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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, 1999
Commission File No.
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)
(813) 632-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. Yes [ ] No [x]
The aggregate market value of common stock held by non-affiliates of the
registrant at March 24, 2000 was $27,906,979, 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 24,
2000 was 6,646,380.
Documents Incorporated by Reference: None.
2
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 global marketer
and distributor of performance chemicals, olefins, and specialty plastics. The
Company is listed as the seventh largest chemical distributor in North America
and a manufacturer and merchant marketer of acetone and phenol. The
Company will continue to strengthen its position in its core chemical
businesses, and will aggressively expand its capabilities in specialty
chemicals and plastics. The Company continues to maintain and expand long-term
supplier relationships with many global chemical companies, manufactures phenol
and acetone at its Blue Island plant, and constantly adds new product
capabilities through new distribution agreements and acquisition and investment
opportunities. The Company sells its products worldwide to over 1000
customers, including major global companies such as Ashland Chemical, B.F.
Goodrich, Celanese AG, DuPont, Eli Lilly, 3M and Shell Chemicals.
In 1977, John L. Macdonald, the 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 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 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. Over the past two
years, the Company has continued its expansion both domestically and
internationally through the acquisitions of Browning Chemical Corporation
("Browning"), Inquinosa International S.A. ("Inquinosa"), Tolson Holland B.V.,
Tolson Transports B.V. and Tolson Asia LTD (the "Tolson Group"), ICI PLC's
Colours and Industrial Chemical Division of ICI South Africa, and a majority of
the shares of ICI South Africa Mozambique and Societe Financiere d' Entreposage
et de Commerce International de l' Alcool, SA ("Sofecia") USA industrial ethyl
Alcohol distribution business, and the joint initiative with Sasol Solvents
(Sasol) for marketing ethyl alcohol (ethanol) in North America. Through the
acquisition of Browning, the Company diversified into the domestic inorganic
chemical distribution business, which was synergistic with the Company's
current infrastructure. The new business not only expanded the Company's
product mix but also added increased margins. Inquinosa has contributed to
JLM's ability to be a niche player in the agrochemical sector. Additionally,
with the acquisition of the Tolson Group, the Company has further expanded its
client base in Europe and Asia. The purchase of certain divisions of ICI's
South African operations continued the Company's strategy by further expanding
into a broad range of high quality specialty and commodity chemicals to target
markets, including surface coatings, textiles, chemical manufacturing,
refactory and rigid packaging. The acquisition of the ethanol business from
Sofecia and the joint initiative with Sasol will further enhance JLM's ability
to provide a broad range of pure and formulated ethanol to core markets and key
customer partners.
3
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 through
1997, declined in 1998 and 1999. Although new production capacity will not
come on line until the second half of 2000, price erosion has occurred in both
acetone and phenol as key supply players are positioning themselves for
additional market share. The Company still expects worldwide and North
American phenol demand to continue to grow by approximately 5.0% per year for
the next five years. The main component of this growth will be in increased
demand for polycarbonate resins that 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 2000 as net selling prices are already below
costs. All major U.S. producers have announced price increases of up to $0.08
per pound effective the start of the second quarter 2000.
4
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. In 1998, these selling prices and margins
began to decline from their cyclical highs. However, during the second half of
1999, Acetone pricing has increased in each of the respective quarters and
continued its upward trend into 2000. World demand is expected to grow
approximately 2.5% annually. New capacity additions in Europe and the U.S. for
phenol, due to come on stream during the second half of 2000, 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. North
American capacity is currently approximately 30 billion pounds with North
American demand expected to grow approximately 2.5% per year. 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.
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 continues to identify and capitalize on
domestic and international opportunities to expand sources of products in, or
consistent with, its core business. These opportunities include joint
ventures, acquisitions and strategic relationships. Consistent with its
strategy, the Company in recent years has established a long-term supply
arrangement with SasolChem for specialty chemicals, concluded an agreement with
Solutia for additional phenol supplies from their new plant when built,
acquired Browning, which was an experienced marketer of inorganic chemicals
with a diversified product range serving industrial, food processing, personal
care and pharmaceutical markets, including USP and FDA regulated applications.
5
- 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,
including Lyondell Chemical Company ("Lyondell"), and Solutia, Inc.
("Solutia"). In addition, the Company recently expanded the product
line it distributes for Sasol Solvents. The Company had entered into
agreements with CONDEAVista Company ("CONDEAVista") to distribute
butanol. The Company recently acquired the ethanol business of Sofecia,
and established a new marketing agreement with Sasol to provide a broad
range of pure and formulated ethanol to JLM's core markets and key
customer markets.
- Continue International Expansion. The Company currently has
international operations in South America, Europe (including Russia and the
Czech Republic),Asia and South Africa. JLM intends to continue to utilize its
chemical market experience, distribution and logistics capabilities and
industry relationships to increase its international presence. In 1999, the
Company continued its acquisition strategy by acquiring the Colours and
Industrial Chemicals Division of ICI South Africa and the majority
shareholdings in ICI South Africa Mozambique Limitada. The Company believes
this acquisition will strengthen the existing international business interest
of the group and further leverage its global service capabilities. JLM's
worldwide network of companies will enhance South Africa's supply portfolio
while at the same time strengthen the relationship with local offshore and
domestic suppliers utilizing the Company's global subsidiaries.
- 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 400 chemical products to over 1,000 customers
worldwide. In 1999, sales of acetone, phenol and propylene accounted for
approximately 29.6% 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 1999, JLM distributed approximately 281 million pounds of acetone, of
which approximately 88.3% 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, 3M, and Rohm & Haas.
6
Phenol
In 1999, the Company distributed approximately 110 million pounds of
phenol, of which approximately 84.0% 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 1999, the Company distributed approximately 219 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 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, methanol and various grades of formulated ethanol. 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 1999, the
Blue Island Plant and Mt. Vernon Plant collectively supplied approximately
88.3% of the total acetone sold by JLM and the Blue Island Plant supplied
approximately 84.0% 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.
7
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 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 British Petroleum's Lima refinery.
Currently, the Blue Island Plant is operating at 60% capacity, meeting
customer demand. 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.
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 225 million pounds of
acetone annually from the Mt. Vernon Plant. In 1996, the amount of acetone
available to JLM from the Mt. Vernon Plant was reduced by approximately 15
million pounds, 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. Through
improvement in operating efficiency the Mt. Vernon plant has increased their
acetone output, thereby offsetting increased internal consumption. As a
result, JLM does not anticipate any further material reduction in volume.
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.
8
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 Lyondell Chemicals, Repsol, CONDEA Vista, Aristar, and Sasol Solvents.
The structure of the Company's long-term relationships with its outside
suppliers helps the Company mitigate the impact of cyclical market fluctuations
in product supply and price to which typical spot traders or distributors are
exposed. In a majority of JLM's supply contracts, the purchase price paid by
JLM is not determined until after JLM sells the product, and is generally based
on a fixed percentage profit per unit of product sold. In contrast, the
typical spot trader or distributor may agree to a fixed purchase price prior to
the sale, taking the market risk of effecting a successful resale of the
product. In addition, spot traders do not typically enter into long-term
supply contracts or relationships, thereby reducing their ability to service
the needs of both customers and suppliers.
In 1988, the Company entered into an agreement to purchase acetone from
SasolChem, which was to remain in effect until either party gave six months
notice of termination. In 1992, the Company entered into new agreements with
SasolChem to purchase additional quantities of acetone, methyl-ethyl ketone and
n-propanol. These new agreements are on terms substantially similar to its
existing acetone agreement with SasolChem. The Company has since expanded its
relationship with SasolChem to include the purchase and distribution of methyl-
isobutyl ketone and ethanol in North America. In conjunction with Sasol's
planned expansion in the coming years, JLM expects to add to its current
portfolio several key solvents, including additional acetates and oxo-alcohols
and their related downstream products.
In 1999, the Company and Sasol Solvents ("Sasol") entered into a joint
initiative for marketing ethyl alcohol (ethanol) in North America. Sasol
commissioned a new world scale ethanol production unit located in Secunda South
Africa. With a nameplate capacity of 85,000 metric tons per annum, this plant
will join units already in operation for Sasol and will expand their overall
capacity to 125,000 metric tons per annum of high purity ethanol.
Simultaneously, JLM brought on line a state of the art computerized blending
and denaturing facility dedicated to serving the North American ethanol market.
Located in Wilmington North Carolina at the site of its subsidiary, JLM
Terminals Inc., the blending facility uses the latest in liquid handling and
metering technology, ensuring accuracy and efficiency. Additionally, a new
dedicated quality control laboratory located on site will be commissioned to
meet customer needs for high quality ethanol blends for the personal care,
coatings, inks, and industrial markets. The required denaturants are stored on
site to ensure a seamless operation from production to delivery. Additionally.
the Company entered into agreements with Lyondell Chemical Company and CONDEA
Vista to distribute n-propanol and 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.
9
The Company has additional terminal and storage facilities located at the
JLM Terminal on the Cape Fear River in Wilmington, North Carolina. The JLM
Terminal is located on 14 acres of land, is accessible to ship, barge, rail and
truck, is capable of handling a broad range of products including methanol,
oxygenated solvents and inorganic chemicals, and has a total capacity of 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 in various years through 2002. See
"Properties."
The Company maintains inventory at strategic locations worldwide. The
Company has implemented a plan to consolidate certain dry storage facilities by
approximately 40% in an effort to add logistical efficiencies and at the same
time streamline operations. As a result, the Company believes its storage
facilities will be adequate for the Company's current and anticipated near-term
needs. Should the need arise for substantial amounts of additional storage
facilities in the future, the Company does not currently anticipate any
material difficulties in obtaining sufficient new storage facilities through
purchase or lease at 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 in 1998, the Company historically
focused primarily on bulk quantity sales (generally in 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 inorganic sector,
generally selling 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 offices in the U.S., Canada, the Netherlands, Venezuela, Thailand,
Colombia, the Czech Republic, Spain, Russia, and Singapore. Additionally
through a recent acquisition, the Company now has an office in South Africa.
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 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. Subsequently, in
January 2000, the Company exchanged its 25% interest in SK Asia and 12.7%
interest in SK Trading, for a 49% interest in an existing terminal facility
which was named Siam JLM.
Approximately 3.8% of the Company's revenues in 1999 were from sales of
specialty chemicals. Prices for specialty chemicals are generally subject to
smaller fluctuations than are those for commodity chemicals, and specialty
chemical sales generally carry higher gross margins. In establishing supply and
distribution relationships in specialty chemicals, the Company attempts to
leverage existing relationships and knowledge of the needs and objectives of
both suppliers and customers.
