<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2001
/ / 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 000-29278
KMG CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2640529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10611 HARWIN DRIVE, SUITE 402
HOUSTON, TEXAS 77036
(Address of principal executive offices)
(713) 988-9252
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class Name of each Exchange on which Registered
None None
-------------------------------- -------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.01 par value
--------------------------------------------------------------------------------
(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 / /
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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. / /
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant computed by reference to the price at
which the common equity was sold, or the average bid and asked prices of such
common equity, as of September 30, 2001 was $1,691,233.
APPLICABLE ONLY TO REGISTRANTS 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 Section 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 REGISTRANTS)
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date were: 7,501,981 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement pertaining to the November 26, 2001 annual meeting
of shareholders is incorporated by reference in Part III of this report.
<Page>
PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
KMG Chemicals, Inc., a Texas corporation (the "Company"), was
incorporated in the State of Texas in 1992 under the name Water Point
Manufacturing, Inc. In connection with the acquisition in 1996 of KMG-Bernuth,
Inc., a Delaware corporation ("KMG"), the Company changed its name to KMG-B,
Inc. In 1997 the Company changed its name to KMG Chemicals, Inc. The Company's
principal executive office is located at 10611 Harwin Drive, Suite 402, Houston,
Texas 77036 and its telephone number is (713) 988-9252.
ACQUISITION OF KMG-BERNUTH, INC.
In October 1996, the Company acquired all of the issued and outstanding
stock of KMG in exchange for 6,510,000 shares of the common stock, par value
$.01 per share ("Common Stock"), of the Company. After giving effect to a 1 for
1.5 reverse split of Common Stock outstanding immediately prior to the
acquisition of KMG, the former stockholders of KMG became owners of
approximately 93% of the issued and outstanding shares of Common Stock.
Unless the context otherwise requires, references hereinafter to the
"Company" shall mean KMG Chemicals, Inc. and any of its subsidiaries. All
references hereinafter to share amounts reflect the reverse split of Common
Stock.
BUSINESS OF THE COMPANY
GENERAL
The Company manufactures and sells specialty chemicals in niche
markets. At the present time, the Company sells three wood preserving chemicals,
pentachlorophenol ("penta"), creosote and sodium pentachlorophenate ("sodium
penta"), and an herbicide product consisting of monosodium and disodium
methanearsonic acids ("MSMA"). The wood treating chemicals are sold to
industrial customers who use these preservatives to extend the useful life of
wood products, principally in the railroad, utility and construction industries.
MSMA is sold by the Company in the United States as Bueno(R) 6 to protect cotton
crops from weed growth and as Ansar(R) 6.6 for highway weed control. It also has
application elsewhere in the world to protect cotton and sugar cane.
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The Company acquired a penta manufacturing and distribution business in
1988 from an affiliated company that had been in the penta business since the
early 1970's. The Company made several acquisitions after 1988 to expand in wood
preserving products. It acquired a creosote distribution business in early 1991
and a sodium penta distribution business late that same year. In 1998, the
Company acquired significant additional assets pertaining to creosote. In
October 2000, the Company acquired its herbicide products line.
The Company's strategy is to continue to grow through acquisitions. The
Company intends to seek, on a selective basis, acquisitions that complement and
expand its existing product lines. The Company's execution of this strategy
depends on its ability to identify, consummate and assimilate acquisitions on
desirable economic terms, to successfully integrate new product lines and expand
its existing product lines. There can be no assurance that the Company will be
successful in executing its growth strategy. Furthermore, the Company's ability
to implement its growth strategy may be dependent to a certain extent upon
obtaining financing for expansion, and there can be no assurance that financing
will be available on acceptable terms.
PRODUCTS AND SERVICES
WOOD PRESERVING CHEMICALS. The three primary chemicals used by the wood
preserving industry in the United States are penta, creosote and chromated
copper arsenate ("CCA"). The Company believes that wood preserving chemicals are
used to treat approximately 600 million cubic feet of wood each year in the
United States and that 6% of that wood is treated with penta, 15% with creosote
and 80% with CCA. The Company supplies the United States wood treating industry
with penta and creosote but not with CCA. The Company also supplies sodium
penta, a wood preserving product used primarily to treat freshly cut lumber, to
customers outside the United States. See "--Competition." The Company's wood
preserving chemicals constituted 89% of the Company's revenue in fiscal 2001 and
all of its revenue in fiscal 2000 and 1999.
Penta is used primarily to treat electric and telephone utility poles,
protecting them from mold, mildew, fungus and insects. The Company manufactures
penta in Matamoros, Mexico through a subsidiary. The Matamoros facility produces
both solid penta blocks and penta flakes. Those penta products are sold by the
Company to its customers or made into a liquid solution of penta concentrate at
the Matamoros facility or at the Company's blending and distribution facility in
Tuscaloosa, Alabama. The penta blocks, flakes and solutions are sold to the
Company's customers in the United States, primarily in Washington, Oregon,
Oklahoma, Missouri, Arkansas, Mississippi, Alabama and Georgia. In addition, a
portion of the flaked penta is used to produce sodium penta. The Company sells
the sodium penta, which is not registered for use in the United States, to
customers primarily in Spain, Portugal, Peru, Ecuador and
Venezuela. As a by-product of the penta manufacturing process,
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the Matamoros facility also produces hydrochloric acid which is sold to
distributors for use in the steel and oil well service industries in the United
States and Mexico.
Creosote is a wood preservative used to treat railroad cross-ties,
bridge timbers and utility poles. Creosote is produced by the distillation of
coal tar, a by-product of the transformation of coal into coke. The Company has
two primary sources of supply for the creosote it sells in the United
States--Reilly Industries, Inc. ("Reilly") and Rutgers VFT AG ("Rutgers"). The
Company believes that Reilly and Rutgers are among the world's largest
manufacturers of creosote and other coal tar products. Creosote is sold by the
Company to customers throughout the United States.
AGRICULTURAL CHEMICALS. The Company's MSMA agricultural chemicals
product line was acquired from Zeneca Ag Products, Inc. ("Zeneca") in October
2000. Zeneca's MSMA production facility was relocated to the Company's
Matamoros, Mexico facility and reassembled. It will be restarted late in
calendar 2001. The Company's MSMA herbicides are sold under the name Bueno(R) 6
in the United States to protect cotton crops, primarily in the southern
cotton-growing states and in California, and under the name Ansar(R) 6.6 to
state agencies to control highway weed growth.
SUPPLIERS
The Company is dependent upon outside suppliers for all of its raw
material requirements for its penta, sodium penta and MSMA manufacturing
operations and, therefore, is subject to fluctuations in the price of those
materials. The principal raw materials used in those operations are phenol,
chlorine, solvent, caustic, methylene chloride and arsenic trioxide, each of
which the Company purchases from a limited number of suppliers. The Company does
not maintain supply contracts with any of those suppliers of those raw
materials. However, the Company believes that these raw materials are each
readily available from a variety of sources and the loss of any of the Company's
suppliers would not have a material adverse effect on its business, financial
condition or results of operations.
The Company has two suppliers of the creosote it sells. Under the
Company's long-term supply contract with Reilly, the Company must purchase
annual quantities at varying prices per pound. The Company's creosote supply
contract with Rutgers is renewable annually ending December 31. The Company must
purchase an agreed minimum volume in each calendar year. The purchase price for
creosote is fixed for calendar year 2001 but is subject to adjustment on
renewal.
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CUSTOMERS
The Company sells its chemical products to approximately 110 customers.
One customer, Kerr McGee Chemical Corp., accounted for approximately 15% of the
Company's revenues in fiscal 2001, 12% in fiscal 2000 and 15% in fiscal 1999. No
other customer accounted for 10% or more in those fiscal years.
MARKETING
The Company markets its chemicals in the United States through five
employees and one independent sales agent. Outside the United States, the
Company sells its products directly and through sales agency contracts to local
lumber producers or to chemical companies for those producers in over 20
countries.
COMPETITION
There are only a few firms competing with the Company in the sale of
its wood preservatives or MSMA products. The Company competes by selling its
products at competitive prices and maintaining a strong commitment to product
quality and customer service.
The Company is one of only two companies producing penta for sale in
the United States. The Company believes that it currently supplies almost half
of the penta sold in the United States. The other penta producer in the United
States is Vulcan Chemicals, Inc., a company that has larger sales volumes and
greater financial and other resources than the Company. The Company believes
that there is one significant competitor for creosote sales in the United States
and two other lesser suppliers.
