<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to Commission file number 1-12716
KOPPERS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1588399
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
436 Seventh Avenue
Pittsburgh, Pennsylvania
15219
(412) 227-2001
(Address of principal executive offices)
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X NO
--- ---
Voting Common Stock and Senior Convertible Preferred Stock, both par value
$.01 per share, outstanding at April 23, 1999 amounted to 1.5 million and 2.3
million shares, respectively.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions except per share figures)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999 1998
------ ------
(Unaudited)
<S> <C> <C>
Net sales..................................................... $157.4 $156.5
Operating expenses:
Cost of sales............................................... 136.0 132.5
Depreciation and amortization............................... 6.8 7.5
Selling, general and administrative......................... 7.9 9.3
------ ------
Total operating expenses.................................. 150.7 149.3
------ ------
Operating profit.............................................. 6.7 7.2
Equity in earnings of affiliates.............................. 0.2 --
------ ------
Income before interest expense, income taxes and minority
interest..................................................... 6.9 7.2
Interest expense.............................................. 7.0 7.1
------ ------
Income (loss) before income taxes and minority interest....... (0.1) 0.1
Income taxes.................................................. 0.0 0.1
Minority interest............................................. 0.1 0.2
------ ------
Net income (loss)......................................... $ (0.2) $ (0.2)
====== ======
Basic earnings (loss) per share of common stock............... $(0.11) $(0.10)
====== ======
Diluted earnings (loss) per share of common stock............. $(0.11) $(0.10)
====== ======
</TABLE>
See accompanying notes.
2
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 8.0 $ 16.6
Accounts receivable less allowance for doubtful
accounts of $1.2 in 1999 and 1998.................... 81.8 71.9
Inventories:
Raw materials....................................... 49.7 52.6
Work in process..................................... 3.8 2.8
Finished goods...................................... 55.9 52.6
LIFO reserve........................................ (12.5) (12.3)
------ ------
Total inventories................................. 96.9 95.7
Deferred tax benefit................................ 7.8 7.7
Other............................................... 3.0 1.6
------ ------
Total current assets.............................. 197.5 193.5
Investments............................................. 18.1 19.7
Fixed assets............................................ 337.0 334.5
Less: accumulated depreciation.......................... (159.2) (153.1)
------ ------
Net fixed assets...................................... 177.8 181.4
Goodwill, net of accumulated amortization............... 28.7 29.4
Deferred tax benefit.................................... 38.4 36.0
Other assets............................................ 16.7 17.6
------ ------
Total assets...................................... $477.2 $477.6
====== ======
</TABLE>
- --------
*Summarized from audited fiscal year 1998 balance sheet.
See accompanying notes.
3
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions except per share figures)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited) *
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 43.4 $ 45.9
Accrued liabilities................................. 35.7 30.1
Current portion of term loans....................... 12.6 12.6
------ ------
Total current liabilities......................... 91.7 88.6
Long-term debt:
Revolving credit.................................... 3.2 2.3
Term loans.......................................... 131.0 131.7
Senior Subordinated Notes due 2007.................. 175.0 175.0
Senior Notes........................................ 11.1 11.1
------ ------
Total long-term debt.............................. 320.3 320.1
Other long-term reserves.............................. 54.3 56.4
------ ------
Total liabilities................................. 466.3 465.1
Common stock subject to redemption.................... 21.0 21.1
Senior Convertible Preferred Stock, $.01 par value per
share;
3.0 shares authorized; 2.3 shares issued in 1999 and
1998................................................. -- --
Voting common stock, $.01 par value per share; 37.0
shares authorized,
2.5 shares issued in 1999 and 1998................... -- --
Capital in excess of par value........................ 7.5 7.5
Retained earnings..................................... 4.7 4.9
Accumulated other comprehensive loss;
Foreign currency translation adjustment............. (8.9) (7.8)
Treasury stock, at cost, 1.0 shares in 1999 and 1998.. (13.4) (13.2)
------ ------
Total liabilities and stockholders' equity........ $477.2 $477.6
====== ======
</TABLE>
- --------
*Summarized from audited fiscal year 1998 balance sheet.
