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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X)     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

Commission File No. 000-22687

JLM INDUSTRIES, INC.

(Exact name of registrant as specified in its charter.)

8675 Hidden River Parkway, Tampa, FL 33637

(Address of principal executive office)

(813) 632-3300

(Registrant’s telephone number, including area code)

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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x

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JLM INDUSTRIES, INC.

INDEX

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

See Notes to Unaudited Condensed Consolidated Financial Statements

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

See Notes to Unaudited Condensed Consolidated Financial Statements

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See Notes to Unaudited Condensed Consolidated Financial Statements

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands)

JLM Industries, Inc. and subsidiaries (“JLM” or the “Company”) is a leading marketer and distributor of certain commodity chemicals, principally acetone and phenol. The Company believes that it is one of the largest chemical distributors 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 established supplier relationships with major chemical companies, (ii) manufactures phenol and acetone at its plant in Blue Island, Illinois and (iii) sources acetone from its joint venture manufacturing operation. The Company’s principal products, acetone, phenol and propylene, are used in the production of adhesives, coatings, forest product resins, paints, pharmaceuticals, plastics, solvents and synthetic rubbers. The Company sells its products worldwide to over 1,000 customers.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2002 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2003.

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring accruals) considered necessary to present fairly the financial position of the Company as of March 31, 2003 and the results of its operations and its cash flows for the respective three months ended March 31, 2003 and 2002. Interim results for the three months ended March 31, 2003 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2003.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses, losses from operations and negative cash flows from operations for the past two years. In addition, the Company has limited additional borrowing capacity under its existing debt agreements and has negotiated revisions to certain debt covenants. Management believes it is necessary that sales increase and gross margins improve in 2003, and that certain non-core assets of the Company may need to be sold or refinanced, in order to continue operations at the current level.

Basic loss per share is computed by dividing loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilutive effect of securities (which can consist of outstanding stock options, restricted stocks, and warrants) that could share in earnings of the Company, unless the inclusion of these potential dilutive effects results in antidilution.

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—Continued

(In thousands)

Other Comprehensive Income (Loss) includes foreign currency translation adjustments. Current assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the respective balance sheet dates. Non-current assets and liabilities are translated at their respective historical rates. Results of operations are translated at weighted average rates for the three months ended March 31, 2003 and 2002, respectively. The effects of exchange rate changes in translating foreign financial statements are reported in accumulated other comprehensive income, a separate component of stockholders’ equity.

Change in Accounting Principle

In the first quarter of 2002, the Company reported a change in accounting principle used to account for goodwill from amortizing goodwill and certain intangible assets with an indefinite useful life to reviewing for impairment. Upon adoption, the Company recorded a noncash charge of approximately $6.2 million to reduce the carrying value of its goodwill. Such charge is nonoperational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations and comprehensive loss. In calculating the impairment charge, the fair value of the impaired reporting units underlying the segments were estimated using a discounted cash flow methodology. Results of operations for the three months ended March 31, 2002 have been restated to reflect the $6.2 million adjustment to adopt Statement No. 142 effective January 1, 2002.

Stock-Based Compensation

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation”, JLM has elected to recognize stock-based compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and to disclose in the consolidated financial statements the effects of SFAS No. 123 as if its fair value method was adopted.

The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the fair value of options in the accompanying consolidated statements of operations. Had compensation cost for the options been determined based on the fair value at the grant date for awards which would have required expense recognition in the three months ended March 31, 2003 and 2002, consistent with the provisions of SFAS No. 123, JLM’s net loss and loss per share for the three months ended March 31, 2003 and 2002 would have been increased to the pro forma amounts indicated below:

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—Continued

(In thousands)

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants that relate to 2003 and 2002, respectively: expected volatility of 63.0% and 63.0%, risk-free interest rate of 3.29% and 5.25%; and expected lives of 5 years and 5 years.

Impact of Recently Issued Accounting Standards

In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (Statement No. 146), which is effective for exit or disposal activities that are initiated after December 31, 2002. Statement No. 146 nullifies Emerging Issues Task Force No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (EITF 94-3). Statement No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and eliminates the definition and requirements of recognition of exit costs in EITF 94-3. The adoption of Statement No. 146 will affect the timing of recognition of costs associated with any future restructuring activities.

