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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, 1998
Commission File No. 1-12333
JLM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 06-1163710
(State of Incorporation) (IRS Employer Identification No.)
8675 HIDDEN RIVER PARKWAY, TAMPA, FL 33637
(Address of principal executive office) (Zip Code)
(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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K ( ).
The aggregate market value of common stock held by non-affiliates of the
registrant at March 25, 1999 was $34,712,219, based upon the last reported sales
price of the Common Stock as reported by the NASDAQ National Market. The number
of shares of the registrant's Common Stock outstanding at March 25, 1999 was
6,691,512.
Documents Incorporated by Reference:
None.
FORWARD LOOKING INFORMATION
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The potential
risks and uncertainties that could cause actual results to differ materially
include: the cyclical nature of the worldwide chemical market; the
possibility of excess capacity; fluctuations in the cost and availability of
raw material; the political and economic uncertainties associated with
international operations; fluctuations of foreign currency exchange; the
risks associated with potential acquisitions and the ability to implement
other features of the Company's business strategy.
PART I
ITEM 1. BUSINESS:
BUSINESS OVERVIEW
JLM Industries, Inc. ("JLM" or the "Company") is a leading marketer
and distributor of certain commodity chemicals, principally acetone and
phenol. The Company believes that it is the second largest marketer of
acetone and the fifth largest supplier of phenol in North America. JLM is
also a global distributor of olefins, principally propylene, as well as a
variety of other commodity, inorganic and specialty chemicals. In order to
provide stable and reliable sources of supply for its products, the Company
(i) maintains long-established supplier relationships with several major
chemical companies, (ii) manufactures phenol and acetone at its Blue Island
Plant and (iii) sources acetone from its joint venture manufacturing
operation. The Company's principal products, acetone, phenol and propylene,
are used in the production of adhesives, coatings, forest product resins,
paints, pharmaceuticals, plastics, solvents and synthetic rubbers. The
Company sells its products worldwide to over 1,000 customers, including
Ashland Chemical, Inc. ("Ashland"), B.F. Goodrich Co. ("B.F. Goodrich"),
Borden, Inc. ("Borden"), Hoechst Celanese Corporation, E.I. duPont de
Nemours and Company ("DuPont"), Dutch State Mines ("DSM"), Eli Lilly & Co.,
Georgia Pacific Corporation ("Georgia Pacific"), Minnesota, Mining and
Manufacturing Company ("3M"), Neste Resins Corporation ("Neste"), Rohm &
Haas Company ("Rohm & Haas") and Shell Chemicals Canada, Inc. ("Shell
Chemicals Canada"). In 1998, sales to the foregoing customers accounted for
approximately 18.5%, respectively, of the Company's revenues. No single
customer accounted for more than 10% of the Company's revenues in 1998.
In 1977, John L. Macdonald, the Chief Executive Officer and President
of the Company, co-founded Gill and Duffus Chemicals, Inc., the domestic
chemical trading operation of the London-based Gill and Duffus Holding PLC.
As part of a management buy-out in 1982, Mr. Macdonald purchased Gill and
Duffus Chemicals, Inc., and subsequently merged into Steuber Company, Inc.,
the domestic operations of the Steuber Group, a worldwide chemical
distribution company. In 1986, Mr. Macdonald purchased the U.S. assets of
the Steuber Company and formed JLM as the successor.
Since 1986, the Company has grown rapidly by expanding its product
sourcing arrangements and product offerings, acquiring manufacturing and
terminaling facilities and providing superior customer service and product
quality and availability. Among the Company's most significant corporate
milestones are (i) its investment in 1987 in the Mt. Vernon Partnership,
(ii) the formation in 1992 of Olefins Terminal Corporation ("OTC"), (iii)
the acquisition of the JLM Terminal in 1992 and (iv) the acquisition of the
Blue Island Plant in
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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. Most recently,
the Company continued its expansion both domestically and internationally
through the acquisitions of Browning Chemical Corporation ("Browning"),
Inquinosa International S.A. ("Inquinosa"), and the acquisitions of Tolson
Holland B.V., Tolson Transports B.V. and Tolson Asia LTD (the "Tolson
Group"). 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. Additionally, with the acquisition of the Tolson Group,
the Company has further expanded its client base in Europe and Asia.
INDUSTRY OVERVIEW
Phenol
Phenol is produced through the oxidation of cumene, which is produced
from propylene and benzene. Acetone is produced as a co-product during this
manufacturing process in the approximate ratio of 0.6 pounds of acetone for
every 1.0 pound of phenol. Approximately 80.0% of global acetone production
is produced as a co-product in the manufacture of phenol, and, as a result,
phenol demand largely determines acetone production levels. The markets for
phenol and acetone are cyclical and sensitive to changes in the balance
between supply and demand, the price of feedstocks and the level of general
economic activity.
According to industry sources, current world phenol capacity is
approximately 13.8 billion pounds (4.5 billion pounds in North America). The
two largest end markets for phenol are phenolic resins, which is the
Company's only market for phenol, and bisphenol A ("BPA"). Phenolic resins
are used extensively as bonding agents and adhesives for wood products such
as plywood and granulated wood panels, and account for approximately 37.0%
of total phenol demand. BPA is used as a raw material in the manufacture of
high performance plastics such as those used in automobiles, household
appliances, electronics and protective coatings applications. BPA, the
fastest growing application for phenol, currently accounts for approximately
28.0% of phenol demand and is expected to grow to approximately 33.0% by the
year 2000. Phenol, for the production of BPA, requires a greater degree of
purification and is produced almost exclusively by manufacturers of BPA for
their internal consumption. Any phenol not consumed internally by such
manufacturers generally is sold to other end users. The Company believes
sales of excess phenol by BPA producers will be relatively limited as the
demand for BPA continues to increase, which should have a positive effect on
phenol prices generally.
Phenol selling prices and margins, at cyclical highs during 1995,
1996 and 1997, started to show significant declines in 1998. Although new
production capacity does not come on line until the second half of 1999,
price erosion has occurred in both acetone and phenol as key supply players
are positioning themselves for additional market share. Currently, demand
equals supply for all of 1999. The Company still expects worldwide and North
American phenol demand to continue to grow by approximately 3.0% per year
for the next five years. The main component of this growth will be in
increased demand for polycarbonate resins that
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is estimated to grow by 8 to 10% per year while phenolic resins are expected
to have a zero growth rate over this same period. In the U.S., confirmed new
capacity includes Aristech, Shell and Phenol Chemie with a combined total of
1.6 billion pounds. This is in excess of 30% of current U.S. capacity. JLM
does not forecast any further significant erosion in prices from January
1999 as net selling prices are approaching costs.
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 ("VOC"). To date, 47 states have followed the
Federal government's ruling, and the Company expects acetone to be exempted
from VOC regulation by all 50 states in the near future. The Company
believes that the exemption of acetone from VOC regulation will lead to
increased demand for acetone based coatings and solvents.
According to industry sources, current world acetone production
capacity is approximately 8.5 billion pounds (2.9 billion pounds in North
America). Selling prices and margins for acetone were at cyclical highs in
1995 and early 1996, similar to those for phenol, driven by growth in the
use of acetone for the production of MMA and BPA (for engineering plastics)
and a rejuvenated market for acetone based solvents. However in 1998 these
selling prices and margins began to decline from their cyclical highs. World
demand is expected to grow approximately 2.5% annually through 1999.
Recently announced capacity additions in Europe and the U.S. for phenol, if
completed, would increase the capability for acetone production, which could
be partially offset by closure of on-purpose production over the next few
years. The Company expects acetone demand in North America to grow
approximately 3.6% annually through 2002, driven primarily by growth in the
BPA market of approximately 8 to 10% annually, renewed growth in
acetone-based solvents of 4.5% annually, and a continued recovery in the MMA
market.
Propylene
According to industry sources, current world propylene capacity is
approximately 100 billion pounds with global demand for propylene expected
to grow approximately 5.0% per year through 1999. North American capacity is
currently approximately 30 billion pounds with North American demand
expected to grow approximately 2.5% per year through 2000. The U.S. is
expected to take a significant role in producing and sourcing propylene to
international consumers.
Over 50.0% of globally produced propylene is used in the manufacture
of polypropylene which, in turn, is used primarily in plastic film and
molded parts in consumer items, including automobile components, brushes,
carpeting, rope and tape.
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BUSINESS STRATEGY
The Company's principal objective is to continue to expand the number
of sources and breadth of its chemical products and the markets in which it
distributes these products to enhance its position as a leading supplier to
the worldwide chemical industry. Key elements of the Company's business
strategy include:
- Expand Sources of Supply through Joint Ventures, Acquisitions and
Strategic Relationships. The Company will continue to seek to identify and
pursue domestic and international opportunities to expand its sources of
supply for products in or consistent with its core business. These
opportunities may include additional joint ventures, acquisitions and
strategic relationships. Consistent with this strategy, the Company formed
the Mt. Vernon joint venture with General Electric Company ("GE") and an
affiliate of CITGO in 1987, acquired the Blue Island Plant in 1995 and
established a long-term supplier relationship with SasolChem in 1987. JLM
concluded an arrangement with Solutia that will assure the Company
additional phenol supplies for 15 years once the phenol plant is built. In
continuing to act upon this strategy, JLM successfully completed its
acquisition of Browning during the first quarter of 1998. Founded in 1948,
Browning is an experienced marketer of inorganic chemicals, with a
diversified product range serving both industrial and food-processing
markets including USSP and FCC regulated applications. With the addition of
Browning, JLM has expanded its product mix offered to its customers while
enhancing its position in the chemical industry.
- Increase Sales of Existing Products; Add New Products. The Company
will continue to develop its existing relationships and establish new
relationships to increase the overall volume and types of products it
distributes by (i) increasing the amount distributed by the Company of an
existing supplier's output of a given chemical, (ii) distributing additional
products for existing suppliers and (iii) adding new chemical producers to
its supplier base. During 1996, the Company entered into agreements to
distribute approximately 70 million additional pounds of chemicals for both
existing and new suppliers in 1997, including ARCO Chemical Company ("ARCO
Chemical"), Goodyear Tire & Rubber Co. ("Goodyear") and Monsanto Company
("Monsanto"). In addition, the Company recently expanded the product line it
distributes for SasolChem. To date, the Company has entered into agreements
with CONDEA Vista Company ("CONDEA Vista") to distribute butanol and with GE
Plastics to become a U.S. distributor of styrene.
- Continue International Expansion. The Company currently has
international operations in South America, Europe (including Russia and the
Czech Republic) and Asia. JLM intends to continue to utilize its chemical
market experience, distribution and logistics capabilities and industry
relationships to increase its international presence, particularly in the
growing chemical markets of Asia and South America. In 1997, JLM purchased a
minority interest in SK Asia and purchased a minority interest in SK
Trading, both of which are participating in a Vietnamese joint venture that
intends to construct a chemical plant in Vietnam that will produce dioctyl
phthlate, a chemical used in the manufacture of plastics such as PVC once
market conditions warrant the building of the plant. The Vietnamese joint
venture also intends to construct terminaling and storage facilities in
Vietnam and Malaysia. The Company believes that its indirect participation
in the Vietnamese joint venture also will provide it with increased access
to the Asian market. Continuing to fulfill on its strategic objective, in
1998, JLM acquired a majority interest in Inquinosa, a Spanish chemical
company that has a joint venture with a Romanian manufacturer of the
pesticide lindane. The investment in Inquinosa gives JLM the exclusive right
to market lindane in the U.S. and Canada. In addition, in the first
5
quarter of 1998, the Company completed the acquisition of the Tolson Group
from Tolson Holdings B.V., a Dutch global distributor and trader of
methanol, solvents and olefins. The Tolson Group is one of the largest
independent methanol merchants and operates worldwide with extensive
distribution operations in both Europe and Asia. The Tolson Group has
successfully marketed such locally produced products as oxo-alcohols,
olefins, chlorinated hydrocarbons and acetates in such CIS countries as the
Ukraine, Belarus and the Baltic States. The acquisition of the Tolson Group
also includes operations in Singapore, Thailand, Indonesia and throughout
Southeast Asia.
- Continue to Provide Superior Customer Service. JLM believes that
its continued success will be in large part due to its emphasis on providing
superior customer service. The Company believes it is well positioned to
take advantage of current trends within the chemical industry as chemical
producers continue to outsource their terminaling and logistics operations
and reduce the number of outside distributors used. The Company focuses on
providing sourcing, inventory and logistics solutions for its customers and
endeavors to provide both its customers and suppliers with a level of
service that is unmatched in the industry.
PRODUCTS AND CUSTOMERS
JLM markets more than 100 chemical products to over 1,000 customers
worldwide. In 1998, sales of acetone, phenol and propylene accounted for
approximately 35.5% of the Company's total revenues. Set forth below is
certain information about the Company's sales of acetone, phenol, propylene
and certain other products, including representative customers for such
products.
Acetone
In 1998, JLM distributed approximately 392 million pounds of acetone,
of which approximately 79.6% was sourced from the Blue Island Plant and the
Mt. Vernon Plant. The largest end market application of acetone is as a raw
material in the production of MMA, an important chemical intermediate used
to make aircraft windows, lighting fixtures, medical/dental parts, storm
doors and taillight lenses. Additional end market applications for acetone
include adhesives, pharmaceuticals, solvents, paints and plastics. JLM's
acetone customers include Ashland, B.F. Goodrich, DuPont, ICI Acrylics and
Rohm & Haas.
Phenol
In 1998, the Company distributed approximately 131 million pounds of
phenol, of which approximately 73.3% was sourced from the Blue Island Plant.
The two largest end market applications for phenol are phenolic resins,
which are used in adhesives and bonding agents in plywood and other forest
products and BPA. JLM's phenol customers include Borden, Georgia Pacific and
Neste.
Propylene
In 1998, the Company distributed approximately 74 million pounds of
propylene. The largest end market application for propylene is as a raw
material in the production of polypropylene which is used in the manufacture
of appliance parts, automobile components, brushes, carpeting, rope and
tape. Propylene is also used in the production of foams for furniture,
insulation, elastomers, molded goods and pharmaceuticals. The Company also
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markets other olefins, including butadiene and ethylene. The Company's
olefins customers include DuPont, Exxon Corporation ("Exxon"), GE and
Goodyear. JLM's propylene customers include Borealis Exploration Limited,
DSM and Dow Chemical Corporation ("Dow Chemical").
Other Products
In addition to acetone, phenol and propylene, the Company markets and
distributes other commodity, inorganic and specialty chemicals including
acetophenone, benzoic acid, butadiene, cumene, DDVP, esters, ethylene,
fumaric acid, ketones, lindane and methanol. Some of JLM's customers for
these products include BASF Corp., Dow Chemical, DSM, Goodyear, Lilly
Industries Inc., PPG Industries Inc., Repsol, S.A.
(Spain) ("Repsol") and Shell Chemicals Canada.
During each of the past three years, no single distribution
relationship, customer or group of affiliated customers has accounted for
more than 10.0% of the Company's revenues.
MANUFACTURING AND PRODUCT SOURCING
In order to support its worldwide marketing and distribution
capabilities, the Company continually seeks to acquire assets and establish
relationships to provide consistent and reliable sources of products. JLM
sources a majority of its products from its Blue Island Plant and the Mt.
Vernon Plant. In 1998, the Blue Island Plant and Mt. Vernon Plant
collectively supplied approximately 79.6% of the total acetone sold by JLM
and the Blue Island Plant supplied approximately 73.3% of the total phenol
sold by JLM.
Blue Island
The Company manufactures cumene, phenol, acetone and certain
co-products including alpha methyl styrene ("AMS") and acetophenone at the
Blue Island Plant. The Blue Island Plant has an annual manufacturing
capacity of approximately 145 million pounds of cumene, 95 million pounds of
phenol, 58 million pounds of acetone, 5 million pounds of AMS and 1 million
pounds of acetophenone. The phenol produced at the Blue Island Plant can
only be used in the production of phenolic resins and not in the production
of BPA.
The Blue Island Plant is strategically located south of Chicago,
Illinois, near primary barge and rail transportation terminals that
facilitate economic and efficient delivery of raw materials and shipment of
finished products. In addition, this location affords the Company
significant freight cost advantages in servicing its customer base (which is
primarily located in the Midwest) in comparison to competitors located on
the U.S. Gulf Coast.
Since 1997, the Blue Island Plant utilizes 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.
The raw materials required for the production of cumene are propylene
and benzene. The Company, under a long-term supply agreement which expires
in 2005, obtains propylene via direct pipeline from the Clark Oil refinery
located adjacent to the Blue Island Plant. The
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Company believes that the terms of its propylene supply contract provide it
with a significant raw material cost advantage over many of its competitors,
in part because the Company does not have to pay for any transportation
costs for the propylene purchased under the supply agreement. The Company
also purchases benzene from Clark Oil as a result of Clark's purchase of
BP's Lima refinery.
Currently, the Blue Island Plant is operating at full capacity, and
in order to economically expand production capacity, it would be necessary
to increase its capacity to that of a world-scale facility. However,
physical limitations at the Blue Island Plant prohibit such an increase and
as a result the Company has no plans to expand the Blue Island Plant. The
Company is continually exploring opportunities to expand its manufacturing
capabilities through acquisitions or joint ventures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity."
Mt. Vernon Partnership
In addition to its ownership of the Blue Island Plant, JLM
participates in a manufacturing joint venture with GE and an affiliate of
CITGO (the "Mt. Vernon Partnership") which owns and operates the Mt. Vernon
Plant. The Company owns a 2.0% partnership interest in the Mt. Vernon
Partnership, an Indiana limited partnership, that was formed to purchase the
Mt. Vernon Plant from GE in November 1987. The Company's principal purpose
for entering into the partnership was to secure a long-term source of supply
for acetone. In 1988, the Company entered into a long-term acetone sales
agreement with the Mt. Vernon Partnership. Under the terms of the acetone
agreement, the Company is obligated through the year 2002, and thereafter
unless the agreement is terminated upon prior notice, to purchase all of the
acetone produced at the Mt. Vernon Plant and not consumed by GE
Petrochemicals, Inc. ("GE Plastics"). The agreement further provides that
the Mt. Vernon Partnership cannot terminate the agreement as long as JLM is
a partner in the Mt. Vernon Partnership. The initial term of this agreement
expires in 2002 and continues thereafter for successive one-year terms
unless one year's notice is otherwise provided by either party.
The Company has profitably 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 250 million
pounds of acetone annually from the Mt. Vernon Plant. In 1996, the amount of
acetone available to JLM from the Mt. Vernon Plant was reduced by
approximately 15 million pounds and it is anticipated over the next four
years that the amount of acetone available to JLM will be further reduced by
approximately 35 to 40 million pounds as a result of increased consumption
by GE Plastics.
Under the terms of the partnership agreement for the Mt. Vernon
Partnership, the management of the business and affairs of the partnership
is controlled by the partners owning at least 66.0% of the partnership
interests. The Mt. Vernon Partnership has entered into an operation and
maintenance agreement with GE pursuant to which GE manages, operates and
maintains the Mt. Vernon Plant. The partnership agreement generally provides
GE with the right at any time to require the sale of JLM's interest in the
Mt. Vernon Partnership to a third party selected by GE and the right after
December 31, 2008 to directly purchase JLM's interest in the partnership.
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Supplier Relationships
In addition to its manufacturing facility and joint venture, JLM
sources its products through long-established supplier relationships with
many of the largest and most well-known chemical companies worldwide.
