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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 0-10735
THE GNI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0232338
(State or other jurisdiction of (I.R.S.) Employer
incorporation or organization) Identification No.)
2525 BATTLEGROUND ROAD
DEER PARK, TEXAS 77536
(Address of principal executive offices)
(Zip Code)
(281) 930-0350
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's Class A voting common
stock, $.01 par value per share, as of October 1, 1999 was 114,631. There were
456,799 shares outstanding of the registrant's Class B non-voting common stock,
$.01 par value per share, as of October 1, 1999.
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INDEX
THE GNI GROUP, INC.
<TABLE>
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Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 1999 and June 30, 1999 1
Consolidated Statements of Operations
Three Months ended September 30,
1999 and 1998 2
Consolidated Statements of Cash Flows
Three Months ended September 30, 1999
and 1998 3
Notes to Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 6-12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Item 21. Exhibits and Financial Statement Schedules 13
</TABLE>
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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THE GNI GROUP, INC. September 30, June 30,
1999 1999
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and time deposits $ 38,137 $ 1,597,145
Accounts receivable, less allowance of approximately $294,000
for 9/30/99 and $279,000 for 6/30/99 8,084,931 9,807,494
Deferred tax asset 1,307,323 1,307,323
Prepaid expenses and other assets 1,915,872 1,226,033
------------ ------------
TOTAL CURRENT ASSETS 11,346,263 13,937,995
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 61,987,117 61,185,322
Less accumulated depreciation (27,009,833) (25,442,639)
------------ ------------
NET PROPERTY, PLANT AND EQUIPMENT 34,977,284 35,742,683
------------ ------------
Deferred tax asset, net 4,249,561 4,249,561
Intangible assets, net 16,568,339 16,989,285
Other assets,net 5,189,735 5,514,769
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TOTAL ASSETS $ 72,331,182 $ 76,434,293
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 4,926,256 $ 3,954,237
Accrued liabilities 4,278,969 6,149,928
Current portion of long-term debt 7,040,481 6,727,017
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TOTAL CURRENT LIABILITIES 16,245,706 16,831,182
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Accrued liabilities 1,185,238 1,676,288
Long-term debt, less current portion 75,000,000 75,000,000
Series A preferred stock 18,500,000 18,500,000
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STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock, $.01 par value
Authorized 1,500,000 shares; issued 114,631 shares at 9/30/99 and at
6/30/99 1,146 1,146
Class B common stock, $.01 par value
Authorized 1,500,000 shares, 456,799 shares outstanding at 9/30/99 and
at 6/30/99 4,568 4,568
Additional paid-in capital 3,994,303 3,994,303
Retained earnings (accumulated deficit) (42,426,837) (39,400,252)
Less cost of treasury stock (24,706 shares) (172,942) (172,942)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (38,599,762) (35,573,177)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 72,331,182 $ 76,434,293
============ ============
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at September 30, 1999 is unaudited. The Balance Sheet at
June 30, 1999 has been derived from the audited financial statements at that
date.
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THE GNI GROUP, INC. Three Months Ended
September 30
1999 1998
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REVENUES $ 9,337,688 $ 8,499,118
COST AND EXPENSES:
Cost of services 6,230,919 5,880,222
Selling, general and administrative 1,256,657 2,071,108
Depreciation and amortization 2,315,704 1,936,901
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TOTAL COST AND EXPENSES 9,803,280 9,888,231
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OPERATING LOSS (465,592) (1,389,113)
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Interest income 6,453 20,178
Interest expense 2,535,504 1,597,277
Other income 1,022 2,857
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LOSS BEFORE TAX (2,993,621) (2,963,355)
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Income tax (benefit) 32,965 (933,048)
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LOSS BEFORE EXTRAORDINARY ITEM (3,026,586) (2,030,307)
============ ============
Extraordinary item, net of tax benefit -- 3,920,936
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NET LOSS (3,026,586) (5,951,243)
============ ============
</TABLE>
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THE GNI GROUP, INC. Three Months Ended
September 30
1999 1998
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Cash flows from operating activities:
NET LOSS $ (3,026,586) $ (5,951,243)
