RNS Number:7347K
FutureFuel Corp
28 December 2007
THIS ANNOUNCEMENT IS NOT FOR RELEASE INTO THE UNITED STATES.
THE FOLLOWING DOES NOT RELATE TO AN OFFER OF SECURITIES FOR SALE IN THE UNITED
STATES. THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE SECURITIES MAY
NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO U.S. PERSONS EXCEPT
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
FutureFuel Corp.
("FutureFuel" or the "Company")
December 27, 2007
2006 Financial Results
FutureFuel, through its wholly owned subsidiary FutureFuel Chemical Company
("FutureFuel Chemical"), is a leading producer and marketer of alternative fuels
in the United States as well as a specialty chemicals manufacturer. The Company
is pleased today to present its restated consolidated financial statements,
including its consolidated balance sheets as of December 31, 2006 and 2005 and
its consolidated statements of operations, statements of cash flows and
statements of changes in stockholders' equity for the year ended December 31,
2006 and for the period from August 12, 2005 (inception) to December 31, 2005,
together with KPMG LLP's report thereon.
Notes on the Presentation of Financial Information
*On July 21, 2006, Viceroy Acquisition Corporation ("Viceroy"), now known
as FutureFuel Corp., entered into an acquisition agreement with Eastman
Chemical Company ("Eastman Chemical") to purchase all of the issued and
outstanding stock of Eastman SE, Inc. ("Eastman SE"), an entity created by
Eastman Chemical for purposes of effecting a sale of Eastman Chemical's
manufacturing facility in Batesville, Arkansas (the "Batesville Plant"). On
October 27, 2006, a special meeting of the shareholders of Viceroy was held
and the acquisition of Eastman SE was approved by the shareholders. On
October 31, 2006, Viceroy acquired all of the issued and outstanding shares
of Eastman SE from Eastman Chemical. After purchase price adjustments to
date, a price of approximately $71.0 million was paid for the stock of
Eastman SE. Immediately subsequent to the acquisition, Viceroy changed its
name to FutureFuel Corp. and Eastman SE changed its name to FutureFuel
Chemical Company.
*For purposes of preparing its financial statements, the Company initially
accounted for the acquisition of FutureFuel Chemical as a reverse
acquisition and did not apply purchase accounting to the transaction.
FutureFuel announced its 2006 preliminary results on April 24, 2007.
*The Company filed a registration statement on Form 10 with the U.S.
Securities and Exchange Commission ("SEC") on April 24, 2007. The
consolidated financial statements included in FutureFuel's April 24, 2007
preliminary results were included in this registration statement. This Form
10 registration statement along with the consolidated financial statements
of FutureFuel and the financial statements of Viceroy were subject to review
by the SEC.
*On July 27, 2007, following a special meeting of the audit committee of
the Company's board of directors, and as a result of SEC comments,
FutureFuel announced that its previously issued financial statements for
2006 would require restatement to apply purchase accounting to the
acquisition of FutureFuel Chemical and should not be relied upon. Trading of
FutureFuel's shares on AIM has been suspended since the date of this
announcement.
*As the restated FutureFuel financial statements present the acquisition
of Eastman SE utilizing purchase accounting, the historical financial
results of Eastman SE occurring before November 1, 2006 are not included
within FutureFuel's historical financial statements. Thus, in order to
provide a more meaningful presentation of the financial information within
this announcement, the financial data presented herein represents the
consolidated results of operations and cash flows for the year ended
December 31, 2006 and for the period from August 12, 2005 (inception) to
December 31, 2005 for FutureFuel combined with the results of operations and
cash flows of Eastman SE for the ten months ended October 31, 2006 and for
the year ended December 31, 2005. Additionally, the selected 2005 balance
sheet information presented herein represents the combined balance sheet
information of FutureFuel and Eastman SE as of December 31, 2005. The
Company's restated consolidated financial statements and notes thereto, as
well as the "carve-out" financial statements of FutureFuel Chemical and
notes thereto, are included at the end of this announcement.
*Copies of the Annual Report, including these financial statements, for
the year ended December 31, 2006 will be mailed to stockholders on or around
January 25, 2008.
Corporate & Financial Highlights
*Completion of share offering and simultaneous admission to AIM, July 12,
2006
*Raised $172.5 million (net)
*Public announcement of execution of acquisition agreement with Eastman
Chemical Company on July 21, 2006; as the acquisition of FutureFuel Chemical
constituted a reverse acquisition, trading in the Company's shares and
warrants was suspended by AIM
*Shareholder approval of acquisition of FutureFuel Chemical on October 27,
2006; acquisition consummated, funds from offering distributed from trust to
FutureFuel, and readmission to AIM granted on October 31, 2006
*Revenues of $150.8 million (2005; $119.5 million)
*EBITDA of $7.7 million (2005; $9.6 million)
*Cash and cash equivalents of $63.1 million (2005; $0)
*Net working capital of $97.1 million (2005; $2.7 million)
*Book value of $161.2 million (2005; $76.1 million)
Operational Highlights
*Biodiesel production capacity at December, 31 2006 of 24 million gallons
per year
*Substantive work initiated on core infrastructure expansion projects at
FutureFuel Chemical's plant site in Batesville, Arkansas
*Addition of methanol recovery and feedstock pretreatment capabilities
*Construction of additional on-site storage to support increased
movements of feedstocks, methanol, glycerin and biodiesel
*Expansion of on-site rail siding and railcar loading and unloading
facilities
*Addition of off-site storage/thruput in Little Rock, Arkansas, in
Memphis, Tennessee, and in Port Allen, Louisiana
*Acquisition of a fleet of tanker trucks
*Procurement of railcars
*Continued sustainable cash flow generation from specialty chemicals
business
Post-Period Highlights
*FutureFuel Chemical entered into a $50 million credit agreement with
Regions Bank in March 2007; the loan is a revolving credit facility,
proceeds of which may be used for working capital, capital expenditures and
general corporate purposes
*FutureFuel Chemical completed the build-out of its information
technology, procurement, finance and accounting functions and in March 2007
terminated the Transition Services Agreement that had been in place with
Eastman Chemical Company since the closing of the acquisition
Paul A. Novelly, Chairman, commented:
"I am pleased to report that during 2006 FutureFuel executed on two important
milestones in achieving its long-term strategic objectives. First, we completed
our AIM share offering, providing the Company with the proper capitalization and
funding to pursue acquisitions in the oil and gas industry. Second, we closed
the acquisition of FutureFuel Chemical, bringing the Company an extremely
talented and entrepreneurial employee base, a strong foothold in the alternative
fuels market, and sustainable cash flow. The board of directors believes that
FutureFuel is well positioned to become a leader in the alternative fuels
segment of the U.S. oil and gas industry."
Lee E. Mikles, Chief Executive Officer, commented:
"On November 1, 2006, having completed both our AIM share offering and the
acquisition of FutureFuel Chemical, FutureFuel was faced with the challenges of
integrating its first acquisition, navigating the changing landscape of the
alternative fuels market, and ensuring the stability of FutureFuel Chemical's
specialty chemicals business. We have made considerable progress toward meeting
each of these challenges during the last two months of the year. FutureFuel
reported a healthy balance sheet and working capital position at December 31,
2006, due in large part to financial results from FutureFuel Chemical that
exceeded our expectations.
Our management and our employees are eager to continue this success into 2007,
always with a focus on creating value for our shareholders."
For more information:
FutureFuel Corp.
Lee Mikles, Chief Executive Officer (805) 565-9800
KBC Peel Hunt
Matt Goode / Dan Harris 44 (0)20 7418 8900
Chairman's Statement
Over the span of one year, beginning in October 2005 with the formation of the
Company, and culminating in October 2006, with the closing of the acquisition of
FutureFuel Chemical, we have successfully laid the foundation to achieve our
objective of becoming a leader in the U.S. alternative fuels segment of the oil
and gas industry. In fact, with a current capacity of 24 million gallons per
year of biodiesel production, FutureFuel Chemical is already an active
participant in the U.S. biodiesel industry. FutureFuel Chemical is also among
the leading participants in the research, development and commercialization of
cellulosic ethanol technology
As we guide FutureFuel Chemical through its transformation into a leader in
alternative fuels it will be important not to overlook its role in the worldwide
specialty chemicals industry. Biodiesel production, cellulosic ethanol
technology, and in fact many aspects of the oil and gas industry are closely
tied to, if not entirely based upon, chemical processes. FutureFuel Chemical's
experience in the specialty chemicals industry is not just an asset, it is how
we differentiate ourselves from our competition.
FutureFuel Chemical has long-lasting relationships with many of the largest
companies in the chemicals industry, companies who are also leading participants
in the worldwide oil and gas industry. FutureFuel Chemical's workforce comprises
over 400 employees with a total of 60 degreed professionals, including 15
chemists (10 PhDs), and 36 engineers (including 10 licensed professional
engineers and 17 chemical engineers). This highly talented workforce enables us
to develop or adopt new technologies and to troubleshoot problems such as cold
flow issues that plagued most of the industry during the winter months. Finally,
and certainly not of the least importance, FutureFuel Chemical's specialty
chemicals business provides sustainable cash flow and positive working capital
to support growth.
We reported $150.8 million in revenues for 2006, an increase of 26% over 2005
revenues of $119.5 million. Operating income decreased moderately, from $0.6
million in 2005 to $(0.5) million in 2006. While we were disappointed that the
combined entities reported an operating loss for the full year, we were pleased
by the operations of FutureFuel Chemical during the final two months of the
year. We believe the improved performance during this time is largely a result
of reduced corporate expense allocations under FutureFuel ownership and we
intend to operate the Company with a constant focus on minimizing expenses.
FutureFuel's operational success during the year was made possible by a
carefully planned and well executed financing transaction in July 2006. This
financing transaction not only provided FutureFuel with the appropriate
structure and funding to pursue an acquisition in the oil and gas industry, it
also brought us a shareholder base that shares our perspective of the changes
occurring within the oil and gas industry and our vision for the opportunities
these changes bring. We could not be more enthusiastic with the quality of our
shareholder base and we will always seek to make decisions for the Company that
are singularly aimed at creating long-term value for our investors.
FutureFuel closed 2006 with $63.1 million in cash and equivalents. At the
present time, the Company intends to retain all cash to fund infrastructure and
capacity expansion at FutureFuel Chemical and to pursue complimentary
acquisitions in the oil and gas industry.
I would like to thank all of FutureFuel's employees for their tireless efforts
throughout the last two months of 2006 and most of 2007 as we collectively
overcame the challenges that come with the integration of any acquisition. And
on behalf of all of FutureFuel's employees, I would like to thank our
shareholders for their support. I look forward to reporting our continuing
progress during 2008.
Paul A. Novelly
Chairman
Chief Executive Officer's Review
General Description of FutureFuel Chemical and Background of the Acquisition
FutureFuel Chemical owns approximately 2,200 acres of land six miles southeast
of Batesville in north central Arkansas fronting the White River. Approximately
500 acres of the site are occupied with batch and continuous manufacturing
facilities, laboratories and infrastructure, including on-site liquid waste
treatment. The plant is staffed by approximately 460 non-union employees.
The Batesville Plant was constructed by Eastman Kodak Company in 1977, initially
to produce proprietary photographic chemicals. Over the past 30 years the
plant's business scope was broadened to include certain specialty chemicals for
Eastman Chemical and, after Eastman Chemical split from Eastman Kodak Company in
1994, a more diverse portfolio of fine chemicals and organic chemical
intermediates used in a variety of end markets, including paints and coatings,
plastics and polymers, pharmaceuticals, food supplements, household detergents
and agricultural products.
In mid 2005, Eastman Chemical decided that specialty chemicals would no longer
be a core business and that it would seek to divest the Batesville Plant. Around
this same time, plant management began to actively pursue new businesses in
which to focus their manufacturing capabilities. Recognizing that the plant was
suited relative to geography and capabilities to manufacture products for the
emerging alternative fuels markets, management launched a local biobased
products platform in early 2005. With minimal capital expenditures, and using
local technical resources, the management team was able to initiate biodiesel
batch production in October 2005 at a capacity of 3 million gallons per year.
Entry into the biofuels business was accomplished with excess plant capacity and
without any reduction in production of specialty chemicals.
FutureFuel was organized in late 2005 to pursue business combinations with
target businesses engaged in the oil and gas industry. We began discussions with
Eastman Chemical in June 2006, at which time the Batesville Plant had
commercialized biodiesel and was capable of producing approximately 9 million
gallons of biodiesel per year by batch processing. Upon completion of the
acquisition of FutureFuel Chemical on October 31, 2006, the plant had increased
biodiesel capacity to 24 million gallons per year.
Plan of Operation and Growth Strategy for the Company
Our strategy in relation to the acquired operations is to build upon and expand
FutureFuel Chemical's biobased products platform and to continue FutureFuel
Chemical's chemical manufacturing activities.
We initially planned to increase the plant's biodiesel capacity to 40 million
gallons per year by May 2007 and to 160 million gallons per year by November
2007, with substantial complementary expenditures on infrastructure to support
this increased capacity. After closing the acquisition of FutureFuel Chemical on
October 31, 2006, we and, to our knowledge, the industry as a whole, witnessed a
rapid erosion in margins for producing biodiesel. As a result of these decreased
margins, we determined that it was not in our shareholders' best interest to
proceed on an accelerated basis to increase capacity and publicly announced this
on January 19, 2007. In the second quarter of 2007, crude oil prices
strengthened and, despite corresponding increased in feedstock prices, we judged
these and future market conditions to be supportive of biodiesel capacity
expansion and therefore resumed a project to expand capacity by 35 million
gallons per year (for a total capacity of 59 million gallons per year) through a
new continuous processing line, projected to be operational on July 1, 2008. We
have also continued with certain core infrastructure projects that we believe
will bring efficiency, operational flexibility and cost savings to FutureFuel
Chemical's existing biodiesel and chemical business lines. These projects
include the addition of methanol recovery and biodiesel feedstock pretreatment,
the construction of additional storage at the plant to support increased
movements of feedstocks, methanol, glycerin and biodiesel, and the expansion of
on-site rail siding and railcar loading and unloading facilities. In addition,
we have acquired a fleet of tanker trucks, procured railcars, and obtained
storage/thruput in strategic regional ports.
