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.
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.
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.
- 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.
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.
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.
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.
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.
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.
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.
ITEM 2.
ITEM 2. PROPERTIES:
The following table sets forth certain information as of December 31, 1999, relating to the Company's principal facilities:
* Less than 25,000 square feet
ITEM 3.
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.
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.
Part II
ITEM 5.
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:
------- First Quarter 11.75 9.50 Second Quarter 12.00 9.75 Third Quarter 10.00 5.63 Fourth Quarter 6.75 4.44
------- 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).
Item 6.
Item 6. SELECTED FINANCIAL INFORMATION:
SELECTED CONSOLIDATED FINANCIAL INFORMATION (in thousands, except per share data) Year ended December 31,
(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.
ITEM 7.
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.
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%) ======== ======== ========
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.
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.
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.
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.
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.
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.
ITEM 7A.
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.
ITEM 8.
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
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
JLM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1999
See notes to consolidated financial statements.
JLM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) Years Ended December 31, 1997, 1998 and 1999
See notes to consolidated financial statements.
JLM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1997, 1998 and 1999
See notes to consolidated financial statements.
JLM INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1998 and 1999
See notes to consolidated financial statements.
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.
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.
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.
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.
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.
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.
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:
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:
------------ [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 ============
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:
JLM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. LONG-TERM DEBT - Continued
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.
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.
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.
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.
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.
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:
---------- 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.
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.
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:
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.
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:
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.
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)
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:
(1) Represents the accumulated amortization of goodwill, deferred acquisition costs, license fees, certain development costs and advances on non- competition agreements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
Not applicable.
Part III
ITEM 10.
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.
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.
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.
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.
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"):
(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.
(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:
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
(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.
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.
(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.
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.
Part IV
ITEM 14.
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)
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)
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.
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.
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