UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2003
o 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
|
10611 Harwin Drive, Suite 402
Houston, Texas 77036
(Address of principal executive offices)
(713) 988-9252
(Registrants 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 |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.01 par value |
(Title of Class) |
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 ý No o
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 registrants 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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.
Yes o No ý
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 the last business day of the Companys most recently completed second fiscal quarter (January 31, 2003) was $2,960,111.
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 o No o
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date was: 7,550,019 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement pertaining to the November 18, 2003 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 and changed its name to KMG Chemicals, Inc. in 1997. The Companys principal executive office is located at 10611 Harwin Drive, Suite 402, Houston, Texas 77036 and its telephone number is (713) 988-9252.
Unless the context otherwise requires, references hereinafter to the Company shall mean KMG Chemicals, Inc. and any of its subsidiaries.
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act) and therefore files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the SEC). You can access financial and other information at the Companys website. The address is www.kmgchemicals.com. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available, free of charge, on the website as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. In addition to accessing copies of periodic reports online, you may request a copy of our Annual Report on Form 10-K, including financial statements, by writing to John V. Sobchak, Chief Financial Officer, at the Companys executive office at 10611 Harwin Drive, Suite 402, Houston, Texas 77036.
Business of the Company
General
The Company manufactures and sells specialty chemicals in carefully focused markets. The Company sells three wood preserving chemicals, pentachlorophenol (penta), creosote and sodium pentachlorophenate (sodium penta). 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. The Company also sells tetrachlorvinphos (Rabon) products, a pesticide line used by domestic livestock and poultry growers to protect animals from flies and other pests, and an herbicide product consisting of monosodium and disodium methanearsonic acids (MSMA). The MSMA herbicide is sold by the Company in the United States as Bueno® 6 to protect cotton crops from weed growth and as Ansar® 6.6 for highway weed control. It also has application elsewhere in the world to protect cotton and sugar cane.
A subsidiary of the Company acquired a penta manufacturing and distribution business in 1988 from a company that had been in the penta business since the early 1970s. The subsidiary 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 2000 the Company acquired its MSMA herbicide product line and i n December 2002 it purchased the Rabon product line.
1
The Companys strategy is to continue to grow through acquisitions. The Company intends to seek, on a selective basis, acquisitions that complement and expand on its existing product lines. The Companys execution of this strategy depends on its ability to locate, consummate and assimilate acquisitions on desirable economic terms. There can be no assurance that the Company will be successful in executing its growth strategy. Furthermore, the Companys 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 over the long term.
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 more than 600 million cubic feet of wood each year in the United States and that approximately 80% of that wood is treated 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 Companys wood preserving chemicals constituted 82% of the Companys revenue in fiscal 2003 and 89% in fiscal 2002 and 2001.
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 Companys blending and distribution facility in Tuscaloosa, Alabama. The penta blocks, flakes and solutions are sold to the Companys customers in the United States, primarily in Alabama, Arkansas, Georgia, Louisiana, Mississippi and Missouri. 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 Brazil, Ecuador, France, Peru, Portugal and Spain. 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.
Creosote is a wood preservative used to treat railroad crossties, 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 Rütgers VFT AG (Rütgers). The Company believes that Reilly and Rütgers are among the worlds largest manufacturers of creosote and other coal tar products. Creosote is sold by the Company to customers throughout the United States.
Other Pesticide Chemicals . In December, 2002 the Company purchased an insecticide product line sold under the Rabon trade name. The product line is used by domestic livestock and poultry growers to protect animals from flies and other pests. The product line includes oral larvicides, insecticidal powders and liquid sprays all containing the active ingredient tetrachlorvinphos and is sold by the Company exclusively in the United States. The Company obtained a substantial supply of the active ingredient as part of its initial purchase and will source additional material from one or more other suppliers.
Agricultural Chemicals . The Companys MSMA agricultural chemicals products were acquired from Zeneca Ag Products, Inc. (Zeneca) in October 2000. Zenecas MSMA plant was relocated to the Companys Matamoros, Mexico facility. It began commercial production in January 2002. The
2
Companys MSMA herbicides are sold under the name Bueno® 6 in the United States to protect cotton crops, primarily in the southern cotton-growing states and in California, and under the name Ansar® 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 has a limited number of raw materials supply contracts and believes that where it does not have contracts those raw materials are each readily available from a variety of sources and the loss of any of the Companys 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 Companys long-term supply contract with Reilly, the Company must purchase varying quantities of creosote at prices established annually over a term ending in 2011. The Companys creosote supply contract with Rütgers is renewable each December. The Company must purchase an agreed minimum volume each calendar year. The purchase price for creosote is fixed for calendar year 2003 but is subject to adjustment on renewal. The Company obtained a substantial supply of tetrachlorvinphos active ingredient for its Rabon products as part of the purchase of that product line. The Company has sourced additional active ingredient for calendar 2004 from a foreign supplier.
Customers
The Company sells its chemical products to approximately 100 customers. One customer for the Companys wood treating chemicals, Kerr McGee Chemical Corp. (Kerr McGee), accounted for approximately 18% of the Companys revenues in fiscal 2003, 19% in fiscal 2002 and 15% in fiscal 2001. No other customer accounted for 10% or more in those fiscal years. In December, 2002 Kerr McGee announced that it would exit the wood treating business. They have already closed one wood treating plant and are expected to close three others over the next six months. Although the Company has experienced some disruption in sales as result of Kerr McGees exit, primarily through inventory consolidations at Kerr McGee plants and reallocation of treating activity among other Company customers, the Company believes that the exit will not have a material adverse effect on the sale of the Companys wood treating chemicals.
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.
3
Geographical Information
Net sales made to customers in the United States comprised 96% of total net sales in fiscal 2003 and 2002 and 95% in fiscal 2001. The balance of net sales in each of those fiscal years was made to foreign customers. The Companys long lived assets are located 5% in the United States and 95% in Mexico where the Companys manufacturing facility is located. See Notes 1 and 3 to the Notes to Condensed Consolidated Financial Statements.
Competition
There are only a few firms competing with the Company in the sale of its wood preservatives or its other 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 approximately half of the penta sold in the United States. The other penta producer is 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.
No other company competes with the Company in the sale of tetrachlorvinphos products.
There are four other firms that produce MSMA products for sale 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® 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, tetrachlorvinphos and MSMA products must be registered prior to sale under United States law. See Environmental and Safety MattersLicenses, Permits and Product Registrations. As a condition to registration, any company wishing to manufacture and sell these products must provide to the United States Environmental Protection Agency (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 Companys competitive position.
Employees
As of the end of fiscal 2003, the Company had a total of 75 full-time employees. Twelve of the Companys employees worked at the Companys corporate offices in Houston, Texas, 57 at the Matamoros facility, five in Alabama and one worked in Louisiana. None of the employees in the United States are represented by a labor union but 29 of the Companys employees in Mexico are represented under a labor contract. The Company believes that it has good relations with its employees.
4
Environmental and Safety Matters
The Companys 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 in substantial compliance with all the applicable laws and regulations. The Company must devote substantial financial resources to ensure compliance. For a discussion of the Companys expenditures regarding environmental matters, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
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 estimate the impact of increased regulation on the Companys 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 Companys operations also are governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and its regulations.
Mexico Regulation . The Companys 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. SEMARNAPs responsibilities include enforcement of Mexicos 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 Companys 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 chemicals such as penta, creosote, tetrachlorvinphos and MSMA are required to obtain a registration for their products from the EPA under Federal law in order to sell those products in the United States. Compliance with the registration system has had, and in the future will continue to have, a material effect on the Companys business, financial condition and results of operations. The registration system requires an ongoing submission to EPA of substantial scientific research and testing data regarding the chemistry and toxicology of pesticide products by manufacturers. Under agreements with the other industry participants, the Company shares most research and testing costs pertaining to its chemical
5
products. The Company incurred expenses of approximately $705 thousand, $520 thousand and $716 thousand in connection with the research and testing program in fiscal 2003, 2002 and 2001, respectively.
ITEM 2. PROPERTIES
The following information is provided for the Companys properties.
Location |
|
Primary Use |
|
Approximate
|
|
Owned/
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Houston, Texas |
|
Corporate Office |
|
8,000 square feet |
|
Leased |
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
Matamoros, Mexico |
|
Manufacturing |
|
7 acres |
|
Owned |
|
|
|
|
|
|
|
|
|
|
|
Tuscaloosa, Alabama |
|
Processing Distribution |
|
1.5 acres |
|
Owned |
|
|
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 material legal actions or proceedings, other than ordinary routine litigation incidental to the business, and it does not believe any such actions or proceedings 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 2003 to a vote of security holders through the solicitation of proxies or otherwise.
