<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 September 30, 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 October 16, 1999 amounted to 1.4 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 Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales..................................... $170.8 $181.2 $501.0 $511.8
Operating expenses:
Cost of sales............................... 137.4 148.2 415.3 420.9
Depreciation and amortization............... 6.9 7.7 20.8 22.7
Selling, general and administrative......... 9.8 10.5 26.9 31.5
------ ------ ------ ------
Total operating expenses.................. 154.1 166.4 463.0 475.1
------ ------ ------ ------
Operating profit.............................. 16.7 14.8 38.0 36.7
Equity in earnings of affiliates.............. 0.6 1.1 1.2 2.0
------ ------ ------ ------
Income before interest expense, income taxes
and minority interest........................ 17.3 15.9 39.2 38.7
Interest expense.............................. 7.3 7.3 21.3 22.0
------ ------ ------ ------
Income before income taxes and minority
interest..................................... 10.0 8.6 17.9 16.7
Income taxes.................................. (1.2) (1.2) (1.9) (0.1)
Minority interest............................. 0.1 0.1 0.3 0.5
------ ------ ------ ------
Net income................................ $ 11.1 $ 9.7 $ 19.5 $ 16.3
====== ====== ====== ======
Basic earnings per share of common stock...... $ 7.95 $ 6.38 $13.26 $10.14
====== ====== ====== ======
Diluted earnings per share of common stock.... $ 2.90 $ 2.42 $ 4.99 $ 3.91
====== ====== ====== ======
</TABLE>
See accompanying notes.
2
<PAGE>
KOPPERS INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 26.9 $ 16.6
Accounts receivable less allowance for doubtful
accounts of
$1.2 in 1999 and $0.8 in 1998.................... 85.7 71.9
Inventories:
Raw materials................................... 51.4 52.6
Work in process................................. 2.8 2.8
Finished goods.................................. 50.5 52.6
LIFO reserve.................................... (10.5) (12.3)
------- -------
Total inventories............................. 94.2 95.7
Deferred tax benefit............................ 8.1 7.7
Other........................................... 1.7 1.6
------- -------
Total current assets.......................... 216.6 193.5
Investments......................................... 18.3 19.7
Fixed assets........................................ 347.8 334.5
Less: accumulated depreciation...................... (171.4) (153.1)
------- -------
Net fixed assets.................................. 176.4 181.4
Goodwill, net of accumulated amortization........... 27.6 29.4
Deferred tax benefit................................ 46.3 36.0
Other assets........................................ 18.1 17.6
------- -------
Total assets.................................. $ 503.3 $ 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>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) *
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 44.8 $ 45.9
Accrued liabilities................................... 47.2 30.1
Current portion of term loans......................... 15.1 12.6
------ ------
Total current liabilities........................... 107.1 88.6
Long-term debt:
Revolving credit...................................... 2.8 2.3
Term loans............................................ 124.1 131.7
Senior Subordinated Notes due 2007.................... 175.0 175.0
Senior Notes.......................................... 11.1 11.1
------ ------
Total long-term debt................................ 313.0 320.1
Other long-term reserves................................ 53.5 56.4
------ ------
Total liabilities................................... 473.6 465.1
Common stock subject to redemption...................... 19.2 21.1
Senior convertible preferred stock, $.01 par value per
share; 10.0 shares authorized, 2.3 shares issued in
1999 and 1998.......................................... -- --
Voting common stock, $.01 par value per share; 37.0
shares authorized, 2.5 total shares issued in 1999 and
1998................................................... -- --
Capital in excess of par value.......................... 7.5 7.5
Retained earnings....................................... 26.4 4.9
Accumulated other comprehensive loss:
Foreign currency translation adjustment............... (8.1) (7.8)
Treasury stock, at cost, 1.1 shares in 1999 and 1.0 in
1998................................................... (15.3) (13.2)
------ ------
Total liabilities and stockholders' equity.......... $503.3 $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>
Nine Months
Ended
September 30,
1999 1998
------ -------
(Unaudited)
<S> <C> <C>
Cash provided by operating activities.......................... $ 31.3 $ 7.7