While the core of our growth strategy centers on FutureFuel Chemical's biofuels
business, we believe there is also tremendous opportunity to build on and
maintain FutureFuel Chemical's reputation as a technology-driven competitive
chemical producer. The chemical business comprises two components: "custom
manufacturing" (manufacturing chemicals for specific customers); and
"performance chemicals" (multi-customer specialty chemicals).
Custom manufacturing involves producing unique products for individual
customers, generally under long-term contracts. The plant's custom manufacturing
product portfolio includes four large products or product families which are
generally produced throughout the year: (i) nonanoyloxybenzenesulfonate
("NOBS"), a bleach activator for a major detergent manufacturer; (ii) a
proprietary herbicide for a major life sciences company; (iii) chlorinated
polyolefin adhesion promoters ("CPOs") for Eastman Chemical Company; and (iv)
antioxidant precursors ("DIPBs") for Eastman Chemical Company. The portfolio
also contains a number of smaller products which are produced intermittently in
a "batch campaign" mode, for diverse customers and end markets.
The performance chemicals product lines comprise multi-customer products which
are sold based upon specification and/or performance in the end-use application.
This portfolio includes a family of polymer (nylon) modifiers and several
small-volume specialty chemicals for diverse applications.
We believe that FutureFuel Chemical must continuously focus on cost control,
operational efficiency and capacity utilization to maximize earnings. We intend
to improve margins in this area of the FutureFuel Chemical business by careful
management of product mix with regard to size of opportunity, timing to market,
capital efficiency and matching of opportunities to assets and capabilities. We
expect to derive significant growth in the performance chemicals segment
primarily as a result of new biobased co-products derived from biofuels
manufacturing, such as glycerin and derivatives. We also expect to capitalize on
FutureFuel Chemical's market position as one of the largest independent custom
chemical manufacturers in North America. FutureFuel Chemical's strong customer
relationships, technical capabilities and process improvement capabilities offer
us a competitive advantage in securing new contracts for custom chemical
production.
Discussion of Financial Performance
Revenues for the year ended December 31, 2006 were $150.8 million as compared to
revenues for the year ended December 31, 2005 of $119.5 million, an increase of
26%. The increase was primarily a result of selling biodiesel for the full year
and increased sales of NOBS. Revenues from NOBS increased 26% due to increased
demand from the customer as a result of changing consumer demand for their
product. Revenues from biodiesel were $13.3 million in 2006; 2005 biodiesel
revenues were inconsequential. Revenues from the proprietary herbicide, CPOs,
DIPBs and FFCC's family of polymer modifiers each changed less than 10% versus
2005 revenues. Revenues from all other products increased 26% but accounted for
only 7% of total revenues in both 2005 and 2006.
The majority of FutureFuel Chemical's expenses are cost of goods sold, which
reflect raw material costs as well as fixed and variable conversion costs,
conversion costs being those expenses that are directly or indirectly related to
operation of FutureFuel Chemical's plant. Significant conversion costs include
labor, benefits, energy, supplies and maintenance and repair. Total cost of
goods sold and distribution for 2006 increased 33% versus 2005, from $105.3
million to $139.7 million. Cost of goods sold for the chemical business actually
decreased when measured as a percent of chemical revenues, from 86% in 2005 to
84% in 2006. This was offset by significantly increased cost of goods sold
related to biofuels as this business utilized a significant portion of the
plant's reactors and hence absorbed more of the plant's conversion costs than it
was able to cover in revenues. We believe that, as FutureFuel Chemical moves its
biodiesel production from primarily batch processing to more continuous
processing, it will become more efficient and will produce higher volumes of
biodiesel per reactor, hence absorbing fewer overhead costs per gallon produced.
Operating expenses decreased from $13.6 million for the year ended December 31,
2005 to $11.6 million for the year ended December 31, 2006, or approximately
15%. This decrease was primarily the result of lower corporate expense
allocations from Eastman Chemical, as well at the lower overall operating
expenses incurred by FutureFuel Chemical on a standalone basis.
Operating income for 2006 was $(0.5) million, down from $0.6 million in 2005.
Meanwhile, cash provided by (used in) operating activities was $(4.0) million in
2006 versus $7.6 million in 2005. This decline in cash provided by operating
activities was entirely attributable to the significant building of working
capital accounts late in the year. FutureFuel Chemical's net working capital at
the end of 2005 was $2.7 million. At the end of 2006, FutureFuel Chemical's net
working capital had grown to nearly $34.0 million.
There were no significant other income or expense items during 2005 or 2006 with
the exception of $3.4 million of interest income earned during 2006. Combined
net income for the year totaled $2.2 million and basic earnings per share was
$0.08.
With more than $60 million in cash and equivalents, we closed the year with a
high degree of liquidity and a sound capital structure. We further improved our
position on March 14, 2007 when we entered into a revolving credit facility with
a commercial bank. The credit agreement makes up to $50 million available to
FutureFuel Chemical for working capital requirements, capital expenditures and
other corporate purposes. The credit agreement is secured by specific
collateral, including FutureFuel Chemical's accounts receivable and inventory.
Advances under the facility bear interest at rates based upon the then current
prime rate or based upon the then current London interbank offered rate plus
margins ranging from (1.00%) to 1.70%. Additionally, FutureFuel Chemical will
pay a commitment fee of 0.25% on any used availability. No borrowings have yet
been made under this credit agreement.
Outlook
We expect this to be a very dynamic year for the Company. FutureFuel Chemical
will continue to grow its biofuels business. And in the chemicals business we
are seeing strong demand for all of our custom and performance products and we
are working on some very exciting new business opportunities.
We should substantially complete our infrastructure expansion later in 2007 and
we are eager to begin making full use of the increased tankage, the improved
rail loading and unloading facilities, and the other infrastructure additions
described above to cut costs and improve efficiency in both the biofuels and
chemicals businesses.
In terms of communicating our financial results to our shareholders, there is no
doubt that this has been a very trying period for the Company. We believe that
this period is rapidly coming to a close. The Company is diligently working with
KPMG to complete the review and restatement of FutureFuel's first quarter 2007
results and the review of our second quarter 2007 results in an effort to
continue its registration process with the U.S. Securities and Exchange
Commission and resume the trading of its stock on AIM. The Company is grateful
for your continued patience in this matter and looks forward to resuming its
standard financial reporting process.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
FutureFuel Corp.:
We have audited the accompanying consolidated balance sheets of FutureFuel Corp.
and subsidiary (the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year ended December 31, 2006, and for the period from August 12,
2005 (Inception) to December 31, 2005. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing 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. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FutureFuel Corp. and
subsidiary as of December 31, 2006 and 2005, and the results of their operations
and their cash flows for the year ended December 31, 2006, and for the period
from August 12, 2005 (Inception) to December 31, 2005; in conformity with U.S.
generally accepted accounting principles.
As described in Note 2 to the consolidated financial statements, the Company has
restated the accompanying consolidated financial statements as of December 31,
2006 and 2005 and for the year ended December 31, 2006 and for the period from
August 12, 2005 (Inception) to December 31, 2005.
/s/ KPMG LLP
St. Louis, Missouri
April 23, 2007, except as to Note 2,
which is dated as of December 27, 2007
FutureFuel Corp.
Consolidated Balance Sheets
As of December 31, 2006 and 2005
(Dollars in thousands)
2006 2005
(Restated) (Restated)
Assets
Cash and cash equivalents $ 63,129 $ 28
Accounts receivable, net of allowances of $42 and 23,903 -
$0, respectively
Inventory 22,582 -
Current deferred income tax asset 70 -
Prepaid expenses 1,248 -
Other current assets 3,131 -
Total current assets 114,063 28
Property, plant and equipment, net 82,626 -
Noncurrent deferred income tax asset 387 -
Restricted cash and cash equivalents 3,127 -
Deferred costs - 207
Intangible assets 548 -
Other assets 2,765 -
Total noncurrent assets 89,453 207
Total Assets $ 203,516 $ 235
Liabilities and Stockholders' Equity
Accounts payable $ 12,945 $ 10
Accounts payable - related parties 112 -
Income taxes payable 1,916 -
Short term contingent consideration 191 -
Accrued expenses and other current liabilities 1,717 -
Accrued expenses and other current liabilities - 40 -
related parties
Total current liabilities 16,921 10
Long term contingent consideration 2,168 -
Other noncurrent liabilities 914 -
Notes payable to related parties - 200
Noncurrent deferred income taxes 22,357 -
Total noncurrent liabilities 25,439 200
Total Liabilities 42,360 210
Preferred stock, $0.0001 par value, 5,000,000 - -
shares authorized, none issued and outstanding
Common stock, $0.0001 par value, 75,000,000 3 1
shares authorized, 26,700,000 issued and
outstanding
Additional paid in capital 158,436 24
Retained earnings 2,717 -
Total stockholders' equity 161,156 25
Total Liabilities and Stockholders' Equity $ 203,516 $ 235
The accompanying notes are an integral part of these financial statements.
FutureFuel Corp.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
For the Year For the
Ended Period from
December31, August12,
2006 2005
(Inception)
to
December31,
2005
(Restated) (Restated)
Revenues $ 23,043 $ -
Cost of goods sold 19,966 -
Distribution 133 -
Gross profit 2,944 -
Selling, general and administrative expenses 1,155 1
Selling, general and administrative expenses - 104 -
related parties
Research and development expenses 923 -
2,182 1
Income from operations 762 (1)
Interest income 3,365 1
Interest expense (37) -
3,328 1
Income before income taxes 4,090 -
Provision for income taxes 1,373 -
Net income $ 2,717 $ -
Earnings per common share
Basic $ 0.10 $ -
Diluted $ 0.09 $ -
Weighted average shares outstanding
Basic 26,700,000 5,625,000
Diluted 31,818,772 5,625,000
The accompanying notes are an integral part of these financial statements.
FutureFuel Corp.
Consolidated Statements of Cash Flows
(Dollars in thousands)
For the Year For the
Ended Period from
December31, August12,
2006 2005
(Inception)
to
December31,
2005
(Restated) (Restated)
Cash flows provided by (used in) operating
activities
Net income $ 2,717 $ -
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 630 -
Provision (benefit) for deferred income taxes (956) -
Change in fair value of derivative instruments 447 -
Noncash interest expense 37 -
Changes in operating assets and liabilities:
Accounts receivable (20,434) -
Inventory (1,256) -
Prepaid expenses (1,240) -
Other assets 653 -
Accounts payable 2,724 10
Accounts payable - related parties 112 -
Income taxes payable 1,916 -
Accrued expenses and other current liabilities 1,747 -
Accrued expenses and other current liabilities - 40 -
related parties
Other noncurrent liabilities 369 -
Net cash provided by (used in) operating (12,494) 10
activities
Cash flows provided by (used in) investing
activities
Restricted cash (3,127) -
Collateralization of derivative instruments (3,578) -
Acquisition of the stock of Eastman SE, Inc. (72,634) -
Contingent purchase price payment (11) -
Capital expenditures (3,269) -
Net cash provided by (used in) investing (82,619) -
activities
Cash flows provided by financing activities
Equity offering expenditures - (207)
Proceeds from long-term debt - related parties 500 200
Repayment of long-term debt - related parties (700) -
Proceeds from the issuance of stock 169,402 25
Stock redemption (10,988) -
Net cash provided by financing activities 158,214 18
Net change in cash and cash equivalents 63,101 28
Cash and cash equivalents at beginning of period 28 -
Cash and cash equivalents at end of period $ 63,129 $ 28
The accompanying notes are an integral part of these financial statements.
FutureFuel Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the year ended December 31, 2006 and
For the period from August 12, 2005 (Inception) to December 31, 2005
(Dollars in thousands)
Additional Retained Total
paid-in stockholders'
Common stock Capital Earnings Equity
(Restated)
Shares Amount (Restated) (Restated) (Restated)
Balance - - $ - $ - $ - $ -
August 12,
2005
(Inception)
Common shares 5,000,000 1 24 - 25
issued
Net income - - - - -
Balance - 5,000,000 1 24 - 25
December 31,
2005
Common share 1,250,000 - - - -
dividend
Common share (625,000) - - - -
cancellation
Equity 21,075,000 2 158,412 - 158,414
offering
Net income - - - 2,717 2,717
Balance - 26,700,000 $ 3 $ 158,436 $ 2,717 $ 161,156
December 31,
2006 (as
restated)
The accompanying notes are an integral part of these financial statements.
1) Nature of operations and basis of presentation
Viceroy Acquisition Corporation
Viceroy Acquisition Corporation ("Viceroy") was incorporated under the laws of
the state of Delaware on August 12, 2005 to serve as a vehicle for the
acquisition by way of asset acquisition, merger, capital stock exchange, share
purchase or similar transaction ("Business Combination") of one or more
operating businesses in the oil and gas industry. On July 12, 2006 Viceroy
completed an equity offering (see Note 12).
