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, 2007
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
St.
Louis, Missouri 63105
(Address
of Principal Executive Offices)
(805)
565-9800
(Registrant’s
Telephone Number)
Securities
to be registered pursuant to Section 12(b) of the Act:
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Title
of each class
to
be so registered
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Name
of each exchange on which
each
class is to be registered
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n/a
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n/a
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Securities
to be 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 accelerate filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” 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 √
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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 Exchange 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. $99,982,500.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 26,700,000.
Table of Contents
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Page
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Part I
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1
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Item 1. Business
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1
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Item 1A. Risk Factors
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21
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Item 2. Properties
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31 | |
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Item 3. Legal Proceedings
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32 | |
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Part II
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33
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Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
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33 | |
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Item 6. Selected Financial
Data
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41
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Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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44
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Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
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57
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Item 8. Financial Statements and Supplementary
Data
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59
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Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure
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95
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Item 9A(T). Controls and
Procedures
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96
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Part III
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97
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Item 10. Directors, Executive Officers and
Corporate Governance
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97
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Item 11. Executive
Compensation
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101
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Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters
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108
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Item 13. Certain Relationships and Related
Transactions, and Director Independence
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111
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Item 14. Principal Accountant Fees and
Services
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113
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Part IV
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115
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Item 15. Exhibits and Financial Statement
Schedules
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115
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PART
I
Item
1. Business.
General
Development of the Business Since January 1, 2007
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.
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
infrastructure, including on-site liquid waste treatment. The plant
is staffed by 453 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 upon and expand
FutureFuel Chemical Company’s biobased products platform and to continue
FutureFuel Chemical Company’s chemical manufacturing activities.
We
initially planned to increase the plant’s biodiesel capacity to 40 million
gallons per year by May 2007 and to 160 million gallons per year by November
2007, with substantial complementary expenditures on infrastructure to support
this increased capacity. After closing on our acquisition of FutureFuel Chemical
Company on October 31, 2006, we and, to our knowledge, the industry as a whole
witnessed a rapid erosion in margins for producing biodiesel. See
http://www.thehindubusinessline.com/2006/12/21/stories/2006122103701200.htm. As
a result of these decreased margins, in January 2007 we determined that it was
not in our shareholders best interest to proceed on an accelerated basis to
increase capacity and, therefore, we suspended the biodiesel capacity expansion.
However, we continued with (and in some cases have already completed) certain
core infrastructure projects as described below. We believe these projects will
bring efficiency, operational flexibility and cost savings to FutureFuel
Chemical Company’s existing biodiesel and chemical business lines.
The core
infrastructure projects included:
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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 the second
half of 2008;
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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 substantially
completed;
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1
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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 substantially completed;
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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 the biofuels and feedstocks between
the plant and these storage facilities on such rivers - this project is
substantially completed until logistical requirements require a larger
internal truck fleet; and
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procuring
railcars to transport raw goods to the plant and deliver biodiesel from
the plant to customers - this project is substantially completed until
logistical requirements require a larger railcar
fleet.
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Construction
is in progress for the first three site infrastructure projects described
above. As indicated, the last three projects are complete or
substantially complete. We believe that FutureFuel Chemical Company
will be able to timely obtain the materials to complete these projects as
scheduled, although no assurances can be given that the scheduled timetables
will be achieved or that they will not be revised based upon market
conditions.
In
December 2006, FutureFuel Chemical Company commenced storage of its biodiesel at
a liquid bulk storage facility in Little Rock, Arkansas. Additional
locations will be assessed as market conditions dictate (e.g., FutureFuel
Chemical Company’s need for additional storage space, the availability of such
space and the cost of such space). FutureFuel Chemical Company has
already acquired several tanker trucks and has leased methanol and biodiesel
railcars. The need for additional tanker trucks and/or railcars will
be assessed as demand for FutureFuel Chemical Company’s biodiesel and logistics
dictate. We believe that implementation of the above strategy will
help FutureFuel Chemical Company remain a substantial participant in the
biofuels market.
At the
time that we suspended expansion of the biodiesel capacity, we determined that
any future expansions of biodiesel production capacity would be dictated by
changing market conditions. Justification for capacity expansion is
dependent upon 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 and
volume mandates. For example, see
http://greenfuels.org/biodiesel/economics.htm. Biodiesel is generally
sold as a blend with petrodiesel, which is its primary competitive product, and
must be priced close to parity with petrodiesel in order to be competitive in
the marketplace. Feedstock cost is the largest single component of
biodiesel production costs and therefore has a substantial impact on production
costs. See
http://www.eia.doe.gov/oiaf/analysispaper/biodiesel/. In the second
quarter of 2007, crude oil prices strengthened (see
http://www.dallasfed.org/research/energy/en0702.cfm) and, despite corresponding
increases in feedstock oil prices, 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 during the second
half of 2008. However, no assurances can be given that the scheduled
timetable will be achieved or that it will not be revised based upon market
conditions such as those discussed above.
Please
see “Item 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 18
of our consolidated financial statements for the year ended December 31,
2007 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.
2
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, 2007 and December 31, 2006, the “carve-out” operations of
the Batesville plant for the ten-month period ended October 31, 2006 and
the twelve-month period ended December 31, 2005, 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 year ended December 31, 2007, our consolidated revenues
from external revenues 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, and FutureFuel Chemical Company’s revenues from
external customers for the year ended December 31, 2005; (ii) our
consolidated net income for the year ended December 31, 2007, 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 FutureFuel Chemical Company’s net income for the year ended
December 31, 2005; and (iii) our total assets at December 31,
2007 and 2006 and FutureFuel Chemical Company’s total assets at
December 31, 2005. 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
External
Customers
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Net
Income
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Total
Assets
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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 | ||||||
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Year
ended December 31, 2005
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$ | 104,364 | $ | 381 | $ | 114,500 | ||||||
For the
year ended December 31, 2005 and 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 11 to FutureFuel Chemical Company’s annual financial statements included
elsewhere herein for revenues from Eastman Chemical Company for the year ended
December 31, 2005 and the ten months ended October 31,
2006.
Prior to
the initiation of its biofuels program in 2005, the Batesville plant did not
have business reporting “segments” as defined by U.S. generally accepted
accounting principles. After the initiation of the biobased products
program in 2005, it had two segments: chemicals and
biofuels. FutureFuel Chemical Company is not able to allocate net
income and total assets between its two business segments. However,
revenues from external
3
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 year ended
December 31, 2007; (ii) our consolidated revenues from external
revenues 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; and (iii) FutureFuel Chemical Company’s revenues
from external customers for the year ended December 31,
2005. 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, 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 | ||||||
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Year
ended December 31, 2005
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$ | 104,364 | $ | 0 | $ | 104,364 | ||||||
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 are listed on AIM under the
symbols “FFU” and “FFUW”, respectively. We have not conducted any
other material business operations.
FutureFuel
Chemical Company
FutureFuel
Chemical Company owns approximately 2,200 acres of land six miles southeast of
Batesville in north central Arkansas fronting the White
River. Approximately 500 acres of the site are occupied with batch
and continuous manufacturing facilities, laboratories and infrastructure,
including on-site liquid waste treatment. The plant is staffed by 453
non-union full-time employees. Land and support infrastructure are
available to support expansion and business growth.
For the
year ended December 31, 2007, approximately 75% of site revenue was derived
from manufacturing specialty chemicals for specific customers (“custom
manufacturing”) with 10% of revenues being derived from multi-customer specialty
chemicals (“performance chemicals”) and 15% from biodiesel. Custom
manufacturing involves producing unique products for individual customers,
generally under long-term contracts. The plant’s custom manufacturing
product portfolio includes a bleach activator for a major detergent
manufacturer, a proprietary herbicide for a major life sciences company and
chlorinated polyolefin adhesion promoters and antioxidant precursors for a major
chemical company. The performance chemicals product portfolio
includes polymer (nylon) modifiers and several small-volume specialty chemicals
for diverse applications.
We are
continuing the specialty chemical business of FutureFuel Chemical
Company. However, we expect that FutureFuel Chemical Company’s
biofuels platform will become the core segment of the business. We
intend to increase production capacity of biodiesel within FutureFuel Chemical
Company as set forth above, and will make future capacity expansions when the
market conditions discussed above support such an increase, and to pursue
commercialization of other biofuel products, including cellulosic-derived
ethanol. In pursuing this strategy, FutureFuel Chemical Company will
continue to establish a name identity in the biofuels business, leverage
its
4
BQ-9000
quality certification, secure local and regional markets and expand marketing
efforts to fleets and regional/national customers. Concurrent efforts
will also seek to enhance margins via: (i) volume increases;
(ii) conversion cost reductions by transition to continuous processing;
(iii) expansion of feedstock options; (iv) legislative incentives; and
(v) value-enhancing applications for glycerin co-product (from the
biodiesel manufacturing process). These items are discussed in
greater detail below.
Biofuels Business Segment
Overview of the Segment
FutureFuel
Chemical Company’s biofuels segment was established in early 2005 as an
initiative of the site management team to leverage site technical and
operational expertise as well as available manufacturing capacity to pursue
business growth opportunities in addition to the legacy specialty chemicals
business. Management targeted this segment in recognition of three
factors: (i) the abundance and diversity of biomass raw materials in the
immediate area of the plant site; (ii) the ability to rapidly convert
under-utilized facilities to biofuels production at substantially advantaged
capital cost relative to new construction; and (iii) the existence of
technical and operational expertise to position the business as a high quality,
low-cost industry leader. The biofuels segment had inconsequential
revenue for the year ended December 31, 2005, revenue of $13,340,000 for
the year ended December 31, 2006 and revenue of $25,314,000 for the year
ended December 31, 2007.
Biofuel Products
FutureFuel
Chemical Company’s biofuels business segment currently targets two products:
biodiesel and bioethanol.
Biodiesel
Biodiesel
is a sustainable, renewable transportation fuel with a growing market in the
United States and internationally. For example, see
http://www.emerging-markets.com/biodiesel/default.asp. Under current
and projected market conditions, there are significant amounts of unsatisfied
demand for biodiesel. As an alternative to petrodiesel and other
petroleum-based fuels, biodiesel has several advantages, including:
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extending
domestic diesel fuel supplies;
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reducing
dependence on foreign crude oil
supplies;
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expanding
markets for domestic and international agricultural
products;
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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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·
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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. See “Legislative Incentives” below.
Biodiesel
commercialization was achieved by FutureFuel Chemical Company in October 2005,
five months following initiation of that project. Technical and
operational competency developed as a supplier of specialty chemicals enabled
the development of a flexible manufacturing process which can utilize the
broadest possible range of feedstock oils, including soy oil, cottonseed oil,
palm oil, pork lard, poultry fat and beef tallow. The Batesville
plant produces B100 (100% biodiesel) and B99.9 (99.9% biodiesel; .1% petrodiesel
blend), the latter product priced net of the federal excise tax credit for those
customers who do not wish to establish themselves as tax-qualified
blenders. B20 (20% biodiesel; 80% petrodiesel) is currently used in
the facility’s diesel fleet and became available for retail sale at the site in
March 2007. In the second quarter of 2008, FutureFuel Chemical
Company intends to begin offering B100 and biodiesel blended with petrodiesel
(B2, B5, B10 and B20 grades) at Little Rock, Arkansas and Memphis,
Tennessee.
5
Bioethanol
Bioethanol
is a fuel for internal-combustion engines that is made from ethyl alcohol
obtained from biological material and is typically sold as a retail blend with
conventional gasoline. FutureFuel Chemical Company is pursuing
production of bioethanol from cellulosic biomass raw
materials. Cellulosic-derived ethanol can be produced from a great
diversity of biomass including waste from urban, agricultural and forestry
sources. See
http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. Unlike
corn-based ethanol, whose raw material competes with food chain products,
cellulosic ethanol derives from abundant and diverse sources of plant and wood
products. See
http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. FutureFuel
Chemical Company is pursuing the “biochemical” technology platform to produce
cellulosic-derived bioethanol, which incorporates four distinct processing
steps: (i) pretreatment; (ii) hydrolysis; (iii) fermentation; and
(iv) distillation.
As
discussed below in greater detail, cellulosic-derived ethanol technology is
developmental throughout the industry and has only been demonstrated at
laboratory and pilot scale. FutureFuel Chemical Company to date has
only evaluated cellulosic ethanol technologies at laboratory
scale. The most-recognized pilot scale unit which has been publicized
to date is the approximate 1 million gallon per year Iogen facility in
Ottawa discussed below. FutureFuel Chemical Company initiated its
cellulosic ethanol research and development program in December 2005 and
incurred costs associated therewith through December 31, 2007 of
approximately $429,000. While FutureFuel Chemical Company expects to
continue its research program on cellulosic ethanol, initiatives and timelines
to progress the technology to pilot and/or commercial scale are dependent upon
results and progress in developing the technology and no assurances can be given
that FutureFuel Chemical Company will be successful or, if successful,
when. Testing and results of the cellulosic ethanol program to date
are not yet complete. As of the date of this report, FutureFuel
Chemical Company has only evaluated cellulosic based ethanol technologies at
laboratory scale and has not commenced commercial production using these
technologies.
Ethanol today is produced in the United
States mostly from sugars or starches obtained from fruits and grains, corn
being the predominant raw material. See
http://www.ars.usda.gov/research/publications/publications.htm?SEQ_NO_115=160162. In
contrast, cellulosic ethanol is obtained from cellulose, the main component of
wood, straw and plants. See
http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. Since
cellulose cannot be digested by humans, the production of cellulose does not
compete with the production of food. The price per ton of the raw
material is thus much cheaper than grains or fruits. Moreover, since
cellulose is the main components of wood and plants, the potential volume of
available raw material is much greater than for agricultural food
crops.
6
The
production of cellulosic ethanol by FutureFuel Chemical Company through the
biochemical route is in the research and development stage as discussed
above. FutureFuel Chemical Company has entered into discussions with
various parties to develop some of the necessary technology for the commercial
production of cellulosic ethanol, also as discussed above. We can
give no assurances, however, that FutureFuel Chemical Company will be able to
bring cellulosic ethanol to commercial realization.
The Biodiesel Production
Process
Biodiesel
can be made from renewable sources such as:
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refined
virgin vegetable oils;
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refined
animal fats; and
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used
cooking oils and trap grease.
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The
choice of feedstock is determined primarily by the price and availability of
each feedstock variety and the capabilities of the producer’s biodiesel
production facility. In the United States, the majority of biodiesel
historically has been made from domestically produced soybean
oil. However, palm oil imported from Malaysia and Indonesia is being
considered as a viable alternative due to price, availability and expected
supply elasticity. See, for example,
http://en.wikipedia.org/wiki/Palm_oil. FutureFuel Chemical Company’s
plant has been designed to process a wide variety of feedstocks to take
advantage of fluctuating prices and availability of the various
feedstocks.
The
biodiesel manufacturing process has three distinct steps: the chemical reaction
step, the separation step and the polishing step.
Table
1
7
Chemical
Reaction. In the chemical reaction step, a mix of biodiesel
glycerin and soap is created from the selected feedstock, methanol and a
catalyst. The collection of equipment that performs this chemical
reaction step in producing biodiesel is referred to as the
“reactors.” Depending upon the type of reactor used, the mix of
biodiesel glycerin and soap produced requires differing degrees of further
processing to separate the methyl esters comprising the biodiesel from the
glycerin and soap, to clean or “polish” both the biodiesel and glycerin and to
recover excess methanol from both the biodiesel and
glycerin. Generally, the more efficient the reactor, the less
downstream processing that is required. If the feedstock used is high
in free fatty acids, an esterification step may be
required. Esterification is a chemical reaction in which two
chemicals (typically an alcohol and an acid) form an
ester. Transesterification is the process of exchanging the alkoxy
group of an ester compound by another alcohol.
Separation. The
methyl esters are separated from the glycerin and soap produced during the
chemical reaction step.
Polishing. The
methyl esters are purified to remove residual catalysts and other
impurities. Any excess water and methanol is also removed and may be
recycled into earlier steps in the production process train.
Legislative Incentives
Agencies
of the United States government, including the Department of Energy, the
Environmental Protection Agency, the Internal Revenue Service and the Department
of Agriculture, and many states offer biodiesel incentives or have mandates for
the use of biodiesel, or both. There are other governmental
incentives that do not directly reduce the net cost of producing or blending
biodiesel but that drive the demand for biodiesel. For example, tax
credits are available under the Internal Revenue Code for investment in
qualifying refueling property, the Environmental Protection Agency will pay
50-100% of the cost for schools to upgrade and/or replace their buses, and
programs administered by the Department of Energy indirectly require government
fleet operators to purchase substantial amounts of biodiesel. The
principal federal incentives that we believe will have the greatest positive
effect on FutureFuel Chemical Company’s business are discussed
below.
The
Energy Policy Act of 1992 requires government fleet operators to use a certain
percentage of alternatively fueled vehicles. The Act established a
goal of replacing 10% of motor fuels with non-petroleum alternatives by 2000,
increasing to 30% by the year 2010. Currently, 75% of all new
light-duty federal vehicles purchased are required to have alternative fuel
capability to set an example for the private automotive and fuel
industries.
Under the
Energy Conservation Reauthorization Act of 1998, vehicle fleets that are
required to purchase alternatively fueled vehicles can generate credit toward
this requirement by purchasing and using biodiesel in a conventional
vehicle. Since there are few cost-effective options for purchasing
heavy-duty alternatively fueled vehicles, federal and state fleet providers can
meet up to 50% of their heavy-duty alternatively fueled vehicle purchase
requirements with biodiesel. The biodiesel fuel credit allows fleets
to purchase and use 450 gallons of biodiesel in vehicles in excess of 8,500
pounds gross vehicle weight instead of alternatively fueled
vehicles. Fleets must purchase and use the equivalent of 450 gallons
of pure biodiesel in a minimum of a 20% blend to earn one
credit. Covered fleets earn one vehicle credit for every light-duty
alternatively fueled vehicle they acquire annually beyond their base vehicle
acquisition requirements. Credits can be banked or sold.
In
October 2004, Congress passed a biodiesel tax incentive, structured as a federal
excise tax credit, as part of the American Jobs Creation Act of
2004. The credit amounts to 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.
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
8
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 is 4.7 billion gallons for 2007 and 5.4 billion
gallons for 2008.
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. FutureFuel Chemical Company’s 2007 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. The mandate 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 did not extend the biodiesel
production tax incentive (set to expire at the end of 2008). An
extension of this credit is part of a draft of the Farm Bill currently before
Congress, although the ultimate outcome of such Farm Bill is
unknown. 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
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.
|
9
|
Federal
Agency
that
Administers/
Oversees
|
Type
of
Incentive
|
Who
Receives
Incentive
|
Commonly
Known
As
|
Summary
|
||
|
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.
|
||
|
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
(capped at $2 million) and up to $50,000 in grants per site for biodiesel
producers and distributors to install distribution
infrastructure. FutureFuel Chemical Company submitted an application
for the $0.20 per gallon biodiesel producer credit for 2007 production and
received the $2 million credit in March 2008. FutureFuel
Chemical Company intends to apply for the credit in future years when and as
such credit is available.
Illinois
and Minnesota have mandated the use of B2 in all diesel fuel sold in their
respective states subject to certain conditions that include sufficient annual
production capacity (defined as at least 8 million gallons). Our
review of state statutes reveals that approximately 39 states provide either
user or producer incentives for biodiesel, several states provide both types of
incentives and approximately 29 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.
10
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
(currently only 20 biodiesel producers have 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 cellulosic-based ethanol,
initially to be produced from local hardwood biomass. FutureFuel
Chemical Company’s research and development program with respect to
cellulosic-based ethanol includes collaboration with the National Renewable
Energy Laboratory (“NREL”) and
other private-sector technology providers. These NREL collaborations
consisted of an assessment of the proposed FutureFuel Chemical Company
technologies for cellulosic ethanol and mapping of these unit operations to an
existing production facility. NREL also supported FutureFuel Chemical
Company in establishing analytical assay techniques for cellulosic biomass and
its hydrolysates. Private sector collaborators have been major enzyme
suppliers who have provided commercial and pre-commercial cellulose enzyme
products, as well as technical support for their use. As with
biodiesel, FutureFuel Chemical Company intends to leverage technical expertise
and existing idle manufacturing assets to move this emerging technology from the
development stage to commercial reality. The biochemical platform
approach being pursued seeks to assemble demonstrated component technologies in
a process design that leverages current facility infrastructure and
capabilities.
Federal
and state support incentives are anticipated to be available for cellulosic
ethanol commercial development. We intend to take full advantage of
incentives as they are promulgated into regulation and
practice. However, no assurances can be given that FutureFuel
Chemical Company will develop a commercially viable cellulosic-based ethanol
manufacturing process.
In
October 2006, a $2 million U.S. Department of Agriculture grant was awarded
to Virent Energy Systems LLC to demonstrate the conversion of glycerin to
propylene glycol at pilot plant scale. FutureFuel Chemical Company is
Virent’s research partner on the grant project. FutureFuel Chemical
Company will be making in-kind contributions to the research effort by
designing, engineering, installing and operating a subscale processing unit at
its Batesville plant. FutureFuel Chemical Company will receive a
portion of the grant to cover direct costs (which direct costs were $0 in 2007
and are estimated to be $418,000 during 2008). We believe this
technology, if successfully demonstrated, may be adapted as a key component
technology to increase the competitiveness of biodiesel
production. However, no assurances can be given that FutureFuel
Chemical Company will develop a commercially viable glycerin to propylene glycol
manufacturing process.
Customers and Markets
FutureFuel
Chemical Company currently markets its biodiesel products by truck and rail
directly to customers in twelve midwest, southwest and western states 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. In addition, FutureFuel Chemical Company entered into a
tolling agreement whereby, for a fee, it produced biodiesel for a third party
(this tolling agreement terminated on September 30, 2007). For
the twelve months ended December 31, 2007, three of FutureFuel Chemical
Company’s customers represented 50% of biodiesel revenues (7% of total
revenues), six customers represented 70% of biodiesel revenues (10% of total
revenues) and the tolling agreement represented 4% of biodiesel revenues (1% of
total revenues). Although the regional market is still being
developed, we estimate that the regional direct market available to FutureFuel
Chemical Company at maturity will be at least 30 million gallons per
year.
11
Competition
FutureFuel
Chemical Company competes with other producers of biodiesel, both locally,
regionally and nationally. There was one other operational biodiesel
plant in the state of Arkansas (in Stuttgart, southeast of Little Rock), with
capacity stated at 3 million gallons per year. However, that
plant closed in 2007 and it is our understanding that it will not
reopen. There are several operating facilities in surrounding states
and announced biodiesel production facilities in Arkansas and surrounding
states. We estimate that regional competitive producers may have
approximately 150 million gallons of capacity by 2008. National
producers of biodiesel are described above.
In
addition to biodiesel producers, FutureFuel Chemical Company competes with new
technologies that are being developed as alternatives to
biodiesel. For example, in December 2006, ConocoPhillips announced
that commercial production of renewable diesel fuel had begun at its Whitegate
refinery in Cork Island, Ireland. The production process, developed
by ConocoPhillips, uses soybean and other vegetable oils to produce fuel that
meets European diesel fuel standards. The fuel is produced using
existing equipment at the refinery and is blended and transported with
petroleum-based diesel. ConocoPhillips claims that renewable diesel
is chemically similar to conventional petrodiesel and can be shipped through
common carrier pipelines. ConocoPhillips is evaluating this
technology for use in the United States. UOP, a major supplier to the
petrochemical refining industry, has also reported the development of technology
for the production of fungible fuels (diesel and gasoline) by hydro-processing
of vegetable oils and cellulose. See
http://www.alternatefuelsworld.com/greendiesel-greengasoline.html. We
cannot give any assurances that renewable diesel fuel (or some other product)
produced by these competing technologies will not supplant biodiesel as an
alternative to conventional petrodiesel.
