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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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 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 Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court.
Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 7,512,981 shares of common
stock
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KMG CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
Janaury 31, July 31,
2002 2001
----------- -----------
ASSETS
- ------
CURRENT ASSETS $10,735,481 $13,348,314
PROPERTY, PLANT AND EQUIPMENT-
Net of accumulated depreciation 6,513,177 5,393,697
NOTES RECEIVABLE, Less current portion 65,512 82,602
DEFFERED TAX ASSET 340,917 328,146
OTHER ASSETS 8,478,690 8,607,531
----------- -----------
TOTAL $26,133,777 $27,760,290
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,783,503 $ 3,961,866
Accrued liabilities 1,161,480 1,967,891
Current portion of long-term debt 1,005,679 939,906
----------- -----------
Total current liabilities 4,950,662 6,869,663
LONG-TERM DEBT 1,085,663 1,614,514
----------- -----------
Total liabilities 6,036,325 8,484,177
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
10,000,000 shares authorized,
none issued
Common stock, $.01 par value,
40,000,000 shares authorized,
7,692,981 shares issued and
7,512,981 shares outstanding at
January 31, 2002 and 7,501,981
shares outstanding at July 31, 2001 76,930 76,820
Additional paid-in capital 3,365,976 3,363,952
Treasury stock (900,000) (900,000)
Unrealized gain on available for sale securities 371,639 211,480
Retained earnings 17,182,907 16,523,861
----------- -----------
Total stockholders' equity 20,097,452 19,276,113
----------- -----------
TOTAL $26,133,777 $27,760,290
=========== ===========
</Table>
See notes to consolidated financial statements.
1
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KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31 January 31
------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
NET SALES $7,571,329 $8,192,896 $15,668,659 $16,494,936
COST OF SALES 5,018,597 5,255,040 10,479,927 10,410,050
---------- ---------- ----------- -----------
Gross Profit 2,552,732 2,937,856 5,188,732 6,084,886
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,900,179 1,969,126 3,828,897 3,648,482
---------- ---------- ----------- -----------
Operating Income 652,553 968,730 1,359,835 2,436,404
OTHER INCOME (EXPENSE):
Interest & Dividend Income 14,292 82,439 43,239 206,113
Interest Expense (39,538) (58,795) (85,906) (121,594)
Other (5,235) (10,320) (12,190) (7,972)
---------- ---------- ----------- -----------
Total Other Income (Expense) (30,481) 13,324 (54,857) 76,547
INCOME BEFORE INCOME TAX 622,072 982,054 1,304,978 2,512,951
Provision For Income Tax (236,387) (373,181) (495,892) (954,921)
---------- ---------- ----------- -----------
NET INCOME $ 385,685 $ 608,873 $ 809,086 $ 1,558,030
========== ========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.05 $ 0.08 $ 0.11 $ 0.21
========== ========== =========== ===========
Diluted $ 0.05 $ 0.08 $ 0.11 $ 0.20
========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,512,981 7,501,681 7,511,579 7,575,351
========== ========== =========== ===========
Diluted 7,546,127 7,544,032 7,546,197 7,619,691
========== ========== =========== ===========
</Table>
See notes to consolidated financial statements.
2
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KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<Table>
<Caption>
COMMON STOCK
------------------- ADDITIONAL ACCUMULATED TOTAL
SHARES PAR PAID-IN TREASURY COMPREHENSIVE RETAINED STOCKHOLDERS'
ISSUED VALUE CAPITAL STOCK INCOME EARNINGS EQUITY
--------- ------- ---------- --------- ------------- ----------- ------------
BALANCE AT AUGUST 1, 1998 7,000,169 $70,002 $1,063,385 $ 0 $ 9,142,291 $10,275,678
Warrants issued for services
Dividends (70,002) (70,002)
Net income 3,752,367 3,752,367
--------- ------- ---------- --------- ----------- -----------
BALANCE AT JULY 31, 1999 7,000,169 70,002 1,063,385 0 12,824,656 13,958,043
Warrants issued for services 66,122 66,122
Dividends (280,007) (280,007)
Net income 3,844,805 3,844,805
--------- ------- ---------- --------- ----------- -----------
BALANCE AT JULY 31, 2000 7,000,169 70,002 1,129,507 0 16,389,454 17,588,963
Warrants issued for services 25,374 25,374
Stock dividends 681,812 6,818 2,209,071 (2,215,889)
Purchase of 180,000 shares
of treasury stock (900,000) (900,000)
Cash dividends (290,044) (290,044)
Unrealized gain on securities 211,480 211,480
Net income 2,640,340 2,640,340
--------- ------- ---------- --------- -------- ----------- -----------
BALANCE AT JULY 31, 2001 7,681,981 $76,820 $3,363,952 $(900,000) $211,480 $16,523,861 $19,276,113
Employee options exercised 11,000 110 2,024 2,134
Cash dividends (150,040) (150,040)
Increase in unrealized gain on
securities held for resale 160,159 160,159
Net income 809,086 809,086
--------- ------- ---------- --------- -------- ----------- -----------
BALANCE AT JANUARY 31, 2002 7,692,981 $76,930 $3,365,976 $(900,000) $371,639 $17,182,907 $20,097,453
========= ======= ========== ========= ======== =========== ===========
</Table>
See notes to consolidated financial statements.
