<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 January 31, 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
(Stated In Dollars)
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS $7,060,878 $6,511,612
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 2,260,529 1,800,143
NOTES RECEIVABLE, Less current portion 241,438 245,267
OTHER ASSETS 867,925 828,543
------- -------
TOTAL $10,430,770 $9,385,565
----------- ----------
----------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $1,766,544 $2,000,877
DEFERRED INCOME TAX LIABILITY 34,881 34,881
------ ------
Total liabilities 1,801,425 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 7,495,958 6,216,420
--------- ---------
Total stockholders' equity 8,629,345 7,349,807
--------- ---------
TOTAL $10,430,770 $9,385,565
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Stated in Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $4,410,757 $4,248,823 $9,795,811 $9,471,767
COST OF SALES 2,696,201 2,462,887 5,911,998 5,512,813
--------- --------- --------- ---------
Gross Profit 1,714,556 1,785,936 3,883,813 3,958,954
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 882,117 904,899 1,713,239 1,634,355
------- ------- --------- ---------
Operating Income 832,439 881,037 2,170,574 2,324,599
OTHER INCOME (EXPENSE):
Interest & Dividend Income 55,660 11,855 102,473 21,489
Interest Expense (282)
Other 15,580 12,824 16,544 5,814
------ ------ ------ -----
Total Other Income 71,240 24,679 119,017 27,021
INCOME BEFORE INCOME TAX 903,679 905,716 2,289,591 2,351,620
Provision For Income Tax (343,403) (373,438) (870,050) (891,627)
------- ------- ------- -------
NET INCOME $560,276 $532,278 $1,419,541 $1,459,993
-------- -------- ---------- ----------
-------- -------- ---------- ----------
EARNINGS PER SHARE:
Basic $0.08 $0.08 $0.20 $0.21
----- ----- ----- -----
----- ----- ----- -----
Diluted $0.08 $0.08 $0.20 $0.21
----- ----- ----- -----
----- ----- ----- -----
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,000,169 6,862,474 7,000,169 6,862,474
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted 7,046,404 6,903,787 7,044,947 6,903,787
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Stated In Dollars)
<TABLE>
<CAPTION>
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) $1,419,541 1,419,541
--------- ------- --------- ---------- ---------
BALANCE AT JANUARY 31, 1998 7,000,169 $70,002 $1,063,385 $7,495,958 $8,629,345
--------- ------- --------- ---------- ----------
--------- ------- --------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(STATED IN DOLLARS)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
-----------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,419,541 $1,459,993
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 126,476 138,838
Gain on the disposal of fixed assets (6,032)
Changes in operating assets and liabilities:
Accounts receivable - trade 203,285 415,235
Accounts receivable - other 50,615 (76,161)
Inventories (64,470) (225,683)
Prepaid expenses and other assets (141,734) 62,071
Accounts payable (142,091) (908,825)
Accrued liabilities (77,455) (210,331)
Income taxes payable (14,787) (56,306)
------ ------
Net cash provided by operating activities $1,353,348 $598,831
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (575,251) (590,605)
Proceeds from sale of fixed assets 7,000
Collection of (additions to) notes receivable 3,829 (46,412)
Additions to other assets (51,961) (46,054)
------ ------
Net cash used in investing activities ($616,383) ($683,071)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings - Short Term (14,944)
Payment of dividends (140,003) (124,995)
Stock registration costs (186,000)
------- -------
Net cash used in financing activities ($140,003) ($325,939)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $596,962 ($410,178)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,643,070 552,550
--------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,240,032 $142,371
---------- --------
---------- --------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $282
Cash paid during the period for income taxes $880,785 $889,425
</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>
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net Income $560,276 $532,278 $1,419,541 $1,459,993
------------------------------------------------
Weighted Average Shares Outstanding 7,000,169 6,862,474 7,000,169 6,862,474
------------------------------------------------
Basic Earnings Per Share $ .08 $ .08 $ .20 $ .21
------------------------------------------------
------------------------------------------------
DILUTED EARNINGS PER SHARE
Net Income $560,276 $532,278 $1,419,541 $1,459,993
------------------------------------------------
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 46,235 41,313 44,778 41,313
------------------------------------------------
Weighted Average Shares
Outstanding, as Adjusted 7,046,404 6,903,787 7,044,947 6,903,787
------------------------------------------------
Diluted Earnings Per Share $ .08 $ .08 $ .20 $ .21
------------------------------------------------
------------------------------------------------
</TABLE>
(4) NAME CHANGE. The Company changed its name from KMG-B, Inc. to
KMG Chemicals, Inc. on December 11, 1997.