Supply and Distribution
As a
result of its feedstock-neutral process, FutureFuel Chemical Company is able to
source oils from a broad supplier base which includes pork, chicken and beef
rendering facilities from both national and regional suppliers. Soy
oil is also sourced from several national and regional
producers. Cottonseed oil has been sourced from a regional
cooperative. All feedstocks are currently supplied by either rail or
truck. FutureFuel Chemical Company is currently exploring the
possibility of importing palm oil feedstocks. We believe that an
adequate supply of feedstocks can be sourced to support anticipated
production.
We intend
that biodiesel and other biofuels will be sold at the plant site as well as
shipped to liquid bulk storage facilities for further
distribution. Plant site sales are made by railcar and tank
truck. Biodiesel is being delivered to liquid bulk storage facilities
by company-owned tank trucks and common carriers for distribution there and for
further transportation by barge.
Chemicals Business Segment
Overview of the Segment
FutureFuel
Chemical Company’s chemicals segment manufactures diversified chemical products
that are sold externally to third party customers. 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 $144,474,000,
$137,430,000 and $119,539,000 for the years ended December 31, 2007, 2006
and 2005, respectively.
Chemical Products
Custom
manufacturing involves producing unique products for individual customers,
generally under long-term contracts. Many of these products are
produced under confidentiality agreements in order to protect intellectual
property. This is a service-based business where customers value
technical capabilities, responsiveness and process improvement to continually
improve costs and reliability. In recent years, a trend toward
off-shoring (to China and India in particular) has placed significant downward
pressure on margins. The plant’s custom manufacturing product
portfolio includes four large products or product families which are generally
produced throughout the year: (i) 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
12
number of
smaller products which are produced intermittently in a “batch campaign” mode,
for diverse customers and end markets.
Performance
chemicals comprises multi-customer products which are sold based upon
specification and/or performance in the end-use application. This
portfolio includes a family of polymer (nylon) modifiers and several
small-volume specialty chemicals for diverse applications.
FutureFuel
Chemical Company historically manufactured CPOs and DIPBs at cost for Eastman
Chemical Company. CPOs are chemical intermediates that promote
adhesion for plastic coatings and DIPBs are intermediates for production of
Eastman Chemical Company products used as general purpose inhibitors,
intermediates or antioxidants. Historically, revenues related to CPOs
and DIPBs were exactly offset by cost of goods sold; hence there was no effect
on gross profit for the year ended December 31, 2005 or the ten-months
ended October 31, 2006. As part of our acquisition of FutureFuel
Chemical Company, FutureFuel Chemical Company entered into conversion agreements
with Eastman Chemical Company whereby FutureFuel Chemical Company agreed to
produce these products on Eastman Chemical Company’s behalf. The
conversion agreements effectively provide a conversion fee to FutureFuel
Chemical Company based on volume manufactured, with a minimum annual
fee. In addition, the conversion agreements provide for revenue
adjustments for actual usage of raw materials versus a standard and stipulate
that Eastman Chemical Company will pay for substantially all raw material
expenses and allow for an annual inflation adjustment factor.
Future Strategy
To build
on and maintain FutureFuel Chemical Company’s reputation as a technology-driven
competitive chemical producer, we believe that FutureFuel Chemical Company must
continuously focus on cost control, operational efficiency and capacity
utilization to maximize earnings. The ability to utilize large scale
batch and continuous production processes and a continuous focus on process
improvements allow FutureFuel Chemical Company to compete effectively in the
custom manufacturing market and to remain cost competitive with, and for some
products cost-advantaged over, its competitors. We intend to improve
margins in this area of the FutureFuel Chemical Company business by careful
management of product mix with regard to size of opportunity, timing to market,
capital efficiency and matching of opportunities to assets and
capabilities.
We expect
to derive significant growth in the performance chemicals component primarily as
a result of new biobased co-products derived from biofuels manufacturing, such
as glycerin and derivatives. We believe that these products and
applications will be competitive in the marketplace due to advantaged raw
material costs derived from their co-product status. For example, for
every gallon of biodiesel produced, approximately one pound of co-product
glycerin is generated. See
http://www.biodiesel.org/pdf_files/fuelfactsheets/prod_quality.pdf and
http://www.harvestcleanenergy.org/conference/HCE6/Frear2.pdf. 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
13
research
and development stage (for example, see the discussion with respect to Virent
Energy Systems LLC above).
Customers and Markets
FutureFuel
Chemical Company’s chemical products are used in a variety of market and end
uses, including detergent, agrochemical, automotive, photographic imaging,
coatings, nutrition and polymer additives. These products are
generally non-cyclical; however, the customers are often the “brand owners” and
therefore control factors related to demand, such as market development
strategy. In many cases, FutureFuel Chemical Company may be unable to
increase or maintain its level of sales revenue for these products.
All sales
of the bleach activator are made to The Procter & Gamble Company pursuant to
a supply contract that is set to expire in June 2008. No assurances
can be given that such contract will be extended past June 2008 or, if extended,
upon what terms. Sales of the bleach activator totaled $82,500,000,
$84,691,000 and $66,959,000 for the years ended December 31, 2007, 2006 and
2005, respectively. Additionally, all sales of a proprietary
herbicide and certain other intermediates used in the production of this
herbicide are made to Arysta LifeScience North America Corporation pursuant to
contracts which continue year-to-year unless terminated by notice given no later
than 270 days prior to the end of the current term for the herbicide and not
later than 18 months prior to the current term for the
intermediates. No assurances can be given that these contracts will
not be terminated. Sales of this herbicide and its intermediates
totaled $25,177,000, $23,685,000 and $25,063,000 for the years ended
December 31, 2007, 2006 and 2005, respectively. These two
customers represented approximately 63%, 72% and 77% of revenues in 2007, 2006
and 2005, 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 and technical capabilities.
Supply and Distribution
Specialty
chemicals are generally high unit value products sold in packaged, or low-volume
bulk form, for which distribution is a relatively minor component of
cost. Most products are sold FOB the Batesville site for distribution
globally. Similarly, raw materials for these products are
comparatively higher-value components that are sourced globally. An
exception will be the biofuels co-products, which will be recovered from local
processing and purified or further functionalized into other products at the
site.
Backlog
The
majority of FutureFuel Chemical Company’s revenues are derived under tolling
arrangements with specific customers. These customers generally
provide FutureFuel Chemical Company with forecasts of demand on a monthly or
quarterly basis. 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. Two of the four
members of the executive team have international experience, including
assignments in Europe and Asia.
14
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 444 additional full-time employees,
with a total of 61 degreed professionals, including 21 chemists (9 PhDs) and 33
engineers (including 10 licensed professional engineers and 17 chemical
engineers). The site is non-unionized. Operations
personnel are highly skilled as all site manufacturing and infrastructure is
fully automated and computer-controlled. The workforce is
substantially self-sufficient in the range of required operational skills and
experience due to the lack of locally-available process industry
infrastructure. Voluntary attrition at the site has averaged less
than 2% annually since 2001.
Cyclicality and
Seasonality
FutureFuel
Chemical Company’s chemical products typically are not cyclical but they are
sensitive to global economic conditions. Supply and demand dynamics
determine profitability at different stages of cycles and global economic
conditions affect the length of each cycle. Despite some sensitivity
to global economic conditions, many of the products in the chemical segment
provide a stable foundation of earnings.
Until
such time as non-seasonal business (primarily on-road transportation) expands
regionally, FutureFuel Chemical Company’s biodiesel sales at grades greater than
B5 are expected to be lower in winter months due to the end of farming activity,
which is a major user of biodiesel. Also, cold weather usage and
storage properties which reduce biodiesel demand during winter months require
resolution in order to fully exploit year-round demand
opportunities. Further, feedstock prices may make it more
advantageous to produce and store biodiesel during winter months and sell it in
the spring and winter months when prices are expected to be higher.
Intellectual Property
We
consider FutureFuel Chemical Company’s intellectual property portfolio to be a
valuable corporate asset which we intend to expand and protect globally through
a combination of trade secrets, confidentiality and non-disclosure agreements,
patents and copyrights. As a producer of a broad and diverse
portfolio of chemicals, FutureFuel Chemical Company’s intellectual property
relates to a wide variety of products and processes acquired through the
development and manufacture of over 300 specialty chemicals during the history
of the site. Our primary strategy regarding FutureFuel Chemical
Company’s intellectual property portfolio will be to appropriately protect all
innovations and know-how in order to provide FutureFuel Chemical Company’s
business segments with a technology-based competitive advantage, wherever
possible. In the chemicals business segment, custom manufacturing
projects are primarily conducted within the framework of confidentiality
agreements with each customer to ensure that intellectual property rights are
defined and protected. In the biofuels business segment, innovations
and process know-how will be vigorously protected as appropriate. As
may be necessary, we will seek to license technology from third parties that
complements FutureFuel Chemical Company’s strategic business
objectives. Neither FutureFuel Chemical Company’s business as a whole
nor any particular segment is materially dependent upon any one particular
patent, copyright or trade secret. As the laws of many foreign
countries do not protect intellectual property to the same extent as the laws of
the United States, we cannot assure you that FutureFuel Chemical Company will be
able to adequately protect all of its intellectual property assets.
Research and Development
FutureFuel
Chemical Company devotes significant resources to its research and development
programs which are primarily targeted towards two objectives:
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innovating,
developing and improving biofuels processes, in particular biodiesel and
bioethanol, including value-up technology and applications for
co-products; and
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developing
and improving processes for custom manufacturing products or performance
chemicals.
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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
15
reaction
chemistries and materials and process engineering capabilities for batch and
continuous processing of both solid and liquid materials. We believe
that these core competencies, established in support of the legacy chemical
business, are applicable to building a technology-based position in biofuels and
associated biobased specialty products.
The
research and development expenses incurred by FutureFuel Chemical Company during
the years ended December 31, 2007, 2006 and 2005 were $3,434,000,
$4,919,000 and $5,975,000, respectively. Substantially all of such
research and development expenses related to the development of new products,
services and processes or the improvement of existing products, services and
processes. Research and development expenses during this timeframe
trended downwards due to: (i) reduced allocation of research and
development overhead from Eastman Chemical Company in anticipation of the
divestiture of Eastman SE, Inc.; and (ii) a reduction in research and
development staffing at the Batesville site resulting from the general
reduction-in-force which was effective May 2005. The 2007 research
and development expenses generally reflect the research and development staffing
and program costs incurred at the Batesville site on a standalone
basis.
Regulatory and Environmental
Matters
Various
aspects of FutureFuel Chemical Company’s operations are subject to regulation by
state and federal agencies. Oil and gas operations as well as
chemical operations are subject to numerous, stringent and complex laws and
regulations at the federal, state and local levels governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may:
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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
16
liability
for onshore facilities to $350 million. These liability limits may
not apply if a spill is caused by a party’s gross negligence or willful
misconduct, the spill resulted from violation of a federal safety, construction
or operating regulation, or if a party fails to report a spill or to cooperate
fully in a clean-up. Failure to comply with OPA’s requirements may
subject a responsible party to civil, criminal or administrative enforcement
actions.
The
federal Water Pollution Control Act (“Clean Water
Act”) imposes restrictions and controls on the discharge of pollutants
into navigable waters. These controls have become more stringent over
the years, and it is possible that additional restrictions may be imposed in the
future. Permits must be obtained to discharge pollutants into state
and federal waters. The Clean Water Act provides for civil, criminal
and administrative penalties for discharges of oil and other pollutants, and
imposes liability on parties responsible for those discharges for the costs of
cleaning up any environmental damage caused by the release and for natural
resource damages resulting from the release. Comparable state
statutes impose liabilities and authorize penalties in the case of an
unauthorized discharge of petroleum or its derivatives, or other pollutants,
into state waters.
The
federal Clean Air Act (“Clean Air
Act”), and associated state laws and regulations, restrict the emission
of air pollutants from many sources, including facilities involved in
manufacturing chemicals and biofuels. New facilities are generally
required to obtain permits before operations can commence, and new or existing
facilities may be required to incur certain capital expenditures to install air
pollution control equipment in connection with obtaining and maintaining
operating permits and approvals. Federal and state regulatory
agencies can impose administrative, civil and criminal penalties for
non-compliance with permits or other requirements of the Clean Air Act and
associated state laws and regulations.
The
federal Endangered Species Act, the federal Marine Mammal Protection Act, and
similar federal and state wildlife protection laws prohibit or restrict
activities that could adversely impact protected plant and animal species or
habitats. Manufacturing activities could be prohibited or delayed in
areas where such protected species or habitats may be located, or expensive
mitigation may be required to accommodate such activities.
FutureFuel
Chemical Company’s policy is to operate its plants and facilities in a manner
that protects the environment and the health and safety of its employees and the
public. FutureFuel Chemical Company intends to continue to make
expenditures for environmental protection and improvements in a timely manner
consistent with its policies and with the technology available. In
some cases, applicable environmental regulations such as those adopted under the
Clean Air Act and RCRA, and related actions of regulatory agencies, determine
the timing and amount of environmental costs incurred by FutureFuel Chemical
Company.
We
establish reserves for closure/post-closure costs associated with the
environmental and other assets we maintain. Environmental assets
include waste management units such as incinerators, landfills, storage tanks
and boilers. When these types of assets are constructed or installed,
a reserve is established for the future costs anticipated to be associated with
the closure of the site based on an expected life of the environmental assets,
the applicable regulatory closure requirements and our environmental policies
and practices. These expenses are charged into earnings over the
estimated useful life of the assets. Currently, we estimate the
useful life of each individual asset up to 35 years.
In
addition to our general environmental policies and policies for asset retirement
obligations and environmental reserves, we accrue environmental costs when it is
probable that we or 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 $13,500,000, $13,300,000 and $13,211,000 for the
years ended December 31, 2007, 2006 and 2005,
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
17
environmental
capital expenditures arising from requirements of recently promulgated
environmental laws and regulations to materially increase FutureFuel Chemical
Company’s planned level of annual capital expenditures for environmental control
facilities.
We
believe that FutureFuel Chemical Company has obtained in all material respects
the necessary permits and licenses to carry on its operations as presently
conducted. We have reviewed environmental investigations of the
properties owned by FutureFuel Chemical Company and believe, on the basis of the
results of the investigations carried out to date, that there are no material
regulatory and/or environmental issues which adversely impact FutureFuel
Chemical Company. In addition, under our acquisition agreement with
Eastman Chemical Company, Eastman Chemical Company acquired environmental
insurance with respect to environmental conditions at the Batesville plant
existing as of the closing date and Eastman Chemical Company has agreed, subject
to certain limitations, to indemnify FutureFuel Chemical Company with respect to
such environmental conditions.
Objectives
Our
business objectives for FutureFuel Chemical Company are to: (i) exploit
growth opportunities in its two core business segments, biofuels and chemicals;
and (ii) improve gross margins.
Exploit Growth Opportunities in Core
Business Segments
We
believe that FutureFuel Chemical Company can become a market leader in biofuels
by leveraging its specialty chemicals technical expertise and by fully utilizing
idle site assets and infrastructure headspace, with emphasis on:
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operational
expertise to produce ASTM D6751 quality biodiesel from diverse
feedstocks;
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leveraging
BQ-9000 quality certification 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;
and
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adding
value to co-products and by-products from biofuels
production.
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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 and biobased
specialty products derived from biofuel products and/or raw
materials. As an example, a significant co-product from biodiesel
production is glycerin, which can be purified and sold and which may also be
chemically converted into other chemical products and
derivatives. See the discussion above. We intend that
FutureFuel Chemical Company will exploit the potential for development of a
“chemicals from biomass” platform, based upon the raw material and co-product
streams associated with biofuels production.
18
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.
Financial
Information about Geographic Areas
We do not
derive revenues from customers in foreign countries. Most of
FutureFuel Chemical Company’s sales are FOB the Batesville plant, although some
FOB points are in other states or at foreign ports. While many of
FutureFuel Chemical Company’s chemicals are utilized to manufacture products
that are shipped, further processed and/or consumed throughout the world, the
chemical products, with limited exceptions, generally leave the United States
only after ownership has transferred from FutureFuel Chemical Company to the
customer. Rarely is FutureFuel Chemical Company the exporter of
record, never is FutureFuel Chemical Company the importer of record into foreign
countries and FutureFuel Chemical Company is not always aware of the exact
quantities of its products that are moved into foreign markets by its
customers. FutureFuel Chemical Company does track the addresses of
its customers for invoicing purposes and uses this address to determine whether
a particular sale is within or outside the United States. FutureFuel
Chemical Company’s revenues 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 chart. The amounts in
the following chart include: (i) our consolidated revenues for the year
ended December 31, 2007; (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; and (iii) FutureFuel Chemical
Company’s revenues for the year ended December 31, 2005. 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
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All
Foreign
Countries
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Total
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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 | ||||||
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Year
ended December 31, 2005
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$ | 105,719 | $ | 13,820 | $ | 119,539 | ||||||
Beginning
in 2005, FutureFuel Chemical Company began invoicing the Mexican subsidiary of
our bleach activator customer directly, at which time revenues from Mexico
became a more significant component of total revenues. For the years
ended December 31, 2005, 2006 and 2007, revenues from Mexico accounted for
10%, 11% and 11%, 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% of total revenues for the year ended December 31,
2007. Other than Mexico and Canada, revenues from a single foreign
country during 2005, 2006 and 2007 did not exceed 3% of total
revenues.
All of
our and FutureFuel Chemical Company’s long-lived assets are located in the
United States.
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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 available in print upon the written request of any shareholder to
FutureFuel Corp., 8235 Forsyth Blvd., 4th Floor,
Clayton, Missouri 63105, Attention: Investor Relations.
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Item
1A. Risk Factors.
An
investment in us involves a high degree of risk and may result in the loss of
all or part of your investment. You should consider carefully all of
the information set out in this document and the risks attaching to an
investment in us, including, in particular, the risks described
below. The information below does not purport to be an exhaustive
list and should be considered in conjunction with the contents of the rest of
this document.
Risks associated with
FutureFuel Chemical Company.
The
industries in which FutureFuel Chemical Company competes are highly
competitive.
The oil
and gas industry, as well as the chemical business, are highly
competitive. There is competition within these industries and also
with other industries in supplying the energy, fuel and chemical needs of
industry and individual consumers. FutureFuel Chemical Company will
compete with other firms in the sale or purchase of various goods or services in
many national and international markets. FutureFuel Chemical Company
will compete with large national and multi-national companies that have longer
operating histories, greater financial, technical and other resources and
greater name recognition than FutureFuel Chemical Company does. In
addition, FutureFuel Chemical Company will compete with several smaller
companies capable of competing effectively on a regional or local basis, and the
number of these smaller companies is increasing. FutureFuel Chemical
Company’s competitors may be able to respond more quickly to new or emerging
technologies and services and changes in customer requirements. As a
result of competition, FutureFuel Chemical Company may lose market share or be
unable to maintain or increase prices for its products and/or services or to
acquire additional business opportunities, which could have a material adverse
effect on our business, financial condition, results of operations and cash
flows. Although FutureFuel Chemical Company will employ all methods
of competition which are lawful and appropriate for such purposes, no assurances
can be made that they will be successful. A key component of
FutureFuel Chemical Company’s competitive position, particularly given the
expected commodity-based nature of many of its products, will be its ability to
manage expenses successfully, which requires continuous management focus on
reducing unit costs and improving efficiency. No assurances can be
given that FutureFuel Chemical Company will be able to successfully manage such
expenses.
FutureFuel
Chemical Company’s competitive position in the markets in which it participates
is, in part, subject to external factors in addition to those that FutureFuel
Chemical Company can impact. Natural disasters, changes in laws or
regulations, war or other outbreak of hostilities, or other political factors in
any of the countries or regions in which FutureFuel Chemical Company operates or
does business, or in countries or regions that are key suppliers of strategic
raw materials, could negatively impact FutureFuel Chemical Company’s competitive
position and its ability to maintain market share.
Increases
in the construction of biodiesel production plants may cause excess biodiesel
production capacity in the market. Excess capacity may adversely
affect the price at which FutureFuel Chemical Company is able to sell the
biodiesel that it produces and may also adversely affect our anticipated results
of operation and financial condition.
In 2005,
approximately 75 million gallons of biodiesel were produced in the United
States, and in 2006 approximately 250 million gallons were
produced. 2007 biodiesel production is estimated between
450-500 million gallons. As of January 25, 2008, there was a
reported 2.24 billion gallons per year of biodiesel production capacity in
the United States. With such biodiesel production capacity in the
United States, compared to historical production levels, there is risk that
there will be a significant amount of excess biodiesel production
capacity. Although this existing capacity is very large compared to
historical production levels, we believe that the market will purchase as much
biodiesel as is available, so long as the prices for biodiesel (net of the
impact of tax credits and other similar incentives) are competitive with those
of petrodiesel.
Fluctuations
in commodity prices may cause a reduction in the demand or profitability of the
products or services FutureFuel Chemical Company produces.
Prices
for alternative fuels tend to fluctuate widely based on a variety of political
and economic factors. These price fluctuations heavily influence the
oil and gas industry. Lower energy prices for existing products tend
to limit the demand for alternative forms of energy services and related
products and infrastructure. Historically, the markets
21
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.
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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 63% of
FutureFuel Chemical Company’s revenues for the year ended December 31,
2007. The contract with The Procter & Gamble Company is set to
expire
22
in June
2008 and no assurances can be given that such contract will be extended past
June 2008 or, if extended, upon what terms. The contracts with Arysta
LifeScience North America Corporation contain certain termination provisions and
no assurances can be given that these contracts will not be
terminated. The loss of these two companies as customers would have a
material adverse effect on us.
Changes
in technology may render FutureFuel Chemical Company’s products or services
obsolete.
The
alternative fuel and chemical industries may be substantially affected by rapid
and significant changes in technology. Examples include competitive
product technologies, such as green gasoline and biodiesel produced from
catalytic hydroforming of renewable feedstock oils and competitive process
technologies such as advanced biodiesel continuous reactor and washing designs
that increase throughput. These changes may render obsolete certain
existing products, energy sources, services and technologies currently used by
FutureFuel Chemical Company. We cannot assure you that the
technologies used by or relied upon by FutureFuel Chemical Company will not be
subject to such obsolescence. While we may attempt to adapt and apply
the services provided by FutureFuel Chemical Company to newer technologies, we
cannot assure you that we will have sufficient resources to fund these changes
or that these changes will ultimately prove successful.
Failure
to comply with governmental regulations could result in the imposition of
penalties, fines or restrictions on operations and remedial
liabilities.
The oil
and gas and chemical industries are subject to extensive federal, state, local
and foreign laws and regulations related to the general population’s health and
safety and those associated with compliance and permitting obligations
(including those related to the use, storage, handling, discharge, emission and
disposal of municipal solid waste and other waste, pollutants or hazardous
substances or waste, or discharges and air and other emissions) as well as land
use and development. Existing laws also impose obligations to clean
up contaminated properties or to pay for the cost of such remediation, often
upon parties that did not actually cause the
contamination. Compliance with these laws, regulations and
obligations could require substantial capital expenditures. Failure
to comply could result in the imposition of penalties, fines or restrictions on
operations and remedial liabilities. These costs and liabilities
could adversely affect our operations.
Changes
in environmental laws and regulations occur frequently, and any changes that
result in more stringent or costly waste handling, storage, transport, disposal
or cleanup requirements could require FutureFuel Chemical Company to make
significant expenditures to attain and maintain compliance and may otherwise
have a material adverse effect on its business segments in general and on our
results of operations, competitive position or financial
condition. We are unable to predict the effect of additional
environmental laws and regulations which may be adopted in the future, including
whether any such laws or regulations would materially adversely increase
FutureFuel Chemical Company’s cost of doing business or affect its operations in
any area.
Under
certain environmental laws and regulations, FutureFuel Chemical Company could be
held strictly liable for the removal or remediation of previously released
materials or property contamination regardless of whether FutureFuel Chemical
Company was responsible for the release or contamination, or if current or prior
operations were conducted consistent with accepted standards of
practice. Such liabilities can be significant and, if imposed, could
have a material adverse effect on our financial condition or results of
operations.
FutureFuel
Chemical Company’s biofuels operations may be harmed if the government were to
change current laws and regulations.
