<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, 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>
January 31, July 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS $ 8,506,110 $ 7,796,260
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 2,324,814 2,382,913
NOTES RECEIVABLE, Less current portion 404,827 408,912
OTHER ASSETS 9,150,769 9,510,916
--------- ---------
TOTAL $20,386,520 $20,099,001
----------- -----------
----------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES $ 3,626,636 $ 4,555,022
LONG TERM DEBT 4,910,914 5,268,301
--------- ---------
Total liabilities 8,537,550 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 10,715,583 9,142,291
---------- ---------
Total stockholders' equity 11,848,970 10,275,678
---------- ----------
TOTAL $20,386,520 $20,099,001
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $8,054,981 $4,410,757 $17,858,803 $9,795,811
COST OF SALES 5,281,595 2,696,201 12,034,342 5,911,998
---------- ---------- ----------- ----------
Gross Profit 2,773,386 1,714,556 5,824,461 3,883,813
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,729,430 882,117 3,167,513 1,713,239
---------- ---------- ----------- ----------
Operating Income 1,043,956 832,439 2,656,948 2,170,574
OTHER INCOME (EXPENSE):
Interest & Dividend Income 54,728 55,660 99,612 102,473
Interest Expense (107,129) (217,411)
Other (6,104) 15,580 (4,231) 16,544
---------- ---------- ----------- ----------
Total Other Income (Expense) (58,505) 71,240 (122,030) 119,017
INCOME BEFORE INCOME TAX 985,451 903,679 2,534,918 2,289,591
Provision For Income Tax (372,829) (343,403) (961,626) (870,050)
---------- ---------- ----------- ----------
NET INCOME $612,622 $560,276 $1,573,292 $1,419,541
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
EARNINGS PER SHARE:
Basic $0.09 $0.08 $0.22 $0.20
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Diluted $0.09 $0.08 $0.22 $0.20
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,000,169 7,000,169 7,000,169 7,000,169
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Diluted 7,061,212 7,046,404 7,055,358 7,044,947
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
3
<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 1,573,292 1,573,292
--------- ------- ---------- ----------- -----------
BALANCE AT JANUARY 31, 1999 7,000,169 $70,002 $1,063,385 $10,715,583 $11,848,970
--------- ------- ---------- ----------- -----------
--------- ------- ---------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
-----------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,573,292 $1,419,541
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 518,304 126,476
(Gain) Loss on the disposal of fixed assets 342 (6,032)
Changes in operating assets and liabilities:
Accounts receivable - trade 229,961 203,285
Accounts receivable - other (89,892) 139,502
Inventories (575,277) (64,470)
Prepaid expenses and other assets (59,086) (141,734)
Income taxes receivable 13,935 (88,887)
Accounts payable (971,497) (142,091)
Accrued liabilities 17,299 (77,455)
Income taxes payable (14,787)
----------
Net cash provided by operating activities $657,381 $1,353,348
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (94,520) (575,251)
Proceeds from sale of fixed assets 7,000
Loans to third parties - short term (399,884)
Collection of notes receivable 4,085 3,829
Additions to other assets (5,880) (51,961)
---------- ----------
Net cash used in investing activities ($496,199) ($616,383)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings' (331,575)
Payment of dividends (140,003)
----------
Net cash used in financing activities ($331,575) ($140,003)
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ($170,393) $596,962
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,207,948 2,643,070
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,037,555 $3,240,032
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $217,411
Cash paid during the period for income taxes $995,490 $880,785
</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, 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
1999 1998 1999 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net Income $ 612,622 $ 560,276 $1,573,292 $1,419,541
----------------------------------------------------------------------
Weighted Average Shares Outstanding 7,000,169 7,000,169 7,000,169 7,000,169
----------------------------------------------------------------------
Basic Earnings Per Share $0.09 $0.08 $0.22 $0.20
----------------------------------------------------------------------
----------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Net Income $ 612,622 $ 560,276 $1,573,292 $1,419,541
----------------------------------------------------------------------
Weighted Average Shares Outstanding 7,000,169 7,000,169 7,000,169 7,000,169
Shares Issuable from Assumed
Conversion of Common Share Options 61,043 46,235 55,189 44,778
----------------------------------------------------------------------
Weighted Average Shares Outstanding,
as Adjusted 7,061,212 7,046,404 7,055,358 7,044,947
----------------------------------------------------------------------
Diluted Earnings Per Share $0.09 $0.08 $0.22 $0.20
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
6
<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, 1999 and January 31, 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31 Increase/ January 31 Increase/
------------------------------ (Decrease) ------------------------------ (Decrease)
1999 1998 1999 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................... $8,054,981 $4,410,757 $3,644,224 $17,858,803 $9,795,811 $8,062,992
Gross profit ................ $2,773,386 $1,714,556 $1,058,830 $5,824,461 $3,883,813 $1,940,648
Gross profit as a
percent of net sales ........ 34.4% 38.9% (4.5)% 32.6% 39.6% (7.0)%
Net income .................. $612,622 $560,276 $52,346 $1,573,292 $1,419,541 $153,751
Earnings per share .......... $0.09 $0.08 $0.01 $0.22 $0.20 $0.02
Weighted average
shares outstanding .......... 7,000,169 7,000,169 7,000,169 7,000,169
</TABLE>
SALES REVENUE
Net sales revenue for the second quarter and for the six months ended
January 31, 1999 rose by 83% and 82%, respectively, compared with the same
periods of the prior fiscal year. 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, Inc.