See accompanying notes.
4
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
<S> <C> <C>
1999 1998
------ ------
(Unaudited)
Cash provided by (used in) operating activities................ $ (6.6) $ (6.2)
Cash provided by (used in) investing activities:
Capital expenditures......................................... (3.0) (2.7)
Other........................................................ -- 0.1
------ ------
Net cash used in investing activities...................... (3.0) (2.6)
Cash provided by (used in) financing activities:
Borrowings from revolving credit............................. 22.5 36.0
Repayments of revolving credit............................... (21.6) (28.2)
Repayment of long-term debt.................................. (0.1) (0.7)
Proceeds from long-term debt................................. -- 7.0
Purchases of voting common stock............................. (0.3) (2.6)
Purchase of non-voting common stock.......................... -- (11.4)
Issuance of Senior Convertible Preferred Stock............... -- 2.0
------ ------
Net cash provided by financing activities.................. 0.5 2.1
------ ------
Effect of exchange rates on cash............................... 0.4 (0.3)
------ ------
Net (decrease) in cash......................................... (8.7) (7.0)
Cash and cash equivalents at beginning of period............... 16.7 20.0
------ ------
Cash and cash equivalents at end of period..................... $ 8.0 $ 13.0
====== ======
</TABLE>
See accompanying notes.
5
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
Company. Those comments should be read in conjunction with these notes.
The Company's annual report on Form 10-K for the fiscal year ended
December 31, 1998 includes additional information about the Company, its
operations, and its financial position, and should be read in conjunction
with this quarterly report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year.
(3) In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
(4) First quarter 1998 results have been restated to reflect $0.8 million of
additional expense related to the redemption of stock options.
(5) Environmental Indemnity and Guarantee
The facilities of the Company are subject to a number of federal, state and
local laws and regulations governing, among other things, the treatment,
storage and disposal of wastes, the discharge of effluent into waterways, the
emission of substances into the air and various health and safety matters.
These laws and regulations are subject to frequent amendment. The Company
expects to incur substantial costs for ongoing compliance with such laws and
regulations. In addition, it is possible that the Company may face third-party
claims for cleanup or for injuries resulting from contamination.
The Company has several environmental indemnification agreements related to
the various former owners of its operating locations. The most significant of
these indemnifications was obtained at the Company's inception. At the
formation of the Company in 1988, the Company and Beazer East, Inc. ("Beazer
East", formerly known as Koppers Company, Inc.) entered into an asset purchase
agreement (the "Asset Purchase Agreement"). Under the terms of the Asset
Purchase Agreement, Beazer East assumed the liability for and indemnified the
Company against cleanup liabilities for past contamination occurring prior to
the purchase date at properties acquired from Beazer East, as well as third-
party claims arising from such past contamination (the "Indemnity"). Beazer
Limited unconditionally guaranteed Beazer East's performance of the Indemnity
pursuant to a guarantee (the "Guarantee"). However, if such indemnification
was not available for any reason, including the inability of Beazer East
and/or Beazer Limited to make such indemnification payments, the Company may
not have sufficient resources to meet such liabilities.
Beazer East has adhered to the terms of the Indemnity agreement and is
actively fulfilling its obligations to conduct investigative and remedial
programs at the properties which the Company acquired from Beazer East in
accordance with the requirements of regulatory authorities. The Indemnity is
not applicable to sites acquired since the formation of the Company, for which
separate indemnifications have been negotiated where appropriate. At the
properties which the Company acquired subsequent to the acquisition of the
Beazer East properties, all remedial actions are being performed in accordance
with applicable regulations and all indemnification obligations are being
honored.
In the event that Beazer East and Beazer Limited do not continue to fulfill
their commitments under the Indemnity and the Guarantee, the Company may be
required to pay costs covered by the Indemnity. The Company believes that for
the last three years amounts paid by Beazer East under the Indemnity have
averaged approximately $12 million per year. The requirement to pay such costs
without reimbursement would have a
6
<PAGE>
material adverse effect on the business, financial condition, cash flow and
results of operations of the Company. Furthermore, if the Company were
required to record a liability with respect to matters covered by the
Indemnity on its balance sheet, the result could be that the Company would
have significant negative net worth.
