<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 June 30, 1998
-------------
Commission File No. 000-22687
----------
JLM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter.)
<TABLE>
<CAPTION>
<S> <C>
Delaware 06-1163710
- -------- ----------
(State of Incorporation) (IRS Employer Identification No.)
8675 Hidden River Parkway, Tampa, FL 33637
- ------------------------------------ -----
(Address of principal executive office) (Zip Code)
</TABLE>
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 August 14, 1998
----- ------------------------------
Common stock, par value
$.01 per share 7,109,998
<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
June 30, 1998 (unaudited) 3
Unaudited Consolidated Statements of Income and
Comprehensive Income for the Three and Six Months Ended
June 30, 1997 and 1998 4
Unaudited Consolidated Statements of Cash Flows
for the Three and Six Months Ended June 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 11
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
</TABLE>
2
<PAGE> 3
ITEM 1 - FINANCIAL STATEMENTS
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, 1997 June 30, 1998
----------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,214,197 $ 7,503,619
Accounts receivable:
Trade 26,457,677 35,730,996
Other 3,012,975 5,454,960
Inventories 11,880,961 17,882,286
Prepaid expenses and other current assets 2,278,224 2,591,466
Assets held for sale 203,009 -
------------ -------------
Total current assets 49,047,043 69,163,327
Other investments 3,436,976 3,961,066
Property and equipment, net 29,505,011 29,262,407
Goodwill - 11,634,536
Other assets 1,571,541 2,070,458
Total assets $ 83,560,571 $ 116,091,794
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 34,474,758 $ 53,097,309
Current portion of long-term debt 789,277 1,290,061
Loans payable 379,034 307,136
Deferred revenue - 324,882
Income taxes payable 115,333 646,591
------------ -------------
Total current liabilities 35,758,402 55,665,979
Long-term debt less current portion 4,795,895 13,106,742
Deferred income taxes 3,949,910 4,666,881
Other liabilities 221,747 2,029
------------ -------------
Total liabilities 44,725,954 73,441,631
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 71,100
Additional paid-in capital 21,074,912 21,094,032
Retained earnings 17,709,397 21,504,471
Accumulated other comprehensive income:
Foreign currency translation adjustment, net of tax (20,743) (19,440)
------------ -------------
Total stockholders' equity 38,834,617 42,650,163
------------ -------------
Total liabilities and stockholders' equity $ 83,560,571 $ 116,091,794
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
JLM INDUSTRIES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1998 1997 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 81,922,833 $ 84,367,029 $ 162,440,616 $ 142,932,130
Cost of sales 74,617,973 74,654,389 148,289,135 125,285,611
------------ ------------ ------------- -------------
Gross profit 7,304,860 9,712,640 14,151,481 17,646,519
Selling, general and administrative expenses 3,945,880 5,646,000 7,863,549 10,003,858
------------ ------------ ------------- -------------
Operating income 3,358,980 4,066,640 6,287,932 7,642,661
Interest expense - net (757,257) (404,619) (1,385,167) (608,894)
Other (expense) income - net (100,499) 86,244 (59,730) 217,825
Foreign currency exchange gain - net 23,531 955 86,432 11,928
------------ ------------ ------------- -------------
Income before minority interest and income taxes 2,524,755 3,749,220 4,929,467 7,263,520
Minority interest in loss of subsidiaries 57,955 - 49,294 -
------------ ------------ ------------- -------------
Income from continuing operations before income
taxes and discontinued operations 2,582,710 3,749,220 4,978,761 7,263,520
------------ ------------ ------------- -------------
Income tax provision:
Current 733,672 1,543,676 1,281,961 2,787,899
Deferred 273,069 290,000 560,576 646,580
------------ ------------ ------------- -------------
Total income tax provision 1,006,741 1,833,676 1,842,537 3,434,479
------------ ------------ ------------- -------------
Income from continuing
operations before discontinued operations 1,575,969 1,915,544 3,136,224 3,829,041
Loss from operation of discontinued operations, net
of tax (75,246) (25,157) (159,925) (33,967)
------------ ------------ ------------- -------------
Net income 1,500,723 1,890,387 2,976,299 3,795,074
Other comprehensive income, net of tax:
Foreign currency translation adjustments 54,049 780 (12,541) 1,303
------------ ------------ ------------- -------------
Comprehensive income $ 1,554,772 $ 1,891,167 $ 2,963,758 $ 3,796,377
============ ============ ============= =============
Basic Income Per Share:
Income from continuing operations before
