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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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)
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DELAWARE 76-0232338
(State or other jurisdiction of (I.R.S.) Employer
incorporation or organization) Identification No.)
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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 April 1, 2000.
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INDEX
THE GNI GROUP, INC.
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Page
PART I - FINANCIAL INFORMATION Number
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2000 and June 30, 1999 1
Consolidated Statements of Operations
Three and Nine Months ended March 31,
2000 and March 31, 1999 2
Consolidated Statements of Cash Flows
Nine Months ended March 31, 2000
and March 31, 1999 3
Notes to Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 6-12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Item 21. Exhibits and Financial Statement Schedules 13
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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THE GNI GROUP, INC. March 31, June 30,
2000 1999
ASSETS
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CURRENT ASSETS:
Cash and time deposits $ 17,686 $ 1,597,145
Accounts receivable, less allowance of approximately $51,000
for 3/31/00 and $279,000 for 6/30/99 7,093,813 9,807,494
Deferred Tax Asset 1,307,323 1,307,323
Prepaid expenses and other assets 1,978,810 1,226,033
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TOTAL CURRENT ASSETS 10,397,632 13,937,995
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PROPERTY, PLANT AND EQUIPMENT 63,747,231 61,185,322
Less accumulated depreciation (29,906,535) (25,442,639)
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NET PROPERTY, PLANT AND EQUIPMENT 33,840,696 35,742,683
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Deferred tax asset, net 4,249,561 4,249,561
Intangible assets, net 15,730,332 16,989,285
Other assets, net 4,532,119 5,514,769
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TOTAL ASSETS $ 68,750,340 $ 76,434,293
====================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
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CURRENT LIABILITIES:
Current portion of long-term debt $ 10,010,423 $ 6,727,017
Accounts payable 7,006,296 3,954,237
Accrued liabilities 7,083,365 6,149,928
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TOTAL CURRENT LIABILITIES 24,100,084 16,831,182
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Accrued liabilities 1,143,137 1,676,288
Long-term debt, less current portion 75,000,000 75,000,000
Series A preferred stock 18,500,000 18,500,000
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STOCKHOLDERS' DEFICIT:
Class A common stock, $.01 par value 1,146 1,146
Authorized 1,500,000 shares; issued 114,631 shares at 3/31/00 and
6/30/99
Class B common stock, $.01 par value 4,568 4,568
Authorized 1,500,000 shares, 456,799 shares outstanding at 3/31/00
and 6/30/99
Additional paid-in capital 3,994,303 3,994,303
Accumulated deficit (53,819,956) (39,400,252)
Less cost of treasury stock (24,706 shares) (172,942) (172,942)
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TOTAL STOCKHOLDERS' DEFICIT (49,992,881) (35,573,177)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 68,750,340 $ 76,434,293
====================================================================================================
</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTE: The Balance Sheet at March 31, 2000 is unaudited. The Balance Sheet at
June 30, 1999 has been derived from the audited financial statements at that
date.
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THE GNI GROUP, INC. Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
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REVENUES $ 7,763,491 $ 9,497,603 $ 25,479,084 $ 27,021,506
COST AND EXPENSES:
Cost of services 7,371,095 5,099,602 20,806,520 15,872,372
Selling, general and administrative 1,516,197 1,237,974 4,236,098 4,428,380
Depreciation and amortization 2,529,552 2,166,494 7,226,867 6,100,452
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TOTAL COST AND EXPENSES 11,416,844 8,504,070 32,269,485 26,401,204
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OPERATING INCOME (LOSS) (3,653,353) 993,533 (6,790,401) 620,302
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Interest income 31,783 16,733 40,502 54,743
Interest expense (2,437,950) (2,089,442) (7,536,824) (5,860,192)
Other expense (97,137) (11,459) (91,726) (6,724)
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LOSS BEFORE TAX AND EXTRAORDINARY ITEM (6,156,657) (1,090,635) (14,378,449) (5,191,871)
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Income tax expense (benefit) 1,340 (354,378) 41,255 (1,671,605)
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LOSS BEFORE EXTRAORDINARY ITEM (6,157,997) (736,257) (14,419,704) (3,520,266)
