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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, 2002

Commission File No. 1-12333

JLM INDUSTRIES, INC.

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

8675 Hidden River Parkway, Tampa, FL 33637

(Address of principal executive office)

(813) 632-3300

(Registrant’s telephone number, including area code)

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 (§229.405 of this chapter) 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.     x

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

The aggregate market value of common stock held by non-affiliates of the registrant at March 31, 2003 was $4,250,308 based upon the last reported sale 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 31, 2003 was 9,587,127.

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JLM INDUSTRIES, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

An index of Exhibits to this Annual Report on Form 10-K begins on page 76.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Items 10, 11 and 13 of Part III of this Report is hereby incorporated by reference from the Company’s definitive proxy statement or will be contained in an amendment to this Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission (the “Commission”) not later than April 30, 2003.

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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; the political and economic uncertainties associated with international operations; fluctuations of foreign currency exchange; the ability to dispose of various non-core assets and operations; 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 Industries, Inc. and subsidiaries (“JLM” or the “Company”) is a leading global marketer and distributor of performance chemicals, olefins, and specialty plastics. The Company is one of the largest chemical distributors in North America and a manufacturer and merchant marketer of phenol and acetone. The Company maintains long-term supplier relationships with many global chemical companies, manufactures phenol and acetone at its phenol plant in Blue Island, IL (the “Blue Island Plant”), and seeks to add new product capabilities through distribution agreements and acquisition and investment opportunities. In addition to seeking to strengthening its position in its core chemical businesses, the Company plans to expand its capabilities in specialty chemicals and plastics. The Company sells its products worldwide to over 1,000 customers, including major global companies such as Ashland Chemical, B.F. Goodrich, Celanese AG, DuPont, Eli Lilly, 3M and Shell Chemicals.

In 1977, John L. Macdonald, the President and Chief Executive Officer 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 worldwide chemical distribution company. In 1986, Mr. Macdonald purchased the U.S. assets of Steuber Company and formed JLM as the successor.

Since 1986, the Company has grown by expanding its product sourcing arrangements and product offerings, acquiring manufacturing and terminal facilities and providing superior customer service and product quality and availability. Significant events include (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 Terminals in 1992 and (iv) the acquisition of the 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, Western Europe in 1995 and Eastern Europe and the Far East in 1998. In recent years, the Company expanded its business both domestically and internationally through the acquisitions of Browning Chemical Corporation (“Browning”), Inquinosa International S.A. (“Inquinosa”), Tolson Holland B.V., Tolson Transports B.V. and Tolson Asia LTD (the “Tolson Group”), ICI PLC’s Colours and Industrial Chemical Division of ICI South Africa, and a majority of the shares of ICI South Africa Mozambique and Société Financière d’ Entreposage et de Commerce International de l’ Alcool, SA’s (“Sofecia”) USA industrial ethyl Alcohol distribution business, and the joint initiative with Sasol Solvents (Sasol) for marketing ethyl alcohol (ethanol) in North America. Through the acquisition of Browning, the Company diversified into the domestic inorganic chemical distribution business, which was synergistic with the Company’s current infrastructure. The new business not only expanded the Company’s product mix but also added increased margins. Inquinosa has contributed to JLM’s ability to be a niche player in the agrochemical sector. The acquisition of the ethanol business from Sofecia further enhanced JLM’s ability to provide a broad range of pure and formulated ethanol to core markets and key customer partners.

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During 2001, the Company completed a series of transactions to sell “non-core” assets in order to reduce its long-term debt and increase working capital, thus enabling the Company to refocus its efforts running its core business. These transactions consisted of selling a portion of the JLM Marketing solvents distribution business in the United States to Sasol North America, the sale of substantially all of the assets of JLM Terminals, Inc., a wholly-owned subsidiary of the Company, and the sale of all the issued and outstanding shares of JLM Chemicals Asia Pte., Ltd. (“JLM Asia”), a wholly-owned subsidiary of the Company. The Company continues to evaluate options for the disposal of various non-core assets and operations from time to time.

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. Over 80% 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 17.2 billion pounds (6.3 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 27% 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. 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.

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 exempted acetone from all regulations as a volatile organic compound. All states with the exception of Hawaii and certain parts of California have followed the Federal government’s ruling.

Propylene

According to industry sources, current world propylene production is approximately 110 billion pounds. Over 50% 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.

Business Strategy

The Company’s principal objective is to continue to expand the number of sources and breadth of its chemical and engineered resins products and the markets in which it distributes these products to enhance its  

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position as a leading supplier to the worldwide chemical and plastics industries. Key elements of the Company’s business strategy include:

Products and Customers

JLM markets more than 400 chemical products to over 1,000 customers worldwide. 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 2002, JLM distributed approximately 274 million pounds of acetone, of which approximately 86.4% 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, Chemcentral, PPG Industries, the 3M Corporation, and Rohm & Haas.

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Phenol

In 2002, the Company distributed approximately 109 million pounds of phenol, which was predominately 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, Tembee, Dynea Plenco and the 3M Corporation.

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”), General Electric (“GE”) and Goodyear. JLM’s propylene customers include Borealis Exploration Limited (“Borealis”), DSM and Dow Chemical Corporation (“Dow Chemical”).

Other Products

In addition to acetone, phenol and propylene, the Company markets and distributes other commodity, inorganic, plastics, and specialty chemicals including acetophenone, benzoic acid, butadiene, cumene, DDVP, esters, ethylene, fumaric acid, ketones, lindane, methanol and various grades of formulated ethanol. Some of JLM’s customers for these products include BASF Corp., Dow Chemical, DSM, Goodyear, Valspar, PPG Industries Inc., and Repsol, S.A. (Spain) (“Repsol”).

During each of the past three years, no single distribution relationship, customer or group of affiliated customers has accounted for more than 10% of the Company’s revenues.

Manufacturing and Product Sourcing

In order to support its worldwide marketing and distribution capabilities, the Company seeks to acquire assets and establish relationships to provide consistent and reliable sources of products. JLM sources a majority of its products distributed in North America from its Blue Island Plant and the Mt. Vernon Plant.

Blue Island Plant

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.

Since 1997, the Blue Island Plant has utilized a 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 increased significantly.

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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 a phenol plant in Mt. Vernon, IN (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 2003, 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”). 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 expired in 2002, was renewed in 2003, and will continue thereafter for successive one-year terms unless one year’s notice is otherwise provided by either party.

The Company has successfully marketed all the acetone offered under this agreement and believes that it will be able to do so in the future. Since 1994, the Company has sourced, on average, approximately 225 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. Over the next four years, the amount of acetone available to JLM was further reduced by approximately 35 to 40 million pounds as a result of increased consumption by GE Plastics. Through improvement in operating efficiency the Mt. Vernon plant has increased their acetone output, thereby offsetting increased internal consumption.

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 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 established supplier relationships with many of the largest and most well-known chemical companies worldwide. Suppliers to JLM include Lyondell Chemicals, Repsol, Premcor, and Solpetroleo. The structure of the Company’s 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.

Storage

The Company maintains inventory at strategic locations worldwide. The Company believes its storage facilities will be 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 commercially reasonable rates. The Company also operates a fleet of more than 125 rail cars and has long-term working relationships with a number of national barge lines and tank truck carriers. See “Properties.”

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Sales and Marketing

Until the acquisition of Browning in 1998, the Company historically focused primarily on bulk quantity sales (generally in truckload lots) of commodity chemicals to over 1,000 customers worldwide in a broad range of industries. With the acquisition of Browning, the Company now services an additional 400 customers in the U.S. primarily in the inorganic sector, generally selling in smaller quantities. 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 has offices in the U.S., Canada, the Netherlands, Venezuela, Colombia, the Czech Republic, South Africa, Spain, Turkey, and Azerbaijan. JLM also has an alliance with a distributor in Spain and operates through agency relationships in Italy, Brazil, Peru, Mexico and Taiwan.