The Company's position as a large volume marketer, combined with JLM's
knowledge of customer and supplier needs and objectives, affords it
opportunities to effect product exchanges. Engaging in product exchange
transactions allows the Company to solve customer or supplier problems and take
profitable advantage of identified market trends. The Company's ability to
engage in exchange transactions is enhanced by its terminal and storage
capabilities that also enable the Company to accumulate inventory to take
advantage of market trends.
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In its olefins marketing activities, JLM focuses on the international
marketing of olefin petrochemical gases that require specialized shipping,
handling and storage. The Company's olefins marketing activities to date have
been largely trading oriented. However, the Company has developed long-term
relationships with essential industry participants and its access to terminal
and storage facilities will enable the Company to become a large volume
marketer of olefins globally. The Company has long-term supply and sales
contracts with a number of major olefins producers and consumers in North
America, South America, Europe and Asia. For example, the Company has supply
relationships with Repsol and Copene-Petroquimica do Nordeste S.A. to source
butadiene for the U.S. and with Diamond Koch, Equistar, and Enterprise to
export propylene from the U.S. Some of the Company's significant olefins
customers include Dow, 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, 1999, the Company and its consolidated subsidiaries had
231 full-time employees. Of these, 124 employees were in management and
administration, 56 in sales and marketing and 51 were in production and
distribution. Approximately 25 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 expires on
October 31, 2001. The Company considers its relations with both its union and
non-union employees to be satisfactory.
ENVIRONMENTAL REGULATION
The Company and its operations are subject to federal, state, local and
foreign environmental laws, rules, regulations and ordinances concerning
emissions to the air, discharges to surface and subsurface waters, and the
generation, handling, storage, transportation, treatment, disposal and import
and export of hazardous materials ("Environmental Laws"). Compliance with such
Environmental Laws may result in significant capital expenditures by the
Company. Moreover, under certain Environmental Laws, the Company may be liable
for remediation of contamination at certain of its current and former
properties. For example, under the Comprehensive Environmental Response,
Compensation and Liability Act of 1990, as amended ("CERCLA"), and similar
state laws, the Company and prior owners and operators of the Company's
properties may be liable for the costs of removal or remediation of certain
hazardous or toxic materials on, under or emanating from the properties,
regardless of their knowledge of, or responsibility for, the presence of such
materials. CERCLA and similar state laws also impose liability for
investigation, cleanup costs and damage to natural resources on persons who
dispose of or arrange for the disposal of hazardous substances at third-party
sites. In addition, under the Resource Conservation and Recovery Act of 1976
("RCRA"), the holder of a permit to treat or store hazardous waste can be
required to remediate environmental pollution from solid waste management areas
at the permitted facility regardless of when the contamination occurred.
11
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 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.
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 had previously been addressing the problem, and recent
analytical results show that the levels of contaminants may have decreased to
acceptable levels. In August 1999, the Company sold the plant in "as is"
condition, relieving the Company of any further environmental liability.
The Blue Island Phenol/Acetone plant paid fines totaling $95,000 in1999,
as a result of prior years violations associated with procedural violations
that did not result in any emissions or damage to the environment. In one
violation, the Company was cited for valves that were not properly locked after
an emission control modification was completed by the Company on a volunteer
basis. The second violation was due to a nine hour delay in reporting a minor
spill that was properly cleaned up. In both instances the Company agreed to
mitigated fines rather than proceed with litigation.
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.
12
ITEM 2. PROPERTIES:
The following table sets forth certain information as of December 31,
1999, 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
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On August 12, 1999, the Company held its 1999 Annual Stockholders meeting.
During such meeting, security holders of the Company's common stock voted for
approval of all nominated Directors, approved Deloitte & Touche LLP as the
Company's independent auditors and approved a proposal to amend the Non-
Employee Directors' Stock Option plan.
13
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, 1998 and 1999 on the NASDAQ beginning
July 24, 1997, the first day of public trading:
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
1999
-------
First Quarter 5.97 4.81
Second Quarter 5.38 4.25
Third Quarter 5.44 4.50
Fourth Quarter 4.63 2.56
As of March 24, 2000, there were 89 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 (see Note 7 and 8).
14
Item 6. SELECTED FINANCIAL INFORMATION:
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
Year ended December 31,
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Statement of Income Data:
Revenues $289,371 $236,521 $286,822 $305,735 $332,698
Gross profit 23,910 28,240 30,792 36,291 21,440
Operating income (loss) 8,734 11,001 13,903 12,647 (3,192)
Income (loss) from continuing
operations before discontinued
operations and extraordinary item 3,629 4,357 7,091 5,734 (3,541)
Basic Earnings/(Loss) Per Share:
Income from continuing operations
before discontinued operations
and extraordinary item $ 0.72 $ 0.89 $ 1.23 $ 0.81 $ 0.53
Diluted Earnings/(Loss) Per Share:
Income from continuing operations
before discontinued operations
and extraordinary item $ 0.72 $ 0.89 $ 1.22 $ 0.81 $ 0.53
Basic weighted average
shares outstanding 5,011 4,878 5,753 7,038 6,665
Diluted weighted average
shares outstanding 5,011 4,878 5,790 7,038 6,665
Pro forma basic income (loss) per share
from continuing operations before
discontinued operations and
extraordinary item (1) $ 0.52 $ 0.64 $ 1.06 $ 0.86 $ (0.53)
Pro forma diluted shares outstanding (1) 6,937 6,803 6,678 6,682 6,665
Other Financial Data:
Depreciation and amortization $ 1,522 $ 2,524 $ 2,947 $ 3,671 $ 4,046
EBITDA (2) 10,256 13,525 16,850 16,318 4,853
Balance Sheet Data:
Working Capital (deficit) $ (274) $ (966) $ 13,289 $ 16,597 $ 17,309
Total assets 86,498 86,387 83,561 103,265 140,022
Total debt 23,204 31,043 5,964 17,048 27,776
Total stockholders' equity 10,519 13,444 38,835 42,638 37,489
Cash Flow Information:
Operating activities $ 2,746 $ 19 $ 8,606 $ 5,192 $ (649)
Investing activities (4,661) (6,631) (3,176) (4,993) (9,261)
Financing activities (469) 6,705 (5,012) (3,083) 9,964
Capital expenditures 2,320 7,347 2,875 1,102 2,204
(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. In 1999, EBITDA also included approximately $4.0 million of
tax benefit. 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.
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 manufacturing and marketing segments.
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.
During the second half of 1998 through the year ending 1999, the Company
felt the hardship of the petrochemical down cycle in which both overall pricing
and margins accelerated downward. Pricing pressure on manufactured products,
specifically phenol, continued during the year coupled with substantial
increases in raw material feedstock costs during the second half. During the
first quarter 2000, major phenol/acetone major U.S. producers have announced
price increases effective April 1, 2000. In addition, pricing has started
firming on the majority of our other products indicating upward movement in the
cycle.
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
As a Percentage of Segment Revenues
Year Ended December 31,
------------------------------------
1997 1998 1999
-------- -------- --------
Gross profit:
Marketing 6.5% 8.0% 6.7%
Manufacturing 25.1% 28.7% 4.7%
-------- -------- --------
Total gross profit 10.7% 11.9% 6.4%
======== ======== ========
Segment operating income:
Marketing 2.4% 1.2% 0.7%
Manufacturing 16.4% 20.6% (7.2%)
-------- -------- --------
Total segment operating income 5.6% 4.9% (0.2%)
======== ======== ========
Year Ended December 31,
(in thousands, except percentages)
1997 1998 1999
---------------- ---------------- ----------------
Revenues:
Marketing $221,301 77.2% $248,060 81.1% $293,169 88.1%
Manufacturing 65,521 22.8% 57,675 18.9% 39.529 11.9%
-------- ------ -------- ------ -------- ------
Total revenues $286,822 100.0% $305,735 100.0% $332,698 100.0%
======== ====== ======== ====== ======== ======
Gross profit:
Marketing $ 14,326 46.5% $ 19,731 54.4% $ 19,592 91.4%
Manufacturing 16,466 53.5% 16,560 45.6% 1,848 8.6%
-------- ------ -------- ------ -------- ------
Total gross profit $ 30,792 100.0% $ 36,291 100.0% $ 21,440 100.0%
======== ====== ======== ====== ======== ======
Segment operating income (loss):
Marketing $ 5,407 33.5% $ 3,055 20.4% $ 2,026 246.5%
Manufacturing 10,753 66.5% 11,903 79.6% (2,848)(346.5%)
-------- ------ -------- ------ -------- ------
Total segment
operating income (loss) 16,160 100.0% 14,958 100.0% (822)(100.0%)
Corporate expense (2,257) - (2,311) - (2,370) -
-------- ------ -------- ------ -------- ------
Total operating income (loss) $ 13,903 100.0% $ 12,647 100.0% $ (3,192) 100.0%
======== ====== ======== ====== ======== ======
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 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. 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.
17
The Company's Venezuelan operations, which accounted for 2.0% of 1999
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 has occurred in the past few years. The
Company may seek periodically in the future, to the extent available, to enter
into financial hedging contracts for the purchase of propylene and benzene in
an effort to manage its raw material purchase costs (see Note 2 of Notes to
Consolidated Financial Statements). There can be no assurance that the 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 1999.
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.
Since 1994, the Company has sourced, on average, approximately 225 million
pounds annually of acetone from the Mt. Vernon Plant. The Company is required
to purchase all of the acetone produced at the Mt. Vernon Plant and not
consumed by GE Plastics. It is anticipated that over the next three 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. However, through improved operating efficiencies
at the Mt. Vernon Plant, acetone output has increased thereby partially
offsetting GE's internal consumption. Based on this, JLM believes the amount
of acetone available for distribution should not be materially affected. 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 U.S. income taxes and accrues for U.S. income tax
liabilities based on its consolidated U.S. earnings. For the 1999 tax year,
the Company will file a U.S. federal income tax return reporting approximately
$13.0 million in tax loss which will result in a tax refund of approximately
$4.0 million based on carrying the loss back to prior years in which income
taxes were paid.
18
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, subject to certain
limitations, to be applied against the Company's U.S. consolidated return for
the foreign taxes paid by the Company's foreign subsidiaries. If losses are
incurred, countries in which the Company's foreign subsidiaries are
incorporated generally allow the losses to be carried forward and applied
against income earned in subsequent years.
The Company's Venezuelan operation has incurred losses which have
generated net operating loss carryforwards ("NOLs") and, based on Venezuelan
tax regulations, these NOLs may be carried forward for three years. In
addition, through the acquisition of Tolson, the Company purchased
approximately $3.8 million of net operating loss carryforwards in Holland that
can be carried forward indefinitely. During 1999, the Holland operation
generated approximately $1.0 million of income on which there will be no income
taxes payable either currently or in the future because of the purchased NOL
carryforwards. However, the utilization of the acquired tax credits results in
Deferred Tax Expense being recognized of approximately $340,000. In general,
foreign losses are not deductible for U.S. federal income tax purposes and as a
result cannot be offset against U.S. pre-tax profits.
