<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended October 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ______
Commission file number 000-21839
KMG CHEMICALS, INC.
(Formerly KMG-B, Inc.)
(Name of Small Business Issuer 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
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 7,000,169 shares of Common
Stock
Transitional Small Business Disclosure Format (Check one): Yes / / No /X/
<PAGE>
PART I --- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KMG CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Stated In Dollars)
October 31, July 31,
1997 1997
------------ ----------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS $ 7,796,189 $6,511,612
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 1,894,445 1,800,143
NOTES RECEIVABLE, Less current portion 243,368 245,267
OTHER ASSETS 835,824 828,543
----------- ----------
TOTAL $10,769,826 $9,385,565
----------- ----------
----------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $ 2,665,876 $2,000,877
DEFERRED INCOME TAX LIABILITY 34,881 34,881
----------- ----------
Total liabilities 2,700,757 2,035,758
----------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
10,000,000 shares authorized,
none issued
Common stock, $.01 par value,
40,000,000 shares authorized,
7,000,169 shares issued and
outstanding 70,002 70,002
Additional paid-in capital 1,063,385 1,063,385
Retained earnings 6,935,682 6,216,420
----------- ----------
Total stockholders' equity 8,069,069 7,349,807
----------- ----------
TOTAL $10,769,826 $9,385,565
----------- ----------
----------- ----------
See notes to consolidated financial statements.
2
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KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(STATED IN DOLLARS)
THREE MONTHS ENDED
OCTOBER 31,
-------------------------
1997 1996
---------- ----------
NET SALES $5,385,055 $5,222,945
COST OF SALES 3,215,797 3,049,926
---------- ----------
Gross Profit 2,169,258 2,173,019
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 831,123 729,457
---------- ----------
Operating Income 1,338,135 1,443,562
OTHER INCOME (EXPENSE):
Interest & Dividend Income 46,814 9,634
Interest Expense (282)
Other 963 (7,010)
---------- ----------
Total Other Income 47,777 2,342
INCOME BEFORE INCOME TAX 1,385,912 1,445,904
Provision For Income Tax (526,647) (518,189)
---------- ----------
NET INCOME $ 859,265 $ 927,715
---------- ----------
---------- ----------
NET INCOME PER SHARE $0.12 $0.14
---------- ----------
---------- ----------
WEIGHTED AVERAGE SHARES
OUTSTANDING 7,000,169 6,862,474
---------- ----------
---------- ----------
See notes to consolidated financial statements.
3
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KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
(Stated In Dollars)
COMMON STOCK
------------------------ ADDITIONAL TOTAL
SHARES PAR PAID-IN RETAINED STOCKHOLDERS'
ISSUED VALUE CAPITAL EARNINGS EQUITY
--------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 1, 1995 6,862,474 $68,625 $1,185,814 $1,080,527 $2,334,966
Dividends (99,996) (99,996)
Net income 2,651,424 2,651,424
--------- ------- ---------- ---------- ----------
BALANCE AT AUGUST 1, 1996 6,862,474 68,625 1,185,814 3,631,955 4,886,394
Dividends (124,995) (124,995)
Shares issued 137,695 1,377 98,623 100,000
Stock registration costs (221,052) (221,052)
Net income 2,709,460 2,709,460
--------- ------- ---------- ---------- ----------
BALANCE AT JULY 31, 1997 7,000,169 $70,002 $1,063,385 $6,216,420 $7,349,807
Dividends (unaudited) $ (140,003) (140,003)
Net income (unaudited) $ 859,265 859,265
--------- ------- ---------- ---------- ----------
BALANCE AT OCTOBER 31, 1997 7,000,169 $70,002 $1,063,385 $6,935,682 $8,069,069
--------- ------- ---------- ---------- ----------
--------- ------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
4
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KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
(STATED IN DOLLARS)
THREE MONTHS ENDED
OCTOBER 31,
---------------------------
1997 1996
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 859,265 $ 927,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 62,699 74,740
Gain on the disposal of fixed assets (3,532)
Changes in operating assets and liabilities:
Accounts receivable - trade 105,934 (50,648)
Accounts receivable - other 47,115 (52,897)
Inventories (92,203) (604,290)
Prepaid expenses and other assets (8,761) (44,715)
Accounts payable 242,629 69,320
Accrued liabilities (68,705) (59,414)
Income taxes payable 491,075 481,689
---------- ---------
Net cash provided by operating activities $1,635,516 $ 741,500
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (151,316) (329,182)
Sale of fixed assets 4,500
Collection of (additions to) notes receivable 1,899 (48,221)
Additions to other assets (13,934) (22,774)
---------- ---------
Net cash used in investing activities $(158,851) $(400,177)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (140,003) (124,995)
---------- ---------
Stock registration costs (138,418)
Net cash used in financing activities $(140,003) $(263,413)
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS $1,336,662 $ 77,910
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,643,070 552,550
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,979,732 $ 630,460
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $ 282
Cash paid during the period for income taxes $ 32,520 $ 36,500
</TABLE>
See notes to consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Company changed its name from KMG-B, Inc. to KMG Chemicals,
Inc. on December 11, 1997.