In 1997, the Company purchased a 25% interest in SK Asia and a 12.7% interest in SK Trading, two Singapore-based companies participating in a Vietnamese joint venture. The Vietnamese joint venture intended to construct a chemical plant in Vietnam to produce dioctyl phthlate, a chemical used in the production of plastics such as PVC. The Vietnamese joint venture also intended to construct terminaling and storage facilities in Vietnam and Malaysia. In January 2000, the Company exchanged its 25% interest in SK Asia and its 12.7% interest in SK Trading, for a 49% interest in an existing terminal facility which was named Siam JLM. In the first quarter of fiscal 2001, the Company made the decision to wind down the operations of JLM Siam. During 2000, when the Company had estimated that the anticipated future undiscounted cash flows would be insufficient to recover the carrying value of the Company’s investment, the Company wrote off this investment and recorded a loss on impairment.

In 2002, approximately 18% of the Company’s domestic marketing revenues 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 volume marketer, combined with JLM’s knowledge of customer and supplier needs and objectives, affords opportunities to effect product exchanges. Engaging in product exchange transactions allows the Company to provide solutions to customers and suppliers and take 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 build 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 has developed long-term relationships with essential industry participants and its access to terminal and storage facilities will enable the Company to become a volume marketer of olefins globally. 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 to source butadiene for the U.S. and with Copene Petroguimicade Nordente S.A., Equistar, and Enterprise to export propylene from South America and the the U.S. Some of the Company’s significant olefins customers include Dow Chemical, DuPont, Exxon Mobil, GE, Goodyear, BP Amoco, Basell and Borealis.

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

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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, 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.

Employees

As of December 31, 2002, the Company had 163 full-time employees. Of these, 80 employees were in management and administration, 58 in sales and marketing and 25 in production and distribution. Approximately 25 of the Company’s 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, 2004. 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 and discharges, 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.

Elevated levels of certain petroleum-related substances, organic chemicals and metals have been detected in groundwater and/or soils at the Company’s former Wilmington, North Carolina terminal facilities, which the Company sold in October 2001. In 1998, the Company assumed from Union Oil Company of California, the prior owner of the site, the implementation of state approved remedial action plans to address onsite petroleum contamination at some of its terminal facilities. No significant cleanup activities have been conducted at the North Carolina terminal facilities since the Company acquired them in 1992 and 1998. Although the Wilmington, North Carolina terminal was sold in October 2001 and the purchaser assumed liability for costs of clean-up and other remedial activities, the Company remains subject to certain liabilities under Environmental Laws with respect to the facilities, which may cause the Company to incur costs which could be material.

Risk Factors

An investment in the Company’s common stock involves a high degree of risk. Stockholders and prospective purchasers should carefully consider the following risk factors, as well as the other information contained

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elsewhere or incorporated by reference in this Annual Report. If any of the following risks actually occur, the Company’s business could be materially harmed.

Worldwide chemical markets are cyclical and excess production capacity may cause chemical prices to decline and adversely affect the Company’s operations.

Sales of commodity chemicals such as acetone and phenol account for a substantial portion of the Company’s revenues. The markets for commodity chemicals are cyclical. This cyclicality primarily results from changes in the balance between supply and demand, the price of feedstocks and the level of general economic activity. Historically, these markets have experienced alternating periods of tight supply resulting in generally rising prices and profit margins, followed by periods of large capacity additions resulting in oversupply and generally declining prices and profit margins. In 2000, 2001 and 2002, the Company experienced losses due to excess production which resulted in oversupply and lower prices. Although the Company believes that the supply of phenol will not increase, the Company cannot predict with any certainty whether the markets for acetone and phenol will favorably impact the Company’s operations or whether the Company will be profitable if a shift in the market causes prices to decline and profit margins for these products to shrink.

If the cost of raw materials increases or the availability of raw materials decreases, the Company’s costs could increase and the Company’s business could be harmed.

In 2002, approximately 12.0% of the Company’s revenues were derived from the sale of products that the Company manufactures. An adequate supply of raw materials at competitive prices is critical to the economic success of the Company’s manufacturing operations. The Company does not produce propylene and benzene, the key raw materials used for the production of cumene, the primary feedstock for the production of acetone and phenol. Currently, the Company obtains propylene and benzene from a number of suppliers under supply contracts at market rates. The Company believes that there are a number of alternative sources of supply for propylene and benzene. However, if the Company’s current propylene suppliers were unable to meet their supply obligations to the Company, the Company could be required to incur increased costs for propylene and benzene which could have a material adverse effect on the Company’s results of operations and financial condition.

The Company’s ability to pass on increases in raw material prices to the Company’s customers is, to a large extent, dependent on market conditions and is limited because the commodity nature of certain chemicals the Company manufactures restricts its ability to increase prices. There may be periods of time in which the Company does not recover increases in raw material prices. If the Company is unable to increase the selling prices of its products due to weak demand for or oversupply of such products, it will not be able to recover such increases in raw material prices. Therefore, increases in raw material prices could have a material adverse effect on its results of operations and financial condition.

Because of the cyclical nature of chemical prices, fluctuations in the selling price of chemicals associated with the Company’s distribution supply contracts may increase the Company’s costs and reduce profits.

Certain products the Company distributes are obtained through supply relationships with other chemical producers. Typically, the Company’s supply contracts have one-year terms with provisions that automatically renew the contracts for additional one-year terms unless notice of termination is provided (which notice may be, under certain agreements, as short as 30 days). The Company has long-established relationships with many of its suppliers. The Company cannot predict whether its relationships or agreements with its suppliers will be terminated and, if terminated, whether they can be replaced.

Due to the cyclical nature of the prices of many of the commodity chemical products that it distributes, the Company tries to enter into distribution agreements with external suppliers that provide it with a fixed percentage profit per unit volume of product or otherwise reduce its exposure to fluctuations in the selling price of the products it distributes for other manufacturers. The Company is unable to predict whether it will be able to enter

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into contracts in the future that provide similar protection against price volatility. The Company’s inability to do so could have a material adverse effect on the Company’s results of operations and financial condition. In addition, some of the Company’s agreements with its suppliers require the Company to purchase a minimum amount of chemical product or to pay certain agreed upon amounts for such minimum quantities if not taken. These agreements expose the Company to financial risk and could require the Company to expend significant amounts of capital without receiving corresponding revenues which could have a material adverse effect on its results of operations and financial condition.

Because a significant portion of the Company’s revenues are derived from international sales, uncertain political, economic or military conditions in other countries where the Company operates or intends to expand its operations could materially disrupt its business.

In 2002, approximately 42.8% of the Company’s revenues were attributable to operations conducted abroad and to export sales. In certain countries where it currently operates or sells products, the Company may be subject to certain political, economic or military conditions, including labor unrest, political instability, restrictions on transfers of funds, high export duties and quotas, domestic and international customs and tariffs, unexpected changes in regulatory environments and potentially adverse tax consequences. The Company cannot predict whether any of these events will occur and if they do occur, whether they will have a material adverse effect on the Company’s business.

Because the Company’s business is affected by changes in currency markets, fluctuations in foreign currency exchange rates may adversely affect the Company’s results of operations.

A portion of the Company’s revenues is denominated in currencies other than the U.S. dollar because the Company’s foreign subsidiaries operate in their local currencies. Accordingly, the Company’s results of operations and financial condition may be affected by fluctuations in the exchange rates between such currencies and the U.S. dollar. Moreover, the Company may incur costs in connection with conversions between currencies. From time to time, the Company purchases short-term forward exchange contracts to hedge payments that are in a currency other than the local currency. The purpose of entering into these short-term forward exchange contracts is to minimize the impact of foreign currency fluctuations on the Company’s results of operations. Certain increases or decreases in these payments are then offset by gains or losses on the related short-term forward exchange contracts. The Company has, in the past, entered into fixed financial contracts on certain of the Company’s raw materials for use in the Company’s manufacturing segment. Exchange rate fluctuations or foreign exchange contracts may have a material adverse effect on the Company’s results of operations and financial condition.

If the Company loses any of its significant customers, it could have a material adverse effect on its financial condition.