6
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock, par value $.01 per share (Common Stock), of the Company is traded under the trading symbol KMGB on The Nasdaq SmallCap Market. The approximate high and low bid quotations in fiscal 2003 and 2002, were as follows:
|
|
2003 |
|
2002 |
|
||||
Period: |
|
High |
|
Low |
|
High |
|
Low |
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
3.51 |
|
2.38 |
|
3.45 |
|
2.05 |
|
Second quarter |
|
3.18 |
|
2.40 |
|
2.60 |
|
1.43 |
|
Third quarter |
|
3.02 |
|
2.00 |
|
4.01 |
|
2.31 |
|
Fourth quarter |
|
3.10 |
|
2.20 |
|
3.40 |
|
2.56 |
|
These quotations represent prices between dealers, do not include retail markups, markdowns or commissions and may not represent actual transactions. The quotations are based on information reported by the National Association of Securities Dealers, Inc.
As of September 30, 2003, there were 7,730,019 shares of Common Stock issued (including 180,000 treasury shares) and 7,550,019 shares outstanding held by approximately 600 shareholders of record, and more than 300 round lot holders.
The Company declared and paid cash dividends in fiscal 2003 and 2002 as follows:
Date declared |
|
Date paid |
|
Amount ($) |
|
Per Share ($) |
|
February 2003 |
|
March 2003 |
|
225,387 |
|
.03 |
|
August 2002 |
|
September 2002 |
|
169,042 |
|
.0225 |
|
February 2002 |
|
March 2002 |
|
169,043 |
|
.0225 |
|
August 2001 |
|
September 2001 |
|
150,040 |
|
.02 |
|
The Company declared a dividend in August 2003 of $.0225 per share ($225,387) payable in September 2003. The Company anticipates that future earnings will be retained to finance the continuing development of its business. The Company currently expects to pay comparable dividends on the Common Stock in the future.
7
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, 2003 set forth below have been derived from the audited consolidated financial statements of the Company. The comparability of the data is affected by the Companys purchases of product registrations and other assets related to Rabon products in fiscal 2003 and MSMA products in fiscal 2001 and by the adoption of SFAS 142 in fiscal 2003. See, Item 7, Managements Discussion and Analysis of Financial Conditions and Results of Operations. The following data should be read in conjunction with the consolidated financial statements of the Company and notes to consolidated financial statements.
|
|
Years Ended July 31, |
|
|||||||||||||
|
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||
|
|
(Amounts in thousands except per share data) |
|
|||||||||||||
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
35,536 |
|
$ |
34,438 |
|
$ |
35,791 |
|
$ |
33,754 |
|
$ |
36,389 |
|
Net income |
|
$ |
1,917 |
|
$ |
2,685 |
|
$ |
2,640 |
|
$ |
3,845 |
|
$ |
3,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income per: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Basic shares Outstanding |
|
$ |
0.26 |
|
$ |
0.36 |
|
$ |
0.35 |
|
$ |
0.50 |
|
$ |
0.49 |
|
Diluted shares Outstanding |
|
$ |
0.25 |
|
$ |
0.36 |
|
$ |
0.35 |
|
$ |
0.50 |
|
$ |
0.48 |
|
Cash dividends declared per share |
|
$ |
0.0525 |
|
$ |
0.0425 |
|
$ |
0.04 |
|
$ |
0.04 |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total assets |
|
$ |
32,337 |
|
$ |
28,862 |
|
$ |
27,760 |
|
$ |
25,312 |
|
$ |
22,792 |
|
Long-term obligations |
|
$ |
4,250 |
|
$ |
1,716 |
|
$ |
1,615 |
|
$ |
2,554 |
|
$ |
3,427 |
|
8
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Results of Operations
The following table sets forth the Companys net sales and certain other financial data for the three fiscal years ended July 31, 2003:
|
|
Years ended July 31, |
|
|||||||
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
Net sales |
|
$ |
35,535,585 |
|
$ |
34,438,034 |
|
$ |
35,790,990 |
|
|
|
|
|
|
|
|
|
|||
Gross profit |
|
11,291,219 |
|
12,041,080 |
|
12,004,737 |
|
|||
|
|
|
|
|
|
|
|
|||
Gross profit as percent of Net Sales |
|
31.8% |
|
35.0% |
|
33.5% |
|
|||
|
|
|
|
|
|
|
|
|||
Selling, general and administrative expense |
|
8,149,333 |
|
7,910,175 |
|
7,751,488 |
|
|||
|
|
|
|
|
|
|
|
|||
Operating income |
|
3,141,886 |
|
4,130,905 |
|
4,253,249 |
|
|||
|
|
|
|
|
|
|
|
|||
Other income (expense), net |
|
(160,033 |
) |
198,993 |
|
5,363 |
|
|||
|
|
|
|
|
|
|
|
|||
Income before taxes |
|
2,981,853 |
|
4,329,898 |
|
4,258,612 |
|
|||
|
|
|
|
|
|
|
|
|||
Provision for income taxes |
|
(1,064,689 |
) |
(1,645,361 |
) |
(1,618,272 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net income |
|
1,917,164 |
|
2,684,537 |
|
2,640,340 |
|
|||
Sales Revenue and Gross Profit
2003 vs. 2002 . Net sales revenue was up 3.2% in fiscal 2003 as compared with fiscal 2002. Although wood treating chemical sales were down significantly due to reduced creosote sales, the Company benefited from substantial sales in the newly acquired Rabon product line. A supply shortfall in the northeast United States hampered creosote sales in fiscal 2003 and sales also suffered because certain railroads, as a cost containment measure, specified petroleum and creosote blends for crosstie treatment rather than specifying creosote alone. Creosote sales improved in the last quarter of fiscal 2003, however, and the Company believes that will continue during the balance of the calendar year since several major railroads have indicated that their demand for treated crossties will be greater than in calendar 2002. Penta products pricing was increased in June 2003 but net sales revenue from penta over the entire year was flat. MSMA sales were also unchanged from the prior year.
Gross profit as a percent of sales in fiscal 2003 declined to 31.8% from 35.0% because the Company experienced higher raw material costs and lower production volume on which to allocate fixed production costs. The Company expects that increased costs and depressed volume will affect gross margins adversely over the balance of the calendar year.
9
2002 vs. 2001 . Net sales revenue was down 3.8% in fiscal 2002 as compared with fiscal 2001. Wood treating chemical sales were significantly less due to reduced penta sales. Penta is used primarily to treat utility poles. Although penta sales experienced some improvement in the second half of fiscal 2002, penta sales for fiscal 2002 were down as compared to fiscal 2001 because of soft demand in the utility pole market beginning late in calendar year 2000. Creosote net sales were generally flat over the two year period. A combination of factors appears to have caused net sales of MSMA products in the U.S. to be down in fiscal 2002 over 2001. Dry weather conditions in the southern U.S. cotton-growing states limited weed growth and the need for multiple applications of herbicides and distribution chain inventories from the prior year were greater than usual. Farmers in the U.S. also continued to expand their use of the glyphosate herbicides that compete with MSMA.
Gross profit as a percent of sales in fiscal 2002 improved to 35.0% from 33.5% due in part to lower raw material costs. In addition, fiscal 2002 cost of goods sold was reduced $333 thousand as a result of reducing certain estimated accrued liabilities that had been established in prior years, primarily in fiscal 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2003 were $239 thousand higher than fiscal 2002 and fiscal 2002 was $159 thousand higher than fiscal 2001. In fiscal 2003 the Company incurred depreciation expense associated with the MSMA plant during months in which the plant was not producing product because of a Company decision to alternate the production of MSMA and penta. The Company also incurred increased registration expenses because of increased activity in the product reauthorization process being conducted by the EPA and the addition of the Rabon product line in December 2002. These increased expenses were offset by a decrease in amortization expense by approximately $25 thousand per month because of the effect of new accounting rules. See Note 1 to the Notes to Consolidated Financial Statements. In fiscal 2002 the Company incurred its first full year of environmental regulatory expenses attributable to the MSMA business it purchased in October 2000 and it added a chief financial officer.
Liquidity and Capital Resources
Cash and cash equivalents in fiscal 2003 were essentially unchanged from the prior year, $1.5 million at the end of fiscal 2003 as compared with approximately $1.2 million and $3.1 million at the end of fiscal 2002 and 2001. The $1.9 million decline in cash and cash equivalents in fiscal 2002 was because trade receivables related to MSMA expanded as the Company responded to the competitive environment by offering the extended payment terms characteristic of that business. The Company provided for the operating cash requirements of its MSMA business by borrowing $1.2 million in fiscal 2002 under its working capital line of credit under a Revolving Loan Agreement (as amended from time to time, the Revolving Credit Facility) with SouthTrust Bank (SouthTrust).
10
Under the Companys 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 lenders 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. As of September 30, 2003, the Company had no borrowings under its Revolving Credit Facility with SouthTrust and its borrowing base availability under that loan was $3.5 million.
