As filed with the Securities and Exchange Commission on April 24, 2007.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 ....................................................................... 29
Item 2. - Financial Information ............................................................... 38
Item 3. - Properties .......................................................................... 47
Item 4. - Security Ownership of Certain Beneficial Owners and Management ...................... 48
Item 5. - Directors and Executive Officers .................................................... 50
Item 6. - Executive Compensation .............................................................. 53
Item 7. - Certain Relationships and Related Transactions, and Director Independence ........... 58
Item 8. - Legal Proceedings ................................................................... 61
Item 9. - Market Price of and Dividends on Our Common Equity/Related Shareholder Matters ...... 62
Item 10. - Recent Sales of Unregistered Securities ............................................ 64
Item 11. - Description of Securities to be Registered ......................................... 67
Item 12. - Indemnification of Directors and Officers .......................................... 72
Item 13. - Financial Statements and Supplementary Data ........................................ 73
Item 14. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 104
Item 15. - Financial Statements and Exhibits .................................................. 105
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., 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); and (iii) Eastman SE, Inc. became our wholly-owned
subsidiary. 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.
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
1
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 430 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. 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 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 of an acquisition agreement with Eastman Chemical Company on
July 21, 2006.
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
2
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. As a
result of these decreased margins, we determined that it was not in our
shareholders best interest to proceed on an accelerated basis to increase
capacity. However, we intend to continue with 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. Any future expansions of
biodiesel production capacity at the Batesville plant will be dictated by
changing market conditions.
The core infrastructure projects include:
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 rail cars 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 and in Memphis, Tennessee and Port Allen, Louisiana on the
Mississippi 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;
o acquiring a fleet of tanker trucks to transport the biofuels and
feedstocks between the plant and these storage facilities on such
rivers; and
o procuring railcars to transport raw goods to the plant and deliver
biodiesel from the plant to customers.
Construction is in progress for the site infrastructure described above. We
believe that FutureFuel Chemical Company will be able to 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. 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 market conditions dictate. We believe that implementation of the
above strategy will help FutureFuel Chemical Company remain a substantial
participant in the biofuels market.
3
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 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 acquisition (beginning of
business on November 1, 2006) and ending December 31, 2006.
The following table sets forth the Batesville plant's: (i) revenues from
external customers for the years ended December 31, 2006, 2005 and 2004; (ii)
net income (loss) for the years ended December 31, 2006, 2005 and 2004; and
(iii) total assets at December 31, 2006, 2005 and 2004.
(Dollars in thousands)
Revenues
from
External Net Income Total
Period Customers (Loss) Assets
------------------------------------- ----------- ----------- -----------
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 audited 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.
4
(Dollars in thousands)
Total
Revenues Revenues Revenues
from from from
Chemical Biofuels External
Period Segment Segment Customers
------------------------------------- ----------- ----------- -----------
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.
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 430
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. 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
5
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 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.
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 when market conditions
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).
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 and revenue of $13,340,000 for the
year ended December 31, 2006.
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. Under current and projected
market conditions, there are significant amounts of unsatisfied demand
6
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; and
o being usable by existing diesel engines while extending their useful
lives.
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.
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 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. Beginning in the
second 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. A small specialty market uses these pellets in
specially-designed outdoor barbeque grills. Market analysis conducted by
FutureFuel Chemical Company indicates a growing demand for premium fuel pellets
in residential heating applications. 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. 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. 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 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. 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.
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. The technology is
7
developmental and exists in pilot configurations where testing is ongoing. 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. 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.
Ethanol today is produced in the United States mostly from sugars or
starches obtained from fruits and grains, corn being the predominant raw
material. In contrast, cellulosic ethanol is obtained from cellulose, the main
component of wood, straw and plants. 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
8
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.
The production of cellulosic ethanol by FutureFuel Chemical Company
through the biochemical route is in the research and development stage.