("AlliedSignal") under the long-term creosote supply contract beginning in
July 1998.
In November 1998 the Company concluded a creosote supply contract with
Rutgers VfT N.V. ("Rutgers"), a copy of which is attached to this report. The
term of the contract is until December 31, 2001, renewable annually. The
supply contract obligates the Company to purchase an agreed minimum volume in
each calendar year. The purchase price for creosote is fixed in calendar
years 1998 and 1999 and is subject to escalation thereafter during the term.
This agreement replaces the creosote sales agency agreement that had been in
effect between the parties.
GROSS PROFIT
Gross profit for the second quarter and for the first six months of
fiscal 1999 rose by approximately $1.1 million and $1.9 million,
respectively, compared to same period of fiscal 1998. Most of that increase
was attributable to sales of creosote
7
<PAGE>
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 34.4% in the
second quarter of fiscal 1999 from 38.9% in the same quarter of fiscal 1998
and to 32.6% in the first six months of fiscal 1999 from 39.6% in the same
period of the prior fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter and
for the six months ended January 31, 1999 increased by approximately $847
thousand and $1.5 million as compared with the same period of fiscal year
1998. Most 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
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 net increase in other expenses in the second quarter ended and for
the six months ended January 31, 1999 as compared to the same period of
fiscal 1998 was due to increased interest expense of approximately $107
thousand and $217 thousand, respectively, 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 January 31, 1999 the Company had cash and cash equivalents of
approximately $2.0 million, a decrease of approximately $170 thousand since
the beginning of fiscal 1999. During the first six months of fiscal 1999, the
Company generated net cash of $657 thousand from operations, including net
income of approximately $1.6 million. The Company increased its inventory
during the first six months of fiscal 1999 by approximately $575 thousand.
Most of that inventory increase was because in the second quarter creosote
from Rutgers began being purchased from Rutgers under a supply contract
rather than under the prior sales agency agreement.
During first six months of fiscal 1999, the Company invested
approximately $95 thousand in capital improvements and purchased
participations or made short-term loans of $400 thousand. The Company also
made principal payments totaling $332 thousand on its term loan with
SouthTrust. The principal balance of that term loan was $5.6 million as of
January 31, 1999. As of January 31, 1999 the Company had no borrowings under
its revolving loan with SouthTrust but its borrowing base availability under
that loan was $2.5 million.
8
<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 not
material to the Company's financial position or results of operations. The
Company is in the process of seeking verification from its key 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 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 intends to mitigate 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.
9
<PAGE>
PART II --- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.20 Creosote Supply Agreement dated November 1, 1998 between
Ratgers VfT N.V. and the Company
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the second quarter ended
January 31, 1999.
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, 1999
-----------------------------
David L. Hatcher, President
By: /s/ Jack Vernie Date: March 12, 1999
-----------------------------
Jack Vernie, Controller
11
<PAGE>
CREOSOTE OIL SUPPLY CONTRACT
BETWEEN
KMG BERNUTH, INC.
10611 HARWIN SUITE 402
HOUSTON, TEXAS 77036
U.S.A.
(HEREINAFTER CALLED "BUYER")
AND
RUTGERS VFT N.V.
VREDEKAAI 18
9060 ZELZATE
BELGIUM
(HEREINAFTER CALLED "SELLER") Note: The marks [*****] indicate that
material has been omitted under a request for
confidential treatment and filed separately
with the SEC.
WITNESSETH
Whereas the Buyer has been acting for a number of years as Agent of the
Seller's group for the sale of Creosote Oil, such as is commonly used for
timber preservation, to customers situated within the South East of the
United States.
Whereas the Seller wishes to continue selling its Creosote in the United
States and whereas the Buyer wishes to continue selling the Seller's creosote
to its customers.
