AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 2007.
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10
REGISTRATION STATEMENT
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
FUTUREFUEL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 20-3340900
(State of incorporation) (IRS Employer
Identification No.)
8235 FORSYTH BLVD., 4TH FLOOR
CLAYTON, MISSOURI 63105
(805) 565-9800
(Address, including zip code and telephone number, of
registrant's principal executive offices)
DOUGLAS D. HOMMERT, EXECUTIVE VICE PRESIDENT
FUTUREFUEL CORP.
8235 FORSYTH BLVD., 4TH FLOOR
CLAYTON, MISSOURI 63105
(314) 854-8520
(Name, address, including zip code, and telephone number of agent for service)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
n/a n/a
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
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TABLE OF CONTENTS
PAGE
Item 1. - Business...............................................................................................1
Item 1A. - Risk Factors.........................................................................................34
Item 2. - Financial Information.................................................................................44
Item 3. - Properties............................................................................................59
Item 4. - Security Ownership of Certain Beneficial Owners and Management........................................60
Item 5. - Directors and Executive Officers......................................................................62
Item 6. - Executive Compensation................................................................................65
Item 7. - Certain Relationships and Related Transactions, and Director Independence.............................70
Item 8. - Legal Proceedings.....................................................................................73
Item 9. - Market Price of and Dividends on Our Common Equity/Related Shareholder Matters........................74
Item 10. - Recent Sales of Unregistered Securities..............................................................76
Item 11. - Description of Securities to be Registered...........................................................83
Item 12. - Indemnification of Directors and Officers............................................................88
Item 13. - Financial Statements and Supplementary Data..........................................................89
Item 14. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................130
Item 15. - Financial Statements and Exhibits...................................................................131
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH
WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
i
ITEM 1. - BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
The Company
FutureFuel Corp. (the "COMPANY" or "WE", "OUR" or "US") is a Delaware
corporation incorporated on August 12, 2005 under the name "Viceroy
Acquisition Corporation". We were formed to serve as a vehicle for the
acquisition by way of an asset acquisition, merger, capital stock exchange,
share purchase or similar transaction (a "business combination") of one or
more operating businesses in the oil and gas industry ("target business").
On July 12, 2006, we completed an offering of 22,500,000 units, each unit
consisting of one share of our common stock and one warrant to acquire one
share of our common stock. The units were issued at $8.00 per unit. In
connection with the offering, our shares and warrants were listed on the
Alternative Investment Market ("AIM") of the London Stock Exchange plc under
the ticker symbols "VAC" and "VACW", respectively.
The net proceeds of the offering in the amount of $172,500,000 were
deposited into a trust fund maintained by Continental Stock Transfer & Trust
Company, as trustee. The trust fund was to be released by the trustee for,
among other things, a business combination approved by the holders of our
common stock. Moreover, the trust fund was to be released in its entirety upon
the completion of a business combination which, either on its own or when
combined with all previous business combinations, had an aggregate transaction
value of at least 50% of the initial trust amount (which initial trust amount
excluded certain deferred placing fees) (a "qualified business combination").
On July 21, 2006, we entered into an acquisition agreement with Eastman
Chemical Company to purchase all of the issued and outstanding stock of its
subsidiary, Eastman SE, Inc. The terms of the acquisition agreement were
negotiated by our executive officers, Paul A. Novelly, Lee E. Mikles and
Douglas D. Hommert, with representatives of Eastman Chemical Company, and were
set based upon such negotiations and the experience of our executive officers
in similar transactions. The acquisition agreement provided for the sale by
Eastman Chemical Company of all of its stock in Eastman SE, Inc. to us in
exchange for: (i) $75,000,000 cash, subject to possible reduction if Eastman
SE, Inc.'s net working capital as of the closing date was less than
$17,562,527; plus (ii) 2(cents) per gallon of biodiesel sold by Eastman SE,
Inc. during the three year period following the closing. Following the
closing, Eastman SE, Inc. would become our wholly-owned subsidiary. The
acquisition agreement contained the following additional material terms.
o The closing of the acquisition was to take place on the later of
October 31, 2006 or the third business day after the date on which
certain closing conditions have been satisfied or waived.
o The acquisition agreement contained various representations and
warranties by us relating to: our proper organization and good
standing; the corporate authorization and enforceability of the
acquisition agreement; required consents and approvals; absence of
conflicts with other agreements and laws; absence of litigation
against the acquisition; available financing to consummate the
acquisition; and no reliance upon representations, warranties,
forecasts and the like except as specifically set forth in the
acquisition agreement.
o The acquisition agreement contained various representations and
warranties of Eastman Chemical Company relating to: proper
organization and good standing of Eastman Chemical Company and
Eastman SE, Inc.; the authorization and enforceability of the
acquisition agreement; required consents; absence of conflicts with
other agreements and laws; the capitalization of Eastman SE, Inc.;
the preparation of Eastman SE, Inc.'s financial statements;
liabilities of Eastman SE, Inc.; the absence of certain developments
regarding Eastman SE, Inc.; Eastman SE, Inc.'s taxes; Eastman SE,
Inc.'s real property; Eastman SE, Inc.'s tangible personal property
and other assets; Eastman SE, Inc.'s intellectual property; Eastman
SE, Inc.'s contracts; Eastman SE, Inc.'s employee benefits; labor
matters affecting Eastman SE, Inc.; litigation affecting Eastman SE,
Inc.; compliance by Eastman SE, Inc. with laws and permits;
environmental matters affecting Eastman SE, Inc.; Eastman SE, Inc.'s
customers and suppliers; and product liability matters affecting
Eastman SE, Inc.
1
o The acquisition agreement contained certain covenants imposed upon
Eastman Chemical Company relating to: our access to documents;
obtaining the necessary consents and satisfying Eastman Chemical
Company's conditions to the closing (including making the
appropriate filings under the Hart-Scott-Rodino Act); public
statements; confidential information; no solicitation of other
acquisition proposals regarding Eastman SE, Inc. or its business;
inspections by us; no competition against Eastman SE, Inc; and no
solicitation of Eastman SE, Inc.'s employees.
o The acquisition agreement contained certain covenants imposed upon
us relating to: confidentiality; public statements; obtaining the
necessary consents and satisfying our conditions to the closing
(including making the appropriate filings under the
Hart-Scott-Rodino Act); Eastman Chemical Company's access to
documents; no solicitation of Eastman Chemical Company's customers;
employee matters; no competition against Eastman Chemical Company;
and no solicitation of Eastman SE, Inc.'s employees.
o All representations and warranties contained in the acquisition
agreement generally terminate 18 months after the closing date with
certain exceptions.
o Except with respect to environmental matters, Eastman Chemical
Company agreed to indemnify, defend, and hold us harmless from and
against any and all losses actually incurred by us to the extent
arising out of or resulting from: (i) any breach as of the closing
date of a representation or warranty made by Eastman Chemical
Company in the acquisition agreement; (ii) any breach of any
covenant or agreement of Eastman Chemical Company in the acquisition
agreement; (iii) pre-closing taxes not included in working capital;
and (iv) any liability of Eastman SE, Inc. relating to product
liability and not disclosed to us in a schedule to the acquisition
agreement or included in closing working capital.
o Eastman Chemical Company is not liable for any losses with respect
to any breach as of the closing date of a representation or warranty
made by Eastman Chemical Company in the acquisition agreement
unless: (i) a claim is asserted prior to the relevant survival
period for such representation or warranty; and (ii) the aggregate
of all such losses exceeds, on a cumulative basis, $750,000 (and
then only to the extent of such excess). In addition, Eastman
Chemical Company will not be required to pay an aggregate amount in
excess of $7,500,000 in respect of all losses with respect to any
breach as of the closing date of a representation or warranty made
by Eastman Chemical Company in the acquisition agreement (exclusive
of environmental matters). These limitations do not apply to losses
attributable to: (a) any breach of any covenant or agreement of
Eastman Chemical Company in the acquisition agreement; (b) any
pre-closing taxes not included in working capital; and (c) any
liability of Eastman SE, Inc. relating to product liability and not
disclosed to us in a schedule to the acquisition agreement or
included in working capital.
o Except with respect to environmental matters, we agreed to indemnify
and hold Eastman Chemical Company harmless from and against any and
all losses actually incurred by it to the extent arising out of or
resulting from: (i) any breach as of the closing date of a
representation or warranty made by us in the acquisition agreement;
and (ii) any breach by us of any covenant or agreement in the
acquisition agreement.
o On the closing of the acquisition, we and Eastman Chemical Company
agreed to obtain an environmental insurance policy to provide
insurance coverage for environmental conditions existing at Eastman
SE, Inc.'s manufacturing facility. We and Eastman Chemical Company
each agreed to pay 50% of the insurance premium. Such insurance
policy was to have a policy limit of $10,000,000 with a per claim
deductible of $150,000 and a term of ten years following the
closing. During the first five years of the term, we will pay the
first $75,000 of the deductible and Eastman Chemical Company will
pay the second $75,000.
o Subject to a $15,000,000 cap (which is inclusive of the $10,000,000
environmental insurance policy limit), during the five-year period
beginning with the closing date, Eastman Chemical Company agreed to
retain liability for and to indemnify, defend and hold us and
Eastman SE, Inc.
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harmless from, against and with respect to any losses actually
incurred by it to the extent arising out of or resulting from: (i)
any breach of any environmental representation or warranty of
Eastman Chemical Company contained in the acquisition agreement;
(ii) any liability under CERCLA or RCRA or any state law based on
CERCLA or RCRA, or under any other environmental law, for costs of
response or the costs of complying with an injunctive or other order
under RCRA or under any other environmental law, at a hazardous
waste site (other than Eastman SE, Inc.'s owned real property) and
attributable to the activities of Eastman Chemical Company, its
affiliates (including Eastman SE, Inc.) or the operation of Eastman
SE, Inc.'s business prior to closing; (iii) an environmental
condition at any of Eastman SE, Inc.'s owned real property which
existed at or prior to the closing (notwithstanding the foregoing,
Eastman Chemical Company is not liable for an environmental
condition: (a) unless an investigation or remediation of the
environmental condition is required by law or by an order issued to
us or Eastman SE, Inc. by an environmental authority; or (b) to the
extent the environmental condition is attributable to the activities
of Eastman SE, Inc. or us or the operation of Eastman SE, Inc.'s
business after the closing); and (iv) any violation of, or
non-compliance with, any environmental law by Eastman SE, Inc.'s
business to the extent that such violation or non-compliance existed
at or prior to the closing.
o We agreed to assume liability for and indemnify and hold Eastman
Chemical Company and Eastman Chemical Company's affiliates harmless
from, against and with respect to any losses actually incurred by or
asserted against Eastman Chemical Company or such affiliates to the
extent arising out of or resulting from: (i) any liability under
CERCLA or any state law based on CERCLA for costs of response at a
property other than Eastman SE, Inc.'s owned real property
attributable to the activities of us, our affiliates or the
operation of Eastman SE, Inc.'s business after the closing; (ii) any
environmental condition at or associated with any of Eastman SE,
Inc.'s owned real property first arising after the closing; (iii)
any violation of, or non-compliance with, any environmental law by
us, our affiliates or Eastman SE, Inc.'s business that did not exist
prior to or at the time of the closing; and (iv) our utilization of
certain financial assurances given by Eastman Chemical Company to
the Arkansas Department of Environmental Quality on behalf of
Eastman SE, Inc.
o Except as with respect to the indemnifications described above, we
agreed that, in connection with Eastman SE, Inc.'s business or owned
real property, we will assert no claim against Eastman Chemical
Company and that Eastman Chemical Company is released from and will
have no liability or obligation whatsoever to us or our successors
or assigns with respect to any losses arising under, related to or
associated with the environment, environmental authorities,
environmental authorizations, environmental conditions,
environmental law, and environmental liabilities. Except as with
respect to the indemnifications described above, Eastman Chemical
Company agreed that, in connection with Eastman SE, Inc.'s business
or owned real property, it will assert no claim against us or
Eastman SE, Inc. and that we and Eastman SE, Inc. are released from
and will have no liability or obligation whatsoever to Eastman
Chemical Company or its successors or assigns with respect to any
losses arising under, related to or associated with the environment,
environmental authorities, environmental authorizations,
environmental conditions, environmental law, and environmental
liabilities.
o Upon closing, Eastman SE, Inc. was to enter into a conversion
agreement with Eastman Chemical Company pursuant to which Eastman
SE, Inc. will produce certain chlorinated polyolefin products on
Eastman Chemical Company's behalf. The initial term was to be for
five years and thereafter will automatically renew for successive
one year renewal terms unless canceled by either party within 180
days of the original term or renewal term, as applicable. Eastman
Chemical Company will have the right to terminate the agreement
earlier upon the payment of certain early termination fees. Eastman
SE, Inc. was to also enter into a conversion agreement with Eastman
Chemical Company pursuant to which Eastman SE, Inc. will produce
di-isopropylbenzene and derivative products on Eastman Chemical
Company's behalf. The initial term was to be for five years and
thereafter automatically renews for successive one year renewal
terms unless canceled by either party within 180 days of the
original term or renewal term, as applicable. Eastman
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Chemical Company will have the right to terminate the agreement
earlier upon the payment of certain early termination fees.
o In connection with the consummation of the acquisition, Eastman
Chemical Company and Eastman SE, Inc. agreed to enter into supply
contracts. Under these contracts, Eastman Chemical Company will
after the closing date sell to Eastman SE, Inc. certain chemicals
and Eastman SE, Inc. will after the closing date sell to Eastman
Chemical Company certain chemicals. The contracts will continue for
one to three years and continue year-to-year thereafter unless
terminated upon 180 days prior written notice by either party.
o In connection with the consummation of the acquisition, Eastman
Chemical Company and Eastman SE, Inc. agreed to enter into a
technology transfer agreement pursuant to which, on the closing
date, Eastman Chemical Company will transfer to Eastman SE, Inc.
certain intellectual property related to Eastman SE, Inc.'s
business.
o In connection with the consummation of the acquisition, Eastman
Chemical Company and Eastman SE, Inc. agreed to enter into a
software license agreement pursuant to which, on the closing date,
Eastman Chemical Company agreed to grant to Eastman SE, Inc. a
royalty-free, non-exclusive license to use certain software solely
in support of Eastman SE, Inc.'s internal business operations. The
license continues until terminated by Eastman SE, Inc.
o In connection with the consummation of the acquisition, Eastman
Chemical Company and Eastman SE, Inc. agreed to enter into a
transition services agreement pursuant to which Eastman Chemical
Company will provide certain transition services to Eastman SE, Inc.
following the closing of the acquisition. These services generally
are those provided to Eastman SE, Inc. by Eastman Chemical Company
prior to the execution of the acquisition agreement. The services
will be provided for six months following the closing date (with
certain exceptions). There is a monthly service charge for most
fees, although some service fees are based upon an hourly charge.
The consummation of the acquisition was subject to approval by our
shareholders. If approved by our shareholders, the acquisition would
constitute both a business combination and a qualified business combination.
On July 24, 2006 and following the public announcement of the execution
of the acquisition agreement with Eastman Chemical Company, trading in our
shares and warrants was suspended by AIM.
On October 6, 2006, we mailed to our shareholders an admission document
containing a proxy statement and other material required by AIM, notifying our
shareholders of a special meeting to be held on October 27, 2006 to approve,
among other things, the acquisition of Eastman SE, Inc. and the acquisition
agreement with Eastman Chemical Company. On October 9, 2006 and following the
mailing of the admission document to our shareholders, trading in our shares
and warrants on AIM recommenced.
Our shareholders approved the acquisition of Eastman SE, Inc. on October
27, 2006. On October 31, 2006: (i) the trust amount was distributed to us;
(ii) the acquisition of Eastman SE, Inc. was consummated (effective after the
close of business on that day); (iii) Eastman SE, Inc. became our wholly-owned
subsidiary; and (iv) Eastman SE, Inc. and Eastman Chemical Company entered
into the conversion agreements, supply contracts, technology transfer
agreement, software license agreement and transition services agreement
described above. In connection with such closing, we changed our name to
FutureFuel Corp. and Eastman SE, Inc. changed its name to FutureFuel Chemical
Company.
Consummation of the acquisition of Eastman SE, Inc. constituted a reverse
takeover of us within the rules of AIM as promulgated by the London Stock
Exchange plc. Where a transaction constitutes a reverse takeover, trading on
AIM in the company's shares and warrants is cancelled and readmission to AIM
is required to be sought in the same manner as any other applicant applying
for admission of its securities for the first time. On October 31, 2006, we
applied for readmission to AIM. Our shares of common stock and warrants were
readmitted to AIM on that date under the ticker symbols "FFU" and "FFUW",
respectively.
4
FutureFuel Chemical Company
FutureFuel Chemical Company is a Delaware corporation incorporated on
September 1, 2005 under the name Eastman SE, Inc. as a wholly-owned subsidiary
of Eastman Chemical Company. It owns approximately 2,200 acres of land six
miles southeast of Batesville in north central Arkansas fronting the White
River. Approximately 500 acres of the site are occupied with batch and
continuous manufacturing facilities, laboratories and infrastructure,
including on-site liquid waste treatment. The plant is staffed by
approximately 450 non-union employees.
The Batesville facility was constructed by Eastman Kodak Company on an
undeveloped "green field" site in 1977, initially to produce proprietary
photographic chemicals. In 1982, the plant's business scope was broadened to
include other specialty chemicals, with the construction of facilities to
support Eastman Chemical Company's hydroquinone and antioxidant business.
Other facility enhancements occurred in subsequent years to expand the
specialty chemicals and custom manufacturing business at the site. In 1994,
Eastman Chemical Company split from Eastman Kodak Company. Following that
split, the facility continued to transition from manufacturing photographic
imaging chemicals and, in recent years, has been engaged almost exclusively in
the custom synthesis of fine chemicals and organic chemical intermediates used
in a variety of end markets, including paints and coatings, plastics and
polymers, pharmaceuticals, food supplements, household detergents and
agricultural products.
In the late 1990's, Eastman Chemical Company attempted to focus the
plant's custom manufacturing on the pharmaceuticals market, but this was
abandoned in 2001 due to capital and business constraints. The specialty
chemicals custom manufacturing business in North America became increasingly
competitive due to off-shoring to India and China, among other countries. For
example, see https://www.frost.com/prod/servlet/market-insight-top.pag?
docid=88875033&ctxixpLink=FcmCtx1&ctxixpLabel=FcmCtx2. This factor, coupled
with Eastman Chemical Company's changing business focus, resulted in a
maturing product portfolio at the site and declining net cash flows.
Employment declined from a peak of about 750 in the late 1990's to about 400
in early 2005 through a series of reductions-in-force.
Faced with declining net cash flows from a mature product portfolio and
substantial competitive pressure in existing businesses, plant management
began to actively pursue new businesses in which to focus their manufacturing
capabilities. This management team became convinced that the plant was suited
relative to geography and capabilities to manufacture products for the
emerging alternative fuels markets. With nominal corporate direction and
support, a local biobased products platform was launched in early 2005,
comprising biofuels (biodiesel, bioethanol and lignin/biomass solid fuels) and
biobased specialty chemical products (biobased solvents, chemicals and
intermediates). With minimal capital expenditures, and using local technical
resources, the management team was able to initiate biodiesel batch production
in October 2005 at a capacity of 3 million gallons per year, subsequently
expanded to 24 million gallons per year from a combination of batch and
continuous processing. Entry into the biofuels business was accomplished with
excess plant capacity and without any reduction in production of specialty
chemicals.
In mid 2005, Eastman Chemical Company decided that specialty chemicals
would no longer be a core business and that it would seek to divest the
Batesville plant. In anticipation of such divestiture, Eastman Chemical
Company incorporated FutureFuel Chemical Company (under the then name of
Eastman SE, Inc.). Effective January 1, 2006, Eastman Chemical Company began
to transfer the facility and certain of its related assets to FutureFuel
Chemical Company. FutureFuel Chemical Company's management team continued its
development of the biobased products business throughout this divestiture
process.
Background of the Acquisition
In March 2006, our executive chairman (Mr. Paul A. Novelly) had initial
discussions with Eastman Chemical Company about acquiring Eastman Chemical
Company's manufacturing plant in Batesville, Arkansas. Those discussions did
not result in any meaningful dialogue. In June 2006, our executive chairman
again expressed interest to Eastman Chemical Company about acquiring the
Batesville plant. At that time, Eastman Chemical Company agreed to engage in
discussions with us about the sale of the Batesville facility. On June 22,
2006, initial discussions were held and we commenced a due diligence
investigation into Eastman SE, Inc. Those discussions and the due diligence
investigation ultimately resulted in the execution by us on July 21, 2006 of
the acquisition agreement with Eastman Chemical Company discussed above.
5
Purpose for the Acquisition
We were organized to pursue business combinations with target businesses
engaged in the oil and gas industry. In 2005, FutureFuel Chemical Company
began the implementation of a biobased products platform, including biofuels
(biodiesel, bioethanol and lignin/biomass solid fuels) and biobased specialty
products (biobased lubricants, solvents and intermediates). At the time we
began discussions with Eastman Chemical Company in June 2006, the Batesville
plant had commercialized biodiesel and was capable of producing approximately
9 million gallons of biodiesel per year by batch processing. Production
capacity was subsequently scheduled to increase to 24 million gallons per year
through a continuous processing line. The purpose of the acquisition was to
acquire FutureFuel Chemical Company, a target business in the oil and gas
industry that we believed could be a meaningful participant in the alternative
fuels markets.
Plan of Operation for the Consolidated Company
Our strategy in relation to the acquired operations is to build upon and
expand FutureFuel Chemical Company's biobased products platform and to
continue FutureFuel Chemical Company's chemical manufacturing activities.
We initially planned to increase the plant's biodiesel capacity to 40
million gallons per year by May 2007 and to 160 million gallons per year by
November 2007, with substantial complementary expenditures on infrastructure
to support this increased capacity. After closing on our acquisition of
FutureFuel Chemical Company on October 31, 2006, we and, to our knowledge, the
industry as a whole witnessed a rapid erosion in margins for producing
biodiesel. For example, see http://www.thehindubusinessline.com/2006/12/21/
stories/2006122103701200.htm. As a result of these decreased margins, in
January, 2007 we determined that it was not in our shareholders best interest
to proceed on an accelerated basis to increase capacity and, therefore, we
suspended the biodiesel capacity expansion. However, we continued with (and in
some cases have already completed) certain core infrastructure projects as
described below. We believe these projects will bring efficiency, operational
flexibility and cost savings to FutureFuel Chemical Company's existing
biodiesel and chemical business lines.
The core infrastructure projects included:
o adding methanol recovery and biodiesel feedstock pretreatment
capabilities to the plant - scheduled for completion in the third
quarter of 2007;
o constructing additional storage at the plant to support increased
movements of feedstocks, methanol, glycerin and biodiesel on and off
the site and to facilitate on-site blending of B5, B10 and B20 grade
fuel - scheduled for completion in the third quarter of 2007;
o expanding on-site rail siding and railcar loading and unloading
facilities to accommodate the increased number of railcars expected
at the plant - scheduled for completion in the third quarter of
2007;
o obtaining storage/thruput in Little Rock, Arkansas on the Arkansas
River so that biodiesel can be shipped by barge to larger markets
and feedstocks can be brought in to the plant by barge and truck - a
lease agreement was signed with Center Point Terminal Company
concurrent with the closing of the acquisition of FutureFuel
Chemical Company;
o acquiring a fleet of tanker trucks to transport the biofuels and
feedstocks between the plant and these storage facilities on such
rivers - this project is substantially completed until logistical
requirements require a larger internal truck fleet; and
o procuring railcars to transport raw goods to the plant and deliver
biodiesel from the plant to customers - this project is
substantially completed until logistic requirements require a larger
railcar fleet.
Construction is in progress for the first three site infrastructure projects
described above. As indicated, the last three projects are complete or
substantially complete. We believe that FutureFuel Chemical Company will be
able to
6
timely obtain the materials to complete these projects as scheduled, although
no assurances can be given that the scheduled timetables will be achieved or
that they will not be revised based upon market conditions.
In December 2006, FutureFuel Chemical Company commenced storage of its
biodiesel at a liquid bulk storage facility in Little Rock, Arkansas.
Additional locations will be assessed as market conditions dictate (e.g.,
FutureFuel Chemical Company's need for additional storage space, the
availability of such space and the cost of such space). FutureFuel Chemical
Company has already acquired several tanker trucks and has leased methanol and
biodiesel railcars. The need for additional tanker trucks and/or railcars will
be assessed as demand for FutureFuel Chemical Company's biodiesel and
logistics dictate. We believe that implementation of the above strategy will
help FutureFuel Chemical Company remain a substantial participant in the
biofuels market.
At the time that we suspended expansion of the biodiesel capacity, we
determined that any future expansions of biodiesel production capacity would
be dictated by changing market conditions. Justification for capacity
expansion is dependent upon two primary factors: (i) the price of crude oil,
and more specifically the price of petrodiesel; and (ii) the price of
feedstock oils/fats required to produce biodiesel. For example, see
http://greenfuels.org/biodiesel/economics.htm. Biodiesel is generally sold as
a blend with petrodiesel, which is its primary competitive product, and must
be priced close to parity with petrodiesel in order to be competitive in the
marketplace. Feedstock cost is the largest single component of biodiesel
production costs and therefore has a substantial impact on production costs.
See http://www.eia.doe.gov/oiaf/analysispaper/biodiesel/. In the second
quarter of 2007, crude oil prices strengthened (see
http://www.dallasfed.org/research/energy/en0702.cfm) and, despite
corresponding increases in feedstock oil prices, we judged these and future
market conditions to be supportive of biodiesel capacity expansion and
therefore resumed a project to expand capacity by 35 million gallons per year
(for a total capacity of 59 million gallons per year) through a new continuous
processing line, projected to be operational on April 1, 2008. However, no
assurances can be given that the scheduled timetable will be achieved or that
it will not be revised based upon market conditions such as those discussed
above.
Please see "Item 2. - Financial Information - Management's Discussion and
Analysis of Financial Condition and Results of Operations" below for an
estimate of the capital cost of the capital projects discussed above. The
storage and procurement of railcars are not capital projects; rather, they
affect cash flow through ongoing lease commitments. These lease commitments
are included in footnote 16 of our consolidated financial statements for the
year ended December 31, 2006 contained elsewhere herein. Based upon our
budget, the remaining cash from our July 2006 offering and the proceeds from
the $50 million credit facility described below, we do not believe that it
will be necessary for us to raise additional funds to meet the expenditures
required for operating the business as set forth above.
FINANCIAL INFORMATION ABOUT SEGMENTS
Historically, the business and assets included in FutureFuel Chemical
Company were accounted for by Eastman Chemical Company in various segments of
Eastman Chemical Company's overall business. Although FutureFuel Chemical
Company was incorporated on September 1, 2005, Eastman Chemical Company did
not begin transferring assets into FutureFuel Chemical Company until January
1, 2006 and completed the transfer in subsequent periods prior to the closing
of our acquisition of FutureFuel Chemical Company. Notwithstanding that
FutureFuel Chemical Company was a separately incorporated entity, Eastman
Chemical Company did not prepare separate financial statements for FutureFuel
Chemical Company nor was Eastman Chemical Company required to do so under
local law or accounting rules. Rather, the operations of the Batesville plant
were reported within Eastman Chemical Company based upon the underlying
products and the revenues and expenses of the plant were effectively spread
throughout Eastman Chemical Company's financial statements. In addition,
allocations to the plant of Eastman Chemical Company overhead (such as
insurance, employee benefits, legal expenses and the like) were based upon
assumptions made by Eastman Chemical Company and such assumptions historically
did not reflect expenses which FutureFuel Chemical Company would have incurred
had it been a stand-alone entity. Since we did not acquire or succeed to all
of the assets and liabilities of Eastman Chemical Company, "carve-out"
financial statements have been prepared for the acquired component business,
excluding the continuing operations retained by Eastman Chemical Company. As
the acquisition is deemed to be a reverse acquisition with FutureFuel Chemical
Company being the accounting acquiror, the selected financial data represents
our consolidated operations for the three-month period ended March 31, 2007
and the operations of the Batesville plant for the twelve-month periods ended
December 31, 2006, 2005 and 2004 (which includes our operations for the period
beginning with the date of acquisition (beginning of business on November 1,
2006) and ending December 31, 2006).
7
The following table sets forth: (i) revenues from external customers for
the three-month period ended March 31, 2007 and for the years ended December
31, 2006, 2005 and 2004; (ii) net income (loss) for the three-month period
ended March 31, 2007 and for the years ended December 31, 2006, 2005 and 2004;
and (iii) total assets at March 31, 2007 and at December 31, 2006, 2005 and
2004.
(Dollars in thousands)
REVENUES
FROM
EXTERNAL NET INCOME TOTAL
PERIOD CUSTOMERS (LOSS) ASSETS
------------------------------------------------------ ---------------- --------------- -----------------
March 31, 2007................................... $ 37,506 $ (1,952) $ 201,678
December 31, 2006................................ $ 134,168 $ 2,137 $ 207,024
December 31, 2005................................ $ 104,364 $ 381 $ 114,500
December 31, 2004................................ $ 127,945 $ (14,867) $ 118,164
For the years ended December 31, 2004 and 2005 and the ten months ended
October 31, 2006, revenues from external customers excludes all revenues from
Eastman Chemical Company. Beginning November 1, 2006, revenues from external
customers equals total revenues. See note 14 to our annual financial
statements included elsewhere herein for revenues from Eastman Chemical
Company for the years ended December 31, 2004 and 2005 and the ten months
ended October 31, 2006.
Prior to the initiation of its biofuels program in 2005, the Batesville
plant did not have business reporting "segments" as defined by U.S. generally
accepted accounting principles. After the initiation of the biobased products
program in 2005, it had two segments: chemicals and biofuels. FutureFuel
Chemical Company is not able to allocate net income (loss) and total assets
between its two business segments. However, revenues from external customers
can be allocated between the two business segments as set forth in the
following chart.
(Dollars in thousands)
TOTAL
REVENUES REVENUES REVENUES
FROM FROM FROM
CHEMICAL BIOFUELS EXTERNAL
PERIOD SEGMENT SEGMENT CUSTOMERS
------------------------------------------------------ ---------------- --------------- -----------------
March 31, 2007................................... $ 35,654 $ 1,852 $ 37,506
December 31, 2006................................ $ 120,828 $ 13,340 $ 134,168
December 31, 2005................................ $ 104,364 $ - $ 104,364
December 31, 2004................................ $ 127,945 $ - $ 127,945
NARRATIVE DESCRIPTION OF THE BUSINESS
Principal Executive Offices
Our principal executive offices are located at 8235 Forsyth Blvd., 4th
Floor, Clayton, Missouri 63105. Our telephone number is (805) 565-9800.
FutureFuel Chemical Company's principal executive offices are located at 2800
Gap Road, Highway 394 South, Batesville, Arkansas 72501-9680. Its telephone
number at such office is (870) 698-1811.
The Company
We completed the offering described above on July 12, 2006 and acquired
FutureFuel Chemical Company at the close of business on October 31, 2006. We
have not conducted any other material business operations.
8
FutureFuel Chemical Company
FutureFuel Chemical Company owns approximately 2,200 acres of land six
miles southeast of Batesville in north central Arkansas fronting the White
River. Approximately 500 acres of the site are occupied with batch and
continuous manufacturing facilities, laboratories and infrastructure,
including on-site liquid waste treatment. The plant is staffed by
approximately 450 non-union employees. Land and support infrastructure are
available to support expansion and business growth.
The Batesville facility was constructed by Eastman Kodak Company as a
green field site in 1977, initially to produce proprietary photographic
chemicals. In 1982, the plant's business scope was broadened to include other
specialty chemicals, including facilities to support Eastman Chemical
Company's hydroquinone and antioxidant business. Other facility enhancements
occurred in subsequent years to expand the specialty chemicals and custom
manufacturing business at the site. In 1994, Eastman Chemical Company split
from Eastman Kodak Company. Following that split, the facility continued to
transition from manufacturing photographic imaging chemicals and, in recent
years, has been engaged almost exclusively in the custom synthesis of fine
chemicals and organic chemical intermediates used in a variety of end markets,
including paints and coatings, plastics and polymers, pharmaceuticals, food
supplements, household detergents and agricultural products.
In the late 1990's, Eastman Chemical Company attempted to focus the
plant's custom manufacturing on the pharmaceuticals market, but this was
abandoned in 2001 due to capital and business constraints. Since that time,
the specialty chemicals custom manufacturing business in North America has
become increasingly competitive due to off-shoring to India and China, among
other countries. For example, see https://www.frost.com/prod/servlet/
marketinsighttop.pag?docid=88875033&ctxixpLink=FcmCtx1&ctxixpLabel=FcmCtx2.
This factor, coupled with Eastman Chemical Company's changing business focus,
resulted in a maturing product portfolio at the site and declining net cash
flows as revenues from new business did not offset declining revenues from
existing products. Employment declined from a peak of about 750 in the late
1990's to about 400 in early 2005 through a series of reductions-in-force.
Faced with declining net cash flows from a mature product portfolio and
substantial competitive pressure in existing businesses, plant management
began to actively pursue new businesses in which to focus the Batesville
plant's manufacturing capabilities. This management team became convinced that
the plant was ideally suited relative to geography and capabilities to
manufacture products for the emerging alternative fuels markets. With nominal
corporate direction and support, a local biobased products platform was
launched in early 2005, comprising biofuels (biodiesel, bioethanol and
lignin/biomass solid fuels) and biobased specialty chemical products (biobased
solvents, chemicals and intermediates). With minimal capital expenditures, and
using local technical resources, the management team was able to initiate
biodiesel batch production in October 2005 at a capacity of 3 million gallons
per year (subsequently expanded to 9 million gallons per year), while pursuing
expansion via continuous processing to an aggregate plant capacity of 24
million gallons per year. The 24 million gallon per year capacity threshold
was reached in October 2006. Entry into the biofuels business was accomplished
with excess plant capacity and without any reduction in production of
specialty chemicals.
In mid 2005, Eastman Chemical Company decided that specialty chemicals
would no longer be a core business and that it would seek to divest the
Batesville plant. Eastman Chemical Company executed an acquisition agreement
with us on July 21, 2006 pursuant to which we agreed to purchase all of the
issued and outstanding stock of FutureFuel Chemical Company (then known as
Eastman SE, Inc.). The material terms of the acquisition agreement are
discussed above. The acquisition closed on October 31, 2006. FutureFuel
Chemical Company's management team continued its development of the bio-based
products business throughout this divestiture process.
For the year ended December 31, 2006, approximately 85% of site revenue
was derived from manufacturing specialty chemicals for specific customers
("custom manufacturing") with 6% of revenues being derived from multi-customer
specialty chemicals ("performance chemicals") and 9% from biodiesel. Custom
manufacturing involves producing unique products for individual customers,
generally under long-term contracts. The plant's custom manufacturing product
portfolio includes a bleach activator for a major detergent manufacturer, a
proprietary herbicide for a major life sciences company and chlorinated
polyolefin adhesion promoters and antioxidant precursors for Eastman Chemical
Company. The performance chemicals product portfolio includes polymer (nylon)
modifiers and several small-volume specialty chemicals for diverse
applications.
9
We will continue the specialty chemical business of FutureFuel Chemical
Company. However, we expect that FutureFuel Chemical Company's biofuels
platform will become the core segment of the business. We intend to increase
production capacity of biodiesel within FutureFuel Chemical Company as set
forth above, and will make future capacity expansions when the market
conditions discussed above support such an increase, and to pursue
commercialization of other biofuel products, including lignocellulosic fuel
pellets and cellulosic-derived ethanol. In pursuing this strategy, FutureFuel
Chemical Company will continue to establish a name identity in the biofuels
business, leverage its BQ-9000 quality certification, secure local and
regional markets and expand marketing efforts to fleets and regional/national
customers. Concurrent efforts will also seek to enhance margins via: (i)
volume increases; (ii) conversion cost reductions by transition to continuous
processing; (iii) expansion of feedstock options; (iv) legislative incentives;
and (v) value-enhancing applications for glycerin co-product (from the
biodiesel manufacturing process). These items are discussed in greater detail
below.
Biofuels Business Segment
Overview of the Segment
FutureFuel Chemical Company's biofuels segment was established in early
2005 as an initiative of the site management team to leverage site technical
and operational expertise as well as available manufacturing capacity to
pursue business growth opportunities in addition to the legacy specialty
chemicals business. Management targeted this segment in recognition of three
factors: (i) the abundance and diversity of biomass raw materials in the
immediate area of the plant site; (ii) the ability to rapidly convert
under-utilized facilities to biofuels production at substantially advantaged
capital cost relative to new construction; and (iii) the existence of
technical and operational expertise to position the business as a high
quality, low-cost industry leader. The biofuels segment had no revenues for
the year ended December 31, 2004, inconsequential revenue for the year ended
December 31, 2005, revenue of $13,340,000 for the year ended December 31, 2006
and revenue of $1,852,000 for the three months ended March 31, 2007.
Biofuel Products
FutureFuel Chemical Company's biofuels business segment currently targets
three products: biodiesel, lignocellulose solid fuel pellets and bioethanol.
Biodiesel
Biodiesel is a sustainable, renewable transportation fuel with a growing
market in the United States and internationally. For example, see
http://www.emerging-markets.com/biodiesel/default.asp. Under current and
projected market conditions, there are significant amounts of unsatisfied
demand for biodiesel. As an alternative to petrodiesel and other
petroleum-based fuels, biodiesel has several advantages, including:
o extending domestic diesel fuel supplies;
o reducing dependence on foreign crude oil supplies;
o expanding markets for domestic and international agricultural
products;
o reducing emissions of greenhouse gases and other gases that are
regulated by the United States Environmental Protection Agency (see,
e.g., http://www.cyberlipid.org/glycer/biodiesel.htm); and
o being usable by existing diesel engines while extending their useful
lives (see, e.g., http://www.cyberlipid.org/glycer/biodiesel.htm).
As a result of the benefits that are expected from the widespread use of
biodiesel, federal and state laws, including tax laws, and governmental policy
favor and in some jurisdictions require the increasing use of biodiesel
instead of petrodiesel. See "Legislative Incentives" below.
Biodiesel commercialization was achieved by FutureFuel Chemical Company
in October 2005, five months following initiation of that project. Technical
and operational competency developed as a supplier of specialty
10
chemicals enabled the development of a flexible manufacturing process which
can utilize the broadest possible range of feedstock oils, including soy oil,
cottonseed oil, palm oil, pork lard, poultry fat and beef tallow. The
Batesville plant produces B100 (100% biodiesel) and B99.9 (99.9% biodiesel;
..1% petrodiesel blend), the latter product priced net of the federal excise
tax credit for those customers who do not wish to establish themselves as
tax-qualified blenders. B20 (20% biodiesel; 80% petrodiesel) is currently used
in the facility's diesel fleet and became available for retail sale at the
site in March 2007. During the third or fourth quarter of 2007, FutureFuel
Chemical Company intends to begin blending biodiesel with petrodiesel at a
liquid bulk storage facility in Little Rock, Arkansas and selling B2, B5, B10
and B20 grades.
Lignocellulose Solid Fuel
Lignocellulose solid fuel was commercialized in March 2007 utilizing
locally available hardwood products and residues. This product is sold as a
low-ash, high BTU premium fuel pellet for use in residential and light
commercial heating applications. See http://www.eere.energy.gov/consumer/
your_home/space_heating_cooling/index.cfm/mytopic=12570. A small specialty
market uses these pellets in specially-designed outdoor barbeque grills. For
example, see http://www.bbqrsdelight.com/. Market analysis conducted by
FutureFuel Chemical Company indicates a growing demand for premium fuel
pellets in residential heating applications. For example, see
http://www.magnumheat.com/pressroom.cfm?tabID=1&pID=39. In addition,
FutureFuel Chemical Company recognized the opportunity to develop a regional
market for bulk product sales to light commercial applications, such as
poultry houses and greenhouses, where renewable fuel pellets could be
competitive on a BTU cost basis with propane and natural gas. For example, see
http://asae.frymulti.com/abstract.asp?aid=21163&t=2. The final reason for
entry into hardwood fuel pellet manufacturing was as a component technology
for the envisioned cellulosic ethanol plant described below. Such a facility,
utilizing the planned biochemical technology route described below, would
generate substantial volumes of a lignocellulosic co-product stream, which is
well-suited for fuel purposes. See http://cat.inist.fr/?aModele=afficheN&cpsidt
=17795323. We expect that production of premium fuel pellets from this
cellulosic ethanol co-product stream will create more value for FutureFuel
Chemical Company than the alternative outlet for the co-product (which is
boiler fuel) and we see this to be important to the overall process economics
for the planned cellulosic ethanol project. However, we can give no assurances
that the planned cellulosic ethanol project will come to fruition for the
reasons set forth below.
Bioethanol
Bioethanol is a fuel for internal-combustion engines that is made
from ethyl alcohol obtained from biological material and is typically sold as
a retail blend with conventional gasoline. FutureFuel Chemical Company is
pursuing production of bioethanol from cellulosic biomass raw materials.
Cellulosic-derived ethanol can be produced from a great diversity of biomass
including waste from urban, agricultural and forestry sources. See
http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. Unlike corn-based
ethanol, whose raw material competes with food chain products, cellulosic
ethanol derives from abundant and diverse sources of plant and wood products.
See http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. FutureFuel
Chemical Company is pursuing the "biochemical" technology platform to produce
cellulosic-derived bioethanol, which incorporates four distinct processing
steps: (i) pretreatment; (ii) hydrolysis; (iii) fermentation; and (iv)
distillation.
As discussed below in greater detail, cellulosic-derived ethanol
technology is developmental throughout the industry and has only been
demonstrated at laboratory and pilot scale. FutureFuel Chemical Company to
date has only evaluated cellulosic ethanol technologies at laboratory scale.
The most-recognized pilot scale unit which has been publicized to date is the
~1 million gallon per year Iogen facility in Ottawa discussed below. Also, the
U.S. Department of Energy has awarded six grants to facilitate the
construction of the initial commercial-scale demonstration facilities. See
http://www.doe.gov/news/4827.htm. FutureFuel Chemical Company initiated its
cellulosic ethanol research and development program in December 2005 and
incurred costs associated therewith through May 2007 of approximately
$350,000. While FutureFuel Chemical Company expects to continue its research
program on cellulosic ethanol, initiatives and timelines to progress the
technology to pilot and/or commercial scale are dependent upon results and
progress in developing the technology and no assurances can be given that
FutureFuel Chemical Company will be successful or, if successful, when.
Testing and results of the cellulosic ethanol program to date are not yet
complete. On May 29, 2007, FutureFuel Chemical Company submitted a letter of
intent to apply and abstract in response to the Department of Energy Funding
Opportunity Announcement DE-PS36-07GO97003, for a project to be entitled:
"Prototype Integrated Cellulosic Ethanol Biorefinery." This grant, if
received, would enable progression of the research program to the pilot or
11
demonstration stage. There is no assurance that FutureFuel Chemical Company
will be successful in obtaining such a grant, nor is progress of the
cellulosic ethanol program totally dependant upon receipt of this federal
grant. FutureFuel Chemical Company has also engaged in discussions with the
State of Arkansas, primarily through the Arkansas Economic Development
Commission, regarding the potential for state grant support for the cellulosic
ethanol program. To date these interactions have not progressed past the
feasibility discussion stage. As of the date of this Registration Statement,
FutureFuel Chemical Company has only evaluated cellulosic based ethanol
technologies at laboratory scale and has not commenced commercial production
using these technologies.
Cellulose is composed of long chains of glucose molecules. In the
hydrolysis process, these chains are broken down to "free" the sugar to make
it available for fermentation to alcohol. There are two major hydrolysis
processes: a chemical reaction using acids and an enzymatic reaction. Chemical
hydrolysis is performed by attacking the cellulose with an acid. Dilute acid
may be used under high heat and high pressure, or more concentrated acid can
be used at lower temperatures and atmospheric pressure. A de-crystalized
cellulosic mixture of acid and sugars reacts in the presence of water to
complete hydrolysis to individual sugar molecules. The product from this
hydrolysis is then neutralized and yeast fermentation is used to produce
ethanol. A significant obstacle to the dilute acid process is that the
hydrolysis is so harsh that toxic degradation products are produced which can
inhibit fermentation. Concentrated acid must be separated from the sugar
stream for recycling to be commercially attractive. In addition, the
aggressive acid conditions require more expensive materials of construction
for process equipment.
Cellulose chains can also be deconstructed into glucose molecules by
cellulase enzymes (enzymatic hydrolysis). This is the sort of reaction that
occurs at body temperature in the stomach of ruminants such as cows and sheep
where the enzymes are produced by bacteria. If the enzymatic hydrolysis
process is accomplished with previously isolated enzymes, a supply of the
cellulase enzymes is needed. Several major and start-up enzyme manufacturers
are pursuing development and commercialization of enzymes specifically for
cellulosic ethanol production. See, for example,
http://en.wikipedia.org/wiki/Cellulosic_ethanol. These companies seek to
produce large volumes of cellulase, xylanase and hemicellulase enzymes which
can be utilized to convert agricultural residues such as corn stover,
distiller grains, wheat straw and sugar cane bagasse, wood products and
wastes, and energy crops such as switch grass into fermentable sugars which
may be used to produce cellulosic ethanol.
This is the biochemical technology platform which FutureFuel Chemical
Company is pursuing. There are four stages to the overall process:
o a "pre-treatment" phase to make the raw material such as wood or
straw amenable to hydrolysis;
o enzymatic hydrolysis to break down the cellulose and hemicellulose
into oligomers and sugars;
o yeast fermentation of the sugar solution; and
o distillation and drying to produce ethyl alcohol meeting fuel-grade
ASTM standards.
An alternative to the biochemical technology platform is the
thermo-chemical route. Also called the "gasification" process, it does not
rely on chemical decomposition of the cellulose chain. Instead of breaking the
cellulose into sugar molecules for fermentation, the carbon in the cellulosic
raw material is converted into synthesis gas. The resulting carbon monoxide,
carbon dioxide and hydrogen may then be fed into a specially designed
fermentor. Instead of yeast, which operates on sugar, this process uses a
microorganism to convert the synthesis gas products to ethanol. The
thermo-chemical process can be broken into three steps:
o gasification -- complex carbon based molecules are broken apart to
access the carbon as carbon monoxide, carbon dioxide and hydrogen
are produced.
o fermentation -- the carbon monoxide, carbon dioxide and hydrogen are
converted into ethanol using developed organisms such as the
Clostridium ljungdahlii organism.
o distillation -- ethanol is separated from water and other
co-products and dried to meet fuel-grade ASTM standards.
12
Ethanol today is produced in the United States mostly from sugars or
starches obtained from fruits and grains, corn being the predominant raw
material. See http://www.ars.usda.gov/research/publications/
publications.htm?SEQ_NO_115=160162. In contrast, cellulosic ethanol is
obtained from cellulose, the main component of wood, straw and plants. See
http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. Since cellulose cannot
be digested by humans, the production of cellulose does not compete with the
production of food. The price per ton of the raw material is thus much cheaper
than grains or fruits. Moreover, since cellulose is the main components of
wood and plants, the potential volume of available raw material is much
greater than for agricultural food crops.
As noted above, cellulosic-derived ethanol technology is developmental
throughout the industry and has only been demonstrated at laboratory and pilot
scale. Under 1 million gallons per year is considered pilot scale, greater
than 1 million gallons per year but less than 10 million gallons per year is
defined as commercial demonstration, while a plant that produces 10 million
gallons per year or greater is considered commercial scale. In April 2004,
Iogen Corporation, a Canadian biotechnology firm, became the first business to
commercially sell cellulosic ethanol, though in very small quantities. See
http://www.iogen.ca/key_messages/overview/cellulose_ethanol_ready_to_go.html.
Another company which appears to be nearing commercialization of cellulosic
ethanol is Abengoa Bioenergy, operating in Spain. See
http://www.abengoabioenergy.com/research/index.cfm?page=3&lang=1. Abengoa is
building a 5 million gallon per year cellulosic ethanol facility in Spain and
has recently entered into a strategic research and development agreement with
Dyadic International, Inc. to create enzyme mixtures which may be used to
improve both the efficiencies and cost structure of producing cellulosic
ethanol. See http://www.dyadic.com/wt/dyad/pr_1161957317. On December 21,
2006, SunOpta Inc. announced a joint venture with GreenField Ethanol. See
http://phx.corporate-ir.net/phoenix.zhtml?c=82712&p=irolnewsArticle&t=
Regular&id=944112. The joint venture intends to build a series of large-scale
plants that will make ethanol from wood chips. The first of these plants will
be 10 million gallons per year. Despite the commercial demonstration
cellulosic ethanol plants SunOpta has been involved with, media reports
continue to state that cellulosic ethanol is an unproven, experimental
technology. For example, see http://www.alternatefuelsworld.com/
the-war-of-the-alcohols.html. The 10 million gallon per year
SunOpta/GreenField cellulosic ethanol plant is intended to demonstrate that
large-scale cellulosic ethanol is commercially viable. See
http://en.wikipedia.org/wiki/Cellulosic_ethanol. However, as of the date of
this Registration Statement, this plant has not been constructed.
