UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ______
Commission file number 000-29278
KMG CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2640529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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10611 HARWIN DRIVE, SUITE 402
HOUSTON, TEXAS 77036
(Address of principal executive offices)
(713) 988-9252
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class Name of each Exchange on which Registered
None None
-------------------------------- -------------------------------------------
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of September 30, 2001 was $1,691,233.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes / / No / /
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date were: 7,501,981 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement pertaining to the November 26, 2001 annual meeting of shareholders is incorporated by reference in Part III of this report.
PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
KMG Chemicals, Inc., a Texas corporation (the "Company"), was incorporated in the State of Texas in 1992 under the name Water Point Manufacturing, Inc. In connection with the acquisition in 1996 of KMG-Bernuth, Inc., a Delaware corporation ("KMG"), the Company changed its name to KMG-B, Inc. In 1997 the Company changed its name to KMG Chemicals, Inc. The Company's principal executive office is located at 10611 Harwin Drive, Suite 402, Houston, Texas 77036 and its telephone number is (713) 988-9252.
ACQUISITION OF KMG-BERNUTH, INC.
In October 1996, the Company acquired all of the issued and outstanding stock of KMG in exchange for 6,510,000 shares of the common stock, par value $.01 per share ("Common Stock"), of the Company. After giving effect to a 1 for 1.5 reverse split of Common Stock outstanding immediately prior to the acquisition of KMG, the former stockholders of KMG became owners of approximately 93% of the issued and outstanding shares of Common Stock.
Unless the context otherwise requires, references hereinafter to the "Company" shall mean KMG Chemicals, Inc. and any of its subsidiaries. All references hereinafter to share amounts reflect the reverse split of Common Stock.
BUSINESS OF THE COMPANY
GENERAL
The Company manufactures and sells specialty chemicals in niche markets. At the present time, the Company sells three wood preserving chemicals, pentachlorophenol ("penta"), creosote and sodium pentachlorophenate ("sodium penta"), and an herbicide product consisting of monosodium and disodium methanearsonic acids ("MSMA"). The wood treating chemicals are sold to industrial customers who use these preservatives to extend the useful life of wood products, principally in the railroad, utility and construction industries. MSMA is sold by the Company in the United States as Bueno(R) 6 to protect cotton crops from weed growth and as Ansar(R) 6.6 for highway weed control. It also has application elsewhere in the world to protect cotton and sugar cane.
The Company acquired a penta manufacturing and distribution business in 1988 from an affiliated company that had been in the penta business since the early 1970's. The Company made several acquisitions after 1988 to expand in wood preserving products. It acquired a creosote distribution business in early 1991 and a sodium penta distribution business late that same year. In 1998, the Company acquired significant additional assets pertaining to creosote. In October 2000, the Company acquired its herbicide products line.
The Company's strategy is to continue to grow through acquisitions. The Company intends to seek, on a selective basis, acquisitions that complement and expand its existing product lines. The Company's execution of this strategy depends on its ability to identify, consummate and assimilate acquisitions on desirable economic terms, to successfully integrate new product lines and expand its existing product lines. There can be no assurance that the Company will be successful in executing its growth strategy. Furthermore, the Company's ability to implement its growth strategy may be dependent to a certain extent upon obtaining financing for expansion, and there can be no assurance that financing will be available on acceptable terms.
PRODUCTS AND SERVICES
WOOD PRESERVING CHEMICALS. The three primary chemicals used by the wood preserving industry in the United States are penta, creosote and chromated copper arsenate ("CCA"). The Company believes that wood preserving chemicals are used to treat approximately 600 million cubic feet of wood each year in the United States and that 6% of that wood is treated with penta, 15% with creosote and 80% with CCA. The Company supplies the United States wood treating industry with penta and creosote but not with CCA. The Company also supplies sodium penta, a wood preserving product used primarily to treat freshly cut lumber, to customers outside the United States. See "--Competition." The Company's wood preserving chemicals constituted 89% of the Company's revenue in fiscal 2001 and all of its revenue in fiscal 2000 and 1999.
Penta is used primarily to treat electric and telephone utility poles, protecting them from mold, mildew, fungus and insects. The Company manufactures penta in Matamoros, Mexico through a subsidiary. The Matamoros facility produces both solid penta blocks and penta flakes. Those penta products are sold by the Company to its customers or made into a liquid solution of penta concentrate at the Matamoros facility or at the Company's blending and distribution facility in Tuscaloosa, Alabama. The penta blocks, flakes and solutions are sold to the Company's customers in the United States, primarily in Washington, Oregon, Oklahoma, Missouri, Arkansas, Mississippi, Alabama and Georgia. In addition, a portion of the flaked penta is used to produce sodium penta. The Company sells the sodium penta, which is not registered for use in the United States, to customers primarily in Spain, Portugal, Peru, Ecuador and Venezuela. As a by-product of the penta manufacturing process,
the Matamoros facility also produces hydrochloric acid which is sold to distributors for use in the steel and oil well service industries in the United States and Mexico.
Creosote is a wood preservative used to treat railroad cross-ties, bridge timbers and utility poles. Creosote is produced by the distillation of coal tar, a by-product of the transformation of coal into coke. The Company has two primary sources of supply for the creosote it sells in the United States--Reilly Industries, Inc. ("Reilly") and Rutgers VFT AG ("Rutgers"). The Company believes that Reilly and Rutgers are among the world's largest manufacturers of creosote and other coal tar products. Creosote is sold by the Company to customers throughout the United States.
AGRICULTURAL CHEMICALS. The Company's MSMA agricultural chemicals product line was acquired from Zeneca Ag Products, Inc. ("Zeneca") in October 2000. Zeneca's MSMA production facility was relocated to the Company's Matamoros, Mexico facility and reassembled. It will be restarted late in calendar 2001. The Company's MSMA herbicides are sold under the name Bueno(R) 6 in the United States to protect cotton crops, primarily in the southern cotton-growing states and in California, and under the name Ansar(R) 6.6 to state agencies to control highway weed growth.
SUPPLIERS
The Company is dependent upon outside suppliers for all of its raw material requirements for its penta, sodium penta and MSMA manufacturing operations and, therefore, is subject to fluctuations in the price of those materials. The principal raw materials used in those operations are phenol, chlorine, solvent, caustic, methylene chloride and arsenic trioxide, each of which the Company purchases from a limited number of suppliers. The Company does not maintain supply contracts with any of those suppliers of those raw materials. However, the Company believes that these raw materials are each readily available from a variety of sources and the loss of any of the Company's suppliers would not have a material adverse effect on its business, financial condition or results of operations.
The Company has two suppliers of the creosote it sells. Under the Company's long-term supply contract with Reilly, the Company must purchase annual quantities at varying prices per pound. The Company's creosote supply contract with Rutgers is renewable annually ending December 31. The Company must purchase an agreed minimum volume in each calendar year. The purchase price for creosote is fixed for calendar year 2001 but is subject to adjustment on renewal.
CUSTOMERS
The Company sells its chemical products to approximately 110 customers. One customer, Kerr McGee Chemical Corp., accounted for approximately 15% of the Company's revenues in fiscal 2001, 12% in fiscal 2000 and 15% in fiscal 1999. No other customer accounted for 10% or more in those fiscal years.
MARKETING
The Company markets its chemicals in the United States through five employees and one independent sales agent. Outside the United States, the Company sells its products directly and through sales agency contracts to local lumber producers or to chemical companies for those producers in over 20 countries.
COMPETITION
There are only a few firms competing with the Company in the sale of its wood preservatives or MSMA products. The Company competes by selling its products at competitive prices and maintaining a strong commitment to product quality and customer service.
The Company is one of only two companies producing penta for sale in the United States. The Company believes that it currently supplies almost half of the penta sold in the United States. The other penta producer in the United States is Vulcan Chemicals, Inc., a company that has larger sales volumes and greater financial and other resources than the Company. The Company believes that there is one significant competitor for creosote sales in the United States and two other lesser suppliers.
There are three other firms that sell MSMA products in the United States, primarily for use on cotton. For several years, however, cotton farmers in the United States have been planting genetically modified cotton seed that is resistant to the herbicide Roundup(R) and other glyphosate herbicides. As farmers converted to that seed and to glyphosate herbicides, MSMA products became niche products used primarily by farmers who are sensitive to the higher cost of the genetically modified seed program. The companies selling resistant seed and glyphosate herbicides have much greater financial and other resources than the Company.
Penta, creosote and MSMA must be registered prior to sale under United States law. See "--Environmental and Safety Matters--Licenses, Permits and Product Registrations." As a condition to registration, any company wishing to manufacture and sell these products must provide to the EPA substantial scientific research and
testing data regarding the chemistry and toxicology of the products. That data must be generated by the applicant or the applicant must compensate other data providers for relying on their information. The Company believes that the cost of satisfying the data submission requirement serves as an impediment to the entry of new competitors in the United States market, particularly those with lesser financial resources. While the Company has no reason to believe that the registration requirement will be discontinued or materially modified, there can be no assurances as to the effect of such a discontinuation or modification on the Company's competitive position.
EMPLOYEES
As of the end of fiscal 2001, the Company had a total of 55 full-time employees. Ten of the Company's employees worked at the Company's corporate offices in Houston, Texas, 39 at the Matamoros facility, six at the Tuscaloosa facility and one worked in Louisiana. None of the employees in the United States are represented by a labor union but 24 of the Company's employees in Mexico are represented under a labor contract. The Company believes that it has good relations with its employees.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations are subject to extensive federal, state and local laws, regulations and ordinances in the United States and abroad relating to the generation, storage, handling, emission, transportation and discharge of certain materials, substances and waste into the environment, and various other health and safety matters. Governmental authorities have the power to enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company believes that it is currently in substantial compliance with all such applicable laws and regulations. The Company must devote substantial financial resources to ensure such compliance. For a discussion of the Company's expenditures regarding environmental matters, see "Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources."
The Company anticipates that the regulation of its business operations under federal, state and local environmental regulations in the United States and abroad will increase over time. The Company cannot at this time estimate the impact of increased regulation on the Company's operations, future capital expenditure requirements or the cost of compliance.
UNITED STATES REGULATION. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA") and comparable state laws, an owner or operator of property from which releases of hazardous
substances have occurred may be liable for investigation and remediation of any resulting contamination. In addition, the generator of hazardous substances may be responsible for all or a portion of any required investigation or remediation at offsite disposal locations. Under the Resource Conservation and Recovery Act, as amended ("RCRA"), a facility that treats, stores or disposes of hazardous wastes on-site may be liable for corrective action costs. In addition to CERCLA and RCRA, state laws and regulations may impose the same or broader liability.
The Company's operations also are governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and the regulations thereunder.
MEXICO REGULATION. The Company's Matamoros facility and its operations in Mexico are subject to various environmental laws, regulations and ordinances promulgated by governmental authorities in Mexico. The Secretariat of Environment, Natural Resources and Fisheries (SECRETARIATE DE MEDIO AMBIENTE, RECURSOS NATURALES Y PESCA: "SEMARNAP") is given overall responsibility for environmental regulation in Mexico. SEMARNAP's responsibilities include enforcement of Mexico's laws and regulations concerning air and water emissions and hazardous waste treatment, storage and disposal. SEMARNAP is given broad authority to enforce compliance with environmental laws and regulations and can require that operations be suspended pending completion of required remedial action.
LICENSES, PERMITS AND PRODUCT REGISTRATIONS. Certain licenses, permits and product registrations are required for the Company's products and operations in the United States, Mexico and other countries in which the Company does business. The licenses, permits and product registrations are subject to revocation, modification and renewal by governmental authorities. In the United States in particular, producers of pesticides such as penta, creosote and MSMA are required to obtain a registration for their products under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA") from the EPA in order to sell those products in the United States. Compliance with the registration system under FIFRA has had and will in the future have a material effect on the Company's business, financial condition and results of operations. The registration system requires an ongoing submission to the EPA of substantial scientific research and testing data regarding the chemistry and toxicology of pesticide products by manufacturers. Under an agreement with the other industry participants, the Company shares research and testing costs pertaining to its chemical products based on its relative market share. The Company incurred expenses of approximately $716 thousand, $756 thousand and $721 thousand in connection with the FIFRA research and testing program in fiscal 2001, 2000 and 1999, respectively.
ITEM 2. PROPERTIES
Set forth below is information with respect to certain of the Company's properties.
LEASE
APPROXIMATE OWNED/ EXPIRATION
LOCATION PRIMARY USE SIZE LEASED DATE
-------- ---------------- ------------ ------ ----------
Houston, Texas Corporate Office 8,000 square Leased March 31,
feet 2004
Matamoros, Mexico Manufacturing 7 acres Owned
Tuscaloosa, Alabama Processing 1.5 acres Owned
Distribution
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The Company believes that all of these properties are adequately insured, in good condition and suitable for their anticipated future use. The Company believes that if the lease for its corporate office were not renewed or were terminated, other suitable facilities could be leased or purchased.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal actions or proceedings that it believes will have a material adverse effect on its business, results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 2001 to a vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock is traded under the trading symbol "KMGB" on The Nasdaq SmallCap Market. The approximate high and low bid quotations in fiscal 2001 and 2000, adjusted for a stock dividend in March 2001, were as follows:
2001 2000
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PERIOD: HIGH LOW HIGH LOW
------ ---- ---- ---- ----
First quarter 4.77 3.64 6.14 4.09
Second quarter 5.91 2.84 5.74 3.64
Third quarter 4.32 2.00 5.68 3.64
Fourth quarter 3.76 3.10 5.23 4.09
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These quotations represent prices between dealers, do not include retail markups, markdowns or commissions and may not represent actual transactions. The quotations are based on information reported by the National Association of Securities Dealers, Inc.
As of September 30, 2001, there were 7,681,981 shares of Common Stock issued (including 180,000 treasury shares) and 7,501,981 shares outstanding held by approximately 600 shareholders of record, and more than 300 round lot holders.
KMG declared and paid cash dividends in fiscal 2001 and 2000 as follows:
DATE DECLARED: DATE PAID: AMOUNT ($): PER SHARE ($) ------------- --------- ---------- ------------- March 2001 April 2001 150,039 .02 September 2000 September 2000 140,003 .02 February 2000 March 2000 140,003 .02 August 1999 September 1999 140,003 .02 |
The Company declared and paid a ten percent stock dividend in March 2001. Additionally, the Company declared a dividend in August 2001 of $.02 per share ($150,039) payable in September 2001. The Company anticipates that future earnings will be retained to finance the continuing development of its business. The Company does not anticipate paying substantial dividends on the Common Stock in the foreseeable future.
In fiscal 2000 the Company granted a warrant to purchase 25,000 shares of Common Stock at $5.50 per share to the assignee of Gilman Financial Corporation. The warrant expires March 6, 2009 and was issued as compensation for that company's acquisition consulting services. In fiscal 1999 the Company also granted a warrant to acquire 25,000 shares of Common Stock to JP Turner & Company, L.L.C. for consulting services pertaining to acquisition and financing transactions and to investor relations. The warrant is exercisable at a price of $5.50 per share of Common Stock through March 17, 2003. The warrants to Gilman Consulting and to JP Turner & Company, L.L.C. were issued by the Company in private transactions without registration in reliance upon the exemption from registration under section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The selected statement of operations, per share data and balance sheet data for each of the five years ended July 31, 2001 set forth below have been derived from the audited consolidated financial statements of the Company. The following data should be read in conjunction with the consolidated financial statements of the Company and notes to consolidated financial statements.