Cash provided by (used in) investing activities:
Capital expenditures......................................... (13.2) (10.5)
Acquisitions and related capitalized costs................... (1.4) (2.6)
Other........................................................ 0.5 --
------ -------
Net cash (used in) investing activities.................... (14.1) (13.1)
Cash provided by (used in) financing activities:
Borrowings from revolving credit............................. 56.8 105.5
Repayments of revolving credit............................... (55.6) (105.1)
Proceeds from long-term debt................................. -- 26.9
Repayment of long-term debt.................................. (6.4) (6.6)
Payment of deferred financing costs.......................... -- (0.4)
Purchases of voting common stock............................. (2.1) (9.1)
Purchase of non-voting common stock.......................... -- (11.4)
Issuance of senior convertible preferred stock............... -- 2.0
------ -------
Net cash provided by (used in) financing activities........ (7.3) 1.8
Effect of exchange rates on cash............................... 0.3 (2.2)
------ -------
Net increase (decrease) in cash................................ 10.2 (5.8)
Cash and cash equivalents at beginning of period............... 16.7 20.0
------ -------
Cash and cash equivalents at end of period..................... $ 26.9 $ 14.2
====== =======
</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
Koppers Industries, Inc. (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) Year-to-date 1998 results have been restated to reflect $1.5 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 most of 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.
6
<PAGE>
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.
The Company has been named in a toxic tort action, along with other
defendants. The action arises from the Company's operations at its wood
treating facility in Green Spring, West Virginia. Plaintiff allegations
include various personal injury and property damage theories related to plant
operations from the mid-1940's through 1992. The Company is currently unable
to estimate a range of potential loss, if any, related to this matter, and the
Company's insurance carriers have been notified. However, there can be no
assurance that an unfavorable outcome would not have a material adverse effect
on the business, financial condition, cash flow and results of operations of
the Company.
On August 5, 1998 Hanson PLC announced that an agreement had been signed
under which the funding and risk of certain liabilities, including
environmental, relating to the former Koppers Company, Inc. 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 has supplemented its initial response.
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 formal International Standards Organization
("ISO") based 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. While the Company is preparing a response to and explanation of the
incidents alleged by the EPA to be violations, it is impossible to predict the
amount of any penalty that the EPA may propose. 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.
During a Company-initiated investigation at the Company's coke facility in
Woodward, Alabama which was closed in January 1998 ("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
7
<PAGE>
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, 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, Australian operations have been served with notices relating to
environmental compliance issues arising in connection with their facilities.
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 in Australia have not
required the investigation or remediation of these or other Koppers Australia
facilities to date, these authorities may require such work if the Company
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 Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
----------------------------- ---------
(In millions except earnings per share)
<S> <C> <C> <C> <C>
Numerators for basic and diluted
earnings per share:
Net income to common stockholders..... $11.1 $ 9.7 $ 19.5 $ 16.3
Denominators:
Weighted-average voting common stock.. 1.4 1.5 1.5 1.6
Effect of dilutive securities:
Senior convertible preferred stock.... 2.3 2.3 2.3 2.3
Employee stock options................ 0.1 0.2 0.1 0.3
--------- --------- --------- ---------
Dilutive potential common shares........ 2.4 2.5 2.4 2.6
Denominators for diluted earnings per
share--adjusted weighted-average shares
and assumed conversions................ 3.8 4.0 3.9 4.2
Basic earnings per share.............. $7.95 $6.38 $13.26 $10.14
Diluted earnings per share............ $2.90 $2.42 $ 4.99 $ 3.91
</TABLE>
8
