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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period to Commission file number 1-12716
KOPPERS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania 25-1588399
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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436 Seventh Avenue
Pittsburgh, Pennsylvania 15219
412-227-2001
(Addresses of principal executive offices)
(A registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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9 7/8% Senior Subordinated Notes due 2007 New York Stock Exchange
8 1/2% Senior Notes due 2004
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Securities Registered Pursuant to Section 12(g) of the Act: None
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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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is no voting stock held by non-affiliates of the registrant as of
December 31, 1999. Shares of voting stock held by the Management Investors
(see Item 10. Directors and Executive Officers of the Registrant) are not
included. However, the Registrant has made no determination that such
individuals are "affiliates" within the meaning of Rule 405 under the
Securities Act of 1933, as amended.
Voting Common Stock and Senior Convertible Preferred Stock, both par value
$.01 per share, outstanding at March 1, 2000, amounted to 1.4 million and 2.3
million shares, respectively.
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TABLE OF CONTENTS
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Item Page
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PART I
1. Business........................................................... 1
2. Properties......................................................... 14
3. Legal Proceedings.................................................. 15
4. Submission of Matters to a Vote of Security Holders................ 15
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 15
6. Selected Financial Data............................................ 16
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 17
7a. Market Risk........................................................ 24
8. Financial Statements and Supplementary Data........................ 24
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 24
PART III
10. Directors and Executive Officers of the Registrant................. 25
11. Executive Compensation............................................. 29
12. Security Ownership of Certain Beneficial Owners and Management..... 31
13. Certain Relationships and Related Transactions..................... 33
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 34
SIGNATURES
Signatures......................................................... 61
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PART I
ITEM 1. Business
General
Koppers Industries, Inc. (the "Company" or "Koppers") is a global integrated
producer of carbon compounds and treated wood products for use in a variety of
markets including the railroad, aluminum, chemical, utility and steel
industries. The "Koppers" name has been associated with the carbon compounds
and wood treating businesses for over 70 years, and the Company has a leading
position in most of its markets. The Company operates 22 facilities in the
United States and an additional 13 operating facilities in the South Pacific
(primarily Australia and New Zealand). The Company also maintains indirect
ownership interests in an additional facility in the United States through its
domestic joint venture KSA (as defined herein) and in four facilities overseas
(one in Denmark and three in the United Kingdom) through its Danish joint
venture Tarconord A/S ("Tarconord"). The Company recorded net sales and net
income of $664.1 million and $24.2 million, respectively, for the twelve
months ended December 31, 1999. For the same period, the Company's businesses,
Carbon Materials & Chemicals and Railroad & Utility Products, accounted for
53.6% and 46.4% of net sales, respectively.
The Company's Carbon Materials & Chemicals division is a supplier of a)
carbon pitch, which is used primarily by the aluminum industry as a binder in
the manufacture of anodes; b) phthalic anhydride ("PAA"), used in the
manufacture of plasticizers, resins, paints and dye making; c) creosote and
chemicals used in the protection of timber against termites, fungal decay and
weathering; d) roofing pitch, used in the manufacture of built-up roofing
systems; e) carbon black, used in the production of rubber tires; and f)
furnace coke, used in the manufacture of steel. The Company's Railroad &
Utility Products division a) provides various products and services to
railroads, including crossties (both wood and concrete), track and switch pre-
assembly, and disposal services; b) supplies treated wood utility poles to
electric and telephone utilities; and c) provides products to, and performs
various wood treating services for, vineyards, construction and other
commercial applications.
The Company was formed in October 1988 under the laws of the Commonwealth of
Pennsylvania by management, Beazer, Inc. and KAP Investments, Inc. ("KAP", a
subsidiary of Koppers Australia Pty. Limited) ("Koppers Australia") to
facilitate the acquisition of certain assets of Koppers Company, Inc. in a
management-led leveraged buyout that closed on December 29, 1988 (the
"Acquisition"). Koppers Company, Inc., now known as Beazer East, Inc. ("Beazer
East," but referred to herein as "Old Koppers" for periods prior to the
Acquisition) had been acquired in June 1988 by BNS Acquisitions, Inc., a
wholly-owned indirect subsidiary of Beazer PLC, now known as Beazer Limited
("Beazer Limited"). The assets acquired from Old Koppers included a coke
facility in Woodward, Alabama ("Woodward Coke") and certain assets of its
Chemical & Allied Products Group which then became the Carbon Materials &
Chemicals and Railroad & Utility Products divisions of the Company.
Under the purchase agreement executed at the Acquisition (the "Asset
Purchase Agreement"), Beazer East assumed the responsibility for and
indemnified the Company against certain liabilities, damages, losses and
costs, to the extent attributable to acts or omissions occurring prior to the
Acquisition, including, with certain limited exceptions, liabilities and costs
of compliance with environmental laws (the "Indemnity"). Beazer Limited
unconditionally guaranteed Beazer East's performance of the Indemnity pursuant
to a guarantee (the "Guarantee"). Beazer Limited became a wholly-owned
indirect subsidiary of Hanson PLC on December 4, 1991. 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 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. See "Business--
Environmental Matters."
1
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On October 15, 1997, KAP and a group of approximately 120 individual
investors who were either officers, Board members or current or former
employees of either Koppers Industries, Inc. or one of its subsidiaries (the
"Management Investors") (collectively, the "Offeree Stockholders") acquired
from Cornerstone-Spectrum, Inc. (an affiliate of Beazer East, Inc. and Hanson
PLC) its voting and non-voting shares of common stock of Koppers Industries,
Inc. The Offeree Stockholders utilized $52.5 million of financing from Koppers
and Saratoga Partners III, L.P. ("Saratoga"). On December 1, 1997, Saratoga
exchanged 2.1 million shares of common stock it acquired as part of the
financing of the acquisition of common stock from Cornerstone-Spectrum, Inc.
for shares of a new series of senior convertible preferred stock of Koppers
Industries, Inc. (the "Preferred Shares"), which entitles Saratoga to elect a
majority of the Board of Directors of Koppers (the "Board of Directors") and
to exercise a majority of the voting power over all outstanding stock of the
Company with respect to all other matters subject to a stockholder vote.
Industry Overview
Carbon Materials & Chemicals
The coal tar distillation business involves the conversion of coal tar, a
by-product of the transformation of coal into coke, into a variety of
intermediate chemical products in processes beginning with distillation.
During the distillation process, heat and vacuum are utilized to separate coal
tar into three primary components: carbon pitch (approximately 50%), creosote
oils (approximately 30%) and chemical oils (approximately 20%). The most
critical element in producing high quality tar products is the ability to
obtain and blend multiple coal tars, with various specifications, from several
sources in order to achieve the consistent properties desired by the customer.
The aluminum industry is the largest user of carbon pitch, which acts as a
binding material for the anodes used in the electrolysis process required in
aluminum smelting. Because all coal tar products are produced in relatively
fixed proportion to carbon pitch, the level of carbon pitch consumption
generally determines the level of production of other coal tar products. The
commercial carbon industry, the second largest user of carbon pitch, uses
carbon pitch to produce electrodes and other specialty carbon products for the
steel industry.
Creosote is used in the wood preservation industry as a preservative for
railroad crossties and lumber, utility poles and pilings. Approximately two-
thirds of the total United States market requirements are used for railroad
construction and maintenance, with the remainder used primarily for utility
poles and pilings. To the extent that creosote cannot be sold for use in
treating wood products, distillate oils are sold into the carbon black market
rather than being blended to creosote specifications.
Carbon black is manufactured in Australia at a carbon black facility using
both petroleum oil and coal tar based feedstocks, which are subjected to heat
and rapid cooling within a reactor. Additionally, tar based carbon black
feedstock is manufactured as a co-product of the tar distillation process and
can be produced at the Company's four domestic and one Australian tar
distillation facilities.
Chemical oils resulting from the distillation of coal tars are further
refined by the Company into naphthalene, which is the primary feedstock used
by the Company for the production of PAA. The primary markets for PAA are in
the production of plasticizers, polyester resins and alkyd resins.
Roofing pitch and refined tars are also produced in smaller quantities and
are sold into the commercial roofing and pavement sealer markets,
respectively.
The main product manufactured in the Company's wood preservation chemicals
business, which is based in Australia, is copper chrome arsenates ("CCA")
which is marketed primarily in Australasia. The wood preservation chemicals
business also markets creosote, a co-product of the tar distillation process.
2
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Furnace coke is a carbon and fuel source required in the manufacture of
steel. Coal, the primary raw material, is carbonized in oxygen-free ovens to
obtain the finished product. Coke manufacturers are either an integrated part
of a steel company or, as in the case of the Company, operate independently
and are known as "merchant producers."
Because of the Clean Air Act Amendments and other environmental laws, future
coal tar availability from both domestic and foreign coke production is
expected to decline. Management believes that the Company's ability to source
coal tar and carbon pitch from overseas markets, as well as its research of
petroleum feedstocks, will assist in securing an uninterrupted supply of
carbon pitch feedstocks.
Railroad & Utility Products
The major product of Railroad & Utility Products is pressure-treated wood
crossties, which are used in railroad track maintenance programs.
Approximately 16.5 million wood crossties are replaced domestically by
railroads or their track maintenance contractors every year. United States
Class 1 railroads (defined as the seven largest railroad systems in the United
States) maintain approximately 170,000 miles of track, estimated to contain
approximately 500 million crossties. In addition to crossties, the division
also offers services to the railroads, such as assembling track panel sections
and specialty track items, pre-plating ties and disposing of discarded ties in
an environmentally safe manner.
Historically, investment trends in track maintenance by domestic railroads
have been linked to general economic conditions in the country. During
recessions, the railroads have typically deferred track maintenance until
economic conditions improve. Recently, however, mergers among several of the
Class 1 railroads have shifted the railroads' focus from track maintenance to
integration issues, causing a reduction in demand for railroad crossties.
Management believes this reduction in demand will be temporary and that these
mergers will not have a long-term adverse effect on the future demand for
crossties.
Hardwoods, such as oak and other species, are the major raw materials in
wood crossties. Hardwood prices, which account for approximately 60% of a
finished tie's cost, fluctuate with the demand from competing hardwood lumber
markets, such as oak flooring, pallets and other specialty lumber products.
Normally, raw material price fluctuations are passed through to the customer
according to the terms of the applicable contract. Weather conditions can be a
factor in the supply of raw material, as unusually wet conditions may make it
difficult to harvest timber.
In the United States, hardwood lumber is procured by the division from
hundreds of small sawmills throughout the northeastern, midwestern, and
southern areas of the country. The ties are shipped via rail car or trucked
directly to one of the division's twelve crosstie treating plants, all of
which are on line with a major railroad. The ties are either air-stacked for a
period of six to twelve months or artificially dried by a process called
boultonizing. Once dried, the ties are pressure treated with creosote, a
product of Koppers' Carbon Materials & Chemicals division.
The Class 1 railroads have demonstrated a desire to outsource their non-core
business activities. This desire, coupled with Koppers' long-standing
relationships with the Class 1 railroads, has positioned the Company for a
growth opportunity. The Company offers services to the railroads at a cost
lower than the railroads' internal cost, and believes there is an opportunity
for future growth in such related areas.
Over the last several years, utility pole demand has dropped as utilities
have reduced spending due to competitive pressures arising from deregulation.
It is expected that deregulation will continue to negatively affect both new
and replacement pole installation markets.
3
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Description of Company's Business
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Segment Sales For Years Ended December 31,
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1999 1998 1997
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(Dollars in millions)
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Carbon Materials & Chemicals... $ 356.2 53.6% $ 346.7 51.7% $ 285.9 48.2%
Railroad & Utility Products.... 307.7 46.4 320.7 47.8 255.2 43.0
All other...................... 0.2 -- 3.2 0.5 52.0 8.8
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$ 664.1 100.0% $ 670.6 100.0 % $ 593.1 100.0%
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Carbon Materials & Chemicals
The Company's Carbon Materials & Chemicals division manufactures four
principal products: a) carbon pitch, used in the production of aluminum and
steel; b) PAA, used in the production of plasticizers and polyester resins; c)
creosote, used in the treatment of wood; and d) furnace coke, used in steel
production. Carbon pitch, PAA and creosote are produced through the
distillation of coal tar, a by-product of the transformation of coal into
coke. The Carbon Materials & Chemicals division's profitability is impacted by
its cost to purchase coal tar in relation to its prices realized for carbon
pitch, PAA and creosote. The Company has four tar distillation facilities in
the United States and one in Australia, strategically located to provide
access to coal tar and to facilitate better service to its customers with a
consistent supply of high-quality products. For 1999, sales of carbon pitch,
PAA, creosote and coke accounted for approximately 40%, 14%, 11% and 11% of
the Carbon Materials & Chemicals division's net sales, respectively.
