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, 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 AUGUST 9, 1999
- -------------------------------------- -----------------------------
Common stock, par value $.01 per share 6,640,655
<PAGE>
JLM INDUSTRIES, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
- ---------------------------- ------
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and
June 30, 1999 (unaudited) 3
Unaudited Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) for the Three and Six Months
Ended June 30, 1998 and 1999 4
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended June 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 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
- -------------------------
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
2
<PAGE>
Item 1 - Consolidated Financial Statements
- ------------------------------------------
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(Unaudited)
<S>
ASSETS <C> <C>
Current Assets:
Cash and cash equivalents $ 2,480,566 $ 2,104,715
Accounts Receivable:
Trade 29,703,639 27,893,661
Other 5,374,933 3,038,071
Inventories 16,100,357 19,155,656
Prepaid expenses and other current assets 2,606,308 2,888,012
Income tax receivable 459,736 2,250,200
------------- -------------
Total current assets 56,725,539 57,330,315
Other investments 3,194,259 3,142,337
Property and equipment, net 28,384,989 27,890,150
Goodwill and other intangibles 11,981,624 11,598,902
Other assets 2,978,878 5,370,997
------------- -------------
Total assets $ 103,265,289 $ 105,332,701
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 37,804,598 $ 37,046,945
Current portion of long-term debt 1,872,483 1,328,237
Loans payable 451,742 1,583,580
Deferred revenue -- 525,000
------------- -------------
Total current liabilities 40,128,823 40,483,762
Long-term debt less current portion 14,723,646 13,185,843
Deferred income taxes 5,517,407 6,256,380
Minority interest 255,867 444,301
Deferred revenue -- 3,555,338
Other liabilities 1,958 2,900
------------- -------------
Total liabilities 60,627,701 63,928,524
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 21,380,699
Retained earnings 23,424,747 22,944,974
Foreign currency translation adjustment 128,871 (384,668)
------------- -------------
44,955,515 44,012,293
Less treasury stock at cost - 424,199 and 478,936 shares, respectively (2,317,927) (2,608,116)
------------- -------------
Total stockholders' equity 42,637,588 41,404,177
------------- -------------
Total liabilities and stockholders' equity $ 103,265,289 $ 105,332,701
============= =============
</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 Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 84,367,029 $ 82,114,998 $ 142,932,130 $ 147,952,538
Cost of sales 74,654,389 75,752,013 125,285,611 136,316,900
------------- ------------- ------------- -------------
Gross profit 9,712,640 6,362,985 17,646,519 11,635,638
Selling, general and administrative expenses 5,646,000 5,927,807 10,003,858 11,541,069
------------- ------------- ------------- -------------
Operating income 4,066,640 435,178 7,642,661 94,569
Interest expense - net (404,619) (320,664) (608,894) (753,453)
Other income (expense) - net 86,244 120,242 217,825 (154,673)
Foreign currency exchange gain (loss) - net 955 (72,394) 11,928 (80,413)
------------- ------------- ------------- -------------
Income (loss) before minority interest and income taxes 3,749,220 162,362 7,263,520 (893,970)
Minority interest in income of subsidiaries -- (85,149) -- (188,434)
------------- ------------- ------------- -------------
Income (loss) from continuing operations before income
taxes and discontinued operations 3,749,220 77,213 7,263,520 (1,082,404)
------------- ------------- ------------- -------------
Income tax provision (benefit):
Current 1,543,676 (659,405) 2,787,899 (1,338,378)
Deferred 290,000 359,757 646,580 735,747
------------- ------------- ------------- -------------
Total income tax provision (benefit) 1,833,676 (299,648) 3,434,479 (602,631)
------------- ------------- ------------- -------------
Income (loss) from continuing operations before
discontinued operations 1,915,544 376,861 3,829,041 (479,773)
Loss from operation of discontinued operations, net of tax (25,157) -- (33,967) --
------------- ------------- ------------- -------------
Net income (loss) 1,890,387 376,861 3,795,074 (479,773)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 780 (277,261) 1,303 (513,539)
------------- ------------- ------------- -------------
Comprehensive income (loss) $ 1,891,167 $ 99,600 $ 3,796,377 $ (993,312)
============= ============= ============= =============
Basic Income (Loss) Per Share:
Income (loss) from continuing operations before
discontinued operations $ .27 $ .06 $ .54 $ (0.07)