Alternative
fuels businesses benefit from tax credits and government
subsidies. If any of the state or federal laws and regulations
relating to the tax credits and government subsidies change, the ability to
recover capital expenditures from an alternative fuels business could be
harmed. FutureFuel Chemical Company’s biofuels platform is subject to
federal, state, and local laws and regulations governing the application and use
of alternative energy products, including those related specifically to
biodiesel. For instance, biodiesel products benefit from being the
only alternative fuel certified by the U.S. Environmental Protection Agency that
fulfills the requirements of Section 211(B) of the Clean Air Act. If
agency determinations, laws and regulations relating to the application and use
of alternative energy are changed, the marketability and sales of biodiesel
production could be materially adversely affected.
23
The
value of FutureFuel Chemical Company may prove to be less than what we paid for
FutureFuel Chemical Company because of uncertainties in evaluating future costs
and/or potential liabilities.
Successful
acquisitions require an assessment of a number of factors, including estimates
of future biofuel prices, operating costs (including the costs of raw goods) and
potential environmental and other liabilities. Such assessments are
inexact and their accuracy is inherently uncertain. In connection
with our due diligence assessment of FutureFuel Chemical Company, we performed a
review of FutureFuel Chemical Company and its properties which we believe was
generally consistent with industry practices. However, such a review
will not reveal all existing or potential problems. In addition, our
review may not have permitted us to become sufficiently familiar with FutureFuel
Chemical Company’s properties to fully assess their deficiencies and
capabilities. As a result of these factors, the value of FutureFuel
Chemical Company may ultimately be less than what we agreed to pay for its
stock.
Market
conditions or transportation impediments may hinder access to raw goods and
distribution markets.
Market
conditions, the unavailability of satisfactory transportation or the location of
FutureFuel Chemical Company’s manufacturing complex from more lucrative markets
may hinder FutureFuel Chemical Company’s access to raw goods and/or distribution
markets. The availability of a ready market for biodiesel depends on
a number of factors, including the demand for and supply of biodiesel and the
proximity of the plant to trucking and terminal facilities. The sale
of large quantities of biodiesel necessitates that FutureFuel Chemical Company
transport its biodiesel to other markets since the Batesville, Arkansas regional
market is not expected to absorb all of FutureFuel Chemical Company’s
contemplated production. Currently, common carrier pipelines are not
transporting biodiesel. This leaves trucks, barges and rail cars as
the means of distribution of FutureFuel Chemical Company’s product from the
plant to these storage terminals for further distribution. However,
the current availability of rail cars is limited and at times unavailable
because of repairs or improvements, or as a result of priority transportation
agreements with other shippers. Additionally, the current
availability of barges is limited, particularly heated barges to transport
biodiesel during winter months. If transportation is restricted or is
unavailable, FutureFuel Chemical Company may not be able to sell into more
lucrative markets and consequently its cash flow from sales of biodiesel could
be restricted.
The
biodiesel industry also faces several challenges to wide biodiesel acceptance,
including cold temperature limitations, storage stability, fuel quality
standards and exhaust emissions. If the industry does not satisfy
consumers that these issues have been resolved or are being resolved, biodiesel
may not gain widespread acceptance which may have an adverse impact on
FutureFuel Chemical Company’s cash flow from sales of biodiesel.
FutureFuel
Chemical Company’s insurance may not protect it against its business and
operating risks.
We
maintain insurance for some, but not all, of the potential risks and liabilities
associated with FutureFuel Chemical Company’s business. For some
risks, we may not obtain insurance if we believe the cost of available insurance
is excessive relative to the risks presented. As a result of market
conditions, premiums and deductibles for certain insurance policies can increase
substantially and, in some instances, certain insurance policies may become
unavailable or available only for reduced amounts of coverage. As a
result, we may not be able to renew our existing insurance policies or procure
other desirable insurance on commercially reasonable terms, if at
all. Although we will maintain insurance at levels we believe are
appropriate for FutureFuel Chemical Company’s business and consistent with
industry practice, we will not be fully insured against all risks which cannot
be sourced on economic terms. In addition, pollution and
environmental risks generally are not fully insurable. Losses and
liabilities from uninsured and underinsured events and delay in the payment of
insurance proceeds could have a material adverse effect on our financial
condition and results of operations.
If a
significant accident or other event resulting in damage to FutureFuel Chemical
Company’s operations (including severe weather, terrorist acts, war, civil
disturbances, pollution or environmental damage) occurs and is not fully covered
by insurance or a recoverable indemnity from a customer, it could adversely
affect our financial condition and results of operations.
24
FutureFuel
Chemical Company depends on key personnel, the loss of any of whom could
materially adversely affect our future operations.
Our
success will depend to a significant extent upon the efforts and abilities of
FutureFuel Chemical Company’s executive officers. The loss of the
services of one or more of these key employees could have a material adverse
effect on us. FutureFuel Chemical Company’s business will also be
dependent upon its ability to attract and retain qualified
personnel. Acquiring or retaining these personnel could prove more
difficult to hire or cost substantially more than estimated. This
could cause FutureFuel Chemical Company to incur greater costs, or prevent it
from pursuing its expansion strategy as quickly as it would otherwise wish to
do.
If
FutureFuel Chemical Company is unable to effectively manage the commodity price
risk of its raw materials or finished goods, FutureFuel Chemical Company may
have unexpected losses.
We hedge
FutureFuel Chemical Company’s raw materials and/or finished products to some
degree to manage the commodity price risk of such items. This
requires the purchase or sale of commodity futures contracts and/or options on
those contracts or similar financial instruments. We may be forced to
make cash deposits available to counterparties as they mark to market these
financial hedges. This funding requirement may limit the level of
commodity price risk management that we are prudently able to
complete. If we do not or are not capable of managing the commodity
price risk of FutureFuel Chemical Company’s raw materials and/or finished
products, FutureFuel Chemical Company may incur losses as a result of price
fluctuations with respect to these raw materials and/or finished
products.
If
FutureFuel Chemical Company is unable to acquire or renew permits and approvals
required for its operations, it may be forced to suspend or cease operations
altogether.
The
operation of FutureFuel Chemical Company’s manufacturing plant requires numerous
permits and approvals from governmental agencies. FutureFuel Chemical
Company may not be able to obtain all necessary permits (or modifications
thereto) and approvals and, as a result, our operations may be adversely
affected. In addition, obtaining all necessary renewal permits (or
modifications to existing permits) and approvals for future expansions may
necessitate substantial expenditures and may create a significant risk of
expensive delays or loss of value if a project is unable to function as planned
due to changing requirements.
The
lack of business diversification may adversely affect our results of
operations.
It is
possible that we will not consummate more than one business combination with the
proceeds from our July 2006 offering and FutureFuel Chemical Company may be the
only target business that we acquire. Accordingly, the prospects for
our success may be entirely dependent upon FutureFuel Chemical
Company. Unlike other entities which may have the resources to
complete several business combinations of entities operating in multiple
industries or multiple areas of a single industry, it is possible that we will
not have the resources to diversify effectively our operations or benefit from
the possible spreading of risks or offsetting of losses.
FutureFuel
Chemical Company’s indebtedness may limit our ability to borrow additional funds
or capitalize on acquisition or other business opportunities.
FutureFuel
Chemical Company has entered into a $50 million revolving credit facility
with Regions Bank and we have guaranteed FutureFuel Chemical Company’s
obligations thereunder. The restrictions governing this indebtedness
(such as total debt to EBITDA limitations) may reduce our ability to incur
additional indebtedness, engage in certain transactions or capitalize on
acquisition or other business opportunities. If FutureFuel Chemical
Company is unable to meet its future debt service obligations and other
financial obligations, we could be forced to restructure or refinance such
indebtedness and other financial transactions, seek additional equity or sell
assets.
We
expect to have capital expenditure requirements, and we may be unable to obtain
needed financing on satisfactory terms.
We expect
to make capital expenditures for the expansion of FutureFuel Chemical Company’s
biofuels production capacity and complementary infrastructure. We
intend to finance these capital expenditures primarily through cash flow from
FutureFuel Chemical Company’s operations, borrowings under the credit facility
with Regions Bank and
25
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 the FutureFuel Chemical Company
acquisition or other future acquisitions with our operations or realize all of
the anticipated benefits of these acquisitions.
Separation
of FutureFuel Chemical Company from Eastman Chemical Company and integration of
FutureFuel Chemical Company with us has been a complex, time-consuming and
costly process. Failure to successfully integrate FutureFuel Chemical
Company in a timely manner may have a material adverse effect on our business,
financial condition, results of operations and cash flows. The
difficulties of combining the acquired operations include, among other
things:
|
|
·
|
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 the
acquisition of FutureFuel Chemical Company and other future acquisitions, such
as increased earnings, cost savings and revenue enhancements, for various
reasons, including difficulties integrating operations and personnel, higher and
unexpected acquisition and operating costs, unknown liabilities and fluctuations
in markets. If the FutureFuel Chemical Company acquisition benefits
do not meet the expectations of financial or industry analysts, the market price
of our shares of common stock may decline.
The
scope of indemnity protection afforded to us under the acquisition agreement
with Eastman Chemical Company is limited.
While we
are confident that the due diligence process undertaken in relation to
FutureFuel Chemical Company was sufficient and that material areas of potential
exposure have been discovered, there can be no certainty that all significant
exposures were uncovered by the due diligence process and it is unlikely that
all existing or potential problems and/or liabilities have been
revealed. The inspections that have been performed may not have
revealed structural and environmental problems, such as groundwater
contamination. We were not able to obtain contractual indemnities
from Eastman Chemical Company for all liabilities that were created by Eastman
Chemical Company or FutureFuel Chemical Company prior to the completion of the
acquisition of FutureFuel Chemical Company and have only limited indemnity
protection under the acquisition agreement with Eastman Chemical
Company. As part of such acquisition agreement, we, through
FutureFuel Chemical Company, assumed the risk of the physical condition of
FutureFuel Chemical Company’s properties in addition to the risk that the
properties may not perform in accordance with expectations, as well as certain
environmental and other unknown liabilities in excess of certain
amounts.
If any
such exposures materialize or the information provided as part of the due
diligence exercise proves to be untrue or inaccurate, we will have to rely on
the limited indemnity protection afforded to us under the acquisition agreement
in order to seek compensation for any financial loss incurred as a
result. By its nature, indemnity protection is limited in scope,
being the product of a negotiation exercise between us and Eastman Chemical
Company, and therefore we may not recover any or sufficient funds fully to cover
any loss incurred.
In
addition, even where potential areas of exposure are covered by the scope of
indemnity protection provided under the acquisition agreement, there is no
guarantee that Eastman Chemical Company will be in a financial position to
support the level of indemnification for which it may be
liable. Consequently, we may not recover any or sufficient funds
fully to cover any loss incurred.
26
Risks associated with
investing in AIM companies.
The
market for our shares or warrants is relatively illiquid.
Our
shares of common stock and warrants currently are traded on AIM and are not
listed or traded on any established market in the United States. AIM
is a market designed primarily for emerging or smaller companies. The
AIM rules are less demanding than those of the Official List of the UK Listing
Authority and other stock exchanges and also than those under federal securities
laws. Neither the London Stock Exchange nor the SEC has approved the
contents of this document. The future success of AIM and liquidity in
the market for our shares of common stock and warrants cannot be
guaranteed. In particular, the market for our shares of common stock
and warrants may be, or may become, relatively illiquid and therefore may be or
may become difficult to sell.
Investment
in shares traded on AIM is perceived to carry a higher risk than an investment
in shares quoted on exchanges with more stringent listing requirements, such as
the London Stock Exchange, the New York Stock Exchange or the NASDAQ Global
Market. This is because AIM imposes less stringent corporate
governance and ongoing reporting requirements. AIM is also a new and
more flexible market, which requires only semi-annual, rather than quarterly,
financial update reports. Investors should be aware that the value of
our shares of common stock and warrants may be influenced by many factors, some
of which may affect quoted companies generally, including the depth and
liquidity of the market, our performance, a large or small volume of trading in
our securities, legislative changes and general economic, political or
regulatory conditions, and that the prices may be volatile and subject to
extensive fluctuations. Therefore, the market price of our shares of
common stock and warrants may not reflect the underlying value. The
value of an investment in us may increase or decrease; therefore investors may
realize less than, or lose all of, their investment.
We
will not adopt the International Financial Reporting Standards but rather will
continue to prepare our financial statements and financial reporting in
accordance with U.S. generally accepted accounting principles.
On
August 22, 2006, AIM announced that non-European Economic Area companies
whose shares are traded on AIM are not required to adopt International Financial
Reporting Standards for financial reporting purposes but may use, among other
things, U.S. generally accepted accounting principles without reconciliation to
International Financial Reporting Standards. We are a non-European
Economic Area company and have determined that we will prepare our financial
statements in accordance with U.S. generally accepted accounting
principles. International Financial Reporting Standards differ in
certain significant respects from U.S. generally accepted accounting principles
and our financial statements prepared in accordance with U.S. generally accepted
accounting principles will not be comparable to financial statements prepared in
accordance with International Financial Reporting Standards.
Risks associated with owning
our shares and warrants.
Our
shares will be represented by definitive certificates which could reduce the
liquidity of our shares and warrants.
Our
shares of common stock are represented by definitive certificates which contain
the following legend.
Prior to
investing in the securities or conducting any transactions in the securities,
investors are advised to consult professional advisers regarding the
restrictions on transfer summarized below and any other
restrictions.
This
security (or its predecessor) was originally issued in a transaction exempt from
registration under the United States Securities Act of 1933, as amended (the
“Securities Act”), and is a restricted security (as defined in Rule 144
under the Securities Act). This security may not be offered, sold or
otherwise transferred in the absence of registration or an applicable exemption
therefrom. Hedging transactions involving this security may not be
conducted directly or indirectly, unless in compliance with the Securities
Act. Each purchaser of this security is hereby notified that the
seller of this security may be relying on the
27
exemption
from the provisions of Section 5 of the Securities Act provided by
Rule 144A or Regulation S thereunder.
The
holder of this security agrees for the benefit of the Company that (a) this
security may be offered, resold, pledged or otherwise transferred, only
(i) in the United States to a person whom the seller reasonably believes is
a qualified institutional buyer (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of Rule 144A,
(ii) outside of the United States in an offshore transaction in accordance
with Rule 903 or Rule 904 under the Securities Act,
(iii) pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available) or (iv) pursuant to an
effective registration statement under the Securities Act, in each of cases (i)
through (iv) in accordance with any applicable securities laws of any state of
the United States, and (b) the holder will, and each subsequent holder is
required to, notify any purchaser of this security from it of the resale
restrictions referred to in (a) above.
The
securities represented by this certificate are subject to transfer restrictions
which require that in addition to any certifications required from a transferor
as set forth on the reverse of this certificate, prior to the expiration of a
distribution compliance period of at least one year, the transferee certifies as
to whether or not it is a US person within the meaning of Regulation S and
provides certain other certifications and agreements. Prior to
permitting any transfer, the Company may request an opinion of counsel
reasonably satisfactory to the Company that such transfer is to be effected in a
transaction meeting the requirements of Regulation S under the Securities
Act or is otherwise exempt from registration under the Securities
Act.
CREST
Co., which is the Central Securities Depository for the U.K. markets (including
AIM) and which operates the CREST system (CREST Co.’s real-time settlement
system for UK and Irish shares and other corporate securities), does not allow
electronic settlement on CREST until the legend has been removed and the
certification requirements required under U.S. securities laws have
expired. As a result, our shares of common stock and warrants must be
represented by definitive certificates. In order to transfer or sell
our shares or warrants, holders must provide the definitive certificates to the
transfer agent, who will require certain certifications as set forth in the
legend, and on occasion legal opinions as set forth in the legend, prior to
issuing new certificates to new security holders. The lack of a fully
electronic settlement mechanism may have a material adverse effect on the
liquidity and the price of our securities.
If
our founding shareholders and Mr. Novelly or his designees exercise their
registration rights, such exercise may have an adverse effect on the market
price of our shares of common stock.
Those
shareholders holding shares of our common stock prior to 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 U.S. Securities
Act of 1933, as amended (the “Securities
Act”), the resale of their shares of our common stock issued prior to our
July 2006 offering (the “founding shares”) and their shares included in the
units purchased in 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.
28
Transfer
of our shares and/or warrants, and the exercise of our warrants, are subject to
stringent transfer and exercise requirements under the Securities
Act.
Our
shares of common stock and our warrants are subject to the conditions listed
under section 903(b)(3) or Category 3 of Regulation S under the
Securities Act. Under Category 3, offering restrictions (as
defined under Regulation S) had to be in place in connection with our July
2006 offering described below and additional restrictions are imposed on resales
of our securities as described elsewhere herein. All of our shares of
common stock and our warrants are subject to these restrictions, regardless of
whether the purchaser acquired the securities in a transaction pursuant to
Rule 144A under the Securities Act or in a transaction pursuant to
Regulation S. Our shares and warrants are considered “restricted
securities” under Rule 144 and will, until the expiration of the applicable
holding period with respect to the securities set forth in Rule 144 and the
expiration of the one-year compliance period, bear restrictive legends, unless
we determine otherwise in compliance with applicable law.
The
Rule 144 holding period for our shares received upon exercise of our
warrants may recommence upon the exercise of such warrants.
The Rule
144 holding period for the shares of our common stock received upon exercise of
our warrants will start upon the exercise of such warrants. Even
though the Rule 144(k) two-year holding period for the shares and warrants may
have expired, enabling certificates for those securities to have the legend
removed, the Rule 144 holding period for the shares received upon exercise of
the warrants will start upon such exercise. Accordingly, holders of
our warrants that exercise their warrants for cash will receive shares of our
common stock subject to trading restrictions which are greater than those
imposed on the trading of previously issued shares. Such restrictions
may mean the value of the shares received upon exercise of the warrants may be
significantly lower, at least until the two-year holding period has expired,
than the shares originally issued.
We
may not list our common stock or our warrants on a stock exchange other than
AIM.
Under the
investor rights agreement that we entered into on July 12, 2006 with CRT
Capital Group LLC and KBC Peel Hunt Ltd, we are obligated to use our
commercially reasonable efforts to cause our shares of common stock to be
authorized to be quoted and/or listed (to the extent applicable) on the American
Stock Exchange, the New York Stock Exchange, the NASD Automated Quotation System
or the NASDAQ National Market (or, in each case, a successor thereto) or a
similarly recognized national trading platform, if our common stock so
qualifies. However, no assurances can be given that our common stock
will qualify to be quoted and/or listed on any such exchange or other similarly
recognized national trading platform. Further, we have no such
obligation with respect to our warrants and no assurances can be given that we
will attempt to cause our warrants to be authorized to be quoted and/or listed
on any such exchange or other similarly recognized national trading
platform.
Internal Reporting
Controls.
Our
management has identified material weaknesses in our internal control over
financial reporting; failure to achieve and maintain effective internal control
over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 (“Section 404”) could have a material adverse effect
on our business and stock price.
We
identified material weaknesses in our internal control over financial reporting
in conjunction with the preparation of our December 31, 2006 financial
statements. No assurances can be given that additional material
weaknesses, significant deficiencies or control deficiencies in our internal
control over financial reporting will not be identified in the
future.
Our
internal control over financial reporting does not currently meet all the
standards contemplated by Section 404 that we will eventually be required
to meet. As a public company, we are required to complete our initial
assessment by the filing of our Form 10-K for the year ending December 31,
2008. If we are not able to implement the requirements of
Section 404 in a timely manner or with adequate compliance, this result may
cause us to be unable to report on a timely basis and thereby subject us to
adverse regulatory consequences, including sanctions by the SEC or violations of
applicable stock exchange listing rules. There could also be a
negative reaction in the financial markets due to a loss of investor confidence
in the reliability of our financial statements. We have and will
incur incremental costs in order to sustain and, where appropriate, improve our
internal control over financial reporting and comply with Section 404,
including increased auditing and legal fees and costs associated with
hiring
29
additional
accounting and administrative staff. This could harm our operating
results and lead to a decline in our stock price.
30
Item
2. Properties.
The
Company
We are a
holding company whose principal assets are all of the issued and outstanding
shares of stock of FutureFuel Chemical Company and cash and cash
equivalents.
FutureFuel
Chemical Company
FutureFuel
Chemical Company’s principal asset is a manufacturing plant situated on
approximately 2,200 acres of land six miles southeast of Batesville in north
central Arkansas fronting the White River. Approximately 500 acres of
the site are occupied with batch and continuous manufacturing facilities,
laboratories and infrastructure, including on-site liquid waste
treatment. FutureFuel Chemical Company is the fee owner of this plant
and the land upon which it is situated, and manufactures both biofuels and
chemicals at the plant. Utilization of these facilities may vary with
product mix and economic, seasonal and other business conditions, but the plant
is substantially utilized with the exception of facilities designated for
capacity expansion of biodiesel and a facility targeted for the potential future
production of cellulosic-based ethanol. The plant, including approved
expansions, has sufficient capacity for existing needs and expected near-term
growth. We believe that the plant is generally well maintained, in
good operating condition and suitable and adequate for its uses.
31
Item
3. Legal Proceedings.
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.
32
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market
Information
There is
no established public trading market in the United States for our shares of
common stock or our warrants. However, our shares and warrants are
listed on AIM under the ticker symbols “FFU” and “FFUW,”
respectively. Trading of our shares of common stock and warrants on
AIM commenced July 12, 2006 and was suspended on July 24, 2006, the
date that our acquisition of FutureFuel Chemical Company was
announced. Trading resumed on October 9,
2006. 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. The high
and low bid on AIM for our shares of common stock and warrants for 2006 and 2007
for the periods during which they were traded are set forth in the following
table.
|
Shares
|
Warrants
|
|||||||
|
Period
|
High
|
Low
|
High
|
Low
|
||||
|
July 12
-24, 2006
|
$7.45
|
$7.40
|
$1.40
|
$1.35
|
||||
|
October 9,
2006 - December 31, 2006
|
$8.21
|
$7.30
|
$2.50
|
$1.25
|
||||
|
January 1,
2007 - March 31, 2007
|
$8.50
|
$6.00
|
$2.45
|
$0.75
|
||||
|
April 1,
2007 - June 30, 2007
|
$8.00
|
$7.00
|
$2.78
|
$1.50
|
||||
|
July 1,
2007 - July 26, 2007
|
$8.00
|
$7.00
|
$2.84
|
$1.50
|
||||
There are
currently outstanding 26,700,000 shares of our common stock and 22,500,000
warrants to purchase 22,500,000 shares of our common stock at $6.00 per
share. Such shares and warrants (and shares issued upon exercise of
the warrants) can only be sold pursuant to Rule 144 and Rule 144A of
the Securities Act upon satisfaction of the terms and conditions of those
rules.
Holders
The
shares of our common stock and our warrants were held by 99 and 80 holders of
record, respectively, on March 26, 2008.
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 2006 or 2007. 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. The following information regarding this plan is as of
December 31, 2007.
33
|
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
|
0
|
n/a
|
2,670,000
|
Performance
Graph
The
following graph shows changes over the seventeen month period beginning
July 13, 2006 (the completion of our offering of units) through
December 31, 2007 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: Aventine Renewable Energy Holdings; Bluefire Ethanol Fuels; China
Clean Energy Inc.; Epolin Inc.; Ethos Environmental Inc.; Green Plains Renewable
Energy; GS Agrifuels Corp.; H2Diesel Holdings Inc.; International Flavours &
Fragrances; Kreido Biofuels Inc.; OM Group Inc.; Pacific Ethanol Inc.; Panda
Ethanol Inc.; Pure Biofuels Corp.; Rentech Inc.; Synthetech Inc.; Tiger Ethanol
International Inc.; United Energy Corp.; US Bioenergy Corp.; Verasun Energy
Corp.; and Westlake Chemical Corp.
34
Securities
Sold and Consideration
The
following is a description of all securities sold by us within the past three
years, which securities were not registered under the Securities
Act.
We were
incorporated on August 12, 2005. We issued 5,000,000 shares of
common stock on September 1, 2005 to certain founding shareholders for an
aggregate consideration of $25,000. On May 24, 2006, we issued a
common stock dividend of 0.25 shares for each outstanding share, effectively
lowering the purchase price paid by each of the founding shareholders to $.004
per share. The total number of issued shares of our common stock
following such stock dividend was 6,250,000. On June 27, 2006,
we and certain of our founding shareholders cancelled an aggregate of 625,000
shares of our common stock, reducing the founding shares outstanding to
5,625,000 shares.