<PAGE>
(8) Comprehensive Income
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
------- ------ ------ ------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Net income.................. $11.1 $9.7 $19.5 $16.3
Other comprehensive income:
Unrealized currency
translation gain (loss).. (0.7) (4.2) (0.3) (8.7)
------- ------ ------ ------
Total comprehensive
income................. $10.4 $5.5 $19.2 $ 7.6
======= ====== ====== ======
</TABLE>
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, net of all
inter-segment transactions, for the Company's businesses for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net sales:
Carbon Materials & Chemicals............ $ 96.0 $ 94.9 $266.0 $266.4
Railroad & Utility Products............. 74.6 85.8 234.8 242.6
All Other............................... 0.2 0.5 0.2 2.8
------ ------ ------ ------
Total.................................. $170.8 $181.2 $501.0 $511.8
====== ====== ====== ======
Percentage of net sales:
Carbon Materials & Chemicals............ 56.2% 52.4% 53.1% 52.1%
Railroad & Utility Products............. 43.7% 47.3% 46.9% 47.4%
All Other............................... 0.1% 0.3% -- 0.5%
------ ------ ------ ------
Total.................................. 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Gross margin (after depreciation and
amortization):
Carbon Materials & Chemicals............ 16.7% 16.0% 13.6% 15.5%
Railroad & Utility Products............. 14.6% 12.1% 12.8% 11.7%
All Other............................... (0.2%) (0.2%) (0.2%) (0.3%)
------ ------ ------ ------
Total.................................. 15.5% 14.0% 13.0% 13.3%
====== ====== ====== ======
Operating profit:
Carbon Materials & Chemicals............ $ 10.1 $ 9.3 $ 19.6 $ 22.2
Railroad & Utility Products............. 7.0 5.9 19.6 16.1
All Other............................... (0.4) (0.4) (1.2) (1.6)
------ ------ ------ ------
Total.................................. $ 16.7 $ 14.8 $ 38.0 $ 36.7
====== ====== ====== ======
</TABLE>
Comparison of Results of Operations for the Three Months Ended September 30,
1999 and 1998
Net Sales. Net sales were lower primarily as a result of lower sales in the
Railroad & Utility Products business. Net sales for Carbon Materials &
Chemicals increased due to a 12.8% increase in prices for phthalic anhydride
("PAA"), based on an increase 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
9
<PAGE>
to determine pricing and therefore, increases in the price of orthoxylene
generally result in proportionally higher PAA prices. Net sales for Railroad &
Utility Products decreased due to lower volumes more than offsetting higher
sales prices for railroad crossties. The lower volumes are primarily due to
maintenance cutbacks from the Class I railroads. Net sales for All Other
represent liquidation of remaining inventories at Woodward Coke. Inter-segment
revenues include $4.9 million and $6.4 million for Carbon Materials &
Chemicals for the quarters ended September 30, 1999 and 1998, respectively.
Gross Profit after Depreciation and Amortization. As a percent of net sales,
gross profit after depreciation and amortization increased primarily as the
result of higher margins for the Railroad & Utility Products business. Gross
margin for Carbon Materials & Chemicals increased as higher prices for PAA
were partially offset by lower prices for furnace coke. Gross margin for
Railroad & Utility Products increased as the result of higher prices for
railroad crossties.
Depreciation and Amortization. The decrease in depreciation and amortization
was due primarily to certain assets becoming fully depreciated.
Selling, General and Administrative Expense. Selling, general and
administrative expense as a percent of net sales decreased primarily as a
result of lower Year 2000 computer update costs and lower travel and
consulting costs.
Equity in Earnings of Affiliates. Equity earnings decreased primarily as a
result of lower earnings from KSA Limited Partnership ("KSA").
Net Income. Net income increased due to higher PAA prices and lower selling,
general and administrative costs.
Comparison of Results of Operations for the Nine Months Ended September 30,
1999 and 1998
Net Sales. Net sales decreased due to lower sales for Railroad & Utility
Products. Net sales for Carbon Materials & Chemicals decreased slightly as a
3.9% reduction in PAA prices was partially offset by higher carbon pitch
volumes. Net sales for Railroad & Utility Products decreased as lower volumes
for railroad crossties were partially offset by higher prices. Net sales for
All Other represent liquidation of remaining inventories at Woodward Coke.
Inter-segment revenues include $13.3 million and $13.6 million for Carbon
Materials & Chemicals for the nine months ended September 30, 1999 and 1998,
respectively.