The Company believes it has a strategic advantage over its competitors based
on its ability to access coal tar from many United States and Australasian
suppliers and subsequently blend such coal tars to produce carbon pitch with
the consistent quality important in the manufacturing of quality anodes for
the aluminum industry. The Company's five coal tar distillation facilities and
one carbon pitch importing terminal give it the ability to offer customers
multiple sourcing and a consistent supply of high quality products. In
anticipation of potential shutdowns of United States coke capacity, the
Company has secured coal tar supply through long-term contracts and
acquisitions. In 1999 the Company entered into a joint venture agreement with
Tangshan Iron & Steel Co. and Jingtan Port Authority to rehabilitate and
operate a tar distillation facility in China for a Company contribution of
$10.5 million. The joint venture, which is 60% owned by the Company, is
expected to begin production of coal tar products by the end of 2000. After
expenditures of $1.7 million in 1999, the projected cash outlays for the
Company are approximately $6 million in 2000 and the remaining $2.8 million in
2001. The joint venture agreement also includes a tar supply contract.
In the past, the Company has generally benefited from its ability to process
chemical oil, a carbon pitch co-product, into naphthalene, for use as a low-
cost feedstock for PAA production and from its ability to sell a large portion
of its creosote production internally to the Railroad & Utility Products
division.
Over 75% of Koppers' carbon pitch is sold to the aluminum industry under
long-term contracts ranging from two to seven years. Demand for carbon pitch
generally has fluctuated with United States production of primary aluminum.
However, an excess supply of carbon pitch in Europe during the past two years
has resulted in pricing pressures in domestic markets. This situation has
negatively impacted the Company's domestic pitch business in 1999, and
continued pricing pressures are anticipated in 2000. There are currently no
known viable substitutes for carbon pitch in the production of carbon anodes.
The Carbon Materials & Chemicals division's ten largest customers represented
approximately 49% of the division's net sales for 1999. The Company's two
competitors in North America in the production of carbon pitch are VFT Canada
and Reilly Industries, Inc.
On a worldwide basis, naphthalene and orthoxylene, a petroleum derivative,
can both be used in the manufacturing of PAA and are considered to be
interchangeable. In the United States, however, the Company is the only PAA
producer capable of utilizing both orthoxylene and naphthalene in its
manufacturing process, with
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naphthalene being a generally lower cost feedstock. Koppers' price
realizations and profit margins for PAA have historically fluctuated with the
price of orthoxylene and its relationship to Koppers' cost to produce
naphthalene. During 1999, orthoxylene prices increased significantly, rising
from $0.13 per pound at the beginning of 1999 to $0.20 per pound at December
31, 1999. As a result, PAA margins have increased, resulting in an increase in
operating profit for PAA in 1999 as compared to 1998. Koppers' cost to produce
naphthalene and PAA is primarily driven by its cost to procure coal tar, which
has historically remained relatively stable. Koppers' four principal PAA
competitors, Exxon Chemical Company, Aristech Chemical Corporation
("Aristech"), BASF Corporation and Stepan Company, can use only orthoxylene in
the production of PAA.
Approximately one-third of Koppers' creosote production is sold to the
Railroad & Utility Products division. An additional one-third is sold to Class
1 railroad customers, all of which take delivery of the creosote at one of
Koppers' wood treating facilities. The Railroad & Utility Products division
purchases all of its creosote from the Carbon Materials & Chemicals division.
Koppers is the only competitor in this market that is integrated in this
fashion. The remainder of its creosote materials are sold to railroads, to
other wood treaters or into the carbon black market as a component in the
manufacture of rubber tires. The Company's principal competitor in the
creosote market is KMG Bernuth, Inc.
Coal tar is purchased from a number of outside sources as well as from the
Company's coke facility located in Monessen, Pennsylvania (the "Monessen
Facility"). Primary suppliers are Bethlehem Steel Corporation, LTV Steel
Company, Inc. ("LTV"), USX Corporation ("USX"), China Steel Chemical
Corporation, The Broken Hill Proprietary Co. Limited ("Broken Hill", located
in Australia) and Wheeling-Pittsburgh Steel Corporation. The Monessen Facility
currently provides approximately 2% of Koppers' coal tar.
The Company's carbon black business, located in Australia, manufactures
carbon black from an oil and tar based feedstock which is subjected to heat
and rapid cooling within a reactor. The tar distillation plant in Australia is
a major raw material supplier of coal tar based feedstock for the Company's
carbon black business. Carbon black is a raw material in the manufacture of
rubber tires.
The timber preservation chemicals division operates throughout Australasia,
Southeast Asia, Japan and South Africa. Timber preservation chemicals are used
to impart durability to timber products used in building/construction,
agricultural and heavy duty industrial markets. The most commonly used
chemicals are creosote, CCA, copper co-biocides, sapstain control products and
light organic solvent preservatives (LOSP).
The Company's coke business consists of the Monessen Facility, which
produces furnace coke. The plant consists of two batteries with a total of 56
ovens and has a total capacity of approximately 350,000 tons of furnace coke
per year. All of the ovens were rebuilt in 1980 and 1981, which, together with
recent improvements, makes the Monessen Facility one of the most modern coking
facilities in the United States. The Monessen Facility is self-sufficient in
all its energy needs other than electricity.
The Monessen Facility qualifies for a tax credit based on its production of
coke as a non-conventional fuel and the sale thereof to unrelated third
parties. The tax credit generated per ton of coke is tied to a per-barrel of
oil equivalent determined on a British Thermal Unit ("BTU") basis and adjusted
annually for inflation. The approximate value of this tax credit per ton of
coke is $27.00. In December 1999 the Company entered into an agreement with a
third party which will result in substantially all future non-conventional
fuel tax credits generated as a result of the production and sale of coke at
the Monessen Facility being transferred to the third party (the "Monessen
Transaction"). In 1999 the Company received $0.8 million for the transfer of
tax credits. The tax credits expire in 2002. Prior to the Monessen
Transaction, the Company earned non-conventional fuels credits on coke
production at the Monessen Facility. Credits utilized for the years ended
December 31, 1999, 1998 and 1997 were approximately $10.2 million, $9.5
million and $9.3 million, respectively.
Other Carbon Materials & Chemicals products include roofing pitch, used in
the construction of built-up roofing systems, and refined tars, sold to
manufacturers of pavement sealers for driveways and parking lots.
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Tarconord is a major regional producer of carbon pitch and related products
and is strategically important to the Company because it enables the Company
to access European markets for its carbon pitch and related products.
Railroad & Utility Products
The Company markets treated wood products primarily to the railroad and
public utility markets, primarily in the United States and Australia. The
Railroad & Utility Products division's profitability is influenced by the
demand for railroad products and services by Class 1 railroads, demand for
transmission and distribution poles by electric utilities and its cost to
procure wood. Historically, sales of railroad products and services have
represented approximately three-fourths of the Railroad & Utility Products
division's net sales. Railroad products include items such as crossties,
switch ties and various types of lumber used for railroad bridges and
crossings. Utility products include transmission and distribution poles for
electric and telephone utilities and pilings used in industrial foundations,
beach housing, docks and piers. The Railroad & Utility Products division
operates 21 wood treating plants, one specialty trackwork facility and 12 pole
distribution yards located throughout the United States and Australasia. The
Company's network of plants is strategically located near timber supplies to
enable it to access raw materials and service customers effectively. In
addition, Koppers' crosstie treating plants abut railroad customers' track
lines, and its pole distribution yards are located near Koppers' utility
customers in the northeast and midwest regions of the United States.
The Railroad & Utility Products business supplies treated crossties and
other products and services to the railroad industry. The Railroad & Utility
Products division's largest customer base is the Class 1 railroad market,
which buys 70% of all crossties produced in the United States. Koppers has
also been expanding key relationships with the approximately 500 short-line
and regional rail lines. The railroad crosstie market is a mature market with
approximately 16.5 million replacement crossties purchased per year. The
Company currently has contracts with six of the seven United States Class 1
railroads and has enjoyed long-standing relationships, some of more than 50
years, with this important customer base. These relationships, coupled with a
growing interest on the part of railroads to outsource non-core activities,
have enabled the Company to position itself for growth by offering new
services to railroads at a cost lower than the railroads' internal cost. Such
new services include assembling track sections and affixing fastening devices
at the treating plant rather than field locations; fabricating specialty track
items such as turnouts; and disposing of discarded ties in an environmentally
safe manner in high temperature boilers. In 1999, approximately 10% of
Railroad & Utility Products' net sales were derived from these types of
services to railroads. The Company intends to capitalize on its relationships
with railroads by expanding its current service offerings, including track
panels, specialty track components and railroad tie disposal.
The Company's top 10 Railroad & Utility Products accounts comprised
approximately 60% of Railroad & Utility Products' net sales for 1999 and are
serviced through long-term contracts ranging from one to twelve years on a
requirements basis. Koppers' sales to the railroad industry are coordinated
through its office in Pittsburgh, Pennsylvania. The Company's principal
competitor in the railroad products market is Kerr-McGee Chemical Corp.
Hardwood lumber accounts for approximately 60% of a finished crosstie's
cost. The Company obtains its hardwood supply from hundreds of small sawmills
throughout the northeastern, midwestern and southern areas of the United
States. Hardwood prices fluctuate with demand from competing hardwood lumber
markets such as flooring and pallets. The wood is taken by either truck or
rail from Company-operated collection points directly into its treating
plants, where it is pressure treated with creosote, a product of the Carbon
Materials & Chemicals division. The Railroad & Utility Products division
purchases all of its creosote requirements from the Carbon Materials &
Chemicals division. In addition, several railroads procure their own raw
materials and ship them into the Company's plants for treating services.
6
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The Company believes that the threat of substitution for the wood crosstie
is low due to the higher cost of alternative materials. Concrete ties,
however, have been identified by the railroads as a feasible alternative to
wood crossties in limited circumstances. In 1991, the Company acquired a 50%
partnership interest in KSA Limited Partnership ("KSA"), a concrete crosstie
manufacturing facility in Portsmouth, Ohio, in order to take advantage of this
growth opportunity. In 1999, an estimated 1.0 million concrete crossties, or
5% of total tie insertions, were installed by Class 1 railroads. The Company
believes that concrete ties will continue to command approximately this level
of market share. KSA produced approximately 145,000 concrete crossties in
1999, or 15% of the U.S. estimated concrete tie market. While the cost of
material and installation of a concrete tie is much higher than that of a wood
tie, the average life of wood and concrete ties are similar, although concrete
generally performs better in high weight bearing, high traffic areas and is
attractive to railroads for these purposes.
Utility poles are produced mainly from softwoods such as pine and fir, which
have been subject to steady price increases in recent years due primarily to
increased demand for softwood materials in the paper and construction
industries. The majority of the softwood used for poles is purchased from
large timber owners and individual landowners and shipped to one of the
Company's pole-peeling facilities. While crossties are treated exclusively
with creosote, the Company treats poles with a variety of preservatives
including pentachlorophenol ("Penta"), CCA and creosote.
The market for utility pole products is characterized by a large number of
smaller, highly competitive producers selling into a price-sensitive industry.
The utility pole market is highly fragmented domestically with over 300
investor-owned electric and telephone utilities and 1,800 smaller municipal
utilities and Rural Electric Associations ("REAs"). Approximately 2.4 million
poles are purchased annually in the United States, with a smaller market in
Australia. From 1996 to 1999, the Company has seen its utility pole volumes
decrease due to industry deregulation and its impact on maintenance programs.
The Company expects demand for utility poles to remain at lower levels. In
Australia, the Company markets its products primarily to the utility,
agricultural, landscape and vineyard markets.
In 1999, pole products accounted for approximately one-fourth of Railroad &
Utility Products' net sales. Principal competitors in the utility products
market are McFarland Cascade, North Pacific Lumber and Atlantic Wood
Industries Inc. There are few barriers to entry in the utility products
market, estimated by the Company to consist of mostly regional wood treating
companies which typically operate small to medium size plants and serve local
clients.
Equity Investments and Related Parties
Tarconord
Tarconord, with one operating location in Denmark and three in the United
Kingdom, produces and markets carbon pitch, naphthalene and related products
for the European and Middle Eastern markets. The Company's 50% partner in
Tarconord is Tarco A/S, a road paving and industrial piping company also
located in Denmark.