There are three other firms that sell MSMA products in the United
States, primarily for use on cotton. For several years, however, cotton farmers
in the United States have been planting genetically modified cotton seed that is
resistant to the herbicide Roundup(R) and other glyphosate herbicides. As
farmers converted to that seed and to glyphosate herbicides, MSMA products
became niche products used primarily by farmers who are sensitive to the higher
cost of the genetically modified seed program. The companies selling resistant
seed and glyphosate herbicides have much greater financial and other resources
than the Company.
Penta, creosote and MSMA must be registered prior to sale under United
States law. See "--Environmental and Safety Matters--Licenses, Permits and
Product Registrations." As a condition to registration, any company wishing to
manufacture and sell these products must provide to the EPA substantial
scientific research and
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testing data regarding the chemistry and toxicology of the products. That data
must be generated by the applicant or the applicant must compensate other data
providers for relying on their information. The Company believes that the cost
of satisfying the data submission requirement serves as an impediment to the
entry of new competitors in the United States market, particularly those with
lesser financial resources. While the Company has no reason to believe that the
registration requirement will be discontinued or materially modified, there can
be no assurances as to the effect of such a discontinuation or modification on
the Company's competitive position.
EMPLOYEES
As of the end of fiscal 2001, the Company had a total of 55 full-time
employees. Ten of the Company's employees worked at the Company's corporate
offices in Houston, Texas, 39 at the Matamoros facility, six at the Tuscaloosa
facility and one worked in Louisiana. None of the employees in the United States
are represented by a labor union but 24 of the Company's employees in Mexico are
represented under a labor contract. The Company believes that it has good
relations with its employees.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations are subject to extensive federal, state and
local laws, regulations and ordinances in the United States and abroad relating
to the generation, storage, handling, emission, transportation and discharge of
certain materials, substances and waste into the environment, and various other
health and safety matters. Governmental authorities have the power to enforce
compliance with their regulations, and violators may be subject to fines,
injunctions or both. The Company believes that it is currently in substantial
compliance with all such applicable laws and regulations. The Company must
devote substantial financial resources to ensure such compliance. For a
discussion of the Company's expenditures regarding environmental matters, see
"Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Liquidity and Capital Resources."
The Company anticipates that the regulation of its business operations
under federal, state and local environmental regulations in the United States
and abroad will increase over time. The Company cannot at this time estimate the
impact of increased regulation on the Company's operations, future capital
expenditure requirements or the cost of compliance.
UNITED STATES REGULATION. Under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA") and
comparable state laws, an owner or operator of property from which releases of
hazardous
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substances have occurred may be liable for investigation and remediation of any
resulting contamination. In addition, the generator of hazardous substances may
be responsible for all or a portion of any required investigation or remediation
at offsite disposal locations. Under the Resource Conservation and Recovery Act,
as amended ("RCRA"), a facility that treats, stores or disposes of hazardous
wastes on-site may be liable for corrective action costs. In addition to CERCLA
and RCRA, state laws and regulations may impose the same or broader liability.
The Company's operations also are governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Safety and Health Act and the regulations thereunder.
MEXICO REGULATION. The Company's Matamoros facility and its operations
in Mexico are subject to various environmental laws, regulations and ordinances
promulgated by governmental authorities in Mexico. The Secretariat of
Environment, Natural Resources and Fisheries (SECRETARIATE DE MEDIO AMBIENTE,
RECURSOS NATURALES Y PESCA: "SEMARNAP") is given overall responsibility for
environmental regulation in Mexico. SEMARNAP's responsibilities include
enforcement of Mexico's laws and regulations concerning air and water emissions
and hazardous waste treatment, storage and disposal. SEMARNAP is given broad
authority to enforce compliance with environmental laws and regulations and can
require that operations be suspended pending completion of required remedial
action.
LICENSES, PERMITS AND PRODUCT REGISTRATIONS. Certain licenses, permits
and product registrations are required for the Company's products and operations
in the United States, Mexico and other countries in which the Company does
business. The licenses, permits and product registrations are subject to
revocation, modification and renewal by governmental authorities. In the United
States in particular, producers of pesticides such as penta, creosote and MSMA
are required to obtain a registration for their products under the Federal
Insecticide, Fungicide and Rodenticide Act ("FIFRA") from the EPA in order to
sell those products in the United States. Compliance with the registration
system under FIFRA has had and will in the future have a material effect on the
Company's business, financial condition and results of operations. The
registration system requires an ongoing submission to the EPA of substantial
scientific research and testing data regarding the chemistry and toxicology of
pesticide products by manufacturers. Under an agreement with the other industry
participants, the Company shares research and testing costs pertaining to its
chemical products based on its relative market share. The Company incurred
expenses of approximately $716 thousand, $756 thousand and $721 thousand in
connection with the FIFRA research and testing program in fiscal 2001, 2000 and
1999, respectively.
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ITEM 2. PROPERTIES
Set forth below is information with respect to certain of the Company's
properties.
<Table>
<Caption>
LEASE
APPROXIMATE OWNED/ EXPIRATION
LOCATION PRIMARY USE SIZE LEASED DATE
-------- ---------------- ------------ ------ ----------
Houston, Texas Corporate Office 8,000 square Leased March 31,
feet 2004
Matamoros, Mexico Manufacturing 7 acres Owned
Tuscaloosa, Alabama Processing 1.5 acres Owned
Distribution
</Table>
The Company believes that all of these properties are adequately
insured, in good condition and suitable for their anticipated future use. The
Company believes that if the lease for its corporate office were not renewed or
were terminated, other suitable facilities could be leased or purchased.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal actions or proceedings that it
believes will have a material adverse effect on its business, results of
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 2001 to a
vote of security holders through the solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock is traded under the trading symbol "KMGB" on The
Nasdaq SmallCap Market. The approximate high and low bid quotations in fiscal
2001 and 2000, adjusted for a stock dividend in March 2001, were as follows:
<Table>
<Caption>
2001 2000
---------------- ----------------
PERIOD: HIGH LOW HIGH LOW
------ ---- ---- ---- ----
First quarter 4.77 3.64 6.14 4.09
Second quarter 5.91 2.84 5.74 3.64
Third quarter 4.32 2.00 5.68 3.64
Fourth quarter 3.76 3.10 5.23 4.09
</Table>
These quotations represent prices between dealers, do not include retail
markups, markdowns or commissions and may not represent actual transactions. The
quotations are based on information reported by the National Association of
Securities Dealers, Inc.
As of September 30, 2001, there were 7,681,981 shares of Common Stock
issued (including 180,000 treasury shares) and 7,501,981 shares outstanding held
by approximately 600 shareholders of record, and more than 300 round lot
holders.
KMG declared and paid cash dividends in fiscal 2001 and 2000 as
follows:
<Table>
<Caption>
DATE DECLARED: DATE PAID: AMOUNT ($): PER SHARE ($)
------------- --------- ---------- -------------
March 2001 April 2001 150,039 .02
September 2000 September 2000 140,003 .02
February 2000 March 2000 140,003 .02
August 1999 September 1999 140,003 .02
</Table>
The Company declared and paid a ten percent stock dividend in March 2001.
Additionally, the Company declared a dividend in August 2001 of $.02 per share
($150,039) payable in September 2001. The Company anticipates that future
earnings will be retained to finance the continuing development of its business.
The Company does not anticipate paying substantial dividends on the Common Stock
in the foreseeable future.
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In fiscal 2000 the Company granted a warrant to purchase 25,000 shares
of Common Stock at $5.50 per share to the assignee of Gilman Financial
Corporation. The warrant expires March 6, 2009 and was issued as compensation
for that company's acquisition consulting services. In fiscal 1999 the Company
also granted a warrant to acquire 25,000 shares of Common Stock to JP Turner &
Company, L.L.C. for consulting services pertaining to acquisition and financing
transactions and to investor relations. The warrant is exercisable at a price of
$5.50 per share of Common Stock through March 17, 2003. The warrants to Gilman
Consulting and to JP Turner & Company, L.L.C. were issued by the Company in
private transactions without registration in reliance upon the exemption from
registration under section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The selected statement of operations, per share data and balance sheet
data for each of the five years ended July 31, 2001 set forth below have been
derived from the audited consolidated financial statements of the Company. The
following data should be read in conjunction with the consolidated financial
statements of the Company and notes to consolidated financial statements.