In addition, Beazer East is presently defending certain toxic tort actions
arising from the operation of assets prior to the inception of the Company
which were acquired from Beazer East. These tort actions were not assumed by
the Company under the Asset Purchase Agreement and, in any event, are within
the scope of the Indemnity.
On August 5, 1998 Hanson PLC announced that an agreement had been signed
under which the funding and risk of the environmental liabilities relating to
the former Koppers Company operations of Beazer PLC (which includes locations
purchased from Beazer East by the Company) will be underwritten by
subsidiaries of two of the world's largest reinsurance companies, Centre
Solutions (a member of the Zurich Group) and Swiss Re.
(6) Other Environmental Matters
In October 1996 the Company received a Clean Water Act information request
from the United States Environmental Protection Agency ("EPA"). This
information request asked for comprehensive information for a period of five
years on discharge permits, applications for discharge permits, discharge
monitoring reports, and the analytical data in support of the reports and
applications. The Company responded in full to the information request and
delivered the requested information to the EPA in November 1996. During the
subsequent two-year period, the Company supplemented its initial response to
the EPA several times as the EPA made supplemental requests. In January 1999
the Company met with officials of the EPA to discuss the EPA's review of the
information submitted by the Company and the EPA requested additional
information from October 1996 to December 1998. In the meeting, the EPA
suggested that the Company and the EPA negotiate an agreement. Included among
the suggestions for settlement were a continuation of the Company's ongoing
efforts to develop a better environmental management system, to conduct third
party environmental audits, and to evaluate aging equipment and facilities
that may have the potential to impact adversely the quality of wastewater
discharged to the environment or to publicly owned treatment facilities. The
EPA did not propose a penalty or suggest a range in which a penalty, if any,
might be sought. At this time without knowing the details behind the summary
of the EPA's alleged violations, it is impossible to predict the amount of any
penalty. There can be no assurance that any monetary penalty and the cost of
any supplemental environmental projects will not have a material adverse
effect on the business, financial condition, cash flow and results of
operations of the Company.
Part of the allegations asserted by the EPA concern the Company's closed
coke facility in Woodward, Alabama ("Woodward Coke") and the Logansport,
Louisiana wood treating plant. During a Company-initiated investigation at
Woodward Coke, it was discovered that certain environmental records and
reports relating to the discharge of treated process water contained
incomplete and inaccurate information. Corrected reports were submitted to the
State of Alabama and the EPA. In June 1997, during a routine third party
environmental compliance audit of the Logansport plant, it was discovered that
certain records and reports relating to the discharge of treated process water
contained incomplete and inaccurate information. Corrected reports have been
submitted to the local municipality, the State of Louisiana and the EPA.
In 1997 the Company paid a civil penalty in the amount of $0.5 million to
the Jefferson County Department of Health ("Jefferson County") in settlement
of various alleged air pollution violations concerning emissions from Woodward
Coke for the period from May 25, 1992 to March 1, 1996 and in settlement of
various alleged air pollution violations concerning benzene abatement
equipment at Woodward Coke that had been discovered as a result of a Company-
initiated investigation. On February 14, 1997 the EPA issued a notice of
violation for the same alleged air pollution violations concerning emissions
which were the subject of the Jefferson County suit. In January 1998 the
Company ceased operations at Woodward Coke. On February 8, 1998 Jefferson
County requested that the original settlement agreement be modified to include
alleged air emission violations for the period of August 1997 to January 1998
and proposed an additional civil penalty of $0.6 million. The Company
7
<PAGE>
is currently in the process of reviewing the proposed modification and has
entered into negotiations with Jefferson County regarding this matter. There
can be no assurance that the EPA will not seek additional actions or penalties
that could have a material adverse effect on the business, financial
condition, cash flow and results of operations of the Company.