During each of the past three years, no single distribution relationship, customer or group of affiliated customers has accounted for more than 10% of the Company’s revenues. However, a small number of the Company’s customers historically have accounted for a significant percentage of its sales of acetone and phenol. If the Company loses one or more of these significant customers it could have a material adverse effect on the Company’s results of operations and financial condition. In the past, the Company has not experienced significant difficulties in replacing the sales volumes accounted for by the periodic loss of significant customers. However, the Company is unable to predict whether the historic levels of business from current customers will be maintained in the future or whether such customers could be replaced quickly enough to avoid adversely impacting the Company’s revenues and profitability.

If the Company is unable to successfully implement its business strategy, the Company’s results of operations and financial condition could be harmed.

Although the Company experienced a period of rapid growth since its inception, the Company has experienced a period of contraction over the past three years. The Company’s continued growth largely depends

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on the successful implementation of its business strategy. The Company is unable to predict whether it will be able to successfully implement its business strategy or whether, if implemented, such strategy will be successful. If the Company is unable to implement its business strategy and resume growth, its results of operations and financial condition could be adversely affected.

The Company has substantial outstanding indebtedness, which could adversely affect its financial condition.

As of December 31, 2002, JLM’s total consolidated debt (including current maturities) is approximately 113% of stockholders’ equity. The degree to which the Company is leveraged could have important consequences, because: a substantial portion of its cash flow from operations is required to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes; the Company’s ability to obtain additional financing in the future may be impaired; the Company may be more highly leveraged than some of its competitors, which may place the Company at a competitive disadvantage; the Company’s flexibility in planning for, or reacting to, changes in the business and industry may be limited; it may make the Company more vulnerable in the event of a downturn in the Company’s business, its industry or the economy in general; and the Company is more vulnerable to interest rate fluctuations because a significant portion of its debt is subject to variable interest rates.

The Company’s business may not generate sufficient cash flow from operations and future borrowings may not be available to it under credit facilities in an amount sufficient to enable the Company to pay its debt or to fund other liquidity needs. The Company may need to refinance all or a portion of its debt on or before maturity. The Company may not be able to refinance any of its debt, including any credit facilities, on commercially reasonable terms or at all.

Because the Company is subject to various environmental laws and compliance with these laws may entail significant costs, the Company’s compliance with environmental laws may adversely affect its operations.

The Company is subject to federal, state, local and foreign environmental laws, rules, regulations and ordinances concerning emissions and discharges, and the generation, handling, storage, transportation, treatment, disposal and import and export of hazardous materials. The operation of chemical manufacturing and storage facilities and the distribution of chemical products entail risks under environmental laws, many of which provide for substantial remediation costs in the event of discharges of contaminants and fines and criminal sanctions for violations. The Company may be liable for remediation of contamination at certain of its current and former properties and may need to make significant capital expenditures in order to comply with existing and future environmental laws. The Company believes that it currently complies in all material respects with applicable environmental laws. However, the Company may incur environmental liabilities and compliance with environmental laws may require significant capital expenditures, each of which could have a material adverse effect on its results of operations and financial condition.

Because the Company operates in a competitive industry, competition may adversely affect its market position and reduce its market share.

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 its 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. Barriers to entry in the industry, apart from capital availability, may be low, particularly with respect to commodity products. The entrance of new competitors in the industry, including companies who currently serve as the Company’s suppliers, may reduce the Company’s ability to maintain current sales or price levels. The Company’s competitive position is based principally on customer service and support, breadth of product line,

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product quality, facility location and the selling prices of its products. The Company’s commercial opportunity may be reduced or eliminated if its competitors market their products more effectively than the Company or if they develop and market products that are more useful or less expensive than the Company’s products. The Company cannot predict whether it will have sufficient resources to maintain its current competitive position or market share.

If the Company loses members of its senior management or key personnel, its business could be harmed.

The Company’s future success largely depends on the efforts and abilities of its senior management and certain other key personnel, particularly John L. Macdonald, its founder, President and Chief Executive Officer. The Company’s success will depend in large part on its ability to retain these individuals and other current members of its senior management team and to attract and retain qualified personnel in the future. The Company’s loss of one or more members of senior management or key employees or its inability to attract or retain other qualified employees could have an adverse impact on its results of operations and financial condition.

Concentration of ownership of the Company’s common stock in its existing principal stockholder may prevent other stockholders from influencing significant corporate decisions.

As of March 31, 2003, John L. Macdonald, the Company’s President and Chief Executive Officer, beneficially owned, in the aggregate, approximately 43.0% of the Company’s issued and outstanding shares. As a result, Mr. Macdonald effectively has the ability to determine the outcome of important matters submitted to the Company’s stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of the Company’s assets.

The Company’s common stock may be delisted by NASDAQ if it fails to meet the continued listing criteria, and as a result, the price of the Company’s stock could decline.

The Company’s common stock is publicly traded on The NASDAQ National Market. The market price of the Company’s common stock may be significantly affected by such factors as its operating results, changes in any earnings estimates publicly announced by the Company or by analysts, announcements of significant business developments by the Company or its competitors and various factors affecting the overall economic environment. In addition, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations not necessarily related to the fundamentals or operating performance of such companies. These market conditions may adversely affect the market price of the Company’s common stock.

In the past, the Company has failed to comply with one or more of the maintenance criteria for continued listing of its common stock on The Nasdaq National Market. On February 20, 2003 and March 6, 2003 the Company received notices from the NASDAQ National Market that: (i) its common stock had failed to maintain a minimum market value of public float of $5,000,000 over the previous 30 consecutive trading days as required by NASDAQ Marketplace Rule 4450(a)(2); and (ii) its common stock had failed to maintain a minimum per share bid price of $1.00 as required by NASDAQ Marketplace Rule 4450a)(5). NASDAQ Staff notified the Company that its common stock would be subject to delisting from the NASDAQ National Market unless, in the 90 days prior to May 21, 2003: (i) the market value of public float was at least $5,000,000 for a minimum of ten consecutive trading days; and (ii) the bid price of the Company’s common stock closes at at least $1.00 per share for a minimum of ten consecutive trading days. The date for compliance was subsequently extended to September 2, 2003 pursuant to Rule 4450(e)(2).

If the Company fails to maintain any of The Nasdaq National Market’s continued listing requirements, the Company’s common stock would in all likelihood be delisted and transferred to the Nasdaq SmallCap Market (provided that the Company meets all requirements for listing on the Nasdaq SmallCap Market and evidences an

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ability to sustain long term compliance) or the OTC Bulletin Board. If the Company’s common stock is delisted from The Nasdaq National Market or if the Company fails to meet the requirements for listing on the Nasdaq SmallCap Market, it could adversely affect the market price of the Company’s common stock and impair the Company’s ability to raise capital.

Anti-takeover provisions in the Company’s charter documents and Delaware law may deter an acquisition of the Company and could limit the price investors might be willing to pay in the future for the Company’s common stock.

Certain provisions of the Company’s certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire or control, or of discouraging a third party from attempting to acquire or control, the Company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company’s common stock. These provisions (i) allow only the board of directors, the chairman of the board of directors or the chief executive officer to call special meetings of the stockholders, (ii) establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders’ meetings, (iii) generally authorize the issuance of one or more classes of “blank check” preferred stock, with such designations, rights and preferences as may be determined from time to time by the board of directors and (iv) require approval of holders of 80% of the outstanding voting power to amend or repeal items (i) and (ii) above. If the Company issues preferred stock, it could decrease the amount of earnings and assets available for distribution to the holders of the Company’s common stock or could adversely affect the rights and powers, including the voting rights, of such holders. In certain circumstances, it could have the effect of decreasing the market price of the Company’s common stock.

