UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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√
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2007
or
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from _____________ to ______________
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Commission
file number: 0-52577
FUTUREFUEL
CORP.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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20-3340900
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(IRS
Employer Identification No.)
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8235
Forsyth Blvd., Suite 400
St.
Louis, Missouri 63105
(Address
of Principal Executive Offices)
(805)
565-9800
(Registrant’s
Telephone Number)
Securities
to be registered pursuant to Section 12(b) of the Act:
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Title
of each class
to
be so registered
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Name
of each exchange on which
each
class is to be registered
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n/a
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n/a
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Securities
to be registered pursuant to Section 12(g) of the Act:
Common
Stock
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes No √
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes
No √
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes √ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate
by check mark whether the registrant is a large accelerate filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer √
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Smaller
reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No √
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. $99,982,500.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 26,700,000.
Table of Contents
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Page
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Part I
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1
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Item 1. Business
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1
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Item 1A. Risk Factors
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21
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Item 2. Properties
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31 | |
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Item 3. Legal Proceedings
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32 | |
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Part II
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33
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Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
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33 | |
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Item 6. Selected Financial
Data
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41
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Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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44
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Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
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57
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Item 8. Financial Statements and Supplementary
Data
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59
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Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure
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95
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Item 9A(T). Controls and
Procedures
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96
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Part III
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97
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Item 10. Directors, Executive Officers and
Corporate Governance
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97
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Item 11. Executive
Compensation
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101
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Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters
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108
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Item 13. Certain Relationships and Related
Transactions, and Director Independence
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111
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Item 14. Principal Accountant Fees and
Services
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113
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Part IV
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115
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Item 15. Exhibits and Financial Statement
Schedules
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115
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PART
I
Item
1. Business.
General
Development of the Business Since January 1, 2007
The
Company
FutureFuel
Corp. (the “Company”
or “we”,
“our” or
“us”) is a
Delaware corporation incorporated on August 12, 2005 under the name
“Viceroy Acquisition Corporation”. We were formed to serve as a
vehicle for the acquisition by way of an asset acquisition, merger, capital
stock exchange, share purchase or similar transaction of one or more operating
businesses in the oil and gas industry. On July 12, 2006, we
completed an offering of 22,500,000 units, each unit consisting of one share of
our common stock and one warrant to acquire one share of our common
stock. These units were issued at $8.00 per unit. In
connection with the offering, our shares and warrants were listed on the
Alternative Investment Market (“AIM”) of
the London Stock Exchange plc. On July 21, 2006, we entered into
an acquisition agreement with Eastman Chemical Company to acquire its
wholly-owned subsidiary, Eastman SE, Inc., a chemical manufacturer which had
just launched a biobased products platform. Our shareholders approved
the acquisition of Eastman SE, Inc. on October 27, 2006. On
October 31, 2006, the acquisition of Eastman SE, Inc. was consummated
(effective after the close of business on that day) and Eastman SE, Inc. became
our wholly-owned subsidiary. In connection with such closing, we
changed our name to FutureFuel Corp. and Eastman SE, Inc. changed its name to
FutureFuel Chemical Company.
FutureFuel
Chemical Company
FutureFuel
Chemical Company is a Delaware corporation incorporated on September 1,
2005 under the name Eastman SE, Inc. It owns approximately 2,200
acres of land six miles southeast of Batesville in north central Arkansas
fronting the White River. Approximately 500 acres of the site are
occupied with batch and continuous manufacturing facilities, laboratories and
infrastructure, including on-site liquid waste treatment. The plant
is staffed by 453 non-union full-time employees. FutureFuel Chemical
Company manufacturers diversified chemical products. In addition, in
2005, it launched a biobased products platform, comprising biofuels and biobased
specialty chemical products.
Plan
of Operation for the Consolidated Company
Our
strategy in relation to the acquired operations is to build upon and expand
FutureFuel Chemical Company’s biobased products platform and to continue
FutureFuel Chemical Company’s chemical manufacturing activities.
We
initially planned to increase the plant’s biodiesel capacity to 40 million
gallons per year by May 2007 and to 160 million gallons per year by November
2007, with substantial complementary expenditures on infrastructure to support
this increased capacity. After closing on our acquisition of FutureFuel Chemical
Company on October 31, 2006, we and, to our knowledge, the industry as a whole
witnessed a rapid erosion in margins for producing biodiesel. See
http://www.thehindubusinessline.com/2006/12/21/stories/2006122103701200.htm. As
a result of these decreased margins, in January 2007 we determined that it was
not in our shareholders best interest to proceed on an accelerated basis to
increase capacity and, therefore, we suspended the biodiesel capacity expansion.
However, we continued with (and in some cases have already completed) certain
core infrastructure projects as described below. We believe these projects will
bring efficiency, operational flexibility and cost savings to FutureFuel
Chemical Company’s existing biodiesel and chemical business lines.
The core
infrastructure projects included:
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·
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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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·
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constructing
additional storage and related infrastructure at the plant to support
increased movements of feedstocks, methanol and biodiesel on and off the
site - this project is substantially
completed;
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1
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·
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expanding
on-site rail siding and railcar loading and unloading facilities to
accommodate the increased number of railcars expected at the plant - this
project is substantially completed;
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·
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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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·
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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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·
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procuring
railcars to transport raw goods to the plant and deliver biodiesel from
the plant to customers - this project is substantially completed until
logistical requirements require a larger railcar
fleet.
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Construction
is in progress for the first three site infrastructure projects described
above. As indicated, the last three projects are complete or
substantially complete. We believe that FutureFuel Chemical Company
will be able to timely obtain the materials to complete these projects as
scheduled, although no assurances can be given that the scheduled timetables
will be achieved or that they will not be revised based upon market
conditions.
In
December 2006, FutureFuel Chemical Company commenced storage of its biodiesel at
a liquid bulk storage facility in Little Rock, Arkansas. Additional
locations will be assessed as market conditions dictate (e.g., FutureFuel
Chemical Company’s need for additional storage space, the availability of such
space and the cost of such space). FutureFuel Chemical Company has
already acquired several tanker trucks and has leased methanol and biodiesel
railcars. The need for additional tanker trucks and/or railcars will
be assessed as demand for FutureFuel Chemical Company’s biodiesel and logistics
dictate. We believe that implementation of the above strategy will
help FutureFuel Chemical Company remain a substantial participant in the
biofuels market.
At the
time that we suspended expansion of the biodiesel capacity, we determined that
any future expansions of biodiesel production capacity would be dictated by
changing market conditions. Justification for capacity expansion is
dependent upon three primary factors: (i) the price of crude oil, and more
specifically the price of petrodiesel; (ii) the price of feedstock
oils/fats required to produce biodiesel; and (iii) tax incentives and
volume mandates. For example, see
http://greenfuels.org/biodiesel/economics.htm. Biodiesel is generally
sold as a blend with petrodiesel, which is its primary competitive product, and
must be priced close to parity with petrodiesel in order to be competitive in
the marketplace. Feedstock cost is the largest single component of
biodiesel production costs and therefore has a substantial impact on production
costs. See
http://www.eia.doe.gov/oiaf/analysispaper/biodiesel/. In the second
quarter of 2007, crude oil prices strengthened (see
http://www.dallasfed.org/research/energy/en0702.cfm) and, despite corresponding
increases in feedstock oil prices, soybean oil in particular, we judged these
and future market conditions to be supportive of biodiesel capacity expansion
and therefore resumed a project to expand capacity by 35 million gallons
per year (for a total capacity of 59 million gallons per year) through a
new continuous processing line, projected to be operational during the second
half of 2008. However, no assurances can be given that the scheduled
timetable will be achieved or that it will not be revised based upon market
conditions such as those discussed above.
Please
see “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Capital Expenditures
and Commitments” below for an estimate of the capital cost of the capital
projects discussed above. The storage and procurement of railcars are
not capital projects; rather, they affect cash flow through ongoing lease
commitments. These lease commitments are included in footnote 18
of our consolidated financial statements for the year ended December 31,
2007 contained elsewhere herein. Based upon our budget, existing cash
and the proceeds from the $50 million credit facility described below, we
do not believe that it will be necessary for us to raise additional funds to
meet the expenditures required for operating the business as set forth
above.
2
Financial
Information about Segments
Historically,
the business and assets included in FutureFuel Chemical Company were accounted
for by Eastman Chemical Company in various segments of Eastman Chemical
Company’s overall business. Although FutureFuel Chemical Company was
incorporated on September 1, 2005, Eastman Chemical Company did not begin
transferring assets into FutureFuel Chemical Company until January 1, 2006
and completed the transfer in subsequent periods prior to the closing of our
acquisition of FutureFuel Chemical Company. Notwithstanding that
FutureFuel Chemical Company was a separately incorporated entity, Eastman
Chemical Company did not prepare separate financial statements for FutureFuel
Chemical Company nor was Eastman Chemical Company required to do so under local
law or accounting rules. Rather, the operations of the Batesville
plant were reported within Eastman Chemical Company based upon the underlying
products and the revenues and expenses of the plant were effectively spread
throughout Eastman Chemical Company’s financial statements. In
addition, allocations to the plant of Eastman Chemical Company overhead (such as
insurance, employee benefits, legal expenses and the like) were based upon
assumptions made by Eastman Chemical Company and such assumptions historically
did not reflect expenses which FutureFuel Chemical Company would have incurred
had it been a stand-alone entity. Since we did not acquire or succeed
to all of the assets and liabilities of Eastman Chemical Company, “carve-out”
financial statements have been prepared for the acquired component business,
excluding the continuing operations retained by Eastman Chemical
Company. As our acquisition of Eastman SE, Inc. was accounted for
through purchase accounting, a presentation of the historical financial results
of the Batesville plant occurring before November 1, 2006 is not made
within our historical financial results. The financial data presented
herein represents our consolidated operations for the twelve-month periods ended
December 31, 2007 and December 31, 2006, the “carve-out” operations of
the Batesville plant for the ten-month period ended October 31, 2006 and
the twelve-month period ended December 31, 2005, and where noted the
combined results of us and FutureFuel Chemical Company for the twelve months
ended December 31, 2006.
The
following table sets forth: (i) our consolidated revenues from external
customers for the year ended December 31, 2007, our consolidated revenues
from external revenues for the year ended December 31, 2006 plus FutureFuel
Chemical Company’s revenues from external customers for the ten-month period
ended October 31, 2006, and FutureFuel Chemical Company’s revenues from
external customers for the year ended December 31, 2005; (ii) our
consolidated net income for the year ended December 31, 2007, our
consolidated income for the year ended December 31, 2006 less FutureFuel
Chemical Company’s net loss for the ten-month period ended October 31,
2006, and FutureFuel Chemical Company’s net income for the year ended
December 31, 2005; and (iii) our total assets at December 31,
2007 and 2006 and FutureFuel Chemical Company’s total assets at
December 31, 2005. Our and FutureFuel Chemical Company’s
information has been combined for the twelve-month period ended
December 31, 2006 solely for comparative purposes.
(Dollars
in thousands)
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Period
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Revenues
from
External
Customers
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Net
Income
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Total
Assets
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|||||||||
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Year
ended December 31, 2007
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$ | 169,788 | $ | 8,408 | $ | 216,113 | ||||||
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Year
ended December 31, 2006
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$ | 134,168 | $ | 2,242 | $ | 203,059 | ||||||
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Year
ended December 31, 2005
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$ | 104,364 | $ | 381 | $ | 114,500 | ||||||
For the
year ended December 31, 2005 and the ten months ended October 31,
2006, FutureFuel Chemical Company’s revenues from external customers exclude all
revenues from Eastman Chemical Company. Beginning November 1,
2006, revenues from external customers equals total revenues. See
note 11 to FutureFuel Chemical Company’s annual financial statements included
elsewhere herein for revenues from Eastman Chemical Company for the year ended
December 31, 2005 and the ten months ended October 31,
2006.
Prior to
the initiation of its biofuels program in 2005, the Batesville plant did not
have business reporting “segments” as defined by U.S. generally accepted
accounting principles. After the initiation of the biobased products
program in 2005, it had two segments: chemicals and
biofuels. FutureFuel Chemical Company is not able to allocate net
income and total assets between its two business segments. However,
revenues from external
3
customers
can be allocated between the two business segments as set forth in the following
chart. The amounts in the following chart include: (i) our
consolidated revenues from external customers for the year ended
December 31, 2007; (ii) our consolidated revenues from external
revenues for the year ended December 31, 2006 plus FutureFuel Chemical
Company’s revenues from external customers for the ten-month period ended
October 31, 2006; and (iii) FutureFuel Chemical Company’s revenues
from external customers for the year ended December 31,
2005. Our and FutureFuel Chemical Company’s information has been
combined for the twelve-month period ended December 31, 2006 solely for
comparative purposes.
(Dollars
in thousands)
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Period
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Revenues
from
Chemical
Segment
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Revenues
from
Biofuels
Segment
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Total
Revenues
from
External
Customers
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|||||||||
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Year
ended December 31, 2007
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$ | 144,474 | $ | 25,314 | $ | 169,788 | ||||||
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Year
ended December 31, 2006
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$ | 120,828 | $ | 13,340 | $ | 134,168 | ||||||
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Year
ended December 31, 2005
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$ | 104,364 | $ | 0 | $ | 104,364 | ||||||
Narrative
Description of the Business
Principal
Executive Offices
Our
principal executive offices are located at 8235 Forsyth Blvd., 4th Floor,
Clayton, Missouri 63105. Our telephone number is (805)
565-9800. FutureFuel Chemical Company’s principal executive offices
are located at 2800 Gap Road, Highway 394 South, Batesville, Arkansas
72501-9680. Its telephone number at such office is
(870) 698-1811.
The
Company
We
completed the offering described above on July 12, 2006 and acquired
FutureFuel Chemical Company at the close of business on October 31,
2006. Our common stock and warrants are listed on AIM under the
symbols “FFU” and “FFUW”, respectively. We have not conducted any
other material business operations.
FutureFuel
Chemical Company
FutureFuel
Chemical Company owns approximately 2,200 acres of land six miles southeast of
Batesville in north central Arkansas fronting the White
River. Approximately 500 acres of the site are occupied with batch
and continuous manufacturing facilities, laboratories and infrastructure,
including on-site liquid waste treatment. The plant is staffed by 453
non-union full-time employees. Land and support infrastructure are
available to support expansion and business growth.
For the
year ended December 31, 2007, approximately 75% of site revenue was derived
from manufacturing specialty chemicals for specific customers (“custom
manufacturing”) with 10% of revenues being derived from multi-customer specialty
chemicals (“performance chemicals”) and 15% from biodiesel. Custom
manufacturing involves producing unique products for individual customers,
generally under long-term contracts. The plant’s custom manufacturing
product portfolio includes a bleach activator for a major detergent
manufacturer, a proprietary herbicide for a major life sciences company and
chlorinated polyolefin adhesion promoters and antioxidant precursors for a major
chemical company. The performance chemicals product portfolio
includes polymer (nylon) modifiers and several small-volume specialty chemicals
for diverse applications.
We are
continuing the specialty chemical business of FutureFuel Chemical
Company. However, we expect that FutureFuel Chemical Company’s
biofuels platform will become the core segment of the business. We
intend to increase production capacity of biodiesel within FutureFuel Chemical
Company as set forth above, and will make future capacity expansions when the
market conditions discussed above support such an increase, and to pursue
commercialization of other biofuel products, including cellulosic-derived
ethanol. In pursuing this strategy, FutureFuel Chemical Company will
continue to establish a name identity in the biofuels business, leverage
its
4
BQ-9000
quality certification, secure local and regional markets and expand marketing
efforts to fleets and regional/national customers. Concurrent efforts
will also seek to enhance margins via: (i) volume increases;
(ii) conversion cost reductions by transition to continuous processing;
(iii) expansion of feedstock options; (iv) legislative incentives; and
(v) value-enhancing applications for glycerin co-product (from the
biodiesel manufacturing process). These items are discussed in
greater detail below.
Biofuels Business Segment
Overview of the Segment
FutureFuel
Chemical Company’s biofuels segment was established in early 2005 as an
initiative of the site management team to leverage site technical and
operational expertise as well as available manufacturing capacity to pursue
business growth opportunities in addition to the legacy specialty chemicals
business. Management targeted this segment in recognition of three
factors: (i) the abundance and diversity of biomass raw materials in the
immediate area of the plant site; (ii) the ability to rapidly convert
under-utilized facilities to biofuels production at substantially advantaged
capital cost relative to new construction; and (iii) the existence of
technical and operational expertise to position the business as a high quality,
low-cost industry leader. The biofuels segment had inconsequential
revenue for the year ended December 31, 2005, revenue of $13,340,000 for
the year ended December 31, 2006 and revenue of $25,314,000 for the year
ended December 31, 2007.
Biofuel Products
FutureFuel
Chemical Company’s biofuels business segment currently targets two products:
biodiesel and bioethanol.
Biodiesel
Biodiesel
is a sustainable, renewable transportation fuel with a growing market in the
United States and internationally. For example, see
http://www.emerging-markets.com/biodiesel/default.asp. Under current
and projected market conditions, there are significant amounts of unsatisfied
demand for biodiesel. As an alternative to petrodiesel and other
petroleum-based fuels, biodiesel has several advantages, including:
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·
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extending
domestic diesel fuel supplies;
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reducing
dependence on foreign crude oil
supplies;
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expanding
markets for domestic and international agricultural
products;
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reducing
emissions of greenhouse gases and other gases that are regulated by the
United States Environmental Protection Agency (see, e.g.,
http://www.cyberlipid.org/glycer/biodiesel.htm);
and
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·
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being
usable by existing diesel engines while extending their useful lives (see,
e.g.,
http://www.cyberlipid.org/glycer/biodiesel.htm).
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As a
result of the benefits that are expected from the widespread use of biodiesel,
federal and state laws, including tax laws, and governmental policy favor and in
some jurisdictions require the increasing use of biodiesel instead of
petrodiesel. See “Legislative Incentives” below.
Biodiesel
commercialization was achieved by FutureFuel Chemical Company in October 2005,
five months following initiation of that project. Technical and
operational competency developed as a supplier of specialty chemicals enabled
the development of a flexible manufacturing process which can utilize the
broadest possible range of feedstock oils, including soy oil, cottonseed oil,
palm oil, pork lard, poultry fat and beef tallow. The Batesville
plant produces B100 (100% biodiesel) and B99.9 (99.9% biodiesel; .1% petrodiesel
blend), the latter product priced net of the federal excise tax credit for those
customers who do not wish to establish themselves as tax-qualified
blenders. B20 (20% biodiesel; 80% petrodiesel) is currently used in
the facility’s diesel fleet and became available for retail sale at the site in
March 2007. In the second quarter of 2008, FutureFuel Chemical
Company intends to begin offering B100 and biodiesel blended with petrodiesel
(B2, B5, B10 and B20 grades) at Little Rock, Arkansas and Memphis,
Tennessee.
5
Bioethanol
Bioethanol
is a fuel for internal-combustion engines that is made from ethyl alcohol
obtained from biological material and is typically sold as a retail blend with
conventional gasoline. FutureFuel Chemical Company is pursuing
production of bioethanol from cellulosic biomass raw
materials. Cellulosic-derived ethanol can be produced from a great
diversity of biomass including waste from urban, agricultural and forestry
sources. See
http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. Unlike
corn-based ethanol, whose raw material competes with food chain products,
cellulosic ethanol derives from abundant and diverse sources of plant and wood
products. See
http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. FutureFuel
Chemical Company is pursuing the “biochemical” technology platform to produce
cellulosic-derived bioethanol, which incorporates four distinct processing
steps: (i) pretreatment; (ii) hydrolysis; (iii) fermentation; and
(iv) distillation.
As
discussed below in greater detail, cellulosic-derived ethanol technology is
developmental throughout the industry and has only been demonstrated at
laboratory and pilot scale. FutureFuel Chemical Company to date has
only evaluated cellulosic ethanol technologies at laboratory
scale. The most-recognized pilot scale unit which has been publicized
to date is the approximate 1 million gallon per year Iogen facility in
Ottawa discussed below. FutureFuel Chemical Company initiated its
cellulosic ethanol research and development program in December 2005 and
incurred costs associated therewith through December 31, 2007 of
approximately $429,000. While FutureFuel Chemical Company expects to
continue its research program on cellulosic ethanol, initiatives and timelines
to progress the technology to pilot and/or commercial scale are dependent upon
results and progress in developing the technology and no assurances can be given
that FutureFuel Chemical Company will be successful or, if successful,
when. Testing and results of the cellulosic ethanol program to date
are not yet complete. As of the date of this report, FutureFuel
Chemical Company has only evaluated cellulosic based ethanol technologies at
laboratory scale and has not commenced commercial production using these
technologies.
Ethanol today is produced in the United
States mostly from sugars or starches obtained from fruits and grains, corn
being the predominant raw material. See
http://www.ars.usda.gov/research/publications/publications.htm?SEQ_NO_115=160162. In
contrast, cellulosic ethanol is obtained from cellulose, the main component of
wood, straw and plants. See
http://www.eia.doe.gov/oiaf/analysispaper/biomass.html. Since
cellulose cannot be digested by humans, the production of cellulose does not
compete with the production of food. The price per ton of the raw
material is thus much cheaper than grains or fruits. Moreover, since
cellulose is the main components of wood and plants, the potential volume of
available raw material is much greater than for agricultural food
crops.
6
The
production of cellulosic ethanol by FutureFuel Chemical Company through the
biochemical route is in the research and development stage as discussed
above. FutureFuel Chemical Company has entered into discussions with
various parties to develop some of the necessary technology for the commercial
production of cellulosic ethanol, also as discussed above. We can
give no assurances, however, that FutureFuel Chemical Company will be able to
bring cellulosic ethanol to commercial realization.
The Biodiesel Production
Process
Biodiesel
can be made from renewable sources such as:
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·
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refined
virgin vegetable oils;
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·
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refined
animal fats; and
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·
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used
cooking oils and trap grease.
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The
choice of feedstock is determined primarily by the price and availability of
each feedstock variety and the capabilities of the producer’s biodiesel
production facility. In the United States, the majority of biodiesel
historically has been made from domestically produced soybean
oil. However, palm oil imported from Malaysia and Indonesia is being
considered as a viable alternative due to price, availability and expected
supply elasticity. See, for example,
http://en.wikipedia.org/wiki/Palm_oil. FutureFuel Chemical Company’s
plant has been designed to process a wide variety of feedstocks to take
advantage of fluctuating prices and availability of the various
feedstocks.
The
biodiesel manufacturing process has three distinct steps: the chemical reaction
step, the separation step and the polishing step.
Table
1
7
Chemical
Reaction. In the chemical reaction step, a mix of biodiesel
glycerin and soap is created from the selected feedstock, methanol and a
catalyst. The collection of equipment that performs this chemical
reaction step in producing biodiesel is referred to as the
“reactors.” Depending upon the type of reactor used, the mix of
biodiesel glycerin and soap produced requires differing degrees of further
processing to separate the methyl esters comprising the biodiesel from the
glycerin and soap, to clean or “polish” both the biodiesel and glycerin and to
recover excess methanol from both the biodiesel and
glycerin. Generally, the more efficient the reactor, the less
downstream processing that is required. If the feedstock used is high
in free fatty acids, an esterification step may be
required. Esterification is a chemical reaction in which two
chemicals (typically an alcohol and an acid) form an
ester. Transesterification is the process of exchanging the alkoxy
group of an ester compound by another alcohol.
Separation. The
methyl esters are separated from the glycerin and soap produced during the
chemical reaction step.
Polishing. The
methyl esters are purified to remove residual catalysts and other
impurities. Any excess water and methanol is also removed and may be
recycled into earlier steps in the production process train.