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 six
month periods ended January 31, 1998 and January 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31 Increase/ January 31 Increase/
---------------------- (Decrease) ------------------------ (Decrease)
1998 1997 1998 1997
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . $4,410,757 $4,248,823 $161,934 $9,795,811 $9,471,767 $324,044
Gross profit . . . . . $1,714,556 $1,785,936 ($71,380) $3,883,813 $3,968,954 ($75,141)
Gross profit as a 38.9% 42.0% 39.6% 41.8%
percent of net sales .
Net income . . . . . . $560,276 $532,278 $27,998 $1,419,541 $1,459,993 ($40,452)
Earnings per share . . $0.08 $0.08 $0.20 $0.21
Weighted average shares 7,000,169 6,862,474 7,000,169 6,862,474
outstanding . . . . . .
</TABLE>
SALES REVENUE
Net sales revenue for the quarter and for the six months ended
January 31, 1998 rose by 3.8% and 3.4%, respectively, compared with the same
periods of the prior year. Sales of pentachlorophenol-based products, as a
whole, remained strong in the second quarter, resulting in comparative revenue
increases of 9.1% for the quarter and 8.1% for the current fiscal year-to-date.
Management attributes these increases to the continued higher demand for treated
utility poles that first surfaced in August 1997, augmented by the need for
utility companies to quickly replace poles that were damaged in the severe ice
storms that ravaged New England in early January 1998.
The large revenue gains realized from sales of pentachlorophenol-based
products were partially offset by declines in creosote revenues of 14.4% for the
second quarter and 12.2% for the first six months of fiscal 1998. These revenue
declines were due to a lessening of demand for railroad ties from higher than
usual levels of the previous year.
Management believes that these comparative changes are not indicative of a
long-term trend.
GROSS PROFIT
Gross profit for the second quarter and for the first six months of fiscal
1998 declined by $71 thousand (4.0%) and $75 thousand (1.9%), respectively,
compared to same periods of fiscal 1997. These declines were primarily
attributable to increases in the
8
<PAGE>
cost of goods sold associated with higher per-unit cost of
pentachlorophenol-based products made at the Company's Matamoros, Mexico plant.
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 production cost which, in turn, lowered cost of
goods sold from the last half of fiscal 1996 through the first ten months of
fiscal 1997. In brief, the current, higher costs are a result of, and represent
a return to, normal plant operation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The $79 thousand (4.8%) rise in selling, general and administrative expense
for the six months ended January 31, 1998 can be attributed largely to an $80
thousand increase in the Company's reserve for anticipated Penta Task Force
(PTF) activities.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998 the Company had cash and cash equivalents of
approximately $3.2 million, an increase of approximately $597 thousand since the
beginning of fiscal 1998. The increase resulted from net income of $1.4 million
generated during the period, partially offset by dividend payments of $140
thousand, a decline of $142 thousand in accounts payable and by capital
expenditures of $575 thousand. Included among capital expenditures for the
quarter was the purchase for approximately $166 thousand of the real property
underlying the Company's Tuscaloosa, Alabama facility.
The Company's borrowing base availability under the Revolving Loan
Agreement with SouthTrust Bank of Alabama, National Association was
approximately $2.0 million as of January 31, 1998, but the Company had no
borrowings under that credit facility. Effective December 31, 1997, the
Company amended the Revolving Loan Agreement to extend its term to January
15, 2000 and to release the guaranty of David L. Hatcher.
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. The results of that meeting were reported on in the
Company's Form 10-QSB for the quarter ended October 31, 1997 which was filed on
December 12, 1997.
9
<PAGE>
PART II --- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
Effective February 1, 1998, the Company and Bobby Godfrey terminated the
split dollar insurance agreement that had been in place since 1991. As part of
the termination, the Company released the collateral assignment to it of the
insurance policy bought under the plan and Bobby Godfrey executed a promissory
note payable to the Company for $170,899.54, the amount of the insurance
premiums paid on his behalf by the Company under the plan. The note calls for
the payment of 60 equal monthly installments beginning on January 1, 2000.