Suppliers to JLM include ARCO Chemicals, Goodyear, Monsanto, Repsol and
SasolChem. The structure of the Company's long-term relationships with its
outside suppliers helps the Company mitigate the impact of cyclical market
fluctuations in product supply and price to which typical spot traders or
distributors are exposed. In a majority of JLM's supply contracts, the
purchase price paid by JLM is not determined until after JLM sells the
product, and is generally based on a fixed percentage profit per unit of
product sold. In contrast, the typical spot trader or distributor may agree
to a fixed purchase price prior to the sale, taking the market risk of
effecting a successful resale of the product. In addition, spot traders do
not typically enter into long-term supply contracts or relationships,
thereby reducing their ability to service the needs of both customers and
suppliers.
In 1988, the Company entered into an agreement to purchase acetone
from SasolChem, which was to remain in effect until either party gave six
months notice of termination. In 1992, the Company entered into new
agreements with SasolChem to purchase additional quantities of acetone,
methyl-ethyl ketone and n-propanol. These new agreements are on terms
substantially similar to its existing acetone agreement with SasolChem. The
Company has since expanded its relationship with SasolChem to include the
purchase and distribution of methyl-isobutyl ketone, ethyl acetate and
ethanol in North America.
In 1997, the Company entered into an agreement to distribute styrene
monomer for GE Plastics. Styrene is the primary component used in the
production of synthetic rubbers and plastics. Additionally in 1997, the
Company has entered into agreements with ARCO Chemical Company, CONDEA Vista
and Monsanto to distribute n-propanol, butanol and ethyl acetate,
respectively.
TERMINALING AND STORAGE
The Company, with an affiliate of Ultramar Diamond Shamrock Corp.
("UDS"), participates in a joint venture that owns and operates the OTC
Terminal at the mouth of the Houston, Texas ship channel in Bayport, Texas.
The facility is located on 2.4 acres of land and has throughput capacity of
approximately 900 million pounds. The facility includes twin storage spheres
with a total capacity of approximately 22 million pounds of propylene and is
capable of handling and storing gaseous products at a full range of
temperature and pressure conditions. The OTC Terminal is believed to be the
only independent propylene export terminal in the U.S. and its Gulf Coast
location is well suited to enable U.S. producers to place their products
into the global market. See "Properties."
The OTC Terminal is operated by Baytank (Houston) Inc. ("Baytank"), a
major terminal owner and operator, under a long-term contract. OTC also
leases from Baytank the land upon which the OTC Terminal is located. The
Company was engaged by OTC to provide certain administrative and managerial
services to OTC, including on-site supervision of terminal operations and
certain bookkeeping and administrative matters.
The Company has additional terminal and storage facilities located at
the JLM Terminal on the Cape Fear River in Wilmington, North Carolina. The
JLM Terminal is located on 14
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acres of land, is accessible to ship, barge, rail and truck, is capable of
handling a broad range of products including methanol, oxygenated solvents
and inorganic chemicals, and has a total capacity of 18.0 million gallons.
The facility includes three tank truck loading bays, six loading bays for
jumbo rail cars, laboratory services and a computerized weigh scale. Of the
total storage capacity at the JLM Terminal, the Company uses approximately
2.5 million gallons of capacity and the remainder is subject to long-term
leases to third parties expiring from 1998 to 2002. See "Properties."
The Company maintains inventory at approximately 15 locations across
North America and in a number of locations in Europe and South America. In
addition to the Company's owned terminal and storage facilities located at
the JLM Terminal and OTC Terminal, the Company has approximately 3.5 million
gallons of liquid storage capacity and approximately 500,000 pounds of
palletized storage capacity pursuant to short-term leases at various
locations in the U.S. The Company believes its storage facilities are
adequate for the Company's current and anticipated near-term needs. Should
the need arise for substantial amounts of additional storage facilities in
the future, the Company does not currently anticipate any material
difficulties in obtaining sufficient new storage facilities through purchase
or lease at prevailing commercially reasonable rates. The Company 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."
SALES AND MARKETING
Until the acquisition of Browning, the Company historically focused
primarily on bulk quantity sales (generally not smaller than truckload lots)
of commodity chemicals to over 1000 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 organic sector that
are generally sold in smaller quantities. Product sourcing and marketing
efforts are handled principally by the Company's sales team of 41 full time
employees. Individual salespersons are assigned principal responsibility for
specific supplier or customer relationships and for specific products. In
addition, each salesperson is required to be familiar with all of the
Company's products, suppliers and customers. Therefore, the Company believes
it is able to respond to customer and supplier needs as well as to take
advantage of changing market conditions more effectively than its
competitors.
JLM has maintained offices in the U.S., Canada, the Netherlands,
Venezuela, Thailand and Colombia. Additionally though its recent
acquisitions, the Company now has offices in the Czech Republic, Spain,
Russia and Singapore. JLM also has an alliance with a distributor in Spain
and operates through agency relationships in Italy, Brazil, Peru and Taiwan.
In 1997, the Company purchased a 25.0% interest in SK Asia, and
purchased a 12.7% interest in SK Trading, two Singapore-based companies
participating in a Vietnamese joint venture. The Vietnamese joint venture
intends to construct a chemical plant in Vietnam that will produce dioctyl
phthlate, a chemical used in the production of plastics such as PVC once
market conditions warrant the building of the plant. The Vietnamese joint
venture also intends to construct terminaling and storage facilities in
Vietnam and Malaysia.
Approximately 2.1% of the Company's revenues in 1998 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
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margins. In establishing supply and distribution relationships in specialty
chemicals, the Company attempts to leverage existing relationships and
knowledge of the needs and objectives of both suppliers and customers.
The Company's position as a large volume marketer, combined with
JLM's knowledge of customer and supplier needs and objectives, affords it
opportunities to effect product exchanges. Engaging in product exchange
transactions allows the Company to solve customer or supplier problems and
take profitable advantage of identified market trends. The Company's ability
to engage in exchange transactions is enhanced by its terminal and storage
capabilities that also enable the Company to accumulate inventory to take
advantage of market trends.
In its olefins marketing activities, JLM focuses on the international
marketing of olefin petrochemical gases that require specialized shipping,
handling and storage. The Company's olefins marketing activities to date
have been largely trading oriented. However, the Company believes that its
long-term relationships with essential industry participants and its access
to terminal and storage facilities will enable the Company to become a large
volume marketer of olefins. The Company has long-term supply and sales
contracts with a number of major olefins producers and consumers in North
America, South America, Europe and Asia. For example, the Company has supply
relationships with Repsol and Copene-Petroquimica do Nordeste S.A. to source
butadiene for the U.S. and with UDS, Exxon and Lyondell Petrochemical
Company to export propylene from the U.S. Some of the Company's significant
olefins customers include DuPont, Exxon, GE and Goodyear.
COMPETITION
The Company operates in a highly competitive industry. Many of the
Company's competitors have significantly greater financial, production and
other resources than the Company. Many of the Company's competitors are
large, integrated chemical manufacturers, some of whom have their own basic
raw material resources. The Company competes to a lesser extent with certain
chemical distribution companies and chemical traders.
The Company competes in its marketing and distribution activities by
providing superior customer service. In the opinion of the Company, the key
elements of effective customer service include reliable and timely delivery
of products, satisfying customer needs for quality and quantity and
competitive pricing. The Company's long-term supplier relationships,
terminal and storage facilities, transportation capabilities and industry
and product knowledge support the Company's efforts to provide superior
customer service. In addition, the Blue Island Plant's Midwest location
gives it significant freight cost advantages in selling to its customers in
the Midwest over its competitors' production facilities located in the
Southeast.
EMPLOYEES
As of December 31, 1998, the Company and its consolidated
subsidiaries had 170 full-time employees. Of these, 89 employees were in
management and administration, 41 in sales and marketing and 40 were in
production and distribution. Approximately 26 of the Company's domestic
employees at the Blue Island Plant are covered by a collective bargaining
agreement with the Oil, Chemical and Atomic Workers Union (the "Union").
This agreement expired on October 31, 1998 but was renewed through October
31, 2001. The Company considers its relations with both its union and
non-union employees to be satisfactory.
11
ENVIRONMENTAL REGULATION
The Company and its operations are subject to federal, state, local
and foreign environmental laws, rules, regulations and ordinances concerning
emissions to the air, discharges to surface and subsurface waters, and the
generation, handling, storage, transportation, treatment, disposal and
import and export of hazardous materials ("Environmental Laws"). Compliance
with such Environmental Laws may result in significant capital expenditures
by the Company. Moreover, under certain Environmental Laws, the Company may
be liable for remediation of contamination at certain of its current and
former properties. For example, under the Comprehensive Environmental
Response, Compensation and Liability Act of 1990, as amended ("CERCLA"), and
similar state laws, the Company and prior owners and operators of the
Company's properties may be liable for the costs of removal or remediation
of certain hazardous or toxic materials on, under or emanating from the
properties, regardless of their knowledge of, or responsibility for, the
presence of such materials. CERCLA and similar state laws also impose
liability for investigation, cleanup costs and damage to natural resources
on persons who dispose of or arrange for the disposal of hazardous
substances at third-party sites. In addition, under the Resource
Conservation and Recovery Act of 1976 ("RCRA"), the holder of a permit to
treat or store hazardous waste can be required to remediate environmental
pollution from solid waste management areas at the permitted facility
regardless of when the contamination occurred.
Although elevated levels of certain petroleum-related substances,
organic chemicals and metals have been detected in groundwater and/or soils
at the Company's Wilmington, North Carolina terminal facilities, the Company
believes that the presence of such substances is the result of either
historical use prior to the Company's acquisition of the site from Union Oil
Company of California ("Unocal") in 1992 of the Company's Cape Fear Terminal
and in 1998 of the Carolina Terminal and, potentially, in the case of the
Cape Fear Terminal, migration from neighboring facilities (including an
adjacent Superfund site that is currently being remediated). In 1998, the
Company assumed from Unocal, the prior owner of the site, the implementation
of state approved Remedial Action Plans ("RAPs") to address onsite petroleum
contamination at the Cape Fear Terminal and at the recently acquired
Carolina Terminal. Compliance with the RAPs does not foreseeably require any
capital expenditures and the Company believes that owners of the neighboring
properties may bear a significant portion of the responsibility for any
additional remediation. Except for the ongoing remediations, no significant
cleanup activities have been conducted at the Cape Fear Terminal since it
was acquired by the Company in 1992 or at the Carolina Terminal since its
acquisition by the Company in 1998. Should remedial activities be conducted
to address contaminants that are not petroleum-related, the Company has
insufficient information regarding the types, concentrations, and possible
cleanup levels of onsite contaminants to reasonably estimate costs that may
be associated with such remediation. The Company believes that the low
levels of various organic compounds detected in soils and groundwater at the
Blue Island plant are the result of historical use of the site prior to its
acquisition by the Company in 1995 and/or migration from neighboring
facilities. The concentrations of some of these compounds exceed established
state groundwater standards and/or cleanup objectives. However, the Company
also believes that the likelihood of either state or federal environmental
regulatory agencies seeking remediation in the near term is low, based on
the location of the facility, the character of the area (each of which are
factors in assessing risk), and the fact that the site is pending removal
from the federal list of contaminated sites. To date, the Company has not
been required to plan, undertake or fund any remedial activities.
12
Levels of organic compounds slightly in excess of regulatory
reporting thresholds were detected in groundwater at the Polychem plant
owned by the Company. The Company has been addressing the problem, and
recent analytical results show that the levels of contaminants may have
decreased to acceptable levels. Accordingly, the Company is preparing to
petition state authorities permit closure of the remediation at the site.
The Company does not believe that a material amount of funds will be
required to complete remediation at any site, however, it is impossible to
predict precisely what effect environmental laws will have on the Company in
the future.
ITEM 2. PROPERTIES:
The following table sets forth certain information as of December 31,
1998, relating to the Company's principal facilities:
APPROXIMATE
FACILITY PRINCIPAL ACTIVITIES; LOCATION SQUARE FEET OWNED/LEASED
- -------- ------------------------------ ----------- ------------
Corporate Headquarters Administration Headquarters; 25,000 Owned
Tampa, Florida
Blue Island Plant Manufacturing; 958,000 Owned
Blue Island, Illinois
OTC Terminal Terminaling and Storage; 104,000 Co-owned
Houston, Texas
JLM Terminal Terminaling and Storage; 609,000 Owned
Wilmington, North Carolina
North America Sales Offices Blue Island, Illinois * Owned
Houston, Texas * Leased
Wilmington, North Carolina * Owned
Toronto, Canada * Leased
White Plains, New York * Leased
International Sales Offices Rotterdam, Netherlands * Leased
Caracas, Venezuela * Leased
Maracaibo, Venezuela * Leased
Valencia, Venezuela * Leased
Bogota, Colombia * Leased
Singapore * Leased
Bangalore, India * Leased
Madrid , Spain * Leased
Moscow, Russia * Leased
Prague, Czech Republic * Leased
JLM Realty Wilmington, North Carolina * Owned
- ----------------
* Less than 25,000 square feet
ITEM 3. LEGAL PROCEEDINGS:
The Company is not a party to any legal proceedings, other than claims and
lawsuits arising in the normal course of the Company's business. The Company
does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on its business. See Note 12
to notes to Consolidated Financial Statements.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On October 21, 1998, the Company held its 1998 Annual Stockholders
meeting. During such meeting, security holders of the Company's common stock
voted for approval of all nominated Directors and approved Deloitte & Touche
LLP as the Company's independent auditors. The number of votes cast in
connection with the election of the Company's Directors was as follows: John
L. Macdonald, 6,024,762 for, 0 against and 5,267 withheld; for Thaddeus J.
Lelek, 6,024,762 for, 0 against and 5,267 withheld; for Wilfred J. Kimball,
6,024,762 for, 0 against and 5,267 withheld; for Frank A. Musto, 6,023,762
for, 1,000 against and 5,267 withheld; For Roger C. Kahn, 6,023,762 for,
1,000 against and 5,267 withheld; for Jerry L. Weinstein, 6,024,762 for, 0
against and 5,267 withheld. The number of votes cast in connection with the
ratification of the appointment of Deloitte & Touche LL was 6,026,404 for,
2,515 against and 1,110 withheld. No other matters were submitted to a vote
of the Company's security holders during the quarter ended December 31,
1998.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS:
The Company's common stock trades on the NASDAQ Stock Market under the
symbol "JLMI." The following table sets forth the quarterly high and low
trade prices of JLM's common stock during 1997 and 1998 on the NASDAQ
beginning July 24, 1997, the first day of public trading:
1997 HIGH LOW
---- ---- ---
Third Quarter $13.50 $9.00
Fourth Quarter 12.75 9.50
1998
----
First Quarter 11.75 9.50
Second Quarter 12.00 9.75
Third Quarter 10.00 5.63
Fourth Quarter 6.75 4.44
As of March 25, 1999, there were 65 stockholders of record.
The Company has not paid cash dividends on its Common Stock and does not
anticipate that it will pay dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, for future operations
and expansion of the Company's business. Any determination to pay dividends
in the future will be at the discretion of the Company's Board of Directors
and will be dependent upon the Company's results of operations, financial
restrictions, restrictions imposed by applicable law and other factors
deemed relevant by the Board of Directors. Furthermore, the Company and its
subsidiaries are restricted from paying dividends under certain credit
agreements to which they are a party.
In the fourth quarter of 1998, the Company utilized the remaining portion
of its net proceeds from the Company's initial public offering consummated
in July 1997 to purchase 330,000 treasury shares at a total cost of
approximately $1,746,000.
14
ITEM 6. SELECTED FINANCIAL INFORMATION:
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
STATEMENT OF INCOME DATA:
Revenues $ 218,570 $ 289,371 $ 236,521 $ 286,822 $ 305,735
Gross profit 11,663 23,910 28,240 30,792 36,291
Operating income 2,383 8,734 11,001 13,903 12,647
Income from continuing operations before
discontinued operations and extraordinary item 1,109 3,629 4,357 7,091 5,734
BASIC INCOME PER SHARE:
Income from continuing operations before
discontinued operations and extraordinary item $ 0.22 $ 0.72 $ 0.89 $ 1.23 $ 0.81
========= ========= ========= ========= =========
DILUTED INCOME PER SHARE:
Income from continuing operations before
discontinued operations and extraordinary item $ 0.22 $ 0.72 $ 0.89 $ 1.22 $ 0.81
========= ========= ========= ========= =========
Basic weighted average shares outstanding 5,011 5,011 4,878 5,753 7,038
Diluted weighted average shares outstanding 5,011 5,011 4,878 5,790 7,038
Pro forma basic income per share from
continuing operations before discontinued
operations and extraordinary item (1) $ 0.16 $ 0.52 $ 0.64 $ 1.06 $ 0.86
Pro forma diluted shares outstanding (1) 6,937 6,937 6,803 6,678 6,682
OTHER FINANCIAL DATA:
Depreciation and amortization $ 572 $ 1,522 $ 2,524 $ 2,947 $ 3,671
EBITDA (2) 2,955 10,256 13,525 16,850 16,318
BALANCE SHEET DATA:
Working Capital (deficit) $ 1,498 $ (274) $ (966) $ 13,289 $ 16,597
Total assets 55,031 86,498 86,387 83,561 103,265
Total debt 6,561 23,204 31,043 5,964 17,048
Total stockholders' equity 7,411 10,519 13,444 38,835 42,638
CASH FLOW INFORMATION:
Operating activities $ 6,064 $ 2,746 $ 19 $ 8,606 $ 5,192
Investing activities (1,218) (4,661) (6,631) (3,176) (4,993)
Financing activities 85 (469) 6,705 (5,012) (3,083)
Capital expenditures 1,221 2,320 7,347 2,875 1,102
(1) The pro forma diluted income per share data reflects the historical weighted
average number of shares outstanding for each period presented adjusted to
include the following items as if they had occurred at the beginning of each
period presented 1) 2,156,000 shares issued during the Company's initial
public offering, 2) the 190,000 shares purchased by the Underwriters of the
Company's initial public offering to cover over-allotments, 3) 3,415 shares
purchased by employees of the Company under the Company's employee stock
purchase plan and 4) 420,909 treasury shares purchased by the Company under
the Company's Stock Repurchase Plan and from a shareholder.
(2) EBITDA represents the operating income of the Company plus depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles ("GAAP") and may not be comparable
to other similarly titled measures by other companies. EBITDA does not
represent net income or cash flows from operations as defined by GAAP and
does not necessarily indicate that cash flows will be sufficient to fund
cash needs. As a result, EBITDA should not be considered an alternative to
net income as an indicator of operating performance or to cash flows as a
measure of liquidity. EBITDA is included because it is a basis upon which
the Company assesses its financial performance.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION:
The following discussion should be read in conjunction with "Selected
Consolidated Financial Information" and the Consolidated Financial
Statements of the Company and the Notes thereto included in this Annual
Report. In particular, for information regarding the Company's operations in
different industry segments and geographic locations see Note 21 of Notes to
Consolidated Financial Statements.
GENERAL
JLM is a leading marketer and distributor of certain commodity
chemicals, principally acetone and phenol. The Company believes it is the
second largest marketer of acetone and the fifth largest marketer of phenol
in North America. JLM is also a global distributor of olefins, principally
propylene, as well as a variety of other commodity and specialty chemicals.
In order to provide stable and reliable sources of supply for its products,
the Company (i) maintains long-established supplier relationships with
several major chemical companies, (ii) manufactures phenol and acetone and
(iii) sources acetone from its joint venture manufacturing operation. JLM's
operating income has grown from $11.0 million in 1996 to $12.6 million in
1998, a compound annual growth rate of 7.3%. This growth was achieved
primarily as a result of the acquisition and successful integration of the
Blue Island Plant, increased sales of existing products and the additional
sales from the Company's current year acquisitions.
A majority of the Company's revenue is derived from the sale of
commodity chemicals, prices for which are subject to cyclical fluctuations.
The Company endeavors to enter into supply contracts that provide a fixed
percentage profit per unit of product sold. As a result, the Company
believes that revenues may not be an accurate indicator of the Company's
overall financial performance. Rather, revenues should be considered along
with operating income and net income to accurately measure the Company's
financial performance.