The production of cellulosic ethanol by FutureFuel Chemical Company
through the biochemical route is in the research and development stage as
discussed above. FutureFuel Chemical Company has entered into discussions with
various parties to develop some of the necessary technology for the commercial
production of cellulosic ethanol, also as discussed above. We can give no
assurances, however, that FutureFuel Chemical Company will be able to bring
cellulosic ethanol to commercial realization.
Emerging Biodiesel Industry
Diesel fuel is the motor fuel that is used in a compression-ignition
engine which causes fuel to combust not by igniting the fuel with a spark but
by injecting the fuel into a highly pressurized combustion chamber. There are
two principal types of diesel fuel: petrodiesel and biodiesel. Petrodiesel is
made from petroleum feedstock and comprises substantially all of the diesel
fuel sold in the United States and elsewhere. Diesel fuel made from renewable
vegetable oil or animal fat feedstock is called biodiesel. To be sold and
distributed as biodiesel, the fuel must meet governmental standards, such as
ASTM D6751 in the United States and EN14214:2003 in the European Union. The
ASTM biodiesel specification defines biodiesel fuel as a fuel comprised of
mono-alkyl esters of long-chain fatty acids derived from vegetable oils or
animal fats. In Europe, the biodiesel specification is defined as fatty acid
methyl esters. Biodiesel can be used in its pure form, known as B100, or
blended in any ratio with conventional petrodiesel. Typical biodiesel blends
are 2% (B2), 5% (B5) and 20% (B20).
Petrodiesel currently comprises more than 99% of the diesel
transportation fuel market. According to the Energy Information Association of
the U.S. Department of Energy, on-highway petrodiesel consumption in 2005 was
approximately 38 billion gallons in the United States (see
http://tonto.eia.doe.gov/dnav/pet/pet_cons_821dsta_dcu_nus_a.htm). We believe
that use of diesel fuel will increase as a percentage of total on-highway
ground transportation in the United States for several reasons, including:
o after compliance with the new low-sulfur requirements, diesel fuel
will become less toxic;
13
o diesel fuel is more fuel efficient than gasoline;
o diesel engines are being installed in a larger number of
commercially successful automobiles; and
o clean diesel light vehicles provide government-owned fleets with an
option for increasing vehicle efficiency.
According to the 2005 Ricardo diesel report, sales of clean diesel vehicles
are projected to increase from 43,000 units in 2004 to over 1.5 million in
2015, driving increased diesel fuel sales for those vehicles. See
http://www.ricardo.com/media/pressreleases/pressrelease.aspx?page=18.
Despite these trends that indicate increased demand for diesel fuel, the
price of petrodiesel closely tracks the cost of petroleum crude oil.
Significantly since 2002, worldwide demand for petroleum-based products has
been growing faster than supply. See http://www.eia.doe.gov/emeu/steo/pub/
special/high-oil-price.html.
Beginning on June 1, 2006, new federal laws went into effect that are
likely to significantly affect the market for petrodiesel. These laws limit
the amount of sulfur content allowed in diesel fuel, reducing the portion of
sulfur allowed in diesel fuel for on-highway use by more than 95%.
Consequently, ultra low sulfur diesel may result in price increases to users
of the fuel.
Petrodiesel currently has several advantages over biodiesel, including
the following.
o Petrodiesel costs less to make per gallon than biodiesel.
o Infrastructure is in place to transport great quantities of
petrodiesel (such as pipelines and bulk storage facilities).
o The petrodiesel industry has solved cold temperature limitations of
petrodiesel.
o The petrodiesel industry has solved storage stability issues with
petrodiesel.
o Petrodiesel meeting fuel quality standards is relatively easy to
manufacture.
o Biodiesel contains 8% less energy per gallon than petrodiesel. See
http://www.nrel.gov/vehiclesandfuels/npbf/pdfs/40555.pdf
Notwithstanding the foregoing, the biodiesel industry has emerged as an
alternative to petrodiesel based principally on the advantages of biodiesel
over petrodiesel. Those advantages include:
o Biodiesel is made from renewable sources.
o When burned, biodiesel results in a substantial reduction of
unburned hydrocarbons, carbon monoxide and particulate matter as
compared to petrodiesel.
o Biodiesel is biodegradable and nontoxic and is not considered a
hazardous material when spilled.
o Biodiesel is essentially free of sulfur and aromatics.
o The overall ozone forming potential of the hydrocarbon exhaust
emissions from biodiesel is nearly 50% less than that for
petrodiesel.
o Biodiesel is registered as a fuel and fuel additive with the U.S.
Environmental Protection Agency and B100 biodiesel has been
designated as an alternative fuel by the U.S. Departments of Energy
and Transportation.
o Biodiesel can use domestic feedstock, reducing the amount of crude
oil imported into the U.S.
14
o Public policy, both as enacted into law and as enunciated by
governmental agencies in the United States, favors the production
and use of biodiesel.
o Biodiesel can be blended with petrodiesel in any ratio.
See, for example, http://www.biodiesel.org/pdf_files/fuelfactsheets/Benefits%
20of%20Biodiesel.Pdf.
Based on these advantages, we believe that demand for biodiesel will
continue to grow at accelerated rates both in the United States and
internationally over the next several years. The rising demand for biodiesel
may also reflect or track the increasing amounts of biodiesel that are
forecasted to be produced in the U.S. Although the existence of production
capacity does not necessarily result in increased demand, we believe that
increased availability of biodiesel as an alternative fuel to petrodiesel will
result in wider voluntary consumer adoption and increased production of both
diesel vehicles capable of burning blends of biodiesel and petrodiesel as well
as vehicles that will burn mixes in which biodiesel predominates.
Although biodiesel use is still in its infancy, biodiesel production has
grown substantially since 1999. The National Biodiesel Board's estimate of
biodiesel production in the United States for the period 1999 through 2005
inclusive is set forth in the following chart. See
http://www.biodiesel.org/pdf_files/fuelfactsheets/Biodiesel_Sales_Graph.pdf.
FutureFuel Chemical Company is a member in the National Biodiesel Board.
TABLE 1
[Refer to Exhibit 99.1]
ESTIMATED GALLONS OF BIODIESEL PRODUCED IN THE UNITED STATES
[BAR GRAPH]
The United States Department of Agriculture estimates that biodiesel
production reached 225 million gallons in 2006. See
http://www.eia.doe.gov/bookshelf/brochures/diesel/index.html.
As of June 7, 2007, the National Biodiesel Board listed 148 operating
biodiesel facilities in the United States, including FutureFuel Chemical
Company, with a combined estimated capacity of 1.39 billion gallons per year.
See http://www.biodiesel.org/pdf_files/fuelfactsheets/Production_Capacity.pdf.
Furthermore, the Board projected that 96 new facilities were under
construction and 5 existing plant expansions were underway for a total of
approximately 1.89 billion gallons per year of new capacity by mid-2008. Id.
According to the National Biodiesel Board, biodiesel is available nationwide.
See http://www.biodiesel.org/buyingbiodiesel/guide/.
15
For the above-cited reasons, we believe that a substantial market for
biodiesel is emerging in the United States. However, the industry faces
several challenges to wide biodiesel acceptance, including cold temperature
limitations, storage stability, fuel quality standards and exhaust emissions.
FutureFuel Chemical Company is actively engaged in addressing these
challenges.
Biodiesel from nearly all feedstocks has cold temperature limitations in
that it freezes at higher temperatures than conventional petrodiesel. Although
not free from doubt, it appears that, at low temperatures, the long chain
molecules of methyl ester align alongside each other and set into a
crystalline structure which may continue to attract other molecules until the
crystal reaches a massive size and can be seen in the fluid as a haze and
then, after a certain time, wax. Conventional petrodiesel also exhibits cold
temperature flow problems; however, the petrochemical industry developed both
additives and a high temperature catalytic process which isomerizes the long
chain molecules, thereby improving cold flow. The challenge for biodiesel is
to achieve effective cold flow properties. FutureFuel Chemical Company is
acquiring fundamental knowledge on this characteristic through its internal
research program. Cold-solvent extraction, solubilization, additives and other
approaches are being investigated for their potential to mitigate these cold
temperature limitations.
The relatively poor oxidative and hydrolytic stabilities of biodiesel are
a concern with respect to fuel quality during storage. We believe that
FutureFuel Chemical Company may be one of the first biodiesel producers to
store biodiesel in large off-site storage tanks. Experience gathered in the
use of such tankage, including cleaning and handling methods, stabilization
additives and the use of water draws, will assist FutureFuel Chemical Company
in ensuring fuel quality during storage and distribution.
A challenge facing the biodiesel industry relates to compliance of
product to established fuel quality standards reflected in ASTM D6751. A
national fuel quality testing project co-funded by the National Biodiesel
Board and the National Renewable Energy Laboratory found that one-third of
biodiesel samples tested between November 2005 and July 2006 did not comply
with these specifications. See http://www.rendermagazine.com/
December2006/BiodieselBulletin.html. FutureFuel Chemical Company strives to
ensure that all biodiesel produced by it meets ASTM D6751 through process
control and product testing protocols that have been certified to the industry
BQ-9000 quality standard. In addition, FutureFuel Chemical Company is actively
participating in industry and ASTM-led programs to further improve biodiesel
testing methodology and specifications in an effort to enhance biodiesel
fitness-for-use under the broadest possible range of temperature and handling
conditions.
We believe that the industry, with support from producers such as
FutureFuel Chemical Company, can resolve in a commercially reasonable manner
the quality and fitness-for-use issues facing the emerging biodiesel market,
although no assurances can be given that the industry will ultimately be
successful with respect to all of these challenges or that biodiesel will, in
fact, achieve wide-spread acceptance.
Volatile Margins
The profit margin generated in the production of biodiesel, on a per
gallon basis, is calculated as sales price less feedstock and production
costs. Sales price is generally based on the spot price of petrodiesel, plus
federal credits, plus or minus small regional and/or market-specific
variances. Feedstock costs include the cost of vegetable oil, animal fat or
waste grease. Production costs include the cost of methanol, a catalyst,
direct labor and variable and fixed costs associated with the operation of a
biodiesel plant.
Looking first at sales price, we are not aware of any public postings of
daily biodiesel prices for the entire year of 2006.(a) However, such prices
tend to follow the price of petrodiesel plus the $1.00 per gallon federal
blending credit. Biodiesel producers may also need to account for regional
and/or market-specific factors in setting their sales price for biodiesel.
These factors may include the size of the local market, the distance that
product must be shipped to reach local or other markets, the availability of
storage and distribution infrastructure, the premium that local markets may
place on alternative fuels and the feedstock source used in producing
biodiesel. Of the three price components, the price of petrodiesel is the most
significant and also the most volatile. The spot prices of one gallon of low
sulfur No. 2 petrodiesel in the U.S. Gulf Coast during 2006 are set forth in
the following chart.
----------
(a) This is changing for 2007 in that both OPIS and Platts are now publishing
posted prices for biodiesel at various locations throughout the United
States.
16
TABLE 2
[Refer to Exhibit 99.1]
[BAR GRAPH]
Source: Department of Energy- http://tonto.eia.doe.gov/dnav/pet/hist/
rdlusgd.htm.
While the net change in the spot price of petrodiesel was modest for 2006 as a
whole, intra year price movements where characterized by relatively high
volatility. As an example, the price of petrodiesel declined by $0.76 per
gallon between August 30, 2006 and September 14, 2006, a 32% decrease in 15
days.
The three primary feedstocks for biodiesel include vegetable oil, animal
fat and waste grease. See http://tonto.eia.doe.gov/FTPROOT/environment/
biodiesel.pdf. The markets for animal fats and waste greases in the United
States and worldwide are smaller and less liquid than those for vegetable
oils. See http://www.iascoils.org/word%20docs/Campbell_speech.pdf. In
addition, vegetable oils are generally a preferred feedstock as they contain
lower free fatty acids and are easier to process into a fuel that meets
industry specifications. See http://www.energy.iastate.edu/efficiency/
transportation/cs/cs-biodiesel_plant.html. In the United States, soybean oil
comprises the largest percentage of the overall vegetable oil market (see
http://www.epa.gov/ttnecas1/regdata/IPs/Vegetable%20Oil_IP.pdf), and is also
the primary feedstock oil for producing biodiesel. As set forth above,
according to the United States Department of Agriculture, soybean oil
constitutes more than 90% of the feedstock for biodiesel. The following chart
sets forth the closing spot price of soybean oil during the year 2006.
17
TABLE 3
[Refer to Exhibit 99.1]
[BAR GRAPH]
Bloomberg
The net increase in the spot price of soybean oil during 2006 as a whole was
24%. Similar to petrodiesel prices, intra year price movements were
characterized by relatively high volatility. As an example, between October 3,
2006 and December 1, 2006, soybean oil prices increased approximately
5.94(cents) per pound, a 26% increase in 59 days. One gallon of biodiesel
requires approximately 7.3 pounds of soybean oil, depending on the yield a
biodiesel producer generates from the conversion of soybean oil into
biodiesel, which in turn depends on that producer's technology and production
techniques. See http://www.eere.energy.gov/afdc/altfuel/bio_market.html. The
5.94(cents) per pound increase in soybean oil between October 3, 2006 and
December 1, 2006 resulted in an increased feedstock cost for biodiesel
producers of approximately $0.44 per gallon. Biodiesel producers can reduce
feedstock costs by expanding or converting their processing methods to include
animal fats and waste greases, which historically can be acquired at
substantial discounts to soybean oil. See http://www.ciras.iastate.edu/
bioindustry/info/AlternativeFeedstocksAndBiodieselProduction.pdf. FutureFuel
Chemical Company is capable of processing several types of animal fat into
biodiesel and is procuring and processing these feedstocks at present.
However, soybean oil remains an important feedstock for FutureFuel Chemical
Company and the primary feedstock for the industry as a whole and is the most
relevant feedstock cost to consider when analyzing margins.
Production costs include the cost of methanol, a catalyst, direct labor
and fixed and variable costs associated with operating a biodiesel plant.
Fixed costs include such items as labor, energy, supplies, insurance, taxes
and maintenance, among others. Although production costs can vary depending
upon the processing method employed (batch processing versus continuous
process, methanol recovery and the like), and other factors, they are
considered somewhat stable. According to the United States Department of
Agriculture, production costs for biodiesel average $0.50 per gallon industry
wide. See http://www.usda.gov/oce/newsroom/congressional
_testimony/Collins_011007.pd
While each of the three components of profit margin (sales price,
feedstock cost and production cost) vary based on the location of a biodiesel
producer, the size, proximity and logistical infrastructure of its regional
market, the acceptance of alternative fuels in that market, the feedstock
utilized, processing methods and techniques, and the efficiency and cost
structure of individual producers, it is possible to utilize the data
presented in the preceding discussion to calculate a hypothetical biodiesel
margin per gallon between January 1, 2006 and December 31, 2006. This margin
is calculated as follows:
18
Basis of Daily Data
----------------------------------------------------------------------
Sales Price............................. Spot price of one gallon of low sulfur No. 2 petrodiesel in the U.S.
Gulf Coast plus $1.00 per gallon federal blending credit
Less: Feedstock Cost.................... USDA crude soybean oil spot price per pound times 7.3
Less: Production Cost................... $0.50 per gallon industry wide average according to the United
States Department of Agriculture
Equals: Hypothetical Margin
Utilizing the calculation set forth above, biodiesel margins for 2006 would be
as set forth in the following chart.
TABLE 4
[Refer to Exhibit 99.1]
[BAR GRAPH]
Note: The margins set forth in the chart above do not include regional and/or
market-specific factors, which may increase or decrease the sales price of
biodiesel by as much as 10% or more. In addition, margins depicted above
exclude transportation costs associated with moving soybean oil to a biodiesel
plant or delivering biodiesel to end markets. These costs vary widely
depending on a plant's proximity to soybean crushing facilities and end
markets and cannot be estimated for the industry as a whole with any degree of
accuracy.
Between October 3, 2006, the date that we sent our shareholders notice of the
special meeting to approve the acquisition of FutureFuel Chemical Company, and
December 31, 2006, the hypothetical margin on the production of biodiesel
decreased from $0.50 per gallon to $0.15 per gallon, a 70% decrease. Although
FutureFuel Chemical Company's actual sales price, feedstock cost and
production costs varied from these hypothetical numbers (and no assurances can
be given that FutureFuel Chemical Company's actual sales price, feedstock
costs and/or production costs will approximate those hypothetical numbers in
the future), its margins did decrease substantially during this same period.
We expect FutureFuel Chemical Company's margins to remain volatile in
future years and no assurances can be given that such margins will be
positive. We intend to address volatile margins through: (i) our current
ability to process lower cost animal fat feedstocks; (ii) our research and
development efforts aimed at developing methods of processing additional lower
cost crude vegetable oils, animal fats and waste greases; (iii) cost
efficiencies and economies of scale gained as we refine our processing
methods, improve our methanol recovery capabilities and increase our biodiesel
production capacity; and (iv) construction of storage capacity on-site and
leases of storage capacity off-site to enable us to acquire large quantities
of feedstock oils when market conditions are favorable or to store biodiesel
when market conditions are not favorable.
19
As a final consideration, the two primary variables described above that
affect biodiesel margins (and the volatility of those margins) are petrodiesel
and soybean oil, both of which are actively traded on commodity exchanges.
Through the purchase and sale of futures contracts or options on futures
contracts, biodiesel producers can effectively hedge their sales price and
feedstock cost when market conditions permit. FutureFuel Chemical Company has
already pursued certain hedging strategies and intends to continue doing so in
the future, as further described herein. However, no assurance can be given
that such hedging strategies will be successful to protect us from all
commodity price risks.
The Biodiesel Production Process
Biodiesel can be made from renewable sources such as:
o refined virgin vegetable oils;
o refined animal fats; and
o used cooking oils and trap grease.
The choice of feedstock is determined primarily by the price and availability
of each feedstock variety and the capabilities of the producer's biodiesel
production facility. In the United States, the majority of biodiesel
historically has been made from domestically produced soybean oil. However,
palm oil imported from Malaysia and Indonesia is being considered as a viable
alternative due to price, availability and expected supply elasticity. See,
for example, http://en.wikipedia.org/wiki/Palm_oil. FutureFuel Chemical
Company's plant has been designed to process a wide variety of feedstocks to
take advantage of fluctuating prices and availability of the various
feedstocks.
The biodiesel manufacturing process has three distinct steps: the
chemical reaction step, the separation step and the polishing step.
TABLE 5
[Refer to Exhibit 99.1]
[FLOW CHART]
20
Chemical Reaction. In the chemical reaction step, a mix of biodiesel
glycerin and soap is created from the selected feedstock, methanol and a
catalyst. The collection of equipment that performs this chemical reaction
step in producing biodiesel is referred to as the "reactors." Depending upon
the type of reactor used, the mix of biodiesel glycerin and soap produced
requires differing degrees of further processing to separate the methyl esters
comprising the biodiesel from the glycerin and soap, to clean or "polish" both
the biodiesel and glycerin and to recover excess methanol from both the
biodiesel and glycerin. Generally, the more efficient the reactor, the less
downstream processing that is required. If the feedstock used is high in free
fatty acids, an esterification step may be required. Esterification is a
chemical reaction in which two chemicals (typically an alcohol and an acid)
form an ester. Transesterification is the process of exchanging the alkoxy
group of an ester compound by another alcohol.
Separation. The methyl esters are separated from the glycerin and soap
produced during the chemical reaction step.
Polishing. The methyl esters are purified to remove residual catalysts
and other impurities. Any excess water and methanol is also removed and may be
recycled into earlier steps in the production process train.
Legislative Incentives
Agencies of the United States government, including the Department of
Energy, the Environmental Protection Agency, the Internal Revenue Service and
the Department of Agriculture, and many states offer biodiesel incentives or
have mandates for the use of biodiesel, or both. There are other governmental
incentives that do not directly reduce the net cost of producing or blending
biodiesel but that drive the demand for biodiesel. For example, tax credits
are available under the Internal Revenue Code for investment in qualifying
refueling property, the Environmental Protection Agency will pay 50-100% of
the cost for schools to upgrade and/or replace their buses, and programs
administered by the Department of Energy indirectly require government fleet
operators to purchase substantial amounts of biodiesel. The principal federal
incentives that we believe will have the greatest positive effect on
FutureFuel Chemical Company's business are discussed below.
The Energy Policy Act of 1992 requires government fleet operators to use
a certain percentage of alternatively fueled vehicles. The Act established a
goal of replacing 10% of motor fuels with non-petroleum alternatives by 2000,
increasing to 30% by the year 2010. Currently, 75% of all new light-duty
federal vehicles purchased are required to have alternative fuel capability to
set an example for the private automotive and fuel industries.
Under the Energy Conservation Reauthorization Act of 1998, vehicle fleets
that are required to purchase alternatively fueled vehicles can generate
credit toward this requirement by purchasing and using biodiesel in a
conventional vehicle. Since there are few cost-effective options for
purchasing heavy-duty alternatively fueled vehicles, federal and state fleet
providers can meet up to 50% of their heavy-duty alternatively fueled vehicle
purchase requirements with biodiesel. The biodiesel fuel credit allows fleets
to purchase and use 450 gallons of biodiesel in vehicles in excess of 8,500
pounds gross vehicle weight instead of alternatively fueled vehicles. Fleets
must purchase and use the equivalent of 450 gallons of pure biodiesel in a
minimum of a 20% blend to earn one credit. Covered fleets earn one vehicle
credit for every light-duty alternatively fueled vehicle they acquire annually
beyond their base vehicle acquisition requirements. Credits can be banked or
sold.
In October 2004, Congress passed a biodiesel tax incentive, structured as
a federal excise tax credit, as part of the American Jobs Creation Act of
2004. The credit amounts to a penny for each percentage point of vegetable oil
or animal fat biodiesel that is blended with petrodiesel (and one-half penny
for each percentage point of recycled oils and other non-agricultural
biodiesel). For example, blenders that blend B20 made from soy, canola and
other vegetable oils and animal fats receive a 20(cents) per gallon excise tax
credit, while biodiesel made from recycled restaurant oils (yellow grease)
receive half of this credit. The tax incentive generally is taken by petroleum
distributors and substantially passed on to the consumer. It is designed to
lower the cost of biodiesel to consumers in both taxable and tax-exempt
markets. The tax credit was scheduled to expire at the end of 2006, but was
extended in the Energy Policy Act of 2005 to the end of 2008. There are
proposals pending in Congress to extend the tax credit to the end of the
decade and beyond.
Congress enacted the Energy Policy Act of 2005 in August 2005 and
included a number of provisions intended to spur the production and use of
biodiesel. In particular, the Act's provisions include biodiesel as part of
21
the minimum volume of renewable fuels (the renewable fuels standard or "RFS"),
in the nationwide gasoline and diesel pool, with the Environmental Protection
Agency being directed to determine the share to be allocated to biodiesel and
other details through its rulemaking process. The Act also extended the
biodiesel tax credit to 2008 and included a new tax credit for renewable
diesel. More specifically, the RFS requires a specific amount of renewable
fuel to be used each year in the nationwide gasoline and diesel pool. The
volume increases each year, from 4 billion gallons per year in 2006 to 7.5
billion gallons per year in 2012. The Act requires the Environmental
Protection Agency, beginning in 2006, to publish by November 30th of each
year, "renewable fuel obligations" that will be applicable to refineries,
blenders and importers in the contiguous 48 states. There must be no
geographic restrictions on where renewable fuel may be used or per-gallon
obligations for the use of renewable fuel. The renewable fuel obligations are
required to be expressed in terms of a volume percentage of gasoline sold or
introduced into commerce and consist of a single applicable percentage that
will apply to all categories of refineries, blenders and importers. The
renewable fuel obligations are to be based on estimates that the Energy
Information Association provides to the Environmental Protection Agency on the
volumes of gasoline it expects will be sold or introduced into commerce. In
terms of implementing the RFS for the year 2006, the Environmental Protection
Agency released a rule determining that the RFS target for 2006, 4 billion
gallons of renewable fuel in the gasoline and diesel pool, will be considered
to be met, given the then-current expectations of production of both ethanol
and biodiesel for that year. If the Environmental Protection Agency had
determined the 2006 target was not being met, refiners, blenders and importers
would be obligated to make up the shortfall in the year 2007. The
Environmental Protection Agency released the final rules to implement the RFS
on April 10, 2007. Under those rules, the RFS compliance period does not begin
until September 1, 2007.
The Energy Policy Act of 2005 also created a new tax credit for small
agri-biodiesel producers with production capacity not in excess of 60 million
gallons, of 10(cents) per gallon for the first 15 million gallons of
agri-biodiesel produced. We believe that FutureFuel Chemical Company's 2007
biodiesel production capacity will not exceed 60 million gallons and thus will
qualify for this credit.
The federal government offers other programs as summarized in the
table below.
FEDERAL AGENCY
THAT
ADMINISTERS/ TYPE OF WHO RECEIVES COMMONLY
OVERSEES INCENTIVE INCENTIVE KNOWN AS SUMMARY
IRS income tax infrastructure Alternative Provides a tax credit in an amount
credit providers Fuel equal to 30% of the cost of any
Infrastructure qualified non-residential alternatively
Credit fueled vehicle refueling property
placed into service in the United
States up to $30,000, subject to
certain limits.
EPA grant program school districts Clean School Reduces operating costs and
Bus Program children's exposure to harmful
diesel exhaust by limiting bus
idling, implementing pollution
reduction technology, improving
route logistics and switching to
biodiesel. The Energy Bill of 2005
utilizes this program to grant up to
a 50% cost share (depending on the
age and emissions of the original
bus) to replace school buses with
buses that operate on alternative
fuel or low-sulfur diesel, or up to
100% for retrofit projects.
22
FEDERAL AGENCY
THAT
ADMINISTERS/ TYPE OF WHO RECEIVES COMMONLY
OVERSEES INCENTIVE INCENTIVE KNOWN AS SUMMARY
USDA grant program agricultural Renewable In 2005, the U.S. Department of
producers and Energy Systems Agriculture's Office of Rural
small businesses and Energy Development made available
Efficiency $22.8 million in competitive grant
Improvements funds and guaranteed loans for the
Grant purchase of renewable energy systems
and energy improvements for
agricultural producers and small rural
businesses. Eligible projects include
biofuels, hydrogen and energy
efficiency improvements, as well as
solar, geothermal and wind.
USDA/DOE grant program biobased fuels Biomass Funds research, development and
researchers Research and demonstration biomass projects with
Development respect to renewable energy resources
Act of 2000 from the agricultural and agro-forestry
sectors. Biomass is defined as organic
matter that is available on a renewable
or recurring basis.
Many states are following the federal government's lead and are offering
similar programs and incentives to spur biodiesel production and use. For
example, Arkansas provides an income tax credit of 5% of the cost of the
facilities and equipment used directly in the wholesale or retail distribution
of biodiesel where the equipment has not been claimed in a previous tax year.
In addition, Arkansas offers a tax refund of $0.50 for each gallon of
biodiesel used by a supplier to produce a biodiesel/petrodiesel mixture of not
more than 2% biodiesel. In April 2007, Arkansas passed legislation that
provides for a $0.20 per gallon biodiesel producer credit (capped at $2
million) and up to $50,000 in grants per site for biodiesel producers and
distributors to install distribution infrastructure.
Illinois and Minnesota have mandated the use of B2 in all diesel fuel
sold in their respective states subject to certain conditions that include
sufficient annual production capacity (defined as at least 8 million gallons).
The mandate took effect in Minnesota in September 2005 and in Illinois in July
2006. Our review of state statutes reveals that approximately 31 states
provide either user or producer incentives for biodiesel, several states
provide both types of incentives and approximately 15 states provide
incentives to biodiesel producers to build facilities in their states,
typically offering tax credits, grants and other financial incentives. As
FutureFuel Chemical Company expands its business outside of Arkansas, it will
evaluate these additional state incentives to determine if it qualifies for
them.
FutureFuel Chemical Company will continue to identify and pursue other
incentives to support its business. However, no assurances can be given that
FutureFuel Chemical Company will qualify for any such incentives or, if it
does qualify, what the amount of such incentives will be.
BQ-9000 Status
The BQ-9000 program was launched in late 2005 by the National Biodiesel
Board. The program requires certified and accredited companies to possess a
quality manual and quality control system and employ best practices in
biodiesel sampling, testing, blending, shipping, storage and distribution. The
goal of the program is to help assure quality of biodiesel from plant gate to
consumer tank.
FutureFuel Chemical Company recognized the potential to establish itself
as an industry quality leader through extension of its existing chemical ISO
9001 quality systems to biodiesel production. Management further recognized
the need within this developing industry to provide a consistent ASTM standard
product as an essential
23
requirement for market expansion into fleet, government and on-the-road
applications. In February 2006, shortly after the biodiesel industry
established its comprehensive quality standard, BQ-9000, FutureFuel Chemical
Company achieved the fourth such certification in the nation (as of June 21,
2007, only 17 biodiesel producers had achieved this quality standard - see
http://www.bq-9000.org/companies/producers.aspx). Consistent with BQ-9000, all
manufactured product is tested in on-site quality control laboratories and
confirmed to meet the ASTM D6751 standard.
Future Strategy of the Enlarged Group
We intend to expand FutureFuel Chemical Company's biodiesel capacity
utilizing available facilities as market conditions dictate as described
above. All future capacity will be operated in continuous processing mode to
realize operating economies and optimum throughput. Existing and future
processes will accommodate a wide range of feedstock oils, allowing
optimization relative to supply and pricing.
FutureFuel Chemical Company is pursuing the commercialization of
cellulosic-based ethanol, initially to be produced from local hardwood
biomass. FutureFuel Chemical Company's research and development program with
respect to cellulosic-based ethanol includes collaboration with the National
Renewable Energy Laboratory ("NREL") and other private-sector technology
providers. These NREL collaborations consisted of an assessment of the
proposed FutureFuel Chemical Company technologies for cellulosic ethanol and
mapping of these unit operations to an existing production facility. NREL also
supported FutureFuel Chemical Company in establishing analytical assay
techniques for cellulosic biomass and its hydrolysates. Private sector
collaborators have been major enzyme suppliers who have provided commercial
and pre-commercial cellulose enzyme products, as well as technical support for
their use. As with biodiesel, FutureFuel Chemical Company intends to leverage
technical expertise and existing idle manufacturing assets to move this
emerging technology from the development stage to commercial reality. The
biochemical platform approach being pursued seeks to assemble demonstrated
component technologies in a process design that leverages current facility
infrastructure and capabilities.
Federal and state support incentives are anticipated to be available for
cellulosic ethanol commercial development. We intend to take full advantage of
incentives as they are promulgated into regulation and practice. In October
2006, a $2 million U.S. Department of Agriculture grant was awarded to Virent
Energy Systems LLC to demonstrate the conversion of glycerin to propylene
glycol at pilot plant scale. FutureFuel Chemical Company is Virent's research
partner on the grant project. FutureFuel Chemical Company will be making
in-kind contributions to the research effort by designing, engineering,
installing and operating a subscale processing unit at its Batesville plant.
FutureFuel Chemical Company will receive a portion of the grant to cover
direct costs (which direct costs are estimated at approximately $686,000 and
are expected to be incurred in the 4th quarter of 2007 and during 2008). We
believe this technology, if successfully demonstrated, may be adapted as a key
component technology for the envisioned cellulosic ethanol process. In
addition, the lignocellulose fuel pellet plant, which began operation in 2007,
is envisioned as a potential outlet to utilize, and add value to, the
substantial lignin residue stream resulting from a future cellulosic ethanol
facility. However, no assurances can be given that FutureFuel Chemical Company
will develop a commercially viable cellulosic-based ethanol manufacturing
process.
Customers and Markets
FutureFuel Chemical Company currently markets its biodiesel products by
truck and rail directly to customers in twelve midwest, southwest and western
states. Through the utilization of liquid bulk storage facilities and barge
loading capabilities, FutureFuel Chemical Company is positioned to market
biodiesel throughout the United States for transportation and home heating
fuel usage. In addition, FutureFuel Chemical Company has entered into a
tolling agreement whereby, for a fee, it produces biodiesel for a third party.
For the twelve months ended December 31, 2006, two of FutureFuel Chemical
Company's customers represented 50% of biodiesel revenues (5% of total
revenues), five customers represented 65% of biodiesel revenues (6% of total
revenues) and the tolling agreement represented 9% of biodiesel revenues (1%
of total revenues). Although the regional market is still being developed, we
estimate that the regional direct market available to FutureFuel Chemical
Company at maturity will be at least 30 million gallons per year.
24
Competition
FutureFuel Chemical Company competes with other producers of biodiesel,
both locally, regionally and nationally. There is one other operational
biodiesel plant in the state of Arkansas (in Stuttgart, southeast of Little
Rock), with capacity stated at 3 million gallon per year. There are several
operating facilities in surrounding states and announced biodiesel production
facilities in Arkansas and surrounding states. We estimate that regional
competitive producers may have approximately 150 million gallons of capacity
by late 2007 or early 2008. National producers of biodiesel are described
above.
In addition to biodiesel producers, FutureFuel Chemical Company competes
with new technologies that are being developed as alternatives to biodiesel.
For example, in December 2006, ConocoPhillips announced that commercial
production of renewable diesel fuel had begun at its Whitegate refinery in
Cork Island, Ireland. The production process, developed by ConocoPhillips,
uses soybean and other vegetable oils to produce fuel that meets European
diesel fuel standards. The fuel is produced using existing equipment at the
refinery and is blended and transported with petroleum-based diesel.
ConocoPhillips claims that renewable diesel is chemically similar to
conventional petrodiesel and can be shipped through common carrier pipelines.
ConocoPhillips is evaluating this technology for use in the United States.
UOP, a major supplier to the petrochemical refining industry, has also
reported the development of technology for the production of fungible fuels
(diesel and gasoline) by hydro-processing of vegetable oils and cellulose. See
http://www.alternatefuelsworld.com/greendiesel-greengasoline.html. We cannot
give any assurances that renewable diesel fuel (or some other product)
produced by these competing technologies will not supplant biodiesel as an
alternative to conventional petrodiesel.
Supply and Distribution
As a result of its feedstock-neutral process, FutureFuel Chemical Company
is able to source oils from a broad supplier base which includes pork, chicken
and beef rendering facilities from both national and regional suppliers. Soy
oil is also sourced from several national and regional producers. Cottonseed
oil has been sourced from a regional cooperative. All feedstocks are currently
supplied by either rail or truck. FutureFuel Chemical Company is currently
exploring the possibility of importing palm oil feedstocks. We believe that an
adequate supply of feedstocks can be sourced to support anticipated
production.
We intend that biodiesel and other biofuels will be sold at the plant
site as well as shipped to liquid bulk storage facilities for further
distribution. Plant site sales are made by railcar and tank truck. Biodiesel
is being delivered to liquid bulk storage facilities by company-owned tank
trucks and common carriers for distribution there and for further
transportation by barge.
Chemicals Business Segment
Overview of the Segment
FutureFuel Chemical Company's chemicals segment manufactures diversified
chemical products that are sold externally to third party customers and to
Eastman Chemical Company. This segment comprises two components: "custom
manufacturing" (manufacturing chemicals for specific customers); and
"performance chemicals" (multi-customer specialty chemicals). The chemicals
segment had revenue of $35,654,000 for the three months ended March 31, 2007
and revenues of $137,430,000, $119,539,000 and $144,157,000 for the years
ended December 31, 2006, 2005 and 2004, respectively.
Chemical Products
Custom manufacturing involves producing unique products for individual
customers, generally under long-term contracts. Many of these products are
produced under confidentiality agreements in order to protect intellectual
property. This is a service-based business where customers value technical
capabilities, responsiveness and process improvement to continually improve
costs and reliability. In recent years, a trend toward off-shoring (to China
and India in particular) has placed significant downward pressure on margins.
The plant's custom manufacturing product portfolio includes four large
products or product families which are generally produced throughout the year:
(i) nonanoyloxybenzenesulfonate ("NOBS"), a bleach activator for The Procter &
Gamble Company, a major detergent and consumer products manufacturer; (ii) a
proprietary herbicide for Arysta
25
LifeScience North America Corporation, a major life sciences company; (iii)
chlorinated polyolefin adhesion promoters ("CPOS") for Eastman Chemical
Company; and (iv) antioxidant precursors ("DIPBS") for Eastman Chemical
Company. The portfolio also contains a number of smaller products which are
produced intermittently in a "batch campaign" mode, for diverse customers and
end markets.
Performance chemicals comprises multi-customer products which are sold
based upon specification and/or performance in the end-use application. This
portfolio includes a family of polymer (nylon) modifiers and several
small-volume specialty chemicals for diverse applications.
FutureFuel Chemical Company has historically manufactured CPOs and DIPBs
at cost for Eastman Chemical Company. CPOs are chemical intermediates that
promote adhesion for plastic coatings and DIPBs are intermediates for
production of Eastman Chemical Company products used as general purpose
inhibitors, intermediates or antioxidants. Historically, revenues related to
CPOs and DIPBs were exactly offset by cost of goods sold; hence there was no
effect on gross profit for the years ended December 31, 2004 and 2005 or the
ten-months ended October 31, 2006. As part of our acquisition of FutureFuel
Chemical Company, FutureFuel Chemical Company entered into conversion
agreements with Eastman Chemical Company whereby FutureFuel Chemical Company
agreed to produce these products on Eastman Chemical Company's behalf. The
conversion agreements effectively provide a conversion fee to FutureFuel
Chemical Company based on volume manufactured, with a minimum annual fee. In
addition, the conversion agreements provide for revenue adjustments for actual
usage of raw materials versus a standard and stipulate that Eastman Chemical
Company will pay for substantially all raw material expenses and allow for an
annual inflation adjustment factor.
Future Strategy
To build on and maintain FutureFuel Chemical Company's reputation as a
technology-driven competitive chemical producer, we believe that FutureFuel
Chemical Company must continuously focus on cost control, operational
efficiency and capacity utilization to maximize earnings. The ability to
utilize large scale batch and continuous production processes and a continuous
focus on process improvements allow FutureFuel Chemical Company to compete
effectively in the custom manufacturing market and to remain cost competitive
with, and for some products cost-advantaged over, its competitors. We intend
to improve margins in this area of the FutureFuel Chemical Company business by
careful management of product mix with regard to size of opportunity, timing
to market, capital efficiency and matching of opportunities to assets and
capabilities.
We expect to derive significant growth in the performance chemicals
component primarily as a result of new biobased co-products derived from
biofuels manufacturing, such as glycerin and derivatives. We believe that
these products and applications will be competitive in the marketplace due to
advantaged raw material costs derived from their co-product status. For
example, for every gallon of biodiesel produced, approximately one pound of
co-product glycerin is generated. See http://www.biodiesel.org/pdf_files/
fuelfactsheets/prod_quality.pdf and http://www.harvestcleanenergy.org/
conference/HCE6/Frear2.pdf. Based upon calculations made by FutureFuel
Chemical Company, we estimate that the production of glycerin from biodiesel
represented 25% of U.S. domestic production of glycerin in 2005 and we
estimate that it represented over 60% of the available U.S. domestic glycerin
production in 2006. Production of glycerin from biofuels has significantly
reduced the value of glycerin in the global marketplace and prices for refined
glycerin have fallen by over 50% since late 2004. See http://www.purchasing.com/
article/CA6341035.html?ref=nbcs and http://www.biodieselmagazine.com/article.
jsp?article_id=1123. The crude form of glycerin derived directly from
biodiesel processing has little or no value unless purified to an industrial
grade quality. See http://www.biodieselmagazine.com/article.jsp?article_id=1123
and http://www.ampc.montana.edu/policypaper/policy22.pdf. Many small biodiesel
producers lack this purification capability and we believe that crude glycerin
has become a disposal issue for many of these producers. See
http://www.biodieselmagazine.com/article.jsp?article_id=1123, and
http://www.biodieselmagazine.com/article.jsp?article_id=237&q=&page=all and
http://www.ampc.montana.edu/policypaper/policy22.pdf. Leveraging its specialty
chemicals expertise and infrastructure, FutureFuel Chemical Company is capable
of refining glycerin to sufficient purity to derive commercial value as a
co-product and/or converting glycerin through chemical processing to
higher-value derivative products. Commercial development samples of refined
glycerin (bulk quantities) are currently available for customer evaluations.
In July 2006, Eastman SE, Inc. identified three key areas for the sale of
glycerin: (i) sale of existing unrefined material; (ii) sale of highly refined
material; and (iii) conversion of unrefined and refined material to higher
value products. FutureFuel Chemical Company has offered unrefined glycerin to
users thereof, which has led to sampling programs and field tests. However, no
sales have been arranged
26
on terms satisfactory to FutureFuel Chemical Company. It has refined glycerin
in batch equipment and has provided samples to various potential customers,
but no sales have been consummated. Conversion of glycerin to higher value
products is still in the research and development stage (for example, see the
discussion with respect to Virent Energy Systems LLC above).
Customers and Markets
FutureFuel Chemical Company's chemical products are used in a variety of
market and end uses, including detergent, agrochemical, automotive,
photographic imaging, coatings, nutrition and polymer additives. These
products are generally non-cyclical; however, the customers are often the
"brand owners" and therefore control factors related to demand, such as market
development strategy. In many cases, FutureFuel Chemical Company may be unable
to increase or maintain its level of sales revenue for these products.
All sales of NOBS are made to The Procter & Gamble Company pursuant to a
supply contract that is set to expire in June 2008. No assurances can be given
that such contract will be extended past June 2008 or, if extended, upon what
terms. Sales of NOBS totaled $20,453,000 for the three months ended March 31,
2007 and $84,691,000, $66,959,000 and $73,607,000 for the years ended December
31, 2006, 2005 and 2004, respectively. Additionally, all sales of a
proprietary herbicide and certain other intermediates used in the production
of this herbicide are made to Arysta LifeScience North America Corporation
pursuant to contracts which continue year-to-year unless terminated by notice
given no later than 270 days prior to the end of the current term for the
herbicide and not later than 18 months prior to the current term for the
intermediates. No assurances can be given that these contracts will not be
terminated. Sales of this herbicide and its intermediates totaled $5,291,000
for the three months ended March 31, 2007 and $23,685,000, $25,063,000 and
$27,946,000 for the years ended December 31, 2006, 2005 and 2004,
respectively. These two customers represented approximately 69% of revenues
for the first three months of 2007 and 72%, 77% and 70% of revenues in 2006,
2005 and 2004, respectively.
Competition
Historically, there have been significant barriers to entry for
competitors with respect to chemicals primarily due to the fact that the
relevant technology and manufacturing capability has been held by a small
number of companies. As technology and investment have increasingly moved
outside of North America, competition from multinational chemical
manufacturers has intensified, primarily from India and China. FutureFuel
Chemical Company competes with these and other producers primarily based on
price and, to a lesser extent, based on customer service, technology, quality
and reliability. FutureFuel Chemical Company's major competitors in this
segment include large multinational companies with specialty chemical business
units, and smaller independent producers. The multinational competitors are
often disadvantaged by poor responsiveness and customer service, while the
small producers often have limited technology and financial resources. We
believe that FutureFuel Chemical Company should be well-positioned for growth
due to the combination of its scale of operations and technical capabilities.
Supply and Distribution
Specialty chemicals are generally high unit value products sold in
packaged, or low-volume bulk form, for which distribution is a relatively
minor component of cost. Most products are sold FOB the Batesville site for
distribution globally. Similarly, raw materials for these products are
comparatively higher-value components that are sourced globally. An exception
will be the biofuels co-products, which will be recovered from local
processing and purified or further functionalized into other products at the
site.
Backlog
The majority of FutureFuel Chemical Company's revenues are derived under
tolling arrangements with specific customers. These customers generally
provide FutureFuel Chemical Company with forecasts of demand on a monthly or
quarterly basis. However, these forecasts are intended to enable FutureFuel
Chemical Company to optimize the efficiency of its production processes and
are not firm sales orders. As such, FutureFuel Chemical Company does not
monitor or report backlog.
27
Management Team and Workforce
FutureFuel Chemical Company's executive management team consists of
four individuals with a combined 80 plus years of experience in the chemicals
industry, comprising technical, operational and business responsibilities.
Three of the four members of the executive team have international experience,
including assignments in Europe and Asia. The fourth member, the chief
financial officer, began employment concurrently with the closing of our
acquisition of FutureFuel Chemical Company. The operational and commercial
management group at the Batesville site includes seven additional degreed
professionals with an average experience of over 20 years in the chemical
industry.
The Batesville workforce comprises approximately 450 additional
employees, with a total of 60 degreed professionals, including 15 chemists (10
PhDs) and 36 engineers (including 10 licensed professional engineers and 17
chemical engineers). The site is non-unionized. Operations personnel are
highly skilled as all site manufacturing and infrastructure is fully automated
and computer-controlled. The workforce is substantially self-sufficient in the
range of required operational skills and experience due to the lack of
locally-available process industry infrastructure. Voluntary attrition at the
site has averaged less than 2% annually since 2001.
Cyclicality and Seasonality
FutureFuel Chemical Company's chemical products typically are not
cyclical but they are sensitive to global economic conditions. Supply and
demand dynamics determine profitability at different stages of cycles and
global economic conditions affect the length of each cycle. Despite some
sensitivity to global economic conditions, many of the products in the
chemical segment provide a stable foundation of earnings.
Until such time as non-seasonal business (primarily on-road
transportation) expands regionally, FutureFuel Chemical Company's biodiesel
sales at grades greater than B5 are expected to be lower in winter months due
to the end of farming activity, which is a major user of biodiesel. Also, cold
weather usage and storage properties which reduce biodiesel demand during
winter months require resolution in order to fully exploit year-round demand
opportunities.
Intellectual Property
We consider FutureFuel Chemical Company's intellectual property
portfolio to be a valuable corporate asset which we intend to expand and
protect globally through a combination of trade secrets, confidentiality and
non-disclosure agreements, patents and copyrights. As a producer of a broad
and diverse portfolio of chemicals, FutureFuel Chemical Company's intellectual
property relates to a wide variety of products and processes acquired through
the development and manufacture of over 300 specialty chemicals during the
history of the site. Our primary strategy regarding FutureFuel Chemical
Company's intellectual property portfolio will be to appropriately protect all
innovations and know-how in order to provide FutureFuel Chemical Company's
business segments with a technology-based competitive advantage, wherever
possible. In the chemicals business segment, custom manufacturing projects are
primarily conducted within the framework of confidentiality agreements with
each customer to ensure that intellectual property rights are defined and
protected. In the biofuels business segment, innovations and process know-how
will be vigorously protected as appropriate. As may be necessary, we will seek
to license technology from third parties that complements FutureFuel Chemical
Company's strategic business objectives. Neither FutureFuel Chemical Company's
business as a whole nor any particular segment is materially dependent upon
any one particular patent, copyright or trade secret. As the laws of many
foreign countries do not protect intellectual property to the same extent as
the laws of the United States, we cannot assure you that FutureFuel Chemical
Company will be able to adequately protect all of its intellectual property
assets.
Research and Development
FutureFuel Chemical Company devotes significant resources to its
research and development programs which are primarily targeted towards two
objectives:
o innovating, developing and improving biofuels processes, in
particular biodiesel and bioethanol, including value-up technology
and applications for co-products; and
28
o developing and improving processes for custom manufacturing products
or performance chemicals.
FutureFuel Chemical Company's research and development capabilities
comprise analytical chemistry competencies to assay and characterize raw
materials and products, organic chemistry expertise applied across a breadth
of reaction chemistries and materials and process engineering capabilities for
batch and continuous processing of both solid and liquid materials. We believe
that these core competencies, established in support of the legacy chemical
business, are applicable to building a technology-based position in biofuels
and associated biobased specialty products.
The research and development expenses incurred by FutureFuel Chemical
Company during the three months ended March 31, 2007 were $1,024,000 and
during the years ended December 31, 2006, 2005 and 2004 were $4,937,000,
$5,975,000 and $9,919,000, respectively. Substantially all of such research
and development expenses related to the development of new products, services
and processes or the improvement of existing products, services and processes.
Research and development expenses during this timeframe trended downwards due
to: (i) reduced allocation of research and development overhead from Eastman
Chemical Company in anticipation of the divestiture of Eastman SE, Inc.; and
(ii) a reduction in research and development staffing at the Batesville site
resulting from the general reduction-in-force which was effective May 2005.
The 2007 and 2006 research and development expenses generally reflect the
research and development staffing and program costs incurred at the Batesville
site on a standalone basis.
Regulatory and Environmental Matters
Various aspects of FutureFuel Chemical Company's operations are subject
to regulation by state and federal agencies. Oil and gas operations as well as
chemical operations are subject to numerous, stringent and complex laws and
regulations at the federal, state and local levels governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may:
o require acquisition of permits regarding discharges into the air and
discharge of waste waters;
o place restrictions on the handling and disposal of hazardous and
other wastes; and
o require capital expenditures to implement pollution control
equipment.
Compliance with such laws and regulations can be costly and noncompliance can
result in substantial civil and even criminal penalties. Some environmental
laws impose strict liability for environmental contamination, rendering a
person liable for environmental damages and cleanup costs without regard to
negligence or fault. Moreover, public interest in the protection of the
environment has increased substantially in recent years. FutureFuel Chemical
Company's operations could be adversely affected to the extent laws are
enacted or other governmental action is taken that imposes environmental
protection requirements that result in increased costs to the oil and gas
industry and/or the chemical manufacturing industry in general. The following
provides a general discussion of some of the significant environmental laws
and regulations that impact FutureFuel Chemical Company's activities.
The federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), and analogous state laws, impose joint and several
liabilities, without regard to fault or the legality of the original act, on
certain classes of persons that contributed to the release of a hazardous
substance into the environment. These persons include the owner and operator
of the site where the release occurred, past owners and operators of the site,
and companies that disposed or arranged for the disposal of hazardous
substances found at the site. Responsible parties under CERCLA may be liable
for the costs of cleaning up hazardous substances that have been released into
the environment and for damages to natural resources. Additionally, it is not
uncommon for third parties to assert claims for personal injury and property
damage allegedly caused by the release of hazardous substances or other
pollutants into the environment.
The federal Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act ("RCRA"), is the principal federal statute
governing the management of wastes, including the treatment, storage and
disposal of hazardous wastes. RCRA imposes stringent operating requirements,
and liability for failure to meet such requirements, on a person who is either
a generator or transporter of hazardous waste or an owner or operator of a
29
hazardous waste treatment, storage or disposal facility. Many of the wastes
generated in FutureFuel Chemical Company's manufacturing facility are governed
by RCRA.
The federal Oil Pollution Act of 1990 ("OPA") and regulations thereunder
impose liability on responsible parties for damages resulting from oil spills
into or upon navigable waters, adjoining shorelines or in the exclusive
economic zone of the United States. A responsible party includes the owner or
operator of an onshore facility. OPA limits liability for onshore facilities
to $350 million. These liability limits may not apply if a spill is caused by
a party's gross negligence or willful misconduct, the spill resulted from
violation of a federal safety, construction or operating regulation, or if a
party fails to report a spill or to cooperate fully in a clean-up. Failure to
comply with OPA's requirements may subject a responsible party to civil,
criminal or administrative enforcement actions.
The federal Water Pollution Control Act ("CLEAN WATER ACT") imposes
restrictions and controls on the discharge of pollutants into navigable
waters. These controls have become more stringent over the years, and it is
possible that additional restrictions may be imposed in the future. Permits
must be obtained to discharge pollutants into state and federal waters. The
Clean Water Act provides for civil, criminal and administrative penalties for
discharges of oil and other pollutants, and imposes liability on parties
responsible for those discharges for the costs of cleaning up any
environmental damage caused by the release and for natural resource damages
resulting from the release. Comparable state statutes impose liabilities and
authorize penalties in the case of an unauthorized discharge of petroleum or
its derivatives, or other pollutants, into state waters.
The federal Clean Air Act ("CLEAN AIR ACT"), and associated state laws
and regulations, restrict the emission of air pollutants from many sources,
including facilities involved in manufacturing chemicals and biofuels. New
facilities are generally required to obtain permits before operations can
commence, and new or existing facilities may be required to incur certain
capital expenditures to install air pollution control equipment in connection
with obtaining and maintaining operating permits and approvals. Federal and
state regulatory agencies can impose administrative, civil and criminal
penalties for non-compliance with permits or other requirements of the Clean
Air Act and associated state laws and regulations.
The federal Endangered Species Act, the federal Marine Mammal Protection
Act, and similar federal and state wildlife protection laws prohibit or
restrict activities that could adversely impact protected plant and animal
species or habitats. Manufacturing activities could be prohibited or delayed
in areas where such protected species or habitats may be located, or expensive
mitigation may be required to accommodate such activities.
FutureFuel Chemical Company's policy is to operate its plants and
facilities in a manner that protects the environment and the health and safety
of its employees and the public. FutureFuel Chemical Company intends to
continue to make expenditures for environmental protection and improvements in
a timely manner consistent with its policies and with the technology
available. In some cases, applicable environmental regulations such as those
adopted under the Clean Air Act and RCRA, and related actions of regulatory
agencies, determine the timing and amount of environmental costs incurred by
FutureFuel Chemical Company.
We establish reserves for closure/post-closure costs associated with the
environmental and other assets we maintain. Environmental assets include waste
management units such as incinerators, landfills, storage tanks and boilers.
When these types of assets are constructed or installed, a reserve is
established for the future costs anticipated to be associated with the closure
of the site based on an expected life of the environmental assets, the
applicable regulatory closure requirements and our environmental policies and
practices. These expenses are charged into earnings over the estimated useful
life of the assets. Currently, we estimate the useful life of each individual
asset up to 35 years.
In addition to our general environmental policies and policies for asset
retirement obligations and environmental reserves, we accrue environmental
costs when it is probable that we or one of our subsidiaries has incurred a
liability and the amount can be reasonably estimated. In some instances, the
amount cannot be reasonably estimated due to insufficient data, particularly
in the nature and timing of the future performance. In these cases, the
liability is monitored until such time that sufficient data exists. With
respect to a contaminated site, the amount accrued reflects our assumptions
about remedial requirements at the site, the nature of the remedy, the outcome
of discussions with regulatory agencies and other potentially responsible
parties at multi-party sites, and the number and financial viability of other
potentially responsible parties. Changes in the estimates on which the
30
accruals are based, unanticipated government enforcement action, or changes in
health, safety, environmental, chemical control regulations, and testing
requirements could result in higher or lower costs.
FutureFuel Chemical Company's cash expenditures related to environmental
protection and improvement were approximately $13,300,000, $13,211,000 and
$12,896,000 for the years ended December 31, 2006, 2005 and 2004,
respectively. These amounts pertain primarily to operating costs associated
with environmental protection equipment and facilities, but also include
expenditures for construction and development. We do not expect future
environmental capital expenditures arising from requirements of recently
promulgated environmental laws and regulations to materially increase
FutureFuel Chemical Company's planned level of annual capital expenditures for
environmental control facilities.
We believe that FutureFuel Chemical Company has obtained in all material
respects the necessary permits and licenses to carry on its operations as
presently conducted. We have reviewed environmental investigations of the
properties owned by FutureFuel Chemical Company and believe, on the basis of
the results of the investigations carried out to date, that there are no
material regulatory and/or environmental issues which adversely impact
FutureFuel Chemical Company. In addition, under our acquisition agreement with
Eastman Chemical Company, Eastman Chemical Company acquired environmental
insurance with respect to environmental conditions at the Batesville plant
existing as of the closing date and Eastman Chemical Company has agreed,
subject to certain limitations, to indemnify FutureFuel Chemical Company with
respect to such environmental conditions.
Objectives
Our business objectives for FutureFuel Chemical Company are to: (i)
exploit growth opportunities in its two core business segments, biofuels and
chemicals; and (ii) improve gross margins.
Exploit Growth Opportunities in Core Business Segments
We believe that FutureFuel Chemical Company can become a market leader in
biofuels by leveraging its specialty chemicals technical expertise and by
fully utilizing idle site assets and infrastructure headspace, with emphasis
on:
o operational expertise to produce ASTM D6751 quality biodiesel from
diverse feedstocks;
o leveraging BQ-9000 quality certification to supply demanding
biodiesel applications;
o conversion of available capacity at below new-build costs;
o service to regional markets and enhanced distribution channels to
national markets;
o process improvement to reduce costs of manufacturing; and
o adding value to co-products and by-products from biofuels
production.
We believe that FutureFuel Chemical Company is one of the largest
independent custom chemical manufacturers in North America and that it will
continue to grow this business based upon:
o long term contracts for most custom manufacturing products;
o strong relationships with customers who are market leaders, leading
to repeat business;
o technical capability to innovate processes, particularly the ability
to apply both chemistry and engineering disciplines to solve complex
technical problems;
o responsiveness and customer service from an entrepreneurial
organization;
o ability to practice a range of manufacturing scale; and
o process improvement capability to achieve lowest-cost manufacturing
position.
31
We intend to grow FutureFuel Chemical Company's multi-customer chemicals
portfolio by producing marketable chemical co-products from biofuels
production and biobased specialty products derived from biofuel products
and/or raw materials. As an example, a significant co-product from biodiesel
production is glycerin, which can be purified and sold and which may also be
chemically converted into other chemical products and derivatives. See the
discussion above. We intend that FutureFuel Chemical Company will exploit the
potential for development of a "chemicals from biomass" platform, based upon
the raw material and co-product streams associated with biofuels production.
Improve Gross Margins
We intend that FutureFuel Chemical Company will continue to work to
maximize the value of core businesses by improving gross margins through:
o enhancing pricing processes and strategies, and optimizing biofuels
channels to market;
o continuing to pursue cost reduction opportunities, including
improved operational efficiency through business simplification;
o achieving high utilization of manufacturing assets;
o improving capital efficiency through high value de-bottlenecking
opportunities and incremental expansions of existing assets and
infrastructure; and
o enhancing custom manufacturing project selection and portfolio mix.
However, no assurances can be given that these objectives will be met, in
whole or in part.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We do not derive revenues from customers in foreign countries. Most of
FutureFuel Chemical Company's sales are FOB the Batesville plant, although
some FOB points are in other states or at foreign ports. While many of
FutureFuel Chemical Company's chemicals are utilized to manufacture products
that are shipped, further processed and/or consumed throughout the world, the
chemical products, with limited exceptions, generally leave the United States
only after ownership has transferred from FutureFuel Chemical Company to the
customer. Rarely is FutureFuel Chemical Company the exporter of record, never
is FutureFuel Chemical Company the importer of record into foreign countries
and FutureFuel Chemical Company is not always aware of the exact quantities of
its products that are moved into foreign markets by its customers. FutureFuel
Chemical Company does track the addresses of its customers for invoicing
purposes and uses this address to determine whether a particular sale is
within or outside the United States. FutureFuel Chemical Company's revenues
from external customers for the three months ended March 31, 2007 and for the
last three fiscal years attributable to the United States and foreign
countries (based upon the billing addresses of its customers) were as follows:
(Dollars in thousands)
ALL FOREIGN
UNITED STATES COUNTRIES TOTAL
---------------------------------------------------- ----------------- ---------------- ----------------
Three months ended March 31, 2007................... $ 32,300 $ 5,206 $ 37,506
Year ended December 31, 2006........................ $ 131,893 $ 18,877 $ 150,770
Year ended December 31, 2005........................ $ 105,719 $ 13,820 $ 119,539
Year ended December 31, 2004........................ $ 138,636 $ 5,521 $ 144,157
For the year ended December 31, 2004, revenues from a single foreign country
did not exceed 2% of total revenues. Beginning in 2005, FutureFuel Chemical
Company began invoicing Procter & Gamble International Operations Mexico, D.F.
directly, at which time revenues from Mexico became a more significant
component of total revenues. For the years ended December 31, 2005 and 2006
and the three months ended March 31, 2007, revenues from Mexico accounted for
10%, 11% and 13%, respectively, of total revenues. Other than Mexico, revenues
from a single foreign country during 2005 and 2006 and the first three months
of 2007 did not exceed 1% of total revenues.
32
All of our and FutureFuel Chemical Company's long-lived assets are
located in the United States.
We have no foreign operations. See "Item 1A. - Risk Factors" at page 34
for a discussion of risks attendant to FutureFuel Chemical Company's foreign
operations.
AVAILABLE INFORMATION
Neither we nor FutureFuel Chemical Company currently files reports with
the Securities and Exchange Commission.
Commencing upon the effectiveness of this Registration Statement, we will
make available free of charge, through the "Investor Relations - SEC Filings"
section of our Internet website (http://www.FutureFuelCorporation.com), our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports, filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after electronically filing such material with,
or furnishing it to, the Securities and Exchange Commission. Once filed with
the Securities and Exchange Commission, such documents may be read and/or
copied at the Securities and Exchange Commission's Public Reference Room at
100 F Street N.E., Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the Securities and Exchange
Commission at 1-800-SEC-0330. In addition, the Securities and Exchange
Commission maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that
electronically file with the Securities and Exchange Commission at
http://www.sec.gov.
Commencing upon the effectiveness of this Registration Statement, we will
make available free of charge, through the "Investor Relations - Corporate
Governance" section of our website (http://www.FutureFuelCorporation.com),
the corporate governance guidelines of our board of directors, the charters of
each of the committees of our board of directors, and codes of ethics and
business conduct for our directors, officers and employees. Such materials
will be available in print upon the written request of any shareholder to
FutureFuel Corp., 8235 Forsyth Blvd., 4th Floor, Clayton, Missouri 63105,
Attention: Investor Relations.
REPORTS TO SECURITY HOLDERS
In the investor rights agreement that we executed on July 12, 2006 in
connection with our offering, we agreed, following completion of the
acquisition of FutureFuel Chemical Company and until this Registration
Statement has become effective, to furnish to our shareholders annual,
quarterly and current reports and to ensure that the proxy materials
distributed to our shareholders in connection with a business combination are
substantially similar to materials that would be required if such materials
were subject to Securities and Exchange Commission requirements, but only to
the extent that our board of directors in its business judgment determines
that it would be reasonably practicable to provide such information, taking
into account factors such as time, expense and other relevant considerations
under the particular circumstances. Such annual reports will contain financial
information that has been examined and reported on, with an opinion expressed
by, an independent certified public accountant.
On August 22, 2006, AIM announced that non-European Economic Area
companies whose shares are traded on AIM are not required to adopt
International Financial Reporting Standards for financial reporting purposes
but may use, among other things, U.S. generally accepted accounting principles
without reconciliation to the International Financial Reporting Standards. We
are a non-European Economic Area company and have determined that we will
prepare our financial statements in accordance with U.S. generally accepted
accounting principles. International Financial Reporting Standards differ in
certain significant respects from U.S. generally accepted accounting
principles and our financial statements prepared in accordance with U.S.
generally accepted accounting principles will not be comparable to financial
statements prepared in accordance with International Financial Reporting
Standards.
33
ITEM 1A. - RISK FACTORS
An investment in us involves a high degree of risk and may result in the
loss of all or part of your investment. You should consider carefully all of
the information set out in this document and the risks attaching to an
investment in us, including, in particular, the risks described below. The
information below does not purport to be an exhaustive list and should be
considered in conjunction with the contents of the rest of this document.
RISKS ASSOCIATED WITH FUTUREFUEL CHEMICAL COMPANY.
--------------------------------------------------
THE INDUSTRIES IN WHICH FUTUREFUEL CHEMICAL COMPANY COMPETES ARE HIGHLY
COMPETITIVE.
The oil and gas industry, as well as the chemical business, are highly
competitive. There is competition within these industries and also with other
industries in supplying the energy, fuel and chemical needs of industry and
individual consumers. FutureFuel Chemical Company will compete with other
firms in the sale or purchase of various goods or services in many national
and international markets. FutureFuel Chemical Company will compete with large
national and multi-national companies that have longer operating histories,
greater financial, technical and other resources and greater name recognition
than FutureFuel Chemical Company does. In addition, FutureFuel Chemical
Company will compete with several smaller companies capable of competing
effectively on a regional or local basis, and the number of these smaller
companies is increasing. FutureFuel Chemical Company's competitors may be able
to respond more quickly to new or emerging technologies and services and
changes in customer requirements. As a result of competition, FutureFuel
Chemical Company may lose market share or be unable to maintain or increase
prices for its products and/or services or to acquire additional business
opportunities, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. Although FutureFuel
Chemical Company will employ all methods of competition which are lawful and
appropriate for such purposes, no assurances can be made that they will be
successful. A key component of FutureFuel Chemical Company's competitive
position, particularly given the expected commodity-based nature of many of
its products, will be its ability to manage expenses successfully, which
requires continuous management focus on reducing unit costs and improving
efficiency. No assurances can be given that FutureFuel Chemical Company will
be able to successfully manage such expenses.
FutureFuel Chemical Company's competitive position in the markets in
which it participates is, in part, subject to external factors in addition to
those that FutureFuel Chemical Company can impact. Natural disasters, changes
in laws or regulations, war or other outbreak of hostilities, or other
political factors in any of the countries or regions in which FutureFuel
Chemical Company operates or does business, or in countries or regions that
are key suppliers of strategic raw materials, could negatively impact
FutureFuel Chemical Company's competitive position and its ability to maintain
market share.
INCREASES IN THE CONSTRUCTION OF BIODIESEL PRODUCTION PLANTS MAY CAUSE EXCESS
BIODIESEL PRODUCTION CAPACITY IN THE MARKET. EXCESS CAPACITY MAY ADVERSELY
AFFECT THE PRICE AT WHICH FUTUREFUEL CHEMICAL COMPANY IS ABLE TO SELL THE
BIODIESEL THAT IT PRODUCES AND MAY ALSO ADVERSELY AFFECT OUR ANTICIPATED
RESULTS OF OPERATION AND FINANCIAL CONDITION.
In 2005, approximately 75 million gallons of biodiesel were produced in
the United States. Currently, there is a reported 1.39 billion gallons per year
of biodiesel production capacity in the United States, with another 1.89
billion gallons per year under construction. With such an increase in
biodiesel production capacity in the United States, compared to historical
production levels, there is risk that there will be a significant amount of
excess biodiesel production capacity. Although this existing and pending
capacity growth is very large compared to historical production levels, we
believe that the market will purchase as much biodiesel as is available, so
long as the prices for biodiesel (net of the impact of tax credits and other
similar incentives) are competitive with those of petrodiesel.
FLUCTUATIONS IN COMMODITY PRICES MAY CAUSE A REDUCTION IN THE DEMAND OR
PROFITABILITY OF THE PRODUCTS OR SERVICES FUTUREFUEL CHEMICAL COMPANY PRODUCES.
Prices for alternative fuels tend to fluctuate widely based on a variety
of political and economic factors. These price fluctuations heavily influence
the oil and gas industry. Lower energy prices for existing products tend to
limit the demand for alternative forms of energy services and related products
and infrastructure. Historically, the
34
markets for alternative fuels have been volatile, and they are likely to
continue to be volatile. Wide fluctuations in alternative fuel prices may
result from relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and other factors that are beyond our control,
including:
o worldwide and domestic supplies of oil and gas;
o the price and/or availability of biodiesel feedstocks;
o weather conditions;
o the level of consumer demand;
o the price and availability of alternative fuels;
o the availability of pipeline and refining capacity;
o the price and level of foreign imports;
o domestic and foreign governmental regulations and taxes;
o the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and
production controls;
o political instability or armed conflict in oil-producing regions;
and
o the overall economic environment.
These factors and the volatility of the commodity markets make it extremely
difficult to predict future alternative fuel price movements with any
certainty. There may be a decrease in the demand for FutureFuel Chemical
Company's products or services and our profitability could be adversely
affected.
FUTUREFUEL CHEMICAL COMPANY IS RELIANT ON CERTAIN STRATEGIC RAW MATERIALS FOR
ITS OPERATIONS.
FutureFuel Chemical Company is reliant on certain strategic raw materials
(such as acetic anhydride, pelargonic acid, soybean oil and methanol) for its
operations. We are implementing certain risk management tools, such as
multiple suppliers and hedging, as appropriate, to mitigate short-term market
fluctuations in raw material supply and costs. There can be no assurance,
however, that such measures will result in cost savings or that all market
fluctuation exposure will be eliminated. In addition, natural disasters,
changes in laws or regulations, war or other outbreak of hostilities, or other
political factors in any of the countries or regions in which FutureFuel
Chemical Company operates or does business, or in countries or regions that
are key suppliers of strategic raw materials, could affect availability and
costs of raw materials.
While temporary shortages of raw materials may occasionally occur, these
items have historically been sufficiently available to cover current
requirements. However, their continuous availability and price are impacted by
natural disasters, plant interruptions occurring during periods of high
demand, domestic and world market and political conditions, changes in
government regulation, and war or other outbreak of hostilities. In addition,
as FutureFuel Chemical Company increases its biodiesel capacity, it will
require larger supplies of raw materials which have not yet been secured and
may not be available for the foregoing reasons, or may be available only at
prices higher than current levels. FutureFuel Chemical Company's operations or
products may, at times, be adversely affected by these factors.
FUTUREFUEL CHEMICAL COMPANY IS RELIANT UPON TWO CUSTOMERS FOR A SUBSTANTIAL
AMOUNT OF ITS SALES.
All sales of NOBS are made to The Procter & Gamble Company and all sales
of a proprietary herbicide and certain other intermediates used in the
production of this herbicide are made to Arysta LifeScience North America
Corporation. These two customers represented approximately 69% of FutureFuel
Chemical Company's revenues for the quarter ended March 31, 2007 and 72% of
its revenues in 2006. The contract with The Procter & Gamble
35
Company is set to expire in June 2008 and no assurances can be given that such
contract will be extended past June 2008 or, if extended, upon what terms. The
contracts with Arysta LifeScience North America Corporation contain certain
termination provisions and no assurances can be given that these contracts
will not be terminated. The loss of these two companies as customers could
have a material adverse effect on us.
CHANGES IN TECHNOLOGY MAY RENDER FUTUREFUEL CHEMICAL COMPANY'S PRODUCTS OR
SERVICES OBSOLETE.
The alternative fuel and chemical industries may be substantially
affected by rapid and significant changes in technology. Examples include
competitive product technologies, such as green gasoline and biodiesel
produced from catalytic hydroforming of renewable feedstock oils and
competitive process technologies such as advanced biodiesel continuous reactor
and washing designs that increase throughput. These changes may render
obsolete certain existing products, energy sources, services and technologies
currently used by FutureFuel Chemical Company. We cannot assure you that the
technologies used by or relied upon by FutureFuel Chemical Company will not be
subject to such obsolescence. While we may attempt to adapt and apply the
services provided by FutureFuel Chemical Company to newer technologies, we
cannot assure you that we will have sufficient resources to fund these changes
or that these changes will ultimately prove successful.
FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS COULD RESULT IN THE IMPOSITION
OF PENALTIES, FINES OR RESTRICTIONS ON OPERATIONS AND REMEDIAL LIABILITIES.
The oil and gas and chemical industries are subject to extensive federal,
state, local and foreign laws and regulations related to the general
population's health and safety and those associated with compliance and
permitting obligations (including those related to the use, storage, handling,
discharge, emission and disposal of municipal solid waste and other waste,
pollutants or hazardous substances or waste, or discharges and air and other
emissions) as well as land use and development. Existing laws also impose
obligations to clean up contaminated properties or to pay for the cost of such
remediation, often upon parties that did not actually cause the contamination.
Compliance with these laws, regulations and obligations could require
substantial capital expenditures. Failure to comply could result in the
imposition of penalties, fines or restrictions on operations and remedial
liabilities. These costs and liabilities could adversely affect our
operations.
Changes in environmental laws and regulations occur frequently, and any
changes that result in more stringent or costly waste handling, storage,
transport, disposal or cleanup requirements could require FutureFuel Chemical
Company to make significant expenditures to attain and maintain compliance and
may otherwise have a material adverse effect on its business segments in
general and on our results of operations, competitive position or financial
condition. We are unable to predict the effect of additional environmental
laws and regulations which may be adopted in the future, including whether any
such laws or regulations would materially adversely increase FutureFuel
Chemical Company's cost of doing business or affect its operations in any
area.
Under certain environmental laws and regulations, FutureFuel Chemical
Company could be held strictly liable for the removal or remediation of
previously released materials or property contamination regardless of whether
FutureFuel Chemical Company was responsible for the release or contamination,
or if current or prior operations were conducted consistent with accepted
standards of practice. Such liabilities can be significant and, if imposed,
could have a material adverse effect on our financial condition or results of
operations.
FUTUREFUEL CHEMICAL COMPANY'S BIOFUELS OPERATIONS MAY BE HARMED IF THE
GOVERNMENT WERE TO CHANGE CURRENT LAWS AND REGULATIONS.
Alternative fuels businesses benefit from tax credits and government
subsidies. If any of the state or federal laws and regulations relating to the
tax credits and government subsidies change, the ability to recover capital
expenditures from an alternative fuels business could be harmed. FutureFuel
Chemical Company's biofuels platform is subject to federal, state, and local
laws and regulations governing the application and use of alternative energy
products, including those related specifically to biodiesel. For instance,
biodiesel products benefit from being the only alternative fuel certified by
the U.S. Environmental Protection Agency that fulfills the requirements of
Section 211(B) of the Clean Air Act. If agency determinations, laws and
regulations relating to the application and use of alternative energy are
changed, the marketability and sales of biodiesel production could be
materially adversely affected.
36
THE VALUE OF FUTUREFUEL CHEMICAL COMPANY MAY PROVE TO BE LESS THAN WHAT WE
PAID FOR FUTUREFUEL CHEMICAL COMPANY BECAUSE OF UNCERTAINTIES IN EVALUATING
FUTURE COSTS AND/OR POTENTIAL LIABILITIES.
Successful acquisitions require an assessment of a number of factors,
including estimates of future biofuel prices, operating costs (including the
costs of raw goods) and potential environmental and other liabilities. Such
assessments are inexact and their accuracy is inherently uncertain. In
connection with our due diligence assessment of FutureFuel Chemical Company,
we performed a review of FutureFuel Chemical Company and its properties which
we believe was generally consistent with industry practices. However, such a
review will not reveal all existing or potential problems. In addition, our
review may not have permitted us to become sufficiently familiar with
FutureFuel Chemical Company's properties to fully assess their deficiencies
and capabilities. As a result of these factors, the value of FutureFuel
Chemical Company may ultimately be less than what we agreed to pay for its
stock.
MARKET CONDITIONS OR TRANSPORTATION IMPEDIMENTS MAY HINDER ACCESS TO RAW GOODS
AND DISTRIBUTION MARKETS.
Market conditions, the unavailability of satisfactory transportation or
the location of FutureFuel Chemical Company's manufacturing complex from more
lucrative markets may hinder FutureFuel Chemical Company's access to raw goods
and/or distribution markets. The availability of a ready market for biodiesel
depends on a number of factors, including the demand for and supply of
biodiesel and the proximity of the plant to trucking and terminal facilities.
The sale of large quantities of biodiesel necessitates that FutureFuel
Chemical Company transport its biodiesel to other markets since the
Batesville, Arkansas regional market is not expected to absorb all of
FutureFuel Chemical Company's contemplated production. Currently, common
carrier pipelines are not transporting biodiesel. This leaves trucks, barges
and rail cars as the means of distribution of FutureFuel Chemical Company's
product from the plant to these storage terminals for further distribution.
However, the current availability of rail cars is limited and at times
unavailable because of repairs or improvements, or as a result of priority
transportation agreements with other shippers. Additionally, the current
availability of barges is limited, particularly heated barges to transport
biodiesel during winter months. If transportation is restricted or is
unavailable, FutureFuel Chemical Company may not be able to sell into more
lucrative markets and consequently its cash flow from sales of biodiesel could
be restricted.
The biodiesel industry also faces several challenges to wide biodiesel
acceptance, including cold temperature limitations, storage stability, fuel
quality standards and exhaust emissions. If the industry does not satisfy
consumers that these issues have been resolved or are being resolved,
biodiesel may not gain widespread acceptance which may have an adverse impact
on FutureFuel Chemical Company's cash flow from sales of biodiesel.
FUTUREFUEL CHEMICAL COMPANY'S INSURANCE MAY NOT PROTECT IT AGAINST ITS
BUSINESS AND OPERATING RISKS.
We maintain insurance for some, but not all, of the potential risks and
liabilities associated with FutureFuel Chemical Company's business. For some
risks, we may not obtain insurance if we believe the cost of available
insurance is excessive relative to the risks presented. As a result of market
conditions, premiums and deductibles for certain insurance policies can
increase substantially and, in some instances, certain insurance policies may
become unavailable or available only for reduced amounts of coverage. As a
result, we may not be able to renew our existing insurance policies or procure
other desirable insurance on commercially reasonable terms, if at all.
Although we will maintain insurance at levels we believe are appropriate for
FutureFuel Chemical Company's business and consistent with industry practice,
we will not be fully insured against all risks which cannot be sourced on
economic terms. In addition, pollution and environmental risks generally are
not fully insurable. Losses and liabilities from uninsured and underinsured
events and delay in the payment of insurance proceeds could have a material
adverse effect on our financial condition and results of operations.
If a significant accident or other event resulting in damage to
FutureFuel Chemical Company's operations (including severe weather, terrorist
acts, war, civil disturbances, pollution or environmental damage) occurs and
is not fully covered by insurance or a recoverable indemnity from a customer,
it could adversely affect our financial condition and results of operations.
37
FUTUREFUEL CHEMICAL COMPANY DEPENDS ON KEY PERSONNEL, THE LOSS OF ANY OF WHOM
COULD MATERIALLY ADVERSELY AFFECT OUR FUTURE OPERATIONS.
Our success will depend to a significant extent upon the efforts and
abilities of FutureFuel Chemical Company's executive officers. The loss of the
services of one or more of these key employees could have a material adverse
effect on us. FutureFuel Chemical Company's business will also be dependent
upon its ability to attract and retain qualified personnel. Acquiring or
retaining these personnel could prove more difficult to hire or cost
substantially more than estimated. This could cause FutureFuel Chemical
Company to incur greater costs, or prevent it from pursuing its expansion
strategy as quickly as it would otherwise wish to do.
IF FUTUREFUEL CHEMICAL COMPANY IS UNABLE TO EFFECTIVELY MANAGE THE COMMODITY
PRICE RISK OF ITS RAW MATERIALS OR FINISHED GOODS, FUTUREFUEL CHEMICAL COMPANY
MAY HAVE UNEXPECTED LOSSES.
We hedge FutureFuel Chemical Company's raw materials and/or finished
products to some degree to manage the commodity price risk of such items. This
requires the purchase or sale of commodity futures contracts and/or options on
those contracts or similar financial instruments. We may be forced to make
cash deposits available to counterparties as they mark to market these
financial hedges. This funding requirement may limit the level of commodity
price risk management that we are prudently able to complete. If we do not or
are not capable of managing the commodity price risk of FutureFuel Chemical
Company's raw materials and/or finished products, FutureFuel Chemical Company
may incur losses as a result of price fluctuations with respect to these raw
materials and/or finished products.
IF FUTUREFUEL CHEMICAL COMPANY IS UNABLE TO ACQUIRE OR RENEW PERMITS AND
APPROVALS REQUIRED FOR ITS OPERATIONS, IT MAY BE FORCED TO SUSPEND OR CEASE
OPERATIONS ALTOGETHER.
The operation of FutureFuel Chemical Company's manufacturing plant
requires numerous permits and approvals from governmental agencies. FutureFuel
Chemical Company may not be able to obtain all necessary permits (or
modifications thereto) and approvals and, as a result, our operations may be
adversely affected. In addition, obtaining all necessary renewal permits (or
modifications to existing permits) and approvals for future expansions may
necessitate substantial expenditures and may create a significant risk of
expensive delays or loss of value if a project is unable to function as
planned due to changing requirements.
THE LACK OF BUSINESS DIVERSIFICATION MAY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
It is possible that we will not consummate more than one business
combination with the proceeds from our July 2006 offering and FutureFuel
Chemical Company may be the only target business that we acquire. Accordingly,
the prospects for our success may be entirely dependent upon FutureFuel
Chemical Company. Unlike other entities which may have the resources to
complete several business combinations of entities operating in multiple
industries or multiple areas of a single industry, it is possible that we will
not have the resources to diversify effectively our operations or benefit from
the possible spreading of risks or offsetting of losses.
FUTUREFUEL CHEMICAL COMPANY'S INDEBTEDNESS MAY LIMIT OUR ABILITY TO BORROW
ADDITIONAL FUNDS OR CAPITALIZE ON ACQUISITION OR OTHER BUSINESS OPPORTUNITIES.
FutureFuel Chemical Company has entered into a $50 million revolving
credit facility with Regions Bank and we have guaranteed FutureFuel Chemical
Company's obligations thereunder. The restrictions governing this indebtedness
(such as total debt to EBITDA limitations) may reduce our ability to incur
additional indebtedness, engage in certain transactions or capitalize on
acquisition or other business opportunities. If FutureFuel Chemical Company is
unable to meet its future debt service obligations and other financial
obligations, we could be forced to restructure or refinance such indebtedness
and other financial transactions, seek additional equity or sell assets.
WE EXPECT TO HAVE CAPITAL EXPENDITURE REQUIREMENTS, AND WE MAY BE UNABLE TO
OBTAIN NEEDED FINANCING ON SATISFACTORY TERMS.
We expect to make capital expenditures for the expansion of FutureFuel
Chemical Company's biofuels production capacity and complementary
infrastructure. We intend to finance these capital expenditures primarily
through cash flow from FutureFuel Chemical Company's operations, borrowings
under the credit facility with
38
Regions Bank and the remaining proceeds of our July 2006 offering. However, if
FutureFuel Chemical Company's capital requirements vary materially from those
provided for in our current projections, we may require additional financing
sooner than anticipated. A decrease in expected revenues or adverse change in
market conditions could make obtaining this financing economically
unattractive or impossible. As a result, we may lack the capital necessary to
complete the projected expansions or capitalize on other business
opportunities.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE FUTUREFUEL CHEMICAL COMPANY
ACQUISITION OR OTHER FUTURE ACQUISITIONS WITH OUR OPERATIONS OR REALIZE ALL OF
THE ANTICIPATED BENEFITS OF THESE ACQUISITIONS.
Separation of FutureFuel Chemical Company from Eastman Chemical Company
and integration of FutureFuel Chemical Company with us has been a complex,
time-consuming and costly process. Failure to successfully integrate
FutureFuel Chemical Company in a timely manner may have a material adverse
effect on our business, financial condition, results of operations and cash
flows. The difficulties of combining the acquired operations include, among
other things:
o operating a significantly larger combined organization;
o consolidating corporate technological and administrative functions;
o integrating internal controls and other corporate governance
matters; and
o diverting management's attention from other business concerns.
In addition, we may not realize all of the anticipated benefits from the
acquisition of FutureFuel Chemical Company and other future acquisitions, such
as increased earnings, cost savings and revenue enhancements, for various
reasons, including difficulties integrating operations and personnel, higher
and unexpected acquisition and operating costs, unknown liabilities and
fluctuations in markets. If the FutureFuel Chemical Company acquisition
benefits do not meet the expectations of financial or industry analysts, the
market price of our shares of common stock may decline.
THE SCOPE OF INDEMNITY PROTECTION AFFORDED TO US UNDER THE ACQUISITION
AGREEMENT WITH EASTMAN CHEMICAL COMPANY IS LIMITED.
While we are confident that the due diligence process undertaken in
relation to FutureFuel Chemical Company was sufficient and that material areas
of potential exposure have been discovered, there can be no certainty that all
significant exposures were uncovered by the due diligence process and it is
unlikely that all existing or potential problems and/or liabilities have been
revealed. The inspections that have been performed may not have revealed
structural and environmental problems, such as groundwater contamination. We
were not able to obtain contractual indemnities from Eastman Chemical Company
for all liabilities that were created by Eastman Chemical Company or
FutureFuel Chemical Company prior to the completion of the acquisition of
FutureFuel Chemical Company and have only limited indemnity protection under
the acquisition agreement with Eastman Chemical Company. As part of such
acquisition agreement, we, through FutureFuel Chemical Company, assumed the
risk of the physical condition of FutureFuel Chemical Company's properties in
addition to the risk that the properties may not perform in accordance with
expectations, as well as certain environmental and other unknown liabilities
in excess of certain amounts.
If any such exposures materialize or the information provided as part of
the due diligence exercise proves to be untrue or inaccurate, we will have to
rely on the limited indemnity protection afforded to us under the acquisition
agreement in order to seek compensation for any financial loss incurred as a
result. By its nature, indemnity protection is limited in scope, being the
product of a negotiation exercise between us and Eastman Chemical Company, and
therefore we may not recover any or sufficient funds fully to cover any loss
incurred.
In addition, even where potential areas of exposure are covered by the
scope of indemnity protection provided under the acquisition agreement, there
is no guarantee that Eastman Chemical Company will be in a financial position
to support the level of indemnification for which it may be liable.
Consequently, we may not recover any or sufficient funds fully to cover any
loss incurred.
39
RISKS ASSOCIATED WITH INVESTING IN AIM COMPANIES.
-------------------------------------------------
THE MARKET FOR OUR SHARES OR WARRANTS IS RELATIVELY ILLIQUID.
Our shares of common stock and warrants currently are traded on AIM and
are not listed or traded on any established market in the United States. AIM
is a market designed primarily for emerging or smaller companies. The AIM
rules are less demanding than those of the Official List of the UK Listing
Authority and other stock exchanges and also than those under federal
securities laws. Neither the London Stock Exchange nor the federal Securities
and Exchange Commission has approved the contents of this document. The future
success of AIM and liquidity in the market for our shares of common stock and
warrants cannot be guaranteed. In particular, the market for our shares of
common stock and warrants may be, or may become, relatively illiquid and
therefore may be or may become difficult to sell.
Investment in shares traded on AIM is perceived to carry a higher risk
than an investment in shares quoted on exchanges with more stringent listing
requirements, such as the London Stock Exchange, the New York Stock Exchange
or the NASDAQ Global Market. This is because AIM imposes less stringent
corporate governance and ongoing reporting requirements. AIM is also a new and
more flexible market, which requires only semi-annual, rather than quarterly,
financial update reports. Investors should be aware that the value of our
shares of common stock and warrants may be influenced by many factors, some of
which may affect quoted companies generally, including the depth and liquidity
of the market, our performance, a large or small volume of trading in our
securities, legislative changes and general economic, political or regulatory
conditions, and that the prices may be volatile and subject to extensive
fluctuations. Therefore, the market price of our shares of common stock and
warrants may not reflect the underlying value. The value of an investment in
us may increase or decrease; therefore investors may realize less than, or
lose all of, their investment.
WE WILL NOT ADOPT THE INTERNATIONAL FINANCIAL REPORTING STANDARDS BUT RATHER
WILL CONTINUE TO PREPARE OUR FINANCIAL STATEMENTS AND FINANCIAL REPORTING IN
ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
On August 22, 2006, AIM announced that non-European Economic Area
companies whose shares are traded on AIM are not required to adopt
International Financial Reporting Standards for financial reporting purposes
but may use, among other things, U.S. generally accepted accounting principles
without reconciliation to International Financial Reporting Standards. We are
a non-European Economic Area company and have determined that we will prepare
our financial statements in accordance with U.S. generally accepted accounting
principles. International Financial Reporting Standards differ in certain
significant respects from U.S. generally accepted accounting principles and
our financial statements prepared in accordance with U.S. generally accepted
accounting principles will not be comparable to financial statements prepared
in accordance with International Financial Reporting Standards.
RISKS ASSOCIATED WITH OWNING OUR SHARES AND WARRANTS.
-----------------------------------------------------
OUR SHARES WILL BE REPRESENTED BY DEFINITIVE CERTIFICATES WHICH COULD REDUCE
THE LIQUIDITY OF OUR SHARES AND WARRANTS.
Our shares of common stock are represented by definitive certificates
which contain the following legend.
Prior to investing in the securities or conducting any
transactions in the securities, investors are advised to
consult professional advisers regarding the restrictions on
transfer summarized below and any other restrictions.
This security (or its predecessor) was originally issued in a
transaction exempt from registration under the United States
Securities Act of 1933, as amended (the "Securities Act"), and
is a restricted security (as defined in Rule 144 under the
Securities Act). This security may not be offered, sold or
otherwise transferred in the absence of registration or an
applicable exemption therefrom. Hedging transactions involving
this security may not be conducted directly or indirectly,
unless in compliance with the Securities Act. Each purchaser of
this security is hereby notified that the seller of this
security may be relying on the
40
exemption from the provisions of Section 5 of the Securities
Act provided by Rule 144A or Regulation S thereunder.
The holder of this security agrees for the benefit of the
Company that (a) this security may be offered, resold, pledged
or otherwise transferred, only (i) in the United States to a
person whom the seller reasonably believes is a qualified
institutional buyer (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of
Rule 144A, (ii) outside of the United States in an offshore
transaction in accordance with Rule 903 or Rule 904 under the
Securities Act, (iii) pursuant to an exemption from
registration under the Securities Act provided by Rule 144
thereunder (if available) or (iv) pursuant to an effective
registration statement under the Securities Act, in each of
cases (i) through (iv) in accordance with any applicable
securities laws of any state of the United States, and (b) the
holder will, and each subsequent holder is required to, notify
any purchaser of this security from it of the resale
restrictions referred to in (a) above.
The securities represented by this certificate are subject to
transfer restrictions which require that in addition to any
certifications required from a transferor as set forth on the
reverse of this certificate, prior to the expiration of a
distribution compliance period of at least one year, the
transferee certifies as to whether or not it is a US person
within the meaning of Regulation S and provides certain other
certifications and agreements. Prior to permitting any
transfer, the Company may request an opinion of counsel
reasonably satisfactory to the Company that such transfer is to
be effected in a transaction meeting the requirements of
Regulation S under the Securities Act or is otherwise exempt
from registration under the Securities Act.
CREST Co., which is the Central Securities Depository for the U.K. markets
(including AIM) and which operates the CREST system (CREST Co.'s real-time
settlement system for UK and Irish shares and other corporate securities),
does not allow electronic settlement on CREST until the legend has been
removed and the certification requirements required under U.S. securities laws
have expired. The filing and effectiveness of this Registration Statement will
not result in the removal of this legend. As a result, our shares of common
stock and warrants must be represented by definitive certificates. In order to
transfer or sell our shares or warrants, holders must provide the definitive
certificates to the transfer agent, who will require certain certifications as
set forth in the legend, and on occasion legal opinions as set forth in the
legend, prior to issuing new certificates to new security holders. The lack of
a fully electronic settlement mechanism may have a material adverse effect on
the liquidity and the price of our securities.
IF OUR FOUNDING SHAREHOLDERS AND MR. NOVELLY OR HIS DESIGNEES EXERCISE THEIR
REGISTRATION RIGHTS, SUCH EXERCISE MAY HAVE AN ADVERSE EFFECT ON THE MARKET
PRICE OF OUR SHARES OF COMMON STOCK.
Those shareholders holding shares of our common stock prior to the July
2006 offering (the "founding shareholders"; see "Item 4. - Security Ownership
of Certain Beneficial Owners and Management--Founding Shares Owned by the
Founding Shareholders" at page 61 for a list of the founding shareholders) and
Mr. Paul A. Novelly, our executive chairman of the board, or his designees,
are entitled to demand that we register under the U.S. Securities Act of 1933,
as amended (the "SECURITIES ACT"), the resale of their shares of our common
stock issued prior to our July 2006 offering (the "founding shares") and their
shares included in the units purchased in such offering. The demand may be
made at any time after the date on which we have become a reporting company
under the U.S. Securities Exchange Act of 1934, as amended, and their founding
shares have been released from escrow. Except in limited circumstances, this
date will not be before July 12, 2009. If our founding shareholders exercise
their registration rights with respect to all of their shares of our common
stock, there will be an additional 11,250,000 shares and/or up to 5,000,000
shares issued on exercise of their warrants eligible for trading in the public
market. The presence of this additional number of shares eligible for trading
in the public market may have an adverse effect on the market price of our
shares.
41
TRANSFER OF OUR SHARES AND/OR WARRANTS, AND THE EXERCISE OF OUR WARRANTS, ARE
SUBJECT TO STRINGENT TRANSFER AND EXERCISE REQUIREMENTS UNDER THE SECURITIES
ACT.
Our shares of common stock and our warrants are subject to the conditions
listed under section 903(b)(3) or Category 3 of Regulation S under the
Securities Act. Under Category 3, offering restrictions (as defined under
Regulation S) had to be in place in connection with our July 2006 offering and
additional restrictions are imposed on resales of our securities as described
elsewhere herein. All of our shares of common stock and our warrants are
subject to these restrictions, regardless of whether the purchaser acquired
the securities in a transaction pursuant to Rule 144A under the Securities Act
or in a transaction pursuant to Regulation S. Our shares and warrants are
considered "restricted securities" under Rule 144 and will, until the
expiration of the applicable holding period with respect to the securities set
forth in Rule 144 and the expiration of the one-year compliance period, bear
restrictive legends, unless we determine otherwise in compliance with
applicable law.
THE RULE 144 HOLDING PERIOD FOR OUR SHARES RECEIVED UPON EXERCISE OF OUR
WARRANTS MAY RECOMMENCE UPON THE EXERCISE OF SUCH WARRANTS.
The Rule 144 holding period for the shares of our common stock received
upon exercise of our warrants will start upon the exercise of such warrants.
Even though the Rule 144(k) two-year holding period for the shares and
warrants may have expired, enabling certificates for those securities to have
the legend removed, the Rule 144 holding period for the shares received upon
exercise of the warrants will start upon such exercise. Accordingly, holders
of our warrants that exercise their warrants for cash will receive shares of
our common stock subject to trading restrictions which are greater than those
imposed on the trading of previously issued shares. Such restrictions may mean
the value of the shares received upon exercise of the warrants may be
significantly lower, at least until the two-year holding period has expired,
than the shares originally issued.
WE MAY NOT LIST OUR COMMON STOCK OR OUR WARRANTS ON A STOCK EXCHANGE OTHER
THAN AIM.
Under the investor rights agreement that we entered into on July 12, 2006
with CRT Capital Group LLC and KBC Peel Hunt Ltd, as promptly as practicable
after this Registration Statement has been declared effective, we are
obligated to use our commercially reasonable efforts to cause our shares of
common stock to be authorized to be quoted and/or listed (to the extent
applicable) on the American Stock Exchange, the New York Stock Exchange, the
NASD Automated Quotation System or the NASDAQ National Market (or, in each
case, a successor thereto) or a similarly recognized national trading
platform, if our common stock so qualifies. However, no assurances can be
given that our common stock will qualify to be quoted and/or listed on any
such exchange or other similarly recognized national trading platform.
Further, we have no such obligation with respect to our warrants and no
assurances can be given that we will attempt to cause our warrants to be
authorized to be quoted and/or listed on any such exchange or other similarly
recognized national trading platform.
INTERNAL REPORTING CONTROLS.
----------------------------
OUR MANAGEMENT HAS IDENTIFIED A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER
FINANCIAL REPORTING; FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL
CONTROL OVER FINANCIAL REPORTING IN ACCORDANCE WITH SECTION 404 OF THE
SARBANES-OXLEY ACT OF 2002 ("SECTION 404") COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS AND STOCK PRICE.
Our internal control over financial reporting does not currently meet all
the standards contemplated by Section 404 that we will eventually be required
to meet. As a public company, we are required to complete our initial
assessment by the filing of our Form 10-K for the year ending December 31,
2007. If we are not able to implement the requirements of Section 404 in a
timely manner or with adequate compliance, this result may cause us to be
unable to report on a timely basis and thereby subject us to adverse
regulatory consequences, including sanctions by the Securities and Exchange
Commission or violations of applicable stock exchange listing rules. There
could also be a negative reaction in the financial markets due to a loss of
investor confidence in the reliability of our financial statements. We have
and will incur incremental costs in order to improve our internal control over
financial reporting and comply with Section 404, including increased auditing
and legal fees and costs associated with hiring additional accounting and
administrative staff. This could harm our operating results and lead to a
decline in our stock price.
42
Our management identified a material weakness in our internal control
over financial reporting, as defined in the standards established by the
Public Company Accounting Oversight Board. This weakness related to the lack,
at December 31, 2006, of an effective cut-off process for accruing
liabilities. We identified the existence of certain deficiencies around the
end-of-period close process to permit the preparation of our financial
statements in accordance with accounting principles generally accepted in the
United States of America and the Securities and Exchange Commission
regulations. The lack of such controls could cause our quarterly or annual
financial statements and other regulatory reporting requirements to become
materially misstated or not meet the applicable filing deadlines if they are
not properly remedied. Our management has designed and begun to implement an
appropriate control that it believes is effective to address the identified
weakness. The steps we have taken or intend to take, however, may not
remediate this material weakness. Additional material weaknesses in our
internal control over financial reporting also may be identified in the
future.
43
ITEM 2. - FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
FutureFuel Chemical Company
Historically, the business and assets included in FutureFuel Chemical
Company were accounted for by Eastman Chemical Company in various segments of
Eastman Chemical Company's overall business. Although FutureFuel Chemical
Company was incorporated on September 1, 2005, Eastman Chemical Company did
not begin transferring assets into FutureFuel Chemical Company until January
1, 2006 and completed the transfer in subsequent periods prior to the closing
of our acquisition of FutureFuel Chemical Company. Notwithstanding that
FutureFuel Chemical Company was a separately incorporated entity, Eastman
Chemical Company did not prepare separate financial statements for FutureFuel
Chemical Company nor was it required to do so under local law or accounting
rules. Rather, the operations of the Batesville plant were reported within
Eastman Chemical Company based upon the underlying products, and the revenues
and expenses of the plant were presented in various segments within Eastman
Chemical Company's financial statements. In addition, allocations to the plant
of Eastman Chemical Company overhead (such as insurance, employee benefits,
legal expenses and the like) were based upon assumptions made by Eastman
Chemical Company and such assumptions historically did not reflect expenses
which FutureFuel Chemical Company would have incurred had it been a
stand-alone entity. Since we did not acquire or succeed to all of the assets
and liabilities of Eastman Chemical Company, "carve-out" financial statements
have been prepared for the acquired component business, excluding the
continuing operations retained by Eastman Chemical Company and allocations for
overhead components described above have been effected. As the acquisition is
deemed to be a reverse acquisition with FutureFuel Chemical Company being the
accounting acquirer, the annual selected financial data presents the
operations of the Batesville plant for the twelve-month periods ended December
31, 2006, 2005 and 2004 and includes our operations for the period beginning
with the date of the acquisition (beginning of business on November 1, 2006)
and ending December 31, 2006. The selected quarterly financial data presents
our consolidated operations for the three-month period ended March 31, 2007
and the Batesville plant's operations for the three-month period ended March
31, 2006.
