<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
Commission File No. 000-22687
---------
JLM INDUSTRIES, INC.
--------------------
(Exact name of registrant as specified in its charter.)
Delaware 06-1163710
-------- ----------
(State of Incorporation) (IRS Employer Identification No.)
8675 Hidden River Parkway, Tampa, FL 33637
- ------------------------------------ -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (813) 632-3300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Class Outstanding at May 14, 1998
----- ---------------------------
Common stock, par value
$.01 per share 7,109,898
<PAGE> 2
JLM INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
- ------ --------------------- -----------
<S> <C> <C>
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and
March 31, 1998 (unaudited) 3
Unaudited Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and 1998 4
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 15
Item 2 Changes in Securities and Use of Proceeds 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
ITEM 1 - FINANCIAL STATEMENTS
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, 1997 March 31, 1998
----------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,214,197 $ 5,833,633
Accounts receivable:
Trade 26,457,677 26,225,047
Other 3,012,975 3,750,374
Inventories 11,880,961 14,705,513
Prepaid expenses and other current assets 2,278,224 2,356,831
Assets held for sale 203,009 147,523
----------- -----------
Total current assets 49,047,043 53,018,921
Other investments 3,436,976 10,973,480
Property and equipment, net 29,505,011 29,194,512
Other assets 1,571,541 1,795,536
----------- -----------
Total assets $83,560,571 $94,982,449
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $34,474,758 $28,160,442
Current portion of long-term debt 789,277 855,943
Loans payable 379,034 7,498,161
Income taxes payable 115,333 1,412,487
----------- -----------
Total current liabilities 35,758,402 37,927,033
Long-term debt less current portion 4,795,895 11,988,770
Deferred income taxes 3,949,910 4,306,490
Other liabilities 221,747 2,138
----------- -----------
Total liabilities 44,725,954 54,224,431
Stockholders' Equity:
Preferred stock - authorized 5,000,000 shares;
0 shares issued and outstanding - -
Common stock, $.01 par value, authorized
30,000,000 shares; issued and outstanding
7,105,101 shares and 7,109,898, respectively 71,051 71,099
Additional paid-in capital 21,074,912 21,093,055
Retained earnings 17,709,397 19,614,084
Accumulated other comprehensive income:
Foreign currency translation adjustment (20,743) (20,220)
----------- -----------
Total stockholders' equity 38,834,617 40,758,018
----------- -----------
Total liabilities and stockholders' equity $83,560,571 $94,982,449
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
JLM INDUSTRIES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenues $ 80,517,783 $ 58,565,101
Cost of sales 73,671,162 50,631,222
------------ ------------
Gross profit 6,846,621 7,933,879
Selling, general and administrative expenses 3,917,669 4,357,858
------------ ------------
Operating income 2,928,952 3,576,021
Interest expense - net (627,910) (204,275)
Other income - net 40,769 131,581
Foreign currency exchange gain - net 62,908 10,973
------------ ------------
Income before minority interest and income taxes 2,404,719 3,514,300
Minority interest in income of subsidiaries (8,668) -
------------ ------------
Income from continuing operations before income
taxes and discontinued operations 2,396,051 3,514,300
------------ ------------
Income tax provision:
Current 548,289 1,244,223
Deferred 287,507 356,580
------------ ------------
Total income tax provision 835,796 1,600,803
------------ ------------
Income from continuing operations before
discontinued operations 1,560,255 1,913,497
Loss from operation of discontinued operations, net
of tax benefit of $56,453 and $5,873, respectively (84,679) (8,810)
------------ ------------
Net income 1,475,576 1,904,687
------------ ------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of tax benefit
(expense) of $44,393 and $(349), respectively (66,590) 523
------------ ------------
Comprehensive income $ 1,408,986 $ 1,905,210
============ ===========
Basic income per share:
Income from continuing operations before
discontinued operations $ 0.33 $ 0.27
Discontinued operations (0.02) -
------------ -----------
Net income per share $ 0.31 $ 0.27