In addition, the Company and Mr. Godfrey entered into an employment
agreement having a term of seven years and containing a covenant not to compete
and other terms and conditions. A copy of the agreement is attached to this
report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.11 Third Amendment to Revolving Loan Agreement
10.12 $2,500,000 Amended and Restated Revolving Note dated
December 31, 1997
10.13 Employment Agreement dated February 1, 1998 between the Company
and Bobby D. Godfrey
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended January 31,
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: March 12, 1998
--------------------------------
David L. Hatcher, President
By: /s/ Jack Vernie Date: March 12, 1998
--------------------------------
Jack Vernie, Controller
11
<PAGE>
THIRD AMENDMENT
TO REVOLVING LOAN AGREEMENT
THIS THIRD AMENDMENT TO REVOLVING LOAN AGREEMENT (the "Third Amendment"),
dated effective as of the 31st day of December, 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
Bank and Borrower amended the Loan Agreement to extend the Revolving Loan
Termination date until November 30, 1998; and
WHEREAS, pursuant to that certain Second amendment to Revolving Loan
Agreement dated effective as of September 1, 1997 (the "Second Amendment") (the
Loan Agreement as amended by the First Amendment and the Second Amendment being
hereinafter referred to as the "Loan Agreement As Amended"), the Bank and
Borrower further amended the Loan Agreement to extend the Revolving Loan
Termination Date until January 15, 1999 (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), all
as more specifically hereinafter set forth.
WHEREAS, the Borrower desires, and the Bank has agreed, to further modify
the Loan Agreement As Amended in order to extend the Revolving Loan Termination
Date until January 15, 2000, as well as to, concurrently herewith, modify the
terms of the Revolving Note to evidence such extension, and, further, to
acknowledge the Bank's release of the Guaranty, all as more specifically
hereinafter set forth.
NOW, THEREFORE, the Borrower and the Bank hereby modify the Loan Agreement
As Amended as follows:
1
<PAGE>
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,
2000, or the date the maturity of the Renewal Revolving Note is
accelerated pursuant to Section 7.2 of this Agreement.
2. Section 6.2(M) of the Loan Agreement As Amended is hereby deleted in
its entirety and the following new Section 6.2(M) substituted in lieu thereof:
(M) The Borrower will not issue, redeem, purchase or retire
any of its capital stock or grant or issue any warrant, right or
option pertaining thereto or any other security convertible into any
of the foregoing. The Borrower will not permit, and will cause KMG
Chemicals, Inc. ("KMG") not to permit, any voluntary transfer, sale,
redemption, retirement, or other change in the ownership of the
outstanding capital stock of the Borrower or of KMG by any of their
respective shareholders which results in a "Change in Control". For
purposes of this Section 7.2(M), "Change in Control" shall mean either
a change in the ownership of the outstanding capital stock of the
Borrower such that KMG owns less than fifty and 01/100 percent
(50.01%) of the outstanding capital stock of the Borrower, or a change
in the ownership of the outstanding capital stock of KMG such that
David L. Hatcher owns less than fifty and 01/100 percent (50.01%) of
the outstanding capital stock of KMG.
3. The Bank and the Borrower hereby acknowledge that, concurrently
herewith, the Bank is completely releasing the guaranty and all obligations of
the Guarantor thereunder and, in furtherance thereof, the Loan Agreement As
Amended and each of the other Loan Documents are hereby amended by deleting any
and all references therein to either the Guaranty or the Guarantor.
3. As a condition to the effectiveness of this Third 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 As Amended 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.
4. 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 Third 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
2
<PAGE>
to the extent affected by this Third 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 Third 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 Third Amendment (in which case the terms
and conditions of this Third 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.
IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment
effective as of the date first above written.
WITNESSES: SOUTHTRUST BANK, NATIONAL ASSOCIATION
/s/ By: /s/ Alan T. Drenan
- ------------------------------ -------------------------------------
Its: Group Vice President
------------------------------------
KMG-BERNUTH, INC.
