FutureFuel Corp. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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√
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2008
or
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from _____________ to
______________
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Commission
file number: 0-52577
FUTUREFUEL
CORP.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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20-3340900
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(State
or Other Jurisdiction of Incorporation or Organization)
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(IRS
Employer Identification No.)
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8235
Forsyth Blvd., Suite 400
Clayton,
Missouri 63105
(Address
of Principal Executive Offices)
(805)
565-9800
(Registrant’s
Telephone Number)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
Of Each Class
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Name
Of Each Exchange On Which Registered
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n/a
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n/a
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes No √
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes
No √
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes √ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filed” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer
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Accelerated
filer √
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Non-accelerated
filer (Do not check if a smaller
reporting company)
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Smaller
reporting
company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes No √
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. $90,831,900.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 28,190,300.
General
Development of the Business Since January 1, 2008
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 of one or more operating
businesses in the oil and gas industry. 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. These 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. On July 21, 2006, we entered into
an acquisition agreement with Eastman Chemical Company to acquire its
wholly-owned subsidiary, Eastman SE, Inc., a chemical manufacturer which had
just launched a biobased products platform. Our shareholders approved
the acquisition of Eastman SE, Inc. on October 27, 2006. On
October 31, 2006, the acquisition of Eastman SE, Inc. was consummated
(effective after the close of business on that day) and 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.
As part
of our initial offering in July 2006, we agreed to use our reasonable commercial
efforts to maintain our listing on AIM until at least July 12,
2008. However, because the trading of our shares and warrants on AIM
was limited and a market for our shares and warrants had been developed in the
United States, we recommended to our shareholders that they approve the
cancellation of admission of our securities to AIM. Our shareholders
approved such cancellation on June 24, 2008 and admission of our shares and
warrants to AIM was canceled on July 14, 2008.
In
connection with such cancellation, a market maker applied to have our shares of
common stock quoted on the Over-the-Counter Bulletin Board (“OTCBB”). The
OTCBB is an electronic trading service offered by the National Association of
Security Dealers (“NASD”)
that shows real-time quotes, last sale prices and volume information for
over-the-counter equity securities. The NASD approved the application
and our shares of common stock began to be quoted on the OTCBB on July 11,
2008. Since our warrants must be in certificated form for the reasons
set forth below in Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities -- Market
Information, our warrants do not qualify for quotation on the
OTCBB. As such, our warrants are not listed or quoted on any
established exchange.
FutureFuel
Chemical Company
FutureFuel
Chemical Company is a Delaware corporation incorporated on September 1,
2005 under the name Eastman SE, Inc. It owns approximately 2,200
acres of land six miles southeast of Batesville in north central Arkansas
fronting the White River. Approximately 500 acres of the site are
occupied with batch and continuous manufacturing facilities, laboratories and
associated infrastructure, including on-site liquid waste
treatment. The plant is staffed by approximately 460 non-union
full-time employees. FutureFuel Chemical Company manufacturers
diversified chemical products. In addition, in 2005, it launched a
biobased products platform, comprising biofuels and biobased specialty chemical
products.
Plan
of Operation for the Consolidated Company
Our
strategy in relation to the acquired operations is to build a diversified
biofuels and chemical manufacturing organization. Our intention is to
leverage the knowledge, expertise and resources of FutureFuel Chemical Company
to develop an industry-leading biofuels business, while maintaining a focus on
the core chemical business. We believe there are substantial growth
opportunities not only in the biofuels area, but also in both preserving
existing and attracting new custom chemical customers, and also in adding
significantly to our proprietary chemicals product line. Growth in
all areas of the business will follow a consistent strategy of dedicating idle
capacity to those opportunities that we believe provide the highest return,
offer the most attractive long-term risk-reward dynamics, and create the most
value through synergies with existing business lines.
1
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. See
http://www.thehindubusinessline.com/2006/12/21/stories/2006122103701200.htm. As
a result of these decreased margins, in January 2007 we determined that it was
not in our shareholders’ best interest to proceed on an accelerated basis to
increase capacity and, therefore, we suspended the biodiesel capacity
expansion. However, we continued with (and in most cases have already
completed) certain core infrastructure projects as described
below. We believe these projects will bring efficiency, operational
flexibility and cost savings to FutureFuel Chemical Company’s existing biodiesel
and chemical business lines.
The core
infrastructure projects included:
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adding
methanol recovery and biodiesel feedstock pretreatment capabilities to the
plant - the biodiesel feedstock pretreatment system has been completed and
the methanol recovery system is scheduled for completion in April
2009;
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constructing
additional storage and related infrastructure at the plant to support
increased movements of feedstocks, methanol and biodiesel on and off the
site - this project is complete;
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expanding
on-site rail siding and railcar loading and unloading facilities to
accommodate the increased number of railcars expected at the plant - this
project is complete;
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obtaining
storage/thruput in Little Rock, Arkansas on the Arkansas River so that
biodiesel can be shipped by barge to larger markets and feedstocks can be
brought in to the plant by barge and truck - a lease agreement was signed
with Center Point Terminal Company concurrent with the closing of the
acquisition of FutureFuel Chemical
Company;
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acquiring
a fleet of tanker trucks to transport biofuels and feedstocks between the
plant and customer locations or leased storage facilities - this project
is complete until logistical requirements dictate a larger internal truck
fleet; and
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procuring
railcars to transport raw goods to the plant and deliver biodiesel from
the plant to customers - this project is complete until logistical
requirements dictate a larger railcar
fleet.
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Construction
is in progress for the first site infrastructure project as described above,
while the remaining projects are complete. We believe that FutureFuel
Chemical Company will be able to timely obtain the materials to complete the
first project as scheduled, although no assurances can be given that the
scheduled timetable will be achieved or that such timetable will not be revised
based upon market conditions.
In
December 2006 and January 2009, FutureFuel Chemical Company commenced storage of
its biodiesel at a liquid bulk storage facility in Little Rock, Arkansas and
Chesapeake, Virginia, respectively. Additional locations will be
assessed as market conditions dictate (e.g., FutureFuel Chemical Company’s need
for additional storage space, the availability of such space and the cost of
such space). FutureFuel Chemical Company has already acquired tanker
trucks and has leased methanol and biodiesel railcars. The need for
additional tanker trucks and/or railcars will be assessed as demand for
FutureFuel Chemical Company’s biodiesel and logistics dictate. We
believe that implementation of the above strategy has helped and will continue
to help FutureFuel Chemical Company remain a substantial participant in the
biofuels market.
At the
time that we suspended expansion of the biodiesel capacity, we determined that
any future expansions of biodiesel production capacity would be dictated by
changing market conditions. Justification for capacity expansion is
dependent upon three primary factors: (i) the price of crude oil, and more
specifically the price of petrodiesel; (ii) the price of feedstock
oils/fats required to produce biodiesel; and (iii) tax incentives, grants,
and volume mandates. For example, see http://www.wilsoncenter.org/news/docs/Brazil.Biofuels%202007%20Report%20-%20McKinsey%20-%202007.pdf. Biodiesel
is generally sold as a blend with petrodiesel, which is its primary competitive
product, and must be priced close to parity with petrodiesel in order to be
competitive in the marketplace. Feedstock cost is the largest single
component of biodiesel production costs and therefore has a
2
substantial
impact on production costs. See http://www.eia.doe.gov/oiaf/analysispaper/biodiesel/. In
the second quarter of 2007, crude oil prices strengthened (see http://www.dallasfed.org/research/energy/en0702.cfm)
and, despite corresponding increases in feedstock oil prices, soybean oil in
particular, we judged these and future market conditions to be supportive of
biodiesel capacity expansion and therefore resumed a project to expand capacity
by 35 million gallons per year (for a total capacity of 59 million
gallons per year) through a new continuous processing line, projected to be
operational by April 2009. However, no assurances can be given that
the scheduled timetable will be achieved or that it will not be revised based
upon market conditions such as those discussed above. We continued
this expansion in 2008 notwithstanding declines in energy prices during the year
because these declines were mostly offset by corresponding declines in feedstock
prices. For example, the front-month heating oil contract on the New
York Mercantile Exchange declined 40% in price during 2008. During
the same time period, the front-month soybean oil contract on the Chicago Board
of Trade declined 32% in price and the reported price of edible technical tallow
reported by the Jacobsen pricing service declined 40% in price.
Please
see “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Capital Expenditures
and Commitments” below for an estimate of the capital cost of the capital
projects discussed above. The storage and procurement of railcars are
not capital projects; rather, they affect cash flow through ongoing lease
commitments. These lease commitments are included in footnote 21
of our consolidated financial statements for the year ended December 31,
2008 contained elsewhere herein. Based upon our budget, existing cash
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 our acquisition of Eastman SE, Inc. was accounted for
through purchase accounting, a presentation of the historical financial results
of the Batesville plant occurring before November 1, 2006 is not made
within our historical financial results. The financial data presented
herein represents our consolidated operations for the twelve-month periods ended
December 31, 2008, December 31, 2007 and December 31, 2006, the
“carve-out” operations of the Batesville plant for the ten-month period ended
October 31, 2006 and, where noted, the combined results of us and
FutureFuel Chemical Company for the twelve months ended December 31,
2006.
The
following table sets forth: (i) our consolidated revenues from external
customers for the years ended December 31, 2008 and 2007, and our
consolidated revenues from external customers for the year ended
December 31, 2006 plus FutureFuel Chemical Company’s revenues from external
customers for the ten-month period ended October 31, 2006; (ii) our
consolidated net income for the years ended December 31, 2008 and 2007, and
our consolidated income for the year ended December 31, 2006 less
FutureFuel Chemical Company’s net loss for the ten-month period ended
October 31, 2006; and (iii) our total assets at December 31,
2008, 2007 and 2006. Our and FutureFuel Chemical Company’s
information has been combined for the twelve-month period ended
December 31, 2006 solely for comparative purposes.
3
(Dollars
in thousands)
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Period
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Revenues
from
External Customers
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Net
Income
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Total
Assets
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Year
ended December 31, 2008
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$ | 198,330 | $ | 22,675 | $ | 238,126 | ||||||
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Year
ended December 31, 2007
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$ | 169,788 | $ | 8,408 | $ | 216,113 | ||||||
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Year
ended December 31, 2006
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$ | 134,168 | $ | 2,242 | $ | 203,059 | ||||||
For the
ten months ended October 31, 2006, FutureFuel Chemical Company’s revenues
from external customers exclude all revenues from Eastman Chemical
Company. Beginning November 1, 2006, revenues from external
customers equals total revenues. See note 8 to FutureFuel
Chemical Company’s annual financial statements included elsewhere herein for
revenues from Eastman Chemical Company for 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 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. The amounts in the
following chart include: (i) our consolidated revenues from external
customers for the years ended December 31, 2008 and 2007; and (ii) our
consolidated revenues from external customers for the year ended
December 31, 2006 plus FutureFuel Chemical Company’s revenues from external
customers for the ten-month period ended October 31, 2006. Our
and FutureFuel Chemical Company’s information has been combined for the
twelve-month period ended December 31, 2006 solely for comparative
purposes.
(Dollars
in thousands)
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Period
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Revenues
from Chemical Segment
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Revenues
from
Biofuels
Segment
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Total
Revenues
from
External Customers
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Year
ended December 31, 2008
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$ | 155,553 | $ | 42,777 | $ | 198,330 | ||||||
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Year
ended December 31, 2007
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$ | 144,474 | $ | 25,314 | $ | 169,788 | ||||||
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Year
ended December 31, 2006
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$ | 120,828 | $ | 13,340 | $ | 134,168 | ||||||
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. Our common stock and warrants were initially listed on AIM
under the symbols “FFU” and “FFUW”, respectively. On July 14,
2008, the admission of our securities to AIM was canceled. On
July 11, 2008, our common stock began to be quoted on the OTCBB under the
symbol “FTFL”. Our warrants are not listed or quoted on any national
exchange or any other price quotation system. We have not conducted
any other material business operations.
4
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 associated
infrastructure, including on-site liquid waste treatment. The plant
is staffed by approximately 460 non-union full-time employees. Land
and support infrastructure are available to support expansion and business
growth.
For the
year ended December 31, 2008, approximately 70% of site revenue was derived
from manufacturing specialty chemicals for specific customers (“custom
manufacturing”) with 8% of revenues being derived from multi-customer specialty
chemicals (“performance chemicals”) and 22% from biofuels. 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 a major
chemical company. The performance chemicals product portfolio
includes polymer (nylon) modifiers and several small-volume specialty chemicals
for diverse applications.
We are
committed to growing the specialty chemical business and biofuels business of
FutureFuel Chemical Company. FutureFuel Chemical Company’s biofuels
platform has become a core segment of our business. We intend to:
(i) increase production capacity of biodiesel within FutureFuel Chemical
Company as set forth above, and will make future capacity expansions when the
market conditions discussed above support such an increase; and (ii) pursue
commercialization of other products, including cellulose derived biofuels and
building block chemicals. In pursuing this strategy, FutureFuel
Chemical Company will continue to establish a name identity in the biofuels
business, leverage its technical capabilities and quality certifications, 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 and economies of scale;
(iii) expansion of feedstock options; (iv) legislative incentives; and
(v) value-enhancing applications for glycerin co-product (from the
biodiesel manufacturing process). These items are discussed in
greater detail below.
Biofuels Business Segment
Overview of the Segment
FutureFuel
Chemical Company’s biofuels segment was established in early 2005 as an
initiative of the site management team to leverage 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 utilize existing
infrastructure to support 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 revenue of
$42,777,000 for the year ended December 31, 2008, revenue of $25,314,000
for the year ended December 31, 2007 and revenue of $13,340,000 for the
year ended December 31, 2006.
Biofuel Products
FutureFuel
Chemical Company’s biofuels business segment currently targets two products:
biodiesel and cellulose-derived biofuels.
Biodiesel
Biodiesel
is a sustainable, renewable transportation fuel with a growing market in the
United States and internationally. See http://www.emerging-markets.com/biodiesel/default.asp. As
an alternative to petrodiesel and other petroleum-based fuels, biodiesel has
several advantages, including:
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extending
domestic diesel fuel supplies;
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reducing
dependence on foreign crude oil
supplies;
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reducing
emissions of greenhouse gases and other gases that are regulated by the
United States Environmental Protection Agency (see, e.g., http://www.cyberlipid.org/glycer/biodiesel.htm);
and
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being
usable by existing diesel engines while extending their useful lives (see,
e.g., http://www.cyberlipid.org/glycer/biodiesel.htm).
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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. For example, the Energy Independence and Security Act of
2007 requires U.S. petroleum refiners and importers to blend 0.5 billion
gallons of biodiesel into petrodiesel in 2009, with increased percentages of
renewable fuel blending required in future years. See “Legislative
Incentives” below.
Biodiesel
commercialization was achieved by FutureFuel Chemical Company in October
2005. 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. 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. In the
second quarter of 2009, FutureFuel Chemical Company plans to begin offering B100
and biodiesel blended with petrodiesel (B2, B5, B10 and B20 grades) at Little
Rock, Arkansas and Memphis, Tennessee.
Cellulose-Derived
Biofuels
FutureFuel
Chemical Company continues to evaluate a variety of manufacturing technologies
for the production of cellulose-derived biofuels and building block
chemicals. Manufacturing processes for these cellulose-derived
products can be categorized into two groups: biochemical and
thermochemical. In addition to producing biofuels and chemicals,
thermochemical processes also have a significant potential to concurrently
produce heat and power. Thermochemical processes also produce a
different set of building block chemicals than biochemical
processes. Building block chemicals produced in a thermochemical
process are acids, alcohols, alkenes, and aldehydes consisting of two to four
carbon atoms much like the products produced in existing petrochemical
plants. Building block chemicals produced in a biochemical process
are typically acids and diacids consisting of four to six atoms.
A typical
biochemical based process for producing cellulose-derived biofuels and building
block chemicals incorporates four distinct processing steps:
(i) pretreatment; (ii) hydrolysis; (iii) fermentation; and
(iv) distillation.
Thermochemical
processes are subdivided into gasification processes and pyrolysis
processes. Thermochemical processes, while less typical than
biochemical processes, generally consist of four distinct processing
steps. The four distinct steps incorporated into gasification
processes are: (i) gasification; (ii) synthesis gas cleanup;
(iii) catalytic reforming; and (iv) final product
refining. The four distinct steps incorporated into pyrolysis
processes are: (i) pyrolysis; (ii) biocrude refining;
(iii) catalytic reforming; and (iv) final product
refining.
While
FutureFuel Chemical Company expects to continue its research program on
cellulose-derived biofuels, initiatives and timelines to progress the
technologies to pilot and/or commercial scale are dependent upon results and
progress in developing the technologies and no assurances can be given that
FutureFuel Chemical Company will be successful or, if successful,
when.
The Biodiesel Production
Process
Biodiesel
can be made from renewable sources such as:
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crude
and refined virgin vegetable oils;
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crude
and refined animal fats; and
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used
cooking oils and trap grease.
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6
The
choice of feedstock is determined primarily by the price and availability of
each feedstock variety, yield loss of lower quality feedstock, 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, 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.
Chemical
Reaction. In the chemical reaction step, a mix of biodiesel,
glycerin and soap is created from the selected feedstock, methanol and a
catalyst. The collection of equipment that performs this chemical
reaction step in producing biodiesel is referred to as the
“reactors.” Depending upon the type of reactor used, the mix of
biodiesel, glycerin and soap produced requires differing degrees of further
processing to separate the methyl esters comprising the biodiesel from the
glycerin and soap, to clean or “polish” both the biodiesel and glycerin and to
recover excess methanol from both the biodiesel and
glycerin. Generally, the more efficient the reactor, the less
downstream processing that is required. If the feedstock used is high
in free fatty acids, an esterification step may be
required. Esterification is a chemical reaction in which two
chemicals (typically an alcohol and an acid) form an
ester. Transesterification is the process of exchanging the alkoxy
group of an ester compound by another alcohol.
Separation. The
methyl esters are separated from the glycerin and soap produced during the
chemical reaction step.
Polishing. The
methyl esters are purified to remove residual catalysts and other
impurities. Any excess water and methanol is also removed and may be
recycled into earlier steps in the production process train.
Legislative Incentives
Agencies
of the United States government, including the Department of Energy, the
Environmental Protection Agency, the Internal Revenue Service and the Department
of Agriculture, and many states offer biodiesel incentives
7
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 one cent for each percentage point of
vegetable oil or animal fat biodiesel that is blended with petrodiesel (and
one-half cent 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¢ 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 is 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 and subsequently extended to December 31,
2009 through the Emergency Economic Stabilization Act of 2008. This
Act also revised the credit for recycled oils from a half credit to a full
credit as described below.
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. The Environmental Protection Agency
released the final rules to implement the RFS on April 10,
2007. Under those rules, the RFS compliance period did not begin
until September 1, 2007. The applicable volume of
renewable fuel under this program was 4.7 billion gallons for 2007 and
5.4 billion gallons for 2008 and is 11.1 billion gallons for
2009.
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¢ per gallon for the first 15 million gallons
of agri-biodiesel sold.
8
FutureFuel
Chemical Company’s 2008 biodiesel production capacity did not exceed
60 million gallons and thus we qualified for this credit.
On
December 19, 2007, the Energy Independence and Security Act of 2007 (“Energy Bill of
2007”) was enacted which, among other things, expanded the
RFS. In contrast to the Energy Policy Act of 2005, this bill provided
an RFS carve-out applicable specifically to biodiesel; the RFS requirement of
the Energy Policy Act of 2005 had mostly been filled by
ethanol. Beginning January 1, 2009, the Energy Bill of 2007
mandates that 500 million gallons of biomass-based diesel (biodiesel) be
used per year. On November 21, 2008, the USEPA announced that
the 2009 RFS for refiners, importers, and blenders was 10.21%. The
2008 RFS was 7.76%. The 2009 RFS represents 11.1 billion gallons
of renewable fuel and is expected to include 500 million gallons of
biodiesel and renewable diesel. The mandate under the Energy Bill of
2007 increases each year and reaches 1 billion gallons per year in
2012. Beyond 2012, the mandate is to be determined by the
Environmental Protection Agency administrator in coordination with the
secretaries of energy and agriculture, but with a minimum of that mandated in
2012, thus a 1 billion gallons per year floor. The Energy Bill
of 2007 also provides an RFS carve-out for cellulosic biofuel, starting at
100 million gallons per year in 2010 and reaches 16 billion gallons
per year in 2022.
The
Emergency Economic Stabilization Act of 2008 extended the biodiesel tax credits
through December 31, 2009 and qualified all biodiesel for a $1.00 per
gallon tax credit, including biodiesel made from non-virgin feedstocks such as
yellow grease. As noted above, prior legislation limited the tax
credit for biodiesel manufactured from non-virgin feedstocks to $0.50 per
gallon.
The
federal government offers other programs as summarized in the table
below.
|
Federal
Agency
that
Administers/
Oversees
|
Type
of
Incentive
|
Who
Receives
Incentive
|
Commonly
Known
As
|
Summary
|
|
IRS
|
income
tax
credit
|
infrastructure
providers
|
Alternative
Fuel
Infrastructure
Credit
|
Provides
a tax credit in an amount equal to 30% of the cost of any qualified
non-residential alternatively 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
Bus
Program
|
Reduces
operating costs and children’s exposure to harmful diesel exhaust by
limiting bus idling, implementing pollution reduction technology,
improving route logistics and switching to biodiesel. The
Energy Bill of 2005 utilizes this program to grant up to a 50% cost share
(depending on the age and emissions of the original bus) to replace school
buses with buses that operate on alternative fuel or low-sulfur diesel, or
up to 100% for retrofit projects.
|
|
USDA
|
grant
program
|
agricultural
producers
and
small
businesses
|
Renewable
Energy
Systems
and
Energy
Efficiency
Improvements
Grant
|
In
2005, the U.S. Department of Agriculture’s Office of Rural Development
made available $22.8 million in competitive grant funds and
guaranteed loans for the purchase of renewable energy systems and energy
improvements for agricultural producers and small rural
businesses. Eligible projects include biofuels, hydrogen and
energy efficiency improvements, as well as solar, geothermal and
wind.
|
9
| Federal
Agency
that
Administers/
Oversees
|
Type
of
Incentive
|
Who
Receives
Incentive
|
Commonly
Known
As
|
Summary
|
|
USDA/DOE
|
grant
program
|
biobased
fuels
researchers
|
Biomass
Research
and Development
Act
of 2000
|
Funds
research, development and demonstration biomass projects with respect to
renewable energy resources 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 and
up to $50,000 in grants per site for biodiesel producers and distributors to
install distribution infrastructure. The $0.20 per gallon Arkansas
producer credit is capped at 10 million gallons or production, or
$2 million, per defined time intervals. The first interval was
January 1, 2007 through June 30, 2008. FutureFuel Chemical
Company submitted an application for the $0.20 per gallon biodiesel producer
credit for production during this 18-month interval and received the
$2 million credit in March 2008. The next funding interval is
July 1, 2008 to June 30, 2009. FutureFuel Chemical Company
has already applied for funding under this program for biodiesel produced during
this interval and has notified the state that, based on production through
January 2009, it is eligible for the full $2 million
credit. FutureFuel Chemical Company received notification that its
application has been approved but has not received notification of the amount of
funding that will be available from the state. FutureFuel Chemical
Company intends to apply for the credit in future years when and as such credit
is available.
Our
review of state statutes reveals that approximately 45 states provide either
user or producer incentives for biodiesel, several states provide both types of
incentives and approximately 36 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, 2008, 30 biodiesel producers had
10
achieved
this quality standard - see
http://www.bq-9000.org/companies/producers.aspx). Consistent with
BQ-9000, all manufactured product is tested in on-site quality control
laboratories and confirmed to meet the ASTM D6751 standard.
Future Strategy of the Enlarged
Group
We intend
to expand FutureFuel Chemical Company’s biodiesel capacity utilizing available
facilities as market conditions dictate as described above. All
future capacity will be operated primarily in continuous processing mode to
realize operating economies and optimum throughput. Existing and
future processes will accommodate a wide range of feedstock oils, allowing
optimization relative to supply and pricing.
FutureFuel
Chemical Company is pursuing the commercialization of cellulose-derived
biofuels. 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 biofuels platform approach being pursued seeks to
assemble demonstrated component technologies in a process design that leverages
current facility infrastructure and capabilities. However, no
assurances can be given that FutureFuel Chemical Company will develop a
commercially viable cellulose-derived biofuels manufacturing
process.
Customers and Markets
FutureFuel
Chemical Company currently markets its biodiesel products by truck and rail
directly to customers in the United States and in Canada. 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. For the
twelve months ended December 31, 2008, six of FutureFuel Chemical Company’s
customers represented 80% of biofuels revenues (17% of total revenues) and 46
customers represented 20% of biofuels revenues (4% 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
As of
September 29, 2008, there was a reported 2.61 billion gallons per year of
biodiesel production capacity in the United States, although only approximately
700 million gallons of biodiesel were actually produced in
2008. FutureFuel Chemical Company competes with these other producers
of biodiesel, both locally, regionally and nationally. There are four
biodiesel plants in the state of Arkansas, but only FutureFuel Chemical
Company’s plant is currently operating. There are several operating
facilities in surrounding states and announced biodiesel production facilities
in Arkansas and surrounding states. We estimate that regional
competitive producers had approximately 150 million gallons of capacity at
the end of 2008.
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. Biotech company LS9 Inc. has
announced that it is producing renewable diesel fuel from E. coli
excrement. See http://www.cnn.com/2008/TECH/science/08/12/bug.diesel/index.html. UOP,
a major supplier to the petrochemical refining industry, has also reported the
development of technology for the production of fungible fuels (diesel and
gasoline) by hydro-processing of vegetable oils and cellulose. See
http://www.alternatefuelsworld.com/greendiesel-greengasoline.html. We
cannot give any assurances that renewable diesel
fuel (or some other product) produced by these competing technologies will not
supplant biodiesel as an alternative to conventional
petrodiesel.
11
Supply and Distribution
As a
result of its feedstock-flexible process, FutureFuel Chemical Company is able to
source feedstock from a broad supplier base which includes pork, chicken and
beef rendering facilities from both national and regional
suppliers. Soybean oil has been sourced from several national and
regional producers. Cottonseed oil has been sourced from a regional
cooperative. All feedstocks are currently supplied by either rail or
truck. 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 from the plant site as well as
shipped to liquid bulk storage facilities for further
distribution. Sales from the plant site 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 or tank truck.
Cyclicality and
Seasonality
The
following charts depict FutureFuel Chemical Company’s monthly sales of biodiesel
(in gallons) for 2007 and 2008. Tolling sales ceased in September
2007.
FutureFuel
Chemical Company’s sales of biodiesel are substantially limited in winter
months. Until such time as non-seasonal business (primarily on-road
transportation) expands regionally, FutureFuel Chemical Company’s biodiesel
sales at blends greater than B5 are expected to continue 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.
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. 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 $155,553,000,
$144,474,000, and $137,430,000 for the years ended December 31, 2008, 2007
and 2006, 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. The plant’s custom manufacturing
product portfolio includes four large products or product families which are
generally produced throughout the year: (i) a bleach activator for a major
detergent and consumer products manufacturer; (ii) a proprietary herbicide
for a major life sciences company; (iii) chlorinated polyolefin adhesion
promoters (“CPOs”) for
a major chemical company; and (iv) antioxidant precursors (“DIPBs”)
for a major chemical company. The portfolio also contains a number of
12
smaller
products which are produced intermittently in a “batch campaign” mode, for
diverse customers and end markets.
Performance
chemicals comprise 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.
Future Strategy
To build
on and maintain FutureFuel Chemical Company’s reputation as a technology-driven
competitive chemical producer, we believe that FutureFuel Chemical Company must
continuously focus on cost control, operational efficiency and capacity
utilization to maximize earnings. The ability to utilize large scale
batch and continuous production processes and a continuous focus on process
improvements allow FutureFuel Chemical Company to compete effectively in the
custom manufacturing market and to remain cost competitive with, and for some
products cost-advantaged over, its competitors. We intend to improve
margins in this area of the FutureFuel Chemical Company business by careful
management of product mix with regard to size of opportunity, timing to market,
capital efficiency and matching of opportunities to assets and
capabilities.
We expect
to derive significant growth in the performance chemicals component primarily as
a result of new biobased co-products derived from biofuels manufacturing, such
as glycerin and derivatives. We believe that these products and
applications will be competitive in the marketplace due to advantaged raw
material costs derived from their co-product status. For example, for
every gallon of biodiesel produced, approximately one pound of co-product
glycerin is generated. See http://www.harvestcleanenergy.org/conference/HCE6/Frear2.pdf. Production
of glycerin from biofuels has significantly reduced the value of glycerin in the
global marketplace and prices for refined glycerin have fallen by over 50% since
late 2004. See http://www.purchasing.com/article/CA6341035.html?ref=nbcs
and http://www.biodieselmagazine.com/article.jsp?article_id=1123. The
crude form of glycerin derived directly from biodiesel processing has little or
no value unless purified to an industrial grade quality. See http://www.biodieselmagazine.com/article.jsp?article_id=1123
and http://www.ampc.montana.edu/policypaper/policy22.pdf. Many
small biodiesel producers lack this purification capability and we believe that
crude glycerin has become a disposal issue for many of these
producers. See http://www.biodieselmagazine.com/article.jsp?article_id=1123, and
http://www.biodieselmagazine.com/article.jsp?article_id=237&q=&page=all
and http://www.ampc.montana.edu/policypaper/policy22.pdf. Leveraging
its specialty chemicals expertise and infrastructure, FutureFuel Chemical
Company is capable of refining glycerin to sufficient purity to derive
commercial value as a co-product and/or converting glycerin through chemical
processing to higher-value derivative products. Commercial
development samples of refined glycerin (bulk quantities) are currently
available for customer evaluations. In July 2006, Eastman SE, Inc.
identified three key areas for the sale of glycerin: (i) sale of existing
unrefined material; (ii) sale of highly refined material; and
(iii) conversion of unrefined and refined material to higher value
products. FutureFuel Chemical Company has offered unrefined glycerin
to users thereof, which has led to sampling programs and field
tests. However, no sales have been arranged on terms satisfactory to
FutureFuel Chemical Company. It has refined glycerin in batch
equipment and has provided samples to various potential customers, but no sales
have been consummated. Conversion of glycerin to higher value
products is still in the research and development stage.
Customers and Markets
FutureFuel
Chemical Company’s chemical products are used in a variety of markets 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 the bleach activator are made to The Procter & Gamble Company pursuant to
a multiyear supply that was effective April 1, 2008. Sales of
the bleach activator totaled $83,995,000, $82,500,000 and $84,691,000 for the
years ended December 31, 2008, 2007 and 2006,
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
13
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 $34,156,000, $25,177,000 and $23,685,000 for the years ended
December 31, 2008, 2007 and 2006, respectively. These two
customers represented approximately 60%, 63% and 72% of revenues in 2008, 2007
and 2006, 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,
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, technical capabilities and financial
resources.
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.
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.
Backlog
The
majority of FutureFuel Chemical Company’s revenues are derived under tolling
arrangements with specific customers. These customers generally
provide FutureFuel Chemical Company with forecasts of demand on a monthly or
quarterly basis. These forecasts are intended to enable FutureFuel
Chemical Company to optimize the efficiency of its production processes and
generally are not firm sales orders. As such, FutureFuel Chemical
Company does not monitor or report backlog.
Management Team and
Workforce
FutureFuel
Chemical Company’s executive management team consists of four individuals with a
combined 100 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. Another 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 five additional degreed
professionals with an average experience of over 20 years in the chemical
industry.
The Batesville workforce comprises
approximately 450 additional full-time employees, with a total of 69 degreed
professionals, including 19 chemists (9 PhDs) and 33 engineers (including 8
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
14
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 2003.
Intellectual Property
We
consider FutureFuel Chemical Company’s intellectual property portfolio to be a
valuable corporate asset which we intend to expand and protect globally through
a combination of trade secrets, confidentiality and non-disclosure agreements,
patents and copyrights. As a producer of a broad and diverse
portfolio of chemicals, FutureFuel Chemical Company’s intellectual property
relates to a wide variety of products and processes acquired through the
development and manufacture of over 300 specialty chemicals during the history
of the site. Our primary strategy regarding FutureFuel Chemical
Company’s intellectual property portfolio will be to appropriately protect all
innovations and know-how in order to provide FutureFuel Chemical Company’s
business segments with a technology-based competitive advantage wherever
possible. In the chemicals business segment, custom manufacturing
projects are primarily conducted within the framework of confidentiality
agreements with each customer to ensure that intellectual property rights are
defined and protected. In the biofuels business segment, innovations
and process know-how will be vigorously protected as appropriate. As
may be necessary, we will seek to license technology from third parties that
complements FutureFuel Chemical Company’s strategic business
objectives. Neither FutureFuel Chemical Company’s business as a whole
nor any particular segment is materially dependent upon any one particular
patent, copyright or trade secret. As the laws of many foreign
countries do not protect intellectual property to the same extent as the laws of
the United States, we can make no assurance 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:
|
|
·
|
innovating,
developing and improving biofuels processes, in particular biodiesel and
cellulose-derived biofuels, including value-up technology and applications
for co-products; and
|
|
|
·
|
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.
Research
and development expense incurred by FutureFuel Chemical Company during the years
ended December 31, 2008, 2007 and 2006 were $3,951,000, $3,434,000 and
$4,919,000, respectively. Substantially all of such research and
development expense related to the development of new products, services and
processes or the improvement of existing products, services and
processes. Research and development expense declined from 2006 to
2007 primarily due to the lack of corporate overhead allocations from Eastman
Chemical Company and also because some research and development costs were
funded by new customers. This funding by new customers did not repeat
in 2008. In addition, FutureFuel Chemical Company expanded the
utilization of external resources to advance certain key projects during
2008. These factors account for the increase in research and
development expense in 2008 as compared to 2007.