============ ===========
Diluted income per share:
Income from continuing operations before
discontinued operations $ 0.33 $ .27
Discontinued operations (0.02) -
------------ -----------
Net income per share $ 0.31 $ 0.27
============ ===========
Weighted average number of shares outstanding used for:
Basic income per share 4,743,936 7,106,080
Diluted income per share 4,743,936 7,129,700
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1997 1998
---- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,475,576 $ 1,904,687
Adjustments to reconcile net income to net cash used
in operating activities:
Deferred income taxes 287,507 356,580
Minority interest in income of subsidiaries 8,668 -
Depreciation and amortization 678,042 765,417
Loss from partnerships 12,000 12,000
Allowance for doubtful accounts - 97,903
Loss from investment in Olefins Terminal Corporation - net 6,924 -
Noncash management fee and interest income from OTC (86,484) -
Changes in assets and liabilities:
Increase in accounts receivable (19,120,480) (602,672)
Increase in inventories (1,331,880) (2,824,552)
Increase in prepaid expenses and other current assets (54,297) (146,744)
Increase in other assets (77,443) (223,995)
Increase (decrease) in accounts payable and accrued expenses 12,102,743 (6,314,316)
Increase in income taxes payable 435,890 1,297,154
Decrease in deferred revenue (280,475) -
Increase (decrease) in other liabilities 5,148 (219,609)
------------- ------------
Net cash used in operating activities (5,938,561) (5,898,147)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets held for sale 1,090 15,871
Capital expenditures (370,633) (347,166)
Other investments (73,393) (7,548,504)
------------- ------------
Net cash used in investing activities (442,936) (7,879,799)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from loans payable 9,212,410 7,119,127
Proceeds from long-term debt 50,333 7,500,000
Repayments of long-term debt (1,703,949) (240,459)
Proceeds from sale of common stock - 18,191
Distributions to stockholders (73,698) -
------------- ------------
Net cash provided by financing activities 7,485,096 14,396,859
Effect of foreign exchange rates on cash (66,590) 523
------------- ------------
Net increase in cash and cash equivalents 1,037,009 619,436
Cash and cash equivalents, beginning of period 4,792,473 5,214,197
------------- ------------
Cash and cash equivalents, end of period $ 5,829,482 $ 5,833,633
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 698,251 $ 207,049
============= ============
Income taxes $ 65,826 $ 96,106
============= ============
Noncash investing activities:
Capital lease obligations $ 50,335 $ -
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
NOTE 1 DESCRIPTION OF BUSINESS
JLM Industries, Inc. and subsidiaries ("JLM" or the "Company") is a
leading marketer and distributor and a manufacturer of certain commodity
chemicals, principally acetone and phenol. JLM is headquartered in Tampa,
Florida. The Company believes it is the second largest marketer of acetone and
the fifth largest marketer of phenol in North America. JLM is also a global
distributor of olefins, principally propylene, as well as a variety of other
commodity and specialty chemicals. In order to provide stable and reliable
sources of supply for its products, the Company (i) maintains long-established
supplier relationships with several major chemical companies, (ii) manufactures
phenol and acetone at its Blue Island, Illinois Plant and (iii) sources acetone
from its joint venture manufacturing operation in Mt. Vernon, Indiana. The
Company's principal products are used in the production of adhesives, coatings,
forest product resins, paints, pharmaceuticals, plastics, solvents, synthetic
rubbers and food processing. The Company sells its products worldwide to over
1,000 customers.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Income
results for the interim periods are not necessarily indicative of the results
that may be expected for an entire year. The Company's cost of sales was
adjusted to reflect a proportionate share of the estimated LIFO provision for
the fiscal years ending December 31, 1998 and 1997. These unaudited
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 1997 included in the Company's Form 10K dated March 25, 1998.
Reclassification - Certain amounts in the 1997 unaudited consolidated
financial statements have been reclassified to conform to the 1998
presentation.
