<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, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ______
Commission file number 000-29278
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
<TABLE>
April 30, July 31,
1998 1997
----------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS 8,669,036 6,511,612
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 2,366,575 1,800,143
NOTES RECEIVABLE, Less current portion 239,477 245,267
OTHER ASSETS 874,778 828,543
----------- ----------
TOTAL $12,149,866 $9,385,565
----------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2,619,510 2,000,877
DEFERRED INCOME TAX LIABILITY 34,881 34,881
----------- ----------
Total liabilities 2,654,391 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 8,362,088 6,216,420
----------- ----------
Total stockholders' equity 9,495,475 7,349,807
----------- ----------
TOTAL $12,149,866 $9,385,565
----------- ----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $5,596,462 $4,951,589 $15,392,273 $14,423,356
COST OF SALES 3,530,134 2,787,693 9,442,132 8,300,506
---------- ---------- ----------- -----------
Gross Profit 2,066,328 2,163,896 5,950,141 6,122,850
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 900,025 1,123,833 2,613,264 2,758,188
---------- ---------- ----------- -----------
Operating Income 1,166,303 1,040,063 3,336,877 3,364,662
OTHER INCOME (EXPENSE):
Interest & Dividend Income 54,560 16,293 157,033 37,782
Interest Expense (282)
Other 176,120 (7,331) 192,664 (1,517)
---------- ---------- ----------- -----------
Total Other Income 230,680 8,962 349,697 35,983
INCOME BEFORE INCOME TAX 1,396,983 1,049,025 3,686,574 3,400,645
Provision For Income Tax (530,853) (392,657) (1,400,903) (1,284,284)
---------- ---------- ----------- -----------
NET INCOME $ 866,130 $ 656,368 $ 2,285,671 $ 2,116,361
---------- ---------- ----------- -----------
EARNINGS PER SHARE:
Basic $0.12 $0.10 $0.33 $0.31
----- ----- ----- -----
Diluted $0.12 $0.10 $0.32 $0.31
----- ----- ----- -----
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,000,169 6,862,474 7,000,169 6,862,474
---------- ---------- ----------- -----------
Diluted 7,046,005 6,903,787 7,044,814 6,903,787
---------- ---------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
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 JULY 31, 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) $2,285,671 2,285,671
--------- ------- ---------- ---------- ----------
BALANCE AT APRIL 30, 1998 7,000,169 $70,002 $1,063,385 $8,362,088 $9,495,475
--------- ------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Nine Months Ended
April 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,285,671 $2,116,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 190,566 182,888
Gain on sale of securities (178,826)
Gain on the disposal of fixed assets (6,032)
Changes in operating assets and liabilities:
Accounts receivable - trade (483,483) (44,631)
Accounts receivable - other (180,971) 20,179
Inventories (237,602) 731,650
Prepaid expenses and other assets (139,406) 14,405
Accounts payable 654,568 (511,926)
Accrued liabilities (35,935) (325,558)
Income taxes payable (38,590)
Net cash provided by operating activities $1,868,550 $2,144,778
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (739,673) (774,605)
Proceeds from sale of securities 223,430
Proceeds from sale of fixed assets 7,000
Collection of notes receivable 5,790 5,427
Additions to other assets (64,528) (206,301)
---------- ----------
Net cash used in investing activities $ (567,981) $ (975,479)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings - Short Term (14,944)
Payment of dividends (140,003) (124,995)
Stock registration costs (207,809)
---------- ----------
Net cash used in financing activities $ (140,003) $ (347,748)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $1,160,566 $ 821,551
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,643,070 552,550
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,803,636 $1,374,101
---------- ----------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $ (282)
Cash paid during the period for income taxes $1,414,626 $1,264,366
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
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 generally accepted accounting principles 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-KSB for the year ended July 31, 1997.
(2) NEW ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share. SFAS No. 128, which was
effective for periods ending after December 15, 1997, specifies the
computation, presentation and disclosure requirements of earnings per share
and supersedes Accounting Principles Board Opinion No. 15. SFAS No. 128
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share, which excludes the impact of common share equivalents,
replaces primary earnings per share. Diluted earnings per share, which
utilizes the average market price per share as opposed to the greater of the
average market price per share or ending market price per share when applying
the treasury stock method in determining common share equivalents, replaces
fully diluted earnings.