At the acquisition of the Monessen, Pennsylvania coke facility (the
"Monessen Facility"), the Company entered into a consent order and agreement
with the Pennsylvania Department of Environmental Protection ("PADEP") (the
"Monessen Consent Order") pursuant to which the Company's liabilities for
environmental cleanup have been capped at $0.6 million for matters identified
pursuant to the Monessen Consent Order. Although an environmental
indemnification was provided to the Company by the seller of that facility,
the Company does not expect that such obligations will be honored. If
contamination at the Monessen Facility should be discovered which was not
identified pursuant to the Monessen Consent Order, or if the EPA should
require cleanup above the $0.6 million cap contained in the Monessen Consent
Order, the costs associated with such events could have a material adverse
effect on the Company's business, financial condition, cash flow and results
of operations.
On occasion, Koppers Australia has been served with notices relating to
environmental compliance issues arising in connection with its operations. In
addition, historic operations conducted at the Koppers Australia facilities
have resulted in identified and potential soil and groundwater contamination
of varying degrees. The Trentham, Victoria facility is listed on the Victorian
register of contaminated sites. The Takura, Queensland facility is listed on
the Queensland register of contaminated sites as a "probable site". In
addition, Koppers Australia has identified various levels of groundwater
contamination at the Mayfield, New South Wales and Bunbury, Western Australia
facilities. Although the relevant regulatory authorities have not required the
investigation or remediation of these or other Koppers Australia facilities to
date, these authorities may require such work if Koppers Australia does not
undertake such activities itself. Costs associated with these activities may
be material and there can be no assurance that such costs will not have a
material adverse effect on the business, financial condition, cash flow and
results of operations of the Company.
(7) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999 1998
--------- ---------
(In millions except
earnings per share)
<S> <C> <C>
Numerators for basic and diluted earnings per share:
Net (loss) to common stockholders...................... $ (0.2) $ (0.2)
Denominators:
Weighted-average voting common shares.................. 1.5 1.8
Basic (loss) per share................................. $(0.11) $(0.10)
Diluted (loss) per share............................... $(0.11) $(0.10)
</TABLE>
(8) Comprehensive Income
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999 1998
------ ------
(In millions)
<S> <C> <C>
Net (loss)...................................................... $(0.2) $(0.2)
Other comprehensive income:
Unrealized currency translation loss.......................... (1.1) (1.1)
------ ------
Total comprehensive income (loss)......................... $(1.3) $(1.3)
====== ======
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain sales and operating data for the
Company's businesses for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999 1998
---------- ----------
(Dollars in millions)
<S> <C> <C>
Net sales:
Carbon Materials & Chemicals.......................... $ 80.4 $ 82.3
Railroad & Utility Products........................... 77.0 72.1
All Other............................................. -- 2.1
---------- ----------
Total................................................ $ 157.4 $ 156.5
Percentage of net sales:
Carbon Materials & Chemicals.......................... 51.1% 52.6%
Railroad & Utility Products........................... 48.9% 46.1%
All Other............................................. 0.0% 1.3%
---------- ----------
Total................................................ 100.0% 100.0%
Gross margin (after depreciation and amortization):
Carbon Materials & Chemicals.......................... 9.0% 12.8%
Railroad & Utility Products........................... 10.2% 9.7%
All Other............................................. (0.4%) (0.7%)
---------- ----------
Total................................................ 9.3% 10.5%
Operating profit:
Carbon Materials & Chemicals.......................... $ 2.6 $ 5.0
Railroad & Utility Products........................... 4.7 3.2
All Other............................................. (0.6) (1.0)
---------- ----------
Total................................................ $ 6.7 $ 7.2
</TABLE>
Comparison of Results of Operations for the Three Months Ended March 31, 1999
and 1998
Net Sales. Net sales for the three months ended March 31, 1999 were higher
than the same period in 1998, as higher sales for Railroad & Utility Products
were partially offset by lower sales for Carbon Materials & Chemicals and
lower sales resulting from the closure of Woodward Coke. Net sales for Carbon
Materials & Chemicals decreased due to lower phthalic anhydride ("PAA") sales
prices caused by reductions in the price of orthoxylene, the primary feedstock
for PAA for all domestic producers other than the Company. In general,
domestic PAA producers use the price of orthoxylene to determine pricing and
therefore, reductions in the price of orthoxylene generally result in
proportionally lower PAA prices. Net sales for Railroad & Utility Products
increased as sales volumes for railroad crossties were higher. Net sales for
All Other in 1998 represent liquidation of remaining inventories at Woodward
Coke. Inter-segment revenues include $3.8 million and $4.4 million for Carbon
Materials & Chemicals for the quarters ended March 31, 1999 and 1998,
respectively.
