<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended October 31, 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
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,091,841 $2,207,948
Accounts receivable:
Trade 3,735,443 3,570,508
Other 27,664 21,218
Notes receivable - current 236,311 36,311
Inventories 1,746,396 1,751,346
Prepaid expenses & other assets 103,063 152,382
Income taxes receivable 42,612 56,547
----------- -----------
Total current assets 8,983,330 7,796,260
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 2,365,961 2,382,913
NOTES RECEIVABLE, Less current portion 406,886 408,912
OTHER ASSETS 9,328,741 9,510,916
----------- -----------
TOTAL $21,084,918 $20,099,001
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,950,306 $3,342,270
Accrued liabilities 553,575 533,511
Current portion of long term debt 679,241 679,241
Income taxes payable 561,358 0
----------- ----------
Total current liabilities 4,744,480 4,555,022
LONG TERM DEBT 5,104,090 5,268,301
----------- ----------
Total liabilities 9,848,570 9,823,323
----------- ----------
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 10,102,961 9,142,291
----------- ----------
Total stockholders' equity 11,236,348 10,275,678
----------- ----------
TOTAL $21,084,918 $20,099,001
=========== ===========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
---------------------------------
1998 1997
---------- ----------
<S> <C> <C>
NET SALES $9,803,822 $5,385,055
COST OF SALES 6,752,747 3,215,797
---------- ----------
Gross Profit 3,051,075 2,169,258
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,438,083 831,123
---------- ----------
Operating Income 1,612,992 1,338,135
OTHER INCOME (EXPENSE):
Interest & Dividend Income 44,884 46,814
Interest Expense (110,282) 0
Other 1,873 963
---------- ----------
Total Other Income (Expense) (63,525) 47,777
INCOME BEFORE INCOME TAX 1,549,467 1,385,912
Provision For Income Tax (588,797) (526,647)
---------- ----------
NET INCOME $960,670 $859,265
========== ==========
EARNINGS PER SHARE:
Basic $0.14 $0.12
===== =====
Diluted $0.14 $0.12
===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,000,169 7,000,169
========= =========
Diluted 7,049,670 7,043,439
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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, 1997 7,000,169 $ 70,002 $ 1,063,385 $ 6,216,420 $ 7,349,807
Dividends (280,007) (280,007)
Net income 3,205,878 3,205,878
--------- ----------- ----------- ----------- -----------
BALANCE AT JULY 31, 1998 7,000,169 $ 70,002 $ 1,063,385 $ 9,142,291 $10,275,678
Net income 960,670 960,670
--------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 1998 7,000,169 $ 70,002 $ 1,063,385 $10,102,961 $11,236,348
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 960,670 $ 859,265
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 257,336 62,699
(Gain) Loss on the disposal of fixed assets 342 (3,532)
Changes in operating assets and liabilities:
Accounts receivable - trade (164,935) 105,934
Accounts receivable - other (6,446) 136,002
Inventories 4,950 (92,204)
Prepaid expenses and other assets 49,319 (8,761)
Income taxes receivable 13,935 (88,887)
Accounts payable (391,964) 242,629
Accrued liabilities 20,064 (68,705)
Income taxes payable 561,358 491,075
----------- -----------
Net cash provided by operating activities $ 1,304,629 $ 1,635,516
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (57,713) (151,316)
Proceeds from sale of fixed assets 4,500
Loans to third parties - short term (200,000) 0
Collection of notes receivable 2,026 1,899
Additions to other assets (838) (13,934)
----------- -----------
Net cash used in investing activities ($ 256,525) ($ 158,851)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings' (164,211)
Payment of dividends 0 (140,003)
----------- -----------
Net cash used in financing activities ($ 164,211) ($ 140,003)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 883,893 $ 1,336,662
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,207,948 2,643,070
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,091,841 $ 3,979,732
=========== ===========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $ 110,282 $ 0
Cash paid during the period for income taxes $ 27,440 $ 32,520
</TABLE>
See notes to consolidated financial statements.
4
<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, 1998.
