<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 1-12333
JLM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter.)
Delaware 86-0385884
-------- ----------
(State of Incorporation) (IRS Employer Identification No.)
8675 Hidden River Parkway, Tampa, FL 33637
------------------------------------ -------
(Address of principal executive office) (Zip Code)
(813) 632-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
(Title of each class)
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 if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant at March 20, 1998 was $30,725,615, based upon the last reported
sales price of the Common Stock as reported by the NASDAQ National Market. The
number of shares of the registrant's Common Stock outstanding at March 20, 1998
was 7,105,101.
<PAGE> 2
Documents Incorporated by Reference:
None.
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 currency exchange; the risks associated
with potential acquisitions, and the ability to implement other features of the
Company's business strategy.
PART I
ITEM 1. BUSINESS:
BUSINESS OVERVIEW
JLM is a leading marketer and distributor of certain commodity
chemicals, principally acetone and phenol. The Company believes that it
is the second largest marketer of acetone and the fifth largest supplier of
phenol in North America. JLM is also a global distributor of olefins,
principally propylene, as well as a variety of other commodity and specialty
chemicals. In order to provide stable and reliable sources of supply for its
products, the Company (i) maintains long-established supplier relationships
with several major chemical companies, (ii) manufactures phenol and acetone at
its Blue Island Plant 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 600 customers, including Ashland
Chemical, Inc. ("Ashland"), B.F. Goodrich Co. ("B.F. Goodrich"), Borden, Inc.
("Borden"), Hoechst Celanese Corporation, E.I. duPont de Nemours and Company
("DuPont"), Dutch State Mines ("DSM"), Eli Lilly & Co., Georgia Pacific
Corporation ("Georgia Pacific"), ICI Acrylics Inc. ("ICI Acrylics"), Minnesota,
Mining and Manufacturing Company ("3M"), Neste Resins Corporation ("Neste"),
Rohm & Haas Company ("Rohm & Haas") and Shell Chemicals Canada, Inc. ("Shell
Chemicals Canada"). In 1996 and 1997, sales to the foregoing customers
accounted for approximately 21.0% and 19.6%, respectively, of the Company's
revenues. No single customer accounted for more than 10% of the Company's
revenues in 1997.
In 1977, John L. Macdonald, the Chief Executive Officer and
President of the Company, co-founded Gill and Duffus Chemicals, Inc., the
domestic chemical trading operation of the London-based Gill and Duffus Holding
PLC. As part of a management buy-out in 1982, Mr. Macdonald purchased Gill and
Duffus Chemicals, Inc., and subsequently merged into Steuber Company, Inc., the
domestic operations of the Steuber Group, a
2
<PAGE> 3
worldwide chemical distribution company. In 1986, Mr. Macdonald purchased the
U.S. assets of the Steuber Group and formed JLM as the successor.
Since 1986, the Company has grown rapidly by expanding its product
sourcing arrangements and product offerings, acquiring manufacturing and
terminaling facilities and providing superior customer service and product
quality and availability. Among the Company's most significant corporate
milestones are (i) its investment in 1987 in the Mt. Vernon Partnership, (ii)
the formation in 1992 of Olefins Terminal Corporation ("OTC"), (iii) the
acquisition of the JLM Terminal in 1992 and (iv) the acquisition of Blue Island
Plant in 1995. In addition, the Company entered into its first exclusive
marketing agreement with Sasol Chemical Industries (PTY) Ltd. (South Africa)
("SasolChem") in 1987 and began its expansion into the international markets
with the opening of offices in Canada in 1987, Venezuela in 1992 and Europe in
1995.
INDUSTRY OVERVIEW
Phenol
Phenol is produced through the oxidation of cumene, which is
produced from propylene and benzene. Acetone is produced as a co-product
during this manufacturing process in the approximate ratio of 0.6 pounds of
acetone for every 1.0 pound of phenol. Approximately 80.0% of global acetone
production is produced as a co-product in the manufacture of phenol, and, as a
result, phenol demand largely determines acetone production levels. The markets
for phenol and acetone are cyclical and sensitive to changes in the balance
between supply and demand, the price of feedstocks and the level of general
economic activity.
According to industry sources, current world phenol capacity is
approximately 13.8 billion pounds (4.5 billion pounds in North America). The
two largest end markets for phenol are phenolic resins, which is the
Company's only market for phenol, and bisphenol A ("BPA"). Phenolic resins are
used extensively as bonding agents and adhesives for wood products such as
plywood and granulated wood panels, and account for approximately 37.0% of
total phenol demand. BPA is used as a raw material in the manufacture of high
performance plastics such as those used in automobiles, household appliances,
electronics and protective coatings applications. BPA, the fastest growing
application for phenol, currently accounts for approximately 28.0% of phenol
demand and is expected to grow to approximately 33.0% by the year 2000. Phenol
for the production of BPA requires a greater degree of purification and is
produced almost exclusively by manufacturers of BPA for their internal
consumption. Any phenol not consumed internally by such manufacturers generally
is sold to other end users. The Company believes sales of excess phenol by BPA
producers will be relatively limited as the demand for BPA continues to
increase, which should have a positive effect on phenol prices generally.
Phenol selling prices and margins were at cyclical highs during 1995
and 1996. The Company expects worldwide and North American phenol demand to
grow by approximately 3.2% and 2.5% per year, respectively, through 1999. The
growth in demand is anticipated to be highest in Southeast Asia and, to a
lesser extent, the United States. The Company also expects there to be little
change in the levels of phenol production through
3
<PAGE> 4
1998. As a result, production utilization rates should remain relatively high.
Capacity expansions by several major phenol producers of approximately 3
billion pounds worldwide (1.2 billion pounds in the U.S.) starting in the year
2000 have recently been announced. It is unclear how many of these projects
will ultimately be completed and the Company believes that it is possible that
some of these announced capacity additions will not be built as scheduled.
Acetone
The largest end market for acetone is as a raw material in the
production of methyl methacrylate ("MMA"), which is used as a chemical
intermediate to produce acrylic sheeting and other chemical products, and as an
ingredient for surface coating resins for the automotive and construction
markets. Acetone is also used as a raw material in the production of BPA and as
an industrial solvent.
The U.S. Federal government has recently exempted acetone from all
regulations as a volatile organic compound ("VOC"). To date, 32 states have
followed the Federal government's ruling and the Company expects acetone to be
exempted from VOC regulation by all 50 states in the near future. The Company
believes that the exemption of acetone from VOC regulation will lead to
increased demand for acetone based coatings and solvents.
According to industry sources, current world acetone production
capacity is approximately 8.5 billion pounds (2.9 billion pounds in North
America). Selling prices and margins for acetone were at cyclical highs in 1995
and early 1996, similar to those for phenol, driven by growth in the use of
acetone for the production of MMA, BPA (for engineering plastics), and a
rejuvenated market for acetone based solvents. World demand is expected to grow
approximately 2.5% annually through 1999. Recently announced capacity additions
in Europe and the U.S. for phenol, if completed, would increase the capability
for acetone production, which could be partially offset by closure of
on-purpose production over the next few years. The Company expects acetone
demand in North America to grow approximately 2.8% annually through 1999,
driven primarily by growth in the BPA market of approximately 4.9% annually,
renewed growth in acetone-based solvents of 3.0% annually, and a continued
recovery in the MMA market.
Propylene
According to industry sources, current world propylene capacity is
approximately 100 billion pounds with global demand for propylene expected to
grow approximately 5.0% per year through 1999. North American capacity is
currently approximately 30 billion pounds with North American demand expected
to grow approximately 2.5% per year through 1999. The U.S. is expected to take
a significant role in producing and sourcing propylene to international
consumers.
Over 50.0% of globally produced propylene is used in the manufacture of
polypropylene which, in turn, is used primarily in plastic film and molded
parts in consumer items, including automobile components, brushes, carpeting,
rope and tape.
4
<PAGE> 5
BUSINESS STRATEGY
The Company's principal objective is to continue to expand the number
of sources and breadth of its chemical products and the markets in which it
distributes these products to enhance its position as a leading supplier to the
worldwide chemical industry. Key elements of the Company's business strategy
include:
- Expand Sources of Supply through Joint Ventures, Acquisitions and
Strategic Relationships. The Company will continue to seek to identify and
pursue domestic and international opportunities to expand its sources of supply
for products in or consistent with its core business. These opportunities may
include additional joint ventures, acquisitions and strategic relationships.
Consistent with this strategy, the Company formed the Mt. Vernon joint venture
with General Electric Company ("GE") and an affiliate of CITGO in 1987,
acquired the Blue Island Plant in 1995 and established a long-term supplier
relationship with SasolChem in 1988. Certain phenol producers have recently
announced their intentions to add approximately 3 billion pounds of annual
production capacity starting in the year 2000. JLM is currently exploring
opportunities to participate in certain of these expansions in order to secure
additional sources of phenol and acetone.
- Increase Sales of Existing Products; Add New Products. The Company
will continue to develop its existing relationships and establish new
relationships to increase the overall volume and types of products it
distributes by (i) increasing the amount distributed by the Company of an
existing supplier's output of a given chemical, (ii) distributing additional
products for existing suppliers and (iii) adding new chemical producers to its
supplier base. During 1996, the Company entered into agreements to distribute
approximately 70 million additional pounds of chemicals for both existing and
new suppliers in 1997, including ARCO Chemical Company ("ARCO Chemical"),
Goodyear Tire & Rubber Co. ("Goodyear") and Monsanto Company ("Monsanto"). In
addition, the Company recently expanded the product line it distributes for
SasolChem. To date, the Company has entered into agreements with CONDEA Vista
Company ("CONDEA Vista") to distribute butanol and with GE Plastics to become a
U.S. distributor of styrene.
- Continue International Expansion. The Company currently has
international operations in South America, Europe and Asia. JLM intends to
continue to utilize its chemical market experience, distribution and logistics
capabilities and industry relationships to increase its international presence,
particularly in the growing chemical markets of Asia and South America. JLM
recently purchased a minority interest in SK Asia and has agreed to purchase a
minority interest in SK Trading, both of which are participating in a
Vietnamese joint venture that intends to construct a chemical plant in Vietnam
that will produce dioctyl phthlate, a chemical used in the manufacture of
plastics such as PVC. The Vietnamese joint venture also intends to construct
terminaling and storage facilities in Vietnam and Malaysia. The Company
believes that its indirect participation in the Vietnamese joint venture also
will provide it with increased access to the Asian market.
- Continue to Provide Superior Customer Service. JLM believes that its
continued success will be in large part due to its emphasis on providing
superior customer service. The Company believes it is well positioned to take
advantage of current trends within the chemical industry as chemical producers
continue to outsource their terminaling and
5
<PAGE> 6
logistics operations and reduce the number of outside distributors used. The
Company focuses on providing sourcing, inventory and logistics solutions for
its customers and endeavors to provide both its customers and suppliers with a
level of service that is unmatched in the industry.
PRODUCTS AND CUSTOMERS
JLM markets more than 50 chemical products to over 600 customers
worldwide. In 1996 and 1997, sales of acetone, phenol and propylene
accounted for approximately 65.0% and 59.0%, respectively, of the Company's
total revenues. Set forth below is certain information about the Company's
sales of acetone, phenol, propylene and certain other products, including
representative customers for such products.
Acetone
In 1996 and 1997, JLM distributed approximately 424 and 353 million
pounds, respectively, of acetone, of which approximately 63.0% and 83.0%,
respectively, was sourced from the Blue Island Plant and the Mt. Vernon Plant.
The largest end market application of acetone is as a raw material in the
production of MMA, an important chemical intermediate used to make aircraft
windows, lighting fixtures, medical/dental parts, storm doors and taillight
lenses. Additional end market applications for acetone include adhesives,
pharmaceuticals, solvents, paints and plastics. JLM's acetone customers include
Ashland, B.F. Goodrich, DuPont, ICI Acrylics and Rohm & Haas.
Phenol
In 1996 and 1997, the Company distributed approximately 130 and 133
million pounds, respectively, of phenol, of which approximately 74.0% and
72.0%, respectively, was sourced from the Blue Island Plant. The two largest
end market applications for phenol are phenolic resins, which are used in
adhesives and bonding agents in plywood and other forest products, and BPA.
JLM's phenol customers include Borden, Georgia Pacific and Neste.
Propylene
In 1996 and 1997, the Company distributed approximately 98 and 223
million pounds, respectively, of propylene. The largest end market application
for propylene is as a raw material in the production of polypropylene which is
used in the manufacture of appliance parts, automobile components, brushes,
carpeting, rope and tape. Propylene is also used in the production of foams
for furniture, insulation, elastomers, molded goods and pharmaceuticals. The
Company also markets other olefins, including butadiene and ethylene. The
Company's olefins customers include DuPont, Exxon Corporation ("Exxon"), GE and
Goodyear. JLM's propylene customers include Borealis Exploration Limited, DSM
and The Dow Chemical Corporation ("Dow Chemical").
6
<PAGE> 7
Other Products
In addition to acetone, phenol and propylene, the Company markets and
distributes other commodity and specialty chemicals including acetophenone,
benzoic acid, butadiene, cumene, DDVP, esters, ethylene, fumaric acid, ketones,
lindane and methanol. Some of JLM's customers for these products include BASF
Corp., Dow Chemical, DSM, Goodyear, Lilly Industries Inc., PPG Industries Inc.,
Repsol, S.A. (Spain) ("Repsol") and Shell Chemicals Canada.
During each of the past three years, no single distribution
relationship, customer or group of affiliated customers has accounted for more
than 10.0% of the Company's revenues.
MANUFACTURING AND PRODUCT SOURCING
In order to support its worldwide marketing and distribution
capabilities, the Company continually seeks to acquire assets and establish
relationships to provide consistent and reliable sources of products. JLM
sources a majority of its products from its Blue Island Plant and the Mt.
Vernon Plant. In 1996 and 1997, the Blue Island Plant and Mt. Vernon Plant
collectively supplied approximately 63.0% and 83.0%, respectively, of the total
acetone sold by JLM and the Blue Island Plant supplied approximately 74.0% and
72.0%, respectively, of the total phenol sold by JLM.
Blue Island
The Company manufactures cumene, phenol, acetone and certain
co-products including alpha methyl styrene ("AMS") and acetophenone at the Blue
Island Plant. The Blue Island Plant has an annual manufacturing capacity of
approximately 145 million pounds of cumene, 95 million pounds of phenol, 58
million pounds of acetone, 5 million pounds of AMS and 1 million pounds of
acetophenone. The phenol produced at the Blue Island Plant can only be used in
the production of phenolic resins and not in the production of BPA.
The Blue Island Plant is strategically located south of Chicago,
Illinois, near primary barge and rail transportation terminals that facilitate
economic and efficient delivery of raw materials and shipment of finished
products. In addition, this location affords the Company significant freight
cost advantages in servicing its customer base (which is primarily located in
the Midwest) in comparison to competitors located on the U.S. Gulf Coast.
The Blue Island Plant utilizes a newly installed state-of-the-art UOP
zeolite catalyst to produce cumene, the key raw material used to manufacture
phenol and acetone. This process has improved the efficiency, profitability and
quality of the cumene production and has eliminated the need to purchase
supplemental cumene from outside sources. Additionally, the new technology has
improved the purity of the Company's AMS and, as a result, the Company's
average margin for AMS has increased significantly.
The raw materials required for the production of cumene are propylene
and benzene. The Company, under a long-term supply agreement which expires in
2005, obtains
7
<PAGE> 8
propylene via direct pipeline from the Clark Oil refinery located adjacent to
the Blue Island Plant. The Company believes that the terms of its propylene
supply contract provide it with a significant raw material cost advantage over
many of its competitors, in part because the Company does not have to pay for
any transportation costs for the propylene purchased under the supply
agreement. The Company purchases benzene from three major petrochemical
producers, generally under supply contracts at market rates.
Currently, the Blue Island Plant is operating at full capacity, and in
order to economically expand production capacity, it would be necessary to
increase its capacity to that of a world-scale facility. However, physical
limitations at the Blue Island Plant prohibit such an increase and as a result
the Company has no plans to expand the Blue Island Plant. The Company is
continually exploring opportunities to expand its manufacturing capabilities
through acquisitions or joint ventures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity."
Mt. Vernon Partnership
In addition to its ownership of the Blue Island Plant, JLM participates
in a manufacturing joint venture with GE and an affiliate of CITGO (the "Mt.
Vernon Partnership") which owns and operates the Mt. Vernon Plant. The Company
owns a 2.0% partnership interest in the Mt. Vernon Partnership, an Indiana
limited partnership, that was formed to purchase the Mt. Vernon Plant from GE
in November 1987. The Company's principal purpose for entering into the
partnership was to secure a long-term source of supply for acetone. In 1988,
the Company entered into a long-term acetone sales agreement with the Mt.
Vernon Partnership. Under the terms of the acetone agreement, the Company is
obligated through the year 2002, and thereafter unless the agreement is
terminated upon prior notice, to purchase all of the acetone produced at the
Mt. Vernon Plant and not consumed by GE Petrochemicals, Inc. ("GE Plastics").
The agreement further provides that the Mt. Vernon Partnership cannot terminate
the agreement as long as JLM is a partner in the Mt. Vernon Partnership. The
initial term of this agreement expires in 2002 and continues thereafter for
successive one-year terms unless one year's notice is otherwise provided by
either party.
The Company has been since 1988 and believes that it will in the future
be able to continue to profitably market all the acetone offered to it under
this agreement. Since 1994, the Company has sourced on average approximately
250 million pounds of acetone annually from the Mt. Vernon Plant. In 1996, the
amount of acetone available to JLM from the Mt. Vernon Plant was reduced by
approximately 15 million pounds and it is anticipated over the next four years
that the amount of acetone available to JLM will be further reduced by
approximately 35 to 40 million pounds as a result of increased consumption by
GE Plastics.
