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, 1999
Commission File No. 000-22687
JLM INDUSTRIES, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter.)
DELAWARE 06-1163710
------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
8675 HIDDEN RIVER PARKWAY, TAMPA, FL 33637
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (813) 632-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
CLASS OUTSTANDING AT NOVEMBER 10, 1999
----- --------------------------------
Common stock, par value
$.01 per share 6,586,855
<PAGE>
JLM INDUSTRIES, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
- ------ --------------------- ------
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and
September 30, 1999 (unaudited) 3
Unaudited Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) for the Three and Nine
Months Ended September 30, 1998 and 1999 4
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 21
Item 2 Changes in Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
2
<PAGE>
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30,1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,480,566 $ 392,424
Accounts Receivable:
Trade 29,703,639 36,531,786
Other 5,374,933 4,359,342
Inventories 16,100,357 20,175,698
Prepaid expenses and other current assets 2,606,308 7,347,054
Income taxes 459,736 3,479,437
------------- -------------
Total current assets 56,725,539 72,285,741
Other investments 3,194,259 2,420,769
Property and equipment, net 28,384,989 28,268,948
Goodwill and other intangibles 11,981,624 11,914,273
Other assets 2,978,878 5,721,551
------------- -------------
Total assets $ 103,265,289 $ 120,611,282
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 37,804,598 $ 48,988,894
Current portion of long-term debt 1,872,483 612,484
Loans payable 451,742 325,000
Deferred revenue -- 525,000
------------- -------------
Total current liabilities 40,128,823 50,451,378
Long-term debt less current portion 14,723,646 17,718,627
Deferred income taxes 5,517,407 6,838,963
Minority interest 255,867 466,363
Deferred revenue -- 3,452,982
Other liabilities 1,958 5,996
------------- -------------
Total liabilities 60,627,701 78,934,309
Stockholders' Equity:
Preferred stock - authorized 5,000,000 shares;
0 shares issued and outstanding -- --
Common stock - $.01 par value; authorized
30,000,000 shares; 7,118,811 and 7,128,811
shares issued, respectively 71,188 71,288
Additional paid-in capital 21,330,709 21,380,796
Retained earnings 23,424,747 23,403,171
Foreign currency translation adjustment 128,871 (297,102)
------------- -------------
44,955,515 44,558,153
Less treasury stock at cost - 424,199 and 533,336
shares, respectively (2,317,927) (2,881,180)
------------- -------------
Total stockholders' equity 42,637,588 41,676,973
------------- -------------
Total liabilities and stockholders' equity $ 103,265,289 $ 120,611,282
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
JLM INDUSTRIES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 83,079,579 $ 84,052,181 $ 226,011,709 $ 232,004,719
Cost of sales 73,716,959 77,674,260 199,002,570 213,991,160
------------- ------------- ------------- -------------
Gross profit 9,362,620 6,377,921 27,009,139 18,013,559
Selling, general and administrative expenses 5,989,112 6,139,095 15,992,970 17,680,164
------------- ------------- ------------- -------------
Operating income 3,373,508 238,826 11,016,169 333,395
Interest expense - net (498,483) (420,550) (1,107,377) (1,174,003)
Other (expense) income - net (172,348) 66,133 45,477 (88,540)
Foreign currency exchange (loss) gain - net (5,512) (48,616) 6,416 (129,029)
------------- ------------- ------------- -------------
Income (loss) before minority interest and income taxes 2,697,165 (164,207) 9,960,685 (1,058,177)
Minority interest in income of subsidiary (133,057) (46,489) (133,057) (234,923)
------------- ------------- ------------- -------------
Income (loss) from continuing operations before income
taxes and discontinued operations 2,564,108 (210,696) 9,827,628 (1,293,100)
------------- ------------- ------------- -------------
Income tax provision (benefit):
Current 768,631 (1,035,392) 3,556,530 (2,373,770)
Deferred 310,000 366,500 956,580 1,102,246
------------- ------------- ------------- -------------
Total income tax provision (benefit) 1,078,631 (668,892) 4,513,110 (1,271,524)
------------- ------------- ------------- -------------
Income (loss) from continuing
operations before discontinued operations 1,485,477 458,196 5,314,518 (21,576)
Loss from operation of discontinued operations, net
of tax (9,039) -- (43,006) --
