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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission File Number:
JUNE 30, 1999 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)
Registrant's telephone number, including area code: (281) 930-0350
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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Title of each class Name of each exchange on which registered
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(TITLE OF CLASS)
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE
None.
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THE GNI GROUP, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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Cover Page ............................................................................... 1
Document Table of Contents................................................................ 2
PART I
Item 1. Business......................................................................... 3
Item 2. Properties....................................................................... 17
Item 3. Legal Proceedings ............................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.............................. 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........ 19
Item 6. Selected Financial Data.......................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risks...................... 26
Item 8. Financial Statements and Supplementary Data...................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................. 26
PART III
Item 10. Directors and Executive Officers................................................ 26
Item 11. Executive Compensation.......................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 30
Item 13. Certain Relationships and Related Transactions.................................. 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................ 33
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PART I
ITEM 1. BUSINESS.
GENERAL
The GNI Group, Inc. ("GNI") provides comprehensive waste management
services that include 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, to over 300 companies through five subsidiaries. GNI
Chemicals Corporation ("GNIC") manufactures specialty chemicals and serves
customers in the contract manufacturing, waste recovery and toll distillation
segments of the chemical industry. Disposal Systems, Inc. ("DSI") and Disposal
Systems of Corpus Christi, Inc. ("DSCCI") own and operate hazardous and
non-hazardous waste treatment, storage and disposal operations. Resource
Transportation Services, Inc. ("RTS") transports hazardous and non-hazardous
waste and chemical products. GNI Technical Services, Inc. ("GNIT") is engaged in
site management and disposal of hazardous waste, primarily as a contractor to
the U.S. government. (GNI, GNIC, DSI, DSCCI, RTS and GNIT are collectively
referred to herein as the "Company.")
The Company's facilities are situated on an approximately 10.5 acre
site in Deer Park, Texas (collectively referred to as the "Deer Park Facility"),
and an approximately 14.3 acre site in Corpus Christi, Texas (the "Corpus
Facility"). (The Deer Park Facility and the Corpus Facility are collectively
referred to herein as the "Facilities.") Hence, the Company's Facilities are
strategically located in the Gulf Coast chemical and petrochemical industrial
complex, thereby placing the Company's operations in close proximity to large
generators of hazardous and non-hazardous waste materials. The Company's
customers include many Fortune 100 chemical and petrochemical producers. 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 Texas Natural Resource Conservation Commission (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").
Management believes that the Company's Deer Park Facility is one of
only a few commercial facilities 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 waste 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.
The Company, at its Deer Park Facility, has conducted hazardous waste
management operations for over ten years. On August 27, 1992, the Company
received its final Deer Park 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 inject up to 262 million gallons of
waste in its deepwells and store up to approximately 2.9 million gallons and
6,472 drums of hazardous waste at its Deer Park Facility. The Company may also
accept substantially all types of hazardous wastes identified by the United
States Environmental Protection Agency (the "EPA"). The Company conducts its
deepwell injection operations for its two deepwells located at the Deer Park
Facility under permits issued by the TNRCC pursuant to the 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
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the injection of certain hazardous wastes that otherwise may be prohibited from
disposal in or on the land, commonly known as "land-banned" wastes.
Similarly, the Company's Corpus Facility received its combined final
RCRA Part B Permit and UIC Permit from the TNRCC on June 23, 1987, and its
exemption issued by the EPA pursuant to RCRA, which allows the injection of
"land-banned" wastes. The permits, which were transferred to the Company at the
time of the acquisition of the Corpus Facility from Chemical Waste Management,
Inc. ("CWM") authorize the disposal by deepwell injection of up to 78 million
gallons of wastes per year.
The Company's processing capabilities, permits and regulatory status
enable it to receive waste and/or by-product materials and recover valuable
components, and to assist customers in minimizing waste volumes, possibly
claiming recycling credits or exemptions or otherwise reducing their waste
disposal costs. GNIC manufactures specialty chemicals on a contract or "tolling"
basis for third parties. GNIC's custom manufacturing and processing services are
provided primarily to customers requiring third-party manufacturing or
processing due to lack of sufficient capacity to satisfy product development
needs or lack of certain internal production capabilities. The streams recycled
or recovered by GNIC would otherwise generally require disposal as hazardous
waste 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.
Management believes that the Company's regulatory status provides it
with a marketing advantage because its disposal, treatment and transportation
capabilities, together with its permits and regulatory status, enable it to
process, handle and dispose of hazardous wastes and other regulated wastes,
by-products and chemicals that many other competitors without such permits are
not authorized to dispose of or process. Management further believes that the
Company's regulatory status is becoming increasingly significant to
liability-sensitive chemical and petrochemical producers, particularly those
that generate materials that, while technically not classified as hazardous
waste under applicable environmental laws, nonetheless are treated as such. As a
result, management believes the Company's regulatory status, combined with its
expertise in waste processing, disposal and recycling, with the related
efficiencies of on-site waste disposal and strategic site location, provide an
excellent base from which to further grow the Company's specialty chemical
manufacturing, recovery and processing business.
HISTORY
The Company is a holding company that conducts business through five
wholly-owned subsidiaries. Originally named Nuclear Environmental Engineering,
Inc., 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 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 Facility from CWM. In September
1998, the Company formed GNIT to acquire assets and certain liabilities of
Moheat, Inc. 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.
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CHEMICAL OPERATIONS
General
GNIC manufactures specialty chemicals on a contract or "tolling" basis
for customers in the contract manufacturing, waste recovery and toll
distillation segments of the chemical industry. GNIC's chemical facility
combines 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 -- 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, neutralization and limited extraction, are
employed to remove compounds not readily separated by heat. The GNIC facility is
designed to achieve fine 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 the Company's
flexibility in handling a wide range of wastes, by-products and chemicals. The
facility has been designed to be extremely flexible to allow rapid
reconfiguration when the Company changes its production stream. Contract
manufacturing is the production of chemicals for third parties on a fee per unit
of production basis. By virtue of having its deepwell operations, the Company is
well positioned to process materials that create large volumes of waste during
manufacturing. In addition, the Company seeks projects wherein the raw material
source for the compounds is either a waste stream or a chemical manufacturing
by-product.
GNIC primarily services its customers' small to mid-size project needs
on a regional and national basis. A substantial number of GNIC's projects are
recurring and a majority of GNIC's customers are repeat customers. Substantially
all of GNIC's contract chemical manufacturing, recovery and processing services
are performed on a tolling basis, wherein GNIC accepts materials owned by its
customers and processes these materials for a tolling charge per unit of
incoming or outgoing weight or volume
The GNIC facility was constructed in multiple phases and was 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, GNIC added
a second, smaller, thirty-foot distillation column to the existing operation.
GNIC added a wiped film evaporator to its facility in the first quarter of
fiscal 1994. Also during fiscal 1994, GNIC constructed and placed into service
its first two batch reactors and made a significant number of other
modifications and enhancements to its facility. During fiscal 1995, a third
batch reactor as well as other capital improvements were added to the facility.
During fiscal 1996, the Company added a fourth and fifth reactor. This series of
expansions has provided it with reaction capabilities that will enable it to
manufacture and process a broad range of specialty chemicals.
The Company's chemical operation currently targets three categories of
business: (i) custom manufacturing, in which the Company manufactures chemical
products on behalf of third parties, (ii) custom processing, in which chemical
products are further purified or processed, and (iii) recycling, in which waste
and by-product streams are accepted, stored and recovered pursuant to the
Company's various permits and operating authorizations.
Custom Chemical Manufacturing
GNIC provides custom chemical manufacturing services to customers by
means of organic chemical synthesis for mainly chemical and petrochemical
producers. Often, custom manufacturing
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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
produced under custom manufacturing agreements include superabsorbents, pipeline
additives, and specialty solvents. Customers who need custom processing services
generally do so because they lack sufficient internal capacity to satisfy
product development needs, lack certain internal production capabilities, or
desire to avoid capital expenditures.
Custom Processing
GNIC also provides custom chemical processing services primarily to
manufacturers of organic chemicals. In contrast to manufacturing, which involves
combining raw materials to produce a more complex end-product, custom processing
generally involves the purification of feedstock by separating undesirable
components from desirable ones to yield an end-product that meets the customer's
specifications. Custom processing typically produces by-product wastes for
disposal, whereas custom chemical manufacturing may or may not produce
by-product wastes. Customers who need custom processing services generally do so
because they lack sufficient internal capacity to satisfy product development
needs, lack certain internal production capabilities, or desire to avoid capital
expenditures.
Recycling
GNIC 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 reusable organic
components from residual wastes and by-product streams generated by their
operations in a cost-effective manner. The streams recycled by GNIC generally
otherwise require disposal as hazardous waste, 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 and permit capabilities and regulatory status allow generators 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 the Company may be able to claim credits for
pollution prevention efforts in the EPA reporting requirements covering releases
of waste to the environment. Under various government regulations such as
Superfund Amendments and Reauthorization Act ("SARA") 313, industry is required
to submit an annual Toxic Release Inventory ("TRI") to the EPA describing the
fate of "chemical releases" from facilities. If these chemicals are recycled,
acknowledgment is made in the report and that volume is not considered a
release. Chemicals recovered under recycling agreements include specialty
amines, carrier solvents, and plastic feedstocks.
WASTE MANAGEMENT SERVICES
General
The waste management market is comprised of a broad spectrum of
treatment and disposal technologies. Prominent among them are: deepwell
disposal, landfill, incineration, disposal via fuels at cement kilns, biological
treatment, and numerous others. The Company, either directly or indirectly,
provides or arranges for the provision of virtually all of these services to its
customers. The Company operates one of the premier commercial hazardous and
non-hazardous waste deepwell disposal operations in the United States. The
Company's leadership position among deepwell companies is based on a strong
record of environmental performance, the superior performance characteristics of
its deepwell operations (such as the ability to accept strong acids), and
excellent customer service.