Under the terms of the partnership agreement for the Mt. Vernon
Partnership, the management of the business and affairs of the partnership is
controlled by the partners owning at least 66.0% of the partnership interests.
The Mt. Vernon Partnership has entered into an operation and maintenance
agreement with GE pursuant to which GE manages, operates and maintains the Mt.
Vernon Plant. The partnership agreement generally provides GE with the right at
any time to require the sale of JLM's interest in the Mt. Vernon
8
<PAGE> 9
Partnership to a third party selected by GE and the right after December 31,
2008 to directly purchase JLM's interest in the partnership.
Supplier Relationships
In addition to its manufacturing facility and joint venture, JLM
sources its products through long-established supplier relationships with many
of the largest and most well-known chemical companies worldwide. Suppliers to
JLM include ARCO Chemicals, Goodyear, Monsanto, Repsol and SasolChem. The
structure of the Company's long-term relationships with its outside suppliers
helps the Company mitigate the impact of cyclical market fluctuations in
product supply and price to which typical spot traders or distributors are
exposed. In a majority of JLM's supply contracts, the purchase price paid by
JLM is not determined until after JLM sells the product, and is generally based
on a fixed percentage profit per unit of product sold. In contrast, the typical
spot trader or distributor may agree to a fixed purchase price prior to the
sale, taking the market risk of effecting a successful resale of the product.
In addition, spot traders do not typically enter into long-term supply
contracts or relationships, thereby reducing their ability to service the needs
of both customers and suppliers.
In 1988, the Company entered into an agreement to purchase acetone from
SasolChem, which was to remain in effect until either party gave six months
notice of termination. In 1992, the Company entered into new agreements with
SasolChem to purchase additional quantities of acetone, methyl-ethyl ketone and
n-propanol. These new agreements are on terms substantially similar to its
existing acetone agreement with SasolChem. The Company has since expanded its
relationship with SasolChem to include the purchase and distribution of
methyl-isobutyl ketone and ethanol in North America.
The Company has recently entered into an agreement to distribute
styrene monomer for GE Plastics. Styrene is the primary component used in the
production of synthetic rubbers and plastics. Additionally, the Company has
entered into agreements with ARCO Chemical Company, CONDEA Vista and Monsanto
to distribute n-propanol, butanol and ethyl acetate, respectively.
TERMINALING AND STORAGE
The Company, with an affiliate of Ultramar Diamond Shamrock Corp.
("UDS"), participates in a joint venture that owns and operates the OTC
Terminal at the mouth of the Houston, Texas ship channel in Bayport, Texas. The
facility is located on 2.4 acres of land and has throughput capacity of
approximately 900 million pounds. The facility includes twin storage spheres
with a total capacity of approximately 22 million pounds of propylene and is
capable of handling and storing gaseous products at a full range of temperature
and pressure conditions. The OTC Terminal is believed to be the only
independent propylene export terminal in the U.S. and its Gulf Coast location
is well suited to enable U.S. producers to place their products into the global
market. See "Properties."
The OTC Terminal is operated by Baytank (Houston) Inc. ("Baytank"), a
major terminal owner and operator, under a long-term contract. OTC also leases
from Baytank the land upon which the OTC Terminal is located. The Company was
engaged by OTC to
9
<PAGE> 10
provide certain administrative and managerial services to OTC, including
on-site supervision of terminal operations and certain bookkeeping and
administrative matters.
The Company has additional terminal and storage facilities located at
the JLM Terminal on the Cape Fear River in Wilmington, North Carolina. The JLM
Terminal is located on 14 acres of land, is accessible to ship, barge, rail and
truck, is capable of handling a broad range of products including methanol,
oxygenated solvents and inorganic chemicals, and has a total capacity of 15.2
million gallons. The facility includes three tank truck loading bays, six
loading bays for jumbo rail cars, laboratory services and a computerized weigh
scale. Of the total storage capacity at the JLM Terminal, the Company uses
approximately 2.5 million gallons of capacity and the remainder is subject to
long-term leases to third parties expiring from 1998 to 2002. See "Properties."
The Company maintains inventory at approximately 15 locations across
North America and in a number of locations in Europe and South America. In
addition to the Company's owned terminal and storage facilities located at the
JLM Terminal and OTC Terminal, the Company has approximately 3.5 million
gallons of liquid storage capacity and approximately 500,000 pounds of
palletized storage capacity pursuant to short-term leases at various locations
in the U.S. The Company believes its storage facilities are adequate for the
Company's current and anticipated near-term needs. Should the need arise for
substantial amounts of additional storage facilities in the future, the Company
does not currently anticipate any material difficulties in obtaining sufficient
new storage facilities through purchase or lease at prevailing commercially
reasonable rates. The Company operates a fleet of more than 100 rail cars and
has long-term working relationships with a number of national barge lines and
tank truck carriers. See "Properties."
SALES AND MARKETING
The Company focuses on bulk quantity sales (generally not smaller than
truck load lots) of commodity chemicals to over 600 customers worldwide in a
broad range of industries. Product sourcing and marketing efforts are handled
principally by the Company's sales team of 39 full time employees. Individual
salespersons are assigned principal responsibility for specific supplier or
customer relationships and for specific products. In addition, each salesperson
is required to be familiar with all of the Company's products, suppliers and
customers. Therefore, the Company believes it is able to respond to customer
and supplier needs as well as to take advantage of changing market conditions
more effectively than its competitors.
JLM maintains offices in the U.S., Canada, the Netherlands, Venezuela
and Thailand and recently opened two affiliate offices in India and one in
Columbia. JLM also has an alliance with a distributor in Spain and operates
through agency relationships in Italy, Brazil, Peru and Taiwan. In addition,
the Company recently purchased a 25.0% interest in SK Asia, and has agreed to
purchase a 12.7% interest in SK Trading, two Singapore-based companies
participating in a Vietnamese joint venture. The Vietnamese joint venture
intends to construct a chemical plant in Vietnam that will produce dioctyl
phthlate, a chemical used in the production of plastics such as PVC. The
Vietnamese joint venture also intends to construct terminaling and storage
facilities in Vietnam and Malaysia.
10
<PAGE> 11
Approximately 2.7% and 2.2% of the Company's revenues in 1996 and 1997,
respectively, were from sales of specialty chemicals. Prices for specialty
chemicals are generally subject to smaller fluctuations than are those for
commodity chemicals and specialty chemical sales generally carry higher gross
margins. In establishing supply and distribution relationships in specialty
chemicals, the Company attempts to leverage existing relationships and
knowledge of the needs and objectives of both suppliers and customers.
The Company's position as a large volume marketer, combined with JLM's
knowledge of customer and supplier needs and objectives, affords it
opportunities to effect product exchanges. Engaging in product exchange
transactions allows the Company to solve customer or supplier problems and take
profitable advantage of identified market trends. The Company's ability to
engage in exchange transactions is enhanced by its terminal and storage
capabilities that also enable the Company to accumulate inventory to take
advantage of market trends.
In its olefins marketing activities, JLM focuses on the international
marketing of olefin petrochemical gases that require specialized shipping,
handling and storage. The Company's olefins marketing activities to date have
been largely trading oriented. However, the Company believes that its long-term
relationships with essential industry participants and its access to terminal
and storage facilities will enable the Company to become a large volume
marketer of olefins. The Company has long-term supply and sales contracts with
a number of major olefins producers and consumers in North America, South
America, Europe and Asia. For example, the Company has supply relationships
with Repsol and Copene-Petroquimica do Nordeste S.A. to source butadiene for
the U.S. and with UDS, Exxon and Lyondell Petrochemical Company to export
propylene from the U.S. Some of the Company's significant olefins customers
include DuPont, Exxon, GE and Goodyear.
COMPETITION
The Company operates in a highly competitive industry. Many of the
Company's competitors have significantly greater financial, production and
other resources than the Company. Many of the Company's competitors are large,
integrated chemical manufacturers, some of whom have their own basic raw
material resources. The Company competes to a lesser extent with certain
chemical distribution companies and chemical traders.
The Company competes in its marketing and distribution activities by
providing superior customer service. In the opinion of the Company, the key
elements of effective customer service include reliable and timely delivery of
products, satisfying customer needs for quality and quantity and competitive
pricing. The Company's long-term supplier relationships, terminal and storage
facilities, transportation capabilities and industry and product knowledge
support the Company's efforts to provide superior customer service. In
addition, the Blue Island Plant's Midwest location gives it significant freight
cost advantages in selling to its customers in the Midwest over its
competitors' production facilities located in the Southeast.
11
<PAGE> 12
EMPLOYEES
As of December 31, 1997, the Company and its consolidated
subsidiaries had approximately 161 full-time employees. Of these, 72 employees
were in management and administration, 39 in sales and marketing and 50 were in
production and distribution. Approximately 39 of the Company's domestic
employees at the Blue Island Plant are covered by a collective bargaining
agreement with the Oil, Chemical and Atomic Workers Union. This agreement
expires on October 31, 1998. The Company considers its relations with both its
union and non-union employees to be satisfactory.
ENVIRONMENTAL REGULATION
The Company and its operations are subject to federal, state, local
and foreign environmental laws, rules, regulations, and ordinances concerning
emissions to the air, discharges to surface and subsurface waters, and the
generation, handling, storage, transportation, treatment, disposal and import
and export of hazardous materials ("Environmental Laws"). Compliance with such
Environmental Laws may result in significant capital expenditures by the
Company. Moreover, under certain Environmental Laws, the Company may be liable
for remediation of contamination at certain of its current and former
properties. For example, under the Comprehensive Environmental Response,
Compensation and Liability Act of 1990, as amended ("CERCLA") and similar state
laws, the Company and prior owners and operators of the Company's properties may
be liable for the costs of removal or remediation of certain hazardous or toxic
materials on, under or emanating from the properties, regardless of their
knowledge of, or responsibility for, the presence of such materials. CERCLA and
similar state laws also impose liability for investigation, cleanup costs and
damage to natural resources on persons who dispose of or arrange for the
disposal of hazardous substances at third-party sites. In addition, under the
Resource Conservation and Recovery Act of 1976 ("RCRA"), the holder of a permit
to treat or store hazardous waste can be required to remediate environmental
pollution from solid waste management areas at the permitted facility regardless
of when the contamination occurred.
Although it is impossible to predict precisely what effect
Environmental Laws will have on the Company in the future, the Company
believes, based on past experience and Management's best assessment of future
events, that any environmental liabilities will be determined and incurred over
an extended period of time, allowing the Company to fund them through its
operating cash flow and mitigating their impact on the Company's results of
operations. Accordingly, the Company further believes that the effect of any
such environmental liabilities would not be material in relation to the
Company's consolidated financial position at December 31, 1996 and 1997.
Depending on future operating results, however, the environmental liabilities
to be recorded in a given annual or quarterly period may result in charges that
materially affect the Company's results of operations for that period.
Although elevated levels of certain petroleum-related substances,
organic chemicals and metals have been detected in groundwater and/or soils at
the Company's Wilmington, North Carolina terminal facilities, the Company
believes that the presence of such substances is the result of either
historical use prior to the Company's acquisition of the site from Union Oil
Company of California ("Unocal") in 1992 and/or migration from
12
<PAGE> 13
neighboring facilities (including an adjacent Superfund site that is currently
being remediated). Unocal, the prior owner of the site, is currently
implementing a state approved Remedial Action Plan ("RAP") to address onsite
petroleum contamination. The Company is not subject to any requirements under
the RAP and believes that the prior owner or the owners of the neighboring
properties bear responsibility for any additional remediation of
petroleum-related contaminants. Except for the ongoing remediation, no
significant cleanup activities have been conducted at the JLM Terminal since it
was acquired by the Company in 1992. Should remedial activities be conducted to
address contaminants that are not petroleum-related, the Company has
insufficient information regarding the types, concentrations, and possible
cleanup levels of onsite contaminants to reasonably estimate costs that may be
associated with such remediation. In addition, the Company may be entitled to
be indemnified for such costs under the 1992 Asset Purchase Agreement between
the Company and Unocal. Pursuant to indemnification provisions set forth in the
agreement, Unocal agreed to indemnify the Company up to $7.5 million for
environmental liabilities at the JLM Terminal. The Company believes that the
low levels of various organic compounds detected in soils and groundwater at
the Blue Island plant are the result of historical use of the site prior to its
acquisition by the Company in 1995 and/or migration from neighboring
facilities. The concentrations of some of these compounds exceed established
state groundwater standards and/or cleanup objectives. However, the Company
also believes that the likelihood of either state or federal environmental
regulatory agencies seeking remediation in the near term is low, based on the
location of the facility, the character of the area (each of which are factors
in assessing risk), and the fact that the site is pending removal from the
federal list of contaminated sites. To date, the Company has not been required
to plan, undertake, or fund any remedial activities.
Levels of organic compounds slightly in excess of regulatory reporting
thresholds were detected in groundwater at the Polychem plant owned by the
Company. The Company has been addressing the problem, and recent analytical
results show that the levels of contaminants have decreased to acceptable
levels. Accordingly, the Company has requested that state authorities permit
closure of the remediation at the site.
The Company does not believe that a material amount of funds will be
required to complete remediation at any site.
ITEM 2. PROPERTIES:
The following table sets forth certain information as of December 31,
1997, relating to the Company's principal facilities:
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY PRINCIPAL ACTIVITIES; LOCATION SQUARE FEET OWNED/LEASED
- -------- ------------------------------ ----------- ------------
<S> <C> <C> <C>
Corporate Headquarters Administration Headquarters; 25,000 Owned
Tampa, Florida
Blue Island Plant Manufacturing; 958,000 Owned
Blue Island, Illinois
OTC Terminal Terminaling and Storage; 104,000 Co-owned
Houston, Texas
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C> <C>
JLM Terminal Terminaling and Storage; 609,000 Owned
Wilmington, North Carolina
North America Sales Offices Blue Island, Illinois * Owned
Houston, Texas * Leased
Wilmington, North Carolina * Owned
Toronto, Canada * Leased
International Sales Offices Rotterdam, Netherlands * Leased
Caracas, Venezuela * Leased
Maracaibo, Venezuela * Leased
Valencia, Venezuela * Leased
Bogota, Colombia * Leased
Singapore * Leased
Bangalore, India * Leased
JLM Realty Wilmington, North Carolina * Owned
</TABLE>
- --------------
* Less than 25,000 square feet
ITEM 3. LEGAL PROCEEDINGS:
The Company is not a party to any legal proceedings, other than claims
and lawsuits arising in the normal course of 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. See Note 12 to
Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS:
The Company's common stock trades on the NASDAQ National Market under
the symbol "JLMI." The following table sets forth the quarterly high and low
trade prices of JLM's common stock during 1997 on the NASDAQ National Market
beginning July 24, 1997, the first day of public trading:
<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
Third quarter $13.50 $9.00
Fourth quarter 12.75 9.50
</TABLE>
As of March 20, 1998, there were 47 stockholders of record.
The Company has not paid cash 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
14
<PAGE> 15
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 law 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.
In the fourth quarter of 1997, the Company utilized $400,000 of the
then remaining $2.8 million of net proceeds from the Company's initial public
offering consummated in July 1997 to purchase certain real property located in
close proximity to the Company's Wilington, North Carolina terminal facility.
The remaining $2.4 of net proceeds is currently being used to supplement general
corporate purposes and working capital.
ITEM 6. SELECTED FINANCIAL INFORMATION:
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $ 174,322 $ 218,570 $289,371 $236,521 $286,822
Gross profit 9,132 11,663 23,910 28,239 30,792
Operating income 1,956 2,383 8,734 11,001 13,903
Income from continuing operations before
discontinued operations and
extraordinary item $ 1,157 $ 1,109 $ 3,629 $ 4,357 $ 7,091
BASIC INCOME PER SHARE:
Income from continuing operations before
discontinued operations and
extraordinary item $ 0.23 $ 0.22 $ 0.72 $ 0.89 $ 1.23
========= ========= ======== ======== ========
Net income per share $ 0.17 $ 0.20 $ 0.63 $ 0.80 $ 1.13
========= ========= ======== ======== ========
DILUTED INCOME PER SHARE:
Income from continuing operations before
discontinued operations and
extraordinary item $ 0.23 $ 0.22 $ 0.72 $ 0.89 $ 1.22
========= ========= ======== ======== ========
Net income per share $ 0.17 $ 0.20 $ 0.63 $ 0.80 $ 1.12
========= ========= ======== ======== ========
Basic weighted average shares outstanding 5,011 5,011 5,011 4,878 5,753
Diluted weighted average shares outstanding 5,011 5,011 5,011 4,878 5,790
Pro forma basic income per share from
continuing operations before discontinued
operations and extraordinary item (1) $ 0.16 $ 0.15 $ 0.49 $ 0.60 $ 1.00
Pro forma diluted shares outstanding (1) 7,361 7,361 7,361 7,227 7,099
OTHER FINANCIAL DATA:
Depreciation and amortization $ 352 $ 572 $ 1,522 $ 2,524 $ 2,947
EBITDA (2) 2,308 2,955 10,256 13,525 16,850
BALANCE SHEET DATA:
Working Capital (deficit) $ 1,047 $ 1,498 $ (274) $ (966) $ 13,275
Total assets 35,945 55,031 86,498 86,387 83,561
Total debt 5,182 6,561 23,204 31,043 5,964
Total stockholders' equity 6,462 7,411 10,519 13,444 38,821
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C> <C>
CASH FLOW INFORMATION:
Operating activities $ 3,487 $ 6,064 $ 2,746 $ 26 $ 8,603
Investing activities (3,229) (1,218) (4,661) (6,631) (3,176)
Financing activities (2,086) 85 (469) 6,705 (5,012)
Capital expenditures 3,161 1,221 2,320 7,347 2,875
</TABLE>
(1) The weighted average number of shares outstanding has been adjusted to
include the 2,156,000 shares issued during the Company's initial public
offering, the 190,000 shares purchased by the Underwriters of the
Company's initial public offering to cover over-allotments and 3,415 shares
purchased by employees of the Company under the Company's employee stock
purchase plan.