/s/ By: /s/ David L. Hatcher
- ------------------------------ -------------------------------------
Its: President
------------------------------------
3
<PAGE>
AMENDED AND RESTATED REVOLVING NOTE
$2,500,000.00 DECEMBER 31, 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 31st day of January, 1998, 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, 2000, the Maker shall pay to the 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
<PAGE>
this Note is eight and one-half percent (8.50%). 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 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 and 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
2
<PAGE>
case may be. If any 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%).
3
<PAGE>
(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 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
4
<PAGE>
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
5
<PAGE>
as the "Loan Agreement"). This Note is subject to 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, the Loan Agreement, the Security agreement, 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; or (4) any change in the
composition, form of business association or ownership of the Maker in violation
of the Loan Agreement; 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.
6
<PAGE>
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.
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
7
<PAGE>
Maker and its successors and assigns. This Note is being held by the Bank in
the State of Alabama, and shall be governed by, and construed in accordance
with, the laws of 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 ANY 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.
8
<PAGE>
Bank may, at its option, release any collateral given to secure the
indebtedness evidenced hereby, 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.
This Note constitutes an amendment to, and a complete restatement in its
entirety of, that certain Amended and Restated Revolving Note dated September 1,
1997, given by the Maker to Bank.
IN WITNESS WHEREOF, the undersigned Maker has caused this instrument to be
executed by its duly authorized officer on the day and year first above written.
MAKER:
KMG-BERNUTH, INC.
By: /s/ David L. Hatcher
--------------------------------------------
Its President
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 13 day of January, 1998.
/s/
-------------------------------------------------
Notary Public
(SEAL)
My Commission Expires: 9-25-99
9
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of February 1, 1998, between KMG CHEMICALS, INC., a
Texas corporation (the "Company"), with an office at 10611 Harwin,
Suite 402, Houston, Texas 77036 and BOBBY D. GODFREY ("Executive"), with an
address at 27206 Wells Lane, Conroe, Texas 77385.
W I T N E S S E T H :
WHEREAS, the Company wishes to continue to employ the Executive to perform
executive and other services for the Company and its subsidiaries, and the
Executive wishes to accept such employment, all on the terms and conditions set
forth below;
NOW, THEREFORE, in consideration of the mutual obligations herein set
forth, the parties agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive for the term of
this Agreement to serve as Vice President of the Company, and the Executive
hereby accepts such employment, on the terms and conditions set forth in this
Agreement.
2. TERM. The term of this Agreement shall be for the period commencing
on the date hereof and ending December 31, 2004, subject to earlier termination
as provided herein.
3. SERVICES.
(a) The Executive shall continue to perform such duties of an
executive nature for the Company and its subsidiaries as he shall have performed
heretofore or as may otherwise be assigned to him from time to time by the
President of the Company. The Executive shall serve the Company and its
subsidiaries faithfully and to the best of his ability and shall devote his full
business time and attention to the affairs of the Company and its subsidiaries,
subject to reasonable absences for vacation and illness in accordance with then
current Company policy and subject to the flex time arrangement currently
approved by the President. The Executive shall be subject at all times to the
direction and control of the President. The Executive shall give the President
periodic reports on and keep him informed on a current basis concerning the
business affairs of the Company.
<PAGE>
(b) The headquarters for the performance of the Executive's services
during the term of this Agreement shall be the principal executive offices of
the Company in Houston, Texas, subject to such reasonable travel as the
performance of the Executive's duties in the business of the Company or its
subsidiaries may require.
(c) During the term of this Agreement the Executive shall, if
elected, serve as a member of the Board of Directors and/or Executive Committee
of the Company or its subsidiaries and such other committees to which the
Executive may be appointed.
4. COMPENSATION.
(a) As compensation for all of the services to be performed by the
Executive hereunder, the Company shall pay the Executive:
(i) A base salary, payable in accordance with the Company's
normal payroll practices, at a rate per annum equal to $75,600 ("Base Salary"),
or such greater amount as shall be approved by the Company from time to time;
(ii) additional bonus compensation equal to $27,469.80 per
annum (net of FICA, FUTA and related employment taxes) ("Bonus Compensation"),
or such greater amount as shall be approved by the Company from time to time,
which additional bonus shall be earned each calendar year during the period from
the date hereof to December 31, 2002 and which shall be payable annually in
arrears on or before December 31 of such years without proration for the initial
calendar year hereof; and
(iii) additional compensation equal to $170,899.54 (net of FICA,
FUTA and related employment taxes), or such greater amount as shall be approved
by the Company from time to time, which additional compensation shall be earned
for services to be rendered in the period from January 1, 2000 to
December 31, 2004 and which shall be payable by the Company forgiving
indebtedness owed to it by the Executive under that certain promissory note
dated the date hereof by and between the Company and the Executive in the
original principal amount of $170,899.54 ("Promissory Note"), which indebtedness
shall be forgiven on a prorata basis over the five-year period beginning
January 1, 2000.