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Deepwell Disposal
The Company treats and disposes of aqueous wastes generated by its
customers and wastewaters resulting from its processing activities by injection
into its two deepwells located at its Deer Park Facility (the "Deer Park
Deepwells") and its deepwell located at its Corpus Christi Facility (the "Corpus
Deepwell"). The Company is authorized by the TNRCC to inject into them a total
of approximately 340 million gallons of wastes per year. The first deepwell at
the Deer Park Facility commenced operation 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 Deepwell has
been in operation since 1969 and has been operated by DSCCI since its
acquisition in March 1995.
The wastes generated by the Company's customers result from various
processes, including metal treating, industrial manufacturing, photo developing,
electronic manufacturing, chemical manufacturing, washwaters and other
industrial operations. In fiscal 1999, the Company disposed of approximately
74.3 million gallons of wastes in its Deer Park Deepwells and approximately 12.6
million gallons of wastes in its Corpus Deepwell. These 86.9 million gallons
represent 25.6% of the capacity of which the Company is permitted to dispose.
The Company's deepwells accept aqueous waste streams, including spent
acids, landfill leachates, rinse water, process water, storm water from
contaminated containment areas, and wastewaters with heavy metals content.
Aqueous wastes resulting from the Company's chemical operation and other
processes also are injected into the Company's deepwells. The Company's permits
allow receipt of most categories of liquid wastes with the exception, among
others, of polychlorinated biphenyls ("PCBs"), radioactive materials and
biological wastes. However, operating considerations relating to solids content
and compatibility with other streams and the injection formation create further
practical limits on wastes accepted by the Company for deepwell injection and
require the Company to treat carefully and monitor closely materials injected
into its deepwells. Prior to the injection of any wastes, the Company's
laboratory conducts extensive tests on the wastes to verify that the materials
are compatible with each other and that the resulting injectate is compatible
with the injection system.
The site of the Company's 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 7,200 feet below the surface in
a confined geologic 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 Company's Corpus Deepwell is one that has
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 Deepwell is over 4,500 feet below the surface in a
confined 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 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 surface to a point along the well below the lowest level at
which potable drinking water is found. A second protective casing extends and is
cemented from the surface to the total depth of the well. Within the second
casing the injection tubing extends from the surface to the injection interval.
Between the injection tubing and the second casing lies an annulus filled with
pressurized brine. Continuous monitoring of the annulus allows for the detection
and prevention of leaks.
Both the Deer Park Deepwells' and the Corpus Deepwell's surface
facilities consist of injection pumps, associated blending and storage tanks,
filters and related transfer pumps, controls and monitoring instruments. Storage
and processing facilities are placed within coated concrete containment
structures to
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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.
In April 1990, the Company received an exemption from the EPA that
allows the Company to inject in its Deer Park Deepwells wastes that are
otherwise banned from disposal in or on the land pursuant to RCRA. The Company
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. The Company's Corpus Deepwell is subject to a similar exemption that
was obtained while the Corpus Deepwell was owned by CWM.
The Company's three deepwells give the Company the ability to provide
continuous 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. Additionally, 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, thus allowing the Company to mitigate any business disruption that
may occur in the event of operational or mechanical difficulties.
Treatment and Other Disposal
Fuels Blending. The Company blends organic wastes and by-products with
significant energy value, but little economically recoverable components, into
supplemental fuels. The Company 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. The Company also blends into
fuels the organic wastes resulting from other processing activities at its
Facilities that cannot be recovered economically. The Company 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 the Company provides this service primarily as an
adjunct to its other services.
The Company has been 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.
The liquid wastes and by-products received from customers are
transported to the Company's Facilities in bulk or in drums. The materials
received in bulk typically come from large- and medium-sized industrial
manufacturing companies, while those shipped in drums come from both small
quantity generators and larger generators with numerous collection points in
their facilities.
Other Treatment. For wastes and by-products that are not economically
recoverable or suitable for fuels blending, the Company 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. The Company's current treatment processes fall into three broad
categories: (i) chemical and physical treatment, (ii) biological treatment and
(iii) other disposal.
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Chemical and Physical Treatment. The Company receives many wastes and
by-product emulsions consisting of water, oil and various solids. The
Company breaks these mixtures into their separate components through
heating and the addition of various chemicals. The Company then
separates the components, with the oil being blended into fuels and the
water being treated biologically by a non-affiliated company or
disposed of in the Company's deepwells. The solids are filtered from
the water and disposed of in a third party's landfill or incinerator.
In addition, the Company 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 or the Company's revenues,
management believes that it is important for the Company 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, the Company arranges for biological treatment services for
dilute aqueous organic wastes. The biological treatment capability adds
another dimension to the wide range of waste management services
provided by the Company.
Other Disposal. As an adjunct to its other services, the Company treats
and arranges for the disposal of certain wastes in incinerators,
landfills or other disposal facilities operated by other businesses.
The Company neither owns nor operates any landfills or incinerators.
Transportation
As an integral part of the Company's services, RTS transports wastes
and by-products for its customers. Historically, a substantial portion of the
Company's revenues contributed by its transportation services have been
attributable to transport of wastes and by-products to and from the Company's
Facilities using RTS vehicles. RTS operates a fleet consisting of 15 tractors
and 47 trailers. 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. RTS has a motor vehicle common carrier
certificate issued by the Interstate Commerce Commission that allows the Company
to transport materials in all 48 states in the continental United States.
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. Standard credit terms are given in most cases by
the Company, and the Company obtains standard credit terms for most of its
purchases.
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SEGMENT INFORMATION
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
manufacturers specialty chemicals on a contract or "tolling" basis for third
parties.
CYCLICALITY AND SEASONALITY
The Company's business is cyclical in nature and its operating results
may be affected by a number of factors, including the spending decisions of the
Company's customers, general economic conditions in the industries served by the
Company, and waste minimization and recycling efforts of the Company's
customers. Historically, the results of the Company's waste management
operations have been closely related to the level of general manufacturing
activity and volumes of chemical and petrochemical production, which are highly
cyclical. Given the relatively high fixed-cost component of the Company's waste
management operations and their substantial contribution to the Company's
earnings, relatively minor fluctuations in disposal volumes can create
significant variations in the Company's operating results. Additionally, a
decline in the chemicals or petrochemicals industries could result in a decrease
in the volume of wastes, by-products or chemicals available for recycling,
processing and disposal. The Company's waste management operations have
historically followed seasonal patterns with lower activity during the period
from October to December. These factors generally are beyond the Company's
control, and there can be no assurance that current conditions influencing the
Company's business will continue in the future. In addition, due to a change in
any factor affecting its business, the Company's operating results for a
particular quarter may not be indicative of its results for any subsequent
quarter or year.
MARKETING AND CUSTOMERS
The Company provides integrated chemical manufacturing, recovery,
processing, treatment and disposal services to a diverse group of customers on a
repetitive, long-term basis. The Company markets its products and services on an
integrated basis and its services in one area often support or lead to services
in other areas. The Company markets its products and services through direct
customer sales using its executive officers and an 11-person marketing and sales
staff.
The Company's customer base is diverse and includes, among others,
chemical and specialty chemical companies, petrochemical companies, industrial
companies, and other waste management firms that, in most cases, generate wastes
and by-products as part of their ongoing operations and/or require chemical
manufacturing, recovery and processing services. In fiscal 1999, the Company
handled over 1,800 different waste and by-product streams and provided services
for approximately 300 customer facilities. The Company's customers include many
Fortune 100 chemical and petrochemical producers. During fiscal 1999, BP
Chemical accounted for approximately 21% of the Company's consolidated revenues.
No other customer accounted for more than 10% of the Company's consolidated
revenues during fiscal 1999.
The Company's Facilities are strategically located in the Gulf Coast
chemical and petrochemical industrial complex, where a substantial portion of
the United States chemical and petrochemical production facilities are located
within 300 miles of the Company's Facilities. Chemical and petrochemical
companies are major sources of the Company's wastes, by-products and chemicals.
Accordingly, the Company historically has derived 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
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base is due in large part to the Company's chemical operation combined with the
regulatory status of its Facilities.
BACKLOG
The Company's operating practices dictate that the maintenance of a
backlog is not appropriate. Accordingly, the Company does not have a recorded
backlog as of June 30, 1999.
CONTRACTING ARRANGEMENTS
The waste management services provided by the Company are typically
performed pursuant to non-exclusive agreements on a project by project basis.
The charges for the 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 to the Company's Facilities. The Company periodically reviews and
adjusts charges for its services. Prior to entering into an agreement with a
customer for waste management services, the Company'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 the Company's laboratory for the purpose of enabling the Company to
recommend the best method of transportation, treatment, processing or disposal.
Upon arrival at the Company's 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 sheet.
The Company provides its chemical manufacturing and processing services
for customers under a variety of arrangements. Substantially all of the
Company's contract manufacturing and processing services are performed on a
tolling or contract basis. In tolling agreements, the Company accepts wastes,
by-products or chemicals owned by its customers and processes these materials
for a tolling charge per pound of incoming or outgoing weight or volume. After
extensive computer simulations, laboratory tests and simulations, and technical
discussions, the Company contracts with its customers to provide finished
product meeting their specifications. The Company also accepts, for a disposal
fee, wastes and by-products from which it recovers valuable components for
resale.
SOURCES AND AVAILABILITY OF RAW MATERIALS
For most of the custom manufacturing and processing activities of GNIC,
the customer provides the necessary raw materials, if any.
