoit
Corporation and Triumph Group Inc., as well as numerous private companies.
COMPENSATION OF DIRECTORS
Directors are reimbursed by the Company for all out-of-pocket expenses
incurred in attending meetings of the Board. Outside directors, other than the
Chairman of the Board, are paid a fee for attending meetings of the Board of
$300 per Board meeting. Currently, the Company has no Chairman of the Board. The
Chairman of the Board, if and when elected, will be paid $5,000 per quarter in
lieu of any other compensation for services to the Company.
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<PAGE> 62
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for
services rendered during Fiscal 1998, Fiscal 1997 and Fiscal 1996 to its Chief
Executive Officer and to the other executive officers of the Company whose
annual cash compensation received from the Company for services rendered during
Fiscal 1998 exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- ---------------------------------
AWARDS PAYOUT
---------------------------------
RESTRICTED STOCK
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS PAYOUTS COMPENSATION(1)
- --------------------------- ---- -------- ------- ------------ ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carl V Rush, Jr............. 1998 $183,250 $ -0- $ -0- $-0- -0- $-0- $593,000(2)
President and 1997 183,250 13,200 -0- -0- 16,000 -0- 37,896(3)
Chief Executive Officer 1996 183,250 20,400 -0- -0- 17,000 -0- 465
Dawn S. Born(4)............. 1998 $135,000 $50,000 $ -0- $-0- -0- $-0- $ 2,502
Vice President and 1997 135,000 -0- -0- -0- 25,000 -0- 1,867
General Counsel 1996 67,500 50,000 1,876 -0- 50,000 -0- 131
Richard M. Cochrane......... 1998 $124,800 $ -0- $ -0- $-0- -0- $-0- $ 2,300
Vice President and 1997 108,967 -0- -0- -0- 50,000 -0- 2,115
General Manager, 1996 100,000 -0- -0- -0- -0- -0- 1,724
Specialty Chemicals
Titus H. Harris, III(5)..... 1998 $148,500 $ -0- $ -0- $-0- -0- $-0- $510,061(2)
Executive Vice President 1997 148,500 6,600 -0- -0- 8,000 -0- 35,012(3)
Chief Financial Officer 1996 148,500 10,200 -0- -0- 8,500 -0- 2,753
and Secretary
Donna L. Ratliff............ 1998 $ 90,000 $50,000 $ -0- $-0- -0- $-0- $ 1,890
Treasurer and Assistant 1997 90,000 15,000 -0- -0- -0- -0- 2,540
Secretary 1996 90,000 -0- -0- -0- -0- -0- 2,286
</TABLE>
- ---------------
(1) No Named Executive Officer had "perquisites and other personal benefits"
with a value greater than the lesser of $50,000 or 10% of reported salary
and bonus. The Company maintains a 401(k) plan pursuant to which amounts
were paid as reflected in the All Other Compensation column. Each
participant is able to direct the Company to contribute to the plan a
minimum of 2.0% and a maximum of 12.0% of the participant's eligible
earnings, subject to certain limitations set forth in the 401(k) plan and
the Internal Revenue Code of 1986, as amended. Subject to certain
restrictions, the Company is required to make mandatory contributions and
also is permitted to make discretionary contributions to the 401(k) plan, at
rates determined by the Compensation Committee, which are allocated to each
participant based on the participant's contributions to the plan.
Additionally, the Company purchases term life insurance policies for its
Named Executive Officers.
(2) Mr. Rush received certain other compensation of $589,500 and Mr. Harris
received certain other compensation of $506,000; each such amount represents
(i) the forgiveness of principal and interest in certain notes between the
Company and each of Messrs. Rush and Harris, and (ii) associated cash
payments made by the Company to Mr. Rush in the amount of $215,000 and to
Mr. Harris in the amount of $185,000, in each case representing the
respective personal income tax obligation associated with such forgiveness
to update.
(3) Mr. Rush received certain other compensation of $37,386 and Mr. Harris
received certain other compensation of $32,045; each such amount represents
the forgiveness of interest expense on certain notes between the Company and
each of Messrs. Rush and Harris.
(4) Ms. Born joined the Company in January 1996. Therefore, Ms. Born's
compensation for Fiscal 1996 reflects only the partial period that Ms. Born
was employed by the Company during such year. In 1996, Ms. Born received a
non-recurring payment of $50,000, plus reimbursement of $1,876 for certain
payroll taxes, when she joined the Company. Ms. Born resigned from the
Company effective July 1, 1998.
(5) Mr. Harris has announced his intention to resign from his positions
effective November 30, 1998.
58
<PAGE> 63
CERTAIN TRANSACTIONS
STOCKHOLDERS' AGREEMENT
In connection with the Merger, GNI entered into an agreement (the
"Stockholders' Agreement") with 399 (the "399 Stockholders") and certain members
of management (the "Management Stockholders"). The following is a summary
description of the principal terms of the Stockholders' Agreement and is subject
to and qualified in its entirety by reference to the definitive Stockholders'
Agreement, which is available upon request from the Company.
Board of Directors. The Board is comprised of up to five members. The
Stockholders' Agreement provides that up to two individuals will be designated
by the 399 Stockholders (individually a "399 Director" and collectively, the
"399 Directors"). If the 399 Stockholders, in their sole discretion, decide not
to designate one or both of the 399 Directors, such 399 Directors will be
designated by the Nominating Committee. The Management Stockholders will
designate an individual (the "Management Director"), initially Mr. Carl V Rush,
Jr., for so long as he owns Management Securities (as defined in the
Stockholders' Agreement). Up to two individuals (individually, a "Disinterested
Director" and collectively, the "Disinterested Directors"), neither of whom is
an affiliate of any 399 Stockholder or an employee, director or agent of such
399 Stockholder or affiliate, employed by the Company or any subsidiary of the
Company, or a Stockholder or any affiliate of any Stockholder will be chosen by
the Nominating Committee. Any of the above requirements for Disinterested
Directors may be waived by the written consent of the 399 Stockholders. The
Nominating Committee shall consist of one 399 Director and two Disinterested
Directors. The Nominating Committee shall act by majority vote. If for any
reason there are fewer than three directors on the Nominating Committee, it
shall act by unanimous vote.
Transfers of Restricted Securities. Each Stockholder agrees that he or she
will not, directly or indirectly, transfer any Restricted Securities or Series A
Preferred Stock except as provided for in the Stockholders' Agreement. Except
for transfers otherwise permitted, if any Management Stockholder or Additional
Stockholder wishes to transfer any Restricted Securities, he or she shall give
written notice of the proposed transfer to the Company and each of the remaining
Stockholders. Pursuant to the terms of the Stockholders' Agreement, stockholders
belonging to the same group of stockholders as the selling stockholders,
non-related stockholders and the Company, respectively, have the right and
option to purchase any or all of the offered securities. A Management
Stockholder or Additional Stockholder must notify the Company of any occurrence
which would cause the involuntary transfer of any Restricted Securities or
Series A Preferred Stock. The Company and the 399 Stockholders, respectively,
shall have the irrevocable right to purchase any or all of the subject
securities, subject to the terms of the Stockholders' Agreement. The 399
Stockholders shall also have the right to require the other Stockholders to
transfer their Restricted Securities, pursuant to the terms of the Stockholders'
Agreement, in order to effect a sale of the Company.
Inclusion Rights. Subject to the conditions of the Stockholders' Agreement,
if the 399 Stockholders propose to transfer Restricted Securities, as a
condition of the transfer, the buyer must include an offer to buy the same
number of shares of the same class of Restricted Securities to each of the
remaining Stockholders holding shares of the same class and series.
Repurchase of Restricted Securities. If any Management Stockholder or
Additional Management Stockholder ceases to be employed by or a director of the
Company or any of its Subsidiaries for any reason, the Company may, at its
option, elect to purchase the subject securities, pursuant to the terms of the
Stockholders' Agreement. The 399 Stockholders may purchase the Management
Securities not purchased by the Company, in accordance with the Stockholders'
Agreement.
Additional Stockholders; Additional Management Stockholders. An Additional
Stockholder is any person, other than 399 Stockholders or Management
Stockholders, to whom the Company issues Restricted Securities or Series A
Preferred Stock after the date of the Stockholders' Agreement. Additional
Management Stockholders are any additional stockholders who are employees,
officers or directors of the Company or any of its Subsidiaries. Both Additional
Stockholders and Additional Management Stockholders are required to execute and
deliver a Joinder Agreement to enter into and become a party to the
Stockholders' Agreement.
59
<PAGE> 64
REGISTRATION RIGHTS AGREEMENT
Pursuant to a registration rights agreement (the "Equity Registration
Rights Agreement"), the 399 Stockholders which hold Registrable Securities
representing at least a majority of the Registrable Securities, on a fully
diluted basis, then held by all 399 Stockholders (the "Required 399
Stockholders") are entitled to require the Company to effect an underwritten
primary or secondary public offering of common stock pursuant to an effective
registration under the Securities Act, covering the distribution of common stock
which (taken together with all similar previous public offerings) raises at
least $25.0 million of aggregate net proceeds to the Company (after
underwriters' fees, commissions and discounts and offering expenses). The
Required 399 Stockholders are entitled to request up to three Long-Form
Registrations and unlimited Short-Form Registrations (each as defined in the
Equity Registration Rights Agreement) on demand (a "Demand Registration"), in
each case at the expense of the Company.
Whenever the Company proposes (other than pursuant to a Demand Registration
or an Initial Public Offering (as defined in the Equity Registration Rights
Agreement), unless otherwise agreed by the Company) to register any of its
equities securities under the Securities Act (a "Piggyback Registration"), the
Company will give written notice to all 399 Stockholders, Management
Stockholders and Additional Stockholders (the "Piggyback Holders") of its
intention. Such notice shall offer each Piggyback Holder the opportunity to
register, on the same terms and conditions as the Company, as many Registrable
Securities as the Piggyback Holder requests. The Company will pay all
registration expenses for Piggyback Registrations. In an underwritten primary
registration on behalf of the Company, if the Company is advised that the number
of securities requested to be included is such that the success of the offering
would be adversely and materially affected, the Registrable Securities included
by the Company will be included first, the Piggyback Holders' Registrable
Securities will be included second, and any other securities proposed will be
included third, subject to the conditions of the Equity Registration Rights
Agreement. If a Piggyback Registration is an underwritten secondary registration
on behalf of the holders of the Company's securities, should the Company be
advised that the success of the offering would be adversely and materially
affected by the number of securities, any securities sold in the registration
will be included in the following order: first, the securities which holders
propose to sell; second, those securities requested by the Piggyback Holders;
and third, any other securities proposed to be included.
Each holder of Registrable Securities agrees not to effect any public sale
or distribution of Registrable Securities, or any securities convertible,
exchangeable or exercisable for or into Registrable Securities, pursuant to the
terms of the Equity Registration Rights Agreement, prior to an Initial Public
Offering, any underwritten Demand Registration, or any underwritten Piggyback
Registration in which the holder had the opportunity to participate.
Subject to the terms and conditions of the Equity Registration Rights
Agreement, the Company agrees not to effect any public sale or distribution of
its equity securities, or any securities convertible, exchangeable or
exercisable 14 days prior to, and during the 90-day period beginning on the
effective date of any underwritten Demand Registration or underwritten Piggyback
Registration in which holders of Registrable Securities are selling stockholders
and to use reasonable efforts to prevent each holder of at least 5.0% of its
equity securities from doing the same.
If requested by the underwriters for any underwritten offering of
Registrable Securities pursuant to a Demand Registration, the Company will enter
into an underwriting agreement with such underwriters for such offering. The
agreement must be satisfactory to the Required 399 Stockholders requesting the
Demand Registration and the underwriters. This agreement is expected to contain
representations and warranties by the Company and such other terms that are
generally included in agreements of this type and be reasonably satisfactory to
the Company.
OTHER TRANSACTIONS
Compensation Arrangements. Following the consummation of the Merger,
Messrs. Rush and Harris, III received bonuses of $336,500 and $297,000,
respectively.
60
<PAGE> 65
STOCK OWNERSHIP
In connection with the Merger, each outstanding share of GNI Common Stock
not subject to appraisal rights, other than the Rollover Shares, was canceled
and converted into the right to receive $7.00 per share in cash. All of the
Rollover Shares owned by Messrs. Rush and Harris, III and Ms. Ratliff were
converted into shares of Class A Common Stock of GNI, $.01 par value per share
("Class A Common Stock"), representing approximately 66% of the Class A Common
Stock of GNI after the Merger, which represents approximately 13.2% of the
overall common stock of GNI after the Merger. In addition, Messrs. Rush and
Harris, III each purchased up to 1,791.35 shares of Series A Preferred Stock (as
defined herein), and Ms. Ratliff was entitled to purchased up to 131.70 shares
of Series A Preferred Stock, at a price of $100 per share, representing in total
approximately 2.0% of the outstanding Series A Preferred Stock. Prior to the
Merger, there was no preferred stock outstanding. In addition, (i) each share of
common stock of Green I immediately outstanding prior to the consummation of the
Recapitalization was canceled and converted into one share of Class A Common
Stock or Class B Common Stock of GNI, $.01 par value per share ("Class B Common
Stock") of GNI, as the surviving corporation and (ii) each share of Series A
Preferred Stock of Green I outstanding prior to the consummation of the
Recapitalization was canceled and converted into one share of Series A Preferred
Stock of the surviving corporation. As a result of the cancellation and
conversion of the shares of Green I described above, 399 holds 181,285.60 shares
of Series A Preferred Stock, 39,121.00 shares of Class A Common Stock and
456,799.00 shares of Class B Common Stock. The Class A Common Stock and the
Class B Common Stock are referred to herein collectively as the "Common Stock."
The following table sets forth certain information with respect to the
beneficial ownership of the Series A Preferred Stock and Common Stock of the
Company as of September 15, 1998.
<TABLE>
<CAPTION>
NUMBER AND PERCENT OF SHARES
-------------------------------------------------------------------------------------
CLASS B
SERIES A CLASS A COMMON TOTAL
PREFERRED STOCK COMMON STOCK(1) STOCK(2) COMMON STOCK
-------------------- ------------------- ----------------- --------------------
(NON-VOTING) (VOTING) (NON-VOTING)
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
------------------------ ---------- ------- --------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
399 Venture Partners, Inc. ...... 181,285.60 97.99% 39,121.00 34.13% 456,799 100% 495,920.00 86.79%
Carl V Rush, Jr. ................ 1,791.35 0.97% 36,416.00 31.77% -- -- 36,416.00 6.37%
Titus H. Harris, III(3).......... 1,791.35 0.97% 36,416.00 31.77% -- -- 36,416.00 6.37%
Donna L. Ratliff................. 131.70 0.07% 2,677.00 2.33% -- -- 2,677.00 0.47%
</TABLE>
- ---------------
(1) Does not include shares of Class A Common Stock issuable upon conversion of
Class B Common Stock.
(2) Does not include shares of Class B Common Stock issuable upon conversion of
Class A Common Stock.
(3) Pursuant to the terms of the Stockholders Agreement, Mr. Harris has offered
to sell his securities to the Company and has expressed an interest in
retaining one-half of his securities following his resignation.
Series A Preferred Stock. The Company's Amended and Restated Certificate of
Incorporation (the "Amended Certificate"), which is attached as an exhibit,
provides that the Company may issue 185,000 shares of preferred stock, all of
which will be designated as 12% Series A Cumulative Compounding Preferred Stock.
The Series A Preferred Stock, which is non-voting stock, has a stated value of
$100 per share and is entitled to semiannual dividends when, as and if declared,
which dividends will be cumulative, whether or not earned or declared, and
accrue at a rate of 12%, compounding annually. The vote of a majority of the
outstanding shares of Series A Preferred Stock, voting as a separate class, is
required to (i) amend the Amended Certificate or By-Laws if such amendment would
adversely affect the relative rights and preferences of the holders of the
Series A Preferred Stock, (ii) authorize the issuance of any class of Series A
Preferred Stock which ranks senior to or pari passu with the Series A Preferred
Stock with respect to dividends upon liquidation, dissolution or winding up of
the Company, (iii) increase the number of shares of Series A Preferred Stock
authorized for issuance or (iv) issue after the effective time any shares of
Series A Preferred Stock (with certain exclusions) except for issuances of
shares of Series A Preferred Stock which have been redeemed or otherwise
acquired. Except as described in the immediately preceding sentence or as
otherwise required by law, the Series A Preferred Stock is not entitled to vote.
The Company may not pay any dividend
61
<PAGE> 66
upon (except for a dividend payable in Junior Stock, as defined below), or
redeem or otherwise acquire shares of, capital stock junior to the Series A
Preferred Stock (including the Company Common Stock) ("Junior Stock") unless all
cumulative dividends on the Series A Preferred Stock have been paid in full.
Upon liquidation, dissolution or winding up of the Company, holders of Series A
Preferred Stock are entitled to receive out of the legally available assets of
the Company, before any amount shall be paid to holders of Junior Stock, an
amount equal to $100 per share of Series A Preferred Stock, plus all accrued and
unpaid dividends to the date of final distribution. If such available assets are
insufficient to pay the holders of the outstanding shares of Series A Preferred
Stock in full, such assets, or the proceeds thereof, will be distributed ratably
among such holders. The Series A Preferred Stock is not mandatorily redeemable
prior to the earlier of July 31, 2010 and the date upon which a Sale of the
Company or a Qualifying Offering (as such terms are defined in the Stockholders'
Agreement) occurs.
Common Stock. The Amended Certificate provides that the Company may issue
3,000,000 shares of Common Stock, divided into two classes consisting of
1,500,000 shares of Class A Common Stock and 1,500,000 shares of Class B Common
Stock. The holders of the Class A Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders of
the Company. Except as required by law, the holders of Class B Common Stock have
no voting rights. Under the Amended Certificate, a holder of either class of
Common Stock may convert any or all of such holder's shares into an equal number
of shares of the other class of Common Stock.
Stock Options. On the effective date of the Merger, GNI's stock option
plans terminated, and each option to purchase GNI Common Stock outstanding
thereunder as of the Merger was converted into the right to receive cash in
exchange for the aggregate number of shares subject to such option multiplied by
$7.00, less the sum of the aggregate exercise price for all of the shares of GNI
Common Stock subject to such option, and any applicable withholding taxes,
determined without regard to any vesting schedule that might otherwise apply.
As of June 11, 1998, there were options outstanding to purchase an
aggregate of 808,950 shares of GNI Common Stock at a weighted average exercise
price of $4.76, which options were held by 22 persons. As of September 15, 1998,
there were no options outstanding to purchase shares of GNI Common Stock.
DESCRIPTION OF THE REVOLVING CREDIT FACILITY
Effective July 28, 1998, the Company entered into a revolving credit
facility with NationsBank, N.A. ("NationsBank" or the "Lender") with respect to
senior secured credit facilities (the "Senior 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 (the
"Revolving Credit Facility") 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 "WMX Letter
of Credit").
The Revolving Credit Facility has an initial term ending July 31, 2001,
with one year renewal options thereafter. The WMX Letter of Credit matures on
November 16, 1998.
The Revolving Credit Facility is available to fund: (i) the working capital
needs of the Company, (ii) capital expenditures and (iii) permitted
acquisitions. Unless a Default or an Event of Default (each as defined in the
Revolving Credit Facility) shall have occurred and be continuing, availability
under the Revolving Credit Facility is calculated based on a borrowing base
formula tied to (i) 85% of eligible accounts receivable plus (ii) under certain
circumstances, an amount based on the Company's fixed assets. As of September
15, 1998, the Company had approximately $8.0 of available credit under the
Revolving Credit Facility.
The borrowers under the Revolving Credit Facility are GNI and its
Subsidiaries. The Revolving Credit Facility is secured by substantially all of
GNI's assets, including but not limited to GNI's accounts receivable,
inventories, equipment, real property, general intangibles and stock of the
Subsidiaries of GNI.
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<PAGE> 67
The Company was required to pay a closing fee to NationsBank in the amount
of $120,000 of which $40,000 has already been paid. The Company may repay and
reborrow the Revolving Loans in whole or in part at any time without penalty,
subject to reimbursement of the Lender's breakage and redeployment costs in the
case of repayment of LIBOR Loans (as defined in the Revolving Credit Facility).
If the Company prepays the Revolving Loans in certain circumstances it shall pay
a termination fee of 1%.
Until the Company provides the Lender with financial statements for the
quarter ending September 30, 1998, borrowings under the Revolving Loans bear
interest, at the option of the Company, at either (i) the Lender's Base Rate
(the higher of (a) the Lender's Prime Rate or (b) the Federal Funds Rate plus
0.50%) 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 Company may select interest
periods of one, two, three or six months for LIBOR Loans, subject to
availability.
The Revolving Credit Facility requires the Company to meet certain
customary financial tests. The Revolving Credit Facility also contains certain
covenants which among other things will limit the payment of dividends, stock
repurchases, the incurrence of additional indebtedness, capital expenditures,
guarantees and liens, the making of loans or investments, transactions with
affiliates, asset sales, acquisitions, mergers and consolidations, and other
matters customarily restricted in such agreements.
The Revolving Credit Facility contains customary events of default,
including without limitation, payment defaults, covenant defaults, breaches of
material representations and warranties, cross-defaults to certain other
indebtedness, certain events of bankruptcy and insolvency, material judgments,
ERISA, failure of any guaranty or security document supporting the Revolving
Credit Facility to be in full force and effect, incurrence of any liability or
potential liability under any employee benefit plan that would have a material
adverse effect on the Company and change of control of the Company.
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<PAGE> 68
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The terms of the Exchange Notes are identical in all material respects to
those of the Restricted Notes, except for certain transfer restrictions and
registration rights relating to the Restricted Notes and except for certain
liquidated damage provisions related to such registration rights. The Restricted
Notes were issued, and the Exchange Notes will be issued, pursuant to an
Indenture (the "Indenture") among the Company, the Guarantors and United States
Trust Company of New York, as trustee (the "Trustee"). The terms of the Exchange
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), as in effect on the date of the Indenture. The Exchange Notes
are subject to all such terms, and holders of Exchange Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
proposed form of Indenture and Registration Rights Agreement are available as
set forth below under "-- Available Information." The definitions of certain
terms used in the following summary are set forth below under "-- Certain
Definitions." For purposes of this summary, the term "Company" refers only to
GNI and not to any of its subsidiaries.