The following tables set forth FutureFuel Chemical Company's summary
historical financial and operating data for the periods indicated below. This
summary historic financial and operating data has been derived from FutureFuel
Chemical Company's "carve-out" financial statements as of and for the
twelve-months ended December 31, 2006, 2005 and 2004 and the three months
ended March 31, 2007 and 2006 which are included elsewhere in this
Registration Statement. Our financial data for the two-month period ending
December 31, 2006 and the three-month period ending March 31, 2007 is included
in the 2006 and 2007 information, respectively. The information presented in
the table below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and notes thereto included elsewhere in this Registration
Statement. The three years of selected financial data represent the complete
financial information prepared and provided by Eastman Chemical Company in
conjunction with the carve out and sale of the Batesville plant to us.
44
(Dollars in thousands, except per share amounts)
THREE THREE
MONTHS MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
MARCH 31, MARCH 31, -----------------------------------------
ITEM 2007 2006 2006 2005 2004
------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Operating revenues..................................... $ 37,506 $ 35,054 $150,770 $119,539 $144,157
Net income (loss)...................................... $ (1,952) $ 767 $ 2,137 $ 381 $(14,867)
Earnings (loss) per common share
Basic............................................. $ (0.07) $ 0.03 $ 0.08 $ 0.01 $ (0.56)
Diluted........................................... $ (0.07) $ 0.02 $ 0.07 $ 0.01 $ (0.56)
Total assets........................................... $201,678 $115,438 $207,024 $114,500 $118,164
Long-term obligations.................................. $ 24,137 $ 25,048 $ 24,429 $ 24,830 $ 25,105
Cash dividends per common share........................ $ - $ - $ - $ - $ -
Net cash provided by (used in) operating activities.... $ 4,784 $ 61 $ (5,517) $ 7,556 $ 19,044
Net cash provided by (used in) investing activities.... $ (6,045) $ (2,097) $(18,524) $ (6,594) $ (6,520)
Net cash provided by (used in) financing activities.... $ (50) $ 2,036 $ 87,170 $ (962) $(12,524)
Prior to the initiation of its biofuels program in 2005, the Batesville
plant did not report financial results by business "segments" as defined by
generally accepted accounting principles. After the initiation of such program
and upon divestiture, it defined two segments: chemicals and biofuels.
In March 2007, FutureFuel Chemical Company entered into a $50 million
credit facility with Regions Bank as described below. As of March 31, 2007,
FutureFuel Chemical Company had not borrowed under such credit facility.
The Company
We were incorporated on August 12, 2005 to serve as a vehicle for the
acquisition by way of an asset acquisition, merger, capital stock exchange,
share purchase or similar transaction of one or more operating businesses in
the oil and gas industry. We completed an offering on July 12, 2006 and
consummated the acquisition of FutureFuel Chemical Company at the close of
business on October 31, 2006. We otherwise had no material business operations
and had no subsidiaries until October 31, 2006. The following is selected
financial data for us for the period that began on August 12, 2005 (date of
incorporation) and ended on December 31, 2005 and for the ten-month period
ended October 31, 2006. The selected financial data has been derived from our
financial statements which are included elsewhere in this Registration
Statement.
(Dollars in thousands, except per share amounts)
ITEM 2006 2005
-------------------------------------------------------------------------- ------------ -----------
Interest and other income.................................................. $ 2,632 $ 1
Net income (loss).......................................................... $ 1,368 $ -
Earnings (loss) per common share
Basic................................................................. $ 0.24 -
Diluted............................................................... $ 0.24 -
Total assets............................................................... $ 1,368 $ 235
Total liabilities.......................................................... $ 1,746 $ 210
Cash dividends declared per common share................................... $ - $ -
Net cash provided by (used in) operating activities..................... $ 2,590 $ 10
Net cash provided by (used in) investing activities..................... $ (1,045) $ -
Net cash provided by (used in) financing activities..................... $ (1,368) $ 18
45
FutureFuel Chemical Company and the Company Combined Results
To illustrate the effects of our July 2006 offering and our acquisition
of FutureFuel Chemical Company as if the combined results of operations had
been in place during 2006, the pro forma effect of such a combination would
have resulted in total assets of $207,024,000, operating revenues of
$150,770,000, net income of $3,505,000 and earnings per share of $0.13 as of
and for the year ending December 31, 2006. This information is for
illustrative purposes only. The consolidated company would likely have
performed differently had they always been combined. The information should
not be relied on as an indication of future results that the combined company
will experience after the acquisition of FutureFuel Chemical Company because
of a variety of factors, including access to additional information and
changes in value. Also see "Item 1A. - Risk Factors" at page 34.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read together with ours and FutureFuel
Chemical Company's financial statements, including the notes thereto, in this
Registration Statement. This discussion contains forward-looking statements
that reflect our current views with respect to future events and financial
performance. Actual results may differ materially from those anticipated in
these forward-looking statements. See "Forward Looking Information" below for
additional discussion regarding risks associated with forward-looking
statements.
Results of Operations
In General
We were not incorporated until August 12, 2005, we did not complete our
offering until July 12, 2006 and we did not complete the acquisition of
FutureFuel Chemical Company until October 31, 2006. Other than the offering
and the acquisition, we have not carried on any material business activities.
FutureFuel Chemical Company's historical revenues have been generated
through the sale of specialty chemicals. FutureFuel Chemical Company breaks
its chemicals business into two main product groups: custom manufacturing and
performance chemicals. Major products in the custom manufacturing group
include: (i) NOBS, a chemical additive manufactured exclusively for The
Procter & Gamble Company for use in a household detergent; (ii) a proprietary
herbicide (and intermediates) manufactured exclusively for Arysta LifeScience
North America Corporation; and (iii) two other product lines (CPOs and DIPBs)
produced under conversion contracts for Eastman Chemical Company. The major
product line in the performance chemicals group is SSIPA/LiSIPA, polymer
modifiers that aid the properties of nylon manufactured for a broad customer
base. There are a number of additional small volume custom and performance
chemical products that FutureFuel Chemical Company groups into "other
products". In late 2005, FutureFuel Chemical Company began producing biodiesel
as a product. All 2005 biodiesel revenues were classified as miscellaneous
sales and recorded as a credit to cost of goods sold. Beginning in 2006,
revenues and cost of goods sold for biofuels were treated as a separate
business segment.
Revenues generated from NOBS are based on a supply agreement with the
customer. The supply agreement stipulates selling price per kilogram based on
volume produced, with price moving up as volumes move down, and vice-versa.
The supply agreement has historically been renewed every five years. The
current contract expires in June 2008, and no assurances can be given that the
contract will be extended past that date or, if extended, under what terms.
FutureFuel Chemical Company pays for raw materials required to produce NOBS.
The contract with the customer provides that the price to be received by
FutureFuel Chemical Company for NOBS is indexed to changes in labor, energy,
inflation and the key external raw materials, enabling FutureFuel Chemical
Company to pass along most increases in production costs to the customer.
FutureFuel Chemical Company has been the exclusive manufacturer for
Arysta LifeScience North America Corporation of a proprietary herbicide and
certain intermediates. These products are beginning to face some generic
competition, and no assurances can be given that FutureFuel Chemical Company
will remain the exclusive manufacturer for this product line. The contracts
automatically renew for successive one-year periods, subject to the right of
either party to terminate the contract not later than 270 days prior to the
end of the then current term for the herbicide and not later than 18 months
prior to the current term for the intermediates. No assurances can be given
that these contracts will not be terminated. Arysta LifeScience North America
Corporation supplies most of the key
46
raw materials for production of the proprietary herbicide. There is no pricing
mechanism or specific protection against cost changes for raw materials that
FutureFuel Chemical Company is responsible for purchasing, and we do not
anticipate this to change going forward.
FutureFuel Chemical Company has historically manufactured CPOs and DIPBs
at cost for Eastman Chemical Company. CPOs are chemical intermediates that
promote adhesion for plastic coatings and DIPBs are intermediates for
production of Eastman Chemical Company products used as general purpose
inhibitors, intermediates or antioxidants. Historically, revenues related to
CPOs and DIPBs were exactly offset by cost of goods sold; hence there was no
effect on gross profits historically. As part of our acquisition of FutureFuel
Chemical Company, FutureFuel Chemical Company entered into conversion
agreements with Eastman Chemical Company that effectively provide a conversion
fee to FutureFuel Chemical Company based on volume manufactured, with a
minimum annual fee. In addition, the conversion agreements provide for revenue
adjustments for actual usage of raw materials versus a standard and stipulate
that Eastman Chemical Company will pay for substantially all raw material
expenses, with an adjustment for annual inflation.
SSIPA/LiSIPA revenues are generated from a diverse customer base of nylon
fiber manufacturers. Historically, more than 50% of SSIPA/LiSIPA revenues were
generated under a supply contract with a single customer. This contract was
terminated in late 2006 and accounted for 43% of total SSIPA/LiSIPA revenues
for that year. During 2006 and the first three months of 2007, no other single
customer accounted for more than 25% of total revenues from this product.
There is no pricing mechanism or specific protection against raw material cost
changes, and we do not anticipate this to change going forward.
Other products include agricultural intermediates and additives, imaging
chemicals, fiber additives and various specialty pharmaceutical intermediates
that FutureFuel Chemical Company has in full commercial production or in
development. These products are currently sold in small quantities to a large
customer base. Pricing for these products is negotiated directly with the
customer (in the case of custom manufacturing) or is established based upon
competitive market conditions (in the case of performance chemicals). In
general, for these products, there is no pricing mechanism or specific
protection against raw material cost changes, and we do not anticipate this to
change going forward.
The year ended December 31, 2006 was the first full year that FutureFuel
Chemical Company sold biodiesel. In addition to selling for its own account,
FutureFuel Chemical Company produces, for a fee, biodiesel for a third party
under a tolling agreement. Under that tolling agreement, for every gallon of
feedstock provided by that party to FutureFuel Chemical Company, FutureFuel
Chemical Company is obligated to deliver one gallon of biodiesel, up to a
maximum amount of 6 million gallons. Through March 31, 2007, 1.9 million
gallons of biodiesel had been delivered under this tolling agreement. The
tolling agreement terminates on September 30, 2007, and no assurances can be
given that the agreement will be renewed (or, if renewed, under what terms) or
that the third party will utilize the maximum capacity provided by the tolling
agreement.
The majority of FutureFuel Chemical Company's expenses are cost of goods
sold. Cost of goods sold reflect raw material costs as well as both fixed and
variable conversion costs, conversion costs being those expenses that are
directly or indirectly related to the operation of FutureFuel Chemical
Company's plant. Significant conversion costs include labor, benefits, energy,
supplies and maintenance and repair. In addition to raw material and
conversion costs, cost of goods sold includes environmental reserves, asset
impairment and restructuring charges, severance costs and costs related to
idle capacity. Finally, cost of goods sold includes hedging gains and losses
recognized by us. Cost of goods sold are allocated to the chemical and
biofuels business segments based on usage and reactor time for most conversion
costs and based on revenues for most other costs.
Operating costs include selling, general and administrative and research
and development expenses. These expense categories include expenses that were
directly incurred by FutureFuel Chemical Company and corporate expense
allocations from Eastman Chemical Company. Allocations of costs of goods sold,
distribution and selling and general administrative expenses were made
primarily based on a percentage of revenues and allocations of research and
development expenses were made based upon actual time incurred; we believe
both represent reasonable allocation methodologies. These allocations and
estimates are not necessarily indicative of the costs and expenses that would
have resulted if FutureFuel Chemical Company had been operating as a separate
entity. Beginning November 1, 2006, all operating expenses were directly
incurred by us and FutureFuel Chemical Company.
47
The annual and quarterly financial statements provided herein
prominently disclose related party transactions and the impact of those
transactions on historical revenues and expenses. The discussions of results
of operations that follow are based on revenues and expenses in total and for
individual product lines and do not differentiate related party transactions.
See footnote 14 to the consolidated annual financial statements contained
elsewhere herein for more details.
Quarter Ended March 31, 2007 Compared to Quarter Ended March 31, 2006
Revenues: Revenues for the quarter ended March 31, 2007 for FutureFuel
Chemical Company were $37,506,000 as compared to revenues for the quarter
ended March 31, 2006 of $35,054,000, an increase of 7%. The increase was
attributable to increased sales of CPOs, DIPBs, SSIPA/LiSIPA, other products
and biodiesel, partially offset by decreased revenues of the proprietary
herbicide and intermediates; revenues from NOBS contributed modestly to the
increase. Revenues from biodiesel accounted for 5% of total revenues in 2007
and increased more than 700% from March 31, 2006. Revenues from NOBS increased
4% and accounted for 55% of total revenues in 2007, compared to 56% in 2006.
Revenues from the proprietary herbicide and intermediates decreased 33% and
accounted for 14% of total revenues in 2007 as compared to 23% in 2006.
Revenues from CPOs increased 19% in 2007 and accounted for 4% of total
revenues in both 2007 and 2006. Revenues from DIPBs increased 56% and
accounted for 8% of total revenues in 2007 as compared to 5% in 2006. Revenues
from SSIPA/LiSIPA increased 52% and accounted for 5% of total revenues in 2007
as compared to 4% in 2006. Revenues from other products increased 39% and
accounted for 10% of total revenues in the quarter ended March 31, 2007 as
compared to 7% in the quarter ended March 31, 2006.
Revenues from NOBS posted strong increases during the first quarter of
2006 as the customer returned to a more typical marketing strategy; this
strong demand has continued thus far in 2007. Revenues from the proprietary
herbicide and intermediates declined more than 30% during the first quarter of
2007 due to both price concessions and reduced volumes sold. Price concessions
were expected and were made in order to maintain market share in the face of
generic product competition. Volume reductions resulted from a change the
customer made in their distribution strategy to the end consumer and
FutureFuel Chemical Company believes these reductions are temporary and that
volume increases during the second quarter of 2007 will offset reductions in
the first quarter. At present, revenues from NOBS and the proprietary
herbicide and intermediates are together the most significant components of
FutureFuel Chemical Company's revenue base, together accounting for 69% of
revenues in the quarter ended March 31, 2007 as compared to 79% in the quarter
ended March 31, 2006. The future volume of and revenues from NOBS depends on
both consumer demand for the product containing NOBS and the manufacturing,
sales and marketing priorities of our NOBS customer. We are unable to predict
with certainty the revenues we will receive from NOBS in the future. The
prices for the proprietary herbicide and intermediates have been reduced by
10% from 2006 to 2007 due to continued competitive pressures as described
above. Our customer has been able to maintain their volume in light of generic
competition by being more price competitive, changing their North American
distribution system and developing new applications. They are forecasting
similar volumes in 2008 with a 2-5% volume growth potential in 2009 at current
pricing.
Revenues from CPOs and DIPBs together increased 41% during the first
quarter of 2007. This increase is largely the result in new supply agreements
and pricing mechanisms in place following the acquisition of FutureFuel
Chemical Company.
Revenue from biodiesel increased in 2007 due to an increase in production
capacity from 750 thousand gallons per quarter at the end of 2006 to 6 million
gallons per quarter at the end of 2007.
Cost of Goods Sold and Distribution: Total cost of goods sold and distribution
for the quarter ended March 31, 2007 were $39,853,000 as compared to total
cost of goods sold and distribution for the quarter ended March 31, 2006 of
$31,933,000, an increase of 25%.
Cost of goods sold and distribution for the quarter ended March 31, 2007
for FutureFuel Chemical Company's chemicals segment were $31,285,000 as
compared to cost of goods sold and distribution for the quarter ended March
31, 2006 of $31,491,000, a decrease of approximately 1%. Cost of goods sold
and distribution for CPOs, DIPBs, SSIPA/LiSIPA and other products, measured as
a percent of total chemical revenues, were consistent at 23% of total chemical
revenues during the first quarter of 2007 as compared to 24% during 2006. Cost
of goods sold and distribution for NOBS increased from 37% of total chemical
revenues in the first quarter of 2006 to 49%
48
during the first quarter of 2007; this increase was largely the result of
increased raw material prices resulting from new supply agreements and pricing
mechanisms in place following the acquisition of FutureFuel Chemical Company.
The dollar increase in NOBS cost of goods sold and distribution was offset by
a decrease in cost of goods sold and distribution for the proprietary
herbicide and intermediates, which decreased from 29% of total chemical
revenues in 2006 to 16% of total chemical revenues in 2007. This decrease is
attributable to growth of FutureFuel Chemical Company's biodiesel segment. As
more fully described below, biodiesel is made using the same assets utilized
to manufacture the propriety herbicide and intermediates, and as biodiesel
revenues increase this segment absorbs more cost away from other chemical
products that utilize the assets, namely the propriety herbicide and
intermediates.
Cost of goods sold and distribution for the quarter ended March 31, 2007
for FutureFuel Chemical Company's biofuels segment were $8,569,000 as compared
to cost of goods sold and distribution for the quarter ended March 31, 2006 of
$443,000. The largest component of this increase was hedging losses of
$4,026,000 in the first quarter of 2007; there were no gains or losses from
hedging in the first quarter of 2006. Excluding the hedging losses, FutureFuel
Chemical Company posted positive gross profit during the first quarter of
2007, and the percentage increase in biofuels cost of goods sold and
distribution more closely correlates to the percentage increase in biofuels
revenues. The biofuels segment began production in the batch plant and has
continued to utilize the batch process to test new processing techniques,
experiment with various alternative feedstocks and meet peak demand. The
biodiesel segment also utilizes a continuous processing line that is more
efficient, produces higher volumes per reactor than the batch process, and
hence absorbs fewer overhead costs per gallon of biodiesel produced.
FutureFuel Chemical Company is transitioning from primarily batch processing
to continuous processing, a strategy which is expected to significantly reduce
fixed cost allocation and as a result reduce total cost of goods sold and
distribution for the product line.
Operating Expenses: Operating expenses decreased from $2,111,000 for the
quarter ended March 31, 2006 to $1,846,000 for the quarter ended March 31,
2007, or approximately 13%. This decrease was primarily the result of lower
overall operating expenses incurred by FutureFuel Chemical Company on a
standalone basis.
Fiscal Year Ended December 31, 2006 Compared to Fiscal Year Ended
December 31, 2005
Revenues: Revenues for the year ended December 31, 2006 for FutureFuel
Chemical Company were $150,770,000 as compared to revenues for the year ended
December 31, 2005 of $119,539,000, an increase of 26%. The increase was
primarily a result of selling biodiesel for the full year and increased sales
of NOBS. Revenues from biodiesel accounted for 9% of total revenues in 2006.
Revenues from NOBS increased 26% and accounted for 56% of total revenues in
2006, the same percent of revenues as in 2005. Revenues from the proprietary
herbicide and intermediates decreased 5% and accounted for 16% of total
revenues in 2006 as compared to 21% in 2005. Revenues from CPOs increased 5%
in 2006 and accounted for 3% of total revenues in 2006 compared to 4% in 2005.
Revenues from DIPBs decreased 3% and accounted for 5% of total revenues in
2006 as compared to 6% in 2005. Revenues from SSIPA/LiSIPA decreased 9% and
accounted for 4% of total revenues in 2006 as compared to 6% in 2005. Revenues
from other products increased 26% and accounted for 7% of total revenues in
2006 as compared to 7% in 2005.
During 2006, revenues for NOBS increased due to increased demand from the
customer as a result of changing consumer demand for their product. Revenue
from the proprietary herbicide and intermediates declined due to price
concessions to the customer in order to maintain market share in the face of
generic product competition. The future volume of and revenues from NOBS
depends on both consumer demand for the product containing NOBS and the
manufacturing, sales and marketing priorities of our NOBS customer. We are
unable to predict with certainty the revenues we will receive from NOBS in the
future. The prices for the proprietary herbicide and intermediates have been
reduced by 10% from 2006 to 2007 due to continued competitive pressures as
described above. Our customer has been able to maintain their volume in light
of generic competition by being more price competitive, changing their North
American distribution system and developing new applications. They are
forecasting similar volumes in 2008 with a 2-5% volume growth potential in
2009.
Revenue from biodiesel increased in 2006 due to: (i) production during
the entire 12 months as opposed to two months of production in 2005 which
resulted in no revenues of consequence; and (ii) an increase in production
capacity from 3 million gallons per year at the end of 2005 to 24 million
gallons per year at the end of 2006.
Cost of Goods Sold and Distribution: Total cost of goods sold and distribution
for the year ended December 31, 2006 were $137,467,000 as compared to total
cost of goods sold and distribution for the year ended December 31, 2005 of
$105,263 ,000, an increase of 31%.
49
Cost of goods sold and distribution for the year ended December 31, 2006
for FutureFuel Chemical Company's chemicals segment were $114,481,000 as
compared to cost of goods sold and distribution for the year ended December
31, 2005 of $102,702,000, an increase of approximately 11%. The increase was
entirely a result of increased sales; cost of goods sold and distribution for
the chemicals segment as a percent of total chemical revenues decreased
slightly from 86% in 2005 to 83% in 2006. The decrease was primarily a result
of the addition of the biofuels segment in 2006. As previously discussed,
FutureFuel Chemical Company allocates the vast majority of its costs to
products as raw materials are processed into finished goods; with the addition
of the biofuels segment in 2006, there was a larger revenue base across which
to allocate costs. The greatest reduction in cost of goods sold and
distribution as a percent of total revenues came from the proprietary
herbicide and intermediates product line, where cost of goods sold and
distribution decreased from 28% of chemical revenues in 2005 to 20% of
chemical revenues in 2006. This large decrease is explained by the fact that
FutureFuel Chemical Company utilizes the same assets used to produce the
proprietary herbicide and intermediates product line to produce biodiesel, and
hence the biodiesel segment absorbed more fixed costs.
Cost of goods sold and distribution for the year ended December 31, 2006
for FutureFuel Chemical Company's biofuels segment were $22,986,000. Cost of
goods sold and distribution for the biofuels segment exceeded biofuels
revenues in 2006. FutureFuel Chemical Company began production of biodiesel in
small individual batches utilizing several of the reactors in its batch plant.
Costs incurred in the batch plant are allocated to products based on reactor
time, and hence the biodiesel segment incurred costs based on the number of
reactors it utilized and the duration of time it utilized those reactors. For
much of 2006 the biodiesel product remained in a development phase and the
biofuels segment did not always utilize the full capacity of the reactors
under its control. This low utilization, combined with lower efficiency during
the development phase, prevented the biofuels segment from generating
sufficient revenues to cover the costs that were allocated during the year.
During the second half of 2006, the biofuels segment initiated production from
a continuous reaction line. Production from the continuous line is more
efficient and produces higher volumes per reactor than the batch process, and
hence absorbs fewer overhead costs per gallon of biodiesel produced. The
biofuels segment has continued to utilize the batch process to test new
processing techniques, experiment with various alternative feedstocks and meet
peak demand. Ultimately, however, the biofuels segment will transition to
continuous production only, which is expected to result in a material decrease
in cost of goods sold and distribution.
Total cost of goods sold and distribution for 2005 included $99,000 of
corporate expense allocations from Eastman Chemical Company and $2,462,000 of
severance charges, none of which were allocated to segments. There were no
corporate expense allocations or restructuring and impairment charges in 2006.
Operating Expenses: Operating expenses decreased from $13,637,000 for the year
ended December 31, 2005 to $11,184,000 for the year ended December 31, 2006,
or approximately 18%. This decrease was primarily the result of lower
corporate expense allocations from Eastman Chemical Company, as well at the
lower overall operating expenses incurred by FutureFuel Chemical Company on a
standalone basis.
Fiscal Year Ended December 31, 2005 Compared to Fiscal year Ended
December 31, 2004
Revenues: Revenues for the year ended December 31, 2005 for FutureFuel
Chemical Company were $119,539,000 as compared to revenues for the year ended
December 31, 2004 of $144,157,000, a decrease of approximately 17%. The
decrease was a result of lower revenues across all product lines, with the
exception of DIPBs, where revenues increased 10%, and SSIPA/LiSIPA, where
revenues were flat. Revenues from NOBS decreased 9% and accounted for 56% of
total revenues in 2005 as compared to 51% in 2004. Revenues from the
proprietary herbicide decreased 10% and accounted for 21% of total revenues in
2005 as compared to 19% in 2004. Revenues from CPOs decreased 36% and
accounted for 4% of total revenues in 2005 versus 5% in 2004. Revenues from
DIPBs increased 10% and accounted for 6% of total revenues in 2005 versus 5%
in 2004. Revenues from SSIPA/LiSIPA increased less than 1% and accounted for
6% of total revenues in 2005 as compared to 5% in 2004. Revenues from other
products decreased 62% and accounted for 7% of total revenues in 2005 as
compared to 15% in 2004.
During 2005, revenues for NOBS declined due to reduced demand from the
customer as a result of changing consumer demand for their product. Revenue
from the proprietary herbicide declined due to price concessions to the
customer in order to maintain market share in the face of generic product
competition. In addition, a large customer contract was completed in 2004 and
not carried into 2005.
50
Cost of Goods Sold and Distribution: Total cost of goods sold and distribution
for the year ended December 31, 2005 were $105,263,000 as compared to total
cost of goods sold and distribution for the year ended December 31, 2004 of
$147,808,000, a decrease of 29%.
Cost of goods sold and distribution for the year ended December 31, 2005
for FutureFuel Chemical Company's chemicals segment were $102,702,000 as
compared to cost of goods sold and distribution for the year ended December
31, 2004 of $127,049,000, a decline of approximately 19%. The decline in cost
of goods sold and distribution was attributed to the decline in revenues as
described above, as evidenced by cost of goods sold and distribution as a
percent of revenues in the chemicals segment decreasing from 88% in 2004 to
86% in 2005. The reduction of cost of goods sold and distribution in line with
revenue reductions was largely a result of an approximate 20%
reduction-in-force at the Batesville facility, effective May 1, 2005, which
reduced the total workforce by 89 employees and afforded an annual labor cost
reduction of approximately $7,000,000.
Total cost of goods sold and distribution for 2005 included $99,000 of
corporate expense allocations from Eastman Chemical Company and $2,462,000 of
restructuring and impairment charges, none of which were allocated to specific
products or segments. Total cost of goods sold and distribution for 2004
included $1,275,000 of corporate expense allocations from Eastman Chemical
Company and $19,485,000 of restructuring and impairment charges, none of which
were allocated to specific products or segments.
Operating Expenses: Operating expenses decreased from $20,773,000 for the year
ended December 31, 2004 to $13,637,000 for the year ended December 31, 2005,
or approximately 34%. This decrease was the result in decreased labor expenses
following the reduction in force implemented by FutureFuel Chemical Company's
management during 2005 as well as significantly lower corporate overhead
allocations.
Critical Accounting Estimates
Allowance for doubtful accounts: FutureFuel Chemical Company reduces its
accounts receivable by amounts that may be uncollectible in the future. This
estimated allowance is based upon management's evaluation of the
collectibility of individual invoices and is based upon management's
evaluation of the financial condition of its customers and historical bad debt
experience. This estimate is subject to change based upon the changing
financial condition of FutureFuel Chemical Company's customers. At December
31, 2006 and March 31, 2007, FutureFuel Chemical Company had recorded an
allowance for doubtful accounts of $42,000, the majority of which pertained to
one customer. FutureFuel Chemical Company historically has not experienced
significant problems in collecting its receivables and does not expect this to
change going forward.
Depreciation: Depreciation is provided for using the straight-line method over
the associated assets' estimated useful lives. FutureFuel Chemical Company
primarily bases its estimate of an asset's useful life on its experience with
other similar assets. The actual useful life of an asset may differ
significantly from FutureFuel Chemical Company's estimate for such reasons as
the asset's build quality, the manner in which the asset is used or changes in
the business climate. When the actual useful life differs from the estimated
useful life, impairment charges may result. In 2004, FutureFuel Chemical
Company recognized asset impairment charges of approximately $18,305,000. This
impairment primarily related to the closure of specific fixed assets used to
manufacture certain performance chemicals product lines that were divested by
Eastman Chemical Company. FutureFuel Chemical Company monitors the estimate
useful lives of its assets and does not currently anticipate further
impairment charges.
Asset retirement obligations: FutureFuel Chemical Company establishes reserves
for closure/post-closure costs associated with the environmental and other
assets it maintains. Environmental assets include waste management units such
as incinerators, landfills, storage tanks and boilers. When these types of
assets are constructed or installed, a reserve is established for the future
costs anticipated to be associated with the closure of the site based on an
expected life of the environmental assets, the applicable regulatory closure
requirements and FutureFuel Chemical Company's environmental policies and
practices. These expenses are charged into earnings over the estimated useful
life of the assets. The future costs anticipated to be associated with the
closure of the site are based upon estimated current costs for such activities
adjusted for anticipated future inflation rates. Unanticipated changes in
either of these two variables or changes in the anticipated timing of
closure/post-closure activities may significantly affect the established
reserves. As of March 31, 2007 and December 31, 2006, FutureFuel Chemical
Company had recorded a reserve for closure/post-closure liabilities of
$551,000 and $545,000, respectively. FutureFuel Chemical Company monitors this
reserve and the assumptions used in its calculation. As deemed
51
necessary, FutureFuel Chemical Company has made changes to this reserve
balance and anticipates that future changes will occur.
Income taxes: FutureFuel Chemical Company accounts for income taxes using the
asset and liability method. Under this method, income tax assets and
liabilities are recognized for temporary differences between financial
statement carrying amounts of assets and liabilities and their respective
income tax basis. A future income tax asset or liability is estimated for each
temporary difference using enacted and substantively enacted income tax rates
and laws expected to be in effect when the asset is realized or the liability
settled. Changes in the expected tax rates and laws to be in effect when the
asset is realized or the liability settled could significantly affect the
income tax assets and liabilities booked by FutureFuel Chemical Company.
FutureFuel Chemical Company monitors changes in applicable tax laws and
adjusts its income tax assets and liabilities as necessary.
Internal Control Deficiency
As noted in "Risk Factors" above, our management identified a material
weakness in our internal control over financial reporting, as defined in the
standards established by the Public Company Accounting Oversight Board. This
weakness related to the lack, at December 31, 2006, of an effective cut-off
process for accruing certain liabilities. The specific deficiencies around the
end of period close process were failure to accrue liabilities related to:
o certain capital projects, including construction of additional
storage capacity, expansion of on-site rail siding and railcar
loading and unloading facilities, and implementation of a new ERP
system that commenced during November and December 2006; FutureFuel
Chemical Company failed to accrue certain liabilities related to
these capital projects at December 31, 2006 due to inadequate
communication between accounting personnel and those personnel
responsible for planning and executing the projects;
o raw materials that were in transit to the Batesville plant but were
shipped under terms where title passed at the time the materials
left the supplier's location; FutureFuel Chemical Company's cut-off
process did not capture accruals related to this inventory as a
result of receipt posting processes that did not account for
shipping terms where title to inventory had passed but the goods had
not yet been received at the plant; and
o certain maintenance and general plant service expenses.
There was no impact upon FutureFuel Chemical Company's financial statements
included herein as the deficiencies were identified and addressed by
management during the audit process and all related liabilities were reflected
in such financial statements.
Management has designed and implemented new procedures that have become
an integral component of our end-of-period close process. To address the first
and third deficiencies described above, FutureFuel Chemical Company's
controller has scheduled correspondence and meetings with plant personnel at
the end of each reporting period, at which time the parties review all capital
projects under construction and all external service being performed on-site.
In cases where goods have been received or services have been performed and
invoices have not been received, the controller records an estimate for the
accrual. To address the second deficiency described above, FutureFuel Chemical
Company's accounting personnel run a report in the ERP system on the 15th day
following the close of the accounting period that lists all goods received
during the preceding 15-day period. This list is filtered to exclude items
where shipping terms are FOB the Batesville plant. Accounting personnel then
analyze the remaining goods received and the controller then records an
accrual for those items shipped prior to the close of the accounting period.
We are aware of only one item that is shipped FOB the supplier's location and
that has transit time longer than 14 days. Accounting personnel communicate
with the procurement group at the end of each accounting period to determine
if any quantity of this material was in transit and the controller posts a
manual reversing accrual if required.
52
Liquidity and Capital Resources
FutureFuel Chemical Company's net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 2006, 2005 and 2004 was:
(Dollars in thousands)
2006(a) 2005 2004
------------ ---------- -----------
Net cash provided by (used in) operating activities.... $ (5,517) $ 7,556 $ 19,044
Net cash provided by (used in) investing activities.... $ (18,524) $ (6,594) $ (6,520)
Net cash provided by (used in) financing activities.... $ 87,170 $ (962) $ (12,524)
----------
(a) Also includes our net cash from November 1, 2006 through December 31, 2006.
Years ended 2006, 2005 and 2004
Operating activities: Cash provided by (used in) operating activities
decreased from $7,556,000 in 2005 to $(5,517,000) in 2006, a decrease of
$13,073,000. This decrease primarily results from an increase in FutureFuel
Chemical Company's accounts receivable balance of $12,943,000. This increase
in accounts receivable resulted from a combination of three factors. First,
Eastman Chemical Company collected a significant amount of payments on behalf
of FutureFuel Chemical Company but had not yet transferred the funds to
FutureFuel Chemical Company as of December 31, 2006. Second, accounts
receivable related to CPOs and DIPBs increased as a result of the new supply
agreements and pricing mechanisms in place following the acquisition of
FutureFuel Chemical Company. Lastly, FutureFuel Chemical Company recorded a
receivable of $2,812,000 from Eastman Chemical Company at December 31, 2006
related to certain agreed-to purchase price adjustments stemming from the
acquisition of FutureFuel Chemical Company. FutureFuel Chemical Company also
experienced a $6,761,000 increase in its inventory balance in 2006 as compared
to 2005. This increase was largely offset by a $5,077,000 increase in accounts
payable.
Cash provided by (used in) operating activities decreased from
$19,044,000 in 2004 to $7,556,000 in 2005, a decrease of $11,488,000. In 2004,
FutureFuel Chemical Company closed specific fixed assets used to manufacture
certain performance chemicals product lines that ceased to be manufactured at
the site. As a result, FutureFuel Chemical Company ceased to maintain
inventory balances related to these product lines. In 2004, there was a
significant decrease in inventory, $10,586,000, that was not repeated in 2005,
leading to a decrease in cash provided by operating activities on a
comparative basis. Additionally, as discussed above, in 2005, there were
decreases in the sales of NOBS, FutureFuel Chemical Company's largest product
line, which further lead to a reduction in cash provided by operating
activities.
Investing Activities: Cash provided by (used in) investing activities
decreased from $(6,594,000) in 2005 to $(18,524,000) in 2006, a decrease of
$(11,930,000). This decrease was primarily driven by FutureFuel Chemical
Company's expansion of its biodiesel related infrastructure in November and
December of 2006. The years 2005 and 2004 had no such activity. The
infrastructure expansion projects include the adding of methanol recovery and
biodiesel feedstock pretreatment capabilities to the plant, the construction
of additional storage at the plant to support increased movements of
feedstocks, methanol, glycerin and biodiesel, to expand FutureFuel Chemical
Company's biodiesel blending capabilities, the expansion of on-site rail
siding and railcar loading and unloading facilities to accommodate the
increased number of rail cars expected at the plant and acquiring a fleet of
tanker trucks to transport the biofuels and feedstocks between the plant and
offsite storage facilities. Most of these projects are scheduled to be
completed in the third quarter of 2007. Additionally, FutureFuel Chemical
Company was required to fund a trust fund reserved for purposes of meeting
certain Arkansas Department of Environmental Quality requirements that become
applicable in the event of a closure of the plant. The amount of cash reserved
for this purpose is based on a formula derived by the state of Arkansas and
totaled $3,127,000 at December 31, 2006. No cash was restricted in periods
prior to December 31, 2006. Lastly, FutureFuel Chemical Company implemented a
hedging program utilizing various derivative instruments such as regulated
futures and regulated options as economic hedges to reduce the effects of
fluctuations in the prices of biodiesel. FutureFuel Chemical Company is
required to maintain a margin account with a broker to collateralize these
derivative instruments. $3,578,000 of cash was used in 2006 to collateralize
the derivative instruments of FutureFuel Chemical Company.
53
Cash provided by (used in) investing activities decreased from
$(6,520,000) in 2004 to $(6,594,000) in 2005, a decrease of $74,000. Cash
flows from investing activities remained relatively unchanged in 2005 as
compared to 2004 as FutureFuel Chemical Company experienced no significant
expansion projects. The decrease that was experienced was primarily due to
higher capital expenditures in 2005, $6,654,000, as compared to 2004,
$6,520,000.
Financing Activities: Cash provided by (used in) financing activities
increased from $(962,000) in 2005 to $87,170,000 in 2006, an increase of
$88,132,000. This increase resulted from FutureFuel Chemical Company's reverse
acquisition of FutureFuel on October 31, 2006. On October 31, 2006, through a
transaction accounted for as a reverse acquisition, FutureFuel Chemical
Company acquired the net assets of FutureFuel which totaled $87,094,000. The
principal composition of the net assets acquired was cash and cash
equivalents. The cash and cash equivalents acquired largely represented the
remaining funds of FutureFuel after its July 2006 equity offering,
disbursements to Eastman Chemical Company incurred in the acquisition of the
stock of Eastman SE and various related offering and acquisition related
costs.
Cash provided by (used in) financing activities increased from
$(12,524,000) in 2004 to $(962,000) in 2005, a decrease of $11,562,000. These
increase resulted from FutureFuel Chemical Company generating less cash from
operating and investing activities in 2005 as compared to 2004 and being able
to transfer a smaller balance to its then parent, Eastman Chemical.
Three Months Ended March 31, 2007 and 2006
FutureFuel Chemical Company's net cash provided by (used in) operating
activities, investing activities and financing activities for the quarters
ended March 31, 2007 (consolidated) and 2006 (FutureFuel Chemical Company
only) was:
(Dollars in thousands)
2007 2006
------------ -----------
Net cash provided by (used in) operating activities..................... $ 4,784 $ 61
Net cash provided by (used in) investing activities..................... $ (6,045) $ (2,097)
Net cash provided by (used in) financing activities..................... $ (50) $ (2,036)
Operating Activities: Cash provided by operating activities increased from
$61,000 during the three months ended March 31, 2006 to $4,784,000 during the
three months ended March 31, 2007. This increase primarily resulted from
changes in accounts receivable and inventory. Cash generated from (used in)
changes in accounts receivable was $3,175,000 during the first quarter of 2007
as compared to $(982,000) during the first quarter of 2006. At the end of
2006, FutureFuel Chemical Company's accounts receivable were abnormally high
as Eastman Chemical Company had collected a significant amount of payments on
behalf of FutureFuel Chemical Company but had not yet transferred funds to
FutureFuel Chemical Company. These funds were collected during the three
months ended March 31, 2007 and the balance owed FutureFuel Chemical Company
at March 31, 2007 was significantly less. Cash generated from (used in)
changes in inventory was $2,819,000 during the first quarter of 2007 as
compared to $(585,000) during the first quarter of 2006. Inventory at December
31, 2006 was higher than historical norms and FutureFuel Chemical Company was
successful during the first quarter of 2007 in reducing inventory days
outstanding. Other significant changes in cash included an increase in
accounts payable, including those associated with related parties, during the
first quarter of 2007 of $2,520,000 as compared to a decrease in accounts
payable during the first quarter of 2006 of $878,000. This was offset by cash
provided by the change in fair value of derivative instruments during the
first quarter of 2007 of $2,817,000 as compared to $0 during the first quarter
of 2006.
Investing Activities: Cash provided by (used in) investing activities during
the first quarter of 2007 was $(6,045,000) as compared to $(2,097,000) during
the first quarter of 2006. This decrease was primarily driven by FutureFuel
Chemical Company's expansion of its biodiesel related infrastructure and
spending on implementation of a new ERP system. The infrastructure capital
projects are more fully described and quantified below.
Financing Activities: Cash provided by (used in) financing activities during
the first quarter of 2007 was $(50,000) as compared to $2,036,000 during the
first quarter of 2006. Financing activities during 2007 consisted solely of
the
54
payment of a bank financing fee. Financing activities during 2006 consisted
solely of transfers of cash to Eastman Chemical Company.
Our net cash provided by (used in) operating activities, investing
activities and financing activities for the ten months ended October 31, 2006
(prior to the acquisition of FutureFuel Chemical Company) and the period from
August 12, 2005 (inception) through December 31, 2005 was:
(Dollars in thousands)
2006 2005
------------ -----------
Net cash provided by (used in) operating activities..................... $ 2,590 $ 10
Net cash provided by (used in) investing activities..................... $ (1,045) $ -
Net cash provided by (used in) financing activities..................... $ (1,368) $ 18
Operating activities: Cash provided by (used in) operating activities
increased from $10,000 for the twelve months ended December 31, 2005 to
$2,590,000 for the ten months ended October 31, 2006, an increase of
$2,580,000. This increase was primarily driven by interest income earned on
the net proceeds of the Company's July 12, 2006 equity offering. Income taxes
associated with this income had not been paid as of October 31, 2006,
resulting in the Company's cash flows from operations approximately equaling
its interest income.
Investing Activities: Cash provided by (used in) investing activities
decreased from $0 for the twelve months ended December 31, 2005 to
$(1,045,000) for the ten months ended October 31, 2006, a decrease of
$1,045,000. From June 2006 through October 2006 the Company incurred various
expenses related to its then potential acquisition of Eastman SE. These
expenses included audit and accounting fees, legal fees, travel expenses and
other professional service fees related to the potential acquisition. These
expenses comprise the entire balance of the decrease in cash flows from
investing activities.
Financing Activities: Cash provided by (used in) financing activities
decreased from $18,000 for the twelve months ended December 31, 2005 to
$(1,368,000) for the ten months ended October 31, 2006, a decrease of
$1,386,000. On July 12, 2006 the Company raised $172,352,000 in net proceeds
from an equity offering. The Company placed $172,500,000, the net proceeds
from the equity offering plus additional cash, into trust, contributing to the
decrease in cash flows from financing activities. As such amounts were held in
trust for restricted use and subject to repurchase from shareholders, the
proceeds from the offering were not considered a financing activity. The
Company was able to utilize $1,000,000 of the interest earned on the cash held
in trust for general corporate purposes, while the balance of interest earned
remained in trust, resulting in a further net decrease of cash flows from
financing activities. The combination of these activities resulted in the
decrease of cash flow from financing activities for the periods presented.
As previously disclosed in Item 1, Plan for Operation of the Consolidated
Company above, FutureFuel Chemical Company is pursuing seven core
infrastructure projects that are expected to bring efficiency, operational
flexibility and cost savings to existing biodiesel and chemical business
lines. These infrastructure projects are: (i) adding methanol recovery and
biodiesel feedstock pretreatment capabilities; (ii) constructing additional
storage; (iii) expanding on-site rail siding and railcar loading and unloading
capabilities; (iv) obtaining storage/thruput in strategic markets; (v)
acquiring a fleet of tanker trucks; (vi) procuring railcars; and (vii)
expanding biodiesel production capacity. Projects (iv) and (vi) do not require
any capital expenditures but instead affect cash flow through ongoing lease
commitments. These lease commitments are included in footnote 16 of the annual
consolidated financial statements presented herein. The remaining projects
require significant capital expenditures that, to the extent not already
complete, are scheduled to be substantially complete by the third quarter of
2007 (April 2008 with respect to the biodiesel capacity expansion). FutureFuel
Chemical Company estimates the total capital cost of these infrastructure
projects from November 1, 2006 through the date of completion will be
approximately $17 million.
For the infrastructure projects discussed immediately above as well as
any additional capital projects being pursued, FutureFuel Chemical Company
typically does not enter into financial or other commitments that would
preclude its ability to expand or decrease the scope of a given project or
cancel it altogether. The following are FutureFuel Chemical Company's material
commitments for capital expenditures as of March 31, 2007 and December 31,
2006.
55
(Dollars in thousands)
MARCH 31, DECEMBER 31,
GENERAL PURPOSE OF THE COMMITMENT 2007 2006
------------------------------------------------------------------------ ---------------- -----------------
Construction of storage at the Batesville facility...................... $ 1,516 $ 3,796
Improvements to materials handling capabilities at the Batesville
facility........................................................... 760 177
Implementation of an enterprise resource planning system................ 576 650
---------------- -----------------
Total................................................................... $ 2,852 $ 4,623
================ =================
FutureFuel Chemical Company has historically financed capital
requirements for its business with cash flows from operations and has not had
the need to incur bank indebtedness to finance any of its chemical operations
during the historical periods discussed herein.
FutureFuel Chemical Company entered into a $50 million credit agreement
with Regions Bank in March 2007. The loan is a revolving facility the proceeds
of which may be used for working capital, capital expenditures and general
corporate purposes of FutureFuel Chemical Company. The facility terminates in
March 2010. Advances are made pursuant to a borrowing base comprised of 85% of
eligible accounts plus 60% of eligible direct inventory plus 50% of eligible
indirect inventory. Advances are secured by a perfected first priority
security interest in accounts receivable and inventory. The interest rate
floats at the following margins over LIBOR or base rate based upon the
leverage ratio from time to time.
LEVERAGE BASE RATE LIBOR
RATIO MARGIN MARGIN
------------------- ---------------- ----------------
> 3 -0.55% 1.70%
> 2 < 3 -0.70% 1.55%
-
> 1 < 2 -0.85% 1.40%
-
< 1 -1.00% 1.25%
There is an unused commitment fee of 0.25% per annum. Beginning December 31,
2007, and on the last day of each fiscal quarter thereafter, the ratio of debt
to EBITDA may not be less than 1.5:1. Beginning June 30, 2007, the ratio of
total funded debt to EBITDA may not exceed 3.50:1, reduced to 3.25:1 at March
31, 2008, June 30, 2008 and September 30, 2008, and then 3:1 thereafter. We
have guaranteed FutureFuel Chemical Company's obligations under this credit
agreement.
The remaining proceeds of our July 2006 offering after consummation of
our acquisition of FutureFuel Chemical Company and repurchase of shares from
shareholders who exercised their repurchase rights described herein were
approximately $85 million. Between November 1, 2006 and January 31, 2007, the
Company utilized approximately $16.5 million of these proceeds to build
FutureFuel Chemical Company's working capital and approximately $2.5 million
to fund insurance and other general expenses. We intend to fund future capital
requirements for FutureFuel Chemical Company's chemical and biofuels segments
from cash flow generated by FutureFuel Chemical Company as well as from the
remaining proceeds of our offering and borrowings under the credit facility
with Regions Bank. We do not believe there will be a need to issue any
securities to fund such capital requirements.
Off-Balance Sheet Arrangements
Our only off-balance sheet arrangements are: (i) the financial assurance
trusts established for the benefit of the Arkansas Department of Environmental
Quality; and (ii) hedging transactions. The financial assurance trusts
aggregate $3,164,000 at March 31, 2007 and were established to provide
assurances to the Arkansas Department of Environmental Quality that, in the
event the Batesville facility is closed permanently, any reclamation
activities necessitated under applicable environmental laws will be completed.
Such financial assurance trusts are not reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors. The amounts held in trust
are included in restricted cash and cash equivalents on our balance sheet. The
closure liabilities are included in other noncurrent liabilities, but only on
a present value basis.
56
The Company and FutureFuel Chemical Company engage in two types of
hedging transactions. First, the Company hedges its biodiesel sales through
the purchase and sale of futures contracts and options on futures contracts of
energy commodities. Such futures contracts and options on contracts of energy
commodities are detailed in note 4 to our annual consolidated financial
statements included elsewhere herein. This activity was captured on our
balance sheet at March 31, 2007 and at December 31, 2006. Second, FutureFuel
Chemical Company hedges its biodiesel feedstocks through the execution of
purchase contracts and supply agreements with certain vendors. These hedging
transactions are recognized in earnings and not recorded on our balance sheet
at December 31, 2006 as they do not meet the definition of a derivative
instrument as defined under accounting principles generally accepted in the
U.S. The purchase of biodiesel feedstocks generally involves two components:
basis and price. Basis covers any refining or processing required as well as
transportation. Price covers the purchases of the actual agricultural
commodity. Both basis and price fluctuate over time. A supply agreement with a
vendor constitutes a hedge when FutureFuel Chemical Company has committed to a
certain volume of feedstock in a future period and has fixed the basis for
that volume.
Contractual Obligations
The following table sets forth as of December 31, 2006 the payments due
by period for the following contractual obligations of us and FutureFuel
Chemical Company.
(Dollars in thousands)
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
-------------------------------- ---------- ---------- -------- --------- ---------
Long-term debt obligations...... $ - $ - $ - $ - $ -
Capital lease obligations....... $ - $ - $ - $ - $ -
Operating lease obligations..... $ 840 $ 318 $ 395 $ 90 $ 37
Purchase obligations(a)......... $ 31,718 $ 31,551 $ 111 $ 56 $ -
Other long-term liabilities..... $ - $ - $ - $ - $ -
----------
(a) Purchase obligations within less than one year include: (i) $4,623 for
capital expenditure commitments related to the construction of additional
storage capacity, material handling infrastructure and implementation of
a new ERP system; (ii) $26,335 in purchase contracts for soybean and
cottonseed oil; and (iii) $593 for information technology maintenance and
software license commitments. Purchase obligations beyond one year
include $167 for software license commitments.
