<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 0-10735
THE GNI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0232338
(State or other jurisdiction of (I.R.S.) Employer
incorporation or organization) Identification No.)
2525 BATTLEGROUND ROAD
DEER PARK, TEXAS 77536
(Address of principal executive offices)
(Zip Code)
(281) 930-0350
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's Class A voting common
stock, $.01 par value per share, as of February 1, 2000 was 114,631. There were
456,799 shares outstanding of the registrant's Class B non-voting common stock,
$.01 par value per share, as of February 1, 2000.
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INDEX
THE GNI GROUP, INC.
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
-------
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 1999 and June 30, 1999 1
Consolidated Statements of Operations
Three and Six Months ended Decem-
ber 31, 1999 and December 31, 1998 2
Consolidated Statements of Cash Flows
Six Months ended December 31, 1999
and December 31, 1998 3
Notes to Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 6-12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE GNI GROUP, INC. December 31, June 30,
1999 1999
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 51,761 $ 1,597,145
Accounts receivable, less allowance of approximately $105,000
for 12/31/99 and $279,000 for 6/30/99 7,970,811 9,807,494
Deferred tax asset 1,307,323 1,307,323
Prepaid expenses and other assets 1,914,157 1,226,033
-------------- --------------
TOTAL CURRENT ASSETS 11,244,052 13,937,995
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT 63,130,467 61,185,322
Less accumulated depreciation (28,464,981) (25,442,639)
-------------- --------------
NET PROPERTY, PLANT AND EQUIPMENT 34,665,486 35,742,683
-------------- --------------
Deferred tax asset, net 4,249,561 4,249,561
Intangible assets, net 16,071,551 16,989,285
Other assets, net 5,012,386 5,514,769
-------------- --------------
TOTAL ASSETS $ 71,243,036 $ 76,434,293
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 5,917,022 $ 3,954,237
Accrued liabilities 6,461,273 6,149,928
Current portion of long-term debt 8,035,438 6,727,017
-------------- --------------
TOTAL CURRENT LIABILITIES 20,413,733 16,831,182
-------------- --------------
Accrued liabilities 1,164,187 1,676,288
Long-term debt, less current portion 75,000,000 75,000,000
Series A preferred stock 18,500,000 18,500,000
-------------- --------------
STOCKHOLDERS' DEFICIT:
Class A common stock, $.01 par value
Authorized 1,500,000 shares; 114,631 shares outstanding at 12/31/99 and
at 6/30/99 1,146 1,146
Class B common stock, $.01 par value
Authorized 1,500,000 shares; 456,799 shares outstanding at 12/31/99 and
at 6/30/99 4,568 4,568
Additional paid-in capital 3,994,303 3,994,303
Accumulated deficit (47,661,959) (39,400,252)
Less cost of treasury stock (24,706 shares) (172,942) (172,942)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIT (43,834,884) (35,573,177)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 71,243,036 $ 76,434,293
============== ==============
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at December 31, 1999 is unaudited. The Balance Sheet at
June 30, 1999 has been derived from the audited financial statements at that
date.
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
THE GNI GROUP, INC. Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 8,377,905 $ 9,024,785 $ 17,715,593 $ 17,523,903
COST AND EXPENSES:
Cost of services 7,204,507 4,892,548 13,435,426 10,772,770
Selling, general and administrative 1,463,244 1,119,298 2,719,901 3,190,406
Depreciation and amortization 2,381,610 1,997,057 4,697,314 3,933,959
------------ ------------ ------------ ------------
TOTAL COST AND EXPENSES 11,049,361 8,008,903 20,852,641 17,897,135
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (2,671,456) 1,015,882 (3,137,048) (373,232)
------------ ------------ ------------ ------------
Interest income 2,265 17,833 8,719 38,011
Interest expense 2,563,369 2,173,474 5,098,874 3,770,750
Other income 4,389 1,879 5,411 4,736
------------ ------------ ------------ ------------
LOSS BEFORE TAX (5,228,171) (1,137,880) (8,221,792) (4,101,235)
------------ ------------ ------------ ------------
Income tax (benefit) 6,950 (384,179) 39,915 (1,317,227)
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (5,235,121) (753,701) (8,261,707) (2,784,008)
============ ============ ============ ============
Extraordinary item, net of tax benefit -- -- -- 3,920,936
------------ ------------ ------------ ------------
NET LOSS $(5,235,121) $ (753,701) $ (8,261,707) $ (6,704,944)
============ ============ ============ ============
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
THE GNI GROUP, INC. Six Months Ended
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
NET LOSS $ (8,261,707) $ (6,704,944)
Adjustments to reconcile income from
Continuing operations to net cash provided by operating activities:
Depreciation and amortization 4,697,314 3,933,959
Deferred taxes -- (3,357,102)
Write-off of deferred loan costs -- 1,140,708
Debt retirement costs -- 4,800,103
Change in assets and liabilities, net of acquisition:
Decrease in accounts receivable 1,836,685 31,386
Decrease in inventory -- 478,886