YEAR ENDED JULY 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Amounts in thousands except per share data)
Net sales $35,791 $33,754 $36,389 $22,657 $19,485
Net income $ 2,640 $ 3,845 $ 3,752 $ 3,206 $ 2,709
Net income per:
Basic shares outstanding $ 0.35 $ 0.50 $ 0.49 $ 0.46 $ 0.39
Diluted shares outstanding $ 0.35 $ 0.50 $ 0.48 $ 0.46 $ 0.39
Total assets $27,760 $25,312 $22,792 $20,099 $ 9,386
Long-term obligations $ 1,615 $ 2,554 $ 3,427 $ 5,268 $ 0
Cash dividends declared per
share $ 0.04 $ 0.04 $ 0.03 $ 0.02 $ 0.02
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales and certain other financial data for the three fiscal years ended July 31, 2001:
YEARS ENDED JULY 31,
-----------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net sales $35,790,990 $33,754,285 $36,388,799
Gross profit 12,004,737 13,221,357 12,821,876
Gross profit as percent of Net Sales 33.5% 39.2% 35.2%
Selling, general and administrative expense 7,751,488 7,070,806 6,765,537
Operating income 4,253,249 6,150,551 6,056,339
Other income (expense), net 5,363 19,375 (4,134)
Income before taxes 4,258,612 6,169,926 6,052,205
Provision for income taxes (1,618,272) (2,325,121) (2,299,838)
Net income $ 2,640,340 $ 3,884,805 $ 3,752,367
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SALES REVENUE
2001 VS 2000. Net sales revenue in fiscal 2001 was 6% greater than in fiscal 2000. Although sales revenue from the Company's wood treating chemicals was down significantly in fiscal 2001, that decline was offset by the Company's sales of MSMA products, which began during the second quarter of fiscal 2001. Management believes that wood treating chemical sales declined in fiscal 2001 because commercial demand for railroad crossties and utility poles was below historical levels during the year. Crosstie replacement projects appear to have been deferred by major railroads. Deregulation and mergers in the utility industry led to inventory consolidations that reduced overall demand for replacement utility poles. Additionally, some utilities shifted to purchases of poles treated with a competing product, CCA. Because the Company's penta product is dissolved in oil to create a treating solution, higher diesel oil prices since fiscal 2000 have meant that treating solutions made using CCA enjoyed a widened price differential over the Company's product compared to historical levels.
Gross profit for fiscal 2001 was down 9.2% from the prior fiscal year and the Company's gross profit margin declined to 33.5% from 39.2%. The decrease in gross profit and margin was attributable to the decline in higher margin penta sales.
2000 VS 1999. Net sales revenue for fiscal 2000 was 7.2% less than in fiscal 1999, a decline caused by reduced sales volume for the Company's wood treating products. Penta product volume fell because utility company consolidations in North America reduced demand for utility poles, the principal wood product treated with penta, and because diesel oil prices were at historically high levels. An additional factor, however, was that the Company's penta-based sapstain product was not renewed for use in its two largest markets, Chile and Malaysia. Creosote sales were adversely affected by a deferral of railroad crosstie replacement by major railroads.
Gross profit for fiscal 2000 increased 3.1% over fiscal 1999 and gross profit margin increased from 35.2% to 39.2%. Higher per unit wood treating chemicals sales revenues coupled with lower per unit manufacturing costs of penta products helped maintain gross profit in the face of declining net sales revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for fiscal 2001 were $681 thousand higher than fiscal 2000 and fiscal 2000 was $305 higher than fiscal 1999. Most of the increase in fiscal 2001 was for expenses related to the MSMA products line purchased in October 2000. The Company also incurred severance costs in the most recent fiscal year for a force reduction at the Company's manufacturing facility in Mexico. Selling, general and administrative expenses increased in fiscal 2000 as compared to fiscal 1999 from increased testing and research costs for creosote and from expenses incurred in pursuing growth by acquiring niche chemical products. Also, the Company absorbed additional storage and distribution expenses related to creosote purchased from Rutgers. Prior to November 1998 the Company acted as an agent on behalf of Rutgers, and those creosote expenses were borne by Rutgers. In November 1998 the agency arrangement was terminated and the Company began to purchase creosote from Rutgers for its own account and now bears creosote related expenses formerly absorbed by Rutgers.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased in fiscal 2001 to $3.1 million as compared with approximately $7.8 million and $4.8 million at the end of fiscal 2000 and 1999. The decrease in fiscal 2001 was attributable to the Company's MSMA product line acquisition.
The Company's wholly-owned subsidiary, KMG, has a working capital line of credit under a Revolving Loan Agreement (as amended from time to time, the "Revolving Credit Facility") with SouthTrust Bank of Alabama, National Association ("SouthTrust"). Under the Revolving Credit Facility, the Company may borrow up to the lesser of $3.5 million or a borrowing base (as defined therein). The Revolving Credit Facility contains various representations and warranties and affirmative and negative covenants applicable to KMG, including a limitation that equity investments or loans by KMG not exceed $250 thousand and a requirement to obtain the lender's consent prior to replacing the President and chairman of the board of directors of KMG, David L. Hatcher, or any merger, reorganization or recapitalization of KMG. In addition, the Revolving Credit Facility requires KMG to maintain (i) a tangible net worth (as defined therein) of not less than $5.0 million, (ii) a fixed charge coverage ratio of at least 1.25 to 1.0, and (iii) a ratio of liabilities to tangible net worth of not more than 2.0 to 1.0 beginning at the end of fiscal 2000. As of September 30, 2001 the Company's borrowing base under the Revolving Credit Facility was $3.5 million and no amount had been borrowed.
In fiscal 2001 the Company purchased its MSMA product line for $2.3 million and invested approximately $2.4 million in capital improvements, most of which was for the relocation of the MSMA facility. The MSMA product line also was responsible for the increased levels of Company inventory and trade accounts receivable in fiscal 2001.
In fiscal 1998 the Company purchased certain creosote registrations that were financed in part by a $6 million term loan to KMG by SouthTrust. The term loan bears interest at a fixed rate of 7.32%. It is being amortized over seven years in equal monthly installments that total approximately $1 million per year. In fiscal 1999 the Company prepaid an additional $1 million of principal on the term loan. As of September 30, 2001, the principal balance outstanding under the term loan was $2.4 million.
The Company's capital expenditures and operating expenses for environmental matters, excluding FIFRA testing and data submission costs, were approximately $387 thousand in fiscal 2001 and $281 thousand and $300 thousand in fiscal 2000
and 1999. The Company estimates that its capital expenditures and operating expenses for environmental matters other than FIFRA will be approximately $508 thousand in fiscal 2002. The Company expensed approximately $716 thousand for testing costs under FIFRA in fiscal 2001 and approximately $756 thousand and $721 thousand testing in fiscal 2000 and 1999. Management believes that total FIFRA testing costs for will be approximately $625 thousand in fiscal 2002. Since environmental laws have traditionally become increasingly stringent, costs and expenses relating to environmental control and compliance may increase in the future. While the Company does not believe that the cost of compliance with existing or future environmental laws and regulations will have a material adverse effect on its business, financial condition or results of operations, there can be no assurance that costs of compliance will not exceed current estimates.
The Company conducts periodic ground water sampling at its facility in Tuscaloosa, Alabama as required by the Alabama Department of the Environmental Management ("ADEM"). A 1991 sampling revealed the presence of penta contamination and more recent sampling continues to show some contamination, although in lesser amounts. ADEM has not required any additional response at this time beyond the continuation of periodic monitoring. The Company does not believe that costs for environmental investigation and remediation will materially impact liquidity or have a material adverse effect on the Company's business, financial condition or results of operations, although there can be no assurances to this effect.
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 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 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.
ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," became effective for the Company beginning August 1, 2001. SFAS No. 133, as amended and interpreted, establishes accounting and reporting standard for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. Management does not believe the adoption of SFAS 133 has a significant impact on the financial position, results of operation, or cash flows of the Company because it currently has no contracts that qualify as derivatives under the provisions of this new standard. The Financial Accounting Standards Board and the Derivatives Implementation Group continue to discuss several issues that, once decided, could have additional impact on the Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing, but has not yet determined, the impact of SFAS 142 on its financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to certain market risks arising from transactions that are entered into in the normal course of business, primarily from changes in foreign exchange rates. The Company does not utilize derivative financial instruments or hedging transactions to manage that risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report 16
Consolidated Balance Sheets as of July 31, 2001
and 1999 17
Consolidated Statements of Income for the Years Ended
July 31, 2001, 2000 and 1999 18
Consolidated Statements of Stockholders' Equity for the
Years Ended July 31, 2001, 2000 and 1999 19
Consolidated Statements of Cash Flows for the
Years Ended July 31, 2001, 2000 and 1999 20
Notes to Consolidated Financial Statements 21
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
KMG Chemicals, Inc.:
We have audited the accompanying consolidated balance sheets of KMG Chemicals, Inc. and subsidiaries (the "Company") as of July 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the consolidated financial position of KMG Chemicals, Inc. and subsidiaries as of July 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for the three years in the period ended July 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP Houston, Texas September 14, 2001 |
KMG CHEMICALS, INC. AND SUBSIDIARIES
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,126,781 $ 7,830,843
Accounts receivable:
Trade, net of allowance for doubtful accounts of $130,000 in 2001 and $120,000 in 2000 4,870,148 3,166,625
Other 130,003 73,576
Notes receivable from related parties - current portion 35,938 724,767
Inventories 4,876,261 2,842,724
Prepaid expenses and other current assets 309,181 187,966
----------- -----------
Total current assets 13,348,312 14,826,501
PROPERTY, PLANT, AND EQUIPMENT - Net of accumulated depreciation 5,393,697 2,189,958
NOTES RECEIVABLE FROM RELATED PARTIES - Less current portion 82,602 116,781
DEFERRED TAX ASSET 328,146 289,684
OTHER ASSETS 8,607,531 7,889,455
----------- -----------
TOTAL $27,760,288 $25,312,379
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,961,865 $ 3,121,500
Accrued liabilities 1,967,891 1,174,621
Current portion of long-term debt 939,906 872,881
----------- -----------
Total current liabilities 6,869,662 5,169,002
LONG-TERM DEBT 1,614,513 2,554,414
----------- -----------
Total liabilities 8,484,175 7,723,416
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued
Common stock, $.01 par value; 40,000,000 shares authorized, 7,681,981 and
7,000,169 shares issued, and 7,501,981 and 7,000,169 outstanding in 2001
and 2000, respectively 76,820 70,002
Additional paid-in capital 3,363,952 1,129,507
Treasury stock (900,000)
Accumulated other comprehensive income - unrealized gain on available for sale securities 211,480
Retained earnings 16,523,861 16,389,454
----------- -----------
Total stockholders' equity 19,276,113 17,588,963
----------- -----------
TOTAL $27,760,288 $25,312,379
=========== ===========
|
KMG CHEMICALS, INC. AND SUBSIDIARIES
2001 2000 1999
----------- ----------- -----------
NET SALES $35,790,990 $33,754,285 $36,388,799
COST OF SALES 23,786,253 20,532,928 23,566,923
----------- ----------- -----------
Gross profit 12,004,737 13,221,357 12,821,876
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES 7,751,488 7,070,806 6,765,537
----------- ----------- -----------
Operating income 4,253,249 6,150,551 6,056,339
OTHER INCOME (EXPENSE):
Interest income 259,666 322,351 203,796
Interest expense (238,994) (288,095) (387,599)
Other, net (15,309) (14,881) 179,669
----------- ----------- -----------
Total other income (expense), net 5,363 19,375 (4,134)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,258,612 6,169,926 6,052,205
PROVISION FOR INCOME TAXES 1,618,272 2,325,121 2,299,838
----------- ----------- -----------
NET INCOME $ 2,640,340 $ 3,844,805 $ 3,752,367
=========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic $ 0.35 $ 0.50 $ 0.49
=========== =========== ===========
Diluted $ 0.35 $ 0.50 $ 0.48
=========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 7,538,967 7,681,981 7,681,981
=========== =========== ===========
Diluted 7,592,232 7,749,455 7,758,701
=========== =========== ===========
|
See notes to consolidated financial statements.
KMG CHEMICALS, INC. AND SUBSIDIARIES
COMMON STOCK ACCUMULATED
------------------- ADDITIONAL OTHER TOTAL
SHARES PAR PAID-IN TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS'
ISSUED VALUE CAPITAL STOCK EARNINGS INCOME EQUITY
--------- ------- ---------- --------- ----------- ------------- ------------
BALANCE, 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, JULY 31, 1999 7,000,169 70,002 1,063,385 12,824,656 13,958,043
Warrants issued in exchange
for services 66,122 66,122
Dividends (280,007) (280,007)
Net income 3,844,805 3,844,805
--------- ------- ---------- --------- ----------- ------------- ------------
BALANCE, JULY 31, 2000 7,000,169 70,002 1,129,507 16,389,454 17,588,963
Warrants issued in exchange
for services 25,374 25,374
Stock dividends 681,812 6,818 2,209,071 (2,215,889)
Treasury stock purchased $(900,000) (900,000)
Dividends (290,044) (290,044)
Net income 2,640,340 2,640,340
Unrealized gain on available
for sale securities $ 211,480 211,480
--------- ------- ---------- --------- ----------- ------------- ------------
BALANCE, JULY 31, 2001 7,681,981 $76,820 $3,363,952 $(900,000) $16,523,861 $ 211,480 $ 19,276,113
========= ======= ========== ========= =========== ============= ============
|
KMG CHEMICALS, INC. AND SUBSIDIARIES
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,640,340 $ 3,844,805 $ 3,752,367
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,128,107 1,065,760 1,042,399
Gain on sale of securities (829)
(Gain) loss on sale or abandonment of equipment 1,448 (7,271) 501
Warrants issued in exchange for services 25,374 66,122
Forgiveness of notes receivable from related parties 74,023 71,288
Deferred income tax benefit (38,462) (38,186) (113,954)
Changes in operating assets and liabilities:
Accounts receivable - trade (1,703,523) 91,759 312,124
Accounts receivable - other (56,427) (10,027) 14,216
Inventories (2,033,537) (298,111) (793,267)
Prepaid expenses and other current assets (121,215) 40,202 (75,786)
Accounts payable 840,365 (499,499) 278,729
Accrued liabilities 793,270 198,898 582,216
----------- ----------- -----------
Net cash provided by operating activities 1,549,763 4,524,911 4,999,545
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment (2,441,247) (231,551) (228,871)
Proceeds from sale of securities 7,752
Proceeds from sale of equipment 8,500 801
Loans to related parties (324,854)
Collection of notes receivable from related parties 648,985 19,836 8,305
MSMA product line purchase (2,300,000)
Additions to other assets (98,643) (286,452) (8,564)
Collection of other assets 29,843 113,954
----------- ----------- -----------
Net cash used in investing activities (4,190,905) (452,072) (439,229)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (290,044) (280,007) (210,006)
Purchase of treasury stock (900,000)
Principal payments on borrowings (872,876) (809,875) (1,710,372)
----------- ----------- -----------
Net cash used in financing activities (2,062,920) (1,089,882) (1,920,378)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,704,062) 2,982,957 2,639,938
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,830,843 4,847,886 2,207,948
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,126,781 $ 7,830,843 $ 4,847,886
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ 238,994 $ 288,095 $ 387,599
=========== =========== ===========
Income taxes $ 1,721,855 $ 2,334,730 $ 2,298,187
=========== =========== ===========
|
See notes to consolidated financial statements.