Gross Profit after Depreciation and Amortization. As a percent of net sales,
gross profit after depreciation and amortization decreased primarily as the
result of lower gross margin for Carbon Materials & Chemicals. Gross margin
for Carbon Materials & Chemicals decreased as a result of a 19.1% reduction in
PAA prices coupled with lower prices for furnace coke. Gross margin for
Railroad & Utility Products increased due primarily to higher volumes of
railroad crossties.
9
<PAGE>
Depreciation and Amortization. Depreciation and amortization decreased due
primarily to a 7% reduction in Australian currency relative to United States
currency.
Selling, General and Administrative Expense. As a percent of net sales,
selling, general and administrative expense decreased due to lower Year 2000
computer update costs and lower costs related to the integration of Koppers
Australia Pty. Limited ("Koppers Australia").
Equity in Earnings of Affiliates. Equity earnings increased slightly as a
result of higher earnings from Tarconord A/S.
Interest Expense. Interest expense decreased slightly due to lower interest
rates.
Income Taxes. The Company's effective income tax rate remained consistent
with the prior year.
Liquidity and Capital Resources
The Company's liquidity needs are primarily for debt service, capital
maintenance and acquisitions. The Company believes that its cash flows from
operations and available borrowings under its bank credit facilities will be
sufficient to fund its anticipated liquidity requirements for the next twelve
months. In the event that the foregoing sources are not sufficient to fund the
Company's expenditures and service its indebtedness, the Company would be
required to raise additional funds.
As of March 31, 1999 the Company had $8.0 million of cash and cash
equivalents and $14.4 million of revolving credit availability for working
capital purposes, subject to restrictions imposed under various debt
covenants. As of March 31, 1999, $9.0 million of commitments were utilized by
outstanding standby letters of credit.
Net cash provided by operating activities decreased slightly as higher
working capital usage in 1999 was partially offset by an increase in cash
dividends received from equity investees.
Capital expenditures for the Company increased slightly as the result of
moderate increases in planned capital expenditures as compared to the prior
year.
Net cash provided by financing activities decreased due primarily to the
issuance in 1998 of $2.0 million of preferred stock.
Impact of Recently Issued Accounting Standards
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (i.e., gains and losses) depends on the intended use of the
derivative and the resulting designation. Statement No. 133 is effective for
fiscal years beginning after June 15, 1999. The Company does not expect the
effect of the adoption of this statement to be material.
Environmental Matters
Like companies involved in similar environmentally sensitive businesses, the
Company's operations and properties are subject to extensive federal, state,
local and foreign environmental laws and regulations, including those
concerning, among other things, the treatment, storage and disposal of wastes,
the investigation and remediation of contaminated soil and groundwater, the
discharge of effluents into waterways, the emissions of substances into the
air or otherwise relating to environmental protection and various health and
safety matters (collectively, "Environmental Laws"). In the United States, the
Clean Air Act and Clean Water Act, each as amended, impose stringent standards
on air emissions and water discharges, respectively. Under the Resource
Conservation and Recovery Act, as amended ("RCRA"), a facility that treats,
stores or disposes of hazardous
10
<PAGE>
waste on-site may be liable for corrective action costs, and a facility that
holds a RCRA permit may have to incur costs relating to the closure of certain
"hazardous" or "solid" waste management units. Under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA") and similar state laws, an owner or operator of property at which
releases of hazardous substances have occurred may be liable for investigation
and remediation of any resulting contamination and related natural resource
damages. In addition, under CERCLA, the generator of hazardous substances may
be strictly, and jointly and severally liable for any required investigation
or remediation at third-party disposal sites and related natural resource
damages. The Environmental Laws are subject to frequent amendment. The
sanction for failure to comply with such Environmental Laws can include
significant civil penalties, criminal penalties, injunctive relief and denial
or loss of, or imposition of significant restrictions on, environmental
permits. In addition, the Company could be subject to suit by third parties in
connection with violations of or liability under Environmental Laws.
