As
filed with the Securities and Exchange Commission on February 29,
2008 .
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 2 TO
FORM
10
REGISTRATION
STATEMENT
Pursuant
to Section 12(b) or (g) of The Securities Exchange Act of 1934
FUTUREFUEL
CORP.
(Exact
name of registrant as specified in its charter)
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Delaware
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20-3340900
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(State
of incorporation)
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(IRS
Employer
Identification
No.)
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8235
Forsyth Blvd., 4th
Floor
Clayton,
Missouri 63105
(805)
565-9800
(Address,
including zip code and telephone number, of
registrant’s
principal executive offices)
Douglas
D. Hommert, Executive Vice President
FutureFuel
Corp.
8235
Forsyth Blvd., 4th
Floor
Clayton,
Missouri 63105
(314)
854-8520
(Name,
address, including zip code, and telephone number of agent for
service)
Securities
to be registered pursuant to Section 12(b) of the Act:
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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)
Table
of Contents
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Page
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Item
1. - Business
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1
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Item
1A. - Risk Factors
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35
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Item
2. - Financial Information
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45
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Item
3. - Properties
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60
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Item
4. - Security Ownership of Certain Beneficial Owners and
Management
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61
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Item
5. - Directors and Executive Officers
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64
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Item 6.
- Executive Compensation
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67
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Item 7.
- Certain Relationships and Related Transactions, and Director
Independence
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73
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Item 8.
- Legal Proceedings
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76
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Item 9.
- Market Price of and Dividends on Our Common Equity/Related Shareholder
Matters
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77
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Item 10.
- Recent Sales of Unregistered Securities
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79
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Item 11.
- Description of Securities to be Registered
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86
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Item 12.
- Indemnification of Directors and Officers
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91
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Item 13.
- Financial Statements and Supplementary Data
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92
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Item 14. -
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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161
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Item 15.
- Financial Statements and Exhibits
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162
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You
should rely only on the information contained in this document or to which we
have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where
it is legal to sell these securities. The information in this
document may only be accurate on the date of this document.
i
Item
1. - Business
Explanatory
Note
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: Investors Relations. We have
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 elsewhere herein for a detailed
discussion of the effects of such restatement.
We are filing this Amendment No. 2
to the Form 10 Registration Statement originally filed with the Securities
and Exchange Commission on April 24, 2007 and amended on June 26, 2007 to
reflect the restatement of our audited consolidated financial statements for the
year ended December 31, 2006, the financial information in the Selected
Financial Data, and the unaudited financial statements for the quarter ended
March 31, 2007.
General
Development of the Business
The
Company
FutureFuel Corp. (the “Company”
or “we”,
“our” or
“us”) is a
Delaware corporation incorporated on August 12, 2005 under the name
“Viceroy Acquisition Corporation”. We were formed to serve as a
vehicle for the acquisition by way of an asset acquisition, merger, capital
stock exchange, share purchase or similar transaction (a “business combination”)
of one or more operating businesses in the oil and gas industry (“target
business”).
On July 12, 2006, we completed an
offering of 22,500,000 units, each unit consisting of one share of our common
stock and one warrant to acquire one share of our common stock. The
units were issued at $8.00 per unit. In connection with the offering,
our shares and warrants were listed on the Alternative Investment Market (“AIM”) of
the London Stock Exchange plc under the ticker symbols “VAC” and “VACW”,
respectively.
The net proceeds of the offering in the
amount of $172,500,000 were deposited into a trust fund maintained by
Continental Stock Transfer & Trust Company, as trustee. The trust
fund was to be released by the trustee for, among other things, a business
combination approved by the holders of our common stock. Moreover,
the trust fund was to be released in its entirety upon the completion of a
business combination which, either on its own or when combined with all previous
business combinations, had an aggregate transaction value of at least 50% of the
initial trust amount (which initial trust amount excluded certain deferred
placing fees) (a “qualified business combination”).
On July 21, 2006, we entered into
an acquisition agreement with Eastman Chemical Company to purchase all of the
issued and outstanding stock of its subsidiary, Eastman SE, Inc. The
terms of the acquisition agreement were negotiated by our executive officers,
Paul A. Novelly, Lee E. Mikles and Douglas D. Hommert, with representatives of
Eastman Chemical Company, and were set based upon such negotiations and the
experience of our executive officers in similar transactions. The
acquisition agreement provided for the sale by Eastman Chemical Company of all
of its stock in Eastman SE, Inc. to us in exchange for: (i) $75,000,000
cash, subject to possible reduction if Eastman SE, Inc.’s net working capital as
of the closing date was less than $17,562,527; plus (ii) 2¢ per gallon of
biodiesel sold by Eastman SE, Inc. during the three-year period following the
closing. Following the closing, Eastman SE, Inc. would become our
wholly-owned subsidiary. The acquisition agreement contained the
following additional material terms.
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The
closing of the acquisition was to take place on the later of
October 31, 2006 or the third business day after the date on which
certain closing conditions have been satisfied or
waived.
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The
acquisition agreement contained various representations and warranties by
us relating to: our proper organization and good standing; the corporate
authorization and enforceability of
the
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acquisition
agreement; required consents and approvals; absence of conflicts with
other agreements and laws; absence of litigation against the acquisition;
available financing to consummate the acquisition; and no reliance upon
representations, warranties, forecasts and the like except as specifically
set forth in the acquisition
agreement.
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The
acquisition agreement contained various representations and warranties of
Eastman Chemical Company relating to: proper organization and good
standing of Eastman Chemical Company and Eastman SE, Inc.; the
authorization and enforceability of the acquisition agreement; required
consents; absence of conflicts with other agreements and laws; the
capitalization of Eastman SE, Inc.; the preparation of Eastman SE, Inc.’s
financial statements; liabilities of Eastman SE, Inc.; the absence of
certain developments regarding Eastman SE, Inc.; Eastman SE, Inc.’s taxes;
Eastman SE, Inc.’s real property; Eastman SE, Inc.’s tangible personal
property and other assets; Eastman SE, Inc.’s intellectual property;
Eastman SE, Inc.’s contracts; Eastman SE, Inc.’s employee benefits; labor
matters affecting Eastman SE, Inc.; litigation affecting Eastman SE, Inc.;
compliance by Eastman SE, Inc. with laws and permits; environmental
matters affecting Eastman SE, Inc.; Eastman SE, Inc.’s customers and
suppliers; and product liability matters affecting Eastman SE,
Inc.
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The
acquisition agreement contained certain covenants imposed upon Eastman
Chemical Company relating to: our access to documents; obtaining the
necessary consents and satisfying Eastman Chemical Company’s conditions to
the closing (including making the appropriate filings under the
Hart-Scott-Rodino Act); public statements; confidential information; no
solicitation of other acquisition proposals regarding Eastman SE, Inc. or
its business; inspections by us; no competition against Eastman SE, Inc;
and no solicitation of Eastman SE, Inc.’s
employees.
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The
acquisition agreement contained certain covenants imposed upon us relating
to: confidentiality; public statements; obtaining the necessary consents
and satisfying our conditions to the closing (including making the
appropriate filings under the Hart-Scott-Rodino Act); Eastman Chemical
Company’s access to documents; no solicitation of Eastman Chemical
Company’s customers; employee matters; no competition against Eastman
Chemical Company; and no solicitation of Eastman SE, Inc.’s
employees.
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All
representations and warranties contained in the acquisition agreement
generally terminate 18 months after the closing date with certain
exceptions.
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Except
with respect to environmental matters, Eastman Chemical Company agreed to
indemnify, defend, and hold us harmless from and against any and all
losses actually incurred by us to the extent arising out of or resulting
from: (i) any breach as of the closing date of a representation or
warranty made by Eastman Chemical Company in the acquisition agreement;
(ii) any breach of any covenant or agreement of Eastman Chemical
Company in the acquisition agreement; (iii) pre-closing taxes not
included in working capital; and (iv) any liability of Eastman SE,
Inc. relating to product liability and not disclosed to us in a schedule
to the acquisition agreement or included in closing working
capital.
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Eastman
Chemical Company is not liable for any losses with respect to any breach
as of the closing date of a representation or warranty made by Eastman
Chemical Company in the acquisition agreement unless: (i) a claim is
asserted prior to the relevant survival period for such representation or
warranty; and (ii) the aggregate of all such losses exceeds, on a
cumulative basis, $750,000 (and then only to the extent of such
excess). In addition, Eastman Chemical Company will not be
required to pay an aggregate amount in excess of $7,500,000 in respect of
all losses with respect to any breach as of the closing date of a
representation or warranty made by Eastman Chemical Company in the
acquisition agreement (exclusive of environmental
matters). These limitations do not apply to losses attributable
to: (a) any breach of any covenant or agreement of Eastman Chemical
Company in the acquisition agreement; (b) any pre-closing taxes not
included in working capital; and (c) any liability of Eastman SE,
Inc. relating to product liability and not disclosed to us in a schedule
to the acquisition agreement or included in working
capital.
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Except
with respect to environmental matters, we agreed to indemnify and hold
Eastman Chemical Company harmless from and against any and all losses
actually incurred by it to the extent arising out of or resulting from:
(i) any breach as of the closing date of a representation or warranty
made by us in the acquisition agreement; and (ii) any breach by us of
any covenant or agreement in the acquisition
agreement.
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On
the closing of the acquisition, we and Eastman Chemical Company agreed to
obtain an environmental insurance policy to provide insurance coverage for
environmental conditions existing at Eastman SE, Inc.’s manufacturing
facility. We and Eastman Chemical Company each agreed to pay
50% of the insurance premium. Such insurance policy was to have
a policy limit of $10,000,000 with a per claim deductible of $150,000 and
a term of ten years following the closing. During the first
five years of the term, we will pay the first $75,000 of the deductible
and Eastman Chemical Company will pay the second
$75,000.
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Subject
to a $15,000,000 cap (which is inclusive of the $10,000,000 environmental
insurance policy limit), during the five-year period beginning with the
closing date, Eastman Chemical Company agreed to retain liability for and
to indemnify, defend and hold us and Eastman SE, Inc. harmless from,
against and with respect to any losses actually incurred by us or Eastman
SE, Inc. to the extent arising out of or resulting from: (i) any
breach of any environmental representation or warranty of Eastman Chemical
Company contained in the acquisition agreement; (ii) any liability
under CERCLA or RCRA or any state law based on CERCLA or RCRA, or under
any other environmental law, for costs of response or the costs of
complying with an injunctive or other order under RCRA or under any other
environmental law, at a hazardous waste site (other than Eastman SE,
Inc.’s owned real property) and attributable to the activities of Eastman
Chemical Company, its affiliates (including Eastman SE, Inc.) or the
operation of Eastman SE, Inc.’s business prior to closing; (iii) an
environmental condition at any of Eastman SE, Inc.’s owned real property
which existed at or prior to the closing (notwithstanding the foregoing,
Eastman Chemical Company is not liable for an environmental condition:
(a) unless an investigation or remediation of the environmental
condition is required by law or by an order issued to us or Eastman SE,
Inc. by an environmental authority; or (b) to the extent the
environmental condition is attributable to the activities of Eastman SE,
Inc. or us or the operation of Eastman SE, Inc.’s business after the
closing); and (iv) any violation of, or non-compliance with, any
environmental law by Eastman SE, Inc.’s business to the extent that such
violation or non-compliance existed at or prior to the
closing.
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We
agreed to assume liability for and indemnify and hold Eastman Chemical
Company and Eastman Chemical Company’s affiliates harmless from, against
and with respect to any losses actually incurred by or asserted against
Eastman Chemical Company or such affiliates to the extent arising out of
or resulting from: (i) any liability under CERCLA or any state law
based on CERCLA for costs of response at a property other than Eastman SE,
Inc.’s owned real property attributable to the activities of us, our
affiliates or the operation of Eastman SE, Inc.’s business after the
closing; (ii) any environmental condition at or associated with any
of Eastman SE, Inc.’s owned real property first arising after the closing;
(iii) any violation of, or non-compliance with, any environmental law
by us, our affiliates or Eastman SE, Inc.’s business that did not exist
prior to or at the time of the closing; and (iv) our utilization of
certain financial assurances given by Eastman Chemical Company to the
Arkansas Department of Environmental Quality on behalf of Eastman SE,
Inc.
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Except
as with respect to the indemnifications described above, we agreed that,
in connection with Eastman SE, Inc.’s business or owned real property, we
will assert no claim against Eastman Chemical Company and that Eastman
Chemical Company is released from and will have no liability or obligation
whatsoever to us or our successors or assigns with respect to any losses
arising under, related to or associated with the environment,
environmental authorities, environmental authorizations, environmental
conditions, environmental law, and environmental
liabilities. Except as with respect to the indemnifications
described above, Eastman Chemical Company agreed that, in connection with
Eastman SE, Inc.’s business or owned real property,
it
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will
assert no claim against us or Eastman SE, Inc. and that we and Eastman SE,
Inc. are released from and will have no liability or obligation whatsoever
to Eastman Chemical Company or its successors or assigns with respect to
any losses arising under, related to or associated with the environment,
environmental authorities, environmental authorizations, environmental
conditions, environmental law, and environmental
liabilities.
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Upon
closing, Eastman SE, Inc. was to enter into a conversion agreement with
Eastman Chemical Company pursuant to which Eastman SE, Inc. will produce
certain chlorinated polyolefin products on Eastman Chemical Company’s
behalf. The initial term was to be for five years and
thereafter will automatically renew for successive one year renewal terms
unless canceled by either party within 180 days of the original term or
renewal term, as applicable. Eastman Chemical Company will have
the right to terminate the agreement earlier upon the payment of certain
early termination fees. Eastman SE, Inc. was to also enter into
a conversion agreement with Eastman Chemical Company pursuant to which
Eastman SE, Inc. will produce di-isopropylbenzene and derivative products
on Eastman Chemical Company’s behalf. The initial term was to
be for five years and thereafter automatically renews for successive one
year renewal terms unless canceled by either party within 180 days of the
original term or renewal term, as applicable. Eastman Chemical
Company will have the right to terminate the agreement earlier upon the
payment of certain early termination
fees.
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In
connection with the consummation of the acquisition, Eastman Chemical
Company and Eastman SE, Inc. agreed to enter into supply
contracts. Under these contracts, Eastman Chemical Company will
after the closing date sell to Eastman SE, Inc. certain chemicals and
Eastman SE, Inc. will after the closing date sell to Eastman Chemical
Company certain chemicals. The contracts will continue for one
to three years and continue year-to-year thereafter unless terminated upon
180 days prior written notice by either
party.
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In
connection with the consummation of the acquisition, Eastman Chemical
Company and Eastman SE, Inc. agreed to enter into a technology transfer
agreement pursuant to which, on the closing date, Eastman Chemical Company
will transfer to Eastman SE, Inc. certain intellectual property related to
Eastman SE, Inc.’s business.
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In
connection with the consummation of the acquisition, Eastman Chemical
Company and Eastman SE, Inc. agreed to enter into a software license
agreement pursuant to which, on the closing date, Eastman Chemical Company
agreed to grant to Eastman SE, Inc. a royalty-free, non-exclusive license
to use certain software solely in support of Eastman SE, Inc.’s internal
business operations. The license continues until terminated by
Eastman SE, Inc.
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In
connection with the consummation of the acquisition, Eastman Chemical
Company and Eastman SE, Inc. agreed to enter into a transition services
agreement pursuant to which Eastman Chemical Company will provide certain
transition services to Eastman SE, Inc. following the closing of the
acquisition. These services generally are those provided to
Eastman SE, Inc. by Eastman Chemical Company prior to the execution of the
acquisition agreement. The services will be provided for six
months following the closing date (with certain
exceptions). There is a monthly service charge for most fees,
although some service fees are based upon an hourly
charge.
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The
consummation of the acquisition was subject to approval by our
shareholders. If approved by our shareholders, the acquisition would
constitute both a business combination and a qualified business
combination.
On July 24, 2006 and following the
public announcement of the execution of the acquisition agreement with Eastman
Chemical Company, trading in our shares and warrants was suspended by
AIM.
On October 6, 2006, we mailed to
our shareholders an admission document containing a proxy statement and other
material required by AIM, notifying our shareholders of a special meeting to be
held on October 27, 2006 to approve, among other things, the acquisition of
Eastman SE, Inc. and the acquisition agreement with Eastman Chemical
Company. On October 9, 2006 and following the mailing of the
admission document to our shareholders, trading in our shares and warrants on
AIM recommenced.
4
Our shareholders approved the
acquisition of Eastman SE, Inc. on October 27, 2006. On
October 31, 2006: (i) the trust amount was distributed to us;
(ii) the acquisition of Eastman SE, Inc. was consummated (effective after
the close of business on that day); (iii) Eastman SE, Inc. became our
wholly-owned subsidiary; and (iv) Eastman SE, Inc. and Eastman Chemical
Company entered into the conversion agreements, supply contracts, technology
transfer agreement, software license agreement and transition services agreement
described above. In connection with such closing, we changed our name
to FutureFuel Corp. and Eastman SE, Inc. changed its name to FutureFuel Chemical
Company.
Consummation of the acquisition of
Eastman SE, Inc. constituted a reverse takeover of us within the rules of AIM as
promulgated by the London Stock Exchange plc. Where a transaction
constitutes a reverse takeover, trading on AIM in the company’s shares and
warrants is cancelled and readmission to AIM is required to be sought in the
same manner as any other applicant applying for admission of its securities for
the first time. On October 31, 2006, we applied for readmission
to AIM. Our shares of common stock and warrants were readmitted to
AIM on that date under the ticker symbols “FFU” and “FFUW”,
respectively.
FutureFuel
Chemical Company
FutureFuel Chemical Company is a
Delaware corporation incorporated on September 1, 2005 under the name
Eastman SE, Inc. as a wholly-owned subsidiary of Eastman Chemical
Company. It owns approximately 2,200 acres of land six miles
southeast of Batesville in north central Arkansas fronting the White
River. Approximately 500 acres of the site are occupied with batch
and continuous manufacturing facilities, laboratories and infrastructure,
including on-site liquid waste treatment. The plant is staffed by
approximately 450 non-union employees.
The Batesville facility was constructed
by Eastman Kodak Company on an undeveloped “green field” site in 1977, initially
to produce proprietary photographic chemicals. In 1982, the plant’s
business scope was broadened to include other specialty chemicals, with the
construction of facilities to support Eastman Chemical Company’s hydroquinone
and antioxidant business. Other facility enhancements occurred in
subsequent years to expand the specialty chemicals and custom manufacturing
business at the site. In 1994, Eastman Chemical Company split from
Eastman Kodak Company. Following that split, the facility continued
to transition from manufacturing photographic imaging chemicals and, in recent
years, has been engaged almost exclusively in the custom synthesis of fine
chemicals and organic chemical intermediates used in a variety of end markets,
including paints and coatings, plastics and polymers, pharmaceuticals, food
supplements, household detergents and agricultural products.
In the late 1990’s, Eastman Chemical
Company attempted to focus the plant’s custom manufacturing on the
pharmaceuticals market, but this was abandoned in 2001 due to capital and
business constraints. The specialty chemicals custom manufacturing
business in North America became increasingly competitive due to off-shoring to
India and China, among other countries. For example, see https://www.frost.com/prod/servlet/market-insight-top.pag?docid=88875033&ctxixpLink=FcmCtx1&ctxixpLabel=FcmCtx2. This
factor, coupled with Eastman Chemical Company’s changing business focus,
resulted in a maturing product portfolio at the site and declining net cash
flows. Employment declined from a peak of about 750 in the late
1990’s to about 400 in early 2005 through a series of
reductions-in-force.