KMG CHEMICALS, INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - KMG Chemicals, Inc. (the "Company") is principally involved in the sale and manufacture of specialty chemicals in niche markets. At the present time, the company sells three wood preserving chemicals, pentachlorophenol ("penta"), creosote and sodium pentacholorphenate ("sodium penta"), and an herbicide product consisting of monosodium and disodium methanearsonic acids ("MSMA"). Penta-manufacturing operations are conducted through KMG de Mexico ("KMEX"), a Mexican corporation and 99.98 percent owned subsidiary, at a plant in Matamoros, Mexico. The penta plant began operations in 1986 and was moved to a new location in Matamoros in May 1997. The Company has two main suppliers of creosote, which it sells throughout the United States.
The Company's MSMA agricultural chemicals product line was acquired form Zeneca Ag Products, Inc. ("Zeneca") in October 2000. The MSMA production facility acquired from Zeneca was relocated adjacent to the Company's penta manufacturing facility and reassembled. The Company's MSMA herbicides are sold under the name Bueno-Registered Trademark- 6 in the United States to protect cotton crops, primarily in the southern cotton-growing states and in California, and under the name Ansar-Registered Trademark- 6.6 to state agencies to control highway weed growth.
The historical financial information of the Company reflects the historical results of KMG-Bernuth ("KMG") and KMEX as a result of a reverse merger of KMG with KMG-B, Inc. ("KMG-B") in October 1996. KMG-B was incorporated in the state of Texas in 1992 under the name Water Point Manufacturing, Inc. ("Water Point"). Water Point adopted "fresh-start" accounting as of October 23, 1996 and subsequently changed its name to KMG-B. On October 15, 1996, pursuant to a stock exchange agreement dated September 13, 1996, KMG-B issued 6,510,000 shares of common stock (approximately 93 percent of its issued and outstanding common stock) in exchange for all of the issued and outstanding shares of common stock of KMG. KMG-B also issued 352,474 shares of common stock to other shareholders as payment for certain services for KMG-B in connection with the stock exchange agreement and in conjunction with other services. During 1998, the Company changed its name to KMG Chemicals, Inc.
The Company's significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of KMG Chemicals, KMG-Bernuth, and KMEX. All significant intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS - The Company considers all investments with original maturities of three months or less when purchased to be cash equivalents.
INVENTORIES - Inventories are valued at the lower of cost or market. Cost is determined using the first-in first-out ("FIFO") method.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated at cost less accumulated depreciation and amortization. Major renewals and betterments are capitalized. Repairs and maintenance costs are expensed as incurred.
INCOME TAXES - Deferred income tax assets and liabilities are determined using the asset and liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are established for future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax bases.
EARNINGS PER SHARE - Basic earnings per common share amounts are calculated using the average number of common shares outstanding during each period. Diluted earnings per share assume the exercise of all stock options having exercise prices less than the average market price of the common stock using the treasury stock method.
CURRENCY TRANSLATION - The U.S. dollar is the functional currency for the Company's foreign operations. For those operations, remeasurements to U.S. dollars from currency translations are included in the statement of income.
STOCK-BASED COMPENSATION - The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, the Company is permitted to either record expenses for stock options and other employee compensation plans based on their fair value at the date of grant or to continue to apply its current accounting policy under Accounting Principles Board Opinion No. 25 ("APB No. 25") and recognize compensation expense, if any, based on the intrinsic value of the equity instrument at the measurement date. The Company elected to continue following APB No. 25 for stock options granted to employees; however, the Company accounts for stock options granted to non-employees under the provisions of SFAS 123.
INTANGIBLE ASSETS - For financial statement purposes, intangible assets are being amortized using the straight-line method over the estimated useful lives of the assets (see Note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the relatively short maturity of these instruments. The notes receivable, including the current portion, are of a related-party nature, and it is not practicable to estimate their fair value. The fair value of the Company's debt at July 31, 2001 and 2000 was estimated to be the same as its carrying value since the debt obligations bear interest at a rate consistent with current market rates.
CONCENTRATIONS OF CREDIT RISKS - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Although the amount of credit exposure to any one institution may exceed federally insured amounts, the Company limits its cash investments to high-quality financial institutions in order to minimize its credit risk. With respect to accounts receivable, such receivables are primarily from wood-treating manufacturers located worldwide. The Company extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is dependent on each customer's financial condition.
NEW ACCOUNTING STANDARDS - Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," became effective for the Company beginning August 1, 2001. SFAS No. 133, as amended and interpreted, establishes accounting and reporting standard for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. Management does not believe the adoption of SFAS 133 has a significant impact on the financial position, results of operation, or cash flows of the Company because it currently has no contracts that qualify as derivatives under the provisions of this new standard. The Financial Accounting Standards Board and the Derivatives Implementation Group continue to discuss several issues that, once decided, could have additional impact on the Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing, but has not yet determined, the impact of SFAS 142 on its financial position and results of operations.
RECLASSIFICATIONS - Certain reclassifications of prior year amounts have been made to conform to current year presentation.
2. INVENTORIES
Inventories are summarized as follows at July 31:
2001 2000
----------- -----------
Chemical raw materials and supplies $ 283,976 $ 344,582
Finished chemical products 4,592,285 2,498,142
----------- -----------
Total $4,876,261 $2,842,724
=========== ===========
|
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment and related accumulated depreciation and amortization are summarized as follows at July 31:
2001 2000
----------- -----------
Land $ 302,527 $ 302,527
Buildings 751,826 718,002
Plant 519,738 445,605
Equipment 2,943,149 2,750,992
Leasehold improvements 38,425 38,425
Construction-in-progress 3,318,438 107,612
----------- -----------
7,874,103 4,363,163
Less accumulated depreciation and amortization (2,480,406) (2,173,205)
----------- -----------
Property, plant and equipment - net $ 5,393,697 $ 2,189,958
=========== ===========
|
On October 3, 2000, the Company acquired the monosodium/-disodium methanearsonic acid ("MSMA") herbicides product line (see Note 6) and its manufacturing facility from Zeneca Limited, for a total acquisition cost of $2.3 million. The MSMA manufacturing facility, originally located in Houston, Texas, is being dismantled and reassembled adjacent to the Company's penta manufacturing facility in Matamoros, Mexico. Included in construction-in-progress at July 31, 2001 are costs of approximately $3.3 million related to the purchase and relocation of the MSMA manufacturing facility.
Depreciation is principally computed using a straight-line method over the estimated useful lives of the assets. Depreciation expense was $336,060, $333,712 and $310,344 in 2001, 2000 and 1999, respectively. The estimated useful lives of classes of assets are as follows:
ASSET DESCRIPTION LIFE (YEARS) ----------------- ------------ Building 15 to 30 Plant 10 to 18 Equipment 3 to 10 Leasehold improvements 5 to 8 |
4. FOREIGN CURRENCY REMEASUREMENT
Monetary assets and liabilities and income items for KMEX are remeasured to U.S. dollars at current rates, and certain assets (notably plant and production equipment) are remeasured at historical rates. Expense items for KMEX are remeasured at average monthly rates of exchange except for depreciation and amortization expense. All gains and losses from currency remeasurement for KMEX are included in operations. Foreign currency remeasurement resulted in an aggregate exchange gain of $11,705 in 2001 and $15,416 in 1999 and an aggregate exchange loss of $1,901 in 2000.
5. INCOME TAXES
The geographical sources of income before income taxes for each of the
three years in the period ended July 31, 2001, 2000 and 1999 were as
follows:
2001 2000 1999
---------- ---------- ----------
United States $3,834,408 $5,883,560 $5,661,546
Foreign 424,204 286,366 390,659
---------- ---------- ----------
Income before income taxes $4,258,612 $6,169,926 $6,052,205
========== ========== ==========
|
The provision for income taxes consisted of the following:
2001 2000 1999
---------- ---------- ----------
Current federal provision $1,303,699 $2,050,567 $2,076,502
Current foreign provision 238,003 114,546 144,544
Current state provision 115,032 198,194 192,746
Deferred income tax benefit (38,462) (38,186) (113,954)
---------- ---------- ----------
Total $1,618,272 $2,325,121 $2,299,838
========== ========== ==========
|
Deferred income taxes are provided on all temporary differences between financial and taxable income. Significant components of the Company's deferred tax assets and liabilities as of July 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
-------- -------- --------
Deferred tax assets (liabilities):
Inventory $ 19,944 $ 19,944
Bad debt expense $ 22,192 44,400 72,150
Difference in depreciable basis of property 161,186 127,242 118,929
Difference in amortization basis of intangibles 144,768 98,098 40,475
-------- -------- --------
Total $328,146 $289,684 $251,498
======== ======== ========
|
The following table accounts for the differences between the actual tax provision and the amounts obtained by applying the applicable statutory U.S. federal and Mexican income tax rate to earnings before income taxes for the year ended July 31:
2001 2000 1999
---------- ---------- ----------
Provision for income taxes at the statutory rate $1,364,370 $2,003,210 $1,997,436
State income taxes 113,558 207,365 157,858
Other 140,344 114,546 144,544
---------- ---------- ----------
Total $1,618,272 $2,325,121 $2,299,838
========== ========== ==========
|
6. OTHER ASSETS
Other assets consisted of the following at July 31:
2001 2000
---------- ----------
Intangible assets - creosote sales and distribution, net of
accumulated amortization of $925,000 in 2001 and
$625,000 in 2000 $3,575,000 $3,875,000
Creosote supply contract, net of accumulated amortization of
$1,233,335 in 2001 and $833,335 in 2000 2,766,665 3,166,665
Intangible assets - MSMA product line, net of accumulated
amortization of $60,000 in 2001 1,140,000
Advances for premiums on employee-owned life insurance
policies (see Note 9) 448,364 412,217
Licensing agreement, net of accumulated amortization of
$177,738 in 2001 and $154,881 in 2000 142,262 165,119
Fair value of investments in available-for-sale securities 361,480 150,000
Other 173,760 120,454
---------- ----------
Total $8,607,531 $7,889,455
========== ==========
|
On June 30, 1998, the Company entered into a long-term supply contract to purchase creosote (a wood-treating chemical) from Allied Signal, Inc. ("Allied"). At the same time, the Company purchased certain intangible assets from Allied pertaining to creosote sales and distribution. The Company paid Allied $4,000,000 and $4,500,000 for entering into the supply contract and for the intangible assets, respectively. The supply contract is being amortized on a straight-line basis over a 10-year term, which is the initial term of the contract. The intangible assets, including Allied's creosote customer list, one customer contract, certain rail car leases, and Allied's rights in creosote product registrations, are being amortized on a straight-line basis over a 15-year term which approximates the life of the assets purchased.
During 1991, the Company entered into a technology-licensing agreement resulting in the granting to the Company of an exclusive worldwide right and license to use and sublease certain proprietary and sales information and to manufacture and sell certain products for an indefinite period of time. Total cost to the Company for this license was $320,000, which is being amortized on a straight-line basis over a 15-year term which approximates the patent life of the products represented by this agreement.
On October 3, 2000, the Company acquired various intangible assets, such as brand names and customer lists, in connection with the purchase of the MSMA herbicides product line from Zeneca Limited (see Note 3). Approximately $1.15 million of the total $2.3 million acquisition cost was allocated to the intangible assets purchased. These costs are being amortized on a straight-line basis over a 15-year term, which approximates the life of the assets purchased.
7. LONG-TERM DEBT
Effective August 1, 1996, the Company entered into a revolving line-of-credit agreement with a bank that provides for borrowings of up to $3,500,000. The borrowing base under this agreement is limited by a formula defined in the agreement based on the amount of receivables and inventory. Interest payments will be due monthly. The line of credit is subject to a one-fourth percent unused line fee and is secured by the Company's receivables, inventory, and general intangibles. The loan agreement includes, among other things, restrictions on equity investments and loans made by the Company and
requires the maintenance of a minimum fixed-charge coverage ratio and minimum net worth requirements. No borrowings were outstanding under this agreement at July 31, 2001 or 2000. The termination date of this loan agreement is January 31, 2004.
On June 26, 1998, the Company entered into a term loan with an original maturity date of July 1, 2005 for $6,000,000 with a bank. Starting August 1, 1998, the Company began making monthly principal and interest payments of $91,498. This term loan is secured by the Company's receivables, inventory, and general intangibles. The interest rate of the term loan is fixed at 7.32 percent per annum. At July 31, 2001, the Company was in compliance with its various debt covenants which, among other things, has restrictions on equity investments and loans made by the Company and
requires the maintenance of a minimum fixed-charge coverage ratio and minimum and ratio requirements on tangible net worth.
The term loan note at July 31, 2001 matures as follows:
YEAR ENDING
JULY 31,
-----------
2002 $ 939,906
2003 1,013,776
2004 600,737
----------
Total $2,554,419
==========
|
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company has noncancelable operating leases for its office and warehouse facilities and certain transportation equipment. At July 31, 2001, the Company was obligated under these leases for the following future minimum lease commitments:
2002 $ 355,316
2003 333,882
2004 251,044
----------
Total $ 940,242
==========
|
Rent expense relating to the operating leases was $437,103, $346,138 and $317,361 in 2001, 2000 and 1999, respectively.
ENVIRONMENTAL - As a manufacturer and supplier of wood treatment products and herbicides, the Company is subject to a variety of health, safety, and environmental laws within the countries in which it operates. These governments may implement new laws or regulations that amend or impose restrictions on the sale or use of the Company's raw materials and products. In management's opinion, the Company is currently in compliance with all applicable laws and regulations, and no actions or proceedings against the Company are known to be in process.
Producers of chemicals such as penta, creosote and MSMA are required by the Environmental Protection Agency ("EPA") to obtain a registration for their products under the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA") in order to sell those products in the United States. The registration system requires an ongoing submission to the EPA of substantial scientific research and testing data regarding the chemistry and toxicology of pesticides produced by manufacturers. Under an agreement with other industry participants, the Company shares the costs of the research and testing required by FIFRA, as well as possible compliance testing required by foreign governments, based on
relative market share. In the current year, data obtained from these tests were consistent with historical test results and will not, in management's opinion, hinder the re-registration of the Company's pesticide products.