As of March 31, 2007, FutureFuel Chemical Company had not borrowed under the
$50 million credit agreement with Regions Bank described above.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In recent years, general economic inflation has not had a material
adverse impact on FutureFuel Chemical Company's costs and, as described
elsewhere herein, we have passed some price increases along to our customers.
However, FutureFuel Chemical Company is subject to certain market risks as
described below.
Market risk represents the potential loss arising from adverse changes in
market rates and prices. Commodity price risk is inherent in the chemical and
biofuels business both with respect to input (acetic anhydride, electricity,
coal, natural gas, biofuel feedstocks, etc.) and output (manufactured
chemicals and biofuels).
FutureFuel Chemical Company seeks to mitigate its market risks associated
with the manufacturing and sale of chemicals by entering into term sale
contracts that include contractual market price adjustment protections to
allow changes in market prices of key raw materials to be passed on to the
customer. Such price protections are not always obtained, however, so raw
material price risk remains a significant risk.
In order to manage price risk caused by market fluctuations in biofuel
prices, FutureFuel Chemical Company may enter into exchange traded commodity
futures and options contracts. FutureFuel Chemical Company accounts for these
derivative instruments in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 133 Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 149 Amendment
57
of Statement 133 on Derivative Instruments and Hedging Activities. Under these
standards, the accounting for changes in the fair value of a derivative
instrument depends upon whether it has been designated as an accounting
hedging relationship and, further, on the type of hedging relationship. To
qualify for designation as an accounting hedging relationship, specific
criteria must be met and appropriate documentation maintained. FutureFuel
Chemical Company had no derivative instruments that qualified under these
rules as designated accounting hedges in 2006 or in any preceding year.
Changes in the fair value of FutureFuel Chemical Company's derivative
instruments are recognized at the end of each accounting period and recorded
in the statement of operations as a component of cost of goods sold.
FutureFuel Chemical Company's immediate recognition of derivative
instrument gains and losses can cause net income to be volatile from quarter
to quarter due to the timing of the change in value of the derivative
instruments relative to the sale of biofuel being sold. As of December 31,
2006 and March 31, 2007, the fair values of FutureFuel Chemical Company's
derivative instruments were a net liability in the amount of $447,000 and
$3,265,000, respectively.
FutureFuel Chemical Company's gross profit will be impacted by the prices
it pays for raw materials and conversion costs (costs incurred in the
production of chemicals and biofuels) for which it does not possess
contractual market price adjustment protection. These items are principally
comprised of acetic anhydride, electricity, coal, natural gas, methanol,
soybean oil and caustic soda. The availability and price of all of these items
are subject to wide fluctuations due to unpredictable factors such as weather
conditions, overall economic conditions, farmers' planting decisions,
governmental policies and global supply and demand.
FutureFuel Chemical Company has prepared a sensitivity analysis of its
exposure to market risk with respect to key raw materials and conversion costs
for which it does not possess contractual market price adjustment protections,
based on average prices in 2006. Assuming that the prices of the associated
finished goods could not be increased and assuming no change in quantities
sold, a hypothetical 10% change in the average price of the commodities listed
below would result in the following change in annual gross profit:
(Volumes and dollars in thousands)
HYPOTHETICAL PERCENTAGE
VOLUME(a) ADVERSE DECREASE IN DECREASE IN
ITEM REQUIREMENTS UNITS CHANGE IN PRICE GROSS PROFIT GROSS PROFIT
---------------------- -------------- -------- ----------------- -------------- --------------
Acetic anhydride...... 7,256 KG 10.0% $459 3.5%
Electricity........... 84 MWH 10.0% $437 3.3%
Coal.................. 40 MT 10.0% $407 3.1%
Natural gas........... 200 KSCF 10.0% $275 2.1%
Methanol.............. 5,915 KG 10.0% $205 1.5%
Soybean oil........... 2,784 KG 10.0% $163 1.2%
Caustic soda.......... 10 MT 10.0% $157 1.2%
----------
(a) Volume requirements and average price information are based upon volumes
used and prices obtained for the twelve months ended December 31, 2006.
Volume requirements may differ materially from these quantities in future
years as the business of FutureFuel Chemical Company evolves.
As of December 31, 2006, FutureFuel Chemical Company had no borrowings
and, as such, was not exposed to interest rate risk. Due to the relative
insignificance of transactions denominated in a foreign currency, FutureFuel
Chemical Company considers its foreign currency risk to be immaterial.
58
ITEM 3. - PROPERTIES
The Company
We are a holding company whose principal assets are all of the issued and
outstanding shares of stock of FutureFuel Chemical Company and cash and cash
equivalents.
FutureFuel Chemical Company
FutureFuel Chemical Company's principal asset is a manufacturing plant
situated on approximately 2,200 acres of land six miles southeast of
Batesville in north central Arkansas fronting the White River. Approximately
500 acres of the site are occupied with batch and continuous manufacturing
facilities, laboratories and infrastructure, including on-site liquid waste
treatment. FutureFuel Chemical Company is the fee owner of this plant and the
land upon which it is situated, and manufactures both biofuels and chemicals
at the plant. Utilization of these facilities may vary with product mix and
economic, seasonal and other business conditions, but the plant is
substantially utilized with the exception of facilities designated for
capacity expansion of biodiesel and a facility targeted for the potential
future production of cellulosic-based ethanol. The plant, including approved
expansions, has sufficient capacity for existing needs and expected near-term
growth. We believe that the plant is generally well maintained, in good
operating condition and suitable and adequate for its uses.
59
ITEM 4. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the date of this Registration Statement, 26,700,000 shares of
our common stock are issued and outstanding and we have issued warrants to
purchase 22,500,000 additional shares of our common stock. The shares of
common stock are our only voting securities issued and outstanding. The
following table sets forth the number and percentage of shares and warrants
owned by all persons known by us to be the beneficial owners of more than 5%
of our shares of common stock and warrants as of the most recent practicable
date.
COMMON STOCK WARRANTS FULLY DILUTED
-------------------------- --------------------------- -------------------------
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL AMOUNT OF PERCENT OF AMOUNT OF AMOUNT OF COMMON
------------------------------ BENEFICIAL COMMON BENEFICIAL PERCENT OF BENEFICIAL STOCK AND
OWNER OWNERSHIP STOCK OWNERSHIP WARRANTS OWNERSHIP WARRANTS(d)
----- --------- ----- --------- -------- --------- -----------
Paul A. Novelly, 8235 Forsyth
Blvd., 4th Floor, Clayton, MO
63105(a).......................... 7,406,250 27.7% 5,268,750 23.4% 12,675,000 25.8%
Lee E. Mikles, 1486 E. Valley
Road, Santa Barbara, CA 93108(b).. 2,100,000 7.9% 12,500 0.1% 2,112,500 4.3%
SOF Investments, L.P., 645 5th
Avenue, 21st Floor, New York,
NY 10022.......................... 1,800,000 6.7% 1,800,000 8.0% 3,600,000 7.3%
Fir Tree entities, Admiral Financial
Center, 5th Floor, 90 Fort
Street, Box 32021 SMB, Grand
Cayman, Cayman Islands(c)......... 1,600,000 6.0% 1,350,000 6.0% 2,950,000 6.0%
N.C.B. Trust Limited, Citigroup
Centre, Canada Square, Canary
Wharf, London E14 5LB, U.K.-...... 1,339,000 5.0% 1,083,000 4.8% 2,422,200 4.9%
----------
(a) Includes 6,781,250 shares of common stock and 4,643,750 warrants held by
St. Albans Global Management, Limited Partnership, LLLP and 625,000
shares of common stock and 625,000 warrants held by Apex Holding Co. Mr.
Novelly is the chief executive officer of both of these entities and
thereby has voting and investment power over such shares, but he
disclaims beneficial ownership except to the extent of a minor pecuniary
interest.
(b) Includes 2,000,000 shares of common stock held by Lee E. Mikles Revocable
Trust dated March 26, 1996 and 100,000 shares of common stock held by Lee
E. Mikles Gift Trust dated October 6, 1999. Also includes 12,500 warrants
held by the Alison L. Mikles Irrevocable Trust. Miss Mikles is the minor
child of Mr. Mikles and lives in Mr. Mikles household. However, Mr.
Mikles is not the trustee of such trust and disclaims beneficial
ownership.
(c) Includes shares of common stock held by Fir Tree Recovery Master Fund,
L.P. and Fir Tree Value Master Fund, L.P., which are managed by a common
investment manager, Fir Tree Partners.
(d) Assumes the exercise of all warrants issued and outstanding as of the
date of this Registration Statement.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock and warrants as of the date of this Registration
Statement by each of our directors and executive officers. Unless otherwise
indicated, we believe that all persons named in the table below have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them and none of such shares or warrants have been
pledged as security.
60
COMMON STOCK WARRANTS FULLY DILUTED
-------------------------- --------------------------- -------------------------
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL AMOUNT OF PERCENT OF AMOUNT OF AMOUNT OF COMMON
------------------------------ BENEFICIAL COMMON BENEFICIAL PERCENT OF BENEFICIAL STOCK AND
OWNER OWNERSHIP STOCK OWNERSHIP WARRANTS OWNERSHIP WARRANTS(d)
----- --------- ----- --------- -------- --------- -----------
Paul A. Novelly(a).............. 7,406,250 27.7% 5,268,750 23.4% 12,675,000 25.8%
Lee E. Mikles(b)................ 2,100,000 7.9% 12,500 0.1% 2,112,500 4.3%
Douglas D. Hommert(c)........... 250,000 0.9% -- -- 250,000 0.5%
Edwin A. Levy................... 250,000 0.9% -- -- 250,000 0.5%
Thomas R. Evans................. 30,000 0.1% 30,000 0.1% 60,000 0.1%
Richard L. Knowlton............. -- -- -- -- -- --
Paul G. Lorenzini............... -- -- -- -- -- --
All directors and executive
officers..................... 10,036,250 37.50% 5,311,250 23.60% 15,347,500 31.20%
----------
(a) Includes 6,781,250 shares of common stock and 4,643,750 warrants held by
St. Albans Global Management, Limited Partnership, LLLP and 625,000
shares of common stock and 625,000 warrants held by Apex Holding Co. Mr.
Novelly is the chief executive officer of both of these entities and
thereby has voting and investment power over such shares, but he
disclaims beneficial ownership except to the extent of a minor pecuniary
interest.
(b) Includes 2,000,000 shares of common stock held by Lee E. Mikles Revocable
Trust dated March 26, 1996 and 100,000 shares of common stock held by Lee
E. Mikles Gift Trust dated October 6, 1999. Also includes 12,500 warrants
held by the Alison L. Mikles Irrevocable Trust. Miss Mikles is the minor
child of Mr. Mikles and lives in Mr. Mikles household. However, Mr.
Mikles is not the trustee of such trust and disclaims beneficial
ownership.
(c) Includes 250,000 shares of common stock held by the Douglas D. Hommert
Revocable Trust, which is a trust established by Mr. Hommert for the
benefit of his descendants, of which Mr. Hommert is the trustee.
(d) Assumes the exercise of all warrants issued and outstanding as of the
date of this Registration Statement.
FOUNDING SHARES OWNED BY THE FOUNDING SHAREHOLDERS
Prior to our July 2006 offering, there were 5,625,000 shares of our
common stock issued as follows ("founding shares").
FOUNDING SHAREHOLDER SHARES RELATIONSHIP TO THE COMPANY
--------------------------------------------------- ------------- ---------------------------------------
St. Albans Global Management, Limited
Partnership, LLLP................................. 2,250,000 Shareholder (affiliate of Mr. Novelly)
Lee E. Mikles Revocable Trust........................ 2,000,000 Shareholders (affiliate of Mr. Mikles)
Douglas D. Hommert Revocable Trust................... 250,000 Shareholder (affiliate of Mr. Hommert)
Edwin A. Levy........................................ 250,000 Director and Shareholder
Joe C. Leach......................................... 250,000 Shareholder
Edwin Wahl........................................... 150,000 Shareholder
Jeffery Call......................................... 150,000 Shareholder
Mark R. Miller....................................... 100,000 Shareholder
Lee E. Mikles Gift Trust............................. 100,000 Shareholder (affiliate of Mr. Mikles)
Ken Fenton........................................... 75,000 Shareholder
RAS, LLC............................................. 50,000 Shareholder
61
ITEM 5. - DIRECTORS AND EXECUTIVE OFFICERS
IDENTIFICATION OF DIRECTORS
Our directors are as follows.
DIRECTOR TERM
NAME AGE SINCE EXPIRES
------------------------------------------------------------------ ------- ---------------- -----------------
Paul A. Novelly, executive chairman of the board.................. 63 2005 2009
Lee E. Mikles, chief executive officer and president.............. 51 2005 2008
Douglas D. Hommert, executive vice president, secretary
and treasurer.................................................. 51 2005 2010
Edwin A. Levy..................................................... 70 2005 2008
Thomas R. Evans................................................... 52 2006 2008
Richard L. Knowlton............................................... 75 2007 2009
Paul G. Lorenzini................................................. 67 2007 2009
Mr. William J. Dore was also a director whose term expired in 2007.
However, he resigned as a director effective June 1, 2007 and our board
determined not to fill his position at this time. In the event his position is
filled, his successor will hold that position only until the annual
shareholder meeting in 2008 and, if reelected at such meeting, such successor
will then hold office until 2010.
There is no arrangement or understanding between any of the above
directors and any other person pursuant to which such person was or is to be
selected as a director.
IDENTIFICATION OF EXECUTIVE OFFICERS
Our executive officers are as follows.
OFFICER
NAME POSITION AGE SINCE
----------------------------- ----------------------------------------------------- -------- ---------------
Paul A. Novelly.............. Executive chairman of the board 63 2005
Lee E. Mikles................ Chief executive officer and president 51 2005
Douglas D. Hommert........... Executive vice president, secretary and treasurer 51 2005
There is no arrangement or understanding between any of the above officers and
any other person pursuant to which such person was or is to be selected as an
officer.
IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
The following individuals are executive officers of FutureFuel Chemical
Company who are expected to make significant contributions to our business.
OFFICER
NAME POSITION AGE SINCE
----------------------------- ----------------------------------------------------- -------- ---------------
Randall W. Powell............ President and chief operating officer 55 2006
David Baker.................. Vice president - manufacturing operations 59 2006
Gary Hess.................... Vice president - commercial operations 56 2006
Benjamin Ladd................ Chief financial officer and treasurer 30 2006
BUSINESS EXPERIENCE
PAUL A. NOVELLY has been our chairman of the board since inception. For at
least the past five years, Mr. Novelly has been chairman and chief executive
officer of Apex Oil Company, Inc., a privately-held company based in St.
Louis, Missouri engaged in the trading, storage, marketing and transportation
of petroleum products, including liquid terminal facilities in the Midwest and
Eastern United States, and towboat and barge operations on the inland waterway
system. Mr. Novelly is president and a director of AIC Limited, a
Bermuda-based oil trading company,
62
chairman and a director of World Point Terminals Inc., a publicly-held
Canadian company based in Calgary which owns and operates petroleum storage
facilities in the Bahamas and United States, and chief executive officer of
St. Albans Global Management, Limited Partnership, LLLP, which provides
corporate management services. He currently serves on boards of directors at
The Bear Stearns Companies Inc., a broker-dealer and global securities and
investment firm, and Boss Holdings, Inc., a distributor of work gloves, boots
and rainwear and other consumer products, and within the past five years also
served on the board of directors of Intrawest Corporation, a company that is a
world leader in destination resorts and adventure travel.
LEE E. MIKLES has been our chief executive officer and a member of our board
since inception. In addition, he has served as our principal financial officer
both before and after our acquisition of FutureFuel Chemical Company. Mr.
Mikles was chairman of Mikles/Miller Management, Inc., a registered investment
adviser and home to the Kodiak family of funds, between 1992 and 2005. He was
also chairman of Mikles/Miller Securities, LLC, a registered broker-dealer,
between 1999 and 2005. Additionally, Mr. Mikles has served on the board of
directors of Official Payments Corporation, Coastcast Corporation, Nelnet,
Inc., Imperial Bank and Imperial Bancorp. He currently serves on the board of
directors of Boss Holdings, Inc. and Pacific Capital Bankcorp. and is the
chair of the audit committee for Boss Holdings, Inc.
DOUGLAS D. HOMMERT has been our executive vice president, secretary, treasurer
and a member of our board since inception. Mr. Hommert has been executive vice
president and general counsel of Apex Oil Company, Inc. since September 2002.
Between October 1988 and September 2002, he was a partner in the St. Louis law
firm of Lewis, Rice & Fingersh, L.C. With that firm, he practiced in the areas
of business law, taxation, mergers and acquisitions, financing and
partnerships. He was licensed as a Certified Public Accountant in 1982.
EDWIN A. LEVY has been a member of our board since November 2005. In 1979, Mr.
Levy co-founded Levy, Harkins & Co., Inc., an investment advisory firm, where
he now serves as chairman of the board and individual advisor. Mr. Levy was a
director of Traffix, Inc. between November 1995 and 2006, and served as a
member of its audit committee and stock options committee. He is a director of
Forward Industries, Inc., a publicly-held company in the business of
designing, manufacturing and distributing custom carrying case solutions, and
World Point Terminals Inc., a publicly-held Canadian company based in Calgary
which owns and operates petroleum storage facilities in the Bahamas and United
States.
THOMAS R. EVANS has been a member of our board since May 2006. Since June
2004, he has served as president and chief executive officer of Bankrate,
Inc., an Internet based aggregator of financial rate information. Mr. Evans
was elected to Bankrate, Inc.'s board of directors in May 2004. From 1999 to
2002, Mr. Evans was chairman and chief executive officer of Official Payments
Corporation, an Internet processor of payment to government entities.
RICHARD L. KNOWLTON has been a member of our board since January 2007. Between
1956 and 1995, Mr. Knowlton worked for Hormel Foods Corporation, a
multinational manufacturer and marketer of consumer-branded meat and food
products. He started as a merchandising manager and became the president and
chief operating officer in 1979. He became the chief executive officer and
chairman of the board in 1981 and retired in 1995. Mr. Knowlton currently
serves as a director on The Hormel Foundation and the Horatio Alger
Association and is a member of the Business Advisory Council for the
University of Colorado Leeds School of Business, the Mayo Laboratory Services
Advisory Board and the Eisenhower Medical Center Board. Mr. Knowlton served as
a director of NG America Insurance Holdings, Inc. between 2000 and 2005 and
SUPERVALU INC. between 1994 and 2005.
PAUL G. LORENZINI has been a member of our board since January 2007. In
January 1970, Mr. Lorenzini co-founded Packaging Consultants, Inc., a
distribution business supplying packaging materials to the food industry. In
1983, Bunzl PLC, a supplier of supermarket and food service packaging,
acquired Packaging Consultants, Inc. Mr. Lorenzini continued to work for Bunzl
PLC and in 1986 became president of Bunzl USA. He subsequently became the
chief executive officer of Bunzl USA and retired in July 2004 with the title
of chairman emeritus. Mr. Lorenzini served as a director of Bunzl PLC between
1999 and 2004.
RANDALL W. POWELL has been the president and chief operating officer of
FutureFuel Chemical Company since October 31, 2006. Prior to that time, he
held the dual position under Eastman Chemical Company of vice president, fine
chemicals manufacturing and technology and general manager, Arkansas
operations. In this position, he had line responsibility for Eastman Chemical
Company's Arkansas and Wales manufacturing sites and also coordination with
Eastman Chemical Company's specialty manufacturing units. Dr. Powell received
a PhD in organic chemistry
63
in 1977 from the University of North Carolina. In 1977, Dr. Powell joined
Eastman Chemical Company's organic chemicals division in Kingsport, Tennessee
as a development chemist. In 2001, he was appointed vice president, European
manufacturing and relocated to Eastman Chemical Company's regional
headquarters in The Hague, Netherlands, with responsibility to integrate and
optimize twelve newly-acquired resins and inks chemical manufacturing sites in
eight European countries. Upon Eastman Chemical Company's divestiture of these
businesses in 2004, Dr. Powell relocated to Batesville, Arkansas.
DAVID BAKER has been the vice president - manufacturing operations of
FutureFuel Chemical Company since October 31, 2006. In 1967, he joined Eastman
Chemical Company's filter products division in Kingsport, Tennessee as a
development engineer. In 2001, Mr. Baker was named managing director of
Eastman Chemical Company's Peboc division, relocating to the United Kingdom.
The Peboc division manufactures specialty chemicals including active
pharmaceutical ingredients. In August 2005, Mr. Baker relocated to Kingsport
as a business development manager in performance chemicals exclusive
manufacturing. Mr. Baker is a registered professional engineer and past
president of the East Tennessee Society of Professional Engineers.
GARY HESS has been the vice president - commercial operations of FutureFuel
Chemical Company since October 31, 2006. Mr. Hess was the vice president for
commercial operations for Bayer Corporation, where he had responsibility for
sales, marketing, customer service, purchasing, research and development and
quality control, prior to joining Eastman Chemical Company in December 2002 as
the market development executive for agrochemicals. In 2004, he was appointed
to the position of global business leader for exclusive manufacturing with
responsibility for sales, marketing and business development.
BENJAMIN LADD became FutureFuel Chemical Company's chief financial officer on
October 31, 2006. Between October 2003 and October 2006, inclusive, Mr. Ladd
has been a fund manager and financial consultant for St. Albans Global
Management, Limited Partnership, LLLP, which provides corporate management
services. In this position, he assisted with the management of capital in the
equity and derivative markets worldwide and was responsible for all financial
analysis and reporting related to the firm's merchant banking and consulting
activities. From 1999 to 2003, Mr. Ladd served in various capacities for Green
Manning & Bunch, Ltd., a middle-market investment banking firm in Denver,
Colorado.
64
ITEM 6. - EXECUTIVE COMPENSATION
GENERAL
Our board of directors has established a remuneration committee. The
remuneration committee's responsibilities include, among other things,
determining our policy on remuneration to our (that is, FutureFuel Corp.'s)
officers and directors and the executive officers and directors of FutureFuel
Chemical Company, provided, however, that no director may be directly involved
in any decisions as to his own remuneration. Given that we are a start-up
company and only recently consummated our acquisition of FutureFuel Chemical
Company, we have determined not to pay salaries, bonuses or other forms of
compensation to any of our executive officers who have not been elected by the
FutureFuel Chemical Company board of directors to an executive officer
position with FutureFuel Chemical Company. The FutureFuel Corp. board has also
determined not to pay any compensation to any member of its board of directors
or to any member of the board of any subsidiary. These policies may change in
the future. We do pay salaries, bonuses and other forms of compensation to the
officers of FutureFuel Chemical Company as described below. For purposes of
the following discussion of executive compensation (Item 6 of this
Registration Statement), the term "executive officers" includes executive
officers of both FutureFuel Corp. and FutureFuel Chemical Company. However,
only Paul A. Novelly, Lee E. Mikles and Douglas D. Hommert have been elected
officers of FutureFuel Corp. by our board of directors.
COMPENSATION DISCUSSION AND ANALYSIS
We have not yet established a comprehensive executive compensation
philosophy, nor have we determined definitively the material elements of the
compensation of our executive officers. The current elements of our
compensation program include base salary and certain retirement, insurance and
other benefits generally available to all employees. In addition, our board
has adopted an Omnibus Incentive Plan which was approved by our shareholders
at our 2007 annual meeting on June 26, 2007. As of the date of this
Registration Statement, the Plan has not been implemented by our board and no
awards have been granted thereunder. Such Plan when implemented by our board
would provide equity-based compensation to our executive officers.
We have formed a remuneration committee of our board, which will
determine compensation arrangements for our executive officers. We expect our
remuneration committee will seek to establish a compensation program that will
be designed to attract, as needed, individuals with the skills necessary for
us to achieve our business plan, to motivate those individuals, to reward
those individuals fairly over time and to retain those individuals who
continue to perform at or above the levels that we expect. We also expect that
our executive compensation program will be designed to afford our executive
officers a sense of ownership in us, and to link rewards to measurable Company
and individual performance. These arrangements are expected to include
appropriate salaries, annual bonus opportunities and long-term incentives
awards linked to equity and equity awards under the omnibus incentive plan
adopted during 2007.
Cash Salaries and Bonuses
At this time, we have determined that we will not pay a salary to
Messrs. Novelly, Mikles and Hommert. This policy may change in the future.
Each of Messrs. Novelly, Mikles and Hommert were granted founder shares as
described elsewhere in this Registration Statement, and our board of directors
determined that the payment of cash compensation to them was unnecessary at
this time. Our executive chairman, Mr. Novelly, receives compensation from our
affiliate, St. Albans Global Management, Limited Partnership, LLLP. Our chief
executive officer, Mr. Mikles, receives compensation from existing business
enterprises and investments, none of which are affiliated with us. Our
executive vice president, secretary and treasurer, Mr. Hommert, receives
compensation from our affiliate, Apex Oil Company, Inc. None of Messrs.
Novelly, Mikles or Hommert received any increase in their salary, bonus or
other income to compensate them for their services to us. As to our other
executive officers, we continued their base salaries paid by Eastman Chemical
Company with a modest percentage increase. We expect that our remuneration
committee will establish future salaries for our executive officers
commensurate with those paid by companies comparable to us and to FutureFuel
Chemical Company, as applicable.
We expect to establish an annual cash bonus program for fiscal years
commencing in 2007. In determining actual bonus payouts, we expect that the
remuneration committee will consider performance against Company performance
goals to be established, as well as individual performance goals. We expect
that this annual cash bonus
65
program will apply to certain key executives of FutureFuel Chemical Company in
addition to the executives whose compensation is described in this
Registration Statement.
Omnibus Incentive Plan
Our board of directors adopted an omnibus incentive plan which was
approved by our shareholders at our 2007 annual shareholder meeting on June
26, 2007. The purpose of the plan is to:
o encourage ownership in us by key personnel whose long-term
employment with or engagement by us or our subsidiaries (including
FutureFuel Chemical Company) is considered essential to our
continued progress and, thereby, encourage recipients to act in our
shareholders' interests and share in our success;
o encourage such persons to remain in our employ or in the employ of
our subsidiaries; and
o provide incentives to persons who are not our employees to promote
our success.
The plan authorizes us to issue stock options (including incentive stock
options and nonqualified stock options), stock awards and stock appreciation
rights. To date, no stock options, stock awards or stock appreciation rights
have been issued.
Eligible participants in the plan include: (i) members of our board of
directors (currently seven persons); (ii) regular, active employees of us or
of any of our subsidiaries (approximately 450 persons); and (iii) persons
engaged by us or by any of our subsidiaries to render services to us or our
subsidiaries as an advisor or consultant.
Awards under the plan are limited to shares of our common stock, which
may be shares reacquired by us, including shares purchased in the open market,
or authorized but un-issued shares. Awards will be limited to 10% of the
issued and outstanding shares of our common stock in the aggregate, or
approximately 2,200,000 shares as of June 26, 2007. Also, as of that date, the
aggregate market value of 2,200,000 shares of our common stock was
approximately $17,600,000.
The plan will be administered by: (i) our board; (ii) a committee of our
board appointed for that purpose; or (iii) if no such committee is appointed,
our board's remuneration committee (the "ADMINISTRATOR"). To date, no
committee has been appointed. The Administrator may appoint agents to assist
it in administering the plan. The Administrator may delegate to one or more
individuals the day-to-day administration of the plan and any of the functions
assigned to the Administrator in the plan. Such delegation may be revoked at
any time. All decisions, determinations and interpretations by the
Administrator regarding the plan and the terms and conditions of any award
granted thereunder will be final and binding on all participants.
The plan became effective upon its approval by our shareholders on June
26, 2007 and continues in effect for a term of ten years thereafter unless
amended and extended by us or unless earlier terminated. The individuals and
number of persons who may be selected to participate in the plan in the future
is at the discretion of the Administrator and, therefore, are not determinable
at this time. Likewise, the number of stock options, stock awards and stock
appreciation rights that will be granted, or that would have been granted
during the last completed fiscal year if the plan had been in effect, to
eligible participants pursuant to the plan are not determinable at this time.
The Administrator may grant a stock option or provide for the grant of a
stock option either from time to time in the discretion of the Administrator
or automatically upon the occurrence of events specified by the Administrator,
including the achievement of performance goals or the satisfaction of an event
or condition within the control of the participant or within the control of
others. Each option agreement must contain provisions regarding: (i) the
number of shares of common stock that may be issued upon exercise of the
option; (ii) the type of option; (iii) the exercise price of the shares and
the means of payment for the shares; (iv) the term of the option; (v) such
terms and conditions on the vesting or exercisability of the option as may be
determined from time to time by the Administrator; (vi) restrictions on the
transfer of the option and forfeiture provisions; and (vii) such further terms
and condition not inconsistent with the plan as may be determined from time to
time by the Administrator. Unless otherwise specifically determined by the
Administrator or otherwise set forth in the plan, the vesting of an
66
option will occur only while the participant is employed or rendering services
to us or one of our subsidiaries, and all vesting will cease upon a
participant's termination of employment for any reason.
The Administrator may grant annual performance vested options.
Performance will be tied to annual cash flow targets (our consolidated income
plus depreciation plus amortization) in amounts to be determined. Annual
performance vested options will vest 25% for each year that the annual cash
flow target is achieved (with provisions for subsequent year catch-ups).
The Administrator may grant cumulative performance vested options.
Performance will be tied to cumulative cash flow in amounts to be determined
for periods to be determined.
The Administrator may issue other options based upon the following
performance criteria either individually, alternatively or in any combination,
applied to either the Company as a whole or to a business unit, subsidiary or
business segment, either individually, alternatively or in any combination,
and measured either annually or cumulatively over a period of years, on an
absolute basis or relative to a pre-established target, to previous years'
results or to a designated comparison group, in each case as specified by the
Administrator: (i) cash flow; (ii) earnings (including gross margin, earnings
before interest and taxes, earnings before taxes, and net earnings); (iii)
earnings per share; (iv) growth in earnings or earnings per share; (v) stock
price; (vi) return on equity or average shareholders' equity; (vii) total
shareholder return; (viii) return on capital; (ix) return on assets or net
assets; (x) return on investment; (xi) revenue; (xii) income or net income;
(xiii) operating income or net operating income; (xiv) operating profit or net
operating profit; (xv) operating margin; (xvi) return on operating revenue;
(xvii) market share; (xviii) overhead or other expense reduction; (xix) growth
in shareholder value relative to the moving average of the S&P 500 Index or a
peer group index; (xx) strategic plan development and implementation; and
(xxi) any other similar criteria.
Such options will vest and expire (including on a pro rata basis) on
such terms as may be determined by the Administrator from time to time
consistent with the terms of the plan.
The Administrator may award our common stock to participants. The
grant, issuance, retention or vesting of each stock award may be subject to
such performance criteria and level of achievement versus these criteria as
the Administrator determines, which criteria may be based on financial
performance, personal performance evaluations or completion of service by the
participant. Unless otherwise provided for by the Administrator, upon the
participant's termination of employment other than due to death or retirement,
the unvested portions of the stock award and the shares of our common stock
subject thereto will generally be forfeited. Unless otherwise provided for by
the Administrator, if a participant's termination of employment is due to
death or retirement, all outstanding stock awards will continue to vest
provided certain conditions to be determined are met. Unless otherwise
provided for by the Administrator, if a participant's termination of
employment is due to his death, a portion of each outstanding stock award
granted to such participant will immediately vest and all forfeiture
provisions and repurchase rights will lapse as to a prorated number of shares
of common stock determined by dividing the number of whole months since the
grant date by the number of whole months between the grant date and the date
that the stock award would have fully vested.
The Administrator may grant stock appreciation rights either alone or
in conjunction with other awards. The Administrator will determine the number
of shares of common stock to be subject to each award of stock appreciation
rights. The award of stock appreciation rights will not be exercisable for at
least six months after the date of grant except as the Administrator may
otherwise determine in the event of death, disability, retirement or voluntary
termination of employment of the participant. Except as otherwise provided by
the Administrator, the award of stock appreciation rights will not be
exercisable unless the person exercising the award of stock appreciation
rights has been at all times during the period beginning with the date of the
grant thereof and ending on the date of such exercise, employed by or
otherwise performing services for us or one of our subsidiaries.
In the event there is a change in control of the Company, as determined
by our board, our board may, in its discretion: (i) provide for the assumption
or substitution of, or adjustment to, each outstanding award; (ii) accelerate
the vesting of awards and terminate any restrictions on cash awards or stock
awards; and (iii) provide for the cancellation of awards for a cash payment to
the participant.
67
Retirement Benefits
We have adopted a 401(k) plan for FutureFuel Chemical Company which is
generally available to all of its employees.
Founder's Grant
Certain of our executive officers (none of whom had been elected to an
officer position with FutureFuel Chemical Company) were granted founders
shares as described herein. Please refer to the discussion under "Item 4. -
Security Ownership of Certain Beneficial Owners and Management - Founding
Shares Owned by the Founding Shareholders" above. Our board of directors
considers the grants of the founders shares to such executive officers to be
adequate to compensate them for their services to us in our start-up stage
(that is, from our organization in August 2005 through the end of 2006).
Life Insurance and Other Employee Benefits
Our executive officers who are not officers of FutureFuel Corp.
participate in employee welfare plans (life insurance, medical insurance,
disability insurance, vacation pay and the like) maintained by FutureFuel
Chemical Company for all of its employees. We do not provide life insurance or
other employee benefits for our executive officers who have been elected to
officer positions with both FutureFuel Corp. and FutureFuel Chemical Company.
The Remuneration Committee
Our remuneration committee currently consists of Mr. Levy, Mr. Knowlton
and Mr. Lorenzini. Each of these individuals is an "independent director"
under the rules of the New York Stock Exchange, a "Non-Employee Director"
within the meaning of Section 16 of the Securities Exchange Act of 1934, as
amended, and an "outside director" within the meaning of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
SUMMARY COMPENSATION TABLE
Our executive officers were paid the following compensation during the
twelve months ended December 31, 2006.
SUMMARY COMPENSATION TABLE
(b)ALL OTHER
PERSON OFFICE SALARY BONUS COMPENSATION TOTAL
------ ------ ------ ----- ------------ -----
Paul A. Novelly(c) Executive chairman, FutureFuel Corp. $ 0 $ 0 $ 0 $ 0
Lee E. Mikles(c) Chief executive officer, FutureFuel Corp. $ 0 $ 0 $ 0 $ 0
Douglas D. Hommert(c) Executive vice president, secretary
and treasurer, FutureFuel Corp. $ 0 $ 0 $ 0 $ 0
Randall W. Powell(a) President and chief operating officer,
FutureFuel Chemical Company $189,041 $296,232 $ 179,862 $665,135
Benjamin Ladd(a) Chief financial officer, FutureFuel
Chemical Company $ 23,750 $ 40,000 $ 0 $ 63,750
David Baker(a) Vice president - manufacturing
operations, FutureFuel Chemical Company $140,618 $ 64,044 $ 28,389 $233,051
Gary Hess(a) Vice president - commercial
operations, FutureFuel Chemical Company $125,984 $ 41,500 $ 20,531 $188,015
----------
(a) Executive officers of FutureFuel Chemical Company. Prior to November 1,
2006, Messrs. Powell, Baker and Hess were employed by Eastman Chemical
Company. Prior to November 1, 2006, Mr. Ladd was employed by St. Albans
Global Management, Limited Partnership, LLLP, an affiliate of Mr.
Novelly. The table includes both amounts paid by FutureFuel Chemical
Company as well as by Eastman Chemical Company, if applicable.
(b) Includes our contributions (including accrued contributions) to vested
and unvested defined contribution plans and the dollar value of any
insurance premiums paid by, or on behalf of, us during the covered fiscal
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year with respect to life and disability insurance for the benefit of the
named person. Also includes the following payments by Eastman Chemical
Company to or for the benefit of the named individual: special pay
makeup, employee recognition, personal umbrella, non-qualified stock
options to purchase stock of Eastman Chemical Company, pay-in-lieu of
vacation, stock awards to purchase stock of Eastman Chemical Company, and
lump sum payment.
(c) Our executive officers. For the year 2006, we did not pay Messrs.
Novelly, Mikles or Hommert any form of compensation. See the discussion
above. However, we did reimburse them for certain ordinary and necessary
business expenses that they incurred in connection with our business.
None of the above-named persons are party to an employment agreement or
employment arrangement with us or with FutureFuel Chemical Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our remuneration committee during 2006 were Mr. Levy, Mr.
Evans and Mr. Dore, three of our then non-executive directors, and the
committee was chaired by Mr. Dore. The committee is now comprised of Mr. Levy,
Mr. Knowlton and Mr. Lorenzini and is chaired by Mr. Levy.
Mr. Novelly, our executive chairman of the board, and Mr. Mikles, our
chief executive officer and one of our directors, are both directors of Boss
Holdings, Inc. Mr. Novelly is a member of Boss Holdings, Inc.'s compensation
committee and Mr. Mikles is a member of its audit committee. Mr. Novelly and
Mr. Levy, one of our directors and a member of our remuneration committee, are
both directors of World Point Terminal Inc.; World Point Terminal Inc. does
not have a separate compensation committee.
69
ITEM 7. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
TRANSACTIONS WITH MANAGEMENT, PROMOTERS AND OTHERS
Storage Agreement
On November 1, 2006, FutureFuel Chemical Company entered into a Storage
and Thruput Agreement with Center Point Terminal Company, a wholly-owned
subsidiary of World Point Terminals Inc. Mr. Novelly, a director and chairman
of our board, is the chairman of World Point Terminals Inc. and he and his
family beneficially own approximately 49% of World Point Terminals Inc. Mr.
Levy, one of our directors, is also a director of World Point Terminal Inc.
Mr. Hommert, one of our directors and our executive vice president, secretary
and treasurer, is the executive vice president of Center Point Terminal
Company. Under the Storage and Thruput Agreement, Center Point Terminal
Company will provide to FutureFuel Chemical Company storage space and thruput
services for FutureFuel Chemical Company's biodiesel and certain feedstocks at
Center Point Terminal Company's bulk liquid storage facilities located in
Little Rock, Arkansas, Memphis, Tennessee and Port Allen, Louisiana. The
initial term of this agreement is two years and automatically renews itself
for successive one year periods unless FutureFuel Chemical Company or Center
Point Terminal Company notifies the other party in writing at least 90 days
prior to expiration of the then current term of its intent to cancel the
agreement, in which case the agreement terminates at the end of the then
current term.
Under the Storage and Thruput Agreement, FutureFuel Chemical Company will
pay the following fees and expenses to Center Point Terminal Company:
o $0.35 per barrel of shell capacity available for thruput of
biodiesel and other liquid products at each terminal each month
(such shell capacity to be mutually agreed from time to time);
o charges for heating; and
o other incidental costs.
As of the date of this Registration Statement, FutureFuel Chemical Company is
only leasing a 45,000 barrel tank at Center Point Terminal Company's Little
Rock, Arkansas facility for which FutureFuel Chemical Company is being charged
$15,750 per month plus charges for heating and other incidental costs.
Center Point Terminal Company's facilities are operated by Petroleum Fuel
& Terminal Company, a wholly-owned subsidiary of Apex Oil Company, Inc. Mr.
Novelly and his family beneficially own approximately 90% of Apex Holding Co.
which owns all of the issued and outstanding stock of Apex Oil Company, Inc.
Mr. Hommert is the president of Apex Holding Co. and the executive vice
president of both Apex Oil Company, Inc. and Petroleum Fuel & Terminal
Company. Our independent directors obtained an opinion from Turner Mason and
Company to the effect that the Storage and Thruput Agreement is fair to
FutureFuel Chemical Company and to our shareholders. Turner, Mason & Company
provides engineering and management consulting services, primarily for
petroleum related industries. Its staff is comprised of licensed chemical
engineers who have an average of over 25 years of experience, including with
petroleum terminalling companies located in the United States. Turner, Mason &
Company has performed numerous fair market assessments of oil terminals and
refineries.
Reimbursement of Expenses
In connection with our July 2006 offering of our shares of common stock
and warrants, two of the founding shareholders, Mr. Novelly and Mr. Mikles,
agreed to fund due diligence expenses incurred in investigating target
businesses in the oil and gas industry, up to a maximum of $1,500,000. Due
diligence expenses incurred in investigating FutureFuel Chemical Company and
its business totaled $164,825. These expenses were incurred by Apex Oil
Company, Inc., Mr. Novelly and Mr. Mikles. Our shareholders approved the
reimbursement of these due diligence expenses and those due diligence expenses
were reimbursed on October 31, 2006 in connection with the completion of the
acquisition of FutureFuel Chemical Company.
70
Repayment of Loans
Prior to the July 2006 offering of our shares and warrants, Mr. Mikles
and St. Albans Global Management, Limited Partnership, LLLP, an affiliate of
Mr. Novelly, loaned us $700,000 in the aggregate. Those loans were repayable,
without interest, upon the consummation of a business combination.
Consequently, those loans were repaid on October 31, 2006 in connection with
the completion of the acquisition of FutureFuel Chemical Company.
Commodity Trading Advisor Agreement
On November 1, 2006, FutureFuel Chemical Company and Apex Oil Company,
Inc. entered into a Commodity Trading Advisor Agreement pursuant to which Apex
Oil Company, Inc. agreed to provide advice and services to FutureFuel Chemical
Company with respect to the purchase, sale, exchange, conversion and hedging
of commodities. The term "commodity" includes: (i) any and all feedstocks that
FutureFuel Chemical Company uses in the operation of its biofuels business,
including fats and oils (including lard, tallow, cottonseed oil, peanut oil,
soybean oil, palm oil and all other fats and oils), cottonseed meal,
cottonseed, soybeans, soybean meal, livestock and livestock products and
methanol; (ii) diesel fuel, heating oil, gasoline and ethanol; (iii) biofuels,
including biodiesel and bioethanol, and co-products from biofuels, including
glycerin; and (iv) pour-point depressants, color stabilizers and other
petroleum additives. Such advice will also include advice as to contracts of
sale for commodities and as to options for commodities. FutureFuel Chemical
Company also granted Apex Oil Company, Inc. a power of attorney, and appointed
Apex Oil Company, Inc. as FutureFuel Chemical Company's agent with full power
and authority, to enter into contracts of sale for the purchase or sale of
commodities and options on commodities. Any such contracts must be approved by
our chairman, chief executive officer or executive vice president or by an
executive officer of FutureFuel Chemical Company. In exchange for these
services, FutureFuel Chemical Company pays Apex Oil Company, Inc. a fee of
$10,000 per month.
Sales of Products
From time to time, FutureFuel Chemical Company may sell to Apex Oil
Company, Inc. and/or its affiliates biofuels (including biodiesel and
bioethanol) produced by FutureFuel Chemical Company, and Apex Oil Company,
Inc. and/or its affiliates may sell to FutureFuel Chemical Company diesel
fuel, gasoline and other petroleum products for use in FutureFuel Chemical
Company's biofuels business. Such sales will be at then posted prices for
comparable products plus or minus applicable geographical differentials.
Service Agreement
On November 1, 2006, we entered into a Service Agreement with Pinnacle
Consulting, Inc. pursuant to which Pinnacle Consulting, Inc. agreed to provide
accounting services, data processing services, financial services and general
administrative services to us and our affiliates as we may request from time
to time. Pinnacle Consulting, Inc. will be paid on an hourly basis for
services actually rendered. The agreement may be terminated by either party
upon 30 days notice. Pinnacle Consulting, Inc. provides accounting and other
financial services solely to entities controlled by Mr. Novelly.
Railcar Sublease
Effective November 1, 2006, Apex Oil Company, Inc. entered into a lease
agreement with General Electric Railcar Services Corporation pursuant to which
Apex Oil Company, Inc. leased certain biodiesel railcars from General Electric
Railcar Services Corporation. On that same date, Apex Oil Company, Inc.
entered into a sublease agreement with FutureFuel Chemical Company pursuant to
which Apex Oil Company, Inc. subleased these railcars to FutureFuel Chemical
Company on the same terms that Apex Oil Company, Inc. leased the cars from
General Electric Railcar Services Corporation.
Time Sharing Agreement
Effective April 18, 2007, we entered into a Time Sharing Agreement with
Apex Oil Company, Inc. pursuant to which Apex Oil Company, Inc. leases certain
airplanes to us. Pursuant to this Time Sharing Agreement, we are charged for
certain expenses incurred with respect to specific flights of the airplanes
while they are being used for our business purposes. These expenses are
authorized by the Federal Aviation Regulations Part 91.501(d).
71
REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
Any transaction in which we (or one of our subsidiaries) are a
participant, the amount involved exceeds the lesser of $120,000 or 5% of our
net income, total assets or total capital, and in which any party related to
us has or will have a direct or indirect material interest must be approved by
a majority of the disinterested members of our board of directors as fair to
us and our shareholders. This policy was adopted by our board on January 8,
2007, is in writing and can be found through the "Investor Relations -
Corporate Governance" section of our internet website
(http://www.FutureFuelCorporation.com). All of the agreements described above
in this Item 7 have been approved by a majority of the disinterested members
of our board of directors.
In addition, we have adopted a Code of Ethics and Business Conduct which
sets forth legal and ethical standards of conduct for our directors, officers
and employees and the directors, officers and employees of our subsidiaries,
including FutureFuel Chemical Company. This Code is designed to deter
wrongdoing and to promote: (i) honest and ethical conduct, including the
ethical handling of actual or apparent conflicts of interest between personal
and professional relationships; (ii) full, fair, accurate, timely and
understandable disclosure in reports and documents that we file with, or
submit to, the Securities and Exchange Commission and in other public
communications made by us; (iii) compliance with applicable governmental laws,
rules and regulations; (iv) the prompt internal reporting of violations of
this Code to appropriate persons identified in this Code; and (v)
accountability for adherence to this Code. This Code was adopted by our board
on November 30, 2005, is in writing and can be found through the "Investor
Relations - Corporate Governance" section of our internet website
(http://www.FutureFuelCorporation.com).
Each of the transactions described above (under the caption "Transactions
with Management, Promoters and Others") was undertaken in compliance with our
Code of Ethics and Business Conduct and approved by a majority of the
disinterested members of our board of directors.
PROMOTERS
All of our founding shareholders are "promoters" within the definition of
Rule 12b-2 as promulgated by the Securities and Exchange Commission. See "Item
4. - Security Ownership of Certain Beneficial Owners and Management - Founding
Shares Owned by the Founding Shareholders" at page 61 for a listing of our
founding shareholders and the founders shares received by them. Also see "Item
7. - Certain Relationships and Related Transactions, and Director Independence
- Transactions with Management, Promoters and Others" at page 70 for a
description of transactions between us or FutureFuel Chemical Company with
such promoters or affiliates of such promoters.
DIRECTOR INDEPENDENCE
We are a listed issuer whose securities are listed on AIM. AIM has
requirements that a majority of our board of directors be independent. AIM's
definition of "independent director" can be found through the "Investor
Relations - Corporate Governance" section of our internet website
(http://www.FutureFuelCorporation.com). The Securities and Exchange Commission
has also promulgated Rule 10A-3, which sets forth the independence
requirements for members of an audit committee. The following members of our
board of directors are independent under both AIM's and the Securities and
Exchange Commission's definitions of independence:
Edwin A. Levy
Thomas R. Evans
Richard L. Knowlton
Paul G. Lorenzini
In addition, each member of our board of directors' remuneration, audit and
nominating committees are comprised of directors who are independent under
such definitions.
72
ITEM 8. - LEGAL PROCEEDINGS
Neither we nor any of our subsidiaries are a party to, nor is any of
ours or their property subject to, any material pending legal proceedings,
other than ordinary routine litigation incidental to their businesses.
However, from time to time, FutureFuel Chemical Company and its operations may
be parties to, or targets of, lawsuits, claims, investigations and
proceedings, including product liability, personal injury, asbestos, patent
and intellectual property, commercial, contract, environmental, antitrust,
health and safety and employment matters, which we expect to be handled and
defended in the ordinary course of business. While we are unable to predict
the outcome of any matters currently pending, we do not believe that the
ultimate resolution of any such pending matters will have a material adverse
effect on our overall financial condition, results of operations or cash
flows. However, adverse developments could negatively impact earnings or cash
flows in future periods.
73
ITEM 9. - MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY/RELATED
SHAREHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market in the United States for
our shares of common stock or our warrants. However, our shares and warrants
are listed on AIM under the ticker symbols "FFU" and "FFUW," respectively.
Trading of our shares of common stock and warrants on AIM commenced July 12,
2006 and was suspended on July 24, 2006, the date that our acquisition of
FutureFuel Chemical Company was announced. Trading resumed on October 9, 2006.
The high and low bid on AIM for our shares of common stock and warrants for
the periods during which they were traded are set forth in the following
table.
SHARES WARRANTS
---------------------------- ---------------------------
PERIOD HIGH LOW HIGH LOW
--------------------------------------------------- ---------- ----------- ---------- -----------
July 12 -24, 2006............................. $7.45 $7.40 $1.40 $1.35
October 9, 2006 - December 31, 2006........... $8.21 $7.30 $2.50 $1.25
January 1, 2007 - March 31, 2007.............. $8.50 $6.00 $2.45 $0.75
April 1, 2007 - June 20, 2007................. $8.00 $7.00 $2.77 $1.50
There are currently outstanding 26,700,000 shares of our common stock and
22,500,000 warrants to purchase 22,500,000 shares of our common stock at $6.00
per share. Such shares and warrants (and shares issued upon exercise of the
warrants) can only be sold pursuant to Rule 144 and Rule 144A of the
Securities Act upon satisfaction of the terms and conditions of those rules.