The Companys purchase for $3.8 million of the Rabon product line was financed with a senior credit facility from SouthTrust that also refinanced the Companys existing term loan facility with that bank. As refinanced, the principal balance outstanding on September 30, 2003 under the Companys term loan with SouthTrust was $4.7 million. The principal amount of the loan is being amortized monthly over ten years but the maturity date is December 20, 2007. The loan carries interest at a varying rate equal to LIBOR plus 1.8% but in February 2003, the Company entered into an interest rate swap transaction with SouthTrust which effectively fixed the interest rate at 5.0% for the remainder of the term. Management believes that the term loan and the Revolving Credit Facility adequately provide for the Companys anticipated need for liquidity and capital resources in fiscal 2004 for the Companys current operations.
The Companys capital expenditures in fiscal 2003 were down significantly to only $276 thousand and reflected a return to more normal expenditure levels. In fiscal 2002 and 2001 the Company incurred substantial capital expenditures of $1.4 million and $4.7 million, most of which were for purchase of MSMA assets or for relocation and construction of the new MSMA plant.
The Companys capital expenditures and operating expenses for environmental matters, excluding testing and data submission costs, were approximately $517 thousand in fiscal 2003 and $703 thousand and $387 thousand in fiscal 2002 and 2001. The fiscal 2003 expenditures reflect a return to more normal expenditure levels while the higher amount in fiscal 2002 was attributable to the MSMA business. The Company estimates that its capital expenditures and operating expenses for environmental matters other than testing and data submission will be approximately $750 thousand in fiscal 2004. The Company expensed approximately $705 thousand for testing and data submission costs in fiscal 2003 and approximately $520 thousand and $716 thousand in fiscal 2002 and 2001. The increased registration expenses was due of increased activity in the product reauthorization process being conducted by the EPA and the addition of the Rabon product line in December 2002. For those reasons, management believes that total testing and data submission costs will increase in fiscal 2004 to approximately $1.1 million. 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
11
environmental investigation and remediation will materially impact liquidity or have a material adverse effect on the Companys business, financial condition or results of operations, although there can be no assurances to this effect.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Disclosure Regarding Forward Looking Statements
Certain information included or incorporated by reference in this report is forward-looking, including statements contained in Managements 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 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.
12
New Accounting Rules
Effective August 1, 2002, the Company adopted a statement promulgated by the Financial Accounting Standards Board (FASB), Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets. As a result, amortization expense decreased by approximately $23,000 per month. See Note 1 to the Notes to Condensed Consolidated Financial Statements.
In February 2003, SFAS No. 148 was issued, Accounting for Stock Based Compensation: A Comparison of FASB Statement No. 123, Accounting for Stock-Based Compensation, and Its Related Interpretations, and IASB Proposed IFRS, Share-based Payments. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock-based compensation. The Company has chosen not to voluntarily change to the fair value based method of accounting for stock-based employee compensation but has adopted the disclosure rules of SFAS No. 148.
The Company has adopted SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 did not have an impact on the Companys financial position or results of operations.
The Company has adopted SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement requires issuers to classify a financial instrument that is within its scope as a liability instead of equity. The adoption of SFAS No. 150 did not have an impact on the Companys financial position or results of operations.
Critical Accounting Policies
The Companys consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting principles that we believe are the most important to aid in fully understanding our financial results are the following:
Revenue Recognition The Company essentially has only one revenue recognition transaction in which the Companys chemical products sold in the open market are recognized as revenue as risk of loss and title to the products transfer to customers, which usually occurs at the time a shipment is made.
13
Allowance for Doubtful Accounts - The Company provides an allowance for accounts receivable it believes it may not collect in full. A provision for bad debt expense recorded to selling, general and administrative expenses increases the allowance. Accounts receivable that are written off the Companys books decrease the allowance. The amount of bad debt expense recorded each period and the resulting adequacy of the allowance at the end of each period are determined using a combination of the Companys historical loss experience, customer-by-customer analyses of the Companys accounts receivable balances each period and subjective assessments of the Companys future bad debt exposure.
Inventories - Inventories consist primarily of raw materials and finished goods that the Company holds for sale in the ordinary course of business. It uses the first-in, first-out method to value inventories at the lower of cost or market. Management believes the Company has not incurred impairments in the carrying value of its inventories.
Impairment of Long-lived Assets - The Company periodically reviews the carrying value of its long-lived assets held and used and assets to be disposed of, including supply contracts and other intangible assets, at least annually or when events and circumstances warrant such a review. The carrying value of long-lived assets are evaluated for potential impairment on a product line basis. The Company has concluded on the basis of its evaluation that the long lived assets are not impaired.
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 ordinary course of business, primarily from changes in foreign exchange rates. The Company generally does not utilize derivative financial instruments or hedging transactions to manage that risk. However, the Company did enter into an interest rate swap transaction in February, 2003 that effectively fixed the interest rate on its term loan at 5.0% for the remainder of the loans term. An increase or decrease in interest rates would not affect the Companys earnings or cash flow over the life of the term loan because the interest rate swap serves to fix the interest rate at 5.0%. Should the financial markets expectations for interest rates in the future increase then the value of the swap, recorded as an asset on the consolidated balance sheets, would increase. Conversely, a drop in the financial markets expectations for future interest rates would cause a drop in the value of that recorded asset. It is possible that the future expectations for interest rates could decline enough to cause the swap to be recorded no longer as an asset, but as a liability, until the swap expires.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
15
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, 2003 and 2002, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended July 31, 2003. These financial statements are the responsibility of the Companys 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, 2003 and 2002, and the consolidated results of its operations and its cash flows for the three years in the period ended July 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP |
|
|
|
Houston, Texas |
|
October 20, 2003 |
16
KMG
CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JULY 31, 2003 AND 2002
|
|
2003 |
|
2002 |
|
||
ASSETS |
|
|
|
|
|
||
CURRENT ASSETS: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
1,490,357 |
|
$ |
1,234,581 |
|
Marketable securities |
|
164,735 |
|
197,627 |
|
||
Accounts receivable: |
|
|
|
|
|
||
Trade |
|
7,397,654 |
|
7,286,118 |
|
||
Other |
|
352,962 |
|
422,462 |
|
||
Notes receivable - current portion |
|
98,442 |
|
35,938 |
|
||
Inventories |
|
5,285,870 |
|
5,192,018 |
|
||
Prepaid expenses and other current assets |
|
178,573 |
|
363,213 |
|
||
Total current assets |
|
14,968,593 |
|
14,731,957 |
|
||
|
|
|
|
|
|
||
PROPERTY, PLANT AND EQUIPMENT - |
|
|
|
|
|
||
Net of accumulated depreciation |
|
5,487,304 |
|
6,106,043 |
|
||
|
|
|
|
|
|
||
NOTES RECEIVABLE, Less current portion |
|
65,844 |
|
48,422 |
|
||
DEFERRED TAX ASSET, Net of accumulated amortization |
|
510,929 |
|
315,077 |
|
||
INTANGIBLE ASSETS |
|
10,397,761 |
|
7,043,121 |
|
||
OTHER ASSETS |
|
907,079 |
|
617,124 |
|
||
|
|
|
|
|
|
||
TOTAL |
|
$ |
32,337,510 |
|
$ |
28,861,744 |
|
|
|
|
|
|
|
||
LIABILITIES & STOCKHOLDERS EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
||
CURRENT LIABILITIES: |
|
|
|
|
|
||
Accounts payable |
|
$ |
3,388,311 |
|
$ |
2,956,696 |
|
Accrued liabilities |
|
1,165,071 |
|
1,608,866 |
|
||
Current portion of long-term debt |
|
504,996 |
|
1,059,529 |
|
||
Total current liabilities |
|
5,058,378 |
|
5,625,091 |
|
||
|
|
|
|
|
|
||
LONG-TERM DEBT |
|
4,250,423 |
|
1,716,003 |
|
||
Total liabilities |
|
9,308,801 |
|
7,341,094 |
|
||
|
|
|
|
|
|
||
STOCKHOLDERS EQUITY: |
|
|
|
|
|
||
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued |
|
|
|
|
|
||
Common stock, $.01 par value, 40,000,000 shares authorized, 7,692,981 shares issued and 7,512,981 shares outstanding at July 31, 2003 and 2002 |
|
76,930 |
|
76,930 |
|
||
Additional paid-in capital |
|
3,365,976 |
|
3,365,976 |
|
||
Treasury stock |
|
(900,000 |
) |
(900,000 |
) |
||
Accumulated other comprehensive income |
|
73,753 |
|
88,429 |
|
||
Retained earnings |
|
20,412,050 |
|
18,889,315 |
|
||
Total stockholders equity |
|
23,028,709 |
|
21,520,650 |
|
||
|
|
|
|
|
|
||
TOTAL |
|
$ |
32,337,510 |
|
$ |
28,861,744 |
|
See notes to consolidated financial statements.