------------- ------------- ------------- -------------
Net income (loss) 1,476,438 458,196 5,271,512 (21,576)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (299,192) 87,565 (297,889) (425,974)
------------- ------------- ------------- -------------
Comprehensive income (loss) $ 1,177,246 $ 545,761 $ 4,973,623 $ (447,550)
============= ============= ============= =============
Basic Income Per Share:
Income from continuing operations before
Discontinued operations $ .21 $ .07 $ .75 $ (0.00)
Discontinued operations -- -- (.01) --
------------- ------------- ------------- -------------
Net income per share $ .21 $ .07 $ .74 $ (0.00)
============= ============= ============= =============
Diluted Income Per Share:
Income from continuing operations before
discontinued operations $ .21 $ .07 $ .75 $ (0.00)
Discontinued operations -- -- (.01) --
------------- ------------- ------------- -------------
Net income per share $ .21 $ .07 $ .74 $ (0.00)
============= ============= ============= =============
Weighted Average Number of Shares Outstanding
Used For:
Basic income per share 7,109,998 6,626,470 7,108,333 6,669,969
Diluted income per share 7,109,998 6,626,470 7,108,333 6,669,969
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,271,512 $ (21,576)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Deferred income taxes 956,580 1,321,556
Minority interest in income of subsidiary 133,057 234,923
Depreciation and amortization 2,599,754 2,888,787
Loss from partnerships 36,000 12,000
Loss from sale of assets 30,473 359,844
Allowance for doubtful accounts 133,902 98,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 12,631,625 (1,721,120)
Increase in inventories (1,064,252) (974,051)
Decrease (increase) in prepaid expenses and other current
assets 282,041 (4,788,707)
Increase in other assets (2,384,983) (2,488,668)
(Decrease) increase in accounts payable and accrued expenses (11,797,165) 8,316,879
Decrease (increase) in income taxes receivable 81,536 (3,019,701)
Increase in deferred revenue 324,882 3,977,982
(Decrease) increase in other liabilities (525,823) 4,038
------------ ------------
Net cash provided by operating activities 6,709,139 4,200,186
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets held for sale 254,809 --
Proceeds from sale of other investments -- 601,938
Other investments (529,328) (196,229)
Capital expenditures (1,139,915) (1,867,162)
Purchase of subsidiaries (2,989,984) (5,394,202)
------------ ------------
Net cash used in investing activities (4,404,418) (6,855,655)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) loans payable 1,177,895 (126,742)
Proceeds from long-term debt 491,324 4,246,114
Repayments of long-term debt (3,534,642) (2,562,818)
Purchase of treasury shares -- (563,253)
Proceeds from sale of common stock 19,169 --
------------ ------------
Net cash (used in) provided by financing activities (1,846,254) 993,301
Effect of foreign exchange rates on cash (297,889) (425,974)
------------ ------------
Net increase (decrease) in cash and cash equivalents 160,578 (2,088,142)
Cash and cash equivalents, beginning of period 5,214,197 2,480,566
------------ ------------
Cash and cash equivalents, end of period $ 5,374,775 $ 392,424
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 991,491 $ 872,986
============ ============
Income taxes $ 2,959,197 $ 246,739
============ ============
Non-cash investing activities:
Capital lease obligations $ -- $ 51,686
============ ============
Non-cash financing activities:
Issuance of restricted stock $ -- $ 167,500
============ ============
</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, 1998 AND 1999
(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, inorganic 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 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.
In the first nine months of 1998, the Company's cost of sales was
adjusted to reflect a proportionate share of the estimated LIFO supplement.
During the first nine months of 1999, no adjustment was made to the LIFO
supplement as the LIFO supplement is estimated to remain relatively constant
during 1999.
These unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 1998, included in the Company's Form 10-K dated March
30, 1999.
6
<PAGE>
RECLASSIFICATION - Certain amounts in the 1998 consolidated financial
statements have been reclassified to conform to the 1999 presentation.
NOTE 3 EARNINGS PER SHARE DATA
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 128, EARNINGS PER SHARE. 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.