NOTE 3 EARNINGS PER SHARE DATA
The Financial Accounting Standards Board issued Statement Financial
Accounting Standard ("SFAS") No. 128, Earnings Per Share, that is required to
be adopted for accounting periods ending after December 15, 1997. SFAS No. 128
requires that "basic" and "diluted" earnings per share replace the primary and
fully diluted earnings per share, respectively. The basic calculation computes
earnings per share based only on the weighted average number of shares
outstanding as compared to primary earnings per share that includes common
stock equivalents. The diluted earnings per share calculation is computed
similarly to fully diluted earnings per share. All earnings per share amounts
for all periods presented conform to SFAS No. 128.
6
<PAGE> 7
On July 24, 1997, the Company sold 2,156,000 shares of common stock at
an initial public offering price of $10 per share. During September 1997, the
underwriters of the Company's initial public offering exercised 190,000 of
their options to purchase additional shares of common stock for the purpose of
covering over-allotments.
In conjunction with the initial public offering, the Company issued
411,500 options to employees of the Company at an exercise price of $10 per
share. As of March 31, 1998, there were only 381,500 of such options
outstanding due to employee turnover. The average market price of the
Company's common stock was greater than the exercise price of the options for
the three months ended March 31, 1998. Accordingly, the impact of the dilutive
effect of the options included in the calculation of diluted weighted average
shares outstanding is illustrated below for the three months ended March 31:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Basic weighted shares outstanding 4,743,936 7,106,080
Dilutive effect of outstanding options - 23,620
--------- ---------
Diluted weighted shares outstanding 4,743,936 7,129,700
========= =========
</TABLE>
The following unaudited computation of pro forma diluted earnings per
share assumes that the sale of the 2,156,000 shares of common stock and the
exercise of 190,000 of the Underwriter's options, mentioned above, had occurred
at the beginning of each of the periods presented and does not purport to be
indicative of what would have occurred had the sales of stock actually been
made as of such dates.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1997 1998
---- ----
<S> <C> <C>
Pro Forma Diluted Income Per Share:
Income from continuing operations before discontinued operations $ .22 $ .27
Discontinued operations (.01) -
------ ------
Pro forma net income per share $ .21 $ .27
====== ======
Pro forma diluted weighted average number of shares outstanding 7,093,351 7,129,700
</TABLE>
NOTE 4 INCOME TAXES
The provision for income tax expense for the three months ended March
31, 1997 and 1998 is calculated using the estimated annual income tax rates
based on projected annualized income.
NOTE 5 COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, that establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements
and is effective for all companies with fiscal years beginning after December
15, 1997. SFAS No. 130 requires that all items that are required to be
recognized under accounting
7
<PAGE> 8
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130
requires that an enterprise (i) classify items of other comprehensive income by
their nature and (ii) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. All financial statements
presented herein conform to SFAS No. 130.
NOTE 6 SIGNIFICANT EVENTS
On March 10, 1998, the Company executed a long-term supply contract
for phenol with Solutia, Inc. ("Solutia") to purchase on a take-or-pay basis
phenol to be produced at Solutia's proposed phenol plant to be constructed in
Pensacola, Florida (the "Supply Contract"). The proposed phenol plant will
attempt to utilize a new benzene-to-phenol technology to produce phenol and is
currently estimated to have a yearly capacity of 300 million pounds.
Construction of the plant is anticipated to commence in the beginning of 1999
and phenol production is anticipated to begin at the plant in the fourth
quarter of 2000.
The Supply Contract requires the Company to advance $35 million to
Solutia as a partial prepayment for required future phenol purchases with $5
million to be paid on or about December 31, 1998, $1.625 million to be paid at
the end of each quarter of 1999 and $5.875 million to be paid at the end of
each quarter of 2000. The Supply Contract also provides that if the Company's
available borrowing capacity under its aggregate credit facilities is less than
the total amount of the advance payments owed to Solutia, Solutia may require
the Company to deliver to Solutia an executed, irrevocable bank guaranty equal
to the amount of the advance payment then owed to Solutia.