The Exchange Notes will be general senior unsecured obligations of the
Company ranking pari passu in right of payment with all senior Indebtedness of
the Company issued in the future, if any. However, the Company and its
Subsidiaries are parties to the Revolving Credit Facility and all borrowings
under the Revolving Credit Facility are secured by a first priority Lien on
substantially all of the assets of the Company and its Subsidiaries. As of June
30, 1998, on a pro forma basis after giving effect to the Recapitalization,
there would have been no borrowings outstanding under the Revolving Credit
Facility and, after giving additional effect to approximately $0.5 million of
outstanding letters of credit, there would have been up to $11.5 million of
borrowings available thereunder, subject to pending asset appraisals. The
Indenture will permit additional borrowings under the Revolving Credit Facility
in the future. See "Risk Factors -- Secured Indebtedness; Effective
Subordination."
A substantial portion of the operations of the Company are conducted
through its Subsidiaries and, therefore, the Company is dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the Exchange Notes. The Exchange Notes will be effectively subordinated to
all Indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of the Company's Subsidiaries who are not Guarantors. Any
right of the Company to receive assets of any of its Subsidiaries upon the
latter's liquidation or reorganization (and the consequent right of the holders
of the Exchange Notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such Subsidiary, in which
case the claims of the Company would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of such Subsidiary senior to that
held by the Company. See "Risk Factors -- Holding Company Structure; Effect of
Asset Encumbrances."
As of the date of the Indenture, all of the Company's Subsidiaries are
Restricted Subsidiaries and Guarantors. See "-- Subsidiary Guarantees." However,
under certain circumstances, the Company will be able to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will
not be Guarantors and will not be subject to many of the restrictive covenants
set forth in the Indenture.
MATURITY, INTEREST AND PRINCIPAL
The Exchange Notes will be general senior unsecured obligations of the
Company, limited in aggregate principal amount to $75.0 million, and will mature
on July 15, 2005. Interest on the Exchange Notes will accrue at the rate of
10 7/8% per annum and will be payable semiannually in arrears on January 15 and
July 15, commencing on January 15, 1999 to holders of record on the immediately
preceding January 1 and July 1. Interest on the Exchange Notes will accrue from
the most recent date to which interest has been paid or, if no
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interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Exchange Notes will be payable
at the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, payment of interest
may be made by check mailed to the holders of the Exchange Notes at their
respective addresses set forth in the register of holders of Exchange Notes;
provided that all payments of principal, premium, if any, interest with respect
to Exchange Notes the holders of which have given wire transfer instructions to
the Company will be required to be made by wire transfer of immediately
available funds to the accounts specified by the holders thereof. Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose. The Exchange
Notes will be issued in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
Except as described below, the Exchange Notes will not be redeemable at the
Company's option prior to July 15, 2003. Thereafter, the Exchange Notes will be
subject to redemption at any time at the option of the Company, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on July 15 of the years listed
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003..................................................... 105.4375%
2004 and thereafter...................................... 100.0000%
</TABLE>
Notwithstanding the foregoing, any time prior to July 23, 2001, the Company
may redeem up to 25% of the aggregate principal amount of Exchange Notes
originally issued under the Indenture at a redemption price of 110.875% of the
principal amount thereof, plus accrued and unpaid interest thereon and
Liquidated Damages, if any, to the redemption date, with the net cash proceeds
of one or more Public Equity Offerings (as defined in the Indenture); provided
that at least 75% of the aggregate principal amount of Exchange Notes originally
issued under the Indenture remains outstanding immediately after the occurrence
of such redemption (excluding Exchange Notes held by the Company and its
Subsidiaries); and provided, further, that such redemption shall occur within 90
days of the date of the closing of such Public Equity Offering.
If less than all of the Exchange Notes are to be redeemed at any time,
selection of Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchange Notes are listed, or, if the Exchange Notes are
not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided that no Exchange Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of Exchange Notes to be redeemed at its registered address. Notices
of redemption may not be conditional. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Note. Exchange Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Exchange Notes or portions of them
called for redemption.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Additional Indebtedness and Issuance of Preferred Stock. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of
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preferred stock; provided, however, that the Company and its Restricted
Subsidiaries may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.0 to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if additional Indebtedness had
been incurred, or the Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant does not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and its Subsidiaries of Indebtedness
under Credit Facilities; provided that the aggregate principal amount of
all Indebtedness outstanding under all Credit Facilities after giving
effect to such incurrence does not exceed an amount equal to $12.0 million
(including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any other Indebtedness incurred pursuant to this
clause (i));
(ii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Exchange Notes and by the Guarantors of Indebtedness represented by the
Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of (A) Acquired Debt or (B) Indebtedness (including Capital
Lease Obligations) for the purpose of financing all or any part of the
lease, purchase price or cost of construction or improvement of any
property (real or personal) or other assets that are used or useful in the
business of the Company or such Restricted Subsidiary (whether through the
direct purchase of assets or the Capital Stock of any Person owning such
assets and whether such Indebtedness is owed to the seller or Person
carrying out such construction or improvement or to any third party), in an
aggregate principal amount at the date of such incurrence (including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (iv)) not to exceed
an amount equal to 5.0% of Total Assets; provided that, in the case of
Indebtedness exceeding $2.0 million incurred pursuant to this clause (iv),
such Indebtedness exists at the date of such purchase or transaction or is
created within 45 days thereafter;
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
(other than intercompany Indebtedness) that was permitted by the Indenture
to be incurred;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that (i) if the
Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Exchange Notes and (ii)(A) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than the Company or a Restricted Subsidiary thereof
and (B) any sale or other transfer of any such Indebtedness to a Person
that is not either the Company or a Restricted Subsidiary thereof shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (vi);
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred (A) for the purpose
of fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding or (B) for the purpose of fixing or hedging currency exchange
rate risk incurred in the ordinary course of business;
(viii) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
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(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness under letters of credit issued in the ordinary
course of business and consistent with past practices, in respect of
workers' compensation claims or self-insurance or regulatory requirements
applicable to the Company or any of its Restricted Subsidiaries;
(x) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (x); and
(xi) the incurrence by the Company of additional Indebtedness in an
aggregate principal amount at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (xi), not to exceed $5.0
million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xi) above or is
entitled to be incurred pursuant to the Fixed Charge Coverage Ratio test
contained in the first paragraph of this covenant, the Company shall, in its
sole discretion, classify such item of Indebtedness in any manner that complies
with this covenant and such item of Indebtedness will be treated as having been
incurred pursuant to only one of such clauses or pursuant to the first paragraph
hereof. Accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, and the payment of dividends on Disqualified
Stock in the form of additional shares of the same class of Disqualified Stock
will not be deemed to be an incurrence of Indebtedness or an issuance of
Disqualified Stock for purposes of this covenant; provided, in each such case,
that the amount thereof is included in Fixed Charges of the Company as accrued.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted Subsidiaries'
Equity Interests (including, without limitation, any payment in connection with
any merger or consolidation involving the Company or any of its Restricted
Subsidiaries) or to the direct or indirect holders of the Company's or any of
its Restricted Subsidiaries' Equity Interests in their capacity as such (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or to the Company or a Subsidiary of the
Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Restricted Subsidiary of the
Company); (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Pari Passu Indebtedness
(other than Exchange Notes or Indebtedness under Credit Facilities), except a
payment of interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the covenant described
above under the caption "-- Limitation on Additional Indebtedness and
Issuance of Preferred Stock;"
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv) and (vi) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for
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the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company since the date of the Indenture as a contribution to its
common equity capital or from the issue or sale of Equity Interests of the
Company (other than Disqualified Stock) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company), plus (iii) to the extent that any Restricted Investment that
was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment, plus (iv)
100% of any dividends received by the Company or a Wholly Owned Restricted
Subsidiary that is a Guarantor after the date of the Indenture from an
Unrestricted Subsidiary of the Company, to the extent that such dividends
were not otherwise included in Consolidated Net Income of the Company for
such period, plus (v) to the extent that any Unrestricted Subsidiary is
redesignated as a Restricted Subsidiary after the date of the Indenture,
the lesser of (A) the fair market value of the Company's Investment in such
Subsidiary as of the date of such redesignation or (B) such fair market
value as of the date on which such Subsidiary was originally designated as
an Unrestricted Subsidiary; plus (vi) $3.0 million.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Pari Passu Indebtedness or subordinated Indebtedness or
Equity Interests of the Company in exchange for, or out of the net cash proceeds
of the substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of or a capital contribution to the Company (other
than any Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (c) (ii) of the
preceding paragraph; (iii) the defeasance, redemption, repurchase or other
acquisition of Pari Passu Indebtedness or subordinated Indebtedness made by an
exchange for, or with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted
Subsidiary of the Company to the holders of its Equity Interests on a pro rata
basis; (v) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Subsidiary of the Company
held by any Management Investor pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the Indenture;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $750,000 in any
twelve-month period (which amount shall be increased by the amount of any net
cash proceeds received from the sale after the date of the Indenture of Equity
Interests (other than Disqualified Stock) to any Management Investor that have
not otherwise been applied to the payment of (x) Restricted Payments pursuant to
the terms of clause (c) of the preceding paragraph or (y) the aggregate price
for all repurchased, redeemed, acquired or retired Equity Interests pursuant to
the terms of this clause (v) exceeding $750,000 in any twelve month period) and
no Default or Event of Default shall have occurred and be continuing immediately
after such transaction; and (vi) the purchase of Equity Interests in the Company
pursuant to the Merger Agreement.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business operated on the date of the Indenture by any
Guarantor existing on the date of the Indenture be transferred to or held by an
Unrestricted Subsidiary. For purposes of making such determination, all
outstanding Investments by the Company and its Restricted Subsidiaries (except
to the extent repaid in cash) in the Subsidiary so designated will be deemed to
be Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such
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designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined in good
faith by the Board of Directors of the Company whose resolution with respect
thereto shall be delivered to the Trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value exceeds $3.0 million. Not
later than the date of making any Restricted Payment, the Company shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Limitations on Restricted Payments" were computed, together with a
copy of any fairness opinion or appraisal required by the Indenture.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign or convey any
right to receive income therefrom, except Permitted Liens.
Limitation on Transactions with Affiliates. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is
on terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable transaction
by the Company or such Restricted Subsidiary with an unrelated Person and (ii)
the Company delivers to the Trustee (a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $1.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0 million, an
opinion as to the fairness to the holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment banking
firm of national standing. Notwithstanding the foregoing, the following items
shall not be deemed to be Affiliate Transactions: (i) any employment agreement
or employee benefit plan entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business of the Company or such
Subsidiary, (ii) transactions between or among the Company and/or its Restricted
Subsidiaries, (iii) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company, (iv) Restricted Payments that are permitted
by the provisions of the Indenture described above under the caption
"-- Limitation on Restricted Payments," (v) the payment of all fees and expenses
related to the Merger, (vi) Specified Affiliate Payments in an aggregate amount
not to exceed $200,000 in any 12 month period; and (vii) the existence of, or
the performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any stockholders agreement (including any
registration rights agreement or purchase agreement related thereto) to which it
is a party as of the date of the Indenture, any amendments thereto and any
similar agreements which it may enter into thereafter; provided, however, that
the existence of, or the performance by the Company or any of its Restricted
Subsidiaries of obligations under any such future amendment to any such existing
agreement or under any such similar agreement entered into after the date of the
Indenture shall be no more disadvantageous to the holders in any material
respect than those in effect on the date of the Indenture.
Limitation on Certain Asset Sales. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, consummate
an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case
may be) receives consideration at the time of such Asset Sale at least equal to
the fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers'
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Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 80% of the consideration
therefor received by the Company or such Restricted Subsidiary is in the form of
cash or Cash Equivalents; provided that the amount of (x) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet), of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Exchange
Notes or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any securities, notes
or other obligations received by the Company or any such Restricted Subsidiary
from such transferee that are contemporaneously (subject to ordinary settlement
periods) converted by the Company or such Restricted Subsidiary into cash (to
the extent of the cash received), shall be deemed to be cash for purposes of
this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to invest in
properties and assets that will be used or useful in a Permitted Business, (b)
to the acquisition of a controlling interest in another business, the making of
a capital expenditure or the acquisition of other assets, in each case, in a
Permitted Business or (c) to repay Indebtedness under a Credit Facility. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Available Asset
Sale Proceeds." When the aggregate amount of Available Asset Sale Proceeds
exceeds $5.0 million, the Company will be required to make an offer to all
holders of Exchange Notes (an "Excess Proceeds Offer") to purchase the maximum
principal amount of Exchange Notes that may be purchased out of the Available
Asset Sale Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
purchase, in accordance with the procedures set forth in the Indenture. To the
extent that any Available Asset Sale Proceeds remain after consummation of an
Excess Proceeds Offer, the Company may use such Available Asset Sale Proceeds
for general corporate purposes. If the aggregate principal amount of Exchange
Notes tendered into such Excess Proceeds Offer surrendered by holders thereof
exceeds the amount of Available Asset Sale Proceeds, the Trustee shall select
the Exchange Notes to be purchased on a pro rata basis. Upon completion of such
offer to purchase, the amount of Available Asset Sale Proceeds shall be reset at
zero.
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Restricted Subsidiaries. The Indenture provides that the Company (i) will not,
and will not permit any Wholly Owned Restricted Subsidiary of the Company to,
transfer, convey, sell, lease or otherwise dispose of (other than by way of a
Lien described under clause (i) of the definition "Permitted Liens") any Equity
Interests in any Wholly Owned Restricted Subsidiary of the Company to any Person
(other than the Company or a Wholly Owned Restricted Subsidiary of the Company),
unless (a) such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in such Wholly Owned Restricted Subsidiary and (b) the cash
Net Proceeds from such transfer, conveyance, sale, lease or other disposition
are applied in accordance with the covenant described above under the caption
"-- Limitation on Certain Asset Sales," and (ii) will not permit any Wholly
Owned Restricted Subsidiary of the Company to issue any of its Equity Interests
(other than, if necessary, shares of its Capital Stock constituting directors'
qualifying shares) to any Person other than to the Company or a Wholly Owned
Restricted Subsidiary of the Company.
Limitation on Sale and Leaseback Transactions. The Indentures provides that
the Company will not, and will not permit any of its Restricted Subsidiaries to,
enter into any sale and leaseback transaction; provided that the Company may
enter into a sale and leaseback transaction if (i) the Company could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt relating to
such sale and leaseback transaction pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-- Limitation on Additional Indebtedness and Issuance of Preferred
Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the
covenant described above under the caption "-- Limitation on Liens," (ii) the
gross cash proceeds of such sale and leaseback transaction are at least equal to
the fair market value (as determined in good faith by the Board of Directors and
set forth in an Officers' Certificate delivered to the Trustee) of the property
that is the subject of such sale and leaseback transaction and (iii) the
transfer of assets in such sale and leaseback transaction is permitted by, and
the Company applies
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the proceeds of such transaction in compliance with, the covenant described
above under the caption "-- Limitation on Certain Asset Sales."
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a)
pay dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay any
Indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii)
make loans or advances to the Company or any of its Restricted Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the provisions or
pledge agreements (or similar agreements) restricting transfers of the assets
secured thereby, (c) the Revolving Credit Facility as in effect as of the date
of the Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refunds, replacements or refinancings thereof, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refunds, replacement or refinancings are no more restrictive, taken
as a whole, with respect to such dividend and other payment restrictions than
those contained in the Revolving Credit Facility as in effect on the date of the
Indenture, (d) the Indenture, the Subsidiary Guarantees and the Exchange Notes,
(e) applicable law, (f) any instrument governing Indebtedness or Capital Stock
of a Person acquired by the Company or any of its Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (g)
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (h) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, (i) any agreement for the sale of a Subsidiary that restricts
distributions by that Subsidiary pending its sale, (j) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive, taken
as a whole, than those contained in the agreements governing the Indebtedness
being refinanced, (k) secured Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the caption
"-- Limitation on Liens" that limits the right of the debtor to dispose of the
assets securing such Indebtedness, (l) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business and
(m) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
Payments for Consent. The Indenture provides that neither the Company nor
any of its Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any holder
of any Exchange Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or the Exchange
Notes unless such consideration is offered to be paid or is paid to all holders
of the Exchange Notes that consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
Limitation on Business Activities. The Company is not permitted, and will
not permit any of its Subsidiaries to, engage in any business other than
Permitted Businesses, except to such extent as would not be material to the
Company and its Subsidiaries taken as a whole.
Additional Subsidiary Guarantees. The Indenture provides that if the
Company or any of its Restricted Subsidiaries shall acquire or create another
Restricted Subsidiary after the date of the Indenture, then such newly acquired
or created Restricted Subsidiary shall become a Guarantor and execute a
supplemental indenture and deliver an Opinion of Counsel, in accordance with the
terms of the Indenture.
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CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, each holder of Exchange Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such holder's Exchange Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the principal amount thereof plus accrued
and unpaid interest thereon to the date of purchase (the "Change of Control
Payment"). Within 15 days following any Change of Control, the Company will mail
a notice to each holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Exchange Notes on
the date specified in such notice, which date shall be no earlier than 30 days
and no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of any
applicable securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Exchange
Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Exchange Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Exchange Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Exchange Notes
or portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each holder of Exchange Notes so tendered the Change of Control
Payment for such Exchange Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each holder a new Note equal
in principal amount to any unpurchased portion of the Exchange Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders of the Exchange Notes to require that the
Company repurchase or redeem the Exchange Notes in the event of a takeover,
recapitalization or similar transaction.
The Company's other senior indebtedness contains prohibitions of certain
events that would constitute a Change of Control. See "Description of the
Revolving Credit Facility." In addition, the exercise by the holders of Exchange
Notes of their right to require the Company to repurchase the Exchange Notes
could cause a default under such other senior indebtedness, even if the Change
of Control itself does not, due to the financial effect of such repurchases on
the Company. Finally, the Company's ability to pay cash to the holders of
Exchange Notes upon a repurchase may be limited by the Company's then existing
financial resources. See "Risk Factors -- Change of Control."
The Company is not required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the Company and
purchases all Exchange Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a holder of Exchange Notes to require the
Company to repurchase such Exchange Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
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MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Registration Rights Agreement, the Exchange Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee; (iii) immediately after such transaction no Default or Event of
Default exists; and (iv) except in the case of the Merger or a merger of the
Company with or into a Wholly Owned Restricted Subsidiary of the Company, the
Company or the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made, will be permitted,
at the time of such transaction and after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable four-quarter
period, to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption "-- Limitation on Additional Indebtedness and
Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Exchange Notes is jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Guarantors. The
obligations of each Guarantor under its Subsidiary Guarantee is limited so as
not to constitute a fraudulent conveyance under applicable law. See, however,
"Risk Factors -- Fraudulent Conveyance Considerations."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Exchange Notes, the Indenture and the Registration Rights
Agreement; (ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; and (iii) the Company would be permitted by virtue
of the Company's pro forma Fixed Charge Coverage Ratio, immediately after giving
effect to such transaction, to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant
described above under the caption "-- Certain Covenant -- Limitation on
Additional Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "-- Certain
Covenants -- Limitation on Certain Asset Sales."
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, with
respect to, the Exchange Notes; (ii) default in payment when
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due of the principal of or premium, if any, on the Exchange Notes; (iii) failure
by the Company or any of its Subsidiaries to comply with the provisions
described above under the captions "-- Change of Control Offer," "-- Certain
Covenants -- Limitation on Certain Asset Sales," "-- Certain
Covenants -- Limitation on Restricted Payments" or "-- Certain
Covenants -- Limitation on Additional Indebtedness and Issuance of Preferred
Stock;" (iv) failure by the Company or any of its Subsidiaries for 60 days after
notice to comply with any of its other agreements in the Indenture or the
Exchange Notes; (v) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or
any of its Restricted Subsidiaries to pay final non-appealable judgments
aggregating in excess of $5.0 million, which judgments are not paid, discharged
or stayed for a period of 60 days; (vii) except as permitted by the Indenture,
any Subsidiary Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii)
certain events of bankruptcy or insolvency with respect to the Company or any of
its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Exchange
Notes may declare all the Exchange Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Restricted Subsidiary that is a Significant Subsidiary or any group of
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding Exchange Notes will become due and payable without further
action or notice. Holders of the Exchange Notes may not enforce the Indenture or
the Exchange Notes except as provided in the Indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
Exchange Notes may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from holders of the Exchange Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
The holders of a majority in aggregate principal amount of the Exchange
Notes then outstanding by notice to the Trustee may on behalf of the holders of
all of the Exchange Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Exchange Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
and any Guarantor's obligations discharged with respect to the outstanding
Exchange Notes and any Subsidiary Guarantees ("Legal Defeasance") and cure all
the then existing Events of Default except for (i) the rights of holders of
outstanding Exchange Notes to receive payments in respect of the principal of,
premium, if any, and interest and Liquidated Damages, if any, on such Exchange
Notes when such payments are due from the trust referred to below, (ii) the
Company's obligations with respect to the Exchange Notes concerning issuing
temporary Exchange Notes, registration of Exchange Notes, mutilated, destroyed,
lost or stolen Exchange Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights,
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powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith, and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture and the Subsidiary Guarantees
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Exchange Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Exchange Notes and the Subsidiary Guarantees.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Exchange Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages, if any, on the outstanding Exchange Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Exchange Notes are being defeased to maturity
or to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that subject to customary
assumptions and exclusions (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that subject to customary assumptions and exclusions, the holders of the
outstanding Exchange Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that subject to customary assumptions and exclusions the holders of
the outstanding Exchange Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit and the
grant of any Lien securing such borrowing) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound; (vi) the Company must have delivered to the
Trustee an opinion of counsel subject to customary assumptions and exclusions to
the effect that after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the holders of
Exchange Notes over the other creditors of the Company with the intent of
defeating, hindering, delaying or defrauding creditors of the Company or others;
and (viii) the Company must deliver to the Trustee an Officers' Certificate and
an opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Exchange
Notes to be redeemed.