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ITEM 2.    PROPERTIES

The following table sets forth certain information as of December 31, 2002, relating to the Company’s principal facilities:

ITEM 3.    LEGAL PROCEEDINGS

During 2002, a vendor of Inquinosa, the Company’s 83.4% owned subsidiary in Madrid, Spain, borrowed amounts from its banks collateralized by receivables due to it from Inquinosa. Inquinosa formally accepted bill of exchange documents thereby, under Spanish law, guaranteeing the vendor’s obligation to its banks. The outstanding balance of these guarantees approximates 2,328,000 euros ($2,499,000 at current exchange rates) as of April 7, 2003. This amount represents the total potential liability for these guarantees at December 31, 2002. Under the terms of these guarantees, the banks have made demands for payment from Inquinosa due to non-payment by the vendor for approximately 479,000 euros ($514,000 at current exchange rates) as of April 7, 2003. As a result of this situation, Inquinosa filed for, and received, in February 2003, court approval for Suspension of Payments status, which under Spanish law protects Inquinosa from actions by creditors, similar to Chapter 11 under the U.S. Bankruptcy Code. Inquinosa continues to operate under court supervision, while negotiating with creditors as to amounts owed as of the filing date. Due to a number of factors, including the status of negotiations between the customer and its banks and the Suspension of Payments status under which Inquinosa is operating, management is not able to estimate the amount, if any, that Inquinosa will be required to pay to satisfy these obligations in this matter.

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

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s stockholders during the fourth quarter of the fiscal year covered by this Report.

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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”. As of March 31, 2003 there were 116 stockholders of record. The following table sets forth the quarterly high and low sale prices of JLM’s common stock during 2001 and 2002 on the NASDAQ National Market:

On February 20, 2003 and March 6, 2003 the Company received notices from the NASDAQ National Market that: (i) its common stock had failed to maintain a minimum market value of public float of $5,000,000 over the previous 30 consecutive trading days as required by NASDAQ Marketplace Rule 4450(a)(2); and (ii) its common stock had failed to maintain a minimum per share bid price of $1.00 as required by NASDAQ Marketplace Rule 4450a)(5). NASDAQ Staff notified the Company that its common stock would be subject to delisting from the NASDAQ National Market unless, in the 90 days prior to May 21, 2003: (i) the market value of public float was at least $5,000,000 for a minimum of ten consecutive trading days; and (ii) the bid price of the Company’s common stock closes at at least $1.00 per share for a minimum of ten consecutive trading days. The date for compliance was subsequently extended to September 2, 2003 pursuant to Rule 4450(e)(2).

To date, 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 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, JLM Industries, Inc. and its subsidiaries are restricted from paying dividends under certain credit agreements to which they are a party (see Note 8 of Notes to Consolidated Financial Statements).

Equity Compensation Plan Information

The following table sets forth certain information as of December 31, 2002 with respect to the compensation plans (including individual compensation arrangements) under which shares of Common Stock of the Company are authorized for issuance, aggregated as follows:

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Recent Sales of Unregistered Securities

In connection with the $2.0 million secured loan (the “Secured Loan”) made by The Philip S. Sassower 1996 Charitable Remainder Annuity Trust (the “Trust”) on August 26, 2002, the Company issued warrants to the Trust (for no additional consideration) to purchase up to 1,666,666 shares of the Company’s Common Stock at an exercise price of $1.20 per share, subject to adjustment for certain dilutive events. The issuance of the warrants did not involve a public offering and was based on Section 4(2) of the Securities Act. There were no underwriting discounts or commissions paid in connection with the Secured Loan.

If the Secured Loan and accrued interest are not repaid in full at maturity the warrants will become exercisable at the rate of 208.333 shares of Common Stock for every $1,000 of the principal balance of the Secured Loan outstanding on each of the following dates: (i) December 31, 2002, (ii) April 30, 2003, (iii) August 31, 2003 and (iv) December 31, 2003. The warrants will expire on December 31, 2007. If the Secured Loan and accrued interest are repaid in full on or prior to maturity, the warrants will terminate and expire prior to becoming exercisable. The Company also granted certain registration rights with respect to the shares underlying the warrants. As of December 31, 2002, 104,166 of the warrants had become exercisable, and none had been exercised.

The terms of the Secured Loan also provide that in the event that the Secured Loan and accrued interest are not repaid in full on or prior to December 31, 2003, the Trust has the option to convert all or any portion of the outstanding principal balance of the Secured Loan into shares of Common Stock at a conversion price equal to $1.20 per share, subject to adjustment for certain dilutive events. For more information regarding the Secured Loan see Note 8 of the Notes to Consolidated Financial Statements.

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ITEM 6.    SELECTED FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(in thousands, except per share data)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 18 of Notes to Consolidated Financial Statements.

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Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory allowances, investment impairments, goodwill impairments, loss contingencies, and income taxes. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.

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

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

Other investments are primarily investments in partnerships. JLM accounts for the majority of its investments in partnerships on the equity basis and, accordingly, records its respective share of profits and losses that are allocated in accordance with the partnership agreements. Changes in market conditions could result in investment impairment.

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

The carrying value of goodwill is reviewed not less than annually for impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The net book value of each of the Company’s segments is generally based upon specific identification. The Company’s reporting units are generally consistent with the operating segments underlying the segments identified in Note 19 – Segment Information. This methodology differs from the Company’s previous policy, as permitted under accounting standards existing at that time, of using undiscounted cash flows on an enterprise-wide basis to determine if goodwill is recoverable.

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

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

GENERAL

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

The Company’s business consists of manufacturing and marketing segments. The Company’s manufacturing segment includes the operations of the Blue Island Plant.

The Company’s marketing segment includes its distribution, storage and terminaling operations and all other sourcing operations.

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. During the second half of 1998 through the first quarter 2000, the Company’s performance was negatively impacted by the petrochemical down cycle in which both overall pricing and margins accelerated downward. Pricing pressure on manufactured products, specifically phenol, continued during the period coupled with substantial increases in raw material feedstock costs. Beginning in the second quarter 2000, major U.S. phenol/acetone producers, including the Company, announced price increases that became effective April 1, 2000. In addition, raw materials costs began dropping in the second half of 2000. Raw material pricing has continued to decline in 2001, leading to some recovery of the Company’s operating margins. During the third quarter of 2002, raw material prices began to rise, which reduced the Company’s operating margins.

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. Results for any one or more periods are not necessarily indicative of continuing trends.

As a Percentage of Segment Revenues

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Marketing Segment

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

Manufacturing Segment

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

The development of financial instruments to hedge against changes in the prices of propylene and benzene has occurred in the past few years. The Company may seek periodically in the future, to the extent available, to enter into financial hedging contracts for the purchase of propylene and benzene in an effort to manage its raw material purchase costs (see Note 2 of Notes to Consolidated Financial Statements). There can be no assurance that the Company will utilize such financial hedging contracts or that the use of such instruments by the Company will be successful. The Company can be exposed to losses in connection with such contracts equal to the amount by which the fixed hedge price on the contract is above the market price for such chemicals at the time of purchase. The Company did not enter into any material financial hedging contracts in 2002, 2001 and 2000.

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

Tax Matters

JLM accounts for U.S. income taxes and accrues for U.S. income tax liabilities based on its consolidated U.S. earnings. The Company’s foreign subsidiaries file tax returns in the countries where incorporated. To the extent these subsidiaries are profitable, taxes are paid based on each country’s prevailing tax rate. Upon repatriation of non-U.S. earnings, the U.S. allows a foreign tax credit, subject to certain limitations, to be applied against the Company’s U.S. consolidated return for the foreign taxes paid by the Company’s foreign subsidiaries. If losses are incurred, countries in which the Company’s foreign subsidiaries are incorporated generally allow the losses to be carried forward and applied against income earned in subsequent years.

The Company’s former Venezuelan operation incurred losses which generated net operating loss carryforwards (“NOLs”) and, based on Venezuelan tax regulations, these NOLs may be carried forward for three years. The Company purchased approximately $3.8 million of net operating loss carryforwards in Holland, through the acquisition of Tolson, that can be carried forward indefinitely. During 2002, 2001, and 2000 respectively, the Holland operation generated approximately $367,000, $2,100,000, and $386,000 respectively, of income on which there will be no income taxes payable either currently or in the future due to the purchased NOL carryforwards. However, the utilization of the acquired tax credits results in deferred tax expense being recognized of approximately $129,000 in 2002, $735,000 in 2001, and $135,000 in 2000. In general, 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.