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:
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require
acquisition of permits regarding discharges into the air and discharge of
waste waters;
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place
restrictions on the handling and disposal of hazardous and other wastes;
and
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require
capital expenditures to implement pollution control
equipment.
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Compliance
with such laws and regulations can be costly and noncompliance can result in
substantial civil and even criminal penalties. Some environmental
laws impose strict liability for environmental contamination, rendering a person
liable for environmental damages and cleanup costs without regard to negligence
or fault. Moreover, public interest in the protection of the
environment has increased substantially in recent years. FutureFuel
Chemical Company’s operations could be adversely affected to the extent laws are
enacted or other governmental action is taken that imposes environmental
protection requirements that result in increased costs to the oil and gas
industry and/or the chemical manufacturing industry in general. The
following provides a general discussion of some of the significant environmental
laws and regulations that impact FutureFuel Chemical Company’s
activities.
The
federal Comprehensive Environmental Response, Compensation and Liability Act
(“CERCLA”),
and analogous state laws, impose joint and several liabilities, without regard
to fault or the legality of the original act, on certain classes of persons that
contributed to the release of a hazardous substance into the
environment. These persons include the owner and operator of the site
where the release occurred, past owners and operators of the site, and companies
that disposed or arranged for the disposal of hazardous substances found at the
site. Responsible parties under CERCLA may be liable for the costs of
cleaning up hazardous substances that have been released into the environment
and for damages to natural resources. Additionally, it is not
uncommon for third parties to assert claims for personal injury and property
damage allegedly caused by the release of hazardous substances or other
pollutants into the environment.
The
federal Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act (“RCRA”), is
the principal federal statute governing the management of wastes, including the
treatment, storage and disposal of hazardous wastes. RCRA imposes
stringent operating requirements, and liability for failure to meet such
requirements, on a person who is either a generator or transporter of hazardous
waste or an owner or operator of a 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.
16
The
federal Endangered Species Act, the federal Marine Mammal Protection Act, and
similar federal and state wildlife protection laws prohibit or restrict
activities that could adversely impact protected plant and animal species or
habitats. Manufacturing activities could be prohibited or delayed in
areas where such protected species or habitats may be located, or expensive
mitigation may be required to accommodate such activities.
FutureFuel
Chemical Company’s policy is to operate its plants and facilities in a manner
that protects the environment and the health and safety of its employees and the
public. FutureFuel Chemical Company intends to continue to make
expenditures for environmental protection and improvements in a timely manner
consistent with its policies and with the technology available. In
some cases, applicable environmental regulations such as those adopted under the
Clean Air Act and RCRA, and related actions of regulatory agencies, determine
the timing and amount of environmental costs incurred by FutureFuel Chemical
Company.
We
establish reserves for closure/post-closure costs associated with the
environmental and other assets we maintain. Environmental assets
include waste management units such as incinerators, landfills, storage tanks
and boilers. When these types of assets are constructed or installed,
a reserve is established for the future costs anticipated to be associated with
the closure of the site based on an expected life of the environmental assets,
the applicable regulatory closure requirements and our environmental policies
and practices. These expenses are charged into earnings over the
estimated useful life of the assets. Currently, we estimate the
useful life of each individual asset up to 35 years.
In
addition to our general environmental policies and policies for asset retirement
obligations and environmental reserves, we accrue environmental costs when it is
probable that we or our subsidiary 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 $11,507,000, $13,500,000 and $13,300,000 for the
years ended December 31, 2008, 2007 and 2006,
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
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:
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operational
expertise to produce ASTM D6751 quality biodiesel from diverse
feedstocks;
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leveraging
quality certifications to supply demanding biodiesel
applications;
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conversion
of available capacity at below new-build
costs;
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service
to regional markets and enhanced distribution channels to national
markets;
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process
improvement to reduce costs of
manufacturing;
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adding
value to co-products and by-products from biofuels production;
and
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producing
cellulose-derived biofuels.
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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:
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long
term contracts for most custom manufacturing
products;
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strong
relationships with customers who are market leaders, leading to repeat
business;
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technical
capability to innovate processes, particularly the ability to apply both
chemistry and engineering disciplines to solve complex technical
problems;
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responsiveness
and customer service from an entrepreneurial
organization;
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ability
to practice a range of manufacturing scale;
and
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process
improvement capability to achieve lowest-cost manufacturing
position.
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We intend
to grow FutureFuel Chemical Company’s multi-customer chemicals portfolio by
producing marketable chemical co-products from biofuels production, biobased
specialty products derived from biofuel products and/or raw materials, and
cellulose-derived building block chemicals. As an example, a
significant co-product from biodiesel production is glycerin, which can be
purified and sold and which may also be chemically converted into other chemical
products and derivatives. See the discussion above.
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:
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enhancing
pricing processes and strategies, and optimizing biofuels channels to
market;
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continuing
to pursue cost reduction opportunities, including improved operational
efficiency through business
simplification;
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achieving
high utilization of manufacturing
assets;
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improving
capital efficiency through high value de-bottlenecking opportunities and
incremental expansions of existing assets and infrastructure;
and
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enhancing
custom manufacturing project selection and portfolio
mix.
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However,
no assurances can be given that these objectives will be met, in whole or in
part.
18
Financial
Information about Geographic Areas
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 for the last three fiscal years attributable to the
United States and foreign countries (based upon the billing addresses of its
customers) were as set forth in the following table. The amounts in
the following table include: (i) our consolidated revenues for the years
ended December 31, 2008 and 2007; and (ii) our consolidated revenues
for the year ended December 31, 2006 plus FutureFuel Chemical Company’s
revenues for the ten-month period ended October 31, 2006. Our
and FutureFuel Chemical Company’s information has been combined for the
twelve-month period ended December 31, 2006 solely for comparative
purposes.
(Dollars
in thousands)
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Period
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United
States
|
All
Foreign
Countries
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Total
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|||||||||
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Year
ended December 31, 2008
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$ | 164,963 | $ | 33,367 | $ | 198,330 | ||||||
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Year
ended December 31, 2007
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$ | 141,233 | $ | 28,555 | $ | 169,788 | ||||||
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Year
ended December 31, 2006
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$ | 131,893 | $ | 18,877 | $ | 150,770 | ||||||
For each
of the years ended December 31, 2008, 2007 and 2006, revenues from Mexico
accounted for 11% of total revenues. Beginning in the third quarter
of 2007, FutureFuel Chemical Company began selling significant quantities of
biodiesel to companies in Canada, at which time revenues from Canada became a
material component of total revenues. Revenues from Canada accounted
for 5% of total revenues for each of the years ended December 31, 2008 and
2007. Other than Mexico and Canada, revenues from a single foreign
country during 2008, 2007 and 2006 did not exceed 3% 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” below for a
discussion of risks attendant to FutureFuel Chemical Company’s foreign
operations.
Available
Information
We 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 (the “Exchange
Act”), as soon as reasonably practicable after electronically filing such
material with, or furnishing it to, the Securities and Exchange Commission
(“SEC”). Once
filed with the SEC, such documents may be read and/or copied at the SEC’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 SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that electronically file
with the SEC at http://www.sec.gov.
We 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 made available in print upon the written request of any shareholder to
FutureFuel Corp., 8235 Forsyth Blvd., 4th Floor,
Clayton, Missouri 63105, Attention: Investor Relations.
19
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
current volatility in global economic conditions and the financial markets may
adversely affect our industry, business and results of operations.
The
volatility and disruption to the capital and credit markets since mid-2008 have
affected global economic conditions, resulting in significant recessionary
pressures and declines in consumer confidence and economic
growth. These conditions have led to economic contractions in the
developed economies and reduced growth rates in the emerging
markets. Despite fiscal and monetary intervention, it is possible
that further declines in consumer spending and global growth rates may occur in
the foreseeable future. Reduced consumer spending may cause changes
in customer order patterns including order cancellations, and changes in the
level of inventory held by our customers, which may adversely affect our
industry, business and results of operations. The impact of the
credit crisis and economic slowdown will vary by region and
country. The diversity of our geographic customer and operating
footprint limits our reliance and exposure to any single economy.
These
conditions have also resulted in a substantial tightening of the credit markets,
including lending by financial institutions and other sources of credit and
liquidity. This tightening of the credit markets has increased the
cost of capital and reduced the availability of credit. Based on our
latest discussions, we believe that our sources of credit and liquidity are able
to fulfill their commitments to us as of our filing date. We cannot
predict, however, how long the current economic and capital and credit market
conditions will continue, whether they will continue to deteriorate and which
aspects of our products or business could be adversely
affected. However, if current levels of economic and capital and
credit market disruption and volatility continue or worsen, there can be no
assurance that we will not experience an adverse impact, which may be material,
on our business, the cost of and access to capital and credit markets, and our
results of operations. In addition, we monitor the financial
condition of our customers on a regular basis based on public information or
data provided directly to us. If the financial condition of one of
our major customers was negatively impacted by market conditions or liquidity,
we could be adversely impacted in terms of accounts receivable and/or inventory
specifically attributable to them.
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.
20
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 2006
and 2007, approximately 250 million gallons and 490 million gallons,
respectively, of biodiesel were produced in the United States. 2008
biodiesel production is estimated at approximately 700 million
gallons. See http://www.americanfuels.info/2008/11/august-biodiesel-production-down.html. As
of September 29, 2008, there was a reported 2.61 billion gallons per
year of biodiesel production capacity in the United States. www.biodiesel.org - see link to Production
Facilities, p 8. With such biodiesel production capacity in the
United States, compared to historical production levels, there is a risk that
there will be a significant amount of excess biodiesel production capacity in
the U.S., which may adversely affect the price at which FutureFuel Chemical
Company is able to sell the biodiesel that it sells and thereby adversely affect
our anticipated results of operation and financial condition.
The
U.S. biodiesel manufacturing base is contracting. This contraction
may adversely affect FutureFuel Chemical Company’s ability to sell
biodiesel.
The
excess biodiesel production in the U.S. as described above has been ameliorated
somewhat in 2008 in that at least 20 of 178 plants are idled while others have
reduced production, which has resulted in approximately 700 million gallons
of biodiesel actually produced in the United States in 2008 as compared to
actual production capacity. See, for example, www.biodiesel.org/buyingbiodiesel/producres_marketers/Producers%20Map-Existing and www.biodiesel.org/pdf_files/fuelfactsheets/Production_Graph_Slide. Further industry consolidation is
expected. While such industry consolidation addresses the issue of
excess production, it could affect the willingness of potential customers to
purchase biodiesel if they perceive that the biodiesel market is not a stable
long-term supply of product, which could adversely affect our financial
condition and results of operation.
Anti-subsidy
and anti-dumping complaints have been filed with the European Commission
concerning imports of biodiesel originating in the United States. The
existence of such complaints, and an adverse decision by the European
Commission, could reduce demand for biodiesel produced in the United
States.
Anti-subsidy
and anti-dumping complaints have been filed with the European Commission
concerning imports of biodiesel originating in the United
States. Although we are not a target of such complaints and do not
import biodiesel into the European community, the existence of such complaints,
and an adverse decision by the European Commission, could reduce demand for
biodiesel produced in the United States. Such a reduction in demand
could reduce the amount of biodiesel that FutureFuel Chemical Company sells,
which could have an adverse effect on our financial condition.
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 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:
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worldwide
and domestic supplies of oil and
gas;
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the
price and/or availability of biodiesel
feedstocks;
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weather
conditions;
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the
level of consumer demand;
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the
price and availability of alternative
fuels;
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the
availability of pipeline and refining
capacity;
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the
price and level of foreign imports;
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domestic
and foreign governmental regulations and
taxes;
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the
ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production
controls;
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political
instability or armed conflict in oil-producing regions;
and
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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 have implemented certain risk management tools, such
as multiple suppliers and hedging, as appropriate, to mitigate short-term market
fluctuations in raw material supply and costs. There can be no
assurance, however, that such measures will result in cost savings or that all
market fluctuation exposure will be eliminated. In addition, natural
disasters, changes in laws or regulations, war or other outbreak of hostilities,
or other political factors in any of the countries or regions in which
FutureFuel Chemical Company operates or does business, or in countries or
regions that are key suppliers of strategic raw materials, could affect
availability and costs of raw materials.
While
temporary shortages of raw materials may occasionally occur, these items have
historically been sufficiently available to cover current
requirements. However, their continuous availability and price are
impacted by natural disasters, plant interruptions occurring during periods of
high demand, domestic and world market and political conditions, changes in
government regulation, and war or other outbreak of hostilities. In
addition, as FutureFuel Chemical Company increases its biodiesel capacity, it
will require larger supplies of raw materials which have not yet been secured
and may not be available for the foregoing reasons, or may be available only at
prices higher than current levels. FutureFuel Chemical Company’s
operations or products may, at times, be adversely affected by these
factors.
FutureFuel
Chemical Company is reliant upon two customers for a substantial amount of its
sales.
All sales
of the bleach activator are made to The Procter & Gamble Company and all
sales of a proprietary herbicide and certain other intermediates used in the
production of this herbicide are made to Arysta LifeScience North America
Corporation. These two customers represented approximately 60% of
FutureFuel Chemical Company’s revenues for the year ended December 31,
2008. The contract with The Procter & Gamble Company is a
multiyear contract and no assurances can be given that such contract will be
extended or, if extended, upon what terms. The contracts with Arysta
LifeScience North America Corporation contain certain termination provisions and
no assurances can be given that these contracts will not be
terminated. The loss of these two companies as customers would have a
material adverse effect on us.
22
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 renewable diesel produced from
catalytic hydroforming of renewable feedstock oils and competitive process
technologies such as advanced biodiesel continuous reactor and washing designs
that increase throughput. These changes may render obsolete certain
existing products, energy sources, services and technologies currently used by
FutureFuel Chemical Company. We cannot assure you that the
technologies used by or relied upon by FutureFuel Chemical Company will not be
subject to such obsolescence. While we may attempt to adapt and apply
the services provided by FutureFuel Chemical Company to newer technologies, we
cannot assure you that we will have sufficient resources to fund these changes
or that these changes will ultimately prove successful.
Failure
to comply with governmental regulations could result in the imposition of
penalties, fines or restrictions on operations and remedial
liabilities.
The oil
and gas and chemical industries are subject to extensive federal, state, local
and foreign laws and regulations related to the general population’s health and
safety and those associated with compliance and permitting obligations
(including those related to the use, storage, handling, discharge, emission and
disposal of municipal solid waste and other waste, pollutants or hazardous
substances or waste, or discharges and air and other emissions) as well as land
use and development. Existing laws also impose obligations to clean
up contaminated properties or to pay for the cost of such remediation, often
upon parties that did not actually cause the
contamination. Compliance with these laws, regulations and
obligations could require substantial capital expenditures. Failure
to comply could result in the imposition of penalties, fines or restrictions on
operations and remedial liabilities. These costs and liabilities
could adversely affect our operations.
Changes
in environmental laws and regulations occur frequently, and any changes that
result in more stringent or costly waste handling, storage, transport, disposal
or cleanup requirements could require FutureFuel Chemical Company to make
significant expenditures to attain and maintain compliance and may otherwise
have a material adverse effect on its business segments in general and on our
results of operations, competitive position or financial
condition. We are unable to predict the effect of additional
environmental laws and regulations which may be adopted in the future, including
whether any such laws or regulations would materially adversely increase
FutureFuel Chemical Company’s cost of doing business or affect its operations in
any area.
Under
certain environmental laws and regulations, FutureFuel Chemical Company could be
held strictly liable for the removal or remediation of previously released
materials or property contamination regardless of whether FutureFuel Chemical
Company was responsible for the release or contamination, or if current or prior
operations were conducted consistent with accepted standards of
practice. Such liabilities can be significant and, if imposed, could
have a material adverse effect on our financial condition or results of
operations.
FutureFuel
Chemical Company’s biofuels operations may be harmed if the government were to
change current laws and regulations.
Alternative
fuels businesses benefit from tax credits and government
subsidies. If any of the state or federal laws and regulations
relating to the tax credits and government subsidies change, the ability to
recover capital expenditures from an alternative fuels business could be
harmed. FutureFuel Chemical Company’s biofuels platform is subject to
federal, state, and local laws and regulations governing the application and use
of alternative energy products, including those related specifically to
biodiesel. For instance, biodiesel products benefit from being the
only alternative fuel certified by the U.S. Environmental Protection Agency that
fulfills the requirements of Section 211(B) of the Clean Air Act. If
agency determinations, laws and regulations relating to the application and use
of alternative energy are changed, the marketability and sales of biodiesel
production could be materially adversely affected.
23
The
federal excise tax credit for biodiesel expires on December 31, 2009 and
Congress has not enacted legislation to extend this credit. If the
credit expires, FutureFuel Chemical Company’s cost of producing biodiesel will
be increased, which could have an adverse effect on our financial
position.
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 one cent for each percentage point of
vegetable oil or animal fat biodiesel that is blended with
petrodiesel. For example, blenders that blend B20 made from soy,
canola and other vegetable oils and animal fats receive a 20¢ per gallon excise
tax credit. The tax incentive generally is taken by petroleum
distributors and is 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 December 31, 2008 and
most recently it was extended to December 31, 2009.
Congress
has not enacted any legislation to extend this tax credit beyond
December 31, 2009. If the tax credit is not extended, FutureFuel
Chemical Company’s biodiesel production costs will increase by $1.00 per
gallon. If biodiesel feedstock costs do not decrease significantly
relative to biodiesel prices by the beginning of 2010, FutureFuel Chemical
Company would realize a negative biodiesel production margin. As a
result, we would cease producing biodiesel, which could have an adverse effect
on our financial condition.
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
24
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.
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 for our
biofuels segment 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 for our biofuels segment, FutureFuel Chemical Company
may incur losses as a result of price fluctuations with respect to these raw
materials and/or finished products.
In most
cases we are not capable of hedging raw material and/or finished products for
our chemicals segment. Certain of our products are produced under
manufacturing agreements with our customers which provide us the contractual
ability to pass along raw material price increases. However, we do
not have this protection for all product lines within the chemicals
segment. If we do not or are not capable of managing escalating raw
material prices and/or passing these increases along to our customers via prices
for our finished products, we may incur losses.
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 a commercial 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,
25
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 our credit facility
and existing cash. However, if FutureFuel Chemical Company’s capital
requirements vary materially from those provided for in our current projections,
we may require additional financing sooner than anticipated. A
decrease in expected revenues or adverse change in market conditions could make
obtaining this financing economically unattractive or impossible. As
a result, we may lack the capital necessary to complete the projected expansions
or capitalize on other business opportunities.
We
may be unable to successfully integrate future acquisitions with our operations
or realize all of the anticipated benefits of such acquisitions.
Failure
to successfully integrate future acquisitions, if any, 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 acquired
operations include, among other things:
|
|
·
|
operating
a significantly larger combined
organization;
|
|
|
·
|
consolidating
corporate technological and administrative
functions;
|
|
|
·
|
integrating
internal controls and other corporate governance matters;
and
|
|
|
·
|
diverting
management’s attention from other business
concerns.
|
In
addition, we may not realize all of the anticipated benefits from 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 benefits from future
acquisitions 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 were 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, most
of which expired 18 months after the acquisition. 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 remaining limited indemnity protection afforded to us under the acquisition
agreement, if any, in order to seek compensation for any financial loss incurred
as a result. By its nature,
26
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
remaining 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 owning
our shares and warrants.
The
exercise of our warrants are subject to transfer and exercise requirements under
the Securities Act. In addition, our warrants are represented by
definitive certificates, which could reduce the liquidity of our
warrants.
The
exercise of the warrants for shares of our common stock are subject to certain
conditions designed to ensure compliance with U.S. securities
laws. These conditions include the provision to us of a written
certification that the exercising shareholder is neither within the U.S. nor a
U.S. person and that the warrant is not being exercised on behalf of a U.S.
person, or the provision to us of a written opinion of counsel to the effect
that the transfer of the warrants and issuance of the shares of our common stock
upon the exercise of such warrants have been registered under the United States
Securities Act of 1933, as amended (the “Securities
Act”), or are exempt from registration thereunder. As a
result, our warrants 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 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
27
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.
In order
to transfer or sell our warrants, holders must provide the definitive
certificates to the transfer agent, who will require certain certifications as
set forth above, and on occasion legal opinions as set forth above, prior to
issuing new warrant certificates to new warrant holders. The
Depository Trust Company, which settles electronic trades, does not allow
electronic settlement until the legend has been removed and the certification
requirements required under U.S. securities laws have expired. The
lack of a fully electronic settlement mechanism may have a material adverse
effect on the liquidity and the price of our warrants.
A
minimum holding period for our shares received upon exercise of our warrants may
commence upon the exercise of such warrants.
The
shares of our common stock issued upon the exercise of a warrant generally will
be considered restricted securities subject to a six-month holding period as
described below. In general, a security holder who has not been our
affiliate for three months may resell these securities without any restriction
after satisfying the six-month holding period, provided that we are current in
our SEC filings.
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. 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 six-month holding period has expired, than the shares originally
issued.
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 our July 2006 offering
(the “founding shareholders” see “Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters -- Founding
Shares Owned by the Founding Shareholders” below 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 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 our July 2006 offering. The demand may be made at any
time after the date on which we have become a reporting company under the
Exchange Act, 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.
We
may not list our common stock on a stock exchange other than the OTCBB and we
may not list our warrants on any stock exchange.
Under the
investor rights agreement that we entered into on July 12, 2006 with CRT
Capital Group LLC and KBC Peel Hunt Ltd, 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. Prior to December 2008, we did not satisfy the listing
requirements of any such exchange other than the OTCBB. Application
for listing was made to the OTCBB and our shares of common stock are quoted
thereon. In December 2008, we met the listing requirements for
certain of the NASDAQ markets, and we are currently assessing whether listing on
a NASDAQ market is commercially reasonable. However, no assurances
can be given that we will list our common stock on such exchange, or, if listed,
whether our common stock will continue to qualify for quotation or listing on
such exchange or other similarly recognized national trading platform, including
the OTCBB.
28
We have
no obligation to list or quote our warrants on any exchange, 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 exchange or recognized national trading
platform.
None.
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, cash equivalents and
investments.
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 cellulose-derived biofuels. 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.
Neither
we nor our subsidiary are a party to, nor is any of ours or its 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.
None.
29
Market
Information
Our
shares and warrants were 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. However, in connection with the restatement of our financial
statements to comply with purchase accounting as discussed below, trading in our
shares of common stock and warrants was again suspended on July 26, 2007 at
our request. We completed the restatement of our financial statements
and requested that our shares and warrants again be traded on
AIM. Trading of our shares and warrants was approved on
February 1, 2008 and trading recommenced on that date. Admission
of our shares and warrants was cancelled on July 14, 2008.
Commencing
July 11, 2008, shares of our common stock were quoted on the OTCBB under
the symbol “FTFL”. The high and low bid quotations on the OTCBB for
our shares of common stock for 2008 for the periods during which it was quoted
on the OTCBB are set forth in the following table.
|
Shares
|
||||||||
|
Period
|
High
|
Low
|
||||||
|
July 11,
2008 - September 30, 2008
|
$ | 7.00 | $ | 6.00 | ||||
|
October
1, 2008 - December 31, 2008
|
$ | 6.40 | $ | 4.00 | ||||
Our
warrants are not quoted or listed on any established exchange or quotation
system.
There are
currently outstanding 28,190,300 shares of our common stock and warrants to
purchase 21,317,500 shares of our common stock at $6.00 per
share. Under U.S. securities laws at the time of our offering, shares
of our common stock and warrants that were sold or acquired on July 12,
2006 could not be re-sold until they had been held for two years, unless
registered with the SEC or unless an exemption from registration was
available. The relevant U.S. securities laws were revised to reduce
the holding period to six months, effective February 15,
2008. As a result, such shares and warrants (subject, in the case of
warrants, to the qualification discussed below) may be sold by non-affiliates of
the Company, either within or outside the U.S., without restrictions imposed by
U.S. securities laws. Affiliates of the Company, defined generally as
any person that directly or indirectly controls, is controlled by, or is under
common control with the Company (typically directors, executive officers and
primary shareholders) remain limited in the amount and manner in which they may
sell our shares and warrants. Thus, non-affiliates who acquired our
shares and warrants which were issued in our initial offering on July 12,
2006 may generally freely trade those shares and warrants in the United
States.
Please
note, however, that the exercise of the warrants for shares of our common stock
are subject to certain conditions designed to ensure compliance with U.S.
securities laws. These conditions include the provision to us of a
written certification that the exercising shareholder is neither within the U.S.
nor a U.S. person and that the warrant is not being exercised on behalf of a
U.S. person, or the provision to us of a written opinion of counsel to the
effect that the transfer of the warrants and issuance of the shares of our
common stock upon the exercise of such warrants have been registered under the
Securities Act, or are exempt from registration thereunder. The
shares of our common stock issued upon the exercise of a warrant generally will
be considered restricted securities subject to a six-month holding
period. In general, a security holder who has not been an affiliate
of the Company for three months may resell these securities without any
restriction after satisfying the six-month holding period, provided that we are
current in our SEC filings. Because of these restrictions, our
warrants must contain an appropriate legend, which means they must be
certificated.
Holders
The
shares of our common stock and our warrants were held by approximately 420 and
69 holders of record, respectively, on March 10, 2009 as recorded on our
transfer agent’s registers.
30
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 2007. A special
cash dividend of $0.70 per share was paid on our common stock in
2008. We currently have no intention of paying dividends in the
foreseeable future.
Securities
Authorized for Issuance Under Equity Compensation Plan
Our board
of directors adopted an omnibus incentive plan which was approved by our
shareholders at our 2007 annual shareholder meeting on June 26,
2007. We do not have any other equity compensation
plan. Under this plan, we are authorized to issue 2,670,000 shares of
our common stock. The shares to be issued under the plan were
registered with the SEC on a Form S-8 filed on April 29,
2008. Through December 31, 2008, we issued options to purchase
410,000 shares of our common stock and awarded an additional 39,800 shares to
participants under the plan. The following additional information
regarding this plan is as of December 31, 2008.
|
Plan
Category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column
(a))
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity compensation plans
approved by security holders
|
142,000
|
$ 5.25
|
2,220,200
|
Performance
Graph
The
following graph shows changes over the 29 month period beginning July 13,
2006 (the completion of our offering of units) through December 31, 2008 in
the value of an $100 investment in: (i) our common stock; (ii) Russell
2000; and (iii) an industry group of other companies that file reports with
the SEC using SIC Code 2860. These companies are: AE Biofuels, Inc.,
Aventine Renewable Energy Holdings; Biofuel Energy Corp., Bluefire Ethanol
Fuels; China Clean Energy Inc.; Epolin Inc.; Ethos Environmental Inc.; Global
Green Solutions, Inc.; Green Energy Resources, Inc.; Green Plains Renewable
Energy; Greenshift Corp.; International Flavors & Fragrances, Inc.; Kreido
Biofuels Inc.; Momentum Biofuels, Inc.; New Generation Biofuels Holdings, Inc.;
OM Group Inc.; Originoil Inc.; Pacific Ethanol Inc.; Panda Ethanol Inc.; Pure
Biofuels Corp.; Rentech Inc.; Stratos Renewables Corp.; Synthetech Inc.; United
Energy Corp.; Verasun Energy Corp.; and Westlake Chemical Corp.
31
Securities
Sold and Consideration
The
following is a description of all securities sold by us within the past three
years, which securities were not registered under the Securities
Act.
We were
incorporated on August 12, 2005. We issued 5,000,000 shares of
common stock on September 1, 2005 to certain founding shareholders for an
aggregate consideration of $25,000. On May 24, 2006, we issued a
common stock dividend of 0.25 shares for each outstanding share, effectively
lowering the purchase price paid by each of the founding shareholders to $.004
per share. The total number of issued shares of our common stock
following such stock dividend was 6,250,000. On June 27, 2006,
we and certain of our founding shareholders cancelled an aggregate of 625,000
shares of our common stock, reducing the founding shares outstanding to
5,625,000 shares.
On
July 12, 2006, we issued 22,500,000 units, each unit consisting of one
share of our common stock and one warrant entitling the holder thereof to
purchase one share of our common stock. The sales price was $8.00 per
unit for an aggregate sales price of $180,000,000.
Placing
Agents and Other Purchasers
KBC Peel
Hunt Ltd and CRT Capital Group, LLC, who served as placing agents in the
offering of the units, assisted us in procuring subscribers for 16,875,000
units. The remaining units sold in the offering were sold to the
following designees of Mr. Novelly.
32
|
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
Doré
|
109,375
|
|
|
Lori
L. Mikles
|
46,875
|
|
|
J.
B. Ladd Trust
|
32,500
|
|
|
Thomas
Evans
|
30,000
|
|
|
Steve
Wallace
|
31,250
|
|
|
Total
|
5,625,000
|
Exemption
from Registration Claimed
Shares of
our common stock were issued to our founding shareholders on the basis of an
exemption from registration under Section 4(2) of the Securities Act for
transactions by an issuer not involving any public offering. Each of
our founding shareholders was, and is, a sophisticated investor who or which
would qualify as an accredited investor (as defined in Rule 501 under the
Securities Act). Neither we nor any person acting on our behalf
offered or sold the shares to the founding shareholders by any form of general
solicitation or general advertising, and each of our founding shareholders
understands that such shares are “restricted securities” (as defined in Rule 144
under the Securities Act). Each of our founding shareholders was
required to represent to us that, among other matters, he or it was purchasing
our shares for investment purposes only, for his or its own account and not with
a view toward selling or otherwise distributing the shares.
The units
were sold: (i) to “qualified institutional buyers” (as defined in Rule 144A
under the Securities Act) and a limited number of “accredited investors” (as
defined in Rule 501 under the Securities Act); and (ii) in offshore
transactions complying with Rule 903 of Regulation S under the Securities
Act. More specifically, the units were not registered under the
Securities Act and are “restricted securities” as defined in Rule
144. A purchaser of such securities may not offer, sell, pledge or
otherwise transfer such securities in the United States or to, or for the
account or benefit of, any U.S. person (as defined under Regulation S of the
Securities Act), except: (a) pursuant to an effective registration
statement under the Securities Act; (b) to a person whom the seller
reasonably believes is a qualified institutional buyer in a transaction meeting
the requirements of Rule 144A under the Securities Act; (c) pursuant to an
exemption from the registration requirements of the Securities Act provided by
Rule 144 thereunder (if available); or (d) in certain transactions
specified in Regulation S. The selling restrictions set forth in the
preceding sentence will continue to be applicable to our shares and warrants
notwithstanding the expiration of the compliance period described
below. Under our bylaws, we are required to refuse to register any
transfer of our securities not made in accordance with the provisions of Rule
144A, Rule 144 (if available), Regulation S, or pursuant to registration under
the Securities Act or another exemption from registration under the Securities
Act.
Our
shares and warrants are subject to the conditions listed under section
903(b)(3), or Category 3, of Regulation S of the Securities
Act. Under Category 3, “offering restrictions” (as defined under
Regulation S) must be in place and additional restrictions are imposed on
resales of the shares and warrants as described below. All shares and
warrants are subject to these restrictions, regardless of whether the purchaser
acquired the shares or warrants in a transaction pursuant to Rule 144A or in a
transaction pursuant to Regulation S.
Prior to
one year after the later of (i) the time when the shares or warrants were first
offered to persons other than distributors in reliance upon Regulation S or (ii)
the date of closing of the offering, or such longer period as may be required
under applicable law (the “compliance period”):
(a) every
purchaser of shares or warrants other than a distributor will be required to
certify that it is not a U.S. person and is not acquiring the securities for the
account or benefit of any U.S. person (as defined under Regulation S of the
Securities Act) or is a U.S. person who purchased securities in a transaction
that did not require registration under the Securities Act;
33
(b) every
purchaser of the shares or warrants has been, or will be, required to agree to
resell such shares or warrants only in accordance with the provisions of Rule
144A, Rule 144 (if available) or Regulation S, or pursuant to an effective
registration statement under the Securities Act, and will be required to agree
to not engage in hedging transactions with regard to the securities unless in
compliance with the Securities Act;
(c) the
shares and warrants will (i) contain a legend to the effect that transfer is
prohibited except in accordance with the restrictions set forth in (a) and (b)
above during the compliance period, and (ii) with respect to the warrants
(notwithstanding the expiration of the compliance period), and pursuant to Rule
903(b)(5)(i), contain a legend stating that the warrants and securities to be
issued upon their exercise have not been registered under the Securities Act and
that the warrant may not be exercised by or on behalf of any U.S. person without
an opinion of counsel;
(d) each
distributor selling securities to a distributor, a dealer (as defined in Section
2(a)(12) of the Securities Act), or a person receiving a selling concession, fee
or other remuneration will be required to send a confirmation or other notice to
the purchaser stating that the purchaser is subject to the same restrictions on
offers and sales that apply to a distributor; and
(e) under
our bylaws, we are required to refuse to register any transfer of our securities
not made in accordance with the provisions of Rule 144A, Rule 144 (if available)
or Regulation S, or pursuant to registration under the Securities Act or another
exemption from registration under the Securities Act.
Each
purchaser of our warrants (regardless of whether such purchaser acquired such
warrants in a transaction pursuant to Rule 144A, Regulation D or Regulation S),
upon exercise of each warrant, must:
(a) provide
us with a written certification that it is neither within the U.S. nor a U.S.
person and the warrant is not being exercised on behalf of a U.S. person;
or
(b) provide
us with a written opinion of counsel to the effect that the transfer of the
warrants and issuance of the shares upon the exercise of such warrants to such
person have been registered under the Securities Act or are exempt from
registration thereunder; and
(c) receive
certificated securities containing the legend described below.