On
July 12, 2006, we issued 22,500,000 units, each unit consisting of one
share of our common stock and one warrant entitling the holder thereof to
purchase one share of our common stock. The sales price was $8.00 per
unit for an aggregate sales price of $180,000,000.
Placing
Agents and Other Purchasers
KBC Peel
Hunt Ltd and CRT Capital Group, LLC, who served as placing agents in the
offering of the units, assisted us in procuring subscribers for 16,875,000
units. The remaining units sold in the offering were sold to the
following designees of Mr. Novelly.
|
Name
|
Shares
|
|||
|
St.
Albans Global Management, Limited Partnership, LLLP
|
4,531,250 | |||
|
Apex
Holding Co.
|
625,000 | |||
|
Ed
Wahl
|
31,250 | |||
|
Jeff
Call
|
31,250 | |||
|
Graziadio
Family Trust
|
62,500 | |||
|
Bermuda
Life Insurance Company/Separate Account C
|
93,750 | |||
|
William
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
35
thereunder
(if available); or (d) in certain transactions specified in Regulation
S. The selling restrictions set forth in the preceding sentence will
continue to be applicable to our shares and warrants notwithstanding the
expiration of the compliance period described below. Under our
bylaws, we are required to refuse to register any transfer of our securities not
made in accordance with the provisions of Rule 144A, Rule 144 (if available),
Regulation S, or pursuant to registration under the Securities Act or another
exemption from registration under the Securities Act.
Our
shares and warrants are subject to the conditions listed under section
903(b)(3), or Category 3, of Regulation S of the Securities
Act. Under Category 3, “offering restrictions” (as defined under
Regulation S) must be in place and additional restrictions are imposed on
resales of the shares and warrants as described below. All shares and
warrants are subject to these restrictions, regardless of whether the purchaser
acquired the shares or warrants in a transaction pursuant to Rule 144A or in a
transaction pursuant to Regulation S.
Prior to
one year after the later of (i) the time when the shares or warrants were first
offered to persons other than distributors in reliance upon Regulation S or (ii)
the date of closing of the offering, or such longer period as may be required
under applicable law (the “compliance period”):
(a) every
purchaser of shares or warrants other than a distributor will be required to
certify that it is not a U.S. person and is not acquiring the securities for the
account or benefit of any U.S. person (as defined under Regulation S of the
Securities Act) or is a U.S. person who purchased securities in a transaction
that did not require registration under the Securities Act;
(b) every
purchaser of the shares or warrants has been, or will be, required to agree to
resell such shares or warrants only in accordance with the provisions of Rule
144A, Rule 144 (if available) or Regulation S, or pursuant to an effective
registration statement under the Securities Act, and will be required to agree
to not engage in hedging transactions with regard to the securities unless in
compliance with the Securities Act;
(c) the
shares and warrants will (i) contain a legend to the effect that transfer is
prohibited except in accordance with the restrictions set forth in (a) and (b)
above during the compliance period, and (ii) with respect to the warrants
(notwithstanding the expiration of the compliance period), and pursuant to Rule
903(b)(5)(i), contain a legend stating that the warrants and securities to be
issued upon their exercise have not been registered under the Securities Act and
that the warrant may not be exercised by or on behalf of any U.S. person without
an opinion of counsel;
(d) each
distributor selling securities to a distributor, a dealer (as defined in Section
2(a)(12) of the Securities Act), or a person receiving a selling concession, fee
or other remuneration will be required to send a confirmation or other notice to
the purchaser stating that the purchaser is subject to the same restrictions on
offers and sales that apply to a distributor; and
(e) under
our bylaws, we are required to refuse to register any transfer of our securities
not made in accordance with the provisions of Rule 144A, Rule 144 (if available)
or Regulation S, or pursuant to registration under the Securities Act or another
exemption from registration under the Securities Act.
Each
purchaser of our warrants (regardless of whether such purchaser acquired such
warrants in a transaction pursuant to Rule 144A, Regulation D or Regulation S),
upon exercise of each warrant, must:
(a) provide
us with a written certification that it is neither within the U.S. nor a U.S.
person and the warrant is not being exercised on behalf of a U.S. person;
or
(b) provide
us with a written opinion of counsel to the effect that the transfer of the
warrants and issuance of the shares upon the exercise of such warrants to such
person have been registered under the Securities Act or are exempt from
registration thereunder; and
(c) receive
certificated securities containing the legend described below.
In the
offerings of the units, each purchaser of the shares and warrants was deemed to
have represented and agreed as follows:
(1) the
purchaser (A) (i) is an institutional accredited investor that is a qualified
institutional buyer (subject to certain limited exceptions in the case of the
initial purchase only), (ii) is aware that the sale to it is being
36
made in
reliance on Rule 144A (or, in the case of the initial purchaser only, in
reliance on Regulation D) and (iii) is acquiring the securities for its own
account or for the account of a qualified institutional buyer or (B) is not a
U.S. person and is purchasing the securities in an offshore transaction pursuant
to Regulation S;
(2) the
purchaser understands that the securities were offered in a transaction not
involving any public offering within the meaning of the Securities Act, that the
securities have not been and, except as otherwise described in the offering
documents relating to the unit issuance, will not be registered under the
Securities Act and that if in the future it decides to offer, resell, pledge or
otherwise transfer any such securities, such securities may be offered, resold,
pledged or otherwise transferred only (i) in the United States to a person
whom the seller reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A, (ii) outside the United
States in a transaction complying with the provisions of Rule 903 or Rule 904
under the Securities Act, (iii) pursuant to an exemption from registration
under the Securities Act provided by Rule 144 (if available), or
(iv) pursuant to an effective registration statement under the Securities
Act, in each of cases (i) through (iv) in accordance with any applicable
securities laws of any state of the United States;
(3) the
purchaser understood and agreed that, in addition to the restrictions set forth
in (2) above, if in the future it decides to resell, pledge or otherwise
transfer any securities or any beneficial interests in any securities prior to
the date which is one year after the later of (1) the date when the shares or
warrants are first offered to persons (other than distributors) pursuant to
Regulation S and (2) the date of closing of the unit offering, it will do so
only (i) in compliance with the restrictions set forth above,
(ii) pursuant to an effective registration statement under the Securities
Act, or (iii) in accordance with the provisions of Rule 144A, Rule 144 (if
available) or Regulation S, and in each of such cases in accordance with any
applicable securities law of any state of the United States;
(4) the
purchaser agreed to and each subsequent holder is required to, notify any
purchaser of the shares or warrants from it of the resale restrictions referred
to in paragraphs (2) and (3) above, if then applicable;
(5) the
purchaser acknowledged that, prior to any proposed transfer of shares or
warrants other than pursuant to an effective registration statement, the
transferee of shares or warrants may be required to provide certifications and
other documentation relating to the non-U.S. person status of such
transferee;
(6) the
purchaser acknowledged that we, our placing agents in the unit issuance and
others rely upon the truth and accuracy of the foregoing acknowledgements,
representations and warranties and agreed that if any such acknowledgement,
representation or warranty deemed to have been made by virtue of its purchase of
shares or warrants is no longer accurate, it must promptly notify our placing
agents and us;
(7) the
purchaser acknowledged that neither we, our placing agents nor any person
representing any of them, has made any representation to it with respect to us
or the unit offering, other than the information contained in the offering
documents related to the unit offering, which had been delivered to the
purchaser and upon which the purchaser relied in making its investment decision
with respect to the securities offered; the purchaser has had access to such
financial and other information concerning us and the securities offered,
including an opportunity to ask questions of and request information from us and
our placing agents;
(8) the
purchaser purchased the units for its own account, or for one or more investor
accounts for which it was acting as fiduciary or agent, in each case, not with a
view to, or for offer or sale in connection with, any distribution thereof in
violation of the Securities Act, subject to any requirement of law that the
disposition of its property or the property of such investor account or accounts
be at all times within its or their control and subject to its or their ability
to resell, reoffer or otherwise transfer such securities pursuant to Rule 144A,
Regulation S or Rule 144 (if available) under the Securities
Act;
(9) the
purchaser understood that the securities offered, as “Restricted Securities”
under Rule 144 of the Securities Act, will, until the expiration of the
applicable holding period with respect to the securities set forth in Rule 144
of the Securities Act, and the expiration of the compliance period described
above, will bear legends described below, unless we determine otherwise in
compliance with applicable law; and
(10) the
purchaser acknowledged that the shares and warrants, whether purchased pursuant
to Rule 144A of the Securities Act, Regulation D of the Securities Act or
pursuant to Regulation S of the Securities Act, will bear a restrictive legend
to the following effect, unless we determine otherwise in compliance with
applicable law:
37
|
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 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
38
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.
Terms
of Warrant Conversion or Exercise
Each of
our outstanding warrants entitles the registered holder to purchase one share of
our common stock at an exercise price of $6.00 per share, subject to adjustment
as discussed below, at any time commencing on October 31,
2006. The warrants will expire on July 12, 2010 at 5:00 p.m.,
New York City time.
We may
call the warrants for redemption at any time after they become
exercisable:
|
|
·
|
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.
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
39
securities
with the certificate bearing a restrictive legend and not saleable in the U.S.
unless registered under the Securities Act, or exempt from
registration.
No
fractional shares will be issued upon exercise of the warrants. If,
upon exercise of the warrants, a holder would be entitled to receive a
fractional interest in a share of our common stock, we will, upon exercise,
round up to the nearest whole number the number of shares to be issued to the
warrant holder.
Use
of Proceeds
The
proceeds of our July 2006 offering aggregated $180 million, which proceeds were
used as follows.
(Dollars
in thousands)
|
Item
|
Amount
|
|||
|
Offering
proceeds
|
$ | 180,000 | ||
|
Underwriters’
fees
|
(6,750 | ) | ||
|
Working
capital amount
|
(750 | ) | ||
|
Amount
transferred to the trust fund
|
$ | 172,500 | ||
The
working capital amount was released to us to pay, among other things, the
expenses of the offering (which aggregated $825,000(a)). In
addition to the underwriters’ fees of $6,750,000 paid in connection with the
offering, the underwriters deferred $2,700,000 of their fees, which deferred
fees were payable upon the consummation of a qualified business combination and
which were in fact paid on October 31, 2006 in connection with the
consummation of our acquisition of FutureFuel Chemical Company.
__________
|
(a)
|
The
expenses of the offering in excess of $750,000 were paid from the proceeds
of loans made by Mr. Mikles and St. Albans Global Management, Limited
Partnership, LLLP to us in the aggregate amount of $700,000, which loans
were repaid as set forth above.
|
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.
|
40
Item
6. Selected Financial Data.
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., 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. 2 to our
Form 10 filed with the SEC on February 29, 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 and 2007, all of which are
included elsewhere herein. The information presented in the table
below should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and the financial statements
and notes thereto included elsewhere herein. 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.
41
(Dollars
in thousands, except per share amounts)
|
FutureFuel
Corp. Consolidated
|
FutureFuel
Corp. and FutureFuel Chemical Company Combined
|
FutureFuel
Corp. Consolidated
|
FutureFuel
Chemical Company
|
|||||||||||||||||||||
|
Item
|
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
|
$ | 169,788 | $ | 150,770 | $ | 23,043 | $ | 127,727 | $ | 119,539 | $ | 144,157 | ||||||||||||
|
Net
income (loss)
|
$ | 8,408 | $ | 2,242 | $ | 2,717 | $ | (475 | ) | $ | 381 | $ | (14,867 | ) | ||||||||||
|
Earnings
(loss) per common share
|
||||||||||||||||||||||||
|
Basic
|
$ | 0.31 | $ | 0.08 | $ | 0.10 |
NA
|
NA
|
NA
|
|||||||||||||||
|
Diluted
|
$ | 0.26 | $ | 0.07 | $ | 0.09 |
NA
|
NA
|
NA
|
|||||||||||||||
|
Total
Assets
|
$ | 216,113 | $ | 203,059 | $ | 203,516 |
NA
|
$ | 114,500 | $ | 118,164 | |||||||||||||
|
Long-term
obligations
|
$ | 24,353 | $ | 20,740 | $ | 20,740 |
NA
|
$ | 24,830 | $ | 25,105 | |||||||||||||
|
Cash
dividends per common share
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 21,554 | $ | (3,960 | ) | $ | (12,494 | ) | $ | 8,534 | $ | 7,556 | $ | 19,044 | ||||||||||
|
Net
cash provided by (used in) investing activities
|
$ | (29,978 | ) | $ | (91,168 | ) | $ | (82,619 | ) | $ | (8,549 | ) | $ | (6,594 | ) | $ | (6,520 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
$ | (50 | ) | $ | 158,229 | $ | 158,214 | $ | 15 | $ | (962 | ) | $ | (12,524 | ) | |||||||||
For the
combined year ended December 31, 2006, operating revenues, net income
(loss) and earnings (loss) 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. 2 to Form 10 Registration Statement filed with the SEC
on February 29, 2008 contains all the financial statements and selected
financial data for FutureFuel Chemical Company that have been provided to us by
Eastman Chemical Company. We requested information from Eastman
Chemical Company for 2002 and 2003 and, in fact, we believe that Eastman
Chemical Company is obligated to honor this request under the terms of the
acquisition agreement through which we acquired FutureFuel Chemical
Company. Eastman Chemical Company, however, has refused to provide us
information for 2002 because there are too many carve-out and allocation issues
to address, many of which stem from the sale of certain product lines in
2002. Information for 2003 has been promised but, to date, it has not
been forthcoming. We believe we could bring suit against Eastman
Chemical Company to provide this information. However, in light of
the changes to FutureFuel Chemical Company’s operating results since its
acquisition by us, and other changes to its business as reflected in the
Form 10, we believe that the burden and expense of obtaining 2003 and 2002
financial information would outweigh the usefulness to investors of that
information. Further, we also believe that such a lawsuit would be
unduly burdensome and expensive to us and do not believe we would be able to
obtain the information through such a suit in a timely manner.
42
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, 2007, FutureFuel Chemical Company had no borrowings under such
credit facility.
43
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read together with ours and FutureFuel Chemical
Company’s financial statements, including the notes thereto, set forth
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 the Company 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) 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. All 2005 biodiesel
revenues were classified as miscellaneous sales and recorded as a credit to cost
of goods sold. Beginning in 2006, revenues and cost of goods sold for
biofuels were treated as a separate business segment.
Revenues
generated from 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 June 2008, and no
assurances can be given that the contract will be extended past that date or, if
extended, under what terms. FutureFuel Chemical Company pays for raw
materials required to produce 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 labor, energy, inflation and the
key external raw materials, 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 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
44
FutureFuel
Chemical Company is responsible for purchasing and/or providing, and we do not
anticipate this to change going forward.
FutureFuel
Chemical Company has historically manufactured CPOs and DIPBs at cost for
Eastman Chemical Company. CPOs are chemical intermediates that
promote adhesion for plastic coatings and DIPBs are intermediates for production
of Eastman Chemical Company products used as general purpose inhibitors,
intermediates or antioxidants. Historically, revenues related to CPOs
and DIPBs were exactly offset by cost of goods sold; hence there was no effect
on gross profits historically. As part of our acquisition of
FutureFuel Chemical Company, FutureFuel Chemical Company entered into conversion
agreements with Eastman Chemical Company that effectively provide a conversion
fee to FutureFuel Chemical Company for 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, and we do
not anticipate this to change going forward.
Other
products include agricultural intermediates and additives, imaging chemicals,
fiber additives and various specialty pharmaceutical intermediates that
FutureFuel Chemical Company has in full commercial production or in
development. These products are currently sold in small quantities to
a large customer base. Pricing for these products is negotiated
directly with the customer (in the case of custom manufacturing) or is
established based upon competitive market conditions (in the case of performance
chemicals). In general, these products have no pricing mechanism or
specific protection against raw material or conversion cost changes, and we do
not anticipate this to change going forward.
The year
ended December 31, 2006 was the first full year that FutureFuel Chemical
Company sold biodiesel. In addition to selling for its own account,
FutureFuel Chemical Company produced, for a fee, biodiesel for a third party
under a tolling agreement. Under that tolling agreement, for every
gallon of feedstock provided by that party to FutureFuel Chemical Company,
FutureFuel Chemical Company was obligated to deliver one gallon of biodiesel, up
to a maximum amount of 6 million gallons. The tolling agreement
terminated on September 30, 2007 and was not renewed. FutureFuel
Chemical Company delivered approximately 2.1 million gallons of biodiesel
pursuant to that tolling agreement.
The
majority of our and FutureFuel Chemical Company’s expenses are cost of goods
sold. Cost of goods sold reflect raw material costs as well as both
fixed and variable conversion costs, conversion costs being those expenses that
are directly or indirectly related to the operation of FutureFuel Chemical
Company’s plant. Significant conversion costs include labor,
benefits, energy, supplies and maintenance and repair. In addition to
raw material and conversion costs, cost of goods sold includes environmental
reserves and costs related to idle capacity and, for the periods prior to 2006,
asset impairment and restructuring charges and severance
costs. Finally, cost of goods sold includes hedging gains and losses
recognized by us. Cost of goods sold are allocated to the chemical
and biofuels business segments based on 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
45
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 16 to our consolidated
annual financial statements and footnote 1 and footnote 11 to
FutureFuel Chemical Company’s annual financial statements contained elsewhere
herein for more details.
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 has 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. 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 63% of revenues in 2007 as compared to 72% in 2006. The future
volume of and revenues from the bleach activator depends on both consumer demand
for the product containing the bleach activator and the manufacturing, sales and
marketing priorities of our bleach activator customer. We are unable
to predict with certainty the revenues we will receive from the bleach activator
in the future. 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 has been 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. Forecasted product demand in 2008 is estimated to be
stronger than 2007, though we remain in discussions with our customer on both
projected demand and supply volumes to which we are able to commit.
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 can only operate
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 is attributable to growth of FutureFuel
Chemical Company’s biodiesel segment. As more fully described below,
biodiesel is made using the same assets utilized to manufacture the 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 are 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 is to
run a relatively balanced position, meaning we generally sell heating oil
futures or options to lock our selling prices whenever we lock 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 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. We have been
informed of approval by our underwriters of our $657,000 business interruption
claim (net of deductible) which helped to offset some of these
losses.
For the
year 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. We expect to continue this practice to the
extent practicable as long as similar market conditions persist. We also expect
to improve biodiesel margins going forward as we begin to receive credits from
the Arkansas producer credit discussed previously (the first $2 million
from this credit was received in March 2008).
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 but intend to do so prospectively, beginning
with our discussion and analysis of results in our Form 10-Q filing for the
first quarter of 2008.
Fiscal
Year Ended December 31, 2006 Compared to Fiscal Year Ended
December 31, 2005
Revenues:
Revenues
for the year ended December 31, 2006 were $150,770,000 as compared to
revenues for the year ended December 31, 2005 of $119,539,000, an increase
of 26%. (Revenues from FutureFuel Chemical Company for the ten-month
period ended October 31, 2006 were $127,727,000.) This increase
was primarily a result of selling biodiesel for the full year and increased
sales of the bleach activator. Revenues from biodiesel accounted for
9% of total revenues in 2006. Revenues from the bleach activator
increased 26% and accounted for 56% of total revenues in 2006, the same percent
of revenues as in 2005. Revenues from the proprietary herbicide and
intermediates decreased 5% and accounted for 16% of total revenues in 2006 as
compared to 21% in 2005. Revenues from CPOs increased 5% in 2006 and
accounted for 3% of total revenues in 2006 compared to 4% in
2005. Revenues from DIPBs decreased 3% and accounted for 5% of total
revenues in 2006 as compared to 6% in 2005. Revenues from
SSIPA/LiSIPA decreased 9% and accounted for 4% of total revenues in 2006 as
compared to 6% in 2005. Revenues from other products increased 26%
and accounted for 7% of total revenues in 2006 and 2005.
During
2006, revenues for the bleach activator increased due to stronger demand from
the customer as a result of changing consumer demand for their
product. Revenue from the proprietary herbicide and intermediates
declined due to price concessions to the customer in order to maintain market
share in the face of generic product competition. See above for a
discussion of current and expected pricing and demand considerations for these
product lines. Revenue
from biodiesel increased in 2006 due to: (i) production during the entire
12 months as opposed to two months of production in 2005 which resulted in no
revenues of consequence; and (ii) an increase in production capacity from
3 million gallons per year at the end of 2005 to 24 million gallons
per year at the end of 2006.
48
Cost of Goods Sold and
Distribution:
Total
cost of goods sold and distribution for the year ended December 31, 2006
was $139,675,000 as compared to total cost of goods sold and distribution for
the year ended December 31, 2005 of $105,263,000, an increase of
33%. (The total 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 the year ended December 31, 2006 for
FutureFuel Chemical Company’s chemicals segment was $115,253,000 as compared to
cost of goods sold and distribution for the year ended December 31, 2005 of
$102,702,000, an increase of approximately 12%. (The cost of goods
sold and distribution of FutureFuel Chemical Company’s chemicals segment for the
ten-month period ended October 31, 2006 was $100,024,000.) The
increase was entirely a result of increased sales; cost of goods sold and
distribution for the chemicals segment as a percent of total chemical revenues
decreased slightly from 86% in 2005 to 84% in 2006. The decrease was
primarily a result of the addition of the biofuels segment in
2006. As previously discussed, FutureFuel Chemical Company allocates
the vast majority of its costs to products as raw materials are processed into
finished goods; with the addition of the biofuels segment in 2006, there was a
larger revenue base across which to allocate costs. The greatest
reduction in cost of goods sold and distribution as a percent of total revenues
came from the proprietary herbicide and intermediates product line, where cost
of goods sold and distribution decreased from 28% of chemical revenues in 2005
to 20% of chemical revenues in 2006. This large decrease is explained
by the fact that FutureFuel Chemical Company utilizes the same assets used to
produce the proprietary herbicide and intermediates product line to produce
biodiesel, and hence the biodiesel segment absorbed more fixed costs from this
product line than any other.
Cost of
goods sold and distribution for the year ended December 31, 2006 for
FutureFuel Chemical Company’s biofuels segment was $24,422,000. (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.) Cost of goods sold and distribution for the biofuels
segment exceeded biofuels revenues in 2006. FutureFuel Chemical
Company began production of biodiesel in small individual batches utilizing
several of the reactors in its batch plant. Costs incurred in the
batch plant are allocated to products based on reactor time, and hence the
biodiesel segment incurred costs based on the number of reactors it utilized and
the duration of time it utilized those reactors. For much of 2006 the
biodiesel product remained in a development phase and the biofuels segment did
not always utilize the full capacity of the reactors under its
control. This low utilization, combined with lower efficiency during
the development phase, prevented the biofuels segment from generating sufficient
revenues to cover the costs that were allocated during the
year. During the second half of 2006, the biofuels segment initiated
production from a continuous reaction line. Production from the
continuous line is more efficient and produces higher volumes per reactor than
the batch process, and hence absorbs fewer overhead costs per gallon of
biodiesel produced. The biofuels segment has continued to utilize the
batch process to test new processing techniques, experiment with various
alternative feedstocks and meet peak demand. Ultimately, however, the
biofuels segment will transition to continuous production only, which is
expected to result in a material decrease in cost of goods sold and
distribution.
Total
cost of goods sold and distribution for 2005 included $99,000 of corporate
expense allocations from Eastman Chemical Company and $2,462,000 of severance
charges, none of which were allocated to segments. There were no
corporate expense allocations or restructuring and impairment charges in
2006.
Operating
Expenses:
Operating
expenses decreased from $13,637,000 for the year ended December 31, 2005 to
$11,581,000 for the year ended December 31, 2006, or approximately
15%. (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 corporate expense allocations from
Eastman Chemical Company, as well at the 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 our acquisition of FutureFuel Chemical
Company, FutureFuel Chemical Company developed standalone sales, marketing,
legal, corporate finance and general administrative functions, and as a whole,
the related expenses
49
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 but intend to do so
prospectively, beginning with our discussion and analysis of results in our
Form 10-Q filing for the first quarter of 2008.