Increase in prepaid expenses and other (863,525) (288,892)
Increase (decrease) in other assets 97,935 (112,290)
Increase (decrease) in accounts payable 1,962,785 (1,099,522)
Increase (decrease) in accrued liabilities (392,533) 3,054,808
Increase (decrease) in income taxes payable -- (200,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (923,046) 1,677,100
============ ============
Cash flows from investing activities:
Increase in restricted time deposits -- (35,257)
Payment of cash in connection with business acquisition -- (482,353)
Purchases of fixed assets (2,122,536) (4,633,141)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,122,536) (5,150,751)
============ ============
Cash flows from financing activities:
Cash proceeds from notes payable 539,375 702,233
Net proceeds from issuance of Senior Notes -- 72,750,000
Purchase of GNI equity -- (50,727,953)
Equity Contribution -- 22,500,000
Deferred loan costs -- (1,597,060)
Merger fees and expenses -- (3,596,242)
Subordinated notes make-whole premium -- (3,590,000)
Net proceeds from revolving line 1,308,421 3,086,002
Principal payments of long-term debt and notes payable (347,598) (35,903,295)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,500,198 3,623,685
============ ============
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,545,384) 150,034
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,597,145 208,257
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,761 $ 358,291
============ ============
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE GNI GROUP, INC. December 31, 1999
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All significant intercompany
transactions are eliminated.
The Consolidated Balance Sheet as of December 31, 1999 and the related
Statements of Operations for the three and six month periods ended December 31,
1999 and 1998, and Statements of Cash Flows for the six month period ended
December 31, 1999 and 1998 are unaudited; in the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted of normal, recurring items. Interim
results are not necessarily indicative of results for a full year. The financial
statements and Notes are presented as permitted by Form 10-Q and do not contain
certain information included in the Company's Annual Financial Statements and
Notes.
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
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as those described in the summary of significant accounting policies. Other
includes corporate expenses and elimination of intersegment revenues.
<TABLE>
<CAPTION>
WASTE SPECIALTY
MANAGEMENT CHEMICAL OTHER TOTAL
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED DECEMBER 31,
1999
Revenues from external customers $ 13,709,925 $ 4,005,668 $ -- $ 17,715,593
Intersegment revenues 392,414 -- (392,414) --
------------ ------------ ----------- ------------
Total revenues $ 14,102,339 $ 4,005,668 $ (392,414) $ 17,715,593
Net interest expense and other 855,007 496,415 3,733,322 5,084,744
Depreciation and amortization 2,394,319 1,983,735 319,260 4,697,314
Loss before taxes (326,662) (3,617,005) (4,278,125) (8,221,792)
Total assets 38,289,346 23,308,691 9,644,999 71,243,036
Purchases of fixed assets 1,363,771 724,156 34,609 2,122,536
1998
Revenues from external customers $ 10,809,217 $ 6,714,686 $ -- $ 17,523,903
Intersegment revenues 258,541 -- (258,541) --
------------ ------------ ----------- ------------
Total revenues $ 11,067,758 $ 6,714,686 $ (258,541) $ 17,523,903
Net interest expense and other 735,604 113,169 2,879,230 3,728,003
Depreciation and amortization 2,049,220 1,630,109 254,630 3,933,959
Income (loss) before taxes (175,765) 191,040 (4,116,510) (4,101,235)
Extraordinary item, net of tax -- -- (3,920,936) (3,920,936)
Total assets 41,618,941 26,614,739 8,310,432 76,544,112
Purchases of fixed assets 2,758,154 1,769,582 105,405 4,633,141
THREE MONTHS ENDED DECEMBER 31,
1999
Revenues from external customers $ 6,497,290 $ 1,880,615 $ -- $ 8,377,905
Intersegment revenues 182,293 -- (182,293) --
------------ ------------ ----------- ------------
Total revenues $ 6,679,583 $ 1,880,615 $ -- $ 8,377,905
Net interest expense and other 427,944 166,427 1,962,344 2,556,715
Depreciation and amortization 1,209,178 1,012,182 160,250 2,381,610
Loss before taxes (937,062) (2,052,047) (2,239,062) (5,228,171)
Purchases of fixed assets 1,069,500 222,587 28,654 1,320,741
1998
Revenues from external customers $ 5,570,659 $ 3,454,126 $ -- $ 9,024,785
Intersegment revenues 122,617 -- (122,617) --
------------ ------------ ----------- ------------
Total revenues $ 5,693,276 $ 3,454,126 $ (122,617) $ 9,024,785
Net interest expense and other 390,725 64,175 1,698,861 2,153,761
Depreciation and amortization 1,050,599 806,685 139,774 1,997,058
Income (loss) before taxes 1,730,976 583,685 (3,452,541) (1,137,880)
Purchases of fixed assets 592,894 424,239 1,395 1,018,528
</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Pursuant to a Merger Agreement dated February 12, 1998, and amended on June
17, 1998, between the Company and Green I Acquisition Corp. ("Green I"), a
company formed by 399 Venture Partners, Inc. ("399"), Green I merged with and
into the Company, with the Company as the surviving corporation (the "Merger").
