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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 0-10735
THE GNI GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0232338
(State or other jurisdiction of (I.R.S.) Employer
incorporation or organization) Identification No.)
2525 Battleground Road
Deer Park, Texas 77536
(Address of principal executive offices) (Zip Code)
(281) 930-0350
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [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 February 1, 1999 was 571,429. There were
no shares outstanding of the registrant's Class B non-voting common stock, $.01
par value per share, as of February 1, 1999.
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INDEX THE GNI GROUP, INC.
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Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 1998 and June 30, 1998 1
Consolidated Statements of Operations
Three and Six Months ended
December 31, 1998 and December 31, 1997 2
Consolidated Statements of Cash Flows
Six Months ended December 31, 1998
and December 31, 1997 3
Notes to Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 6-14
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote
of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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THE GNI GROUP, INC.
December 31, June 30,
1998 1998
ASSETS
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<S> <C> <C>
CURRENT ASSETS:
Cash and time deposits $ 358,291 $ 208,257
Accounts receivable, less allowance of approximately $279,000
for 12/31/98 and $229,000 for 6/30/98 7,937,029 7,022,323
Inventory -- 478,886
Prepaid expenses and other assets 1,560,340 1,232,555
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TOTAL CURRENT ASSETS 9,855,660 8,942,021
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PROPERTY, PLANT AND EQUIPMENT 60,224,905 55,541,764
Less accumulated depreciation (22,349,227) (19,628,867)
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NET PROPERTY, PLANT AND EQUIPMENT 37,875,678 35,912,897
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Restricted time deposits 1,486,511 1,451,253
Deferred tax asset, net 3,697,267 360,165
Intangible assets, net 17,815,661 18,193,364
Other assets, net 5,813,335 4,016,866
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TOTAL ASSETS $ 76,544,112 $ 68,876,566
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Accounts payable $ 3,106,185 $ 3,299,930
Accrued liabilities 6,750,302 2,987,625
Federal income taxes payable -- 190,005
Current portion of long-term debt -- 2,147,826
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TOTAL CURRENT LIABILITIES 9,856,487 8,625,386
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Accrued liabilities 2,188,383 2,700,484
Long-term debt, less current portion 78,086,002 32,016,606
Series A preferred stock 18,500,000 --
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 20,000,000 shares, no
shares outstanding at 12/31/98 and 6,674,709 issued at 6/30/98. -- 66,747
Class A common stock, $.01 par value. 5,714 --
Authorized 1,500,000 shares; issued 571,429 shares at 12/31/98 and
no shares issued at 6/30/98.
Class B common stock, $.01 par value -- --
Authorized 1,500,000 shares, no shares outstanding at 12/31/98 and
No shares issued at 6/30/98.
Additional paid-in capital 3,994,303 21,156,898
Retained earnings (accumulated deficit) (36,086,777) 4,357,451
Less cost of treasury stock (40,184 shares) -- (47,006)
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TOTAL STOCKHOLDERS' EQUITY (32,086,760) 25,534,090
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 76,544,112 $ 68,876,566
=======================================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at December 31, 1998 is unaudited. The Balance Sheet at
June 30, 1998 has been derived from the audited financial statements at that
date.