6
<PAGE>
(3) 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, with 1997 periods being
restated to conform with the requirements of the SFAS No. 128, described
above:
<TABLE>
Three Months Ended Nine Months Ended
April 30 April 30
1998 1997 1998 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net Income $866,130 $656,368 $2,285,671 $2,116,361
-----------------------------------------------------
Weighted Average Shares
Outstanding 7,000,169 6,862,474 7,000,169 6,862,474
-----------------------------------------------------
Basic Earnings Per
Share $ .12 $ .10 $ .33 $ .31
-----------------------------------------------------
-----------------------------------------------------
DILUTED EARNINGS PER SHARE
Net Income $866,130 $656,368 $2,285,671 $2,116,361
-----------------------------------------------------
Weighted Average Shares
Outstanding 7,000,169 6,862,474 7,000,169 6,862,474
Shares Issuable from Assumed
Conversion of Common Share
Options 45,836 41,313 44,645 41,313
-----------------------------------------------------
Weighted Average Shares
Outstanding, as Adjusted 7,046,005 6,903,787 7,044,814 6,903,787
-----------------------------------------------------
Diluted Earnings Per
Share $ .12 $ .10 $ .32 $ .31
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
7
<PAGE>
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, 1998 and April 30, 1997:
<TABLE>
Three Months Ended Nine Months Ended
April 30 April 30
------------------------- Increase/ -------------------------- Increase/
(Decrease) (Decrease)
1998 1997 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . $5,596,462 $4,951,589 $644,873 $15,392,273 $14,423,356 $968,917
Gross profit . . . . . . . . . $2,066,328 $2,163,896 $(97,568) $5,950,141 $6,122,850 $(172,709)
Gross profit as a percent of
net sales. . . . . . . . . . . 36.9% 43.7% 38.7% 42.5%
Net income . . . . . . . . . . $866,130 $656,368 $209,762 $2,285,671 $2,116,361 $169,310
Basic earnings per share . . . $0.12 $0.10 $0.33 $0.31
Weighted average shares
outstanding. . . . . . . . . . 7,000,169 6,862,474 7,000,169 6,862,474
</TABLE>
SALES REVENUE
Net sales revenue for the quarter ended April 30, 1998 was $645 thousand
(13.0%) higher than for the same period last year. Most of the increase was
the result of significantly higher creosote sales volume. The remaider of
the increase was due to increased hydrochloric acid (HCL) sales volume.
However, there were no HCL sales in the third quarter of 1997 because the
Company's plant was relocated during that quarter.
Net sales revenue for the nine months ended April 30, 1998 was $969
thousand (6.7%) above the same period last year. Higher revenue from
pentachlorophenol-based products (including HCL) account for all of the
increase.
GROSS PROFIT
Gross profit for the third quarter and for the first nine months of
fiscal 1998 declined by $98 thousand (4.5%) and $173 thousand (2.8%),
respectively, compared to same periods of fiscal 1998. These declines were
primarily attributable to increases in the cost of goods sold associated with
higher per-unit cost of pentachlorophenol-based products.
During calendar year 1996 the Company's original production facility
operated at approximately 125% of its normal thru-put level in order to build
sufficient inventory to meet its needs during the five month period from the
planned December 1996 shutdown of that facility to the May 1997 reopening of
the plant at its new location in Matamoros, Mexico. This higher thru-put
level significantly lowered per-unit
8
<PAGE>
production costs which, in turn, lowered cost of goods sold from the last
half of fiscal 1996 through the first ten months of fiscal 1997. Manangement
believes that the current, higher, unit costs are a result of, and represent
a return to, normal plant operation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the third quarter and
for the nine months ended April 30, 1998 declined by $224 thousand and $145
thousand, respectively, compared with the same periods of last year.
Management believes that these declines are a result of costs, normally
allocable to production, being included in selling, general and
administrative expense during last year's shutdown of the Company's
Matamoros, Mexico manufacturing facility. In effect, this treatment inflated
selling, general and administrative expenses from December 1996, when the old
plant was shut down, through May 1997 when the plant was reopened at its new
location.
OTHER INCOME (EXPENSE)
In March 1998 the Company sold 14,000 shares of Sterling Bancshares
stock and recognized a gain on that sale of approximately $179 thousand. The
Company now holds 13,943 additional shares.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998 the Company had cash and cash equivalents of
approximately $3.8 million, an increase of approximately $1.2 million since
the beginning of fiscal 1998. The increase resulted from net income of $2.3
million and $223 in proceeds from the sale of Sterling Bancshares stock
during the period, partially offset by dividend payments of $140 thousand, an
increase of $483 thousand in trade receivables and by capital expenditures of
$740 thousand.
The Company's borrowing base availability under the Revolving Loan
Agreement with SouthTrust Bank of Alabama, National Association was
approximately $2.5 million as of April 30, 1998, but the Company had no
borrowings under that credit facility.
9
<PAGE>
PART II --- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
The board of directors approved a loan of $200,000 to David L. Hatcher
on May 20, 1998. The loan has a term of seven years and is payable in equal
annual installments plus interest at the prime rate of interest reported in
THE WALL STREET JOURNAL.
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, 1998.
10
<PAGE>
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: June 5, 1998
-------------------------------
David L. Hatcher, President
By: /s/ Jack Vernie Date: June 5, 1998
-------------------------------
Jack Vernie, Controller
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 3,803,636
<SECURITIES> 44,436
<RECEIVABLES> 3,080,851
<ALLOWANCES> (40,000)
<INVENTORY> 1,420,886
<CURRENT-ASSETS> 8,669,035
<PP&E> 3,918,332
<DEPRECIATION> (1,551,757)
<TOTAL-ASSETS> 12,149,866
<CURRENT-LIABILITIES> 2,619,511
<BONDS> 0
0
0
<COMMON> 70,002
<OTHER-SE> 9,425,472
<TOTAL-LIABILITY-AND-EQUITY> 12,149,866
<SALES> 15,392,273
<TOTAL-REVENUES> 15,392,273
<CGS> 9,442,132
<TOTAL-COSTS> 9,442,132
<OTHER-EXPENSES> 2,613,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,686,574
<INCOME-TAX> 1,400,903
<INCOME-CONTINUING> 2,285,671
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,285,671
<EPS-PRIMARY> .33
<EPS-DILUTED> 0
</TABLE>