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The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Exchange Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Exchange Notes then
outstanding (including, without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, Exchange Notes), and any
existing default or compliance with any provision of the Indenture or the
Exchange Notes may be waived with the consent of the holders of a majority in
principal amount of the then outstanding Exchange Notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Exchange Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Exchange Notes held by a non-consenting holder): (i) reduce
the principal amount of Exchange Notes whose holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Note or alter the provisions with respect to the
redemption of the Exchange Notes (other than provisions relating to the
covenants described above under the captions "-- Certain Covenants -- Limitation
on Certain Asset Sales" and "Change of Control Offer"), (iii) reduce the rate of
or change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Exchange Notes (except a rescission of acceleration of the Exchange Notes
by the holders of at least a majority in aggregate principal amount of the
Exchange Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Exchange Notes, (vi) make any change in the provisions of the Indenture relating
to waivers of past Defaults or the rights of holders of Exchange Notes to
receive payments of principal of or premium, if any, or interest on the Exchange
Notes, (vii) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the captions
"-- Certain Covenants -- Limitation on Certain Asset Sales" and "Change of
Control Offer") or (viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any holder of
Exchange Notes, the Company and the Trustee may amend or supplement the
Indenture or the Exchange Notes to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Exchange Notes in addition to or in place of
certificated Exchange Notes, to provide for the assumption of the Company's or
any Guarantor's obligations to holders of Exchange Notes in the case of a merger
or consolidation or sale of all or substantially all of the Company's assets, to
release any Subsidiary Guarantee in accordance with the provisions of the
Indenture, to provide for additional Guarantors, to make any change that would
provide any additional rights or benefits to the holders of Exchange Notes or
that does not adversely affect the legal rights under the Indenture of any such
holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
REPORTS TO HOLDERS
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Exchange Notes are outstanding, the Company will furnish to the
holders of Exchange Notes and to securities analysts and prospective investors
(i) all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company, if any) and, with respect to the
annual information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company
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were required to file such reports, in each case within the time periods
specified in the Commission's rules and regulations. In addition, following the
consummation of the Exchange Offer contemplated by the Registration Rights
Agreement, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified in
the Commission's rules and regulations (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and the Guarantors
have agreed that, for so long as any Exchange Notes remain outstanding, they
will furnish to the holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder or Affiliate of
the Company, as such, shall have any liability for any obligations of the
Company under the Exchange Notes, the Indenture or the Registration Rights
Agreement or for any claim based on, in respect of, or by reason of, such
obligations or their creation. No director, officer, employee, incorporator or
stockholder or Affiliate of any of the Guarantors, as such, shall have any
liability for any obligations of the Guarantors under the Subsidiary Guarantees,
the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of Exchange Notes and Subsidiary
Guarantees by accepting a Note and a Subsidiary Guarantee waives and releases
all such liabilities. The waiver and release are part of the consideration for
issuance of the Exchange Notes and any Subsidiary Guarantees. Such waiver may
not be effective to waive liabilities under the federal securities laws and it
is the view of the Commission that such a waiver is against public policy.
THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The holders of a majority in principal amount of the then outstanding
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Exchange Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
AVAILABLE INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to The GNI Group, Inc.,
P.O. Box 220, 2525 Battleground Road, Deer Park, Texas 77536, Attention: Chief
Financial Officer.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation
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of, such other Person merging with or into or becoming a Restricted Subsidiary
of such specified Person, and (ii) Indebtedness secured by a Lien encumbering
any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "-- Change of Control Offer" and/or
the provisions described above under the caption "-- Merger, Consolidation or
Sale of Assets" and not by the provisions of the Indenture described above under
the caption "-- Certain Covenants -- Limitation on Asset Sales"), and (ii) the
issue or sale by the Company or any of its Restricted Subsidiaries of Equity
Interests of any of the Company's Subsidiaries (other than director's qualifying
shares), in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following items shall not be deemed
to be Asset Sales: (i) a transfer of assets by the Company to a Restricted
Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, and
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption "-- Certain Covenants -- Limitation on Restricted Payments."
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and Eurodollar time deposits with maturities of one year or less from the date
of acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any lender party to the Revolving
Credit Facility or with any domestic commercial bank having capital and surplus
in excess of $300 million, (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (ii)
and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having the
highest rating obtainable from Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") and in each case maturing within one year
after the date of acquisition, (vi) investment funds at least 95% of the assets
of which constitute Cash Equivalents of the kinds described in clauses (i)-(v)
of this definition and (vii) readily marketable direct obligations issued
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by any state of the United States of America or any political subdivision
thereof having one of the two highest rating categories obtainable from either
Moody's or S&P.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than a Principal or a Permitted Transferee of a
Principal (as defined below), (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Permitted Transferees, becomes the "beneficial owner" (as
such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of the
Company (measured by voting power rather than number of shares), (iv) the
consummation of the first transaction (including, without limitation, any merger
or consolidation) the result of which is that any "person" (as defined above)
becomes the "beneficial owner" (as defined above), directly or indirectly, of at
least 40% of, as well as more, of the Voting Stock of the Company (measured by
voting power rather than number of shares) than is at the time "beneficially
owned" (as defined above) by the Principals and their Permitted Transferees in
the aggregate or (v) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors.
"Citicorp" means Citicorp, a Delaware corporation.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Subsidiary of the referent Person
shall be added to Consolidated Net Income to compute Consolidated Cash Flow only
to the extent that a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount
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of dividends or distributions paid in cash to the referent Person or a Wholly
Owned Restricted Subsidiary thereof that is a Guarantor, (ii) the Net Income of
any Subsidiary shall be excluded to the extent that the declaration or payment
of dividends or similar distributions by that Subsidiary of that Net Income is
not at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) the Net Income (but not loss) of any Unrestricted
Subsidiary shall be excluded, whether or not distributed to the Company or one
of its Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors immediately following the Merger on the date of the Indenture or (ii)
was nominated for election or elected to such Board of Directors with the
approval of a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Revolving Credit Facility and the
WMX Letter of Credit) or commercial paper facilities with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
Indebtedness under the Revolving Credit Facility and the WMX Letter of Credit
outstanding on the date on which Exchange Notes are first issued and
authenticated under the Indenture shall be deemed to have been incurred on such
date in reliance on the exceptions provided by clauses (i) and (ii),
respectively, of the definition of Permitted Debt.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Exchange Notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "-- Certain Covenants -- Limitation on Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means up to $1.5 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries (other
than Indebtedness under the Revolving Credit Facility) in existence on the date
of the Indenture, represented by unmatured reimbursement obligations in respect
of the WMX Letter of Credit.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or
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bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest of such Person and its
Restricted Subsidiaries that was capitalized during such period, and (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon) and (iv) the product of (a) all dividend payments,
whether or not in cash, on any series of preferred stock of such Person or any
of its Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company (other than Disqualified
Stock) or to the Company or a Restricted Subsidiary of the Company, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referent Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees, prepays or redeems any Indebtedness (other than revolving credit
borrowings) or issues or redeems preferred stock subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee, prepayment or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) Investments,
acquisitions, dispositions, mergers and consolidations that have been made by
the Company or any of its Restricted Subsidiaries, and including any related
financing transactions, during the four-quarter reference period or subsequent
to such reference period and on or prior to the Calculation Date shall be deemed
to have occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture. All ratios and
computations based on GAAP contained in the Indenture shall be computed in
conformity with GAAP as in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Guarantors" means each of (i) Gulf Nuclear of Louisiana, Inc., a Delaware
corporation, GNI Chemicals Corporation, a Delaware corporation, Disposal
Systems, Inc., a Delaware corporation, Resource Transportation Services, Inc., a
Delaware corporation, and Disposal Systems of Corpus Christi, Inc., a Delaware
corporation, and (ii) any other subsidiary that executes a Subsidiary Guarantee
in accordance with the provisions of the Indenture, and their respective
successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
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"Indebtedness" means, with respect to any Person (without duplication), (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property, which purchase price
is due more than three months after the date of placing such property in service
or taking delivery thereof, or representing any Hedging Obligations, except any
such balance that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, Indebtedness under clause (i) of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, (iii) to the extent not otherwise included, the
Guarantee by such Person of any Indebtedness under clause (i) of any other
Person; provided, however, that Indebtedness shall not include (a) obligations
of the Company or any of its Restricted Subsidiaries arising from agreements of
the Company or a Restricted Subsidiary providing for indemnification, adjustment
of purchase price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Subsidiary, other
than guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of financing
such acquisition; provided, however, that (x) such obligations are not reflected
on the balance sheet of the Company or any Restricted Subsidiary (contingent
obligations referred to in a footnote to financial statements and not otherwise
reflected on the balance sheet will not be deemed to be reflected on such
balance sheet for purposes of this clause (x)) and (y) the maximum assumable
liability in respect of all such obligations shall at no time exceed the gross
proceeds including noncash proceeds (the fair market value of such noncash
proceeds being measured at the time received and without giving effect to any
subsequent changes in value) actually received by the Company and its Restricted
Subsidiaries in connection with such disposition; or (b) obligations in respect
of performance and surety bonds and completion guarantees provided by the
Company or any Restricted Subsidiary in the ordinary course of business. The
amount of any Indebtedness outstanding as of any date shall be (i) the
accredited value thereof, in the case of any Indebtedness that does not require
current payments of interest, and (ii) the principal amount thereof in the case
of any other Indebtedness. The amount of any Indebtedness outstanding as of any
date shall be (i) the accreted value thereof, in the case of any Indebtedness
issued with original issue discount, and (ii) the principal amount thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "-- Certain
Covenants -- Limitation on Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement);
provided that in no event shall an operating lease entered into by the Company
in the ordinary course of business constitute a Lien.
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"Management Investors" means the officers and employees of the Company or a
Subsidiary of the Company who acquire Equity Interests of the Company on or
after the date of the Indenture and any of their Permitted Transferees.
"Merger" means the merger and the transactions ancillary thereto on the
date of the Indenture pursuant to the Merger Agreement as described in the
Prospectus, dated July 23, 1998 pertaining to the Exchange Notes.
"Merger Agreement" means that certain agreement and plan of merger, dated
as of February 12, 1998 between the Company and Green I Acquisition Corp. as
amended by the First Amendment to Agreement and Plan of Merger Between Green I
Acquisition Corp. and the Company, dated as of June 17, 1998.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than revolving credit Indebtedness) secured by a Lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Exchange Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Pari Passu Indebtedness" means any Indebtedness of the Company that ranks
pari passu in right of payment (whether secured or unsecured) with the Exchange
Notes.
"Permitted Business" means any business of the Company and its Restricted
Subsidiaries as of the date of the Indenture, and any other business reasonably
related thereto.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary that is a Guarantor; (b) any Investment in
Cash Equivalents; (c) any Investment by the Company or any Subsidiary of the
Company in a Person if as a result of such Investment (i) such Person becomes a
Wholly Owned Restricted Subsidiary and a Guarantor or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company that is a Guarantor; (d) any
Investment
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made as a result of the receipt of non-cash consideration from an Asset Sale
that was made pursuant to and in compliance with the covenant described above
under the caption "-- Certain Covenants -- Limitation on Certain Asset Sales;"
or in connection with any other disposition of assets not constituting an Asset
Sale; (e) any acquisition of assets solely in exchange for the issuance of
Equity Interests of the Company; and (f) loans or advances to employees (or
guarantees of third party loans to employees) in the ordinary course of
business; (g) stock obligations or securities received in satisfaction of
judgments or settlement of debts in the ordinary course of business; (h)
receivables owing to the Company or any Restricted Subsidiary, if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms (including such concessionary terms as the
Company or such Restricted Subsidiary deems reasonable); (i) an Investment
existing on the date of the Indenture; (j) Hedging Obligations otherwise
permitted under the Indenture; (k) any transaction to the extent it constitutes
an Investment that is permitted and made in accordance with the provisions of
clause (vi) of the covenant described under the caption "-- Limitation on
Transactions with Affiliates;" and (l) additional Investments having an
aggregate fair market value, taken together with all other Investments made
pursuant to this clause (l) that are at that time outstanding, not to exceed
5.0% of Total Assets at the time of such Investment (with the fair market value
of each Investment being measured at the time made and without giving effect to
subsequent changes in value).
"Permitted Liens" means (i) Liens on assets (including Subsidiary Capital
Stock and inventory) securing Indebtedness permitted by clause (i) of the second
paragraph of the covenant entitled "-- Certain Covenants -- Limitation on
Additional Indebtedness and Issuance of Preferred Stock;" (ii) Liens in favor of
the Company or any Restricted Subsidiary; (iii) Liens to secure the performance
of bids, statutory obligations, surety or appeal bonds, performance bonds or
other obligations of a like nature incurred in the ordinary course of business;
(iv) Liens on property of a Person existing at the time such Person is merged
into or consolidated with the Company or any Restricted Subsidiary of the
Company; provided that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with the Company or a Restricted
Subsidiary, as the case may be; (v) Liens on property existing at the time of
acquisition thereof by the Company or any Restricted Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the covenant
entitled "-- Certain Covenants -- Limitation on Additional Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (vi) Liens existing on the date of the Indenture; (vii) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (viii) Liens incurred in the ordinary course of business of
the Company or any Subsidiary of the Company with respect to obligations that do
not exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Subsidiary; (ix) Liens on Assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries; (x) carriers', warehousemen's,
mechanics', landlords', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business in respect obligations that are not yet due
or that are bonded or that are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
books of the Company or such Restricted Subsidiary, as the case may be, in
accordance with GAAP; (xi) pledges or deposits in connection with workmen's
compensation, unemployment insurance and other social security legislation;
(xii) easements (including reciprocal easement agreements), rights-of-way,
building, zoning and similar restrictions, utility agreements, covenants,
reservations, restrictions, encroachments, changes, and other similar
encumbrances or title defects incurred, or leases or subleases granted to
others, in the ordinary course of business, that do not in the aggregate
materially detract from the aggregate value of the properties of the Company and
its Subsidiaries, taken as a whole, or in the aggregate materially interfere
with or adversely affect in any material respect the ordinary conduct of the
business of the Company and its Subsidiaries on the properties subject thereto,
taken as a whole; (xiii) Liens on goods (and the proceeds thereof) and documents
of title and the
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property covered thereby securing Indebtedness in respect of commercial letters
of credit; (xiv) (a) mortgages, liens, security interests, restrictions,
encumbrances or any other matters of record that have been placed by any
developer, landlord or other third party on property over which the Company or
any Restricted Subsidiary of the Company has easement rights or on any real
property leased by the Company on the date of the Indenture and subordination or
similar agreements relating thereto and (b) any condemnation or eminent domain
proceedings affecting any real property; (xvi) leases or subleases to third
parties; (xv) Liens in connection with workmen's compensation obligations and
general liability exposure of the Company and its Restricted Subsidiaries; (xvi)
Liens arising by reason of a judgment, decree or court order, to the extent not
otherwise resulting an Event of Default; (xvii) Liens securing Hedging
Obligations entered into in the ordinary course of business; (xviii) without
limitation of clause (i), Liens securing Refinancing Indebtedness permitted to
be incurred under the Indenture or amendments or renewals of Liens that were
permitted to be incurred, provided, in each case, that such Liens do not extend
to an additional property or asset; and (xix) Liens that secure Indebtedness of
a Person existing at the time such Person becomes a Restricted Subsidiary of the
Company, provided such Liens do not extend to any property or asset of any other
Restricted Subsidiary or the Company.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Subsidiaries (other than
intercompany Indebtedness); provided that: (i) the principal amount (or
accredited value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accredited value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Exchange Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Exchange Notes on terms at least as favorable to the holders of
Exchange Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Permitted Transferee" means (a) with respect to 399 Venture Partners, Inc.
(i) Citicorp, any direct or indirect wholly owned subsidiary of Citicorp, and
any officer, director or employee of 399 Venture Partners, Inc., Citicorp or any
wholly owned subsidiary of Citicorp, (ii) any spouse or lineal descendant
(including by adoption and stepchildren) of the officers, directors and
employees referred to in clause (a)(i) above, (iii) any trust, corporation or
partnership 100% in interest of the beneficiaries, stockholders or partners of
which consists of one or more of the persons described in clause (a)(i) or (ii)
above; (b) with respect to any Management Investor, (i) any spouse or lineal
descendant (including by adoption and stepchildren) of such officer or employee
and (ii) any trust, corporation or partnership 100% in interest of the
beneficiaries, stockholders or partners of which consists of such officer or
employee, any of the persons described in clause (b)(i) above or any combination
thereof; or (c) with respect to the Company, any Wholly Owned Restricted
Subsidiary.
"Principals" means 399 Venture Partners, Inc., Mr. Carl V Rush, Jr., Mr.
Titus H. Harris, III, Ms. Donna L. Ratliff and any other officer of the Company
or a Subsidiary of the Company that acquires Equity Interests of the Company on
or after the date of the Indenture.
"Public Equity Offering" means a public offering of Equity Interests (other
than Disqualified Stock) of the Company.
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Revolving Credit Facility" means that certain Credit Facility, dated as of
July 28, 1998, by and among the Company, the Guarantors and NationsBank N.A.,
providing for up to $12.0 million of revolving credit borrowings and letters of
credit, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date of the
Indenture.
"Specified Affiliate Payments" means the payment to 399 Venture Partners,
Inc. of fees payable for any financial advisory, financing or similar services
in connection with acquisitions or divestitures, which payments have been
approved by the Board of Directors of the Company.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Total Assets" means, at any time, the total consolidated tangible assets
of the Company and its Restricted Subsidiaries that are Guarantors at such time.
For the purposes of paragraph (iv) of the covenant described under the caption
"-- Certain Covenants -- Limitation on Additional Indebtedness and Issuance of
Preferred Stock," Total Assets shall be determined giving pro forma effect to
the lease, acquisition, construction or improvement of the assets being leased,
acquired, constructed or improved with the proceeds of such Indebtedness.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than the
Guarantors in existence on the date of the Indenture or any successor to any of
them) that is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a)
has no Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any direct
or indirect obligation (x) to subscribe for additional Equity Interests or (y)
to maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "-- Certain Covenants -- Limitation
on Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary shall be deemed to be
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incurred by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption "-- Certain Covenants -- Limitation on Additional
Indebtedness and Issuance of Preferred Stock," the Company shall be in default
of such covenant). The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
"Certain Covenants -- Limitation on Additional Indebtedness and Issuance of
Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person then outstanding that is normally entitled to vote in the election of the
Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
"WMX Letter of Credit" means the $1.5 million stand-by letter of credit
issued by NationsBank, N.A. on behalf of the Company and guaranteed by WMX
Technologies, Inc.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement and a copy of which is available as set
forth under the heading "Available Information."
TERMS OF THE EXCHANGE OFFER
In connection with the issuance of the Restricted Notes pursuant to a
Purchase Agreement dated as of July 28, 1998, by and among the Company, the
Guarantors and the Initial Purchaser, the Initial Purchaser and their respective
assignees became entitled to the benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company and the Guarantors are
required to file within 60 days after July 28, 1998 (the date the Registration
Rights Agreement was entered into (the "Closing Date")) a registration statement
(the "Exchange Offer Registration Statement") for a registered exchange offer
with respect to an issue of Exchange Notes identical in all material respects to
the Restricted Notes except that the Exchange Notes shall contain no restrictive
legend thereon and except for certain provisions with regard to liquidated
damages associated with such registration rights. Under the Registration Rights
Agreement, the Company and the Guarantors are required to (i) use their
respective best efforts to cause such Exchange Offer Registration Statement to
become effective at the earliest possible time, but in no event later than 150
days after the Closing Date, (ii) use their respective best efforts to keep the
Exchange Offer open for at least 20 business days (or longer if required by
applicable law), (iii) use their respective best efforts to consummate the
Exchange Offer on or prior to the 30th business day following the date on which
the Exchange Offer Registration Statement is declared effective by the
Commission (the "Consummation Deadline"), and (iv) cause the Exchange Offer to
comply with all applicable federal and state securities laws. The Exchange Offer
being made hereby, if commenced and consummated within the time periods
described in this paragraph, will satisfy those requirements under the
Registration Rights Agreement and the liquidated damages provisions will cease
to be operative.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Restricted Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be
accepted for exchange. Exchange Notes of the same class will be issued in
exchange for an equal principal amount of outstanding Restricted Notes accepted
in the Exchange Offer. Restricted Notes may be tendered only in integral
multiples of $1,000. This Prospectus, together with the Letter of Transmittal,
is being sent to all registered holders as of October 15, 1998. The Exchange
Offer is not conditioned upon any minimum principal amount of Restricted Notes
being tendered in exchange. However, the obligation to accept Restricted Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions as
set forth herein under "-- Conditions."
Restricted Notes shall be deemed to have been accepted as validly tendered
when, as and if the Trustee has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Restricted Notes for the purposes of receiving the Exchange Notes and
delivering Exchange Notes to such holders.
Based on interpretations by the Staff of the Commission, as set forth in
no-action letters issued to third parties, including the Exchange Offer
No-Action Letters, the Company believes that the Exchange Notes issued pursuant
to the Exchange Offer in exchange for the Restricted Notes may be offered for
resale, resold or otherwise transferred by each holder thereof (other than any
holder who is (i) a broker-dealer who acquires such Exchange Notes directly from
the Company for resale pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act or (ii) any holder who is an
"affiliate" (within the meaning of Rule 405 under the Securities Act) of the
Company) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holder is not engaged
in, and does not intend to engage in, a distribution of such Exchange Notes and
has no arrangement with any person to participate in a distribution of such
Exchange Notes. By tendering the Restricted Notes in exchange for Exchange
Notes, each holder,
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including, without limitation, any holder who is a broker-dealer, will represent
to the Company and the Guarantors that: (i) it is not an affiliate (as defined
in Rule 405 under the Securities Act) of the Company; (ii) it is acquiring the
Exchange Notes (including the Subsidiary Guarantors) in the ordinary course of
its business; and (iii) it is not engaged in, and does not intend to engage in
and has no arrangement or understanding to participate in, a distribution of the
Exchange Notes. If a holder of Restricted Notes is engaged in or intends to
engage in a distribution of the Exchange Notes or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder may not rely on the
applicable interpretations of the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each Participating
Broker-Dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Restricted Notes where such
Restricted Notes were acquired by such Participating Broker-Dealer as a result
of market-making activities or other trading activities. The Company and the
Guarantors have agreed that they will make this Prospectus available to any
Participating Broker-Dealer for a period of time not to exceed one year after
the date on which the Exchange Offer is consummated for use in connection with
any such resale. See "Plan of Distribution."
In the event that (i) any changes in law or the applicable interpretations
of the Staff of the Commission do not permit the Company to effect the Exchange
Offer, or (ii) if any holder of Restricted Notes shall notify the Company within
20 business days following the consummation of the Exchange Offer that (A) such
holder was prohibited by law or Commission policy from participating in the
Exchange Offer or (B) such holder may not resell the Exchange Notes acquired by
it in the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such holder or (C) such holder is a
broker-dealer and holds Restricted Notes acquired directly from the Company or
the Guarantors or one of their affiliates, then the Company and the Guarantors
shall (x) cause to be filed a shelf registration statement pursuant to Rule 415
under the Act (the "Shelf Registration Statement") on or prior to 60 days after
the date on which the Company determines that it is not required to file the
Exchange Offer Registration Statement pursuant to clause (i) above or 60 days
after the date on which the Company receives the notice specified in clause (ii)
above and shall (y) use their respective best efforts to cause such Shelf
Registration Statement to become effective within 150 days after the date on
which the Company becomes obligated to file such Shelf Registration Statement.