FutureFuel Chemical Company has entered into discussions with various parties to
develop some of the necessary technology for the commercial production of
cellulosic ethanol. 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 39 billion gallons in the United States, or 22% of all ground
transportation fuel consumed that year, and 228 billion gallons globally. 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;
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.
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.
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.
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.
9
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 that 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.
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.
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.
Estimated Gallons of Biodiesel Produced in the United States
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE SOURCE DOCUMENT]
0.5 2.0 5.0 15.0 20.0 25.0 75.0
1999 2000 2001 2002 2003 2004 2005
The United States Department of Agriculture estimates that biodiesel production
reached 245 million gallons in 2006.
10
As of January 31, 2007, the National Biodiesel Board listed 105 operating
biodiesel facilities in the United States, including FutureFuel Chemical
Company, with a combined estimated capacity of 864 million gallons per year.
Furthermore, the Board projected that 77 new facilities were under construction
and 8 existing plant expansions were underway for a total of approximately 1.7
billion gallons per year of new capacity by mid-2008. According to the National
Biodiesel Board, biodiesel is available nationwide. As of November 1, 2006, it
could be purchased in the U.S. directly from biodiesel producers and marketers,
more than 1,259 biodiesel distributors or at 1,016 retail pumping stations.
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. 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
11
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.
[Set forth here is a chart that sets forth the spot prices of one gallon of low
sulfur No. 2 petrodiesel in the U.S. Gulf Coast during each trading day of 2006.
The following table contains the plot points, at approximate 14- or 15-day
intervals, for the chart.]
------------------------------------------------------
U.S. GULF COAST NO. 2 DIESEL LOW SULFUR SPOT PRICE FOB
------------------------------------------------------
------------------------------------------------------
PRICE IN
------------------------------------------------------
DATE DOLLARS
------------------------------------------------------
Jan 03, 2006 1.7774
------------------------------------------------------
Jan 18, 2006 1.7255
------------------------------------------------------
Feb 03, 2006 1.8075
------------------------------------------------------
Feb 17, 2006 1.768
------------------------------------------------------
Mar 03, 2006 1.9165
------------------------------------------------------
Mar 17, 2006 1.868
------------------------------------------------------
Apr 03, 2006 1.9395
------------------------------------------------------
Apr 18, 2006 2.1925
------------------------------------------------------
May 03, 2006 2.1125
------------------------------------------------------
May 18, 2006 2.059
------------------------------------------------------
Jun 02, 2006 2.212
------------------------------------------------------
Jun 19, 2006 2.018
------------------------------------------------------
Jul 05, 2006 2.2137
------------------------------------------------------
Jul 18, 2006 2.27
------------------------------------------------------
Aug 03, 2006 2.3613
------------------------------------------------------
Aug 18, 2006 2.2015
------------------------------------------------------
Sep 05, 2006 1.9785
------------------------------------------------------
Sep 18, 2006 1.712
------------------------------------------------------
Oct 03, 2006 1.6785
------------------------------------------------------
Oct 18, 2006 1.7075
------------------------------------------------------
Nov 03, 2006 1.7146
------------------------------------------------------
Nov 17, 2006 1.73
------------------------------------------------------
Dec 04, 2006 1.8515
------------------------------------------------------
Dec 18, 2006 1.785
------------------------------------------------------
Dec 29, 2006 1.743
------------------------------------------------------
Source: Department of Energy-http//www.eia.doe.gov/oil_gas/petroleum/info_glance
/distillate.html (Diesel Spot Prices - History XLS file)
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. The markets for animal fats and waste greases in the
United States and worldwide are smaller and less liquid than those for vegetable
oils. 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. In the United States, soybean oil comprises the largest
percentage of the overall vegetable market, and is also the primary feedstock
oil for producing biodiesel. 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.
12
[Set forth here is a chart that sets forth the closing spot price of soybean oil
during each trading day of 2006. The following table contains the plot points,
at approximate 14- or 15-day intervals, for the chart.]