<Table>
<Caption>
YEAR ENDED JULY 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Amounts in thousands except per share data)
Net sales $35,791 $33,754 $36,389 $22,657 $19,485
Net income $ 2,640 $ 3,845 $ 3,752 $ 3,206 $ 2,709
Net income per:
Basic shares outstanding $ 0.35 $ 0.50 $ 0.49 $ 0.46 $ 0.39
Diluted shares outstanding $ 0.35 $ 0.50 $ 0.48 $ 0.46 $ 0.39
Total assets $27,760 $25,312 $22,792 $20,099 $ 9,386
Long-term obligations $ 1,615 $ 2,554 $ 3,427 $ 5,268 $ 0
Cash dividends declared per
share $ 0.04 $ 0.04 $ 0.03 $ 0.02 $ 0.02
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales and certain
other financial data for the three fiscal years ended July 31, 2001:
<Table>
<Caption>
YEARS ENDED JULY 31,
-----------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net sales $35,790,990 $33,754,285 $36,388,799
Gross profit 12,004,737 13,221,357 12,821,876
Gross profit as percent of Net Sales 33.5% 39.2% 35.2%
Selling, general and administrative expense 7,751,488 7,070,806 6,765,537
Operating income 4,253,249 6,150,551 6,056,339
Other income (expense), net 5,363 19,375 (4,134)
Income before taxes 4,258,612 6,169,926 6,052,205
Provision for income taxes (1,618,272) (2,325,121) (2,299,838)
Net income $ 2,640,340 $ 3,884,805 $ 3,752,367
</Table>
SALES REVENUE
2001 VS 2000. Net sales revenue in fiscal 2001 was 6% greater than in
fiscal 2000. Although sales revenue from the Company's wood treating chemicals
was down significantly in fiscal 2001, that decline was offset by the Company's
sales of MSMA products, which began during the second quarter of fiscal 2001.
Management believes that wood treating chemical sales declined in fiscal 2001
because commercial demand for railroad crossties and utility poles was below
historical levels during the year. Crosstie replacement projects appear to have
been deferred by major railroads. Deregulation and mergers in the utility
industry led to inventory consolidations that reduced overall demand for
replacement utility poles. Additionally, some utilities shifted to purchases of
poles treated with a competing product, CCA. Because the Company's penta product
is dissolved in oil to create a treating solution, higher diesel oil prices
since fiscal 2000 have meant that treating solutions made using CCA enjoyed a
widened price differential over the Company's product compared to historical
levels.
Gross profit for fiscal 2001 was down 9.2% from the prior fiscal year
and the Company's gross profit margin declined to 33.5% from 39.2%. The decrease
in gross profit and margin was attributable to the decline in higher margin
penta sales.
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2000 VS 1999. Net sales revenue for fiscal 2000 was 7.2% less than in
fiscal 1999, a decline caused by reduced sales volume for the Company's wood
treating products. Penta product volume fell because utility company
consolidations in North America reduced demand for utility poles, the principal
wood product treated with penta, and because diesel oil prices were at
historically high levels. An additional factor, however, was that the Company's
penta-based sapstain product was not renewed for use in its two largest markets,
Chile and Malaysia. Creosote sales were adversely affected by a deferral of
railroad crosstie replacement by major railroads.
Gross profit for fiscal 2000 increased 3.1% over fiscal 1999 and gross
profit margin increased from 35.2% to 39.2%. Higher per unit wood treating
chemicals sales revenues coupled with lower per unit manufacturing costs of
penta products helped maintain gross profit in the face of declining net sales
revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for fiscal 2001 were $681
thousand higher than fiscal 2000 and fiscal 2000 was $305 higher than fiscal
1999. Most of the increase in fiscal 2001 was for expenses related to the MSMA
products line purchased in October 2000. The Company also incurred severance
costs in the most recent fiscal year for a force reduction at the Company's
manufacturing facility in Mexico. Selling, general and administrative expenses
increased in fiscal 2000 as compared to fiscal 1999 from increased testing and
research costs for creosote and from expenses incurred in pursuing growth by
acquiring niche chemical products. Also, the Company absorbed additional storage
and distribution expenses related to creosote purchased from Rutgers. Prior to
November 1998 the Company acted as an agent on behalf of Rutgers, and those
creosote expenses were borne by Rutgers. In November 1998 the agency arrangement
was terminated and the Company began to purchase creosote from Rutgers for its
own account and now bears creosote related expenses formerly absorbed by
Rutgers.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased in fiscal 2001 to $3.1 million as
compared with approximately $7.8 million and $4.8 million at the end of fiscal
2000 and 1999. The decrease in fiscal 2001 was attributable to the Company's
MSMA product line acquisition.
The Company's wholly-owned subsidiary, KMG, has a working capital line
of credit under a Revolving Loan Agreement (as amended from time to time, the
"Revolving Credit Facility") with SouthTrust Bank of Alabama, National
Association ("SouthTrust"). Under the Revolving Credit Facility, the Company may
borrow up to the lesser of $3.5 million or a borrowing base (as defined
therein). The Revolving Credit Facility contains various representations and
warranties and affirmative and negative covenants applicable to KMG, including a
limitation that equity investments or loans by KMG not exceed $250 thousand and
a requirement to obtain the lender's consent prior to replacing the President
and chairman of the board of directors of KMG, David L. Hatcher, or any merger,
reorganization or recapitalization of KMG. In addition, the Revolving Credit
Facility requires KMG to maintain (i) a tangible net worth (as defined therein)
of not less than $5.0 million, (ii) a fixed charge coverage ratio of at least
1.25 to 1.0, and (iii) a ratio of liabilities to tangible net worth of not more
than 2.0 to 1.0 beginning at the end of fiscal 2000. As of September 30, 2001
the Company's borrowing base under the Revolving Credit Facility was $3.5
million and no amount had been borrowed.
In fiscal 2001 the Company purchased its MSMA product line for $2.3
million and invested approximately $2.4 million in capital improvements, most of
which was for the relocation of the MSMA facility. The MSMA product line also
was responsible for the increased levels of Company inventory and trade accounts
receivable in fiscal 2001.
In fiscal 1998 the Company purchased certain creosote registrations
that were financed in part by a $6 million term loan to KMG by SouthTrust. The
term loan bears interest at a fixed rate of 7.32%. It is being amortized over
seven years in equal monthly installments that total approximately $1 million
per year. In fiscal 1999 the Company prepaid an additional $1 million of
principal on the term loan. As of September 30, 2001, the principal balance
outstanding under the term loan was $2.4 million.
The Company's capital expenditures and operating expenses for
environmental matters, excluding FIFRA testing and data submission costs, were
approximately $387 thousand in fiscal 2001 and $281 thousand and $300 thousand
in fiscal 2000
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and 1999. The Company estimates that its capital expenditures and operating
expenses for environmental matters other than FIFRA will be approximately $508
thousand in fiscal 2002. The Company expensed approximately $716 thousand for
testing costs under FIFRA in fiscal 2001 and approximately $756 thousand and
$721 thousand testing in fiscal 2000 and 1999. Management believes that total
FIFRA testing costs for will be approximately $625 thousand in fiscal 2002.
Since environmental laws have traditionally become increasingly stringent, costs
and expenses relating to environmental control and compliance may increase in
the future. While the Company does not believe that the cost of compliance with
existing or future environmental laws and regulations will have a material
adverse effect on its business, financial condition or results of operations,
there can be no assurance that costs of compliance will not exceed current
estimates.