Under terms of the Supply Contract, the Company is required to
purchase, and Solutia is required to sell, a total of 1.875 billion pounds of
phenol as follows: 75 million pounds of phenol during the first year following
satisfactory startup of phenol production at the plant and 125 million pounds
of phenol each year thereafter. The Supply Contract provides for purchases to
be made at a specified price that shall be reduced on a pro rata per pound
basis for the advance payment mentioned above.
Effective April 1, 1998, the Company completed the purchase of all of
the assets of Browning Chemical Corporation ("Browning") for $9.5 million. The
purchase price consisted of an initial payment of $7.5 million cash and a $2
million promissory note to be paid in equal installments over four years.
Browning was founded in 1948 and is a major marketer of inorganic chemicals,
with a diversified product range serving both industrial and food processing
markets throughout the United States. The acquisition will be accounted for as
a purchase.
NOTE 7 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, Segment Data, that
requires companies to report selected segment information in their quarterly
reports issued to shareholders for fiscal years beginning after December 31,
1997. It also requires, among other items, entity-wide disclosure about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues and its major customers. In accordance with
SFAS No. 131, the Company will begin implementing the requirements under SFAS
No. 131 beginning in fiscal year 1999.
8
<PAGE> 9
NOTE 8 SUBSEQUENT EVENTS
On May 13, 1998, JLM completed the acquisition of Tolson Transport
B.V., a Dutch Company, Tolson Holland B.V., a Dutch company and Tolson Asia
Pte., Ltd, a Singapore company through the purchase of all of the outstanding
shares of capital stock of the three companies (the "Acquired Companies") from
their parent Tolson Holding, B.V., a Dutch company. The total purchase price
for the Acquired Companies was $5,750,000 subject to certain adjustments as
described below.
The Acquired Companies are global distributors and traders of
methanol, solvents, aromatics and olefins. The acquisition will expand the
Company's international chemical business especially in Asia and Europe
including an office in Russia.
The purchase price was determined based on a closing valuation date of
March 31, less excluded receivables as defined in the Share Purchase Agreement
and the execution of a $2,850,000 promissory note that accrues interest at the
LIBOR rate plus 1%. The promissory note is payable in five semi-annual
installments of $350,000 with a lump-sum payment of $1.1 million due in May
2001. If the combined shareholders' equity of the Acquired Companies is less
than zero at the effective closing date, Tolson will pay JLM for any deficit.
Conversely, if the combined shareholders' equity of the Acquired Companies is
in excess of zero at the time of the effective closing date, then JLM is
required to pay Tolson for such excess. Should JLM pay any excess to Tolson,
JLM will fund all required amounts to Tolson using its acquisition line of
credit. The acquisition line has an available borrowing capacity of $7.5
million as of May 14, 1998.
The purchase of the Acquired Companies will exclude certain
receivables, as defined in the Share Purchase Agreement. For such excluded
receivables, JLM will collect such receivables on a best efforts basis and JLM
will receive a commission, as defined in the Share Purchase Agreement, for
actual collections made. The transaction will be treated as a purchase under
generally accepted accounting principles.
*********************
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion
should be read in conjunction with the unaudited Consolidated Financial
Statements appearing in Item 1.
JLM is a leading marketer and distributor and a manufacturer of certain
commodity chemicals, principally acetone and phenol. The Company believes it is
the second largest marketer of acetone and the fifth largest marketer of phenol
in North America. The Company's business consists of a manufacturing and
marketing segment. The Company's manufacturing segment includes the operations
of the Blue Island Plant and the sale of acetone manufactured at the Mt. Vernon
Plant.
Within the Company's manufacturing segment, the Blue Island
phenol/acetone plant continued to operate at full capacity during the three
months ended March 31, 1998. This factor, combined with a reduction in
manufacturing costs primarily from a reduction in the cost of certain raw
materials resulted in improved operating profitability for the Company's
manufacturing segment.