(2) The Management's Discussion and Analysis of Operations which
follows these notes contains additional information on the results of current
operations and the financial position of the Company. Those comments should
be read in conjunction with these notes. The Company's annual report on Form
10-KSB, filed on October 17,1997, includes additional information about the
Company, its operations and financial position for the fiscal years ended
July 31, 1997 and 1996 and should be read in conjunction with this quarterly
report on Form 10-QSB.
(2) The results for the interim periods are not necessarily indicative
of the results to be expected for the full fiscal year.
(3) In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
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
periods ended October 31, 1997 and October 31, 1996 and gross profit
expressed as a percentage of net sales:
Three Months Ended
October 31, Increase/
1997 1996 (Decrease)
Net sales $5,385,055 $5,222,945 $ 162,110
Cost of goods sold 3,215,797 3,049,926 165,871
---------- ---------- ---------
Gross profit 2,169,258 2,173,019 (3,761)
Gross profit percent 40.3% 41.6%
Selling, general and
administrative expense 831,123 729,457 101,666
---------- ---------- ---------
Operating income 1,338,135 1,443,562 (105,427)
Other income (expense), net 47,777 2,342 45,435
---------- ---------- ---------
Income before taxes 1,385,912 1,445,904 (59,992)
Provision for income taxes (526,647) (518,189) (8,458)
---------- ---------- ---------
Net income $ 859,265 $ 927,715 $ (68,450)
---------- ---------- ---------
---------- ---------- ---------
6
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SALES REVENUE
Net sales revenue for the quarter ended October 31, 1997 was $162 thousand
greater than in the same quarter of fiscal 1997, a 3.1% increase. Net sales
from pentachlorophenol-based products as a whole rose by 9.7%, an increase that
management believes was primarily due to an increase in demand for treated
utility poles in the United States. Conversely, net sales of creosote fell by
10.4% due to a decline in demand for treated railroad ties. Management
believes that these comparative changes represent normal demand fluctuations
and that neither is indicative of a long-term trend.
GROSS PROFIT
The increase in net sales revenues for the first quarter of fiscal 1998
over the first quarter of fiscal 1997 was offset by a $166 thousand (5.4%)
increase in cost of goods sold. Most of the cost increase was attributable to
the fact that the Company's Matamoros, Mexico production facility was operated
at a higher thru-put level during the quarter ended October 31, 1996, which
resulted in a lower per-unit cost of production for that quarter as compared to
the quarter ended October 31, 1997. The higher thru-put level was maintained
in order to build inventory in anticipation of the relocation of the facility.
Commercial production at the Company's original manufacturing facility was shut
down in December 1996 and restarted at the new location in Matamoros, Mexico in
May 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses registered a $102 thousand
or, 13.9% increase in the current quarter. Most of this rise was attributable
to increases of approximately $39 thousand, each, in the accrued reserves
related to Penta Task Force (PTF) activities and for fiscal year-end bonus
payments. Both the PTF and bonus accruals were relatively low in the first and
second quarters of fiscal 1997 and were raised, significantly, for the final
six months of that period. Management estimates that for fiscal 1998, in
total, PTF and bonus expenses will rise by approximately $80 thousand and $50
thousand, respectively.
7
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LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1997 the Company had cash and cash equivalents of
approximately $4.0 million, an increase of approximately $1.4 million since the
beginning of fiscal 1998. The increase was due to pre-tax income generated
during the first quarter. Estimated tax payments attributable to first quarter
earnings were paid in November 1997.