5. EXPENSES. The Company shall reimburse the Executive for any
out-of-pocket expenses reasonably incurred by the Executive in the performance
of his duties to the Company upon receipt of appropriate vouchers therefor, in
accordance with the Company's current practices as such practices may be changed
from time to time by the Company.
2
<PAGE>
6. FRINGE BENEFITS. The Executive shall be entitled to participate in
all Company group health (including family major medical plans), life insurance,
pension, profit-sharing or other plans or fringe benefit programs which may,
from time to time, be available to executive employees of the Company generally,
subject to eligibility and vesting requirements from time to time in effect;
provided, however, that nothing herein shall require the Company at any time to
create or continue any such plan, program or arrangement.
7. COPYRIGHT, PATENTS, TRADEMARKS.
(a) All right, title and interest, of every kind whatsoever, in the
United States and throughout the world, in (i) any work, including the copyright
thereof (for the full terms and extensions thereof in every jurisdiction),
created by the Executive at any time during the term hereof and all material
embodiments of the work subject to such rights; and (ii) all inventions, ideas,
discoveries, designs and improvements, patentable or not, made or conceived by
the Executive at any time during the term hereof, shall be and remain the sole
property of the Company without the payment to the Executive or any other person
of any further consideration, and each such work shall, for United States
copyright law ("Copyright Law") purposes, be deemed created by the Executive
pursuant to his duties under this Agreement and within the scope of his
employment and shall be deemed a work made for hire; and the Executive agrees to
assign, at the Company's expense, and the Executive does hereby assign, all of
his right, title and interest in and to all such works, copyrights, materials,
inventions, ideas, discoveries, designs and improvements, patentable or not, and
any copyrights, letters patent, trademarks, trade secrets, and similar rights,
and the applications therefor, which may exist or be issued with respect
thereto. For the purposes of this paragraph 7, "works" shall include all
materials created during the term hereof, whether or not ever used by or
submitted to the Company, including, without limitation, any work which may be
the subject matter of copyright under the Copyright Law of the United States.
In addition to its other rights, the Company may copyright any such work in its
name in the United states in accordance with the requirements of the United
States Copyright Law and the Universal Copyright Convention and any other
Convention or treaty to which the United States is or may become a party.
(b) Whenever the Company shall so request, whether during or after
the term of this Agreement, the Executive shall execute, acknowledge and deliver
all applications, assignments or other instruments; make or cause to be made all
rightful oaths; testify in all legal proceedings; communicate all known facts
which relate to such works, copyrights, inventions, ideas, discoveries, designs
and improvements; perform all lawful acts and otherwise render all such
assistance as the Company may deem necessary to apply for, obtain, register,
enforce and maintain any copyrights, letters patent and trademark registrations
of the United States or any foreign jurisdiction or under the Universal
Copyright Convention (or any other convention or
3
<PAGE>
treaty to which the United States is or may become a party), or otherwise to
protect the Company's interests therein, including any which the Company shall
deem necessary in connection with any proceeding or litigation involving the
same. The Company shall reimburse the Executive for all reasonable
out-of-pocket costs incurred by the Executive in testifying at the Company's
request or in rendering any other assistance requested by the Company pursuant
to this subparagraph 7(b). All registration and filing fees and similar expense
shall be paid by the Company.