====================================================================================================
Extraordinary item, net of tax benefit -- -- -- 3,920,936
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NET LOSS (6,157,997) (736,257) (14,419,704) (7,441,202)
====================================================================================================
</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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THE GNI GROUP, INC. Nine Months Ended
March 31,
2000 1999
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Cash flows from operating activities:
NET LOSS $(14,419,704) $ (7,441,202)
Adjustments to reconcile loss from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 7,226,867 6,100,452
Deferred taxes -- (3,717,980)
Write-off of deferred loan costs -- 1,140,708
Debt retirement costs -- 4,800,103
Change in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable 2,713,681 (2,150,520)
Decrease in inventory -- 478,886
Increase in prepaid expenses and other (1,041,186) (242,581)
Decrease (increase) in other assets 152,037 (126,568)
Increase (decrease) in accounts payable 3,052,059 (569,926)
Increase (decrease) in accrued liabilities 352,343 (50,903)
Decrease in income taxes payable -- (200,000)
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NET CASH USED IN OPERATING ACTIVITIES (1,963,903) (1,979,531)
========================================================================================
Cash flows from investing activities:
Increase in restricted time deposits -- (50,257)
Payment of cash in connection with business acquisition --
(482,353)
Purchases of fixed assets (2,946,906) (5,696,836)
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NET CASH USED IN INVESTING ACTIVITIES (2,946,906) (6,229,446)
========================================================================================
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 -- (1,772,581)
Merger fees and expenses -- (3,596,242)
Subordinated notes make-whole premium -- (3,590,000)
Net proceeds from revolving line 3,283,406 8,326,421
Principal payments of long-term debt and notes payable (491,431) (36,075,059)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 3,331,350 8,516,819
========================================================================================
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,579,459) 307,842
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,597,145 208,257
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,686 $ 516,099
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</TABLE>
Notes to Consolidated Financial Statements are an integral part of these
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE GNI GROUP, INC. March 31, 2000
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 March 31, 2000 and the related
Statements of Operations for the three and nine month periods ended March 31,
2000 and 1999, and Statements of Cash Flows for the nine month period ended
March 31, 2000 and 1999 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.
Liquidity
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. At March 31, 2000,
the Company was not in compliance with certain of its covenants related to its
outstanding Senior Credit Facility and had incurred substantial losses and
negative cash flows from operation for the nine months ended March 31, 2000.
Because of the noncompliance, all amounts due under the Senior Credit Facility
have been classified as current on the accompanying consolidated balance sheet.
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 certain covenants through July 1, 2000. The Company is
pursuing alternate financing arrangements with other lender, but there can be
no assurance that the Company will successfully negotiate a refinancing
agreement. In the event that alternative financing is not obtained by July 1,
2000, the Company anticipates it would be in default with respect to its Senior
Credit Facility which would also create a default under the indenture related
to the Senior 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.
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WASTE SPECIALTY
NINE MONTHS ENDED MARCH 31, MANAGEMENT CHEMICAL OTHER TOTAL
------------ ------------ ----------- ------------
2000
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Revenues from external customers $ 20,046,730 $ 5,432,354 $ -- $ 25,479,084
Intersegment revenues 768,908 -- (768,908) --
------------ ------------ ----------- ------------
Total revenues $ 20,815,638 $ 5,432,354 $ (768,908) $ 25,479,084
Net interest expense and other 1,291,338 684,322 5,612,388 7,588,048
Depreciation and amortization 3,605,738 2,999,777 621,352 7,226,867
Loss before taxes (1,666,736) (6,394,525) (6,317,188) (14,378,449)
Total assets 37,007,210 22,451,742 9,291,388 68,750,340
Purchases of fixed assets 2,084,917 817,178 44,811 2,946,906
1999
Revenues from external customers $ 17,044,603 $ 9,976,903 $ -- $ 27,021,506
Intersegment revenues 482,637 -- (482,637) --