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 under its Long-Term Incentive Plan ("LTIP"). During 1998 and 1999, the
Company granted 6,000 and 100,000 options, respectively, under the LTIP to
employees of JLM. The options granted in 1998 have an exercise price of between
$10.50 and $11.00 while the options granted in 1999 have an exercise price of
$5.00. Additionally, on January 1, 1999, the Company issued 40,000 shares of
restricted stock to an officer of the Company of which 10,000 options were
immediately vested and the other 30,000 vest ratably over three years (see Note
6). Due to employee turnover, there were 507,700 of such options and restricted
stock outstanding as of September 30, 1999. The dilutive effect of the options
included in the calculation of diluted weighted average shares outstanding is
illustrated below for the three and nine months ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED)
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted shares outstanding 7,109,998 6,626,470 7,108,333 6,669,969
Dilutive effect of outstanding options -- -- -- --
--------- --------- --------- ---------
Diluted weighted shares outstanding 7,109,998 6,626,470 7,108,333 6,669,969
========= ========= ========= =========
</TABLE>
NOTE 4 INCOME TAXES
The provision (benefit) for income taxes for the three and nine months
ended September 30, 1998 and 1999 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, which establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
consolidated financial statements. 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 consolidated financial statement that is
displayed with the same prominence as other consolidated financial statements.
SFAS No. 130 does not require a specific format for that consolidated financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that consolidated 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 consolidated statement of financial
position. The Company has adopted SFAS No. 130 in the accompanying unaudited
consolidated financial statements of income (loss) and comprehensive income
(loss).
NOTE 6 SIGNIFICANT EVENTS
Effective January 1, 1999, the Company granted 100,000 options under
the LTIP to the employees of JLM at an exercise price of $5.00 per share. These
options vest ratably over a three-year period. In addition, on January 1, 1999,
the Company issued 40,000 shares of restricted stock to an officer of the
Company of which 10,000 shares are vested immediately and the remaining portion
vests ratably over a three-year period.
During March 1999, the Company entered into an agreement with a
customer to supply certain of its products over an extended period. As part of
this agreement, the customer has agreed to partially prepay for the product and
the Company has agreed to apply such partial prepayment to future sales of such
product based on the then current market price. Should the Company default on
the contract, all such unapplied prepayments shall be returned to the customer.
The prepayment is included in deferred revenue in the accompanying unaudited
consolidated balance sheet.
During 1998, the Company's Board of Directors approved a Stock
Repurchase Program (the "Program") whereby the Company can purchase up to
500,000 shares of its common stock. During the nine months ended September 30,
1999, the Company purchased 106,200 shares of its common stock for approximately
$526,700 under the Program.
In April 1999, the Company settled a 1997 contract dispute for
$500,000. The item is included in costs of sales in the accompanying unaudited
consolidated
8
<PAGE>
statement of income (loss) and comprehensive income (loss) for the nine months
ended September 30, 1999. In addition, the Company sold an investment real
estate property for approximately $600,000 cash. The sale of the property
generated a loss of approximately $336,000 that is included in other income
(expense) - net in the accompanying unaudited consolidated statement of income
(loss) and comprehensive income (loss) for the nine months ended September 30,
1999.
In May 1999, the Company entered into a purchase option agreement (the
"Purchase Agreement") with two independent third parties (the "Parties"). Under
terms of the Purchase Agreement, the Company has the right of first refusal that
expires in March 2001 to purchase from the Parties a certain manufacturing
facility. As part of the Purchase Agreement, the Company paid $1.1 million to
the Parties. Additionally, the Parties agreed to cancel all future payments
required under Non-Competition and Consulting Agreements entered into in
December 1996. See Note 12 to the Company's 1998 audited consolidated financial
statements included in the Company's Form 10-K dated March 30, 1999 for
additional information on the Non-Competition and Consulting Agreements.
Effective August 31, 1999 (the "Acquisition Date"), a certain
subsidiary of JLM Industries, Inc. ("JLM" or the "Company") purchased from
Imperial Chemicals Industries PLC ("ICI PLC") (i) all of the assets and
liabilities of ICI PLC's Colours and Industrial Chemicals Division of ICI South
Africa and (ii) a majority of the shares of ICI South Africa Mozambique Limitada
(the "Acquired Companies"). The Acquired Companies are operated under JLM's
subsidiary, JLM Industries (South Africa) Pty. The total purchase price,
including expenses, for the Acquired Companies was $5.4 million and was funded
by the Company's available acquisition line of credit.
The Acquired Companies are a supply chain management based distribution
business that markets a broad range of high quality specialty and commodity
chemicals to target markets, including surface coatings, textiles, chemical
manufacturing, refractory and rigid packing. The Acquired Companies operate from
modern leased facilities in Durban, Johannesburg, Cape Town, Port Elizabeth and
Maputo, South Africa. The acquisition is accounted for under the purchase method
in accordance with generally accepted accounting principles in the accompanying
unaudited consolidated financial statements.
NOTE 7 SEGMENT DATA
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. 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.