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 and prior to 1999, the Company had met these requirements,
thereby reducing its taxable income. Due to losses incurred by the qualified
exporting entities during the 1999 tax year, the Company derived no benefit
from the FSC.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues increased $27.0 million to $332.7 million for the year
ended December 31, 1999 from $305.7 million for the prior year, an increase of
8.8%. Revenues for the marketing segment increased $45.1 million to $293.2
million for the year ended December 31, 1999 from $248.1 million for the prior
year, an increase of 18.2%. The increase in marketing revenues was the result
of increased sales from the Company's Holland and Singapore subsidiaries in
addition to the current year acquisitions. Revenues for the manufacturing
segment decreased $18.1 million to $39.5 million for the year ended December
31, 1999, from $57.7 million for the prior year, a decrease of 31.4%. The
decrease in manufacturing segment revenues was primarily due to decreases in
overall acetone and phenol selling prices throughout 1999.
Gross Profit. Gross profit decreased $14.9 million to $21.4 million for
the year ended December 31, 1999 from $36.3 million for the prior year, a
decrease of 41.0%. As a percentage of revenues, total gross profit was 6.4% in
1999 compared to 11.9% for the prior year. Gross profit from the marketing
segment decreased $0.1 million to $19.6 million for the year ended December 31,
1999, from $19.7 million for the prior year, a decrease of less than 1%. This
decrease was due primarily to lower margins on the existing product base due to
lower overall selling prices and the settlement of a 1997 contract dispute for
$0.5 million, partially offset by a strong performance by the Company's Holland
and Singapore operations in addition to a positive contribution from the South
Africa acquisition.
Gross profit from the manufacturing segment decreased to $1.8 million for
the 1999 fiscal year from the $16.6 million reported during the year ended
December 31, 1998. The decrease in manufacturing gross profit was the result
of lower selling prices in the Company's two main products, phenol and acetone,
coupled with substantial increases in raw material costs during the year ended
December 31, 1999 compared to the prior year.
19
Selling, General and Administrative Expenses (SG&A). SG&A increased $1.0
million to $24.6 million for the year ended December 31, 1999 from $23.6
million for the prior year, an increase of 4.0%. This increase was principally
due to acquisitions, South Africa and the ethanol business from Sofecia, and an
increase in depreciation/amortization expense of $.4 million. As a percentage
of revenue, SG&A decreased 0.3% to 7.4% for the year ended December 31, 1999
from 7.7% for the year ended December 31,1998. The slight decrease in SG&A as
a percentage of revenue was primarily a result of efficiencies gained by
integrating the operations of acquired business.
Operating Income (Loss). Operating income decreased $15.8 million to
($3.2) million for the year ended December 31, 1999 from $12.6 million for the
prior year. The decrease was principally the result of the decrease in gross
profit and the increase in SG&A discussed above.
Interest Expense - Net. Interest expense increased $0.4 million to $1.7
million for the year ended December 31, 1999 from $1.3 million for the prior
year, an increase of 30.8%. This increase is principally due to an increase in
borrowings to fund the South Africa and Sofecia acquisitions.
Other Income (Expense) - Net. Other Income (Expense) - net in 1998 and
1999 consists of interest (losses) from investments. In 1999, other income
(expense) consisted principally of a loss on the sale of investment real estate
of approximately $336,000 that was sold for $600,000. This loss in 1999, was
more than offset by gains on the Company's other investments.
Foreign Currency Exchange (Loss) Gain. During the 1999 fiscal year, the
Company experienced a slight strengthening in the currencies of certain of its
foreign subsidiaries compared to the U.S. dollar resulting in an increase in
the loss of $.2 million compared to the same period in 1998.
Income Tax Provision (Benefit). The Company's benefit for income taxes
was approximately $1.6 million for the year ended December 31, 1999 compared to
an income tax expense of $5.2 million for the comparable period in 1998. The
net income tax benefit was incurred primarily on the Company's U.S. operations,
partially offset by the tax provision generated by the Company's foreign
operations.
Net Income (loss). Net income decreased $9.2 million to ($3.5) million
for the year ended December 31, 1999, from $5.7 million for the prior year, due
to the factors discussed above.
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.
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.
20
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 terminaling 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 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. Operating activities utilized $0.6 million of cash in 1999.
The net loss adjusted for non-cash items such as depreciation, amortization,
and other non-cash charges incurred provided $3.9 million of cash. Increase in
other investments utilized an additional $4.5 million of cash. Investing
activities utilized $9.3 million of cash, principally consisting of
acquisitions (see note 16) and capital expenditures. Financing activities
provided $10.0 million of cash, primarily from the Company's acquisition and
working capital lines of credit. Foreign currency translation loss was $1.1
million principally as a result of increased international business and the
weakening of the dollar in 1999.
21
In 1998, operating activities provided $5.2 million of cash. Net income
adjusted for non-cash items such as depreciation, amortization, and other non-
cash charges incurred provided $12.1 million. Net decrease in operating
liabilities utilized $6.9 million. Investing activities utilized $5.0 million
of cash, principally consisting of acquisitions (see note 16) and capital
expenditures. Financing activities utilized $3.1 million of cash, primarily
from the repayment of long-term debt. Foreign currency translation gain was
$0.1 million.
In 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. In
November 1999, the Company completed the restructuring of its unsecured $30
million line of credit replacing it with a $34.5 million line of credit (the
"LOC"). Under the terms of the restructuring, $14.5 million is a five year
secured term loan which will expire on November 1, 2004 and the remaining $20.0
million, which will be used to fund working capital needs, has terms that will
expire on November 1, 2001. The Company believes that cash flows generated by
operations, existing cash and the Company's borrowing capacity are sufficient
to support the Company's business strategies through 2000.
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 $0.75 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.
22
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 1999, the Company did not enter into any material fixed financial hedge
contracts and there were no fixed financial contracts open at December 31,
1999.
Commodity Price Risk
JLM enters into contracts whereby parties to the contracts agree to
Exchange various quantities of inventory, primarily acetone, over a specified
period of time. JLM records these exchanges of inventory at the lower of cost
or market. As of December 31, 1999, the Company had the following related to
inventory exchanges:
Total pounds receivable under the exchange contracts 5,156,000
Total amount receivable under the exchange contracts $ 718,000
Weighted average price per pound payable under the
exchange contracts $ 0.1393
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 2000. However, there can be no assurances
that interest rates will not significantly change in 2000.
23
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 24
Consolidated Balance Sheets - December 31, 1998 and 1999 25
Consolidated Statements of Operations and Comprehensive Income (Loss)
- Years Ended December 31, 1997, 1998 and 1999 26
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1997, 1998 and 1999 27
Consolidated Statements of Cash Flows - Years Ended December 31,
1997, 1998 and 1999 28
Notes to Consolidated Financial Statements 29
CONSOLIDATED SUPPLEMENTAL SCHEDULE
Schedule II - Valuation and Qualifying Accounts 51
24
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, 1998 and 1999, and the
related consolidated statements of operations and comprehensive income (loss),
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 8. These consolidated financial
statements and the consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and the consolidated
financial statement schedule 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of JLM Industries, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountant
Tampa, Florida
March 7, 2000
25
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
1998 1999
----------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,480,566 $ 1,419,568
Accounts Receivable:
Trade 29,703,639 52,063,858
Other 5,374,933 4,595,630
Inventories 16,100,357 20,557,450
Prepaid expenses and other current assets 2,606,308 4,383,263
Income tax receivable 459,736 3,877,942
-------------- --------------
Total current assets 56,725,539 86,897,711
Other investments 3,194,259 6,725,834
Property and equipment, net 28,384,989 27,900,465
Goodwill and other intangibles 11,981,624 11,692,139
Other assets 2,978,878 6,805,828
-------------- --------------
Total assets $ 103,265,289 $ 140,021,977
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 37,804,598 $ 62,638,192
Current portion of long-term debt 1,872,483 2,904,166
Loans payable 451,742 -
Deferred income taxes - current - 127,194
Deferred revenue - 3,919,477
-------------- --------------
Total current liabilities 40,128,823 69,589,029
Long-term debt less current portion 14,723,646 24,872,156
Deferred income taxes 5,517,407 7,525,641
Minority interest 255,867 543,085
Other liabilities 1,958 3,164
-------------- --------------
Total liabilities 60,627,701 102,533,075
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; 7,118,811 and
7,151,151 shares issued, respectively 71,188 71,511
Additional paid-in capital 21,330,709 21,550,453
Retained earnings 23,424,747 19,883,927
Accumulated other comprehensive income (loss)
Foreign currency translation adjustment 128,871 (985,820)
-------------- --------------
44,955,515 40,520,071
Less treasury stock at cost - 424,199 and
573,636 shares, respectively (2,317,927) (3,031,169)
-------------- --------------
Total stockholders' equity 42,637,588 37,488,902
-------------- --------------
Total liabilities and stockholders' equity $ 103,265,289 $ 140,021,977
============== ==============
See notes to consolidated financial statements.