Legislative Incentives
Agencies
of the United States government, including the Department of Energy, the
Environmental Protection Agency, the Internal Revenue Service and the Department
of Agriculture, and many states offer biodiesel incentives or have mandates for
the use of biodiesel, or both. There are other governmental
incentives that do not directly reduce the net cost of producing or blending
biodiesel but that drive the demand for biodiesel. For example, tax
credits are available under the Internal Revenue Code for investment in
qualifying refueling property, the Environmental Protection Agency will pay
50-100% of the cost for schools to upgrade and/or replace their buses, and
programs administered by the Department of Energy indirectly require government
fleet operators to purchase substantial amounts of biodiesel. The
principal federal incentives that we believe will have the greatest positive
effect on FutureFuel Chemical Company’s business are discussed
below.
The
Energy Policy Act of 1992 requires government fleet operators to use a certain
percentage of alternatively fueled vehicles. The Act established a
goal of replacing 10% of motor fuels with non-petroleum alternatives by 2000,
increasing to 30% by the year 2010. Currently, 75% of all new
light-duty federal vehicles purchased are required to have alternative fuel
capability to set an example for the private automotive and fuel
industries.
Under the
Energy Conservation Reauthorization Act of 1998, vehicle fleets that are
required to purchase alternatively fueled vehicles can generate credit toward
this requirement by purchasing and using biodiesel in a conventional
vehicle. Since there are few cost-effective options for purchasing
heavy-duty alternatively fueled vehicles, federal and state fleet providers can
meet up to 50% of their heavy-duty alternatively fueled vehicle purchase
requirements with biodiesel. The biodiesel fuel credit allows fleets
to purchase and use 450 gallons of biodiesel in vehicles in excess of 8,500
pounds gross vehicle weight instead of alternatively fueled
vehicles. Fleets must purchase and use the equivalent of 450 gallons
of pure biodiesel in a minimum of a 20% blend to earn one
credit. Covered fleets earn one vehicle credit for every light-duty
alternatively fueled vehicle they acquire annually beyond their base vehicle
acquisition requirements. Credits can be banked or sold.
In
October 2004, Congress passed a biodiesel tax incentive, structured as a federal
excise tax credit, as part of the American Jobs Creation Act of
2004. The credit amounts to one cent for each percentage point of
vegetable oil or animal fat biodiesel that is blended with petrodiesel (and
one-half cent for each percentage point of recycled oils and other
non-agricultural biodiesel). For example, blenders that blend B20
made from soy, canola and other vegetable oils and animal fats receive a 20¢ per
gallon excise tax credit, while biodiesel made from recycled restaurant oils
(yellow grease) receive half of this credit. The tax incentive
generally is taken by petroleum distributors and is substantially passed on to
the consumer. It is designed to lower the cost of biodiesel to
consumers in both taxable and tax-exempt markets. The tax credit was
scheduled to expire at the end of 2006, but was extended in the Energy Policy
Act of 2005 to the end of 2008.
Congress
enacted the Energy Policy Act of 2005 in August 2005 and included a number of
provisions intended to spur the production and use of biodiesel. In
particular, the Act’s provisions include biodiesel as part of the minimum volume
of renewable fuels (the renewable fuels standard or “RFS”), in
the nationwide gasoline and diesel pool, with the Environmental Protection
Agency being directed to determine the share to be allocated to biodiesel and
other details through its rulemaking process. The Act also extended
the biodiesel tax credit to 2008 and
8
included
a new tax credit for renewable diesel. More specifically, the RFS
requires a specific amount of renewable fuel to be used each year in the
nationwide gasoline and diesel pool. The volume increases each year,
from 4 billion gallons per year in 2006 to 7.5 billion gallons per
year in 2012. The Act requires the Environmental Protection Agency,
beginning in 2006, to publish by November 30th of each
year, “renewable fuel obligations” that will be applicable to refineries,
blenders and importers in the contiguous 48 states. There must be no
geographic restrictions on where renewable fuel may be used or per-gallon
obligations for the use of renewable fuel. The renewable fuel
obligations are required to be expressed in terms of a volume percentage of
gasoline sold or introduced into commerce and consist of a single applicable
percentage that will apply to all categories of refineries, blenders and
importers. The renewable fuel obligations are to be based on
estimates that the Energy Information Association provides to the Environmental
Protection Agency on the volumes of gasoline it expects will be sold or
introduced into commerce. The Environmental Protection Agency
released the final rules to implement the RFS on April 10,
2007. Under those rules, the RFS compliance period did not begin
until September 1, 2007. The applicable volume of renewable fuel
under this program is 4.7 billion gallons for 2007 and 5.4 billion
gallons for 2008.
The
Energy Policy Act of 2005 also created a new tax credit for small agri-biodiesel
producers with production capacity not in excess of 60 million gallons, of
10¢ per gallon for the first 15 million gallons of agri-biodiesel
sold. FutureFuel Chemical Company’s 2007 biodiesel production
capacity did not exceed 60 million gallons and thus we qualified for this
credit.
On
December 19, 2007, the Energy Independence and Security Act of 2007 (“Energy Bill of
2007”) was enacted which, among other things, expanded the
RFS. In contrast to the Energy Policy Act of 2005, this bill provided
an RFS carve-out applicable specifically to biodiesel; the RFS requirement of
the Energy Policy Act of 2005 had mostly been filled by
ethanol. Beginning January 1, 2009, the Energy Bill of 2007
mandates that 500 million gallons of biomass-based diesel (biodiesel) be
used per year. The mandate increases each year and reaches
1 billion gallons per year in 2012. Beyond 2012, the mandate is
to be determined by the Environmental Protection Agency administrator in
coordination with the secretaries of energy and agriculture, but with a minimum
of that mandated in 2012, thus a 1 billion gallons per year
floor. The Energy Bill of 2007 did not extend the biodiesel
production tax incentive (set to expire at the end of 2008). An
extension of this credit is part of a draft of the Farm Bill currently before
Congress, although the ultimate outcome of such Farm Bill is
unknown. The Energy Bill of 2007 also provides an RFS carve-out for
cellulosic biofuel, starting at 100 million gallons per year in 2010 and
reaches 16 billion gallons per year in 2022.
The
federal government offers other programs as summarized in the table
below.
|
Federal
Agency
that
Administers/
Oversees
|
Type
of
Incentive
|
Who
Receives
Incentive
|
Commonly
Known
As
|
Summary
|
||
|
IRS
|
income
tax credit
|
infrastructure
providers
|
Alternative
Fuel Infrastructure Credit
|
Provides
a tax credit in an amount equal to 30% of the cost of any qualified
non-residential alternatively fueled vehicle refueling property placed
into service in the United States up to $30,000, subject to certain
limits.
|
||
|
EPA
|
grant
program
|
school
districts
|
Clean
School Bus Program
|
Reduces
operating costs and children’s exposure to harmful diesel exhaust by
limiting bus idling, implementing pollution reduction technology,
improving route logistics and switching to biodiesel. The
Energy Bill of 2005 utilizes this program to grant up to a 50% cost share
(depending on the age and emissions of the original bus) to replace school
buses with buses that operate on alternative fuel or low-sulfur diesel, or
up to 100% for retrofit projects.
|
9
|
Federal
Agency
that
Administers/
Oversees
|
Type
of
Incentive
|
Who
Receives
Incentive
|
Commonly
Known
As
|
Summary
|
||
|
USDA
|
grant
program
|
agricultural
producers and small businesses
|
Renewable
Energy Systems and Energy Efficiency Improvements Grant
|
In
2005, the U.S. Department of Agriculture’s Office of Rural Development
made available $22.8 million in competitive grant funds and
guaranteed loans for the purchase of renewable energy systems and energy
improvements for agricultural producers and small rural
businesses. Eligible projects include biofuels, hydrogen and
energy efficiency improvements, as well as solar, geothermal and
wind.
|
||
|
USDA/DOE
|
grant
program
|
biobased
fuels researchers
|
Biomass
Research and Development Act of 2000
|
Funds
research, development and demonstration biomass projects with respect to
renewable energy resources from the agricultural and agro-forestry
sectors. Biomass is defined as organic matter that is available
on a renewable or recurring basis.
|
Many
states are following the federal government’s lead and are offering similar
programs and incentives to spur biodiesel production and use. For
example, Arkansas provides an income tax credit of 5% of the cost of the
facilities and equipment used directly in the wholesale or retail distribution
of biodiesel where the equipment has not been claimed in a previous tax
year. In addition, Arkansas offers a tax refund of $0.50 for each
gallon of biodiesel used by a supplier to produce a biodiesel/petrodiesel
mixture of not more than 2% biodiesel. In April 2007, Arkansas passed
legislation that provides for a $0.20 per gallon biodiesel producer credit
(capped at $2 million) and up to $50,000 in grants per site for biodiesel
producers and distributors to install distribution
infrastructure. FutureFuel Chemical Company submitted an application
for the $0.20 per gallon biodiesel producer credit for 2007 production and
received the $2 million credit in March 2008. FutureFuel
Chemical Company intends to apply for the credit in future years when and as
such credit is available.
Illinois
and Minnesota have mandated the use of B2 in all diesel fuel sold in their
respective states subject to certain conditions that include sufficient annual
production capacity (defined as at least 8 million gallons). Our
review of state statutes reveals that approximately 39 states provide either
user or producer incentives for biodiesel, several states provide both types of
incentives and approximately 29 states provide incentives to biodiesel producers
to build facilities in their states, typically offering tax credits, grants and
other financial incentives. As FutureFuel Chemical Company expands
its business outside of Arkansas, it will evaluate these additional state
incentives to determine if it qualifies for them.
FutureFuel
Chemical Company will continue to identify and pursue other incentives to
support its business. However, no assurances can be given that
FutureFuel Chemical Company will qualify for any such incentives or, if it does
qualify, what the amount of such incentives will be.
BQ-9000 Status
The
BQ-9000 program was launched in late 2005 by the National Biodiesel
Board. The program requires certified and accredited companies to
possess a quality manual and quality control system and employ best practices in
biodiesel sampling, testing, blending, shipping, storage and
distribution. The goal of the program is to help assure quality of
biodiesel from plant gate to consumer tank.
10
FutureFuel
Chemical Company recognized the potential to establish itself as an industry
quality leader through extension of its existing chemical ISO 9001 quality
systems to biodiesel production. Management further recognized the
need within this developing industry to provide a consistent ASTM standard
product as an essential requirement for market expansion into fleet, government
and on-the-road applications. In February 2006, shortly after the
biodiesel industry established its comprehensive quality standard, BQ-9000,
FutureFuel Chemical Company achieved the fourth such certification in the nation
(currently only 20 biodiesel producers have achieved this quality standard - see
http://www.bq-9000.org/companies/producers.aspx). Consistent with
BQ-9000, all manufactured product is tested in on-site quality control
laboratories and confirmed to meet the ASTM D6751 standard.
Future Strategy of the Enlarged
Group
We intend
to expand FutureFuel Chemical Company’s biodiesel capacity utilizing available
facilities as market conditions dictate as described above. All
future capacity will be operated primarily in continuous processing mode to
realize operating economies and optimum throughput. Existing and
future processes will accommodate a wide range of feedstock oils, allowing
optimization relative to supply and pricing.
FutureFuel
Chemical Company is pursuing the commercialization of cellulosic-based ethanol,
initially to be produced from local hardwood biomass. FutureFuel
Chemical Company’s research and development program with respect to
cellulosic-based ethanol includes collaboration with the National Renewable
Energy Laboratory (“NREL”) and
other private-sector technology providers. These NREL collaborations
consisted of an assessment of the proposed FutureFuel Chemical Company
technologies for cellulosic ethanol and mapping of these unit operations to an
existing production facility. NREL also supported FutureFuel Chemical
Company in establishing analytical assay techniques for cellulosic biomass and
its hydrolysates. Private sector collaborators have been major enzyme
suppliers who have provided commercial and pre-commercial cellulose enzyme
products, as well as technical support for their use. As with
biodiesel, FutureFuel Chemical Company intends to leverage technical expertise
and existing idle manufacturing assets to move this emerging technology from the
development stage to commercial reality. The biochemical platform
approach being pursued seeks to assemble demonstrated component technologies in
a process design that leverages current facility infrastructure and
capabilities.
Federal
and state support incentives are anticipated to be available for cellulosic
ethanol commercial development. We intend to take full advantage of
incentives as they are promulgated into regulation and
practice. However, no assurances can be given that FutureFuel
Chemical Company will develop a commercially viable cellulosic-based ethanol
manufacturing process.
In
October 2006, a $2 million U.S. Department of Agriculture grant was awarded
to Virent Energy Systems LLC to demonstrate the conversion of glycerin to
propylene glycol at pilot plant scale. FutureFuel Chemical Company is
Virent’s research partner on the grant project. FutureFuel Chemical
Company will be making in-kind contributions to the research effort by
designing, engineering, installing and operating a subscale processing unit at
its Batesville plant. FutureFuel Chemical Company will receive a
portion of the grant to cover direct costs (which direct costs were $0 in 2007
and are estimated to be $418,000 during 2008). We believe this
technology, if successfully demonstrated, may be adapted as a key component
technology to increase the competitiveness of biodiesel
production. However, no assurances can be given that FutureFuel
Chemical Company will develop a commercially viable glycerin to propylene glycol
manufacturing process.
Customers and Markets
FutureFuel
Chemical Company currently markets its biodiesel products by truck and rail
directly to customers in twelve midwest, southwest and western states and in
Canada. Through the utilization of liquid bulk storage facilities and
barge loading capabilities, FutureFuel Chemical Company is positioned to market
biodiesel throughout the United States for transportation and home heating fuel
usage. In addition, FutureFuel Chemical Company entered into a
tolling agreement whereby, for a fee, it produced biodiesel for a third party
(this tolling agreement terminated on September 30, 2007). For
the twelve months ended December 31, 2007, three of FutureFuel Chemical
Company’s customers represented 50% of biodiesel revenues (7% of total
revenues), six customers represented 70% of biodiesel revenues (10% of total
revenues) and the tolling agreement represented 4% of biodiesel revenues (1% of
total revenues). Although the regional market is still being
developed, we estimate that the regional direct market available to FutureFuel
Chemical Company at maturity will be at least 30 million gallons per
year.
11
Competition
FutureFuel
Chemical Company competes with other producers of biodiesel, both locally,
regionally and nationally. There was one other operational biodiesel
plant in the state of Arkansas (in Stuttgart, southeast of Little Rock), with
capacity stated at 3 million gallons per year. However, that
plant closed in 2007 and it is our understanding that it will not
reopen. There are several operating facilities in surrounding states
and announced biodiesel production facilities in Arkansas and surrounding
states. We estimate that regional competitive producers may have
approximately 150 million gallons of capacity by 2008. National
producers of biodiesel are described above.
In
addition to biodiesel producers, FutureFuel Chemical Company competes with new
technologies that are being developed as alternatives to
biodiesel. For example, in December 2006, ConocoPhillips announced
that commercial production of renewable diesel fuel had begun at its Whitegate
refinery in Cork Island, Ireland. The production process, developed
by ConocoPhillips, uses soybean and other vegetable oils to produce fuel that
meets European diesel fuel standards. The fuel is produced using
existing equipment at the refinery and is blended and transported with
petroleum-based diesel. ConocoPhillips claims that renewable diesel
is chemically similar to conventional petrodiesel and can be shipped through
common carrier pipelines. ConocoPhillips is evaluating this
technology for use in the United States. UOP, a major supplier to the
petrochemical refining industry, has also reported the development of technology
for the production of fungible fuels (diesel and gasoline) by hydro-processing
of vegetable oils and cellulose. See
http://www.alternatefuelsworld.com/greendiesel-greengasoline.html. We
cannot give any assurances that renewable diesel fuel (or some other product)
produced by these competing technologies will not supplant biodiesel as an
alternative to conventional petrodiesel.
Supply and Distribution
As a
result of its feedstock-neutral process, FutureFuel Chemical Company is able to
source oils from a broad supplier base which includes pork, chicken and beef
rendering facilities from both national and regional suppliers. Soy
oil is also sourced from several national and regional
producers. Cottonseed oil has been sourced from a regional
cooperative. All feedstocks are currently supplied by either rail or
truck. FutureFuel Chemical Company is currently exploring the
possibility of importing palm oil feedstocks. We believe that an
adequate supply of feedstocks can be sourced to support anticipated
production.
We intend
that biodiesel and other biofuels will be sold at the plant site as well as
shipped to liquid bulk storage facilities for further
distribution. Plant site sales are made by railcar and tank
truck. Biodiesel is being delivered to liquid bulk storage facilities
by company-owned tank trucks and common carriers for distribution there and for
further transportation by barge.
Chemicals Business Segment
Overview of the Segment
FutureFuel
Chemical Company’s chemicals segment manufactures diversified chemical products
that are sold externally to third party customers. This segment
comprises two components: “custom manufacturing” (manufacturing chemicals for
specific customers); and “performance chemicals” (multi-customer specialty
chemicals). The chemicals segment had revenue of $144,474,000,
$137,430,000 and $119,539,000 for the years ended December 31, 2007, 2006
and 2005, respectively.
Chemical Products
Custom
manufacturing involves producing unique products for individual customers,
generally under long-term contracts. Many of these products are
produced under confidentiality agreements in order to protect intellectual
property. This is a service-based business where customers value
technical capabilities, responsiveness and process improvement to continually
improve costs and reliability. In recent years, a trend toward
off-shoring (to China and India in particular) has placed significant downward
pressure on margins. The plant’s custom manufacturing product
portfolio includes four large products or product families which are generally
produced throughout the year: (i) a bleach activator for a major detergent
and consumer products manufacturer; (ii) a proprietary herbicide for a
major life sciences company; (iii) chlorinated polyolefin adhesion
promoters (“CPOs”) for
a major chemical company; and (iv) antioxidant precursors (“DIPBs”)
for a major chemical company. The portfolio also contains
a
12
number of
smaller products which are produced intermittently in a “batch campaign” mode,
for diverse customers and end markets.
Performance
chemicals comprises multi-customer products which are sold based upon
specification and/or performance in the end-use application. This
portfolio includes a family of polymer (nylon) modifiers and several
small-volume specialty chemicals for diverse applications.
FutureFuel
Chemical Company historically manufactured CPOs and DIPBs at cost for Eastman
Chemical Company. CPOs are chemical intermediates that promote
adhesion for plastic coatings and DIPBs are intermediates for production of
Eastman Chemical Company products used as general purpose inhibitors,
intermediates or antioxidants. Historically, revenues related to CPOs
and DIPBs were exactly offset by cost of goods sold; hence there was no effect
on gross profit for the year ended December 31, 2005 or the ten-months
ended October 31, 2006. As part of our acquisition of FutureFuel
Chemical Company, FutureFuel Chemical Company entered into conversion agreements
with Eastman Chemical Company whereby FutureFuel Chemical Company agreed to
produce these products on Eastman Chemical Company’s behalf. The
conversion agreements effectively provide a conversion fee to FutureFuel
Chemical Company based on volume manufactured, with a minimum annual
fee. In addition, the conversion agreements provide for revenue
adjustments for actual usage of raw materials versus a standard and stipulate
that Eastman Chemical Company will pay for substantially all raw material
expenses and allow for an annual inflation adjustment factor.
Future Strategy
To build
on and maintain FutureFuel Chemical Company’s reputation as a technology-driven
competitive chemical producer, we believe that FutureFuel Chemical Company must
continuously focus on cost control, operational efficiency and capacity
utilization to maximize earnings. The ability to utilize large scale
batch and continuous production processes and a continuous focus on process
improvements allow FutureFuel Chemical Company to compete effectively in the
custom manufacturing market and to remain cost competitive with, and for some
products cost-advantaged over, its competitors. We intend to improve
margins in this area of the FutureFuel Chemical Company business by careful
management of product mix with regard to size of opportunity, timing to market,
capital efficiency and matching of opportunities to assets and
capabilities.
We expect
to derive significant growth in the performance chemicals component primarily as
a result of new biobased co-products derived from biofuels manufacturing, such
as glycerin and derivatives. We believe that these products and
applications will be competitive in the marketplace due to advantaged raw
material costs derived from their co-product status. For example, for
every gallon of biodiesel produced, approximately one pound of co-product
glycerin is generated. See
http://www.biodiesel.org/pdf_files/fuelfactsheets/prod_quality.pdf and
http://www.harvestcleanenergy.org/conference/HCE6/Frear2.pdf. Production
of glycerin from biofuels has significantly reduced the value of glycerin in the
global marketplace and prices for refined glycerin have fallen by over 50% since
late 2004. See
http://www.purchasing.com/article/CA6341035.html?ref=nbcs and
http://www.biodieselmagazine.com/article.jsp?article_id=1123. The
crude form of glycerin derived directly from biodiesel processing has little or
no value unless purified to an industrial grade quality. See
http://www.biodieselmagazine.com/article.jsp?article_id=1123 and
http://www.ampc.montana.edu/policypaper/policy22.pdf. Many small
biodiesel producers lack this purification capability and we believe that crude
glycerin has become a disposal issue for many of these producers. See
http://www.biodieselmagazine.com/article.jsp?article_id=1123, and
http://www.biodieselmagazine.com/article.jsp?article_id=237&q=&page=all
and http://www.ampc.montana.edu/policypaper/policy22.pdf. Leveraging
its specialty chemicals expertise and infrastructure, FutureFuel Chemical
Company is capable of refining glycerin to sufficient purity to derive
commercial value as a co-product and/or converting glycerin through chemical
processing to higher-value derivative products. Commercial
development samples of refined glycerin (bulk quantities) are currently
available for customer evaluations. In July 2006, Eastman SE, Inc.
identified three key areas for the sale of glycerin: (i) sale of existing
unrefined material; (ii) sale of highly refined material; and
(iii) conversion of unrefined and refined material to higher value
products. FutureFuel Chemical Company has offered unrefined glycerin
to users thereof, which has led to sampling programs and field
tests. However, no sales have been arranged on terms satisfactory to
FutureFuel Chemical Company. It has refined glycerin in batch
equipment and has provided samples to various potential customers, but no sales
have been consummated. Conversion of glycerin to higher value
products is still in the
13
research
and development stage (for example, see the discussion with respect to Virent
Energy Systems LLC above).
Customers and Markets
FutureFuel
Chemical Company’s chemical products are used in a variety of market and end
uses, including detergent, agrochemical, automotive, photographic imaging,
coatings, nutrition and polymer additives. These products are
generally non-cyclical; however, the customers are often the “brand owners” and
therefore control factors related to demand, such as market development
strategy. In many cases, FutureFuel Chemical Company may be unable to
increase or maintain its level of sales revenue for these products.
All sales
of the bleach activator are made to The Procter & Gamble Company pursuant to
a supply contract that is set to expire in June 2008. No assurances
can be given that such contract will be extended past June 2008 or, if extended,
upon what terms. Sales of the bleach activator totaled $82,500,000,
$84,691,000 and $66,959,000 for the years ended December 31, 2007, 2006 and
2005, respectively. Additionally, all sales of a proprietary
herbicide and certain other intermediates used in the production of this
herbicide are made to Arysta LifeScience North America Corporation pursuant to
contracts which continue year-to-year unless terminated by notice given no later
than 270 days prior to the end of the current term for the herbicide and not
later than 18 months prior to the current term for the
intermediates. No assurances can be given that these contracts will
not be terminated. Sales of this herbicide and its intermediates
totaled $25,177,000, $23,685,000 and $25,063,000 for the years ended
December 31, 2007, 2006 and 2005, respectively. These two
customers represented approximately 63%, 72% and 77% of revenues in 2007, 2006
and 2005, respectively.
Competition
Historically,
there have been significant barriers to entry for competitors with respect to
chemicals primarily due to the fact that the relevant technology and
manufacturing capability has been held by a small number of
companies. As technology and investment have increasingly moved
outside of North America, competition from multinational chemical manufacturers
has intensified, primarily from India and China. FutureFuel Chemical
Company competes with these and other producers primarily based on price,
customer service, technology, quality and reliability. FutureFuel
Chemical Company’s major competitors in this segment include large multinational
companies with specialty chemical business units, and smaller independent
producers. The multinational competitors are often disadvantaged by
poor responsiveness and customer service, while the small producers often have
limited technology and financial resources. We believe that
FutureFuel Chemical Company should be well-positioned for growth due to the
combination of its scale of operations and technical capabilities.