------------ ------------ ----------- ------------
Total revenues $ 17,527,240 $ 9,976,903 $ (482,637) $ 27,021,506
Net interest expense and other 1,032,532 147,001 4,632,640 5,812,173
Depreciation and amortization 3,204,399 2,487,707 408,346 6,100,452
Income (loss) before taxes 564,231 399,470 (6,155,572) (5,191,871)
Extraordinary item, net of tax -- -- (3,920,936) (3,920,936)
Total assets 41,720,474 27,716,236 8,883,685 78,320,395
Purchases of fixed assets 3,142,082 2,449,335 105,419 5,696,836
THREE MONTHS ENDED MARCH 31,
2000
Revenues from external customers $ 6,336,805 $ 1,426,686 $ -- $ 7,763,491
Intersegment revenues 227,358 -- (227,358) --
------------ ------------ ----------- ------------
Total revenues $ 6,564,163 $ 1,426,686 $ (227,358) $ 7,763,491
Net interest expense and other 436,331 187,907 1,879,066 2,503,304
Depreciation and amortization 1,211,418 1,016,042 302,092 2,529,552
Loss before taxes (1,340,074) (2,777,520) (2,039,063) (6,156,657)
Purchases of fixed assets 721,145 93,022 10,202 824,369
1999
Revenues from external customers $ 6,235,386 $ 3,262,217 $ -- $ 9,497,603
Intersegment revenues 224,096 -- (224,096) --
------------ ------------ ----------- ------------
Total revenues $ 6,459,482 $ 3,262,217 $ (224,096) $ 9,497,603
Net interest expense and other 296,926 33,832 1,753,410 2,084,168
Depreciation and amortization 1,150,984 861,794 153,716 2,166,494
Income (loss) before taxes 739,997 208,430 (2,039,062) (1,090,635)
Purchases of fixed assets 383,928 679,753 14 1,063,695
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5
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Pursuant to a Merger Agreement dated February 12, 1998, and amended on June
17, 1998, between the Company and Green I Acquisition Corp. ("Green I"), a
company formed by 399 Venture Partners, Inc. ("399"), Green I merged with and
into the Company, with the Company as the surviving corporation (the "Merger").
Immediately following the Merger, each share of GNI common stock was canceled
and converted into the right to receive $7.00 in cash, other than certain shares
held by management and other than shares held by stockholders who were entitled
to, and who perfected their, appraisal rights. Each option and warrant to
purchase GNI common stock outstanding immediately prior to the effective date
was canceled and the holder thereof received $7.00 per share in cash, net of the
application option or warrant exercise price. The Company mailed a proxy
statement with respect to the Merger on June 24, 1998 for a stockholders'
meeting on July 23, 1998. On July 23, 1998, a majority of the Company's
stockholders approved the Merger. On July 28, 1998, the Merger became effective.
The Merger was financed by an offering of $75 million of 10.875% Senior
Notes due 2005, together with an equity investment in the Company of
approximately $22.5 million by 399 and certain members of GNI's management (the
Merger together with the equity and debt financing arrangements described
herein, the "Recapitalization"). In conjunction with the Recapitalization, the
Company entered into a new $12 million senior secured revolving facility (the
"Revolving Credit Facility") with NationsBank, N.A. which is available for
working capital requirements, capital expenditures and other general corporate
purposes and permitted acquisitions, subject to a borrowing base formula and
certain asset appraisals.
On September 25, 1998, a wholly-owned subsidiary of the Company, GNI
Technical Services, Inc., purchased substantially all of the assets and assumed
certain liabilities of Moheat, Inc. ("Moheat") for cash consideration of
approximately $480,000. Moheat is engaged in the site management and disposal of
hazardous waste, primarily as a contractor to the U.S. government.
RESULTS OF OPERATIONS-
FISCAL 2000 THIRD QUARTER COMPARED WITH FISCAL 1999 THIRD QUARTER
Revenues. Consolidated revenues declined by $1.7 million or 18.3% from $9.5
million in the third quarter of Fiscal 1999 to $7.8 million for the comparable
period of Fiscal 2000. The net decrease was attributable to (i) an increase in
the Company's waste management service segment of $100,000 or 1.6% from $6.2
million in the Fiscal 1999 third quarter to $6.3 million in the third quarter of
Fiscal 2000, and (ii) a decrease in revenue from the Company's specialty
chemical manufacturing business segment of $1.8 million or 56.3% from $3.2
million in the Fiscal 1999 third quarter to $1.4 million in the third quarter of
Fiscal 2000.
The increase in the revenues for the waste management service segment was
attributable to a major increase of $1.2 million in the service provided to the
U.S. Navy for the treatment and
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disposal of napalm. The contract for these services is scheduled to last until
June, 2001. The increase in the napalm business was offset by a decline in
deepwell revenues caused by a lack of demand for this service and the
maintenance outage of one of the three company owned deepwell units for one-half
of the third quarter in Fiscal 2000.