The Company incurred expenses in connection with the FIFRA research and testing programs of approximately $716,000, $756,000 and $721,000 in 2001, 2000 and 1999, respectively. These costs are included in selling, general, and administrative expenses.
Future costs to the Company of the research and testing programs are difficult to quantify, since foreign governments have the authority to amend testing protocols and/or mandate additional tests. However, management estimates that these future costs will be approximately $625,000 per year and intends to expense these costs as incurred.
LAWSUITS - The Company is involved in various claims and lawsuits in the normal course of business. Management does not believe that the outcome of any of these matters will have a materially adverse effect on the Company's consolidated financial position or results of operations.
9. RELATED-PARTY TRANSACTIONS
During 1991, the Company entered into "split-dollar insurance" arrangements with two officers/stockholders. Under these arrangements, the Company advances funds for insurance premiums and records these advances as a noncurrent asset. The Company has a security interest in the insurance policies to the extent of the advances made. The security interest is to be satisfied either from death benefit proceeds or, in the event of termination of the arrangement(s), by reimbursement from the officer(s)/stockholder(s). During fiscal 1998, the arrangement with one such officer was terminated under the provisions of a five-year employment agreement and converted to a noninterest-bearing promissory note. As a portion of the officer's compensation under the employment agreement, the note is being amortized to compensation expense by the Company over a five-year period beginning January 1, 2000 (see Note 6); such amortization was $74,023 and $71,288 in 2001 and 2000, respectively.
The Company advanced funds to an officer under unsecured promissory notes dated May 15, 1998 and July 15, 1994. The 1998 note was due in annual installments of $28,571, plus interest at 8 percent, with installments starting May 15, 2001. The 1994 note was due in semimonthly installments of $1,000, including interest at 6.5 percent. The amount outstanding under these notes was $0 and $428,057 at July 31, 2001 and 2000, respectively.
In August 1998, the Company purchased a $200,000 participation in a loan by Sterling Bank to National Health Capital, Ltd. ("NHC"), a limited partnership engaged in purchasing medical receivables. In November 1998, the Company made an additional loan of $200,000 to NHC. At the time of these transactions, directors of the Company were directors of the general partner of NHC, limited partners in NHC, and one director was president of NHC. NHC ceased operations in 1999 and began the process of recovering on its assets and winding up its business. Management believes that at that time, and through the date that the interest in theses notes was purchased by an officer of the Company (see below), the notes receivable were collectible. Both loans were modified and renewed as of October 1999. The participation loan bore no interest and was due August 20, 2000. The second loan bore no interest and was due on September 30, 2000.
On October 18, 2000, the Company completed its purchase of 180,000 shares of the Company's outstanding common stock from an officer at a price of $5.00 per share, the value of the Company's common stock on August 29, 2000, the date on which the Company's Board of Directors approved the transaction. In accordance with the Company's desire to remove certain related party transactions from
its accounts, the proceeds from the sale were used by the officer to purchase the Company's interest in the two NHC notes referred to above, and to repay the loans made to the officer by the Company in fiscal 1998 and 1994.
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan covering substantially all of its U.S. employees. The participants may contribute from 3 percent to 15 percent of their compensation, and the Company makes matching contributions under this plan equal to 3 percent of the participant's compensation. Company contributions to the plan totaled approximately $30,000, $40,000 and $46,000 in 2001, 2000 and 1999, respectively.
In July 2001, the Company adopted a supplemental executive retirement plan. Only persons specifically designated by the company may be participants in the plan. The plan is unfunded and amounts payable to participants are general obligations of the company. The plan provides that a participant will be paid a supplemental retirement benefit for 10 years equal to a percentage of the participant's three-year average base salary at normal retirement. The benefit payable to participants is reduced by the equivalent actuarial value of the Company's other pension plan payments to the participant, if any, the Company's 401(k) plan and one-half social security benefits. Normal retirement is the earlier of age 65 and completion of 10 years credited service or age 60 with 30 years credited service. As of July 31, 2001, none of the Company's executives were designated as a participant in the plan; however, one executive was designated as a participant in August 2001.
11. SIGNIFICANT CUSTOMERS
The Company had one significant customer in 2001, 2000 and 1999 whose sales as a percentage of total sales were 15 percent, 12 percent and 15 percent, respectively.
12. STOCKHOLDERS' EQUITY
The Company adopted the 1996 Stock Option Plan (the "Stock Plan") on October 15, 1996 and reserved 700,000 shares of its common stock for issuance under the Stock Plan. The Stock Plan provides for the grant of "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock options. The Stock Plan will be administered either by the Company's Board of Directors or by a committee of two or more nonemployee directors. Subject to the terms of the Stock Plan, the Board of Directors or the committee has the authority to grant options under the Stock Plan, to amend, construe, and interpret it, and to make all other determinations and take any and all actions necessary or advisable for its administration. The directors, consultants, and key employees of the Company or any subsidiary are eligible to receive options under the Plan, which are fully vested upon issuance, but only salaried employees of the Company or its subsidiaries are eligible to receive incentive stock options, which vest over a five-year period from the date of issuance.
Options will be exercisable during the period specified in each option agreement and in accordance with a vesting schedule to be designated by the Board of Directors or the committee. Any option agreement may provide that options become immediately exercisable in the event of a change or threatened change in control of the Company and in the event of certain mergers and reorganizations of the Company. Options may be subject to early termination within a designated period following the option holder's cessation of service with the Company.
In 2000 the Company granted an option to acquire 40,000 shares of common stock in consideration for investor relations consulting services. These options would have vested if before January 1, 2000 the average closing price of the Company's common stock equaled or exceeded $9.00 per share for ten
consecutive days, however, the options failed to vest and expired unexercised. Also in 2000 the Company granted warrants to acquire 25,000 shares of common stock to JP Turner & Company L.L.P. for consulting services as requested by the Company and pertaining to the evaluation of acquisition and financing transactions and to investor relations. The warrants are immediately exercisable at a price of $5.50 per share of common stock through March 17, 2003.
In 2000, the Company granted a warrant for the purchase of 25,000 shares of the Company's common stock to Gilman Financial Corporation, a company that employs a Director of the Company, in exchange for consulting services with respect to developing, studying, and evaluating merger and acquisition proposals. The warrant is immediately exercisable at a price of $5.50 per share of common stock through March 6, 2009.
Stock option and warrants activity for the Company in 2001, 2000 and 1999 was as follows:
2001 2000 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
Stock options and warrants
outstanding, beginning of year 154,171 $ 3.67 160,171 $ 3.69 70,171 $ 1.73
Granted 190,000 3.55 34,000 5.17 90,000 5.21
Cancelled (40,000) 5.00
------- --------- ------- --------- ------- ---------
Stock options and warrants
outstanding, end of year 344,171 $ 3.61 154,171 $ 3.67 160,171 $ 3.69
======= ========= ======= ========= ======= =========
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Options and warrants outstanding as of July 31, 2001 are as follows:
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- ----------- --------- ----------- ---------
$ 0.213 43,671 3.22 $ 0.213 43,671 $ 0.213
3.44 - 5.50 300,500 10.87 4.100 79,300 5.170
|
At July 31, 2001, options were exercisable for 122,971 shares at a weighted-average exercise price of $3.41. The remaining contractual life of these options was approximately 7.9 years. At July 31, 2001, 355,829 shares were available for future option grants.
The weighted-average fair value of options granted during 2001, 2000 and 1999 was $103,176, $114,314 and $95,488, respectively. The effect of these options would have decreased basic and diluted EPS by $.01 per share in 2001 and $.02 per share during 2000 and 1999, respectively. Fair value of the options is estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions for fiscal years 2001, 2000 and 1999:
2001 2000 1999
----- ----- -----
Weighted-average expected life 12.91 9.66 11.94
Volatility factor 48% 48% 45%
Dividend yield 0.1% 0.8% 0.2%
Weighted-average risk-free interest 5.07% 7.26% 6.40%
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The following is a reconciliation of the numerators and denominators of basic and diluted earnings per share computations, in accordance with SFAS No. 128:
YEAR ENDED JULY 31, 2001
-------------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) (AMOUNT)
----------- ------------- ---------
Basic EPS - Income available to common
stockholders $ 2,640,340 7,538,967 $ 0.35
Effect of Dilutive Securities -Common stock options 53,265 0.00
----------- ------------ ---------
Diluted EPS - Income available to common
stockholders $ 2,640,340 7,592,232 $ 0.35
=========== ============ =========
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YEAR ENDED JULY 31, 2000
-------------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) (AMOUNT)
----------- ------------- ---------
Basic EPS - Income available to common
stockholders $ 3,844,805 7,681,981 $ 0.50
Effect of Dilutive Securities -Common stock options 67,474 0.00
----------- ------------ ---------
Diluted EPS - Income available to common
stockholders $ 3,844,805 7,749,455 $ 0.50
=========== ============ =========
|
YEAR ENDED JULY 31, 1999
-------------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) (AMOUNT)
----------- ------------- ---------
Basic EPS - Income available to common
stockholders $ 3,752,367 7,681,981 $ 0.49
Effect of Dilutive Securities -Common stock options 76,720 (0.01)
----------- ------------ ---------
Diluted EPS - Income available to common
stockholders $ 3,752,367 7,758,701 $ 0.48
=========== ============ =========
|
The Company declared and paid a 10% stock dividend during fiscal 2001, which resulted in the issuance of 681,812 shares of the Company's common stock.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- -----------
Year ended July 31, 2001
Net sales $8,302,040 $8,192,896 $8,098,371 $11,197,683
Operating income 1,467,674 968,730 375,867 1,440,978
Income before income tax 1,530,895 982,054 341,073 1,404,590
Net income $ 949,155 $ 608,873 $ 211,465 $ 870,847
Per share data:
Earnings per share - basic $ 0.13 $ 0.08 $ 0.03 $ 0.11
Earnings per share - diluted $ 0.13 $ 0.08 $ 0.03 $ 0.11
Year ended July 31, 2000
Net sales $8,833,089 $7,761,334 $8,176,294 $ 8,983,568
Operating income 1,580,027 1,285,055 1,555,007 1,730,462
Income before income tax 1,570,703 1,277,383 1,548,829 1,773,011
Net income $1,005,250 $ 792,031 $ 948,274 $ 1,099,250
Per share data:
Earnings per share - basic $ 0.13 $ 0.10 $ 0.12 $ 0.15
Earnings per share - diluted $ 0.13 $ 0.10 $ 0.12 $ 0.15
Year ended July 31, 1999
Net sales $9,803,822 $8,054,981 $9,234,191 $ 9,295,805
Operating income 1,612,992 1,403,956 1,747,659 1,291,732
Income before income taxes 1,549,467 985,451 1,889,424 1,627,863
Net income $ 960,670 $ 612,622 $1,171,443 $ 1,007,632
Per share data:
Earnings per share - basic $ 0.13 $ 0.08 $ 0.15 $ 0.13
Earnings per share - diluted $ 0.12 $ 0.08 $ 0.15 $ 0.13
|
* * * * * *
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Pursuant to instruction G(3) to Form 10-K, the information required by Items 10-13 of Part III is incorporated by reference from the Company's definitive proxy statement to be filed on or about October 30, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K.
(a) The financial statements filed as part of this report in Item 8 are listed in the Index to Financial Statements contained in such Item. The following documents are filed as exhibits to this report:
2.1(i) First Amended Joint Plan of Reorganization dated September 1,
1995, as modified and clarified to date.*
2.1(ii) Asset Purchase and Sale Agreement dated June 26, 1998
with AlliedSignal, Inc.*
2.1(iii) Asset Sale Agreement dated October 3, 2000 between the
Company and GB Biosciences Corporation *
2.2 Stock Exchange Agreement dated September 13, 1996 by and
between W.P. Acquisition Corp., Halter Financial Group, Inc.,
KMG-Bernuth, Inc. and certain shareholders of KMG-Bernuth,
Inc.*
3(i) Amended and Restated Articles of Incorporation.*
3(ii) Bylaws.*
3(iii) Articles of Amendment to Restated and Amended Articles of
Incorporation, filed December 11, 1997.*
4.1 Form of Common Stock Certificate.*
10.1 Agency Agreement dated January 1, 1987 by and between Bernuth,
Lembcke Co. Inc. and VfT AG.*
10.2 Revolving Loan Agreement dated August 1, 1996 by and between
KMG-Bernuth, Inc. and SouthTrust Bank of Alabama, National
Association.*
33
|
10.3 $2,500,000 Revolving Note dated August 1, 1996 payable by
KMG-Bernuth, Inc. to SouthTrust Bank of Alabama, National
Association.*
10.4 1996 Stock Option Plan.*
10.5 Stock Option Agreement dated October 17, 1996 by and between
KMG-B, Inc. and Thomas H. Mitchell.*
10.6 Consulting Agreement dated October 15, 1996 by and between the
Company and Gilman Financial Corporation.*
10.7 Split Dollar Insurance Agreement dated November 8, 1991
between KMG-Bernuth, Inc. and David L. Hatcher.*
10.8 Split Dollar Insurance Agreement dated December 13, 1991
between KMG-Bernuth, Inc. and Bobby D. Godfrey.*
10.9 Second Amendment to Revolving Loan Agreement.*
10.10 $2,500,000 Amended and Restated Revolving Note.*
10.11 Third Amendment to Revolving Loan Agreement.*
10.12 $2,500,00 Amended and Restated Revolving Note dated December 31,
1997.*
10.13 Employment Agreement dated February 1, 1998 with Bobby D.
Godfrey.*
10.14 Creosote Supply Agreement dated as of June 30, 1998 between
AlliedSignal Inc. and the Company.*
10.15 Performance Guaranty dated June 30, 1998 by the Company.*
10.16 Term Loan Agreement between SouthTrust Bank, National
Association and KMG-Bernuth, Inc.*
10.17 $6,000,000 Term Note.*
10.18 Guaranty of Payment by the Company.*
10.19 Fourth Amendment to Revolving Loan Agreement.*
10.20 Creosote Supply Agreement dated November 1, 1998 between
Rutgers VFT and the Company*
10.21 Option to Purchase 40,000 Shares of Common Stock dated as of
September 16, 1998 between the Company and Halter Financial
Group, Inc.*
10.22 Warrant for the Purchase of 25,000 Shares of Common Stock
dated as of March 17, 1999 between the Company and JP Turner &
Company, L.L.C.*
10.23 Manufacturing and Formulation Agreement dated October 3, 2000
between the Company and GB Biosciences Corporation.*
10.24 Warrant for the Purchase of 25,000 Shares of Common Stock
dated as of March 6, 2000 between the Company and JGIS, Ltd.,
an assignee of Gilman Financial Corporation.*
34
|
10.25 Employment Agreement with Thomas H. Mitchell dated July 11,
2001.
10.26 Employment Agreement with John V. Sobchak dated June 26, 2001.
10.27 Supplemental Executive Retirement Plan dated effective August 1,
2001
21.1 Subsidiaries of the Company.*
|
Documents marked by an (*) were previously filed by the Company and are incorporated by this reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KMG CHEMICALS, INC.