Supply and Distribution
Specialty
chemicals are generally high unit value products sold in packaged, or low-volume
bulk form, for which distribution is a relatively minor component of
cost. Most products are sold FOB the Batesville site for distribution
globally. Similarly, raw materials for these products are
comparatively higher-value components that are sourced globally. An
exception will be the biofuels co-products, which will be recovered from local
processing and purified or further functionalized into other products at the
site.
Backlog
The
majority of FutureFuel Chemical Company’s revenues are derived under tolling
arrangements with specific customers. These customers generally
provide FutureFuel Chemical Company with forecasts of demand on a monthly or
quarterly basis. These forecasts are intended to enable FutureFuel
Chemical Company to optimize the efficiency of its production processes and
generally are not firm sales orders. As such, FutureFuel Chemical
Company does not monitor or report backlog.
Management Team and
Workforce
FutureFuel
Chemical Company’s executive management team consists of four individuals with a
combined 100 plus years of experience in the chemicals industry, comprising
technical, operational and business responsibilities. Two of the four
members of the executive team have international experience, including
assignments in Europe and Asia.
14
Another
member, the chief financial officer, began employment concurrently with the
closing of our acquisition of FutureFuel Chemical Company. The
operational and commercial management group at the Batesville site includes five
additional degreed professionals with an average experience of over 20 years in
the chemical industry.
The
Batesville workforce comprises approximately 444 additional full-time employees,
with a total of 61 degreed professionals, including 21 chemists (9 PhDs) and 33
engineers (including 10 licensed professional engineers and 17 chemical
engineers). The site is non-unionized. Operations
personnel are highly skilled as all site manufacturing and infrastructure is
fully automated and computer-controlled. The workforce is
substantially self-sufficient in the range of required operational skills and
experience due to the lack of locally-available process industry
infrastructure. Voluntary attrition at the site has averaged less
than 2% annually since 2001.
Cyclicality and
Seasonality
FutureFuel
Chemical Company’s chemical products typically are not cyclical but they are
sensitive to global economic conditions. Supply and demand dynamics
determine profitability at different stages of cycles and global economic
conditions affect the length of each cycle. Despite some sensitivity
to global economic conditions, many of the products in the chemical segment
provide a stable foundation of earnings.
Until
such time as non-seasonal business (primarily on-road transportation) expands
regionally, FutureFuel Chemical Company’s biodiesel sales at grades greater than
B5 are expected to be lower in winter months due to the end of farming activity,
which is a major user of biodiesel. Also, cold weather usage and
storage properties which reduce biodiesel demand during winter months require
resolution in order to fully exploit year-round demand
opportunities. Further, feedstock prices may make it more
advantageous to produce and store biodiesel during winter months and sell it in
the spring and winter months when prices are expected to be higher.
Intellectual Property
We
consider FutureFuel Chemical Company’s intellectual property portfolio to be a
valuable corporate asset which we intend to expand and protect globally through
a combination of trade secrets, confidentiality and non-disclosure agreements,
patents and copyrights. As a producer of a broad and diverse
portfolio of chemicals, FutureFuel Chemical Company’s intellectual property
relates to a wide variety of products and processes acquired through the
development and manufacture of over 300 specialty chemicals during the history
of the site. Our primary strategy regarding FutureFuel Chemical
Company’s intellectual property portfolio will be to appropriately protect all
innovations and know-how in order to provide FutureFuel Chemical Company’s
business segments with a technology-based competitive advantage, wherever
possible. In the chemicals business segment, custom manufacturing
projects are primarily conducted within the framework of confidentiality
agreements with each customer to ensure that intellectual property rights are
defined and protected. In the biofuels business segment, innovations
and process know-how will be vigorously protected as appropriate. As
may be necessary, we will seek to license technology from third parties that
complements FutureFuel Chemical Company’s strategic business
objectives. Neither FutureFuel Chemical Company’s business as a whole
nor any particular segment is materially dependent upon any one particular
patent, copyright or trade secret. As the laws of many foreign
countries do not protect intellectual property to the same extent as the laws of
the United States, we cannot assure you that FutureFuel Chemical Company will be
able to adequately protect all of its intellectual property assets.
Research and Development
FutureFuel
Chemical Company devotes significant resources to its research and development
programs which are primarily targeted towards two objectives:
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innovating,
developing and improving biofuels processes, in particular biodiesel and
bioethanol, including value-up technology and applications for
co-products; and
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developing
and improving processes for custom manufacturing products or performance
chemicals.
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FutureFuel
Chemical Company’s research and development capabilities comprise analytical
chemistry competencies to assay and characterize raw materials and products,
organic chemistry expertise applied across a breadth of
15
reaction
chemistries and materials and process engineering capabilities for batch and
continuous processing of both solid and liquid materials. We believe
that these core competencies, established in support of the legacy chemical
business, are applicable to building a technology-based position in biofuels and
associated biobased specialty products.
The
research and development expenses incurred by FutureFuel Chemical Company during
the years ended December 31, 2007, 2006 and 2005 were $3,434,000,
$4,919,000 and $5,975,000, respectively. Substantially all of such
research and development expenses related to the development of new products,
services and processes or the improvement of existing products, services and
processes. Research and development expenses during this timeframe
trended downwards due to: (i) reduced allocation of research and
development overhead from Eastman Chemical Company in anticipation of the
divestiture of Eastman SE, Inc.; and (ii) a reduction in research and
development staffing at the Batesville site resulting from the general
reduction-in-force which was effective May 2005. The 2007 research
and development expenses generally reflect the research and development staffing
and program costs incurred at the Batesville site on a standalone
basis.
Regulatory and Environmental
Matters
Various
aspects of FutureFuel Chemical Company’s operations are subject to regulation by
state and federal agencies. Oil and gas operations as well as
chemical operations are subject to numerous, stringent and complex laws and
regulations at the federal, state and local levels governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may:
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require
acquisition of permits regarding discharges into the air and discharge of
waste waters;
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place
restrictions on the handling and disposal of hazardous and other wastes;
and
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require
capital expenditures to implement pollution control
equipment.
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Compliance
with such laws and regulations can be costly and noncompliance can result in
substantial civil and even criminal penalties. Some environmental
laws impose strict liability for environmental contamination, rendering a person
liable for environmental damages and cleanup costs without regard to negligence
or fault. Moreover, public interest in the protection of the
environment has increased substantially in recent years. FutureFuel
Chemical Company’s operations could be adversely affected to the extent laws are
enacted or other governmental action is taken that imposes environmental
protection requirements that result in increased costs to the oil and gas
industry and/or the chemical manufacturing industry in general. The
following provides a general discussion of some of the significant environmental
laws and regulations that impact FutureFuel Chemical Company’s
activities.
The
federal Comprehensive Environmental Response, Compensation and Liability Act
(“CERCLA”),
and analogous state laws, impose joint and several liabilities, without regard
to fault or the legality of the original act, on certain classes of persons that
contributed to the release of a hazardous substance into the
environment. These persons include the owner and operator of the site
where the release occurred, past owners and operators of the site, and companies
that disposed or arranged for the disposal of hazardous substances found at the
site. Responsible parties under CERCLA may be liable for the costs of
cleaning up hazardous substances that have been released into the environment
and for damages to natural resources. Additionally, it is not
uncommon for third parties to assert claims for personal injury and property
damage allegedly caused by the release of hazardous substances or other
pollutants into the environment.
The
federal Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act (“RCRA”), is
the principal federal statute governing the management of wastes, including the
treatment, storage and disposal of hazardous wastes. RCRA imposes
stringent operating requirements, and liability for failure to meet such
requirements, on a person who is either a generator or transporter of hazardous
waste or an owner or operator of a hazardous waste treatment, storage or
disposal facility. Many of the wastes generated in FutureFuel
Chemical Company’s manufacturing facility are governed by RCRA.
The
federal Oil Pollution Act of 1990 (“OPA”) and
regulations thereunder impose liability on responsible parties for damages
resulting from oil spills into or upon navigable waters, adjoining shorelines or
in the exclusive economic zone of the United States. A responsible
party includes the owner or operator of an onshore facility. OPA
limits
16
liability
for onshore facilities to $350 million. These liability limits may
not apply if a spill is caused by a party’s gross negligence or willful
misconduct, the spill resulted from violation of a federal safety, construction
or operating regulation, or if a party fails to report a spill or to cooperate
fully in a clean-up. Failure to comply with OPA’s requirements may
subject a responsible party to civil, criminal or administrative enforcement
actions.
The
federal Water Pollution Control Act (“Clean Water
Act”) imposes restrictions and controls on the discharge of pollutants
into navigable waters. These controls have become more stringent over
the years, and it is possible that additional restrictions may be imposed in the
future. Permits must be obtained to discharge pollutants into state
and federal waters. The Clean Water Act provides for civil, criminal
and administrative penalties for discharges of oil and other pollutants, and
imposes liability on parties responsible for those discharges for the costs of
cleaning up any environmental damage caused by the release and for natural
resource damages resulting from the release. Comparable state
statutes impose liabilities and authorize penalties in the case of an
unauthorized discharge of petroleum or its derivatives, or other pollutants,
into state waters.
The
federal Clean Air Act (“Clean Air
Act”), and associated state laws and regulations, restrict the emission
of air pollutants from many sources, including facilities involved in
manufacturing chemicals and biofuels. New facilities are generally
required to obtain permits before operations can commence, and new or existing
facilities may be required to incur certain capital expenditures to install air
pollution control equipment in connection with obtaining and maintaining
operating permits and approvals. Federal and state regulatory
agencies can impose administrative, civil and criminal penalties for
non-compliance with permits or other requirements of the Clean Air Act and
associated state laws and regulations.
The
federal Endangered Species Act, the federal Marine Mammal Protection Act, and
similar federal and state wildlife protection laws prohibit or restrict
activities that could adversely impact protected plant and animal species or
habitats. Manufacturing activities could be prohibited or delayed in
areas where such protected species or habitats may be located, or expensive
mitigation may be required to accommodate such activities.
FutureFuel
Chemical Company’s policy is to operate its plants and facilities in a manner
that protects the environment and the health and safety of its employees and the
public. FutureFuel Chemical Company intends to continue to make
expenditures for environmental protection and improvements in a timely manner
consistent with its policies and with the technology available. In
some cases, applicable environmental regulations such as those adopted under the
Clean Air Act and RCRA, and related actions of regulatory agencies, determine
the timing and amount of environmental costs incurred by FutureFuel Chemical
Company.
We
establish reserves for closure/post-closure costs associated with the
environmental and other assets we maintain. Environmental assets
include waste management units such as incinerators, landfills, storage tanks
and boilers. When these types of assets are constructed or installed,
a reserve is established for the future costs anticipated to be associated with
the closure of the site based on an expected life of the environmental assets,
the applicable regulatory closure requirements and our environmental policies
and practices. These expenses are charged into earnings over the
estimated useful life of the assets. Currently, we estimate the
useful life of each individual asset up to 35 years.
In
addition to our general environmental policies and policies for asset retirement
obligations and environmental reserves, we accrue environmental costs when it is
probable that we or our subsidiary has incurred a liability and the amount can
be reasonably estimated. In some instances, the amount cannot be
reasonably estimated due to insufficient data, particularly in the nature and
timing of the future performance. In these cases, the liability is
monitored until such time that sufficient data exists. With respect
to a contaminated site, the amount accrued reflects our assumptions about
remedial requirements at the site, the nature of the remedy, the outcome of
discussions with regulatory agencies and other potentially responsible parties
at multi-party sites, and the number and financial viability of other
potentially responsible parties. Changes in the estimates on which
the accruals are based, unanticipated government enforcement action, or changes
in health, safety, environmental, chemical control regulations, and testing
requirements could result in higher or lower costs.
FutureFuel
Chemical Company’s cash expenditures related to environmental protection and
improvement were approximately $13,500,000, $13,300,000 and $13,211,000 for the
years ended December 31, 2007, 2006 and 2005,
respectively. These amounts pertain primarily to operating costs
associated with environmental protection equipment and facilities, but also
include expenditures for construction and development. We do not
expect future
17
environmental
capital expenditures arising from requirements of recently promulgated
environmental laws and regulations to materially increase FutureFuel Chemical
Company’s planned level of annual capital expenditures for environmental control
facilities.
We
believe that FutureFuel Chemical Company has obtained in all material respects
the necessary permits and licenses to carry on its operations as presently
conducted. We have reviewed environmental investigations of the
properties owned by FutureFuel Chemical Company and believe, on the basis of the
results of the investigations carried out to date, that there are no material
regulatory and/or environmental issues which adversely impact FutureFuel
Chemical Company. In addition, under our acquisition agreement with
Eastman Chemical Company, Eastman Chemical Company acquired environmental
insurance with respect to environmental conditions at the Batesville plant
existing as of the closing date and Eastman Chemical Company has agreed, subject
to certain limitations, to indemnify FutureFuel Chemical Company with respect to
such environmental conditions.
Objectives
Our
business objectives for FutureFuel Chemical Company are to: (i) exploit
growth opportunities in its two core business segments, biofuels and chemicals;
and (ii) improve gross margins.
Exploit Growth Opportunities in Core
Business Segments
We
believe that FutureFuel Chemical Company can become a market leader in biofuels
by leveraging its specialty chemicals technical expertise and by fully utilizing
idle site assets and infrastructure headspace, with emphasis on:
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operational
expertise to produce ASTM D6751 quality biodiesel from diverse
feedstocks;
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leveraging
BQ-9000 quality certification to supply demanding biodiesel
applications;
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conversion
of available capacity at below new-build
costs;
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service
to regional markets and enhanced distribution channels to national
markets;
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process
improvement to reduce costs of manufacturing;
and
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adding
value to co-products and by-products from biofuels
production.
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We
believe that FutureFuel Chemical Company is one of the largest independent
custom chemical manufacturers in North America and that it will continue to grow
this business based upon:
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long
term contracts for most custom manufacturing
products;
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strong
relationships with customers who are market leaders, leading to repeat
business;
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technical
capability to innovate processes, particularly the ability to apply both
chemistry and engineering disciplines to solve complex technical
problems;
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responsiveness
and customer service from an entrepreneurial
organization;
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ability
to practice a range of manufacturing scale;
and
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process
improvement capability to achieve lowest-cost manufacturing
position.
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We intend
to grow FutureFuel Chemical Company’s multi-customer chemicals portfolio by
producing marketable chemical co-products from biofuels production and biobased
specialty products derived from biofuel products and/or raw
materials. As an example, a significant co-product from biodiesel
production is glycerin, which can be purified and sold and which may also be
chemically converted into other chemical products and
derivatives. See the discussion above. We intend that
FutureFuel Chemical Company will exploit the potential for development of a
“chemicals from biomass” platform, based upon the raw material and co-product
streams associated with biofuels production.
18
Improve Gross Margins
We intend
that FutureFuel Chemical Company will continue to work to maximize the value of
core businesses by improving gross margins through:
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enhancing
pricing processes and strategies, and optimizing biofuels channels to
market;
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continuing
to pursue cost reduction opportunities, including improved operational
efficiency through business
simplification;
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achieving
high utilization of manufacturing
assets;
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improving
capital efficiency through high value de-bottlenecking opportunities and
incremental expansions of existing assets and infrastructure;
and
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enhancing
custom manufacturing project selection and portfolio
mix.
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However,
no assurances can be given that these objectives will be met, in whole or in
part.
Financial
Information about Geographic Areas
We do not
derive revenues from customers in foreign countries. Most of
FutureFuel Chemical Company’s sales are FOB the Batesville plant, although some
FOB points are in other states or at foreign ports. While many of
FutureFuel Chemical Company’s chemicals are utilized to manufacture products
that are shipped, further processed and/or consumed throughout the world, the
chemical products, with limited exceptions, generally leave the United States
only after ownership has transferred from FutureFuel Chemical Company to the
customer. Rarely is FutureFuel Chemical Company the exporter of
record, never is FutureFuel Chemical Company the importer of record into foreign
countries and FutureFuel Chemical Company is not always aware of the exact
quantities of its products that are moved into foreign markets by its
customers. FutureFuel Chemical Company does track the addresses of
its customers for invoicing purposes and uses this address to determine whether
a particular sale is within or outside the United States. FutureFuel
Chemical Company’s revenues for the last three fiscal years attributable to the
United States and foreign countries (based upon the billing addresses of its
customers) were as set forth in the following chart. The amounts in
the following chart include: (i) our consolidated revenues for the year
ended December 31, 2007; (ii) our consolidated revenues for the year
ended December 31, 2006 plus FutureFuel Chemical Company’s revenues for the
ten-month period ended October 31, 2006; and (iii) FutureFuel Chemical
Company’s revenues for the year ended December 31, 2005. Our and
FutureFuel Chemical Company’s information has been combined for the twelve-month
period ended December 31, 2006 solely for comparative
purposes.
(Dollars
in thousands)
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Period
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United
States
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All
Foreign
Countries
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Total
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Year
ended December 31, 2007
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$ | 141,233 | $ | 28,555 | $ | 169,788 | ||||||
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Year
ended December 31, 2006
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$ | 131,893 | $ | 18,877 | $ | 150,770 | ||||||
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Year
ended December 31, 2005
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$ | 105,719 | $ | 13,820 | $ | 119,539 | ||||||
Beginning
in 2005, FutureFuel Chemical Company began invoicing the Mexican subsidiary of
our bleach activator customer directly, at which time revenues from Mexico
became a more significant component of total revenues. For the years
ended December 31, 2005, 2006 and 2007, revenues from Mexico accounted for
10%, 11% and 11%, respectively, of total revenues. Beginning in the
third quarter of 2007, FutureFuel Chemical Company began selling significant
quantities of biodiesel to companies in Canada, at which time revenues from
Canada became a material component of total revenues. Revenues from
Canada accounted for 5% of total revenues for the year ended December 31,
2007. Other than Mexico and Canada, revenues from a single foreign
country during 2005, 2006 and 2007 did not exceed 3% of total
revenues.
All of
our and FutureFuel Chemical Company’s long-lived assets are located in the
United States.
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We have
no foreign operations. See “Item 1A. Risk Factors” below for a
discussion of risks attendant to FutureFuel Chemical Company’s foreign
operations.
Available
Information
We make
available free of charge, through the “Investor Relations - SEC Filings” section
of our Internet website (http://www.FutureFuelCorporation.com), our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports, filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), as soon as reasonably practicable after electronically filing such
material with, or furnishing it to, the Securities and Exchange Commission
(“SEC”). Once
filed with the SEC, such documents may be read and/or copied at the SEC’s Public
Reference Room at 100 F Street N.E., Washington, D.C.
20549. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that electronically file
with the SEC at http://www.sec.gov.
We make
available free of charge, through the “Investor Relations - Corporate
Governance” section of our website (http://www.FutureFuelCorporation.com), the
corporate governance guidelines of our board of directors, the charters of each
of the committees of our board of directors, and codes of ethics and business
conduct for our directors, officers and employees. Such materials
will be available in print upon the written request of any shareholder to
FutureFuel Corp., 8235 Forsyth Blvd., 4th Floor,
Clayton, Missouri 63105, Attention: Investor Relations.
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Item
1A. Risk Factors.
An
investment in us involves a high degree of risk and may result in the loss of
all or part of your investment. You should consider carefully all of
the information set out in this document and the risks attaching to an
investment in us, including, in particular, the risks described
below. The information below does not purport to be an exhaustive
list and should be considered in conjunction with the contents of the rest of
this document.
Risks associated with
FutureFuel Chemical Company.
The
industries in which FutureFuel Chemical Company competes are highly
competitive.
The oil
and gas industry, as well as the chemical business, are highly
competitive. There is competition within these industries and also
with other industries in supplying the energy, fuel and chemical needs of
industry and individual consumers. FutureFuel Chemical Company will
compete with other firms in the sale or purchase of various goods or services in
many national and international markets. FutureFuel Chemical Company
will compete with large national and multi-national companies that have longer
operating histories, greater financial, technical and other resources and
greater name recognition than FutureFuel Chemical Company does. In
addition, FutureFuel Chemical Company will compete with several smaller
companies capable of competing effectively on a regional or local basis, and the
number of these smaller companies is increasing. FutureFuel Chemical
Company’s competitors may be able to respond more quickly to new or emerging
technologies and services and changes in customer requirements. As a
result of competition, FutureFuel Chemical Company may lose market share or be
unable to maintain or increase prices for its products and/or services or to
acquire additional business opportunities, which could have a material adverse
effect on our business, financial condition, results of operations and cash
flows. Although FutureFuel Chemical Company will employ all methods
of competition which are lawful and appropriate for such purposes, no assurances
can be made that they will be successful. A key component of
FutureFuel Chemical Company’s competitive position, particularly given the
expected commodity-based nature of many of its products, will be its ability to
manage expenses successfully, which requires continuous management focus on
reducing unit costs and improving efficiency. No assurances can be
given that FutureFuel Chemical Company will be able to successfully manage such
expenses.
FutureFuel
Chemical Company’s competitive position in the markets in which it participates
is, in part, subject to external factors in addition to those that FutureFuel
Chemical Company can impact. Natural disasters, changes in laws or
regulations, war or other outbreak of hostilities, or other political factors in
any of the countries or regions in which FutureFuel Chemical Company operates or
does business, or in countries or regions that are key suppliers of strategic
raw materials, could negatively impact FutureFuel Chemical Company’s competitive
position and its ability to maintain market share.
Increases
in the construction of biodiesel production plants may cause excess biodiesel
production capacity in the market. Excess capacity may adversely
affect the price at which FutureFuel Chemical Company is able to sell the
biodiesel that it produces and may also adversely affect our anticipated results
of operation and financial condition.
In 2005,
approximately 75 million gallons of biodiesel were produced in the United
States, and in 2006 approximately 250 million gallons were
produced. 2007 biodiesel production is estimated between
450-500 million gallons. As of January 25, 2008, there was a
reported 2.24 billion gallons per year of biodiesel production capacity in
the United States. With such biodiesel production capacity in the
United States, compared to historical production levels, there is risk that
there will be a significant amount of excess biodiesel production
capacity. Although this existing capacity is very large compared to
historical production levels, we believe that the market will purchase as much
biodiesel as is available, so long as the prices for biodiesel (net of the
impact of tax credits and other similar incentives) are competitive with those
of petrodiesel.
Fluctuations
in commodity prices may cause a reduction in the demand or profitability of the
products or services FutureFuel Chemical Company produces.
Prices
for alternative fuels tend to fluctuate widely based on a variety of political
and economic factors. These price fluctuations heavily influence the
oil and gas industry. Lower energy prices for existing products tend
to limit the demand for alternative forms of energy services and related
products and infrastructure. Historically, the markets
21
for
alternative fuels have been volatile, and they are likely to continue to be
volatile. Wide fluctuations in alternative fuel prices may result
from relatively minor changes in the supply of and demand for oil and natural
gas, market uncertainty and other factors that are beyond our control,
including:
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worldwide
and domestic supplies of oil and
gas;
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the
price and/or availability of biodiesel
feedstocks;
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weather
conditions;
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the
level of consumer demand;
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the
price and availability of alternative
fuels;
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the
availability of pipeline and refining
capacity;
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the
price and level of foreign imports;
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domestic
and foreign governmental regulations and
taxes;
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the
ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production
controls;
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political
instability or armed conflict in oil-producing regions;
and
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the
overall economic environment.
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These
factors and the volatility of the commodity markets make it extremely difficult
to predict future alternative fuel price movements with any
certainty. There may be a decrease in the demand for FutureFuel
Chemical Company’s products or services and our profitability could be adversely
affected.
FutureFuel
Chemical Company is reliant on certain strategic raw materials for its
operations.
FutureFuel
Chemical Company is reliant on certain strategic raw materials (such as acetic
anhydride, pelargonic acid, soybean oil and methanol) for its
operations. We have implemented certain risk management tools, such
as multiple suppliers and hedging, as appropriate, to mitigate short-term market
fluctuations in raw material supply and costs. There can be no
assurance, however, that such measures will result in cost savings or that all
market fluctuation exposure will be eliminated. In addition, natural
disasters, changes in laws or regulations, war or other outbreak of hostilities,
or other political factors in any of the countries or regions in which
FutureFuel Chemical Company operates or does business, or in countries or
regions that are key suppliers of strategic raw materials, could affect
availability and costs of raw materials.