Now therefore both parties desire to establish a business relationship
whereby the Buyer will be acting no longer as an Agent but in its own name
and for its own account.
1. PURCHASE AND SALE
Seller shall sell to Buyer and Buyer shall purchase from Seller minimum
[*****] metric Tons of Creosote Oil per calendar year, in 1998 a minimum of
[*****].
<PAGE>
2
It is understood that if the Buyer wants to buy a higher quantity, the
Seller will do its reasonable commercial endeavors to set the quantity
asked for available. For the purposes of this clause "Metric Ton" shall
mean 1.000 kilogram.
2. DURATION
This contract is entered into for a 3 years and 2 months period, as from
01/11/98 terminating on 31/12/2001. Thereafter this agreement shall
continue on an annual basis with two calendar years advance notice of
termination to be given by either party in writing by registered mail.
3. PRICE
The price for the period 01/11/98 to 31/12/98 will be [*****] FOB
Zelzate/Belgium (Incoterms 1990). As from the 01/01/99 to the 31/12/99 the
price will be [*****] FOB Zelzate. Thereafter the price will increase with
at least [*****] per each calendar year (prices to be negotiated).
4. PAYMENT
Each delivery shall be considered as a separate transaction. All invoices
shall be made at the price determined in accordance with clause 3 hereof
and shall be due and payable within 90 calendar days from Bill of Lading
date. Buyer shall pay by bank transfer free of charges to Seller's
nominated bank.
5. QUANTITIES AND DELIVERIES
5.1 Three months prior to the end of each calendar year, the Buyer shall
advise the Seller in writing of the quantity and of a tentative
shipping plan for the next following year. Within 15 business days
from the receipt of such advice the Seller shall advise the Buyer the
quantity which he is willing to deliver and will have available for
shipment in bulk during the ensuing year. The quantity is estimated
to be between [*****] T. and [*****] T. in any one year subject to
clause 1 and clauses 9 and 10 of this agreement.
5.2 The loading quantity and Bill of Lading quantity of Oil shipped under
this Agreement ascertained by a competent qualified independent
surveyor appointed by the Seller is binding on the parties. The cost
of the independent surveyor for the loadport shall be to seller's
account.
<PAGE>
3
6. QUALITY AND QUALITY CONTROL
6.1 The Creosote Oil shall meet the specification as attached in Annex A
and will be loaded with a minimum temperature of 55 DEG. C.
6.2 The quality of the oil delivered shall be determined by means of a
representative composite sample drawn from the shore tanks before
loading by a competent qualified surveyor appointed by the Seller.
The sample will be divided in three portions:
1 to be analysed by a qualified competent chemist at loadport
1 for retain of Seller for a period of 6 months
1 to be given with the ship for handing over to the Buyer.
Quality control costs at loadport for account of the Seller. The
Seller will provide the Buyer with the quality analysis results.
7. LIABILITY OF SELLER
Seller warrants that the creosote will meets the specification. If by
Seller's mistake delivered material is found to be defective or otherwise
fails to conform to the specification Buyer shall nevertheless use every
reasonable effort to utilise the creosote. Liability of Seller shall never
exceed the free delivered value of the relevant shipment of creosote.
Further claims of Buyer against the Seller for whatever reason, especially
because of consequential damages, are expressly excluded.
8. EXCLUSIVITY
The Seller ensures and warrants that during the lifetime of the contract he
shall not sell AWPA specification P1/P13 and P2 grade creosote oil to wood
treaters in the United States and/or P1/P13 and P2 grade creosote oil
consumed in the United States as a wood preservative other than through
Buyer.
9. CREOSOTE COUNCIL II
The Seller continues its membership to Creosote Council II. Buyer will
continue as Seller's designated representative to Creosote Council II
unless Seller stipulates otherwise.
<PAGE>
4
10. HARDSHIP
If during the period for which this agreement is in force, the application
of the agreement would seriously prejudice one of the parties, the parties
shall meet and make every effort to come to an amicable agreement so as to
lessen or remove such prejudice.
11. FORCE MAJEURE
In the event the performance of this Agreement by either party is affected
by strike, fire, riot, war (declared or undeclared), Act of God, Government
regulations, or Government request or requisitions for national defense or
other purpose, or breakdown of, or injury to facilities used for
production, or storage of Oil, or any other cause beyond the reasonable
control of the parties hereto, the suffering party may, at its option,
suspend the performance of this Agreement in whole or in part during the
period of such event to the extent reasonably required by such event, and
no liability for damages shall attach against either party on account
thereof.