Discontinued operations -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) per share $ .27 $ .06 $ .54 $ (0.07)
============= ============= ============= =============
Diluted Income (Loss) Per Share:
Income (loss) from continuing operations before
discontinued operations $ .27 $ .06 $ .54 $ (0.07)
Discontinued operations -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) per share $ .27 $ .06 $ .54 $ (0.07)
============= ============= ============= =============
Weighted Average Number of Shares Outstanding
Used For:
Basic income (loss) per share 7,108,138 6,687,419 7,107,550 6,683,373
Diluted income (loss) per share 7,131,356 6,687,419 7,127,550 6,684,831
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,795,074 $ (479,773)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes 716,971 738,973
Minority interest in income of subsidiaries -- 188,434
Depreciation and amortization 1,635,320 1,883,425
Loss from partnerships 12,000 12,000
Loss from sale of assets 30,473 344,631
Allowance for doubtful accounts 115,902 18,000
Changes in assets and liabilities:
Decrease in accounts receivable 20,900,843 4,728,840
Increase in inventories (1,344,959) (3,055,299)
Increase in prepaid expenses and other current assets (364,225) (295,384)
Increase in other assets (499,261) (2,392,119)
Decrease in accounts payable and accrued expenses (15,499,345) (757,653)
Decrease (increase) in income taxes receivable 205,682 (1,790,464)
Increase in deferred revenue 324,882 4,080,338
(Decrease) increase in other liabilities (219,718) 942
------------ ------------
Net cash provided by operating activities 9,809,639 3,224,891
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets held for sale 123,871 --
Other Investments (536,090) (891,432)
Capital expenditures (783,192) (903,685)
Purchase of subsidiaries (2,989,984) --
------------ ------------
Net cash used in investing activities (4,185,395) (1,795,117)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds from loans payable (71,898) 1,131,838
Proceeds from long-term debt -- 1,066,686
Repayments of long-term debt (3,283,396) (3,200,421)
Purchase of treasury shares -- (290,189)
Proceeds from sale of common stock 19,169 --
------------ ------------
Net cash used in financing activities (3,336,125) (1,292,086)
Effect of foreign exchange rates on cash 1,303 (513,539)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,289,422 (375,851)
Cash and cash equivalents, beginning of period 5,214,197 2,480,566
------------ ------------
Cash and cash equivalents, end of period $ 7,503,619 $ 2,104,715
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 469,152 $ 599,873
============ ============
Income taxes $ 2,256,643 $ 167,552
============ ============
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 SIX MONTHS ENDED JUNE 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 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.
In the first six months of 1998, the Company's cost of sales was
adjusted to reflect a proportionate share of the estimated LIFO reserve. During
the first six 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.
RECLASSIFICATION - Certain amounts in the 1998 consolidated financial
statements have been reclassified to conform to the 1999 presentation.
6
<PAGE>
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 381,500 and 529,832 of such options and
restricted stock outstanding as of June 30, 1998 and 1999, respectively. The
dilutive effect of the options included in the calculation of diluted weighted
average shares outstanding is illustrated below for the three and six months
ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted shares outstanding 7,108,138 6,687,419 7,107,550 6,683,373
Dilutive effect of outstanding options 23,218 -- 20,000 1,458
--------- --------- --------- ---------
Diluted weighted shares outstanding 7,131,356 6,687,419 7,127,550 6,684,831
========= ========= ========= =========
</TABLE>
NOTE 4 INCOME TAXES
- -------------------
The provision (benefit) for income taxes for the three and six months
ended June 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 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 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 six months ended June 30, 1999,
the Company purchased 51,800 shares of its common stock for approximately
$253,700 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 statements of income (loss) and comprehensive income (loss) for the
six months ended June 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
8
<PAGE>
of approximately $336,000 that is included in other income (expense) - net in
the accompanying unaudited consolidated statements of income (loss) and
comprehensive income (loss) for the six months ended June 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.
