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 SEPTEMBER 30, 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 [ ] No [X]
CLASS OUTSTANDING AT NOVEMBER 13, 1998
----- --------------------------------
Common stock, par value
$.01 per share 7,109,998
<PAGE>
JLM INDUSTRIES, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
- ------ --------------------- -----------
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and
September 30, 1998 (unaudited) 3
Unaudited Consolidated Statements of Income and
Comprehensive Income for the Three and Nine Months Ended
September 30, 1997 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 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 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
2
<PAGE>
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,214,197 $ 5,374,775
Accounts receivable:
Trade 26,457,677 42,183,139
Other 3,012,975 8,730,616
Inventories 11,880,961 17,992,232
Prepaid expenses and other current assets 2,278,224 2,039,013
Assets held for sale 203,009 -
----------- ------------
Total current assets 49,047,043 76,319,775
Other investments 3,436,976 3,930,304
Property and equipment, net 29,505,011 28,767,978
Goodwill - 11,613,352
Other assets 1,571,541 3,789,996
----------- ------------
Total assets $83,560,571 $124,421,405
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $34,474,758 $ 58,534,437
Current portion of long-term debt 789,277 1,348,346
Loans payable 379,034 1,556,928
Deferred revenue - 324,882
Income taxes payable 115,333 500,666
----------- ------------
Total current liabilities 35,758,402 62,265,259
Long-term debt less current portion 4,795,895 13,288,535
Deferred income taxes 3,949,910 4,906,490
Minority Interest - 133,057
Other liabilities 221,747 654
----------- ------------
Total liabilities 44,725,954 80,593,995
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 7,109,998, respectively 71,051 71,101
Additional paid-in capital 21,074,912 21,094,032
Retained earnings 17,709,397 22,980,909
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment, net of tax (20,743) (318,632)
----------- ------------
Total stockholders' equity 38,834,617 43,827,410
----------- ------------
Total liabilities and stockholders' equity $83,560,571 $124,421,405
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
JLM INDUSTRIES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ -------------------------------
1997 1998 1997 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $63,464,228 $83,079,579 $225,904,844 $226,011,709
Cost of sales 55,661,571 73,716,959 203,950,706 199,002,570
----------- ----------- ------------ ------------
Gross profit 7,802,657 9,362,620 21,954,138 27,009,139
Selling, general and administrative expenses 4,152,642 5,989,112 12,016,191 15,992,970
----------- ----------- ------------ ------------
Operating income 3,650,015 3,373,508 9,937,947 11,016,169
Interest expense - net (451,639) (498,483) (1,836,806) (1,107,377)
Other (expense) income - net (39,866) (172,348) (99,596) 45,477
Foreign currency exchange (loss) gain - net (8,471) (5,512) 77,968 6,416
----------- ----------- ------------ ------------
Income before minority interest and income taxes 3,150,039 2,697,165 8,079,513 9,960,685
Minority interest in income (loss) of subsidiaries 12,591 (133,057) 61,878 (133,057)
----------- ----------- ------------ ------------
Income from continuing operations before income
taxes, discontinued operations and extraordinary item 3,162,630 2,564,108 8,141,391 9,827,628
----------- ----------- ------------ ------------
Income tax provision:
Current 810,125 768,631 2,142,086 3,556,530
Deferred 324,203 310,000 834,779 956,580
----------- ----------- ------------ ------------
Total income tax provision 1,134,328 1,078,631 2,976,865 4,513,110
----------- ----------- ------------ ------------
Income from continuing operations before
discontinued operations and extraordinary item 2,028,302 1,485,477 5,164,526 5,314,518
Loss from operation of discontinued operations, net
of tax (18,567) (9,039) (178,492) (43,006)
----------- ----------- ------------ ------------
Income before extraordinary item 2,009,735 1,476,438 4,986,034 5,271,512