On July 12, 2006, we and our founding shareholders entered into a
registration rights agreement pursuant to which the holders of the majority of
founding shares and shares of common stock included in the units purchased in
our July 2006 offering by Mr. Novelly or his designees are entitled to make up
to two demands that we register with the Securities and Exchange Commission
their founding shares and the shares included in the units purchased in our
offering. The holders of the majority of such shares can elect to exercise
these registration rights at any time after the date on which we have become a
reporting company under the Securities Exchange Act of 1934, as amended, and
such shares have been released from the escrow agreement and the lock-in deeds
discussed below. In addition, those shareholders have certain "piggy-back"
registration rights on registration statements filed subsequent to the date on
which such shares are released from escrow (as provided in the insider letters
described below) or other lock up arrangements. We have agreed to bear the
expenses incurred in connection with the filing of any such registration
statements. There are 11,250,000 shares of our common stock subject to this
registration rights agreement.
On July 12, 2006, we entered into an investor rights agreement with each
of KBC Peel Hunt Ltd and CRT Capital Group LLC for the benefit of the holders
of our shares of common stock and warrants in which we agreed, at our cost, to
provide "piggyback" registration rights as to any shares of our common stock
that are not, at the time, freely saleable identical to the "piggyback"
registration rights of the founding shareholders described above, plus the
right to piggyback on any registration statement filed pursuant to the
founding shareholders' demand registration rights described above, provided
that in the event such piggyback rights are exercised in an underwritten
offering, the number of shares of our common stock registered will be subject
to a cutback, pro rata with the founding shareholders, if the underwriter so
requires. There are 15,450,000 shares of our common stock subject to this
investor rights agreement.
On July 12, 2006, each of our founding shareholders executed an insider
letter with CRT Capital Group, LLC, KBC Peel Hunt Ltd and us pursuant to which
each founding shareholder agreed that it will, among other things, place its
founding shares in escrow pursuant to the escrow agreement described below for
three years from July 12, 2006.
On July 12, 2006, we entered into an escrow agreement with Capita Trust
Company (Jersey) Limited, as escrow agent, and with our founding shareholders
pursuant to which all of their founding shares were placed in escrow with the
escrow agent until July 12, 2009. During the time that such shares are held in
escrow, the founding shareholders are not able to sell or transfer their
founding shares except: (i) at a time at least one year after July 12, 2006 to
their spouses and children or trusts established for their benefit; (ii) by
virtue of the laws of descent and distribution upon the death of any founding
shareholder; (iii) pursuant to a qualified domestic relations order; or
74
(iv) to any company fully-owned by that founding shareholder (provided,
however, that such transfers are permitted pursuant to the terms of the
insider letters described above and the lock-in deed described below executed,
respectively, by each founding shareholder, and such transferees agree, in
writing to be bound by the terms of each of the escrow agreement, the insider
letter and the lock-in deed, and in the case of a company, to transfer the
founding shares back to the founding shareholder in the event that he disposed
of a majority interest in that company).
On July 12, 2006, each of our directors and our founding shareholders
entered into a lock-in deed with us and KBC Peel Hunt Ltd whereby they
covenanted that they will not dispose of, and their respective related parties
will not dispose of, any interest in any shares of our common stock or our
warrants (whenever such shares or warrants were acquired) for one year from
July 12, 2006 other than as consented to in writing by both KBC Peel Hunt Ltd
and us or pursuant to a takeover offer, a court order or a testamentary
disposition. The lock-in deed also requires that, for a further year following
the lock-in period, any disposal by any founding shareholder of any shares or
warrants must be made through KBC Peel Hunt Ltd as broker (or our broker from
time to time) in order to ensure an orderly market in our securities.
On July 12, 2006, we entered into a warrant solicitation fee letter with
CRT Capital Group, LLC, on a non-exclusive basis, as our agent for the
solicitation of the exercise of our warrants beginning July 12, 2007, pursuant
to which we agreed to pay CRT Capital Group, LLC, for services rendered in
connection with the solicitation of such warrants, a commission equal to two
percent of the exercise price for each warrant exercised for cash as a result
of CRT Capital Group, LLC's solicitation efforts. In addition to soliciting
the exercise of our warrants, CRT Capital Group, LLC's services may (subject
to compliance with applicable laws) also include disseminating information,
orally or in writing, to warrant holders about us or the market for our
securities. CRT Capital Group, LLC will be paid the solicitation fee only
where: (i) it has been requested by us to solicit the exercise of the
warrants; (ii) it (or its sub-agent) has solicited the exercise of the
warrants; (iii) the arrangement to pay the commission is disclosed to warrant
holders at the time of exercise in a prospectus, solicitation notice or any
other written solicitation materials provided to warrant holders in connection
with the exercise of the warrants; (iv) the warrant holder has confirmed in
writing that CRT Capital Group, LLC or its subagent has solicited the exercise
of the warrants being exercised; (v) a notice of the redemption of the
warrants has been published by us; and (vi) the solicitation of the exercise
was not in violation of Regulation M, to the extent applicable at the time of
any solicitation (as such rules or any successor rules may be in effect as of
such time of exercise) promulgated under the Securities Act or any provision
of any other law or regulation then applicable. In addition, no compensation
will be paid to CRT Capital Group, LLC upon the exercise of our warrants if
the market price of the underlying shares of our common stock is lower than
102% of the exercise price at the time of such exercise or where the warrants
are held in a discretionary account except where prior written approval for
the exercise of warrants in such account is received from the relevant
customer.
HOLDERS
The shares of our common stock and our warrants were held by 98 and 97
holders of record, respectively, on June 21, 2007.
DIVIDENDS
The payment of cash dividends by us is dependent upon our future
earnings, capital requirements and overall financial condition. There were no
cash dividends declared on shares of our common stock in 2005, 2006 or 2007
(through the date of this Registration Statement).
75
ITEM 10. - RECENT SALES OF UNREGISTERED SECURITIES
SECURITIES SOLD AND CONSIDERATION
The following is a description of all securities sold by us within the
past three years, which securities were not registered under the Securities
Act.
We were incorporated on August 12, 2005. We issued 5,000,000 shares of
common stock on September 1, 2005 to certain founding shareholders for an
aggregate consideration of $25,000. On May 24, 2006, we issued a common stock
dividend of 0.25 shares for each outstanding share, effectively lowering the
purchase price paid by each of the founding shareholders to $.004 per share.
The total number of issued shares of our common stock following such stock
dividend was 6,250,000. On June 27, 2006, we and certain of our founding
shareholders cancelled an aggregate of 625,000 shares of our common stock,
reducing the founding shares outstanding to 5,625,000 shares.
On July 12, 2006, we issued 22,500,000 units, each unit consisting of one
share of our common stock and one warrant entitling the holder thereof to
purchase one share of our common stock. The sales price was $8.00 per unit for
an aggregate sales price of $180,000,000.
PLACING AGENTS AND OTHER PURCHASERS
KBC Peel Hunt Ltd and CRT Capital Group, LLC, who served as placing
agents in the offering of the units, assisted us in procuring subscribers for
16,875,000 units. The remaining units sold in the offering were sold to the
following designees of Mr. Novelly.
NAME SHARES
---------------------------------------------------------------- ------------
St. Albans Global Management, Limited Partnership, LLLP......... 4,531,250
Apex Holding Co................................................. 625,000
Ed Wahl......................................................... 31,250
Jeff Call....................................................... 31,250
Graziadio Family Trust.......................................... 62,500
Bermuda Life Insurance Company/Separate Account C............... 93,750
William Dore.................................................... 109,375
Lori L. Mikles.................................................. 46,875
J. B. Ladd Trust................................................ 32,500
Thomas Evans.................................................... 30,000
Steve Wallace................................................... 31,250
------------
Total........................................................... 5,625,000
============
EXEMPTION FROM REGISTRATION CLAIMED
Shares of our common stock were issued to our founding shareholders on
the basis of an exemption from registration under Section 4(2) of the
Securities Act for transactions by an issuer not involving any public
offering. Each of our founding shareholders was, and is, a sophisticated
investor who or which would qualify as an accredited investor (as defined in
Rule 501 under the Securities Act). Neither we nor any person acting on our
behalf offered or sold the shares to the founding shareholders by any form of
general solicitation or general advertising, and each of our founding
shareholders understands that such shares are "restricted securities" (as
defined in Rule 144 under the Securities Act). Each of our founding
shareholders was required to represent to us that, among other matters, he or
it was purchasing our shares for investment purposes only, for his or its own
account and not with a view toward selling or otherwise distributing the
shares.
The units were sold: (i) to "qualified institutional buyers" (as defined
in Rule 144A under the Securities Act) and a limited number of "accredited
investors" (as defined in Rule 501 under the Securities Act); and (ii) in
offshore transactions complying with Rule 903 of Regulation S under the
Securities Act. More specifically, the units were not registered under the
Securities Act and are "restricted securities" as defined in Rule 144. A
purchaser of such securities may not offer, sell, pledge or otherwise transfer
such securities in the United States or to, or for the account or benefit of,
any U.S. person (as defined under Regulation S of the Securities Act), except:
(a) pursuant to
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an effective registration statement under the Securities Act; (b) to a person
whom the seller reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A under the Securities Act;
(c) pursuant to an exemption from the registration requirements of the
Securities Act provided by Rule 144 thereunder (if available); or (d) in
certain transactions specified in Regulation S. The selling restrictions set
forth in the preceding sentence will continue to be applicable to our shares
and warrants notwithstanding the expiration of the compliance period described
below. Under our bylaws, we are required to refuse to register any transfer of
our securities not made in accordance with the provisions of Rule 144A, Rule
144 (if available), Regulation S, or pursuant to registration under the
Securities Act or another exemption from registration under the Securities
Act.
Our shares and warrants are subject to the conditions listed under
section 903(b)(3), or Category 3, of Regulation S of the Securities Act. Under
Category 3, "offering restrictions" (as defined under Regulation S) must be in
place and additional restrictions are imposed on resales of the shares and
warrants as described below. All shares and warrants are subject to these
restrictions, regardless of whether the purchaser acquired the shares or
warrants in a transaction pursuant to Rule 144A or in a transaction pursuant
to Regulation S.
Prior to one year after the later of (i) the time when the shares or
warrants were first offered to persons other than distributors in reliance
upon Regulation S or (ii) the date of closing of the offering, or such longer
period as may be required under applicable law (the "compliance period"):
(a) every purchaser of shares or warrants other than a distributor will
be required to certify that it is not a U.S. person and is not acquiring the
securities for the account or benefit of any U.S. person (as defined under
Regulation S of the Securities Act) or is a U.S. person who purchased
securities in a transaction that did not require registration under the
Securities Act;
(b) every purchaser of the shares or warrants has been, or will be,
required to agree to resell such shares or warrants only in accordance with
the provisions of Rule 144A, Rule 144 (if available) or Regulation S, or
pursuant to an effective registration statement under the Securities Act, and
will be required to agree to not engage in hedging transactions with regard to
the securities unless in compliance with the Securities Act;
(c) the shares and warrants will (i) contain a legend to the effect that
transfer is prohibited except in accordance with the restrictions set forth in
(a) and (b) above during the compliance period, and (ii) with respect to the
warrants (notwithstanding the expiration of the compliance period), and
pursuant to Rule 903(b)(5)(i), contain a legend stating that the warrants and
securities to be issued upon their exercise have not been registered under the
Securities Act and that the warrant may not be exercised by or on behalf of
any U.S. person without an opinion of counsel;
(d) each distributor selling securities to a distributor, a dealer (as
defined in Section 2(a)(12) of the Securities Act), or a person receiving a
selling concession, fee or other remuneration will be required to send a
confirmation or other notice to the purchaser stating that the purchaser is
subject to the same restrictions on offers and sales that apply to a
distributor; and
(e) under our bylaws, we are required to refuse to register any transfer
of our securities not made in accordance with the provisions of Rule 144A,
Rule 144 (if available) or Regulation S, or pursuant to registration under the
Securities Act or another exemption from registration under the Securities
Act.
Each purchaser of our warrants (regardless of whether such purchaser
acquired such warrants in a transaction pursuant to Rule 144A, Regulation D or
Regulation S), upon exercise of each warrant, must:
(a) provide us with a written certification that it is neither within the
U.S. nor a U.S. person and the warrant is not being exercised on behalf of a
U.S. person; or
(b) provide us with a written opinion of counsel to the effect that the
transfer of the warrants and issuance of the shares upon the exercise of such
warrants to such person have been registered under the Securities Act or are
exempt from registration thereunder; and
(c) receive certificated securities containing the legend described
below.
In the offerings of the units, each purchaser of the shares and warrants
was deemed to have represented and agreed as follows:
(1) the purchaser (A) (i) is an institutional accredited investor that is
a qualified institutional buyer (subject to certain limited exceptions in the
case of the initial purchase only), (ii) is aware that the sale to it is being
77
made in reliance on Rule 144A (or, in the case of the initial purchaser only,
in reliance on Regulation D) and (iii) is acquiring the securities for its own
account or for the account of a qualified institutional buyer or (B) is not a
U.S. person and is purchasing the securities in an offshore transaction
pursuant to Regulation S;
(2) the purchaser understands that the securities were offered in a
transaction not involving any public offering within the meaning of the
Securities Act, that the securities have not been and, except as otherwise
described in the offering documents relating to the unit issuance, will not be
registered under the Securities Act and that if in the future it decides to
offer, resell, pledge or otherwise transfer any such securities, such
securities may be offered, resold, pledged or otherwise transferred only (i)
in the United States to a person whom the seller reasonably believes is a
qualified institutional buyer in a transaction meeting the requirements of
Rule 144A, (ii) outside the United States in a transaction complying with the
provisions of Rule 903 or Rule 904 under the Securities Act, (iii) pursuant to
an exemption from registration under the Securities Act provided by Rule 144
(if available), or (iv) pursuant to an effective registration statement under
the Securities Act, in each of cases (i) through (iv) in accordance with any
applicable securities laws of any state of the United States;
(3) the purchaser understood and agreed that, in addition to the
restrictions set forth in (2) above, if in the future it decides to resell,
pledge or otherwise transfer any securities or any beneficial interests in any
securities prior to the date which is one year after the later of (1) the date
when the shares or warrants are first offered to persons (other than
distributors) pursuant to Regulation S and (2) the date of closing of the unit
offering, it will do so only (i) in compliance with the restrictions set forth
above, (ii) pursuant to an effective registration statement under the
Securities Act, or (iii) in accordance with the provisions of Rule 144A, Rule
144 (if available) or Regulation S, and in each of such cases in accordance
with any applicable securities law of any state of the United States;
(4) the purchaser agreed to and each subsequent holder is required to,
notify any purchaser of the shares or warrants from it of the resale
restrictions referred to in paragraphs (2) and (3) above, if then applicable;
(5) the purchaser acknowledged that, prior to any proposed transfer of
shares or warrants other than pursuant to an effective registration statement,
the transferee of shares or warrants may be required to provide certifications
and other documentation relating to the non-U.S. person status of such
transferee;
(6) the purchaser acknowledged that we, our placing agents in the unit
issuance and others rely upon the truth and accuracy of the foregoing
acknowledgements, representations and warranties and agreed that if any such
acknowledgement, representation or warranty deemed to have been made by virtue
of its purchase of shares or warrants is no longer accurate, it must promptly
notify our placing agents and us;
(7) the purchaser acknowledged that neither we, our placing agents nor
any person representing any of them, has made any representation to it with
respect to us or the unit offering, other than the information contained in
the offering documents related to the unit offering, which had been delivered
to the purchaser and upon which the purchaser relied in making its investment
decision with respect to the securities offered; the purchaser has had access
to such financial and other information concerning us and the securities
offered, including an opportunity to ask questions of and request information
from us and our placing agents;
(8) the purchaser purchased the units for its own account, or for one or
more investor accounts for which it was acting as fiduciary or agent, in each
case, not with a view to, or for offer or sale in connection with, any
distribution thereof in violation of the Securities Act, subject to any
requirement of law that the disposition of its property or the property of
such investor account or accounts be at all times within its or their control
and subject to its or their ability to resell, reoffer or otherwise transfer
such securities pursuant to Rule 144A, Regulation S or Rule 144 (if available)
under the Securities Act;
(9) the purchaser understood that the securities offered, as "Restricted
Securities" under Rule 144 of the Securities Act, will, until the expiration
of the applicable holding period with respect to the securities set forth in
Rule 144 of the Securities Act, and the expiration of the compliance period
described above, will bear legends described below, unless we determine
otherwise in compliance with applicable law; and
(10) the purchaser acknowledged that the shares and warrants, whether
purchased pursuant to Rule 144A of the Securities Act, Regulation D of the
Securities Act or pursuant to Regulation S of the Securities Act, will bear a
restrictive legend to the following effect, unless we determine otherwise in
compliance with applicable law:
PRIOR TO INVESTING IN THE SECURITIES OR CONDUCTING ANY TRANSACTIONS IN
THE SECURITIES, INVESTORS ARE ADVISED TO CONSULT
78
PROFESSIONAL ADVISERS REGARDING THE RESTRICTIONS ON TRANSFER SUMMARIZED
BELOW AND ANY OTHER RESTRICTIONS.
THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), AND IS A RESTRICTED SECURITY (AS
DEFINED IN RULE 144 UNDER THE SECURITIES ACT). THIS SECURITY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION OR
AN APPLICABLE EXEMPTION THEREFROM. HEDGING TRANSACTIONS INVOLVING THIS
SECURITY MAY NOT BE CONDUCTED DIRECTLY OR INDIRECTLY, UNLESS IN
COMPLIANCE WITH THE SECURITIES ACT. EACH PURCHASER OF THIS SECURITY IS
HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE
EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED
BY RULE 144A OR REGULATION S THEREUNDER.
THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT
(A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (II) OUTSIDE OF THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 UNDER THE
SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT,
IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF
THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A)
ABOVE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR
TRANSFERRED TO ANY EMPLOYEE BENEFIT PLAN AS DEFINED IN SECTION 3(3) OF
ERISA SUBJECT TO TITLE I OF ERISA OR ANY PLAN AS DEFINED IN SECTION 4975
OF THE CODE WHICH IS SUBJECT TO THE RULES OF SECTION 4975 OR ANY ENTITY
DEEMED TO HOLD ASSETS OF ANY SUCH PLANS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER
RESTRICTIONS WHICH REQUIRE THAT IN ADDITION TO ANY CERTIFICATIONS
REQUIRED FROM A TRANSFEROR AS SET FORTH ON THE REVERSE OF THIS
CERTIFICATE, PRIOR TO THE EXPIRATION OF A DISTRIBUTION COMPLIANCE PERIOD
OF AT LEAST ONE YEAR, THE TRANSFEREE CERTIFIES AS TO WHETHER OR NOT IT IS
A U.S. PERSON WITHIN THE MEANING OF REGULATION S AND PROVIDES CERTAIN
OTHER CERTIFICATIONS AND AGREEMENTS. PRIOR TO PERMITTING ANY TRANSFER,
THE COMPANY MAY REQUEST AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY THAT SUCH TRANSFER IS TO BE EFFECTED IN A TRANSACTION MEETING
THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT OR IS EXEMPT
FROM REGISTRATION.
In addition, each purchaser of Warrants was deemed to have represented
and agreed as follows:
(1) the purchaser understood that shares issuable upon exercise of the
warrants are, subject to certain exceptions, not being offered in the United
States or to U.S. persons (as defined in Regulation S under the Securities
Act) and that warrant holders will be required, as a condition precedent to
the exercise of any warrants, to comply with the certain requirements; and
79
(2) the purchaser understood that warrant holders located in the United
States or who are U.S. persons (as defined under Regulation S of the
Securities Act) may be permitted to exercise their warrants for shares if we
reasonably believe that such exercise does not require registration under the
Securities Act in reliance upon such warrant holder (i) certifying that it is
a qualified institutional buyer and understands that the shares to be issued
upon exercise of such warrants have not been registered under the Securities
Act, (ii) supplying an opinion of counsel that the warrants and the shares
issuable upon exercise are exempt from registration under the Securities Act
and (iii) agreeing that (x) such shares will be subject to certain
restrictions on transfer as set forth above for the shares and warrants, (y) a
new holding period for the shares issued upon exchange of such warrant, for
purposes of Rule 144 under the Securities Act, will commence upon issue of
such shares and (z) its acquisition of shares was not solicited by any form of
general solicitation or general advertising and that it has been given access
to information sufficient to permit it to make an informed decision as to
whether to invest in the shares. We may, in our sole discretion, permit the
exercise of warrants in certain limited circumstances in accordance with their
terms if the requirements of other exemptions under the Securities Act and
other applicable laws can be satisfied.
TERMS OF WARRANT CONVERSION OR EXERCISE
Each of our outstanding warrants entitles the registered holder to
purchase one share of our common stock at an exercise price of $6.00 per
share, subject to adjustment as discussed below, at any time commencing on
October 31, 2006. The warrants will expire on July 12, 2010 at 5:00 p.m., New
York City time.
We may call the warrants for redemption at any time after they become
exercisable:
o in whole and not in part;
o at a price of $0.01 per warrant;
o upon a minimum of 30 days' prior written notice of redemption to
each warrant holder;
o if, and only if, the last independent bid price on AIM of our shares
of common stock equals or exceeds $11.50 per share for any 20
trading days within a 30 trading day period ending three business
days before we send the notice of redemption; and
o the weekly trading volume of our shares has been at least 200,000
shares for each of the two calendar weeks prior to the day we send
the notice of redemption.
If the foregoing conditions are satisfied and we call the warrants for
redemption, each warrant holder is entitled to exercise its warrant prior to
the date scheduled for redemption by payment of the exercise price in cash.
The warrants were issued in registered form under a warrant deed between
Capita IRG (Offshore) Limited, as warrant agent, and us.
The exercise price and number of shares of our common stock issuable on
exercise of the warrants may be adjusted in certain circumstances, including
in the event of a share dividend or our recapitalization, reorganization,
merger or consolidation. However, the warrants will not be adjusted for
issuances of shares of our common stock at a price below the exercise price of
the warrants.
The warrants may be exercised upon surrender of the warrant certificate
on or prior to the expiration date at the offices of the warrant agent, with
the exercise form on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price by
certified check payable to us for the number of warrants being exercised. The
warrant holders do not have the rights or privileges of holders of shares of
common stock or any voting rights until they exercise their warrants and
receive shares.
No warrants will be exercisable by a U.S. warrant holder unless, at the
time of exercise, the exercise of the warrants for shares has been registered
under the Securities Act, or is exempt from registration. U.S. warrant holders
will be required to provide appropriate representations, warranties and legal
opinions to support any applicable exemption and, if received in an exempt
transaction, the shares received upon exercise of the warrant would be
restricted securities with the certificate bearing a restrictive legend and
not saleable in the U.S. unless registered under the Securities Act, or exempt
from registration.
No fractional shares will be issued upon exercise of the warrants. If,
upon exercise of the warrants, a holder would be entitled to receive a
fractional interest in a share of our common stock, we will, upon exercise,
round up to the nearest whole number the number of shares to be issued to the
warrant holder.
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USE OF PROCEEDS
The proceeds of our July 2006 offering aggregated $180 million, which
proceeds were used as follows.
(Dollars in thousands)
ITEM AMOUNT
-------------------------------------------------------- -----------------
Offering proceeds....................................... $ 180,000
Underwriters' fees...................................... (6,750)
Working capital amount.................................. (750)
-----------------
Amount transferred to the trust fund.................... $ 172,500
=================
The working capital amount was released to us to pay, among other things, the
expenses of the offering (which aggregated $825,000(a)). In addition to the
underwriters' fees of $6,750,000 paid in connection with the offering, the
underwriters deferred $2,700,000 of their fees, which deferred fees were
payable upon the consummation of a qualified business combination and which
were in fact paid on October 31, 2006 in connection with the consummation of
our acquisition of FutureFuel Chemical Company.
----------
(a) The expenses of the offering in excess of $750,000 were paid from the
proceeds of loans made by Mr. Mikles and St. Albans Global Management,
Limited Partnership, LLLP to us in the aggregate amount of $700,000,
which loans were repaid as set forth above.
The trust fund was released concurrently with the consummation of our
acquisition of FutureFuel Chemical Company (which acquisition constituted a
qualified business combination) and was disbursed as follows.
(Dollars in thousands)
ITEM AMOUNT
-------------------------------------------------------- --------------
Trust Amount(a)......................................... $ 174,123
Acquisition purchase price(b)........................... (73,971)
Additional acquisition costs............................ (70)
Reimbursement of due diligence expenses................. (165)
Repayment of the loans from the founding shareholders... (700)
Deferred underwriters' fees............................. (2,700)
Deferred NOMAD fee...................................... (250)
Exercise of repurchase rights........................... (10,987)
--------------
Amount disbursed to us.................................. $ 85,280
==============
----------
(a) Includes $2,623 in interest income, less $1,000 transferred to us for
working capital purposes.
(b) Prior to purchase price adjustments. After purchase price adjustments,
the amount was $71,159. See note 1 to our annual consolidated financial
statements contained elsewhere herein.
In connection with the offering, shareholders other than founding
shareholders ("new shareholders") were granted certain rights to have their
shares of our common stock repurchased by us ("repurchase rights"). At the
time we sought approval of any business combination, each new shareholder that
voted against the business combination was entitled to simultaneously exercise
his repurchase rights with respect to his shares (exclusive of founding
shares); provided that our repurchase obligations were only effective if such
business combination was approved by the new shareholders and completed.
Since our acquisition of FutureFuel Chemical Company constituted a
business combination, a new shareholder was entitled to have his shares
repurchased by us at the repurchase price described below following
consummation of the acquisition if the new shareholder voted against the
acquisition and exercised his repurchase rights. Our board of directors
imposed as a condition to us consummating the acquisition of FutureFuel
Chemical Company the requirement that those new shareholders voting against
the acquisition and exercising their repurchase
81
rights must own in the aggregate not more than 15% of the issued and
outstanding shares of our common stock. At our shareholder meeting to approve
the acquisition of FutureFuel Chemical Company, 28,125,000 shares were issued
and outstanding. Consequently, if new shareholders holding more than 4,218,750
shares voted against the acquisition and exercised their repurchase rights,
the acquisition would not be approved. At the shareholder meeting, new
shareholders holding an aggregate of 1,425,000 shares voted against the
acquisition and exercised their repurchase rights, and shareholders holding
25,205,477 shares voted to approve the acquisition. Consequently, since the
15% threshold was not exceeded, the acquisition of FutureFuel Chemical Company
by us was approved.
The repurchase price was $7.667 per eligible share plus any interest
earned by the trust fund, net of expenses and income taxes payable on such
interest. The interest earned by the trust fund, net of expenses and income
taxes payable on such interest, was $973,594 as of the consummation of the
acquisition, for a repurchase price of $7.71 per eligible share and an
aggregate repurchase price of $10,986,750. Such payments to new shareholders
exercising their repurchase rights were made and the 1,425,000 shares have
been canceled.
Following consummation of our acquisition of FutureFuel Chemical
Company, new shareholders who did not exercise their repurchase rights ceased
to have such repurchase rights.
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ITEM 11. - DESCRIPTION OF SECURITIES TO BE REGISTERED
The total number of shares of all classes of stock which we have the
authority to issue is 80,000,000 shares consisting of: (i) 5,000,000 shares of
a class designated as preferred stock, par value $0.0001 per share; and (ii)
75,000,000 shares of a class designated as common stock, par value $0.0001 per
share. Of the 22,500,000 shares of common stock previously issued in our July
2006 offering, 1,425,000 were the subject of repurchase rights and have been
canceled as discussed above. The designations, preferences, rights,
qualifications, limitations and restrictions of our preferred stock and common
stock are as follows.
PREFERRED STOCK
Our preferred stock may be issued from time to time in one or more
classes or series. The shares of each class or series are to have such
designations and powers, preferences, rights, qualifications, limitations and
restrictions as are stated and expressed herein and in the resolution or
resolutions providing for the issuance of such class or series adopted by our
board of directors. Authority is vested in our board to authorize the issuance
of the preferred stock from time to time in one or more classes or series, and
with respect to each class or series of the preferred stock, to fix and state
by the resolution or resolutions of our board from time to time adopted
providing for the issuance thereof the following:
o whether the class or series is to have voting rights, full, special
or limited, and whether such class or series is to be entitled to
vote as a separate class either alone or together with the holders
of one or more other classes or series of our stock;
o the number of shares to constitute the class or series and the
designations thereof;
o the preferences and relative, participating, optional or other
special rights, if any, and the qualifications, limitations or
restrictions thereof, if any, with respect to any class or series;
o whether the shares of any class or series are redeemable at our
option or the holders thereof or upon the happening of any specified
event and, if redeemable, the redemption price or prices (which may
be payable in the form of cash, notes, securities or other
property), and the time or times at which, and the terms and
conditions upon which, such shares are redeemable and the manner of
redemption;
o whether the shares of a class or series are subject to the operation
of retirement or sinking funds to be applied to the purchase or
redemption of such shares for retirement and, if such retirement or
sinking fund or funds are to be established, the annual amount
thereof and the terms and provisions relative to the operation
thereof;
o the dividend rate, whether dividends are payable in cash, our stock
or other property, the conditions upon which and the times when such
dividends are payable, the preference to or the relation to the
payment of dividends payable on any other class or classes or series
of our stock, whether or not such dividends are cumulative or
noncumulative and, if cumulative, the date or dates from which such
dividends accumulate;
o the preferences, if any, and the amounts thereof which the holders
of any class or series thereof will be entitled to receive upon our
voluntary or involuntary dissolution or liquidation, or upon any
distribution of our assets;
o whether the shares of any class or series, at our option or the
holders thereof or upon the happening of any specified event, are
convertible into or exchangeable for the shares of any other class
or classes or of any other series of the same or any other class or
classes of stock, securities or other property and the conversion
price or prices or ratio or the rate or rates at which such exchange
may be made, with such adjustments, if any, as may be stated and
expressed or provided for in such resolution or resolutions; and
83
o such other special rights and protective provisions with respect to
any class or series as our board of directors may deem advisable.
The shares of each class or series of our preferred stock may vary from
the shares of any other class or series thereof in any or all of the foregoing
respects. Our board may increase the number of shares of the preferred stock
designated for any existing class or series by a resolution adding to such
class or series authorized and un-issued shares of the preferred stock not
designated for any other class or series. Our board may decrease the number of
shares of the preferred stock designated for any existing class or series (but
not below the number of shares thereof then outstanding) by a resolution
subtracting from such class or series, and the shares so subtracted will
become authorized, un-issued and undesignated shares of the preferred stock.
As of the date of this Registration Statement, no shares of our preferred
stock have been issued.
COMMON STOCK
All shares of common stock have identical rights and privileges in every
respect. Except as specifically provided by our board in a resolution
providing for any preferred stock, or series thereof, in no event will shares
of common stock have preferences over shares of our preferred stock with
respect to payment of dividends or distribution of assets upon our liquidation
and dissolution.
Our common stock is fully voting stock entitled to one vote per share
with respect to all matters to be voted on by our shareholders. Except as
expressly required under the Delaware General Corporation Law, our common
stock will vote as a single class with respect to all matters to be voted on
by our shareholders. Except as otherwise required by law or as otherwise
provided by our board with respect to any preferred stock, the holders of our
common stock exclusively possess all voting power with respect to us.
A holder of shares of our common stock will share ratably with the other
holders of our common stock on a share-for-share basis in all distributions of
assets pursuant to any voluntary or involuntary liquidation, dissolution or
winding up of us.
PREEMPTIVE RIGHTS
Our shareholders have no preemptive rights to acquire our un-issued
shares or securities convertible into or carrying a right to subscribe to or
acquire shares of our stock.
BOARD OF DIRECTORS
The number of directors initially to constitute our board was three.
Thereafter, the number of directors may be changed: (i) by amendment to our
certificate of incorporation; or (ii) as set forth in our bylaws. The size of
our board was increased to four directors on October 26, 2005, to six
directors on May 24, 2006 and to eight directors on January 8, 2007. The
number of directors may be decreased at any time and from time to time either
by our shareholders or by a majority of our directors then in office, but only
to eliminate vacancies existing by reason of the death, resignation, removal
or expiration of the term of one or more directors. At each meeting of our
shareholders for the election of directors at which a quorum is present, the
persons receiving a plurality of the votes cast will be elected directors.
Nominations for the election of directors may be made by our board or a
committee appointed by the board, or by any shareholder entitled to vote
generally in the election of directors who complies with the shareholder
proposal procedures described below. All nominations by shareholders must be
made pursuant to timely notice in proper written form to our corporate
secretary as described below. To be in proper written form, such shareholder's
notice must set forth in writing: (i) as to each person whom the shareholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, including such person's written consent to being a nominee and to
serving as a director if elected (irrespective of whether the Securities
Exchange Act of 1934, as amended, is applicable to us); and (ii) as to the
shareholder giving the notice, (a) the name and address, as they appear on our
books, of such shareholder and (b) the class and number of shares of our stock
which are beneficially owned by such shareholder.
84
Our board is divided into three classes: Class A, Class B and Class C.
The number of directors in each class are to be nearly as equal as possible.
At the first election of directors by the incorporator, the incorporator
elected a Class C director for a term expiring at our third annual meeting of
shareholders, which Class C director was Mr. Novelly. The Class C director
then appointed additional Class A and Class B directors. The directors in
Class A were elected for a term expiring at our first annual meeting of
shareholders, the directors in Class B were elected for a term expiring at the
second annual meeting and the director in Class C was elected for a term
expiring at the third annual meeting. The Class A, Class B and Class C
directors are as follows.
TERM
NAME CLASS(a) EXPIRES
-------------------------------------------- ------------ ------------
Paul A. Novelly............................. C 2009
Lee. E. Mikles.............................. B 2008
Douglas D. Hommert.......................... A 2010
Edwin A. Levy............................... B 2008
Thomas R. Evans............................. B 2008
Richard L. Knowlton......................... C 2009
Paul G. Lorenzini........................... C 2009
----------
(a) Mr. William J. Dore was also a director whose term expired in 2007.
However, he resigned as a director effective June 1, 2007 and our board
determined not to fill his position at this time. In the event his
position is filled, his successor will hold that position only until the
annual shareholder meeting in 2008 and, if reelected at such meeting,
such successor will hold office until 2010.
Commencing at the first annual meeting of our shareholders, and at each
annual meeting thereafter, directors elected to succeed those directors whose
terms expire are elected for a term of office to expire at the third
succeeding annual meeting after their election. Except as the Delaware General
Corporation Law may otherwise require, in the interim between annual meetings
or special meetings of our shareholders called for the election of directors
and/or the removal of one or more directors and the filling of any vacancy in
that connection, newly created directorships and any vacancies in our board,
including unfilled vacancies resulting from the removal of directors for
cause, may be filled by the vote of a majority of the remaining directors then
in office, although less than a quorum (as defined in our bylaws), or by the
sole remaining director. All directors hold office until the expiration of
their respective terms of office and until their successors have been elected
and qualified. A director elected to fill a vacancy resulting from the death,
resignation or removal of a director serves for the remainder of the full term
of the director whose death, resignation or removal has created such vacancy
and until his successor has been elected and qualified.
Our board has the power, without the assent or vote of our shareholders,
to make, alter, amend, change, add to or repeal our bylaws.
A majority of the total number of the whole board constitutes a quorum at
all meetings of our board. In the event one or more of our directors is
disqualified to vote at any meeting, then the required quorum will be reduced
by one for each such director so disqualified; provided, however, that in no
case will less than one third of the total number of the whole board
constitute a quorum.
Subject to the rights of holders of our preferred stock to elect
directors under circumstances specified in a resolution of our board adopted
pursuant to the provisions of our certificate of incorporation and bylaws
establishing such series, a director may be removed from office, but only for
cause, by the affirmative vote of the holders of more than fifty percent of
the voting power of our voting stock, voting together as a single class.
"Voting stock" means our common stock and any preferred stock entitled to vote
generally in the election of our directors.
Our board may provide for the payment to any of our directors of a
specified amount for services as director or member of a committee of our
board, or of a specified amount for attendance at each regular or special
board meeting or committee meeting, or of both. All directors will be
reimbursed for ordinary and necessary expenses of attendance at any such
meeting.
85
NOTIFICATION BY INTERESTED SHAREHOLDERS
Pursuant to our certificate of incorporation, any holder of shares of our
common stock or our warrants must notify us without delay, and including
particulars of the price, amount and nature of the relevant transaction, if
the aggregate amount of such shares or warrants in which he has an interest:
(i) exceeds three percent by nominal value of the entire issued class of our
common stock or warrants respectively; or (ii) changes from an aggregate
amount which exceeded three percent by nominal value of the then issued class
of our common stock or warrants. "Interest" includes an interest of any kind
(whether conditional or absolute) whatsoever in the shares of our common stock
or warrants (and accordingly there are to be disregarded any restraints or
restrictions to which the exercise of any right attached to the interest is or
may be subject), including: (a) a joint interest; (b) a beneficial interest;
(c) a contractual right to purchase; (d) the right to exercise any right
conferred by or the right to control the exercise of such right in shares of
our common stock or warrants; or (e) the right to call for delivery of, the
right to acquire or the obligation to take an interest in shares of our common
stock or warrants.
ALTERATION OF THE CERTIFICATE OF INCORPORATION
Our certificate of incorporation may be amended only if approved by a
majority of our directors then in office and eligible to vote on such
resolution, presented to our shareholders for consideration pursuant to
Section 242 of the Delaware General Corporation Law and approved by our
shareholders: (i) at a general or special meeting at which a quorum is present
by a majority of votes cast; or (ii) by written consent in accordance with
Section 228 of the Delaware General Corporation Law. Where our board has, by a
resolution passed by a majority of our directors then in office and eligible
to vote on such resolution, approved an amendment to the article of our
certificate of incorporation dealing with the number of directors and classes
of directors, the amendment will not be effective unless approved by a vote of
shareholders holding no less than 80% of our issued stock carrying the right
to vote at general or special meetings at the relevant time (or by written
consent in accordance with Section 228 of the Delaware General Corporation
Law).
MEETING OF SHAREHOLDERS
An annual meeting of our shareholders for the election of directors and
for the transaction of such other business as may properly be brought before
the meeting will be held at such place, on such date and at such time as our
board or our chief executive officer each year fixes, which date will be
within thirteen months of the last annual meeting of our shareholders. If no
annual meeting is held in accordance with the foregoing provisions, a special
meeting may be held in lieu of the annual meeting, and any action taken at
that special meeting will have the same effect as if it had been taken at the
annual meeting, and in such case all references in our bylaws to the annual
meeting of shareholders will be deemed to refer to such special meeting.
Except as required by law and subject to the rights of holders of any series
of our preferred stock, special meetings of our shareholders may be called at
any time but only by our chief executive officer, the chairman of our board or
by our board pursuant to a resolution approved by a majority of the then
directors. Business transacted at any special meeting of our shareholders will
be limited to matters relating to the purpose or purposes stated in the notice
of the meeting unless this requirement is waived in accordance with our bylaws
or with applicable law.
Except as otherwise may be required by law, notice of each meeting of our
shareholders, whether an annual meeting or a special meeting: (i) must be in
writing; (ii) must be delivered or sent by mail not less than ten nor more
than sixty days before the date of such meeting to each shareholder entitled
to vote at such meeting; and (iii) must state the place, date and hour of the
meeting. The notice of a special meeting must also state the purpose or
purposes for which the meeting is called and must indicate that such notice is
being issued by or at the direction of the persons calling the meeting. Except
as otherwise provided by law, our certificate of incorporation or our bylaws,
at each meeting of our shareholders, the holders of shares of stock possessing
a majority of the voting power of our capital stock issued and outstanding and
entitled to vote at such meeting, present in person or represented by proxy at
such meeting, constitute a quorum for the transaction of any business of the
Company.
Except as otherwise provided with respect to our preferred stock, at each
meeting of our shareholders, each holder of shares of our common stock will be
entitled to one vote for each share of common stock standing in such holder's
name on our stock records at the record date for the determination of
shareholders entitled to vote at such meeting or, if no such record date has
been fixed, then at the close of business on the day next preceding the day on
which notice thereof is given. All voting, including on the election of
directors but excepting where otherwise
86
required by law, may be by a voice vote; provided, however, that upon demand
therefor by a shareholder entitled to vote or by such shareholder's proxy, a
stock vote will be taken by ballots (which may be submitted by electronic
transmission), each of which will state the name of the shareholder or proxy
voting and such other information as may be required under the procedure
established for the meeting.
At each meeting of our shareholders where a quorum is present, the
holders of a majority of our capital stock present or represented by proxy and
entitled to vote thereon will decide any matter to be voted upon by our
shareholders at such meeting, except when a different vote is required by
express provision of law, our certificate of incorporation or our bylaws. At
any annual meeting of our shareholders, only such business may be conducted as
may be brought before the annual meeting: (i) by or at the direction of our
board; or (ii) by any shareholder who complies with the procedures set forth
in our bylaws. For business properly to be brought before an annual meeting by
a shareholder, the shareholder must have given timely notice thereof in proper
written form to our corporate secretary. To be timely, a shareholder's notice
must be delivered to or mailed and received at our executive office not less
than 30 days nor more than 60 days prior to the annual meeting; provided,
however, that in the event that less than 40 days' notice or prior public
disclosure of the date of the annual meeting is given or made to our
shareholders, notice by the shareholder to be timely must be received not
later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. To be in proper written form, a shareholder's notice to
our corporate secretary must set forth in writing as to each matter the
shareholder proposes to bring before the annual meeting: (a) a brief
description of the business desired to be brought before the annual meeting
and the reason for conducting such business at the annual meeting; (b) the
name and address, as they appear on our books, of the shareholder proposing
such business; (c) the class and number of shares of our stock which are
beneficially owned by the shareholder; and (d) any material interest of the
shareholder in such business.
87
ITEM 12. - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article Eleven of our certificate of incorporation, we will
indemnify, to the fullest extent permitted under the Delaware General
Corporation Law, any individual who was, is or is threatened to be made a
party to a proceeding by reason of the fact that he or she: (i) is or was a
director or officer of the Company; or (ii) while a director or officer of the
Company is or was serving at our request as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of
another foreign or domestic person. Such right is a contract right and, as
such, runs to the benefit of any director or officer who is elected and
accepts the position of director or officer of the Company or elects to
continue to serve as a director or officer of the Company while Article Eleven
is in effect. Any repeal or amendment of Article Eleven may be prospective
only and will not limit the rights of any such director or officer or our
obligations with respect to any claim arising from or related to the services
of such director or officer in any of the foregoing capacities prior to any
such repeal or amendment to Article Eleven.
Such right includes the right to be paid by us for expenses incurred in
defending any such proceeding in advance of its final disposition to the
maximum extent permitted under the Delaware General Corporation Law. If a
claim for indemnification or advancement of expenses is not paid in full by us
within 60 days after a written claim has been received by us, the claimant may
at any time thereafter bring suit against us to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant will also be
entitled to be paid the expenses of prosecuting such claim. It is a defense to
any such action that such indemnification or advancement of costs of defense
are not permitted under the Delaware General Corporation Law, but the burden
of proving such defense is on us. Neither our failure (including our board,
any committee thereof, independent legal counsel or shareholders) to have made
our determination prior to commencement of such action that indemnification
of, or advancement of costs of defense to, the claimant is permissible in the
circumstances, nor an actual determination by us (including our board, any
committee thereof, independent legal counsel or shareholders) that such
indemnification or advancement is not permissible, may be a defense to the
action or create a presumption that such indemnification or advancement is not
permissible. In the event of the death of any individual having a right of
indemnification under Article Eleven, such right inures to the benefit of his
or her heirs, executors, administrators and personal representatives. The
rights so conferred are not exclusive of any other right which any person may
have or hereafter acquire under any statute, bylaw, resolution of shareholders
or directors, agreement or otherwise.
A director is not personally liable to us or our shareholders for
monetary damages for breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to us or our
shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law; (iii) for any transaction
from which the director derived an improper personal benefit; or (iv) under
Section 174 of the Delaware General Corporation Law.
88
ITEM 13. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANNUAL FINANCIAL STATEMENTS
FutureFuel Chemical Company
The following sets forth FutureFuel Chemical Company's consolidated
balance sheets as of December 31, 2006 and December 31, 2005 and the
consolidated statements of operations, statements of cash flows and statements
of changes in stockholders' equity for each of the years in the three-year
period ended December 31, 2006, together with KPMG LLP's report thereon.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FutureFuel Corp.:
We have audited the accompanying consolidated balance sheets of
FutureFuel Corp. and subsidiary as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ending December 31, 2006.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FutureFuel
Corp. and subsidiary as of December 31, 2006 and 2005, and the results of
their operations and their cash flows for each of the years in the three-year
period ending December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
April 23, 2007
89
FUTUREFUEL CORP.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2006 2005
------------- -------------
ASSETS
Cash and cash equivalents.......................................... $ 63,129 $ -
Accounts receivable, net of allowances of $42 and $0, respectively. 23,824 10,881
Inventory.......................................................... 11,591 4,830
Current deferred income tax asset.................................. 68 552
Prepaid expenses................................................... 1,248 -
Other current assets............................................... 3,131 -
------------- -------------
Total current assets........................................... 102,991 16,263
Property, plant and equipment, net................................. 97,761 95,115
Noncurrent deferred income tax asset............................... 381 516
Restricted cash and cash equivalents............................... 3,127 -
Other assets....................................................... 2,764 2,606
------------- -------------
Total noncurrent assets........................................ 104,033 98,237
------------- -------------
TOTAL ASSETS............................................................ $ 207,024 $ 114,500
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................... $ 12,945 $ 7,940
Accounts payable - related parties................................. 112 -
Income taxes payable............................................... 2,264 -
Accrued expenses and other current liabilities..................... 1,717 5,657
Accrued expenses and other current liabilities - related parties... 40 -
------------- -------------
Total current liabilities...................................... 17,078 13,597
Other noncurrent liabilities....................................... 545 843
Noncurrent deferred income taxes................................... 23,884 23,987
------------- -------------
Total noncurrent liabilities................................... 24,429 24,830
------------- -------------
TOTAL LIABILITIES....................................................... 41,507 38,427
Preferred stock, $0.0001 par value, 5,000,000 shares authorized,
none issued and outstanding...................................... - -
Common stock, $0.0001 par value, 75,000,000 shares authorized,
26,700,000 issued and outstanding................................ 3 -
Additional paid in capital......................................... 162,995 -
Retained earnings.................................................. 2,519 -
Net investment of parent........................................... - 76,073
------------- -------------
Total stockholders' equity..................................... 165,517 76,073
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 207,024 $ 114,500
============= =============
The accompanying notes are an integral part of these financial statements.
90
FUTUREFUEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2006 2005 2004
------------- ------------- -------------
Revenues $ 134,168 $ 104,364 $ 127,945
Revenues - related parties......................... 16,602 15,175 16,212
Cost of goods sold................................. 119,574 88,484 130,097
Cost of goods sold - related parties............... 16,602 15,175 16,212
Distribution....................................... 1,291 1,604 1,499
------------- ------------- -------------
Gross profit (loss)........................... 13,303 14,276 (3,651)
Selling, general and administrative expenses....... 6,143 7,662 10,854
Selling, general and administrative expenses -
related parties.................................. 104 - -
Research and development expenses.................. 4,937 5,975 9,919
------------- ------------- -------------
11,184 13,637 20,773
------------- ------------- -------------
Income (loss) from operations...................... 2,119 639 (24,424)
Interest income.................................... 733 - -
Interest expense................................... (37) (31) (37)
------------- ------------- -------------
696 (31) (37)
------------- ------------- -------------
Income (loss) before income taxes.................. 2,815 608 (24,461)
Provision (benefit) for income taxes............... 678 227 (9,594)
------------- ------------- -------------
Net income (loss).................................. $ 2,137 $ 381 $ (14,867)
============= ============= =============
Earnings (loss) per common share
Basic......................................... $ 0.08 $ 0.01 $ (0.56)
Diluted....................................... $ 0.07 $ 0.01 $ (0.56)
Weighted average shares outstanding
Basic......................................... 26,700,000 26,700,000 26,700,000
Diluted....................................... 31,818,772 31,818,772 26,700,000
The accompanying notes are an integral part of these financial statements.