(2) EBITDA represents the operating income of the Company plus depreciation
and amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles ("GAAP") and may not be comparable
to other similarly titled measures by other companies. EBITDA does not
represent net income or cash flows from operations as defined by GAAP and
does not necessarily indicate that cash flows will be sufficient to fund
cash needs. As a result, EBITDA should not be considered an alternative
to net income as an indicator of operating performance or to cash flows as
a measure of liquidity. EBITDA is included because it is a basis upon which
the Company assesses its financial performance.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION:
The following discussion should be read in conjunction with
"Selected Consolidated Financial Information" and the Consolidated Financial
Statements of the Company and the Notes thereto included in this Annual Report.
In particular, for information regarding the Company's operations in different
industry segments and geographic locations see Note 21 of Notes to Consolidated
Financial Statements.
GENERAL
JLM is a leading marketer and distributor 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. JLM is also a global distributor of olefins, principally
propylene, as well as a variety of other commodity and specialty chemicals. In
order to provide stable and reliable sources of supply for its products, the
Company (i) maintains long-established supplier relationships with several major
chemical companies, (ii) manufactures phenol and acetone and (iii) sources
acetone from its joint venture manufacturing operation. JLM's operating income
has grown from $8.7 million in 1995 to $13.9 million in 1997, a compound annual
growth rate of 16.9%. This growth was achieved primarily as a result of the
acquisition and successful integration of the Blue Island Plant, increased sales
of existing products and the addition of new products.
A majority of the Company's revenue is derived from the sale of
commodity chemicals, prices for which are subject to cyclical fluctuations. The
Company endeavors to enter into supply contracts that provide a fixed percentage
profit per unit of product sold. As a result, the Company believes that revenues
may not be an accurate indicator of the Company's overall financial performance.
Rather, revenues should be considered along with operating income and net income
to accurately measure the Company's financial performance. For example as
average acetone, phenol and propylene selling prices declined from 1995 to 1996,
the Company's revenues declined by approximately 18.3% over the same period.
However, in 1996 operating income and net income increased 26.0% and 23.5%,
respectively, in comparison to the prior year's results.
16
<PAGE> 17
The Company's business consists of a manufacturing and a marketing
segment. The Company's manufacturing segment includes the operations of the Blue
Island Plant and the sale of acetone manufactured at the Mt. Vernon Phenol
Plant. The Company's marketing segment includes its distribution, storage and
terminaling operations and all other sourcing operations.
Set forth below, for the periods indicated, is certain information
regarding the contributions by the marketing and manufacturing segments to the
Company's revenues, gross profit, operating income, gross margin and operating
margin. The marketing segment revenues include an assumed selling commission
determined in accordance with industry standards for the sale of products that
are manufactured at the Blue Island Plant. In addition, the marketing segment
operating income reflects the expenses associated with the sale of such
products. 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 Plant, which allocation has been determined on a basis
consistent with the assumed commission for sale of products manufactured at the
Blue Island Plant. Results for any one or more periods are not necessarily
indicative of annual results or continuing trends.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
1995 1996 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Marketing $229,505 79.3% $176,274 74.5% $221,301 77.2%
Manufacturing 59,866 20.7 60,247 25.5 65,521 22.8
-------- ----- -------- ----- -------- -----
Total revenues $289,371 100.0% $236,521 100.0% $286,822 100.0%
======== ===== ======== ===== ======== =====
Gross profit:
Marketing $ 14,154 59.2% $ 15,241 54.0% $ 14,326 46.5%
Manufacturing 9,756 40.8 12,998 46.0 16,466 53.5
-------- ----- -------- ----- -------- -----
Total gross profit $ 23,910 100.0% $ 28,239 100.0% $ 30,792 100.0%
======== ===== ======== ===== ======== =====
Segment operating profit:
Marketing $ 5,186 45.7% $ 5,011 39.8% $ 5,407 33.5%
Manufacturing 6,164 54.3 7,586 60.2 10,753 66.5
-------- ----- -------- ----- -------- ------
Total segment operating
income 11,350 100.0% 12,597 100.0% 16,160 100.0%
Corporate expense (2,616) - (1,596) - (2,257) -
-------- ----- -------- ----- --------- -----
Total operating income $ 8,734 100.0% $ 11,001 100.0% $ 13,903 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
17
<PAGE> 18
AS A PERCENTAGE OF SEGMENT REVENUES
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Gross margin:
Marketing 6.2% 8.6% 6.5%
Manufacturing 16.3 21.6 25.1
---- ---- ----
Total gross margin 8.3% 11.9% 10.7%
Segment operating margin:
Marketing 2.3% 2.8% 2.4%
Manufacturing 10.3 12.6 16.4
----- ---- ----
Total segment operating
margin 3.9% 5.3% 5.63%
</TABLE>
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 growth in the homebuilding and
automobile sectors and the overall economic environment. The Company's 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.
In 1995, the Company instituted changes in its shipping and handling of
olefins in order to increase its olefins marketing gross profit margins.
Specifically, the Company now attempts to secure free on board ("FOB") shipping
terms for its bulk commodity sales and, when unable to do so, attempts to
negotiate extended free time for unloading vessels at the port of destination.
By doing so, the Company has reduced the risks of incurring charges for delays
in unloading vessels at the port of destination. In 1995, as a result of the
implementation of these changes, the Company experienced lower revenues, but
improved gross margins, from its olefins marketing activities.
In May 1997, the Company and its joint venture partners agreed to
restructure their investments in OTC. As a result, the Company and UDS bought
out the interest of a third joint venture partner and each became a 50% owner of
OTC. The Company accounts for its investment in OTC through the equity method of
accounting. (See Note 5 of Notes to Consolidated Financial Statements). As part
of the restructuring, OTC's $3.6 million of existing indebtedness was refinanced
and the take-or-pay terminaling agreement between OTC and the Company's olefins
marketing operations was cancelled and a new terminaling arrangement was
implemented. The original take-or-pay terminaling agreement resulted in charges
to JLM's pre-tax income of $1.3 million in 1994, $1.3 million in 1995, and $1.4
million in 1996, and the Company did not generate significant revenues at the
terminaling facility to offset these charges. Under the new arrangement,
effective as of January 1, 1997, the Company will pay terminal throughput fees
only when it utilizes the terminaling facility
18
<PAGE> 19
thus generating offsetting revenues. The Company expects that this arrangement
should improve the Company's gross profit potential (as compared to historical
results) because the Company will no longer be required to incur terminal fees
without accompanying revenues.
The Company's Venezuelan operations, which accounted for 3.4% of 1997
total revenues, exposes it to the risk of hyperinflation and currency
devaluation. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, Foreign Currency Translation, the effects of fluctuations in
exchange rates in translating the net assets of the financial statements in a
hyperinflationary economy require any gains or losses to be included in current
net income. During the period 1994 through April 1996, exchange controls imposed
by the Venezuelan government, followed by rapid devaluation, created
translation losses that were charged against earnings in each of the respective
accounting periods. In April 1996, exchange controls were lifted and have
contributed to stabilizing the currency.
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. As a result of an
anticipated propylene price increase, in 1996 the Company entered into a
financial hedging contract in order to minimize its exposure in the first
quarter of 1997 to fluctuations in the price of propylene. Gains and losses for
such contracts are recognized as an adjustment of cost of sales at the time the
finished products are sold. As a result, in the first quarter of 1997 the
Company had a gain on the hedging contract of approximately $500,000, which
reduced cost of sales for this period by a corresponding amount.
The development of financial instruments to hedge against changes in the
prices of propylene and benzene has only recently occurred and the Company has
just begun using such instruments. 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 (see Note 2 of Notes to Consolidated Financial Statements). There
can be no assurance 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.
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,
it would be necessary to increase its capacity to that of a worldscale facility.
However, physical limitations at the Blue Island Plant prohibit such an increase
and, as a result, the Company has no plans to expand the Blue Island Plant. In
1997, the second full year of ownership of the Blue Island Plant, approximately
71.0% of the Company's total segment operating income was derived from the
manufacturing segment.
19
<PAGE> 20
Since 1994, the Company has sourced, on average, approximately 250
million pounds annually of acetone from the Mt. Vernon Plant. The Company is
required to purchase all of the acetone produced at the Mt. Vernon Plant and not
consumed by GE Plastics. In 1996, the amount of acetone available to JLM was
reduced by approximately 15 million pounds and it is anticipated that over the
next four years the amount of acetone available to JLM will be further reduced
by approximately 35 to 40 million pounds. The reduction in the amount of acetone
sourced from the Mt. Vernon Plant is the result of increased consumption by GE
Plastics. In view of capacity limitations affecting the Blue Island Plant and
the anticipated reduction in product sourced from the Mt. Vernon Plant, the
Company anticipates any growth in the manufacturing segment will come as a
result of additional acquisitions or joint ventures.
TAX MATTERS
JLM accounts for income taxes on a consolidated basis and accrues for
tax liabilities based on its U.S. earnings. The Company's foreign subsidiaries
file tax returns in the country where incorporated. To the extent these
subsidiaries are profitable, taxes are payable based on that country's
prevailing tax rate. Upon repatriation of non-U.S. earnings, the U.S. allows a
foreign tax credit 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 Venezuelan operation has incurred
losses which have generated net operating loss carryforwards ("NOL's") and,
based on Venezuelan tax regulations, these NOL's may be carried forward for
three years. In addition, the Company's Holland operation has incurred losses
which have generated NOL carryforwards and, based on Netherlands' tax
regulations, these NOL's may be carried forward indefinitely. However, these
foreign losses are not deductible for U.S. federal income tax purposes and as a
result cannot be offset against U.S. pre-tax profits.
In an effort to reduce its U.S. federal and state income tax liability,
in 1994 the Company established a foreign sales corporation ("FSC"). Under the
Internal Revenue Code, FSCs are granted tax incentives for exporting U.S.
produced goods overseas, and as such, there are specific tax benefits to the
Company for the products it exports. If specific conditions are met under the
Internal Revenue Code, up to 65.0% of the commission income earned by the FSC
from these export transactions may be exempted from U.S. taxation. Since the
formation of the FSC, the Company has met these requirements, thereby reducing
its taxable income.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased $50.3 million to $286.8 million for the
year ended December 31, 1997 from $236.5 million for the prior year, an increase
of 21.3%. Revenues for the marketing segment increased $45.0 million to $221.3
million for the year ended December 31, 1997 from $176.3 million for the prior
year, an increase of 25.5%. The increase in marketing revenues was generally
the result of increased sales in the Company's
20
<PAGE> 21
Olefins division, principally propylene, between Latin America and Europe during
the second half of 1997 and between United States and the Far East during the
first half of 1997. Revenues for the manufacturing segment increased $5.3
million to $65.5 million for the year ended December 31, 1997, from $60.2
million for the prior year, an increase of 8.8%. The increase in manufacturing
segment revenues was primarily due to an increase in overall acetone sales
volumes and an increase in phenol selling prices both of which were partially
offset by a decrease in the average selling price of acetone.
Gross Profit. Gross profit increased $2.6 million to $30.8 million for
the year ended December 31, 1997 from $28.2 million for the prior year, an
increase of 9.2%. As a percentage of revenues, total gross profit was 10.7% in
1997 compared to 11.9% for the prior year. This decrease is due to lower
margins from the Company's Olefins division (principally propylene) that had
higher sales volumes in the current year as noted above which was partially
offset by the full-year contribution of higher margin products from the Blue
Island Plant. Gross profit for the marketing segment decreased $0.9 million to
$14.3 million for the year ended December 31, 1997, from $15.2 million for the
prior year, a decrease of 5.9%. This decrease was principally the result of
higher sales in the Olefins division with lower margins than the other marketing
products. The Company's overall gross margin would have been 12.8% and 13.81%
during the years ended 1997 and 1996 had there been no propylene in the product
mix. Gross profit for the manufacturing segment increased $3.5 million to $16.5
million for the year ended December 31, 1997 from $13.0 million for the prior
year, an increase of 26.9%. The increase in total gross profit was principally
the result of favorable prices in certain raw material costs, increases in the
selling prices for phenol, reductions in manufacturing costs associated with the
successful implementation of the QMAX technology in the production of cumene at
the Blue Island Plant and a reduction in raw material costs resulting from a
successful hedge of its propylene purchases. During the first quarter of 1997,
approximately 13 million pounds of propylene purchases were covered by a fixed
financial hedge for which the Company had a gain of $492,970 which reduced its
cost of sales for this period by a corresponding amount. The reduction in cost
of sales resulting from the propylene hedge was partially offset by an increase
in the cost of benzene, which the Company elected not to hedge. Gross profit in
both the manufacturing and marketing segments was also adversely impacted by
decreases in acetone selling prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.3 million to $16.9 million for the year
ended December 31, 1997 from $17.2 million for the prior year, a decrease of
1.7%. During the year ended December 31, 1997, depreciation and amortization
expense increased due to capital improvements in the fourth quarter of 1996
related principally to the QMAX technology and to the depreciation from the
additional storage tanks built in July 1997 at the Company's terminaling
facility. This increase was offset by reductions in various selling, general
and administrative expenses in the Company's foreign operations.
Operating Income. Operating income increased $2.9 million to $13.9
million for the year ended December 31, 1997 from $11.0 million for the
prior year an increase of 26.4%. The increase was principally the result of the
increase in gross profit, and by the decrease in selling, general and
administrative expenses mentioned above.
21
<PAGE> 22
Interest Expense - Net. Interest expense decreased $0.7 million to $2.1
million for the year ended December 31, 1997 from $2.8 million for the prior
year, a decrease of 25%. This decrease is principally due to the Company's
early retirement of debt in August of 1997 with funds received from the
Company's initial public offering.
Foreign Currency Exchange (Loss) Gain. The results from foreign
currency exchange increased $0.6 million to a gain of $0.1 million for the year
ended December 31, 1997 from a loss of $0.5 million for the prior year.
Substantially all of these losses in 1996 were the result of the Company's
activities in Venezuela. In December 1995, the Company began using the market
rate, in accordance with SFAS No. 52, to recognize foreign currency exchange
gains and losses for its Venezuelan subsidiary rather than using the official
Venezuelan rate. During the first quarter of 1996, the market rate for U.S.
dollars rose from 350 to 470 bolivars per dollar, at which time it stabilized
for the remainder of 1996. In 1997, the bolivars' rate per U.S. dollar rose by
only 25 bolivars per U.S. dollar.
Income Tax Provision. The Company's provision for income taxes
increased $0.8 million to $3.9 million for the year ended December 31, 1997 from
$3.1 million for the prior year, an increase of 25.8%. The effective tax rate
for 1996 was significantly higher than that of the current year due to the
increased proportion of Venezuelan pre-tax loss in 1996 compared to 1997 for
which no tax benefit was recorded. The Company's Venezuelan operations have not
recorded any income tax benefit in 1996 and 1997 due to the uncertainty of
utilizing the income tax loss carryforwards. Excluding Venezuelan operations,
the effective tax rate for the year ended December 31, 1997 would have been
approximately 36.1% compared to the effective tax rate for the year ended
December 31, 1996 of 38.3%. 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 which has an effective tax rate of 11.8%.
Net Income. Net income increased $2.6 million to $6.5 million for the
year ended December 31, 1997 from $3.9 million for the prior year, an
increase of 66.7%, principally due to the factors discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues decreased $52.9 million to $236.5 million for the
year ended December 31, 1996 from $289.4 million for the prior year, a decrease
of 18.3%. Revenues for the marketing segment decreased $53.2 million to $176.3
million for the year ended December 31, 1996 from $229.5 million for the prior
year, a decrease of 23.2%. Substantially all of the decrease was a result of
changes made by the Company in its olefins marketing strategy to reduce its
exposure to shipping and handling charges. To a lesser extent, the decrease was
also attributable to a decrease of $12.9 million in opportunistic sales of
certain products in 1995 that did not recur in 1996 and a decrease in revenues
of $6.8 million from Venezuelan operations primarily as a result of the
devaluation of the local currency. These decreases more than offset the increase
in revenues of $9.0 million from a full year of the Company's European
operations in 1996 as compared to nine months in 1995. Revenues for the
manufacturing segment increased $0.3 million to $60.2 million for the year
ended December 31, 1996, from $59.9 million for the prior year, an increase of
22
<PAGE> 23
0.6%. This increase was principally the result of a decline in sale of acetone
from the Mt. Vernon Plant which was offset by the $17.8 million increase in
sales resulting from a full year of the Blue Island Plant's operations in 1996
compared to seven months in 1995.
Gross Profit. Gross profit increased $4.3 million to $28.2 million for
the year ended December 31, 1996 from $23.9 million for the prior year, an
increase of 18.1%. As a percentage of revenues, total gross profit increased to
11.9% in 1996 compared to 8.3% for the prior year, primarily due to the
full-year contribution of higher gross margin products from the Blue Island
Plant and higher distribution margins. Gross profit for the marketing segment
increased $1.0 million to $15.2 million for the year ended December 31, 1996,
from $14.2 million for the prior year, an increase of 7.7%. Despite generally
lower selling prices on many products, margins were significantly higher in 1996
as compared to the prior year principally as a result of the exercise by the
Company of its options on certain acetone sales contracts. Gross profit for the
manufacturing segment increased $3.2 million to $13.0 million for the year ended
December 31, 1996 from $9.8 million for the prior year, an increase of 33.2%,
primarily as a result of including a full year of operations of the Blue Island
Plant which generally carry higher gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.0 million to $17.2 million for the year
ended December 31, 1996 from $15.2 million for the prior year, an increase of
13.2%. The increase was primarily the result of including a full year of
operations of the Blue Island Plant. To a lesser extent, the marketing segment
experienced increased distribution costs in 1996 as compared to 1995, which more
than offset reduced compensation costs for this period.