discontinued operations $ .33 $ .27 $ .66 $ .54
Discontinued operations (.01) - (.03) -
------------ ------------ ------------- -------------
Net income per share $ .32 $ .27 $ .63 $ .54
============ ============ ============= =============
Diluted Income Per Share:
Income from continuing operations before
discontinued operations $ .33 $ .27 $ .66 $ .54
Discontinued operations (.01) - (.03) -
------------ ------------ ------------- -------------
Net income per share $ .32 $ .27 $ .63 $ .54
============ ============ ============= =============
Weighted Average Number of Shares Outstanding
Used For:
Basic income per share 4,743,936 7,108,138 4,743,936 7,107,550
Diluted income per share 4,743,936 7,131,356 4,743,936 7,127,550
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,976,299 $ 3,795,074
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes 285,288 716,971
Minority interest in income of subsidiaries (49,294) -
Loss on disposal of assets 215,765 30,473
Depreciation and amortization 1,418,896 1,635,320
Loss from partnerships 24,000 12,000
Allowance for doubtful accounts - 115,902
Loss from investment in Olefins Terminal Corporation - net 272,021 -
Noncash management fee and interest income from OTC (133,818) -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,778,790) 15,150,843
Decrease (increase) in inventories 2,002,695 (1,344,959)
Increase in prepaid expenses and other current assets (581,699) (364,225)
Increase in other assets (151,285) (499,261)
Increase (decrease) in accounts payable and accrued expenses 349,576 (15,499,345)
Increase in income taxes payable 772,659 205,682
(Decrease) increase in deferred revenue (298,075) 324,882
Decrease in other liabilities (144,967) (219,718)
----------- ------------
Net cash provided by operating activities 4,179,271 4,059,639
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets held for sale 1,192,128 123,871
Capital expenditures (1,250,479) (783,192)
Purchase of subsidiaries - (7,589,984)
Other investments (917,631) (536,090)
----------- ------------
Net cash used in investing activities (975,982) (8,785,395)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of loans payable 9,435 (71,898)
Proceeds from long-term debt 1,750,335 7,500,000
Repayments of long-term debt (4,052,970) (433,396)
Proceeds from sale of common stock - 19,169
Distributions to stockholders (1,752,923) -
----------- ------------
Net cash (used in) provided by financing activities (4,046,123) 7,013,875
Effect of foreign exchange rates on cash (12,540) 1,303
----------- ------------
Net (decrease) increase in cash and cash equivalents (855,374) 2,289,422
Cash and cash equivalents, beginning of period 4,792,473 5,214,197
----------- ------------
Cash and cash equivalents, end of period $ 3,937,099 $ 7,503,619
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,592,602 $ 469,152
=========== ============
Income taxes $ 875,586 $ 2,256,643
=========== ============
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> 6
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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. 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 as updated by the Company's 10K/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
6
<PAGE> 7
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.
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 June 30, 1998, there were only 271,500 of such options outstanding
due to employee turnover. The average market price of the Company's common stock
was greater than the exercise price for the majority of the outstanding options
for substantially all three months ended June 30, 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 June 30:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted shares outstanding 4,743,936 7,108,138 4,743,936 7,107,550
Dilutive effect of outstanding options - 23,218 - 20,000
--------- --------- --------- ---------
Diluted weighted shares outstanding 4,743,936 7,131,356 4,743,936 7,127,550
========= ========= ========= =========
</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 Six Months Ended
June 30, June 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Pro Forma Diluted Income Per Share:
Income from continuing operations $ .23 $ .27 $ .45 $ .54
Discontinued operations (.01) - (.02) -
------------- ------------- ------------- -------------
Pro forma net income per share $ .22 $ .27 $ .43 $ .54
============= ============= ============= =============
Pro forma diluted weighted average number of shares
outstanding 6,899,936 7,131,356 6,899,936 7,127,550
</TABLE>
NOTE 4 INCOME TAXES
The provision for income tax expense for the three and six months ended
June 30, 1997 and 1998 is calculated using the estimated annual income tax rates
based on projected annualized income.