The Company's marketing segment includes its distribution, storage and
terminaling operations and all other sourcing operations. Effective April 1,
1998, the Company expanded its marketing segment through the acquisition of all
the assets of Browning Chemical Corporation ("Browning"). With the acquisition
of Browning, JLM will broaden its product, supplier and customer base. Browning
was founded in 1948 and is a major marketer of inorganic chemicals with a
diversified product range serving both the industrial and food processing
markets. The Company borrowed $7.5 million form its acquisition line of credit
on March 31, 1998 and paid the amounts to the escrow agent. The amount paid to
the escrow agent is included in other investments in the accompanying unaudited
consolidated balance sheet as of March 31, 1998. See Note 7 of the unaudited
consolidated financial statements for a further discussion on the acquisition of
Browning.
In May 1998, the Company entered an agreement with Tolson Holding B.V.
("Tolson"), a Dutch global distributor and trader of methanol, solvents,
aromatics and olefins, to acquire certain subsidiaries of Tolson. The
acquisition of the Tolson's subsidiaries will expand the Company's international
chemical business, especially in Asia and Europe, including Russia where Tolson
already has an existing business structure.
During 1997, the Company's investment in Olefins Terminal Corporation
("OTC") was reduced to zero due to the recognition of the Company's pro rata
share of OTC's operating losses. As the Company has no current financial
commitments to OTC, the Company has not recorded additional losses on its
investment during the first quarter of 1998. Additionally, the Company will not
record future losses on its investment in OTC until future operating income from
OTC surpasses the cumulative unrecorded operating losses or until any contingent
payment obligation is required to be made by the Company on behalf of OTC.
Set forth below for the periods indicated, is certain unaudited segment
information for the Company's manufacturing and marketing segments.
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(In thousands, except percentages)
1997 1998
---- ----
<S> <C> <C> <C> <C>
Revenues:
Marketing $64,186 79.7% $42,246 72.1%
Manufacturing 16,332 20.3% 16,319 27.9%
------- ----- ------- -----
$80,518 100.0% $58,565 100.0%
======= ===== ======= =====
Gross profit:
Marketing $ 3,265 47.7% $ 3,237 40.8%
Manufacturing 3,582 52.3% 4,697 59.2%
------- ----- ------- -----
$ 6,847 100.0% $ 7,934 100.0%
======= ===== ======= =====
Segment operating income:
Marketing $ 1,367 39.0% $ 633 15.1%
Manufacturing 2,137 61.0% 3,552 84.9%
------- ----- ------- -----
Total segment operating
income $ 3,504 100.0% $ 4,185 100.0%
Corporate expenses (575) - (609) -
------- ----- ------- -----
Total operating income $ 2,929 100.0% $ 3,576 100.0%
======= ===== ======= =====
</TABLE>
During the three months ended March 31, 1997 and 1998, the
manufacturing segment sold approximately $472,000 and $1,391,000, respectively,
of products to the marketing segment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. Revenues decreased $21.9 million to $58.6 million for the
three months ended March 31, 1998 from $80.5 million for the comparable period
in 1997, a decrease of 27.2%. Revenues for the marketing segment decreased
$22.0 million to $42.2 million for the three months ended March 31, 1998 from
$64.2 million for the comparable period in 1997, a decrease of 34.3%. The
decrease in marketing revenues was generally the result of decreased sales of
propylene in the Company's Olefins division due to the recent economic
difficulties experienced in the Far East. Revenues for the manufacturing
segment remained constant at $16.3 million for the three months ended March 31,
1998 and 1997. This stabilization in manufacturing segment revenues was due to
an increase in overall sales volumes at the Company's Blue Island Plant offset
by a decrease in the acetone selling volumes at the Company's Mt. Vernon plant.
Gross Profit. Gross profit increased $1.1 million to $7.9 million
for the three months ended March 31, 1998 from $6.8 million for the comparable
period in 1997, an increase of 16.2%. As a percentage of revenues, gross profit
increased to 13.5% for the three months ended March 31, 1998 from 8.5% for the
comparable period in 1997. Gross profit for the marketing segment remained
constant at $3.3 million for the three months ended March 31, 1998 and 1997.
