SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-12
KMG Chemicals, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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and 0-11.
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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previously. Identify the previous filing by registration statement number,
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KMG CHEMICALS, INC.
10611 HARWIN, SUITE 402
HOUSTON, TEXAS 77036
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
The Annual Meeting of Shareholders of KMG Chemicals, Inc., a Texas
corporation (the "Company"), will be held at The Houstonian Hotel, 111 North
Post Oak Lane, Houston, Texas 77024 on November 26, 2001 at 10:00 a.m.:
1. To elect six (6) directors to hold office until the next
annual meeting of shareholders or until their respective successors have been
duly elected and qualified;
2. To ratify the appointment of Deloitte & Touche LLP as
independent accountants and auditors for the Company for fiscal year 2002; and
3. To transact such other business as may properly come before
the meeting or any adjournment or postponement thereof.
Shareholders of record at the close of business on October 15, 2001 are
entitled to notice of and to vote at this Annual Meeting of Shareholders or any
adjournment or postponement thereof.
All shareholders are cordially invited and urged to attend the Annual
Meeting of Shareholders in person. EVEN IF YOU PLAN TO ATTEND THE MEETING, YOU
ARE REQUESTED TO COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED
ADDRESSED ENVELOPE. A return of a blank proxy will be deemed a vote in favor of
the proposals contained in the Proxy Statement. If you attend, you may vote in
person if you wish, even though you have sent in your proxy.
By Order of the Board of Directors,
/s/ Fred C. Leonard III
-----------------------------------
Fred C. Leonard III, Secretary
October 31, 2001
KMG CHEMICALS, INC.
10611 HARWIN, SUITE 402
HOUSTON, TEXAS 77036
PROXY STATEMENT
This Proxy Statement and the accompanying form of proxy are being
furnished to the shareholders of KMG Chemicals, Inc., a Texas corporation (the
"Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company for use at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held on November 26, 2001, at 10:00 a.m., at The
Houstonian Hotel, 111 North Post Oak Lane, Houston, Texas 77024, and any
adjournment or postponement thereof.
The matters to be considered and acted upon at the Annual Meeting are
described in the foregoing Notice of Annual Meeting and this Proxy Statement.
This Proxy Statement and the related form of proxy are being mailed on or about
November 2, 2001 to all shareholders of record as of October 15, 2001 (the
"Record Date"). Shares of the Company's common stock, par value $.01 per share
(the "Common Stock"), represented by proxies will be voted as described in this
Proxy Statement or as otherwise specified by a shareholder. With respect to the
election of directors, a shareholder may, by checking the appropriate box on the
proxy: (i) vote for all director nominees as a group; (ii) withhold authority to
vote for all director nominees as a group; or (iii) vote for all director
nominees as a group except those nominees identified by the shareholder in the
appropriate area. With respect to the other proposals contained in this Proxy
Statement, a shareholder may, by checking the appropriate box on the proxy: (i)
vote for the proposal; (ii) vote against the proposal; or (iii) abstain from
voting on the proposal. The form of proxy is attached to this Proxy Statement as
Appendix A.
Any shareholder who executes and delivers a proxy may revoke it at any
time prior to its use by (i) giving written notice of revocation to the
Secretary of the Company, (ii) executing and delivering a proxy bearing a later
date or (iii) appearing at the Annual Meeting and voting in person.
If the proxy in the accompanying form is properly executed and not
revoked, the shares represented by the proxy will be voted in accordance with
the instructions thereon. If no instructions are given on the matters to be
acted upon, the shares represented by the proxy will be voted: (i) for election
of the directors nominated herein; (ii) for the ratification of the appointment
of Deloitte & Touche LLP as independent accountants and auditors for the Company
for fiscal year 2002; and (iii) in the discretion of the proxy holders as to any
business that may properly come before the Annual Meeting or any adjournment or
postponement thereof.
VOTING RIGHTS
Only holders of record of outstanding shares of Common Stock at the
close of business on the Record Date are entitled to one vote for each share
held on all matters coming before the Annual Meeting or any adjournment or
postponement thereof. There were 7,512,981 shares of Common Stock outstanding
and entitled to vote on the Record Date.
VOTING REQUIREMENTS
To be elected, each director must receive the affirmative vote of the
holders of a plurality of the issued and outstanding shares of Common Stock
entitled to vote and represented at the Annual Meeting in person or by proxy. To
ratify the appointment of Deloitte & Touche LLP as independent accountants and
auditors for the Company, the affirmative vote of a majority of the issued and
outstanding shares of Common Stock entitled to vote and represented at the
Annual Meeting in person or by proxy is required.