Tarconord markets its primary product, carbon pitch, to aluminum producers
in Norway, the Netherlands and northern Germany. Coal tar supplies are
primarily purchased from steel producers in Scandinavia, Poland, the states of
the former Soviet Union, Germany and the United Kingdom.
Tarconord helps to position the Company as not only one of the two largest
carbon pitch suppliers in the world, but also as the only such supplier
operating on four continents. Management believes that this global presence
represents a significant competitive advantage in serving multinational and
domestic aluminum manufacturers.
Domestic Joint Venture: KSA
KSA, located in Portsmouth, Ohio, produces concrete crossties, a
complementary product to the Company's treated wood crosstie business.
7
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Other interests are held by Sherman International Corp. (24%), Abetong
America, Inc. (24%) and Sherman Abetong, Inc. (2%). KSA was formed to
construct, own and operate a concrete railroad crosstie manufacturing facility
located in Portsmouth, Ohio. KSA's major customer is CSX Transportation, Inc.
("CSX"). It has also expanded its product offerings to include concrete
turnouts, used in rail traffic switching, and used crosstie rehabilitation.
The following table presents total sales, equity in earnings and dividends
received with respect to each of the Company's significant joint ventures,
excluding Koppers Australia which is now consolidated, for the years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
------------------------
(Dollars in millions)
<S> <C> <C> <C>
Tarconord
Total sales.......................................... $ 90.8 $ 94.1 $ 107.1
Equity in earnings................................... 0.9 0.0 1.7
Dividends received................................... 0.0 0.6 1.2
KSA
Total sales.......................................... $ 13.9 $ 17.8 $ 13.2
Equity in earnings................................... 0.5 1.8 1.2
Dividends received................................... 2.0 0.5 1.3
</TABLE>
Research and Development
As of December 31, 1999, the Company had eleven full-time employees engaged
in research and development and technical service activities. The Company's
research efforts are directed toward further development and utilization of
products and technology developed from coal tar and technical service efforts
to promote further use of creosote. The Company believes the research and
technical efforts currently expended in these areas are adequate to maintain a
leadership position in the technology related to these products. Expenditures
for research and development for 1999, 1998 and 1997 were $2.1 million, $2.3
million and $1.8 million, respectively.
Technology and Licensing
In 1988, Koppers acquired certain assets from Old Koppers including the
patents, patent applications, trademarks, copyrights, transferable licenses,
inventories, trade secrets, and proprietary processes used in the businesses
acquired. The most important trademark acquired was the name "Koppers." The
association of the name with the chemical, building, wood preservation and
coke industries is beneficial to the Company, as it represents longstanding,
high-quality products. Included in the patents that were acquired by Koppers
were patents for pitch quality controls (both in tar plants and aluminum
plants), wood preservatives and additives, and tar distillation.
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
8
<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 alleged violations of or liability under Environmental Laws.
In addition, Koppers Australia holds licenses issued by the various
regulatory authorities which regulate the use and management of chemicals
stored on operational sites and the management of discharges to air,
surface/groundwater and waste disposal.
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. 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. The Company has
provided all requested information and appropriate technical information
clarifying a number of issues leading to allegations of violation by the EPA.
The Company remains in discussions with the EPA. The EPA has not proposed a
penalty or suggested a range in which a penalty, if any, might be sought.
While the Company has prepared 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 prior to its
closure in January 1998, 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, Louisiana wood treating
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.
For the last three fiscal years, the Company's capital expenditures for
environmental matters averaged approximately $6 million, and operating
expenses for environmental matters, excluding depreciation, averaged
approximately $10 million. The Company currently estimates that capital
expenditures in connection with matters relating to environmental control will
be approximately $6 million for 2000. Because Environmental Laws have
historically become more stringent, costs and expenses relating to
environmental control and compliance may increase in the future. Also, Koppers
may have to incur additional capital expenditures and compliance costs (which
it is unable to estimate at this time) in connection with the resolution of
the EPA matters. As such, there can be no assurance that costs of compliance
with existing and future Environmental Laws will not exceed current estimates
and will not have a material adverse effect on the business, financial
condition, cash flow and results of operations of the Company.
9
<PAGE>
Under the terms of the Asset Purchase Agreement between the Company and Old
Koppers (now known as Beazer East, Inc.) at the formation of Koppers in 1988,
Beazer East assumed the liability for and indemnified Koppers against (among
other things) cleanup liabilities for contamination occurring prior to the
purchase date at sites acquired from Beazer East, and third-party claims
arising from such contamination under the Indemnity. Beazer East's performance
of the Indemnity is unconditionally guaranteed by Beazer Limited under the
Guarantee. The obligations of Beazer Limited under the Guarantee may be
enforced directly against Beazer Limited without notice of default to Beazer
East and without making any demand on, obtaining any judgment or order or
commencing any legal proceeding against, or taking any other action against
Beazer East. Beazer East is actively fulfilling its obligations to conduct
investigative, cleanup and closure programs at the properties which Koppers
acquired from Beazer East in accordance with the requirements of regulatory
authorities. The Indemnity is not applicable to sites acquired since the
formation of Koppers, for which separate indemnifications have been negotiated
where appropriate. Management believes that for the last three years amounts
paid by Beazer East under the Indemnity have averaged approximately $11
million per year. 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, and if Koppers was required to pay such costs,
it could have a material adverse effect on the business, financial condition,
cash flow and results of operations of the Company. Furthermore, if Koppers
was required to record a contingent liability in respect of environmental
matters covered by the Indemnity on its balance sheet, the result could be
that Koppers would have significant negative net worth.
Five of the sites owned and/or operated by Koppers are listed on the
National Priorities List ("NPL") promulgated under CERCLA. These sites are the
Feather River, California wood treating facility, the Gainesville, Florida
wood treating facility, the Galesburg, Illinois wood treating facility, the
Florence, South Carolina wood treating facility, and the Follansbee, West
Virginia carbon materials and chemicals facility. In addition, many of
Koppers' sites are or have been operated under RCRA permits, and RCRA remedial
and closure activities are being conducted on several such sites. Currently,
at the properties acquired from Beazer East (which include all of the NPL
sites and all but one of the RCRA-permitted sites), substantially all
investigative, cleanup and closure activities are being conducted and paid for
by Beazer East pursuant to the terms of the Indemnity. In regard to
environmental claims or environmental cleanup liabilities, the Indemnity
provides four different mechanisms by which Beazer East will indemnify
Koppers. First, if the claim or liability involves hazardous substances that
were generated at facilities owned or operated before the Acquisition and
disposed of at third-party locations before the Acquisition, then Beazer East
will indemnify Koppers regardless of when the claim or liability is asserted.
Second, if the claim involves a personal injury asserted by an employee as a
result of exposure to toxic substances in the workplace, then the claim is
allocated in proportion to the length of time the employee worked for each
entity. Third, if the claim involves costs for disposal of contaminated soil
from facilities owned or operated before the Acquisition and generated as a
result of a voluntary decision by Koppers, then Beazer East will indemnify
Koppers for ninety percent (90%) of all disposal costs over $0.1 million in
any single year. Fourth, if the claim or cleanup liability involves
investigation, response, removal, or remedial costs at facilities owned or
operated before the Acquisition and for conditions occurring or existing prior
to the Acquisition, then Beazer East will indemnify Koppers provided the claim
or liability is a pre-Acquisition environmental claim or a pre-Acquisition
environmental cleanup liability. A claim or liability can acquire the pre-
Acquisition status two ways. It can be asserted by a third party (someone
other than Koppers) before the twelfth anniversary of the Acquisition
(December 29, 2000), or Beazer East can receive from anyone, including
Koppers, "specific and particularized notice with respect to acts, omissions,
conditions or circumstances that may give rise" to the claim or liability
before the twelfth anniversary of the Acquisition.
Costs and liabilities associated with investigative, cleanup and closure
activities at the NPL sites and RCRA-permitted facilities acquired from Beazer
East are expected to be significant. While Beazer East has retained and
accepted responsibility for investigative, cleanup and closure activities
relating to pre-Acquisition contamination at such properties (including being
the signatory on several consent agreements relating to such sites) and has
paid, to date, for substantially all such investigative, remedial and closure
costs, the government has the right under applicable Environmental Laws to
seek relief directly from Koppers for any and all such pre-Acquisition
10
<PAGE>
obligations and liabilities at or on sites owned or operated by Koppers.
Although Beazer East and Beazer Limited have performed their respective
obligations since 1989, there can be no assurances that Beazer East and Beazer
Limited will continue to meet their obligations under the Indemnity and the
Guarantee, respectively. Since 1991, Beazer East and Beazer Limited have been
wholly-owned indirect subsidiaries of Hanson PLC.
In addition, Beazer East has defended and is presently defending certain
toxic tort actions arising from the pre-Acquisition operation of assets which
the Company acquired from Beazer East. These tort actions were not assumed by
Koppers under the Asset Purchase Agreement and are within the scope of the
Indemnity.
The Company has been named in two toxic tort actions. The first action
arises from the Company's operations at its wood treating facility in Green
Spring, West Virginia ("Green Spring"). Plaintiff allegations include various
personal injury and property damage theories related to plant operations from
the mid-1940's through 1992. As a result of a lawsuit among CSX, Beazer East
and the Company, CSX has assumed Beazer East's obligations under the Indemnity
in connection with Green Spring. There can be no assurance that CSX will
perform its obligations and if Koppers was required to pay such costs, it
could have a material adverse effect on the business, financial condition,
cash flow and results of operations of the Company. The Company has also been
informed that it has been named in a toxic tort action that arises from its
operation at its wood treating facility in North Little Rock, Arkansas.
Plaintiff allegations include various property damage and personal injury
theories related to plant operations for an unspecified period of time. The
Company is currently unable to estimate a range of potential loss, if any,
related to these matters, and the Company's insurance carriers have been
notified. Although management believes that some or all of the claims in these
matters are within the scope of the Indemnity, 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.
In 1997 Koppers evaluated the environmental liabilities related to the
manufacturing sites associated with the Acquisition. The evaluation was based
on a report prepared by an independent consultant, which utilized site-
specific public information to the extent available, as supplemented by (among
other things) its technical knowledge and expertise, published resources
regarding costing of remediation techniques and specified technical cost and
regulatory assumptions. The evaluation and report estimated that approximately
$111.1 million would be expended at these sites for environmental remediation
during the period of 1998 to 2042. Koppers estimates that approximately $92.9
million of this amount is covered under the Indemnity, that it is responsible
for $0.1 million, and that identified third parties are responsible for the
remaining $18.1 million. Information derived from the independent consultant's
report indicates that, for the years ending December 31, 2000, 2001 and 2002
environmental expenses will total approximately $6.9 million, $9.1 million and
$10.8 million, respectively. There can be no assurance, however, that the
actual liabilities associated with the investigation, cleanup and closure of
these sites will not exceed this estimate. The factors that could affect the
continuing validity of the estimate include: new information about the
contamination at the sites that is contrary to previous assumptions, new
interpretations of existing Environmental Laws, new and more stringent
Environmental Laws, and more vigorous enforcement policies of regulatory
authorities. Further, in the event that Beazer East does not fulfill its
commitments under the Indemnity or the identified third parties do not fulfill
their commitments, Koppers may be required to pay costs that would 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.
The Indemnity does not afford Koppers indemnification against environmental
costs and liabilities relating to activities or conditions occurring or
arising after the Acquisition, nor does the Indemnity cover liabilities
arising in connection with post-Acquisition acquisitions.
11
<PAGE>
At the acquisition of 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.
Koppers purchased a wood treating facility located in Somerville, Texas from
Atchison, Topeka & Santa Fe Railway Company ("Santa Fe") in March 1995. At the
time of the purchase there were several existing environmental issues at the
facility. Santa Fe retained responsibility for remediating and monitoring all
closed solid waste units and surface impoundments at the facility that were in
existence at the time of the sale. Santa Fe indemnified Koppers for all
violations of Environmental Laws or releases of hazardous substances or
petroleum products that occurred before the sale. In addition, for the first
twelve years following the sale, Santa Fe is obligated to indemnify Koppers
for costs that exceed a specified annual cap ($50,000) when such costs arise
from a construction project that Koppers voluntarily initiates and also arise
from complying with Environmental Laws governing containment, disposal or
monitoring of hazardous substances at the site.
Koppers purchased a tar distillation facility located in Clairton,
Pennsylvania from Aristech in April 1996. This tar distillation facility is
located within the boundaries of a coke facility owned and operated by U.S.