7
<PAGE> 8
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 will be 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
8
<PAGE> 9
"Acquired Companies") from their parent Tolson Holding, B.V., a Dutch company.
The total purchase price for the Acquired Companies was $5,750,000, 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 $2,850,000 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. Based on the combined negative shareholders' equity of the Acquired
Companies as of March 31, 1998 Tolson will contribute $7.4 million to bring the
combined negative equity of the Acquired Companies to zero.
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.
On June 23, 1998, the Company entered an agreement with Mr. Jesus
Herboso, a Spanish citizen, to purchase 5,001 shares, or 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 PRO FORMA FINANCIAL INFORMATION
As noted in note 6, the Company purchased certain subsidiaries from
Tolson. Accordingly, pro forma financial statements are required for the six
months ended June 30, 1998 and 1997 and the three months ended June 30, 1997 to
reflect the purchase as if it had occurred at the beginning of each period. As
described in the Company's Current Form 8-K/A filed on July 27, 1998, the
Company filed a Current Report on Form 8-K/A reporting, under item 7 thereof,
that due to circumstances beyond its control, the Company would be unable to
timely provide pro forma financial information due to not receiving certain
financial information from the seller. The Company expects to provide this
information in the near future once all information is obtained.
NOTE 8 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.
9
<PAGE> 10
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.
****************************
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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
six months ended June 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.
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.
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.
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 Spanish distributor of the pesticide
Lindane.
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.
11
<PAGE> 12
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
(in thousands, except percentages)
1997 1998 1997 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Marketing $ 64,943 79.3% $ 69,353 82.2% $ 129,130 79.5% $ 111,599 78.1%
Manufacturing 16,979 20.7% 15,014 17.8% 33,311 20.5% 31,333 21.9%
-------- ------ -------- ------ --------- ------ --------- ------
$ 81,922 100.0% $ 84,367 100.0% $ 162,441 100.0% $ 142,932 100.0%
======== ====== ======== ====== ========= ====== ========= ======
Gross profit:
Marketing $ 3,675 50.3% $ 4,432 45.6% $ 6,940 49.0% $ 7,669 43.5%
Manufacturing 3,630 49.7% 5,280 54.4% 7,211 51.0% 9,977 56.5%
-------- ------ -------- ------ --------- ------ --------- ------
$ 7,305 100.0% $ 9,712 100.0% $ 14,151 100.0% $ 17,646 100.0%
======== ====== ======== ====== ========= ====== ========= ======
Segment operating income:
Marketing $ 1,757 45.3% $ 395 8.4% $ 3,124 42.3% $ 1,028 11.5%
Manufacturing 2,121 54.7% 4,333 91.6% 4,258 57.7% 7,885 88.5%
-------- ------ -------- ------ --------- ------ --------- ------
Total segment operating
income 3,878 100.0% 4,728 100.0% $ 7,382 100.0% 8,913 100.0%
Corporate expenses (519) - (662) - (1,094) - (1,270) -
-------- ------ -------- ------ --------- ------ --------- ------
Total operating income $ 3,359 100.0% $ 4,066 100.0% $ 6,288 100.0% $ 7,643 100.0%
======== ====== ======== ====== ========= ====== ========= ======
</TABLE>
The manufacturing segment sold approximately $472,000 and $1,391,000,
respectively, of products to the marketing segment during the six months ended
June 30, 1998 and 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues. Revenues increased $2.5 million to $84.4 million for the
three months ended June 30, 1998 from $81.9 million for the comparable period in
1997, an increase of 3.1%. Revenues for the marketing segment increased $4.5
million to $69.4 million for the three months ended June 30, 1998 from $64.9
million for the comparable period in 1997, an increase of 6.9%. The increase in
marketing revenue is due primarily to additional revenue from the Company's two
acquisitions - Tolson and Browning. However, revenues for the marketing segment
would have been higher had the volume and selling prices of propylene been at
the same levels as in 1997. Revenues for the manufacturing segment decreased
$2.0 million to $15.0 million for the three months ended June 30, 1998 from
$17.0 million for the comparable period in 1997, a decrease of 11.8%. This
decrease in manufacturing segment revenues was due primarily to a decrease in
overall sales volumes of acetone at the Company's Mt. Vernon plant.