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 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, which
allocation is determined on a basis consistent with the commission for sale of
products manufactured at JLM Chemicals, Inc.
The following schedule presents information about JLM's continuing
operations in these segments and geographic locations for the six months ended
June 30:
INDUSTRY SEGMENT 1998 1999
------------- -------------
Revenues:
Marketing $ 111,598,928 $ 131,981,465
Manufacturing 31,333,202 15,971,073
------------- -------------
$ 142,932,130 $ 147,952,538
============= =============
9
<PAGE>
Operating Income (Loss):
Marketing $ 1,027,607 $ 1,558,762
Manufacturing 7,885,073 (324,120)
Corporate (1,270,019) (1,140,073)
------------- -------------
$ 7,642,661 $ 94,569
============= =============
Capital Expenditures:
Marketing $ 464,568 $ 659,070
Manufacturing 254,365 244,615
Corporate 64,259 --
------------- -------------
$ 783,192 $ 903,685
============= =============
Depreciation and Amortization:
Marketing $ 506,904 $ 892,311
Manufacturing 909,468 847,905
Corporate 218,948 143,209
------------- -------------
$ 1,635,320 $ 1,883,425
============= =============
Identifiable Assets:
Marketing $ 69,146,757 $ 69,567,973
Manufacturing 32,260,281 24,950,791
Corporate 14,684,756 10,813,937
------------- -------------
$ 116,091,794 $ 105,332,701
============= =============
GEOGRAPHIC LOCATION
Revenues:
United States $ 98,960,724 $ 69,189,574
Venezuela 4,931,120 3,294,559
Holland 24,109,315 32,363,100
Singapore 12,274,082 36,304,673
Other nations 2,656,889 6,800,632
------------- -------------
$ 142,932,130 $ 147,952,538
============= =============
Operating Income (Loss):
United States $ 9,624,671 $ (802,119)
Venezuela (136,183) (77,313)
Holland (1,023,885) 614,051
Singapore 287,459 676,913
Other nations 160,618 823,110
Corporate (1,270,019) (1,140,073)
------------- -------------
$ 7,642,661 $ 94,569
============= =============
10
<PAGE>
Identifiable Assets:
United States $ 85,945,175 $ 76,486,789
Venezuela 1,174,213 601,254
Holland 15,573,658 12,549,422
Singapore 12,157,566 10,414,241
Other nations 1,241,182 5,280,995
------------- -------------
$ 116,091,794 $ 105,332,701
============= =============
NOTE 8 SUBSEQUENT EVENTS
- ------------------------
On July 29, 1999, the Company entered into an agreement with Imperial
Chemicals Industries PLC ("ICI PLC") to acquire all of the assets and
liabilities of ICI PLC's Colours and Industrial Chemicals Division of ICI South
Africa and the majority shares in ICI South Africa Mozambique Limitada. The two
divisions will be organized under the Company's new affiliate - JLM Industries
(South Africa) PTY. The two 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 throughout Southern Africa. It is
anticipated that the acquisition will be concluded on or about September 1,
1999. The purchase price of the acquisition will be approximately $4.4 million
subject to final adjustments as noted in the agreement. The purchase has been
denominated in the South African Rand (the "Rand"). The Company purchased a
forward contract on July 30, 1999 equivalent to the Rand purchase price and
expiring on September 1, 1999 in order to minimize market risk. The acquisition
will be accounted under the purchase method of accounting.
*********************
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 its Blue Island, Illinois plant and the sale of acetone manufactured at the
Mt. Vernon Phenol plant.
11
<PAGE>
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, 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.