ELECTION OF DIRECTORS
NOMINEES FOR DIRECTOR
The nominees for directors are the current directors. Each director of
the Company will serve until the next annual meeting of shareholders or until
his successor is elected and qualified. Set forth below is a description of the
backgrounds of the nominees for director.
DAVID L. HATCHER, age 58, has served as a director and President of the
Company since its acquisition of KMG-Bernuth, Inc. ("KMG") in October 1996. Mr.
Hatcher has also served as a director and President of KMG since 1985. Mr.
Hatcher has worked in the wood treating industry since 1980 for predecessors and
affiliates of KMG in various capacities, including engineer, general manager and
President. Mr. Hatcher is an officer and director of KMG de Mexico, S.A. de
C.V., KMG's subsidiary. He is also serves as a director of Sterling Bancshares,
Inc., a public company that is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended.
BOBBY D. GODFREY, age 62, has served as a director and Vice President
of the Company since its acquisition of KMG in October 1996. Mr. Godfrey has
also served as a director and Vice President of KMG since 1985.
CHARLES M. NEFF, JR., age 55, has served as a director of the Company
since its acquisition of KMG in October 1996. Mr. Neff also served as a director
of KMG from 1991 until 1997 and served as Treasurer of KMG from 1993 until 1997.
Mr. Neff served as the Chief Executive Officer and President of Houston National
Bank, N.A. from 1988 to 1998 and is currently a director and Chief Executive
Officer of Sterling Bank-Bayou Bend, President of National Health Capital, Ltd.
FRED C. LEONARD III, age 56, has served as a director and Secretary of
the Company since its acquisition of KMG in October 1996. Mr. Leonard also
served as a director of KMG from 1992 until 1997 and served as the Secretary of
KMG since 1993. Mr. Leonard has served as the Chairman of the Board, Chief
Executive Officer and President of Valves Incorporated of Texas, Inc., a
manufacturing company located in Houston, Texas since 1972. Mr. Leonard also
currently serves as the Chairman of the Board and Treasurer of Agrimpex, Inc., a
company that acts as a manufacturers' representative promoting sales of
equipment and services in Turkey, and as Secretary of North Star Tours, Inc., a
travel agency specializing in tours to Turkey.
GEORGE W. GILMAN, age 59, has served as a director of the Company since
its acquisition of KMG in October 1996 and also served as a director of KMG from
1995 until 1997. Mr. Gilman has served as the Chief Executive Officer, President
and as a director of Commerce Securities Corporation, a National Association of
Securities Dealers, Inc. member firm, since 1982. He practiced law with the law
firm of George Gilman, P.C. from 1986 to 1998 and since 1998 has practiced with
the law firm of Wilbanks and Gilman, P.C.
RICHARD L. URBANOWSKI, age 65, has served as a director of the Company
since August 2000. Mr. Urbanowski retired in 1998 as President and Chief
Operating Officer of ISK Biosciences Corporation, a specialty chemicals company
selling crop protection chemicals and wood preservative products. Mr.
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Urbanowski began his career with Diamond Alkali Company where he held various
positions in research and development, engineering, operations, production and
sales. He is currently a member of the CoAg Advisory Council for the College of
Agriculture at Auburn University.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES FOR DIRECTOR.
BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors held five meetings in fiscal 2001. The Board of
Directors has two standing committees, an Audit Committee and a Compensation
Committee. The Audit Committee is composed entirely of non-employee directors.
The members of the Audit Committee in fiscal 2001 were of Messrs.
Leonard, Neff and Gilman. The Audit Committee advises the Board from time to
time with respect to internal controls, systems and procedures, accounting
policies and other significant aspects of the financial management of the
Company. The Audit Committee also reviews with the Company's independent public
accounting firm its audit procedures and other significant aspects of the annual
audit made by the independent public accounting firm. The Audit Committee met
two times during fiscal 2001. A copy of the charter of the Audit Committee is
attached to this Proxy Statement as Appendix B.
The Compensation Committee is composed of Messrs. Leonard, Neff,
Urbanowski and Hatcher. The Compensation Committee makes recommendations to the
Board of Directors regarding compensation for the Company's executive officers,
directors, employees and agents. During fiscal 2001, the Compensation Committee
held one meeting.