As of October 31, 1997 the Company had cash and cash equivalents of
approximately $4.0 million as compared with $630 thousand as of October 31,
1996. The increase, approximately $3.4 million, was primarily attributable to
net income of $2.6 million over the intervening 12 month period coupled with a
$1.5 million decline in inventory and partially offset by capital expenditures
of approximately $661 thousand. The inventory decline and the majority of the
capital expenditures were directly related to the relocation of the Company's
Matamoros, Mexico production facility.
The Company's borrowing base under the Revolving Loan Agreement with
SouthTrust Bank of Alabama, National Association was approximately $1.9 million
as of October 31, 1997, but the Company had no borrowings under that credit
facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the shareholders of the Company was held on
November 19, 1997. At that meeting, the shareholders voted to elect all the
nominees for director as follows:
Nominees Votes For Votes Against
-------- --------- -------------
David L. Hatcher 6,682,471 331
George W. Gilman 6,682,471 331
Bobby D. Godfrey 6,682,471 331
Fred C. Leonard, III 6,682,471 331
Charles M. Neff, Jr. 6,682,471 331
In addition, the shareholders approved resolutions to amend the
Company's Restated and Amended Articles of Incorporation to change the
Company's name to "KMG-Chemicals, Inc." The vote was 6,682,423 votes for
the proposal, no votes against the proposal, and 379 abstentions. The
amendment to the Company's Restated and Amended Articles of Incorporation
to change the name of the Company was filed with the Secretary of State
of the State of Texas on December 11, 1997.
Finally, the shareholders voted to ratify the appointment of Deloitte &
Touche, LLP as independent accountants and auditors of the Company for fiscal
year
8
<PAGE>
1998. The vote was 6,682,223 votes for the ratification, 200 votes against,
and 379 abstentions.
PART II --- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3(iii) Articles of Amendment to Restated and Amended Articles of
Incorporation, filed December 11, 1997
10.9 Second Amendment to Revolving Loan Agreement
10.10 $2,500,000 Amended and Restated Revolving Note
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
October 31, 1997.
9
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
KMG Chemicals, Inc.
By: /s/ David L. Hatcher Date: December 12, 1997
------------------------------
David L. Hatcher, President
By: /s/ Jack Vernie Date: December 12, 1997
------------------------------
Jack Vernie, Controller
10
<PAGE>
ARTICLES OF AMENDMENT
TO THE
RESTATED AND AMENDED ARTICLES OF INCORPORATION
OF
KMG-B, INC.
Pursuant to the provisions of Art. 4.04 of the Texas Business Corporation
Act, the undersigned corporation adopts the following Articles of Amendment to
its Restated and Amended Articles of Incorporation which changes the name of
the corporation:
ARTICLE ONE. The name of the corporation is KMG-B, Inc.
ARTICLE TWO. The following amendment to its Restated and Amended Articles
of Incorporation was adopted by the shareholders of the corporation on
November 19, 1997: to change the name of the corporation.
The amendment alters or changes Article One of the Restated and Amended
Articles of Incorporation and the full text of each provision altered is:
ARTICLE ONE
NAME
The name of the Corporation is KMG Chemicals, Inc. (hereinafter
the "Corporation").
ARTICLE THREE. The number of shares of the corporation outstanding at the
time of adoption of such amendment was 7,000,169; and the number of shares
entitled to vote thereon was 6,682,802.
ARTICLE FOUR. The number of shares voted for such amendment was
6,682,423; and the number of shares voting against or abstaining was 379.
Dated December 11, 1997.
KMG-B, INC.
By: /s/ David L. Hatcher
----------------------------------
David L. Hatcher,
President
<PAGE>
AMENDED AND RESTATED REVOLVING NOTE
$2,500,000.00 September 1, 1997
FOR VALUE RECEIVED, the undersigned KMG-BERNUTH, INC., a Delaware
corporation (hereinafter referred to as "Maker"), promises to pay to the order
of SOUTHTRUST BANK, NATIONAL ASSOCIATION, a national banking association
formerly known as SouthTrust Bank of Alabama, National Association
(hereinafter, together with any holder of this Note, the "Bank"), at its main
office in the City of Birmingham, Alabama, or at such other address as the Bank
may from time to time designate in writing, the principal sum of Two Million
Five Hundred Thousand and No/100 Dollars ($2,500,000.00), or so much as may be
advanced hereunder, together with interest thereon, such principal and interest
to be payable as follows:
A. On the 30th day of September, 1997, and on the last day of each
successive calendar month thereafter until this Note is paid in
full, Maker shall pay to Bank all accrued and unpaid interest
on the outstanding principal balance.