Gross Profit after Depreciation and Amortization. As a percent of net sales,
gross profit after depreciation and amortization decreased due to lower
margins for Carbon Materials & Chemicals. Gross margin for Carbon Materials &
Chemicals decreased primarily as a result of a reduction in PAA prices. Gross
margin for Railroad & Utility Products increased due to higher prices for
railroad crossties.
Depreciation and Amortization. The decrease in depreciation and amortization
was due primarily to certain assets becoming fully depreciated and a decrease
in the value of Australian currency relative to United States currency.
Selling, General and Administrative Expense. Selling, general and
administrative expense as a percent of net sales decreased primarily as a
result of lower Year 2000 computer update costs and lower travel and
consulting costs.
Equity in Earnings of Affiliates. Equity earnings decreased primarily as the
result of lower earnings from KSA.
Interest Expense. Interest expense decreased as the result of lower debt
levels and lower interest rates.
Income Taxes. The Company's effective income tax rate decreased due to
higher utilization of energy tax credits at the Monessen Facility.
10
<PAGE>
Net Income. Net income increased as the result of lower interest and taxes.
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 September 30, 1999 the Company had cash and cash equivalents of $26.9
million and $6.7 million of availability under the revolving credit facility
for working capital purposes, subject to limitations under existing debt
covenants. As of September 30, 1999 $9.6 million of commitments were utilized
by outstanding standby letters of credit.
Net cash provided by operating activities increased due to a working capital
increase of $9.9 million for the first nine months of 1999 compared to a
working capital increase of $24.8 million in the prior year period. The
working capital increase for 1998 was due primarily to plant closing costs for
Woodward Coke and contractual benefit payments related to the acquisition of
Koppers Australia.
Capital expenditures excluding acquisitions increased, although the
Company's ongoing capital expenditures program remains relatively stable.
Capital expenditures related to acquisitions in 1999 relate to the TISCO joint
venture for the refurbishment of a Chinese tar distillation facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" on page 21 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
Net cash utilized by financing activities increased primarily due to
scheduled debt repayments. Cash provided in 1998 included approximately $21
million of term borrowings used to purchase approximately $20 million of
voting and non-voting common stock. On July 1, 1999 the Company redeemed all
the shares of former Director Brooks C. Wilson for approximately $1.8 million.
Impact of Year 2000. Most of the Company's computer programs were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date
using "00" as the year 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has organized its activities to address Year 2000 issues in
three phases: 1) initial assessment; 2) remediation; and 3) implementation and
testing. There is considerable overlap in these phases due to the timing and
nature of this project. The Company has substantially completed all three
phases, which included assessment and remediation of hardware and software
applications; assessment of embedded chips in manufacturing equipment and
various process control systems; implementation and testing of hardware and
software applications; identification of, and communication with, significant
vendors and customers; establishment of compliance and testing programs; and
development of the project plan.
The Company has assessed and remediated its information technology systems,
such as business computing systems, end user computer systems and technical
infrastructure, and has assessed and remediated its embedded systems commonly
found in manufacturing and service equipment, testing equipment and
environmental operations. The assessments and remediation also included
evaluations of the readiness of its suppliers and service providers, personal
computers, communication systems and electronic data interchange (EDI).
Options for remediation have included replacement, modification or continued
use depending on information gathered during the assessment stage. The
remediated systems are being tested and reviewed before a final determination
is made as to the final readiness of the system. A project committee meets
regularly to review the status of the investigation into and resolution of the
Year 2000 issues.
11
<PAGE>
As of September 30, 1999 the only remaining uncompleted items of which the
Company is aware are a) EDI system; b) replacement of a communications
processor for the domestic Carbon Materials & Chemicals business; and c)
replacement of the file server at the corporate headquarters. Management
believes these items will be completed by November 30, 1999.
The expected completion date for the Year 2000 project has been extended
from September 30, 1999 to November 30, 1999, which is prior to any
anticipated impact on the Company's operations. The Company believes that with
the remaining modifications to existing software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 Issue could have a material adverse effect on the
results of operations of the Company.