91
FUTUREFUEL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(DOLLARS IN THOUSANDS)
2006 2005 2004
------------ ----------- ------------
Cash flows provide by (used in) operating activities
Net income (loss).......................................... $ 2,137 $ 381 $(14,867)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Asset impairment charges............................... - - 18,305
Depreciation........................................... 9,067 8,940 10,218
Provision (benefit) for deferred income taxes.......... 516 (148) (6,017)
Change in fair value of derivative instruments......... 447 - -
Noncash environmental charges (credits) from parent.... 148 (2,682) (1,266)
Losses on disposals of fixed assets.................... 95 67 402
Noncash interest expense............................... 37 31 37
Changes in operating assets and liabilities:
Accounts receivable.................................... (12,943) (533) 896
Inventory.............................................. (6,761) 2,121 10,586
Prepaid expenses....................................... (1,248) - -
Other assets........................................... (158) (382) (233)
Accounts payable....................................... 5,077 (57) 1,102
Accounts payable - related parties..................... 112 - -
Income taxes payable................................... 2,264 - -
Accrued expenses and other current liabilities......... (4,012) (129) 7
Accrued expenses and other current liabilities -
related parties...................................... 40 - -
Other noncurrent liabilities........................... (335) (53) (126)
------------ ----------- ------------
Net cash provided by (used in) operating
activities...................................... (5,517) 7,556 19,044
------------ ----------- ------------
Cash flows provided by (used in) investing activities
Restricted cash............................................ (3,127) - -
Collateralization of derivative instruments................ (3,578) - -
Proceeds from the sale of fixed assets..................... - 60 -
Capital expenditures....................................... (11,819) (6,654) (6,520)
------------ ----------- ------------
Net cash provided by (used in) investing activities.... (18,524) (6,594) (6,520)
------------ ----------- ------------
Cash flows provided by (used in) financing activities
Net proceeds from reverse acquisition...................... 87,094 - -
Transfers to parent, net................................... 76 (962) (12,524)
------------ ----------- ------------
Net cash provided by (used in) financing activities.... 87,170 (962) (12,524)
------------ ----------- ------------
Net change in cash and cash equivalents......................... 63,129 - -
Cash and cash equivalents at beginning of period................ - - -
------------ ----------- ------------
Cash and cash equivalents at end of period...................... $ 63,129 $ - $ -
============ =========== ============
The accompanying notes are an integral part of these financial statements.
92
FUTUREFUEL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(DOLLARS IN THOUSANDS)
Common stock Additional Net Total
------------------------ paid-in Retained investment stockholders'
Shares Amount capital earnings of parent equity
------------ -------- ---------- ---------- ------------ ---------------
Balance - December 31, - $ - $ - $ - $ 107,933 $ 107,933
2003...................
Net income (loss).... - - - - (14,867) (14,867)
Net transfers to
parent............. - - - - (13,790) (13,790)
------------ -------- ------------ ---------- ------------ ------------
Balance - December 31,
2004................... - - - - 79,276 79,276
Net income........... - - - - 381 381
Net transfers to
parent............. - - - - (3,584) (3,584)
------------ -------- ------------ ---------- ------------ ------------
Balance - December 31,
2005 - - - - 76,073 76,073
Net income (loss)
prior to reverse
acquisition........ - - - - (382) (382)
Net transfers to
parent............. - - - - 213 213
Reverse acquisition.. 26,700,000 3 87,091 - - 87,094
Recapitalization..... - - 75,904 - (75,904) -
Net income after
giving effect to
recapitalization... - - - 2,519 - 2,519
------------ -------- ----------- ---------- ------------ ------------
Balance - December 31,
2006................... 26,700,000 $ 3 $ 162,995 $ 2,519 $ - $ 165,517
============ ======== =========== ========== ============ ============
The accompanying notes are an integral part of these financial statements.
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
1) Nature of operations and basis of presentation
Eastman SE, Inc.
Eastman SE, Inc. ("Eastman SE") was incorporated under the laws of
the state of Delaware on September 1, 2005 and subsequent thereto
operated as a wholly-owned subsidiary of Eastman Chemical Company
("Eastman Chemical") through October 31, 2006. Eastman SE was
incorporated for purposes of effecting a sale of Eastman Chemical's
manufacturing facility in Batesville, Arkansas (the "Batesville
Plant"). Commencing January 1, 2006, Eastman Chemical began
transferring the assets associated with the business of the
Batesville Plant to Eastman SE.
The Batesville Plant was constructed to produce proprietary
photographic chemicals for Eastman Kodak Company ("Eastman Kodak").
Over the years, Eastman Kodak shifted the plant's focus away from the
photographic imaging business to the custom synthesis of fine
chemicals and organic chemical intermediates used in a variety of end
markets, including paints and coatings, plastics and polymers,
pharmaceuticals, food supplements, household detergents and
agricultural products.
In 2005, the Batesville Plant began the implementation of a biobased
products platform. This includes the production of biofuels
(biodiesel, bioethanol and lignin/biomass solid fuels) and biobased
specialty chemical products (biobased solvents, chemicals and
intermediates). In addition to biobased products, the Batesville
Plant continues to manufacture fine chemicals and other organic
chemicals.
Viceroy Acquisition Corporation
Viceroy Acquisition Corporation ("Viceroy") was incorporated under
the laws of the state of Delaware on August 12, 2005 to serve as a
vehicle for the acquisition by way of asset acquisition, merger,
capital stock exchange, share purchase or similar transaction
("Business Combination") of one or more operating businesses in the
oil and gas industry. On July 12, 2006 Viceroy completed an equity
offering (see Note 10).
On July 21, 2006, Viceroy entered into an acquisition agreement with
Eastman Chemical to purchase all of the issued and outstanding stock
of Eastman SE. On October 27, 2006, a special meeting of the
shareholders of Viceroy was held and the acquisition of Eastman SE
was approved by the shareholders. On October 31, 2006, Viceroy
acquired all of the issued and outstanding shares of Eastman SE from
Eastman Chemical. After purchase price adjustments to date, a price
of $71,159 was paid for the stock of Eastman SE. Any future purchase
price adjustments will be treated as an adjustment to equity in the
period realized. Immediately subsequent to the acquisition, Viceroy
changed its name to FutureFuel Corp. ("FutureFuel") and Eastman SE
changed its name to FutureFuel Chemical Company ("FutureFuel
Chemical").
Acquisition Accounting
For accounting purposes, the transaction is deemed to be a reverse
acquisition and FutureFuel Chemical has been treated as the
accounting acquirer and continuing reporting entity that acquired
FutureFuel. Accordingly, the October 31, 2006 acquisition has been
accounted for as a capital transaction or, more specifically, the
issuance of stock by FutureFuel Chemical for the net monetary assets
of FutureFuel accompanied by a recapitalization and reorganization
with FutureFuel assuming the role of the reporting entity and
FutureFuel Chemical assuming the role of FutureFuel's operating
subsidiary.
Through October 31, 2006, the operations of the Batesville Plant were
included in the consolidated financial statements of Eastman
Chemical. Accordingly, the accompanying balance sheets, statements of
operations and related statements of cash flows have been prepared
from Eastman Chemical's historical accounting records and are
presented on a carve-out basis to include the historical financial
position, results of operations and cash flows applicable to Eastman
SE through October 31, 2006. As a result of the lack of capital
structure of Eastman SE prior to October 31, 2006, the net investment
of the parent has been presented in lieu of stockholder's equity.
94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
Subsequent to October 31, 2006, the consolidated financial statements
present the combined operations of FutureFuel and FutureFuel
Chemical.
Corporate Allocations
The financial statements prior to October 31, 2006 include
allocations of certain corporate services provided by Eastman
Chemical's management, including finance, legal, information systems,
human resources and distribution. Eastman Chemical has utilized its
experience with the business of the Batesville Plant and its judgment
in allocating such corporate services and other support to the
periods prior to October 31, 2006. Costs allocated for such services
were:
Ten months
ended Twelve months ended
October 31: December 31:
----------------- ---------------------------
2006 2005 2004
----------------- ----------- ------------
Cost of goods sold....................................... $ - $ 99 $ 1,275
Distribution............................................. 438 874 818
Selling, general and administrative...................... 4,398 5,327 7,776
Research and development................................. 652 2,388 6,094
----------------- ----------- ------------
Total cost and expenses allocated........................ $ 5,488 $ 8,688 $ 15,963
================= =========== ============
Allocations were made to cost of goods sold, distribution and
selling, general and administrative expenses primarily based on a
percentage of revenues and allocations to research and development
expenditures were made primarily on actual time and effort incurred,
which management believes represents reasonable allocation
methodologies. These allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if
Eastman SE had been operating as a separate entity.
Eastman Chemical uses a centralized approach to cash management,
hedging and the financing of its operations. As a result, debt and
related interest income and expense, and certain cash and cash
equivalents, were maintained at the corporate office and are not
included in the accompanying consolidated financial statements.
In addition, allocations related to LIFO inventories were made on
the basis of the specific attributes of the inventories and
related products sold by Eastman SE.
2) Significant accounting policies
Consolidation
The accompanying consolidated financial statements include the
accounts of FutureFuel and its wholly-owned subsidiary, FutureFuel
Chemical. All significant intercompany transactions have been
eliminated.
Cash and cash equivalents
Cash equivalents consist of highly liquid investments with maturities
of three months or less when purchased and are carried at cost, which
approximates market.
Accounts receivable, allowance for doubtful accounts and credit risk
Accounts receivable are recorded at the invoiced amount and do not
bear interest. FutureFuel has established procedures to monitor
credit risk and has not experienced significant credit losses in
prior years. Accounts receivable have been reduced by an allowance
for amounts that may be uncollectible in the future. This estimated
allowance is based upon management's evaluation of the collectibility
of individual invoices and is based upon management's evaluation of
the financial condition of its customers and historical bad debt
experience. Write-offs are recorded at the time a customer receivable
is deemed uncollectible. FutureFuel had recorded an allowance for
doubtful accounts of $42 as of December 31, 2006. There was no
allowance for doubtful accounts as of December 31, 2005.
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
Prior to October 31, 2006, Eastman SE participated in an agreement
that allowed Eastman Chemical to sell certain domestic accounts
receivable under a planned continuous sale program to a third party.
The agreement permitted the sale of undivided interests in domestic
trade accounts receivable, which Eastman Chemical continued to
service until collection. As the sale program was part of Eastman
Chemical's centralized approach to cash management, Eastman SE's
$7,888 participation at December 31, 2005 is classified as accounts
receivable in the accompanying consolidated balance sheet with the
corresponding liability included in the net investment of parent.
Customer concentrations
Significant portions of FutureFuel's sales are made to a relatively
small number of customers. All sales of nonanoyloxybenzenesulfonate
("NOBS"), a bleach activator, are made to a leading North American
consumer products company pursuant to a supply contract that is set
to expire in June 2008. Sales of NOBS totaled $84,691, $66,959 and
$73,607 for the years ended December 31, 2006, 2005 and 2004,
respectively. Additionally, all sales of a herbicide and certain
other intermediates used in the production of this herbicide are made
to one customer. Sales of this herbicide and its intermediates
totaled $23,685, $25,063 and $27,946 for the years ended December 31,
2006, 2005 and 2004, respectively. These two customers represented
approximately 64% and 88% of FutureFuel's accounts receivable balance
at December 31, 2006 and 2005, respectively.
Inventory
FutureFuel determines the cost of substantially all raw materials and
finished goods inventories by the last-in, first-out ("LIFO") method.
FutureFuel writes down its inventories for estimated obsolescence or
unmarketable inventory equal to the difference between the carrying
value of inventory and the estimated market value based upon current
demand and market conditions.
Financial and derivative instruments
The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses and other current
liabilities approximate their fair values due to the short-term
maturities of these instruments.
FutureFuel maintains inventories of biodiesel and utilizes various
derivative instruments such as regulated futures and regulated
options as an economic hedge to reduce the effects of fluctuations in
the prices of biodiesel. These derivative instruments do not qualify
for hedge accounting under the specific guidelines of Statement of
Financial Accounting Standards ("SFAS") No. 133 Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No.
149 Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. While management believes each of these instruments are
entered into in order to effectively manage various market risks,
none of the derivative instruments are designated and accounted for
as hedges primarily as a result of the extensive record-keeping
requirements.
FutureFuel records all derivative instruments at fair value. Fair
value is determined by using the closing prices of the derivative
instruments on the New York Mercantile Exchange at the end of an
accounting period. Changes in fair value of the derivative
instruments are recorded in the statements of operations as a
component of cost of goods sold. FutureFuel maintains a margin
account with a broker to collateralize these derivative instruments.
Property, plant and equipment
Property, plant and equipment is carried at cost. Maintenance and
repairs are charged to earnings; replacements and betterments are
capitalized. When FutureFuel retires or otherwise disposes of assets,
it removes the cost of such asset and related accumulated
depreciation from the accounts. FutureFuel records any profit and
loss on retirement or other disposition in earnings. Asset
impairments are reflected as increases in accumulated depreciation.
Depreciation is provided using the straight-line method over the
following estimated useful lives:
96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
Buildings and building equipment................... 20 - 50 years
Machinery and equipment............................ 3 - 33 years
Transportation equipment........................... 5 - 33 years
Other.............................................. 5 - 33 years
Restricted cash and cash equivalents
Restricted cash and cash equivalents include cash and cash
equivalents reserved for purposes of meeting certain Arkansas
Department of Environmental Quality requirements that become
applicable in the event of a closure of the Batesville Plant. The
amount of cash reserved for this purpose is based on a formula
derived by the state of Arkansas and totaled $3,127 at December 31,
2006. No cash was restricted in periods prior to December 31, 2006.
Impairment of assets
FutureFuel evaluates the carrying value of long-lived assets when
events or changes in circumstances indicate that the carrying value
may not be recoverable. Such events and circumstances include, but
are not limited to, significant decreases in the market value of the
asset, adverse changes in the extent or manner in which the asset is
being used, significant changes in business climate, or current or
projected cash flow losses associated with the use of the assets. The
carrying value of a long-lived asset is considered impaired when the
total projected undiscounted cash flows from such assets are
separately identifiable and are less than its carrying value. In that
event, a loss is recognized based on the amount by which the carrying
value exceeds the fair value of the long-lived asset. For long-lived
assets to be held for use in future operations and for fixed
(tangible) assets, fair value is determined primarily using either
the projected cash flows discounted at a rate commensurate with the
risk involved or appraisal. For long-lived assets to be disposed of
by sale or other than sale, fair value is determined in a similar
manner, except that fair values are reduced for disposal costs.
Asset retirement obligations
FutureFuel establishes reserves for closure/post-closure costs
associated with the environmental and other assets it maintains.
Environmental assets include but are not limited to waste management
units such as incinerators, landfills, storage tanks and boilers.
When these types of assets are constructed or installed, a reserve is
established for the future costs anticipated to be associated with
the closure of the site based on an expected life of the
environmental assets, the applicable regulatory closure requirements
and FutureFuel's environmental policies and practices. These expenses
are charged into earnings over the estimated useful life of the
assets. Currently, FutureFuel estimates the useful life of each
individual asset up to 35 years. Changes made in estimates of the
asset retirement obligation costs or the estimate of the useful lives
of these assets are reflected in earnings as an increase or decrease
in the period such changes are made.
Environmental costs are capitalized if they extend the life of the
related property, increase its capacity and/or mitigate or prevent
future contamination. The cost of operating and maintaining
environmental control facilities is charged to expense.
Deferred income taxes
Prior to October 31, 2006, Eastman SE was included in the
consolidated federal tax return of Eastman Chemical. For purposes of
the financial results presented up to that date, the provision for
income taxes has been prepared using the separate return method. As
Eastman SE did not file a separate federal tax return prior to
October 31, 2006 and no tax sharing agreement was in place, any
amounts payable or receivable were actually due to or receivable from
Eastman Chemical and are included in the net investment of parent and
transfers to parent.
97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
Income taxes are accounted for using the asset and liability method.
Under this method, income tax assets and liabilities are recognized
for temporary differences between financial statement carrying
amounts of assets and liabilities and their respective income tax
basis. A future income tax asset or liability is estimated for each
temporary difference using enacted and substantively enacted income
tax rates and laws expected to be in effect when the asset is
realized or the liability settled. A valuation allowance is
established, if necessary, to reduce any future income tax asset to
an amount that is more likely than not to be realized.
Revenue recognition
Revenue from product sales are recognized when persuasive evidence of
an arrangement exists, delivery has occurred or services have been
rendered, the price to the customer is fixed or determinable and
collectibility is reasonably assured.
Prior to October 31, 2006, certain sales from Eastman SE to then
affiliated companies, such as Eastman Chemical, were recorded with no
margin based on the interdivision arrangements. Since October 31,
2006, these sales have been recorded based upon the pricing
provisions stipulated within negotiated sales contracts.
Shipping and handling fees
Shipping and handling fees related to sales transactions are billed
to customers and recorded as sales revenues.
Cost of goods sold and selling, general and administration expense
Cost of goods sold includes the costs of inventory sold, related
purchasing, distribution and warehousing costs, costs incurred for
shipping and handling, and environmental remediation costs.
Selling, general and administration expense includes personnel costs
associated with sales, marketing and administration, legal and
legal-related costs, consulting and professional services fees,
advertising expenses, and other similar costs.
Research and development
All costs identified as research and development costs are charged to
expense when incurred.
Planned major maintenance activities
Expenditures for planned major maintenance activities are recognized
as expense as incurred.
Earnings per share
Basic earnings per share is computed by dividing net income (the
numerator) by the weighted average number of outstanding shares (the
denominator) for the period. Diluted earnings per share are
calculated in accordance with the treasury stock method to determine
the dilutive effect of warrants and options. The computation of
diluted earnings per share includes the same numerator, but the
denominator is increased to include the number of additional common
shares from the exercise of warrants and options that would have been
outstanding if potentially dilutive common shares had been issued.
The weighted average basic and diluted shares outstanding for the
years ended December 31, 2006, 2005 and 2004 have been calculated
assuming that all shares outstanding at December 31, 2006, net of
those shares whose holders exercised their repurchase rights as
described in Note 10, were outstanding for all periods presented. The
dilutive impact of the warrants, as described in Note 10, was
calculated based upon the trading activity of FutureFuel's common
stock from July 13, 2006 to December 31, 2006.
98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
Comprehensive income (loss)
As it has not historically recognized any other comprehensive income
(loss), the comprehensive income (loss) of FutureFuel is comprised
entirely of its net income (loss). As FutureFuel recognizes revenues,
expenses, gains or losses that, under accounting principles generally
accepted in the U.S., are included in comprehensive income but
excluded from net income, these items will be recognized as a
component of other comprehensive income in its financial statements.
Commitments and contingent liabilities
In the ordinary course of its business, FutureFuel enters into supply
and sales contracts as deemed commercially desirable. Supply
contracts are utilized to ensure the availability of raw materials
used in the production process. Sales contracts are utilized to
ensure the future sale of produced product.
FutureFuel and its operations from time to time may be parties to or
targets of lawsuits, claims, investigations and proceedings including
product liability, personal injury, patent and intellectual property,
commercial, contract, environmental, health and safety and
environmental matters, which are handled and defended in the ordinary
course of business. FutureFuel accrues a liability for such matters
when it is probable that a liability has been incurred and the amount
can be reasonably estimated. When a single amount cannot be
reasonably estimated but the cost can be estimated within a range,
FutureFuel accrues the minimum amount.
Use of estimates
The preparation of financial statements in conformity with accounting
principals generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during a reporting period.
Estimates are used when accounting for allowance for doubtful
accounts, depreciation, amortization, asset retirement obligations
and income taxes as well as the evaluation of potential losses due to
impairments or future liabilities. Actual results could differ
materially from those estimates.
3) Inventories
The carrying values of inventory were as follows as of December 31:
2006 2005
------------ ------------
At first-in, first-out or average cost (approximates current cost)
Finished goods................................................ $ 10,038 $ 5,818
Work in process............................................... 1,794 1,587
Raw materials and supplies.................................... 12,631 9,842
------------ ------------
24,463 17,247
LIFO reserve.................................................. (12,872) (12,417)
------------ ------------
Total inventories............................................. $ 11,591 $ 4,830
============ ============
99
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
4) Derivative instruments
The volumes and carrying values of FutureFuel's derivative
instruments were as follows at December 31:
Asset/(Liability)
----------------------------------------------------------------
2006 2005
------------------------------- ----------------------------
Quantity Fair Quantity Fair
(000 bbls) Market (000 bbls) Market
Long/(Short) Value Long/(Short) Value
-------------- ------------ -------------- -----------
Regulated fixed price future commitments,
included in prepaid expenses and other
current assets.............................. (250) $ (28) - $ -
Regulated options, included in prepaid
expenses and other current assets........... (100) $ (419) - $ -
The margin account maintained with a broker to collateralize these
derivative instruments carried an account balance of $3,578 at
December 31, 2006, and is classified as other current assets in the
consolidated balance sheet. This margin account carried no balance at
December 31, 2005. The carrying values of the margin account and of
the derivative instruments are included in other current assets and
comprise the entire account balance.
5) Property, plant and equipment
Property, plant and equipment consisted of the following at December
31:
2006 2005
------------ ------------
Land............................................................... $ 1,345 $ 1,345
Buildings and building equipment................................... 47,895 47,301
Machinery and equipment............................................ 409,676 403,051
Construction in progress........................................... 6,335 2,538
Accumulated depreciation........................................... (367,490) (359,120)
------------ ------------
$ 97,761 $ 95,115
============ ============
Depreciation expense totaled $9,067, $8,940 and $10,218 for the years
ended December 31, 2006, 2005 and 2004, respectively.
6) Other assets
Other assets is comprised of spare equipment and parts that have not
been placed into service as of the balance sheet date and are not
expected to be placed into service for the twelve-month period
subsequent to the balance sheet date. The balance related to these
items totaled $2,764 and $2,606 at December 31, 2006 and 2005,
respectively.
7) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities, including those
associated with related parties, consisted of the following at
December 31:
2006 2005
------------ ------------
Accrued employee liabilities....................................... $ 773 $ 4,238
Accrued property, use and franchise taxes.......................... 373 1,419
Accrued professional fees.......................................... 340 -
Amounts collected on behalf of Eastman Chemical.................... 178 -
Other.............................................................. 93 -
------------ ------------
$ 1,757 $ 5,657
============ ============
100
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
8) Asset retirement obligations and environmental reserves
The Batesville Plant generates hazardous and non-hazardous wastes,
the treatment, storage, transportation and disposal of which are
regulated by various governmental agencies. In addition, the
Batesville Plant may be required to incur costs for environmental and
closure and post closure costs under the Resource Conservation and
Recovery Act ("RCRA"). FutureFuel's reserve for asset retirement
obligations and environmental contingencies was $545 and $513 as of
December 31, 2006 and 2005, respectively.
The following table summarizes the activity of accrued obligations
for asset retirement obligations for the years ended December 31:
2006 2005 2004
----------- ----------- -----------
Beginning balance at January 1.................... $ 513 $ 474 $ 612
Accretion expense................................. 37 31 37
Revisions in estimates ........................... (5) 8 (175)
----------- ----------- -----------
Balance at December 31............................ $ 545 $ 513 $ 474
=========== =========== ===========
In addition, certain closure and post-closure liabilities were not
transferred to the Batesville Plant and were retained by Eastman
Chemical. As these liabilities related to the operations of the
Batesville Plant, charges (credits) of $148, $(2,682) and $(1,266)
for the years ended December 31, 2006, 2005 and 2004, respectively,
were included in cost of goods sold within the accompanying
consolidated statements of operations in deriving the results of
operations.
9) Deferred taxes
The following table summarizes the provision for income taxes for the
years ended December 31:
2006 2005 2004
------------ ----------- -------------
Income (loss) before taxes - U.S............ $ 2,815 $ 608 $ (24,461)
============ =========== =============
Provision/(benefit) for income taxes:
Current.................................. $ 10 $ 313 $ (2,983)
Deferred................................. 479 (132) (5,370)
State and other
Current.................................. 107 62 (593)
Deferred................................. 82 (16) (648)
------------ ----------- -------------
Total.................................. $ 678 $ 227 $ (9,594)
============ =========== =============
Differences between the provision for income taxes computed using the
U.S. federal statutory income tax rate were as follows as of December
31:
2006 2005 2004
------------ ----------- -------------
Amount computed using the statutory rate...... $ 985 $ 213 $ (8,561)
Section 199 manufacturing deduction........... (40) (10) -
Agri-biodiesel production credit.............. (401) - -
State income taxes, net....................... 134 24 (1,033)
------------ ----------- -------------
Provision for income taxes............... $ 678 $ 227 $ (9,594)
============ =========== =============
101
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
The significant components of deferred tax assets and liabilities
were as follows as of December 31:
2006 2005 2004
----------- ----------- -----------
Deferred tax assets
Vacation pay............................ $ 52 $ 258 $ 317
Allowance for doubtful accounts......... 16 - -
Inventory reserves...................... 175 279 338
Separation and retirement allowances.... - 191 169
Deferred compensation................... - 129 153
Asset retirement obligation............. 206 211 196
----------- ----------- -----------
Total deferred tax assets.................... 449 1,068 1,173
----------- ----------- -----------
Deferred tax liabilities
Derivative instruments.................. (45) - -
Depreciation............................ (23,884) (23,987) (24,240)
----------- ----------- -----------
Total deferred tax liabilities............... (23,929) (23,987) (24,240)
----------- ----------- -----------
Net deferred tax liabilities................. $ (23,480) $ (22,919) $ (23,067)
=========== =========== ===========
As recorded in the consolidated balance sheet
Current deferred income tax asset....... $ 68 $ 552 $ 601
Noncurrent deferred income tax asset.... 381 516 572
Accrued expenses and other current (45)
liabilities........................... - -
Noncurrent deferred income tax liability (23,884) (23,987) (24,240)
----------- ----------- -----------
Net deferred income tax liabilities.......... $ (23,480) $ (22,919) $ (23,067)
=========== =========== ===========
10) Stockholders' equity
On July 12, 2006, Viceroy completed an offering of 22,500,000 units.
Each unit consisted of one share of Viceroy's common stock and one
warrant to acquire one share. The units were issued at $8.00 per
unit. In connection with this offering, the shares and warrants
issued were listed on the Alternative Investment Market ("AIM")
maintained by the London Stock Exchange plc. The net proceeds of this
offering totaled $172,500 and were placed into a trust fund. All or a
portion of the trust fund was to be released for, among other things,
a Business Combination approved by the holders of Viceroy's common
stock. Moreover, the trust fund was to be released in its entirety
upon the completion of a Business Combination which, either on its
own or when combined with all previous Business Combinations, had an
aggregate transaction value of at least 50% of the initial trust
amount (which initial trust amount excluded certain deferred placing
fees).
Certain of the Viceroy shareholders who purchased units in the July
12, 2006 offering were granted repurchase rights whereby at the time
Viceroy sought approval for a Business Combination these shareholders
could vote against the Business Combination and require Viceroy to
repurchase their common shares for $7.667 per common share plus
accrued interest earned on the offering proceeds held in trust net of
expenses and income taxes payable on the interest earned.
Shareholders who exercised their repurchase rights retained all
rights to any warrants that they may have held.
On July 12, 2006, Viceroy and its founding shareholders entered into
a registration rights agreement pursuant to which the holders of the
majority of founding shares and shares of common stock included in
the units purchased in Viceroy's July 2006 offering by a director or
his designees are entitled to make up to two demands that Viceroy
register with the Securities and Exchange Commission their founding
shares and the shares included in the units purchased in Viceroy's
July 2006 offering. The holders of the majority of such shares can
elect to exercise these registration rights at any time after the
date on which Viceroy has
102
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
become a reporting company under the Securities Exchange Act of 1934
("Securities Act"), as amended, and such shares have been released
from any applicable escrow agreement and lock-in deeds. In addition,
those shareholders have certain "piggyback" registration rights on
registration statements filed subsequent to the date on which such
shares are released from escrow or other lock up arrangements.
Viceroy agreed to bear the expenses incurred in connection with the
filing of any such registration statements. There are 11,250,000
shares of Viceroy's common stock subject to this registration rights
agreement.
On July 12, 2006, Viceroy entered into an investor rights agreement
with each of KBC Peel Hunt Ltd, Viceroy's Nominated Advisor on the
AIM, and CRT Capital Group LLC, Viceroy's placing agent, for the
benefit of the holders of its shares of common stock and warrants in
which Viceroy agreed, at its cost, to provide "piggyback"
registration rights as to any shares of its common stock that are
not, at the time, freely saleable identical to the "piggyback"
registration rights of the founding shareholders described above,
plus the right to piggyback on any registration statement filed
pursuant to the founding shareholders' demand registration rights
described above, provided that in the event such piggyback rights are
exercised in an underwritten offering, the number of shares of
Viceroy's common stock registered will be subject to a cutback, pro
rata with the founding shareholders, if the underwriter so requires.
There are 15,450,000 shares of Viceroy's common stock subject to this
investor rights agreement.
In addition, the July 12, 2006 investor rights agreement stipulates
that Viceroy has agreed, at its cost, to file with the Securities and
Exchange Commission no later than the 180th day after the date of a
consummation of a Business Combination which, either on its own or
when combined with all previous Business Combinations, had an
aggregate transaction value of at least 50% of the initial trust
amount (which initial trust amount excluded certain deferred placing
fees) ("Registration Trigger"), a registration statement ("Exchange
Act Registration Statement") on Form 10 to register its common
shares. Additionally, Viceroy agreed to use commercially reasonable
efforts to cause the Exchange Act Registration Statement to become
effective under the Securities Act no later than 270 days after the
Registration Trigger and use reasonable commercial efforts promptly
upon effectiveness of the Exchange Act Registration Statement to list
the common shares of Viceroy on the American Stock Exchange, the New
York Stock Exchange, NASDAQ or a similarly recognized trading
platform in the United States. Viceroy did not make any assurances
that any such listing application would be accepted.
If the Exchange Act Registration Statement is not declared effective
on or prior to the 270th day after the date of the Registration
Trigger ("Registration Default"), Viceroy will pay liquidated damages
to each holder of its common stock issued in connection with its July
2006 offering. The liquidated damages will be:
o paid to each holder in the form of common stock in Viceroy
in an amount equal to 0.5% per month of the number of each
holder's common shares in Viceroy;
o payable promptly after the occurrence of the Registration
Default, but in no event later than two days after the end
of the month in which the Registration Default has occurred;
o payable within two days of the end of each month, until the
Registration Default has been cured, provided that a pro
rata payment shall be made with respect to a month a portion
of which Viceroy has been in default; and
o payable for a maximum of 12 months.
The investors rights agreement provided that the liquidated damages
specified above are the only exclusive remedy available to holders of
Viceroy's common shares for any failure by Viceroy to comply with the
requirements of the investors rights agreement.
Viceroy has also agreed to use reasonable commercial efforts to
maintain its listing on the AIM for at least two years.
103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
At the October 27, 2006 special meeting of the shareholders of
Viceroy, the acquisition of Eastman SE by Viceroy was approved by the
shareholders of Viceroy. Shareholders owning 1,425,000 common shares
of Viceroy voted against the acquisition and exercised their
repurchase rights. Accordingly, such shares are deemed to be held for
redemption, are not deemed to be outstanding, and are not included in
equity in the post-acquisition period. The repurchase price totaled
$7.71 per share, calculated as $7.667 plus $0.043 of accrued interest
earned on the offering proceeds held in trust net of expenses and
income taxes payable on the interest earned per share. Pursuant to
the terms of the July 12, 2006 offering, the repurchase price was
payable by Viceroy only when those shareholders who exercised their
repurchase rights surrendered to Viceroy their common share
certificates. Through December 31, 2006, shareholders owing 1,175,000
common shares of FutureFuel had surrendered their shares to
FutureFuel and FutureFuel had paid an aggregate $9,059 to repurchase
these shares. At December 31, 2006, FutureFuel remained obligated to
repurchase 250,000 common shares at the $7.71 per share repurchase
price. The $1,928 payable to these shareholders remains in trust and
is subject to distribution to the shareholders upon proper
presentation of the related stock certificates.
As discussed in Note 1, immediately subsequent to the acquisition
Viceroy changed its name to FutureFuel Corp. and Eastman SE changed
its name to FutureFuel Chemical Company. As also discussed in Note 1,
for accounting purposes, the transaction is deemed to be a reverse
acquisition and FutureFuel Chemical has been treated as the
accounting acquirer and continuing reporting entity that acquired
FutureFuel. Accordingly, the October 31, 2006 acquisition has been
accounted for as a capital transaction or, more specifically, the
issuance of stock by FutureFuel Chemical for the net monetary assets
of FutureFuel accompanied by a recapitalization and reorganization
with FutureFuel assuming the role of the reporting entity and
FutureFuel Chemical assuming the role of FutureFuel's operating
subsidiary.
At December 31, 2006, 5,000,000 shares of $0.0001 par value preferred
stock and 75,000,000 shares of $0.0001 a par value common stock were
authorized. At December 31, 2006, no preferred shares were
outstanding and 26,700,000 common shares were issued and outstanding.
At December 31, 2006, 22,500,000 warrants to purchase common shares
of FutureFuel were issued and outstanding. Each warrant is
exercisable for one common share of FutureFuel at an exercise price
of $6.00 per warrant. These warrants are only settleable through
physical delivery of the common share certificate and expire July 12,
2010.
11) Earnings per share
The computation of basic and diluted earnings per common share was as
follows for the years ended December 31:
2006 2005 2004
------------ ------------- --------------
Net income (loss) available to common
stockholders.................................. $ 2,137 $ 381 $ (14,867)
Weighted average number of common shares
outstanding................................... 26,700,000 26,700,000 26,700,000
Effect of warrants............................ 5,118,772 5,118,772 -
Weighted average diluted number of common
shares outstanding............................ 31,818,772 31,818,772 26,700,000
Basic earnings per share...................... $ 0.08 $ 0.01 $ (0.56)
Diluted earnings per share.................... $ 0.07 $ 0.01 $ (0.56)
Warrants to purchase 22,500,000 common shares of FutureFuel were not
included in the computation of diluted earnings per share in 2004 as
FutureFuel reported a net loss for the period and the inclusion of
those securities in the computation would have been antidilutive.
104
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
12) Impairments and severance charges
Impairments and severance charges totaled approximately $2,462 and
$19,485 in the years ended December 31, 2005 and 2004, respectively.
These charges consisted of severance charges of $2,462 in the year
ended December 31, 2005 and non-cash asset impairment charges and
severance charges of $18,305 and $1,180, respectively, in the year
ended December 31, 2004.
Eastman SE recognized $2,462 and $1,180 in severance charges in the
years ended December 31, 2005 and 2004, respectively, from ongoing
cost reduction efforts related to employee separation programs
announced in April 2004.
In 2004, Eastman SE recognized asset impairments of approximately
$18,305 related to assets at the Batesville Plant. This impairment
primarily relates to the closure of specific fixed assets used to
manufacture certain performance chemicals product lines that were
divested by Eastman Chemical. The related assets were deemed to be
impaired, were determined to have no disposal value and remained at
the Batesville Plant.
No impairment charges or severance costs were incurred in the year
ended December 31, 2006.
13) Employee benefit plans
Eastman Chemical maintains certain deferred benefit plans that
provide eligible employees, including those who have been a part of
the operations of Eastman SE, with retirement benefits. All such
benefit plans and associated benefit obligations were retained by
Eastman Chemical. For the purposes of the presentation with the
financial statements of FutureFuel Corp., costs recognized for these
benefits are allocated based on the employee participants and are
summarized based on the following component plans.
Defined benefit pension plans
Eastman Chemical maintains defined benefit plans that provide
eligible employees, which included those of the Batesville Plant
while they were employed by Eastman Chemical, with retirement
benefits. Costs recognized for these benefits are recorded using
estimated amounts, which may change as actual costs derived for the
year are determined.
Defined contribution plans
Eastman Chemical sponsors a defined contribution employee stock
ownership plan (the "ESOP") in which the employees of the Batesville
Plant participated while they were employed by Eastman Chemical. The
ESOP is a qualified plan under Section 401(a) of the Internal Revenue
Code, which is a component of the Eastman Investment Plan and
Employee Stock Ownership Plan ("EIP/ESOP").
Postretirement welfare plans
Eastman Chemical provides life insurance and health care benefits for
eligible retirees, and health care benefits for retirees' eligible
survivors in the United States.
Eastman SE was allocated $3,005 of expense related to these employee
benefit plans for the ten months ended October 31, 2006 and $4,386
and $4,435 for the years ended December 31, 2005 and 2004,
respectively.
No liabilities or assets affiliated with any Eastman Chemical
employee benefit plan, including the defined benefit pension plans,
the defined contribution plan and postretirement welfare plans, were
assumed or acquired in the reverse acquisition as described in Note 1.
105
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
Defined contribution savings plan
FutureFuel currently offers its employees a defined contribution
savings plan, which covers substantially all employees. Under this
plan, FutureFuel matches the amount of employee contributions,
subject to specified limits. Plan related expenses totaled $120 for
the year ended December 31, 2006. No expense related to this plan was
incurred in the years ended December 31, 2005 and 2004.
14) Related party transactions
In addition to receiving support services such as research and
development, legal, finance, treasury, income tax, public relations,
executive management functions, and certain other administrative
services from Eastman Chemical or Eastman Chemical affiliates prior
to the October 31, 2006 reverse acquisition, Eastman SE purchased a
significant portion of its raw materials and sold a significant
portion of its product produced to Eastman Chemical or affiliates of
Eastman Chemical. Purchases of raw materials from affiliates of
Eastman Chemical totaled $5,789 for the ten months ended October 31,
2006 and $5,014 and $4,115 for the years ended December 31, 2005 and
2004, respectively. Sales of Eastman SE products to Eastman Chemical
or affiliates of Eastman Chemical totaled $5,952 for the ten months
ended October 31, 2006 and $2,493 and $1,396 for the years ended
December 31, 2005 and 2004, respectively.
Historically, Eastman SE processed certain products for Eastman
Chemical or Eastman Chemical affiliates for which the ownership of
the product had not been transferred to Eastman SE. Eastman SE
historically processed such products on a cost basis without
recognizing a selling margin. As the risks and rewards of ownership
were not transferred to Eastman SE, the related inventories, revenues
and costs have not been reflected in the accompanying financial
statements. The financial statements include the cost of processing
and the corresponding revenue received for processing such products.
The costs of product processed on behalf of Eastman Chemical or
Eastman Chemical affiliates totaled $10,650 for the ten months ended
October 31, 2006 and $12,682 and $14,816 for the years ended December
31, 2005 and 2004, respectively.
Inventories of $4,103 were held by FutureFuel on behalf of Eastman
Chemical or Eastman Chemical affiliates as of December 31, 2005.
Prior to October 31, 2006, all receivables and payables due to or
from Eastman Chemical or Eastman Chemical affiliates were included in
the net investment of parent.
Since October 31, 2006 all sales and purchases between FutureFuel and
Eastman Chemical or any Eastman Chemical affiliates have been made
pursuant to negotiated contracts. All receivables and payables
stemming from transactions with Eastman Chemical or Eastman Chemical
affiliates are included in accounts receivable and accounts payable.
FutureFuel enters into transactions with companies affiliated with or
controlled by a director and significant shareholder.
FutureFuel leases oil storage capacity from an affiliate under a
storage and thruput agreement. This agreement provides for the
storage of biodiesel, biodiesel/petrodiesel blends, palm oil,
methanol and other biodiesel feedstocks in above-ground storage
tankage at designated facilities of the affiliate. Lease expense
related to this agreement totaled $9 for the year ended December 31,
2006. No expense was incurred for the years ended December 31, 2005
and 2004, respectively.
FutureFuel entered into a commodity trading advisor agreement with an
affiliate. Pursuant to the terms of this agreement the affiliate
provides advice to FutureFuel concerning the purchase, sale,
exchange, conversion and/or hedging of commodities as FutureFuel may
request from time to time. Expenditures related to this agreement
totaled $20 in the year ended December 31, 2006. No expenses were
incurred for this contract in the years ended December 31, 2005 and
2004.
FutureFuel entered into a railcar sublease agreement with an
affiliate. Pursuant to the terms of this sublease, FutureFuel leases
from the affiliate railcars upon the same terms, conditions and price
the affiliate
106
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
leases the railcars. Lease terms for individual railcars begin upon
delivery of the railcars. No railcars had been received through
December 31, 2006 under this agreement. As such, no expenditures were
incurred.
FutureFuel reimburses an affiliate for travel and other
administrative services incurred on its behalf. Such reimbursement is
performed at cost with the affiliate realizing no profit on the
transaction. These reimbursements totaled $123 in 2006.
Accounts payable included $112 and accrued expenses and other current
liabilities included $40 due to related parties at December 31, 2006.
All amounts due to or from related parties as of December 31, 2005
and 2004 were included in net investment of parent.
15) Segment information
FutureFuel has determined that is has two reportable segments
organized along product lines - chemicals and biofuels. The
accounting policies of the segments are the same as those described
in the summary of significant accounting policies in Note 2.
Chemicals
FutureFuel's chemicals segment manufactures diversified chemical
products that are sold externally to third party customers and to
Eastman Chemical. This segment comprises two components: "custom
manufacturing" (manufacturing chemicals for specific customers); and
"performance chemicals" (multi-customer specialty chemicals).
Biofuels
FutureFuel's biofuels business segment manufactures and markets
biodiesel. Biodiesel commercialization was achieved in October 2005.
Biodiesel revenues are generally derived in one of two ways. Revenues
are generated under tolling agreements whereby customers supply key
biodiesel feed stocks which FutureFuel then converts into biodiesel
at the Batesville Plant in exchange for a fixed price processing
charge per gallon of biodiesel produced. Revenues are also generated
through the sale of biodiesel to customers through FutureFuel's
distribution network at the Batesville Plant and through distribution
facilities available at a leased oil storage facility near Little
Rock, Arkansas at negotiated prices.
Summary of long-lived assets and revenues by geographic area
All of FutureFuel's long-lived assets are located in the U.S.
Most of FutureFuel's sales are transacted with title passing at the
time of shipment from the Batesville Plant, although some sales are
transacted based on title passing at the delivery point. While many
of FutureFuel's chemicals are utilized to manufacture products that
are shipped, further processed and/or consumed throughout the world,
the chemical products, with limited exceptions, generally leave the
United States only after ownership has transferred from FutureFuel to
the customer. Rarely is FutureFuel the exporter of record, never is
FutureFuel the importer of record into foreign countries and
FutureFuel is not always aware of the exact quantities of its
products that are moved into foreign markets by its customers.
FutureFuel does track the addresses of its customers for invoicing
purposes and uses this address to determine whether a particular sale
is within or without the United States. FutureFuel's revenues for the
last three years ended December 31 attributable to the United States
and foreign countries (based upon the billing addresses of its
customers) were as follows:
ALL FOREIGN
FISCAL YEAR UNITED STATES COUNTRIES TOTAL
------------------------------------------- ---------------- ---------------- -----------
December 31, 2006.......................... $ 131,893 $ 18,877 $ 150,770
December 31, 2005.......................... $ 105,719 $ 13,820 $ 119,539
December 31, 2004.......................... $ 138,636 $ 5,521 $ 144,157
107
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
For the year ended December 31, 2004, revenues from a single foreign
country did not exceed 2% of total revenues. Beginning in 2005,
FutureFuel Chemical Company began invoicing Procter & Gamble
International Operations Mexico, D.F. directly, at which time
revenues from Mexico became a material component of total revenues.
For the years ended December 31, 2005 and 2006, revenues from Mexico
accounted for 10% and 11%, respectively, of total revenues. Other
than Mexico, revenues from a single foreign country during 2005 and
2006 did not exceed 1% of total revenues.
Summary of business by segment
2006 2005 2004
------------ ------------ ------------
Revenues
Chemicals................................ $ 137,430 $ 119,539 $ 144,157
Biofuels................................. 13,340 - -
------------ ------------ ------------
Revenues...................................... $ 150,770 $ 119,539 $ 144,157
============ ============ ============
Segment gross margins
Chemicals................................ $ 22,949 $ 16,837 $ 17,108
Biofuels................................. (9,646) - -
------------ ------------ ------------
Segment gross margins......................... 13,303 16,837 17,108
Corporate expenses............................ (11,184) (16,198) (41,532)
------------ ------------ ------------
Income (loss) before interest and taxes....... 2,119 639 (24,424)
Interest income............................... 733 - -
Interest expense.............................. (37) (31) (37)
Provision for income taxes.................... (678) (227) 9,594
------------ ------------ ------------
Net income (loss)............................. $ 2,137 $ 381 $ (14,867)
============ ============ ============
No biofuels were sold by FutureFuel in 2004. FutureFuel's 2005
biofuel revenues and related gross margin were inconsequential. Due
to the inconsequential nature of the amounts, 2005 biofuel gross
margin has been included in the chemicals gross margin for that year.
Depreciation is allocated to segment costs of goods sold based on
plant usage. The total assets and capital expenditures of FutureFuel
have not been allocated to individual segments as large portions of
these assets are shared to varying degrees by each segment, causing
such an allocation to be of little value.
16) Commitments
Lease agreements
FutureFuel has entered into lease agreements for oil storage capacity
and railcars. Minimum rental commitments under existing
noncancellable operating leases as of December 31, 2006 were as
follows:
2007.............................................. $ 318
2008.............................................. 287
2009.............................................. 108
2010.............................................. 45
2011.............................................. 45
Thereafter........................................ 37
-----------
$ 840
===========
108
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
Lease expenses totaled $115, $182 and $181 for the years ended
December 31, 2006, 2005 and 2004, respectively.
Purchase obligations
FutureFuel has entered into contracts for the purchase of goods and
services including contracts for the expansion of FutureFuel's
biodiesel related infrastructure, the development, implementation and
maintenance of an enterprise resource planning computer software
package, the purchase of biodiesel related feedstocks and the
licensing of a chemical modeling software product.
Deferred payments Eastman Chemical
In connection with the purchase of shares of Eastman SE, FutureFuel
agreed to pay Eastman Chemical $0.02 per gallon of biodiesel sold by
FutureFuel during the three-year period commencing on October 31,
2006 and ending on October 31, 2009. Payments to Eastman Chemical in
2006 for this agreement totaled $11.
17) Recently issued accounting standards
In February 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. SFAS No. 155 simplifies accounting for certain hybrid
instruments under SFAS No. 133 by permitting fair value remeasurement
for financial instruments containing an embedded derivative that
otherwise would require bifurcation. SFAS No. 155 eliminates both the
previous restriction under SFAS No. 140 on passive derivative
instruments that a qualifying special-purpose entity may hold and
SFAS No. 133 Implementation Issue No. D1, Application of Statement
133 to Beneficial Interests in Securitized Financial Assets, which
provides that beneficial interests are not subject to the provisions
of SFAS No. 133. SFAS No. 155 also establishes a requirement to
evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation, and clarifies that concentrations of credit risk in the
form of subordination are not imbedded derivatives. SFAS No. 155 is
effective for all financial instruments acquired, issued, or subject
to a remeasurement event occurring after the beginning of an entity's
fiscal year that begins after September 15, 2006. FutureFuel is
currently evaluating the effect SFAS No. 157 will have on its
consolidated financial position, liquidity, and results of
operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets, an amendment of SFAS No. 140. SFAS No. 156
permits entities to choose to either subsequently measure servicing
rights at fair value and report changes in fair value in earnings or
amortize servicing rights in proportion to and over the estimated net
servicing income or loss and assess to rights for impairment or the
need for an increased obligation. SFAS No. 156 also clarifies when a
servicer should separately recognize servicing assets and
liabilities; requires all separately recognized assets and
liabilities to be initially measured at fair value, if practicable;
and permits a one-time reclassification of available-for-sales
securities to trading securities by an entity with recognized
servicing rights and requires additional disclosures for all
separately recognized servicing assets and liabilities. SFAS No. 156
is effective as of the beginning of an entity's fiscal year that
begins after September 15, 2006. FutureFuel is currently evaluating
the effect SFAS No. 157 will have on its consolidated financial
position, liquidity, and results of operations.
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes--an Interpretation of SFAS
109 Accounting for Income Taxes. FIN 48 prescribes a comprehensive
model for how a company should recognize, measure, present, and
disclose in its financial statements uncertain tax positions that a
company has taken or expects to take on a tax return. Under FIN 48,
the financial statements will reflect expected future tax
consequences of such positions presuming the taxing
109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
authorities' full knowledge of the position and all relevant facts,
but without considering time values. FIN 48 also revises disclosure
requirements and introduces a prescriptive, annual, tabular
roll-forward of the unrecognized tax benefits. FIN 48 is effective
for fiscal years beginning after December 15, 2006. FutureFuel does
not expect the adoption of FIN 48 to have a material effect on its
consolidated financial position, liquidity, or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which addresses the measurement of fair value by
companies when they are required to use a fair value measure for
recognition or disclosure purposes under GAAP. SFAS No. 157 provides
a common definition of fair value to be used throughout GAAP which is
intended to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. SFAS No. 157
will be effective for an entity's financial statements issued for
fiscal years beginning after November 15, 2007. FutureFuel is
currently evaluating the effect SFAS No. 157 will have on its
consolidated financial position, liquidity, and results of
operations.
In September 2006, the FASB issued Staff Position No. AUG AIR-1 ("FSP
No. AUG AIR-1"), which addresses the accounting for planned major
maintenance activities. FSP No. AUG AIR-1 amends certain provisions
in the American Institute of Certified Public Accountants ("AICPA")
Industry Audit Guide and APB Opinion No. 28, Interim Financial
Reporting. Four alternative methods of accounting for planned major
maintenance activities were permitted: direct expense, built-in
overhaul, deferral, and accrual ("accrue-in-advance"). This FSP
prohibits the use of the accrue-in-advance method of accounting for
planned major maintenance activities because it results in the
recognition of a liability in a period prior to the occurrence of the
transaction or event obligating the entity. FSP No. AUG AIR-1 is
effective for an entity's financial statements issued for fiscal
years beginning after December 15, 2006. FutureFuel does not utilize
the accrue-in-advance method of accounting and therefore expects this
FSP to have no impact on its consolidated financial position,
liquidity, or results of operations.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities--Including an
amendment of FASB Statement No. 115. SFAS No. 159 permits companies
to choose to measure many financial instruments and certain other
items at fair value at specified election dates. Upon adoption, an
entity shall report unrealized gains and losses on items for which
the fair value option has been elected in earnings at each subsequent
reporting date. Most of the provisions apply only to entities that
elect the fair value option. However, the amendment to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities,
applies to all entities with available for sale and trading
securities. SFAS No. 159 will be effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007.