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, Inc., American Ecology, Inc., and Safety-Kleen Corp.
Chemical processing firms include SpecialtyChem Products Corp., Cedar Chemical
Corporation, and KMCO, Inc. Some of the Company's competitors are more
established in the industry 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. Management
believes that the Company's RCRA Part B Permits combined with its GNIC
manufacturing and processing capabilities provides it with a significant
competitive advantage because only a few of its principal chemical competitors
have on-site waste management capabilities and commercial RCRA Part B Permits.
The competitive market also is influenced by the extent to which the companies
that generate waste seek to minimize, process and dispose of the waste
themselves.
Management believes that the principal competitive factors in its
targeted markets include the level of compliance with applicable environmental
regulatory requirements, the degree of sophistication and flexibility
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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.
ENVIRONMENTAL REGULATION AND SAFETY MATTERS
General
The waste management industry, including the Company, 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 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 re-write 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
conducted by the Company) would be regulated, and the extent to which treatment
of certain wastes would be required prior to disposal. 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 underground injection control ("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 the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA" or "Superfund"), and workplace
conditions are subject to the Occupational Safety and Health Act ("OSHA") and
Emergency Planning and Community Right-to-Know Act ("EPCRA") programs. 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
The Federal Resource Conservation and Recovery Act 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
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<PAGE> 13
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.
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 ("Part B Permit"). Both the Deer Park Facility and
the Corpus Facility have received 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, (1)
providing for the regulation of additional hazardous wastes, (2) imposing
restrictions on the disposal of certain hazardous wastes in or on the land, (3)
prescribing more stringent standards for land disposal facilities, and (4)
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, four of the Company's five operating
subsidiaries have 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 the Corpus RCRA Part B Permit was up
for renewal in June 1997. The Company submitted the renewal application for the
Corpus RCRA Part B Permit to the TNRCC and received approval on September 25,
1998. There were no material changes in the reissuance of the Corpus RCRA Part B
Permit. Consistent with RCRA's permitting standards, the RCRA Part B Permits
require the Company to meet certain financial assurance requirements. As of May
18, 1999 the Company has obtained closure and post-closure insurance in the
aggregate amount of $1,500,000 covering its Deer Park Facility. CWM currently
has in place approximately $1,500,000 to satisfy financial assurance obligations
for the Company's Corpus Facility for the next year. The Company also has
obtained pollution legal liability insurance covering its Facilities in the
aggregate amount of $12,000,000 and $4,000,000 per occurrence, subject to a
deductible of $250,000 per occurrence.
The Company's Deer Park RCRA Part B Permit also requires the Company to
proceed diligently with a RCRA Facility Investigation ("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 submitted a proposed RFI workplan to the TNRCC for
approval. The Company has submitted a revised RFI workplan in response to
comments from the TNRCC. Phase I of the workplan was approved with no further
action required. Phase II of the workplan is pending decision. Although no
determinations as to the requirement for any corrective action can be made at
this time, capital expenditures for corrective action, if required, could have a
material adverse effect on the Company.
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 groundwaters from injection wells. The UIC
program designates five different classes of injection wells, including a class
for those wells like the three the Company operates, which inject hazardous
waste below any underground sources of drinking water in the vicinity of the
well. 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 Facility (the "UIC Permits"). Subject to their terms, the UIC
Permits generally authorize the Company until 2008 to dispose of aqueous wastes
through injection into two deepwells at its Deer Park Facility and into one
deepwell at its Corpus
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<PAGE> 14
Facility. 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 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 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 wastestream, 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 Facility's
exemption was similarly reissued shortly before its transfer to the Company. 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
their 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, the Company obtained an air permit ("Air Permit") covering its chemical
operations from the TNRCC. The Air Permit encompasses the existing GNIC
subsidiary air emissions sources that, until 1993, operated under various TNRCC
permit exemptions.
The Corpus Facility does not have a stand-alone air emissions permit,
but its UIC/RCRA Permit contains emission control requirements.
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, and
including a requirement for certain facilities to obtain a Federal air emissions
operating permit. 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.
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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 currently does not operate under a Federal NPDES permit or state
wastewater discharge permit because most process wastewaters 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 times also delivers some wastewaters to the third
party's wastewater treatment facility for treatment and discharge under its
federal NPDES and state wastewater discharge permits. The EPA also adopted
regulations concerning discharges of storm water runoff. On February 8, 1993,
the Company was granted an EPA General Stormwater NPDES Permit for the Deer Park
Facility. The Corpus Facility also has an EPA General Stormwater NPDES Permit.
In addition, the Company obtained on December 19, 1997 a NPDES permit for the
discharge of domestic and certain non-process industrial wastewater at Deer
Park. The permit is currently being renewed and approval is anticipated. Due to
continued available domestic processing capacity at an adjacent facility,
construction of a sewage treatment unit has not been undertaken.
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.
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 governmental 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 a
potentially responsible party for cleanup costs or damages under Superfund.
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
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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 businesses in the area.
Predecessor Activities
As a result of the Company's prior involvement in the manufacturing of
radioactive sources and tracers utilized in the petroleum, industrial and
medical markets, the Company has conducted decontamination activities at four
sites not currently used in its primary operations. The Company has completed
decontamination 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 is in the process of implementing 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 decontamination
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 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 has
received approval from the BRC on a procedure to decontaminate the site.
Management believes that the fair value of these four sites will exceed the cost
incurred in connection with decommissioning such sites.
INSURANCE
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
million; products-completed operations insurance in the aggregate amount of $2
million covering various chemical products; property damage insurance in the
aggregate amount of $60 million, subject to a deductible of $100,000 per
occurrence (in the event of a flood or earthquake, subject to a $7.5 million
aggregate limit and a $250,000 deductible); physical loss or damage insurance on
certain crude petroleum, natural gas, products of natural gas and their products
in the aggregate amount of $2 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 $10 million per occurrence and $10 million
in the aggregate, subject to a $10,000 self-insured retention where applicable;
pollution legal liability insurance in the amount of $4 million for each loss
and $12 million in the aggregate, subject to a deductible of $250,000 per loss;
contractors' pollution legal liability insurance in the aggregate amount of $1
million for each loss and $1 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 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 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 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
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<PAGE> 17
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 its agreements with its commercial bank and subordinated debtholders. 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 August 31, 1999, the Company had 176 employees, of whom 138 are
engaged in operations, 22 in administration and accounting, 11 in marketing and
sales, and 5 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.
ITEM 2. 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.
ITEM 3. 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.
Effective July 28, 1998, Green I Acquisition Corp., a Delaware
corporation formed by 399 Venture Partners, Inc., merged with and into the
Company, with the Company as the surviving corporation (the "Merger"). 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
was wrongful, unfair and harmful to holders of GNI Common Stock, that the
proposed consideration of $7.00 per share was not the result of arms-length
negotiations or based upon any independent valuation of the current or projected
value
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of GNI, and that the directors of the Company had conflicts of interest and
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 added
allegations based on information set forth in the Company's original filing of
preliminary proxy materials, filed with the SEC on April 16, 1998. In addition,
the Amended Complaint (i) names Titus H. Harris, III as a defendant, (ii) does
not name John W. Lyons as a defendant and (iii) eliminates the request to enjoin
the Merger which was set forth in the original complaint. The Company believes
it has meritorious defenses and intends to vigorously defend itself against this
claim.
On August 31, 1995, Odilia Benavidez and certain other owners of
property near Waste Management's Corpus Christi deepwell filed suit in the 94th
Judicial District Court, Nueces County, Texas 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 operation of the
deepwell. In June of this year, the court granted partial summary judgment in
favor of the Company against a number of the plaintiffs' claims, while allowing
the plaintiffs to proceed with one claim against the Company. The court
continues to consider whether the plaintiffs have a right to pursue other claims
against the Company. Management does not believe that the plaintiffs will
succeed in their claims nor that this litigation will have a material adverse
affect on the Company's operations, cash flow, or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
There is no established public trading market for shares of the
Company's common stock. As of September 23, 1999, there were approximately
five holders of the Company's common stock.
In fiscal year 1999, the Company did not distribute any cash
dividends on its common stock. In addition to restrictions on payment of
dividends pursuant to the terms of the Company's Series A Preferred Stock,
the Company has a restrictive debt covenant which precludes any payment of
cash dividends on the common stock. Notwithstanding such restrictions, the
Company intends to retain any earnings for future growth and therefore does
not anticipate paying any cash dividends on the common stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA THE GNI GROUP, INC.
- ---------------------------------------------------------------------------------------------------------------------
Years ended June 30,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Revenues $ 34,979 $ 42,217 $ 40,727 $ 39,339 $ 34,359
Operating income (loss) (1,169) 4,543 4,069 (1,910)(a) 5,848
Income (loss) before tax (9,249) 774 1,293 (3,397) 5,036
Net Income (loss) before extraordinary item (6,075) 541 753 (2,112) 3,151
Extraordinary item net of tax 3,921(b) -- -- -- --
Net income (loss) (9,996) 541 $ 753 $ (2,112) $ 3,151
- ---------------------------------------------------------------------------------------------------------------------
Working capital $ 2,527 $ 317 $ 3,658 $ 7 $ 618
Total assets 76,434 68,877 68,588 49,078 46,079
Total debt 81,727 34,164 33,940 19,189 16,485
Series A redeemable preferred stock 18,500 -- -- -- --
Stockholders' equity (deficit) (35,573) 25,534 24,888 22,334 24,418
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating income for fiscal 1996 includes a non-cash charge of
approximately $6.7 million resulting from the adoption of FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed
Of." After tax the net charge was approximately $4.4 million.