Operating Income. Operating income increased $2.3 million to $11.0
million for the year ended December 31, 1996 from $8.7 million for the prior
year an increase of 26.4%. The increase was principally the result of the
increase in gross profit, which was partially offset by the increase in selling,
general and administrative expenses.
Interest Expense - Net. Interest expense increased $1.0 million to $2.8
million for the year ended December 31, 1996 from $1.8 million for the prior
year principally due to the additional interest expense associated with the
inclusion of the Blue Island Plant for the full year and to a lesser extent to
increased borrowings used to fund working capital requirements associated with
the Company's marketing segment.
Foreign Currency Exchange (Loss) Gain. Foreign currency exchange
decreased $0.6 million to a loss of $0.5 million for the year ended December 31,
1996 from a loss of $1.1 million for the prior year. Substantially all of these
losses were the result of the Company's activities in Venezuela. In December
1995, the Company began using the market rate, in accordance with SFAS No. 52,
to recognize foreign currency exchange gains and losses for its Venezuelan
subsidiary rather than using the official Venezuelan rate. The effect of using
the market rate resulted in an additional $0.4 million foreign exchange loss
during 1995. During the first quarter of 1996, the market rate for U.S. dollars
rose from 350 to 470 bolivars per dollar, at which time it stabilized for the
remainder of 1996.
Income Tax Provision. The Company's provision for income taxes
increased $1.0 million to $3.1 million for the year ended December 31, 1996 from
$2.1 million for the
23
<PAGE> 24
prior year, an increase of 47.6%, principally as a result of the Company's
inability to apply $1.2 million of pre-tax losses from its Venezuelan operations
to reduce its U.S. taxable income. The Company's effective income tax rate
increased to 44.4% for 1996 as compared to 40.1% for 1995.
Net Income. Net income increased $0.7 million to $3.9 million for the
year ended December 31, 1996 from $3.2 million for the prior year, an increase
of 21.9%, principally as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased by approximately
$8.6 million to $8.6 million for the year ended December 31, 1997 as compared to
the same period of 1996. This increase was due primarily to increases in the
Company's working capital generated from higher net income for the period. Net
cash used in investing activities decreased by approximately $3.4 million to
$3.2 million for the year ended period December 31, 1997 compared to
approximately $6.6 million during the same period in 1996. This decrease was
due primarily to lower capital expenditures and higher proceeds from the sale of
assets held for sale from the Company's discontinued operations partially offset
by an increase of $2 million in investments. The Company's cash from financing
activities decreased by approximately $11.7 million to a net cash used in
financing activities of approximately $5.0 million during the year ended
December 31, 1997 compared to cash provided by financing activities of
approximately $6.7 million during the same period in 1996. The decrease was due
primarily to the repayment of approximately $17.6 million in long-term debt from
funds received from the Company's initial public offering of $20.9 million, net
of stock issuance costs. Additionally, the Company repaid approximately $8.0
million of loans payable in 1997 as compared to proceeds from loans payable of
$6.2 million during the same period in 1996.
During 1997, the Company raised approximately $21.8 million through an
initial public offering of its common stock. In August 1997, approximately
$14.0 million was used to repay certain outstanding indebtedness. During
December 1997, the Company renegotiated one of its line of credit agreements
whereby the Company increased the line by $19.0 million to $30.0 million. After
the repayment of such indebtedness and the renegotiated line of credit, the
Company now has a total borrowing capacity of approximately $72.1 million. The
Company believes that the remaining funds available from this public offering,
cash flow generated by operations, existing cash and the Company's borrowing
capacity, are sufficient to meet the Company's business strategies through 1998.
In July 1997, the Company completed the construction of an additional
storage tank at the JLM Terminal. The new storage tank increased JLM's current
storage capacity at the JLM Terminal by 3 million pounds. Costs associated with
the evaluation, planning, design and construction of the tanks was funded out of
working capital.
In April 1997, the Company entered into an agreement to purchase a 12.7%
interest in SK Chemical Trading Pte. Ltd. The agreement provides that upon
commencing construction of a chemical plant in Vietnam, the Company is required
to pay an additional
24
<PAGE> 25
$0.5 million as additional consideration for its ownership interest in SK
Chemical Trading Pte. Ltd. The Company expects to fund this payment through the
Company's current credit facilities.
In February 1998, the Company signed a non-binding letter of intent to
purchase all of the assets of Browning Chemical Company ("Browning") for $9.5
million of which $7.5 million will be paid in cash and the remaining $2.0
million will be evidenced by a promissory note payable in equal installments
over four years. Browning is a leading distributor of inorganic chemicals
throughout the United States. It is expected that the purchase will be
consummated March 31, 1998 provided, however, the consummation of the purchase
is subject to, among other things, negotiation and execution of a definitive
agreement.
On February 20, 1998, the Company entered into a non-binding agreement
to purchase 50.1% of the outstanding stock of Inquinosa S.A. ("Inquinosa"). The
purchase price will be determined based upon earnings over a five-year period as
defined in the agreement. The consummation of the purchase is subject to, among
other things, negotiation and execution of a definitive agreement. Inquinosa is
a leading marketer of lindane throughout the world.
On March 2, 1998, the Company signed a non-binding letter of intent to
acquire 100% of the outstanding stock of Tolson Holding B.V. ("Tolson"), for
approximately $5.7 million. The purchase will require the Company to make a
$2.9 million cash down payment and execute a $2.8 million note payable due in
five equal installments with interest accruing at the six month LIBOR rate and a
$750,000 balloon payment. However, pursuant to the terms of the letter of
intent, the purchase price may be subject to certain adjustments, which
adjustments could partially or completely offset the cash purchase price. The
consummation of the purchase is subject to, among other things, negotiation and
execution of a definitive agreement. Tolson is a Dutch global distributor and
trader of methanol, solvents, aromatics and olefins.
On March 10, 1998, the Company executed a long-term purchase agreement
with Solutia, Inc. ("Solutia") for a phenol plant to be built on the Gulf Coast
of the United States. Under terms of the agreement, the Company will advance
over three years $35 million to Solutia as a partial prepayment for future
inventory purchases. The prepayment will be paid as follows: $5 million on
December 31, 1998, $6.5 million in 1999 and the remaining balance in 2000. In
return, Solutia will sell up to the greater of 125 million pounds of phenol per
year, or 31% of the phenol produced by the plant per year, to JLM for 15 years
at a specified price outlined in the agreement with a credit on a per pound
basis for the advance payments mentioned above. Construction of the plant is
anticipated to commence in the beginning of 1999 and phenol production is
anticipated to begin at the plant in the fourth quarter of 2000.
The Company expects capital expenditures for its manufacturing and
terminaling facilities to be approximately $1.2 million for each of the years
1998, 1999 and 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, 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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report 26
Consolidated Balance Sheets - December 31, 1996 and 1997 27
Consolidated Statements of Income - Years Ended December 31, 1995,
1996 and 1997 28
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1995, 1996 and 1997 29
Consolidated Statements of Cash Flows - Years Ended December 31,
1995, 1996 and 1997 30
Notes to Consolidated Financial Statements 31
CONSOLIDATED SUPPLEMENTAL SCHEDULE
Independent Auditors' Report 47
Supplemental Schedule 48
</TABLE>
25
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
JLM Industries, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of JLM Industries,
Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
of cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position JLM Industries, Inc. and
subsidiaries as of December 31, 1996 and 1997 and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
February 25, 1998
(March 10, 1998 as to the third and
fourth paragraphs of Note 22)
26
<PAGE> 27
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,792,473 $ 5,214,197
Accounts Receivable:
Trade 25,721,911 26,457,677
Other 1,864,084 3,012,975
Inventories 13,283,576 11,880,961
Prepaid expenses and other current assets 3,699,913 2,278,224
Assets held for sale 1,924,394 203,009
----------- ------------
Total current assets 51,286,351 49,047,043
Other investments 1,881,066 3,436,976
Note receivable from Olefins Terminal Corporation 2,320,313 -
Property and equipment, net 29,368,360 29,505,011
Other assets 1,530,565 1,571,541
----------- ------------
Total assets $86,386,655 $ 83,560,571
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $39,590,106 $ 34,474,758
Current portion of long-term debt 3,962,385 789,277
Loans payable 8,366,520 379,034
Income taxes payable 33,322 129,161
Deferred revenue 300,475 -
----------- ------------
Total current liabilities 52,252,808 35,772,230
Long-term debt less current portion 17,808,872 4,795,895
Deferred income taxes 2,538,980 3,949,910
Minority Interest 137,802 -
Other liabilities 203,761 221,747
----------- ------------
Total liabilities 72,942,223 44,739,782
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Preferred stock - authorized 5,000,000 shares;
0 shares issued and outstanding - -
Common stock - $.01 par value. Authorized
30,000,000 shares; issued and outstanding
5,011,200 shares and 7,105,101, respectively 50,112 71,051
Additional paid-in capital 489,888 21,074,912
Retained earnings 13,467,898 17,709,397
Foreign currency translation adjustment (41,266) (34,571)
----------- ------------
13,966,632 38,820,789
Less treasury stock at cost - 267,264 shares (522,200) -
----------- ------------
Total stockholders' equity 13,444,432 38,820,789
----------- ------------
Total liabilities and stockholders' equity $86,386,655 $ 83,560,571
=========== ============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $289,370,945 $236,521,183 $286,822,166
Cost of sales 265,460,931 208,281,667 256,030,337
------------ ------------ ------------
Gross profit 23,910,014 28,239,516 30,791,829
Selling, general and administrative expenses 15,175,815 17,237,736 16,889,268
------------ ------------ ------------
Operating income 8,734,199 11,001,780 13,902,561
Interest expense - net (1,757,326) (2,814,667) (2,082,986)
Other income (expense) - net 152,320 196,896 (583,409)
Foreign currency exchange (loss) gain - net (1,074,974) (527,652) 83,852
------------ ------------ ------------
Income before minority interest and income
taxes 6,054,219 7,856,357 11,320,018
Minority interest in loss (income) of
subsidiaries 4,670 (82,103) 61,878
------------ ------------ ------------
Income from continuing operations before
income taxes, discontinued operations and
extraordinary item 6,058,889 7,774,254 11,381,896
------------ ------------ ------------
Income tax provision:
Current 2,093,004 2,073,586 2,880,263
Deferred 336,793 1,343,849 1,410,930
------------ ------------ ------------
Total income tax provision 2,429,797 3,417,435 4,291,193
------------ ------------ ------------
Income from continuing operations before
discontinued operations and extraordinary item 3,629,092 4,356,819 7,090,703
Discontinued operations:
Loss from operations of discontinued
operations (net of income tax benefit of
$217,000, $279,000 and $121,400,respectively) (325,728) (419,215) (182,053)
Loss on disposal of discontinued operations
(net of income tax benefit of $81,000,
$4,000 and $19,400, respectively) (121,574) (9,050) (29,054)
------------ ------------ ------------
Income before extraordinary item 3,181,790 3,928,554 6,879,596
Extraordinary loss on extinguishment of debt
(net of income tax benefit of $257,000) - - (385,842)
------------ ------------ ------------
Net income $ 3,181,790 $ 3,928,554 $ 6,493,754
============ ============ ============
Basic income per share:
Income from continuing operations before
discontinued operations and extraordinary item $ 0.72 $ 0.89 $ 1.23
============ ============ ============
Net income $ 0.63 $ 0.80 $ 1.13
============ ============ ============
Diluted income per share:
Income from continuing operations before
discontinued operations and extraordinary item $ 0.72 $ 0.89 $ 1.22
============ ============ ============
Net income $ 0.63 $ 0.80 $ 1.12
============ ============ ============
Weighted average shares outstanding 5,011,200 4,877,568 5,752,579
Diluted weighted average shares outstanding 5,011,200 4,877,568 5,789,988
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
JLM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Foreign
Additional Currency
Preferred Common Paid-in Retained Translation Treasury Stockholders'
Stock Stock Capital Earnings Adjustments Stock Equity
----- ----- ------- -------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ - $ 50,112 $ 489,888 $ 6,967,472 $ (96,486) $ - $ 7,410,986
Stockholder distributions - - - (147,080) - - (147,080)
Net income - - - 3,181,790 - - 3,181,790
Currency translation
adjustment - - - - 73,677 - 73,677
------- --------- ----------- ----------- --------- --------- -------------
Balance at December 31, 1995 - 50,112 489,888 10,002,182 (22,809) - 10,519,373
Stockholder distributions - - - (462,838) - - (462,838)
Net income - - - 3,928,554 - - 3,928,554
Foreign currency
translation adjustment - - - - (18,457) - (18,457)
Purchase of treasury
shares - - - - - (522,200) (522,200)
------- --------- ----------- ----------- --------- ---------- -------------
Balance at December 31, 1996 - 50,112 489,888 13,467,898 (41,266) (522,200) 13,444,432
Stockholer distributions - - - (1,732,728) - - (1,732,728)
Retirement of treasury shares - (2,673) - (519,527) - 522,200 -
Proceeds from sale of stock - 23,495 21,823,334 - - - 21,846,829
Stock issuance costs - - (1,238,193) - - - (1,238,193)
Issuance of restricted
stock - 117 (117) - - - -
Net income - - - 6,493,754 - - 6,493,754
Foreign currency
translation adjustment - - - - 6,695 - 6,695
------- --------- ----------- ----------- --------- --------- -------------
Balance at December 31, 1997 $ - $ 71,051 $21,074,912 $17,709,397 $ (34,571) $ - $ 38,820,789
======= ========= =========== =========== ========= ========= =============
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,181,790 $ 3,928,554 $ 6,493,754
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes 336,793 1,343,849 1,410,930
Minority interest in (loss) income of subsidiaries (172,950) 82,103 (61,878)
Loss on disposal of assets 177,942 379,067 119,712
Loss on disposal of discontinued operations 121,574 9,050 29,054
Depreciation and amortization 1,522,282 2,524,187 2,947,163
Loss from partnerships 41,697 48,000 48,000
(Income) loss from investment in Olefins Terminal
Corporation - net (82,500) 55,169 830,482
Non-cash management fee and interest income from Olefins
Terminal Corporation (297,706) (334,578) (133,818)
Allowance for doubtful accounts 44,537 383,662 94,039
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (3,720,019) 4,081,252 (1,978,696)
(Increase) decrease in inventories (6,703,960) 510,593 1,402,615
(Increase) decrease in prepaid expenses and other
current assets (397,739) (1,774,891) 1,136,145
Decrease in income tax receivable 396,334 - -
(Increase) decrease in assets held for sale (2,476,594) 1,101,250 -
Increase in other assets (33,351) (906,048) (390,313)
Increase (decrease) in accounts payable and accrued
expenses 10,642,880 (11,345,206) (3,157,191)
Increase (decrease) in income taxes payable 78,740 (322,759) 95,839
Increase (decrease) in deferred revenue 20,400 280,075 (300,475)
Increase (decrease) in other liabilities 65,627 (16,927) 17,986
------------ ------------ ------------
Net cash provided by operating activities 2,745,777 26,402 8,603,348
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets held for sale - 786,535 1,726,916
Proceeds from sale of Polychem Ltd., Inc. 882,337 - -
Proceeds from sale of investments - - 145,834
Capital expenditures (2,319,890) (7,346,658) (2,875,431)
Purchase of net assets, net of cash acquired (3,223,084) - -
Other investments - (70,672) (2,062,992)
Purchase of minority interest - - (110,526)
------------ ------------ ------------
Net cash used in investing activities (4,660,637) (6,630,795) (3,176,199)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of loans payable 797,140 6,234,441 (7,987,486)
Proceeds from long-term debt 7,699,613 4,279,312 1,400,335
Principal payments of long-term debt (9,223,825) (3,241,263) (17,586,420)
Proceeds from shareholder loan 402,380 - -
Proceeds from the sale of common stock - - 21,846,829
Stock issuance costs - - (952,650)
Distributions to shareholders (147,080) (462,838) (1,732,728)
Borrowings (repayments) of shareholder loan 2,580 (104,812) -
------------ ------------ ------------
Net cash (used in) provided by financing activities (469,192) 6,704,840 (5,012,120)
------------ ------------ ------------
Effect of foreign exchange rates on cash 73,677 (18,457) 6,695
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,310,375) 81,990 421,724
Cash and cash equivalents, beginning of year 7,020,858 4,710,483 4,792,473
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,710,483 $ 4,792,473 $ 5,214,197
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,000,005 $ 2,928,671 $ 2,227,815
============ ============ ============
Income taxes $ 1,131,857 $ 2,113,975 $ 2,223,344
============ ============ ============
Noncash investing activities:
Capital lease obligations $ 121,135 $ 106,391 $ 50,335
============ ============ ============
Forgiveness of accounts payable for joint venture
restructuring $ - $ - $ 1,958,157
============ ============ ============
Noncash financing activities:
Treasury stock purchased by satisfaction
of accounts receivable $ - $ 522,200 $ -
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 31
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. DESCRIPTION OF BUSINESS
JLM Industries, Inc. and subsidiaries ("JLM" or the "Company") is a
leading marketer and distributor of certain commodity chemicals,
principally acetone and phenol. JLM is headquartered in Tampa, Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of JLM and its wholly-owned subsidiaries. JLM's
principal operating subsidiaries are JLM Marketing, Inc., JLM Chemicals,
Inc., JLM Terminals, Inc., JLM International, Inc., Olefins Marketing,
Inc., JLM Industries (Europe) B.V., JLM Chemicals Canada, Inc., JLM
Industries de Venezuela, C.A., Aurora Chemicals, Inc. ("Aurora") and
Phoenix Tank Car Corporation ("Phoenix"). All material intercompany
balances and transactions have been eliminated in consolidation. In 1995,
the former 20% minority interest owner of Olefins Marketing Inc. assigned
his interest to JLM and the resulting decrease in minority interest was
included in other income. Also in 1995, a former subsidiary, Polychem
Ltd., Inc., ("Polychem") was sold (see Note 15). Included in the 1995 and
1996 consolidation is the 55% owned subsidiary, JLM Industries (Europe)
B.V. In July 1997, the Company purchased the 45% minority interest in JLM
Industries (Europe) B.V. for approximately $111,000 cash.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cash equivalents consist of
highly liquid investments with original maturities from purchase date of
three months or less.