If, after the Company has filed an Exchange Offer Registration Statement, the
Company is required to file and make effective a Shelf Registration Statement
solely because the Exchange Offer shall not be permitted under applicable
federal law, then the filing of the Exchange Offer Registration Statement shall
be deemed to satisfy the requirements of clause (x) above; provided, that in
such event, the Company shall remain obligated to meet the effectiveness
deadline set forth in clause (y) above. The Company and the Guarantors shall use
their respective best efforts to keep the Shelf Registration Statement
continuously effective, supplemented and amended to the extent necessary to
ensure that it is available for sales of Transfer Restricted Securities (as
defined below) by the holders thereof for a period of at least two years
following the date on which such Shelf Registration Statement first becomes
effective under the Securities Act. The term "Transfer Restricted Securities"
means each Restricted Note, until the earliest to occur of (a) the date on which
such Restricted Note is exchanged for an Exchange Note in the Exchange Offer and
entitled to be resold to the public by the holder thereof without complying with
the prospectus delivery requirements of the Securities Act, (b) the date on
which such Restricted Note has been disposed of in accordance with a Shelf
Registration Statement, (c) and Exchange Notes are issued to such holders and
such Exchange Note is disposed of by a broker-dealer pursuant to the "Plan of
Distribution" contemplated by the Exchange Offer Registration Statement
(including delivery of the prospectus contained therein) or (d) the date on
which such Restricted Note is distributed to the public pursuant to Rule 144
under the Securities Act.
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If (i) the Exchange Offer Registration Statement or the Shelf Registration
Statement is not filed with the Commission on or prior to the date specified in
the Registration Rights Agreement, (ii) any such Registration Statement has not
been declared effective by the Commission on or prior to the date specified for
such effectiveness in the Registration Rights Agreement, (iii) the Exchange
Offer has not been consummated on or prior to the Consummation Deadline or (iv)
any Registration Statement required by the Registration Rights Agreement is
filed and declared effective but shall thereafter cease to be effective or fail
to be usable for its intended purpose without being succeeded immediately by a
post-effective amendment to such Registration Statement that cures such failure
and that is itself declared effective immediately (each such event referred to
in clauses (i) through (iv), a "Registration Default"), then the Company and the
Guarantors hereby jointly and severally agree to pay liquidated damages to each
holder of Transfer Restricted Securities in an amount equal to the rate of 50
basis points per year times the principal amount of Transfer Restricted
Securities held by such holder for the first 90-day period immediately following
the occurrence of a Registration Default. The amount of liquidated damages shall
increase by an additional 25 basis points per year times the principal amount of
the Transfer Restricted Securities with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
liquidated damages of 200 basis points per year times the principal amount of
Transfer Restricted Securities; provided, however that the Company and the
Guarantors shall in no event be required to pay liquidated damages for more than
one Registration Default at any given time. Notwithstanding anything to the
contrary set forth herein, (1) upon filing of the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement), in the case
of (i) above, (2) upon the effectiveness of the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement), in the case
of (ii) above, (3) upon consummation of the Exchange Offer, in the case of (iii)
above, or (4) upon the filing of a post-effective amendment to the Registration
Statement or an additional Registration Statement that causes the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf Registration Statement)
to again be declared effective or made usable in the case of (iv) above, the
liquidated damages payable with respect to the Transfer Restricted Securities a
result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease.
All accrued liquidated damages shall be paid to the holders entitled
thereto, as specified in the Indenture on each January 15 and July 15. All
obligations of the Company and the Guarantors set forth in the preceding
paragraph that are outstanding with respect to any Transfer Restricted Security
at the time such security ceases to be a Transfer Restricted Security shall
survive until such time as all such obligations with respect to such security
shall have been satisfied in full.
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Restricted Notes who do not exchange their Restricted Notes for
Exchange Notes in the Exchange Offer will no longer be entitled to registration
rights and will not be able to offer or sell their Restricted Notes, unless such
Restricted Notes are subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Company will have no obligation to
do), except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. See "Risk
Factors -- Risk Factors Relating to the Notes -- Consequences of Failure to
Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean November 20, 1998 unless the Exchange
Offer is extended, if and as required by applicable law, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will notify the
holders of the Restricted Notes by means of a press release or other public
announcement prior to 9:00 A.M., New York City time, on the next business day
after the previously scheduled Expiration Date.
The Company and the Guarantors reserve the right (i) to delay acceptance of
any Restricted Notes, to extend the Exchange Offer or to terminate the Exchange
Offer and not permit acceptance of Restricted Notes not previously accepted if
any of the conditions set forth herein under "-- Conditions" shall have occurred
and
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shall not have been waived by the Company and the Guarantors, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent, or
(ii) to amend the terms of the Exchange Offer in any manner deemed by it to be
advantageous to the holders of the Restricted Notes. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the Exchange Agent. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of the Restricted Notes of such
amendment.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will accrue interest at the applicable per annum rate
set forth on the cover page of this Prospectus, from (i) the later of (A) the
last interest payment date on which interest was paid on the Restricted Notes
surrendered in exchange therefor or (B) if the Restricted Notes are surrendered
for exchange on a date subsequent to the record date for an interest payment
date to occur on or after the date of such exchange and as to which interest
will be paid, the date of such interest payment or (ii) if no interest has been
paid on the Restricted Notes, from the date the Restricted Notes were issued
(the "Issue Date"). Interest on the Exchange Notes is payable on January 15 and
July 15 of each year commencing January 15, 1999.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such
Restricted Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Restricted Notes, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF RESTRICTED NOTES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS OF THE
NOTES. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR RESTRICTED NOTES SHOULD BE SENT TO THE COMPANY. Delivery of all
documents must be made to the Exchange Agent at its address set forth below.
Holders of Restricted Notes may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
The tender by a holder of Restricted Notes will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
Only a holder of Restricted Notes may tender such Restricted Notes in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name Restricted Notes are registered on the books of the Company
or any other person who has obtained a properly completed bond power from the
registered holder.
Any beneficial owner whose Restricted Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Restricted Notes, either
make appropriate arrangements to register ownership of the
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Restricted Notes in such owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the
Restricted Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Restricted Notes listed therein, such Restricted Notes
must be endorsed or accompanied by bond powers and a proxy which authorizes such
person to tender the Restricted Notes on behalf of the registered holder, in
each case as the name of the registered holder or holders appears on the
Restricted Notes.
If the Letter of Transmittal or any Restricted Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Restricted Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all
Restricted Notes not properly tendered or any Restricted Notes which, if
accepted, would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the absolute right to waive any irregularities or
conditions of tender as to particular Restricted Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Restricted Notes must be cured within such time as the Company shall
determine. Neither the Company, the Guarantors, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Restricted Notes, nor shall any of them incur any
liability for failure to give such notification. Tenders of Restricted Notes
will not be deemed to have been made until such irregularities have been cured
or waived. Any Restricted Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost to such holder by the Exchange
Agent to the tendering holders of Restricted Notes, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any
Restricted Notes that remain outstanding subsequent to the Expiration Date or,
as set forth under "-- Conditions", (ii) to terminate the Exchange Offer in
accordance with the terms of the Registration Rights Agreement and (iii) to the
extent permitted by applicable law, purchase Restricted Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
ACCEPTANCE OF RESTRICTED NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Restricted Notes properly tendered will be accepted, promptly after the
Expiration Date, and the Exchange Notes will be issued promptly after acceptance
of the Restricted Notes. See "-- Conditions" below. For purposes of the Exchange
Offer, Restricted Notes shall be deemed to have been accepted as validly
tendered for exchange when, as and if the Company has given oral or written
notice thereof to the Exchange Agent.
In all cases, issuance of Exchange Notes for Restricted Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such
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Restricted Notes or a timely Book-Entry Confirmation of such Restricted Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility, a
properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Restricted Notes are not accepted for any
reason set forth in the terms and conditions of the Exchange Offer or if
Restricted Notes are submitted for a greater principal amount than the holder
desires to exchange, such unaccepted or nonexchanged Restricted Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Restricted Notes tendered by book-entry transfer procedures described below,
such nonexchanged Restricted Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Restricted Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Restricted Notes by causing
the Book-Entry Transfer Facility to transfer such Restricted Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Restricted Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "-- Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Restricted Notes desires to tender such
Restricted Notes, and the Restricted Notes are not immediately available, or
time will not permit such holder's Restricted Notes or other required documents
to reach the Exchange Agent before the Expiration Date, or the procedures for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if (i) the tender is made through an Eligible Institution, (ii) prior
to the Expiration Date, the Exchange Agent receives from such Eligible
Institution a properly completed and duly executed Letter of Transmittal and
Notice of Guaranteed Delivery, substantially in the form provided by the Company
(by mail or hand delivery), setting forth the name and address of the holder of
Restricted Notes and the amount of Restricted Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Restricted
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent and (iii) the
certificates for all physically tendered Restricted Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent within three NYSE trading days after the date of execution of the Notice
of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Restricted Notes may be withdrawn at any time prior to 5:00
p.m., New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under "-- Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Restricted Notes to be withdrawn, identify the Restricted Notes to
be withdrawn (including the principal amount of such Restricted Notes) and
(where certificates for Restricted Notes have been transmitted) specify the name
in which such Restricted Notes are registered, if different from that of the
withdrawing holder. If certificates for Restricted Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior
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to the release of such certificates, the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution. If Restricted Notes have been
tendered pursuant to the procedure for book-entry transfer described above, any
notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Restricted Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Restricted Notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the Exchange Offer. Any
Restricted Notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Restricted Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described above, such Restricted Notes
will be credited to an account maintained with such Book-Entry Transfer Facility
for the Restricted Notes) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Restricted Notes
may be retendered by following one of the procedures described under
"-- Procedures for Tendering" and "--Book-Entry Transfer" above at any time on
or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Restricted Notes will
not be required to be accepted for exchange, nor will Exchange Notes be issued
in exchange for any Restricted Notes, and the Company and the Guarantors may
terminate or amend the Exchange Offer as provided herein before the acceptance
of such Restricted Notes, if because of any change in law, or applicable
interpretations thereof by the Commission, the Company and the Guarantors
determine that they are not permitted to effect the Exchange Offer. The Company
and the Guarantors have no obligation to, and will not knowingly, permit
acceptance of tenders of Restricted Notes from affiliates of the Company or the
Guarantors (within the meaning of Rule 405 under the Securities Act) or from any
other holder or holders who are not eligible to participate in the Exchange
Offer under applicable law or interpretations thereof by the Commission, or if
the Exchange Notes to be received by such holder or holders of Restricted Notes
in the Exchange Offer, upon receipt, will not be tradable by such holder without
restriction under the Securities Act and the Exchange Act and without material
restrictions under the "blue sky" or securities laws of substantially all of the
states of the United States.
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EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Mail or Courier and By Hand after 4:30
p.m. on the Expiration Date:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 770 Broadway, 13th Floor
Cooper Station New York, New York 10003
New York, New York 10276-0844 Attention: Corporate Trust Services
Attn: Corporate Trust Services
</TABLE>
By Hand before 4:30 p.m.:
United States Trust Company of New York
111 Broadway
Lower Level
New York, New York 10006
Attention: Corporate Trust Services
By Facsimile:
United States Trust Company of New York
(212) 780-0592
Attn: Corporate Trust Services
Confirm by phone (800) 548-6565
Delivery of the Letter of Transmittal to an address other than as set forth
above will not constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Restricted Notes, and in handling or forwarding tenders for
exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Restricted Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Restricted Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Restricted Notes tendered, or if tendered Restricted Notes are registered
in the name of any person other than the person signing the Letter of
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Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Restricted Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
BOOK-ENTRY; DELIVERY, FORM AND TRANSFER
The Restricted Notes were offered and sold by the Initial Purchaser to
qualified institutional buyers in reliance on Rule 144A ("Rule 144A Notes").
Restricted Notes were also offered and sold by the Initial Purchaser in offshore
transactions in reliance on Regulation S ("Regulation S Notes"). Except as set
forth below, the Restricted Notes were issued in registered, global form in
minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof. The Restricted Notes were issued at the closing of the Offering (the
"Closing") only against payment in immediately available funds.
Rule 144A Notes are represented by one or more Restricted Notes in
registered, global form without interest coupons (collectively, the "Rule 144A
Global Notes"). Regulation S Notes are represented by one or more Restricted
Notes in registered, global form without interest coupons (collectively, the
"Regulation S Global Notes" and, together with the Rule 144A Global Notes, the
"Global Notes"). The Global Notes were deposited upon issuance with the Trustee
as custodian for The Depository Trust Company ("DTC"), in New York, New York,
and registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below. Through
and including the 40th day after the later of the commencement of the Offering
and the Closing (such period through and including such 40th day, the
"Restricted Period"), beneficial interests in the Regulation S Global Notes were
held only through the Euroclear System ("Euroclear") and Cedel, S.A. ("Cedel")
(as indirect participants in DTC), unless transferred to a person who took
delivery through a Rule 144A Global Note in accordance with the certification
requirements described below. Beneficial interests in the Rule 144A Global Notes
may not be exchanged for beneficial interests in the Regulation S Global Notes
at any time except in the limited circumstances described below. See
"-- Exchanges between Regulation S Notes and Rule 144A Notes."
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Exchange Notes in certificated form except in the limited circumstances
described below. See "-- Exchange of Book-Entry Notes for Certificated Notes."
Except in the limited circumstances described below, owners of beneficial
interests in the Global Notes will not be entitled to receive physical delivery
of Certificated Notes (as defined below).
Rule 144A Notes (including beneficial interests in the Rule 144A Global
Notes) are subject to certain restrictions on transfer and bear a restrictive
legend as described under "Notice to Investors." Regulation S Notes also bear
the legend as described under "Notice to Investors." In addition, transfers of
beneficial interests in the Global Notes are subject to the applicable rules and
procedures of DTC and its direct or indirect participants (including, if
applicable, those of Euroclear and Cedel), which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Cedel are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time. The
Company takes no responsibility for these operations and procedures and urges
investors to contact the system or their participants directly to discuss these
matters.
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DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the principal
amount of the Global Notes and (ii) ownership of such interests in the Global
Notes will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
Investors in the Rule 144A Global Notes may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and Cedel) which are Participants in
such system. Investors in the Regulation S Global Notes must initially hold
their interests therein through Euroclear or Cedel, if they are participants in
such systems, or indirectly through organizations that are participants in such
systems. After the expiration of the Restricted Period (but not earlier),
investors may also hold interests in the Regulation S Global Notes through
Participants in the DTC system other than Euroclear and Cedel. Euroclear and
Cedel will hold interests in the Regulation S Global Notes on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective depositories, which are Morgan Guaranty Trust
Company of New York, Brussels office, as operator of Euroclear, and Citibank,
N.A., as operator of Cedel. All interests in a Global Note, including those held
through Euroclear or Cedel, may be subject to the procedures and requirements of
DTC. Those interests held through Euroclear or Cedel may also be subject to the
procedures and requirements of such systems. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Note to such persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Note to pledge such interests to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate evidencing
such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, and interest
on a Global Note registered in the name of DTC or its nominee will be payable to
DTC in its capacity as the registered holder under the Indenture. Under the
terms of the Indenture, the Company and the Trustee will treat the persons in
whose names the Exchange Notes, including the Global Notes, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Company, the Trustee
nor any agent of the Company or the Trustee has or will have any responsibility
or liability for (i) any aspect of DTC's records or any Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interest in the Global Notes, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes or (ii) any other matter relating to the actions and practices of
DTC or any of its Participants or Indirect Participants. DTC has advised the
Company that its current practice, upon receipt of any payment in respect of
securities such as the Exchange Notes (including principal and interest), is to
credit the accounts of the relevant Participants with the payment on the payment
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date, in amounts proportionate to their respective holdings in the principal
amount of beneficial interest in the relevant security as shown on the records
of DTC unless DTC has reason to believe it will not receive payment on such
payment date. Payments by the Participants and the Indirect Participants to the
beneficial owners of the Exchange Notes will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Trustee or the Company. Neither the Company nor the Trustee will be
liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the Exchange Notes, and the Company and the Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants,
interests in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants. See "-- Same Day
Settlement and Payment."
Subject to the transfer restrictions set forth under "Notice to Investors,"
transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same day funds, and transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Exchange Notes described herein, cross-market transfers between the Participants
in DTC, on the one hand, and Euroclear or Cedel participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Cedel, as the case may be, by its respective depositary; however,
such cross-market transactions will require delivery of instructions to
Euroclear or Cedel, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Cedel, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Cedel participants may
not deliver instructions directly to the depositories for Euroclear or Cedel.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global Notes
and only in respect of such portion of the aggregate principal amount of the
Exchange Notes as to which such Participant or Participants has or have given
such direction. However, if there is an Event of Default under the Exchange
Notes, DTC reserves the right to exchange the Global Notes for Exchange Notes in
certificated form, and to distribute such Exchange Notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the Regulation S Global Notes and in the
Rule 144A Global Notes among Participants in DTC, Euroclear and Cedel, they are
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee nor any of their respective agents will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for Exchange Notes in registered certificated
form ("Certificated Notes") if (i) DTC (x) notifies the Company that it is
unwilling or unable to continue as depositary for the Global Notes and the
Company thereupon fails to appoint a successor depositary or (y) has ceased to
be a clearing agency registered under the Exchange Act, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the Certificated Notes or (iii) there shall have occurred and be continuing a
Default or Event of Default with respect to the Exchange Notes. In addition,
beneficial interests in a Global Note may be exchanged for Certificated Notes
upon request but only upon prior written notice
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given to the Trustee by or on behalf of DTC in accordance with the Indenture. In
all cases, Certificated Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures) and will bear the applicable
restrictive legend referred to in "Notice to Investors," unless the Company
determines otherwise in compliance with applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR BOOK-ENTRY NOTES
Exchange Notes issued in certificated form may not be exchanged for
beneficial interests in any Global Note unless the transferor first delivers to
the Trustee a written certificate (in the form provided in the Indenture) to the
effect that such transfer will comply with the appropriate transfer restrictions
applicable to such Notes. See "Notice to Investors."
EXCHANGES BETWEEN REGULATION S NOTES AND RULE 144A NOTES
Prior to the expiration of the Restricted Period, beneficial interests in
the Regulation S Global Note may be exchanged for beneficial interests in the
Rule 144A Global Note only if such exchange occurs in connection with a transfer
of the Exchange Notes pursuant to Rule 144A and the transferor first delivers to
the Trustee a written certificate (in the form provided in the Indenture) to the
effect that the Exchange Notes are being transferred to a person who the
transferor reasonably believes to be a qualified institutional buyer within the
meaning of Rule 144A, purchasing for its own account or the account of a
qualified institutional buyer in a transaction meeting the requirements of Rule
144A and in accordance with all applicable securities laws of the states of the
United States and other jurisdictions.
Beneficial interest in a Rule 144A Global Note may be transferred to a
person who takes delivery in the form of an interest in the Regulation S Global
Note, whether before or after the expiration of the Restricted Period, only if
the transferor first delivers to the Trustee a written certificate (in the form
provided in the Indenture) to the effect that such transfer is being made in
accordance with Rule 903 or 904 of Regulation S or Rule 144 (if available) and
that, if such transfer occurs prior to the expiration of the Restricted Period,
the interest transferred will be held immediately thereafter through Euroclear
or Cedel.
Transfers involving an exchange of a beneficial interest in the Regulation
S Global Note for a beneficial interest in a Rule 144A Global Note or vice versa
will be effected in DTC by means of an instruction originated by the Trustee
through the DTC Deposit/Withdraw at Custodian system. Accordingly, in connection
with any such transfer, appropriate adjustments will be made to reflect a
decrease in the principal amount of the Regulation S Global Note and a
corresponding increase in the principal amount of the Rule 144A Global Note or
vice versa, as applicable. Any beneficial interest in one of the Global Notes
that is transferred to a person who takes delivery in the form of an interest in
the other Global Note will, upon transfer, cease to be an interest in such
Global Note and will become an interest in the other Global Note and,
accordingly, will thereafter be subject to all transfer restrictions and other
procedures applicable to beneficial interest in such other Global Note for so
long as it remains such an interest. The policies and practices of DTC may
prohibit transfers of beneficial interests in the Regulation S Global Note prior
to the expiration of the Restricted Period.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Exchange Notes
represented by the Global Notes (including principal, premium, if any, interest
be made by wire transfer of immediately available funds to the accounts
specified by the Global Note holder. With respect to Exchange Notes in
certificated form, the Company will make all payments of principal, premium, if
any, interest by wire transfer of immediately available funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. The Exchange Notes represented
by the Global Notes are expected to be eligible to trade in the PORTAL market
and to trade in the Depositary's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such Exchange Notes will,
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therefore, be required by the Depositary to be settled in immediately available
funds. The Company expects that secondary trading in any certificated Exchange
Notes will also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear and Cedel) immediately following the
settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or Cedel as a result of sales of interests in a Global Note by or
through a Euroclear or Cedel participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following summary is of a general nature only and is not intended to
be, and should not be construed to be, legal or tax advice to any prospective
purchaser and no representation with respect to the tax consequences to any
particular investor is made. The summary does not address any Notes that may be
issued under the Indenture other than the Exchange Notes pursuant to the
Exchange The tax treatment of the holders of the Exchange Notes may vary
depending upon their particular situations, for example, certain other holders
(including insurance companies, tax exempt organizations, financial institutions
and broker dealers) may be subject to special rules not discussed below. HOLDERS
ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE U.S. FEDERAL TAX
CONSEQUENCES OF HOLDING AND DISPOSING OF EXCHANGE NOTES, AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER
TAXING JURISDICTION.
For purposes of the following discussion, a "U.S. Person" means a citizen
or resident of the U.S., a corporation created or organized in the U.S. or under
the laws of the U.S. or of any political subdivision thereof, an estate whose
income is includable in gross income for U.S. federal income tax purposes
regardless of its source or a trust, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S. Persons
have the authority to control all substantial decisions of the trust.
EXCHANGE OF RESTRICTED NOTES FOR EXCHANGE NOTES
The following summary describes the principal U.S. federal income tax
consequences of the exchange of the Restricted Notes for Exchange Notes (the
"Exchange") that may be relevant to a beneficial owner of Restricted Notes that
will hold the Exchange Notes as capital assets. The exchange of Restricted Notes
for Exchange Notes pursuant to the Exchange Offer should not be a taxable event
for U.S. federal income tax purposes. As a result, a holder of a Restricted Note
whose Restricted Note is accepted in an Exchange Offer should not recognize gain
on the Exchange. A tendering holder's tax basis in the Exchange Notes will be
the same as such holder's tax basis in its Restricted Notes. A tendering
holder's holding period for the Exchange Notes received pursuant to the Exchange
Offer will include its holding period for the Restricted Notes surrendered
therefor. AS DISCUSSED ABOVE, ALL HOLDERS OF RESTRICTED NOTES ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE EXCHANGE OF RESTRICTED NOTES FOR EXCHANGE NOTES AND OF THE
OWNERSHIP AND DISPOSITION OF EXCHANGE NOTES RECEIVED IN THE EXCHANGE OFFER IN
VIEW OF THEIR OWN PARTICULAR CIRCUMSTANCES.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
The following is a general discussion of certain U.S. Federal income tax
consequences of the receipt, ownership and disposition of Exchange Notes by an
initial beneficial owner of Exchange Notes that for U.S. federal income tax
purposes is a U.S. Person (a "U.S. Holder").