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 2,315,704 1,936,901
Deferred taxes -- (2,952,923)
Write-off of deferred loan costs -- 1,140,708
Debt retirement costs -- 4,800,103
Change in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable 1,722,564 (310,311)
Decrease in inventory -- 414,461
Increase in prepaid expenses and other (777,540) (502,171)
Decrease (increase) in other assets 85,170 (1,243)
Increase in accounts payable 972,019 1,081,326
Increase (decrease) in accrued liabilities (2,697,618) 1,126,066
Decrease in income taxes payable -- (200,000)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,406,287) 581,674
============ ============
Cash flows from investing activities:
Increase in restricted time deposits -- (18,781)
Payment of cash in connection with business acquisition -- (482,353)
Purchases of fixed assets (801,795) (3,614,613)
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NET CASH USED IN INVESTING ACTIVITIES (801,795) (4,115,747)
============ ============
Cash flows from financing activities:
Cash proceeds from notes payable 539,375 702,233
Net proceeds from issuance of Senior Notes -- 72,750,000
Purchase of GNI equity -- (50,727,953)
Equity Contribution -- 22,500,000
Deferred loan costs -- (1,344,478)
Merger fees and expenses -- (3,558,733)
Subordinated notes make-whole premium -- (3,590,000)
Net proceeds from revolving line 313,464 2,773,652
Principal payments of long-term debt and notes payable (203,765) (35,638,061)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 649,074 3,866,660
============ ============
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,559,008) 332,587
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,597,145 208,257
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 38,137 $ 540,844
============ ============
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE GNI GROUP, INC. September 30, 1999
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All significant intercompany
transactions are eliminated.
The Consolidated Balance Sheet as of September 30, 1999 and the related
Statements of Operations for the three month periods ended September 30, 1999
and 1998, and Statements of Cash Flows for the three month period ended
September 30, 1999 and 1998 are unaudited; in the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted of normal, recurring items. Interim
results are not necessarily indicative of results for a full year. The financial
statements and Notes are presented as permitted by Form 10-Q and do not contain
certain information included in the Company's Annual Financial Statements and
Notes.
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Business Segments
The Company operates primarily in two business segments, waste
management services and specialty chemical manufacturing. The Company's waste
management business provides a broad range of waste management services which
consist of transporting, testing, recovering, treating and disposing of
hazardous and non-hazardous wastes. The Company's specialty chemical business
manufactures specialty chemicals on a contract or "tolling" basis for third
parties.
The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies. Other includes corporate expenses and
elimination of intersegment revenues.
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WASTE SPECIALTY
THREE MONTHS ENDED SEPTEMBER 30, MANAGEMENT CHEMICAL OTHER TOTAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1999
Revenues from external customers $ 7,212,635 $ 2,125,053 -- $ 9,337,688
Intersegment revenues 210,121 -- (210,121) --
-------------- -------------- -------------- --------------
Total revenues $ 7,422,756 $ 2,125,053 $ (210,121) $ 9,337,688
Net interest expense and other 427,063 329,988 1,770,978 2,528,029
Depreciation and amortization 1,185,141 971,553 159,010 2,315,704
Income (loss) before taxes 610,400 (1,564,958) (2,039,063) (2,993,621)
Total assets 38,518,273 24,249,144 9,563,765 72,331,182
Purchases of fixed assets 294,271 501,569 5,955 801,795
1998
Revenues from external customers $ 5,238,558 $ 3,260,560 $ -- $ 8,499,118
Intersegment revenues 135,924 -- (135,924) --
-------------- -------------- -------------- --------------
Total revenues $ 5,374,482 $ 3,260,560 $ (135,924) $ 8,499,118
Net interest expense and other 344,879 48,994 1,180,369 1,574,242
Depreciation and amortization 998,621 823,424 114,856 1,936,901
Loss before taxes (1,906,741) (392,645) (663,969) (2,963,355)
Extraordinary item, net of tax -- -- (3,920,936) (3,920,936)
Total assets 41,801,829 27,844,080 7,914,404 77,560,313
Purchases of fixed assets 2,165,260 1,345,343 104,010 3,614,613
</TABLE>
5
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Pursuant to a Merger Agreement dated February 12, 1998, and amended on June
17, 1998, between the Company and Green I Acquisition Corp. ("Green I"), a
company formed by 399 Venture Partners, Inc. ("399"), Green I merged with and
into the Company, with the Company as the surviving corporation (the "Merger").