In the
offerings of the units, each purchaser of the shares and warrants was deemed to
have represented and agreed as follows:
(1) the
purchaser (A) (i) is an institutional accredited investor that is a qualified
institutional buyer (subject to certain limited exceptions in the case of the
initial purchase only), (ii) is aware that the sale to it is being made in
reliance on Rule 144A (or, in the case of the initial purchaser only, in
reliance on Regulation D) and (iii) is acquiring the securities for its own
account or for the account of a qualified institutional buyer or (B) is not a
U.S. person and is purchasing the securities in an offshore transaction pursuant
to Regulation S;
(2) the
purchaser understands that the securities were offered in a transaction not
involving any public offering within the meaning of the Securities Act, that the
securities have not been and, except as otherwise described in the offering
documents relating to the unit issuance, will not be registered under the
Securities Act and that if in the future it decides to offer, resell, pledge or
otherwise transfer any such securities, such securities may be offered, resold,
pledged or otherwise transferred only (i) in the United States to a person
whom the seller reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A, (ii) outside the United
States in a transaction complying with the provisions of Rule 903 or Rule 904
under the Securities Act, (iii) pursuant to an exemption from registration
under the Securities Act provided by Rule 144 (if available), or
(iv) pursuant to an effective registration statement under the Securities
Act, in each of cases (i) through (iv) in accordance with any applicable
securities laws of any state of the United States;
(3) the
purchaser understood and agreed that, in addition to the restrictions set forth
in (2) above, if in the future it decides to resell, pledge or otherwise
transfer any securities or any beneficial interests in any securities prior to
the date which is one year after the later of (1) the date when the shares or
warrants are first offered to persons (other than distributors) pursuant to
Regulation S and (2) the date of closing of the unit offering, it will do
so
34
only
(i) in compliance with the restrictions set forth above, (ii) pursuant
to an effective registration statement under the Securities Act, or
(iii) in accordance with the provisions of Rule 144A, Rule 144 (if
available) or Regulation S, and in each of such cases in accordance with any
applicable securities law of any state of the United States;
(4) the
purchaser agreed to and each subsequent holder is required to, notify any
purchaser of the shares or warrants from it of the resale restrictions referred
to in paragraphs (2) and (3) above, if then applicable;
(5) the
purchaser acknowledged that, prior to any proposed transfer of shares or
warrants other than pursuant to an effective registration statement, the
transferee of shares or warrants may be required to provide certifications and
other documentation relating to the non-U.S. person status of such
transferee;
(6) the
purchaser acknowledged that we, our placing agents in the unit issuance and
others rely upon the truth and accuracy of the foregoing acknowledgements,
representations and warranties and agreed that if any such acknowledgement,
representation or warranty deemed to have been made by virtue of its purchase of
shares or warrants is no longer accurate, it must promptly notify our placing
agents and us;
(7) the
purchaser acknowledged that neither we, our placing agents nor any person
representing any of them, has made any representation to it with respect to us
or the unit offering, other than the information contained in the offering
documents related to the unit offering, which had been delivered to the
purchaser and upon which the purchaser relied in making its investment decision
with respect to the securities offered; the purchaser has had access to such
financial and other information concerning us and the securities offered,
including an opportunity to ask questions of and request information from us and
our placing agents;
(8) the
purchaser purchased the units for its own account, or for one or more investor
accounts for which it was acting as fiduciary or agent, in each case, not with a
view to, or for offer or sale in connection with, any distribution thereof in
violation of the Securities Act, subject to any requirement of law that the
disposition of its property or the property of such investor account or accounts
be at all times within its or their control and subject to its or their ability
to resell, reoffer or otherwise transfer such securities pursuant to Rule 144A,
Regulation S or Rule 144 (if available) under the Securities
Act;
(9) the
purchaser understood that the securities offered, as “Restricted Securities”
under Rule 144 of the Securities Act, will, until the expiration of the
applicable holding period with respect to the securities set forth in Rule 144
of the Securities Act, and the expiration of the compliance period described
above, will bear legends described below, unless we determine otherwise in
compliance with applicable law; and
(10) the
purchaser acknowledged that the shares and warrants, whether purchased pursuant
to Rule 144A of the Securities Act, Regulation D of the Securities Act or
pursuant to Regulation S of the Securities Act, will bear a restrictive legend
to the following effect, unless we determine otherwise in compliance with
applicable law:
PRIOR
TO INVESTING IN THE SECURITIES OR CONDUCTING ANY TRANSACTIONS IN THE SECURITIES,
INVESTORS ARE ADVISED TO CONSULT 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.
35
THE
HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS
SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN
THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE OF THE UNITED
STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 or RULE 904 UNDER
THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF
CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY
STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER
IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE
RESTRICTIONS REFERRED TO IN (A) ABOVE.
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED TO ANY
EMPLOYEE BENEFIT PLAN AS DEFINED IN SECTION 3(3) OF ERISA SUBJECT TO TITLE I OF
ERISA OR ANY PLAN AS DEFINED IN SECTION 4975 OF THE CODE WHICH IS SUBJECT TO THE
RULES OF SECTION 4975 OR ANY ENTITY DEEMED TO HOLD ASSETS OF ANY SUCH
PLANS.
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER RESTRICTIONS
WHICH REQUIRE THAT IN ADDITION TO ANY CERTIFICATIONS REQUIRED FROM A TRANSFEROR
AS SET FORTH ON THE REVERSE OF THIS CERTIFICATE, PRIOR TO THE EXPIRATION OF A
DISTRIBUTION COMPLIANCE PERIOD OF AT LEAST ONE YEAR, THE TRANSFEREE CERTIFIES AS
TO WHETHER OR NOT IT IS A U.S. PERSON WITHIN THE MEANING OF REGULATION S AND
PROVIDES CERTAIN OTHER CERTIFICATIONS AND AGREEMENTS. PRIOR TO
PERMITTING ANY TRANSFER, THE COMPANY MAY REQUEST AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER IS TO BE EFFECTED IN A
TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT OR
IS EXEMPT FROM REGISTRATION.
In
addition, each purchaser of Warrants was deemed to have represented and agreed
as follows:
(1) the
purchaser understood that shares issuable upon exercise of the warrants are,
subject to certain exceptions, not being offered in the United States or to U.S.
persons (as defined in Regulation S under the Securities Act) and that warrant
holders will be required, as a condition precedent to the exercise of any
warrants, to comply with the certain requirements; and
(2) the
purchaser understood that warrant holders located in the United States or who
are U.S. persons (as defined under Regulation S of the Securities Act) may be
permitted to exercise their warrants for shares if we reasonably believe that
such exercise does not require registration under the Securities Act in reliance
upon such warrant holder (i) certifying that it is a qualified institutional
buyer and understands that the shares to be issued upon exercise of such
warrants have not been registered under the Securities Act, (ii) supplying an
opinion of counsel that the warrants and the shares issuable upon exercise are
exempt from registration under the Securities Act and (iii) agreeing that (x)
such shares will be subject to certain restrictions on transfer as set forth
above for the shares and warrants, (y) a new holding period for the shares
issued upon exchange of such warrant, for purposes of Rule 144 under the
Securities Act, will commence upon issue of such shares and (z) its acquisition
of shares was not solicited by any form of general solicitation or general
advertising and that it has been given access to information sufficient to
permit it to make an informed decision as to whether to invest in the
shares. We may, in our sole discretion, permit the exercise of
warrants in certain limited circumstances in accordance with their terms if the
requirements of other exemptions under the Securities Act and other applicable
laws can be satisfied.
36
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 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:
|
|
·
|
in
whole and not in part;
|
|
|
·
|
at
a price of $0.01 per warrant;
|
|
|
·
|
upon
a minimum of 30 days’ prior written notice of redemption to each warrant
holder;
|
|
|
·
|
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
|
|
|
·
|
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. In 2008, Computershare
Investor Services (Channel Islands) Limited succeeded Capita IRG (Offshore)
Limited as warrant agent.
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.
37
The
following chart sets forth the status of the outstanding warrants as of
December 31, 2008.
|
Initial
issuance of warrants
|
22,500,000
|
|
Warrants
exercised in 2006
|
-
|
|
Outstanding
warrants at December 31, 2006
|
22,500,000
|
|
Warrants
exercised in 2007
|
-
|
|
Outstanding
warrants at December 31, 2007
|
22,500,000
|
|
Warrants
exercised in 2008
|
1,182,500
|
|
Outstanding
warrants at December 31, 2008
|
21,317,500
|
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. Lee E. 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
below.
|
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 (discussed below)
|
(10,987 | ) | ||
|
Amount
disbursed to us
|
$ | 85,280 | ||
__________
|
(a)
|
Includes
$2,623 in interest income, less $1,000 transferred to us for working
capital purposes.
|
|
(b)
|
Prior
to purchase price adjustments. After purchase price
adjustments, the amount was $70,970. See note 3 to our
annual consolidated financial statements contained elsewhere
herein.
|
38
Purchase
of Securities by Us
Neither
we nor anyone acting on our behalf has purchased any shares or other units of
any class of our equity securities that is registered pursuant to
section 12 of the Exchange Act. However, in connection with the
July 2006 offering of units, 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.
39
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.
For
purposes of preparing our financial statements, we initially accounted for the
acquisition of Eastman SE, Inc. as a reverse acquisition and did not apply
purchase accounting to such transaction. On July 27, 2007, we
issued a Form 8-K pursuant to Item 4.02(a) of Form 8-K, informing
investors that our 2006 Annual Financial Statements should not be relied upon
for the reasons set forth therein. A copy of that Form 8-K may
be obtained free of charge on our website at
http://ir.futurefuelcorporation.com/sec.cfm or by requesting the same from us at
FutureFuel Corp., 8235 Forsyth Blvd., 4th Floor,
Clayton, Missouri 63105 Attn: Investor Relations. We restated our
2006 financial statements to apply purchase accounting to our acquisition of
Eastman SE, Inc., a portion of which 2006 financial statements are included
herein. See Note 2 to our consolidated financial statements for
the year ended December 31, 2006 included in Amendment No. 3 to our
Form 10 filed with the SEC on April 9, 2008 for a detailed discussion
of the effects of such restatement.
The
following tables set forth our and 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 ten months ended October 31, 2006 (the period between
January 1, 2006 and the date we acquired FutureFuel Chemical Company), the
twelve months ended December 31, 2005 and 2004 (the two most recent
complete fiscal years prior to 2006) and our consolidated financial statements
for the twelve months ended December 31, 2006, 2007 and 2008, all of which
are included elsewhere herein or in Amendment No. 3 to our Form 10
filed with the SEC on April 9, 2008. 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 such
financial statements and notes thereto. The selected financial data
for FutureFuel Chemical Company prior to our acquisition thereof represent the
complete financial information prepared and provided by Eastman Chemical Company
to us in conjunction with the carve out and sale of the Batesville plant to us
for the twelve months ended December 31, 2004 and 2005, as well as the ten
months ended October 31, 2006.
40
(Dollars
in thousands, except per share amounts)
|
FutureFuel
Corp. Consolidated
|
FutureFuel
Corp.
and FutureFuel Chemical Company Combined
|
Future
Fuel
Corp.
Consolidated
|
Future
Fuel Chemical Company
|
|||||||||||||||||||||||||
|
Item
|
Twelve
Months
Ended
December 31, 2008
|
Twelve
Months
Ended
December 31, 2007
|
Twelve
Months
Ended
December
31,
2006
|
Twelve
Months
Ended
December 31, 2006
|
Ten
Months
Ended
October
31,
2006
|
Twelve
Months
Ended
December
31,
2005
|
Twelve
Months
Ended
December
31,
2004
|
|||||||||||||||||||||
|
Operating
Revenues
|
$ | 198,330 | $ | 169,788 | $ | 150,770 | $ | 23,043 | $ | 127,727 | $ | 119,539 | $ | 144,157 | ||||||||||||||
|
Net
income (loss)
|
$ | 22,675 | $ | 8,408 | $ | 2,242 | $ | 2,717 | $ | (475 | ) | $ | 381 | $ | (14,867 | ) | ||||||||||||
|
Earnings
per common share
|
||||||||||||||||||||||||||||
|
Basic
|
$ | 0.84 | $ | 0.31 | $ | 0.08 | $ | 0.10 |
NA
|
NA
|
NA
|
|||||||||||||||||
|
Diluted
|
$ | 0.82 | $ | 0.26 | $ | 0.07 | $ | 0.09 |
NA
|
NA
|
NA
|
|||||||||||||||||
|
Total
Assets
|
$ | 238,126 | $ | 216,113 | $ | 203,059 | $ | 203,516 |
NA
|
$ | 114,500 | $ | 118,164 | |||||||||||||||
|
Long-term
obligations
|
$ | 34,377 | $ | 24,353 | $ | 20,740 | $ | 20,740 |
NA
|
$ | 24,830 | $ | 25,105 | |||||||||||||||
|
Cash
dividends per common share
|
$ | 0.70 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 36,275 | $ | 21,554 | $ | (3,960 | ) | $ | (12,494 | ) | $ | 8,534 | $ | 7,556 | $ | 19,044 | ||||||||||||
|
Net
cash provided by (used in) investing activities
|
$ | (52,009 | ) | $ | (29,978 | ) | $ | (91,168 | ) | $ | (82,619 | ) | $ | (8,549 | ) | $ | (6,594 | ) | $ | (6,520 | ) | |||||||
|
Net
cash provided by (used in) financing activities
|
$ | (11,466 | ) | $ | (50 | ) | $ | 158,229 | $ | 158,214 | $ | 15 | $ | (962 | ) | $ | (12,524 | ) | ||||||||||
For the
combined year ended December 31, 2006, operating revenues, net income
(loss) and earnings per common share combine our consolidated results for the
entire twelve months ended December 31, 2006 and FutureFuel Chemical Company’s
results for the ten months ended October 31, 2006. This
information is for illustrative purposes only. The consolidated
company would likely have performed differently had they always been
combined. The information should not be relied on as an indication of
future results that the combined company will experience after the acquisition
of FutureFuel Chemical Company because of a variety of factors, including access
to additional information and changes in value.
Our
Amendment No. 3 to Form 10 Registration Statement filed with the SEC
on April 9, 2008 contains all the financial statements and selected
financial data for FutureFuel Chemical Company that was provided to us by
Eastman Chemical Company.
Prior to
the initiation of its biofuels program in 2005, the Batesville plant did not
report financial results by business “segments” as defined by generally accepted
accounting principles. After the initiation of such program and upon
divestiture, it defined two segments: chemicals and biofuels.
In March
2007, FutureFuel Chemical Company entered into a $50 million credit
facility with Regions Bank as described below. As of
December 31, 2008, FutureFuel Chemical Company had no borrowings under such
credit facility.
41
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read together with our and FutureFuel Chemical
Company’s financial statements, including the notes thereto, set forth or
otherwise referenced herein. For the year ended December 31,
2006, the financial information presented combines our consolidated results for
the entire twelve months ended December 31, 2006 and FutureFuel Chemical
Company’s results for the ten months ended October 31,
2006. This information is for illustrative purposes only and to
provide additional information to investors by showing FutureFuel Chemical
Company’s contribution to the results of the combined company. As a
result of this presentation, however, the amounts referred to in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (including the tables set forth below) will not agree to our
financial statements for the year ended December 31, 2006. The
consolidated company, moreover, would likely have performed differently had we
and FutureFuel Chemical Company 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. This discussion contains forward-looking statements
that reflect our current views with respect to future events and financial
performance. Actual results may differ materially from those
anticipated in these forward-looking statements. See “Forward Looking
Information” below for additional discussion regarding risks associated with
forward-looking statements.
Results
of Operations
In General
We were
not incorporated until August 12, 2005, we did not complete our offering
until July 12, 2006 and we did not complete the acquisition of FutureFuel
Chemical Company until October 31, 2006. Other than the offering
and the acquisition, we did not carry on any material business activities prior
to November 1, 2006.
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) nonanoyloxybenzene-sulfonate, a bleach activator manufactured
exclusively for a customer for use in a household detergent; (ii) a
proprietary herbicide (and intermediates) manufactured exclusively for a
customer; and (iii) two other product lines (CPOs and DIPBs) produced under
conversion contracts for another customer. 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. Beginning in 2006, revenues and cost of goods sold for
biofuels were treated as a separate business segment.
Revenues
generated from the bleach activator are based on a supply agreement with the
customer. The supply agreement stipulates selling price per kilogram
based on volume sold, with price moving up as volumes move down, and
vice-versa. The current contract expires in March
2013. FutureFuel Chemical Company pays for raw materials required to
produce the bleach activator. The contract with the customer provides
that the price received by FutureFuel Chemical Company for the bleach activator
is indexed to changes in certain items, enabling FutureFuel Chemical Company to
pass along most inflationary increases in production costs to the
customer.
FutureFuel
Chemical Company has been the exclusive manufacturer for a customer 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 then current term for the
intermediates. No assurances can be given that these contracts will
not be terminated. The customer 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
or conversion costs that FutureFuel Chemical Company is responsible for
purchasing and/or providing.
42
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. 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 for CPOs and
DIPB based on volume manufactured, with a minimum annual fee for both
products. In addition, the conversion agreements provide for revenue
adjustments for actual price of raw materials purchased by FutureFuel Chemical
Company at standard usages. Eastman Chemical Company provides key raw
materials at no cost. For the key raw materials, usage over standard
is owed Eastman Chemical Company; likewise, any improvement over standard is
owed to FutureFuel Chemical Company at the actual price Eastman Chemical Company
incurred for the key raw material.
SSIPA/LiSIPA
revenues are generated from a diverse customer base of nylon fiber
manufacturers. Contract sales with two customers are indexed to key
raw materials for inflation; otherwise, there is no pricing mechanism or
specific protection against raw material or conversion cost
changes.
Other
products include agricultural intermediates and additives, imaging chemicals,
fiber additives, various specialty pharmaceutical intermediates and various
other chemicals that FutureFuel Chemical Company has in full commercial
production or in development. 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, these products have no pricing
mechanism or specific protection against raw material or conversion cost
changes.
The year
ended December 31, 2006 was the first full year that FutureFuel Chemical
Company sold biodiesel. Capacity was initially 3 million gallons
per year, increasing to 24 million gallons per year by the end of 2007
through a dedicated continuous processing line and, to a lesser extent, batch
processing. During 2006 and 2007, FutureFuel Chemical Company sold
for its own account and produced, for a fee, biodiesel for a third party under a
tolling agreement. The tolling agreement terminated on
September 30, 2007 and was not renewed. Today, FutureFuel
Chemical Company procures all of its own feedstock and only sells biodiesel for
its own account. In rare instances, FutureFuel Chemical Company
purchases biodiesel from other producers for resale. FutureFuel
Chemical Company has the capability to process multiple types of vegetable oils
and animal fats, it can receive feedstock by rail or truck, and it has completed
the construction of substantial storage capacity to acquire feedstock at
advantaged prices when market conditions permit. We have plans to
increase FutureFuel Chemical Company’s production capacity to 59 million
gallons of biodiesel per year by April 2009 through the addition of a second
continuous processing line. We believe we have successfully
demonstrated our ability to keep our existing continuous processing line at or
near capacity for sustained periods of time as well as our ability to both
procure and logistically handle large quantities of
feedstock. Uncertainty related to our future biodiesel production
relates to changes in feedstock prices relative to biodiesel prices, the $1 per
gallon federal blenders credit, which has been extended to the end of 2009 and
overall biodiesel demand and usage in the United States.
The
majority of our and FutureFuel Chemical Company’s expenses are cost of goods
sold. Cost of goods sold reflects 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 and costs related to idle capacity. Finally, cost of goods
sold includes hedging gains and losses recognized by us. Cost of
goods sold is allocated to the chemical and biofuels business segments based on
equipment and resource usage 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 us and FutureFuel Chemical Company and, for the periods
prior to October 31, 2006, corporate expense allocations from Eastman
Chemical Company. Allocations from Eastman Chemical Company of costs
of goods sold, distribution and selling and general administrative expenses were
made primarily based on a percentage of revenues and allocations of research and
development expenses were made based upon actual time incurred; we believe both
represent reasonable allocation methodologies. These allocations and
estimates are not necessarily indicative of the costs and expenses that would
have resulted if FutureFuel Chemical Company had been operating as a separate
entity. Beginning November 1, 2006, all operating expenses were
directly incurred by us and FutureFuel Chemical Company. Please see
footnote 1
43
of
FutureFuel Chemical Company’s financial statements set forth below for a more
detailed discussion of corporate expense allocations.
The
financial statements provided herein disclose related party transactions and the
impact of those transactions on historical revenues and expenses. The
discussions of results of operations that follow are based on revenues and
expenses in total and for individual product lines and do not differentiate
related party transactions. See footnote 18 to our consolidated
annual financial statements and footnote 1 and footnote 8 to
FutureFuel Chemical Company’s annual financial statements contained elsewhere
herein for more details.
Fiscal Year Ended December 31,
2008 Compared to Fiscal Year Ended December 31, 2007
Revenues:
Revenues
for the year ended December 31, 2008 were $198,330,000 as compared to
revenues for the year ended December 31, 2007 of $169,788,000, an increase
of 17%. The increase was mainly attributable to increased volumes and
prices of biodiesel and the proprietary herbicide and
intermediates. Revenues from biofuels increased 69% and accounted for
21% of total revenues in 2008 as compared to 15% in 2007. Revenues
from chemicals increased 8% and accounted for 79% of total revenues in 2008 as
compared to 85% in 2007. Within the chemicals segment, revenues for
the year ended December 31, 2008 changed as follows as compared to the year
ended December 31, 2007: revenues from the bleach activator increased 2%;
revenues from the proprietary herbicide and intermediates increased 36%;
revenues from CPOs increased 11%; revenues from DIPB decreased 4%; revenues from
SSIPA/LiSIPA decreased 12%; and revenues from other products increased
9%.
Sales
volumes of the bleach activator during the year ended December 31, 2008
were unchanged from volumes for the year ended December 31, 2007 and were
generally in-line with expectations. The 2% increase in revenue was
mainly attributable to higher prices that resulted from contractual inflationary
increases of certain raw material prices. We experienced relatively
stable demand from this customer through 2007 and 2008. Demand from
this customer began to deteriorate in the first quarter of 2009 and our
customer’s demand for 2009 may be materially less than the preceding two
years. However, our agreement with this customer provides a
volume-price curve that protects our gross margin at these lower
volumes.
At
present, revenues from the bleach activator and the proprietary herbicide and
intermediates are together the most significant components of FutureFuel
Chemical Company’s revenue base, together accounting for 59% of revenues in the
year ended December 31, 2008 as compared to 64% in the year ended
December 31, 2007. The future volume of and revenues from the
bleach activator depend on both consumer demand for the product containing the
bleach activator and the manufacturing, sales and marketing priorities of our
customer. We are unable to predict with certainty the revenues we
will receive from this product in the future. We believe our customer
for the proprietary herbicide has been able to maintain or increase its volume
in light of generic competition by being more price competitive, changing its
North American distribution system and developing new
applications. In addition, our customer has benefited from the
general increase in planted acreage in the markets it serves.
Revenues
from CPOs and DIPBs together increased 3% during 2008, due mainly to higher
prices stemming from contractual inflationary increases of certain raw material
prices and conversion costs. Both of these products are late in their
life cycle and both are negatively impacted by the automotive and housing slow
down. As a result, our customer’s demand for these products, CPOs in
particular, has eroded in the first quarter of 2009 and future market conditions
for both CPOs and DIPBs may be challenging. We believe our customer
is actively seeking new customers and new applications for these
products. Absent success in these areas by our customer, we
anticipate a material decrease in revenues, on a percentage basis, for 2009
versus 2008.
The
majority of the increased revenues from biodiesel stem from higher selling
prices during 2008 as compared to 2007. In addition, gallons of
biodiesel sold during 2008 were 42% greater than 2007; this volume increase was,
in turn, due to stronger demand from certain key bulk
customers. There were no material shutdowns during 2008 and we
leveraged our newly built storage capacity and expanded infrastructure, as well
as our fleet of leased railcars, to meet customer requirements during the peak
demand season for biodiesel.
44
Cost of Goods Sold and
Distribution:
Total
cost of goods sold and distribution for the year ended December 31, 2008
were $157,913,000 as compared to total cost of goods sold and distribution for
the year ended December 31, 2007 of $152,555,000, an increase of
4%.
Cost of
goods sold and distribution for the year ended December 31, 2008 for
FutureFuel Chemical Company’s chemicals segment were $122,815,000 as compared to
cost of goods sold and distribution for the year ended December 31, 2007 of
$117,367,000. On a percentage basis, cost of goods sold and
distribution increased 5% as compared to an 8% increase in
revenues. This margin increase is due to: (i) FutureFuel
Chemical Company’s ability to pass the majority of raw material prices increases
on to its customers via contractual inflationary price adjustments (although, in
some cases, increases in prices of finished products via these contractual
adjustments lag increases in raw material prices); (ii) overall conversion
cost control; and (iii) increased sales of biodiesel during 2008, which in
turn pulled a greater share of fixed cost away from the chemicals segment as
compared to 2007.
Cost of
goods sold and distribution for 2008 for FutureFuel Chemical Company’s biofuels
segment were $35,098,000 as compared to cost of goods sold and distribution for
2007 of $35,188,000. On a percentage basis, cost of goods sold and
distribution did not change against increased revenues of 69%, resulting in
increased margins for the biofuels segment for 2008 as compared to
2007. These increased margins are a result of economies of scale that
result from higher volumes of biodiesel produced and sold. In
addition, margins were favorably impacted by gains on hedging activity of
$9,519,000 during 2008 as compared to losses of $6,910,000 during
2007. The gains on hedging activity are a direct result of declining
prices of heating oil and other commodities during the second half of
2008. We manage price risk in our biofuels segment by selling heating
oil futures contracts (and/or options on futures contracts) at the time of
establishing price commitments for feedstock purchases, thereby preserving the
per gallon margin available at the time of such commitment. As
heating oil (and biodiesel) prices declined during the second half of 2008, we
recognized gains on our hedging positions and lower margins (or in some cases
losses) on the sale of the physical product. In addition, commodity
price declines resulted in our cost of biodiesel (and certain associated raw
material) inventory at December 31, 2008 exceeding its market
value. Cost of goods sold for 2008 include a $3,973,000 charge to
reduce these inventories to market value. The majority of this charge
is attributable to the biofuels segment. Cost of goods sold and
distribution for the biofuels segment includes funding from the State of
Arkansas under the Arkansas Alternative Fuels Development Program of
$2,000,000. Under this program, biodiesel producers in the state of
Arkansas were eligible to receive $0.20 per gallon for every gallon of
biodiesel produced during defined time periods, up to a maximum of $2,000,000
per period. FutureFuel Chemical Company applied for and received the
maximum $2,000,000 funding under this program for biodiesel produced between
January 1, 2007 and June 30, 2008. The next eligible
application period opened July 1, 2008 and closes June 30,
2009. FutureFuel Chemical Company has applied for the $0.20 per
gallon credit for biodiesel produced during the second half of
2008. Due to the uncertainty of funding from this program, we do not
recognize a credit to cost of goods sold and distribution until such time as our
application is approved and funding is received.
Operating
Expenses:
Operating
expense increased from $7,578,000 in 2007 to $8,236,000 in 2008, or
approximately 9%. This increase was primarily the result of higher
compensation expense and research and development expense.
Our
consolidated financial statements present the four principal components of
selling, general and administrative expenses: (i) compensation expense,
which includes salaries, wages and benefits paid to sales and administrative
personnel, as well as fees paid to directors; (ii) formation expense and
cancelled offerings costs; (iii) other expense, which includes travel and
entertainment, selling, advertising, third party services, charitable
contributions, memberships, dues and subscriptions and overhead allocations; and
(iv) related party expenses, which consist primarily of reimbursement of
travel and administrative services incurred on our behalf, as well as fees for a
commodity trading advisory agreement with an affiliate.
Selling,
general and administrative expense increased $141,000 from 2007 to 2008, or
approximately 3%. This increase is a result of higher compensation
expense for 2008, partially offset by the lack of formation expense or canceled
offering costs in 2008, as well as a decline in other
expense. Research and development expense increased $517,000 from
2007 to 2008, or approximately 15%. This increase is the result of
customer reimbursement of certain research and development activities in 2007,
which had the effect of reducing overall research and
45
development
expense in that year, as well as expanded utilization of external resources to
advance certain key projects during 2008.
Provision
for Income Taxes:
The
effective tax rates for the years ended December 31, 2008 and
December 31, 2007 reflect our expected tax rate on reported operating
earnings before income taxes. We have determined that we do not
believe that we have a more likely than not probability of realizing a portion
of our deferred tax assets. As such, we have recorded a valuation
allowance of $737,000 at December 31, 2008. An allowance of
$472,000 was recorded at December 31, 2007.
Fiscal Year Ended December 31,
2007 Compared to Fiscal Year Ended December 31, 2006
Revenues:
Revenues
for the year ended December 31, 2007 were $169,788,000 as compared to
revenues for the year ended December 31, 2006 of $150,770,000, an increase
of 13%. (Revenues from FutureFuel Chemical Company for the ten-month
period ended October 31, 2006 were $127,727,000.) Revenues from
biodiesel increased 88% and accounted for 15% of total revenues in 2007 as
compared to 9% in 2006. Revenues from the bleach activator decreased
3% and accounted for 49% of total revenues in 2007 as compared to 56% in
2006. Revenues from the proprietary herbicide and intermediates
increased 6% and accounted for 15% of total revenues in 2007 as compared to 16%
in 2006. Revenues from CPOs increased 37% in 2007 and accounted for
4% of total revenues in 2007 compared to 3% in 2006. Revenues from
DIPBs increased 12% and accounted for 5% of total revenues in both 2007 and
2006. Revenues from SSIPA/LiSIPA increased 31% and accounted for 5%
of total revenues in 2007 as compared to 4% in 2006. Revenues from
other products increased 29% and accounted for 7% of total revenues in both 2007
and 2006. All of the revenues from these operating activities were
generated at FutureFuel Chemical Company.
During
2007, revenues for the bleach activator decreased due to lower volumes which
were partially offset by higher prices stipulated by the pricing curve embedded
in the supply agreement with this customer. Demand for the bleach
activator was very strong during the fourth quarter and remained strong into
2008. Revenue from the proprietary herbicide and intermediates
increased as very strong volumes offset a net price reduction as more fully
described below. Revenues from the bleach activator and the
proprietary herbicide and intermediates were together the most significant
components of FutureFuel Chemical Company’s revenue base, accounting for 63% of
revenues in 2007 as compared to 72% in 2006. The prices for the
proprietary herbicide and intermediates were reduced by 10% from 2006 to 2007
due to continued competitive pressures as described above. This price
decrease was partially offset by a June 1, 2007 price increase of
approximately 4% to cover certain raw material cost increases that we had
incurred beginning in the first quarter of 2007. We believe our
customer was able to maintain its volume in light of generic competition by
being more price competitive, changing its North American distribution system
and developing new applications.
Revenues
from CPOs and DIPBs together increased 22% during 2007. This increase
is largely the result of new supply agreements and pricing mechanisms in place
following the acquisition of FutureFuel Chemical Company.
Revenue
from biodiesel increased in 2007 due to an increase in production capacity and a
stronger focus on the biofuels segment. Biodiesel capacity was 2
million gallons per year at the beginning of 2006 and increased to
24 million gallons per year by the end of 2006. Capacity was 24
million gallons per year for all of 2007. Capacity in 2007 was
reduced from February through May due to a fire that destroyed the two
centrifuges that were part of the continuous biodiesel production
line. Without these centrifuges, the continuous line operated at very
low rates. We increased batch production to the greatest extent
possible to offset lost continuous production but still were unable to sell as
much product during the shutdown period or accumulate as much inventory as we
had planned leading into the summer. We filed business interruption
and property claims to recover losses incurred as a result of the fire and in
March 2008 these claims were approved by our underwriters. The
financial impact of these claims is discussed in Cost of Goods Sold and
Distribution below.
46
Cost of Goods Sold and
Distribution:
Total
cost of goods sold and distribution for 2007 was $152,555,000 as compared to
total cost of goods sold and distribution for 2006 of $139,674,000, an increase
of 9%. (Cost of goods sold and distribution of FutureFuel Chemical
Company for the ten-month period ended October 31, 2006 was
$119,576,000.)
Cost of
goods sold and distribution for 2007 for FutureFuel Chemical Company’s chemicals
segment was $117,367,000 as compared to cost of goods sold and distribution for
2006 of $115,252,000, an increase of 2%. (Cost of goods sold and
distribution for FutureFuel Chemical Company’s chemical segment for the
ten-month period ended October 31, 2006 was $100,024,000.) Cost
of goods sold and distribution for all chemical products excluding the bleach
activator, measured as a percent of total chemical revenues, decreased from 41%
in 2006 to 35% during 2007. Cost of goods sold and distribution for
the bleach activator increased from 43% of total chemical revenues in 2006 to
46% in 2007; this increase was largely the result of increased raw material
prices resulting from new supply agreements and pricing mechanisms in place
following the acquisition of FutureFuel Chemical Company. Gross
margins improved substantially for all chemical products excluding the bleach
activator. This improvement was attributable to growth of FutureFuel
Chemical Company’s biodiesel segment. As more fully described above,
biodiesel is made using the same assets utilized to manufacture the majority of
our product lines (other than the bleach activator), and as biodiesel production
increases the biofuels segment absorbs more cost away from other chemical
products that utilize those assets.
Cost of
goods sold and distribution for 2007 for FutureFuel Chemical Company’s biofuels
segment was $35,188,000 as compared to cost of goods sold and distribution for
2006 of $24,422,000, an increase of 44%. (The cost of goods sold and
distribution of FutureFuel Chemical Company’s biofuels segment for the ten-month
period ended October 31, 2006 was $19,552,000.) The largest
component of this increase was hedging losses of $6,910,000 in 2007; gains from
hedging in 2006 were insignificant. Hedging losses were attributable
to steadily increasing energy prices during 2007, heating oil in particular,
which is the commodity that we believe is most appropriate for use in hedging
FutureFuel Chemical Company’s biodiesel inventory. Our practice was
to run a relatively balanced position, meaning we generally sold heating oil
futures or options to lock our selling prices whenever we locked our feedstock
cost. Had we not fixed our feedstock cost, we would not have fixed
our selling cost; in this case we would not have incurred hedging losses but we
would have experienced markedly higher feedstock costs.