RESULTS OF OPERATIONS

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues.    Revenues decreased $98.7 million, or 29.0%, to $241.5 million for the year ended December 31, 2002 from $340.2 million for the prior year. Revenues for the marketing segment decreased $104.1 million, or 32.9%, to $212.1 million for the year ended December 31, 2002 from $316.2 million for the prior year. The Company sold its Singapore subsidiary and JLM Terminals in 2001, which accounted for $132.6 million in revenues for the year ending December 31, 2001. The Company experienced higher revenues from its marketing activities in the United States in 2002, primarily due to price increases. In addition, there were lower revenues from the Company’s Holland subsidiary primarily due to a decrease in volume. Revenues for the manufacturing segment increased $5.4 million, or 22.1%, to $29.4 million for the year ended December 31, 2002 from $24.0 million for the prior year. The increase in manufacturing segment revenues was due primarily to increases in phenol selling prices.

Gross Profit.    Gross profit decreased approximately $4.4 million, or 25.5%, to $13.2 million for the year ended December 31, 2002 from $17.7 million for prior year. Gross profit from the marketing segment decreased $3.2 million to $10.7 million for the year ended December 31, 2002 from $13.9 million for the prior year, a decrease of 23.0%. The sale of the Singapore subsidiary and JLM Terminals accounted for $3.5 million of the decrease. The decrease in gross profit was offset by higher gross profits from the Company’s marketing activities in the United States.

Gross profit from the manufacturing segment decreased $1.3 million to $2.4 million for the year ended December 31, 2002 from $3.7 million for the prior year. The decrease in manufacturing gross profit was the result of higher costs of raw materials.

Selling, General and Administrative Expenses (SG&A).    SG&A decreased $4.9 million, or 20.8%, to $18.6 million for the year ended December 31, 2002 from $23.5 million for the prior year. The sale of the Singapore

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subsidiary and JLM Terminals accounted for $3.5 million of the decrease. The remainder of the decrease, $1.4 million, was primarily the result of reductions in personnel, office closings and other cost savings initiatives implemented by management. As a percentage of revenues, SG&A increased to 7.7% of revenues for the year ended December 31, 2002 from 5.2% of revenues for the prior year.

Operating Loss.    Operating loss decreased by $0.5 million to an operating loss of $5.4 million for the year ended December 31, 2002 from an operating loss of $5.9 million for the prior year.

Interest Expense—Net.    Interest expense, net of interest income, decreased $0.9 million to interest expense, net of interest income, of $1.9 million for the year ended December 31, 2002 as compared to $2.8 million for the prior year primarily due to decreases in interest rates. The Company completed a refinancing in the second quarter of 2001, and accordingly, anticipates lower interest expense. (See “Liquidity and Capital Resources—Refinancings and Credit Facilities”).

Other Income—Net.    Other income decreased $6.6 million to $0.4 million for the year ended December 31, 2002 from $7.0 million for the prior year. The decrease was primarily attributable to a gain of $2.9 million on the sale of the Company’s solvents distribution business in the United States in the second quarter of 2001, a settlement of a lawsuit in the amount of $3.0 million in the third quarter of 2001, and a $3.7 million gain on the sale of the JLM Terminals property in the forth quarter 2001. These gains were partially offset by a $1.4 million loss relating to the sale of JLM Asia in 2001.

Foreign Currency Exchange Loss—Net.    During the year ended December 31, 2002, although the Company experienced a strengthening in the currencies of certain of its foreign subsidiaries compared to the U.S. dollar, foreign currency exchange losses decreased $0.2 million to a loss of $0.2 million for the year ended December 31, 2002 as compared to a loss of $0.4 million for the prior year. This was primarily the result of the use of short-term forward exchange contracts to offset the impact of currency fluctuations on certain transactions denominated in a currency other than a subsidiary’s functional currency.

Income Tax Provision (Benefit).    The Company’s income tax benefit for the year ended December 31, 2002 rose $2.4 million to an income tax benefit of $1.4 million from an income tax provision of $1.0 million for the prior year. The increase in the Company’s income tax benefit was primarily attributable to income taxes incurred in 2001 on a gain of $2.9 million on the sale of a portion of the Company’s solvents distribution business in the United States, the lawsuit settlement in the amount of $3.0 million, and from permanent tax differences arising during the year.

Loss before cumulative effect of accounting change.    Loss before cumulative effect of accounting change increased by $2.4 million to a net loss of $5.4 million for the year ended December 31, 2002 from a net loss of $3.0 million in the prior year.

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

Net loss.    Net loss increased by $8.7 million to a net loss of $11.7 million for the year ended December 31, 2002 from a net loss of $3.0 million in the prior year.

Other Comprehensive Income (Loss).    Other comprehensive income (loss) includes foreign currency translation adjustments. Current assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the balance sheet dates. Non-current assets and liabilities are translated at their respective historical rates. Results of operations are translated at weighted average rates for the respective years. The effects of exchange rate changes in translating foreign financial statements are reported in accumulated other comprehensive income, a separate component of stockholders’ equity. Net other comprehensive income (loss) increased by $1.1 million to $0.1 million for the year ended December 31, 2002 from a comprehensive loss of $1.2 million in the prior year.

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Comprehensive income (loss).    Comprehensive loss, including the effect of other comprehensive income (loss), increased by $7.5 million to a comprehensive loss of $11.6 million for the year ended December 31, 2002 from a comprehensive loss of $4.1 million for the prior year.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues.    Revenues decreased $94.3 million, or 21.7%, to $340.2 million for the year ended December 31, 2001 from $434.5 million for the prior year. Revenues for the marketing segment decreased $94.3 million, or 23.0%, to $316.2 million for the year ended December 31, 2001 from $410.5 million for the prior year. The Company experienced lower revenues from its marketing activities in the United States in 2001, primarily due to the sale in 2001 of a portion of its solvents distribution business. In addition, there were lower revenues from the Company’s Holland subsidiary primarily due to a decrease in volume. These decreases in marketing revenues were partially offset by an increase in revenue from the Company’s Singapore subsidiary. Revenues for the manufacturing segment increased $0.1 million, or 0.5%, to $24.1 million for the year ended December 31, 2001 from $23.9 million for the prior year. The increase in manufacturing segment revenues was due primarily to increases in phenol selling prices. Revenues for JLM Terminals for the years ended December 31, 2001 and 2000 were $1.7 million and $2.0 million, respectively. Revenues for JLM Asia for the years ended December 31, 2001 and 2000 were $131.0 million and $111.9 million, respectively. Both of these entities were sold in October 2001 and were included in the marketing segment.

Gross Profit.    Gross profit decreased approximately $4.0 million, or 18.4%, to $17.7 million for the year ended December 31, 2001 from $21.7 million for prior year. Gross profit from the marketing segment decreased $5.7 million to $13.9 million for the year ended December 31, 2001 from $19.6 million for the prior year, a decrease of 29.1%. The decrease in gross profit was primarily due to lower gross profits from the Company’s marketing activities in the United States due to the sale in 2001 of a portion of its solvents distribution business and decreased sales and gross profits from its Holland subsidiary.

Gross profit from the manufacturing segment increased $1.6 million to $3.7 million for the year ended December 31, 2001 from $2.1 million for the prior year. The increase in manufacturing gross profit was the result of higher selling prices in the Company’s two main products, phenol and acetone, coupled with decreases in raw material costs.

Selling, General and Administrative Expenses (SG&A).    SG&A decreased $1.8 million, or 7.1%, to $23.5 million for the year ended December 31, 2001 from $25.3 million for the prior year. The decrease in SG&A was primarily the result of reductions in personnel, office closings and other cost savings initiatives implemented by management in the last nine months of 2000 and in 2001. As a percentage of revenues, SG&A increased to 6.9% of revenues for the year ended December 31, 2001 from 5.8% of revenues for the prior year.

Operating Loss.    Operating loss increased by $2.3 million to an operating loss of $5.9 million for the year ended December, 31 2001 from an operating loss of $3.6 million for the prior year.