12. ENTIRETY OF AGREEMENT
This agreement constitutes the entire agreement between the parties hereto,
and there are no understandings, representations or warranties of any kind
except those expressly set forth herein. Neither this Agreement nor any of
the rights, obligations, or liabilities of either of the parties hereunder
may be amended, changed or added to in any respect except by written
instrument executed by duly authorised representatives of each of the
parties.
13. TRANSFERS
Neither party shall without the previous consent in writing of the other
assign or dispose of the benefits of this agreement or any part thereof,
but without committing a breach of this clause, the sellers may transfer
the benefits and burdens of this agreement to any other association or
company to which they may transfer their business or that part of it that
relates to the shipment of Oil in bulk.
The present agreement may be transferred to any associate company in which
the transferring party or its parent company directly or indirectly holds
at least 50% of the capital.
<PAGE>
5
14. ARBITRATION
The parties hereto shall do their best to settle all disputes and
controversies arising out of or in connection with this Agreement in an
amicable way. Any controversy or claim arising from or relating to this
Agreement or any Amendment to this Agreement, in particular concerning its
existence, validity or default, which can mutually not be friendly resolved
shall be finally decided by a court of arbitration of the Zurich Chamber of
Commerce pursuant to its rules of Arbitration and the following terms.
The Court of Arbitration shall have its seat in Zurich, Switzerland.
The number of arbitrators shall be three. Each of the parties shall
nominate one arbitrator. The arbitrators thus appointed shall appoint a
third member, who is to be their chairman. The chairman shall be a lawyer,
familiar with international business transactions and with the English
language. If within 30 days one party shall not have complied with a
summons by the other party to appoint its arbitrator or, if within 30 days
the two arbitrators properly selected shall not reach agreement concerning
the chairman, each of the parties may apply to the Court of Appeals of the
Canton of Zurich to make such appointment.
The language to be used in the arbitrary proceedings shall be English.
The Court of Arbitration shall decide in accordance with the material laws
as valid and applicable in the Canton of Switzerland.
RUTGERS VFT N.V. KMG BERNUTH INC.
/s/ /s/
By Mr. Gyselinck Thomas H. Mitchell
Vice President, General Manager
/s/
By Mr. Vanden Burre 23 November, 1998
Date 1st November 1998
<PAGE>
ANNEX A
N.V. RUTGERS VFT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
CREOSOTE E23
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
SPECIFICATIONS BLC 1 (USA) East Coast
- -------------- VFT (April 1991) AWPA P1-89
WARM IMPREGNATION
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
TESTS UNIT VALUES METHOD
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Water vol% max. 1,5 WEI APP 4
2. Density 38/15,5 DEG. C g/ml min. 1,070 WEI APP 3
3. Insolubles in Toluene % max. 0,5 BSS 144
4. Distillation (AWPA based on waterfree AWPA
product in quantity):
0 - 210 DEG. C % max. 2,0
0 - 235 DEG. C % max. 12,0
0 - 270 DEG. C % 10 - 40
0 - 315 DEG. C % 40 - 65
0 - 355 DEG. C % 65 - 77
Residu at 355 DEG. C % 23 - 35
5. Density 38/15,5 DEG. C BSS 144
Fraction 235/315 DEG. C g/ml min. 1,028
Fraction 315/355 DEG. C g/ml min. 1,100
6. Naphthalin content (GC) % max. 10,0 GC
7. Cristalisation point DEG. C max. 28 WEI APP 5
DEG. F max. 85
Remark:
-------
Expedition during the winter DEG. C max. 24
(between 01/10 and 01/03)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFROMATION EXTRACTED FROM AS OF AND
FOR THE SIX MONTHS PERIOD ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 2,037,555
<SECURITIES> 0
<RECEIVABLES> 3,980,464
<ALLOWANCES> (50,000)
<INVENTORY> 2,326,623
<CURRENT-ASSETS> 8,506,110
<PP&E> 4,081,127
<DEPRECIATION> (1,756,313)
<TOTAL-ASSETS> 20,386,520
<CURRENT-LIABILITIES> 3,626,636
<BONDS> 0
0
0
<COMMON> 70,002
<OTHER-SE> 11,778,968
<TOTAL-LIABILITY-AND-EQUITY> 20,386,520
<SALES> 17,858,803
<TOTAL-REVENUES> 17,858,803
<CGS> 12,034,342
<TOTAL-COSTS> 12,034,342
<OTHER-EXPENSES> 3,167,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 217,411
<INCOME-PRETAX> 2,534,918
<INCOME-TAX> 961,626
<INCOME-CONTINUING> 1,573,292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,573,292
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