(2) EARNINGS PER SHARE - Basic earnings per share has been computed
by dividing net income by the weighted average shares outstanding. Diluted
earnings per share has been computed by dividing net income by the weighted
average shares outstanding plus dilutive potential common shares.
The following table presents information necessary to calculate
basic and diluted earnings per share for periods indicated, with the 1997 period
being restated to conform with the requirements of the SFAS No. 128,
described above:
<TABLE>
<CAPTION>
Three Months Ended
October 31
1998 1997
----------------------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net Income $960,670 $859,265
----------------------
Weighted Average Shares Outstanding 7,000,169 7,000,169
----------------------
Basic Earnings Per Share $ .14 $ .12
======================
DILUTED EARNINGS PER SHARE
Net Income $960,670 $859,265
----------------------
Weighted Average Shares Outstanding 7,000,169 7,000,169
Shares Issuable from Assumed Conversion of
Common Share Options 49,501 43,270
----------------------
Weighted Average Shares Outstanding,
as Adjusted 7,049,670 7,043,439
----------------------
Diluted Earnings Per Share $ .14 $ .12
======================
</TABLE>
5
<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 month
periods ended October 31, 1998 and October 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended
October 31
Increase/
---------------------------- (Decrease)
1998 1997
-----------------------------------------
<S> <C> <C> <C>
Net sales .................. $9,803,822 $5,385,055 $4,418,767
Gross profit ............... $3,051,075 $2,169,258 $ 881,817
Gross profit as a percent of
net sales .................. 31.1% 40.3%
Net income ................. $ 960,670 $ 859,265 $ 101,405
Basic earnings per share ... $ 0.14 $ 0.12
Weighted average shares
outstanding ................ 7,000,169 7,000,169
</TABLE>
SALES REVENUE
Net sales revenue for the quarter ended October 31, 1998 was
approximately $4.4 million greater than for the same period last year -- an
82.1% increase. The increase was due to a significantly higher volume of
creosote sales. Most of the creosote sales increase was attributable to sales
of creosote purchased from AlliedSignal under the long-term creosote supply
contract agreed to in July 1998.
GROSS PROFIT
Gross profit for the quarter ended October 31, 1998 rose by approximately
$882 thousand (40.7%) compared to same period of fiscal 1998. Almost all of
that increase was attributable to sales of creosote purchased from AlliedSignal.
Creosote sales produce a lower gross profit margin as a percent of sales than
do sales of the Company's other products. Increased sales of the lower
margin creosote had the effect of reducing the Company's overall gross margin
as a percent of total sales to 31.1% in the first quarter of fiscal 1999 from
40.3% in the same quarter of fiscal 1998. Management believes that
anticipated greater creosote revenues in fiscal 1999 will have that same
effect throughout the year when fiscal 1999 is compared with fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended
October 31, 1998 increased by approximately $607 thousand compared with the
same period of fiscal year 1998. Almost all of that increase was a consequence
of the AlliedSignal supply contract. In particular, transportation expenses
increased with creosote sales volume and the Company has begun amortizing the
$4 million of
6
<PAGE>
additional consideration paid upon entering into the supply contract and the
$4.5 million paid to AlliedSignal for its creosote registrations.
OTHER INCOME (EXPENSE)
The increase in net expenses in the quarter ended October 31, 1998 as
compared to the same period of fiscal 1998 was due to increased interest
expense of approximately $110 thousand paid to SouthTrust Bank of Alabama,
National Association ("SouthTrust") on the term loan secured to finance the
AlliedSignal transaction.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998 the Company had cash and cash equivalents of
approximately $3.1 million, an increase of approximately $884 thousand since
the beginning of fiscal 1999. During the first quarter of fiscal 1999, the
Company generated cash of $1.3 million from operations, including net income
of $961 thousand. The Company invested approximately $58 thousand in capital
improvements and, for $200 thousand purchased a participation in a short-term
loan made by Sterling Bank. The Company also made principal payments totaling
$164 thousand on its term loan with SouthTrust. The principal balance of that
term loan was $5.8 million as of October 31, 1998.