26
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 1997, 1998 and 1999
1997 1998 1999
------------- ------------- -------------
Revenues $ 286,822,166 $ 305,735,314 $ 332,697,833
Cost of sales 256,030,337 269,443,909 311,257,954
------------- ------------- -------------
Gross profit 30,791,829 36,291,405 21,439,879
Selling, general and administrative expenses 16,889,268 23,644,565 24,632,066
------------- ------------- -------------
Operating income (loss) 13,902,561 12,646,840 (3,192,187)
Interest expense - net (2,082,986) (1,300,161) (1,676,036)
Other (expense) income - net (583,409) (160,412) 230,539
Foreign currency exchange (loss) gain - net 83,852 (38,434) (237,784)
------------- ------------- -------------
Income (loss) before minority interest and
income taxes 11,320,018 11,147,833 (4,875,468)
Minority interest in loss (income) of
Subsidiaries 61,878 (255,867) (287,218)
------------- ------------- -------------
Income (loss) from continuing operations
before income taxes, discontinued operations
and extraordinary item 11,381,896 10,891,966 (5,162,686)
------------- ------------- -------------
Income tax provision (benefit)
Current 2,880,263 3,589,990 (4,075,746)
Deferred 1,410,930 1,567,497 2,453,880
------------- ------------- -------------
Total income tax provision (benefit) 4,291,193 5,157,487 (1,621,866)
------------- ------------- -------------
Income (loss) from continuing operations
before discontinued operations and
extraordinary item 7,090,703 5,734,479 (3,540,820)
Discontinued operations:
Loss from operations (net of income tax
benefit of $121,400 and $14,900, respectively) (182,053) (19,129) -
Loss on disposal (net of income tax benefit
of $19,400) (29,054) - -
------------- ------------- -------------
Income (loss) before extraordinary item 6,879,596 5,715,350 (3,540,820)
Extraordinary loss on extinguishment of debt
(net of income tax benefit of $257,000) (385,842) - -
------------- ------------- -------------
Net income (loss) 6,493,754 5,715,350 (3,540,820)
Other comprehensive income (loss):
Foreign currency translation adjustments 4,017 149,614 (1,114,691)
------------- ------------- -------------
Comprehensive income (loss) $ 6,497,771 $ 5,864,964 $ (4,655,511)
============= ============= =============
Basic earnings (loss) per share:
Income (loss) from continuing operations
before discontinued operations and
extraordinary item $ 1.23 $ 0.81 $ (0.53)
Net income (loss) $ 1.13 $ 0.81 $ (0.53)
Diluted earnings (loss) per share:
Income (loss) from continuing operations
before discontinued operations and
extraordinary item $ 1.22 $ 0.81 $ (0.53)
Net income (loss) $ 1.12 $ 0.81 $ (0.53)
Weighted average shares outstanding 5,752,579 7,038,321 6,664,580
Diluted weighted average shares outstanding 5,789,988 7,038,321 6,664,580
See notes to consolidated financial statements.
27
JLM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1998 and 1999
Foreign
Additional Currency Total
Common Paid-in Retained Translation Treasury Stockholders'
Stock Capital Earnings Adjustment Stock Equity
-------- ------------ ----------- ----------- ---------- -------------
Balance at December 31, 1996 $ 50,112 $ 489,888 $13,467,898 $ (24,760) $ (522,200) $ 13,460,938
Stockholder distributions - - (1,732,728) - - (1,732,728)
Retirement of treasury shares (2,673) - (519,527) - 522,200 -
Proceeds from sale of stock 23,495 21,823,334 - - - 21,846,829
Stock issuance costs - (1,238,193) - - - (1,238,193)
Issuance of restricted stock 117 (117) - - - -
Net income - - 6,493,754 - - 6,493,754
Foreign currency
translation adjustment - - - 4,017 - 4,017
-------- ------------ ----------- ----------- --------- --------------
Balance at December 31, 1997 71,051 21,074,912 17,709,397 (20,743) - 38,834,617
Purchase of treasury shares - - - - (2,317,927) (2,317,927)
Sale of stock to Employee 38 21,020 - - - 21,058
Issuance of restricted stock 99 234,777 - - - 234,876
Net income - - 5,715,350 - - 5,715,350
Foreign currency
translation adjustment - - - 149,614 - 149,614
-------- ------------ ----------- ----------- ---------- --------------
Balance at December 31, 1998 71,188 21,330,709 23,424,747 128,871 (2,317,927) 42,637,588
Purchase of treasury shares - - - - (713,242) (713,242)
Sale of stock to Employees 10 2,543 - - - 2,553
Issuance of restricted stock 313 217,201 - - - 217,514
Net loss - - (3,540,820) - - (3,540,820)
Foreign currency
translation adjustment - - - (1,114,691) - (1,114,691)
-------- ------------ ----------- ----------- ---------- --------------
Balance at December 31, 1999 $ 71,511 $ 21,550,453 $19,883,927 $ (985,820) $(3,031,169) $ 37,488,902
======== ============ =========== ========== ========== ==============
See notes to consolidated financial statements.
28
JLM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1998 and 1999
1997 1998 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,493,754 $ 5,715,350 $ (3,540,820)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Deferred income taxes 1,410,930 1,567,497 2,453,880
Minority interest in (loss) income of
Subsidiaries (61,878) 255,867 287,218
Loss on disposal of assets 119,712 116,432 359,844
Loss on disposal of discontinued operations 29,054 - -
Loss on other investments - 194,717 -
Issuance of restricted stock - 234,876 -
Depreciation and amortization 2,947,163 3,671,452 4,045,626
Loss from partnerships 48,000 48,000 12,000
Loss from investment in Olefins Terminal
Corporation - net 830,482 - -
Non-cash management fee and interest income
from Olefins Terminal Corporation (133,818) - -
Bad debt expense 94,039 270,902 286,248
Changes in assets and liabilities
(exclusive of acquisitions):
Decrease (increase) in accounts receivable (1,978,696) 27,829,808 (16,708,686)
Decrease (increase) in inventories 1,402,615 827,623 (330,113)
(Increase) decrease in prepaid expenses and
other current assets 1,136,145 (213,733) (1,936,166)
Increase in other assets (390,313) (1,386,907) (3,710,954)
Increase in other investments - - (4,528,553)
Decrease (increase) in accounts payable and
accrued expenses (3,157,191) (32,536,054) 22,136,056
(Decrease) increase in income taxes
payable/receivable 98,517 (878,866) (3,395,258)
(Decrease) increase in deferred revenue (300,475) - 3,919,477
(Decrease) increase in other liabilities 17,986 (524,519) 1,206
------------ ------------ ------------
Net cash provided by (used in) operating activities 8,606,026 5,192,445 (648,995)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,726,916 155,115 653,624
Proceeds from sale of investments 145,834 - -
Capital expenditures (2,875,431) (1,102,192) (2,203,571)
Acquisitions - (4,045,469) (7,710,888)
Other investments (2,062,992) - -
Purchase of minority interest (110,526) - -
------------ ------------ ------------
Net cash used in investing activities (3,176,199) (4,992,546) (9,260,835)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds (repayments of) loans payable (7,987,486) 72,708 (451,742)
Proceeds from long-term debt 1,400,335 3,531,500 58,044,321
Principal payments of long-term debt (17,586,420) (4,890,483) (46,915,814)
Purchase of treasury shares - (1,817,927) (713,242)
Proceeds from the sale of common stock 21,846,829 21,058 -
Stock issuance costs (952,650) - -
Distributions to shareholders (1,732,728) - -
------------ ------------ ------------
Net cash (used in) provided by financing activities (5,012,120) (3,083,144) 9,963,523
------------ ------------ ------------
Effect of foreign exchange rates on cash 4,017 149,614 (1,114,691)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 421,724 (2,733,631) (1,060,998)
Cash and cash equivalents, beginning of year 4,792,473 5,214,197 2,480,566
------------ ------------ ------------
Cash and cash equivalents, end of year $ 5,214,197 $ 2,480,566 $ 1,419,568
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,227,815 $ 1,344,243 $ 1,425,071
Income taxes $ 2,223,344 $ 4,243,724 $ 249,456
Deferred tax asset adjustment $ - $ - $ 341,400
Noncash investing activities:
Capital lease obligations $ 50,335 $ 274,913 $ 51,686
Forgiveness of accounts payable for joint
venture restructuring $ 1,958,157 $ - $ -
Noncash financing activities:
Treasury stock purchased by satisfaction
of accounts receivable $ - $ 500,000 $ -
See notes to consolidated financial statements.
29
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of JLM Industries, Inc. and its wholly-owned subsidiaries.
The Company'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"), Inquinosa International S.A.
("Inquinosa"), and JLM South Africa. All material intercompany balances and
transactions have been eliminated in consolidation. Included in the 1999
consolidated financial statements is the 50.1% owned subsidiary, Inquinosa,
that the Company acquired in July 1998 (see Note16). Included in the 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.
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, 1998 and 1999, JLM Marketing,
Inc.'s inventory was approximately 40% and 34%, respectively, of total
inventory. The costs of the Company's remaining inventories are determined on
the first-in, first-out (FIFO) method. If LIFO inventories were valued at
current costs, operating income would have been approximately $(570,000),
$(1,585,000) and $0 lower than those reported for the years ended December 31,
1997, 1998 and 1999, respectively. The supplement of the replacement cost over
the value of inventories based upon the LIFO method was approximately $539,000
as of December 31, 1998 and 1999.
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, 1998, JLM owed approximately $1,439,000 and as of December 31,
1999, JLM was owed approximately $718,000 under these contracts which are
included in inventory.
30
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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, 1998, or 1999.
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 the 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 net of
accumulated depreciation and amortization. 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, 1998 and 1999, 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
agreements, an option to purchase 85% of the outstanding common shares of a
melamine resin manufacturer, and prepayments for product testing (see Note 12).
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 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 operations in the period that the
change in the rate is enacted.
31
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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, 1998 and 1999, JLM had no open foreign exchange contracts.
Stock-Based Compensation - As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, JLM has elected to recognize stock-based compensation
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and to disclose in the consolidated financial statements the
effects of SFAS No. 123 as if its fair value recognition provisions were
adopted. See Note 19 for additional information on the Company's stock-based
compensation.
Income (Loss) Per Share - Basic income (loss) per share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted income (loss) per share
reflects the potential dilutive effect of securities (which can consist of
stock options and restricted stocks) that could share in earnings of the
Company, unless the inclusion of these potential dilutive effects results in
antidilution.
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 approximate their
fair value because of their short-term nature. The fair value of long-term debt
approximates its carrying value.
Impairment of Long-Lived 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. An impairment would
be recognized by a charge to operations.
32
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to a concentration of credit risk principally consist of
trade accounts receivable. Credit risk with respect to trade accounts
receivable is generally diversified due to the large number of entities
comprising the Company's customer base and their dispersion across many
different 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, which 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, which requires
companies to report selected segment information in their quarterly reports
issued to shareholders for fiscal 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 adopted SFAS No. 131
in 1998 (see Note 21). However, there were no changes required to be made to
prior year amounts.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which 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. SFAS No. 133, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company has not
completed its evaluation of the impact of SFAS No. 133, if any, on the
financial statements.
RECLASSIFICATIONS - Certain amounts in the 1997 consolidated financial
statements are reclassified to conform to the 1998 and 1999 presentation.
33
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1998 1999
------------ ------------
Land and building $ 7,438,563 $ 4,882,836
Vehicles 216,652 693,556
Airplane 2,475,939 2,475,939
Equipment 24,977,860 28,819,320
Leased equipment - capital leases 1,188,122 1,188,122
Furniture and fixtures 882,804 1,490,823
Leasehold improvements 442,699 627,079
------------ ------------
37,622,639 40,177,675
Less accumulated depreciation
and amortization (9,237,650) (12,277,210)
------------ ------------
$ 28,384,989 $ 27,900,465
============ ============
Depreciation and amortization expense for property and equipment was
approximately $2,598,000, $2,834,000 and $3,040,000, for the years ended
December 31, 1997, 1998 and 1999, respectively. Future minimum capital lease
payments for each of the years 2000 through 2003 are approximately $106,000,
$49,000, $14,000, and $9,000, respectively.
4. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS
Investments in partnerships at December 31, 1998 and 1999, consist principally
of the following:
PHENOL PLANT PARTNERSHIP - The Company holds a 2% interest in the Mt.
Vernon Phenol Plant Partnership via its wholly owned subsidiary JLM (Ind),
Inc., an Indiana corporation. The plant converts cumene into phenol that is
marketed under contractual agreements to GE Plastics. JLM has a long-term
exclusive agreement through 2002, and thereafter, unless the agreement is
terminated upon prior notice, to purchase all acetone 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, 1998 and 1999, the amount of this investment was approximately
$496,000. During 1998 and 1999, JLM did not contribute to the partnership or
receive any distributions.
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, 1998 and 1999, these investments of approximately $1,069,000 were
included in other investments in the accompanying consolidated balance sheet
and are carried on the equity method.
REAL ESTATE PARTNERSHIPS - The Company holds a 99% interest in Len-Kel
Realty Limited Partnership ("Len-Kel"). During 1987 and 1988, Len-Kel acquired
28 units in a development project converting historical buildings into
residential use. The units are currently operated as rental property. JLM is a
limited partner in Len-Kel and cannot exert control over the partnership.
Accordingly, the investment is carried on the equity method. As of
December 31, 1997 and 1998, the amount of this investment was approximately
$996,000 and $948,000, respectively. In 1999, the investment property was
sold for approximately $600,000. The sale of the property generated a loss of
approximately $336,000.
34
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS - Continued
JLM holds other investments through limited partnerships. The amount of
these partnerships totaled approximately $744,000 and $450,000 at December 31,
1998 and 1999, respectively, and are carried on the cost method in the
accompanying consolidated balance sheet.
During the years ended December 31, 1997, 1998 and 1999, JLM recorded
losses from partnership investments of approximately $48,000, $48,000, and $0,
respectively. As a limited partner, the Company has no obligation to make any
contributions beyond its initial investment.
During 1999, the Company entered into a loan agreement with Polyform USA
LLC, with the objective of acquiring an equity interest in a plastics
manufacturing facility in Greece. Under the terms of the loan agreement, the
Company loaned $3.0 million and has a secured interest in all of the machinery
and equipment at the Greece facility. Depending on the results of ongoing
negotiations, the Company may convert the loan to equity in the plant and may
contribute additional funds towards purchasing a majority equity position.
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,
1997, 1998 and 1999, losses from the investment in OTC of approximately
$(830,000) and $0, and $0, respectively, were recorded. At December 31, 1998
and 1999, 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 $134,000, $196,000 and $196,000 for the years ended December 31,
1997, 1998 and 1999, respectively, under this agreement.
On May 7, 1997, OTC refinanced its existing long-term debt and replaced it
with an unsecured term loan (the "Term Loan"). The proceeds from the Term Loan
was, among other items, used to repay all of OTC's existing long-term debt,
purchase all outstanding stock warrants and repay all outstanding management
fees to JLM. After the purchase of the stock warrants, OTC was 50% owned by
JLM. In conjunction with the refinancing, JLM's terminaling contract was
canceled and a new, renewable, 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.
35
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. OLEFINS TERMINAL CORPORATION
The following summarizes the assets, liabilities and stockholders' equity of
OTC as of December 31:
1998 1999
-------------- --------------
ASSETS:
Current $ 874,033 $ 1,047,641
Noncurrent 7,590,993 5,477,867
-------------- --------------
$ 8,465,026 $ 6,525,508
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities $ 524,814 $ 476,385
Non-current liabilities 7,300,000 7,300,000
Stockholders' equity (deficiency) 640,212 (1,250,877)
-------------- --------------
Total liabilities and stockholders equity (deficiency) $ 8,465,026 $ 6,525,508
============== ==============
OTC had net losses of approximately $1,468,000, $2,261,000 and $1,891,000
for the years ended December 31, 1997, 1998 and 1999, 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, 1999, the Company had cumulative unrecorded operating losses from OTC of
approximately $3,209,000.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December 31:
1998 1999
------------ ------------
Accounts payable $ 31,047,242 $ 44,589,833
Accrued expenses 6,757,356 18,048,359
------------ ------------
$ 37,804,598 $ 62,638,192
============ ============
7. LOANS PAYABLE
Loans payable consist of the following at December 31:
1998
------------
[S] [C]
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. $ 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
------------
$ 451,742
============
36
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. LOANS PAYABLE - Continued
The loans payable are collateralized by most of JLM's inventory and
accounts receivable. As of December 31, 1998 and 1999, JLM had a total of
approximately $125,000,000 of credit facilities available with various
financial institutions of which approximately $95,116,000 and $56,866,000,
respectively, was unused. Additionally, as of December 31, 1998 and 1999, JLM
had guaranteed vendor letters of credit of approximately $12,836,000 and
$22,638,000, respectively.
In November 1999, the Company completed the restructuring of its unsecured
$30 million line of credit replacing it with a $34.5 million line of credit
(the "LOC"). Under the terms of the restructuring, $14.5 million is a five
year secured term loan which will expire on November 1, 2004 and the remaining
$20.0 million will be used to fund working capital needs with terms that will
expire on November 1, 2001.
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, 1999 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:
1998 1999
------------ ------------
Notes payable to shareholders due in June 2002.
Interest is payable monthly at rates of prime
and 10.0%. Prime was 7.75% and 8.25%, respectively $ 1,250,000 $ 1,250,000
Mortgage payable due in equal monthly installments
through June 2004. Interest is payable monthly
at 9.59%. 1,509,909 1,413,018
Secured loan payable due in 2006. Interest is payable
monthly at rates between 8% - 9.68%. 1,459,725 1,337,095
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 7.75% at December 31, 1998. 114,207 -
Secured loans payable due in equal monthly
installments through 1999. Interest is payable
monthly at rates between 10.13% - 13.47%. 17,605 -
Acquisition line of credit payable due in
November 2004. Interest is payable monthly at
LIBOR rate plus 2 points. The LIBOR rate was
5.04% and 5.75%, respectively. 6,000,000 14,500,000
37
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. LONG-TERM DEBT - Continued
1998 1999
------------ ------------
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 5.75% and 5.04%, respectively $ 2,500,000 $ 1,800,000
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 1,248,272
Secured loans payable due in June 2001. Interest
is payable monthly at 7.25%. 1,688,500 5,995,208
Capital lease obligations due in equal monthly
installments through April 2003. Interest is
payable monthly at rates between 4.83% - 16.99%. 582,468 232,729
------------ ------------
Total 16,596,129 27,776,322
Less current portion (1,872,483) (2,904,166)
------------ ------------
Long-term portion $ 14,723,646 $ 24,872,156
============ ============
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 approximately as follows:
2000 $ 2,904,000
2001 17,010,000
2002 4,888,000
2003 1,600,000
2004 1,254,000
Thereafter 120,000
-------------
$ 27,776,000
The long-term debt is secured by substantially all of JLM's property and
equipment.
9. RELATED PARTY TRANSACTIONS
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. The transaction described above has been accounted for as a
combination of entities under common control using historical amounts.
38
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. RELATED PARTY TRANSACTIONS - Continued
In 1997, the Company leased chemical tank railcars from Phoenix, a
Connecticut corporation of which the sole owner is the majority stockholder of
JLM. The Company made payments in 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 transaction described above has been accounted for as a
combination of entities under common control using historical amounts.
JLM has loans payable to its majority stockholder of $905,148 at December
31, 1998 and 1999. The loan payable bears interest at the prime rate, which
was 7.75% and 8.25% at December 31, 1998 and 1999, respectively, and matures on
June 1, 2002. Additionally, the Company has approximately $1,700,000 of
miscellaneous receivables owed by the majority stockholder. These items are
netted together and included as part of other accounts receivable in the
accompanying consolidated balance sheet.
10. INCOME TAXES
The significant components of the deferred tax assets and liabilities were
as follows as of December 31:
1998 1999
------------ ------------
Deferred tax assets:
Foreign intangible assets $ 433,168 $ 318,318
Foreign reserves 222,313 304,351
Foreign net operating loss and
other carryforwards 1,630,165 1,415,328
Tax loss carryforards - 478,682
Minimum tax credit carryforward - 400,000
Other 455,274 65,419
------------ ------------
2,740,920 2,982,098
Valuation allowance (2,285,646) (2,037,997)
------------ ------------
Total deferred tax assets 455,274 944,101
Deferred tax liabilities:
Property (5,215,389) (5,959,904)
Nonconsolidated investments (415,453) (521,561)
Foreign prepaid expenses (341,839) (669,085)
Foreign reserves and other - (1,319,192)
Other - (127,194)
------------ ------------
Total deferred tax liabilities (5,972,681) (8,596,936)
------------ ------------
Net deferred tax liability $(5,517,407) $(7,652,835)
============ ============
The valuation allowance for deferred tax assets as of December 31, 1999
was $2,037,997, which serves to offset the potential tax benefits to be derived
from foreign tax jurisdictions. The net change in the total valuation
allowance for the year ended December 31, 1999 was a decrease of $247,649.
39
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. INCOME TAXES - Continued
Current and deferred income tax provision (benefit) consisted of the following
at December 31:
1997 1998 1999
------------ ------------ ------------
Current:
Federal $ 1,930,435 $ 2,820,534 $ (4,502,282)
State and local 402,285 561,776 (26,385)
Foreign 150,152 192,780 452,921
------------ ------------ ------------
Total current 2,482,872 3,575,090 (4,075,746)
Deferred 1,410,930 1,567,497 2,453,880
------------ ------------ ------------
Total income tax
Provision (benefit) $ 3,893,802 $ 5,142,587 $ (1,621,866)
============ ============ ============
The income tax provision reflected above includes the income tax expense
(benefit) associated with discontinued operations and extraordinary loss.
At December 31, 1998 and 1999, there were Venezuelan NOLs of approximately
$1,223,000 and $1,960,000, respectively, available to offset future foreign
taxable income. These net operating losses expire in various years after 2001.
At December 31, 1998 and 1999, there were Holland NOLs of approximately
$3,186,000 and $2,140,000, 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:
1997 1998 1999
-------- -------- --------
Statutory federal income tax rate 34.00% 34.00% 34.00%
State and local income taxes, net of
federal income tax 3.87 3.44 4.45
Difference arising from transactions
with, and profit and loss of, foreign
subsidiaries not deductible or
includible for U.S. tax purposes 2.93 9.64 (7.93)
Foreign Sales Corporation benefit (2.15) (0.40) -
Other (1.16) 0.86 0.90
-------- -------- --------
Effective income tax rate 37.49% 47.54% 31.42%
======== ======== ========
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. Accordingly, no provision has been made for U.S.
income taxes that might be payable upon repatriation of such earnings of
approximately $4,000,000. 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.