B. On the 15th day of January, 1999, the Maker shall pay to Bank
the then outstanding principal balance, together with all
accrued and unpaid interest thereon.
During the entire term of this Note, except during any applicable LIBOR
Rate Interest Period (as hereinafter defined), the outstanding principal amount
shall bear interest at the Bank's Base Rate (the actual rate of interest at
which the outstanding principal balance bears interest from time to time during
the term of this Note being hereinafter referred to as the "Interest Rate").
As used in this Note, the term "Base Rate" means the per annum rate of interest
designated by the Bank periodically as its Base Rate. THE BASE RATE IS NOT
NECESSARILY THE LOWEST RATE CHARGED BY THE BANK. The Base Rate on the date of
this Note is eight and one-half percent (8.5%). Except during any applicable
LIBOR Rate Interest Period, the Interest Rate payable under this Note during
the term of this Note will change to reflect any change in the Base Rate, as
and when the Base Rate changes.
Provided that no Event of Default (as hereinafter defined) then exists,
Maker may from time to time deliver to Bank for receipt by Bank at least two
(2) Business Days (as hereinafter defined) prior to the commencement of any
90-Day LIBOR Rate Interest Period (as hereinafter defined) or 180-Day LIBOR
Rate Interest Period (as hereinafter defined) a written notice (herein, a
"LIBOR Rate Election Notice") providing for Maker's election for the outstanding
principal balance to bear interest at either: (a) the 90-Day LIBOR Rate (as
hereinafter defined) during a 90-Day LIBOR Rate Interest Period and specifying
the date of beginning of such 90-Day LIBOR Rate Interest Period during which
such 90-Day LIBOR Rate shall be charged, or (b) the 180-Day LIBOR Rate (as
hereinafter defined) during a 180-Day LIBOR Rate Interest Period and specifying
the date of beginning of such 180-Day LIBOR Rate Interest Period during which
such 180-Day LIBOR Rate shall be charged; provided, however, that in no event
may any 90-Day LIBOR Rate Interest Period or 180-Day LIBOR Rate Interest Period
begin until the expiration of any current 90-Day LIBOR Rate Interest Period or
180-Day LIBOR Rate Interest
Page 1 of 6
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Period, and in no event may a 90-Day LIBOR Rate be elected by Maker at any
time when the corresponding 90-Day LIBOR Rate Interest Period would extend
beyond the maturity date of this Note nor may a 180-Day LIBOR Rate be elected
by Maker at any time when the corresponding 180-Day LIBOR Rate Interest
Period would extend beyond the maturity date of this Note. If any such LIBOR
Rate Election Notice electing a 90-Day LIBOR Rate or a 180-Day LIBOR Rate is
timely received ane properly made, then interest shall accrue at the
applicable 90-Day LIBOR Rate during the applicable 90-Day LIBOR Rate Interest
Period or at the applicable 180-Day LIBOR Rate during the applicable 180-Day
LIBOR Rate Interest Period, as the case may be. If any of such LIBOR Rate
Election Notice is not timely received or is otherwise not properly made, the
LIBOR Rate Election Notice, at Bank's election, shall not be effective.
Notwithstanding anything herein, if at any time Bank determines that its
obtaining of funds in the London interbank market should be unsafe, impractical
or in violation of any law, regulation, guideline or order applicable to Bank,
Bank may so notify maker in writing or by telephone. Upon the giving of such
notice, this Note shall immediately cease to bear interest at such rate and
shall commence to bear interest at the Base Rate. Furthermore, notwithstanding
the fact that the Interest Rate pursuant to this Note may be calculated based
upon Bank's cost of funds in the Eurodollar market, Maker agrees that Bank
shall not be required actually to obtain funds from such source at any time.
As used herein:
(a) "LIBOR Rate Interest Period" means any applicable 90-Day LIBOR Rate
Interest Period or 180-Day LIBOR Rate Interest Period.