Immediately following the Merger, each share of GNI common stock was canceled
and converted into the right to receive $7.00 in cash, other than certain shares
held by management and other than shares held by stockholders who were entitled
to, and who perfected their, appraisal rights. Each option and warrant to
purchase GNI common stock outstanding immediately prior to the effective date
was canceled and the holder thereof received $7.00 per share in cash, net of the
application option or warrant exercise price. The Company mailed a proxy
statement with respect to the Merger on June 24, 1998 for a stockholders'
meeting on July 23, 1998. On July 23, 1998, a majority of the Company's
stockholders approved the Merger. On July 28, 1998, the Merger became effective.
The Merger was financed by an offering of $75 million of 10.875% Senior
Notes due 2005, together with an equity investment in the Company of
approximately $22.5 million by 399 and certain members of GNI's management (the
Merger together with the equity and debt financing arrangements described
herein, the "Recapitalization"). In conjunction with the Recapitalization, the
Company entered into a new $12 million senior secured revolving facility (the
"Revolving Credit Facility") with NationsBank, N.A. which is available for
working capital requirements, capital expenditures and other general corporate
purposes and permitted acquisitions, subject to a borrowing base formula and
certain asset appraisals.
On September 25, 1998, a wholly-owned subsidiary of the Company, GNI
Technical Services, Inc., purchased substantially all of the assets and assumed
certain liabilities of Moheat, Inc. ("Moheat") for cash consideration of
approximately $480,000. Moheat was engaged in the site management and disposal
of hazardous waste, primarily as a contractor to the U. S. government.
RESULTS OF OPERATIONS-
FISCAL 2000 SECOND QUARTER COMPARED WITH FISCAL 1999 SECOND QUARTER
Revenues. Consolidated revenues declined by $600,000 or 7.2% from $9.0
million in the second quarter of fiscal 1999 to $8.4 million for the comparable
period of Fiscal 2000. The net decrease was attributable to (i) an increase in
the Company's waste management services segment of $900,000 or 16.6% from $5.6
million in the Fiscal 1999 second quarter to $6.5 million in the second quarter
of Fiscal 2000, and (ii) a decrease in revenue from the Company's specialty
chemical manufacturing business segment of $1.6 million or 45.6% from $3.5
million in the Fiscal 1999 second quarter to $1.9 million in the second quarter
of Fiscal 2000.
The increase in the revenues for the waste management services segment was
primarily attributable to a major increase in the service provided to the U.S.
Navy for the treatment of Napalm. The contract for these services is scheduled
to last for approximately 18 months. The
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increase in the Napalm business was partially offset by a decline in deepwell
revenues caused by major repairs being performed on two of the three company
owned deepwell units.
The revenue decline for the specialty chemical manufacturing business was
attributable to continued production problems caused by equipment outages and
employee turnover. The continued delay in reaching optimum production levels
caused the chemical plant to remain underutilized during the quarter.