While
temporary shortages of raw materials may occasionally occur, these items have
historically been sufficiently available to cover current
requirements. However, their continuous availability and price are
impacted by natural disasters, plant interruptions occurring during periods of
high demand, domestic and world market and political conditions, changes in
government regulation, and war or other outbreak of hostilities. In
addition, as FutureFuel Chemical Company increases its biodiesel capacity, it
will require larger supplies of raw materials which have not yet been secured
and may not be available for the foregoing reasons, or may be available only at
prices higher than current levels. FutureFuel Chemical Company’s
operations or products may, at times, be adversely affected by these
factors.
FutureFuel
Chemical Company is reliant upon two customers for a substantial amount of its
sales.
All sales
of the bleach activator are made to The Procter & Gamble Company and all
sales of a proprietary herbicide and certain other intermediates used in the
production of this herbicide are made to Arysta LifeScience North America
Corporation. These two customers represented approximately 63% of
FutureFuel Chemical Company’s revenues for the year ended December 31,
2007. The contract with The Procter & Gamble Company is set to
expire
22
in June
2008 and no assurances can be given that such contract will be extended past
June 2008 or, if extended, upon what terms. The contracts with Arysta
LifeScience North America Corporation contain certain termination provisions and
no assurances can be given that these contracts will not be
terminated. The loss of these two companies as customers would have a
material adverse effect on us.
Changes
in technology may render FutureFuel Chemical Company’s products or services
obsolete.
The
alternative fuel and chemical industries may be substantially affected by rapid
and significant changes in technology. Examples include competitive
product technologies, such as green gasoline and biodiesel produced from
catalytic hydroforming of renewable feedstock oils and competitive process
technologies such as advanced biodiesel continuous reactor and washing designs
that increase throughput. These changes may render obsolete certain
existing products, energy sources, services and technologies currently used by
FutureFuel Chemical Company. We cannot assure you that the
technologies used by or relied upon by FutureFuel Chemical Company will not be
subject to such obsolescence. While we may attempt to adapt and apply
the services provided by FutureFuel Chemical Company to newer technologies, we
cannot assure you that we will have sufficient resources to fund these changes
or that these changes will ultimately prove successful.
Failure
to comply with governmental regulations could result in the imposition of
penalties, fines or restrictions on operations and remedial
liabilities.
The oil
and gas and chemical industries are subject to extensive federal, state, local
and foreign laws and regulations related to the general population’s health and
safety and those associated with compliance and permitting obligations
(including those related to the use, storage, handling, discharge, emission and
disposal of municipal solid waste and other waste, pollutants or hazardous
substances or waste, or discharges and air and other emissions) as well as land
use and development. Existing laws also impose obligations to clean
up contaminated properties or to pay for the cost of such remediation, often
upon parties that did not actually cause the
contamination. Compliance with these laws, regulations and
obligations could require substantial capital expenditures. Failure
to comply could result in the imposition of penalties, fines or restrictions on
operations and remedial liabilities. These costs and liabilities
could adversely affect our operations.
Changes
in environmental laws and regulations occur frequently, and any changes that
result in more stringent or costly waste handling, storage, transport, disposal
or cleanup requirements could require FutureFuel Chemical Company to make
significant expenditures to attain and maintain compliance and may otherwise
have a material adverse effect on its business segments in general and on our
results of operations, competitive position or financial
condition. We are unable to predict the effect of additional
environmental laws and regulations which may be adopted in the future, including
whether any such laws or regulations would materially adversely increase
FutureFuel Chemical Company’s cost of doing business or affect its operations in
any area.
Under
certain environmental laws and regulations, FutureFuel Chemical Company could be
held strictly liable for the removal or remediation of previously released
materials or property contamination regardless of whether FutureFuel Chemical
Company was responsible for the release or contamination, or if current or prior
operations were conducted consistent with accepted standards of
practice. Such liabilities can be significant and, if imposed, could
have a material adverse effect on our financial condition or results of
operations.
FutureFuel
Chemical Company’s biofuels operations may be harmed if the government were to
change current laws and regulations.
Alternative
fuels businesses benefit from tax credits and government
subsidies. If any of the state or federal laws and regulations
relating to the tax credits and government subsidies change, the ability to
recover capital expenditures from an alternative fuels business could be
harmed. FutureFuel Chemical Company’s biofuels platform is subject to
federal, state, and local laws and regulations governing the application and use
of alternative energy products, including those related specifically to
biodiesel. For instance, biodiesel products benefit from being the
only alternative fuel certified by the U.S. Environmental Protection Agency that
fulfills the requirements of Section 211(B) of the Clean Air Act. If
agency determinations, laws and regulations relating to the application and use
of alternative energy are changed, the marketability and sales of biodiesel
production could be materially adversely affected.
23
The
value of FutureFuel Chemical Company may prove to be less than what we paid for
FutureFuel Chemical Company because of uncertainties in evaluating future costs
and/or potential liabilities.
Successful
acquisitions require an assessment of a number of factors, including estimates
of future biofuel prices, operating costs (including the costs of raw goods) and
potential environmental and other liabilities. Such assessments are
inexact and their accuracy is inherently uncertain. In connection
with our due diligence assessment of FutureFuel Chemical Company, we performed a
review of FutureFuel Chemical Company and its properties which we believe was
generally consistent with industry practices. However, such a review
will not reveal all existing or potential problems. In addition, our
review may not have permitted us to become sufficiently familiar with FutureFuel
Chemical Company’s properties to fully assess their deficiencies and
capabilities. As a result of these factors, the value of FutureFuel
Chemical Company may ultimately be less than what we agreed to pay for its
stock.
Market
conditions or transportation impediments may hinder access to raw goods and
distribution markets.
Market
conditions, the unavailability of satisfactory transportation or the location of
FutureFuel Chemical Company’s manufacturing complex from more lucrative markets
may hinder FutureFuel Chemical Company’s access to raw goods and/or distribution
markets. The availability of a ready market for biodiesel depends on
a number of factors, including the demand for and supply of biodiesel and the
proximity of the plant to trucking and terminal facilities. The sale
of large quantities of biodiesel necessitates that FutureFuel Chemical Company
transport its biodiesel to other markets since the Batesville, Arkansas regional
market is not expected to absorb all of FutureFuel Chemical Company’s
contemplated production. Currently, common carrier pipelines are not
transporting biodiesel. This leaves trucks, barges and rail cars as
the means of distribution of FutureFuel Chemical Company’s product from the
plant to these storage terminals for further distribution. However,
the current availability of rail cars is limited and at times unavailable
because of repairs or improvements, or as a result of priority transportation
agreements with other shippers. Additionally, the current
availability of barges is limited, particularly heated barges to transport
biodiesel during winter months. If transportation is restricted or is
unavailable, FutureFuel Chemical Company may not be able to sell into more
lucrative markets and consequently its cash flow from sales of biodiesel could
be restricted.
The
biodiesel industry also faces several challenges to wide biodiesel acceptance,
including cold temperature limitations, storage stability, fuel quality
standards and exhaust emissions. If the industry does not satisfy
consumers that these issues have been resolved or are being resolved, biodiesel
may not gain widespread acceptance which may have an adverse impact on
FutureFuel Chemical Company’s cash flow from sales of biodiesel.
FutureFuel
Chemical Company’s insurance may not protect it against its business and
operating risks.
We
maintain insurance for some, but not all, of the potential risks and liabilities
associated with FutureFuel Chemical Company’s business. For some
risks, we may not obtain insurance if we believe the cost of available insurance
is excessive relative to the risks presented. As a result of market
conditions, premiums and deductibles for certain insurance policies can increase
substantially and, in some instances, certain insurance policies may become
unavailable or available only for reduced amounts of coverage. As a
result, we may not be able to renew our existing insurance policies or procure
other desirable insurance on commercially reasonable terms, if at
all. Although we will maintain insurance at levels we believe are
appropriate for FutureFuel Chemical Company’s business and consistent with
industry practice, we will not be fully insured against all risks which cannot
be sourced on economic terms. In addition, pollution and
environmental risks generally are not fully insurable. Losses and
liabilities from uninsured and underinsured events and delay in the payment of
insurance proceeds could have a material adverse effect on our financial
condition and results of operations.
If a
significant accident or other event resulting in damage to FutureFuel Chemical
Company’s operations (including severe weather, terrorist acts, war, civil
disturbances, pollution or environmental damage) occurs and is not fully covered
by insurance or a recoverable indemnity from a customer, it could adversely
affect our financial condition and results of operations.
24
FutureFuel
Chemical Company depends on key personnel, the loss of any of whom could
materially adversely affect our future operations.
Our
success will depend to a significant extent upon the efforts and abilities of
FutureFuel Chemical Company’s executive officers. The loss of the
services of one or more of these key employees could have a material adverse
effect on us. FutureFuel Chemical Company’s business will also be
dependent upon its ability to attract and retain qualified
personnel. Acquiring or retaining these personnel could prove more
difficult to hire or cost substantially more than estimated. This
could cause FutureFuel Chemical Company to incur greater costs, or prevent it
from pursuing its expansion strategy as quickly as it would otherwise wish to
do.
If
FutureFuel Chemical Company is unable to effectively manage the commodity price
risk of its raw materials or finished goods, FutureFuel Chemical Company may
have unexpected losses.
We hedge
FutureFuel Chemical Company’s raw materials and/or finished products to some
degree to manage the commodity price risk of such items. This
requires the purchase or sale of commodity futures contracts and/or options on
those contracts or similar financial instruments. We may be forced to
make cash deposits available to counterparties as they mark to market these
financial hedges. This funding requirement may limit the level of
commodity price risk management that we are prudently able to
complete. If we do not or are not capable of managing the commodity
price risk of FutureFuel Chemical Company’s raw materials and/or finished
products, FutureFuel Chemical Company may incur losses as a result of price
fluctuations with respect to these raw materials and/or finished
products.
If
FutureFuel Chemical Company is unable to acquire or renew permits and approvals
required for its operations, it may be forced to suspend or cease operations
altogether.
The
operation of FutureFuel Chemical Company’s manufacturing plant requires numerous
permits and approvals from governmental agencies. FutureFuel Chemical
Company may not be able to obtain all necessary permits (or modifications
thereto) and approvals and, as a result, our operations may be adversely
affected. In addition, obtaining all necessary renewal permits (or
modifications to existing permits) and approvals for future expansions may
necessitate substantial expenditures and may create a significant risk of
expensive delays or loss of value if a project is unable to function as planned
due to changing requirements.
The
lack of business diversification may adversely affect our results of
operations.
It is
possible that we will not consummate more than one business combination with the
proceeds from our July 2006 offering and FutureFuel Chemical Company may be the
only target business that we acquire. Accordingly, the prospects for
our success may be entirely dependent upon FutureFuel Chemical
Company. Unlike other entities which may have the resources to
complete several business combinations of entities operating in multiple
industries or multiple areas of a single industry, it is possible that we will
not have the resources to diversify effectively our operations or benefit from
the possible spreading of risks or offsetting of losses.
FutureFuel
Chemical Company’s indebtedness may limit our ability to borrow additional funds
or capitalize on acquisition or other business opportunities.
FutureFuel
Chemical Company has entered into a $50 million revolving credit facility
with Regions Bank and we have guaranteed FutureFuel Chemical Company’s
obligations thereunder. The restrictions governing this indebtedness
(such as total debt to EBITDA limitations) may reduce our ability to incur
additional indebtedness, engage in certain transactions or capitalize on
acquisition or other business opportunities. If FutureFuel Chemical
Company is unable to meet its future debt service obligations and other
financial obligations, we could be forced to restructure or refinance such
indebtedness and other financial transactions, seek additional equity or sell
assets.
We
expect to have capital expenditure requirements, and we may be unable to obtain
needed financing on satisfactory terms.
We expect
to make capital expenditures for the expansion of FutureFuel Chemical Company’s
biofuels production capacity and complementary infrastructure. We
intend to finance these capital expenditures primarily through cash flow from
FutureFuel Chemical Company’s operations, borrowings under the credit facility
with Regions Bank and
25
existing
cash. However, if FutureFuel Chemical Company’s capital requirements
vary materially from those provided for in our current projections, we may
require additional financing sooner than anticipated. A decrease in
expected revenues or adverse change in market conditions could make obtaining
this financing economically unattractive or impossible. As a result,
we may lack the capital necessary to complete the projected expansions or
capitalize on other business opportunities.
We
may be unable to successfully integrate the FutureFuel Chemical Company
acquisition or other future acquisitions with our operations or realize all of
the anticipated benefits of these acquisitions.
Separation
of FutureFuel Chemical Company from Eastman Chemical Company and integration of
FutureFuel Chemical Company with us has been a complex, time-consuming and
costly process. Failure to successfully integrate FutureFuel Chemical
Company in a timely manner may have a material adverse effect on our business,
financial condition, results of operations and cash flows. The
difficulties of combining the acquired operations include, among other
things:
|
|
·
|
operating
a significantly larger combined
organization;
|
|
|
·
|
consolidating
corporate technological and administrative
functions;
|
|
|
·
|
integrating
internal controls and other corporate governance matters;
and
|
|
|
·
|
diverting
management’s attention from other business
concerns.
|
In
addition, we may not realize all of the anticipated benefits from the
acquisition of FutureFuel Chemical Company and other future acquisitions, such
as increased earnings, cost savings and revenue enhancements, for various
reasons, including difficulties integrating operations and personnel, higher and
unexpected acquisition and operating costs, unknown liabilities and fluctuations
in markets. If the FutureFuel Chemical Company acquisition benefits
do not meet the expectations of financial or industry analysts, the market price
of our shares of common stock may decline.
The
scope of indemnity protection afforded to us under the acquisition agreement
with Eastman Chemical Company is limited.
While we
are confident that the due diligence process undertaken in relation to
FutureFuel Chemical Company was sufficient and that material areas of potential
exposure have been discovered, there can be no certainty that all significant
exposures were uncovered by the due diligence process and it is unlikely that
all existing or potential problems and/or liabilities have been
revealed. The inspections that have been performed may not have
revealed structural and environmental problems, such as groundwater
contamination. We were not able to obtain contractual indemnities
from Eastman Chemical Company for all liabilities that were created by Eastman
Chemical Company or FutureFuel Chemical Company prior to the completion of the
acquisition of FutureFuel Chemical Company and have only limited indemnity
protection under the acquisition agreement with Eastman Chemical
Company. As part of such acquisition agreement, we, through
FutureFuel Chemical Company, assumed the risk of the physical condition of
FutureFuel Chemical Company’s properties in addition to the risk that the
properties may not perform in accordance with expectations, as well as certain
environmental and other unknown liabilities in excess of certain
amounts.
If any
such exposures materialize or the information provided as part of the due
diligence exercise proves to be untrue or inaccurate, we will have to rely on
the limited indemnity protection afforded to us under the acquisition agreement
in order to seek compensation for any financial loss incurred as a
result. By its nature, indemnity protection is limited in scope,
being the product of a negotiation exercise between us and Eastman Chemical
Company, and therefore we may not recover any or sufficient funds fully to cover
any loss incurred.
In
addition, even where potential areas of exposure are covered by the scope of
indemnity protection provided under the acquisition agreement, there is no
guarantee that Eastman Chemical Company will be in a financial position to
support the level of indemnification for which it may be
liable. Consequently, we may not recover any or sufficient funds
fully to cover any loss incurred.
26
Risks associated with
investing in AIM companies.
The
market for our shares or warrants is relatively illiquid.
Our
shares of common stock and warrants currently are traded on AIM and are not
listed or traded on any established market in the United States. AIM
is a market designed primarily for emerging or smaller companies. The
AIM rules are less demanding than those of the Official List of the UK Listing
Authority and other stock exchanges and also than those under federal securities
laws. Neither the London Stock Exchange nor the SEC has approved the
contents of this document. The future success of AIM and liquidity in
the market for our shares of common stock and warrants cannot be
guaranteed. In particular, the market for our shares of common stock
and warrants may be, or may become, relatively illiquid and therefore may be or
may become difficult to sell.
Investment
in shares traded on AIM is perceived to carry a higher risk than an investment
in shares quoted on exchanges with more stringent listing requirements, such as
the London Stock Exchange, the New York Stock Exchange or the NASDAQ Global
Market. This is because AIM imposes less stringent corporate
governance and ongoing reporting requirements. AIM is also a new and
more flexible market, which requires only semi-annual, rather than quarterly,
financial update reports. Investors should be aware that the value of
our shares of common stock and warrants may be influenced by many factors, some
of which may affect quoted companies generally, including the depth and
liquidity of the market, our performance, a large or small volume of trading in
our securities, legislative changes and general economic, political or
regulatory conditions, and that the prices may be volatile and subject to
extensive fluctuations. Therefore, the market price of our shares of
common stock and warrants may not reflect the underlying value. The
value of an investment in us may increase or decrease; therefore investors may
realize less than, or lose all of, their investment.
We
will not adopt the International Financial Reporting Standards but rather will
continue to prepare our financial statements and financial reporting in
accordance with U.S. generally accepted accounting principles.
On
August 22, 2006, AIM announced that non-European Economic Area companies
whose shares are traded on AIM are not required to adopt International Financial
Reporting Standards for financial reporting purposes but may use, among other
things, U.S. generally accepted accounting principles without reconciliation to
International Financial Reporting Standards. We are a non-European
Economic Area company and have determined that we will prepare our financial
statements in accordance with U.S. generally accepted accounting
principles. International Financial Reporting Standards differ in
certain significant respects from U.S. generally accepted accounting principles
and our financial statements prepared in accordance with U.S. generally accepted
accounting principles will not be comparable to financial statements prepared in
accordance with International Financial Reporting Standards.
Risks associated with owning
our shares and warrants.
Our
shares will be represented by definitive certificates which could reduce the
liquidity of our shares and warrants.
Our
shares of common stock are represented by definitive certificates which contain
the following legend.
Prior to
investing in the securities or conducting any transactions in the securities,
investors are advised to consult professional advisers regarding the
restrictions on transfer summarized below and any other
restrictions.
This
security (or its predecessor) was originally issued in a transaction exempt from
registration under the United States Securities Act of 1933, as amended (the
“Securities Act”), and is a restricted security (as defined in Rule 144
under the Securities Act). This security may not be offered, sold or
otherwise transferred in the absence of registration or an applicable exemption
therefrom. Hedging transactions involving this security may not be
conducted directly or indirectly, unless in compliance with the Securities
Act. Each purchaser of this security is hereby notified that the
seller of this security may be relying on the
27
exemption
from the provisions of Section 5 of the Securities Act provided by
Rule 144A or Regulation S thereunder.
The
holder of this security agrees for the benefit of the Company that (a) this
security may be offered, resold, pledged or otherwise transferred, only
(i) in the United States to a person whom the seller reasonably believes is
a qualified institutional buyer (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of Rule 144A,
(ii) outside of the United States in an offshore transaction in accordance
with Rule 903 or Rule 904 under the Securities Act,
(iii) pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available) or (iv) pursuant to an
effective registration statement under the Securities Act, in each of cases (i)
through (iv) in accordance with any applicable securities laws of any state of
the United States, and (b) the holder will, and each subsequent holder is
required to, notify any purchaser of this security from it of the resale
restrictions referred to in (a) above.
The
securities represented by this certificate are subject to transfer restrictions
which require that in addition to any certifications required from a transferor
as set forth on the reverse of this certificate, prior to the expiration of a
distribution compliance period of at least one year, the transferee certifies as
to whether or not it is a US person within the meaning of Regulation S and
provides certain other certifications and agreements. Prior to
permitting any transfer, the Company may request an opinion of counsel
reasonably satisfactory to the Company that such transfer is to be effected in a
transaction meeting the requirements of Regulation S under the Securities
Act or is otherwise exempt from registration under the Securities
Act.
CREST
Co., which is the Central Securities Depository for the U.K. markets (including
AIM) and which operates the CREST system (CREST Co.’s real-time settlement
system for UK and Irish shares and other corporate securities), does not allow
electronic settlement on CREST until the legend has been removed and the
certification requirements required under U.S. securities laws have
expired. As a result, our shares of common stock and warrants must be
represented by definitive certificates. In order to transfer or sell
our shares or warrants, holders must provide the definitive certificates to the
transfer agent, who will require certain certifications as set forth in the
legend, and on occasion legal opinions as set forth in the legend, prior to
issuing new certificates to new security holders. The lack of a fully
electronic settlement mechanism may have a material adverse effect on the
liquidity and the price of our securities.
If
our founding shareholders and Mr. Novelly or his designees exercise their
registration rights, such exercise may have an adverse effect on the market
price of our shares of common stock.
Those
shareholders holding shares of our common stock prior to our July 2006 offering
(the “founding shareholders”; see “Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters --Founding
Shares Owned by the Founding Shareholders” below for a list of the founding
shareholders) and Mr. Paul A. Novelly, our executive chairman of the board, or
his designees, are entitled to demand that we register under the U.S. Securities
Act of 1933, as amended (the “Securities
Act”), the resale of their shares of our common stock issued prior to our
July 2006 offering (the “founding shares”) and their shares included in the
units purchased in our July 2006 offering. The demand may be made at
any time after the date on which we have become a reporting company under the
Exchange Act, and their founding shares have been released from
escrow. Except in limited circumstances, this date will not be before
July 12, 2009. If our founding shareholders exercise their
registration rights with respect to all of their shares of our common stock,
there will be an additional 11,250,000 shares and/or up to 5,000,000 shares
issued on exercise of their warrants eligible for trading in the public
market. The presence of this additional number of shares eligible for
trading in the public market may have an adverse effect on the market price of
our shares.
28
Transfer
of our shares and/or warrants, and the exercise of our warrants, are subject to
stringent transfer and exercise requirements under the Securities
Act.
Our
shares of common stock and our warrants are subject to the conditions listed
under section 903(b)(3) or Category 3 of Regulation S under the
Securities Act. Under Category 3, offering restrictions (as
defined under Regulation S) had to be in place in connection with our July
2006 offering described below and additional restrictions are imposed on resales
of our securities as described elsewhere herein. All of our shares of
common stock and our warrants are subject to these restrictions, regardless of
whether the purchaser acquired the securities in a transaction pursuant to
Rule 144A under the Securities Act or in a transaction pursuant to
Regulation S. Our shares and warrants are considered “restricted
securities” under Rule 144 and will, until the expiration of the applicable
holding period with respect to the securities set forth in Rule 144 and the
expiration of the one-year compliance period, bear restrictive legends, unless
we determine otherwise in compliance with applicable law.
The
Rule 144 holding period for our shares received upon exercise of our
warrants may recommence upon the exercise of such warrants.
The Rule
144 holding period for the shares of our common stock received upon exercise of
our warrants will start upon the exercise of such warrants. Even
though the Rule 144(k) two-year holding period for the shares and warrants may
have expired, enabling certificates for those securities to have the legend
removed, the Rule 144 holding period for the shares received upon exercise of
the warrants will start upon such exercise. Accordingly, holders of
our warrants that exercise their warrants for cash will receive shares of our
common stock subject to trading restrictions which are greater than those
imposed on the trading of previously issued shares. Such restrictions
may mean the value of the shares received upon exercise of the warrants may be
significantly lower, at least until the two-year holding period has expired,
than the shares originally issued.
We
may not list our common stock or our warrants on a stock exchange other than
AIM.
Under the
investor rights agreement that we entered into on July 12, 2006 with CRT
Capital Group LLC and KBC Peel Hunt Ltd, we are obligated to use our
commercially reasonable efforts to cause our shares of common stock to be
authorized to be quoted and/or listed (to the extent applicable) on the American
Stock Exchange, the New York Stock Exchange, the NASD Automated Quotation System
or the NASDAQ National Market (or, in each case, a successor thereto) or a
similarly recognized national trading platform, if our common stock so
qualifies. However, no assurances can be given that our common stock
will qualify to be quoted and/or listed on any such exchange or other similarly
recognized national trading platform. Further, we have no such
obligation with respect to our warrants and no assurances can be given that we
will attempt to cause our warrants to be authorized to be quoted and/or listed
on any such exchange or other similarly recognized national trading
platform.