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,
------------------------------------------ ------------------------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Marketing $ 69,353 82.2% $ 74,993 91.3% $ 111,599 78.1% $ 131,981 89.2%
Manufacturing 15,014 17.8% 7,122 8.7% 31,333 21.9% 15,971 10.8%
--------- ----- --------- ----- --------- ----- --------- -----
$ 84,367 100.0% $ 82,115 100.0% $ 142,932 100.0% $ 147,952 100.0%
========= ===== ========= ===== ========= ===== ========= =====
Gross profit:
Marketing $ 4,432 45.6% $ 5,902 92.8% $ 7,669 43.5% $ 9,675 83.1%
Manufacturing 5,280 54.4% 461 7.2% 9,977 56.5% 1,961 16.9%
--------- ----- --------- ----- --------- ----- --------- -----
$ 9,712 100.0% $ 6,363 100.0% $ 17,646 100.0% $ 11,636 100.0%
========= ===== ========= ===== ========= ===== ========= =====
Segment operating income:
Marketing $ 395 8.4% $ 1,713 166.3% $ 1,028 11.5% $ 1,559 126.2%
Manufacturing 4,333 91.6% (683) -- 7,885 88.5% (324) --
--------- ----- --------- ----- --------- ----- --------- -----
Total segment operating income 4,728 100.0% 1,030 100.0% 8,913 100.0% 1,235 100.0%
Corporate expenses (662) -- (595) -- (1,270) -- (1,140) --
--------- ----- --------- ----- --------- ----- --------- -----
Total operating income $ 4,066 100.0% $ 435 100.0% $ 7,643 100.0% $ 95 100.0%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
During the six months ended June 30, 1998 and 1999, the manufacturing
segment sold approximately $26,823,000 and $15,980,574, respectively, of
products to the marketing segment.
12
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues decreased $2.3 million to $82.1 million for the
three months ended June 30, 1999 from $84.4 million for the comparable period in
1998, a decrease of 2.7%. Revenues for the marketing segment increased $5.6
million to $74.9 million for the three months ended June 30, 1999 from $69.3
million for the comparable period in 1998, an increase of 8.1%. The increase in
marketing revenues was generally the result of sales from the Company's 1998
acquisitions, partially offset by decreased selling prices on most of the
Company's products. Revenues for the manufacturing segment decreased $7.9
million to $7.1 million for the three months ended June 30, 1999 compared to
$15.0 million for the comparable period in 1998, a decrease of 52.7%. This
decrease in manufacturing segment revenues was due primarily to lower overall
selling prices for the two main products, acetone and phenol, during the second
quarter of 1999 compared to the same period in 1998.
GROSS PROFIT. Gross profit decreased $3.3 million to $6.4 million for
the three months ended June 30, 1999 from $9.7 million for the comparable period
in 1998, a decrease of 34.0%. As a percentage of revenues, gross profit
decreased to 7.7% for the three months ended June 30, 1999 from 11.5% for the
comparable period in 1998. Gross profit for the marketing segment increased $1.6
million to $6.0 million for the three months ended June 30, 1999 compared to
$4.4 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
acquisitions, partially offset by lower margins on the Company's existing
product base due to lower selling prices. Gross profit for the manufacturing
segment decreased by $4.9 million to $.4 million for the three months ended June
30, 1999 from $5.3 million for the comparable period in 1998, a decrease of
92.5%. 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 a slight increase in raw material costs during the three months ended June
30, 1999 compared to the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.3 million to $5.9 million for the three
months ended June 30, 1999 from $5.6 million for the comparable period in 1998,
an increase of 5.4%. This increase is primarily the result of expenses relating
to the Company's 1998 acquisitions, including an increase of approximately
$174,000 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 million lower in 1999 as
compared to 1998. This reduction is due primarily to a reduction in personnel
costs including approximately $80,000 in severance costs related to moving
Browning's back office support to the Company's headquarters in Florida.