----------------------------------------------------
USDA CRUDE SOYBEAN OIL SPOT PRICE PER POUND/ILLINOIS
----------------------------------------------------
----------------------------------------------------
PRICE PER
----------------------------------------------------
POUND
----------------------------------------------------
DATE DOLLARS
----------------------------------------------------
Jan 03, 2006 0.2271
----------------------------------------------------
Jan 18, 2006 0.2078
----------------------------------------------------
Feb 03, 2006 0.2228
----------------------------------------------------
Feb 17, 2006 0.2295
----------------------------------------------------
Mar 03, 2006 0.2466
----------------------------------------------------
Mar 17, 2006 0.2286
----------------------------------------------------
Apr 03, 2006 0.2226
----------------------------------------------------
Apr 18, 2006 0.227
----------------------------------------------------
May 03, 2006 0.2517
----------------------------------------------------
May 18, 2006 0.2482
----------------------------------------------------
Jun 02, 2006 0.2468
----------------------------------------------------
Jun 19, 2006 0.2345
----------------------------------------------------
Jul 05, 2006 0.2557
----------------------------------------------------
Jul 18, 2006 0.256
----------------------------------------------------
Aug 03, 2006 0.2597
----------------------------------------------------
Aug 18, 2006 0.2417
----------------------------------------------------
Sep 05, 2006 0.2372
----------------------------------------------------
Sep 18, 2006 0.2379
----------------------------------------------------
Oct 03, 2006 0.2266
----------------------------------------------------
Oct 18, 2006 0.2532
----------------------------------------------------
Nov 03, 2006 0.2706
----------------------------------------------------
Nov 17, 2006 0.2766
----------------------------------------------------
Dec 04, 2006 0.2797
----------------------------------------------------
Dec 18, 2006 0.2671
----------------------------------------------------
Dec 29, 2006 0.2826
----------------------------------------------------
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(cent)
per pound, a 26% increase in 59 days. One gallon of biodiesel requires
approximately 7.4 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. The
5.94(cent) 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 and at present can be acquired at
substantial discounts to soybean oil. 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.
Assuming the sales price of biodiesel approximated the price of
petrodiesel plus the $1.00 per gallon federal blending credit, that feedstock
costs equaled the price of soybean oil and that production costs equaled $0.50
per gallon, biodiesel margins for 2006 would be as set forth in the following
chart.
13
[Set forth here is a chart that sets forth biodiesel margins for each trading
day of 2006. The following table contains the plot points, at approximate 14- or
15-day intervals, for the chart.]
----------------------------------------------
HYPOTHETICAL BIODIESEL MARGIN PER GALLON
----------------------------------------------
----------------------------------------------
DATE MARGIN
----------------------------------------------
1/3/2006 0.5969
----------------------------------------------
1/18/2006 0.6878
----------------------------------------------
2/3/2006 0.6588
----------------------------------------------
2/17/2006 0.5697
----------------------------------------------
3/3/2006 0.5917
----------------------------------------------
3/17/2006 0.6764
----------------------------------------------
4/3/2006 0.7923
----------------------------------------------
4/18/2006 1.0127
----------------------------------------------
5/3/2006 0.7499
----------------------------------------------
5/18/2006 0.7223
----------------------------------------------
6/2/2006 0.8857
----------------------------------------------
6/19/2006 0.7827
----------------------------------------------
7/5/2006 0.8215
----------------------------------------------
7/18/2006 0.8756
----------------------------------------------
8/3/2006 0.9395
----------------------------------------------
8/18/2006 0.9129
----------------------------------------------
9/5/2006 0.7232
----------------------------------------------
9/18/2006 0.4515
----------------------------------------------
10/3/2006 0.5017
----------------------------------------------
10/18/2006 0.3338
----------------------------------------------
11/3/2006 0.2122
----------------------------------------------
11/17/2006 0.1832
----------------------------------------------
12/4/2006 0.2817
----------------------------------------------
12/18/2006 0.3085
----------------------------------------------
12/29/2006 0.1518
----------------------------------------------
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.