INVENTORIES - Inventories are valued at the lower of cost or market.
The costs of JLM Marketing, Inc.'s inventories are determined on the
last-in, first-out (LIFO) method. As of December 31, 1996 and 1997, JLM
Marketing, Inc.'s inventory was approximately 22% and 30%, respectively,
of total inventory. The costs of remaining inventories are determined on
the first-in, first-out (FIFO) method. In the year ended December 31,
1997, there was a decrease of LIFO inventory quantities resulting in a
decrease in the LIFO reserve. If LIFO inventories were valued at current
costs, operating income would have been approximately $623,000, $(13,000)
and $(570,000) higher (lower) than those reported for the years ended
December 31, 1995, 1996 and 1997, respectively. The excess of the
replacement cost over the value of inventories based upon the LIFO method
was approximately $1,616,000 and $1,046,000 as of December 31, 1996 and
1997, respectively.
JLM enters into contracts whereby parties to the contracts agree to
exchange various quantities of inventory over a specified period of time.
JLM records these exchanges of inventory at the lower of cost or market.
As of December 31, 1996 and 1997, JLM owed approximately $1,378,000 and
$80,000 respectively, under these contracts which are included in
inventory.
In 1996, JLM entered into a fixed price financial hedging contract in
order to minimize its exposure in the three months ended March 31, 1997 to
the fluctuations in the price of propylene, one of the two key raw
materials used by JLM. The purpose of the financial hedging contract was
to secure an acceptable purchase price for JLM's propylene requirements in
the three months ended March 31, 1997. The contract was for 13 million
pounds of propylene at $.1225 per pound. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 80, Accounting for Futures
Contracts, gains and losses for such contracts are recognized as an
adjustment to cost of sales at the time the finished goods are sold by
JLM. During the three months ended March 31, 1997, JLM purchased and sold
substantially all of the 13 million pounds of propylene covered under the
hedging contract. As a result, JLM recognized a gain of approximately
$493,000, which reduced cost of sales for the period. JLM can be exposed
to losses in connection with such contracts, generally the amount by which
the fixed hedged price on the contract is above the market price for such
chemicals at the time of purchase. The Company did not enter into any
financial hedging contracts in 1997.
31
<PAGE> 32
PREPAID EXPENSES AND OTHER CURRENT ASSETS - Prepaid expenses and other
current assets include marketable securities. Marketable securities are
stated at cost, adjusted for unrealized gains or losses, in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Included in the 1996 amount are stock issuance costs that were
netted against proceeds received from the Company's initial public offering
in July 1997.
ASSETS HELD FOR SALE - Assets held for sale are stated at cost which
approximates market value.
OTHER INVESTMENTS - Other investments include investments in
partnerships and the investment in Olefins Terminal Corporation ("OTC").
JLM accounts for certain of its investments in partnerships on an equity
basis and, accordingly, records its respective share of profits and losses
that are allocated in accordance with the partnership agreements. Except
for OTC, JLM has no obligation to make any contributions beyond its
initial investment. See further discussion of OTC in Note 5.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method
over the shorter of the lease term or the estimated useful lives.
A summary of the lives used for computing depreciation is as follows:
<TABLE>
<S> <C>
Buildings 15 and 31.5 years
Vehicles and airplane 2 to 10 years
Equipment 5 to 10 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Life of lease
</TABLE>
OTHER ASSETS - As of December 31, 1996 and 1997, other assets consist
primarily of the cash surrender values of life insurance policies held on
key employees and deferred acquisition costs. In addition to the above, as
of December 31, 1996 and 1997, other assets include license fees, certain
development costs and advances on consulting and non-competition
agreements (see Note 12). These costs are amortized on a straight-line
basis from 2 to 10 years. Accumulated amortization on other assets as of
December 31, 1996 and 1997 was approximately $578,000 and $927,000,
respectively.
DEFERRED REVENUE - JLM accounts for amounts received from customers in
advance of shipments of goods as deferred revenue.
INCOME TAXES -JLM accounts for income taxes under the asset and
liability method as required by SFAS No. 109, Accounting for Income Taxes.
Under this method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a tax rate change is
recognized in income in the period that the change in the rate is enacted.
Prior to the acquisition of Aurora on January 1, 1997 and Phoenix on
June 1, 1997 by the Company, Aurora and Phoenix elected to be treated as S
corporations for federal income tax purposes, with profits and losses
generally reportable by the stockholder in their individual income tax
returns. Any tax liability related to either Aurora or Phoenix prior to
their acquisition by JLM will be the responsibility of their shareholders.
Accordingly, JLM has recorded no tax liability for such periods. On a pro
forma basis, the tax liability for Aurora and Phoenix is immaterial.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS - Assets and
liabilities of foreign subsidiaries are translated at year-end exchange
rates. Results of operations are translated at weighted average rates for
the year. The effects of exchange rate changes in translating foreign
financial statements are presented as a separate component of
stockholders' equity, except for the Company's Venezuelan subsidiary
which operates
32
<PAGE> 33
in a hyperinflationary economy for which the translation gains and
losses are included in net income currently.
FOREIGN EXCHANGE CONTRACTS - JLM enters into foreign exchange
contracts as a hedge against foreign accounts payable and receivables.
Market value gains and losses are recognized and the resulting credit or
debit offsets foreign exchange gains and losses on these payables and
receivables. At December 31, 1996 and 1997, JLM had no open foreign
exchange contracts.
STOCK-BASED COMPENSATION - In accordance with Financial Accounting
Standards Board (the "FASB") 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 recognition provisions were
adopted. See Note 19 for additional information on the Company's
stock-based compensation.
STOCKHOLDERS' EQUITY - Effective May 22, 1997, the Company amended its
Certificate of Incorporation and increased the number of shares of common
stock authorized to 30,000,000 and changed the par value from no par to
$.01 per share. Additionally, this amendment provided for 5,000,000
authorized shares of a new class of preferred stock. All shares and per
share amounts in the accompanying consolidated financial statements have
been retroactively adjusted for the amendment.
INCOME PER SHARE - FASB has issued SFAS No. 128, Earnings Per Share,
which was required to be adopted for financial statement periods ending
after December 15, 1997. SFAS No. 128 requires that "basic" and "diluted"
earnings per share replace the primary and fully diluted earnings per
share, respectively. The basic calculation computes earnings per share
based only on the weighted average number of shares outstanding as
compared to primary earnings per share which 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. See Note 13.
REVENUE RECOGNITION - The Company recognizes revenue from product
sales upon shipment and passage of title. The Company estimates and
records provisions for quantity rebates and sales allowances, if
necessary, in the period the sale is reported.
USES OF ESTIMATES - The preparation of the consolidated financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimated.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value of
amounts reported in the consolidated financial statements have been
determined by using available market information and appropriate valuation
methodologies. The carrying value of all current assets and current
liabilities approximates the fair value because of their short-term
nature. The fair value of long-term debt approximates its carrying value.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to a concentration of credit risk principally consist
of trade accounts receivable. Credit risk with respect to trade accounts
receivable is generally diversified due to the large number of entities
comprising the Company's customer base and their dispersion across many
different geographies. The Company performs ongoing credit evaluations of
its customers' financial condition and requires collateral, such as
letters of credit, or business insurance in certain circumstances.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the
FASB issued SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and display of comprehensive
33
<PAGE> 34
income and its components in a full set of general-purpose financial
statements and will be required to be effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS
No. 130 does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No.
130 requires that an enterprise (i) classify items of other comprehensive
income by their nature and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. Management does not believe that the adoption of SFAS No. 130
will have a significant impact on the Company's consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, Segment Data, which will
require companies to report selected segment information in their
quarterly reports issued to shareholders for fiscal years beginning after
December 31, 1997. It also requires 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. SFAS No.
131 also requires disclosure as to how management makes decisions about
allocating resources to segments and measuring their performance.
Management does not believe that the requirements of SFAS No. 131 will
have a significant impact on the Company's consolidated financial
statements.
RECLASSIFICATIONS - Certain amounts in the 1995 and 1996 consolidated
financial statements are reclassified to conform to the 1997 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Land and building $ 6,168,690 $ 7,123,124
Vehicles 378,894 319,708
Airplane 2,090,071 2,411,681
Equipment 22,493,073 23,647,967
Leased equipment - capital lease 1,188,122 1,188,122
Furniture and fixtures 850,708 878,288
Leasehold improvements 318,066 388,250
------------ ------------
33,487,624 35,957,140
Less accumulated depreciation and amortization (4,119,264) (6,452,129)
------------ ------------
$ 29,368,360 $ 29,505,011
============ ============
</TABLE>
Depreciation and amortization expense for property and equipment was
approximately $1,336,000, $2,242,000 and $2,598,000 for the years ended
December 31, 1995, 1996 and 1997, respectively. The leased equipment
consists of several capital leases, which expire through June 1999, with a
$189,000 option to purchase at the end of the lease period. Future
minimum capital lease payments for the years 1998 and 1999 are
approximately $316,000 and $329,000, respectively.
4. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS
Investments in partnerships at December 31, 1996 and 1997, consist
principally of the following:
PHENOL PLANT PARTNERSHIP - The Company holds a 2% interest in the Mt.
Vernon Phenol Plant Partnership via its wholly owned subsidiary JLM (Ind),
Inc., an Indiana corporation. The plant converts cumene into phenol that
is marketed under contractual agreements to GE Plastics. JLM has a
long-term exclusive agreement through 2002, and thereafter, unless the
agreement is terminated upon prior notice, to purchase all acetone
34
<PAGE> 35
not used internally by GE Plastics produced at the Mt. Vernon Phenol Plant.
Based on its percentage ownership, JLM accounts for this investment using
the cost method. As of December 31, 1996 and 1997, the amount of this
investment was approximately $492,000 and $496,000, respectively. During
1997, JLM contributed approximately $4,000 to the partnership and received
no distributions. There were no contributions or distributions made in
either 1995 or 1996.
ASIAN PARTNERSHIP - In April 1997, JLM entered into an agreement to
purchase 25% of the common stock of S.K. Chemicals Asia Pte. Ltd. ("SK
Chemicals"), an international petrochemical distributor, for $500,000
cash. In addition, in April 1997, JLM entered into an agreement to
purchase for $500,000 cash a 12.7% interest in S.K. Chemical Trading Pte.
("SK Trading"). As of December 31, 1997, these investments of
approximately $1,069,000 are included in other investments in the
accompanying consolidated balance sheet and are carried on the equity
method.
REAL ESTATE PARTNERSHIPS - The Company holds a 99% interest in Len-Kel
Realty Limited Partnership ("Len-Kel"). During 1987 and 1988, Len-Kel
acquired 28 units in a development project converting historical buildings
into residential use. The units are currently operated as rental property.
JLM is a limited partner in Len-Kel and cannot exert control over the
partnership. Accordingly, the investment is carried on the equity method.
As of December 31, 1996 and 1997, the amount of this investment was
approximately $909,000 and $996,000, respectively.
JLM holds other investments through limited partnerships. The amount
of these partnerships totaled approximately $47,000 and $821,000 at
December 31, 1996 and 1997, respectively.
During the years ended December 31, 1995, 1996 and 1997, JLM recorded
losses from partnership investments of approximately $(42,000), $(48,000)
and $(48,000), respectively. As a limited partner, the Company has no
obligation to make any contributions beyond its initial investment.
5. OLEFINS TERMINAL CORPORATION
During 1991, JLM formed a 100% owned subsidiary, OTC, to design and
construct a polymer grade propylene export facility in Bayport, Texas. On
August 15, 1991, OTC issued stock and stock warrants to other investors
reducing the Company's ownership to 49% (32% on a fully diluted basis).
Construction was completed in July 1992. The Company accounts for its
investment in OTC on the equity basis. During the years ended December 31,
1995, 1996 and 1997, income (losses) from the investment in OTC of
approximately $82,500 and $(55,000), and $(830,000), respectively, were
recorded. As of December 31, 1996 and 1997, the amount of this investment
was approximately $280,000 and $0, respectively.
During 1995 and 1996, JLM provided OTC with financial and management
services for a fee of 2.5% on certain sales, as defined. As part of the
refinancing of OTC's long-term debt discussed below, JLM switched its
management fee to fixed rate of $16,000 per month. JLM recorded
management fees of approximately $148,000, $139,000 and $134,000 for the
years ended December 31, 1995, 1996 and 1997, respectively, under this
agreement.
On May 7, 1997, OTC refinanced its existing long-term debt and
replaced it with an unsecured term loan (the "Term Loan"). The proceeds
from the Term Loan was, among other items, used to repay all of OTC's
existing long-term debt, purchase all outstanding stock warrants and
repay all outstanding management fees to JLM. After the purchase of the
stock warrants, OTC is owned 50% by JLM. In conjunction with the
refinancing, JLM's terminaling contract was canceled and a new, one-year
terminaling arrangement, which became effective January 1, 1997, was
entered into by all parties. The new terminaling contract, which has no
minimum throughput requirements, requires JLM to pay for throughput at $16
per metric ton during the one-year term and it cancels the carryover
rights from the old terminaling contract. Also in conjunction with the
refinancing, JLM's non-current note receivable, including accrued
interest, was converted to an investment in OTC and JLM's account payable
to OTC was forgiven and accounted for as a reduction in JLM's investment
35
<PAGE> 36
in OTC. The amount of the accounts payable to OTC which was forgiven was
approximately $2 million. In addition, JLM has pledged its ownership
interest in OTC to the other 50% owner as security for certain contingent
payment obligations required to be made equally by JLM and the other 50%
owner of OTC, if OTC has inadequate operating funds.
The following summarizes the assets, liabilities and stockholders'
equity of OTC as of December 31:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS:
Current $ 2,154,737 $ 1,233,608
Noncurrent 12,095,787 9,502,090
----------- -----------
$14,250,524 $10,735,698
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities $ 4,292,927 $ 534,383
Noncurrent liabilities 9,230,060 7,300,000
Stockholders' equity 727,537 2,901,315
----------- -----------
$14,250,524 $10,735,698
=========== ===========
</TABLE>
OTC had net income (loss) of approximately $250,000, $(166,000) and
$(1,500,000) for the years ended December 31, 1995, 1996 and 1997,
respectively. During 1997, the Company's investment in OTC was reduced to
zero due to the recognition of the Company's pro rata share of OTC's
operating losses. As the Company has no current financial commitments to
OTC, the Company will not record additional losses on its investment until
future operating income from OTC surpasses the cumulative unrecorded
operating losses or until any contingent payment obligations, discussed
above, are required. As of December 31, 1997, the Company had cumulative
unrecorded operating losses from OTC of approximately $187,000.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accounts payable $35,886,152 $31,668,665
Accrued expenses 3,703,954 2,806,093
----------- -----------
$39,590,106 $34,474,758
=========== ===========
</TABLE>
7. LOANS PAYABLE
Loans payable consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Secured revolving loan agreements expiring in June 1997 and April 2000.
The loan agreement expiring in June 1997 was extended to
August 31, 1997. Interest is payable monthly at prime and prime
plus 1.75% (prime was 8.25% as of December 31, 1996). $5,915,336 $ -
Secured loans payable associated with Venezuelan operations due on
demand. Interest is payable monthly at 37.2% and between 21% and
23% as of December 31, 1996 and 1997, respectively. 1,013,655 377,546
Secured loans payable due on demand. Interest is payable monthly at
rates between 8.3% and 10% as of December 31, 1996 and 1997,
respectively. 1,437,529 1,488
---------- ---------
Total loans payable $8,366,520 $ 379,034
========== =========
</TABLE>
The loans payable are collateralized by most of JLM's inventory and
accounts receivable. As of December 31, 1996 and 1997, JLM had a total of
approximately $52,800,000 and $72,100,000, respectively, of credit
36
<PAGE> 37
facilities available with various financial institutions of which
approximately $38,214,000 and $55,759,000, respectively, was unused.
Additionally, as of December 31, 1996 and 1997, JLM had guaranteed vendor
letters of credit of approximately $6,220,000 and $5,964,000, respectively.
In December 1997, the Company completed the refinancing of certain of
its revolving loan agreements and replaced it with an unsecured $30
million line of credit (the "LOC"). Under terms of the LOC, $15 million
of the LOC will be restricted to funding future acquisitions with terms
that will expire on November 1, 2003. The remaining $15 million will be
used to fund working capital needs with terms that will expire on November
1, 2001. The interest on the LOC will accrue at the bank's prime rate
less 1/2 percent. As of December 31, 1997, there were no outstanding
amounts due under the LOC.
JLM's loans payable contain certain financial covenants which must be
met with respect to, among other things, minimum consolidated net income
levels, minimum current ratio and debt service. JLM was in compliance with
such financial covenants as of December 31, 1997. Certain provisions of
the loans payable to which JLM is subject restricts JLM's ability to pay
dividends.