40
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. TREASURY STOCK AND STOCK SPLIT
Chemical Trading, S.L. ("Trading"), JLM's Spanish distributor, is 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 the Company's 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 the Company's 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 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 1998 and 1999, the Company
purchased approximately 330,000 and 149,000 shares of its common stock for
approximately $1,818,000 and $713,000, respectively, 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, 1999 are
as follows:
2000 $ 1,127,352
2001 1,282,515
2002 1,048,192
2003 626,741
2004 314,731
------------
Total minimum lease payments $ 4,399,531
============
Total rental expenses for all operating leases approximated $1,540,000,
$1,588,000 and $1,914,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
On December 12, 1996, JLM entered into consulting and non-competition
agreements (the "Agreements") with two independent third parties. The terms
of the Agreements require that the Company make payments of $230,000 per year,
payable semi-annually beginning January 1, 1997 through December 31, 2002, and
$470,000 on January 1, 2003. The Agreements cover the period from January 1,
1997 through December 31, 2006. The payments were capitalized and amortized
over the lives of the respective agreements. In 1999, the Agreements were
terminated, and unamortized payments of approximately $200,000 were written
off.
41
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. COMMITMENTS AND CONTINGENCIES - Continued
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.
During 1997, the Internal Revenue Service ("IRS") concluded its federal
income tax examination of JLM's 1988 through 1990 and 1992 through 1994 tax
years. JLM subsequently made payments to the IRS as a result of these
examinations. The settlement of these IRS examinations did not materially
affect the Company's financial condition or results of operations in 1997 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.
42
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. COMMITMENTS AND CONTINGENCIES - Continued
On May 26, 1999, the Company entered into an Option Agreement (the
"Option"), for $1.1 million, to acquire 85% of the outstanding common shares of
GZ Holdings Inc. at a purchase price of $15.0 million. The Option expires
March 31, 2001. The Company did not exercise its option as of December 31,
1999. In March 2000, the parties extended the option expiration date to March
31, 2002 and amended the purchase price to $20.0 million. If the option is
exercised prior to March 31, 2001, the $1.1 million option price shall be
applied against the purchase price.
During 1999, the Company entered into a sales contract with a third party
to sell phenol on a formula based price. Upon entering the contract, the
Company received $4.16 million as a prepayment towards future purchases by the
third party. Volume commitments by the third party were 18 million pounds in
1999, 30 million pounds annually for each of the years 2000 through 2008. The
prepayment was recorded as deferred revenue and will be applied against future
purchases. Sales exceeding the yearly volume under the contract will be sold
at market price. Additionally, the third party has an option to increase the
volume up to 45 million pounds in 2002 for an additional prepayment of $1.7
million by December 31, 2001.
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 year ended December 31, 1997:
1997
----------
Basic earnings per share:
Discontinued operations $ (0.03)
Extraordinary item (0.07)
Diluted earnings per share:
Discontinued operations $ (0.03)
Extraordinary item (0.07)
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 366,033 shares, reduced by employee turnover,
were still outstanding at December 31, 1999. The average market price of the
Company's common stock was less than the exercise price of the options
throughout 1999.
43
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. EARNINGS PER SHARE - Continued
the following table illustrates information concerning the options issued
under the Company's Long-Term Incentive Plan (see Note 19) for the years ended
December 31, 1997 and 1998:
1997 1998 1999
---------- ---------- ----------
Options granted 411,500 6,000 100,000
Options vested - 129,399 116,713
Options exercised - - -
Options cancelled 3,400 43,935 26,333
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 and 1999. The
impact of the dilutive effect of options and restricted stock included in the
calculation of diluted weighted average shares outstanding is illustrated below
for the years ended December 31:
1997 1998 1999
---------- ---------- ----------
Basic weighted shares outstanding 5,752,579 7,038,321 6,664,580
Dilutive effect of outstanding options 37,409 - -
---------- ---------- ----------
Diluted weighted shares outstanding 5,789,988 7,038,321 6,664,580
========== ========== ==========
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 $348,000, $395,000 and $376,000 in 1997, 1998 and 1999,
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, 1997, 1998 and 1999, were
approximately $529,000, $656,000 and $84,000, 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 retained title to this real
property. In 1999, the property was sold for approximately $600,000. The sale
of the property generated a loss of approximately $336,000.
44
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. ACQUISITIONS
In September 1999, JLM acquired Colours and Industrial Chemicals Division
of ICI South Africa and the majority shareholdings in ICI South Africa
Mozambique Limitada (collectively "ICI") for $5.4 million, which was accounted
for under the purchase method of accounting. ICI is a distributor of bulk and
packaged organic and inorganic industrial chemicals. Operating with
approximately 60 employees from offices in Durban, Johannesburg, Capetown and
Port Elizabeth in South Africa and Maputo, Mozambique, the business markets a
broad range of surface coatings, textiles, chemical manufacturing, refractory
and rigid packaging. Operating results of ICI for the four months ended
December 31, 1999 is included in the accompanying consolidated financial
statements. Goodwill of $451,000 was recorded and is being amortized over 20
years.
In November 1999, JLM acquired Sofecia USA ("Sofecia"), a wholly-owned and
unincorporated operating division of Societe Financiere d'Entreposage et de
Commerce International de l'Alcool, S.A. for $2.3 million, which was accounted
for under the purchase method of accounting. Sofecia is a manufacturer and
distributor of various formulations of ethyl alcohol for industrial use and of
grain neutral spirits for beverage use in the United States. Operating results
of Sofecia for the two months ended December 31, 1999 is included in the
accompanying consolidated financial statements. Goodwill of $285,000 was
recorded and is being amortized over 20 years.
The fair value of the assets acquired and liabilities assumed recorded in
conjunction with the above purchase transactions are presented below:
ICI Sofecia Total
-------------- --------------- -------------
Accounts receivable $ 4,189,436 $ 969,042 $ 5,158,478
Inventory 3,101,290 1,025,690 4,126,980
Prepaid expenses 24,316 - 24,316
Other assets 254,005 - 254,005
Property & equipment 291,300 36,969 328,269
Goodwill 451,460 284,985 736,445
Accounts payable and accrued expenses (2,917,605) - (2,917,605)
-------------- --------------- -------------
Fair value of assets acquired, net of
liabilities assumed $ 5,394,202 $ 2,316,686 $ 7,710,888
============== =============== =============
The proforma effects of the 1999 acquisitions on the 1998 and 1999
operating results of the Company were insignificant.
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 non-interest bearing
promissory note to be paid in equal installments over four years (see Note 8).
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.
45
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. ACQUISITIONS - Continued
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 (see Note 8). 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. In 1999, goodwill was reduced by approximately $341,000 to reflect the
reversal of a valuation allowance on a deferred tax asset which was realized in
1999.
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 1999
payment was approximately $689,000. 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.
The fair value of the assets acquired and liabilities assumed recorded in
conjunction with the 1998 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)
------------ ------------ ------------ ------------
Fair value of assets acquired,
net of liabilities assumed $ 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, 1997. 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.
46
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. ACQUISITIONS - Continued
1997 1998
-------------- --------------
Revenues $447,573,000 $357,966,000
Income before extraordinary item and
discontinued operations 9,305,000 7,603,497
Net Income 8,919,000 7,603,497
Basic income per share 1.34 1.14
Basic shares outstanding 6,682,862 6,678,317
The pro forma income before extraordinary item and discontinued operations
and pro forma net income for 1997 and 1998 include adjustments for the
amortization of goodwill and other intangibles of approximately $750,000 and
$750,000, respectively, and approximately $600,000 of interest expense that
relate to the above acquisitions.
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 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. Any remaining assets
relating to these segments were sold in 1998.
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:
1997 1998
---------- ----------
Sales $ 69,966 $ -
Loss from discontinued operations
before income taxes (351,270) (34,078)
Income tax benefit 140,163 14,949
Net loss (211,107) (19,129)
47
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. As a
result of the early extinguishment of debt, the Company recognized an
extraordinary loss of approximately $386,000, net of income tax benefits of
approximately $257,000, consisting primarily of prepayment penalties.
19. STOCK-BASED COMPENSATION
On July 2, 1997, the Company approved a long-term incentive plan ("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 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. During 1999, the Company issued 100,000 options
with an exercise price of $5.00 per share under the LTIP. These options vest
ratably over a three-year period. None of the options granted under the LTIP
vested during 1997. During 1998 and 1999, 123,055 and 123,057 options
previously granted vested under the LTIP, respectively. Options outstanding
and exercisable as of December 31, 1997, 1998 and 1999 were 0, 128,799 and
246,112, respectively. 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 (loss). Had
compensation cost for the options been determined based on the fair value at
the grant date for awards in 1997, 1998, and 1999, consistent with the
provisions of SFAS No. 123, JLM's net income (loss) and income (loss) per share
for the years ended December 31, 1997, 1998, and 1999 would have been reduced
to the pro forma amounts indicated below:
1997 1998 1999
---------- ---------- ----------
Net income (loss) - as reported $6,493,754 $5,715,350 ($3,540,820)
Net income (loss) - pro forma 6,318,137 4,793,043 (3,942,123)
Basic net income (loss) per share - as reported 1.13 0.81 (0.53)
Basic net income (loss) per share - pro forma 1.10 0.68 (0.59)
Diluted net income (loss) per share - as reported 1.12 0.81 (0.53)
Diluted net income (loss) per share - pro forma 1.09 0.68 (0.59)
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, 1998, and 1999, respectively:
expected volatility of .59%, 67.0%, and 65.4% and risk-free interest rate of
5.7%, 4.69%, and 6.34%. Additionally, in each year, the dividend yield was 0%
and the expected lives were 10 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. In 1999, the Company issued 40,000 shares of restricted stock
to an officer of the Company, of which 10,000 shares were vested immediately,
and the remainder vests over three years. The Company recognizes compensation
expense related to the issuance of such restricted stock ratably over the
vesting period.
48
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 Purchase 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, 1998, and 1999, employees of
the Company purchased 3,415, 1,960, and 590 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 goods sold and
expenses associated with the sale of products sourced from the Mt. Vernon
Phenol Plant, which allocation is determined on a basis consistent with the
commission for sale of products manufactured at JLM Chemicals, Inc.