Environmental Indemnity and Guarantee
The Company has several environmental indemnification agreements related to
the various former owners of its operating locations. The most significant of
these indemnifications was obtained at the Company's inception. At the
formation of the Company in 1988, the Company and Beazer East entered into the
Asset Purchase Agreement. Under the terms of the Asset Purchase Agreement,
Beazer East indemnified the Company by issuing the Indemnity and the
Guarantee. However, if such indemnification was not available for any reason,
including the inability of Beazer East and/or Beazer Limited to make such
indemnification payments, the Company may not have sufficient resources to
meet such liabilities.
Beazer East has adhered to the terms of the Indemnity agreement and is
actively fulfilling its obligations to conduct investigative and remedial
programs at the properties which the Company acquired from Beazer East in
accordance with the requirements of regulatory authorities. The Indemnity is
not applicable to sites acquired since the formation of the Company, for which
separate indemnifications have been negotiated where appropriate. At the
properties which the Company acquired subsequent to the acquisition of the
Beazer East properties, all remedial actions are being performed in accordance
with applicable regulations and all indemnification obligations are being
honored.
In the event that Beazer East and Beazer Limited do not continue to fulfill
their commitments under the Indemnity and the Guarantee, the Company may be
required to pay costs covered by the Indemnity. The Company believes that for
the last three years amounts paid by Beazer East under the Indemnity have
averaged approximately $12 million per year. The requirement to pay such costs
without reimbursement would have a material adverse effect on the business,
financial condition, cash flow and results of operations of the Company.
Furthermore, if the Company were required to record a liability in respect of
matters covered by the Indemnity on its balance sheet, the result could be
that the Company would have significant negative net worth.
In addition, Beazer East is presently defending certain toxic tort actions
arising from the operation of assets prior to the inception of the Company
which were acquired from Beazer East. These tort actions were not assumed by
the Company under the Asset Purchase Agreement and, in any event, are within
the scope of the Indemnity.
On August 5, 1998 Hanson PLC announced that an agreement had been signed
under which the funding and risk of the environmental liabilities relating to
the former Koppers Company operations of Beazer PLC (which includes locations
purchased from Beazer East by the Company) will be underwritten by
subsidiaries of two of the world's largest reinsurance companies, Centre
Solutions (a member of the Zurich Group) and Swiss Re.
Other Environmental Matters
In October 1996 the Company received a Clean Water Act information request
from the EPA. This information request asked for comprehensive information for
a period of five years on discharge permits,
11
<PAGE>
applications for discharge permits, discharge monitoring reports, and the
analytical data in support of the reports and applications. The Company
responded in full to the information request and delivered the requested
information to the EPA in November 1996. During the subsequent two year
period, the Company supplemented its initial response to the EPA several times
as the EPA made supplemental requests. In January 1999 the Company met with
officials of the EPA to discuss the EPA's review of the information submitted
by the Company and the EPA requested additional information from October 1996
to December 1998. In the meeting, the EPA suggested that the Company and the
EPA negotiate an agreement. Included among the suggestions for settlement were
a continuation of the Company's ongoing efforts to develop a better
environmental management system, to conduct third party environmental audits,
and to evaluate aging equipment and facilities that may have the potential to
impact adversely the quality of wastewater discharged to the environment or to
publicly owned treatment facilities. The EPA did not propose a penalty or
suggest a range in which a penalty, if any, might be sought. At this time
without knowing the details behind the summary of the EPA's alleged
violations, it is impossible to predict the amount of any penalty. There can
be no assurance that any monetary penalty and the cost of any supplemental
environmental projects will not have a material adverse effect on the
business, financial condition, cash flow and results of operations of the
Company.