The Company's business consists of a manufacturing and a marketing
segment. The Company's manufacturing segment includes the operations of the
Blue Island Plant and the sale of acetone manufactured at the Mt. Vernon
Phenol Plant. The Company's marketing segment includes its distribution,
storage and terminaling operations and all other sourcing operations.
Set forth below, for the periods indicated, is certain information
regarding the contributions by the marketing and manufacturing segments to
the Company's revenues, gross profit, operating income, gross margin and
operating margin. The marketing segment revenues include an assumed selling
commission determined in accordance with industry standards for the sale of
products that are manufactured at the Blue Island Plant. In addition, the
marketing segment operating income reflects the expenses associated with the
sale of such products. The marketing segment also includes an assumed
allocation of revenues, costs of goods sold and expenses associated with the
sale of products sourced from the Mt. Vernon Plant, which allocation has
been determined on a basis consistent with the assumed commission for sale
of products manufactured at the Blue Island Plant. Results for any one or
more periods are not necessarily indicative of annual results or continuing
trends.
16
YEAR ENDED DECEMBER 31,
----------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
1996 1997 1998
-------------------- -------------------- --------------------
Revenues:
Marketing $ 176,274 74.5% $ 221,301 77.2% $ 248,060 81.1%
Manufacturing 60,247 25.5 65,521 22.8 57,675 18.9
--------- ------- --------- ------- --------- -------
Total revenues $ 236,521 100.0% $ 286,822 100.0% $ 305,735 100.0%
========= ======= ========= ======= ========= =======
Gross profit:
Marketing $ 15,241 54.0% $ 14,326 46.5% $ 19,731 54.4%
Manufacturing 12,998 46.0 16,466 53.5 16,560 45.6
--------- ------- --------- ------- --------- -------
Total gross profit $ 28,239 100.0% $ 30,792 100.0% $ 36,291 100.0%
========= ======= ========= ======= ========= =======
Segment operating income:
Marketing $ 5,011 39.8% $ 5,407 33.5% $ 3,055 20.4%
Manufacturing 7,586 60.2 10,753 66.5 11,903 79.6
--------- ------- --------- ------- --------- -------
Total segment operating income 12,597 100.0% 16,160 100.0% 14,958 100.0%
Income
Corporate expense (1,596) -- (2,257) -- (2,311) --
--------- ------- --------- ------- --------- -------
Total operating income $ 11,001 100.0% $ 13,903 100.0% $ 12,647 100.0%
========= ======= ========= ======= ========= =======
AS A PERCENTAGE OF SEGMENT REVENUES
-----------------------------------
YEAR ENDED DECEMBER 31,
1996 1997 1998
---- ---- ----
Gross profit:
Marketing 8.6% 6.5% 8.0%
Manufacturing 21.6 25.1 28.7
---- ---- ----
Total gross profit 11.9% 10.7% 11.9%
==== ==== ====
Segment operating income:
Marketing 2.8% 2.4% 1.2%
Manufacturing 12.6 16.4 20.6
---- ---- ----
Total segment operating income 5.3% 5.6% 4.9%
==== ==== ====
MARKETING SEGMENT
The marketing segment revenues are influenced largely by the volume of new
and existing products sold by the Company. The volume of products sold
depends on a number of factors, including growth in the homebuilding and
automobile sectors and the overall economic environment. The Company's
supply agreements, primarily relating to acetone, frequently contain a term
providing for a fixed percentage profit per unit of product sold. In
addition, the Company's supplier and customer contracts have a provision
permitting the Company to purchase or sell additional product at the
Company's option, typically plus or minus 5.0% of the contractual volume
amount. As a result, during a period of pricing volatility, the Company has
the opportunity to improve its profitability by exercising the appropriate
option to either build inventory in a rising price environment or to sell
product for future delivery in a declining price environment.
In May 1997, the Company and its joint venture partners agreed to
restructure their investments in OTC. As a result, the Company and UDS
bought out the interest of a third joint venture partner and each became a
50% owner of OTC. The Company accounts for its
17
investment in OTC through the equity method of accounting. (See Note 5 of
Notes to Consolidated Financial Statements). As part of the restructuring,
OTC's $3.6 million of existing indebtedness was refinanced and the
take-or-pay terminaling agreement between OTC and the Company's olefins
marketing operations was cancelled and a new terminaling arrangement was
implemented. The original take-or-pay terminaling agreement resulted in
charges to JLM's pre-tax income of $1.4 million in 1996, and the Company did
not generate significant revenues at the terminaling facility to offset
these charges. Under the new arrangement, effective as of January 1, 1997,
the Company pays terminal throughput fees only when it utilizes the
terminaling facility thus generating offsetting revenues. This restructuring
has improved the Company's gross profit potential (as compared to historical
results) because the Company is no longer required to incur terminal fees
without accompanying revenues.
The Company's Venezuelan operations, which accounted for 2.8% of 1998
total revenues, expose it to the risk of hyperinflation and currency
devaluation. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, FOREIGN CURRENCY TRANSLATION, the effects of fluctuations
in exchange rates in translating the net assets of the financial statements
in a hyperinflationary economy require any gains or losses to be included in
current net income. During the period 1994 through April 1996, exchange
controls imposed by the Venezuelan government, followed by rapid
devaluation, created translation losses that were charged against earnings
in each of the respective accounting periods. In April 1996, exchange
controls were lifted and have contributed to the stabilization of the
Venezuelan currency.
MANUFACTURING SEGMENT
The results of operations of the Company's manufacturing segment are
influenced by a number of factors, including economic conditions,
competition and the cost of raw materials, principally propylene and
benzene. The Company's ability to pass along raw material price increases to
its customers is limited because the commodity nature of the chemicals
manufactured at the Blue Island Plant restricts the Company's ability to
increase prices.
The development of financial instruments to hedge against changes in
the prices of propylene and benzene occured only recently. The Company may
seek periodically in the future, to the extent available, to enter into
financial hedging contracts for the purchase of propylene and benzene in an
effort to manage its raw material purchase costs (see Note 2 of Notes to
Consolidated Financial Statements). There can be no assurance that the use
of such instruments by the Company will be successful. The Company can be
exposed to losses in connection with such contracts equal to the amount by
which the fixed hedge price on the contract is above the market price for
such chemicals at the time of purchase. The Company did not enter into any
material financial hedging contracts in 1998.
Since its acquisition in 1995, the Blue Island Plant has operated at
or near full capacity and, in order to economically expand its production
capacity, it would be necessary to increase its capacity to that of a
worldscale facility. However, physical limitations at the Blue Island Plant
prohibit such an increase and, as a result, the Company has no plans to
expand the Blue Island Plant. In 1998, the third full year of ownership of
the Blue Island Plant, approximately 79.6% of the Company's total segment
operating income was derived from the manufacturing segment.
Since 1994, the Company has sourced, on average, approximately 250
million pounds annually of acetone from the Mt. Vernon Plant. The Company is
required to purchase all of
18
the acetone produced at the Mt. Vernon Plant and not consumed by GE
Plastics. It is anticipated that over the next four years the amount of
acetone available to JLM from the Mt. Vernon Plant will be further reduced
by approximately 35 to 40 million pounds. The reduction in the amount of
acetone sourced from the Mt. Vernon Plant is the result of increased
consumption by GE Plastics. In view of capacity limitations affecting the
Blue Island Plant and the anticipated reduction in product sourced from the
Mt. Vernon Plant, the Company anticipates any growth in the manufacturing
segment will come as a result of additional acquisitions or joint ventures.
TAX MATTERS
JLM accounts for income taxes on a consolidated basis and accrues for
tax liabilities based on its U.S. earnings. The Company's foreign
subsidiaries file tax returns in the country where incorporated. To the
extent these subsidiaries are profitable, taxes are payable based on that
country's prevailing tax rate. Upon repatriation of non-U.S. earnings, the
U.S. allows a foreign tax credit to be applied against the Company's U.S.
consolidated return for the foreign taxes paid by the Company's foreign
subsidiaries. If losses are incurred, countries in which the Company's
foreign subsidiaries are incorporated generally allow the losses to be
carried forward and applied against income earned in subsequent years. The
Company's Venezuelan operation has incurred losses which have generated net
operating loss carryforwards ("NOL's") and, based on Venezuelan tax
regulations, these NOL's may be carried forward for three years. In
addition, the Company's Holland operation has incurred losses which have
generated NOL carryforwards and, based on Netherlands' tax regulations,
these NOL's may be carried forward indefinitely. In addition, through the
acquisition of Tolson, the Company purchased approximately $3.8 million of
net operating loss carryforwards that can be carried forward indefinitely.
However, these foreign losses are not deductible for U.S. federal income tax
purposes and as a result cannot be offset against U.S. pre-tax profits.
In an effort to reduce its U.S. federal and state income tax
liability, in 1994 the Company established a foreign sales corporation
("FSC"). Under the Internal Revenue Code, FSCs are granted tax incentives
for exporting U.S. produced goods overseas, and as such, there are specific
tax benefits to the Company for the products it exports. If specific
conditions are met under the Internal Revenue Code, up to 65.0% of the
commission income earned by the FSC from these export transactions may be
exempted from U.S. taxation. Since the formation of the FSC, the Company has
met these requirements, thereby reducing its taxable income.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased $18.9 million to $305.7 million for the
year ended December 31, 1998 from $286.8 million for the prior year, an
increase of 6.6%. Revenues for the marketing segment increased $26.8 million
to $248.1 million for the year ended December 31, 1998 from $221.3 million
for the prior year, an increase of 12.1%. The increase in marketing revenues
was generally the result of increased sales from the Company's current year
acquisitions. Revenues for the manufacturing segment decreased $7.8 million
to $57.7 million for the year ended December 31, 1998, from $65.5 million
for the prior year, a decrease of 11.9%. The decrease in manufacturing
segment revenues was primarily due to decreases in overall acetone and
phenol selling prices during the second half of 1998.
19
Gross Profit. Gross profit increased $5.5 million to $36.3 million
for the year ended December 31, 1998 from $30.8 million for the prior year,
an increase of 17.9%. As a percentage of revenues, total gross profit was
11.9% in 1998 compared to 10.7% for the prior year. This increase resulted
from the Company's current year acquisitions that have higher gross margins
compared to the Company's historical gross margins. Gross profit for the
marketing segment increased $5.4 million to $19.7 million for the year ended
December 31, 1998, from $14.3 million for the prior year, an increase of
37.8%. This increase was principally the result of higher sales in the
Company's current year acquisitions mentioned above. Gross profit for the
manufacturing segment increased $0.1 million to $16.6 million for the year
ended December 31, 1998 from $16.5 million for the prior year, an increase
of 0.6%. The increase in manufacturing gross profit was principally the
result of lower acetone and phenol selling prices coupled with a temporary
increase in the cost of the raw material benzene in the fourth quarter of
1998 that partially offset lower benzene costs during the first three
quarters of 1998. During the first quarter of 1997, approximately 13 million
pounds of propylene purchases were covered by a fixed financial hedge for
which the Company had a gain of approximately $0.5 million which reduced its
cost of sales for this period by a corresponding amount. In 1997, the
reduction in cost of sales resulting from the propylene hedge was partially
offset by an increase in the cost of benzene, which the Company elected not
to hedge.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.7 million to $23.6 million for the year
ended December 31, 1998 from $16.9 million for the prior year, an increase
of 39.6%. During the year ended December 31, 1998, depreciation expense
increased due to capital improvements in the fourth quarter of 1997 related
principally to additional storage tanks built at the Company's terminalling
facility. The Company also incurred approximately $0.4 million of
amortization expense related to current year acquisitions. Additionally, the
selling, general and administrative expenses of the acquired companies were
higher than the Company's historical rates.
Operating Income. Operating income decreased $1.3 million to $12.6
million for the year ended December 31, 1998 from $13.9 million for the
prior year a decrease of 9.4%. The decrease was principally the result of
the increase in gross profit offset in part by the increase in selling,
general and administrative expenses mentioned above.
Interest Expense - Net. Interest expense decreased $0.8 million to
$1.3 million for the year ended December 31, 1998 from $2.1 million for the
prior year, a decrease of 38.1%. This decrease is principally due to the
Company's early retirement of debt in August of 1997 with funds received
from the Company's initial public offering, partially offset by debt
incurred to finance the current year acquisitions.
Foreign Currency Exchange (Loss) Gain. The results from foreign
currency exchange decreased by less than $0.1 million to a loss of less than
$0.1 million for the year ended December 31, 1998 from a gain of $0.1
million for the prior year. Substantially all the foreign currency exchange
gains in 1998 were from the Company's foreign currency gains in Europe
offset by the Company's foreign currency exchange losses in Venezuela.
Income Tax Provision. The Company's provision for income taxes
increased $0.9 million to $5.2 million for the year ended December 31, 1998
from $4.3 million for the prior year, an increase of 20.9%. The effective
tax rate for 1998 was higher than that of the prior year due to the
increased proportion of Venezuelan and Holland pre-tax loss in 1998 compared
to 1997 for which no tax benefit was recorded. The Company's Venezuelan and
20
Holland operations have not recorded any income tax benefit in 1998 or 1997
due to the uncertainty of utilizing the income tax loss carryforwards.
Excluding Venezuelan and Holland operations, the effective tax rate for the
year ended December 31, 1998 would have been approximately 38.6% compared to
the effective tax rate for the year ended December 31, 1997 of 35.4%. The
Company's consolidated U.S. federal tax rate is lower than the statutory
rate due to the Company's ability to reduce its taxable income on U.S.
export sales through the use of the Company's Foreign Sales Corporation
which has an effective tax rate of 11.8%.
Net Income. Net income decreased $0.8 million to $5.7 million for the
year ended December 31, 1998 from $6.5 million for the prior year, a
decrease of 12.3%, principally due to the factors discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased $50.3 million to $286.8 million for the year
ended December 31, 1997 from $236.5 million for the prior year, an increase
of 21.3%. Revenues for the marketing segment increased $45.0 million to
$221.3 million for the year ended December 31, 1997 from $176.3 million for
the prior year, an increase of 25.5%. The increase in marketing revenues was
generally the result of increased sales in the Company's Olefins division,
principally propylene, between Latin America and Europe during the second
half of 1997 and between United States and the Far East during the first
half of 1997. Revenues for the manufacturing segment increased $5.3 million
to $65.5 million for the year ended December 31, 1997, from $60.2 million
for the prior year, an increase of 8.8%. The increase in manufacturing
segment revenues was primarily due to an increase in overall acetone sales
volumes and an increase in phenol selling prices both of which were
partially offset by a decrease in the average selling price of acetone.
Gross Profit. Gross profit increased $2.6 million to $30.8 million
for the year ended December 31, 1997 from $28.2 million for the prior year,
an increase of 9.2%. As a percentage of revenues, total gross profit was
10.7% in 1997 compared to 11.9% for the prior year. This decrease is due to
lower margins from the Company's Olefins division (principally propylene)
that had higher sales volumes in the current year as noted above which was
partially offset by the full-year contribution of higher margin products
from the Blue Island Plant. Gross profit for the marketing segment decreased
$0.9 million to $14.3 million for the year ended December 31, 1997, from
$15.2 million for the prior year, a decrease of 5.9%. This decrease was
principally the result of higher sales in the Olefins division with lower
margins than the other marketing products. The Company's overall gross
margin would have been 12.8% and 13.8% during the years ended 1997 and 1996
had there been no propylene in the product mix. Gross profit for the
manufacturing segment increased $3.5 million to $16.5 million for the year
ended December 31, 1997 from $13.0 million for the prior year, an increase
of 26.9%. The increase in total gross profit was principally the result of
favorable prices in certain raw material costs, increases in the selling
prices for phenol, reductions in manufacturing costs associated with the
successful implementation of the QMAX technology in the production of cumene
at the Blue Island Plant and a reduction in raw material costs resulting
from a successful hedge of its propylene purchases. During the first quarter
of 1997, approximately 13 million pounds of propylene purchases were covered
by a fixed financial hedge for which the Company had a gain of $492,970
which reduced its cost of sales for this period by a corresponding amount.
The reduction in cost of sales resulting from the propylene hedge was
partially offset by an increase in the cost of benzene, which the Company
elected not to hedge. Gross profit in both the manufacturing and marketing
segments was also adversely impacted by decreases in acetone selling prices.
21
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.3 million to $16.9 million for the year
ended December 31, 1997 from $17.2 million for the prior year, a decrease of
1.7%. During the year ended December 31, 1997, depreciation and amortization
expense increased due to capital improvements in the fourth quarter of 1996
related principally to the QMAX technology and to the depreciation from the
additional storage tanks built in July 1997 at the Company's terminaling
facility. This increase was offset by reductions in various selling, general
and administrative expenses in the Company's foreign operations.
Operating Income. Operating income increased $2.9 million to $13.9
million for the year ended December 31, 1997 from $11.0 million for the
prior year an increase of 26.4%. The increase was principally the result of
the increase in gross profit, and by the decrease in selling, general and
administrative expenses mentioned above.
Interest Expense - Net. Interest expense decreased $0.7 million to
$2.1 million for the year ended December 31, 1997 from $2.8 million for the
prior year, a decrease of 25%. This decrease is principally due to the
Company's early retirement of debt in August of 1997 with funds received
from the Company's initial public offering.
Foreign Currency Exchange (Loss) Gain. The results from foreign
currency exchange increased $0.6 million to a gain of $0.1 million for the
year ended December 31, 1997 from a loss of $0.5 million for the prior year.
Substantially all of these losses in 1996 were the result of the Company's
activities in Venezuela. In December 1995, the Company began using the
market rate, in accordance with SFAS No. 52, to recognize foreign currency
exchange gains and losses for its Venezuelan subsidiary rather than using
the official Venezuelan rate. During the first quarter of 1996, the market
rate for U.S. dollars rose from 350 to 470 bolivars per dollar, at which
time it stabilized for the remainder of 1996. In 1997, the bolivars' rate
per U.S. dollar rose by only 25 bolivars per U.S. dollar.
Income Tax Provision. The Company's provision for income taxes
increased $0.9 million to $4.3 million for the year ended December 31, 1997
from $3.4 million for the prior year, an increase of 26.5%. The effective
tax rate for 1996 was significantly higher than that of the current year due
to the increased proportion of Venezuelan pre-tax loss in 1996 compared to
1997 for which no tax benefit was recorded. The Company's Venezuelan
operations have not recorded any income tax benefit in 1996 and 1997 due to
the uncertainty of utilizing the income tax loss carryforwards. Excluding
Venezuelan operations, the effective tax rate for the year ended December
31, 1997 would have been approximately 36.1% compared to the effective tax
rate for the year ended December 31, 1996 of 38.3%. In addition, the
Company's consolidated U.S. federal tax rate is lower than the statutory
rate due to the Company's ability to reduce its taxable income on U.S.
export sales through the use of the Company's Foreign Sales Corporation
which has an effective tax rate of 11.8%.
Net Income. Net income increased $2.6 million to $6.5 million for the
year ended December 31, 1997 from $3.9 million for the prior year, an
increase of 66.7%, principally due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased by approximately
$3.4 million to $5.2 million for the year ended December 31, 1998 as
compared to the same period in 1997.
22
This decrease was due primarily to a decrease in the Company's net income
for the period partially accompanied by an increase in the Company's working
capital. In addition, the Company increased its depreciation and
amortization during the current year by approximately $0.7 million due to
the current year acquisitions and to plant improvements in the fourth
quarter of 1997. Net cash used in investing activities increased by
approximately $1.8 million to $5.0 million for the year ended period
December 31, 1998 compared to approximately $3.2 million during the same
period in 1997. This increase was due primarily from the Company's
acquisitions of the Tolson Group, Browning and Inquinosa during 1998 for
approximately $4.0 million partially offset by a reduction in capital
expenditures. The Company's cash used in financing activities decreased by
approximately $1.9 million to a net cash used in financing activities of
approximately $3.1 million during the year ended December 31, 1998 compared
to cash used in financing activities of approximately $5.0 million during
the same period in 1997. The decrease was due primarily to a reduction in
the principal payment of long-term debt and distributions to shareholders.