The following schedule presents information about JLM's continuing
operations in these segments and geographic locations for the years ended
December 31:
INDUSTRY SEGMENT 1997 1998 1999
------------ ------------ ------------
Revenues:
Marketing $221,301,428 $248,060,581 $293,168,769
Manufacturing 65,520,738 57,674,733 39,529,064
------------ ------------ ------------
$286,822,166 $305,735,314 $332,697,833
============ ============ ============
Operating Income (Loss):
Marketing $ 5,406,856 $ 3,055,108 $ 2,026,219
Manufacturing 10,752,634 11,902,754 (2,847,746)
Corporate (2,256,929) ( 2,311,022) (2,370,660)
------------ ------------ ------------
$ 13,902,561 $ 12,646,840 $ (3,192,187)
============ ============ ============
INDUSTRY SEGMENT
Capital Expenditures:
Marketing $ 1,670,703 $ 669,768 $ 921,754
Manufacturing 883,118 368,165 1,276,817
Corporate 321,610 64,259 5,000
------------ ------------ ------------
$ 2,875,431 $ 1,102,192 $ 2,203,571
============ ============ ============
Depreciation and Amortization:
Marketing $ 822,409 $ 1,458,007 $ 1,945,414
Manufacturing 1,687,935 1,691,783 1,703,281
Corporate 436,819 521,662 396,931
------------ ------------ ------------
$ 2,947,163 $ 3,671,452 $ 4,045,626
============ ============ ============
49
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
21. SEGMENT REPORTING - Continued
INDUSTRY SEGMENT 1997 1998 1999
------------ ------------ ------------
Identifiable Assets:
Marketing $ 39,644,328 $ 67,010,955 $102,738,173
Manufacturing 29,691,796 26,437,814 24,174,644
Corporate 14,224,447 9,816,520 13,109,160
------------ ------------ ------------
$ 83,560,571 $103,265,289 $140,021,977
============ ============ ============
GEOGRAPHIC LOCATION
Revenues:
United States $236,650,808 $187,075,834 $137,870,520
Venezuela 9,624,688 8,606,942 6,779,238
Holland 35,533,157 52,530,545 93,714,584
Singapore - 46,992,874 73,212,683
South Africa - - 7,338,330
Other nations 5,013,513 10,529,119 13,782,478
------------ ------------ ------------
$286,822,166 $305,735,314 $332,697,833
============ ============ ============
Operating Income (Loss):
United States $ 16,466,705 $ 14,727,018 $ (4,656,413)
Venezuela (143,327) (818,268) (360,738)
Holland (230,586) (655,637) 1,695,458
Singapore - 454,072 1,403,464
South Africa - - (148,553)
Other nations 66,698 1,250,677 1,245,255
Corporate (2,256,929) (2,311,022) (2,370,660)
------------ ------------ ------------
$ 13,902,561 $ 12,646,840 $ (3,192,187)
============ ============ ============
Identifiable Assets:
United States $ 70,756,106 $ 74,164,842 $ 82,489,757
Venezuela 3,035,968 469,690 3,862,645
Holland 8,411,689 15,759,658 23,931,789
Singapore - 7,510,211 13,438,680
South Africa - - 8,952,621
Other nations 1,356,808 5,360,888 7,346,485
------------ ------------ ------------
$ 83,560,571 $103,265,289 $140,021,977
============ ============ ============
22. SUBSEQUENT EVENTS
The Company has made the decision to discontinue it's operations conducted
through its subsidiary, JLM Industries de Venezuela, C.A. The Company is
targeting an April 2000 shutdown. At this point, management does not believe
there will be any material costs related to closing the existing operations.
In order to maintain a presence in Venezuela, the Company will take a minority
equity interest in an old line distribution business which was a direct
competitor of JLM in the local markets. Management believes joining forces
will not only reduce competition, but will also allow the new entity to take
advantage of cost synergies which under normal circumstances would not be
available. As a result, management believes that the new structure should
generate positive results for both partners. The agreement calls for both
partners to transfer selective assets into the venture (receivables, inventory,
payables). Each partner will guarantee the solvency of the respective debtors
transferred as part of the joint venture agreement.
50
JLM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
21. SUBSEQUENT EVENTS - Continued
In February 2000, the Company entered into a contract to sell the
Company's airplane for approximately $2.5 million in cash. Gain on the
disposal of this asset is approximately $340,000.
In January 2000, the Company exchanged its 25% interest in SK Asia and
12.7% interest in SK Trading, two Singapore based companies participating in a
joint venture to construct a dioctyl phthlate plant and terminal in Vietnam,
for a 49% interest in an existing terminal facility which was named Siam JLM Co., Ltd.
51
JLM INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1998 and 1999
Balance at Charged to Balance at
Beginning of Year Expenses Deductions End of Year
----------------- ---------- ---------- -----------
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
Year ended December 31, 1999
Accumulated amortization (1) 1,784,476 1,006,066 - 2,790,542
Allowance for doubtful accounts 818,901 286,248 - 1,105,149
(1) Represents the accumulated amortization of goodwill, deferred acquisition
costs, license fees, certain development costs and advances on non-
competition agreements.
52
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.
Director
Directors and Executive Officers Age Positions Since
- - -------------------------------- --- --------- --------
John L. Macdonald 57 President, Chief Executive Officer
& Director 1986
Frank A. Musto 43 Vice President, Chief Financial Officer
& Director 1997
Walter M. Tarpley 55 Vice President, Director 1999
Michael J. Molina 48 Vice President - Tax and Audit
& Secretary
Linda L. Sato 39 Vice President & Treasurer
Sean D. Macdonald 29 Vice President, Director 1999
Jerry L. Weinstein 64 Director 1997
Thomas F. Kennedy 57 Director 1999
Charles Neivert 42 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.
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.
53
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 Johns 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 managed 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.
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.
CHARLES N. NEIVERT joined the Board of Directors on July 2, 1999. In 1992,
Mr. Neivert co-founded and is currently the Executive Vice President of New
Vernon Associates, which is an investment advisory boutique focusing on select
global chemical, life science and pharmaceutical companies. From 1987 to 1992,
Mr. Neivert was the Vice President and Senior Sector Analyst of Anantha Raman &
Company, Inc., a leading equity research boutique. From 1980 until 1986, Mr.
Neivert worked with Data Resources, Inc. as a Manager and Economist wherein he
developed, designed and marketed new computer-based forecasting and cost models
for the chemical industry. Mr. Neivert is a candidate for his M.B.A. at
Rutgers University and received his B.A. from the University of Pennsylvania
Economics and Chemistry.
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.
Directors Compensation - Through October 21, 1998, Directors who were not
employees of the Company received an annual retainer of $10,000 and an
automatic grant of options to purchase 1,000 shares of Common Stock upon their
initial election and upon each reelection to the Board in accordance with the
Company's Non-Employee Directors' Stock Plan. Effective October 22, 1998, the
Board of Directors amended the plan to provide for an increase in the number of
options granted under the plan to non-employee Directors to 5,000 options upon
initial election to the Board and will 2,500 upon their reelection to the
Board.
54
To the Company's knowledge, based upon a review of the forms, reports and
certificates filed with the Company by the Company's directors, officers, and
stockholders, all Section 16(a) filing requirements have been complied with by
such persons during 1999, except that for each of the following directors and
officers, one form was not timely filed relating to the indicated number of
transactions: Mr. Musto, Ms. Sato, Mr. Molina, Mr. Kimball, and Mr. Lelek, one
transaction; Mr. Weinstein, two transactions. In addition, for Sean Macdonald,
four forms were filed late reporting an aggregate of five transactions.
Item 11. Executive Compensation:
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the years
ended December 31, 1997, 1998 and 1999 for each of the named executive officers
(as defined under applicable Securities and Exchange Commission Rules) of the
Company (the "Named Executive Officers"):
Long-Term Compensation
Annual Compensation Awards
----------------------- ------------------------
Name Restricted All Other
And Salary Bonus Stock Options Compensation
Position Year ($) ($) Awards ($)(2) (#) ($)(1)
- - --------------------- ----- -------- -------- ------------ -------- ------------
John L. Macdonald 1999 $400,000 $ - $ - 10,000 $22,551
President & CEO 1998 410,769 180,000 - - 23,271
1997 401,541 200,000 - 125,000 17,056
Walter M. Tarpley 1999 175,000 - 200,000 40,000 84,171
Vice President 1998 - - - - -
1997 - - - - -
Wilfred J. Kimball 1999 135,483 - - 5,000 16,346
Vice President 1998 136,437 20,000 - - 12,694
1997 136,437 22,000 20,000 30,000 15,266
Frank A. Musto 1999 135,769 - - 5,000 32,470
Vice President & CFO 1998 128,365 25,000 - - 12,400
1997 121,274 27,000 150,000 30,000 15,841
John T. White 1999 132,200 - - 2,000 10,420
Vice President & 1998 123,759 11,000 - 5,000 16,861
General Counsel 1997 114,462 27,500 - 15,000 11,888
(1) Amount in 1999, for Mr. Macdonald consists of $7,913 for a car allowance
and $14,638 which is the dollar value, on a term loan, of the benefit to
Mr. Macdonald of the $128,338 premium paid by the Company during 1999, 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 1999, for Mr. Tarpley consists of $50,000 in stock,
relocation expense reimbursement of $29,564 and $3,859 for a car
allowance. Amount for Mr. Kimball 1999 consists of $2,500 in stock,
$3,300 for a car allowance and $9,715 contributed by the Company to the
Company's Deferred Plan. Amount for Mr. Musto in 1999, consists of $18,750
in stock, $3,600 for a car allowance and $10,000 contributed by the
Company to the Company's Defined Contribution Plan. Amount for Mr. White
in 1999, consists of a car allowance of $1,650 and $7,920 that was
contributed by the Company to the Company's Defined Contribution Plan.
55
(2) The aggregate restricted stock holdings and value of such holdings at
December 31, 1999 for Mr. Tarpley were 30,000 shares and $101,250,
respectively, for Mr. Kimball were 1,000 shares and $3,375, respectively,
and for Mr. Musto were 7,500 shares and $25,313, respectively. For Mr.
Tarpley, 25% of the shares vested immediately upon grant and 25% vest each
year thereafter. For Messrs. Musto and Kimball, the shares of restricted
stock are subject to a substantial risk of forfeiture which lapses as to
one-quarter of the shares each January 1st, commencing on January 1, 1998.
Dividends on all restricted shares issued to the named executive officers
are paid at the same rate as paid to all stockholders. The Company
currently intends to retain all future earnings for the development of its
business and does not anticipate paying cash dividends for the foreseeable
future.
(3) Mr. Kimball and Mr. White terminated employment with the Company as of
December 31, 1999.