Faced with declining net cash flows
from a mature product portfolio and substantial competitive pressure in existing
businesses, plant management began to actively pursue new businesses in which to
focus their manufacturing capabilities. This management team became
convinced that the plant was suited relative to geography and capabilities to
manufacture products for the emerging alternative fuels markets. With
nominal corporate direction and support, a local biobased products platform was
launched in early 2005, comprising biofuels (biodiesel, bioethanol and
lignin/biomass solid fuels) and biobased specialty chemical products (biobased
solvents, chemicals and intermediates). With minimal capital
expenditures, and using local technical resources, the management team was able
to initiate biodiesel batch production in October 2005 at a capacity of
3 million gallons per year, subsequently expanded to 24 million
gallons per year from a combination of batch and continuous
processing. Entry into the biofuels business was accomplished with
excess plant capacity and without any reduction in production of specialty
chemicals.
In mid 2005, Eastman Chemical Company
decided that specialty chemicals would no longer be a core business and that it
would seek to divest the Batesville plant. In anticipation of such
divestiture, Eastman Chemical Company incorporated FutureFuel Chemical Company
(under the then name of Eastman SE, Inc.). Effective
5
January 1,
2006, Eastman Chemical Company began to transfer the facility and certain of its
related assets to FutureFuel Chemical Company. FutureFuel Chemical
Company’s management team continued its development of the biobased products
business throughout this divestiture process.
Background
of the Acquisition
In March 2006, our executive chairman
(Mr. Paul A. Novelly) had initial discussions with Eastman Chemical Company
about acquiring Eastman Chemical Company’s manufacturing plant in Batesville,
Arkansas. Those discussions did not result in any meaningful
dialogue. In June 2006, our executive chairman again expressed
interest to Eastman Chemical Company about acquiring the Batesville
plant. At that time, Eastman Chemical Company agreed to engage in
discussions with us about the sale of the Batesville facility. On
June 22, 2006, initial discussions were held and we commenced a due
diligence investigation into Eastman SE, Inc. Those discussions and
the due diligence investigation ultimately resulted in the execution by us on
July 21, 2006 of the acquisition agreement with Eastman Chemical Company
discussed above.
Purpose
for the Acquisition
We were organized to pursue business
combinations with target businesses engaged in the oil and gas
industry. In 2005, FutureFuel Chemical Company began the
implementation of a biobased products platform, including biofuels (biodiesel,
bioethanol and lignin/biomass solid fuels) and biobased specialty products
(biobased lubricants, solvents and intermediates). At the time we
began discussions with Eastman Chemical Company in June 2006, the Batesville
plant had commercialized biodiesel and was capable of producing approximately
9 million gallons of biodiesel per year by batch
processing. Production capacity was subsequently scheduled to
increase to 24 million gallons per year through a continuous processing
line. The purpose of the acquisition was to acquire FutureFuel
Chemical Company, a target business in the oil and gas industry that we believed
could be a meaningful participant in the alternative fuels markets.
Plan
of Operation for the Consolidated Company
Our strategy in relation to the
acquired operations is to build upon and expand FutureFuel Chemical Company’s
biobased products platform and to continue FutureFuel Chemical Company’s
chemical manufacturing activities.
We initially planned to increase the
plant’s biodiesel capacity to 40 million gallons per year by May 2007 and
to 160 million gallons per year by November 2007, with substantial
complementary expenditures on infrastructure to support this increased
capacity. After closing on our acquisition of FutureFuel Chemical
Company on October 31, 2006, we and, to our knowledge, the industry as a
whole witnessed a rapid erosion in margins for producing biodiesel. 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, glycerin and biodiesel on and
off the site - scheduled for completion in the first quarter of
2008;
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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 -
scheduled for completion in the first quarter of
2008;
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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 2. - Financial Information -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” below for an estimate of the capital cost of the capital projects
discussed above. The storage and procurement of railcars are not
capital projects; rather, they affect cash flow through ongoing lease
commitments. These lease commitments are included in footnote 18
of our consolidated financial statements for the year ended December 31,
2006 contained elsewhere herein. Based upon our budget, the remaining
cash from our July 2006 offering and the proceeds from the $50 million
credit facility described below, we do not believe that it will be necessary for
us to raise additional funds to meet the expenditures required for operating the
business as set forth above.
Financial
Information about Segments
Historically, the business and assets
included in FutureFuel Chemical Company were accounted for by Eastman Chemical
Company in various segments of Eastman Chemical Company’s overall
business. Although FutureFuel Chemical Company was incorporated on
September 1, 2005, Eastman Chemical Company did not begin transferring
assets into FutureFuel Chemical Company until January 1, 2006 and completed
the transfer in
7
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. Thus, unless otherwise noted, the financial data
presented herein represents our consolidated operations for the twelve-month
period ended December 31, 2006 and the three-month period ended March 31,
2007, and the “carve-out” operations of the Batesville plant for the ten-month
period ended October 31, 2006, the three-month period ended March 31,
2006 and the twelve-month periods ended December 31, 2005 and
2004.
The following table sets forth:
(i) revenues from external customers for the three-month period ended
March 31, 2007 and for the years ended December 31, 2006, 2005 and
2004; (ii) net income (loss) for the three-month period ended
March 31, 2007 and for the years ended December 31, 2006, 2005 and
2004; and (iii) total assets at March 31, 2007 and at
December 31, 2006, 2005 and 2004.
(Dollars
in thousands)
|
Period
|
Revenues
from
External
Customers
|
Net
Income
(Loss)
|
Total
Assets
|
|||||||||
|
Three
months ended March 31, 2007
|
$ | 37,506 | $ | (2,040 | ) | $ | 197,809 | |||||
|
Year
ended December 31, 2006
|
$ | 134,168 | $ | 2,242 | $ | 203,516 | ||||||
|
Year
ended December 31, 2005
|
$ | 104,364 | $ | 381 | $ | 114,500 | ||||||
|
Year
ended December 31, 2004
|
$ | 127,945 | $ | (14,867 | ) | $ | 118,164 | |||||
For
the years ended December 31, 2004 and 2005 and the ten months ended
October 31, 2006, revenues from external customers excludes all revenues
from Eastman Chemical Company. Beginning November 1, 2006,
revenues from external customers equals total revenues. See note 11
to Eastman SE, Inc.’s annual financial statements included elsewhere herein for
revenues from Eastman Chemical Company for the years ended December 31,
2004 and 2005 and the ten months ended October 31, 2006 .
Prior to the initiation of its biofuels
program in 2005, the Batesville plant did not have business reporting “segments”
as defined by U.S. generally accepted accounting principles. After
the initiation of the biobased products program in 2005, it had two segments:
chemicals and biofuels. FutureFuel Chemical Company is not able to
allocate net income (loss) and total assets between its two business
segments. However, revenues from external customers can be allocated
between the two business segments as set forth in the following
chart.
8
(Dollars
in thousands)
|
Period
|
Revenues
from
Chemical
Segment
|
Revenues
from
Biofuels
Segment
|
Total
Revenues
from
External
Customers
|
|||||||||
|
Three
months ended March 31, 2007
|
$ | 35,654 | $ | 1,852 | $ | 37,506 | ||||||
|
Year
ended December 31, 2006
|
$ | 120,828 | $ | 13,340 | $ | 134,168 | ||||||
|
Year
ended December 31, 2005
|
$ | 104,364 | $ | 0 | $ | 104,364 | ||||||
|
Year
ended December 31, 2004
|
$ | 127,945 | $ | 0 | $ | 127,945 | ||||||
Narrative
Description of the Business
Principal
Executive Offices
Our principal executive offices are
located at 8235 Forsyth Blvd., 4th Floor,
Clayton, Missouri 63105. Our telephone number is (805)
565-9800. FutureFuel Chemical Company’s principal executive offices
are located at 2800 Gap Road, Highway 394 South, Batesville, Arkansas
72501-9680. Its telephone number at such office is
(870) 698-1811.
The
Company
We completed the offering described
above on July 12, 2006 and acquired FutureFuel Chemical Company at the
close of business on October 31, 2006. We have not conducted any
other material business operations.
FutureFuel
Chemical Company
FutureFuel Chemical Company owns
approximately 2,200 acres of land six miles southeast of Batesville in north
central Arkansas fronting the White River. Approximately 500 acres of
the site are occupied with batch and continuous manufacturing facilities,
laboratories and infrastructure, including on-site liquid waste
treatment. The plant is staffed by approximately 450 non-union
employees. Land and support infrastructure are available to support
expansion and business growth.
The Batesville facility was constructed
by Eastman Kodak Company as a green field site in 1977, initially to produce
proprietary photographic chemicals. In 1982, the plant’s business
scope was broadened to include other specialty chemicals, including facilities
to support Eastman Chemical Company’s hydroquinone and antioxidant
business. Other facility enhancements occurred in subsequent years to
expand the specialty chemicals and custom manufacturing business at the
site. In 1994, Eastman Chemical Company split from Eastman Kodak
Company. Following that split, the facility continued to transition
from manufacturing photographic imaging chemicals and, in recent years, has been
engaged almost exclusively in the custom synthesis of fine chemicals and organic
chemical intermediates used in a variety of end markets, including paints and
coatings, plastics and polymers, pharmaceuticals, food supplements, household
detergents and agricultural products.
In the late 1990’s, Eastman Chemical
Company attempted to focus the plant’s custom manufacturing on the
pharmaceuticals market, but this was abandoned in 2001 due to capital and
business constraints. Since that time, the specialty chemicals custom
manufacturing business in North America has become increasingly competitive due
to off-shoring to India and China, among other countries. For
example, see https://www.frost.com/prod/servlet/market-insight-top.pag?docid=88875033&ctxixpLink=FcmCtx1&ctxixpLabel=FcmCtx2. This
factor, coupled with Eastman Chemical Company’s changing business focus,
resulted in a maturing product portfolio at the site and declining net cash
flows as revenues from new business did not offset declining revenues from
existing products. Employment declined from a peak of about 750 in
the late 1990’s to about 400 in early 2005 through a series of
reductions-in-force.
Faced with declining net cash flows
from a mature product portfolio and substantial competitive pressure in existing
businesses, plant management began to actively pursue new businesses in which to
focus the Batesville
9
plant’s
manufacturing capabilities. This management team became convinced
that the plant was ideally suited relative to geography and capabilities to
manufacture products for the emerging alternative fuels markets. With
nominal corporate direction and support, a local biobased products platform was
launched in early 2005, comprising biofuels (biodiesel, bioethanol and
lignin/biomass solid fuels) and biobased specialty chemical products (biobased
solvents, chemicals and intermediates). With minimal capital
expenditures, and using local technical resources, the management team was able
to initiate biodiesel batch production in October 2005 at a capacity of
3 million gallons per year (subsequently expanded to 9 million gallons
per year), while pursuing expansion via continuous processing to an aggregate
plant capacity of 24 million gallons per year. The
24 million gallon per year capacity threshold was reached in October
2006. Entry into the biofuels business was accomplished with excess
plant capacity and without any reduction in production of specialty
chemicals.
In mid 2005, Eastman Chemical Company
decided that specialty chemicals would no longer be a core business and that it
would seek to divest the Batesville plant. Eastman Chemical Company
executed an acquisition agreement with us on July 21, 2006 pursuant to
which we agreed to purchase all of the issued and outstanding stock of
FutureFuel Chemical Company (then known as Eastman SE, Inc.). The
material terms of the acquisition agreement are discussed above. The
acquisition closed on October 31, 2006. FutureFuel Chemical
Company’s management team continued its development of the bio-based products
business throughout this divestiture process.
For the year ended December 31,
2006, approximately 85% of site revenue was derived from manufacturing specialty
chemicals for specific customers (“custom manufacturing”) with 6% of revenues
being derived from multi-customer specialty chemicals (“performance chemicals”)
and 9% from biodiesel. Custom manufacturing involves producing unique
products for individual customers, generally under long-term
contracts. The plant’s custom manufacturing product portfolio
includes a bleach activator for a major detergent manufacturer, a proprietary
herbicide for a major life sciences company and chlorinated polyolefin adhesion
promoters and antioxidant precursors for Eastman Chemical
Company. The performance chemicals product portfolio includes polymer
(nylon) modifiers and several small-volume specialty chemicals for diverse
applications.
We will continue the specialty
chemical business of FutureFuel Chemical Company. However, we expect
that FutureFuel Chemical Company’s biofuels platform will become the core
segment of the business. We intend to increase production capacity of
biodiesel within FutureFuel Chemical Company as set forth above, and will make
future capacity expansions when the market conditions discussed above support
such an increase, and to pursue commercialization of other biofuel products,
including cellulosic-derived ethanol. In pursuing this strategy,
FutureFuel Chemical Company will continue to establish a name identity in the
biofuels business, leverage its BQ-9000 quality certification, secure local and
regional markets and expand marketing efforts to fleets and regional/national
customers. Concurrent efforts will also seek to enhance margins via:
(i) volume increases; (ii) conversion cost reductions by transition to
continuous processing; (iii) expansion of feedstock options;
(iv) legislative incentives; and (v) value-enhancing applications for
glycerin co-product (from the biodiesel manufacturing process). These
items are discussed in greater detail below.
Biofuels Business Segment
Overview of the Segment
FutureFuel Chemical Company’s biofuels
segment was established in early 2005 as an initiative of the site management
team to leverage site technical and operational expertise as well as available
manufacturing capacity to pursue business growth opportunities in addition to
the legacy specialty chemicals business. Management targeted this
segment in recognition of three factors: (i) the abundance and diversity of
biomass raw materials in the immediate area of the plant site; (ii) the
ability to rapidly convert under-utilized facilities to biofuels production at
substantially advantaged capital cost relative to new construction; and
(iii) the existence of technical and operational expertise to position the
business as a high quality, low-cost industry leader. The biofuels
segment had no revenues for the year ended December 31, 2004,
inconsequential revenue for the year ended December 31, 2005, revenue of
$13,340,000 for the year ended December 31, 2006 and revenue of $1,852,000
for the three months ended March 31, 2007.
10
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:
|
|
·
|
extending
domestic diesel fuel supplies;
|
|
|
·
|
reducing
dependence on foreign crude oil
supplies;
|
|
|
·
|
expanding
markets for domestic and international agricultural
products;
|
|
|
·
|
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
|
|
|
·
|
being
usable by existing diesel engines while extending their useful lives (see,
e.g., http://www.cyberlipid.org/glycer/biodiesel.htm).
|
As a
result of the benefits that are expected from the widespread use of biodiesel,
federal and state laws, including tax laws, and governmental policy favor and in
some jurisdictions require the increasing use of biodiesel instead of
petrodiesel. See “Legislative Incentives” below.
Biodiesel commercialization was
achieved by FutureFuel Chemical Company in October 2005, five months following
initiation of that project. Technical and operational competency
developed as a supplier of specialty chemicals enabled the development of a
flexible manufacturing process which can utilize the broadest possible range of
feedstock oils, including soy oil, cottonseed oil, palm oil, pork lard, poultry
fat and beef tallow. The Batesville plant produces B100 (100%
biodiesel) and B99.9 (99.9% biodiesel; .1% petrodiesel blend), the latter
product priced net of the federal excise tax credit for those customers who do
not wish to establish themselves as tax-qualified blenders. B20 (20%
biodiesel; 80% petrodiesel) is currently used in the facility’s diesel fleet and
became available for retail sale at the site in March 2007. During
the first quarter of 2008, FutureFuel Chemical Company intends to begin blending
biodiesel with petrodiesel at a liquid bulk storage facility in Little Rock,
Arkansas and selling B2, B5, B10 and B20 grades.
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. Also, the U.S. Department of Energy has awarded six grants to
facilitate the construction of the initial commercial-scale demonstration
facilities. See http://www.doe.gov/news/4827.htm. FutureFuel
Chemical Company initiated its
11
cellulosic
ethanol research and development program in December 2005 and incurred costs
associated therewith through September 2007 of approximately
$400,000. 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. FutureFuel Chemical Company engaged in
discussions with the State of Arkansas, primarily through the Arkansas Economic
Development Commission, regarding the potential for state grant support for the
cellulosic ethanol program. Subsequently, the State of Arkansas
agreed to provide $2.1 million to fund, among other things, the
purchase of equipment for a pilot scale autohydrolysis unit. The
pilot scale autohydrolysis unit will pretreat cellulosic biomass prior to
conversion to ethanol. Construction of the pilot scale autohydrolysis
unit has not been scheduled at this time. As of the date of this
Registration Statement, FutureFuel Chemical Company has only evaluated
cellulosic based ethanol technologies at laboratory scale and has not commenced
commercial production using these technologies.
Cellulose
is composed of long chains of glucose molecules. In the hydrolysis
process, these chains are broken down to “free” the sugar to make it available
for fermentation to alcohol. There are two major hydrolysis
processes: a chemical reaction using acids and an enzymatic
reaction. Chemical hydrolysis is
performed by attacking the cellulose with an acid. Dilute acid may be
used under high heat and high pressure, or more concentrated acid can be used at
lower temperatures and atmospheric pressure. A de-crystalized
cellulosic mixture of acid and sugars reacts in the presence of water to
complete hydrolysis to individual sugar molecules. The product from
this hydrolysis is then neutralized and yeast fermentation is used to produce
ethanol. A significant obstacle to the dilute acid process is that
the hydrolysis is so harsh that toxic degradation products are produced which
can inhibit fermentation. Concentrated acid must be separated from
the sugar stream for recycling to be commercially attractive. In
addition, the aggressive acid conditions require more expensive materials of
construction for process equipment.
This is the biochemical technology
platform which FutureFuel Chemical Company is pursuing. There are
four stages to the overall process:
|
|
·
|
a
“pre-treatment” phase to make the raw material such as wood or straw
amenable to hydrolysis;
|
|
|
·
|
enzymatic
hydrolysis to break down the cellulose and hemicellulose into oligomers
and sugars;
|
|
|
·
|
yeast
fermentation of the sugar solution;
and
|
|
|
·
|
distillation
and drying to produce ethyl alcohol meeting fuel-grade ASTM
standards.
|
An alternative to the biochemical
technology platform is the thermo-chemical route. Also called the
“gasification” process, it does not rely on chemical decomposition of the
cellulose chain. Instead of breaking the cellulose into sugar
molecules for fermentation, the carbon in the cellulosic raw material is
converted into synthesis gas. The resulting carbon monoxide, carbon
dioxide and hydrogen may then be fed into a specially designed
fermentor. Instead of yeast, which operates on sugar, this process
uses a microorganism to convert the synthesis gas products to
ethanol. The thermo-chemical process can be broken into three
steps:
|
|
·
|
gasification
— complex carbon based molecules are broken apart to access the carbon as
carbon monoxide, carbon dioxide and hydrogen are
produced.
|
12
|
|
·
|
fermentation
— the carbon monoxide, carbon dioxide and hydrogen are converted into
ethanol using developed organisms such as the Clostridium ljungdahlii
organism.
|
|
|
·
|
distillation
— ethanol is separated from water and other co-products and dried to meet
fuel-grade ASTM standards.
|
The production of cellulosic ethanol by
FutureFuel Chemical Company through the biochemical route is in the research and
development stage as discussed above. FutureFuel Chemical Company has
entered into discussions with various parties to develop some of the necessary
technology for the commercial production of cellulosic ethanol, also as
discussed above. We can give no assurances, however, that FutureFuel
Chemical Company will be able to bring cellulosic ethanol to commercial
realization.