(b) The extraordinary item for fiscal 1999 consisted of (i) the payment for the
make whole premium of $3,590,000 and the write-off of $1,209,000 discount
associated with the Senior Subordinated Notes, and (ii) the write-off of
deferred costs related to the existing debt at July 28, 1998 in the amount
of $1,140,000.
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ITEM 7. 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
applicable 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 (the "Notes"), 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 1999 COMPARED WITH FISCAL 1998
Revenues
Revenues decreased by $7.7 million, or 18.1%, from $42.7 million in
Fiscal 1998 to $35.0 million in Fiscal 1999. Revenues from the Company's waste
treatment and disposal operations decreased by $1.8 million, or 8.5%, from $21.3
million in Fiscal 1998 to $19.5 million in Fiscal 1999 due to decreased deepwell
disposal volumes. Deepwell disposal volumes decreased in Fiscal 1999 due to
several factors: (i) unusually dry weather conditions throughout most 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.
The decline in deepwell disposal revenue was partially offset by an increase in
treatment and other disposal volumes as a result of the September 1998 asset
acquisition of Moheat which is engaged in site management and disposal of
hazardous waste for the U.S. government along with the startup of a new contract
to treat Napalm for the U.S. Navy.
Transportation revenues decreased by $1.8 million or 33.3% from $5.4
million in Fiscal 1998 to $3.6 million in Fiscal 1999 which was attributable to
the decline in deepwell disposal volumes.
Chemical manufacturing revenues decreased by $4.2 million, or 26.1%,
from $16.0 million in Fiscal 1998 to $11.8 million in Fiscal 1999 The revenue
decline was due to several factors: (i) one customer moving
20
<PAGE> 21
their custom manufacturing in-house in response to slower-than-expected market
penetration of product, (ii) delays in start-up of two large projects due to
contracting and capital construction issues and (iii) significant reactor
downtime caused by several small mechanical failures of auxiliary equipment.
Quarter-to-quarter fluctuation in chemical manufacturing revenues is primarily
due to customer decisions related to timing of projects.
Cost of Services
Cost of services increased as a percentage of revenues from 57.5% in
Fiscal 1998 to 62.8% in Fiscal 1999. This increase is attributable to the
significant decline in revenues in both segments of the Company's business and
the high fixed cost nature of the cost structure.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased as a percentage
of revenue from 15% in Fiscal 1998 to 16.1% in Fiscal 1999 even though there was
a total dollar reduction in this expense category of approximately $.75 million
between the two years. The dollar reduction was the result of a personnel
reduction program initiated in the first quarter of Fiscal 1999. As many of the
cost elements in this category are fixed, the percentage will increase as
revenue declines.
Depreciation and Amortization
Depreciation and amortization increased by $1.3 million from $7.2
million in Fiscal 1998 to $8.5 million in Fiscal 1999 due to capital
improvements made during late 1998 and throughout 1999.
Interest Expense
Interest expense increased by $4.2 million, or 109%, from $3.9 million
in Fiscal 1998 to $8.1 million in Fiscal 1999. This increase resulted from the
higher level of indebtedness in the Fiscal 1999 period due to 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.
Net Income (Loss)
The Company recorded a net loss of approximately $10 million in Fiscal
1999 which included an extraordinary charge in the amount of $3.9 million, net
of tax benefit, in connection with the Recapitalization transaction completed on
July 28, 1998. In Fiscal 1998, the Company had net income of $0.5 million.
Inflation did not have a material impact on the Company's revenues or
income in either Fiscal 1999 or Fiscal 1998. Further, it is not expected that
inflation will have a material impact during Fiscal 2000 for either the
Company's revenues or income.
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 Inc. ("EMPAK"), which closed on September 30, 1996, whereby EMPAK
exited the third-party commercial deepwell disposal business and agreed to
assist in the transfer of EMPAK's third-party commercial deepwell customers to
the Company. Transportation revenues also
21
<PAGE> 22
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 customer timing decisions. To this
end, over the past six months the Company 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 certain 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 such 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.
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 1999 the Company used $0.4 million in net cash from
operations compared to providing $8.3 million for Fiscal 1998. This decrease of
approximately $8.7 million was attributable to several factors, some of which
were offsetting: (i) the net loss after giving effect to non-cash depreciation
and amortization expenses, deferred taxes and debt retirement costs for Fiscal
1999 compared with net income for Fiscal 1998, (ii) an increase in accounts
receivable of $1.8 million in Fiscal 1999 compared to an increase of $.6 million
in Fiscal 1998 primarily due to extended billing terms granted to a customer,
(iii) a decrease in accounts payable in Fiscal 1999 of $.25 million compared to
an increase of $1.0 million in Fiscal 1998 and (iv) an increase in accrued
liabilities of $2.1 million in Fiscal 1999 compared to a decrease of $1.0
million in Fiscal 1998. Primarily due to accrual of interest on the Senior
Notes.
In Fiscal 1999 and 1998, the Company's net cash used in investing
activities was $4.5 million and $8.4 million respectively. Capital expenditures
declined in Fiscal 1999 by $2.1 million to $5.6 million for the year. Ongoing
maintenance capital expenditures for Fiscal 2000 are expected to approximate
$1.2 million as no further plant expansion is contemplated.
In Fiscal 1999, net cash provided by financing activities was $6.3
million compared with net cash used of $0.5 million in Fiscal 1998. The Fiscal
1999 activity included the transition related to the Recapitalization of the
Company.
As of June 30, 1999, total debt exceeded total assets of the Company
by $5.3 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 submit 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,
amount other things, require the maintenance of specified financial ratios,
restrict payment of dividends and limit the amount of capital expenditures. As
of June 30, 1999, the Company's Revolving Credit Facility had an outstanding
balance of approximately $6.7 million and approximately $0.5 million of letters
of credit outstanding, leaving approximately $4.8 million of availability.
At June 30, 1999, the Company was not in compliance with certain of its
covenants related to its outstanding Senior Credit Facility. As such, all
amounts due under this Senior Credit Facility have been classified
as current on the accompanying balance sheet, resulting in a working capital
deficit at June 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 plans to pursue other financing
arrangements with other lenders. Ultimately, the Company's ability to
generate 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. Based upon the Company's current level of operations,
management believes that cash flow from operations, 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 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. 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 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
23
<PAGE> 24
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.
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 remaining
cost of bringing the evaluated systems into compliance is estimated to be
between $50,000 and $75,000, including all software upgrade fees and
installation costs.
Although there can be no assurance that the Company will successfully
complete implementation of its Year 2000 plan, the project is currently
progressing in accordance with the timetable established by the Company.
Although failure to complete implementation on a timely basis may have material
adverse financial and operational impacts on the Company, the Company believes
that such failure is not reasonably likely. The possible effects of unsuccessful
implementation of the plan include the following: (i) a temporary inability to
process transactions, (ii) a temporary inability to order supplies or materials,
(iii) a temporary inability to timely process orders and billings, and (iv) a
temporary inability to deliver quality services to customers.
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.
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
24
<PAGE> 25
of its year 2000 plans. The contingency planning phase is estimated to be
completed in the fourth quarter of calendar 1999.
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.
25
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required hereunder is included in this report as set
forth in the "Index to Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive offices and/or members of the Board:
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Carl V Rush, Jr.................... 44 President and Chief Executive Officer and Director
Bruce D. Tobecksen................. 55 Executive Vice President, Chief Financial Officer and
Secretary
Donna L. Ratliff................... 52 Treasurer and Assistant Secretary
Richard M. Cochrane................ 38 Vice President and General Manager, Specialty Chemicals
W. R. Reeves, Jr................... 51 Vice President - Environmental and Regulatory Affairs
John Mowbray O'Mara................ 71 Director
Gavin J. Parfit.................... 51 Director
Richard M. Cashin, Jr.............. 46 Director
Joseph M. Silvestri................ 38 Director
Norman Foster...................... 61 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 is BBA
and his MBA in Finance, each from Texas Christian University.
26
<PAGE> 27
Bruce D. Tobecksen has been Executive Vice President, Chief Financial
Officer and Secretary of the Company since February 1999. From January 1998 to
October 1998, Mr. Tobecksen was Vice President and Chief Financial Officer of
American ECO Corporation, a specialty fabrication company. From 1993 to 1998 Mr.
Tobecksen was employed by WMX, Technologies, Inc., a waste management company.
Mr. Tobecksen earned a BS and MS in Finance from the University of Kansas.
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.
W.R. Reeves, Jr. has 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 Recapitalization in July 1998. 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 1998 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 Recapitalization in July 1998. Mr. Parfit has been Chief
Executive Officer of Delta Financial Services, Inc., since 1995. He has also
been Chief Executive Officer of Queen City Terminal, 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 Recapitalization in July 1998. 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,
Furnishing 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 Recapitalization in July 1998. 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 board of Euramax International plc,
JTM Industries, Glenoit Corporation and Triumph Group Inc., as well as numerous
private companies.
Norman Foster became a director July 1, 1999. Mr. Foster has been
employed in varying positions within the chemical industry with Monsanto
Company, Pan American Chemical and Occidental Petroleum since July 1997. Mr.
Foster founded Nortru, Inc., in 1979 as a resource recovery company in Detroit,
Michigan,
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<PAGE> 28
which was acquired by Philip Services Corporation in late 1993. Mr. Foster was
President of the Philip's By-Products Group from March 1994 until July 1997 and
was a member of Philip's Board of Directors from March 1994 through May 1997.
COMPENSATION OF DIRECTORS
Directors are not paid a fee for attending meetings of the board.