Extraordinary loss on extinguishment of debt, net of
tax (385,842) - (385,842) -
----------- ----------- ------------ ------------
Net income 1,623,893 1,476,438 4,600,192 5,271,512
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments 12,695 (299,192) 154 (297,889)
----------- ----------- ------------ ------------
Comprehensive income $ 1,636,588 $ 1,177,246 $ 4,600,346 $ 4,973,623
=========== =========== ============ ============
Basic Income Per Share:
Income from continuing operations before
discontinued operations and extraordinary item $ .32 $ .21 $ .97 $ .75
Discontinued operations - - (.03) (.01)
Extraordinary item (.06) - (.07) -
----------- ----------- ------------ ------------
Net income per share $ .26 $ .21 $ .87 $ .74
=========== =========== ============ ============
Diluted Income Per Share:
Income from continuing operations before
discontinued operations and extraordinary item $ .31 $ .21 $ .96 $ .75
Discontinued operations - - (.03) (.01)
Extraordinary item (.06) - (.07) -
----------- ----------- ------------ ------------
Net income per share $ .25 $ .21 $ .86 $ .74
=========== =========== ============ ============
Weighted Average Number of Shares Outstanding
Used For:
Basic income per share 6,403,521 7,109,998 5,319,599 7,108,333
Diluted income per share 6,457,743 7,109,998 5,373,822 7,108,333
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,600,192 $ 5,271,512
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes 834,779 956,580
Minority interest in (loss) income of subsidiaries (61,878) 133,057
Loss on disposal of assets 250,367 30,473
Depreciation and amortization 2,158,417 2,599,754
Loss from partnerships 36,000 36,000
Allowance for doubtful accounts - 133,902
Loss from investment in Olefins Terminal Corpor ation - net 418,428 -
Noncash management fee and interest income from OTC (133,818) -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (10,066,161) 7,215,910
Decrease (increase) in inventories 2,095,196 (1,064,252)
(Increase) decrease in prepaid expenses and other current assets (97,375) 282,041
Increase in other assets (159,235) (2,384,983)
Increase (decrease) in accounts payable and accrued expenses 4,304,011 (10,062,217)
Increase in income taxes payable 32,628 81,536
(Decrease) increase in deferred revenue (300,475) 324,882
Decrease in other liabilities (145,140) (525,823)
------------ ------------
Net cash provided by operating activities 3,765,936 3,028,372
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets held for sale 1,192,128 254,809
Capital expenditures (1,970,031) (1,139,915)
Purchase of minority interest (110,526) -
Stock issuance cost (1,144,710) -
Purchase of subsidiaries - (7,924,268)
Other investments (1,022,615) (529,328)
------------ ------------
Net cash used in investing activities (3,055,754) (9,338,702)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds of loans payable (2,475,506) 1,177,894
Proceeds from long-term debt 1,750,335 7,991,324
Repayments of long-term debt (17,794,874) (2,419,590)
Proceeds from sale of common stock 21,846,828 19,169
Distributions to stockholders (1,740,056) -
------------ ------------
Net cash provided by financing activities 1,586,727 6,768,797
Effect of foreign exchange rates on cash 257 (297,889)
------------ ------------
Net increase in cash and cash equivalents 2,297,166 160,578
Cash and cash equivalents, beginning of period 4,792,473 5,214,197
------------ ------------
Cash and cash equivalents, end of period $ 7,089,639 $ 5,374,775
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,274,525 $ 991,491
============ ============
Income taxes $ 1,528,283 $ 2,959,197
============ ============
Noncash investing activities:
Capital lease obligations $ 50,335 $ -
============ ============
Forgiveness of accounts payable for joint venture restructuring $ 1,958,157 $ -
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 and 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 on an interim basis
are adjusted to reflect a proportionate share of the estimated LIFO provision
for the entire fiscal year. 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
10-K dated March 25, 1998 as updated by the Company's 10-K/A dated April 13,
1998.