Steel Group, Inc. ("U.S. Steel"), a subsidiary of USX. USX had sold the tar
distillation facility to Aristech in 1986. At the time of the purchase there
were several existing environmental issues at the tar distillation facility.
When USX sold the tar distillation facility to Aristech, it provided Aristech
with a broad indemnity for environmental contamination that predated the 1986
sale of the tar distillation facility to Aristech. When Koppers purchased the
tar distillation facility from Aristech, it assumed Aristech's obligations and
gained Aristech's protections under the USX indemnity agreement. The principal
obligation is that Koppers must pay for ten percent (10%) of the environmental
remediation costs incurred by USX in implementing a consent decree concerning
the tar distillation facility and USX's surrounding coke facility, up to a
maximum combined payment by both Koppers and Aristech of $0.5 million. Prior
to Koppers' purchase of the tar distillation facility, Aristech had made
payments of approximately $0.2 million under the USX indemnity agreement. To
date, Koppers has not made any payments under this indemnity provision. As
part of the agreement with Aristech, Koppers agreed to indemnify Aristech for
environmental claims arising from operations at the tar distillation facility.
However, the requirement for Koppers to indemnify Aristech has several
exceptions, including but not limited to: claims for which USX will provide
indemnification, personal injury claims arising from a pre-sale chemical
release, and any incident listed on a schedule to the asset purchase
agreement.
At the Clairton facility, the Somerville facility and the Monessen Facility
(all of which Koppers acquired subsequent to the acquisition of the Beazer
East properties), remedial actions are being performed in accordance with
applicable regulations and all indemnification obligations are being honored
at the Clairton and Somerville facilities. The Company believes that the
sellers (or their predecessors) at both of these sites will conduct and
finance most investigative and cleanup activities directly. Although the
Company is not aware of any reason why such indemnification obligations will
not be performed, if Koppers were required to pay costs associated with
environmental contamination at these two sites, it could have a material
adverse effect on the business, financial condition, cash flow and results of
operations of the Company. The Monessen Facility was purchased pursuant to a
bankruptcy sale. Although an environmental indemnification was provided by the
seller of that facility to Koppers, Koppers does not expect that such
indemnification obligations will be honored. If contamination at the Monessen
Facility should be discovered which has not been 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.
Koppers has made other asset acquisitions that involved the purchase of real
property. While environmental indemnifications were obtained as part of the
transactions, the limited financial resources of the selling parties
12
<PAGE>
makes fulfillment of these indemnifications unlikely. Material pre-purchase
environmental conditions identified during the due diligence leading up to
these acquisitions were addressed either before the purchase or immediately
afterwards.
On occasion, Australian operations have been served with notices relating to
environmental compliance issues arising in connection with their 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. As recommended in a recently completed environmental audit, and
from comments made by the environmental authorities, the Mayfield plant is now
required to notify that it is a "contaminated site" under a Section 60
notification to the environmental authorities. This notification is expected
to be made by March 31, 2000. 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.
Employees and Employee Relations
As of January 31, 2000, the Company employed 593 salaried employees and
1,311 hourly employees. Listed below is a breakdown of employees by business
segment, including administration.
<TABLE>
<CAPTION>
Non-
Division Salaried Salaried Total
- -------- -------- -------- -----
<S> <C> <C> <C>
Carbon Materials & Chemicals............................ 196 555 751
Railroad & Utility Products............................. 312 749 1,061
Administration.......................................... 85 7 92
--- ----- -----
Total Employees....................................... 593 1,311 1,904
=== ===== =====
</TABLE>
Of the Company's 1,904 employees, approximately 59% are represented by 16
different unions and covered under 26 separate labor contracts. The United
Steelworkers of America, covering workers at six facilities, accounts for the
largest membership with more than 300 employees. Another significant
affiliation is the Paper, Allied-Industrial, Chemical & Energy Workers'
International Union (PACE), with approximately 250 employees at four
facilities. Labor contracts expiring in 2000 represent approximately 20% of
total employees.
13
<PAGE>
ITEM 2. Properties
The principal fixed assets of the Company consist of its production,
treatment, and storage facilities and its transportation and plant vehicles.
Its production facilities consist of 13 Carbon Materials & Chemicals
facilities and 22 Railroad & Utility Products facilities. See "Business--
Carbon Materials & Chemicals," and "Business--Railroad & Utility Products". As
of December 31, 1999, vehicles and equipment represented approximately 35% of
the Company's total assets, as reflected in its consolidated balance sheet.
The following chart sets forth information regarding the Company's facilities:
<TABLE>
<CAPTION>
Description of
Segment/Primary Product Line Location Acreage Property Interest
- ---------------------------- -------- ------- -----------------
<S> <C> <C> <C>
Carbon Materials &
Chemicals
Wood Preservation
Chemicals Auckland, New Zealand 1.3 Leased
Carbon Pitch Clairton, Pennsylvania 17 Owned
Wood Preservation
Chemicals Christchurch, New Zealand 1.4 Owned
Wood Preservation
Chemicals Fiji .7 Owned
Carbon Pitch Follansbee, West Virginia 32 Owned
Carbon Black Kurnell, New South Wales 20 Leased
Carbon Pitch Mayfield, New South Wales 26 Owned
Furnace Coke Monessen, Pennsylvania 45 Owned
Wood Preservation
Chemicals Penang, Malaysia 3 Leased
Carbon Pitch Portland, Oregon 6 Leased
Carbon Pitch, PAA Stickney, Illinois 38 Owned
Wood Preservation
Chemicals Trentham, Victoria 24 Owned
Carbon Pitch Woodward, Alabama 23 Owned
Railroad & Utility
Products
Prefabricated Rail
Sections Alorton, Illinois 12.2 6.6 Leased, 5.6 Owned
Utility Poles, Railroad
Crossties Bunbury, Western Australia 26 Owned
Utility Poles, Railroad
Crossties Denver, Colorado 64 Owned
Utility Poles Feather River, California 56 Owned
Utility Poles, Railroad
Crossties Florence, South Carolina 200 Owned
Utility Poles Gainesville, Florida 86 Owned
Railroad Crossties Galesburg, Illinois 125 Leased
Utility Poles Grafton, New South Wales 100 Owned
Railroad Crossties Green Spring, West Virginia 98 Owned
Utility Poles, Railroad
Crossties Grenada, Mississippi 154 Owned
Railroad Crossties Guthrie, Kentucky 122 Owned
Pine Products Hume, Australia Capital Territory 50 99 Year Lease
Utility Poles Logansport, Louisiana 30 Owned
Utility Poles Longford, Tasmania 16.5 Owned
Utility Poles, Railroad
Crossties Montgomery, Alabama 84 Owned
Railroad Crossties N. Little Rock, Arkansas 148 Owned
Railroad Crossties Roanoke, Virginia 91 Owned
Railroad Crossties Somerville, Texas 244 Owned
Railroad Crossties Superior, Wisconsin 120 Owned
Railroad Crossties Susquehanna, Pennsylvania 109 Owned
Pine Products Takura, Queensland 75 Owned
Utility Poles Thornton, New South Wales 15 Owned
</TABLE>
The Company's corporate offices are located in approximately 50,000 square
feet of leased office space in the Koppers Building, Pittsburgh, Pennsylvania.
The office space is leased from Axiom Real Estate Management, Inc. pursuant to
an 11-year lease, with the initial term expiring December 31, 2003. The lease
provides for an additional five-year renewal option.
14
<PAGE>
ITEM 3. Legal Proceedings
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
as was 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. In 1999 the Company
relinquished emission reduction credits and paid a fine of $10,000 in full
settlement of this matter with Jefferson County. However, 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. See "Business--
Environmental Matters."
The Company is involved in various other proceedings relating to
environmental laws and regulations. See "Business--Environmental Matters."
The Company is involved in various other proceedings incidental to the
ordinary conduct of its business. The Company believes that none of these
other proceedings will have a material adverse effect on the business,
financial condition, cash flow and results of operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
At a joint meeting of the Board of Directors and shareholders on November
10, 1999, amendments to the Company's Stockholders' Agreement and Stock Option
Plans were ratified by unanimous vote. The amendment to the Stockholders'
Agreement provides for the redemption by the Company of its common stock for
charitable contributions. The amendment to the Company's Stock Option Plans
allows option shares to be used for statutory tax withholdings upon exercise.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Currently, there is no established public trading market for the Company's
common stock. At March 1, 2000 the Company had 1.4 million shares of common
stock outstanding. Of the total, 1.1 million shares of common stock were owned
by approximately 200 Management Investors, with the remainder owned by the
Company's Employee Savings Plan. The terms and conditions of ownership,
including voting rights and dividends, are governed by the Restated Articles
of Incorporation of the Company and the stockholders' agreement by and among
the Company, Saratoga and the Management Investors, dated as of December 1,
1997 (as amended, the "Stockholders' Agreement"). See "Directors and Executive
Officers of the Registrant--Stockholders' Agreement."
Each share of common stock has an equal and ratable right to receive
dividends to be paid from the Company's assets legally available therefore
when, as, and if declared by the Board of Directors. The declaration and
payment of dividends on the common stock are subject to the Company's credit
and loan agreements, are subject to the provisions of the indenture which
governs the Company's 9 7/8% Senior Subordinated Notes due 2007 (the
"Subordinated Notes"), are subject to the supermajority vote requirements of
the Stockholders' Agreement, and are subject to the provisions of any series
of preferred stock, including the Preferred Shares held by Saratoga, which
may, at the time, be outstanding. On February 25, May 30, and August 29, 1997
the Company declared dividends of $0.085 per common share and common share
equivalent. There were no dividends declared or paid in 1998 or 1999.
15
<PAGE>
ITEM 6. Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In millions except shares figures)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales................. $ 664.1 $ 670.6 $ 593.1 $ 588.5 $ 525.7
Cost of sales........... 548.9 553.5 501.4 496.1 440.7
Depreciation and
amortization........... 27.1 30.6 23.5 21.8 17.5
Selling, general and
administrative......... 37.4 39.9 28.1 27.5 27.6
Restructuring charges
(1).................... -- (1.0) 45.4 15.5 --
------- ------- ------- ------- -------
Operating profit (loss)... 50.7 47.6 (5.3) 27.6 39.9
Equity in earnings of
affiliates............... 1.7 2.4 5.3 9.6 9.2
Other income (expense)
(2)...................... 0.8 -- (1.4) (12.6) 0.4
Interest expense.......... 28.1 29.7 17.3 16.6 15.1
------- ------- ------- ------- -------
Income (loss) before
income tax provision
(benefit),
minority interest and
extraordinary item....... 25.1 20.3 (18.7) 8.0 34.4
Income tax provision
(benefit)................ 0.2 (0.3) (19.7) (6.1) 10.0
Minority interest......... 0.7 0.5 -- -- --
------- ------- ------- ------- -------
Income before
extraordinary item....... $ 24.2 $ 20.1 $ 1.0 $ 14.1 $ 24.4
======= ======= ======= ======= =======
Net income (loss) (3).......$ 24.2 $ 20.1 $ (5.7) $ 14.1 $ 24.4
======= ======= ======= ======= =======
Earnings per share of
common stock before
extraordinary item:
Basic earnings per share
of common stock........ $ 16.70 $ 12.64 $ 0.17 $ 1.54 $ 3.18
======= ======= ======= ======= =======
Diluted earnings per
share of common stock.. $ 6.23 $ 4.85 $ 0.12 $ 1.47 $ 2.36
======= ======= ======= ======= =======
Earnings (loss) per share
of common stock:
Basic earnings (loss) per
share of common stock.... $ 16.70 $ 12.64 $ (0.92) $ 1.54 $ 3.18
======= ======= ======= ======= =======
Diluted earnings (loss)
per share of common
stock.................... $ 6.23 $ 4.85 $ (0.65) $ 1.47 $ 2.36
======= ======= ======= ======= =======
Balance Sheet Data (end of
period):
Working capital........... $ 97.3 $ 104.9 $ 109.2 $ 77.7 $ 80.1
Total assets.............. 477.7 477.6 500.2 411.2 349.0
Total debt (4)............ 309.8 332.7 320.7 209.9 174.0
Preferred stock (5)....... -- -- -- -- 0.3
Common stock subject to
redemption (6)........... 25.6 21.1 26.4 24.0 23.7
Common equity............. 7.8 (8.6) (14.6) 54.1 54.3
Other Data:
Cash dividends per common
share.................... $ -- $ -- $ 0.26 $ 0.34 $ 0.25
Capital expenditures...... 22.5 20.2 19.8 21.7 15.2
Acquisitions and related
capital expenditures..... 1.7 2.6 34.1 39.5 34.9
</TABLE>
- --------
(1) The 1997 charges were comprised of $39.9 million related to the closure of
Woodward Coke and $5.5 million related to the Feather River, California
co-generation and wood treating facilities. In 1998, approximately $1.0
million of plant closing reserves were credited to income as the result of
a negotiated reduction in a contractual penalty obligation related to the
Feather River, California cogeneration facility. The 1996 charges included
$7.4 million primarily related to the closing of the Company's tar
distillation facility located in Houston, Texas, $5.4 million of charges
related to capacity rationalization at Woodward Coke, and $2.6 million of
severance charges for salaried employees as a result of workforce
reductions at various locations. See Note 2 of the Notes to Consolidated
Financial Statements of the Company.