Emerging Biodiesel
Industry
Diesel fuel is the motor fuel that is
used in a compression-ignition engine which causes fuel to combust not by
igniting the fuel with a spark but by injecting the fuel into a highly
pressurized combustion chamber. There are two principal types of
diesel fuel: petrodiesel and biodiesel. Petrodiesel is made from
petroleum feedstock and comprises substantially all of the diesel fuel sold in
the United States and elsewhere. Diesel fuel made from renewable
vegetable oil or animal fat feedstock is called biodiesel. To be sold
and distributed as biodiesel, the fuel must meet governmental standards, such as
ASTM D6751 in the United States and EN14214:2003 in the European
Union. The ASTM biodiesel specification defines biodiesel fuel as a
fuel comprised of mono-alkyl esters of long-chain fatty acids derived from
vegetable oils or animal fats. In Europe, the biodiesel specification
is defined as fatty acid methyl esters. Biodiesel can be used in its
pure form, known as B100, or blended in any ratio with conventional
petrodiesel. Typical biodiesel blends are 2% (B2), 5% (B5) and 20%
(B20).
13
Petrodiesel currently comprises more
than 99% of the diesel transportation fuel market. According to the
Energy Information Association of the U.S. Department of Energy, on-highway
petrodiesel consumption in 2005 was approximately 38 billion gallons in the
United States (see http://tonto.eia.doe.gov/dnav/pet/pet_cons_821dsta_dcu_nus_a.htm). We
believe that use of diesel fuel will increase as a percentage of total
on-highway ground transportation in the United States for several reasons,
including:
|
|
·
|
after
compliance with the new low-sulfur requirements, diesel fuel will become
less toxic;
|
|
|
·
|
diesel
fuel is more fuel efficient than
gasoline;
|
|
|
·
|
diesel
engines are being installed in a larger number of commercially successful
automobiles; and
|
|
|
·
|
clean
diesel light vehicles provide government-owned fleets with an option for
increasing vehicle efficiency.
|
According
to the 2005 Ricardo diesel report, sales of clean diesel vehicles are projected
to increase from 43,000 units in 2004 to over 1.5 million in 2015, driving
increased diesel fuel sales for those vehicles. See http://www.ricardo.com/media/pressreleases/pressrelease.aspx?page=18.
Despite these trends that indicate
increased demand for diesel fuel, the price of petrodiesel closely tracks the
cost of petroleum crude oil. Significantly since 2002, worldwide
demand for petroleum-based products has been growing faster than
supply. See http://www.eia.doe.gov/emeu/steo/pub/special/high-oil-price.html.
Beginning on June 1, 2006, new
federal laws went into effect that are likely to significantly affect the market
for petrodiesel. These laws limit the amount of sulfur content
allowed in diesel fuel, reducing the portion of sulfur allowed in diesel fuel
for on-highway use by more than 95%. Consequently, ultra low sulfur
diesel may result in price increases to users of the fuel.
Petrodiesel currently has several
advantages over biodiesel, including the following.
|
|
·
|
Petrodiesel
costs less to make per gallon than
biodiesel.
|
|
|
·
|
Infrastructure
is in place to transport great quantities of petrodiesel (such as
pipelines and bulk storage
facilities).
|
|
|
·
|
The
petrodiesel industry has solved cold temperature limitations of
petrodiesel.
|
|
|
·
|
The
petrodiesel industry has solved storage stability issues with
petrodiesel.
|
|
|
·
|
Petrodiesel
meeting fuel quality standards is relatively easy to
manufacture.
|
|
|
·
|
Biodiesel
contains 8% less energy per gallon than petrodiesel. See http://www.nrel.gov/vehiclesandfuels/npbf/pdfs/40555.pdf
|
Notwithstanding the foregoing, the
biodiesel industry has emerged as an alternative to petrodiesel based
principally on the advantages of biodiesel over petrodiesel. Those
advantages include:
|
|
·
|
Biodiesel
is made from renewable sources.
|
|
|
·
|
When
burned, biodiesel results in a substantial reduction of unburned
hydrocarbons, carbon monoxide and particulate matter as compared to
petrodiesel.
|
|
|
·
|
Biodiesel
is biodegradable and nontoxic and is not considered a hazardous material
when spilled.
|
|
|
·
|
Biodiesel
is essentially free of sulfur and
aromatics.
|
|
|
·
|
The
overall ozone forming potential of the hydrocarbon exhaust emissions from
biodiesel is nearly 50% less than that for
petrodiesel.
|
14
|
|
·
|
Biodiesel
is registered as a fuel and fuel additive with the U.S. Environmental
Protection Agency and B100 biodiesel has been designated as an alternative
fuel by the U.S. Departments of Energy and
Transportation.
|
|
|
·
|
Biodiesel
can use domestic feedstock, reducing the amount of crude oil imported into
the U.S.
|
|
|
·
|
Public
policy, both as enacted into law and as enunciated by governmental
agencies in the United States, favors the production and use of
biodiesel.
|
|
|
·
|
Biodiesel
can be blended with petrodiesel in any
ratio.
|
See,
for example, http://www.biodiesel.org/pdf_files/fuelfactsheets/Benefits%20of%20Biodiesel.Pdf.
Based on these advantages, we believe
that demand for biodiesel will continue to grow at accelerated rates both in the
United States and internationally over the next several years. The
rising demand for biodiesel may also reflect or track the increasing amounts of
biodiesel that are forecasted to be produced in the U.S. Although the
existence of production capacity does not necessarily result in increased
demand, we believe that increased availability of biodiesel as an alternative
fuel to petrodiesel will result in wider voluntary consumer adoption and
increased production of both diesel vehicles capable of burning blends of
biodiesel and petrodiesel as well as vehicles that will burn mixes in which
biodiesel predominates.
Although biodiesel use is still in
its infancy, biodiesel production has grown substantially since
1999. The National Biodiesel Board’s estimate of biodiesel production
in the United States for the period 1999 through 2005 inclusive is set forth in
the following chart. See http://www.biodiesel.org/pdf_files/fuelfactsheets/Biodiesel_Sales_Graph.pdf. FutureFuel
Chemical Company is a member in the National Biodiesel Board.
Table
1
Estimated
Gallons of Biodiesel Produced in the United States
The
United States Department of Agriculture estimates that biodiesel production
reached 225 million gallons in 2006 (see http://www.eia.doe.gov/bookshelf/brochures/diesel/index.html)
whereas the National Biodiesel Board
15
estimates this number at 250 million gallons (see
http://www.biodiesel.org/pdf_files/fuelfactsheets/Biodiesel_Sales_Graph.pdf).
As of June 7, 2007, the
National Biodiesel Board listed 148 operating biodiesel facilities in the United
States, including FutureFuel Chemical Company, with a combined estimated
capacity of 1.39 billion gallons per year. See http://www.biodiesel.org/pdf_files/fuelfactsheets/Production_Capacity.pdf. Furthermore,
the Board projected that 96 new facilities were under construction and 5
existing plant expansions were underway for a total of approximately
1.89 billion gallons per year of new capacity by mid-2008. Id. According to
the National Biodiesel Board, biodiesel is available nationwide. See
http://www.biodiesel.org/buyingbiodiesel/guide/.
For the above-cited reasons, we believe
that a substantial market for biodiesel is emerging in the United
States. However, the industry faces several challenges to wide
biodiesel acceptance, including cold temperature limitations, storage stability,
fuel quality standards and exhaust emissions. FutureFuel Chemical
Company is actively engaged in addressing these challenges.
Biodiesel from nearly all feedstocks
has cold temperature limitations in that it freezes at higher temperatures than
conventional petrodiesel. Although not free from doubt, it appears
that, at low temperatures, the long chain molecules of methyl ester align
alongside each other and set into a crystalline structure which may continue to
attract other molecules until the crystal reaches a massive size and can be seen
in the fluid as a haze and then, after a certain time,
wax. Conventional petrodiesel also exhibits cold temperature flow
problems; however, the petrochemical industry developed both additives and a
high temperature catalytic process which isomerizes the long chain molecules,
thereby improving cold flow. The challenge for biodiesel is to
achieve effective cold flow properties. FutureFuel Chemical Company
is acquiring fundamental knowledge on this characteristic through its internal
research program. Cold-solvent extraction, solubilization, additives
and other approaches are being investigated for their potential to mitigate
these cold temperature limitations.
The relatively poor oxidative and
hydrolytic stabilities of biodiesel are a concern with respect to fuel quality
during storage. We believe that FutureFuel Chemical Company may be
one of the first biodiesel producers to store biodiesel in large off-site
storage tanks. Experience gathered in the use of such tankage,
including cleaning and handling methods, stabilization additives and the use of
water draws, will assist FutureFuel Chemical Company in ensuring fuel quality
during storage and distribution.
A challenge facing the biodiesel
industry relates to compliance of product to established fuel quality standards
reflected in ASTM D6751. A national fuel quality testing project
co-funded by the National Biodiesel Board and the National Renewable Energy
Laboratory found that one-third of biodiesel samples tested between November
2005 and July 2006 did not comply with these specifications. See
http://www.rendermagazine.com/December2006/BiodieselBulletin.html. FutureFuel
Chemical Company strives to ensure that all biodiesel produced by it meets ASTM
D6751 through process control and product testing protocols that have been
certified to the industry BQ-9000 quality standard. In addition,
FutureFuel Chemical Company is actively participating in industry and ASTM-led
programs to further improve biodiesel testing methodology and specifications in
an effort to enhance biodiesel fitness-for-use under the broadest possible range
of temperature and handling conditions.
We believe that the industry, with
support from producers such as FutureFuel Chemical Company, can resolve in a
commercially reasonable manner the quality and fitness-for-use issues facing the
emerging biodiesel market, although no assurances can be given that the industry
will ultimately be successful with respect to all of these challenges or that
biodiesel will, in fact, achieve wide-spread acceptance.
Volatile Margins
The profit margin generated in the
production of biodiesel, on a per gallon basis, is calculated as sales price
less feedstock and production costs. Sales price is generally based
on the spot price of petrodiesel, plus federal credits, plus or minus small
regional and/or market-specific variances. Feedstock costs include
the cost of vegetable oil, animal fat or waste grease. Production
costs include the cost of methanol, a catalyst, direct labor and
variable and fixed costs associated with the operation of a biodiesel
plant.
16
Looking first at sales price, we are
not aware of any public postings of daily biodiesel prices for the entire year
of 2006.(a) However,
such prices tend to follow the price of petrodiesel plus the $1.00 per gallon
federal blending credit. Biodiesel producers may also need to account
for regional and/or market-specific factors in setting their sales price for
biodiesel. These factors may include the size of the local market,
the distance that product must be shipped to reach local or other markets, the
availability of storage and distribution infrastructure, the premium that local
markets may place on alternative fuels and the feedstock source used in
producing biodiesel. Of the three price components, the price of
petrodiesel is the most significant and also the most volatile. The
spot prices of one gallon of low sulfur No. 2 petrodiesel in the U.S. Gulf Coast
during 2006 are set forth in the following chart.
__________
|
(a)
|
This
is changing for 2007 in that both OPIS and Platts are now publishing
posted prices for biodiesel at various locations throughout the United
States.
|
Table
2
Source:
Department of Energy- http://tonto.eia.doe.gov/dnav/pet/hist/rdlusgd.htm.
While
the net change in the spot price of petrodiesel was modest for 2006 as a whole,
intra year price movements where characterized by relatively high
volatility. As an example, the price of petrodiesel declined by $0.76
per gallon between August 30, 2006 and September 14, 2006, a 32%
decrease in 15 days.
The three primary feedstocks for
biodiesel include vegetable oil, animal fat and waste grease. See
http://tonto.eia.doe.gov/FTPROOT/environment/biodiesel.pdf. The
markets for animal fats and waste greases in the United States and worldwide are
smaller and less liquid than those for vegetable oils. See http://www.iasc-oils.org/word%20docs/Campbell_speech.pdf. In
addition, vegetable oils are generally a preferred feedstock as they contain
lower free fatty acids and are easier to process into a fuel that meets industry
specifications. See www.rpi.edu/dept/chem-eng/WWW/faculty/bequette/URP/Czech-report.pdf. In
the United States, soybean oil comprises the largest percentage of the overall
vegetable oil market (see http://www.epa.gov/ttnecas1/regdata/IPs/Vegetable%20Oil_IP.pdf),
and is also the primary feedstock oil for producing biodiesel. As set
forth above, according to the United States Department of Agriculture, soybean
oil constitutes more than 90% of the feedstock for biodiesel. The
following chart sets forth the closing spot price of soybean oil during the year
2006.
17
Table
3
Bloomberg
The
net increase in the spot price of soybean oil during 2006 as a whole was
24%. Similar to petrodiesel prices, intra year price movements were
characterized by relatively high volatility. As an example, between
October 3, 2006 and December 1, 2006, soybean oil prices increased
approximately 5.94¢ per pound, a 26% increase in 59 days. One gallon
of biodiesel requires approximately 7.3 pounds of soybean oil, depending on the
yield a biodiesel producer generates from the conversion of soybean oil into
biodiesel, which in turn depends on that producer’s technology and production
techniques. See http://www.eere.energy.gov/afdc/altfuel/bio_market.html. The
5.94¢ per pound increase in soybean oil between October 3, 2006 and
December 1, 2006 resulted in an increased feedstock cost for biodiesel
producers of approximately $0.44 per gallon. Biodiesel producers can
reduce feedstock costs by expanding or converting their processing methods to
include animal fats and waste greases, which historically can be acquired at
substantial discounts to soybean oil. See http://www.ciras.iastate.edu/bioindustry/info/AlternativeFeedstocksAndBiodieselProduction.pdf. FutureFuel
Chemical Company is capable of processing several types of animal fat into
biodiesel and is procuring and processing these feedstocks at
present. However, soybean oil remains an important feedstock for
FutureFuel Chemical Company and the primary feedstock for the industry as a
whole and is the most relevant feedstock cost to consider when analyzing
margins.
Production costs include the cost of
methanol, a catalyst, direct labor and fixed and variable costs associated with
operating a biodiesel plant. Fixed costs include such items as labor,
energy, supplies, insurance, taxes and maintenance, among
others. Although production costs can vary depending upon the
processing method employed (batch processing versus continuous process, methanol
recovery and the like), and other factors, they are considered somewhat
stable. According to the United States Department of Agriculture,
production costs for biodiesel average $0.50 per gallon industry
wide. See http://www.usda.gov/oce/newsroom/congressional_testimony/Collins_011007.pdf.
While each of the three components of
profit margin (sales price, feedstock cost and production cost) vary based on
the location of a biodiesel producer, the size, proximity and logistical
infrastructure of its regional market, the acceptance of alternative fuels in
that market, the feedstock utilized, processing methods and techniques, and the
efficiency and cost structure of individual producers, it is possible to utilize
the data presented in the preceding discussion to calculate a hypothetical
biodiesel margin per gallon between January 1, 2006 and December 31,
2006. This margin is calculated as follows:
18
|
Basis
of Daily Data
|
||
|
Sales
Price
|
Spot
price of one gallon of low sulfur No. 2 petrodiesel in the U.S. Gulf Coast
plus $1.00 per gallon federal blending credit
|
|
|
Less:
Feedstock Cost
|
USDA
crude soybean oil spot price per pound times 7.3
|
|
|
Less:
Production Cost
|
$0.50
per gallon industry wide average according to the United States Department
of Agriculture
|
|
|
Equals:
Hypothetical Margin
|
Utilizing
the calculation set forth above, biodiesel margins for 2006 would be as set
forth in the following chart.
Table
4
Note: The
margins set forth in the chart above do not include regional and/or
market-specific factors, which may increase or decrease the sales price of
biodiesel by as much as 10% or more. In addition, margins depicted
above exclude transportation costs associated with moving soybean oil to a
biodiesel plant or delivering biodiesel to end markets. These costs
vary widely depending on a plant’s proximity to soybean crushing facilities and
end markets and cannot be estimated for the industry as a whole with any degree
of accuracy.
Between
October 3, 2006, the date that we sent our shareholders notice of the
special meeting to approve the acquisition of FutureFuel Chemical Company, and
December 31, 2006, the hypothetical margin on the production of biodiesel
decreased from $0.50 per gallon to $0.15 per gallon, a 70%
decrease. Although FutureFuel Chemical Company’s actual sales price,
feedstock cost and production costs varied from these hypothetical numbers (and
no assurances can be given that FutureFuel Chemical Company’s actual sales
price, feedstock costs and/or production costs will approximate those
hypothetical numbers in the future), its margins did decrease substantially
during this same period.
We expect FutureFuel Chemical Company’s
margins to remain volatile in future years and no assurances can be given that
such margins will be positive. We intend to address volatile margins
through: (i) our current ability to process lower cost animal fat
feedstocks; (ii) our research and development efforts aimed at developing
methods of processing additional lower cost crude vegetable oils, animal fats
and waste greases; (iii) cost efficiencies and economies of scale gained as
we refine our processing methods, improve our methanol recovery capabilities and
increase our biodiesel production capacity; and (iv) construction of
storage capacity on-site and leases of storage capacity off-site to enable us to
acquire large quantities of feedstock oils when market conditions are favorable
or to store biodiesel when market conditions are not favorable.
19
As a final consideration, the two
primary variables described above that affect biodiesel margins (and the
volatility of those margins) are petrodiesel and soybean oil, both of which are
actively traded on commodity exchanges. Through the purchase and sale
of futures contracts or options on futures contracts, biodiesel producers can
effectively hedge their sales price and feedstock cost when market conditions
permit. FutureFuel Chemical Company has already pursued certain
hedging strategies and intends to continue doing so in the future, as further
described herein. However, no assurance can be given that such
hedging strategies will be successful to protect us from all commodity price
risks.
The Biodiesel Production
Process
Biodiesel can be made from renewable
sources such as:
|
|
·
|
refined
virgin vegetable oils;
|
|
|
·
|
refined
animal fats; and
|
|
|
·
|
used
cooking oils and trap grease.
|
The
choice of feedstock is determined primarily by the price and availability of
each feedstock variety and the capabilities of the producer’s biodiesel
production facility. In the United States, the majority of biodiesel
historically has been made from domestically produced soybean
oil. However, palm oil imported from Malaysia and Indonesia is being
considered as a viable alternative due to price, availability and expected
supply elasticity. See, for example, http://en.wikipedia.org/wiki/Palm_oil. FutureFuel
Chemical Company’s plant has been designed to process a wide variety of
feedstocks to take advantage of fluctuating prices and availability of the
various feedstocks.
The biodiesel manufacturing process has
three distinct steps: the chemical reaction step, the separation step and the
polishing step.
Table
5
20
Chemical
Reaction. In the chemical reaction step, a mix of biodiesel
glycerin and soap is created from the selected feedstock, methanol and a
catalyst. The collection of equipment that performs this chemical
reaction step in producing biodiesel is referred to as the
“reactors.” Depending upon the type of reactor used, the mix of
biodiesel glycerin and soap produced requires differing degrees of further
processing to separate the methyl esters comprising the biodiesel from the
glycerin and soap, to clean or “polish” both the biodiesel and glycerin and to
recover excess methanol from both the biodiesel and
glycerin. Generally, the more efficient the reactor, the less
downstream processing that is required. If the feedstock used is high
in free fatty acids, an esterification step may be
required. Esterification is a chemical reaction in which two
chemicals (typically an alcohol and an acid) form an
ester. Transesterification is the process of exchanging the alkoxy
group of an ester compound by another alcohol.