17
KMG
CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
YEARS ENDED JULY 31, 2003, 2002 AND 2001
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
NET SALES |
|
$ |
35,535,585 |
|
$ |
34,438,034 |
|
$ |
35,790,990 |
|
|
|
|
|
|
|
|
|
|||
COST OF SALES |
|
24,244,366 |
|
22,396,954 |
|
23,786,253 |
|
|||
|
|
|
|
|
|
|
|
|||
Gross profit |
|
11,291,219 |
|
12,041,080 |
|
12,004,737 |
|
|||
|
|
|
|
|
|
|
|
|||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
|
8,149,333 |
|
7,910,175 |
|
7,751,488 |
|
|||
|
|
|
|
|
|
|
|
|||
Operating income |
|
3,141,886 |
|
4,130,905 |
|
4,253,249 |
|
|||
|
|
|
|
|
|
|
|
|||
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|||
Interest and dividend income |
|
53,877 |
|
58,601 |
|
259,666 |
|
|||
Interest expense |
|
(161,578 |
) |
(122,096 |
) |
(238,994 |
) |
|||
Other |
|
(52,332 |
) |
262,488 |
|
(15,309 |
) |
|||
|
|
|
|
|
|
|
|
|||
Total other income (expense) |
|
(160,033 |
) |
198,993 |
|
5,363 |
|
|||
|
|
|
|
|
|
|
|
|||
INCOME BEFORE INCOME TAX |
|
2,981,853 |
|
4,329,898 |
|
4,258,612 |
|
|||
|
|
|
|
|
|
|
|
|||
Provision for income tax |
|
(1,064,689 |
) |
(1,645,361 |
) |
(1,618,272 |
) |
|||
|
|
|
|
|
|
|
|
|||
NET INCOME |
|
$ |
1,917,164 |
|
$ |
2,684,537 |
|
$ |
2,640,340 |
|
|
|
|
|
|
|
|
|
|||
EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|||
Basic |
|
$ |
0.26 |
|
$ |
0.36 |
|
$ |
0.35 |
|
Diluted |
|
$ |
0.25 |
|
$ |
0.36 |
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|||
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|||
Basic |
|
7,512,981 |
|
7,512,274 |
|
7,538,967 |
|
|||
Diluted |
|
7,550,394 |
|
7,548,545 |
|
7,592,232 |
|
See notes to consolidated financial statements.
18
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JULY 31, 2003, 2002 AND 2001
|
|
COMMON STOCK |
|
ADDITIONAL
|
|
|
|
ACCUMULATED
|
|
|
|
TOTAL
|
|
||||||||
|
|
SHARES
|
|
PAR
|
|
|
TREASURY
|
|
|
RETAINED
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
BALANCE AT JULY 31, 2000 |
|
7,000,169 |
|
$ |
70,002 |
|
$ |
1,129,507 |
|
|
|
|
|
$ |
16,389,454 |
|
$ |
17,588,963 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Warrants issued for services |
|
|
|
|
|
25,374 |
|
|
|
|
|
|
|
25,374 |
|
||||||
Stock dividends |
|
681,812 |
|
6,818 |
|
2,209,071 |
|
|
|
|
|
(2,215,889 |
) |
|
|
||||||
Purchase of 180,000 shares of treasury stock |
|
|
|
|
|
|
|
$ |
(900,000 |
) |
|
|
|
|
(900,000 |
) |
|||||
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
(290,044 |
) |
(290,044 |
) |
||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
2,640,340 |
|
2,640,340 |
|
||||||
Unrealized gain on available for sale securities (net of taxes of $129,616) |
|
|
|
|
|
|
|
|
|
$ |
211,480 |
|
|
|
211,480 |
|
|||||
BALANCE AT JULY 31, 2001 |
|
7,681,981 |
|
76,820 |
|
3,363,952 |
|
(900,000 |
) |
211,480 |
|
16,523,861 |
|
19,276,113 |
|
||||||
Employee options exercised |
|
11,000 |
|
110 |
|
2,024 |
|
|
|
|
|
|
|
2,134 |
|
||||||
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
(319,083 |
) |
(319,083 |
) |
||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
2,684,537 |
|
2,684,537 |
|
||||||
Change in unrealized gain on available for sale securities (net of taxes of $54,198) |
|
|
|
|
|
|
|
|
|
(123,051 |
) |
|
|
(123,051 |
) |
||||||
BALANCE AT JULY 31, 2002 |
|
7,692,981 |
|
76,930 |
|
3,365,976 |
|
(900,000 |
) |
88,429 |
|
18,889,315 |
|
21,520,650 |
|
||||||
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
(394,429 |
) |
(394,429 |
) |
||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
1,917,164 |
|
1,917,164 |
|
||||||
Change in unrealized gain on available for sale securities (net of taxes of $12,499) |
|
|
|
|
|
|
|
|
|
(18,199 |
) |
|
|
(18,199 |
) |
||||||
Unrealized gain on interest rate swap (net of taxes of $1,982) |
|
|
|
|
|
|
|
|
|
3,523 |
|
|
|
3,523 |
|
||||||
BALANCE AT JULY 31, 2003 |
|
7,692,981 |
|
$ |
76,930 |
|
$ |
3,365,976 |
|
$ |
(900,000) |
|
$ |
73,753 |
|
$ |
20,412,050 |
|
$ |
23,028,709 |
|
See notes to consolidated financial statements.
19
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2003, 2002 AND 2001
|
|
2003 |
|
2002 |
|
2001 |
|
|||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Net income |
|
$ |
1,917,164 |
|
$ |
2,684,537 |
|
$ |
2,640,340 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|||
Depreciation and amortization |
|
1,422,568 |
|
1,391,237 |
|
1,128,107 |
|
|||
Bad debt expense |
|
25,000 |
|
31,102 |
|
10,000 |
|
|||
Gain on sale of securities |
|
|
|
(283,077 |
) |
|
|
|||
Gain on sale of equipment |
|
(19,383 |
) |
(566 |
) |
1,448 |
|
|||
Warrents issued in exchange for services |
|
|
|
|
|
25,374 |
|
|||
Forgiveness of notes receivable from related parties |
|
25,635 |
|
74,023 |
|
74,023 |
|
|||
Conversion of account receivable to notes receivable |
|
(79,926 |
) |
|
|
|
|
|||
Deferred income taxes |
|
(182,256 |
) |
54,198 |
|
(38,462 |
) |
|||
Unrealized gain on securities held for sale |
|
|
|
(123,051 |
) |
|
|
|||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|||
Accounts receivable - trade |
|
(136,536 |
) |
(2,447,072 |
) |
(1,713,523 |
) |
|||
Accounts receivable - other |
|
69,500 |
|
(292,457 |
) |
(56,427 |
) |
|||
Inventories |
|
(93,851 |
) |
(315,757 |
) |
(2,033,537 |
) |
|||
Prepaid expenses and other assets |
|
159,005 |
|
174,118 |
|
(121,215 |
) |
|||
Accounts payable |
|
431,613 |
|
(1,005,169 |
) |
840,365 |
|
|||
Accrued liabilities |
|
(443,795 |
) |
(359,027 |
) |
793,270 |
|
|||
|
|
|
|
|
|
|
|
|||
Net cash provided by (used in) operating activities |
|
3,094,738 |
|
(416,961 |
) |
1,549,763 |
|
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Additions to property, plant and equipment |
|
(275,660 |
) |
(1,360,848 |
) |
(2,441,247 |
) |
|||
Proceeds from sale of securities |
|
|
|
378,076 |
|
|
|
|||
Proceeds from sale of equipment |
|
18,500 |
|
566 |
|
|
|
|||
Collecton of notes receivable from related parties |
|
|
|
34,180 |
|
648,985 |
|
|||
Product line purchases |
|
(3,855,572 |
) |
|
|
(2,300,000 |
) |
|||
Additions to other assets |
|
(311,688 |
) |
(431,377 |
) |
(98,643 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net cash used in investing activities |
|
(4,424,420 |
) |
(1,379,403 |
) |
(4,190,905 |
) |
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Principal borrowings |
|
3,820,000 |
|
1,202,002 |
|
|
|
|||
Principal payments on borrowings |
|
(1,840,113 |
) |
(980,889 |
) |
(872,876 |
) |
|||
Proceeds from exercise of stock options |
|
|
|
2,134 |
|
|
|
|||
Purchase of treasury stock |
|
|
|
|
|
(900,000 |
) |
|||
Payment of dividends |
|
(394,429 |
) |
(319,083 |
) |
(290,044 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net cash provided by (used in) financing activities |
|
1,585,458 |
|
(95,836 |
) |
(2,062,920 |
) |
|||
|
|
|
|
|
|
|
|
|||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
255,776 |
|
(1,892,200 |
) |
(4,704,062 |
) |
|||
|
|
|
|
|
|
|
|
|||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
1,234,581 |
|
3,126,781 |
|
7,830,843 |
|
|||
|
|
|
|
|
|
|
|
|||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
|
$ |
1,490,357 |
|
$ |
1,234,581 |
|
$ |
3,126,781 |
|
|
|
|
|
|
|
|
|
|||
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Cash paid during the year for interest |
|
$ |
156,727 |
|
$ |
122,096 |
|
$ |
238,994 |
|
|
|
|
|
|
|
|
|
|||
Cash paid during the year for income taxes |
|
$ |
1,182,556 |
|
$ |
1,759,717 |
|
$ |
1,721,855 |
|
See notes to consolidated financial statements.