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, 2006 and 2007, we recorded an
allowance for doubtful accounts of $42,000, the majority of which pertained to
one customer. FutureFuel Chemical Company historically has not
experienced significant problems in collecting its receivables and 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.
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, 2007 and December 31, 2006, we
recorded a reserve for closure/post-closure liabilities of $566,000 and
$545,000, 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.
50
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 2007 related to two 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. Both
customers’ credit and payment terms are similar to other specialty chemical
customers. Sales revenue under bill and hold arrangements were
$33,494,000, $31,550,000 and $31,197,000 for the years ended December 31,
2007, 2006 and 2005, 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.
Internal
control deficiency
During
the preparation of our 2006 financial statements, material weaknesses in our
internal control over financial reporting, as defined in the standards
established by the Public Company Accounting Oversight Board, were
identified. A material weakness is a control deficiency or
combination of control deficiencies that result in more than a remote likelihood
that a material misstatement of the annual or interim consolidated financial
statements will not be prevented or detected. The material weaknesses
in internal controls related to: (i) the lack of maintaining effective
controls in the monitoring of the accrual of certain liabilities; and
(ii) the application, monitoring and review of certain complex accounting
standards and assumptions applied within the financial reporting
process. A description of the control deficiencies that existed as of
December 31, 2006, as well as their effect on the presentation of our
consolidated financial statements, is discussed below.
Monitoring of the Accrual of
Liabilities
During
the preparation of the 2006 financial statements, it was determined that the
procedures for the recording of certain liabilities were not sufficient to
properly reflect the balance of financial statement liabilities and the
monitoring of such procedures did not appropriately identify such under-accruals
in a timely manner. Specifically, the following areas were identified
as not being appropriately accounted for or identified by our control processes
- the recognition of accruals for certain capital projects, the accrual of raw
materials in transit for which FutureFuel Chemical Company had obtained right of
ownership, and the recording of certain maintenance and other plant
expenses. The deficiencies were identified and addressed by
management during the preparation of the December 31, 2006 financial
statements and resulted in material corrections related to the accrual of
liabilities.
Management
has designed and implemented new procedures that have become an integral
component of our end-of-period close process. These procedures are
comprised of implementing higher levels of review between operating and
financial personnel and integrating the generation and review of certain reports
from our ERP system into our closing process to ensure the timely identification
of such matters for accrual and proper recording in the financial
statements.
51
Application, Monitoring and Review of
Certain Complex Accounting Standards and Assumptions
During
the preparation of our restated December 31, 2006 financial statements, it
was determined that there were control deficiencies in the application,
monitoring and review of certain complex accounting standards and assumptions
applied within the financial reporting process. Specifically,
deficiencies were identified related to: (i) the application of appropriate
assumptions related to purchase accounting; (ii) the monitoring of the
appropriate levels of inventory reserves; and (iii) the monitoring of the
recording of appropriate reserves for income taxes. As a result of
these deficiencies, financial statement adjustments were made to:
(i) properly present the financial statements to give effect to all of the
appropriate considerations of purchase accounting to the acquisition of Eastman
SE, Inc.; (ii) to give effect to the recording of inventory at the lower of
cost or market; and (iii) to give proper determination of the estimates
related to contingent liabilities associated with income taxes. The
first and second deficiencies were directly related to our restatement of our
financial statements to apply purchase accounting to the acquisition of Eastman
SE, Inc. The remediation of each of these deficiencies included
ensuring the appropriate level of oversight and review by individuals with the
sufficient knowledge who are independent of the process of preparing the initial
accounting entries.
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, 2007, 2006 and 2005 are set forth in the following
chart. The 2007 amounts are our consolidated results, the 2006
amounts are our consolidated results plus FutureFuel Chemical Company’s results
for the ten-month period ended October 31, 2006, and the 2005 amounts are
FutureFuel Chemical Company’s results. The combined results for 2006
are being presented for comparative purposes only.
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 21,554 | $ | (3,960 | ) | $ | 7,556 | |||||
|
Net
cash provided by (used in) investing activities
|
$ | (29,978 | ) | $ | (91,168 | ) | $ | (6,594 | ) | |||
|
Net
cash provided by (used in) financing activities
|
$ | (50 | ) | $ | 158,229 | $ | (962 | ) | ||||
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 (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 results 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,
52
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).)
Cash
provided by (used in) operating activities decreased from $7,556,000 in 2005 to
$(3,960,000) in 2006, a decrease of $11,516,000. This decrease
primarily results from an increase in FutureFuel Chemical Company’s accounts
receivable balance of $12,489,000. This increase in accounts
receivable resulted from a combination of three factors. First,
Eastman Chemical Company collected a significant amount of payments on behalf of
FutureFuel Chemical Company but had not yet transferred the funds to FutureFuel
Chemical Company as of December 31, 2006. (See note 16 to
our consolidated financial statements.) Second, accounts receivable
related to CPOs and DIPBs increased as a result of the new supply agreements and
pricing mechanisms in place following the acquisition of FutureFuel Chemical
Company. Lastly, FutureFuel Chemical Company recorded a receivable of
$2,891,000 from Eastman Chemical Company at December 31, 2006 related to
certain agreed-to purchase price adjustments stemming from the acquisition of
FutureFuel Chemical Company. FutureFuel Chemical Company also
experienced a $5,790,000 increase in its inventory balance in 2006 as compared
to 2005. This increase was largely offset by a $5,164,000 increase in
accounts payable.
Investing
Activities:
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 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 in 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.
Cash
provided by (used in) investing activities decreased $84,574,000, from
$(6,594,000) in 2005 to $(91,168,000) in 2006. $72,645,000 of this
decrease was attributable to cash paid for the acquisition of Eastman SE,
Inc. The majority of the remaining balance was primarily driven by
FutureFuel Chemical Company’s expansion of its biodiesel related infrastructure
in November and December of 2006. The years 2005 and 2004 had no such
activity. The infrastructure expansion projects include: (i) the
addition of methanol recovery and biodiesel feedstock pretreatment capabilities
to the plant; (ii) the construction of additional storage at the plant to
support increased movements of feedstocks, methanol, glycerin and biodiesel to
expand FutureFuel Chemical Company’s biodiesel blending capabilities;
(iii) the expansion of on-site rail siding and railcar loading and
unloading facilities to accommodate the increased number of rail cars expected
at the plant; and (iv) acquiring a fleet of tanker trucks to transport the
biofuels and feedstocks between the plant and offsite storage
facilities. These projects are substantially completed or are
scheduled to be completed in 2008 as set forth above. Additionally,
FutureFuel Chemical Company was required to fund a trust fund reserved for
purposes of meeting certain Arkansas Department of Environmental Quality
requirements that become applicable in the event of a closure of the
plant. The amount of cash reserved for this purpose is based on a
formula derived by the state of Arkansas and totaled $3,127,000 at
December 31, 2006. No cash was restricted in periods prior to
December 31, 2006. Lastly, we implemented a hedging program
utilizing various derivative instruments such as regulated futures and regulated
options as economic hedges to reduce the effects of fluctuations in the prices
of biodiesel. We are required to maintain a margin account with a
broker to collateralize these derivative instruments. $3,578,000 of
cash was used in 2006 to collateralize our derivative instruments.
Financing
Activities:
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).
53
Cash
provided by (used in) financing activities increased from $(962,000) in 2005 to
$158,229,000 in 2006, an increase of $159,191,000. This increase
resulted primarily from our equity offering in July 2006 less various related
offering costs.
Capital
Expenditure Commitments
As
previously disclosed in Item 1. Business - General Development of the Business
above, FutureFuel Chemical Company is pursuing seven core infrastructure
projects that are expected to bring efficiency, operational flexibility and cost
savings to existing biodiesel and chemical business lines. These
infrastructure projects are: (i) adding methanol recovery and biodiesel
feedstock pretreatment capabilities; (ii) constructing additional storage;
(iii) expanding on-site rail siding and railcar loading and unloading
capabilities; (iv) obtaining storage/thruput in strategic markets;
(v) acquiring a fleet of tanker trucks; (vi) procuring railcars; and
(vii) expanding biodiesel production capacity. Projects (iv) and
(vi) do not require any capital expenditures but instead affect cash flow
through ongoing lease commitments. These lease commitments are
included in footnote 18 of our annual consolidated financial statements
presented herein. The remaining projects require significant capital
expenditures that, to the extent not already complete, are scheduled to be
completed by the end of the second quarter of 2008, with the exception of the
methanol recovery project, which is scheduled to be completed by the end of
2008. We estimate the total capital cost of these infrastructure
projects from November 1, 2006 through the date of completion will be
approximately $14 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, 2007.
(Dollars
in thousands)
|
General
Purpose of the Commitment
|
December 31,
2007
|
|||
|
Construction
of storage at the Batesville facility
|
$ | 92 | ||
|
Improvements
to materials handling capabilities at the Batesville
facility
|
589 | |||
|
Implementation
of an enterprise resource planning system
|
- | |||
|
Biodiesel
capacity expansion
|
154 | |||
|
Health,
safety and environment, maintenance and selected specialty chemical
expansion projects
|
1,906 | |||
|
Total
|
$ | 2,741 | ||
FutureFuel
Chemical Company has historically financed capital requirements for its business
with cash flows from operations and has not had the need to incur bank
indebtedness to finance any of its chemical operations during the historical
periods discussed herein. As noted above, 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.
FutureFuel
Chemical Company entered into a $50 million credit agreement with Regions
Bank in March 2007. The loan is a revolving facility the proceeds of
which may be used for working capital, capital expenditures and general
corporate purposes of FutureFuel Chemical Company. The facility
terminates in March 2010. Advances are made pursuant to a borrowing
base comprised of 85% of eligible accounts plus 60% of eligible direct inventory
plus 50% of eligible indirect inventory. Advances are secured by a
perfected first priority security interest in accounts receivable and
inventory. The interest rate floats at the following margins over
LIBOR or base rate based upon the leverage ratio from time to time.
54
|
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 have guaranteed FutureFuel Chemical Company’s
obligations under this credit agreement.
The
remaining proceeds of our July 2006 offering after consummation of our
acquisition of FutureFuel Chemical Company and repurchase of shares from
shareholders who exercised their repurchase rights described herein were
approximately $85 million. 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.
Off-Balance
Sheet Arrangements
Our only
off-balance sheet arrangements are: (i) the financial assurance trusts
established for the benefit of the Arkansas Department of Environmental Quality;
and (ii) hedging transactions. The financial assurance trusts
aggregated $3,263,000 at December 31, 2007 and were established to provide
assurances to the Arkansas Department of Environmental Quality that, in the
event the Batesville facility is closed permanently, any reclamation activities
necessitated under applicable environmental laws will be
completed. Such financial assurance trusts are not reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors. The amounts held in trust are included in restricted cash
and cash equivalents on our balance sheet. The closure liabilities
are included in other noncurrent liabilities, but only on a present value
basis.
We engage
in two types of hedging transactions. First, we hedge our biodiesel
sales through the purchase and sale of futures contracts and options on futures
contracts of energy commodities. Such futures contracts and options
on contracts of energy commodities are detailed in note 5 to our annual
consolidated financial statements included elsewhere herein. This
activity was captured on our balance sheet at December 31, 2007 and at
December 31, 2006. Second, we hedge our biodiesel feedstocks
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, 2007 or 2006 as they
do not meet the definition of a derivative instrument as defined under
accounting principles generally accepted in the U.S. The purchase of
biodiesel feedstocks generally involves two components: basis and
price. Basis covers any refining or processing required as well as
transportation. Price covers the purchases of the actual agricultural
commodity. Both basis and price fluctuate over time. A
supply agreement with a vendor constitutes a hedge when FutureFuel Chemical
Company has committed to a certain volume of feedstock in a future period and
has fixed the basis for that volume.
Contractual
Obligations
The
following table sets forth as of December 31, 2007 the payments due by
period for the following contractual obligations of us and FutureFuel Chemical
Company.
55
(Dollars
in thousands)
|
Contractual
Obligations
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
Years
|
|||||||||||||||
|
Long-term
debt obligations
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Capital
lease obligations
|
- | - | - | - | - | |||||||||||||||
|
Operating
lease obligations
|
3,665 | 724 | 901 | 724 | 1,316 | |||||||||||||||
|
Purchase
obligations(a)
|
3,191 | 3,041 | 150 | - | - | |||||||||||||||
|
Other
long-term liabilities
|
- | - | - | - | - | |||||||||||||||
|
Total
|
$ | 6,856 | $ | 3,765 | $ | 1,051 | $ | 724 | $ | 1,316 | ||||||||||
__________
|
(a)
|
Purchase
obligations within less than one year include: (i) $2,741 for capital
expenditure commitments related to the construction of additional storage
capacity, material handling infrastructure, biodiesel capacity expansion
and health, safety and environment, maintenance and chemical expansion
projects; and (ii) $300 for information technology maintenance and
software license commitments. Purchase obligations beyond one
year include $150 for information technology maintenance and software
license commitments.
|
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 $559,000 as of December 31, 2007.
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
12 to our consolidated financial statements included elsewhere herein.
As of
December 31, 2007, FutureFuel Chemical Company had no borrowings under the
$50 million credit agreement with Regions Bank described
above.
56
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
In recent
years, general economic inflation has not had a material adverse impact on
FutureFuel Chemical Company’s costs and, as described elsewhere herein, we have
passed some price increases along to our customers. However, 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 (acetic anhydride, electricity,
coal, natural gas, 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 2007 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, 2006 and 2007, the fair values of our
derivative instruments were a net liability in the amount of $447,000 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 soybean oil, acetic anhydride, electricity,
animal fat and coal. 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
2007. We included only those raw materials and conversion costs for
which a hypothetical adverse change in price would result in a 2% 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:
(Volumes
and dollars in thousands)
|
Item
|
Volume(a)
Requirements
|
Units
|
Hypothetical
Adverse
Change
in
Price
|
Decrease
in
Gross
Profit
|
Percentage
Decrease
in
Gross
Profit
|
|
Soybean
oil
|
56,060 |
LB
|
10.0 | % | $ | 1,618 | 9.4 | % | |||||||||
|
Acetic
anhydride
|
14,736 |
LB
|
10.0 | % | $ | 1,067 | 6.2 | % | |||||||||
|
Electricity
|
10 |
MWH
|
10.0 | % | $ | 504 | 2.9 | % | |||||||||
|
Animal
fat
|
23,294 |
LB
|
10.0 | % | $ | 468 | 2.7 | % | |||||||||
|
Coal
|
49 |
Ton
|
10.0 | % | $ | 386 | 2.2 | % |
__________
57
|
(a)
|
Volume
requirements and average price information are based upon volumes used and
prices obtained for the twelve months ended December 31,
2007. Volume requirements may differ materially from these
quantities in future years as the business of FutureFuel Chemical Company
evolves.
|
As of
December 31, 2007, we had no borrowings and, as such, were not exposed to
interest rate risk. Due to the relative insignificance of
transactions denominated in a foreign currency, we consider our foreign currency
risk to be immaterial.
58
Item
8. Financial Statements and Supplementary Data.
The
following sets forth our consolidated balance sheets as at December 31,
2007 and 2006 and our consolidated statements of operations, statements of cash
flows and statements of stockholders’ equity for the years ended
December 31, 2007, 2006 and 2005, 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 as of December 31, 2007, and the related consolidated statements
of operations, changes in stockholders’ equity and cash flows for the year 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. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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, 2007, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/
RubinBrown LLP
St.
Louis, Missouri
March 31,
2008
59
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 (the Company) as of December 31, 2006, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for each of
the years ended December 31, 2006 and 2005. 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 audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of FutureFuel Corp. and
subsidiary as of December 31, 2006, and the results of their
operations and their cash flows for each of the years ended
December 31, 2006 and 2005; in conformity with U.S. generally accepted
accounting principles.
As
described in Note 21 to the consolidated financial statements, the Company
restated the accompanying consolidated financial statements as of
December 31, 2006 and for each of the years ended December 31, 2006
and 2005.
/s/ KPMG
LLP
St.
Louis, Missouri
April 23,
2007, except as to Note 21,
which is
dated as of December 27, 2007
60
FutureFuel
Corp.
Consolidated
Balance Sheets
As
of December 31, 2007 and 2006
(Dollars
in thousands)
|
2007
|
2006
|
|||||||
|
Assets
|
||||||||
|
Cash and cash
equivalents
|
$ | 54,655 | $ | 63,129 | ||||
|
Accounts
receivable, net of allowances of $42 and $42, respectively
|
17,514 | 23,903 | ||||||
|
Inventory
|
24,192 | 22,582 | ||||||
|
Prepaid expenses
|
1,200 | 1,248 | ||||||
|
Marketable debt
securities
|
15,086 | - | ||||||
|
Other current
assets
|
541 | 3,131 | ||||||
|
Total current
assets
|
113,188 | 113,993 | ||||||
|
Property, plant and equipment,
net
|
95,036 | 82,626 | ||||||
|
Restricted cash and cash
equivalents
|
3,263 | 3,127 | ||||||
|
Intangible assets
|
435 | 548 | ||||||
|
Other assets
|
4,191 | 2,765 | ||||||
|
Total noncurrent
assets
|
102,925 | 89,066 | ||||||
|
Total
Assets
|
$ | 216,113 | $ | 203,059 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Accounts payable
|
$ | 12,622 | $ | 12,945 | ||||
|
Accounts payable - related
parties
|
121 | 112 | ||||||
|
Income taxes
payable
|
1,231 | 1,916 | ||||||
|
Short term contingent
consideration
|
197 | 191 | ||||||
|
Current deferred income tax
liability
|
4,597 | 4,242 | ||||||
|
Accrued expenses and other
current liabilities
|
3,370 | 1,717 | ||||||
|
Accrued expenses and other
current liabilities - related parties
|
- | 40 | ||||||
|
Total current
liabilities
|
22,138 | 21,163 | ||||||
|
Long term contingent
consideration
|
1,989 | 2,168 | ||||||
|
Deferred revenue
|
1,571 | - | ||||||
|
Other noncurrent
liabilities
|
1,126 | 914 | ||||||
|
Noncurrent deferred income
taxes
|
19,667 | 17,658 | ||||||
|
Total noncurrent
liabilities
|
24,353 | 20,740 | ||||||
|
Total
Liabilities
|
46,491 | 41,903 | ||||||
|
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, 26,700,000 issued
and outstanding
|
3 | 3 | ||||||
|
Accumulated other comprehensive
income
|
58 | - | ||||||
|
Additional paid in
capital
|
158,436 | 158,436 | ||||||
|
Retained earnings
|
11,125 | 2,717 | ||||||
|
Total stockholders’
equity
|
169,622 | 161,156 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 216,113 | $ | 203,059 | ||||
The
accompanying notes are an integral part of these financial
statements.
61
FutureFuel
Corp.
Consolidated
Statements of Operations
for
the Years Ended December 31, 2007, 2006 and 2005
(Dollars
in thousands, except per share amounts)
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
$ | 169,732 | $ | 23,043 | $ | - | ||||||
|
Revenues
– related parties
|
56 | - | - | |||||||||
|
Cost
of goods sold
|
149,181 | 19,966 | - | |||||||||
|
Cost
of goods sold – related parties
|
1,529 | - | - | |||||||||
|
Distribution
|
1,845 | 133 | - | |||||||||
|
Gross profit
|
17,233 | 2,944 | - | |||||||||
|
Selling,
general and administrative expenses
|
||||||||||||
|
Compensation
expense
|
2,502 | 328 | - | |||||||||
|
Formation expense and canceled
offering costs
|
117 | 427 | 1 | |||||||||
|
Other expense
|
1,353 | 400 | - | |||||||||
|
Related party
expense
|
172 | 104 | - | |||||||||
|
Research
and development expenses
|
3,434 | 923 | - | |||||||||
| 7,578 | 2,182 | 1 | ||||||||||
|
Income
(loss) from operations
|
9,655 | 762 | (1 | ) | ||||||||
|
Interest
income
|
3,567 | 3,365 | 1 | |||||||||
|
Interest
expense
|
(24 | ) | (37 | ) | - | |||||||
|
Gain
on foreign currency
|
16 | - | - | |||||||||
|
Other
expense
|
(23 | ) | - | - | ||||||||
| 3,536 | 3,328 | 1 | ||||||||||
|
Income
before income taxes
|
13,191 | 4,090 | - | |||||||||
|
Provision
for income taxes
|
4,783 | 1,373 | - | |||||||||
|
Net income
|
$ | 8,408 | $ | 2,717 | $ | - | ||||||
|
Earnings
per common share
|
||||||||||||
|
Basic
|
$ | 0.31 | $ | 0.10 | $ | - | ||||||
|
Diluted
|
$ | 0.26 | $ | 0.09 | $ | - | ||||||
|
Weighted
average shares outstanding
|
||||||||||||
|
Basic
|
26,700,000 | 26,700,000 | 5,625,000 | |||||||||
|
Diluted
|
32,286,996 | 31,818,772 | 5,625,000 | |||||||||
The
accompanying notes are an integral part of these financial
statements.
62
FutureFuel
Corp.
Consolidated
Statements of Cash Flows
for
the Years Ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows provided by (used in) operating activities
|
||||||||||||
|
Net income
|
$ | 8,408 | $ | 2,717 | $ | - | ||||||
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||
|
Depreciation and
amortization
|
4,712 | 630 | - | |||||||||
|
Provision
(benefit) for deferred income taxes
|
2,330 | (956 | ) | - | ||||||||
|
Change
in fair value of derivative instruments
|
(199 | ) | 447 | - | ||||||||
|
Accretion
of the discount of marketable debt securities
|
(127 | ) | - | - | ||||||||
|
Losses on disposals of fixed
assets
|
64 | - | - | |||||||||
|
Noncash interest
expense
|
21 | 37 | - | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
6,389 | (20,434 | ) | - | ||||||||
|
Inventory
|
(977 | ) | (1,256 | ) | - | |||||||
|
Prepaid expenses
|
48 | (1,240 | ) | - | ||||||||
|
Accrued
interest on marketable debt securities
|
(64 | ) | - | - | ||||||||
|
Other assets
|
(1,426 | ) | 653 | - | ||||||||
|
Accounts payable
|
(323 | ) | 2,724 | 10 | ||||||||
|
Accounts payable - related
parties
|
9 | 112 | - | |||||||||
|
Income taxes
payable
|
(685 | ) | 1,916 | - | ||||||||
|
Accrued
expenses and other current liabilities
|
1,653 | 1,747 | - | |||||||||
|
Accrued
expenses and other current liabilities - related parties
|
(40 | ) | 40 | - | ||||||||
|
Deferred revenue
|
1,571 | - | - | |||||||||
|
Other noncurrent
liabilities
|
191 | 369 | - | |||||||||
|
Net
cash provided by (used in) operating activities
|
21,554 | (12,494 | ) | 10 | ||||||||
|
Cash
flows used in investing activities
|
||||||||||||
|
Restricted cash
|
(136 | ) | (3,127 | ) | - | |||||||
|
Collateralization of derivative
instruments
|
2,789 | (3,578 | ) | - | ||||||||
|
Purchase of marketable
securities
|
(14,803 | ) | - | - | ||||||||
|
Proceeds from the sale of fixed
assets
|
55 | - | - | |||||||||
|
Acquisition of the stock of
Eastman SE, Inc.
|
- | (72,634 | ) | - | ||||||||
|
Contingent purchase price
payment
|
(173 | ) | (11 | ) | - | |||||||
|
Capital
expenditures
|
(17,710 | ) | (3,269 | ) | - | |||||||
|
Net
cash used in investing activities
|
(29,978 | ) | (82,619 | ) | - | |||||||
63
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows provided by (used in) financing activities
|
||||||||||||
|
Equity offering
expenditures
|
- | - | (207 | ) | ||||||||
|
Proceeds
from long-term debt - related parties
|
- | 500 | 200 | |||||||||
|
Repayment
of long-term debt - related parties
|
- | (700 | ) | - | ||||||||
|
Proceeds from the issuance of
stock
|
- | 169,382 | 25 | |||||||||
|
Stock redemption
|
- | (10,968 | ) | - | ||||||||
|
Bank financing
fee
|
(50 | ) | - | - | ||||||||
|
Net
cash provided by (used in) financing activities
|
(50 | ) | 158,214 | 18 | ||||||||
|
Net
change in cash and cash equivalents
|
(8,474 | ) | 63,101 | 28 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
63,129 | 28 | - | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 54,655 | $ | 63,129 | $ | 28 | ||||||
| Cash paid for interest | $ | 3 | $ | - | $ | - | ||||||
| Cash paid for income taxes | $ | 2,992 | $ | - | $ | - |
The
accompanying notes are an integral part of these financial
statements.