The revenue decline for the specialty chemical manufacturing business was
attributable to a lack of demand for the Company's distillation services.
Furthermore, chemical manufacturing revenues were benefited in the Fiscal 1999
third quarter by the sale and assignment of a long-term supply agreement owned
by the Company. This sale contributed approximately $1.1 million to the third
quarter revenue in Fiscal 1999.
Cost of Services. Cost of services increased as a percent of revenues from
53.7% during the third quarter of Fiscal 1999 to 94.9% in the third quarter of
Fiscal 2000. The increase in cost of services was attributable to (i) a
significant increase in the deepwell operating costs related to the deepwell
outage. During the period, the deepwells experienced high maintenance costs and
offsite disposal costs related to the well work-over, and (ii) a significant
increase in the cost of services for chemical manufacturing related to equipment
rental and offsite waste disposal caused by the deepwell outage.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased as a percentage of revenues from
13.0% in the third quarter of Fiscal 1999 to 19.5% in the comparable period of
Fiscal 2000. This increase was caused by the addition of four new positions in
sales/customer service as well as increased consulting and legal expense in
Fiscal 2000.
Depreciation and Amortization Expenses. Depreciation and amortization
increased by approximately $363,000, from $2.2 million in the third quarter of
Fiscal 1999 to $2.5 million in the third quarter of Fiscal 2000 primarily due to
capital improvements made by the Company to its facilities in Fiscal 1999 and
Fiscal 2000.
Interest Expense. Interest expense increased by $349,000 from $2.1 million
in the third quarter of Fiscal 1999 to $2.4 million in the comparable quarter of
Fiscal 2000 due to higher borrowing levels under the Company's revolving line of
credit and higher interest rate on those borrowings due to the forbearance
agreement with the Company's lender.
Net Loss. The Company recorded a net loss of $6.2 million for the third
quarter of Fiscal 2000. In Fiscal 1999, the Company had a net loss for the
comparable period of $736,000.
FISCAL 2000 NINE MONTHS COMPARED TO FISCAL 1999 NINE MONTHS
Revenues. Consolidated revenues decreased by $1.5 million, or 5.7%, from
$27.0 million for the first nine months of Fiscal 1999 to $25.5 million for the
first nine months of Fiscal 2000. This net decrease was primarily attributable
to (i) an increase in revenues from the Company's waste management segment of
$3.0 million or 17.6% from $17.0 million in the first nine months of Fiscal 1999
to $20.0 million in the comparable period for Fiscal 2000, and (ii) a decrease
in revenues from the Company's specialty chemical manufacturing business of $4.5
million or
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45.6% from $10.0 million in Fiscal 1999 nine months to $5.4 million for the
first nine months of Fiscal 2000.
The increase in revenues from the Company's waste management business was
primarily attributable to a major increase in service provided to the U.S. Navy
for the treatment and disposal 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 production problems caused by equipment outages and employee
turnover. The continued delay in reaching optimum product levels, caused the
chemical plant to remain underutilized during the nine months of Fiscal 2000.
Furthermore, customer demand for distillation tolling service was extremely weak
during Fiscal 2000 due to competitive pressures.
Cost of Services. Cost of services increased as a percent of revenues from
58.7% in the first nine months of Fiscal 1999 to 81.7% 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 57.8%
in the Fiscal 1999 nine 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 inefficiencies of the deepwell operation
due to major maintenance activities, and (ii) increased overtime costs in the
specialty chemical manufacturing business segment due to high employee turnover,
high equipment rental costs due to equipment failure and lack of adequate
storage tankage, and offsite waste disposal cost caused by the deepwell outage.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased as a percentage of revenues from
16.4% in the first nine months of Fiscal 1999 to 16.6% 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 nine months of Fiscal 1999. The
increase in selling, general and administrative costs for the first nine months
of Fiscal 2000 compared to the adjusted first nine 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 $1.1 million from $6.1 million for the first nine months of Fiscal
1999 to $7.2 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 $1.7 million from $5.9
million in the first nine months of Fiscal 1999 to $7.5 million in the first
nine months of Fiscal 2000 due to higher
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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.
