Initial Public Offering (IPO): Registration Statement of a Foreign Private Issuer — Form F-1 Filing Table of Contents
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F-1 — Registration Statement of a Foreign Private Issuer
Approximate
date of proposed sale to the public: As soon as practicable after the effective
date of this Registration Statement.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the
following box x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the offering. o
If
this
Form is post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Calculation
of Registration Fee
Title
of each class
of
securities to
be
registered
Amount
to be
registered
Proposed
maximum
offering
price
per unit
Proposed
maximum
aggregate
offering
price
Amount
of
registration
fee
Ordinary
Shares, par value $.001 per share (1)
5,062,500
$
5.00
(2)
$
25,312,500
$
777.10
Ordinary
Shares, par value $.001 per share (3)
9,396,538
$
5.30
(4)
$
49,801,649
$
1,528.91
Ordinary
Shares, par value $.001 per share (5)
14,046,033
$
5.50
(4)
$
77,253,179
$
2,371.68
Ordinary
Shares, par value $.001 per share (6)
1,183,288
$
5.83
$
6,898,569
$
211.79
Total
29,688,359
$
4,889.48
(1)
Relates to the resale by the selling shareholders identified herein of up to
5,062,500 of our Ordinary Shares issued in private placement
transactions.
(2)
Estimated solely for the purpose of calculating the registration fee pursuant
to
Rule 457. As of the date hereof, there is no established public market for
the
Ordinary Shares being registered. The selling shareholders may sell our Ordinary
at prevailing market prices or privately negotiated prices.
(3)
Relates to the resale by certain of the selling shareholders identified herein
of up 9,396,538
of our Ordinary Shares issuable upon exercise of warrants to purchase
such Ordinary Shares at an initial exercise price of $5.30 per share which
were
issued by us in private placement transactions.
(4)
Estimated solely for the purpose of calculating the registration fee pursuant
to
Rule 457(g).
(5)
Relates to the resale by certain of the selling shareholders identified herein
of up 14,046,033
of our Ordinary Shares issuable upon conversion notes convertible into our
Ordinary Shares at an initial conversion rate of $5.50 per share which were
issued by us in a private placement transaction.
(6)
Relates to the resale by one of the selling shareholders identified herein
of up
1,183,288 of our Ordinary Shares issuable upon exercise of warrants to purchase
such Ordinary Shares at an initial exercise price of $5.83 per share which
were
issued by us in a private placement transaction.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE
SELLING SECURITY HOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT
IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR
SALE IS NOT PERMITTED.
29,688,359 Ordinary
Shares
Comanche
Clean Energy Corporation
This
prospectus covers the resale by selling shareholders of up to 29,688,359
of our Ordinary Shares, par value $.001 per share.
The
selling shareholders may sell the shares described in this prospectus or its
supplements in a number of different ways and at varying prices. We provide
more
information about how the selling security holders may sell their shares in
the
section entitled “Plan of Distribution.” We will not be paying any underwriting
discounts or commissions in this offering. We will not receive any proceeds
from
the sale of the shares, but may receive payment of the exercise price paid
to
convert warrants into shares prior to the sale thereof.
Investing
in our Ordinary Shares involves a high degree of risk.See
“Risk Factors” beginning on page 5.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
None
of
our securities are listed on a national securities exchange or quoted on any
quotation service.
The
selling shareholders have not engaged any underwriter in connection with the
sale of their shares. The selling shareholders may sell shares in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
at prevailing market prices at the time of sale or at negotiated prices in
the
manner set forth under “Plan of Distribution.”
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with different information from that contained
in this prospectus. The selling shareholders are offering to sell and seeking
offers to buy shares only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date
of
this prospectus, regardless of the time of delivery of this prospectus or of
any
sale of our shares.
The
date
of this prospectus is ________, 2007
TABLE
OF
CONTENTS
PAGE
About
this Prospectus
1
Special
Note Regarding Forward Looking Statements
2
Prospectus
Summary
2
Risk
Factors
5
Use
of Proceeds
25
Selling
Shareholders
25
Plan
of Distribution
28
Description
of Shares to be Registered
30
Our
Business
30
Property
59
Selected
Financial Data
60
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
61
Unaudited
Pro Forma Consolidated Financial Statements
73
Executive
Officers and Directors
78
Executive
Compensation
81
Security
Ownership of Certain Beneficial Owners and Management
82
Certain
Relationships and Related Transactions
86
Legal
Matters
87
Experts
87
Where
You Can Find Additional Information
87
Service
of Process and Enforcement of Judgments
88
Financial
Statements
89
In
this
prospectus, references to “our company,”“Comanche,”“we,”“us” and “our” refer
to Comanche Clean Energy Corporation and its subsidiaries, except where the
context otherwise indicates.
The
market and industry data and forecasts included in this prospectus are based
upon independent industry sources. Although we believe that these independent
sources are reliable, we have not independently verified the accuracy and
completeness of this information, nor have we independently verified the
underlying economic assumptions relied upon in preparing any such market or
industry forecasts. See “Risk Factors.”
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with additional information or information
different from that contained in this prospectus. The selling stockholders
are
offering to sell our Ordinary Shares only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery
of
this prospectus or of any sale of our Ordinary Shares.
This
prospectus contains or incorporates by reference forward-looking statements.
All
statements, other than statements of historical facts, that address activities,
events or developments that we intend, expect, project, believe or anticipate
will or may occur in the future are forward-looking statements. Such statements
are characterized by terminology such as “anticipates,”“believes,”“expects,”“future,”“intends,”“assuming,”“projects,”“plans,”“will,”“should” and
similar expressions or the negative of those terms or other comparable
terminology. These forward-looking statements, which include statements about
the growth of the alternative fuels industry; market size, share and demand;
performance; our expectations, objectives, anticipations, intentions and
strategies regarding the future, expected operating results, revenues and
earnings and current and potential litigation are not guarantees of future
performance and are subject to risks and uncertainties, including those risks
described under the heading “Risk Factors” set forth herein, or in the documents
incorporated by reference herein, that could cause actual results to differ
materially from the results contemplated by the forward-looking statements.
Investors
are cautioned that our forward-looking statements are not guarantees of future
performance and the actual results or developments may differ materially from
the expectations expressed in the forward-looking statements.
As
for
the forward-looking statements that relate to future financial results and
other
projections, actual results will be different due to the inherent uncertainty
of
estimates, forecasts and projections may be better or worse than projected.
Given these uncertainties, you should not place any reliance on these
forward-looking statements. These forward-looking statements also represent
our
estimates and assumptions only as of the date that they were made. We assume
no
obligation to update forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities laws. If
we
do update one or more forward-looking statements, no inference should be drawn
that we will make additional updates with respect to those or other
forward-looking statements. You should also read, among other things, the risks
and uncertainties described in the section of this prospectus entitled “Risk
Factors.”
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. It is
not
complete and may not contain all the information that may be important to you.
You should read the entire prospectus carefully before making an investment
decision, especially the information presented under the heading “Risk Factors”
and our financial statements and the related notes included elsewhere in this
prospectus.
Our
Company
Through
our subsidiaries we are engaged in the production of clean fuels in Brazil
for
domestic consumption and for export. We have been organized by people
experienced in working in emerging economies and particularly in Brazil, and
are
being managed by them together with persons who are experienced and recognized
in the Brazilian ethanol sector both as fuel producers and distributors. We
have
acquired two operating ethanol plants, Canitar and Santa Anita, and one new
biodiesel plant, Salvador. We produce ethanol from sugar cane, which we believe
to be the most energy and cost efficient feedstock for the production of ethanol
in the world. We produce biodiesel from a variety of feedstocks, optimizing
feedstock acquisitions near-term to minimize cost. Our business plan is to
be
vertically integrated into the majority of our feedstocks. We have our principal
offices at Rua do Rocio 84, 11 andar, Sao Paulo CP 04552000, Brazil, at which
the telephone number is 5511-3842-7098.
2
Our
History
We
were
incorporated under the laws of the Cayman Islands on February 9, 2007.
On
March30, 2007, we entered into and on April 3, 2007 we consummated, a securities
purchase agreement with 15 investors pertaining to the issuance and sale for
an
aggregate gross purchase price of $15 million of an aggregate of 3 million
of
our Ordinary Shares and five-year warrants to purchase for $5.30 per share,
an
aggregate of 2,250,000 of our Ordinary Shares (the “Shares and Warrants Purchase
Agreement”). On March 30, 2007 we also entered into and on April 3, 2007 we also
consummated, a securities purchase agreement with 14 investors pertaining to
the
issuance and sale for an aggregate gross purchase price of $44,752,540 of our
secured convertible notes in the aggregate principal amount of $44,752,540
and
five-year warrants to purchase for $5.30 per share, an aggregate of 3,254,730
of
our Ordinary Shares (the “Notes and Warrants Purchase Agreement” and together
with the Shares and Warrants Purchase Agreement, the “Securities Purchase
Agreements”).
On
June18, 2007 we issued and sold to 7 of the investors who had purchased our
securities pursuant to the Securities Purchase Agreements an aggregate of
1,050,000 Ordinary Shares, secured convertible notes in the aggregate principal
amount of $17,050,000 and warrants to purchase an aggregate of 2,027,499
Ordinary Shares. The aggregate purchase price we received for the sale of
such
securities was $22,300,000. The secured convertible notes and warrants we
issued
in the June 18, 2007 transaction contained substantially the same terms as
the
secured convertible notes and warrants we issued on April 3,2007.
In
April
2007, certain of our subsidiaries acquired:
·
Certain
of the assets of Ouro Verde Ltda. into our newly formed unit Comanche
Biocombustiveis de Canitar Ltda. (sometimes referred to in this document
as the “Canitar” facility) , a 250,000ton
cane processing facility, located near the city of Ourinhos in the
State
of São Paulo, approximately 350 kilometers from the city of São Paulo (we
will not mill at Canitar in 2007, rather we will reconfigure and
expand
the plant during the year, as well as acquire additional agricultural
resources, so as to be able to mill 750,000 tons of cane in
2008);
·
605
hectares of land near the Canitar facility and certain agricultural
equipment and tank trucks;
·
all
of the outstanding shares of Destilaria de Alcool Simoes Ltda. (which
has been renamed Comanche Biocombustiveis de Santa Anita Ltda.),
which
owns the 550,000 ton cane processing facility located near Tatui
in the
State of São Paulo approximately 140 kilometers from the city of
São
Paulo,
with the capability of producing 13 million gallons of ethanol per
year
(sometimes referred to in this document as the “Santa Anita” facility);
and
·
all
of the outstanding shares of IBR Inoquimica do Brasil Ltda. (which
has
been renamed Comanche Biocombustiveis de Bahia Ltda.), which owns
the 10.6
million gallon biodiesel estherization facility located in Simoes
Filho,
in the State of Bahia, close to the principal industrial port of
the City
of Salvador, Brazil (sometimes referred to in this document as the
“Salvador” or “Bahia”
facility).
The purchase prices in such acquisitions were paid for with a portion
of
the proceeds we received for the sale to the selling shareholders
of our
Ordinary Shares, convertible notes and warrants to purchase our Ordinary
Shares pursuant to the Securities Purchase
Agreements.
In
connection with the financing transactions pursuant to the Securities Purchase
Agreements we agreed to file a registration statement registering for resale
the
shares (including shares issuable upon exercise of warrants and convertible
notes) issued in connection with such transactions. The registration statement
of which this prospectus forms a part of is being filed to fulfill these
obligations.
Our
Business Model
As
a
dedicated clean fuel producer, our business plan is to continue to acquire,
expand, develop and operate industrial and agricultural clean fuel production
capacity. We intend to produce only fuels, not sugar or any other agricultural
commodity. In the long term, we aspire to be financially equivalent to a mid-cap
oil company, but with a better, renewable business model. Our model calls for
us
to:
first,
acquire
mid-sized production facilities in privileged agricultural settings which are
vertically integrated into their feedstocks;
3
to
expand
the industrial plants and agricultural areas of these facilities to their
optimum size, while at the same time install enterprise information systems
and
financial and accounting systems; and
then,
grow further by making additional similar acquisitions or developing greenfield
projects.
The
facilities that we have acquired consist of a certain level of production
capability and sufficient owned, dedicated leased or anticipated purchases
of
agricultural feedstocks to enable the Company to meet its revenue generation
targets for 2007. Our medium term business plan is to be vertically integrated
into about 70% of our sugar cane feedstock needs, and 50% or more of our
biodiesel feedstock needs, to reduce the volatility of cost and risk of supply
to our operations. We expect that the anticipated expansions of these projects,
and further acquisitions and greenfield projects, will increase profitability
and reduce our average production capacity cost.
Currently,
the producers of ethanol in Brazil are fragmented, with the largest producing
approximately 6% of Brazilian volume and approximately 360 others of various
sizes producing the balance; and internationally, a similar situation exists.
Thus, we believe that our position as a medium size player will not hinder
our
opportunity. At the same time, we believe that the installation of internal
controls is indispensable for efficient and rapid growth. We believe that
starting out as a mid-size producer will make it possible for us to readily
put
internal controls, technology and growth strategies in place in 2007, so that
we
can grow efficiently and quickly thereafter.
Selling
Security Holders
The
shares offered under this prospectus are being offered by certain holders of
our
Ordinary Shares, convertible notes convertible into our Ordinary Shares and
warrants exercisable for our Ordinary Shares. These holders acquired their
securities pursuant to the Securities Purchase Agreements. We prepared this
prospectus to satisfy the registration rights obligations in connection with
the
Securities Purchase Agreements. We are not selling any securities under this
prospectus and will not receive any of the proceeds from the sale of shares
by
the selling shareholders.
In
accordance with the terms of the registration rights agreement with certain
of
the selling shareholders, this prospectus covers the resale of at least 125%
of
the sum of (i) the number of our shares issuable upon conversion of our
convertible notes as of the trading day immediately preceding the date our
registration statement, of which this prospectus forms a part, is initially
filed with the SEC, (ii) the number of our shares issuable upon exercise of
warrants as of the trading day immediately preceding the date our registration
statement is initially filed with the SEC and (iii) our shares held by the
selling shareholders. We agreed to register the 25% excess of shares as a
negotiated precaution for the selling shareholders to cover future adjustments
to the conversion prices of our convertible notes and the exercise price of
the
warrants. The number of our shares into which our convertible notes are
convertible and our warrants are exercisable will be adjusted to account for
future stock splits, stock dividends, reclassifications, recapitalizations
or
other similar events, fundamental transactions, distributions of company assets,
certain issuances of common stock, options, convertible securities or purchase
rights, or if we take certain other actions with regard to our shares that
would
diminish the value of our shares, convertible notes or warrants.
In
addition to the other information in this prospectus, you should consider
carefully the following factors in evaluating our business. You should pay
particular attention to the fact that we conduct our operations in Brazil and
are governed by a legal and regulatory environment that in some respects differs
significantly from the environment that may prevail in other countries that
you
may be familiar with. If any of the following risks actually occur, our business
or results of operations could be seriously harmed. In that case, the trading
price of our Ordinary Shares could decline, and you may lose part or all of
your investment. The risks described below are not the only ones we face.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations.
4
RISK
FACTORS
You
should carefully consider the following risk factors and all other information
contained in this prospectus before purchasing our shares. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties that we are unaware of, or that we currently deem immaterial,
also may become important factors that affect us. We have assembled these risk
factors based upon both publicly available information, our own analysis and
our
own beliefs relative to our understanding of our business. If any of the
following risks occur, our business, financial condition or results of
operations could be materially and adversely affected, in which case, the value
of our shares could decline, and you may lose some or all of your investment.
General
Risks Relating to Our Business
We
are a newly formed company with a newly formed management team and are acquiring
assets tied to businesses with limited internal controls.
We
will
have to develop the necessary internal controls and management information
system platforms to support our growth strategy rapidly. This could take longer
than expected and may require us to make adjustments to the management team.
Hiring additional capable experienced professionals may be difficult and if
we
are unable to hire qualified personnel on a timely basis our business may be
adversely affected.
Our
business is essentially an agricultural based business.
Therefore,
we are susceptible to a variety of climatic, commoditization, resource,
government policy and pestilence risks, all of which could affect our business
and results. In addition, we are subject to the speculation in commodity markets
in terms of the cost of certain of our key feedstocks, to the extent that we
are
not growing them ourselves. Such speculation can create price volatility of
certain crops that could affect our costs of doing business.
We
have limited time periods within the year to plant crops and perform maintenance
or expansion, so significant delays in the execution of planting or maintenance
or expansion, could have a material affect on our anticipated 2007 or 2008
financial performance.
For
example, while we have begun planting cane in March 2007, we will need to
aggressively plant more cane in 2007 to meet our planting objectives for our
2008 business plan, we will need to carry out the reconfiguration and first
expansion of Canitar before the 2008 season begins, and the maintenance and
expansion of Santa Anita, and further maintenance and expansion of Canitar,
between harvesting seasons.
Harvesting
sugar cane manually is a labor-intensive activity, and we are highly dependent
on seasonal workers to harvest our plantations.
We
might
face difficulties in hiring the number of workers we may need, and/or we and
the
industry might face difficult negotiations with the unions which generally
represent all workers in the sector. While we might switch to mechanized
harvesting, if other producers do this, then the availability of mechanical
harvesters might be subject to a backlog.
We
rely on a limited number of production plants, and any interruption on the
production of those plants would affect us.
Interruptions
in the operations of the plants might be caused by, among other things,
technical difficulties, accidents, operating flaw, natural or environmental
disasters or strikes, diminishing our output and resulting in material losses.
Our insurance coverage might not be sufficient to compensate for such losses,
or
not cover unpredicted events.
5
The
market price for our product is volatile and affected by economic and political
conditions in Brazil and the world.
The
market for ethanol, both globally and in Brazil, has historically been volatile
in response to domestic and international changes in supply and demand. We
expect that the market for biodiesel might be subject to similar fluctuations
caused by changes in supply or demand and in response to fuel alternatives.
Fluctuations in prices for our products may occur for various reasons,
including: domestic and global demand for ethanol, sugar, biodiesel or food
oils; variations in the production levels of our competitors; and the
availability of substitute goods for the products we produce. The prices we
are able to obtain for ethanol or biodiesel will depend on prevailing market
prices. Market conditions, both domestically and internationally, are
beyond our control. Like other agricultural commodities, the growing of
sugar cane and production of products derived from sugar cane, such as ethanol,
or oil seeds and products from oilseeds, such as biodiesel, are subject to
price
fluctuations resulting from weather, natural disasters, domestic and foreign
trade policies, shifts in supply and demand and other factors beyond our
control. In addition, approximately 20% to 30% of the total worldwide sugar
production is traded on exchanges and is thus subject to speculation,
which could affect the price of sugar and derivatively the price of
ethanol, which may effect our results of operations in ethanol. There can be
no
assurance that, among other factors, competition from alternative sources of
ethanol or biodiesel, gasoline or diesel, changes in world or Brazilian
agricultural or trade policy or developments relating to international
trade, including those under the World Trade Organization (WTO), will not
directly or indirectly result in lower domestic or global fuel, ethanol or
biodiesel prices. Any prolonged decrease in ethanol or biodiesel prices
could have a material adverse effect on our company and our results
of operations. There can also be no assurance that we will be able to
maintain sales at generally prevailing market prices for ethanol or
biodiesel (to the extent that a sustainable prevailing market price develops)
in
Brazil without discounts and that we will be able to export sufficient
quantities of ethanol to assure an appropriate domestic market
balance. In addition, we may hedge against market price fluctuations by
fixing the prices of a portion of our sales volume. To the extent that the
market price of our products exceeds the fixed price under our
hedging policy, our earnings will be lower than they would have been if we
had not adopted the hedging policy.
The
prevailing price of ethanol and biodiesel is subject to significant
fluctuations, which may reduce our profit margins.
Ethanol
and biodiesel are marketed as independent fuel sources, in the case of ethanol
as a substitute for gasoline and as a fuel additive to reduce vehicle emissions
from gasoline and as an octane enhancer to improve the octane rating of
gasoline with which it is blended, and in the case of biodiesel as a substitute
for diesel. As a result, ethanol and biodiesel prices are influenced by the
supply and demand for gasoline which, in turn, is related to the price of
petroleum, and our results of operations and financial position may be
materially adversely affected if gasoline or petroleum demand or price
decreases. Petroleum prices are highly volatile and difficult to forecast
due to frequent changes in global politics and the world economy.
The industrialized world depends critically on oil from various countries
throughout the world, some of which may be politically and economically
unstable. Consequently, we cannot predict the future price of oil or
gasoline. In recent years, the prices of gasoline, petroleum, ethanol and diesel
have all reached historically unprecedented high levels. If the prices of
gasoline, diesel and petroleum decline, the demand for, and price of,
ethanol and/or biodiesel may also decline.
Biodiesel
is a new market worldwide, the business is new in Brazil and thus the demand
cannot be forecasted with great accuracy.
Our
revenue will be derived in part from the production and sales of
biodiesel. We expect that sales of biodiesel may constitute approximately
30% of our revenues in 2007. This industry is brand new in Brazil and the world,
so there is not the depth of experience that the ethanol industry has.
Furthermore, the industry is dependent on mandates to mix biodiesel into regular
diesel both in Brazil and worldwide. To the extent such mandates are eliminated
or reduced, our profitability could be diminished. Finally, the initial mandate
for Brazil doesn’t take affect until 2008, thus there is a possibility that a
market may not fully develop until 2008 or beyond.
6
We
will rely on the production and distribution of ethanol and biodiesel as its
main business focus, so any factor negatively impacting the biofuels
industry may adversely affect our profitability.
Our
revenue will be derived primarily from the production and sales of ethanol
and
biodiesel. Ethanol competes with several other existing products and may
compete with other alternatives to be developed in the future for use as an
independent fuel source or fuel additives. Biodiesel competes with oil based
diesel. We may be unable to move our business focus away from the
production of ethanol and biodiesel to other products. Accordingly, an industry
shift away from ethanol or biodiesel or the emergence of new competing
products may reduce the demand for ethanol and/or biodiesel. A downturn in
the
demand for ethanol and/or biodiesel may adversely affect our sales and
profitability.
We
face significant competition in our business, which may adversely affect our
market share and profitability.
The
ethanol industry is highly competitive, and we anticipate the biodiesel market
will also be highly competitive. Domestically, we will compete with numerous
small to medium-size producers. Despite increased consolidation, the
Brazilian sugar and ethanol industries remain highly fragmented. Our major
competitors in ethanol in Brazil are Cosan, Grupo São Martinho, Vale do Rosario,
Carlos Lyra, Grupo Zillo Lorenzetti, Alto Alegre, Grupo Irmaos Biaggi, J. Pessoa
& Co. Nova America and Infinity Bio Energy, along with other sugar and
ethanol producers in Brazil who market their sugar products through the
Copersucar cooperative. Currently, Copersucar is comprised of 32 producers
in the States of São Paulo, Minas Gerais and Parana. Today, our major
competitor in the biodiesel sector is Brasil Ecodiesel. Many factors influence
our competitive position, including the availability, quality and cost of
fertilizer, energy, water, chemical products and labor. A number of our
competitors have substantially greater financial and marketing resources, a
larger customer base and a greater breadth of products than we do. If we are
unable to remain competitive with these producers in the future our market
share may be adversely affected.
The
agricultural products industry in Brazil is very competitive. Some existing
producers may have greater financial and other resources than we do and one
or more of these competitors could use their greater resources to gain
market share at our expense.
The
agricultural industry in Brazil is very competitive and some existing producers
have substantially greater production, financial, research and development,
personnel and marketing resources than us. As a result, our competitors may
be able to compete more aggressively and sustain that competition over a
longer period of time. Our lack of resources relative to many of its
competitors may cause us to fail to anticipate or respond adequately to new
developments and other competitive pressures. This failure could reduce our
competitiveness and cause a decline in market share, sales and/or
profitability.
Our
competitors may open new plants that will expand the Brazilian sugar
cane-related industry or biodiesel industry, and such expansion could result
in
competitive pricing pressures as well as create other risks to our
business.
These
risks include, among others: oversupply—the internal market might not absorb the
additional production, bringing prices down and forcing producers to export
ethanol or biodiesel; infrastructure—the Brazilian infrastructure for exports is
currently limited and requires additional investments; availability of
equipment, or delays in newly contracted equipment due to an increased demand
for processing equipment, which could affect our forecasted expansion plan;
availability of agricultural and industrial workers—the sugar cane industry, for
example, employs over 1 million people, and depending on the rate of
mechanization of the fields, the industry will have to attract a significant
number of workers; we might face difficulties to hire trained experienced
workers, similarly in the biodiesel industry we will need to attract experienced
agricultural workers.
Tariffs
and regulatory issues for exporting our products could impact our ability to
export.
Even
though many countries have mandates to consume certain amounts of ethanol,
governmental actions to protect the internal market of other countries might
affect the anticipated Brazilian exports.
7
Our
biodiesel business is subject to a number of sales, income and other tax
exemptions granted by the Brazilian state and federal
governments.
These
exemptions are granted pursuant to law or special tax zone regulations. However
any repeal of such exemptions could materially affect our cost competitiveness
in the biodiesel business. Some Brazilian states have not yet developed specific
tax legislation for biodiesel, and the entire tax regime at different stages
for
biodiesel could change. Any changes in such legislation could negatively affect
our biodiesel profitability.
A
change in the Brazilian Government's policy that biodiesel be added to the
sales of all diesel may materially adversely affect our
business.
Law
11.097 of January 13, 2005 requires that the biodiesel participation in total
diesel sales be at least 2% by January 2008 (250 million gallons) and 5% by
2013
(500 million gallons). Any changes in these mandates by the Brazilian Government
could materially affect our biodiesel business operations by reducing overall
demand within Brazil for biodiesel.
We
may invest in innovative technologies or alternative feedstock for the
production of ethanol and biodiesel, and such investments might not have the
anticipated results, leading to a partial or complete loss of such
investments.
Alternatively,
such investment by others in such technological developments could make other
sources of ethanol or biodiesel less expensive.
Such
technologies or alternative feedstocks could increase plant utilization, lead
to
different processing technologies to increase the yield from feedstocks, such
as
cellulosic technology, or make feasible the use of entirely new feedstocks,
among others. For example, although at present ethanol produced from sugar
cane
is competitive with that produced from other feedstocks, various technologies
are under development that could improve the efficiency of production from
corn
or that can make possible the economic production of ethanol from agricultural
sources not presently used for ethanol production, and such developments would
have an adverse effect on the market for ethanol derived from sugar cane.
Similarly, there could be significant technological breakthroughs in the
production processes of biodiesel. These technologies could create a vastly
different competitive landscape for us and our products.
There
could occur technological developments for the production of sugar care ethanol
or biodiesel to which we might not have access.
Other
producers may have access to such developments, allowing them to produce more
efficiently, reducing our competitiveness and causing a decline in market share,
sales and/or profitability.
If
the increase in ethanol and biodiesel demand expected by us does not occur,
or
if the demand for ethanol or biodiesel otherwise decreases, there may be
excess capacity in these industries.
The
potential global growth in the production of ethanol and biodiesel may affect
market prices. For example, U.S. domestic ethanol capacity has increased
steadily from 1.7 billion gallons per year in January of 1999 to 4.8
billion gallons per year at June 2006. In addition, there is a significant
amount of capacity being added to the ethanol industry. This capacity is
being added to address anticipated increases in demand. However, demand for
ethanol may not increase as quickly as expected or to a level that exceeds
supply, or at all. If the ethanol industry has excess capacity and such
excess capacity results in a fall in prices, it will have an adverse impact
on our results of operations, cash flows and financial condition.
Excess capacity may result from the increases in capacity coupled with
insufficient demand. Demand could be impaired due to a number of factors,
including regulatory developments and reduced gasoline consumption. Reduced
gasoline consumption could occur as a result of increased gasoline or oil
prices. For example, price increases could cause businesses and consumers
to reduce driving or acquire vehicles with more favorable gasoline fuel
efficiency. The increased production of ethanol may also have other adverse
effects. For example, increased ethanol production would likely result in
the increased demand for sugar cane. This may result in higher
market prices for sugarcane which, in the event that we are unable to pass
such price increases on to customers, will result in lower profits. We
cannot predict the future price of ethanol. Any decline in the price of
ethanol may adversely affect our sales and profitability. Similarly the
biodiesel business is new worldwide and although many experts expect the growth
to be rapid for a variety of regulatory reasons, overcapacity or lack of
expected demand growth could affect our business.
8
Competition
from large producers of other petroleum-based gasoline additives and other
competitive products may affect our profitability.
Our
ethanol and biodiesel operations will compete with producers of other fuel
sources and gasoline additives made from other raw materials having similar
octane and oxygenate values as ethanol. Many of our potential competitors,
including the major oil companies, have significantly greater resources
than we have to develop alternative products and to influence legislation and
public perception of ethanol.
A
reduction in market demand for ethanol as a clean fuel or a change in the
Brazilian Government's policy that ethanol be added to gasoline may
materially adversely affect our business.
The
Brazilian Government currently requires the use of ethanol as an additive to
gasoline. Since 1997, the Brazilian Sugar and Alcohol Interministerial
Council (Conselho
Interministerial do Acucar
e
Alcool) has
set the percentage of anhydrous ethanol that must be used as an additive to
gasoline (currently 23%). Approximately half of all fuel ethanol in Brazil
is used to fuel automobiles, which run on a blend of anhydrous ethanol and
gasoline; the remainder is used in vehicles that are powered by hydrous ethanol
alone. Any reduction in the percentage of ethanol required to be added to
gasoline or change in the Brazilian Government policy towards ethanol use,
as well as the growth in the demand for natural gas and other fuels as
an alternative to ethanol, may have a material adverse effect on our
business.
Governmental
regulations or the repeal or modification of tax incentives favoring the use
of
ethanol may reduce the demand for ethanol and affect our target
markets.
Ethanol
production is subject to extensive regulation in many countries, including
Brazil. We cannot predict in what manner or to what extent current or
future governmental regulations or export or import restrictions will harm
our
business or the ethanol industry in general. The fuel ethanol business
benefits significantly from tax incentive policies and environmental
regulations existing in Brazil and other countries that favor the use of
ethanol in motor fuel blends. These policies and regulations are subject to
changes which we are unable to predict. For example, the Brazilian Government
has reduced the quantity of ethanol mixed into gasoline from 25 percent to
20 percent, and while the required percentage is at 23% percent as of the date
of this prospectus, decreases in the required percentage may reduce the demand
for ethanol in Brazil, at least in the near term. The repeal or substantial
modification to policies and regulations that encourage the use of ethanol
could have a detrimental effect on the ethanol industry which, in turn, may
have
an adverse effect on our sales and profitability.
Ethanol
prices have been correlated to the price of sugar historically. Accordingly,
a
decline in the price of sugar could lead to overproduction of ethanol and
adversely affect our ethanol business.
The
price
of ethanol can be associated with the price of sugar. A vast majority of ethanol
in Brazil is produced at sugar cane mills that produce both ethanol and
sugar. Because some millers are able to alter their product mix in response
to the relative prices of ethanol and sugar, this results in the prices of
both products being correlated. Moreover, because sugar prices in Brazil
are determined by prices in the world market, there can be a strong
correlation between Brazilian ethanol prices and world sugar
prices. Accordingly, a decline in sugar prices may also have an adverse
effect on our ethanol business.
9
We
may be adversely affected by seasonality.
Our
business is subject to seasonal trends based on the growing cycles in the
regions where we produce in Brazil. The annual sugar cane harvesting period
in
the Center-South region of Brazil begins in April/May and ends in
November/December. This can create fluctuations in our inventory, usually
peaking in December to cover sales between crop harvests (i.e.,
January
through April), and a degree of seasonality in our gross profit, with sugar
and ethanol sales significantly lower in the last quarter of the fiscal year.
Similarly, oil crops in the Northeast of Brazil have a certain growing season,
and we may need to store material or inventory outside of these seasons. This
seasonality could have a material adverse effect on our results of operations
for the last quarter of each fiscal year.
We
may be adversely affected by the dishonesty of persons or entities who may
sell
assets or equity interest in businesses to us or of other
vendors.
We
may
rely heavily on the performance and integrity of representations made by the
sellers of assets or equity interests in making our acquisition and purchasing
decisions. Because there may be generally little or no publicly available
information about other entities, we may not be able to confirm independently
or
verify the information provided for use in such decisions. In addition, we
will
be relying on the performance and integrity of suppliers, customers or vendors,
whose employees or partners may take actions which are not permitted by the
relevant agreements.
Risks
Related to Our Acquisition and Development Strategy
The
expansion of our business through acquisitions and strategic alliances poses
risks that may reduce the benefits we anticipate from these
transactions.
As
part
of our business strategy, we will initially grow primarily through acquisitions,
and by expansion of the capacity of acquired assets. We plan to
continue growing by acquiring other ethanol or biodiesel producers or
facilities in Brazil or elsewhere that complement or expand our existing
operations. We also may enter into strategic alliances to increase our
competitiveness. We believe that the ethanol industry in Brazil is highly
fragmented and that future consolidation opportunities will continue to be
a significant source of our growth. However, our management is unable
to predict whether or when any prospective acquisitions or strategic
alliances will occur, or the likelihood of a certain transaction being
completed on favorable terms and conditions. Our ability to continue to expand
our business successfully through acquisitions or alliances depends on many
factors, including our ability to identify acquisitions or access capital
markets at an acceptable cost and negotiate favorable transaction
terms. Even if we are able to identify acquisition targets and obtain the
necessary financing to make these acquisitions, we could financially
overextend ourselves, especially if an acquisition is followed by a period
of lower than projected biofuel prices. Our failure to integrate new
businesses or manage any new alliances successfully could adversely
affect our business and financial performance. Some of our competitors have
substantially greater financial and other resources than we do and also may
be pursuing growth through acquisitions and alliances. This may reduce
the likelihood that we will be successful in completing acquisitions and
alliances necessary for the expansion of our business. In addition, any
major acquisition we consider may be subject to antitrust and other
regulatory approvals. We may not be successful in obtaining required
approvals on a timely basis or at all. Acquisitions also pose the risk that
we may be exposed to successor liability relating to actions involving an
acquired company, its management or contingent liabilities incurred before
the
acquisition. The due diligence we conduct in connection with an
acquisition, and any contractual guarantees or indemnities that we receive
from the sellers of acquired companies, may not be sufficient to protect us
from, or compensate us for, actual liabilities. A material liability
associated with an acquisition could adversely affect our business
and results of operations and reduce the benefits of the
acquisition.
10
There
are execution risks related to the expansion plans of acquired or greenfield
projects that could affect our ability to deliver the anticipated business
plan,
or increase substantially the anticipated capital
expenditures.
Such
delays or cost increase might be caused by, among others: availability, delivery
and installation of equipment; implementation of engineering services; delays
in
the analyses by governmental agencies to provide all necessary licenses and
permits, to the extent required. Despite relying on engineering assessments
in
purchasing facilities, there may be unexpected technical difficulties in
operating the acquired assets as expected, leading to additional investments
or
delays in meeting the objectives of our business plan with respect to revenues
and earnings.
We
may be exposed to existing environmental and other liabilities of acquisitions,
which could affect our results of operations and financial condition in the
future.
Under
Brazilian law, there are certain successor liabilities — for example,
environmental, tax and employment-related liabilities — for which we may become
liable as an acquirer of businesses or assets. Our acquisition agreements
may provide for an escrow against, or guarantees regarding, such contingencies,
but there can be no assurance, however, that the amount in any such escrow
will be sufficient to pay all such liabilities, or that no further such
liabilities will become payable after the escrow term has ended, or that
the guarantees regarding such contingencies will be enforceable. In such events,
we may be obligated to fund such liabilities without recourse to the
sellers, and its results of operations and financial condition may be
adversely affected.
Potential
future business combinations could be difficult to find and integrate, divert
the attention of key personnel, disrupt our business, dilute shareholder
value and adversely affect our financial results.
Business
combinations involve numerous risks, any of which could harm our
business, including: difficulties in integrating the operations,
technologies, products, existing contracts, accounting processes and
personnel of the target and realizing the anticipated synergies of the
combined businesses; difficulties in supporting and transitioning
customers, if any, of the target company or assets; diversion of financial
and management resources from existing operations; the price paid for, or
other resources devoted to, the business combination may exceed the
value realized, or the value which could have been realized, if we had
allocated the purchase price or other resources to another opportunity;
risks of entering new markets or areas in which we have limited or no experience
or are outside our core competencies; potential loss of key
employees, customers and strategic alliances from either our current business
or
the business of the target; assumption of unanticipated problems or latent
liabilities, such as problems with the quality of the products of the
target; and inability to generate sufficient revenue to offset acquisition
costs. Business combinations also frequently result in the recording of
goodwill and other intangible assets which are subject to potential
impairments in the future that could harm our financial results. As a
result, if we fail to properly evaluate acquisitions or investments, we may
not achieve the anticipated benefits of any such business combinations, and
may incur costs in excess of what was anticipated. The failure to
successfully evaluate and execute business combinations or investments
or otherwise adequately address these risks could materially harm our
business and financial results.