COMPENSATION OF DIRECTORS
Each director, including directors who were employees of the Company,
received a fee in fiscal 2001 for attending regular meetings of the Board of
Directors of $1,500. Directors are reimbursed for out-of-pocket expenses
incurred in attending meetings and for other expenses incurred in performing in
their capacity as directors. During fiscal 2000 the Board of Directors of the
Company held four regular meetings and one special meeting. In fiscal 2000,
non-employee directors were each granted fully vested options to purchase Common
Stock. Options were granted in November 2000 to each of the four non-employee
directors. After adjustment to account for the Company's stock dividend in March
2001, those options allow non-employee directors to acquire 11,000 shares of
Common Stock (44,000 shares total) at an exercise price of $3.46 per share.
MANAGEMENT
Set forth below is a description of the backgrounds of certain
significant employees of the Company and KMG in addition to Messrs. Hatcher and
Godfrey, directors whose backgrounds are described above.
THOMAS H. MITCHELL, age 57, has served as KMG's Vice President since
1994. Mr. Mitchell has been employed by KMG since 1988 in various capacities,
including general sales manager and since July, 1998, General Manager.
JOHN V. SOBCHAK, age 41, was employed in 2001 as the Chief Financial
Officer of the Company. Prior to his employment with the Company, Mr. Sobchak
was the CFO of Novistar, Inc., a joint venture
3
between Torch Energy Advisors, Inc. and Oracle Corporation. He also served from
1988 to 1997 as treasurer of Mesa, Inc, a publicly traded oil and gas company.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid
to the Company's chief executive officer, its other most highly compensated
executive officer and an executive officer of a subsidiary for the fiscal years
ended July 31, 2001, 2000 and 1999. None of the Company's other officers or
directors received cash or non-cash compensation in excess of $100,000 for the
fiscal year ended July 31, 2001.
SUMMARY COMPENSATION TABLE
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SHARES
ANNUAL UNDERLYING
NAME AND FISCAL COMPENSATION (1) OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS GRANTED COMPENSATION (2)
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David L. Hatcher.............. 2001 276,000 110,054 17,266
President 2000 276,500 183,223 22,367
1999 276,350 181,363 22,017
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Bobby D. Godfrey.............. 2001 122,555 3,596
Vice President 2000 105,413 6,250 3,673
1999 82,750 6,000 3,308
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John V. Sobchak............... 2001 15,417 50,000
Chief Financial Officer
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Thomas H. Mitchell............ 2001 125,532 39,957 100,000 5,441
Vice President (KMG only) 2000 125,000 63,993 5,000 5,370
1999 125,000 63,171 15,000 5,027
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(1) Salary includes directors' fees paid to each of Mr. Hatcher and Mr.
Godfrey for serving as directors of the Company and KMG.
(2) Includes payments made by the Company under its 401(k) Profit
Sharing Plan and for David L. Hatcher the economic benefit of premiums paid by
the Company under a split dollar life insurance agreement. In fiscal 2001, the
economic benefit of the split dollar agreement for Mr. Hatcher was $11,296.
4
EMPLOYEE OPTION GRANTS IN FISCAL YEAR 2001
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PERCENT OF
SHARES OF COMMON TOTAL EXERCISE
STOCK UNDERLYING GRANTED TO PRICE EXPIRATION VALUE OF
NAME OPTIONS GRANTED EMPLOYEES ($/SH) DATE OPTIONS (2)
------------------------------------------------------------------------------------------------------------
Thomas H. Mitchell........... 100,000 66.7% 3.44 (1) $176,715
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John V. Sobchak.............. 50,000 33.3% 3.58 (1) $92,234
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(1) Options expire ten years after becoming vested. Vesting is
twenty percent of the total shares per year except that vesting for options for
25,000 shares for Mr. Sobchak is ten percent per year. The vesting period begins
on the date of grant, July 11, 2001 for the options to Mr. Mitchell and June 26,
2001 for the options to Mr. Sobchak.
(2) Pursuant to the rules of the Securities and Exchange
Commission, the Company has elected to provide a grant date present value for
these option grants determined by a Black-Scholes pricing model. The assumptions
utilized in this model include: an expected volatility of 54% (derived by using
daily closing 1.04%, an interest rate of 4.8% (the rate on a bond equivalent
yield with a maturity date of 7 years from the grant date), and an expected time
of exercise of six years from grant date. The Company does not believe that the
values estimated by the Black-Scholes model, or any other model, will
necessarily be indicative of the values to be realized by an executive.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 2001 AND FISCAL YEAR-END VALUES
--------------------------------------------------------------------------------------------------------
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS FY01: OPTIONS:
SHARES ACQUIRED ON (#) EXERCISABLE/ ($) EXERCISABLE/
NAME EXERCISE (#) UNEXERCISABLE UNEXERCISABLE
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Bobby D. Godfrey................... 0 1,100/0 $0/$0
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Thomas H. Mitchell................. 0 63,988/114,300 $139,483/$0
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John V. Sobchak.................... 0 0/50,000 $0/$0
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5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 30,
2001 with regard to the beneficial ownership of Common Stock by (i) each person
known to the Company to be the beneficial owner of 5% or more of its outstanding
Common Stock, (ii) the executive officers and directors of the Company
individually and (iii) the officers and directors of the Company as a group. All
addresses are in care of the Company, 10611 Harwin Drive, Suite 402, Houston,
Texas 77036.