Internal Reporting
Controls.
Our
management has identified material weaknesses in our internal control over
financial reporting; failure to achieve and maintain effective internal control
over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 (“Section 404”) could have a material adverse effect
on our business and stock price.
We
identified material weaknesses in our internal control over financial reporting
in conjunction with the preparation of our December 31, 2006 financial
statements. No assurances can be given that additional material
weaknesses, significant deficiencies or control deficiencies in our internal
control over financial reporting will not be identified in the
future.
Our
internal control over financial reporting does not currently meet all the
standards contemplated by Section 404 that we will eventually be required
to meet. As a public company, we are required to complete our initial
assessment by the filing of our Form 10-K for the year ending December 31,
2008. If we are not able to implement the requirements of
Section 404 in a timely manner or with adequate compliance, this result may
cause us to be unable to report on a timely basis and thereby subject us to
adverse regulatory consequences, including sanctions by the SEC or violations of
applicable stock exchange listing rules. There could also be a
negative reaction in the financial markets due to a loss of investor confidence
in the reliability of our financial statements. We have and will
incur incremental costs in order to sustain and, where appropriate, improve our
internal control over financial reporting and comply with Section 404,
including increased auditing and legal fees and costs associated with
hiring
29
additional
accounting and administrative staff. This could harm our operating
results and lead to a decline in our stock price.
30
Item
2. Properties.
The
Company
We are a
holding company whose principal assets are all of the issued and outstanding
shares of stock of FutureFuel Chemical Company and cash and cash
equivalents.
FutureFuel
Chemical Company
FutureFuel
Chemical Company’s principal asset is a manufacturing plant situated on
approximately 2,200 acres of land six miles southeast of Batesville in north
central Arkansas fronting the White River. Approximately 500 acres of
the site are occupied with batch and continuous manufacturing facilities,
laboratories and infrastructure, including on-site liquid waste
treatment. FutureFuel Chemical Company is the fee owner of this plant
and the land upon which it is situated, and manufactures both biofuels and
chemicals at the plant. Utilization of these facilities may vary with
product mix and economic, seasonal and other business conditions, but the plant
is substantially utilized with the exception of facilities designated for
capacity expansion of biodiesel and a facility targeted for the potential future
production of cellulosic-based ethanol. The plant, including approved
expansions, has sufficient capacity for existing needs and expected near-term
growth. We believe that the plant is generally well maintained, in
good operating condition and suitable and adequate for its uses.
31
Item
3. Legal Proceedings.
Neither
we nor our subsidiary are a party to, nor is any of ours or its property subject
to, any material pending legal proceedings, other than ordinary routine
litigation incidental to their businesses. However, from time to
time, FutureFuel Chemical Company and its operations may be parties to, or
targets of, lawsuits, claims, investigations and proceedings, including product
liability, personal injury, asbestos, patent and intellectual property,
commercial, contract, environmental, antitrust, health and safety and employment
matters, which we expect to be handled and defended in the ordinary course of
business. While we are unable to predict the outcome of any matters
currently pending, we do not believe that the ultimate resolution of any such
pending matters will have a material adverse effect on our overall financial
condition, results of operations or cash flows. However, adverse
developments could negatively impact earnings or cash flows in future
periods.
32
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market
Information
There is
no established public trading market in the United States for our shares of
common stock or our warrants. However, our shares and warrants are
listed on AIM under the ticker symbols “FFU” and “FFUW,”
respectively. Trading of our shares of common stock and warrants on
AIM commenced July 12, 2006 and was suspended on July 24, 2006, the
date that our acquisition of FutureFuel Chemical Company was
announced. Trading resumed on October 9,
2006. However, in connection with the restatement of our financial
statements to comply with purchase accounting as discussed below, trading in our
shares of common stock and warrants was again suspended on July 26, 2007 at
our request. We completed the restatement of our financial statements
and requested that our shares and warrants again be traded on
AIM. Trading of our shares and warrants was approved on
February 1, 2008 and trading recommenced on that date. The high
and low bid on AIM for our shares of common stock and warrants for 2006 and 2007
for the periods during which they were traded are set forth in the following
table.
|
Shares
|
Warrants
|
|||||||
|
Period
|
High
|
Low
|
High
|
Low
|
||||
|
July 12
-24, 2006
|
$7.45
|
$7.40
|
$1.40
|
$1.35
|
||||
|
October 9,
2006 - December 31, 2006
|
$8.21
|
$7.30
|
$2.50
|
$1.25
|
||||
|
January 1,
2007 - March 31, 2007
|
$8.50
|
$6.00
|
$2.45
|
$0.75
|
||||
|
April 1,
2007 - June 30, 2007
|
$8.00
|
$7.00
|
$2.78
|
$1.50
|
||||
|
July 1,
2007 - July 26, 2007
|
$8.00
|
$7.00
|
$2.84
|
$1.50
|
||||
There are
currently outstanding 26,700,000 shares of our common stock and 22,500,000
warrants to purchase 22,500,000 shares of our common stock at $6.00 per
share. Such shares and warrants (and shares issued upon exercise of
the warrants) can only be sold pursuant to Rule 144 and Rule 144A of
the Securities Act upon satisfaction of the terms and conditions of those
rules.
Holders
The
shares of our common stock and our warrants were held by 99 and 80 holders of
record, respectively, on March 26, 2008.
Dividends
The
payment of cash dividends by us is dependent upon our future earnings, capital
requirements and overall financial condition. There were no cash
dividends declared on shares of our common stock in 2006 or 2007. We
currently have no intention of paying dividends in the foreseeable
future.
Securities
Authorized for Issuance Under Equity Compensation Plan
Our board
of directors adopted an omnibus incentive plan which was approved by our
shareholders at our 2007 annual shareholder meeting on June 26,
2007. We do not have any other equity compensation
plan. The following information regarding this plan is as of
December 31, 2007.
33
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
(a)
|
(b)
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
0
|
n/a
|
2,670,000
|
Performance
Graph
The
following graph shows changes over the seventeen month period beginning
July 13, 2006 (the completion of our offering of units) through
December 31, 2007 in the value of an $100 investment in: (i) our
common stock; (ii) Russell 2000; and (iii) an industry group of other
companies that file reports with the SEC using SIC Code 2860. These
companies are: Aventine Renewable Energy Holdings; Bluefire Ethanol Fuels; China
Clean Energy Inc.; Epolin Inc.; Ethos Environmental Inc.; Green Plains Renewable
Energy; GS Agrifuels Corp.; H2Diesel Holdings Inc.; International Flavours &
Fragrances; Kreido Biofuels Inc.; OM Group Inc.; Pacific Ethanol Inc.; Panda
Ethanol Inc.; Pure Biofuels Corp.; Rentech Inc.; Synthetech Inc.; Tiger Ethanol
International Inc.; United Energy Corp.; US Bioenergy Corp.; Verasun Energy
Corp.; and Westlake Chemical Corp.
34
Securities
Sold and Consideration
The
following is a description of all securities sold by us within the past three
years, which securities were not registered under the Securities
Act.
We were
incorporated on August 12, 2005. We issued 5,000,000 shares of
common stock on September 1, 2005 to certain founding shareholders for an
aggregate consideration of $25,000. On May 24, 2006, we issued a
common stock dividend of 0.25 shares for each outstanding share, effectively
lowering the purchase price paid by each of the founding shareholders to $.004
per share. The total number of issued shares of our common stock
following such stock dividend was 6,250,000. On June 27, 2006,
we and certain of our founding shareholders cancelled an aggregate of 625,000
shares of our common stock, reducing the founding shares outstanding to
5,625,000 shares.
On
July 12, 2006, we issued 22,500,000 units, each unit consisting of one
share of our common stock and one warrant entitling the holder thereof to
purchase one share of our common stock. The sales price was $8.00 per
unit for an aggregate sales price of $180,000,000.
Placing
Agents and Other Purchasers
KBC Peel
Hunt Ltd and CRT Capital Group, LLC, who served as placing agents in the
offering of the units, assisted us in procuring subscribers for 16,875,000
units. The remaining units sold in the offering were sold to the
following designees of Mr. Novelly.
|
Name
|
Shares
|
|||
|
St.
Albans Global Management, Limited Partnership, LLLP
|
4,531,250 | |||
|
Apex
Holding Co.
|
625,000 | |||
|
Ed
Wahl
|
31,250 | |||
|
Jeff
Call
|
31,250 | |||
|
Graziadio
Family Trust
|
62,500 | |||
|
Bermuda
Life Insurance Company/Separate Account C
|
93,750 | |||
|
William
Doré
|
109,375 | |||
|
Lori
L. Mikles
|
46,875 | |||
|
J.
B. Ladd Trust
|
32,500 | |||
|
Thomas
Evans
|
30,000 | |||
|
Steve
Wallace
|
31,250 | |||
|
Total
|
5,625,000 | |||
Exemption
from Registration Claimed
Shares of
our common stock were issued to our founding shareholders on the basis of an
exemption from registration under Section 4(2) of the Securities Act for
transactions by an issuer not involving any public offering. Each of
our founding shareholders was, and is, a sophisticated investor who or which
would qualify as an accredited investor (as defined in Rule 501 under the
Securities Act). Neither we nor any person acting on our behalf
offered or sold the shares to the founding shareholders by any form of general
solicitation or general advertising, and each of our founding shareholders
understands that such shares are “restricted securities” (as defined in Rule 144
under the Securities Act). Each of our founding shareholders was
required to represent to us that, among other matters, he or it was purchasing
our shares for investment purposes only, for his or its own account and not with
a view toward selling or otherwise distributing the shares.
The units
were sold: (i) to “qualified institutional buyers” (as defined in Rule 144A
under the Securities Act) and a limited number of “accredited investors” (as
defined in Rule 501 under the Securities Act); and (ii) in offshore
transactions complying with Rule 903 of Regulation S under the Securities
Act. More specifically, the units were not registered under the
Securities Act and are “restricted securities” as defined in Rule
144. A purchaser of such securities may not offer, sell, pledge or
otherwise transfer such securities in the United States or to, or for the
account or benefit of, any U.S. person (as defined under Regulation S of the
Securities Act), except: (a) pursuant to an effective registration
statement under the Securities Act; (b) to a person whom the seller
reasonably believes is a qualified institutional buyer in a transaction meeting
the requirements of Rule 144A under the Securities Act; (c) pursuant to an
exemption from the registration requirements of the Securities Act provided by
Rule 144
35
thereunder
(if available); or (d) in certain transactions specified in Regulation
S. The selling restrictions set forth in the preceding sentence will
continue to be applicable to our shares and warrants notwithstanding the
expiration of the compliance period described below. Under our
bylaws, we are required to refuse to register any transfer of our securities not
made in accordance with the provisions of Rule 144A, Rule 144 (if available),
Regulation S, or pursuant to registration under the Securities Act or another
exemption from registration under the Securities Act.
Our
shares and warrants are subject to the conditions listed under section
903(b)(3), or Category 3, of Regulation S of the Securities
Act. Under Category 3, “offering restrictions” (as defined under
Regulation S) must be in place and additional restrictions are imposed on
resales of the shares and warrants as described below. All shares and
warrants are subject to these restrictions, regardless of whether the purchaser
acquired the shares or warrants in a transaction pursuant to Rule 144A or in a
transaction pursuant to Regulation S.
Prior to
one year after the later of (i) the time when the shares or warrants were first
offered to persons other than distributors in reliance upon Regulation S or (ii)
the date of closing of the offering, or such longer period as may be required
under applicable law (the “compliance period”):
(a) every
purchaser of shares or warrants other than a distributor will be required to
certify that it is not a U.S. person and is not acquiring the securities for the
account or benefit of any U.S. person (as defined under Regulation S of the
Securities Act) or is a U.S. person who purchased securities in a transaction
that did not require registration under the Securities Act;
(b) every
purchaser of the shares or warrants has been, or will be, required to agree to
resell such shares or warrants only in accordance with the provisions of Rule
144A, Rule 144 (if available) or Regulation S, or pursuant to an effective
registration statement under the Securities Act, and will be required to agree
to not engage in hedging transactions with regard to the securities unless in
compliance with the Securities Act;
(c) the
shares and warrants will (i) contain a legend to the effect that transfer is
prohibited except in accordance with the restrictions set forth in (a) and (b)
above during the compliance period, and (ii) with respect to the warrants
(notwithstanding the expiration of the compliance period), and pursuant to Rule
903(b)(5)(i), contain a legend stating that the warrants and securities to be
issued upon their exercise have not been registered under the Securities Act and
that the warrant may not be exercised by or on behalf of any U.S. person without
an opinion of counsel;
(d) each
distributor selling securities to a distributor, a dealer (as defined in Section
2(a)(12) of the Securities Act), or a person receiving a selling concession, fee
or other remuneration will be required to send a confirmation or other notice to
the purchaser stating that the purchaser is subject to the same restrictions on
offers and sales that apply to a distributor; and
(e) under
our bylaws, we are required to refuse to register any transfer of our securities
not made in accordance with the provisions of Rule 144A, Rule 144 (if available)
or Regulation S, or pursuant to registration under the Securities Act or another
exemption from registration under the Securities Act.
Each
purchaser of our warrants (regardless of whether such purchaser acquired such
warrants in a transaction pursuant to Rule 144A, Regulation D or Regulation S),
upon exercise of each warrant, must:
(a) provide
us with a written certification that it is neither within the U.S. nor a U.S.
person and the warrant is not being exercised on behalf of a U.S. person;
or
(b) provide
us with a written opinion of counsel to the effect that the transfer of the
warrants and issuance of the shares upon the exercise of such warrants to such
person have been registered under the Securities Act or are exempt from
registration thereunder; and
(c) receive
certificated securities containing the legend described below.
In the
offerings of the units, each purchaser of the shares and warrants was deemed to
have represented and agreed as follows:
(1) the
purchaser (A) (i) is an institutional accredited investor that is a qualified
institutional buyer (subject to certain limited exceptions in the case of the
initial purchase only), (ii) is aware that the sale to it is being
36
made in
reliance on Rule 144A (or, in the case of the initial purchaser only, in
reliance on Regulation D) and (iii) is acquiring the securities for its own
account or for the account of a qualified institutional buyer or (B) is not a
U.S. person and is purchasing the securities in an offshore transaction pursuant
to Regulation S;
(2) the
purchaser understands that the securities were offered in a transaction not
involving any public offering within the meaning of the Securities Act, that the
securities have not been and, except as otherwise described in the offering
documents relating to the unit issuance, will not be registered under the
Securities Act and that if in the future it decides to offer, resell, pledge or
otherwise transfer any such securities, such securities may be offered, resold,
pledged or otherwise transferred only (i) in the United States to a person
whom the seller reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A, (ii) outside the United
States in a transaction complying with the provisions of Rule 903 or Rule 904
under the Securities Act, (iii) pursuant to an exemption from registration
under the Securities Act provided by Rule 144 (if available), or
(iv) pursuant to an effective registration statement under the Securities
Act, in each of cases (i) through (iv) in accordance with any applicable
securities laws of any state of the United States;
(3) the
purchaser understood and agreed that, in addition to the restrictions set forth
in (2) above, if in the future it decides to resell, pledge or otherwise
transfer any securities or any beneficial interests in any securities prior to
the date which is one year after the later of (1) the date when the shares or
warrants are first offered to persons (other than distributors) pursuant to
Regulation S and (2) the date of closing of the unit offering, it will do so
only (i) in compliance with the restrictions set forth above,
(ii) pursuant to an effective registration statement under the Securities
Act, or (iii) in accordance with the provisions of Rule 144A, Rule 144 (if
available) or Regulation S, and in each of such cases in accordance with any
applicable securities law of any state of the United States;
(4) the
purchaser agreed to and each subsequent holder is required to, notify any
purchaser of the shares or warrants from it of the resale restrictions referred
to in paragraphs (2) and (3) above, if then applicable;
(5) the
purchaser acknowledged that, prior to any proposed transfer of shares or
warrants other than pursuant to an effective registration statement, the
transferee of shares or warrants may be required to provide certifications and
other documentation relating to the non-U.S. person status of such
transferee;
(6) the
purchaser acknowledged that we, our placing agents in the unit issuance and
others rely upon the truth and accuracy of the foregoing acknowledgements,
representations and warranties and agreed that if any such acknowledgement,
representation or warranty deemed to have been made by virtue of its purchase of
shares or warrants is no longer accurate, it must promptly notify our placing
agents and us;
(7) the
purchaser acknowledged that neither we, our placing agents nor any person
representing any of them, has made any representation to it with respect to us
or the unit offering, other than the information contained in the offering
documents related to the unit offering, which had been delivered to the
purchaser and upon which the purchaser relied in making its investment decision
with respect to the securities offered; the purchaser has had access to such
financial and other information concerning us and the securities offered,
including an opportunity to ask questions of and request information from us and
our placing agents;
(8) the
purchaser purchased the units for its own account, or for one or more investor
accounts for which it was acting as fiduciary or agent, in each case, not with a
view to, or for offer or sale in connection with, any distribution thereof in
violation of the Securities Act, subject to any requirement of law that the
disposition of its property or the property of such investor account or accounts
be at all times within its or their control and subject to its or their ability
to resell, reoffer or otherwise transfer such securities pursuant to Rule 144A,
Regulation S or Rule 144 (if available) under the Securities
Act;
(9) the
purchaser understood that the securities offered, as “Restricted Securities”
under Rule 144 of the Securities Act, will, until the expiration of the
applicable holding period with respect to the securities set forth in Rule 144
of the Securities Act, and the expiration of the compliance period described
above, will bear legends described below, unless we determine otherwise in
compliance with applicable law; and
(10) the
purchaser acknowledged that the shares and warrants, whether purchased pursuant
to Rule 144A of the Securities Act, Regulation D of the Securities Act or
pursuant to Regulation S of the Securities Act, will bear a restrictive legend
to the following effect, unless we determine otherwise in compliance with
applicable law:
37
|
PRIOR TO INVESTING IN THE
SECURITIES OR CONDUCTING ANY TRANSACTIONS IN THE SECURITIES, INVESTORS ARE
ADVISED TO CONSULT PROFESSIONAL ADVISERS REGARDING THE RESTRICTIONS ON
TRANSFER SUMMARIZED BELOW AND ANY OTHER
RESTRICTIONS.
|
THIS
SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND IS A RESTRICTED SECURITY (AS DEFINED IN RULE 144 UNDER
THE SECURITIES ACT). THIS SECURITY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE
CONDUCTED DIRECTLY OR INDIRECTLY, UNLESS IN COMPLIANCE WITH THE SECURITIES
ACT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE
SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF
SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A OR REGULATION S
THEREUNDER.
THE
HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS
SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN
THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE OF THE UNITED
STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 or RULE 904 UNDER
THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF
CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY
STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER
IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE
RESTRICTIONS REFERRED TO IN (A) ABOVE.
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED TO ANY
EMPLOYEE BENEFIT PLAN AS DEFINED IN SECTION 3(3) OF ERISA SUBJECT TO TITLE I OF
ERISA OR ANY PLAN AS DEFINED IN SECTION 4975 OF THE CODE WHICH IS SUBJECT TO THE
RULES OF SECTION 4975 OR ANY ENTITY DEEMED TO HOLD ASSETS OF ANY SUCH
PLANS.
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER RESTRICTIONS
WHICH REQUIRE THAT IN ADDITION TO ANY CERTIFICATIONS REQUIRED FROM A TRANSFEROR
AS SET FORTH ON THE REVERSE OF THIS CERTIFICATE, PRIOR TO THE EXPIRATION OF A
DISTRIBUTION COMPLIANCE PERIOD OF AT LEAST ONE YEAR, THE TRANSFEREE CERTIFIES AS
TO WHETHER OR NOT IT IS A U.S. PERSON WITHIN THE MEANING OF REGULATION S AND
PROVIDES CERTAIN OTHER CERTIFICATIONS AND AGREEMENTS. PRIOR TO
PERMITTING ANY TRANSFER, THE COMPANY MAY REQUEST AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER IS TO BE EFFECTED IN A
TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT OR
IS EXEMPT FROM REGISTRATION.
In
addition, each purchaser of Warrants was deemed to have represented and agreed
as follows:
(1) the
purchaser understood that shares issuable upon exercise of the warrants are,
subject to certain exceptions, not being offered in the United States or to U.S.
persons (as defined in Regulation S under the Securities
38
Act) and
that warrant holders will be required, as a condition precedent to the exercise
of any warrants, to comply with the certain requirements; and
(2) the
purchaser understood that warrant holders located in the United States or who
are U.S. persons (as defined under Regulation S of the Securities Act) may be
permitted to exercise their warrants for shares if we reasonably believe that
such exercise does not require registration under the Securities Act in reliance
upon such warrant holder (i) certifying that it is a qualified institutional
buyer and understands that the shares to be issued upon exercise of such
warrants have not been registered under the Securities Act, (ii) supplying an
opinion of counsel that the warrants and the shares issuable upon exercise are
exempt from registration under the Securities Act and (iii) agreeing that (x)
such shares will be subject to certain restrictions on transfer as set forth
above for the shares and warrants, (y) a new holding period for the shares
issued upon exchange of such warrant, for purposes of Rule 144 under the
Securities Act, will commence upon issue of such shares and (z) its acquisition
of shares was not solicited by any form of general solicitation or general
advertising and that it has been given access to information sufficient to
permit it to make an informed decision as to whether to invest in the
shares. We may, in our sole discretion, permit the exercise of
warrants in certain limited circumstances in accordance with their terms if the
requirements of other exemptions under the Securities Act and other applicable
laws can be satisfied.
Terms
of Warrant Conversion or Exercise
Each of
our outstanding warrants entitles the registered holder to purchase one share of
our common stock at an exercise price of $6.00 per share, subject to adjustment
as discussed below, at any time commencing on October 31,
2006. The warrants will expire on July 12, 2010 at 5:00 p.m.,
New York City time.
We may
call the warrants for redemption at any time after they become
exercisable:
|
|
·
|
in
whole and not in part;
|
|
|
·
|
at
a price of $0.01 per warrant;
|
|
|
·
|
upon
a minimum of 30 days’ prior written notice of redemption to each warrant
holder;
|
|
|
·
|
if,
and only if, the last independent bid price on AIM of our shares of common
stock equals or exceeds $11.50 per share for any 20 trading days within a
30 trading day period ending three business days before we send the notice
of redemption; and
|
|
|
·
|
the
weekly trading volume of our shares has been at least 200,000 shares for
each of the two calendar weeks prior to the day we send the notice of
redemption.
|
If the
foregoing conditions are satisfied and we call the warrants for redemption, each
warrant holder is entitled to exercise its warrant prior to the date scheduled
for redemption by payment of the exercise price in cash.
The
warrants were issued in registered form under a warrant deed between Capita IRG
(Offshore) Limited, as warrant agent, and us.
The
exercise price and number of shares of our common stock issuable on exercise of
the warrants may be adjusted in certain circumstances, including in the event of
a share dividend or our recapitalization, reorganization, merger or
consolidation. However, the warrants will not be adjusted for
issuances of shares of our common stock at a price below the exercise price of
the warrants.
The
warrants may be exercised upon surrender of the warrant certificate on or prior
to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed as
indicated, accompanied by full payment of the exercise price by certified check
payable to us for the number of warrants being exercised. The warrant
holders do not have the rights or privileges of holders of shares of common
stock or any voting rights until they exercise their warrants and receive
shares.
No
warrants will be exercisable by a U.S. warrant holder unless, at the time of
exercise, the exercise of the warrants for shares has been registered under the
Securities Act, or is exempt from registration. U.S. warrant holders
will be required to provide appropriate representations, warranties and legal
opinions to support any applicable exemption and, if received in an exempt
transaction, the shares received upon exercise of the warrant would be
restricted
39
securities
with the certificate bearing a restrictive legend and not saleable in the U.S.
unless registered under the Securities Act, or exempt from
registration.