28
<PAGE> 29
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid by the Company for
services rendered during Fiscal 1999, Fiscal 1998 and Fiscal 1997 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 1999 exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
AWARDS PAYOUT
ANNUAL COMPENSATION
--------------------------------------- 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 ..................... 1999 $240,000 $336,500 $ -0- $ -0- $ -0- $ -0- $ 1,836
President and Chief 1998 183,250 -0- -0- -0- -0- -0- 593,000(2)
Executive Officer 1997 183,250 13,200 -0- -0- 16,000 -0- 7,896(3)
Richard M. Cochrane ................. 1999 $146,675 $ -0- $ -0- $ -0- $ -0- $ -0- $ 2,979
Vice President and 1998 124,800 -0- -0- -0- -0- -0- 2,300
General Manager, 1997 108,967 -0- -0- -0- -0- -0- 2,115
Specialty Chemicals
W.R. Reeves, Jr ..................... 1999 $117,500 $ 15,000 $ -0- $ -0- $ -0- $ -0- $ 2,468
Vice President - Environmental 1998 100,000 -0- -0- -0- -0- -0- 1,838
And Regulatory Affairs 1997 100,000 -0- -0- -0- -0- -0- 1,838
Donna L. Ratliff .................... 1999 $107,500 $ -0- $ -0- $ -0- $ -0- $ -0- $ 2,258
Treasurer and Assistant 1998 90,000 50,000 -0- -0- -0- -0- 1,890
Secretary 1997 90,000 15,000 -0- -0- -0- -0- 2,540
</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 which amount
represents (i) the forgiveness of principal and interest in certain notes
between the Company and (ii) associated cash payments made by the Company
to Mr. Rush in the amount of $215,000 representing the personal income tax
obligation associated with such forgiveness.
(3) Mr. Rush received certain other compensation of $37,386 which represents
the forgiveness of interest expense on certain notes between the Company
and Mr. Rush.
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<PAGE> 30
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted during fiscal 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Prior to the Merger, Mr. Rush and Ms. Ratliff exercised options to
acquire 36,417 and 2,677 shares, respectively, of common stock (the "Rollover
Shares"). In connection with the Merger, (i) the Rollover Shares were converted
into Class A Common Stock of GNI and (ii) each option to acquire the Company's
common stock that was outstanding immediately prior to the effective date of
the Merger was cancelled and the holders thereof received a cash payment equal
to the difference between $7.00 and the applicable option exercise price. The
following table reflects the options held by the Named Executive Officers which
were cancelled in the Merger as if such cancelled options were actually
exercised by the holders thereof on the effective date of the Merger.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
SHARES VALUE OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END($)
ACQUIRED ON REALIZED ------------------------------ -------------------------------
NAME EXERCISE(#) $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Carl V Rush, Jr. .......... 273,000 711,500 -0- -0- -0- -0-
Richard M. Cochrane........ 72,200 125,700 -0- -0- -0- -0-
Donna L. Ratliff........... 25,000 75,000 -0- -0- -0- -0-
W.R. Reeves, Jr. .......... 35,000 55,000 -0- -0- -0- -0-
</TABLE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of August 31, 1999, the shares of
Series A Preferred Stock and Common Stock beneficially owned by (i) each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock, (ii) each director, (iii) each Named
Executive Officer, and (iv) the directors and executive officers of the
Company, as a group.
<TABLE>
<CAPTION>
NUMBER AND PERCENT OF SHARES
------------------------------------------------
SERIES A CLASS A CLASS B TOTAL
PREFERRED STOCK COMMON STOCK (1) COMMON 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.
& Affiliates.......................... 181,285.60 97.99% 39,121 43.50% 456,799 100% 495,920 90.71%
Carl V Rush, Jr. ..................... 1,791.35 0.97% 36,416 40.50% -- -- 36,416 6.66%
Donna L. Ratliff...................... 131.70 0.07% 2,677 2.98% -- -- 2,677 .49%
Directors and Executive Officers
as a group (2 persons).............. 1,923.05 1.04% 39,994 43.47% -- -- 39,094 7.15%
</TABLE>
- ------------------------
(1) Does not include shares of Class A Common Stock issuable upon conversion of
Class B Common Stock. 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.
(2) Does not include shares of Class B Common Stock issuable upon conversion of
Class A Common Stock. 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.
Under the credit agreement with its commercial bank, the Company
granted a security interest in all of the outstanding capital stock of its
subsidiaries to secure its obligations. In the event of a default by the Company
under the credit agreement with the bank, the bank could foreclose on the
pledged stock. Because the Company is organized in a holding company structure
with the principal operating assets at the subsidiary level, the transfer of
ownership of the pledged stock resulting from the foreclosure would effectively
cause a change of control of the Company
30
<PAGE> 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 wished 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.
31
<PAGE> 32
Additional Stockholders; Additional Management Stockholders. An
Additional Stockholder is any person, other than 399 Stockholders or Management
Stockholders, to whom the Company issued 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.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the 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 Stockholder (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 Registration (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 underwritten Piggyback
Registration in which each 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.
32
<PAGE> 33
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,
Mr. Rush received a bonus of $336,500 and Mr. Titus H. Harris, III, the
Company's former Chief Financial Officer, received a bonus of $297,000.
In connection with the resignation of Mr. Titus H. Harris, III, the
Company elected to exercise its option under the terms of the Stockholder's
Agreement to buy back from Mr. Harris, 24,706 shares of Class A Common Stock of
the Company at a price of $7.00 per share. These shares are reflected as
Treasury Stock on the Company's balance sheet.
Effective July 1, 1999 the Company has entered into a consulting
agreement with Mr. Norman Foster, a director of the Company. Pursuant to this
agreement, the Company will pay to Mr. Foster a monthly fee of $7,500 in
exchange for his performance of certain consulting services in connection with
the Company's operations.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1). FINANCIAL STATEMENTS
See "Index to Financial Statements" set forth on page F-1.
(a)(2). FINANCIAL STATEMENT SCHEDULES.
See "Index to Financial Statements" set forth on page F-1.
(a)(3). LIST OF EXHIBITS.
See pages E-1 through E-5 for a listing of the exhibits.
(b). REPORTS ON FORM 8-K.
Not Applicable.
33
<PAGE> 34
INDEX TO FINANCIAL STATEMENTS
THE GNI GROUP, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report .................................... F-2
Consolidated Balance Sheets -- June 30, 1998 and 1999 ........... F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended June 30, 1999 ....................... F-4
Consolidated Statements of Stockholders' Equity for Each of
the Three Years in the Period Ended June 30, 1999 ............. F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended June 30, 1999 ....................... F-6
Notes to Consolidated Financial Statements ...................... F-7
</TABLE>
F-1
<PAGE> 35
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, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended June 30, 1999. 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, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to
the consolidated financial statements, the Company has a working capital
deficit that raises substantial doubt about its ability to continue as a going
concern, Management's plans in regard to this matter are also described in
note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG LLP
Houston, Texas
August 13, 1999
F-2
<PAGE> 36
THE GNI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and time deposits ................................................. $ 208,257 $ 1,597,145
Accounts receivable, less allowance of approximately
$229,000 in 1998 and $279,000 in 1999 ............................... 7,022,323 9,807,494
Inventory .............................................................. 478,886 --
Deferred tax asset...................................................... -- 1,307,323
Prepaid expenses and other current assets .............................. 1,232,555 1,226,033
------------ ------------
Total current assets ........................................... 8,942,021 13,937,995
Property, plant and equipment ............................................ 55,541,764 61,185,322
Less accumulated depreciation .......................................... (19,628,867) (25,442,639)
------------ ------------
Net property, plant and equipment ....................................... 35,912,897 35,742,683
Restricted time deposits ................................................. 1,451,253 --
Deferred tax asset, net .................................................. 360,165 4,249,561
Intangible assets, net ................................................... 18,193,364 16,989,285
Other assets, net ........................................................ 4,016,866 5,514,769
------------ ------------
Total assets ................................................... $ 68,876,566 $ 76,434,293
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ...................................... $ 2,147,826 6,727,017
Accounts payable ....................................................... 3,299,930 3,954,237
Accrued liabilities .................................................... 2,987,625 6,149,928
Federal income taxes payable ........................................... 190,005 --
------------ ------------
Total current liabilities ...................................... 8,625,386 16,831,182
Accrued liabilities ...................................................... 2,700,484 1,676,288
Long-term debt, less current portion ..................................... 32,016,606 75,000,000
Series A preferred stock, $100 per share liquidation value, authorized,
issued and outstanding 18,500 shares ................................... -- 18,500,000
Stockholders' equity (deficit):
Common stock, $.01 par value. Authorized 20,000,000 shares,
6,674,709 shares outstanding at 6/30/98 and no shares
outstanding 6/30/99 .................................................. 66,747 --
Class A common stock, $.01 par value. Authorized 1,500,000
shares; no shares issued at 6/30/98 and 571,429 shares issued at
6/30/99 .............................................................. -- 1,146
Class B common stock, $.01 par value. Authorized 1,500,000
shares, no shares outstanding at 6/30/98 and 456,799 shares issued at
6/30/99 .............................................................. -- 4,568
Additional paid-in capital ............................................. 21,156,898 3,994,303
Retained earnings (accumulated deficit) ................................ 4,357,451 (39,400,252)
Less treasury stock (40,184 shares at 6/30/98 and 24,706 shares
6/30/99) .............................................................. (47,006) (172,942)
------------ ------------