The Company conducts periodic ground water sampling at its facility in
Tuscaloosa, Alabama as required by the Alabama Department of the Environmental
Management ("ADEM"). A 1991 sampling revealed the presence of penta
contamination and more recent sampling continues to show some contamination,
although in lesser amounts. ADEM has not required any additional response at
this time beyond the continuation of periodic monitoring. The Company does not
believe that costs for environmental investigation and remediation will
materially impact liquidity or have a material adverse effect on the Company's
business, financial condition or results of operations, although there can be no
assurances to this effect.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain information included or incorporated by reference in this
report is forward-looking, including statements contained in "Management's
Discussion and Analysis of Operations." It includes statements regarding the
intent, belief and current expectations of the Company and its directors and
officers. Forward-looking information involves important risks and uncertainties
that could materially alter results in the future from those expressed in these
statements. These risks and uncertainties include, but are not limited to, the
ability of the Company to maintain existing relationships with long-standing
customers, the ability of the Company to successfully implement productivity
improvements, cost reduction initiatives, facilities expansion and the ability
of the Company to develop, market and sell new products include uncertainties
relating to economic conditions, acquisitions and divestitures, government and
regulatory policies, technological developments and changes in the competitive
environment in which the Company operates. Persons reading this report are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, readers should
specifically
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<Page>
consider the various factors that could cause actual events or results to differ
materially from those indicated by the forward-looking statements.
ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," became effective
for the Company beginning August 1, 2001. SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standard for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. Management does not believe the adoption of SFAS 133 has a
significant impact on the financial position, results of operation, or cash
flows of the Company because it currently has no contracts that qualify as
derivatives under the provisions of this new standard. The Financial Accounting
Standards Board and the Derivatives Implementation Group continue to discuss
several issues that, once decided, could have additional impact on the Company's
financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. The Company does not
believe that the adoption of SFAS 141 will have a significant impact on its
financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is currently assessing, but has not yet determined, the impact of SFAS
142 on its financial position and results of operations.
14
<Page>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to certain market risks arising from
transactions that are entered into in the normal course of business, primarily
from changes in foreign exchange rates. The Company does not utilize derivative
financial instruments or hedging transactions to manage that risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Independent Auditors' Report 16
Consolidated Balance Sheets as of July 31, 2001
and 1999 17
Consolidated Statements of Income for the Years Ended
July 31, 2001, 2000 and 1999 18
Consolidated Statements of Stockholders' Equity for the
Years Ended July 31, 2001, 2000 and 1999 19
Consolidated Statements of Cash Flows for the
Years Ended July 31, 2001, 2000 and 1999 20
Notes to Consolidated Financial Statements 21
</Table>
15
<Page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
KMG Chemicals, Inc.:
We have audited the accompanying consolidated balance sheets of KMG Chemicals,
Inc. and subsidiaries (the "Company") as of July 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended July 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the consolidated financial position of KMG Chemicals, Inc. and
subsidiaries as of July 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for the three years in the period ended July 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Houston, Texas
September 14, 2001
16
<Page>
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2001 AND 2000
--------------------------------------------------------------------------------
<Table>
<Caption>
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,126,781 $ 7,830,843
Accounts receivable:
Trade, net of allowance for doubtful accounts of $130,000 in 2001 and $120,000 in 2000 4,870,148 3,166,625
Other 130,003 73,576
Notes receivable from related parties - current portion 35,938 724,767
Inventories 4,876,261 2,842,724
Prepaid expenses and other current assets 309,181 187,966
----------- -----------
Total current assets 13,348,312 14,826,501
PROPERTY, PLANT, AND EQUIPMENT - Net of accumulated depreciation 5,393,697 2,189,958
NOTES RECEIVABLE FROM RELATED PARTIES - Less current portion 82,602 116,781
DEFERRED TAX ASSET 328,146 289,684
OTHER ASSETS 8,607,531 7,889,455
----------- -----------
TOTAL $27,760,288 $25,312,379
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,961,865 $ 3,121,500
Accrued liabilities 1,967,891 1,174,621
Current portion of long-term debt 939,906 872,881
----------- -----------
Total current liabilities 6,869,662 5,169,002
LONG-TERM DEBT 1,614,513 2,554,414
----------- -----------
Total liabilities 8,484,175 7,723,416
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued
Common stock, $.01 par value; 40,000,000 shares authorized, 7,681,981 and
7,000,169 shares issued, and 7,501,981 and 7,000,169 outstanding in 2001
and 2000, respectively 76,820 70,002
Additional paid-in capital 3,363,952 1,129,507
Treasury stock (900,000)
Accumulated other comprehensive income - unrealized gain on available for sale securities 211,480
Retained earnings 16,523,861 16,389,454
----------- -----------
Total stockholders' equity 19,276,113 17,588,963
----------- -----------
TOTAL $27,760,288 $25,312,379
=========== ===========
</Table>
17
<Page>
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
NET SALES $35,790,990 $33,754,285 $36,388,799
COST OF SALES 23,786,253 20,532,928 23,566,923
----------- ----------- -----------
Gross profit 12,004,737 13,221,357 12,821,876
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES 7,751,488 7,070,806 6,765,537
----------- ----------- -----------
Operating income 4,253,249 6,150,551 6,056,339
OTHER INCOME (EXPENSE):
Interest income 259,666 322,351 203,796
Interest expense (238,994) (288,095) (387,599)
Other, net (15,309) (14,881) 179,669
----------- ----------- -----------
Total other income (expense), net 5,363 19,375 (4,134)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,258,612 6,169,926 6,052,205
PROVISION FOR INCOME TAXES 1,618,272 2,325,121 2,299,838
----------- ----------- -----------
NET INCOME $ 2,640,340 $ 3,844,805 $ 3,752,367
=========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic $ 0.35 $ 0.50 $ 0.49
=========== =========== ===========
Diluted $ 0.35 $ 0.50 $ 0.48
=========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 7,538,967 7,681,981 7,681,981
=========== =========== ===========
Diluted 7,592,232 7,749,455 7,758,701
=========== =========== ===========
</Table>
See notes to consolidated financial statements.
18
<Page>
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
<Table>
<Caption>
COMMON STOCK ACCUMULATED
------------------- ADDITIONAL OTHER TOTAL
SHARES PAR PAID-IN TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS'
ISSUED VALUE CAPITAL STOCK EARNINGS INCOME EQUITY
--------- ------- ---------- --------- ----------- ------------- ------------
BALANCE, AUGUST 1, 1998 7,000,169 $70,002 $1,063,385 $ 9,142,291 $ 10,275,678
Dividends (70,002) (70,002)
Net income 3,752,367 3,752,367
--------- ------- ---------- --------- ----------- ------------- ------------
BALANCE, JULY 31, 1999 7,000,169 70,002 1,063,385 12,824,656 13,958,043
Warrants issued in exchange
for services 66,122 66,122
Dividends (280,007) (280,007)
Net income 3,844,805 3,844,805
--------- ------- ---------- --------- ----------- ------------- ------------
BALANCE, JULY 31, 2000 7,000,169 70,002 1,129,507 16,389,454 17,588,963
Warrants issued in exchange
for services 25,374 25,374
Stock dividends 681,812 6,818 2,209,071 (2,215,889)
Treasury stock purchased $(900,000) (900,000)
Dividends (290,044) (290,044)
Net income 2,640,340 2,640,340
Unrealized gain on available
for sale securities $ 211,480 211,480
--------- ------- ---------- --------- ----------- ------------- ------------
BALANCE, JULY 31, 2001 7,681,981 $76,820 $3,363,952 $(900,000) $16,523,861 $ 211,480 $ 19,276,113
========= ======= ========== ========= =========== ============= ============
</Table>
19
<Page>
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,640,340 $ 3,844,805 $ 3,752,367
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,128,107 1,065,760 1,042,399
Gain on sale of securities (829)
(Gain) loss on sale or abandonment of equipment 1,448 (7,271) 501
Warrants issued in exchange for services 25,374 66,122
Forgiveness of notes receivable from related parties 74,023 71,288
Deferred income tax benefit (38,462) (38,186) (113,954)
Changes in operating assets and liabilities:
Accounts receivable - trade (1,703,523) 91,759 312,124
Accounts receivable - other (56,427) (10,027) 14,216
Inventories (2,033,537) (298,111) (793,267)
Prepaid expenses and other current assets (121,215) 40,202 (75,786)
Accounts payable 840,365 (499,499) 278,729
Accrued liabilities 793,270 198,898 582,216
----------- ----------- -----------
Net cash provided by operating activities 1,549,763 4,524,911 4,999,545
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (2,441,247) (231,551) (228,871)
Proceeds from sale of securities 7,752
Proceeds from sale of equipment 8,500 801
Loans to related parties (324,854)
Collection of notes receivable from related parties 648,985 19,836 8,305
MSMA product line purchase (2,300,000)
Additions to other assets (98,643) (286,452) (8,564)
Collection of other assets 29,843 113,954
----------- ----------- -----------
Net cash used in investing activities (4,190,905) (452,072) (439,229)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (290,044) (280,007) (210,006)
Purchase of treasury stock (900,000)
Principal payments on borrowings (872,876) (809,875) (1,710,372)
----------- ----------- -----------
Net cash used in financing activities (2,062,920) (1,089,882) (1,920,378)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,704,062) 2,982,957 2,639,938
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,830,843 4,847,886 2,207,948
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,126,781 $ 7,830,843 $ 4,847,886
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ 238,994 $ 288,095 $ 387,599
=========== =========== ===========
Income taxes $ 1,721,855 $ 2,334,730 $ 2,298,187
=========== =========== ===========
</Table>
See notes to consolidated financial statements.