(2) Other income for 1999 consists of proceeds from the monetization of tax
credits from the Monessen Facility based on December 1999 coke production.
See Note 7 of the Notes to Consolidated Financial Statements of the
Company. Other expense for 1997 is for the write-off of expenses related
to an Initial Public Offering
16
<PAGE>
which was withdrawn in 1997. Other expense for 1996 consists of a $10.1
million charge related to a settlement for a legal judgment rendered against
the Company in connection with product liability claims from the Company's
roofing business for years prior to the formation of the Company in 1988
(the "OCF Settlement"), and a $2.5 million legal settlement to CSX.
(3) Net income for 1997 includes extraordinary loss on early extinguishment of
debt of $6.7 million. See Note 4 of the Notes to Consolidated Financial
Statements of the Company.
(4) The Company sold $175.0 million of Subordinated Notes on December 1, 1997
in a private placement and established with Swiss Bank Corporation,
Stamford Branch and Mellon Bank, N.A. a total of $135.0 million of senior
term loan facilities and a $140.0 million senior revolving credit facility
($40.0 million and $20.0 million of which was reserved for use in
connection with a term loan and a revolving credit facility, respectively,
of Koppers Australia). See Note 4 of the Notes to Consolidated Financial
Statements of the Company.
(5) On December 1, 1997 the Company converted 2.1 million shares of voting and
non-voting common stock held by Saratoga into 2.1 million Preferred Shares,
which entitles Saratoga to elect a majority of the Board of Directors and
to exercise a majority of the voting power over all outstanding stock of
the Company with respect to all other matters subject to a stockholder
vote. See Note 5 of the Notes to Consolidated Financial Statements of the
Company.
(6) Represents the amount necessary to redeem stock held by Management
Investors upon termination of their employment with the Company pursuant to
the Stockholders' Agreement. See Note 5 of the Notes to Consolidated
Financial Statements of the Company.
ITEM 7. 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>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales (In millions):
Carbon Materials & Chemicals............... $ 356.2 $ 346.7 $ 285.9
Railroad & Utility Products................ 307.7 320.7 255.2
All Other.................................. 0.2 3.2 52.0
-------- -------- --------
Total.................................... $ 664.1 $ 670.6 $ 593.1
======== ======== ========
Segment sales as percent of total net sales:
Carbon Materials & Chemicals............... 53.6% 51.7% 48.2%
Railroad & Utility Products................ 46.4% 47.8% 43.0%
All Other.................................. 0.0% 0.5% 8.8%
-------- -------- --------
Total.................................... 100.0% 100.0% 100.0%
Gross margin by segment (after depreciation
and amortization):
Carbon Materials & Chemicals............... 14.1% 14.5% 16.8%
Railroad & Utility Products................ 12.6% 11.3% 10.9%
All Other.................................. (0.1)% (0.3)% (1.5)%
-------- -------- --------
Total.................................... 13.3% 12.6% 11.3%
Operating margin by segment:
Carbon Materials & Chemicals............... 8.0% 7.9% 11.2%
Railroad & Utility Products................ 7.8% 7.0% 4.0%
All Other.................................. (0.3)% (0.3)% (8.0)%
-------- -------- --------
Total.................................... 7.6% 7.1% (0.9)%
</TABLE>
17
<PAGE>
Comparison of Results of Operations for the Years Ended December 31, 1999 and
1998.
Net Sales. Net sales for the year ended December 31, 1999 were lower than
the same period in 1998, as lower sales for Railroad & Utility Products offset
higher sales for Carbon Materials & Chemicals. Net sales for Carbon Materials
& Chemicals increased compared to the prior year period due to an increase in
sales for PAA as a result of higher pricing and volumes. Net sales for
Railroad & Utility Products decreased compared to the prior year due to
reductions in sales volumes for railroad crossties. Net sales for All Other
represent liquidation of remaining inventories at Woodward Coke.
Gross Profit after Depreciation and Amortization. As a percent of net sales,
gross profit after depreciation and amortization increased due to higher
margins for Railroad & Utility Products. Gross margin for Carbon Materials &
Chemicals decreased primarily as a result of a 4.3% reduction in furnace coke
prices as compared to the prior year period. Gross margin for Railroad &
Utility Products increased due to higher volumes and prices for crosstie sales
to commercial markets coupled with higher prices for utility poles.
Depreciation and Amortization. The decrease in depreciation and amortization
for 1999 as compared to the prior year was due primarily to certain assets
becoming fully depreciated in 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expense as a percent of net sales decreased as a result of
lower consulting and Year 2000 computer costs than in the prior year period.
Equity in Earnings of Affiliates. Equity earnings for 1999 were lower than
the prior year period as a reduction in earnings for KSA was more than the
increase in earnings for Tarconord.
Interest Expense. Interest expense decreased in 1999 as compared to the
prior year due to lower debt levels.
Income Taxes. The Company's effective income tax rate for the year ended
December 31, 1999 increased due to higher taxable earnings in 1999 and the
reduction in available tax credits as a result of the Monessen Transaction.
The reduction from statutory rates for both years was due primarily to tax
credits related to the Monessen Facility.
Net Income. Net income for 1999 compared to the same period last year
increased due to higher earnings from both of the Company's operating segments
coupled with lower interest expense in 1999.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997.
Net Sales. Net sales for the year ended December 31, 1998 were higher than
the same period in 1997, as approximately $105 million of net sales from the
acquisition of Koppers Australia more than offset a reduction of $52.0 million
of sales as a result of the closure of Woodward Coke. Net sales for Carbon
Materials & Chemicals increased as Koppers Australia contributed $84.8 million
of net sales to this segment. Net sales for the domestic portion of Carbon
Materials & Chemicals decreased compared to the prior year period due to
reductions in sales for PAA as a result of lower pricing coupled with
reductions in carbon pitch volumes. Net sales for Railroad & Utility Products
increased compared to the prior year due to $20.6 million in net sales from
Koppers Australia coupled with increases in sales volumes and prices for
railroad crossties. Net sales for All Other represent liquidation of remaining
inventories at Woodward Coke.
Gross Profit after Depreciation and Amortization. As a percent of net sales,
gross profit after depreciation and amortization increased due to the positive
effects of the ceasing of operations at Woodward Coke and the acquisition of
Koppers Australia more than offsetting lower PAA prices and lower carbon pitch
volumes in 1998. Gross margins for Carbon Materials & Chemicals decreased as a
result of a 23.5% reduction in PAA prices as compared to the prior year
period, coupled with higher unit costs for carbon pitch as a result of lower
production volumes in 1998. Gross margin for Railroad & Utility Products
increased due to higher volumes and prices for railroad crossties.
18
<PAGE>
Depreciation and Amortization. The increase in depreciation and amortization
for 1998 as compared to the prior year was due to additional depreciation and
amortization for Koppers Australia more than offsetting the reduction in
depreciation as a result of the closure of Woodward Coke.
Selling, General and Administrative Expense. Selling, general and
administrative expense as a percent of net sales increased as a result of the
consolidation of Koppers Australia and $1.8 million of Year 2000 computer
costs more than offsetting $0.8 million of severance charges in the prior year
period.
Restructuring Charges. The restructuring credit for 1998 was the result of a
negotiated reduction in a contractual penalty obligation related to the
Feather River, California cogeneration facility. Restructuring charges for
1997 included $39.9 million related to the closing of Woodward Coke and $5.5
million related to the closing of the cogeneration facility and write-down of
assets at the adjacent wood treating facility located in Feather River,
California.
Equity in Earnings of Affiliates. Equity earnings for 1998 were lower than
the prior year period as a result of the consolidation of Koppers Australia
coupled with lower earnings from Tarconord A/S in 1998 due to difficult market
conditions for carbon pitch in Europe.
Interest Expense. Interest expense increased in 1998 as compared to the
prior year due to higher debt levels in 1998 as a result of the Company's debt
refinancing.
Income Taxes. The Company's effective income tax rate for the year ended
December 31, 1998 increased due to restructuring charges of $45.4 million and
an extraordinary loss of $9.6 million in 1997. The reduction from statutory
rates for both years was due primarily to energy tax credits at the Monessen
Facility.
Net Income. Net income for 1998 compared to the same period last year
increased primarily as the result of non-recurring charges in 1997 coupled
with earnings from Koppers Australia in 1998 more than offsetting lower
earnings from the domestic Carbon Materials & Chemicals business and higher
interest expense in 1998.
Earnings Per Share. Earnings per share for 1998 were positively impacted by
approximately $55 million of net share repurchases from December 1997 through
April 1998.
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 December 31, 1999 the Company had $30.1 million of revolving credit
availability for working capital purposes, subject to restrictions imposed
under various covenants related to the Company's debt agreements. As of
December 31, 1999, $11.2 million of commitments were utilized by outstanding
standby letters of credit.
The Company sold $175.0 million of 9 7/8% Senior Subordinated Notes due 2007
on December 1, 1997 in a private placement and established with Swiss Bank
Corporation, Stamford Branch and Mellon Bank, N.A. a total of $135.0 million
of senior term loan facilities and a $140.0 million senior revolving credit
facility ($40.0 million and $20.0 million of which was reserved for use in
connection with a term loan and a revolving credit facility, respectively, of
Koppers Australia) (the "New Credit Facilities"). The proceeds from the New
Credit Facilities were used to complete the following transactions: (i) the
acquisition of Broken Hill's 50% interest in Koppers Australia; (ii) the
repayment of $98.9 million of 8 1/2% Senior Notes due 2004 tendered pursuant
to a tender offer, plus $6.4 million of redemption premium thereof; (iii) the
repayment of outstanding indebtedness
19
<PAGE>
of approximately $88.1 million under the Company's term loan and revolving
credit facilities; (iv) the redemption of 1.8 million shares of non-voting
common stock owned by APT Holdings Corporation, an affiliate of Mellon Bank,
N.A. for $22.9 million; (v) the redemption of 0.5 million shares of common
stock for $8.8 million; (vi) the redemption of 0.4 million non-voting shares
of common stock from Saratoga; and (vii) the payment of related fees and
expenses of approximately $16.0 million.
The New Credit Facilities provide for a $70.0 million Term Loan A, $31.5
million of which was outstanding at December 31, 1999 and a $65.0 million Term
Loan B, $54.3 million of which was outstanding at December 31, 1999. In
addition, $30.9 million was outstanding on the Australian term loan at
December 31, 1999. The term loans and the revolving credit facility under the
New Credit Facilities provide for interest at variable rates. At December 31,
1999 the effective rates on the term loans were 8.19% for Term Loan A, 8.71%
for Term Loan B and 7.22% for the Australian term loan.
Substantially all of the Company's assets, including the assets of any
significant subsidiary, are pledged as collateral for the New Credit
Facilities. The New Credit Facilities contain certain covenants which limit
capital expenditures by the Company and restrict its ability to incur
additional indebtedness, create liens on its assets, enter into leases, pay
dividends and make investments or acquisitions. In addition, such covenants
give rise to events of default upon the failure by the Company to meet certain
financial ratios.
Cash provided by operating activities increased due to higher earnings in
1999 and lower outlays related to restructuring charges as compared to the
prior year. Additionally, approximately $6 million of compensation payments
were made in 1998 as a result of the acquisition of Koppers Australia in
December 1997.
Capital expenditures for the Company (excluding acquisitions) increased due
primarily to the Company's ongoing capital expenditures program.