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Notes payable to shareholders due in yearly installements
through June 2000. Interest is payable monthly at rates of
prime and 10.0%. Prime was 8.5% at December 31, 1997. $ - $ 1,350,000
Secured term loan payable due in equal quarterly
installments through June 2002. Interest is payable
quarterly at LIBOR plus 3.5%. LIBOR was 5.38%
at December 31, 1996. 12,507,619 -
Secured term loan payable due in June 2002. Interest was
payable monthly at 8.875% at December 31, 1996. 2,300,000 -
Mortgage payable due in equal monthly installments through
July 1999. Final balloon principal payment due July 1999.
Interest is payable monthly at 9.59%. 1,703,694 1,606,802
Secured loans payable due in 2006, Interest is payable
at rates between 8% - 9.68%. 1,838,215 1,583,102
Secured loan payable due in variable monthly installments
through June 2000. Interest is payable monthly at 10.9%. 929,167 -
Secured loan payable due in 1998. Interest is payable
at the prime rate plus 1% (prime was 8.25% at
December 31, 1996). 978,400 -
Secured installment loan payable due in September 1999,
payable in quarterly installments of $50,000. Interest is
payable quarterly at the prime rate plus 2% (prime was
and 8.5% at December 31, 1996 and 1997, respectively). 564,339 364,207
Secured loans payable due in equal monthly installments
through 1999. Interest is payable monthly at rates
between 10.13% - 13.47%. 65,258 35,890
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C>
Capital lease obligations due in equal monthly installments
through April 2001. Interest is payable monthly at rates
between 9.93% - 16.99% as of December 31, 1996 and
respectively. 884,565 645,171
----------- ----------
Total 21,771,257 5,585,172
Less current portion (3,962,385) (789,277)
----------- ---------
Long-term portion $17,808,872 $4,795,895
=========== ==========
</TABLE>
See Note 7 regarding the prepayment of certain of the Company's
revolving loans.
Long-term debt becoming due during subsequent fiscal years ending on
December 31 are as follows:
<TABLE>
<S> <C>
1998 $ 789,277
1999 2,182,319
2000 185,545
2001 1,178,031
2002 1,250,000
Thereafter -
----------
Total 5,585,172
Less current portion (789,277)
----------
Long-term portion $4,795,895
==========
</TABLE>
The long-term debt is secured by substantially all of JLM's property
and equipment.
9. RELATED PARTY TRANSACTIONS
JLM has loans payable to its majority stockholder of $905,148 at
December 31, 1996 and 1997. The loan payable bears interest at the prime
rate, which was 8.50%, and matures on January 1, 1999. Additionally, the
Company has approximately $1,700,000 of miscellaneous receivables owed by
the majority stockholder. These items are netted together and included as
part of other receivable in the accompanying consolidated balance sheet.
In 1995 and 1996, JLM purchased approximately $479,000 and $319,000,
respectively, of chemical products from a joint venture partnership owned
50% by Kemlink, L.L.C., a Delaware Limited Liability company, of which the
majority stockholder of JLM is a 97% owner. All purchases in 1995 and
1996 were at prices comparable to those paid to unrelated parties. In
addition, during 1995 and 1996, JLM sold approximately $1,589,000 and
$1,260,000, respectively, of chemical products to Kemlink J.V. Effective
December 31, 1996, the Company ceased doing business with both Kemlink
J.V. and Kemlink, L.L.C. due to the termination of such entities by their
partners.
10. INCOME TAXES
Current and deferred income tax provision consists of the following
at December 31:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 1,333,030 $1,350,848 $1,930,435
State and local 212,427 182,528 402,285
Foreign 249,343 257,278 150,152
Deferred 336,793 1,343,849 1,410,930
----------- ---------- ----------
$ 2,131,593 $3,134,503 $3,893,802
=========== ========== ==========
</TABLE>
The income tax provision reflected above includes the income tax
expense/benefit associated with discontinued operations and extraordinary
loss.
38
<PAGE> 39
The significant components of the deferred tax assets and liabilities
are as follows as of December 31,:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Foreign reserves $ 205,000 $ 167,000
Foreign net operating loss 210,000 402,000
Minimum tax credit carryforward 283,400 293,784
Other - 78,404
-------------- ------------
698,400 941,188
Valuation allowance (415,000) (569,000)
-------------- ------------
Total deferred tax assets 283,400 372,188
-------------- ------------
Deferred tax liabilities:
Property (1,953,133) (3,821,089)
Nonconsolidated investments (817,974) (501,009)
Other (51,273) -
-------------- ------------
Total deferred tax liabilities (2,822,380) (4,322,098)
-------------- ------------
Net deferred tax liability $ (2,538,980) $ (3,949,910)
============== ============
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1996 and 1997 was an increase of $338,000 and $154,000,
respectively. The valuation allowance represents the deferred tax assets
booked for foreign net operating losses and reserves generated from
Venezuelan and Holland operations.
At December 31, 1996 and 1997, there were Venezuelan NOL's of
approximately $1,220,000 and $621,000, respectively, available to offset
future foreign taxable income. These net operating losses expire in
various years ending in 2001. At December 31, 1997 there were Holland
NOL's of approximately $535,000 that may be carryforward indefinitely.
JLM's effective tax rate differs from the statutory federal income tax
rate of 34% as follows at December 31,:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.00% 34.00% 34.00%
State and local income taxes, net of federal income tax 4.00 2.58 3.87
Foreign income taxes 2.12 3.80 1.45
Valuation allowance - foreign NOL/ reserves - 4.79 1.48
Foreign Sales Corporation benefit - (2.05) (2.15)
Other - 1.25 (1.16)
----- ----- -----
Effective income tax rate 40.12% 44.37% 37.49%
===== ===== =====
</TABLE>
Accumulated deficit of non-U.S. subsidiaries included in consolidated
retained earnings amounted to approximately $(284,000) and $(708,000) at
December 31, 1996 and 1997, respectively. The Company intends to continue
to indefinitely reinvest these earnings, which reflect full provision for
non-U.S. income taxes, to expand its international operations.
Accordingly, no provision has been made for U.S. income taxes that might
be payable upon repatriation of such earnings. In the event any earnings
of non-U.S. subsidiaries are repatriated, the Company will provide U.S.
income taxes upon repatriation of such earnings which will be offset by
applicable foreign tax credits, subject to certain limitations.
11. TREASURY STOCK AND STOCK SPLIT
Chemical Trading, S.L. ("Trading"), JLM's Spanish distributor, was
indebted to JLM pursuant to an arrangement in which JLM pays the
distributor's operating expenses. JLM treats the difference between such
payments made by JLM and the amount of commissions and other amounts due
to the distributor in respect of his activities on behalf of JLM as a loan
by JLM to the distributor. Such indebtedness was carried on an open
account basis and in July 1996, $522,200 was repaid without interest
through the sale to JLM at fair market value of 48 shares (267,264 shares
after giving effect to the stock split in July 1997) of common stock owned
by Trading's owner. On July 3, 1997, JLM approved the retirement of the
shares of common stock held in
39
<PAGE> 40
treasury by the Company and a stock split resulting in an exchange of 1
share for 5,568 shares of common stock issued and outstanding. All
share and per share amounts have been retroactively adjusted for this
split.
12. COMMITMENTS AND CONTINGENCIES
JLM is obligated under operating leases with remaining non-cancelable
terms of a year or more for office equipment, storage facilities and
automobiles. The approximate minimum annual rentals under these leases at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 665,260
1999 442,304
2000 248,311
2001 74,957
2002 41,094
---------
Total minimum lease payments $1,471,926
==========
</TABLE>
Total rental expenses for all operating leases approximated
$1,605,000, $1,875,000 and $1,540,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
JLM is also obligated under a license agreement at December 31, 1997
to make future minimum payments as follows:
<TABLE>
<S> <C>
1998 $115,750
1999 115,750
--------
Total $231,500
========
</TABLE>
JLM is subject to federal, state, local and foreign environmental laws,
rules, regulations and ordinances concerning emissions to the air,
discharges to surface and subsurface waters, and the generation, handling,
storage, transportation, treatment, disposal and import and export of
hazardous materials. JLM has engaged environmental counsel for three of
their facilities: the JLM Chemicals, Inc., Blue Island Illinois facility,
the JLM Terminals, Inc. facility and the Polychem facility. Regarding the
JLM Chemicals facility, JLM believes that the low levels of various organic
compounds detected in the soil and groundwater at the facility are the
result of historical use of the facility prior to the acquisition by JLM
(see Note 16) and/or migration from neighboring facilities. JLM also
believes that the likelihood of either state or federal environmental
regulatory agencies seeking remediation in the near term is low, based on
the location of the facility, the character of the area (each of which are
factors in assessing risk) and the fact that the site is pending removal
from the federal list of contaminated sites. Regarding the JLM Terminals,
Inc. facility, JLM believes that ultimate liability for remediation of soil
and groundwater contamination rests with the previous owner of the facility
and/or a neighboring facility. The previous owner is currently
implementing a state approved Remedial Action Plan ("RAP"). The Company is
not subject to any requirements under the RAP. Regarding the Polychem
facility, levels of organic compounds slightly in excess of regulatory
thresholds were detected in the ground water. JLM has been addressing the
problem and recent analytical results show the levels of contamination have
decreased to acceptable levels. Accordingly, JLM has requested that state
authorities permit closure of the remediation of the Polychem facility.
JLM does not believe that a material amount of funds will be required to
complete remediation at any of the sites. Accordingly, the Company has not
accrued any amounts related to the remediation of any of the sites.
On December 12, 1996, JLM entered into consulting and non-competition
agreements with two independent third parties. The terms of the
consulting agreements are from January 3, 1997 through December 31, 2003
and JLM is committed to pay $130,000 per year, payable semi-annually
beginning January 1, 1997 through December 31, 2002 and $200,000 on
January 1, 2003. The terms of the non-competition agreements will be from
January 1, 1997 through December 31, 2006 and JLM is committed to
40
<PAGE> 41
$100,000 per year, payable semi-annually from July 1, 1997 through December
31, 2002 and $270,000 on January 1, 2003. As of December 31, 1997, JLM has
advanced $700,000 to the third parties and, in conjunction with entering
into the consulting and non-competition agreements, these amounts shall be
satisfied by setting them off against the amounts owed by the third parties
to JLM. As of December 31, 1996 and 1997, the $240,000 advance has been
recorded in other current assets-net and the remaining $230,000 advance
is recorded in prepaid expenses and other current assets in the
accompanying consolidated balance sheet. On October 24, 1996, the third
parties signed promissory notes aggregating $470,000 and bearing no
interest for the monies that had been advanced.
During 1997, the Internal Revenue Service ("IRS") concluded its
federal income tax examination of JLM's 1988 through 1990 and 1992 through
1994 tax years. JLM subsequently made payments to the IRS as a result of
these examinations. The settlement of these IRS examinations did not
materially affect the Company's financial condition or results of
operations in 1997.
13. EARNINGS PER SHARE
As described in Note 17, the Company's Board of Directors adopted
formal plans to discontinue certain segments of its business.
Additionally during 1997, the Company repaid certain debt from proceeds
received from the initial public offering of its Common Stock in July
1997. As part of the repayment of the debt, the Company incurred $386,000
of extraordinary loss (see Note 18). Accordingly, the following table
illustrates the impact of such items on income per share for the years
ended December 31,:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share:
Discontinued operations $(0.09) $(0.09) $(0.03)
Extraordinary item - - (0.07)
Diluted earnings per share:
Discontinued operations $(0.09) $(0.09) $(0.03)
Extraordinary item - - (0.07)
</TABLE>
The basic income per share calculation is based on the weighted
average number of common shares outstanding adjusted for actual shares
issued or reacquired during the period. 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 all of which were
outstanding as of December 31, 1997. The average market price of the
Company's common stock was greater than the exercise price of the options
throughout 1997. Accordingly, the impact of the dilutive effect of
options included in the calculation of diluted weighted average shares
outstanding is illustrated below for the year ended December 31, 1997:
<TABLE>
<S> <C>
Basic weighted shares outstanding 5,752,579
Dilutive effect of outstanding options 37,409
---------
Diluted weighted shares outstanding 5,789,988
=========
</TABLE>
There was no dilution of earnings per share for either 1995 or 1996.
14. PROFIT-SHARING PLAN
The Company has a defined contribution profit-sharing plan covering
substantially all of its employees. Prior to July 1995, the Company was
contributing an amount equal to 50% of the contribution of eligible
employees, up to a maximum amount of 3% of the employees' compensation or
$1,000, whichever is less. Effective July 1995, the Company changed its
contribution amount from the above to 100% of the contribution of eligible
employees, up to a maximum amount of 6% of the employees' compensation. The
41
<PAGE> 42
Company's contribution rate is determined annually at the beginning of
each plan year. The costs for this plan were $130,000, $278,000 and
$348,000 in 1995, 1996 and 1997, respectively.
Included in selling, general and administrative expenses are
profit-sharing bonuses paid to employees based on performance or formulas.
The bonuses of the Company for the years ended December 31, 1995, 1996 and
1997 were approximately $326,000, $581,000 and $529,000, respectively.
15. POLYCHEM LTD., INC.
During 1994, the Company formed and held 95% ownership of a new
subsidiary, JLM Acquisition, Inc. On August 8, 1994, JLM Acquisition, Inc.
purchased substantially all the business assets of Polychem, a chemical
dyes distributor in Dalton, Georgia, for $900,000 in cash and a promissory
note for $1,240,000 payable in semi-annual installments over five years.
The acquisition was accounted for as a purchase transaction and
accordingly, the purchase price was allocated to the assets on the basis
of estimated fair market value on the date of purchase. The excess of
purchase price over the fair value of the tangible assets acquired was
$1,515,000.
On October 26, 1995, JLM completed the sale of substantially all the
operating assets of Polychem for cash of $882,000 and the assumption of
related liabilities. The purchaser has an irrevocable option for a period
of three years to buy the Polychem real property for $1; however Polychem
has retained title to this real property. In conjunction with the sale of
Polychem, JLM guaranteed the payment of the note payable that was assumed
by the purchaser of Polychem.
16. JLM CHEMICALS, INC.
During 1995, the Company formed a wholly-owned subsidiary, JLM
Chemicals, Inc. On June 8, 1995, JLM Chemicals, Inc. purchased
substantially all of the business assets of BTL Specialty Resins, Corp., a
phenol and acetone producer located in Blue Island, Illinois. The
acquisition has been accounted for as a purchase transaction and,
accordingly, the purchase price was allocated to the assets and
liabilities on the basis of estimated fair market value on the date of
purchase. The fair value of the assets and liabilities at the date of
acquisition recorded in conjunction with the transaction are presented
below:
<TABLE>
<S> <C>
Inventories $ 2,983,555
Prepaid expenses and other current assets 598,505
Property and equipment 18,583,845
Other assets 325,000
Accounts payable and asccrued expenses (1,146,686)
Debt (18,121,135)
------------
Net assets acquired, excluding cash 3,223,084
Cash 1,776,916
------------
Net assets acquired $ 5,000,000
============
</TABLE>
17. DISCONTINUED OPERATIONS
During 1995 and 1996, JLM's Board of Directors adopted formal plans to
sell the non-core business segments, consisting of Polychem (see Note 15),
MAC Enterprises, Inc. ("Enterprises") and JLM Stables, Inc. ("Stables")
(collectively the "Segments"), as part of JLM's strategic focus on
marketing and manufacturing of commodity and specialty chemicals. The
Segments are accounted for as discontinued operations in the accompanying
consolidated financial statements, which requires the plan of disposal to
be carried out within one year.
42
<PAGE> 43
In December 1996, JLM entered into a plan to sell the assets of both
Enterprises and Stables. Based on management's review of the assumptions
used in determining the estimated gain or loss from the disposals of
Enterprises and Stables, JLM recorded a provision of $9,050, net of
income taxes, for the loss on disposal during 1996. The Company does not
allocate any corporate overhead to either Enterprises or Stables.
In May 1997, the Company completed the sale of the majority of the
assets of Enterprises for $1,075,000 cash. The sale resulted in an
additional loss of $29,054 and the proceeds of the sale were used to
repay the entire outstanding loan balance of Enterprises of approximately
$905,000.
The operating results of the discontinued operations, which includes
interest expense associated with Enterprises and Stables, are summarized
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Sales $4,004,431 $ 244,909 $ 69,966
Loss from discontinued operations before income
taxes (745,506) (711,197) (351,270)
Income tax benefit 298,204 282,932 140,163
Net loss (447,302) (428,265) (211,107)
</TABLE>
The net liabilities of discontinued operations are summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Current assets $2,227,636 $ 720,106
Property and equipment, net 4,735 -
Current liabilities 2,712,711 2,280,473
Net liabilities of discontinued operations 1,384,741 1,599,714
</TABLE>
Current assets of discontinued operations as of December 31, 1996 and
1997 includes assets held for sale of approximately $1,817,000 and
$203,000, respectively.
18. EXTRAORDINARY ITEM
During August 1997, the Company prepaid debt consisting of (i)
approximately $13.2 million incurred to finance the acquisition of the
Blue Island, Illinois facility and related capital expenditures
associated with the QMAX Catalyst technology and (ii) approximately $0.8
million incurred to finance the acquisition of the Cape Fear, North
Carolina, Terminal, respectively. As a result of the early
extinguishment of debt, the Company recognized approximately $386,000 of
extraordinary loss consisting primarily of prepayment penalties, net of
income tax benefits of approximately $257,000
19. STOCK-BASED COMPENSATION
On July 2, 1997, the Company approved a long-term incentive plan (the
"LTIP") whereby 750,000 shares of Common Stock are reserved for issuance
under the LTIP. Under the LTIP, restricted stock, incentive stock options,
nonqualified stock options and stock appreciation rights or any
combination thereof may be granted to JLM employees.