On July 21, 2006, Viceroy entered into an acquisition agreement with Eastman
Chemical Company ("Eastman Chemical") to purchase all of the issued and
outstanding stock of Eastman SE, Inc. ("Eastman SE"). On October 27, 2006, a
special meeting of the shareholders of Viceroy was held and the acquisition of
Eastman SE was approved by the shareholders. On October 31, 2006, Viceroy
acquired all of the issued and outstanding shares of Eastman SE from Eastman
Chemical. Immediately subsequent to the acquisition, Viceroy changed its name to
FutureFuel Corp. ("FutureFuel") and Eastman SE changed its name to FutureFuel
Chemical Company ("FutureFuel Chemical").
Eastman SE, Inc.
Eastman SE was incorporated under the laws of the state of Delaware on
September 1, 2005 and subsequent thereto operated as a wholly-owned subsidiary
of Eastman Chemical through October 31, 2006. Eastman SE was incorporated for
purposes of effecting a sale of Eastman Chemical's manufacturing facility in
Batesville, Arkansas (the "Batesville Plant"). Commencing January 1, 2006,
Eastman Chemical began transferring the assets associated with the business of
the Batesville Plant to Eastman SE.
The Batesville Plant was constructed to produce proprietary photographic
chemicals for Eastman Kodak Company ("Eastman Kodak"). Over the years, Eastman
Kodak shifted the plant's focus away from the photographic imaging business to
the custom synthesis of fine chemicals and organic chemical intermediates used
in a variety of end markets, including paints and coatings, plastics and
polymers, pharmaceuticals, food supplements, household detergents and
agricultural products.
In 2005, the Batesville Plant began the implementation of a biobased products
platform. This includes the production of biofuels (biodiesel, bioethanol and
lignin/biomass solid fuels) and biobased specialty chemical products (biobased
solvents, chemicals and intermediates). In addition to biobased products, the
Batesville Plant continues to manufacture fine chemicals and other organic
chemicals.
2) Restatement of consolidated financial results
On October 31, 2006, FutureFuel acquired Eastman SE. For purposes of preparing
its financial statements, FutureFuel accounted for the acquisition as a reverse
acquisition; FutureFuel did not apply purchase accounting to the transaction.
Upon further review of the accounting for the acquisition of Eastman SE in
connection with the filing of its Form 10 registration Statement, FutureFuel
reassessed its accounting for the acquisition and determined that FutureFuel's
financial statements should be restated to apply purchase accounting to the
acquisition.
The consolidated financial statements, more specifically the consolidated
balance sheet of FutureFuel and its subsidiary as of December 31, 2006 and 2005
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 2006 and for the period from
August 12, 2005 (Inception) to December 31, 2005, contained herein represent the
financial statements of FutureFuel restated to account for the acquisition of
Eastman SE utilizing purchase accounting. The allocation of the estimated fair
values of the Eastman SE assets acquired and liabilities assumed are set forth
in Note 4. The restatement also affected the accompanying notes to the financial
statements; the affected figures have been denoted as being restated.
The following table sets forth the consolidated balance sheet for FutureFuel,
showing previously reported and restated amounts, as of December 31, 2006:
As Adjustment As Restated
Previously
Reported
Assets
Cash and cash equivalents $ 63,129 $ - $ 63,129
Accounts receivable, net of 23,824 79 23,903
allowances of $42 and $42,
respectively
Inventory 11,591 10,991 22,582
Current deferred income tax 68 2 70
asset
Prepaid expenses 1,248 - 1,248
Other current assets 3,131 - 3,131
Total current assets 102,991 11,072 114,063
Property, plant and equipment, 97,761 (15,135) 82,626
net
Noncurrent deferred income tax 381 6 387
asset
Restricted cash and cash 3,127 - 3,127
equivalents
Intangible assets - 548 548
Other assets 2,764 1 2,765
Total noncurrent assets 104,033 (14,580) 89,453
Total Assets $ 207,024 $ (3,508) $ 203,516
Liabilities and Stockholders'
Equity
Accounts payable $ 12,945 $ - $ 12,945
Accounts payable - related 112 - 112
parties
Income taxes payable 2,264 (348) 1,916
Short term contingent - 191 191
consideration
Accrued expenses and other 1,717 - 1,717
current liabilities
Accrued expenses and other 40 - 40
current liabilities - related
parties
Total current liabilities 17,078 (157) 16,921
Long term contingent - 2,168 2,168
consideration
Other noncurrent liabilities 545 369 914
Noncurrent deferred income 23,884 (1,527) 22,357
taxes
Total noncurrent liabilities 24,429 1,010 25,439
Total Liabilities 41,507 853 42,360
Preferred stock, $0.0001 par - - -
value, 5,000,000 shares
authorized, none issued and
outstanding
Common stock, $0.0001 par 3 - 3
value, 75,000,000 shares
authorized, 26,700,000 issued
and outstanding
Additional paid in capital 162,995 (4,559) 158,436
Retained earnings 2,519 198 2,717
Total stockholders' equity 165,517 (4,361) 161,156
Total Liabilities and $ 207,024 $ (3,508) $ 203,516
Stockholders' Equity
The following table sets forth the consolidated statement of operations for
FutureFuel, showing previously reported and restated amounts, for the year ended
December 31, 2006:
As Adjustment As Restated
Previously
Reported
Revenues $ 134,168 $ (111,125) $ 23,043
Revenues - related parties 16,602 (16,602) -
Cost of goods sold 119,574 (99,608) 19,966
Cost of goods sold - related 16,602 (16,602) -
parties
Distribution 1,291 (1,158) 133
Gross profit 13,303 (10,359) 2,944
Selling, general and 6,143 (4,988) 1,155
administrative expenses
Selling, general and 104 - 104
administrative expenses -
related parties
Research and development 4,937 (4,014) 923
expenses
11,184 (9,002) 2,182
Income from operations 2,119 (1,357) 762
Interest income 733 2,632 3,365
Interest expense (37) - (37)
696 2,632 3,328
Income before income taxes 2,815 1,275 4,090
Provision for income taxes 678 695 1,373
Net income $ 2,137 $ 580 $ 2,717
Earnings per common share
Basic $ 0.08 $ 0.02 $ 0.10
Diluted $ 0.07 $ 0.02 $ 0.09
Weighted average shares
outstanding
Basic 26,700,000 26,700,000 26,700,000
Diluted 31,818,772 31,818,772 31,818,772
The following table sets forth the consolidated statements of cash flow for
FutureFuel, showing previously reported and restated amounts, for the year ended
December 31, 2006:
As Adjustment As Restated
Previously
Reported
Cash flows provided by (used
in) operating activities
Net income $ 2,137 $ 580 $ 2,717
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 9,067 (8,437) 630
Provision (benefit) for 516 (1,472) (956)
deferred income taxes
Change in fair value of 447 - 447
derivative instruments
Noncash environmental charges 148 (148) -
from parent
Losses on disposals of fixed 95 (95) -
assets
Noncash interest expense 37 - 37
Changes in operating assets and
liabilities:
Accounts receivable (12,943) (7,491) (20,434)
Inventory (6,761) 5,505 (1,256)
Prepaid expenses (1,248) 8 (1,240)
Other assets (158) 811 653
Accounts payable 5,077 (2,353) 2,724
Accounts payable - related 112 - 112
parties
Income taxes payable 2,264 (348) 1,916
Accrued expenses and other (4,012) 5,759 1,747
current liabilities
Accrued expenses and other 40 - 40
current liabilities - related
parties
Other noncurrent liabilities (335) 704 369
Net cash provided by (used in) (5,517) (6,977) (12,494)
operating activities
Cash flows provided by (used
in) investing activities
Restricted cash (3,127) - (3,127)
Collateralization of derivative (3,578) - (3,578)
instruments
Acquisition of the stock of - (72,634) (72,634)
Eastman SE, Inc.
Contingent purchase price - (11) (11)
payment
Capital expenditures (11,819) 8,550 (3,269)
Net cash provided by (used in) (18,524) (64,095) (82,619)
investing activities
Cash flows provided by
financing activities
Proceeds from long term debt - - 500 500
related parties
Repayment of long term debt - - (700) (700)
related parties
Proceeds from reverse 87,094 (87,094) -
acquisition
Proceeds from the issuance of - 169,402 169,402
stock
Stock redemption - (10,988) (10,988)
Transfers to parent, net 76 (76) -
Net cash provided by (used in) 87,170 71,044 158,214
financing activities
Net change in cash and cash 63,129 (28) 63,101
equivalents
Cash and cash equivalents at - 28 28
beginning of period
Cash and cash equivalents at $ 63,129 $ - $ 63,129
end of period
The following table sets forth the consolidated balance sheet of FutureFuel,
showing previously reported and restated amounts, as of December 31, 2005:
As Adjustment As Restated
Previously
Reported
Assets
Cash and cash equivalents $ - $ 28 $ 28
Accounts receivable, net of 10,881 (10,881) -
allowances of $0 and $0,
respectively
Inventory 4,830 (4,830) -
Current deferred income tax 552 (552) -
asset
Total current assets 16,263 (16,235) 28
Property, plant and equipment, 95,115 (95,115) -
net
Noncurrent deferred income tax 516 (516) -
asset
Deferred costs - 207 207
Other assets 2,606 (2,606) -
Total noncurrent assets 98,237 (98,030) 207
Total Assets $ 114,500 $ (114,265) $ 235
Liabilities and Stockholders'
Equity
Accounts payable $ 7,940 $ (7,930) $ 10
Accrued expenses and other 5,657 (5,657) -
current liabilities
Total current liabilities 13,597 (13,587) 10
Notes payable to related - 200 200
parties
Other noncurrent liabilities 843 (843) -
Noncurrent deferred income 23,987 (23,987) -
taxes
Total noncurrent liabilities 24,830 (24,630) 200
Total Liabilities 38,427 (38,217) 210
Preferred stock, $0.0001 par - - -
value, 5,000,000 shares
authorized, none issued and
outstanding
Common stock, $0.0001 par - 1 1
value, 75,000,000 shares
authorized, 26,700,000 issued
and outstanding
Net investment of parent 76,073 (76,073) -
Additional paid in capital - 24 24
Total stockholders' equity 76,073 (76,048) 25
Total Liabilities and $ 114,500 $ (114,265) $ 235
Stockholders' Equity
The following table sets forth the consolidated statement of operations for
FutureFuel, showing previously reported and restated amounts, for the period
ended December 31, 2005:
As Adjustment As Restated
Previously
Reported
Revenues $ 104,364 $ (104,364) $ -
Revenues - related parties 15,175 (15,175) -
Cost of goods sold 88,484 (88,484) -
Cost of goods sold - related 15,175 (15,175) -
parties
Distribution 1,604 (1,604) -
Gross profit 14,276 (14,276) -
Selling, general and 7,662 (7,661) 1
administrative expenses
Research and development 5,975 (5,975) -
expenses
13,637 (13,636) 1
Income from operations 639 (640) (1)
Interest income - 1 1
Interest expense (31) 31 -
(31) 32 1
Income before income taxes 608 (608) -
Provision for income taxes 227 (227) -
Net income $ 381 $ (381) $ -
Earnings per common share
Basic $ 0.01 $ (0.01) $ -
Diluted $ 0.01 $ (0.01) $ -
Weighted average shares
outstanding
Basic 26,700,000 (21,075,000) 5,625,000
Diluted 31,818,772 (26,193,772) 5,625,000
The following table sets forth the consolidated statements of cash flows for
FutureFuel, showing previously reported and restated amounts, for the period
ended December 31, 2005:
As Adjustment As Restated
Previously
Reported
Cash flows provided by (used
in) operating activities
Net income $ 381 $ (381) $ -
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 8,940 (8,940) -
Provision (benefit) for (148) 148 -
deferred income taxes
Noncash environmental credits (2,682) 2,682 -
from parent
Losses on disposals of fixed 67 (67) -
assets
Noncash interest expense 31 (31) -
Changes in operating assets and
liabilities:
Accounts receivable (533) 533 -
Inventory 2,121 (2,121) -
Other assets (382) 382 -
Accounts payable (57) 67 10
Accrued expenses and other (129) 129 -
current liabilities
Other noncurrent liabilities (53) 53 -
Net cash provided by (used in) 7,556 (7,546) 10
operating activities
Cash flows provided by (used
in) investing activities
Proceeds from the sale of fixed 60 (60) -
assets
Capital expenditures (6,654) 6,654 -
Net cash provided by (used in) (6,594) 6,594 -
investing activities
Cash flows provided by
financing activities
Cancelled offering expenditures - (207) (207)
Proceeds from long term debt - - 200 200
related parties
Proceeds from the issuance of - 25 25
stock
Transfers to parent, net (962) 962 -
Net cash provided by (used in) (962) 980 18
financing activities
Net change in cash and cash - 28 28
equivalents
Cash and cash equivalents at - -
beginning of period
Cash and cash equivalents at $ - $ 28 $ 28
end of period
3) Significant accounting policies
Consolidation
The accompanying consolidated financial statements include the accounts of
FutureFuel and its wholly-owned subsidiary, FutureFuel Chemical. All significant
intercompany transactions have been eliminated.
Cash and cash equivalents
Cash equivalents consist of highly liquid investments with maturities of three
months or less when purchased and are carried at cost, which approximates
market.
Accounts receivable, allowance for doubtful accounts and credit risk
Accounts receivable are recorded at the invoiced amount and do not bear
interest. FutureFuel has established procedures to monitor credit risk and has
not experienced significant credit losses in prior years. Accounts receivable
have been reduced by an allowance for amounts that may be uncollectible in the
future. This estimated allowance is based upon management's evaluation of the
collectibility of individual invoices and is based upon management's evaluation
of the financial condition of its customers and historical bad debt experience.