The stabilization of the marketing gross margin was due to sales of new products
with higher profit margins sold domestically offset by the reduction of
propylene sales to the Far East discussed above. Gross profit for the
manufacturing segment increased by $1.1 million to $4.7 million for the three
months ended March 31, 1998 from $3.6 million for the comparable period in 1997,
an increase of 30.6%. The increase in manufacturing gross profit was principally
the result of favorable prices in certain raw material costs partially offset by
lower acetone selling volumes from sales at the Mt. Vernon plant. During the
three months ended March 31, 1997, approximately 13 million pounds of propylene
purchases were covered by a fixed financial hedge for which the Company had a
gain of approximately $.5 million, which reduced its cost of sales for this
period by a corresponding amount. The reduction in cost of sales during the
three months ended March 31, 1997 resulting from the propylene hedge was
partially offset by an increase in the cost of benzene,
11
<PAGE> 12
which the Company elected not to hedge. There were no financial hedges during
the three months ended March 31, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.4 million to $4.3 million for the three
months ended March 31, 1998 from $3.9 million for the comparable period in 1997,
an increase of 10.3%. This increase is primarily the result of expenses
relating to the expansion of the Company's product base and expenses related to
JLM being publicly traded.
Operating Income. Operating income increased $0.7 million to $3.6
million for the three months ended March 31, 1998 from $2.9 million for the
comparable period in 1997, an increase of 24.1%. This increase was principally
as a result of the factors that increased gross profit as discussed above.
Interest Expense - Net. Net interest expense decreased by
approximately $424,000 to $204,000 for the three months ended March 31, 1997
from approximately $628,000 for the comparable period in 1997, a decrease of
67.5%. This decrease in interest expenses was principally due to the Company's
early retirement of debt in August of 1997 from proceeds that the Company
received from its initial public offering in July 1997.
Other Income - Net. Other income in 1997 consists of, principally, the
Company's proportionate share of income or loss from the operations of OTC. In
1998, other income primarily represents income from investments.
Foreign Currency Exchange Gain. Foreign currency exchange gain
decreased by approximately $52,000 to approximately $11,000 for the three months
ended March 31, 1998 from approximately $63,000 for the comparable period in
1997. The decrease in the foreign currency exchange gain was principally the
result of the further stabilization of the Venezuelan currency since the lifting
of exchange controls in 1996.
Income Tax Provision. The Company's provision for income taxes
increased $0.8 million to $1.6 million for the three months ended March 31, 1998
from $.8 million for the comparable period in 1997, an increase of 100.0%. The
Company's effective tax rate for the three months ended March 31, 1998 was 45.6%
as compared to 34.9% for the comparable period in 1997. The Company's
Venezuelan and Holland operations have not recorded any income tax benefit in
1998 or 1997 due to the uncertainty of utilizing the income tax loss
carryforwards. Excluding these operations, the effective tax rate for the three
months ended March 31, 1998 and 1997 would have been approximately 40.4% and
35.3%, respectively. In addition, the Company's consolidated effective tax rate
is lower than the statutory rate due to the Company's ability to reduce its
taxable income on U.S. export sales through the use of the Company's Foreign
Sales Corporation ("FSC") that has an effective tax rate of 11.8%. During the
three months ended March 31, 1997, the Company exported significantly more
propylene than in the same period in 1998. Therefore, the Company was able to
better reduce its effective tax rate through the use of its FSC during the three
months ended March 31, 1997 compared to the same period in 1998.
Net Income. Net income increased $0.4 million to $1.9 million for the
three months ended March 31, 1998 from $1.5 million for the comparable period in
1997, an increase of 26.7%. The increase in net income was due to the factors
stated above.
12
<PAGE> 13
Liquidity and Capital Resources
During December 1997, the Company renegotiated one of its line of
credit agreements whereby the Company increased the line by $19.0 million to
$30.0 million. Under the renegotiated line, $15.0 of the line is reserved for
acquisition financing and the remaining is reserved for working capital needs.
After the renegotiations of the line of credit, the Company now has a total
borrowing capacity of approximately $72.1 million.