RECLASSIFICATION - Certain amounts in the 1997 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>
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 their
over-allotment option to purchase 190,000 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 September 30, 1998, there were only 264,500 of such options
outstanding due to employee turnover. Except for the three months ended
September 30, 1998, the average market price of the Company's common stock was
greater than the exercise price for the outstanding options for substantially
all periods presented. 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 periods ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted shares outstanding 6,403,521 7,109,998 5,319,599 7,108,333
Dilutive effect of outstanding options 54,222 - 54,223 -
--------- --------- --------- ---------
Diluted weighted shares outstanding 6,457,743 7,109,998 5,373,822 7,108,333
========= ========= ========= =========
</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 sale
of 190,000 shares pursuant to the exercise of the Underwriter's over-allotment
option, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Pro Forma Diluted Income Per Share:
Income from continuing operations $ .29 $ .21 $ .73 $ .75
Discontinued operations - - (.03) (.01)
Extraordinary item (.05) - (.05) -
----- ----- ----- -----
Pro forma net income per share $ .24 $ .21 $ .65 $ .74
===== ===== ===== =====
Pro forma diluted weighted average number of shares
outstanding 7,123,977 7,109,998 7,120,061 7,108,333
</TABLE>
NOTE 4 INCOME TAXES
The provision for income tax expense for the three and nine months
ended September 30, 1997 and 1998 is calculated using the estimated annual
income tax rates based on projected annualized income.
7
<PAGE>
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 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 was accounted for as a
purchase.
Effective April 1, 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
8
<PAGE>
price for the Acquired Companies was $5.75 million, including the execution of a
$2.9 million promissory note, 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, 1998, less excluded receivables as defined in the Share Purchase
Agreement and the execution of a $2.9 million 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. Based on the combined negative shareholders' equity of the Acquired
Companies as of March 31, 1998 Tolson contributed approximately $7.4 million to
bring the combined negative equity of the Acquired Companies to zero.
The purchase of the Acquired Companies excluded 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 was treated as a purchase under generally accepted
accounting principles.
On July 3, 1998, the Company acquired from Mr. Jesus Herboso, a Spanish
citizen, 50.1%, of the outstanding common stock of Inquinosa International, S.A.
("Inquinosa"), a Spanish company. The purchase price for Inquinosa is $1.8
million to be funded through a four-year earn-out period. The effective date of
the acquisition is July 1, 1998. Inquinosa is a worldwide marketer of the
pesticide lindane. Lindane is a preferred seed-treating pesticide that prevents
insect damage during the critical pre-germination stage for wheat, other grains
and canola.
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.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, that requires that gains or losses be
recognized in earnings for a fair value hedge in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. Management does not believe that the adoption of SFAS No. 133 will
have a significant impact on the Company's consolidated financial statements. In
accordance with SFAS No. 133, the Company will begin implementing the
requirements under SFAS No. 133 beginning in fiscal year 2000.
****************************
9
<PAGE>
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 and
nine months ended September 30, 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 during the first two quarters of 1998. During the third
quarter of 1998, the Company experienced declines in both acetone and phenol
selling prices resulting in lower margins both in its marketing and
manufacturing segments.
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 domestic 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 marketer of inorganic
chemicals with a diversified product range serving both the industrial and food
processing markets. The Company borrowed $7.5 million from its acquisition line
of credit to fund the acquisition. See Note 6 of the unaudited consolidated
financial statements for a further discussion on the acquisition of Browning.
As fully explained in Note 6 of the unaudited consolidated financial
statements, 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.
Effective April 1, 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. See Note 6 of the unaudited
consolidated financial statements for a further discussion on the acquisition of
Tolson
In July 1998, the Company further expanded its international marketing
business through an agreement to purchase 50.1% of the outstanding common stock
of Inquinosa International, S.A., a
10
<PAGE>
Spanish distributor of the pesticide Lindane. See Note 6 of the unaudited
consolidated financial statements for a further discussion on the acquisition of
Inquinosa.