The
possible lack of business diversification may adversely affect our results
of
operations.
While
we
expect to effect one or more business combinations beyond our initial
acquisitions, it is possible that we will not consummate any further
business combination. Accordingly, the prospects for our success may be
entirely dependent upon the assets acquired through the initial
acquisitions. As such, it is possible that we may not have the resources to
carry out our intended expansion of the initial assets or to
diversify effectively our operations or benefit from the possible spreading
of risks or offsetting of losses. In this case, our lack of diversification
may subject us to numerous economic, competitive and regulatory
developments, any or all of which may have a substantial adverse impact
upon the particular industry in which we may operate subsequent to the initial
acquisitions, and result in our dependency upon a single or limited number
of markets.
11
Because
we will manage our business on a localized basis, our operations and internal
controls may be materially adversely affected by inconsistent management
practices.
We
will
manage our business in Brazil with local and regional management retaining
responsibility for day-to-day operations, profitability and the growth of the
business. Our operating approach may make it difficult for us to implement
strategic decisions and coordinated practices and procedures throughout our
extended operations, including implementing and maintaining effective internal
controls Company-wide. Our decentralized operating approach could result in
inconsistent management practices and procedures and adversely affect our
overall profitability, and ultimately our business, results of operations,
financial condition and prospects.
Our
need for new information technology systems is subject to implementation risks
which we cannot control.
Our
information technology systems are not sufficient for our anticipated
operations. We will need to implement a new enterprise resource management,
financial and operating system, but we will be dependent upon communications
providers, web browsers, telephone systems and other aspects of the Internet
infrastructure which have experienced significant system failures and electrical
outages in the past. Our systems are susceptible to outages due to fire, floods,
power loss, telecommunications failures, break-ins and similar events. Despite
our implementation of network security measures, our servers are vulnerable
to
computer viruses, break-ins and similar disruptions from unauthorized tampering
with our computer systems. Unplanned systems outages or unauthorized access
to
our systems could materially and adversely affect our business.
Our
ability to grow our business could be adversely affected if we are unable to
obtain additional financing on acceptable terms.
We
may
seek additional debt or equity financing to finance future acquisitions or
expansions. Such financing may not be available on acceptable terms and our
failure to obtain additional financing when needed could negatively impact
our
growth, financial condition and results of operations. Additional equity
financing may be dilutive to the holders of our shares, and debt financing,
if
available, may involve significant cash payment obligations and covenants that
restrict our ability to operate our business.
We
may incur indebtedness in order to consummate future acquisitions and
expansions.
Future
acquisitions and expansions may be financed with debt. If we are not able to
generate sufficient cash flow from the operations of the acquired companies
or
the expanded capacity to make scheduled payments of principal and interest
on
the indebtedness, then we will be required to use our capital for such payments.
This will restrict our ability to make additional acquisitions or expansions.
We
may also be forced to sell an acquired company in order to satisfy indebtedness.
We cannot be certain that we will be able to operate profitably once we incur
this indebtedness or that we will be able to generate a sufficient amount of
proceeds from the ultimate operation of such acquired companies or expanded
capacity to repay the indebtedness incurred to make such acquisitions.
Risks
Related to Our Cost Structure
We
may not be successful at reducing our operating costs and increasing our
operating efficiencies.
We
have
only recently acquired existing businesses and anticipate that we will be able
to successfully manage the costs of integration and reduce operating costs
by
applying processes, equipment, technology and cost controls and increasing
our
operating efficiencies to achieve improved operating results in the future.
We cannot assure you that we will be able to achieve all of the
cost savings that we expect to realize from our business initiatives with
respect to new and acquired assets. In particular, we may be unable to implement
one or more of our initiatives successfully or we may experience unexpected
cost increases that offset the savings that we achieve. Our failure to
realize cost savings may adversely affect our competitiveness and results
of operations.
12
Our
results of operations, financial position and business outlook are highly
dependent on commodity prices, which are subject to significant volatility
and uncertainty, and the availability of supplies, so our results could
fluctuate substantially.
Our
results are substantially dependent on commodity prices, especially prices
for ethanol, biodiesel, regular diesel and unleaded gasoline. As a result
of the volatility of the prices for these items, our results may fluctuate
substantially and we may experience periods of declining prices for
its products and increasing costs for its raw materials, which could result
in operating losses. Although we may attempt to offset a portion of the effects
of fluctuations in prices by entering into forward contracts to supply
ethanol or biodiesel or other items or by engaging in transactions
involving exchange-traded futures contracts, the amount and duration of
these hedging and other risk mitigation activities may vary substantially
over time and these activities also involve substantial risks. In addition,
to
the extent that we have borrowed money, price declines also increase the risk
of
losses.
We
intend to maintain third-party insurance over a certain range of risks to
our business and assets, and our results of operations and financial
condition may be affected by the cost of uninsured risks.
We
have
obtained insurance for our business and assets that we believe is
comparable to what other similar companies in Brazil have obtained or can
obtain. However, since the Brazilian insurance market is closed and the ability
to place insurance is somewhat limited, this may address only a limited range
of
risks and may not cover a variety of risks that might be covered by
other types of businesses in other developed country markets. As a result,
our results of operations and financial condition may be affected by the
cost of uninsured risks.
Our
business is highly sensitive to our cost of producing and/or buying feedstock
such as sugar cane (to the extent that we buy sugar cane to achieve more output)
or oils to produce biodiesel and we may not be able to pass on increases in
cost to our customers.
The
principal raw material we use to produce ethanol is sugarcane and for biodiesel
is agricultural oil. As a result, changes in the price of feedstocks or the
cost of producing our own feedstocks can significantly affect our business.
The
yield, cost and market price of sugar cane are influenced by weather conditions
and other factors affecting crop yields, farmer planting decisions and
general economic, market and regulatory factors. These factors include Brazilian
Government policies and subsidies with respect to agriculture and
international trade, and global and local demand and supply. The
significance and relative effect of these factors on the price of feedstock
or
the cost of growing crops is difficult to predict. Any event that tends to
negatively affect these, such as adverse weather or crop disease, could
increase costs and potentially harm our business. The price paid by us for
sugarcane at a facility could increase if an additional ethanol production
facility is built in the same general vicinity.
Risks
Related to Our Agricultural Operations
We
intend to be vertically integrated into our ethanol feedstock and as a result,
control and plant a sizeable portion of our sugar-cane needs for feedstock,
as
such we are subjected to many risks related to agricultural activities. In
addition, over time we expect to adopt a similar strategy with respect to our
biodiesel operations needs.
13
Weather
conditions affect any agricultural activity. Even though sugar cane is a
resilient crop, certain characteristics, such as the yield in terms of tons
per
hectare, or the sugar content per ton, are affected by weather conditions.
A
significant change in expected or historical rain patterns for the regions
where
we have our plantations might diminish our ethanol output. Our ability to
harvest and transport sugar cane from the fields to the production facility
is
reduced or impeded during rainy periods. Therefore, the rainy season of the
year
defines our harvesting period, and rain-intensive periods during the production
period forces us to have idle plants or operate below capacity even during
the
production period. A significantly rainy year might reduce our ethanol output.
Even though we keep agricultural experts to control our sugar cane plantations,
uncommon plagues might affect our plantations, impacting our feedstock
supply.
We
intend
to grow our plantations mainly through multi-year land leasing agreements,
and
therefore we are exposed to the risks of relying on the availability and
enforceability of such contracts to control our feedstock production. Similarly,
we will pursue similar arrangements for our biodiesel production over the next
few years. Transportation is an important cost to us, so we must lease our
land
within a limited area of influence for cane, forcing us to negotiate our leasing
contracts with a limited number of properties and land owners, which could
result in higher leasing rates. Although for oil crops, this is not as big
a
factor, it is still important. Therefore, we will focus our strategy on regions
where currently there is availability of land for lease. However, competitors
might install themselves or expand their area of influence and dispute land
with
us, changing the market dynamics and affecting either our ability to lease
land
or the price of the leasing contracts. Due to the high profitability per hectare
provided by of the production of ethanol and sugar from sugar cane, we are
able
to pay higher leasing prices and do not face strong competition from land
leasers for alternative uses of the areas. However, market conditions for
alternative crops or uses of land might change and affect either our ability
to
lease land or the price of the leasing contracts. In the Northeast of Brazil
there is a similar competitive market for alternative uses for crops such as
oilseeds. Delays or difficulties on signing leasing contracts to reach the
forecasted controlled areas would affect our expected crushing estimates, or
diminish our profitability by forcing us to buy more cane or oil crops from
third parties over time. Unexpected delays in planting activities might affect
the forecasted expansion of our plantations. Such delays might be caused, among
other factors, by weather conditions, availability of seedling cane or oil
seeds, availability of agricultural workers or availability of planting
equipments to be leased from third parties.
Changes
in yields and productivity of our plantations or in the yield of feedstocks,
such as cane or oil we acquire from third parties might affect our production
costs.
There
could be a change in the average production per hectare, in terms of tons of
sugar cane or the sugar content in the cane we are processing or oil per crop.
Theses factors might be as a result of soil conditions, topography to the extent
we use mechanized cutting, weather conditions, or agricultural techniques and
varieties used. Our agricultural specialists might not correctly anticipate
such
changes, having an effect on our costs in a particular season.
We
will rely on a number of land leasing or agricultural partnership agreements
in
the cane area and contracts with farmers in the biodiesel and cane areas to
meet
a large portion of our land or feedstock needs.
Interruptions
in cane supply by our third party suppliers, or termination of our leasing
or
sugarcane partnership agreements, might affect our processing forecasts.
Similarly we will be acquiring oils from farmers for our biodiesel area and
cane
from suppliers to meet the balance of our cane needs. Contract issues or
contract defaults could have a materially negative affect on our business.
If we
are forced to cover needs at market prices in excess of our own estimated
internal costs of production, our financial results would be adversely
affected.
The
agricultural sector is highly susceptible to governmental influence and
policies.
Changes
in rules or more restrictive rules for the agricultural sector could negatively
affect our results. Industry specific increases in taxation, price-control
policies, land use restrictions, import-export restrictions or rulings by
environmental agencies could broadly affect the agricultural industry, and
therefore our results.
14
Currency
Considerations
Our
future results of operations may be significantly affected by currency
fluctuations.
We
intend
primarily to acquire companies or businesses with assets outside the
U.S. and nearly all of our revenues are likely to be generated outside the
U.S. As a result, we may be subject to risks relating to fluctuations in
currency exchange rates. While we may attempt to reduce the risks
associated with exchange rate fluctuations through hedging transactions, we
cannot guarantee that, in the event such hedging transactions are implemented,
they will be effective or that fluctuations in the value of the currencies
in which we may operate will not materially affect our results of
operations.
Significant
volatility in the value of the real in relation to the U.S. dollar could harm
our ability to meet our U.S. dollar-denominated
liabilities.
The
Brazilian currency has historically suffered frequent devaluations. In the
past,
the Brazilian Government has implemented various economic plans and utilized
a
number of exchange rate policies, including sudden devaluations and
periodic mini-devaluations, during which the frequency of adjustments
has ranged from daily to monthly, floating exchange rate systems, exchange
controls and dual exchange rate markets. There have been significant
fluctuations in the exchange rates between the Brazilian currency and the
U.S. dollar and other currencies. For example, the U.S. dollar/real
exchange
rate depreciated from R$1.807 per U.S. $1.00 as of April 30, 2000 to
R$2.185 as of April 30, 2001 and to R$2.363 as of April 30, 2002. The
exchange rate reached R$3.955 per U.S.$1.00 in October 2002. However, the
economic policies initiated by the Brazilian Government in 2003 have helped
to restore confidence in the Brazilian market. This has resulted in the
appreciation of the real
relative
to the U.S. dollar to better than R$1.95 per U.S.$1.00 as of May 25, 2007.
We are subject to risk brought about by the possibility of a devaluation of
the
real or
a
decline in the rate of exchange of U.S. dollars for reals.
Unless
we fully hedge this devaluation risk, any decrease in the value of the
real
relative
to the U.S. dollar could have a material adverse effect on our business and
results of operations. In addition, a devaluation, or a less favorable exchange
rate would effectively increase the interest expense in respect of our U.S.
dollar-denominated debt and may have a material adverse effect on our
operations.
Dependency
on Management
We
are highly dependent on certain members of our management.
Our
operations are dependent on certain members of our Board of Directors and some
of our executive officers, particularly with respect to business planning,
strategy and operations. If any of these key members of our management
leaves our company, our business and results of operations may be adversely
impacted.
We
are dependent upon our officers and other key employees for management and
direction, and the loss of any of these persons could adversely affect our
operations and results.
Our
success will depend to a significant extent upon the efforts and abilities
of
our officers to implement our proposed expansion strategy and execution of
our business plan. The loss of the services of one or more of these key
persons could have a material adverse effect upon our results of operations
and financial position. Our business will also be dependent upon our
ability to attract and retain qualified personnel. Acquiring these
personnel could prove more difficult or cost substantially more than estimated.
This could cause us to incur greater costs, or prevent us from pursuing our
strategy as quickly as we would otherwise wish to do. While we anticipate
that we may enter into employment agreements with certain of our officers
or other key personnel, no such agreements are currently in place. The loss
of
any of our key employees could delay or prevent the achievement of our business
objectives.
15
The
Risks of Local and International Liquidity
As
our operations are in Brazil, the availability of credit and the rates at which
such funds may be borrowed, could affect our future operating
results.
There
are
limited sources of capital available domestically within Brazil. We anticipate
the need for future borrowings to achieve our business objectives. To the extent
that such borrowings are unavailable from commercial banks or development banks,
we may not be able to obtain our business objectives.
The
use of credit and level of interest rates could affect our operating
results.
Overall,
the use of leverage, while providing the opportunity for a higher investments
and return, also increases the volatility of our results and the risk of loss.
Risks
Relating to the Environment and Environmental Regulation
We
are subject to extensive environmental regulation and may be exposed to
liabilities as a result of our handling of hazardous materials and
potential costs for environmental compliance. We also require permits from
Brazilian Governmental authorities with control over certain aspects of our
business.
Because
ethanol and biodieselare
potentially hazardous if ingested or used for an improper purpose, we are
subject to various Brazilian federal, state and local environmental protection
and health and safety laws and regulations governing, among other
things: ¬ the generation, storage, handling, use and transportation of
hazardous materials; ¬ the emission and discharge of hazardous materials into
the ground, air or water; and ¬ the health and safety of our
employees. We are also required to obtain permits from Brazilian
Governmental authorities for certain aspects of our operations. These laws
and regulations and permits can often require us to purchase and install
expensive pollution control equipment or to make operational changes to
limit impacts or potential impacts on the environment and/or health of our
employees and violation of these laws and regulations or permit
conditions can result in substantial fines, criminal sanctions, revocations
of operating permits and/or shutdowns of our facilities. In addition
we are required to produce outputs within certain tolerances of purity and
chemical composition. Violations of those parameters could cause us to install
additional equipment for quality control or risk losing certain licenses. We
have made and expect to make substantial capital expenditures on an ongoing
basis to continue to ensure our compliance with environmental laws and
regulations and permit requirements. In addition, due to the possibility of
changes to environmental regulations, permit regulations and other
unanticipated changes, the amount and timing of future environmental or
regulatory expenditures may vary substantially from those currently anticipated.
We could be subject to civil penalties for non-compliance with certain laws
or
regulations under Brazilian law or other international laws. Under certain
Brazilian environmental laws, we could be held strictly liable for all of
the costs relating to any contamination at our or our predecessors'
current and former facilities and at third-party waste disposal sites. We
could also be held liable for any and all consequences arising out of human
exposure to hazardous substances or other environmental damage.
In addition, Brazilian law allocates any liability for non-compliance with
environmental laws by an acquired company to the purchaser for an
indefinite period of time. See ""Business - Regulations - Environmental
Regulation.''
We
cannot assure you that our costs of complying with current and
future environmental and health and safety laws, permit laws, and our
liabilities arising from past or future releases of, or exposure to,
hazardous substances will not adversely affect our business, results of
operations or financial condition.
16
Our
operations could have adverse environmental impact. Costs of compliance with
burdensome or changing environmental and operational safety regulations
could cause our focus to be diverted away from our business and our results
of operations to suffer.
Ethanol
production involves the emission of various airborne pollutants, including
particulate matter, carbon monoxide, carbon dioxide, nitrous oxide,
volatile organic compounds and sulfur dioxide. Also, our mills will
discharge process water, and crushing residue (vinhasa)
into
the environment. The production of biodiesel requires the use of certain
hazardous substances, such as methanol, the storage and handling of which are
subject to regulation, and the production process also yields waste water which
is required to be properly treated. The growing of feedstocks requires the
use
of pesticides and fertilizers that may run off, or contaminate ground or running
water, or may affect flora or fauna. The dedication of large land areas to
single crops could have an adverse affect on biodiversity. Fuels produced by
our
operations must be properly stored and contained, and safeguarded from fire
and
other risks. As a result, we will be subject to environmental regulations
in Brazil and likely in any other country in which we produce biofuels in
the future. These regulations will be subject to change and such changes may
require additional capital expenditures or increased operating costs.
Consequently, considerable resources may be required to comply with future
environmental regulations. In addition, our facilities could be subject to
environmental nuisance or related claims by employees, property owners or
residents near the facilities arising from air or water discharges, or the
existence of environmental risks. Ethanol production has been known to produce
an unpleasant odor to which any surrounding residents could object.
Environmental and public nuisance claims, or tort claims based on
emissions, or increased environmental compliance costs could
significantly increase our operating costs.
Government
policies and regulations affecting the agricultural sector and related
industries could adversely affect our operations and
profitability.
Agricultural
production and trade flows are significantly affected by government policies
and
regulations. Governmental policies affecting the agricultural industry,
such as taxes, tariffs, duties, subsidies and import and export
restrictions on agricultural commodities and commodity products, can influence
industry profitability, the planting of certain crops versus other uses of
agricultural resources, the location and size of crop production, whether
unprocessed or processed commodity products are traded, and the volume and
types
of imports and exports. Future government policies in Brazil and
elsewhere may adversely affect the supply, demand for and prices of our
products, restrict our ability to do business in our existing and target markets
and could adversely affect our results of operations. Sugar prices have an
indirect effect on the pricing of ethanol. Sugar prices, like the prices of
many
other staple goods in Brazil, were historically subject to controls imposed
by the Brazilian Government. Sugar in Brazil has not been subject to price
controls since 1997. However, there can be no assurance that price control
regulations will not be imposed in the future.
Ineffective
enforcement of environmental and energy policy regulations may adversely affect
demand for ethanol or biodiesel.
Our
success will depend in part on the effective enforcement of existing and
future environmental and energy policy regulations in Brazil and other
countries in which we may operate. Many consumers may be unlikely to switch
from the use of conventional fuels unless compliance with applicable
regulatory requirements leads, directly or indirectly, to the use of ethanol
or
biodiesel. Both additional regulation and enforcement of such regulatory
provisions are likely to be vigorously opposed by the entities affected by
such requirements. If existing emissions-reducing standards are weakened, or
if governments are not active and effective in enforcing such standards,
our business and results of operations could be adversely affected. Even if
the current trend toward more stringent emissions standards continues, we
will depend on the ability of ethanol to satisfy these emissions standards
more efficiently than other alternative technologies. Certain standards imposed
by regulatory programs may limit or preclude the use of our products to
comply with environmental or energy requirements. Any decrease in the
emission standards or the failure to enforce existing emission standards
and other regulations could result in a reduced demand for ethanol. A decrease
in the demand for ethanol may reduce the price of ethanol and adversely
affect our profitability.
17
Risks
of the Brazilian Economy
The
Brazilian Government has exercised, and continues to exercise, significant
influence over the Brazilian economy. Brazilian economic and political
conditions have a direct impact on our business.
The
Brazilian economy has been characterized by frequent, and occasionally drastic,
intervention by the Brazilian Government, which has often changed monetary,
credit and other policies to influence Brazil's economy. The Brazilian
Government's actions to control inflation and affect other policies have often
involved wage and price controls and fluctuation of the Central Bank's base
interest rates. Actions taken by the Brazilian Government concerning the
economy may have important effects on Brazilian companies, including our
company, and on market conditions. For example, in the past, the Brazilian
Government maintained domestic price controls, and we cannot assume that price
controls will not be re-imposed in the future. Our financial condition and
results of operations may also be adversely affected by the following
factors and the Brazilian Government's actions in response to
them: devaluations and other exchange rate
movements; inflation; economic and social instability; energy
shortages; interest rates; exchange controls and restrictions on
remittances abroad; liquidity of the domestic capital and lending
markets; tax policy; and other political, diplomatic, social and
economic policies or developments in or affecting Brazil. Luiz Ignacio Lula
da Silva, one of the founders of the left-wing Workers' Party, took office
as
President of Brazil on January 1, 2003. In the period leading up to and
following the October 2002 presidential election, there was substantial
uncertainty regarding the policies that the new Brazilian Government would
pursue. This uncertainty resulted in a loss of investor confidence in the
Brazilian economy and a 34.3% devaluation of the real
against
the U.S. dollar between January 1, 2002 and December 31, 2002. While the
Brazilian Government has adopted economic measures that are more
conservative than expected, we cannot assure you that these policies will
continue or that the Brazilian Government will continue to pursue economic
stabilization and liberalization policies. We cannot predict what future fiscal,
monetary, social security and other policies will be adopted by the
Brazilian Government and whether these policies will result in adverse
consequences to the economy and to our business, results of operations,
financial condition or prospects. While the current administration's
policies have to date not been adverse to our industry, the uncertainty
over what policies this Brazilian Government may propose or adopt in the future
may adversely impact our business and contribute to economic uncertainty in
Brazil and to heightened volatility in the Brazilian international
securities markets. Recently, the Workers' Party has been accused of not
publicly disclosing funds used to finance political campaigns and of paying
other political parties in exchange for support for its policies. These
allegations are currently under investigation by Brazilian authorities and,
at
this point, it remains uncertain and difficult to predict the outcome of
these investigations. This uncertainty and volatility and the recent
allegations of corruption, in turn, may adversely impact our
business.
Economic
and market conditions in other emerging market countries may adversely affect
the Brazilian economy and, therefore, the value of our
Company.
The
value
of securities issued by Brazilian companies may be influenced by economic and
market conditions in Brazil, and, to varying degrees, market conditions in
other Latin American and emerging market countries, independently of the results
of our business. Although economic conditions are different in each
country, the reaction by investors to developments in one country may cause
the capital markets in other countries to fluctuate. Developments or conditions
in other emerging market countries have at times significantly affected the
availability of credit in the Brazilian economy and resulted in
considerable outflows of funds and declines in the amount of foreign
currency invested in Brazil, as well as limited access to international
capital markets by Brazilian companies, which may adversely affect
our ability to borrow funds at an acceptable interest rate or to raise
equity capital when and if there should be a need for us to do
so. Although market concerns that crises that have affected other South
American countries would ensue in Brazil have not become a reality, the
volatility in market prices for Brazilian securities has been affected from
time to time. Investors' perception of increased risk due to a crisis in
other emerging market countries may adversely affect our ability to borrow
funds at an acceptable interest rate or raise equity capital when and
if there is a need for us to do so.
18
Inflation,
and the Brazilian Government's measures to combat inflation, may contribute
significantly to economic uncertainty in Brazil, and affect our operating
results.
Brazil
has historically experienced high rates of inflation. Inflation, as well as
Brazilian Government efforts to combat inflation, had significant negative
effects on the Brazilian economy, particularly prior to 1995. The annual
inflation rate, as measured by the General Price Index Internal Availability
(
±
Indice
Geral de Precos Disponibilidade Interna),
reached
2,708% in 1993. Inflation rates have been generally low since 1994 as
measured by the General Price Index Internal Availability. For the
twelve-month period ended April 30, 2007, the inflation rate was 4.62%. The
Brazilian Government's measures to control inflation have often included
maintaining a tight monetary policy with high interest rates, restricting
thereby the availability of credit and reducing economic growth. Inflation,
actions to combat inflation and public speculation about possible additional
actions also may contribute materially to economic uncertainty in Brazil
and accordingly weaken investor confidence in Brazil, thus impacting our
ability to access the international capital markets. Brazil may experience
high levels of inflation in the future. Inflationary pressures may also curtail
our ability to access foreign financial markets and may lead to further
Brazilian Government intervention in the economy, including the
introduction of Brazilian Government policies that may adversely affect the
overall performance of the Brazilian economy, which in turn could adversely
affect our operations.
Political
and economic conditions in Brazil may have a detrimental effect on our
business.
The
Brazilian economy has been characterized by significant involvement by the
Brazilian Government, which often changes monetary, credit and other
policies to influence Brazil’s economy. The Brazilian Government’s actions to
control inflation and other economic policies have often involved wage and
price controls, modifications to the Central Bank of Brazil’s base interest
rates, and other measures, such as the freezing of bank accounts, which
occurred in 1990. The Brazilian Government’s economic policies may have
important effects on Brazilian corporations and other entities, including
us, and on market conditions and prices of Brazilian securities.
Our financial condition may be adversely affected by the following factors
and the Brazilian Government’s response to them:
·
devaluations
and other exchange rate
movements;
·
inflation;
·
exchange
control policies;
·
social
instability;
·
price
instability; energy shortages; interest rates; liquidity
of domestic capital and lending markets; and tax
policy.
Investment
registration and control requirements in Brazil may have adverse effects on
us.
Brazil
generally requires the registration of foreign capital invested in Brazilian
markets or businesses. Thereafter, any repatriation of the foreign capital,
or
income earned on the foreign capital investment, must be approved by the
Brazilian Government. In the past, the Brazilian Government has also imposed
temporary restrictions on foreign capital remittances abroad when Brazil’s
foreign currency reserves decline significantly. Although approvals on
repatriation are usually granted and there are currently no restrictions on
foreign capital remittances, there can be no assurance that in the future
approvals on repatriation will be granted or restrictions or adverse policies
will not be imposed. If the Brazilian Government delays or refuses to grant
approval for the repatriation of funds or imposes restrictions on the remittance
of foreign capital, our ability to transfer cash out of Brazil may be limited,
thus affecting our other operations. Our investments might also be subject
to
anti-trust or other regulatory reviews depending on our size and future possible
regulations.
19
Brazilian
contract and corporate laws are less developed than in many other jurisdictions
and this may negatively affect us.
The
enforcement of contracts in Brazil is a lengthy process, requiring skill and
tenacity, and the application of the corporate laws through the Brazilian legal
system can be uneven, haphazard and unreliable.
Brazilian
tax laws are complex and this may be detrimental to us.
Brazilian
taxation tends to be one of the more complex tax regimes in the world. We will
make every effort, in conjunction with Brazilian tax advisors, to limit the
taxes that we, our investments or potential investors are subjected to, however,
there is no assurance that the tax laws in Brazil will not be changed, nor
interpreted by Brazilian authorities in a manner that could be detrimental
to
us.
International
Taxation
It
is
expected that non-corporate U.S. shareholders will be ineligible for the
favorable U.S. federal income tax treatment that applies to dividend income
received from certain corporations.
Dividends
received before January 1, 2009 by non-corporate U.S. shareholders on shares
of
certain foreign corporations will be subject to U.S. federal income tax at
lower rates than other types of ordinary income if certain conditions are
met. However, because our Ordinary Shares are not readily tradable on
an established securities market in the U.S. and there is no income tax
treaty between Brazil and the U.S., we currently do not expect that those
conditions will be met. As a result, distributions on our Ordinary Shares
paid out of our current or accumulated earnings and profits, as determined
under
U.S. federal income tax principles, will generally be taxable as ordinary
income to U.S. shareholders and will not be entitled to a reduced rate of
taxation. See "Taxation- U.S. Distributions.''
We
may be a passive foreign investment company, which could lead to additional
taxes for U.S. holders of our shares.
A
passive
foreign investment company or PFIC is a non-U.S. corporation that meets either
the income or asset PFIC tests. The income test is met if 75 per cent or
more of a corporation’s gross income is ‘‘passive income’’ (generally
dividends, interest, rents, royalties, and gains from the disposition of
passive assets) in any taxable year. The asset test is met if at least 50
per cent of the average value of a corporation’s assets produce, or are
held for the production of, passive income. If we are considered a PFIC, a
U.S.
holder of our shares could be subject to substantially increased tax
liability, including an interest charge upon the sale or other disposition
of
the U.S. holder’s shares or upon the receipt of ‘‘excess distributions’’
from us. Certain elections may sometimes be used to reduce the adverse
impact of the PFIC rules. These elections may not be available to U.S.
holders. If these elections are available, they may result in a current U.S.
federal tax liability prior to any distribution or disposition of the
shares, and without the assurance of a U.S. holder receiving an equivalent
amount of income or gain from a distribution or disposition.
Risks
Relating to our Shares
There
has been no market for our Ordinary Shares, and prospective investors may not
be
able to resell their Ordinary Shares at or above the purchase price paid by
such
investor, or at all.
As
of May31, 2007 there were less than 20 holders of our Ordinary Shares and no trading
market for our Ordinary Shares. We intend to qualify our Ordinary Shares for
quotation on the Over-the-Counter Bulletin Board (the “OTC Bulletin Board”). The
OTC Bulletin Board tends to be highly illiquid. There is a greater chance of
market volatility for securities that trade on the OTC Bulletin Board as opposed
to a national exchange or quotation system. This volatility may be caused by
a
variety of factors including:
·
the
absence of consistent administrative supervision of “bid” and “ask”
quotations;
·
lower
trading volume; and
·
market
conditions.
In
addition, the value of our Ordinary Shares could be affected by:
·
actual
or anticipated variations in our operating
results;
·
changes
in the market valuations of other similarly situated companies providing
similar services or serving similar
markets;
·
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
·
adoption
of new accounting standards affecting our
industry;
·
additions
or departures of key personnel;
·
introduction
of new products or services by us or our
competitors;
·
sales
of our shares or other securities in the open
market;
·
changes
in financial estimates by securities
analysts;
·
conditions
or trends in the market in which we
operate;
·
changes
in our earnings estimates and recommendations by financial
analysts;
·
our
failure to meet financial analysts’ performance expectations;
and
·
other
events or factors, many of which are beyond our
control.
In
a
volatile market, you may experience wide fluctuations in the market price of
our
securities. These fluctuations may have an extremely negative effect on the
market price of our securities and may prevent you from obtaining a market
price
equal to your purchase price when you attempt to sell our securities in the
open
market. In these situations, you may be required either to sell our securities
at a market price which is lower than your purchase price, or to hold our
securities for a longer period of time than you planned. An inactive market
may
also impair our ability to raise capital by selling shares of capital stock
and
may impair our ability to acquire other companies by using shares as
consideration or to recruit and retain managers with equity-based flexible
stock
incentive plans.
20
We
cannot assure you that our Ordinary Shares will become quoted on the OTC
Bulletin Board, or listed on any stock exchange, Nasdaq or any other securities
exchange.
We
may
not meet the initial listing standards of any stock exchange, and cannot assure
you as to when or if we will meet the listing standards, or that we will be
able
to maintain a listing of the shares on any stock exchange. Pending a listing,
if
any, we expect that our Ordinary Shares would be eligible for quotation on
the
OTC Bulletin Board, another over-the-counter quotation system, or on the “pink
sheets,” where an investor may find it difficult to dispose of shares or obtain
accurate quotations as to the market value of the shares. In addition, we
would be subject to an SEC rule that, if we failed to meet the criteria set
forth in such rule, imposes various requirements on broker-dealers who sell
securities governed by the rule to persons other than established customers
and
accredited investors. Consequently, such rule may deter broker-dealers
from recommending or selling the shares, which may further affect its
liquidity.
The
Company’s quarterly revenue and operating results are volatile and difficult to
predict, and if we fail to meet the expectations of investors, the market price
of our shares would likely decline significantlyOur
revenue and operating results are likely to fluctuate significantly from quarter
to quarter, due to a number of factors. These factors include:
·
our
ability to retain and increase sales to existing customers, attract
new
customers and satisfy our customers’
requirements;
·
commodity
prices;
·
input
prices;
·
currency
rates;
·
weather
and agricultural yields;
·
periods
of time when we are not harvesting, thus incurring costs but not
necessarily sales, unless we have unliquidated
inventories;
·
the
rate of expansion of our
production;
·
costs
or potential limitations on our business activities resulting from
litigation and regulatory developments in our industry, which could
be
significant;
·
the
adverse impact on our profit and loss statement due to amortization
of
intangible assets of the Acquisitions and the valuation of embedded
derivatives in the financing documents and related earnings
charges;
·
downward
pricing pressures;
·
costs
associated with any future acquisitions;
·
our
ability to respond to technological developments in our industry;
and
·
fluctuations
in economic and market conditions.
Many
of
these factors are largely outside of our control, and there are many facets
of
each of these factors over which we have limited control. As a result of the
factors above and the evolving nature of our business and industry, we may
be
unable to forecast our revenue accurately. We plan our expenses based on
operating plans and estimates of future revenue. We may be unable to adjust
our
spending in a timely manner to compensate for any unexpected revenue shortfalls.
Additionally, a failure to meet our revenue or expense projections would have
an
immediate and negative impact on our operating results. If this were to happen,
the market price of our Ordinary Shares would likely decline significantly.
The
influx of additional shares of our Ordinary Shares onto the market may create
downward pressures on the trading price of our Ordinary Shares.
We
have
issued a large number of Ordinary Shares and securities convertible into, or
exercisable for, Ordinary Shares in connection with the Securities Purchase
Agreements. We agreed to register the public resale of many of these shares.
The
secondary resale of substantial amounts of our Ordinary Shares in the public
markets, when and if these shares are registered, could have an adverse effect
on the market price of our Ordinary Shares. Such an adverse effect on the market
price would make it more difficult for us to sell our equity securities in
the
future at prices which we deem appropriate or to use our shares as currency
for
future acquisitions.
21
Our
Ordinary Shares may be considered a “penny stock” and it may be difficult to
sell.
The
SEC
has adopted regulations which generally define a “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. If, upon
development of a market, the market price of the shares falls below $5.00 per
share, the SEC’s penny stock rules require a broker-dealer, before a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the
risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and the salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held
in
the customer’s account. In addition, the penny stock rules generally require
that before a transaction in a penny stock, the broker-dealer make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser’s agreement to the transaction. These rules
may adversely impact the liquidity of our shares and may affect the ability
of
investors to sell their shares.
A
significant amount of our Ordinary Shares will be eligible for sale on the
effectiveness of the registration statement of which this prospectus comprises
a
part and the sale of such shares could depress the market price of our Ordinary
Shares.
All
of
the Ordinary Shares and all of the shares issuable to the selling shareholders
upon the conversion of the convertible notes and the exercise of the warrants
issued pursuant to the Securities Purchase Agreements may be sold anytime after
being registered for sale. In addition, members of our senior management and
certain other persons receiving our Ordinary Shares as part of the purchase
price in the acquisitions which were closed in April 2007 will be contractually
free to sell all of their Ordinary Shares after the first anniversary of the
effectiveness of a registration statement covering such investors’ shares,
although the Ordinary Shares held by such persons may be subject to restrictions
on sale under the Securities Act of 1933, as amended (the “Securities Act”) as
described below. Sales of a significant number of shares of Ordinary Shares
in
the public market commencing in a year could lower the market price of our
Ordinary Shares. Substantially all of our shareholders are subject to Rule
144
under the Securities Act, which, in general, permits a person who has held
restricted shares for a period of one year, upon filing with the SEC a
notification on Form 144, to sell into the market shares in an amount equal
to
the greater of 1% of the outstanding shares or the average weekly number of
shares sold in the last four weeks prior to such sale. Such sales may be
repeated once each three months, and any of the restricted shares may be sold
by
a non-affiliate after they have been held two years.
Following
the effective date of the registration statement covering the resale of Ordinary
Shares issued to the selling shareholders pursuant to the Securities Purchase
Agreements (including shares issuable upon conversion of convertible notes
and
warrants issued to the selling shareholders), a large number of Ordinary Shares
would become available for sale in the public market, which could derpress
the
market price of our Ordinary Shares.
We
do
not anticipate paying dividends on our Ordinary Shares, pursuant to the term
of
our convertible notes.
Pursuant
to the terms of the convertible notes we issued to selling shareholders pursuant
to the Notes and Warrants Purchase Agreement, we may not be able to pay
dividends on our Ordinary Shares. To the extent these notes stay outstanding
for
their full term or we enter into other restrictive credit agreements, we may
face significant limitations on paying dividends to investors.
22
Securities
analysts may not initiate coverage or continue to cover our Ordinary Shares
and
this may have a negative impact on our shares’ market price.
