<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, 1999
/ / 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,
1999 1999
ASSETS ------ ------
- ------
<S> <C> <C>
CURRENT ASSETS $12,051,551 $11,303,765
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 2,257,299 2,300,138
NOTES RECEIVABLE, Less current portion 398,445 400,607
DEFERRED TAX ASSET 262,179 251,498
OTHER ASSETS 8,550,326 8,535,927
--------- ---------
TOTAL $23,519,800 $22,791,940
----------- -----------
----------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES $5,433,533 $5,406,532
LONG TERM DEBT 3,214,981 3,427,360
--------- ---------
Total liabilities 8,648,514 8,833,892
--------- ---------
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 1,111,381 1,063,385
Retained earnings 13,689,903 12,824,656
---------- ----------
Total stockholders' equity 14,871,286 13,958,043
---------- ----------
TOTAL $23,519,800 $22,791,935
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
KMG CHEMICALS, INC
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-----------
1999 1998
---- ----
<S> <C> <C>
NET SALES $8,833,089 $9,803,822
COST OF SALES 5,450,933 6,752,747
--------- ---------
Gross Profit 3,382,156 3,051,075
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,802,129 1,438,083
--------- ---------
Operating Income 1,580,027 1,612,992
OTHER INCOME (EXPENSE):
Interest & Dividend Income 66,679 44,884
Interest Expense (78,043) (110,282)
Other 2,040 1,873
--------- ---------
Total Other Income (Expense) (9,324) (63,525)
INCOME BEFORE INCOME TAX 1,570,703 1,549,467
Provision For Income Tax (565,453) (588,797)
--------- ---------
NET INCOME $1,005,250 $960,670
---------- --------
EARNINGS PER SHARE:
Basic $0.14 $0.14
--------- ---------
--------- ---------
Diluted $0.14 $0.14
--------- ---------
--------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,000,169 7,000,169
--------- ---------
--------- ---------
Diluted 7,054,907 7,049,670
--------- ---------
--------- ---------
</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, 1998 7,000,169 $70,002 $1,063,385 $9,142,291 $10,275,678
Dividends (70,002) (70,002)
Net income 3,752,367 3,752,367
--------- ------- ---------- ---------- -----------
BALANCE AT JULY 31, 1999 7,000,169 $70,002 $1,063,385 $12,824,656 $13,958,043
--------- ------- ---------- ---------- -----------
Dividends (140,003) (140,003)
Warrants issued for services $47,996 47,996
Net income 1,005,250 1,005,250
--------- ------- ---------- ---------- -----------
BALANCE AT OCTOBER 31, 1999 7,000,169 $70,002 $1,111,381 $13,689,903 $14,871,286
--------- ------- ---------- ---------- -----------
--------- ------- ---------- ---------- -----------
</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,
-----------
1999 1998
---- ----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,005,250 $960,670
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 266,117 257,336
(Gain) on sale of securities (829)
Loss on the disposal of fixed assets 342
Options and warrants issued for services 47,997
Deferred income tax asset (10,681)
Changes in operating assets and liabilities:
Accounts receivable - trade 110,408 (164,935)
Accounts receivable - other 10,992 7,489
Inventories (724,848) 4,950
Prepaid expenses and other assets 81,137 49,319
Accounts payable (269,524) (391,964)
Accrued liabilities (252,288) 20,064
Income taxes payable 532,882 561,358
---------- ----------
Net cash provided by operating activities $796,614 $1,304,629
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (40,274) (57,713)
Proceeds from sale of securities 7,752
Loans to third parties - short term (200,000)
Collection of notes receivable 8,266 2,026
Additions to other assets (197,403) (838)
---------- ----------
Net cash used in investing activities ($221,659) ($256,525)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings' (196,449) (164,211)
Payment of dividends (140,003)
---------- ----------
Net cash used in financing activities ($336,453) ($164,211)
NET INCREASE IN CASH AND CASH EQUIVALENTS $238,502 $883,893
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,840,963 2,207,948
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,079,466 $3,091,841
---------- ----------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $78,043 $110,282
Cash paid during the period for income taxes $63,986 $27,440
</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, 1999.
(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:
<TABLE>
<CAPTION>
Three Months Ended
October 31
1999 1998
--------------------------------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net Income $ 1,005,250 $ 960,670
--------------------------------
Weighted Average Shares Outstanding 7,000,169 7,000,169
--------------------------------
Basic Earnings Per Share $ 0.14 $ 0.14
--------------------------------
--------------------------------
DILUTED EARNINGS PER SHARE
Net Income $ 1,005,250 $ 960,670
--------------------------------
Weighted Average Shares Outstanding 7,000,169 7,000,169
Shares Issuable from Assumed Conversion of
Common Share Options 67,187 45,836
--------------------------------
Weighted Average Shares Outstanding, as
Adjusted 7,054,907 7,049,670
--------------------------------
Diluted Earnings Per Share $ 0.14 $ 0.14
--------------------------------
--------------------------------
</TABLE>
<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, 1999 and October 31, 1998:
<TABLE>
<CAPTION>
Three Months Ended
October 31 Increase/
--------------------- (Decrease)
1999 1998
------------------------------------------
<S> <C> <C> <C>
Net sales..................... $8,833,089 $9,803,822 ($970,733)
Gross profit.................. $3,382,156 $3,051,075 $331,081
Gross profit as a percent of
net sales..................... 38.3% 31.1% 7.2%
Net income.................... $1,005,250 $ 960,670 $ 44,580
Earnings per share............ $ 0.14 $ 0.14
Weighted average shares
outstanding................... 7,000,169 7,000,169
</TABLE>
SALES REVENUE
Net sales revenue for the first quarter of fiscal 2000 fell 10%
compared with the same period in fiscal 1999 primarily because of the combined
effect of greater than normal creosote sales in the first quarter of the earlier
fiscal year, some deferral of railroad crosstie replacement by railroad
companies in the first quarter of this fiscal year and utility company
reorganizations. Creosote is used primarily to treat railroad crossties. In
fiscal 1999 railroads increased their inventories of treated crossties to
unusually high levels. Utility company reorganizations are having the effect of
reducing the number of pole yards and penta-treated poles carried in inventory
by those yards. Although the Company believes that net sales will recover over
the coming fiscal year to near normal levels, management expects that sales of
its wood treating chemicals will be soft this fiscal year.