Interest Expense—Net.    Interest expense, net of interest income, decreased $0.1 million to interest expense, net of interest income, of $2.8 million for the year ended December 31, 2001 as compared to $2.9 million for the prior year. The Company completed a refinancing in the second quarter of 2001, and accordingly, anticipates lower interest expense. (See “Liquidity and Capital Resources—Refinancings and Credit Facilities”).

Other Income—Net.    Other income increased $12.1 million to $7.0 million for the year ended December 31, 2001 from a loss of $(5.1) million for the prior year. The increase was primarily attributable to a gain of $2.9 million on the sale of the Company’s solvents distribution business in the United States in the second quarter of 2001, a settlement of a lawsuit in the amount of $3.0 million in the third quarter of 2001, and a $3.7 million gain on the sale of the JLM Terminals property in the forth quarter 2001. These gains were partially offset by a $1.4 million loss relating to the sale of JLM Asia. The Company had recorded losses in 2000 totaling $5.3 million relating to investment impairments, which did not recur in 2001.

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Foreign Currency Exchange Loss—Net.    During the year ended December 31, 2001, although the Company experienced a weakening in the currencies of certain of its foreign subsidiaries compared to the U.S. dollar, foreign currency exchange losses were relatively unchanged. This was primarily the result of the use of short-term forward exchange contracts to offset the impact of currency fluctuations on certain transactions denominated in a currency other than a subsidiary’s functional currency.

Income Tax Provision (Benefit).    The Company’s income tax provision for the year ended December 31, 2001 rose $5.0 million to $1.0 million from an income tax benefit of $4.0 million for the prior year. The increase in the Company’s income tax provision was primarily attributable to income taxes incurred on a gain of $2.9 million on the sale of a portion of the Company’s solvents distribution business in the United States, the lawsuit settlement in the amount of $3.0 million, and from permanent tax differences arising during the year.

Net loss.    Net loss decreased by $5.3 million to a net loss of $3.0 million for the year ended December 31, 2001 from a net loss of $8.3 million in the prior year.

Other Comprehensive Loss.    Other comprehensive loss includes foreign currency translation adjustments. Current assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the balance sheet dates. Non-current assets and liabilities are translated at their respective historical rates. Results of operations are translated at weighted average rates for the respective years. The effects of exchange rate changes in translating foreign financial statements are reported in accumulated other comprehensive income, a separate component of stockholders’ equity. Net other comprehensive loss increased by $0.2 million to $1.2 million for the year ended December 31, 2001 from comprehensive loss of $1.0 million in the prior year.

Comprehensive loss.    Comprehensive loss, including the effect of other comprehensive loss, decreased by $5.1 million to a comprehensive loss of $4.1 million for the year ended December 31, 2001 from a comprehensive loss of $9.2 million for the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Operating activities used approximately $0.4 million of cash in 2002. The net loss adjusted for non-cash items such as cumulative effect of accounting change, depreciation, amortization, and other non-cash charges incurred utilized $4.1 million of cash. Changes in assets and liabilities provided approximately $3.7 million of cash. Investing activities used approximately $1.0 million of cash. Financing activities provided approximately $2.7 million of cash, primarily related to proceeds from long-term debt.

Operating activities used approximately $9.8 million of cash in 2001. The net loss adjusted for non-cash items such as depreciation, amortization, and other non-cash charges incurred utilized $5.1 million of cash, primarily to reduce accounts payable. Changes in assets and liabilities used approximately $4.7 million of cash. Investing activities provided approximately $6.7 million of cash. Financing activities utilized approximately $1.9 million of cash, primarily related to principal payments on long-term debt. Foreign currency translation loss was $1.6 million principally as a result of increased international business.

Operating activities provided approximately $12.1 million of cash in 2000. The net loss adjusted for non-cash items such as depreciation, amortization, and other non-cash charges incurred utilized $5.6 million of cash. Changes in assets and liabilities provided approximately $17.7 million of cash. Investing activities provided approximately $0.8 million of cash. Financing activities utilized approximately $6.5 million of cash, primarily related to principal payments on long-term debt. Foreign currency translation loss was $1.0 million principally as a result of increased international business.

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Credit Facilities

The Company’s debt is collateralized by substantially all of JLM’s assets. As of December 31, 2002, JLM had a total of approximately $40,000,000 of credit facilities in place, consisting of line of credit and letters of credit agreements, with various financial institutions of which approximately $16,300,000 was unused. Availability under these agreements is subject to borrowing base calculations. Total availability under all agreements at December 31, 2002 was approximately $8,900,000. Of this, approximately $923,000 was available under the Company’s line of credit agreement, and approximately $7,977,000 was available under letter of credit agreements. Additionally, as of December 31, 2002 and 2001, JLM had letters of credit outstanding of approximately $6,100,000 and $7,760,000, respectively in favor of its vendors. Certain provisions of the loans payable restrict the Company’s ability to pay dividends.

Former Credit Agreement

In November 1999, the Company entered into the Amended and Restated Credit Agreement with Citizens Bank of Massachusetts (“Citizens”) (f/k/a State Street Bank and Trust) (the “Credit Agreement”) which restructured its unsecured $30 million acquisition line of credit, replacing it with a $34.5 million line of credit. Under the terms of the restructuring, $14.5 million was a five year secured term loan which was scheduled to expire on November 1, 2004 and the remaining $20.0 million had terms that expired on November 1, 2001. The loan was repaid in June 2001.

In the third quarter of 2000, the Company gave notice to Citizens that it would not meet financial covenants contained in the Credit Agreement for the periods ending September 30, 2000 and December 31, 2000. On April 17, 2001, the Company and Citizens entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”), which waived compliance, up through and including December 31, 2000, with the financial covenants contained in the Credit Agreement. In connection with the First Amendment, the Company issued a warrant to Citizens to purchase 250,000 shares of the Company’s common stock at an exercise price of $1.15 per share (the “Citizens warrants”). Pursuant to the First Amendment, the warrants were reduced to 125,000 due to the loan being paid in full by October 1, 2001. The loan was repaid on June 28, 2001. As of December 31, 2001 none of the 125,000 warrants had been exercised.

As of the issue date, the Company estimated the value of the Citizens warrants using the Black-Scholes model to be $255,000, calculated based on a ten year life, 5.25 percent risk-free interest rate, 63 percent volatility, and no dividend yield due to lender restrictions on the Company’s ability to pay dividends. In addition the Company has never paid dividends. The value of the warrants has been accounted for as a discount on the debt issuance, and was charged to expense during 2001 as an extraordinary loss due to the extinguishment of the Citizens loan.

June 2001 Refinancing

On June 28, 2001, the Company consummated a series of debt and equity financings aggregating approximately $31.5 million, the proceeds of which were used to refinance the Company’s prior credit facilities and reduce indebtedness. The financings consisted of: (i) a $20.0 million revolving credit facility; (ii) a $7.1 million term debt facility; (iii) a $1.9 million mortgage loan; and (iv) a $2.5 million private placement of common stock.

Revolving Credit Facility.    On June 28, 2001, the Company entered into a revolving credit facility (the “Revolving Credit Facility”) with Congress Financial Corporation (Florida) (“Congress”). Under the terms of the Revolving Credit Facility, the Company may borrow up to 85% of the net amount of the Company’s eligible accounts receivable, plus the lesser of (i) 55% of the value of the Company’s eligible inventory or (ii) $12.0 million, up to a maximum amount of $20.0 million (including outstanding letters of credit). As of December 30, 2002, $10.4 million was outstanding under the Revolving Credit Facility, $8 million of which bore interest at LIBOR plus 250 basis points, and $2.4 million of which bore interest at the rate of 4.75% per annum.

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As collateral for the borrowings under the Revolving Credit Facility, the Company granted Congress a security interest in the Company’s receivables, general intangibles, equipment, certain real property and records. Borrowings under the Revolving Credit Facility will mature on June 27, 2005, unless the credit line is extended. If the Revolving Credit Facility is terminated prior to its expiration date, including by reason of the Company’s prepayment of borrowings, the Company will be required to pay a termination fee of $200,000.