Immediately following the Merger, each share of GNI common stock was canceled
and converted into the right to receive $7.00 in cash, other than certain shares
held by management and other than shares held by stockholders who were entitled
to, and who perfected their, appraisal rights. Each option and warrant to
purchase GNI common stock outstanding immediately prior to the effective date
was canceled and the holder thereof received $7.00 per share in cash, net of the
application option or warrant exercise price. The Company mailed a proxy
statement with respect to the Merger on June 24, 1998 for a stockholders'
meeting on July 23, 1998. On July 23, 1998, a majority of the Company's
stockholders approved the Merger. On July 28, 1998, the Merger became effective.
The Merger was financed by an offering of $75 million of 10.875% Senior
Notes due 2005, together with an equity investment in the Company of
approximately $22.5 million by 399 and certain members of GNI's management (the
Merger together with the equity and debt financing arrangements described
herein, the "Recapitalization"). In conjunction with the Recapitalization, the
Company entered into a new $12 million senior secured revolving facility (the
"Revolving Credit Facility") with NationsBank, N.A., which is available for
working capital requirements, capital expenditures and other general corporate
purposes and permitted acquisitions, subject to a borrowing base formula and
certain asset appraisals.
On September 25, 1998, a wholly-owned subsidiary of the Company, GNI
Technical Services, Inc., purchased substantially all of the assets and assumed
certain liabilities of Moheat, Inc. ("Moheat") for cash consideration of
approximately $480,000. Moheat is engaged in the site management and disposal of
hazardous waste, primarily as a contractor to the U. S. government.
RESULTS OF OPERATIONS-
FISCAL 2000 FIRST QUARTER COMPARED WITH FISCAL 1999 FIRST QUARTER
Revenues. Consolidated revenues increased by $800 thousand or 9.9% from $8.5
million in the first quarter of Fiscal 1999 to $9.3 million for the comparable
period of Fiscal 2000. This increase was attributable to (i) an increase in the
Company's waste management services segment of $2.0 million or 37.7% from $5.2
million in the Fiscal 1999 first quarter to $7.2
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million in the first quarter of Fiscal 2000, and (ii) a decrease in revenue from
the Company's specialty chemical manufacturing business segment of $1.1 million
or 34.8% from $3.2 million in the Fiscal 1999 first quarter to $2.1 million in
the first quarter of Fiscal 2000.
The increase in the revenues for the waste management services segment was
primarily attributable to a major increase in the service provided to the U.S.
Navy for the treatment of Napalm. The contract for these services is scheduled
to last for approximately two years.
The revenue decline for the specialty chemical manufacturing business was
attributable to continued production problems related to one customer project
which was started in the third quarter of Fiscal 1999. The production problems
centered on several equipment outages coupled with chemical processing issues
with the project. The continued delay in reaching optimum production levels for
this project caused the chemical plant to remain underutilized during the
quarter.
Cost of Services. Cost of services declined as a percentage of revenue from
69.2% in the first quarter of Fiscal 1999 to 66.7% in the first quarter of
Fiscal 2000. Included within the cost of service figure for Fiscal 1999 were
non-recurring personnel reduction costs of approximately $249,000. Excluding
these non-recurring costs would result in a cost of services of 66.3% in the
first quarter of Fiscal 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses declined as a percentage of revenue from 24.4%
in the first quarter of Fiscal 1999 to 13.5% in the first quarter of Fiscal
2000. Included within the selling, general and administrative expense figure for
Fiscal 1999 were non-recurring personnel reduction costs and transaction costs
of approximately $232,000 and $673,000, respectively. Excluding these
non-recurring costs would result in selling, general and administrative costs of
13.7% in the first quarter of Fiscal 1999.
Depreciation and Amortization Expenses. Depreciation and amortization
increased by approximately $379,000 from $1.9 million in the first quarter of
Fiscal 1999 to $2.3 million in the comparable period in Fiscal 2000 primarily
due to the capital improvements made by the Company to its facilities in Fiscal
1999.
Interest Expense. Interest expense increased $938 thousand from $1.6 million
in the first quarter of Fiscal 1999 to $2.5 million in the first quarter of
Fiscal 2000 due to higher borrowing levels including the issuance of the $75
million 10.875% Senior Notes due 2005 in connection with the Recapitalization
Transaction completed by the Company on July 28, 1998 as well as increased
borrowing under the Company's revolving line of credit.