------------------------------------------------------------------------------------------------
NUMBER OF
NAME SHARES OWNED PERCENT
------------------------------------------------------------------------------------------------
David L. Hatcher (3)...................................... 5,382,303 71.7
Bobby D. Godfrey (1)...................................... 457,146 6.1
Fred C. Leonard III (1) (2)............................... 1,060,950 14.1
George W. Gilman (1) (2).................................. 126,384 1.7
Charles M. Neff, Jr.(1)................................... 42,603 *
Richard L. Urbanowski..................................... 11,000 *
Thomas H. Mitchell (KMG executive officer)(1)............. 65,638 *
John V. Sobchak........................................... 0 *
Directors and executive officers as a group
(7 persons) .............................................. 7,146,024 93.8
------------------------------------------------------------------------------------------------
* less than 1%
(1) The ownership shown in the table includes shares of Common
Stock that may be acquired within 60 days on the exercise of outstanding stock
options under the Company's 1996 Stock Option Plan as follows: Mr. Godfrey -
1,100 shares, Mr. Leonard - 12,100 shares, Mr. Gilman - 12,100 shares, Mr. Neff
- 12,100 shares, Mr. Urbanowski 11,000 shares, and Mr. Mitchell - 65,638 shares;
and for the entire group, 114,038 shares.
(2) Includes shares held by Valves Incorporated of Texas, Inc., a
company in which Mr. Leonard is an officer and a principal shareholder.
(3) Includes shares held by Commerce Securities, Inc., a company
in which Mr. Gilman is an officer, director and, indirectly, a significant
shareholder.
EMPLOYMENT, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
In June and July 2001, the Company entered into employment agreements
with Thomas H. Mitchell and John V. Sobchak. Mr. Mitchell's agreement has an
initial three-year term and Mr. Sobchak's agreement has an initial one-year
term. Each agreement automatically extends for additional one-year periods at
the end of the initial term or any renewal term unless the Company gives at
least 60 days prior notice of nonrenewal. If the Company terminates the
executive's employment (other than for cause or due to death or disability) or
if the executive voluntarily terminates his employment for good reason, the
Company must pay the executive a termination payment equal to a multiple of his
then annual base salary. For Mr. Mitchell the multiple is three times his then
annual base salary and for Mr. Sobchak it is two times. In addition, Mr.
Mitchell also would be paid the benefit provided for under the Company's
supplemental executive
6
retirement plan. If the termination by the Company or the voluntary resignation
for good reason was within one year of a Change of Control, options to acquire
Common Stock held by each executive fully vest and the benefit payable to Mr.
Mitchell under the supplemental executive retirement plan would be paid in a
lump sum. If Mr. Mitchell dies while employed by the Company, his beneficiary
will be paid a lump sum payment of $500,000. A "good reason" includes demotion,
relocation or an uncured breach of the employment agreement by the Company and a
"Change of Control" includes the acquisition by any individual or group of
beneficial ownership of more than 50% of the then outstanding Common Stock or
certain business combination transactions.
Mr. Bobby Godfrey entered into an employment agreement with the Company
in February 1998 having a term of seven years and containing a covenant not to
compete. If the agreement terminates because of the death or disability of the
executive, he would be paid an amount equal to indebtedness then owing by him to
the Company. As of the end of fiscal 2001, the amount of that indebtedness was
$116,781. The agreement does not include provisions regarding Change of Control.
In June 2001 the Company adopted a supplemental executive retirement
plan. Only persons specifically designated by the Company may be participants in
the plan. As of the end of fiscal 2001, there were no participants in the plan,
but in August 2001, Thomas H. Mitchell was designated as a participant. The plan
is unfunded and amounts payable to participants are general obligations of the
Company. The plan provides that a participant will be paid a supplemental
retirement benefit for 10 years equal to a percentage of the participant's
three-year average base salary at normal retirement. Mr. Mitchell's benefit
percentage was established under the plan to pay 56% of his three-year average
base salary at normal retirement prior to reductions. The benefit payable to
participants is reduced by the equivalent actuarial value of Company's other
pension plan payments to the participant, if any, the Company's 401(k) plan and
one-half of 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.
TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND OTHERS
In October 2000, the Company purchased 180,000 shares of the Common
Stock of the Company from Mr. Hatcher at a price of $5.00 per share. The per
share purchase price was established by the Board of Directors on August 29,
2000 when it approved the purchase and was based on the then current price of
the Common Stock. Of the total purchase price of $900 thousand, Mr. Hatcher used
$674 thousand of the proceeds to purchase the Company's interest in a
participation loan by Sterling Bank to National Health Capital, Ltd. ("NHC"), to
purchase a second loan to NHC and to repay loans made to him by the Company in
fiscal 1998 and 1992.
In August 1998, the Company purchased for $200 thousand a participation
in a loan by Sterling Bank to NHC, a limited partnership engaged in purchasing
medical receivables. In November 1998, the Company made a further loan of $200
thousand to NHC. At the time of these transactions, Messrs. Hatcher, Neff and
Gilman were directors of the general partner of NHC, Messrs. Hatcher and Neff
each 8% limited partners in NHC and Mr. Neff was president of NHC. NHC ceased
operations in 1999 and is now in the process of recovering on its assets and
winding up its business. The Company agreed that beginning in January 1999 the
participation loan and second loan would bear no interest. The participation
loan was partially guaranteed by Mr. Neff and both the participation loan and
the second loan were guaranteed by Mr. Hatcher. In October 2000, Mr. Hatcher
purchased both the participation and the second loan made to NHC from the
Company for their then outstanding balance of $241 thousand. The Company
released Mr. Hatcher on his guaranty of the two loans.
7
The Company loaned $200 thousand to David L. Hatcher in fiscal 1998.
That indebtedness was renewed, extended and modified. In October 2000, Mr.
Hatcher paid in full the interest and principal of $207 thousand then owing on
the indebtedness. The Company also loaned $218 thousand to Mr. Hatcher in fiscal
1992. Mr. Hatcher repaid in full the interest and principal of $226 thousand
then owing on the indebtedness in October 2000.
In February 1998, the split dollar insurance agreement between the
Company and Mr. Godfrey was terminated. The Company released the collateral
assignment of the insurance policy bought under the plan on Mr. Godfrey and he
signed a non interest bearing promissory note payable to the Company for
$170,900, the amount of insurance premiums paid on behalf of Mr. Godfrey by the
Company under the split dollar insurance plan. The amount owing on the
promissory note was $116,781 and $150,961 as of the end of fiscal 2001 and 2000,
respectively.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee consists of two directors who are independent and
one director who is not independent under the standards of The Nasdaq Stock
Market, Inc. Fred C. Leonard III is not independent under those standards
because he also is the Secretary of the Company. The Board of Directors has
requested that he serve as a member of the Audit Committee because it has
determined that his service is required by the best interests of the Company and
its shareholders on an interim basis pending a reorganization of the Audit
Committee into a committee of only independent members. The Audit Committee
operates under a written charter approved by the Board of Directors, a copy of
which is attached as Appendix A. As described more fully in its charter, the
Audit Committee assists the Board in fulfilling its responsibility for oversight
of the quality and integrity of the accounting, auditing and financial reporting
practices of the Company. During fiscal 2001, the Committee met two times.
The Audit Committee reviewed the audited financial statements of the
Company for the fiscal year ended July 30, 2001, with the independent auditors.
Management has the responsibility for the preparation, presentation and
integrity of the Company's financial statements and the independent auditors
have the responsibility for auditing the Company's financial statements and
expressing an opinion as to their conformity with accounting principles
generally accepted in the United States of America.
The Audit Committee discussed and reviewed with the independent
auditors all communications required by accounting principles generally accepted
in the United States of America, including those described in Statement on
Auditing Standards No. 61, as amended, "Communication with Audit Committees" and
without management present, discussed and reviewed the results of the
independent auditors' examination of the financial statements.
In discharging its oversight responsibility with respect to the audit
process, the Audit Committee obtained from the independent auditors a formal
written statement describing all relationships between the auditors and the
Company that might bear on the auditors' independence consistent with
Independence Standards Board Standard No. 1, "Independence Discussions with
Audit Committees." The Audit Committee also discussed with the auditors any
relationship that may impact their objectivity and independence and satisfied
itself as to the auditors' independence. The Audit Committee also discussed with
management, the internal auditors and the independent auditors the quality and
adequacy of the Company's responsibilities, budget and staffing.
Based on the above-mentioned review and discussions with management and
the independent auditors, the Committee recommended to the Board that the
Company's audited financial statements be
8
included in its report on Form 10-K for the fiscal year ended July 31, 2001, for
filing with the Securities and Exchange Commission. The Committee also
recommended the reappointment, subject to shareholder approval, of the
independent accountants and auditors and the Board concurred in such
recommendation.