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;
14
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.
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.
[The printed version contains a chart that illustrates the biodiesel
manufacturing process, from the feedstock (which may be low or high in free
fatty acids) and including the chemical reaction step (with the
transesterification and esterification processes), the separation step
(resulting in glycerin and biodiesel) and the polishing step (resulting in
biodiesel and waste to be disposed of).]
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.
15
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(cent) 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 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
16
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(cent) 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 children's
Bus Program 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.
USDA grant program agricultural Renewable In 2005, the U.S. Department of
producers and Energy Agriculture's Office of Rural
small Systems and Development made available
businesses Energy $22.8 million in competitive grant
Efficiency funds and guaranteed loans for the
Improvements purchase of renewable energy systems
Grant 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.
17
Federal Agency
that
Administers/ Type of Who Receives Commonly
Oversees Incentive Incentive Known As Summary
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.
Approximately 31 states provide either user or producer incentives for
biodiesel. Several states provide both types of incentives. 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 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
December 31, 2006, only 17 biodiesel producers had achieved this quality
standard). 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. 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.
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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 and other private-sector technology providers. 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. 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.
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. 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
19
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 $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 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
20
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. 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. The crude form of glycerin derived directly from
biodiesel processing has little or no value unless purified to an industrial
grade quality. Many small biodiesel producers lack this purification capability
and we believe that crude glycerin has become a disposal issue for many of these
producers. 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. Routine production of refined glycerin is expected to be
established at such time as we identify commercially viable opportunities.
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 $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 $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 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.
21
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
FutureFuel Chemical Company manages its inventory levels to control the
backlog of products depending on customers' needs. In areas where FutureFuel
Chemical Company is the single source of supply, or competitive forces or
customers' needs dictate, FutureFuel Chemical Company may carry additional
inventory to meet customer requirements.
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 eight additional degreed professionals with an
average experience of over 20 years in the chemical industry.
The Batesville workforce comprises approximately 424 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,
22
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
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 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
2006 research and development expense generally reflects 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.
23
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
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
24
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 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.
25
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.
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. 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 last three fiscal years attributable to the United
States and foreign countries (based upon the billing addresses of its customers)
were as follows:
26
(Dollars in thousands)
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
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, 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.
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 29
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.
27
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.
28
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 864 million gallons per year
of biodiesel production capacity in the United States, with another 1.7 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
29
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.
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
30
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.
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
31
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.
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.
32
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 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.
33
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.
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.
34
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
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
35
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 49 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.
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
36
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.
Our management has 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 may
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.
37
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 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 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 which are included
elsewhere in this Registration Statement. 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.
(Dollars in thousands, except per share amounts)
Item 2006 2005 2004
------------------------------------------------------ --------- --------- ---------
Operating revenues ................................... $ 150,770 $ 119,539 $ 144,157
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)
Total assets ......................................... $ 207,024 $ 114,500 $ 118,164
Long-term obligations ................................ $ 24,429 $ 24,830 $ 25,105
Cash dividends per common share ...................... $ -- $ -- $ --
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)
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
38
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
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. 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 29.
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" at page 103
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.
39
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 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, 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
40
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 were made primarily based
on a percentage of revenues, which we believe represents a reasonable allocation
methodology. 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.
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.
41
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%.
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.
42
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.
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.
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 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)
See our audited consolidated statements of cash flows for the years ended
December 31, 2006, 2005 and 2004 contained elsewhere herein for a description of
the sources and uses of such cash.
The Company's net cash provided by (used in) operating activities,
investing activities and financing activities for the ten months ended October
31, 2006 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
43
See our audited statements of cash flows for the ten months ended October 31,
2006 and for the period from August 12, 2005 through December 31, 2005 contained
elsewhere herein for a description of the sources and uses of such cash.
The following are FutureFuel Chemical Company's material commitments for
capital expenditures as of December 31, 2006.