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
THE GNI GROUP, INC. Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUES $ 9,024,785 $ 10,681,801 $ 17,523,903 $ 21,599,058
COSTS AND EXPENSES:
Cost of services 4,892,548 5,965,599 10,772,770 12,111,456
Selling, general and administrative 1,119,298 1,295,782 3,190,406 2,541,780
Depreciation and amortization 1,997,057 1,828,203 3,933,959 3,556,971
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TOTAL COST AND EXPENSES 8,008,903 9,089,584 17,897,135 18,210,207
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OPERATING INCOME (LOSS) 1,015,882 1,592,217 (373,232) 3,388,851
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Interest income 17,833 34,923 38,011 61,245
Interest expense 2,173,474 987,202 3,770,750 1,972,743
Other income 1,879 2,756 4,736 106,770
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INCOME (LOSS) BEFORE TAX (1,137,880) 642,694 (4,101,235) 1,584,123
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Income tax (benefit) (384,179) 242,500 (1,317,227) 599,100
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INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (753,701) 400,194 (2,784,008) 985,023
============================================================================================================
Extraordinary item, net of tax benefit -- -- 3,920,936 --
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NET INCOME (LOSS) (753,701) 400,194 (6,704,944) 985,023
============================================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
2
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
THE GNI GROUP, INC. Six Months Ended
December 31,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
NET INCOME $ (6,704,944) $ 985,023
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 3,933,959 3,556,971
Deferred taxes (3,357,102) 75,183
Write-off of deferred loan costs 1,140,708 --
Debt retirement costs 4,800,103 --
Gain on sale of assets -- (4,500)
Change in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable 31,386 (1,475,830)
Decrease in inventory 478,886 1,523
Increase in prepaid expenses and other (288,892) (682,449)
Increase in other assets (112,290) (510,913)
Increase (decrease) in accounts payable (1,099,522) 233,649
Increase (decrease) in accrued liabilities 3,054,808 (359,162)
Increase (decrease) in income taxes payable (200,000) 458,192
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,677,100 2,277,687
===========================================================================================
Cash flows from investing activities:
Increase in restricted time deposits (35,257) (33,030)
Payment of cash in connection with business acquisition (482,353) --
Proceeds from sale of assets -- 4,500
Purchases of fixed assets (4,633,141) (3,465,448)
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NET CASH USED IN INVESTING ACTIVITIES (5,150,751) (3,493,978)
===========================================================================================
Cash flows from financing activities:
Cash proceeds from notes payable 702,233 920,782
Net cash from exercise of stock options -- 105,000
Net proceeds from issuance of Senior Notes 72,750,000 --
Purchase of GNI equity (50,727,953) --
Equity Contribution 22,500,000 --
Deferred loan costs (1,597,060) --
Merger fees and expenses (3,596,242) --
Subordinated notes make-whole premium (3,590,000) --
Net proceed from revolving line 3,086,002 1,500,000
Principal payments of long-term debt and notes payable (35,903,295) (1,731,876)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 3,623,685 793,906
===========================================================================================
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 150,034 (422,385)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 208,257 807,387
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 358,291 $ 385,002
===========================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
3
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THE GNI GROUP, INC. December 31, 1998
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All significant intercompany
transactions are eliminated.
The Consolidated Balance Sheet as of December 31, 1998 and the related
Statements of Operations for the three and six month periods ended December 31,
1998 and 1997, and Statements of Cash Flows for the six month period ended
December 31, 1998 and 1997 are unaudited; in the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted of normal, recurring items. Interim
results are not necessarily indicative of results for a full year. The financial
statements and Notes are presented as permitted by Form 10-Q and do not contain
certain information included in the Company's Annual Financial Statements and
Notes.
Statement of Cash Flows
For purposes of reporting cash flows, cash and time deposits include cash
on hand and certificates of deposit.
ACQUISITIONS
On September 25, 1998, a wholly-owned subsidiary of the Company, GNI
Technical Services, Inc., purchased substantially all of the assets and assumed
certain liabilities of Moheat, Inc. ("Moheat") for cash consideration of
approximately $480,000. Moheat is engaged in the site management and disposal of
hazardous waste, primarily as a contractor to the U.S. government.
MERGER
On July 29, 1998, the Company completed an offering of $75 million of
10.875% Senior Notes due 2005. The net proceeds from the offering, together with
an equity investment in the Company of $22.5 million by 399 Venture Partners,
Inc. and certain members of the Company's management, were used to purchase the
Company's issued and outstanding Common Stock, pay a cash consideration to
holders of options and warrants to purchase Common Stock, repay the existing
bank indebtedness and senior subordinated notes, and pay related fees and
expenses (the "Merger Transactions").
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Effective July 28, 1998, in connection with the Merger Transactions, the
Company entered into a revolving credit facility with NationsBank, N.A. with
respect to senior secured credit facilities which provides for (i) revolving
loans in the aggregate amount of up to $12 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 and (ii) the Company's
existing $1.5 million automatically renewable, stand-by letter of credit, the
reimbursement obligations of which are guaranteed by WMX Technologies, Inc. The
Revolving Credit Facility has an initial term ending July 31, 2001, with one
year renewal options thereafter.