(b) "90-Day LIBOR Rate", as applicable to each respective 90-Day LIBOR
Rate Interest Period, means a per annum rate of interest equal to the sum of
(1) the quotient obtained (stated as an annual percentage rate rounded upward
to the next higher 1/100th of 1%) by dividing (A) the ninety (90) day London
Interbank Offered rate ("LIBOR"), as determined by Bank as of the
commencement date of the applicable 90-Day LIBOR Rate Interest Period from
Telerate, as provided by the Dow Jones Telerate British Bankers Association
(or such other source as Bank may select if such source is not available or
if such a rate index is not available from Telerate), by (B) 1.00 minus any
Reserve Requirement for the 90-Day LIBOR Rate Interest Period (expressed as a
decimal), plus (2) two and no/100 percent (2.0%).
(c) "90-Day LIBOR Rate Interest Period" means, in the case of Maker's
election of a 90-Day LIBOR Rate, a period beginning on the day as specified
in the applicable LIBOR Rate Election Notice and ending ninety (90) days
thereafter.
(d) "180-Day LIBOR Rate", as applicable to each respective 180-Day
LIBOR rate Interest Period, means a per annum rate of interest equal to the
sum of (1) the quotient obtained (stated as an annual percentage rate rounded
upward to the next higher 1/100th of 1%) by dividing (A) the one hundred
eighty (180) day London Interbank Offered Rate ("LIBOR") as determined by
Bank as of the commencement date of the applicable 180-Day LIBOR Rate
Interest Period from Telerate, as provided by the Dow Jones Telerate British
Page 2 of 6
<PAGE>
Bankers Association (or such other source as Bank may select if such source
is not available or if such a rate index is not available from Telerate), by
(B) 1.00 minus any Reserve Requirement for the 180-Day LIBOR Rate Interest
Period (expressed as a decimal), plus (2) two and no/100 percent (2.0%).
(e) "180-Day LIBOR Rate Interest Period" means, in the case of Maker's
election of a 180-Day LIBOR Rate, a period beginning on the day as specified
in the applicable LIBOR Rate Election Notice and ending one hundred eighty
(180) days thereafter.
(f) "Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System from time to time in effect and shall include any
successor or other regulation or official interpretation of said Board of
Governors relating to reserve requirements applicable to member banks of the
Federal Reserve System.
(g) "Reserve Requirement" with respect to a LIBOR Rate Interest Period
means the weighted average during the LIBOR Rate Interest Period of the maximum
aggregate reserve requirement (including all basic, supplemental, marginal and
other reserves and taking into account any transitional adjustments or other
scheduled changes in reserve requirements during the LIBOR Rate Interest
Period) which is imposed on Bank under Regulation D.
(h) "Business Day" means a day of the year, other than Saturday or
Sunday, on which dealings in United States dollars are carried on in the London
interbank market and banks are open for business in London and banks (including
SouthTrust Bank, National Association) in Birmingham, Alabama, and New York,
New York are not required or authorized to close.
All payments shall be applied first to interest then due and payable and
any balance shall be applied in reduction of principal. The principal and
interest shall be payable in lawful money of the United States which shall be
legal tender for public and private debts at the time of payment. All interest
payable herein shall be calculated on the basis of a 360-day year by
multiplying the outstanding principal amount by the applicable per annum rate,
multiplying the product thereof by the actual number of days elapsed, and
dividing the product so obtained by 360.
During the entire term of this Note, Maker may borrow up to the maximum
principal amount hereof, repay all or any portion thereof, and reborrow up to
such amount on a revolving basis, subject to the terms and conditions set forth
in the Loan Agreement referred to hereinafter.
Maker will pay a late charge equal to five percent (5.0%) of any payment
not received by Bank within fifteen (15) days after the due date thereof.
Collection or acceptance by Bank of such late charge shall not constitute a
waiver of any remedies of Bank provided herein.