Total stockholders' equity (deficit) ........................... 25,534,090 (35,573,177)
------------ ------------
Total liabilities and stockholders' equity (deficit) ........... $ 68,876,566 $ 76,434,293
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 37
THE GNI GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES ...................................... $ 40,726,878 $ 42,716,800 $ 34,979,451
Cost of services .............................. 25,109,651 24,539,508 21,968,695
Selling, general and administrative ........... 5,559,137 6,387,746 5,637,649
Depreciation and amortization ................. 5,989,575 7,247,027 8,542,571
------------ ------------ ------------
TOTAL COSTS AND EXPENSES ...................... 36,658,363 38,174,281 36,148,915
OPERATING INCOME (LOSS) ....................... 4,068,515 4,542,519 (1,169,464)
Interest income ............................... 116,663 100,555 70,254
Interest expense .............................. (2,970,183) (3,887,531) (8,136,382)
Other income (expense) ........................ 77,625 18,906 (13,362)
------------ ------------ ------------
INCOME (LOSS) BEFORE TAX ...................... 1,292,620 774,449 (9,248,954)
Income taxes (benefit) ........................ 540,000 233,647 (3,173,517)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ....... 752,620 540,802 (6,075,437)
Extraordinary item, (net of tax benefit of
$2,019,875) ................................ -- -- 3,920,936
------------ ------------ ------------
Net income (loss) ............................. $ 752,620 $ 540,802 $ (9,996,373)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 38
THE GNI GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of year ............................ $ 66,059 $ 66,547 $ 66,747
Exercise of stock options (48,833 shares in 1997,
20,000 shares in 1998, and 34,903 shares in 1999 ........ 488 200 341
Equity purchased in connection with Merger
Transaction ........................................... -- -- (67,088)
------------ ------------ ------------
Balance at end of year ............................. 66,547 66,747 --
CLASS A COMMON STOCK:
Balance at beginning of year ............................ -- -- --
Equity issued in connection with Merger Transaction ..... -- -- 1,146
Balance at end of year .......................... -- -- 1,146
CLASS B COMMON STOCK:
Balance at beginning of year ............................ -- -- --
Equity issued in connection with Merger Transaction ..... -- -- 4,568
Balance at end of year ........................... -- -- 4,568
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year ............................ 19,251,048 21,052,098 21,156,898
Exercise of stock options ............................... 263,094 104,800 136,031
Subordinated debt warrants .............................. 1,537,956 -- --
Equity purchased in connection with Merger
Transaction .......................................... -- -- (21,292,929)
Equity issued in connection with Merger
Transaction ............................................... -- -- 3,994,303
------------ ------------ ------------
Balance at end of year .......................... 21,052,098 21,156,898 3,994,303
RETAINED EARNINGS:
Balance at beginning of year ............................ 3,064,029 3,816,649 4,357,451
Equity purchased in connection with Merger
Transaction ........................................... -- -- (30,113,040)
Merger transaction expenses ............................. -- -- (3,648,290)
Net income (loss) ....................................... 752,620 540,802 (9,996,373)
------------ ------------ ------------
Balance at end of year .......................... 3,816,649 4,357,451 (39,400,252)
TREASURY STOCK, AT COST:
Balance at beginning of year ............................ (47,006) (47,006) (47,006)
Equity purchased in connection with Merger
Transaction .......................................... -- -- 47,006
Purchase treasury stock (24,706 shares) ................. -- -- (172,942)
------------ ------------ ------------
Balance at end of year .................................. (47,006) (47,006) (172,942)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY ...................... $ 24,888,288 $ 25,534,090 $(35,573,177)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 39
THE GNI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 752,620 $ 540,802 $ (9,996,373)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................. 5,989,575 7,247,027 8,542,571
Deferred taxes ............................................ 1,423,010 (1,160,165) (5,196,719)
Write-off of deferred loan cost ........................... -- -- 1,140,708
Debt retirement costs ..................................... -- -- 4,800,103
Accretion of discount on Senior Subordinated Notes ........ 109,854 219,708 --
Gain on sale of assets .................................... (9,183) (1,705) --
CHANGE IN ASSETS AND LIABILITIES, NET OF
ACQUISITION OR CONSOLIDATION:
Decrease (increase) in accounts receivable ................ 58,795 (572,438) (1,839,080)
Decrease in inventory ..................................... 136,797 45,550 478,886
Decrease (increase) in federal income tax receivable ...... (930,470) 930,470 --
Decrease (increase) in prepaid expenses and other ......... (1,706,410) 816,062 (6,523)
Increase (decrease) in accounts payable ................... (1,633,732) 1,046,267 (251,470)
Increase (decrease) in accrued liabilities ................ (1,112,430) (1,017,768) 2,084,108
Increase (decrease) in income taxes payable ............... (549,256) 190,005 (190,005)
------------ ------------ ------------
Net cash provided by (used in) operating activities ....... 2,529,170 8,283,815 (433,794)
INVESTING ACTIVITIES:
Decrease (increase) in restricted time deposits ........... 108,982 (64,554) 1,451,254
Payment of cash in connection with business
acquisition, net of cash acquired ....................... -- -- (443,457)
Payment of cash in connection with EMPAK Inc.
transaction .............................................. (12,000,000) -- --
Decrease (increase) in other assets, net .................. (326,478) (624,947) 103,546
Proceeds from sale of assets .............................. 17,200 11,700 --
Purchases of fixed assets ................................. (5,570,053) (7,717,716) (5,593,558)
------------ ------------ ------------
Net cash used in investing activities ..................... (17,770,349) (8,395,517) (4,482,215)
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments of long-term debt and notes payable .... (19,782,650) (3,416,434) (36,075,059)
Cash proceeds from notes payable .......................... 852,144 920,782 702,233
Net proceeds from revolving line .......................... -- 2,500,000 6,727,017
Proceeds from issuance of Senior Subordinated
Notes and warrants ...................................... 20,000,000 -- --
Proceeds from issuance of long-term debt .................. 15,000,000 -- --
Net cash from exercise of stock options ................... 263,582 105,000 136,372
Purchase of treasury stock ................................ -- -- (172,942)
Issuance of preferred stock and equity contribution ....... -- -- 22,500,000
Equity purchased in connection with Merger
Transaction ............................................. -- -- (50,727,953)
Net proceeds from issuance of Senior Notes ................ -- -- 72,750,000
Senior Subordinated Notes make-whole premium .............. -- -- (3,590,000)
Merger fees and expenses .................................. -- -- (3,648,290)
Deferred loan costs ....................................... -- -- (1,772,581)
Payments of deferred costs ................................ (1,407,451) (596,776) (523,900)
------------ ------------ ------------
Net cash provided by (used in) financing activities ....... 14,925,625 (487,428) 6,304,897
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ...... (315,554) (599,130) 1,388,888
Cash and cash equivalents at beginning of year ............ 1,122,941 807,387 208,257
------------ ------------ ------------
Cash and cash equivalents at end of year .................. $ 807,387 $ 208,257 $ 71,597,145
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 40
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 $135,908, $340,754, and
$387,559 were capitalized in 1997, 1998, and 1999, 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.
F-7
<PAGE> 41
Restricted Time Deposits
Restricted time deposits represent funds pledged in connection with
financial assurance requirements for the Company's various operating permits.
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 (see Note 3). The Company
amortizes intangible assets over the lesser of 15 years or the life of the
related agreement. Accumulated amortization was $3,130,502 and $4,791,292 at
June 30, 1998 and 1999, respectively. Amortization expense for each of the years
ended June 30, 1997, 1998 and 1999 was $1,215,367, $1,595,092, and $1,660,790,
respectively.
Revenue Recognition
Revenue from contracts on custom chemical manufacturing is 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.
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
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-8
<PAGE> 42
Review of the Company's assets for Fiscal 1997, Fiscal 1998, and Fiscal
1999 did not result in any asset impairment loss.
2. LIQUIDITY
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. At June 30, 1999,
the Company was not in compliance with certain of its covenants related to its
outstanding Senior Credit Facility (see note 7). As such, all amounts due under
this Senior Credit Facility have been classified as current on the accompanying
consolidated balance sheet.
Management is currently in discussion 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 plans to pursue other financing
arrangement 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.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following at June 30,
1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Land ....................................... $ 714,357 $ 714,357
Well, surface and processing facility ...... 40,989,866 48,195,114
Buildings and improvements ................. 3,141,790 3,850,387
Machinery and equipment .................... 3,280,041 4,233,723
Furniture, fixtures and other .............. 924,295 1,131,143
Construction in progress ................... 6,491,415 3,060,598
----------- -----------
Total property, plant and equipment ..... $55,541,764 $61,185,322
=========== ===========
</TABLE>
4. 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.
5. 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.
6. MERGER TRANSACTION
On July 28, 1998, the Company completed an offering of $75 million of
10.875% Senior Notes ("Senior Notes") due 2005. The net proceeds to the Company
from the issuance of the Senior Notes, after deducting the initial purchaser's
fees, were $72,750,000. 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 Transaction"), and are summarized as follows:
<TABLE>
<S> <C>
Purchase price of GNI equity, net $50,728,000
Repayment of existing debt at July 28, 1998 35,373,000
Payment of Senior Subordinated Notes make-whole premium 3,590,000
Payment of merger fees and expenses 3,648,000
</TABLE>
In connection with the Merger Transaction, the Company recognized an
extraordinary loss before-taxes of $5,941,000. This loss consisted of the
payment of a Senior Subordinated Notes make-
F-9
<PAGE> 43
whole premium of $3,590,000, the write-off of a $1,209,000 discount associated
with the Senior Subordinated Notes and the write-off of deferred loan costs
related to the existing debt at July 28, 1998 in the amount of $1,140,000.