JLM's business consists of a manufacturing and a marketing segment.
JLM's manufacturing segment includes the operations of JLM Chemicals, Inc. and
the sale
9
<PAGE>
of acetone manufactured at the Mt. Vernon Phenol Plant. JLM's marketing segment
includes its distribution, storage and terminaling operations and all other
sourcing operations. Marketing segment revenues include an assumed selling
commission determined in accordance with industry standards for the sale of
products manufactured at JLM Chemicals, Inc. The marketing segment also includes
an assumed allocation of revenues, costs of goods sold and expenses associated
with the sale of products sourced from the Mt. Vernon Phenol Plant, whereby the
allocation is determined on a basis consistent with the commission for sale of
products manufactured at JLM Chemicals, Inc.
The following unaudited schedule presents information about JLM's
continuing operations in these segments and geographic locations for the nine
months ended September 30:
1998 1999
------------- -------------
INDUSTRY SEGMENT
Revenues:
Marketing $ 181,755,775 $ 203,509,025
Manufacturing 44,255,934 28,495,694
------------- -------------
$ 226,011,709 $ 232,004,719
============= =============
Operating Income (Loss):
Marketing $ 2,831,852 $ 3,265,145
Manufacturing 10,131,344 (1,175,215)
Corporate (1,947,027) (1,756,535)
------------- -------------
$ 11,016,169 $ 333,395
============= =============
Capital Expenditures:
Marketing $ 709,606 $ 1,462,411
Manufacturing 366,050 399,751
Corporate 64,259 5,000
------------- -------------
$ 1,139,915 $ 1,867,162
============= =============
Depreciation and Amortization:
Marketing $ 965,130 $ 1,372,771
Manufacturing 1,266,987 1,271,849
Corporate 367,637 244,167
------------- -------------
$ 2,599,754 $ 2,888,787
============= =============
Identifiable Assets:
Marketing $ 79,232,739 $ 85,601,104
Manufacturing 29,801,233 24,818,225
Corporate 15,387,433 10,191,953
------------- -------------
$ 124,421,405 $ 120,611,282
============= =============
10
<PAGE>
1998 1999
------------- -------------
GEOGRAPHIC LOCATION
Revenues:
United States $ 146,196,516 $ 98,527,361
Venezuela 6,907,948 5,294,869
Holland 37,322,519 61,618,170
Singapore 31,566,469 56,261,033
Other nations 4,018,257 10,303,286
------------- -------------
$ 226,011,709 $ 232,004,719
============= =============
Operating Income (Loss):
United States $ 13,671,542 $ (2,072,042)
Venezuela (242,922) (284,884)
Holland (308,132) 2,227,554
Singapore 267,915 1,294,710
Other nations 251,801 924,592
Corporate (2,624,035) (1,756,535)
------------- -------------
$ 11,016,169 $ 333,395
============= =============
Identifiable Assets:
United States $ 81,920,474 $ 71,281,240
Venezuela 6,656,212 4,204,841
Holland 18,536,862 19,952,522
Singapore 11,798,639 10,971,307
Other nations 5,509,218 14,201,372
------------- -------------
$ 124,421,405 $ 120,611,282
============= =============
NOTE 8 SUBSEQUENT EVENTS
On November 8, 1999, the Company and Societe Financiere d' Entreposage
et de Commerce International de l'Alcool, S.A. ("Sofecia") entered into a
contract for the purchase of the Sofecia USA industrial ethyl alcohol
distribution business. The acquisition includes various assets including
inventory, receivables and contractual commitments of Sofecia USA. Sofecia is
engaged in the marketing and distribution of synthetic and fermentation grade
ethyl alcohol throughout the United States. The purchase of Sofecia was $2.1
million plus additional annual payments, based on earnings as defined in the
contract, to be made over the next five years. The acquisition will be accounted
for under the purchase method in accordance with generally accepted accounting
principles.
In October 1999, the Company negotiated a line of credit agreement with
a bank for $5.0 million to be used in the Company's South African subsidiary.
Additionally in October 1999, the Company increased its current domestic working
capital line from $15.0 million to $20.0 million.
*********************
11
<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 a
marketing segment. The Company's manufacturing segment includes the operations
of its Blue Island, Illinois plant and the sale of acetone manufactured at the
Mt. Vernon Phenol 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, 1999.