8. NON-COMPETITION; TRADE SECRETS.
(a) During the term of this Agreement and for a period of [ one ]
year thereafter, the Executive shall not, without the Company's prior written
consent, directly or indirectly engage or be interested in any business which is
then competitive to the business of the Company or the business of any of its
subsidiaries or the licensed business of any of its licensees in the United
States or Canada. For the purpose of this paragraph, the Executive will be
considered to have been directly or indirectly engaged or interested in a
business if the Executive is engaged or interested in such business as a
stockholder, director, officer, employee, agent, broker, partner, individual
proprietor, lender, consultant, licensor, independent contractor or otherwise,
except that nothing herein will prevent the Executive from owning or
participating as a member of a group which owns less than a 5% block of equity
or debt securities of any company traded on a national securities exchange or in
any established over-the-counter securities market. For the purpose of this
paragraph, the term "any business then competitive" to the business of the
Company, its subsidiaries or licensees shall be deemed to include, without
limitation, any business which involves any aspect of the development,
manufacture, sale, promotion or distribution of (i) wood treating chemicals or
similar products of any kind and (ii) any chemicals developed, manufactured,
sold, promoted or distributed by the Company or any of its subsidiaries during
the term of this Agreement.
(b) During the term of this Agreement and thereafter without
limitation of time, the Executive shall not knowingly divulge, furnish, or make
available to any third person, company, corporation or other organization
(including but not limited to customers, competitors or government officials),
without the Company's prior written consent, any trade secrets or other
confidential information concerning the Company or any of its subsidiaries or
licensees or the business of any of the foregoing, including without limitation,
confidential methods of operation and organization and confidential sources of
supply and customer lists, but the Executive may respond to proper subpoenas
issued by governmental agencies without the Company's prior written consent but
with prior written notice to the Company. For purposes of this subparagraph
(b), information shall not be deemed confidential if it (i) is within the public
domain or (ii) becomes publicly known other than through disclosure by the
Executive in violation of this provision.
4
<PAGE>
(c) In the event the Executive shall violate any provisions of this
paragraph 8 (which provisions the Executive hereby acknowledges are reasonable
and equitable), the Executive shall no longer be entitled to and hereby waives
any and all rights to any termination payment under paragraph 9. This
termination of rights shall be in addition to and not in substitution for any
and all other rights of the Company at law or in equity against the Executive
arising out of any such breach. The Executive acknowledges that his breach or
attempted or threatened breach of any provisions of this paragraph 8 would cause
irreparable injury to the Company not compensable in money damages and that the
Company shall be entitled, in addition to all other applicable remedies, to
obtain a temporary and a permanent injunction and a decree for specific
performance of paragraph 8 without being required to prove damages or furnish
any bond or other security.
9. TERMINATION.
(a) The Company shall have the right to terminate this Agreement in
the event of the permanent disability of the Executive, upon five days' prior
written notice. Upon termination, the Company shall pay the Executive all
compensation earned under paragraph 4 through the date of termination plus all
compensation to be paid the Executive to the end of the term of this Agreement
under paragraph 4(ii) and (iii), whether or not then earned. For the purposes
of this subparagraph "permanent disability" shall mean the physical or mental
incapacity of the Executive for any consecutive three-month period or any
aggregate period of six months in any eighteen-month period of such a nature
that the Executive shall be unable to perform a substantial portion of his
duties as Vice President of Company as contemplated hereby.
(b) This Agreement shall terminate automatically upon the death of
the Executive. In such event, the Company shall pay the estate of the
Executive, in addition to any amounts to which the Executive's estate would
otherwise be entitled under the Company's retirement plans and group life
insurance policy, within 30 days after the date of death, (i) all compensation
earned under paragraph 4(i) through the date of termination, plus (ii) all
compensation to be paid to the Executive to the end of the term of this
Agreement under paragraph 4(ii) and (iii), regardless whether such compensation
has been earned at the date of the Executive's death.
(c) The Executive shall have the right to terminate this Agreement at
any time, without cause, upon 90 days' prior notice. Upon such termination, the
Executive shall be entitled to receive all compensation earned under paragraph 4
through the date of termination but shall not be entitled to receive any
compensation not earned at the date of such termination.
5
<PAGE>
(d) In addition to its rights under subparagraph 9(a) above, the
Company shall have the right, at its sole option, to terminate this Agreement
"for cause" at any time, without any further payment to the Executive other than
compensation earned under subparagraph 4(a)(i) prior to the date of termination,
by notice to the Executive (or his personal representative, as the case may be),
specifying the reason for such termination, and the Executive shall not be
entitled to any incentive compensation for the period ending on the date of such
termination. For purposes of this subparagraph, "cause" shall mean solely (i)
the Executive's conviction of a felony (ii) the Executive's wilful misconduct or
gross negligence seriously detrimental to the Company; or (iii) the breach by
the Executive of a material term of this Agreement or his failure to implement
the reasonable business requests or directions of the President which in any of
the foregoing cases continues for 30 days after written notice specifying the
nature of the breach or failure is given to the Executive.