During 1998, the Company negotiated additional lines of credit with
two new financial institutions in the amount of $52.0 million. The line is
available to support the operating activities for the recent acquisitions in
both Holland and Asia and supplement the Company's existing facilities in
the U.S. The Company now has a total borrowing capacity of approximately
$125.0 million. The Company believes that cash flows generated by
operations, existing cash and the Company's borrowing capacity are
sufficient to meet the Company's business strategies through 1999.
On March 10, 1998, the Company executed a long-term purchase agreement
with Solutia, Inc. ("Solutia") to purchase on a take-or-pay basis phenol to
be produced at a phenol plant to be built on the Gulf Coast of the United
States. Under terms of the agreement, the Company was required to advance
over three years $35 million to Solutia as a partial prepayment for future
inventory purchases. The prepayment was scheduled to be paid as follows: $5
million on or about December 31, 1998, $6.5 million in equal quarterly
payments in 1999 and the remaining balance in equal quarterly payments in
2000. Under the contract, Solutia is required to sell 125 million pounds of
phenol per year to JLM for 15 years at a specified price outlined in the
agreement with a credit on a per pound basis for the advancement mentioned
above. Construction of the plant was anticipated to commence in the
beginning of 1999 and phenol production was anticipated to begin at the
plant in the fourth quarter of 2000. The agreement also provides that if the
Company's available borrowing capacity under its aggregate credit facilities
is less than the total amount of the advance payments owed to Solutia,
Solutia may require the Company to deliver to Solutia an executed,
irrevocable bank guaranty equal to the total amount of the advance payments
owed to Solutia. Due to current market conditions, the project and any
required payments have been suspended through the mutual consent of both
Solutia and the Company.
The Company expects capital expenditures for its manufacturing and
terminaling facilities to be approximately $1.5 million for fiscal year 1999
and $.75 million for each of the years 2000 and 2001.
JLM believes its liquidity and capital resources, including its ability
to borrow additional amounts under its credit agreements, are sufficient to
meet its currently anticipated needs through the foreseeable future and to
permit it to continue to implement its business strategy.
23
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs using the last
two digits rather than all four digits to record an applicable year. Should
any of the Company's computer programs, hardware or software use "00" as the
year rather than the year "2000" it could result in a system failure,
miscalculations or disruptions of the Company's business, including a
temporary inability to provide services to its customers.
The Company recognized this problem over two years ago. As such, the
Company began a program whereby all internally used programs, hardware and
software would be evaluated to determine the best course of action to take
in order to ensure that all such items are Year 2000 compliant.
The Company began in late fiscal 1996 to search for a new business core
application that would provide more flexibility with the Company's growing
needs as well as being Year 2000 compliant. In the first quarter of 1998,
the Company concluded its search and has begun the transition to the new
application system and expects to complete conversion by the end of the
first quarter of 1999 for all domestic JLM companies. Additionally, the
Company has completely replaced all other hardware and software programs
that provide both standardization of the Company's computer environment and
are all Year 2000 compliant.
The Company also recognized that the Year 2000 compliance issue also
affects its vendors and customers. Therefore, the Company initiated a plan
with all of its vendors and customers to ensure that no material disruption
of service would occur due to the Year 2000 issue. Based on the responses
received, it does not appear that any such material disruption will occur
due to the lack of any of our vendors or customers not having operating
systems that are Year 2000 compliant.
Additionally, the Company has identified Year 2000 vulnerabilities with
its international operations and will have in place business core
applications by the end of the second quarter of 1999 that are Year 2000
compliant. By the end of 1999, all hardware will be in Year 2000 compliance
for the Company's international operations. The Company anticipates that the
total cost of implementing the new business core applications to be $0.3
million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
FOREIGN CURRENCY EXCHANGE RISK
The majority of the Company's U.S. transactions are denominated in U.S.
Dollars. The Company's foreign subsidiaries operate in their local currencies.
The Company does, from time to time, purchase short-term forward hedge exchange
contracts to hedge payments that are in other than the local currency. The
purpose of entering into these short-term forward exchange contracts is to
minimize the impact of foreign currency fluctuations on the results of the
Company's operations. Certain increases or decreases in these payments are then
offset by gains and losses on the related short-term forward exchange contracts.
The Company has in the past entered into fixed financial hedge contracts on
certain of its raw materials for use in its manufacturing segment. During 1998,
the Company did not enter into any material fixed financial hedge contracts and
there were no fixed financial contracts open as of December 31, 1998.
24
COMMODITY PRICE RISK
JLM enters into contracts whereby parties to the contracts agree to
exchange various quantities of inventory, primarily acetone, over a specified
period of time. JLM records these exchanges of inventory at the lower of cost or
market. As of December 31, 1998, the Company had the following related to
inventory exchanges:
Total pounds payable under the exchange contracts 12,639,000
Total amount payable under the exchange contracts $ 1,439,000
Weighted average price per pound payable under the
exchange contracts $ 0.114
Due to the fact that 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. 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 (see
Notes 7 and 8 to the consolidated financial statements). The Company does not
expect changes in interest rates to have a material adverse effect on its income
or its cash flows in fiscal 1999. However, there can be no assurances that
interest rates will not significantly change in 1999.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 26
Consolidated Balance Sheets - December 31, 1997 and 1998 27
Consolidated Statements of Income and Comprehensive Income
- Years Ended December 31, 1996, 1997 and 1998 28
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1996, 1997 and 1998 29
Consolidated Statements of Cash Flows - Years Ended December 31,
1996, 1997 and 1998 30
Notes to Consolidated Financial Statements 33
CONSOLIDATED SUPPLEMENTAL SCHEDULE
Independent Auditors' Report 52
Supplemental Schedule 53
25
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
JLM Industries, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of JLM Industries,
Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1998, and the
related consolidated statements of income and comprehensive income, of changes
in stockholders' equity and of cash flows for each of the three years in the
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of JLM Industries, Inc.
and subsidiaries as of December 31, 1997 and 1998 and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
March 8, 1999
26
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
1997 1998
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,214,197 $ 2,480,566
Accounts Receivable:
Trade 26,457,677 29,703,639
Other 3,012,975 5,374,933
Inventories 11,880,961 16,100,357
Prepaid expenses and other current assets 2,278,224 2,606,308
Income tax receivable -- 459,736
Assets held for sale 203,009 --
------------- -------------
Total current assets 49,047,043 56,725,539
Other investments 3,436,976 3,194,259
Property and equipment, net 29,505,011 28,384,989
Goodwill and other intangibles -- 11,981,624
Other assets 1,571,541 2,978,878
------------- -------------
Total assets $ 83,560,571 $ 103,265,289
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 34,474,758 $ 37,804,598
Current portion of long-term debt 789,277 1,872,483
Loans payable 379,034 451,742
Income taxes payable 115,333 --
------------- -------------
Total current liabilities 35,758,402 40,128,823
Long-term debt less current portion 4,795,895 14,723,646
Deferred income taxes 3,949,910 5,517,407
Minority Interest -- 255,867
Other liabilities 221,747 1,958
------------- -------------
Total liabilities 44,725,954 60,627,701
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Preferred stock - authorized 5,000,000 shares;
0 shares issued and outstanding -- --
Common stock - $.01 par value. Authorized
30,000,000 shares; 7,105,101 and 7,118,811
shares issued, respectively 71,051 71,188
Additional paid-in capital 21,074,912 21,330,709
Retained earnings 17,709,397 23,424,747
Foreign currency translation adjustment (20,743) 128,871
------------- -------------
38,834,617 44,955,515
Less treasury stock at cost - 424,199 shares -- (2,317,927)
------------- -------------
Total stockholders' equity 38,834,617 42,637,588
------------- -------------
Total liabilities and stockholders' equity $ 83,560,571 $ 103,265,289
============= =============
See notes to consolidated financial statements.
27
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
------------- ------------- -------------
Revenues $ 236,521,183 $ 286,822,166 $ 305,735,314
Cost of sales 208,281,667 256,030,337 269,443,909
------------- ------------- -------------
Gross profit 28,239,516 30,791,829 36,291,405
Selling, general and administrative expenses 17,237,736 16,889,268 23,644,565
------------- ------------- -------------
Operating income 11,001,780 13,902,561 12,646,840
Interest expense - net (2,814,667) (2,082,986) (1,300,161)
Other income (expense) - net 196,896 (583,409) (160,412)
Foreign currency exchange (loss) gain - net (527,652) 83,852 (38,434)
------------- ------------- -------------
Income before minority interest and income taxes 7,856,357 11,320,018 11,147,833
Minority interest in (income) loss of subsidiaries (82,103) 61,878 (255,867)
------------- ------------- -------------
Income from continuing operations before income taxes,
discontinued operations and extraordinary item 7,774,254 11,381,896 10,891,966
------------- ------------- -------------
Income tax provision:
Current 2,073,586 2,880,263 3,589,990
Deferred 1,343,849 1,410,930 1,567,497
------------- ------------- -------------
Total income tax provision 3,417,435 4,291,193 5,157,487
------------- ------------- -------------
Income from continuing operations before
discontinued operations and extraordinary item 4,356,819 7,090,703 5,734,479
Discontinued operations:
Loss from operations of discontinued operations (net of
income tax benefit of $279,000, $121,400 and $14,900,
respectively) (419,215) (182,053) (19,129)
Loss on disposal of discontinued operations (net of income
tax benefit of $4,000 and $19,400, respectively) (9,050) (29,054) --
------------- ------------- -------------
Income before extraordinary item 3,928,554 6,879,596 5,715,350
Extraordinary loss on extinguishment of debt
(net of income tax benefit of $257,000) -- (385,842) --
------------- ------------- -------------
Net income 3,928,554 6,493,754 5,715,350
Other comprehensive (loss) income:
Foreign currency translation adjustments (11,074) 4,017 149,614
------------- ------------- -------------
Comprehensive income $ 3,917,480 $ 6,497,771 $ 5,864,964
============= ============= =============
Basic income per share:
Income from continuing operations before
discontinued operations and extraordinary item $ 0.89 $ 1.23 $ 0.81
============= ============= =============
Net income $ 0.80 $ 1.13 $ 0.81
============= ============= =============
Diluted income per share:
Income from continuing operations before
discontinued operations and extraordinary item $ 0.89 $ 1.22 $ 0.81
============= ============= =============
Net income $ 0.80 $ 1.12 $ 0.81
============= ============= =============
Weighted average shares outstanding 4,877,568 5,752,579 7,038,321
Diluted weighted average shares outstanding 4,877,568 5,789,988 7,038,321
See notes to consolidated financial statements.
28
JLM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS
----- ----- ------- --------
Balance at December 31, 1995 $-- $ 50,112 $ 489,888 $ 10,002,182
Stockholder distributions -- -- -- (462,838)
Net income -- -- -- 3,928,554
Purchase of treasury shares -- -- -- --
Foreign currency translation adjustment -- -- -- --
---- ------------ ------------ -----------
Balance at December 31, 1996 -- 50,112 489,888 13,467,898
Stockholder distributions -- -- -- (1,732,728)
Retirement of treasury shares -- (2,673) -- (519,527)
Proceeds from sale of stock -- 23,495 21,823,334 --
Stock issuance costs -- -- (1,238,193) --
Issuance of restricted stock -- 117 (117) --
Net income -- -- -- 6,493,754
Foreign currency translation adjustment -- -- -- --
---- ------------ ------------ -----------
Balance at December 31, 1997 -- 71,051 21,074,912 17,709,397
Purchase of treasury shares -- -- -- --
Sale of stock to employees -- 38 21,020 --
Issuance of restricted stock -- 99 234,777 --
Net income -- -- -- 5,715,350
Foreign currency translation adjustment -- -- -- --
---- ------------ ------------ -----------
Balance at December 31, 1998 $-- $ 71,188 $ 21,330,709 $ 23,424,747
==== ============ ============ ============
FOREIGN
CURRENCY
TRANSLATION TREASURY STOCKHOLDERS'
ADJUSTMENTS STOCK EQUITY
----------- ----- ------
Balance at December 31, 1995 $ (13,686) $ -- $ 10,528,496
Stockholder distributions -- -- (462,838)
Net income -- -- 3,928,554
Purchase of treasury shares -- (522,200) (522,200)
Foreign currency translation adjustment (11,074) -- (11,074)
------------ ------------ ------------
Balance at December 31, 1996 (24,760) (522,200) 13,460,938
Stockholder distributions -- -- (1,732,728)
Retirement of treasury shares -- 522,200 --
Proceeds from sale of stock -- -- 21,846,829
Stock issuance costs -- -- (1,238,193)
Issuance of restricted stock -- -- --
Net income -- -- 6,493,754
Foreign currency translation adjustment 4,017 -- 4,017
------------ ------------ ------------
Balance at December 31, 1997 (20,743) -- 38,834,617
Purchase of treasury shares -- (2,317,927) (2,317,927)
Sale of stock to employees -- -- 21,058
Issuance of restricted stock -- -- 234,876
Net income -- -- 5,715,350
Foreign currency translation adjustment 149,614 -- 149,614
------------ ------------ ------------
Balance at December 31, 1998 $ 128,871 $ (2,317,927) $ 42,637,588
============ ============ ============
See notes to consolidated financial statements.
29
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,928,554 $ 6,493,754 $ 5,715,350
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes 1,343,849 1,410,930 1,567,497
Minority interest in income (loss) of subsidiaries 82,103 (61,878) 255,867
Loss on disposal of assets 379,067 119,712 116,432
Loss on disposal of discontinued operations 9,050 29,054 --
Loss on other investments -- -- 194,717
Issuance of restricted stock -- -- 234,876
Depreciation and amortization 2,524,187 2,947,163 3,671,452
Loss from partnerships 48,000 48,000 48,000
Loss from investment in Olefins Terminal Corporation - net 55,169 830,482 --
Non-cash management fee and interest income from Olefins
Terminal Corporation (334,578) (133,818) --
Allowance for doubtful accounts 383,662 94,039 270,902
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 4,081,252 (1,978,696) 27,829,808
Decrease in inventories 510,593 1,402,615 827,623
(Increase) decrease in prepaid expenses and other current
assets (1,774,891) 1,136,145 (213,733)
Decrease in assets held for sale 1,101,250 -- --
Increase in other assets (906,048) (390,313) (1,386,907)
Decrease in accounts payable and accrued expenses (11,345,206) (3,157,191) (32,536,054)
(Decrease) increase in income taxes payable/receivable (330,142) 98,517 (878,866)
Increase (decrease) in deferred revenue 280,075 (300,475) --
(Decrease) increase in other liabilities (16,927) 17,986 (524,519)
------------ ------------ ------------
Net cash provided by operating activities 19,019 8,606,026 5,192,445
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets held for sale 786,535 1,726,916 155,115
Proceeds from sale of investments -- 145,834 --
Capital expenditures (7,346,658) (2,875,431) (1,102,192)
Purchase of net assets -- -- (4,045,469)
Other investments (70,672) (2,062,992) --
Purchase of minority interest -- (110,526) --
------------ ------------ ------------
Net cash used in investing activities (6,630,795) (3,176,199) (4,992,546)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of loans payable 6,234,441 (7,987,486) 72,708
Proceeds from long-term debt 4,279,312 1,400,335 3,531,500
Principal payments of long-term debt (3,241,263) (17,586,420) (4,890,483)
Purchase of treasury shares -- -- (1,817,927)
Proceeds from the sale of common stock -- 21,846,829 21,058
Stock issuance costs -- (952,650) --
Distributions to shareholders (462,838) (1,732,728) --
Repayments of shareholder loan (104,812) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 6,704,840 (5,012,120) (3,083,144)
------------ ------------ ------------
Effect of foreign exchange rates on cash (11,074) 4,017 149,614
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 81,990 421,724 (2,733,631)
Cash and cash equivalents, beginning of year 4,710,483 4,792,473 5,214,197
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,792,473 $ 5,214,197 $ 2,480,566
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,928,671 $ 2,227,815 $ 1,344,243
============ ============ ============
Income taxes $ 2,113,975 $ 2,223,344 $ 4,243,724
============ ============ ============
Noncash investing activities:
Capital lease obligations $ 106,391 $ 50,335 $ 274,913
============ ============ ============
Forgiveness of accounts payable for joint venture
restructuring $ -- $ 1,958,157 $ --
============ ============ ============
Noncash financing activities:
Treasury stock purchased by satisfaction of accounts
receivable $ 522,200 $ -- $ 500,000
============ ============ ============
See notes to consolidated financial statements
30
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. DESCRIPTION OF BUSINESS
JLM Industries, Inc. and subsidiaries ("JLM" or the "Company") is a
leading marketer and distributor of certain commodity chemicals, principally
acetone and phenol. JLM is headquartered in Tampa, Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of JLM and its wholly-owned subsidiaries. JLM's
principal operating subsidiaries are JLM Marketing, Inc., JLM Chemicals,
Inc., JLM Terminals, Inc., JLM International, Inc., Olefins Marketing, Inc.,
JLM Industries (Europe) B.V., JLM Chemicals Canada, Inc., JLM Industries de
Venezuela, C.A., Tolson Holland B.V., Tolson Transport B.V., Tolson Asia,
Ltd. (the "Tolson Group"), Browning Chemical Corporation ("Browning"),
Inquinosa International S.A. ("Inquinosa") Aurora Chemicals, Inc. ("Aurora")
and Phoenix Tank Car Corporation ("Phoenix"). All material intercompany
balances and transactions have been eliminated in consolidation. Included in
the 1998 consolidated financial statements is the 50.1% owned subsidiary.
Inquinosa, that the Company acquired in July 1998 (see Note16). Included in
the 1996 and 1997 consolidated financial statements is the 55% owned
subsidiary, JLM Industries (Europe) B.V. In July 1997, the Company purchased
the 45% minority interest in JLM Industries (Europe) B.V. for approximately
$111,000 cash. Effective January 1, 1997, both Aurora and Phoenix were
dissolved and all business conducted under these companies were transferred
to the Company's remaining subsidiaries.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cash equivalents consist of highly
liquid investments with original maturities from purchase date of three
months or less.
INVENTORIES - Inventories are valued at the lower of cost or market. The
costs of JLM Marketing, Inc.'s inventories are determined on the last-in,
first-out (LIFO) method. As of December 31, 1997 and 1998, JLM Marketing,
Inc.'s inventory was approximately 30% and 40%, respectively, of total
inventory. The costs of the Company's remaining inventories are determined
on the first-in, first-out (FIFO) method. In the year ended December 31,
1998, there was a decrease of LIFO inventory prices partially offset by an
increase in LIFO inventory quantities resulting in the elimination of the
LIFO reserve and the creation of a LIFO inventory supplement. If LIFO
inventories were valued at current costs, operating income would have been
approximately $(13,000), $(570,000) and $(1,585,000) lower than those
reported for the years ended December 31, 1996, 1997 and 1998, respectively.
The excess (supplement) of the replacement cost over the value of
inventories based upon the LIFO method was approximately $1,046,000 and
$(539,000) as of December 31, 1997 and 1998, respectively.
JLM enters into contracts whereby parties to the contracts agree to
exchange various quantities of inventory over a specified period of time.
JLM records these exchanges of inventory at the lower of cost or market. As
of December 31, 1997 and 1998, JLM owed approximately $80,000 and $1,439,000
respectively, under these contracts which are included in inventory.