Audit Committee:
Fred C. Leonard III
George W. Gilman
Charles M. Neff, Jr.
This report by the Audit Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934 except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such acts.
PRINCIPAL ACCOUNTING FIRM FEES
The aggregate fees billed by the Company's independent accountants and
auditors, Deloitte & Touche LLP, for professional services rendered for the
audit of the company's annual financial statements for fiscal year 2001 and for
the reviews of financial statements included in the Company's quarterly reports
on Form 10-Q for that fiscal year were $69,348. The Company did not pay any fees
to its auditors during the fiscal 2001 for financial information systems design
and implementation fees. The Company paid $58,163 to its auditors for all other
fees, which includes fees for tax preparation and consulting and other non-audit
services. The Audit Committee has considered whether the provision of the
services included in other fees is compatible with maintaining the independence
of the Company's accountants and auditors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company, the Company knows of no failure in Section 16(a)
beneficial ownership reporting compliance except that due to inadvertence
Form 5 was filed late by directors and executive officers and two directors
failed to report certain transactions. Mr. Neff did not timely report small
purchases in his individual retirement account. Mr. Gilman did not timely
report a purchase in 1998 by a related trust or purchases in 1997 and 1998 by
a corporation of which he is an officer and director. Messrs. Neff and Gilman
have now reported these transactions in Form 5.
PROPOSAL TO RATIFY THE APPOINTMENT
OF INDEPENDENT AUDITORS
The Board of Directors has appointed Deloitte & Touche LLP as
independent accountants and auditors to conduct the annual audit of the
Company's accounts for fiscal year 2002. Although action by the shareholders in
this matter is not required, the Board of Directors believes that it is
appropriate to seek shareholder ratification of this appointment in light of the
important role played by the independent auditors in maintaining the integrity
of the Company's financial controls and reporting. If ratification of the
appointment is not approved, the Board of Directors will reconsider the
appointment.
9
Representatives of Deloitte & Touche LLP will be present at the Annual
Meeting and will have an opportunity to make a statement if they desire. They
will be available to respond to appropriate questions from shareholders at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT ACCOUNTANTS AND AUDITORS.
SHAREHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Any shareholder who intends to present a proposal at the 2002 Annual
Meeting of Shareholders must file such proposal with the Company by June 28,
2002, for possible inclusion in the Company's proxy statement and form of proxy
relating to that meeting.
ADDITIONAL FINANCIAL INFORMATION
A copy of the Company's annual report on Form 10-K, including any
financial statements, schedules and exhibits thereto, may be obtained without
charge by written request to John V. Sobchak, Chief Financial Officer, KMG
Chemicals, Inc., 10611 Harwin, Suite 402, Houston, Texas 77036.
OTHER MATTERS
The Board of Directors knows of no matters other than those stated
above which are to be brought before the Annual Meeting. However, if any such
other matters should be presented for consideration and voting, the persons
named in the proxy to vote thereon will do so in accordance with their judgment.
By Order of the Board of Directors,
/s/ Fred C. Leonard III
Fred C. Leonard III
Secretary
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KMG CHEMICALS, INC.
10611 HARWIN, SUITE 402, HOUSTON, TEXAS 77036
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints David L. Hatcher as proxy with power of substitution to vote all shares of KMG Chemicals,
Inc. (the "Company") which the undersigned is entitled to vote at an Annual Meeting of Shareholders on November 26, 2001, at the
Houstonian Hotel, 111 North Post Oak Lane, Houston, Texas 77024, or any adjournment or postponement thereof, with all the powers
the undersigned would have if personally present as specified, respecting the following matters described in the accompanying
Proxy Statement and, in his discretion, on other matters which come before such meeting.
1. To elect six directors to hold office until the next annual meeting of shareholders or until their respective
successors have been duly elected and qualified.
/ / FOR the nominees listed below / / WITHHOLD AUTHORITY to / / FOR ALL NOMINEES EXCEPT:
vote for all nominees listed below
INSTRUCTIONS: To withhold authority to vote for (an) any individual(s), choose the third box and write in the name of
the nominee(s) on this line
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Nominees: David L. Hatcher, Bobby D. Godfrey, Fred C. Leonard III, George W. Gilman, Charles M. Neff, Jr.,
Richard L. Urbanowski
2. To ratify the appointment of Deloitte & Touche LLP as independent accountants and auditors for the Company for fiscal
year 2001; and
FOR / / AGAINST / / ABSTAIN / /
3. To transact such other business as may properly come before the meeting or any adjournment thereof.
This proxy will be voted in accordance with shareholder specifications. Unless directed to the contrary, this proxy will
be voted FOR each proposal and in his discretion for any other matters coming before the meeting. A majority (or if only one,
then that one) of the proxies or substitutes acting at the meeting may exercise the powers conferred herein. Receipt of
accompanying Notice of Meeting and Proxy Statement is hereby acknowledged.