The Company's marketing segment includes its distribution, storage and
terminaling operations and all other sourcing operations. Effective April 1,
1998, the Company expanded its marketing segment through the acquisition of all
the assets of Browning Chemical Corporation ("Browning"). With the acquisition
of Browning, the Company broadened its product, supplier and customer base.
Browning was founded in 1948 and is a major marketer of inorganic chemicals with
a diversified product range serving both the industrial and food processing
markets.
In May 1998, the Company entered into 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 subsidiaries expanded 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 acquired 50.1% of the outstanding common
stock of Inquinosa International, S.A. ("Inquinosa"), a Spanish Company, for
$450,000 plus an estimated $1.35 million to be funded through a three-year
earn-out period on a formula defined in the acquisition agreement. During the
second quarter of 1999, the Company paid $350,000 under terms of the agreement.
Inquinosa is a worldwide marketer of the pesticide Lindane.
In July 1999, the Company entered into an agreement with Imperial
Chemicals Industries PLC, to acquire all of the assets and liabilities of its
Colours and Industrial Chemicals Division of ICI South Africa and the majority
shareholdings in
12
<PAGE>
ICI South Africa, Mozambique (South Africa) Pty. The business is a supply chain
management based distribution business, which markets a broad range of high
quality specialty and commodity chemicals to target markets. This acquisition
will facilitate JLM's entrance into the growing South African market, strengthen
our existing international business interest and will further leverage our
global service capabilities.
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,
--------------------------------------------- ----------------------------------------------
(in thousands, except percentages)
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Marketing $ 70,157 84.4% $ 71,527 85.1% $ 181,756 80.4% $ 203,509 87.7%
Manufacturing 12,923 15.6% 12,525 14.9% 44,256 19.6% 28,496 12.3%
--------- ------- --------- ------- --------- ------- --------- -------
$ 83,080 100.0% $ 84,052 100.0% $ 226,012 100.0% $ 232,005 100.0%
========= ======= ========= ======= ========= ======= ========= =======
Gross profit:
Marketing $ 6,072 64.9% $ 6,051 94.9% $ 13,741 50.9% $ 15,833 87.9%
Manufacturing 3,291 35.1% 327 5.1% 13,268 49.1% 2,181 12.1%
--------- ------- --------- ------- --------- ------- --------- -------
$ 9,363 100.0% $ 6,378 100.0% $ 27,009 100.0% $ 18,014 100.0%
========= ======= ========= ======= ========= ======= ========= =======
Segment operating income:
Marketing $ 1,804 44.5% $ 1,706 199.5% $ 2,832 21.8% $ 3,265 156.2%
Manufacturing 2,246 55.5% (851) -- 10,131 78.2% (1,175) --
--------- ------- --------- ------- --------- ------- --------- -------
Total segment operating income 4,050 100.0% 855 100.0% 12,963 100.0% 2,090 100.0%
Corporate expenses (676) -- (616) -- (1,947) -- (1,757) --
--------- ------- --------- ------- --------- ------- --------- -------
Total operating income $ 3,374 100.0% $ 239 100.0% $ 11,016 100.0% $ 333 100.0%
========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
During the nine months ended September 30, 1998 and 1999, the
manufacturing segment sold approximately $37,617,000 and $24,072,000,
respectively, of products to the marketing segment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES. Revenues increased $1.0 million to $84.1 million for the
three months ended September 30, 1999 from $83.1 million for the comparable
period in 1998, an increase of 1.2%. Revenues for the marketing segment
increased $1.3 million to $71.5 million for the three months ended September 30,
1999 from $70.2 million for the comparable period in 1998. The slight increase
in the marketing revenues was generally the result of sales from the Company's
1998 and 1999 acquisitions, partially offset by decreased selling prices on most
of the Company's products. Revenues for the manufacturing segment decreased $0.4
million to $12.5 million for the three months ended September 30, 1999 compared
to $12.9 million for the comparable period in 1998, a decrease of 3.1%. This
decrease in the manufacturing segment revenues was due primarily to lower
overall selling prices for the two main products, acetone and phenol, during the
third quarter of 1999 compared to the same period in 1998.
13
<PAGE>
GROSS PROFIT. Gross profit decreased $3.0 million to $6.4 million for
the three months ended September 30, 1999 from $9.4 million for the comparable
period in 1998, a decrease of 31.9%. As a percentage of revenues, gross profit
decreased to 7.6% for the three months ended September 30, 1999 from 11.3% for
the comparable period in 1998. Gross profit for the marketing segment remained
constant at $6.1 million for the three months ended September 30, 1999 and 1998.
