<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 April 30, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ______
Commission file number __________________________
KMG-B, INC.
(Name of Small Business Issuer in its charter)
TEXAS 75-2404468
(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 / / No /X/
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 / / 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: 6,862,474 shares of Common Stock
Transitional Small Business Disclosure Format (Check one): Yes / / No /X/
<PAGE>
PART I --- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KMG-B, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
(STATED IN DOLLARS)
Three Months Ended Nine Months Ended
April 30 April 30
------------------- -----------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $4,951,588 $5,057,150 $14,423,356 $14,758,313
COST OF SALES 2,787,693 2,954,170 8,300,505 8,655,063
---------- ---------- ----------- -----------
Gross Profit 2,163,896 2,102,980 6,122,850 6,103,251
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,123,833 1,121,265 2,758,188 2,936,627
---------- ---------- ----------- -----------
Operating Income 1,040,063 981,715 3,364,662 3,166,623
OTHER INCOME (EXPENSE):
Interest & Dividend Income 16,293 9,530 37,782 25,314
Interest Expense 0 (2,861) (282) (29,936)
Other (7,331) (19,914) (1,517) (43,549)
---------- ---------- ----------- -----------
Total Other Income (Expense) 8,962 (13,245) 35,983 (48,171)
INCOME BEFORE INCOME TAX 1,049,025 968,470 3,400,645 3,118,453
Provision For Income Tax (392,657) (355,754) (1,284,284) (1,080,017)
---------- ---------- ----------- -----------
NET INCOME $656,368 $612,717 $2,116,361 $2,038,435
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
NET INCOME PER SHARE $0.10 $0.09 $0.31 $0.30
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,862,474 6,862,474 6,862,474 6,862,474
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
KMG-B, INC.
CONSOLIDATED BALANCE SHEETS
(Stated In Dollars)
April 30, July 31
1997 1996
----------- ---------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS: $5,403,221 $5,303,274
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 1,822,687 1,210,915
NOTES RECEIVABLE, Less current portion 247,675 253,102
OTHER ASSETS 818,511 632,265
---------- ----------
TOTAL $8,292,095 $7,399,557
---------- ----------
---------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $1,622,144 $2,513,162
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
10,000,000 shares authorized,
none issued
Common stock, $.01 par value,
40,000,000 shares authorized,
6,862,474 shares issued and
outstanding 68,625 68,625
Additional paid-in capital 978,005 1,185,814
Retained earnings 5,623,321 3,631,955
---------- ----------
Total stockholders' equity 6,669,951 4,886,394
---------- ----------
TOTAL $8,292,095 $7,399,557
---------- ----------
---------- ----------
See notes to consolidated financial statements.
3
<PAGE>
KMG-B, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(STATED IN DOLLARS)
<TABLE>
NINE MONTHS ENDED
APRIL 30
---------------------
4/30/97 4/30/96
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,116,361 $2,038,435
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 182,888 294,753
Deferred income tax (benefit) provision 59,298 (66,069)
Changes in operating assets and liabilities:
Accounts receivable - trade (44,631) (148,114)
Accounts receivable - other 20,179 (905)
Inventories 731,650 (46,630)
Prepaid expenses and other assets (44,892) (134,209)
Accounts payable (511,926) 106,877
Accrued liabilities (325,558) 112,525
Income taxes payable (38,590) (278,463)
---------- -----------
Net cash provided by operating activities $2,144,778 $ 1,878,200
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (774,605) (497,565)
Collection of (additions to) notes receivable 5,427 17,389
Additions to other assets (206,301) (37,364)
---------- -----------
Net cash used in investing activities $(975,479) $ (517,539)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (14,944) (11,217)
Net payments on line of credit 0 (921,184)
Payment of dividends (124,995) (99,996)
Stock registration costs (207,809) 0
---------- -----------
Net cash used in financing activities $(347,748) $(1,032,397)
---------- -----------
NET INCREASE (DECREASE) IN CASH ANDCASH EQUIVALENTS $821,551 $ 328,263
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 552,550 70,232
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,374,101 $ 398,496
---------- -----------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $282 $29,936
Cash paid during the period for income taxes $1,264,366 $ 1,424,552
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
KMG-B, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(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 JULY 31, 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 JULY 31, 1996 6,862,474 68,625 1,185,814 3,631,955 4,886,394
Dividends (unaudited) (124,995) (124,995)
Stock registration costs
(unaudited) (207,809) (207,809)
Net income (unaudited) 2,116,361 2,116,361
BALANCE AT APRIL 30, 1997 6,862,474 $68,625 $978,005 $5,623,321 $6,669,951
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional information
on the results of operations and the financial position of the Company. Those
comments should be read in conjunction with these notes. The Company's
registration statement on Form 10-SB includes additional information about the
Company for the fiscal years ended July 31, 1996 and 1995 and for the six month
periods ending January 31, 1997 and 1996, about its operations and financial
position, 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 and nine
month periods ended April 30, 1997 and April 30, 1996 and gross profit expressed
as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Increase/ Nine Months Ended Increase/
---------------------------- (Decrease) ------------------------- (Decrease)
1997 1996 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $4,951,588 $5,057,150 $(105,562) $14,423,356 $14,758,313 $(334,957)
Cost of sales 2,787,693 2,954,170 (166,477) 8,300,505 8,655,063 (354,558)
---------- ---------- ---------- ----------- ----------- ----------
Gross profit 2,163,896 2,102,980 60,916 6,122,850 6,103,251 19,599
Gross profit percent 44% 42% 42% 41%
Selling, general and
administrative expense 1,123,833 1,121,265 2,568 2,758,188 2,936,627 (178,439)
---------- ---------- ---------- ----------- ----------- ----------
Operating income 1,040,063 981,715 58,348 3,364,662 3,166,623 198,039
Other income (expense), net 8,962 (13,245) 22,207 35,983 (48,171) 84,154
---------- ---------- ---------- ----------- ----------- ----------
Income before taxes 1,049,025 968,470 80,555 3,400,645 3,118,453 282,192
Provision for income taxes (392,657) (355,754) (36,903) (1,284,284) (1,080,017) (204,267)
---------- ---------- ---------- ----------- ----------- ----------
Net income $ 656,368 $ 612,717 $ 43,651 $2,116,361 $2,038,435 $ 77,926
---------- ---------- ---------- ----------- ----------- ----------
---------- ---------- ---------- ----------- ----------- ----------
</TABLE>
6
<PAGE>
SALES REVENUE
Net sales for the third quarter ended April 30, 1997 decreased
approximately $105 thousand as compared to the third quarter ended
April 30, 1996, a 2% decrease. Net sales for the nine month period ended
April 30, 1997 decreased approximately $335 thousand as compared to the nine
months ended April 30, 1996, also a 2% decrease.