Separation. The
methyl esters are separated from the glycerin and soap produced during the
chemical reaction step.
Polishing. The
methyl esters are purified to remove residual catalysts and other
impurities. Any excess water and methanol is also removed and may be
recycled into earlier steps in the production process train.
Legislative Incentives
Agencies of the United States
government, including the Department of Energy, the Environmental Protection
Agency, the Internal Revenue Service and the Department of Agriculture, and many
states offer biodiesel incentives or have mandates for the use of biodiesel, or
both. There are other governmental incentives that do not directly
reduce the net cost of producing or blending biodiesel but that drive the demand
for biodiesel. For example, tax credits are available under the
Internal Revenue Code for investment in qualifying refueling property, the
Environmental Protection Agency will pay 50-100% of the cost for schools to
upgrade and/or replace their buses, and programs administered by the Department
of Energy indirectly require government fleet operators to purchase substantial
amounts of biodiesel. The principal federal incentives that we
believe will have the greatest positive effect on FutureFuel Chemical Company’s
business are discussed below.
The Energy Policy Act of 1992 requires
government fleet operators to use a certain percentage of alternatively fueled
vehicles. The Act established a goal of replacing 10% of motor fuels
with non-petroleum alternatives by 2000, increasing to 30% by the year
2010. Currently, 75% of all new light-duty federal vehicles purchased
are required to have alternative fuel capability to set an example for the
private automotive and fuel industries.
Under the Energy Conservation
Reauthorization Act of 1998, vehicle fleets that are required to purchase
alternatively fueled vehicles can generate credit toward this requirement by
purchasing and using biodiesel in a conventional vehicle. Since there
are few cost-effective options for purchasing heavy-duty alternatively fueled
vehicles, federal and state fleet providers can meet up to 50% of their
heavy-duty alternatively fueled vehicle purchase requirements with
biodiesel. The biodiesel fuel credit allows fleets to purchase and
use 450 gallons of biodiesel in vehicles in excess of 8,500 pounds gross vehicle
weight instead of alternatively fueled vehicles. Fleets must purchase
and use the equivalent of 450 gallons of pure biodiesel in a minimum of a 20%
blend to earn one credit. Covered fleets earn one vehicle credit for
every light-duty alternatively fueled vehicle they acquire annually beyond their
base vehicle acquisition requirements. Credits can be banked or
sold.
In October 2004, Congress passed a
biodiesel tax incentive, structured as a federal excise tax credit, as part of
the American Jobs Creation Act of 2004. The credit amounts to a penny
for each percentage point of vegetable oil or animal fat biodiesel that is
blended with petrodiesel (and one-half penny for each percentage point of
recycled oils and other non-agricultural biodiesel). For example,
blenders that blend B20 made from soy, canola and other vegetable oils and
animal fats receive a 20¢ per gallon excise tax credit, while biodiesel made
from recycled restaurant oils (yellow grease) receive half of this
credit. The tax incentive generally is taken by petroleum
distributors and substantially passed on to the consumer. It is
designed to lower the cost of biodiesel to consumers in both taxable and
tax-exempt markets. The tax credit was scheduled to expire at the end
of 2006, but was extended in the Energy Policy Act of 2005 to the end of
2008.
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
21
diesel
pool, with the Environmental Protection Agency being directed to determine the
share to be allocated to biodiesel and other details through its rulemaking
process. The Act also extended the biodiesel tax credit to 2008 and
included a new tax credit for renewable diesel. More specifically,
the RFS requires a specific amount of renewable fuel to be used each year in the
nationwide gasoline and diesel pool. The volume increases each year,
from 4 billion gallons per year in 2006 to 7.5 billion gallons per
year in 2012. The Act requires the Environmental Protection Agency,
beginning in 2006, to publish by November 30th of each
year, “renewable fuel obligations” that will be applicable to refineries,
blenders and importers in the contiguous 48 states. There must be no
geographic restrictions on where renewable fuel may be used or per-gallon
obligations for the use of renewable fuel. The renewable fuel
obligations are required to be expressed in terms of a volume percentage of
gasoline sold or introduced into commerce and consist of a single applicable
percentage that will apply to all categories of refineries, blenders and
importers. The renewable fuel obligations are to be based on
estimates that the Energy Information Association provides to the Environmental
Protection Agency on the volumes of gasoline it expects will be sold or
introduced into commerce. In terms of implementing the RFS for
the year 2006, the Environmental Protection Agency released a rule determining
that the RFS target for 2006, 4 billion gallons of renewable fuel in the
gasoline and diesel pool, will be considered to be met, given the then-current
expectations of production of both ethanol and biodiesel for that
year. If the Environmental Protection Agency had determined the 2006
target was not being met, refiners, blenders and importers would be obligated to
make up the shortfall in the year 2007. The Environmental Protection
Agency released the final rules to implement the RFS on April 10,
2007. Under those rules, the RFS compliance period did not begin
until September 1, 2007.
The Energy Policy Act of 2005 also
created a new tax credit for small agri-biodiesel producers with production
capacity not in excess of 60 million gallons, of 10¢ per gallon for the
first 15 million gallons of agri-biodiesel produced. We believe
that FutureFuel Chemical Company’s 2007 biodiesel production capacity will not
exceed 60 million gallons and thus will qualify for this
credit.
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 Bill of 2005, this bill provided a RFS
carve-out applicable specifically to biodiesel. This is significant
because the RFS requirement of the Energy Bill 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 a 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
|
22
|
Federal
Agency
that
Administers/
Oversees
|
Type
of
Incentive
|
Who
Receives
Incentive
|
Commonly
Known
As
|
Summary
|
|
utilizes
this program to grant up to a 50% cost share (depending on the age and
emissions of the original bus) to replace school buses with buses that
operate on alternative fuel or low-sulfur diesel, or up to 100% for
retrofit projects.
|
||||
|
USDA
|
grant
program
|
agricultural
producers and small businesses
|
Renewable
Energy Systems and Energy Efficiency Improvements Grant
|
In
2005, the U.S. Department of Agriculture’s Office of Rural Development
made available $22.8 million in competitive grant funds and
guaranteed loans for the purchase of renewable energy systems and energy
improvements for agricultural producers and small rural
businesses. Eligible projects include biofuels, hydrogen and
energy efficiency improvements, as well as solar, geothermal and
wind.
|
|
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.
Illinois and Minnesota have mandated
the use of B2 in all diesel fuel sold in their respective states subject to
certain conditions that include sufficient annual production capacity (defined
as at least 8 million gallons). The mandate took effect in
Minnesota in September 2005 and in Illinois in July 2006. Our review
of state statutes reveals that approximately 35 states provide either user or
producer incentives for biodiesel, several states provide both types of
incentives and approximately 21 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.
23
BQ-9000 Status
The BQ-9000 program was launched in
late 2005 by the National Biodiesel Board. The program requires
certified and accredited companies to possess a quality manual and quality
control system and employ best practices in biodiesel sampling, testing,
blending, shipping, storage and distribution. The goal of the program
is to help assure quality of biodiesel from plant gate to consumer
tank.
FutureFuel Chemical Company
recognized the potential to establish itself as an industry quality leader
through extension of its existing chemical ISO 9001 quality systems to biodiesel
production. Management further recognized the need within this
developing industry to provide a consistent ASTM standard product as an
essential requirement for market expansion into fleet, government and
on-the-road applications. In February 2006, shortly after the
biodiesel industry established its comprehensive quality standard, BQ-9000,
FutureFuel Chemical Company achieved the fourth such certification in the nation
(as of October 15, 2007, only 19 biodiesel producers had achieved this
quality standard - see http://www.bq-9000.org/companies/producers.aspx). Consistent
with BQ-9000, all manufactured product is tested in on-site quality control
laboratories and confirmed to meet the ASTM D6751 standard.
Future Strategy of the Enlarged
Group
We intend to expand FutureFuel Chemical
Company’s biodiesel capacity utilizing available facilities as market conditions
dictate as described above. All future capacity will be operated in
continuous processing mode to realize operating economies and optimum
throughput. Existing and future processes will accommodate a wide
range of feedstock oils, allowing optimization relative to supply and
pricing.
FutureFuel Chemical Company is pursuing
the commercialization of cellulosic-based ethanol, initially to be produced from
local hardwood biomass. FutureFuel Chemical Company’s research and
development program with respect to cellulosic-based ethanol includes
collaboration with the National Renewable Energy Laboratory (“NREL”) and
other private-sector technology providers. These NREL collaborations
consisted of an assessment of the proposed FutureFuel Chemical Company
technologies for cellulosic ethanol and mapping of these unit operations to an
existing production facility. NREL also supported FutureFuel Chemical
Company in establishing analytical assay techniques for cellulosic biomass and
its hydrolysates. Private sector collaborators have been major enzyme
suppliers who have provided commercial and pre-commercial cellulose enzyme
products, as well as technical support for their use. As with
biodiesel, FutureFuel Chemical Company intends to leverage technical expertise
and existing idle manufacturing assets to move this emerging technology from the
development stage to commercial reality. The biochemical platform
approach being pursued seeks to assemble demonstrated component technologies in
a process design that leverages current facility infrastructure and
capabilities.
Federal and state support incentives
are anticipated to be available for cellulosic ethanol commercial
development. We intend to take full advantage of incentives as they
are promulgated into regulation and practice. 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 are estimated at approximately
$418,000 and are expected to be incurred in the 4th quarter
of 2007 and during 2008). We believe this technology, if successfully
demonstrated, may be adapted as a key component technology 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. Through the utilization of
liquid bulk storage facilities
24
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, 2006, two of FutureFuel Chemical
Company’s customers represented 50% of biodiesel revenues (5% of total
revenues), five customers represented 65% of biodiesel revenues (6% of total
revenues) and the tolling agreement represented 9% of biodiesel revenues (1% of
total revenues). Although the regional market is still being
developed, we estimate that the regional direct market available to FutureFuel
Chemical Company at maturity will be at least 30 million gallons per
year.
Competition
FutureFuel Chemical Company competes
with other producers of biodiesel, both locally, regionally and
nationally. There was one other operational biodiesel plant in the
state of Arkansas (in Stuttgart, southeast of Little Rock), with capacity stated
at 3 million gallon per year. However, that plant has closed 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 late 2007 or early 2008. National producers of
biodiesel are described above.
In addition to biodiesel producers,
FutureFuel Chemical Company competes with new technologies that are being
developed as alternatives to biodiesel. For example, in December
2006, ConocoPhillips announced that commercial production of renewable diesel
fuel had begun at its Whitegate refinery in Cork Island, Ireland. The
production process, developed by ConocoPhillips, uses soybean and other
vegetable oils to produce fuel that meets European diesel fuel
standards. The fuel is produced using existing equipment at the
refinery and is blended and transported with petroleum-based
diesel. ConocoPhillips claims that renewable diesel is chemically
similar to conventional petrodiesel and can be shipped through common carrier
pipelines. ConocoPhillips is evaluating this technology for use in
the United States. UOP, a major supplier to the petrochemical
refining industry, has also reported the development of technology for the
production of fungible fuels (diesel and gasoline) by hydro-processing of
vegetable oils and cellulose. See http://www.alternatefuelsworld.com/greendiesel-greengasoline.html. We
cannot give any assurances that renewable diesel fuel (or some other product)
produced by these competing technologies will not supplant biodiesel as an
alternative to conventional petrodiesel.
Supply and Distribution
As a result of its feedstock-neutral
process, FutureFuel Chemical Company is able to source oils from a broad
supplier base which includes pork, chicken and beef rendering facilities from
both national and regional suppliers. Soy oil is also sourced from
several national and regional producers. Cottonseed oil has been
sourced from a regional cooperative. All feedstocks are currently
supplied by either rail or truck. FutureFuel Chemical Company is
currently exploring the possibility of importing palm oil
feedstocks. We believe that an adequate supply of feedstocks can be
sourced to support anticipated production.
We intend that biodiesel and other
biofuels will be sold at the plant site as well as shipped to liquid bulk
storage facilities for further distribution. Plant site sales are
made by railcar and tank truck. Biodiesel is being delivered to
liquid bulk storage facilities by company-owned tank trucks and common carriers
for distribution there and for further transportation by barge.
Chemicals Business Segment
Overview of the Segment
FutureFuel Chemical Company’s chemicals
segment manufactures diversified chemical products that are sold externally to
third party customers and to Eastman Chemical Company. This segment
comprises two components: “custom manufacturing” (manufacturing chemicals for
specific customers); and “performance chemicals” (multi-customer specialty
chemicals). The chemicals segment had revenue of $35,654,000 for the
three months ended March 31, 2007 and revenues of $137,430,000,
$119,539,000 and $144,157,000 for the years ended December 31, 2006, 2005
and 2004, respectively.
25
Chemical Products
Custom manufacturing involves producing
unique products for individual customers, generally under long-term
contracts. Many of these products are produced under confidentiality
agreements in order to protect intellectual property. This is a
service-based business where customers value technical capabilities,
responsiveness and process improvement to continually improve costs and
reliability. In recent years, a trend toward off-shoring (to China
and India in particular) has placed significant downward pressure on
margins. The plant’s custom manufacturing product portfolio includes
four large products or product families which are generally produced throughout
the year: (i) nonanoyloxybenzenesulfonate (“NOBS”), a
bleach activator for The Procter & Gamble Company, a major detergent and
consumer products manufacturer; (ii) a proprietary herbicide for Arysta
LifeScience North America Corporation, a major life sciences company;
(iii) chlorinated polyolefin adhesion promoters (“CPOs”) for
Eastman Chemical Company; and (iv) antioxidant precursors (“DIPBs”)
for Eastman Chemical Company. The portfolio also contains a number of
smaller products which are produced intermittently in a “batch campaign” mode,
for diverse customers and end markets.
Performance chemicals comprises
multi-customer products which are sold based upon specification and/or
performance in the end-use application. This portfolio includes a
family of polymer (nylon) modifiers and several small-volume specialty chemicals
for diverse applications.
FutureFuel Chemical Company has
historically manufactured CPOs and DIPBs at cost for Eastman Chemical
Company. CPOs are chemical intermediates that promote adhesion for
plastic coatings and DIPBs are intermediates for production of Eastman Chemical
Company products used as general purpose inhibitors, intermediates or
antioxidants. Historically, revenues related to CPOs and DIPBs were
exactly offset by cost of goods sold; hence there was no effect on gross profit
for the years ended December 31, 2004 and 2005 or the ten-months ended
October 31, 2006. As part of our acquisition of FutureFuel
Chemical Company, FutureFuel Chemical Company entered into conversion agreements
with Eastman Chemical Company whereby FutureFuel Chemical Company agreed to
produce these products on Eastman Chemical Company’s behalf. The
conversion agreements effectively provide a conversion fee to FutureFuel
Chemical Company based on volume manufactured, with a minimum annual
fee. In addition, the conversion agreements provide for revenue
adjustments for actual usage of raw materials versus a standard and stipulate
that Eastman Chemical Company will pay for substantially all raw material
expenses and allow for an annual inflation adjustment factor.
Future Strategy
To build on and maintain FutureFuel
Chemical Company’s reputation as a technology-driven competitive chemical
producer, we believe that FutureFuel Chemical Company must continuously focus on
cost control, operational efficiency and capacity utilization to maximize
earnings. The ability to utilize large scale batch and continuous
production processes and a continuous focus on process improvements allow
FutureFuel Chemical Company to compete effectively in the custom manufacturing
market and to remain cost competitive with, and for some products
cost-advantaged over, its competitors. We intend to improve margins
in this area of the FutureFuel Chemical Company business by careful management
of product mix with regard to size of opportunity, timing to market, capital
efficiency and matching of opportunities to assets and
capabilities.
We expect to derive significant
growth in the performance chemicals component primarily as a result of new
biobased co-products derived from biofuels manufacturing, such as glycerin and
derivatives. We believe that these products and applications will be
competitive in the marketplace due to advantaged raw material costs derived from
their co-product status. For example, for every gallon of biodiesel
produced, approximately one pound of co-product glycerin is
generated. See http://www.biodiesel.org/pdf_files/fuelfactsheets/prod_quality.pdf
and http://www.harvestcleanenergy.org/conference/HCE6/Frear2.pdf. Based
upon calculations made by FutureFuel Chemical Company, we estimate that the
production of glycerin from biodiesel represented 25% of U.S. domestic
production of glycerin in 2005 and we estimate that it represented over 60% of
the available U.S. domestic glycerin production in 2006. Production
of glycerin from biofuels has significantly reduced the value of glycerin in the
global marketplace and prices for refined glycerin have fallen by over 50% since
late 2004. See http://www.purchasing.com/article/CA6341035.html?ref=nbcs
and http://www.biodieselmagazine.com/article.jsp?article_id=1123. The
crude form of glycerin derived directly from biodiesel processing has little or
no value unless purified to an industrial grade quality. See http://www.biodieselmagazine.com/article.jsp?article_id=1123
and
26
http://www.ampc.montana.edu/policypaper/policy22.pdf . Many
small biodiesel producers lack this purification capability and we believe that
crude glycerin has become a disposal issue for many of these
producers. See http://www.biodieselmagazine.com/article.jsp?article_id=1123, and
http://www.biodieselmagazine.com/article.jsp?article_id=237&q=&page=all
and http://www.ampc.montana.edu/policypaper/policy22.pdf. Leveraging
its specialty chemicals expertise and infrastructure, FutureFuel Chemical
Company is capable of refining glycerin to sufficient purity to derive
commercial value as a co-product and/or converting glycerin through chemical
processing to higher-value derivative products. Commercial
development samples of refined glycerin (bulk quantities) are currently
available for customer evaluations. In July 2006, Eastman SE, Inc.
identified three key areas for the sale of glycerin: (i) sale of existing
unrefined material; (ii) sale of highly refined material; and
(iii) conversion of unrefined and refined material to higher value
products. FutureFuel Chemical Company has offered unrefined glycerin
to users thereof, which has led to sampling programs and field
tests. However, no sales have been arranged on terms satisfactory to
FutureFuel Chemical Company. It has refined glycerin in batch
equipment and has provided samples to various potential customers, but no sales
have been consummated. Conversion of glycerin to higher value
products is still in the research and development stage (for example, see the
discussion with respect to Virent Energy Systems LLC above).
Customers and Markets
FutureFuel Chemical Company’s chemical
products are used in a variety of market and end uses, including detergent,
agrochemical, automotive, photographic imaging, coatings, nutrition and polymer
additives. These products are generally non-cyclical; however, the
customers are often the “brand owners” and therefore control factors related to
demand, such as market development strategy. In many cases,
FutureFuel Chemical Company may be unable to increase or maintain its level of
sales revenue for these products.