Gross
loss for the biofuels segment was $(9,874,000) in 2007, up from $(11,082,000) in
2006. (The gross loss of FutureFuel Chemical Company’s biofuels
segment for the ten-month period ended October 31, 2006 was
$(7,973,000).) Of the gross loss for 2007, greater than 75% is
attributable to the first quarter. This is due to lower chemical
revenues across the plant in the first quarter which effectively forced the
biofuels segment to carry a larger than normal amount of fixed cost, as well as
the higher cost of batch production after the fire discussed above forced us to
produce biodiesel almost exclusively in the batch plant. Our
underwriters approved our $657,000 business interruption claim (net of
deductible) which helped to offset some of these losses.
For the
year 2007 as a whole, the increase in cost of goods sold and distribution for
the biofuels segment was only half the increase in biofuels
revenues. We were successful in reducing costs during the second half
of the year through a focus on continuous manufacturing and also through the use
of new tankage and other infrastructure. The biofuels segment began
production in the batch plant and has continued to utilize the batch process to
test new processing techniques, experiment with various alternative feedstocks
and meet peak demand. The biodiesel segment also utilizes a
continuous processing line that is more efficient and produces higher volumes
per reactor than the batch process, and hence absorbs fewer overhead costs per
gallon of biodiesel produced. FutureFuel Chemical Company has
transitioned from primarily batch processing to primarily continuous processing,
a strategy which is expected to continue to significantly reduce fixed cost
allocation and as a result reduce total cost of goods sold and distribution per
gallon of biodiesel produced.
In
addition to the above considerations, we were successful in reducing costs per
gallon of biodiesel produced through selective sales of biodiesel feedstocks to
third parties. As a result of fixed price purchase commitments into
which we entered during 2007 and rapidly increasing commodity prices late in
2007, we determined that, in certain cases, the value of our feedstocks was
greater individually than the value of biodiesel finished product we could
produce utilizing these feedstocks.
47
Operating
Expenses:
Operating
expenses decreased from $11,581,000 for 2006 to $7,578,000 for 2007, or
approximately 35%. (Operating expenses of FutureFuel Chemical Company
for the ten-month period ended October 31, 2006 was
$9,399,000.) This decrease was primarily the result of lower overall
operating expenses incurred by FutureFuel Chemical Company on a standalone
basis. Prior to November 1, 2006, corporate overhead allocations
from Eastman Chemical Company comprised the largest component of FutureFuel
Chemical Company’s selling, general and administrative and research and
development expenses. These corporate overhead allocations are
detailed in note 1 of FutureFuel Chemical Company’s financial statements
included elsewhere herein. Following the acquisition of FutureFuel
Chemical Company by us, FutureFuel Chemical Company developed standalone sales,
marketing, legal, corporate finance and general administrative functions, and as
a whole, the related expenses have been significantly less than the allocation
from Eastman Chemical Company for corporate support in these functional
areas.
Our
consolidated financial statements present the four principal components of
selling, general and administrative expenses: (i) compensation expense,
which includes salaries, wages and benefits paid to sales and administrative
personnel, as well as fees paid to directors; (ii) formation expense and
cancelled offerings costs; (iii) other expense, which includes travel and
entertainment, selling, advertising, third party services, charitable
contributions, memberships, dues and subscriptions and overhead allocations; and
(iv) related party expenses, which consist primarily of reimbursement of
travel and administrative services incurred on our behalf, as well as fees for a
commodity trading advisor agreement with an affiliate.
For
FutureFuel Chemical Company in periods prior to November 1, 2006, the
material component of selling, general and administrative expenses is corporate
overhead allocations. Due to the changes in the structure,
organization and the related expense of the sales and administrative departments
of FutureFuel Chemical Company pre- and post-acquisition, we do not believe a
comparison of the material components of selling, general and administrative
expenses pre- and post-acquisition is meaningful. As such, we have
not included a discussion and analysis of the material components of selling,
general and administrative expenses for 2007 versus 2006.
Critical
Accounting Estimates
Purchase Price Allocation
Following
our acquisition of Eastman SE, Inc., we allocated the cost of the acquired
entity to the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. We do not anticipate these
estimates changing in the future.
Allowance for Doubtful
Accounts
We reduce
our accounts receivable by amounts that may be uncollectible in the
future. This estimated allowance is based upon management’s
evaluation of the collectibility of individual invoices and is based upon
management’s evaluation of the financial condition of our customers and
historical bad debt experience. This estimate is subject to change
based upon the changing financial condition of our customers. At
December 31, 2008 and 2007, we recorded an allowance for doubtful accounts
of $4,000 and $42,000, respectively, the majority of which pertained to one
customer. FutureFuel Chemical Company historically has not
experienced significant problems in collecting its receivables and we do not
expect this to change going forward.
Depreciation
Depreciation
is provided for using the straight-line method over the associated assets’
estimated useful lives. We primarily base our estimate of an asset’s
useful life on our experience with other similar assets. The actual
useful life of an asset may differ significantly from our estimate for such
reasons as the asset’s build quality, the manner in which the asset is used or
changes in the business climate. When the actual useful life differs
from the estimated useful life, impairment charges may result. We
monitor the estimate useful lives of our assets and do not currently anticipate
impairment charges.
48
Asset Retirement
Obligations
We
establish reserves for closure/post-closure costs associated with the
environmental and other assets we maintain. Environmental assets
include waste management units such as incinerators, landfills, storage tanks
and boilers. When these types of assets are constructed or installed,
a reserve is established for the future costs anticipated to be associated with
the closure of the site based on an expected life of the environmental assets,
the applicable regulatory closure requirements and our environmental policies
and practices. These expenses are charged into earnings over the
estimated useful life of the assets. The future costs anticipated to
be associated with the closure of the site are based upon estimated current
costs for such activities adjusted for anticipated future inflation
rates. Unanticipated changes in either of these two variables or
changes in the anticipated timing of closure/post-closure activities may
significantly affect the established reserves. As of
December 31, 2008 and December 31, 2007, we recorded a reserve for
closure/post-closure liabilities of $588,000 and $566,000,
respectively. We monitor this reserve and the assumptions used in its
calculation. As deemed necessary, we have made changes to this
reserve balance and anticipate that future changes will occur.
Revenue Recognition
For most
product sales, revenue is recognized when product is shipped from our facilities
and risk of loss and title have passed to the customer, which is in accordance
with our customer contracts and the stated shipping terms. All custom
manufactured products are manufactured under written
contracts. Performance chemicals and biodiesel are sold pursuant to
the terms of written purchase orders. In general, customers do not
have any rights of return, except for quality disputes. However, all
of our products are tested for quality before shipment, and historically returns
have been inconsequential. We do not offer volume discounts, rebates
or warranties.
Revenue
from bill and hold transactions in which a performance obligation exists is
recognized when the total performance obligation has been met. Bill
and hold transactions for three specialty chemical customers in 2008 and for two
specialty chemical customers in 2007 related to revenue that was recognized in
accordance with contractual agreements based on product produced and ready for
use. These sales were subject to written monthly purchase orders with
agreement that production was reasonable. The inventory was custom
manufactured and stored at the customer’s request and could not be sold to
another buyer. Credit and payment terms for bill and hold customers
are similar to other specialty chemical customers. Sales revenue
under bill and hold arrangements were $50,527,000, $33,494,000 and $31,550,000
for the years ended December 31, 2008, 2007 and 2006,
respectively.
Income Taxes
We
account for income taxes using the asset and liability method. Under
this method, income tax assets and liabilities are recognized for temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective income tax basis. A future income
tax asset or liability is estimated for each temporary difference using enacted
and substantively enacted income tax rates and laws expected to be in effect
when the asset is realized or the liability settled. Changes in the
expected tax rates and laws to be in effect when the asset is realized or the
liability settled could significantly affect the income tax assets and
liabilities booked by us. We monitor changes in applicable tax laws
and adjust our income tax assets and liabilities as necessary.
Liquidity
and Capital Resources
Our and
FutureFuel Chemical Company’s net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 2008, 2007 and 2006 are set forth in the following
chart. The 2008 and 2007 amounts are our consolidated results, and
the 2006 amounts are our consolidated results plus FutureFuel Chemical Company’s
results for the ten-month period ended October 31, 2006. The
combined results for 2006 are presented for comparative purposes
only.
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 36,275 | $ | 21,554 | $ | (3,960 | ) | |||||
|
Net
cash used in investing activities
|
$ | (52,009 | ) | $ | (29,978 | ) | $ | (91,168 | ) | |||
|
Net
cash provided by (used in) financing activities
|
$ | (11,446 | ) | $ | (50 | ) | $ | 158,229 | ||||
49
FutureFuel
Chemical Company’s net cash provided by (used in) operating activities,
investing activities and financing activities for the ten-month period ended
October 31, 2006 was:
(Dollars
in thousands)
|
Ten
Months Ended October 31, 2006
|
||||
|
Net
cash provided by operating activities
|
$ | 8,534 | ||
|
Net
cash used in investing activities
|
$ | (8,549 | ) | |
|
Net
cash provided by financing activities
|
$ | 15 | ||
Operating Activities
Cash
provided by operating activities increased from $21,554,000 during 2007 to
$36,275,000 during 2008. The increase in cash provided by operating
activities is a result of a $14,267,000 increase in net income, a $6,852,000
increase in cash provided by the change in deferred revenue, a $3,127,000
increase in the fair value of derivative instruments and other marketable
securities, a $2,468,000 increase in cash provided by the change in other
assets, a $1,088,000 increase in depreciation and amortization, and a $1,325,000
increase in cash provided by the change in accounts payable, including related
party balances. Offsetting these cash flows were a $8,923,000
increase in cash used for accounts receivable, a $3,172,000 increase in cash
used for inventory and a $2,712,000 increase in cash used for accrued expenses,
including related party balances and other current liabilities. Other
than the changes in cash discussed above, no single item resulted in a greater
or less than $1,000,000 change in cash provided from operating activities
between 2007 and 2008.
Cash
provided by (used in) operating activities increased from $(3,960,000) in 2006
to $21,554,000 in 2007, an increase of $25,514,000. (FutureFuel
Chemical Company’s net cash provided by operating activities for the ten-month
period ended October 31, 2006 was $8,534,000.) The increase
primarily resulted from changes in accounts receivable from year to
year. During 2006, FutureFuel Chemical Company used $(13,022,000) of
cash to build accounts receivable up to normal levels following the purchase of
the plant from Eastman Chemical Company. Additionally, accounts
receivable levels at the end of 2006 were abnormally high due to delayed
collections of balances which Eastman Chemical Company had collected on
FutureFuel Chemical Company’s behalf. These balances were collected
early in 2007 and accounts receivable were at a more normalized historical level
as of the end of 2007. (Accounts receivable at FutureFuel Chemical
Company provided $7,412,000 in cash for the ten-month period ended
October 31, 2006.) Other significant year to year changes
include a decrease in cash provided by (used in) changes in accounts payable,
including related party balances, from $5,107,000 in 2006 to $(314,000) in 2007,
and an increase in cash provided by (used in) changes in accrued expenses and
other current liabilities, from $(3,900,000) in 2006 to $1,613,000 in
2007. (For FutureFuel Chemical Company for the ten-month period ended
October 31, 2006, the decrease in cash provided by (used in) changes in
accounts payable was $2,271,000, and the increase in cash provided by (used in)
changes in accrued expenses and other current liabilities was
$(5,657,000).)
Investing Activities
Cash used
in investing activities increased from $29,978,000 in 2007 to $52,009,000 in
2008. The aggregate amount of cash used in the purchase and sale of
marketable securities, auction rate securities and commercial paper increased
from $14,803,000 in 2007 to $31,647,000 in 2008 as we sought both higher yield
and security for our cash. These investments are further described
under “Capital Management”. In addition, the increase in cash used in
investing activities was attributable to a $9,826,000 increase in cash used for
the collateralization of derivative instruments, which in turn resulted from a
greater use of options in our hedging activities, partially offset by an
increase in cash provided by restricted cash (which resulted from the Arkansas
Department of Environmental Quality relinquishing the need for us to maintain a
trust account to satisfy potential plant closure obligations).
Cash
provided by (used in) investing activities increased from $(91,168,000) in 2006
to $(29,978,000) in 2007. (FutureFuel Chemical Company’s net cash
provided by (used in) investing activities for the ten-month period ended
October 31, 2006 was $(8,549,000), all of which was attributable to capital
expenditures.) The majority of this
50
increase
was attributable to $(72,634,000) of cash used in the acquisition of Eastman SE,
Inc. during 2006; there was no cash provided by (used in) this investing
activity in 2007. The increase was also attributable to an increase
in cash provided by (used in) the collateralization of derivative instruments
from $(3,578,000) in 2006 to $2,789,000 in 2007. These increases were
offset by $14,803,000 of cash used to purchase marketable securities during 2007
(no activity during 2006) and capital expenditures which were $5,892,000 higher
in 2007 than 2006.
Financing Activities
Cash used
in financing activities was $50,000 in 2007 as compared to $11,466,000 in
2008. Financing activities during 2007 consisted solely of the
payment of a bank financing fee. Financing activities during 2008
consisted primarily of the payment of $19,705,000 in dividends offset by
$8,169,000 in proceeds from the issuance of shares of our common
stock. The issuance of shares of our common stock resulted from the
exercise of warrants and options.
Cash
provided by (used in) financing activities decreased from $158,229,000 in 2006
to $(50,000) in 2007. (For the ten-month period ended
October 31, 2006, cash provided by (used in) FutureFuel Chemical Company’s
financing activities was $15,000.) This decrease primarily resulted
from our equity offering in July 2006 less various related offering
costs. The only financing activity during 2007 consisted of a bank
financing fee of $(50,000).
Capital
Expenditure Commitments
As
previously disclosed in Item 1. Business - General Development of the Business
above, FutureFuel Chemical Company pursued seven core infrastructure projects
that are expected to bring efficiency, operational flexibility and cost savings
to existing biodiesel and chemical business lines. These
infrastructure projects were: (i) adding methanol recovery and biodiesel
feedstock pretreatment capabilities; (ii) constructing additional storage;
(iii) expanding on-site rail siding and railcar loading and unloading
capabilities; (iv) obtaining storage/thruput in strategic markets;
(v) acquiring a fleet of tanker trucks; (vi) procuring railcars; and
(vii) expanding biodiesel production capacity. Projects (iv) and
(vi) did not require any capital expenditures but instead affect cash flow
through ongoing operating lease commitments. These lease commitments
are included in footnote 21 of our annual consolidated financial statements
presented herein. Projects (ii), (iii) and (v) have been
completed. Projects (i) and (vii) require significant capital
expenditures and are scheduled to be completed in April 2009. We
estimate the total capital cost of these infrastructure projects from
November 1, 2006 through the date of completion will be approximately
$16 million.
For the
infrastructure projects discussed immediately above as well as any additional
capital projects being pursued, FutureFuel Chemical Company typically does not
enter into financial or other commitments that would preclude its ability to
expand or decrease the scope of a given project or cancel it
altogether. The following are our material commitments for capital
expenditures as of December 31, 2008.
(Dollars
in thousands)
|
General
Purpose of the Commitment
|
December 31,
2008
|
|||
|
Specialty
chemical expansion
|
$ | 1,555 | ||
|
Health,
safety and environment, and maintenance
|
229 | |||
|
Total
|
$ | 1,784 | ||
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 operations during the historical periods
discussed herein.
Credit
Facility
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%
51
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
Ratio
|
Base
Rate
Margin
|
LIBOR
Margin
|
||
|
>
3
|
-0.55%
|
1.70%
|
||
|
> 2 <
3
|
-0.70%
|
1.55%
|
||
|
> 1 <
2
|
-0.85%
|
1.40%
|
||
|
<
1
|
-1.00%
|
1.25%
|
There is
an unused commitment fee of 0.25% per annum. Beginning
December 31, 2007, and on the last day of each fiscal quarter thereafter,
the ratio of EBITDA to fixed charges 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 guaranteed FutureFuel Chemical Company’s obligations
under this credit agreement.
FutureFuel
Chemical Company had no borrowings under this credit facility at
December 31, 2008 or 2007.
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. 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 existing
cash 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.
Special
Dividend
On
October 1, 2008, we declared a special cash dividend of $0.70 per share on
our common stock, with a record date of October 22, 2008 and a payment date
of November 11, 2008. The special cash dividend amounted to
$19,705,000.
Off-Balance
Sheet Arrangements
Our only
off-balance sheet arrangements were: (i) the financial assurance trusts
established for the benefit of the Arkansas Department of Environmental Quality;
and (ii) hedging transactions. The financial assurance trusts
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 would be completed. The amounts held in trust were
included in restricted cash and cash equivalents on our balance
sheet. The closure liabilities were included in other noncurrent
liabilities, but only on a present value basis. These financial
assurance trusts were terminated on August 8, 2008 and were replaced by our
guaranty. This guaranty is not expected to have a material adverse
effect upon our financial condition.
We engage
in two types of hedging transactions. First, we hedge our biofuels
sales through the purchase and sale of futures contracts and options on futures
contracts of energy commodities. This activity was captured on our
balance sheet at December 31, 2008 and December 31,
2007. Second, we hedge our biofuels feedstock through the execution
of purchase contracts and supply agreements with certain
vendors. These hedging transactions are recognized in earnings and
were not recorded on our balance sheet at December 31, 2008 or
December 31, 2007 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 biofuels feedstock 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.
52
Contractual
Obligations
The
following table sets forth as of December 31, 2008 the payments due by
period for the following contractual obligations of us and FutureFuel Chemical
Company.
(Dollars
in thousands)
|
Contractual
Obligations
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
Years
|
|||||||||||||||
|
Operating
lease obligations
|
$ | 3,659 | $ | 1,163 | $ | 1,180 | $ | 871 | $ | 445 | ||||||||||
|
Purchase
obligations(a)
|
2,077 | 2,010 | 67 | - | - | |||||||||||||||
|
Total
|
$ | 5,736 | $ | 3,173 | $ | 1,247 | $ | 871 | $ | 445 | ||||||||||
__________
|
(a)
|
Purchase
obligations within less than one year include: (i) $1,784 for capital
expenditure commitments related to the construction of special chemical
expansion, health, safety and environment, and maintenance projects; and
(ii) $226 for information technology maintenance and software license
commitments. Purchase obligations beyond one year include $67
for information technology maintenance and software license
commitments.
|
Income
Taxes
Our total
liability for uncertain tax positions under Financial Accounting Standards Board
No. 48 Accounting for Uncertainty in Income Taxes - An Interpretation of
FASB No. 109 (FIN 48) was $654,729 as of December 31,
2008. We are not able to reasonably estimate the amount by which the
liability will increase or decrease over time; however, at this time, we do not
expect a significant payment related to these obligations within the next
year. See Note 14 to our consolidated financial statements
included elsewhere herein.
Capital
Management
Over
approximately the last 24 months, the global financial markets have experienced
significant volatility and fluctuations in credit market
liquidity. In some instances, these market conditions have caused
companies to reconsider the classification of certain investments on their
balance sheets and, in some cases, to record losses on the reduced fair market
value of those investments. To date, as more fully described in the
following paragraphs, we have been able to avoid these problems through our
active management of our short-term investments and cash.
As a
result of our initial equity offering and the subsequent positive operating
results of FutureFuel Chemical Company, we accumulated excess working
capital. Some of this excess working capital was paid out in 2008 as
a special cash dividend. We intend to retain the remaining cash to
fund infrastructure and capacity expansion at FutureFuel Chemical Company and to
pursue complimentary acquisitions in the oil and gas and chemical
industries. While in the present state of having excess working
capital, we intend to manage these assets in such a way as to generate
sufficient returns on these funds. Third parties have not placed
significant restrictions on our working capital management
decisions.
In 2008,
the management of these funds has largely taken the form of investments in U.S.
treasury bills and bonds, investments in foreign denominated government bonds,
investments in auction rate securities, investments in foreign currency and the
holding of cash in money market or similar bank accounts.
Beginning
in late 2007, we made investments in certain U.S. treasury bills and
notes. As of December 31, 2008, our investments in U.S. treasury
debt securities carried maturity dates ranging from January 2009 to March
2009. We have designated these securities as being
available-for-sale. Accordingly, these securities are carried at fair
value, with the unrealized gains and losses, net of taxes, reported as a
separate component of stockholders’ equity. The fair value of these
securities, including accrued interest, totaled $15,999,000 at December 31,
2008.
In 2008
we made an investment in treasury bonds of a certain foreign
government. As of December 31, 2008, the instruments comprising
this investment had matured or been sold and no subsequent, similar investments
were made.
53
We have
selectively made investments in certain auction rate securities that we believe
offer sufficient yield along with sufficient liquidity. To date, all
the auction rate securities in which we invested have maintained a mechanism for
liquidity, meaning that the respective auctions have not failed, the issuers
have called the instruments, or a secondary market exists for liquidation of the
securities. We classified these instruments as current assets in the
accompanying consolidated balance sheet and carry them at their estimated fair
market value. The fair value of these instruments approximated their
par value and, including accrued interest, totaled $14,990,000 at
December 31, 2008. Auction rate securities are typically long
term bonds issued by an entity for which there is a series of auctions over the
life of the bond that serve to reset the interest rate on the bonds to a market
rate. These auctions also serve as a mechanism to provide liquidity
to the bond holders; as long as there are sufficient purchasers of the auction
rate securities, the then owners of the auction rate securities are able to
liquidate their investment through a sale to the new purchasers. In
the event of an auction failure, a situation when there are more sellers than
buyers of a particular issue, the current owners of an auction rate security
issue may not be able to liquidate their investment. As a result of
an auction failure, a holder may be forced to hold the particular security
either until maturity or until a willing buyer is found. Even if a
willing buyer is found, however, there is no guarantee that this willing buyer
will purchase the security for its carrying value, which would result in a loss
being realized on the sale. The liquidity problems currently
experienced in the U.S. auction rate securities markets have generally been
focused on closed-end fund and student loan auction rate securities, asset
classes that we have avoided.
Beginning
in the second half of 2008, we made investments in certain commercial
paper. As of December 31, 2008, our investments in commercial
paper carried maturity dates ranging from January 2009 to March
2009. We have designated these investments as being
available-for-sale. Accordingly, these investments are carried at
fair value, with the unrealized gains and losses, net of taxes, reported as a
component of stockholders’ equity. The fair value of these
investments, including accrued interest, totaled $15,422,000 at
December 31, 2008.
In 2008,
we made investments in certain foreign currencies. We exited from
these investments prior to December 31, 2008.
Lastly,
we maintain depository accounts such as checking accounts, money market accounts
and other similar accounts at selected financial institutions.
Other
Matters
We
entered into an agreement with a customer to construct at a fixed price a
processing plant and produce a certain chemical for the customer. We
engaged a third party to act as general contractor on the construction of this
plant for a guaranteed price. That general contractor defaulted on
its obligations under its contract with us and abandoned the
project. As a result, we have undertaken the general contractor role
ourselves. We also filed suit against our former contractor to recoup
any damages that we may incur as a result of his default. The former
contractor has counterclaimed against us for amounts he asserts are due him
under our contract with him. At this time, we are unable to determine
what effect the general contractor’s default and/or his counterclaim will have
on us or on our financial condition.
A
customer entered into a contract with us for the purchase of approximately one
million gallons of biodiesel. The customer defaulted on a portion of
the contract approximately one month later by which time the market price of
biodiesel had declined substantially. Pursuant to the general terms
and conditions of the contract which we had previously agreed to with the
customer, we filed with the American Arbitration Association (“AAA”) to recoup
our damages that resulted from the customer’s default. The customer
claims that we breached the contract and has brought suit in court for a
declaratory judgment that we repudiated the contract; that the customer does not
owe us any damages; and for recovery of its court costs and attorneys
fees. Due to the customer’s refusal to participate in the AAA
proceeding, we withdrew from the proceeding and countersued in federal court to
recover our damages resulting from the customer’s default. At this
time we are unable to determine the probability that we will be successful in
recovering our damages. We do not expect that the customer’s claim
against us will have a material impact on our financial condition.
We
entered into a membership agreement with a biodiesel trade association, and
recently filed for rescission of the contract on various grounds. At
this time we are unable to determine the probability that we will be successful
in the rescission suit. However, we do not expect that any potential
claim or counterclaim against us by the
54
association,
including a claim for breach of contract or default, will have a material impact
on our financial condition.
55
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, we are
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 (electricity, coal, biofuel
feedstocks, etc.) and output (manufactured chemicals and biofuels).
We seek
to mitigate our 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, we may
enter into exchange traded commodity futures and options
contracts. We account for these derivative instruments in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 133 Accounting for Derivative
Instruments and Hedging Activities, as amended. Under these
standards, the accounting for changes in the fair value of a derivative
instrument depends upon whether it has been designated as an accounting hedging
relationship and, further, on the type of hedging relationship. To
qualify for designation as an accounting hedging relationship, specific criteria
must be met and appropriate documentation maintained. We had no
derivative instruments that qualified under these rules as designated accounting
hedges in 2008 or in any preceding year. Changes in the fair value of
our 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.
Our
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, 2008 and 2007, the fair values of our
derivative instruments were a net liability in the amount of $3,175,000 and
$247,000, respectively.
Our gross
profit will be impacted by the prices we pay for raw materials and conversion
costs (costs incurred in the production of chemicals and biofuels) for which we
do not possess contractual market price adjustment protection. These
items are principally comprised of animal fat, electricity, caustic soda, coal
and natural gas. 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.
We
prepared a sensitivity analysis of our exposure to market risk with respect to
key raw materials and conversion costs for which we do not possess contractual
market price adjustment protections, based on average prices in
2008. We included only those raw materials and conversion costs for
which a hypothetical adverse change in price would result in a 1% or greater
decrease in gross profit. 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:
56
(Volumes
and dollars in thousands)
|
Item
|
Volume(a)
Requirements
|
Units
|
Hypothetical
Adverse
Change
in
Price
|
Decrease
in Gross Profit
|
Percentage
Decrease in Gross Profit
|
||||||||||||
|
Animal
fat
|
109,154,161 |
LB
|
10.0%
|
$ | 4,552 |
11.3%
|
|||||||||||
|
Electricity
|
80,146 |
MWH
|
10.0%
|
$ | 486 |
1.2%
|
|||||||||||
__________
|
(a)
|
Volume
requirements and average price information are based upon volumes used and
prices obtained for the twelve months ended December 31,
2008. Volume requirements may differ materially from these
quantities in future years as the business of FutureFuel Chemical Company
evolves.
|
We had no
borrowings as of December 31, 2008 or 2007 and, as such, were not exposed
to interest rate risk for those years. Due to the relative
insignificance of transactions denominated in a foreign currency, we consider
our foreign currency risk to be immaterial.
57
The
following sets forth our consolidated balance sheets as at December 31,
2008 and 2007 and our consolidated statements of operations, statements of cash
flows and statements of stockholders’ equity for the years ended
December 31, 2008, 2007 and 2006, together with RubinBrown LLP’s and KPMG
LLP’s respective reports thereon.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
FutureFuel
Corp.:
We have
audited the accompanying consolidated balance sheet of FutureFuel Corp. and
subsidiary (collectively, the Company) as of December 31, 2008 and 2007,
and the related consolidated statements of operations, comprehensive income,
changes in stockholders’ equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit 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 audit provides 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, 2008 and December 31, 2007, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As
discussed in Note 2 to the consolidated financial statements, effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of Statement of Financial Accounting Standard No.
109.
As
discussed in Note 20 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurement, as of
January 1, 2008.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), FutureFuel Corp. and subsidiary’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) , and our report dated
March 16, 2009 expressed an unqualified opinion of the Company’s internal
control over financial reporting.
/s/
RubinBrown LLP
St.
Louis, Missouri
March 16,
2009
58
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
FutureFuel
Corp.:
We have
audited the accompanying consolidated statement of operations, changes in
stockholders’ equity, and cash flows for the year ended December 31, 2006
of FutureFuel Corp. and subsidiary (the Company). These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of their operations and their cash flows
for the year ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
As
described in note 25 to the consolidated financial statements, the Company
has restated the accompanying consolidated financial statements for the year
ended December 31, 2006.
/s/ KPMG
LLP
St.
Louis, Missouri
April 23,
2007, except as to note 25,
which
is dated as of December 27, 2007
59
FutureFuel
Corp.
Consolidated
Balance Sheets
As
of December 31, 2008 and 2007
(Dollars
in thousands)
|
2008
|
2007
|
|||||||
|
Assets
|
||||||||
|
Cash and cash
equivalents
|
$ | 27,455 | $ | 54,655 | ||||
|
Accounts
receivable, net of allowances of $4 and $42, respectively
|
20,048 | 17,514 | ||||||
|
Inventory
|
27,585 | 24,192 | ||||||
|
Income taxes
receivable
|
792 | - | ||||||
|
Prepaid expenses
|
1,294 | 1,200 | ||||||
|
Marketable debt and auction rate
securities
|
46,411 | 15,086 | ||||||
|
Other current
assets
|
4,751 | 541 | ||||||
|
Total current
assets
|
128,336 | 113,188 | ||||||
|
Property, plant and equipment,
net
|
106,320 | 95,036 | ||||||
|
Restricted cash and cash
equivalents
|
- | 3,263 | ||||||
|
Intangible assets
|
321 | 435 | ||||||
|
Other assets
|
3,149 | 4,191 | ||||||
|
Total noncurrent
assets
|
109,790 | 102,925 | ||||||
|
Total
Assets
|
$ | 238,126 | $ | 216,113 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Accounts payable
|
$ | 13,332 | $ | 12,622 | ||||
|
Accounts payable - related
parties
|
422 | 121 | ||||||
|
Income taxes
payable
|
- | 1,231 | ||||||
|
Current deferred income tax
liability
|
4,151 | 4,597 | ||||||
|
Short term contingent
consideration
|
1,936 | 197 | ||||||
|
Accrued expenses and other
current liabilities
|
2,251 | 3,370 | ||||||
|
Accrued expenses and other
current liabilities - related parties
|
20 | - | ||||||
|
Total current
liabilities
|
22,112 | 22,138 | ||||||
|
Long term contingent
consideration
|
- | 1,989 | ||||||
|
Deferred revenue
|
9,994 | 1,571 | ||||||
|
Other noncurrent
liabilities
|
1,243 | 1,126 | ||||||
|
Noncurrent deferred income tax
liability
|
23,140 | 19,667 | ||||||
|
Total noncurrent
liabilities
|
34,377 | 24,353 | ||||||
|
Total
Liabilities
|
56,489 | 46,491 | ||||||
|
Commitments
and contingencies
|
||||||||
|
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,
28,190,300 issued and outstanding as of December 31, 2008
and 26,700,000 issued and outstanding as of December 31,
2007
|
3 | 3 | ||||||
|
Accumulated other comprehensive
income
|
15 | 58 | ||||||
|
Additional paid in
capital
|
167,524 | 158,436 | ||||||
|
Retained earnings
|
14,095 | 11,125 | ||||||
|
Total stockholders’
equity
|
181,637 | 169,622 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 238,126 | $ | 216,113 | ||||
The
accompanying notes are an integral part of these financial
statements.
60
FutureFuel
Corp.
Consolidated
Statements of Operations
for
the Years Ended December 31, 2008, 2007 and 2006
(Dollars
in thousands, except per share amounts)
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues
|
$ | 193,466 | $ | 169,732 | $ | 23,043 | ||||||
|
Revenues
– related parties
|
4,864 | 56 | - | |||||||||
|
Cost
of goods sold
|
149,122 | 149,181 | 19,966 | |||||||||
|
Cost
of goods sold – related parties
|
5,331 | 1,529 | - | |||||||||
|
Distribution
|
3,460 | 1,845 | 133 | |||||||||
|
Gross profit
|
40,417 | 17,233 | 2,944 | |||||||||
|
Selling,
general and administrative expenses
|
||||||||||||
|
Compensation
expense
|
2,907 | 2,502 | 328 | |||||||||
|
Formation expense and canceled
offering costs
|
- | 117 | 427 | |||||||||
|
Other expense
|
1,191 | 1,353 | 400 | |||||||||
|
Related party
expense
|
187 | 172 | 104 | |||||||||
|
Research
and development expenses
|
3,951 | 3,434 | 923 | |||||||||
| 8,236 | 7,578 | 2,182 | ||||||||||
|
Income
from operations
|
32,181 | 9,655 | 762 | |||||||||
|
Interest
income
|
2,965 | 3,567 | 3,365 | |||||||||
|
Interest
expense
|
(26 | ) | (24 | ) | (37 | ) | ||||||
|
Gain
on foreign currency
|
287 | 16 | - | |||||||||
|
Loss
on sale of marketable debt securities
|
(377 | ) | - | - | ||||||||
|
Other
expense
|
(34 | ) | (23 | ) | - | |||||||
| 2,815 | 3,536 | 3,328 | ||||||||||
|
Income
before income taxes
|
34,996 | 13,191 | 4,090 | |||||||||
|
Provision
for income taxes
|
12,321 | 4,783 | 1,373 | |||||||||
|
Net income
|
$ | 22,675 | $ | 8,408 | $ | 2,717 | ||||||
|
Earnings
per common share
|
||||||||||||
|
Basic
|
$ | 0.84 | $ | 0.31 | $ | 0.10 | ||||||
|
Diluted
|
$ | 0.82 | $ | 0.26 | $ | 0.09 | ||||||
|
Weighted
average shares outstanding
|
||||||||||||
|
Basic
|
27,029,210 | 26,700,000 | 26,700,000 | |||||||||
|
Diluted
|
27,550,441 | 32,286,996 | 31,818,772 | |||||||||
|
Comprehensive income
|
2008
|
2007
|
2006
|
|||||||||
|
Net
income
|
$ | 22,675 | $ | 8,408 | $ | 2,717 | ||||||
|
Other
comprehensive income (loss), net of tax
(benefit)
of $(26) in 2008 and $34 in 2007
|
(43 | ) | 58 | - | ||||||||
|
Comprehensive
income
|
$ | 22,632 | $ | 8,466 | $ | 2,717 | ||||||
The
accompanying notes are an integral part of these financial
statements.