By: /s/ David L. Hatcher Date: 10/24/01
------------------------------------------- ----------------
David L. Hatcher, President
and Chairman
|
Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ John V. Sobchak Date: 10/24/01
------------------------------------------- ----------------
John V. Sobchak, Chief Financial Officer
By: /s/ Bobby D. Godfrey Date: 10/24/01
------------------------------------------- ----------------
Bobby D. Godfrey, Director
By: /s/ George W. Gilman Date: 10/24/01
------------------------------------------- ----------------
George W. Gilman, Director
By: /s/ Fred C. Leonard III Date: 10/24/01
------------------------------------------- ----------------
Fred C. Leonard III, Director
By: /s/ Charles M. Neff, Jr. Date: 10/24/01
------------------------------------------- ----------------
Charles M. Neff, Jr., Director
By: /s/ Richard L. Urbanowski Date: 10/24/01
------------------------------------------- ----------------
Richard L. Urbanowski, Director
|
EMPLOYMENT AGREEMENT
AGREEMENT, dated effective as of July 11, 2001 ("Effective Date"), between KMG CHEMICALS, INC., a Texas corporation (the "Company"), with an office at 10611 Harwin, Suite 402, Houston, Texas 77036 and THOMAS H. MITCHELL ("Executive"), with an address at 520 Three Corners, Houston, Texas 77024.
WHEREAS, the Executive has been an employee of Company and Company wishes to continue to employ the Executive to perform executive duties 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 continues the employment of the Executive under this Agreement as of the Effective Date to serve as Executive Vice President and Chief Operating Officer of the Company's subsidiary, KMG-Bernuth, Inc., and the Executive hereby accepts such employment, on the terms and conditions set forth in this Agreement.
2. TERM OF EMPLOYMENT. The term of employment under this Agreement shall be for the period commencing on the Effective Date and ending July 31, 2004, subject to earlier termination as provided herein. The term of employment under this Agreement shall be automatically extended for an additional one (1) year period at the end of the initial term of employment and at the end of any renewal term of employment unless the Company gives notice at least sixty (60) days prior to the end of the employment period that the Executive's employment under this Agreement shall not be so extended; provided, however, that such automatic extensions of the term of employment shall not extend beyond the Executive attaining age 65.
3. DUTIES.
(a) The Executive shall continue to perform such duties of an executive nature for the Company and its subsid-iaries as he shall have performed heretofore or such other duties as may be assigned to him from time to time by the President of the Company and that are customarily performed by an executive holding positions similar to that of the Executive. 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.
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 and its subsidiaries.
(b) The headquarters for the performance of the Executive's duties 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 duties 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 $135,000 ("Base Salary"), or such greater amount as shall be approved by the Company in its sole discretion from time to time;
(ii) for the fiscal year ending July 31, 2001, incentive compensation under the Company's current incentive program for the Executive, and for periods beginning after July 31, 2001, incentive compensation pursuant to an incentive compensation plan for Company executives ("Executive Incentive Plan") as such plan shall be in effect from time to time;
(iii) (A) on the Effective Date an option to purchase 100,000 shares of the common stock of the Company and (B) on or before September 1 of each calendar year beginning after January 1, 2001, an option to purchase not less than 10,000 shares of the common stock of the Company (collectively, the options described in paragraph 4(a)(iii)(A) and (B) are referred to as the "Stock Options"), subject to vesting and the other terms and conditions set forth in such Stock Options.
(b) The Company shall have the unrestricted right to modify, amend, terminate or change the Executive Incentive Plan at any time during the term of this Agreement, provided, that the during the term of employment the Company shall provide the Executive with the opportunity to receive an award of incentive compensation targeted at fifty percent (50%) of Base Salary when performance goals
established by the Company are met; provided, further, that the actual award will vary in the sole discretion of the Company above and below the targeted percentage of Base Salary as achievement of the performance goals varies above and below the goals and the maximum award payable will be seventy-five percent (75%) of Base Salary in any given fiscal year. The Executive acknowledges and agrees that the exercise price, vesting, and all other terms and conditions of the Stock Options to be granted under paragraph 4(a)(iii)(B) shall be established by the Company in its sole discretion at the time of grant.
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.
6. BENEFITS. The Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan, a copy of which has been provided to the Executive, and all Company group health (including family major medical plans), life insurance, pension, profit-sharing, stock purchase or stock option plan, annuity or other benefit programs that may, from time to time, be available to employees of the Company generally, subject to eligibility, vesting requirements and other terms and conditions from time to time in effect in respect of such benefit programs; provided, however, that nothing herein shall require the Company at any time to create or continue any such plan, program or arrangement[; provided, further, that no modification, amendment, suspension or termination of the Plan shall adversely affect the right of the Executive or his beneficiary to receive the benefits granted under the Supplemental Executive Retirement Plan in respect of such Executive as of the date of modification, amendment, suspension or termination unless the Executive or his beneficiary, as the case may be, agrees in writing to such modification, amendment, suspension or termination] .
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 of his employment under this Agreement, 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 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. CONFIDENTIAL INFORMATION; NON-COMPETITION.
(a) Company and its affiliates shall disclose to Executive, or place Executive in a position to have access to or develop, trade secrets or confidential information of Company or its affiliates; and/or shall entrust Executive with business opportunities of Company or its affiliates; and/or shall place Executive in a position to develop business good will on behalf of Company or its affiliates. Executive recognizes and acknowledges that Executive will have access to certain information of Company and its affiliates and that such information is confidential and constitutes
valuable, special and unique property of Company or its affiliates . Executive shall not at any time, either during or subsequent to the term of employment with Company, disclose to others, use, copy or permit to be copied, except in pursuance of Executive's duties for and on behalf of Company and its affiliates, successors, assigns or nominees, any Confidential Information of Company or its affiliates (regardless of whether developed by Executive) without the prior written consent of Company. The Executive may make disclosure of Confidential Information if, and solely to the extent that, the Executive is advised in writing by legal counsel prior to disclosure that such disclosure is required by law or court order and a copy of such advice is provided to the Company. The term "Confidential Information" means any secret or confidential information or know-how and shall include, but shall not be limited to, the plans, customers, costs, prices, uses, corporate opportunities, research, financial data, evaluations, prospects, and applications of products and services, results of investigations or studies owned or used by Company or its affiliates, and all apparatus, products, processes, compositions, samples, formulas, computer programs, computer hardware designs, computer firmware designs, and servicing, marketing or manufacturing methods and techniques at any time used, developed, investigated, made or sold by Company or its affiliates, before or during the term of employment with Company, that are not generally available to the public. Executive shall maintain in confidence any Confidential Information of third parties received as a result of Executive's employment with Company in accordance with Company's obligations to such third parties and the policies established by Company. Executive acknowledges that all books, records, documents, manuals, computer data, notes, files, customer lists, marketing studies and any other similar or dissimilar information or data, whether or not containing Confidential Information, that are used by the Executive or other employees or affiliates of the Company during Executive's term of employment are the exclusive property of the Company or its affiliates and shall be delivered by Executive to Company on termination of Executive's term of employment for whatever reason, or at any earlier time requested by Company.
(b) As part of the consideration for the compensation and benefits to be paid to Executive hereunder; to protect the Confidential Information of Company and its affiliates that has been and will in the future be disclosed or entrusted to Executive, the business goodwill of Company and its affiliates that has been and will in the future been developed in Executive, or the business opportunities that have been and will in the future be disclosed or entrusted to Executive by Company and its affiliates; and as an additional incentive for Company to enter into this Agreement, Company and Executive agree to the non-competition obligations hereunder. During the term of employment under 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 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 five percent (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 or its subsidiaries shall be deemed to include, without limitation, any business which manufactures, sells or distributes chemicals manufactured, sold or distributed by the Company or any of its affiliates for which, during the one year immediately preceding the termination of the Executive's term of employment under this Agreement, the Executive provided substantial executive services.
(c) In the event the Executive shall breach any provisions of this paragraph 8 (which provisions the Executive hereby acknowledges are reasonable and equitable), the Company shall be entitled to terminate any payments then owing to the Executive under this Agreement and/or to seek specific performance and injunctive relief for such breach or threatened breach. This termination of payments 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.
(d) Executive understands that the restrictions set forth in this paragraph 8 may limit Executive's ability to engage in certain businesses anywhere in the world during the period provided for above, but acknowledges that Executive will receive sufficiently high remuneration and other benefits under this Agreement to justify such restriction. It is expressly understood and agreed that Company and Executive consider the restrictions contained in this paragraph 8 to be reasonable and necessary to protect the Confidential Information of Company. Nevertheless, if any of the aforesaid restrictions are found by a court having jurisdiction to be unreasonable, or overly broad as to geographic area or time, or otherwise unenforceable, the parties intend for the restrictions therein set forth to be modified by such court so as to be reasonable and enforceable and, as so modified by the court, to be fully enforced.
9. TERMINATION. The Executive's employment under this Agreement shall terminate as provided in paragraph 2 and under the following circumstances:
(a) DEATH OR DISABILITY. The Executive's employment shall terminate upon the death or Disability of Executive. For purposes of this Agreement, "Disability" shall be the inability to perform executive-level services, combined with eligibility to receive disability benefits under the standards used by the Company's long-term disability benefit plan. In the event Executive is a "Qualified Individual with a Disability," as such term is defined in the Americans with Disabilities Act, the Company shall not terminate Executive's employment hereunder if Executive is able to perform the essential functions of Executive's job with reasonable accommodation from the Company.
(b) WITH "CAUSE". For purposes of this Agreement, the Company shall
have "Cause" to terminate Executive's employment hereunder upon the occurrence
of any of the following: (i) embezzlement, theft or other misappropriation of
any property of the Company or any of its subsidiaries by Executive, (ii) gross
negligence or willful misconduct by Executive resulting in substantial loss to
the Company or any of its subsidiaries or substantial damage to the reputation
of the Company or any of its subsidiaries, (iii) any act by Executive that
results in a conviction of, or a pleading nolo contendere to, a felony or other
crime involving moral turpitude, fraud or misrepresentation, (iv) willful and
continued failure or neglect by Executive to substantially perform his assigned
duties for the Company or any of its subsidiaries, (v) gross breach of
Executive's fiduciary obligations to the Company or any of its subsidiaries,
(vi) any chemical dependence which materially affects the performance of
Executive's duties and responsibilities to the Company or any of its
subsidiaries; provided, that in the case of the misconduct set forth in clauses
(iv) and (vi) above, such misconduct shall continue for a period of five (5)
days following written notice thereof by the Company to Executive.
(c) WITHOUT "CAUSE". Notwithstanding any provisions of this
Agreement to the contrary, the Company may terminate Executive's employment
hereunder for any reason other than those specified in the foregoing paragraphs
(a) and (b), or for no reason, at any time, effective upon delivery of sixty
(60) day's notice by the Company.
(d) VOLUNTARY RESIGNATION. Executive may terminate his employment hereunder at any time during the Term subject only to the requirement that Executive shall provide the Company with a minimum of sixty (60) days prior written notice (a "Voluntary Resignation").
(e) WITH "GOOD REASON". Notwithstanding any provision of this
Agreement to the contrary, Executive may terminate his employment hereunder for
Good Reason, subject to the requirement that Executive shall provide the Company
with a minimum of sixty (60) days prior written notice and subject to the
requirement that such notice is given within thirty (30) days (plus the
applicable cure period, if any) after the occurrence of the events constituting
a Good Reason. For purposes of this Agreement, Executive shall have "Good
Reason" to terminate his employment hereunder upon the occurrence, without
Executive's written consent, of any of the following: (i) a failure by the
Company to pay to Executive any amounts due to Executive (including but not
limited to Base Salary and incentive compensation payable under the Company's
Executive Incentive Compensation Plan), which failure is not cured within thirty
(30) days following receipt by the Company of written notice from Executive of
such failure; (ii) demotion of Executive from his position as Executive Vice
President and Chief Operating Officer of KMG-Bernuth, Inc. or a change in his
management reporting relationship such that he no longer reports to the Chief
Executive Officer of the Company; (iii) a relocation of the headquarters for the
performance of the Executive's duties during the term of this Agreement more
than fifty miles outside the limits of Houston, Texas, or (iv) any other
material breach by the Company of this Agreement that remains uncured for thirty
(30) days after written notice thereof by Executive to the Company.
10. COMPENSATION UPON TERMINATION. Executive shall be entitled to the following compensation from Company, in lieu of all compensation or other sums or benefits owed or payable to Executive under paragraph 4 of this Agreement, upon the termination of Executive's employment during the term of this Agreement. Except as may be specifically provided to the contrary in subparagraphs (a) and (f) of this paragraph 10, Executive shall also be entitled to the compensation or benefits payable to Executive, if any, on termination of Executive's employment under the terms and conditions of the Supplemental Executive Retirement Plan or other benefit plan.
(a) DEATH OR DISABILITY. In the event of the death or Disability of Executive during the term of this Agreement, except for amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, the Company shall have no obligation to make payments to Executive or his estate for the periods after the date Executive's employment with the Company terminates on account of death or Disability. On the termination of Executive's employment by reason of death, Company shall pay Executive's legal representative $500,000 on or before sixty (60) days after the Executive's death, and such payment shall be in lieu of and relieve Company from any obligation to pay the benefit, if any, payable under the Supplemental Executive Retirement Plan on termination of employment by death.
(b) WITH CAUSE. In the event that Executive's employment is terminated by the Company for Cause, except for the amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, the Company shall have no obligation to make payments to Executive for the periods before or after the date Executive's employment with the Company terminates for Cause.
(c) WITHOUT CAUSE OR ON A FAILURE TO EXTEND. In the event that Executive's employment is terminated by the Company without Cause at any time during the term of this Agreement or if the Executive's employment is terminated because the Company elects not to extend the Executive's term of employment at the end of the initial term or any renewal term, Executive shall be entitled to receive (A) if the termination was not within one year after a Change of Control, (i) the amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, (ii) an amount equal to three times the Base Salary then in effect in a lump sum 45 days after the date of termination, and (iii) the Stock Options that are vested as of the date of termination may be exercised within two years of such termination as provided therein; or (B) if the termination was within one year after a Change of Control, (i) the amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, (ii) an amount equal to three times the Base Salary then in effect in a lump sum 45 days after the date of termination, and (iii) the Stock Options shall be deemed fully vested as of the date of termination and may be exercised within two years of such termination as provided therein.
(d) VOLUNTARY RESIGNATION.
(i) Without Good Reason. In the event that Executive's employment is terminated by Executive as a Voluntary Resignation pursuant to paragraph 9(d), except for amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, the Company shall have no obligation to make payments to Executive for the periods after the date Executive's employment with the Company terminates on account of Voluntary Resignation.