This Note is the Revolving Note referred to in, and entitled to the
security of, and proceeds of which will be advanced in accordance with, that
certain Revolving Loan Agreement between Maker and Bank dated as of August 1,
1996 (herein, together with any and all extensions, revisions, modifications or
amendments heretofore, simultaneously herewith, or hereafter made, referred to
as the "Loan Agreement"). This Note is subject to
Page 3 of 6
<PAGE>
the terms and conditions of the Loan Agreement, which Loan Agreement
(including all defined terms set forth therein) is hereby incorporated herein
in its entirety. This Note is further secured by a Security Agreement (as
defined in the Loan Agreement), which Security Agreement, and all terms and
conditions thereof (including all defined terms set forth therein), are
hereby incorporated herein by this reference. This Note is guaranteed by a
Guaranty of Payment (hereinafter, together with any and all extensions,
revisions, modifications or amendments heretofore, simultaneously herewith or
hereafter made, referred to as the "Guaranty") executed by David L. Hatcher
(the "Guarantor") (this Note, the Loan Agreement, the Security Agreement, the
Guaranty, and any and all other agreements, instruments or documents, now
existing or hereafter arising, executed or delivered in connection with the
Loan, together with any and all extensions, revisions, modifications or
amendments heretofore, simultaneously herewith or hereafter made to any of
the foregoing, hereinafter referred to collectively as the "Loan Documents").
The Principal sum evidenced by this Note, together with accrued interest,
shall become immediately due and payable at the option of the Bank upon the
occurrence of (1) any failure to pay any installment of principal or interest
due hereunder within ten (10) days of the due date thereof; (2) any "Event of
Default" under the terms of the Loan Agreement, the Security Agreement, and/or
any of the other Loan Documents; (3) any transfer of any property or any
interest therein or any further encumbrance of any property or any interest
therein in violation of any one or more of the Loan Agreement, the Security
Agreement, and/or any of the other Loan Documents; (4) any change in the
composition, form of business association or ownership of the Maker in
violation of the Loan Agreement; or (5) at Bank's election, the death or
incompetency of any Guarantor (unless Maker shall cause to be substituted
another guarantor acceptable to Bank, in its sole and absolute discretion,
within thirty (30) days of the death or determination f incompetency of such
Guarantor); each of which shall constitute an "Event of Default" hereunder.
Upon any Event of Default, in addition to any late charge which may be due as
provided for hereinabove, Maker agrees to pay interest to Bank at a rate equal
to two percentage points (2.0%) in excess of the Interest Rate from time to
time accruing, as set forth herein, on the aggregate indebtedness represented
hereby, including accrued interest, until such aggregate indebtedness is paid
in full. Maker will also pay to Bank, in addition to the amount due, all costs
of collecting, securing or attempting to collect or secure this Note, including
without limitation, court costs and reasonable attorneys' fees, including
attorneys' fees on any appeal by either Maker or Bank.
With respect to the amounts due pursuant to this Note, Maker waives the
following:
(1) All rights of exemption of property from levy or sale under execution
or other process for the collection of debts under the Constitution
or laws of the United States or any state thereof;
(2) Demand, presentment, protest, notice of dishonor, notice of
nonpayment, suit against any party, diligence in collection, and all
other requirements necessary to enforce this Note; and
(3) Any further receipt by or acknowledgment of any collateral now or
hereafter deposited as security for the obligations hereunder.
Page 4 of 6
<PAGE>
In no event shall the amount of interest due or payable hereunder exceed
the maximum rate of interest allowed by applicable law, and in the event such
payment is inadvertently paid by maker or inadvertently received by Bank, then
such excess sum shall be credited as a payment of principal, unless Maker
elects to have such excess sum refunded to it forthwith. it is the express
intent hereof that Maker not pay and Bank not receive, directly or indirectly,
interest in excess of that which may be legally paid by Maker under applicable
law. Bank shall not by any act, delay, omission, or otherwise be deemed to
have waived any of its rights or remedies, and no waiver of any kind shall be
valid unless in writing and signed by Bank. All rights and remedies of Bank
under the terms of this Note and applicable statutes or rules of law shall be
cumulative, and may be exercised successively or concurrently. Maker agrees
that there are no defenses, equities or setoffs with respect to the obligations
set forth herein. The obligations of Maker hereunder shall be binding upon and
enforceable against Maker and its successors and assigns. This Note is being
held by the Bank in the State of Alabama, and Maker hereby consents to the
jurisdiction of the state and federal courts presiding in and over Jefferson
County, Alabama, and agrees that the receipt of this Note by Bank in the State
of Alabama shall constitute sufficient minimum contacts of the Maker with the
State of Alabama. Any provisions of this Note which may be unenforceable
or invalid under any law shall be ineffective to the extent of such
unenforceability or invalidity without affecting the enforceability or
validity of any other provision hereof.