3
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KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
Six Months Ended
January 31
---------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 809,086 $ 1,558,029
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 566,966 549,148
Options and warrants issued for services 21,749
Forgiveness of notes receivable from related parties 17,091 17,090
Deferred income tax asset (12,770) (21,005)
Changes in operating assets and liabilities:
Accounts receivable - trade 841,667 (587,049)
Accounts receivable - other (153,097) (120,993)
Inventories 456,354 (3,140,084)
Prepaid expenses and other assets 11,795 1,212
Accounts payable (1,178,362) (147,795)
Accrued liabilities (806,411) 791,249
----------- -----------
Net cash provided by operating activities 552,318 (1,078,449)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,280,032) (342,946)
Collection of notes receivable 688,828
Product line purchase from Zeneca affiliate (2,300,000)
Additions to other assets (117,413) (75,094)
----------- -----------
Net cash used in investing activities (1,397,445) (2,029,211)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (463,079) (427,392)
Purchase of treasury stock (900,000)
Proceeds from exercise of stock options 2,134
Payment of dividends (150,040) (140,003)
----------- -----------
Net cash used in financing activities (610,985) (1,467,395)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,456,112) (4,575,055)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,126,781 7,830,843
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,670,669 $ 3,255,788
=========== ===========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $ 85,906 $ 121,594
Cash paid during the period for income taxes $ 629,981 $ 1,099,545
</Table>
See notes to consolidated financial statements.
4
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The unaudited condensed consolidated
financial statements included herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and reflect in the
opinion of management all adjustments, consisting only of normal recurring
accruals, that are necessary for a fair presentation of financial position
and results of operations for the interim periods presented. These financial
statements include the accounts of KMG Chemicals, Inc. and its subsidiaries
(the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation. Certain information and footnote
disclosures required by accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such
rules and regulations. The financial statements included herein should be
read in conjunction with the financial statements and notes thereto included
in the Company's annual report on Form 10-K for the year ended July 31, 2001.
(2) EARNINGS PER SHARE - Basic earnings per share has been computed by
dividing net income by the weighted average shares outstanding. Diluted
earnings per share has been computed by dividing net income by the weighted
average shares outstanding plus dilutive potential common shares.
The following table presents information necessary to calculate basic
and diluted earnings per share for periods indicated:
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31 January 31
2002 2001 2002 2001
---------- ---------- ---------- ----------
BASIC EARNINGS PER SHARE
Net Income $ 385,685 $ 608,873 $ 809,086 $1,558,030
Weighted Average Shares Outstanding
7,512,981 7,501,681 7,511,579 7,575,351
----------------------------------------------------
Basic Earnings Per Share $ 0.05 $ 0.08 $ 0.11 $ 0.21
====================================================
DILUTED EARNINGS PER SHARE
Net Income $ 385,685 $ 608,873 $ 809,086 $1,558,030
----------------------------------------------------
Weighted Average Shares Outstanding
7,512,981 7,501,681 7,511,579 7,575,351
Shares Issuable from Assumed
Conversion of Common Share Options 33,146 42,351 34,618 44,340
----------------------------------------------------
Weighted Average Shares Outstanding,
as Adjusted 7,546,127 7,544,032 7,546,197 7,619,691
----------------------------------------------------
Diluted Earnings Per Share $ 0.05 $ 0.08 $ 0.11 $ 0.20
====================================================
</Table>
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales and certain other
financial data, including the amount of the change between the three month
and six month periods ended January 31, 2002 and 2001:
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31 Increase/ January 31 Increase/
--------------------------- (Decrease) --------------------------- (Decrease)
2002 2001 2002 2001
------------------------------------------------------------------------------------------
Net sales............. $ 7,571,329 $ 8,192,896 $ (621,567) $ 15,668,659 $ 16,494,936 $ (826,277)
Gross profit.......... $ 2,552,732 $ 2,937,856 $ (385,124) $ 5,188,732 $ 6,084,886 $ (896,154)
Gross profit as a
percent of net sales.. 33.7% 35.9% (2.2)% 33.1% 36.9% (3.8)%
Net income............ $ 385,685 $ 608,873 $ (223,188) $ 809,086 $1,558,030 $ (748,944)
Earnings per share.... $ 0.05 $ 0.08 $ (0.03) $ 0.11 $ 0.21 $ (0.10)
Weighted average
shares outstanding.... 7,512,981 7,501,681 11,300 7,511,579 7,575,351 (63,772)
</Table>
SALES REVENUE
Net sales revenue for the second quarter of fiscal 2002 was 7.6% less
than in the same quarter of fiscal 2001 and net sales revenue for the first
six months of fiscal 2002 was 5.0% less than in that period in fiscal 2001.