Gross Profit. Gross profit increased $2.4 million to $9.7 million for
the three months ended June 30, 1998 from $7.3 million for the comparable period
in 1997, an increase of 32.9%. As a percentage of revenues, gross profit
increased to 11.5% for the three months ended June 30, 1998 from 8.9% for the
comparable period in 1997. Gross profit for the marketing segment increased $.8
million to $4.4 million for the three months ended June 30, 1998 from $3.7
million for the comparable period in 1997, an increase of 21.6%. The increase in
marketing segment gross margin was due primarily to the impact of Tolson and
Browning and due to sales of new products with higher profit margins. As noted
above, gross margin for the marketing segment for the three months ended June
30, 1998 would have been higher had both propylene selling volumes and selling
price been at the same levels as during the second quarter of 1997. Gross profit
for the manufacturing segment increased by $1.7 million to $5.3 million for the
three months ended June 30, 1998 from $3.6 million for the comparable period in
1997, an increase of 47.2%. The increase in manufacturing gross profit was
principally the result of favorable
12
<PAGE> 13
prices in certain raw material costs that equated to higher margins due to
phenol price stability. During the three months ended June 30, 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 June 30, 1997 resulting
from the propylene hedge was partially offset by an increase in the cost of
benzene, that the Company elected not to hedge. There were no financial hedges
during the three months ended June 30, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.7 million to $5.6 million for the three
months ended June 30, 1998 from $3.9 million for the comparable period in 1997,
an increase of 43.6%. This increase was due to higher depreciation costs related
to new terminal facilities built in late 1997, expenses related to Tolson and
Browning, certain expenses relating to the expansion of the Company's product
base and costs pertaining to JLM being publicly traded.
Operating Income. Operating income increased $0.7 million to $4.1
million for the three months ended June 30, 1998 from $3.4 million for the
comparable period in 1997, an increase of 20.6%. 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
$.4 million to $.4 million for the three months ended June 30, 1998 from
approximately $.8 for the comparable period in 1997, a decrease of 50.0%. 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 $23,000 to approximately $1,000 for the three months
ended June 30, 1998 from approximately $24,000 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 $1.8 million for the three months ended June 30, 1998
from $1.0 million for the comparable period in 1997, an increase of 80.0%. The
Company's effective tax rate for the three months ended June 30, 1998 was 48.9%
as compared to 39.0% 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 June 30,
1998 and 1997 would have been approximately 38.2% and 38.2%, 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 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
June 30, 1998.
13
<PAGE> 14
Net Income. Net income increased $0.4 million to $1.9 million for the
three months ended June 30, 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.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. Revenues decreased $19.5 million to $142.9 million for the
six months ended June 30, 1998 from $162.4 million for the comparable period in
1997, a decrease of 12.0%. Revenues for the marketing segment decreased $17.5
million to $111.6 million for the six months ended June 30, 1998 from $129.1
million for the comparable period in 1997, a decrease of 13.6%. The decrease in
marketing segment revenues was generally the result of decreased sales of
propylene from the Company's Olefins division partially offset by revenues from
Tolson and Browning. Revenues for the manufacturing segment decreased by $2.0
million to $31.3 million for the six months ended June 30, 1998 from $33.3
million for the comparable period in 1997, a decrease of 6.0%. The decrease in
manufacturing segment revenues was principally due to a decrease in the volume
of acetone sold from the Company's Mt. Vernon plant.
Gross Profit. Gross profit increased $3.4 million to $17.6 million for
the six months ended June 30, 1998 from $14.2 million for the comparable period
in 1997, an increase of 23.9%. As a percentage of revenues, gross profit
increased to 12.3% for the six months ended June 30, 1998 from 8.7% for the
comparable period in 1997. Gross profit for the marketing segment increased $.7
million to $7.7 million for the six months ended June 30, 1998 compared to $7.0
million for the comparable period in 1997, an increase of 10.0%. This increase
in gross margin for the marketing segment was due primarily from the profit
contributions from Tolson and Browning partially offset by lower propylene sales
in 1998 compared to the same period in 1997. Gross profit for the manufacturing
segment increased by $2.8 million to $10.0 million for the six months ended June
30, 1998 from $7.2 million for the comparable period in 1997, an increase of
38.9%. 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 partially offset by lower acetone selling volumes
from sales at the Mt. Vernon plant. 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 $2.1 million to $10.0 million for the six
months ended June 30, 1998 from $7.9 million for the comparable period in 1997,
an increase of 26.6%. This increase was due to higher depreciation costs related
to new terminal facilities built in late 1997, expenses related to Tolson and
Browning, certain expenses relating to the expansion of the Company's product
base and costs pertaining to JLM being publicly traded.