61
FutureFuel
Corp.
Consolidated
Statements of Cash Flows
for
the Years Ended December 31, 2008, 2007 and 2006
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows provided by (used in) operating activities
|
||||||||||||
|
Net income
|
$ | 22,675 | $ | 8,408 | $ | 2,717 | ||||||
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||
|
Depreciation and
amortization
|
5,800 | 4,712 | 630 | |||||||||
|
Provision
(benefit) for deferred income taxes
|
3,053 | 2,330 | (956 | ) | ||||||||
|
Change
in fair value of derivative instruments
|
2,928 | (199 | ) | 447 | ||||||||
|
Loss
on the sale of investments
|
377 | - | - | |||||||||
|
Accretion
of the discount of marketable debt securities
|
(188 | ) | (127 | ) | - | |||||||
|
Losses on disposals of fixed
assets
|
24 | 63 | - | |||||||||
|
Stock based
compensation
|
849 | - | - | |||||||||
|
Noncash interest
expense
|
22 | 21 | 37 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(2,534 | ) | 6,389 | (20,434 | ) | |||||||
|
Inventory
|
(4,149 | ) | (977 | ) | (1,256 | ) | ||||||
|
Income taxes
receivable
|
(793 | ) | - | - | ||||||||
|
Prepaid expenses
|
(94 | ) | 48 | (1,240 | ) | |||||||
|
Accrued
interest on marketable debt securities
|
63 | (64 | ) | - | ||||||||
|
Other assets
|
1,042 | (1,426 | ) | 653 | ||||||||
|
Accounts payable
|
711 | (323 | ) | 2,724 | ||||||||
|
Accounts payable - related
parties
|
300 | 9 | 112 | |||||||||
|
Income taxes
payable
|
(1,231 | ) | (685 | ) | 1,916 | |||||||
|
Accrued
expenses and other current liabilities
|
(1,119 | ) | 1,653 | 1,747 | ||||||||
|
Accrued
expenses and other current liabilities - related parties
|
20 | (40 | ) | 40 | ||||||||
|
Deferred revenue
|
8,423 | 1,571 | - | |||||||||
|
Other noncurrent
liabilities
|
96 | 191 | 369 | |||||||||
|
Net
cash provided by (used in) operating activities
|
36,275 | 21,554 | (12,494 | ) | ||||||||
|
Cash
flows used in investing activities
|
||||||||||||
|
Restricted cash
|
3,263 | (136 | ) | (3,127 | ) | |||||||
|
Collateralization of derivative
instruments
|
(7,037 | ) | 2,789 | (3,578 | ) | |||||||
|
Purchase of marketable
securities
|
(40,835 | ) | (14,803 | ) | - | |||||||
|
Proceeds
from the sale of marketable securities
|
39,557 | - | - | |||||||||
|
Net
purchases of auction rate securities
|
(14,985 | ) | - | - | ||||||||
|
Purchase of commercial
paper
|
(15,384 | ) | - | - | ||||||||
|
Proceeds from the sale of fixed
assets
|
8 | 55 | - | |||||||||
|
Acquisition of the stock of
Eastman SE, Inc.
|
- | - | (72,634 | ) | ||||||||
|
Contingent purchase price
payment
|
(250 | ) | (172 | ) | (11 | ) | ||||||
|
Capital
expenditures
|
(16,346 | ) | (17,711 | ) | (3,269 | ) | ||||||
|
Net
cash used in investing activities
|
(52,009 | ) | (29,978 | ) | (82,619 | ) | ||||||
62
| 2008 | 2007 | 2006 | ||||||||||
|
Cash
flows provided by (used in) financing activities
|
||||||||||||
|
Proceeds
from long-term debt - related parties
|
- | - | 500 | |||||||||
|
Repayment
of long-term debt - related parties
|
- | - | (700 | ) | ||||||||
|
Proceeds from the issuance of
stock
|
8,169 | - | 169,382 | |||||||||
|
Payment
of dividend
|
(19,705 | ) | - | - | ||||||||
|
Excess
tax benefit associated with stock options
|
70 | - | - | |||||||||
|
Stock redemption
|
- | - | (10,968 | ) | ||||||||
|
Financing fee
|
- | (50 | ) | - | ||||||||
|
Net
cash provided by (used in) financing activities
|
(11,466 | ) | (50 | ) | 158,214 | |||||||
|
Net
change in cash and cash equivalents
|
(27,200 | ) | (8,474 | ) | 63,101 | |||||||
|
Cash
and cash equivalents at beginning of period
|
54,655 | 63,129 | 28 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 27,455 | $ | 54,655 | $ | 63,129 | ||||||
|
Cash
paid for interest
|
$ | 4 | $ | 3 | $ | - | ||||||
|
Cash
paid for income taxes
|
$ | 11,117 | $ | 2,992 | $ | - |
The
accompanying notes are an integral part of these financial
statements.
63
FutureFuel
Corp.
Consolidated
Statements of Changes in Stockholders’ Equity
For
the years ended December 31, 2008, 2007 and 2006
(Dollars
in thousands)
|
Common
Stock
|
Other
Comprehensive
|
Additional
Paid-In
|
Retained
|
Total
Stockholders’
|
||||||||||||||||||||
|
Shares
|
Amount
|
Income
|
Capital
|
Earnings
|
Equity
|
|||||||||||||||||||
|
Balance
- December 31, 2005
|
5,000,000 | $ | 1 | $ | - | $ | 24 | $ | - | $ | 25 | |||||||||||||
|
Common
share dividend
|
1,250,000 | - | - | - | - | - | ||||||||||||||||||
|
Common
share cancellation
|
(625,000 | ) | - | - | - | - | - | |||||||||||||||||
|
Proceeds
from the issuance of stock
|
22,500,000 | 2 | - | 169,380 | - | 169,382 | ||||||||||||||||||
|
Stock
redemption
|
(1,425,000 | ) | - | - | (10,968 | ) | (10,968 | ) | ||||||||||||||||
|
Net
income
|
- | - | - | - | 2,717 | 2,717 | ||||||||||||||||||
|
Balance
- December 31, 2006
|
26,700,000 | 3 | - | 158,436 | 2,717 | 161,156 | ||||||||||||||||||
|
Other
comprehensive income
|
- | - | 58 | - | - | 58 | ||||||||||||||||||
|
Net
income
|
- | - | - | - | 8,408 | 8,408 | ||||||||||||||||||
|
Balance
- December 31, 2007
|
26,700,000 | 3 | 58 | 158,436 | 11,125 | 169,622 | ||||||||||||||||||
|
Special
cash dividend
|
- | - | - | - | (19,705 | ) | (19,705 | ) | ||||||||||||||||
|
Stock
based compensation
|
39,800 | - | - | 849 | - | 849 | ||||||||||||||||||
|
Proceeds
from the issuance of stock
|
1,450,500 | - | - | 8,169 | - | 8,169 | ||||||||||||||||||
|
Excess
income tax benefits from
exercise
of stock options
|
- | - | - | 70 | - | 70 | ||||||||||||||||||
|
Other
comprehensive income (loss)
|
- | - | (43 | ) | - | - | (43 | ) | ||||||||||||||||
|
Net
income
|
- | - | - | - | 22,675 | 22,675 | ||||||||||||||||||
|
Balance
- December 31, 2008
|
28,190,300 | $ | 3 | $ | 15 | $ | 167,524 | $ | 14,095 | $ | 181,637 | |||||||||||||
The
accompanying notes are an integral part of these financial
statements.
64
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
1) Nature
of operations and basis of presentation
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 15).
On
July 21, 2006, Viceroy entered into an acquisition agreement with Eastman
Chemical Company (“Eastman Chemical”) to purchase all of the issued and
outstanding stock of Eastman SE, Inc. (“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. 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”).
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 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 and
cellulose-derived biofuels) 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.
2) Significant
accounting policies
Consolidation
The
accompanying consolidated financial statements include the accounts of
FutureFuel and its wholly-owned subsidiary, FutureFuel Chemical. The
results for the fiscal year ended December 31, 2006 include: (i) the
operations of Viceroy from January 1, 2006 through October 31, 2006;
and (ii) the operations of both FutureFuel and FutureFuel Chemical from
November 1, 2006 through December 31, 2006. 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. FutureFuel places its temporary cash investments with high
credit quality financial institutions. At times, such investments may
be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance
limit.
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.
65
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
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.
Customer
concentrations
Significant
portions of FutureFuel’s sales are made to a relatively small number of
customers. All sales of a bleach activator are made to a leading
North American consumer products company pursuant to a supply contract that is
set to expire in May 2013. Sales of the bleach activator totaled
$83,995 for the year ended December 31, 2008. 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 $34,156 for the year ended December 31,
2008. These two customers represented 72% of FutureFuel’s accounts
receivable balance at December 31, 2008.
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. 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:
|
Buildings
and building equipment
|
20
– 39 years
|
|
Machinery
and equipment
|
3 –
33 years
|
|
Transportation
equipment
|
5 –
33 years
|
|
Other
|
5 –
33 years
|
66
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
Customer
relationships
Customer
relationships are recorded at acquisition cost and are amortized on a
straight-line basis over their estimated useful lives of 5
years. FutureFuel reviews and evaluates the recoverability of the
carrying amounts of its acquired customer contracts annually, or whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable.
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 trust account was terminated in 2008 and replaced with
FutureFuel’s guarantee. The amount of cash reserved for this purpose is based on
a formula derived by the state of Arkansas and totaled $0 at December 31,
2008 and $3,263 at December 31, 2007.
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.
Deferred
revenue
FutureFuel
signed a contract with a customer to construct a plant on FutureFuel’s property
for the manufacture of a custom chemical. The cost of construction
was funded by the customer with title and risk of loss to the equipment residing
with FutureFuel. Reimbursements were recognized as deferred revenue
and amortized over the expected life of the customer relationship as product is
shipped. Production began in the fourth quarter of 2008.
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 destructors,
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.
67
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
Deferred
income taxes
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
For most
product sales, revenue is recognized when product is shipped from our facilities
and risk of loss and title have passed to the customer, which is in accordance
with our customer contracts and the stated shipping terms. All custom
manufactured products are manufactured under written
contracts. Performance chemicals and biofuels are sold pursuant to
the terms of written purchase orders. In general, customers do not
have any rights of return, except for quality disputes. However, all
of our products are tested for quality before shipment, and historically returns
have been inconsequential. We do not offer volume discounts, rebates
or warranties.
Bill and
hold transactions for 2008 related to three specialty chemical customers whereby
revenue was recognized in accordance with contractual agreements based on
product produced and ready for use. These sales were subject to
written monthly purchase orders with agreement that production was
reasonable. The inventory was custom manufactured and stored at the
customer’s request and could not be sold to another buyer. Credit and
payment terms for bill and hold transactions are similar to other specialty
chemical customers. Sales revenue under bill and hold arrangements
were $50,527, $33,494 and $3,858 for the years ended December 31, 2008,
2007 and 2006, respectively.
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. Netted from cost of goods sold
is the biodiesel tax incentive for blending biodiesel with
petrodiesel. The biodiesel tax credit amounts to one cent for each
percentage point of vegetable oil or animal fat biodiesel that is blended with
petrodiesel. The credit is recognized as it is earned when biodiesel
is blended with petrodiesel.
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.
Uncertainty
in income taxes
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
68
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
uncertain
tax positions that a company has taken or expects to take on a tax
return. Under FIN 48, the financial statements 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. The adoption of FIN 48 did not have a
material effect on the consolidated financial position, liquidity or results of
operations of FutureFuel.
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 year ended
December 31, 2006 have been calculated assuming that all shares outstanding
at December 31, 2007 were outstanding for those periods
presented. The dilutive impact of the warrants, as described in
Note 16, was calculated based upon the trading activity of FutureFuel’s
common stock from July 13, 2006 to December 31, 2008.
Comprehensive
income
Comprehensive
income is comprised of net income and other comprehensive income
(“OCI”). Comprehensive income comprises all changes in shareholders’
equity from transactions and other events and circumstances from non-owner
sources. FutureFuel’s OCI is comprised of gains resulting from its
investment in certain marketable debt securities classified as available for
sale (see Note 6). For the year ended December 31, 2008,
FutureFuel recorded an unrealized gain of $15, net of income taxes of $9, on
these securities. For the year ended December 31, 2007,
FutureFuel recorded an unrealized gain of $58, net of income taxes of $34, on
these securities. There were no elements of other comprehensive
income in 2006.
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.
69
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
Segment
reporting
FutureFuel
identifies operating segments when separate financial information is available
that is evaluated regularly by its chief operating decision maker in assessing
the performance of those segments and in determining how to allocate
resources. FutureFuel has determined that it has two reportable
segments organized along product lines -- chemicals and biofuels.
3) Business
combination
FutureFuel
was incorporated on August 12, 2005 to serve as a vehicle for a Business
Combination of one or more operating businesses in the oil and gas
industry. In 2006 FutureFuel identified such an operating business in
Eastman SE. Eastman SE, as owner of the Batesville Plant, began the
implementation of a biobased products platform, including the production of
biofuels (biodiesel and cellulose-derived biofuels) and biobased specialty
products (biobased lubricants, solvents and intermediates). In
addition to the biobased products platform, the Batesville Plant has continued
the custom synthesis of fine chemicals and other organic
chemicals. On October 31, 2006, FutureFuel acquired all of the
issued and outstanding shares of Eastman SE from Eastman Chemical for cash
consideration and $0.02 per gallon of biodiesel sold by FutureFuel during the
three-year period commencing on November 1, 2006 and ending on
October 31, 2009. Immediately subsequent to its acquisition,
Eastman SE changed its name to FutureFuel Chemical. The results of
FutureFuel Chemical have been included in FutureFuel’s results of operations
since October 31, 2006. After final purchase price adjustments,
a price of $70,970 was paid for the stock of Eastman SE. Cumulative
contingent purchase price payments to Eastman Chemical based on volumes of
biodiesel sold totaled $11 through December 31, 2006, $183 through
December 31, 2007 and $433 through December 31, 2008. The
contingent purchase price payments offset a contingent consideration liability
that FutureFuel recorded as of the closing date of the acquisition.
The
following table summarizes the estimated fair values of the Eastman SE assets
acquired and liabilities assumed and related deferred income taxes as of the
acquisition date.
|
Eastman
SE
|
||||
|
Assets acquired
|
||||
|
Current
assets
|
$ | 24,804 | ||
|
Property,
plant and equipment
|
79,968 | |||
|
Noncurrent
deferred income tax asset
|
373 | |||
|
Intangible
assets subject to amortization
|
567 | |||
|
Other
assets
|
3,211 | |||
|
Total
assets
|
108,923 | |||
|
Liabilities assumed
|
||||
|
Current
liabilities
|
10,353 | |||
|
Long-term
contingent consideration
|
2,198 | |||
|
Other
noncurrent liabilities
|
508 | |||
|
Noncurrent
deferred income taxes
|
23,230 | |||
|
Total
liabilities
|
36,289 | |||
|
Net
assets acquired
|
$ | 72,634 | ||
In the
allocation of the fair values of the assets acquired and liabilities assumed,
FutureFuel determined there was a balance of $2,370 of negative
goodwill. As the purchase of Eastman SE provided for contingent
consideration to be paid to Eastman Chemical, the negative goodwill has been
allocated to contingent consideration. FutureFuel has not identified
any material unrecorded pre-acquisition contingencies where the related asset,
liability or impairment is probable and the amount can be reasonably
estimated.
70
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
The
following unaudited pro forma consolidated results of operations for the twelve
months ended December 31, 2006 assume that the acquisition of Eastman SE
was completed as of January 1, 2006.
|
Revenues
|
$ | 150,770 | ||
|
Net
income
|
$ | 5,142 | ||
|
Basic
earnings per share
|
$ | 0.19 | ||
|
Diluted
earnings per share
|
$ | 0.16 |
Pro-forma
data may not be indicative of the results that would have been obtained had
these events actually occurred at the beginning of the periods presented, nor
does it intend to be a projection of future results.
4) Inventories
The
carrying values of inventory were as follows as of December 31:
|
2008
|
2007
|
|||||||
|
At
first-in, first-out or average cost (approximates current
cost)
|
||||||||
|
Finished goods
|
$ | 15,634 | $ | 8,993 | ||||
|
Work in process
|
1,800 | 1,091 | ||||||
|
Raw materials and
supplies
|
14,833 | 15,670 | ||||||
| 32,267 | 25,754 | |||||||
|
LIFO reserve
|
(4,682 | ) | (1,562 | ) | ||||
|
Total inventories
|
$ | 27,585 | $ | 24,192 | ||||
Commodity
price declines during the fourth quarter of 2008 resulted in the cost of certain
raw material and finished goods inventories exceeding their respective market
values. Inventory balances at December 31, 2008 include the
impact of a $3,973 write-down to market value, the majority of which impacted
finished biodiesel and a key biodiesel raw material.
FutureFuel’s
calculation of its LIFO reserve is reliant, in part, upon the Producer Price
Index published by the Bureau of Labor Statistics (“PPI”). For its
December 31, 2008 LIFO reserve calculation, FutureFuel changed its policy
to use the November preliminary PPI as opposed to the December
PPI. This change was made to enable FutureFuel to meet an accelerated
closing process which, in turn, enables FutureFuel to meet the U.S. Securities
and Exchange Commission’s filing deadlines for FutureFuel’s financial
statements. The impact of this change was an increase in the LIFO
reserve at December 31, 2008 of $753. FutureFuel will continue
to utilize the preliminary November PPI in future years.
5) Derivative
instruments
The
volumes and carrying values of FutureFuel’s derivative instruments were as
follows at December 31:
|
Asset/(Liability)
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Quantity
(contracts) Long/ (Short)
|
Fair
Value
|
Quantity
(contracts) Long/ (Short)
|
Fair
Value
|
|||||||||||||
|
Regulated
options, included in prepaid
expenses and other current assets
|
(875 | ) | $ | (3,175 | ) | (100 | ) | $ | (247 | ) | ||||||
The
margin account maintained with a broker to collateralize these derivative
instruments carried an account balance of $7,826 and $788 at December 31,
2008 and 2007, respectively, and is classified as other current assets in the
consolidated balance sheet. The carrying values of the margin account
and of the derivative instruments are included, net, in other current
assets.
71
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
6) Marketable
debt securities
At
December 31, 2008, FutureFuel had investments in certain U.S. treasury
bills and notes. These investments had maturity dates ranging from
January 2009 to March 2009 and have been classified as current assets in the
accompanying consolidated balance sheet. FutureFuel has designated
these securities as being available-for-sale; accordingly, they are recorded at
fair value, with the unrealized gains and losses, net of taxes, reported as a
component of stockholders’ equity. The fair market value of these
investments, including accrued interest, totaled $15,999 at December 31,
2008. The fair market value of similar investments, including accrued
interest, totaled $15,086 at December 31, 2007.
Additionally,
as of December 31, 2008, FutureFuel had made investments in certain auction
rate securities. As of December 31, 2008, these securities had
maturities ranging from June 2028 to July 2042. FutureFuel has
classified these instruments as current assets in the accompanying consolidated
balance sheet as the issuers have either exercised their right to repurchase or
a liquid market still exists for these securities, which allows FutureFuel to
exit its positions within a short period of time. FutureFuel
anticipates these securities either being sold or repurchased within the next
year. Therefore, regardless of their maturity dates, FutureFuel has
classified these investments as current. FutureFuel has designated
these securities as being available-for-sale. Accordingly, these
securities are carried at fair value, with unrealized gains and losses, net of
taxes, reported as a component of stockholders’ equity. No realized
gains or losses have been incurred related to these securities through
December 31, 2008.
The fair
market value of auction rate securities approximated their par value and,
including accrued interest, totaled $14,990 at December 31,
2008. No auction rate securities were held by FutureFuel at
December 31, 2007.
At
December 31, 2008, FutureFuel had investments in certain commercial
paper. These investments had maturity dates ranging from January 2009
to March 2009 and have been classified as current assets in the accompanying
consolidated balance sheet. FutureFuel has designated these
securities as being available for sale. Accordingly, they are
recorded at fair value, with the unrealized gains and losses, net of taxes,
reported as a component of stockholders’ equity. The fair value of
these investments, including accrued interest, totaled $15,422 at
December 31, 2008. FutureFuel had no similar investments at
December 31, 2007.
7) Property,
plant and equipment
Property, plant and equipment consisted
of the following at December 31:
|
2008
|
2007
|
|||||||
|
Land
and land improvements
|
$ | 4,570 | $ | 4,260 | ||||
|
Buildings
and building equipment
|
22,023 | 20,444 | ||||||
|
Machinery
and equipment
|
87,388 | 69,309 | ||||||
|
Construction
in progress
|
4,447 | 6,126 | ||||||
|
Accumulated
depreciation
|
(12,108 | ) | (5,103 | ) | ||||
|
Total
|
$ | 106,320 | $ | 95,036 | ||||
Depreciation
expense totaled $5,686, $4,599 and $611 for the years ended December 31,
2008, 2007 and 2006, respectively.
72
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
8) Intangible
assets
In
connection with its acquisition of Eastman SE, a certain portion of the purchase
price was allocated to the intangible asset customer
relationships. Customer relationships consisted of the following at
December 31:
|
2008
|
2007
|
|||||||
|
Cost
|
$ | 567 | $ | 567 | ||||
|
Accumulated
amortization
|
(246 | ) | (132 | ) | ||||
| $ | 321 | $ | 435 | |||||
Amortization
expense totaled $114, $113 and $19 for the years ended December 31, 2008,
2007 and 2006, respectively. FutureFuel estimates that amortization
expense for 2009 to 2010 will be $113 annually and that amortization expense in
2011 will be $95.
9) Other
assets
Other
assets are comprised of supplies and parts that have been held longer than 24
months and are not expected to be used in the twelve-month period subsequent to
the balance sheet date. The balance related to these items totaled
$3,149 and $4,191 at December 31, 2008 and 2007, respectively.
10) Accrued
expenses and other current liabilities
Accrued
expenses and other current liabilities, including those associated with related
parties, consisted of the following at December 31:
|
2008
|
2007
|
|||||||
|
Accrued
employee liabilities
|
$ | 1,248 | $ | 1,722 | ||||
|
Accrued
property, use and franchise taxes
|
975 | 1,110 | ||||||
|
Accrued
professional fees
|
- | 30 | ||||||
|
Other
|
48 | 508 | ||||||
|
Total
|
$ | 2,271 | $ | 3,370 | ||||
11) Borrowings
In March
2007, FutureFuel Chemical entered into a $50 million credit agreement with
a commercial bank. The loan is a revolving facility the proceeds of
which may be used for working capital, capital expenditures and the general
corporate purposes of FutureFuel Chemical. 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 certain margins over the
London Interbank Offered Rate (“LIBOR”) or base rate based upon the leverage
ratio from time to time as set forth in the following table.
|
Leverage
Ratio
|
Base
Rate
Margin
|
LIBOR
Margin
|
||
|
>
3
|
-0.55%
|
1.70%
|
||
|
> 2 <
3
|
-0.70%
|
1.55%
|
||
|
> 1 <
2
|
-0.85%
|
1.40%
|
||
|
<
1
|
-1.00%
|
1.25%
|
There is
an unused commitment fee of 0.25% per annum. Beginning
December 31, 2007, and on the last day of each fiscal quarter thereafter,
the ratio of EBITDA to fixed charges may not be less than
1.5:1. Beginning June 30, 2007, the ratio of total funded debt
to EBITDA may not exceed 3.50:1, reduced to 3.25:1 at March 31, 2008,
June 30, 2008 and September 30, 2008, and then 3:1
thereafter. FutureFuel has guaranteed FutureFuel Chemical’s
obligations under this credit agreement.
73
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
There
were no borrowings at December 31, 2008 or 2007.
12) 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 $588 and $566 as of December 31, 2008 and
2007, respectively. These amounts are recorded in other noncurrent
liabilities in the accompanying balance sheet.
The
following table summarizes the activity of accrued obligations for asset
retirement obligations:
|
2008
|
2007
|
|||||||
|
Beginning
balance
|
$ | 566 | $ | 545 | ||||
|
Accretion
expense
|
22 | 21 | ||||||
|
Balance
at December 31
|
$ | 588 | $ | 566 | ||||
13) Stock
based compensation
The board
of directors of FutureFuel adopted an omnibus incentive plan which was approved
by the shareholders of FutureFuel at its 2007 annual shareholder meeting on
June 26, 2007. The purpose of the plan is to:
|
|
·
|
Encourage
ownership in FutureFuel by key personnel whose long-term employment with
or engagement by FutureFuel or its subsidiaries is considered essential to
its continued progress and, thereby, encourage recipients to act in
FutureFuel’s shareholders’ interests and share in its
success;
|
|
|
·
|
Encourage
such persons to remain in FutureFuel’s employ or in the employ of its
subsidiaries; and
|
|
|
·
|
Provide
incentives to persons who are not FutureFuel employees to promote
FutureFuel’s success.
|
The plan
authorizes FutureFuel to issue stock options (including incentive stock options
and nonqualified stock options), stock awards and stock appreciation
rights. Eligible participants in the plan include: (i) members
of FutureFuel’s board of directors and its executive officers;
(ii) regular, active employees of FutureFuel and any of its subsidiaries;
and (iii) persons engaged by FutureFuel or any of its subsidiaries to
render services to FutureFuel or its subsidiaries as an advisor or
consultant.
Awards
under the plan are limited to shares of FutureFuel’s common stock, which may be
shares acquired by FutureFuel, including shares purchased in the open market, or
authorized but un-issued shares. Awards are limited to 10% of the
issued and outstanding shares of FutureFuel’s common stock in the
aggregate.
The plan
became effective upon its approval by FutureFuel’s shareholders on June 26,
2007 and continues in effect for a term of ten years thereafter unless amended
and extended by FutureFuel or unless otherwise terminated.
FutureFuel
adopted Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment
(“SFAS No. 123(R)”) and related interpretations and began recognizing
compensation expense in its financial statements for stock based options based
upon the grant-date fair value over the requisite service period.
In April
2008, FutureFuel granted a total of 250,000 stock options to members of its
board of directors (“Director Options”). Additionally, it granted a
total of 55,000 stock options to selected members of its management (“Management
Options”). An additional 5,000 Management Options were issued in
September 2008 and an additional 100,000 Director Options were granted on
December 10, 2008. The options awarded in April 2008 have an
exercise price equal to the average of the bid and ask price of
74
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
FutureFuel’s
common stock on the date of grant as established in private sales, which the
board of directors determined to be the fair value of such stock on that
date. The Management Options awarded in September 2008 and the
Director Options awarded in December 2008 have an exercise price equal to the
closing price of FutureFuel’s common stock on the date of grant as quoted on the
Over-the-Counter Bulletin Board. The Director Options vested
immediately upon grant. Originally, one-third of the Management
Options granted in April 2008 vested on each of the annual anniversary dates of
the grant. Those Management Options were amended in September 2008 to
provide for immediate vesting. The Management Options issued in
September 2008 vested immediately upon grant. Both the Director
Options and the Management Options awarded in April 2008 expire on April 7,
2013. The Management Options awarded in September 2008 expire on
September 30, 2013. The Director Options awarded in December
2008 expire on December 10, 2013. FutureFuel has utilized the
Black Scholes Merton option pricing model, which relies on certain assumptions,
to estimate the fair value of the options it granted.
The
assumptions used in the determination of the fair value of the options granted
are provided in the following table:
|
Assumptions
|
April
2008
Director
Options
|
April
2008
Management
Options
|
September
2008
Management
Options
|
December
2008
Director
Options
|
|
Expected
volatility rate
|
46.78%
|
48.74%
|
50.63%
|
60.88%
|
|
Expected
dividend yield
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
|
Risk-free
interest rate
|
2.03%
|
2.26%
|
2.22%
|
1.04%
|
|
Expected
forfeiture rate
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
|
Expected
term in years
|
2.5
|
2.5
|
2.5
|
2.5
|
The
volatility rate for the options granted is derived from the historical stock
price volatility of a peer group of companies over the same time period as the
expected term of each stock option award. The volatility rate is
derived by a mathematical formula utilizing the daily closing stock price data
over the expected term. It is FutureFuel’s expectation that
volatility rates for future stock option grants will be based on FutureFuel’s
historical stock price volatility as FutureFuel develops a lengthier stock
trading history.
The
expected dividend yield is calculated using FutureFuel’s expected dividend
amount at the date of the option grant over the expected term divided by the
fair market value of FutureFuel’s common stock.
The
risk-free interest rate is derived from the United States Federal Reserve’s
published interest rates of yields for the same time period as the expected
term.
SFAS No.
123(R) specifies that only share-based awards expected to vest are to be
included in share-based compensation expense. The estimated
forfeiture rates are based upon FutureFuel’s expected rate of forfeiture and are
excluded from the quantity of awards included in share-based compensation
expense.
FutureFuel
has not historically granted stock options and therefore does not have a
historical record of share-based award transactions on which to base an estimate
of expected term. FutureFuel has therefore elected to utilize the
“simplified” method of estimating expected term as discussed in Staff Accounting
Bulletins No. 107 and No. 110.
On
December 3, 2008, FutureFuel granted a stock award of 100 shares of its
common stock to 398 of FutureFuel Chemical’s employees. FutureFuel
recognized compensation expense as a result of this award equal to the number of
shares granted multiplied by the fair value of its common stock on the date of
the award. Such compensation expense was recorded as a component of
cost of goods sold and totaled $225 in the twelve months ended December 31,
2008.
For the
years ended December 31, 2008 and 2007, total share-based compensation
expense (before tax) totaled $849 and $0, respectively. In the year
ended December 31, 2008, $225, $610 and $14 of this balance was recorded as
an element of selling, general and administrative expense, cost of goods sold
and research and development expense, respectively.
75
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
The
weighted average fair value of options granted in 2008 was $1.52 per
option.
A summary
of the activity of FutureFuel’s stock option awards for the period beginning
January 1, 2008 and ending December 31, 2008 is presented
below.
|
Options
|
Weighted
Average Exercise Price
|
|||||||
|
Outstanding
as January 1, 2008
|
- | $ | - | |||||
|
Granted
|
410,000 | 4.43 | ||||||
|
Exercised
|
268,000 | 4.00 | ||||||
|
Cancelled,
forfeited or expired
|
- | - | ||||||
|
Outstanding
at December 31, 2008
|
142,000 | $ | 5.25 | |||||
There
were 2,220,200 options available for grant at December 31,
2008. The following table provides the remaining contractual term and
weighted average exercise prices of stock options outstanding and exercisable at
December 31, 2008.
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||
|
Exercise
Price
|
Number
Outstanding
at December 31,
2008
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
at December 31,
2008
|
Weighted
Average
Exercise
Price
|
||||||||||||||
| $ | 4.00 | 37,000 |
4.27
years
|
$ | 4.00 | 37,000 | $ | 4.00 | |||||||||||
| $ | 5.65 | 100,000 |
4.95
years
|
$ | 5.65 | 100,000 | $ | 5.65 | |||||||||||
| $ | 6.48 | 5,000 |
4.75 years
|
$ | 6.48 | 5,000 | $ | 6.48 | |||||||||||
| 142,000 |
4.76 years
|
$ | 5.25 | 142,000 | $ | 5.25 | |||||||||||||
The
weighted average remaining contractual life of all exercisable options is 4.76
years.
The
aggregate intrinsic values of total options outstanding and total options
exercisable at December 31, 2008 are $50 and $50,
respectively. Intrinsic value is the amount by which the last trade
price of the common stock closest to December 31, 2008 exceeded the
exercise price of the options granted.
The
amendment of the Management Options in September 2008 referred to above resulted
in the immediate recognition into expense of the estimated fair value of those
options not previously recognized, which totaled $74.
In 2008,
FutureFuel realized gross proceeds from stock option exercises of $1,072 and
realized a net tax benefit of $204. FutureFuel did not realize any
proceeds on the December 3, 2008 stock grant but did realize a net tax
benefit of $86.