(ii) With Good Reason. Notwithstanding any provision of this Agreement to the contrary, if Executive's employment with the Company terminates on account of Voluntary Resignation for Good Reason, Executive shall be entitled to receive (1) if the termination was not within one year after a Change of Control, (a) the amounts of Base Salary and accrued vacation time earned by
Executive as of the date of termination but not yet paid by
the Company, (b) an amount equal to three times the Base
Salary then in effect in a lump sum 45 days after the date
of termination, and (c) the Stock Options that are vested as
of the date of termination may be exercised within two years
of such termination as provided therein; or (2) if the
termination was within one year after a Change of Control,
(a) the amounts of Base Salary and accrued vacation time
earned by Executive as of the date of termination but not
yet paid by the Company, (b) an amount equal to three times
the Base Salary then in effect in a lump sum 45 days after
the date of termination, and (c) the Stock Options shall be
deemed fully vested as of the date of termination and may be
exercised within two years of such termination as provided
therein.
(e) CHANGE OF CONTROL. For purposes of this Agreement, a "Change of Control" shall be deemed to exist upon the occurrence of any of the following:
(i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than (i) the Company, (ii) any trustee or other fiduciary holding securities under any employee benefit plan of the Company, (iii) any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities;
(ii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person, not already the beneficial owner of less than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, acquires more than
fifty percent (50%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; and provided, further, a merger or consolidation in which the Company is the surviving entity (other than as a wholly owned subsidiary or another entity) and in which the Board of the Company after giving effect to the merger or consolidation is comprised of a majority of members who are either (x) directors of the Company immediately preceding the merger or consolidation, or (y) appointed to the Board of the Company by the Company (or its Board) as an integral part of such merger or consolidation, shall not constitute a Change in Control of the Company; or
(iii) the consummation of a plan of complete liquidation of the Company or of a sale or disposition by the Company of all or substantially all of the Company's assets other than (i) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (ii) pursuant to a dividend in kind or spin-off type transactions, directly or indirectly, of such assets to the stockholders of the Company.
(f) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN BENEFIT. In the event that Executive's employment is terminated either by the Company without Cause at any time during the term of this Agreement, or by the Company giving notice that the term of employment under the Agreement shall not extend at the end of the initial term or any renewal term, or by the Executive's Voluntary Resignation For Good Reason, (A) if the termination was not within one year after a Change of Control the termination shall be deemed under the Supplemental Executive Retirement Plan as an early retirement and Executive shall be paid the benefit provided in the Supplemental Executive Retirement Plan on early retirement on the terms and conditions thereof except in calculating any early retirement Supplemental Pension Benefit the requirement of having reached his 60th birthday shall be waived, or (B) if the termination was within one year after a Change of Control, the termination shall be deemed under the Supplemental Executive Retirement Plan as a retirement at the Normal Retirement Date and the Equivalent Actuarial Value of the benefit provided in the Supplemental Executive Retirement Plan, calculated at such termination as if the Executive had reached Normal Retirement Date with 20 years of Credited Service, shall be paid in a single sum 45 days after the date of termination. Any such payments shall be in lieu of and relieve Company from any obligation to pay the benefit, if any,
otherwise payable under the Supplemental Executive Retirement Plan on termination of employment.
(g) CERTAIN DEFINITIONS. For purposes of this Agreement, the term "Equivalent Actuarial Value", "Supplemental Pension Benefit", "Credited Service" and "Normal Retirement Date" shall have the meaning set forth in the Supplemental Executive Retirement Plan.
(h) MUTUAL RELEASE. Payment of the amounts payable on the termination of the employment of the Executive under this paragraph 10, other than Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, shall be conditioned upon the execution by the Executive and the Company of a valid mutual release, pursuant to which the Executive and the Company shall each mutually release each other, to the maximum extent permitted by law, from any and all claims either party may have against the other as of the date of termination that relate to or arise out of the employment or termination of employment of the Executive, except such claims arising under this Agreement, any employee benefit plan, or any other written plan or agreement (a "Mutual Release").
11. ARBITRATION. The parties will attempt to promptly resolve any dispute or controversy arising out of or relating to this Agreement or termination of the Executive by the Company. Any negotiations pursuant to this paragraph 11 are confidential and will be treated as compromise and settlement negotiations for all purposes. If the parties are unable to reach a settlement amicably, the dispute will be submitted to binding arbitration before a single arbitrator in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. The arbitrator will be instructed and empowered to take reasonable steps to expedite the arbitration and the arbitrator's judgment will be final and binding upon the parties subject solely to challenge on the grounds of fraud or gross misconduct. The parties agree that the arbitrator shall not be empowered to award punitive or exemplary damages each party hereby irrevocably waives any such damages. The arbitration will be held in Harris County, Texas. Judgment upon any verdict in arbitration may be entered in any court of competent jurisdiction and the parties hereby consent to the jurisdiction of, and proper venue in, the federal and state courts located in Harris County, Texas. Each party will bear its own costs in connection with the arbitration and the costs of the arbitrator will be borne by the party who the arbitrator determines did not prevail in the matter. Unless otherwise expressly set forth in this Agreement, the procedures specified in this paragraph 11 will be the sole and exclusive procedures for the resolution of disputes and controversies between the parties arising out of or relating to this Agreement. Notwithstanding the foregoing, a party may seek a preliminary
injunction or other provisional judicial relief if in such party's judgment such action is necessary to avoid irreparable damage or to preserve the status quo.
12. 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 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 or any of its subsidiaries under a 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) This Agreement has a term co-extensive with the term of employment provided in paragraph 2. Termination shall not affect any right or obligation of any party which is accrued or vested prior to such termination. Without limiting the scope of the preceding sentence, the provisions of paragraphs 8 and 11 shall survive the termination of the employment relationship and/or of this Agreement.
(i) 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.
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/ Thomas H. Mitchell
--------------------------------
Thomas H. Mitchell
|
EMPLOYMENT AGREEMENT
AGREEMENT, dated effective as of June 26, 2001 ("Effective Date"), between KMG CHEMICALS, INC., a Texas corporation (the "Company"), with an office at 10611 Harwin, Suite 402, Houston, Texas 77036 and JOHN V. SOBCHAK ("Executive"), with an address at 4032 Villanova, Houston, Texas 77005.
W I T N E S S E T H :
WHEREAS, the Company wishes to employ the Executive to perform executive duties 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 under this Agreement as of the Effective Date to serve as Chief Financial Officer of the Company and its subsidiary, KMG-Bernuth, Inc., and the Executive hereby accepts such employment, on the terms and conditions set forth in this Agreement.
2. TERM OF EMPLOYMENT. The term of employment under this Agreement shall be for the period commencing on July 16, 2001 and ending July 31, 2002, subject to earlier termination as provided herein. The term of employment under this Agreement shall be automatically extended for an additional one (1) year period at the end of the initial term of employment and at the end of any renewal term of employment unless the Company gives notice at least sixty (60) days prior to the end of the employment period that the Executive's employment under this Agreement shall not be so extended.
3. DUTIES.
(a) The Executive shall continue to perform such duties of an executive nature for the Company and its subsidiaries as may be assigned to him from time to time by the President of the Company and that are customarily performed by an executive holding positions similar to that of the Executive. 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. 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 and its subsidiaries.
(b) The headquarters for the performance of the Executive's duties 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 duties 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 $130,000 ("Base Salary"), or such greater amount as shall be approved by the Company in its sole discretion from time to time;
(ii) a one-time bonus of $10,000 payable within 30 days after the beginning of the Executive's term of employment and incentive compensation pursuant to an incentive compensation plan for Company executives ("Executive Incentive Plan") as such plan shall be in effect from time to time;
(iii) two (2) options to purchase 25,000 shares of the common stock of the Company (50,000 shares in total)(collectively, the "Stock Options"), subject to vesting and the other terms and conditions set forth in such Stock Options.
(b) The Company shall have the unrestricted right to modify, amend, terminate or change the Executive Incentive Plan at any time during the term of this Agreement, provided, that the during the term of employment the Company shall provide the Executive with the opportunity to receive an award of incentive compensation targeted at fifty percent (50%) of Base Salary when performance goals established by the Company are met; provided, further, that the actual award will vary in the sole discretion of the Company above and below the targeted percentage of Base Salary as achievement of the performance goals varies above and below the goals and the maximum award payable will be seventy-five percent (75%) of Base Salary in any given fiscal year. The Executive acknowledges and agrees that the exercise price, vesting, and all other terms and conditions of the Stock Options to be granted under paragraph 4(a)(iii)(B) shall be established by the Company in its sole discretion at the time of grant.
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.
6. BENEFITS. The Executive shall be entitled to one week paid vacation in calendar 2001 and four weeks paid vacation in subsequent calendar years during the term of his employment. The Executive shall be entitled to participate in all Company group health (including family major medical plans), life insurance, pension, profit-sharing, stock purchase or stock option plan, annuity or other benefit programs that may, from time to time, be available to employees of the Company generally, subject to eligibility, vesting requirements and other terms and conditions from time to time in effect in respect of such benefit programs; 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 of his employment under this Agreement, 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 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. CONFIDENTIAL INFORMATION; NON-COMPETITION.
(a) Company and its affiliates shall disclose to Executive, or place Executive in a position to have access to or develop, trade secrets or confidential information of Company or its affiliates; and/or shall entrust Executive with business opportunities of Company or its affiliates; and/or shall place Executive in a position to develop business good will on behalf of Company or its affiliates. Executive recognizes and acknowledges that Executive will have access to certain information of Company and its affiliates and that such information is confidential and constitutes valuable, special and unique property of Company or its affiliates . Executive shall not at any time, either during or subsequent to the term of employment with Company, disclose to others, use, copy or permit to be copied, except in pursuance of Executive's duties for and on behalf of Company and its affiliates, successors, assigns or nominees, any Confidential Information of Company or its affiliates (regardless of whether developed by Executive) without the prior written consent of Company. The Executive may make disclosure of Confidential Information if, and solely to the extent that, the Executive is advised in writing by legal counsel prior to disclosure that such disclosure is required by law or court order and a copy of such advice is provided to the Company. The term "Confidential Information" means any secret or confidential information or know-how and shall include, but shall not be limited to, the plans, customers, costs, prices, uses, corporate opportunities, research, financial data, evaluations, prospects, and applications of products and services, results of
investigations or studies owned or used by Company or its affiliates, and all apparatus, products, processes, compositions, samples, formulas, computer programs, computer hardware designs, computer firmware designs, and servicing, marketing or manufacturing methods and techniques at any time used, developed, investigated, made or sold by Company or its affiliates, before or during the term of employment with Company, that are not generally available to the public or that are maintained as confidential by Company or its affiliates. Executive shall maintain in confidence any Confidential Information of third parties received as a result of Executive's employment with Company in accordance with Company's obligations to such third parties and the policies established by Company. Executive acknowledges that all books, records, documents, manuals, computer data, notes, files, customer lists, marketing studies and any other similar or dissimilar information or data, whether or not containing Confidential Information, that are used by the Executive or other employees or affiliates of the Company during Executive's term of employment are the exclusive property of the Company or its affiliates and shall be delivered by Executive to Company on termination of Executive's term of employment for whatever reason, or at any earlier time requested by Company.
(b) As part of the consideration for the compensation and benefits to be paid to Executive hereunder; to protect the Confidential Information of Company and its affiliates that has been and will in the future be disclosed or entrusted to Executive, the business goodwill of Company and its affiliates that has been and will in the future been developed in Executive, or the business opportunities that have been and will in the future be disclosed or entrusted to Executive by Company and its affiliates; and as an additional incentive for Company to enter into this Agreement, Company and Executive agree to the non-competition obligations hereunder. During the term of employment under 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 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 five percent (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 or its subsidiaries shall mean any business that manufactures, sells or distributes chemicals that were manufactured, sold or distributed by the Company or any of its affiliates during the one year immediately preceding the termination of the
Executive's term of employment under this Agreement, the Executive provided substantial executive services.
(c) In the event the Executive shall breach any provisions of this paragraph 8 (which provisions the Executive hereby acknowledges are reasonable and equitable), the Company shall be entitled to terminate any payments then owing to the Executive under this Agreement and/or to seek specific performance and injunctive relief for such breach or threatened breach. This termination of payments 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.
(d) Executive understands that the restrictions set forth in this paragraph 8 may limit Executive's ability to engage in certain businesses anywhere in the world during the period provided for above, but acknowledges that Executive will receive sufficiently high remuneration and other benefits under this Agreement to justify such restriction. It is expressly understood and agreed that Company and Executive consider the restrictions contained in this paragraph 8 to be reasonable and necessary to protect the Confidential Information of Company. Nevertheless, if any of the aforesaid restrictions are found by a court having jurisdiction to be unreasonable, or overly broad as to geographic area or time, or otherwise unenforceable, the parties intend for the restrictions therein set forth to be modified by such court so as to be reasonable and enforceable and, as so modified by the court, to be fully enforced.
9. TERMINATION. The Executive's employment under this Agreement shall terminate under the following circumstances:
(a) DEATH OR DISABILITY. The Executive's employment shall terminate upon the death or Disability of Executive. For purposes of this Agreement, "Disability" shall be the inability to perform executive-level services, combined with eligibility to receive disability benefits under the standards used by the Company's long-term disability benefit plan. In the event Executive is a "Qualified Individual with a Disability," as such term is defined in the Americans with Disabilities Act, the Company shall not terminate Executive's employment hereunder if Executive is able to perform the essential functions of Executive's job with reasonable accommodation from the Company.
(b) WITH "CAUSE". For purposes of this Agreement, the Company shall
have "Cause" to terminate Executive's employment hereunder upon the occurrence
of any of the following: (i) embezzlement, theft or other misappropriation of
any property of the Company or any of its subsidiaries by Executive, (ii) gross
negligence or willful misconduct by Executive resulting in substantial loss to
the Company or any of its subsidiaries or substantial damage to the reputation
of the Company or any of its subsidiaries, (iii) any act by Executive that
results in a conviction of, or a pleading nolo contendere to, a felony or other
crime involving moral turpitude, fraud or misrepresentation, (iv) willful and
continued failure or neglect by Executive to substantially perform his assigned
duties for the Company or any of its subsidiaries, (v) gross breach of
Executive's fiduciary obligations to the Company or any of its subsidiaries,
(vi) any chemical dependence which materially affects the performance of
Executive's duties and responsibilities to the Company or any of its
subsidiaries; provided, that in the case of the misconduct set forth in clauses
(iv) and (vi) above, such misconduct shall continue for a period of five (5)
days following written notice thereof by the Company to Executive.
(c) WITHOUT "CAUSE". Notwithstanding any provisions of this
Agreement to the contrary, the Company may terminate Executive's employment
hereunder for any reason other than those specified in the foregoing paragraphs
(a) and (b), or for no reason, at any time, effective upon delivery of five (5)
day's notice by the Company.
(d) VOLUNTARY RESIGNATION. Executive may terminate his employment hereunder at any time during the Term subject only to the requirement that Executive shall provide the Company with a minimum of sixty (60) days prior written notice (a "Voluntary Resignation").