Operating Income. Operating income increased $1.3 million to $7.6
million for the six months ended June 30, 1998 from $6.3 million for the
comparable period in 1997, an increase of 20.6%. 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.
14
<PAGE> 15
Interest Expense - Net. Net interest expense decreased by approximately
$.8 million to $.6 million for the six months ended June 30, 1998 from $1.4
million for the comparable period in 1997, a decrease of 57.1%. 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.
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. Foreign currency exchange decreased
approximately $74,000 to approximately $12,000 for the six months ended June 30,
1998 from approximately $86,000 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 $1.6 million to $3.4 million for the six months ended June 30, 1998
from $1.8 million for the comparable period in 1997, an increase of 88.9%. The
Company's effective tax rate for the six months ended June 30, 1998 was 47.3% as
compared to 37.0% for the comparable period in 1997. Excluding Venezuelan and
European operations, the effective tax rate for the six months ended June 30,
1998 would have been approximately 39.2% compared to the effective tax rate for
the six months ended June 30, 1997 of 35.5%. 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 June 30, 1998.
Net Income. Net income increased $0.8 million to $3.8 million for the
six months ended June 30, 1998 from $3.0 million for the comparable period in
1997, an increase of 26.7%. 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 is reserved for working capital needs. Effective
April 1, 1998, the Company signed a new domestic trade finance line of credit
for $19 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.
Net cash provided by operating activities decreased by $.1 million for
the six months ended June 30, 1998 and 1997. This decrease was due primarily to
an increase in net income offset by changes in the Company's decrease in
accounts receivable and decrease in accounts payable during the first six months
of 1998. Net cash used in investing activities increased by approximately $7.8
million to $8.8 million for the six months ended June 30, 1998 compared to $1.0
million for the same period in 1997. This increase was primarily the result of a
$7.6 million payment made on April 1, 1998 for the
15
<PAGE> 16
acquisition of Browning from funds borrowed on the Company's acquisition line of
credit discussed above. Net cash from financing activities increased by
approximately $11.1 million to cash from investing activities of $7.0 million
for the six months ended June 30, 1998 compared to cash used in financing
activities of $4.1 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 $0.6 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 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.
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> 17
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 June 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 six months ended
June 30, 1998.
(b) Reports on Form 8-K during quarter ended June 30, 1998:
On April 22, 1998, the Company filed a Current Report on Form
8-K reporting, under item 2 thereof, that 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. Phenol
production is anticipated to commence in the fourth quarter of 2000.
17
<PAGE> 18
On May 27, 1998, the Company filed a Current Report on Form
8-K reporting, under Item 2 thereof, that the Company had consummated
the acquisition of certain of the subsidiaries of Tolson Holding, B.V.,
a Dutch company, ("Tolson Subsidiaries") on May 13, 1998. These Tolson
Subsidiaries are global distributors and traders of methanol, solvents,
aromatics and olefins throughout Europe and the Far East. The purchase
price for the Tolson Subsidiaries was $5,750,000 subject to certain
adjustments as described in the Current Report on Form 8-K. On July 27,
1998, the Company filed a Current Report on Form 8-K/A reporting, under
item 7 thereof, that due to circumstances beyond its control, the
Company would be unable to timely provide pro forma financial
information due to not receiving certain financial information from the
seller. It is anticipated that such information will be received in the
near future and the Company will file all necessary pro forma
information at such time.
On June 23, 1998, the Company filed a Current Report on Form
8-K reporting, under Item 2 thereof, that the Company entered into an
agreement with Mr. Jesus Herboso, a Spanish citizen. Under terms of the
agreement, the Company purchased 5,001 shares, or 50.1%, of the
outstanding common stock of Inquinosa International, S.A.
("Inquinosa"), a Spanish company, for $1.8 million to be funded through
a four-year earn-out period. Inquinosa is a marketer of lindane.
Lindane is a preferred seed-treating pesticide that prevents insect
damage during the critical pre-germination stage for wheat, other
grains and canola.
18
<PAGE> 19
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: August 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)
19
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