100
<PAGE> 105
INTEREST
Interest paid or payable on an Exchange Note will be taxable to a U.S.
Holder as ordinary interest income, generally at the time it is received or
accrued, in accordance with such holder's regular method of accounting for
United States federal income tax purposes.
GAIN ON DISPOSITION
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of an Exchange Note, a U.S. Holder generally will recognize taxable
gain or loss equal to the difference between the sum of cash plus the fair
market value of all other property received on such disposition (except to the
extent such cash or property is attributable to accrued but unpaid interest,
which will be taxable as ordinary income) and such U.S. Holder's adjusted tax
basis in the Exchange Note. A U.S. Holder's adjusted tax basis in an Exchange
Note generally will equal the cost of the Restricted Note which was exchanged
for the Exchange Note.
Gain or loss recognized on the disposition of an Exchange Note generally
will be capital gain or loss and will be long-term capital gain or loss if, at
the time of such disposition, the U.S. Holder's holding period for the Exchange
Note is more than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium, if any, and interest on an Exchange
Note, and to proceeds of the sale or redemption of an Exchange Note before
maturity. The Company, its agent, a broker, the Trustee or any paying agent, as
the case may be, will be required to withhold from any payment that is subject
to backup withholding a tax equal to 31% of such payment if a U.S. Holder fails
to furnish his taxpayer identification number (social security or employer
identification number), certify that such number is correct, certify that such
holder is not subject to backup withholding or otherwise comply with the
applicable requirements of the backup withholding rules. Certain U.S. Holders,
including all corporations, are not subject to backup withholding and
information reporting requirements. Any amounts withheld under the backup
withholding rules from a payment to a U.S. Holder will be allowed as a credit
against such U.S. Holder's United States federal income tax and may entitle the
holder to a refund, provided that the required information is furnished to the
Internal Revenue Service ("IRS").
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the receipt, ownership and disposition of Exchange
Notes by an initial beneficial owner of Exchange Notes that, for U.S. federal
income tax purposes, is not a "U.S. Person" (a "Non-U.S. Holder"). This
discussion is based upon the U.S. federal tax law now in effect, which is
subject to change, possibly retroactively.
For purposes of the discussion below, interest and gain on the sale,
exchange or other disposition of Exchange Notes will be considered to be "U.S.
trade or business income" if such income or gain is (i) effectively connected
with the conduct of a U.S. trade or business or (ii) in the case of a treaty
resident, attributable to a U.S. permanent establishment (or, in the case of an
individual, a fixed base) in the U.S.
INTEREST
Interest paid by the Company to a Non-U.S. Holder will not be subject to
U.S. federal income or withholding tax if such interest is not U.S. trade or
business income and is "portfolio interest." Interest will be portfolio interest
if the Non-U.S. Holder (i) does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company; (ii)
is not a controlled foreign corporation with respect to which the Company is a
"related person" within the meaning of the U.S. Internal Revenue Code of 1986,
as amended (the "Code"), (iii) is not a bank receiving interest described in
881(c)(3)(a) of the Code, and (iv) certifies, under penalties of perjury, that
such holder is not a U.S. Person and provides such holder's name and address.
101
<PAGE> 106
The gross amount of payments of interest that do not qualify for the
portfolio interest exception and that are not U.S. trade or business income will
be subject to U.S. withholding tax at a rate of 30% unless a treaty applies to
reduce or eliminate withholding. U.S. trade or business income will be taxed at
regular graduated U.S. rates rather than the 30% gross rate. In the case of a
Non-U.S. Holder that is a corporation, such U.S. trade or business income may
also be subject to the branch profits tax. To claim exemption from withholding
or to claim the benefits of a treaty, a Non-U.S. Holder must provide a properly
executed Form 1001 or 4224 (or such successor form as the Internal Revenue
Service (the "IRS") designates), as applicable prior to the payment of interest.
These forms must be periodically updated. Under new final regulations effective,
subject to certain transition rules, for payments after December 31, 1999, the
Forms 1001 and 4224 will be replaced by a Form W 8. Also under these
regulations, a Non-U.S. Holder who is claiming the benefits of a treaty may be
required in certain instances to obtain a U.S. taxpayer identification number
and to provide certain documentary evidence issued by foreign governmental
authorities to prove residence in the foreign country.
GAIN ON DISPOSITION
A Non-U.S. Holder will generally not be subject to U.S. federal income tax
on gain recognized on a sale, redemption or other disposition of an Exchange
Note unless (i) the gain is effectively connected with the conduct of a trade or
business within the U.S. by the Non-U.S. Holder; (ii) in the case of a Non-U.S.
Holder who is a nonresident alien individual and holds the Note as a capital
asset, such holder is present in the U.S. for 183 or more days in the taxable
year and certain other requirements are met; or (iii) the Non-U.S. Holder is
subject to the special rules applicable to certain former citizens and residents
of the U.S.
FEDERAL ESTATE TAXES
If interest on the Exchange Notes is exempt from withholding of U.S.
federal income tax as portfolio interest described above, the Exchange Notes
will not be included in the estate of a deceased Non-U.S. Holder for U.S.
federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest paid to the Non-U.S. Holder. Copies of these information returns may
also be made available under the provisions of a specific treaty or other
agreement to the tax authorities of the country in which the Non-U.S. Holder
resides.
In the case of payments of interest to Non-U.S. Holders, Treasury
regulations provide that the 31% backup withholding tax and certain information
reporting will not apply to such payments with respect to which either the
requisite certification, as described above, has been received or an exemption
has otherwise been established; provided that neither the Company nor its
payment agent has actual knowledge that the holder is a U.S. person or that the
conditions of any other exemption are not in fact satisfied. The payment of the
proceeds from the disposition of Exchange Notes to or through the U.S. office of
any broker, U.S. or foreign, will be subject to information reporting and
possible backup withholding unless the owner certifies as to its non-U.S. status
under penalty of perjury or otherwise establishes an exemption, provided that
the broker does not have actual knowledge that the Holder is a U.S. person or
that the conditions of any other exemption are not, in fact, satisfied. The
payment of the proceeds from the disposition of Exchange Notes to or through a
non-U.S. office of a non-U.S. broker will not be subject to information
reporting or backup withholding unless the non-U.S. broker has certain types of
relationships with the U.S.
In the case of the payment of proceeds from the disposition of Exchange
Notes to or through a non-U.S. office of a broker that is either a U.S. person
or a U.S. related person, the regulations require information reporting on the
payment unless the broker has documentary evidence in its files that the owner
is a Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through foreign offices of a broker
that is not a U.S. Person or a U.S. related person (absent actual knowledge that
the payee is a U.S. person). Backup withholding is not an additional tax. Any
amounts
102
<PAGE> 107
withheld under the backup withholding rules may be refunded or credited against
the Non-U.S. Holder's U.S. federal income tax liability, provided that the
required information is furnished to the IRS.
The Treasury Department recently issued final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding, and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The final regulations are
generally effective for payments made after December 31, 1999, subject to
certain transition rules. NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW FINAL REGULATIONS.
PLAN OF DISTRIBUTION
Each broker-dealer that holds Restricted Notes that were acquired for the
account of such broker-dealer as a result of market-making activities or other
trading activities (other than Restricted Notes acquired directly from the
Company, any of the Guarantors or their affiliates) may exchange such Restricted
Notes pursuant to this Exchange Offer. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Restricted Notes where
such Restricted Notes were acquired as a result of market-making activities or
other trading activities receives Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Company and the Guarantors have agreed that they will make
this Prospectus available to any Participating Broker-Dealer for a period of
time not to exceed one year after the date on which the Exchange Offer is
consummated for use in connection with any such resale. In addition, until such
date, all broker-dealers effecting transactions in the Exchange Notes may be
required to deliver a prospectus.
Neither the Company nor the Guarantors will receive any proceeds from any
sale of Exchange Notes by broker-dealers. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Starting on the Expiration Date, the Company and the Guarantors will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Restricted Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Restricted Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
103
<PAGE> 108
LEGAL MATTERS
Certain legal matters with respect to the validity of the Exchange Notes
offered hereby will be passed upon for the Company by LeBoeuf, Lamb, Greene &
MacRae, L.L.P.
EXPERTS
The audited consolidated balance sheets of the Company as of June 30, 1997
and 1998, and the related consolidated statements of operations, cash flows, and
stockholders' equity for each of the three years in the period ended June 30,
1998, have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in accounting and auditing.
104
<PAGE> 109
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Commission a
Registration Statement on Form S-4 (the "Registration Statement," which term
shall include all amendments, exhibits, annexes and schedules thereto) pursuant
to the Securities Act, and the rules and regulations promulgated thereunder,
covering the Exchange Notes being offered hereby. This Prospectus does not
contain all the information set forth in the Registration statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to in the Registration Statement
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
Pursuant to the terms of the Indenture, the Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, it will furnish
to the holders of the Notes and submit to the Commission (unless the Commission
will not accept such materials) (i) all quarterly and annual financial
information that would be required to be contained in filings with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants, and (ii) all
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, for so long as any
of the Notes remain outstanding, the Company has agreed to make available upon
request to any prospective purchaser of, or beneficial owner of Notes in
connection with any offer or sale thereof, the information required by Rule
144A(d)(4) under the Securities Act. Periodic reports and other information
filed by the Company with the Commission may be inspected at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding companies that file electronically
with the Commission. The address of such site is http://www.sec.gov. Copies of
such material can also be obtained from the Company upon request. Any such
request should be directed to the Secretary of the Company at 2525 Battleground
Road, P.O. Box 220, Deer Park, Texas 77536 (281) 930-0350.
---------------------
The Guarantors are the subsidiaries guaranteeing the Company's obligations
under the Notes and are each wholly owned subsidiaries of the Company. The
guarantee of each Guarantor is full and unconditional. Separate financial
statements of the Guarantors are not set forth in this Prospectus as the Company
has determined that they would not be material to investors.
105
<PAGE> 110
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Prospectus 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 with 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.
106
<PAGE> 111
INDEX TO FINANCIAL STATEMENTS
THE GNI GROUP, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- June 30, 1997 and 1998....... F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended June 30, 1998................... F-4
Consolidated Statements of Stockholders' Equity for Each of
the Three Years in the Period Ended June 30, 1998......... F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended June 30, 1998................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 112
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The GNI Group, Inc.
We have audited the accompanying consolidated balance sheets of The GNI
Group, Inc. and subsidiaries as of June 30, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The GNI
Group, Inc. and subsidiaries as of June 30, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
July 10, 1998, except for
Note 14 which is as of
October 15, 1998
F-2
<PAGE> 113
THE GNI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and time deposits.................................... $ 807,387 $ 208,257
Accounts receivable, less allowance of approximately
$46,000 in 1997 and $229,000 in 1998................... 6,449,885 7,022,323
Inventory................................................. 524,436 478,886
Federal tax receivable.................................... 930,470 --
Prepaid expenses and other current assets................. 2,676,172 1,232,555
------------ ------------
Total current assets.............................. 11,388,350 8,942,021
Property, plant and equipment............................... 48,768,095 55,541,764
Less accumulated depreciation............................. (15,473,844) (19,628,867)
------------ ------------
Net property, plant and equipment........................... 33,294,251 35,912,897
Restricted time deposits.................................... 1,386,699 1,451,253
Deferred tax asset, net..................................... -- 360,165
Intangible assets, net...................................... 19,788,457 18,193,364
Other assets, net........................................... 2,730,447 4,016,866
------------ ------------
Total assets...................................... $ 68,588,204 $ 68,876,566
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 2,495,652 $ 2,147,826
Accounts payable.......................................... 2,253,663 3,299,930
Accrued liabilities....................................... 2,981,203 2,987,625
Federal income taxes payable.............................. -- 190,005
------------ ------------
Total current liabilities......................... 7,730,518 8,625,386
Accrued liabilities......................................... 3,724,674 2,700,484
Long-term debt, less current portion........................ 31,444,724 32,016,606
Deferred income taxes, net.................................. 800,000 --
Stockholders' equity:
Non-redeemable convertible, Series A preferred stock, $.01
par value. Authorized 1,000,000 shares; issued 0 shares
in 1997 and 1998....................................... -- --
Common stock, $.01 par value. Authorized 20,000,000
shares; issued 6,654,709 shares in 1997 and 6,674,709
shares in 1998......................................... 66,547 66,747
Additional paid-in capital................................ 21,052,098 21,156,898
Retained earnings......................................... 3,816,649 4,357,451
Less cost of treasury stock (40,184 shares)............... (47,006) (47,006)
------------ ------------
Total stockholders' equity........................ 24,888,288 25,534,090
------------ ------------
Total liabilities and stockholders' equity........ $ 68,588,204 $ 68,876,566
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 114
THE GNI GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................................. $39,338,642 $40,726,878 $42,716,800
Cost of services...................................... 24,661,876 25,109,651 24,539,508
Selling, general and administrative................... 5,057,467 5,559,137 6,387,746
Depreciation and amortization......................... 4,820,189 5,989,575 7,247,027
Asset impairment...................................... 6,708,791 -- --
----------- ----------- -----------
Total costs and expenses.................... 41,248,323 36,658,363 38,174,281
Operating income (loss)............................... (1,909,681) 4,068,515 4,542,519
Interest income....................................... 81,058 116,663 100,555
Interest expense...................................... (1,586,641) (2,970,183) (3,887,531)
Other income.......................................... 18,317 77,625 18,906
----------- ----------- -----------
Income (loss) before tax.................... (3,396,947) 1,292,620 774,449
Income taxes (benefit)................................ (1,285,429) 540,000 233,647
----------- ----------- -----------
Net income (loss)........................... $(2,111,518) $ 752,620 $ 540,802
=========== =========== ===========
Basic earnings (loss) per share....................... $ (.33) $ .11 $ .08
Diluted earnings (loss) per share..................... $ (.33) $ .11 $ .08
Average shares outstanding -- basic................... 6,475,651 6,571,854 6,633,404
Average and potential shares outstanding -- diluted... 6,475,651 6,912,799 7,175,405
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 115
THE GNI GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year........................ $ 2,344 $ -- $ --
Conversion to common stock (234,375 shares in
1996)............................................ (2,344) -- --
----------- ----------- -----------
Balance at end of year...................... -- -- --
Common stock:
Balance at beginning of year........................ 61,300 66,059 66,547
Conversion of preferred stock (468,750 shares in
1996)............................................ 4,688 -- --
Exercise of stock options (7,000 shares in 1996,
48,833 shares in 1997 and 20,000 shares in
1998)............................................ 71 488 200
----------- ----------- -----------
Balance at end of year...................... 66,059 66,547 66,747
Additional paid-in capital:
Balance at beginning of year........................ 19,225,461 19,251,048 21,052,098
Preferred stock conversion.......................... (2,344) -- --
Exercise of stock options........................... 27,931 263,094 104,800
Subordinated debt warrants.......................... -- 1,537,956 --
----------- ----------- -----------
Balance at end of year...................... 19,251,048 21,052,098 21,156,898
Retained earnings:
Balance at beginning of year........................ 5,175,547 3,064,029 3,816,649
Net income (loss)................................... (2,111,518) 752,620 540,802
----------- ----------- -----------
Balance at end of year...................... 3,064,029 3,816,649 4,357,451
Treasury stock, at cost:
Balance at beginning of year........................ (47,006) (47,006) (47,006)
Balance at end of year.............................. (47,006) (47,006) (47,006)
----------- ----------- -----------
Total stockholders' equity.................. $22,334,130 $24,888,288 $25,534,090
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 116
THE GNI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss)................................. $(2,111,518) $ 752,620 $ 540,802
Adjustments to reconcile income to net cash
provided by operating activities:..............
Depreciation and amortization.................. 4,820,189 5,989,575 7,247,027
Impairment of assets........................... 6,708,791 -- --
Deferred taxes................................. (1,901,649) 1,423,010 (1,160,165)
Accretion of discount on Senior Subordinated
Notes........................................ -- 109,854 219,708
Gain on sale of assets......................... (16,143) (9,183) (1,705)
Change in assets and liabilities, net of acquisition
consolidation:
Decrease (increase) in accounts receivable........ (907,490) 58,795 (572,438)
Decrease (increase) in inventory.................. (274,411) 136,797 45,550
Decrease (increase) in federal income tax
receivable..................................... -- (930,470) 930,470
Decrease (increase) in prepaid expenses and
other.......................................... (373,616) (1,706,410) 816,062
Increase (decrease) in accounts payable........... 2,022,186 (1,633,732) 1,046,267
Increase (decrease) in accrued liabilities........ 644,028 (1,112,430) (1,017,768)
Increase (decrease) in income taxes payable....... (24,064) (549,256) 190,005
----------- ------------ -----------
Net cash provided by operating
activities.............................. 8,586,303 2,529,170 8,283,815
----------- ------------ -----------
Investing activities:
Decrease (increase) in restricted time deposits... (145,610) 108,982 (64,554)
Payment of cash in connection with business
acquisition, net of cash acquired.............. (4,043,132) -- --
Payment of cash in connection with EMPAK Inc.
transaction.................................... -- (12,000,000) --
Increase in other assets, net..................... (408,936) (326,478) (624,947)
Proceeds from sale of assets...................... 20,000 17,200 11,700
Purchases of fixed assets......................... (6,454,513) (5,570,053) (7,717,716)
----------- ------------ -----------
Net cash used in investing activities..... (11,032,191) (17,770,349) (8,395,517)
----------- ------------ -----------
Financing activities:
Cash proceeds from notes payable.................. 933,095 852,144 920,782
Net cash from exercise of stock options........... 28,000 263,582 105,000
Proceeds from issuance of Senior Subordinated
Notes and warrants............................. -- 20,000,000 --
Net proceeds from revolving line.................. 1,350,000 -- 2,500,000
Payments of deferred costs........................ (15,889) (1,407,451) (596,776)
Proceeds from issuance of long-term debt.......... 3,850,000 15,000,000 --
Principal payments of long-term debt and notes
payable........................................ (3,428,747) (19,782,650) (3,416,434)
----------- ------------ -----------
Net cash provided by (used in) financing
activities.............................. 2,716,459 14,925,625 (487,428)
----------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents............................. 270,571 (315,554) (599,130)
Cash and cash equivalents at beginning of year.... 852,370 1,122,941 807,387
----------- ------------ -----------
Cash and cash equivalents at end of year.......... $ 1,122,941 $ 807,387 $ 208,257
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 117
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of The GNI
Group, Inc. and its subsidiaries ("GNI" or the "Company"), all of which are
wholly-owned. Certain amounts presented in prior years have been reclassified to
conform to current year presentation. All significant intercompany transactions
are eliminated.
Industry
The GNI Group, Inc. is headquartered in Deer Park, Texas with operations in
Deer Park and Corpus Christi, Texas. The Company provides comprehensive waste
management services through the treatment, storage, transportation and disposal
of hazardous and non-hazardous liquid and solid industrial waste and by-product
streams, together with specialized chemical manufacturing, recovery and
processing services.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciation is
provided on a straight line method over the estimated useful lives of the
assets. The estimated useful lives for financial statement purposes are as
follows:
<TABLE>
<S> <C>
Well and surface facility.............................. 5 to 15 years
Processing facility.................................... 5 to 15 years
Buildings and improvements............................. 5 to 30 years
Machinery and equipment................................ 3 to 5 years
Furniture and fixtures................................. 3 to 5 years
</TABLE>
Maintenance and repairs are charged to expense while improvements and
betterments are depreciated over the life of the asset.
The Company capitalizes interest costs as part of the cost of constructing
facilities and equipment. Interest costs of $0, $135,908, and $340,754 were
capitalized in 1996, 1997, and 1998, respectively.
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers'
financial condition. Receivables generally are due within 30 days.
Inventories
Inventories are stated at the lower of cost or market using the average
cost method.
Restricted Time Deposits
Restricted time deposits represent funds pledged in connection with
financial assurance requirements for the Company's various operating permits.
F-7
<PAGE> 118
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Intangible assets consist of amounts relating to contract rights,
acquisition costs, and covenants not to compete arising from acquisitions and
the EMPAK Inc. ("EMPAK") consolidation transaction. The Company amortizes
intangible assets over the lesser of 15 years or the life of the related
agreement. Accumulated amortization was $1,535,410 and $3,130,502 at June 30,
1997 and 1998, respectively. Amortization expense for each of the years ended
June 30, 1996, 1997 and 1998 was $304,492, $1,215,367 and $1,595,092,
respectively.
Revenue Recognition
Revenue from contracts on custom chemical manufacturing are recognized
using the percentage-of-completion method. Other revenues are recognized when
products are shipped or services are performed.
Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare this balance sheet in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
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 during Fiscal
1998. Prior period amounts have been retroactively restated to conform with the
presentation requirements of SFAS No. 128.
Income Taxes
The asset and liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Fair Value of Financial Instruments
The estimated fair value of long-term debt is not materially different from
carrying value for financial statement purposes.
Impairment of Long-Lived Assets
Effective as of January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that an impairment loss be recognized
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
The Company recognized a non-cash pre-tax charge against earnings of
approximately $6.7 million for Fiscal 1996. The total impairment loss recognized
by the Company primarily related to the following: (i) various parcels of real
estate which exceeded their fair market value and (ii) the carrying value of the
Company's wiped film evaporator and associated equipment exceeded the value of
expected future cash flows. An impairment loss on various smaller assets was
also recognized due to regulatory changes and changes in
F-8
<PAGE> 119
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the manner in which the assets are being used. Review of the Company's assets
for Fiscal 1997 and Fiscal 1998 did not result in any asset impairment loss.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following at June 30,
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land...................................................... $ 714,357 $ 714,357
Well, surface and processing facility..................... 37,431,306 40,989,866
Buildings and improvements................................ 3,077,413 3,141,790
Machinery and equipment................................... 2,880,703 3,280,041
Furniture, fixtures and other............................. 988,154 924,295
Construction in progress.................................. 3,676,162 6,491,415
----------- -----------
Total property, plant and equipment............. $48,768,095 $55,541,764
=========== ===========
</TABLE>
3. CONSOLIDATIONS
On September 30, 1996, the Company participated in a consolidation
transaction with EMPAK, whereby EMPAK exited the third-party commercial waste
management business and agreed to assist in the transfer of EMPAK's third-party
commercial waste management customers to the Company. EMPAK will continue to use
its facility in Deer Park, Texas for the disposal of its own waste and the waste
of its affiliates and customers of its related businesses. The Company paid
EMPAK the sum of $12,000,000 at closing. Additionally, the Company has agreed to
pay EMPAK $1,200,000 per year for five years in exchange for the use of EMPAK's
deepwell in case of a force majeure at the Company's facilities, thus allowing
the Company to mitigate any business disruption that may occur should one of its
deepwells have operational or mechanical difficulties.