20
KMG CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - KMG Chemicals, Inc. (the Company) is principally involved in the manufacture and sale of specialty chemicals in niche markets through its wholly owned subsidiary, KMG-Bernuth, Inc. The Company sells three wood preserving chemicals - pentachlorophenol (penta), creosote and sodium pentacholorphenate (sodium penta). The Company also sells tetrachlorvinphos products, a pesticide sold to domestic livestock and poultry growers under the Rabon trade name to protect animals from flies and other pests; as well as an herbicide product consisting of monosodium and disodium methanearsonic acids (MSMA). The herbicide product is sold by the Company in the United States as Bueno 6 â to protect cotton crops from weed growth and as Ansar 6.6 â for highway weed control.
The Company manufactures penta, sodium penta and MSMA at its plant in Matamoros, Mexico through KMG de Mexico (KMEX), a Mexican corporation and a 99.98% owned subsidiary of KMG-Bernuth. The Company has two main suppliers of creosote, which it sells throughout the United States.
The Company acquired its Rabon products in December 2002. The acquisition price of $3.9 million included $122 thousand for equipment and packaging inventory and $3.7 million for intangible assets, principally product registrations issued by the Environmental Protection Agency (see Notes 6 and 8). The Company obtained a substantial supply of the active ingredient as part of that acquisition and will source additional quantities of the active ingredient from one or more other sources as needed.
The Companys 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.
Investments in Marketable Securities The Company classifies its existing marketable equity securities as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. These securities are carried at fair market value, with unrealized gains and losses reported in stockholders equity as a component of other comprehensive income (loss). Fair value of
21
the equity securities is based upon the quoted market price on the last business day of the fiscal year plus. Gains or losses on securities sold are based on the specific identification method.
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 Companys debt at July 31, 2003 and 2002 was estimated to be the same as its carrying value since the debt obligations bear interest at a rate consistent with current market rates.
In February 2003, the Company entered into an interest rate swap to effectively fix the interest rate on the Companys term loan at 5.0% through December 20, 2007 (see Note 7). In accordance with SFAS No. 133, Accounting for Derivative and Hedging Activities, this derivative instrument is accounted for as a cash flow hedge. The swap is reported on the consolidated balance sheet at fair value as either an asset or a liability. As of July 31, 2003, an asset of $5,506 associated with this interest rate swap was recorded on the consolidated balance sheet. The unrealized gain or loss on the swap is included in accumulated other comprehensive income on the consolidated balance sheet. For the year ending July 31, 2003, the Company recorded a gain of $3,523 for other comprehensive income associated with this interest rate swap. The effectiveness of the hedge was evaluated for the year ending July 31, 2003. It was determined that the hedge was successful at fixing the effective interest rate on the Companys term loan at 5.0%.
In accordance with SFAS No. 133, certain criteria must be met before an interest rate swap or other derivative instrument is accounted for as a hedge. This includes documentation at hedge inception of (i) the hedging relationship and the Companys risk management objective and strategy for putting the hedge in place and (ii) an indication that the hedging relationship is expected to be highly effective in hedging the designated risk during the term of the hedge. The effectiveness of the hedge is tested periodically and at least annually. The Companys hedging policy requires that only risks (i) determined to have a potentially material impact on the financial performance of the Company and (ii) for which there exists a perfect hedge, employing financial instruments in a mature market, be considered for hedging.
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 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.
Revenue Recognition The Company essentially has only one type of revenue transaction in which the Companys chemical products sold in the open market are recognized as revenue as risk and title to the products transfer to the customers, which is usually at the time a shipment is made.
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
22
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 Companys foreign operations. For those operations, re-measurements 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 No. 123.
Intangible Assets For financial statement purposes, identifiable intangible assets with a defined life are being amortized using the straight-line method over the useful lives of the assets. Identifiable intangible assets of an indefinite life are not amortized in accordance with SFAS No. 142. These assets are required to be tested for impairment annually at a minimum. (See below New Accounting Standards.) The adoption of SFAS No. 142 by the Company on August 1, 2002 resulted in amortization expense decreasing by approximately $300 thousand in fiscal year 2003 versus the previous year.
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 and agriculture chemicals distributors in the United States. The Company extends credit based on an evaluation of the customers financial condition, generally without requiring collateral. Exposure to losses on receivables is dependent on each customers financial condition. At July 31, 2003, no customers represented 10% or more of the Companys accounts receivable. At July 31, 2002, two customers combined to represent 28% of the Companys accounts receivable.
Concentration of Operations in Other Countries The Company manufactures penta and MSMA at its plant in Matamoros, Mexico. Property, plant and equipment on the Companys consolidated balance sheet of $5,034,443 in 2003 and $6,045,589 in 2002 are assignable to the Companys plant in Mexico. This concentration of operations outside of the Companys home country exposes the Company to the risk that its operations may be disrupted in the future.
New Accounting Standards Effective August 1, 2002, the Company adopted SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets, and requires that the balance sheet valuation of goodwill and other intangible assets of indefinite life be evaluated for impairment at least annually and requires that their regular charge, or amortization, against income be discontinued. The Company currently does not have goodwill assets on its balance sheet and has performed an impairment analysis on its intangible assets of indefinite life, which indicated as of July 31, 2003 an impairment charge was not appropriate.
23
In February 2003, SFAS No. 148 was issued, Accounting for Stock Based Compensation: A Comparison of FASB Statement No. 123, Accounting for Stock-Based Compensation, and Its Related Interpretations, and IASB Proposed IFRS, Share-based Payments. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock-based compensation. The Company has chosen not to voluntarily change to the fair value based method of accounting for stock-based employee compensation but has adopted the disclosure rules of SFAS No. 148.
The Company has adopted SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 did not have an impact on the Companys financial position or results of operations.
The Company has adopted SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both liabilities and Equity. This statement requires issuers to classify a financial instrument that is within its scope as a liability instead of equity. The adoption of SFAS No. 150 did not have an impact on the Companys financial position or results of operations.
Reclassifications - Certain reclassifications of prior year amounts have been made to conform to current year presentation.
Segment Reporting For purposes of financial disclosure, the Companys operation is considered to be one business segment.
2. INVENTORIES
Inventories are summarized as follows at July 31:
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
||
Chemical raw materials and supplies |
|
$ |
827,292 |
|
$ |
549,098 |
|
Finished chemical products |
|
4,458,578 |
|
4,642,920 |
|
||
|
|
|
|
|
|
||
Total |
|
$ |
5,285,870 |
|
$ |
5,192,018 |
|
24
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment and related accumulated depreciation and amortization are summarized as follows at July 31:
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
||
Land |
|
$ |
302,527 |
|
$ |
302,527 |
|
Buildings |
|
1,491,109 |
|
1,491,109 |
|
||
Plant |
|
1,747,843 |
|
1,747,843 |
|
||
Equipment |
|
5,762,135 |
|
5,508,315 |
|
||
Leasehold improvements |
|
105,595 |
|
105,595 |
|
||
Construction-in-progress |
|
92,846 |
|
60,453 |
|
||
|
|
|
|
|
|
||
|
|
9,502,055 |
|
9,215,842 |
|
||
|
|
|
|
|
|
||
Less accumulated depreciation and amortization |
|
(4,014,751 |
) |
(3,109,799 |
) |
||
|
|
|
|
|
|
||
Property, plant and equipment - net |
|
$ |
5,487,304 |
|
$ |
6,106,043 |
|
On December 30, 2002, the Company acquired the Rabon products and the associated formulation and packaging equipment. The equipment has remained at the sellers facility where they provide contract formulation and packaging services for the Rabon oral larvicide products.
Depreciation is principally computed using a straight-line method over the estimated useful lives of the assets. Depreciation expense was $955,911 $648,503 and $336,060 in 2003, 2002 and 2001, 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 re-measured to U.S. dollars at current rates, and certain assets (notably plant and production equipment) are re-measured at historical rates. Expense items for KMEX are re-measured at average monthly rates of exchange except for depreciation and amortization expense. All gains and losses from currency re-measurement for KMEX are included in operations. Foreign currency re-measurement resulted in an aggregate exchange loss of $37,798 and $2,971 in 2003 and 2002 and an aggregate exchange gain of $11,705 in 2001.