Write-offs are recorded at the time a customer receivable is deemed
uncollectible. FutureFuel had recorded an allowance for doubtful accounts of $42
as of December 31, 2006. There was no allowance for doubtful accounts as of
December 31, 2005.
Customer concentrations
Significant portions of FutureFuel's sales are made to a relatively small number
of customers. All sales of nonanoyloxybenzenesulfonate ("NOBS"), a bleach
activator, are made to a leading North American consumer products company
pursuant to a supply contract that is set to expire in June 2008. Sales of NOBS
(as restated) totaled $14,710 for the year ended December 31, 2006.
Additionally, all sales of a herbicide and certain other intermediates used in
the production of this herbicide are made to one customer. Sales of this
herbicide and its intermediates (as restated) totaled $2,126 for the year ended
December 31, 2006. These two customers represented 64% of FutureFuel's accounts
receivable balance at December 31, 2006.
Inventory
FutureFuel determines the cost of substantially all raw materials and finished
goods inventories by the last-in, first-out ("LIFO") method. FutureFuel writes
down its inventories for estimated obsolescence or unmarketable inventory equal
to the difference between the carrying value of inventory and the estimated
market value based upon current demand and market conditions.
Financial and derivative instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses and other current liabilities approximate their
fair values due to the short-term maturities of these instruments.
FutureFuel maintains inventories of biodiesel and utilizes various derivative
instruments such as regulated futures and regulated options as an economic hedge
to reduce the effects of fluctuations in the prices of biodiesel. These
derivative instruments do not qualify for hedge accounting under the specific
guidelines of Statement of Financial Accounting Standards ("SFAS") No. 133
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. While management believes each of these instruments are entered into
in order to effectively manage various market risks, none of the derivative
instruments are designated and accounted for as hedges primarily as a result of
the extensive record-keeping requirements.
FutureFuel records all derivative instruments at fair value. Fair value is
determined by using the closing prices of the derivative instruments on the New
York Mercantile Exchange at the end of an accounting period. Changes in fair
value of the derivative instruments are recorded in the statements of operations
as a component of cost of goods sold. FutureFuel maintains a margin account with
a broker to collateralize these derivative instruments.
Property, plant and equipment
Property, plant and equipment is carried at cost. Maintenance and repairs are
charged to earnings; replacements and betterments are capitalized. When
FutureFuel retires or otherwise disposes of assets, it removes the cost of such
asset and related accumulated depreciation from the accounts. FutureFuel records
any profit and loss on retirement or other disposition in earnings. Asset
impairments are reflected as increases in accumulated depreciation. Depreciation
is provided using the straight-line method over the following estimated useful
lives:
Buildings and building equipment 20 - 39 years
Machinery and equipment 3 - 33 years
Transportation equipment 5 - 33 years
Other 5 - 33 years
Customer relationships
Customer relationships are recorded at acquisition cost and are amortized on a
straight-line basis over their estimated useful lives of 5 years. FutureFuel
reviews and evaluates the recoverability of the carrying amounts of its acquired
customer contracts annually, or whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Restricted cash and cash equivalents
Restricted cash and cash equivalents include cash and cash equivalents reserved
for purposes of meeting certain Arkansas Department of Environmental Quality
requirements that become applicable in the event of a closure of the Batesville
Plant. The amount of cash reserved for this purpose is based on a formula
derived by the state of Arkansas and totaled $3,127 at December 31, 2006. No
cash was restricted in periods prior to December 31, 2006.
Impairment of assets
FutureFuel evaluates the carrying value of long-lived assets when events or
changes in circumstances indicate that the carrying value may not be
recoverable. Such events and circumstances include, but are not limited to,
significant decreases in the market value of the asset, adverse changes in the
extent or manner in which the asset is being used, significant changes in
business climate, or current or projected cash flow losses associated with the
use of the assets. The carrying value of a long-lived asset is considered
impaired when the total projected undiscounted cash flows from such assets are
separately identifiable and are less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair value of the long-lived asset. For long-lived assets to be held for use in
future operations and for fixed (tangible) assets, fair value is determined
primarily using either the projected cash flows discounted at a rate
commensurate with the risk involved or appraisal. For long-lived assets to be
disposed of by sale or other than sale, fair value is determined in a similar
manner, except that fair values are reduced for disposal costs.
Asset retirement obligations
FutureFuel establishes reserves for closure/post-closure costs associated with
the environmental and other assets it maintains. Environmental assets include
but are not limited to waste management units such as incinerators, landfills,
storage tanks and boilers. When these types of assets are constructed or
installed, a reserve is established for the future costs anticipated to be
associated with the closure of the site based on an expected life of the
environmental assets, the applicable regulatory closure requirements and
FutureFuel's environmental policies and practices. These expenses are charged
into earnings over the estimated useful life of the assets. Currently,
FutureFuel estimates the useful life of each individual asset up to 35 years.
Changes made in estimates of the asset retirement obligation costs or the
estimate of the useful lives of these assets are reflected in earnings as an
increase or decrease in the period such changes are made.
Environmental costs are capitalized if they extend the life of the related
property, increase its capacity and/or mitigate or prevent future contamination.
The cost of operating and maintaining environmental control facilities is
charged to expense.
Deferred income taxes
Income taxes are accounted for using the asset and liability method. Under this
method, income tax assets and liabilities are recognized for temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective income tax basis. A future income tax asset or
liability is estimated for each temporary difference using enacted and
substantively enacted income tax rates and laws expected to be in effect when
the asset is realized or the liability settled. A valuation allowance is
established, if necessary, to reduce any future income tax asset to an amount
that is more likely than not to be realized.
Revenue recognition
Revenue from product sales are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price to the customer is fixed or determinable and collectibility is reasonably
assured.
Shipping and handling fees
Shipping and handling fees related to sales transactions are billed to customers
and recorded as sales revenues.
Cost of goods sold and selling, general and administration expense
Cost of goods sold includes the costs of inventory sold, related purchasing,
distribution and warehousing costs, costs incurred for shipping and handling,
and environmental remediation costs.
Selling, general and administration expense includes personnel costs associated
with sales, marketing and administration, legal and legal-related costs,
consulting and professional services fees, advertising expenses, and other
similar costs.
Research and development
All costs identified as research and development costs are charged to expense
when incurred.
Planned major maintenance activities
Expenditures for planned major maintenance activities are recognized as expense
as incurred.
Earnings per share
Basic earnings per share is computed by dividing net income (the numerator) by
the weighted average number of outstanding shares (the denominator) for the
period. Diluted earnings per share are calculated in accordance with the
treasury stock method to determine the dilutive effect of warrants and options.
The computation of diluted earnings per share includes the same numerator, but
the denominator is increased to include the number of additional common shares
from the exercise of warrants and options that would have been outstanding if
potentially dilutive common shares had been issued.
The weighted average basic and diluted shares outstanding for the years ended
December 31, 2006 and from August 12, 2005 (Inception) through December 31, 2005
have been calculated assuming that all shares outstanding at December 31, 2006,
net of those shares whose holders exercised their repurchase rights as described
in Note 12, were outstanding for all periods presented. The dilutive impact of
the warrants, as described in Note 12, was calculated based upon the trading
activity of FutureFuel's common stock from July 13, 2006 to December 31, 2006.
Comprehensive income (loss)
As it has not historically recognized any other comprehensive income (loss), the
comprehensive income (loss) of FutureFuel is comprised entirely of its net
income (loss).
Commitments and contingent liabilities
In the ordinary course of its business, FutureFuel enters into supply and sales
contracts as deemed commercially desirable. Supply contracts are utilized to
ensure the availability of raw materials used in the production process. Sales
contracts are utilized to ensure the future sale of produced product.
FutureFuel and its operations from time to time may be parties to or targets of
lawsuits, claims, investigations and proceedings including product liability,
personal injury, patent and intellectual property, commercial, contract,
environmental, health and safety and environmental matters, which are handled
and defended in the ordinary course of business. FutureFuel accrues a liability
for such matters when it is probable that a liability has been incurred and the
amount can be reasonably estimated. When a single amount cannot be reasonably
estimated but the cost can be estimated within a range, FutureFuel accrues the
minimum amount.
Use of estimates
The preparation of financial statements in conformity with accounting principals
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during a reporting
period. Estimates are used when accounting for allowance for doubtful accounts,
depreciation, amortization, asset retirement obligations and income taxes as
well as the evaluation of potential losses due to impairments or future
liabilities. Actual results could differ materially from those estimates.
Segment Reporting
FutureFuel identifies operating segments when separate financial information is
available that is evaluated regularly by its chief operating decision maker in
assessing the performance of those segments and in determining how to allocate
resources. FutureFuel has determined that it has two reportable segments
organized along product lines -- chemicals and biofuels.
4) Business combination
FutureFuel was incorporated on August 12, 2005 to serve as a vehicle for a
Business Combination of one or more operating businesses in the oil and gas
industry. In 2006 FutureFuel identified such an operating business in Eastman
SE. Eastman SE, as owner of the Batesville Plant, began the implementation of a
biobased products platform, including the production of biofuels (biodiesel,
bioethanol and lignin/biomass solid fuels) and biobased specialty products
(biobased lubricants, solvents and intermediates). In addition to the biobased
products platform, the Batesville Plant has continued the custom synthesis of
fine chemicals and other organic chemicals. On October 31, 2006, FutureFuel
acquired all of the issued and outstanding shares of Eastman SE from Eastman
Chemical for cash consideration and $0.02 per gallon of biodiesel sold by
FutureFuel during the three-year period commencing on November 1, 2006 and
ending on October 31, 2009. Immediately subsequent to its acquisition, Eastman
SE changed its name to FutureFuel Chemical. The results of FutureFuel Chemical
have been included in FutureFuel's results of operations since October 31, 2006.
After purchase price adjustments to date, a price of $70,970 was paid for the
stock of Eastman SE. Contingent purchase price payments to Eastman Chemical
based on volumes of biodiesel sold totaled $11 through December 31, 2006. The
contingent purchase price payments offset a contingent consideration liability
that FutureFuel booked as of the closing date of the acquisition.
The following table summarizes the preliminary estimated fair values of the
Eastman SE assets acquired and liabilities assumed and related deferred income
taxes as of the acquisition date:
Eastman SE
Assets acquired
Current assets $ 24,804
Property, plant and equipment 79,968
Noncurrent deferred income tax asset 373
Intangible assets subject to amortization 567
Other assets 3,211
Total assets 108,923
Liabilities assumed
Current liabilities 10,353
Long-term contingent consideration 2,198
Other noncurrent liabilities 508
Noncurrent deferred income taxes 23,230
Total liabilities 36,289
Net assets acquired $ 72,634
In the allocation of the fair values of the assets acquired and liabilities
assumed, FutureFuel determined there was a balance of $2,370 of negative
goodwill. As the purchase of Eastman SE provided for contingent consideration to
be paid to Eastman Chemical, the negative goodwill has been allocated to
contingent consideration.
FutureFuel has not identified any material unrecorded pre-acquisition
contingencies where the related asset, liability or impairment is probable and
the amount can be reasonably estimated. Prior to the end of the one-year
purchase price allocation period, if information becomes available which would
indicate it is probable that such events had occurred and the amounts can be
reasonably estimated, such items may be included in the final purchase price
allocation.
The following unaudited pro forma consolidated results of operations assume that
the acquisition of Eastman SE was completed as of January 1 for each of the
fiscal years shown below:
2006 2005
Revenues $ 150,770 $ 119,539
Net income $ 5,142 $ 3,769
Basic earnings per share $ 0.19 $ 0.14
Diluted earnings per share $ 0.16 $ 0.12
Pro-forma data may not be indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
5) Inventories
The carrying values of inventory were as follows as of December 31:
2006 2005
(Restated) (Restated)
At first-in, first-out or average cost
(approximates current cost)
Finished goods $ 7,943 $ -
Work in process 1,750 -
Raw materials and supplies 12,894 -
22,587 -
LIFO reserve (5) -
Total inventories $ 22,582 $ -
6) Derivative instruments
The volumes and carrying values of FutureFuel's derivative instruments were as
follows at December 31:
Asset/(Liability)
2006 2005
Quantity Fair Quantity Fair
(000 bbls) Market (000 bbls) Market
Long/ Value Long/ Value
(Short) (Short)
Regulated fixed price future (250) $ (28) - $ -
commitments, included in
prepaid expenses and other
current assets
Regulated options, included in (100) $ (419) - $ -
prepaid expenses and other
current assets
The margin account maintained with a broker to collateralize these derivative
instruments carried an account balance of $3,578 at December 31, 2006, and is
classified as other current assets in the consolidated balance sheet. This
margin account carried no balance at December 31, 2005. The carrying values of
the margin account and of the derivative instruments are included in other
current assets and comprise the entire account balance.
7) Property, plant and equipment
Property, plant and equipment consisted of the following at December 31:
2006 2005
(Restated) (Restated)
Land and land improvements $ 4,260 $ -
Buildings and building equipment 19,037 -
Machinery and equipment 54,797 -
Construction in progress 5,143 -
Accumulated depreciation (611) -
$ 82,626 $ -
Depreciation expense totaled $611 (as restated) for the year ended December 31,
2006 and $0 (as restated) for the period from August 12, 2005 (Inception) to
December 31, 2005.
8) Other assets
Other assets is comprised of spare equipment and parts that have not been placed
into service as of the balance sheet date and are not expected to be placed into
service for the twelve-month period subsequent to the balance sheet date. The
balance related to these items totaled $2,765 and $0 (as restated) at
December 31, 2006 and 2005, respectively.
9) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities, including those associated with
related parties, consisted of the following at December 31:
2006 2005
(Restated)
Accrued employee liabilities $ 773 $ -
Accrued property, use and franchise taxes 373 -
Accrued professional fees 340 -
Amounts collected on behalf of Eastman 178 -
Chemical
Other 93 -
$ 1,757 $ -
10) Asset retirement obligations and environmental reserves
The Batesville Plant generates hazardous and non-hazardous wastes, the
treatment, storage, transportation and disposal of which are regulated by
various governmental agencies. In addition, the Batesville Plant may be required
to incur costs for environmental and closure and post closure costs under the
Resource Conservation and Recovery Act ("RCRA"). FutureFuel's reserve for asset
retirement obligations and environmental contingencies was $545 and $0 (as
restated) as of December 31, 2006 and 2005, respectively.
The following table summarizes the activity of accrued obligations for asset
retirement obligations:
For the Year For the
Ended Period from
December31, August12,
2006 2005
(Inception)
to
December31,
2005
(Restated)
Beginning balance $ - $ -
Batesville Plant acquisition opening balance 508 -
Accretion expense 37 -
Balance at December 31 $ 545 $ -
11) Deferred taxes
The following table summarizes the provision for income taxes:
For the Year For the
Ended Period from
December31, August12,
2006 2005
(Inception)
to
December31,
2005
(Restated) (Restated)
Income before taxes - U.S. $ 4,090 $ -
Provision/(benefit) for income taxes:
Current $ 1,818 $ -
Deferred (687) -
State and other
Current 23333 466 -
Deferred (224) -
Total $ 1,373 $ -
Differences between the provision for income taxes computed using the U.S.
federal statutory income tax rate were as follows:
For the Year For the
Ended Period from
December31, August12,
2006 2005
(Inception)
to
December31,
2005
(Restated) (Restated)
Amount computed using the statutory rate of $ 1,390 $ -
34%
Section 199 manufacturing deduction (33) -
Agri-biodiesel production credit (78) -
State income taxes, net 94 -
Provision for income taxes $ 1,373 $ -
The significant components of deferred tax assets and liabilities were as
follows as of December 31:
2006 2005
(Restated) (Restated)
Deferred tax assets
Vacation pay $ 52 $ -
Allowance for doubtful accounts 16 -
Inventory reserves 175 175 -
Asset retirement obligation 214 -
Total deferred tax assets 457 -
Deferred tax liabilities
Derivative instruments (45) -
LIFO inventory (4,312) -
Intangible assets (215) -
Depreciation (17,829) -
Total deferred tax liabilities (22,401) -
Net deferred tax liabilities $ (21,944) $ -
As recorded in the consolidated balance sheet
Current deferred income tax asset $ 70 $ -
Noncurrent deferred income tax asset 387 -
Accrued expenses and other current (44) -
liabilities
Noncurrent deferred income tax liability (22,357) -
Net deferred income tax liabilities $ (21,944) $ -
12) Stockholders' equity
On July 12, 2006, Viceroy completed an offering of 22,500,000 units. Each unit
consisted of one share of Viceroy's common stock and one warrant to acquire one
share. The units were issued at $8.00 per unit. In connection with this
offering, the shares and warrants issued were listed on the Alternative
Investment Market ("AIM") maintained by the London Stock Exchange plc. The net
proceeds of this offering totaled $172,500 and were placed into a trust fund.
All or a portion of the trust fund was to be released for, among other things, a
Business Combination approved by the holders of Viceroy's common stock.
Moreover, the trust fund was to be released in its entirety upon the completion
of a Business Combination which, either on its own or when combined with all
previous Business Combinations, had an aggregate transaction value of at least
50% of the initial trust amount (which initial trust amount excluded certain
deferred placing fees).
Certain of the Viceroy shareholders who purchased units in the July 12, 2006
offering were granted repurchase rights whereby at the time Viceroy sought
approval for a Business Combination these shareholders could vote against the
Business Combination and require Viceroy to repurchase their common shares for
$7.667 per common share plus accrued interest earned on the offering proceeds
held in trust net of expenses and income taxes payable on the interest earned.
Shareholders who exercised their repurchase rights retained all rights to any
warrants that they may have held.
On July 12, 2006, Viceroy and its founding shareholders entered into a
registration rights agreement pursuant to which the holders of the majority of
founding shares and shares of common stock included in the units purchased in
Viceroy's July 2006 offering by a director or his designees are entitled to make
up to two demands that Viceroy register with the SEC their founding shares and
the shares included in the units purchased in Viceroy's July 2006 offering. The
holders of the majority of such shares can elect to exercise these registration
rights at any time after the date on which Viceroy has become a reporting
company under the Securities Exchange Act of 1934 ("Securities Act"), as
amended, and such shares have been released from any applicable escrow agreement
and lock-in deeds. In addition, those shareholders have certain "piggyback"
registration rights on registration statements filed subsequent to the date on
which such shares are released from escrow or other lock up arrangements.
Viceroy agreed to bear the expenses incurred in connection with the filing of
any such registration statements. There are 11,250,000 shares of Viceroy's
common stock subject to this registration rights agreement.
On July 12, 2006, Viceroy entered into an investor rights agreement with each of
KBC Peel Hunt Ltd, Viceroy's Nominated Advisor on the AIM, and CRT Capital Group
LLC, Viceroy's placing agent, for the benefit of the holders of its shares of
common stock and warrants in which Viceroy agreed, at its cost, to provide
"piggyback" registration rights as to any shares of its common stock that are
not, at the time, freely saleable identical to the "piggyback" registration
rights of the founding shareholders described above, plus the right to piggyback
on any registration statement filed pursuant to the founding shareholders'
demand registration rights described above, provided that in the event such
piggyback rights are exercised in an underwritten offering, the number of shares
of Viceroy's common stock registered will be subject to a cutback, pro rata with
the founding shareholders, if the underwriter so requires. There are 15,450,000
shares of Viceroy's common stock subject to this investor rights agreement.
In addition, the July 12, 2006 investor rights agreement stipulates that Viceroy
has agreed, at its cost, to file with the SEC no later than the 180th day after
the date of a consummation of a Business Combination which, either on its own or
when combined with all previous Business Combinations, had an aggregate
transaction value of at least 50% of the initial trust amount (which initial
trust amount excluded certain deferred placing fees) ("Registration Trigger"), a
registration statement ("Exchange Act Registration Statement") on Form 10 to
register its common shares. Additionally, Viceroy agreed to use commercially
reasonable efforts to cause the Exchange Act Registration Statement to become
effective under the Securities Act no later than 270 days after the Registration
Trigger and use reasonable commercial efforts promptly upon effectiveness of the
Exchange Act Registration Statement to list the common shares of Viceroy on the
American Stock Exchange, the New York Stock Exchange, NASDAQ or a similarly
recognized trading platform in the United States. Viceroy did not make any
assurances that any such listing application would be accepted.
If the Exchange Act Registration Statement was not declared effective on or
prior to the 270th day after the date of the Registration Trigger ("Registration
Default"), Viceroy would have paid liquidated damages to each holder of its
common stock issued in connection with its July 2006 offering. The liquidated
damages would have been:
* paid to each holder in the form of common stock in Viceroy in an amount
equal to 0.5% per month of the number of each holder's common shares in
Viceroy;
* payable promptly after the occurrence of the Registration Default,
but in no event later than two days after the end of the month in which
the Registration Default has occurred;
* payable within two days of the end of each month, until the
Registration Default has been cured, provided that a pro rata
payment shall be made with respect to a month a portion of which
Viceroy has been in default; and
* payable for a maximum of 12 months.
The investors rights agreement provided that the liquidated
damages specified above were the only exclusive remedy available
to holders of Viceroy's common shares for any failure by Viceroy
to comply with the requirements of the investors rights
agreement.
On April 24, 2007, Viceroy filed the Exchange Act Registration
Statement. On June 23, 2007, the Exchange Act Registration
Statement became effective. This was prior to the 270th day
after the date of the Registration trigger. Consequently, no
liquidated damages, as described above, were paid.
Viceroy has also agreed to use reasonable commercial efforts to
maintain its listing on the AIM for at least two years.
At the October 27, 2006 special meeting of the shareholders of
Viceroy, the acquisition of Eastman SE by Viceroy was approved
by the shareholders of Viceroy. Shareholders owning 1,425,000
common shares of Viceroy voted against the acquisition and
exercised their repurchase rights. Accordingly, such shares are
deemed to be held for redemption, are not deemed to be
outstanding, and are not included in equity in the
post-acquisition period. The repurchase price totaled $7.71 per
share, calculated as $7.667 plus $0.043 of accrued interest
earned on the offering proceeds held in trust net of expenses
and income taxes payable on the interest earned per share.
Pursuant to the terms of the July 12, 2006 offering, the
repurchase price was payable by Viceroy only when those
shareholders who exercised their repurchase rights surrendered
to Viceroy their common share certificates. Through December 31,
2006, shareholders owing 1,175,000 common shares of FutureFuel
had surrendered their shares to FutureFuel and FutureFuel had
paid an aggregate $9,059 to repurchase these shares. At
December 31, 2006, FutureFuel remained obligated to repurchase
250,000 common shares at the $7.71 per share repurchase price.
The $1,928 payable to these shareholders remains in trust and is
subject to distribution to the shareholders upon proper
presentation of the related stock certificates.
As discussed in Note 1, immediately subsequent to the
acquisition Viceroy changed its name to FutureFuel Corp. and
Eastman SE changed its name to FutureFuel Chemical Company.
At December 31, 2006, 5,000,000 shares of $0.0001 par value
preferred stock and 75,000,000 shares of $0.0001 a par value
common stock were authorized. At December 31, 2006, no preferred
shares were outstanding and 26,700,000 common shares were issued
and outstanding.
At December 31, 2006, 22,500,000 warrants to purchase common
shares of FutureFuel were issued and outstanding. Each warrant
is exercisable for one common share of FutureFuel at an exercise
price of $6.00 per warrant. These warrants are only settleable
through physical delivery of the common share certificate and
expire July 12, 2010.
13) Intangible assets
In connection with its acquisition of Eastman SE, a certain
portion of the purchase price was allocated to the intangible
asset customer relationships. Customer relationships consisted
of the following at December 31:
2006 2005
(Restated) (Restated)
Cost $ 567 $ -
Accumulated amortization (19) -
$ 548 $ -
Amortization expense totaled $19 (as restated) for the year
ended December 31, 2006 and $0 (as restated) for the period from
August 12, 2005 (Inception) through December 31, 2005.
FutureFuel estimates that aggregate amortization expense for
2008 to 2011 will be $113 and that aggregate amortization
expense in 2012 will be $96.
14) Earnings per share
The computation of basic and diluted earnings per common share
was as follows:
For the Year For the
Ended Period from
December31, August12,
2006 2005
(Inception)
to
December31,
2005
(Restated) (Restated)
Net income available to common stockholders $ 2,717 $ -
Weighted average number of common shares 26,700,000 5,625,000
outstanding
Effect of warrants 5,118,772 -
Weighted average diluted number of common 31,818,772 5,625,000
shares outstanding
Basic earnings per share $ 0.10 $ -
Diluted earnings per share $ 0.09 $ -
15) Employee benefit plans
Defined contribution savings plan
FutureFuel currently offers its employees a defined contribution
savings plan, which covers substantially all employees. Under
this plan, FutureFuel matches the amount of employee
contributions, subject to specified limits. Plan related
expenses totaled $120 for the year ended December 31, 2006. No
expense related to this plan was incurred from August 12, 2005
(Inception) to December 31, 2005.
16) Related party transactions
FutureFuel enters into transactions with companies affiliated
with or controlled by a director and significant shareholder.
FutureFuel leases oil storage capacity from an affiliate under a
storage and thruput agreement. This agreement provides for the
storage of biodiesel, biodiesel/petrodiesel blends, palm oil,
methanol and other biodiesel feedstocks in above-ground storage
tankage at designated facilities of the affiliate. Lease expense
related to this agreement totaled $9 for the year ended
December 31, 2006. No expense was incurred from August 12, 2005
(Inception) to December 31, 2005.
FutureFuel entered into a commodity trading advisor agreement
with an affiliate. Pursuant to the terms of this agreement the
affiliate provides advice to FutureFuel concerning the purchase,
sale, exchange, conversion and/or hedging of commodities as
FutureFuel may request from time to time. Expenditures related
to this agreement totaled $20 in the year ended December 31,
2006. No expenses were incurred for this contract from
August 12, 2005 (Inception) to December 31, 2005.
FutureFuel entered into a railcar sublease agreement with an
affiliate. Pursuant to the terms of this sublease, FutureFuel
leases from the affiliate railcars upon the same terms,
conditions and price the affiliate leases the railcars. Lease
terms for individual railcars begin upon delivery of the
railcars. No railcars had been received through December 31,
2006 under this agreement. As such, no expenditures were
incurred.
FutureFuel reimburses an affiliate for travel and other
administrative services incurred on its behalf. Such
reimbursement is performed at cost with the affiliate realizing
no profit on the transaction. These reimbursements totaled $123
in 2006. No such reimbursements occurred from August 12, 2005
(Inception) to December 31, 2005.
At December 31, 2005, FutureFuel had unsecured promissory notes
payable to shareholders (one of these shareholders was an
officer and director of FutureFuel and the other was affiliated
with one) of $200 in aggregate. The loans were non-interest
bearing and were payable upon the consummation of a Business
Combination. Due to the short-term nature of the notes, the fair
value of the notes approximated their carrying value. These
notes were repaid in November 2006 in connection with the
consummation of the acquisition of Eastman SE.