All sales of NOBS are made to The
Procter & Gamble Company pursuant to a supply contract that is set to expire
in June 2008. No assurances can be given that such contract will be
extended past June 2008 or, if extended, upon what terms. Sales of
NOBS totaled $20,453,000 for the three months ended March 31, 2007 and
$84,691,000, $66,959,000 and $73,607,000 for the years ended December 31,
2006, 2005 and 2004, respectively. Additionally, all sales of a
proprietary herbicide and certain other intermediates used in the production of
this herbicide are made to Arysta LifeScience North America Corporation pursuant
to contracts which continue year-to-year unless terminated by notice given no
later than 270 days prior to the end of the current term for the herbicide and
not later than 18 months prior to the current term for the
intermediates. No assurances can be given that these contracts will
not be terminated. Sales of this herbicide and its intermediates
totaled $5,291,000 for the three months ended March 31, 2007 and
$23,685,000, $25,063,000 and $27,946,000 for the years ended December 31,
2006, 2005 and 2004, respectively. These two customers represented
approximately 69% of revenues for the first three months of 2007 and 72%, 77%
and 70% of revenues in 2006, 2005 and 2004, respectively.
Competition
Historically, there have been
significant barriers to entry for competitors with respect to chemicals
primarily due to the fact that the relevant technology and manufacturing
capability has been held by a small number of companies. As
technology and investment have increasingly moved outside of North America,
competition from multinational chemical manufacturers has intensified, primarily
from India and China. FutureFuel Chemical Company competes with these
and other producers primarily based on price and, to a lesser extent, based on
customer service, technology, quality and reliability. FutureFuel
Chemical Company’s major competitors in this segment include large multinational
companies with specialty chemical business units, and smaller independent
producers. The multinational competitors are often disadvantaged by
poor responsiveness and customer service, while the small producers often have
limited technology and financial resources. We believe that
FutureFuel Chemical Company should be well-positioned for growth due to the
combination of its scale of operations and technical capabilities.
Supply and Distribution
Specialty chemicals are generally high
unit value products sold in packaged, or low-volume bulk form, for which
distribution is a relatively minor component of cost. Most products
are sold FOB the Batesville site for distribution
globally. Similarly, raw materials for these products are
comparatively higher-value components that
27
are
sourced globally. An exception will be the biofuels co-products,
which will be recovered from local processing and purified or further
functionalized into other products at the site.
Backlog
The majority of FutureFuel Chemical
Company’s revenues are derived under tolling arrangements with specific
customers. These customers generally provide FutureFuel Chemical
Company with forecasts of demand on a monthly or quarterly
basis. However, these forecasts are intended to enable FutureFuel
Chemical Company to optimize the efficiency of its production processes and are
not firm sales orders. As such, FutureFuel Chemical Company does not
monitor or report backlog.
Management Team and
Workforce
FutureFuel Chemical Company’s
executive management team consists of three individuals with a combined 70 plus
years of experience in the chemicals industry, comprising technical, operational
and business responsibilities. One of the three members of the
executive team has international experience, including assignments in Europe and
Asia. The third 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 nine additional degreed professionals with an average
experience of over 20 years in the chemical industry.
The Batesville workforce comprises
approximately 447 additional employees, with a total of 78 degreed
professionals, including 17 chemists (10 PhDs) and 37 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
28
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 reaction chemistries and materials and process engineering
capabilities for batch and continuous processing of both solid and liquid
materials. We believe that these core competencies, established in
support of the legacy chemical business, are applicable to building a
technology-based position in biofuels and associated biobased specialty
products.
The research and development
expenses incurred by FutureFuel Chemical Company during the three months ended
March 31, 2007 were $991,000 and during the years ended December 31,
2006, 2005 and 2004 were $4,919,000, $5,975,000 and $9,919,000,
respectively. Substantially all of such research and development
expenses related to the development of new products, services and processes or
the improvement of existing products, services and
processes. Research and development expenses during this timeframe
trended downwards due to: (i) reduced allocation of research and
development overhead from Eastman Chemical Company in anticipation of the
divestiture of Eastman SE, Inc.; and (ii) a reduction in research and
development staffing at the Batesville site resulting from the general
reduction-in-force which was effective May 2005. The 2007 and 2006
research and development expenses generally reflect the research and development
staffing and program costs incurred at the Batesville site on a standalone
basis.
Regulatory and Environmental
Matters
Various aspects of FutureFuel Chemical
Company’s operations are subject to regulation by state and federal
agencies. Oil and gas operations as well as chemical operations are
subject to numerous, stringent and complex laws and regulations at the federal,
state and local levels governing the discharge of materials into the environment
or otherwise relating to environmental protection. These laws and
regulations may:
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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
29
certain
classes of persons that contributed to the release of a hazardous substance into
the environment. These persons include the owner and operator of the
site where the release occurred, past owners and operators of the site, and
companies that disposed or arranged for the disposal of hazardous substances
found at the site. Responsible parties under CERCLA may be liable for
the costs of cleaning up hazardous substances that have been released into the
environment and for damages to natural resources. Additionally, it is
not uncommon for third parties to assert claims for personal injury and property
damage allegedly caused by the release of hazardous substances or other
pollutants into the environment.
The federal Solid Waste Disposal Act,
as amended by the Resource Conservation and Recovery Act (“RCRA”), is
the principal federal statute governing the management of wastes, including the
treatment, storage and disposal of hazardous wastes. RCRA imposes
stringent operating requirements, and liability for failure to meet such
requirements, on a person who is either a generator or transporter of hazardous
waste or an owner or operator of a hazardous waste treatment, storage or
disposal facility. Many of the wastes generated in FutureFuel
Chemical Company’s manufacturing facility are governed by RCRA.
The federal Oil Pollution Act of 1990
(“OPA”) and
regulations thereunder impose liability on responsible parties for damages
resulting from oil spills into or upon navigable waters, adjoining shorelines or
in the exclusive economic zone of the United States. A responsible
party includes the owner or operator of an onshore facility. OPA
limits liability for onshore facilities to $350 million. These
liability limits may not apply if a spill is caused by a party’s gross
negligence or willful misconduct, the spill resulted from violation of a federal
safety, construction or operating regulation, or if a party fails to report a
spill or to cooperate fully in a clean-up. Failure to comply with
OPA’s requirements may subject a responsible party to civil, criminal or
administrative enforcement actions.
The federal Water Pollution Control Act
(“Clean
Water Act”) imposes restrictions and controls on the discharge of
pollutants into navigable waters. These controls have become more
stringent over the years, and it is possible that additional restrictions may be
imposed in the future. Permits must be obtained to discharge
pollutants into state and federal waters. The Clean Water Act
provides for civil, criminal and administrative penalties for discharges of oil
and other pollutants, and imposes liability on parties responsible for those
discharges for the costs of cleaning up any environmental damage caused by the
release and for natural resource damages resulting from the
release. Comparable state statutes impose liabilities and authorize
penalties in the case of an unauthorized discharge of petroleum or its
derivatives, or other pollutants, into state waters.
The federal Clean Air Act (“Clean Air
Act”), and associated state laws and regulations, restrict the emission
of air pollutants from many sources, including facilities involved in
manufacturing chemicals and biofuels. New facilities are generally
required to obtain permits before operations can commence, and new or existing
facilities may be required to incur certain capital expenditures to install air
pollution control equipment in connection with obtaining and maintaining
operating permits and approvals. Federal and state regulatory
agencies can impose administrative, civil and criminal penalties for
non-compliance with permits or other requirements of the Clean Air Act and
associated state laws and regulations.
The federal Endangered Species Act, the
federal Marine Mammal Protection Act, and similar federal and state wildlife
protection laws prohibit or restrict activities that could adversely impact
protected plant and animal species or habitats. Manufacturing
activities could be prohibited or delayed in areas where such protected species
or habitats may be located, or expensive mitigation may be required to
accommodate such activities.
FutureFuel Chemical Company’s policy is
to operate its plants and facilities in a manner that protects the environment
and the health and safety of its employees and the public. FutureFuel
Chemical Company intends to continue to make expenditures for environmental
protection and improvements in a timely manner consistent with its policies and
with the technology available. In some cases, applicable
environmental regulations such as those adopted under the Clean Air Act and
RCRA, and related actions of regulatory agencies, determine the timing and
amount of environmental costs incurred by FutureFuel Chemical
Company.
We establish reserves for
closure/post-closure costs associated with the environmental and other assets we
maintain. Environmental assets include waste management units such as
incinerators, landfills, storage tanks and boilers. When these types
of assets are constructed or installed, a reserve is established for the future
costs 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
30
charged
into earnings over the estimated useful life of the
assets. Currently, we estimate the useful life of each individual
asset up to 35 years.
In addition to our general
environmental policies and policies for asset retirement obligations and
environmental reserves, we accrue environmental costs when it is probable that
we or one of our subsidiaries has incurred a liability and the amount can be
reasonably estimated. In some instances, the amount cannot be
reasonably estimated due to insufficient data, particularly in the nature and
timing of the future performance. In these cases, the liability is
monitored until such time that sufficient data exists. With respect
to a contaminated site, the amount accrued reflects our assumptions about
remedial requirements at the site, the nature of the remedy, the outcome of
discussions with regulatory agencies and other potentially responsible parties
at multi-party sites, and the number and financial viability of other
potentially responsible parties. Changes in the estimates on which
the accruals are based, unanticipated government enforcement action, or changes
in health, safety, environmental, chemical control regulations, and testing
requirements could result in higher or lower costs.
FutureFuel Chemical Company’s cash
expenditures related to environmental protection and improvement were
approximately $13,300,000, $13,211,000 and $12,896,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. These amounts
pertain primarily to operating costs associated with environmental protection
equipment and facilities, but also include expenditures for construction and
development. We do not expect future environmental capital
expenditures arising from requirements of recently promulgated environmental
laws and regulations to materially increase FutureFuel Chemical Company’s
planned level of annual capital expenditures for environmental control
facilities.
We believe that FutureFuel Chemical
Company has obtained in all material respects the necessary permits and licenses
to carry on its operations as presently conducted. We have reviewed
environmental investigations of the properties owned by FutureFuel Chemical
Company and believe, on the basis of the results of the investigations carried
out to date, that there are no material regulatory and/or environmental issues
which adversely impact FutureFuel Chemical Company. In addition,
under our acquisition agreement with Eastman Chemical Company, Eastman Chemical
Company acquired environmental insurance with respect to environmental
conditions at the Batesville plant existing as of the closing date and Eastman
Chemical Company has agreed, subject to certain limitations, to indemnify
FutureFuel Chemical Company with respect to such environmental
conditions.
Objectives
Our business objectives for FutureFuel
Chemical Company are to: (i) exploit growth opportunities in its two core
business segments, biofuels and chemicals; and (ii) improve gross
margins.
Exploit Growth Opportunities in Core
Business Segments
We believe that FutureFuel Chemical
Company can become a market leader in biofuels by leveraging its specialty
chemicals technical expertise and by fully utilizing idle site assets and
infrastructure headspace, with emphasis on:
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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.
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 three months ended March 31, 2007 and for the last three fiscal
years attributable to the United States and foreign countries (based upon the
billing addresses of its customers) were as follows:
32
(Dollars
in thousands)
|
Period
|
United
States
|
All
Foreign
Countries
|
Total
|
|||||||||
|
Three
months ended March 31, 2007
|
$ | 32,300 | $ | 5,206 | $ | 37,506 | ||||||
|
Year
ended December 31, 2006
|
$ | 131,893 | $ | 18,877 | $ | 150,770 | ||||||
|
Year
ended December 31, 2005
|
$ | 105,719 | $ | 13,820 | $ | 119,539 | ||||||
|
Year
ended December 31, 2004
|
$ | 138,636 | $ | 5,521 | $ | 144,157 | ||||||
For the
year ended December 31, 2004, revenues from a single foreign country did
not exceed 2% of total revenues. Beginning in 2005, FutureFuel
Chemical Company began invoicing Procter & Gamble International Operations
Mexico, D.F. directly, at which time revenues from Mexico became a more
significant component of total revenues. For the years ended
December 31, 2005 and 2006 and the three months ended March 31, 2007,
revenues from Mexico accounted for 10%, 11% and 13%, respectively, of total
revenues. Other than Mexico, revenues from a single foreign country
during 2005 and 2006 and the first three months of 2007 did not exceed 1% of
total revenues.
All of our and FutureFuel Chemical
Company’s long-lived assets are located in the United States.
We have no foreign
operations. See “Item 1A. - Risk Factors” at page 35for 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, 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.
Reports
to Security Holders
In the investor rights agreement
that we executed on July 12, 2006 in connection with our offering, we
agreed, following completion of the acquisition of FutureFuel Chemical Company
and until this Registration Statement became effective (which was June 23,
2007), to furnish to our shareholders annual, quarterly and current reports and
to ensure that the proxy materials distributed to our shareholders in connection
with a business combination are substantially similar to materials that would be
required if such materials were subject to SEC requirements, but only to the
extent that our board of directors in its business judgment determines that it
would be reasonably practicable to provide such information, taking into account
factors such as time, expense and other relevant considerations under the
particular circumstances. Such annual reports were to contain
financial information that has been examined and reported on, with an opinion
expressed by, an independent certified public accountant.
On August 22, 2006, AIM announced
that non-European Economic Area companies whose shares are traded on AIM are not
required to adopt International Financial Reporting Standards for financial
reporting purposes but may use, among other things, U.S. generally accepted
accounting principles without reconciliation to the
33
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.
34
Item
1A. - Risk Factors
An investment in us involves a high
degree of risk and may result in the loss of all or part of your
investment. You should consider carefully all of the information set
out in this document and the risks attaching to an investment in us, including,
in particular, the risks described below. The information below does
not purport to be an exhaustive list and should be considered in conjunction
with the contents of the rest of this document.
Risks associated with
FutureFuel Chemical Company.
The
industries in which FutureFuel Chemical Company competes are highly
competitive.
The oil and gas industry, as well as
the chemical business, are highly competitive. There is competition
within these industries and also with other industries in supplying the energy,
fuel and chemical needs of industry and individual
consumers. FutureFuel Chemical Company will compete with other firms
in the sale or purchase of various goods or services in many national and
international markets. FutureFuel Chemical Company will compete with
large national and multi-national companies that have longer operating
histories, greater financial, technical and other resources and greater name
recognition than FutureFuel Chemical Company does. In addition,
FutureFuel Chemical Company will compete with several smaller companies capable
of competing effectively on a regional or local basis, and the number of these
smaller companies is increasing. FutureFuel Chemical Company’s
competitors may be able to respond more quickly to new or emerging technologies
and services and changes in customer requirements. As a result of
competition, FutureFuel Chemical Company may lose market share or be unable to
maintain or increase prices for its products and/or services or to acquire
additional business opportunities, which could have a material adverse effect on
our business, financial condition, results of operations and cash
flows. Although FutureFuel Chemical Company will employ all methods
of competition which are lawful and appropriate for such purposes, no assurances
can be made that they will be successful. A key component of
FutureFuel Chemical Company’s competitive position, particularly given the
expected commodity-based nature of many of its products, will be its ability to
manage expenses successfully, which requires continuous management focus on
reducing unit costs and improving efficiency. No assurances can be
given that FutureFuel Chemical Company will be able to successfully manage such
expenses.
FutureFuel Chemical Company’s
competitive position in the markets in which it participates is, in part,
subject to external factors in addition to those that FutureFuel Chemical
Company can impact. Natural disasters, changes in laws or
regulations, war or other outbreak of hostilities, or other political factors in
any of the countries or regions in which FutureFuel Chemical Company operates or
does business, or in countries or regions that are key suppliers of strategic
raw materials, could negatively impact FutureFuel Chemical Company’s competitive
position and its ability to maintain market share.
Increases
in the construction of biodiesel production plants may cause excess biodiesel
production capacity in the market. Excess capacity may adversely
affect the price at which FutureFuel Chemical Company is able to sell the
biodiesel that it produces and may also adversely affect our anticipated results
of operation and financial condition.
In 2005, approximately 75 million
gallons of biodiesel were produced in the United States. Currently,
there is a reported 1.39 billion gallons per year of biodiesel production
capacity in the United States, with another 1.89 billion gallons per year
under construction. With such an increase in biodiesel production
capacity in the United States, compared to historical production levels, there
is risk that there will be a significant amount of excess biodiesel production
capacity. Although this existing and pending capacity growth is very
large compared to historical production levels, we believe that the market will
purchase as much biodiesel as is available, so long as the prices for biodiesel
(net of the impact of tax credits and other similar incentives) are competitive
with those of petrodiesel.
Fluctuations
in commodity prices may cause a reduction in the demand or profitability of the
products or services FutureFuel Chemical Company produces.
Prices for alternative fuels tend to
fluctuate widely based on a variety of political and economic
factors. These price fluctuations heavily influence the oil and gas
industry. Lower energy prices for existing products tend to limit the
demand for alternative forms of energy services and related products and
infrastructure. Historically, the
35
markets
for alternative fuels have been volatile, and they are likely to continue to be
volatile. Wide fluctuations in alternative fuel prices may result
from relatively minor changes in the supply of and demand for oil and natural
gas, market uncertainty and other factors that are beyond our control,
including:
|
|
·
|
worldwide
and domestic supplies of oil and
gas;
|
|
|
·
|
the
price and/or availability of biodiesel
feedstocks;
|
|
|
·
|
weather
conditions;
|
|
|
·
|
the
level of consumer demand;
|
|
|
·
|
the
price and availability of alternative
fuels;
|
|
|
·
|
the
availability of pipeline and refining
capacity;
|
|
|
·
|
the
price and level of foreign imports;
|
|
|
·
|
domestic
and foreign governmental regulations and
taxes;
|
|
|
·
|
the
ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production
controls;
|
|
|
·
|
political
instability or armed conflict in oil-producing regions;
and
|
|
|
·
|
the
overall economic environment.
|
These
factors and the volatility of the commodity markets make it extremely difficult
to predict future alternative fuel price movements with any
certainty. There may be a decrease in the demand for FutureFuel
Chemical Company’s products or services and our profitability could be adversely
affected.
FutureFuel
Chemical Company is reliant on certain strategic raw materials for its
operations.
FutureFuel Chemical Company is reliant
on certain strategic raw materials (such as acetic anhydride, pelargonic acid,
soybean oil and methanol) for its operations. We are implementing
certain risk management tools, such as multiple suppliers and hedging, as
appropriate, to mitigate short-term market fluctuations in raw material supply
and costs. There can be no assurance, however, that such measures
will result in cost savings or that all market fluctuation exposure will be
eliminated. In addition, natural disasters, changes in laws or
regulations, war or other outbreak of hostilities, or other political factors in
any of the countries or regions in which FutureFuel Chemical Company operates or
does business, or in countries or regions that are key suppliers of strategic
raw materials, could affect availability and costs of raw
materials.
While temporary shortages of raw
materials may occasionally occur, these items have historically been
sufficiently available to cover current requirements. However, their
continuous availability and price are impacted by natural disasters, plant
interruptions occurring during periods of high demand, domestic and world market
and political conditions, changes in government regulation, and war or other
outbreak of hostilities. In addition, as FutureFuel Chemical Company
increases its biodiesel capacity, it will require larger supplies of raw
materials which have not yet been secured and may not be available for the
foregoing reasons, or may be available only at prices higher than current
levels. FutureFuel Chemical Company’s operations or products may, at
times, be adversely affected by these factors.
FutureFuel
Chemical Company is reliant upon two customers for a substantial amount of its
sales.