13
<PAGE>
OPERATING INCOME. Operating income decreased $3.7 million to $0.4
million for the three months ended June 30, 1999 from $4.1 million for the
comparable period in 1998, a decrease of 90.2%. 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 $0.3 million for the three months ended June 30, 1999 from
approximately $0.4 million for the comparable period in 1998, a decrease of
25.0%. 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 from investments.
FOREIGN CURRENCY EXCHANGE GAIN (LOSS). Foreign currency exchange gain
(loss) remained relatively constant for the three months ended June 30, 1999
compared to the same period in 1998. During 1999, the Company experienced a
slight strengthening in the currencies of its foreign subsidiaries compared to
the U.S. dollar resulting in a loss of approximately $0.1 million.
INCOME TAX PROVISION (BENEFIT). The Company's benefit for income taxes
was approximately $.3 million for the three months ended June 30, 1999 compared
to an income tax expense of $1.8 million for the comparable period in 1998. The
net income tax benefit for the three months ended June 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 other operations. The Company's Venezuelan
operation has not recorded any income tax benefit in 1999 or 1998 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
June 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 June 30, 1999, the
Company's net income decreased by $1.5 to $0.4 million compared to approximately
$1.9 million for the same period in 1998. This decrease in net income in the
three months ended June 30, 1999 compared to the same period in 1998 was due to
the factors stated above.
14
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased $5.0 million to $147.9 million for the six
months ended June 30, 1999 from $142.9 million for the comparable period in
1998, an increase of 3.5%. Revenues for the marketing segment increased $20.4
million to $132.0 million for the six months ended June 30, 1999 from $111.6
million for the comparable period in 1998, an increase of 18.3%. The increase in
marketing revenues was generally the result of sales from the Company's 1998
acquisitions, partially offset by decreased selling prices on most of the
Company's products. Revenues for the manufacturing segment decreased $15.4
million to $15.9 million for the six months ended June 30, 1999 compared to
$31.3 million for the comparable period in 1998, a decrease of 49.2%. 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
half of 1999 compared to the same period in 1998.
GROSS PROFIT. Gross profit decreased $6.0 million to $11.6 million for
the six months ended June 30, 1999 from $17.6 million for the comparable period
in 1998, a decrease of 34.1%. As a percentage of revenues, gross profit
decreased to 7.9% for the six months ended June 30, 1999 from 12.3% for the
comparable period in 1998. Gross profit for the marketing segment increased $2.0
million to $9.7 million for the six months ended June 30, 1999 compared to $7.7
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
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
$8.0 million to $2.0 million for the six months ended June 30, 1999 from $10.0
million for the comparable period in 1998, a decrease of 80.0%. The decrease in
manufacturing gross profit was principally the result of lower selling prices in
its two main products, acetone and phenol, coupled with stable raw material
costs during the six months ended June 30, 1999 compared to the same period in
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.5 million to $11.5 million for the six
months ended June 30, 1999 from $10.0 million for the comparable period in 1998,
an increase of 15.0%. This increase is primarily the result of expenses relating
to the Company's 1998 acquisitions, including an increase of approximately
$283,000 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 $1.6 million lower in 1999
as compared to 1998.
OPERATING INCOME. Operating income decreased $7.5 million to $.1
million for the six months ended June 30, 1999 from $7.6 million for the
comparable period in 1998, a decrease of 98.7%. This decrease was principally as
a result of the factors
15
<PAGE>
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 $0.7 million for the six months ended June 30, 1999 from
approximately $0.6 million for the comparable period in 1998, an increase of
16.7%. This increase in interest expense was principally due to the Company's
borrowings on its lines of credit to finance certain of its 1998 acquisitions
partially offset by lower borrowings on loans payable in the Company's foreign
operations during the three months ended June 30, 1999.
OTHER INCOME (EXPENSE) - NET. Other income (expense) in 1999 and 1998
consisted principally of income 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 six months ended June
30, 1999, the Company incurred approximately $.2 million of foreign exchange
losses as compared to foreign exchange gains of $.2 million during the same
period in 1998. The loss in 1999 is due to a weakening of the currencies in the
Company's foreign subsidiaries during the first quarter of 1999 that was more
than offset by a strengthening of such currencies in the second quarter of 1999.