4. ACQUISITIONS
On November 14, 1995 the Company completed the purchase of certain assets
of E. I. du Pont de Nemours and Company's ("DuPont") refined acetonitrile
business for an undisclosed amount of cash. These assets included certain
intangible personal property, inventory and contractual rights. As part of this
transaction, DuPont entered into a long-term license agreement with respect to
certain intellectual property, a long-term supply agreement pursuant to which
DuPont will supply the Company with the raw material stream from which refined
acetonitrile is produced and a long-term covenant not to compete. The Company
funded the entire consideration with additional borrowings provided by a
commercial bank.
F-9
<PAGE> 120
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT AND CREDIT FACILITIES
As of June 30, 1997 and 1998, long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Note payable to bank secured by certain land and equipment
at a fixed annual rate of interest of 8.44% with quarterly
principal installments of $173,913 plus interest through
December 1998. The facility contains restrictive covenants
including, among others, minimum tangible net worth
requirements, and restrictions relating to investments,
purchases and sales of assets, and payment of dividends... $ 1,043,478 $ 347,826
$15,000,000 secured revolving line of credit, at the lending
bank's prime rate of interest (8.50% at June 30, 1998),
due in full October 31, 1999.............................. 7,000,000 9,500,000
Note payable to bank at the lending bank's prime rate of
interest (8.50% at June 30, 1998) with a fixed rate option
available. Quarterly payments of interest plus principal
based on an 8-year amortization are required with a
balloon at maturity on October 31, 1998. Line is secured
by first lien deed of trust and direct assignment of all
assets.................................................... 5,250,000 4,250,000
Note payable totaling $2,000,000 relating to the acquisition
of the Corpus Christi, Texas facility at the lending
bank's prime rate of interest (8.50% at June 30, 1998).
Quarterly payments of $200,000 plus interest are required
for the first year, then quarterly principal payments of
$75,000 plus interest are required thereafter............. 825,000 525,000
Note payable to Chemical Waste Management, Inc. bearing an
interest rate of 10% relating to the acquisition of Corpus
Christi, Texas facility. Quarterly interest payments only
were required for the first year, then quarterly principal
payments of $125,000 plus accrued interest until maturity
in 2000................................................... 1,250,000 750,000
Senior Subordinated Notes at a fixed annual interest rate of
12.00%, semi-annual interest payments only are required
with a balloon principal payment due at maturity on
December 31, 2003......................................... 18,571,898 18,791,606
----------- -----------
Total long-term debt........................................ 33,940,376 34,164,432
Less amounts classified as current.......................... 2,495,652 2,147,826
----------- -----------
Long-term portion........................................... $31,444,724 $32,016,606
=========== ===========
</TABLE>
The aggregate annual maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30 AMOUNT
------------------- -----------
<S> <C>
1999................................................... $ 2,147,826
2000................................................... 13,225,000
2001................................................... --
2002................................................... --
Thereafter............................................. 18,791,606
-----------
Total........................................ $34,164,432
===========
</TABLE>
On December 31, 1996, the Company entered into a Note and Warrant Purchase
Agreement (the "Purchase Agreement") with two institutional investors (the
"Purchasers") who purchased, in multiple
F-10
<PAGE> 121
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts, (i) $20 million aggregate principal amount of 12.00% senior
subordinated notes due December 31, 2003 ("Senior Subordinated Notes") and (ii)
warrants entitling the Purchasers to purchase, prior to December 31, 2006,
428,400 shares of the Company's common stock, par value $.01 per share, for an
exercise price of $.01 per share. The notes and the warrants issued pursuant to
the Purchase Agreement (respectively, the "Notes" and the "Warrants") were
issued under Rule 506 of Regulation D of the Securities Act of 1933, as amended,
on December 31, 1996. NationsBanc Capital Markets, Inc. acted as placement
agent. The Company received consideration of $20,000,000 and allocated
$18,462,044 for the purchase of the Notes and $1,537,956 for the issuance of the
Warrants.
Interest paid during the years ended June 30, 1996, 1997 and 1998 amounted
to $1,448,214, $2,555,284 and $4,279,806, respectively.
6. RELATED PARTY TRANSACTIONS
In February 1997 the Company granted unsecured loans totaling $650,000 to
the CEO and CFO. Principal and interest at a rate of 7% per annum were due on
February 7, 1998. The loans were used to repay loans to a commercial bank which
were guaranteed by the Company. In April 1998, the Board of Directors agreed to
forgive the notes, with all accrued interest thereon, and reimburse the CEO and
the CFO for federal income taxes owing in respect to such notes.
7. EARNINGS PER SHARE
In February 1997, FASB issued SFAS No. 128, Earnings per Share, which
specified new measurement, presentation and disclosure requirements for earnings
per share and is required to be applied retroactively upon initial adoption. The
Company has adopted SFAS No. 128 in the third quarter of 1998 and accordingly,
has restated all previously reported earnings per share data. Basic earnings per
share is based on the weighted average shares outstanding without any dilutive
effects considered. Dilutive earnings per share reflects dilution from all
potential common shares, including options and warrants.
A reconciliation of such earnings per share data is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Net income (loss)............................... $(2,111,518) $ 752,620 $ 540,802
Basic weighted-average shares outstanding....... 6,475,651 6,571,854 6,633,404
Effect of dilutive securities:
Stock Options................................. -- 128,506 113,601
Warrants...................................... -- 212,439 428,400
----------- ---------- ----------
Diluted weighted-average shares outstanding..... 6,475,651 6,912,799 7,175,405
Basic earnings (loss) per share................. $ (.33) $ .11 $ .08
Diluted earnings (loss) per share............... $ (.33) $ .11 $ .08
</TABLE>
Options to purchase 25,000, 25,000, and 50,137 shares of common stock were
outstanding during a portion of 1996, 1997 and 1998, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
Common stock equivalents with a weighted-average of 205,866 were not included in
the 1996 calculation of diluted earnings per share due to the net loss recorded
during the year.
F-11
<PAGE> 122
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The provision for income taxes in the consolidated statements of operations
is summarized below.
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Provision:
Federal -- Current............................ $ 625,722 $ (893,730) $1,304,185
Federal -- Deferred........................... (1,794,151) 1,343,730 (949,317)
State......................................... (117,000) 90,000 (121,221)
----------- ---------- ----------
Total................................. $(1,285,429) $ 540,000 $ 233,647
=========== ========== ==========
</TABLE>
The provision for income taxes varied from the amount computed by applying
the U.S. federal statutory rate as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
----------- -------- ---------
<S> <C> <C> <C>
Tax at statutory rate........................... $(1,154,962) $439,491 $ 263,313
State income tax, net of federal income tax
benefit....................................... (77,000) 59,400 (142,057)
Nondeductible expenses.......................... 29,984 44,383 46,805
Other........................................... (83,451) (3,274) 65,586
----------- -------- ---------
Income tax provision.................. $(1,285,429) $540,000 $ 233,647
=========== ======== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and tax liabilities at June 30, 1997 and
1998 are presented below:
Deferred Tax Assets:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Amounts deductible when paid................................ $ 162,687 $1,252,057
Accounts receivable, principally due to allowance for
doubtful accounts......................................... 17,027 84,751
Compensated absences, principally due to accrual for
financial reporting purposes.............................. 91,849 95,055
Net state operating loss carryforward....................... -- 295,009
Net federal operating loss carryforward..................... -- 207,202
Contributions carryforward.................................. -- 18,513
Alternative minimum tax credit carryforwards................ 1,021,850 1,395,565
---------- ----------
Total gross deferred tax assets................... 1,293,413 3,348,152
Less valuation allowance.................................... (20,000) (40,000)
---------- ----------
Total net deferred tax assets..................... 1,273,413 3,308,152
Deferred Tax Liabilities:
Facility and equipment, principally due to differences in
depreciation and capitalized interest..................... 2,073,413 2,947,987
---------- ----------
Net deferred tax asset (liability)................ $ (800,000) $ 360,165
========== ==========
</TABLE>
Federal income taxes paid during the years ended June 30, 1996, 1997 and
1998 were $500,000, $675,996 and $60,315, respectively.
F-12
<PAGE> 123
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a net operating loss for federal income tax purposes of
$609,419 which will expire in 2012, and a net operating loss for state income
tax purposes of $9,932,961 which will expire in years 1999 through 2003.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance.
9. STOCK OPTION PLAN
Under the Company's 1991 Stock Option Plan ("1991 Plan"), 400,000 shares
were originally approved for issuance. An additional 200,000 shares were
approved for issuance by the Compensation Committee of the Board of Directors
and the stockholders of the Company, bringing the total number of shares
available for grant to 600,000. The 1991 Plan provides for both qualified
incentive stock options and non-qualified stock options. To date, all options
that have been granted under the 1991 Plan are qualified incentive stock
options. The 1991 Plan requires that qualified options may not be granted at
prices less than fair market value on the dates of the grants and the options
may not be outstanding for a period longer than ten years from the date the
options are granted.
Under the Company's 1995 Management Equity Incentive/Stock Option Plan
("1995 Plan"), 500,000 shares were approved for issuance by the Compensation
Committee of the Board of Directors. The 1995 Plan provides for both qualified
incentive stock options and non-qualified stock options. To date, all options
that have been granted under the 1995 Plan are qualified incentive stock
options. The 1995 Plan requires that qualified options may not be granted at
prices less than fair market value on the dates of the grants and the options
may not be outstanding for a period longer than ten years from the date the
options are granted.
Transactions for the three years ended June 30, 1998 related to all plans
are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Options outstanding on July 1................. 711,300 803,600 880,150
Granted....................................... 100,500 134,000 --
Exercised (prices ranging from $4.00 to $6.00
per share).................................. (7,000) (48,833) (20,000)
Canceled...................................... (1,200) (8,617) (51,200)
----------- ----------- -----------
Options outstanding at June 30................ 803,600 880,150 808,950
=========== =========== ===========
Options price range at June 30................ $4.00-$6.69 $ 4.00-6.69 $4.00-$6.06
Options exercisable at June 30................ 539,767 618,982 694,950
Options available for grant at June 30........ 282,700 157,317 208,517
</TABLE>
F-13
<PAGE> 124
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
plans. No compensation cost has been recognized for its stock option plans due
to the options being issued at fair market value. Had compensation expense for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under the 1991 Plan and the 1995 Plan and
recognized over the weighted average expected life of the options, the Company's
net income and earnings per share would have been decreased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) As reported......... $(2,111,518) $752,620 $540,802
Pro forma........... (2,164,598) 629,325 417,507
Basic earnings (loss) per share As reported......... (.33) .11 .08
Pro forma........... (.33) .10 .06
Diluted earnings (loss) per share As reported......... (.33) .11 .08
Pro forma........... (.33) .09 .06
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
risk free rates of 5.28% to 6.26%; implied volatilities from 34.6% to 38.6%;
expected lives of 4 to 6 years; and no assumed dividend yield.
Weighted average fair values of options granted during Fiscal 1996 and 1997
as determined by the Black-Scholes pricing model were $2.11 and $2.22,
respectively. No options were granted during Fiscal 1998.
10. MAJOR CUSTOMERS
The Company considers itself to be engaged in one business segment. The
Company markets its services on an integrated basis with its services in one
area often supporting or leading to projects in other areas. For Fiscal 1996,
the Company had a single customer that accounted for 10% of total revenues.
During Fiscal 1997 and Fiscal 1998, no major customer accounted for more than
10% of the Company's total revenues.
11. GOVERNMENTAL REGULATIONS
The Company is required to obtain governmental permits and authorizations
which are subject to suspension, revocation, modification, denial or non-renewal
under certain circumstances for various aspects of its operations. Although
management believes that such developments will not occur, the Company's failure
to obtain or renew any such permit or authorization or to obtain acceptable
permit conditions could have a material adverse effect on the Company.
12. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have cancelable and non-cancelable lease
contracts covering certain equipment. Minimum rental commitments under these
leases are $815,471, $367,150, $140,831, $124,596, and $120,456 for the years
ending June 30, 1999 to 2003, respectively. Rental expense was $691,788,
$623,676, and $873,375 for the years ended June 30, 1996, 1997 and 1998,
respectively.
F-14
<PAGE> 125
THE GNI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 27, 1998, a complaint purporting to state a class action was
filed in the Delaware Court of Chancery by William Chaffin and Marcia Chaffin,
alleged to be stockholders of GNI, on behalf of themselves and all others
similarly situated, against GNI and its directors. The plaintiffs allege that
the merger (see Note 14) is wrongful, unfair and harmful to holders of GNI
Common Stock, that the proposed consideration of $7.00 per share is not the
result of arms-length negotiations or based upon any independent valuation of
the current or projected value of GNI, 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. On June 5, 1998, the
plaintiffs filed an amended class action complaint (the "Amended Complaint").
The Amended Complaint adds allegations based on information set forth in the
Company's original filing of preliminary proxy materials, filed with the
Securities and Exchange Commission on April 16, 1998. In addition, the Amended
Complaint (i) names Mr. Titus H. Harris, III as a defendant, (ii) does not name
Mr. Lyons as a defendant; and (iii) eliminates the request to enjoin the merger
which was set forth in the original complaint.
In 1995, certain owners of property near Waste Management's Corpus Christi
deepwell filed suit in district court in Corpus Christi against the Company and
Chemical Waste Management, Inc., a prior owner of the Corpus Christi deepwell,
seeking injunctive relief and alleging property damage with respect to material
injected into the Corpus Christi deepwell. All proceedings have been stayed
while the Texas Supreme Court considers whether plaintiffs have the right to
pursue their claims, and if so, on what basis. Management does not believe that
the plaintiffs will succeed in their claims nor that this litigation will have a
material adverse effect on the Company's operations, cash flow or consolidated
financial position.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's operations, cash flows or consolidated financial position.
13. DIVIDEND POLICY
The Company does not pay any cash dividends on its Common Stock and does
not have any plans to do so in the future. The Company intends to continue a
policy of retaining income for use in its business.
14. SUBSEQUENT EVENTS (UNAUDITED)
In July 1998, the Company completed an offering of $75 million of Senior
Exchange 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.
Effective July 28, 1998, 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.
F-15
<PAGE> 126
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL JANUARY
13, 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE
OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 15
The Company.......................... 22
Use of Proceeds...................... 22
Capitalization....................... 23
Selected Historical and Pro Forma
Consolidated Financial Data........ 24
Unaudited Pro Forma Consolidated
Financial Statements............... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 30
Business............................. 37
Management........................... 56
Certain Transactions................. 59
Stock Ownership...................... 61
Description of the Revolving Credit
Facility........................... 62
Description of the Exchange Notes.... 64
The Exchange Offer................... 88
Book-Entry; Delivery, Form and
Transfer........................... 96
Certain U.S. Federal Tax
Considerations..................... 100
Plan of Distribution................. 103
Legal Matters........................ 104
Experts.............................. 104
Available Information................ 105
Special Note Regarding
Forward-Looking Information........ 106
Index to Financial Statements........ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXCHANGE OFFER
$75,000,000
THE GNI GROUP, INC.
10 7/8% SENIOR NOTES DUE 2005
---------------------
PROSPECTUS
---------------------
OCTOBER 15, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 127
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Officers and Directors of the Company have signed Indemnity Agreements
which provide, among other things, that the Company shall, to the fullest extent
permitted by the Delaware General Corporation Law ("DGCL"), indemnify the party
to such Indemnity Agreement and shall advance expenses incurred in defending any
proceeding for which such right to indemnification is applicable, provided that,
if the DGCL so requires, the indemnitee provides the Company with an undertaking
to repay all amounts advanced if it shall ultimately be determined that such
indemnitee is not entitled to be indemnified by the Company.
The Company's Amended and Restated Certificate of Incorporation contains a
provision eliminating the personal liability of the Company's directors for
monetary damages for breach of any fiduciary duty. By virtue of this provision,
under the DGCL, a director of the Company will not be personally liable for
monetary damages for breach of his fiduciary duty as a director, except for
liability for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) dividends or stock
purchases or redemptions that are unlawful under the DGCL and (iv) any
transaction from which a director derives an improper personal benefit. However,
this provision in the Company's Amended and Restated Certificate of
Incorporation pertains only to breaches of duty by directors as directors and
not in any other corporate capacity such as officers, and limits liability only
for breaches of fiduciary duties under the DGCL and not for violations of other
laws, such as the federal securities laws. As a result of the inclusion of such
provision, stockholders may be unable to recover monetary damages against
directors for actions taken by them that constitute negligence or gross
negligence or that are in violation of their fiduciary duties, although it may
be possible to obtain injunctive or other equitable relief with respect to such
actions. The inclusion of this provision in the Company's Amended and Restated
Certificate of Incorporation may have the effect of reducing the likelihood of
derivative litigation against directors, and may discourage or deter
stockholders or management from bringing a lawsuit against directors for breach
of their duty of care, even though such an action, if successful, might
otherwise have benefitted the Company and its stockholders.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.1* -- Amended and Restated Certificate of Incorporation of The
GNI Group, Inc.
3.2* -- Amended and Restated Bylaws of The GNI Group, Inc.
3.3* -- Form of specimen certificate evidencing the Common Stock.
4.1* -- Series A and Series B 10 7/8% Senior Notes Due 2005
Indenture dated as of July 28, 1998 among the Company,
the Guarantors named on the signature pages thereto and
the United States Trust Company of New York, as trustee.
4.2* -- $75,000,000 10 7/8% Series A Senior Notes due 2005
Purchase Agreement dated as of July 23, 1998 by and among
the Company and the Guarantors named on the signature
pages thereto.
4.3* -- Form of 10 7/8% [Series A] [Series B] Senior Notes Due
2005.
4.4* -- Notation of Guarantee dated July 28, 1998, among GNI
Chemicals Corporation, Disposal Systems of Corpus
Christi, Disposal Systems, Inc., Gulf Nuclear Systems,
Inc. and GNI Transportation Systems, Inc.
4.5* -- A/B Registration Rights Agreement dated as of July 28,
1998 by and among the Company, the Guarantors named on
the signature pages thereto and CIBC Oppenheimer Corp.
4.6* -- Registration Rights Agreement dated as of July 28, 1998
by and among The GNI Group, Inc. and its stockholders.
</TABLE>
II-1
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.7* -- Stockholder's Agreement dated July 28, 1998 among the
Company, the 399 Stockholders and certain members of
management of the Company.
5.1* -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
8.1 -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. with
respect to certain tax matters
10.1* -- The GNI Group, Inc. 401(k) Plan Amended and Restated as
of , . This document is
incorporated by reference to the Company's Registration
Statement No. 33-58784 on Form S-1 filed by the Company
on March 19, 1993, wherein the Company filed this
document as Exhibit "10.4".
10.2* -- Deed dated July 17, 1987 executed by DSI Properties, Inc.
to Disposal Systems, Inc. This document is incorporated
by reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as Exhibit
"10.7".
10.3* -- Agreement of Purchase and Sale dated April 28, 1989 by
and between GNI/ Disposal Systems, Inc. and DSI
Transports, Inc. This document is incorporated by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as Exhibit
"10.8".
10.4* -- Asset Purchase Agreement dated May 22, 1984 by and among
Nuclear Systems, Inc., Gamma Industries, Inc., Nuclear
Systems Export, Inc. and Gulf Gamma, Inc. This document
is incorporated by reference to the Company's
Registration Statement No. 33-58784 on Form S-1 filed by
the Company on March 19, 1993, wherein the Company filed
this document as Exhibit "10.9".
10.5* -- Stock Purchase Agreement dated July 17, 1987 by and
between United Distribution Systems, Inc. and GNI
Incorporated. This document is incorporated by reference
to the Company's Registration Statement No. 33-58784 on
Form S-1 filed by the Company on March 19, 1993, wherein
the Company filed this document as Exhibit "10.10".
10.6* -- Asset Purchase Agreement dated June 17, 1988 by and among
Amersham Corporation, The GNI Group, Inc. and Gamma
Industries, Inc. This document is incorporated by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as Exhibit
"10.11".
10.7* -- Asset Purchase Agreement dated June 17, 1988 by and among
The GNI Group, Inc., Lefco Western Acquisition Company,
LefcoWestern, Inc. ("LW") and LW's shareholders, Lefco
Corporation, George Brock, John LeFevre, Phyllis Brock
and Jean Adele LeFevre. This document is incorporated by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as Exhibit
"10.12".
10.8* -- Stock Purchase Agreement dated September 30, 1988 by and
among The GNI Group, Inc. and Gulf Nuclear Group, Inc.
("Purchaser"). The Agreement was also executed by the
sole shareholder of the Purchaser, Oxford Interests, Inc.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on Form S-1
filed by the Company on March 19, 1993, wherein the
Company filed this document as Exhibit "10.13".
</TABLE>
II-2
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.9* -- Asset Purchase Agreement dated August 14, 1989 by and
among The GNI Group, Inc., Lefco Western, Inc. Lefco
Corporation, George Brock, John LeFevre and Jean LeFevre.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on Form S-1
filed by the Company on March 19, 1993, wherein the
Company filed this document as Exhibit "10.14".
10.10* -- Asset Purchase Agreement dated as of March 1, 1995 by and
among Disposal Systems of Corpus Christi, Inc.; The GNI
Group, Inc.; Disposal Systems, Inc. and Chemical Waste
Management, Inc. This document is incorporated by
reference to the Company's Current Report on Form 8-K
filed by the Company on November 29, 1995, wherein the
Company filed this document as Exhibit "2.1".
10.11* -- GNI-DUPONT AGREEMENT, dated November 14, 1995 and amended
as of June 5, 1998, by and between The GNI Group, Inc.
and E.I. du Pont de Nemours and Company. This document is
incorporated by reference to the Company's Current Report
on Form 8-K filed by the Company on November 29, 1995,
wherein the Company filed this document as Exhibit "2.1".