In December 2002, the FASB issued Statement of Financial Accounting Standards Statement No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure” (Statement No. 148), which is effective for fiscal years beginning after December 31, 2002. Statement No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosure provisions of Statement 123 to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company follows and presently intends to continue following APB 25 and related interpretations in accounting for its employee stock options and hence there was no impact on the Company’s consolidated financial position and results of operations.

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—Continued

(In thousands)

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about it obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of this interpretation are effective for interim and annual periods after December 15, 2002. The initial recognition and initial measurement requirements of this interpretation are effective prospectively for guarantees issued or modified after December 31, 2002. The adoption of the recognition and initial measurement requirements of this interpretation did not have a material impact on its financial position or results of operations.

JLM’s business consists of a marketing and a manufacturing segment. JLM’s manufacturing segment consists of JLM Chemicals, Inc. JLM’s marketing segment includes its distribution, storage and terminalling 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 following schedule presents information about JLM’s operating segments and geographic locations for the three months ended March 31:

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—Continued

(In thousands)

Basic loss per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilutive effect of securities (which can consist of stock options, warrants, and restricted stocks) that could share in earnings of the Company, unless the inclusion of these potential dilutive effects results in antidilution. The average market price of the Company’s common stock was less than the exercise price of the options and warrants throughout the majority of the three months ended March 31, 2003 and 2002. During the three months ended March 31, 2003 and 2002 the effect of these securities was antidilutive.

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—Continued

(In thousands)

Included in other investments, is the Company’s 49% interest in Quimicos La Barraca, C.A. (“Quibarca”), which is accounted for using the equity method. The Company’s equity in earnings during the three months ended March 31, 2003 and 2002 was approximately $196,000 and $222,000, respectively. The Company’s investment in Quibarca totaled approximately $2,820,000 at March 31, 2003 and $2,799,000 at December 31, 2002.

The following summarizes the assets, liabilities and stockholders’ equity of Quibarca at:

The following summarizes revenues, cost of revenues, net income, and comprehensive loss for the three months ended March 31:

As of March 31, 2003, the Company was in violation of a debt covenant with respect to its debt service coverage ratio related to its term loan agreement with GATX Capital Corporation. In anticipation of such violation, the Company had previously obtained a waiver of this covenant requirement. The Company believes that it will be able to comply with the covenants of all its loan agreements for a period of not less than twelve months, and accordingly, has classified maturities beyond twelve months as long-term.

During 2002, a vendor of Inquinosa International S.A., the Company’s 83.4% owned subsidiary in Madrid, Spain, borrowed amounts from its banks collateralized by receivables due to it from Inquinosa. Inquinosa formally accepted bill of exchange documents thereby, under Spanish law, guaranteeing the vendor’s obligation to its banks. The outstanding balance of these guarantees approximates 2,328,000 euros ($2,676,000 at current exchange rates) as of May 15, 2003. This amount represents the total potential liability for these guarantees. Under the terms of these guarantees, the banks have made demands for payment from Inquinosa due to non-payment by the vendor for approximately 479,000 euros ($551,000 at current exchange rates) as of May 15, 2003. As a result of this situation, Inquinosa filed for, and received, in February 2003, court approval for Suspension of Payments status, which under Spanish law protects Inquinosa from actions by creditors, similar to Chapter 11 under the U.S. Bankruptcy Code. Inquinosa continues to operate under court supervision, while negotiating with creditors as to amounts owed as of the filing date. Due to a number of factors, including the status of negotiations between the customer and its banks and the Suspension of Payments status under which Inquinosa is operating, management is not able to estimate the amount, if any, that Inquinosa will be required to pay to satisfy these obligations in this matter.

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Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND  

FINANCIAL CONDITION

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 materials; the potential 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.

An investment in the Company’s common stock involves a high degree of risk. Stockholders and prospective purchasers should carefully consider the risk factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission on April 15, 2003, as well as other information contained in the Company’s other periodic filings with the Commission. If any of the risks described therein actually occur, the Company’s business could be materially harmed.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Note 2 to the Company’s audited consolidated financial statements, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2003, describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory valuation adjustments, investment impairments, goodwill impairments, loss contingencies, and income taxes. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the unaudited condensed consolidated financial statements.

The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. The Company utilizes credit insurance to minimize the risk of loss from non-payment of U.S. customer receivables. If there is a deterioration of a major customer’s credit worthiness, and if balances exceed insured limits, the Company’s estimates of the recoverability of amounts due to us could be adversely affected. The allowance for doubtful accounts is determined primarily on the basis of management’s best estimate of probable losses, including specific allowances for known troubled accounts.

Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for its products, the Company may be required to record adjustments in order to reflect the inventory at the lower of cost or market, and the gross margin could be adversely affected.

Other investments are primarily investments in partnerships. JLM accounts for the majority of its investments in partnerships on the equity basis and, accordingly, records its respective share of

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profits and losses that are allocated in accordance with the partnership agreements. Changes in market conditions could result in investment impairment.

The carrying values of long-lived assets, including property and equipment, goodwill and other intangibles, and investments, are reviewed for impairment whenever events or changes in circumstances indicate that there may be indicators of impairment.

The carrying value of goodwill is reviewed not less than annually for impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The net book value of each of the Company’s segments is generally based upon specific identification. The Company’s reporting units are generally consistent with the operating segments underlying the segments identified in Note 3 – Segment Information. The Company performs its annual review during the fourth quarter of the fiscal year.

JLM is subject to the possibility of various loss contingencies arising in the ordinary course of business. JLM considers the likelihood of the loss or impairment of an asset, or the incurrence of a liability as well as JLM’s ability to reasonably estimate the amount of the loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired, and the amount of loss can be reasonably estimated. JLM regularly evaluates information currently available to the Company to determine whether such losses should be recorded. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators.

JLM accounts for U.S. income taxes and accrues for U.S. income tax liabilities based on its consolidated U.S. earnings. The Company’s foreign subsidiaries file tax returns in the countries where they are incorporated. To the extent these subsidiaries are profitable, taxes are paid based on each country’s prevailing tax rate. Upon repatriation of non-U.S. earnings, the U.S. allows a foreign tax credit, subject to certain limitations, to be applied against the Company’s U.S. consolidated return for the foreign taxes paid by the Company’s foreign subsidiaries. If losses are incurred, countries in which the Company’s foreign subsidiaries are incorporated generally allow the losses to be carried forward and applied against income earned in subsequent years. The Company’s future effective tax rates and realization of carry forward losses could be adversely affected if earnings are lower than anticipated in countries where there are lower statutory rates or by unfavorable changes in tax laws or regulations.

General

JLM is a leading marketer and distributor of certain commodity chemicals, principally acetone and phenol. The Company believes it is one of the largest chemical distributors in North America. JLM is also a global distributor of olefins, principally propylene, as well as a variety of other commodity and specialty chemicals. In order to provide stable and reliable sources of supply for its products, the Company (i) maintains established supplier relationships with several major chemical companies, (ii) manufactures phenol and acetone and (iii) sources acetone from its joint venture manufacturing operation.

The Company’s business consists of manufacturing and marketing segments. The Company’s manufacturing segment includes the operations of the Blue Island Plant. The Company’s marketing segment includes its distribution, storage and terminaling operations and all other sourcing operations.

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Set forth below, for the periods indicated, is certain unaudited information regarding the contributions by the marketing and manufacturing segments to the Company’s revenues, gross profit, operating income, gross margin and operating margin. Results for any one or more periods are not necessarily indicative of annual results or continuing trends.

Marketing Segment

The marketing segment revenues are influenced largely by the volume of new and existing products sold by the Company. The volume of products sold depends on a number of factors, including strength in the homebuilding and automobile industries and the overall economic environment. The Company’s vendor supply agreements, primarily relating to acetone, frequently contain a term providing for a fixed percentage profit per unit of product sold. In addition, the Company’s supplier and customer contracts have a provision permitting the Company to purchase or sell additional product at the Company’s option, typically plus or minus 5.0% of the contractual volume amount. As a result, during a period of pricing volatility, the Company has the opportunity to improve its profitability by exercising the appropriate option to either build inventory in a rising price environment or to sell product for future delivery in a declining price environment.

Manufacturing Segment

The results of operations of the Company’s manufacturing segment are influenced by a number of factors, including economic conditions, competition and the cost of raw materials, principally propylene and benzene. The Company’s ability to pass along raw material price increases to its customers is limited because the commodity nature of the chemicals manufactured at the Blue Island Plant restricts the Company’s ability to increase prices.

The development of financial instruments to hedge against changes in the prices of propylene and benzene has occurred in the past few years. The Company may seek periodically in the future, to the extent available, to enter into financial hedging contracts for the purchase of propylene and benzene in an effort to manage its raw material purchase costs. There can be no assurance that the

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Company will utilize such financial hedging contracts or that the use of such instruments by the Company will be successful. The Company can be exposed to losses in connection with such contracts equal to the amount by which the fixed hedge price on the contract is above the market price for such chemicals at the time of purchase. The Company did not enter into any material financial hedging contracts in 2002 or in the first quarter of 2003.