31
In 1996, JLM entered into a fixed price financial hedging contract in
order to minimize its exposure in the three months ended March 31, 1997 to
the fluctuations in the price of propylene, one of the two key raw materials
used by JLM Chemicals, Inc. The purpose of the financial hedging contract
was to secure an acceptable purchase price for JLM's propylene requirements
in the three months ended March 31, 1997. The contract was for 13 million
pounds of propylene at $.1225 per pound. In accordance with the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 80, ACCOUNTING FOR FUTURES CONTRACTS, gains and
losses for such contracts are recognized as an adjustment to cost of sales
at the time the finished goods are sold by JLM. During the three months
ended March 31, 1997, JLM purchased and sold substantially all of the 13
million pounds of propylene covered under the hedging contract. As a result,
JLM recognized a gain of approximately $493,000, which reduced cost of sales
for the period. JLM can be exposed to losses in connection with such
contracts, generally the amount by which the fixed hedged price on the
contract is above the market price for such chemicals at the time of
purchase. The Company did not enter into any material financial hedging
contracts in 1997 or 1998.
OTHER INVESTMENTS - Other investments include investments in partnerships
and the investment in Olefins Terminal Corporation ("OTC"). JLM accounts for
certain of its investments in partnerships on an equity basis and,
accordingly, records its respective share of profits and losses that are
allocated in accordance with the partnership agreements. Except for OTC, JLM
has no obligation to make any contributions beyond its initial investment.
See further discussion of OTC in Note 5.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method
over the shorter of the lease term or the estimated useful lives.
A summary of the lives used for computing depreciation is as follows:
Buildings 15 and 31.5 years
Vehicles and airplane 2 to 10 years
Equipment 5 to 10 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Life of lease
OTHER ASSETS - As of December 31, 1997 and 1998, other assets consist
primarily of the cash surrender values of life insurance policies held on
key employees, license fees, certain development costs and advances on
consulting and non-competition agreements (see Note 12). These costs are
amortized on a straight-line basis from 2 to 10 years. Accumulated
amortization on other assets as of December 31, 1997 and 1998 was
approximately $927,000 and $1,355,000, respectively.
GOODWILL AND OTHER INTANGIBLES - Goodwill and other intangibles resulting
from business acquisitions (see Note 16), comprising cost in excess of net
assets of businesses acquired, customer lists, tax credit carry forwards,
employee contracts and distribution rights are being amortized over their
respective useful lives ranging from 3 to 40 years.
INCOME TAXES - JLM accounts for income taxes under the asset and liability
method as required by SFAS No. 109, ACCOUNTING FOR INCOME Taxes. Under this
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying
32
enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. The effect of a tax rate change on deferred
taxes is recognized in income in the period that the change in the rate is
enacted.
Prior to the acquisition of Aurora on January 1, 1997 and Phoenix on June
1, 1997 by the Company, Aurora and Phoenix elected to be treated as S
corporations for federal income tax purposes, with profits and losses
generally reportable by the stockholder in their individual income tax
returns. Any tax liability related to either Aurora or Phoenix prior to
their acquisition by JLM will be the responsibility of their shareholders.
Accordingly, JLM has recorded no tax liability for such periods. On a pro
forma basis, the tax liability for Aurora and Phoenix is immaterial.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS - Assets and
liabilities of foreign subsidiaries are translated at year-end exchange
rates. Results of operations are translated at weighted average rates for
the year. The effects of exchange rate changes in translating foreign
financial statements are presented as a separate component of stockholders'
equity, except for the Company's Venezuelan subsidiary which operates in a
hyperinflationary economy for which the translation gains and losses are
included in net income currently.
FOREIGN EXCHANGE CONTRACTS - From time to time, JLM enters into foreign
exchange contracts as a hedge against foreign accounts payable and
receivables. Market value gains and losses are recognized and the resulting
credit or debit offsets foreign exchange gains and losses on these payables
and receivables. At December 31, 1997 and 1998, JLM had no open foreign
exchange contracts.
STOCK-BASED COMPENSATION - In accordance with SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, JLM has elected to recognize stock-based
compensation under Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and to disclose in the consolidated financial
statements the effects of SFAS No. 123 as if its fair value recognition
provisions were adopted. See Note 19 for additional information on the
Company's stock-based compensation.
STOCKHOLDERS' EQUITY - Effective May 22, 1997, the Company amended its
Certificate of Incorporation and increased the number of shares of common
stock authorized to 30,000,000 and changed the par value from no par to $.01
per share. Additionally, this amendment provided for 5,000,000 authorized
shares of a new class of preferred stock. All shares and per share amounts
in the accompanying consolidated financial statements have been
retroactively adjusted for the amendment.
INCOME PER SHARE - The FASB has issued SFAS No. 128, EARNINGS PER Share,
which was required to be adopted for financial statement periods ending
after December 15, 1997. SFAS No. 128 requires that "basic" and "diluted"
earnings per share replace the primary and fully diluted earnings per share,
respectively. The basic calculation computes earnings per share based only
on the weighted average number of shares outstanding as compared to
"primary" earnings per share reported in prior years which included common
stock equivalents. The diluted earnings per share calculation is computed
similarly to fully diluted earnings per share reported in prior years. All
earnings per share amounts for all periods presented conform to SFAS No.
128. See Note 13.
33
REVENUE RECOGNITION - The Company recognizes revenue from product sales
upon shipment and passage of title. The Company estimates and records
provisions for quantity rebates and sales allowances, if necessary, in the
period the sale is reported.
USES OF ESTIMATES - The preparation of the consolidated financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value of amounts
reported in the consolidated financial statements have been determined by
using available market information and appropriate valuation methodologies.
The carrying value of all current assets and current liabilities
approximates the fair value because of their short-term nature. The fair
value of long-term debt approximates its carrying value.
IMPAIRMENT OF LONG-TERM ASSETS - The Company evaluates the recoverability
of the net carrying value of its property and equipment, goodwill and other
intangibles, and other long-lived assets by comparing the carrying values to
the estimated future undiscounted cash flows. A deficiency in these cash
flows relative to the carrying amounts is an indication of the need for a
write-down due to impairment. The impairment write-down would be the
difference between the carrying amounts and the fair value of these assets.
A loss on impairment would be recognized by a charge to operations.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subjects the Company to a concentration of credit risk principally consist
of trade accounts receivable. Credit risk with respect to trade accounts
receivable is generally diversified due to the large number of entities
comprising the Company's customer base and their dispersion across many
different geographic regions. The Company performs ongoing credit
evaluations of its customers' financial condition and requires collateral,
such as letters of credit, or business insurance in certain circumstances.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the FASB
issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, that establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements and is
effective for all companies with fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement. SFAS No. 130 requires that an enterprise (i)
classify items of other comprehensive income by their nature and (ii)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. The Company has adopted SFAS No. 130
in the accompanying consolidated financial statements of income and
comprehensive income.
In June 1997, the FASB issued SFAS No. 131, SEGMENT DATA, that requires
companies to report selected segment information in their quarterly reports
issued to shareholders for fiscal
34
years beginning after December 31, 1997. It also requires, among other
items, entity-wide disclosure about the products and services an entity
provides, the material countries in which it holds assets and reports
revenues and its major customers. The Company will begin implementing the
requirements under SFAS No. 131 for quarterly purposes beginning in fiscal
year 1999. The Company has adopted SFAS No. 131 in 1998 (see Note 21).
However, there were no changes required to prior year amounts.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, that requires that gains or losses be
recognized in earnings for a fair value hedge in the period of change
together with the offsetting loss or gain on the hedged item attributable to
the risk being hedged. Management does not believe that the adoption of SFAS
No. 133 will have a significant impact on the Company's consolidated
financial statements. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.
RECLASSIFICATIONS - Certain amounts in the 1996 and 1997 consolidated
financial statements are reclassified to conform to the 1998 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
1997 1998
------------ ------------
Land and building $ 7,123,124 $ 7,438,563
Vehicles 319,708 216,652
Airplane 2,411,681 2,475,939
Equipment 23,647,967 24,977,860
Leased equipment - capital leases 1,188,122 1,188,122
Furniture and fixtures 878,288 882,804
Leasehold improvements 388,250 442,699
------------ ------------
35,957,140 37,622,639
Less accumulated depreciation and amortization (6,452,129) (9,237,650)
------------ ------------
$ 29,505,011 $ 28,384,989
============ ============
Depreciation and amortization expense for property and equipment was
approximately $2,242,000, $2,598,000 and $2,834,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. The leased equipment
consists of several capital leases, which expire through June 1999, with a
$189,000 option to purchase at the end of the lease period. Future minimum
capital lease payments for each of the years 1999 through 2003 are
approximately $420,000, $74,000, $54,000, $14,000 and $11,000, respectively.
4. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS
Investments in partnerships at December 31, 1997 and 1998, consist
principally of the following:
PHENOL PLANT PARTNERSHIP - The Company holds a 2% interest in the Mt.
Vernon Phenol Plant Partnership via its wholly owned subsidiary JLM (Ind),
Inc., an Indiana corporation. The plant converts cumene into phenol that is
marketed under contractual agreements to GE Plastics. JLM has a long-term
exclusive agreement through 2002, and thereafter, unless the
35
agreement is terminated upon prior notice, to purchase all acetone not used
internally by GE Plastics produced at the Mt. Vernon Phenol Plant. Based on
its percentage ownership, JLM accounts for this investment using the cost
method. As of December 31, 1997 and 1998, the amount of this investment was
approximately $496,000. During 1997 and 1998, JLM contributed approximately
$4,000 and $0, respectively, to the partnership and received no
distributions in either year.
ASIAN PARTNERSHIP - In April 1997, JLM entered into an agreement to
purchase 25% of the common stock of S.K. Chemicals Asia Pte. Ltd. ("SK
Chemicals"), an international petrochemical distributor, for $500,000 cash.
In addition, in April 1997, JLM entered into an agreement to purchase for
$500,000 cash a 12.7% interest in S.K. Chemical Trading Pte. ("SK Trading").
As of December 31, 1997 and 1998, these investments of approximately
$1,069,000 were included in other investments in the accompanying
consolidated balance sheet and are carried on the cost method.
REAL ESTATE PARTNERSHIPS - The Company holds a 99% interest in Len-Kel
Realty Limited Partnership ("Len-Kel"). During 1987 and 1988, Len-Kel
acquired 28 units in a development project converting historical buildings
into residential use. The units are currently operated as rental property.
JLM is a limited partner in Len-Kel and cannot exert control over the
partnership. Accordingly, the investment is carried on the equity method. As
of December 31, 1997 and 1998, the amount of this investment was
approximately $996,000 and $948,000, respectively.
JLM holds other investments through limited partnerships. The amount of
these partnerships totaled approximately $821,000 and $744,000 at December
31, 1997 and 1998, respectively, and are carried on the cost method in the
accompanying consolidated balance sheet.
During each of the years ended December 31, 1996, 1997 and 1998, JLM
recorded losses from partnership investments of approximately $48,000. As a
limited partner, the Company has no obligation to make any contributions
beyond its initial investment.
5. OLEFINS TERMINAL CORPORATION
During 1991, JLM formed a 100% owned subsidiary, OTC, to design and
construct a polymer grade propylene export facility in Bayport, Texas. On
August 15, 1991, OTC issued stock and stock warrants to other investors
reducing the Company's ownership to 49% (32% on a fully diluted basis).
Construction was completed in July 1992. The Company accounts for its
investment in OTC on the equity basis. During the years ended December 31,
1996, 1997 and 1998, losses from the investment in OTC of approximately
$(55,000) and $(830,000), and $0, respectively, were recorded. As of
December 31, 1997 and 1998, the Company's investment in OTC was $0 due to
the cumulative losses incurred by OTC.
During 1996, JLM provided OTC with financial and management services for a
fee of 2.5% on certain sales, as defined. As part of the refinancing of
OTC's long-term debt discussed below, JLM switched its management fee to a
fixed rate of approximately $16,000 per month. JLM recorded management fees
of approximately $139,000, $134,000 and $192,000 for the years ended
December 31, 1996, 1997 and 1998, respectively, under this agreement.
On May 7, 1997, OTC refinanced its existing long-term debt and replaced it
with an unsecured term loan (the "Term Loan"). The proceeds from the Term
Loan was, among other
36
items, used to repay all of OTC's existing long-term debt, purchase all
outstanding stock warrants and repay all outstanding management fees to JLM.
After the purchase of the stock warrants, OTC is owned 50% by JLM. In
conjunction with the refinancing, JLM's terminaling contract was canceled
and a new, one-year terminaling arrangement, which became effective January
1, 1997, was entered into by all parties. The new terminaling contract,
which has no minimum throughput requirements, requires JLM to pay for
throughput at $16 per metric ton during the one-year term and it cancels the
carryover rights from the old terminaling contract. Also in conjunction with
the refinancing, JLM's non-current note receivable, including accrued
interest, was converted to an investment in OTC and JLM's account payable to
OTC was forgiven and accounted for as a reduction in JLM's investment in
OTC. The amount of the accounts payable to OTC which was forgiven was
approximately $2 million. In addition, JLM has pledged its ownership
interest in OTC to the other 50% owner as security for certain contingent
payment obligations required to be made equally by JLM and the other 50%
owner of OTC, if OTC has inadequate operating funds.
The following summarizes the assets, liabilities and stockholders' equity
of OTC as of December 31:
1997 1998
----------- -----------
ASSETS:
Current $ 1,233,608 $ 874,033
Noncurrent 9,502,090 7,590,993
----------- -----------
$10,735,698 $ 8,465,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities $ 534,383 $ 524,814
Noncurrent liabilities 7,300,000 7,300,000
Stockholders' equity 2,901,315 640,212
----------- -----------
$10,735,698 $ 8,465,026
=========== ===========
OTC had net losses of approximately $166,000, $1,468,000 and $2,261,000
for the years ended December 31, 1996, 1997 and 1998, respectively. During
1997, the Company's investment in OTC was reduced to zero due to the
recognition of the Company's pro rata share of OTC's operating losses. As
the Company has no current financial commitments to OTC, the Company will
not record additional losses on its investment until future operating income
from OTC surpasses the cumulative unrecorded operating losses or until any
contingent payment obligations, discussed above, are required. As of
December 31, 1998, the Company had cumulative unrecorded operating losses
from OTC of approximately $1,318,000.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31:
1997 1998
----------- -----------
Accounts payable $31,668,665 $31,047,242
Accrued expenses 2,806,093 6,757,356
----------- -----------
$34,474,758 $37,804,598
=========== ===========
37
7. LOANS PAYABLE
Loans payable consist of the following at December 31:
1997 1998
-------- --------
Secured loans payable associated with Venezuelan
operations due on demand. Interest is payable
monthly between 21% and 23% during 1997 and
between 23% and 48% during 1998 $377,546 $177,148
Secured loan payable associated with International
operations due on demand. Interest is payable monthly
at prime less 1%. Prime was 7.75% at December 31, 1998 -- 274,594
Secured loans payable due on demand. Interest
is payable monthly at rates between 8.3% and 10% as
of December 31, 1997 1,488 --
-------- --------
$379,034 $451,742
======== ========
The loans payable are collateralized by most of JLM's inventory and
accounts receivable. As of December 31, 1997 and 1998, JLM had a total of
approximately $72,100,000 and $125,000,000, respectively, of credit
facilities available with various financial institutions of which
approximately $60,172,000 and $95,116,000, respectively, was unused.
Additionally, as of December 31, 1997 and 1998, JLM had guaranteed vendor
letters of credit of approximately $5,964,000 and $12,836,000, respectively.
In December 1997, the Company completed the refinancing of certain of its
revolving loan agreements and replaced it with an unsecured $30 million line
of credit (the "LOC"). Under terms of the LOC, $15 million of the LOC will
be restricted to funding future acquisitions with terms that will expire on
November 1, 2003. The remaining $15 million will be used to fund working
capital needs with terms that will expire on November 1, 2001. The interest
on the LOC will accrue at the bank's prime rate less 1/2 percent. As of
December 31, 1998, there was $6.0 million outstanding under the LOC.
During 1998, the Company negotiated additional lines of credit with two
new financial institutions that are renewable each year in the amount of
$52.0 million. These lines of credit are to be used primarily for the
Company's international subsidiaries. The lines of credit are unused and are
secured by accounts receivable and inventory.
JLM's loans payable contain certain financial covenants which must be met
with respect to, among other things, minimum consolidated net income levels,
minimum current ratio and debt service. JLM was not in compliance with
certain of such financial covenants as of December 31, 1998 related to
quarterly income levels. With respect to such noncompliance, the Company
received a waiver from the respective financial institutions. Certain
provisions of the loans payable to which JLM is subject restricts JLM's
ability to pay dividends.
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1997 1998
------------ ------------
Notes payable to shareholders due in June
2002. Interest is payable monthly at rates
of prime and 10.0%. Prime was 8.5% and 7.75%
at December 31, 1997 and 1998, respectively $ 1,350,000 $ 1,250,000
38
Mortgage payable due in equal monthly
installments through July 1999. Final
balloon principal payment due July 1999
Interest is payable monthly at 9.59%. The
Company intends to refinance the mortgage
loan payable through 2001 1,606,802 1,509,909
Secured loan payable due in 2006, Interest is
payable monthly at rates between 8% - 9.68% 1,583,102 1,459,725
Secured installment loan payable due in
September 1999, payable in quarterly
installments of $50,000. Interest is payable
quarterly at the prime rate plus 2%. Prime
was 8.5% and 7.75% at December 31, 1997 and
1998, respectively 364,207 114,207
Secured loans payable due in equal monthly
installments through 1999. Interest is
payable monthly at rates between 10.13% -
13.47% 35,890 17,605
Acquisition line of credit payable due in
November 2001. Interest is payable monthly
at LIBOR rate plus 2 points. Was The LIBOR
rate was 5.04% at December 31, 1998 -- 6,000,000
Note payable due in semi-annual installments
through November 2000 with a balloon payment
due May 2001. Interest is payable
semi-annually at LIBOR plus one point. LIBOR
was 5.04% at December 31, 1998 -- 2,500,000
Note payable due in semi-annual installments
through March 2002. The note is non-interest
bearing. Interest has been imputed at the
Company's weighted average borrowing rate of
7.37% -- 1,473,715
Secured loans payable due in June 2001
Interest is payable monthly at 7.25% -- 1,688,500
Capital lease obligations due in equal monthly
installments through April 2001. Interest is
payable monthly at rates between 4.83% -
16.99% 645,171 582,468
------------ ------------
Total 5,585,172 16,596,129
Less current portion (789,277) (1,872,483)
------------ ------------
Long-term portion $ 4,795,895 $ 14,723,646
============ ============
See Note 7 regarding the prepayment of certain of the Company's revolving
loans.
Long-term debt becoming due during subsequent fiscal years ending on
December 31 are as follows:
1999 $ 1,872,483
2000 4,466,384
2001 2,786,285
2002 1,460,319
2003 6,010,658
The long-term debt is secured by substantially all of JLM's property and
equipment.
9. RELATED PARTY TRANSACTIONS
JLM has loans payable to its majority stockholder of $905,148 at December
31, 1997 and 1998. The loan payable bears interest at the prime rate, which
was 8.5% and 7.75% at December 31, 1997 and 1998, respectively, and matures
on January 1, 2000. Additionally,
39
the Company has approximately $1,700,000 of miscellaneous receivables owed
by the majority stockholder. These items are netted together and included as
part of other accounts receivable in the accompanying consolidated balance
sheet.
In 1996, JLM purchased approximately $319,000 of chemical products from a
joint venture partnership owned 50% by Kemlink, L.L.C., a Delaware Limited
Liability company, of which the majority stockholder of JLM is a 97% owner.
All purchases in 1996 were at prices comparable to those paid to unrelated
parties. In addition, during 1996, JLM sold approximately $1,260,000 of
chemical products to Kemlink J.V. Effective December 31, 1996, the Company
ceased doing business with both Kemlink J.V. and Kemlink, L.L.C. due to the
termination of such entities by their partners.