Cost of Services. Cost of service increased as a percentage of revenue from
54.2% in the second quarter of Fiscal 1999 to 86% in the second quarter of
Fiscal 2000. The increase in cost of services was attributable to (i) increased
cost of the waste management service segment related to processing of
containerized waste for a single customer due to unforeseen handling expenses
and the inefficiencies of the deepwell operation due to major maintenance
activities, and, (ii) increased overtime costs in the specialty chemical
manufacturing business due to high employee turnover and high equipment rental
costs due to equipment failure and lack of adequate storage tankage.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased as a percentage of revenues from
12.4% in the second quarter of Fiscal 1999 to 17.5% in the second quarter of
Fiscal 2000. This increase was caused by the addition of four new positions in
sales/customer service as well as increased consulting expenses during the
quarter.
Depreciation and Amortization Expenses. Depreciation and amortization
increased by approximately $384,000 from $2.0 million in the second quarter of
Fiscal 1999 to $2.38 million in the comparable period in Fiscal 2000 primarily
due to the capital improvements made by the Company to its facilities in Fiscal
1999 and Fiscal 2000.
Interest Expense. Interest expense increased by $390,000, from $2.173
million in the second quarter of Fiscal 1999 to $2.563 million in the second
quarter of Fiscal 2000 due to higher borrowing levels under the Company's
revolving line of credit.
Net Loss. The Company recorded a net loss of $5.2 million of the second
quarter of Fiscal 2000. In Fiscal 1999, the Company had a net loss for the
comparable period of $754,000.
FISCAL 2000 SIX MONTHS COMPARED TO FISCAL 1999 SIX MONTHS
Revenues. Consolidated revenues increased by $192,000 or 1.1% from $17.5
million for the first six months of Fiscal 1999 to $17.7 million for the first
six months of Fiscal 2000. This increase was primarily attributable to (i) an
increase in revenues from the Company's waste management segment of $2.9 million
or 26.8% from $10.8 million in the first six months of Fiscal 1999 to $13.7
million in the comparable period for Fiscal 20000, and (ii) a decrease in
revenues form the Company's specialty chemical manufacturing business of $2.7
million or 40.3% from $6.7 million in Fiscal 1999 first six months to $4.0
million for the first six months of Fiscal 2000.
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The increase in revenues from the Company's waste management business was
primarily attributable to a major increase in the service provided to the U.S.
Navy for the treatment of Napalm. Furthermore, the Company experienced an
increase in containerized waste revenues as a result of the Moheat acquisition
in September of 1998. Moheat was engaged in the site management and disposal of
hazardous waste, primarily as a contractor to the U. S. Government.
The revenue decline for the specialty chemical manufacturing business was
attributable to continued production problems caused by equipment outages and
employee turnover. The continued delay in reaching optimum production levels,
caused the chemical plant to remain underutilized during the six months of
Fiscal 2000.
Cost of Services. Cost of services increased as a percentage of revenue
from 61.5% in the first six months of Fiscal 1999 to 75.8% in the comparable
period for Fiscal 2000. Included within the cost of services figure for Fiscal
1999 were non-recurring personnel reduction costs of approximately $249,000.
Excluding these non-recurring costs would result in a cost of services of 60.0%
in the Fiscal 1999 six month period. The increase in cost of services was
attributable to (i) increased cost of the waste management service segment
related to processing of containerized waste for a single customer due to
unforeseen handling expenses and the inefficiences of the deepwell operation due
to major maintenance activities, and (ii) increased overtime costs in the
specialty chemical manufacturing business due to high employee turnover and high
equipment rental costs due to equipment failure and lack of adequate storage
tankage.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of revenues from 18.2% in the
first six months of Fiscal 1999 to 15.4% in the comparable period for Fiscal
2000. Included within the selling, general and administrative expense figure for
Fiscal 1999 were non-recurring personnel reduction costs and transaction costs
of approximately $232,000 and $673,000, respectively. Excluding these
non-recurring costs would result in selling, general and administrative costs of
13.0% in the first six months of Fiscal 1999. The increase in selling, general
and administrative costs for the first six months of Fiscal 2000 compared to the
adjusted first six months of Fiscal 1999 was attributable to additional
headcount in the sales force and customer service group as well as increased
consulting expenses in Fiscal 2000.
Depreciation and Amortization Expenses. Depreciation and amortization
increased by $763,000 from $3.9 million for the first six months of Fiscal 1999
to $4.7 million for the comparable period in Fiscal 2000 due to capital
improvements made by the Company in its facilities in Fiscal 1999 and Fiscal
2000.
Interest Expense. Interest expense increased by $1.3 million from $3.8
million in the first six months of Fiscal 1999 to $5.1 million in the first six
months of Fiscal 2000 due to higher borrowing levels under the Company's
revolving line of credit and 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.