Net Loss. The Company recorded a net loss of $14.4 million for the first
nine months of Fiscal 2000. In Fiscal 1999, the Company had a net loss of $7.4
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 nine months of Fiscal 2000 or 1999. Further, it is not
expected that inflation will have a material impact during for the last quarter
of Fiscal 2000 for either the Company's revenues or income.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. At March 31, 2000,
the Company was not in compliance with certain of its covenants related to its
outstanding Senior Credit Facility and had incurred substantial losses and
negative cash flows from operation for the nine months ended March 31, 2000.
Because of the noncompliance, all amounts due under the Senior Credit Facility
have been classified as current on the accompanying consolidated balance sheet.
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 certain covenants through July 1, 2000. The company is
pursuing alternate financing arrangements with other lenders, but there can be
no assurance that the Company will successfully negotiate a refinancing
agreement. In the event that alternative financing is not obtained by July 1,
2000, the Company anticipates it would be in default with respect to its
Senior Credit Facility which would also create a default under the indenture
related to the Senior Notes.
In the first nine months of Fiscal 2000 the Company used approximately$2.0
million in net cash from operations compared with the use of $2.0 million for
the Fiscal 1999 period. In the Fiscal 2000 nine month period, the net loss from
operations was partially offset by $7.2 million of depreciation and
amortization, a decrease in accounts receivable of $2.7 million and an increase
in accounts payable of $3.0 million. In the first nine months of Fiscal 1999 the
net loss from operations was reduced by $6.1 million of depreciation and
amortization and non-cash charges net of taxes of $2.2 million. Increases in
accounts receivable and accounts payable of $2.1 million and $570,000,
respectively utilized cash for operating activities.
During the first nine months of Fiscal 2000 and Fiscal 1999, the Company's
net cash used in investing activities was $2.9 million and $6.2 million,
respectively. The main component of cash used in investing activity in both
periods was capital expended for fixed assets.
In Fiscal 2000, the net cash provided by financing activities was $3.3
million compared with $8.5 million in the comparable period in Fiscal 1999.
Financing activity in Fiscal 2000 was primarily related to an increase in
amounts drawn on the Company's revolving line of credit. The Fiscal 1999
activity included the transactions related to the recapitalization of the
Company.
As of March 31, 2000, total debt exceeded total assets of the Company by
$16.3 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 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. The current rate of interest under the Revolving
Credit Facility is the Lenders base rate plus 3%. The Revolving Credit Facility
contains standard financial and restrictive covenants for facilities of this
type. As of March 31, 2000 the Company's Revolving Credit Facility had an
9
<PAGE> 12
outstanding balance of approximately $10 million leaving approximately $2.0
million of availability. At March 31, 2000, 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 March 31, 2000.
On September 30, 1996, the Company participated in a consolidation
transaction with EMPAK Inc. ("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 financial instruments for trading or speculative
purposes. The Company's market risk could arise from changes in interest rates.
11
<PAGE> 14
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 $100,000.
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
None.
Item 21. Exhibits and Financial Statement Schedules
None.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE GNI GROUP, INC.
Date: May 15, 2000 /s/ CARL V RUSH, JR.
--------------------------- ------------------------- Carl V Rush, Jr.
President and CEO
Date: May 15, 2000 /s/ BRUCE D. TOBECKSEN
--------------------------- ------------------------- Bruce D. Tobecksen
Chief Financial Officer
</TABLE>
14
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 17,686
<SECURITIES> 0
<RECEIVABLES> 7,144,813
<ALLOWANCES> 51,000
<INVENTORY> 0
<CURRENT-ASSETS> 10,397,632
<PP&E> 63,747,231
<DEPRECIATION> (29,906,535)
<TOTAL-ASSETS> 68,750,340
<CURRENT-LIABILITIES> 24,100,084
<BONDS> 0
18,500,000
0
<COMMON> 5,714
<OTHER-SE> (49,998,595)
<TOTAL-LIABILITY-AND-EQUITY> 68,750,340
<SALES> 25,479,084
<TOTAL-REVENUES> 25,479,084
<CGS> 20,806,520
<TOTAL-COSTS> 32,269,485
<OTHER-EXPENSES> 51,224
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 7,536,824
<INCOME-PRETAX> (14,378,449)
<INCOME-TAX> 41,255
<INCOME-CONTINUING> (14,419,704)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,419,704)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