64
FutureFuel
Corp.
Consolidated
Statements of Changes in Stockholders’ Equity
For
the years ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
Common
Stock
|
Other
Comprehensive
|
Additional
Paid-In
|
Retained
|
Total
Stockholders’
|
||||||||||||||||||||
|
Shares
|
Amount
|
Income
|
Capital
|
Earnings
|
Equity
|
|||||||||||||||||||
|
Balance
- August 12, 2005 (Inception)
|
- | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
|
Common
shares issued
|
5,000,000 | 1 | - | 24 | - | 25 | ||||||||||||||||||
|
Net
income
|
- | - | - | - | - | - | ||||||||||||||||||
|
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 | |||||||||||||
Consolidated
Statements of Comprehensive Income
For
the years ended December 31, 2007, 2006 and 2005
|
Comprehensive income
|
2007
|
2006
|
2005
|
|||||||||
|
Net
income
|
$ | 8,408 | $ | 2,717 | $ | - | ||||||
|
Other
comprehensive income, net of tax ($34 in 2007)
|
58 | - | - | |||||||||
|
Comprehensive
income
|
$ | 8,466 | $ | 2,717 | $ | - | ||||||
The
accompanying notes are an integral part of these financial
statements.
65
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 12).
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,
bioethanol and lignin/biomass solid fuels) and biobased specialty chemical
products (biobased solvents, chemicals and intermediates). In
addition to biobased products, the Batesville Plant continues to manufacture
fine chemicals and other organic chemicals.
Certain
prior year balances have been reclassified to conform to the current year
presentation.
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.
66
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
Accounts
receivable, allowance for doubtful accounts and credit risk
Accounts
receivable are recorded at the invoiced amount and do not bear
interest. FutureFuel has established procedures to monitor credit
risk and has not experienced significant credit losses in prior
years. Accounts receivable have been reduced by an allowance for
amounts that may be uncollectible in the future. This estimated
allowance is based upon management’s evaluation of the collectibility of
individual invoices and is based upon management’s evaluation of the financial
condition of its customers and historical bad debt
experience. Write-offs are recorded at the time a customer receivable
is deemed uncollectible.
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 June 2008. Sales of the bleach activator totaled
$82,500 for the year ended December 31, 2007. 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 $25,177 for the year ended December 31,
2007. These two customers represented 51% of FutureFuel’s accounts
receivable balance at December 31, 2007.
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:
67
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
|
Buildings
and building equipment
|
20
– 39 years
|
|
Machinery
and equipment
|
3 –
33 years
|
|
Transportation
equipment
|
5 –
33 years
|
|
Other
|
5 –
33 years
|
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 amount of cash reserved for this purpose is based on a
formula derived by the state of Arkansas and totaled $3,263 at December 31,
2007 and $3,127 at December 31, 2006.
Impairment
of assets
FutureFuel
evaluates the carrying value of long-lived assets when events or changes in
circumstances indicate that the carrying value may not be
recoverable. Such events and circumstances include, but are not
limited to, significant decreases in the market value of the asset, adverse
changes in the extent or manner in which the asset is being used, significant
changes in business climate, or current or projected cash flow losses associated
with the use of the assets. The carrying value of a long-lived asset
is considered impaired when the total projected undiscounted cash flows from
such assets are separately identifiable and are less than its carrying
value. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the long-lived
asset. For long-lived assets to be held for use in future operations
and for fixed (tangible) assets, fair value is determined primarily using either
the projected cash flows discounted at a rate commensurate with the risk
involved or appraisal. For long-lived assets to be disposed of by
sale or other than sale, fair value is determined in a similar manner, except
that fair values are reduced for disposal costs.
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 is funded by the customer but with title and risk of loss to the
equipment residing with FutureFuel. Reimbursements are being
recognized as deferred revenue and will be amortized over the life of the
contract as product is shipped. Production is expected to begin in
the third 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 incinerators,
landfills, storage tanks and boilers. When these types of assets are
constructed or installed, a reserve is established for the future costs
anticipated to be associated with the closure of the site based on an expected
life of the environmental assets, the applicable regulatory closure requirements
and FutureFuel’s environmental policies and practices. These expenses
are charged into earnings over the estimated useful life of the
assets. Currently, FutureFuel estimates the useful life of each
individual asset up to 35 years. Changes made in estimates of the
asset retirement obligation costs or the estimate of the useful lives of these
assets are reflected in earnings as an increase or decrease in the period such
changes are made.
68
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
Environmental
costs are capitalized if they extend the life of the related property, increase
its capacity and/or mitigate or prevent future contamination. The
cost of operating and maintaining environmental control facilities is charged to
expense.
Deferred
income taxes
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 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.
Bill and
hold transactions for 2007 related to two 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. Both
customers’ credit and payment terms are similar to other specialty chemical
customers. Sales revenue under bill and hold arrangements were
$33,494, $3,858, and $0 for the years ended December 31, 2007, 2006 and
2005, 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 (and one-half cent for each percentage point of recycled oils and
other non-agricultural biodiesel). 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.
69
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
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 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 years ended
December 31, 2006 and 2005 have been calculated assuming that all shares
outstanding at December 31, 2007 were outstanding for all periods
presented. The dilutive impact of the warrants, as described in
Note 14, was calculated based upon the trading activity of FutureFuel’s
common stock from July 13, 2006 to December 31, 2007.
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, 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 or 2005.
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
70
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
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
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, bioethanol and lignin/biomass solid fuels) 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. Contingent
purchase price payments to Eastman Chemical based on volumes of biodiesel sold
totaled $11 through December 31, 2006 and $183 through December 31,
2007. 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 preliminary 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.
71
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
The
following unaudited pro forma consolidated results of operations assume that the
acquisition of Eastman SE was completed as of January 1:
|
2006
|
2005
|
|||||||
|
Revenues
|
$ | 150,770 | $ |
119,539
|
||||
|
Net
income
|
$ | 5,142 | $ |
3,769
|
||||
|
Basic
earnings per share
|
$ | 0.19 | $ |
0.14
|
||||
|
Diluted
earnings per share
|
$ | 0.16 | $ |
0.12
|
||||
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:
|
2007
|
2006
|
|||||||
|
At
first-in, first-out or average cost (approximates current
cost)
|
||||||||
|
Finished goods
|
$ | 8,993 | $ | 7,943 | ||||
|
Work in process
|
1,091 | 1,750 | ||||||
|
Raw materials and
supplies
|
15,670 | 12,894 | ||||||
| 25,754 | 22,587 | |||||||
|
LIFO reserve
|
(1,562 | ) | (5 | ) | ||||
|
Total inventories
|
$ | 24,192 | $ | 22,582 | ||||
5) Derivative
instruments
The
volumes and carrying values of FutureFuel’s derivative instruments were as
follows at December 31:
|
Asset/(Liability)
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Quantity
(000 bbls) Long/ (Short)
|
Fair
Market Value
|
Quantity
(000 bbls) Long/ (Short)
|
Fair
Market Value
|
|||||||||||||
|
Regulated
fixed price future commitments, included in prepaid expenses and other
current assets
|
- | $ | - | (250 | ) | $ | (28 | ) | ||||||||
|
Regulated
options, included in prepaid expenses and other current
assets
|
(100 | ) | $ | (247 | ) | (100 | ) | $ | (419 | ) | ||||||
The
margin account maintained with a broker to collateralize these derivative
instruments carried an account balance of $789 and $3,578 at December 31,
2007 and 2006, 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 in other current assets and
comprise the entire account balance.
6) Marketable
debt securities
In
September 2007, FutureFuel made an investment in certain U.S. treasury bills and
notes. These marketable debt securities have maturities ranging from
March 2008 to August 2009. FutureFuel anticipates these securities
being sold within one year, regardless of the maturity date, and has therefore
classified all marketable debt securities as current assets in the accompanying
consolidated balance sheet. FutureFuel has 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 component of stockholders’ equity. No realized gains or
losses have been incurred related to these securities through December 31,
2007.
72
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
The fair
market value of these marketable debt securities, including accrued interest,
totaled $15,086 and $0 at December 31, 2007 and December 31, 2006,
respectively.
7) Property,
plant and equipment
Property, plant and equipment consisted
of the following at December 31:
|
2007
|
2006
|
|||||||
|
Land
and land improvements
|
$ | 4,260 | $ | 4,260 | ||||
|
Buildings
and building equipment
|
20,444 | 19,037 | ||||||
|
Machinery
and equipment
|
69,309 | 54,797 | ||||||
|
Construction
in progress
|
6,126 | 5,143 | ||||||
|
Accumulated
depreciation
|
(5,103 | ) | (611 | ) | ||||
|
Total
|
$ | 95,036 | $ | 82,626 | ||||
Depreciation
expense totaled $4,599 for the year ended December 31, 2007 and $611 for
the year ended December 31, 2006.
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:
|
2007
|
2006
|
|||||||
|
Cost
|
$ | 567 | $ | 567 | ||||
|
Accumulated
amortization
|
(132 | ) | (19 | ) | ||||
| $ | 435 | $ | 548 | |||||
Amortization
expense totaled $113 and $19 for the years ended December 31, 2007 and
2006, respectively. FutureFuel estimates that amortization expense
for 2008 to 2010 will be $113 annually and that amortization expense in 2011
will be $94.
9) Other
assets
Other
assets is comprised of spare equipment and parts that have not been placed into
service as of the balance sheet date and are not expected to be placed into
service for the twelve-month period subsequent to the balance sheet
date. The balance related to these items totaled $4,191 and $2,765 at
December 31, 2007 and 2006, 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:
|
2007
|
2006
|
|||||||
|
Accrued
employee liabilities
|
$ | 1,722 | $ | 773 | ||||
|
Accrued
property, use and franchise taxes
|
1,110 | 373 | ||||||
|
Accrued
professional fees
|
30 | 340 | ||||||
|
Amounts
collected on behalf of Eastman Chemical
|
- | 178 | ||||||
|
Other
|
508 | 93 | ||||||
|
Total
|
$ | 3,370 | $ | 1,757 | ||||
FutureFuel
Chemical 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. The facility terminates in March
2010. Advances are made pursuant to a borrowing
base. Advances are secured by a perfected first priority security
interest in
73
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
accounts
receivable and inventory. The interest rate floats at certain margins
over LIBOR or base rate based upon the leverage ratio from time to
time. There is an unused commitment fee. 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.
11) 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 $566 and $545 as of December 31, 2007 and
2006, 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:
|
2007
|
2006
|
|||||||
|
Beginning
balance
|
$ | 545 | $ | - | ||||
|
Batesville
Plant acquisition opening balance
|
- | 508 | ||||||
|
Accretion
expense
|
21 | 37 | ||||||
|
Balance
at December 31
|
$ | 566 | $ | 545 | ||||
12) Deferred
taxes
The
following table summarizes the provision for income taxes:
|
2007
|
2006
|
|||||||
|
Income
before taxes - U.S.
|
$ | 13,191 | $ | 4,090 | ||||
|
Provision/(benefit)
for income taxes:
|
||||||||
|
Current
|
$ | 2,080 | $ | 1,818 | ||||
|
Deferred
|
2,201 | (687 | ) | |||||
|
State
and other
|
||||||||
|
Current
|
228 | 466 | ||||||
|
Deferred
|
274 | (224 | ) | |||||
|
Total
|
$ | 4,783 | $ | 1,373 | ||||
Differences
between the provision for income taxes computed using the U.S. federal statutory
income tax rate were as follows:
|
2007
|
2006
|
|||||||
|
Amount
computed using the statutory rate of 34%
|
$ | 4,485 | $ | 1,390 | ||||
|
Section
199 manufacturing deduction
|
(183 | ) | (33 | ) | ||||
|
Agri-biodiesel
production credit
|
(564 | ) | (78 | ) | ||||
|
Credit
for increasing research activities
|
(69 | ) | - | |||||
|
Change
in the valuation allowance
|
472 | - | ||||||
|
State
income taxes, net
|
601 | 94 | ||||||
|
Other
|
41 | - | ||||||
|
Provision
for income taxes
|
$ | 4,783 | $ | 1,373 | ||||
74
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
The
significant components of deferred tax assets and liabilities were as follows as
of December 31:
|
2007
|
2006
|
|||||||
|
Deferred
tax assets
|
||||||||
|
Vacation
pay
|
$ | 115 | $ | 52 | ||||
|
Allowance
for doubtful accounts
|
16 | 16 | ||||||
|
Agri-biodiesel
production credit
|
190 | - | ||||||
|
Inventory
reserves
|
219 | 175 | ||||||
|
Self
insurance
|
123 | - | ||||||
|
Asset
retirement obligation
|
222 | 214 | ||||||
|
Directors
and officers fees
|
122 | - | ||||||
|
Derivative
instruments
|
444 | - | ||||||
|
Total
deferred tax assets
|
1,451 | 457 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Derivative
instruments
|
- | (45 | ) | |||||
|
Available
for sale securities
|
(34 | ) | - | |||||
|
Accrued
expenses
|
(18 | ) | - | |||||
|
LIFO
inventory
|
(4,684 | ) | (4,312 | ) | ||||
|
Intangible
assets
|
(170 | ) | (215 | ) | ||||
|
Insurance
proceeds
|
(275 | ) | - | |||||
|
Depreciation
|
(20,062 | ) | (17,829 | ) | ||||
|
Total
deferred tax liabilities
|
(25,243 | ) | (22,401 | ) | ||||
|
Valuation
allowance
|
(472 | ) | - | |||||
|
Net
deferred tax liabilities
|
$ | (24,264 | ) | $ | (21,944 | ) | ||
|
As
recorded in the consolidated balance sheet
|
||||||||
|
Current
deferred income tax liability
|
$ | (4,597 | ) | $ | (4,242 | ) | ||
|
Accrued
expenses and other current liabilities
|
- | (44 | ) | |||||
|
Noncurrent
deferred income tax liability
|
(19,667 | ) | (17,658 | ) | ||||
|
Net
deferred income tax liabilities
|
$ | (24,264 | ) | $ | (21,944 | ) | ||
As
discussed in Note 1, FutureFuel adopted the provisions of FIN 48 on
January 1, 2007. FutureFuel did not recognize a significant
change in liability for uncertain tax positions as a result of its
implementation of FIN 48. FutureFuel's unrecognized tax benefits, recorded
as an element of other noncurrent liabilities, totaled $559 at December 31,
2007, the total amount of which, if recognized, would reduce FutureFuel's
effective tax rate.
We do not
expect our unrecognized tax benefits to change significantly over the next 12
months.
FutureFuel records interest and penalties net as a component of
income tax expense. As of December 31, 2007, FutureFuel had no accrual for
interest or tax penalties.
FutureFuel and its subsidiary, FutureFuel Chemical, files tax
returns in the U.S. federal jurisdiction and with various state jurisdictions.
FutureFuel was incorporated in 2005 and is subject to examination by U.S., state
and local tax authorities from 2005 forward. FutureFuel Chemical is subject to
the effects of tax examination that may impact the carryover basis of its assets
and liabilities.
75
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
13) 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 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.
76
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
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.
Viceroy
has also agreed to use reasonable commercial efforts to maintain its listing on
the AIM for at least two years.
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.
14) Earnings
per share
The
computation of basic and diluted earnings per common share was as
follows:
77
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income available to common stockholders
|
$ | 8,408 | $ | 2,717 | $ | - | ||||||
|
Weighted
average number of common shares outstanding
|
26,700,000 | 26,700,000 | 5,625,000 | |||||||||
|
Effect
of warrants
|
5,586,996 | 5,118,772 | - | |||||||||
|
Weighted
average diluted number of common shares outstanding
|
32,286,996 | 31,818,772 | 5,625,000 | |||||||||
|
Basic
earnings per share
|
$ | 0.31 | $ | 0.10 | $ | - | ||||||
|
Diluted
earnings per share
|
$ | 0.26 | $ | 0.09 | $ | - | ||||||
15) 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. Plan related expenses totaled $1,552
and $120 for the years ended December 31, 2007 and 2006,
respectively. No expense related to this plan was incurred from
August 12, 2005 (Inception) to October 31, 2006.
16) Related
party transactions
FutureFuel
enters into transactions with companies affiliated with or controlled by a
director and significant shareholder.
FutureFuel
leases oil storage capacity from an affiliate under a storage and thruput
agreement. This agreement provides for the storage of biodiesel,
biodiesel/petrodiesel blends, palm oil, methanol and other biodiesel feedstocks
in above-ground storage tankage at designated facilities of the
affiliate. Lease expense related to this agreement totaled $126 and
$9 for the years ended December 31, 2007 and 2006, respectively, and $0 for
the period from August 12, 2005 (Inception) to December 31,
2005.
FutureFuel
entered into a commodity trading advisor agreement with an
affiliate. Pursuant to the terms of this agreement the affiliate
provides advice to FutureFuel concerning the purchase, sale, exchange,
conversion and/or hedging of commodities as FutureFuel may request from time to
time. Expenditures related to this agreement totaled $127 and $20 in
the years ended December 31, 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,
2007 but no railcars had been received in 2006 under this
agreement. Expenditures incurred under this agreement were $72 and
$0, respectively, and $0 for the period from August 12, 2005 (Inception) to
December 31, 2005.
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 $78 and $123 in 2007 and 2006, respectively, and $0 for
the period from August 12, 2005 (Inception) to December 31,
2005.
At
December 31, 2005, FutureFuel had unsecured promissory notes payable to
shareholders (one of these shareholders was an officer and director of
FutureFuel and the other was affiliated with one) of $200 in
aggregate. The loans were non-interest bearing and were payable upon
the consummation of a Business Combination. Due to the short-term
nature of the notes, the fair value of the notes approximated their
78
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
carrying
value. These notes were repaid in November 2006 in connection with
the consummation of the acquisition of Eastman SE.
Accounts
payable included $121 and $112 and accrued expenses and other current
liabilities included $0 and $40 due to related parties at December 31, 2007
and 2006, respectively.
As new
payment instructions were adopted by FutureFuel Chemical’s customers subsequent
to its acquisition by FutureFuel, Eastman Chemical collected trade accounts
receivable on FutureFuel Chemical’s behalf. These collections were
subsequently remitted to FutureFuel Chemical. At December 31,
2006, Eastman Chemical had collected $3,046 of trade accounts receivable on
FutureFuel Chemical’s behalf. No amounts were outstanding at
December 31, 2007.
17) 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 are generally derived in
one of two ways. Revenues are generated under tolling agreements
whereby customers supply key biodiesel feed stocks which FutureFuel then
converts into biodiesel at the Batesville Plant in exchange for a fixed price
processing charge per gallon of biodiesel produced. Revenues are also
generated through the sale of biodiesel to customers through FutureFuel’s
distribution network at the Batesville Plant and through distribution facilities
available at a leased oil storage facility near Little Rock, Arkansas at
negotiated prices.
Summary
of long-lived assets and revenues by geographic area
All of
FutureFuel’s long-lived assets are located in the U.S.
Most of
FutureFuel’s sales are transacted with title passing at the time of shipment
from the Batesville Plant, although some sales are transacted based on title
passing at the delivery point. While many of FutureFuel’s chemicals
are utilized to manufacture products that are shipped, further processed and/or
consumed throughout the world, the chemical products, with limited exceptions,
generally leave the United States only after ownership has transferred from
FutureFuel to the customer. Rarely is FutureFuel the exporter of
record, never is FutureFuel the importer of record into foreign countries and
FutureFuel is not always aware of the exact quantities of its products that are
moved into foreign markets by its customers. FutureFuel does track
the addresses of its customers for invoicing purposes and uses this address to
determine whether a particular sale is within or without the United
States. FutureFuel’s revenues for the year ended December 31,
2007 and 2006 attributable to the United States and foreign countries (based
upon the billing addresses of its customers) were as follows:
|
Fiscal
Year
|
United
States
|
All
Foreign Countries
|
Total
|
|||||||||
|
December 31,
2007
|
$ | 141,233 | $ | 28,555 | $ | 169,788 | ||||||
|
December 31,
2006
|
$ | 21,474 | $ | 1,569 | $ | 23,043 | ||||||
|
August 12,
2005 (Inception) to December 31, 2005
|
$ | - | $ | - | $ | - | ||||||
79
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
For the
years ended December 31, 2007 and 2006, revenues from Mexico accounted for
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% of total revenues for the year ended December 31,
2007. Other than Mexico and Canada, revenues from a single foreign
country during 2007 or 2006 did not exceed 3% of total revenues.
Summary
of business by segment
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
||||||||||||
|
Chemicals
|
$ | 144,474 | $ | 21,282 | $ | - | ||||||
|
Biofuels
|
25,314 | 1,761 | - | |||||||||
|
Revenues
|
$ | 169,788 | $ | 23,043 | $ | - | ||||||
|
Segment
gross margins
|
||||||||||||
|
Chemicals
|
$ | 27,107 | $ | 6,054 | $ | - | ||||||
|
Biofuels
|
(9,874 | ) | (3,110 | ) | - | |||||||
|
Segment
gross margins
|
17,233 | 2,944 | - | |||||||||
|
Corporate
expenses
|
(7,578 | ) | (2,182 | ) | (1 | ) | ||||||
|
Income
(loss) before interest and taxes
|
9,655 | 762 | (1 | ) | ||||||||
|
Interest
income
|
3,567 | 3,365 | 1 | |||||||||
|
Interest
and other expense
|
(31 | ) | (37 | ) | - | |||||||
|
Provision
for income taxes
|
(4,783 | ) | (1,373 | ) | - | |||||||
|
Net
income
|
$ | 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.
18) 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, 2007 were as follows:
|
2008
|
724 | |||
|
2009
|
482 | |||
|
2010
|
419 | |||
|
2011
|
393 | |||
|
2012
|
331 | |||
|
Thereafter
|
1,316 | |||
|
Total
|
$ | 3,665 |
Lease
expenses totaled $408 and $9 for the years ended December 31, 2007 and
2006, respectively, and $0 from August 12, 2005 (Inception) to
December 31, 2005.
Purchase
obligations
FutureFuel
has entered into contracts for the purchase of goods and services including
contracts for the expansion of FutureFuel’s biodiesel related infrastructure,
the development, implementation and maintenance of an enterprise resource
planning computer software package and the licensing of a chemical modeling
software product.
80
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
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 2007 and 2006
for this agreement totaled $172 and $11, respectively.
19) Quarterly
financial information (unaudited)
|
Quarter
|
||||||||||||||||
|
1st
|
2nd
|
3rd
|
4th
|
|||||||||||||
|
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 | |||||||
|
2006
|
||||||||||||||||
|
Revenues
|
$ | - | $ | - | $ | - | $ | 23,043 | ||||||||
|
Gross
profit
|
$ | - | $ | - | $ | - | $ | 2,944 | ||||||||
|
Net
income (loss)
|
$ | (188 | ) | $ | 1 | $ | 1,151 | $ | 1,753 | |||||||
|
Net
income (loss) per common share:
|
||||||||||||||||
|
Basic
|
$ | (0.01 | ) | $ | - | $ | 0.04 | $ | 0.07 | |||||||
|
Diluted
|
$ | (0.01 | ) | $ | - | $ | 0.04 | $ | 0.05 | |||||||
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.