(Dollars in thousands)
General Purpose of the Commitment Amount
------------------------------------------------------------------------------- -------
Construction of storage at the Batesville facility ............................ $ 3,796
Improvements to materials handling capabilities at the Batesville facility .... 177
Implementation of an enterprise resource planning system ...................... 650
-------
Total ......................................................................... $ 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 -070% 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
$3,127,000 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
44
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.
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 audited consolidated financial
statements included elsewhere herein. This activity was captured on our balance
sheet 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 ........... $ 31,718 $ 31,551 $ 111 $ 56 $ --
Other long-term liabilities .... $ -- $ -- $ -- $ -- $ --
Subsequent to December 31, 2006, FutureFuel Chemical Company entered into the
$50 million credit agreement with Regions Bank described above. As of March 31,
2007, FutureFuel Chemical Company had not borrowed under such credit facility.
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 of Statement 133 on Derivative
Instruments and Hedging Activities. Under these standards, the accounting for
45
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, the fair
value of FutureFuel Chemical Company's derivative instruments was a net
liability in the amount of $447,000.
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
Adverse Percentage
Volume(a) Change in Change in Change in
Item Requirements Units 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.
46
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.
47
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
Amount of Percent of Amount of Amount of Common
Beneficial Common Beneficial Percent of Beneficial Stock and
Name and Address of Beneficial 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%
Morstan Nominees Limited, 25
Cabot Square, Canary Wharf,
London E14 4QA, UK ............... 1,352,241 5.1% 974,099 4.3% 2,326,340 4.7%
N.C.B. Trust Limited, Citigroup
Centre, Canada Square, Canary
Wharf, London E14 5LB, U.K ....... 1,292,200 4.8% 1,155,000 5.1% 2,447,200 5.0%
----------
(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.
(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.
48
Common Stock Warrants Fully Diluted
----------------------- ----------------------- ------------------------
Percent of
Amount of Percent of Amount of Amount of Common
Beneficial Common Beneficial Percent of Beneficial Stock and
Name and Address of Beneficial 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%
William J Dore ....................... 109,375 0.4% 109,375 0.5% 218,750 0.4%
Richard L Knowlton ................... -- -- -- -- -- --
Paul G Lorenzini ..................... -- -- -- -- -- --
All directors and executive officers .. 10,145,625 38.0% 5,420,625 24.1% 15,566,250 31.6%
----------
(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
49
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 2007
Edwin A. Levy .............................................. 70 2005 2008
Thomas R. Evans ............................................ 52 2006 2008
William J. Dore(a) ......................................... 64 2006 2007
Richard L. Knowlton ........................................ 74 2007 2009
Paul G. Lorenzini .......................................... 67 2007 2009
----------
(a) Mr. Dore has tendered his resignation as a director effective June 1,
2007.
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, 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
50
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. 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 has been a
director of Traffix, Inc. since November 1995, and he currently serves as a
member of its audit committee and stock options committee. He is also 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.
William J. Dore has been a member of our board since May 2006. Since 1973, Mr.
Dore has served as chairman of the board and chief executive officer of Global
Industries, Ltd., a worldwide organization of over 3,000 employees which
operates one of the largest fleet of marine construction assets in the world.
Mr. Dore was formerly president of the Association of Diving Contractors and the
Offshore Pipeline Contractors Association, and a former director of the National
Ocean Industries Association. Mr. Dore currently serves on the Louisiana Public
Affairs Research Council board of directors, the Horatio Alger Association board
of directors, the M. D. Anderson Center's board of visitors, and the LSU Health
Sciences Center advisory board.
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.
51
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 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.
52
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 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 or directors or to the directors of our subsidiaries. This
policy 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.
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 or of the executive officers of
FutureFuel Chemical Company, except as described below. We do not currently
provide any compensation (other than reimbursement of expenses) to any of our
executive officers. For FutureFuel Chemical Company, the current elements of our
compensation program include base salary and certain retirement, insurance and
other benefits generally available to all employees.