5
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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 1998 SECOND QUARTER COMPARED WITH FISCAL 1997 SECOND QUARTER
Revenues. Revenues decreased by $1.7 million, or 15.5%, from $10.7 million
in the second quarter of Fiscal 1998 to $9.0 million for the comparable Fiscal
1999 period. This decrease was primarily attributable to (i) a decrease in
revenues from the Company's treatment and disposal operation, and (ii) a
decrease in chemical manufacturing and processing revenues resulting from low
utilization of the Company's stainless steel reaction equipment. Revenues from
the Company's treatment and disposal operation decreased by approximately $0.7
million, or 11.4%, from $6.3 million in the Fiscal 1998 second quarter to $5.6
million in the Fiscal 1999 second quarter, primarily due to decreased deepwell
disposal volumes. Deepwell disposal volumes decreased in the Fiscal 1999 period
due primarily to (i) a decline in the volumes generated by several large
deepwell disposal customers compared to the comparable period in Fiscal 1998,
and (ii) the loss of certain non-hazardous deepwell disposal volumes to less
costly treatment alternatives. Transportation revenues also decreased in the
second quarter of Fiscal 1999 by approximately $383,000, or 30.8%, from $1.2
million in the second quarter of Fiscal 1998 to $0.9 million in the comparable
period in Fiscal 1999. This decrease in transportation revenues was primarily
attributable to the decrease in deepwell disposal volumes during the Fiscal 1999
period. Other treatment and disposal revenues increased approximately $765,000,
or 83.1% from $0.9 million in the second quarter of Fiscal 1998 to $1.7 million
in the comparable period in Fiscal 1999. This increase in other treatment and
disposal revenues was attributable to (i) the Moheat acquisition, and (ii) an
increase in special project revenues involving containerized waste, field
services and fuels blending.
Chemical manufacturing revenues decreased by approximately $0.9 million, or
21.4%, from $4.4 million in the second quarter of Fiscal 1998 to $3.5 million
for the comparable Fiscal 1999 period. Chemical manufacturing revenues were
lower in
6
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the Fiscal 1999 period as compared with the Fiscal 1998 period primarily as a
result of underutilization in the Company's stainless steel reaction equipment.
This underutilization was primarily due to (i) one customer moving their custom
manufacturing in-house in response to slower-than-expected market penetration
for several of that customer's chemical products which opened up in-house
manufacturing capacity and (ii) a delay in start-up of two large projects due to
contracting and capital construction issues. Excluding a one-time sale of
inventory in the first quarter of Fiscal 1999, the Company's custom
manufacturing and processing revenues were approximately $673,000 higher in the
second quarter of Fiscal 1999 than in the first quarter of Fiscal 1999,
primarily due to increased production from the Company's chemical processing and
distillation projects. The fluctuation in chemical manufacturing revenues is
primarily due to customer decisions related to timing of projects. Therefore,
custom manufacturing and processing revenues may vary from quarter to quarter.
The Company's strategy is to foster long-term relationships in its manufacturing
and processing business, thereby minimizing the quarter to quarter effects of
customer timing decisions.
Cost of Services. Cost of services decreased as a percent of revenues from
55.9% during the second quarter of Fiscal 1998 to 54.2% for the second quarter
of Fiscal 1999. Cost of services decreased by $1.1 million, or 18.0%, from $6.0
million in the second quarter of Fiscal 1998 to $4.9 million in the second
quarter of Fiscal 1999. This decrease is primarily the result of the personnel
reductions which occurred near the end of the first quarter of Fiscal 1999 and
other direct cost savings associated with operational changes in the Company's
deepwell disposal business.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased as a percentage of revenues from
12.1% in the second quarter of Fiscal 1998 to 12.4% in the second quarter of
Fiscal 1999, due primarily to lower revenues in the second quarter of Fiscal
1999. SG&A decreased by approximately $176,000, or 13.6%, from $1.3 million in
the second quarter of Fiscal 1998 to $1.1 million in the second quarter of
Fiscal 1999, primarily due to the personnel reductions which occurred near the
end of the first quarter of Fiscal 1999.
Depreciation and Amortization Expenses. Depreciation and amortization
increased by approximately $169,000, or 9.2%, from $1.8 million in the second
quarter of Fiscal 1998 to $2.0 million in the second quarter of Fiscal 1999
primarily due to capital improvements made by the Company during Fiscal 1998 and
the first and second quarters of Fiscal 1999.
Net Interest Expense. Net interest expense increased by $1.2 million, or
126.8%, from $1.0 million in the second quarter of Fiscal 1998 to $2.2 million
in the second quarter of Fiscal 1999. This increase resulted from higher average
levels of indebtedness during the Fiscal 1999 period. The higher level of
indebtedness in the Fiscal 1999 period was a result of the issuance of the
10.875% Senior Notes due 2005 in connection with the recapitalization
transaction completed by the Company on July 28, 1998.
Net Income (Loss). The Company recorded a net loss of approximately
$754,000 for the second quarter of Fiscal 1999 compared to net income of
approximately $400,000 for the second quarter of Fiscal 1998.