All sales of NOBS are made to The
Procter & Gamble Company and all sales of a proprietary herbicide and
certain other intermediates used in the production of this herbicide are made to
Arysta LifeScience North America Corporation. These two customers
represented approximately 69% of FutureFuel Chemical Company’s revenues for the
quarter ended March 31, 2007 and 72% of its revenues in
2006. The contract with The Procter & Gamble
36
Company
is set to expire in June 2008 and no assurances can be given that such contract
will be extended past June 2008 or, if extended, upon what terms. The
contracts with Arysta LifeScience North America Corporation contain certain
termination provisions and no assurances can be given that these contracts will
not be terminated. The loss of these two companies as customers could
have a material adverse effect on us.
Changes
in technology may render FutureFuel Chemical Company’s products or services
obsolete.
The alternative fuel and chemical
industries may be substantially affected by rapid and significant changes in
technology. Examples include competitive product technologies, such
as green gasoline and biodiesel produced from catalytic hydroforming of
renewable feedstock oils and competitive process technologies such as advanced
biodiesel continuous reactor and washing designs that increase
throughput. These changes may render obsolete certain existing
products, energy sources, services and technologies currently used by FutureFuel
Chemical Company. We cannot assure you that the technologies used by
or relied upon by FutureFuel Chemical Company will not be subject to such
obsolescence. While we may attempt to adapt and apply the services
provided by FutureFuel Chemical Company to newer technologies, we cannot assure
you that we will have sufficient resources to fund these changes or that these
changes will ultimately prove successful.
Failure
to comply with governmental regulations could result in the imposition of
penalties, fines or restrictions on operations and remedial
liabilities.
The oil and gas and chemical industries
are subject to extensive federal, state, local and foreign laws and regulations
related to the general population’s health and safety and those associated with
compliance and permitting obligations (including those related to the use,
storage, handling, discharge, emission and disposal of municipal solid waste and
other waste, pollutants or hazardous substances or waste, or discharges and air
and other emissions) as well as land use and development. Existing
laws also impose obligations to clean up contaminated properties or to pay for
the cost of such remediation, often upon parties that did not actually cause the
contamination. Compliance with these laws, regulations and
obligations could require substantial capital expenditures. Failure
to comply could result in the imposition of penalties, fines or restrictions on
operations and remedial liabilities. These costs and liabilities
could adversely affect our operations.
Changes in environmental laws and
regulations occur frequently, and any changes that result in more stringent or
costly waste handling, storage, transport, disposal or cleanup requirements
could require FutureFuel Chemical Company to make significant expenditures to
attain and maintain compliance and may otherwise have a material adverse effect
on its business segments in general and on our results of operations,
competitive position or financial condition. We are unable to predict
the effect of additional environmental laws and regulations which may be adopted
in the future, including whether any such laws or regulations would materially
adversely increase FutureFuel Chemical Company’s cost of doing business or
affect its operations in any area.
Under certain environmental laws and
regulations, FutureFuel Chemical Company could be held strictly liable for the
removal or remediation of previously released materials or property
contamination regardless of whether FutureFuel Chemical Company was responsible
for the release or contamination, or if current or prior operations were
conducted consistent with accepted standards of practice. Such
liabilities can be significant and, if imposed, could have a material adverse
effect on our financial condition or results of operations.
FutureFuel
Chemical Company’s biofuels operations may be harmed if the government were to
change current laws and regulations.
Alternative fuels businesses benefit
from tax credits and government subsidies. If any of the state or
federal laws and regulations relating to the tax credits and government
subsidies change, the ability to recover capital expenditures from an
alternative fuels business could be harmed. FutureFuel Chemical
Company’s biofuels platform is subject to federal, state, and local laws and
regulations governing the application and use of alternative energy products,
including those related specifically to biodiesel. For instance,
biodiesel products benefit from being the only alternative fuel certified by the
U.S. Environmental Protection Agency that fulfills the requirements of Section
211(B) of the Clean Air Act. If agency determinations, laws and
regulations relating to the application and use of alternative energy are
changed, the marketability and sales of biodiesel production could be materially
adversely affected.
37
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.
38
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
39
Regions
Bank and the remaining proceeds of our July 2006 offering. However,
if FutureFuel Chemical Company’s capital requirements vary materially from those
provided for in our current projections, we may require additional financing
sooner than anticipated. A decrease in expected revenues or adverse
change in market conditions could make obtaining this financing economically
unattractive or impossible. As a result, we may lack the capital
necessary to complete the projected expansions or capitalize on other business
opportunities.
We
may be unable to successfully integrate the FutureFuel Chemical Company
acquisition or other future acquisitions with our operations or realize all of
the anticipated benefits of these acquisitions.
Separation of FutureFuel Chemical
Company from Eastman Chemical Company and integration of FutureFuel Chemical
Company with us has been a complex, time-consuming and costly
process. Failure to successfully integrate FutureFuel Chemical
Company in a timely manner may have a material adverse effect on our business,
financial condition, results of operations and cash flows. The
difficulties of combining the acquired operations include, among other
things:
|
|
·
|
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.
40
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
41
exemption
from the provisions of Section 5 of the Securities Act provided by
Rule 144A or Regulation S thereunder.
The
holder of this security agrees for the benefit of the Company that (a) this
security may be offered, resold, pledged or otherwise transferred, only
(i) in the United States to a person whom the seller reasonably believes is
a qualified institutional buyer (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of Rule 144A,
(ii) outside of the United States in an offshore transaction in accordance
with Rule 903 or Rule 904 under the Securities Act,
(iii) pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available) or (iv) pursuant to an
effective registration statement under the Securities Act, in each of cases (i)
through (iv) in accordance with any applicable securities laws of any state of
the United States, and (b) the holder will, and each subsequent holder is
required to, notify any purchaser of this security from it of the resale
restrictions referred to in (a) above.
The
securities represented by this certificate are subject to transfer restrictions
which require that in addition to any certifications required from a transferor
as set forth on the reverse of this certificate, prior to the expiration of a
distribution compliance period of at least one year, the transferee certifies as
to whether or not it is a US person within the meaning of Regulation S and
provides certain other certifications and agreements. Prior to
permitting any transfer, the Company may request an opinion of counsel
reasonably satisfactory to the Company that such transfer is to be effected in a
transaction meeting the requirements of Regulation S under the Securities
Act or is otherwise exempt from registration under the Securities
Act.
CREST
Co., which is the Central Securities Depository for the U.K. markets (including
AIM) and which operates the CREST system (CREST Co.’s real-time settlement
system for UK and Irish shares and other corporate securities), does not allow
electronic settlement on CREST until the legend has been removed and the
certification requirements required under U.S. securities laws have
expired. The filing and effectiveness of this Registration Statement
will not result in the removal of this legend. As a result, our
shares of common stock and warrants must be represented by definitive
certificates. In order to transfer or sell our shares or warrants,
holders must provide the definitive certificates to the transfer agent, who will
require certain certifications as set forth in the legend, and on occasion legal
opinions as set forth in the legend, prior to issuing new certificates to new
security holders. The lack of a fully electronic settlement mechanism
may have a material adverse effect on the liquidity and the price of our
securities.
If
our founding shareholders and Mr. Novelly or his designees exercise their
registration rights, such exercise may have an adverse effect on the market
price of our shares of common stock.
Those shareholders holding shares of
our common stock prior to the July 2006 offering (the “founding shareholders”;
see “Item 4. - Security Ownership of Certain Beneficial Owners and
Management--Founding Shares Owned by the Founding Shareholders” at page
63 for a list of the founding shareholders) and Mr. Paul A. Novelly, our
executive chairman of the board, or his designees, are entitled to demand that
we register under the U.S. Securities Act of 1933, as amended (the “Securities
Act”), the resale of their shares of our common stock issued prior to our
July 2006 offering (the “founding shares”) and their shares included in the
units purchased in such offering. The demand may be made at any time
after the date on which we have become a reporting company under the U.S.
Securities Exchange Act of 1934, as amended, and their founding shares have been
released from escrow. Except in limited circumstances, this date will
not be before July 12, 2009. If our founding shareholders
exercise their registration rights with respect to all of their shares of our
common stock, there will be an additional 11,250,000 shares and/or up to
5,000,000 shares issued on exercise of their warrants eligible for trading in
the public market. The presence of this additional number of shares
eligible for trading in the public market may have an adverse effect on the
market price of our shares.
42
Transfer
of our shares and/or warrants, and the exercise of our warrants, are subject to
stringent transfer and exercise requirements under the Securities
Act.
Our shares of common stock and our
warrants are subject to the conditions listed under section 903(b)(3) or
Category 3 of Regulation S under the Securities Act. Under
Category 3, offering restrictions (as defined under Regulation S) had
to be in place in connection with our July 2006 offering and additional
restrictions are imposed on resales of our securities as described elsewhere
herein. All of our shares of common stock and our warrants are
subject to these restrictions, regardless of whether the purchaser acquired the
securities in a transaction pursuant to Rule 144A under the Securities Act
or in a transaction pursuant to Regulation S. Our shares and
warrants are considered “restricted securities” under Rule 144 and will,
until the expiration of the applicable holding period with respect to the
securities set forth in Rule 144 and the expiration of the one-year
compliance period, bear restrictive legends, unless we determine otherwise in
compliance with applicable law.
The
Rule 144 holding period for our shares received upon exercise of our
warrants may recommence upon the exercise of such warrants.
The Rule 144 holding period for the
shares of our common stock received upon exercise of our warrants will start
upon the exercise of such warrants. Even though the Rule 144(k)
two-year holding period for the shares and warrants may have expired, enabling
certificates for those securities to have the legend removed, the Rule 144
holding period for the shares received upon exercise of the warrants will start
upon such exercise. Accordingly, holders of our warrants that
exercise their warrants for cash will receive shares of our common stock subject
to trading restrictions which are greater than those imposed on the trading of
previously issued shares. Such restrictions may mean the value of the
shares received upon exercise of the warrants may be significantly lower, at
least until the two-year holding period has expired, than the shares originally
issued.
We
may not list our common stock or our warrants on a stock exchange other than
AIM.
Under the investor rights agreement
that we entered into on July 12, 2006 with CRT Capital Group LLC and KBC
Peel Hunt Ltd, as promptly as practicable after this Registration Statement has
been declared effective, we are obligated to use our commercially reasonable
efforts to cause our shares of common stock to be authorized to be quoted and/or
listed (to the extent applicable) on the American Stock Exchange, the New York
Stock Exchange, the NASD Automated Quotation System or the NASDAQ National
Market (or, in each case, a successor thereto) or a similarly recognized
national trading platform, if our common stock so qualifies. However,
no assurances can be given that our common stock will qualify to be quoted
and/or listed on any such exchange or other similarly recognized national
trading platform. Further, we have no such obligation with respect to
our warrants and no assurances can be given that we will attempt to cause our
warrants to be authorized to be quoted and/or listed on any such exchange or
other similarly recognized national trading platform.
Internal Reporting
Controls.
Our
management has identified 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.
43
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 additional accounting and administrative
staff. This could harm our operating results and lead to a decline in
our stock price.
44
Item
2. - Financial Information
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.
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 the
three months ended March 31, 2006 (for purposes of comparison to our
summary historic financial and operating data for the three months ended
March 31, 2007) and our consolidated financial statements for the twelve
months ended December 31, 2006 and the three months ended March 31,
2007, all of which are included elsewhere in this Registration
Statement. The information presented in the table below should be
read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial statements and notes
thereto included elsewhere in this Registration Statement. The three
years of selected financial data for FutureFuel Chemical Company 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. The data related to the three
months ended March 31, 2007 and the twelve months ended December 31,
2006 has been restated to reflect adjustments described in Note 2 of the
consolidated financial statements of the Company for the year ended
December 31, 2006 included elsewhere herein.
45
(Dollars
in thousands, except per share amounts)
|
Combined
|
FutureFuel
Corp.
|
Eastman SE, Inc. | ||||||||||||||||||||||||||
|
Item
|
Twelve
Months
Ended
December
31,
2006
|
Three
Months
Ended
March
31,
2007
|
Twelve
Months
Ended
December
31, 2006
|
Ten
Months
Ended
October
31,
2006
|
Three
Months
Ended
March,
31, 2006
|
Twelve
Months
Ended
December
31,
2005
|
Twelve
Months
Ended
December
31,
2004
|
|||||||||||||||||||||
|
Operating
Revenues
|
$ | 150,770 | $ | 37,506 | $ | 23,043 | $ | 127,727 | $ | 35,054 | $ | 119,539 | $ | 144,157 | ||||||||||||||
|
Net
income (loss)
|
$ | 2,242 | $ | (2,040 | ) | $ | 2,717 | $ | (475 | ) | $ | 767 | $ | 381 | $ | (14,867 | ) | |||||||||||
|
Earnings
(loss) per common share
|
||||||||||||||||||||||||||||
|
Basic
|
$ | 0.08 | $ | (0.08 | ) | $ | 0.10 |
NA
|
NA
|
NA
|
NA
|
|||||||||||||||||
|
Diluted
|
$ | 0.07 | $ | (0.08 | ) | $ | 0.09 |
NA
|
NA
|
NA
|
NA
|
|||||||||||||||||
|
Total
Assets
|
$ | 203,516 | $ | 197,809 | $ | 203,516 |
NA
|
NA
|
$ | 114,500 | $ | 118,164 | ||||||||||||||||
|
Long-term
obligations
|
$ | 25,052 | $ | 24,955 | $ | 25,439 |
NA
|
NA
|
$ | 24,830 | $ | 25,105 | ||||||||||||||||
|
Cash
dividends per common share
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | (3,960 | ) | $ | 4,797 | $ | (12,494 | ) | $ | 8,534 | $ | 61 | $ | 7,556 | $ | 19,044 | ||||||||||||
|
Net
cash provided by (used in) investing activities
|
$ | (91,168 | ) | $ | (6,058 | ) | $ | (82,619 | ) | $ | (8,549 | ) | $ | (2,097 | ) | $ | (6,594 | ) | $ | (6,520 | ) | |||||||
|
Net
cash provided by (used in) financing activities
|
$ | 158,229 | $ | (50 | ) | $ | 158,214 | $ | 15 | $ | 2,036 | $ | (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. Also see “Item 1A. - Risk Factors” beginning at
page 35.
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 February 14, 2008, FutureFuel Chemical
Company had no borrowings under such credit facility.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following Management’s
Discussion and Analysis of Financial Condition and Results of Operations should
be read together with ours and FutureFuel Chemical Company’s financial
statements, including the notes thereto, in this Registration
Statement. 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. For the three months ended
March 31, 2006, the financial information presented combines our results
for the three-month period with FutureFuel Chemical Company’s results for the
same period. This information is for illustrative purposes
only. The consolidated company 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. Also see “Item 1A. -
Risk Factors” beginning at
46
page 35.
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.
Restatement
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: Investors Relations. We have
restated our 2006 financial statements to apply purchase accounting to our
acquisition of Eastman SE, Inc., which 2006 financial statements are included
herein.
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) NOBS, a chemical additive manufactured exclusively for The Procter
& Gamble Company for use in a household detergent; (ii) a proprietary
herbicide (and intermediates) manufactured exclusively for Arysta LifeScience
North America Corporation; and (iii) two other product lines (CPOs and
DIPBs) produced under conversion contracts for Eastman Chemical
Company. The major product line in the performance chemicals group is
SSIPA/LiSIPA, polymer modifiers that aid the properties of nylon manufactured
for a broad customer base. There are a number of additional small
volume custom and performance chemical products that FutureFuel Chemical Company
groups into “other products”. In late 2005, FutureFuel Chemical
Company began producing biodiesel as a product. All 2005 biodiesel
revenues were classified as miscellaneous sales and recorded as a credit to cost
of goods sold. Beginning in 2006, revenues and cost of goods sold for
biofuels were treated as a separate business segment.
Revenues
generated from NOBS are based on a supply agreement with the
customer. The supply agreement stipulates selling price per kilogram
based on volume produced, with price moving up as volumes move down, and
vice-versa. The current contract expires in June 2008, and no
assurances can be given that the contract will be extended past that date or, if
extended, under what terms. FutureFuel Chemical Company pays for raw
materials required to produce NOBS. The contract with the customer
provides that the price to be received by FutureFuel Chemical Company for NOBS
is indexed to changes in labor, energy, inflation and the key external raw
materials, enabling FutureFuel Chemical Company to pass along most inflationary
increases in production costs to the customer.
FutureFuel
Chemical Company has been the exclusive manufacturer for Arysta LifeScience
North America Corporation of a proprietary herbicide and certain
intermediates. These products are beginning to face some generic
competition, and no assurances can be given that FutureFuel Chemical Company
will remain the exclusive manufacturer for this product line. The
contracts automatically renew for successive one-year periods, subject to the
right of either party to terminate the contract not later than 270 days prior to
the end of the then current term for the herbicide and not later than 18 months
prior to the current term for the intermediates. No assurances can be
given that these contracts will not be terminated. Arysta LifeScience
North America Corporation supplies most of the key raw materials for production
of the proprietary herbicide. There is no pricing mechanism or
specific protection against cost changes for raw materials that FutureFuel
Chemical Company is responsible for purchasing, and we do not anticipate this to
change going forward.
47
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 cost changes, and we do not anticipate this to change going
forward.
Other
products include agricultural intermediates and additives, imaging chemicals,
fiber additives and various specialty pharmaceutical intermediates that
FutureFuel Chemical Company has in full commercial production or in
development. These products are currently sold in small quantities to
a large customer base. Pricing for these products is negotiated
directly with the customer (in the case of custom manufacturing) or is
established based upon competitive market conditions (in the case of performance
chemicals). In general, for these products, there is no pricing
mechanism or specific protection against raw material cost changes, and we do
not anticipate this to change going forward.
The year ended December 31,
2006 was the first full year that FutureFuel Chemical Company sold
biodiesel. In addition to selling for its own account, FutureFuel
Chemical Company 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 and inventory
reserves, asset impairment and restructuring charges, severance costs and costs
related to idle capacity. Finally, cost of goods sold includes
hedging gains and losses recognized by us. Cost of goods sold are
allocated to the chemical and biofuels business segments based on equipment
usage and reactor time for most conversion costs and based on revenues for most
other costs.
Operating costs include selling,
general and administrative and research and development
expenses. These expense categories include expenses that were
directly incurred by us and FutureFuel Chemical Company and, for 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 of FutureFuel Chemical Company’s financial statements set forth
below for a more detailed discussion of corporate expense
allocations.
48
The annual and quarterly financial
statements provided herein prominently disclose related party transactions and
the impact of those transactions on historical revenues and
expenses. The discussions of results of operations that follow are
based on revenues and expenses in total and for individual product lines and do
not differentiate related party transactions. See footnote 16 to
our consolidated annual financial statements, footnote 1 and
footnote 11 to FutureFuel Chemical Company’s annual financial statements,
and footnote 1 to FutureFuel Chemical Company’s interim financial
statements contained elsewhere herein for more details.
Quarter Ended March 31, 2007
Compared to Quarter Ended March 31, 2006
Revenues: Revenues for the
quarter ended March 31, 2007 were $37,506,000 as compared to revenues for
the quarter ended March 31, 2006 of $35,054,000, an increase of
7%. The increase was attributable to CPOs, DIPBs, SSIPA/LiSIPA, other
products and biodiesel, partially offset by decreased revenues of the
proprietary herbicide and intermediates; revenues from NOBS contributed modestly
to the increase. Revenues from biodiesel accounted for 5% of total
revenues in 2007 and increased more than 700% from March 31,
2006. Revenues from NOBS increased 4% and accounted for 55% of total
revenues in 2007, compared to 56% in 2006. Revenues from the
proprietary herbicide and intermediates decreased 33% and accounted for 14% of
total revenues in 2007 as compared to 23% in 2006. Revenues from CPOs
increased 19% in 2007 and accounted for 4% of total revenues in both 2007 and
2006. Revenues from DIPBs increased 56% and accounted for 8% of total
revenues in 2007 as compared to 5% in 2006. Revenues from
SSIPA/LiSIPA increased 32% and accounted for 5% of total revenues in 2007 as
compared to 4% in 2006. Revenues from other products increased 39%
and accounted for 10% of total revenues in the quarter ended March 31, 2007
as compared to 7% in the quarter ended March 31, 2006.