Concurrent with the initial public offering, the Company awarded
47,000 shares of restricted stock, with a four-year vesting period to
certain officers and employees. The Company recognized an expense of
approximately $118,000 in 1997 related to the issuance of the restricted
stock.
On July 23, 1997, the Company granted 411,500 options under the LTIP
to the employees of JLM at an exercise price of $10 per share. These
options vest ratably over a three-year period. The Company has adopted
the disclosure-only provisions of SFAS No. 123. Accordingly, no
compensation cost has been recognized for the options in the accompanying
consolidated statements of income. Had compensation cost
43
<PAGE> 44
for the options been determined based on the fair value at the grant date
for awards in 1997 consistent with the provisions of SFAS No. 123, JLM's
net income and income per share for the year ended December 31, 1997
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net income - as reported $6,493,754
Net income - pro forma $6,318,137
Basic net income per share - as reported $ 1.13
Basic net income per share - pro forma $ 1.10
Diluted net income per share - as reported $ 1.12
Diluted net income per share - pro forma $ 1.09
</TABLE>
None of the options granted under the LTIP vested during 1997. 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 in 1997: dividend yield of 0%; expected
volatility of .59%; risk-free interest rate of 5.7% and expected lives of
3.0 years.
20. EMPLOYEE STOCK PURCHASE PLAN
On July 2, 1997, the Company approved an employee stock purchase plan
(the "Purchase Plan") whereby an aggregate of 75,000 shares of Common
Stock are reserved for issuance under the plan. Under the Purchase Plan,
all employees will be given an opportunity to purchase shares of JLM
Common Stock two times a year at a price equal to 85% of the market price
of the Common Stock immediately prior to the beginning of each offering
period. The Purchase Plan provides for two offering periods, the months
of March and September, in each of the years 1997 through 2006. During
September 1997, employees of the Company purchased 3,415 shares of the
Company's Common Stock under the Purchase Plan.
21. SEGMENT REPORTING
JLM's business consists of marketing and a manufacturing 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 good 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 years ended
December 31,:
<TABLE>
<CAPTION>
INDUSTRY SEGMENT 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Marketing $229,504,506 $176,274,489 $221,301,428
Manufacturing 59,866,439 60,246,694 65,520,738
------------ ------------ ------------
$289,370,945 $236,521,183 $286,822,166
============ ============ ============
Operating Income:
Marketing $ 5,186,059 $ 5,011,196 $ 5,406,856
Manufacturing 6,164,010 7,586,128 10,752,634
Corporate (2,615,870) (1,595,544) (2,256,929)
------------ ------------ ------------
$ 8,734,199 $ 11,001,780 $ 13,902,561
============ ============ ============
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C> <C> <C>
Capital Expenditures:
Marketing $ 1,390,899 $ 592,422 $ 1,670,703
Manufacturing 928,991 4,398,480 883,118
Corporate - 2,355,756 321,610
------------ -------------- ------------
$ 2,319,890 $ 7,346,658 $ 2,875,431
============ ============== ============
Depreciation and Amortization:
Marketing $ 839,890 $ 794,031 $ 822,409
Manufacturing 667,745 1,652,809 1,687,935
Corporate 14,647 77,347 436,819
------------ ------------ ------------
$ 1,522,282 $ 2,524,187 $ 2,947,163
============ ============= ============
Identifiable Assets:
Marketing $ 49,865,521 $ 43,303,972 $ 39,644,328
Manufacturing 28,092,298 31,871,092 29,691,796
Corporate 7,634,984 11,211,591 14,224,447
------------ ------------- -------------
$ 85,592,803 $ 86,386,655 $ 83,560,571
============ ============= ============
GEOGRAPHIC LOCATION
Revenues:
United States $244,864,754 $ 191,382,570 $236,650,808
Venezuela 14,491,443 10,068,395 9,624,688
Holland 21,248,933 29,201,763 35,533,157
Other nations 8,765,815 5,868,455 5,013,513
------------ ------------- ------------
$289,370,945 $ 236,521,183 $286,822,166
============ ============= ============
Operating Income (Loss):
United States $ 9,324,264 $ 12,204,002 $ 16,466,705
Venezuela 1,290,877 (414,554) (143,327)
Holland 117,666 571,046 (230,586)
Other nations 617,261 236,830 66,698
Corporate (2,615,869) (1,595,544) (2,256,929)
------------ ------------- ------------
$ 8,734,199 $ 11,001,780 $ 13,902,561
============ ============= ============
Identifiable Assets:
United States $ 73,991,228 $ 72,778,120 $ 70,756,106
Venezuela 4,233,208 6,112,667 3,035,968
Holland 5,374,039 6,169,386 8,411,689
Other nations 1,994,328 1,326,482 1,356,808
------------ ------------- -------------
$ 85,592,803 $ 86,386,655 $ 83,560,571
============ ============= ============
</TABLE>
45
<PAGE> 46
22. SUBSEQUENT EVENTS
In February 1998, the Company signed a letter of intent to purchase
all of the assets of Browning Chemical Company ("Browning") for $9.5
million of which $7.5 million will be paid in cash and the remaining $2.0
million will be evidenced by a promissory note payable in equal
installments over four years. Browning is a leading distributor of
inorganic chemicals throughout the United States. It is expected that the
purchase will be effective March 31, 1998. The acquisition of Browning's
assets will be accounted for as a purchase.
On February 20, 1998, the Company entered into an agreement to purchase
50.1% of the outstanding stock of Inquinosa S.A. ("Inquinosa"). The
purchase price will be determined based upon earnings over a five-year
period as defined in the agreement. Inquinosa is a leading marketer of
lindane throughout the world. The purchase of Inquinosa's common stock
will be accounted for as a purchase.
On March 2, 1998, the Company signed a letter of intent to acquire
100% of the outstanding stock of Tolson Holding B.V. ("Tolson"), for
approximately $5.7 million. The purchase will require the Company to make
a $2.9 million cash down payment and execute a $2.8 million note payable
due in five equal installments with interest accruing at the six month
LIBOR rate and a $750,000 balloon payment. However, pursuant to the terms
of the letter of intent, the purchase price may be subject to certain
adjustments, which adjustments could partially or completely offset the
cash purchase price. Tolson is a Dutch global distributor and trader of
methanol, solvents, aromatics and olefins. The purchase of Tolson's common
stock will be accounted for as a purchase.
On March 10, 1998, the Company executed a long-term purchase agreement
with Solutia, Inc. ("Solutia") for a phenol plant to be built on the Gulf
Coast of the United States. Under terms of the agreement, the Company will
advance over three years $35 million to Solutia as a partial prepayment for
future inventory purchases. The prepayment will be paid as follows: $5
million on December 31, 1998 and the remaining balance to be paid in
substantially equal payments on December 31, 1999 and 2000. In return,
Solutia will sell up to 125 metric tons of phenol per year, or 31% of the
phenol produced by the plant per year, to JLM for 15 years at a specified
price outlined in the agreement with a credit on a per pound basis for the
advancement mentioned above. The phenol production is anticipated to
begin at the plant in the fourth quarter of 2000.
46
<PAGE> 47
The Stockholders and Board of Directors
JLM Industries, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of JLM Industries,
Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
of cash flows for each of the three years in the period ended December 31, 1997
and have issued our report thereon dated February 25, 1998 (March 10, 1998 as
to the third and fourth paragraphs of Note 22). Our audits also included the
accompanying consolidated financial statement schedule. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this schedule based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects the information set forth
herein.
DELOITTE & TOUCHE LLP
Tampa, Florida
February 25, 1998
47
<PAGE> 48
JLM INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Balance at Beginning Charged to Deductions Balance at End
of Year Expenses of Year
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Accumulated amortization (2) $147,697 $104,925 $44,188(1) $208,434
Allowance for doubtul accounts 25,661 44,637 - 70,298
Year ended December 31, 1996:
Accumulated amortization (2) 208,434 389,595 - 598,029
Allowance for doubtul accounts 70,298 383,662 - 453,960
Year ended December 31, 1997:
Accumulated amortization (2) 598,029 349,337 - 947,366
Allowance for doubtul accounts 453,960 94,039 - 547,999
</TABLE>
(1) Represents the disposal of the goodwill for Polychem Ltd., Inc. in October
1995.
(2) Represents the accumulated amortization of goodwill, deferred acquisition
costs, license fees, certain development costs and advances on
non-competition agreements.
48
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The following table sets forth the names and ages of the Directors,
executive officers and key employees of the Company and the positions they
hold with the Company listed herein. Executive officers serve at the
pleasure of the Board of Directors.
<TABLE>
<S> <C> <C>
Directors and Executive Officers Age Positions
-------------------------------- --- ---------
John L. Macdonald 54 President, Chief Executive Officer & Director
Thaddeus J. Lelek 48 Vice President & Director
Wilfred J. Kimball 58 Vice President & Director
Frank A. Musto 40 Vice President, Chief Financial Officer & Director
John T. White 66 Vice President & General Counsel
Michael J. Molina 45 Vice President - Tax and Audit & Secretary
Linda L. Sato 36 Vice President & Treasurer
Roger C. Kahn 45 Director
J. Robert Mehall 55 Director
Jerry L. Weinstein 61 Director
</TABLE>
JOHN L. MACDONALD founded the Company in April, 1986, and has served
as the President, Chief Executive Officer and a director of the Company
throughout its history. Mr. Macdonald also co-founded Gill and Duffus
Chemical, Inc., in 1978 and served as its President and Chief Executive
Officer until the conclusion of a leveraged buyout in 1983, in which Gill
and Duffus Chemical, Inc., merged with the Steuber Company, Inc. Mr.
Macdonald received a B.A. from Colorado College and has more than 28
years experience in the chemical industry.
THADDEUS J. LELEK has been with the Company since its formation in
1986, serving in a variety of senior marketing positions. In 1986 he was
elected Vice President of JLM Marketing. Mr. Lelek has more than 28 years
of experience in the chemical industry. Mr. Lelek is principally
responsible for formulating and implementing the Company's marketing
strategies and programs for North American sales. From 1983 to 1986, Mr.
Lelek was also responsible for marketing in North America for Steuber
Company, Inc., and from 1980 to 1983, Mr. Lelek headed up the national
sales effort for distribution for Gill and Duffus Chemicals, Inc. Mr.
Lelek was also employed in various capacities, including National Sales
Manager for certain products, for Gulf Oil Chemicals, Inc., from 1970 to
1979. Mr. Lelek graduated with a B.S. in Chemical Engineering from
Worchester Polytechnic Institute.
WILFRED J. KIMBALL was hired as Vice President of JLM Chemicals and
Vice President of the Company following the acquisition by the Company in
1995 of the Blue Island Plant from BTL Specialty Resins Corp. ("BTL
Corporation"). Mr. Kimball is primarily responsible for the operation of
the Company's Blue Island Plant. In addition, he is responsible for the
operations of JLM Terminals and the day-to-day direction of certain of the
Company's sales force and support staff. From 1990 to 1995, Mr. Kimball
was President of BTL Corporation and in this capacity was primarily
responsible for the Blue Island Plant. From 1985 to 1990, Mr. Kimball
served in various executive capacities with BTL Corporation, including
Vice President of Manufacturing and Engineering, and President of Plyophen
Chemicals, a division of BTL Corporation. Prior to
49
<PAGE> 50
1985, Mr. Kimball served for 22 years in various capacities with Union
Carbide Canada LTD. Mr. Kimball received a B.S. in Chemical Engineering
from the University of Brunswick.
FRANK A. MUSTO has been with the Company since its formation in 1986.
Mr. Musto was elected Vice President and Chief Financial Officer in 1994.
Mr. Musto is principally responsible for the Company's banking
relationships, current cash management systems, and investment of excess
funds. Prior to joining the Company, from 1979 to 1981, and from 1983 to
1985, Mr. Musto was the Marine Accountant, Controller and Treasurer for
the Steuber Company, Inc. From 1981 to 1982, Mr. Musto was the controller
for Amerpol International, New York City, a custom house broker, freight
forwarder, and agent for the government-controlled fishing fleet in
Poland. Mr. Musto graduated from Bernard M. Baruch College with a B.B.A.
in Accounting.
JOHN T. WHITE has served as Vice President and General Counsel of the
Company since 1990. Mr. White is the Company's chief legal officer and is
principally responsible for the legal affairs of the Company and its
consolidated subsidiaries. From 1987 to 1989, Mr. White was Senior Vice
President for Paribas Corporation, a North American investment banking
firm. From 1970 to 1987, Mr. White was partner with the New York City law
firm of Wender, Murase and White. From 1962 to 1970, Mr. White was a
partner in the international law firm of Baker & McKenzie, resident in the
firm's New York City office. Mr. White received a bachelor's degree from
Harvard College, a Juris Doctorate from Columbia and an L.L.M. from New
York University.
MICHAEL J. MOLINA joined the Company in 1986 as Controller. In 1995,
he was promoted to his current position as Vice President - Tax and Audit.
Mr. Molina is primarily responsible for taxes, audits and management
information systems. From 1992 to 1995, Mr. Molina served as Vice
President of Administration. Mr. Molina received a B.A. from John Hopkins
University and an M.B.A. from Pace University.
LINDA L. SATO has been employed by the Company since 1986 when she
was hired as the Company's Assistant Controller. In 1994, she was
appointed Vice President and Controller. In 1996, Ms. Sato was promoted
to Vice President and Treasurer. Ms. Sato graduated from the University
of Connecticut with a B.A. in Accounting.
ROGER C. KAHN has been a Managing Director of Oppenheimer & Co., Inc.,
in investment banking since 1989, and is currently the head of its
Industrial Products Group.
J. ROBERT MEHALL has been Executive Vice President - Corporate
Development, Petrochemicals / NGLs and Crude Oil Supply for Ultramar
Diamond Shamrock since 1996. From 1982 to 1996, Mr. Mehall was Executive
Vice President and Senior Vice President of Diamond Shamrock, Inc.
JERRY L. WEINSTEIN served as Vice President of Owens Corning -
Specialty & Foam Products Division since 1994. From 1980 until 1994, Mr.
Weinstein was President and Chief Executive Officer of UC Industries,
Inc., an independent manufacturer of plastic products for the building
materials industry.
None of the executive officers or directors are related to one
another. Executive officers are elected by and serve at the discretion of
the Board of Directors.
Directors Compensation - Directors who are not employees of the
Company receive an annual retainer of $10,000 and an automatic grant of
options to purchase 1,000 shares of Common Stock each year in accordance
with the Company's Non-Employee Directors' Stock Plan.
To the Company's knowledge, based solely on a review of the forms,
reports and certificates filed with the Company by the Company's directors and
officers and the holders of more than 10% of the Company's Common Stock, all
Section 16(a) filing requirements were complied with by such persons in fiscal
1997, except that a Form 4 was filed late by John L. Macdonald, the Company's
Chief Executive Officer and President, in connection with the purchase by Mr.
Macdonald's wife of 300 shares in December 1997.
50
<PAGE> 51
ITEM 11. EXECUTIVE COMPENSATION:
The following table sets forth all compensation awarded to, earned by,
or paid for services rendered to the Company in all capacities during the years
ended December 31, 1996 and 1997 for each of the named executive officers (as
defined under applicable Securities and Exchange Commission Rules) of the
Company (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------
Annual Compensation (1) Awards
------------------------- --------------------------
Name Restricted All Other
And Salary Bonus Stock Compensation
Position Year ($) ($) Awards (#) Options (#) ($)(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John L. Macdonald 1997 $401,541 $200,000 - 125,000 17,056
President & CEO 1996 168,486 250,000 - - 9,486
Thaddeus J. Lelek 1997 129,803 12,500 15,000 30,000 3,588
Vice President 1996 108,333 10,000 - - -
Wilfred J. Kimball 1997 136,437 22,000 2,000 30,000 15,266
Vice President 1996 135,483 15,000 - - 39,141
Frank A. Musto 1997 121,274 27,000 15,000 30,000 15,841
Vice President & CFO 1996 91,683 26,000 - - 9,500
John T. White 1997 114,462 27,500 - 15,000 11,888
Vice President & 1996 113,866 27,500 - - -
General Counsel
</TABLE>
(1) The Company was not subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, in 1995. Accordingly,
information with respect to 1995 is not required to be disclosed. Other
Annual Compensation consisting of perquisites does not exceed the minimum
amounts required to be reported pursuant to Securities and Exchange
Commission Rules and the column has therefore been deleted.
(2) Amounts in 1997, for Mr. Macdonald consists of $9,500 contributed to the
Company's Defined Contribution Plan and $7,556 which is the dollar value,
on a term loan approach, of the benefit to Mr. Macdonald of the $248,941
premium paid by the Company during 1997 for a split-dollar life insurance
plan covering Mr. Macdonald and his wife. Under the terms of the split
dollar life insurance agreement, the Company has the right to recover all
of the premiums paid by the Company under the agreement. Amount in 1997
for Mr. Lelek consists of the amount contributed by the Company to the
Company's Defined Contribution Plan. Amount for Mr. White in 1997 consists
of a car allowance. Amount for Mr. Kimball in 1997 consists of $6,000 car
allowance and $9,266 contributed by the Company to the Company's Defined
Contribution Plan. Amounts for Mr. Musto in 1997 consists of $7,200 of car
allowance and $8,066 contributed by the Company to the Company's Defined
Contribution Plan.