20
<Page>
KMG CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - KMG Chemicals, Inc. (the "Company") is principally involved in
the sale and manufacture of specialty chemicals in niche markets. At the
present time, the company sells three wood preserving chemicals,
pentachlorophenol ("penta"), creosote and sodium pentacholorphenate
("sodium penta"), and an herbicide product consisting of monosodium and
disodium methanearsonic acids ("MSMA"). Penta-manufacturing operations are
conducted through KMG de Mexico ("KMEX"), a Mexican corporation and 99.98
percent owned subsidiary, at a plant in Matamoros, Mexico. The penta plant
began operations in 1986 and was moved to a new location in Matamoros in
May 1997. The Company has two main suppliers of creosote, which it sells
throughout the United States.
The Company's MSMA agricultural chemicals product line was acquired form
Zeneca Ag Products, Inc. ("Zeneca") in October 2000. The MSMA production
facility acquired from Zeneca was relocated adjacent to the Company's
penta manufacturing facility and reassembled. The Company's MSMA
herbicides are sold under the name Bueno-Registered Trademark- 6 in the
United States to protect cotton crops, primarily in the southern
cotton-growing states and in California, and under the name
Ansar-Registered Trademark- 6.6 to state agencies to control highway weed
growth.
The historical financial information of the Company reflects the
historical results of KMG-Bernuth ("KMG") and KMEX as a result of a
reverse merger of KMG with KMG-B, Inc. ("KMG-B") in October 1996. KMG-B
was incorporated in the state of Texas in 1992 under the name Water Point
Manufacturing, Inc. ("Water Point"). Water Point adopted "fresh-start"
accounting as of October 23, 1996 and subsequently changed its name to
KMG-B. On October 15, 1996, pursuant to a stock exchange agreement dated
September 13, 1996, KMG-B issued 6,510,000 shares of common stock
(approximately 93 percent of its issued and outstanding common stock) in
exchange for all of the issued and outstanding shares of common stock of
KMG. KMG-B also issued 352,474 shares of common stock to other
shareholders as payment for certain services for KMG-B in connection with
the stock exchange agreement and in conjunction with other services.
During 1998, the Company changed its name to KMG Chemicals, Inc.
The Company's significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of KMG Chemicals, KMG-Bernuth, and KMEX. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS - The Company considers all investments with
original maturities of three months or less when purchased to be cash
equivalents.
INVENTORIES - Inventories are valued at the lower of cost or market. Cost
is determined using the first-in first-out ("FIFO") method.
21
<Page>
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated
at cost less accumulated depreciation and amortization. Major renewals and
betterments are capitalized. Repairs and maintenance costs are expensed as
incurred.
INCOME TAXES - Deferred income tax assets and liabilities are determined
using the asset and liability method in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are
established for future tax consequences of temporary differences between
the financial statement carrying amounts of assets and liabilities and
their tax bases.
EARNINGS PER SHARE - Basic earnings per common share amounts are
calculated using the average number of common shares outstanding during
each period. Diluted earnings per share assume the exercise of all stock
options having exercise prices less than the average market price of the
common stock using the treasury stock method.
CURRENCY TRANSLATION - The U.S. dollar is the functional currency for the
Company's foreign operations. For those operations, remeasurements to U.S.
dollars from currency translations are included in the statement of
income.
STOCK-BASED COMPENSATION - The Company has adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." Under SFAS No. 123, the Company
is permitted to either record expenses for stock options and other
employee compensation plans based on their fair value at the date of grant
or to continue to apply its current accounting policy under Accounting
Principles Board Opinion No. 25 ("APB No. 25") and recognize compensation
expense, if any, based on the intrinsic value of the equity instrument at
the measurement date. The Company elected to continue following APB No. 25
for stock options granted to employees; however, the Company accounts for
stock options granted to non-employees under the provisions of SFAS 123.
INTANGIBLE ASSETS - For financial statement purposes, intangible assets
are being amortized using the straight-line method over the estimated
useful lives of the assets (see Note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of financial
instruments, including cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value because of the relatively short
maturity of these instruments. The notes receivable, including the current
portion, are of a related-party nature, and it is not practicable to
estimate their fair value. The fair value of the Company's debt at July
31, 2001 and 2000 was estimated to be the same as its carrying value since
the debt obligations bear interest at a rate consistent with current
market rates.
CONCENTRATIONS OF CREDIT RISKS - Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and cash equivalents and accounts receivable. Although
the amount of credit exposure to any one institution may exceed federally
insured amounts, the Company limits its cash investments to high-quality
financial institutions in order to minimize its credit risk. With respect
to accounts receivable, such receivables are primarily from wood-treating
manufacturers located worldwide. The Company extends credit based on an
evaluation of the customer's financial condition, generally without
requiring collateral. Exposure to losses on receivables is dependent on
each customer's financial condition.
NEW ACCOUNTING STANDARDS - Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," became effective for the Company beginning August 1, 2001.
SFAS No. 133, as amended and interpreted, establishes accounting and
reporting standard for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. Under SFAS 133, certain contracts that were not formerly
22
<Page>
considered derivatives may now meet the definition of a derivative.
Management does not believe the adoption of SFAS 133 has a significant
impact on the financial position, results of operation, or cash flows of
the Company because it currently has no contracts that qualify as
derivatives under the provisions of this new standard. The Financial
Accounting Standards Board and the Derivatives Implementation Group
continue to discuss several issues that, once decided, could have
additional impact on the Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the
purchase method of accounting for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method. The Company
does not believe that the adoption of SFAS 141 will have a significant
impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142
also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption. The Company is currently
assessing, but has not yet determined, the impact of SFAS 142 on its
financial position and results of operations.
RECLASSIFICATIONS - Certain reclassifications of prior year amounts have
been made to conform to current year presentation.
2. INVENTORIES
Inventories are summarized as follows at July 31:
<Table>
<Caption>
2001 2000
----------- -----------
Chemical raw materials and supplies $ 283,976 $ 344,582
Finished chemical products 4,592,285 2,498,142
----------- -----------
Total $4,876,261 $2,842,724
=========== ===========
</Table>
23
<Page>
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment and related accumulated depreciation and
amortization are summarized as follows at July 31:
<Table>
<Caption>
2001 2000
----------- -----------
Land $ 302,527 $ 302,527
Buildings 751,826 718,002
Plant 519,738 445,605
Equipment 2,943,149 2,750,992
Leasehold improvements 38,425 38,425
Construction-in-progress 3,318,438 107,612
----------- -----------
7,874,103 4,363,163
Less accumulated depreciation and amortization (2,480,406) (2,173,205)
----------- -----------
Property, plant and equipment - net $ 5,393,697 $ 2,189,958
=========== ===========
</Table>
On October 3, 2000, the Company acquired the monosodium/-disodium
methanearsonic acid ("MSMA") herbicides product line (see Note 6) and its
manufacturing facility from Zeneca Limited, for a total acquisition cost
of $2.3 million. The MSMA manufacturing facility, originally located in
Houston, Texas, is being dismantled and reassembled adjacent to the
Company's penta manufacturing facility in Matamoros, Mexico. Included in
construction-in-progress at July 31, 2001 are costs of approximately $3.3
million related to the purchase and relocation of the MSMA manufacturing
facility.