The following table summarizes certain information concerning stock options
granted during fiscal year 1999 to the Named Executive Officers:
Individual Grants
- - -----------------------------------------------------------------------
% of Total Potential Realizable
Options Value at Assumed
Granted to Exercise Annual Rates of
Employees or Base Stock Price Appreciation
Options in Fiscal Price Expiration for Option Term
Name Granted(#) Year ($/Share) Date 5% ($) 10% ($)
- - ---- ---------- --------- --------- ---------- -------- --------
John L. Macdonald 5,000 5.0% 5.00 01/01/09 15,700 39,850
Walter M. Tarpley 40,000 40.0% 5.00 01/01/09 125,600 318,800
Wilfred J. Kimball 5,000 5.0% 5.00 01/01/09 15,700 39,850
Frank A. Musto 5,000 5.0% 5.00 01/01/09 15,700 39,850
John T. White 2,000 2.0% 5.00 01/01/09 6,280 15,940
The following table provides information regarding the exercise of stock
options during fiscal year 1999 and stock options held as of the end of fiscal
year 1999 by the Named Executive Officers:
AGGREGATED OPTION EXERCISE
AND YEAR END OPTIONS VALUE TABLE
Value of Unexercised
Number of Unexercised In-the-Money Options
Options At Fiscal Year End At Fiscal Year End (1)
-----------------------------------------------------
Shares
Acquired on Value
Name Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
- - ---- ----------- ----------- ----------- ------------- ----------- -------------
John L. Macdonald 0 0 86,666 48,334 $0 $0
Walter M. Tarpley 0 0 10,000 30,000 0 0
Wilfred J. Kimball 0 0 21,666 13,334 0 0
Frank A. Musto 0 0 21,666 13,334 0 0
John T. White 0 0 13,999 8,001 0 0
56
(1) This represents the amount by which the fair market value of the Company's
Common Stock of $3.375 per share as of December 31, 1999 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 4,285,814 (2) 59.7
Maxwell Stolzberg 2,596,608 (2) 36.2
Derry L. Macdonal 1,435,500 (2) 20.0
Walter M. Tarpley 24,400 (3) *
Frank A. Musto 30,216 (3) *
Sean D. Macdonald 14,199 (3) *
Jerry L. Weinstein 7,500 (4) *
Thomas F. Kennedy 5,000 (4) *
All Directors, Nominees for Directors
and Executive Officers As a Group (9 persons) 4,407,815 (5) 61.4
*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,
2,596,608 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 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. Also, of the shares shown for Mr. Macdonald, 1,435,500 are held of
record by Derry L. Macdonald, but Mr. Macdonald is deemed to beneficially
own these shares because pursuant to a Stockholders Voting Agreement,
Irrevocable Proxy and Right of First Refusal Mr. Macdonald has a right to
vote the shares. The number of shares shown for Mr. Macdonald also
includes 167,040 shares of Common Stock held by two irrevocable trusts
created for the benefit of Mr. Macdonald's children for which Mr.
Macdonald disclaims beneficial ownership, and 86,666 shares deemed to be
beneficially owned by Mr. Macdonald by virtue of certain stock options
that are currently exercisable. The number of shares shown for Mr.
Stolzberg includes 3,000 shares held by Mr. Stolzberg's wife.
(3) For Mr. Tarpley, the number of shares include 10,000 shares of vested
options and 14,400 shares of vested restricted stock. For Mr. Musto, the
number of shares include 21,666 shares of vested options, 8,100 shares of
vested restricted stock, and 450 shares personally owned. For Mr.
Macdonald, the number of shares include 4,999 shares of vested options and
9,200 share personally owned.
57
(4) For each of Messrs. Weinstein and Kennedy, the number of shares shown
represent vested options that are currently exercisable.
(5) The number of shares shown includes, in addition to the options held by
the officers and Directors named in the table, an additional 40,686 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 $650,000 as of
December 31, 1999. As of December 31, 1999, Mr. Delgadillo was the beneficial
owner of approximately 1.8% of the Company's outstanding Common Stock.
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.
JLM has loans payable to its majority stockholder of $905,148 at December
31, 1998 and 1999. The loan payable bears interest at the prime rate, which
was 7.75% and 8.25% at December 31, 1998 and 1999, respectively, and matures on
June 1, 2002. Additionally, the Company has approximately $1,700,000 of
miscellaneous receivables owed by the majority stockholder. These items are
netted together and included as part of other accounts receivable in the
accompanying consolidated balance sheet.
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.
58
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:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1998 and 1999
For the Independent Auditors' Reports on the Consolidated Financial Statements
and Consolidated Financial Statement Schedule, see index at the beginning of
Item 8, "Consolidated Financial Statements and Supplemental Data."
All other schedules are not submitted because they are not applicable or are
not required or because the required information is included in the Consolidated
Financial Statements or notes thereto.
3. Exhibits Filed Herewith:
23 Consent of Deloitte 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
3.1 Articles of Incorporation, as amended (1)
3.2 Form of Amended and Restated Articles of Incorporation (1)
3.3 Bylaws (1)
3.4 Form of Amended and Restated Bylaws (1)
4 Form of Common Stock Certificate (1)
10.1 Authorized Distributor Agreement between GE Petrochemicals, Inc.
and JLM Marketing, Inc. for Styrene (1)
10.2** Memorandum of Agreement between Sasol Chemical Industries (PTY)
Ltd. and JLM Marketing, Inc. for N-Propanol (1)
10.3** Memorandum of Agreement between Sasol Chemical Industries (PTY)
Ltd. and JLM Marketing, Inc. for Acetone (1)
10.4** Memorandum of Agreement between Sasol Chemical Industries (PTY)
Ltd. and JLM Marketing, Inc. for Methyl Ethyl Ketone (1)
10.5** Acetone Sales Agreement between Mt. Vernon Phenol Plant
Partnership, JLM Marketing, Inc. and JLM Industries, Inc. (1)
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 (1)
10.7 Propane/Propylene Agreement between Clark Oil & Refining
Corporation and BTL Specialty Resins Corp. (1)
10.8 Q-Max Process License Agreement between BTL Specialty Resins Corp.
and UOP (1)
10.9 Credit Agreement among JLM Chemicals, Inc., The CITGroup/Equipment
Financing, Inc. and The CIT Group/Business Credit, Inc., as
amended (1)
10.10 Security Agreement by JLM Chemicals, Inc. in favor of the Lenders
and The CIT Group/Equipment Financing, Inc. (1)
59
10.11 Pledge Agreement by JLM Industries, Inc. in favor of the Lenders
and The CIT Group/Equipment Financing, Inc. (1)
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 (1)
10.13 Partnership Agreement of Mt. Vernon Phenol Plant Partnership (1)
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 (1)
10.15 Master Promissory Note by JLM International, Inc. and Olefins
Marketing, Inc. in favor of Caisse Nationale De Credit Agricole (1)
10.16 Guaranty Agreement by JLM Industries, Inc. to Caisse Nationale De
Credit Agricole, New York Branch (1)
10.17 Security Agreement between Olefins Marketing, Inc. and Caisse
Nationale De Credit Agricole, New York Branch (1)
10.18 Security Agreement between JLM International, Inc. and Caisse
Nationale De Credit Agricole, New York Branch (1)
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 (1)
10.20 Facility Letter between Standard Chartered Bank and Olefins
Marketing (1)
10.21 Security Agreement by Olefins Marketing to Standard Chartered
Bank (1)
10.22 Security Agreement by JLM International, Inc. to Standard Chartered
Bank (1)
10.23 Continuing Guaranty by JLM International, Inc. and Olefins
Marketing Corp. in favor of Standard Chartered Bank (1)
10.24 Facility letter between Generale Bank and JLM Industries (1)
10.25 Corporate Guarantee by JLM Industries, Inc. to Generale Bank (1)
10.26 Agreement by and among Union Carbide Corporation, D-S Splitter,
Inc., JLM Industries, Inc. and Olefins Terminal Corporation (1)
10.27 Pledge and Security Agreement by JLM Industries, Inc. to Ultramar
Diamond Shamrock Corporation (1)
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 (1)
10.29 Investment Agreement by and between JLM Industries, Inc. and Tan
Siew Kiat (1)
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. (1)
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. (1)
10.32 Form of Indemnification Agreement for Officers and Directors (1)
10.33 Form of 1997 Employee Stock Purchase Plan (1)
10.34 Form of Long Term Incentive Plan (1)
10.35 Form of Non-employee Directors' Plan (1)
10.36 Assignment and Assumption Agreement between Ashland Chemical, Inc.
and JLM Terminals, Inc. (1)
10.37 Asset Purchase Agreement between Union Oil Company of California
and Ashland Chemical, Inc. (1)
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. (1)
60
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. (1):
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
10.40 Employment agreement between JLM Industries, Inc. and Walter M.
Tarpley dated (2)
10.41 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. (3)
10.42 Purchase agreement with ICI South Africa Limited.
10.43 Purchase agreement with Societe Financiere d'Entreposage et de
Commerce International de l'Alcool, S.A.
(1) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 (File No. 333-27843) filed with the SEC
on July 21, 1997.
(2) Incorporated by reference to the Exhibits filed with the Company's Report
on Form 10-Q, dated May 14, 1999.
(3) Incorporated by reference to the Exhibits filed with the Company's Report
on Form 8-K/A, dated June 23, 1999.
** Confidential treatment has been requested with respect to portions of this
Exhibit.
(b) Reports on Form 8-K
The Company did not file any reports on From 8-K during the fourth quarter
1999.
61
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, 2000
- - ----------------------- Director (Principal Executive Officer)
John L. Macdonald
/s/ Frank A. Musto Chief Financial Officer, Vice President March 30, 2000
- - ----------------------- and Director (Principal Financial Officer
Frank A. Musto and Principal Accounting Officer)
/s/ Walter M. Tarpley Vice President and Director March 30, 2000
- - -----------------------
Walter M. Tarpley
/s/ Jerry L. Weinstein Director March 30, 2000
- - -----------------------
Jerry L. Weinstein
/s/ Charles Neivert Director March 30, 2000
- - -----------------------
Charles Neivert
/s/ Thomas F. Kennedy Director March 30, 2000
- - -----------------------
Thomas F. Kennedy
/s/ Sean D. Macdonald Director March 30, 2000
- - -----------------------
Sean D. Macdonald
62
Exhibit 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration Statements for
the Company's Long-term Incentive Plan, Non-Employee Directors Stock Option
Plan and Employee Stock Purchase Plan (No.'s 333-32337,333-32339 and 333-32347,
respectively) of JLM Industries, Inc. and subsidiaries on Forms S-8 of our
report dated March 7, 2000 appearing in the annual report on Form 10-K of JLM
Industries, Inc. and subsidiaries for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Tampa, Florida
March 30, 2000