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 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------- -------------------------------------------
1997 1998 1997 1998
------------------- ---------------- ------------------- -----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Marketing $47,748 75.2% $70,157 84.4% $176,878 78.3% $181,756 80.4%
Manufacturing 15,716 24.8% 12,923 15.6% 49,027 21.7% 44,256 19.6%
------- ----- ------- ----- -------- ----- -------- -----
$63,464 100.0% $83,080 100.0% $225,905 100.0% $226,012 100.0%
======= ===== ======= ===== ======== ===== ======== =====
Gross profit:
Marketing $ 3,150 40.4% $ 6,072 64.9% $ 10,090 46.0% $ 13,741 50.9%
Manufacturing 4,653 59.6% 3,291 35.1% 11,864 54.0% 13,268 49.1%
------- ----- ------- ----- -------- ----- -------- -----
$ 7,803 100.0% $ 9,363 100.0% $ 21,954 100.0% $ 27,009 100.0%
======= ===== ======= ===== ======== ===== ======== =====
Segment operating income:
Marketing $ 937 23.0% $ 1,804 44.5% $ 4,061 35.4% $ 2,832 30.1%
Manufacturing 3,138 77.0% 2,246 55.5% 7,396 64.6% 6,579 69.9%
------- ----- ------- ----- -------- ----- -------- -----
Total segment
operating income 4,075 100.0% 4,050 100.0% 11,457 100.0% 9,411 100.0%
Corporate expenses (425) - (676) - (1,519) - (2,624) -
------- ----- ------- ----- -------- ----- -------- -----
Total operating income $ 3,650 100.0% $ 3,374 100.0% $ 9,938 100.0% $ 6,787 100.0%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
The manufacturing segment sold approximately $3,558,000 and $2,045,000,
respectively, of products to the marketing segment during the nine months ended
September 30, 1998 and 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES. Revenues increased $19.6 million to $83.1 million for the
three months ended September 30, 1998 from $63.5 million for the comparable
period in 1997, an increase of 30.9%. Revenues for the marketing segment
increased $22.4 million to $70.2 million for the three months ended September
30, 1998 from $47.8 million for the comparable period in 1997, an increase of
46.9%. The increase in marketing revenue is due primarily to additional revenue
from the Company's three acquisitions - Tolson, Browning and Inquinosa. However,
this increase in revenues for the marketing segment was partially offset due to
decreases in the volume and selling prices of propylene from their levels in
1997. Revenues for the manufacturing segment decreased $2.8 million to $12.9
million for the three months ended September 30, 1998 from $15.7 million for the
comparable period in 1997, a decrease of 17.8%. This decrease in manufacturing
segment revenues was due primarily to a decrease in overall sales volumes and
prices of acetone sourced from the Company's Mt. Vernon plant and a reduction in
selling prices of phenol during the third quarter of 1998.
GROSS PROFIT. Gross profit increased $1.6 million to $9.4 million for
the three months ended September 30, 1998 from $7.8 million for the comparable
period in 1997, an increase of 20.5%. As a
11
<PAGE>
percentage of revenues, gross profit decreased to 11.3% for the three months
ended September 30, 1998 from 12.3% for the comparable period in 1997. Gross
profit for the marketing segment increased $2.9 million to $6.1 million for the
three months ended September 30, 1998 from $3.2 million for the comparable
period in 1997, an increase of 90.6%. The increase in marketing segment gross
profit was due primarily to the impact of Tolson, Browning and Inquinosa and due
to sales of new products with higher profit margins. As noted above, gross
profit for the marketing segment for the three months ended September 30, 1998
would have been higher had both propylene selling volumes and selling prices
been at the same levels as during the second quarter of 1997. Gross profit for
the manufacturing segment decreased by $1.4 million to $3.3 million for the
three months ended September 30, 1998 from $4.7 million for the comparable
period in 1997, a decrease of 29.8%. The decrease in manufacturing gross profit
was principally the result of reductions in phenol selling prices that occurred
during the third quarter of 1998
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.8 million to $6.0 million for the three
months ended September 30, 1998 from $4.2 million for the comparable period in
1997, an increase of 42.9%. This increase was due to higher depreciation costs
related to new terminal facilities built in late 1997, expenses related to
Tolson, Browning and Inquinosa, certain expenses relating to the expansion of
the Company's product base, amortization of goodwill relating to Tolson and
costs pertaining to JLM being publicly traded.