The
trading market for our Ordinary Shares may depend significantly on the research
and reports that securities analysts publish about us or our business,
competitors, or markets. We do not have any control over these analysts. There
is no guarantee that securities analysts will cover our shares. If securities
analysts do not cover our Ordinary Shares, the lack of research coverage may
adversely affect our shares’ market price and liquidity. If we are covered by
securities analysts, and our stock is downgraded, our stock price would likely
decline. If one or more of these analysts ceases to cover us or fails to publish
regular reports on us, we could lose visibility in the financial markets, which
could cause our stock price or trading volume to decline.
If
we
fail to comply in a timely manner with the requirements of Section 404 of the
Sarbanes-Oxley Act regarding internal control over financial reporting or to
remedy any material weaknesses in our internal controls that we may identify,
such failure could result in material misstatements in our financial statements,
cause investors to lose confidence in our reported financial information and
have a negative effect on the trading price of our Ordinary
Shares.
Pursuant
to Section 404 of the Sarbanes-Oxley Act and current SEC regulations,
beginning with our annual report on Form 20-F for the 2007 fiscal year, we
will be required to furnish a report by our management on our internal controls
over financial reporting. Such report will contain, among other matters, an
assessment of the effectiveness of our internal controls over financial
reporting as of the end of 2007. We will not be able to effectively begin the
process of documenting and testing our internal control procedures in order
to
satisfy these requirements until we complete our acquisitions. Such
implementation is likely to result in increased general and administrative
expenses and may shift management time and attention from revenue-generating
activities to compliance activities. While our management expects to expend
significant resources in an effort to complete this important project, we cannot
assure that we will be able to achieve our objective on a timely basis. There
also can be no assurance that our auditors will be able to issue an unqualified
opinion on management’s assessment of the effectiveness of our internal control
over financial reporting. Failure to achieve and maintain an effective internal
control environment or to complete our Section 404 certifications could
have a material adverse effect on our stock price.
In
addition, in connection with our on-going assessment of the effectiveness of
our
internal controls over financial reporting, we may discover “material
weaknesses” in our internal controls as defined in standards established by the
Public Company Accounting Oversight Board, or the PCAOB. A material weakness
is
a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. The
PCAOB defines “significant deficiency” as a deficiency that results in more than
a remote likelihood that a misstatement of the financial statements that is
more
than inconsequential will not be prevented or detected.
In
the
event that a material weakness is identified, we will employ qualified personnel
and adopt and implement policies and procedures to address any material
weaknesses that we identify. However, the process of designing and implementing
effective internal controls is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as
a
public company. We cannot assure you that the measures we will take will
remediate any material weaknesses that we may identify or that we will implement
and maintain adequate controls over our financial process and reporting in
the
future.
Any
failure to complete our assessment of our internal control over financial
reporting, to remediate any material weaknesses that we may identify or to
implement new or improved controls, or difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet
our
reporting obligations or result in material misstatements in our financial
statements. Any such failure also could adversely affect the results of the
periodic management evaluations of our internal controls and, in the case of
a
failure to remediate any material weaknesses that we may identify, would
adversely affect the annual auditor attestation reports regarding the
effectiveness of our internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act of 2002. Inadequate internal
controls could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
shares.
The
ability of our Board of Directors to issue Ordinary Shares without shareholder
approval may have the effect of delaying, deterring or preventing a change
in
control of the Company.
Our
Articles of Association (the “Articles”) provides that our Board of Directors
(the “Board of Directors”) may authorize the issuance of Ordinary Shares and
Preference Shares with or without preferred, deferred or other rights or
restrictions. The ability of our Board of Directors to issue additional Ordinary
Shares or Preference Shares without shareholder approval could have the effect
of delaying, deterring or preventing a change in control of the Company.
The
rights of our shareholders are not as extensive as those rights of shareholders
of U.S. corporations.
Principles
of Cayman Islands corporate law relating to such matters as the validity of
our
procedures, the fiduciary duties of management and the rights of our
shareholders may differ from those that would apply if we were incorporated
in a
jurisdiction within the U.S. Under U.S. law, majority and controlling
shareholders generally have certain “fiduciary” responsibilities to
the minority shareholders. A U.S. shareholder action must be taken in good
faith. Also, actions by controlling shareholders in a U.S. jurisdiction and
executive compensation which are obviously unreasonable may be declared
null and void. In addition, in most U.S. jurisdictions, directors owe a
fiduciary duty to the corporation and its shareholders, including a duty of
care, pursuant to which directors must properly apprise themselves of all
reasonably available information, and a duty of loyalty, pursuant to which
they must protect the interests of the corporation and refrain from conduct
that injures the corporation or its shareholders or that deprives the
corporation or its shareholders of any profit or advantage. Many U.S.
jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under our
Memorandum of Association (the “Memorandum of Association”), liability of a
director of the Company to the Company is limited to cases of fraud or
willful malfeasance in the performance of his duties.
Further,
Cayman Islands law does not protect the interests of the minority shareholders
to the extent that the law in the U.S. protects the minority shareholders in
U.S. corporations. Our shareholders may have difficulty in protecting their
interests in the face of actions by the Board of Directors and may have more
limited rights than they might have as shareholders of a company incorporated
in
many U.S. jurisdictions.
The
protection available to our shareholders may be limited under Cayman Island
law.
The
rights of our shareholders will be governed by the Memorandum of Association
and
the Articles of the Company as interpreted in accordance with the laws of
the Cayman Islands. Where any provision of any contractual arrangement
between a shareholder and us or any third party is inconsistent with
the provisions of our Memorandum of Association and Articles, the shareholder
may be unable to claim certain remedies, including specific performance, for
breach of such provision against us. Any remedies available
to a shareholder of the Company may be limited to remedies available
under Cayman Islands law and regulation which may not afford the same
protection to minority or other shareholders as is available under the
laws or regulations of the shareholder’s home jurisdiction or under other
jurisdictions' laws and regulations.
Our
authorization of Preference Shares could discourage a Change of
Control.
Our
Memorandum of Association authorizes the issuance of up to 10,000,000 Preference
Shares, where such Preference Shares may have multiple votes per share, a
liquidation preference or other preferences. The Preference Shares could be
utilized, under certain circumstances, as a method of discouraging, delaying
or
preventing a change in control of the Company. Although we have no present
intention to issue any of our Preference Shares, there can be no assurance
that
we will not do so in the future.
24
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale by the selling security holders of our
Ordinary Shares registered hereunder. All proceeds from the sale of the Ordinary
Shares offered under this prospectus will be for the account of the selling
shareholders, as described below in the sections entitled “Selling Shareholders”
and “Plan of Distribution.”
The
Ordinary Shares being offered by the selling shareholders are those previously
issued to the selling shareholders and those issuable upon conversion of our
convertible notes and upon exercise of warrants to purchase our Ordinary Shares.
We are registering the Ordinary Shares in order to permit the selling
shareholders to offer the Ordinary Shares for resale from time to time. Except
for the ownership of the shares, convertible notes and warrants issued pursuant
to the Securities Purchase Agreements, the selling shareholders who acquired
their securities pursuant to the Securities Purchase Agreements have not had
any
material relationship with us within the past three years. Rodman & Renshaw,
LLC acted as the placement agent for us in respect of the issuance in April
2007
of our Ordinary Shares, convertible notes and warrants to purchase our
Ordinary Shares pursuant to the Securities Purchase Agreements. In partial
payment for its services, Rodman & Renshaw, LLC received warrants
exercisable for our Ordinary Shares.
The
table
below lists the selling shareholders and other information regarding the
beneficial ownership of the shares by each of the selling shareholders. The
second column lists the number of shares beneficially owned by each selling
shareholder, based on its ownership of shares, convertible notes and warrants,
as of June 18, 2007. In computing the number of shares beneficially owned by
a
selling shareholder the number of shares underlying the convertible notes and
the warrants held by that selling shareholder that are convertible or
exercisable, as the case may be, within 60 days of June18,2007 are included. We will not receive any of the proceeds from the
sale of our shares by the selling shareholders. None of these selling
shareholders are, or are affiliates of, a broker-dealer registered under the
Exchange Act.
The
third
column lists the number of Ordinary Shares being offered by this prospectus
by
each selling stockholder.
In
accordance with the terms of registration rights agreements among the Company
and the selling shareholders, this prospectus generally covers the resale of
at
least 125% of the sum of (i) the number of our shares issuable upon conversion
of the convertible notes, (ii) the number of our shares issuable upon exercise
of warrants and (iii) our shares held by the selling shareholders, each as
of
the trading day immediately preceding the date the registration statement is
initially filed with the SEC.Because
the conversion price of the convertible notes may be adjusted and the exercise
price of the warrants may be adjusted, the number of shares that will actually
be issued may be more or less than the number of shares being offered by this
prospectus. The fourth column assumes the sale of all of the shares offered
by
the selling shareholders pursuant to this prospectus.
Under
the
terms of certain of the convertible notes and the warrants, a selling
shareholder may not convert the convertible notes or exercise the warrants
to
the extent such conversion or exercise would cause such selling shareholder,
together with its affiliates, to beneficially own a number of shares which
would
exceed 9.99% or 4.99% of our then outstanding shares following such conversion
or exercise, excluding for purposes of such determination shares issuable upon
conversion of the convertible notes which have not been converted and upon
exercise of the warrants that have not been exercised. The number of shares
in
the second column does not reflect this limitation. The selling shareholders
may
sell all, some or none of their shares in this offering. See "Plan of
Distribution."
25
Except
as
set forth above, the number of Ordinary Shares beneficially owned by such holder
has been determined in accordance with SEC Rule 13d-3 promulgated under the
Exchange Act. The information contained in the table below is not necessarily
indicative of beneficial ownership for any other purpose. We believe that each
individual or entity named has sole investment and voting power with respect
to
the shares indicated as beneficially owned by it, except where otherwise noted.
The selling shareholders listed in the table below may have transferred, in
transactions exempt from the registration requirements of the Securities Act,
some or all of their shares since the date on which the information in the
table
below is presented. Information about the selling share holders may change
from
time to time.
Each
of
the selling shareholders listed below, other than Rodman & Renshaw, LLC, is
party to registration rights agreement with the Company. The registration rights
agreement is described in more detail in “Certain Relationships and Related
Transactions - Registration Rights.” We have also agreed with Rodman &
Renshaw, LLC that it shall be entitled to the same registration rights
as provided to the selling shareholders under their registration rights
agreement with us.
Name
of Selling Shareholder
Number
of Shares Beneficially Owned prior to Offering
Amount
Offered for Sale (1)
Number
of Shares Owned Upon Completion of the Offering
(2)
(1)
The
amounts listed in this column reflect the shares held by the selling shareholder
and shares underlying convertible notes and warrants owned by the selling
shareholder. In accordance with the terms of registration rights agreement
between us and the selling shareholders, other than Rodman & Renshaw, LLC,
we are also required to register an additional 25% of the sum of (i) the
number
of our Ordinary Shares issuable upon conversion of the convertible notes,
(ii) the number of our Ordinary Shares issuable upon exercise of warrants
and
(iii) our Ordinary Shares held by the selling shareholders. We agreed to
register the 25% excess of shares as a negotiated precaution for the selling
shareholders to cover future adjustments to the conversion prices of our
convertible notes and the exercise price of the warrants. The number of our
Ordinary Shares into which our convertible notes are convertible and for
which our warrants are exercisable are subject to adjustment in certain
circumstances, in accordance with the operative agreements. The amount of
Ordinary Shares listed in this column does not include this additional
25%.
26
(2)
The
selling security holders can offer all, some or none of their shares noted
in
the column “Amount offered for sale”, thus we have no way of determining the
number they will hold after this offering. Therefore, we have prepared the
above
table on the assumption that the selling shareholders will sell all of our
shares covered by this prospectus.
(3)
Includes 1,322,364 shares issuable upon conversion of a convertible note
of the
Company and 937,995 shares issuable upon exercise of warrants.
(4)
The
convertible note and warrants held by the selling shareholder provide that
no
conversion or exercise may be effected to the extent it would result in
such
selling shareholder holding in excess of 9.99% of our outstanding capital
stock.
Neither the number in the above chart under the heading “Amount Beneficially
Owned” nor the number in the above chart under the heading “Amount Offered for
Sale” reflects such limitations and the inclusion of such amounts in the above
table is not an admission by any person that the selling shareholder
beneficially owns shares in excess of the maximum amount which would be
beneficially owned by such person under such limitations.
(5)
Includes 1,822,284 shares issuable upon conversion of convertible notes of
the
Company and 1,213,029 shares issuable upon exercise of warrants.
(6)
Includes 99,170 shares issuable upon conversion of a convertible note of the
Company and 70,352 shares issuable upon exercise of warrants.
(7)
Includes 418,182 shares issuable upon conversion of convertible notes of the
Company and 212,272 shares issuable upon exercise of warrants.
(8)
Includes 1,318,909 shares issuable upon conversion of convertible notes of
the
Company and 921,463 shares issuable upon exercise of warrants.
(9)
Includes 1,363,636 shares issuable upon conversion of a convertible note
of the
Company and 920,455 shares issuable upon exercise of warrants.
(10)
Includes 889,164 shares issuable upon conversion of a convertible note of the
Company and 630,751 shares issuable upon exercise of warrants.
(11)
Includes 102,571 shares issuable upon conversion of a convertible note of the
Company and 72,762 shares issuable upon exercise of warrants.
(12)
Includes 21,000 shares issuable upon exercise of warrants.
27
(13)
Includes 32,909 shares issuable upon conversion of a convertible note of the
Company and 23,514 shares issuable upon exercise of warrants.
(14)
Includes 37,500 shares issuable upon exercise of warrants.
(15)
Includes 797,455 shares issuable upon conversion of convertible notes of the
Company and 561,081 shares issuable upon exercise of warrants.
(16)
Includes 293,600 shares issuable upon conversion of convertible notes of the
Company and 191,030 shares issuable upon exercise of warrants.
(17)
Includes 822,036 shares issuable upon conversion of convertible notes of the
Company and 534,824 shares issuable upon exercise of warrants.
(18)
Includes 1,454,545 shares issuable upon conversion of a convertible note of
the
Company and 881,818 shares issuable upon exercise of warrants.
(19)
Includes 463,636 shares issuable upon conversion of a convertible note of the
Company and 185,455 shares issuable upon exercise of warrants.
(20)
Includes 36,364 shares issuable upon conversion of a convertible note of the
Company and 14,545 shares issuable upon exercise of warrants.
(21)
Includes 102,382 shares issuable upon exercise of warrants.
(22)
Includes 946,630 shares issuable upon exercise of warrants.
PLAN
OF DISTRIBUTION
We
are
registering the number of Ordinary Shares issued pursuant to the Securities
Purchase Agreements and the Registration Rights Agreement to permit the
resale of these shares by the holders of our Ordinary Shares, convertible
notes
and warrants from time to time after the date of this prospectus. We will
not
receive any of the proceeds from the sale by the selling shareholders of
the
Ordinary Shares. We will bear all fees and expenses incident to our obligation
to register the Ordinary Shares.
The
selling shareholders may sell all or a portion of the Ordinary Shares
beneficially owned by them and offered hereby from time to time directly
or
through one or more underwriters, broker-dealers or agents. If the shares
are
sold through underwriters or broker-dealers, the selling shareholders will
be
responsible for underwriting discounts or commissions or agent's commissions.
The shares may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected
in
transactions, which may involve crosses or block transactions,
·
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
·
in
the over-the-counter market;
·
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
·
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
·
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
·
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
28
·
privately
negotiated transactions;
·
short
sales;
·
sales
pursuant to Rule 144;
·
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per share;
·
a
combination of any such methods of sale;
and
·
any
other method permitted pursuant to applicable
law.
If
the
selling shareholders effect such transactions by selling shares to or through
underwriters, broker-dealers or agents, such underwriters, broker-dealers
or
agents may receive commissions in the form of discounts, concessions or
commissions from the selling shareholders or commissions from purchasers
of the
shares for whom they may act as agent or to whom they may sell as principal
(which discounts, concessions or commissions as to particular underwriters,
broker-dealers or agents may be in excess of those customary in the types
of
transactions involved); provided that the commissions payable to, or discounts
received by, any member of the National Securities Dealers Association, Inc.
shall not exceed 8% of the sale of any shares being registered pursuant to
Rule
415. In connection with sales of the shares or otherwise, the selling
shareholders may enter into hedging transactions with broker-dealers, which
may
in turn engage in short sales of the shares in the course of hedging in
positions they assume. The selling shareholders may also sell shares short
and
deliver shares covered by this prospectus to close out short positions and
to
return borrowed shares in connection with such short sales. The selling
shareholders may also loan or pledge shares to broker-dealers that in turn
may
sell such shares.
The
selling shareholders may pledge or grant a security interest in some or all
of
the convertible notes, warrants or the shares owned by them and, if they
default
in the performance of their secured obligations, the pledgees or secured
parties
may offer and sell the shares from time to time pursuant to this prospectus
or
any amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act amending, if necessary, the list of selling
shareholders to include the pledgee, transferee or other successors in interest
as selling shareholders under this prospectus. The selling shareholders also
may
transfer and donate the shares in other circumstances in which case the
transferees, donees, pledgees or other successors in interest will be the
selling beneficial owners for purposes of this prospectus.
The
selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning
of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker dealers or agents and any profit on the resale of
the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling shareholder has informed
the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Ordinary Shares.
The
maximum commission or discount to be received by any NASD member or independent
broker/dealer will not be greater than eight percent (8.0%) for the sale
of any
securities registered pursuant to this registration statement. At the time
a
particular offering of the shares is made, a prospectus supplement, if required,
will be distributed which will set forth the aggregate amount of shares being
offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under
the
securities laws of some states, the Ordinary Shares may be sold in such states
only through registered or licensed brokers or dealers. In addition, in some
states the may not be sold unless such shares have been registered or qualified
for sale in such state or an exemption from registration or qualification
is
available and is complied with.
There
can
be no assurance that any selling shareholder will sell any or all of the
Ordinary Shares registered pursuant to the registration statement, of which
this
prospectus forms a part.
29
The
selling shareholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules
and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of
the
shares by the selling shareholders and any other participating person.
Regulation M may also restrict the ability of any person engaged in the
distribution of the shares to engage in market-making activities with respect
to
the Ordinary Shares. All of the foregoing may affect the marketability of
the
Ordinary Shares and the ability of any person or entity to engage in
market-making activities in respect of the Ordinary Shares.
We
will
pay all expenses of the registration of the Ordinary Shares pursuant to the
registration rights agreement, including, without limitation, SEC filing
fees
and expenses of compliance with state securities or "blue sky" laws;
provided,
however,
that a
selling shareholder will pay all underwriting discounts and selling commissions,
if any. We will indemnify the selling shareholders against liabilities,
including some liabilities under the Securities Act, in accordance with the
registration rights agreements, or the selling shareholders will be entitled
to
contribution. We may be indemnified by the selling shareholders against civil
liabilities, including liabilities under the Securities Act, that may arise
from
any written information furnished to us by the selling shareholder specifically
for use in this prospectus, in accordance with the related registration rights
agreement, or we may be entitled to contribution.
Once
sold
under the registration statement, of which this prospectus forms a part,
the
Ordinary Shares will be freely tradable in the hands of persons other than
our
affiliates.
DESCRIPTION
OF SHARES TO BE REGISTERED
We
are
authorized to issue a maximum of 110,000,000 Shares, par value $.001 per
share,
divided into Ordinary Shares and Preference Shares. The rights, preferences
and
restrictions attaching to each class of our Shares are as follows:
Ordinary
Shares
We
are
authorized to issue 100,000,000 Ordinary Shares. Holders of Ordinary Shares
are
entitled to one vote for each share held of record on all matters to be acted
upon by the shareholders. Holders of Ordinary Shares possess the right to
an
equal share in any dividend paid by us to the class of Ordinary Shares. Upon
liquidation, each holder of Ordinary Shares is given the right to an equal
share
in the distribution of our surplus assets subject to the liquidation preference
for Preference Shares, if any.
Preference
Shares
We
are
authorized to issue 10,000,000 Preference Shares. Each holder of Preference
Shares shall be entitled to such preferences and rights and be subject to
such
limitations as our Board of Directors shall determine.
Our
Memorandum of Association and Articles of Association have no provisions
for
surrender or sinking funds and for discriminating against any existing or
prospective holder of securities as a result of such shareholder owning a
substantial number of Shares.
OUR
BUSINESS
Ethanol
Industry Overview
We
believe that ethanol is an alternative source of energy that can displace
a
portion of world oil consumption for pricing, environmental and geopolitical
reasons. According to the U.S. Energy Information Agency (the “EIA”), for 2005,
world oil consumption is approximately 13.2 billion liters per day, of which
the
U.S. consumes about 3.3 billion liters per day and Europe consumes about
2.6 billion liters per day. Oil consumption in developing countries such as
China and India is increasing particularly rapidly. According to EIA statistics,
transportation accounts, globally, for more than 50% of all oil
consumption. By contrast, according to Datagro, annual consumption of ethanol
for fuel is currently about 36 billion liters, or approximately 2.5% of the
1.4 trillion liters of gasoline used for transportation annually worldwide,
based on a an estimated yield of 75 liters of gasoline per barrel. However,
we
believe that the projected growth of ethanol as an oil displacement is growing
far more rapidly than world oil consumption.
30
The
following tables illustrate how demand for ethanol is projected to
increase.
We
believe that the primary reasons for the increase in global ethanol fuel
demand
include: (i) a desire for a number of countries to reduce dependency on oil
producing countries; (ii) a desire to reduce carbon-based emissions as
outlined in the Kyoto Protocol; and (iii) gasoline price increases — alternative
fuels can be a cost competitive source of fuel for cars. As a result of
these factors, according to Jeffries & Co., a number of countries are moving
towards the use of a gasoline-ethanol mix to fuel
vehicles.
According
to the U.S. Department of Agriculture and the World Bank, ethanol is an alcohol
that can be distilled from natural sources, such as sugar cane, corn, beets
and
wood. According to the same information, ethanol has three primary uses —
human consumption as spirits, medical or cosmetic applications,
and transportation fuel. According to Worldwatch Institute, an independent
research group based in Washington, D.C. that focuses on research concerning
sustainable environmental policies and a socially just society (“Worldwatch”),
sugar cane is an excellent source of ethanol compared to other feedstock
alternatives because of its low relative production cost and its high
relative energy yield (measured as the ratio between the amount of energy
output and the amount of energy input). According to Worldwatch, ethanol
from
sugar cane has an energy yield that is more than four times greater than
the energy yield of corn, beets or wheat. We believe that as a fuel, sugar
cane ethanol has several key physical properties: a high energy content; it
is environmentally friendly; the waste generated as part of the production
process (‘‘bagasse’’) is a high value by-product which is used to generate
power needed for the production process; any additional power generated
from this source may be used for other purposes, such as producing electricity
for sale to the national energy ‘‘grid.”
We
intend
to focus our activities principally in the area of sugar cane ethanol. The
production of ethanol comprises two cycles, the agricultural cycle and the
industrial production cycle. The agricultural cycle consists of land
preparation, planting, irrigation, harvesting and transportation.
The industrial/production cycle consists of grinding, milling and crushing
the sugar cane to produce cane juice. The cane juice is then fermented and
distilled to produce ethanol, or cooked and dried to produce
sugar. According to Datagro, for 2005 Brazil was the largest producer and
user of ethanol in the world and has been since the Brazilian Government
mandated a 20-25% mix of ethanol in all fuel sold in Brazil. In 2006, according
to Datagro, Brazil’s production fell to second place behind the U.S., but still
represented 34% of world production. The Brazilian Government has periodically
revised the percentage requirement, such as in March 2006 to 20%, then in
October 2006 to 23% as policy measure to manage blended gasoline prices at
the
pump. Such measures can periodically reduce the demand for ethanol in Brazil,
at
least in the near term. See the section titled ‘‘Risk Factors — Risks
associated with the proposed investment sector’’.
31
According
to the Brazilian Government, Brazil’s initial move towards making ethanol a
mainstream fuel came about following the petroleum and sugar crises of
1973, and was soon followed by additional pro-ethanol reforms by Brazil,
including the Brazilian Government’s 1979 introduction of large scale
production of ethanol vehicles in Brazil. Brazil’s current President has
recently made public statements about his intention to make Brazil a leader
in
the ‘‘energy revolution’’ and use more ethanol based fuel. Today, according
to Datagro, 80% of all new cars (through November 2006 for the year) sold
in
Brazil are ‘‘flex fuel’’ cars, which can run on any combination of ethanol
or gasoline. We expect that by 2008, these cars are expected to account for
over 90% of all new car sales. Since, according to Worldwatch, burning ethanol
reduces carbon emissions by as much as 80% compared to gasoline and
completely eliminates sulfur dioxide emissions, it is expected that Brazil
will experience a reduction in toxic emissions. We believe that for
Brazilian consumers (and this is borne out by Datagro’s statistics and
information provided by the Renewable Fuels Association), the use of ethanol
as
a fuel is competitive to gasoline for the following reasons: Engine
Power —
because
of varying compression rates as compared to gasoline, an engine running on
ethanol as opposed to gasoline generates more horsepower resulting in
marginally greater acceleration and a higher top speed; Engine
Life —
ethanol
was thought to be more corrosive to engines than gasoline, thus increasing
maintenance costs, but manufacturers in Brazil are now advertising a similar
engine life for both fuels, and providing the same
warranties. Datagro’s figures indicate that the significant increase in the
flexible fuel vehicle market in Brazil over the last 36 months has
largely been driven by the disparity in fuel costs.
While
the
pricing relationship between ethanol and gasoline will vary depending on
the season and geographic location, the weighted average retail price of
ethanol
in Brazil, according ESALQ which collects a number of pricing statistics in
the Brazilian Agricultural industry, for the period through November 2006,
the
price of ethanol of Real 1.47 per liter was 62% of the weighted average retail
price of gasoline for the same period of Real 2.36 per liter which more
than compensates for the ethanol decrease in fuel efficiency (which can be
up to 25%). We believe that the domestic ethanol production in Brazil is
expected to grow from approximately 14 billion liters annually in 2004 to
between 17 and 25 billion liters by 2010 (depending on the source of the
projection). We expect that, based on various forecasts, global annual demand
is
expected to exceed approximately 60 billion liters by 2010, increasing from
production of 36 billion liters in 2005. Based on increasing awareness of
the existence and benefits of ethanol and the changes in the ethanol
industry, our management team believes that projected global demand may be
up to 80 billion liters annually by 2010.
According
to Jeffries & Co., a number of countries around the world (including
U.S., Japan, India, Belgium, Sweden and Australia) have begun
introducing minimum levels of ethanol additions to gasoline.
Approximately 36% of world ethanol production in 2005 came from sugar cane
in
Brazil (42% in 2004), compared to 35% from the U.S. (32% in 2004).
According
to Grupo Idea, another Brazilian industry consultant in agriculture,
sugar/ethanol production in Brazil is highly fragmented, with over 300
sugar cane processing mills in Brazil operating at varying levels of
capacity. According to Cosan, a leading sugar/ethanol producer in Brazil,
in the
2004/2005 harvest, the largest ethanol producer, itself (which has Tereos,
Sucden and Kuok as partners), made up 8.5% of the ethanol market in Brazil
and the next largest ten producers (excluding Cosan) made up 22.5% of the
market. According to Cosan, the remainder of this market is shared by a
number of independent mills, the majority of which are small independent
producers that our management team believes generally lack high levels of
financial and management expertise and operate below theoretical levels of
yield and efficiency.
32
Additionally,
we believe the existing manufacturing and logistics infrastructure in
Brazil is inadequate to support the projected growth in domestic
and international demand, but shows clear potential for consolidation and
improvement. According to Jeffries, only 5.34 million hectares of Brazil’s
320 million hectares of arable land are devoted to sugar cane and roughly
2.7 million hectares are committed to ethanol. 60 million hectares of land
are
cultivated with local crops. Given the availability of arable land, we
believe it is possible to increase sugar cane cultivation.
Some
examples that illustrate market dynamics within the international ethanol
market
include (according to industry sources, Datagro, the Brazilian Government
and
news reports): in July 2005, Petrobras began exporting 25 million liters of
ethanol per month to Venezuela, which has adopted various ethanol/gasoline
mixes across several of its provinces; Venezuela has also indicated that it
may increase the mix of ethanol to 10% nationwide, in the future; and Japan
today allows for an ethanol mix of up to 3%, and is considering an increase
in
the mix of ethanol of up to 10%, based on the success of the 3% program—a
3% ethanol mix in Japan would represent more than 60% of Brazil’s
current ethanol export and a 10% ethanol mix would more than double current
Brazilian exports. Additional demand from other countries would further add
to
what we believe will become a supply — demand gap. In According to Datagro, in
Thailand (the second largest sugar exporter in the world), the worst drought
in
40 years has created a domestic sugar shortage, which may drive
international sugar prices up. This is expected to put additional pressure
on the same raw material as ethanol. Higher sugar prices may make mills that
have used ethanol as a hedge against decreases in sugar prices less likely
to seek such a hedge against potentially decreasing ethanol
supplies. Although we believe there are many positive reasons that make the
acquisition of entities or businesses in the ethanol industry attractive,
there are various risks of acquiring assets or a business in such
industry. For a more complete discussion of the risks relating to
operations in the ethanol industry and other risks, see the section titled
‘‘Risk Factors’’.
We
believe, and it is confirmed by our chemists and industry reports, that
biodiesel is a bio fuel component which can be produced from domestically
grown
soybean and other oil crops as well as palm oil, jatropha, rape seed oil,
waste
oil and animal fats. We believe that biodiesel requires no engine modifications
or changes in the fuel handling and delivery systems and biodiesel has qualities
similar to conventional or mineral diesel, while producing significantly
lower
emissions of carbon monoxide, black smoke and particulate matter.
According
to Goldman, Sachs and other analysts’ reports and U.S. Government information,
biodiesel is a cleaner fuel than diesel, it is biodegradable, and its
manufacturing and burning do not contribute to the greenhouse effect.
According to these same reports, worldwide, biodiesel (B100) production is
rising from a small base of 251 million gallons in 2000 to an estimated 790
million gallons in 2005. In the U.S., according to EPA mandates, EPA ultra-low
sulfur diesel mandates will reduce sulfur content in petroleum diesel from
the
current 500 ppm to 15 ppm starting July 2006. Since petroleum diesel loses
vital
lubricity when sulfur is removed, a blending agent must be added by refineries
to meet lubricity standards. We expect this to be a worldwide trend. In the
U.S., over 1 billion gallons of biodiesel will be required to reach a 2%
federal
blending level with petroleum diesel in order to reduce emissions, according
to
governmental mandates. We believe that at the beginning of 2006, the U.S.
only
had about 100 million gallons of capacity for biodiesel. A federal excise
tax
credit is provided for blending B100 (100% biodiesel) with petroleum diesel.
According to the EPA rules, the tax credit is allocated to the company that
actually blends the B100 with petroleum diesel.
While,
according to the Brazilian Ministry of Energy and Petrobras S.A. (the leading
Brazilian petroleum company), Brazil produces the bulk of its own energy
domestically as a fact and a policy objective, it cannot produce sufficient
diesel from domestic oil production. Accordingly, we believe, and the new
Brazilian domestic mandates to use biodiesel are proof, that Brazil will
dramatically increase domestic biodiesel production as a way to reduce imported
diesel.
33
In
Brazil, there is a similar law to the EPA standards in the U.S. Brazilian law
11.097 of January 13, 2005 requires that the biodiesel participation in total
diesel sales is at least 2% by January 2008 (250 million gallons, at current
consumption levels) and 5% by 2013 (500 million gallons). If overall levels
of
diesel consumption grow (by growth in number of vehicles or in kilometers
traveled per vehicle), the mandated volume of biodiesel will grow concomitantly.
There may also be demand distinct from that created by mandated levels, in
that
fleet operators may choose to fuel their fleets by direct purchase of biodiesel
at levels higher than the mandates, a trend that we have observed empirically.
In addition, Law 11.116 of 2005 reduces substantially the taxes that are levied
on agricultural products used to make biodiesel. This means that, in certain
areas, such as the Brazilian State of Bahia where our acquisition is based,
the
taxes on such purchases are very low, from a distributor’s viewpoint, and thus
biodiesel can be more attractive to the market than regular diesel, and this
also may encourage demand. At the same time, according to RevistaBiodiesel,
as of the beginning of 2006 there were only eight million gallons of installed
biodiesel capacity. We expect capacity to grow quickly, nonetheless, as of
February 2007, the Brazilian regulator ANP had authorized the operation of
approximately 170 million gallons of capacity, of which our Salvador facility
represents approximately 6.3%. Although we expect competition in time, in our
view, our facility’s being already installed and fully operational in the face
of strong potential demand will establish us as a principal biodiesel supplier.
We
believe that Brazil will be the world’s low cost producer of biodiesel due to
its diversity of different crops and feedstocks that can be used to produce
biodiesel, including its large soy bean production (second in the world after
the U.S., according to the USDA), castor beans, jatropha, sunflower and palm
oil
crops. According to the Biodiesel Review, a publication in Brazil, survey as
of
February, 2006, the largest biodiesel producers in Brazil are Brasil Ecodiesel,
Granol, Soy Minas and Agropalma, and the Biodiesel Review indicates that the
internal price for biodiesel is about $3.36 per gallon based on a recent auction
organized by the Agencia Nacional de Petroleo (“ANP”) for Petrobras for 70
million liters in 2006.
Market
Summary Table
Item
Europe
U.S.
Brazil
Demand
in January 2008
700,000,000
gallons
1,000,000,000
gallons
211,000,000
gallons
Demand
in 2010
1,800,000,000
gallons
1,100,000,000
gallons
220,000,000
gallons
Primary
Demand Driver
2%
Fuel blending requirement, increasing to 5.75% in 2010. No taxes
for
biodiesel in Germany
2%
Fuel blending requirement
2%
Fuel blending requirement, increasing to 5% in January
2013
Source:
FO Licht and JP Morgan
We
believe that to obtain a long-term cost advantage in the biofuel business,
locating plants in a region with multiple feedstock will be critical to
maintaining operating margins, and we also believe that Brazil is one of the
few
places in the world where a biofuel company can afford to be vertically
integrated by contracting farmers to grow specific feedstock for the mill in
addition to buying on the spot market. Our opinion is that Brazil has the most
productive agricultural land in the world available at relatively low prices
when compared to American and European farm land. For biodiesel operations
which
use agricultural feedstock that can be stored for at least one year and can
be
transported long distances, we will secure feedstock at competitive prices
in
order to protect operating margins by buying virgin soybean oil in the local
market and contract farmers to grow sunflower oil seeds, castor beans and
eventually jatropha.
Our
Business Approach in Brazil
Our
business approach is to acquire existing facilities, expand them, and build
new
facilities over the next five years that accommodate increasing levels
of market presence. Initially, our base line plan is to supply the domestic
market in Brazil and then the international market to take advantage of
opportunities outside of Brazil. We intend to do this by acquiring initial
platform ethanol and biodiesel production facilities in Brazil and to install
back office systems and controls to create a platform for growth. We then
intend
to expand ethanol production capacity through the deployment of capital and
technology. The criteria for evaluating potential target businesses will
include
the following: configuration that allows for increases in capacity through
low cost additions; cost of land and agricultural yields (quality of land
and
weather conditions); opportunity for application of best practices to create
operating leverage; opportunity for ‘‘add-on’’ acquisitions and ‘‘greenfields’’.
These criteria are not intended to be exhaustive. Any evaluation relating
to the
merits of a particular investment or acquisition will be based, to the
extent relevant, on the above factors as well as other considerations
deemed relevant. Given projections by F.O. Licht, an industry consultant,
as to
the high organic growth in the domestic Brazilian and international ethanol
markets, coupled with a large number of potential acquisition targets, we
believe there is an attractive opportunity to create value in the ethanol
industry in Brazil.
34
To
manage
commodity price risk associated with ethanol and biodiesel production, as well
as foreign exchange risk, we may hedge a portion of any future production
with an options strategy to enhance the likelihood of recovery of and
return on capital, while maintaining the potential for future benefit if
prices rise. Through hedging based upon proven and developed producing
capabilities, we may also seek to obtain a certain level of downside
commodity price protection with the objective of providing
greater assurance of recovery of capital deployed.
Our
management team has experience in a varied range of industries in the U.S.
and
Brazil, as well as elsewhere in the world. We believe our management team’s
knowledge of the energy industry and related businesses, as well as its
experience in acquiring and building businesses, are important assets
that will assist us in implementing our business
strategy.
Brazilian
Ethanol
According
to Worldwatch and other industry sources, Brazil is:
·
the
grower of 25% of the world’s sugar cane
crop;
·
the
largest and lowest cost producer of ethanol in the world. In Brazil,
ethanol produced from local sugar cane costs approximately 60% of
ethanol
produced from corn in the U.S.;
·
the
second largest market for fuel ethanol in the world, with distribution
to
virtually every gas station in the country;
and
·
the
world’s number one per capita producer and consumer of
ethanol.