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<PAGE> 10
Inflation did not have a material impact on the Company's revenues or
income for either the second quarter of Fiscal 1999 or Fiscal 1998. Further, it
is not expected that inflation will have a material impact during the upcoming
quarters for either the Company's revenues or income.
FISCAL 1999 SIX MONTHS COMPARED TO FISCAL 1998 SIX MONTHS
Revenues. Revenues decreased by $4.1 million, or 18.9%, from $21.6 million
for the first six months of Fiscal 1998 to $17.5 million for the comparable
period of Fiscal 1999. This decrease was primarily attributable to (i) a
decrease in revenues from the Company's treatment and disposal operation, and
(ii) chemical manufacturing revenues that were below expected levels. Revenues
from the Company's treatment and disposal operations decreased by approximately
$2.4 million, or 18.3%, from $13.2 million in the first six months of Fiscal
1998 to $10.8 million in the first six months of Fiscal 1999, primarily due to
decreased deepwell disposal volumes. Deepwell disposal volumes decreased in the
Fiscal 1999 period due to several factors: (i) unusually dry weather conditions
for most of the first quarter of Fiscal 1999, (ii) a decline in the volumes
generated by several large deepwell disposal customers compared with prior
periods, and (iii) the loss of certain non-hazardous deepwell disposal volumes
to less costly treatment alternatives. Transportation revenues also decreased by
$0.7 million, or 28.9%, from $2.5 million for the first six months of Fiscal
1998 to $1.8 million for the comparable Fiscal 1999 period. This decrease in
transportation revenues is primarily attributable to the decrease in deepwell
disposal volumes during the Fiscal 1999 period.
Chemical manufacturing revenues decreased by approximately $1.7 million, or
19.8%, from $8.4 million during the first six months of Fiscal 1998 to $6.7
million for the comparable Fiscal 1999 period. This decrease was primarily due
to one customer moving their custom manufacturing in-house in response to
slower-than-expected market penetration for several of that customer's chemical
products which opened up in-house manufacturing capacity. Chemical manufacturing
revenues also vary from period to period due to customer decisions relating to
timing of projects. The Company's strategy is to foster long-term relationships
in its manufacturing and processing business, thereby minimizing the effects of
customer timing decisions.
Cost of Services. Cost of services increased as a percent of revenues from
56.1% during the first six months of Fiscal 1998 to 61.5% for the comparable
Fiscal 1999 period. Cost of services decreased by $1.3 million, or 11.1%, from
$12.1 million for the first six months of Fiscal 1998 to $10.8 million for the
first six months of Fiscal 1999. The increase of cost of services as a percent
of revenue and the decrease in actual cost of services together reflect the
combination of the relatively fixed cost nature of the Company's cost of
services and the lower revenues in the Fiscal 1999 period. Included within the
cost of services figure for Fiscal 1999 were non-recurring personnel reduction
costs of approximately $249,000. Excluding these non-recurring costs would
result in
8
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cost of services of 60.1% of revenues during the first six months of Fiscal 1999
compared with 56.1% in the first six months of Fiscal 1998, and a decrease in
cost of services of approximately $1.6 million, or 13.1%, from Fiscal 1998 to
Fiscal 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased as a percentage of revenues from
11.8% in the first six months of Fiscal 1998 to 18.2% in the comparable Fiscal
1999 period. SG&A increased by approximately $0.6 million, or 25.5%, from $2.5
million in the first six months of Fiscal 1998 to $3.2 million for the
comparable period in Fiscal 1999. This increase was due primarily to (i) the
inclusion in the first quarter of Fiscal 1999 of non-recurring personnel
reduction costs and transactions costs of approximately $232,000 and $673,000,
respectively, and (ii) lower revenues in the Fiscal 1999 period compared to
Fiscal 1998. Excluding the non-recurring charges, SG&A decreased by
approximately $256,000, or 10.1%, from Fiscal 1998 to Fiscal 1999.
Depreciation and Amortization Expenses. Depreciation and amortization
increased by approximately $378,000, or 10.6%, from $3.6 million in the first
six months of Fiscal 1998 to $3.9 million in the comparable Fiscal 1999 period
primarily due to the capital improvements made by the Company to its facilities
during Fiscal 1998 and the first and second quarters of Fiscal 1999.