14) Provision
for income taxes
The
following table summarizes the provision for income taxes:
|
2008
|
2007
|
2006
|
||||||||||
|
Income
before taxes - U.S.
|
$ | 34,996 | $ | 13,191 | $ | 4,090 | ||||||
|
Provision
for income taxes:
|
||||||||||||
|
Current
|
$ | 8,176 | $ | 2,080 | $ | 1,818 | ||||||
|
Deferred
|
2,710 | 2,201 | (687 | ) | ||||||||
|
State
and other
|
||||||||||||
|
Current
|
1,093 | 228 | 466 | |||||||||
|
Deferred
|
342 | 274 | (224 | ) | ||||||||
|
Total
|
$ | 12,321 | $ | 4,783 | $ | 1,373 | ||||||
76
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
Differences
between the provision for income taxes computed using the U.S. federal statutory
income tax rate were as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Amount
computed using the statutory rate
of
35%, 34% and 34%, respectively
|
$ | 12,249 | $ | 4,485 | $ | 1,390 | ||||||
|
Section
199 manufacturing deduction
|
(271 | ) | (183 | ) | (33 | ) | ||||||
|
Agri-biodiesel
production credit
|
(812 | ) | (564 | ) | (78 | ) | ||||||
|
Credit
for increasing research activities
|
(78 | ) | (69 | ) | - | |||||||
|
Tax
exempt interest income
|
(541 | ) | - | - | ||||||||
|
Change
in the valuation allowance
|
265 | 472 | - | |||||||||
|
State
income taxes, net
|
1,336 | 601 | 94 | |||||||||
|
Other
|
173 | 41 | - | |||||||||
|
Provision
for income taxes
|
$ | 12,321 | $ | 4,783 | $ | 1,373 | ||||||
The
significant components of deferred tax assets and liabilities were as follows as
of December 31:
|
2008
|
2007
|
|||||||
|
Deferred
tax assets
|
||||||||
|
Vacation
pay
|
$ | 117 | $ | 115 | ||||
|
Allowance
for doubtful accounts
|
2 | 16 | ||||||
|
Agri-biodiesel
production credit
|
190 | 190 | ||||||
|
Inventory
reserves
|
1,919 | 219 | ||||||
|
Self
insurance
|
96 | 123 | ||||||
|
Asset
retirement obligation
|
231 | 222 | ||||||
|
Directors
and officers fees
|
- | 122 | ||||||
|
Derivative
instruments
|
251 | 444 | ||||||
|
Stock
based compensation
|
106 | - | ||||||
|
Total
deferred tax assets
|
2,912 | 1,451 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Available
for sale securities
|
(9 | ) | (34 | ) | ||||
|
Accrued
expenses
|
(19 | ) | (18 | ) | ||||
|
LIFO
inventory
|
(5,530 | ) | (4,684 | ) | ||||
|
Intangible
assets
|
(126 | ) | (170 | ) | ||||
|
Insurance
proceeds
|
- | (275 | ) | |||||
|
Depreciation
|
(23,782 | ) | (20,062 | ) | ||||
|
Total
deferred tax liabilities
|
(29,466 | ) | (25,243 | ) | ||||
|
Valuation
allowance
|
(737 | ) | (472 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (27,291 | ) | $ | (24,264 | ) | ||
|
As
recorded in the consolidated balance sheet
|
||||||||
|
Current
deferred income tax liability
|
$ | (4,151 | ) | $ | (4,597 | ) | ||
|
Noncurrent
deferred income tax liability
|
(23,140 | ) | (19,667 | ) | ||||
|
Net
deferred income tax liabilities
|
$ | (27,291 | ) | $ | (24,264 | ) | ||
The
effective tax rates for the years December 31, 2008 and 2007 reflect
FutureFuel’s expected tax rate on reported operating earnings before income
tax.
FutureFuel’s
unrecognized tax benefits, recorded as an element of other noncurrent
liabilities, totaled $559 at both December 31, 2008 and December 31,
2007, the total amount of which, if recognized, would reduce FutureFuel’s
effective tax rate.
FutureFuel
does not expect its unrecognized tax benefits to change significantly over the
next 12 months.
77
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
FutureFuel
records interest and penalties net as a component of income tax
expense. FutureFuel accrued a balance of $96 and $0 at
December 31, 2008 and December 31, 2007, respectively, for interest or
tax penalties.
FutureFuel
and its subsidiary, FutureFuel Chemical, file tax returns in the U.S. federal
jurisdiction and with various state jurisdictions. FutureFuel was
incorporated in 2005 and is subject to U.S., state and local examinations by tax
authorities from 2005 forward. FutureFuel Chemical is subject to the
effects of tax examinations that may impact the carry-over basis of its assets
and liabilities.
15) Stockholders’
equity
On
July 12, 2006, Viceroy completed an offering of 22,500,000
units. Each unit consisted of one share of Viceroy’s common stock and
one warrant to acquire one share. The units were issued at $8.00 per
unit. In connection with this offering, the shares and warrants
issued were listed on the Alternative Investment Market (“AIM”) maintained by
the London Stock Exchange plc. The net proceeds of this offering
totaled $172,500 and were placed into a trust fund. All or a portion
of the trust fund was to be released for, among other things, a Business
Combination approved by the holders of Viceroy’s common
stock. Moreover, the trust fund was to be released in its entirety
upon the completion of a Business Combination which, either on its own or when
combined with all previous Business Combinations, had an aggregate transaction
value of at least 50% of the initial trust amount (which initial trust amount
excluded certain deferred placing fees).
Certain
of the Viceroy shareholders who purchased units in the July 12, 2006
offering were granted repurchase rights whereby at the time Viceroy sought
approval for a Business Combination these shareholders could vote against the
Business Combination and require Viceroy to repurchase their common shares for
$7.667 per common share plus accrued interest earned on the offering proceeds
held in trust net of expenses and income taxes payable on the interest
earned. Shareholders who exercised their repurchase rights retained
all rights to any warrants that they may have held.
On
July 12, 2006, Viceroy and its founding shareholders entered into a
registration rights agreement pursuant to which the holders of the majority of
founding shares and shares of common stock included in the units purchased in
Viceroy’s July 2006 offering by a director or his designees are entitled to make
up to two demands that Viceroy register with the SEC their founding shares and
the shares included in the units purchased in Viceroy’s July 2006
offering. The holders of the majority of such shares can elect to
exercise these registration rights at any time after the date on which Viceroy
has become a reporting company under the Securities Exchange Act of 1934
(“Securities Act”), as amended, and such shares have been released from any
applicable escrow agreement and lock-in deeds. In addition, those
shareholders have certain “piggyback” registration rights on registration
statements filed subsequent to the date on which such shares are released from
escrow or other lock up arrangements. Viceroy agreed to bear the
expenses incurred in connection with the filing of any such registration
statements. There are 11,250,000 shares of Viceroy’s common stock
subject to this registration rights agreement.
On
July 12, 2006, Viceroy entered into an investor rights agreement with each
of KBC Peel Hunt Ltd, Viceroy’s Nominated Advisor on the AIM, and CRT Capital
Group LLC, Viceroy’s placing agent, for the benefit of the holders of its shares
of common stock and warrants in which Viceroy agreed, at its cost, to provide
“piggyback” registration rights as to any shares of its common stock that are
not, at the time, freely saleable identical to the “piggyback” registration
rights of the founding shareholders described above, plus the right to piggyback
on any registration statement filed pursuant to the founding shareholders’
demand registration rights described above, provided that in the event such
piggyback rights are exercised in an underwritten offering, the number of shares
of Viceroy’s common stock registered will be subject to a cutback, pro rata with
the founding shareholders, if the underwriter so requires. There are
15,450,000 shares of Viceroy’s common stock subject to this investor rights
agreement.
In
addition, the July 12, 2006 investor rights agreement stipulates that
Viceroy has agreed, at its cost, to file with the SEC no later than the 180th
day after the date of a consummation of a Business Combination which, either on
its own or when combined with all previous Business Combinations, had an
aggregate transaction value of at least 50% of the initial trust amount (which
initial trust amount excluded certain deferred placing fees) (“Registration
Trigger”), a registration statement (“Exchange Act Registration
78
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
Statement”)
on Form 10 to register its common shares. Additionally, Viceroy
agreed to use commercially reasonable efforts to cause the Exchange Act
Registration Statement to become effective under the Securities Act no later
than 270 days after the Registration Trigger and use reasonable commercial
efforts promptly upon effectiveness of the Exchange Act Registration Statement
to list the common shares of Viceroy on the American Stock Exchange, the New
York Stock Exchange, NASDAQ or a similarly recognized trading platform in the
United States. Viceroy did not make any assurances that any such
listing application would be accepted.
If the
Exchange Act Registration Statement was not declared effective on or prior to
the 270th day after the date of the Registration Trigger (“Registration
Default”), Viceroy would have paid liquidated damages to each holder of its
common stock issued in connection with its July 2006 offering. The
liquidated damages would have been:
|
|
·
|
paid
to each holder in the form of common stock in Viceroy in an amount equal
to 0.5% per month of the number of each holder’s common shares in
Viceroy;
|
|
|
·
|
payable
promptly after the occurrence of the Registration Default, but in no event
later than two days after the end of the month in which the Registration
Default has occurred;
|
|
|
·
|
payable
within two days of the end of each month, until the Registration Default
has been cured, provided that a pro rata payment shall be made with
respect to a month a portion of which Viceroy has been in default;
and
|
|
|
·
|
payable
for a maximum of 12 months.
|
The
investors rights agreement provided that the liquidated damages specified above
were the only exclusive remedy available to holders of Viceroy’s common shares
for any failure by Viceroy to comply with the requirements of the investors
rights agreement.
On
April 24, 2007, Viceroy filed the Exchange Act Registration
Statement. On June 23, 2007, the Exchange Act Registration
Statement became effective. This was prior to the 270th day
after the date of the Registration trigger. Consequently, no
liquidated damages, as described above, were paid.
At the
October 27, 2006 special meeting of the shareholders of Viceroy, the
acquisition of Eastman SE by Viceroy was approved by the shareholders of
Viceroy. Shareholders owning 1,425,000 common shares of Viceroy voted
against the acquisition and exercised their repurchase
rights. Accordingly, such shares are deemed to be held for
redemption, are not deemed to be outstanding, and are not included in equity in
the post-acquisition period. The repurchase price totaled $7.71 per
share, calculated as $7.667 plus $0.043 of accrued interest earned on the
offering proceeds held in trust net of expenses and income taxes payable on the
interest earned per share. Pursuant to the terms of the July 12,
2006 offering, the repurchase price was payable by Viceroy only when those
shareholders who exercised their repurchase rights surrendered to Viceroy their
common share certificates. Through December 31, 2006,
shareholders owing 1,175,000 common shares of FutureFuel had surrendered their
shares to FutureFuel and FutureFuel had paid an aggregate $9,059 to repurchase
these shares. At December 31, 2006, FutureFuel remained
obligated to repurchase 250,000 common shares at the $7.71 per share repurchase
price. The $1,928 payable to these shareholders was paid in
January 2007.
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.
In 2008,
1,182,500 warrants to purchase FutureFuel’s common stock were
exercised. Proceeds from the exercise of these warrants totaled
$7,095. At December 31, 2008, warrants to purchase 21,317,500
shares of FutureFuel’s common stock were outstanding and
unexercised.
79
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
16) Earnings
per share
The
computation of basic and diluted earnings per common share was as
follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Net
income available to common stockholders
|
$ | 22,675 | $ | 8,408 | $ | 2,717 | ||||||
|
Weighted
average number of common
shares
outstanding
|
27,029,210 | 26,700,000 | 26,700,000 | |||||||||
|
Effect
of warrants
|
487,180 | 5,586,996 | 5,118,772 | |||||||||
|
Effect
of stock options
|
34,051 | - | - | |||||||||
|
Weighted
average diluted number of
common
shares outstanding
|
27,550,441 | 32,286,996 | 31,818,772 | |||||||||
|
Basic
earnings per share
|
$ | 0.84 | $ | 0.31 | $ | 0.10 | ||||||
|
Diluted
earnings per share
|
$ | 0.82 | $ | 0.26 | $ | 0.09 | ||||||
Certain
warrants to purchase shares of FutureFuel’s common stock were not included in
the computation of diluted earnings per share for the year ended
December 31, 2008 as they were anti-dilutive in the period. The
weighted average number of warrants excluded on this basis was
16,579,375. Additionally, certain options to purchase shares of
FutureFuel’s common stock were not included in the computation of diluted
earnings per share for the year ended December 31, 2008 as they were
anti-dilutive in the period. The weighted number of options excluded
on this basis was 1,250.
17) Employee
benefit plans
Defined
contribution savings plan
FutureFuel
currently offers its employees a company 401(k) match and a defined contribution
savings plan, which covers substantially all employees. Under this
plan, FutureFuel matches the amount of employee contributions, subject to
specified limits and makes a retirement savings safe harbor contribution to
employees’ 401(k) savings plans. Company contributions totaled
$1,763, $1,552 and $120 for the years ended December 31, 2008, 2007 and
2006, respectively. No expense related to this plan was incurred from
August 12, 2005 (Inception) to October 31, 2006.
18) Related
party transactions
FutureFuel
enters into transactions with companies affiliated with or controlled by a
director and significant shareholder.
FutureFuel
enters into agreements to sell biodiesel to an affiliate from time to
time. Such agreements are priced at the then current market price of
biodiesel as determined from bids from other customers and/or market pricing
services. Volumes sold under these agreements are generally delivered
by railcars leased by FutureFuel. Revenue from this affiliate totaled
$4,864, $56 and $0 for the years ended December 31, 2008, 2007 and 2006,
respectively. Cost of goods sold associated with these biodiesel
sales to the affiliate were $2,357, $26 and $0 for the years ended
December 31, 2008, 2007 and 2006, respectively. These amounts
include allocated hedging gains (losses) for the respective period.
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 $-0-, $126
and $9 for the years ended December 31, 2008, 2007 and 2006,
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,
80
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
conversion
and/or hedging of commodities as FutureFuel may request from time to
time. Expenditures related to this agreement totaled $132, $127 and
$20 in the years ended December 31, 2008, 2007 and 2006,
respectively.
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. Forty railcars were received through December 31,
2008 but no railcars had been received in 2006 under this
agreement. Expenditures incurred under this agreement were $331, $72
and $0, for the years ended December 31, 2008, 2007 and 2006,
respectively.
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 $40, $78 and $123 for the years ended December 31,
2008, 2007 and 2006, respectively.
Accounts
payable included $422 and $121 and accrued expenses and other current
liabilities included $20 and $0 due to related parties at December 31, 2008
and 2007, respectively.
19) 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. 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
at the Batesville Plant. Biodiesel revenues were generally derived in
one of two ways. Revenues were generated under tolling agreements
whereby customers supplied key biodiesel feed stocks which FutureFuel then
converted into biodiesel at the Batesville Plant in exchange for a fixed price
processing charge per gallon of biodiesel produced. Tolling
agreements were terminated in 2007. 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 year ended December 31,
2008, 2007 and 2006 attributable to the United States and foreign countries
(based upon the billing addresses of its customers) were as
follows.
81
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
|
Fiscal
Year
|
United
States
|
All
Foreign Countries
|
Total
|
|||||||||
|
December 31,
2008
|
$ | 164,963 | $ | 33,367 | $ | 198,330 | ||||||
|
December 31,
2007
|
$ | 141,233 | $ | 28,555 | $ | 169,788 | ||||||
|
December 31,
2006
|
$ | 21,474 | $ | 1,569 | $ | 23,043 | ||||||
For the
years ended December 31, 2008, 2007 and 2006, revenues from Mexico
accounted for 11%, 11% and 7%, respectively, of total
revenues. Beginning in the third quarter of 2007, FutureFuel Chemical
Company began selling significant quantities of biodiesel to companies in
Canada, at which time revenues from Canada became a material component of total
revenues. Revenues from Canada accounted for 5% and 5% of total
revenues for the years ended December 31, 2008 and 2007,
respectively. Other than Mexico and Canada, revenues from a single
foreign country during 2008, 2007 or 2006 did not exceed 3% of total
revenues.
Summary
of business by segment
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues
|
||||||||||||
|
Chemicals
|
$ | 155,553 | $ | 144,474 | $ | 21,282 | ||||||
|
Biofuels
|
42,777 | 25,314 | 1,761 | |||||||||
|
Revenues
|
$ | 198,330 | $ | 169,788 | $ | 23,043 | ||||||
|
Segment
gross margins
|
||||||||||||
|
Chemicals
|
$ | 32,738 | $ | 27,107 | $ | 6,054 | ||||||
|
Biofuels
|
7,679 | (9,874 | ) | (3,110 | ) | |||||||
|
Segment
gross margins
|
40,417 | 17,233 | 2,944 | |||||||||
|
Corporate
expenses
|
(8,236 | ) | (7,578 | ) | (2,182 | ) | ||||||
|
Income
before interest and taxes
|
32,181 | 9,655 | 762 | |||||||||
|
Interest
income
|
2,965 | 3,567 | 3,365 | |||||||||
|
Interest
and other expense
|
(150 | ) | (31 | ) | (37 | ) | ||||||
|
Provision
for income taxes
|
(12,321 | ) | (4,783 | ) | (1,373 | ) | ||||||
|
Net
income
|
$ | 22,675 | $ | 8,408 | $ | 2,717 | ||||||
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.
Gross
margin for the biodiesel segment for the year ended December 31, 2008 was
favorably impacted by the receipt of $2,000 from the State of Arkansas during
the second quarter resulting from our biodiesel operating cost grant application
under the Arkansas Alternative Fuels Development Program. This
funding was attributable to our biodiesel production between January 1,
2007 and June 30, 2008 and was calculated as $0.20 per gallon of biodiesel
produced, capped at $2,000. FutureFuel has applied for funding under
this program for biodiesel produced during the period July 1 to
December 31, 2008 but has not yet received notification that its
application has been approved. Based on the characteristics of the
Arkansas Alternative Fuels Development Program and the State funding behind this
program, FutureFuel recognizes income in the period funding is
received.
20) Fair
value measurements
FutureFuel
adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements,
effective January 1, 2008. Under SFAS No. 157, fair value
is defined as the exit price, or the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants as of the measurement date. SFAS No. 157 also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when
available. Observable inputs are inputs market participants would use
in valuing the asset or liability developed based on market data obtained from
sources independent of FutureFuel. Unobservable inputs are inputs
that reflect
82
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
FutureFuel’s
assumptions about the factors market participants would use in valuing the asset
or liability developed based upon the best information available in the
circumstances. The hierarchy is broken down into three
levels. Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 inputs
include quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are
not active, and inputs (other than quoted prices) that are observable for the
asset or liability, either directly or indirectly. Level 3
inputs are unobservable inputs for the asset or
liability. Categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.
The
following table provides information by level for assets and liabilities that
are measured at fair value, as defined by SFAS No. 157, on a recurring
basis.
|
Asset/(Liability)
|
||||||||||||||||
|
Fair
Value at December 31,
|
Fair
Value Measurements Using
Inputs
Considered as
|
|||||||||||||||
|
Description
|
2008
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Available
for sale:
|
||||||||||||||||
|
U.S.
treasury securities
|
$ | 15,999 | $ | 15,999 | - | - | ||||||||||
|
Auction
rate securities
|
$ | 14,990 | - | $ | 14,990 | - | ||||||||||
|
Commercial
paper
|
$ | 15,422 | $ | 15,422 | - | - | ||||||||||
|
Derivative
instruments
|
$ | (3,175 | ) | $ | (3,175 | ) | - | - | ||||||||
21) Commitments
Lease
agreements
FutureFuel
has entered into lease agreements for oil storage capacity, railcars,
isotainers, gas cylinders, argon tanks and office machines. Minimum
rental commitments under existing noncancellable operating leases as of
December 31, 2008 were as follows:
|
2009
|
$ | 1,163 | ||
|
2010
|
457 | |||
|
2011
|
393 | |||
|
2012
|
331 | |||
|
2013
|
331 | |||
|
Thereafter
|
985 | |||
|
Total
|
$ | 3,660 |
Lease
expenses totaled $885, $408 and $9 for the years ended December 31, 2008,
2007 and 2006, respectively.
Purchase
obligations
FutureFuel
has entered into contracts for the purchase of goods and services including
contracts for the expansion of FutureFuel’s biofuels related infrastructure, the
development, implementation and maintenance of an enterprise resource planning
computer software package and the licensing of a chemical modeling software
product.
Deferred
payments to 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 2008, 2007 and
2006 for this agreement totaled $250, $172 and $11, respectively.
83
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
22) Quarterly
financial information (unaudited)
|
Quarter
|
||||||||||||||||
|
1st
|
2nd
|
3rd
|
4th
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Revenues
|
$ | 43,220 | $ | 49,896 | $ | 60,585 | $ | 44,629 | ||||||||
|
Gross
profit
|
$ | 10,582 | $ | 4,451 | $ | 10,880 | $ | 14,504 | ||||||||
|
Net
income
|
$ | 6,160 | $ | 2,913 | $ | 5,389 | $ | 8,213 | ||||||||
|
Net
income per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.23 | $ | 0.11 | $ | 0.20 | $ | 0.29 | ||||||||
|
Diluted
|
$ | 0.23 | $ | 0.11 | $ | 0.19 | $ | 0.29 | ||||||||
|
2007
|
||||||||||||||||
|
Revenues
|
$ | 37,506 | $ | 41,620 | $ | 46,558 | $ | 44,104 | ||||||||
|
Gross
profit (loss)
|
$ | (2,448 | ) | $ | 5,582 | $ | 6,885 | $ | 7,214 | |||||||
|
Net
income (loss)
|
$ | (2,040 | ) | $ | 2,907 | $ | 3,343 | $ | 4,198 | |||||||
|
Net
income (loss) per common share:
|
||||||||||||||||
|
Basic
|
$ | (0.08 | ) | $ | 0.11 | $ | 0.13 | $ | 0.16 | |||||||
|
Diluted
|
$ | (0.08 | ) | $ | 0.09 | $ | 0.10 | $ | 0.13 | |||||||
Earnings
per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly amounts will not
necessarily equal the total for the year.
23) Recently
issued accounting standards
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007)
“Business Combinations” (“SFAS No. 141R”) which replaces SFAS No. 141 “Business
Combinations” (“SFAS No. 141”). SFAS No. 141R retains the fundamental
requirements of SFAS No. 141 that the acquisition method of accounting be used
for all business combinations. However, SFAS No. 141R provides for
the following changes from SFAS No. 141: an acquirer will record 100% of assets
and liabilities of acquired business, including goodwill, at fair value,
regardless of the level of interest acquired; certain contingent assets and
liabilities will be recognized at fair value at the acquisition date; contingent
consideration will be recognized at fair value on the acquisition date with
changes in fair value to be recognized in earnings upon settlement;
acquisition-related transaction and restructuring costs will be expensed as
incurred; reversals of valuation allowances related to acquired deferred tax
assets and changes to acquired income tax uncertainties will be recognized in
earnings; and when making adjustments to finalize preliminary accounting,
acquirers will revise any previously issued post-acquisition financial
information in future financial statements to reflect any adjustments as if they
occurred on the acquisition date. SFAS No. 141R applies prospectively
to business combinations for which the acquisition date is on or after
January 1, 2009. SFAS No. 141R will not have an impact on
FutureFuel’s consolidated financial statements at the effective date, but the
nature and magnitude of the specific effects will depend upon the nature, terms,
and size of acquisitions, if any, consummated after the effective
date.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”),
which establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 provides that accounting and reporting for
minority interests be recharacterized as noncontrolling interests and classified
as a component of equity. SFAS No. 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 applies to all entities that
prepare consolidated financial statements but will affect only those entities
that have an outstanding noncontrolling interest in one or more subsidiaries or
that deconsolidate a subsidiary. SFAS No. 160 is effective as of the
beginning of an entity’s first fiscal year beginning after December 15,
2008. FutureFuel
84
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
has
concluded that SFAS No. 160 will not have a material impact on its consolidated
financial position, liquidity, or results of operations.
In March
2008, the FASB issued SFAS Statement No. 161 “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS No. 161”). The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. The new standard also
improves transparency about the location and amounts of derivative instruments
in an entity’s financial statements; how derivative instruments and related
hedged items are accounted for under SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities” and how derivative instruments and related
hedged items affect its financial position, financial performance, and cash
flows. FutureFuel has concluded that SFAS No. 161 will not have a
material impact on the Company’s disclosures.
24) Reserve
roll forwards - valuation and qualifying accounts
|
Additions
|
|
Balance
at January 1, 2008
|
Charged
to Cost and Expense
|
Charged
to Other Accounts
|
Deductions
|
Balance
at December 31, 2008
|
||||||||||||||||
|
Reserve
for:
|
||||||||||||||||||||
|
Doubtful
accounts and returns
|
$ | 42 | $ | 4 | $ | - | $ | 42 | $ | 4 | ||||||||||
|
LIFO
inventory
|
1,562 | 3,120 | - | - | 4,682 | |||||||||||||||
|
Aged
and obsolete inventory
|
124 | 129 | - | - | 253 | |||||||||||||||
|
Deferred
tax valuation allowance
|
472 | 265 | - | - | 737 | |||||||||||||||
|
Aged
and obsolete supplies and parts
|
436 | 230 | 666 | |||||||||||||||||
| $ | 2,636 | $ | 3,748 | $ | - | $ | 42 | $ | 6,342 | |||||||||||
|
Additions
|
|
Balance
at January 1, 2007
|
Charged
to Cost and Expense
|
Charged
to Other Accounts
|
Deductions
|
Balance
at December 31, 2007
|
||||||||||||||||
|
Reserve
for:
|
||||||||||||||||||||
|
Doubtful
accounts and returns
|
$ | 42 | $ | - | $ | - | $ | - | $ | 42 | ||||||||||
|
LIFO
inventory
|
5 | 1,557 | - | - | 1,562 | |||||||||||||||
|
Aged
and obsolete inventory
|
2 | 122 | - | - | 124 | |||||||||||||||
|
Deferred
tax valuation allowance
|
- | 472 | - | - | 472 | |||||||||||||||
|
Aged
and obsolete supplies and parts
|
442 | (6 | ) | 436 | ||||||||||||||||
| $ | 491 | $ | 2,145 | $ | - | $ | - | $ | 2,636 | |||||||||||
85
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
|
Additions
|
|
Balance
at January 1, 2006
|
Charged
to Cost and Expense
|
Charged
to Other Accounts
|
Deductions
|
Balance
at December 31, 2006
|
||||||||||||||||
|
Reserve
for:
|
||||||||||||||||||||
|
Doubtful
accounts and returns
|
$ | 4 | $ | 38 | $ | - | $ | - | $ | 42 | ||||||||||
|
LIFO
inventory
|
- | 5 | - | - | 5 | |||||||||||||||
|
Aged
and obsolete inventory
|
- | 2 | - | - | 2 | |||||||||||||||
|
Deferred
tax valuation allowance
|
- | - | - | - | - | |||||||||||||||
|
Aged
and obsolete supplies and parts
|
442 | 442 | ||||||||||||||||||
| $ | 4 | $ | 487 | $ | - | $ | - | $ | 491 | |||||||||||
25) Restatement
of consolidated financial results
On
October 31, 2006, FutureFuel acquired Eastman SE. For purposes
of preparing its financial statements, FutureFuel accounted for the acquisition
as a reverse acquisition; FutureFuel did not apply purchase accounting to the
transaction. Upon further review of the accounting for the
acquisition of Eastman SE in connection with the filing of its Form 10
Registration Statement, FutureFuel reassessed its accounting for the acquisition
and determined that FutureFuel’s financial statements should be restated to
apply purchase accounting to the acquisition. The consolidated
financial statements of FutureFuel along with the accompanying notes to the
financial statements contained herein reflect this restatement.
86
The
following sets forth FutureFuel Chemical Company’s statements of operations and
statements of cash flows 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
FutureFuel
Corp.:
We have
audited the accompanying statement of operations, changes in stockholder’s
equity, and cash flows for the ten months ended October 31, 2006 of
FutureFuel Chemical Company (the Company), formerly known as Eastman SE,
Inc. These 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 audit.
We
conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows for the ten months
ended October 31, 2006 of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc., in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG
LLP
St.
Louis, Missouri
December
27, 2007
87
FutureFuel
Chemical Company,
formerly
known as Eastman SE, Inc.
Statements
of Operations
For
the Ten Months Ended October 31, 2006
(Dollars
in thousands)
|
Predecessor
Ten Months Ended October 31, 2006
|
||||
|
Revenues
|
$ | 111,125 | ||
|
Revenues
- related parties
|
16,602 | |||
|
Cost
of goods sold
|
101,816 | |||
|
Cost
of goods sold - related parties
|
16,602 | |||
|
Distribution
|
1,158 | |||
|
Gross profit
(loss)
|
8,151 | |||
|
Selling,
general and administrative expenses
|
5,403 | |||
|
Research
and development expenses
|
3,996 | |||
| 9,399 | ||||
|
Income
(loss) from operations
|
(1,248 | ) | ||
|
Interest
expense
|
- | |||
| - | ||||
|
Income
(loss) before income taxes
|
(1,248 | ) | ||
|
Provision
(benefit) for income taxes
|
(773 | ) | ||
|
Net income (loss)
|
$ | (475 | ) | |
The
accompanying notes are an integral part of these financial
statements.
88
FutureFuel
Chemical Company,
formerly
known as Eastman SE, Inc.
Statements
of Cash Flows
For
the Ten Months Ended October 31, 2006
(Dollars
in thousands)
|
Predecessor
Ten Months Ended October 31, 2006
|
||||
|
Cash
flows provided by operating activities
|
||||
|
Net income (loss)
|
$ | (475 | ) | |
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||
|
Asset impairment
charges
|
- | |||
|
Depreciation
|
7,531 | |||
|
Provision (benefit) for deferred
income taxes
|
601 | |||
|
Noncash
environmental charges (credits) from parent
|
148 | |||
|
Losses
on disposals of fixed assets
|
95 | |||
|
Changes
in operating assets and liabilities:
|
||||
|
Accounts
receivable
|
7,412 | |||
|
Inventory
|
(2,413 | ) | ||
|
Prepaid expenses and other
current assets
|
(38 | ) | ||
|
Other assets
|
(606 | ) | ||
|
Accounts payable
|
2,271 | |||
|
Accrued
expenses and other current liabilities
|
(5,657 | ) | ||
|
Other
noncurrent liabilities
|
(335 | ) | ||
|
Net
cash provided by operating activities
|
8,534 | |||
|
Cash
flows used in investing activities
|
||||
|
Proceeds from the sale of fixed
assets
|
- | |||
|
Capital
expenditures
|
(8,549 | ) | ||
|
Net
cash used in investing activities
|
(8,549 | ) | ||
|
Cash
flows provided by (used in) financing activities
|
||||
|
Transfers to parent,
net
|
15 | |||
|
Net
cash provided by (used in) financing activities
|
15 | |||
|
Net
change in cash and cash equivalents
|
- | |||
|
Cash
and cash equivalents at beginning of period
|
- | |||
|
Cash
and cash equivalents at end of period
|
$ | - | ||
The
accompanying notes are an integral part of these financial
statements.
89
FutureFuel
Chemical Company,
formerly
known as Eastman SE, Inc.
Statements
of Changes in Stockholder’s Equity
For
the Ten Months Ended October 31, 2006
(Dollars
in thousands)
|
Predecessor
|
||||||||
|
Net
Investment of Parent
|
Total
Stockholder’s Equity
|
|||||||
|
Balance
- December 31, 2005
|
$ | 76,073 | $ | 76,073 | ||||
|
Net income (loss)
|
(475 | ) | (475 | ) | ||||
|
Net transfer to
parent
|
153 | 153 | ||||||
|
Balance
- October 31, 2006
|
$ | 75,751 | $ | 75,751 | ||||
The
accompanying notes are an integral part of these financial
statements.
90
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
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 and
cellulose-derived biofuels) 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 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. 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”).
Basis
of Presentation
Through
October 31, 2006, the operations of the Batesville Plant were included in
the consolidated financial statements of Eastman
Chemical. Accordingly, the accompanying 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. These financial statements are presented as the predecessor
financial statements to FutureFuel Corp. The financial statements for
Eastman SE do not reflect the application of purchase accounting and are
presented on a different cost basis than periods following the acquisition and,
therefore, are not comparable.
Corporate
Allocations
The
financial statements of Eastman SE 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:
91
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
|
Ten
Months Ended October 31, 2006
|
||||
|
Cost
of goods sold
|
$ | - | ||
|
Distribution
|
438 | |||
|
Selling,
general and administrative
|
4,398 | |||
|
Research
and development
|
652 | |||
|
Total
cost and expenses allocated
|
$ | 5,488 | ||
Allocations
were made to cost of goods sold, distribution and selling, general and
administrative expenses primarily based on a percentage of revenues and
allocations to research and development expenditures were made primarily on
actual time and effort incurred, which management believes represents reasonable
allocation methodologies. These allocations and estimates are not
necessarily indicative of the costs and expenses that would have resulted if
Eastman SE had been operating as a separate entity.
Eastman
Chemical used a centralized approach to cash management, hedging and the
financing of its operations. As a result, debt and related interest
income and expense, and certain cash and cash equivalents, were maintained at
the corporate office and are not included in the accompanying consolidated
financial statements. In addition, allocations related to LIFO
inventories were made on the basis of the specific attributes of the inventories
and related products sold by Eastman SE.
2) Significant
accounting policies
Accounts
receivable, allowance for doubtful accounts and credit risk
Accounts
receivable are recorded at the invoiced amount and do not bear
interest. Eastman SE 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.
Through
October 31, 2006, Eastman SE participated in an agreement that allowed
Eastman Chemical to sell certain domestic accounts receivable under a planned
continuous sale program to a third party. The agreement permitted the
sale of undivided interests in domestic trade accounts receivable, which Eastman
Chemical continued to service until collection.
Customer
concentrations
Significant
portions of Eastman SE’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 $69,982 for the ten months ended
October 31, 2006. 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
$21,559 for the ten months ended October 31, 2006.
Inventory
Eastman
SE determines the cost of substantially all raw materials and finished goods
inventories by the last-in, first-out (“LIFO”) method. Eastman SE
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.
92
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
Financial
and derivative instruments
The
carrying values of accounts receivable, accounts payable and accrued expenses
and other current liabilities approximate their fair values due to the
short-term maturities of these 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 Eastman SE retires or otherwise disposes of assets,
it removes the cost of such asset and related accumulated depreciation from the
accounts. Eastman SE 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:
|
Buildings
and building equipment
|
20
– 50 years
|
|
Machinery
and equipment
|
3 –
33 years
|
|
Transportation
equipment
|
5 –
33 years
|
|
Other
|
5 –
33 years
|
Impairment
of assets
Eastman
SE 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
Eastman
SE 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 Eastman SE’s environmental policies and practices. These expenses
are charged into earnings over the estimated useful life of the
assets. Currently, Eastman SE 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.
Income
taxes
Through
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
93
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
receivable
were actually due to or receivable from Eastman Chemical and are included in the
net investment of parent and transfers to parent.
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.
Through
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.
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.