51
<PAGE> 52
The following table summarizes certain information concerning stock
options granted during fiscal year 1997 to the Named Executive officer:
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed Annual
- ------------------------------------------------------------------------ Rates of
% of Total Stock Price Appreciation
Options Exercise for Option Term
Granted to or Base ------------------------
Options Employees in Price Expiration
Name Granted(#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
---- ---------- ----------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
John L. Macdonald 125,000 30% $10 07/23/07 345,000 763,750
Thaddeus J. Lelek 30,000 7% 10 07/23/07 82,800 183,300
Wilfred J. Kimball 30,000 7% 10 07/23/07 82,800 183,300
Frank A. Musto 30,000 7% 10 07/23/07 82,800 183,300
John T. White 15,000 4% 10 07/23/07 41,400 91,650
</TABLE>
The following table provides information regarding the exercise of
stock options during fiscal year 1997 and stock options held as of the end
of fiscal year 1997 by the Named Executive Officers:
AGGREGATED OPTION EXERCISE
AND YEAR END OPTIONS VALUE TABLE
<TABLE>
<CAPTION>
Value of Unexercised In-the-Money
Shares Number of Unexercised Options at Options
Acquired At Fiscal Year End At Fiscal Year End (1)
on Value ------------------------------- -------------------------------
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------- ------------ ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
John L. Macdonald 0 $0 0 125,000 $0 $31,250
Thaddeus J. Lelek 0 0 0 30,000 0 7,500
Wilfred J. Kimball 0 0 0 30,000 0 7,500
Frank A. Musto 0 0 0 30,000 0 7,500
John T. White 0 0 0 15,000 0 3,750
</TABLE>
(1) This represents the amount by which the fair market value of the
Company's Common Stock of $10.25 per share as of December 31, 1997
exceeded the exercise price of the options held by the Named Executive
Officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 20, 1998 for (I)
each person known by the Company to own beneficially more than 5.0% of the
outstanding Common Stock, (ii) each director of the Company, (iii) each of the
Named Executive Officers and (iv) all officers and directors as a group. The
persons named in the table have sole voting and investment powers with respect
to all shares of Common Stock shown as beneficially owned by them. For the
purposes of the table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such persons has
the right to acquire within 60 days after such date.
52
<PAGE> 53
<TABLE>
<CAPTION>
NUMBER PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED CLASS
<S> <C> <C>
John L. Macdonald(1) 4,371,948 61.2
Maxwell Stolzberg (1) 4,146,608 58.4
Thaddeus J. Lelek 15,000 *
Wilfred J. Kimball 2,000 *
Frank A. Musto 15,000 *
John T. White - *
Roger C. Kahn - *
J. Robert Mehall - *
Jerry L. Weinstein - *
All Directors, Nominees, for Directors and
Executive Officers As a Group (10 persons) 4,403,948 61.2
</TABLE>
* Less than one percent ownership
(1) For Mr. Macdonald, Includes 167,040 shares of Common Stock held by two
irrevocable trusts created for the benefit of Mr. Macdonald's children
for which Mr. Macdonald disclaims beneficial ownership. Of the 4,371,948
shares shown, 4,146,608 shares are held of record by an irrevocable trust
of which Maxwell Stolzberg is the sole trustee and Mr. Macdonald is the
sole beneficiary. Under the terms of the Irrevocable Trust Agreement, Mr.
Stolzberg has the full and exclusive right and power to vote and dispose
of all shares of the Common Stock held by the Irrevocable Trust. However,
as a result of Mr. Macdonald's right to terminate the Irrevocable Trust by
providing a written notice at certain specified times, Mr. Macdonald and
the Trustee may be deemed to share voting and investment control with
respect to the shares of Common Stock held by the Irrevocable Trust.
Also, for Mr. Macdonald, includes 300 shares held by Derry Macdonald, Mr.
Macdonald's wife. The address for Mr. Macdonald is 8675 Hidden River
Parkway, Tampa, Florida 33637 and for Maxwell Stolzberg as trustee of the
Irrevocable Trust is 460 Park Avenue, New York, New York 10022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
JLM Stables, Inc., a subsidiary of the Company, operated a horse farm in
Ocala, Florida and in connection herewith, leased from John L. Macdonald,
100 acres of land consisting of riding areas and grazing pasture, a stable
building and farm manager's house. Pursuant to the lease, JLM Stables, Inc.
paid certain costs associated with owning and operating the leased property
including utilities, maintenance and insurance. In 1995 and 1996, the
Company's total rental payments to Mr. Macdonald were $48,000 per year.
Effective November 1, 1996, the Company entered into a new three-year lease
with Mr. Macdonald, providing for rental payments of $4,000 per month.
In December 1996, the Company made a decision to terminate its involvement
with the horse farm business, and is taking steps to sell all assets used
in those activities. In connection with the termination of the horse farm
operations, Mr. Macdonald purchased certain horses from the Company for an
aggregate purchase price of approximately $324,000 and terminated the lease
effective April 30, 1997.
On November 19, 1996, Mr. Macdonald loaned the Company approximately
$941,000. The loan is unsecured, bears interest at the prime rate,
currently 8.5%, compounded annually and matures on January 1, 1999. As of
December 31, 1997, the unpaid principal balance of the loan was
approximately $905,000. During 1995 and 1996, the Company was indebted to
Mr. Macdonald on an open account basis for approximately $886,000 and
$905,000, respectively. All such indebtedness was repaid prior to entering
into the November loan transaction.
53
<PAGE> 54
In 1995 and 1996, the Company purchased approximately $479,000 and
$319,000, respectively, of chemical products from Kemlink JV, a New York joint
venture partnership owned 50.0% by Kemlink, L.L.C., a Delaware limited
liability company of which Mr. Macdonald is a 97.0% owner. All purchases in 1995
and 1996 were at prices comparable to those paid to unrelated parties. In
addition, during these years, the Company sold approximately $1.6 million and
$1.3 million, respectively, of chemical products to Kemlink JV. Effective
December 31, 1996, the Company ceased doing business with Kemlink JV, which was
terminated by its partners, and Kemlink, L.L.C.
The Company's Spanish distributor is Chemical Trading, S.L. ("CTSL"),
which is owned 100.0% by Eduardo Delgadillo, a stockholder of the Company. The
Company and CTSL have an arrangement pursuant to which the Company pays CTSL's
operating expenses. The Company treats the difference between such payments and
the amount of commissions and other amounts due to CTSL as a loan. Under such
arrangement CTSL was indebted to the Company for approximately $569,000 and
$322,000, as of December 31, 1995 and 1996, respectively, and approximately
$421,000 as of March 31, 1997. Such indebtedness is carried on an open account
basis and during 1996, approximately $522,000 was repaid without interest
through the sale at fair market value to the Company by Mr. Delgadillo of 48
shares (267,264 shares after giving effect to the stock split in July 1997) of
the Company's Common Stock (representing approximately 5.1% of the issued and
outstanding shares of Common Stock at such date) owned by him. During the period
from 1994 to 1996, Mr. Delgadillo was the beneficial owner of between 9.9% and
4.8% of the Company's outstanding Common Stock.
In 1995, 1996 and 1997, the Company leased certain office space from
Aurora, a Texas corporation of which John L. Macdonald is an 80% stockholder.
Aurora markets certain solvent chemicals, primarily phenol, benzene, and
acetone. The lease is on a month to month basis with a rental of $2,100 per
month. In 1995, 1996 and 1997, lease payments were approximately $25,000,
$25,000 and $12,600, respectively. The lease with Aurora was terminated upon
consummation of the purchase by the Company of all of the common stock of
Aurora. In 1995, 1996 and 1997, the Company sold approximately $5.6 million,
$1.4 million and $0.4 million, respectively, of chemical products to Aurora.
The Company entered into an Agreement for Sale and Purchase of Common
Stock held by Mr. Macdonald and an unrelated third party to purchase for a total
purchase price of approximately $1.25 million all of the issued and outstanding
shares of Aurora. Under the terms of the agreement, the Company purchased Mr.
Macdonald's ownership interest in Aurora for a $1.0 million promissory note that
matures on June 1, 2002 and bears interest at a rate of 10.0% per annum. The
other shareholder received consideration of $250,000 for the purchase of his
ownership interest. Of such amount, $150,000 was paid at closing in cash and
$100,000 was paid by a three year promissory note which bears interest at the
prime rate and is payable in three equal annual installments.
In 1995, 1996 and 1997, the Company leased chemical tank railcars from
Phoenix, a Connecticut corporation of which the sole stockholder is John L.
Macdonald. The Company made payments in 1995, 1996 and 1997 to Phoenix in
respect of such leases of approximatel $162,000, $203,000 and $6,000,
respectively. The Company entered into an Agreement for Sale and Purchase of
Common Stock with Mr. Macdonald to purchase for a total purchase price of
$500,000 all of the issued and outstanding shares of Phoenix. Under the terms of
the agreement, the Company purchased Mr. Macdonald's ownership interest in
Phoenix for $500,000, of which $250,000 was offset against advances owed to the
Company by Mr. Macdonald and $250,000 paid by means of a promissory note that
matures on June 1, 2002 and bears interest at a rate of 10.0% per annum.
The Company believes that each of the certain transactions described
above were on terms no less favorable to the Company than those which could have
been obtained in arm's length transactions with unaffiliated third parties.
However, except as indicated above, the Company did not obtain independent
objective information to support its belief in this respect. After the
consummation of the Offering, the Company will not enter into any transaction
with any officer, director or stockholder except on terms that are
54
<PAGE> 55
no less favorable to the Company than those which could be obtained in an
arm-length transaction with an unaffiliated party unless the approval of a
majority of disinterested directors is obtained.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) 1. Consolidated Financial Statements, notes to Consolidated Financial
Statements and report thereon of Deloitte & Touche LLP are found in
Item 8 "Consolidated Financial Statements and Supplemental Data"
herein.
2. The following Consolidated Financial Statement Schedule and
reports are included herein:
VIII - Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1996 and 1997
For the Independent Auditors' Reports on the Consolidated Financial
Statements and Consolidated Financial Statement Schedules, see index
at the beginning of Item 8, "Consolidated Financial Statements and
Supplemental Data."
All other schedules are not submitted because they are not applicable
or are not required or because the required information is included in
the Consolidated Financial Statements or notes thereto.
3. Exhibits Filed Herewith:
23 Consent of Deloitte & Touche LLP to the consolidated
financial statements of JLM Industries, Inc. and
subsidiaries
27 Financial Data Schedule for the year ended December 31,
1997
4. Exhibits incorporated herein by reference as each exhibit was
filed with the Company's Registration Statement on Form S-1 (No.
333-27843) filed with the SEC on July 21, 1997:
<TABLE>
<S> <C>
3.1 Articles of Incorporation, as amended
3.2 Form of Amended and Restated Articles of Incorporation
3.3 Bylaws
3.4 Form of Amended and Restated Bylaws
4 Form of Common Stock Certificate
10.1 Authorized Distributor Agreement between GE Petrochemicals, Inc. and JLM Marketing, Inc. for
Styrene
10.2** Memorandum of Agreement between Sasol Chemical Industries (PTY) Ltd. and JLM Marketing, Inc. for
N-Propanol
10.3** Memorandum of Agreement between Sasol Chemical Industries (PTY) Ltd. and JLM Marketing, Inc. for
Acetone
10.4** Memorandum of Agreement between Sasol Chemical Industries (PTY) Ltd. and JLM Marketing,
Inc. for Methyl Ethyl Ketone
10.5** Acetone Sales Agreement between Mt. Vernon Phenol Plant Partnership, JLM Marketing, Inc. and JLM
Industries, Inc.
10.6 Asset Purchase Agreement by and among BTL Specialty Resins Corp. and JLM Chemicals, Inc.
providing for the acquisition of the Blue Island (Illinois) Phenol Plant, as amended
10.7 Propane/Propylene Agreement between Clark Oil & Refining Corporation and BTL Specialty Resins
Corp.
10.8 Q-Max Process License Agreement between BTL Specialty Resins Corp. and UOP
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C>
10.9 Credit Agreement among JLM Chemicals, Inc., The CIT Group/Equipment Financing, Inc. and The CIT
Group/Business Credit, Inc., as amended
10.10 Security Agreement by JLM Chemicals, Inc. in favor of the Lenders and The CIT
Group/Equipment Financing, Inc.
10.11 Pledge Agreement by JLM Industries, Inc. in favor of the Lenders and The CIT Group/Equipment
Financing, Inc.
10.12 Mortgage, Assignment of Leases and Rents and Security Agreement from JLM Chemicals, Inc. to The CIT
Group/Equipment Financing, Inc., as corrected and modified
10.13 Partnership Agreement of Mt. Vernon Phenol Plant Partnership
10.14 Intercreditor Agreement between JLM Marketing, Inc., JLM Industries, Inc., JLM Terminals, Inc., JLM
International, Olefins Marketing, Inc., State Street Bank and Trust Company, Caisse Nationale De Credit
Agricole and Standard Chartered Bank New York Branch
10.15 Master Promissory Note by JLM International, Inc. and Olefins Marketing, Inc. in favor of Caisse
Nationale De Credit Agricole
10.16 Guaranty Agreement by JLM Industries, Inc. to Caisse Nationale De Credit Agricole, New York Branch
10.17 Security Agreement between Olefins Marketing, Inc. and Caisse Nationale De Credit Agricole, New
York Branch
10.18 Security Agreement between JLM International, Inc. and Caisse Nationale De Credit Agricole, New
York Branch
10.19 Amended and Restated Credit Agreement among JLM Industries, Inc., JLM Marketing, Inc., JLM
Terminals, Inc., JLM International Inc., Olefins Marketing, Inc., John L. Macdonald and State Street Bank
and Trust Company, as amended
10.20 Facility Letter between Standard Chartered Bank and Olefins Marketing
10.21 Security Agreement by Olefins Marketing to Standard Chartered Bank
10.22 Security Agreement by JLM International, Inc. to Standard Chartered Bank
10.23 Continuing Guaranty by JLM International, Inc. and Olefins Marketing Corp. in favor of Standard
Chartered Bank
10.24 Facility letter between Generale Bank and JLM Industries
10.25 Corporate Guarantee by JLM Industries, Inc. to Generale Bank
10.26 Agreement by and among Union Carbide Corporation, D-S Splitter, Inc., JLM Industries, Inc. and
Olefins Terminal Corporation
10.27 Pledge and Security Agreement by JLM Industries, Inc. to Ultramar Diamond Shamrock Corporation
10.28 Management, Operating and Stockholders Agreement of Olefins Terminal Corporation between D-S
Splitter, Inc., Ultramar Diamond Shamrock Corporation, JLM Industries, Inc., Olefins Marketing, Inc. and
Olefins Terminal Corporation
10.29 Investment Agreement by and between JLM Industries, Inc. and Tan Siew Kiat
10.30 Agreement for Sale and Purchase of Common Stock between John L. Macdonald and Gene Harmeyer, as
owners of the capital stock of Aurora Chemical, Inc., and JIM Marketing, Inc.
10.31 Agreement for Sale and Purchase of Common Stock between John L. Macdonald, owner of the capital
stock of Phoenix Tank Car Corp., and JLM Marketing, Inc.
10.32 Form of Indemnification Agreement for Officers and Directors
10.33 Form of 1997 Employee Stock Purchase Plan
10.34 Form of Long Term Incentive Plan
10.35 Form of Non-employee Directors' Plan
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C>
10.36 Assignment and Assumption Agreement between Ashland Chemical, Inc. and JLM Terminals, Inc.
10.37 Asset Purchase Agreement between Union Oil Company of California and Ashland Chemical,
Inc.
</TABLE>
** Confidential treatment has been requested with respect to
portions of this Exhibit.
(b) During the fourth quarter of 1997, the Company did not file any
report on Form 8-K.
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
JLM INDUSTRIES, INC.
March 25, 1998 By: /s/ John L. Macdonald
-------------------------------
John L. Macdonald
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John L. Macdonald President, Chief Executive Officer and March 25, 1998
- ----------------------------- Director (Principal Executive Officer)
John L. Macdonald
/s/ Frank A. Musto Chief Financial Officer, Vice President March 25, 1998
- ----------------------------- and Director (Principal Financial Officer
Frank A. Musto and Principal Accounting Officer)
/s/ Thaddeus J. Lelek Vice President and Director March 25, 1998
- -----------------------------
Thaddeus J. Lelek
/s/ Wilfred J. Kimball Vice President and Director March 25, 1998
- -----------------------------
Wilfred J. Kimball
/s/ J. Robert Mehall Director March 25, 1998
- -----------------------------
J. Robert Mehall
/s/ Jerry L. Weinstein Director March 25, 1998
- -----------------------------
Jerry L. Weinstein
/s/ Roger C. Kahn Director March 25, 1998
- -----------------------------
Roger C. Kahn
</TABLE>
58
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration Statements for
the Company's Long-term Incentive Plan, Non-employee Directors Stock Option Plan
and Employee Stock Purchase Plan (No.'s 333-32337, 333-32339, and 333-32347,
respectively) of JLM Industries, Inc. and subsidiaries on Form S-8 of our report
Dated February 25, 1998 (March 10, 1998 as to the third and fourth paragraphs of
Note 22), appearing in the annual report on Form 10-K of JLM Industries, Inc.
and subsidiaries for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Tampa, Florida
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,214
<SECURITIES> 0
<RECEIVABLES> 29,471
<ALLOWANCES> 0
<INVENTORY> 11,881
<CURRENT-ASSETS> 49,047
<PP&E> 35,957
<DEPRECIATION> 6,452
<TOTAL-ASSETS> 83,561
<CURRENT-LIABILITIES> 35,772
<BONDS> 4,796
0
0
<COMMON> 71
<OTHER-SE> 38,750
<TOTAL-LIABILITY-AND-EQUITY> 38,821
<SALES> 286,822
<TOTAL-REVENUES> 286,822
<CGS> 256,030
<TOTAL-COSTS> 256,030
<OTHER-EXPENSES> 16,889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,083
<INCOME-PRETAX> 11,382
<INCOME-TAX> 4,291
<INCOME-CONTINUING> 7,091
<DISCONTINUED> (211)
<EXTRAORDINARY> (386)
<CHANGES> 0
<NET-INCOME> 6,494
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.12
</TABLE>