Net Interest Expense. Net interest expense increased by $1.9 million, or
106.6%, from $1.8 million in the first six months of Fiscal 1998 to $3.7 million
for the comparable Fiscal 1999 period. This increase resulted from higher
average levels of indebtedness during the Fiscal 1999 period. The higher level
of indebtedness in the Fiscal 1999 period was a result of the issuance of the
10.875% Senior Notes due 2005 in connection with the recapitalization
transaction completed by the Company on July 28, 1998.
Income (Loss) Before Extraordinary Item. The Company recorded a loss before
extraordinary item of $2.8 million for the first six months of Fiscal 1999
compared to income before extraordinary item of $1.0 million for the comparable
Fiscal 1998 period.
Net Income (Loss). The Company recorded a net loss of $6.7 million for the
first six months of Fiscal 1999 compared to net income of $1.0 million for the
comparable Fiscal 1998 period. The Company recorded an extraordinary charge in
the amount of $3.9 million, net of tax benefit, in connection with the
recapitalization transaction completed by the Company on July 28, 1998.
Inflation did not have a material impact on the Company's revenues or
income for either the Fiscal 1999 or 1998 periods. Further, it is not expected
that inflation will have a material impact during the upcoming quarters for
either the Company's revenues or income.
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
For the first six months of Fiscal 1999 the Company provided $1.7 million
in net cash from operations compared with $2.3 million for the comparable Fiscal
1998 period. This decrease of approximately $0.6 million was attributable to
several factors, some of which were offsetting: (i) a net loss in the Fiscal
1999 period as compared with net income in the Fiscal 1998 period, (ii) the
incurrence of debt retirement costs in the Fiscal 1999 period, without a
corresponding expense in the Fiscal 1998 period, (iii) a slight decrease in
accounts receivable, net of acquisition, in the Fiscal 1999 period compared with
a substantial increase in the comparable Fiscal 1998 period, (iv) a larger
decrease in inventory for the Fiscal 1999 period compared with the Fiscal 1998
period, (v) a decrease in accounts payable, net of acquisition, for the Fiscal
1999 period compared with an increase in accounts payable for the comparable
Fiscal 1998 period, and (vi) a significant increase in accrued liabilities in
the Fiscal 1999 period compared to a small decrease in accrued liabilities for
the comparable Fiscal 1998 period. Item (ii) above relates to the
Recapitalization that closed during the first quarter of fiscal 1999. As a part
of the accounting treatment for the Recapitalization, the Company's deferred tax
asset increased by approximately $3.0 million and existing deferred loan costs
as well as debt retirement costs were written-off. With respect to item (iii),
accounts receivable increased substantially in the Fiscal 1998 period primarily
as a result of consolidation of former customers of a waste management firm that
closed in late September. Item (iv) relates to the decrease in inventory for the
Fiscal 1999 period and results from the sale of the Company's acetonitrile
business to BP Chemicals Inc. ("BP") effective as of July 1, 1998. As a part of
the sale, the Company's acetonitrile inventory was also sold to BP. Item (v),
accounts payable, experienced a substantial decrease in the Fiscal 1999 period
primarily attributable to a reduction in the level of payables associated with
capital expenditures over the period. Item (vi), accrued liabilities,
experienced a significant increase in the Fiscal 1999 period compared with a
small decrease in the comparable Fiscal 1998 period, primarily the result of
accrued interest associated with the Senior Notes, coupled with no such accrued
expense in the Fiscal 1998 period.
During the first six months of Fiscal 1999 and Fiscal 1998, the Company's
net cash used in investing activities was $5.2 million and $3.5 million,
respectively. For Fiscal 1999, the main components were the cash payment of
approximately $480,000 made for a business acquisition during the period and
capital expenditures during the first six months of Fiscal 1999. The Company's
capital expenditures during the first six months of Fiscal 1999 and Fiscal 1998
were $4.6 million and $3.5 million, respectively. In the first six months of
Fiscal 1999, capital expenditures included approximately $1.5 million spent to
bring the Company's facilities into compliance with new environmental
regulations regarding air emissions. These regulatory-related capital
expenditures represent a continuation of projects originally anticipated to be
completed by the end of the Company's Fiscal 1998. Also, during the first six
months of Fiscal 1999, the Company incurred customer-related capital
expenditures of approximately $2.0 million, approximately $0.5 million of which
related to the Navy contract to blend and recycle a fuel mixture as a
subcontractor to Battelle Memorial Institute. This capital will be recovered
over the life of the Navy contract. The balance of the customer-related capital
expenditures were incurred on behalf of a major specialty chemical customer and
10
<PAGE> 13
represented a slippage in the completion of construction modifications to GNI's
chemical plant for this particular project, which was originally anticipated to
be completed by the end of the Company's Fiscal 1998. The capital expenditures
incurred for this plant modification will be recovered over the term of the
particular contract. Capital expenditures for fixed assets for the Fiscal 1998
periods were primarily related to general improvements to the Company's chemical
manufacturing and treatment and disposal facilities. For the first six months of
Fiscal 1999, the Company's financing activities provided net cash of $3.6
million compared with $0.8 million in the fiscal 1997 period. For the fiscal
1999 period, the main components of financing activities were the various
financing steps that comprised the Recapitalization.