Comprehensive
income (loss)
As it has
not historically recognized any other comprehensive income (loss), the
comprehensive income (loss) of Eastman SE is comprised entirely of its net
income (loss). As Eastman SE 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, Eastman SE 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.
Eastman
SE 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,
94
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
commercial,
contract, environmental, health and safety and environmental matters, which are
handled and defended in the ordinary course of business. Eastman SE
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, Eastman 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.
Segment
reporting
Eastman
SE identifies operating segments when separate financial information is
available that is evaluated regularly by its chief operating decision maker in
assessing the performance of those segments and in determining how to allocate
resources. Eastman SE has determined that it has two reportable
segments organized along product lines - chemicals and biofuels.
3) Property,
plant and equipment
Depreciation
expense totaled $7,531 for the ten months ended October 31,
2006.
4) 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”).
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 of $148 for the ten
months ended October 31, 2006 were included in cost of goods sold within
the accompanying consolidated statements of operations in deriving the results
of operations.
5) Income
taxes
The
following table summarizes the provision for income taxes for the periods
ended:
|
Ten
Months Ended October 31, 2006
|
||||
|
Income
(loss) before taxes - U.S.
|
$ | (1,248 | ) | |
|
Provision/(benefit)
for income taxes:
|
||||
|
Current
|
$ | (1,238 | ) | |
|
Deferred
|
511 | |||
|
State
and other
|
||||
|
Current
|
(136 | ) | ||
|
Deferred
|
90 | |||
|
Total
|
$ | (773 | ) | |
95
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
Differences
between the provision for income taxes computed using the U.S. federal statutory
income tax rate were as follows as of:
|
Ten
Months Ended October 31, 2006
|
||||
|
Amount
computed using the statutory rate of 35%
|
$ | (437 | ) | |
|
Section
199 manufacturing deduction
|
- | |||
|
Agri-biodiesel
production credit
|
(303 | ) | ||
|
State
income taxes, net
|
(33 | ) | ||
|
Provision
for income taxes
|
$ | (773 | ) | |
6) Impairments
and severance charges
No
impairment charges or severance costs were incurred in the ten months ended
October 31, 2006.
7) 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. For the purposes of the their presentation
within the financial statements of Eastman SE, 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, 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. Eastman Chemical
aggregated the cost of defined benefit and defined contribution plans and a
breakout between the two is not available for financial reporting at the plant
level.
8) 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 through October 31, 2006, 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. Sales of Eastman SE products to Eastman Chemical or affiliates
of Eastman Chemical totaled $5,952 for the ten months ended October 31,
2006.
96
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
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.
9) Segment
information
Eastman
SE has determined that it 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
Eastman
SE’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
Eastman
SE’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 Eastman SE 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 Eastman SE’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
Eastman SE’s long-lived assets are located in the U.S.
Most of
Eastman SE’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 Eastman SE’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
Eastman SE to the customer. Rarely is Eastman SE the exporter of
record, never is Eastman SE the importer of record into foreign countries and
Eastman SE is not always aware of the exact quantities of its products that are
moved into foreign markets by its customers. Eastman SE 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. Eastman SE’s revenues for the ten months ended
October 31, 2006 attributable to the United States and foreign countries
(based upon the billing addresses of its customers) were as
follows:
|
Period
Ended
|
United
States
|
All
Foreign Countries
|
Total
|
|||||||||
|
October 31,
2006
|
$ | 110,419 | $ | 17,308 | $ | 127,727 | ||||||
For the
ten months ended October 31, 2006, revenues from Mexico accounted for 12%
of total revenues. Other than Mexico, revenues from a single foreign
country during 2006 did not exceed 1% of total revenues.
97
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
Summary
of business by segment
|
Ten
Months Ended
October
31, 2006
|
||||
|
Revenues
|
||||
|
Chemicals
|
$ | 116,148 | ||
|
Biofuels
|
11,579 | |||
|
Total Revenues
|
$ | 127,727 | ||
|
Segment
gross margins
|
||||
|
Chemicals
|
$ | 16,124 | ||
|
Biofuels
|
(7,973 | ) | ||
|
Segment gross
margins
|
8,151 | |||
|
Corporate
expenses
|
(9,399 | ) | ||
|
Income
(loss) before interest and taxes
|
(1,248 | ) | ||
|
Interest
expense
|
- | |||
|
Provision
for income taxes
|
773 | |||
|
Net
income (loss)
|
$ | (475 | ) | |
Depreciation
is allocated to segment costs of goods sold based on plant usage. The
total assets and capital expenditures of Eastman SE have not been allocated to
individual segments as large portions of these assets are shared to varying
degrees by each segment, causing such an allocation to be of little
value.
10) Commitments
Lease
agreements
Eastman
SE historically had entered into lease agreements for information technology
equipment and railcars. Lease expenses totaled $106 for the ten
months ended October 31, 2006. Eastman SE terminated its lease
commitments in anticipation of the acquisition by Viceroy and had no minimum
rental commitments under existing noncancellable operating leases as of
October 31, 2006.
Purchase
obligations
Eastman
SE has entered into contracts for the purchase of goods and services including
contracts for the expansion of its biodiesel related infrastructure, the
purchase of biodiesel related feedstocks and the licensing of a chemical
modeling software product.
98
During
2006 and 2007, KPMG LLP was engaged as an independent accountant to audit our
financial statements. On February 13, 2008, our audit committee
selected RubinBrown LLP to serve as our independent accountant. KPMG
LLP continued to perform services with respect to our Form 10 Registration
Statement and Form 10-Q for the period ended June 30,
2007. Upon the completion of those services, KPMG LLP no longer
served as our independent accountants.
KPMG
LLP’s report on our financial statements for 2006, as well as FutureFuel
Chemical Company’s financial statements for the ten months ended
October 31, 2006, did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. During our three most recent fiscal years
ended December 31, 2008, there were no disagreements with KPMG LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, management has concluded that,
as of December 31, 2008, our internal control over financial reporting is
effective based on those criteria.
The
effectiveness of our internal control over financial reporting as of
December 31, 2008 has been audited by our auditor, RubinBrown LLP, an
independent registered public accounting firm, which expressed an unqualified
opinion as stated in their report, a copy of which is included
below.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
FutureFuel
Corp.:
We have
audited the internal control over financial reporting of FutureFuel Corp. and
subsidiary (the Company) as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such
other
99
procedures
as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable details,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and related statements of
operations, comprehensive income, changes in stockholders’ equity, and cash
flows of the Company, and our report dated March 16, 2009 expressed an
unqualified opinion on those financial statements and included an explanatory
paragraph regarding the Company’s adoption of Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FAB Statement No. 109 and Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements.
/s/
RubinBrown LLP
St.
Louis, Missouri
March 16,
2009
Changes
in Internal Control Over Financial Reporting
We did
not make any changes in our internal control over financial reporting as a
result of our evaluation that occurred during the fiscal quarter ended
December 31, 2008.
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our Chief Executive Officer and our
Principal Financial Officer and other senior management personnel, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the
Exchange Act) as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and our
Principal Financial Officer have concluded that these disclosure controls and
procedures as of December 31, 2008 were effective to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms.
100
Identification
of Directors
Our
directors are as follows.
|
Name
|
Age
|
Director
Since
|
Term
Expires
|
|||
|
Paul
A. Novelly, executive chairman of the board
|
65
|
2005
|
2009
|
|||
|
Lee
E. Mikles, chief executive officer and president
|
53
|
2005
|
2011
|
|||
|
Edwin
A. Levy
|
71
|
2005
|
2010
|
|||
|
Thomas
R. Evans
|
54
|
2006
|
2011
|
|||
|
Richard
L. Knowlton
|
76
|
2007
|
2009
|
|||
|
Paul
G. Lorenzini, chief operating officer
|
69
|
2007
|
2009
|
|||
|
Donald
C. Bedell
|
67
|
2008
|
2010
|
There is
no arrangement or understanding between any of the above directors and any other
person pursuant to which such person was or is to be selected as a
director.
Identification
of Executive Officers
Our
executive officers are as follows.
|
Name
|
Position
|
Age
|
Officer
Since
|
|||
|
Paul
A. Novelly
|
Executive
chairman of the board
|
65
|
2005
|
|||
|
Lee
E. Mikles
|
Chief
executive officer and president
|
53
|
2005
|
|||
|
Paul
G. Lorenzini
|
Chief
operating officer
|
69
|
2008
|
|||
|
Douglas
D. Hommert
|
Principal
financial officer, executive vice president, secretary and
treasurer
|
53
|
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.
|
Name
|
Position
|
Age
|
Officer
Since
|
|||
|
David
Baker
|
Senior
Vice president - operations support
|
62
|
2006
|
|||
|
Gary
Hess
|
Senior
Vice president - sales and marketing
|
57
|
2006
|
|||
|
Benjamin
Ladd
|
Chief
financial officer and treasurer
|
32
|
2006
|
|||
|
Samuel
Dortch
|
Senior
Vice president - operations
|
60
|
2007
|
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 St.
101
Albans
Global Management, Limited Partnership, LLLP, which provides corporate
management services. He currently serves on the board of directors at
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 in the destination resorts and
adventure travel industry, and The Bear Stearns Companies, Inc., a broker-dealer
and global securities and investment firm.
Lee E.
Mikles has been our chief executive officer and a member of our board
since inception. In addition, he served as our principal financial
officer before our acquisition of FutureFuel Chemical Company and thereafter
through January 31, 2008. 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.
Paul G.
Lorenzini has been a member of our board since January 2007 and our chief
operating officer since April 21, 2008. 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.
Douglas D.
Hommert has been our executive vice president, secretary and treasurer
since inception. He was a member of our board from inception through
January 14, 2008. He became our principal financial officer on
February 1, 2008. Mr. Hommert has been executive vice president
and general counsel of Apex Oil Company, Inc. since September
2002. Between October 1988 and September 2002, he was a partner in
the St. Louis law firm of Lewis, Rice & Fingersh, L.C. With that
firm, he practiced in the areas of business law, taxation, mergers and
acquisitions, financing and partnerships. He was licensed as a
Certified Public Accountant in 1982.
Edwin A.
Levy has been a member of our board since November 2005. In
1979, Mr. Levy co-founded Levy, Harkins & Co., Inc., an investment advisory
firm, where he now serves as chairman of the board and individual
advisor. Mr. Levy was a director of Traffix, Inc. between November
1995 and 2006, and served as a member of its audit committee and stock options
committee. He is a director of 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 in the past
five years was a director of Forward Industries, Inc., a publicly-held company
in the business of designing, manufacturing and distributing custom carrying
case solutions.
Thomas R.
Evans has been a member of our board since May 2006. Since
June 2004, he has served as president and chief executive officer of Bankrate,
Inc., an Internet based aggregator of financial rate information. Mr.
Evans was elected to Bankrate, Inc.’s board of directors in May
2004. From 1999 to 2002, Mr. Evans was chairman and chief executive
officer of Official Payments Corporation, an Internet processor of payment to
government entities.
Richard L.
Knowlton has been a member of our board since January
2007. Between 1956 and 1995, Mr. Knowlton worked for Hormel Foods
Corporation, a multinational manufacturer and marketer of consumer-branded meat
and food products. He started as a merchandising manager and became
the president and chief operating officer in 1979. He became the
chief executive officer and chairman of the board in 1981 and retired in
1995. Mr. Knowlton currently serves as a director on The Hormel
Foundation and the Horatio Alger Association and is a member of the Business
Advisory Council for the University of Colorado Leeds School of Business, the
Mayo Laboratory Services Advisory Board and the Eisenhower Medical Center
Board. Mr. Knowlton served as a director of NG America Insurance
Holdings, Inc. between 2000 and 2005 and SUPERVALU INC. between 1994 and
2005.
Donald C.
Bedell has been a member of our board since March 17,
2008. Mr. Bedell is chairman of the board of privately held Castle
Partners and its affiliates, based in Sikeston, Missouri, which operate over 35
skilled nursing and health care facilities throughout Missouri, Arkansas and
Arizona. Mr. Bedell is a director of several privately held
commercial banks, including First Community Bank of Batesville, Arkansas and is
a member of the executive committee of such bank and its holding
company. He is also a director of World Point Terminals Inc., serving
as
102
chairman
of World Point’s Corporate Governance and Human Resources
Committees. FutureFuel Corp.’s chairman, Paul A. Novelly, is the
chairman of the board of World Point Terminals Inc.
David
Baker was the vice president - manufacturing operations of FutureFuel
Chemical Company between October 31, 2006 and October 14, 2007 and has
been senior vice president - operations support since October 15,
2007. 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
was the vice president - commercial operations of FutureFuel Chemical Company
between October 31, 2006 and October 14, 2007 and has been senior vice
president - sales and marketing since October 15, 2007. 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. During his tenure with Bayer Corporation, Mr. Hess
resided two years in Germany where he directed the market development efforts in
pharmaceutical intermediates and photographic chemicals. 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. From October 2003 to October 2006, Mr.
Ladd was a fund manager and financial consultant for St. Albans Global
Management, Limited Partnership, LLLP. 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.
Samuel
Dortch was the vice president - operations services of FutureFuel
Chemical Company between July 30, 2007 and October 14, 2007 and has
been senior vice president - operations since October 15,
2007. In 1972, Mr. Dortch joined Eastman Chemical Company’s technical
services division in Kingsport, Tennessee as a development chemical
engineer. He has served in numerous management positions in
Kingsport, Batesville and at Eastman Kodak’s Kirby, England
facility. In 2004, Mr. Dortch became manager of research and
development at the Batesville plant and director of research and development in
December 2006.
Section 16(a)
Beneficial Ownership Reporting Compliance
The
following table sets forth transactions in 2008 for which our directors and
executive officers were required to file with the SEC a Form 3 or
Form 4, and whether or not such Form was filed timely with the
SEC.
|
Director
or Officer
|
Transaction
|
Form
Required
|
Filed
Timely
|
|
Paul
A. Novelly
|
4-7-08
award of 100,000 options
|
Form
4
|
|
|
4-15-08
purchase of 1,525,100 shares of our common stock by warrant
exercise
|
Form
4
|
yes
|
|
|
7-14-08
exercise of 100,000 options
|
Form
4
|
yes
|
|
|
7-16-08
purchase of 862,000 shares of our common stock
|
Form
4
|
yes
|
|
|
10-3-08
purchase of 500,000 shares of our common stock
|
Form
4
|
yes
|
|
|
10-6-08
purchase of 500,000 shares of our common stock
|
Form
4
|
yes
|
|
|
10-6-08
purchase of 185,400 shares of our common stock
|
Form
4
|
yes
|
|
|
10-21-08
exercise of 625,000 warrants
|
Form
4
|
||
|
12-8-08
award of 100,000 options
|
Form
4
|
103
| Director or Officer | Transaction | Form Required | Filed Timely |
|
Lee
E. Mikles
|
4-7-08
award of 10,000 options
|
Form
4
|
|
|
7-16-08
purchase of 100,000 shares of our common stock
|
Form
4
|
yes
|
|
|
9-3-08
exercise of 10,000 options
|
Form
4
|
||
|
Paul
G. Lorenzini
|
4-7-08
award of 100,000 options
|
Form
4
|
|
|
7-16-08
purchase of 150,000 shares of our common stock
|
Form
4
|
yes
|
|
|
10-3-08
exercise of 100,000 options
|
Form
4
|
||
|
Douglas
D. Hommert
|
7-16-08
purchase of 10,000 shares of our common stock
|
Form
4
|
yes
|
|
Edwin
A. Levy
|
4-7-08
award of 10,000 options
|
Form
4
|
|
|
10-10-08
exercise of 10,000 options
|
Form
4
|
||
|
Thomas
R. Evans
|
4-7-08
award of 10,000 options
|
Form
4
|
|
|
Richard
L. Knowlton
|
4-7-08
award of options
|
Form
4
|
|
|
7-16-08
purchase of 150,000 shares of our common stock
|
Form
4
|
yes
|
|
|
10-20-08
exercise of 10,000 options
|
Form
4
|
||
|
Donald
C. Bedell
|
4-7-08
award of 10,000 options
|
Form
4
|
|
|
10-9-08
exercise of 10,000 options
|
Form
4
|
||
|
David
Baker
|
4-7-08
award of 10,000 options
|
Form
4
|
|
|
10-2-08
purchase of 3,600 shares of our common stock
|
Form
4
|
||
|
10-2-08
purchase of 2,600 shares of our common stock
|
Form
4
|
||
|
10-7-08
purchase of 350 shares of our common stock
|
Form
4
|
||
|
12-3-08
award of 100 shares of our common stock
|
Form
4
|
||
|
Gary
Hess
|
4-7-08
award of 10,000 options
|
Form
4
|
|
|
10-22-08
exercise of 10,000 options
|
Form
4
|
||
|
12-3-08
award of 100 shares of our common stock
|
Form
4
|
||
|
Sam
Dortch
|
4-7-08
award of 10,000 options
|
Form
4
|
|
|
12-3-08
award of 100 shares of our common stock
|
Form
4
|
||
|
Ben
Ladd
|
4-7-08
award of 10,000 options
|
Form
4
|
|
|
7-16-08
purchase of 10,000 shares of our common stock
|
Form
4
|
yes
|
|
|
10-2-08
exercise of 10,000 options
|
Form
4
|
||
|
12-3-08
award of 100 shares of our common stock
|
To our
knowledge, based upon the reports provided to us under Section 16(a) of the
Exchange Act, no other filing required under such section was not timely
filed.
Code
of Ethics
We
adopted a code of ethics and business conduct that applies to all of our
employees and the employees of our subsidiaries, including our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of this
code of ethics and business conduct has been posted on our Internet website and
may be accessed at http://ir.futurefuelcorporation.com/governance.cfm. We
will provide any person, without charge, a copy of such code of ethics and
business conduct upon request to FutureFuel Corp., 8235 Forsyth Blvd., 4th Floor,
Clayton, Missouri 63105, attention: Investor Relations.
104
Nominating
Committee
Our board
established a nominating committee and adopted a charter for such nominating
committee. A copy of this nominating committee charter is posted on
our Internet website and may be accessed at http://ir.futurefuelcorporation.com/governance.cfm. The
nominating committee charter contains procedures for Company shareholders to
submit recommendations for nomination to our board. There have not
been any changes to those procedures since that charter was attached as an
exhibit to our Form 10 Registration Statement filed with the SEC on
April 24, 2007.
Audit
Committee
We have a
separately-designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act, and have adopted an audit
committee charter. A copy of this audit committee charter has been
posted on our Internet website and may be accessed at http://ir.futurefuelcorporation.com/governance.cfm. The
current members of the audit committee are as follows:
Thomas R. Evans
Edwin A. Levy
Richard L. Knowlton
Audit
Committee Expert
Our board
of directors determined that each member of our audit committee is an audit
committee financial expert. Each such member of our audit committee
is independent, as independence for audit committee members is defined in the
listing standards applicable to us.
105
General
Our board
of directors has established a remuneration committee. The
remuneration committee’s responsibilities include, among other things,
determining our policy on remuneration to our (that is, FutureFuel Corp.’s)
officers and directors and the executive officers and directors of FutureFuel
Chemical Company. Given that we were a start-up company and only
consummated our acquisition of FutureFuel Chemical Company on October 31,
2006, we determined for 2006 not to pay salaries, bonuses or other forms of
compensation to any of our executive officers who have been elected by the
FutureFuel Chemical Company board of directors to an executive officer position
with FutureFuel Chemical Company. The FutureFuel Corp. board also
determined not to pay any compensation to any member of its board of directors
or to any member of the board of any subsidiary for the year 2006. On
January 16, 2008, our remuneration committee recommended that we pay each
of our then directors $25,000 in compensation, and $25,000 to our past director
William J. Doré. The remuneration committee also recommended that we
pay $100,000 in compensation to each of Paul A. Novelly and Paul G. Lorenzini
for services provided in 2007 to our subsidiary, FutureFuel Chemical Company,
and to reimburse an affiliate of Lee E. Mikles $100,000 for expenses incurred by
such affiliate in 2007 in the course of Mr. Mikles performing services for us
and our subsidiary, FutureFuel Chemical Company. Our board approved
such payments on January 22, 2008. On December 11, 2008,
our remuneration committee recommended that we pay each of our then directors
$25,000 in compensation. The remuneration committee also recommended
that we pay $100,000 in compensation to Paul G. Lorenzini for services provided
in 2008 to our subsidiary, FutureFuel Chemical Company, and to reimburse an
affiliate of Paul A. Novelly and an affiliate of Lee E. Mikles $100,000 each for
expenses incurred by such affiliates in 2008 in the course of Mr. Novelly and
Mr. Mikles performing services for us and our subsidiary, FutureFuel Chemical
Company. Our board approved such payments on December 30,
2008. No compensation for our directors or executive officers has
been set at this time for the calendar year 2009. Rather, our board
believes it is more appropriate to set such compensation later in the year when
2009 results are capable of reasonable estimation.
We pay
salaries, bonuses and other forms of compensation to the officers of FutureFuel
Chemical Company as described below. For purposes of the following
discussion of executive compensation, the term “executive officers” includes
executive officers of both FutureFuel Corp. and FutureFuel Chemical
Company. Only Paul A. Novelly, Lee E. Mikles, Paul G. Lorenzini and
Douglas D. Hommert have been elected officers of FutureFuel Corp. by our board
of directors.
Compensation
Discussion and Analysis
We have
not yet established a comprehensive executive compensation philosophy, nor have
we determined definitively the material elements of the compensation of our
executive officers. The current elements of our compensation program
include base salary, bonuses and certain retirement, insurance and other
benefits generally available to all employees. In addition, our board
adopted an Omnibus Incentive Plan (the “Incentive
Plan”) which was approved by our shareholders at our 2007 annual meeting
on June 26, 2007. The Incentive Plan provides equity-based
compensation to our executive officers and our directors.
Cash
Salaries and Bonuses
At this
time, we have determined that we will pay $100,000 compensation to Mr. Lorenzini
for services rendered by Mr. Lorenzini to our subsidiary, FutureFuel Chemical
Company during 2008, and to reimburse an affiliate of Mr. Novelly and an
affiliate of Mr. Mikles $100,000 each for expenses incurred by such affiliate in
the course of Mr. Novelly and Mr. Mikles performing services for us and our
subsidiary, FutureFuel Chemical Company. Such services included
reviewing business operations and reducing operating costs. The
$100,000 was determined by Messrs. Novelly and Mikles as reasonable in relation
to the services rendered, and was approved by our remuneration committee and our
board. No compensation will be paid to Mr. Hommert for
2008. Our executive chairman, Mr. Novelly, also receives compensation
from our affiliate, St. Albans Global Management, Limited Partnership,
LLLP. Our chief executive officer, Mr. Mikles, receives compensation,
in addition to the amounts received from us, 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. Except as described above, none
of Messrs. Novelly, Mikles, Lorenzini or Hommert received any increase in their
salary, bonus or other income to compensate them for their services to
us. As to our other executive
106
officers,
we continued their base salaries paid for 2007 with a modest percentage increase
for 2008. We expect that our remuneration committee will establish
future salaries for our executive officers commensurate with those paid by
companies comparable to us and to FutureFuel Chemical Company, as
applicable.
For the
year 2008, we established a bonus pool for the employees of our subsidiary,
FutureFuel Chemical Company. The total bonus target amount was
determined at 10% of the estimated (as of December 15, 2008) after-tax
earnings of FutureFuel Chemical Company for the year ended December 31,
2008, subject to certain adjustments. We believe the 10% amount was
reasonable and provides an incentive for such employees to continue implementing
the business plan that we have installed at FutureFuel Chemical
Company. This bonus was paid in cash and shares of our common
stock. FutureFuel Chemical Company employees with over one year of
service received approximately two weeks pay. Employees with less
than one year service received $250. In addition, FutureFuel Chemical
Company employees with over three years service received 100 shares of our
common stock issued under the Incentive Plan. The cash portion of
such bonuses was paid on December 19, 2008. The shares of stock
were issued on December 3, 2008. Salaried employees of
FutureFuel Chemical Company received an additional bonus amount ranging from $0
to $40,000, with the larger bonuses going to FutureFuel Chemical Company’s
executive officers as determined by FutureFuel Chemical Company’s board of
directors.
We expect
to establish an annual cash bonus program for fiscal years commencing after 2008
in an amount equal to 10% of after-tax earnings of FutureFuel Chemical Company,
subject to certain adjustments, but solely on a discretionary
basis. In determining actual bonus payouts for such years, 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 herein. The actual amount
of bonuses, if any, will be determined near the end of our fiscal
year.
Omnibus
Incentive Plan
Our board
of directors adopted the Incentive Plan, which was approved by our shareholders
at our 2007 annual shareholder meeting on June 26, 2007. The
purpose of the Incentive Plan is to:
|
|
·
|
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;
|
|
|
·
|
encourage
such persons to remain in our employ or in the employ of
our subsidiaries; and
|
|
|
·
|
provide
incentives to persons who are not our employees to promote our
success.
|
The
Incentive Plan authorizes us to issue stock options (including incentive stock
options and nonqualified stock options), stock awards and stock appreciation
rights. To date, options for 410,000 shares of stock and awards of
39,800 shares of stock have been made. We will consider issuing
additional stock options, stock awards and/or stock appreciation rights pursuant
to the criteria set forth below. However, no determinations have been
made for 2009.
Eligible
participants in the Incentive Plan include: (i) members of our board of
directors and our executive officers; (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.
Awards
under the Incentive Plan are limited to shares of our common stock, which may be
shares reacquired by us, including shares purchased in the open market, or
authorized but un-issued shares. Awards will be limited to 10% of the
issued and outstanding shares of our common stock in the aggregate, or
approximately 2,670,000 shares as of the date of adoption of the Incentive
Plan.
The
Incentive Plan will be administered by our board’s remuneration committee (the
“Administrator”). The
Administrator may appoint agents to assist it in administering the Incentive
Plan. The Administrator may delegate to one or more individuals the
day-to-day administration of the Incentive Plan and any of the functions
assigned to
107
the
Administrator in the Incentive Plan. Such delegation may be revoked
at any time. All decisions, determinations and interpretations by the
Administrator regarding the Incentive Plan and the terms and conditions of any
award granted thereunder will be final and binding on all
participants.
The
Incentive Plan became effective upon its approval by our shareholders on
June 26, 2007 and continues in effect for a term of ten years thereafter
unless amended and extended by us or unless earlier terminated. The
individuals and number of persons who may be selected to participate in the
Incentive Plan in the future is at the discretion of the Administrator and,
therefore, are not determinable at this time. Likewise, the number of
stock options, stock awards and stock appreciation rights that will be granted,
or that would have been granted during the last completed fiscal year if the
Incentive Plan had been in effect, to eligible participants pursuant to the
Incentive Plan are not determinable at this time.
The
Administrator may grant a stock option or provide for the grant of a stock
option either from time to time in the discretion of the Administrator or
automatically upon the occurrence of events specified by the Administrator,
including the achievement of performance goals or the satisfaction of an event
or condition within the control of the participant or within the control of
others. Each option agreement must contain provisions regarding:
(i) the number of shares of common stock that may be issued upon exercise
of the option; (ii) the type of option; (iii) the exercise price of
the shares and the means of payment for the shares; (iv) the term of the
option; (v) such terms and conditions on the vesting or exercisability of
the option as may be determined from time to time by the Administrator;
(vi) restrictions on the transfer of the option and forfeiture provisions;
and (vii) such further terms and condition not inconsistent with the plan
as may be determined from time to time by the Administrator. Unless
otherwise specifically determined by the Administrator or otherwise set forth in
the Incentive 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).
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 Incentive 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
108
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
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 12. - Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters - Founding Shares Owned by the Founding Shareholders”
below. Our board of directors considered 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).
Our
executive officers who are not officers of FutureFuel Corp. participate in
employee welfare plans (life insurance, medical insurance, disability insurance,
vacation pay and the like) maintained by FutureFuel Chemical Company for all of
its employees. We do not provide life insurance or other employee
benefits for our executive officers who have been elected to officer positions
with both FutureFuel Corp. and FutureFuel Chemical Company.
The
Remuneration Committee
Our
remuneration committee currently consists of Mr. Bedell, Mr. Knowlton and Mr.
Levy. 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 Exchange Act, and an “outside director” within the
meaning of §162(m) of the Internal Revenue Code of 1986, as
amended.
109
Summary
Compensation Table
Our
executive officers were paid the following compensation for the three-year
period ended December 31, 2008.
Summary
Compensation Table
|
Person
|
Year
|
Salary
|
Bonus
(e)
|
Stock
Awards
(d)
|
Option
Awards (g)
|
All
Other
Compensa-
tion
(b)
|
Total | ||||||
|
Paul
A. Novelly(c)
Executive
chairman
FutureFuel
Corp.
|
2008
2007
2006
|
$
$
$
|
0
0
0
|
$
$
$
|
0
100,000
0
|
$
$
$
|
0
0
0
|
$
$
$
|
175,000
0
0
|
$
$
$
|
25,000
25,000
0
|
$
$
$
|
200,000
125,000
0
|
|
Lee
E. Mikles(c)
Chief
executive officer
FutureFuel
Corp.
|
2008
2007
2006
|
$
$
$
|
0
0
0
|
$
$
$
|
0
0
0
|
$
$
$
|
0
0
0
|
$
$
$
|
25,250
0
0
|
$
$
$
|
25,000
25,000
0
|
$
$
$
|
50,250
25,000
0
|
|
Paul
G. Lorenzini(c)
Chief
operating officer
FutureFuel
Corp.
|
2008
2007
2006
|
$
$
|
0
0
n/a
|
$
$
|
100,000
100,000
n/a
|
$
$
|
0
0
n/a
|
$
$
|
211,500
0
n/a
|
$
$
|
25,000
25,000
n/a
|
$
$
|
336,500
125,000
n/a
|
|
Douglas
D. Hommert(c)
Executive
vice president,
secretary
and treasurer,
FutureFuel
Corp.
|
2008
2007
2006
|
$
$
$
|
0
0
0
|
$
$
$
|
0
0
0
|
$
$
$
|
0
0
0
|
$
$
$
|
0
0
0
|
$
$
$
|
0
0
0
|
$
$
$
|
0
0
0
|
|
Benjamin
Ladd(a)
Chief
financial officer,
FutureFuel
Chemical Company
|
2008
2007
2006
|
$
$
$
|
163,943
147,117
23,750
|
$
$
$
|
74,788
27,885
40,000
|
$
$
$
|
525
0
0
|
$
$
$
|
23,900
0
0
|
$
$
$
|
11,586
99,547
0
|
$
$
$
|
274,742
274,549
63,750
|
|
David
Baker(a)
Vice
president - operations
support,
FutureFuel Chemical Company
|
2008
2007
2006
|
$
$
$
|
170,957
170,005
140,618
|
$
$
$
|
75,173
28,270
64,044
|
$
$
$
|
525
0
0
|
$
$
$
|
0
0
0
|
$
$
$
|
14,266
24,634
28,389
|
$
$
$
|
260,921
222,909
233,051
|
|
Gary
Hess(a)
Vice
president - sales and
marketing,
FutureFuel Chemical Company
|
2008
2007
2006
|
$
$
$
|
170,623
170,000
125,984
|
$
$
$
|
75,173
18,268
41,500
|
$
$
$
|
525
0
0
|
$
$
$
|
20,250
0
0
|
$
$
$
|
14,633
11,359
20,531
|
$
$
$
|
281,203
199,628
188,015
|
|
Samuel
Dortch(a)(f)
Vice
president, operations,
FutureFuel
Chemical Company
|
2008
2007
2006
|
$
$
|
176,298
145,000
n/a
|
$
$
|
74,692
27,788
n/a
|
$
$
|
525
0
n/a
|
$
$
|
0
0
n/a
|
$
$
|
20,381
9,689
n/a
|
$
$
|
271,896
182,477
n/a
|
__________
|
(a)
|
Executive
officers of FutureFuel Chemical Company for the years
indicated. Prior to November 1, 2006, Messrs. Powell,
Baker, Hess and Dortch were employed by Eastman Chemical
Company. Prior to November 1, 2006, Mr. Ladd was employed
by St. Albans Global Management, Limited Partnership, LLLP, an affiliate
of Mr. Novelly. For 2006, the table includes both amounts paid
by FutureFuel Chemical Company as well as by Eastman Chemical Company, if
applicable.
|
|
(b)
|
For
Messrs. Novelly, Mikles and Lorenzini, includes $25,000 in directors fees
for 2008 and 2007 as described below. 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 or for the covered fiscal year with
respect to life and disability insurance for the benefit of the named
person. 2006 also includes the following payments by Eastman
Chemical Company to or for the benefit of the named individual: special
pay makeup, employee recognition, personal umbrella, non-qualified stock
options to purchase stock of Eastman Chemical Company, pay-in-lieu of
vacation, stock awards to purchase stock of Eastman Chemical Company, and
lump sum payment. 2007 includes a separation allowance of
$55,769 and vacation cash-out of $7,212 for Mr. Powell, a relocation
allowance of $13,077 for Mr. Baker, and nondeductible moving expenses
(grossed up) of $78,746 and deductible moving expenses (not grossed up) of
$11,123 for Mr. Ladd. 2008 includes $6,003 of moving expenses
for Mr. Dortch, exclusive of $14,686 in deductible moving expenses paid
directly to movers. The above amounts do not include travel
expenses reimbursed pursuant to company
policy.
|
|
(c)
|
Our
executive officers for the years indicated. 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
|
110
|
|
certain
ordinary and necessary business expenses that they incurred in connection
with our business. We reimbursed an affiliate of Mr. Mikles
$100,000 in 2008 and 2007 as set forth above for expenses incurred by such
affiliate in 2008 and 2007 in connection with Mr. Mikles performing
services for us and FutureFuel Chemical Company in 2008 and
2007. We reimbursed an affiliate of Mr. Novelly $100,000 in
2008 as set forth above for expenses incurred by such affiliate in 2008 in
connection with Mr. Novelly performing services for us and FutureFuel
Chemical Company in 2008.
|
|
(d)
|
Calculated
at the number of shares awarded multiplied by the average between the high
and low trade prices of shares of our common stock on the OTCBB on the
date of the award.
|
|
(e)
|
2007
amounts were earned in 2007 but paid in
2008.
|
|
(f)
|
Mr.