MAKER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY ON AN CLAIM, COUNTERCLAIM,
SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY
PERTAINING OR RELATING TO THIS NOTE, THE LOAN AGREEMENT, THE SECURITY
AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OTHER INSTRUMENT, DOCUMENT
OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS NOTE OR (B) IN ANY
WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALING
WITH RESPECT TO THIS NOTE, THE LOAN AGREEMENT, THE SECURITY AGREEMENT, ANY OF
THE OTHER LOAN DOCUMENTS, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR IN CONNECTION WITH THE
TRANSACTIONS RELATED THERETO OR CONTEMPLATED THEREBY OR THE EXERCISE OF ANY
RIGHTS AND REMEDIES THEREUNDER, IN ALL OF THE FOREGOING CASES WHETHER NOW
EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE. MAKER AGREES THAT BANK MAY FILE A COPY OF THIS PARAGRAPH WITH ANY
COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED AGREEMENT OF
MAKER WITH BANK IRREVOCABLY TO WAIVE TRIAL BY JURY, AND THAT ANY DISPUTE OR
CONTROVERSY WHATSOEVER BETWEEN THEM SHALL INSTEAD BE TRIED IN A COURT OF
COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.
Bank may, at its option, release any collateral given to secure the
indebtedness evidenced hereby or release the Guarantor from his obligations
under the Guaranty, and no such release shall impair the obligations to Bank of
maker not expressly released by Bank.
All capitalized terms used herein shall be as defined in the Loan
Agreement unless otherwise indicated.
Page 5 of 6
<PAGE>
This Note constitutes an amendment to, and a complete restatement in its
entirety of, that certain Revolving Note dated August 1, 1996, given by the
Maker to Bank, as the same has heretofore been amended.
IN WITNESS WHEREOF, the undersigned Maker has caused this instrument to be
execute by its duly authorized officer on the day and year first above written.
MAKER:
KMG-BERNUTH, INC.
By: /s/ David L. Hatcher
-----------------------------------
Its: President
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
I, the undersigned, a Notary Public in and for said County in said State,
hereby certify that DAVID L. HATCHER, whose name as President of KMG-Bernuth,
Inc., a Delaware corporation, is signed to the foregoing Amended and Restated
Revolving Note, and who is known to me, acknowledged before me on this day
that, being informed of the contents of said Amended and Restated Revolving
Note, he, as such officer and with full authority, executed the same
voluntarily for and as the act of said corporation.
Given under my hand and official seal, this the 2nd day of September,
1997.
/s/ Carrie Daniels
-------------------------------------
Notary Public
(SEAL)
My Commission Expires: 9/25/99
Page 6 of 6
<PAGE>
SECOND AMENDMENT
TO REVOLVING LOAN AGREEMENT
THIS SECOND AMENDMENT TO REVOLVING LOAN AGREEMENT (the "Second
Amendment"), dated effective as of the 1st day of September, 1997, is made by
and between KMG-BERNUTH, INC., a Delaware corporation (the "Borrower"), and
SOUTHTRUST BANK, NATIONAL ASSOCIATION, formerly known as SouthTrust Bank of
Alabama, National Association (the "Bank").
W I T N E S S E T H:
WHEREAS, the Borrower and the Bank entered into a Revolving Loan Agreement
dated August 1, 1996 (the "Loan Agreement"); and
WHEREAS, pursuant to that certain First Amendment to Revolving Loan
Agreement dated effective as of December 31, 1996 (the "First Amendment")
(the Loan Agreement as amended by the First Amendment being hereinafter
referred to as the "Loan Agreement As Amended"), the Bank and Borrower
amended the Loan Agreement to extend the Revolving Loan Termination Date
until November 30, 1998 (except as otherwise herein specifically provided,
all capitalized terms used but not otherwise defined herein shall have the
respective meanings ascribed to them in the Loan Agreement As Amended); and
WHEREAS, the Borrower desires, and the Bank has agreed, to further
modify the Loan Agreement As Amended to extend the revolving Loan Termination
Date until January 15, 1999, as well as to, concurrently herewith, modify the
terms of the Revolving Note to evidence such extension and to revise the
Interest Rate (as defined in the Revolving Note), all as more specifically
hereinafter set forth.