GROSS PROFIT
Gross profit for the first quarter of fiscal 2000 rose by approximately
$331 thousand compared to same period in fiscal 1999. Despite the decrease in
net sales for the quarter as compared to last fiscal year, the Company managed
to improve gross profit with increased unit prices and lowered unit costs.
6
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first quarter of
this fiscal year increased by approximately $364 thousand over the same quarter
of the prior fiscal year. The increase resulted in part from increased testing
and research costs for the Company's products, particularly creosote, and from
expenses incurred in connection with pursuing the Company's plan to grow by
acquiring niche chemical products. The largest portion of the increase, however,
was for storage, selling and distribution expenses related to creosote purchased
from Rutgers VFT ("Rutgers"). Prior to November 1998 the Company acted as an
agent on behalf of Rutgers and those creosote expenses were borne by Rutgers. As
of November 1, 1998, the agency arrangement was terminated and the Company began
to purchase creosote from Rutgers for its own account. Under the new supply
agreement, the Company bears creosote related expenses formerly absorbed by
Rutgers.
OTHER INCOME (EXPENSE)
During fiscal 1999, the Company made principal reductions of $1.7
million on term indebtedness incurred with SouthTrust Bank of Alabama, National
Association ("SouthTrust"). That reduction had the effect of lowering interest
expense for the first quarter of fiscal 2000 as compared to the same period in
fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
During first quarter of fiscal 1999, the Company invested approximately
$40 thousand in capital improvements. The principal balance of Company's term
loan with SouthTrust was approximately $3.2 million as of October 31, 1999. As
of that same date, the Company had no borrowings under its revolving loan with
SouthTrust but its borrowing base availability under that loan was $2.5 million.
7
<PAGE>
YEAR 2000 COMPLIANCE
The Company has reviewed its critical accounting and information
systems for Year 2000 compliance and remedied deficiencies by upgrades to Year
2000 compliant applications and hardware. The cost of these upgrades was less
than $10 thousand. The Company has sought verification from its key suppliers
that they are Year 2000 compliant and asked, if they are not yet so compliant,
those suppliers to provide a description of their plans to become so. Positive
assurances have been received from most of the Company's key suppliers. The
Company has received no indication from any key supplier that a disruption will
occur. However, if suppliers and other third parties with whom the Company
conducts business do not successfully address Year 2000 issues, the Company's
business, operating results and financial position could be materially and
adversely affected. As a contingency plan, therefore, the Company has mitigated
a portion of that risk by increasing its finished products and raw materials
inventory. Management believes that the cost of carrying the additional
inventory will not be material to the Company's financial position or results of
operations.
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.
8
<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 22, 1999. At that meeting, the shareholders voted to elect all the
nominees for director as follows:
<TABLE>
<CAPTION>
Nominees Votes For Votes Against
-------- --------- -------------
<S> <C> <C>
David L. Hatcher 6,489,496 12
George W. Gilman 6,489,496 12
Bobby D. Godfrey 6,489,496 12
Fred C. Leonard, III 6,489,496 12
Charles M. Neff, Jr. 6,489,496 12
</TABLE>
The shareholders also voted to ratify the appointment of Deloitte &
Touche, LLP as independent accountants and auditors of the Company for fiscal
year 2000. The vote was 6,489,196 votes for the ratification, 300 votes against
and 12 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, 1999.
9
<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, 1999
------------------------------------------
David L. Hatcher, President
By: /s/ Jack Vernie Date: December 14, 1999
----------------------------------------
Jack Vernie, Controller
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AS
OF AND FOR THE THREE MONTHS PERIOD ENDED OCTOBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 5,079,466
<SECURITIES> 0
<RECEIVABLES> 3,690,594
<ALLOWANCES> (135,000)
<INVENTORY> 3,269,461
<CURRENT-ASSETS> 12,051,551
<PP&E> 4,252,743
<DEPRECIATION> (1,995,444)
<TOTAL-ASSETS> 23,519,800
<CURRENT-LIABILITIES> 5,433,533
<BONDS> 0
0
0
<COMMON> 70,002
<OTHER-SE> 14,801,284
<TOTAL-LIABILITY-AND-EQUITY> 23,519,800
<SALES> 8,833,089
<TOTAL-REVENUES> 8,833,089
<CGS> 5,450,933
<TOTAL-COSTS> 5,450,933
<OTHER-EXPENSES> 1,802,129
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,043
<INCOME-PRETAX> 1,570,703
<INCOME-TAX> 565,453
<INCOME-CONTINUING> 1,005,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,005,250
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