Dortch did not become an officer of FutureFuel Chemical Company until
2007.
|
|
(g)
|
Calculated
at the number of options exercised multiplied by the average between the
high and low trade prices of shares of our common stock on the OTCBB on
the date of the exercise.
|
None of
the above-named persons is a party to an employment agreement or employment
arrangement with us or with FutureFuel Chemical Company.
Grants
of Plan-Based Awards
We
adopted the Incentive Plan but did not make any awards thereunder until
2008. In April 2008, we granted a total of 55,000 stock options to
selected members of our management. An additional 5,000 management
options were issued in September 2008. The options awarded in April
2008 had an exercise price equal to the average of the bid and ask price of our
common stock on the date of grant as established in private sales, which our
board of directors determined to be the fair market value of such stock on that
date. The management options awarded in September 2008 had an
exercise price equal to the closing price of our common stock on the date of
grant as quoted on the OTCBB. Originally, one-third of the management
options granted in April 2008 vested on each of the annual anniversary dates of
the grant. Our compensation committee determined that it was in our
best interests if those options were to vest
immediately. Accordingly, those management options were amended in
September 2008 to provide for immediate vesting. The management
options issued in September 2008 vested immediately upon grant. The
management options awarded in April 2008 expire on April 7,
2013. The management options awarded in September 2008 expire on
September 30, 2013. On December 3, 2008, we awarded an
aggregate of 39,800 shares of our common stock to employees of FutureFuel
Chemical Company. These shares vested upon grant.
The
following tables set forth certain information regarding the awards to our
executive officers and certain officers of FutureFuel Chemical Company of
options and shares of our common stock under the Incentive Plan.
111
Grants
of Plan-Based Awards
|
Estimated
Future Payout Under Equity
Incentive
Plan Awards
|
||||||||
|
Name
|
Grant
Date
|
Threshold(#)
|
Target
(#)
|
Maximum
(#)
|
All
Other Option Awards: Number
of
Shares
of
Stock
or
Units
(#)
|
All
Other
Option
Awards:
Number
of Securities Underlying Options(#)
|
Exercise
or
Base
Price
of Option Awards
($/Sh)
|
Grant
Date
Fair Value of Stock and Option Awards
|
|
Paul
A. Novelly
Executive
chairman
FutureFuel
Corp.
|
04/07/08
12/10/08
|
100,000
100,000
|
100,000
100,000
|
100,000
100,000
|
0
|
0
|
$4.00
$5.65
|
$4.00
$5.65
|
|
Lee
E. Mikles
Chief
executive officer
FutureFuel
Corp.
|
04/07/08
|
10,000
|
10,000
|
10,000
|
0
|
0
|
$4.00
|
$4.00
|
|
Paul
G. Lorenzini
Chief
operating officer
FutureFuel
Corp.
|
04/07/08
|
100,000
|
100,000
|
100,000
|
0
|
0
|
$4.00
|
$4.00
|
|
Douglas
D. Hommert
Executive
vice president,
secretary
and treasurer, and
principal
financial officer,
FutureFuel
Corp.
|
n/a
|
n/a
|
n/a
|
n/a
|
0
|
0
|
n/a
|
n/a
|
|
Benjamin
Ladd
Chief
financial officer,
FutureFuel
Chemical Company
|
04/07/08
12/03/08
|
10,000
100
|
10,000
100
|
10,000
100
|
0
|
0
|
$4.00
n/a
|
$4.00
$5.65
|
|
David
Baker
Vice
president - operations
support,
FutureFuel Chemical
Company
|
04/0708
12/03/08
|
10,000
100
|
10,000
100
|
10,000
100
|
0
|
0
|
$4.00
n/a
|
$4.00
$5.65
|
|
Gary
Hess
Vice
president - sales and
marketing,
FutureFuel
Chemical
Company
|
04/07/08
12/03/08
|
10,000
100
|
10,000
100
|
10,000
100
|
0
|
0
|
$4.00
n/a
|
$4.00
$5.65
|
|
Samuel
Dortch
Vice
president, operations,
FutureFuel
Chemical Company
|
04/07/08
12/03/08
|
10,000
100
|
10,000
100
|
10,000
100
|
0
|
0
|
$4.00
n/a
|
$4.00
$5.65
|
Outstanding
Equity Awards at Fiscal Year End
|
Option
Awards
|
Stock
Awards
|
||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (3)
Unexercisable
|
Equity
Incentive
Plan
Awards: Number of Securities Unexercised Unearned Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration Date
|
Number
of
Shares
or
Units
of Stock That Have
Not
Vested
(#)
|
Market
Value
of
Shares or
Units
of Stock That Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards: Number of
Unearned
Shares, Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|
Paul
A. Novelly
|
0
|
0
|
0
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Lee
E. Mikles
|
0
|
0
|
0
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Paul
G. Lorenzini
|
0
|
0
|
0
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Douglas
D. Hommert
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Benjamin
Ladd
|
0
|
0
|
0
|
n/a
|
n/a
|
0
|
0
|
0
|
0
|
|
David
Baker
|
10,000
|
0
|
0
|
$4.00
|
04/07/13
|
0
|
0
|
0
|
0
|
|
Gary
Hess
|
0
|
0
|
0
|
n/a
|
n/a
|
0
|
0
|
0
|
0
|
|
Sam
Dortch
|
10,000
|
0
|
0
|
$4.00
|
04/07/13
|
0
|
0
|
0
|
0
|
112
Option
Exercises and Stock Vested
|
Option
Awards
|
Stock
Awards
|
||||||||||||||
|
Name
|
Number
of Shares Acquired on Exercise
(#)
|
Value
Realized on Exercise
($)
(a)
|
Number
of Shares Acquired on Vesting
(#)
|
Value
Realized on Vesting
($)
(b)
|
|||||||||||
|
Paul
A. Novelly
|
100,000 |
$
|
175,000 | n/a | n/a | ||||||||||
|
Lee
E. Mikles
|
10,000 |
$
|
25,000 | n/a | n/a | ||||||||||
|
Paul
G. Lorenzini
|
100,000 |
$
|
212,000 | n/a | n/a | ||||||||||
|
Douglas
D. Hommert
|
n/a | n/a | n/a | n/a | |||||||||||
|
Benjamin
Ladd
|
10,000 |
$
|
23,900 | 100 |
$
|
565 | |||||||||
|
David
Baker
|
n/a | n/a | 100 |
$
|
565 | ||||||||||
|
Gary
Hess
|
10,000 |
$
|
20,300 | 100 |
$
|
565 | |||||||||
|
Sam
Dortch
|
n/a | n/a | 100 |
$
|
565 | ||||||||||
__________
|
(a)
|
Calculated
as the number of options exercised multiplied by the average between the
high and low trade price of our common stock as quoted on the OTCBB on the
exercise date, minus the option exercise
price.
|
|
(b)
|
Calculated
as the number of shares of our common stock awarded multiplied by the
average between the high and low trade price of our common stock as quoted
on the OTCBB on the award date.
|
Compensation
of Directors
We have
determined to pay to each of our directors $25,000 for services provided as
director in 2008. The $25,000 was determined by Mr. Novelly as a
reasonable amount and was recommended to the remuneration committee and our
board, who approved such payments. No directors fees have been
determined for 2009 or thereafter, but rather will be set towards the end of our
fiscal year.
We
adopted the Incentive Plan but did not make any awards thereunder until
2008. In April 2008, we granted a total of 250,000 stock options to
members of our board of directors. An additional 100,000 director
options were granted on December 10, 2008. The options awarded
in April 2008 had an exercise price equal to the average of the bid and ask
price of our common stock on the date of grant as established in private sales,
which our board of directors determined to be the fair market value of such
stock on that date. The director options awarded in December 2008 had
an exercise price equal to the closing price of our common stock on the date of
grant as quoted on the OTCBB. The director options vested immediately
upon grant. The director options awarded in April 2008 expire on
April 7, 2013. The director options awarded in December 2008
expire on December 10, 2013.
113
The
following is the compensation our directors earned for 2008.
|
Director
|
Fees
Earned or Paid in Cash
|
Stock
Awards
|
Option
Awards (a)
|
Non-Equity
Incentive Plan Compensa-tion
|
Change
in Pension Value and Non-Qualified Deferred Compensa-tion
Earnings
|
All
Other
Compensa-tion
|
Total
|
||||||||||||||||||||
|
Paul
A. Novelly
|
$ | 25,000 | $ | 0 | $ | 341,450 | $ | 0 | $ | 0 | $ | 0 | $ | 366,450 | |||||||||||||
|
Lee
E. Mikles
|
$ | 25,000 | $ | 0 | $ | 12,797 | $ | 0 | $ | 0 | $ | 0 | $ | 37,797 | |||||||||||||
|
Edwin
A. Levy
|
$ | 25,000 | $ | 0 | $ | 12,797 | $ | 0 | $ | 0 | $ | 0 | $ | 37,797 | |||||||||||||
|
Thomas
R. Evans
|
$ | 25,000 | $ | 0 | $ | 12,797 | $ | 0 | $ | 0 | $ | 0 | $ | 37,797 | |||||||||||||
|
Richard
L. Knowlton
|
$ | 25,000 | $ | 0 | $ | 12,797 | $ | 0 | $ | 0 | $ | 0 | $ | 37,797 | |||||||||||||
|
Paul
G. Lorenzini
|
$ | 25,000 | $ | 0 | $ | 127,967 | $ | 0 | $ | 0 | $ | 0 | $ | 152,967 | |||||||||||||
|
William
J. Doré
|
$ | 25,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
__________
|
(a)
|
The
amounts reported represent the grant date fair value of options vested in
2008 and recognized as expense in our financial statements in 2008,
measured in accordance with Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 123 (revised 2004) Shares Based
Payments.
|
Messrs.
Novelly, Mikles and Lorenzini also received compensation as executive
officers. See the discussion above.
Compensation
Committee Interlocks and Insider Participation
The
members of our remuneration committee between January 1, 2008 and
April 25, 2008 were Mr. Levy, Mr. Knowlton and Mr. Lorenzini and the
committee was chaired by Mr. Levy. The members of our remuneration
committee between April 25, 2008 and December 31, 2008 were Mr. Bedell, Mr.
Knowlton and Mr. Levy and the committee was chaired by Mr.
Bedell. None of such individuals other than Mr. Lorenzini are or have
been an officer or employee of the Company. On April 21, 2008,
Mr. Lorenzini became our chief operating officer. Prior to that time
Mr. Lorenzini was neither an officer nor an employee of the
Company.
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, Mr. Levy (one of our directors and a member of our remuneration
committee), and Mr. Bedell (one of our directors and a member of our
remuneration committee) are directors of World Point Terminal Inc.; World Point
Terminal Inc. does not have a separate compensation committee.
Compensation
Committee Report
The
remuneration committee of our board has reviewed and discussed the Compensation
Discussion and Analysis set forth above with our management. Based on
this review and discussions, the remuneration committee recommended to our board
of directors that the Compensation Discussion and Analysis be included in this
annual report on Form 10-K.
Donald C.
Bedell, Richard L. Knowlton and Edwin A. Levy
114
Securities
Authorized for Issuance Under Equity Compensation Plans
Our board
of directors adopted the Incentive Plan which was approved by our shareholders
at our 2007 annual shareholder meeting on June 26, 2007. We do
not have any other equity compensation plan. The following
information regarding the Incentive Plan is as of December 31,
2008
|
Plan
Category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column
(a))
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity
compensation plans
approved
by security holders
|
142,000
|
$ 5.25
|
2,220,200
|
Security
Ownership of Certain Beneficial Owners
As of the
date of this report, 28,190,300 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, of which 21,317,500 are unexercised. 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
March 10, 2009.
|
Common
Stock
|
Warrants
|
Fully
Diluted
|
||||||
|
Name and Address of Beneficial
Owner
|
Amount
of
Beneficial
Ownership
|
Percent
of
Common
Stock
|
Amount
of
Beneficial
Ownership
|
Percent
of
Warrants
|
Amount
of
Beneficial
Ownership
|
Percent
of
Common
Stock
and
Warrants(f)
|
||
|
Paul
A. Novelly, 8235 Forsyth Blvd., 4th
Floor, Clayton, MO 63105(a)
|
11,703,750
|
41.5%
|
6,168,850
|
28.9%
|
17,872,600
|
36.1%
|
||
|
Lee
E. Mikles, 1486 E. Valley Road,
Santa Barbara, CA 93108(b)
|
2,210,000
|
7.8%
|
12,500
|
0.1%
|
2,222,500
|
4.5%
|
||
|
SOF
Investments, L.P., 645 5th
Avenue, 21st
Floor, New York, NY 10022(c)
|
1,800,000
|
6.4%
|
1,800,000
|
8.4%
|
3,600,000
|
7.3%
|
||
|
Fir
Tree, LLC, Camellia Partners, LLC, Jeffrey Tannenbaum and Andrew Fredman,
505 Fifth Avenue, 23rd
Floor, New York, NY 10017(d)
|
0
|
0.0%
|
1,350,000
|
6.3%
|
1,350,000
|
2.7%
|
||
|
Burlingame
Equity Investors, LP, One Market Street, Spear Street Tower, Suite 3750,
San Francisco, California 94105(e)
|
486,600
|
1.7%
|
1,972,500
|
9.3%
|
2,459,100
|
5.0%
|
||
|
Osmium
Special Situations Fund Ltd., Canon’s Court, 22 Victoria Street, Hamilton,
Bermuda DO HM 11(g)
|
2,225,900
|
7.9%
|
1,154,895
|
5.4%
|
3,380,795
|
6.8%
|
||
|
David
M. Knott, 485 Underhill Blvd., Suite 205, Syosset, New York
11791-3419(h)
|
2,164,380
|
7.7%
|
1,763,900
|
8.3%
|
3,928,280
|
7.9%
|
||
115
__________
|
(a)
|
Includes
10,978,750 shares of common stock and 6,168,850 warrants held by St.
Albans Global Management, Limited Partnership, LLLP, 625,000 shares of
common stock held by Apex Holding Co. and 100,000 shares of common stock
held by Mr. Novelly. 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
2,110,000 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)
|
Based
solely upon review of a Schedule 13G filed on February 14, 2008,
we understand that SOF Investments, L.P. is the record and direct
beneficial owner of the shares and warrants listed above, MSD Capital,
L.P. is the general partner of SOF Investments, L.P. and may be deemed to
indirectly beneficially own securities owned by SOF Investments, L.P., and
MSD Capital Management LLC is the general partner of MSD Capital,
L.P. Except as set forth in this footnote, we have no knowledge
as to the beneficial owners of these
entities.
|
|
(d)
|
Based
solely upon information contained in a Form 3 filed with the SEC on
March 7, 2008 and a Form 4 filed on July 17, 2008, Fir
Tree, L.L.C. is the general partner of Fir Tree Value Master Fund, LP, a
Cayman Islands exempted limited partnership (“Fir Tree
Value”), and Camellia Partners, LLC is the general partner of Fir
Tree Capital Opportunity Master Fund, LP, a Cayman Islands exempted
limited partnership (“Fir Tree
Capital Opportunity”). Fir Tree, L.L.C. and Camellia
Partners, LLC hold indirectly the common stock through the accounts of Fir
Tree Capital Opportunity and Fir Tree Value; Jeffrey Tannenbaum, a
principal of Fir Tree, L.L.C. and Camellia Partners, LLC, and Andrew
Fredman, another principal of Camellia Partners, LLC, at the time of
purchase, controlled the disposition and voting of the common
stock. Except as set forth in this footnote, we have no
knowledge as to the beneficial owners of these
entities.
|
|
(e)
|
Based
solely upon a Schedule 13G/A filed with the SEC on February 17,
2009. Burlingame Equity Investors, LP beneficially owns 328,035
shares of common stock and 1,330,668 warrants. Burlingame
Equity Investors II, LP beneficially owns 40,606 shares of common stock
and 164,410 warrants. Burlingame Equity Investors (Offshore)
Ltd. beneficially owns 117,959 shares of common stock and 477,422
warrants. Burlingame Asset Management, LLC is the general
partner of Burlingame Equity Investors, LP and Burlingame Equity Investors
II, LP, and is the investment manager of Burlingame Equity Investors
(Offshore) Ltd. and may be deemed to beneficially own the shares and
warrants held by them. Mr. Blair E. Sanford is the managing
member of Burlingame Asset Management, LLC and may be deemed to
beneficially own the shares and warrants held by it. Except as
set forth in this footnote, we have no knowledge as to the beneficial
owners of these entities.
|
|
(f)
|
Assumes
the exercise of all warrants issued and outstanding as of the date of this
report.
|
|
(g)
|
Based
solely on Schedule 13G, Form 3 and Form 4s filed with the
SEC. Mr. Chris Kuchanny, as chairman and chief executive
officer of Osmium Special Situations Fund Ltd., may, by virtue of such
position, be deemed to have beneficial ownership of such shares and
warrants. Mr. Kuchanny disclaims beneficial ownership other
than the portion of such shares and warrants which relates to his
individual economic interest in Osmium Special Situations Fund
Ltd. Except as set fort in this footnote, we have no knowledge
as to the beneficial owners of Osmium Special Situations Fund
Ltd.
|
|
(h)
|
Based
solely on Schedule 13G, Form 3 and Form 4s filed with the
SEC. Knott Partners, L.P. beneficially owns 820,000 shares of
common stock and 883,800 warrants. Shoshone Partners, L.P.
beneficially owns 510,630 shares of common stock and 355,300
warrants. Mulsanne Partners, L.P. beneficially owns 11,200
shares of common stock. Knott Partners Offshore Master Fund,
L.P. beneficially owns 752,550 shares of common stock and 454,200
warrants. 70,000 shares of common stock and 70,600 warrants are
held in accounts managed by Dorset Management
Corporation. David M. Knott is the managing member of Knott
Partners Management, LLC, a general partner of Knott Partners, L.P. and
the sole director of Dorset
|
116
|
|
Management
Corporation. Knott Partners Management, LLC is: (i) the
sole general partner of Shoshone Partners, L.P., Knott Partners Offshore
Master Fund, L.P. and Mulsanne Partners, L.P.; and (ii) the managing
general partner of Knott Partners, L.P. As a result of Mr.
Knott’s interests in Knott Partners Management, LLC and in Dorset
Management Corporation, Mr. Knott has investment discretion and control of
the securities described above. Mr. Knott may be deemed to
beneficially own an indirect pecuniary interest in the securities
described above as a result of its performance-related
fee. Except with respect to Knott Partners, L.P., Knott
Partners Offshore Master Fund, L.P. and Shoshone Partners, L.P., in which
Mr. Knott owns a beneficial interest, Mr. Knott disclaims beneficial
ownership therein except to the extent ultimately
realized. Each of Knott Partners, L.P., Knott Partners Offshore
Master Fund, L.P., Shoshone Partners, L.P., Mulsanne Partners, L.P. and
each of the managed accounts disclaims beneficial ownership of securities
reported as owned by any other party. Except as set forth in
this footnote, we have no knowledge as to the beneficial owners of these
entities.
|
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 report by each of our directors
and executive officers and the executive officers of FutureFuel Chemical
Company. 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.
|
Common
Stock
|
Warrants
|
Fully
Diluted
|
||||||
|
Name and Address of Beneficial
Owner
|
Amount
of
Beneficial
Ownership
|
Percent
of
Common
Stock
|
Amount
of
Beneficial
Ownership
|
Percent
of
Warrants
|
Amount
of
Beneficial
Ownership
|
Percent
of
Common
Stock
and
Warrants(d)
|
||
|
Paul
A. Novelly(a)
|
11,703,750
|
41.5%
|
6,168,850
|
28.9%
|
17,872,600
|
36.1%
|
||
|
Lee
E. Mikles(b)
|
2,210,000
|
7.8%
|
12,500
|
0.0%
|
2,222,500
|
4.5%
|
||
|
Douglas
D. Hommert(c)
|
260,000
|
0.9%
|
--
|
--
|
260,000
|
0.5%
|
||
|
Edwin
A. Levy
|
250,000
|
0.9%
|
--
|
--
|
260,000
|
0.5%
|
||
|
Thomas
R. Evans
|
30,000
|
0.1%
|
30,000
|
0.1%
|
60,000
|
0.1%
|
||
|
Richard
L. Knowlton
|
160,000
|
0.6%
|
--
|
--
|
160,000
|
0.3%
|
||
|
Paul
G. Lorenzini
|
250,000
|
0.9%
|
--
|
--
|
250,000
|
0.5%
|
||
|
Donald
C. Bedell
|
10,000
|
0.0%
|
--
|
--
|
10,000
|
0.0%
|
||
|
David
Baker
|
6,650
|
0.0%
|
--
|
--
|
6,650
|
0.0%
|
||
|
Gary
Hess
|
10,100
|
0.0%
|
--
|
--
|
10,100
|
0.0%
|
||
|
Sam
Dortch
|
100
|
0.0%
|
--
|
--
|
100
|
0.0%
|
||
|
Ben
Ladd
|
20,100
|
0.1%
|
--
|
--
|
20,100
|
0.0%
|
||
|
All
directors and executive officers
|
14,920,700
|
52.9%
|
6,211,350
|
29.1%
|
21,132,050
|
42.7%
|
||
__________
|
(a)
|
Includes
10,978,750 shares of common stock and 6,168,850 warrants held by St.
Albans Global Management, Limited Partnership, LLLP, 625,000 shares of
common stock held by Apex Holding Co. and 100,000 shares of common stock
held by Mr. Novelly. 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
2,110,000 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
260,000 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
report.
|
117
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
|
Shareholder
(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
|
||
|
RAS1,
LLC
|
50,000
|
Shareholder
|
118
Transactions
with Related Persons
Sales of Products
From time
to time, FutureFuel Chemical Company may sell to Apex Oil Company, Inc. and/or
its affiliates biofuels (including biodiesel) 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.
Lease of Centrifuge
FutureFuel
Chemical Company has executed an agreement with South Riding Point Holding, Ltd.
to lease a centrifuge for a four-month term at a lease rate of $750 per
day. This lease will commence upon delivery and installation of the
centrifuge, which is expected to occur in March 2009. South Riding
Point Holding, Ltd. is a wholly-owned subsidiary of World Point Terminals Inc.,
an affiliate of Mr. Novelly.
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 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 13 have been approved by a majority of the
disinterested members of our board of directors.
In
addition, we 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 SEC 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.
Director
Independence
The SEC
has 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 the SEC’s definitions of
independence:
Edwin A. Levy
Thomas R. Evans
Richard L. Knowlton
Donald C. Bedell
In
addition, each member of our board of directors’ remuneration, audit and
nominating committees are comprised of directors who are independent under such
definitions.
119
Audit
Fees
During
fiscal 2008 and 2007, we incurred $307,000 and $193,000 for audit and financial
statement review services from RubinBrown LLP, respectively, and $0 and
$464,900, respectively, for audit, financial statement review and services
provided in connection with our statutory and regulatory filings from KPMG
LLP.
Audit-Related
Fees
During
fiscal 2008 and 2007, we incurred $12,000 for employee benefit plan
audits. No fees were incurred for audit-related fees from either
RubinBrown LLP or KPMG LLP in 2007.
Tax
Fees
During
fiscal 2008 and 2007, we incurred fees of $15,100 and $2,500, respectively, for
tax compliance, tax advice and tax planning services from RubinBrown
LLP. No fees were incurred for these services from KPMG
LLP.
All
Other Fees
We
incurred $10,730 in fees from RubinBrown LLP during fiscal 2007 related to the
settlement of final working capital amounts stemming from our acquisition of
Eastman SE, Inc. No other fees were incurred by us from RubinBrown
LLP in fiscal 2008, nor were any other fees incurred by us in 2008 or 2007 from
KPMG LLP.
Pre-Approval
Policies
The Audit
Committee approves the engagement of our independent auditors prior to their
rendering audit or non-audit services and sets their
compensation. Pursuant to SEC regulations, the Audit Committee
approves all fees payable to the independent auditors for all routine and
non-routine services provided. The Audit Committee considers and
approves the budget for the annual audit and financial statement review services
prior to the initiation of the work. Non-routine services in the
ordinary course of business which are not prohibited under SEC regulation, such
as tax planning, tax compliance and other services generally are pre-approved on
a case-by-case basis.
120
Forward
Looking Information
This
report 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:
|
·
|
our
board’s selection of FutureFuel Chemical Company as a prospective target
business;
|
|
·
|
conflicts
of interest of our officers and
directors;
|
|
·
|
potential
future affiliations of our officers and directors with competing
businesses;
|
|
·
|
the
control by our founding shareholders of a substantial interest in
us;
|
|
·
|
the
highly competitive nature of the chemical and alternative fuel
industries;
|
|
·
|
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;
|
|
·
|
changes
in technology may render our products or services
obsolete;
|
|
·
|
failure
to comply with governmental regulations could result in the imposition of
penalties, fines or restrictions on operations and remedial
liabilities;
|
|
·
|
the
operations of FutureFuel Chemical Company’s biofuels business may be
harmed if the applicable government were to change current laws and/or
regulations;
|
|
·
|
our
board may have incorrectly evaluated FutureFuel Chemical Company’s
potential liabilities;
|
|
·
|
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
|
|
·
|
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 herein 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.
121
|
(a)
|
List
separately all financial statements filed as part of this
report.
|
|
|
|
1.
|
FutureFuel
Corp.’s audited consolidated Balance Sheets as at December 31, 2008
and 2007 and the related consolidated Statements of Operations, Statements
of Changes in Stockholders’ Equity and Statements of Cash Flows for the
years ended December 31, 2008, 2007 and
2006.
|
|
|
2.
|
FutureFuel
Chemical Company’s audited Statements of Operations and Statements of Cash
Flows for the ten-month period ended 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 (incorporated by reference to Exhibit No. 2 to
Form 10 filed April 24,
2007)
|
|
|
3.1.
|
Fourth
Amended and Restated Certificate of Incorporation filed on June 27,
2007 (incorporated by reference to Exhibit No. 3.1.f to Amendment No.
2 to Form 10 filed February 29,
2008)
|
|
|
3.2.
|
FutureFuel
Corp.’s Bylaws (incorporated by reference to Exhibit No. 3.2.a to
Form 10 filed April 24,
2007)
|
|
|
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
(incorporated by reference to Exhibit No. 4.1 to Form 10 filed
April 24, 2007)
|
|
|
4.2.
|
Warrant
Deed dated July 12, 2006 between FutureFuel Corp. and Capita IRG
(Offshore) Limited (incorporated by reference to Exhibit No. 4.2 to
Form 10 filed April 24, 2007); Addendum to Warrant Deed dated
July 18, 2008 between FutureFuel Corp. and Computershare Investor
Services (Channel Islands), 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: (incorporated by
reference to Exhibit No. 4.3 to Form 10 filed April 24,
2007)
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4.3a
|
Paul
Anthony Novelly
|
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4.3b
|
St.
Albans Global Management, Limited Partnership,
LLLP
|
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4.3c
|
Lee
E. Mikles
|
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4.3d
|
Lee
E. Mikles as Trustee of the Lee E. Mikles Gift Trust dated October 6,
1999
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4.3e
|
Lee
E. Mikles as Trustee of the Lee E. Mikles Revocable Trust dated
March 26, 1996
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4.3f
|
Douglas
D. Hommert
|
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4.3g
|
Douglas
D. Hommert as Trustee of the Douglas D. Hommert Revocable
Trust
|
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4.3h
|
Edwin
A. Levy
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4.3i
|
Joe
C. Leach
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122
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4.3j
|
Mark
R. Miller
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|
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4.3k
|
RAS
LLC
|
|
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4.3l
|
William
J. Doré
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4.3m
|
Thomas
R. Evans
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4.3n
|
Edwin
L. Wahl
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4.3o
|
Jeffery
H. Call
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4.3p
|
Ken
Fenton
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4.4.
|
Investor
Rights Agreement dated July 12, 2006 among FutureFuel Corp., CRT
Capital Group LLC and KBC Peel Hunt Ltd (incorporated by reference to
Exhibit No. 4.4 to Form 10 filed April 24,
2007)
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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 (incorporated by
reference to Exhibit No. 4.5 to Form 10 filed April 24,
2007)
|
|
|
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. Doré
(incorporated by reference to Exhibit No. 4.6 to Form 10 filed
April 24, 2007)
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|
|
10.1.
|
Placing
Agreement dated July 12, 2006 among CRT Capital Group LLC, KBC Peel
Hunt Ltd, FutureFuel Corp. and FutureFuel Corp.’s Directors (incorporated
by reference to Exhibit No. 10.1 to Form 10 filed April 24,
2007)
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|
|
10.2.
|
Offshore
Registrar Agreement dated July 12, 2006 between FutureFuel Corp. and
Capita IRG (Offshore) Limited (incorporated by reference to Exhibit
No. 10.2 to Form 10 filed April 24, 2007); Registrar
Agreement dated June 27, 2008 between FutureFuel Corp. and
Computershare Investor Services (Channel Islands)
Limited
|
|
|
10.3.
|
Warrant
Solicitation Fee Letter dated July 12, 2006 between FutureFuel Corp.
and CRT Capital Group LLC (incorporated by reference to Exhibit
No. 10.3 to Form 10 filed April 24,
2007)
|
|
|
10.4.
|
Storage
and Thruput Agreement dated November 1, 2006 between FutureFuel
Chemical Company and Center Point Terminal Company (incorporated by
reference to Exhibit No. 10. to Form 10 filed April 24,
2007)
|
|
|
10.5
|
Commodity
Trading Advisor Agreement dated November 1, 2006 between FutureFuel
Chemical Company and Apex Oil Company, Inc. (incorporated by reference to
Exhibit No. 10.5 to Form 10 filed April 24,
2007)
|
|
|
10.6
|
Service
Agreement dated November 1, 2006 between FutureFuel Corp. and
Pinnacle Consulting, Inc. (incorporated by reference to Exhibit
No. 10.6 to Form 10 filed April 24,
2007)
|
|
|
10.7
|
Purchase
Agreement made and entered into as of April 1, 2008 between The
Procter & Gamble Manufacturing Company, The Procter & Gamble
Distributing LLC and Procter & Gamble International Operations SA, as
buyer, and FutureFuel Chemical Company, as seller (portions of the exhibit
have been omitted pursuant to a request for confidential treatment)
(incorporated by reference to Exhibit 10.7 to Form 10-Q filed
August 14, 2008.)
|
123
|
|
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)
(incorporated by reference to Exhibit No. 10.8 to Form 10 filed
April 24, 2007)
|
|
|
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) (incorporated by reference to Exhibit
No. 10.9 to Form 10 filed April 24,
2007)
|
|
|
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) (incorporated by reference to Exhibit
No. 10.10 to Form 10 filed April 24,
2007)
|
|
|
10.11
|
Revolving
Credit Promissory Note dated March 14, 2007 executed by FutureFuel
Chemical Company and payable to the order of Regions Bank (incorporated by
reference to Exhibit No. 10.11 to Form 10 filed April 24,
2007)
|
|
|
10.12
|
Security
Agreement -Accounts and Inventory dated March 14, 2007 executed by
FutureFuel Chemical Company in favor of Regions Bank (incorporated by
reference to Exhibit No. 10.12 to Form 10 filed April 24,
2007)
|
|
|
10.13
|
Continuing
Unlimited Guaranty Agreement dated March 14, 2007 executed by
FutureFuel Corp. in favor of Regions Bank (incorporated by reference to
Exhibit No. 10.13 to Form 10 filed April 24,
2007)
|
|
|
10.14
|
Car
Subleasing Agreement dated November 1, 2006 between Apex Oil Company,
Inc. and FutureFuel Chemical Company (incorporated by reference to Exhibit
No. 10.14 to Form 10 filed April 24,
2007)
|
|
|
10.15
|
Time
Sharing Agreement dated April 18, 2007 between Apex Oil Company, Inc.
and FutureFuel Corp. (incorporated by reference to Exhibit No. 10.15
to Form 10 filed April 24,
2007)
|
|
|
10.16
|
Omnibus
Incentive Plan (incorporated by reference to Exhibit No. 10.16 to
Amendment No. 1 to Form 10 filed June 26,
2007)
|
|
|
11.
|
Statement
re Computation of per Share
Earnings
|
|
|
21.
|
Subsidiaries
of FutureFuel Corp.
|
|
|
23.1
|
Consent
of RubinBrown LLP
|
|
|
23.2
|
Consent
of KPMG LLP
|
|
|
23.3
|
Consent
of KPMG LLP
|
|
|
31(a).
|
Rule
13a-15(e)/15d-15(e) Certification of chief executive
officer
|
|
|
31(b).
|
Rule
13a-15(e)/15d-15(e) Certification of principal financial
officer
|
|
|
32.
|
Section
1350 Certification of chief executive officer and principal financial
officer
|
124
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FUTUREFUEL
CORP.
By: /s/ Douglas D.
Hommert
Douglas
D. Hommert, Executive Vice President, Secretary,
Treasurer
and Principal Financial Officer
/s/ Paul A.
Novelly
Paul A.
Novelly, Director
/s/ Lee E.
Mikles
Lee. E.
Mikles, Director and Chief Executive Officer
/s/Edwin A.
Levy
Edwin A.
Levy, Director
/s/ Thomas R.
Evans
Thomas R.
Evans, Director
/s/ Richard L.
Knowlton
Richard
L. Knowlton, Director
/s/ Paul G.
Lorenzini
Paul G.
Lorenzini, Director and Chief Operating Officer
/s/ Donald C.
Bedell
Donald C.
Bedell, Director
Date: March 16,
2009
125