INCOME TAX PROVISION (BENEFIT). The Company's benefit for income taxes
was approximately $.6 million for the six months ended June 30, 1999 compared to
an income tax expense of $3.4 million for the comparable period in 1998. The net
income tax benefit for the six months ended June 30, 1999 was incurred primarily
on the Company's U.S. operations partially offset by income generated by the
Company's other operations. The Company's Venezuelan operation has not recorded
any income tax benefit in 1999 or 1998 due to the uncertainty of utilizing its
income tax loss carryforwards. Furthermore, the Company's Holland operations,
which had net income for the six months ended June 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 six months ended June 30, 1999, the Company
incurred a net loss of approximately $0.5 million compared to net income of
approximately $3.8 million for the same period in 1998. This decrease in the
first six months ended June 30, 1999 compared to the same period of 1998 was due
to the factors stated above.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During 1998, the Company renegotiated additional lines of credit with
two new financial institutions in the amount of $52 million. The Company
currently has a total borrowing capacity of approximately $125 million.
Net cash provided by operating activities decreased by $6.6 million to
$3.2 million for the six months ended June 30, 1999 compared to $9.8 million for
the same period in 1998. This decrease was due primarily to lower net income in
the six months ended June 30, 1999 combined with the changes in the other
operating accounts. Net cash used in investing activities decreased by
approximately $2.4 million to $1.8 million for the six months ended June 30,
1999 compared to $4.2 million for the same period in 1998. This decrease was
primarily the result of the $3.0 million used to purchase Browning and Tolson.
Net cash used in financing activities decreased by $2.0 million to $1.3 million
during the six months ended June 30, 1999 compared to $3.3 million for the same
period in 1998. This decrease was due primarily to the borrowings on the
Company's acquisition line of credit to fund the purchase of Browning and Tolson
in 1998, 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 $0.75 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.
As previously noted, on July 29, 1999, the Company entered into an
agreement with ICI PLC to acquire all of the assets and liabilities of ICI PLC's
Colours and Industrial Chemicals Division of ICI South Africa and the majority
shares in ICI South Africa Mozambique Limitada. The two divisions will be
organized under the Company's new affiliate - JLM Industries (South Africa) PTY.
It is anticipated that the acquisition will be concluded on or about September
1, 1999. The acquisition costs will be financed by the Company's available
acquisition lines of credit.
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
17
<PAGE>
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
expects to complete conversion by 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 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
18
<PAGE>
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 June 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 June 30, 1999, the Company had the following related to inventory
exchanges:
Total net pounds receivable under the exchange contracts 7,258,064
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.
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.
19
<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:
27 - Financial Data Schedule
(b) Reports on Form 8-K during quarter ended June 30, 1999:
On June 23, 1999, the Company filed a Current Report on Form 8-K/A
amending its Current Reports on Form 8-K filed on May 27, 1998 and July
27, 1998 to amend Item 7 as set forth therein.
20
<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: August 11, 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)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,105
<SECURITIES> 0
<RECEIVABLES> 31,769
<ALLOWANCES> 837
<INVENTORY> 19,156
<CURRENT-ASSETS> 57,330
<PP&E> 38,527
<DEPRECIATION> 10,637
<TOTAL-ASSETS> 105,333
<CURRENT-LIABILITIES> 40,484
<BONDS> 13,186
0
0
<COMMON> 71
<OTHER-SE> 41,333
<TOTAL-LIABILITY-AND-EQUITY> 105,333
<SALES> 147,953
<TOTAL-REVENUES> 147,953
<CGS> 136,317
<TOTAL-COSTS> 11,541
<OTHER-EXPENSES> 235
<LOSS-PROVISION> 18
<INTEREST-EXPENSE> 753
<INCOME-PRETAX> (1,082)
<INCOME-TAX> (603)
<INCOME-CONTINUING> (480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (480)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