OPERATING INCOME. Operating income decreased $0.3 million to $3.4
million for the three months ended September 30, 1998 from $3.7 million for the
comparable period in 1997, a decrease of 8.1%. This decrease was principally as
a result of the factors that increased selling, general, and administrative as
discussed above.
INTEREST EXPENSE - NET. Net interest expense increased by approximately
$47,000 for the three months ended September 30, 1998 from approximately
$452,000 for the comparable period in 1997, an increase of 10.4%. This increase
in interest expense was principally from the Company's new acquisitions of
Tolson, Browning and Inquinosa.
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 loss
decreased by approximately $3,000 to approximately $5,000 for the three months
ended September 30, 1998 from approximately $8,000 for the comparable period in
1997. The decrease in the foreign currency exchange loss 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
decreased $56,000 for the three months ended September 30, 1998 from
approximately $1,134,000 for the comparable period in 1997, a decrease of 4.9%.
The Company's effective tax rate for the three months ended September 30, 1998
was 42.1% as compared to 35.9% 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 September 30, 1998 and 1997 would have been approximately 39.4% and
35.5%, respectively. 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
12
<PAGE>
Company's Foreign Sales Corporation ("FSC") that has an effective tax rate of
11.8%. In addition, as part of the Tolson acquisition, the Company acquired
operating loss carryforwards. Therefore, no tax expense was recognized on the
pre-tax income derived from Tolson for the three months ended September 30,
1998.
NET INCOME. Net income decreased $0.1 million to $1.5 million for the
three months ended September 30, 1998 from $1.6 million for the comparable
period in 1997, a decrease of 6.3%. This decrease in net income was due to the
factors stated above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES. Revenues increased $0.1 million to $226.0 million for the
nine months ended September 30, 1998 from $225.9 million for the comparable
period in 1997. Revenues for the marketing segment increased $4.9 million to
$181.8 million for the nine months ended September 30, 1998 from $176.9 million
for the comparable period in 1997, an increase of 2.8%. The increase in
marketing segment revenues was generally the result of increased revenues from
Tolson, Browning and Inquinosa that was partially offset due to decreased
propylene sales during 1998 compared to 1997. Revenues for the manufacturing
segment decreased by $4.8 million to $44.2 million for the nine months ended
September 30, 1998 from $49.0 million for the comparable period in 1997, a
decrease of 9.8%. The decrease in manufacturing segment revenues was principally
due to a decrease in the volume and sales prices of acetone sold from the
Company's Mt. Vernon plant and the reduction of phenol selling prices during the
third quarter of 1998.
GROSS PROFIT. Gross profit increased $5.1 million to $27.0 million for
the nine months ended September 30, 1998 from $21.9 million for the comparable
period in 1997, an increase of 23.3%. As a percentage of revenues, gross profit
increased to 11.9% for the nine months ended September 30, 1998 from 9.7% for
the comparable period in 1997. Gross profit for the marketing segment increased
$3.6 million to $13.7 million for the nine months ended September 30, 1998
compared to $10.1 million for the comparable period in 1997, an increase of
35.6%. This increase in gross profit for the marketing segment was due primarily
from the profit contributions from Tolson, Browning and Inquinosa partially
offset by lower propylene sales in 1998 compared to the same period in 1997.