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Net Loss. The Company recorded a net loss of $8.3 million for the first six
months of Fiscal 2000. In Fiscal 1999 the Company had a net loss of $6.7 million
which included an extraordinary charge in the amount of $3.9 million, net of tax
benefit, in connection with the Recapitalization transaction completed in July,
1998.
Inflation did not have a material impact on the Company's revenues or income
in either the first six months of Fiscal 2000 or Fiscal 1999. Further, it is not
expected that inflation will have a material impact during the remaining
quarters of Fiscal 2000 for either the Company's revenues or income.
LIQUIDITY AND CAPITAL RESOURCES
In the second six months of Fiscal 2000 the Company used approximately
$923,000 in net cash from operations compared with providing approximately $1.7
million for the Fiscal 1999 period. The major cause of the decrease of
approximately $2.6 million was attributable to increased net loss for the Fiscal
2000 period. This use of cash was partially offset by a decrease in accounts
receivable of $1.8 million in Fiscal 2000 versus an increase in accounts
receivable of $31,000 in the corresponding period of Fiscal 1999. The use of
cash was also partially offset by an increase in accounts payable of $1.96
million in Fiscal 2000 versus a decrease in accounts payable of $1.1 million in
Fiscal 1999.
During the first six months of Fiscal 2000 and Fiscal 1999, the Company's
net cash used in investing activities was $2.1 million and $5.1 million,
respectively. For Fiscal 1999, the main components were the cash payment of
approximately $480,000 made for a business acquisition during the period and
capital expenditures relating to plant expansion of $4.6 million. For Fiscal
2000, the capital expenditures were reduced to $2.1 million.
In Fiscal 2000, the net cash provided by financing activities was $1.5
million compared with $3.6 million provided in the comparable period in Fiscal
1999. The Fiscal 1999 activity included the transaction related to the
Recapitalization of the Company.
As of December 31, 1999, total debt exceeded total assets of the Company by
$11.8 million.
The Revolving Credit Facility provides for revolving loans in the aggregate
amount of up to $12 million, subject to a borrowing base formula and certain
asset appraisals, with a $3 million sublimit for the issuance of standby and
commercial letters of credit. Availability under the Revolving Credit Facility
is calculated based on a borrowing base formula tied to (i) 85% of eligible
accounts receivable plus (ii) an amount based on the Company's fixed assets.
Amounts borrowed under the Revolving Credit Facility will be due in full on July
31, 2001, unless extended. Until the Company provided the Lender with financial
statements for the quarter ended September 30, 1998, amounts borrowed under the
Revolving Credit Facility bear interest, at the option of the Company, at either
(i) the Lender's Base Rate plus 1.00% or (ii) LIBOR plus 2.75%. Thereafter, such
applicable margins are subject to reduction based upon the Company's Interest
Coverage Ratio (as defined in the Revolving Credit Facility.) The Revolving
Credit Facility contains standard financial and restrictive covenants for
facilities of this type, including
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covenants which, among other things, require the maintenance of specified
financial ratios, restrict payments of dividends and limit the amount of
capital expenditures. As of December 31, 1999 the Company's Revolving Credit
Facility had an outstanding balance of approximately $8.035 million, leaving
approximately $4.0 million of availability. At December 31, 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 consolidated
balance sheet, resulting in a working capital deficit at December 31, 1999.
The Senior Credit Facility lender has agreed not to exercise any of its
remedies under the provision of the Loan Document solely based upon
noncompliance with the covenants through July 1, 2000. Should the Company be
unable to re-finance this debt with the Senior Credit Facility lender,
management is pursuing other financing arrangements with other lenders.
Ultimately, the Company's ability to generate positive cash flows depends on
factors which may be beyond the Company's control. There can be no assurance
that the Company will successfully negotiate a re-financing agreement with the
Senior Credit Facility lender or other lenders.
At June 30, 1999, the Company has a $5.6 million net deferred tax asset.
Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are realizable,
the reversal of taxable timing differences, and tax planning strategies,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowance.
On September 30, 1996, the Company participated in a consolidation
transaction with EMPAK, whereby EMPAK exited the third-party commercial waste
management business and agreed to assist in the transfer of EMPAK's third-party
commercial waste management customers to the Company. EMPAK will continue to use
its facility in Deer Park, Texas, for the disposal of its own waste and the
waste of its affiliates and customers of its related businesses. The Company
paid EMPAK the sum of $12,000,000 at closing. Additionally, the Company has
agreed to pay EMPAK $1,200,000 per year for five years in exchange for the use
of EMPAK's deepwell in case of a force majeure at the Company's facilities.