7. LONG-TERM DEBT AND CREDIT FACILITIES
As of June 30, 1998 and 1999, long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1999
--------------- ---------------
<S> <C> <C>
Senior Notes at a fixed annual interest rate of 10.875%,
semi-annual interest payments, principal due at maturity
in 2005 ............................................................. $ -- 75,000,000
Senior Credit facility up to $12 million at either (I) the
lending banks prime rate of interest plus 1% (8,75% at June
30, 1999), or (ii) LIBOR plus 2.75%, due in full July
31, 2001 ............................................................ -- 6,727,017
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 contained restrictive covenants
including, among others, minimum tangible net worth
requirements, and restrictions relating to investments,
purchases and sales of assets, and payment of dividends Repaid
in July 1998 ........................................................ 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. Repaid in July 1998 ................... 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. Repaid in July 1998 ......................................... 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. Repaid in July
1998 ................................................................ 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. Repaid in July 1998 ........................................ 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. Repaid in July 1998 .............................. 18,791,606 --
--------------- ---------------
Total long-term debt ................................................. 34,164,432 81,727,017
Less amounts classified as current ................................... 2,147,826 6,727,017
--------------- ---------------
Long-term portion .................................................... $ 32,016,606 $ 75,000,000
=============== ===============
</TABLE>
Effective July 28, 1998, in connection with the Merger Transaction, 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
F-10
<PAGE> 44
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.
The Revolving Credit Facility includes covenants which among other
things, require the maintenance of specified financial ratios, restrict payments
of dividends and limit the amount of capital expenditures. At June 30, 1999, the
Company was not in compliance with certain of its covenants related to its
outstanding Senior Credit Facility and subsequently has received a waiver from
the lender. The waiver does not extend beyond November 15, 1999. As 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 June 30, 1999.
The aggregate annual maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30 AMOUNT
-------------------- -----------
<S> <C>
2000................ $ 6,727,017
2001................ --
2002................ --
2003................ --
Thereafter.......... 75,000,000
-----------
Total............... $81,727,017
===========
</TABLE>
Interest paid during the years ended June 30, 1997, 1998 and 1999
amounted to $2,555,284, $4,279,806 and $4,504,898, respectively.
8. SERIES A PREFERRED STOCK
In connection with the Merger Transaction, the Company issued 185,000
shares of its 12% Series A Cumulative Compounding Preferred Stock ("Series A
Preferred Stock"). The Series A Preferred Stock has a stated value of $100 per
share and is entitled to semiannual dividends when, as and if declared. The
dividends are cumulative, whether or not earned or declared, and accrue at a
rate of 12%, compounding annually. At June 30, 1999, dividends earned but not
declared amounted to $2,035,000.
Upon liquidation, dissolution or winding up of the Company, holders of
Series A Preferred Stock are entitled to receive an amount equal to $100 per
share plus all accrued and unpaid dividends. The Series A Preferred Stock is
redeemable, at the option of the holder, on July 31, 2010.
9. 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.
F-11
<PAGE> 45
10. INCOME TAXES
The provision (benefit) for income taxes in the consolidated statements
of operations is summarized below.
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Provision:
Federal -- Current...... $ (893,730) $1,304,185 $ 137
Federal-- Deferred...... 1,343,730 (949,317) (5,298,931)
State................... 90,000 (121,221) 105,403
---------- ---------- -----------
Total............... $ 540,000 $ 233,647 $(5,193,391)
========== ========== ===========
</TABLE>
The provision (benefit) for income taxes varied from the amount
computed by applying the U.S. federal statutory rate as a result of the
following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Tax at statutory rate.......................... $439,491 $263,313 $ (5,193,152)
State income tax, net of federal income tax
Benefit...................................... 59,400 (142,057) 69,566
Nondeductible expenses......................... 44,383 46,805 44,935
Other.......................................... (3,274) 65,586 (114,740)
-------- -------- ------------
Income tax provision (benefit)........... $540,000 $233,647 $ (5,193,391)
======== ======== ============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and tax liabilities at June 30, 1998 and
1999 are presented below:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS:
1998 1999
----------- ----------
<S> <C> <C>
Amounts deductible when paid.............................. $ 1,252,057 $1,114,765
Accounts receivable, principally due to allowance for
Doubtful accounts....................................... 84,751 103,383
Compensated absences, principally due to accrual for
Financial reporting purposes............................ 95,055 89,175
Net state operating loss carryforward..................... 295,009 379,578
Net federal operating loss carryforward................... 207,202 5,563,903
Contributions carryforward................................ 18,513 25,258
Alternative minimum tax credit carryforwards.............. 1,395,565 1,395,701
Total gross deferred tax assets........................... 3,348,152 8,671,763
Less valuation allowance.................................. (40,000) (40,000)
----------- ----------
Total net deferred tax assets............................. 3,308,152 8,631,763
DEFERRED TAX LIABILITIES:
Facility and equipment, principally due to differences in
depreciation and capitalized interest................... 2,947,987 3,074,879
Net deferred tax asset.................................... $ 360,165 $5,556,884
=========== ==========
</TABLE>
Federal income taxes paid during the years ended June 30, 1997, 1998
and 1999 were $675,996, $60,315 and $200,000, respectively.
The Company has a net operating loss for federal income tax purposes of
$16,364,419 which will expire in 2019, and a net operating loss for state income
tax purposes of $8,435,075 which will expire in years 1999 through 2004.
F-12
<PAGE> 46
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.
11. STOCK OPTION PLANS
In connection with the Merger Transaction, all outstanding stock
options were cashed out at the difference between the exercise price and $7.00.
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 provided 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 required 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 provided 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 required 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 two years ended June 30, 1998 related to all plans
are as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Options outstanding on July 1.................... 803,600 880,150
Granted.......................................... 134,000 --
Exercised (prices ranging from $4.00 to $6.00
Per share)..................................... (48,833) (20,000)
Cancelled........................................ (8,617) (51,200)
------------- -------------
Options outstanding at June 30................... 880,150 808,950
============= =============
Options price range at June 30................... $ 4.00-$6.69 $ 4.00-$6.06
Options exercisable at June 30................... 618,982 694,950
Options available for grant at June 30........... 157,317 208,517
</TABLE>
The Company applied 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>
1997 1998
---------- ----------
<S> <C> <C>
Net income As reported $ 752,620 $ 540,802
Pro forma 629,325 417,507
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of
F-13
<PAGE> 47
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 1997 as
determined by the Black-Scholes pricing model was $2.22. No options were granted
during Fiscal 1998.
12. MAJOR CUSTOMERS
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 1999, the Company had a single customer that accounted for 21% of total
revenues. During Fiscal 1997 and Fiscal 1998, no major customer accounted for
more than 10% of the Company's total revenues.
13. 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.
14. 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 $788,883, $610,344, $374,732, $240,653, and $140,273 for the
years ending June 30, 2000 to 2004, respectively. Rental expense was $623,676,
$873,375, and $995,173 for the years ended June 30, 1997, 1998 and 1999,
respectively.
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 transaction was wrongful, unfair and harmful to holders of GNI
common stock, that the consideration of $7.00 per share was 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 Titus H. Harris, III as a defendant, (ii) does not name John W. Lyons as a
defendant; and (iii) eliminates the request to enjoin the merger which was set
forth in the original complaint.
F-14
<PAGE> 48
In 1995, certain owners of property near Waste Management's Corpus
Christi deepwell filed suit in state district court 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 operation
of the deepwell. In June of this year, the court granted partial summary
judgment in favor of the Company against a number of the plaintiffs' claims,
while allowing the plaintiffs to proceed with one claim against the Company. The
court continues to consider whether the plaintiffs have a right to pursue other
claims against the Company. To date, no class has been certified in this
lawsuit. Management does not believe that the plaintiffs will succeed in their
claims nor that this litigation will have a material adverse affect on the
Company's operations, cash flow, or 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.
15. 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.
F-15
<PAGE> 49
16. 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.
<TABLE>
<CAPTION>
WASTE SPECIALTY
YEARS ENDED JUNE 30, MANAGEMENT CHEMICAL OTHER TOTAL
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
1999
Revenues from external customers $ 23,125,617 $ 11,853,834 -- $ 34,979,451
Intersegment revenues 819,567 -- (819,567) --
------------ ------------ ----------- ------------
Total revenues $ 23,945,184 $ 11,853,834 $ (819,567) $ 34,979,451
Net interest expense and other 1,445,760 242,907 6,390,823 8,079,490
Depreciation and amortization 4,372,773 3,443,569 726,229 8,542,571
Income (loss) before taxes 244,498 (1,297,049) (8,196,403) (9,248,954)
Extraordinary item, net of tax -- -- (3,920,936) (3,920,936)
Total assets 40,688,418 25,937,288 9,808,587 76,434,293
Purchases of fixed assets 3,364,439 2,147,447 81,672 5,593,558
1998
Revenues from external customers $ 26,677,995 $ 16,038,805 $ -- $ 42,716,800
Intersegment revenues 897,215 110,260 (1,007,475) --
------------ ------------ ----------- ------------
Total revenues $ 27,575,210 $ 16,149,065 $(1,007,475) $ 42,716,800
Net interest expense and other 1,653,237 676,655 1,438,178 3,768,070
Depreciation and amortization 3,843,843 3,117,719 285,465 7,247,027
Income (loss) before taxes 2,708,292 (696,652) (1,237,191) 774,449
Total assets 39,078,593 27,106,127 2,691,846 68,876,566
Purchases of fixed assets 6,105,165 1,588,225 24,326 7,717,716
1997
Revenues from external customers $ 24,006,360 $ 16,720,518 $ -- $ 40,726,878
Intersegment revenues 494,176 -- (494,176) --
------------ ------------ ----------- ------------
Total revenues $ 24,500,536 $ 16,720,518 $ (494,176) $ 40,726,878
Net interest expense and other 1,557,270 602,969 615,656 2,775,895
Depreciation and amortization 3,148,238 2,658,542 182,795 5,989,575
Income before taxes 1,282,002 10,618 -- 1,292,620
Total assets 37,154,024 27,301,739 4,132,441 68,588,204
Purchases of fixed assets 2,638,070 2,909,353 22,630 5,570,053
</TABLE>
F-16
<PAGE> 50
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal 1999 Quarters
----------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------------------------------- ---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 8,499,118 $ 9,024,785 $ 9,497,603 $ 7,957,945
Operating income (loss) (1,389,113) 1,015,882 993,533 (1,789,766)
Extraordinary item, net of tax (3,920,936) -- -- --
Net (loss) (5,951,243) (753,701) (736,257) (2,555,172)
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 Quarters
----------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------------------------------- ---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 10,917,257 $ 10,681,801 $ 11,036,712 $ 10,081,030
Operating income (loss) 1,796,633 1,592,217 1,678,725 (525,056)
Net income (loss) 584,830 400,194 440,024 (884,246)
</TABLE>
F-17
<PAGE> 51
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THE GNI GROUP, INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectible $ 229,242 51,000 (603)(1) $ 279,639
---------------- ---------------- ---------------- -----------------
Accounts:
Year ended June 30, 1998:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectible
Accounts:
$ 46,055 190,000 (6,813)(1) $ 229,242
---------------- ---------------- ---------------- -----------------
Year ended June 30, 1997:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectible
Accounts:
$ 141,655 40,793 (136,393)(1) $ 46,055
---------------- ---------------- ---------------- -----------------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 52
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
and Exchange Act of 1933, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: October 13, 1999 The GNI Group, Inc.