Since its acquisition in 1995, the Blue Island Plant has operated at or near full capacity and, in order to economically expand its production capacity, the Company would be required to incur significant costs. As a result, the Company has no plans to expand the capacity of the Blue Island Plant.

Results of Operations

Revenues. Revenues increased $28.4 million, or 63.7%, to $73.1 million for the three months ended March 31, 2003 from $44.6 million for the comparable prior year period. Revenues for the marketing segment increased $25.5 million, or 65.9%, to $64.1 million for the three months ended March 31, 2003 from $38.6 million for the comparable prior year period. The Company experienced higher revenues from its marketing activities in the United States in the first three months of 2003, due to increase in both sales prices and volume. European marketing revenues also increased due to increases in both sales prices and volume, while export revenues from the United States decreased primarily as a result of a decrease in volume.

Revenues for the manufacturing segment increased $3.0 million, or 49.8%, to $9.0 million for the three months ended March 31, 2003 from $6.0 million for the comparable prior year period. The increase in manufacturing segment revenues was primarily due to increases in phenol selling prices.

Gross Profit. Gross profit increased approximately $1.9 million, or 90.2%, to $4.1 million for the three months ended March 31, 2003 from $2.1 million for the comparable prior year period. Gross profit from the marketing segment increased $1.6 million to $3.5 million for the three months ended March 31, 2003 from $1.9 million for the comparable prior year period, an increase of 87.1%. The increase in gross profit was primarily due to higher gross margins from the Company’s marketing activity in the United States in the first three months of 2003, as a result of higher selling prices and higher volumes.

Gross profit from the manufacturing segment increased $0.3 million, or 110.1%, to $0.6 million for the three months ended March 31, 2003 from $0.3 million for the comparable prior year period. The increase in manufacturing gross profit was the result of increases in phenol selling prices during the first three months of 2003.

Selling, General and Administrative Expenses (SG&A). SG&A increased $0.7 million, or 15.9%, to $4.9 million for the three months ended March 31, 2003 from $4.2 million for the

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comparable prior year period. The increase is primarily the result of increases in insurance rates and consulting fees related to the Company’s ERP system implementation. As a percentage of revenues, SG&A decreased to 6.7% of revenues for the first quarter of 2003 from 9.5% of revenues for the first three months of 2002.

Operating Loss. Operating loss decreased by $1.3 million to an operating loss of $0.8 million for the three months ended March 31, 2003 from $2.1 million for the comparable prior year period.

Interest Expense – Net. Interest expense, net of interest income, increased $0.1 million to $0.5 million for the three months ended March 31, 2003 from $0.4 million for the comparable prior year period, primarily due to additional borrowings on the Company’s revolving credit facility.

Other Income – Net. Other income decreased $0.2 million to $0.2 million for the three months ended March 31, 2003 from $0.4 million from the comparable prior year period. In the first quarter of 2002, other income consisted primarily of gains on the sale of certain assets.

Foreign Currency Exchange Loss. During the three months ended March 31, 2003, the Company experienced relatively stable currencies of its foreign subsidiaries compared to the U.S. dollar resulting in a loss on foreign currency exchange of $9 thousand as compared to a loss of $42 thousand for the comparable prior year period.

Income Tax Provision (Benefit). The Company’s provision for income taxes increased $0.8 million to an income tax provision of $11 thousand for the three months ended March 31, 2003 from an income tax benefit of $0.8 million for the comparable prior year period. No tax benefits related to operating losses have been recognized in the current period. After evaluating all available evidence, the Company believes that a valuation allowance is necessary to offset against any potential tax assets.

Loss before Cumulative Effect of Accounting Change. Loss before cumulative effect of accounting change decreased $0.2 million to $1.1 million for the three months ended March 31, 2003 from $1.3 million for the comparable prior year period.

Cumulative Effect of Accounting Change. Cumulative effect of accounting change is $6.2 million due to the Company adopting SFAS No. 142 “Goodwill and Other Intangible Assets” effective January 1, 2002. Such charge is nonoperational in nature and is reflected as a cumulative effect of an accounting change in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss. In calculating the impairment charge, the fair value of the impaired reporting units underlying the segments were estimated using a discounted cash flow methodology.