No
fractional shares will be issued upon exercise of the warrants. If,
upon exercise of the warrants, a holder would be entitled to receive a
fractional interest in a share of our common stock, we will, upon exercise,
round up to the nearest whole number the number of shares to be issued to the
warrant holder.
Use
of Proceeds
The
proceeds of our July 2006 offering aggregated $180 million, which proceeds were
used as follows.
(Dollars
in thousands)
|
Item
|
Amount
|
|||
|
Offering
proceeds
|
$ | 180,000 | ||
|
Underwriters’
fees
|
(6,750 | ) | ||
|
Working
capital amount
|
(750 | ) | ||
|
Amount
transferred to the trust fund
|
$ | 172,500 | ||
The
working capital amount was released to us to pay, among other things, the
expenses of the offering (which aggregated $825,000(a)). In
addition to the underwriters’ fees of $6,750,000 paid in connection with the
offering, the underwriters deferred $2,700,000 of their fees, which deferred
fees were payable upon the consummation of a qualified business combination and
which were in fact paid on October 31, 2006 in connection with the
consummation of our acquisition of FutureFuel Chemical Company.
__________
|
(a)
|
The
expenses of the offering in excess of $750,000 were paid from the proceeds
of loans made by Mr. Mikles and St. Albans Global Management, Limited
Partnership, LLLP to us in the aggregate amount of $700,000, which loans
were repaid as set forth above.
|
The trust
fund was released concurrently with the consummation of our acquisition of
FutureFuel Chemical Company (which acquisition constituted a qualified business
combination) and was disbursed as follows.
(Dollars
in thousands)
|
Item
|
Amount
|
|||
|
Trust
Amount(a)
|
$ | 174,123 | ||
|
Acquisition
purchase price(b)
|
(73,971 | ) | ||
|
Additional
acquisition costs
|
(70 | ) | ||
|
Reimbursement
of due diligence expenses
|
(165 | ) | ||
|
Repayment
of the loans from the founding shareholders
|
(700 | ) | ||
|
Deferred
underwriters’ fees
|
(2,700 | ) | ||
|
Deferred
NOMAD fee
|
(250 | ) | ||
|
Exercise
of repurchase rights (discussed below)
|
(10,987 | ) | ||
|
Amount
disbursed to us
|
$ | 85,280 | ||
__________
(a) Includes
$2,623 in interest income, less $1,000 transferred to us for working capital
purposes.
|
(b)
|
Prior
to purchase price adjustments. After purchase price
adjustments, the amount was $70,970. See note 3 to our
annual consolidated financial statements contained elsewhere
herein.
|
40
Item
6. Selected Financial Data.
Historically,
the business and assets included in FutureFuel Chemical Company were accounted
for by Eastman Chemical Company in various segments of Eastman Chemical
Company’s overall business. Although FutureFuel Chemical Company was
incorporated on September 1, 2005, Eastman Chemical Company did not begin
transferring assets into FutureFuel Chemical Company until January 1, 2006
and completed the transfer in subsequent periods prior to the closing of our
acquisition of FutureFuel Chemical Company. Notwithstanding that
FutureFuel Chemical Company was a separately incorporated entity, Eastman
Chemical Company did not prepare separate financial statements for FutureFuel
Chemical Company nor was it required to do so under local law or accounting
rules. Rather, the operations of the Batesville plant were reported
within Eastman Chemical Company based upon the underlying products, and the
revenues and expenses of the plant were presented in various segments within
Eastman Chemical Company’s financial statements. In addition,
allocations to the plant of Eastman Chemical Company overhead (such as
insurance, employee benefits, legal expenses and the like) were based upon
assumptions made by Eastman Chemical Company and such assumptions historically
did not reflect expenses which FutureFuel Chemical Company would have incurred
had it been a stand-alone entity. Since we did not acquire or succeed
to all of the assets and liabilities of Eastman Chemical Company, “carve-out”
financial statements have been prepared for the acquired component business,
excluding the continuing operations retained by Eastman Chemical Company, and
allocations for overhead components described above have been
effected.
For
purposes of preparing our financial statements, we initially accounted for the
acquisition of Eastman SE, Inc. as a reverse acquisition and did not apply
purchase accounting to such transaction. On July 27, 2007, we
issued a Form 8-K pursuant to Item 4.02(a) of Form 8-K, informing
investors that our 2006 Annual Financial Statements should not be relied upon
for the reasons set forth therein. A copy of that Form 8-K may
be obtained free of charge on our website at
http://ir.futurefuelcorporation.com/sec.cfm or by requesting the same from us at
FutureFuel Corp., 8235 Forsyth Blvd., 4th Floor,
Clayton, Missouri 63105 Attn: Investor Relations. We restated our
2006 financial statements to apply purchase accounting to our acquisition of
Eastman SE, Inc., which 2006 financial statements are included
herein. See Note 2 to our consolidated financial statements for
the year ended December 31, 2006 included in Amendment No. 2 to our
Form 10 filed with the SEC on February 29, 2008 for a detailed
discussion of the effects of such restatement.
The
following tables set forth our and FutureFuel Chemical Company’s summary
historical financial and operating data for the periods indicated
below. This summary historic financial and operating data has been
derived from FutureFuel Chemical Company’s “carve-out” financial statements as
of and for the ten months ended October 31, 2006 (the period between
January 1, 2006 and the date we acquired FutureFuel Chemical Company), the
twelve months ended December 31, 2005 and 2004 (the two most recent
complete fiscal years prior to 2006) and our consolidated financial statements
for the twelve months ended December 31, 2006 and 2007, all of which are
included elsewhere herein. The information presented in the table
below should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and the financial statements
and notes thereto included elsewhere herein. The selected financial
data for FutureFuel Chemical Company prior to our acquisition thereof represent
the complete financial information prepared and provided by Eastman Chemical
Company to us in conjunction with the carve out and sale of the Batesville plant
to us for the twelve months ended December 31, 2004 and 2005, as well as
the ten months ended October 31, 2006.
41
(Dollars
in thousands, except per share amounts)
|
FutureFuel
Corp. Consolidated
|
FutureFuel
Corp. and FutureFuel Chemical Company Combined
|
FutureFuel
Corp. Consolidated
|
FutureFuel
Chemical Company
|
|||||||||||||||||||||
|
Item
|
Twelve
Months Ended December 31, 2007
|
Twelve
Months
Ended
December
31,
2006
|
Twelve
Months Ended December 31, 2006
|
Ten
Months
Ended
October
31,
2006
|
Twelve
Months
Ended
December
31,
2005
|
Twelve
Months
Ended
December
31,
2004
|
||||||||||||||||||
|
Operating
Revenues
|
$ | 169,788 | $ | 150,770 | $ | 23,043 | $ | 127,727 | $ | 119,539 | $ | 144,157 | ||||||||||||
|
Net
income (loss)
|
$ | 8,408 | $ | 2,242 | $ | 2,717 | $ | (475 | ) | $ | 381 | $ | (14,867 | ) | ||||||||||
|
Earnings
(loss) per common share
|
||||||||||||||||||||||||
|
Basic
|
$ | 0.31 | $ | 0.08 | $ | 0.10 |
NA
|
NA
|
NA
|
|||||||||||||||
|
Diluted
|
$ | 0.26 | $ | 0.07 | $ | 0.09 |
NA
|
NA
|
NA
|
|||||||||||||||
|
Total
Assets
|
$ | 216,113 | $ | 203,059 | $ | 203,516 |
NA
|
$ | 114,500 | $ | 118,164 | |||||||||||||
|
Long-term
obligations
|
$ | 24,353 | $ | 20,740 | $ | 20,740 |
NA
|
$ | 24,830 | $ | 25,105 | |||||||||||||
|
Cash
dividends per common share
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 21,554 | $ | (3,960 | ) | $ | (12,494 | ) | $ | 8,534 | $ | 7,556 | $ | 19,044 | ||||||||||
|
Net
cash provided by (used in) investing activities
|
$ | (29,978 | ) | $ | (91,168 | ) | $ | (82,619 | ) | $ | (8,549 | ) | $ | (6,594 | ) | $ | (6,520 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
$ | (50 | ) | $ | 158,229 | $ | 158,214 | $ | 15 | $ | (962 | ) | $ | (12,524 | ) | |||||||||
For the
combined year ended December 31, 2006, operating revenues, net income
(loss) and earnings (loss) per common share combine our consolidated results for
the entire twelve months ended December 31, 2006 and FutureFuel Chemical
Company’s results for the ten months ended October 31,
2006. This information is for illustrative purposes
only. The consolidated company would likely have performed
differently had they always been combined. The information should not
be relied on as an indication of future results that the combined company will
experience after the acquisition of FutureFuel Chemical Company because of a
variety of factors, including access to additional information and changes in
value.
Our
Amendment No. 2 to Form 10 Registration Statement filed with the SEC
on February 29, 2008 contains all the financial statements and selected
financial data for FutureFuel Chemical Company that have been provided to us by
Eastman Chemical Company. We requested information from Eastman
Chemical Company for 2002 and 2003 and, in fact, we believe that Eastman
Chemical Company is obligated to honor this request under the terms of the
acquisition agreement through which we acquired FutureFuel Chemical
Company. Eastman Chemical Company, however, has refused to provide us
information for 2002 because there are too many carve-out and allocation issues
to address, many of which stem from the sale of certain product lines in
2002. Information for 2003 has been promised but, to date, it has not
been forthcoming. We believe we could bring suit against Eastman
Chemical Company to provide this information. However, in light of
the changes to FutureFuel Chemical Company’s operating results since its
acquisition by us, and other changes to its business as reflected in the
Form 10, we believe that the burden and expense of obtaining 2003 and 2002
financial information would outweigh the usefulness to investors of that
information. Further, we also believe that such a lawsuit would be
unduly burdensome and expensive to us and do not believe we would be able to
obtain the information through such a suit in a timely manner.
42
Prior to
the initiation of its biofuels program in 2005, the Batesville plant did not
report financial results by business “segments” as defined by generally accepted
accounting principles. After the initiation of such program and upon
divestiture, it defined two segments: chemicals and biofuels.
In March
2007, FutureFuel Chemical Company entered into a $50 million credit
facility with Regions Bank as described below. As of
December 31, 2007, FutureFuel Chemical Company had no borrowings under such
credit facility.
43
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read together with ours and FutureFuel Chemical
Company’s financial statements, including the notes thereto, set forth
herein. For the year ended December 31, 2006, the financial
information presented combines our consolidated results for the entire twelve
months ended December 31, 2006 and FutureFuel Chemical Company’s results
for the ten months ended October 31, 2006. This information is
for illustrative purposes only and to provide additional information to
investors by showing FutureFuel Chemical Company’s contribution to the results
of the combined company. As a result of this presentation, however,
the amounts referred to in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations (including the tables set forth
below) will not agree to our financial statements for the year ended
December 31, 2006. The consolidated company, moreover, would
likely have performed differently had the Company and FutureFuel Chemical
Company always been combined. The information should not be relied on
as an indication of future results that the combined company will experience
after the acquisition of FutureFuel Chemical Company because of a variety of
factors, including access to additional information and changes in
value. This discussion contains forward-looking statements that
reflect our current views with respect to future events and financial
performance. Actual results may differ materially from those
anticipated in these forward-looking statements. See “Forward Looking
Information” below for additional discussion regarding risks associated with
forward-looking statements.
Results
of Operations
In General
We were
not incorporated until August 12, 2005, we did not complete our offering
until July 12, 2006 and we did not complete the acquisition of FutureFuel
Chemical Company until October 31, 2006. Other than the offering
and the acquisition, we did not carry on any material business activities prior
to November 1, 2006.
FutureFuel
Chemical Company’s historical revenues have been generated through the sale of
specialty chemicals. FutureFuel Chemical Company breaks its chemicals
business into two main product groups: custom manufacturing and performance
chemicals. Major products in the custom manufacturing group include:
(i) a bleach activator manufactured exclusively for a customer for use in a
household detergent; (ii) a proprietary herbicide (and intermediates)
manufactured exclusively for a customer; and (iii) two other product lines
(CPOs and DIPBs) produced under conversion contracts for another
customer. The major product line in the performance chemicals group
is SSIPA/LiSIPA, polymer modifiers that aid the properties of nylon manufactured
for a broad customer base. There are a number of additional small
volume custom and performance chemical products that FutureFuel Chemical Company
groups into “other products”. In late 2005, FutureFuel Chemical
Company began producing biodiesel as a product. All 2005 biodiesel
revenues were classified as miscellaneous sales and recorded as a credit to cost
of goods sold. Beginning in 2006, revenues and cost of goods sold for
biofuels were treated as a separate business segment.
Revenues
generated from the bleach activator are based on a supply agreement with the
customer. The supply agreement stipulates selling price per kilogram
based on volume sold, with price moving up as volumes move down, and
vice-versa. The current contract expires in June 2008, and no
assurances can be given that the contract will be extended past that date or, if
extended, under what terms. FutureFuel Chemical Company pays for raw
materials required to produce the bleach activator. The contract with
the customer provides that the price received by FutureFuel Chemical Company for
the bleach activator is indexed to changes in labor, energy, inflation and the
key external raw materials, enabling FutureFuel Chemical Company to pass along
most inflationary increases in production costs to the customer.
FutureFuel
Chemical Company has been the exclusive manufacturer for a customer of a
proprietary herbicide and certain intermediates. These products are
beginning to face some generic competition, and no assurances can be given that
FutureFuel Chemical Company will remain the exclusive manufacturer for this
product line. The contracts automatically renew for successive
one-year periods, subject to the right of either party to terminate the contract
not later than 270 days prior to the end of the then current term for the
herbicide and not later than 18 months prior to the current term for the
intermediates. No assurances can be given that these contracts will
not be terminated. The customer supplies most of the key raw
materials for production of the proprietary herbicide. There is no
pricing mechanism or specific protection against cost changes for raw materials
or conversion costs that
44
FutureFuel
Chemical Company is responsible for purchasing and/or providing, and we do not
anticipate this to change going forward.
FutureFuel
Chemical Company has historically manufactured CPOs and DIPBs at cost for
Eastman Chemical Company. CPOs are chemical intermediates that
promote adhesion for plastic coatings and DIPBs are intermediates for production
of Eastman Chemical Company products used as general purpose inhibitors,
intermediates or antioxidants. Historically, revenues related to CPOs
and DIPBs were exactly offset by cost of goods sold; hence there was no effect
on gross profits historically. As part of our acquisition of
FutureFuel Chemical Company, FutureFuel Chemical Company entered into conversion
agreements with Eastman Chemical Company that effectively provide a conversion
fee to FutureFuel Chemical Company for DIPB based on volume manufactured, with a
minimum annual fee for both products. In addition, the conversion
agreements provide for revenue adjustments for actual price of raw materials
purchased by FutureFuel Chemical Company at standard usages. Eastman
Chemical Company provides key raw materials at no cost. For the key
raw materials, usage over standard is owed Eastman Chemical Company; likewise,
any improvement over standard is owed to FutureFuel Chemical Company at the
actual price Eastman Chemical Company incurred for the key raw
material.
SSIPA/LiSIPA
revenues are generated from a diverse customer base of nylon fiber
manufacturers. Contract sales with two customers are indexed to key
raw materials for inflation; otherwise, there is no pricing mechanism or
specific protection against raw material or conversion cost changes, and we do
not anticipate this to change going forward.
Other
products include agricultural intermediates and additives, imaging chemicals,
fiber additives and various specialty pharmaceutical intermediates that
FutureFuel Chemical Company has in full commercial production or in
development. These products are currently sold in small quantities to
a large customer base. Pricing for these products is negotiated
directly with the customer (in the case of custom manufacturing) or is
established based upon competitive market conditions (in the case of performance
chemicals). In general, these products have no pricing mechanism or
specific protection against raw material or conversion cost changes, and we do
not anticipate this to change going forward.
The year
ended December 31, 2006 was the first full year that FutureFuel Chemical
Company sold biodiesel. In addition to selling for its own account,
FutureFuel Chemical Company produced, for a fee, biodiesel for a third party
under a tolling agreement. Under that tolling agreement, for every
gallon of feedstock provided by that party to FutureFuel Chemical Company,
FutureFuel Chemical Company was obligated to deliver one gallon of biodiesel, up
to a maximum amount of 6 million gallons. The tolling agreement
terminated on September 30, 2007 and was not renewed. FutureFuel
Chemical Company delivered approximately 2.1 million gallons of biodiesel
pursuant to that tolling agreement.
The
majority of our and FutureFuel Chemical Company’s expenses are cost of goods
sold. Cost of goods sold reflect raw material costs as well as both
fixed and variable conversion costs, conversion costs being those expenses that
are directly or indirectly related to the operation of FutureFuel Chemical
Company’s plant. Significant conversion costs include labor,
benefits, energy, supplies and maintenance and repair. In addition to
raw material and conversion costs, cost of goods sold includes environmental
reserves and costs related to idle capacity and, for the periods prior to 2006,
asset impairment and restructuring charges and severance
costs. Finally, cost of goods sold includes hedging gains and losses
recognized by us. Cost of goods sold are allocated to the chemical
and biofuels business segments based on equipment and resource usage for most
conversion costs and based on revenues for most other costs.
Operating
costs include selling, general and administrative and research and development
expenses. These expense categories include expenses that were
directly incurred by us and FutureFuel Chemical Company and, for the periods
prior to October 31, 2006, corporate expense allocations from Eastman
Chemical Company. Allocations from Eastman Chemical Company of costs
of goods sold, distribution and selling and general administrative expenses were
made primarily based on a percentage of revenues and allocations of research and
development expenses were made based upon actual time incurred; we believe both
represent reasonable allocation methodologies. These allocations and
estimates are not necessarily indicative of the costs and expenses that would
have resulted if FutureFuel Chemical Company had been operating as a separate
entity. Beginning November 1, 2006, all operating expenses were
directly incurred by us and FutureFuel Chemical Company. Please see
footnote 1
45
of
FutureFuel Chemical Company’s financial statements set forth below for a more
detailed discussion of corporate expense allocations.
The
financial statements provided herein disclose related party transactions and the
impact of those transactions on historical revenues and expenses. The
discussions of results of operations that follow are based on revenues and
expenses in total and for individual product lines and do not differentiate
related party transactions. See footnote 16 to our consolidated
annual financial statements and footnote 1 and footnote 11 to
FutureFuel Chemical Company’s annual financial statements contained elsewhere
herein for more details.
Fiscal Year Ended December 31,
2007 Compared to Fiscal Year Ended December 31, 2006
Revenues:
Revenues
for the year ended December 31, 2007 were $169,788,000 as compared to
revenues for the year ended December 31, 2006 of $150,770,000, an increase
of 13%. (Revenues from FutureFuel Chemical Company for the ten-month
period ended October 31, 2006 were $127,727,000.) Revenues from
biodiesel increased 88% and accounted for 15% of total revenues in 2007 as
compared to 9% in 2006. Revenues from the bleach activator decreased
3% and accounted for 49% of total revenues in 2007 as compared to 56% in
2006. Revenues from the proprietary herbicide and intermediates
increased 6% and accounted for 15% of total revenues in 2007 as compared to 16%
in 2006. Revenues from CPOs increased 37% in 2007 and accounted for
4% of total revenues in 2007 compared to 3% in 2006. Revenues from
DIPBs increased 12% and accounted for 5% of total revenues in both 2007 and
2006. Revenues from SSIPA/LiSIPA increased 31% and accounted for 5%
of total revenues in 2007 as compared to 4% in 2006. Revenues from
other products increased 29% and accounted for 7% of total revenues in both 2007
and 2006. All of the revenues from these operating activities were
generated at FutureFuel Chemical Company.
During
2007, revenues for the bleach activator decreased due to lower volumes which
were partially offset by higher prices stipulated by the pricing curve embedded
in the supply agreement with this customer. Demand for the bleach
activator was very strong during the fourth quarter and has remained strong into
2008. Revenue from the proprietary herbicide and intermediates
increased as very strong volumes offset a net price reduction as more fully
described below. At present, revenues from the bleach activator and
the proprietary herbicide and intermediates are together the most significant
components of FutureFuel Chemical Company’s revenue base, together accounting
for 63% of revenues in 2007 as compared to 72% in 2006. The future
volume of and revenues from the bleach activator depends on both consumer demand
for the product containing the bleach activator and the manufacturing, sales and
marketing priorities of our bleach activator customer. We are unable
to predict with certainty the revenues we will receive from the bleach activator
in the future. The prices for the proprietary herbicide and
intermediates were reduced by 10% from 2006 to 2007 due to continued competitive
pressures as described above. This price decrease was partially
offset by a June 1, 2007 price increase of approximately 4% to cover
certain raw material cost increases that we had incurred beginning in the first
quarter of 2007. We believe our customer has been able to maintain
its volume in light of generic competition by being more price competitive,
changing its North American distribution system and developing new
applications. Forecasted product demand in 2008 is estimated to be
stronger than 2007, though we remain in discussions with our customer on both
projected demand and supply volumes to which we are able to commit.
Revenues
from CPOs and DIPBs together increased 22% during 2007. This increase
is largely the result of new supply agreements and pricing mechanisms in place
following the acquisition of FutureFuel Chemical Company.
Revenue
from biodiesel increased in 2007 due to an increase in production capacity and a
stronger focus on the biofuels segment. Biodiesel capacity was 2
million gallons per year at the beginning of 2006 and increased to
24 million gallons per year by the end of 2006. Capacity was 24
million gallons per year for all of 2007. Capacity in 2007 was
reduced from February through May due to a fire that destroyed the two
centrifuges that were part of the continuous biodiesel production
line. Without these centrifuges, the continuous line can only operate
at very low rates. We increased batch production to the greatest
extent possible to offset lost continuous production but still were unable to
sell as much product during the shutdown period or accumulate as much inventory
as we had planned leading into the summer. We filed business
interruption and property claims to recover losses incurred as a result of the
fire and in March 2008 these claims were approved by our
underwriters. The financial impact of these claims is discussed in
Cost of Goods Sold and Distribution below.
46
Cost of Goods Sold and
Distribution:
Total
cost of goods sold and distribution for 2007 was $152,555,000 as compared to
total cost of goods sold and distribution for 2006 of $139,674,000, an increase
of 9%. (Cost of goods sold and distribution of FutureFuel Chemical
Company for the ten-month period ended October 31, 2006 was
$119,576,000.)
Cost of
goods sold and distribution for 2007 for FutureFuel Chemical Company’s chemicals
segment was $117,367,000 as compared to cost of goods sold and distribution for
2006 of $115,252,000, an increase of 2%. (Cost of goods sold and
distribution for FutureFuel Chemical Company’s chemical segment for the
ten-month period ended October 31, 2006 was $100,024,000.) Cost
of goods sold and distribution for all chemical products excluding the bleach
activator, measured as a percent of total chemical revenues, decreased from 41%
in 2006 to 35% during 2007. Cost of goods sold and distribution for
the bleach activator increased from 43% of total chemical revenues in 2006 to
46% in 2007; this increase was largely the result of increased raw material
prices resulting from new supply agreements and pricing mechanisms in place
following the acquisition of FutureFuel Chemical Company. Gross
margins improved substantially for all chemical products excluding the bleach
activator. This improvement is attributable to growth of FutureFuel
Chemical Company’s biodiesel segment. As more fully described below,
biodiesel is made using the same assets utilized to manufacture the majority of
our product lines (other than the bleach activator), and as biodiesel production
increases the biofuels segment absorbs more cost away from other chemical
products that utilize those assets.