Net Loss. The Company recorded a net loss of approximately $3.0 million for
the first quarter of Fiscal 2000. In Fiscal 1999 the Company had a net loss of
approximately $6 million which included an extraordinary charge in the amount of
$3.9 million, net of tax benefit, in connection with the Recapitalization
Transaction completed in July, 1998.
Inflation did not have a material impact on the Company's revenues or income
in either the
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first quarter of Fiscal 2000 or Fiscal 1999. Further, it is not expected that
inflation will have a material impact during the remaining quarter of Fiscal
2000 for either the Company's revenues or income.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of Fiscal 2000 the Company used approximately $1.4
million in net cash from operations compared with providing approximately
$600,000 for the Fiscal 1999 period. The major cause of the decrease of
approximately $2.0 million was attributable to the payment in July 1999 of the
$4.1 million semi-annual interest coupon on the $75 million 10.875% Senior
Notes. This use of cash was partially offset by a decrease in accounts
receivable of $1.7 million in Fiscal 2000 versus an increase in accounts
receivable of $310,000 in the corresponding period in Fiscal 1999.
During the first quarter of Fiscal 2000 and Fiscal 1999, the Company's net
cash used in investing activities was $800 thousand and $4.1 million,
respectively. For Fiscal 1999, the main components were the cash payment of
approximately $480 thousand made for a business acquisition during the period
and capital expenditures relating to plant expansion of $3.6 million. For Fiscal
2000, the capital expenditures were reduced to $802 thousand.
In Fiscal 2000, the net cash provided by financing activities was $649
thousand compared with $3.9 million provided in the comparable period in Fiscal
1999. The Fiscal 1999 activity included the transaction related to the
Recapitalization of the Company.
As of September 30, 1999, total debt exceeded total assets of the Company by
$9.7 million.
The Revolving Credit Facility provides for revolving loans in the aggregate
amount of up to $12 million, subject to a borrowing base formula and certain
asset appraisals, with a $3 million sublimit for the issuance of standby and
commercial letters of credit. Availability under the Revolving Credit Facility
is calculated based on a borrowing base formula tied to (i) 85% of eligible
accounts receivable plus (ii) an amount based on the Company's fixed assets.
Amounts borrowed under the Revolving Credit Facility will be due in full on July
31, 2001, unless extended. Until the Company provided the lender with financial
statements for the quarter ended September 30, 1998, amounts borrowed under the
Revolving Credit Facility bore interest, at the option of the Company, at either
(i) the lender's Base Rate plus 1.00% or (ii) LIBOR plus 2.75%. Thereafter, such
applicable margins are subject to reduction based upon the Company's Interest
Coverage Ratio (as defined in the Revolving Credit Facility). The Revolving
Credit Facility contains standard financial and restrictive covenants for
facilities of this type, including covenants which, among other things, require
the maintenance of specified financial ratios, restrict payment of dividends and
limit the amount of capital expenditures. As of September 30, 1999, the
Company's Revolving Credit Facility had an outstanding balance of approximately
$7.0 million and approximately $0.5 million of letters of credit outstanding,
leaving approximately $4.5 million of availability. At September 30, 1999, the
Company was not in compliance with certain of its covenants related to its
outstanding Senior Credit Facility. As
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such, all amounts due under this Senior Credit Facility have been classified as
current on the accompanying consolidated balance sheet, resulting in a working
capital deficit at September 30, 1999.
Management is currently in discussions with the Senior Credit Facility
lender to determine a resolution to this matter suitable to both parties.
Alternatively, should the Company be unable to re-finance this debt with the
Senior Credit Facility lender, management is pursuing other financing
arrangements with other lenders. Ultimately, the Company's ability to generate
positive cash flows depends on factors which may be beyond the Company's
control. There can be no assurance that the Company will successfully negotiate
a re-financing agreement with the Senior Credit Facility lender or other
lenders.
At June 30, 1999, the Company has a $5.6 million net deferred tax asset.
Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are realizable,
the reversal of taxable timing differences, and tax planning strategies,
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.
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.
The Company's ability to make scheduled payments of principal of or
interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures, will depend on its future performance, which is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond its control. 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 Notes, or to fund
its other liquidity needs.
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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. Standard credit terms are given in most cases by
the Company, and the Company obtains standard credit terms for most of its
purchases.