Registrant
/s/ Carl V Rush, Jr
---------------------
Carl V Rush, Jr.
President and CEO
Pursuant to the requirement of the Securities Exchange Act of 1933, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Carl V Rush, Jr. Director, President October 13, 1999
- ----------------------- and CEO (Principal
Carl V Rush, Jr. Executive Officer)
/s/ Bruce D. Tobecksen Executive Vice October 13, 1999
- ----------------------- President, CFO and
Bruce D. Tobecksen Secretary (Principal
Accounting Officer)
/s/ Richard M. Cashin. Director, October 13, 1999
- -----------------------
Richard M. Cashin
/s/ Norman Foster Director October 13, 1999
- -----------------------
Norman Foster
/s/ John Mowbray O'Mara Director October 13, 1999
- -----------------------
John Mowbray O'Mara
/s/Gavin J. Parfit Director October 13, 1999
- -----------------------
Gavin J. Parfit
/s/Joseph M. Silvestri Director October 13, 1999
- -----------------------
Joseph M. Silvestri
</TABLE>
<PAGE> 53
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
3.1 --Amended and Restated Certificate of Incorporation of The GNI Group,
Inc. This document is incorporated by reference to the Company's
Registration Statement No. 333-64307 on Form S-4 filed by the Company
on September 25, 1998, wherein the Company filed this documents as
Exhibit "3.1".
3.2 --Amended and Restated Bylaws of The GNI Group, Inc. This document is
incorporated by reference to the Company's Registration Statement No.
333-64307 on Form S-4 filed by the Company on September 25, 1998,
wherein the Company filed this documents as Exhibit "3.2".
3.3 --Form of specimen certificate evidencing the Common Stock. This
document is incorporated by reference to the Company's Registration
Statement No. 333-64307 on Form S-4 filed by the Company on September
25, 1998, wherein the Company filed this documents as Exhibit "3.3".
4.1 --Series A 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.
This document is incorporated by reference to the Company's
Registration Statement No. 333-64307 on Form S-4 filed by the Company
on September 25, 1998, wherein the Company filed this documents as
Exhibit "4.1".
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. This document is incorporated by
reference to the Company's Registration Statement No. 333-64307 on Form
S-4 filed by the Company on September 25, 1998, wherein the Company
filed this documents as Exhibit "4.2".
4.3 --Form of 10-7/8% Series A Senior Notes Due 2005. This document is
incorporated by reference to the Company's Registration Statement No.
333-64307 on Form S-4 filed by the Company on September 25, 1998,
wherein the Company filed this documents as Exhibit "4.3".
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.
This document is incorporated by reference to the Company's
Registration Statement No. 333-64307 on Form S-4 filed by the Company
on September 25, 1998, wherein the Company filed this documents as
Exhibit "4.4".
</TABLE>
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<TABLE>
<S> <C>
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. This document is incorporated by reference
to the Company's Registration Statement No. 333-64307 on Form S-4 filed
by the Company on September 25, 1998, wherein the Company filed this
documents as Exhibit "4.5".
4.6 --Registration Rights Agreement dated as of July 28, 1998 by and among
The GNI Group, Inc. and its stockholders. This document is incorporated
by reference to the Company's Registration Statement No. 333-64307 on
Form S-4 filed by the Company on September 25, 1998, wherein the
Company filed this documents as Exhibit "4.6".
4.7 --Stockholder's Agreement dated July 28, 1998 among the Company, the
399 Stockholders and certain members of management of the Company. This
document is incorporated by reference to the Company's Registration
Statement No. 333-64307 on Form S-4 filed by the Company on September
25, 1998, wherein the Company filed this documents as Exhibit "4.7".
10.1 --The GNI Group, Inc. 401 (k) Plan Amended and Restated as of July 1,
1989. 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, 1994 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".
</TABLE>
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<TABLE>
<S> <C>
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 A10.11".
10.7 --Asset Purchase Agreement dated June 17, 1988 by and among The GNI
Group, Inc., Lefco Western Acquisition Company, Lefco Western, 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 A10.12".
10.8 --Stock Purchase Agreement dated September 30, 1998 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 A10.14".
10.10. --Asset Purchase Agreement dated 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, 1988, 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 A2.1".
</TABLE>
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<PAGE> 56
<TABLE>
<S> <C>
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 A10.2".
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. This
document is incorporated by reference to the Company's Registration
Statement No. 333-64307 on Form S-4 filed by the Company on September
25, 1998, wherein the Company filed this documents as Exhibit "10.14".
10.15. --First Amendment to and Assignment of Deed of Trust dated effective as
of July 28, 1998 among Disposal Systems of Corpus Christi, Inc., a
subsidiary of the Company, and NationsBank, N.A. This document is
incorporated by reference to the Company's Form 10-Q for the nine month
period ending on March 31, 1999 filed by the Company on May 17, 1999,
wherein the Company filed this document as Exhibit "10.1".
10.16. --Sixth Amendment to and Assignment of Second Lien Deed of Trust dated
effective as of July 28, 1998 among Disposal Systems, Inc., a
subsidiary of the Company, and NationsBank, N.A. This document is
incorporated by reference to the Company's Form 10-Q for the nine month
period ending on March 31, 1999 filed by the Company on May 17, 1999,
wherein the Company filed this document as Exhibit "10.2".
</TABLE>
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<TABLE>
<S> <C>
10.17. --Eighth Amendment to and Assignment of Deed of Trust dated effective
as of July 28, 1998 among Disposal Systems, Inc., a subsidiary of the
Company, and NationsBank, N.A. This document is incorporated by
reference to the Company's Form 10-K for the nine month period ending
on March 31, 1999 filed by the Company on May 17, 1999, wherein the
Company filed this document as Exhibit "10.3".
10.18. --Tenth Amendment to and Assignment of Deed of Trust dated effective as
of July 28, 1998 among Disposal Systems, Inc., a subsidiary of the
Company, and NationsBank, N.A. This document is incorporated by
reference to the Company's Form 10-K for the nine month period ending
on March 31, 1999 filed by the Company on May 17, 1999, wherein the
Company filed this document as Exhibit "10.4".
21.1.* --Subsidiaries of the Company
27.1.* --Financial Data Schedule
* Filed Herewith
</TABLE>
E-5
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
Percent of Voting
Name State of Incorporation Stock Owned
- ---- ---------------------- -----------------
<S> <C> <C>
Gulf Nuclear of Louisiana, Inc.(1) Delaware 100
Disposal Systems, Inc. Delaware 100
Resource Transportation Services, Delaware 90
Inc.(2)
GNI Chemicals Corporation(3) Delaware 100
Disposal Systems of Corpus Delaware 100
Christi, Inc.
GNI Technical Services, Inc.(4) Delaware 100
</TABLE>
- --------------------------
(1) Formerly Gamma Industries, Inc. The inventory and certain fixed
assets of this subsidiary were sold to Amersham Corporation on January 8, 1988.
(2) As of September 19, 1988 the remaining 10% of the outstanding
capital stock of Resource Transportation Services, Inc. has been owned by
Disposal Systems, Inc., a wholly-owned subsidiary of the Company.
(3) Formerly Treatment Technologies, Inc and Chemical Resource
Processing, Inc.
(4) New subsidiary formed September 10, 1998 to acquire certain assets
and liabilities of Moheat, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,597,145
<SECURITIES> 0
<RECEIVABLES> 10,086,494
<ALLOWANCES> 279,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,630,672
<PP&E> 61,185,322
<DEPRECIATION> (25,442,639)
<TOTAL-ASSETS> 76,434,293
<CURRENT-LIABILITIES> 16,831,182
<BONDS> 0
0
18,500,000
<COMMON> 5,714
<OTHER-SE> (35,578,891)
<TOTAL-LIABILITY-AND-EQUITY> (35,573,177)
<SALES> 34,979,451
<TOTAL-REVENUES> 34,979,451
<CGS> 21,968,695
<TOTAL-COSTS> 36,148,915
<OTHER-EXPENSES> (13,362)
<LOSS-PROVISION> 51,000
<INTEREST-EXPENSE> 8,136,382
<INCOME-PRETAX> (9,248,954)
<INCOME-TAX> (3,173,517)
<INCOME-CONTINUING> (6,075,437)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,920,936
<CHANGES> 0
<NET-INCOME> (9,996,373)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