We
believe that our market in Brazil is ripe for consolidation. There is only
one
competitor in Brazil with greater than 5% of the industry’s productive capacity,
creating a significant opportunity for growth though acquisitions.
35
Ethanol
Production Technology Economics
Corn
Dry Mill U.S.
Sugar
Cane Mill Brazil
Advantage
Brazil
Raw
Material
Corn
Sugar
Cane
Co-product
Distillers
dried grain
None
Plant
Size
50
mmgpy
1.5mm
Tons, 32 mm Gals.
Capital
Cost
$
65
million
$
38
million
Variable
Cost Structure ($/gallon):
Raw
Material Cost
$
0.90
$
0.65
+27.8
%
Non-energy
Operating Cost
$
0.25
$
0.15
+40.0
%
Cost
of delivered Energy
$
0.21
$
0.00
Infinite
Co-product
Value
($0.16
)
Total
Variable Cost
$
1.20
$
0.80
Advantage
Brazil +33
%
Source:
EIA Annual Energy Outlook 2006, BofA SEcurities and Comanche. Note:
For
com ethanol production technologies, the raw material cost estimates
are
based on com prices of $2.52/bushel.
We
believe that Brazil has the potential to become the world’s “Saudi Arabia of
ethanol production”. Brazil is one of the world’s true agricultural giants, with
equatorial sun and over 20% of the world’s rainfall.
According
to the Brazilian Ministry of Agriculture, and as also indicated by the USDA,
currently, about 15 million acres in Brazil are cultivated for sugar cane.
According to Datagro, in 2005, about 50% of sugar cane production was used
for
sugar and the balance was used to produce ethanol.
According
to the Brazilian Ministry of Agriculture, with over 959 million prime acres
available or used for agriculture and 250 million unused prime acres of land
(outside of Brazil’s rainforest, protected areas, the Amazon and cities), Brazil
has plentiful land remaining for new agricultural production. According to
our
calculations from a Bear, Stearns research report, approximately 33% of this
undeveloped agricultural land represents prime sugar cane acreage. If developed
and planted as such, this incremental sugar cane resource could more than
sextuple Brazil’s sugar cane/ethanol production—and supply 15% of the U.S.’s
current demand for fuel, based upon EIA’s estimate of U.S.
consumption.
Sugar
Cane
According
to Worldwatch, sugar cane provides one of nature’s optimal mediums for
converting sun and water into energy. Ethanol produced from sugar cane has
an
energy balance seven times more favorable than ethanol produced from corn.
As a
result, ethanol produced from sugar cane is more cost efficient and more
environmentally friendly than ethanol produced from other
feedstocks.
36
Note:
Figures represent the amount of energy contained in the listed
fuel per
unit of fossil fuel input. The ratios for cellulosic biofuels are
theoretical. Complete information is in sourcel
report.
Source:
Worldwatch Institute and the German Federal Ministry for food and
agriculture "Biofuels for transportation" June,
2006
Cost
Ranges (Operating and Capital Amortization) for Ethanol and Gasoline
Production, 2006
Clean
Fuels in Brazil
In
our
opinion, and as indicated by the consumption figures put out by Datagro,
Brazil’s market for producing ethanol and bio-diesel as well as for distributing
and using them, is already in place. In 2006, Brazil was not only the world’s
second largest producer of ethanol, but also the second largest consumer,
responsible for both about 35% of global production and consumption. Unlike
in
the U.S., the ethanol market in Brazil is not tax driven. According to our
analysis and Datagro, in Brazil, the market for ethanol is a competitive market
where virtually every gas station in Brazil sells pure ethanol; many cars are
“flex-fuel” vehicles, using gas or ethanol or any combination; and the domestic
demand for ethanol is expanding rapidly. Within the domestic Brazilian market
the buyers of ethanol and biodiesel are the same, essentially the fuel
wholesalers. Moreover the practice in Brazil is to transport ethanol and diesel
in the same trucks (using ethanol to clean out the diesel residue).
Ethanol
production was about 4.4 billion gallons in Brazil in 2006, supplying nearly
30%
of Brazil’s light vehicle fuel needs, according to F.O. Licht and Datagro.
According to Bear, Stearns, in order for the U.S. to reach a 10% blend of
ethanol by 2015, the U.S. would become a net corn importer by 2014, implying
a
dramatic increase in feedstock cost for U.S. ethanol producers.
37
Ethanol
is Cleaner than Gasoline.Approximately
two thirds of all ethanol consumed globally is used as fuel. Ethanol is a
cleaner fuel than gasoline according to the EPA. It is also biodegradable;
the
manufacture and combustion of ethanol are not believed to be processes that
increase the greenhouse effect, according to the Renewable Fuels Association.
Ethanol's high oxygen content reduces carbon monoxide emission levels by
25% to 30% as compared to the carbon monoxide levels emitted from the
combustion of gasoline, according to the EPA. Blends of ethanol and
gasoline also reduce emissions of hydrocarbons, a major contributor to the
depletion of the ozone layer. As an octane enhancer, according to the Renewable
Fuels Association, ethanol can also cut emissions of cancer-causing benzene
and butadiene by more than 50%.
Growth
in Flex-Fuel Cars in Brazil.The
introduction of flex-fuel vehicles in Brazil in March 2003 jump-started a
significant demand for ethanol. According to the Associação Nacional dos
Fabricantes de Veículos Automotores (“Anfavea”), flex-fuel cars are designed to
operate on gasoline, ethanol, or a mixture of these two fuels. According to
Anfavea statistics, in 2003, approximately 48,000 flex-fuel cars were sold
in Brazil. During 2006, more than 1,430,000 flex-fuel cars were sold,
increasing the number of Flex-Fuel or Alcohol capable cars and light trucks
in
Brazil to 18% of the fleet in 2006 according to Datagro. Flex-fuel cars
represent 80% of total new car sales in Brazil today, according to the same
source. By definition then, approximately 82% of the current Brazilian
automotive fleet consists of vehicles that were produced prior to the
introduction of flex-fuel technology. We believe that the increase in production
of flex-fuel cars is expected to increase the demand for hydrous ethanol in
Brazil. Most owners of flex-fuel cars are currently opting to use ethanol
given that the price of this fuel is currently thirty percent less than the
price of gasoline, even though ethanol is approximately 25% less efficient
than gasoline.
Unlike
the American Ethanol Market, The Brazilian Market Is Competitive and Not
Regulated.Over
the
past four years the demand for ethanol in Brazil has risen rapidly with 80%
of
all cars sold today now offering “flex-fuel”, the ability to use gas, ethanol or
any combination. In 2 years, we estimate that virtually all cars that are
manufactured and sold in Brazil will be flex-fuel. And according to Anfavea
this
number is growing fast—in the last twelve months, domestic automobile demand in
Brazil increased nearly 10% by unit sales.
The
Ethanol Industry in Brazil Is Fragmented, and Focused on Sugar.
According to industry reports and Cosan, our industry in Brazil is fragmented,
with over 300 sugar/ethanol mills in operation owned by over 100 firms.
According to the Brazilian Instituto Desenvolvimento Agroindustrial (“Idea”),
224 mills are located in the Central-South region of Brazil; 136 plants are
located in the state of São Paulo. We believe that most companies in the
industry are relatively small and family owned—most of these organizations also
view themselves as sugar companies, rather than ethanol companies. The largest
producer of ethanol in Brazil is Cosan, S.A., according to their own reports,
one of the largest sugar companies in the world. Its share of the market is
about 5%, with production of 209 million gallons. The next two largest companies
are half that size, with the fourth largest about 50% the size of the second.
Brazilian
Ethanol Production Is More Profitable in a Down Market and the Only Source
of
Major Supply in an Up Market.Brazilian
ethanol production, as indicated in the following table, has a break-even at
a
far lower level of oil prices on a straight up comparison. U.S. break-even
in
this table is at about $40 per barrel of oil or higher, assuming that corn
prices are $2.70 per bushel and natural gas prices are $6.50 per mmbtu, as
projected in the Bank of America Securities (“BofA Securities”) analysis upon
which the U.S. information is based. In fact today this is not the case, corn
is
trading at $3.30 or more according to Chicago Board of Trade prices on a forward
basis and natural gas in the upper Midwest is closer to $8 per mmbtu, according
to a BofA Securities report. At these prices and as indicated according to
our
analysis based upon a BofA Securities analysis, U.S. breakeven is closer to
$50
per barrel. The Brazil model with feedstock integration is still profitable
down
to approximately $20 per barrel oil in Brazil. Finally, Brazil has the excess
acreage, conditions for expansion, infrastructure and capability, unique among
world production areas, to dramatically expand biofuels production to meet
growing world demand.
38
Table
1
F/X
Assumed
2.15
Return
per dollar of invested capital Brazil
West
Texas Oil Price (US$/bbl)
$
20.00
$
30.00
$
40.00
$
50.00
$
60.00
$
70.00
$
80.00
AnhydrousAlcohol
Max at Refinery (US$/Gal)
$
1.15
$
1.38
$
1.61
$
1.83
$
2.05
$
2.28
$
2.51
Direct
Cost of Alcohol Production (US$/Gal) (from Tab Production
Costs-Brazil)
($0.88
)
($0.88
)
($0.88
)
($0.88
)
($0.88
)
($0.88
)
($0.88
)
Less
Sales Taxes
($0.18
)
($0.22
)
($0.25
)
($0.29
)
($0.32
)
($0.36
)
($0.39
)
Contribution/Gallon
(US$) after Sales Taxes
$
0.09
$
0.29
$
0.48
$
0.67
$
0.85
$
1.05
$
1.24
Marginal
Capital Cost/ Gallon of Industrial Capacity
$
1.75
$
1.75
$
1.75
$
1.75
$
1.75
$
1.75
$
1.75
Cost
of marginal new plant
Return
per Dollar Invested Capital
5.3
%
16.5
%
27.5
%
38.1
%
48.8
%
59.8
%
71.0
%
Source:
National Pertoleum Agency Brazil, IGBE Statistical Institute-Brazil,
Comanche Estimate.
Table
2
Corn
Price per bushel assumed
$
2.70
Return
per dollar of invested capital U.S.
Natural
Gas Price/mmbtu asssumed
$
6.50
West
Texas Oil Price (US$/bbl)
$
20.00
$
30.00
$
40.00
$
50.00
$
60.00
$
70.00
$
80.00
Wholesale
Gasoline Price
$
0.57
$
0.84
$
1.12
$
1.36
$
1.60
$
1.83
$
2.07
Ethanol-Gasoline
Spread
$
0.40
$
0.40
$
0.40
$
0.40
$
0.40
$
0.40
$
0.40
Ethanol
Price ($/Gallon)-Plant Gate Before Transport
$
0.97
$
1.24
$
1.52
$
1.76
$
2.00
$
2.23
$
2.47
Corn
Cost
($0.96
)
($0.96
)
($0.96
)
($0.96
)
($0.96
)
($0.96
)
($0.96
)
DDGS
Co-Product Value
$
0.29
$
0.29
$
0.29
$
0.29
$
0.29
$
0.29
$
0.29
Natural
Gas
($0.20
)
($0.20
)
($0.20
)
($0.20
)
($0.20
)
($0.20
)
($0.20
)
Other
($0.22
)
($0.22
)
($0.22
)
($0.22
)
($0.22
)
($0.22
)
($0.22
)
Total
Production Costs
($1.09
)
($1.09
)
($1.09
)
($1.09
)
($1.09
)
($1.09
)
($1.09
)
Freight
to Market
($0.20
)
($0.20
)
($0.20
)
($0.20
)
($0.20
)
($0.20
)
($0.20
)
Contribution/Gallon
(US$)
($0.32
)
($0.05
)
$
0.24
$
0.48
$
0.72
$
0.95
$
1.19
Marginal
Capital Cost/ Gallon of Industrial Capacity
$
2.00
$
2.00
$
2.00
$
2.00
$
2.00
$
2.00
$
2.00
Cost
of marginal new plant
Return
per Dollar Invested Capital
-15.8
%
-2.3
%
11.8
%
23.8
%
35.8
%
47.3
%
59.3
%
Profitability
Brazil/U.S. per Gallon
-0.294
-6.426
2.050
1.403
1.195
1.108
1.049
Source:
Bofa Securities, Comanche.
Brazil
can be the Low Cost Biodiesel Producer in the World.We
believe that Brazilian farmers are growing soy beans, cotton and some sunflower
oil seeds with yields equal to or only slightly less than the U.S. yields.
These
are highly mechanized crops. At the same time, the cost of Brazilian farmland
in
the immense Cerrado is only 20% of the cost of land in, for example, Iowa,
labor
rates are lower, and there is a more predictable rain pattern, so that in our
opinion, the Cerrado has potentially one of the most abundant and high yield
bio-crop potentials in the world. By developing additional crops for bio-fuels,
such as castor beans, sunflower seeds, and jatropha, and double cropping some
crops such as sunflower seeds during the 6-month rainy season, we believe that
Brazil can potentially double the yield per acre of biodiesel over similar
operations in other countries.
Diversity
of Feedstock.
We will
have access to a wide range of feedstocks, and the ability to consume both
vegetable oils usable as food as well as non-food oils such as those derived
from palm and jatropha, animal fat waste and even municipal waste. We believe
that this flexibility will allow us to manage the weighted average cost of
our
feedstock for biofuels, as well as reduce the risks from sudden short-term
price
fluctuations of a single commodity, allowing full play against petroleum prices.
Clean
Fuels in the Rest of the World
The
clean
fuels industry has strong growth prospects, often underpinned by specific
regulatory targets. Demand for oxygenated gasoline and cleaner diesel fuel
has
resulted in dramatic growth in the ethanol and biodiesel industries. Analyst
research reports indicate that biodiesel may experience double digit growth
in
the U.S. (40 million to 500 million gallons in five years) and in Europe (500
million gallons to over 1.8 billion gallons in five years) in response to
stricter air quality standards and other government incentives.
39
Government
Initiatives and Targets for Biofuel Utilization
Brazil
National
Law
Domestic
mandate of 25% ethanol blends.
Biodiesel
law
Mandated
B2 diesel by 2008, B5 by 2013, President will accelerate
plan
Expanding
ports to ship 11-13bn liters vs. 2.6bn liters in 2004.
United
States
US
2000 Biomass R&D Act
Biomass
3% of power, 4% of transportation fuels, 12% of bioproducts by
2010.
Biomass
4% of power, 10% of transportation fuels, 20% of bioproducts
by
2020.
Biomass
5% of power, 20% of transportation fuels, 25% of bioproducts
by
2030.
US
2002 Farm Bill
Federal
procurement of bio-based products where available, $60m for
R&D.
US
2005 Energy Policy Act
Double
volume of ethanol and biodiesel added to fuel supply to 7.5bn
gallons by
2012.
Extends
the $1/gal tax credit for biodiesel to 2008 (initially slated
to expire in
2006).
$0.8bn
in tax-credit bonds to support municipal investment in renewable
power.
$2.7bn
over 10 years for R&D into bioenergy, biomass processing, and
bio-based products.
Loan
guarantees for 4 demonstration biorefineries.
$1bn
in grants and incentives for cellulosic ethanol.
USDA
small-business grants of ip to $100,000 for bio-based product
marketing
and certification.
Sun
Grant Initiative
$40m
over 4 years, USDA, DoE and DOT working with South Dakota State,
Tennessee, Oregon State, Oklahoma State, and Cornell.
Other
Countries
Argentina
Requires
5% blends over next 5 years.
Australia
Voluntary
blending up to 10% ethanol.
Canada
National
target of 45% of gasoline E10 by 2010. Several provinces have
their own
biofuel mandates. Alberta recently announced a $200m tax incentive
program.
China
Est.
$1.2bn industry. Help to cut energy as % of GDP by 20% in 5
years.
Colombia
Up
to 10% requirement
European
Union
Biofuels
4.75% of total by 2010.
India
Requires
5% blends.
Japan
$15bn
industry (2003 sales), increase funding 2x and researchers 3x
in
2003-2007.
Peru
5%
Requirement
Mexico
Consideration
of an up to 10% requirement
South
Africa
Legislation
requiring 10% ethanol blends pending.
Sweden
10%
Requirement
Thailand
All
gasoline sold in Bangkok must be 10% ethanol.
UK
36
pence/liter incentives for production.
Source:
Jefferies & Company, Inc. and Comanche
According
to Worldwatch, ten years ago, there were only a handful of countries producing
ethanol, with Brazil the largest, and none producing biodiesel. The U.S.
produces ethanol mostly from corn alcohol and in France, sugar beets are being
used, according to the same data. In some African countries, sugar cane is
processed into fuel alcohol. In 2003, there were some 13 countries on five
continents which actually used ethyl alcohol as a fuel component. Looking into
the future, we believe that the Americas are likely to be almost completely
covered by fuel ethanol and biodiesel programs, and green fuels will be firmly
established in the European Union, India, Thailand, China, Australia and
Japan.
Ethanol
has been promoted because it has a positive net energy balance, according to
Worldwatch, depending on the feedstock. The energy contained in a ton of ethanol
is greater than the energy required to produce it, according to this analysis.
Moreover, as indicated above, ethanol has been demonstrated to have a less
severe impact on the environment than conventional gasoline or other petroleum
derived additives. From a macro-economic point of view, we believe it is good
for the development of disadvantaged rural areas by promoting industry which
creates jobs. Furthermore, it can help to reduce the dependence on oil imports
and, finally, it may be regarded as a means to promote advances in
biotechnology.
In
Brazil, according to our analysis and BofA Securities research, sugar cane
ethanol costs about 50% of the cost to produce ethanol from corn, which is
the
primary feedstock in the U.S. According to Worldwatch the cost advantage is
due
to both climate differences and the industrial process used to produce ethanol
from corn compared to the process used to create ethanol from sugar cane.
According to Worldwatch and the USDA, after 18 months of a frost free growing
season in Brazil, sugar cane yields high ethanol content, about 21 gallons
per
ton of sugar cane, with about 32.2 tons of sugar cane per acre. This results
in
a gallon per acre ratio of 1.5x for sugar in Brazil versus corn in the U.S.
Sugar cane can be re-cut for 5 to 8 growing seasons before it needs to be
replanted. Corn and other crops grown between winter freezes in the U.S. do
not
have the same yields per acre of crop as Brazil, according to this methodology.
Furthermore, Brazilian mills can be energy self-sufficient by burning bagasse
while US mills consume coal, natural gas or buy electricity from the grid.
Above
all, we believe that labor and land in Brazil are about 25% of the comparable
cost in the U.S.
40
In
our
opinion, investment in the ethanol sector anywhere in the world, except Brazil,
is fundamentally a play on high oil prices, government regulation and clean
fuel mandates. For example, a key driver is the greenhouse gas (“GHG”) emission
targets, initially set down by the United Nations and then implemented by the
European Union. These targets are addressing the causes of climate change.
A
second non-oil-price driver is the balance of payments, that is, the reliance
on
imports. Third are the issues concerning what is known as “security of supply”.
Security of supply has two important aspects to it: first is the issue of the
provenance of the fuel supplies and whether there is any threat to those
supplies in the future (geo-political issues); and second, the sustainability
issues concerning the longevity of certain fossil fuels, such as oil and gas
(peak oil scenarios), and the cost of those supplies in terms of social issues
and human rights. In addition, there are issues concerning public health and
particulates in emissions from fossil-fuelled engines. Finally, there are other
drivers for change emanating from agricultural reform and the need to diversify
land-use.
By
comparison, we believe that, in Brazil, the economics of ethanol are relatively
more sustainable as a competitor to gasoline at the pump. In the Brazilian
internal market, prices for ethanol and biodiesel are determined by the direct
inter-fuel competition with gasoline or diesel prices at the pump, which in
turn
are affected by world oil prices, costs of refining and distribution, and taxes
on fuel. Tax on oil-based fuels in Brazil, like in most countries around the
world, are high, with rates approximately 50% of the end pump value, far greater
than in the U.S. for example. Like in most countries, ethanol and biodiesel
are
largely exempt from these taxes. Because of the relatively higher tax burden
on
oil-based fuels in Brazil than in the U.S., the world price of oil has a less
significant effect on pricing at the pump in Brazil than in the U.S., according
to information supplied by Petrobras and the DOE. Moreover, biofuels prices
are
relatively stable, because gasoline and diesel prices in Brazil, while very
closely correlated to oil prices with a few month lag, are historically less
volatile than the U.S. Petrobras increases prices to reflect rising oil costs
only gradually, for political reasons, and decreases prices to reflect dropping
oil costs also slowly, for commercial reasons, in our opinion and the opinion
of
many market analysts.
The
world
market for ethanol, outside of Brazil, is a mandate driven market, according
to
Jeffries & Co. As soon as supplies reach the mandate, the mandate is
raised—as happened recently in the U.S., in our opinion. As mandates grow, the
pressure on pricing to obtain supply continues. Brazil is the only country
able
to dramatically increase the low cost production of ethanol in the world,
according to our estimate of alternative production costs around the world
and
the USDA.
According
to Goldman, Sachs and other analysts reports and U.S. Government information,
biodiesel is a cleaner fuel than diesel, it is biodegradable, and its
manufacturing and burning do not contribute to the greenhouse effect.
According to these same reports, worldwide, biodiesel (B100) production is
rising from a small base of 251 million gallons in 2000 to an estimated 790
million gallons in 2005. In the U.S., according to EPA mandates, EPA ultra-low
sulfur diesel mandates will reduce sulfur content in petroleum diesel from
the
current 500 ppm to 15 ppm starting July 2006. Since petroleum diesel loses
vital
lubricity when sulfur is removed, a blending agent must be added by refineries
to meet lubricity standards.
41
OUR
BUSINESS
We
have
acquired certain assets to form the Canitar sugar cane processing mill in
the state of São Paulo, Brazil. This mill is located in Ourinhos, the heart of
the São Paulo sugar cane industry. Certain of our managers, who have operated
Canitar for six years, and have owned and managed a fuel distribution business,
have become Shareholders and have joined our team with their general management
and operational capabilities. We also acquired agricultural land and equipment
from nearby farmers to complement our Ourinhos business. We will not mill at
Canitar in 2007, rather we will reconfigure and expand the plant during the
year, as well as acquire additional agricultural resources, so as to be able
to
mill up to 750,000 tons of cane in 2008 allowing for further expansion to
1,400,000 tons in the following year provided that sufficient agricultural
resources can be secured to preserve the same level of vertical integration.
We
have
also acquired Santa Anita, a 550,000 ton per year mill in São Paulo state which
is presently in full operation. Between the 2007 and the 2008 harvests, we
plan
to install additional distillation equipment at Santa Anita, and begin the
expansion of crushing capacity so as to reach approximately 1,250,000 tons
per
year in 2009, with a level of approximately 70% agricultural integration. Both
Canitar and Santa Anita mills have combined onsite storage for approximately
five million gallons, which will also be expanded.
Our
final
initial acquisition was the Salvador facility in Salvador state, a new biodiesel
refinery with 10.4 million gallons of refining capacity, which we will expand
to
approximately 26 million gallons as feedstock is secured.
As
a
dedicated clean fuel producer, our business plan is to continue to acquire,
expand, develop and operate industrial and agricultural clean fuel production
capacity and transportation infrastructure. We will both acquire existing
production capacity and projects and develop greenfield projects. We intend
to
produce only fuels, not sugar or any other agricultural commodity. In the long
term, we aspire to be financially equivalent to a mid-cap oil company, but
with
a better, renewable business model. Our model calls for us to:
first,
acquire mid-sized production facilities in privileged agricultural settings
which are vertically integrated into their feedstocks;
to
expand
the industrial plants and agricultural areas of these facilities to their
optimum size, reducing average production capacity cost, while at the same
time,
install enterprise information systems and financial and accounting systems;
and
then,
grow further by making additional similar acquisitions or developing greenfield
projects, including transportation infrastructure projects.
At
this
moment, the producers of ethanol in Brazil are fragmented, with the largest
producing 6% of Brazilian volume and 360 others of various sizes producing
the
balance, and internationally, a similar situation exists. Thus, we believe
that
our position as a medium size player will not hinder our opportunity. At the
same time, we are convinced that the installation of internal controls is
indispensable for efficient and rapid growth. In our view, only three ethanol
producers have sufficient internal controls today to grow reliably by making
acquisitions or building additional capacity. We believe that our starting
out
as a mid-size producer will make it possible for us to readily put internal
controls, technology and growth strategies in place in 2007, so that we can
grow
efficiently and quickly in 2008 and beyond.
42
Our
current customers are fuel distributors and trading companies, but we intend
to
expand this group to include international relationships.
Market
Opportunity
Take
Advantage of the Worldwide Growth in the Use of
Bio-fuels.We
intend
to take advantage of the growing use of ethanol as an alternative, renewable
and
clean fuel type and as a fuel additive and biodiesel as a cleaner fuel than
diesel. All of our fuels are biodegradable and their manufacturing
and burning do not contribute to the greenhouse effect.
Cost
Opportunity
Strategically
Located Manufacturing and Transportation
Facilities. The
locations of the facilities, allow us, in our opinion, to benefit from optimal
production practices and close proximity to customers, suppliers and port
terminal and warehouses. The ethanol mills’ relation to each other enables us to
improve delivery times, increase operating efficiencies, facilitate
response to shifts in demand, and fulfill orders and reduce costs. All of
our acquisitions of ethanol mills and our corporate headquarters benefit from
their location in the State of São Paulo, a key state in the Brazilian
economy that accounts for approximately 20% of the country's population
and approximately 35% of its gross domestic product, according to Brazilian
Government statistics. Our biodiesel strategy is located in an area with
excellent logistics and a broader variety of feedstocks than found elsewhere
in
the world to balance out production costs.
Production
Costs. It
is our
belief that our average total production costs, divided among our
facilities, will be slightly lower than the industry average in Brazil
after completion of our construction, providing us with a competitive cost
position in the Brazilian and international ethanol markets. Additionally,
we are reviewing options for our own terminal facilities at ports to further
reduce our export costs, lower our loading expenses and maximizing
efficient turn-around time.
Strong
Acquisition Plan to Anchor the Cost per Gallon of Capacity at a Low Figure.
Our
acquisition of certain of the assets of Ouro Verde is an example of our ability
to acquire and expand production at reasonable prices. Our acquisition was
made
at a total price per ton of capacity that is far less than the going prices
in
the market. Our ability to quickly rebuild the Canitar mill and dramatically
increase its output, again at far less than the comparable price of a new mill,
puts Comanche in a very strong competitive position.
Recent
Acquisitions
We
acquired three facilities in early April 2007 (the “Acquisitions”). The
transactions for each facility are described below:
43
Santa
Anita Ethanol Facility:
Santa
Anita is a 550,000 ton cane processing facility with the capability of producing
13 million gallons of ethanol per year located about 125 kilometers from the
city of São Paulo. São Paulo is the fourth largest city in the world, according
to the Economist Magazine, and the largest single market for ethanol in the
world. In addition the State of São Paulo has among the highest productivity
land and yields of sugarcane in the world, according to the U.S. Department
of
Agriculture (the “USDA”). We purchased the shares of Santa Anita, associated
land and equipment for approximately $29 million. We expect Santa Anita to
have
200,000 tons of proprietary cane available for the 2007 harvest and we will
purchase an additional 350,000 tons of cane adjacent to the mill to provide
our
cane feedstock needs for 2007. With this quantity of cane and production, we
expect Santa Anita to produce approximately 12 million gallons of ethanol in
2007. In 2007 we will plant additional acreage of cane for 2008 production,
and
in 2008 we expect to increase the Santa Anita industrial capacity and
storage capacity to about 29 million gallons, for an anticipated incremental
capital expenditure of $19 million, including new cane plantings and new
equipment.
Canitar
Ethanol Facility:
The
Canitar assets constitute the basis for a 250,000 ton cane processing facility,
located near the city of Ourinhos in the State of São Paulo. Ourinhos is about
350 kilometers from the city of São Paulo, but is connected to the City of São
Paulo by modern expressways and to the ports of Santos and Paranagua by
railroads and highways. Ourinhos is one of the largest ethanol collection points
in Brazil. As noted above, the State of São Paulo has among the highest
productivity land and yields of sugarcane in the world, according to the U.S.
Department of Agriculture. We purchased the assets of Ouro Verde for
approximately $2.8 million in cash (of which $.84 million in cash was paid
at
closing and $1.96 million in cash was advanced prior to the closing), 165,049
of
our Shares; we also paid approximately $1.3 of liabilities, and assumed the
net
(of estimated purchase price offsets) of $1.47 million in short and long-term
obligations. Certain managers of this entity were instrumental in arranging
for
the acquisition of the Santa Anita and Salvador projects so as to further the
company’s business plan, and as a result were issued 844,660 Shares subject to
certain conditions, without a requirement to pay any cash for such Shares..
During 2007, we will not operate this plant, rather we expect to reconfigure
and
expand its capacity, as well as to plant additional acreage of cane for 2008
production, so as to be able to produce approximately to about 17 million
gallons of ethanol in 2008 at Canitar.
Ourinhos
Agricultural Assets:
In order
to advance our expansion of Canitar, we purchased from other parties 605
hectares of land near the plant and certain agricultural equipment and tank
trucks, for an aggregate of approximately $7.9 million in cash to the sellers
and to their creditors at the closing. This will solidify our supply of cane
for
Canitar and provide us with land for planting more productive cane for the
area.
Salvador
Biodiesel Facility: Salvador is a 10.6 million gallon estherization
facility located in the State of Bahia, close to the principal industrial port
of the City of Salvador and within 6 km of the third largest refinery in Brazil.
Salvador is a water based batch biodiesel processing facility. It is one of
only
12 that are currently licensed in Brazil today according to the Brazilian
National Petroleum Agency (the “ANP”). Salvador was successfully tested during
the last three months of 2006, can batch process a variety of feedstocks into
biodiesel, and will commence full commercial production in 2007. We purchased
the shares of Simoes for approximately $9.2 million in cash, and the assumption
of $1.7 million in liabilities before any adjustments that we might make. The
seller has agreed to use approximately $2.5 million of the proceeds to develop
an agricultural plantation to initially supply 10% of our feedstock needs on
a
long-term basis; we expect this arrangement to commence in 2008. We have presold
approximately 9 million liters to an affiliate of Petrobras. We expect
deliveries to commence in approximately July 2007 and we are currently
negotiating contracts for the purchase of vegetable and animal oils to supply
our feedstock needs for this contract. We believe that we can increase the
industrial capacity to 25 million gallons per year at an incremental cost of
$2.6 million at a future date, depending on sales. Our business plan calls
for
us to arrange for up to 50% of our feedstock needs through long-term contracts
in the years beyond 2008.
44
Based
on
our experience, we selected acquisitions that we believe offer significantly
lower invested cost, including expansion costs, per gallon of capacity than
many
other transactions we are seeing in Brazil.
Facility
Descriptions
General
Overview of our Ethanol Business
We
are
located in sugar cane country.
Sugar
cane is a tropical grass that grows best in locations with stable warm
temperatures and high humidity according to the USDA. Our mills are located
in
the Center-South region of Brazil, a location whose climate and topography
is ideal for the growth of sugar cane, according to our management team and
Datagro and the Center-South region of Brazil accounts for approximately
85% of Brazil's sugar cane production. We have purchased or leased land in
the
area so as to own 605 hectares and lease 3,254 hectares of land. We intend
to
increase our leased land by 15,000 hectares for our mill expansions, through
arranging land lease or agricultural partnership contracts with a number of
nearby landholders who have indicated a desire to work with us. Current
agricultural contracts have terms ranging from 1-5 years, some with
renewal terms. We make lease payments based on the market value of sugar
cane per hectare (in tons) used by us in each harvest, with the market
value based on the price of sugar cane established by the regulations of by
the
Council of Sugar, Sugarcane and Alcohol Producers (Conselho
de Produtores de Cana-Acúçar, e Acúçar Álcool,
or
“CONSECANA”), an independent organization consisting of sugar and alcohol
producers, and a fixed amount of total recoverable sugar per ton. We will
also purchase sugar cane directly from third-party growers.
45
Of
our
purchases from third-party growers, we intend to initially purchase
approximately 50% through spot purchases from other sugar cane producers
with whom we have relationships but no contractual arrangements. For 2007,
as a
result of our capacity increases, we will lease as much new land as possible
and
then purchase the balance of our increase in capacity from third party sugar
cane suppliers. Over time we expect to substantially diminish purchases from
third party cane suppliers. This will allow us to continue to increase
production, while we increase land under lease with higher quality cane
seedlings for 2008. All of our third-party sugar cane suppliers are
responsible for the harvest of the sugar cane and its delivery to our
mills. The price that we pay to third-party sugar cane growers is based on
the total amount of sugar content in the sugar cane, measured by the amount
of sugar recovered and on the prices of sugar and ethanol sold by
each mill.
The
sugar
cane harvesting period in the Center-South region of Brazil begins annually
in
May and ends in November. We plant several types of sugar cane seedlings.
The type of seed cane we use in a particular area depends on the quality of
the soil. Once planted, sugar cane can be harvested for up to six or seven
consecutive harvests, although it must be carefully maintained in order to
continue to attain sugar yields similar to the newly planted crop. Our
long-term financial plans call for rotating one sixth of the land out of
production per year and replanting.
Sugar
cane is ready for harvesting when the crop's sucrose content is at its highest
level. Harvesting is either done manually or mechanically. Most of our
sugar cane is harvested manually. Manual harvesting begins by burning the
crop, which removes leaves and destroys insects and other pests. The
amount of the crop that we may burn is subject to environmental
regulations. The remaining sugar cane is harvested mechanically. We believe
the
costs of manual and mechanical harvesting are essentially equal, averaging
approximately US$3.00 per ton. Mechanical harvesting requires investments in
acquiring and maintaining harvesting machines, as well as the additional
cost of treating the land following the mechanical harvest, which causes more
damage to the land than manual harvesting.
Sugar
cane yield is an important productivity measure for our harvesting operations.
Geographical factors, such as land composition, topography and climate, as
well as agricultural techniques that we implement, affect our sugar cane
yield. During fiscal year 2007, we expect to average 80 tons of sugar cane
per hectare of land that we are acquiring.
Competition
in Sugar Cane.According
to industry sources, there are only three competitors in Brazil with greater
than 1% of the sugar cane productive capacity of the country, creating a
significant opportunity for consolidation.
Development
of Sugar Cane Varieties and Other Products.Our
own
agricultural managers analyze the possible use of new varieties of sugar
cane to respond to the different soil and climate conditions of the State
of São Paulo. We also analyze and develop different products used to
facilitate and enhance the growth of sugar cane, such as herbicides and
fertilizers, also taking into consideration the different conditions of our
sugar cane fields.
46
Milling
Facilities, Production Capacity and Output.Once
the
sugar cane is harvested, it is loaded onto trucks owned by us and third parties
and transported to our mills for inspection and weighing. The average
distance from the fields on which our sugar cane is harvested to our mills
is
approximately 25 kilometers (16 miles). The proximity of our milling
facilities to the land on which we cultivate sugar cane reduces our
transportation costs and enables us to process the sugar cane within 48 hours
of harvesting, thereby maximizing sucrose recovery. The mills that we
have acquired under contract have a total crushing capacity of about 800,000
tons today, and are readily expandable to a total of approximately 2,500,000
tons of crushing capacity. Our annual ethanol production capacity is
approximately 17 million gallons, which we intend to increase to 54 million
gallons by 2008 and 2009.
Products.We
produce and sell two different types of ethanol: i) hydrous ethanol; and ii)
anhydrous ethanol. Brazil consumes anhydrous and hydrous alcohol, anhydrous
ethanol is used as a clean fuel to be combined with gasoline (as opposed to
hydrous ethanol which is used for ethanol-only fueled vehicles and for
flex-fuel vehicles).
Ethanol
Prices.The
price
of ethanol we sell in Brazil is set according to market prices, using the
indices published by ESALQ and the São Paulo Futures and Commodities Exchange
(“Bolsa
de Mercadorias e Futuros-BMF”)
as a reference. The prices of the industrial and neutral alcohol that
we sell are also determined in accordance with market prices, which tend to
be
up to 20% higher than the price of fuel ethanol. Prices of ethanol for
export are set according to international market prices for ethanol. The
international ethanol market is highly competitive. In May 2004, the New
York Board of Trade began trading a futures contract for ethanol, known as
the World Ethanol Contract. We anticipate that this contract will result
in improved liquidity for the international ethanol market.
Customers.
We sell
ethanol to gasoline distributors or in the international markets through
commodities trading firms such as Coimex Trading Ltd. Although today we intend
to sell our ethanol in Brazil, we believe that the international ethanol market
has the strongest potential to grow substantially. The global trend toward
adoption of cleaner and renewable sources of energy and alternative fuels
and the increasing use of flex-fuel cars is expected to increase the demand
for
ethanol. Broader international acceptance of ethanol as a fuel or fuel
additive could boost our exports of ethanol significantly. Today, our
proposed ethanol customers in Brazil take shipments of ethanol from mills.