Depreciation is principally computed using a straight-line method over the
estimated useful lives of the assets. Depreciation expense was $336,060,
$333,712 and $310,344 in 2001, 2000 and 1999, respectively. The estimated
useful lives of classes of assets are as follows:
<Table>
<Caption>
ASSET DESCRIPTION LIFE (YEARS)
----------------- ------------
Building 15 to 30
Plant 10 to 18
Equipment 3 to 10
Leasehold improvements 5 to 8
</Table>
4. FOREIGN CURRENCY REMEASUREMENT
Monetary assets and liabilities and income items for KMEX are remeasured
to U.S. dollars at current rates, and certain assets (notably plant and
production equipment) are remeasured at historical rates. Expense items
for KMEX are remeasured at average monthly rates of exchange except for
depreciation and amortization expense. All gains and losses from currency
remeasurement for KMEX are included in operations. Foreign currency
remeasurement resulted in an aggregate exchange gain of $11,705 in 2001
and $15,416 in 1999 and an aggregate exchange loss of $1,901 in 2000.
24
<Page>
5. INCOME TAXES
The geographical sources of income before income taxes for each of the
three years in the period ended July 31, 2001, 2000 and 1999 were as
follows:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
United States $3,834,408 $5,883,560 $5,661,546
Foreign 424,204 286,366 390,659
---------- ---------- ----------
Income before income taxes $4,258,612 $6,169,926 $6,052,205
========== ========== ==========
</Table>
The provision for income taxes consisted of the following:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Current federal provision $1,303,699 $2,050,567 $2,076,502
Current foreign provision 238,003 114,546 144,544
Current state provision 115,032 198,194 192,746
Deferred income tax benefit (38,462) (38,186) (113,954)
---------- ---------- ----------
Total $1,618,272 $2,325,121 $2,299,838
========== ========== ==========
</Table>
Deferred income taxes are provided on all temporary differences between
financial and taxable income. Significant components of the Company's
deferred tax assets and liabilities as of July 31, 2001, 2000 and 1999 are
as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Deferred tax assets (liabilities):
Inventory $ 19,944 $ 19,944
Bad debt expense $ 22,192 44,400 72,150
Difference in depreciable basis of property 161,186 127,242 118,929
Difference in amortization basis of intangibles 144,768 98,098 40,475
-------- -------- --------
Total $328,146 $289,684 $251,498
======== ======== ========
</Table>
The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the applicable statutory
U.S. federal and Mexican income tax rate to earnings before income taxes
for the year ended July 31:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Provision for income taxes at the statutory rate $1,364,370 $2,003,210 $1,997,436
State income taxes 113,558 207,365 157,858
Other 140,344 114,546 144,544
---------- ---------- ----------
Total $1,618,272 $2,325,121 $2,299,838
========== ========== ==========
</Table>
25
<Page>
6. OTHER ASSETS
Other assets consisted of the following at July 31:
<Table>
<Caption>
2001 2000
---------- ----------
Intangible assets - creosote sales and distribution, net of
accumulated amortization of $925,000 in 2001 and
$625,000 in 2000 $3,575,000 $3,875,000
Creosote supply contract, net of accumulated amortization of
$1,233,335 in 2001 and $833,335 in 2000 2,766,665 3,166,665
Intangible assets - MSMA product line, net of accumulated
amortization of $60,000 in 2001 1,140,000
Advances for premiums on employee-owned life insurance
policies (see Note 9) 448,364 412,217
Licensing agreement, net of accumulated amortization of
$177,738 in 2001 and $154,881 in 2000 142,262 165,119
Fair value of investments in available-for-sale securities 361,480 150,000
Other 173,760 120,454
---------- ----------
Total $8,607,531 $7,889,455
========== ==========
</Table>
On June 30, 1998, the Company entered into a long-term supply contract to
purchase creosote (a wood-treating chemical) from Allied Signal, Inc.
("Allied"). At the same time, the Company purchased certain intangible
assets from Allied pertaining to creosote sales and distribution. The
Company paid Allied $4,000,000 and $4,500,000 for entering into the supply
contract and for the intangible assets, respectively. The supply contract
is being amortized on a straight-line basis over a 10-year term, which is
the initial term of the contract. The intangible assets, including
Allied's creosote customer list, one customer contract, certain rail car
leases, and Allied's rights in creosote product registrations, are being
amortized on a straight-line basis over a 15-year term which approximates
the life of the assets purchased.
During 1991, the Company entered into a technology-licensing agreement
resulting in the granting to the Company of an exclusive worldwide right
and license to use and sublease certain proprietary and sales information
and to manufacture and sell certain products for an indefinite period of
time. Total cost to the Company for this license was $320,000, which is
being amortized on a straight-line basis over a 15-year term which
approximates the patent life of the products represented by this
agreement.
On October 3, 2000, the Company acquired various intangible assets, such
as brand names and customer lists, in connection with the purchase of the
MSMA herbicides product line from Zeneca Limited (see Note 3).
Approximately $1.15 million of the total $2.3 million acquisition cost was
allocated to the intangible assets purchased. These costs are being
amortized on a straight-line basis over a 15-year term, which approximates
the life of the assets purchased.
7. LONG-TERM DEBT
Effective August 1, 1996, the Company entered into a revolving
line-of-credit agreement with a bank that provides for borrowings of up to
$3,500,000. The borrowing base under this agreement is limited by a
formula defined in the agreement based on the amount of receivables and
inventory. Interest payments will be due monthly. The line of credit is
subject to a one-fourth percent unused line fee and is secured by the
Company's receivables, inventory, and general intangibles. The loan
agreement includes, among other things, restrictions on equity investments
and loans made by the Company and
26
<Page>
requires the maintenance of a minimum fixed-charge coverage ratio and
minimum net worth requirements. No borrowings were outstanding under this
agreement at July 31, 2001 or 2000. The termination date of this loan
agreement is January 31, 2004.
On June 26, 1998, the Company entered into a term loan with an original
maturity date of July 1, 2005 for $6,000,000 with a bank. Starting August
1, 1998, the Company began making monthly principal and interest payments
of $91,498. This term loan is secured by the Company's receivables,
inventory, and general intangibles. The interest rate of the term loan is
fixed at 7.32 percent per annum. At July 31, 2001, the Company was in
compliance with its various debt covenants which, among other things, has
restrictions on equity investments and loans made by the Company and
requires the maintenance of a minimum fixed-charge coverage ratio and
minimum and ratio requirements on tangible net worth.
The term loan note at July 31, 2001 matures as follows:
<Table>
<Caption>
YEAR ENDING
JULY 31,
-----------
2002 $ 939,906
2003 1,013,776
2004 600,737
----------
Total $2,554,419
==========
</Table>
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company has noncancelable operating leases for its
office and warehouse facilities and certain transportation equipment. At
July 31, 2001, the Company was obligated under these leases for the
following future minimum lease commitments:
<Table>
<Caption>
2002 $ 355,316
2003 333,882
2004 251,044
----------
Total $ 940,242
==========
</Table>
Rent expense relating to the operating leases was $437,103, $346,138 and
$317,361 in 2001, 2000 and 1999, respectively.
ENVIRONMENTAL - As a manufacturer and supplier of wood treatment products
and herbicides, the Company is subject to a variety of health, safety, and
environmental laws within the countries in which it operates. These
governments may implement new laws or regulations that amend or impose
restrictions on the sale or use of the Company's raw materials and
products. In management's opinion, the Company is currently in compliance
with all applicable laws and regulations, and no actions or proceedings
against the Company are known to be in process.
Producers of chemicals such as penta, creosote and MSMA are required by
the Environmental Protection Agency ("EPA") to obtain a registration for
their products under the Federal Insecticide, Fungicide, and Rodenticide
Act ("FIFRA") in order to sell those products in the United States. The
registration system requires an ongoing submission to the EPA of
substantial scientific research and testing data regarding the chemistry
and toxicology of pesticides produced by manufacturers. Under an agreement
with other industry participants, the Company shares the costs of the
research and testing required by FIFRA, as well as possible compliance
testing required by foreign governments, based on
27
<Page>
relative market share. In the current year, data obtained from these tests
were consistent with historical test results and will not, in management's
opinion, hinder the re-registration of the Company's pesticide products.
The Company incurred expenses in connection with the FIFRA research and
testing programs of approximately $716,000, $756,000 and $721,000 in 2001,
2000 and 1999, respectively. These costs are included in selling, general,
and administrative expenses.
Future costs to the Company of the research and testing programs are
difficult to quantify, since foreign governments have the authority to
amend testing protocols and/or mandate additional tests. However,
management estimates that these future costs will be approximately
$625,000 per year and intends to expense these costs as incurred.