Date: ___________________, 2001
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(Signature)
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(Please print your name)
(PLEASE SIGN NAME AS FULLY AND EXACTLY AS IT
APPEARS OPPOSITE. When signing in a fiduciary or
representative capacity, please give full title as
such. When more than one owner, each owner should
sign. Proxies executed by a corporation should be
signed in full corporate name by duly authorized
officer.)
PLEASE MARK, SIGN, DATE AND MAIL TO THE COMPANY AT THE ADDRESS STATED ABOVE.
KMG CHEMICALS, INC.
CHARTER
OF THE
AUDIT COMMITTEE
NOVEMBER 21, 2000
1. PURPOSE
1.1 The Audit Committee is authorized by the Board of Directors of
KMG Chemicals, Inc. (referred to in this charter as the
"Company") to provide a direct contact between the independent
public accounting firm and the financial management of the
Company in order to assist the Directors in satisfying their
fiduciary obligations to the Company's shareholders.
Furthermore, the Audit committee will assist the Board of
Directors in performing its oversight responsibilities related
to corporate accounting, financial reporting practices, the
quality and integrity of financial reports as well as
compliance with policies and procedures, and compliance of the
Company's financial statements and internal controls with
Federal and State securities regulatory requirements and
business ethics, and to evaluate the Company's system of
internal controls, the internal audit function, and other
related areas.
1.2 The Audit Committee's practices and procedures are intended to
comply with the requirements of Nasdaq's Audit Committee
Listing Standards as approved by the SEC on December 14, 1999
("Audit Committee Requirements").
1.3 The Audit Committee's job is one of oversight. Management is
responsible for the preparation of the Company's financial
statements and the independent auditors are responsible for
auditing those financial statements. The Audit Committee and
the Board of Directors recognize that management (including
the internal audit staff) and the independent auditors have
more resources and time, and more detailed knowledge and
information regarding the Company's accounting, auditing,
internal control and financial reporting practices than the
Audit Committee does. Accordingly, the Audit Committee's
oversight role does not provide any expert or special
assurance as to the financial statements and other financial
information provided by the Company to its shareholders and
others.
2. MEMBERSHIP
2.1 The Audit Committee will be appointed annually by the Board of
Directors and will be comprised of not less than three
qualified outside directors. An outside Director is an
individual who was neither an officer nor employee of the
Company or any affiliate.
2.2 Each Member shall be an independent outside Director as
defined in the Audit Committee Requirements except that one
Director who is not independent and who is not a current
employee or an immediate family member of such employee may be
appointed to the Board of Directors if it, under exceptional
and unusual circumstances, determines that membership on the
Audit Committee by the individual is required in the best
interests of the Company and its shareholders and the Board of
Directors discloses in its next annual proxy statement
subsequent to that determination the nature of the
relationship and the reasons for that determination. No Member
of the Audit Committee shall be an active or retired employee
of the Company. The Members shall be independent of the
management of the Company as well as free from material
relationships; personal, financial, or otherwise that, in the
opinion of the Board of Directors, would interfere with their
independent judgment as an Audit Committee Member.
2.3 Based on the SEC approved amendments to Nasdaq's independent
director and audit committee listing standards, a director
will not be considered "independent" if, among other things,
he or she has:
(a) been employed by the corporation or its affiliates in
the current or past three years;
(b) accepted any compensation from the corporation or its
affiliates in excess of $60,000 during the previous
fiscal year (except for board service, retirement
plan benefits, or nondiscretionary compensation);
(c) An immediate family member who is, or has been in the
past three years, employed by the corporation or its
affiliates as an executive officer;
(d) been a partner, controlling shareholder or an
executive officer of any for-profit business to which
the corporation made, or from which it received,
payments (other than those which arise solely
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from investments in the corporation's securities)
that exceed five percent of the organization's
consolidated gross revenues for that year, or
$200,000, whichever is more, in any of the past three
years; or
(e) been employed as an executive of another entity where
any of the Company's executives serve on that
entity's compensation committee.
2.4 Each Member of the Audit Committee will have a working
knowledge of basic finance and accounting practices and at
least one member must have accounting or related financial
management expertise.