Part of the allegations asserted by the EPA concern Woodward Coke and the
Logansport, Louisiana wood treating plant. During a Company-initiated
investigation at Woodward Coke, it was discovered that certain environmental
records and reports relating to the discharge of treated process water
contained incomplete and inaccurate information. Corrected reports were
submitted to the State of Alabama and the EPA. In June 1997, during a routine
third party environmental compliance audit of the Logansport plant, it was
discovered that certain records and reports relating to the discharge of
treated process water contained incomplete and inaccurate information.
Corrected reports have been submitted to the local municipality, the State of
Louisiana and the EPA.
In 1997 the Company paid a civil penalty in the amount of $0.5 million to
Jefferson County in settlement of various alleged air pollution violations
concerning emissions from Woodward Coke for the period from May 25, 1992 to
March 1, 1996 and in settlement of various alleged air pollution violations
concerning benzene abatement equipment at Woodward Coke that had been
discovered as a result of a Company-initiated investigation. On February 14,
1997 the EPA issued a notice of violation for the same alleged air pollution
violations concerning emissions which were the subject of the Jefferson County
suit. In January 1998 the Company ceased operations at Woodward Coke. On
February 8, 1998 Jefferson County requested that the original settlement
agreement be modified to include alleged air emission violations for the
period of August 1997 to January 1998 and proposed an additional civil penalty
of $0.6 million. The Company is currently in the process of reviewing the
proposed modification and has entered into negotiations with Jefferson County
regarding this matter. There can be no assurance that the EPA will not seek
additional actions or penalties that could have a material adverse effect on
the business, financial condition, cash flow and results of operations of the
Company.
At the acquisition of the Monessen Facility, the Company entered into the
Monessen Consent Order pursuant to which the Company's liabilities for
environmental cleanup have been capped at $0.6 million for matters identified
pursuant to the Monessen Consent Order. Although an environmental
indemnification was provided to the Company by the seller of that facility,
the Company does not expect that such obligations will be honored. If
contamination at the Monessen Facility should be discovered which was not
identified pursuant to the Monessen Consent Order, or if the EPA should
require cleanup above the $0.6 million cap contained in the Monessen Consent
Order, the costs associated with such events could have a material adverse
effect on the Company's business, financial condition, cash flow and results
of operations.
On occasion, Koppers Australia has been served with notices relating to
environmental compliance issues arising in connection with its operations. In
addition, historic operations conducted at the Koppers Australia facilities
have resulted in identified and potential soil and groundwater contamination
of varying degrees. The Trentham, Victoria facility is listed on the Victorian
register of contaminated sites. The Takura, Queensland facility is listed on
the Queensland register of contaminated sites as a "probable site". In
addition, Koppers
12
<PAGE>
Australia has identified various levels of groundwater contamination at the
Mayfield, New South Wales and Bunbury, Western Australia facilities. Although
the relevant regulatory authorities have not required the investigation or
remediation of these or other Koppers Australia facilities to date, these
authorities may require such work if Koppers Australia does not undertake such
activities itself. Costs associated with these activities may be material and
there can be no assurance that such costs will not have a material adverse
effect on the business, financial condition, cash flow and results of
operations of the Company.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the status of legal proceedings as
previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders on February 17, 1999, David M.
Hillenbrand was unanimously elected as a new member of the Board of Directors.
Unanimously elected to continue as Directors were Robert K. Wagner, Walter W.
Turner, Clayton A. Sweeney, Brooks C. Wilson, N. H. Prater, Christian L.
Oberbeck, Charles P. Durkin, Jr. and Robert Cizik. Additionally, Ernst & Young
LLP were approved to continue as auditors of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
27.2 Financial Data Schedule for Period Ended March 31, 1998
(b) Reports on Form 8-K:
None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOPPERS INDUSTRIES, INC.
(Registrant)
May 4, 1999
Date /s/ Donald E. Davis
------------------------- -------------------------------------
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
14
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