Net Loss. Net loss decreased by $6.4 million to a net loss of $1.1 million for the three months ended March 31, 2003 from $7.5 million for the comparable prior year period.

Other Comprehensive Income. Other comprehensive income includes foreign currency translation adjustments. Current assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the balance sheet dates. Non-current assets and liabilities are translated at their respective historical rates. Results of operations are translated at weighted average rates for the respective periods. The effects of exchange rate changes in translating foreign financial statements are reported in accumulated other comprehensive income, a separate component of stockholders’ equity. Net other comprehensive income increased by $0.2 million to $0.3 million for the three months ended March 31, 2003 from $0.1 million for the comparable prior year period.

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Comprehensive loss. Comprehensive loss, including the effect of other comprehensive income, decreased $6.6 million to a comprehensive loss of $0.8 million for the three months ended March 31, 2003 from $7.5 million for the comparable prior year period.

Liquidity and Capital Resources

Cash Flows

Operating activities used approximately $1.2 million of cash in the three months ended March 31, 2003. Net loss adjusted for non-cash items such as depreciation, amortization, and other non-cash charges incurred used $0.4 million of cash. Changes in assets and liabilities used approximately $0.8 million of cash. Investing activities utilized approximately $0.1 million of cash, primarily consisting of capital expenditures. Financing activities used approximately $3 thousand of cash, primarily related to principal payments of debt, net of borrowings on the revolving line of credit.

The Company has in the past funded its working capital and capital expenditure requirements through a combination of cash flow from operations, borrowings, and from the sale of non-core assets. For information about these transactions in 2002, including the terms of the Company’s existing revolving credit facility, term debt facility, mortgage loan, and secured loan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Credit Facilities

As of March 31, 2003, the Company was in violation of a debt covenant with respect to its debt service coverage ratio related to its term loan agreement with GATX Capital Corporation. In anticipation of such violation, the Company had previously obtained a waiver of this covenant requirement. The Company believes that it will be able to comply with the covenants of all of its loan agreements for a period of not less than twelve months, and accordingly, has classified maturities beyond twelve months as long-term.

Outlook

The Company has incurred net losses, losses from operations and negative cash flows form operations for the past two years. In addition, the Company has limited additional borrowing capacity under its existing debt agreements and has negotiated revisions to certain debt covenants. Management believes it is necessary that sales increase and gross margins improve in 2003, and that certain non-core assets of the Company may need to be sold or refinanced, in order to continue operations at the current level.

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report of Form 10-K for the fiscal year ended December 31, 2002.

Item 4 – Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures within 90 days before the filing date of this quarterly report. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

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PART II

OTHER INFORMATION

Item 1 – Legal Proceedings

During 2002, a vendor of Inquinosa International S.A., the Company’s 83.4% owned subsidiary in Madrid, Spain, borrowed amounts from its banks collateralized by receivables due to it from Inquinosa. Inquinosa formally accepted bill of exchange documents thereby, under Spanish law, guaranteeing the vendor’s obligation to its banks. The outstanding balance of these guarantees approximates 2,328,000 euros ($2,676,000 at current exchange rates) as of May 15, 2003. This amount represents the total potential liability for these guarantees. Under the terms of these guarantees, the banks have made demands for payment from Inquinosa due to non-payment by the vendor for approximately 479,000 euros ($551,000 at current exchange rates) as of May 15, 2003. As a result of this situation, Inquinosa filed for, and received, in February 2003, court approval for Suspension of Payments status, which under Spanish law protects Inquinosa from actions by creditors, similar to Chapter 11 under the U.S. Bankruptcy Code. Inquinosa continues to operate under court supervision, while negotiating with creditors as to amounts owed as of the filing date. Due to a number of factors, including the status of negotiations between the customer and its banks and the Suspension of Payments status under which Inquinosa is operating, management is not able to estimate the amount, if any, that Inquinosa will be required to pay to satisfy these obligations in this matter.

Other than the action above, the Company is not a party to any legal proceedings, other than ordinary and routine litigation incidental to the Company’s business. The Company does not believe that such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on its business.

Item 6 – Exhibits and Reports on Form 8-K

On April 17, 2003 the Company filed a Current Report on Form 8-K incorporating by reference (in Item 5 of the report) the matters set forth in the Company’s earnings press release dated April 17, 2003.

*  Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-27843), filed with the Securities and Exchange Commission on July 21, 1997.

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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.

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Certification

I, John L. Macdonald, certify that:

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Certification

I, Michael Molina, certify that:

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