25
5. INCOME TAXES
The geographical sources of income before income taxes for each of the three years in the period ended July 31, 2003, 2002 and 2001 were as follows:
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
United States |
|
$ |
2,448,377 |
|
$ |
3,963,676 |
|
$ |
3,834,408 |
|
Foreign |
|
533,476 |
|
366,222 |
|
424,204 |
|
|||
|
|
|
|
|
|
|
|
|||
Income before income taxes |
|
$ |
2,981,853 |
|
$ |
4,329,898 |
|
$ |
4,258,612 |
|
The provision for income taxes consisted of the following:
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
Current federal provision |
|
$ |
966,360 |
|
$ |
1,347,650 |
|
$ |
1,303,699 |
|
Current foreign provision |
|
181,380 |
|
165,732 |
|
238,003 |
|
|||
Current state provision |
|
99,205 |
|
118,910 |
|
115,032 |
|
|||
Deferred income tax (benefit) |
|
(182,256 |
) |
13,069 |
|
(38,462 |
) |
|||
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
1,064,689 |
|
$ |
1,645,361 |
|
$ |
1,618,272 |
|
Deferred income taxes are provided on all temporary differences between financial and taxable income. The following table presents the components of the Companys deferred tax assets and liabilities as of July 31:
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
||
Deferred tax assets (liabilities): |
|
|
|
|
|
||
Bad debt expense |
|
$ |
46,250 |
|
$ |
14,791 |
|
Difference in depreciable basis of property |
|
612,382 |
|
173,656 |
|
||
Difference in amortization basis of intangibles |
|
(32,547 |
) |
180,828 |
|
||
Other |
|
(115,156 |
) |
(54,198 |
) |
||
|
|
|
|
|
|
||
Total |
|
$ |
510,929 |
|
$ |
315,077 |
|
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 years ended July 31:
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
Provision for income taxes at the statutory rate |
|
$ |
1,013,830 |
|
$ |
1,424,382 |
|
$ |
1,364,370 |
|
State income taxes |
|
34,474 |
|
53,658 |
|
113,558 |
|
|||
Other |
|
16,385 |
|
167,321 |
|
140,344 |
|
|||
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
1,064,689 |
|
$ |
1,645,361 |
|
$ |
1,618,272 |
|
26
6. INTANGIBLE AND OTHER ASSETS
|
|
2003 |
|
2002 |
|
||
Intangible assets consisted of the following at July 31: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Unamortized intangible assets: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Creosote sales and distribution assets |
|
$ |
4,500,000 |
|
$ |
4,500,000 |
|
Other creosote related assets |
|
77,604 |
|
77,604 |
|
||
Rabon product registrations and related assets |
|
3,557,042 |
|
|
|
||
|
|
8,134,646 |
|
4,577,604 |
|
||
|
|
|
|
|
|
||
Amortized intangible assets: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Creosote supply contract |
|
4,000,000 |
|
4,000,000 |
|
||
MSMA product registrations and related assets |
|
1,200,000 |
|
1,200,000 |
|
||
Other MSMA related assets |
|
101,904 |
|
97,652 |
|
||
Licensing agreement |
|
320,000 |
|
320,000 |
|
||
Other Rabon related assets |
|
204,000 |
|
|
|
||
Loan costs |
|
42,985 |
|
20,000 |
|
||
|
|
5,868,889 |
|
5,637,652 |
|
||
|
|
|
|
|
|
||
Total intangible assets |
|
14,003,535 |
|
10,215,256 |
|
||
|
|
|
|
|
|
||
Less accumulated amortization |
|
(3,605,774 |
) |
(3,172,135 |
) |
||
|
|
|
|
|
|
||
Total net intangible assets |
|
10,397,761 |
|
7,043,121 |
|
||
|
|
|
|
|
|
||
Other assets consisted of the following at July 31: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Advances for premiums on employee-owned life insurance policies (see Note 9) |
|
521,740 |
|
488,054 |
|
||
Other |
|
385,339 |
|
129,070 |
|
||
Total other assets |
|
$ |
907,079 |
|
$ |
617,124 |
|
Amortization expense was $466,657, $739,351, and $790,618 for fiscal years 2003, 2002 and 2001 respectively. The estimated amortization expense for the fiscal years ended 2004 through 2007 is projected to be $451,098 per year, and $406,257 for fiscal year 2008.
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 for entering into the supply contract. The supply contract is being amortized on a straight-line basis over a 10-year term, which is the initial term of the contract.
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
27
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.
Effective August 1, 2002, the Company adopted SFAS No. 142. As a result, the Company identified certain intangible assets that were not amortizable under this statement due to their indeterminable life. Instead, these intangible assets are subject to impairment testing annually, or sooner as circumstances require. The Company completed an impairment analysis of these intangible assets that indicated as of July 31, 2003 an impairment charge is not appropriate.
The following table summarizes and reconciles net income before the accumulative effect of the accounting change related to SFAS No. 142 for the three years ended July 31, 2003, 2002 and 2001, adjusted to exclude amortization expense recognized in such periods relating to indefinite lived intangible assets that are no longer amortized:
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
|
|
|
|
|
|||
Reported net income before accounting change |
|
$ |
1,917,164 |
|
$ |
2,684,537 |
|
$ |
2,640,340 |
|
|
|
|
|
|
|
|
|
|||
Change in amortization due to accounting change |
|
|
|
307,760 |
|
307,760 |
|
|||
|
|
|
|
|
|
|
|
|||
Income tax effect due to accounting change |
|
|
|
(116,949 |
) |
(116,949 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net income subsequent to accounting change |
|
$ |
1,917,164 |
|
$ |
2,875,348 |
|
$ |
2,831,151 |
|
|
|
|
|
|
|
|
|
|||
Adjusted earnings per share subsequent to accounting change: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Basic |
|
$ |
0.26 |
|
$ |
0.38 |
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|||
Diluted |
|
$ |
0.25 |
|
$ |
0.38 |
|
$ |
0.37 |
|
7. LONG-TERM DEBT
Effective August 1, 1996, the Company entered into a revolving note 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 revolving note is secured by the Companys receivables, inventory, and general intangible assets. 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 tangible net worth requirements. The Company was in compliance with debt covenants as of July 31, 2003 and 2002. Borrowings outstanding under this agreement at July 31, 2003 and 2002 were $0 and $1,202,000. The termination date of this loan agreement is January 31, 2005.
28
The Companys purchase of the Rabon products was financed with a senior credit facility from SouthTrust Bank (SouthTrust) that also served to refinance the Companys existing term loan facility with that bank. As refinanced, the principal balance outstanding as of July 31, 2003 was $4.8 million while the principal balance was $2.8 million at July 31, 2002. The principal amount of the loan is to be amortized over ten years, but the maturity date is December 20, 2007. The loan carries interest at a varying rate equal to LIBOR plus 1.8%, but in February 2003, the Company entered into an interest rate swap transaction with SouthTrust that effectively fixed the interest rate at 5.0% for the remainder of the term. At July 31, 2003, 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 Companys debt matures at the rate of $504,996 per year through December 20, 2007, at which time $2.6 million will be due and payable.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company has non-cancelable operating leases for its office and warehouse facilities and certain transportation equipment. At July 31, 2003, the Company was obligated under these leases for the following future minimum lease commitments:
2004 |
|
$ |
264,284 |
|
2005 |
|
127,600 |
|
|
2006 |
|
74,338 |
|
|
|
|
|
|
|
Total |
|
$ |
466,222 |
|
Rent expense relating to the operating leases was $365,854, $353,983, and $382,119 in 2003, 2002 and 2001, 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 Companys raw materials and products. In managements opinion, the Company is in substantial 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, MSMA and Rabon 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.
The Company incurred expenses in connection with the FIFRA research and testing programs of approximately $704,700, $520,000 and $716,000 in 2003, 2002 and 2001, respectively. These costs
29
are included in selling, general, and administrative expenses. The Company intends to expense such future regulatory and testing 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 Companys 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. Since that time, the employee has ceased serving as an officer of the Company, but has continued as an employee. As a portion of the employees compensation under the employment agreement, the Company is amortizing the note to compensation expense over a five-year period beginning January 1, 2000 (see Note 6); such amortization was $52,034 in 2003 and $74,023 in 2002 and 2001.
On October 18, 2000, the Company completed its purchase of 180,000 shares of the Companys outstanding common stock from an officer at a price of $5.00 per share, the value of the Companys common stock on August 29, 2000, the date on which the Companys Board of Directors approved the transaction. In accordance with the Companys desire to remove certain related party transactions from its accounts, the proceeds from the sale were used by the officer to purchase the Companys interest in two promissory notes and to repay 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% to 15% of their compensation, and the Company makes matching contributions under this plan equal to 3% of the participants compensation. Company contributions to the plan totaled approximately $34,000, $31,000 and $30,000 in 2003, 2002 and 2001, 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 participants three-year average base salary at normal retirement. The benefit payable to participants is reduced by the equivalent actuarial value of the Companys other pension plan payments to the participant, if any, the Companys 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. One executive was designated as a participant in August 2001, which resulted in $52,088 and $47,164 of expenses for 2002 and 2003, respectively.