Net sales revenue declined on reduced sales volume for pentachlorophenol wood
treating chemicals ("penta"). Penta is used to treat wooden utility poles
and demand for those poles was soft in the first and second quarters of
fiscal 2002. The decline in penta sales was partially offset by stronger
creosote sales revenue.
GROSS PROFIT
Gross profit for the second quarter of fiscal 2002 was 13.1% less than
in the same quarter of the prior fiscal year and 14.7% less when the first
six months of fiscal 2002 are compared to fiscal 2001. The decrease in gross
profit was caused by the decline in higher margin penta sales combined with
an increase in sales volume for the Company's lower margin creosote product.
6
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter of
fiscal 2002 were $69 thousand less than in that quarter of the prior year but
for the six month period were $180 thousand more than in the comparable
period in fiscal 2001. The Company did not acquire its herbicide product
line until the end of the first quarter of fiscal 2001. Most of the increase
in selling, general and administrative expenses in the first six months of
this fiscal year over fiscal 2001 is due to expenses of that herbicide
product line.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal 2002, the Company invested
approximately $1.3 million in capital improvements, primarily for the
Company's new herbicide (MSMA) production facility. The Company paid $2.3
million in fiscal 2001 to purchase that product line. The principal balance
of the Company's term loan with SouthTrust Bank of Alabama, National
Association ("SouthTrust") was approximately $2.1 million as of
January 31, 2002. As of that same date, the Company had no borrowings under
its revolving loan with SouthTrust, but its borrowing base availability under
that loan was $3.5 million.
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 the 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 and to continue to comply with environmental laws, rules
and regulations. Other risks and uncertainties 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 consider the various factors that
could cause actual events or results to differ materially from those
indicated by the forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to certain market risks arising from transactions
that are entered into in the ordinary 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.
7
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PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the shareholders of the Company was held on
November 26, 2001. At that meeting, the shareholders voted to elect all the
nominees for director as follows:
<Table>
<Caption>
Nominees Votes For Votes Against
-------- --------- -------------
David L. Hatcher 7,383,247 5,705
George W. Gilman 7,383,247 5,705
Bobby D. Godfrey 7,383,247 5,705
Fred C. Leonard, III 7,383,247 5,705
Charles M. Neff, Jr. 7,388,747 205
Richard L. Urbanowski 7,383,247 5,705
</Table>
The shareholders also voted to ratify the appointment of Deloitte &
Touche LLP as independent accountants and auditors of the Company for fiscal
year 2002. The vote was 7,392,715 votes for the ratification, 162 votes
against and 205 abstentions.
At the Company's Board of Directors meeting held on November 26, 2001
after the annual meeting of the shareholders, Charles L. Mears was elected by
the board as an additional director. Mr. Mears, 62, retired in 2000 from
Occidental Chemical Company where he had most recently been executive vice
president of the chlor-alkalai business. Prior to that he had served as
senior vice president of the industrial chemicals division. Effective
December 31, 2001, Bobby D. Godfrey resigned as an officer and director of
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The following documents were previously filed by the Company and are
incorporated by this reference:
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.
8
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10.2 Revolving Loan Agreement dated August 1, 1996 by and between
KMG-Bernuth, Inc. and SouthTrust Bank of Alabama, National
Association.
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.
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.
99.1 Direct Stock Purchase Plan
(b) Reports on Form 8-K:
On February 14, 2002, the Company filed a report on Form 8-K describing
the Company's Direct Stock Purchase Plan. The plan permits current
stockholders, customers, employees and other investors the opportunity to
purchases shares of the Company's common stock in a convenient and
9
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economical way. Securities Transfer Corporation will administer the plan.
The main features of the plan are:
Participants in the plan will be permitted to invest in the Company's
common stock at current market prices by making voluntary cash payments
of at least $25 up to a maximum of $100 thousand each calendar year.
Investors who are not currently stockholders are required to make an
initial investment of at least $200.
Purchases made through the plan may be a one time event or if the
participant chooses, they can be monthly investments automatically by
funds transfer from their bank accounts.
Securities Transfer Corporation, as agent, will purchase shares
directly from the open market with no service fee or brokerage
commissions charged to the participants. Once purchased, the value
of the participants' shares will rise and fall as the market for the
Company's common stock rises and falls on the securities exchange
where it is listed. Participants will incur commissions and fees
only when they sell their shares.
The plan also allows current stockholders to deposit their existing
shares for safekeeping.
Participants may sell their shares at any time through the plan.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KMG Chemicals, Inc.
By: /s/ David L. Hatcher Date: 3/14/02
------------------------------ ---------------
David L. Hatcher, President
By: /s/ John V. Sobchak Date: 3/14/02
------------------------------ ---------------
John V. Sobchak,
Chief Financial Officer