(e) WITH "GOOD REASON". Notwithstanding any provision of this
Agreement to the contrary, Executive may terminate his employment hereunder for
Good Reason, subject to the requirement that Executive shall provide the Company
with a minimum of sixty (60) days prior written notice and subject to the
requirement that such notice is given within thirty (30) days (plus the
applicable cure period, if any) after the occurrence of the events constituting
a Good Reason. For purposes of this Agreement, Executive shall have "Good
Reason" to terminate his employment hereunder upon the occurrence, without
Executive's written consent, of any of the following: (i) a failure by the
Company to pay to Executive any amounts due to Executive (including but not
limited to Base Salary and incentive compensation payable under the Company's
Executive Incentive Compensation Plan), which failure is not cured within thirty
(30) days following receipt by the Company of written notice from Executive of
such failure; (ii) demotion of Executive from his position as Chief Financial
Officer of the Company or a change in his management reporting relationship such
that
he no longer reports to the Chief Executive Officer of the Company; (iii) a relocation of the headquarters for the performance of the Executive's duties during the term of this Agreement more than fifty miles outside the limits of Houston, Texas, or (iv) any other material breach by the Company of this Agreement that remains uncured for thirty (30) days after written notice thereof by Executive to the Company.
10. COMPENSATION UPON TERMINATION. Executive shall be entitled to the following compensation from Company, in lieu of all compensation or other sums or benefits owed or payable to Executive under paragraph 4 of this Agreement, upon the termination of Executive's employment during the term of this Agreement.
(a) DEATH OR DISABILITY. In the event of the death or Disability of Executive during the term of this Agreement, except for amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, the Company shall have no obligation to make payments to Executive or his estate for the periods after the date Executive's employment with the Company terminates on account of death or Disability.
(b) WITH CAUSE. In the event that Executive's employment is terminated by the Company for Cause, except for the amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, the Company shall have no obligation to make payments to Executive for the periods before or after the date Executive's employment with the Company terminates for Cause.
(c) WITHOUT CAUSE. In the event that Executive's employment is terminated by the Company without Cause at any time during the term of this Agreement, Executive shall be entitled to receive (A) if the termination was not within one year after a Change of Control, (i) the amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, (ii) an amount equal to two times the Base Salary then in effect in a lump sum 45 days after the date of termination, and (iii) the Stock Options that are vested as of the date of termination may be exercised within two years of such termination as provided therein; or (B) if the termination was within one year after a Change of Control, (i) the amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, (ii) an amount equal to two times the Base Salary then in effect in a lump sum 45 days after the date of termination, and (iii) the Stock Options shall be deemed fully vested as of the date of termination and may be exercised within two years of such termination as provided therein.
(d) VOLUNTARY RESIGNATION.
(i) Without Good Reason. In the event that Executive's employment is terminated by Executive as a Voluntary Resignation pursuant to paragraph 9(d), except for amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, the Company shall have no obligation to make payments to Executive for the periods after the date Executive's employment with the Company terminates on account of Voluntary Resignation.
(ii) With Good Reason. Notwithstanding any provision of this Agreement to the contrary, if Executive's employment with the Company terminates on account of Voluntary Resignation for Good Reason, Executive shall be entitled to receive (1) if the termination was not within one year after a Change of Control, (a) the amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, (b) an amount equal to two times the Base Salary then in effect in a lump sum 45 days after the date of termination, and (c) the Stock Options that are vested as of the date of termination may be exercised within two years of such termination as provided therein; or (2) if the termination was within one year after a Change of Control, (a) the amounts of Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, (b) an amount equal to two times the Base Salary then in effect in a lump sum 45 days after the date of termination, and (c) the Stock Options shall be deemed fully vested as of the date of termination and may be exercised within two years of such termination as provided therein.
(e) CHANGE OF CONTROL. For purposes of this Agreement, a "Change of Control" shall be deemed to exist upon the occurrence of any of the following:
(i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than (i) the Company, (ii) any trustee or other fiduciary holding securities under any employee benefit plan of the Company, (iii) any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing
more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities;
(ii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person, not already the beneficial owner of less than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, acquires more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; and provided, further, a merger or consolidation in which the Company is the surviving entity (other than as a wholly owned subsidiary or another entity) and in which the Board of the Company after giving effect to the merger or consolidation is comprised of a majority of members who are either (x) directors of the Company immediately preceding the merger or consolidation, or (y) appointed to the Board of the Company by the Company (or its Board) as an integral part of such merger or consolidation, shall not constitute a Change in Control of the Company; or
(iii) the consummation of a plan of complete liquidation of the Company or of a sale or disposition by the Company of all or substantially all of the Company's assets other than (i) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (ii) pursuant to a dividend in kind or spin-off type transactions, directly or indirectly, of such assets to the stockholders of the Company.
(f) MUTUAL RELEASE. Payment of the amounts payable on the termination of the employment of the Executive under this paragraph 10, other than
Base Salary and accrued vacation time earned by Executive as of the date of termination but not yet paid by the Company, shall be conditioned upon the execution by the Executive and the Company of a valid mutual release, pursuant to which the Executive and the Company shall each mutually release each other, to the maximum extent permitted by law, from any and all claims either party may have against the other as of the date of termination that relate to or arise out of the employment or termination of employment of the Executive, except such claims arising under this Agreement, any employee benefit plan, or any other written plan or agreement (a "Mutual Release").
11. ARBITRATION. The parties will attempt to promptly resolve any dispute or controversy arising out of or relating to this Agreement or termination of the Executive by the Company. Any negotiations pursuant to this paragraph 11 are confidential and will be treated as compromise and settlement negotiations for all purposes. If the parties are unable to reach a settlement amicably, the dispute will be submitted to binding arbitration before a single arbitrator in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. The arbitrator will be instructed and empowered to take reasonable steps to expedite the arbitration and the arbitrator's judgment will be final and binding upon the parties subject solely to challenge on the grounds of fraud or gross misconduct. The parties agree that the arbitrator shall not be empowered to award punitive or exemplary damages each party hereby irrevocably waives any such damages. The arbitration will be held in Harris County, Texas. Judgment upon any verdict in arbitration may be entered in any court of competent jurisdiction and the parties hereby consent to the jurisdiction of, and proper venue in, the federal and state courts located in Harris County, Texas. Each party will bear its own costs in connection with the arbitration and the costs of the arbitrator will be borne by the party who the arbitrator determines did not prevail in the matter. Unless otherwise expressly set forth in this Agreement, the procedures specified in this paragraph 11 will be the sole and exclusive procedures for the resolution of disputes and controversies between the parties arising out of or relating to this Agreement. Notwithstanding the foregoing, a party may seek a preliminary injunction or other provisional judicial relief if in such party's judgment such action is necessary to avoid irreparable damage or to preserve the status quo.
12. 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 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 or any of its subsidiaries under a 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) This Agreement has a term co-extensive with the term of employment provided in paragraph 2. Termination shall not affect any right or obligation of any party which is accrued or vested prior to such termination. Without limiting the scope of the preceding sentence, the provisions of paragraphs 8 and 11 shall survive the termination of the employment relationship and/or of this Agreement.
(i) 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.
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
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David L. Hatcher,
President
/s/ John V. Sobchak
----------------------------------
John V. Sobchak
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KMG CHEMICALS, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
This Supplemental Executive Retirement Plan for eligible executives of KMG Chemicals, Inc. and its subsidiaries, has been adopted by the Board to be applicable on and after August 1, 2001. The purpose of this Plan is to provide supplemental retirement benefits to certain Employees in addition to the benefits that may be provided to those Employees under other retirement plans maintained by an Employer. This Plan is also designed to retain executive level personnel.
This Plan is intended to constitute a non-qualified, unfunded deferred compensation plan for a select group of management employees under Title I of ERISA. All benefits payable under this Plan shall be paid from the general assets of the Employer.
ARTICLE 1
DEFINITIONS
1.01 "ADMINISTRATIVE COMMITTEE" shall mean the person or persons appointed
by the Board to administer and supervise the Plan as provided in
Article IV. In the absence of such appointment, the Compensation
Committee of the Board shall serve as the Administrative Committee.
1.02 "BENEFICIARY" shall mean the beneficiary designated by a Participant in
the time and manner determined by the Administrative Committee. If the
Participant fails to designate a beneficiary, or if his beneficiary
predeceased him, his beneficiary shall be his spouse or, if none, his
children in equal shares. If no beneficiary survives the Participant,
his beneficiary shall be his estate.
1.03 "BOARD" shall mean the Board of Directors of KMG Chemicals, Inc.
("KMG").
1.04 "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
1.05 "COMPENSATION" shall mean the base salary only of the Employee and,
without limitation, shall not include (i) cash incentive bonuses
payable under any executive or other Employee incentive plan, (ii)
other forms of incentive bonuses (including lump-sum merit, performance
pay, mid-term and long-term incentive, and key employee bonuses); and
(iii) amounts deferred under any deferred compensation plan.
1.06 "COMPENSATION COMMITTEE" shall mean the Compensation Committee of the
Board.
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1.07 "CREDITED SERVICE" shall mean the number of years and months of a
Participant's most recent period of consecutive employment with the
Employer ending on the date the Participant retires or otherwise
terminates his employment with the Employer. Solely for purposes of
determining the amount of a Participant's Supplemental Pension Benefit,
a Participant's Credited Service shall also include, (i) with respect
to Executive Officers, service as the Compensation Committee, in its
sole discretion, shall determine; and (ii) with respect to all other
Participants, service as the Chief Executive Officer, in his sole
discretion, shall determine.
1.08 "EFFECTIVE DATE" shall mean August 1, 2001.
1.09 "EMPLOYEE" shall mean an individual employed by the Employer.
1.10 "EMPLOYER" shall mean KMG Chemicals, Inc. or any predecessor or
successor by merger, purchase or otherwise, and any subsidiary of KMG
Chemicals, Inc.
1.11 "EQUIVALENT ACTUARIAL VALUE" shall mean the equivalent value when
computed on the basis of such rates, tables and factors as the
Compensation Committee shall determine upon the advice of an actuary
appointed by the Compensation Committee.
1.12 "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
1.13 "EXECUTIVE OFFICER" shall mean the officers of KMG as shall be
designated by the Compensation Committee from time to time.
1.14 "FINAL AVERAGE COMPENSATION" shall mean a Participant's average annual
Compensation during the three consecutive calendar years of his
employment with the Employer immediately preceding his retirement or
other termination of employment.
1.15 "NORMAL RETIREMENT DATE" shall mean the first day of the calendar month
coincident with or immediately following the earlier of the date the
Participant: (i) attains age 65 and completes ten years of Credited
Service or (ii) attains age 60 and completes 30 years of Credited
Service.
1.16 "PARTICIPANT" shall mean any person participating in the Plan as
provided in Article II of this Plan.
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1.17 "PARTICIPANT'S BENEFIT PERCENTAGE" shall mean one-twentieth (1/20) of
the percentage established from time to time by the Compensation
Committee.
1.18 "PENSION PLAN" shall mean any defined benefit plans which meet the
requirements of a qualified plan under Section 401(a) of the Code which
may be maintained from time to time by the Employer. The term Pension
Plan shall also include any defined benefit plan which meets the
requirements of a qualified plan under Section 401(a) of the Code which
is (or was) maintained by a Participant's prior employer if any service
with such prior employer is deemed Credited Service under Section 1.06.
1.19 "PLAN" shall mean this Supplemental Executive Retirement Plan of KMG.
1.20 "SAVINGS PLAN" shall mean any defined contribution plans which meet the
requirements of a qualified plan under Section 401(a) of the Code which
may be maintained from time to time by the Employer. The term Savings
Plan shall also include any defined contribution plan which meets the
requirements of a qualified plan under Section 401(a) of the Code which
is (or was) maintained by a Participant's prior employer if any service
with such prior employer is deemed Credited Service under Section 1.06.
1.21 "SOCIAL SECURITY BENEFIT" shall mean the annual old-age insurance
benefit the Participant is entitled to receive under Title II of the
Social Security Act as in effect on the date he retires or otherwise
terminates his employment, or would be entitled to receive if he did
not disqualify himself from receiving a Social Security Benefit by
entering into covered employment or for any other reason. In the case
of a Participant who retires or otherwise terminates employment with
the Employer prior to being eligible for an unreduced old-age benefit
under Title II of the Social Security Act, the Social Security Benefit
shall be computed on the assumption that the Participant will continue
to receive compensation at the same rate as in effect on his retirement
or termination of employment until the date he could first retire with
the right to an unreduced old-age benefit.
1.22 "SUPPLEMENTAL PENSION BENEFIT" shall mean the amount determined under
Section 3.01 of the Plan.
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ARTICLE 2
PARTICIPATION
2.01 PARTICIPATION
An Employee shall become a Participant in this Plan provided that he or
she is: (i) an Executive Officer, or (ii) a United States-based
executive selected by the Chief Executive Officer for participation in
this Plan.
2.02 TERMINATION OF PARTICIPATION
A Participant's participation in the Plan shall terminate on the date
he or she terminates his employment with the Employer unless the
Participant is entitled to a benefit under the Plan. If a Participant
is entitled to a benefit under the Plan, his or her participation in
the Plan shall terminate when the benefit is distributed to him.
ARTICLE 3
AMOUNT AND PAYMENT
OF SUPPLEMENTAL PENSION BENEFITS
3.01 SUPPLEMENTAL PENSION BENEFIT
A Participant who retires or otherwise terminates his employment on or
after his Normal Retirement Date shall receive an annual benefit for
ten years, equal to the excess, if any, of:
(a) the Participant's Benefit Percentage of the Participant's
Final Average Compensation multiplied by his years of Credited
Service up to a maximum of 20 years;
reduced by
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(b) the sum of:
(i) the annual amount of a single life annuity payable as of the Participant's retirement or other termination of employment which is of Equivalent Actuarial Value to the Participant's accrued benefit under any Pension Plan determined as of the Participant's retirement or other termination of employment;
(ii) the annual amount of a single life annuity payable as of the Participant's retirement or other termination of employment which is of Equivalent Actuarial Value to the value of the Participant's accounts under the Savings Plan attributable to contributions made by the Employer (other than pre-tax contributions to a qualified cash or deferred arrangement under Section 401(k) of the Code made by the Employer on behalf of the Participant) determined as of the Participant's retirement or other termination of employment;
(iii) the Equivalent Actuarial Value determined as of the Participant's retirement or other termination of employment of fifty percent (50%) the Participant's annual Social Security Benefit; and
(iv) the annual amount of a single life annuity payable as of the Participant's retirement or other termination of employment which is of Equivalent Actuarial Value to the Employer-provided portion of any benefit provided under any other nonqualified retirement plan or program.
The Participant's accrued benefit under the Pension Plan, the value of his accounts under the Savings Plan, the amount of his Social Security Benefit and any determination which may be required under Section 3.01(b)(iv) of the Plan shall be determined as of the first day of the month coincident with or immediately following the Participant's retirement or other termination of employment.
3.02 EARLY RETIREMENT
(a) If a Participant who has not reached his Normal Retirement Date but who, prior to his termination of employment from the Employer, has reached his 60th birthday and has completed ten years of Credited Service with the Employer, may, with the consent of the Administrative Committee, retire from service and receive an early retirement Supplemental Pension Benefit following the Administrative Committee's approval of his retirement.