However, we will be able to transport ethanol for export to the Ports of Santos
or Paranagua primarily through third-party railroad and trucking companies
located in Ourinhos.
47
Cost
Structure.Our
cost
structure can be divided into: (i) costs that are linked to the prices of our
products; and (ii) costs that are not linked to the prices of our
products.
Two
of
our principal cost components, raw materials and land leases (which
together account for approximately 61% of our operating costs and expenses),
are
linked to the prices of our products. Accordingly, we adjust the prices of
our products to accompany fluctuations in the cost of our raw materials and
leased lands, which in practice substantially eliminates the effects of this
type of cost’s volatility on our results of operations. In addition,
another relevant portion of our costs is represented by agricultural
and industrial inputs, some of which are imported and which are also
subject to price fluctuations primarily as a result of exchange rate
variations. As the majority of our Brazilian net revenue is tied to, in effect,
gasoline and diesel prices, a substantial portion of fluctuations in the
costs of these inputs is offset by similar fluctuations in our domestic
and international prices, which in practice largely eliminates the
influence of this cost volatility on our results
of operations.
Insurance.
We
have
obtained and expect to maintain insurance covering our entire inventory of
ethanol, and certain buildings and equipment, against fire, lightning
and explosions of any nature. We believe that our insurance policies
provide for coverage at levels that are consistent with industry standards
in
Brazil.
Production
Efficiency Improvements
Increasing
Output through Technology.
We
believe that the general state of the industry in Brazil is to use available
technology sparingly and limit investment. We intend to substantially improve
processing technology to bring down costs and increase yield.
Self-Generation
of Electrical Power.The
Company will be energy self-sufficient by burning biomass. Sugar cane is
composed of water, fibers, sucrose and other sugars and minerals. When the
sugar
cane goes through the milling process, we separate the water, sugar and
minerals from the fibers, and are left with sugar cane bagasse. Sugar cane
bagasse is an important sub-product of sugar cane and it is used as fuel for
the boilers in our plants. Sugar cane bagasse is burned at very high
temperatures and the resulting vapor is used to produce sugar and alcohol.
Part of the vapor is also cannibalized and directed to a turbo-generator that
produces electricity. Currently, all of our plants are self-sufficient
during the crop period, generating all of the energy they consume. In our
opinion, the principal advantages of energy generated by burning sugar cane
bagasse from sugarcane are:
·
it
is a clean and renewable
energy;
·
it
is complementary to hydroelectric energy (which represents over 85%
of
Brazilian energy), when generated during the crop period when the
reserve levels are lower;
·
there
is a short period of time required to begin operations;
and
·
only
a small investment in transmission lines is required when plants
are
located close to
consumer centers.
We
believe that there is potential in the generation of electricity, and we are
prepared to make investments to the extent that prices of Brazilian energy
justify making such investments. According to the Brazilian Ministry of Energy
and Mines forecasts, the Brazilian electricity system is expected to
experience shortages of capacity in the 2008-2010 time frame, therefore, as
a
result we believe that energy prices levels will be sufficiently attractive
for
investment in co-generation. In addition, projected economic and resulting
electrical growth rates for Brazil suggest that significant investments
in electric energy generation will be required as hydroelectric energy
become more and more expensive. The Brazilian Government has also
demonstrated an interest in electric energy from sugar cane bagasse by offering
incentives to promote this type of generation.
48
Carbon
Credits.Pursuant
to the Kyoto Protocol, signatory nations will have the option of engaging in
emissions trading if they are not in compliance with Kyoto Protocol
emissions levels. Under the Kyoto protocol, countries are allocated assigned
amount units (“AAU”s), or “carbon credits”. Assigned amounts are quotas,
meaning
the total number of emission allowances (or AAUs) for the period of 2008-2012
have been allocated and no action can be taken by market participants to create
additional AAUs. Since AAUs are allocated in advance, they are available for
trading and transfer from the start of the first commitment period under the
Protocol. The emissions trading option enables a country to purchase AAUs
from another country that has excess unused AAUs. The purchasing country
can then use the AAUs to meet its climate mitigation objectives.
According
to Point Carbon A.S. a provider of consultancy services and independent analysis
of European and global power, gas and carbon markets (“Point Carbon”), in
2005, an estimated 799 million tons of emission credits were traded, a
growth of 112% compared to 2004. Demand has arisen primarily from European,
Japanese and Canadian companies. This emission trading market has been
estimated to reach a total value of $400 billion by 2010 according to a World
Bank study, 25% of which has been estimated to come from Brazil. The
Brazilian Government has announced that it intends to establish acceptable,
industry specific emission levels based on the Kyoto Protocol, and
companies that have emission levels that are lower than the Brazilian
Government established levels would be free to trade their carbon credits on
a
to-be established carbons credit trading market. We believe that we may
generate credits available for trading, if we make certain related capital
expenditures. Current estimates are that one ton of carbon credit will be
worth between $4 to $ $18 per ton depending on type, volume and term according
to Point Carbon.
49
Regulation
Ethanol
Governmental Regulations
The
sugar
and ethanol industries were heavily regulated by the Brazilian Government until
1999. Prices of sugar cane, ethanol and sugar were established in
accordance with federal laws, and their production was controlled pursuant
to centralized harvest plans (“planos
de safra”)
established by the Brazilian Government.
The
Brazilian Government strongly promoted the use of ethanol as a fuel starting
in
the 1970's, especially through the implementation of the Pró-álcool
program
in 1975. The Pró-álcool
program
set incentives for the production of ethanol-fueled vehicles and
established prices for ethanol. During the 1990's, the Brazilian Government
also promoted the use of anhydrous ethanol as an additive to gasoline. The
Sugar and Alcohol Interministerial Council, created in August 1997,
established a mandatory percentage of anhydrous ethanol to be added to
gasoline, historically ranging between 20% and 25% (currently 20%).
The
deregulation of the sugar and ethanol industries began with the promulgation
of
Brazil's Federal Constitution in 1988 and the country's first experiments
with bona fide free markets since the end of the military dictatorship. In
1989, producers were authorized to directly export sugar cane under the
Brazilian Government's supervision. In 1990, the Brazilian Government
closed the Sugar and Alcohol Institute, the Brazilian Governmental
agency that controlled several aspects of sugar production and sales,
including the preparation of the harvest plans. In 1996, the Brazilian
Government's harvest plans ceased to be compulsory, and were thereafter used
only for indicative purposes. From 1995 to 1999, the prices of sugar and
ethanol were gradually released from Brazilian Government control, and
sugar exports were permitted to be made freely in accordance with market
conditions.
Complete deregulation
of sugar cane prices occurred on February 1, 1999. Currently, the sugar and
ethanol industries are virtually unregulated, except for rules regarding sugar
cane burning, environmental regulations, and the requirement for mandatory
anhydrous ethanol content in all gasoline sold in
Brazil.
Environmental
and Permit Regulation
General.We
are
subject to Brazilian federal, state and local laws and regulations governing
the
discharge of effluents and emissions into the environment, the use of
water, and the handling and disposal of industrial waste or matters
otherwise relating to the protection of the environment. The national
policy of Brazil, established by Law No. 6938/81, has as its objective the
preservation, improvement and recuperation of environmental quality, with
parallel, and equally important, aims of assuring socioeconomic development
and
the protection of human dignity. CETESB (Companhia
de Tecnologia de Saneamento Ambiental)
is the
principal agency directly governing our business in the State of São Paulo. A
similar agency exists in Salvador state, the Secretaria de Meio Ambiente e
de
Recursos Hidralicas (SEMARH) of the State of Bahia. These agencies are also
linked to the federal environmental ministry, and both issues licenses - for
siting, installation and operation - and monitors compliance.
The
initial license is issued during the preliminary phase of the project
planning and authorizes the location and basic development of the undertaking
or
activity. The installation license authorizes the construction of civil
works and the installation of equipment. The operating license authorizes
the commencement of operational activities. Siting and installation licenses
are
issued for two year periods each; operating licenses expire in five years,
and
are renewable. In contrast with regulation in the U.S., the environmental
authority adopts a policy of balancing environmental with socioeconomic
considerations. Thus, in order to encourage the efficient development of
dispersed industry, the licensing of mills of the size of ours is processed
on a
fast-track, not requiring the filing of environmental impact statements or
public hearings.
50
Biodiesel.The
biodiesel industry is regulated by the ANP. Basically, ANP established the
technical standards for biodiesel and requires biodiesel producers to submit
periodic reports on inventory, movement of biodiesel and requires an
authorization to export the product. ANP has the authority to block an export
and to buy the product if there is a biodiesel shortage in Brazil. The primary
legislation is Portaria DNC #26 of 13/11/1992 which requires the reporting
of
biodiesel inventory, Resolução ANP #41 of 24/11/2004 which establishes the
authority of ANP for biodiesel and Resolução ANP #42 that establishes the
technical specifications for biodiesel.
Water
and Forest Quality.
Specific
authorizations are required for the use of water resources for irrigation and
industrial purposes. Considerations include assurance of water quality, as
well
as sufficiency of the resource both for the intended use as well as for current,
and potential, competing uses for available water.
In
order
to protect riparian environments, the Brazilian Forestry Code prohibits any
type
of development in permanently protected rural areas, including areas
bordering streams and rivers and areas surrounding water springs and reservoirs.
In addition, in order to preserve biodiversity in areas that are planted in
a single crop, such as sugar cane, the Code obligates us to maintain and
register a forestry reserve in each of our rural landholdings newly
converted to agricultural use, covering at least 20% of the total area of such
land. In those properties where agriculture is already established but the
forestry reserve does not meet the legal minimum, we are permitted under
Provisional Measure No. 2166- 67/01 to meet the standard by gradual
reforestation of at least 1/10 of the total legal forestry reserve area every
three years until 20% of the area is restored to its natural state. Our
environmental compliance costs are likely to increase as a result of the
projected increase in our production acreage. In addition, as a result of
future regulatory and other developments, the amount and timing of future
expenditures required for us to remain in compliance with environmental
regulations could increase substantially from their current
levels.
Burning.A
significant environmental consideration of the sugar cane sector is the
replacement of manual harvest by mechanical harvest. This is desired from an
environmental perspective, in that manual harvesting requires that sugar cane
fields be burned as part of the harvesting process. Law No. 11,241/02 of the
State of São Paulo, which took effect in 2002, establishes regulations for
the gradual reduction of the burning of sugar cane in the state. Regulation
in
this area has equilibrated air-quality concerns with social concerns regarding
the displacement of field workers, and also takes into account the current
limitations of mechanical harvesting technology. Thus, in areas that
are suitable for the replacement of a manual harvest with a mechanical
harvest, the law requires mechanical harvesting to increase from a level of
30%
currently, to 100% of the harvested area by the year 2021. For areas where
replacement of manual harvesting by mechanical means would be more difficult,
mechanical harvesting will be required at the 10% level beginning in 2011,
increasing to 100% by the year 2031.
In
any
case, Law No. 11,241/02 also requires sugar cane producers to burn sugar cane
at
least one kilometer from urban centers, at least 25 meters from
telecommunication stations, and at least 15 meters from
electricity transmission and distribution lines, and 15 meters from federal
and state railways and highways. Sugar cane producers are required to give
prior
notice of the burning of sugar cane to the Department for the Protection of
Natural Resources (Departamento
Estadual de Proteção
de
Recursos Naturais-DEPRN)
and to the owners of lands surrounding the area where the sugar cane will
be burned. We have taken measures to comply with the provisions of Law No.
11,241/02, and believe we have achieved the targets currently applicable to
us.
Enforcement.Enforcement
of environmental law is carried out by inspections of licensed facilities.
Labor
unions, which cover both field and industrial workers, often serve as
non-governmental reporters of environmental law violations. Aberrations from
norms are recorded, and fines are levied, with significant penalties in the
event remedial measures are not timely taken. A record of unmitigated violations
puts at risk the renewal of operating licenses by the operator originally
obtaining the license. Regulators favor the acquisition of environmentally
troubled projects by entities with the capacity and commitment to improve
conditions, and allowances are regularly made by CETESB so that compliance
can
be reached on an economically viable timetable.
51
In
1998,
the Brazilian Government enacted an environmental crimes law that imposes
administrative and criminal penalties on corporations and individuals
committing environmental violations. Individuals (including corporate
officers and directors) may be imprisoned for up to five years for environmental
crimes. In the criminal sphere, penalties against corporations include
fines, community service and certain other restrictions, including the
cancellation of credit lines with official entities. At the administrative
level, corporations found to be violating environmental laws can be fined
in significant amounts, have their operations suspended, be barred from
entering into certain types of Brazilian Government contracts, be required
to
repair or indemnify any environmental damages they cause and be required to
forfeit tax benefits and incentives.
We
believe we have obtained or will obtain within the necessary periods all
material environmental and other licenses, permits and authorizations that
are required to operate our mills, and that the operation of the mills is,
or is
in the process of becoming, in compliance with such licenses, permits and
authorizations, or with a remediation program acceptable to regulators.
Exchange
Controls
Law
No.
4,131, of September 03, 1962, as amended, regulates foreign investments in
Brazil. This law requires that foreign investments in Brazil be registered
with
the Brazilian Central Bank to enable foreign remittance of profits and/or
interest on equity, and repatriation of foreign capital invested in Brazil.
The
Brazilian legislation allows the investment in the capital market by individuals
or legal entities, by means of the acquisition of shares and other securities.
These investments, designated "portfolio investments," when performed by
non-residents, are subject to registration with the Brazilian Central Bank
(as
per the provisions of the Brazilian Monetary Council’s Resolution No. 2.689/00,
which was regulated by Central Bank of Brazil’s Circular No. 2.975/00) and with
the Brazilian Securities Commissions ("CVM").
The
non-resident investors must indicate one or more attorneys-in-fact in Brazil,
which will be responsible mainly for the provision of information and for the
registrations with the Brazilian Central Bank and the CVM. The registration
of
the portfolio investments with the Brazilian Central Bank’s electronic system
constitutes an obligatory requirement for remittances abroad as distribution
ofprofits
and/or interest on equity, and repatriation of the capital invested. Such
remittances may be made by means of a foreign exchange contract between the
Brazilian company remitting the funds and a Brazilian commercial bank duly
authorized to operate in the foreign exchange market. Such foreign exchange
contract reflects the exchange of Brazilian currency into foreign currency,
at
the rate agreed with the Brazilian commercial bank.
Under
current Brazilian legislation, the federal government may impose temporary
restrictions on remittances of foreign capital abroad in the event of a serious
imbalance or an anticipated serious imbalance of Brazil’s balance of payments.
For approximately six months in 1989 and early 1990, the federal government
froze all dividend and capital repatriations held by the Central Bank that
were
owed to foreign equity investors, in order to conserve Brazil’s foreign currency
reserves. These amounts were subsequently released in accordance with federal
government directives. There can be no assurance that the federal government
will not impose similar restrictions on foreign repatriations in the
future.
The
likelihood of the imposition of such restrictions by the Brazilian government
may be affected by, among other factors, the extent of Brazil’s foreign currency
reserves, the availability of sufficient foreign currency on the date a payment
is due, the size of Brazil’s debt service burden relative to the economy as a
whole, Brazil’s policy towards the International Monetary Fund and political
constraints to which Brazil may be subject.
See
“Risk
Factors—Risks of the Brazilian Economy.”
Certain
Brazil Taxation Considerations
The
following is a summary of tax issues that affect foreign investment in Brazil
businesses and is based on the Brazilian tax regulations as presently in effect
and does not take into account possible future changes in such tax laws.
General
Comments
Brazilian
companies are taxed in Brazil on the basis of their worldwide income (which
includes earnings of Brazilian companies’ foreign subsidiaries, branches and
affiliates). In general terms, branches and representative offices of foreign
companies in Brazil are taxed as Brazilian legal entities with respect to
the
business carried out in Brazil.
52
The
earnings of non-Brazilian residents in general are taxed in Brazil only when
derived from Brazilian sources. Exception is made to capital gains earned by
foreign residents with respect to assets located in Brazil. In such case, the
legislation in force in being interpreted in the sense that the Brazilian
withholding income tax -WHT shall apply regardless of whether the payment is
made from a Brazilian source or not. In such case, the responsibility for
collecting the WHT is assigned to buyer’s attorney in fact.
Payment
of dividends and interest on equity/ Repatriation of
investments
Dividends
distributed by Brazilian companies to resident or non-resident shareholders
or
partners, based on profits earned as from January 1, 1996, are exempt from
Brazilian withholding income tax. Profits and dividends realized prior to
January 1, 1996 are still subject to income tax at the rates prevailing within
the year the profits are generated. Prior to 1996, dividends and profits
distributed were subject to a fifteen percent (15%) withholding income tax
(IRRF), withheld by the company, except for distribution to residents of Japan,
in which a Brazilian tax treaty provides for a 12.5 % rate.
Alternatively
to the distribution of dividends, Brazilian companies may remunerate its equity
holders through the payment of interest on equity, provided that the company
has
retained or current-year earnings. The total amount of interest on equity that
can be paid or credited are subject to limits provided in Brazilian tax law.
The
Brazilian companies may deduct the interest on equity paid or credited as
operational expenses for the purposes of corporate income taxes. A fifteen
percent (15%) withholding income tax is levied on the amount of interest on
equity paid, accrued to the equity holders, or capitalized (25% rate for low
tax
jurisdictions).
When
the
foreign investor sells shares or quotas in the Brazilian venture or when the
Brazilian company reduces its capital or is liquidated, the foreign-registered
investment can be repatriated in the relevant foreign currency free of taxes
up
to the amount of foreign currency registered with the Central Bank. If the
foreign investor withdraws from its Brazilian subsidiary by assigning its
quotas/shares for an amount exceeding that registered with the Central Bank,
the
exceeding amount is considered a capital gain and shall be subject to
withholding income tax at a 15% rate (25% for low tax jurisdictions).
Nevertheless, the exceeding amount may be remitted abroad in case of a local
sale. Remittances of sale prices exceeding the net worth value (“valor
patrimonial”) of the Brazilian company sold must be supported by an appraisal
report. There is also a discussion on whether the calculation of the capital
gain should be made taking into consideration the basis in foreign currency
without monetary correction or in the Brazilian currency acquired by the foreign
investor by the time the foreign investment was made, indexed by monetary
correction until 1996.
Tax
treaties
There
is
currently no tax treaty in place between Brazil and the United States nor with
the Cayman Islands.
Brazil
has entered into numerous tax treaties with other countries, to provide relief
from double taxation on international transactions. To date, Brazil has executed
treaties with Argentina, Austria, Belgium, Canada, China, Chile, Czech Republic
and Slovakia Republic, Denmark, Ecuador, Finland, France, Hungary, India,
Israel, Italy, Japan, Korea, Luxembourg, the Netherlands, Norway, the
Philippines, Portugal, Spain, Sweden, Paraguay*, Mexico and Ukraine (* Pending
publication of the Executive Decree).
Low-tax
jurisdictions
The
Brazilian Federal Revenue Department has listed some locations considered to
be
low-tax jurisdictions for Brazilian tax purposes. Current regulations list
the
Cayman Islands. Low-tax jurisdictions are defined for Brazilian tax purposes
as
jurisdictions that do not tax income or tax it at a maximum rate lower than
20%.
Payments of certain types of income to entities in low-tax jurisdictions are
subject to a higher withholding tax rate of 25% (15% usually applies), with
few
exceptions (such as payment of operational lease fees abroad-15% and payment
of
interest fees related to the financing of Brazilian exports - 0%). Transactions
between a Brazilian resident and a company resident in a low-tax jurisdiction
are subject to Brazilian transfer pricing rules, irrespective of whether the
two
parties qualify as associated companies.
Normative
Ruling 188/2002, issued by the Brazilian tax authorities, expressly lists
jurisdictions that are deemed to be low-tax jurisdictions, to wit: American
Samoa, American Virgin Islands, Andorra, Anguilla, Antigua, Aruba, Bahamas,
Bahrain, Barbados, Barbuda, Belize, Bermuda Islands, British Virgin Islands,
Campione D'Italia, Cayman Islands, Channel Islands (Alderney, Guernsey, Jersey,
and Sark), Dominica, Cook Islands, Costa Rica, Cyprus, Djibouti, Saint Kitts
& Nevis, Gibraltar, Grenada, Hong Kong, Isle of Man, Labuan, Lebanon,
Liberia, Liechtenstein, Luxembourg (with respect to holding companies existed
under Luxembourg Law of July 31,1929), Macao, Madeira Islands, Maldives, Malta,
Mauritius Islands, Marshall Islands, Monaco, Monserrat Islands, Nauru,
Netherlands Antilles, Niue Islands, Occidental Samoa, Oman, Panama, Santa Lucia,
Saint Vincent & Grenadines, San Marino, Seychelles, Singapore,Tonga,Turks
& Caicos Islands, United Arab Emirates and Vanuatu.
53
Withholding
Income Tax on payments abroad
In
general, payments made to non-residents are subject to withholding income tax
in
Brazil. As a general rule, interest, fees, commissions and any other income
payable by a Brazilian obligor to an individual, company, entity, trust or
organization domiciled outside Brazil is considered derived from Brazilian
sources and is therefore subject to income tax withheld at the source. Brazilian
tax laws expressly authorize the paying source to pay the income or earnings
net
of taxes and, therefore, to assume the cost of the applicable tax. The WHT
should be withheld when the income is paid, credited, used on behalf of or
effectively remitted to a non-resident, whichever first occurs. The tax is
generally based on gross payments (i.e., without any deductions). The general
WHT rate is 15% (25% rate may apply to certain activities such as non-technical
services).
Corporate
Income Taxes applicable to Brazilian companies
Most
business entities are required to pay corporate income tax (IRPJ).The IRPJ
is
computed at fifteen percent (15%) rate on adjusted net income. Annual net income
in excess of R$240,000.00 is also subject to a surtax of ten percent (10%).
According to Law No. 9,430, of December 30, 1996, taxpayers may opt to calculate
the IRPJ on a quarter or annual basis. If the IRPJ is calculated quarterly,
it
is also payable on a quarterly basis. Over the quarter net income, a fifteen
percent (15%) rate is applied, plus a ten percent (10%) surtax on net income
exceeding R$60.000,00 per quarter. If the IRPJ is calculated annually, taxpayers
are required to anticipate monthly payments of IRPJ, calculated over estimated
income. For most companies, such monthly estimated income corresponds to eight
percent (8%) of the total monthly gross revenues plus capital gains and other
revenues and positive results incurred by the company. Such percentage ranges
from 8% to 32%, depending on the activity performed by the taxpayer. Over this
tax basis, the fifteen percent (15%) rate applies, plus the ten percent (10%)
surtax on estimated income exceeding approximately R$20,000.00 per month. When
the annual method of calculation is adopted, with payment of monthly
anticipations, at the end of the year, the entities must either pay or request
reimbursement for the difference between the amount paid monthly and that
calculated on annual income.
Net
operating losses (“NOLs”) generated in a given period can offset taxable income
of the subsequent period, limited to thirty percent (30%) of taxable income
(i.e., for each R$ 1.00 of income, R$0.70 must be subject to taxation,
regardless of the existing amount of NOL).Tax losses may be carried forward,
without statute of limitation.
Another
used method of calculating income tax is the presumed method (apuração
de imposto de renda porlucro
presumido).
In
this case, the income tax is calculated on a quarterly basis and for most
activities, the tax basis corresponds to eight percent (8%) of gross revenues.
There are other applicable rates to calculate presumed income related to certain
specific activities (e.g., thirty-two percent [32%] for most service
activities). Over the presumed income, income tax rates of fifteen percent
(15%)
and ten percent (10%) surtax levied on presumed income exceeding R$60,000.00
per
quarter are applied. If the presumed method of taxation is adopted, the taxpayer
is not subject to any adjustment according to annual actual income. Among other
requirements for eligibility the Brazilian company’s revenues earned in the
previous taxable year must not exceed R$48,000,000.00.
In
addition to the Corporate Income Tax, Brazilian companies are subject to the
Social Contribution on Net Profits (“CSLL”), which is in fact a true corporate
income tax surcharge. The CSLL applies at a rate of nine percent (9%). The
reason why it is levied separately is that it is specifically allocated to
the
social security system. Most rules concerning book and presumed profit methods
also apply to CSLL (the CSLL basis in the presumed profit method may be
different from the one applicable to the Corporate Income Tax).
Other
taxes that Brazilian companies are subject to that may be relevant to foreign
investors
-
Provisional Tax on Banking Transfer (Contribuição Provisória sobre Movimentação
ou Transmissão de Valores e de Créditos de Natureza Financeira - “CPMF”) - The
CPMF tax was created for a temporary application. In 2003, the effects of this
tax were extended until December 2007. The CPMF applies at a 0.38% rate to
all
banking transfers and withdrawals of currency, such as the cashing of
checks.
54
-
Tax on
Credit, Exchange, Insurance and Securities Transactions (IOF): the IOF is
imposed on foreign currency exchange transactions, among other transactions.
Currently, however, a zero rate applies to most cases
-
Other
Brazilian taxes: Brazil charge taxes over company’s gross turn-over, sale of
goods, manufacturing of goods, services, property, transfer of property,
transportation, importation, exportation, among other activities.
Competition
Ethanol.
The
sugar
industry in Brazil has experienced some consolidation through merger and
acquisition activity during the last several years, according to industry
sources in Brazil, including the União da Agroindústria Canavieira de São Paulo
(“Unica”). Despite this recent consolidation, the industry remains highly
fragmented. There are few large players in the sector, and no entity can be
described as dominant. For example, Cosan, according to their own information,
is the largest sugar producer in Brazil, is responsible for only 5.3% of
production in Brazil; the next biggest sugar producer is 50% of the size of
Cosan. Below the top six producers, no producer has greater than 1% of the
market. Copersucar and Crystalsev are cooperatives of producers, and these
individual producers market ethanol independently, but sugar through the
cooperatives.
Perhaps
more important in our view, all of the producers are primarily sugar producers,
where ethanol is merely a product enhancement. We believe that over time, our
focus on producing clean fuel will give us competitive advantages over companies
that view ethanol as a byproduct. Furthermore, none of the producers in Brazil
view themselves as fuel companies, and none are positioning themselves in this
way.
The
Top Ten Producers in the Sugarcane/Ethanol Industry of
Brazil—2005/2006
Company
Plants
Millions
of Tons of Sugarcane Processed
Millions
of Tons of Sugar Produced
Annual
Ethanol Production in millions of gallons
Cosan
16
34.7
2,926
298
São
Martinho
2
9.7
597
116
Vale
do Rosario
3
9.6
641
105
Carlos
Lyra
5
8.9
827
52
Zillo
Lorenzeti
3
7.9
490
100
Alto
Alegre
3
7.6
720
49
Irmãos
Biagi
3
6.7
265
107
Santa
Terezinha
4
5.3
569
26
J.Pessoa
6
5.1
224
70
Nova
América
2
5.0
389
53
Top-Ten
groups
47
100.5
4,725
976
Market
share top-Ten groups
15
%
26
%
27
%
21
%
Source:
Unica
55
Note:
Copersucar and Crystalsev are marketing cooperatives in the table
above.
Biodiesel.
Similar
to the ethanol business, we believe that the biodiesel business is becoming
very
active and large amounts of capital are being attracted to the industry to
supply a strong demand for the fuels. In Brazil all existing competitors in
the
biodiesel area are small and undercapitalized, except Brasil Ecodiesel which
recently raised money in a public offering. The only major firms with the
resources to be major competitors in Brazil, are, in our opinion, Cargill,
Bunge
and ADM. Cargill, Bunge and ADM will add incremental production capacity to
their soybean crushing mills to provide the option of selling biodiesel instead
of virgin vegetable oils depending on the wholesale price for biodiesel and
for
virgin vegetable oil. Regarding the large crushing mills owned by companies
such
as Cargill, the mills are designed to be efficient in making protein rich feed
in which the oil extracted is an ancillary product to feed production.
There
are
a number of small three million gallon biodiesel plants being proposed
throughout the Northeast of Brazil based on using castor beans or soybeans.
In
the south of Brazil, soybeans and sunflower seeds are being proposed for
biodiesel plants. At this point, in our view and according to Revista Biodiesel,
the competition is small and fragmented.
The
environment for biodiesel in Brazil is being stimulated by the Brazilian
Government. The Brazilian Government has required a 2% mix of biodiesel by
2008
and 5% by 2012. However the Brazilian Government is considering advancing the
2012 requirement to 2008 or 2009. In addition, Brazil has a myriad of sales
and
value added taxes that biodiesel is not liable for, under certain conditions.
Thus, with the waiver of these taxes along the chain, biodiesel can be as
competitive as diesel at the pump to the consumer. As the margins for
distributors is greater than for conventional diesel, we believe that biodiesel
will adopt fast and take off fast in Brazil, much as ethanol has
done.
56
Economies
of Scale.While
the
ethanol industry lends itself to some economies of scale, we believe that such
economies effectively limit themselves at six million tons of sugar cane or
about 126 million gallons of production from several plants. This is primarily
because the mills themselves are limited in size—there are very few mills
crushing more than two million tons of sugar cane—due to the logistical problem
of transporting in the sugar cane and the need for land dominance in the area.
For example, a 1.5 million ton mill needs to dominate 10% of the land in a
25km
radius (optimal for transporting in). A 6 million ton mill, for example would
need a 40% land dominance in the same area, a very difficult proposition to
attain.
Summary
of Our Competitive Advantages
We
believe that the Company has the following competitive advantages in comparison
with other biofuels companies in Brazil:
Focus
on
Clean Fuels.Our
primary business is fuel, not agricultural commodities, such as sugar. Unlike
many of our competitors, our focus is on the efficient use of feedstocks,
multiple feedstocks and multiple fuel products.
Capital
Structure.Our
access to capital will allow us to invest in operational efficiency, technology
and commercialization. The Brazilian corporate sector has very limited access
to
capital. The agricultural industrial sector’s access to capital is even more
limited. Access to capital is a strong competitive edge in Brazil.
Vertical
Integration of Feedstock.We
will
both own and lease land pursuant to long-term leases, and are contracting more
land in this manner. In addition, we use bagasse to generate electricity and
steam for the industrial process. This gives us an ability to control cost
throughout the production process.
Technology.We
are
constantly looking at alternative ways to enhance yield and productive
capability through agricultural, process and operating technology improvements.
For example, sugar cane mills run for seven months of the year during the
harvest season, then are idle for five months. We are working with an
engineering firm to develop an alternative feedstock, such as corn (Brazil
is
the world’s fourth largest producer of corn) for the idle months. We are also
looking at enhanced yield sugar cane crops and process re-engineering in the
existing mills.
Logistics.Because
Brazil has such a large internal demand for ethanol, logistics for export are
significantly less developed. Our existing mill is located close to a major
ethanol collection center and railroad connected to the port of São Paulo.
However, we are also looking at our own port facilities in other areas and
new
opportunities that are located near pipelines, good roads and railroads. Our
proposed biodiesel facility is located at a port.
Employees
As
of
April 30, 2007, there were 240 full time employees in the industrial,
agricultural and administration areas and up to 600 further temporary workers
are retained seasonally through third parties during the harvest. Expansion
of
the facilities will require employing additional staff, which is roughly linear
in the case of agricultural production, but less than linear in the case of
industrial and administration functions.
We
believe that the existing entities have good relations with our employees
and the unions that represent them. We offer our employees, including our
executive officers, various benefits, which are provided in accordance with
the employee's position in our company. Benefits include medical assistance,
private pension plans and meal vouchers. Our employees are also legally entitled
to receive a yearly bonus equal to one-month's salary (known as the
“thirteenth'' (monthly) salary in Brazil), 33.3% of one month's salary for
vacation, and contributions of 8.0% of their salary into a defined contribution
pension fund known as the Guarantee Fund for Time of Service (Fundo
de Garantia por Tempo de Serviço).
Members of our Board of Directors are not entitled to these
benefits.
57
Organizational
Structure
The
Company is not part of a group.
Our
operating companies in Brazil are formed as Brazilian limitadas, with all of
the
quotas held by Comanche Brasil Participaçoes Ltda., our holding vehicle in
Brazil, except for a de minimus equity interest held by officers or employees
of
such Brazilian subsidiaries granted pursuant to employment agreements. In the
aggregate all such equity interests held by such Brazilian officers or employees
in the Brazilian subsidiaries do not exceed 1% of any Subsidiary’s outstanding
equity. Comanche Brasil Participaçoes is owned 100% (except only for a nominal
share that is owned by Alicia Noyola as required for the proper organization
of
a Brazilian Limitada)
by
Comanche Clean Energy LLC, organized in the U.S. to facilitate international
taxation structure. Comanche Clean Energy LLC is held in turn 100% by Comanche
Corporation, a Cayman Islands company, which is in turn owned 100% by us.
58
PROPERTY
The
following is a description of each facility and our physical review of each
of
our operations:
Santa
Anita Facility.
Santa
Anita is located about 150 kilometers west of São Paulo. The Santa Anita
facility has been recently upgraded. In addition, it includes 200,000 tons
of
proprietary cane for 2007 and another 350,000 tons of purchased cane to be
milled in 2007. The longer term Santa Anita capital plan will increase capacity
from 550,000 tons of sugar cane to approximately 1,250,000 tons of sugar cane
or
more. Based on using only sugar cane as the feedstock which is available only
210 days out of the year, the maximum ethanol output of Santa Anita will be
about 31 million gallons per year in 2008-2009. We will invest approximately
$7.7 million in the industrial area and a similar amount in the agricultural
area to increase Santa Anita’s capacity from 12.8 million gallons, a net
increase in capacity of 18 million gallons. The overall cost of expansion per
gallon of capacity is much more competitive than building a new
mill.
Typically,
mills have bottlenecks at some point along their production. There are four
major components: (i) feeding tables (where the sugar cane is crushed); (ii)
boilers and generators (to supply the mechanical power and steam); (iii)
fermentation tanks; and (iv) distillation columns. Thus, any particular
component may handle much more, but the processing capacity is limited by one
bottleneck. The Santa Anita bottleneck to capacity increase is in the areas
of
new columns for distillation, increased fermentation and an additional boiler.
Canitar
Facility.
Canitar
is located in SW São Paulo state near Ourinhos. It is a mill that was originally
a cachaca refinery, but was converted to ethanol about 5 years ago. It has
no
sugar capacity but can produce about 6 million gallons of ethanol per year.
The
plant requires a new boiler, which will be sized for its expanded capacity,
and
we will also install improvements to the distillation equipment, power plant
and
cane preparation system, as well as expand crushing capacity and add a juice
treatment facility. The plant is located in an excellent agricultural situation,
and provides a basis for a very cost effective nearly new plant. Accordingly,
the economics of purchase and retrofit are very attractive. Canitar’s capital
plan will increase capacity from 250,000 tons of sugar cane crushed annually
to
approximately 1,400,000 tons of sugar cane crushed annually, equivalent to
about
31 million gallons of ethanol per year. Expansion will be partially completed
in
2008, and fully built out by 2009. The overall cost of expansion per gallon
of
capacity is very competitive relative to a new mill.
Due
to
fluctuations in the price and supply of feedstock, we intend to utilize forward
contracting and hedging strategies to manage our commodity risk exposure and
optimize finished product pricing and supply. We intend to do this to help
guard
against price and supply movements that often occur in the various agricultural
oil markets.
Administrative
Offices.
The
Company has leased approximately 2,500 square feet of office space in the Vila
Olimpia area of the city of Sao Paulo for its principal offices in Brazil.
SELECTED
FINANCIAL DATA
The
following selected consolidated financial data should be read in conjunction
with “Management’s discussion and analysis of financial condition and results of
operations” and our consolidated financial statements and related notes included
elsewhere in this prospectus. The selected consolidated financial data presented
below are derived from our audited consolidated financial statements of Comanche
and the audited financial statements for Simões included elsewhere in this
prospectus, which are prepared in accordance with U.S. GAAP. It
was
not practical to obtain financial data for Simões prior to 2005. The
historical
results are not necessarily indicative of results to be expected in any future
period.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
the
related notes and other information included elsewhere in this registration
statement. This discussion contains forward-looking statements that are based
on
management’s current expectations, estimates and projections about our business
and operations. Our actual results may differ materially from those currently
anticipated and expressed in such forward-looking statements and as a result
of
the factors we describe under “Risk Factors” and elsewhere in this registration
statement. See “Special Note Regarding Forward-looking Statements” and “Risk
Factors.” We undertake no obligation to update publicly any forward looking
statements for any reason, even if new information becomes available or other
events occur in the future.