Gross profit for the manufacturing segment increased by $1.4 million to $13.3
million for the nine months ended September 30, 1998 from $11.9 million for the
comparable period in 1997, an increase of 11.8%. The increase in manufacturing
gross profit was principally the result of favorable prices in certain raw
material costs that equated to higher margins due to phenol price stability
during the first two quarters of 1998 partially offset by lower acetone and
phenol selling prices during the third quarter of 1998. The increase in overall
gross profit would have been larger had the Company not hedged propylene during
the first quarter of 1997. During the first quarter of 1997, approximately 13
million pounds of propylene purchases were covered by a fixed financial hedge
for which the Company had a gain of $0.5 million which reduced its cost of sales
for this period by a corresponding amount. The reduction in cost of sales in
1997 resulting from the propylene hedge was partially offset by an increase in
the cost of benzene, which the Company elected not to hedge.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.0 million to $16.0 million for the nine
months ended September 30, 1998 from $12.0 million for the comparable period in
1997, an increase of 33.3%. This increase was due to higher depreciation costs
related to new terminal facilities built in late 1997, expenses related to
Tolson, Browning and Inquinosa, certain expenses relating to the expansion of
the Company's product base, amortization of goodwill and costs pertaining to JLM
being publicly traded.
13
<PAGE>
OPERATING INCOME. Operating income increased $1.1 million to $11.0
million for the nine months ended September 30, 1998 from $9.9 million for the
comparable period in 1997, an increase of 11.1%. This increase was principally
as a result of the factors that increased gross profit discussed above partially
offset by the increase in selling, general and administrative expenses discussed
above.
INTEREST EXPENSE - NET. Net interest expense decreased by approximately
$.7 million to $1.1 million for the nine months ended September 30, 1998 from
$1.8 million for the comparable period in 1997, a decrease of 38.9%. This
decrease in interest expense was principally due to the Company's early
retirement of certain of its debt in August 1997 from proceeds that the Company
received from its initial public offering partially offset by additional
interest from the Company's acquisitions in 1998.
OTHER INCOME (EXPENSE) - NET. Other income and expense in 1997 consists
of, principally, the Company's proportionate share of loss from the operation of
OTC. In 1998, other income primarily represents income from investments.
FOREIGN CURRENCY EXCHANGE GAIN. The Company's gain from foreign
currency exchanges decreased by approximately $71,000 to approximately $7,000
for the nine months ended September 30, 1998 from approximately $78,000 for the
comparable period in 1997. The gain was principally the result of the Company's
activities in Venezuela and Holland.
INCOME TAX PROVISION. The Company's provision for income taxes
increased $1.5 million to $4.5 million for the nine months ended September 30,
1998 from $3.0 million for the comparable period in 1997, an increase of 50.0%.
The Company's effective tax rate for the nine months ended September 30, 1998
was 45.9% as compared to 36.6% for the comparable period in 1997. Excluding
Venezuelan and European operations, the effective tax rate for the nine months
ended September 30, 1998 would have been approximately 39.3% compared to the
effective tax rate for the nine months ended September 30, 1997 of 36.0%. The
1997 effective tax rate after considering the effects of both the Venezuelan and
European operations is lower than the 1998 effective tax rate due to greater
U.S. exports during 1997. The Company has the ability to reduce its effective
consolidated tax rate on its U.S. export sales by way of the Company's FSC which
has an effective tax rate of 11.8%. In addition, as part of the Tolson
acquisition, the Company acquired operating loss carryforwards. Therefore, no
tax expense was recognized on the pre-tax income derived from Tolson for the
three months ended September 30, 1998.
NET INCOME. Net income increased $0.7 million to $5.3 million for the
nine months ended September 30, 1998 from $4.6 million for the comparable period
in 1997, an increase of 15.2%. The increase in net income was due to the factors
stated above.
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 million of the line is
reserved for acquisition financing, of which $7.5 million was used to acquire
Browning, and the remaining $15.0 is reserved for working capital needs.
Effective April 1, 1998, the Company signed a new domestic trade finance line of
credit for $19.0 million. Additionally, on June 4, 1998, the Company signed a
new credit agreement for the benefit of the Tolson Acquired Companies. After the
renegotiations of the line of credit and the additional credit facilities, the
Company now has a total borrowing capacity of approximately $120.0 million of
which approximately $103.8 million is available as of September 30, 1998.