The year to date decrease is attributable primarily to a decline in the
Company's export sales of sodium penta and to a lesser extent to a decrease in
certain utility pole treatment product sales in the United States, partially
offset by increases in sales of certain other products. The sodium penta
decrease resulted when certain foreign producers made significant inroads into
the South American and Far Eastern markets with an aggressive pricing strategy.
The Company has taken steps to counter this threat by emphasizing the quality of
its products and by granting certain concessions where appropriate. These
actions have resulted in a moderation of the decline in sodium penta sales
during the third quarter. The Company believes that the decline in sales of
certain of its utility pole treatment products is accounted for by utility
industry delays in utility pole acquisitions because of ongoing utility industry
consolidation.
GROSS PROFIT
Despite the decline in net sales in the three month and nine month periods
ended April 30, 1997 as compared to those same periods ended April 30, 1996,
gross profit was essentially unchanged over the previous year in both periods
due to reductions in cost of goods sold. In the fourth quarter of fiscal 1996,
the Company began producing sodium penta at its plant in Matamoros, Mexico,
replacing a higher-cost, contract manufacturer that had been the Company's
source for that product. That change resulted in significant cost savings
during fiscal 1997 that essentially offset the impact of the net sales declines
described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were flat in the third quarter
ended April 30, 1997 as compared with that same quarter in fiscal 1996. Those
expenses decreased approximately 6% in the nine months ended April 30, 1997 as
compared to the same period in fiscal 1996. That decrease was due in large part
to the establishment of a reserve of $210 thousand as of April 30, 1996 for
anticipated expenses in connection with the relocation of the Company's
Matamoros, Mexico manufacturing facility.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1997 the Company had cash and cash equivalents of
approximately $1.4 million as compared with approximately $398 thousand at the
end of that same period in fiscal 1996. Net cash provided by operations
during the nine months ended April 30, 1997 was approximately $2.1 million as
compared with approximately $1.9 million for the same period in fiscal 1996.
The Company's borrowing base under the Revolving Loan Agreement with SouthTrust
Bank of Alabama, National Association was approximately $2.0 million as of
May 31, 1997, but the Company had no borrowings under that credit facility.
In fiscal 1997 the Company moved its manufacturing facility to a new
location in Matamoros, Mexico. Production at the original facility ceased early
in December 1996 and commercial production did not restart at the new facility
until May 1997. As a consequence of the relocation of that manufacturing
facility, changes occurred in operating assets and liabilities during
fiscal 1997. As of April 30, 1997, finished product inventories, which had been
built up in anticipation of the plant relocation, were drawn down to a near-
normal operating level, freeing approximately $732 thousand. Conversely,
accounts payable and accrued liabilities declined approximately $837 thousand
primarily due to the elimination of raw material purchases during the extended
plant relocation process and to payments made against the Company's reserve for
plant relocation expenses.
The Company's investing activities consisted primarily of capital
expenditures related to site acquisition and construction costs for relocation
of its Matamoros, Mexico manufacturing facility. The move to the new plant
site was substantially completed by late April, 1997, although commercial
production did not resume until May, 1997. The Company anticipates that the
total project cost will be approximately $1.4 million, of which approximately
$1.1 million will be capitalized.
In fiscal 1996 the Company paid approximately $921 thousand toward its then
existing revolving credit facility with BNY Financial Corporation. The Company
has had virtually no borrowing against its current credit line with SouthTrust
Bank of Alabama during fiscal 1997.
8
<PAGE>
PART II --- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended April 30, 1997
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-B, INC.
By: /s/ David L. Hatcher Date: June 13, 1997
------------------------------
David L. Hatcher, President
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AS OF
AND FOR THE NINE MONTHS PERIOD ENDED APRIL 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 1,374,101
<SECURITIES> 89,040
<RECEIVABLES> 2,379,430
<ALLOWANCES> 0
<INVENTORY> 1,398,140
<CURRENT-ASSETS> 5,403,221
<PP&E> 3,453,289
<DEPRECIATION> (1,630,602)
<TOTAL-ASSETS> 8,292,095
<CURRENT-LIABILITIES> 1,622,144
<BONDS> 0
0
0
<COMMON> 68,625
<OTHER-SE> 6,601,326
<TOTAL-LIABILITY-AND-EQUITY> 8,292,095
<SALES> 14,423,356
<TOTAL-REVENUES> 14,423,356
<CGS> 8,300,505
<TOTAL-COSTS> 8,300,505
<OTHER-EXPENSES> 2,758,188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> 3,400,645
<INCOME-TAX> 1,284,284
<INCOME-CONTINUING> 2,116,361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,116,361
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0
</TABLE>