Cost of
goods sold and distribution for 2007 for FutureFuel Chemical Company’s biofuels
segment was $35,188,000 as compared to cost of goods sold and distribution for
2006 of $24,422,000, an increase of 44%. (The cost of goods sold and
distribution of FutureFuel Chemical Company’s biofuels segment for the ten-month
period ended October 31, 2006 was $19,552,000.) The largest
component of this increase was hedging losses of $6,910,000 in 2007; gains from
hedging in 2006 were insignificant. Hedging losses are attributable
to steadily increasing energy prices during 2007, heating oil in particular,
which is the commodity that we believe is most appropriate for use in hedging
FutureFuel Chemical Company’s biodiesel inventory. Our practice is to
run a relatively balanced position, meaning we generally sell heating oil
futures or options to lock our selling prices whenever we lock our feedstock
cost. Had we not fixed our feedstock cost, we would not have fixed
our selling cost; in this case we would not have incurred hedging losses but we
would have experienced markedly higher feedstock costs.
Gross
loss for the biofuels segment was $(9,874,000) in 2007, up from $(11,082,000) in
2006. (The gross loss of FutureFuel Chemical Company’s biofuels
segment for the ten-month period ended October 31, 2006 was
$(7,973,000).) Of the gross loss for 2007, greater than 75% is
attributable to the first quarter. This is due to lower chemical
revenues across the plant in the first quarter which effectively forced the
biofuels to carry a larger than normal amount of fixed cost, as well as the
higher cost of batch production after the fire discussed above forced us to
produce biodiesel almost exclusively in the batch plant. We have been
informed of approval by our underwriters of our $657,000 business interruption
claim (net of deductible) which helped to offset some of these
losses.
For the
year as a whole, the increase in cost of goods sold and distribution for the
biofuels segment was only half the increase in biofuels revenues. We
were successful in reducing costs during the second half of the year through a
focus on continuous manufacturing and also through the use of new tankage and
other infrastructure. The biofuels segment began production in the
batch plant and has continued to utilize the batch process to test new
processing techniques, experiment with various alternative feedstocks and meet
peak demand. The biodiesel segment also utilizes a continuous
processing line that is more efficient and produces higher volumes per reactor
than the batch process, and hence absorbs fewer overhead costs per gallon of
biodiesel produced. FutureFuel Chemical Company has transitioned from
primarily batch processing to primarily continuous processing, a strategy which
is expected to continue to significantly reduce fixed cost allocation and as a
result reduce total cost of goods sold and distribution per gallon of biodiesel
produced.
In
addition to the above considerations, we were successful in reducing costs per
gallon of biodiesel produced through selective sales of biodiesel feedstocks to
third parties. As a result of fixed price purchase commitments into
which we entered during 2007 and rapidly increasing commodity prices late in
2007, we determined that, in certain cases, the value of our feedstocks was
greater individually than the value of biodiesel finished product we could
produce utilizing these feedstocks. We expect to continue this practice to the
extent practicable as long as similar market conditions persist. We also expect
to improve biodiesel margins going forward as we begin to receive credits from
the Arkansas producer credit discussed previously (the first $2 million
from this credit was received in March 2008).
47
Operating
Expenses:
Operating
expenses decreased from $11,581,000 for 2006 to $7,578,000 for 2007, or
approximately 35%. (Operating expenses of FutureFuel Chemical Company
for the ten-month period ended October 31, 2006 was
$9,399,000.) This decrease was primarily the result of lower overall
operating expenses incurred by FutureFuel Chemical Company on a standalone
basis. Prior to November 1, 2006, corporate overhead allocations
from Eastman Chemical Company comprised the largest component of FutureFuel
Chemical Company’s selling, general and administrative and research and
development expenses. These corporate overhead allocations are
detailed in note 1 of FutureFuel Chemical Company’s financial statements
included elsewhere herein. Following the acquisition of FutureFuel
Chemical Company by us, FutureFuel Chemical Company developed standalone sales,
marketing, legal, corporate finance and general administrative functions, and as
a whole, the related expenses have been significantly less than the allocation
from Eastman Chemical Company for corporate support in these functional
areas.
Our
consolidated financial statements present the four principal components of
selling, general and administrative expenses: (i) compensation expense,
which includes salaries, wages and benefits paid to sales and administrative
personnel, as well as fees paid to directors; (ii) formation expense and
cancelled offerings costs; (iii) other expense, which includes travel and
entertainment, selling, advertising, third party services, charitable
contributions, memberships, dues and subscriptions and overhead allocations; and
(iv) related party expenses, which consist primarily of reimbursement of
travel and administrative services incurred on our behalf, as well as fees for a
commodity trading advisor agreement with an affiliate.
For
FutureFuel Chemical Company in periods prior to November 1, 2006, the
material component of selling, general and administrative expenses is corporate
overhead allocations. Due to the changes in the structure,
organization and the related expense of the sales and administrative departments
of FutureFuel Chemical Company pre- and post-acquisition, we do not believe a
comparison of the material components of selling, general and administrative
expenses pre- and post-acquisition is meaningful. As such, we have
not included a discussion and analysis of the material components of selling,
general and administrative expenses but intend to do so prospectively, beginning
with our discussion and analysis of results in our Form 10-Q filing for the
first quarter of 2008.
Fiscal
Year Ended December 31, 2006 Compared to Fiscal Year Ended
December 31, 2005
Revenues:
Revenues
for the year ended December 31, 2006 were $150,770,000 as compared to
revenues for the year ended December 31, 2005 of $119,539,000, an increase
of 26%. (Revenues from FutureFuel Chemical Company for the ten-month
period ended October 31, 2006 were $127,727,000.) This increase
was primarily a result of selling biodiesel for the full year and increased
sales of the bleach activator. Revenues from biodiesel accounted for
9% of total revenues in 2006. Revenues from the bleach activator
increased 26% and accounted for 56% of total revenues in 2006, the same percent
of revenues as in 2005. Revenues from the proprietary herbicide and
intermediates decreased 5% and accounted for 16% of total revenues in 2006 as
compared to 21% in 2005. Revenues from CPOs increased 5% in 2006 and
accounted for 3% of total revenues in 2006 compared to 4% in
2005. Revenues from DIPBs decreased 3% and accounted for 5% of total
revenues in 2006 as compared to 6% in 2005. Revenues from
SSIPA/LiSIPA decreased 9% and accounted for 4% of total revenues in 2006 as
compared to 6% in 2005. Revenues from other products increased 26%
and accounted for 7% of total revenues in 2006 and 2005.
During
2006, revenues for the bleach activator increased due to stronger demand from
the customer as a result of changing consumer demand for their
product. Revenue from the proprietary herbicide and intermediates
declined due to price concessions to the customer in order to maintain market
share in the face of generic product competition. See above for a
discussion of current and expected pricing and demand considerations for these
product lines. Revenue
from biodiesel increased in 2006 due to: (i) production during the entire
12 months as opposed to two months of production in 2005 which resulted in no
revenues of consequence; and (ii) an increase in production capacity from
3 million gallons per year at the end of 2005 to 24 million gallons
per year at the end of 2006.
48
Cost of Goods Sold and
Distribution:
Total
cost of goods sold and distribution for the year ended December 31, 2006
was $139,675,000 as compared to total cost of goods sold and distribution for
the year ended December 31, 2005 of $105,263,000, an increase of
33%. (The total cost of goods sold and distribution of FutureFuel
Chemical Company for the ten-month period ended October 31, 2006 was
$119,576,000.)
Cost of
goods sold and distribution for the year ended December 31, 2006 for
FutureFuel Chemical Company’s chemicals segment was $115,253,000 as compared to
cost of goods sold and distribution for the year ended December 31, 2005 of
$102,702,000, an increase of approximately 12%. (The cost of goods
sold and distribution of FutureFuel Chemical Company’s chemicals segment for the
ten-month period ended October 31, 2006 was $100,024,000.) The
increase was entirely a result of increased sales; cost of goods sold and
distribution for the chemicals segment as a percent of total chemical revenues
decreased slightly from 86% in 2005 to 84% in 2006. The decrease was
primarily a result of the addition of the biofuels segment in
2006. As previously discussed, FutureFuel Chemical Company allocates
the vast majority of its costs to products as raw materials are processed into
finished goods; with the addition of the biofuels segment in 2006, there was a
larger revenue base across which to allocate costs. The greatest
reduction in cost of goods sold and distribution as a percent of total revenues
came from the proprietary herbicide and intermediates product line, where cost
of goods sold and distribution decreased from 28% of chemical revenues in 2005
to 20% of chemical revenues in 2006. This large decrease is explained
by the fact that FutureFuel Chemical Company utilizes the same assets used to
produce the proprietary herbicide and intermediates product line to produce
biodiesel, and hence the biodiesel segment absorbed more fixed costs from this
product line than any other.
Cost of
goods sold and distribution for the year ended December 31, 2006 for
FutureFuel Chemical Company’s biofuels segment was $24,422,000. (The
cost of goods sold and distribution of FutureFuel Chemical Company’s biofuels
segment for the ten-month period ended October 31, 2006 was
$19,552,000.) Cost of goods sold and distribution for the biofuels
segment exceeded biofuels revenues in 2006. FutureFuel Chemical
Company began production of biodiesel in small individual batches utilizing
several of the reactors in its batch plant. Costs incurred in the
batch plant are allocated to products based on reactor time, and hence the
biodiesel segment incurred costs based on the number of reactors it utilized and
the duration of time it utilized those reactors. For much of 2006 the
biodiesel product remained in a development phase and the biofuels segment did
not always utilize the full capacity of the reactors under its
control. This low utilization, combined with lower efficiency during
the development phase, prevented the biofuels segment from generating sufficient
revenues to cover the costs that were allocated during the
year. During the second half of 2006, the biofuels segment initiated
production from a continuous reaction line. Production from the
continuous line is more efficient and produces higher volumes per reactor than
the batch process, and hence absorbs fewer overhead costs per gallon of
biodiesel produced. The biofuels segment has continued to utilize the
batch process to test new processing techniques, experiment with various
alternative feedstocks and meet peak demand. Ultimately, however, the
biofuels segment will transition to continuous production only, which is
expected to result in a material decrease in cost of goods sold and
distribution.
Total
cost of goods sold and distribution for 2005 included $99,000 of corporate
expense allocations from Eastman Chemical Company and $2,462,000 of severance
charges, none of which were allocated to segments. There were no
corporate expense allocations or restructuring and impairment charges in
2006.
Operating
Expenses:
Operating
expenses decreased from $13,637,000 for the year ended December 31, 2005 to
$11,581,000 for the year ended December 31, 2006, or approximately
15%. (Operating expenses of FutureFuel Chemical Company for the
ten-month period ended October 31, 2006 was $9,399,000.) This
decrease was primarily the result of lower corporate expense allocations from
Eastman Chemical Company, as well at the lower overall operating expenses
incurred by FutureFuel Chemical Company on a standalone basis. Prior
to November 1, 2006, corporate overhead allocations from Eastman Chemical
Company comprised the largest component of FutureFuel Chemical Company’s
selling, general and administrative and research and development
expenses. These corporate overhead allocations are detailed in
note 1 of FutureFuel Chemical Company’s financial statements included
elsewhere herein. Following our acquisition of FutureFuel Chemical
Company, FutureFuel Chemical Company developed standalone sales, marketing,
legal, corporate finance and general administrative functions, and as a whole,
the related expenses
49
have been
significantly less than the allocation from Eastman Chemical Company for
corporate support in these functional areas.
Our
consolidated financial statements present the four principal components of
selling, general and administrative expenses: (i) compensation expense,
which includes salaries, wages and benefits paid to sales and administrative
personnel, as well as fees paid to directors; (ii) formation expense and
cancelled offerings costs; (iii) other expense, which includes travel and
entertainment, selling, advertising, third party services, charitable
contributions, memberships, dues and subscriptions and overhead allocations; and
(iv) related party expenses, which consist primarily of reimbursement of
travel and administrative services incurred on our behalf, as well as fees for a
commodity trading advisor agreement with an affiliate.
For
FutureFuel Chemical Company in periods prior to November 1, 2006, the
material component of selling, general and administrative expenses is corporate
overhead allocations. Due to the changes in the structure,
organization and the related expense of the sales and administrative departments
of FutureFuel Chemical Company pre- and post-acquisition, we do not believe a
comparison of the material components of selling, general and administrative
expenses pre- and post-acquisition is meaningful. As such,
we have not included a discussion and analysis of the material
components of selling, general and administrative expenses but intend to do so
prospectively, beginning with our discussion and analysis of results in our
Form 10-Q filing for the first quarter of 2008.
Critical
Accounting Estimates
Purchase price allocation:
Following our acquisition of Eastman SE, Inc., we allocated the cost of the
acquired entity to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. We do not
anticipate these estimates changing in the future.
Allowance for doubtful
accounts: We reduce our accounts receivable by amounts that may be
uncollectible in the future. This estimated allowance is based upon
management’s evaluation of the collectibility of individual invoices and is
based upon management’s evaluation of the financial condition of our customers
and historical bad debt experience. This estimate is subject to
change based upon the changing financial condition of our
customers. At December 31, 2006 and 2007, we recorded an
allowance for doubtful accounts of $42,000, the majority of which pertained to
one customer. FutureFuel Chemical Company historically has not
experienced significant problems in collecting its receivables and we do not
expect this to change going forward.
Depreciation: Depreciation
is provided for using the straight-line method over the associated assets’
estimated useful lives. We primarily base our estimate of an asset’s
useful life on our experience with other similar assets. The actual
useful life of an asset may differ significantly from our estimate for such
reasons as the asset’s build quality, the manner in which the asset is used or
changes in the business climate. When the actual useful life differs
from the estimated useful life, impairment charges may result. We
monitor the estimate useful lives of our assets and do not currently anticipate
impairment charges.
Asset retirement
obligations: We establish reserves for closure/post-closure
costs associated with the environmental and other assets we
maintain. Environmental assets include waste management units such as
incinerators, landfills, storage tanks and boilers. When these types
of assets are constructed or installed, a reserve is established for the future
costs anticipated to be associated with the closure of the site based on an
expected life of the environmental assets, the applicable regulatory closure
requirements and our environmental policies and practices. These
expenses are charged into earnings over the estimated useful life of the
assets. The future costs anticipated to be associated with the
closure of the site are based upon estimated current costs for such activities
adjusted for anticipated future inflation rates. Unanticipated
changes in either of these two variables or changes in the anticipated timing of
closure/post-closure activities may significantly affect the established
reserves. As of December 31, 2007 and December 31, 2006, we
recorded a reserve for closure/post-closure liabilities of $566,000 and
$545,000, respectively. We
monitor this reserve and the assumptions used in its calculation. As
deemed necessary, we have made changes to this reserve balance and anticipate
that future changes will occur.
50
Revenue
recognition: For most product sales, revenue is recognized
when product is shipped from our facilities and risk of loss and title have
passed to the customer, which is in accordance with our customer contracts and
the stated shipping terms. All custom manufactured products are
manufactured under written contracts. Performance chemicals and
biodiesel are sold pursuant to the terms of written purchase
orders. In general, customers do not have any rights of return,
except for quality disputes. However, all of our products are tested
for quality before shipment, and historically returns have been
inconsequential. We do not offer volume discounts, rebates or
warranties.
Revenue
from bill and hold transactions in which a performance obligation exists is
recognized when the total performance obligation has been met. Bill
and hold transactions for 2007 related to two specialty chemical customers
whereby revenue was recognized in accordance with contractual agreements based
on product produced and ready for use. These sales were subject to
written monthly purchase orders with agreement that production was
reasonable. The inventory was custom manufactured and stored at the
customer’s request and could not be sold to another buyer. Both
customers’ credit and payment terms are similar to other specialty chemical
customers. Sales revenue under bill and hold arrangements were
$33,494,000, $31,550,000 and $31,197,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
Income taxes: We
account for income taxes using the asset and liability method. Under
this method, income tax assets and liabilities are recognized for temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective income tax basis. A future income
tax asset or liability is estimated for each temporary difference using enacted
and substantively enacted income tax rates and laws expected to be in effect
when the asset is realized or the liability settled. Changes in the
expected tax rates and laws to be in effect when the asset is realized or the
liability settled could significantly affect the income tax assets and
liabilities booked by us. We monitor changes in applicable tax laws
and adjust our income tax assets and liabilities as necessary.
Internal
control deficiency
During
the preparation of our 2006 financial statements, material weaknesses in our
internal control over financial reporting, as defined in the standards
established by the Public Company Accounting Oversight Board, were
identified. A material weakness is a control deficiency or
combination of control deficiencies that result in more than a remote likelihood
that a material misstatement of the annual or interim consolidated financial
statements will not be prevented or detected. The material weaknesses
in internal controls related to: (i) the lack of maintaining effective
controls in the monitoring of the accrual of certain liabilities; and
(ii) the application, monitoring and review of certain complex accounting
standards and assumptions applied within the financial reporting
process. A description of the control deficiencies that existed as of
December 31, 2006, as well as their effect on the presentation of our
consolidated financial statements, is discussed below.
Monitoring of the Accrual of
Liabilities
During
the preparation of the 2006 financial statements, it was determined that the
procedures for the recording of certain liabilities were not sufficient to
properly reflect the balance of financial statement liabilities and the
monitoring of such procedures did not appropriately identify such under-accruals
in a timely manner. Specifically, the following areas were identified
as not being appropriately accounted for or identified by our control processes
- the recognition of accruals for certain capital projects, the accrual of raw
materials in transit for which FutureFuel Chemical Company had obtained right of
ownership, and the recording of certain maintenance and other plant
expenses. The deficiencies were identified and addressed by
management during the preparation of the December 31, 2006 financial
statements and resulted in material corrections related to the accrual of
liabilities.
Management
has designed and implemented new procedures that have become an integral
component of our end-of-period close process. These procedures are
comprised of implementing higher levels of review between operating and
financial personnel and integrating the generation and review of certain reports
from our ERP system into our closing process to ensure the timely identification
of such matters for accrual and proper recording in the financial
statements.
51
Application, Monitoring and Review of
Certain Complex Accounting Standards and Assumptions
During
the preparation of our restated December 31, 2006 financial statements, it
was determined that there were control deficiencies in the application,
monitoring and review of certain complex accounting standards and assumptions
applied within the financial reporting process. Specifically,
deficiencies were identified related to: (i) the application of appropriate
assumptions related to purchase accounting; (ii) the monitoring of the
appropriate levels of inventory reserves; and (iii) the monitoring of the
recording of appropriate reserves for income taxes. As a result of
these deficiencies, financial statement adjustments were made to:
(i) properly present the financial statements to give effect to all of the
appropriate considerations of purchase accounting to the acquisition of Eastman
SE, Inc.; (ii) to give effect to the recording of inventory at the lower of
cost or market; and (iii) to give proper determination of the estimates
related to contingent liabilities associated with income taxes. The
first and second deficiencies were directly related to our restatement of our
financial statements to apply purchase accounting to the acquisition of Eastman
SE, Inc. The remediation of each of these deficiencies included
ensuring the appropriate level of oversight and review by individuals with the
sufficient knowledge who are independent of the process of preparing the initial
accounting entries.
Liquidity
and Capital Resources
Our and
FutureFuel Chemical Company’s net cash provided by (used in) operating
activities, investing activities and financing activities for the years ended
December 31, 2007, 2006 and 2005 are set forth in the following
chart. The 2007 amounts are our consolidated results, the 2006
amounts are our consolidated results plus FutureFuel Chemical Company’s results
for the ten-month period ended October 31, 2006, and the 2005 amounts are
FutureFuel Chemical Company’s results. The combined results for 2006
are being presented for comparative purposes only.
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | 21,554 | $ | (3,960 | ) | $ | 7,556 | |||||
|
Net
cash provided by (used in) investing activities
|
$ | (29,978 | ) | $ | (91,168 | ) | $ | (6,594 | ) | |||
|
Net
cash provided by (used in) financing activities
|
$ | (50 | ) | $ | 158,229 | $ | (962 | ) | ||||
FutureFuel
Chemical Company’s net cash provided by (used in) operating activities,
investing activities and financing activities for the ten-month period ended
October 31, 2006 was:
(Dollars
in thousands)
|
Ten
Months Ended October 31, 2006
|
||||
|
Net
cash provided by operating activities
|
$ | 8,534 | ||
|
Net
cash used in investing activities
|
$ | (8,549 | ) | |
|
Net
cash provided by financing activities
|
$ | 15 | ||
Operating
activities:
Cash
provided by (used in) operating activities increased from $(3,960,000) in 2006
to $21,554,000 in 2007, an increase of $25,514,000. (FutureFuel
Chemical Company’s net cash provided by operating activities for the ten-month
period ended October 31, 2006 was $8,534,000.) The increase
primarily results from changes in accounts receivable from year to
year. During 2006, FutureFuel Chemical Company used $(13,022,000) of
cash to build accounts receivable up to normal levels following the purchase of
the plant from Eastman Chemical Company. Additionally, accounts
receivable levels at the end of 2006 were abnormally high due to delayed
collections of balances which Eastman Chemical Company had collected on
FutureFuel Chemical Company’s behalf. These balances were collected
early in 2007 and accounts receivable were at a more normalized historical level
as of the end of 2007. (Accounts receivable at FutureFuel Chemical
Company provided $7,412,000 in cash for the ten-month period ended
October 31, 2006.) Other significant year to year changes
include a decrease in cash provided by (used in) changes in accounts payable,
including related party balances, from $5,107,000 in 2006 to $(314,000) in
2007,
52
and an
increase in cash provided by (used in) changes in accrued expenses and other
current liabilities, from $(3,900,000) in 2006 to $1,613,000 in
2007. (For FutureFuel Chemical Company for the ten-month period ended
October 31, 2006, the decrease in cash provided by (used in) changes in
accounts payable was $2,271,000, and the increase in cash provided by (used in)
changes in accrued expenses and other current liabilities was
$(5,657,000).)
Cash
provided by (used in) operating activities decreased from $7,556,000 in 2005 to
$(3,960,000) in 2006, a decrease of $11,516,000. This decrease
primarily results from an increase in FutureFuel Chemical Company’s accounts
receivable balance of $12,489,000. This increase in accounts
receivable resulted from a combination of three factors. First,
Eastman Chemical Company collected a significant amount of payments on behalf of
FutureFuel Chemical Company but had not yet transferred the funds to FutureFuel
Chemical Company as of December 31, 2006. (See note 16 to
our consolidated financial statements.) Second, accounts receivable
related to CPOs and DIPBs increased as a result of the new supply agreements and
pricing mechanisms in place following the acquisition of FutureFuel Chemical
Company. Lastly, FutureFuel Chemical Company recorded a receivable of
$2,891,000 from Eastman Chemical Company at December 31, 2006 related to
certain agreed-to purchase price adjustments stemming from the acquisition of
FutureFuel Chemical Company. FutureFuel Chemical Company also
experienced a $5,790,000 increase in its inventory balance in 2006 as compared
to 2005. This increase was largely offset by a $5,164,000 increase in
accounts payable.
Investing
Activities:
Cash
provided by (used in) investing activities increased from $(91,168,000) in 2006
to $(29,978,000) in 2007. (FutureFuel Chemical Company’s net cash
provided by (used in) investing activities for the ten-month period ended
October 31, 2006 was $(8,549,000), all of which was attributable to capital
expenditures.) The majority of this increase was attributable to
$(72,634,000) of cash used in the acquisition of Eastman SE, Inc. during 2006;
there was no cash provided by (used in) this investing activity in
2007. The increase was also attributable to in increase in cash
provided by (used in) the collateralization of derivative instruments from
$(3,578,000) in 2006 to $2,789,000 in 2007. These increases were
offset by $14,803,000 of cash used to purchase marketable securities during 2007
(no activity during 2006) and capital expenditures which were $5,892,000 higher
in 2007 than 2006.