In 1997, the Company entered into an agreement for sale and purchase of
common stock held by the majority stockholder of JLM and an unrelated third
party to purchase for a total purchase price of approximately $1.25 million
all of the issued and outstanding shares of Aurora. Under the terms of the
agreement, the Company purchased from the majority owner of JLM his 80%
ownership interest in Aurora for a $1.0 million promissory note that matures
on June 1, 2002 and bears interest at a rate of 10.0% per annum. The other
shareholder of Aurora received consideration of $250,000 for the purchase of
his ownership interest. Of such amount, $150,000 was paid at closing in cash
and $100,000 was paid by a three year promissory note which bears interest
at the prime rate and is payable in three equal annual installments. During
1998, the Company repaid the entire outstanding balance due to the unrelated
third party.
In 1996 and 1997, the Company leased chemical tank railcars from Phoenix,
a Connecticut corporation of which sole owner is the majority stockholder is
the majority stockholder of JLM. The Company made payments in 1996 and 1997
to Phoenix in respect of such leases of approximately $203,000 and $6,000,
respectively. In 1997, the Company entered into an agreement for sale and
purchase of common stock with JLM's majority stockholder to purchase for a
total purchase price of $500,000 all of the issued and outstanding shares of
Phoenix. Under the terms of the agreement, the Company purchased the
majority stockholder of JLM's ownership interest in Phoenix for $500,000, of
which $250,000 was offset against advances owed to the Company by the
majority stockholder of JLM and $250,000 paid by means of a promissory note
that matures on June 1, 2002 and bears interest at a rate of 10.0% per
annum.
The Aurora and Phoenix transactions described above have been accounted
for as a combination of entities under common control using historical
amounts.
10. INCOME TAXES
Current and deferred income tax provision consists of the following at
December 31:
1996 1997 1998
---------- ---------- ----------
Current:
Federal $1,350,848 $1,930,435 $2,820,534
State and local 182,528 402,285 561,776
Foreign 257,278 150,152 192,780
Deferred 1,343,849 1,410,930 1,567,497
---------- ---------- ----------
$3,134,503 $3,893,802 $5,142,587
========== ========== ==========
40
The income tax provision reflected above includes the income tax
expense/benefit associated with discontinued operations and extraordinary
loss.
The significant components of the deferred tax assets and liabilities are
as follows as of December 31,:
1997 1998
----------- -----------
Deferred tax assets:
Foreign intangible assets $ -- $ 433,168
Foreign reserves 167,000 222,313
Foreign net operating loss and
other carryforwards 402,000 1,630,165
Minimum tax credit carryforward 293,784 --
Other 78,404 455,274
----------- -----------
941,188 2,740,920
Valuation allowance (569,000) (2,285,646)
----------- -----------
Total deferred tax assets 372,188 455,274
Deferred tax liabilities:
Property (3,821,089) (5,215,389)
Nonconsolidated investments (501,009) (415,453)
Foreign prepaid expenses -- (341,839)
Other -- --
----------- -----------
Total deferred tax liabilities (4,322,098) (5,972,681)
----------- -----------
Net deferred tax liability $(3,949,910) $(5,517,407)
=========== ===========
The net change in the total valuation allowance for the year ended
December 31, 1997 and 1998 was an increase of approximately $154,000 and
$1,717,000, respectively. The valuation allowance was established to reduce
the deferred tax assets booked for foreign net operating losses, reserves
and intangible assets generated from Venezuelan and Holland operations.
At December 31, 1997 and 1998, there were Venezuelan NOL's of
approximately $621,000 and $1,223,000, respectively, available to offset
future foreign taxable income. These net operating losses expire in various
years after 2000. At December 31, 1997 and 1998, there were Holland NOL's of
approximately $535,000 and $3,186,000, respectively, that may be carried
forward indefinitely.
JLM's effective tax rate differs from the statutory federal income tax
rate of 34% for the fiscal years ended December 31,:
1996 1997 1998
----- ----- -----
Statutory federal income tax rate 34.00% 34.00% 34.00%
State and local income taxes, net of federal income tax benefit 2.58 3.87 3.44
Difference arising from transactions with, and profit and
loss of, foreign subsidiaries not deductible or
includible for U.S. tax purposes 8.59 2.93 9.64
Foreign Sales Corporation benefit (2.05) (2.15) (0.40)
Other 1.25 (1.16) 0.86
----- ----- -----
Effective income tax rate 44.37% 37.49% 47.54%
===== ===== =====
The Company intends to indefinitely reinvest the earnings of its non-U.S.
subsidiaries, which reflect full provision for non-U.S. income taxes, to
expand its international operations.
41
Accordingly, no provision has been made for U.S. income taxes that might be
payable upon repatriation of such earnings. In the event any earnings of
non-U.S. subsidiaries are repatriated, the Company will provide U.S. income
taxes upon repatriation of such earnings which will be offset by applicable
foreign tax credits, subject to certain limitations.
11. TREASURY STOCK AND STOCK SPLIT
Chemical Trading, S.L. ("Trading"), JLM's Spanish distributor, was
indebted to JLM pursuant to an arrangement in which JLM pays the
distributor's operating expenses. JLM treats the difference between such
payments made by JLM and the amount of commissions and other amounts due to
the distributor in respect of his activities on behalf of JLM as a loan by
JLM to the distributor. Such indebtedness was carried on an open account
basis and in July 1996, $522,200 was repaid without interest through the
sale to JLM at fair market value of 48 shares (267,264 shares after giving
effect to the stock split in July 1997) of common stock owned by Trading's
owner. On July 3, 1997, JLM approved the retirement of the shares of common
stock held in treasury by the Company and a stock split resulting in an
exchange of 1 share for 5,568 shares of common stock issued and outstanding.
All share and per share amounts have been retroactively adjusted for this
split. Effective October 1, 1998, $500,000 owed by Trading was repaid
without interest through the sale to JLM at fair market value of 90,909
shares of common stock owned by Trading's owner.
Effective January 1, 1998, the Company purchased 3,290 shares of common
stock from certain officers of the Company valued at $72,000. The Company
entered into the transaction in order to assume certain tax liabilities
related to the vested portion of the restricted stock received by the
certain officers.
On October 16, 1998, the Company's Board of Directors approved a Stock
Repurchase Program (the "Program") whereby the Company can purchase up to
500,000 shares of its common stock. During the fourth quarter of 1998, the
Company purchased approximately 330,000 shares of its common stock for
approximately $1,818,000 under the Program.
12. COMMITMENTS AND CONTINGENCIES
JLM is obligated under operating leases with remaining non-cancelable
terms of a year or more for office equipment, storage facilities and
automobiles. The approximate minimum annual rentals under these leases at
December 31, 1998 are as follows:
1999 $279,135
2000 250,552
2001 394,842
2002 18,040
2003 7,150
--------
Total minimum lease payments $949,719
========
Total rental expenses for all operating leases approximated $1,875,000,
$1,540,000 and $1,588,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
42
At December 31, 1998, JLM is obligated to make future minimum payments of
$115,750 in 1999 under a license agreement for the use of the cumene
catalysts at its manufacturing facility.
JLM is subject to federal, state, local and foreign environmental laws,
rules, regulations and ordinances concerning emissions to the air,
discharges to surface and subsurface waters, and the generation, handling,
storage, transportation, treatment, disposal and import and export of
hazardous materials. JLM has engaged environmental counsel for four of their
facilities: the JLM Chemicals, Inc., Blue Island Illinois facility, the JLM
Terminals, Inc. facility, JLM Real Estate, Inc. property and the Polychem
facility. Regarding the JLM Chemicals facility, JLM believes that the low
levels of various organic compounds detected in the soil and groundwater at
the facility are the result of historical use of the facility prior to the
acquisition by JLM and/or migration from neighboring facilities. JLM also
believes that the likelihood of either state or federal environmental
regulatory agencies seeking remediation in the near term is low, based on
the location of the facility, the character of the area (each of which are
factors in assessing risk) and the fact that the site is pending removal
from the federal list of contaminated sites. Regarding the JLM Terminals,
Inc. facility and the JLM Realty property, JLM believes that ultimate
liability for remediation of soil and groundwater contamination rests with
the previous owner of the facility and/or a neighboring facility. In 1998,
the Company assumed from the previous owner of both the JLM Terminal, Inc.
and JLM Realty, Inc. the implementation of state approved Remedial Action
Plans ("RAPs") to address onsite petroleum contamination at the sites.
Compliance with the RAPs does not foreseeably require any capital
expenditures and the Company believes that the owners of the neighboring
properties may bear a significant portion of the responsibility or any
additional remediation. Regarding the Polychem facility, levels of organic
compounds slightly in excess of regulatory thresholds were detected in the
ground water. JLM addressed the problem and recent analytical results show
the levels of contamination have decreased to acceptable levels.
Accordingly, JLM has requested that state authorities permit closure of the
remediation of the Polychem facility. JLM does not believe that a material
amount of funds will be required to complete remediation at any of the
sites. Accordingly, the Company has not accrued any amounts related to the
remediation of any of the sites.
On December 12, 1996, JLM entered into consulting and non-competition
agreements with two independent third parties. The terms of the consulting
agreements are from January 3, 1997 through December 31, 2003 and JLM is
committed to pay $130,000 per year, payable semi-annually beginning January
1, 1997 through December 31, 2002 and $200,000 on January 1, 2003. The terms
of the non-competition agreements will be from January 1, 1997 through
December 31, 2006 and JLM is committed to $100,000 per year, payable
semi-annually from July 1, 1997 through December 31, 2002 and $270,000 on
January 1, 2003. As of December 31, 1998, JLM has advanced $930,000 to the
third parties and, in conjunction with entering into the consulting and
non-competition agreements, these amounts shall be satisfied by setting them
off against the amounts owed by the third parties to JLM. As of December 31,
1997, the $240,000 advance has been recorded in other current assets-net and
the remaining $230,000 advance is recorded in prepaid expenses and other
current assets in the accompanying consolidated balance sheet. During 1996,
the third parties signed promissory notes aggregating $470,000 and bearing
no interest for the monies that had been advanced.
During 1997, the Internal Revenue Service ("IRS") concluded its federal
income tax examination of JLM's 1988 through 1990 and 1992 through 1994 tax
years. JLM subsequently
43
made payments to the IRS as a result of these examinations. The settlement
of these IRS examinations did not materially affect the Company's financial
condition or results of operations in 1997 or 1998.
On March 10, 1998, the Company executed a long-term purchase agreement
with Solutia, Inc. ("Solutia") to purchase on a take-or-pay basis phenol to
be produced at a phenol plant to be built on the Gulf Coast of the United
States. Under terms of the agreement, the Company was required to advance
over three years $35 million to Solutia as a partial prepayment for future
inventory purchases. The prepayment was scheduled to be paid as follows: $5
million on or about December 31, 1998, $6.5 million in equal quarterly
payments in 1999 and the remaining balance in equal quarterly payments in
2000. Under the contract, Solutia is required to sell 125 million pounds of
phenol per year to JLM for 15 years at a specified price outlined in the
agreement with a credit on a per pound basis for the advancement mentioned
above. Construction of the plant was anticipated to commence in the
beginning of 1999 and phenol production was anticipated to begin at the
plant in the fourth quarter of 2000. The agreement also provides that if the
Company's available borrowing capacity under its aggregate credit facilities
is less than the total amount of the advance payments owed to Solutia,
Solutia may require the Company to deliver to Solutia an executed,
irrevocable bank guaranty equal to the total amount of the advance payments
owed to Solutia. Due to market conditions, the project and any required
payments were suspended prior to December 31, 1998 through the mutual
consent of both Solutia and the Company.
13. EARNINGS PER SHARE
As described in Note 17, the Company's Board of Directors adopted formal
plans to discontinue certain segments of its business. Additionally during
1997, the Company repaid certain debt from proceeds received from the initial
public offering of its Common Stock in July 1997. As part of the repayment of
the debt, the Company incurred $386,000 of extraordinary loss (see Note 18).
Accordingly, the following table illustrates the impact of such items on
income per share for the years ended December 31,:
1996 1997 1998
------- -------- --------
Basic earnings per share:
Discontinued operations $ (0.09) $ (0.03) $ (0.00)
Extraordinary item -- (0.07) (0.00)
Diluted earnings per share:
Discontinued operations $ (0.09) $ (0.03) $ (0.00)
Extraordinary item (0.00) (0.07) (0.00)
The basic earnings per share calculation is based on the weighted average
number of common shares outstanding adjusted for actual shares issued or
reacquired during the period. In conjunction with the initial public
offering, the Company issued 411,500 options to employees of the Company at
an exercise price of $10 per share of which 369,165 shares, reduced by
employee turnover, were still outstanding as of December 31, 1998. The
average market price of the Company's common stock was greater than the
exercise price of the options throughout 1997.
The following table illustrates information concerning the options issued
under the Company's LTIP for the years ended December 31, 1997 and 1998:
44
1997 1998
------- -------
Options granted 411,500 6,000
Options vested -- 129,399
Options exercised -- --
Options cancelled 3,400 43,935
Options expired -- --
The average market price of the Company's common stock was less than the
exercise price of the options throughout the majority of 1998. The impact of
the dilutive effect of options included in the calculation of diluted
weighted average shares outstanding is illustrated below for the year ended
December 31,:
1996 1997 1998
--------- --------- ---------
Basic weighted shares outstanding 4,877,568 5,752,579 7,038,321
Dilutive effect of outstanding options -- 37,409 --
--------- --------- ---------
Diluted weighted shares outstanding 4,877,568 5,789,988 7,038,321
========= ========= =========
There was no dilution of earnings per share for either 1996 or 1998.
14. PROFIT-SHARING PLAN
The Company has a defined contribution profit-sharing plan covering
substantially all of its employees. The Company contributes 100% of the
contribution of eligible employees, up to a maximum amount of 6% of the
employees' compensation. The Company's contribution rate is determined
annually at the beginning of each plan year. The costs for this plan were
approximately $278,000, $348,000 and $395,000 in 1996, 1997 and 1998,
respectively.
Included in selling, general and administrative expenses are
profit-sharing bonuses paid to employees based on performance or formulas.
The bonuses of the Company for the years ended December 31, 1996, 1997 and
1998 were approximately $581,000, $529,000 and $656,000, respectively.
15. POLYCHEM LTD., INC.
During 1994, the Company formed and held a 95% ownership of a new
subsidiary, JLM Acquisition, Inc. On August 8, 1994, JLM Acquisition, Inc.
purchased substantially all the business assets of Polychem, a chemical dyes
distributor in Dalton, Georgia, for $900,000 in cash and a promissory note
for $1,240,000 payable in semi-annual installments over five years.
On October 26, 1995, JLM completed the sale of substantially all the
operating assets of Polychem for cash of $882,000 and the assumption of
related liabilities. The purchaser had an irrevocable option for a period of
three years to buy the Polychem real property for $1; however, such option
was not exercised by the purchaser. Therefore, the Company has retained
title to this real property.
45
16. ACQUISITIONS OF BROWNING, THE TOLSON GROUP AND INQUINOSA
Effective April 1, 1998, the Company completed the purchase of all of the
assets of Browning for $9.5 million. The purchase price consisted of an
initial payment of $7.5 million cash and a $2 million promissory note to be
paid in equal installments over four years. Browning was founded in 1948 and
is a major marketer of inorganic chemicals, with a diversified product range
serving both industrial and food processing markets throughout the United
States.
Effective April 1, 1998, JLM completed the acquisition of Tolson Transport
B.V., a Dutch company, Tolson Holland B.V., ("Holdings") a Dutch company,
and Tolson Asia Pte., Ltd, a Singapore company through the purchase of all
of the outstanding shares of capital stock of the three companies,
collectively the Tolson Group from their parent Tolson Holding, B.V., a
Dutch company. The total purchase price paid to Holdings for the Acquired
Companies was $5.75 million, including the execution of a $2.9 million
promissory note, subject to certain adjustments as described below.
The Tolson Group is a global distributor and trader of methanol, solvents,
aromatics and olefins. The acquisition expanded the Company's international
chemical business especially in Asia and Europe including an office in
Russia.
The purchase price of the Tolson Group was determined based on a closing
valuation date of March 31, 1998, less excluded receivables as defined in
the Share Purchase Agreement and the execution of a $2.9 million promissory
note that accrues interest at the LIBOR rate plus 1%. The promissory note is
payable in five semi-annual installments of $350,000 with a lump-sum payment
of $1.1 million due in May 2001. Based on the combined negative
shareholders' equity of the Tolson Group as of March 31, 1998, Tolson
Holding. B.V. contributed approximately $7.4 million to bring the combined
negative equity of the Tolson Group to zero.
The purchase of the Tolson Group excluded certain receivables, as defined
in the Share Purchase Agreement. For such excluded receivables, JLM will
collect such receivables on a best efforts basis and JLM will receive a
commission, as defined in the Share Purchase Agreement, for actual
collections made.
On July 3, 1998, the Company acquired 50.1%, of the outstanding common
stock of Inquinosa, a Spanish company. The purchase price for Inquinosa was
$450,000 plus an estimated $1.35 million to be funded through a three-year
earn-out period based on a formula as defined in the agreement. The
effective date of the acquisition was July 1, 1998. Inquinosa is a worldwide
marketer of the pesticide lindane. Lindane is a preferred seed-treating
pesticide that prevents insect damage during the critical pre-germination
stage for wheat, other grains and canola.
All of the above acquisitions were accounted for under the purchase method
of accounting.
46
The fair value of the assets acquired and liabilities assumed recorded in
conjunction with the above purchase transactions are presented below:
TOLSON BROWNING INQUINOSA TOTAL
------------ ------------ ------------ ------------
Accounts receivable $ 28,567,623 $ 4,164,426 $ 1,476,581 $ 34,208,630
Inventories 2,728,339 1,928,027 390,653 5,047,019
Prepaid and other current assets 4,379 14,026 150,665 169,070
Property and equipment 348,313 57,440 -- 405,753
Goodwill and other intangible assets:
Distribution rights (15 year useful life) -- -- 450,000 450,000
Tax credit carryforward (19 year useful life) 1,574,163 -- -- 1,574,163
Customer lists (15 year useful life) 2,690,367 1,470,000 -- 4,160,367
Employee contracts (3 year useful life) -- 194,492 -- 194,492
Non-compete agreements (3 year useful life) -- 183,439 -- 183,439
Goodwill (40 year useful life) 2,046,752 4,154,802 -- 6,201,554
Other long-term assets -- 20,430 21,779 42,209
Accounts payable and accrued expenses (31,598,387) (2,858,135) (1,734,948) (36,191,470)
Long-term debt incurred (2,889,730) (9,205,297) -- (12,095,027)
Other long-term liabilities -- -- (304,730) (304,730)
------------ ------------ ------------ ------------
$ 3,471,819 $ 123,650 $ 450,000 $ 4,045,469
============ ============ ============ ============
The following unaudited pro forma consolidated financial information for
the Company gives effect to the above acquisitions as if they had occurred
on January 1, 1996. These unaudited pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results
of operations that actually would have resulted had the acquisitions
occurred on the date indicated, or that may result in the future.
1996 1997 1998
---- ---- ----
Revenues $432,548,000 $447,573,000 $357,966,000
Income before extraordinary item and discontinued
operations 12,167,000 9,305,000 7,603,497
Net Income 11,738,863 8,919,000 7,603,497
Basic income per share 1.76 1.34 1.14
Basic shares outstanding 6,682,862 6,682,862 6,678,317
The pro forma income from continuing operations and pro forma net income
for 1996, 1997 and 1998 includes adjustments for the amortization of
goodwill and other intangibles of approximately $650,000, $750,000 and
$750,000, respectively, that relates to the above acquisitions.