Accounts payable included $112 and accrued expenses and other
current liabilities included $40 due to related parties at
December 31, 2006.
As new payment instructions were adopted by FutureFuel
Chemical's customers subsequent to its acquisition by
FutureFuel, Eastman Chemical collected trade accounts receivable
on FutureFuel Chemical's behalf. These collections were
subsequently remitted to FutureFuel Chemical. At December 31,
2006, Eastman Chemical had collected $3,046 of trade accounts
receivable on FutureFuel Chemical's behalf.
17) Segment information
FutureFuel has determined that is has two reportable segments
organized along product lines - chemicals and biofuels. The
accounting policies of the segments are the same as those
described in the summary of significant accounting policies in
Note 3.
Chemicals
FutureFuel's chemicals segment manufactures diversified chemical
products that are sold externally to third party customers and
to Eastman Chemical. This segment comprises two components:
"custom manufacturing" (manufacturing chemicals for specific
customers); and "performance chemicals" (multi-customer
specialty chemicals).
Biofuels
FutureFuel's biofuels business segment manufactures and markets
biodiesel. Biodiesel commercialization was achieved in October
2005 at the Batesville Plant. Biodiesel revenues are generally
derived in one of two ways. Revenues are generated under tolling
agreements whereby customers supply key biodiesel feed stocks
which FutureFuel then converts into biodiesel at the Batesville
Plant in exchange for a fixed price processing charge per gallon
of biodiesel produced. Revenues are also generated through the
sale of biodiesel to customers through FutureFuel's distribution
network at the Batesville Plant and through distribution
facilities available at a leased oil storage facility near
Little Rock, Arkansas at negotiated prices.
Summary of long-lived assets and revenues by geographic area
All of FutureFuel's long-lived assets are located in the U.S.
Most of FutureFuel's sales are transacted with title passing at
the time of shipment from the Batesville Plant, although some
sales are transacted based on title passing at the delivery
point. While many of FutureFuel's chemicals are utilized to
manufacture products that are shipped, further processed and/or
consumed throughout the world, the chemical products, with
limited exceptions, generally leave the United States only after
ownership has transferred from FutureFuel to the customer.
Rarely is FutureFuel the exporter of record, never is FutureFuel
the importer of record into foreign countries and FutureFuel is
not always aware of the exact quantities of its products that
are moved into foreign markets by its customers. FutureFuel does
track the addresses of its customers for invoicing purposes and
uses this address to determine whether a particular sale is
within or without the United States. FutureFuel's revenues for
the year ended December 31, 2006 and from August 12, 2005
(Inception) to December 31, 2005 attributable to the United
States and foreign countries (based upon the billing addresses
of its customers) were as follows:
Fiscal Year United All Foreign Total
States
(Restated) Countries (Restated)
(Restated)
December31, 2006 $ 21,474 $ 1,569 $ 23,043
August 12, 2005 (Inception) $ - $ - $ -
to December 31, 2005
For the year ended December 31, 2006, revenues from Mexico
accounted for 7% of total revenues. Other than Mexico, revenues
from a single foreign country during 2006 did not exceed 1% of
total revenues. From August 12, 2005 (Inception) to December 31,
2005 no revenues were derived from any foreign country.
Summary of business by segment
For the Year For the
Ended Period from
December31, August12,
2006 2005
(Inception)
to
December31,
2005
(Restated) (Restated)
Revenues
Chemicals $ 21,282 $ -
Biofuels 1,761 -
Revenues $ 23,043 $ -
Segment gross margins
Chemicals $ 6,054 $ -
Biofuels (3,110) -
Segment gross margins 2,944 -
Corporate expenses (2,182) (1)
Income (loss) before interest and taxes 762 (1)
Interest income 3,365 1
Interest expense (37) -
Provision for income taxes (1,373) -
Net income $ 2,717 $ -
Depreciation is allocated to segment costs of goods sold based
on plant usage. The total assets and capital expenditures of
FutureFuel have not been allocated to individual segments as
large portions of these assets are shared to varying degrees by
each segment, causing such an allocation to be of little value.
18) Commitments
Lease agreements
FutureFuel has entered into lease agreements for oil storage
capacity and railcars. Minimum rental commitments under existing
noncancellable operating leases as of December 31, 2006 were as
follows:
2007 $ 318
2008 287
2009 108
2010 45
2011 45
Thereafter 37
$ 840
Lease expenses totaled $9 (as restated) for the year ended
December 31, 2006 and $0 (as restated) from August 12, 2005
(Inception) to December 31, 2005.
Purchase obligations
FutureFuel has entered into contracts for the purchase of goods
and services including contracts for the expansion of
FutureFuel's biodiesel related infrastructure, the development,
implementation and maintenance of an enterprise resource
planning computer software package, the purchase of biodiesel
related feedstocks and the licensing of a chemical modeling
software product.
Deferred payments to Eastman Chemical
In connection with the purchase of shares of Eastman SE,
FutureFuel agreed to pay Eastman Chemical $0.02 per gallon of
biodiesel sold by FutureFuel during the three-year period
commencing on October 31, 2006 and ending on October 31, 2009.
Payments to Eastman Chemical in 2006 for this agreement totaled
$11.
19) Recently issued accounting standards
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes-an Interpretation of
SFAS 109 Accounting for Income Taxes. FIN 48 prescribes a
comprehensive model for how a company should recognize, measure,
present, and disclose in its financial statements uncertain tax
positions that a company has taken or expects to take on a tax
return. Under FIN 48, the financial statements will reflect
expected future tax consequences of such positions presuming the
taxing authorities' full knowledge of the position and all
relevant facts, but without considering time values. FIN 48 also
revises disclosure requirements and introduces a prescriptive,
annual, tabular roll-forward of the unrecognized tax benefits.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of FIN 48 did not have a
material effect on the consolidated financial position,
liquidity or results of operations of FutureFuel.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which addresses the measurement of fair value by
companies when they are required to use a fair value measure for
recognition or disclosure purposes under GAAP. SFAS No. 157
provides a common definition of fair value to be used throughout
GAAP which is intended to make the measurement of fair value
more consistent and comparable and improve disclosures about
those measures. With the exception of other non-financial assets
and liabilities, SFAS No. 157 will be effective for an entity's
financial statements issued for fiscal years beginning after
November 15, 2007. With respect to other non-financial assets
and liabilities, the Financial Accounting Standards Board has
provided a one-year implementation deferral. FutureFuel is
currently evaluating the effect SFAS No. 157 will have on its
consolidated financial position, liquidity, and results of
operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities-Including
an amendment of FASB Statement No. 115. SFAS No. 159 permits
companies to choose to measure many financial instruments and
certain other items at fair value at specified election dates.
Upon adoption, an entity shall report unrealized gains and
losses on items for which the fair value option has been elected
in earnings at each subsequent reporting date. Most of the
provisions apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, applies to
all entities with available for sale and trading securities.
SFAS No. 159 will be effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007.
FutureFuel is currently evaluating the effect SFAS No. 159 will
have on its consolidated financial position, liquidity, and
results of operations.
20) Subsequent events
Share redemption
In January 2007 the last remaining shareholders who exercised
their repurchase rights relinquished their stock certificates to
FutureFuel and FutureFuel subsequently paid the $1,928
repurchase price to these shareholders from the trust.
Customer dispute
A customer of FutureFuel Chemical has indicated it has been
billed on certain products for amounts aggregating up to $1,400
in excess of their management's interpretation of the
appropriate billings under their contract with FutureFuel
Chemical since the second quarter of 2004. FutureFuel has
evaluated the position asserted by the customer and the
arrangements under the contract and has determined that they do
not believe there have been any excess billings or overpayments
under this contract. As a result, management intends to
vigorously defend against any such claim if made by the
customer. In addition, to the extent such a liability exists,
FutureFuel believes it has a right under the Acquisition
Agreement between itself and Eastman Chemical to assert a claim
with respect to amounts related to periods prior to October 31,
2006.
Credit agreement (unaudited)
On March 14, 2007, FutureFuel Chemical entered into a revolving
credit agreement with a commercial bank. This credit agreement
makes up to $50,000 available to FutureFuel Chemical for working
capital requirements, capital expenditures and other general
corporate purposes. This credit agreement is secured by specific
collateral, including FutureFuel Chemical's accounts receivable
and inventory. The maximum availability under this credit
agreement at any point in time is determined based upon a
borrowing base calculation, which is in turn based upon the
eligible accounts receivable and inventory balances of
FutureFuel Chemical. The credit agreement contains financial and
non-financial restrictive covenants, which, among other things,
require FutureFuel Chemical to maintain a certain ratio of debt
to earnings before interest, taxes, depreciation and
amortization.
Advances under the credit facility bear interest, payable
monthly, at rates based upon the then current prime rate or
based upon the then current London interbank offered rate plus
margins ranging from (1.00%) to 1.70%. Additionally, FutureFuel
Chemical will pay a commitment fee of 0.25% on any unused
availability. This credit agreement matures on March 14, 2010.
FutureFuel unconditionally guaranteed any and all indebtedness
and obligations of FutureFuel Chemical to the commercial bank
under this credit agreement.
Purchase price settlement (unaudited)
In 2007, FutureFuel received $2,891 (plus interest thereon) from
Eastman Chemical as satisfaction of certain agreed-to purchase
price adjustments for the settlement of the working capital
adjustment stemming from the October 31, 2006 acquisition of
Eastman SE. A receivable from Eastman Chemical was included in
the consolidated balance sheet of FutureFuel at December 31,
2006 in anticipation of this payment from Eastman Chemical.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
FutureFuel Corp.:
We have audited the accompanying balance sheets of FutureFuel
Chemical Company (the Company), formerly known as Eastman SE,
Inc., as of December 31, 2005 and 2004, and the related
statements of operations, changes in stockholder's equity, and
cash flows for the ten months ended October 31, 2006 and for
each of the years ended December 31, 2005 and 2004. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing 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. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of FutureFuel Chemical Company, formerly known as Eastman SE,
Inc., as of December 31, 2005 and 2004, and the results of its
operations and its cash flows for the ten months ended
October 31, 2006 and for each of the years ended December 31,
2005 and 2004, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
December 27, 2007
FutureFuel Chemical Company, formerly known as Eastman SE, Inc.
Balance Sheets
As of December 31, 2005 and 2004
(Dollars in thousands, except per share amounts)
Predecessor
December 31, December 31,
2005 2004
Assets
Accounts receivable, net of $ 10,881 $ 10,348
allowances of, $0 and $0,
respectively
Inventory 4,830 6,951
Current deferred income tax asset 552 601
Prepaid expenses and other current - -
assets
Total current assets 16,263 17,900
Property, plant and equipment, net 95,115 97,468
Noncurrent deferred income tax 516 572
asset
Other assets 2,606 2,224
Total noncurrent assets 98,237 100,264
Total Assets $ 114,500 $ 118,164
Liabilities and Stockholder's
Equity
Accounts payable $ 7,940 $ 7,997
Accrued expenses and other current 5,657 5,786
liabilities
Total current liabilities 13,597 13,783
Other noncurrent liabilities 843 865
Noncurrent deferred income taxes 23,987 24,240
Total noncurrent liabilities 24,830 25,105
Total Liabilities 38,427 38,888
Net investment of parent 76,073 79,276
Total stockholder's equity 76,073 79,276
Total Liabilities and $ 114,500 $ 118,164
Stockholder's Equity
The accompanying notes are an integral part of these financial statements.
FutureFuel Chemical Company, formerly known as Eastman SE, Inc.
Statements of Operations
For the Ten Months Ended October 31, 2006 and the Years Ended December 31, 2005
and 2004
(Dollars in thousands, except per share amounts)
Predecessor
Ten Months Year Ended December 31,
Ended
October 31,
2006 2005 2004
Revenues $ 111,125 $ 104,364 $ 127,945
Revenues - related parties 16,602 15,175 16,212
Cost of goods sold 101,816 88,484 130,097
Cost of goods sold - related 16,602 15,175 16,212
parties
Distribution 1,158 1,604 1,499
Gross profit (loss) 8,151 14,276 (3,651)
Selling, general and 5,403 7,662 10,854
administrative expenses
Research and development expenses 3,996 5,975 9,919
9,399 13,637 20,773
Income (loss) from operations (1,248) 639 (24,424)
Interest expense - (31) (37)
- (31) (37)
Income (loss) before income taxes (1,248) 608 (24,461)
Provision (benefit) for income (773) 227 (9,594)
taxes
Net income (loss) $ (475) $ 381 $ (14,867)
The accompanying notes are an integral part of these financial statements.
FutureFuel Chemical Company, formerly known as Eastman SE, Inc.
Statements of Cash Flows
For the Ten Months Ended October 31, 2006 and the Years Ended December 31, 2005
and 2004
(Dollars in thousands)
Predecessor
Ten Months Year Ended December 31,
Ended
October 31,
2006 2005 2004
Cash flows provide by operating
activities
Net income (loss) $ (475) $ 381 $ (14,867)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Asset impairment charges - - 18,305
Depreciation 7,531 8,940 10,218
Provision (benefit) for deferred 601 (148) (6,017)
income taxes
Noncash environmental charges 148 (2,682) (1,266)
(credits) from parent
Losses on disposals of fixed assets 95 67 402
Changes in operating assets and
liabilities:
Accounts receivable 7,412 (533) 896
Inventory (2,413) 2,121 10,586
Prepaid expenses and other current (38) - -
assets
Other assets (606) (382) (233)
Accounts payable 2,271 (57) 1,102
Accrued expenses and other current (5,657) (129) 7
liabilities
Other noncurrent liabilities (335) (22) (89)
Net cash provided by operating 8,534 7,556 19,044
activities
Cash flows used in investing
activities
Proceeds from the sale of fixed assets - 60 -
Capital expenditures (8,549) (6,654) (6,520)
Net cash used in investing activities (8,549) (6,594) (6,520)
Cash flows provided by (used in)
financing activities
Transfers to parent, net 15 (962) (12,524)
Net cash provided by (used in) 15 (962) (12,524)
financing activities
Net change in cash and cash - - -
equivalents
Cash and cash equivalents at beginning - - -
of period
Cash and cash equivalents at end of $ - $ - $ -
period
The accompanying notes are an integral part of these financial statements.