NOW, THEREFORE, the Borrower and the Bank hereby modify the Loan
Agreement As Amended as follows:
1. Article I of the Loan Agreement As Amended is further modified by
deleting the definition of "Revolving Loan Termination Date" in its entirety
and substituting the following definition in lieu thereof:
"REVOLVING LOAN TERMINATION DATE" means the earlier of January 15,
1999, or the date the maturity of the Renewal Revolving Note is
accelerated pursuant to Section 7.2 of this Agreement.
2. As a condition to the effectiveness of this Second Amendment, (a) the
Borrower shall have executed and delivered to the Bank an Amended and
Restated Revolving Note in the form of EXHIBIT A hereto, and any and all
references in the Loan Agreement, the Guaranty or any of the other Loan
Documents to a "Note", "Revolving Note", "Promissory Note" or any other
terminology intending to refer to the promissory note executed by the
Borrower to evidence Borrower's obligation to repay the Revolving Loan shall
automatically be deemed to mean said Amended and Restated Revolving Note, as
the same may be further amended from time to time.
<PAGE>
3. Borrower represents and warrants to the Bank that all
representations and warranties given by Borrower in Article V of the Loan
Agreement As Amended are true and correct as of the date hereof, except to
the extent affected by this Second Amendment. Borrower represents and
warrants to the Bank that Borrower is in full compliance with all of the
covenants of Borrower contained in Article VI of the Loan Agreement As
Amended, except to the extent affected by this Second Amendment. Borrower
agrees to pay directly, or reimburse the Bank for, all reasonable expenses,
including the reasonable fees and expenses of legal counsel, incurred in
connection with the preparation of the documentation to evidence this Second
Amendment and any other documents executed in furtherance hereof, including,
without limitation, the Amended and Restated Revolving Note.
4. Except as heretofore or herein expressly modified, or as may
otherwise be inconsistent with the terms of this Second Amendment (in which
case the terms and conditions of this Second Amendment shall govern), all
terms of the Loan Agreement As Amended shall be and remain in full force and
effect, and the same are hereby ratified and confirmed in all respects.
5. The undersigned David L. Hatcher ("Hatcher"), in his individual
capacity, executes this Second Amendment to Revolving Loan Agreement to
expressly evidence his assent to all the terms of the Loan Agreement As
Amended and this Second Amendment, and to further acknowledge and agree that
the Guaranty of Payment dated August 1, 1996, delivered by him to the Bank,
as amended by that certain First Amendment to Guaranty of Payment dated as of
December 31, 1996 (such guaranty of Payment as so amended being herein
referred to as the "Guaranty"), remains in full force and effect and that the
"Obligations" of Hatcher as the "Guarantor" under the Guaranty shall include,
among other obligations, all obligations of the Borrower under the Loan
Agreement As Amended, as amended by this Second Amendment, and under the
Amended and Restated Revolving Note being executed simultaneously herewith.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment effective as of the date first above written.
WITNESSES: SOUTHTRUST BANK, NATIONAL ASSOCIATION
/s/ By: /s/
- ------------------------------- -------------------------------
Its: Group Vice President
-------------------------------
KMG-BERNUTH, INC.
/s/ Jack Vernie By: /s/ David L. Hatcher
- ------------------------------- -------------------------------
Its: President
ACKNOWLEDGMENT OF GUARANTOR:
/s/ David L. Hatcher
- -------------------------------
David L. Hatcher, Guarantor
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AS OF AND
FOR THE THREE MONTHS PERIOD ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 3,979,732
<SECURITIES> 89,040
<RECEIVABLES> 2,281,122
<ALLOWANCES> (40,000)
<INVENTORY> 1,275,487
<CURRENT-ASSETS> 7,796,189
<PP&E> 3,350,841
<DEPRECIATION> (1,456,396)
<TOTAL-ASSETS> 10,769,826
<CURRENT-LIABILITIES> 2,665,876
<BONDS> 0
0
0
<COMMON> 70,002
<OTHER-SE> 7,999,067
<TOTAL-LIABILITY-AND-EQUITY> 10,769,826
<SALES> 5,385,055
<TOTAL-REVENUES> 5,385,055
<CGS> 3,215,797
<TOTAL-COSTS> 3,215,797
<OTHER-EXPENSES> 831,123
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,385,912
<INCOME-TAX> 526,647
<INCOME-CONTINUING> 859,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 859,265
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0
</TABLE>