The Company's ability to make scheduled payments of principal of or
interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures, will depend on its future performance, which is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond its control. There can be no assurance that the Company's businesses
will generate sufficient cash flow from operations, or that future borrowings
will be available under the Revolving Credit Facility in an amount sufficient to
enable the Company to service its indebtedness, including the Notes, or to fund
its other liquidity needs.
10
<PAGE> 13
WORKING CAPITAL
The Company's business does not place unusual demands on working capital.
Specialty Chemicals' contracts are generally tolling arrangements whereby the
customer provides the raw materials and pays for the finished product on a per
unit basis. Standard credit terms are given in most cases by the Company, and
the Company obtains standard credit terms for most of its purchases.
YEAR 2000
The Company's Year 2000 remediation plan has been completed. To date, the
Company has not encountered any major problems or issues internally or with
third party vendors.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes new accounting and reporting standards requiring
that all derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. This statement is effective for all fiscal years beginning after
June 15, 2000. The Company has not yet determined the impact, if any, this
standard will have on its financial position or results of operations, and plans
to adopt this standard during the year ending June 30, 2001.
DIVIDEND POLICY
The Company does not pay any cash dividends on its common stock and does
not have any plans to do so in the future. The Company intends to continue a
policy of retaining income for use in its business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RICK
Market Risk
The Company is exposed to market risk. Market risk is the potential loss
arising from adverse changes in market prices and rates. The Company does not
enter into derivative or other
11
<PAGE> 14
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 $75,000.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
including any forecasts, projections and descriptions of revenues and cash flows
expected to be generated pursuant to long-term outsourcing to manufacture
specialty chemicals for major chemical customers, anticipated costs savings and
synergies referred to herein including statements contained herein regarding the
development or possible assumed future results of operations, markets for the
Company's services, regulatory developments, any statements preceded by,
followed by or that include the words "believes," "expects," "may," "estimates,"
"will," "should," "intends," "regarded to be," "plans," or "anticipates," or
similar expressions, or the negative thereof, and other statements regarding
matters that are not historical facts, are or may constitute forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995). Because such statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. The risks and uncertainties that may cause actual
results to differ include, among others, effectiveness of management's
strategies and decisions, general economic conditions, risks associated with
acquisitions, fluctuations in operating results, changes in applicable federal,
state and local laws and regulations, especially environmental regulations,
alternate and emerging technologies, competition and pricing pressures,
overcapacity in the waste management industry, the Company's ability to deal
with Year 2000 issues, and uncertainties of litigation. As a result of these
factors, among others, the Company's revenues and cash flow could vary
significantly from quarter to quarter, and past financial performance should not
be considered a reliable indicator of future performance. No assurance can be
given that these are all of the factors that could cause results to vary
materially from the forward-looking statements. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on the
Company's behalf are expressly qualified in their entirety by the cautionary
statements set forth or referred to above in this paragraph. Investors are
cautioned not to place undue reliance on such statements, which speak only as of
the date hereof. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events,
except as may be required by federal securities laws.
12
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GNI GROUP, INC.
Date: February 14, 2000 /s/ Carl V Rush, Jr. Carl V Rush, Jr.
--------------------- ---------------------- President and CEO
Date: February 14, 2000 /s/ Bruce D. Tobecksen Bruce D. Tobecksen
--------------------- ---------------------- Chief Financial Officer
(Principal Accounting
Officer)
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 51,761
<SECURITIES> 0
<RECEIVABLES> 7,970,811
<ALLOWANCES> (105,000)
<INVENTORY> 0
<CURRENT-ASSETS> 11,244,052
<PP&E> 63,130,467
<DEPRECIATION> (28,464,981)
<TOTAL-ASSETS> 71,243,036
<CURRENT-LIABILITIES> 20,413,733
<BONDS> 0
18,500,000
0
<COMMON> 5,714
<OTHER-SE> (43,829,170)
<TOTAL-LIABILITY-AND-EQUITY> 71,243,036
<SALES> 17,715,593
<TOTAL-REVENUES> 17,715,593
<CGS> 13,435,426
<TOTAL-COSTS> 20,852,641
<OTHER-EXPENSES> (14,130)
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 5,098,874
<INCOME-PRETAX> (8,221,792)
<INCOME-TAX> 39,915
<INCOME-CONTINUING> (8,261,707)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,261,707)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