For fiscal year 2000 the Company anticipates capital expenditures of $18.8
million excluding acquisitions. This amount includes environmental capital
expenditures of approximately $6 million, with the remainder for capital
maintenance and improvements. The Company expects to finance 2000 capital
expenditures primarily through cash flow generated from operations. The
Company's projection of 2000 capital expenditures is based on a continuation
of the Company's program to maintain and modernize existing manufacturing
capacity and to comply with existing environmental regulations. The actual
level of capital expenditures may be higher in the event of unforeseen
breakdowns of equipment or changes in environmental requirements, or lower in
the event of inadequate cash flow from operations.
Cash used for financing activities in 1999 was due primarily to net term
debt repayments of $23.1 million, $15.6 million of which was unscheduled
prepayment. Cash used in 1998 was due primarily to $15.0 million of borrowings
used to provide for $20.8 million of purchases of voting and non-voting common
stock. Cash provided in 1997 consisted primarily of net proceeds from the debt
refinancing of approximately $119 million, which was used for i) the
acquisition of Koppers Australia for $63.0 million; ii) the purchase of $34.0
million of non-voting common stock; iii) $16.0 million of fees and expenses
related to the debt refinancing; and iv) $6.4 million of premium payments
related to the redemption of the Company's 8 1/2% Senior Notes due 2004.
Stock Redemptions. In 2000, anticipated stock redemptions for retirees total
$1.8 million, including $1.5 million paid in February 2000 to a former
Director pursuant to the provisions of the Stockholders' Agreement. See
"Certain Relationships and Related Transactions." Additionally, the Company
has offered a stock and stock option redemption program for active employees
for 2000 up to an aggregate maximum redemption amount of $2.0 million.
20
<PAGE>
Impact of Deferred Taxes. Energy tax credits from the Monessen Facility
provided tax benefits to Koppers of approximately $10.2 million, $9.5 million
and $9.3 million in 1999, 1998 and 1997, respectively. The Company has entered
into the Monessen Transaction to monetize substantially all of these tax
credits. Based on the Company's earnings history, along with the
implementation of various tax planning strategies, the Company believes the
deferred tax assets on the Consolidated Balance Sheet at December 31, 1999 are
realizable.
Foreign Operations and Foreign Currency Transactions. The Company is subject
to foreign currency translation fluctuations due to its foreign operations,
the most significant of which is Koppers Australia, which has operations in
Australia and various Pacific Rim nations.
Seasonality; Effects of Weather. The Company's quarterly operating results
fluctuate due to a variety of factors that are outside Koppers' control,
including inclement weather conditions, which in the past have affected
operating results. Operations at several of Koppers' facilities have been
halted for short periods of time during the winter months. Moreover, demand
for some of Koppers' products declines during periods of inclement weather. As
a result of the foregoing, the Company anticipates that it may experience
material fluctuations in quarterly operating results.
Restructuring Charges. At December 31, 1999 approximately $14.1 million of
the cash charges for the 1997 restructuring had been expended. The majority of
the remaining cash expenditures related to the 1997 restructuring are
primarily pension and postretirement benefits expected to be paid over
approximately a ten-year period. Approximately $1.0 million of plant closing
reserves were credited to income for 1998 as the result of a negotiated
reduction in a contractual penalty obligation related to the Feather River,
California cogeneration facility.
Year 2000 Disclosure. Many information systems were expected to experience
disruptions when attempting to process information containing dates subsequent
to December 31, 1999 if they were not successfully remediated. The Company
successfully completed the testing and remediation of all systems prior to
December 31, 1999 and has not experienced any significant Year 2000 problems.
Additionally, none of the Company's significant customers or suppliers has
experienced significant Year 2000 problems which have affected Koppers. The
Company expensed a total of $0.7 million during 1999 in connection with Year
2000 remediation and testing.
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.
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.
21
<PAGE>
Environmental Matters
Like companies involved in similar environmentally sensitive businesses, the
Company's operations and properties are subject to the Environmental Laws. The
Clean Air Act and Clean Water Act, each as amended, impose stringent standards
on air emissions and water discharges, respectively. Under 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 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 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 commitment 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 $11 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 was 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.
22
<PAGE>
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 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. The
Company has provided all requested information and appropriate technical
information clarifying a number of issues leading to allegations of violation
by the EPA. The Company remains in discussions with the EPA. The EPA has not
proposed a penalty or suggested a range in which a penalty, if any, might be
sought. While the Company has prepared 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 prior to its
closure in January 1998, 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, Louisiana wood treating
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.
The Company has been named in two toxic tort actions. The first action
arises from the Company's operations at Green Spring. Plaintiff allegations
include various personal injury and property damage theories related to plant
operations from the mid-1940's through 1992. As a result of a lawsuit among
CSX, Beazer East and the Company, CSX has assumed Beazer East's obligations
under the Indemnity in connection with Green Spring. There can be no assurance
that CSX will perform its obligations and if Koppers was required to pay such
costs, it could have a material adverse effect on the business, financial
condition, cash flow and results of operations of the Company. The Company has
also been informed that it has been named in a toxic tort action that arises
from its operation at its wood treating facility in North Little Rock,
Arkansas. Plaintiff allegations include various property damage and personal
injury theories related to plant operations for an unspecified period of time.
The Company is currently unable to estimate a range of potential loss, if any,
related to these matters, and the Company's insurance carriers have been
notified. Although management believes that some or all of the claims in these
matters are within the scope of the Indemnity, 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 occasion, Australian operations have been served with notices relating to
environmental compliance issues arising in connection with their 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. As recommended in a recently completed environmental audit, and
from comments made by the environmental authorities, the Mayfield plant is now
required to notify that it is a "contaminated site" under a Section 60
notification to the environmental authorities. This notification is expected
to be made by March 31, 2000. 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
23
<PAGE>
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.
ITEM 7a. Market Risk
Like other global companies, Koppers is exposed to market risks relating to
fluctuations in interest rates and foreign currency exchange rates. The
objective of financial risk management at Koppers is to minimize the negative
impact of interest rate and foreign exchange rate fluctuations on the
Company's earnings, cash flows and equity.
To manage the interest rate risks, the Company uses a combination of fixed
and variable rate debt. This reduces the impact of short-term fluctuations in
interest rates. To manage foreign currency exchange rate risks, the Company
uses foreign currency debt to hedge long-term investments in foreign
subsidiaries. This reduces the impact of fluctuating currencies on net income
and equity.
As required by the Securities and Exchange Commission rules, the following
analyses present the sensitivity of the market value, earnings and cash flows
of the Company's financial instruments and foreign operations to hypothetical
changes in interest and exchange rates as if these changes occurred at
December 31, 1999. The range of changes chosen for these analyses reflect the
Company's view of changes which are reasonably possible over a one-year
period. Market values are the present values of projected future cash flows
based on the interest rate and exchange rate assumptions. These forward
looking statements are selective in nature and only address the potential
impacts from financial instruments and foreign operations. They do not include
other potential effects which could impact the Company's business as a result
of these changes.
Interest Rate and Debt Sensitivity Analysis. The Company's exposure to
market risk for changes in interest rates relates primarily to the Company's
long-term debt obligations, including the current portion. As described in
Note 4 of the Notes to Consolidated Financial Statements, the Company has both
fixed and variable rate debt to manage interest rate risk and to minimize
borrowing costs.
At December 31, 1999 the Company had $191.1 million of fixed rate debt and
$118.7 million of variable rate debt, reflecting the Company's strategy of
maintaining variable rate debt at 30%-50% of total debt. For fixed rate debt,
interest rate changes affect the fair market value but do not impact earnings
or cash flows. For variable rate debt, interest rate changes generally do not
affect the fair market value but do impact future earnings and cash flows,
assuming other factors are held constant.
Holding other variables constant (such as debt levels and foreign exchange
rates) a one percentage point decrease in interest rates would increase the
unrealized fair market value of the fixed rate debt by approximately $11.2
million. The earnings and cash flows for the next year assuming a one
percentage point increase in interest rates would decrease approximately $1.2
million, holding other variables constant.
Exchange Rate Sensitivity Analysis. The Company's exchange rate exposures
result primarily from its investment and ongoing operations in Australia.
Holding other variables constant, if there were a ten percent reduction in
exchange rates, the effect on earnings of the Company, based on actual
earnings from foreign operations in 1999, would be a reduction of
approximately $0.8 million.
ITEM 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by Item 8 are
included in this Annual Report on Form 10-K beginning on page 34 and are
listed in Item 14 hereof.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
24
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The following table sets forth the names and ages of the executive officers
and Directors of the Company as of March 1, 2000 and the positions which they
hold. Directors hold their positions until the annual meeting of the
stockholders at which their term expires or until their respective successors
are elected and qualified. Executive officers hold their positions until the
annual meeting of the Board of Directors or until their respective successors
are elected and qualified.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Robert Cizik.... 68 Non-Executive Chairman and Director
Walter W. 53 President and Chief Executive Officer and Director
Turner.........
Clayton A. 68 Director
Sweeney........
N. H. Prater.... 71 Director
Christian L. 40 Director
Oberbeck.......
David M. 52 Director
Hillenbrand....
Donald E. Davis. 43 Vice President and Chief Financial Officer
Thomas D. 45 Vice President and General Manager, Railroad & Utility Products
Loadman........
Kevin J. 47 Vice President and General Manager, Carbon Materials & Chemicals
Fitzgerald.....
Ernest S. Bryon. 54 Vice President, Australasian Operations and Managing Director,
Koppers Australia Pty. Limited
Randall D. 47 Vice President, Safety, Health & Environmental Affairs
Collins........ and Corporate Secretary
Joseph E. Boan.. 53 Vice President, Human Resources
Robert H. 48 Vice President, Technology
Wombles........
M. Claire 46 Treasurer and Assistant Secretary
Schaming.......
</TABLE>
Mr. Cizik was elected Non-Executive Chairman in July 1999. Mr. Cizik has
been a Director of Koppers since January 1999. Mr. Cizik retired from Cooper
Industries, Inc. where he served as President, Chief Executive Officer and
Chairman of the Board from 1973 to 1996. He currently serves as Non-Executive
Chairman of Stanadyne Automotive and as a Director of Air Products and
Chemicals Inc. and Temple-Inland Inc. He previously served as a Director of
Harris Corporation from 1988 until November 1999.
Mr. Turner was elected President, Chief Executive Officer and Director in
February 1998. Mr. Turner had been appointed Vice President and General
Manager, Carbon Materials & Chemicals division in early 1995. Mr. Turner had
been elected Vice President and Manager, Marketing & Development, Industrial
Pitches and Related Products in February 1992. Mr. Turner was Marketing
Manager, Industrial Pitches and Creosote Oils for Old Koppers' Tar and Wood
Products Sector. Mr. Turner joined Old Koppers in 1969 and has served in
various positions in the controller's department and as Product Manager, Tar
Operations.
Mr. Sweeney has been a Director of Koppers since January 1989. Mr. Sweeney
is the President and a member of Sweeney Metz Fox McGrann & Schermer L.L.C.
Mr. Sweeney had been a shareholder and Director of Dickie, McCamey & Chilcote,
P.C. since 1987 and served as Managing Director from 1988 to September 1993.
Mr. Sweeney previously served as Executive Vice President, Chief
Administrative Officer, Vice Chairman, and a Director of Allegheny
International, Inc., as Senior Vice President and a Director of Allegheny
Ludlum Industries, and as a Director of Wilkinson Sword Group, Ltd. U.K.,
Landmark Savings and Loan Association, Halbouty Energy Company and Liquid Air
Corporation. Mr. Sweeney currently serves as a Director of Schaefer
Manufacturing Inc. and Schaefer Equipment, Inc., and as Chairman of the Boards
of St. Francis Health System and St. Francis Medical Center.
Mr. Prater has been a Director of Koppers since May 1989. Mr. Prater retired
from Mobay Corporation, where he served as the President and Chief Executive
Officer from July 1986 to July 1990. He served as a
25
<PAGE>
visiting Professor at the University of Virginia and currently serves as a
Director of Calgon Carbon Corporation. He is a member of the Board of Trustees
of Robert Morris College and the Georgia Institute of Technology, and is a
special trustee of the University of Pittsburgh.
Mr. Oberbeck has been a Director of Koppers since October 1997. Mr. Oberbeck
is one of the founders of Saratoga Partners where he has been Managing
Director since its formation as an independent entity in September 1998. Prior
to that time Mr. Oberbeck was a Managing Director of SBC Warburg Dillon Read
Inc. since September 1997, the successor entity of Dillon, Read & Co. Inc.
where he was a Managing Director from February 1995 to September 1997,
responsible for the management of the Saratoga funds. Prior to joining Dillon,
Read & Co. Inc., Mr. Oberbeck was a Managing Director of Castle Harlan, Inc.
where he worked from October 1987 until February 1995. Mr. Oberbeck is a
Director of Equality Specialties, Inc., J&W Scientific Incorporated, Scovill
Fasteners Inc. and Wireless Services Holding Corporation.