(b) The early retirement Supplemental Pension Benefit shall be a deferred Supplemental Pension Benefit beginning on the Participant's Normal Retirement Date and shall be equal to his Supplemental Pension Benefit determined under Section 3.01. However, the Participant may elect to receive an early retirement Supplemental Pension Benefit beginning on the first day of any calendar month before his Normal Retirement Date
and after the Administrative Committee's approval of his retirement. In that case, the Participant's Supplemental Pension Benefit shall be determined in accordance with the provisions of Section 3.01; provided, however, that the amount determined under Section 3.01(a) shall be reduced by five-twelfths of one percent for each month by which the date the Participant's early retirement Supplemental Pension Benefit precedes his Normal Retirement Date.
3.03 DISABILITY
(a) A Participant who has completed at least ten years of Credited Service with the Employer and who ceases to be employed by the Employer on account of disability as defined in the Employer's long-term disability plan shall continue to be credited with Credited Service but only if he is eligible for and continuously receiving disability benefits under the Employer's long-term disability plan. There shall also be included in his Credited Service any applicable waiting period for disability benefits under the Employer's long-term disability plan; provided that after expiration of such period the Participant becomes entitled to such disability benefits. Upon attaining age 65 the Participant shall be entitled to a disability Supplemental Pension Benefit in an amount provided in paragraph (b) below. A Participant's disability Supplemental Pension Benefit shall commence on the Participant's Normal Retirement Date or, if later, the first day of the month on or immediately after the date he ceases, because of retirement or otherwise, to be eligible for payments under the Employer's long-term disability plan.
(b) The Participant's disability Supplemental Pension Benefit shall be determined under Section 3.01 as in effect on the date the Participant's disability Supplemental Pension Benefit commences, based on his Final Average Compensation at the time he ceased employment on account of disability, and his Credited Service as modified by paragraph (a) above.
(c) If the Participant's disability benefits under the Employer's long-term disability plan are discontinued prior to his Normal Retirement Date and he is not restored to service with the Employer, he shall be entitled to retire and receive an early Supplemental Pension Benefit under Section 3.02 as of the first day of the calendar month immediately after such discontinuance if at the date he ceased to be disabled he had completed ten years of Credited Service with the Employer and he had attained age 60. The Participant's Supplemental Pension Benefit shall be computed on the basis of his Final Average Compensation at the time he ceased
employment on account of disability, his Credited Service as modified by paragraph (a) above at the date he ceases to be disabled, and the benefit formula in effect on the date he ceases to be disabled.
3.04 DEATH BENEFITS
(a) If a Participant eligible for a Supplemental Pension Benefit dies prior to his termination of employment with the Employer, or after he terminates his employment with the Employer but before payment of his Supplemental Pension Benefit begins, his Beneficiary shall receive a Supplemental Pension Benefit. The Supplemental Pension Benefit shall be paid in equal monthly installments beginning the first day of the month following the Participant's death and shall be equal to the excess of:
(i) the amount determined under Section 3.01(a) as of the date of his death, reduced by
(ii) the amount determined under Section 3.01(b) as of the date of his death.
The Supplemental Pension Benefit shall be paid for a period of 120 months. If the Participant's Beneficiary dies prior to receiving 120 monthly payments, any remaining payments shall be made to the Beneficiary's estate.
(b) If a Participant dies after payment of his Supplemental Pension Benefit begins, his Beneficiary shall receive the benefit, if any, provided in the event of the Participant's death under the optional form of benefit in which the Participant's Supplemental Pension Benefit was paid.
3.05 PAYMENT OF BENEFITS
(a) Unless the Participant elects an optional form of payment under Section 3.05(b), a Participant's Supplemental Pension Benefit shall be paid to him in monthly installments ending with the last monthly payment before his death.
(b) A Participant may elect to convert the Supplemental Pension Benefit otherwise payable to him into an optional benefit of Equivalent Actuarial Value as provided in one of the following optional forms:
OPTION 1 - JOINT AND 100% SURVIVOR ANNUITY: A modified Supplemental Pension Benefit payable during the Participant's life, and after his death payable during the life of, and to, the Beneficiary named by him when he elects the option.
OPTION 2 - JOINT AND 50% SURVIVOR ANNUITY: A modified Supplemental Pension Benefit payable during the Participant's life, and after his death payable at one-half of the rate of his modified Supplemental Pension Benefit during the life of, and to, the Beneficiary named by him when he elected the option.
OPTION 3 - TEN YEAR CERTAIN AND LIFE: A modified Supplemental Pension Benefit payable during the Participant's life; provided, however, if the Participant dies before receiving 120 monthly payments, the remaining balance of those 120 monthly payments shall be paid to the Beneficiary named by him when he elected the option. If the Beneficiary does not survive to the end of the 120-month period, a lump sum payment of Equivalent Actuarial Value shall be paid to the estate of the last to survive of the Participant and the Beneficiary.
OPTION 4 - SINGLE SUM: A single sum payment; provided,
however, that the Administrative Committee, in its sole
discretion and without any obligation to exercise reasonable
discretion, approves of such single sum payment. If the
Administrative Committee does not grant approval of a single
sum payment, the Participant shall make an election to receive
benefits in any one of the forms otherwise permitted in this
Section 3.05.
(c) The Participant shall make his election by filing the appropriate form with the Administrative Committee no later than December 31 of the calendar year which is at least one calendar year prior to the calendar year in which the Participant terminates his employment with the Employer. Any election made under this Section may be revoked in writing by the Participant provided his written revocation is received by the Administrative Committee no later than December 31 of the calendar year which is at least one calendar year prior to the calendar year in which the Participant terminates his employment with the Employer.
3.06 CASH OUT OF SMALL BENEFITS
Notwithstanding anything in this Plan to the contrary, if upon
retirement, other termination of employment, or death:
(a) the single sum Equivalent Actuarial Value of the Participant's
Supplemental Pension Benefit is $30,000 or less; or
(b) the monthly Supplemental Pension Benefit payable to the
Participant is $500 or less;
his Supplemental Pension Benefit may, in the discretion of the
Administrative Committee, be paid in a single sum Equivalent Actuarial
Value. Any payments to be made under this Section will be made as soon
as practicable following the Participant's retirement, other
termination of employment or death.
3.07 FORFEITURE
Notwithstanding anything in this Plan to the contrary, if the
Participant's employment with the Employer shall terminate prior to the
attainment of Early Retirement or Normal Retirement Age as described
above, and if such termination is not due to death or disability, all
benefits that would otherwise be payable under this Plan shall be
forfeited. If a Participant's employment with the Employer shall
terminate prior to completion of five years of Credited Service with
the Employer (exclusive of any Credited Service which relates to
service with a prior employer), all benefits that would otherwise be
payable under this Plan shall be forfeited. The application of this
provision may be waived by the Chief Executive Officer; provided,
however, that any waiver on behalf of an Executive Officer is subject
to the consent of the Compensation Committee.
3.08 SOURCE OF BENEFITS
Supplemental Pension Benefits shall be payable only from the general
assets of the Employer.
3.09 RESTORATION TO SERVICE
If a Participant who retired or whose employment was otherwise
terminated is restored to employment with the Employer, any payments of
a Supplemental Pension Benefit under this Plan shall cease. Upon his
subsequent retirement or termination of employment with the Employer
and his again becoming entitled
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to receive a Supplemental Pension Benefit, his Supplemental Pension
Benefit shall be recomputed in accordance with the provisions of this
Article. Any recomputed Supplemental Pension Benefit shall be reduced
by the Equivalent Actuarial Value of any Supplemental Pension Benefit
payments the Participant has previously received.
3.10 RECEIPT AND RELEASE
Any final payment or distribution to a Participant or Beneficiary or
their legal representative shall be in full satisfaction of all claims
against the Plan, the Administrative Committee, the Compensation
Committee, the Board and the Employer. The Administrative Committee
may, in its sole discretion, require a Participant, or Beneficiary or
their legal representative to execute a receipt and release, in such
form as the Administrative Committee may determine, upon final payment
of all claims or distributions under the Plan, or a receipt to the
extent of any partial payment or distribution, as a condition of
receiving such payment or distribution.
ARTICLE 4
GENERAL PROVISIONS
4.01 ADMINISTRATION
The administration of the Plan, the exclusive power to interpret it and
to establish rules and regulations for its administration, and the
responsibility for carrying out its provisions are vested in the
Administrative Committee. Any interpretation of the Plan by the
Administrative Committee or any administrative act by the
Administrative Committee shall be final and binding on all Participants
and Beneficiaries. The expenses of the Administrative Committee
attributable to the administration of the Plan shall be paid directly
by the Employer.
4.02 FUNDING
(a) Nothing contained in this Plan shall require the Employer to
segregate any monies from its general funds, or to create any
trusts, or to make any special deposits for any amounts to be
paid to any Participant, former Participant or Beneficiary.
Neither a Participant, former Participant or Beneficiary or
their heirs or personal representatives shall have any right,
title or interest in or to any of the funds of the Employer on
account of this Plan.
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(b) All Supplemental Pension Benefits payable in accordance with
this Plan, as well as any administrative costs relating to the
Plan, shall constitute a general unsecured obligation of the
Employer and shall be payable only from the general assets of
the Employer.
4.03 NO CONTRACT OF EMPLOYMENT
The establishment of the Plan shall not be construed as conferring any
legal rights upon any person for a continuation of employment, nor
shall it interfere with the rights of the Employer to modify a
Participant's compensation or to discharge any Participant and to treat
him without regard to the effect which such treatment might have upon
him as a Participant in the Plan.
4.04 WITHHOLDING TAXES
The Employer shall have the right to deduct any required federal, state
and local withholding taxes from each payment to be made under the
Plan.
4.05 NONALIENATION
Subject to any applicable law, no benefit under the Plan shall be
subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or charge, and any attempt so to do
shall be void, nor shall any such benefit be in any manner liable for
or subject to garnishment, attachment, execution or levy, or liable for
or subject to the debts, contracts, liabilities, engagements or torts
of the Participant.
4.06 PAYMENT TO MINORS, OTHERS
If the Administrative Committee finds that a Participant or other
person entitled to a benefit under the Plan is unable to care for his
affairs because of illness or accident or because he is a minor, the
Administrative Committee may direct that any benefit due him be paid to
his spouse, a child, a parent or other blood relative or a person with
whom he resides, unless a claim has been made for the benefit by a duly
appointed legal representative. Any payment made under the provisions
of this Section shall be a complete discharge of the liabilities of the
Plan for that benefit.
4.07 FURNISHING OF INFORMATION
Prior to paying any benefit under this Plan, the Administrative
Committee may require the Participant or Beneficiary to provide such
information or material as
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the Administrative Committee, in its sole discretion, shall deem
necessary for it to make any determination it may be required to make
under this Plan. The Administrative Committee may withhold payment of
any benefit under this Plan until it receives all such information and
material and is reasonably satisfied of its correctness and
genuineness.
4.08 EFFECT ON OTHER PLANS
Nothing in this Plan shall be deemed to affect the provisions of any
Savings Plan or any other employee benefit plan as defined in Section
3(3) of ERISA, or any employment contract maintained by or entered into
by the Employer.
4.09 INDEMNIFICATION
(a) KMG shall indemnify the members of the Administrative
Committee, the Compensation Committee and/or any of their
delegates against the reasonable expenses, including
attorneys' fees, actually and appropriately incurred by them
in connection with the defense of any action, suit or
proceeding, or in connection with any appeal thereto, to which
they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan
(including any action or failure to act constituting
negligence) and against all amounts paid by them in settlement
thereof and against all amounts paid by them in satisfaction
of a judgment in any such action, suit or proceeding, except
in relation to matters as to which it shall be adjudged in a
suit of final adjudication that such member is liable for
gross negligence, fraud, deliberate dishonesty or willful
misconduct in the performance of his duties.
(b) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in
respect of which indemnity may be sought pursuant to this
Section 4.09, such person (the "Indemnified Party") shall
promptly notify KMG in writing. No indemnification provided
for in Section 4.09(a) shall be available to any party who
shall fail to give notice as provided in this Section 4.09(b)
if KMG was unaware of the proceeding to which such notice
would have related and was prejudiced by the failure to give
such notice, but the failure to give such notice shall not
relieve KMG from any liability which it may have to the
Indemnified Party for contribution or otherwise than on
account of the provisions of Section 4.09(a). In case any such
proceeding shall be brought against any Indemnified Party and
it shall notify KMG of the commencement thereof, KMG shall be
entitled to participate therein and, to the extent that it
shall wish, to assume the defense thereof, with counsel
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satisfactory to such Indemnified Party and shall pay as
incurred the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any Indemnified Party
shall have the right to retain its own counsel at its own
expense. Notwithstanding the foregoing, KMG shall pay as
incurred the fees and expenses of the counsel retained by the
Indemnified Party in the event (i) KMG and the Indemnified
Party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both KMG and the
Indemnified Party and representation of both parties by the
same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that KMG
shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the
reasonable fees and expenses or more than one separate firm
for all such Indemnified Parties. Such firm shall be
designated in writing by KMG. KMG shall not be liable for any
settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a
final judgment for the plaintiff, KMG agrees to indemnify the
Indemnified Party from and against any loss or liability by
reason of such settlement or judgment.
4.10 CLAIMS PROCEDURE
The Administrative Committee shall provide adequate notice in writing
to any Participant, former Participant or Beneficiary whose claim for
benefits under this Plan has been denied, setting forth the specific
reasons for such denial. A reasonable opportunity shall be afforded to
any such Participant, former Participant or Beneficiary for a full and
fair review by the Administrative Committee of its decision denying the
claim. The Administrative Committee's decision on any such review shall
be final and binding on the Participant, former Participant or
Beneficiary and all other interested persons.
4.11 CONSTRUCTION
(a) The Plan is intended to constitute an unfunded deferred
compensation arrangement for a select group of management or
highly compensated employees and therefore exempt from the
requirements of Sections 201, 301 and 401 of ERISA. All rights
hereunder shall be governed by and construed in accordance
with the laws of the State of Texas to the extent such laws
are not pre-empted by ERISA or other federal law.
(b) The masculine pronoun shall mean the feminine wherever
appropriate.
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(c) The titles and headings of the Articles and Sections of the Plan are for convenience only. In case of ambiguity or inconsistency, the text, rather than the titles or headings, shall control.
ARTICLE 5
AMENDMENT OR TERMINATION
The Chief Executive Officer may modify or amend the Plan at any time, provided, however, that any material modification shall be subject to Compensation Committee approval. The Board may suspend or terminate this Plan for any reason at any time. No modification, amendment, suspension or termination of the Plan shall reduce the right of a Participant or his Beneficiary to receive benefits accrued under the Plan in respect of such Participant as of the date of the modification, amendment, suspension or termination unless the Participant or his Beneficiary, as the case may be, agrees in writing to such modification, amendment, suspension or termination.
IN WITNESS WHEREOF, the proper officer of KMG Chemicals, Inc. has executed this instrument this 25th day of June, 2001.
KMG CHEMICALS, INC.
By: /s/ David L. Hatcher
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David L. Hatcher, President
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