Term Debt Facility.    On June 28, 2001, the Company entered into a $7.1 million term loan (the “Term Debt Facility”) with GATX Capital Corporation (“GATX”) which matures on June 27, 2007. As security for the borrowings under the Term Debt Facility, the Company granted GATX a first lien on real property located at the Company’s Blue Island, Illinois manufacturing facility and the Wilmington, North Carolina terminal. On October 10, 2001, the Company sold its Wilmington, North Carolina terminal, amended its Term Debt Facility, repaid $3.0 million of the term loan to GATX along with a prepayment penalty of $83,000, and delivered a standby letter of credit of $500,000 as additional collateral. The balance of the Term Loan of $3.3 million bears interest at a rate of 10.99% per annum. Pursuant to the terms of the Term Debt Facility, the Company is required to make 70 monthly installments of principal and accrued interest in the amount of $76,965 each, ending June 27, 2007. Borrowings may be prepaid subject to a prepayment penalty ranging between $114,720 (if paid between January 1, 2003 and June 30, 2003) to $18,677 (if paid between July 1, 2005 and June 30, 2006). As of December 31, 2002, the outstanding principal balance was $3.3 million.

In connection with the Term Debt Facility, the Company issued warrants to GATX to purchase 155,109 shares of the Company’s common stock at an exercise price of $2.30 per share (the “GATX Warrants”). The GATX Warrants were immediately exercisable and expire on June 28, 2011. The Company also granted GATX certain registration rights with respect to the shares underlying the GATX Warrants. As of December 31, 2002, none of the warrants had been exercised.

As of the issue date, the Company estimated the value of the GATX warrants using the Black-Scholes model to be $366,502, calculated based on a ten year life, 5.28 percent risk-free interest rate, 63 percent volatility, and no dividend yield due to lender restrictions on the Company’s ability to pay dividends. In addition the Company has never paid dividends. The value of the warrants has been accounted for as a discount on the debt issuance, and is being amortized to interest expense over the outstanding debt term using the effective interest method.

Mortgage Loan.    On June 15, 2001, the Company entered into a $1.9 million credit agreement (the “Mortgage Loan”) with SouthTrust Bank (“SouthTrust”). As collateral for the Mortgage Loan, the Company granted SouthTrust a first lien on the premises located at 8675 Hidden River Parkway, Tampa, Florida, and an assignment of all rents and leases related thereto. The Mortgage Loan bears interest at a rate equal to LIBOR plus 300 basis points for periods of 30, 60 or 90 days, calculated using a base year of 360 days. Pursuant to the terms of the Mortgage Loan, the Company must make monthly payments of principal and accrued interest until June 15, 2004 based on a ten-year amortization schedule. The Company may prepay the principal balance due under the Mortgage Loan at any time without penalty. As of December 31, 2002, the outstanding principal balance was $1.6 million.

Private Placement.    On June 28, 2001, the Company consummated a private placement (the “Private Placement”) of 2,173,913 shares of common stock (the “Shares”) at a purchase price of $1.15 per share, and received an aggregate of $2.5 million in gross proceeds therefor. In connection with the Private Placement, the Company issued warrants to purchase 250,000 shares of the Company’s common stock on March 29, 2001 to Phoenix Enterprises LLC (“Phoenix”) and its designees, at exercise prices of $1.43. The Company issued 100,000 warrants on May 24, 2001 and 325,000 warrants on June 28, 2001 to Phoenix Enterprises LLC (“Phoenix”) and its designees, at an exercise price of $1.15 per share (collectively, the “Phoenix Warrants”). The Phoenix Warrants were immediately exercisable at the date of the grant and were scheduled to expire five years from the date of grant. On September 7, 2001, Phoenix exercised warrants to purchase 555,000 shares of

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common stock, using the cashless exercise provision, and received 331,048 shares of common stock. On October 11, 2001 designees of Phoenix exercised warrants to purchase 120,000 shares of common stock, using the cashless exercise provision, and received 70,164 shares of common stock. As of December 31, 2001, all of the Phoenix Warrants had been exercised.

The value of the Phoenix Warrants was estimated as of the respective issue dates using the Black-Scholes model. The Company estimated the total value of the warrant issues to be $1,024,718, calculated based on a five year life, a risk-free interest rate between 4.51 percent and 4.96 percent, 63 percent volatility, and no dividend yield due to lender restrictions on the Company’s ability to pay dividends. In addition, the Company has never paid dividends. The value of the warrants has been accounted for within paid in capital as a cost of the issuance of the private placement.

At the time of the closing, the Company entered into a registration rights agreement with the holders of the Shares and Phoenix Warrants which required the Company to file a registration statement with the Securities and Exchange Commission relating to the sale of the Shares and shares of common stock issuable upon exercise of the Phoenix Warrants within 30 days from the closing date and use the Company’s best efforts to cause such registration statement to be declared effective. The Company filed a Form S-3 Registration Statement on July 20, 2001 relating to the offer and sale by certain shareholders of up to 4,511,022 shares of the Company’s common stock. The Company will not receive any proceeds from the sale of the Shares. The Company’s Registration Statement on Form S-3 became effective on October 30, 2001.

In connection with the closing of the Private Placement, the Company appointed Philip S. Sassower, the Chief Executive Officer of Phoenix, as a director. At closing, Phoenix and Mr. Sassower entered into a standstill agreement with the Company pursuant to which Phoenix and Mr. Sassower agreed for a period of two years that they (and their affiliates) will not, directly or indirectly (i) make, or in any way participate, directly or indirectly, in any solicitation in opposition to the board; (ii) initiate or propose any “shareholder proposals” for submission to a vote of stockholders; (iii) form, join or in any way participate in a group to take any actions otherwise prohibited by the terms of the standstill agreement; or (iv) enter into any arrangements or understandings with any third party with respect to any of the foregoing.

2002 Secured Loan

On August 26, 2002, two of the Company’s subsidiaries, JLM Realty, Inc. (“JLM Realty”) and JLM Industries (South Africa) (Proprietary) Limited (“JLM SA”), entered into a $2.0 million secured loan (the “Secured Loan”) with The Philip S. Sassower 1996 Charitable Remainder Annuity Trust (the “Trust”) which matured on December 31, 2002. Philip S. Sassower is a director of the Company and a co-trustee of the Trust. The Secured Loan bears interest at a rate per annum equal to the interest rate applicable to the amounts due by the Company under the Term Debt Facility with GATX Capital Corporation, and shall be adjusted from time to time in the same manner as the interest rate under the Term Debt Facility. The Company’s subsidiary JLM Chemicals, Inc. (“JLM Chemicals”) has guaranteed the payment and performance by JLM Realty and JLM SA of the Secured Loan and related indebtedness. The guaranty of JLM Chemicals is not effective unless any consents of senior lenders of the Company, JLM Chemicals, JLM Realty or JLM SA that are required in order for JLM Chemicals to make the guaranty without breach of any Company or Company subsidiary obligations to such lenders are obtained. As of December 31, 2002, The Trust had elected not to require JLM Chemicals to seek such senior lender consents, and the guaranty was not effective. As collateral for indebtedness under the Secured Loan: (i) JLM SA granted the Trust a first priority security interest and lien on all of its tangible and intangible property, including but not limited to, equipment, receivables, general intangibles, personal property and records; and (ii) JLM Realty granted the Trust a first lien on certain undeveloped real property located in New Hanover County, North Carolina. If and when the JLM Chemicals guaranty becomes effective, it is secured by a subordinate security interest in and lien on JLM Chemicals’ equipment, inventory, fixtures, vehicles, consumer goods and improvements located at the Company’s Blue Island, Illinois manufacturing facility.

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The obligations of JLM Realty and JLM SA under the Secured Loan are joint and several and the principal balance due under the Secured Loan may be prepaid in whole or in part at any time without penalty. As of December 31, 2002, the outstanding principal balance due under the Secured Loan was $0.5 million.