Dr. Hillenbrand was elected as a Director of Koppers in February 1999. Dr.
Hillenbrand has been the President and Chief Executive Officer of Bayer, Inc.
since 1994. Prior to 1994, Dr. Hillenbrand was Senior Vice President and
Elkhart General Site Manager, Miles Inc. (now Bayer Corporation). In that
position, he was responsible for the administration services and operations at
Bayer's largest North American site, which included chemical manufacturing
facilities. Dr. Hillenbrand is a member of the Board of Directors of Bayer
Inc. and Afga Inc., and is Chairman of the Board of Representatives of the
Gustafson Partnership. In addition he is a member of the Executive Committee
and Board of Directors of the Canadian Chemical Producers Association (CCPA).
Dr. Hillenbrand is also a member of the Board of the Canadian German Chamber
of Industry and Commerce Inc.
Mr. Davis was elected Vice President and Chief Financial Officer of Koppers
in November 1994. Mr. Davis had been General Manager of Koppers' Recovery
Resources Group from June 1992 to March 1996 and served as Treasurer from 1988
until 1992. He joined Old Koppers in 1978 and held various positions in the
corporate accounting and auditing departments until being named General
Manager of the Chemical Systems Sector at Old Koppers in 1988. He is also a
Director of Koppers-Hickson and Tarconord. Mr. Davis is a certified
public accountant.
Mr. Loadman was appointed Vice President and General Manager, Railroad &
Utility Products division in March 1998. Mr. Loadman had been elected Vice
President and General Manager, Railroad Products & Services in November 1994,
and had been the Transportation Plants Operations Manager of the Railroad &
Utility Products division since January 1989. He joined Old Koppers in 1979
and served in various management assignments including plant manager and
cogeneration plant manager. Mr. Loadman is a Director of KSA.
Mr. Fitzgerald was appointed Vice President and General Manager, Carbon
Materials & Chemicals division in March 1998. After serving as plant manager
of the Stickney, Illinois Carbon Materials & Chemicals plant in 1996 and 1997,
Mr. Fitzgerald was appointed Vice President and Manager, Carbon Materials &
Chemicals in January 1998. He joined Old Koppers in 1975 and had several
operations and office positions at the Stickney plant before being named as
plant manager of the Houston, Texas carbon materials facility in 1988. He was
Product Manager Industrial Pitches from 1991 to 1995.
Mr. Bryon was appointed Vice President, Australasian Operations and Managing
Director, Koppers Australia Pty. Limited on October 1, 1998. Mr. Bryon had
served as General Manager of Koppers Coal Tar Products Pty. Ltd. (a subsidiary
of Koppers Australia) since 1993. Mr. Bryon is a Director of Koppers-Hickson
and Koppers (China) Carbon and Chemical Co., Limited.
Mr. Collins was elected Vice President, Safety, Health and Environmental
Affairs November 1994, and has been Corporate Secretary since January 1989.
Mr. Collins was Manager of Loss Control for Old Koppers. He joined Old Koppers
in 1974 and held various line and staff assignments including personnel,
industrial relations, and plant operations. Currently Mr. Collins serves the
Company as Vice President, Safety, Health &
26
<PAGE>
Environmental Affairs and Corporate Secretary. His responsibilities include
establishing policy and assuring regulatory compliance for environmental,
safety and health matters, coordination of legal affairs and shareholder
relations.
Mr. Boan has been Vice President, Human Resources since January 1989. Mr.
Boan was Manager, Labor Relations for Old Koppers. He joined Old Koppers in
1969. Prior to 1987, Mr. Boan held the position of Director, Human Resources,
for three Old Koppers subsidiaries in the Construction Materials and Services
Group. In 1987, he was named Manager, Labor Relations for Old Koppers.
Mr. Wombles joined the Company in June 1997 and was elected Vice President,
Technology. Prior to joining Koppers, Mr. Wombles was Vice President,
Research, Applications and Development for Ashland Oil, Inc. Mr. Wombles has
published a series of technical articles on hydrocarbon processing and holds
five patents on related methodologies.
Ms. Schaming was elected Treasurer in May 1992. Her previous position was
Assistant Treasurer and Manager of Cash Operations. Ms. Schaming joined Old
Koppers in 1976, where she held various positions in corporate and Chemical
Systems Sector accounting, including controller for the Polyester Resins
Division. Ms. Schaming is a certified cash manager.
Stockholders' Agreement
The Company is a party to the Stockholders' Agreement. The Management
Investors are a group of approximately 200 individual stockholders with
various ownership interests in the common stock and collectively comprising
80% of the total outstanding shares of the common stock of the Company. The
remaining 20% is held indirectly by approximately 600 current and former
employees through the Company's Employee Savings Plan. Each Management
Investor is an officer, Board member or current or former employee of either
Koppers or one of its subsidiaries. Pursuant to the Stockholders' Agreement,
each of the Management Investors has appointed Walter W. Turner and Clayton A.
Sweeney as the two representatives ("Representatives") of the Management
Investors and granted to the Representatives an irrevocable proxy for the term
of the Stockholders' Agreement to vote all his or her voting shares.
The Stockholders' Agreement sets forth supermajority voting requirements for
the Board of Directors for certain matters, including the issuance of
additional stock, mergers, consolidations, acquisitions, significant asset
sales, and the incurrence of material indebtedness. Saratoga is entitled to
nominate a majority of the Board of Directors. The Stockholders' Agreement
requires the Company to redeem shares upon a Management Investor's ceasing for
any reason to be employed by the Company.
As of December 31, 1999, Koppers was obligated to purchase approximately 0.3
million shares of common stock from Management Investors no longer actively
affiliated with the Company based on currently available information.
Director Compensation
Koppers does not pay compensation to Directors who are also employees. Each
Director who is not an employee is paid a fee of $22,000 per year, except for
the Saratoga Directors as noted below.
Stock Option Grants to Directors. In January 1999, Mr. Hillenbrand received
stock options for 15,000 shares of common stock of Koppers. In December 1998,
Mr. Prater received stock options for 15,000 shares of common stock of
Koppers. The options were issued with exercise prices at the fair value when
granted, and have a vesting period of 5 years and expire in 10 years.
27
<PAGE>
Consulting Agreements
The Company entered into a consulting agreement with Mr. Cizik in 1999
pursuant to which the Company pays a fee of $12,500 per month to Mr. Cizik for
consulting services beginning in January 1999. The agreement also includes a
provision which allowed Mr. Cizik to purchase 20,000 shares of common stock
for $17.00 per share, which purchase was made in October 1999 when the fair
value per share was $17.25. Additionally, the agreement provides for a $0.6
million interest free loan from the Company for the purchase of 35,294 shares
of restricted common stock at a price of $17.00 per share. Mr. Cizik purchased
these shares in October 1999 by signing a promissory note to the Company for
$0.6 million. The note, which is 70% collateralized by the value of the
related shares and 30% by Mr. Cizik's personal assets, is due in 2009, or
immediately in the event Mr. Cizik is no longer Non-Executive Chairman of the
Board of Directors. The shares are restricted, with a vesting period of five
years; at December 31, 1999 28,235 of the shares were restricted. In the event
Mr. Cizik is no longer Non-Executive Chairman of the Board of Directors of
Koppers, the Company will redeem any non-vested shares at cost and all other
shares at fair value.
Koppers has entered into an advisory and consulting agreement with Saratoga
pursuant to which the Company pays a management fee of $150,000 per quarter to
Saratoga in lieu of Director's fees to Mr. Oberbeck. In addition, Saratoga
provides the Company with advisory services in connection with significant
business transactions, such as acquisitions, for which the Company pays
Saratoga compensation comparable to compensation paid for such services by
similarly situated companies.
28
<PAGE>
ITEM 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth information concerning the compensation for
services in all capacities to the Company, including options and stock
appreciation rights ("SARS"), for the years ended December 31, 1999, 1998 and
1997, of those persons who were at December 31, 1999 the current Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company who earned more than $100,000 in salary and bonus in
1999 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------ ----------------------------
Other Securities All Other
Annual Underlying Compensation
Name and Principal Position Year Salary Bonus Compensation Options/SARS(#) (1)
- ---------------------------- ---- -------- -------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Turner........ 1999 $325,000 $148,080 $ 302 -- $ 6,483
President and Chief
Executive 1998 278,060 -- 567 40,000 3,513
Officer 1997 150,060 36,293 181 -- 6,164
Donald E. Davis......... 1999 201,820 79,876 -- -- 6,483
Vice President and Chief 1998 188,560 -- -- 15,000 3,513
Financial Officer 1997 169,860 62,424 -- -- 6,164
Thomas D. Loadman....... 1999 170,400 83,883 -- -- 6,483
Vice President and
General 1998 152,400 28,602 -- 15,000 3,513
Manager, Railroad &
Utility 1997 139,400 44,911 -- -- 6,164
Products
Ernest S. Bryon......... 1999 131,200 71,163 12,224 -- --
Vice President,
Australasian 1998 117,180 19,916 12,033 7,000 95,224(2)
Operations and Managing
Director, Koppers
Australia
Kevin J. Fitzgerald..... 1999 138,000 46,680 -- -- 5,592
Vice President and
General 1998 116,550 -- -- 10,000 3,089
Manager, Carbon
Materials 1997 98,200 19,916 -- 2,500 4,885
& Chemicals
</TABLE>
- --------
(1) All other compensation consists of regular and supplemental matches to the
Company's 401(k) plan except as noted below.
(2) Consists of payments from the Koppers Australia Senior Executive Unit
Trust, which was liquidated due to a change of control upon the
acquisition of Koppers Australia by the Company.
Stock Options
There were no grants of stock options during 1999 to any of the Named
Executive Officers.
Option Exercises and Fiscal Year-End Values
Shown below is information with respect to unexercised options at the end of
the fiscal year under the Company's stock option plans. There were no options
exercised by, or granted to, any of the Named Executive Officers during 1999.
No SARS were granted to any of the Named Executive Officers and none of the
Named Executive Officers held any unexercised SARS at the end of the fiscal
year.
29
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Number of Underlying Unexercised Value of Unexercised
Securities Options/SARS at FY- In-the-money Options/
Underlying End (#) SARS at FY-End ($) (1)
Options/SARS Value ------------------------- -------------------------
Name Exercised Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Turner........ -- $-- 33,683 28,667 $483,692 $222,000
Donald E. Davis......... -- -- 23,100 12,000 361,086 72,000
Thomas D. Loadman....... -- -- 16,200 12,000 201,080 72,000
Ernest S. Bryon......... -- -- 1,400 5,600 8,400 33,600
Kevin J. Fitzgerald..... -- -- 10,125 8,000 148,001 48,000
</TABLE>
- --------
(1) The value of unexercised in-the-money options is calculated by subtracting
the exercise price from the fair value as of December 31, 1999 as
determined by the Board of Directors pursuant to the provisions of the
Stockholders' Agreement. Pursuant to the provisions of the Company's stock
option plans, all options granted prior to December 1, 1997 became vested
due to a change of control.
Benefit Plans
Pension Plan. All executive officers of the Company are covered by the
Retirement Plan of Koppers Industries, Inc. and Subsidiaries for Salaried
Employees (the "Salaried Plan"). The following table contains approximate
retirement benefits payable under the Salaried Plan, assuming retirement at
age 65, payments made on the straight-life annuity basis and no election of a
co-annuitant option. Annual retirement benefits are computed at the rate of
1.2% of Terminal Salary (as defined below) not in excess of $16,000, plus 1.6%
of Terminal Salary in excess of $16,000, all multiplied by years of Credited
Service (as defined below). Terminal Salary is determined based on the average
annual salary (defined as salary plus one half of any incentive payments) for
the five highest consecutive years of the last ten years of credited service,
or during all years of such credited service if less than five. Credited
Service includes all accumulated service as a salaried employee of the Company
(excluding its predecessors) except for any period of layoff or leave of
absence. In 1998 the Company amended the Salaried Plan to provide a minimum
pension equal to 1.2% of Terminal Salary multiplied by years of Credited
Service up to 35 years reduced by any pension benefit paid by the pension plan
of Old Koppers.