This stabilization of the marketing gross margin was due primarily to lower
margins on the Company's existing product base due to lower selling prices
offset by margins on the Company's 1998 and 1999 acquisitions. Gross profit for
the manufacturing segment decreased by $3.0 million to $.3 million for the three
months ended September 30, 1999 from $3.3 million for the comparable period in
1998, a decrease of 90.9%. This decrease in manufacturing gross profit was
principally the result of lower selling prices of its two main products, acetone
and phenol, in addition to an increase in raw material costs during the three
months ended September 30, 1999 compared to the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million to $6.1 million for the three
months ended September 30, 1999 from $6.0 million for the comparable period in
1998, an increase of 1.7%. This increase is primarily the result of expenses
relating to the Company's 1998 acquisitions, including an increase of
approximately $69,000 in amortization expense related to the goodwill and other
intangibles resulting from these acquisitions. Without the 1998 acquisitions,
selling, general and administrative expenses would have been $0.2 million lower
in 1999 as compared to 1998. This reduction is due primarily to a reduction in
personnel costs related to moving Browning's back office support to the
Company's headquarters in Florida.
OPERATING INCOME. Operating income decreased $3.2 million to $0.2
million for the three months ended September 30, 1999 from $3.4 million for the
comparable period in 1998, a decrease of 94.1%. This decrease was principally as
a result of the factors that decreased gross profit and increased selling,
general and administrative expenses as discussed above.
INTEREST EXPENSE - NET. Net interest expense decreased by approximately
$0.1 million to $0.4 million for the three months ended September 30, 1999 from
approximately $0.5 million for the comparable period in 1998, a decrease of
20.0%. This decrease in interest expense was principally due to the Company's
lower borrowings on its loans payable specifically in the Company's foreign
operations.
OTHER INCOME (EXPENSE) - NET. Other income (expense) in 1999 and 1998
consisted principally of income (losses) from investments.
FOREIGN CURRENCY EXCHANGE (LOSS) GAIN. Foreign currency exchange (loss)
gain remained relatively constant for the three months ended September 30, 1999
compared to the same period in 1998. During the three months ended September 30,
1999, the Company experienced a slight strengthening in the currencies of its
14
<PAGE>
foreign subsidiaries compared to the U.S. dollar resulting in a loss of
approximately $49,000.
INCOME TAX PROVISION (BENEFIT). The Company's benefit for income taxes
was approximately $.7 million for the three months ended September 30, 1999
compared to an income tax expense of $1.1 million for the comparable period in
1998. The net income tax benefit for the three months ended September 30, 1999
was incurred primarily on the Company's U.S. operations and was partially offset
by income and losses generated by the Company's foreign operations. The
Company's Venezuelan operation has not recorded any income tax benefit in 1998
or 1999 due to the uncertainty of utilizing its income tax loss carryforwards.
Furthermore, the Company's Holland operations, which had net income for the
three months ended September 30, 1999, did not record any income tax expense due
to its loss carryforward positions. In addition, the Company's consolidated
effective tax rate is lower than the statutory rate due to the Company's ability
to reduce its taxable income on U.S. export sales through the use of the
Company's Foreign Sales Corporation ("FSC") that has an effective tax rate of
11.8%.
NET INCOME (LOSS). During the three months ended September 30, 1999,
the Company's net income decreased by $1.0 to $0.5 million compared to
approximately $1.5 million for the same period in 1998. This decrease in net
income in the three months ended September 30, 1999 compared to the same period
in 1998 was due to the factors stated above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES. Revenues increased $6.0 million to $232.0 million for the
nine months ended September 30, 1999 from $226.0 million for the comparable
period in 1998, an increase of 2.6%. Revenues for the marketing segment
increased $21.7 million to $203.5 million for the nine months ended September
30, 1999 from $181.8 million for the comparable period in 1998, an increase of
11.9%. The increase in marketing revenues was generally the result of sales from
the Company's 1998 and 1999 acquisitions, partially offset by decreased selling
prices on most of the Company's products. Revenues for the manufacturing segment
decreased $15.8 million to $28.5 million for the nine months ended September 30,
1999 compared to $44.3 million for the comparable period in 1998, a decrease of
35.7%. This decrease in manufacturing segment revenues was due primarily to
lower overall selling prices for the two main products, acetone and phenol,
during the first nine months of 1999 compared to the same period in 1998.