Company
Overview
Comanche
Corporation, through its subsidiaries, produces clean fuels in Brazil. All
of
our clean fuels production is currently destined for domestic consumption,
although we may also export to other countries in the future. We have acquired
two ethanol plants, Canitar, located in Ourinhos, Sao Paolo State, Brazil,
and
Santa Anita, located in Tatui, Sao Paolo State, Brazil, and one new
biodiesel plant, Bahia, located in Simões Filho,
Bahia
State, Brazil. We produce ethanol from sugar cane, which we believe to be the
most energy and cost efficient feedstock for the production of ethanol in the
world. We will produce biodiesel from a variety of feedstocks, optimizing
feedstock acquisitions near-term to minimize cost. Our business plan is to
be
vertically integrated into the majority of our feedstocks.
61
Results
of Operations
The
following discussion summarizes the significant factors affecting the
consolidated operating results of the Company for the period from June 8, 2006
(date of inception) through December 31, 2006. This discussion should be
read in conjunction with the audited consolidated financial statements and
notes
to the audited consolidated financial statements contained elsewhere in this
report.
Our
revenues are principally derived from the sale of ethanol produced in the Santa
Anita plant. Additional revenue is obtained from the sale of sugar cane from
our
farmland in the Canitar area. The Canitar plant is currently being updated
and is expected to become operational by May 2008. The Bahia biodiesel
plant is also being expanded and automated and is expected to become
operational by July 2007.
We
sell
ethanol to many different customers at current market prices. We have also
signed an agreement with Petróleo Brasileiro S.A. (“Petrobras”) to sell 9
million liters of biodiesel at a fixed price of R$1.885/liter through 2007.
In
the near-term, we expect that virtually all of the biodiesel production from
our
Salvador facility will be sold to Petrobras under this or similar
arrangements.
Executive
Summary
Comanche
commenced operations on June 8, 2006 (date of inception) and had reached
agreements in principle to acquire certain Brazilian ethanol and biodiesel
plants as of year-end. Accordingly, we generated no revenues and had no cost
of
sales in 2006. During the year we incurred pre-operational expenses $1.17
million and recognized a net loss of the same amount.
Our
founders invested a total of $0.7 million in the Company during 2006. Our
founders and affiliated companies controlled by our founders advanced, in the
form of demand notes, an additional $2.34 million to Comanche during the year.
In 2006 we advanced $1.85 million to the owners of the Canitar ethanol plant
to
secure the purchase of that facility. As of December 31, 2006, we had cash
available of $0.03 million.
Selling,
general and administrative expenses (“SG&A”) were $1.10 million for the
period from June 8, 2006 (date of inception) to December 31, 2006. These amounts
consisted primarily of professional fees ($0.46 million), payroll ($0.46
million) and travel ($0.09 million).
Interest
expense for the period was $0.08 million. The bulk of this amount relates to
interest accrued on loans from our founders and affiliated companies controlled
by our founders.
We
have
not yet generated any profits and, accordingly, no income tax expense was
recognized for the period. Income taxes in Brazil comprise Federal income tax
and social contributions. There are no state or local income taxes in Brazil.
Brazilian statutory income tax rates are 25.0% for Federal income taxes and
9.0%
for Social contributions. As of December 31, 2006, Comanche Participações, our
Brazilian subsidiary, had tax loss carryforwards of approximately $0.34 million.
These amounts can be used to offset future taxable income and have no expiration
date, but can only be offset against 30% of pre-tax income in any given year.
We
are not subject to income taxes in the Cayman Islands, our jurisdiction of
incorporation, although some of our subsidiaries may be subject to income taxes
in their respective jurisdictions.
62
Research
and Development, Patents and Licenses
Research
and Development
The
technology that we use to produce ethanol and biodiesel is well-established.
We
do not currently engage in any research and development activities and had
no
R&D expenses in 2006.
Patents
and Licenses
We
do not currently hold any patents.
All of our plants require certain government-issued environmental licenses
in
order to operate. All of our plants currently hold all of the licenses necessary
in order for them to operate.
Trends
and Factors that May Affect Future Operating Results
Ethanol
Pricing
We
sell
all of our ethanol production to various customers at prevailing market prices.
We produce ethanol during the sugar cane harvest when the supply of ethanol
is
most plentiful. We currently have the ability to store up to 19 million liters
of ethanol and intend to expand this capacity to at least 24 million
liters by 2008. We intend to stockpile our ethanol production during periods
of
relatively low market prices and to sell during periods of higher prices. There
is no guarantee that we will be successful at this, however. Liquidity concerns
may also force us to sell ethanol during periods of sub-optimal prices. We
do
not currently engage in any hedging activities related to ethanol, although
we
may do so in the future.
Sugar
Cane Pricing
We
are
currently both a buyer and seller of sugar cane. We currently grow sugar cane
on
both owned and leased land in the vicinity of our Canitar plant and on leased
land surrounding our Santa Anita plant. Since the Canitar plant is not currently
operating, we are selling all of the cane we grow there in the local markets.
Once the Canitar plant is operational, we will use this cane, along with
purchased cane as the principal feedstock for the Canitar plant. Similarly,
we
use our grown cane along with purchased cane as the principal feedstock for
the
Santa Anita facility. As much as possible, we will attempt to secure 100% of
our
cane feedstock needs before the harvest actually begins. We do not currently
engage in hedging activities relating to sugar cane prices, although we may
do
so in the future.
Bio-Diesel
Pricing and Feedstock
We
expect
to begin biodiesel production by August 2007. We have signed a contract to
sell a portion of our anticipated 2007 biodiesel production to
Petrobras at a fixed price and we intend to enter into similar agreements during
2007. We have not, however, entered into fixed price contracts to secure all
feedstock for our Bahia plant. If feedstock prices increase, we could
experience reduced profitability. We are able to use many different types of
vegetable and animal fats as feedstock for our biodiesel production and we
intend to alter this mix continuously to minimize production costs. There is
no
guarantee that we will be successful in accomplishing this goal. Also, in order
to qualify for reduced tax rates and to comply with the terms of the Petrobras
contract, we will be required to secure a certain percentage of our
biodiesel feedstock from family-owned farms in Brazil. This may increase
our costs for raw materials. We do not currently engage in hedging activities
related to our biodiesel production, although we may do so in the
future.
63
Supply
and Demand
The
demand for ethanol in Brazil is substantially increasing due to flex vehicles
which represent nearly 80% of new cars sold in the country. Dispute the
increasing demand, there are number of new projects and expansion programs
on
current mills that might increase production capacity above the internal
demand
in the next years. This additional capacity may cause supply to exceed
demand. If additional demand for ethanol is not created the excess supply
may cause ethanol prices to decrease, perhaps substantially.
Expansion
We
have
announced plans to expand our ethanol production capacity at our Canitar and
Santa Anita plants by up to an aggregate of 170 million liters. We are
currently negotiating engineering, procurement and construction (“EPC”)
contracts to start expansion in the production capacity at the Canitar
facility in 2007 and plan to increase Santa Anita’s capacity
for the
2009 season. We are currently finishing an upgrade to our Bahia
biodiesel plant which will allow the plant to operate 24 hours per day with
very
little increase in employee headcount. The timing of such expansions and the
final terms of the EPC contracts may have a material affect on our results
of
operations. In addition, we may not have sufficient liquidity to complete
all of these planned expansions.
Off-Balance
Sheet Arrangements
We
have also signed an agreement with
Petróleo Brasileiro S.A. (“Petrobras”) to sell 9 million liters of biodiesel at
a fixed price of R$1.885/liter through 2007.
Liquidity
and Capital Resources
Overview
and Outlook
The
following table sets forth selected information concerning our financial
condition as of December 31, 2006:
During
2006 we had no outside sources of liquidity and we were completely dependent
on
equity investments by our founders, and on loans from our founders and
affiliated companies controlled by our founders, to meet our financial
obligations.
In
April
2007, we completed a $59.8 million private placement, consisting of $15 million
of equity and $44.8 million of convertible notes due April 2012. In
June
2007, we completed a $22.3 million private placement consisting of $5.25 million
of equity and $17.05 million of convertible notes due April
2012.
64
We
anticipate that we will be dependent on the capital markets to satisfy existing
anticipated working capital needs, debt service obligations, capital expenditure
and other anticipated cash requirements in the near future.
Sources
of Liquidity
Our
principal sources of liquidity in 2006 were equity investments by our founders
and advances made by our founders and affiliated companies controlled by our
founders.
Equity
& notes payable.
Our
founders invested a total of $0.7 million in the Company during 2006. Our
founders and affiliated companies controlled by our founders advanced an
additional $2.3 million to us during 2006
and
$0.4 million during the first quarter of 2007. These advances bear
interest at a rate of 9% annually and are repayable on demand.
In
April
2007, we completed a $59.8 million private placement, consisting of $15 million
of equity and $44.8 million of convertible notes due April 2012. The
convertible notes bear interest at a rate of 12 month Libor plus 3.5% per
annum and are convertible into our Ordinary Shares at a price of $5.50 per
share. After transaction costs, we realized net proceeds of approximately $55.8
million from this offering.
In
June
2007, we completed a $22.3 million private placement, consisting of $5.25
million of equity and $17.05 million of convertible notes due April 2012.
The
convertible notes bear interest at a rate of 12 month Libor, plus 3.5% per
annum
and are convertible into our ordinary shares at a price of $5.50 per share.
After transaction cost, we realized set proceeds of $22.25 million from this
offering.
In
connection with the above transaction, in April 2007 our founders agreed to
convert an additional $0.4 million of their advances to equity and agreed to
certain restrictions on the repayment of the remaining advances.
Uses
of Liquidity
Our
principal uses of liquidity are acquisitions, capital expenditures and payments
related to our outstanding debt.
Acquisitions.
During 2006 we advanced approximately $1.9 million to the owners of the Canitar
facility. These funds were used to reduce the existing indebtedness of the
facility and to secure the purchase of sugar cane for the 2006 harvest. $0.8
million of the amounts advanced were secured by contracts to purchase ethanol
at
a 7% discount to the prevailing price. The assets of the Canitar plant were
secured as collateral against the remaining amounts due.
Subsequent
to year-end, we purchased the Canitar, Santa Anita and Bahia plants as well
as
the Ourinhos farmland for a total purchase price of approximately $46
million in cash and notes, $0.8 million in stock of Comanche plus the
assumption of $7.8 million in debt or other liabilities.
Capital
expenditures.
We
had no capital expenditures during 2006 and had no substantial capital
commitments as of December 31, 2006. We expect to incur substantial capital
expenditures in 2007 related to the upgrades of the Canitar
and Bahia plants and related to planting of feed stocks for Canitar, Santa
Anita and Bahia.
Payments
related to our outstanding debt. Our
founders and affiliated companies controlled by our founders advanced
approximately $2.3 million to us in 2006
and
an additional $0.4 million in the first quarter of 2007 in the form of
notes payable. These notes bear interest at a rate of 9% annually and are
repayable on demand. In 2006 no payments were made against these demand notes.
In
April 2007 our founders agreed to convert approximately $2.4 million of this
amount to equity and agreed to certain restrictions on the repayment of the
remaining debt.
Environmental
Matters
We
are
subject to extensive federal, state and local environmental laws, regulations
and permit conditions (and interpretations thereof), including those relating
to
the discharge of materials into the air, water and ground, the generation,
storage, handling, use, transportation and disposal of hazardous materials,
and
the health and safety of our employees. These laws, regulations, and
permits require us to incur significant capital and other costs. They may
also require us to make operational changes to limit actual or potential impacts
to the environment. A violation of these laws, regulations or permit
conditions can result in substantial fines, natural resource damages, criminal
sanctions, permit revocations and/or facility shutdowns. In addition,
environmental laws and regulations (and interpretations thereof) change over
time, and any such changes, more vigorous enforcement policies or the discovery
of currently unknown conditions may require substantial additional environmental
expenditures.
In
addition, the hazards and risks associated with producing and transporting
our
products (such as fires, natural disasters, explosions, abnormal pressures
and
spills) may result in spills or releases of hazardous substances, and may
result
in claims from governmental authorities or third parties relating to actual
or
alleged personal injury, property damage, or damages to natural resources.
We maintain insurance coverage against some, but not all, potential losses
caused by our operations. Our coverage includes, but is not limited to, physical
damage to assets, employer’s liability, comprehensive general liability,
automobile liability and workers’ compensation. We do not carry
environmental insurance. We believe that our insurance is adequate for our
industry, but losses could occur for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. The occurrence of events
which result in significant personal injury or damage to our property, natural
resources or third parties that is not covered by insurance could have a
material adverse impact on our results of operations and financial
condition.
Simoes
The
following discussion and analysis of the financial condition and results
of
operations for Destliaria de Álcool Simões Ltda. (“Simões”)should
be read in conjunction with the financial statements and the related notes
and
other information included elsewhere in this prospectus.
This discussion contains forward-looking statements that are based on
management’s current expectations, estimates and projections about the business
and operations of Simões. Actual results may differ materially from those
currently anticipated and expressed in such forward-looking statements
and as a
result of the factors described under “Risk Factors” and elsewhere in this prospectus.
See “Special Note Regarding Forward-looking Statements” and “Risk Factors.” We
undertake no obligation to update publicly any forward looking statements
for
any reason, even if new information becomes available or other events occur
in
the future.
The
financial information related to Simões and disclosed herein is based on
financial statements prepared in accordance with Brazilian GAAP provided
by the
previous owners of Simões, and making such adjustments to convert such
statements to US GAAP. These statements have been audited by Simões’ prior
auditors, however Comanche did not have access to all of Simões’ books and
records prior to the closing and Comanche has
made no effort to independently verify the financial information
presented
herein.
Simões
had numerous transactions with its former affiliates that may not have
been at
arms-length, with the result that Simões’ financial results may have been
materially different had these transactions been conducted at arms-length.
The
Company cannot estimate such differences and makes no representations as
to how
the financial results of Simões might have differed from the results shown had
these transactions been conducted at arms-length.
Company
Overview
Simões
produced and marketed ethanol in Brazil. In April 2007, Simões was acquired by a
subsidiary of Comanche Clean Energy Corporation (“Comanche”) 2007 and
subsequently changed its name to Comanche Biocombustives de Santa Anita
Ltda
(“Santa Anita”). All of Simões’ ethanol production was sold for domestic
consumption. Simões/Santa Anita produces ethanol from sugar cane, which it
believes to be the most energy and cost efficient feedstock for the production
of ethanol in the world. Simões' business plan is to be vertically integrated
into the majority of its feedstocks.
Results
of Operations
Executive
Summary
Simões
had a net loss of $2.1 million in 2006 versus a net loss of $2.2 million
in
2005. Simões had numerous transactions with its former affiliates that may not
have been at arms-length, with the result that Simões’ financial results may
have been materially different had these transactions been conducted at
arms-length.
The
following discussion summarizes the significant factors affecting the
consolidated operating results of Simões
for years ended December 31, 2006 and 2005. This discussion should be read
in conjunction with the audited consolidated financial statements and notes
to
the audited consolidated financial statements contained elsewhere in this
report.
Revenues
were principally derived from the sale of ethanol produced in the Simões Tatui
plant.
66
Simões
generated a net loss of $2.1 million, or $0.65 per diluted share, in 2006.
This represents a 2.5% decrease in its net loss versus 2005.
Net
revenue for 2006 was $3.3 million, a decrease of $1.9 million, or 36.2%,
over
2005 revenue of $5.2 million. Cost of sales meanwhile dropped 40% from
$6.2 million in 2005 to $3.7 million in 2006. As a percentage of revenues,
cost
of sales dropped from 119% of revenues in 2005 to 112% in 2006. This caused
the
gross loss to drop 60% from $1.0 million in 2005 to $0.4 million in
2006.
Despite
an average ethanol price of R$0.90/liter in 2006, 21.6% higher than 2005’s
average, market prices for sugarcane in the field was 41.7% higher in 2006,
with
an average price for ATR (recoverable sugar content) of R$0.34/kg in 2006,
versus R$0.24/kg in 2005. The principal factor for the increase in
sugarcane prices was directly related to sugar prices, which were
extraordinarily high during 2006, with an average of R$45.30 per 50kg bag
of
crystal sugar in 2006, 44.6% higher than the R$ 31.32 per 50kg bag average
in
2005 in São Paulo State. Since Simões only produces ethanol, not crystal
sugar, and relied principally on purchases from third party cane producers
during the 2006 season, as owned plantations were still being formed, planted
and expanded, management decided to operate below capacity during the 2006
season and not pay premium prices for third party sugarcane that could
be better
afforded by sugar producers. In addition, the exchange rate between the
Real and
the Dollar dropped 10.47% from an average of 2.435 in 2005 to an average
of
2.180 in 2006. Also as explained previously, Simões had a number of transactions
with affiliates that may not have been at arms-length.
Selling,
general and administrative expenses (“SG&A”) were $1.7 million in 2006,
compared to $0.8 million in 2005. As a percentage of revenues, SG&A
expenses increased from 15.5% of revenues in 2005 to 51.0% in 2006. The
increase
in SG&A expenses was primarily due to a $0.8 million increase in payroll
costs. During 2006 Simões
substantially increased management salaries and added additional headcount
in
anticipation of expanding 2007 production capacity.
Non-operating
income increased 126%, from a loss of $0.2 million in 2005 to a gain of
$0.1
million in 2006. This was primarily due to a transaction gain of $0.2 million
in
2006. As a result, the Simões net loss decreased 2.49% from a $2.2 million loss
in 2005 to a $2.1 million loss in 2006.
General
The
following general factors should be considered in analyzing Simões' results of
operations:
Variability
of Gross Profit
The
gross
profit for Simões
has
fluctuated and in the future, the gross profit for Simões may continue to
fluctuate substantially from period to period. Gross profit from ethanol
sales is mainly affected by changes in selling prices for ethanol, the
cost to
us of growing sugar cane on leased land, and the cost of purchased sugar
cane
from third parties. The rise and fall of ethanol and sugar cane prices
affects the levels of costs of goods, gross profit and inventory values,
even in
the absence of any increases or decreases in business activity. Selling
prices for ethanol are affected principally by the supply of ethanol in
the
market, the price of oil and gasoline and other market factors. All of
these factors are beyond Simões' control.
Simões’
most volatile manufacturing cost is purchased sugar cane. See “Risk
Factors”. Simões’ business is dependent upon the availability and price of sugar
cane. Significant disruptions in the supply of cane will materially affect
Simões’ operating results. In addition, since Simões generally cannot pass
on increases in cane prices to its customers, continued periods of historically
high cane prices will also materially adversely affect Simões’ operating
results.
Conversion
costs per liter are an important metric in determining profitability.
Conversion costs represent the cost of converting the sugar cane into ethanol,
and include production salaries, wages and stock compensation costs, fringe
benefits, utilities, maintenance, denaturant, insurance, materials and
supplies
and other miscellaneous production costs. It does not include depreciation
and amortization expense.
67
Summary
of Critical Accounting Policies
We
base
this discussion and analysis of results of operations, cash flow and financial
condition on our consolidated financial statements, which have been prepared
in
accordance with generally accepted accounting principles in the U.S.
Inventories
Inventories
are stated at the lower of cost and net realizable value. Work in progress
and
finished goods are valued at direct production cost. The cost of production
comprises the direct cost of raw materials purchased from third parties,
agriculture costs, which comprise the growing costs and the costs of harvesting,
transport and other point of purchase costs, the direct manufacturing expenses,
an appropriate allocation of material and manufacturing overhead and an
appropriate share of the depreciation and write-downs of assets used for
production, when applicable. If the purchase or production cost is higher
than
the net realizable value, inventories are written down to net realizable
value.
Net realizable value is the estimated selling price in the ordinary course
of
business, less the estimated costs of completion and selling expenses.
Property,
plant and equipment
Property,
plant and equipment are stated at purchase price or production cost less
accumulated depreciation and impairment losses. Freehold land is carried
at
purchase cost. Expenses for the repair of property, plant and equipment
are
usually charged against income when incurred. They are, however, capitalized
when they increase the future economic benefits expected to arise from
the item
of property, plant and equipment. Costs of developing sugar cane orchards
are
capitalized during the development period and depreciated over the estimated
productive lives. Assets under construction represent plant and properties
under
construction and are stated at cost. This includes cost of construction,
plant
and equipment and other direct costs. Assets under construction are not
depreciated until such time as the relevant assets are available for their
intended use. Interest incurred on borrowings directly attributable to
the
construction of such assets is capitalized as part of the cost of the asset.
Depreciation is calculated on a straight line method over the estimated
useful
life or utility of the assets. Where the carrying amount of an asset is
greater
than its estimated recoverable amount, it is written down immediately to
its
recoverable value.
Impairment
of assets
Assets
are reviewed for impairment whenever events or changes in circumstances
indicate
that their carrying amount may not be recoverable. Whenever the carrying
amount
of an asset exceeds its recoverable amount (being the higher of its fair
value
less cost to sell and its value in use), an impairment loss is recognized
in
income. The fair value less cost to sell is the amount obtainable from
the sale
of an asset in an arm’s length transaction while value in use is the present
value of estimated future cash flows expected to arise from the continuing
use
of an asset and from its disposal at the end of its useful life. Recoverable
amounts are estimated for individual assets or, if this is not possible,
for the
cash generating unit to which the assets belong. Reversal of impairment
losses
recognized in prior years is recorded in income when there is an indication
that
the impairment losses recognized for the assets no longer exist or have
decreased.
Interest
bearing borrowings
Interest
bearing borrowings are recognized initially at the proceeds received, net
of
transaction costs incurred. In subsequent periods, borrowings are stated
at
amortized cost using the effective yield method; any difference between
proceeds
(net of transaction costs) and the redemption value is recognized in the
income
statement over the period of the borrowing. When borrowings are repurchased
or
settled before maturity, any difference between the amount repaid and the
carrying amount is recognized immediately in the income statement.
68
Provisions
Provisions
are recognized when there is a present legal or constructive obligation
as a
result of past events, it is probable that an outflow of resources will
be
required to settle the obligation and a reliable estimate of the amount
can be
made. Contingencies for labor, tax, commercial and civil litigations in
the
ordinary course of our business are recorded when determined that the loss
is
probable and can be reasonably estimated. The assessment of liability and
amount
of loss is based on a number of factor, including legal advice and management’s
estimate of the likely outcome.
Income
Taxes
The
Company has not yet generated any profits and, accordingly, no general
provision
for income taxes is recorded in these financial statements. Income taxes
comprise Federal income tax and social contribution.. The Brazilian income
tax
statutory rates are 25.0% for Federal income tax and 9.0% for Social
contribution.
Deferred
tax assets and liabilities are recognized under the liability method for
temporary differences between the financial accounting and income tax basis
of
assets and liabilities. Deferred tax assets are reduced by a valuation
allowance
to an amount that management believes is more likely than not to be
realized.
Federal
and State income tax filings of the Company are subject to examination
by the
tax authorities.
Revenue
recognition
The
company derives its revenue from sales of ethanol. Revenues are recognized
when
title to the products is transferred. The company recognizes revenue on
products
it sells to distributors when, according to the terms of the sales agreements,
delivery has occurred, performance is complete, no right of return exists,
and
pricing is fixed or determinable at the time of sale.
There
are
several additional conditions for recognition of revenue: that the collection
of
sales proceeds be reasonably assured based on historical experience and
current
market conditions, that pricing be fixed or determinable, and that there
be no
further performance obligations under the sale.
The
Company follows Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, the SEC interpretation of accounting guidelines on revenue
recognition.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued Interpretation No. 48— Accounting for Uncertainty in
Income Taxes-An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
an
enterprise’s financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Statement will be effective for the Company
beginning January 1, 2007 and is not expected to have a material impact on
the Company’s financial statements.
69
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS
157). SFAS 157 provides a common definition of fair value and establishes
a
framework to make the measurement of fair value in generally accepted accounting
principles more consistent and comparable. SFAS 157 also requires expanded
disclosures to provide information about the extent to which fair value
is used
to measure assets and liabilities, the methods and assumptions used to
measure
fair value, and the effect of fair value measures on earnings. SFAS 157
is
effective for fiscal years beginning after November 15, 2007. The Company
is currently analyzing the potential impact, if any, of SFAS 157 on its
financial statements.
FASB
Statement 155: Fair Value Option for Hybrid Instruments: SFAS
No. 155:
In May
2005, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Instruments,”
which is
an amendment of SFAS No. 133 and 140 and allows financial instruments that
have embedded derivatives to be accounted for as a whole (eliminating the
need
to bifurcate the derivative from its host) if the holder elects to account
for
the whole instrument on a fair value basis. SFAS No. 155 is effective for
all financial instruments acquired or issued after the beginning of an
entity’s
first fiscal year that begins after September 15, 2006. Companies must
apply the
standard prospectively. This
Statement does not currently affect the Company’s financial
statements.
Research
and Development, Patents and Licenses
Research
and Development
The
technology that Simões uses to produce ethanol is well-established. Simões does
not currently engage in any research and development activities and had
no
R&D expenses in 2006.
Patents
and Licenses
Simões
does not currently hold any patents. All of our plants require certain
government-issued environmental licenses in order to operate. Our plant
currently holds all of the licenses necessary in order for it to
operate.
Trends
and Factors that May Affect Future Operating Results
Ethanol
Pricing
Simões
sells all of its ethanol production to various customers at prevailing
market
prices. Simões produces ethanol during the sugar cane harvest when the supply of
ethanol is most plentiful. Simões currently has the ability to store up to 10
million liters of ethanol and intend to expand this capacity to 15 million
liters. Simões intends to stockpile its ethanol production during periods of
relatively low market prices and to sell during periods of higher prices.
There
is no guarantee that Simões will be successful at this, however. Liquidity
concerns may also force Simões
to sell ethanol during periods of sub-optimal prices. Simões does not currently
engage in any hedging activities related to ethanol, although it may do
so in
the future.
Sugar
Cane Pricing
Simões currently
grows sugar cane on leased land surrounding its Tatui plant. Simões uses its
grown cane along with purchased cane as the principal feedstock for the
Tatui
facility. As much as possible, Simões
will attempt to secure 100% of its cane feedstock needs before the harvest
actually begins. Simões does not currently engage in hedging activities relating
to sugar cane prices, although it may do so in the future.
Supply
and Demand
70
The
demand for ethanol in Brazil is substantially increasing due to flex fuel
vehicles, which represent nearly 80% of new cars sold in the country. Despite
the increasing demand, there are a number of new projects and expansion
programs
that might increase production capacity above the internal demand in the
next
years. This additional capacity may cause supply to exceed demand. If
additional demand for ethanol is not created, the excess supply may cause
ethanol prices to decrease, perhaps substantially.
Expansion
At
the
end of the 2007 sugar cane harvest, Simões will also evaluate the feasibility of
expanding production capacity at its Tatui ethanol plant. The timing of
such
expansions may have a material affect on Simões' results of operations. In
addition, Simões may not have sufficient liquidity to complete all of these
planned expansions.
Off-Balance
Sheet Arrangements
Simões
had numerous transactions with its former affiliates that may not have
been at
arms-length. Simões does not know whether any of these transactions might have
constituted off-balance sheet arrangements. Simões does not intend to have any
non-arms-length transaction with affiliates in the future.
Liquidity
and Capital Resources
Overview
and Outlook
The
following table sets forth selected information concerning the financial
condition of Simões as of December 31, 2006 and 2005:
Sources
of Liquidity
Simões’
principal sources of liquidity in 2005 and 2006 were from ethanol sales
and
loans from related parties.
Uses
of Liquidity
Simões’
principal uses of resources were for the purchase of sugar cane, operating
expenses, capital expenditures and payments related to outstanding
debt.
Capital
expenditures.
Simões’ capital expenditures totaled $1.0 million in 2006 and $0.5 million in
2005. 2006 capital expenditures included $0.6 million for planting sugar
cane on
leased land and $0.4 million for machinery and equipment. 2005 capital
expenditures included $0.5 million for sugar cane planting costs. At the
end of
the 2007 production season, Simões will evaluate various alternative to
expand production capacity at our Santa Anita plant.
Payments
related to our outstanding debt.
During
2006 Simões’
controlling shareholders substantially restructured the Company’s transactions
and indebtedness with affiliates. As a result, related party payables were
reduced by approximately $9.3 million during the year.
71
Environmental
Matters
We
(Comanche/Santa Anita) are subject to extensive federal, state and local
environmental laws, regulations and permit conditions (and interpretations
thereof), including those relating to the discharge of materials into the
air,
water and ground, the generation, storage, handling, use, transportation
and
disposal of hazardous materials, and the health and safety of our
employees. These laws, regulations, and permits require us to incur
significant capital and other costs. They may also require us to make
operational changes to limit actual or potential impacts to the
environment. A violation of these laws, regulations or permit conditions
can result in substantial fines, natural resource damages, criminal sanctions,
permit revocations and/or facility shutdowns. In addition, environmental
laws and regulations (and interpretations thereof) change over time, and
any
such changes, more vigorous enforcement policies or the discovery of currently
unknown conditions may require substantial additional environmental
expenditures.
Simões
is
also subject to potential liability for the investigation and cleanup of
environmental contamination at each of the properties that it owns or
operates. Simões may also be subject to related claims by private parties
alleging property damage or personal injury due to exposure to hazardous
or
other materials at or from such properties. Simões has not accrued any
amounts for environmental matters as of December 31, 2006. The ultimate
costs of any liabilities that may be identified or the discovery of additional
contaminants could adversely impact Simões’
results of operation or financial condition.
In
addition, the hazards and risks associated with producing and transporting
our
products (such as fires, natural disasters, explosions, abnormal pressures
and
spills) may result in spills or releases of hazardous substances, and may
result
in claims from governmental authorities or third parties relating to actual
or
alleged personal injury, property damage, or damages to natural resources.
Simões maintains insurance coverage against some, but not all, potential losses
caused by its operations. Its coverage includes, but is not limited to,
physical
damage to assets, employer’s liability, comprehensive general liability,
automobile liability and workers’ compensation. Simões does not carry
environmental insurance. Simões believes that its insurance is adequate
for its industry, but losses could occur for uninsurable or uninsured risks
or
in amounts in excess of existing insurance coverage. The occurrence of
events which result in significant personal injury or damage to our property,
natural resources or third parties that is not covered by insurance could
have a
material adverse impact on Simões' results of operations and financial
condition.
Subsequent
Event
Simões
was acquired by a subsidiary of Comanche Clean Energy Corporation in
April 2007.
72
UNAUDITED
PRO FORMA
CONSOLIDATED
FINANCIAL STATEMENTS
Comanche
Clean Energy Corporation
(a
Cayman Islands Exempted Company)
BASIS
OF PREPARATION
In
April
2007, the Company, through its subsidiaries, acquired (i) all of the equity
interests of Distileria de Álcool Simões Ltda. (“Simões”), (ii) all of the
equity interests of Ibr Indústria Brasileira de Resinas Ltda. (“Bahia”), (iii)
certain assets of Ouro Verde Acucar e Alcool Ltda. (“Canitar”), and (iv) certain
farmland in Ourinhos, São Paulo, Brazil. The financial information related to
Simões and disclosed herein is based on financial statements prepared in
accordance with Brazilian GAAP provided by the previous owners of Simões, and
making such adjustments as considered necessary to convert such statements
to US
GAAP. These statements have been audited by Simões’s prior auditors, however the
Company did not have access to all of Simões’s books and records prior to the
closing and has not made any effort to independently verify the financial
information for Simões presented herein.
Simões
had numerous transactions with its former affiliates that may not have been
at
arms-length, with the result that Simões’ financial results may have been
materially different had these transactions been conducted at arms-length.
The
Company cannot estimate such differences and makes no representations as
to how
the financial results of Simões might have differed from the results shown had
these transactions been conducted at arms-length. However, the Company has
independently verified the capacity of the Simões plant and the leases of land
and the availability of sugar cane in the area and future financial statements
will reflect the results of actual operations without such transactions.
The
Ourinhos farmland does not currently constitute a stand-alone business, and
therefore, no historical statements have been provided and the acquired assets
of Canitar are immaterial so as not to require separate financial statements
under US GAAP.
Bahia
has
a historic business unrelated to agricultural clean fuels, and began
construction of the biodiesel plant in 2006. Construction of the basic biodiesel
plant was completed recently, but automation work is still in progress and
is
expected to be completed by July 2007. Hence, the plant has not yet begun
operations. Since all of Bahia’s assets that are unrelated to biodiesel were
spun off to the former shareholders before the acquisition by the Company,
separate “carve-out” financial statements have been prepared by Bahia’s
accountants and pursuant to construction accounting principles, all of the
costs
related to the biodiesel plant construction were capitalized and the “carve-out”
financial statements do not show any revenues or expenses.
The
Company derived the Pro Forma financial data below as of December 31, 2006
from
the audited financial statements of Comanche Corporation consolidated after
incorporating pro-forma adjustments with the estimated US GAAP financial
statements of Simões.
All
of
the summary data presented below should be read in conjunction with the
Financial Statements included elsewhere in this prospectus.
73
SUMMARY
FINANCIAL DATA
Estimated
Unaudited Pro Forma Combined Balance Sheet (including Simões)
The
selected pro forma financial information represents the consolidated
financial results of the Company and Simões Pro Forma as of December 31,2006. As discussed above, the balance sheets of Bahia, Canitar
and the
Ourinhos farmland are not included either because they have
no operations
or because operating results are clearly
immaterial.
(2)
Simões’
financial results are based on the financial statements provided
by
Simões’ former owners and management, and audited by Simões’s former
auditors. The Company has made no effort to independently verify
the
financial information for Simões presented herein.
(3)
The
Simões financial results reflect a number of transactions with
affiliates
that may not have been conducted on an arms-length basis. The
consolidated
pro forma results presented herein might have differed significantly
had
these transactions been conducted on an arms-length basis.
At this time it
is not practical for the Company to determine how the consolidated
financial statements might have differed had these transactions
been
conducted on an arms-length basis and makes no representations
to this
effect.
(4)
Assumes
that all Simões financial assets and liabilities would have been
liquidated prior to the
acquisition.
(5)
Assumes
that $15 million of equity and $44.8 million of convertible
debt (at 12
months Libor plus 3.5%) would have been issued to finance the
Simões
acquisition. Also assumes that interest expense of $4.0 million
related to
the convertible debt have been paid with
cash.
(6)
The
Consolidated Pro Forma financial results presented herein are
for
illustrative purposes only.
76
SUMMARY
FINANCIAL DATA
In
April
2007, Comanche Clean Energy Corporation (“Comanche”) completed a private
placement offering and acquired Comanche Corporation (“Comanche Sub”), a Cayman
Islands corporation which was incorporated and commenced operations in
2006,
pursuant to a share exchange transaction with the holders of all of the
outstanding capital stock of Comanche Sub (the “Reorganization”). Immediately
following the Reorganization and the Note Financing, through our subsidiaries,
we acquired (i) certain of the assets of Ouro Verde (“Canitar”), (ii) certain
farmland, crops and machinery in the Ourinhos area; (iii) all of the equity
interests of Ibr (“Bahia”); and (iv) all of the outstanding equity interests of
Simoes.
.
All
of
the summary data presented below should be read in conjunction with the
information set forth in the “Financial Considerations” section and the
Unaudited Financial Statements included elsewhere in this Memorandum. The
balance sheets below are adjusted for the proceeds of the private placement
and
the estimated impact of the acquisitions as of December 31, 2006.
Consolidated
Unaudited Pro Forma Comanche Balance Sheet
Pro
Forma for the April 2007 Private Placement Financing as of
December 31,2006
($000's)
Acquired
Companies
Estimated
Estimated
Estimated
Existing
Pre-
Transaction
Financing
Pro
Forma
Comanche
Bahia
Santa
Anita
Canitar
Other
Transaction
Adjustments
Adjustments
Notes
Balance
Sheet
Unaudited
Audited
Estimated
Estimated
Estimated
Estimated
Assets
Cash
$
32
$
(9,076
)
$
(29,157
)
$
(1,820
)
$
(2,897
)
$
(42,918
)
$
(3,827
)
$
59,753
A
$
13,008
Loans
Receivable
1,852
0
0
(1,852
)
0
0
0
0
0
Inventories
0
37
0
0
0
37
0
0
37
Prepaid
Expenses
79
0
0
0
0
79
(62
)
0
17
Total
Current Assets
1,963
(9,039
)
(29,157
)
(3,672
)
(2,897
)
(42,802
)
(3,889
)
59,753
13,062
Land
0
1,014
580
29
5,665
7,288
0
0
7,288
Planted
Cane
0
0
1,117
0
0
1,117
0
0
1,117
Property,
Plant & Equipment
0
1,285
11,613
3,885
646
17,429
0
0
17,429
Transaction
Financing Costs
0
0
0
0
0
0
2,913
0
2,913
Goodwill
0
9,091
19,161
2,190
578
31,020
0
0
B
31,020
Total
Assets
$
1,963
$
2,351
$
3,314
$
2,432
$
3,992
$
14,052
$
(976
)
$
59,753
$
72,829
Liabilities
& Equity
Accounts
Payable & Accrued Liabilities
17
313
0
234
0
564
0
0
564
Short-Term
Debt
0
0
0
0
1,546
1,546
0
0
1,546
Total
Current Liabilities
17
313
0
234
1,546
2,110
0
0
2,110
Due
to Affiliates
2,399
0
0
0
0
2,399
0
0
2,399
Long-Term
Lease Obligations
0
0
303
0
0
303
0
0
303
Long-Term
Debt
0
982
0
1,403
2,446
4,831
0
44,753
49,584
Total
Liabilities
2,416
1,295
303
1,637
3,992
9,643
0
44,753
54,396
Equity
(453
)
1,056
3,011
795
0
4,409
(976
)
15,000
18,433
Total
Liabilities & Equity
$
1,963
$
2,351
$
3,314
$
2,432
$
3,992
$
14,052
$
(976
)
$
59,753
$
72,829
NOTES:
1.