30
11. SIGNIFICANT CUSTOMERS
The Company had one significant customer in 2003, 2002 and 2001 whose sales as a percentage of total sales were 18%, 19% and 15%, respectively. No other customers accounted for 10% or more in those fiscal years. The Companys one significant customer has announced that it will exit the wood treating business. The Company believes that the exit will not have a material adverse effect on the sale of the Companys wood treating chemicals.
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 Companys Board of Directors or by a committee of two or more non-employee 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 nonqualified options under the Plan, but only salaried employees of the Company or its subsidiaries are eligible to receive incentive stock options.
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 holders 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 Companys 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 were immediately exercisable at a price of $5.00 per share of common stock through March 17, 2003. They expired unexercised.
In 2000, the Company granted a warrant for the purchase of 25,000 shares of the Companys 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 $5.00 per share of common stock through March 6, 2009.
31
Stock option and warrants activity for the Company in 2003, 2002 and 2001 was as follows:
|
|
2003 |
|
2002 |
|
2001 |
|
|||||||||
|
|
Number
|
|
Average
|
|
Number
|
|
Average
|
|
Number
|
|
Average
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Stock options and warrants outstanding, beginning of year |
|
402,588 |
|
$ |
3.41 |
|
344,171 |
|
$ |
3.67 |
|
154,171 |
|
$ |
3.67 |
|
Granted |
|
210,000 |
|
5.20 |
|
69,417 |
|
3.55 |
|
190,000 |
|
3.55 |
|
|||
Exercised |
|
|
|
|
|
(11,000 |
) |
(1.96 |
) |
|
|
|
|
|||
Cancelled |
|
(27,500 |
) |
(5.00 |
) |
|
|
|
|
|
|
|
|
|||
Stock options and warrants outstanding, end of year |
|
585,088 |
|
$ |
3.96 |
|
402,588 |
|
$ |
3.39 |
|
344,171 |
|
$ |
3.61 |
|
Options and warrants outstanding as of July 31, 2003 are as follows:
Exercise
|
|
Shares
|
|
Contractual
|
|
Exercise
|
|
Shares
|
|
Exercise
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
$ 0.194 |
|
37,038 |
|
1.22 |
|
$ |
0.196 |
|
37,038 |
|
$ |
0.196 |
|
2.48 - 8.00 |
|
548,050 |
|
9.35 |
|
4.209 |
|
433,590 |
|
4.396 |
|
||
At July 31, 2003, options were exercisable for 470,625 shares at a weighted-average exercise price of $4.07. The remaining average contractual life of these options was approximately 9 years. At July 31, 2003, 131,412 shares were available for future option grants.
The weighted-average fair value of options granted during 2003, 2002 and 2001 was $298,244, $91,857 and $103,176, respectively. The effect of these options would have decreased basic and diluted EPS by $.01 per share in 2003, 2002 and 2001. 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 2003, 2002 and 2001:
|
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
Weighted-average expected life |
|
8.65 |
|
9.33 |
|
12.91 |
|
Volatility factor |
|
60 |
% |
60 |
% |
48 |
% |
Dividend yield |
|
1.7 |
% |
1.2 |
% |
0.1 |
% |
Weighted-average risk-free interest |
|
4.37 |
% |
4.51 |
% |
5.07 |
% |
32
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, 2003 |
|
||||||
|
|
Income
|
|
Shares
|
|
Weighted-
|
|
||
|
|
|
|
|
|
|
|
||
Basic EPS - Income available to common stockholders |
|
$ |
1,917,164 |
|
7,512,981 |
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
||
Effect of dilutive securities -Common stock options |
|
|
|
37,413 |
|
(0.01 |
) |
||
|
|
|
|
|
|
|
|
||
Diluted EPS - Income available to common stockholders |
|
$ |
1,917,164 |
|
7,550,394 |
|
$ |
0.25 |
|
|
|
Year Ended July 31, 2002 |
|
|||||||
|
|
Income
|
|
Shares
|
|
Weighted-
|
|
|||
|
|
|
|
|
|
|
|
|||
Basic EPS - Income available to common stockholders |
|
$ |
2,684,537 |
|
7,512,274 |
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|||
Effect of dilutive securities -Common stock options |
|
|
|
36,271 |
|
0.00 |
|
|||
|
|
|
|
|
|
|
|
|||
Diluted EPS - Income available to common stockholders |
|
$ |
2,684,537 |
|
$ |
7,548,545 |
|
$ |
0.36 |
|
|
|
Year Ended July 31, 2001 |
|
||||||
|
|
Income
|
|
Shares
|
|
Weighted-
|
|
||
|
|
|
|
|
|
|
|
||
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 |
|
The Company declared and paid a 10% stock dividend during fiscal 2001, which resulted in the issuance of 681,812 shares of the Companys common stock.
33
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Year ended July 31, 2003 |
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
8,053,629 |
|
$ |
6,287,300 |
|
$ |
8,979,786 |
|
$ |
12,214,870 |
|
Gross profit |
|
2,716,351 |
|
2,057,383 |
|
2,814,868 |
|
3,702,617 |
|
||||
Operating income |
|
729,744 |
|
257,207 |
|
845,540 |
|
1,309,395 |
|
||||
Income before income tax |
|
731,158 |
|
231,212 |
|
802,850 |
|
1,216,633 |
|
||||
Net income |
|
482,564 |
|
152,600 |
|
529,879 |
|
752,121 |
|
||||
Per share data: |
|
|
|
|
|
|
|
|
|
||||
Earnings per share - basic |
|
0.06 |
|
0.02 |
|
0.07 |
|
0.11 |
|
||||
Earnings per share - diluted |
|
0.06 |
|
0.02 |
|
0.07 |
|
0.10 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Year ended July 31, 2002 |
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
8,097,329 |
|
$ |
7,571,329 |
|
$ |
8,783,236 |
|
$ |
9,986,140 |
|
Gross profit |
|
2,636,002 |
|
2,552,732 |
|
3,326,056 |
|
3,526,290 |
|
||||
Operating income |
|
707,282 |
|
652,553 |
|
1,295,375 |
|
1,475,695 |
|
||||
Income before income tax |
|
682,907 |
|
622,072 |
|
1,288,593 |
|
1,736,326 |
|
||||
Net income |
|
423,402 |
|
385,685 |
|
798,981 |
|
1,076,469 |
|
||||
Per share data: |
|
|
|
|
|
|
|
|
|
||||
Earnings per share - basic |
|
0.06 |
|
0.05 |
|
0.11 |
|
0.14 |
|
||||
Earnings per share - diluted |
|
0.06 |
|
0.05 |
|
0.11 |
|
0.14 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Year ended July 31, 2001 |
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
8,302,040 |
|
$ |
8,192,896 |
|
$ |
8,098,371 |
|
$ |
11,197,683 |
|
Gross profit |
|
3,147,030 |
|
2,937,856 |
|
2,501,847 |
|
3,418,004 |
|
||||
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 |
|
* * * * * *
34
ITEM 9 |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|
|
|
|
|
None. |
|
||
|
|
|
|
ITEM 9A |
|
CONTROLS AND PROCEDURES. |
|
Within 90 days prior to the filing of this report, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation of the effectiveness of the Companys disclosure controls and procedures was performed. Based on this evaluation, the CEO and CFO have concluded that the Companys disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Companys disclosure obligations under the Securities Exchange Act and the rules of the SEC. There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART III
Pursuant to instruction G(3) to Form 10-K, the information required by Items 10-14 of Part III is incorporated by reference from the Companys definitive proxy statement to be filed on or about October 30, 2003.