10.12* -- Deepwell Access Agreement dated as of September 30, 1996
by and between EMPAK Inc. and Disposal Systems, Inc. a
subsidiary of the Company. This document is incorporated
by reference to the Company's Form 10-Q for the three
month period ending on September 30, 1996 filed by the
Company on November 14, 1996, wherein the Company filed
this document as Exhibit "10.2".
10.13* -- Assistance Agreement dated as of September 30, 1996 among
Pakhoed Corporation, EMPAK Inc. and Disposal Systems,
Inc., a subsidiary of the Company. This document is
incorporated by reference to the Company's Form 10-Q for
the three month period ending on September 30, 1996 filed
by the Company on November 14, 1996, wherein the Company
filed this document as Exhibit "10.2".
10.14* -- Amended and Restated Loan and Security Agreement dated
effective as of July 28, 1998 among The GNI Group, Inc.,
GNI Chemicals Corporation, Disposal Systems, Inc.,
Disposal Systems of Corpus Christi, Inc., Resource
Transportation Services, Inc. and Gulf Nuclear of
Louisiana, Inc., as Borrowers, and NationsBank, N.A. as
Agent and a Lender.
21.1* -- Subsidiaries of the Company.
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
(included in Exhibit 5.1 hereto).
24.1* -- Powers of Attorney (included in the signature pages
hereto).
25.1* -- Statement on Form T-1 of Eligibility of Trustee.
27.1* -- Financial Data Schedule
</TABLE>
II-3
<PAGE> 130
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
99.1 -- Form of The GNI Group, Inc. Letter of Transmittal for
10 7/8% Series A Senior Notes due 2005.
99.2 -- Form of The GNI Group, Inc. Notice of Guaranteed Delivery
to Holders of its 10 7/8% Series A Senior Notes due 2005.
99.3 -- Form of The GNI Group, Inc. Letter to Clients regarding
the Offer to Exchange up to $75,000,000 in Principal
Amount of 10 7/8% Series A Senior Notes due 2005 Issued
and Sold in a Transaction Exempt from Registration Under
the Securities Act of 1933, as amended, for up to
$75,000,000 in Principal Amount of 10 7/8% Series B
Senior Notes due 2005.
99.4 -- Form of The GNI Group, Inc. Letter to Nominees regarding
the Offer to Exchange up to $75,000,000 in Principal
Amount of 10 7/8% Series A Senior Notes due 2005 Issued
and Sold in a Transaction Exempt from Registration Under
the Securities Act of 1933, as amended, for up to
$75,000,000 in Principal Amount of 10 7/8% Series B
Senior Notes due 2005.
</TABLE>
- ---------------
* Previously filed
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus: (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Houston, state of Texas,
on October 15, 1998.
THE GNI GROUP, INC.
Registrant
/s/ CARL V RUSH, JR.
------------------------------------
Carl V Rush, Jr.
President and CEO
(Principal Executive Officer)
Date: October 15, 1998
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl V Rush, Jr. his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he might or could
do in person thereby ratifying and confirming all that said attorney-in-fact and
agent or his substitute may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirement of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ CARL V RUSH, JR. Director, President and CEO October 15, 1998
- -----------------------------------------------------
Carl V Rush, Jr.
/s/ TITUS H. HARRIS, III Executive Vice President, CFO and October 15, 1998
- ----------------------------------------------------- Secretary
Titus H. Harris, III
/s/ DONNA L. RATLIFF Treasurer and Assistant Secretary October 15, 1998
- -----------------------------------------------------
Donna L. Ratliff
/s/ JOHN MOWBRAY O'MARA* Director October 15, 1998
- -----------------------------------------------------
John Mowbray O'Mara
/s/ GAVIN J. PARFIT* Director October 15, 1998
- -----------------------------------------------------
Gavin J. Parfit
/s/ RICHARD M. CASHIN, JR.* Director October 15, 1998
- -----------------------------------------------------
Richard M. Cashin, Jr.
/s/ JOSEPH M. SILVESTRI* Director October 15, 1998
- -----------------------------------------------------
Joseph M. Silvestri
</TABLE>
II-5
<PAGE> 132
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.1* -- Amended and Restated Certificate of Incorporation of The
GNI Group, Inc.
3.2* -- Amended and Restated Bylaws of The GNI Group, Inc.
3.3* -- Form of specimen certificate evidencing the Common Stock.
4.1* -- Series A and Series B 10 7/8% Senior Notes Due 2005
Indenture dated as of July 28, 1998 among the Company,
the Guarantors named on the signature pages thereto and
the United States Trust Company of New York, as trustee.
4.2* -- $75,000,000 10 7/8% Series A Senior Notes due 2005
Purchase Agreement dated as of July 23, 1998 by and among
the Company and the Guarantors named on the signature
pages thereto.
4.3* -- Form of 10 7/8% [Series A] [Series B] Senior Notes Due
2005.
4.4* -- Notation of Guarantee dated July 28, 1998, among GNI
Chemicals Corporation, Disposal Systems of Corpus
Christi, Disposal Systems, Inc., Gulf Nuclear Systems,
Inc. and GNI Transportation Systems, Inc.
4.5* -- A/B Registration Rights Agreement dated as of July 28,
1998 by and among the Company, the Guarantors named on
the signature pages thereto and CIBC Oppenheimer Corp.
4.6* -- Registration Rights Agreement dated as of July 28, 1998
by and among The GNI Group, Inc. and its stockholders.
4.7* -- Stockholder's Agreement dated July 28, 1998 among the
Company, the 399 Stockholders and certain members of
management of the Company.
5.1* -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
8.1 -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. with
respect to certain tax matters
10.1* -- The GNI Group, Inc. 401(k) Plan Amended and Restated as
of , . This document is
incorporated by reference to the Company's Registration
Statement No. 33-58784 on Form S-1 filed by the Company
on March 19, 1993, wherein the Company filed this
document as Exhibit "10.4".
10.2* -- Deed dated July 17, 1987 executed by DSI Properties, Inc.
to Disposal Systems, Inc. This document is incorporated
by reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as Exhibit
"10.7".
10.3* -- Agreement of Purchase and Sale dated April 28, 1989 by
and between GNI/ Disposal Systems, Inc. and DSI
Transports, Inc. This document is incorporated by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as Exhibit
"10.8".
10.4* -- Asset Purchase Agreement dated May 22, 1984 by and among
Nuclear Systems, Inc., Gamma Industries, Inc., Nuclear
Systems Export, Inc. and Gulf Gamma, Inc. This document
is incorporated by reference to the Company's
Registration Statement No. 33-58784 on Form S-1 filed by
the Company on March 19, 1993, wherein the Company filed
this document as Exhibit "10.9".
10.5* -- Stock Purchase Agreement dated July 17, 1987 by and
between United Distribution Systems, Inc. and GNI
Incorporated. This document is incorporated by reference
to the Company's Registration Statement No. 33-58784 on
Form S-1 filed by the Company on March 19, 1993, wherein
the Company filed this document as Exhibit "10.10".
</TABLE>
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.6* -- Asset Purchase Agreement dated June 17, 1988 by and among
Amersham Corporation, The GNI Group, Inc. and Gamma
Industries, Inc. This document is incorporated by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as Exhibit
"10.11".
10.7* -- Asset Purchase Agreement dated June 17, 1988 by and among
The GNI Group, Inc., Lefco Western Acquisition Company,
LefcoWestern, Inc. ("LW") and LW's shareholders, Lefco
Corporation, George Brock, John LeFevre, Phyllis Brock
and Jean Adele LeFevre. This document is incorporated by
reference to the Company's Registration Statement No.
33-58784 on Form S-1 filed by the Company on March 19,
1993, wherein the Company filed this document as Exhibit
"10.12".
10.8* -- Stock Purchase Agreement dated September 30, 1988 by and
among The GNI Group, Inc. and Gulf Nuclear Group, Inc.
("Purchaser"). The Agreement was also executed by the
sole shareholder of the Purchaser, Oxford Interests, Inc.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on Form S-1
filed by the Company on March 19, 1993, wherein the
Company filed this document as Exhibit "10.13".
10.9* -- Asset Purchase Agreement dated August 14, 1989 by and
among The GNI Group, Inc., Lefco Western, Inc. Lefco
Corporation, George Brock, John LeFevre and Jean LeFevre.
This document is incorporated by reference to the
Company's Registration Statement No. 33-58784 on Form S-1
filed by the Company on March 19, 1993, wherein the
Company filed this document as Exhibit "10.14".
10.10* -- Asset Purchase Agreement dated as of March 1, 1995 by and
among Disposal Systems of Corpus Christi, Inc.; The GNI
Group, Inc.; Disposal Systems, Inc. and Chemical Waste
Management, Inc. This document is incorporated by
reference to the Company's Current Report on Form 8-K
filed by the Company on November 29, 1995, wherein the
Company filed this document as Exhibit "2.1".
10.11* -- GNI-DUPONT AGREEMENT, dated November 14, 1995 and amended
as of June 5, 1998, by and between The GNI Group, Inc.
and E.I. du Pont de Nemours and Company. This document is
incorporated by reference to the Company's Current Report
on Form 8-K filed by the Company on November 29, 1995,
wherein the Company filed this document as Exhibit "2.1".
10.12* -- Deepwell Access Agreement dated as of September 30, 1996
by and between EMPAK Inc. and Disposal Systems, Inc. a
subsidiary of the Company. This document is incorporated
by reference to the Company's Form 10-Q for the three
month period ending on September 30, 1996 filed by the
Company on November 14, 1996, wherein the Company filed
this document as Exhibit "10.2".
10.13* -- Assistance Agreement dated as of September 30, 1996 among
Pakhoed Corporation, EMPAK Inc. and Disposal Systems,
Inc., a subsidiary of the Company. This document is
incorporated by reference to the Company's Form 10-Q for
the three month period ending on September 30, 1996 filed
by the Company on November 14, 1996, wherein the Company
filed this document as Exhibit "10.2".
10.14* -- Amended and Restated Loan and Security Agreement dated
effective as of July 28, 1998 among The GNI Group, Inc.,
GNI Chemicals Corporation, Disposal Systems, Inc.,
Disposal Systems of Corpus Christi, Inc., Resource
Transportation Services, Inc. and Gulf Nuclear of
Louisiana, Inc., as Borrowers, and NationsBank, N.A. as
Agent and a Lender.
21.1* -- Subsidiaries of the Company.
</TABLE>
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
(included in Exhibit 5.1 hereto).
24.1* -- Powers of Attorney (included in the signature pages
hereto).
25.1* -- Statement on Form T-1 of Eligibility of Trustee.
27.1* -- Financial Data Schedule
99.1 -- Form of The GNI Group, Inc. Letter of Transmittal for
10 7/8% Series A Senior Notes due 2005.
99.2 -- Form of The GNI Group, Inc. Notice of Guaranteed Delivery
to Holders of its 10 7/8% Series A Senior Notes due 2005.
99.3 -- Form of The GNI Group, Inc. Letter to Clients regarding
the Offer to Exchange up to $75,000,000 in Principal
Amount of 10 7/8% Series A Senior Notes due 2005 Issued
and Sold in a Transaction Exempt from Registration Under
the Securities Act of 1933, as amended, for up to
$75,000,000 in Principal Amount of 10 7/8% Series B
Senior Notes due 2005.
99.4 -- Form of The GNI Group, Inc. Letter to Nominees regarding
the Offer to Exchange up to $75,000,000 in Principal
Amount of 10 7/8% Series A Senior Notes due 2005 Issued
and Sold in a Transaction Exempt from Registration Under
the Securities Act of 1933, as amended, for up to
$75,000,000 in Principal Amount of 10 7/8% Series B
Senior Notes due 2005.
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
EXHIBIT 8.1
October 15, 1998
The GNI Group, Inc.
2525 Battleground Rd.
P.O. Bo 220
Deer Park, Texas 77536
Ladies and Gentlemen:
We have acted as counsel to The GNI Group, Inc., a Delaware corporation (the
"Company"), in connection with various legal matters relating to the filing with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-4 (Registration No. 333-64307) as amended, (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") covering the offer by the Company to exchange up to
$75,000,000 in aggregate principal amount of its 10 7/8% Series B Senior Notes
due 2005, (the "Series B Notes") for up to $75,000,000 in aggregate principal
amount of its 10 7/8% Series A Senior Notes due 2005 (the "Original Notes")
originally issued and sold in reliance upon an exemption from registration under
the Securities Act. The Original Notes were issued under that certain Series A
and Series B 10 7/8% Senior Notes due 2005 Indenture dated as of July 28, 1998
(the "Indenture"), by and among the Company, its subsidiaries (the "Guarantors")
and the United States Trust Company of New York, as trustee ("Trustee"). The
exchange of Series B Notes for Original Notes will be made pursuant to an
exchange offer contemplated by the Registration Statement ("Exchange Offer").
Capitalized terms used but not defined herein shall have the meanings assigned
to them in the Registration Statement.
We have examined originals or copies of the Registration Statement and of (a)
the Series A and Series B 10 7/8% Senior Notes Due 2005 Indenture dated as of
July 28, 1998 (the "Indenture") by and among the Company, the Guarantors and the
Trustee, (b) the Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws of the Company, (c) certain resolutions of the Board of
Directors of the Company, and (d) such other documents and records as we have
deemed necessary and relevant for the purposes hereof. In addition, we have
relied on certificates of officers of the Company and of public officials and
others as to certain matters of fact relating to this opinion and have made such
investigations of law as we have deemed necessary and relevant as a basis
hereof. We have assumed the genuineness of all signatures, the legal capacity
of all persons who are signatories, the authenticity of all documents and
records submitted to us as originals, the conformity to authentic original
documents and records of all documents and records submitted to us as copies and
the truthfulness of all statements of fact, representations or warranties
contained therein. We have also assumed the due execution and delivery of the
Indenture and the due authentication of the Original Notes by duly authorized
officers of the Trustee.
Based on the foregoing, we are of the opinion that the statements under the
caption "Certain U.S. Federal Tax Considerations" in the Prospectus included in
the Registration Statement, insofar as they are statements of law or legal
conclusions, are correct in all material respects.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The GNI Group, Inc.
We consent to the use of our report dated July 10, 1998, related to the
consolidated financial statements of The GNI Group, Inc. and subsidiaries as of
June 30, 1997 and 1998 and for each of the years in the three year period ended
June 30, 1998, included herein, and the reference to our firm under the heading
"Experts" in the Registration Statement.
KPMG PEAT MARWICK LLP
Houston, Texas
October 15, 1998
<PAGE> 1
EXHIBIT 99.1
THE GNI GROUP, INC.
2525 BATTLEGROUND ROAD
POST OFFICE BOX 220
DEER PARK, TEXAS 77536
LETTER OF TRANSMITTAL
FOR 10 7/8% SERIES A SENIOR NOTES DUE 2005
EXCHANGE AGENT:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C>
By Facsimile: By Registered or Certified Mail:
United States Trust Company of New York United States Trust Company of New York
(212) 780-0592 P.O. Box 844 Cooper Station
Attention: Corporate Trust Services New York, New York 10276-0844
Attention: Corporate Trust Services
Confirm by telephone:
(800) 548-6565
By Hand before 4:30 p.m.: By Overnight Courier and By Hand after
United States Trust Company of New York 4:30 p.m. on the Expiration Date:
111 Broadway United States Trust Company of New York
Lower Level 770 Broadway, 13th Floor
New York, New York 10006 New York, New York 10003
Attention: Corporate Trust Services Attention: Corporate Trust Services
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL
TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
WILL NOT CONSTITUTE A VALID DELIVERY
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
NOVEMBER 20, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
The undersigned acknowledges receipt of the Prospectus dated October 15,
1998 (the "Prospectus") of The GNI Group, Inc., a Delaware corporation (the
"Company" and, together with the subsidiaries of the Company, the "Issuers") and
this Letter of Transmittal for 10 7/8% Series A Senior Notes due 2005 which may
be amended from time to time (this "Letter"), which together constitute the
Issuers' offer (the "Exchange Offer") to exchange, for each $1,000 in principal
amount of its outstanding 10 7/8% Series A Senior Notes due 2005 issued and sold
in a transaction exempt from registration under the Securities Act of 1933, as
amended (the "Restricted Notes"), $1,000 in principal amount of 10 7/8% Series B
Senior Notes due 2005 (the "Exchange Notes").
The undersigned has completed, executed and delivered this Letter to
indicate the action he or she desires to take with respect to the Exchange
Offer.
All holders of Restricted Notes who wish to tender their Restricted Notes
must, prior to the Expiration Date: (1) complete, sign, date and mail or
otherwise deliver this Letter to the Exchange Agent, in person or to the address
set forth above; and (2) tender his or her Restricted Notes or, if a tender of
Restricted Notes is to be made by book-entry transfer to the account maintained
by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility"), confirm such book-entry transfer (a "Book-Entry Confirmation"), in
each case in accordance with the procedures for tendering described in the
Instructions to this
<PAGE> 2
Letter. Holders of Restricted Notes whose certificates are not immediately
available, or who are unable to deliver their certificates or Book-Entry
Confirmation and all other documents required by this Letter to be delivered to
the Exchange Agent on or prior to the Expiration Date, must tender their
Restricted Notes according to the guaranteed delivery procedures set forth under
the caption "The Exchange Offer -- Guaranteed Delivery Procedures" in the
Prospectus. (See Instruction 1).
The Instructions included with this Letter must be followed in their
entirety. Questions and requests for assistance or for additional copies of the
Prospectus or this Letter may be directed to the Exchange Agent, at the address
listed above, or Titus H. Harris, III, Secretary of the Company at (281)
930-0350, The GNI Group, Inc., 2525 Battleground Road, Post Office Box 220, Deer
Park, Texas 77536-0220.
<PAGE> 3
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING
THE INSTRUCTIONS TO THIS LETTER, CAREFULLY
BEFORE CHECKING ANY BOX BELOW
Capitalized terms used in this Letter and not defined herein shall have the
respective meanings ascribed to them in the Prospectus.
List in Box 1 below the Restricted Notes of which you are the holder. If
the space provided in Box 1 is inadequate, list the certificate numbers and
principal amount of Restricted Notes on a separate signed schedule and affix
that schedule to this Letter.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
BOX 1
TO BE COMPLETED BY ALL TENDERING HOLDERS
- --------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S), CERTIFICATE
(PLEASE FILL IN, IF BLANK) NUMBER(S)*
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
TOTALS**
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
* Need not be completed if Restricted Notes are being tendered by book-entry transfer.
** Unless otherwise indicated, the entire principal amount of Restricted Notes represented
by a certificate or Book-Entry confirmation delivered to the Exchange Agent will be
deemed to have been tendered.
- --------------------------------------------------------------------------------------------
</TABLE>
[ ] CHECK HERE IF TENDERED RESTRICTED NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
-----------------------------------------------------------------------------
Account Number:
-----------------------------------------------------------------------------
Transaction Code Number:
-----------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED RESTRICTED NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):
-----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-----------------------------------------------------------------------------
Window Ticket Number (if available):
-----------------------------------------------------------------------------
Name of Institution which Guaranteed Delivery:
-----------------------------------------------------------------------------
<PAGE> 4
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned tenders to the Issuers the principal amount of Restricted Notes
indicated above. Subject to, and effective upon, the acceptance for exchange of
the Restricted Notes tendered with this Letter, the undersigned exchanges,
assigns and transfers to, or upon the order of, the Issuers all right, title and
interest in and to the Restricted Notes tendered.
The undersigned constitutes and appoints the Exchange Agent as his or her
agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Issuers) with respect to the tendered Restricted Notes,
with full power of substitution, to: (a) deliver certificates for such
Restricted Notes; (b) deliver Restricted Notes and all accompanying evidence of
transfer and authenticity to or upon the order of the Issuers upon receipt by
the Exchange Agent, as the undersigned's agent, of the Exchange Notes to which
the undersigned is entitled upon the acceptance by the Issuers of the Restricted
Notes tendered under the Exchange Offer; and (c) receive all benefits and
otherwise exercise all rights of beneficial ownership of the Restricted Notes,
all in accordance with the terms of the Exchange Offer. The power of attorney
granted in this paragraph shall be deemed irrevocable and coupled with an
interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, exchange, assign and transfer the Restricted
Notes tendered hereby and that the Issuers will acquire good and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The undersigned will, upon
request, execute and deliver any additional documents deemed by the Issuers to
be necessary or desirable to complete the assignment and transfer of the
Restricted Notes tendered.
The undersigned agrees that acceptance of any tendered Restricted Notes by
the Issuers and the issuance of Exchange Notes in exchange therefor shall
constitute performance in full by the Issuers of their obligations under the
Registration Rights Agreement (as defined in the Prospectus) and that, upon the
issuance of the Exchange Notes, the Issuers will have no further obligations or
liabilities thereunder (except in certain limited circumstances). By tendering
Restricted Notes, the undersigned certifies (a) that it is not an "affiliate" of
the Issuers within the meaning of Rule 405 under the Securities Act, that it is
acquiring the Exchange Notes in the ordinary course of the undersigned's
business and that the undersigned has no arrangement with any person to
participate in the distribution of the Exchange Notes or (b) that it is an
"affiliate" (as so defined) of the Issuers or of the initial purchasers in the
original offering of the Restricted Notes, and that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable to it.
The undersigned acknowledges that, if it is a broker-dealer that will
receive Exchange Notes for its own account, it will deliver a prospectus in
connection with any resale of such Exchange Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
All authority conferred or agreed to be conferred by this Letter shall
survive the death or incapacity of the undersigned, and every obligation of the
undersigned under this Letter shall be binding upon the undersigned's heirs,
personal representatives, successors and assigns. Tenders may be withdrawn only
in accordance with the procedures set forth in the Instructions contained in
this Letter.
Unless otherwise indicated under "Special Delivery Instructions" below, the
Exchange Agent will deliver Exchange Notes (and, if applicable, a certificate
for any Restricted Notes not tendered but represented by a certificate also
encompassing Restricted Notes which are tendered) to the undersigned at the
address set forth in Box 1.
The undersigned acknowledges that the Exchange Offer is subject to the more
detailed terms set forth in the Prospectus and, in case of any conflict between
the terms of the Prospectus and this Letter, the Prospectus shall prevail.