Revenues from NOBS posted strong
increases during the first quarter of 2006 as the customer returned to a more
typical marketing strategy; this strong demand has continued thus far in
2007. Revenues from the proprietary herbicide and intermediates
declined more than 30% during the first quarter of 2007 due to both price
concessions and reduced volumes sold. Price concessions were expected
and were made in order to maintain market share in the face of generic product
competition. Volume reductions resulted from a change the customer
made in their distribution strategy to the end consumer and FutureFuel Chemical
Company believes these reductions are temporary and that volume increases during
the remainder of 2007 will offset reductions in the first quarter. At
present, revenues from NOBS and the proprietary herbicide and intermediates are
together the most significant components of FutureFuel Chemical Company's
revenue base, together accounting for 69% of revenues in the quarter ended
March 31, 2007 as compared to 79% in the quarter ended March 31,
2006. The future volume of and revenues from NOBS depends on both
consumer demand for the product containing NOBS and the manufacturing, sales and
marketing priorities of our NOBS customer. We are unable to predict
with certainty the revenues we will receive from NOBS in the
future. The prices for the proprietary herbicide and intermediates
have been reduced by 10% from 2006 to 2007 due to continued competitive
pressures as described above. 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
their volume in light of generic competition by being more price competitive,
changing their North American distribution system and developing new
applications. Forecasted product demand in 2008 is projected to be
similar to 2007 with a 2-5% volume growth potential in 2009 at current
pricing.
Revenues from CPOs and DIPBs
together increased 41% during the first quarter of 2007. This
increase is largely the result 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 from 750,000 gallons per quarter
at the end of 2006 to 6 million gallons per quarter at the end of
2007.
Cost of Goods Sold and
Distribution: Total cost of goods sold and distribution for
the quarter ended March 31, 2007 were $39,954,000 as compared to total cost
of goods sold and distribution for the quarter ended March 31, 2006 of
$31,933,000, an increase of 25%.
Cost of goods sold and distribution
for the quarter ended March 31, 2007 for FutureFuel Chemical Company’s
chemicals segment were $30,207,000 as compared to cost of goods sold and
distribution for the quarter ended March 31, 2006 of $31,491,000, a
decrease of 4%. Cost of goods sold and distribution for CPOs, DIPBs,
SSIPA/LiSIPA and other products, measured as a percent of total chemical
revenues, were relatively constant at
49
24%
during the first quarter of 2006 as compared to 22% during the first quarter of
2007. Cost of goods sold and distribution for NOBS increased from 37%
of total chemical revenues in the first quarter of 2006 to 48% during the first
quarter of 2007; this increase was largely the result of increased raw material
prices resulting from new supply agreements and pricing mechanisms in place
following the acquisition of FutureFuel Chemical Company. The dollar
increase in NOBS cost of goods sold and distribution was offset by a decrease in
cost of goods sold and distribution for the proprietary herbicide and
intermediates from 29% of total chemical revenues in 2006 to 15% of total
chemical revenues in 2007. This decrease is attributable to growth of
FutureFuel Chemical Company's biodiesel segment. As more fully
described below, biodiesel is made using the same assets utilized to manufacture
the propriety herbicide and intermediates, and as biodiesel revenues increase
this segment absorbs more cost away from other chemical products that utilize
the assets, namely the propriety herbicide and intermediates.
Cost of goods sold and distribution
for the quarter ended March 31, 2007 for FutureFuel Chemical Company’s
biofuels segment were $9,747,000 as compared to cost of goods sold and
distribution for the quarter ended March 31, 2006 of $442,000. The
largest component of this increase was hedging losses of $4,026,000 in the first
quarter of 2007; there were no gains or losses from hedging in the first quarter
of 2006. Excluding the hedging losses, FutureFuel Chemical Company
posted positive gross profit during the first quarter of 2007, and the increase
in biofuels cost of goods sold and distribution more closely correlates to the
increase in biofuels revenues. The biofuels segment began production
in the batch plant and has continued to utilize the batch process to test new
processing techniques, experiment with various alternative feedstocks and meet
peak demand. The biodiesel segment also utilizes a continuous
processing line that is more efficient and produces higher volumes per reactor
than the batch process, and hence absorbs fewer overhead costs per gallon of
biodiesel produced. FutureFuel Chemical Company is transitioning from
primarily batch processing to primarily continuous processing, a strategy which
is expected to significantly reduce fixed cost allocation and as a result reduce
total cost of goods sold and distribution per gallon of biodiesel
produced.
Operating
Expenses: Operating expenses decreased from $2,414,000 for the
quarter ended March 31, 2006 to $1,792,000 for the quarter ended
March 31, 2007, or approximately 26%. This decrease was
primarily the result of lower overall operating expenses incurred by FutureFuel
Chemical Company on a standalone basis.
Fiscal
Year Ended December 31, 2006 Compared to Fiscal Year Ended
December 31, 2005
Revenues: Revenues for the
year ended December 31, 2006 were $150,770,000 as compared to revenues for
the year ended December 31, 2005 of $119,539,000, an increase of
26%. This increase was primarily a result of selling biodiesel for
the full year and increased sales of NOBS. Revenues from biodiesel
accounted for 9% of total revenues in 2006. Revenues from NOBS
increased 26% and accounted for 56% of total revenues in 2006, the same percent
of revenues as in 2005. Revenues from the proprietary herbicide and
intermediates decreased 5% and accounted for 16% of total revenues in 2006 as
compared to 21% in 2005. Revenues from CPOs increased 5% in 2006 and
accounted for 3% of total revenues in 2006 compared to 4% in
2005. Revenues from DIPBs decreased 3% and accounted for 5% of total
revenues in 2006 as compared to 6% in 2005. Revenues from
SSIPA/LiSIPA decreased 9% and accounted for 4% of total revenues in 2006 as
compared to 6% in 2005. Revenues from other products increased 26%
and accounted for 7% of total revenues in 2006 and 2005.
During 2006, revenues for NOBS
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.
Cost of Goods Sold and
Distribution: Total cost of goods sold and distribution for
the year ended December 31, 2006 were $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%.
50
Cost of goods sold and distribution
for the year ended December 31, 2006 for FutureFuel Chemical Company’s
chemicals segment were $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 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 were $24,422,000. 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%. This decrease was
primarily the result of lower corporate expense allocations from Eastman
Chemical Company, as well at the lower overall operating expenses incurred by
FutureFuel Chemical Company on a standalone basis.
Fiscal Year Ended December 31, 2005
Compared to Fiscal year Ended December 31, 2004
Revenues: Revenues
for the year ended December 31, 2005 for FutureFuel Chemical Company were
$119,539,000 as compared to revenues for the year ended December 31, 2004
of $144,157,000, a decrease of approximately 17%. The decrease was a
result of lower revenues across all product lines, with the exception of DIPBs,
where revenues increased 10%, and SSIPA/LiSIPA, where revenues were
flat. Revenues from NOBS decreased 9% and accounted for 56% of total
revenues in 2005 as compared to 51% in 2004. Revenues from the
proprietary herbicide decreased 10% and accounted for 21% of total revenues in
2005 as compared to 19% in 2004. Revenues from CPOs decreased 36% and
accounted for 4% of total revenues in 2005 versus 5% in
2004. Revenues from DIPBs increased 10% and accounted for 6% of total
revenues in 2005 versus 5% in 2004. Revenues from SSIPA/LiSIPA
increased less than 1% and accounted for 6% of total revenues in 2005 as
compared to 5% in 2004. Revenues from other products decreased 62%
and accounted for 7% of total revenues in 2005 as compared to 15% in
2004.
During 2005, revenues for NOBS declined
due to reduced demand from the customer as a result of changing consumer demand
for their product. Revenue from the proprietary herbicide declined
due to price concessions to the customer in order to maintain market share in
the face of generic product competition. In addition, a large
customer contract was completed in 2004 and not carried into 2005.
51
Cost of Goods Sold and
Distribution: Total cost of goods sold and distribution for
the year ended December 31, 2005 were $105,263,000 as compared to total
cost of goods sold and distribution for the year ended December 31, 2004 of
$147,808,000, a decrease of 29%.
Cost of goods sold and distribution for
the year ended December 31, 2005 for FutureFuel Chemical Company’s
chemicals segment were $102,702,000 as compared to cost of goods sold and
distribution for the year ended December 31, 2004 of $127,049,000, a
decline of approximately 19%. The decline in cost of goods sold and
distribution was attributed to the decline in revenues as described above, as
evidenced by cost of goods sold and distribution as a percent of revenues in the
chemicals segment decreasing from 88% in 2004 to 86% in 2005. The
reduction of cost of goods sold and distribution in line with revenue reductions
was largely a result of an approximate 20% reduction-in-force at the Batesville
facility, effective May 1, 2005, which reduced the total workforce by 89
employees and afforded an annual labor cost reduction of approximately
$7,000,000.
Total cost of goods sold and
distribution for 2005 included $99,000 of corporate expense allocations from
Eastman Chemical Company and $2,462,000 of restructuring and impairment charges,
none of which were allocated to specific products or segments. Total
cost of goods sold and distribution for 2004 included $1,275,000 of corporate
expense allocations from Eastman Chemical Company and $19,485,000 of
restructuring and impairment charges, none of which were allocated to specific
products or segments.
Operating
Expenses: Operating expenses decreased from $20,773,000 for
the year ended December 31, 2004 to $13,637,000 for the year ended
December 31, 2005, or approximately 34%. This decrease was the
result in decreased labor expenses following the reduction in force implemented
by FutureFuel Chemical Company’s management during 2005 as well as significantly
lower corporate overhead allocations.
Critical
Accounting Estimates
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 March 31, 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. In
2004, FutureFuel Chemical Company recognized asset impairment charges of
approximately $18,305,000. This impairment primarily related to the
closure of specific fixed assets used to manufacture certain performance
chemicals product lines that were divested by Eastman Chemical
Company. We monitor the estimate useful lives of our assets and do
not currently anticipate further 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 March 31, 2007 and
52
December 31,
2006, we recorded a reserve for closure/post-closure liabilities of $551,000 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.
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.
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 will include
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.
53
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, 2006, 2005 and 2004 was:
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | (3,960 | ) | $ | 7,556 | $ | 19,044 | |||||
|
Net
cash provided by (used in) investing activities
|
$ | (91,168 | ) | $ | (6,594 | ) | $ | (6,520 | ) | |||
|
Net
cash provided by (used in) financing activities
|
$ | 158,229 | $ | (962 | ) | $ | (12,524 | ) | ||||
Years ended 2006, 2005 and
2004
Operating
activities: 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.
Cash provided by (used in) operating
activities decreased from $19,044,000 in 2004 to $7,556,000 in 2005, a decrease
of $11,488,000. In 2004, FutureFuel Chemical Company closed specific
fixed assets used to manufacture certain performance chemicals product lines
that ceased to be manufactured at the site. As a result, FutureFuel
Chemical Company ceased to maintain inventory balances related to these product
lines. In 2004, there was a significant decrease in inventory,
$10,586,000, that was not repeated in 2005, leading to a decrease in cash
provided by operating activities on a comparative
basis. Additionally, as discussed above, in 2005, there were
decreases in the sales of NOBS, FutureFuel Chemical Company’s largest product
line, which further lead to a reduction in cash provided by operating
activities.
Investing
Activities: Cash provided by (used in) investing activities
decreased $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 the addition of methanol recovery and
biodiesel feedstock pretreatment capabilities to the plant, the construction of
additional storage at the plant to support increased movements of feedstocks,
methanol, glycerin and biodiesel, to expand FutureFuel Chemical Company’s
biodiesel blending capabilities, the expansion of on-site rail siding and
railcar loading and unloading facilities to accommodate the increased number of
rail cars expected at the plant and acquiring a fleet of tanker trucks to
transport the biofuels and feedstocks between the plant and offsite storage
facilities. These projects are substantially completed or are
scheduled to be completed in 2008. 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.
54
Cash provided by (used in) investing
activities decreased from $(6,520,000) in 2004 to $(6,594,000) in 2005, a
decrease of $74,000. Cash flows from investing activities remained
relatively unchanged in 2005 as compared to 2004 as FutureFuel Chemical Company
experienced no significant expansion projects. The decrease that was
experienced was primarily due to higher capital expenditures in 2005,
$6,654,000, as compared to 2004, $6,520,000.
Financing
Activities: Cash provided by (used in) financing activities
increased from $(962,000) in 2005 to $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 related
costs.
Cash provided by (used in) financing
activities increased from $(12,524,000) in 2004 to $(962,000) in 2005, a
decrease of $11,562,000. These increase resulted from FutureFuel
Chemical Company generating less cash from operating and investing activities in
2005 as compared to 2004 and being able to transfer a smaller balance to its
then parent, Eastman Chemical.
Three Months Ended March 31, 2007
and 2006
Our
net cash provided by (used in) operating activities, investing activities and
financing activities for the quarters ended March 31, 2007 and 2006
was:
(Dollars
in thousands)
|
2007
|
2006
|
|||||||
|
Net
cash provided by (used in) operating activities
|
$ | 4,797 | $ | (35 | ) | |||
|
Net
cash provided by (used in) investing activities
|
$ | (6,058 | ) | $ | (2,097 | ) | ||
|
Net
cash provided by (used in) financing activities
|
$ | (50 | ) | $ | 2,536 | |||
Operating
Activities: Cash provided by operating activities increased
from $(35,000) during the three months ended March 31, 2006 to $4,797,000 during
the three months ended March 31, 2007. This increase primarily
resulted from changes in accounts receivable and inventory. Cash
generated from (used in) changes in accounts receivable was $3,175,000 during
the first quarter of 2007 as compared to $(982,000) during the first quarter of
2006. At the end of 2006, FutureFuel Chemical Company’s accounts
receivable were abnormally high as Eastman Chemical Company had collected a
significant amount of payments on behalf of FutureFuel Chemical Company but had
not yet transferred funds to FutureFuel Chemical Company. These funds
were collected during the three months ended March 31, 2007 and the balance owed
FutureFuel Chemical Company at March 31, 2007 was significantly
less. Cash generated from (used in) changes in inventory was
$4,243,000 during the first quarter of 2007 as compared to $(585,000) during the
first quarter of 2006. Inventory at December 31, 2006 was higher than
historical norms and FutureFuel Chemical Company was successful during the first
quarter of 2007 in reducing inventory days outstanding. Other
significant changes in cash included an increase in accounts payable during the
first quarter of 2007 of $2,520,000 as compared to a decrease in accounts
payable during the first quarter of 2006 of $878,000. This was offset
by cash provided by the change in fair value of derivative instruments during
the first quarter of 2007 of $2,817,000 as compared to $0 during the first
quarter of 2006.
Investing
Activities: Cash provided by (used in) investing activities
during the first quarter of 2007 was $(6,058,000) as compared to $(2,097,000)
during the first quarter of 2006. This decrease was primarily driven
by FutureFuel Chemical Company’s expansion of its biodiesel related
infrastructure and spending on implementation of a new ERP
system. The infrastructure capital projects are more fully described
and quantified below.
Financing
Activities: Cash provided by (used in) financing activities
during the first quarter of 2007 was $(50,000) as compared to $2,536,000 during
the first quarter of 2006. Financing activities during 2007 consisted
solely of the payment of a bank financing fee. Financing activities
during 2006 consisted of transfers of cash to Eastman Chemical Company and
proceeds of long-term debt from related parties.
Capital
Expenditure Commitments
As previously disclosed in Item 1,
Plan for Operation of the Consolidated Company above, FutureFuel Chemical
Company is pursuing seven core infrastructure projects that are expected to
bring efficiency, operational
55
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 complete by the first 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 March 31, 2007 and
December 31, 2006.
(Dollars
in thousands)
|
General
Purpose of the Commitment
|
March
31,
2007
|
December
31,
2006
|
||||||
|
Construction
of storage at the Batesville facility
|
$ | 1,516 | $ | 3,796 | ||||
|
Improvements
to materials handling capabilities at the Batesville
facility
|
760 | 177 | ||||||
|
Implementation
of an enterprise resource planning system
|
576 | 650 | ||||||
|
Total
|
$ | 2,852 | $ | 4,623 | ||||
FutureFuel Chemical Company has
historically financed capital requirements for its business with cash flows from
operations and has not had the need to incur bank indebtedness to finance any of
its chemical operations during the historical periods discussed
herein.
FutureFuel Chemical Company entered
into a $50 million credit agreement with Regions Bank in March
2007. The loan is a revolving facility the proceeds of which may be
used for working capital, capital expenditures and general corporate purposes of
FutureFuel Chemical Company. The facility terminates in March
2010. Advances are made pursuant to a borrowing base comprised of 85%
of eligible accounts plus 60% of eligible direct inventory plus 50% of eligible
indirect inventory. Advances are secured by a perfected first
priority security interest in accounts receivable and inventory. The
interest rate floats at the following margins over LIBOR or base rate based upon
the leverage ratio from time to time.
|
Leverage
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. Between
November 1, 2006 and January 31, 2007, the Company utilized
approximately $16.5 million of these proceeds to build FutureFuel Chemical
Company’s working capital and
56
approximately
$2.5 million to fund insurance and other general expenses. We
intend to fund future capital requirements for FutureFuel Chemical Company’s
chemical and biofuels segments from cash flow generated by FutureFuel Chemical
Company as well as from the remaining proceeds of our offering and borrowings
under the credit facility with Regions Bank. We do not believe there
will be a need to issue any securities to fund such capital
requirements.
Off-Balance
Sheet Arrangements
Our only off-balance sheet arrangements
are: (i) the financial assurance trusts established for the benefit of the
Arkansas Department of Environmental Quality; and (ii) hedging
transactions. The financial assurance trusts aggregate $3,164,000 at
March 31, 2007 and were established to provide assurances to the Arkansas
Department of Environmental Quality that, in the event the Batesville facility
is closed permanently, any reclamation activities necessitated under applicable
environmental laws will be completed. Such financial assurance trusts
are not reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors. The amounts held in trust are included in
restricted cash and cash equivalents on our balance sheet. The
closure liabilities are included in other noncurrent liabilities, but only on a
present value basis.
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 6 to our annual consolidated
financial statements included elsewhere herein. This activity was
captured on our balance sheet at March 31, 2007 and at December 31,
2006. Second, 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, 2006 as they do not
meet the definition of a derivative instrument as defined under accounting
principles generally accepted in the U.S. The purchase of biodiesel
feedstocks generally involves two components: basis and price. Basis
covers any refining or processing required as well as
transportation. Price covers the purchases of the actual agricultural
commodity. Both basis and price fluctuate over time. A
supply agreement with a vendor constitutes a hedge when FutureFuel Chemical
Company has committed to a certain volume of feedstock in a future period and
has fixed the basis for that volume.