Additionally, the unaudited pro forma data includes approximately $600,000
of interest expense related to the acquisitions mentioned above. The 1996
pro forma information does not include the operations of Inquinosa, as it
was not in operation.
47
The pro forma basic income per share data also reflects the historical
weighted average number of shares outstanding adjusted to include the
following items as if they had occurred at the beginning of each period
presented 1) 2,156,000 shares issued during the Company's initial public
offering, 2) the 190,000 shares purchased by the Underwriters of the
Company's initial public offering to cover over-allotments, 3) 3,415 shares
purchased by employees of the Company under the Company's employee stock
purchase plan and 4) 420,909 treasury shares repurchased by the Company
under the Company's Stock Repurchase Plan and from a shareholder (see Note
11).
17. DISCONTINUED OPERATIONS
During 1995 and 1996, JLM's Board of Directors adopted formal plans to
sell the non-core business segments, consisting of Polychem (see Note 15),
MAC Enterprises, Inc. ("Enterprises") and JLM Stables, Inc. ("Stables")
(collectively the "Segments"), as part of JLM's strategic focus on marketing
and manufacturing of commodity and specialty chemicals. The Segments are
accounted for as discontinued operations in the accompanying consolidated
financial statements, which requires the plan of disposal to be carried out
within one year.
In December 1996, JLM entered into a plan to sell the assets of both
Enterprises and Stables. Based on management's review of the assumptions
used in determining the estimated gain or loss from the disposals of
Enterprises and Stables, JLM recorded a provision of $9,050, net of income
taxes, for the loss on disposal during 1996. The Company does not allocate
any corporate overhead to either Enterprises or Stables.
In May 1997, the Company completed the sale of the majority of the assets
of Enterprises for $1,075,000 cash. The sale resulted in an additional loss
of $29,054 and the proceeds of the sale were used to repay the entire
outstanding loan balance of Enterprises of approximately $905,000.
The operating results of the discontinued operations, which includes
interest expense associated with Enterprises and Stables, are summarized as
follows for the years ended December 31:
1996 1997 1998
---- ---- ----
Sales $ 244,909 $ 69,966 $ --
Loss from discontinued operations before income taxes (711,197) (351,270) (34,078)
Income tax benefit 282,932 140,163 14,949
Net loss (428,265) (211,107) (19,129)
The net liabilities of discontinued operations are summarized as follows:
1997 1998
---- ----
Current assets $ 720,106 $ --
Property and equipment, net -- --
Current liabilities 2,280,473 --
Net liabilities of discontinued operations 1,599,714 --
Current assets of discontinued operations as of December 31, 1997 includes
assets held for sale of approximately $203,000. All assets held for sale
were sold during 1998.
48
18. EXTRAORDINARY ITEM
During August 1997, the Company prepaid debt consisting of (i)
approximately $13.2 million incurred to finance the acquisition of the Blue
Island, Illinois facility and related capital expenditures associated with
the QMAX Catalyst technology and (ii) approximately $0.8 million incurred to
finance the acquisition of the Cape Fear, North Carolina, Terminal,
respectively. As a result of the early extinguishment of debt, the Company
recognized approximately $386,000 of extraordinary loss consisting primarily
of prepayment penalties, net of income tax benefits of approximately
$257,000.
19. STOCK-BASED COMPENSATION
On July 2, 1997, the Company approved a long-term incentive plan (the
"LTIP") whereby 750,000 shares of Common Stock are reserved for issuance
under the LTIP. Under the LTIP, restricted stock, incentive stock options,
nonqualified stock options and stock appreciation rights or any combination
thereof may be granted to JLM employees.
On July 23, 1997, the Company granted 411,500 options under the LTIP to
the employees of JLM at an exercise price of $10 per share. During 1998, the
Company issued 5,000 options with an exercise price of $10.50 per share and
1,000 options with an exercise price of $11.00 per share to various
employees under the LTIP. These options vest ratably over a three-year
period. The Company has adopted the disclosure-only provisions of SFAS No.
123. Accordingly, no compensation cost has been recognized for the options
in the accompanying consolidated statements of income. Had compensation cost
for the options been determined based on the fair value at the grant date
for awards in 1997 and 1998 consistent with the provisions of SFAS No. 123,
JLM's net income and income per share for the year ended December 31, 1997
and 1998 would have been reduced to the pro forma amounts indicated below:
1997 1998
---- ----
Net income - as reported $ 6,493,754 $ 5,715,350
Net income - pro forma 6,318,137 4,793,043
Basic net income per share - as reported 1.13 0.81
Basic net income per share - pro forma 1.10 0.68
Diluted net income per share - as reported 1.12 0.81
Diluted net income per share - pro forma 1.09 0.68
None of the options granted under the LTIP vested during 1997. During
1998, 123,055 options previously granted vested under the LTIP. The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998, respectively: dividend yield
of 0%and 0%; expected volatility of .59% and .67%; risk-free interest rate
of 5.7% and 4.69%; and expected lives of 10.0 years.
Concurrent with the initial public offering, the Company awarded 47,000
shares of restricted stock, with a four-year vesting period to certain
officers and employees. The Company recognizes expense related to the
issuance of such restricted stock ratably over the vesting period.
49
20. EMPLOYEE STOCK PURCHASE PLAN
On July 2, 1997, the Company approved an employee stock purchase plan (the
"Purchase Plan") whereby an aggregate of 75,000 shares of Common Stock are
reserved for issuance under the plan. Under the Purchase Plan, all employees
will be given an opportunity to purchase shares of JLM Common Stock two
times a year at a price equal to 85% of the market price of the Common Stock
immediately prior to the beginning of each offering period. The Purchase
Plan provides for two offering periods, the months of March and September,
in each of the years 1997 through 2006. During 1997 and 1998, employees of
the Company purchased 3,415 and 1,960 shares, respectively, of the Company's
common stock under the Purchase Plan.
21. SEGMENT REPORTING
JLM's business consists of marketing and a manufacturing segment. JLM's
manufacturing segment includes the operations of JLM Chemicals, Inc. and the
sale of acetone manufactured at the Mt. Vernon Phenol Plant. JLM's marketing
segment includes its distribution, storage and terminaling operations and
all other sourcing operations. Marketing segment revenues include an assumed
selling commission determined in accordance with industry standards for the
sale of products manufactured at JLM Chemicals, Inc. The marketing segment
also includes an assumed allocation of revenues, costs of good sold and
expenses associated with the sale of products sourced from the Mt. Vernon
Phenol Plant, which allocation is determined on a basis consistent with the
commission for sale of products manufactured at JLM Chemicals, Inc.
The following schedule presents information about JLM's continuing
operations in these segments and geographic locations for the years ended
December 31,:
INDUSTRY SEGMENT 1996 1997 1998
------------- ------------- -------------
Revenues:
Marketing $ 176,274,489 $ 221,301,428 $ 248,060,581
Manufacturing 60,246,694 65,520,738 57,674,733
------------- ------------- -------------
$ 236,521,183 $ 286,822,166 $ 305,735,314
============= ============= =============
Operating Income:
Marketing $ 5,011,196 $ 5,406,856 $ 3,055,108
Manufacturing 7,586,128 10,752,634 11,902,754
Corporate (1,595,544) (2,256,929) (2,311,022)
------------- ------------- -------------
$ 11,001,780 $ 13,902,561 $ 12,646,840
============= ============= =============
Capital Expenditures:
Marketing $ 592,422 $ 1,670,703 $ 669,768
Manufacturing 4,398,480 883,118 368,165
Corporate 2,355,756 321,610 64,259
------------- ------------- -------------
$ 7,346,658 $ 2,875,431 $ 1,102,192
============= ============= =============
Depreciation and Amortization:
Marketing $ 794,031 $ 822,409 $ 1,458,007
Manufacturing 1,652,809 1,687,935 1,691,783
Corporate 77,347 436,819 521,662
------------- ------------- -------------
$ 2,524,187 $ 2,947,163 $ 3,671,452
============= ============= =============
50
Identifiable Assets:
Marketing $ 43,303,972 $ 39,644,328 $ 67,010,955
Manufacturing 31,871,092 29,691,796 26,437,814
Corporate 11,211,591 14,224,447 9,816,520
------------- ------------- -------------
$ 86,386,655 $ 83,560,571 $ 103,265,289
============= ============= =============
GEOGRAPHIC LOCATION
Revenues:
United States $ 191,382,570 $ 236,650,808 $ 187,075,834
Venezuela 10,068,395 9,624,688 8,606,942
Holland 29,201,763 35,533,157 52,530,545
Singapore -- -- 46,992,874
Other nations 5,868,455 5,013,513 10,529,119
------------- ------------- -------------
$ 236,521,183 $ 286,822,166 $ 305,735,314
============= ============= =============
Operating Income (Loss):
United States $ 12,204,002 $ 16,466,705 $ 14,727,018
Venezuela (414,554) (143,327) (818,268)
Holland 571,046 (230,586) (655,637)
Singapore -- -- 454,072
Other nations 236,830 66,698 1,250,677
Corporate (1,595,544) (2,256,929) (2,311,022)
------------- ------------- -------------
$ 11,001,780 $ 13,902,561 $ 12,646,840
============= ============= =============
Identifiable Assets:
United States $ 72,778,120 $ 70,756,106 $ 74,164,842
Venezuela 6,112,667 3,035,968 469,690
Holland 6,169,386 8,411,689 15,759,658
Singapore -- -- 7,510,211
Other nations 1,326,482 1,356,808 5,360,888
------------- ------------- -------------
$ 86,386,655 $ 83,560,571 $ 103,265,289
============= ============= =============
22. SUBSEQUENT EVENTS
Effective January 1, 1999, the Company granted 100,000 options under the
LTIP to the employees of JLM at an exercise price of $5.00 per share. These
options vest ratably over a three-year period. In addition on January 1,
1999, the Company issued 40,000 shares of restricted stock to an officer of
the Company. Of these shares of restricted stock, 10,000 shares are vested
immediately and the remaining portion vests ratably over a three-year
period.
Subsequent to year-end, the Company entered into an agreement with a
customer to supply certain of its products over an extended period. As part
of this agreement, the customer has agreed to partially prepay for the
product and the Company has agreed to apply such partial prepayment to
future sales of such product based on the then current market price. Should
the Company default on the contract, all such unapplied prepayments shall be
returned to the customer.
51
The Stockholders and Board of Directors
JLM Industries, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of JLM Industries,
Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1998, and the
related consolidated statements of income and comprehensive income, of changes
in stockholders' equity and of cash flows for each of the three years in the
period ended December 31, 1998 and have issued our report thereon dated March 8,
1999. Our audits also included the accompanying consolidated financial statement
schedule. This consolidated financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
schedule based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects
the information set forth herein.
DELOITTE & TOUCHE LLP
Tampa, Florida
March 8, 1999
52
JLM INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
BALANCE AT CHARGED TO BALANCE AT END
BEGINNING OF YEAR EXPENSES DEDUCTIONS OF YEAR
Year ended December 31, 1996:
Accumulated amortization (1) $ 208,434 $ 389,595 -- $ 598,029
Allowance for doubtful accounts 70,298 383,662 -- 453,960
Year ended December 31, 1997:
Accumulated amortization (1) 598,029 349,337 -- 947,366
Allowance for doubtful accounts 453,960 94,039 -- 547,999
Year ended December 31, 1998
Accumulated amortization (1) 947,366 837,110 -- 1,784,476
Allowance for doubtful accounts 547,999 270,902 -- 818,901
(1) Represents the accumulated amortization of goodwill, deferred acquisition
costs, license fees, certain development costs and advances on
non-competition agreements.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The following table sets forth the names and ages of the Directors,
executive officers and key employees of the Company and the positions they
hold with the Company listed herein. Executive officers serve at the
pleasure of the Board of Directors.
DIRECTORS AND DIRECTOR
EXECUTIVE OFFICERS AGE POSITIONS SINCE
- ------------------ --- --------- --------
John L. Macdonald 56 President, Chief Executive Officer & Director 1986
Thaddeus J. Lelek 50 Vice President & Director 1997
Wilfred J. Kimball 60 Vice President & Director 1997
Frank A. Musto 42 Vice President, Chief Financial Officer & Director 1997
Walter M. Tarpley 54 Vice President
John T. White 68 Vice President & General Counsel
Michael J. Molina 47 Vice President - Tax and Audit & Secretary
Linda L. Sato 38 Vice President & Treasurer
Sean D. Macdonald 28 Vice President
Roger C. Kahn 47 Director 1997
Jerry L. Weinstein 63 Director 1997
Thomas F. Kennedy 56 Director 1999
JOHN L. MACDONALD founded the Company in April, 1986, and has served as
the President, Chief Executive Officer and a director of the Company
throughout its history. Mr. Macdonald also co-founded Gill and Duffus
Chemical, Inc., in 1978 and served as its President and Chief Executive
Officer until the conclusion of a leveraged buyout in 1983, in which Gill
and Duffus Chemical, Inc., merged with the Steuber Company, Inc. Mr.
Macdonald received a B.A. from Colorado College and has more than 29 years
experience in the chemical industry.
THADDEUS J. LELEK has been with the Company since its formation in 1986,
serving in a variety of senior marketing positions. In 1986, he was elected
Vice President of JLM
54
Marketing. Mr. Lelek has more than 28 years of experience in the chemical
industry. Mr. Lelek is principally responsible for formulating and
implementing the Company's marketing strategies and programs for North
American sales. From 1983 to 1986, Mr. Lelek was also responsible for
marketing in North America for Steuber Company, Inc., and from 1980 to 1983,
Mr. Lelek headed up the national sales effort for distribution for Gill and
Duffus Chemicals, Inc. Mr. Lelek was also employed in various capacities,
including National Sales Manager for certain products, for Gulf Oil
Chemicals, Inc., from 1970 to 1979. Mr. Lelek graduated with a B.S. in
Chemical Engineering from Worchester Polytechnic Institute.
WILFRED J. KIMBALL was hired as Vice President of JLM Chemicals and Vice
President of the Company following the acquisition by the Company in 1995 of
the Blue Island Plant from BTL Specialty Resins Corp. ("BTL Corporation").
Mr. Kimball is primarily responsible for the operation of the Company's Blue
Island Plant. In addition, he is responsible for the operations of JLM
Terminals and the day-to-day direction of certain of the Company's sales
force and support staff. From 1990 to 1995, Mr. Kimball was President of BTL
Corporation and in this capacity was primarily responsible for the Blue
Island Plant. From 1985 to 1990, Mr. Kimball served in various executive
capacities with BTL Corporation, including Vice President of Manufacturing
and Engineering, and President of Plyophen Chemicals, a division of BTL
Corporation. Prior to 1985, Mr. Kimball served for 22 years in various
capacities with Union Carbide Canada LTD. Mr. Kimball received a B.S. in
Chemical Engineering from the University of Brunswick.
FRANK A. MUSTO has been with the Company since its formation in 1986. Mr.
Musto was elected Vice President and Chief Financial Officer in 1994. Mr.
Musto is principally responsible for the Company's banking relationships,
current cash management systems, and investment of excess funds. Prior to
joining the Company, from 1979 to 1981, and from 1983 to 1985, Mr. Musto was
the Marine Accountant, Controller and Treasurer for the Steuber Company,
Inc. From 1981 to 1982, Mr. Musto was the controller for Amerpol
International, New York City, a custom house broker, freight forwarder, and
agent for the government-controlled fishing fleet in Poland. Mr. Musto
graduated from Bernard M. Baruch College with a B.B.A. in Accounting.
WALTER M. TARPLEY started with JLM in January 1999 as President of the
Company's North American Division and Vice President of JLM Industries, Inc.
Prior to joining JLM, Mr. Tarpley served as Vice President and General
Manager of Ashland Chemical Company's Industrial Chemicals & Solvents
Division, the United States' largest distributor of performance chemicals
and additives. Mr. Tarpley served 26 years with Unocal Chemicals in various
General Management positions and joined Ashland in 1993 in a merger of these
firms. Upon joining Ashland, Mr. Tarpley was named Business Director for the
IC&S Divisions Coatings, Adhesives and Inks business. In this capacity, Mr.
Tarpley also managed the Divisions' International Group and Technical
Services Laboratories. Mr. Tarpley received a B.S. in Marine Biology from
the University of Miami.
JOHN T. WHITE has served as Vice President and General Counsel of the
Company since 1990. Mr. White is the Company's chief legal officer and is
principally responsible for the legal affairs of the Company and its
consolidated subsidiaries. From 1987 to 1989, Mr. White was Senior Vice
President for Paribas Corporation, a North American investment banking firm.
From 1970 to 1987, Mr. White was partner with the New York City law firm of
Wender, Murase and White. From 1962 to 1970, Mr. White was a partner in the
international law firm of Baker & McKenzie, resident in the firm's New York
City office. Mr. White received a
55
bachelor's degree from Harvard College, a Juris Doctorate from Columbia
University and an L.L.M. from New York University.
MICHAEL J. MOLINA joined the Company in 1986 as Controller. In 1995, he
was promoted to his current position as Vice President - Tax and Audit. Mr.
Molina is primarily responsible for taxes, audits and management information
systems. From 1992 to 1995, Mr. Molina served as Vice President of
Administration. Mr. Molina received a B.A. from John Hopkins University and
an M.B.A. from Pace University.
LINDA L. SATO has been employed by the Company since 1986 when she was
hired as the Company's Assistant Controller. In 1994, she was appointed Vice
President and Controller. In 1996, Ms. Sato was promoted to Vice President
and Treasurer. Ms. Sato graduated from the University of Connecticut with a
B.A. in Accounting.
SEAN D. MACDONALD joined the Company in May 1994. Mr. Macdonald worked as
a sales representative in the Company's Southwest region until January 1997.
In January 1997, Mr. Macdonald was relocated to the Company's Dutch
subsidiary, JLM Industries (Europe) B.V. in the olefins trading group. In
November 1997, Mr. Macdonald was appointed Managing Director of JLM
Industries (Europe) B.V. in order to facilitate the integration of the
Tolson acquisition. Mr. Macdonald was transferred to the Company's Singapore
operation, JLM Chemicals (Asia) Pte. Ltd. in November 1998. In April 1999,
Mr. Macdonald was appointed Vice President International and transferred to
the Company's headquarters in Tampa. Mr. Macdonald received a B.A. in
political science and a minor in international marketing from the University
of Tampa.
ROGER C. KAHN has been a Managing Director of Gruntal & Co., L.L.C. in
investment banking February 1999. Prior to joining Gruntal & Co., L.L.C.,
Mr. Kahn was Managing Director of Oppenheimer & Co, Inc. in investment
banking from 1989 to 1998 and was in charge of the Industrial Products
Group.
JERRY L. WEINSTEIN served as Vice President of Owens Corning Specialty &
Foam Products Division since 1994. From 1980 until 1994, Mr. Weinstein was
President and Chief Executive Officer of UC Industries, Inc., an independent
manufacturer of plastic products for the building materials industry.
THOMAS F. KENNEDY joined the Board of Directors of the Company in January
1999. Prior to joining the Board, Mr. Kennedy served as President and Chief
Executive Officer of Hoechst Celanese ("Hoechst") from January 1996 until
his retirement in March 1998. Mr. Kennedy joined Hoechst in 1966 and held
various sales and marketing positions with the company including Vice
President and General Manager of the Filter Products Division of Celanese
Fibers Operations. Mr. Kennedy became Executive Vice President of Celanese
Chemical Company in 1986 and President of Hoechst Celanese Chemical Group in
1989, which included responsibility for overseeing the Textile Fibers,
Technical Fibers Polyester Resins and Films and Specialty Chemicals groups.;
Sean D. Macdonald is the son of the Company's President and Chief
Executive Officer, John L. Macdonald. None of the other executive officers
or directors are related to one another. Executive officers are elected by
and serve at the discretion of the Board of Directors.