20) Recently
issued accounting standards
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which addresses the measurement of fair value by companies when they are
required to use a fair value measure for recognition or disclosure purposes
under GAAP. SFAS No. 157 provides a common definition of fair value
to be used throughout GAAP which is intended to make the measurement of fair
value more consistent and comparable and improve disclosures about those
measures. With the exception of other non-financial assets and
liabilities, SFAS No. 157 will be effective for an entity's financial statements
issued for fiscal years beginning after November 15, 2007. With
respect to other non-financial assets and liabilities, the Financial Accounting
Standards Board has provided a one-year implementation
deferral. FutureFuel is currently evaluating the effect SFAS No. 157
will have on its consolidated financial position, liquidity, and results of
operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115. SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value at specified
election dates. Upon adoption, an entity shall report unrealized
gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. Most of the provisions apply only to entities that elect the
fair value option. However, the amendment to SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with available for
sale and trading securities. SFAS No. 159 will be effective as of the
beginning of an entity's first fiscal year that begins after November 15,
2007. FutureFuel is currently evaluating the effect SFAS No. 159 will
have on its consolidated financial position, liquidity, and results of
operations.
81
Notes
to Consolidated Financial Statements of FutureFuel Corp.
(Dollars
in thousands, except per share amounts)
21) 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.
82
The
following sets forth FutureFuel Chemical Company’s balance sheets as of
December 31, 2005 and 2004, the statements of operations, statements of
cash flows and statements of changes in stockholder’s equity for each of the
years in the two-year period ended December 31, 2005, and the 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 statements of operations, changes in stockholder’s
equity, and cash flows for the ten months ended October 31, 2006 and for
the year ended December 31, 2005 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 audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows for the ten months
ended October 31, 2006 and for the year ended December 31, 2005 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
83
FutureFuel
Chemical Company,
formerly
known as Eastman SE, Inc.
Statements
of Operations
For
the Ten Months Ended October 31, 2006 and the Year Ended December 31,
2005
(Dollars
in thousands)
|
Predecessor
|
||||||||
|
Ten
Months Ended October 31, 2006
|
Year
Ended December 31, 2005
|
|||||||
|
Revenues
|
$ | 111,125 | $ | 104,364 | ||||
|
Revenues
- related parties
|
16,602 | 15,175 | ||||||
|
Cost
of goods sold
|
101,816 | 88,484 | ||||||
|
Cost
of goods sold - related parties
|
16,602 | 15,175 | ||||||
|
Distribution
|
1,158 | 1,604 | ||||||
|
Gross profit
(loss)
|
8,151 | 14,276 | ||||||
|
Selling,
general and administrative expenses
|
5,403 | 7,662 | ||||||
|
Research
and development expenses
|
3,996 | 5,975 | ||||||
| 9,399 | 13,637 | |||||||
|
Income
(loss) from operations
|
(1,248 | ) | 639 | |||||
|
Interest
expense
|
- | (31 | ) | |||||
| - | (31 | ) | ||||||
|
Income
(loss) before income taxes
|
(1,248 | ) | 608 | |||||
|
Provision
(benefit) for income taxes
|
(773 | ) | 227 | |||||
|
Net income (loss)
|
$ | (475 | ) | $ | 381 | |||
The
accompanying notes are an integral part of these financial
statements.
84
FutureFuel
Chemical Company,
formerly
known as Eastman SE, Inc.
Statements
of Cash Flows
For
the Ten Months Ended October 31, 2006 and the Year Ended December 31,
2005
(Dollars
in thousands)
|
Predecessor
|
||||||||
|
Ten
Months Ended October 31, 2006
|
Year
Ended December 31, 2005
|
|||||||
|
Cash
flows provide by operating activities
|
||||||||
|
Net income (loss)
|
$ | (475 | ) | $ | 381 | |||
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||
|
Asset impairment
charges
|
- | - | ||||||
|
Depreciation
|
7,531 | 8,940 | ||||||
|
Provision (benefit) for deferred
income taxes
|
601 | (148 | ) | |||||
|
Noncash
environmental charges (credits) from parent
|
148 | (2,682 | ) | |||||
|
Losses
on disposals of fixed assets
|
95 | 67 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
7,412 | (533 | ) | |||||
|
Inventory
|
(2,413 | ) | 2,121 | |||||
|
Prepaid expenses and other
current assets
|
(38 | ) | - | |||||
|
Other assets
|
(606 | ) | (382 | ) | ||||
|
Accounts payable
|
2,271 | (57 | ) | |||||
|
Accrued
expenses and other current liabilities
|
(5,657 | ) | (129 | ) | ||||
|
Other
noncurrent liabilities
|
(335 | ) | (22 | ) | ||||
|
Net
cash provided by operating activities
|
8,534 | 7,556 | ||||||
|
Cash
flows used in investing activities
|
||||||||
|
Proceeds from the sale of fixed
assets
|
- | 60 | ||||||
|
Capital
expenditures
|
(8,549 | ) | (6,654 | ) | ||||
|
Net
cash used in investing activities
|
(8,549 | ) | (6,594 | ) | ||||
|
Cash
flows provided by (used in) financing activities
|
||||||||
|
Transfers to parent,
net
|
15 | (962 | ) | |||||
|
Net
cash provided by (used in) financing activities
|
15 | (962 | ) | |||||
|
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.
85
FutureFuel
Chemical Company,
formerly
known as Eastman SE, Inc.
Statements
of Changes in Stockholder’s Equity
For
the Ten Months Ended October 31, 2006 and the Year Ended December 31,
2005
(Dollars
in thousands)
|
Predecessor
|
||||||||
|
Net
Investment of Parent
|
Total
Stockholder’s Equity
|
|||||||
|
Balance
- December 31, 2004
|
79,276 | 79,276 | ||||||
|
Net income
|
381 | 381 | ||||||
|
Net transfers to
parent
|
(3,584 | ) | (3,584 | ) | ||||
|
Balance
- December 31, 2005
|
76,073 | 76,073 | ||||||
|
Net income (loss)
|
(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.
86
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,
bioethanol and lignin/biomass solid fuels) and biobased specialty chemical
products (biobased solvents, chemicals and intermediates). In
addition to biobased products, the Batesville Plant continues to manufacture
fine chemicals and other organic chemicals.
Viceroy
Acquisition Corporation
Viceroy
Acquisition Corporation (“Viceroy”) was incorporated under the laws of the state
of Delaware on August 12, 2005 to serve as a vehicle for the acquisition by
way of asset acquisition, merger, capital stock exchange, share purchase or
similar transaction (“Business Combination”) of one or more operating businesses
in the oil and gas industry.
On
July 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:
87
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
|
Ten
Months Ended October 31, 2006
|
Year
Ended December 31, 2005
|
|||||||
|
Cost
of goods sold
|
$ | - | $ | 99 | ||||
|
Distribution
|
438 | 874 | ||||||
|
Selling,
general and administrative
|
4,398 | 5,327 | ||||||
|
Research
and development
|
652 | 2,388 | ||||||
|
Total
cost and expenses allocated
|
$ | 5,488 | $ | 8,688 | ||||
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 and $66,959 for the ten months
ended October 31, 2006 and for the year ended December 31, 2005,
respectively. Additionally, all sales of a herbicide and certain
other intermediates used in the production of this herbicide are made to one
customer. Sales of this herbicide and its intermediates totaled
$21,559 and $25,063 for the ten months ended October 31, 2006 and the year ended
December 31, 2005, respectively.
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.
88
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
89
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,
90
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 and $8,940 for the ten months ended October 31, 2006 and
the year ended December 31, 2005, respectively.
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 (credits) of $148 and
$(2,682) for the ten months ended October 31, 2006 and the year ended
December 31, 2005, respectively, 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
|
Year
Ended December 31, 2005
|
|||||||
|
Income
(loss) before taxes - U.S.
|
$ | (1,248 | ) | $ | 608 | |||
|
Provision/(benefit)
for income taxes:
|
||||||||
|
Current
|
$ | (1,238 | ) | $ | 313 | |||
|
Deferred
|
511 | (132 | ) | |||||
|
State
and other
|
||||||||
|
Current
|
(136 | ) | 62 | |||||
|
Deferred
|
90 | (16 | ) | |||||
|
Total
|
$ | (773 | ) | $ | 227 | |||
91
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
|
Year
Ended December 31, 2005
|
|||||||
|
Amount
computed using the statutory rate of 35%
|
$ | (437 | ) | $ | 213 | |||
|
Section
199 manufacturing deduction
|
- | (10 | ) | |||||
|
Agri-biodiesel
production credit
|
(303 | ) | - | |||||
|
State
income taxes, net
|
(33 | ) | 24 | |||||
|
Provision
for income taxes
|
$ | (773 | ) | $ | 227 | |||
6) Impairments
and severance charges
Impairments
and severance charges totaled approximately $2,462 in the year ended December
31, 2005. These charges consisted of severance charges of
$2,462.
Eastman
SE recognized $2,462 in severance charges in the year ended December 31,
2005 from ongoing cost reduction efforts related to employee separation programs
announced in April 2004.
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 and $4,386 for the year ended
December 31, 2005. 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
92
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
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 and $5,014 for
the year ended December 31, 2005. Sales of Eastman SE products to
Eastman Chemical or affiliates of Eastman Chemical totaled $5,952 for the ten
months ended October 31, 2006 and $2,493 for the year ended December 31,
2005.
Historically,
Eastman SE processed certain products for Eastman Chemical or Eastman Chemical
affiliates for which the ownership of the product had not been transferred to
Eastman SE. Eastman SE historically processed such products on a cost
basis without recognizing a selling margin. As the risks and rewards
of ownership were not transferred to Eastman SE, the related inventories,
revenues and costs have not been reflected in the accompanying financial
statements. The financial statements include the cost of processing
and the corresponding revenue received for processing such
products. The costs of product processed on behalf of Eastman
Chemical or Eastman Chemical affiliates totaled $10,650 for the ten months ended
October 31, 2006 and $12,682 for the year ended December 31, 2005.
9) Segment
information
Eastman
SE 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
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 and for the year ended December 31, 2005 attributable
to the United States and foreign countries (based upon the billing addresses of
its customers) were as follows:
93
Notes
to the Financial Statements of FutureFuel Chemical Company, formerly known as
Eastman SE, Inc.
(Dollars
in thousands)
|
Period
Ended
|
United
States
|
All
Foreign Countries
|
Total
|
|||||||||
|
October 31,
2006
|
$ | 110,419 | $ | 17,308 | $ | 127,727 | ||||||
|
December 31,
2005
|
$ | 105,719 | $ | 13,820 | $ | 119,539 | ||||||
For the
year ended December 31, 2005 and for the ten months ended October 31,
2006, revenues from Mexico accounted for 10% and 12%, respectively, of total
revenues. Other than Mexico, revenues from a single foreign country
during 2005 and 2006 did not exceed 1% of total revenues.
Summary
of business by segment
|
Ten
Months Ended October 31, 2006
|
Year
Ended December 31, 2005
|
|||||||
|
Revenues
|
||||||||
|
Chemicals
|
$ | 116,148 | $ | 119,539 | ||||
|
Biofuels
|
11,579 | - | ||||||
|
Total Revenues
|
$ | 127,727 | $ | 119,539 | ||||
|
Segment
gross margins
|
||||||||
|
Chemicals
|
$ | 16,124 | $ | 16,837 | ||||
|
Biofuels
|
(7,973 | ) | - | |||||
|
Segment gross
margins
|
8,151 | 16,837 | ||||||
|
Corporate
expenses
|
(9,399 | ) | (16,198 | ) | ||||
|
Income
(loss) before interest and taxes
|
(1,248 | ) | 639 | |||||
|
Interest
expense
|
- | (31 | ) | |||||
|
Provision
for income taxes
|
773 | (227 | ) | |||||
|
Net
income (loss)
|
$ | (475 | ) | $ | 381 | |||
Eastman
SE’s 2005 biofuel revenues and related gross margin were
inconsequential. Due to the inconsequential nature of the amounts,
2005 biofuel gross margin has been included in the chemicals gross margin for
that year.
Depreciation
is allocated to segment costs of goods sold based on plant usage. The
total assets and capital expenditures of 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 and $182 for the
ten months ended October 31, 2006 and the year ended December 31, 2005,
respectively. 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.
94
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
During
2006 and 2007, KPMG LLP was engaged as an independent accountant to audit our
financial statements. On December 13, 2007, our audit committee
requested proposals from certain accounting firms to audit our financial
statements for 2007 and perform the quarterly work for 2008. As a
result of those proposals, 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 2005 and 2006, as well as
FutureFuel Chemical Company’s financial statements for 2004, 2005 and 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 two most recent
fiscal years ended December 31, 2007, there were no disagreements with KPMG
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
95
Item
9A(T). 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, 2007 were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms.
This
annual report does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of the
Company’s registered public accounting firm due to a transition period
established by rules of the SEC for newly public companies.
96
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
Identification
of Directors
Our
directors are as follows.
|
Name
|
Age
|
Director
Since
|
Term
Expires
|
|||
|
Paul
A. Novelly, executive chairman of the board
|
64
|
2005
|
2009
|
|||
|
Lee
E. Mikles, chief executive officer and president
|
52
|
2005
|
2008
|
|||
|
Edwin
A. Levy
|
70
|
2005
|
2008
|
|||
|
Thomas
R. Evans
|
53
|
2006
|
2008
|
|||
|
Richard
L. Knowlton
|
75
|
2007
|
2009
|
|||
|
Paul
G. Lorenzini
|
68
|
2007
|
2009
|
|||
|
Donald
C. Bedell
|
67
|
2008
|
2008
|
Mr.
William J. Doré was also a director whose term expired in
2007. However, he resigned as a director effective June 1, 2007
and our board determined not to fill his position at this time. In
the event his position is filled, his successor will hold that position only
until the annual shareholder meeting in 2008 and, if reelected at such meeting,
such successor will then hold office until 2010.
Mr.
Douglas D. Hommert was also a director whose term expired in
2010. However, he resigned as a director on January 14, 2008,
and our board filled his position with the appointment of Donald C.
Bedell. Mr. Bedell will hold that position until the annual
shareholder meeting in 2008 and, if reelected at such meeting, he will then hold
office until 2010. Mr. Hommert continues to be our executive vice
president, secretary and treasurer.
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
|
64
|
2005
|
|||
|
Lee
E. Mikles
|
Chief
executive officer and president
|
52
|
2005
|
|||
|
Douglas
D. Hommert
|
Executive
vice president, secretary and treasurer
|
52
|
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
|
Vice
president - operations support
|
61
|
2006
|
|||
|
Gary
Hess
|
Vice
president - sales and marketing
|
56
|
2006
|
|||
|
Benjamin
Ladd
|
Chief
financial officer and treasurer
|
31
|
2006
|
|||
|
Samuel
Dortch
|
Vice
president - operations
|
59
|
2007
|
97
Randall
W. Powell was the president and chief operating officer of FutureFuel Chemical
Company. However, he retired on October 1, 2007 and his
responsibilities have been assumed by several members of FutureFuel Chemical
Company’s management team and, to date, a president has not been appointed to
replace Mr. Powell.
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. Albans Global Management, Limited
Partnership, LLLP, which provides corporate management services. He
currently serves on boards of directors at The Bear Stearns Companies Inc., a
broker-dealer and global securities and investment firm, and Boss Holdings,
Inc., a distributor of work gloves, boots and rainwear and other consumer
products, and within the past five years also served on the board of directors
of Intrawest Corporation, a company that is a world leader in destination
resorts and adventure travel.
Lee E.
Mikles has been our chief executive officer and a member of our board
since inception. In addition, he 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.
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.
98
Paul G.
Lorenzini has been a member of our board since January
2007. In January 1970, Mr. Lorenzini co-founded Packaging
Consultants, Inc., a distribution business supplying packaging materials to the
food industry. In 1983, Bunzl PLC, a supplier of supermarket and food
service packaging, acquired Packaging Consultants, Inc. Mr. Lorenzini
continued to work for Bunzl PLC and in 1986 became president of Bunzl
USA. He subsequently became the chief executive officer of Bunzl USA
and retired in July 2004 with the title of chairman emeritus. Mr.
Lorenzini served as a director of Bunzl PLC between 1999 and 2004.
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 also serves as a director of World Point Terminals Inc.,
a Toronto Stock Exchange listed company, serving as 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 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 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. Between October 2003 and October 2006,
inclusive, Mr. Ladd has been a fund manager and financial consultant for St.
Albans Global Management, Limited Partnership, LLLP, which provides corporate
management services. In this position, he assisted with the
management of capital in the equity and derivative markets worldwide and was
responsible for all financial analysis and reporting related to the firm’s
merchant banking and consulting activities. From 1999 to 2003, Mr.
Ladd served in various capacities for Green Manning & Bunch, Ltd., a
middle-market investment banking firm in Denver, Colorado.
Samuel
Dortch was the vice president - operations services of FutureFuel
Chemical Company between July 30, 2007 and October 14, 2007 and has
been 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
Other
than Samuel Dortch, each of our directors and executive officers, as well as Fir
Tree LLC and its related parties Camellia Partners, LLC, Jeffrey Tannenbaum and
Andrew Fredman, did not timely file their respective Forms 3 during
2007. The Form 3 for Donald Bedell was timely
filed. 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.
99
Code
of Ethics
We have
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.
Nominating
Committee
Our board
has established a nominating committee and has adopted a charter for such
nominating committee. A copy of this nominating committee charter has
been 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:
Paul Lorenzini
Thomas R. Evans
Richard L. Knowlton
Audit
Committee Expert
Our board
of directors has 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.
100
Item
11. Executive Compensation.
General
Our board
of directors has established a remuneration committee. The
remuneration committee’s responsibilities include, among other things,
determining our policy on remuneration to our (that is, FutureFuel Corp.’s)
officers and directors and the executive officers and directors of FutureFuel
Chemical Company. 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. No compensation for our
directors or executive officers has been set at this time for the calendar year
2008. Rather, our board believes it is more appropriate to set such
compensation later in the year when 2008 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. However, only Paul A. Novelly, Lee E. Mikles and Douglas D.
Hommert have been elected officers of FutureFuel Corp. by our board of
directors.
Compensation
Discussion and Analysis
We have
not yet established a comprehensive executive compensation philosophy, nor have
we determined definitively the material elements of the compensation of our
executive officers. The current elements of our compensation program
include base salary, bonuses and certain retirement, insurance and other
benefits generally available to all employees. In addition, our board
adopted an Omnibus Incentive Plan which was approved by our shareholders at our
2007 annual meeting on June 26, 2007. As of the date of filing
this Form 10-K, the Plan has not been implemented by our board and no
awards have been granted thereunder. Such Plan when implemented by
our board would provide equity-based compensation to our executive
officers.
We formed
a remuneration committee of our board, which will determine compensation
arrangements for our executive officers. Our remuneration committee
has established a compensation program that is designed to attract, as needed,
individuals with the skills necessary for us to achieve our business plan, to
motivate those individuals, to reward those individuals fairly over time and to
retain those individuals who continue to perform at or above the levels that we
expect. Our executive compensation program is designed to afford our
executive officers a sense of ownership in us, and to link rewards to measurable
Company and individual performance. These arrangements include
appropriate salaries, annual bonus opportunities and long-term incentives awards
linked to equity and equity awards under the omnibus incentive plan adopted
during 2007.
Cash
Salaries and Bonuses
At this
time, we have determined that we will pay $100,000 compensation to Mr. Novelly
for services rendered by Mr. Novelly to our subsidiary, FutureFuel Chemical
Company during 2007, and to reimburse an affiliate of Mr. Mikles $100,000 for
expenses incurred by such affiliate in the course of 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 2007, nor to Messrs. Novelly, Mikles or Hommert for
2006. Each of Messrs. Novelly, Mikles and Hommert were granted
founder shares as described elsewhere herein, and our board of directors
determined that the payment of cash compensation to them was unnecessary for
2006 and to Mr. Hommert for 2007. Our executive
101
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 or
Hommert received any increase in their salary, bonus or other income to
compensate them for their services to us. As to our other executive
officers, we continued their base salaries paid by Eastman Chemical Company with
a modest percentage increase in both 2006 and 2007. 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 2007, 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, 2007) after-tax
earnings of FutureFuel Chemical for the year ended December 31,
2007. 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. Such bonuses were paid
by January 4, 2008. All employees hired after January 1,
2007 received $250. All employees hired prior to January 1, 2007
received 40 hours of pay at their normal hourly rate. Additional
bonuses for nine executive and management employees of FutureFuel Chemical
Company ranged between $15,000 to $25,000 depending upon their positions with
FutureFuel Chemical Company, with the larger bonuses going to Messrs. Baker,
Dortch, Hess and Ladd. All remaining salaried employees of FutureFuel
Chemical Company received one week salary plus an additional amount ranging from
$0 to $6,000 as determined by FutureFuel Chemical Company’s vice presidents of
operations and operations support.
We expect
to establish an annual cash bonus program for fiscal years commencing after 2007
in an amount equal to 10% of after-tax earnings of FutureFuel Chemical Company,
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 an omnibus incentive plan which was approved by our
shareholders at our 2007 annual shareholder meeting on June 26,
2007. The purpose of the plan is to:
|
|
·
|
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 plan
authorizes us to issue stock options (including incentive stock options and
nonqualified stock options), stock awards and stock appreciation
rights. To date, no stock options, stock awards or stock appreciation
rights have been issued. For the reasons set forth above, we were
required to restate our financial statements to apply purchase accounting to our
acquisition of FutureFuel Chemical Company. Until those statements
were restated, trading in our shares and warrants on AIM were
suspended. We did not believe it was appropriate to issue stock
options, stock awards or stock appreciation rights while such trading was
suspended. Now that trading has resumed, we will consider issuing
such stock options, stock awards and/or stock appreciation rights pursuant to
the criteria set forth below.
Eligible
participants in the 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.
102
Awards
under the plan are limited to shares of our common stock, which may be shares
reacquired by us, including shares purchased in the open market, or authorized
but un-issued shares. Awards will be limited to 10% of the issued and
outstanding shares of our common stock in the aggregate, or approximately
2,670,000 shares as of December 31, 2007. Also, as of that date,
the aggregate market value of 2,670,000 shares of our common stock was
approximately $21,360,000.
The plan
will be administered by: (i) our board; (ii) a committee of our board
appointed for that purpose; or (iii) if no such committee is appointed, our
board’s remuneration committee (the “Administrator”). To
date, no committee has been appointed. The Administrator may appoint
agents to assist it in administering the plan. The Administrator may
delegate to one or more individuals the day-to-day administration of the plan
and any of the functions assigned to the Administrator in the
plan. Such delegation may be revoked at any time. All
decisions, determinations and interpretations by the Administrator regarding the
plan and the terms and conditions of any award granted thereunder will be final
and binding on all participants.
The plan
became effective upon its approval by our shareholders on June 26, 2007 and
continues in effect for a term of ten years thereafter unless amended and
extended by us or unless earlier terminated. The individuals and
number of persons who may be selected to participate in the plan in the future
is at the discretion of the Administrator and, therefore, are not determinable
at this time. Likewise, the number of stock options, stock awards and
stock appreciation rights that will be granted, or that would have been granted
during the last completed fiscal year if the plan had been in effect, to
eligible participants pursuant to the plan are not determinable at this
time.
The
Administrator may grant a stock option or provide for the grant of a stock
option either from time to time in the discretion of the Administrator or
automatically upon the occurrence of events specified by the Administrator,
including the achievement of performance goals or the satisfaction of an event
or condition within the control of the participant or within the control of
others. Each option agreement must contain provisions regarding:
(i) the number of shares of common stock that may be issued upon exercise
of the option; (ii) the type of option; (iii) the exercise price of
the shares and the means of payment for the shares; (iv) the term of the
option; (v) such terms and conditions on the vesting or exercisability of
the option as may be determined from time to time by the Administrator;
(vi) restrictions on the transfer of the option and forfeiture provisions;
and (vii) such further terms and condition not inconsistent with the plan
as may be determined from time to time by the Administrator. Unless
otherwise specifically determined by the Administrator or otherwise set forth in
the plan, the vesting of an 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.
103
Such
options will vest and expire (including on a pro rata basis) on such terms as
may be determined by the Administrator from time to time consistent with the
terms of the plan.