Based on year-end exchange rate of 2.1385 R$ to the US$. The
transactions
were actually completed at an exchange rate of 2.0212 R$ to
the
US$.
2.
Santa Anita net cash paid consists of total cash paid out less
actual
Santa Anita cash balances as of Dec. 31, 2006.
3.
The Consolidated Pro Forma results presented herein are for
illustrative
purposes only.
A.
Assumes transaction costs of $3,889 will be paid from Transaction
Proceeds.
B.
Goodwill arising from the shares allocated to Management is
allocated to
Salvador and Santa Anita based on their respective purchase
prices.
We
are
led by senior management with over 20 years of experience in the sugar
and ethanol industries and ten years investing in businesses in South
America. Each of our mills' managers has at least ten years of experience
in the sugar and ethanol industries. Unlike our domestic
competitors, comprised mostly of family-owned-and-managed businesses, our
strong management team has developed extensive technical know-how in sugar
cane cultivation through professional experiences and resources.
We
have a
board and management team with experience in the industrial operations of
producing bio-fuels, the agriculture of bio-fuels, and substantial transactional
experience in Brazil, finance, marketing, regulatory, legal and accounting.
Our
officers and directors as of May 31, 2007 are as follows:
Thomas
Cauchois, Chairman, 54.Mr.
Cauchois is a founder of FondElec Capital Investors (“FondElecCI”) and has spent
12 years investing in global emerging markets and twenty-two years in the global
advisory and finance areas. FondElecCI is an emerging markets private equity
investment firm. Affiliates of FondElecCI were early participants in investing
in privatizations from Russia to Latin America and successfully exiting, and
managing about $150 million in direct investment capital from a wide variety
of
institutions, corporations and governmental entities. Mr. Cauchois was on the
Board of Cia Força e Luz Cataguazes-Leopoldina in Brazil, and is on the Boards
of Chispa Dos Inc. in El Salvador, and NexTep in France. Prior to founding
affiliates of FondElecCI, Mr. Cauchois was a Managing Director at Drexel Burnham
Lambert. Mr. Cauchois has an S.M. from the Sloan School of Management at the
Massachusetts Institute of Technology and an A.B. from the University of
California at Berkeley.
Alicia
Návar Noyola, Vice Chairman and Secretary, 57.Mrs.
Noyola's career has been centered on complex asset finance, including the energy
and infrastructure sectors, working both in the U.S. and throughout Latin
America. Prior to founding FondElecCI and having a management role with its
affiliates, she was Vice President for Latin America Development for Calpine
Corporation, an affiliate of Electrowatt Ltd., a Swiss multi-national, and
earlier was a partner in the law firms of Thelen, Marrin, Johnson & Bridges
and Lillick and Charles. Mrs. Noyola received her J.D. from Hastings College
of
the University of California, and a B.A. degree in architecture from the
University of California, Berkeley.
Alexandre
Tadeu Nunes Kume, Vice President andGeneral Manager-CEO Brazil and
Director,
43.Mr.
Kume
comes from a family that has been an active player in the Brazilian fuel market
since early 1960’s, and he was instrumental in the development of the family’s
businesses since 1984, when he became partner and director of Novoeste Com.
Petroleo Ltda. The family business was for twelve years the second largest
fuel
retailer under the Ipiranga chain in Brazil, and currently the family has its
own fuel distribution company (Novoeste), in addition to interests in fuel
transportation. Mr. Kume is a board member of all the businesses of the family,
and was responsible for managing Ouro Verde since the family’s investment in
Ouro Verde in 2002. Mr. Kume has a degree in Economics from Unimar -
Universidade de Marilia. Mr. Tadeu Kume is the brother of Mr. Ricardo
Kume.
79
Jose
Ricardo Nunes Kume, Vice President Operations-Brazil and General
Manager-Bio-Diesel,
41.
Mr.
Kume
comes from a family that has been active in the fuel distribution market since
the 60’s and most recently was the CEO of a fuel distributor. Mr. Kume has an
accounting background at PW Coopers. Mr. Kume is a graduate of FEA-USP with
an
MBA from IBMEC. Mr. Ricardo Kume is the brother of Mr. Tadeu Kume.
João
Eduardo Pesciotto de Carvalho, Vice President Finance and Development and
Director, 28.Mr.
Pesciotto grew up in the major sugar cane producing area of São Paulo state and
has experience in this industry as well as seven years of experience in mergers
and acquisitions, strategic consulting and operational management, Mr. Pesciotto
started his financial career in the Investment Banking area of Banco Brascan,
working in M&A and Capital Market transactions, and worked as a senior
analyst for the Corporate Finance area of BNP Paribas. He then founded an
independent financial advisory boutique, and developed several successful
projects in the M&A, strategic consulting, and project development (business
planning, implementation and initial management). He is a Production Engineer
graduate from the Escola Politécnica of the Universidade de São Paulo -
Poli/USP.
Peter
Laudano, Vice President, Investor Relations and Accounting, 50. Mr. Laudano’s
entire career has been focused on financial planning and analysis and accounting
for complex international businesses. For the past 6 years, Mr. Laudano has
been
the CFO of FondElecCI. Mr. Laudano's prior experience includes 4 years at
Cendant Corporation, a $20 billion provider of consumer and business services.
At Cendant, Mr. Laudano oversaw Financial Planning & Analysis for the $2
Billion Direct Marketing Segment, divested several businesses and assisted
with
the cleanup of $500 Million of accounting irregularities. Prior to Cendant,
Mr.
Laudano spent 9 years in various senior level financial positions at NextWave
Telecom (a start-up wireless carrier), eunetcom (a joint venture of France
Telecom & Deutsche Telekom) and DunsNet (a worldwide communications network
for Dun & Bradstreet that Mr. Laudano helped sell to eunetcom). Earlier in
his career, Mr. Laudano held various financial positions at Data Switch Corp.
and at D&B Computing Services Inc. Mr. Laudano holds an MBA from the
University of Michigan and a BA from Tufts University.
Elaine
Leme Cardoso, 42, Vice President Administration-Brazil. Ms. Cardoso has been
an
officer of the Company since May 2007. Since 2001, she has been the Manager
of
Administration for Octet Brazil Ltda., which is an affiliate of Mr. Cauchois
and
Mrs. Noyola. She was formerly with World Access Communications as a director
of
international. Prior to this she had similar positions in administration at
Purina Nutrimentos and Philips do Brasil. Delmo Sergio Vilhena, Member of the
Board of Directors,53,
Mr.
Vilhena is a Brazilian national with a degree in business administration. He
is
an entrepreneur with thirty years of experience in the fuel, passenger
transportation and trucking sectors. He has been involved in the last fifteen
years in the supply of chemical and oil derivative products to large industrial
consumers.
The
Messrs. Kume are brothers; otherwise, there is no family relationship between
any directors or executive officers listed above. We note that Mr. Ricardo
Kume,
by reason of his capacity as the legal representative of a fuel distribution
company, is named as defendant in a criminal proceeding alleging adulteration
along the distribution chain. We believe that Mr. Kume has excellent factual
defenses in the matter and that in any case, the allegations made are not
material to his ability to serve in the capacities indicated above.
Board
Committees
Our
Board
of Directors will form certain Committees including Compensation, Audit and
Nominating and Governance Committees. If we proceed with a listing of our
Ordinary Shares on Nasdaq, each member of the Compensation, Audit, Nominating
and Governance Committees will be determined by the Board of the Directors
to be
“independent” within the meaning of Nasdaq Rule 4200(a)(15) and, in
addition, each member of the Audit Committee will be “independent” and possess
adequate financial skills within the meaning of applicable rules and regulations
of the Securities and Exchange Commission regarding the independence of audit
committee members.
80
Compensation
Committee. The Compensation Committee will be charged with
recommending to the Board of Directors the compensation for our executives
and
administering our flexible stock incentive plan and benefit plans.
Audit
Committee. The Audit Committee will be charged with,
among other things, the appointment of independent auditors of the Company,
as
well as discussing and reviewing with the independent auditors the scope of
the
annual audit and results thereof, pre-approving the engagement of the
independent auditors for all audit-related services and permissible non-audit
related services, and reviewing and approving all related-party transactions.
The Audit Committee will also review documents we file with the SEC.
Nominating
and Governance Committee. The Nominating and Governance Committee
will be charged with assisting the Board of Directors in its selection of
individuals as nominees for election to the Board of Directors at annual
meetings of our Shareholders and to fill any vacancies or newly created
directorships on our Board of Directors.
EXECUTIVE
COMPENSATION
We
have
entered into employment contracts (“Employment Agreements”) with certain key
members of our management team, including Thomas Cauchois, Alicia Noyola, Tadeu
Kume, Ricardo Kume and Joao Pesciotto. The Employment Agreements for Mr.
Cauchois and Ms. Noyola are in the form of written contracts. The Employment
Agreements for Messrs. Kume, Kume and Pesciotto are in the form of addenda
to
the by-laws of Comanche Participaçoes do Brasil Ltda. in accordance with
Brazilian practice on generally similar terms and conditions, adjusting for
the
requirements of Brazilian law. The terms of the Employment Agreements call
for a
base salary and an annual bonus based upon our achievement of certain operating
performance goals including profitability, volume of production, and capacity
additions in the form of a Management Incentive Plan. The basic terms of each
Employment Agreement are for five years, but shall be renewable automatically
for one-year periods after expiration of the initial five year term, up to
a
maximum of five years in total, unless either party gives notice of non-renewal
to the other at least sixty 60 days prior to the beginning of the applicable
one-year period. Under the terms of the Employment Agreements, such covered
parties are entitled to severance if terminated without cause or resignation
for
good reason in the form of base salary continuation for a certain number of
months yet to be defined or until the end of the term of such agreements or
extensions, whichever is shorter. Under the terms of such severance, we shall
also pay premiums for COBRA continuation coverage under our group health plan
for 18 months, for our American employees. Upon expiration of the 18 month
period, we shall pay the officers a lump sum equal to the cost of six additional
months of individual coverage under a substantially similar health plan. The
total amount for the lump sum shall not exceed $25,000. In the event termination
is in connection with a change in control, then the 24 months of base salary
continuation shall be made in lump sum and outplacement services shall be
provided to the officers in an amount not to exceed $10,500. In addition, we
shall be obligated to maintain the officer’s perquisites and benefits for a
period of two years. A termination shall be deemed to be in connection with
a
change in control if it occurs on the date of the change in control or within
the two years following the change in control.
Each
Employment Agreement contains non-competition and non-solicitation provisions.
The non-competition and non-solicitation provisions prohibit the officer
from directly or indirectly competing with us or soliciting our employers or
customers during the employment term and generally for one year
thereafter.
Pursuant
to the terms of a Management Incentive Plan, to be adopted by our Compensation
Committee, identified worldwide officers will receive an annual
performance-based bonus for each fiscal year within the employment period set
forth in their Employment Agreements. The bonus will be tied in part to
achievement of annual targets (the “Bonus Targets”) set by the Compensation
Committee. Bonuses will range from a minimum percentage of base salary to a
maximum percentage of base salary. This proposed plan is more fully described
in
the footnotes to the following table.
81
Pursuant
to the terms of an Equity Incentive Plan which is designed to be a flexible
stock incentive plan to be adopted by the our Compensation Committee, each
executive officer or employee worldwide may receive grants of incentive stock
options with respect to Ordinary Shares of the Company, stock appreciation
rights ("SARS"), restricted stock units, non-qualified stock options and other
forms of equity or synthetic equity. This proposed plan is more fully described
in the footnotes to the following table.
Generally
the terms of the executive compensation are outlined in the following
table:
Annual
Compensation (1)
Long
Term Compensation
Awards
Payouts
Name
and Principal Position
Salary
($)
Annual
Incentive Bonus $ (2)
Estimated
Other Annual Compensation ($) (3)
Shares
of Common Stock Underlying ISO Awards (#) (4)
Shares
of Common Stock Underlying SARs (#) (4)
All
Other Compensation ($)
Thomas
Cauchois, Executive Chairman
$
185,000
TBD
$
21,000
TBD
TBD
TBD
Alicia
Noyola, Vice Chairman
$
185,000
TBD
$
21,000
TBD
TBD
TBD
Tadeu
Kume, CEO and General Manager Brazil
$
185,000
TBD
$
21,000
TBD
TBD
TBD
Ricardo
Kume, Vice President-Operations Brazil
$
147,000
TBD
$
21,000
TBD
TBD
TBD
Joao
Pesciotto, Vice President Finance, Brazil
$
135,000
TBD
$
21,000
TBD
TBD
TBD
(1)
Projected annualized figures, subject to exchange rate variations.
(2)
Pursuant to the terms of the proposed Management Incentive Plan to be adopted
by
our Compensation Committee, all identified worldwide officers will receive
an
annual performance-based bonus for each fiscal year within the employment period
set forth in their employment agreements (see Employment Agreements, below).
The
bonus is tied to achievement of the annual Bonus Targets to be set by the
Compensation Committee. Under the proposed plan, the Bonus Target will be keyed
off of annual EBITDA (60% weighting), yearly production goals (20% weighting)
and capacity addition implementation for the year (20% weighting). The minimum
bonus requires achievement of 80% of the applicable fiscal year’s Bonus Target.
Bonuses will range from 60% of base salary to 150% of base salary, for
achievement of 80% to 120% or better of the applicable fiscal year’s Bonus
Target. EBITDA shall be calculatedwithout
regard to extraordinary or other nonrecurring or unusual items or changes in
accounting. In the event of the officer’s termination with good reason,
disability or termination by the Company without cause, or retirement on or
after attaining age 65, the officer will be entitled to a pro-rata annual bonus
equal to the full amount payable under the annual bonus for the applicable
fiscal year, as determined by the Compensation Committee as of the end of such
fiscal year, multiplied by a fraction the numerator of which is equal to the
number of full months worked during the year and the denominator of which is
12.
In
the
event the officer is terminated for cause, or resigns without good reason or
dies, he will forfeit his annual bonus for that year.
(3)
The
$21,000 is an estimated amount which has yet to be determined. Each executive
officer will be eligible for an executive health, dental and life insurance
plan. In addition, certain of the key Brazilian employees may be provided car
benefits in an amount to be determined. Each executive will be provided with
a
Company-paid annual health examination, the cost of which is estimated at $1,000
per examination.
(4)
Pursuant to the terms of the proposed Equity Incentive Plan which is designed
to
be a flexible stock incentive plan to be adopted by our Compensation Committee,
each executive officer or employee worldwide may receive grants of incentive
stock options with respect to Common Stock of the Company, stock appreciation
rights ("SARS"), restricted stock units, non-qualified stock options and other
forms of equity or synthetic equity. In the case of options, each of these
options shall have an exercise price equal to the fair market value of the
Company’s Ordinary Shares on the grant date, a term of 5 years and shall vest
33.4% on the one year anniversary of the grant date and 33.3% each on the second
and third anniversaries of the grant date. In the event of the officer’s death,
disability, retirement, termination for good reason, termination without cause
or a change in control, all unvested options shall be immediately vested. All
unvested options shall be forfeited in full upon the officer’s termination for
cause or termination other than for good reason. In the case of SARS, the SARS
entitle them to share in the appreciation, if any, of the Company's Ordinary
Shares above the initial value set forth in the governing stock appreciation
rights agreement. The SARS shall vest 33.4% on the one year anniversary of
the
grant date and 33.3% each on the second and third anniversaries of the grant
date. Grants of stock appreciation rights are measured by the growth in the
value of the Ordinary Shares of underlying the incentive stock options (with
a
tax “gross-up” for applicable taxes due upon exercise of the incentive stock
options and the SARs). In addition, the Equity Incentive Plan is expected to
include other long-term awards, such as restricted stock units, non-qualified
stock options and other forms of equity or synthetic equity.
We
also
intend to use the Management Incentive Plan and the Equity Incentive Plan to
assist us in recruiting and retaining key employees, directors and consultants.
These plans may permit us to grant cash-based performance awards and
equity-based compensation (representing up to 10% of our outstanding Shares
at
any given time) to our key employees, directors and consultants pursuant to
bonus awards, stock option awards, restricted stock grants, stock appreciation
rights and/or other stock-based awards. Such equity compensation may be subject
to certain vesting terms.
All
officers and other employees shall be eligible to participate in our various
pension and welfare benefit plans in accordance with their terms. Such benefits
will include a 401(k) plan, group term life insurance, a medical, dental,
prescription drug, long-term disability, short-term disability, accidental
death
and dismemberment and travel accident insurance.
Compensation
of Directors
Each
member of our Board of Directors who is not an employee of the Company (a
“non-employee director”) will receive annual compensation of up to $60,000,
including compensation for each Board meeting and Board committee meeting
attended either in person or telephonically. Non-employee directors may also
receive additional compensation for attending special meetings of the Board
of
Directors or for special efforts undertaken by such non-employee director and
such additional compensation may not be equal among the individual non-employee
directors. Board members will be reimbursed for reasonable travel expenses
associated with attending any meetings of the Board of Directors or committees
of the Board of Directors.
The
following table sets forth certain information as of June 18, 2007
regarding the beneficial ownership of our Ordinary Shares by: (i) each
person or entity known to us to be the beneficial owner of more than 5% of
our
Ordinary Shares; (ii) each of our named executive officers; (iii) each
member of our board of directors; and (iv) all members of our board of
directors and executive officers as a group. The number and percentage of our
Ordinary Shares beneficially owned by each person is based on 7,424,535 of
our
Ordinary Shares outstanding as of June18, 2007 and the Ordinary Shares owned by such person determined in
accordance with Rule 13d-3 of the Exchange Act. The information contained in
the
table below is not necessarily indicative of beneficial ownership for any other
purpose.
82
Except
as
otherwise noted below, each of the following individual’s address of record is
c/o the Company at Rua do Rocio 84, 11 andar, Sao Paulo CEP 04552-000,
Brazil.
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage ownership
of that person, shares issuable upon the exercise of stock options or warrants
or the conversion of other securities held by that person that are exercisable
or convertible within 60 days are deemed to be issued and outstanding.
These shares, however, are not deemed outstanding for the purposes of computing
percentage ownership of each other shareholder.
(1)
Based
on 7,424,535 Ordinary Shares outstanding as of June 18, 2007.
(2)
Includes 1,322,364 shares issuable upon conversion of a convertible note of
the
Company and 937,995 shares issuable upon exercise of warrants.
84
(3)
Includes 1,822,284 shares issuable upon conversion of convertible notes of
the
Company and 1,213,029 shares issuable upon exercise of warrants.
(4)
The
convertible note and warrants held by the shareholder provide that no conversion
or exercise may be effected to the extent it would result in such shareholder
holding in excess of 9.99% of our outstanding capital stock. The number in
the
above table under the heading “Number of Shares” does not reflect such
limitations, but the percentage set forth in the above table under the heading
“percentage of Shares Beneficially Owned” does reflect such limitations. The
inclusion of any amount in the above table is not an admission by any person
that the shareholder beneficially owns shares in excess of the maximum amount
which would be beneficially owned by such person under such
limitations.
(5)
Includes 1,318,909 shares issuable upon conversion of convertible notes of
the
Company and 921,463 shares issuable upon exercise of warrants.
(6)
Includes 889,164 shares issuable upon conversion of a convertible note of
the
Company and 630,751 shares issuable upon exercise of warrants.
(7)
Includes 1,454,545 shares issuable upon conversion of a convertible note
of the
Company and 881,818 shares issuable upon exercise of warrants.
(8)
Includes 418,182 shares issubale upon conversion of convertible notes of
the
Company and 212,272 shares issuable upon exercise of warrants.
(9)
Includes 797,455 shares issuable upon conversion of convertible notes of
the
Company and 561,081 shares issuable upon exercise of warrants.
(10)
Includes 293,600 shares issuable upon conversion of convertible notes of
the
Company and 191,030 shares issuable upon exercise of warrants.
(11)
Includes 822,036 shares issuable upon conversion of convertible notes of
the
Company and 534,824 shares issuable upon exercise of warrants.
(12)
Includes 463,636 shares issuable upon conversion of a convertible note of
the
Company and 185,455 shares issuable upon exercise of warrants.
(13)
Includes 946,630 shares issuable upon exercise of warrants.
Terms
of our lockup agreements
Each
of
Thomas Cauchois (our Chairman); Alicia Noyola (our Vice Chairman and
Secretary); Castanhera Acquisition Company, LLC; Netoil Intermediacao de
Negocios Ltda.; and Ouro Verde Participacoes S.A, has agreed not to sell the
shares such person has acquired until after the earlier of the first anniversary
of the effective date of the registration statements of which this prospectus
comprises a part or April 3, 2010, except in compliance with a lockup agreement.
The lockup agreement provides that the prohibition on each shareholder’s right
to sell such shareholder’s shares lapses as follows:
§
as
as to all of the shareholder’s shares in the event of a change of control
of our Company; and
85
§
as
as to all of the shareholder’s shares upon the shareholder’s death or
incapacity.
In
addition, each such person is permitted to transfer shares to family members,
trusts for the benefit of family members, and companies such person
controls.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
An
affiliate of Mr. Cauchois and Ms. Noyola, Greenwich Administrative Services,
performs certain financial, bookkeeping, compliance and assistance with auditing
for Comanche at its cost plus 7.5%. Neither Mr. Cauchois nor Ms. Noyola directly
receives any compensation through this arrangement.
Registration
Rights
Under
a
registration rights agreement dated April 3, 2007 among us and each of the
investors purchasing securities pursuant to the Securities Purchase Agreements
(the “Registration Rights Agreement, no later than 30 days after the date of the
Registration Rights Agreement (the “Registration Filing Date”), we are required
to file a registration statement under the Securities Act covering the resale
of
the Ordinary Shares purchased pursuant to the Securities Purchase Agreements
and
the Ordinary Shares issuable upon exercise of the warrants and the conversion
of
the convertible notes issued pursuant to the Securities Purchase Agreements.
We
are required to use our reasonable best efforts to cause the registration
statement to be declared effective by the SEC within 120 days after filing
(150
days if the registration statement is reviewed by the SEC); provided, however,
that we will not be obligated to effect any such registration, qualification
or
compliance or keep such registration effective: (a) in any particular
jurisdiction in which we would be required to qualify to do business as a
foreign corporation or as a dealer in securities under the securities or blue
sky laws of such jurisdiction or to execute a general consent to service of
process in effecting such registration, qualification or compliance, in each
case where it has not already done so, or (b) during any “blackout period”
during which we determine that the distribution of our shares covered by the
Registration Statement would be detrimental to us and our Shareholders, in
which
case the Registration Filing Date is extended to the date immediately following
the last day of such “blackout” period.
Under
the
Registration Rights Agreement, prior to the date the registration statement
is
declared effective by the SEC (the “SEC Effective Date”), we will not, without
the prior written consent of the holders of a majority of the convertible notes
and holders of a majority of our Ordinary Shares (collectively, the “Registrable
Securities”), file or request the acceleration of any other registration
statement filed with the SEC. In addition, during any time subsequent to the
SEC
Effective Date when the registration statement is unavailable for use by any
holder for the resale of any Registrable Securities, we will not without the
consent of the holders of a majority of the Registrable Securities, file any
other registration statement or amendment to any registration statement filed
with the SEC or request the acceleration of effectiveness of any other
registration statement previously filed with the SEC, any registration statement
or amendment which we are required to file or as to which we are required to
request acceleration pursuant to any obligation in effect on the date of
execution and delivery of the Registration Rights Agreement.
In
April
2007 the holders of a majority of the Registrable Securities agreed to extend
our deadline for filing of a registration statement with the SEC without penalty
for an additional 30 days and on June 15, 2007 the holders of a majority of
the
Registerable Securities agreed to extend our deadline for filing of a
registration statement with the SEC without penalty until June 20,2007.
We
will
make payments to purchasers who are parties to the Registration Rights Agreement
as liquidated damages (adjusted proportionally for any portion thereof) if
any
of the following events (“Registration Events”) occurs and remains uncured:
(a)
We
fail to file the registration statement with the SEC by the 30th
day
after the date of the Registration Rights Agreement;
86
(b)
The
registration statement is not declared effective by the SEC by the
120th
day
after filing (or the 150th
day
after filing if the registration statement is subject to review by the SEC);
(c)
After
the SEC Effective Date, a registration statement ceases for any reason to remain
continuously effective as to all Registrable Securities for which it is required
to be effective, or the holders are otherwise not permitted to utilize the
prospectus therein to resell such Registrable Securities, for more than 10
consecutive calendar days or more than an aggregate of 20 calendar days during
any 12-month period (which need not be consecutive calendar days);
Such
payment shall be equal to one percent (1%) of the purchase price of the Units
for each of first three thirty (30) day periods in which we are in default
of
our registration obligations after the Registration Event and two percent (2%)
of the purchase price of the Units for each thirty (30) day period thereafter
subject to a 10% aggregate limit
LEGAL
MATTERS
Maples and Calder, Cayman Islands, will pass on the validity of the Ordinary
Shares offered by this prospectus for us and the selling shareholders, with
respect to the laws of The Cayman Islands.
EXPERTS
The
consolidated financial statements of Comanche Corporation as of
December 31, 2006 and the
related consolidated statement of operations and comprehensive loss,
shareholders’ deficit and cash flows for the period June 8, 2006 (date of
inception) to December 31, 2006, appearing in this prospectus and
registration statement have been audited by BDO Trevisan, independent registered
public accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on authority of
such
firm as experts in accounting and auditing.
The
balance sheets of Destilaria de Alcool Simões Ltda. as of December 31, 2006 and
2005 and the related statements of operations and comprehensive loss,
quotaholders’ equity and cash flows for the years ended December 31, 2006 and
2005, appearing in this prospectus and registration statement have been audited
by Imateo Auditoria e Consultoria S/C, independent accounting firm, as set
forth
in their report thereon appearing elsewhere herein and are included in reliance
upon such report given in authority of such firm as experts in accounting
and
auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have filed with the SEC a registration statement on Form F-1 under the
Securities Act relating to our ordinary shares being offered by this prospectus.
This prospectus, which constitutes part of that registration statement, does
not
contain all of the information set forth in the registration statement or the
exhibits and schedules that are part of the registration statement. For further
information about us and the ordinary shares offered, see the registration
statement and the exhibits and schedules thereto. Statements contained in this
prospectus regarding the contents of any contract or any other document to
which
reference is made are not necessarily complete, and, in each instance in which
a
copy of a contract or other document has been filed as an exhibit to the
registration statement, reference is made to the copy so filed, each of those
statements being qualified in all respects by the reference.
A
copy of the registration statement, the exhibits and schedules thereto and
any
other document we file may be inspected without charge at the public reference
facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549
and copies of all or any part of the registration statement may be obtained
from
this office upon the payment of the fees prescribed by the SEC. The public
may
obtain information on the operation of the public reference facilities in
Washington, D.C. by calling the SEC at 1-800-732-0330. Our filings with the
SEC
are available to the public from the SEC's website at www.sec.gov.
Prior
to this offering we were not required to file reports with the SEC. As a
"foreign private issuer," we will be exempt from the rules under the Securities
Exchange Act of 1934, as amended, or, the Exchange Act, prescribing the
furnishing and content of proxy statements to shareholders. In addition, our
officers and directors will be exempt from the rules under the Exchange Act
relating to short-swing profit reporting and liability. Upon completion of
this
offering, we will become subject to the information and periodic reporting
requirements of the Exchange Act. As a foreign private issuer, we will file
annual reports containing our financial statements audited by an independent
public accounting firm on Form 20-F with the SEC. We are not required to
file quarterly reports containing our unaudited financial data with the SEC.
We
will also file with the SEC, as required under Form 6-K, copies of each
material document that we are required to publish, or have published, under
Cayman Islands law, or that we have distributed to our non-U.S. shareholders.
You will be able to inspect and copy such periodic reports and other information
at the SEC's public reference room and the website of the SEC referred to above.
We
are
incorporated under the laws of the Cayman Islands. Certain of our directors
and
officers reside outside the United States. Substantially all of our assets
are
located in Brazil. As a result, it may not be possible (or it may be difficult)
for you to effect service of process upon us or these other persons within
the
United States or to enforce judgments obtained in United States courts against
us or them, including those predicated upon the civil liability provisions
of
the federal securities laws of the United States.
We
have
been advised by our Brazilian counsel that, according to Brazilian law, a
judgment of a United States court for civil liabilities predicated upon the
federal securities laws of the United States may be enforced in Brazil, subject
to certain requirements described below. Such counsel has advised that a
judgment against us, the directors and officers or certain advisors named herein
obtained in the United States would be enforceable in Brazil upon confirmation
of that judgment by the Superior
Tribunal de Justiça (Superior
Tribunal of Justice). That confirmation will only be available if the
U.S. judgment:
·
fulfills
all formalities required for its enforceability under the laws of
the
United States;
·
is
issued by a court of competent jurisdiction after proper service
of
process on the parties, which service must be in accordance with
Brazilian
law if made in Brazil, or after sufficient evidence of our absence
has
been given, as established pursuant to applicable law;
·
is
not subject to appeal and all formalities required for execution
in the
United States have already been accomplished;
·
is
for payment of a determined sum of money;
·
is
authenticated by a Brazilian diplomatic office in the United States
and is
accompanied by a sworn translation into Portuguese; and
·
is
not against Brazilian public policy, good morals or national sovereignty
(as set forth in Brazilian law).
It
is
important to mention that, according to Brazilian law, the Brazilian courts
are
exclusively competent in the case of actions concerning real estate located
in
Brazil. In this sense, although a civil liability cognitive claim may be
judged in a foreign jurisdiction, and be confirmed in Brazil, provided that
the
above conditions are observed, in order to enforce and execute such judgment
against a real estate located in Brazil, it will be necessary to file an
executive proceeding before the Brazilian courts, after recognition and
ratification of the foreign judgment by the Superior Tribunal of
Justice.
We
have
been further advised by our Brazilian counsel that original actions may be
brought in connection with this prospectus predicated solely on the federal
securities laws of the United States in Brazilian courts and that, subject
to
applicable law, Brazilian courts may enforce liabilities in such actions against
us or the directors and officers and certain advisors named herein, in one
of
the following cases: (i) the defendant is a Brazilian citizen (in case of a
legal entity, if it is headquartered or holds a branch in Brazil); (ii) if
the
obligation must be accomplished in Brazil; and (iii) the action derived from
a
fact or an act performed in Brazil.
Maples
and Calder, our counsel as to Cayman Islands law, has advised us that there
is
uncertainty as to whether the courts of the Cayman Islands would
(1) recognize or enforce judgments of United States courts obtained against
us or our directors predicated upon the civil liability provisions of the
securities laws of the United States or any state in the United States, or
(2) entertain original actions brought in the Cayman Islands against us or
our directors or officers predicated upon the securities laws of the United
States or any state in the United States.
Maples
and Calder have informed us that the uncertainty with regard to Cayman Islands
law relates to whether a judgment obtained from the United States courts under
civil liability provisions of the securities law will be determined by the
courts of the Cayman Islands as penal or punitive in nature. The courts of
the
Cayman Islands will not recognize or enforce such judgments against a Cayman
company, and because such a determination has not yet been made by a court
of
the Cayman Islands, it is uncertain whether such civil liability judgments
from
United States courts would be enforceable in the Cayman Islands. Maples and
Calder has further advised us that a final and conclusive judgment in the
federal or state courts of the United States under which a sum of money is
payable, other than a sum payable in respect of taxes, fines, penalties or
similar charges, may be subject to enforcement proceedings as a debt in the
courts of the Cayman Islands under the common law doctrine of
obligation.
88
COMANCHE
CORPORATION
(A
CAYMAN ISLANDS EXEMPTED COMPANY)
AND
DESTILARIA
de ÁLCOOL SIMOES LTDA.
INDEX
TO FINANCIAL STATEMENTS
Page
Comanche
Corporation
Report
of Independent Registered Public Accounting
Firm
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Comanche
Corporation
Cayman
Island
We
have
audited the accompanying consolidated balance sheet of Comanche Corporation
and
subsidiaries (the “Company”) as of December 31, 2006, and the related
consolidated statements of operations, comprehensive loss, shareholders’
deficit, and cash flows for the period from June 8, 2006 (date of inception)
to
December 31, 2006. This consolidated financial statement is the responsibility
of the Company’s Management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We
conducted our audits in accordance with the standards generally accepted in
the
United States of America. Those standards require that we plan and perform
the
audit to obtain reasonable assurance about whether the financial statements
are
free of material misstatement. Our audit of financial statements included
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, and 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 consolidated financial position of Comanche
Corporation and subsidiaries as of December 31, 2006, and the results of
their operations and their cash flows for the period from June 8, 2006 (date
of
inception) to December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
(In
thousands of dollars, except otherwise indicated)
1.
OPERATIONS
Comanche
Corporation (the “Company”) is an exempted holding company formed in the Cayman
Islands on June 8, 2006 as Comanche Clean Energy Corporation. On February 8,2007, the Company changed its name to Comanche Corporation. The Company is
currently in the pre-revenue stage.
Through
its subsidiary, Comanche Clean Energy, LLC (“Comanche LLC”), on July 10, 2006the Company completed the process of acquiring an affiliated holding company,
Comanche Participações do Brasil Ltda. (“Comanche Participações”), located in
Brazil.
The
Company has been established to invest in agricultural clean fuel production
companies and to sell ethanol and biodiesel in various global markets. The
Company also plans to invest in assets involved in the supply of sugarcane,
the
distribution of ethanol and ‘‘greenfield’’ projects to build ethanol
facilities.
2.
PRESENTATION
OF FINANCIAL STATEMENTS
The
consolidated financial statements of Comanche Corporation and its subsidiaries
have been prepared in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”), which requires management to make
judgments, estimates and assumptions that affect the application of policies
and
reported amounts of assets and liabilities, income and expenses during the
reporting period and require the disclosure of contingent assets and liabilities
as of the date of the financial statements. The estimates and associated
assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which
form
the basis of making the judgments about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may
differ from these estimates. The estimates and underlying assumptions are
reviewed on an ongoing basis. Revisions to accounting estimates are recognized
in the period in which the estimate is revised if the revision affects only
that
period, or in the period of the revision and future periods if the revision
affects both current and future periods.
a)
Basis
of Preparation
The
Company has prepared this consolidated financial statement for the period from
June 8, 2006 (date of inception) through December 31, 2006.
F-6
The
accompanying financial statements, denominated in United States of America
Dollars, were prepared in accordance with accounting principles generally
accepted in the United States of America.
For
foreign operations with functional currency other than the U.S. dollar, assets
and liabilities accounts are translated into United States dollars at exchange
rates in effect at the balance sheet date, and income and expenses are
translated at weighted average exchange rates in effect during the period.
Resulting translation adjustments are reported as cumulative translation
adjustment in other comprehensive loss and accumulated in Shareholders’ Deficit.
Transaction gains and losses that arise from exchange rate changes on
transactions denominated in a currency other than the functional currency are
included in income as incurred.
b)
Principles
of Consolidation
The
accompanying consolidated financial statements of the Company, together with
its
subsidiaries, include the accounts of all majority owned subsidiaries.
Intercompany profits, transactions and balances have been eliminated in
consolidation.
The
following is a brief summary of the operating activities of Company’s
subsidiaries:
Comanche
Clean Energy LLC -
This
wholly-owned subsidiary is a holding company organized in the U.S. state of
Delaware. At the moment, Comanche LLC’s sole purpose is to hold Comanche
Participações.
Comanche
Participações do Brasil Ltda.
(previously named Ontol Consultoria Empresarial Ltda.) - This wholly-owned
subsidiary of Comanche Clean Energy LLC was acquired on July 10, 2006. Comanche
Participações is a holding company in Brazil, and was established to implement
strategic investments in and acquisitions of agricultural clean fuel production
companies.
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
a)
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash on hand, deposits in banks with original
maturities of three months or less.
b)
Loans
Receivable
The
amounts of loans include accrued interest and applicable monetary exchange
incurred but not paid to the balance sheet date.