14
<PAGE>
Net cash provided by operating activities decreased by $.7 million for
the nine months ended September 30, 1998 compared to the same period in 1997.
This decrease was due primarily to an increase in net income offset by changes
in the Company's accounts receivable and accounts payable during the first nine
months of 1998. Net cash used in investing activities increased by approximately
$6.3 million to $9.3 million for the nine months ended September 30, 1998
compared to $3.0 million for the same period in 1997. This increase was
primarily the result of approximately $7.6 million used in the current year
acquisitions noted above. Net cash from financing activities increased by
approximately $5.2 million to $6.8 million for the nine months ended September
30, 1998 compared to $1.6 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 domestic manufacturing
and terminaling facilities to be approximately $0.3 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.
EFFECTS OF INFLATION
Inflation generally impacts 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.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs using the last
two digits rather than all four digits to record an applicable year. Should any
of the Company's computer programs, hardware or software use "00" as the year
rather than the year 2000 it could result in a system failure, miscalculations
or disruptions of the Company's business, including a temporary inability to
provide services to its customers.
The Company recognized this problem over 2 years ago. As such, the
Company began a program whereby all internally used programs, hardware and
software would be evaluated to determine the best course of action to take in
order to ensure that all such items are Year 2000 compliant.
15
<PAGE>
The Company began in late fiscal 1996 to search for a new business core
application that would provide more flexibility with the Company's growing needs
as well as being Year 2000 compliant. In the first quarter of 1998, the Company
concluded its search and has begun the transition to the new application system
and expects to complete conversion by the end of the first quarter of 1999 for
all domestic JLM companies. Additionally, the Company has completely replaced
all other hardware and software programs that provide both standardization to
the Company's computer environment and are all Year 2000 compliant.
The Company also recognized that the Year 2000 compliance issue also
affects its vendors and customers. Therefore, the Company initiated a plan with
all of its vendors and customers to ensure that no material disruption of
service would occur due to the Year 2000 issue. As of the end of the third
quarter of 1998, based on the responses received, it does not appear that any
such material disruption will occur due to the lack of any of our vendors or
customers not having operating systems that are Year 2000 compliant.
Additionally, the Company has identified Year 2000 vulnerabilities with
its international operations and will have in place business core applications
by the end of the second quarter of 1999 that are Year 2000 compliant. By the
end of 1999, all Year 2000 hardware will be in compliance for the Company's
international operations. The Company anticipates that the total cost of
implementing the new business core applications to be $.3 million.
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.
16
<PAGE>
JLM INDUSTRIES, INC.
PART II
OTHER INFORMATION
ITEM 1 - 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 September 30, 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:
Exhibit 27 - Financial Data Schedule for the nine months ended
September 30, 1998.
(b) Reports on Form 8-K during quarter ended September 30, 1998:
On July 27, 1998, the Company filed a Current Report on Form 8-K/A
under item 7 thereon reporting 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. Additionally, the Company reported that it was unable to
report on the pro forma financial information due to not receiving financial
information on a timely manner due to circumstances beyond its control.
17
<PAGE>
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: November 13, 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)
18
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,375
<SECURITIES> 0
<RECEIVABLES> 42,183
<ALLOWANCES> 0
<INVENTORY> 17,992
<CURRENT-ASSETS> 76,320
<PP&E> 37,379
<DEPRECIATION> (8,609)
<TOTAL-ASSETS> 124,421
<CURRENT-LIABILITIES> 62,265
<BONDS> 13,289
0
0
<COMMON> 71
<OTHER-SE> 43,756
<TOTAL-LIABILITY-AND-EQUITY> 124,421
<SALES> 226,012
<TOTAL-REVENUES> 226,012
<CGS> 199,003
<TOTAL-COSTS> 15,941
<OTHER-EXPENSES> (133)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,107
<INCOME-PRETAX> 9,828
<INCOME-TAX> 4,513
<INCOME-CONTINUING> 5,315
<DISCONTINUED> (43)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,272
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