LAWSUITS - The Company is involved in various claims and lawsuits in the
normal course of business. Management does not believe that the outcome of
any of these matters will have a materially adverse effect on the
Company's consolidated financial position or results of operations.
9. RELATED-PARTY TRANSACTIONS
During 1991, the Company entered into "split-dollar insurance"
arrangements with two officers/stockholders. Under these arrangements, the
Company advances funds for insurance premiums and records these advances
as a noncurrent asset. The Company has a security interest in the
insurance policies to the extent of the advances made. The security
interest is to be satisfied either from death benefit proceeds or, in the
event of termination of the arrangement(s), by reimbursement from the
officer(s)/stockholder(s). During fiscal 1998, the arrangement with one
such officer was terminated under the provisions of a five-year employment
agreement and converted to a noninterest-bearing promissory note. As a
portion of the officer's compensation under the employment agreement, the
note is being amortized to compensation expense by the Company over a
five-year period beginning January 1, 2000 (see Note 6); such amortization
was $74,023 and $71,288 in 2001 and 2000, respectively.
The Company advanced funds to an officer under unsecured promissory notes
dated May 15, 1998 and July 15, 1994. The 1998 note was due in annual
installments of $28,571, plus interest at 8 percent, with installments
starting May 15, 2001. The 1994 note was due in semimonthly installments
of $1,000, including interest at 6.5 percent. The amount outstanding under
these notes was $0 and $428,057 at July 31, 2001 and 2000, respectively.
In August 1998, the Company purchased a $200,000 participation in a loan
by Sterling Bank to National Health Capital, Ltd. ("NHC"), a limited
partnership engaged in purchasing medical receivables. In November 1998,
the Company made an additional loan of $200,000 to NHC. At the time of
these transactions, directors of the Company were directors of the general
partner of NHC, limited partners in NHC, and one director was president of
NHC. NHC ceased operations in 1999 and began the process of recovering on
its assets and winding up its business. Management believes that at that
time, and through the date that the interest in theses notes was purchased
by an officer of the Company (see below), the notes receivable were
collectible. Both loans were modified and renewed as of October 1999. The
participation loan bore no interest and was due August 20, 2000. The
second loan bore no interest and was due on September 30, 2000.
On October 18, 2000, the Company completed its purchase of 180,000 shares
of the Company's outstanding common stock from an officer at a price of
$5.00 per share, the value of the Company's common stock on August 29,
2000, the date on which the Company's Board of Directors approved the
transaction. In accordance with the Company's desire to remove certain
related party transactions from
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<Page>
its accounts, the proceeds from the sale were used by the officer to
purchase the Company's interest in the two NHC notes referred to above,
and to repay the loans made to the officer by the Company in fiscal 1998
and 1994.
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan covering substantially
all of its U.S. employees. The participants may contribute from 3 percent
to 15 percent of their compensation, and the Company makes matching
contributions under this plan equal to 3 percent of the participant's
compensation. Company contributions to the plan totaled approximately
$30,000, $40,000 and $46,000 in 2001, 2000 and 1999, respectively.
In July 2001, the Company adopted a supplemental executive retirement
plan. Only persons specifically designated by the company may be
participants in the plan. The plan is unfunded and amounts payable to
participants are general obligations of the company. The plan provides
that a participant will be paid a supplemental retirement benefit for 10
years equal to a percentage of the participant's three-year average base
salary at normal retirement. The benefit payable to participants is
reduced by the equivalent actuarial value of the Company's other pension
plan payments to the participant, if any, the Company's 401(k) plan and
one-half social security benefits. Normal retirement is the earlier of age
65 and completion of 10 years credited service or age 60 with 30 years
credited service. As of July 31, 2001, none of the Company's executives
were designated as a participant in the plan; however, one executive was
designated as a participant in August 2001.
11. SIGNIFICANT CUSTOMERS
The Company had one significant customer in 2001, 2000 and 1999 whose
sales as a percentage of total sales were 15 percent, 12 percent and 15
percent, respectively.
12. STOCKHOLDERS' EQUITY
The Company adopted the 1996 Stock Option Plan (the "Stock Plan") on
October 15, 1996 and reserved 700,000 shares of its common stock for
issuance under the Stock Plan. The Stock Plan provides for the grant of
"incentive stock options," as defined in Section 422 of the Internal
Revenue Code of 1986, as amended, and nonqualified stock options. The
Stock Plan will be administered either by the Company's Board of Directors
or by a committee of two or more nonemployee directors. Subject to the
terms of the Stock Plan, the Board of Directors or the committee has the
authority to grant options under the Stock Plan, to amend, construe, and
interpret it, and to make all other determinations and take any and all
actions necessary or advisable for its administration. The directors,
consultants, and key employees of the Company or any subsidiary are
eligible to receive options under the Plan, which are fully vested upon
issuance, but only salaried employees of the Company or its subsidiaries
are eligible to receive incentive stock options, which vest over a
five-year period from the date of issuance.
Options will be exercisable during the period specified in each option
agreement and in accordance with a vesting schedule to be designated by
the Board of Directors or the committee. Any option agreement may provide
that options become immediately exercisable in the event of a change or
threatened change in control of the Company and in the event of certain
mergers and reorganizations of the Company. Options may be subject to
early termination within a designated period following the option holder's
cessation of service with the Company.
In 2000 the Company granted an option to acquire 40,000 shares of common
stock in consideration for investor relations consulting services. These
options would have vested if before January 1, 2000 the average closing
price of the Company's common stock equaled or exceeded $9.00 per share
for ten
29
<Page>
consecutive days, however, the options failed to vest and expired
unexercised. Also in 2000 the Company granted warrants to acquire 25,000
shares of common stock to JP Turner & Company L.L.P. for consulting
services as requested by the Company and pertaining to the evaluation of
acquisition and financing transactions and to investor relations. The
warrants are immediately exercisable at a price of $5.50 per share of
common stock through March 17, 2003.
In 2000, the Company granted a warrant for the purchase of 25,000 shares
of the Company's common stock to Gilman Financial Corporation, a company
that employs a Director of the Company, in exchange for consulting
services with respect to developing, studying, and evaluating merger and
acquisition proposals. The warrant is immediately exercisable at a price
of $5.50 per share of common stock through March 6, 2009.
Stock option and warrants activity for the Company in 2001, 2000 and 1999
was as follows:
<Table>
<Caption>
2001 2000 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
Stock options and warrants
outstanding, beginning of year 154,171 $ 3.67 160,171 $ 3.69 70,171 $ 1.73
Granted 190,000 3.55 34,000 5.17 90,000 5.21
Cancelled (40,000) 5.00
------- --------- ------- --------- ------- ---------
Stock options and warrants
outstanding, end of year 344,171 $ 3.61 154,171 $ 3.67 160,171 $ 3.69
======= ========= ======= ========= ======= =========
</Table>
Options and warrants outstanding as of July 31, 2001 are as follows:
<Table>
<Caption>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- ----------- --------- ----------- ---------
$ 0.213 43,671 3.22 $ 0.213 43,671 $ 0.213
3.44 - 5.50 300,500 10.87 4.100 79,300 5.170
</Table>
At July 31, 2001, options were exercisable for 122,971 shares at a
weighted-average exercise price of $3.41. The remaining contractual life
of these options was approximately 7.9 years. At July 31, 2001, 355,829
shares were available for future option grants.