During the first six months of Fiscal 1999, accounts receivable increased
by approximately $0.9 million primarily due to the Company's Moheat acquisition
which closed on September 25, 1998. During the first six months of Fiscal 1999,
accounts payable decreased by approximately $194,000, primarily due to the
offsetting effect of substantially lower capital expenditures near the end of
the period with the addition of accounts payable related to the Company's
acquisition of Moheat.
Effective July 28, 1998, the Company entered into a revolving credit
facility with NationsBank, N.A. ("Lender") with respect to senior secured credit
facilities which provides for revolving loans in the aggregate amount of up to
$12 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 (the "Revolving Credit Facility"). Availability under the Revolving
Credit Facility is calculated based on a borrowing base formula tied to (i) 85%
of eligible accounts receivable plus (ii) an amount based on the Company's fixed
assets. Amounts borrowed under the Revolving Credit Facility will be due in full
on July 31, 2001, unless extended. Until the Company provided the Lender with
financial statements for the quarter ended September 30, 1998, amounts borrowed
under the Revolving Credit Facility bear interest, at the option of the Company,
at either (i) the Lender's Base Rate plus 1.00% or (ii) LIBOR plus 2.75%.
Thereafter, such applicable margins are subject to reduction based upon the
Company's Interest Coverage Ratio (as defined in the Revolving Credit Facility.)
The Revolving Credit Facility contains standard financial and restrictive
covenants for facilities of this type. As of December 31, 1998 the Company's
Revolving Credit Facility had an outstanding balance of approximately $3.1
million and approximately $0.5 million of letters of credit outstanding, leaving
approximately $7.8 million of availability.
The Company's ability to make scheduled payments of principal of and
interest on, or to refinance its indebtedness, or to fund planned capital
expenditures will depend on its future performance, which is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond its control. Based upon the Company's current level of operations,
management believes that cash flow from operations and available cash, together
with available borrowings under the Revolving Credit Facility, will be adequate
to meet the Company's liquidity needs for the next several years. However, there
can be no assurance that the Company's businesses will generate sufficient cash
flow from operations, or that future borrowings will be available under the
Revolving Credit Facility in an amount sufficient to enable the Company to
service its indebtedness, or to fund its other liquidity needs.
11
<PAGE> 14
YEAR 2000
Background. The Year 2000 issue refers to the inability of certain
date-sensitive computer chips, software and systems to recognize a two-digit
date field as belonging to the 21st century. Many computer software programs, as
well as certain hardware and equipment containing date-sensitive data, were
structured to utilize a two-digit date field. Accordingly, these programs may
not be able to properly recognize dates in the year 2000 and later, which could
result in significant system and equipment failures. This is a significant issue
for most if not all companies, with far reaching implications, some of which
cannot be anticipated or predicted with any degree of certainty. The Company
recognizes that it must take action to ensure that its operations will not be
adversely impacted by Year 2000 software failures.
The Company's State of Readiness. An initial systems survey of the Company
was completed in April, 1998 and revealed that several of the Company's
administrative applications and plant systems possess Year 2000 problems. The
Company has implemented a remediation plan to address the issues in a timely
manner. To date, the remediation plan is partially complete, with the remainder
to be completed by September 30, 1999. The remaining cost of bringing the
evaluated systems into compliance is estimated to be between $75,000 and
$100,000, including all software upgrade fees and installation costs.
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.
12
<PAGE> 15
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("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, a
company's owner. 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 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, 1999. 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, 2000.
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.
13
<PAGE> 16
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.
14
<PAGE> 17
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.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GNI GROUP, INC.
Date: February 16, 1998 /s/ Carl V Rush, Jr.
-------------------------------
Carl V Rush, Jr.
President and CEO
Date: February 16, 1998 /s/ Donna L. Ratliff
-------------------------------
Donna L. Ratliff
Treasurer
(Principal Accounting
Officer)
16
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<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
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