FutureFuel Chemical Company, formerly known as Eastman SE, Inc.
Statements of Changes in Stockholder's Equity
For the Ten Months Ended October 31, 2006 and the Years Ended December 31, 2005
and 2004
(Dollars in thousands)
Predecessor
Net Total
Investment Stockholder's
of Parent Equity
Balance - December 31, 2003 $ 107,933 $ 107,933
Net income (loss) (14,867) (14,867)
Net transfers to parent (13,790) (13,790)
Balance - December 31, 2004 79,276 79,276
Net income 381 381
Net transfers to parent (3,584) (3,584)
Balance - December 31, 2005 76,073 76,073
Net income (loss) (475) (475)
Net transfers to parent 153 153
Balance - October 31, 2006 $ 75,751 $ 75,751
The accompanying notes are an integral part of these financial statements.
1) Nature of operations and basis of presentation
Eastman SE, Inc.
Eastman SE, Inc. ("Eastman SE") was incorporated under the laws of the state of
Delaware on September 1, 2005 and subsequent thereto operated as a wholly-owned
subsidiary of Eastman Chemical Company ("Eastman Chemical") through October 31,
2006. Eastman SE was incorporated for purposes of effecting a sale of Eastman
Chemical's manufacturing facility in Batesville, Arkansas (the "Batesville
Plant"). Commencing January 1, 2006, Eastman Chemical began transferring the
assets associated with the business of the Batesville Plant to Eastman SE.
The Batesville Plant was constructed to produce proprietary photographic
chemicals for Eastman Kodak Company ("Eastman Kodak"). Over the years, Eastman
Kodak shifted the plant's focus away from the photographic imaging business to
the custom synthesis of fine chemicals and organic chemical intermediates used
in a variety of end markets, including paints and coatings, plastics and
polymers, pharmaceuticals, food supplements, household detergents and
agricultural products.
In 2005, the Batesville Plant began the implementation of a biobased products
platform. This includes the production of biofuels (biodiesel, bioethanol and
lignin/biomass solid fuels) and biobased specialty chemical products (biobased
solvents, chemicals and intermediates). In addition to biobased products, the
Batesville Plant continues to manufacture fine chemicals and other organic
chemicals.
Viceroy Acquisition Corporation
Viceroy Acquisition Corporation ("Viceroy") was incorporated under the laws of
the state of Delaware on August 12, 2005 to serve as a vehicle for the
acquisition by way of asset acquisition, merger, capital stock exchange, share
purchase or similar transaction ("Business Combination") of one or more
operating businesses in the oil and gas industry.
On July 21, 2006, Viceroy entered into an acquisition agreement with Eastman
Chemical to purchase all of the issued and outstanding stock of Eastman SE. On
October 27, 2006, a special meeting of the shareholders of Viceroy was held and
the acquisition of Eastman SE was approved by the shareholders. On October 31,
2006, Viceroy acquired all of the issued and outstanding shares of Eastman SE
from Eastman Chemical. Immediately subsequent to the acquisition, Viceroy
changed its name to FutureFuel Corp. ("FutureFuel") and Eastman SE changed its
name to FutureFuel Chemical Company ("FutureFuel Chemical").
Basis of Presentation
Through October 31, 2006, the operations of the Batesville Plant were included
in the consolidated financial statements of Eastman Chemical. Accordingly, the
accompanying balance sheets, statements of operations and related statements of
cash flows have been prepared from Eastman Chemical's historical accounting
records and are presented on a carve-out basis to include the historical
financial position, results of operations and cash flows applicable to Eastman
SE through October 31, 2006. As a result of the lack of capital structure of
Eastman SE prior to October 31, 2006, the net investment of the parent has been
presented in lieu of stockholder's equity. These financial statements are
presented as the predecessor financial statements to FutureFuel. The financial
statements for Eastman SE do not reflect the application of purchase accounting
and are presented on a different cost basis than periods following the
acquisition and, therefore, are not comparable.
Corporate Allocations
The financial statements of Eastman SE include allocations of certain corporate
services provided by Eastman Chemical's management, including finance, legal,
information systems, human resources and distribution. Eastman Chemical has
utilized its experience with the business of the Batesville Plant and its
judgment in allocating such corporate services and other support to the periods
prior to October 31, 2006. Costs allocated for such services were:
Ten Months Year Ended December 31,
Ended
October 31,
2006 2005 2004
Cost of goods sold $ - $ 99 $ 1,275
Distribution 438 874 818
Selling, general and 4,398 5,327 7,776
administrative
Research and development 652 2,388 6,094
Total cost and expenses allocated $ 5,488 $ 8,688 $ 15,963
Allocations were made to cost of goods sold, distribution and selling, general
and administrative expenses primarily based on a percentage of revenues and
allocations to research and development expenditures were made primarily on
actual time and effort incurred, which management believes represents reasonable
allocation methodologies. These allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if Eastman SE had
been operating as a separate entity.
Eastman Chemical used a centralized approach to cash management, hedging and the
financing of its operations. As a result, debt and related interest income and
expense, and certain cash and cash equivalents, were maintained at the corporate
office and are not included in the accompanying consolidated financial
statements. In addition, allocations related to LIFO inventories were made on
the basis of the specific attributes of the inventories and related products
sold by Eastman SE.
2) Significant accounting policies
Accounts receivable, allowance for doubtful accounts and credit risk
Accounts receivable are recorded at the invoiced amount and do not bear
interest. Eastman SE has established procedures to monitor credit risk and has
not experienced significant credit losses in prior years. Accounts receivable
have been reduced by an allowance for amounts that may be uncollectible in the
future. This estimated allowance is based upon management's evaluation of the
collectibility of individual invoices and is based upon management's evaluation
of the financial condition of its customers and historical bad debt experience.
Write-offs are recorded at the time a customer receivable is deemed
uncollectible. There was an allowance for doubtful accounts of $0 and $0 at
December 31, 2005 and 2004, respectively.
Through October 31, 2006, Eastman SE participated in an agreement that allowed
Eastman Chemical to sell certain domestic accounts receivable under a planned
continuous sale program to a third party. The agreement permitted the sale of
undivided interests in domestic trade accounts receivable, which Eastman
Chemical continued to service until collection. As the sale program was part of
Eastman Chemical's centralized approach to cash management, Eastman SE's $7,888
participation at December 31, 2005 is classified as accounts receivable in the
accompanying consolidated balance sheet with the corresponding liability
included in the net investment of parent.
Customer concentrations
Significant portions of Eastman SE's sales are made to a relatively small number
of customers. All sales of nonanoyloxybenzenesulfonate ("NOBS"), a bleach
activator, are made to a leading North American consumer products company
pursuant to a supply contract that is set to expire in June 2008. Sales of NOBS
totaled $69,982, $66,959 and $73,607 for the ten months ended October 31, 2006
and for the years ended December 31, 2005 and 2004, respectively. Additionally,
all sales of a herbicide and certain other intermediates used in the production
of this herbicide are made to one customer. Sales of this herbicide and its
intermediates totaled $21,559, $25,063 and $27,946 for the ten months ended
October 31, 2006 and the years ended December 31, 2005 and 2004, respectively.
These two customers represented approximately 88% of Eastman SE's accounts
receivable balance at December 31, 2005. Eastman SE assigned nearly 100% of the
receivables from these two customers at October 31, 2006 to Eastman Chemical.
Inventory
Eastman SE determines the cost of substantially all raw materials and finished
goods inventories by the last-in, first-out ("LIFO") method. Eastman SE writes
down its inventories for estimated obsolescence or unmarketable inventory equal
to the difference between the carrying value of inventory and the estimated
market value based upon current demand and market conditions.
Financial and derivative instruments
The carrying values of accounts receivable, accounts payable and accrued
expenses and other current liabilities approximate their fair values due to the
short-term maturities of these instruments.
Property, plant and equipment
Property, plant and equipment is carried at cost. Maintenance and repairs are
charged to earnings; replacements and betterments are capitalized. When Eastman
SE retires or otherwise disposes of assets, it removes the cost of such asset
and related accumulated depreciation from the accounts. Eastman SE records any
profit and loss on retirement or other disposition in earnings. Asset
impairments are reflected as increases in accumulated depreciation. Depreciation
is provided using the straight-line method over the following estimated useful
lives:
Buildings and building equipment 20 - 50
years
Machinery and equipment 3 - 33 years
Transportation equipment 5 - 33 years
Other 5 - 33 years
Impairment of assets
Eastman SE evaluates the carrying value of long-lived assets when events or
changes in circumstances indicate that the carrying value may not be
recoverable. Such events and circumstances include, but are not limited to,
significant decreases in the market value of the asset, adverse changes in the
extent or manner in which the asset is being used, significant changes in
business climate, or current or projected cash flow losses associated with the
use of the assets. The carrying value of a long-lived asset is considered
impaired when the total projected undiscounted cash flows from such assets are
separately identifiable and are less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair value of the long-lived asset. For long-lived assets to be held for use in
future operations and for fixed (tangible) assets, fair value is determined
primarily using either the projected cash flows discounted at a rate
commensurate with the risk involved or appraisal. For long-lived assets to be
disposed of by sale or other than sale, fair value is determined in a similar
manner, except that fair values are reduced for disposal costs.
Asset retirement obligations
Eastman SE establishes reserves for closure/post-closure costs associated with
the environmental and other assets it maintains. Environmental assets include
but are not limited to waste management units such as incinerators, landfills,
storage tanks and boilers. When these types of assets are constructed or
installed, a reserve is established for the future costs anticipated to be
associated with the closure of the site based on an expected life of the
environmental assets, the applicable regulatory closure requirements and Eastman
SE's environmental policies and practices. These expenses are charged into
earnings over the estimated useful life of the assets. Currently, Eastman SE
estimates the useful life of each individual asset up to 35 years. Changes made
in estimates of the asset retirement obligation costs or the estimate of the
useful lives of these assets are reflected in earnings as an increase or
decrease in the period such changes are made.
Environmental costs are capitalized if they extend the life of the related
property, increase its capacity and/or mitigate or prevent future contamination.
The cost of operating and maintaining environmental control facilities is
charged to expense.
Income taxes
Through October 31, 2006, Eastman SE was included in the consolidated federal
tax return of Eastman Chemical. For purposes of the financial results presented
up to that date, the provision for income taxes has been prepared using the
separate return method. As Eastman SE did not file a separate federal tax return
prior to October 31, 2006 and no tax sharing agreement was in place, any amounts
payable or receivable were actually due to or receivable from Eastman Chemical
and are included in the net investment of parent and transfers to parent.
Income taxes are accounted for using the asset and liability method. Under this
method, income tax assets and liabilities are recognized for temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective income tax basis. A future income tax asset or
liability is estimated for each temporary difference using enacted and
substantively enacted income tax rates and laws expected to be in effect when
the asset is realized or the liability settled. A valuation allowance is
established, if necessary, to reduce any future income tax asset to an amount
that is more likely than not to be realized.
Revenue recognition
Revenue from product sales are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price to the customer is fixed or determinable and collectibility is reasonably
assured.
Through October 31, 2006, certain sales from Eastman SE to then affiliated
companies, such as Eastman Chemical, were recorded with no margin based on the
interdivision arrangements.
Shipping and handling fees
Shipping and handling fees related to sales transactions are billed to customers
and recorded as sales revenues.
Cost of goods sold and selling, general and administration expense
Cost of goods sold includes the costs of inventory sold, related purchasing,
distribution and warehousing costs, costs incurred for shipping and handling,
and environmental remediation costs.
Selling, general and administration expense includes personnel costs associated
with sales, marketing and administration, legal and legal-related costs,
consulting and professional services fees, advertising expenses, and other
similar costs.
Research and development
All costs identified as research and development costs are charged to expense
when incurred.
Planned major maintenance activities
Expenditures for planned major maintenance activities are recognized as expense
as incurred.
Comprehensive income (loss)
As it has not historically recognized any other comprehensive income (loss), the
comprehensive income (loss) of Eastman SE is comprised entirely of its net
income (loss). As Eastman SE recognizes revenues, expenses, gains or losses
that, under accounting principles generally accepted in the U.S., are included
in comprehensive income but excluded from net income, these items will be
recognized as a component of other comprehensive income in its financial
statements.
Commitments and contingent liabilities
In the ordinary course of its business, Eastman SE enters into supply and sales
contracts as deemed commercially desirable. Supply contracts are utilized to
ensure the availability of raw materials used in the production process. Sales
contracts are utilized to ensure the future sale of produced product.
Eastman SE and its operations from time to time may be parties to or targets of
lawsuits, claims, investigations and proceedings including product liability,
personal injury, patent and intellectual property, commercial, contract,
environmental, health and safety and environmental matters, which are handled
and defended in the ordinary course of business. Eastman SE accrues a liability
for such matters when it is probable that a liability has been incurred and the
amount can be reasonably estimated. When a single amount cannot be reasonably
estimated but the cost can be estimated within a range, Eastman accrues the
minimum amount.