The primary financial information systems for the Company include 1)
Corporate; 2) Carbon Materials & Chemicals; 3) Railroad & Utility Products;
and 4) Australian operations. Assessments, remediation and testing have been
completed for all these systems except for the replacement of the
communications processor for the domestic Carbon Materials & Chemicals
business as noted above.
Non-financial information systems and embedded systems for the Company
consist primarily of process control systems for the various manufacturing
processes the Company uses in manufacturing its products, as well as
environmental process controls. Engineers and consultants have been engaged to
assess such non-financial and embedded systems as deemed necessary. The
Company has completed the assessment, remediation and testing phases for all
of its operating locations.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failures to remediate
their own Year 2000 issues. There can be no assurance that the systems of
other companies on which the Company's systems rely will be corrected on a
timely basis and will not have a material adverse effect on the Company's
results of operations.
The total Year 2000 project cost is estimated at approximately $3.0 million,
$2.5 million of which is expected to be expensed when incurred. At September
30, 1999, the Company had incurred approximately $2.8 million, of which
approximately $2.3 million has been expensed, primarily for assessment,
remediation, implementation and testing, and the replacement of the majority
of information systems for Australian operations.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company
has substantially completed all remediation, implementation and testing, but
there are certain items that have not been completed for the Year 2000
project. In the event the Company does not complete these remaining items,
revenues could be lost and the Company could incur significant liabilities.
Additionally, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the Company. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no assurance that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company has developed a contingency plan which outlines alternatives
available to the Company in the event that critical systems fail in the year
2000. This contingency plan, which has been completed, outlines
12
<PAGE>
the steps to be taken in the event that problems occur in critical systems
such as invoicing, inventory control and certain production processes. The
plan also identifies the Company's business information systems, outlines
transition plans for all operating locations, addresses operations and
shipping contingencies, safety, health and environmental contingencies, and
indicates the current status of all public utilities utilized by the Company.
Safe Harbor Statement
This discussion contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those forward-looking statements. The
Company's efforts to ensure its operations are not materially affected by the
arrival of the year 2000 depend upon the accuracy and completeness of its
remediation assessments and activities. In addition, the Company could be
adversely impacted by the failures of third parties with which it has a
material relationship for which the Company's contingency plans are
inadequate. Furthermore, the Company's efforts are dependent upon the
continued availability of qualified personnel.
There are other important factors not described above which could also cause
actual results to differ materially from those in any forward-looking
statement made for or on behalf of the Company.
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, originally
effective for fiscal years beginning after June 15, 1999, has been deferred
and will be effective for fiscal years beginning after June 15, 2000. 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 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 alleged
violations of or liability under Environmental Laws.
13
<PAGE>
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 most of 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.
The Company has been named in a toxic tort action, along with other
defendants. The action arises from the Company's operations at its wood
treating facility in Green Spring, West Virginia. Plaintiff allegations
include various personal injury and property damage theories related to plant
operations from the mid-1940's through 1992. The Company is currently unable
to estimate a range of potential loss, if any, related to this matter, and the
Company's insurance carriers have been notified. However, there can be no
assurance that an unfavorable outcome would not have a material adverse effect
on the business, financial condition, cash flow and results of operations of
the Company.
On August 5, 1998 Hanson PLC announced that an agreement had been signed
under which the funding and risk of certain liabilities, including
environmental, relating to the former Koppers Company, Inc. 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, 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 has supplemented its
initial response. 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
14
<PAGE>
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
formal ISO-based 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. While the Company is preparing a response to and explanation of the
incidents alleged by the EPA to be violations, it is impossible to predict the
amount of any penalty that the EPA may propose. 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.
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, Australian operations have been served with notices relating to
environmental compliance issues arising in connection with their facilities.
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 in Australia have not
required the investigation or remediation of these or other Koppers Australia
facilities to date, these authorities may require such work if the Company
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.
15
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the status of legal proceedings as
previously reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
27.2 Financial Data Schedule for the period ended September 30, 1998.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Company in the third quarter
of 1999.
16
<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)
11/5/99
Date /s/ Donald E. Davis
------------------------- -------------------------------------
Donald E. Davis,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
17
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