The weighted-average fair value of options granted during 2001, 2000 and
1999 was $103,176, $114,314 and $95,488, respectively. The effect of these
options would have decreased basic and diluted EPS by $.01 per share in
2001 and $.02 per share during 2000 and 1999, respectively. Fair value of
the options is estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for fiscal years 2001,
2000 and 1999:
<Table>
<Caption>
2001 2000 1999
----- ----- -----
Weighted-average expected life 12.91 9.66 11.94
Volatility factor 48% 48% 45%
Dividend yield 0.1% 0.8% 0.2%
Weighted-average risk-free interest 5.07% 7.26% 6.40%
</Table>
30
<Page>
The following is a reconciliation of the numerators and denominators of
basic and diluted earnings per share computations, in accordance with SFAS
No. 128:
<Table>
<Caption>
YEAR ENDED JULY 31, 2001
-------------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) (AMOUNT)
----------- ------------- ---------
Basic EPS - Income available to common
stockholders $ 2,640,340 7,538,967 $ 0.35
Effect of Dilutive Securities -Common stock options 53,265 0.00
----------- ------------ ---------
Diluted EPS - Income available to common
stockholders $ 2,640,340 7,592,232 $ 0.35
=========== ============ =========
</Table>
<Table>
<Caption>
YEAR ENDED JULY 31, 2000
-------------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) (AMOUNT)
----------- ------------- ---------
Basic EPS - Income available to common
stockholders $ 3,844,805 7,681,981 $ 0.50
Effect of Dilutive Securities -Common stock options 67,474 0.00
----------- ------------ ---------
Diluted EPS - Income available to common
stockholders $ 3,844,805 7,749,455 $ 0.50
=========== ============ =========
</Table>
<Table>
<Caption>
YEAR ENDED JULY 31, 1999
-------------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) (AMOUNT)
----------- ------------- ---------
Basic EPS - Income available to common
stockholders $ 3,752,367 7,681,981 $ 0.49
Effect of Dilutive Securities -Common stock options 76,720 (0.01)
----------- ------------ ---------
Diluted EPS - Income available to common
stockholders $ 3,752,367 7,758,701 $ 0.48
=========== ============ =========
</Table>
The Company declared and paid a 10% stock dividend during fiscal 2001,
which resulted in the issuance of 681,812 shares of the Company's common
stock.
31
<Page>
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- -----------
Year ended July 31, 2001
Net sales $8,302,040 $8,192,896 $8,098,371 $11,197,683
Operating income 1,467,674 968,730 375,867 1,440,978
Income before income tax 1,530,895 982,054 341,073 1,404,590
Net income $ 949,155 $ 608,873 $ 211,465 $ 870,847
Per share data:
Earnings per share - basic $ 0.13 $ 0.08 $ 0.03 $ 0.11
Earnings per share - diluted $ 0.13 $ 0.08 $ 0.03 $ 0.11
Year ended July 31, 2000
Net sales $8,833,089 $7,761,334 $8,176,294 $ 8,983,568
Operating income 1,580,027 1,285,055 1,555,007 1,730,462
Income before income tax 1,570,703 1,277,383 1,548,829 1,773,011
Net income $1,005,250 $ 792,031 $ 948,274 $ 1,099,250
Per share data:
Earnings per share - basic $ 0.13 $ 0.10 $ 0.12 $ 0.15
Earnings per share - diluted $ 0.13 $ 0.10 $ 0.12 $ 0.15
Year ended July 31, 1999
Net sales $9,803,822 $8,054,981 $9,234,191 $ 9,295,805
Operating income 1,612,992 1,403,956 1,747,659 1,291,732
Income before income taxes 1,549,467 985,451 1,889,424 1,627,863
Net income $ 960,670 $ 612,622 $1,171,443 $ 1,007,632
Per share data:
Earnings per share - basic $ 0.13 $ 0.08 $ 0.15 $ 0.13
Earnings per share - diluted $ 0.12 $ 0.08 $ 0.15 $ 0.13
</Table>
* * * * * *
32
<Page>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Pursuant to instruction G(3) to Form 10-K, the information required by
Items 10-13 of Part III is incorporated by reference from the Company's
definitive proxy statement to be filed on or about October 30, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K.
(a) The financial statements filed as part of this report in Item 8 are
listed in the Index to Financial Statements contained in such Item. The
following documents are filed as exhibits to this report:
<Table>
2.1(i) First Amended Joint Plan of Reorganization dated September 1,
1995, as modified and clarified to date.*
2.1(ii) Asset Purchase and Sale Agreement dated June 26, 1998
with AlliedSignal, Inc.*
2.1(iii) Asset Sale Agreement dated October 3, 2000 between the
Company and GB Biosciences Corporation *
2.2 Stock Exchange Agreement dated September 13, 1996 by and
between W.P. Acquisition Corp., Halter Financial Group, Inc.,
KMG-Bernuth, Inc. and certain shareholders of KMG-Bernuth,
Inc.*
3(i) Amended and Restated Articles of Incorporation.*
3(ii) Bylaws.*
3(iii) Articles of Amendment to Restated and Amended Articles of
Incorporation, filed December 11, 1997.*
4.1 Form of Common Stock Certificate.*
10.1 Agency Agreement dated January 1, 1987 by and between Bernuth,
Lembcke Co. Inc. and VfT AG.*
10.2 Revolving Loan Agreement dated August 1, 1996 by and between
KMG-Bernuth, Inc. and SouthTrust Bank of Alabama, National
Association.*
33
<Page>
10.3 $2,500,000 Revolving Note dated August 1, 1996 payable by
KMG-Bernuth, Inc. to SouthTrust Bank of Alabama, National
Association.*
10.4 1996 Stock Option Plan.*
10.5 Stock Option Agreement dated October 17, 1996 by and between
KMG-B, Inc. and Thomas H. Mitchell.*
10.6 Consulting Agreement dated October 15, 1996 by and between the
Company and Gilman Financial Corporation.*
10.7 Split Dollar Insurance Agreement dated November 8, 1991
between KMG-Bernuth, Inc. and David L. Hatcher.*
10.8 Split Dollar Insurance Agreement dated December 13, 1991
between KMG-Bernuth, Inc. and Bobby D. Godfrey.*
10.9 Second Amendment to Revolving Loan Agreement.*
10.10 $2,500,000 Amended and Restated Revolving Note.*
10.11 Third Amendment to Revolving Loan Agreement.*
10.12 $2,500,00 Amended and Restated Revolving Note dated December 31,
1997.*
10.13 Employment Agreement dated February 1, 1998 with Bobby D.
Godfrey.*
10.14 Creosote Supply Agreement dated as of June 30, 1998 between
AlliedSignal Inc. and the Company.*
10.15 Performance Guaranty dated June 30, 1998 by the Company.*
10.16 Term Loan Agreement between SouthTrust Bank, National
Association and KMG-Bernuth, Inc.*
10.17 $6,000,000 Term Note.*
10.18 Guaranty of Payment by the Company.*
10.19 Fourth Amendment to Revolving Loan Agreement.*
10.20 Creosote Supply Agreement dated November 1, 1998 between
Rutgers VFT and the Company*
10.21 Option to Purchase 40,000 Shares of Common Stock dated as of
September 16, 1998 between the Company and Halter Financial
Group, Inc.*
10.22 Warrant for the Purchase of 25,000 Shares of Common Stock
dated as of March 17, 1999 between the Company and JP Turner &
Company, L.L.C.*
10.23 Manufacturing and Formulation Agreement dated October 3, 2000
between the Company and GB Biosciences Corporation.*
10.24 Warrant for the Purchase of 25,000 Shares of Common Stock
dated as of March 6, 2000 between the Company and JGIS, Ltd.,
an assignee of Gilman Financial Corporation.*
34
<Page>
10.25 Employment Agreement with Thomas H. Mitchell dated July 11,
2001.
10.26 Employment Agreement with John V. Sobchak dated June 26, 2001.
10.27 Supplemental Executive Retirement Plan dated effective August 1,
2001
21.1 Subsidiaries of the Company.*
</Table>
Documents marked by an (*) were previously filed by the Company and are
incorporated by this reference.
35
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
KMG CHEMICALS, INC.
<Table>
By: /s/ David L. Hatcher Date: 10/24/01
------------------------------------------- ----------------
David L. Hatcher, President
and Chairman
</Table>
Pursuant to the Securities Exchange Act of 1934, 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>
By: /s/ John V. Sobchak Date: 10/24/01
------------------------------------------- ----------------
John V. Sobchak, Chief Financial Officer
By: /s/ Bobby D. Godfrey Date: 10/24/01
------------------------------------------- ----------------
Bobby D. Godfrey, Director
By: /s/ George W. Gilman Date: 10/24/01
------------------------------------------- ----------------
George W. Gilman, Director
By: /s/ Fred C. Leonard III Date: 10/24/01
------------------------------------------- ----------------
Fred C. Leonard III, Director
By: /s/ Charles M. Neff, Jr. Date: 10/24/01
------------------------------------------- ----------------
Charles M. Neff, Jr., Director
By: /s/ Richard L. Urbanowski Date: 10/24/01
------------------------------------------- ----------------
Richard L. Urbanowski, Director
</Table>
36