GROSS PROFIT. Gross profit decreased $9.0 million to $18.0 million for
the nine months ended September 30, 1999 from $27.0 million for the comparable
period in 1998, a decrease of 33.3%. As a percentage of revenues, gross profit
decreased to 7.7% for the nine months ended September 30, 1999 from 11.9% for
the comparable period in 1998. Gross profit for the marketing segment increased
$2.1 million to
15
<PAGE>
$15.8 million for the nine months ended September 30, 1999 compared to $13.7
million for the same period in 1998. The increase of the marketing gross margin
was due to sales volume increases, principally from the Company's 1998 and 1999
acquisitions, partially offset by lower margins on the Company's existing
products due to lower selling prices and the settlement of a 1997 contract
dispute for $.5 million. Gross profit for the manufacturing segment decreased by
$11.1 million to $2.2 million for the nine months ended September 30, 1999 from
$13.3 million for the comparable period in 1998, a decrease of 83.5%. The
decrease in manufacturing gross profit was principally the result of lower
selling prices in its two main products, acetone and phenol, coupled with
increasing raw material costs during the nine months ended September 30, 1999
compared to the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.7 million to $17.7 million for the nine
months ended September 30, 1999 from $16.0 million for the comparable period in
1998, an increase of 10.6%. This increase is primarily the result of expenses
relating to the Company's 1998 and 1999 acquisitions, including an increase of
approximately $214,000 in amortization expense related to the goodwill and other
intangibles resulting from these acquisitions. Without the 1998 acquisitions,
selling, general and administrative expenses would have been $3.3 million lower
in 1999 as compared to 1998.
OPERATING INCOME. Operating income decreased $10.7 million to $0.3
million for the nine months ended September 30, 1999 from $11.0 million for the
comparable period in 1998, a decrease of 97.3%. This decrease was principally as
a result of the factors that decreased gross profit and increased selling,
general and administrative expenses as discussed above.
INTEREST EXPENSE - NET. Net interest expense increased by approximately
$0.1 million to $1.2 million for the nine months ended September 30, 1999 from
approximately $1.1 million for the comparable period in 1998, an increase of
9.1%. This marginal increase in interest expense was principally due to the
Company's borrowings on its lines of credit to finance certain of its 1998 and
1999 acquisitions partially offset by lower borrowings on loans payable in the
Company's foreign operations during the nine months ended September 30, 1999.
OTHER INCOME (EXPENSE) - NET. Other income (expense) in 1998 and 1999
consisted principally of income (losses) from investments. In 1999, other income
(expense) consisted primarily of a loss on the sale of investment real estate of
approximately $336,000 that was sold for approximately $600,000. This loss in
1999 was partially offset by income from the Company's other investments.
FOREIGN CURRENCY EXCHANGE GAIN (LOSS). During the nine months ended
September 30, 1999, the Company incurred approximately $0.1 million of foreign
exchange losses as compared to foreign exchange gains of $0.1 million during the
16
<PAGE>
same period in 1998. The loss in 1999 is due to the slight strengthening in the
currencies of the Company's foreign subsidiaries compared to the U.S. dollar.
INCOME TAX PROVISION (BENEFIT). The Company's benefit for income taxes
was approximately $1.3 million for the nine months ended September 30, 1999
compared to an income tax expense of $4.5 million for the comparable period in
1998. The net income tax benefit for the nine months ended September 30, 1999
was incurred primarily on the Company's U.S. operations partially offset by
income generated by the Company's foreign operations. The Company's Venezuelan
operation has not recorded any income tax benefit in 1998 or 1999 due to the
uncertainty of utilizing its income tax loss carryforwards. Furthermore, the
Company's Holland operations, which had net income for the nine months ended
September 30, 1999, did not record any income tax expense due to its loss
carryforward positions. In addition, the Company's consolidated effective tax
rate is lower than the statutory rate due to the Company's ability to reduce its
taxable income on U.S. export sales through the use of the Company's FSC that
has an effective tax rate of 11.8%.
NET INCOME (LOSS). During the nine months ended September 30, 1999, the
Company incurred a net loss of approximately $21,000 compared to net income of
approximately $5.3 million for the same period in 1998. This change from net
income to net loss in the first nine months ended September 30, 1998 compared to
the same period of 1999 was due to the factors stated above.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company renegotiated additional lines of credit with
two new financial institutions in the amount of $52 million. In October 1999,
the Company negotiated an increase in its domestic working capital line by $5.0
million and negotiated an additional $5.0 working capital line to be used in the
Company's South African operations. The Company currently has a total borrowing
capacity of approximately $124.5 million.