YEAR 2000
The Company is aware of the issues associated with the year 2000 as it
relates to information systems and is currently working to resolve the potential
impact to the Company's operations. The year 2000 issue results from the fact
that many computer programs use only two digits to identify a year in the date
field. These programs were designed and developed without consideration of the
impact of the upcoming change in century.
An initial systems survey of the Company was completed in April 1998
focusing on administrative applications, plant systems, and non-information
technology systems (i.e. embedded technology such as microcontrollers). Due to
the nature of the Company's operations, the non-information technology systems
do not represent a significant area of risk, as the operations do not include
equipment with embedded microcontrollers. The initial survey did reveal Year
2000 issues in the administrative applications and plant systems.
The Company has implemented a remediation plan to address Year 2000 issues
in a timely manner. To date, the remediation plan is substantially complete,
with the remainder to be completed by November 30, 1999.
The Company's business is dependent upon the systems of various third
parties. With regard to these vendors, the Company is in the process of
assessing their year 2000 readiness based upon communications with each such
vendor. The Company believes that a material financial or business risk could
occur if the financial institutions serving the Company or the Company's utility
providers have year 2000 induced failures. The Company understands that these
institutions and providers are cognizant of the year 2000 issues and are either
compliant or actively working towards becoming compliant.
The Company believes that its most reasonably likely worst case result
relating to a year 2000 issue would be the failure of third party systems on
which the Company's systems rely. Although there can be no assurance that these
failures would not have an adverse effect on the Company's business, the Company
believes the effect of such failure would not be material to its business.
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Currently there are no contingency plans for the potential problems noted
above with third party vendors, however the Company has implemented a
contingency planning phase for those or other matters as part of its year 2000
plans. The contingency planning phase is estimated to be completed in the fourth
quarter of calendar 1999.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes new accounting and reporting standards requiring
that all derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. This statement is effective for all fiscal years beginning after
June 15, 2000. The Company has not yet determined the impact, if any, this
standard will have on its financial position or results of operations, and plans
to adopt this standard during the year ending June 30, 2001.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RICK
Market Risk
The Company is exposed to market risk. Market risk is the potential loss
arising from adverse changes in market prices and rates. The Company does not
enter into derivative or other financial instruments for trading or speculative
purposes. The Company's market risk could arise from changes in interest rates.
Interest Rate Risk
The Company's net income is affected by changes in interest rates. Assuming
the Company's current level of borrowings under the Revolving Credit Facility, a
100 basis point increase in interest rates under these borrowings would decrease
net income by approximately $28,000.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q including
any forecasts, projections and descriptions of revenues and cash flows expected
to be generated pursuant to long-term outsourcing to manufacture specialty
chemicals for major chemical customers, anticipated costs savings and synergies
referred to herein including 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 results to vary
materially from the forward-looking statements. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on the
Company's behalf are expressly qualified in their entirety by the cautionary
statements set forth or referred to above in this paragraph. Investors are
cautioned not to place undue reliance on such statements, which speak only as of
the date hereof. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events,
except as may be required by federal securities laws.
12
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
Item 21. Exhibits and Financial Statement Schedules
None.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GNI GROUP, INC.
Date: November 15, 1999 /s/ Carl V Rush, Jr. Carl V Rush, Jr.
----------------------- ---------------------- President and CEO
Date: November 15, 1999 /s/ Bruce D. Tobecksen Bruce D. Tobecksen
----------------------- ---------------------- Chief Financial Officer
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 38,137
<SECURITIES> 0
<RECEIVABLES> 8,084,931
<ALLOWANCES> (294,000)
<INVENTORY> 0
<CURRENT-ASSETS> 11,346,263
<PP&E> 61,987,117
<DEPRECIATION> (27,009,833)
<TOTAL-ASSETS> 72,331,182
<CURRENT-LIABILITIES> 16,245,706
<BONDS> 0
18,500,000
0
<COMMON> 5,714
<OTHER-SE> (38,605,476)
<TOTAL-LIABILITY-AND-EQUITY> 72,331,182
<SALES> 9,337,688
<TOTAL-REVENUES> 9,337,688
<CGS> 6,230,919
<TOTAL-COSTS> 9,803,280
<OTHER-EXPENSES> (7,475)
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 2,535,504
<INCOME-PRETAX> (2,993,621)
<INCOME-TAX> 32,965
<INCOME-CONTINUING> (3,026,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,026,586)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