Use of estimates
The preparation of financial statements in conformity with accounting principals
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during a reporting
period. Estimates are used when accounting for allowance for doubtful accounts,
depreciation, amortization, asset retirement obligations and income taxes as
well as the evaluation of potential losses due to impairments or future
liabilities. Actual results could differ materially from those estimates.
Segment Reporting
Eastman SE identifies operating segments when separate financial information is
available that is evaluated regularly by its chief operating decision maker in
assessing the performance of those segments and in determining how to allocate
resources. Eastman SE has determined that it has two reportable segments
organized along product lines - chemicals and biofuels.
3) Inventories
The carrying values of inventory were as follows as of:
December 31, December 31,
2005 2004
At first-in, first-out or
average cost (approximates
current cost)
Finished goods $ 5,818 $ 7,834
Work in process 1,587 1,585
Raw materials and supplies 9,842 6,821
17,247 16,240
LIFO reserve (12,417) (9,289)
Total inventories $ 4,830 $ 6,951
4) Property, plant and equipment
Property, plant and equipment consisted of the following at:
December 31, December 31,
2005
2004
Land $ 1,345 $ 1,345
Buildings and building equipment 47,301 47,240
Machinery and equipment 403,051 398,971
Construction in progress 2,538 2,680
Accumulated depreciation (359,120) (352,768)
$ 95,115 $ 97,468
Depreciation expense totaled $7,531, $8,940 and $10,218 for the ten months ended
October 31, 2006 and the years ended December 31, 2005 and 2004, respectively.
5) Other assets
Other assets is comprised of spare equipment and parts that have not been placed
into service as of the balance sheet date and are not expected to be placed into
service for the twelve-month period subsequent to the balance sheet date. The
balance related to these items totaled $2,606 and $2,224 at December 31, 2005
and 2004, respectively.
6) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following at:
December 31, December 31,
2005 2004
Accrued employee liabilities $ 4,238 $ 4,264
Accrued property, use and 1,419 1,522
franchise taxes
$ 5,657 $ 5,786
7) Asset retirement obligations and environmental reserves
The Batesville Plant generates hazardous and non-hazardous wastes, the
treatment, storage, transportation and disposal of which are regulated by
various governmental agencies. In addition, the Batesville Plant may be required
to incur costs for environmental and closure and post closure costs under the
Resource Conservation and Recovery Act ("RCRA").
The following table summarizes the activity of accrued obligations for asset
retirement obligations for the period ended:
December 31, December 31,
2005 2004
Beginning balance at January 1 $ 474 $ 612
Accretion expense 31 37
Revisions in estimates 8 (175)
Balance $ 513 $ 474
In addition, certain closure and post-closure liabilities were not transferred
to the Batesville Plant and were retained by Eastman Chemical. These liabilities
related to the operations of the Batesville Plant, charges (credits) of $148, $
(2,682) and $(1,266) for the ten months ended October 31, 2006 and the years
ended December 31, 2005 and 2004, respectively, were included in cost of goods
sold within the accompanying consolidated statements of operations.
8) Income taxes
The following table summarizes the provision for income taxes for the periods
ended:
Ten Months Year Ended December 31,
Ended
October 31,
2006 2005 2004
Income (loss) before taxes $ (1,248) $ 608 $ (24,461)
- U.S.
Provision/(benefit) for
income taxes:
Current $ (1,238) $ 313 $ (2,983)
Deferred 511 (132) (5,370)
State and other
Current 23333 (136) 62 (593)
Deferred 90 (16) (648)
Total $ (773) $ 227 $ (9,594)
Differences between the provision for income taxes computed using the U.S.
federal statutory income tax rate were as follows as of:
Ten Months Year Ended December 31,
Ended
October 31,
2006 2005 2004
Amount computed using the $ (437) $ 213 $ (8,561)
statutory rate of 35%
Section 199 manufacturing - (10) -
deduction
Agri-biodiesel production (303) - -
credit
State income taxes, net (33) 24 (1,033)
Provision for income taxes $ (773) $ 227 $ (9,594)
The significant components of deferred tax assets and liabilities were as
follows as of:
December December
31, 2005 31, 2004
Deferred tax assets
Vacation pay $ 258 $ 317
Inventory reserves 175 279 338
Separation and retirement 191 169
allowances
Deferred compensation 129 153
Asset retirement obligation 211 196
Total deferred tax assets 1,068 1,173
Deferred tax liabilities
Depreciation (23,987) (24,240)
Total deferred tax liabilities (23,987) (24,240)
Net deferred tax liabilities $ (22,919) $ (23,067)
As recorded in the
consolidated balance sheet
Current deferred income tax $ 552 $ 601
asset
Noncurrent deferred income tax 516 572
asset
Noncurrent deferred income tax (23,987) (24,240)
liability
Net deferred income tax $ (22,919) $ (23,067)
liabilities
9) Impairments and severance charges
Impairments and severance charges totaled approximately $2,462 and $19,485 in
the years ended December 31, 2005 and 2004, respectively. These charges
consisted of severance charges of $2,462 in the year ended December 31, 2005 and
non-cash asset impairment charges and severance charges of $18,305 and $1,180,
respectively, in the year ended December 31, 2004.
Eastman SE recognized $2,462 and $1,180 in severance charges in the years ended
December 31, 2005 and 2004, respectively, from ongoing cost reduction efforts
related to employee separation programs announced in April 2004.
In 2004, Eastman SE recognized asset impairments of approximately $18,305
related to assets at the Batesville Plant. This impairment primarily relates to
the closure of specific fixed assets used to manufacture certain performance
chemicals product lines that were divested by Eastman Chemical. The related
assets were deemed to be impaired, were determined to have no disposal value and
remained at the Batesville Plant.
No impairment charges or severance costs were incurred in the ten months ended
October 31, 2006.
10) Employee benefit plans
Eastman Chemical maintains certain deferred benefit plans that provide eligible
employees, including those who have been a part of the operations of Eastman SE,
with retirement benefits. For the purposes of the their presentation within the
financial statements of Eastman SE, costs recognized for these benefits are
allocated based on the employee participants and are summarized based on the
following component plans.
Defined benefit pension plans
Eastman Chemical maintains defined benefit plans that provide eligible
employees, which included those of the Batesville Plant, retirement benefits.
Costs recognized for these benefits are recorded using estimated amounts, which
may change as actual costs derived for the year are determined.
Defined contribution plans
Eastman Chemical sponsors a defined contribution employee stock ownership plan
(the "ESOP") in which the employees of the Batesville Plant participated while
they were employed by Eastman Chemical. The ESOP is a qualified plan under
Section 401(a) of the Internal Revenue Code, which is a component of the Eastman
Investment Plan and Employee Stock Ownership Plan ("EIP/ESOP").
Postretirement welfare plans
Eastman Chemical provides life insurance and health care benefits for eligible
retirees, and health care benefits for retirees' eligible survivors in the
United States.
Eastman SE was allocated $3,005 of expense related to these employee benefit
plans for the ten months ended October 31, 2006 and $4,386 and $4,435 for the
years ended December 31, 2005 and 2004, respectively. Eastman Chemical
aggregated the cost of defined benefit and defined contribution plans and a
breakout between the two is not available for financial reporting at the plant
level.
11) Related party transactions
In addition to receiving support services such as research and development,
legal, finance, treasury, income tax, public relations, executive management
functions, and certain other administrative services from Eastman Chemical or
Eastman Chemical affiliates through October 31, 2006, Eastman SE purchased a
significant portion of its raw materials and sold a significant portion of its
product produced to Eastman Chemical or affiliates of Eastman Chemical.
Purchases of raw materials from affiliates of Eastman Chemical totaled $5,789
for the ten months ended October 31, 2006 and $5,014 and $4,115 for the years
ended December 31, 2005 and 2004, respectively. Sales of Eastman SE products to
Eastman Chemical or affiliates of Eastman Chemical totaled $5,952 for the ten
months ended October 31, 2006 and $2,493 and $1,396 for the years ended December
31, 2005 and 2004, respectively.
Historically, Eastman SE processed certain products for Eastman Chemical or
Eastman Chemical affiliates for which the ownership of the product had not been
transferred to Eastman SE. Eastman SE historically processed such products on a
cost basis without recognizing a selling margin. As the risks and rewards of
ownership were not transferred to Eastman SE, the related inventories, revenues
and costs have not been reflected in the accompanying financial statements. The
financial statements include the cost of processing and the corresponding
revenue received for processing such products. The costs of product processed on
behalf of Eastman Chemical or Eastman Chemical affiliates totaled $10,650 for
the ten months ended October 31, 2006 and $12,682 and $14,816 for the years
ended December 31, 2005 and 2004, respectively.
Inventories of $4,103 were held by FutureFuel on behalf of Eastman Chemical or
Eastman Chemical affiliates as of December 31, 2005.
Through October 31, 2006, all receivables and payables due to or from Eastman
Chemical or Eastman Chemical affiliates were included in the net investment of
parent.
12) Segment information
Eastman SE has determined that is has two reportable segments organized along
product lines - chemicals and biofuels. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies in Note 2.
Chemicals
Eastman SE's chemicals segment manufactures diversified chemical products that
are sold externally to third party customers and to Eastman Chemical. This
segment comprises two components: "custom manufacturing" (manufacturing
chemicals for specific customers); and "performance chemicals" (multi-customer
specialty chemicals).
Biofuels
Eastman SE's biofuels business segment manufactures and markets biodiesel.
Biodiesel commercialization was achieved in October 2005. Biodiesel revenues are
generally derived in one of two ways. Revenues are generated under tolling
agreements whereby customers supply key biodiesel feed stocks which Eastman SE
then converts into biodiesel at the Batesville Plant in exchange for a fixed
price processing charge per gallon of biodiesel produced. Revenues are also
generated through the sale of biodiesel to customers through Eastman SE's
distribution network at the Batesville Plant and through distribution facilities
available at a leased oil storage facility near Little Rock, Arkansas at
negotiated prices.
Summary of long-lived assets and revenues by geographic area
All of Eastman SE's long-lived assets are located in the U.S.
Most of Eastman SE's sales are transacted with title passing at the time of
shipment from the Batesville Plant, although some sales are transacted based on
title passing at the delivery point. While many of Eastman SE's chemicals are
utilized to manufacture products that are shipped, further processed and/or
consumed throughout the world, the chemical products, with limited exceptions,
generally leave the United States only after ownership has transferred from
Eastman SE to the customer. Rarely is Eastman SE the exporter of record, never
is Eastman SE the importer of record into foreign countries and Eastman SE is
not always aware of the exact quantities of its products that are moved into
foreign markets by its customers. Eastman SE does track the addresses of its
customers for invoicing purposes and uses this address to determine whether a
particular sale is within or without the United States. Eastman SE's revenues
for the ten months ended October 31, 2006 and for the years ended December 31,
2005 and 2004 attributable to the United States and foreign countries (based
upon the billing addresses of its customers) were as follows:
Period Ended United All Foreign Total
States
Countries
October31, 2006 $ 110,419 $ 17,308 $ 127,727
December31, 2005 $ 105,719 $ 13,820 $ 119,539
December 31, 2004 $ 138,636 $ 5,521 $ 144,157
For the year ended December 31, 2004, revenues from a single foreign country did
not exceed 2% of total revenues. Beginning in 2005, Eastman SE began invoicing
Procter & Gamble International Operations Mexico, D.F. directly, at which time
revenues from Mexico became a material component of total revenues. For the year
ended December 31, 2005 and for the ten months ended October 31, 2006, revenues
from Mexico accounted for 10% and 12%, respectively, of total revenues. Other
than Mexico, revenues from a single foreign country during 2005 and 2006 did not
exceed 1% of total revenues.
Summary of business by segment
Ten Months Year Ended December 31,
Ended
October 31,
2006 2005 2004
Revenues
Chemicals $ 116,148 $ 119,539 $ 144,157
Biofuels 11,579 - -
Total Revenues 127,727 119,539 144,157
Segment gross margins
Chemicals 16,124 16,837 17,108
Biofuels (7,973) - -
Segment gross margins 8,151 16,837 17,108
Corporate expenses (9,399) (16,198) (41,532)
Income (loss) before interest (1,248) 639 (24,424)
and taxes
Interest expense - (31) (37)
Provision for income taxes 773 (227) 9,594
Net income (loss) $ (475) $ 381 $ (14,867)
No biofuels were sold by Eastman SE in 2004. Eastman SE's 2005 biofuel revenues
and related gross margin were inconsequential. Due to the inconsequential nature
of the amounts, 2005 biofuel gross margin has been included in the chemicals
gross margin for that year.
Depreciation is allocated to segment costs of goods sold based on plant usage.
The total assets and capital expenditures of Eastman SE have not been allocated
to individual segments as large portions of these assets are shared to varying
degrees by each segment, causing such an allocation to be of little value.
13) Commitments
Lease agreements
Eastman SE historically had entered into lease agreements for information
technology equipment and railcars. Lease expenses totaled $106, $182 and $181
for the ten months ended October 31, 2006 and the years ended December 31, 2005
and 2004, respectively. Eastman SE terminated its lease commitments in
anticipation of the acquisition by Viceroy and had no minimum rental commitments
under existing noncancellable operating leases as of October 31, 2006.
Purchase obligations
Eastman SE has entered into contracts for the purchase of goods and services
including contracts for the expansion of its biodiesel related infrastructure,
the purchase of biodiesel related feedstocks and the licensing of a chemical
modeling software product.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EAEAPAASXFFE
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