Net cash provided by operating activities decreased by $2.5 million to
$4.2 million for the nine months ended September 30, 1999 compared to $6.7
million for the same period in 1998. This decrease was due primarily to lower
net income in the nine months ended September 30, 1999 combined with the changes
in the other operating accounts. Net cash used in investing activities increased
by approximately $2.5 million to $6.9 million for the nine months ended
September 30, 1999 compared to $4.4 million for the same period in 1998. This
increase was primarily the result of the $5.4 million used to purchase the
Acquired Companies compared to $3.0 million to purchase Browning and Tolson in
1998. Net cash provided by financing activities was $1.0 million during the nine
months ended September 30, 1999 compared to cash used in financing activities of
$1.8 million for the same period in 1998. This change was due primarily to the
borrowings on the Company's acquisition line of credit to fund the purchase of
the acquired companies in 1998,
17
<PAGE>
mentioned above, partially offset by changes in the Company's borrowings and
repayments of its loans payable and other long-term debt.
The Company expects capital expenditures for its manufacturing and
terminaling facilities to be approximately $0.1 million for the remainder of
1999 and $.75 million for 2000.
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, the 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.
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 several 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.
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 began the transition to the new application system and
completed conversion on September 1, 1999 for all domestic JLM companies.
Additionally, the Company has completely replaced all other hardware and
software programs to i) provide standardization of the Company's computer
environment and ii) to ensure that they 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. 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.
The Company has also identified Year 2000 vulnerabilities with its
international operations and will have business core applications in place by
the end
18
<PAGE>
of the fourth quarter of 1999 that are Year 2000 compliant. By the end of 1999,
all hardware will be in Year 2000 compliance for the Company's international
operations. The Company anticipates that the total cost of implementing the new
business core applications will be $0.3 million.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the cost of
labor, equipment and raw materials. The Company does not believe that inflation
has had any material effect on the Company's business over the last three years.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The majority of the Company's U.S. transactions are denominated in U.S.
dollars. The Company's foreign subsidiaries operate in their local currencies.
The Company does, from time to time, purchase short-term forward hedge exchange
contracts to hedge payments that are in other than the local currency. The
purpose of entering into these short-term forward exchange contracts is to
minimize the impact of foreign currency fluctuations on the results of the
Company's operations. Certain increases or decreases in these payments are then
offset by gains and losses on the related short-term forward exchange contracts.
In addition, the Company has, in the past, entered into fixed financial hedge
contracts on certain of its raw materials for use in its manufacturing segment.
During 1999, the Company has not entered into any material fixed financial hedge
contracts, and there were no fixed financial contracts open as of September 30,
1999.
COMMODITY PRICE RISK
JLM enters into contracts whereby parties to the contracts agree to
exchange various quantities of inventory, primarily acetone, over a specified
period of time. JLM records these exchanges of inventory at the lower of cost or
market. At September 30, 1999, the Company had the following related to
inventory exchanges:
Total net pounds receivable under the exchange contracts 2,015,508
Due to the fact that the Company is a market maker in the largest
component of its inventory exchanges acetone, the Company normally becomes aware
of future price fluctuations in acetone prior to such prices being disclosed on
the open market. Therefore, the Company believes that it can reposition itself
with respect to the majority of its inventory exchanges in order to minimize the
market risk inherent in such positions.
19
<PAGE>
INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in
interest rates based upon its financing, investing and cash management
activities. The Company utilizes a balanced mix of debt maturities along with
both fixed-rate and variable-rate debt to manage its exposure to changes in
interest rates. The Company does not expect changes in interest rates to have a
material adverse effect on its income or its cash flows in fiscal 1999. However,
there can be no assurances that interest rates will not significantly change in
1999.
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.
20
<PAGE>
JLM INDUSTRIES, INC.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
The Company at times does have routine litigation incidental to its business. In
the opinion of the Company's management, such proceedings should not,
individually or in the aggregate, have a material adverse effect on the
Company's consolidated results of operations or consolidated 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
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
for the 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
NO. DESCRIPTION
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K during quarter ended September 30, 1999:
On September 16, 1999, the Company filed a Current Report on Form 8-K to
report the purchase of two South African companies as more fully
included in Item 5 as set forth therein.
21
<PAGE>
SIGNATURES
Pursuant to the requirements 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 15, 1999 /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)
22
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<RECEIVABLES> 41,808
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