In connection with the Secured Loan, the Company issued warrants to the Trust to purchase up to 1,666,666 shares of the Company’s common stock (the “Trust Warrants”) at an exercise price of $1.20 per share, subject to adjustment for certain dilutive events. If the Secured Loan and accrued interest are not repaid in full at maturity the Trust Warrants will become exercisable at the rate of 208.333 shares of the Company’s common stock for every $1,000 of the principal balance of the Secured Loan outstanding on each of the following dates: (i) December 31, 2002, (ii) April 30, 2003, (iii) August 31, 2003 and (iv) December 31, 2003. The Trust Warrants will expire on December 31, 2007. If the Secured Loan and accrued interest are repaid in full on or prior to maturity, the Trust Warrants will terminate and expire prior to becoming exercisable. The Company also granted certain registration rights with respect to the shares underlying the Trust Warrants. As of December 31, 2002, 104,166 of the Trust Warrants had become exercisable and none had been exercised.

The terms of the Secured Loan also provide that in the event that the Secured Loan and accrued interest are not repaid in full on or prior to December 31, 2003, the Trust has the option to convert all or any portion of the outstanding principal balance of the Secured Loan into shares of the Company’s common stock at a conversion price equal to $1.20 per share, subject to adjustment for certain dilutive events.

Outlook

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

Settlement of Litigation

On October 9, 2001, the Company received a payment of $1.15 million in connection with a settlement in the action entitled JLM Europe B.V., JLM Industries (Europe) B.V., JLM International, Inc., and JLM Industries, Inc. v. Tolson Holding B.V. and Vitol Netherlands B.V. pursuant to a stipulation dated September 25, 2001. Upon the payment of the $1.15 million, the plaintiff JLM companies delivered a general release to the defendants and Vitol Holding B.V., the defendants delivered to the plaintiff JLM companies a general release, and the action was discontinued with prejudice by stipulation. The consideration given to the plaintiff JLM companies included (a) the agreement by the defendants that the promissory note given by JLM Industries (Europe) B.V. to defendant Tolson Holding B.V., dated May 13, 1998, in the original principal amount of $2.85 million was deemed satisfied and paid, and (b) the payment by the defendants of the sum of $1.15 million mentioned above. The defendants had maintained in the action that JLM Industries (Europe) B.V. owed $1.8 million and interest thereon under the note. JLM Industries (Europe) B.V. had denied that it owed anything on the note. It had made three installment payments of $.35 million and interest on the note, but refused to make any further payments on the note by reason of the conduct of defendants as alleged in the complaint in the action. This action was pending in the Supreme Court of the State of New York in and for the County of New York.

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Dispositions

On October 10, 2001, the Company sold substantially all of the assets of JLM Terminals, Inc. (“JLM Terminals”) for $6.25 million cash. The proceeds were used to repay $3.0 million of long-term debt, and the remainder provided working capital and liquidity for the Company. The carrying value of the property and equipment was $2.5 million. Revenues, net income (loss), and earnings (loss) per share, excluding the gain on the sale of assets of $3.7 million in 2001, of JLM Terminals, for the years ended December 31, 2001 and 2000 are as follows:

On October 4, 2001, the Company sold all of the outstanding stock of its wholly owned subsidiary, JLM Chemicals Asia Pte, Ltd. (“JLM Asia”) for $1.7 million in cash and the cancellation of letters of credit in the amount of $3 million. The proceeds were applied to the Company’s Revolving Credit Facility. Included in the Company’s results for the year ended December 31, 2001 is a charge of $1.4 million to reflect the loss on the transaction. Revenues, net income (loss), and earnings (loss) per share, excluding the loss on the sale of $1.4 million in 2001, of JLM Asia, for the years ended December 31, 2001 and 2000 are as follows:

During the second quarter of 2001 the Company sold a portion of JLM Marketing’s solvents distribution business in the United States to Sasol North America for $2.9 million in cash. The primary assets sold as part of the transaction were customer and supplier lists, marketing records, promotional materials, and contracts and agreements. The assets were generated internally by the Company and as a result had no carrying value. The $2.9 million is reflected in other income in the financial statements.

Commitments and Contingent Liabilities

During 2002, a vendor of Inquinosa, the Company’s 83.4% owned subsidiary in Madrid, Spain, borrowed amounts from its banks collateralized by receivables due to it from Inquinosa. Inquinosa formally accepted bill of exchange documents thereby, under Spanish law, guaranteeing the vendor’s obligation to its banks. The outstanding balance of these guarantees approximates 2,328,000 euros ($2,499,000 at current exchange rates) as of April 7, 2003. This amount represents the total potential liability for these guarantees at December 31, 2002. Under the terms of these guarantees, the banks have made demands for payment from Inquinosa due to non-payment by the vendor for approximately 479,000 euros ($514,000 at current exchange rates) as of April 7, 2003. As a result of this situation, Inquinosa filed for, and received, in February 2003, court approval for Suspension of Payments status, which under Spanish law protects Inquinosa from actions by creditors, similar to Chapter 11 under the U.S. Bankruptcy Code. Inquinosa continues to operate under court supervision, while negotiating with creditors as to amounts owed as of the filing date. Due to a number of factors, including the status of negotiations between the customer and its banks and the Suspension of Payments status under which Inquinosa is operating, management is not able to estimate the amount, if any, that Inquinosa will be required to pay to satisfy these obligations in this matter.

Effects of Inflation

Inflation generally affects the Company by increasing the cost of labor, equipment and raw materials. The Company does not believe that inflation has had a material effect on its results over the last three years.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

As a global enterprise, JLM faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve. The majority of the Company’s U.S. transactions are denominated in U.S. Dollars. Historically, the Company’s primary exposures relating to U.S. operations have related to nondollar-denominated sales in foreign markets, primarily Canada. The Company’s foreign subsidiaries operate in their respective local currencies. Primary exposures for the Company’s foreign subsidiaries have related to sales and purchases in currencies other than their own respective local currencies. The Company does, from time to time, purchase short-term forward exchange contracts to offset the impact of currency fluctuations on certain nonfunctional currency assets and liabilities. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. At December 31, 2002, the Company had forward currency exchange agreements that remained outstanding. The fair value of the forward currency exchange agreements at December 31, 2002 was a liability of approximately $315,000.

The formal adoption of the Euro on January 1, 2002 as the common currency for members of the European Union did not have a material adverse effect on our internal systems, operating results, or financial condition.

Commodity Price Risk

The Company enters into contracts whereby parties to the contracts agree to exchange various quantities of inventory, primarily acetone, over a specified period of time. JLM records these exchanges of inventory at the lower of cost or market. As of December 31, 2002, the Company had the following related to inventory exchanges:

Since the Company is a market maker in acetone, the Company normally becomes aware of future price fluctuations in acetone prior to such prices being disclosed on the open market. In addition, the Company manufactures acetone, and can deliver its manufactured acetone to satisfy quantities payable under exchange contracts. Therefore, the Company believes that it can reposition itself with respect to the inventory exchanges in order to minimize the market risk inherent in such positions.

Interest Rate Risk

The Company is subject to market risk from exposure to changes in interest rates based upon its financing, investing and cash management activities. The Company utilizes a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage its exposure to changes in interest rates. The Company does not expect changes in interest rates to have a material adverse effect on its income or its cash flows in fiscal 2003. However, there can be no assurances that interest rates will not significantly change in 2003.

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ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS

Index to Consolidated Financial Statements

As of December 31, 2002 and 2001

And for the years ended December 31, 2002, 2001, and 2000

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Stockholders and Board of Directors

JLM Industries, Inc.

We have audited the accompanying consolidated balance sheets of JLM Industries, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15a. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of JLM Industries, Inc. and subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, effective January 1, 2002 the Company changed its method of accounting for goodwill.

ERNST & YOUNG LLP

Tampa, Florida

April 14, 2003

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INDEPENDENT AUDITORS’ REPORT

The Stockholders and Board of Directors of

JLM Industries, Inc.:

We have audited the accompanying consolidated statements of operations and comprehensive loss, of changes in stockholders’ equity and of cash flows of JLM Industries, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2000. Our audit also included the 2000 financial statement schedule listed in the Index at Item 8. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly for 2000, in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

Certified Public Accountants

Tampa, Florida

April 17, 2001

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

See notes to consolidated financial statements.

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JLM INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Years Ended December 31,