Contractual
Obligations
The following table sets forth as of
December 31, 2006 the payments due by period for the following contractual
obligations of us and FutureFuel Chemical Company.
(Dollars
in thousands)
|
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
|
$ | 840 | $ | 318 | $ | 395 | $ | 90 | $ | 37 | ||||||||||
|
Purchase
obligations(a)
|
$ | 31,718 | $ | 31,551 | $ | 111 | $ | 56 | $ | - | ||||||||||
|
Other
long-term liabilities
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
__________
|
(a)
|
Purchase
obligations within less than one year include: (i) $4,623 for capital
expenditure commitments related to the construction of additional storage
capacity, material handling infrastructure and implementation of a new ERP
system; (ii) $26,335 in purchase contracts for soybean and cottonseed
oil; and (iii) $593 for information technology maintenance and
software license commitments. Purchase obligations beyond one
year include $167 for software license
commitments.
|
As of
February 7, 2008, FutureFuel Chemical Company had no borrowings under the
$50 million credit agreement with Regions Bank described
above.
57
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 by SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. Under these
standards, the accounting for changes in the fair value of a derivative
instrument depends upon whether it has been designated as an accounting hedging
relationship and, further, on the type of hedging relationship. To
qualify for designation as an accounting hedging relationship, specific criteria
must be met and appropriate documentation maintained. We had no
derivative instruments that qualified under these rules as designated accounting
hedges in 2006 or in any preceding year. Changes in the fair value of
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 March 31, 2007, the fair values of our
derivative instruments were a net liability in the amount of $447,000 and
$3,265,000, 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 acetic anhydride, electricity, coal, natural gas, methanol, soybean
oil and caustic soda. The availability and price of all of these
items are subject to wide fluctuations due to unpredictable factors such as
weather conditions, overall economic conditions, farmers’ planting decisions,
governmental policies and global supply and demand.
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 2006. Assuming that the
prices of the associated finished goods could not be increased and assuming no
change in quantities sold, a hypothetical 10% change in the average price of the
commodities listed below would result in the following change in annual gross
profit:
58
(Volumes
and dollars in thousands)
|
Item
|
Volume(a)
Requirements
|
Units
|
Hypothetical
Adverse
Change
in Price
|
Decrease
in
Gross
Profit
|
Percentage
Decrease in Gross Profit
|
|||||
|
Acetic
anhydride
|
7,256
|
KG
|
10.0%
|
$459
|
4.1%
|
|||||
|
Electricity
|
84
|
MWH
|
10.0%
|
$437
|
3.8%
|
|||||
|
Coal
|
40
|
MT
|
10.0%
|
$407
|
3.7%
|
|||||
|
Natural
gas
|
200
|
KSCF
|
10.0%
|
$275
|
2.5%
|
|||||
|
Methanol
|
5,915
|
KG
|
10.0%
|
$205
|
1.8%
|
|||||
|
Soybean
oil
|
2,784
|
KG
|
10.0%
|
$163
|
1.5%
|
|||||
|
Caustic
soda
|
10
|
MT
|
10.0%
|
$157
|
1.4%
|
__________
|
(a)
|
Volume
requirements and average price information are based upon volumes used and
prices obtained for the twelve months ended December 31,
2006. Volume requirements may differ materially from these
quantities in future years as the business of FutureFuel Chemical Company
evolves.
|
As of December 31, 2006, 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.
59
Item
3. - Properties
The
Company
We are a holding company whose
principal assets are all of the issued and outstanding shares of stock of
FutureFuel Chemical Company and cash and cash equivalents.
FutureFuel
Chemical Company
FutureFuel Chemical Company’s principal
asset is a manufacturing plant situated on approximately 2,200 acres of land six
miles southeast of Batesville in north central Arkansas fronting the White
River. Approximately 500 acres of the site are occupied with batch
and continuous manufacturing facilities, laboratories and infrastructure,
including on-site liquid waste treatment. FutureFuel Chemical Company
is the fee owner of this plant and the land upon which it is situated, and
manufactures both biofuels and chemicals at the plant. Utilization of
these facilities may vary with product mix and economic, seasonal and other
business conditions, but the plant is substantially utilized with the exception
of facilities designated for capacity expansion of biodiesel and a facility
targeted for the potential future production of cellulosic-based
ethanol. The plant, including approved expansions, has sufficient
capacity for existing needs and expected near-term growth. We believe
that the plant is generally well maintained, in good operating condition and
suitable and adequate for its uses.
60
Item
4. - Security Ownership of Certain Beneficial Owners and Management
Security
Ownership of Certain Beneficial Owners
As
of the date of this Registration Statement, 26,700,000 shares of our common
stock are issued and outstanding and we have issued warrants to purchase
22,500,000 additional shares of our common stock. The shares of
common stock are our only voting securities issued and
outstanding. The following table sets forth the number and percentage
of shares and warrants owned by all persons known by us to be the beneficial
owners of more than 5% of our shares of common stock and warrants as of the most
recent practicable date.
|
Common
Stock
|
Warrants
|
Fully
Diluted
|
|||||||
|
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 entities, Admiral Financial
Center,
5th
Floor, 90 Fort Street,
Box
32021 SMB, Grand Cayman,
Cayman
Islands(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%
|
|||
__________
|
(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 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)
|
Includes
shares of common stock held by Fir Tree Recovery Master Fund, L.P. and Fir
Tree Value Master Fund, L.P., which are managed by a common investment
manager, Fir Tree, Inc. Consequently, Fir
Tree,
|
61
|
|
Inc.
may be deemed to beneficially own the shares and warrants held by Fir Tree
Recovery Master Fund, L.P. and Fir Tree Value Master Fund,
L.P. We have no knowledge as to the beneficial owners of Fir
Tree, Inc.
|
|
(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
Registration Statement.
|
|
(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 Registration Statement by each of our directors and
executive officers. Unless otherwise indicated, we believe that all
persons named in the table below have sole voting and investment power with
respect to all shares of common stock beneficially owned by them and none of
such shares or warrants have been pledged as security.
|
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
|
--
|
--
|
--
|
--
|
--
|
--
|
|||
|
All
directors and executive officers
|
10,036,250
|
37.50%
|
5,311,250
|
23.60%
|
15,347,500
|
31.20%
|
|||
__________
|
(a)
|
Includes
6,781,250 shares of common stock and 4,643,750 warrants held by St. Albans
Global Management, Limited Partnership, LLLP and 625,000 shares of common
stock and 625,000 warrants held by Apex Holding Co. Mr. Novelly
is the chief executive officer of both of these entities and thereby has
voting and investment power over such shares, but he disclaims beneficial
ownership except to the extent of a minor pecuniary
interest.
|
|
(b)
|
Includes
2,000,000 shares of common stock held by Lee E. Mikles Revocable Trust
dated March 26, 1996 and 100,000 shares of common stock held by Lee
E. Mikles Gift Trust dated October 6, 1999. Also includes
12,500 warrants held by the Alison L. Mikles Irrevocable
Trust. Miss Mikles is the minor child of Mr. Mikles and lives
in Mr. Mikles household. However, Mr. Mikles is not the trustee
of such trust and disclaims beneficial
ownership.
|
|
(c)
|
Includes
250,000 shares of common stock held by the Douglas D. Hommert Revocable
Trust, which is a trust established by Mr. Hommert for the benefit of his
descendants, of which Mr. Hommert is the
trustee.
|
|
(d)
|
Assumes
the exercise of all warrants issued and outstanding as of the date of this
Registration Statement.
|
62
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
|
63
Item
5. - Directors and Executive Officers
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
|
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 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. 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
|
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.
64
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 Forward Industries, Inc., a
publicly-held company in the business of designing, manufacturing and
distributing custom carrying case solutions, and World Point Terminals Inc., a
publicly-held Canadian company based in Calgary which owns and operates
petroleum storage facilities in the Bahamas and United States.
Thomas R.
Evans has been a member of our board since May 2006. Since
June 2004, he has served as president and chief executive officer of Bankrate,
Inc., an Internet based aggregator of financial rate information. Mr.
Evans was elected to Bankrate, Inc.’s board of directors in May
2004. From 1999 to 2002, Mr. Evans was chairman and chief executive
officer of Official Payments Corporation, an Internet processor of payment to
government entities.
Richard L.
Knowlton has been a member of our board since January
2007. Between 1956 and 1995, Mr. Knowlton worked for Hormel Foods
Corporation, a multinational manufacturer and marketer of consumer-branded meat
and food products. He started as a merchandising manager and became
the president and chief operating officer in 1979. He became the
chief executive officer and chairman of the board in 1981 and retired in
1995. Mr. Knowlton currently serves as a director on The Hormel
Foundation and the Horatio Alger Association and is a member of the Business
Advisory Council for the University of Colorado Leeds School of Business, the
Mayo Laboratory Services Advisory Board and the Eisenhower Medical Center
Board. Mr. Knowlton served as a director of NG America Insurance
Holdings, Inc. between 2000 and 2005 and SUPERVALU INC. between 1994 and
2005.
Paul G.
Lorenzini has been a member of our board since January
2007. In January 1970, Mr. Lorenzini co-founded Packaging
Consultants, Inc., a distribution business supplying packaging materials to the
food industry. In 1983, Bunzl PLC, a supplier of supermarket and food
service packaging, acquired Packaging Consultants, Inc. Mr. Lorenzini
continued to work for Bunzl PLC and in 1986 became president of Bunzl
USA. He subsequently became
65
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.
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. 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.
66
Item 6.
- Executive Compensation
General
Our board of directors has
established a remuneration committee. The remuneration committee’s
responsibilities include, among other things, determining our policy on
remuneration to our (that is, FutureFuel Corp.’s) officers and directors and the
executive officers and directors of FutureFuel Chemical Company, provided,
however, that no director may be directly involved in any decisions as to his
own remuneration. Given that we 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 to our subsidiary, FutureFuel Chemical
Company. Our board approved such payments on January 22,
2008. Our board also approved reimbursement of $100,000 in expenses
incurred by an affiliate of Lee E. Mikles as a result of Mr. Mikles serving as
an executive officer of the Company and our subsidiary. No
compensation for our directors or our executive officers has been set at this
time for the calendar year 2008.
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 (Item 6 of this Registration Statement), the term
“executive officers” includes executive officers of both FutureFuel Corp. and
FutureFuel Chemical Company. However, only Paul A. Novelly, Lee E.
Mikles and Douglas D. Hommert have been elected officers of FutureFuel Corp. by
our board of directors.
Compensation
Discussion and Analysis
We have not yet established a
comprehensive executive compensation philosophy, nor have we determined
definitively the material elements of the compensation of our executive
officers. The current elements of our compensation program include
base salary and certain retirement, insurance and other benefits generally
available to all employees. In addition, our board has adopted an
Omnibus Incentive Plan which was approved by our shareholders at our 2007 annual
meeting on June 26, 2007. As of the date of this Registration
Statement, the Plan has not been implemented by our board and no awards have
been granted thereunder. Such Plan when implemented by our board
would provide equity-based compensation to our executive officers.
We have formed a remuneration committee
of our board, which will determine compensation arrangements for our executive
officers. We expect our remuneration committee will seek to establish
a compensation program that will be designed to attract, as needed, individuals
with the skills necessary for us to achieve our business plan, to motivate those
individuals, to reward those individuals fairly over time and to retain those
individuals who continue to perform at or above the levels that we
expect. We also expect that our executive compensation program will
be designed to afford our executive officers a sense of ownership in us, and to
link rewards to measurable Company and individual performance. These
arrangements are expected to include appropriate salaries, annual bonus
opportunities and long-term incentives awards linked to equity and equity awards
under the omnibus incentive plan adopted during 2007.
Cash
Salaries and Bonuses
At this time, we have determined
that we will pay $100,000 compensation to each of Messrs. Novelly and Lorenzini
for services rendered to our subsidiary, FutureFuel Chemical Company during
2007. No compensation will be paid to Messrs. Mikles or Hommert for
2007 (although the Company will reimburse an affiliate of Mr. Mikles $100,000
for expenses incurred by such affiliate as a result of Mr. Mikles serving as an
executive officer of the Company and our subsidiary), nor to Messrs. Novelly,
Mikles or Hommert for 2006. Each of Messrs. Novelly, Mikles and
Hommert were granted founder shares as described elsewhere in this Registration
Statement, and our board of directors determined that the payment of cash
compensation to them was unnecessary for 2006. Our executive
chairman, Mr. Novelly, receives compensation from our affiliate, St. Albans
Global Management, Limited
67
Partnership,
LLLP. Our chief executive officer, Mr. Mikles, receives compensation
from existing business enterprises and investments, none of which are affiliated
with us. Our executive vice president, secretary and treasurer, Mr.
Hommert, receives compensation from our affiliate, Apex Oil Company,
Inc. None of Messrs. Novelly, Mikles or Hommert received any increase
in their salary, bonus or other income to compensate them for their services to
us. As to our other executive officers, we continued their base
salaries paid by Eastman Chemical Company with a modest percentage
increase. We expect that our remuneration committee will establish
future salaries for our executive officers commensurate with those paid by
companies comparable to us and to FutureFuel Chemical Company, as
applicable.
We expect to establish an annual
cash bonus program for fiscal years commencing in 2007. In
determining actual bonus payouts, we expect that the remuneration committee will
consider performance against Company performance goals to be established, as
well as individual performance goals. We expect that this annual cash
bonus program will apply to certain key executives of FutureFuel Chemical
Company in addition to the executives whose compensation is described in this
Registration Statement. The specifics of the 2007 cash bonus program
will be detailed in our Form 10-K for the year ended December 31,
2007.
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.
Eligible participants in the plan
include: (i) members of our board of directors (currently seven persons);
(ii) regular, active employees of us or of any of our subsidiaries
(approximately 450 persons); and (iii) persons engaged by us or by any of
our subsidiaries to render services to us or our subsidiaries as an advisor or
consultant.
Awards under the plan are limited to
shares of our common stock, which may be shares reacquired by us, including
shares purchased in the open market, or authorized but un-issued
shares. Awards will be limited to 10% of the issued and outstanding
shares of our common stock in the aggregate, or approximately 2,670,000 shares
as of June 26, 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
68
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.
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
69
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 (none
of whom had been elected to an officer position with FutureFuel Chemical
Company) were granted founders shares as described herein. Please
refer to the discussion under “Item 4. - Security Ownership of Certain
Beneficial Owners and Management - Founding Shares Owned by the Founding
Shareholders” above. Our board of directors considers the grants of
the founders shares to such executive officers to be adequate to compensate them
for their services to us in our start-up stage (that is, from our organization
in August 2005 through the end of 2006).
Our executive officers who are not
officers of FutureFuel Corp. participate in employee welfare plans (life
insurance, medical insurance, disability insurance, vacation pay and the like)
maintained by FutureFuel Chemical Company for all of its
employees. We do not provide life insurance or other employee
benefits for our executive officers who have been elected to officer positions
with both FutureFuel Corp. and FutureFuel Chemical Company.
The
Remuneration Committee
Our remuneration committee currently
consists of Mr. Levy, Mr. Knowlton and Mr. Lorenzini. Each of these
individuals is an “independent director” under the rules of the New York Stock
Exchange, a “Non-Employee Director” within the meaning of Section 16 of the
Securities Exchange Act of 1934, as amended, and an “outside director” within
the meaning of §162(m) of the Internal Revenue Code of 1986, as
amended.
Summary
Compensation Table
Our executive officers were paid the
following compensation during the twelve months ended December 31,
2006.
70
Summary
Compensation Table
|
Person
|
Office
|
Salary
|
Bonus
|
(b)All
Other
Compensation
|
Total
|
||||||||||||
|
Paul
A. Novelly(c)
|
Executive
chairman, FutureFuel Corp.
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
|
Lee
E. Mikles(c)
|
Chief
executive officer, FutureFuel Corp.
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
|
Douglas
D. Hommert(c)
|
Executive
vice president, secretary and treasurer, FutureFuel Corp.
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
|
Randall
W. Powell(a)
|
President
and chief operating officer,
FutureFuel
Chemical Company
|
$ | 189,041 | $ | 296,232 | $ | 179,862 | $ | 665,135 | ||||||||
|
Benjamin
Ladd(a)
|
Chief
financial officer, FutureFuel Chemical Company
|
$ | 23,750 | $ | 40,000 | $ | 0 | $ | 63,750 | ||||||||
|
David
Baker(a)
|
Vice
president - manufacturing operations, FutureFuel Chemical
Company
|
$ | 140,618 | $ | 64,044 | $ | 28,389 | $ | 233,051 | ||||||||
|
Gary
Hess(a)
|
Vice
president - commercial operations, FutureFuel Chemical
Company
|
$ | 125,984 | $ | 41,500 | $ | 20,531 | $ | 188,015 | ||||||||
__________
|
(a)
|
Executive
officers of FutureFuel Chemical Company. Prior to November 1,
2006, Messrs. Baker and Hess were employed by Eastman Chemical
Company. Prior to November 1, 2006, Mr. Ladd was employed
by St. Albans Global Management, Limited Partnership, LLLP, an affiliate
of Mr. Novelly. The table includes both amounts paid by
FutureFuel Chemical Company as well as by Eastman Chemical Company, if
applicable.
|
|
(b)
|
Includes
our contributions (including accrued contributions) to vested and unvested
defined contribution plans and the dollar value of any insurance premiums
paid by, or on behalf of, us during the covered fiscal year with respect
to life and disability insurance for the benefit of the named
person. Also includes the following payments by Eastman
Chemical Company to or for the benefit of the named individual: special
pay makeup, employee recognition, personal umbrella, non-qualified stock
options to purchase stock of Eastman Chemical Company, pay-in-lieu of
vacation, stock awards to purchase stock of Eastman Chemical Company, and
lump sum payment.
|
|
(c)
|
Our
executive officers. For the year 2006, we did not pay Messrs.
Novelly, Mikles or Hommert any form of compensation. See the
discussion above. However, we did reimburse them for certain
ordinary and necessary business expenses that they incurred in connection
with our business. Messrs. Novelly and Mikles will receive
compensation for 2007 as set forth
above.
|
None of the above-named persons are
party to an employment agreement or employment arrangement with us or with
FutureFuel Chemical Company.
Compensation
of Directors
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 Compensa-tion
|
Change
in Pension Value and Non-Qualified Deferred Compensa-tion
Earnings
|
All
Other
Compensa-tion
|
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 | ||||||||||||||
71
A
description of such compensation will be included in our Form 10-K to be
filed with the SEC for the year ended December 31, 2007.
Compensation
Committee Interlocks and Insider Participation
The members of our remuneration
committee during 2006 were Mr. Levy, Mr. Evans and Mr. Doré, three of our
then non-executive directors, and the committee was chaired by Mr.
Doré. The committee is now comprised of Mr. Levy, Mr. Knowlton and
Mr. Lorenzini and is chaired by Mr. Levy.
Mr. Novelly, our executive chairman of
the board, and Mr. Mikles, our chief executive officer and one of our directors,
are both directors of Boss Holdings, Inc. Mr. Novelly is a member of
Boss Holdings, Inc.’s compensation committee and Mr. Mikles is a member of its
audit committee. Mr. Novelly and Mr. Levy, one of our directors and a
member of our remuneration committee, are both directors of World Point Terminal
Inc.; World Point Terminal Inc. does not have a separate compensation
committee.
72
Item 7.
- Certain Relationships and Related Transactions, and Director
Independence