Net cash used in operating activities remained constant at $5.9
million for the three months ended March 31, 1998 and 1997. This stabilization
was due primarily to decreases in the Company's accounts receivables offset by
the decrease in the Company's accounts payable and accrued expenses. Net cash
used in investing activities increased by approximately $7.5 million to $7.9
for the three months ended March 31, 1998 compared to $0.4 million for the same
period in 1997. This increase was primarily the result of a $7.5 million
payment made on March 31, 1998 for the acquisition of Browning from funds
borrowed on the Company's acquisition line of credit discussed above. Net cash
provided by financing activities increased by approximately $6.9 million to
$14.4 million for the three months ended March 31, 1998 compared to $7.5
million for the same period in 1997. This increase was due primarily to the
borrowings on the Company's acquisition line of credit to fund the purchase of
Browning, mentioned above, partially offset by changes in the Company's
borrowings and repayments of its loans payable and other long-term debt.
As described in Note 6 of the unaudited consolidated financial
statements, the Company executed a long-term supply contract (the "Supply
Contract") for phenol with Solutia to purchase on a take-or-pay basis phenol to
be produced at Solutia's proposed phenol plant. The Supply Contract requires
JLM to advance $35 million to Solutia as a partial prepayment for required
future phenol purchases with $5 million to be paid on or about December 31,
1998, $1.625 million to be paid at the end of each quarter of 1999 and $5.875
million to be paid at the end of each quarter of 2000. The Supply Contract
also provides that if the Company's available borrowing capacity under its
aggregate credit facilities is less than the total amount of the advance
payments owed to Solutia, Solutia may require the Company to deliver to Solutia
an executed, irrevocable bank guaranty equal to the amount of the advance
payment then owed to Solutia.
The Company expects capital expenditures for its manufacturing and
terminaling facilities to be approximately $0.8 million for the remainder of
1998 and $1.2 million for 1999 and 2000, respectively.
JLM believes its liquidity and capital resources, including its
ability to borrow additional amounts under its credit agreements, are
sufficient to meet its currently anticipated needs through the foreseeable
future and to permit it to continue to implement its business strategy. In
addition, requirements of bringing the Company's information systems to
compliance with Year 2000 standards will not have a material impact on its
liquidity or capital resources.
Effects of Inflation
Inflation generally affects the Company by increasing the cost of
labor, equipment and raw materials. The Company does not believe that
inflation has had any material effect on the Company's business over the last
three years.
13
<PAGE> 14
Forward Looking Information
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The potential
risks and uncertainties that could cause actual results to differ materially
include: the cyclical nature of the worldwide chemical market; the possibility
of excess capacity; fluctuations in the cost and availability of raw material
prices; the political and economic uncertainties associated with international
operations; fluctuations of foreign exchange; the risks associated with
potential acquisitions, and the ability to implement other features of the
Company's business strategy.
14
<PAGE> 15
JLM INDUSTRIES, INC.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
The Company at times does have routine litigation incidental to its business.
In the opinion of the Company's management, such proceedings should not,
individually or in the aggregate, have a material adverse effect on the
Company's results of operation or financial condition. The Company maintains
insurance in such amounts and with such coverage and deductibles as management
believes are reasonable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 1998, the Company did not use
any of the proceeds from its initial public offering. All working capital
needs were met via the use of the Company's available credit facilities.
The Company has not paid dividends on its Common Stock and does not
anticipate that it will pay dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, for future operations and
expansion of the Company's business. Any determination to pay dividends in the
future will be at the discretion of the Company's Board of Directors and will
be dependent upon the Company's results of operations, financial restrictions,
restrictions imposed by applicable laws and other factors deemed relevant by
the Board of Directors. Furthermore, the Company and its subsidiaries are
restricted from paying dividends under certain credit agreements to which they
are a party.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
ITEM 5 - OTHER INFORMATION:
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K during quarter ended March 31, 1998 - None.
15
<PAGE> 16
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.
JLM INDUSTRIES, INC.
Dated: May 14, 1998
/s/ John L. Macdonald
-------------------------------------
John L. Macdonald
President and Chief Executive Officer
/s/ Frank A. Musto
-------------------------------------
Frank A. Musto
Vice President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
16
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