The
Administrator may award our common stock to participants. The grant,
issuance, retention or vesting of each stock award may be subject to such
performance criteria and level of achievement versus these criteria as the
Administrator determines, which criteria may be based on financial performance,
personal performance evaluations or completion of service by the
participant. Unless otherwise provided for by the Administrator, upon
the participant’s termination of employment other than due to death or
retirement, the unvested portions of the stock award and the shares of our
common stock subject thereto will generally be forfeited. Unless
otherwise provided for by the Administrator, if a participant’s termination of
employment is due to death or retirement, all outstanding stock awards will
continue to vest provided certain conditions to be determined are
met. Unless otherwise provided for by the Administrator, if a
participant’s termination of employment is due to his death, a portion of each
outstanding stock award granted to such participant will immediately vest and
all forfeiture provisions and repurchase rights will lapse as to a prorated
number of shares of common stock determined by dividing the number of whole
months since the grant date by the number of whole months between the grant date
and the date that the stock award would have fully vested.
The
Administrator may grant stock appreciation rights either alone or in conjunction
with other awards. The Administrator will determine the number of
shares of common stock to be subject to each award of stock appreciation
rights. The award of stock appreciation rights will not be
exercisable for at least six months after the date of grant except as the
Administrator may otherwise determine in the event of death, disability,
retirement or voluntary termination of employment of the
participant. Except as otherwise provided by the Administrator, the
award of stock appreciation rights will not be exercisable unless the person
exercising the award of stock appreciation rights has been at all times during
the period beginning with the date of the grant thereof and ending on the date
of such exercise, employed by or otherwise performing services for us or one of
our subsidiaries.
In the
event there is a change in control of the Company, as determined by our board,
our board may, in its discretion: (i) provide for the assumption or
substitution of, or adjustment to, each outstanding award; (ii) accelerate
the vesting of awards and terminate any restrictions on cash awards or stock
awards; and (iii) provide for the cancellation of awards for a cash payment
to the participant.
Retirement
Benefits
We have
adopted a 401(k) plan for FutureFuel Chemical Company which is generally
available to all of its employees.
Founder’s
Grant
Certain
of our executive officers were granted founders shares as described
herein. Please refer to the discussion under “Item 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. Levy, Mr. Knowlton and Mr.
Lorenzini. Each of these individuals is an “independent director”
under the rules of the New York Stock Exchange, a “Non-Employee Director” within
the meaning of Section 16 of the Exchange Act, and an “outside director” within
the meaning of §162(m) of the Internal Revenue Code of 1986, as
amended.
104
Summary
Compensation Table
Our
executive officers were paid the following compensation for the three-year
period ended December 31, 2007.
Summary
Compensation Table
|
Person
|
Year
|
Salary
|
Bonus
(e)
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensa-tion
|
Change
in Pension Value and Non-Qualified Deferred Compensa-tion
Earnings
|
All
Other
Compensa-tion
(b)
|
Total
|
|
Paul
A. Novelly(c)
Executive
chairman
FutureFuel
Corp.
|
2007
2006
2005
|
$
0
$
0
$
0
|
$ 100,000
$
0
$
0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$ 25,000
$
0
$
0
|
$ 125,000
$
0
$
0
|
|
Lee
E. Mikles(c)
Chief
executive officer
FutureFuel
Corp.
|
2007
2006
2005
|
$
0
$
0
$
0
|
$
0
$
0
$
0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$ 25,000
$
0
$
0
|
$ 25,000
$
0
$
0
|
|
Douglas
D. Hommert(c)
Executive
vice president, secretary and treasurer, FutureFuel Corp.
|
2007
2006
2005
|
$
0
$
0
$
0
|
$
0
$
0
$
0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$ 0
$ 0
$ 0
|
$
0
$
0
$
0
|
$
0
$
0
$
0
|
|
Randall
W. Powell(a)(d)
President,
FutureFuel Chemical Company
|
2007
2006
2005
|
$ 194,231
$ 189,041
n/a
|
$ 0
$ 296,232
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 77,619
$
179,862
n/a
|
$ 271,850
$ 665,135
n/a
|
|
Benjamin
Ladd(a)
Chief
financial officer, FutureFuel Chemical Company
|
2007
2006
2005
|
$ 147,117
$ 23,750
n/a
|
$ 27,885
$ 40,000
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 99,547
$
0
n/a
|
$ 274,549
$ 63,750
n/a
|
|
David
Baker(a)
Vice
president - operations support, FutureFuel Chemical
Company
|
2007
2006
2005
|
$ 170,005
$ 140,618
n/a
|
$ 28,270
$ 64,044
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 24,634
$ 28,389
n/a
|
$ 222,909
$ 233,051
n/a
|
|
Gary
Hess(a)
Vice
president - sales and marketing, FutureFuel Chemical
Company
|
2007
2006
2005
|
$ 170,000
$ 125,984
n/a
|
$ 18,268
$
41,500
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 0
$ 0
n/a
|
$ 11,359
$ 20,531
n/a
|
$ 199,628
$ 188,015
n/a
|
|
Samuel
Dortch(a)(f)
Vice
president, operations, FutureFuel Chemical Company
|
2007
2006
2005
|
$ 145,000
n/a
n/a
|
$ 27,788
n/a
n/a
|
$ 0
n/a
n/a
|
$ 0
n/a
n/a
|
$ 0
n/a
n/a
|
$ 0
n/a
n/a
|
$ 9,689
n/a
n/a
|
$ 182,477
n/a
n/a
|
__________
|
(a)
|
Executive
officers of FutureFuel Chemical Company. 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 and Mikles, includes $25,000 in directors fees for 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.
|
105
|
(c)
|
Our
executive officers. For the year 2006, we did not pay Messrs.
Novelly, Mikles or Hommert any form of compensation. See the
discussion above. However, we did reimburse them for certain
ordinary and necessary business expenses that they incurred in connection
with our business. We reimbursed an affiliate of Mr. Mikles
$100,000 in 2008 as set forth above for expenses incurred by such
affiliate in 2007 in connection with Mr. Mikles performing services for us
and FutureFuel Chemical Company in
2007.
|
|
(d)
|
Mr.
Powell retired effective October 1, 2007. However, after
such date, we have employed Mr. Powell as a consultant and have paid him a
consulting fee of $50,000 for 2008. Such amount is not included
in the table above.
|
|
(e)
|
Earned
in 2007 but paid in 2008.
|
|
(f)
|
Mr.
Dortch did not become an officer of FutureFuel Chemical Company until
2007.
|
None of
the above-named persons is a party to an employment agreement or employment
arrangement with us or with FutureFuel Chemical Company.
Compensation
of Directors
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 2007. Such services included reviewing and, where
appropriate, reducing operating costs. Such amount was determined by
Messrs. Novelly and Mikles, and recommended to and approved by both our
remuneration committee and our board. In addition, we have determined
to pay to each of our directors, other than Mr. Hommert, $25,000 for services
provided as director in 2007. We believe the founders shares issued
to Mr. Hommert were adequate compensation for his services rendered as a
director. 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. We also determined to pay our past director,
Mr. William J. Doré, $25,000 for services rendered as a director. No
directors fees have been determined for 2008 or thereafter, but rather will be
set towards the end of our fiscal year.
The
following is the compensation our directors earned for 2007.
|
Director
|
Fees
Earned or Paid in Cash
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensation
|
Change
in Pension Value and Non-Qualified Deferred Compensation
Earnings
|
All
Other
Compensation
|
Total
|
|||||||||||||||||||||
|
Paul
A. Novelly
|
$ | 25,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 25,000 | ||||||||||||||
|
Lee
E. Mikles
|
$ | 25,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 25,000 | ||||||||||||||
|
Edwin
A. Levy
|
$ | 25,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 25,000 | ||||||||||||||
|
Thomas
R. Evans
|
$ | 25,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 25,000 | ||||||||||||||
|
Richard
L. Knowlton
|
$ | 25,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 25,000 | ||||||||||||||
|
Paul
G. Lorenzini
|
$ | 125,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 125,000 | ||||||||||||||
|
William
J. Doré
|
$ | 25,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 25,000 | ||||||||||||||
|
Douglas
D. Hommert
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||
Compensation
Committee Interlocks and Insider Participation
The
members of our remuneration committee during 2007 were Mr. Levy, Mr.
Knowlton and Mr. Lorenzini and the committee is chaired by Mr.
Levy. None of such individuals are or have been an officer or
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 and Mr. Levy, one of our directors and
106
a member
of our remuneration committee, are both directors of World Point Terminal Inc.;
World Point Terminal Inc. does not have a separate compensation
committee.
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.
Edwin A.
Levy. Richard L. Knowlton and Paul G. Lorenzini
107
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Securities
Authorized for Issuance Under Equity Compensation Plans
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. The following information regarding this plan is as of
December 31, 2007
|
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
|
0
|
n/a
|
2,670,000
|
Security
Ownership of Certain Beneficial Owners
As of the
date of this report, 26,700,000 shares of our common stock are issued and
outstanding and we have issued warrants to purchase 22,500,000 additional shares
of our common stock. The shares of common stock are our only voting
securities issued and outstanding. The following table sets forth the
number and percentage of shares and warrants owned by all persons known by us to
be the beneficial owners of more than 5% of our shares of common stock and
warrants as of the most recent practicable date.
|
Common
Stock
|
Warrants
|
Fully
Diluted
|
||||||||||||||||||||||
|
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)
|
7,406,250 | 27.7 | % | 5,268,750 | 23.4 | % | 12,675,000 | 25.8 | % | |||||||||||||||
|
Lee
E. Mikles, 1486 E. Valley
Road,
Santa Barbara, CA 93108(b)
|
2,100,000 | 7.9 | % | 12,500 | 0.1 | % | 2,112,500 | 4.3 | % | |||||||||||||||
|
SOF
Investments, L.P., 645 5th
Avenue,
21st
Floor, New York,
NY
10022(c)
|
1,800,000 | 6.7 | % | 1,800,000 | 8.0 | % | 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)
|
1,600,000 | 6.0 | % | 1,350,000 | 6.0 | % | 2,950,000 | 6.0 | % | |||||||||||||||
|
Morstan
Nominees Limited, 25
Cabot
Square, Canary Wharf,
London
E144QA, U.K.(g)
|
1,435,841 | 5.4 | % | 1,493,761 | 6.6 | % | 2,929,602 | 6.0 | % | |||||||||||||||
|
N.C.B.
Trust Limited, Citigroup
Centre,
Canada Square, Canary
Wharf,
London E14 5LB, U.K(e).
|
1,365,000 | 5.1 | % | 1,042,800 | 4.6 | % | 2,407,800 | 4.9 | % | |||||||||||||||
|
Vidacos
Nominees Limited,
Citigroup
Centre, Canada Square,
Canary
Wharf, London E14 5LB,
United
Kingdom(h)
|
765,527 | 2.9 | % | 1,631,965 | 7.3 | % | 2,397,492 | 4.9 | % | |||||||||||||||
__________
108
|
(a)
|
Includes
6,781,250 shares of common stock and 4,643,750 warrants held by St. Albans
Global Management, Limited Partnership, LLLP and 625,000 shares of common
stock and 625,000 warrants held by Apex Holding Co. Mr. Novelly
is the chief executive officer of both of these entities and thereby has
voting and investment power over such shares, but he disclaims beneficial
ownership except to the extent of a minor pecuniary
interest.
|
|
(b)
|
Includes
2,000,000 shares of common stock held by Lee E. Mikles Revocable Trust
dated March 26, 1996 and 100,000 shares of common stock held by Lee
E. Mikles Gift Trust dated October 6, 1999. Also includes
12,500 warrants held by the Alison L. Mikles Irrevocable
Trust. Miss Mikles is the minor child of Mr. Mikles and lives
in Mr. Mikles household. However, Mr. Mikles is not the trustee
of such trust and disclaims beneficial
ownership.
|
|
(c)
|
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 and may be deemed to
indirectly beneficially own securities owned by SOF Investments, and MSD
Capital Management LLC is the general partner of MSD
Capital. We have no knowledge as to the beneficial owners of
MSD Capital Management LLC.
|
|
(d)
|
Based
solely upon information contained in a Form 3 filed with the SEC on
March 7, 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. We have no knowledge as to the beneficial owners of Fir
Tree, L.L.C. or Camellia Partners,
LLC.
|
|
(e)
|
We
have no knowledge as to the beneficial owners of N.C.B. Trust
Limited.
|
|
(f)
|
Assumes
the exercise of all warrants issued and outstanding as of the date of this
report.
|
|
(g)
|
We
have no knowledge as to the beneficial owners of Morstan Nominees
Limited.
|
|
(h)
|
Includes
shares of common stock and warrants held by Vidacos Nominees Limited
Designation: BAR; Vidacos Nominees Limited Designation: 1952; Vidacos
Nominees Limited Designation: 1953; Vidacos Nominees Limited Designation:
2071; Vidacos Nominees Limited Designation: BEAR; Vidacos Nominees Limited
Designation: DMG7; and Vidacos Nominees Limited Designation:
SSBL. 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. 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.
109
|
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)
|
7,406,250 | 27.7 | % | 5,268,750 | 23.4 | % | 12,675,000 | 25.8 | % | |||||||||||||||
|
Lee
E. Mikles(b)
|
2,100,000 | 7.9 | % | 12,500 | 0.1 | % | 2,112,500 | 4.3 | % | |||||||||||||||
|
Douglas
D. Hommert(c)
|
250,000 | 0.9 | % | -- | -- | 250,000 | 0.5 | % | ||||||||||||||||
|
Edwin
A. Levy
|
250,000 | 0.9 | % | -- | -- | 250,000 | 0.5 | % | ||||||||||||||||
|
Thomas
R. Evans
|
30,000 | 0.1 | % | 30,000 | 0.1 | % | 60,000 | 0.1 | % | |||||||||||||||
|
Richard
L. Knowlton
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Paul
G. Lorenzini
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Donald
C. Bedell
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
All
directors and executive officers
|
10,036,250 | 37.50 | % | 5,311,250 | 23.60 | % | 15,347,500 | 31.20 | % | |||||||||||||||
__________
|
(a)
|
Includes
6,781,250 shares of common stock and 4,643,750 warrants held by St. Albans
Global Management, Limited Partnership, LLLP and 625,000 shares of common
stock and 625,000 warrants held by Apex Holding Co. Mr. Novelly
is the chief executive officer of both of these entities and thereby has
voting and investment power over such shares, but he disclaims beneficial
ownership except to the extent of a minor pecuniary
interest.
|
|
(b)
|
Includes
2,000,000 shares of common stock held by Lee E. Mikles Revocable Trust
dated March 26, 1996 and 100,000 shares of common stock held by Lee
E. Mikles Gift Trust dated October 6, 1999. Also includes
12,500 warrants held by the Alison L. Mikles Irrevocable
Trust. Miss Mikles is the minor child of Mr. Mikles and lives
in Mr. Mikles household. However, Mr. Mikles is not the trustee
of such trust and disclaims beneficial
ownership.
|
|
(c)
|
Includes
250,000 shares of common stock held by the Douglas D. Hommert Revocable
Trust, which is a trust established by Mr. Hommert for the benefit of his
descendants, of which Mr. Hommert is the
trustee.
|
|
(d)
|
Assumes
the exercise of all warrants issued and outstanding as of the date of this
report.
|
Founding
Shares Owned by the Founding Shareholders
Prior to
our July 2006 offering, there were 5,625,000 shares of our common stock issued
as follows (“founding shares”).
|
Founding
Shareholder
|
Shares
|
Relationship
to the Company
|
||
|
St.
Albans Global Management, Limited
Partnership,
LLLP
|
2,250,000
|
Shareholder
(affiliate of Mr. Novelly)
|
||
|
Lee
E. Mikles Revocable Trust
|
2,000,000
|
Shareholders
(affiliate of Mr. Mikles)
|
||
|
Douglas
D. Hommert Revocable Trust
|
250,000
|
Shareholder
(affiliate of Mr. Hommert)
|
||
|
Edwin
A. Levy
|
250,000
|
Director
and Shareholder
|
||
|
Joe
C. Leach
|
250,000
|
Shareholder
|
||
|
Edwin
Wahl
|
150,000
|
Shareholder
|
||
|
Jeffery
Call
|
150,000
|
Shareholder
|
||
|
Mark
R. Miller
|
100,000
|
Shareholder
|
||
|
Lee
E. Mikles Gift Trust
|
100,000
|
Shareholder
(affiliate of Mr. Mikles)
|
||
|
Ken
Fenton
|
75,000
|
Shareholder
|
||
|
RAS,
LLC
|
50,000
|
Shareholder
|
110
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
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 and bioethanol) produced by
FutureFuel Chemical Company, and Apex Oil Company, Inc. and/or its affiliates
may sell to FutureFuel Chemical Company diesel fuel, gasoline and other
petroleum products for use in FutureFuel Chemical Company’s biofuels
business. Such sales will be at then posted prices for comparable
products plus or minus applicable geographical differentials.
Time
Sharing Agreement
Effective
April 18, 2007, we entered into a Time Sharing Agreement with Apex Oil
Company, Inc. pursuant to which Apex Oil Company, Inc. leases certain airplanes
to us. Pursuant to this Time Sharing Agreement, we are charged for
certain expenses incurred with respect to specific flights of the airplanes
while they are being used for our business purposes. These expenses
are authorized by the Federal Aviation Regulations Part 91.501(d).
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 have adopted a Code of Ethics and Business Conduct which sets forth
legal and ethical standards of conduct for our directors, officers and employees
and the directors, officers and employees of our subsidiaries, including
FutureFuel Chemical Company. This Code is designed to deter
wrongdoing and to promote: (i) honest and ethical conduct, including the
ethical handling of actual or apparent conflicts of interest between personal
and professional relationships; (ii) full, fair, accurate, timely and
understandable disclosure in reports and documents that we file with, or submit
to, the Securities and Exchange Commission and in other public communications
made by us; (iii) compliance with applicable governmental laws, rules and
regulations; (iv) the prompt internal reporting of violations of this Code
to appropriate persons identified in this Code; and (v) accountability for
adherence to this Code. This Code was adopted by our board on
November 30, 2005, is in writing and can be found through the “Investor
Relations - Corporate Governance” section of our internet website
(http://www.FutureFuelCorporation.com).
Each of
the transactions described above (under the caption “Transactions with
Management, Promoters and Others”) was undertaken in compliance with our Code of
Ethics and Business Conduct and approved by a majority of the disinterested
members of our board of directors.
Director
Independence
We are a
listed issuer whose securities are listed on AIM. AIM has
requirements that a majority of our board of directors be
independent. AIM’s definition of “independent director” can be found
through the “Investor Relations - Corporate Governance” section of our internet
website (http://www.FutureFuelCorporation.com). The Securities and
Exchange Commission has also promulgated Rule 10A-3, which sets forth the
independence requirements for members of an audit committee. The
following members of our board of directors are independent under both AIM’s and
the Securities and Exchange Commission’s definitions of
independence:
111
Edwin A. Levy
Thomas R. Evans
Richard L. Knowlton
Paul G. Lorenzini
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.
112
Item
14. Principal Accountant Fees and Services.
Audit
Fees
During
fiscal 2007, we incurred no fees for audit and financial statement review
services from RubinBrown LLP and $464,900 for audit, financial statement review
and services provided in connection with our statutory and regulatory filings
from KPMG LLP. During fiscal 2006, we incurred fees of $675,000 for
audit, financial statement review and services provided in connection with our
statutory and regulatory filings from KPMG LLP.
Audit-Related
Fees
During
fiscal 2007 and 2006, no fees were incurred for audit-related fees from either
RubinBrown LLP or KPMG LLP.
Tax
Fees
During
fiscal 2007, we incurred fees of $2,500 for tax compliance, tax advice and tax
planning services from RubinBrown LLP. No fees were incurred for
these services from KPMG LLP. No tax fees were incurred during fiscal
2006 from either RubinBrown LLP or 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 2006. During fiscal 2006, we incurred $170,177 in fees
from KPMG LLP for services provided in connection with our admission and
readmission to AIM.
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.
113
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:
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·
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our
board’s selection of FutureFuel Chemical Company as a prospective target
business;
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·
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conflicts
of interest of our officers and
directors;
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·
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potential
future affiliations of our officers and directors with competing
businesses;
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·
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the
control by our founding shareholders of a substantial interest in
us;
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·
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the
highly competitive nature of the chemical and alternative fuel
industries;
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·
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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;
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·
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changes
in technology may render our products or services
obsolete;
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·
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failure
to comply with governmental regulations could result in the imposition of
penalties, fines or restrictions on operations and remedial
liabilities;
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·
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the
operations of FutureFuel Chemical Company’s biofuels business may be
harmed if the applicable government were to change current laws and/or
regulations;
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·
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our
board may have incorrectly evaluated FutureFuel Chemical Company’s
potential liabilities;
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·
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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
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·
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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.
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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.
114
PART
IV
Item
15. Exhibits and Financial Statement Schedules.
(a) List
separately all financial statements filed as part of this report.
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1.
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FutureFuel
Corp.’s audited consolidated Balance Sheets as of December 31, 2007
and 2006 and the related consolidated Statements of Operations, Statements
of Changes in Stockholders’ Equity and Statements of Cash Flows for the
years ended December 31, 2007, 2006 and
2005.
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2.
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FutureFuel
Chemical Company’s audited consolidated Balance Sheets as at
December 31, 2005 and 2004, and the audited Statements of Operations,
Statements of Changes in Stockholder’s Equity and Statements of Cash Flows
for each of the years in the two-year period ended December 31, 2005
and the audited Statements of Operations and Statements of Cash Flows for
the ten-month period ended October 31,
2006.
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(b) Exhibits
required by Item 601 of Regulation S-K.
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2.
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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)
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3.1.
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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)
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3.2.
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FutureFuel
Corp.’s Bylaws (incorporated by reference to Exhibit No. 3.2.a to
Form 10 filed April 24,
2007)
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4.1.
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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)
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4.2.
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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)
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4.3
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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
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Paul
Anthony Novelly
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4.3b
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St.
Albans Global Management, Limited Partnership,
LLLP
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4.3c
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Lee
E. Mikles
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4.3d
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Lee
E. Mikles as Trustee of the Lee E. Mikles Gift Trust dated October 6,
1999
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4.3e
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Lee
E. Mikles as Trustee of the Lee E. Mikles Revocable Trust dated
March 26, 1996
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4.3f
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Douglas
D. Hommert
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4.3g
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Douglas
D. Hommert as Trustee of the Douglas D. Hommert Revocable
Trust
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4.3h
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Edwin
A. Levy
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115
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4.3i
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Joe
C. Leach
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4.3j
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Mark
R. Miller
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4.3k
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RAS
LLC
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4.3l
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William
J. Doré
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4.3m
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Thomas
R. Evans
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4.3n
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Edwin
L. Wahl
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4.3o
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Jeffery
H. Call
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4.3p
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Ken
Fenton
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4.4.
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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.
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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)
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4.6.
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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
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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
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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)
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10.3
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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)
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10.4
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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)
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10.5
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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)
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10.6
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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)
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116
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10.7
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NOBS
Supply Agreement dated January 1, 1999 between Eastman Chemical
Company and The Procter & Gamble Manufacturing Company, as amended
October 6, 1999, October 1, 2001, July 10, 2002,
April 22, 2003 and June 18, 2003 (portions of the exhibit have
been omitted pursuant to a request for confidential treatment)
(incorporated by reference to Exhibit No. 10.7 to Form 10 filed
April 24, 2007)
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10.8
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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)
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10.9
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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)
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10.10
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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)
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10.11
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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)
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10.12
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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)
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10.13
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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)
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10.14
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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)
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10.15
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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)
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10.16
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Omnibus
Incentive Plan (incorporated by reference to Exhibit No. 10.16 to
Amendment No. 1 to Form 10 filed June 26,
2007)
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11.
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Statement
re Computation of per Share
Earnings
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21.
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Subsidiaries
of FutureFuel Corp. (incorporated by reference to Exhibit No. 21 to
Form 10 filed April 24,
2007)
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24.
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Power
of Attorney
|
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
117
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99.
|
Table
contained in Item 1 of the
Form 10-K
|
118
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
Date: March
31, 2008
119