56
Directors Compensation - Through October 21, 1998, Directors who were not
employees of the Company receive an annual retainer of $10,000 and an
automatic grant of options to purchase 1,000 shares of Common Stock upon
their initial election and upon each reelection to the Board in accordance
with the Company's Non-Employee Directors' Stock Plan. Effective October 22,
1998, the Board of Directors amended the plan, subject to shareholder
approval, to provide for an increase in the number of options granted under
the plan to non-employee Directors to 2,500 options upon initial election to
the Board and will receive 5,000 upon their reelection to the Board.
To the Company's knowledge, based solely on a review of the forms, reports
and certificates filed with the Company by the Company's directors and
officers and the holders of more than 10% of the Company's Common Stock, all
Section 16(a) filing requirements were complied with by such persons in
fiscal 1997.
ITEM 11. EXECUTIVE COMPENSATION:
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the years
ended December 31, 1996, 1997 and 1998 for each of the named executive
officers (as defined under applicable Securities and Exchange Commission
Rules) of the Company (the "Named Executive Officers"):
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
----------------------- ---------------------------------------------------------
NAME RESTRICTED
AND STOCK ALL OTHER
POSITION YEAR SALARY($) BONUS($) AWARDS($)(2) OPTIONS (#) COMPENSATION($)(1)
John L. Macdonald 1998 $410,769 $180,000 -- -- $ 23,271
President & CEO 1997 401,541 200,000 -- 125,000 17,056
1996 168,486 250,000 -- -- 9,486
Thaddeus J. Lelek 1998 138,634 22,500 -- -- 13,588
Vice President 1997 129,803 12,500 150,000 30,000 3,588
1996 108,333 10,000 -- -- --
Wilfred J. Kimball 1998 136,437 20,000 -- -- 12,694
Vice President 1997 136,437 22,000 20,000 30,000 15,266
1996 135,483 15,000 -- -- 39,141
Frank A. Musto 1998 128,365 25,000 -- -- 12,400
Vice President & CFO 1997 121,274 27,000 150,000 30,000 15,841
1996 91,683 26,000 -- -- 9,500
John T. White 1998 123,759 11,000 -- 5,000 16,861
Vice President & 1997 114,462 27,500 -- 15,000 11,888
General Counsel 1996 113,866 27,500 -- -- --
- -----------
(1) Amounts in 1998, for Mr. Macdonald consists of $10,000 contributed to the
Company's Defined Contribution Plan, $6,580 for a car allowance and $5,185
which is the dollar value, on a term loan, of the benefit to Mr. Macdonald
of the $248,941 premium paid by the Company
57
during 1998 for a split-dollar life insurance plan covering Mr. Macdonald
and his wife. Under the terms of the split dollar life insurance agreement,
the Company has the right to recover all of the premiums paid by the Company
under the agreement. Amount in 1998 for Mr. Lelek consists of the amounts
contributed by the Company to the Company's Defined Contribution Plan
$10,000 and $3,558 for car allowance. Amount for Mr. White in 1998, consists
of a car allowance of $8,359 and $8,502 that was contributed by the Company
to the Company's Defined Contribution Plan. Amount for Mr. Kimball 1998
consists of $3,000 car allowance and $9,694 contributed by the Company to
the Company's Deferred Plan. Amount for Mr. Musto in 1998 consists of $2,400
of car allowance and $10,000 contributed by the Company to the Company's
Defined Contribution Plan.
(2) The aggregate restricted stock holdings and value of such holdings at
December 31, 1998 for Mr. Lelek were 13,950 shares and $71,494,
respectively, for Mr. Kimball were 1,860 shares and $3,953, respectively,
and for Mr. Musto were 13,950 shares and $71,494, respectively. The shares
of restricted stock are subject to a substantial risk of forfeiture which
lapses as to one-quarter of the shares each January 1st, commencing on
January 1, 1998. Dividends on all restricted shares issued to the named
executive officers are paid at the same rate as paid to all stockholders.
The Company currently intends to retain all future earnings for the
development of its business and does not anticipate paying cash dividends
for the foreseeable future.
The following table summarizes certain information concerning stock options
granted during fiscal year 1998 to the Named Executive Officers:
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- --------------------------------------------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ---------- ----------- --------- ---- ------ -------
John T. White 5,000 83% 10.5 10/31/08 14,505 32,052
No other Named Executive Officer received stock options during 1998.
58
The following table provides information regarding the exercise of stock
options during fiscal year 1998 and stock options held as of the end of
fiscal year 1998 by the Named Executive Officers:
AGGREGATED OPTION EXERCISE
AND YEAR END OPTIONS VALUE TABLE
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END (1)
SHARES ACQUIRED VALUE ---------------------------- --------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
John L. Macdonald 0 $0 41,667 83,333 $0 $0
Thaddeus J. Lelek 0 0 10,000 20,000 0 0
Wilfred J. Kimball 0 0 10,000 20,000 0 0
Frank A. Musto 0 0 10,000 20,000 0 0
John T. White 0 0 5,000 20,000 0 0
(1) This represents the amount by which the fair market value of the Company's
Common Stock of $5.125 per share as of December 31, 1998 exceeded the
exercise price of the options held by the Named Executive Officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 20, 1999 for
(i) each person known by the Company to own beneficially more than 5.0% of
the outstanding Common Stock, (ii) each director of the Company, (iii) each
of the Named Executive Officers and (iv) all officers and directors as a
group. The persons named in the table have sole voting and investment powers
with respect to all shares of Common Stock shown as beneficially owned by
them. For the purposes of the table, a person or group of persons is deemed
to have "beneficial ownership" of any shares as of a given date which such
persons has the right to acquire within 60 days after such date.
NUMBER PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED (1) CLASS
------------------------ ------------- -------
John L. Macdonald (1) 4,305,614(2) 64.3
Maxwell Stolzberg (1) 4,096,608(2) 61.2
Thaddeus J. Lelek 23,900(3) *
Wilfred J. Kimball 12,520(3) *
Frank A. Musto 23,150(3) *
Walter M. Tarpley 47,200 *
John T. White 6,000(4) *
Roger C. Kahn 1,000(5) *
J. Robert Mehall -- *
59
Jerry L. Weinstein 1,000(5) *
Thomas F. Kennedy -- *
All Directors, Nominees, for
Directors and Executive Officers
As a Group (11 persons) 4,420,384 66.0
*Less than one percent ownership
(1) Beneficial ownership of shares, as determined in accordance with applicable
Securities and Exchange Commission rules, includes shares as to which person
has or shares voting power and/or investment power. Except as otherwise
indicated, all shares are held of record with sole voting and investment
power.
(2) Of the shares shown for Mr. Macdonald and Mr. Stolzberg, as Trustee,
4,096,608 shares are held of record by an Irrevocable Trust of which Mr.
Stolzberg is Trustee and Mr. Macdonald is the grantor and sole beneficiary.
Under terms of the Irrevocable Trust, Mr. Stolzberg, as Trustee, has the
full and exclusive right and power to vote and dispose of all shares of the
Common Stock held by the Irrevocable Trust. However, as a result of Mr.
Macdonald's right to terminate the Irrevocable Trust by providing written
notice at certain specified times and acquire beneficial ownership of the
shares of Common Stock held by the Irrevocable Trust, Mr. Macdonald and the
Trustee may be deemed to share voting and investment control with respect to
the shares of Common Stock held by the Irrevocable Trust. For Mr. Macdonald,
the number of shares include 167,040 shares of Common Stock held by two
irrevocable trusts created for the benefit of Mr. Macdonald's children for
which Mr. Macdonald disclaims beneficial ownership. Additionally, Mr.
Macdonald's shares include 41,666 shares deemed to be beneficially owned by
Mr. Macdonald by virtue of certain stock options that are currently
exercisable.
(3) For each of Messrs. Lelek, Kimball and Musto, the number of shares shown
includes 10,000 shares deemed to be beneficially owned by each such officer
by virtue of certain stock options that are currently exercisable. For Mr.
Lelek, Kimball and Musto, the number also includes 12,900, 1,720 and 12,900
shares, respectively, related to the vesting of restricted shares.
Additionally, the number includes for Mr. Lelek, Kimball and Musto 1,000,
800 and 250 shares, respectively, that each owns personally.
(4) The number of shares shown includes 5,000 shares deemed to be beneficially
owned by Mr. White by virtue of certain stock options that are currently
exercisable. Additionally, the number includes 1,000 shares that Mr. White
owns personally.
(5) For each of Messrs. Kahn and Weinstein, the number of shares shown includes
1,000 shares deemed to be beneficially owned by them by virtue of certain
stock options that are currently exercisable.
(6) The number of shares shown includes, in addition to the options held by the
officers and Directors named in the table, an additional 10,000 shares
deemed to be beneficially owned by two other executive officers not shown in
the table that are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The Company's Spanish distributor is Chemical Trading, S.L. ("CTSL"),
which is owned 100.0% by Eduardo Delgadillo, a stockholder of the Company.
The Company and CTSL have an arrangement pursuant to which the Company pays
CTSL's operating expenses. The Company treats the difference between such
payments and the amount of commissions and other amounts due to CTSL as a
loan. Under such arrangement CTSL was indebted to the Company for
approximately $905,000 as of December 31, 1998. Such indebtedness is carried
on an open account basis. Effective October 1, 1998, $500,000 owed by CTSL
was repaid without interest through the sale to JLM at fair market value of
90,909 shares of common stock owned by CTSL owner. As of December 31, 1998,
Mr. Delgadillo was the beneficial owner of 1.8% of the Company's outstanding
Common Stock.
In 1997, the Company entered into an agreement for sale and purchase
of common stock held the majority stockholder of JLM and an unrelated third
party to purchase for a total
60
purchase price of approximately $1.25 million all of the issued and
outstanding shares of Aurora, a Texas corporation. Under the terms of the
agreement, the Company purchased from JLM's majority stockholder his
ownership interest in Aurora for a $1.0 million promissory note that matures
on June 1, 2002 and bears interest at a rate of 10.0% per annum. The other
shareholder received consideration of $250,000 for the purchase of his
ownership interest of which $150,000 was paid at closing in cash and the
remaining $100,000 was to be paid by a three year promissory note which bore
interest at the prime rate and was payable in three equal annual
installments. During 1998, the Company discounted the promissory note and
paid the entire outstanding balance to the shareholder.
In 1997, the Company entered into an agreement for sale and purchase of
common stock with the majority stockholder of JLM to purchase for a total
purchase price of $500,000 all of the issued and outstanding shares of
Phoenix, a Connecticut corporation. Under the terms of the agreement, the
Company purchased this ownership interest in Phoenix for $500,000, of which
$250,000 was offset against advances owed to the Company by JLM's majority
stockholder and $250,000 paid by means of a promissory note that matures on
June 1, 2002 and bears interest at a rate of 10.0% per annum.
The Company believes that each of the certain transactions described
above were on terms no less favorable to the Company than those which could
have been obtained in arm's length transactions with unaffiliated third
parties. However, except as indicated above, the Company did not obtain
independent objective information to support its belief in this respect.
After the consummation of the Offering, the Company will not enter into any
transaction with any officer, director or stockholder except on terms that
are no less favorable to the Company than those which could be obtained in
an arm-length transaction with an unaffiliated party unless the approval of
a majority of disinterested directors is obtained.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) 1. Consolidated Financial Statements, notes to Consolidated Financial
Statements and report thereon of Deloitte & Touche LLP are found in Item 8
"Consolidated Financial Statements and Supplemental Data" herein.
2. The following Consolidated Financial Statement Schedule and reports are
included herein:
VIII - Valuation and Qualifying Accounts for the years ended December
31, 1996, 1997 and 1998
For the Independent Auditors' Reports on the Consolidated Financial
Statements and Consolidated Financial Statement Schedules, see index at
the beginning of Item 8, "Consolidated Financial Statements and
Supplemental Data."
All other schedules are not submitted because they are not applicable or
are not required or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3. Exhibits Filed Herewith:
61
23 Consent of Deloitte and Touche LLP to the consolidated
financial statements of JLM Industries, Inc. and subsidiaries
27 Financial Data Schedule for the year ended December 31, 1998
4. Exhibits incorporated herein by reference as each exhibit was filed with
the Company's Registration Statement on Form S-1 (No. 333-27843) filed
with the SEC on July 21, 1997:
3.1 Articles of Incorporation, as amended
3.2* Form of Amended and Restated Articles of Incorporation
3.3 Bylaws
3.4* Form of Amended and Restated Bylaws
4* Form of Common Stock Certificate
10.1 Authorized Distributor Agreement between GE Petrochemicals,
Inc. and JLM Marketing, Inc. for Styrene
10.2** Memorandum of Agreement between Sasol Chemical Industries
(PTY) Ltd. and JLM Marketing, Inc. for N-Propanol
10.3** Memorandum of Agreement between Sasol Chemical Industries
(PTY) Ltd. and JLM Marketing, Inc. for Acetone
10.4** Memorandum of Agreement between Sasol Chemical Industries
(PTY) Ltd. and JLM Marketing, Inc. for Methyl Ethyl Ketone
10.5** Acetone Sales Agreement between Mt. Vernon Phenol Plant
Partnership, JLM Marketing, Inc. and JLM Industries, Inc.
10.6 Asset Purchase Agreement by and among BTL Specialty Resins
Corp. and JLM Chemicals, Inc. providing for the acquisition of
the Blue Island (Illinois) Phenol Plant, as amended
10.7 Propane/Propylene Agreement between Clark Oil & Refining
Corporation and BTL Specialty Resins Corp.
10.8 Q-Max Process License Agreement between BTL Specialty Resins
Corp. and UOP
10.9 Credit Agreement among JLM Chemicals, Inc., The
CITGroup/Equipment Financing, Inc. and The CIT Group/Business
Credit, Inc., as amended
10.10 Security Agreement by JLM Chemicals, Inc. in favor of the
Lenders and The CIT Group/Equipment Financing, Inc.
10.11 Pledge Agreement by JLM Industries, Inc. in favor of the
Lenders and The CIT Group/Equipment Financing, Inc.
10.12 Mortgage, Assignment of Leases and Rents and Security
Agreement from JLM Chemicals, Inc. to The CIT Group/Equipment
Financing, Inc., as corrected and modified
10.13 Partnership Agreement of Mt. Vernon Phenol Plant Partnership
10.14 Intercreditor Agreement between JLM Marketing, Inc., JLM
Industries, Inc., JLM Terminals, Inc., JLM International,
Olefins Marketing, Inc., State Street Bank and Trust Company,
Caisse Nationale De Credit Agricole and Standard Chartered
Bank New York Branch
10.15 Master Promissory Note by JLM International, Inc. and Olefins
Marketing, Inc. in favor of Caisse Nationale De Credit
Agricole
10.16 Guaranty Agreement by JLM Industries, Inc. to Caisse Nationale
De Credit Agricole, New York Branch
62
10.17 Security Agreement between Olefins Marketing, Inc. and Caisse
Nationale De Credit Agricole, New York Branch
10.18 Security Agreement between JLM International, Inc. and Caisse
Nationale De Credit Agricole, New York Branch
10.19 Amended and Restated Credit Agreement among JLM Industries,
Inc., JLM Marketing, Inc., JLM Terminals, Inc., JLM
International Inc., Olefins Marketing, Inc., John L. Macdonald
and State Street Bank and Trust Company, as amended
10.20 Facility Letter between Standard Chartered Bank and Olefins
Marketing
10.21 Security Agreement by Olefins Marketing to Standard Chartered
Bank
10.22 Security Agreement by JLM International, Inc. to Standard
Chartered Bank
10.23 Continuing Guaranty by JLM International, Inc. and Olefins
Marketing Corp. in favor of Standard Chartered Bank
10.24 Facility letter between Generale Bank and JLM Industries
10.25 Corporate Guarantee by JLM Industries, Inc. to Generale Bank
10.26 Agreement by and among Union Carbide Corporation, D-S
Splitter, Inc., JLM Industries, Inc. and Olefins Terminal
Corporation
10.27 Pledge and Security Agreement by JLM Industries, Inc. to
Ultramar Diamond Shamrock Corporation
10.28 Management, Operating and Stockholders Agreement of Olefins
Terminal Corporation between D-S Splitter, Inc., Ultramar
Diamond Shamrock Corporation, JLM Industries, Inc., Olefins
Marketing, Inc. and Olefins Terminal Corporation
10.29 Investment Agreement by and between JLM Industries, Inc. and
Tan Siew Kiat
10.30 Agreement for Sale and Purchase of Common Stock between John
L. Macdonald and Gene Harmeyer, as owners of the capital stock
of Aurora Chemical, Inc., and JLM Marketing, Inc.
10.31 Agreement for Sale and Purchase of Common Stock between John
L. Macdonald, owner of the capital stock of Phoenix Tank Car
Corp., and JLM Marketing, Inc.
10.32 Form of Indemnification Agreement for Officers and Directors
10.33 Form of 1997 Employee Stock Purchase Plan
10.34 Form of Long Term Incentive Plan
10.35 Form of Non-employee Directors' Plan
10.36 Assignment and Assumption Agreement between Ashland Chemical,
Inc. and JLM Terminals, Inc.
10.37 Asset Purchase Agreement between Union Oil Company of
California and Ashland Chemical, Inc.
10.38 Tolson Holland B.V., Tolson Transport B.V. and Tolson Asia Pte
Ltd combined financial statements for the three-year period
ended December 31, 1997.
63
10.39 Final Form of Indemnification Agreements effective as of July
29, 1997 (except for Walter M. Tarpley whose effective date
was January 1, 1999) by and between the following officers
and/or Directors of JLM Industries, Inc.:
-----------------------------------------------------------------
NAME DATE SIGNED
-----------------------------------------------------------------
John L. Macdonald January 7, 1999
-----------------------------------------------------------------
Thaddeus J. Lelek January 11, 1999
-----------------------------------------------------------------
Wilfred J. Kimball January 7, 1999
-----------------------------------------------------------------
Frank A. Musto January 7, 1999
-----------------------------------------------------------------
John T. White January 11, 1999
-----------------------------------------------------------------
Michael J. Molina January 7, 1999
-----------------------------------------------------------------
Linda Sato January 7, 1999
-----------------------------------------------------------------
Sean D. Macdonald January 7, 1999
-----------------------------------------------------------------
Roger C. Kahn January 24, 1999
-----------------------------------------------------------------
Jerry L. Weinstein January 20, 1999
-----------------------------------------------------------------
Walter M. Tarpley January 13, 1999
-----------------------------------------------------------------
** Confidential treatment has been requested with respect to
portions of this Exhibit.
(a) During the fourth quarter of 1998, the Company did not file any report
on Form 8-K.
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SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JLM INDUSTRIES, INC.
By: /s/ JOHN L. MACDONALD
------------------------------------
John L. Macdonald
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN L. MACDONALD President, Chief Executive Officer and March 30, 1999
- ----------------------- Director (Principal Executive Officer)
John L. Macdonald
/s/ FRANK A. MUSTO Chief Financial Officer, Vice President March 30, 1999
- ----------------------- and Director (Principal Financial Officer
Frank A. Musto and Principal Accounting Officer)
/s/ THADDEUS J. LELEK Vice President and Director March 30, 1999
- -----------------------
Thaddeus J. Lelek
/s/ WILFRED J. KIMBALL Vice President and Director March 30, 1999
- -----------------------
Wilfred J. Kimball
/s/ JERRY L. WEINSTEIN Director March 30, 1999
- -----------------------
Jerry L. Weinstein
/s/ ROGER C. KAHN Director March 30, 1999
- -----------------------
Roger C. Kahn
/s/ THOMAS F. KENNEDY Director March 30, 1999
- -----------------------
Thomas F. Kennedy
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