We have formed a remuneration committee of our board, which will determine
compensation arrangements for our executive officers and the executive officers
of FutureFuel Chemical Company going forward. We expect our remuneration
committee will seek to establish a compensation program for executive officers
of the Company and of FutureFuel Chemical Company 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 an omnibus incentive plan expected to be adopted during 2007.
Cash Salaries and Bonuses
At this time, we have determined that we will not pay a salary to those
executive officers listed in the Summary Compensation Table who are our
executive officers (i.e., Messrs. Novelly, Mikles and Hommert), although such
policy may change in the future. Each of those executive officers 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
the executive officers of FutureFuel Chemical Company who were employees of
Eastman Chemical Company, 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
and for the executive officers of FutureFuel Chemical Company 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 program will apply to certain key executives of
FutureFuel Chemical Company in addition to the executives whose compensation is
described elsewhere in this Registration Statement.
53
Omnibus Incentive Plan
We intend to adopt an omnibus incentive plan, subject to approval of our
shareholders. The purpose of the plan will be 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.
We expect that the plan will contain the following provisions, among others,
although the final omnibus incentive plan may contain provisions different from
those set forth below.
We expect that the plan will authorize us to issue stock options
(including incentive stock options and nonqualified stock options), stock awards
and stock appreciation rights.
We expect that eligible participants will include: (i) members of our
board of directors; (ii) regular, active employees of us or of any of our
subsidiaries; 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.
We expect that stock awards will be limited to our common stock, which may
be shares reacquired by us, including shares purchased in the open market, or
authorized but un-issued shares. We expect that stock awards will be limited to
10% of the issued and outstanding shares of our common stock in the aggregate.
We expect that 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 compensation committee (the "Administrator"). 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 would become effective upon its approval by our shareholders and
would continue in effect for a term of ten years thereafter unless amended and
extended by us or unless earlier terminated.
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 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).
54
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 final 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.
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 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
55
Owned by the Founding Shareholders" at page 49. 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
We do not provide life insurance or other employee benefits for our
executive officers. The executive officers of FutureFuel Chemical Company
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.
The Remuneration Committee
Our remuneration committee currently consists of Mr. Levy, Mr. Evans and
Mr. Dore. 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 ss.162(m) of the Internal Revenue Code of 1986,
as amended.
Summary Compensation Table
To date, we have not paid any compensation (in any form) to any of our
executive officers or directors. See the discussion above. FutureFuel Chemical
Company's principal executive officer, principal financial officer and other
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 $ 0 $ 0 $ 0 $ 0
Lee E. Mikles(c) Chief executive officer $ 0 $ 0 $ 0 $ 0
Douglas D. Hommert(c) Executive vice president, secretary and treasurer $ 0 $ 0 $ 0 $ 0
Randall W. Powell(a) President and chief operating officer $ 36,538 $ 0 $ 1,180 $ 37,718
Benjamin Ladd(a) Chief financial officer $ 23,750 $ 40,000 $ 0 $ 63,750
David Baker(a) Vice president - manufacturing operations $ 24,849 $ 0 $ 1,548 $ 26,397
Gary Hess(a) Vice president - commercial operations $ 24,846 $ 0 $ 1,548 $ 26,394
----------
(a) Executive officers of FutureFuel Chemical Company. Only includes salary
paid since November 1, 2006, the date that we acquired FutureFuel Chemical
Company. Prior to such date, Messrs. Powell, Baker and Hess were employed
by Eastman Chemical Company. Compensation paid by Eastman Chemical Company
to Messrs. Powell, Baker and Hess have not been included in this Summary
Compensation Table. Prior to November 1, 2006, Mr. Ladd was employed by
St. Albans Global Management, Limited Partnership, LLLP, an affiliate of
Mr. Novelly. Compensation paid by St. Albans Global Management, Limited
Partnership, LLLP has not been included in this Summary Compensation
Table.
(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 year with
respect to life and disability insurance for the benefit of the named
person.