FutureFuel is currently evaluating the effect SFAS No. 159 will have
on its consolidated financial position, liquidity, and results of
operations.
18) Subsequent events
Share redemption
In January 2007 the last remaining shareholders who exercised their
repurchase rights relinquished their stock certificates to FutureFuel
and FutureFuel subsequently paid the $1,928 repurchase price to these
shareholders from the trust.
Credit agreement
On March 14, 2007, FutureFuel Chemical entered into a revolving
credit agreement with a commercial bank. This credit agreement makes
up to $50,000 available to FutureFuel Chemical for working capital
requirements, capital expenditures and other general corporate
purposes. This credit agreement is secured by specific collateral,
including FutureFuel Chemical's accounts receivable and inventory.
The maximum availability under this credit agreement at any point in
time is determined based upon a borrowing base calculation, which is
in turn based upon the eligible accounts receivable and inventory
balances of FutureFuel Chemical. The credit agreement contains
financial and non-financial restrictive covenants,
110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(Dollars in thousands, except per share or unit amounts, and as noted)
which, among other things, require FutureFuel Chemical to maintain a
certain ratio of debt to earnings before interest, taxes,
depreciation and amortization.
Advances under the credit facility bear interest, payable monthly, at
rates based upon the then current prime rate or based upon the then
current London interbank offered rate plus margins ranging from
(1.00%) to 1.70%. Additionally, FutureFuel Chemical will pay a
commitment fee of 0.25% on any unused availability. This credit
agreement matures on March 14, 2010.
FutureFuel unconditionally guaranteed any and all indebtedness and
obligations of FutureFuel Chemical to the commercial bank under this
credit agreement.
No borrowings have yet been made under this credit agreement.
Purchase price settlement
On March 30, 2007, FutureFuel received $2,812 (plus interest thereon)
from Eastman Chemical as satisfaction of certain agreed-to purchase
price adjustments stemming from the October 31, 2006 acquisition of
Eastman SE. A receivable from Eastman Chemical was included in the
consolidated balance sheet of FutureFuel at December 31, 2006 in
anticipation of this payment from Eastman Chemical. FutureFuel and
Eastman Chemical continue to discuss remaining potential purchase
price adjustments (which may be recognized in future periods if and
when they are realized by FutureFuel).
Customer dispute
A customer of FutureFuel Chemical has indicated it has been billed on
certain products for amounts aggregating up to $1,400 in excess of
their management's interpretation of the appropriate billings under
their contract with FutureFuel Chemical since the second quarter of
2004. FutureFuel has evaluated the position asserted by the customer
and the arrangements under the contract and has determined that they
do not believe there have been any excess billings or overpayments
under this contract. As a result, management intends to vigorously
defend against any such claim if made by the customer. In addition,
to the extent such a liability exists, FutureFuel believes it has a
right under the Acquisition Agreement between itself and Eastman
Chemical to assert a claim with respect to amounts related to periods
prior to October 31, 2006.
111
The Company
The following sets forth our balance sheets as at December 31, 2005 and
October 31, 2006 and the statements of operations, statements of changes in
stockholders' equity (deficit) and statements of cash flows for the period
from inception through December 31, 2005 and for the ten-month period ended
October 31, 2006, together with KPMG LLP's report thereon.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Viceroy Acquisition Corp.:
We have audited the accompanying balance sheets of Viceroy Acquisition
Corp. as of October 31, 2006 and December 31, 2005, and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for the ten months ended October 31, 2006 and for the period from
August 12, 2005 (Inception) through December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Viceroy
Acquisition Corp. as of October 31, 2006 and December 31, 2005, and the
results of its operations and its cash flows for the ten months ended October
31, 2006 and for the period from August 12, 2005 (Inception) through December
31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
April 23, 2007
112
VICEROY ACQUISITION CORPORATION
BALANCE SHEETS
AS AT OCTOBER 31, 2006 AND DECEMBER 31 2005
(DOLLARS IN THOUSANDS)
OCTOBER 31, DECEMBER 31,
2006 2005
------------ ------------
ASSETS
Cash and cash equivalents.......................................... $ 205 $ 28
Prepaid expenses................................................... 118 -
------------ ------------
Total current assets........................................... 323 28
Deferred costs..................................................... 1,045 207
------------ ------------
TOTAL ASSETS............................................................ $ 1,368 $ 235
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable................................................... $ 212 $ 10
Income taxes payable............................................... 834 -
------------ ------------
Total current liabilities...................................... 1,046 10
Notes payable to related parties................................... 700 200
------------ ------------
Total noncurrent liabilities................................... 700 200
------------ ------------
TOTAL LIABILITIES....................................................... 1,746 210
Preferred stock, $0.0001 par value, 5,000,000 shares authorized,
none issued and outstanding...................................... - -
Common stock, $0.0001 par value, 75,000,000 shares authorized,
5,625,000 issued and outstanding and, additionally,
22,500,000 issued and outstanding and subject to repurchase
at October 31, 2006; 5,000,000 issued and outstanding at
December 31, 2005................................................ 3 1
Called-up share capital held in trust.............................. (174,123) -
Additional paid in capital......................................... 172,374 24
Retained earnings.................................................. 1,368 -
------------ ------------
Total stockholders' equity (deficit)........................... (378) 25
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).................... $ 1,368 $ 235
============ ============
The accompanying notes are an integral part of these financial statements.
113
VICEROY ACQUISITION CORPORATION
STATEMENTS OF OPERATIONS
FOR THE TEN MONTHS ENDED OCTOBER 31, 2006 AND FOR
THE PERIOD FROM AUGUST 12, 2005 (INCEPTION)
THROUGH DECEMBER 31, 2005
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AUGUST 12, 2005
10 MONTHS ENDED (INCEPTION) TO
OCTOBER 31, DECEMBER 31,
2006 2005
---------------- ---------------
Interest and other income............................................... $ 2,632 $ 1
Formation and operating costs........................................... (126) (1)
Cancelled offering costs................................................ (304) -
Provision for income taxes.............................................. (834) -
---------------- ---------------
Net income (loss)....................................................... $ 1,368 $ -
================ ===============
Weighted Average Shares Outstanding
Basic.............................................................. 5,625,000 5,625,000
Diluted............................................................ 5,625,000 5,625,000
Net Income (Loss) Per Share
Basic.............................................................. $ 0.24 $ 0.00
Diluted............................................................ $ 0.24 $ 0.00
The accompanying notes are an integral part of these financial statements.
114
VICEROY ACQUISITION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM AUGUST 12, 2005 (INCEPTION) TO OCTOBER 31, 2006
(DOLLARS IN THOUSANDS)
Called-up
Common stock share Total
------------------------- Additional capital stockholders'
paid-in held in Retained equity
Shares Amount capital trust Earnings (deficit)
------------ --------- ------------ ----------- ----------- -------------
December 31, 2004..... - $ - $ - $ - $ - $ -
Common shares issued.. 5,000,000 1 24 - - 25
Net loss.............. - - - - - -
------------ -------- ------------ ----------- ----------- -------------
December 31, 2005..... 5,000,000 1 24 - - 25
Common share dividend. 1,250,000 - - - - -
Common share
cancellation........ (625,000) - - - - -
Equity offering
(shares subject to
repurchase)......... 22,500,000 2 172,350 (172,500) - (148)
Interest earned on
trust fund.......... - - - (2,623) - (2,623)
Transfer from trust... - - - 1,000 - 1,000
Net income............ - - - - 1,368 1,368
------------ -------- ------------ ----------- ----------- -------------
October 31, 2006...... 28,125,000 $ 3 $ 172,374 $(174,123) $ 1,368 $ (378)
============ ======== ============ =========== =========== =============
The accompanying notes are an integral part of these financial statements.
115
VICEROY ACQUISITION CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 2006 AND FOR
THE PERIOD FROM AUGUST 12, 2005 (INCEPTION)
THROUGH DECEMBER 31, 2005
(DOLLARS IN THOUSANDS)
AUGUST 12, 2005
10 MONTHS ENDED (INCEPTION) TO
OCTOBER 31, DECEMBER 31,
2006 2005
----------------- ---------------
Cash flows provided by operating activities
Net income......................................................... $ 1,368 $ -
Adjustments to reconcile net income to net cash provided by operating
activities:
Cancelled offering costs........................................... 304 -
Changes in operating assets and liabilities:
Prepaid expenses................................................... (118) -
Accounts payable................................................... 202 10
Income taxes payable............................................... 834 -
----------------- ---------------
Net cash provided by operating activities...................... 2,590 10
----------------- ---------------
Cash flows provided by (used in) investing activities
Capitalized acquisition costs...................................... (1,045) -
----------------- ---------------
Net cash provided by (used in) investing activities............ (1,045) -
----------------- ---------------
Cash flows provided by (used in) financing activities
Equity offering expenditures....................................... (97) (207)
Proceeds from long term debt....................................... 500 200
Net proceeds from stock issuance................................... 172,352 25
Net cash placed into trust......................................... (172,500) -
Interest earned on cash held in trust.............................. (2,623) -
Transfers of cash held in trust to cash ........................... 1,000 -
----------------- ---------------
Net cash provided by (used in) financing activities............ (1,368) 18
----------------- ---------------
Net change in cash and cash equivalents................................. 177 28
Cash and cash equivalents at beginning of period........................ 28 -
----------------- ---------------
Cash and cash equivalents at end of period.............................. $ 205 $ 28
================= ===============
The accompanying notes are an integral part of these financial statements.
116
NOTES TO FINANCIAL STATEMENTS OF VICEROY ACQUISITION CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1) Organization, business and operations and summary of significant
accounting policies
Viceroy Acquisition Corporation
Viceroy Acquisition Corporation (the "Company") was incorporated in
Delaware on August 12, 2005 to serve as a vehicle for the acquisition
by way of asset acquisition, merger, capital stock exchange, share
purchase or similar transaction, of one or more operating businesses
in the oil and gas industry (a "Business Combination"). Through
October 31, 2006, the Company had not commenced any operations.
Offering
On July 12, 2006, the Company completed an offering (the "Offering")
of 22,500,000 units ("Units"), each Unit consisting of one common
share of the Company ("Share") and one warrant to purchase one Share
("Warrant"). In connection with the Offering, the Shares and Warrants
were listed on the Alternative Investment Market ("AIM") maintained
by the London Stock Exchange plc.
The net proceeds of the Offering of $172,500 (the "Trust Amount")
were deposited into a trust fund (the "Trust Fund") maintained by a
corporate trustee (the "Trustee"). The Trust Fund was to be released
by the Trustee for, among other things, a Business Combination
approved by the shareholders of the Company. Moreover, the Trust Fund
was to be released in its entirety upon the completion of a Business
Combination which, either on its own or combined with all previous
Business Combinations, had an aggregate transaction value of at least
50% of the initial Trust Amount (which initial Trust Amount excluded
certain deferred placing fees) (a "Qualified Business Combination").
Acquisition agreement
On July 21, 2006, the Company entered into an acquisition agreement
with Eastman Chemical Company ("Eastman Chemical") to purchase all of
the issued and outstanding stock of its subsidiary, Eastman SE, Inc.,
subject to approval by the Company's shareholders. If approved by the
Company's shareholders, the acquisition would constitute both a
Business Combination and a Qualified Business Combination.
On October 27, 2006, a special meeting of the shareholders of the
Company was held. At this meeting the acquisition of Eastman SE, Inc.
by the Company was approved by the shareholders of the Company.
Eastman SE, Inc.
Eastman SE, Inc. ("Eastman SE") was incorporated under the laws of
the state of Delaware on September 1, 2005 and subsequent thereto
operated as a wholly-owned subsidiary of Eastman Chemical through
October 31, 2006. Eastman SE was incorporated for purposes of
effecting a sale of Eastman Chemical's manufacturing facility in
Batesville, Arkansas (the "Batesville Plant"). Commencing January 1,
2006, Eastman Chemical began transferring the assets associated with
the business of the Batesville Plant to Eastman SE.
The Batesville Plant was constructed in 1977 to produce proprietary
photographic chemicals for Eastman Kodak Company ("Eastman Kodak").
Over the years, Eastman Kodak shifted the plant's focus away from the
photographic imaging business to the custom synthesis of fine
chemicals and organic chemical intermediates used in a variety of end
markets, including paints and coatings, plastics and polymers,
pharmaceuticals, food supplements, household detergents and
agricultural products.
In 2005, the Batesville Plant began the implementation of a biobased
products platform. This includes the production of biofuels
(biodiesel, bioethanol and lignin/biomass solid fuels) and biobased
specialty chemical products (biobased solvents, chemicals and
intermediates). In addition to biobased products, the Batesville
Plant continues to manufacture fine chemicals and other organic
chemicals.
The accompanying financial statements present the financial position,
the results of operations and the cash flows of the Company from its
inception through the closing of the Company's acquisition of Eastman
SE.
117
NOTES TO FINANCIAL STATEMENTS OF VICEROY ACQUISITION CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Summary of significant accounting policies
Cash and cash equivalents
The Company includes demand deposits with banks and all highly liquid
investments with original maturities of three months or less in cash
and cash equivalents.
Income taxes
Income taxes are accounted for using the asset and liability method.
Under this method, future income tax assets and liabilities are
recognized for temporary differences between financial statement
carrying amounts of assets and liabilities and their respective
income tax basis. A future income tax asset or liability is estimated
for each temporary difference using enacted and substantively enacted
income tax rates and laws expected to be in effect when the asset is
realized or the liability settled. A valuation allowance is
established, if necessary, to reduce any future income tax asset to
an amount that is more likely than not to be realized.
Earnings per share
Basic earnings per share is computed by dividing net income (the
numerator) by the weighted average number of outstanding shares (the
denominator) for the period. Diluted earnings per share are
calculated in accordance with the treasury stock method to determine
the dilutive effect of warrants and options. The computation of
diluted earnings per share includes the same numerator, but the
denominator is increased to include the number of additional common
shares from the exercise of warrants and options that would have been
outstanding if potentially dilutive common shares had been issued.
The weighted average basic and diluted shares outstanding as at
October 31, 2006 and December 31, 2005 have been calculated excluding
the effects of all Shares and Warrants issued in the Offering as a
result of the repurchase rights associated with the Shares in effect
through the time of the Company's acquisition of Eastman SE.
Use of estimates
The preparation of financial statements in conformity with accounting
principals generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during a reporting period.
Actual results could differ materially from those estimates.
2) Notes payable to related parties
The Company had unsecured promissory notes payable to shareholders
(one of these shareholders was an officer and director of the Company
and the other was affiliated with one) of $700 and $200 in aggregate
as of October 31, 2006 and as of December 31, 2005, respectively. The
loans were non-interest bearing and were payable upon the
consummation of a Business Combination. Due to the short-term nature
of the notes, the fair value of the notes approximated their carrying
value.
3) Common stock
On July 12, 2006, the Company completed the Offering. The net
proceeds of the Offering totaled $172,500 and were placed into the
Trust Fund. All or a portion of the Trust Fund was to be released
for, among other things, a Business Combination.
Certain of the Company's shareholders who purchased Units in the July
12, 2006 offering were granted repurchase rights whereby at the time
the Company sought approval for a Business Combination these
shareholders could vote against the Business Combination and require
the Company to repurchase their
118
NOTES TO FINANCIAL STATEMENTS OF VICEROY ACQUISITION CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Shares for $7.667 per Share plus accrued interest earned on the
Offering proceeds held in the Trust Fund net of expenses and income
taxes payable on the interest earned. Shareholders who exercised
their repurchase rights retained all rights to any Warrants that they
may have held.
At the October 27, 2006 special meeting of the shareholders of the
Company, the acquisition of Eastman SE by the Company was approved by
the shareholders of the Company. Shareholders owning 1,425,000 Shares
of the Company voted against the acquisition and exercised their
repurchase rights. The repurchase price totaled $7.71 per Share,
calculated as $7.667 plus $0.043 of accrued interest earned on the
offering proceeds held in trust net of expenses and income taxes
payable on the interest earned per Share. Pursuant to the terms of
the July 12, 2006 offering, the repurchase price was payable by the
Company only when those shareholders who exercised their repurchase
rights surrendered to the Company their Share certificates. As of
October 31, 2006, no shareholders had surrendered their Share
certificates to the Company. Subsequent to October 31, 2006, all such
Share certificates were presented to the Company and 1,425,000 Shares
were repurchased for an aggregate $10,987.
4) Preferred stock
The Company is authorized to issue 5,000,000 shares of preferred
stock with such designations, voting and other rights and preferences
as may be determined from time to time by the Company's board of
directors. As of October 31, 2006, no shares of preferred stock were
issued or outstanding.
5) Contingent liabilities
The Company agreed to pay its placing agents deferred placing fees
totaling $2,700 payable upon the consummation of a Business
Combination meeting certain defined parameters.
6) Subsequent events
On October 31, 2006, the Company acquired all of the issued and
outstanding shares of Eastman SE from Eastman Chemical. Immediately
subsequent to the acquisition the Company changed its name to
FutureFuel Corp. ("FutureFuel") and Eastman SE changed its name to
FutureFuel Chemical Company ("FutureFuel Chemical").
For accounting purposes, the transaction is deemed to be a reverse
acquisition and FutureFuel Chemical has been treated as the
accounting acquirer and continuing reporting entity that acquired
FutureFuel. Accordingly, the October 31, 2006 acquisition will be
accounted for as a capital transaction or, more specifically, the
issuance of stock by FutureFuel Chemical for the net monetary assets
of FutureFuel accompanied by a recapitalization and reorganization
with FutureFuel assuming the role of the reporting entity and
FutureFuel Chemical assuming the role of FutureFuel's operating
subsidiary.
119
INTERIM FINANCIAL STATEMENTS
The following sets forth our unaudited balance sheet as at March 31,
2007 and our audited balance as at December 31, 2006 and the unaudited
statements of operations and statements of cash flows for the three-month
periods ending March 31, 2007 and March 31, 2006.
FUTUREFUEL CORP.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 AND DECEMBER 31, 2006
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
3/31/07 12/31/06
---------------- ----------------
ASSETS
Cash and cash equivalents.......................................... $ 61,818 $ 63,129
Accounts receivable, net of allowances of $42 and $42, respectively 20,649 23,824
Inventory.......................................................... 9,384 11,591
Current deferred income tax asset.................................. 1,102 68
Prepaid expenses................................................... 927 1,248
Other current assets............................................... 1,385 3,131
---------------- ----------------
Total current assets........................................... 95,265 102,991
Property, plant and equipment, net................................. 99,754 97,761
Noncurrent deferred income tax asset............................... 409 381
Restricted cash and cash equivalents............................... 3,164 3,127
Other assets....................................................... 3,086 2,764
---------------- ----------------
Total noncurrent assets........................................ 106,413 104,033
---------------- ----------------
TOTAL ASSETS............................................................ $ 201,678 $ 207,024
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................... $ 10,330 $ 12,945
Accounts payable - related parties................................. 207 112
Income taxes payable............................................... 984 2,264
Accrued expenses and other current liabilities..................... 2,392 1,717
Accrued expenses and other current liabilities - related parties... 63 40
---------------- ----------------
Total current liabilities...................................... 13,976 17,078
Other noncurrent liabilities....................................... 551 545
Noncurrent deferred income taxes................................... 23,586 23,884
---------------- ----------------
Total noncurrent liabilities................................... 24,137 24,429
---------------- ----------------
TOTAL LIABILITIES....................................................... 38,113 41,507
Preferred stock, $0.0001 par value, 5,000,000 shares authorized,
none issued and outstanding...................................... - -
Common stock, $0.0001 par value, 75,000,000 shares authorized,
26,700,000 issued and outstanding................................ 3 3
Additional paid in capital......................................... 162,995 162,995
Retained earnings.................................................. 567 2,519
---------------- ----------------
Total stockholders' equity..................................... 163,565 165,517
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 201,678 $ 207,024
================ ================
The accompanying notes are an integral part of these financial statements.
120
FUTUREFUEL CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FIRST THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST THREE MONTHS
ENDED MARCH 31,
-----------------------------------
2007 2006
--------------- ---------------
Revenues........................................... $ 37,506 $ 29,937
Revenues - related parties......................... - 5,117
Cost of goods sold................................. 39,557 26,510
Cost of goods sold - related parties............... - 5,117
Distribution....................................... 296 306
--------------- ---------------
Gross profit (loss)........................... (2,347) 3,121
Selling, general and administrative expenses....... 792 1,341
Selling, general and administrative expenses -
related parties.................................. 30 -
Research and development expenses.................. 1,024 770
--------------- ---------------
1,846 2,111
--------------- ---------------
Income (loss) from operations...................... (4,193) 1,010
Interest income.................................... 940 -
Interest expense................................... (5) -
--------------- ---------------
935 -
--------------- ---------------
Income (loss) before income taxes.................. (3,258) 1,010
Provision (benefit) for income taxes............... (1,306) 243
--------------- ---------------
Net income (loss).................................. $ (1,952) $ 767
=============== ===============
Earnings (loss) per common share
Basic......................................... $ (0.07) $ 0.03
Diluted....................................... $ (0.07) $ 0.02
Weighted average shares outstanding
Basic......................................... 26,700,000 26,700,000
Diluted....................................... 26,700,000 31,818,772
The accompanying notes are an integral part of these financial statements.
121
FUTUREFUEL CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIRST THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(DOLLARS IN THOUSANDS)
FIRST THREE MONTHS ENDED
MARCH 31,
----------------------------
2007 2006
----------- ----------
Cash flows provide by (used in) operating activities
Net income (loss).......................................... $ (1,952) $ 767
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................... 2,339 2,247
Provision (benefit) for deferred income taxes.......... (1,405) 361
Change in fair value of derivative instruments......... 2,817 -
Losses on disposals of fixed assets.................... 44 31
Noncash interest expense............................... 5 -
Changes in operating assets and liabilities:
Accounts receivable.................................... 3,175 (982)
Inventory.............................................. 2,819 (585)
Prepaid expenses....................................... 320 (37)
Other assets........................................... (322) (23)
Accounts payable....................................... (2,615) (878)
Accounts payable - related parties..................... 95 -
Income taxes payable................................... (1,278) -
Accrued expenses and other current liabilities......... 719 (1,109)
Accrued expenses and other current liabilities -
related parties...................................... 23 -
Other noncurrent liabilities........................... - 269
----------- ----------
Net cash provided by (used in) operating activities 4,784 61
----------- ----------
Cash flows provided by (used in) investing activities
Restricted cash............................................ (37) -
Collateralization of derivative instruments................ (1,071) -
Capital expenditures....................................... (4,937) (2,097)
----------- ----------
Net cash provided by (used in) investing activities.... (6,045) (2,097)
----------- ----------
Cash flows provided by (used in) financing activities
Financing fee.............................................. (50) -
Transfers to parent, net................................... - 2,036
----------- ----------
Net cash provided by (used in) financing activities.... (50) 2,036
----------- ----------
Net change in cash and cash equivalents......................... (1,311) -
Cash and cash equivalents at beginning of period................ 63,129 -
----------- ----------
Cash and cash equivalents at end of period...................... $ 61,818 $ -
=========== ==========
Cash paid for interest $ - $ -
=========== ==========
Cash paid for taxes $ 1,380 $ -
=========== ==========
The accompanying notes are an integral part of these financial statements.
122
NOTES TO FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1) Nature of operations and basis of presentation
Eastman SE, Inc. ("Eastman SE") was incorporated under the laws of
the state of Delaware on September 1, 2005 and subsequent thereto
operated as a wholly-owned subsidiary of Eastman Chemical Company
("Eastman Chemical") through October 31, 2006. Eastman SE was
incorporated for purposes of effecting a sale of Eastman Chemical's
manufacturing facility in Batesville, Arkansas (the "Batesville
Plant").
Viceroy Acquisition Corporation ("Viceroy") was incorporated under
the laws of the state of Delaware on August 12, 2005 to serve as a
vehicle for the acquisition by way of asset acquisition, merger,
capital stock exchange, share purchase or similar transaction
("Business Combination") of one or more operating businesses in the
oil and gas industry. On July 12, 2006 Viceroy completed an equity
offering.
On October 31, 2006, Viceroy acquired all of the issued and
outstanding shares of Eastman SE from Eastman Chemical. Immediately
subsequent to the acquisition, Viceroy changed its name to FutureFuel
Corp. ("FutureFuel") and Eastman SE changed its name to FutureFuel
Chemical Company ("FutureFuel Chemical").
For accounting purposes, the transaction is deemed to be a reverse
acquisition and FutureFuel Chemical has been treated as the
accounting acquirer and continuing reporting entity that acquired
FutureFuel.
Through October 31, 2006, the operations of the Batesville Plant were
included in the consolidated financial statements of Eastman
Chemical. Accordingly, the accompanying statement of operations and
related statement of cash flows for the three months ended March 31,
2006 have been prepared from Eastman Chemical's historical accounting
records and is presented on a carve-out basis to include the results
of operations and cash flows applicable to Eastman SE through March
31, 2006. As a result of the lack of capital structure of Eastman SE
prior to October 31, 2006, the net investment of the parent has been
presented in lieu of stockholder's equity.
Subsequent to October 31, 2006, the consolidated financial statements
present the combined operations of FutureFuel and FutureFuel
Chemical.
The accompanying unaudited consolidated financial statements have
been prepared by FutureFuel in accordance and consistent with the
accounting policies stated in FutureFuel's 2006 audited financial
statements on Form 10 and should be read in conjunction with the 2006
audited consolidated financial statements of FutureFuel on Form 10.
In the opinion of FutureFuel, all normal recurring adjustments
necessary for a fair presentation have been included in the unaudited
consolidated financial statements. The unaudited consolidated
financial statements are presented in conformity with generally
accepted accounting principles ("GAAP") in the United States and, of
necessity, include some amounts that are based upon management
estimates and judgments. Future actual results could differ from such
current estimates. The unaudited consolidated financial statements
include assets, liabilities, revenues and expenses of FutureFuel and
its wholly owned subsidiary, FutureFuel Chemical. Intercompany
transactions and balances have been eliminated in consolidation.
2) Corporate Allocations
The financial statements prior to October 31, 2006 include
allocations of certain corporate services provided by Eastman
Chemical's management, including finance, legal, information systems,
human resources and distribution. Eastman Chemical has utilized its
experience with the business of the Batesville Plant and its judgment
in allocating such corporate services and other support to the
periods prior to October 31, 2006. Costs allocated for such services
were:
123
NOTES TO FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended
March 31:
--------------------------
2007 2006
---------- -----------
Cost of goods sold....................................... $ - $ -
Distribution............................................. - 128
Selling, general and administrative...................... - 1,083
Research and development................................. - (81)
---------- -----------
Total cost and expenses allocated........................ $ - $ 1,130
========== ===========
Allocations were made to costs of goods sold, distribution and
selling, general and administrative expenses primarily based on a
percentage of revenues and allocations to research and development
expenditures were made primarily on actual time and effort incurred,
which management believes represents reasonable allocation
methodologies. These allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if
Eastman SE had been operating as a separate entity.
3) Inventories
The carrying values of inventory were as follows as of:
March 31, December 31,
2007 2006
---------------- -----------------
At first-in, first-out or average cost (approximates current cost)
Finished goods................................................ $ 10,835 $ 10,038
Work-in-process............................................... 1,452 1,794
Raw materials and supplies.................................... 10,556 12,631
---------------- -----------------
22,843 24,463
LIFO reserve.................................................. (13,459) (12,872)
---------------- -----------------
Total inventories............................................. $ 9,384 $ 11,591
================ =================
4) Derivative instruments
The volumes and carrying values of FutureFuel's derivative
instruments were as follows at:
Asset/(Liability)
---------------------------------------------------------------
March 31, 2007 December 31, 2006
----------------------------- ----------------------------
Quantity Fair Quantity Fair
(000 bbls) Market (000 bbls) Market
Long/(Short) Value Long/(Short) Value
------------ ------------ -------------- -----------
Regulated fixed price future commitments, (125) $ (2,534) (250) $ (28)
included in other current assets..........
Regulated options, included in other
current assets............................ (100) $ (731) (100) $ (419)
The margin account maintained with a broker to collateralize these
derivative instruments carried an account balance of $4,650 and
$3,578 at March 31, 2007 and December 31, 2006, and is classified as
other current assets in the consolidated balance sheet. The carrying
values of the margin account and of the derivative instruments are
included in other current assets and comprise the entire account
balance.
124
NOTES TO FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities, including those
associated with related parties, consisted of the following at:
March 31, December 31,
2007 2006
------------ ------------
Accrued employee liabilities....................................... $ 1,264 $ 773
Accrued property, use and franchise taxes.......................... 636 373
Accrued professional fees.......................................... 340 340
Amounts collected on behalf of Eastman Chemical.................... 60 178
Other.............................................................. 155 93
------------ ------------
$ 2,455 $ 1,757
============ ============
6) Borrowings
In March of 2007 FutureFuel Chemical Company entered into a $50
million credit agreement with a commercial bank. The loan is a
revolving facility the proceeds of which may be used for working
capital, capital expenditures and the general corporate purposes of
FutureFuel Chemical Company. The facility terminates in March 2010.
Advances are made pursuant to a borrowing base comprised of 85% of
eligible accounts plus 60% of eligible direct inventory plus 50% of
eligible indirect inventory. Advances are secured by a perfected
first priority security interest in accounts receivable and
inventory. The interest rate floats at the following margins over the
London Interbank Offered Rate ("LIBOR") or base rate based upon the
leverage ratio from time to time.
LEVERAGE BASE RATE LIBOR
RATIO MARGIN MARGIN
----------------- -------------- --------------
> 3 -0.55% 1.70%
> 2 < 3 -0.70% 1.55%
-
> 1 < 2 -0.85% 1.40%
-
< 1 -1.00% 1.25%
There is an unused commitment fee of 0.25% per annum. Beginning
December 31, 2007, and on the last day of each fiscal quarter
thereafter, the ratio of debt to EBITDA may not be less than 1.5:1.
Beginning June 30, 2007, the ratio of total funded debt to EBITDA may
not exceed 3.50:1, reduced to 3.25:1 at March 31, 2008, June 30, 2008
and September 30, 2008, and then 3:1 thereafter. FutureFuel has
guaranteed FutureFuel Chemical Company's obligations under this
credit agreement.
As of March 31, 2007 no borrowings were outstanding under this credit
facility.
7) Provision for income taxes
For the three months ended
March 31,
-----------------------------------
2007 2006
--------------- --------------
Provision (benefit) for income taxes................... $ (1,306) $ 243
Effective tax rate..................................... 40.1% 24.1%
The effective tax rates for the three months ended March 31, 2007 and
2006 reflect FutureFuel's expected tax rate on reported operating
earnings before income tax.
FutureFuel adopted the provisions of Financial Accounting Standards
Board ("FASB") Interpretations No. 48, Accounting for Uncertainty in
Income Taxes ("FIN 48") on January 1, 2007. FutureFuel does not and
has not possessed a liability for unrecognized tax benefits, and, as
a result, did not recognize any change in this liability as a result
of the implementation of FIN 48.
125
NOTES TO FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FutureFuel records interest and penalties net as a component of
income tax expense. As of March 31, 2007, FutureFuel had no accrual
for interest or tax penalties.
FutureFuel and its subsidiary, FutureFuel Chemical, file tax returns
in the U.S. federal jurisdiction and with various state
jurisdictions. FutureFuel was incorporated in 2005 and is subject to
U.S., state and local examinations by tax authorities from 2005
forward. FutureFuel Chemical is subject to the effects of tax
examinations that impact the carry-over basis of its assets and
liabilities. FutureFuel Chemical's carry-over basis of its assets and
liabilities are no longer subject to U.S. federal, state and local
income tax examinations by tax authorities for years before 2001.
8) Earnings per share
The computation of basic and diluted earnings per common share was as
follows for the three months ended March 31:
2007 2006
--------------- ----------------
Net income (loss) available to common stockholders................. $ (1,952) $ 767
Weighted average number of common shares outstanding............... 26,700,000 26,700,000
Effect of warrants................................................. - 5,118,772
Weighted average diluted number of common shares outstanding....... 26,700,000 31,818,772
Basic earnings per share........................................... $ (0.07) $ 0.03
Diluted earnings per share......................................... $ (0.07) $ 0.02
Warrants to purchase 22,500,000 common shares of FutureFuel were not
included in the computation of diluted earnings per share for the
three months ended March 31, 2007 as FutureFuel reported a net loss
for the period and the inclusion of those securities in the
computation would have been antidilutive.
9) Segment information
FutureFuel has determined that is has two reportable segments
organized along product lines - chemicals and biofuels.
Chemicals
FutureFuel's chemicals segment manufactures diversified chemical
products that are sold externally to third party customers and to
Eastman Chemical. This segment comprises two components: "custom
manufacturing" (manufacturing chemicals for specific customers); and
"performance chemicals" (multi-customer specialty chemicals).
Biofuels
FutureFuel's biofuels business segment manufactures and markets
biodiesel. Biodiesel revenues are generally derived in one of two
ways. Revenues are generated under tolling agreements whereby
customers supply key biodiesel feed stocks which FutureFuel then
converts into biodiesel at the Batesville Plant in exchange for a
fixed price processing charge per gallon of biodiesel produced.
Revenues are also generated through the sale of biodiesel to
customers through FutureFuel's distribution network at the Batesville
Plant and through distribution facilities available at a leased oil
storage facility near Little Rock, Arkansas at negotiated prices.
Summary of long-lived assets and revenues by geographic area
All of FutureFuel's long-lived assets are located in the U.S.
Most of FutureFuel's sales are transacted with title passing at the
time of shipment from the Batesville Plant, although some sales are
transacted based on title passing at the delivery point. While many of
126
NOTES TO FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FutureFuel's chemicals are utilized to manufacture products that are
shipped, further processed and/or consumed throughout the world, the
chemical products, with limited exceptions, generally leave the
United States only after ownership has transferred from FutureFuel to
the customer. Rarely is FutureFuel the exporter of record, never is
FutureFuel the importer of record into foreign countries and
FutureFuel is not always aware of the exact quantities of its
products that are moved into foreign markets by its customers.
FutureFuel does track the addresses of its customers for invoicing
purposes and uses this address to determine whether a particular sale
is within or without the United States. FutureFuel's revenues for the
first three months ended March 31 attributable to the United States
and foreign countries (based upon the billing addresses of its
customers) were as follows:
ALL FOREIGN
THREE MONTHS ENDED UNITED STATES COUNTRIES TOTAL
-------------------------------------------- ----------------- ----------------- -------------
March 31, 2007.............................. $ 32,300 $ 5,206 $ 37,506
March 31, 2006.............................. $ 30,382 $ 4,672 $ 35,054
Beginning in 2005, FutureFuel Chemical Company began invoicing
Procter & Gamble International Operations Mexico, D.F. directly, at
which time revenues from Mexico became a material component of total
revenues. Revenues from Mexico account for 13% of total revenues in
for the three months ended March 31, 2006 and 2007. Other than
Mexico, revenues from a single foreign country during the three
months ended March 31, 2006 and 2007 did not exceed 1% of total
revenues.
Summary of business by segment
Three Months Ended March 31:
--------------------------------
2007 2006
------------- --------------
Revenues
Chemicals..................................................... $ 35,654 $ 34,825
Biofuels...................................................... 1,852 229
------------- --------------
Revenues........................................................... $ 37,506 $ 35,054
============= ==============
Segment gross margins
Chemicals..................................................... $ 4,369 $ 3,335
Biofuels...................................................... (6,716) (214)
------------- --------------
Segment gross margins.............................................. (2,347) 3,121
Corporate expenses................................................. (1,846) (2,111)
------------- --------------
Income (loss) before interest and taxes............................ (4,193) 1,010
Interest income.................................................... 940 -
Interest expense................................................... (5) -
Provision for income taxes......................................... 1,306 (243)
------------- --------------
Net income (loss).................................................. $ (1,952) $ 767
============= ==============
Depreciation is allocated to segment costs of goods sold based on
plant usage. The total assets and capital expenditures of FutureFuel
have not been allocated to individual segments as large portions of
these assets are shared to varying degrees by each segment, causing
such an allocation to be of little value.
10) Recently issued accounting standards
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, ("SFAS No. 157") which addresses the measurement of
fair value by companies when they are required to use a fair value
measure for recognition or disclosure purposes under GAAP. SFAS No.
157 provides a common definition of fair value to be used throughout
GAAP which is intended to make the measure of fair value more
consistent and comparable and improve disclosures about those
measures. SFAS No. 157 will be effective for an entity's financial
statements issued for fiscal years beginning after November 15, 2007.
FutureFuel is currently evaluating the effect SFAS No. 157 will have
on its consolidated financial position, liquidity and results of
operations.
127
NOTES TO FINANCIAL STATEMENTS OF FUTUREFUEL CORP.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option
for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115 ("SFAS No. 159). SFAS No. 159
permits companies to choose to measure many financial instruments and
certain other items at fair value at specified election dates. Upon
adoption, an entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each
subsequent reporting date. Most of the provisions apply only to
entities that elect the fair value option. The amendment to SFAS No.
115 Accounting for Certain Investments in Debt and Equity Securities,
however, applies to all entities with available for sale and trading
securities. SFAS No. 159 will be effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007.
FutureFuel is currently evaluating the effect SFAS No. 159 will have
on its consolidated financial position, liquidity and results of
operations.
128
FORWARD LOOKING INFORMATION
This Registration Statement contains or incorporates by reference
"forward-looking statements". When used in this document, the words
"anticipate," "believe," "estimate," "expect," "plan," and "intend" and
similar expressions, as they relate to us, FutureFuel Chemical Company or our
respective management, are intended to identify forward-looking statements.
These forward-looking statements are based on current management assumptions
and are subject to uncertainties and inherent risks that could cause actual
results to differ materially from those contained in any forward-looking
statement. We caution you therefore that you should not rely on any of these
forward-looking statements as statements of historical fact or as guarantees
or assurances of future performance. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include regional, national or global political, economic, business,
competitive, market and regulatory conditions as well as, but not limited to,
the following:
o our board's selection of FutureFuel Chemical Company as a
prospective target business;
o conflicts of interest of our officers and directors;
o potential future affiliations of our officers and directors with
competing businesses;
o the control by our founding shareholders of a substantial interest
in us;
o the highly competitive nature of the chemical and alternative fuel
industries;
o fluctuations in energy prices may cause a reduction in the demand or
profitability of the products or services we may ultimately produce
or offer or which form a portion of our business;
o changes in technology may render our products or services obsolete;
o failure to comply with governmental regulations could result in the
imposition of penalties, fines or restrictions on operations and
remedial liabilities;
o the operations of FutureFuel Chemical Company's biofuels business
may be harmed if the applicable government were to change current
laws and/or regulations;
o our board may have incorrectly evaluated FutureFuel Chemical
Company's potential liabilities;
o our board may have FutureFuel Chemical Company engage in hedging
transactions in an attempt to mitigate exposure to price
fluctuations in petroleum product transactions and other portfolio
positions which may not ultimately be successful; and
o we may not continue to have access to capital markets and commercial
bank financing on favorable terms and FutureFuel Chemical Company
may lose its ability to buy on open credit terms.
Although we believe that the expectations reflected by such forward-looking
statements are reasonable based on information currently available to us, no
assurances can be given that such expectations will prove to have been
correct. All forward-looking statements included in this Registration
Statement and all subsequent oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety
by these cautionary statements. We undertake no obligation to publicly update
or revise any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers are cautioned not to place
undue reliance on any forward-looking statements, which speak only as to their
particular dates.
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ITEM 14. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 16, 2005, we engaged Rothstein, Kass & Company, P.C. to audit
our balance sheet and the related statements of operations, stockholders'
equity and cash flow. On August 30, 2005, Rothstein, Kass & Company, P.C.
issued its audit report on our balance sheet as of August 29, 2005 and the
related statement of operations, stockholders' equity and cash flows for the
period from August 12, 2005 (the date of our incorporation) to August 29,
2005. This audit report was used in connection with our Registration Statement
on Form S-1, which we filed on September 2, 2005 and withdrew on February 14,
2006. When we decided to list with AIM, Rothstein, Kass & Company, P.C.
declined to continue as our auditors because they were unfamiliar with AIM
rules and regulations. As a result, on June 6, 2006 we engaged KPMG LLP to act
as our independent accountants due to their expertise in auditing AIM listed
companies. This change of accountants was approved by our board.
Rothstein, Kass & Company, P.C.'s report on our financial statements did
not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles.
Further, during such time as Rothstein, Kass & Company, P.C. served as our
principal independent accountant, there were not any disagreements between us
and Rothstein, Kass & Company, P.C. on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
130
ITEM 15. - FINANCIAL STATEMENTS AND EXHIBITS
(a) List separately all financial statements filed as part of the
registration statement.
1. FutureFuel Chemical Company's audited Balance Sheets as of December
31, 2005 and December 31, 2006 and Statements of Operations,
Statements of Changes in Stockholders' Equity and Statements of Cash
Flows for the twelve-month periods ended December 31, 2004, December
31, 2005 and December 31, 2006
2. FutureFuel Corp.'s audited Balance Sheets as of December 31, 2005
and October 31, 2006 and Statements of Operations, Statements of
Changes in Stockholders' Equity (Deficit) and Statements of Cash
Flows for the period from August 12, 2005 (Inception) through
October 31, 2006
3. FutureFuel Corp.'s unaudited Balance Sheet as at March 31, 2007 and
audited Balance Sheet as at December 31, 2006 and unaudited
Statements of Operations and Statements of Cash Flows for the
three-month periods ending March 31, 2007 and March 31, 2006.
(b) Exhibits required by Item 601 of Regulation S-K.
2. Acquisition Agreement dated July 21, 2006 between FutureFuel Corp.
and Eastman Chemical Company*
3.1. FutureFuel Corp.'s Certificate of Incorporation*
a. Original Certificate of Incorporation filed on August 12, 2005
b. Amended and Restated Certificate of Incorporation filed on
August 26, 2005
c. Second Amended and Restated Certificate of Incorporation filed
on June 5, 2006
d. Third Amended and Restated Certificate of Incorporation filed
on July 5, 2006
e. Amendment to Certificate of Incorporation filed on October 31,
2006
3.2. FutureFuel Corp.'s Bylaws*
a. Original Bylaws
b. Amendment to Bylaws
4.1. Stock Escrow Agreement dated July 12, 2006 among FutureFuel Corp.,
Capita IRG (Offshore) Limited, St. Albans Global Management, Limited
Partnership, LLLP, Lee E. Mikles as Trustee of the Lee E. Mikles
Gift Trust dated October 6, 1999, Lee E. Mikles as Trustee of the
Lee E. Mikles Revocable Trust dated March 26, 1996, Douglas D.
Hommert as Trustee of the Douglas D. Hommert Revocable Trust, Edwin
A. Levy, Joe C. Leach, Mark R. Miller, RAS LLC, Edwin L. Wahl,
Jeffery H. Call and Ken Fenton*
4.2. Warrant Deed dated July 12, 2006 between FutureFuel Corp. and Capita
IRG (Offshore) Limited*
4.3. Insider Letters dated July 12, 2006 to FutureFuel Corp., CRT Capital
Group LLC and KBC Peel Hunt Ltd from the following persons:*
4.3a Paul Anthony Novelly
4.3b St. Albans Global Management, Limited Partnership, LLLP
4.3c Lee E. Mikles
4.3d Lee E. Mikles as Trustee of the Lee E. Mikles Gift Trust dated
October 6, 1999
131
4.3e Lee E. Mikles as Trustee of the Lee E. Mikles Revocable Trust
dated March 26, 1996
4.3f Douglas D. Hommert
4.3g Douglas D. Hommert as Trustee of the Douglas D. Hommert
Revocable Trust
4.3h Edwin A. Levy
4.3i Joe C. Leach
4.3j Mark R. Miller
4.3k RAS LLC
4.3l William J. Dore
4.3m Thomas R. Evans
4.3n Edwin L. Wahl
4.3o Jeffery H. Call
4.3p Ken Fenton
4.4. Investor Rights Agreement dated July 12, 2006 among FutureFuel
Corp., CRT Capital Group LLC and KBC Peel Hunt Ltd*
4.5. Registration Rights Agreement dated July 12, 2006 among FutureFuel
Corp., St. Albans Global Management, Limited Partnership, LLLP, Lee
E. Mikles as Trustee of the Lee E. Mikles Gift Trust dated October
6, 1999, Lee E. Mikles as Trustee of the Lee E. Mikles Revocable
Trust dated March 26, 1996, Douglas D. Hommert as Trustee of the
Douglas D. Hommert Revocable Trust, Edwin A. Levy, Joe C. Leach,
Mark R. Miller, RAS LLC, Edwin L. Wahl, Jeffery H. Call and Ken
Fenton*
4.6. Lock-in Deed dated July 12, 2006 among FutureFuel Corp., KBC Peel
Hunt Ltd, St. Albans Global Management, Limited Partnership, LLLP,
Lee E. Mikles as Trustee of the Lee E. Mikles Gift Trust dated
October 6, 1999, Lee E. Mikles as Trustee of the Lee E. Mikles
Revocable Trust dated March 26, 1996, Douglas D. Hommert as Trustee
of the Douglas D. Hommert Revocable Trust, Edwin A. Levy, Paul
Anthony Novelly, Lee E. Mikles, Douglas D. Hommert, Thomas R. Evans
and William J. Dore*
10.1. Placing Agreement dated July 12, 2006 among CRT Capital Group LLC,
KBC Peel Hunt Ltd, FutureFuel Corp. and FutureFuel Corp.'s
Directors*
10.2. Offshore Registrar Agreement dated July 12, 2006 between FutureFuel
Corp. and Capita IRG (Offshore) Limited*
10.3. Warrant Solicitation Fee Letter dated July 12, 2006 between
FutureFuel Corp. and CRT Capital Group LLC*
10.4. Storage and Thruput Agreement dated November 1, 2006 between
FutureFuel Chemical Company and Center Point Terminal Company*
10.5. Commodity Trading Advisor Agreement dated November 1, 2006 between
FutureFuel Chemical Company and Apex Oil Company, Inc.*
10.6. Service Agreement dated November 1, 2006 between FutureFuel Corp.
and Pinnacle Consulting, Inc.*
132
10.7. NOBS Supply Agreement dated January 1, 1999 between Eastman
Chemical Company and The Procter & Gamble Manufacturing Company, as
amended October 6, 1999, October 1, 2001, July 10, 2002, April 22,
2003 and June 18, 2003 (portions of the exhibit have been omitted
pursuant to a request for confidential treatment)*
10.8. Custom Manufacturing Agreement dated September 1, 1992 between
Tomen Corporation and Eastman Kodak Company, as amended October 2,
1992, February 1, 1993, March 19, 1993, September 28, 1995, October
30, 1998, May 24, 1999, November 10, 1999, December 12, 2000 and
July 25, 2006 (portions of the exhibit have been omitted pursuant to
a request for confidential treatment)*
10.9. Conversion Agreement dated October 1, 1993 between Tomen Corporation
and Eastman Chemical Company, as amended March 7, 1994, May 13,
1994, May 17, 1994, June 14, 1994, July 19, 1994, August 17, 1994,
February 10, 1995, May 25, 1995, October 15, 1997, March 27, 1998,
June 23, 1998, September 29, 1998, October 30, 1998, November 10,
1999 and July 25, 2006 (portions of the exhibit have been omitted
pursuant to a request for confidential treatment)*
10.10. Credit Agreement dated March 14, 2007 between FutureFuel Chemical
Company and Regions Bank (portions of the exhibit have been omitted
pursuant to a request for confidential treatment)*
10.11. Revolving Credit Promissory Note dated March 14, 2007 executed by
FutureFuel Chemical Company and payable to the order of Regions
Bank*
10.12. Security Agreement -Accounts and Inventory dated March 14, 2007
executed by FutureFuel Chemical Company in favor of Regions Bank*
10.13. Continuing Unlimited Guaranty Agreement dated March 14, 2007
executed by FutureFuel Corp. in favor of Regions Bank*
10.14. Car Subleasing Agreement dated November 1, 2006 between Apex Oil
Company, Inc. and FutureFuel Chemical Company*
10.15. Time Sharing Agreement dated April 18, 2007 between Apex Oil
Company, Inc. and FutureFuel Corp.*
10.16. Omnibus Incentive Plan (filed herewith)
11. Statement re Computation of per Share Earnings (filed herewith)
16. June 22, 2007 Letter from Rothstein, Kass & Company, P.C. to the
Securities and Exchange Commission (filed herewith)
21. Subsidiaries of FutureFuel Corp.*
24. Power of Attorney*
99. Tables contained in Item 1 of the Registration Statement (filed
herewith)
* Previously filed.
133
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized.
FUTUREFUEL CORP.
Date: June 26, 2007 By: /s/ Douglas D. Hommert
-----------------------------
Douglas D. Hommert, Executive
Vice President
134