(e) Upon termination of the Executive's employment under this
Agreement for any reason (including death and the expiration of the term
hereof), all loans and advances made to the Executive, including but not limited
to loans or advances of compensation payable hereunder, shall become immediately
due and payable.
10. MISCELLANEOUS.
(a) Any notice required or permitted under this Agreement shall be in
writing and shall be deemed given when delivered personally or three days after
being sent by first-class registered or certified mail, return receipt
requested, to the party for which intended at its or his address set forth at
the beginning of this Agreement (which, in the case of the Company, shall be
sent "Attention: President") or to such other address as either party may
hereafter specify by similar notice to the other.
(b) This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas governing contracts made and to be performed
in Texas.
(c) This Agreement supersedes all prior agreements between the
parties, written or oral, and cannot be amended or modified except by a writing
signed by both parties. It may be executed in one or more counterpart copies,
each of which shall be deemed an original, but all of which shall constitute the
same instrument.
(d) This Agreement, which is personal in nature, may not be assigned
by either party without the prior written consent of the other party, but the
Executive may, upon reasonable prior notice to the Company, assign his right to
receive any
6
<PAGE>
payment previously due and owing provided, that, such assignment shall be
subject to all claims and defenses of the Company against the Executive.
(e) This Agreement shall be binding upon and inure to the benefit of
the parties and their respective heirs, executors, administrators, personal
representatives, successors and permitted assigns. The term "personal
representative" as used in this Agreement with respect to an individual shall
mean such individual's guardian, committee, executor, administrator or other
legal representative duly empowered to act on his behalf following his death or
legal incapacity.
(f) Captions used in this Agreement are for convenience of reference
only and shall not be deemed a part of this Agreement nor used in the
construction of its meaning. Exhibits attached to this Agreement shall be
deemed as fully a part of this Agreement as if set forth in full herein.
(g) The Company may setoff any amounts owed by it or its subsidiaries
to the Executive (or to the personal representative of the Executive's estate),
including but not limited to amounts owed hereunder, against amounts owed by the
Executive or his estate to the Company under the Promissory Note or for any
loans or advances made by the Company or its subsidiaries to the Executive,
including but not limited to loans or advances of compensation hereunder.
(h) If any provision of this Agreement shall be deemed invalid or
unenforceable as written it shall be construed, to the greatest extent possible,
in a manner which shall render it valid and enforceable and any limitations on
the scope or duration of any such provision necessary to make it valid and
enforceable shall be deemed to be part thereof; no invalidity or
unenforceability shall affect any other portion of this Agreement unless the
provision deemed to be so invalid or unenforceable is a material element of this
Agreement, taken as a whole.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
KMG CHEMICALS, INC.
By: /s/ David L. Hatcher
--------------------------------------
David L. Hatcher,
President
/s/ Bobby D. Godfrey
-------------------------------------------
Bobby D. Godfrey
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AS OF AND
FOR THE SIX MONTHS PERIOD ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 3,240,032
<SECURITIES> 89,040
<RECEIVABLES> 2,180,272
<ALLOWANCES> (40,000)
<INVENTORY> 1,247,754
<CURRENT-ASSETS> 7,060,878
<PP&E> 3,753,910
<DEPRECIATION> (1,493,381)
<TOTAL-ASSETS> 10,430,770
<CURRENT-LIABILITIES> 1,766,544
<BONDS> 0
0
0
<COMMON> 70,002
<OTHER-SE> 8,559,343
<TOTAL-LIABILITY-AND-EQUITY> 10,430,770
<SALES> 9,795,811
<TOTAL-REVENUES> 9,795,811
<CGS> 5,911,998
<TOTAL-COSTS> 5,911,998
<OTHER-EXPENSES> 1,713,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,289,591
<INCOME-TAX> 870,050
<INCOME-CONTINUING> 1,419,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,419,541
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0
</TABLE>