F-7
c)
Organization
Costs
Organization
costs consisting of fees incurred to incorporate the Company and commence
operations are expensed as incurred.
d)
Compensated
absence
The
liability for future compensation for employee vacations earned is fully accrued
as benefits are earned.
e)
Long-lived
assets
Long-lived
assets and certain intangibles held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When such events or changes
occur, an estimate of the future cash flows expected to result from the use
of
the assets and their eventual disposition is made. If the sum of such expected
future cash flows (undiscounted and without interest charges) is less than
the
carrying amount of the asset, an impairment loss is recognized in an amount
by
which the assets’ net book values exceed their fair values.
f)
Fair
Value of Financial
Instruments
Financial
instruments consist of cash and cash equivalents, loans receivable, notes
payable and amounts due to affiliates. The carrying value of these financial
instruments approximates their fair value.
In
managing interest rate and currency risks, the Company aims to reduce the impact
of short term fluctuations on the Company’s earnings. Over the longer term,
however, permanent changes in foreign exchange and interest rates would have
an
impact on earnings.
g)
Income
Taxes
The
Company has not yet generated any profits and, accordingly, no general provision
for income taxes is recorded in these financial statements. Income taxes in
Brazil comprise Federal income tax and social contribution and there is no
state
or local income taxes in Brazil. The income tax statutory rates are 25.0% for
Federal income tax and 9.0% for Social contribution. As of December 31, 2006,
Comanche Participações had tax loss carryforwards for income and social
contribution taxes of approximately $342. These amounts can be used to offset
future taxable income and have no expiration date. The
Company is not subject to income taxes in the Cayman Islands, although some
subsidiaries may be subject to income taxes in their respective
jurisdictions.
Federal
and State income tax filings of the Company’s subsidiaries are subject to
examination by the tax authorities.
F-8
h)
Segment
reporting
A
segment
is a distinguishable component of the Company that is engaged either in
providing products or services (business segment), or in providing products
or
services within a particular economic environment (geographical segment), which
is subject to risks and rewards that are different from those of other segments.
At this time the Company has only one segment, which is the Company’s investment
in two holding companies located in the USA and Brazil.
i)
Earnings
per Share
Basic
earnings per share amounts are calculated based on the weighted average number
of shares outstanding during the period. Diluted earnings per share, when
applicable, are calculated by adjusting the profit measure and the weighted
average number of shares in issue on the assumption of conversion of all
dilutive potential shares. The treasury stock method is applied to determine
the
number of potentially dilutive shares.
j)
Comprehensive
income (loss)
SFAS
No.
130, “Reporting Comprehensive Income,” establishes standards for reporting and
display of comprehensive income and its components in financial statements.
It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive loss consists of net loss and the effects of foreign
currency translation adjustments.
4.
NEW
ACCOUNTING PRONOUNCEMENTS
In
June
2006, the FASB issued Interpretation No. 48 - Accounting for Uncertainty in
Income Taxes-An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes . This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Statement will be effective for the Company
beginning January 1, 2007 and is not expected to have a material impact on
the Company’s consolidated financial statements.
F-9
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS
157). SFAS 157 provides a common definition of fair value and establishes a
framework to make the measurement of fair value in generally accepted accounting
principles more consistent and comparable. SFAS 157 also requires expanded
disclosures to provide information about the extent to which fair value is
used
to measure assets and liabilities, the methods and assumptions used to measure
fair value, and the effect of fair value measures on earnings. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. The Company
is currently analyzing the potential impact, if any, of SFAS 157 on its
financial statements.
FASB
Statement 155: Fair Value Option for Hybrid Instruments : SFAS
No. 155:
In May
2005, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Instruments,”
which is
an amendment of SFAS No. 133 and 140 and allows financial instruments that
have embedded derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects to account
for
the whole instrument on a fair value basis. SFAS No. 155 is effective for
all financial instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. Companies must apply
the
standard prospectively. This
Statement does not currently affect the Company’s consolidated financial
statements.
Variability
in Variable Interest Entities (VIEs) FIN 46(R)-6 : On April 13, 2006, the FASB
issued FASB Staff Position No. FIN 46(R)-6, "Determining the Variability to
Be
Considered in Applying FASB Interpretation No. 46(R). At issue is the type
of
variability that should be considered in identifying variable interests (i.e.,
risks of fluctuations in cash flows, fair values of assets, both, or risks
that
the VIE was designed to bear). The FSP supports the "by design" approach under
which the determination of whether an interest is variable requires a thorough
understanding of the design of the potential variable interest entity. This
Statement does not affect the Company’s consolidated financial
statements.
5.
LOANS
RECEIVABLE
In
connection with negotiations to acquire a Brazilian ethanol production company
(the “Producer”), Comanche Participações has advanced $1,852 to the Producer.
These funds have been used primarily to reduce indebtedness of the Producer
and
to secure the purchase of 17,946 tons of sugar cane for the 2006 harvest. $832
of this amount was secured by contracts to purchase ethanol at a 7% discount
to
the prevailing ESALQ price at the date of delivery. As of December 31, 2006,
this would be equivalent to approximately 2,274,000 liters of ethanol. The
assets of the Producer were secured as collateral against the remaining amounts
due.
F-10
6.
DUE
TO AFFILIATE COMPANIES
The
outstanding balance of $2,399 refers to advances from an officer and affiliated
companies controlled by the officers to fund the Loans Receivable described
in
item 5 above and to fund the Company’s U.S. and Brazilian operations. This total
includes accrued interest in the amount of $64. The loans accrue interest at
rates of 6% to 9% annually and are repayable on demand. The outstanding balance
is composed as follows:
Palatum
Investments, LLC
$
819
Octet
Data Centers Participações
676
Octet
Participações
5
Greenwich
Administrative Services, LLC
664
Citlali
LLC
54
Thomas
Cauchois - Officer
181
$
2,399
7.
GENERAL
AND ADMINISTRATIVE
EXPENSES
The
following summarize the components of General and Administrative Expense for
the
period from June 8, 2006 (date of inception) to December 31, 2006:
Consulting,
Legal & Professional Fees
$
455
Payroll
461
Travel
93
Other
87
Total
Expenses
$
1,096
These
costs represent mainly the pre-incorporation costs incurred by the Company
in
carrying out research into the clean fuels industry in Brazil. The company
had 5
employees the 2 directors during the period.
F-11
8.
SEGMENT
INFORMATION
Summary
geographical results for the Company’s operations are as follows:
The
Company has related party transactions with its Directors and Officers and
with
affiliate companies controlled by those individuals.
Various
affiliates of the Company had previously owned Comanche Participações prior to
its acquisition by Palatum Investments, LLC (“Palatum”), another affiliated
company. Due to somewhat different ownership structures between Palatum and
the
prior owners, this acquisition was accounted for under the provisions of SFAS
141, Business Combinations. The prior owners had invested a total of $954 in
Comanche Participações to pay third party consulting fees. As of the date of
acquisition though, Comanche Participações had no assets or liabilities and had
no revenue generating activities. As such, the fair value of Comanche
Participações was deemed to be zero and no value was paid by Palatum for the
acquisition. Comanche LLC then acquired ownership of Comanche Participações from
Palatum on July 10, 2006 for a note payable of $781. This amount reflects the
sums invested in Comanche Participações by Palatum at the date of acquisition.
Since Palatum and Comanche LLC are under common control, the purchase accounting
provisions of SFAS 141 did not apply to this transaction. The note payable
bears
interest at a rate of 9% annually and is repayable on demand. The outstanding
balance in the amount of $819 as of December 31, 2006 includes accrued interest
in the amount of $38.
Other
affiliates and one officer of the Company advanced a total of $909 to the
Company and its subsidiaries to help fund the Notes Receivable discussed in
Note
5. These advances bear interest at rates from 6% to 9% annually and are
repayable on demand. The outstanding balance in the amount of $916 as of
December 31, 2006 includes accrued interest in the amount of $7.
An
affiliate of the Company, Greenwich Administrative Services, LLC (“GAS”), which
is owned by officers of the Company, performs various administrative and
accounting services for the Company at cost plus 7.5%. Total expenses related
to
these administrative and accounting services amounted to $645 in 2006. Amounts
due to GAS are recorded on the financial statements as a “Due to Affiliate”
balance. Unpaid amounts bear interest at a rate of 9% annually. The outstanding
balance in the amount of $664 as of December 31, 2006 includes accrued interest
in the amount of $19.
10.
COMMITMENTS
AND CONTINGENT LIABILITIES
Commitments
The
Company, through Comanche Participações, entered into a preliminary agreement to
purchase certain assets of an ethanol refinery, Ouro Verde Açúcar e Álcool
Ltda., (“Ouro Verde”), on June 24, 2006. This agreement was subsequently
terminated in 2007 and the Company through Comanche Participações entered into a
definitive agreement to purchase certain assets of Ouro Verde. Pursuant to
the
terms of these agreements, the Company advanced $1,852 to Ouro Verde as advances
against the purchase price in the form of loans. These loans are collateralized
by certain assets of Ouro Verde. If the purchase of the assets is consummated,
these amounts will be applied against the purchase price.
F-13
On
November 9, 2006, the Company, through Comanche Participações, also entered into
definitive agreements to purchase the shares of Ibr Indústria Brasileira de
Resinas Ltda (“Iba” and the “Iba Agreement”), a biodiesel facility in Bahia,
Brazil and on December 27, 2006, the shares of Destilaria de Álcool Simões Ltda.
(“Itu” and the “Itu Agreement”) an ethanol facility in the state of São Paulo,
Brazil. The agreements contain provisions whereby the sellers must satisfy
certain terms and conditions prior to the Company’s obligation to
purchase.
The
Company signed an agreement with Rodman & Renshaw, an investment banking
firm located in New York, NY on October 17, 2006 to arrange for a placement
of
the Company’s securities (the “Rodman Agreement”). Pursuant to the Rodman
Agreement, the Company intends to raise approximately $15 million of new common
equity and $35 - $60 million of convertible debt securities. The Company has
agreed to pay Rodman & Renshaw a non-refundable financial advisory fee of
$15 per month for 3 months following execution of the Rodman Agreement. In
addition, the Company has agreed to reimburse Rodman & Renshaw for all
reasonable travel and out-of-pocket expenses up to a maximum of $50 over the
life of the contract. As of December 31, 2006the Company has made advances
in
the amount of $57 pursuant to the Rodman Agreement for certain due diligence
and
documentation costs. Pursuant to the terms of the engagement, the Company is
obligated to pay to the Placement Agent in connection with the Offering (i)
a
cash fee equal to 6% of the gross proceeds from sale of the Units, (ii) warrants
(the “Placement Warrants”) which will be exercisable for that number of Shares
equal to 8.5% of the Shares sold in the Offering, and (iii) reimbursement of
expenses actually incurred by the Placement Agent, including but not limited
to,
fees of the Placement Agent’s counsel. Such reimbursement shall be limited to
$50 without prior written approval by the Company.
The
bulk
of the remuneration described above is contingent on the consummation of a
successful offering.
Contingent
Liabilities
As
mentioned above the Company has agreed to pay its placing agents corporate
finance fees - Rodman & Renshaw - a financing fee equal to 6.0% of the gross
proceeds of the Financing then closing plus warrants to purchase the Company’s
equity equal to 8.5% of the gross proceeds. The strike price for the warrants
shall be 110% of the price of the equity securities issued.
In
the
case of the agreement to purchase the Itu ethanol facility, if either of the
parties elects not to close for other than cause, the contract provisions
require liquidated damages payable by the non performing party in the amount
of
approximately $4.6 million.
Certain
consultants to the Company who will become members of Brazilian management
have
played instrumental roles in arranging the Iba and Itu Agreements. As
compensation for these efforts, the Company has agreed to issue approximately
844,000 Comanche shares (subject to exchange rate adjustments) to these
individuals, subject to certain conditions, without any requirement to pay
cash
for such shares. The value of these shares is estimated to be approximately
$4,100 after the completion of a successful private placement.
F-14
The
Company has agreed to pay certain consultants, who will become members of
Brazilian management, cash payments in the aggregate amount of approximately
$129 in the event that a private placement financing of the Company
closes.
The
Company has agreed to indemnify the Placement Agent against certain liabilities
that may be incurred in connection with this Offering, including certain civil
liabilities under the Securities Act, and, where such indemnification is not
available, to contribute to the payments the Placement Agent may be required
to
make in respect of such liabilities
11.
CALLED
UP SHARE CAPITAL
On
incorporation on June 8, 2006, the Company authorized 50,000 shares and issued
2
common shares of $1.00 each. At the balance sheet date, all of the allotted
share capital was paid.
The
holders of common shares are entitled to receive dividends as declared from
time
to time and are entitled to one vote per share. There are no preference shares
outstanding.
12.
SUBSEQUENT
EVENTS
On
February 12, 2007, the Company, through Comanche Participações, signed an
amendment to the Itu Agreement which modified certain terms of the original
agreement.
On
March13, 2007, the Company, through Comanche Participações, signed an amendment to
the Iba Agreement which modified certain terms of the original
agreement.
The
Company, through Comanche Participações, entered into a definitive agreement,
the “Ligeiro Agreement”, on February 14, 2007 to purchase farmland in Ourinhos,
São Paulo, Brazil. The agreements contain provisions whereby the sellers must
satisfy certain terms and conditions prior to the Company’s obligation to
purchase.
F-15
REPORT
OF INDEPENDENT ACCOUNTING FIRM
To
the
Directors and Quotaholders of
Destilaria
de Álcool Simões Ltda.
São
Paulo
- Brazil
1.
We
have audited the accompanying balance sheet of Destilaria de Álcool Simões
Ltda. (the “Company”) as of December 31, 2006 and 2005, and the
related statements of operations, comprehensive loss, quotaholders’
equity, and cash flows for the years ended December 31, 2006 and
2005. These financial statements are the responsibility of the Company’s
Management. Our responsibility is to express an opinion on these
financial
statements based on our audits.
2.
We
conducted our audits in accordance with the standards generally accepted
in Brazil. Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements
are
free of material misstatement. Our audit of financial statements
included
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, and
evaluating the overall financial statement presentation. We believe
that
our audits provide a reasonable basis for our
opinion.
3.
Because
we were contracted by Destilaria
de Álcool Simões Ltda.,
after the end of the accounting period, which ended on December 31,2006,
we were not physically present during the company’s inventory-taking for
this period, and we also could not check the fixed assets. However,
we
adopted permitted alternative auditing procedures, so as to form
the basis
of our opinion on the financial
statements.
4.
In
our opinion, except
by adjusts that could be applied regarding the facts mentioned in
the
third paragraph, the financial statements referred to above present
fairly, in all material respects, the financial position of Destilaria
de
Álcool Simões Ltda. as of December 31, 2006 and 2005, the results of
its operations and its cash flows for the years ended December 31,2006 and 2005, in conformity with accounting principles generally
accepted
in the United States of America.
Destilaria
de Álcool Simões Ltda is a member of a group affiliated companies and, as
disclosed in the notes to the financial statements, has transactions and
relationships with members of the group. Because of these relationships, it
is
possible that the terms of these transactions are not the same as those, which
would result from arms-length transactions among wholly unrelated
parties.
(In
thousands of U.S. dollars, except otherwise
indicated)
1.
OPERATIONS
Destilaria
De Álcool Simões Ltda. (“Simões “) is a vertically integrated, fuel ethanol
producer located approximately 125 km. from the city of São Paulo.
Simões
was initially established in 1958 as a cachaça
(a type
of liquor produced from sugar cane) producer. In March 2003, after a sizeable
recapitalization and a complete substitution and reconstruction of the
industrial plant, Simões was transformed into a fuel ethanol producer. In
addition, Simões has leased and planted sugar cane farmland adjacent to the
plant.
2.
PRESENTATION
OF FINANCIAL
STATEMENTS
The
financial statements of Destilaria de Álcool Simões Ltda. have been prepared in
conformity with accounting principles generally accepted in the United States
of
America (“U.S. GAAP”), which requires management to make judgments, estimates
and assumptions that affect the application of policies and reported amounts
of
assets and liabilities, income and expenses during the reporting period and
require the disclosure of contingent assets and liabilities as of the date
of
the financial statements. The estimates and associated assumptions are based
on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making the judgments about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates. The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the period in which
the estimate is revised if the revision affects only that period, or in the
period of the revision and future periods if the revision affects both current
and future periods.
a)
Basis
of Preparation
The
accompanying financial statements, denominated in United States of
America
Dollars, were prepared in accordance with accounting principles generally
accepted in the United States of America.
Since
the
Company has a functional currency other than the U.S. dollar, assets and
liabilities accounts are translated into United States dollars at exchange
rates
in effect at the balance sheet date, and income and expenses are translated
at
weighted average exchange rates in effect during the period. Resulting
translation adjustments are reported as other comprehensive income (loss) and
accumulated in Quotaholders’ Equity. Transaction gains and losses that arise
from exchange rate changes on transactions denominated in a currency other
than
the functional currency are included in income as incurred.
F-21
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
a)
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash on hand, deposits in banks with original
maturities of three months or less.
b)
Inventories
Inventories
are stated at the lower of cost and net realizable value. Work in progress
and
finished goods are valued at direct production cost. The cost of production
comprises the direct cost of raw materials purchased from third parties,
agriculture costs, which comprise the growing costs and the costs of harvesting,
transport and other point of purchase costs, the direct manufacturing expenses,
an appropriate allocation of material and manufacturing overhead and an
appropriate share of the depreciation and write-downs of assets used for
production, when applicable. If the purchase or production cost is higher than
the net realizable value, inventories are written down to net realizable value.
Net realizable value is the estimated selling price in the ordinary course
of
business, less the estimated costs of completion and selling expenses.
c)
Property,
plant and equipment
Property,
plant and equipment are stated at purchase price or production cost less
accumulated depreciation and impairment losses. Freehold land is carried at
purchase cost. Expenses for the repair of property, plant and equipment are
usually charged against income when incurred. They are, however, capitalized
when they increase the future economic benefits expected to arise from the
item
of property, plant and equipment. Costs of developing sugar cane orchards are
capitalized during the development period and depreciated over the estimated
productive lives. Assets under construction represent plant and properties
under
construction and are stated at cost. This includes cost of construction, plant
and equipment and other direct costs. Assets under construction are not
depreciated until such time as the relevant assets are available for their
intended use. Interest incurred on borrowings directly attributable to the
construction of such assets is capitalized as part of the cost of the asset.
Depreciation is calculated on a straight line method over the estimated useful
life or utility of the assets. Where the carrying amount of an asset is greater
than its estimated recoverable amount, it is written down immediately to its
recoverable value.
d)
Impairment
of assets
Assets
are reviewed for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. Whenever the carrying amount
of an asset exceeds its recoverable amount (being the higher of its fair value
less cost to sell and its value in use), an impairment loss is recognized in
income. The fair value less cost to sell is the amount obtainable from the
sale
of an asset in an arm’s length transaction while value in use is the present
value of estimated future cash flows expected to arise from the continuing
use
of an asset and from its disposal at the end of its useful life. Recoverable
amounts are estimated for individual assets or, if this is not possible, for
the
cash generating unit to which the assets belong. Reversal of impairment losses
recognized in prior years is recorded in income when there is an indication
that
the impairment losses recognized for the assets no longer exist or have
decreased.
F-22
e)
Interest
bearing borrowings
Interest
bearing borrowings are recognized initially at the proceeds received, net of
transaction costs incurred. In subsequent periods, borrowings are stated at
amortized cost using the effective yield method; any difference between proceeds
(net of transaction costs) and the redemption value is recognized in the income
statement over the period of the borrowing. When borrowings are repurchased
or
settled before maturity, any difference between the amount repaid and the
carrying amount is recognized immediately in the income statement.
f)
Provisions
Provisions
are recognized when there is a present legal or constructive obligation as
a
result of past events, it is probable that an outflow of resources will be
required to settle the obligation and a reliable estimate of the amount can
be
made. Contingencies for labor, tax, commercial and civil litigations in the
ordinary course of our business are recorded when determined that the loss
is
probable and can be reasonably estimated. The assessment of liability and amount
of loss is based on a number of factor, including legal advice and management’s
estimate of the likely outcome.
g)
Fair
Value of Financial
Instruments
Financial
instruments consist of cash and cash equivalents and loans. The carrying value
of these financial instruments approximates their fair value.
In
managing interest rate and currency risks , the Company aims to reduce the
impact of short term fluctuations on the Company’s earnings. Over the longer
term, however, permanent changes in foreign exchange and interest rates would
have an impact on earnings.
h)
Income
Taxes
The
Company has not yet generated any profits and, accordingly, no general provision
for income taxes is recorded in these financial statements. Income taxes
comprise Federal income tax and social contribution.. The Brazilian income
tax
statutory rates are 25.0% for Federal income tax and 9.0% for Social
contribution.
Deferred
tax assets and liabilities are recognized under the liability method for
temporary differences between the financial accounting and income tax basis
of
assets and liabilities. Deferred tax assets are reduced by a valuation allowance
to an amount that management believes is more likely than not to be
realized.
F-23
Federal
and State income tax filings of the Company are subject to examination by the
tax authorities.
i)
Revenue
recognition
The
company derives its revenue from sales of ethanol. Revenues are recognized
when
title to the products is transferred. The company recognizes revenue on products
it sells to distributors when, according to the terms of the sales agreements,
delivery has occurred, performance is complete, no right of return exists,
and
pricing is fixed or determinable at the time of sale.
There
are
several additional conditions for recognition of revenue: that the collection
of
sales proceeds be reasonably assured based on historical experience and current
market conditions, that pricing be fixed or determinable, and that there be
no
further performance obligations under the sale.
The
Company follows Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, the SEC interpretation of accounting guidelines on revenue
recognition.
j)
Earnings
per Share
Basic
earnings per quotas amounts are calculated based on the weighted
average
number of quotas outstanding during the period. Diluted earnings per quota,
when
applicable, are calculated by adjusting the profit measure and the weighted
average number of quota in issue on the assumption of conversion of all dilutive
potential quotas. The treasury stock method is applied to determine the number
of potentially dilutive quotas.
k)
Comprehensive
income
SFAS
No.
130, “Reporting Comprehensive Income,” establishes standards for reporting and
display of comprehensive income and its components in financial statements.
It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income consists of net income and the effects of
foreign currency translation adjustments.
4.
NEW
ACCOUNTING
PRONOUNCEMENTS
In
June
2006, the FASB issued Interpretation No. 48— Accounting for Uncertainty in
Income Taxes-An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Statement will be effective for the Company
beginning January 1, 2007 and is not expected to have a material impact on
the Company’s financial statements.
F-24
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS
157). SFAS 157 provides a common definition of fair value and establishes a
framework to make the measurement of fair value in generally accepted accounting
principles more consistent and comparable. SFAS 157 also requires expanded
disclosures to provide information about the extent to which fair value is
used
to measure assets and liabilities, the methods and assumptions used to measure
fair value, and the effect of fair value measures on earnings. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. The Company
is currently analyzing the potential impact, if any, of SFAS 157 on its
financial statements.
FASB
Statement 155: Fair Value Option for Hybrid Instruments: SFAS
No. 155:
In May
2005, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Instruments,”
which is
an amendment of SFAS No. 133 and 140 and allows financial instruments that
have embedded derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects to account
for
the whole instrument on a fair value basis. SFAS No. 155 is effective for
all financial instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. Companies must apply
the
standard prospectively. This
Statement does not currently affect the Company’s financial
statements.
5.
CASH
AND CASH EQUIVALENTS
At
December, 31
2006
2005
Cash
and bank accounts
$
5
$
12
Investments
funds
In
Brazilian reais:
Bank
certificates of deposit
680
529
$
685
$
541
The
average annualized interest rates related to the investments in Brazilian reais
for the year ended December 31, 2006 were 17.15%. These investments are stated
at cost plus accrued interest at the balance sheet date.
The
costs
of preparing land for planting sugar cane, through lease, are amortised over
five years from when the first cane crop is planted. Sugar cane reaches maturity
between twelve and eighteen months of the first crop being planted. Subsequent
crops are harvested on an annual basis.
8.
LOANS
Balances
at
December
31,
Maturity
Currency
Interest
rate - %
2006
2005
U.S.
dollars:
Property
and equipment acquisition
2008
U.S.
dollar
LIBOR
plus 5.0
$
1,652
$
2,527
Brazilian
currency:
Working
capital
2007
Brazilian
Reais
120
23
-
Total
1,675
2,527
Less-
Current maturities
1,026
498
Long-term
portion
$
649
$
2,029
F-26
The
following summarizes the maturities of long-term debt loans including accrued
interest:
At
December 31,
Year
2006
2005
2007
-
$
1,015
2008
$
649
1,014
$
649
$
2,029
The
related parties Vibrapar Participações and Rede Brasil Ltda. have agreed to
guarantee through a letter of guarantee the due, compliance, performance and
punctual observance of all obligations.
Accounts
payable to related party Petrovia Ltda. for acquisitions of property,
plant and equipment. The accounts payable do not accrue interest
and
matured on December 31, 2006.
(b)
Refers
to working capital loans made by related party Petrovia Ltda. to
the
Company. The loans do not accrue interest and do not have maturity
date.
As
of
October 10, 2006, the Quotholders’approved the capital increase through a debt
conversion from the related party Petrovia Ltda.
11.
INCOME
AND SOCIAL CONTRIBUTION TAX
CREDITS
As
of
December 31, 2006, the Company had tax losses that can be carried forward
indefinitely up to 30% of annual taxable income,
composed
as follows:
Year
Income
tax
Social
contribution
tax
2003
$
60
$
60
2004
797
797
2005
2,987
2,987
2006
2,490
2,490
$
6,334
$
6,334
F-28
Income
and social contribution taxes on temporary differences and tax loss carry
forwards are shown below:
2006
2005
Deferred
tax assets on:
Income
tax losses
$
1,584
$
961
Social
contribution tax losses
570
346
2,154
1,307
Deferred
tax assets on temporary differences:
Accrual
for contingencies
18
-
18
-
Deferred
income and social contribution tax assets, net
2,172
1,307
Valuation
allowance
(2,172
)
(1,307
)
Deferred
tax assets, net
-
-
The
Company adopts the criteria of recognizing deferred tax assets on loss
carryforwards and credits referring to temporary differences, when realization
is probable, based on internal studies and forecasts.
12.
CONTINGENTS
LIABILITIES
As
of
December 31, 2006, reserves in the amount of $ 52 were recognized which,
according to management, based on its legal counsel’s opinion, are sufficient to
cover losses expected to result from current lawsuits. The amounts reserved
are
summarized as follows:
As
of
December 31, 2006, the Company is subject to labor lawsuits with the most
diverse characteristics and in different phases of litigation. These lawsuits
represent a total maximum risk of $ 86. Based on the opinions of the
Company’s legal counsel and favorable outcomes expected by the Company
management in certain cases and negotiations to be conducted, the accrued amount
of $ 52 is considered sufficient by management to cover expected
losses.
F-29
Civil
contingency
As
of
December 31, 2006, the company is defendant in a variety of civil cases at
various stages of proceedings. These suits represent a total maximum risk of
$ 39. Based on opinions of its legal counsel, whose expected favorable
outcome is possible, the management has not recorded reserve for
contingencies.
In
the
opinion of management none of these proceedings, individually or as a whole,
is
expected to have a material adverse effect on the financial position or results
of operations of the Company.
13.
QUOTAHOLDERS’
CAPITAL
a) Capital
As
of
December 31, 2006, fully paid-up capital is composed as follows:
Quotaholders
Number
Amount
Univen
Petroquímica Ltda.
16,990,848
$
7,846
Werner
José Brancaglion Rottgering
809,088
374
Eunice
Granato Quecine
809,088
374
Jairo
Simões de Almeida
728,179
336
Fabio
Simões de Almeida
728,179
336
Luciana
Simões de Almeida Kfouri
161,818
75
20,227,200
$
9,341
b) Debts
Capitalization
As
of
October 10, 2006, the Quotaholders approved the capital increase in the amount
of $9,223 through a debt conversion from the related party Petrovia Ltda. At
the
same date Petrovia Ltda. transferred its 16,990,848 quotas to Univen
Petroquímica Ltda.
F-30
14.
GENERAL
AND ADMINISTRATIVE
EXPENSES
The
following summarize the components of General and Administrative
Expense:
Commitments
under non-cancellable operating commitments on land use
expiring:
Within
one year
$
734
$
370
Later
than one year and in less than five years
1,931
$
1,222
$
2,665
$
1,592
Payments
for land leases are calculated based on the quantity per leased area and price
of the sugarcane in the month prior to payment. In order to calculate future
obligations, the sugarcane prices of December 31, 2006 and 2005, respectively,
were used.
The
payments are recognized in the profit and loss account.
Agriculture
partnership agreements relate to use of land for sugar cane planting. The
agreements are negotiated for an average term of 4 years.
F-31
16.
SEGMENT
INFORMATION
The
Company operates in one business and one geographical segment. Accordingly,
no
segment information is reported.
17.
SUBSEQUENT
EVENTS
On
January 17, 2007, the Company signed a definitive agreement to be acquired
by
Comanche Brasil Participações Ltda., a holding company established to invest in
agricultural clean fuel production.
*****
F-32
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM 6.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Cayman
Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except
to
the extent any such provision may be held by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against civil
fraud or the consequences or committing a crime. Our articles of association
provide for indemnification of officers and directors for losses, damages,
costs
and expenses incurred in their capacities as such, except through their own
fraud or willful default.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us under the foregoing
provisions, we have been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act
and
is therefore unenforceable.
ITEM 7.
RECENT SALES OF UNREGISTERED SECURITIES.
Since
our
inception on February 9, 2007, we have issued the following securities. We
believe that each of the following issuances was exempt from registration under
the Securities Act in reliance on Regulation S under the Securities Act or
pursuant to Section 4(2) of the Securities Act regarding transactions not
involving a public offering.
·
In
February 2007 the Company issued one ordinary share to each of Thomas
Cauchois and Alicia Noyola as a founder’s
share.
·
On
April 3, 2007the Company issued an aggregate of 3,000,000 ordinary
shares
and five year warrants to purchase an aggregate of 2,250,000 ordinary
shares at $5.30 per share to 15 institutional investors for an aggregate
gross purchase price of $15 million. The placement agent in such
transaction received a cash commission of $900,000 in respect of
such sale
and five-year warrants to purchase an aggregate of 255,000 ordinary
shares
at $5.83 per share.
·
On
April 3, 2007the Company issued and sold to 14 institutional investors
senior secured convertible notes of the Company in the aggregate
principal
amount of $44,752,540 and five year warrants to purchase an aggregate
of
3,254,730 ordinary shares at $5.30 per share for an aggregate gross
purchase price of $44,752,540. The placement agent in such transaction
received a cash commission of $2,685,152 in respect of such sale
and
five-year warrants to purchase an aggregate of 691,630 ordinary shares
at
$5.83 per share.
·
In
April 2007 the Company issued to an aggregate of 1,182,412 ordinary
shares
to each of Thomas Cauchois and Alicia Noyola in consideration of
the
satisfaction of certain indebtedness of the Company to such persons
and in
exchange for their holdings in Comanche Corporation which they had
acquired for cash.
·
In
April 2007 the Company issued and aggregate of 165,049 ordinary shares
to
Ouro Verde Participacoes S/A in partial consideration for the acquisition
of certain assets.
·
In
April 2007 the Company issued an aggregate of 844,660 ordinary shares
to
Castanhera Acquisition Company LLC in partial consideration for the
acquisition of certain assets.
·
In June 2007 the Company issued an aggregate of
1,050,000
ordinary shares and warrants exercisable until April 3, 2012 to purchase
an aggregate of 787,500 ordinary shares at $5.30 per share to 6
institutional investors for an aggregate purchase price of
$5,250,000.
·
In June 2007, the Company issued and sold to 7
institutional investors, for an aggregate purchase price of $17,050,000,
senior secured convertible notes of the Company in the aggregate principal
amount of $17,050,000 and warrants exercisable until April 3, 2012
to
purchase an aggregate of 1,239,999 ordinary shares at $5.30 per share.
ITEM 8.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Form
of Warrants to Purchase Ordinary Shares of the
Company.*
5.1
Opinion
of Maples and Calder regarding the validity of the ordinary
shares*
10.1
Form
of Securities Purchase Agreement (Shares and Warrants) dated as of
March30, 2007 between the Company and the buyers set forth in the Schedule
of
Buyers attached thereto.*
10.2
Form
of Securities Purchase Agreement (Notes and Warrants) dated as of
March30, 2007 between the Company and the buyers set forth in the Schedule
of
Buyers attached thereto.*
Lockup
Agreement between the Company and certain
shareholders.*
10.5
Pledge
Agreement, dated April 3, 2007 between Comanche Cayman and Tri-State
Title
& Escrow, LLC.*
10.6
Purchase
and Sale Private Instrument and Other Adjustment dated March 14,2007
among FJJ Empreendimentos e Participacoes Ltda., Netoil Intermediacao
de
Negocios Ltda., Ouro Verde Participacoes S/A and Comanche Participacoes
do
Brasil Ltda. *
10.7
Private
Instrument of Purchase and Sale and Other Agreements dated November9,2006 among IBR Industria
Brasileira de Resinas Ltda., Hilton Barbosa Lima, Thiago Barbosa
Lima and
HBL Participacoes e Empreendimentos Ltda.*
10.8
Private
Instrument of Purchase and Sale and Other Agreements dated Februray
14,
2007 among Francisco Ligeiro, Alice Maria Furlaneto Ligeiro and Comanche
Participacoes do Brasil Ltda.*
10.9
Contract
of Purchase and Sale and Other Settlements dated December 27, 2006
among
Univen Petroquimica Ltda., Werner Jose Brancaglion Rottgering, Eunice
Granato Quecine, Luciana Simões de Almeida Kfouri, Jairo Simões de
Almeida, Fábio Simões de Almeida, Destilaria de Alcool Simoes Ltda.,
Vibrapar Participacoes Ltda., Cecilia Sansigolo Simoes de Almeida
and
Comanche Participacoes do Brasil Ltda.*
10.10
Supplement
to Contract of Purchase and Sale and Other Settlements dated February12,2007 among Univen Petroquimica Ltda., Werner Jose Brancaglion Rottgering,
Eunice Granato Quecine, Luciana Simões de Almeida Kfouri, Jairo Simões de
Almeida, Fábio Simões de Almeida, Destilaria de Alcool Simoes Ltda.,
Vibrapar Participacoes Ltda., Cecilia Sansigolo.*
10.11
Addition,
dated March 13, 2007 to Private Instrument of Purchase and Sale and
Other
Agreements among IBR Industria Brasileira de Resinas Ltda., Hilton
Barbosa
Lima, Thiago Barbosa Lima and HBL Participacoes e Empreendimentos
Ltda.*
10.12
Private
Contract of Advisory Services and Other Settlements, dated November2,2006 among Castanheira Acquisition Company LLC, the Company and Comanche
Participacoes do Brasil Ltda.*
10.13
Charge
over Shares in Comanche Corporation dated April 3, 2007
10.14
Quota
Pledge Agreement dated April 3, 2007 among Comanche Clean Energy,
LLC and
Tri-State Title & Escrow, LLC
10.15
Amendment
No. 1
dated June 15, 2007 to Securities Purchase Agreement (Notes and Warrants),
dated as of March 30, 2007.*
10.16
Amendment
No. 1
dated June 15, 2007 to Securities Purchase Agreement (Shares and Warrants)
dated as of March 30, 2007.*
23.1
Consent
of BDO Trevisan*
23.2
Consent
of Maples and Calder contained in Exhibit 5.1
23.3
Consent
of Imateo Auditoria e Consultoria S/C*
*
Filed
herewith.
ITEM 9.
UNDERTAKINGS
(a)
The undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
To include any prospectus required by Section 10(a)(3) of the Securities Act
of
1933;
II-2
(ii)
To reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement.
(iii)
To include any material information with respect to the plan of distribution
not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
II-3
(2)
That, for the purpose of determining any liability under the Securities Act
of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona
fide
offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Item 8.A. of Form 20-F at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, provided that
the
registrant includes in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph (a)(4) and other
information necessary to ensure that all other information in the prospectus
is
at least as current as the date of those financial statements. Notwithstanding
the foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and
information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter
if such financial statements and information are contained in periodic reports
filed with or furnished to the Commission by the registrant pursuant to section
13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Form F-3.
(b)
Insofar as indemnification for liabilities arising under the Securities Act
of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
(c)
The undersigned registrant hereby undertakes that:
(1)
For purposes of determining any liability under the Securities Act of 1933,
the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2)
For the purpose of determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona
fide
offering thereof.
II-4
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Sao Paulo, Brazil, on June 15, 2007.
COMANCHE
CLEAN ENERGY CORPORATION
By:
/s/
Thomas Cauchois
Thomas
Cauchois
Chairman
(Principal
Executive Officer)
POWER
OF ATTORNEY
KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constituand appoints Thomas Cauchois and Alicia Noyola his true and lawful
attorney-in-fact, with full power of substitution and resubstitution for him
and
in his name, place and stead, in any and all capacities to sign any and all
amendments including post-effective amendments to this registration statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute,
each
acting alone, may lawfully do or cause to be done by virtue
thereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