(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.
56
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 non-executive directors, and the committee is
chaired by Mr. Dore.
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.
57
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.
58
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, 2008, 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).
59
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 49 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 58 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
William J. Dore
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.
60
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.
61
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 - _________, 2007
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
62
(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 97 and 96
holders of record, respectively, on March 31, 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).
63
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 in an offering 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.
Underwriters and Other Purchasers
The underwriters in the offering were KBC Peel Hunt Ltd and CRT Capital
Group, LLC, who sold 16,875,000 units to the public. 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.
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.
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;
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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.
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.
65
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.
(b) Prior to purchase price adjustments. After purchase price adjustments, the
amount was $71,159. See note 1 to our 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 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.
66
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
67
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.
68
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 Expires
-------------------------------------------------------------- ----- -------
Paul A. Novelly .............................................. C 2009
Lee E. Mikles ............................................... B 2008
Douglas D. Hommert ........................................... A 2007
Edwin A. Levy ................................................ B 2008
Thomas R. Evans .............................................. B 2008
William J. Dore .............................................. A 2007
Richard L. Knowlton .......................................... C 2009
Paul G. Lorenzini ............................................ C 2009
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.
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
69
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 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.
70
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.
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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 ss.174 of the Delaware
General Corporation Law.
72
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
73
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 ............................................ 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 ............................................... $ 13,057 $ 7,940
Income taxes payable ........................................... 2,264 --
Accrued expenses and other current liabilities ................. 1,757 5,657
-------- --------
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.
74
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 ................................... $ 150,770 $ 119,539 $ 144,157
Cost of goods sold ......................... 136,176 103,659 146,309
Distribution ............................... 1,291 1,604 1,499
------------ ------------ ------------
Gross profit (loss) ................... 13,303 14,276 (3,651)
Selling, general and administrative expenses 6,247 7,662 10,854
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.
75
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 ............................................ 5,117 (57) 1,102
Income taxes payable ........................................ 2,264 -- --
Accrued expenses and other current liabilities .............. (3,900) (129) 7
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.
76
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, 2003 ..... -- $ -- $ -- $ -- $ 107,933 $ 107,933
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.
77
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.
78
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 primarily based on a percentage of revenues, which
management believes represents a reasonable allocation methodology. 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.
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.
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
79
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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:
80
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.
81
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.
82
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 .............................................. $ 11,832 $ 7,405
Raw materials and supplies .................................. 12,631 9,842
-------- --------
24,463 17,247
LIFO reserve ................................................ (12,872) (12,417)
-------- --------
Total inventories ........................................... $ 11,591 $ 4,830
======== ========
83
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 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
======== ========
84
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)
========= ========= =========
85
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
liabilities .......................... (45) -- --
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.
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
86
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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.
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.
87
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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.
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.
88
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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
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.
89
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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
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.
90
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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
=========
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.
91
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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
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
92
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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, 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.
93
Notes to the Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share or unit amounts, and as noted)
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.
94
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
95
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.
96
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,
10 months 2005
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.
97
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)
Total
Common stock Additional Called-up stockholders'
----------------------- paid-in share capital Retained equity
Shares Amount capital held in 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.
98
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,
10 months 2005
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.
99
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.
100
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
101
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.
102
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.
103
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.
104
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
(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
4.3e Lee E. Mikles as Trustee of the Lee E. Mikles Revocable
Trust dated March 26, 1996
4.3f Douglas D. Hommert
105
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.
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,
106
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.
11. Statement re Computation of per Share Earnings
21. Subsidiaries of FutureFuel Corp.
24. Power of Attorney
107
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
FUTUREFUEL CORP.
Date: April 23, 2007 By: /s/ Douglas D. Hommert
------------------------------------
Douglas D. Hommert, Executive
Vice President
108
APPENDIX
Pages 12, 13 and 14 of this Registration Statement contain a Performance
Graph. The information contained within the graph is presented in a tabular
format immediately following the graph.