3. GENERAL RESPONSIBILITIES
3.1 The Audit Committee will provide reasonable assurance to the
Board of Directors that the financial affairs of the Company
are properly conducted, supervised and reported.
3.2 The Audit Committee will maintain free and open communication
with the Board of Directors, independent auditors, the
internal audit manager, legal counsel, financial management,
and, as necessary, Federal and State securities regulatory
authorities.
3.3 Hold regular meetings of the Audit Committee in order to
review and discuss those specific matters regarding the
Company's financial reporting, regulatory compliance, internal
controls and other related practices, procedures and policies
with respect to which the Audit Committee has oversight
responsibility.
3.4 Maintain minutes of all Audit Committee meetings regarding the
results of discussions concerning the topics set forth in the
agenda and other business items addressed. Report any matters
that are deemed to warrant attention to the Board of
Directors.
3.5 Evaluate whether the Board of Directors has committed
sufficient financial resources to the Audit Committee to
enable it to satisfy its responsibilities, including the
engagement of special counsel when necessary.
3.6 Discuss with management and/or the Company's general counsel
any legal matters (including the status of pending litigation)
that may have a
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material impact on the Company's financial statements, and any
material reports or inquiries from regulatory or governmental
agencies, and, if necessary, retain outside counsel for their
assistance.
4. RESPONSIBILITIES AND AUTHORITY - INDEPENDENT ACCOUNTANT OVERSIGHT
4.1 Recommend to the Board of Directors the independent public
accounting firm to perform the annual audit of the Company's
financial statements and to issue any management letters
regarding the Company's internal controls or that may
otherwise be required by applicable law.
4.2 The Audit Committee will review and assess any fees paid to
the independent public accountants as well as review and
recommend to the Board of Directors for approval the dismissal
of the independent public accounting firm. The Audit Committee
will ascertain that the external auditor is aware that they
are ultimately accountable to the Board of Directors and the
Audit Committee.
4.3 Obtain an appropriate written representation annually from the
independent public accounting firm assuring their independence
associated with the financial engagement as well as other
management consulting services that may be provided to the
Company. In the event that relationships may exist which might
have an impact on its independence and objectivity, the public
accounting firm will disclose this information to the Audit
Committee such that the appropriate action is taken to ensure
their independence is maintained.
4.4 Meet with the independent public accounting firm and Company
management prior to commencement of the annual audit to review
the audit scope; the procedural plans to be used; the audit
report anticipated to be issued; the audit timing; and the
proposed audit fee. The Audit committee may require the
independent public accountants to conduct a SAS71 Interim
Financial Review prior to the filing of each quarterly report
to shareholders (Form 10-Q).
4.5 A letter should be obtained from the independent public
accounting firm concerning any significant weaknesses or
deficiencies with internal controls that are discovered during
the financial engagement.
4.6 The committee should discuss with management and the
independent public accounting firm the substance of any
significant issues raised by
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counsel concerning litigation, contingencies or other claims,
and how such matters affect the financial statements.
4.7 Review, consider and monitor practices, procedures and
policies related to the Company's financial and regulatory
reporting responsibilities including, but not limited to, the
following:
(a) Compliance with GAAP and SEC reporting requirements,
including representations and disclosures made in
annual and quarterly reports, proxy statements and
all other required filings.
(b) Review with management and the independent public
accounting firm their assessment of the adequacy of
the Company's internal control system, and the
resolution of identified material weaknesses and
reportable conditions in internal controls.
(c) Evaluate the performance of the independent public
accounting firm and its professional relationship
with the Company.
(d) Review the audit opinion and audited financial
statements with the independent public accounting
firm before the report is finalized; obtain the
independent public accountant's evaluation of the
competence of financial and accounting personnel;
discuss and resolve disagreements between independent
public accounting firm and Company management; and
evaluate and monitor recommendations for improvement
of internal control deficiencies and compliance
weaknesses identified by the independent public
accounting firm.
(e) Review the independent accountant's qualitative
judgments concerning the propriety, not just the
acceptability, of the Company's accounting principles
and financial disclosures as well as how aggressive
(or conservative) the approach involving the
accounting principles and underlying estimates.
(f) Review with Company management and the independent
public accounting firm major accounting policies and
reporting disclosures affecting annual and quarterly
financial statements.
4.8 The Audit Committee will listen to management and the primary
independent auditor if either think there might be a need to
engage
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additional auditors. The Audit Committee will decide whether
to engage an additional firm and, if so, which one.
5. ETHICS AND BUSINESS CONDUCT
5.1 Monitor compliance with the Company's policies regarding
related party transactions and potential conflicts of
interest.
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