<PAGE> 5
[ ] CHECK HERE IF TENDERED RESTRICTED NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
-----------------------------------------------------------------------------
Account Number:
-----------------------------------------------------------------------------
Transaction Code Number:
-----------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED RESTRICTED NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):
-----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-----------------------------------------------------------------------------
Window Ticket Number (if available):
-----------------------------------------------------------------------------
Name of Institution which Guaranteed Delivery:
-----------------------------------------------------------------------------
<PAGE> 6
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
BOX 2
PLEASE SIGN HERE
WHETHER OR NOT RESTRICTED NOTES ARE BEING
PHYSICALLY TENDERED HEREBY
<TABLE>
<S> <C>
- --------------------------------------------------- ---------------------------------------------------
Signature(s) of Owner(s) or Authorized Signatory Date
Area Code and Telephone Number:
- ---------------------------------------------------
</TABLE>
This box must be signed by registered holder(s) of Restricted Notes as their
name(s) appear(s) on certificate(s) for Restricted Notes, or by person(s)
authorized to become registered holder(s) by endorsement and documents
transmitted with this Letter. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
(See Instruction 3)
Name(s)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
Capacity
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
(Include Zip Code)
Signature(s) Guaranteed by
an Eligible Institution:
- --------------------------------------------------------------------------------
(If required by Instruction
3) (Authorized Signature)
- --------------------------------------------------------------------------------
(Title)
- --------------------------------------------------------------------------------
(Name of Firm)
<PAGE> 7
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TO BE COMPLETED BY ALL TENDERING HOLDERS
- ----------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK
- ----------------------------------------------------------------------------------------------------------------------
BOX 3 PART 1 -- PLEASE PROVIDE YOUR TIN IN THE ----------------------------------
SUBSTITUTE SPACE AT RIGHT AND CERTIFY BY SIGNING AND SOCIAL SECURITY NUMBER OF
FORM W-9 DATING BELOW. EMPLOYER IDENTIFICATION NUMBER
-----------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR TAXPAYER PART 2 -- CHECK THE BOX IF YOU ARE NOT SUBJECT TO BACK-UP WITHHOLDING UNDER THE
IDENTIFICATION NUMBER (TIN) PROVISIONS OF SECTION 2406(A)(1)(C) OF THE INTERNAL REVENUE CODE BECAUSE (1) YOU
HAVE NOT BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACK-UP WITHHOLDING AS A RESULT OF
FAILURE TO REPORT ALL INTEREST OR DIVIDENDS OR (2) THE INTERNAL REVENUE SERVICE
HAS NOTIFIED YOU THAT YOU ARE NO LONGER SUBJECT TO BACK-UP WITHHOLDING. [ ]
-----------------------------------------------------------------------------------
CERTIFICATION -- UNDER THE PENALTIES OF PERJURY, I CERTIFY THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE.
SIGNATURE: -------------------------------------- DATE:--------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
BOX 4
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Restricted Notes in a principal amount
not exchanged, or Exchange Notes, are to be issued in the name of someone other
than the person whose signature appears in Box 2, or if Restricted Notes
delivered by book-entry transfer which are not accepted for exchange are to be
returned by credit to an account maintained at the Book-Entry Transfer Facility
other than the account indicated above.
ISSUE AND DELIVER:
(check appropriate boxes)
[ ] Restricted Notes not tendered
[ ] Exchange Notes, to:
Name
- -----------------------------------------
(Please Print)
- -------------------------------------------------
(Address)
Please complete the Substitute Form W-9 at Box 3
Tax I.D. or Social Security Number:
-------------------------------------------------
BOX 5
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Restricted Notes in a principal amount
not exchanged, or Exchange Notes, are to be sent to someone other than the
person whose signature appears in Box 2 or to an address other than that shown
in Box 1.
Deliver:
(check appropriate boxes)
[ ] Restricted Notes not tendered
[ ] Exchange Notes, to:
Name
- -----------------------------------------
(Please Print)
- -------------------------------------------------
(Address)
<PAGE> 9
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER AND CERTIFICATES. Certificates for Restricted
Notes or a Book-Entry Confirmation, as the case may be, as well as a properly
completed and duly executed copy of this Letter and any other documents required
by this Letter, must be received by the Exchange Agent at one of its addresses
set forth herein on or before the Expiration Date. The method of delivery of
this Letter, certificates for Restricted Notes or a Book-Entry Confirmation, as
the case may be, and any other required documents is at the election and risk of
the tendering holder, but except as otherwise provided below, the delivery will
be deemed made when actually received by the Exchange Agent. If delivery is by
mail, the use of registered mail with return receipt requested, properly
insured, is suggested.
Holders whose Restricted Notes are not immediately available or who cannot
deliver their Restricted Notes or a Book-Entry Confirmation, as the case may be,
and all other required documents to the Exchange Agent on or before the
Expiration Date may tender their Restricted Notes pursuant to the guaranteed
delivery procedures set forth in the Prospectus. Pursuant to such procedure: (i)
tender must be made by or through an Eligible Institution (as defined in the
Prospectus under the caption "The Exchange Offer"); (ii) prior to the Expiration
Date, the Exchange Agent must have received from the Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by telegram,
telex, facsimile transmission, mail or hand delivery) (x) setting forth the name
and address of the holder, the description of the Restricted Notes and the
principal amount of Restricted Notes tendered, (y) stating that the tender is
being made thereby and (z) guaranteeing that, within five New York Stock
Exchange trading days after the date of execution of such Notice of Guaranteed
Delivery, this Letter together with the certificates representing the Restricted
Notes or a Book-Entry Confirmation, as the case may be, and any other documents
required by this Letter will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) the certificates for all tendered Restricted Notes or
a Book-Entry Confirmation, as the case may be, as well as all other documents
required by this Letter, must be received by the Exchange Agent within five New
York Stock Exchange trading days after the date of execution of such Notice of
Guaranteed Delivery, all as provided in the Prospectus under the caption "The
Exchange Offer -- Guaranteed Delivery Procedures."
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Restricted Notes will be
determined by the Issuers, whose determination will be final and binding. The
Issuers reserve the absolute right to reject any or all tenders that are not in
proper form or the acceptance of which, in the opinion of the Issuers' counsel,
would be unlawful. The Issuers also reserve the right to waive any
irregularities or conditions of tender as to particular Restricted Notes. All
tendering holders, by execution of this Letter, waive any right to receive
notice of acceptance of their Restricted Notes.
Neither the Issuers, the Exchange Agent nor any other person shall be
obligated to give notice of defects or irregularities in any tender, nor shall
any of them incur any liability for failure to give any such notice.
2. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal amount
of any Senior Note evidenced by a submitted certificate or by a Book-Entry
Confirmation is tendered, the tendering holder must fill in the principal amount
tendered in the fourth column of Box 1 above. All of the Restricted Notes
represented by a certificate or by a Book-Entry Confirmation delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
A certificate for Restricted Notes not tendered will be sent to the holder,
unless otherwise provided in Box 5, as soon as practicable after the Expiration
Date, in the event that less than the entire principal amount of Restricted
Notes represented by a submitted certificate is tendered (or, in the case of
Restricted Notes tendered by book-entry transfer, such non-exchanged Restricted
Notes will be credited to an account maintained by the holder with the
Book-Entry Transfer Facility).
If not yet accepted, a tender pursuant to the Exchange Offer may be
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. To be
effective with respect to the tender of Restricted Notes, a notice of withdrawal
must: (i) be received by the Exchange Agent before the Company notifies the
Exchange Agent that it has accepted the tender of Restricted Notes pursuant to
the Exchange Offer; (ii) specify the
<PAGE> 10
name of the person who tendered the Restricted Notes; (iii) contain a
description of the Restricted Notes to be withdrawn, the certificate numbers
shown on the particular certificates evidencing such Restricted Notes and the
principal amount of Restricted Notes represented by such certificates; and (iv)
be signed by the holder in the same manner as the original signature on this
Letter (including any required signature guarantee).
3. SIGNATURES ON THIS LETTER; ASSIGNMENTS; GUARANTEE OF SIGNATURES. If this
Letter is signed by the holder(s) of Restricted Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the
certificate(s) for such Restricted Notes, without alteration, enlargement or any
change whatsoever.
If any of the Restricted Notes tendered hereby are owned by two or more
joint owners, all owners must sign this Letter. If any tendered Restricted Notes
are held in different names on several certificates, it will be necessary to
complete, sign and submit as many separate copies of this Letter as there are
names in which certificates are held.
If this Letter is signed by the holder of record and (i) the entire
principal amount of the holder's Restricted Notes are tendered; and/or (ii)
untendered Restricted Notes, if any, are to be issued to the holder of record,
then the holder of record need not endorse any certificates for tendered
Restricted Notes, nor provide a separate bond power. If any other case, the
holder of record must transmit a separate bond power with this Letter.
If this Letter or any certificate or assignment is signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and proper evidence satisfactory to the
Issuer of their authority to so act must be submitted, unless waived by the
Issuers.
Signatures on this Letter must be guaranteed by an Eligible Institution,
unless Restricted Notes are tendered: (i) by a holder who has not completed the
Box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
on this Letter; or (ii) for the account of an Eligible Institution. In the event
that the signatures in this Letter or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantees must be by an eligible
guarantor institution which is a member of The Securities Transfer Agents
Medallion Program (STAMP), The New York Stock Exchanges Medallion Signature
Program (MSP) or The Stock Exchanges Medallion Program (SEMP) (collectively,
"Eligible Institutions"). If Restricted Notes are registered in the name of a
person other than the signer of this Letter, the Restricted Notes surrendered
for exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Issuers, in their sole discretion, duly executed by the registered holder with
the signature thereon guaranteed by an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in Box 4 or 5, as applicable, the name and address to which the
Exchange Notes or certificates for Restricted Notes not exchanged are to be
issued or sent, if different from the name and address of the person signing
this Letter. In the case of issuance in a different name, the tax identification
number of the person named must also be indicated. Holders tendering Restricted
Notes by book-entry transfer may request that Restricted Notes not exchanged be
credited to such account maintained at the Book-Entry Transfer Facility as such
holder may designate.
5. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder
whose tendered Restricted Notes are accepted for exchange must provide the
Exchange Agent (as payor) with his or her correct taxpayer identification number
("TIN"), which, in the case of a holder who is an individual, is his or her
social security number. If the Exchange Agent is not provided with the correct
TIN, the holder may be subject to a $50 penalty imposed by the Internal Revenue
Service. In addition, delivery to the holder of the Exchange Notes pursuant to
the Exchange Offer may be subject to back-up withholding. (If withholding
results in overpayment of taxes, a refund may be obtained.) Exempt holders
(including, among others, all corporations and certain foreign individuals) are
not subject to these back-up withholding and reporting requirements. See
<PAGE> 11
the enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional instructions.
Under federal income tax laws, payments that may be made by the Issuers on
account of Exchange Notes issued pursuant to the Exchange Offer may be subject
to back-up withholding at a rate of 31%. In order to prevent back-up
withholding, each tendering holder must provide his or her correct TIN by
completing the "Substitute Form W-9" referred to above, certifying that the TIN
provided is correct (or that the holder is awaiting a TIN) and that: (i) the
holder has not been notified by the Internal Revenue Service that he or she is
subject to back-up withholding as a result of failure to report all interest or
dividends; or (ii) the Internal Revenue Service has notified the holder that he
or she is no longer subject to back-up withholding; or (iii) certify in
accordance with the Guidelines that such holder is exempt from back-up
withholding. If the Restricted Notes are in more than one name or are not in the
name of the actual owner, consult the enclosed Guidelines for information on
which TIN to report.
6. TRANSFER TAXES. The Issuers will pay all transfer taxes, if any,
applicable to the transfer of Restricted Notes to it or its order pursuant to
the Exchange Offer. If, however, the Exchange Notes or certificates for
Restricted Notes not exchanged are to be delivered to, or are to be issued in
the name of, any person other than the record holder, or if tendered
certificates are recorded in the name of any person other than the person
signing this Letter, or if a transfer tax is imposed by any reason other than
the transfer of Restricted Notes to the Company or its order pursuant to the
Exchange Offer, then the amount of such transfer taxes (whether imposed on the
record holder or any other person) will be payable by the tendering holder. If
satisfactory evidence of payment of taxes or exemption from taxes is not
submitted with this Letter, the amount of transfer taxes will be billed directly
to the tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the certificates listed in this Letter.
7. WAIVER OF CONDITIONS. The Issuers reserve the absolute right to amend or
waive any of the specified conditions in the Exchange Offer in the case of any
Restricted Notes tendered.
8. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. Any holder whose
certificates for Restricted Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above, for further
instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Prospectus or this Letter, may be directed to the Exchange Agent.
IMPORTANT: This Letter (together with certificates representing tendered
Restricted Notes or a Book-Entry Confirmation and all other required documents)
must be received by the Exchange Agent on or before the Expiration Date (as
defined in the Prospectus).
<PAGE> 1
EXHIBIT 99.2
THE GNI GROUP, INC.
EXCHANGE OFFER
TO HOLDERS OF ITS
10 7/8% SERIES A SENIOR NOTES DUE 2005
NOTICE OF GUARANTEED DELIVERY
As set forth in the Prospectus dated October 15, 1998 (the "Prospectus") of
The GNI Group, Inc. (the "Company" and, together with it subsidiaries, each of
whom have guaranteed the Restricted Notes (as defined below), the "Issuers")
under "The Exchange Offer -- How to Tender" and in the Letter of Transmittal
(the "Letter of Transmittal") relating to the offer (the "Exchange Offer") by
the Issuers to exchange up to $75,000,000 in principal amount of its 10 7/8%
Series A Senior Notes due 2005 issued and sold in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Restricted
Notes"), for up to $75,000,000 in principal amount of its 10 7/8% Series B
Senior Notes due 2005 (the "Exchange Notes"), this form or one substantially
equivalent hereto must be used to accept the Exchange Offer of the Issuers if:
(i) certificates for the Restricted Notes are not immediately available; or (ii)
time will not permit all required documents to reach the Exchange Agent (as
defined below) on or prior to the Expiration Date (as defined in the Prospectus)
of the Exchange Offer. Such form may be delivered by hand or transmitted by
telegram, telex, facsimile transmission or letter to the Exchange Agent.
TO: UNITED STATES TRUST COMPANY OF NEW YORK (the "Exchange Agent")
By Facsimile:
(212) 780-0592
Attention: Customer Service
Confirm by telephone:
(800) 548-6565
By Registered or Certified Mail:
United States Trust Company of New York
P. O. Box 844 Cooper Station
New York, New York 10276
By Hand:
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Corporate Trust Operations
By Overnight Courier:
United States Trust Company of New York
770 Broadway
New York, New York 10003
Attention: Corporate Trust Operations
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE OR TRANSMITTAL OF THIS INSTRUMENT TO
A FACSIMILE OR TELEX NUMBER OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to the Issuers, upon the terms and
conditions set forth in the Prospectus and the Letter of Transmittal (which
together constitute the "Exchange Offer"), receipt of which are hereby
acknowledged, the principal amount of Restricted Notes set forth below pursuant
to the guaranteed delivery procedure described in the Prospectus and the Letter
of Transmittal.
<TABLE>
<S> <C>
Principal Amount of Restricted Notes Tendered
$ Signature: ----------------------------------------
- ---------------------------------------------------
</TABLE>
Certificate Nos:
- --------------------------------------------------------------------------------
Please Print the Following Information (if available)
Name(s)
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Area Code
and Tel. No(s).
- --------------------------------------------------------------------------------
Total Principal Amount
Represented by Restricted Notes
- -------------------------------------------------------------------------
<TABLE>
<S> <C>
Certificate(s) ------------------------------------ Account Number --------------------------------
</TABLE>
Dated:
- ---------------------------------------------------, 1998
GUARANTEE
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17A(d)-15 under the Securities Exchange Act
of 1934, as amended, hereby guarantees that delivery to the Exchange Agent of
certificates tendered hereby, in proper form for transfer, or delivery of such
certificates pursuant to the procedure for book-entry transfer, in either case
with delivery of a properly completed and duly executed Letter of Transmittal
(or facsimile thereof) and any other required documents, is being made within
five trading days after the date of execution of a Notice of Guaranteed Delivery
of the above-named person.
Name of Firm
- --------------------------------------------------------------------------------
Authorized Signature
- --------------------------------------------------------------------------------
Number and Street
or P.O. Box
- --------------------------------------------------------------------------------
City, State,
and Zip Code
- --------------------------------------------------------------------------------
Area Code and
Telephone Number
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.3
THE GNI GROUP, INC.
OFFER TO EXCHANGE
UP TO $75,000,000 IN PRINCIPAL AMOUNT OF
10 7/8% SERIES A SENIOR NOTES DUE 2005 ISSUED AND
SOLD IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED
FOR
UP TO $75,000,000 IN PRINCIPAL AMOUNT OF
10 7/8% SERIES B SENIOR NOTES DUE 2005
To Our Clients:
Enclosed for your consideration is a Prospectus dated October 15, 1998 (as
the same may be amended or supplemented from time to time, the "Prospectus") and
a form of Letter of Transmittal (the "Letter of Transmittal") relating to the
offer (the "Exchange Offer") by The GNI Group, Inc. (the "Company") and,
together with its subsidiaries, each of whom have guaranteed the Restricted
Notes (as defined below) (the "Issuers") to exchange up to $75,000,000 in
principal amount of its 10 7/8% Series A Senior Notes due 2005 issued and sold
in a transaction exempt from registration under the Securities Act of 1933, as
amended (the "Restricted Notes"), for up to $75,000,000 in principal amount of
its 10 7/8% Series B Senior Notes due 2005 (the "Exchange Notes").
The material is being forwarded to you as the beneficial owner of
Restricted Notes carried by us for your account or benefit but not registered in
your name. A tender of any Restricted Notes may be made only by us as the
registered holder and pursuant to your instructions. Therefore, the Issuers urge
beneficial owners of Restricted Notes registered in the name of a broker,
dealer, commercial bank, trust company or other nominee to contact such
registered holder promptly if they wish to tender Restricted Notes in the
Exchange Offer.
Accordingly, we request instructions as to whether you wish us to tender
any or all Restricted Notes, pursuant to the terms and conditions set forth in
the Prospectus and Letter of Transmittal. We urge you to read carefully the
Prospectus and Letter of Transmittal before instructing us to tender your
Restricted Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Restricted Notes on your behalf in accordance with
the provisions of the Exchange Offer. The Exchange Offer will expire at 5:00
p.m., New York City Time, on November 20, 1998, unless extended (the "Expiration
Date"). Restricted Notes tendered pursuant to the Exchange Offer may be
withdrawn, subject to the procedures described in the Prospectus, at any time
prior to the Expiration Date.
If you wish to have us tender any or all of your Restricted Notes held by
us for your account or benefit, please so instruct us by completing, executing
and returning to us the instruction form that appears below. The accompanying
Letter of Transmittal is furnished to you for informational purposes only and
may not be used by you to tender Restricted Notes held by us and registered in
our name for your account or benefit.
<PAGE> 2
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of The GNI Group,
Inc.
THIS WILL INSTRUCT YOU TO TENDER THE PRINCIPAL AMOUNT OF RESTRICTED NOTES
INDICATED BELOW HELD BY YOU FOR THE ACCOUNT OR BENEFIT OF THE UNDERSIGNED,
PURSUANT TO THE TERMS OF AND CONDITIONS SET FORTH IN THE PROSPECTUS AND THE
LETTER OF TRANSMITTAL.
Box 1 [ ] Please tender my Restricted Notes held by you for my account or
benefit. I have identified on a signed schedule attached hereto the
principal amount of Restricted Notes to be tendered if I wish to
tender less than all of my Restricted Notes.
Box 2 [ ] Please do not tender any Restricted Notes held by you for my account
or benefit.
Date:
- ------------ , 1998.
---------------------------------------
Signature(s)
---------------------------------------
Please print name(s) here
- --------------------------------------------------------------------------------
Unless a specific contrary instruction is given in a signed Schedule
attached hereto, your signature(s) hereon shall constitute an instruction to us
to tender all of your Restricted Notes.
<PAGE> 1
EXHIBIT 99.4
THE GNI GROUP, INC.
OFFER TO EXCHANGE
UP TO $75,000,000 IN PRINCIPAL AMOUNT OF
10 7/8% SERIES A SENIOR NOTES DUE 2005 ISSUED
AND SOLD IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED
FOR
UP TO $75,000,000 IN PRINCIPAL AMOUNT OF
10 7/8% SERIES B SENIOR NOTES DUE 2005
To Securities Dealers, Commercial Banks
Trust Companies and Other Nominees:
Enclosed for your consideration is a Prospectus dated October 15, 1998 (as
the same may be amended or supplemented from time to time, the "Prospectus") and
a form of Letter of Transmittal (the "Letter of Transmittal") relating to the
offer (the "Exchange Offer") by The GNI Group, Inc. (the "Company" and, together
with its subsidiaries, each of whom have guaranteed the Restricted Notes (as
defined below) the "Issuers") to exchange up to $75,000,000 in principal amount
of its 10 7/8% Series A Notes due 2005 issued and sold in a transaction exempt
from registration under the Securities Act of 1933, as amended (the "Restricted
Notes"), for up to $75,000,000 in principal amount of its 10 7/8% Series B
Senior Notes due 2005 (the "Exchange Notes").
We are asking you to contact your clients for whom you hold Restricted
Notes registered in your name or in the name of your nominee. In addition, we
ask you to contact your clients who, to your knowledge, hold Restricted Notes
registered in their own name. The Issuers will not pay any fees or commissions
to any broker, dealer or other person in connection with the solicitation of
tenders pursuant to the Exchange Offer. You will, however, be reimbursed by the
Issuers for customary mailing and handling expenses incurred by you in
forwarding any of the enclosed materials to your clients. The Issuers will pay
all transfer taxes, if any, applicable to the tender of Restricted Notes to it
or its order, except as otherwise provided in the Prospectus and the Letter of
Transmittal.
Enclosed are copies of the following documents:
1. The Prospectus;
2. A Letter of Transmittal for your use in connection with the tender of
Restricted Notes and for the Information of your clients;
3. A form of letter that may be sent to your clients for whose accounts
you hold Restricted Notes registered in your name or the name of your
nominee, with space provided for obtaining the clients' instructions
with regard to the Exchange Offer;
4. A form of Notice of Guaranteed Delivery; and
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
Your prompt action is requested. The Exchange Offer will expire at 5:00
p.m., New York City Time, on November 20, 1998, unless extended (the "Expiration
Date"). Restricted Notes tendered pursuant to the Exchange Offer may be
withdrawn, subject to the procedures described in the Prospectus, at any time
prior to the Expiration Date.
<PAGE> 2
To tender Restricted Notes, certificates for Restricted Notes or a
Book-Entry Confirmation, a duly executed and properly completed Letter of
Transmittal or a facsimile thereof, and any other required documents, must be
received by the Exchange Agent as provided in the Prospectus and the Letter of
Transmittal.
Additional copies of the enclosed material may be obtained from United
States Trust Company of New York, the Exchange Agent, by calling (800) 548-6565.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE ISSUERS OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY
OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO
THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS AND
THE LETTER OF TRANSMITTAL.