The Company's borrowing base availability under the Revolving Loan
Agreement with SouthTrust Bank of Alabama was approximately $2.5 million as
of October 31, 1998, but the Company had no borrowings under that credit
facility.
YEAR 2000 COMPLIANCE
The Company has reviewed its critical accounting and information systems
for Year 2000 compliance and has developed a plan to remedy any deficiencies
in a timely manner. The Company expects to resolve Year 2000 compliance
issues relating to its software primarily through normal upgrades of its
software or, when necessary, through replacement of existing software with
Year 2000 compliant applications. The cost of these upgrades or replacements
is not expected to be material to the Company's financial position or results
of operations. In addition, the Company is in the process of seeking
verification from its key distributors, vendors and suppliers that they are
Year 2000 compliant or, if they are not yet so compliant, to provide a
description of their plans to become so. If the Company's present efforts to
address the Year 2000 compliance issues are not successful, or if distributors,
suppliers and other third parties with which the Company conducts business do
not successfully address such issues, the Company's business, operating
results and financial position could be materially and adversely affected.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain information included or incorporated by reference in this report
is forward-looking, including statements contained in "Management's Discussion
and Analysis of Operations". It includes statements regarding the intent,
belief and current expectations of the Company and its directors and officers.
Forward-looking information involves important risks and uncertainties that
could materially alter results in the future from those expressed in these
the statements. These risks and uncertainties include, but are not limited
to, the ability of the Company to maintain existing relationships with long-
standing customers, the ability of the Company to successfully implement
productivity improvements, cost reduction initiatives, facilities expansion
and the ability of the Company to develop, market and sell new products and
to continue to comply with environmental laws, rules and regulations. Other
risks and uncertainties include uncertainties relating to economic conditions,
acquisitions and divestitures, government and regulatory policies, technological
developments and changes in the competitive environment in which the Company
operates. Persons reading this report are cautioned that such statements are
only predictions and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors that could cause actual events or results to differ materially from
those indicated by the forward-looking statements.
7
<PAGE>
PART II --- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the shareholders of the Company was held on
November 18, 1998. At that meeting, the shareholders voted to elect all the
nominees for director as follows:
<TABLE>
<CAPTION>
Nominees Votes For Abstentions
-------- --------- -----------
<S> <C> <C>
David L. Hatcher 6,774,899 36
George W. Gilman 6,774,899 36
Bobby D. Godfrey 6,774,899 36
Fred C. Leonard, III 6,774,899 36
Charles M. Neff, Jr. 6,774,899 36
</TABLE>
The shareholders also voted to ratify the appointment of Deloitte &
Touche, LLP as independent accountants and auditors of the Company for fiscal
year 1999. The vote was 6,774,935 votes for the ratification, no votes
against, and no abstentions.
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 first quarter
ended October 31, 1998.
8
<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: December 14, 1998
---------------------------------
David L. Hatcher, President
By: /s/ Jack Vernie Date: December 14, 1998
----------------------------------
Jack Vernie, Controller
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 3,091,841
<SECURITIES> 0
<RECEIVABLES> 4,092,030
<ALLOWANCES> (50,000)
<INVENTORY> 1,746,396
<CURRENT-ASSETS> 8,983,330
<PP&E> 4,044,320
<DEPRECIATION> (1,678,359)
<TOTAL-ASSETS> 21,084,918
<CURRENT-LIABILITIES> 4,744,480
<BONDS> 0
0
0
<COMMON> 70,002
<OTHER-SE> 11,166,346
<TOTAL-LIABILITY-AND-EQUITY> 21,084,918
<SALES> 9,803,822
<TOTAL-REVENUES> 9,803,822
<CGS> 6,752,747
<TOTAL-COSTS> 6,752,747
<OTHER-EXPENSES> 1,438,083
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,282
<INCOME-PRETAX> 1,549,467
<INCOME-TAX> 588,797
<INCOME-CONTINUING> 960,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 960,670
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