PART IV
ITEM 15. 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 by the Company and documents marked by an asterisk (*) were previously filed (file number 29278):
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* |
2.1 (iv) |
|
Asset Purchase Agreement dated December 30, 2002 between Boehringer Ingelheim Vetmedica, Inc. and KMG-Bernuth, Inc.* |
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.* |
35
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.* |
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 |
|
$2,500,000 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 Rütgers 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.* |
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.* |
10.28 |
|
Sales Agreement dated January 1, 2002 between Reilly Industries, Inc. and the Company.* |
10.29 |
|
Contract Manufacturing Agreement dated December 30, 2002 between Boehringer Ingelheim Vetmedica, Inc. and KMG-Bernuth, Inc.* |
10.30 |
|
Amended and Restated Promissory Note dated December 30, 2002 made payable by KMG-Bernuth, Inc. to SouthTrust Bank.* |
10.31 |
|
Employment Agreement with Roger C. Jackson dated August 1, 2002. |
36
21.1 |
|
Subsidiaries of the Company.* |
31 |
|
Certificates under Section 302 of the Sarbanes-Oxley Act of 2002 of David L. Hatcher and John V. Sobchak |
32 |
|
Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of David L. Hatcher and John V. Sobchak |
99.1 |
|
Direct Stock Purchase Plan.* |
Schedule II Valuation and Qualifying Accounts
Allowances for Doubtful Accounts |
|
|
|
Additions |
|
|
|
|
|
||||||
Reserves |
|
Balance at
|
|
Charged to
|
|
Charged to
|
|
Deductions |
|
Balance at
|
|
||||
Fiscal year July 31, 2003 |
|
$ |
100,000 |
|
$ |
25,000 |
|
|
|
|
|
$ |
125,000 |
|
|
Fiscal year July 31, 2002 |
|
130,000 |
|
31,102 |
|
|
|
$ |
(61,102 |
) |
|
100,000 |
|
||
Fiscal year July 31, 2001 |
|
120,000 |
|
10,000 |
|
|
|
|
|
130,000 |
|
||||
37
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. |
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By: |
/s/ David L. Hatcher |
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Date: October 21, 2003 |
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David L. Hatcher, President |
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and Chairman |
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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.
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/s/ John V. Sobchak |
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Date: October 21, 2003 |
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John V. Sobchak, Vice President |
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and Chief Financial Officer |
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By: |
/s/ George W. Gilman |
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Date: October 21, 2003 |
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George W. Gilman, Director |
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By: |
/s/ Fred C. Leonard |
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Date: October 21, 2003 |
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Fred C. Leonard III, Director |
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By: |
/s/ Charles L. Mears |
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Date: October 21, 2003 |
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Charles L. Mears, Director |
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By: |
/s/ Charles M. Neff |
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Date: October 21, 2003 |
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Charles M. Neff, Jr., Director |
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By: |
/s/ Richard L. Urbanowski |
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Date: October 21, 2003 |
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Richard L. Urbanowski, Director |
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EXHIBIT 10.31
EMPLOYMENT AGREEMENT
AGREEMENT, dated effective as of August 1, 2002 (Effective Date), between KMG CHEMICALS, INC. , a Texas corporation (the Company), with an office at 10611 Harwin, Suite 402, Houston, Texas 77036 and ROGER C. JACKSON (Executive), with an address at 9019 Linkmeadow, Houston, Texas 77025.
WITNESSETH:
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;
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual obligations herein set forth, the parties agree as follows:
1. Employment . The Company hereby employs Executive under this Agreement as of the Effective Date to serve as General Counsel and Vice President of the Company 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, 2005, 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 Executives 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 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 which shall include acting as legal counsel generally in charge of all legal matters and advice, including all regulatory matters and compliance. The Executive shall serve the Company and its subsidiaries faithfully and to the best of his ability and shall devote his full business and professional time and attention to the affairs of the Company and its subsidiaries, subject to reasonable absences for vacation and illness in accordance with then current Company policy and service in such community, charitable and personal investment activities as do not materially detract from the discharge by Executive of his duties. 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 on the affairs of the Company and its subsidiaries subject to the control and direction of Executive.
(b) The headquarters for the performance of the Executives 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 Executives duties in the business of the Company or its subsidiaries may require.
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 Companys normal payroll practices, at a rate per annum equal to $120,000 (Base Salary), or such greater amount as shall be approved by the Board of Directors of the Company in its sole discretion from time to time;
(ii) Annual Incentive compensation (Incentive Compensation) under the Companys current incentive program for Company executives (Executive Incentive Plan) as such plan shall be in effect from time to time; and
(iii) As of the Effective Date, an option to purchase 150,000 shares of the common stock, $.01 par value, of the Company at exercise prices as follows: (A) 50,000 shares at $4.00, (B) 50,000 shares at $6.00, and (C) 50,000 shares at $8.00, in each case such grants being effected pursuant to Stock Option Agreements in the form of Exhibit A hereto; (collectively, the options are referred to as the Stock Options), subject to vesting and the other terms and conditions set forth in such Stock Options Agreements.
(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 Incentive Compensation targeted at fifty percent (50%) of Base Salary (Targeted Percentage) when performance goals established by the Company are met; provided, further, that the amount of Incentive Compensation will vary in the sole discretion of the Company above and below the Targeted Percentage as achievement of the performance goals varies above and below the goals. The maximum award payable will not exceed seventy-five percent (75%) of Base Salary in any fiscal year unless a greater percent is approved by the Company.
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 Companys current practices as such practices may be changed from time to time by the Company provided that any expenditure or group of expenditures in excess of an amount established by Company policy shall receive prior written approval as required thereunder.
6. Benefits . The Executive shall be entitled to the following benefits:
(a) 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;
(b) one week paid vacation for calendar year 2002 and three (3) weeks for every year thereafter; and
(c) Reimbursement of all continuing legal education and professional fees.
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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 Companys 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 Section 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 Companys 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 Companys 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 Executives 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
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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 Executives employment with Company in accordance with Companys 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 Executives term of employment are the exclusive property of the Company or its affiliates and shall be delivered by Executive to Company on termination of Executives 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 Companys 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 Executives term of employment under this Agreement, the Executive provided substantial executive services. The foregoing covenant shall not apply to Executive pursuing gainful employment pursuant to the part time or full time practice of law in a private law firm or in a corporate legal department of a corporation not in substantial competition with the Company.
(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
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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 Executives 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 Executives employment under this Agreement shall terminate as provided in paragraph 2 and under the following circumstances:
(a) Death or Disability . The Executives 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 Companys 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 Executives employment hereunder if Executive is able to perform the essential functions of Executives job with reasonable accommodation from the Company.
(b) With Cause . For purposes of this Agreement, the Company shall have Cause to terminate Executives 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 loss to the Company or any of its subsidiaries or 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, after five (5) days written notice and opportunity to cure, to substantially perform his assigned duties for the Company or any of its subsidiaries, (v) breach of Executives fiduciary obligations to the Company or any of its subsidiaries, and (vi) any chemical dependence which affects the Executives performance of duties and responsibilities to the Company or any of its subsidiaries.
(c) Without Cause . Notwithstanding any provisions of this Agreement to the contrary, the Company may terminate Executives 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) days 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
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Good Reason to terminate his employment hereunder upon the occurrence, without Executives 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 Companys 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 Vice President and General Counsel or a change in his 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 Executives 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 Executives 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 Executives 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 Executives employment with the Company terminates on account of death or Disability.
(b) With Cause . In the event that Executives 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 Executives employment with the Company terminates for Cause.
(c) Without Cause or on a Failure to Extend . In the event that Executives employment is terminated by the Company without Cause at any time during the term of this Agreement or if the Executives employment is terminated because the Company elects not to extend the Executives 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 three equal installments each payable 45 days, one year and 45 days and two years and 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 (as hereinafter defined), (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 Executives employment is terminated by Executive as a Voluntary Resignation pursuant to paragraph 9(d), except for amounts
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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 Executives employment with the Company terminates on account of Voluntary Resignation.
(ii) With Good Reason. Notwithstanding any provision of this Agreement to the contrary, if Executives 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 then in effect in three equal installments each payable 45 days, one year and 45 days and two years and 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 Companys 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 Companys then outstanding securities, acquires more than fifty percent (50%) of the combined voting power of the Companys 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
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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 Companys 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 arbitrators 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 partys 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.
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(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 individuals 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 Executives 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.
[signature page follows]
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IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written but signed this the 19th day of June 2003.
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KMG CHEMICALS, INC. |
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/s/ David L. Hatcher |
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David L. Hatcher, President |
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EXECUTIVE: |
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/s/ Roger C. Jackson |
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Roger C. Jackson |
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Exhibit 31
CERTIFICATE
I, David L. Hatcher, certify that:
(1) I have reviewed this annual report on Form 10-K of KMG Chemicals, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
(5) The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
KMG CHEMICALS, INC. |
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Date: October 21, 2003 |
By: |
/s/ David L. Hatcher |
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David L. Hatcher, President |
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and Chairman |
CERTIFICATE
I, John V. Sobchak, certify that:
(1) I have reviewed this annual report on Form 10-K of KMG Chemicals, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
(5) The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
KMG CHEMICALS, INC. |
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Date: October 21, 2003 |
By: |
/s/ John V. Sobchak |
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John V. Sobchak, Vice President |
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and Chief Financial Officer |
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Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this report of the Company on Form 10-K for the annual period ended July 31, 2003, I, David L. Hatcher, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: October 21, 2003 |
/s/ David L. Hatcher |
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David L. Hatcher |
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Chief Executive Officer and President |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this report of the Company on Form 10-K for the annual period ended July 31, 2003, I, John V. Sobchak, Chief Financial Officer and Vice President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: October 21, 2003 |
/s/ John V. Sobchak |
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John V. Sobchak |
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Chief Financial Officer and Vice President |
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