Cash
provided by (used in) investing activities decreased $84,574,000, from
$(6,594,000) in 2005 to $(91,168,000) in 2006. $72,645,000 of this
decrease was attributable to cash paid for the acquisition of Eastman SE,
Inc. The majority of the remaining balance was primarily driven by
FutureFuel Chemical Company’s expansion of its biodiesel related infrastructure
in November and December of 2006. The years 2005 and 2004 had no such
activity. The infrastructure expansion projects include: (i) the
addition of methanol recovery and biodiesel feedstock pretreatment capabilities
to the plant; (ii) the construction of additional storage at the plant to
support increased movements of feedstocks, methanol, glycerin and biodiesel to
expand FutureFuel Chemical Company’s biodiesel blending capabilities;
(iii) the expansion of on-site rail siding and railcar loading and
unloading facilities to accommodate the increased number of rail cars expected
at the plant; and (iv) acquiring a fleet of tanker trucks to transport the
biofuels and feedstocks between the plant and offsite storage
facilities. These projects are substantially completed or are
scheduled to be completed in 2008 as set forth above. Additionally,
FutureFuel Chemical Company was required to fund a trust fund reserved for
purposes of meeting certain Arkansas Department of Environmental Quality
requirements that become applicable in the event of a closure of the
plant. The amount of cash reserved for this purpose is based on a
formula derived by the state of Arkansas and totaled $3,127,000 at
December 31, 2006. No cash was restricted in periods prior to
December 31, 2006. Lastly, we implemented a hedging program
utilizing various derivative instruments such as regulated futures and regulated
options as economic hedges to reduce the effects of fluctuations in the prices
of biodiesel. We are required to maintain a margin account with a
broker to collateralize these derivative instruments. $3,578,000 of
cash was used in 2006 to collateralize our derivative instruments.
Financing
Activities:
Cash
provided by (used in) financing activities decreased from $158,229,000 in 2006
to $(50,000) in 2007. (For the ten-month period ended
October 31, 2006, cash provided by (used in) FutureFuel Chemical Company’s
financing activities was $15,000.) This decrease primarily resulted
from our equity offering in July 2006 less various related offering
costs. The only financing activity during 2007 consisted of a bank
financing fee of $(50,000).
53
Cash
provided by (used in) financing activities increased from $(962,000) in 2005 to
$158,229,000 in 2006, an increase of $159,191,000. This increase
resulted primarily from our equity offering in July 2006 less various related
offering costs.
Capital
Expenditure Commitments
As
previously disclosed in Item 1. Business - General Development of the Business
above, FutureFuel Chemical Company is pursuing seven core infrastructure
projects that are expected to bring efficiency, operational flexibility and cost
savings to existing biodiesel and chemical business lines. These
infrastructure projects are: (i) adding methanol recovery and biodiesel
feedstock pretreatment capabilities; (ii) constructing additional storage;
(iii) expanding on-site rail siding and railcar loading and unloading
capabilities; (iv) obtaining storage/thruput in strategic markets;
(v) acquiring a fleet of tanker trucks; (vi) procuring railcars; and
(vii) expanding biodiesel production capacity. Projects (iv) and
(vi) do not require any capital expenditures but instead affect cash flow
through ongoing lease commitments. These lease commitments are
included in footnote 18 of our annual consolidated financial statements
presented herein. The remaining projects require significant capital
expenditures that, to the extent not already complete, are scheduled to be
completed by the end of the second quarter of 2008, with the exception of the
methanol recovery project, which is scheduled to be completed by the end of
2008. We estimate the total capital cost of these infrastructure
projects from November 1, 2006 through the date of completion will be
approximately $14 million.
For the
infrastructure projects discussed immediately above as well as any additional
capital projects being pursued, FutureFuel Chemical Company typically does not
enter into financial or other commitments that would preclude its ability to
expand or decrease the scope of a given project or cancel it
altogether. The following are our material commitments for capital
expenditures as of December 31, 2007.
(Dollars
in thousands)
|
General
Purpose of the Commitment
|
December 31,
2007
|
|||
|
Construction
of storage at the Batesville facility
|
$ | 92 | ||
|
Improvements
to materials handling capabilities at the Batesville
facility
|
589 | |||
|
Implementation
of an enterprise resource planning system
|
- | |||
|
Biodiesel
capacity expansion
|
154 | |||
|
Health,
safety and environment, maintenance and selected specialty chemical
expansion projects
|
1,906 | |||
|
Total
|
$ | 2,741 | ||
FutureFuel
Chemical Company has historically financed capital requirements for its business
with cash flows from operations and has not had the need to incur bank
indebtedness to finance any of its chemical operations during the historical
periods discussed herein. As noted above, FutureFuel Chemical
Company’s net cash provided by (used in) investing activities for the ten-month
period ended October 31, 2006 was $(8,549,000), all of which was
attributable to capital expenditures.
FutureFuel
Chemical Company entered into a $50 million credit agreement with Regions
Bank in March 2007. The loan is a revolving facility the proceeds of
which may be used for working capital, capital expenditures and general
corporate purposes of FutureFuel Chemical Company. The facility
terminates in March 2010. Advances are made pursuant to a borrowing
base comprised of 85% of eligible accounts plus 60% of eligible direct inventory
plus 50% of eligible indirect inventory. Advances are secured by a
perfected first priority security interest in accounts receivable and
inventory. The interest rate floats at the following margins over
LIBOR or base rate based upon the leverage ratio from time to time.
54
|
Leverage
Ratio
|
Base
Rate
Margin
|
LIBOR
Margin
|
||
|
>
3
|
-0.55%
|
1.70%
|
||
|
≥ 2 <
3
|
-0.70%
|
1.55%
|
||
|
≥ 1
< 2
|
-0.85%
|
1.40%
|
||
|
<
1
|
-1.00%
|
1.25%
|
There is
an unused commitment fee of 0.25% per annum. Beginning
December 31, 2007, and on the last day of each fiscal quarter thereafter,
the ratio of EBITDA to fixed charges may not be less than
1.5:1. Beginning June 30, 2007, the ratio of total funded debt
to EBITDA may not exceed 3.50:1, reduced to 3.25:1 at March 31, 2008,
June 30, 2008 and September 30, 2008, and then 3:1
thereafter. We have guaranteed FutureFuel Chemical Company’s
obligations under this credit agreement.
The
remaining proceeds of our July 2006 offering after consummation of our
acquisition of FutureFuel Chemical Company and repurchase of shares from
shareholders who exercised their repurchase rights described herein were
approximately $85 million. We intend to fund future capital
requirements for FutureFuel Chemical Company’s chemical and biofuels segments
from cash flow generated by FutureFuel Chemical Company as well as from existing
cash and borrowings under the credit facility with Regions Bank. We
do not believe there will be a need to issue any securities to fund such capital
requirements.
Off-Balance
Sheet Arrangements
Our only
off-balance sheet arrangements are: (i) the financial assurance trusts
established for the benefit of the Arkansas Department of Environmental Quality;
and (ii) hedging transactions. The financial assurance trusts
aggregated $3,263,000 at December 31, 2007 and were established to provide
assurances to the Arkansas Department of Environmental Quality that, in the
event the Batesville facility is closed permanently, any reclamation activities
necessitated under applicable environmental laws will be
completed. Such financial assurance trusts are not reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors. The amounts held in trust are included in restricted cash
and cash equivalents on our balance sheet. The closure liabilities
are included in other noncurrent liabilities, but only on a present value
basis.
We engage
in two types of hedging transactions. First, we hedge our biodiesel
sales through the purchase and sale of futures contracts and options on futures
contracts of energy commodities. Such futures contracts and options
on contracts of energy commodities are detailed in note 5 to our annual
consolidated financial statements included elsewhere herein. This
activity was captured on our balance sheet at December 31, 2007 and at
December 31, 2006. Second, we hedge our biodiesel feedstocks
through the execution of purchase contracts and supply agreements with certain
vendors. These hedging transactions are recognized in earnings and
were not recorded on our balance sheet at December 31, 2007 or 2006 as they
do not meet the definition of a derivative instrument as defined under
accounting principles generally accepted in the U.S. The purchase of
biodiesel feedstocks generally involves two components: basis and
price. Basis covers any refining or processing required as well as
transportation. Price covers the purchases of the actual agricultural
commodity. Both basis and price fluctuate over time. A
supply agreement with a vendor constitutes a hedge when FutureFuel Chemical
Company has committed to a certain volume of feedstock in a future period and
has fixed the basis for that volume.
Contractual
Obligations
The
following table sets forth as of December 31, 2007 the payments due by
period for the following contractual obligations of us and FutureFuel Chemical
Company.
55
(Dollars
in thousands)
|
Contractual
Obligations
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
Years
|
|||||||||||||||
|
Long-term
debt obligations
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Capital
lease obligations
|
- | - | - | - | - | |||||||||||||||
|
Operating
lease obligations
|
3,665 | 724 | 901 | 724 | 1,316 | |||||||||||||||
|
Purchase
obligations(a)
|
3,191 | 3,041 | 150 | - | - | |||||||||||||||
|
Other
long-term liabilities
|
- | - | - | - | - | |||||||||||||||
|
Total
|
$ | 6,856 | $ | 3,765 | $ | 1,051 | $ | 724 | $ | 1,316 | ||||||||||
__________
|
(a)
|
Purchase
obligations within less than one year include: (i) $2,741 for capital
expenditure commitments related to the construction of additional storage
capacity, material handling infrastructure, biodiesel capacity expansion
and health, safety and environment, maintenance and chemical expansion
projects; and (ii) $300 for information technology maintenance and
software license commitments. Purchase obligations beyond one
year include $150 for information technology maintenance and software
license commitments.
|
Our total liability for uncertain tax positions under Financial
Accounting Standards Board No. 48 Accounting for Uncertainty in Income Taxes -
An Interpretation of FASB No. 109 (FIN 48) was $559,000 as of December 31, 2007.
We are not able to reasonably estimate the amount by which the liability
will increase or decrease over time; however, at this time, we do not expect a
significant payment related to these obligations within the next year. See Note
12 to our consolidated financial statements included elsewhere herein.
As of
December 31, 2007, FutureFuel Chemical Company had no borrowings under the
$50 million credit agreement with Regions Bank described
above.
56
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
In recent
years, general economic inflation has not had a material adverse impact on
FutureFuel Chemical Company’s costs and, as described elsewhere herein, we have
passed some price increases along to our customers. However, we are
subject to certain market risks as described below.
Market
risk represents the potential loss arising from adverse changes in market rates
and prices. Commodity price risk is inherent in the chemical and
biofuels business both with respect to input (acetic anhydride, electricity,
coal, natural gas, biofuel feedstocks, etc.) and output (manufactured chemicals
and biofuels).
We seek
to mitigate our market risks associated with the manufacturing and sale of
chemicals by entering into term sale contracts that include contractual market
price adjustment protections to allow changes in market prices of key raw
materials to be passed on to the customer. Such price protections are
not always obtained, however, so raw material price risk remains a significant
risk.
In order
to manage price risk caused by market fluctuations in biofuel prices, we may
enter into exchange traded commodity futures and options
contracts. We account for these derivative instruments in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 133 Accounting for Derivative
Instruments and Hedging Activities, as amended. Under these
standards, the accounting for changes in the fair value of a derivative
instrument depends upon whether it has been designated as an accounting hedging
relationship and, further, on the type of hedging relationship. To
qualify for designation as an accounting hedging relationship, specific criteria
must be met and appropriate documentation maintained. We had no
derivative instruments that qualified under these rules as designated accounting
hedges in 2007 or in any preceding year. Changes in the fair value of
our derivative instruments are recognized at the end of each accounting period
and recorded in the statement of operations as a component of cost of goods
sold.
Our
immediate recognition of derivative instrument gains and losses can cause net
income to be volatile from quarter to quarter due to the timing of the change in
value of the derivative instruments relative to the sale of biofuel being
sold. As of December 31, 2006 and 2007, the fair values of our
derivative instruments were a net liability in the amount of $447,000 and
$247,000, respectively.
Our gross
profit will be impacted by the prices we pay for raw materials and conversion
costs (costs incurred in the production of chemicals and biofuels) for which we
do not possess contractual market price adjustment protection. These
items are principally comprised of soybean oil, acetic anhydride, electricity,
animal fat and coal. The availability and price of all of these items
are subject to wide fluctuations due to unpredictable factors such as weather
conditions, overall economic conditions, farmers’ planting decisions,
governmental policies and global supply and demand.
We
prepared a sensitivity analysis of our exposure to market risk with respect to
key raw materials and conversion costs for which we do not possess contractual
market price adjustment protections, based on average prices in
2007. We included only those raw materials and conversion costs for
which a hypothetical adverse change in price would result in a 2% or greater
decrease in gross profit. Assuming that the prices of the associated
finished goods could not be increased and assuming no change in quantities sold,
a hypothetical 10% change in the average price of the commodities listed below
would result in the following change in annual gross profit:
(Volumes
and dollars in thousands)
|
Item
|
Volume(a)
Requirements
|
Units
|
Hypothetical
Adverse
Change
in
Price
|
Decrease
in
Gross
Profit
|
Percentage
Decrease
in
Gross
Profit
|
|
Soybean
oil
|
56,060 |
LB
|
10.0 | % | $ | 1,618 | 9.4 | % | |||||||||
|
Acetic
anhydride
|
14,736 |
LB
|
10.0 | % | $ | 1,067 | 6.2 | % | |||||||||
|
Electricity
|
10 |
MWH
|
10.0 | % | $ | 504 | 2.9 | % | |||||||||
|
Animal
fat
|
23,294 |
LB
|
10.0 | % | $ | 468 | 2.7 | % | |||||||||
|
Coal
|
49 |
Ton
|
10.0 | % | $ | 386 | 2.2 | % |
__________
57
|
(a)
|
Volume
requirements and average price information are based upon volumes used and
prices obtained for the twelve months ended December 31,
2007. Volume requirements may differ materially from these
quantities in future years as the business of FutureFuel Chemical Company
evolves.
|
As of
December 31, 2007, we had no borrowings and, as such, were not exposed to
interest rate risk. Due to the relative insignificance of
transactions denominated in a foreign currency, we consider our foreign currency
risk to be immaterial.
58
Item
8. Financial Statements and Supplementary Data.
The
following sets forth our consolidated balance sheets as at December 31,
2007 and 2006 and our consolidated statements of operations, statements of cash
flows and statements of stockholders’ equity for the years ended
December 31, 2007, 2006 and 2005, together with RubinBrown LLP’s and KPMG
LLP’s respective reports thereon.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
FutureFuel
Corp.:
We have
audited the accompanying consolidated balance sheet of FutureFuel Corp. and
subsidiary as of December 31, 2007, and the related consolidated statements
of operations, changes in stockholders’ equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of FutureFuel Corp. and
subsidiary as of December 31, 2007, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/
RubinBrown LLP
St.
Louis, Missouri
March 31,
2008
59
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
FutureFuel
Corp.:
We have
audited the accompanying consolidated balance sheet of FutureFuel Corp. and
subsidiary (the Company) as of December 31, 2006, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for each of
the years ended December 31, 2006 and 2005. These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of FutureFuel Corp. and
subsidiary as of December 31, 2006, and the results of their
operations and their cash flows for each of the years ended
December 31, 2006 and 2005; in conformity with U.S. generally accepted
accounting principles.
As
described in Note 21 to the consolidated financial statements, the Company
restated the accompanying consolidated financial statements as of
December 31, 2006 and for each of the years ended December 31, 2006
and 2005.
/s/ KPMG
LLP
St.
Louis, Missouri
April 23,
2007, except as to Note 21,
which is
dated as of December 27, 2007
60
FutureFuel
Corp.
Consolidated
Balance Sheets
As
of December 31, 2007 and 2006
(Dollars
in thousands)
|
2007
|
2006
|
|||||||
|
Assets
|
||||||||
|
Cash and cash
equivalents
|
$ | 54,655 | $ | 63,129 | ||||
|
Accounts
receivable, net of allowances of $42 and $42, respectively
|
17,514 | 23,903 | ||||||
|
Inventory
|
24,192 | 22,582 | ||||||
|
Prepaid expenses
|
1,200 | 1,248 | ||||||
|
Marketable debt
securities
|
15,086 | - | ||||||
|
Other current
assets
|
541 | 3,131 | ||||||
|
Total current
assets
|
113,188 | 113,993 | ||||||
|
Property, plant and equipment,
net
|
95,036 | 82,626 | ||||||
|
Restricted cash and cash
equivalents
|
3,263 | 3,127 | ||||||
|
Intangible assets
|
435 | 548 | ||||||
|
Other assets
|
4,191 | 2,765 | ||||||
|
Total noncurrent
assets
|
102,925 | 89,066 | ||||||
|
Total
Assets
|
$ | 216,113 | $ | 203,059 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Accounts payable
|
$ | 12,622 | $ | 12,945 | ||||
|
Accounts payable - related
parties
|
121 | 112 | ||||||
|
Income taxes
payable
|
1,231 | 1,916 | ||||||
|
Short term contingent
consideration
|
197 | 191 | ||||||
|
Current deferred income tax
liability
|
4,597 | 4,242 | ||||||
|
Accrued expenses and other
current liabilities
|
3,370 | 1,717 | ||||||
|
Accrued expenses and other
current liabilities - related parties
|
- | 40 | ||||||
|
Total current
liabilities
|
22,138 | 21,163 | ||||||
|
Long term contingent
consideration
|
1,989 | 2,168 | ||||||
|
Deferred revenue
|
1,571 | - | ||||||
|
Other noncurrent
liabilities
|
1,126 | 914 | ||||||
|
Noncurrent deferred income
taxes
|
19,667 | 17,658 | ||||||
|
Total noncurrent
liabilities
|
24,353 | 20,740 | ||||||
|
Total
Liabilities
|
46,491 | 41,903 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Preferred
stock, $0.0001 par value, 5,000,000 shares authorized, none issued and
outstanding
|
- | - | ||||||
|
Common
stock, $0.0001 par value, 75,000,000 shares authorized, 26,700,000 issued
and outstanding
|
3 | 3 | ||||||
|
Accumulated other comprehensive
income
|
58 | - | ||||||
|
Additional paid in
capital
|
158,436 | 158,436 | ||||||
|
Retained earnings
|
11,125 | 2,717 | ||||||
|
Total stockholders’
equity
|
169,622 | 161,156 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 216,113 | $ | 203,059 | ||||
The
accompanying notes are an integral part of these financial
statements.
61
FutureFuel
Corp.
Consolidated
Statements of Operations
for
the Years Ended December 31, 2007, 2006 and 2005
(Dollars
in thousands, except per share amounts)
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
$ | 169,732 | $ | 23,043 | $ | - | ||||||
|
Revenues
– related parties
|
56 | - | - | |||||||||
|
Cost
of goods sold
|
149,181 | 19,966 | - | |||||||||
|
Cost
of goods sold – related parties
|
1,529 | - | - | |||||||||
|
Distribution
|
1,845 | 133 | - | |||||||||
|
Gross profit
|
17,233 | 2,944 | - | |||||||||
|
Selling,
general and administrative expenses
|
||||||||||||
|
Compensation
expense
|
2,502 | 328 | - | |||||||||
|
Formation expense and canceled
offering costs
|
117 | 427 | 1 | |||||||||
|
Other expense
|
1,353 | 400 | - | |||||||||
|
Related party
expense
|
172 | 104 | - | |||||||||
|
Research
and development expenses
|
3,434 | 923 | - | |||||||||
| 7,578 | 2,182 | 1 | ||||||||||
|
Income
(loss) from operations
|
9,655 | 762 | (1 | ) | ||||||||
|
Interest
income
|
3,567 | 3,365 | 1 | |||||||||
|
Interest
expense
|
(24 | ) | (37 | ) | - | |||||||
|
Gain
on foreign currency
|
16 | - | - | |||||||||
|
Other
expense
|
(23 | ) | - | - | ||||||||
| 3,536 | 3,328 | 1 | ||||||||||
|
Income
before income taxes
|
13,191 | 4,090 | - | |||||||||
|
Provision
for income taxes
|
4,783 | 1,373 | - | |||||||||
|
Net income
|
$ | 8,408 | $ | 2,717 | $ | - | ||||||
|
Earnings
per common share
|
||||||||||||
|
Basic
|
$ | 0.31 | $ | 0.10 | $ | - | ||||||
|
Diluted
|
$ | 0.26 | $ | 0.09 | $ | - | ||||||
|
Weighted
average shares outstanding
|
||||||||||||
|
Basic
|
26,700,000 | 26,700,000 | 5,625,000 | |||||||||
|
Diluted
|
32,286,996 | 31,818,772 | 5,625,000 | |||||||||
The
accompanying notes are an integral part of these financial
statements.
62
FutureFuel
Corp.
Consolidated
Statements of Cash Flows
for
the Years Ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows provided by (used in) operating activities
|
||||||||||||
|
Net income
|
$ | 8,408 | $ | 2,717 | $ | - | ||||||
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||
|
Depreciation and
amortization
|
4,712 | 630 | - | |||||||||
|
Provision
(benefit) for deferred income taxes
|
2,330 | (956 | ) | - | ||||||||
|
Change
in fair value of derivative instruments
|
(199 | ) | 447 | - | ||||||||
|
Accretion
of the discount of marketable debt securities
|
(127 | ) | - | - | ||||||||
|
Losses on disposals of fixed
assets
|
64 | - | - | |||||||||
|
Noncash interest
expense
|
21 | 37 | - | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
6,389 | (20,434 | ) | - | ||||||||
|
Inventory
|
(977 | ) | (1,256 | ) | - | |||||||
|
Prepaid expenses
|
48 | (1,240 | ) | - | ||||||||
|
Accrued
interest on marketable debt securities
|
(64 | ) | - | - | ||||||||
|
Other assets
|
(1,426 | ) | 653 | - | ||||||||
|
Accounts payable
|
(323 | ) | 2,724 | 10 | ||||||||
|
Accounts payable - related
parties
|
9 | 112 | - | |||||||||
|
Income taxes
payable
|
(685 | ) | 1,916 | - | ||||||||
|
Accrued
expenses and other current liabilities
|
1,653 | 1,747 | - | |||||||||
|
Accrued
expenses and other current liabilities - related parties
|
(40 | ) | 40 | - | ||||||||
|
Deferred revenue
|
1,571 | - | - | |||||||||
|
Other noncurrent
liabilities
|
191 | 369 | - | |||||||||
|
Net
cash provided by (used in) operating activities
|
21,554 | (12,494 | ) | 10 | ||||||||
|
Cash
flows used in investing activities
|
||||||||||||
|
Restricted cash
|
(136 | ) | (3,127 | ) | - | |||||||
|
Collateralization of derivative
instruments
|
2,789 | (3,578 | ) | - | ||||||||
|
Purchase of marketable
securities
|
(14,803 | ) | - | - | ||||||||
|
Proceeds from the sale of fixed
assets
|
55 | - | - | |||||||||
|
Acquisition of the stock of
Eastman SE, Inc.
|
- | (72,634 | ) | - | ||||||||
|
Contingent purchase price
payment
|
(173 | ) | (11 | ) | - | |||||||
|
Capital
expenditures
|
(17,710 | ) | (3,269 | ) | - | |||||||
|
Net
cash used in investing activities
|
(29,978 | ) | (82,619 | ) | - | |||||||
63
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows provided by (used in) financing activities
|
||||||||||||
|
Equity offering
expenditures
|
- | - | (207 | ) | ||||||||
|
Proceeds
from long-term debt - related parties
|
- | 500 | 200 | |||||||||
|
Repayment
of long-term debt - related parties
|
- | (700 | ) | - | ||||||||
|
Proceeds from the issuance of
stock
|
- | 169,382 | 25 | |||||||||
|
Stock redemption
|
- | (10,968 | ) | - | ||||||||
|
Bank financing
fee
|
(50 | ) | - | - | ||||||||
|
Net
cash provided by (used in) financing activities
|
(50 | ) | 158,214 | 18 | ||||||||
|
Net
change in cash and cash equivalents
|
(8,474 | ) | 63,101 | 28 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
63,129 | 28 | - | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 54,655 | $ | 63,129 | $ | 28 | ||||||
| Cash paid for interest | $ | 3 | $ | - | $ | - | ||||||
| Cash paid for income taxes | $ | 2,992 | $ | - | $ | - |
The
accompanying notes are an integral part of these financial
statements.
64
FutureFuel
Corp.
Consolidated
Statements of Changes in Stockholders’ Equity
For
the years ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
Common
Stock
|
Other
Comprehensive
|
Additional
Paid-In
|
Retained
|
Total
Stockholders’
|
||||||||||||||||||||
|
Shares
|
||||||||||||||||||||||||