Estimated Annual Retirement Benefit Under the Salaried Retirement Plan
<TABLE>
<CAPTION>
Years of Credited Service at Retirement
-----------------------------------------------------------------------
TERMINAL
SALARY 5 10 15 20 25 30
- -------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 7,680 $15,360 $ 23,040 $ 30,720 $ 38,400 $ 46,080
150,000 11,680 23,360 35,040 46,720 58,400 70,080
200,000 15,680 31,360 47,040 62,720 78,400 94,080
250,000 19,680 39,360 59,040 78,720 98,400 118,080
300,000 23,680 47,360 71,040 94,720 118,400 142,080
350,000 27,680 55,360 83,040 110,720 138,400 166,080
400,000 31,680 63,360 95,040 126,720 158,400 190,080
450,000 35,680 71,360 107,040 142,720 178,400 214,080
500,000 39,680 79,360 119,040 158,720 198,400 238,080
</TABLE>
The following describes the Terminal Salary and Years of Service,
respectively, accrued as of December 31, 1999 for each participating Named
Executive Officer: Walter W. Turner, $186,562 and 10 years of service; Donald
E. Davis, $182,460 and 10 years of service; Thomas D. Loadman, $154,698 and 10
years of service; and Kevin J. Fitzgerald, $142,750 and 10 years of service.
30
<PAGE>
Effective December 1, 1997 the Board of Directors established a Supplemental
Executive Retirement Plan ("SERP") for each participating Named Executive
Officer and all other officers of the Company. The SERP will pay an annual
benefit equal to 2% of final pay multiplied by years of service up to 35
years, reduced by the sum of: i) pension benefits received from the Company;
ii) pension benefits received from Old Koppers; iii) One half of any Social
Security benefits; and iv) the value of Company paid common stock in the
individual's Employee Savings Plan account.
Compensation Committee Interlocks and Insider Participation
Mr. Sweeney, Mr. Prater, Mr. Oberbeck and Mr. Cizik serve on the Human
Resources and Compensation Committee of the Board of Directors of the Company,
which establishes compensation levels for the Company's three most highly paid
executive officers. Mr. Sweeney is the President of Sweeney Metz Fox McGrann &
Schermer L.L.C. of Pittsburgh, Pennsylvania which has been retained as counsel
to the Company.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's voting common stock and Senior Convertible
Preferred Stock as of March 1, 2000 by (i) each person known to the Company to
beneficially own more than 5% of the outstanding shares of either common stock
or Preferred Shares; (ii) each Director of the Company; (iii) each Named
Executive Officer; and (iv) all officers and Directors of the Company as a
group.
<TABLE>
<CAPTION>
Senior Convertible
Voting Common Stock Preferred Stock (2)
------------------------- -------------------------
Shares Percentage Shares Percentage
Beneficially Beneficially Beneficially Beneficially
Name of Beneficial Owner Owned (1) Owned (1) Owned Owned
- ------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Saratoga (3)............... 2,288,481 100.00%
Management Investors
(4)(5).................... 1,738,713 100.00%
Robert K. Wagner (6)....... 197,876 11.38%
Walter W. Turner (7)....... 65,730 3.78%
Clayton A. Sweeney (7)..... 103,133 5.93%
N. H. Prater (8)........... 29,569 1.70%
Christian L. Oberbeck (3).. -- * 2,288,481 100.00%
Robert Cizik (9)........... 55,294 3.18%
David M. Hillenbrand (10).. 4,000 *
Donald E. Davis (11)....... 53,857 3.10%
Thomas D. Loadman (12)..... 32,854 1.89%
Ernest S. Bryon (13)....... 1,400 *
Kevin J. Fitzgerald (14)... 19,502 1.12%
All Directors and officers
as a group (14 persons)... 532,612 30.63%
Total shares outstanding,
including vested options.. 1,738,713 100.00% 2,288,481 100.00%
</TABLE>
- --------
* 1% or less.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and/or investment
power with respect to the shares shown as beneficially owned.
(2) On December 1, 1997 2,117,952 shares of voting common stock and 27,672
shares of non-voting common stock held by Saratoga were converted into
2,145,624 Preferred Shares, entitling Saratoga to elect a majority of the
Board of Directors of the Company and to exercise a majority of the voting
power over all outstanding stock of the Company with respect to all
matters subject to a stockholder vote. The Preferred
31
<PAGE>
Shares have voting (except as described below) and dividend rights equal to
voting common stock, and have a liquidation preference equal to par value.
The Preferred Shares are convertible into voting common stock at any time on
a one-for-one basis. The holders of the Preferred Shares vote as a separate
series from all other classes of stock, and are entitled to elect a majority
of the Board of Directors.
(3) With respect to 142,857 of these shares, Saratoga has voting power with
respect to such shares and Koppers has been informed that Brown University
Third Century Fund has dispositive directive power with respect to such
shares subject to the terms of the Stockholders' Agreement. Saratoga is a
private investment fund. The address for Saratoga is 535 Madison Avenue,
New York, NY 10022. Saratoga has generally authorized Mr. Oberbeck, a
Director of the Company, to vote the shares of the Company held by
Saratoga. Mr. Oberbeck disclaims beneficial ownership of the Preferred
Shares owned by Saratoga. Saratoga is entitled to elect a majority of the
Board of Directors and to exercise a majority of the voting power of all
outstanding stock of the Company.
(4) Pursuant to the Stockholders' Agreement, Mr. Turner and Mr. Sweeney were
appointed as Representatives of the approximately 200 Management Investors
and granted irrevocable proxies to vote the shares of common stock owned by
the Management Investors for the term of the Stockholders' Agreement. Upon
consummation of the share redemption and purchase offer by the Company, new
proxies were executed by the current shareholder employees appointing Mr.
Turner and Mr. Sweeney as representatives of the Management Investors. See
"Directors and Executive Officers of the Registrant--Stockholders'
Agreement". The address for Mr. Turner is Koppers Industries, Inc., 436
Seventh Avenue, Pittsburgh, PA 15219. The address for Mr. Sweeney is
Sweeney Metz Fox McGrann & Schermer L.L.C., 18th Floor, 11 Stanwix Street,
Pittsburgh, PA 15222.
(5) Includes vested options held by the Management Investors to acquire 386,792
shares of common stock which are exercisable at any time.
(6) Pursuant to the Stockholders' Agreement, Mr. Wagner has granted an
irrevocable proxy to the Representatives of the Management Investors to
vote the shares owned by him. Upon his resignation from the Board of
Directors in February 2000, the Company redeemed 65,959 shares of common
stock held by Mr. Wagner for approximately $1.5 million. The redemption
represented 25% of Mr. Wagner's shares; the remaining shares held by Mr.
Wagner will be redeemed in equal amounts of shares over the next three
years at the fair value on each redemption date.
(7) Mr. Turner and Mr. Sweeney, as Representatives of the Management Investors
pursuant to the Stockholders' Agreement, have the authority to vote
1,351,921 shares held by the Management Investors and consequently may be
deemed to have voting control of such shares (which include 23,713 shares
directly owned by Mr. Turner and 103,133 shares directly owned by Mr.
Sweeney).
(8) Includes vested options to purchase 3,000 shares. Pursuant to the
Stockholders' Agreement, Mr. Prater has granted an irrevocable proxy to the
Representatives of the Management Investors to vote the shares owned by
him.
(9) Includes 28,235 restricted shares. Mr. Cizik financed 35,294 of his shares
in 1999 through a loan from the Company. The financed shares vest at a rate
of 20% per year according to Mr. Cizik's compensation arrangement. See
"Directors and Executive Officers of the Registrant---Director
Compensation".
(10) Includes vested options to purchase 3,000 shares. Pursuant to the
Stockholders' Agreement, Mr. Hillenbrand has granted an irrevocable proxy
to the Representatives of the Management Investors to vote the shares
owned by him.
(11) Includes vested options to purchase 23,100 shares. Pursuant to the
Stockholders' Agreement, Mr. Davis has granted an irrevocable proxy to the
Representatives of the Management Investors to vote the shares owned by
him.
32
<PAGE>
(12) Includes vested options to purchase 16,200 shares. Pursuant to the
Stockholders' Agreement, Mr. Loadman has granted an irrevocable proxy to
the Representatives of the Management Investors to vote the shares owned
by him.
(13) Consists of vested options to purchase 1,400 shares.
(14) Includes vested options to purchase 10,125 shares. Pursuant to the
Stockholders' Agreement, Mr. Fitzgerald has granted an irrevocable proxy
to the Representatives of the Management Investors to vote the shares
owned by him.
ITEM 13. Certain Relationships and Related Transactions
Sweeney Metz Fox McGrann & Schermer L.L.C. of Pittsburgh, Pennsylvania has
been retained as general counsel to Koppers and received $1.1 million in legal
fees from the Company in 1999. Clayton A. Sweeney, a shareholder and Director
of the Company, is also the President and a member of Sweeney Metz Fox McGrann
& Schermer L.L.C. Mr. Sweeney is one of two Representatives of the Management
Investors appointed pursuant to the Stockholders' Agreement and, as such, was
granted an irrevocable proxy for the term of the Stockholders' Agreement to
vote the shares of the Management Investors. See "Directors and Executive
Officers of the Registrant--Stockholders' Agreement."
In February 2000 the Company redeemed 65,959 shares of common stock from
former Director Robert K. Wagner for approximately $1.5 million. The
redemption represents 25% of Mr. Wagner's shares pursuant to the provisions of
the Stockholders' Agreement. The Company will redeem the rest of Mr. Wagner's
shares in equal share amounts (at the fair value at each redemption date) in
2001, 2002 and 2003.
The Company redeemed 96,579 shares of common stock in July 1999 that were
held by former Director Brooks C. Wilson. This redemption, in the amount of
approximately $1.7 million, was for all of the shares held by Mr. Wilson.
In October 1997, all shares of common stock held by Cornerstone-Spectrum,
Inc. were purchased by the Offeree Stockholders and subsequently transferred
to the Company and Saratoga. In addition, all remaining shares of common stock
held by APT Holdings Corporation were purchased by the Company in 1997 and
1998.
In connection with the Company's debt refinancing, the Company paid a
transaction fee of $1.4 million to an affiliate of Saratoga, and a financial
advisory fee of $1.4 million to SBC Warburg Dillon Read Inc., in consideration
for advisory services related to the structuring and financing of Saratoga's
investment in Koppers and the Company's debt refinancing.
33
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1.Financial Statements
The following financial statements of Koppers Industries, Inc. are required
to be filed in Part II, Item 8:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Koppers Industries, Inc.
Consolidated Financial Statements for the Years Ended
December 31, 1999, 1998 and 1997
Report of Independent Auditors.................................... 35
Consolidated Statement of Operations for the Years Ended
December 31, 1999, 1998 and 1997................................. 36
Consolidated Balance Sheet at December 31, 1999 and 1998.......... 37
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997................................. 39
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997................................. 40
Notes to Consolidated Financial Statements........................ 42
2.Schedules for the Years Ended December 31, 1999, 1998 and 1997
Schedule II--Valuation and Qualifying Accounts........................ 65
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
</TABLE>
3.See Exhibit Index on page 62 hereof.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed in the fourth quarter of 1999.
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Koppers Industries, Inc.
We have audited the accompanying consolidated financial statements and
schedule of Koppers Industries, Inc. listed in the accompanying Index to
Consolidated Financial Statements [Item 14(a)]. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements listed in the
accompanying Index to Consolidated Financial Statements present fairly, in all
material respects, the consolidated financial position of Koppers Industries,
Inc. at December 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
January 28, 2000
35
<PAGE>
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions except per share figures)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................... $ 664.1 $ 670.6 $ 593.1
Operating expenses:
Cost of sales..................................... 548.9 553.5 501.4
Depreciation and amortization..................... 27.1 30.6 23.5
Selling, general and administrative............... 37.4 39.9 28.1
Restructuring charges............................. -- (1.0) 45.4
-------- -------- --------
Total operating expenses........................ 613.4 623.0 598.4
-------- -------- --------
Operating profit (loss)............................. 50.7 47.6 (5.3)
Equity in earnings of affiliates.................... 1.7 2.4 5.3
Other income (expense).............................. 0.8 -- (1.4)
-------- -------- --------
Income (loss) before interest expense, income tax
provision (benefit), minority interest and
extraordinary item................................. 53.2 50.0 (1.4)
Interest expense.................................... 28.1 29.7 17.3
-------- -------- --------
Income (loss) before income tax provision (benefit),
minority interest and extraordinary item........... 25.1 20.3 (18.7)
Income tax provision (benefit)...................... 0.2 (0.3) (19.7)
Minority interest................................... 0.7 0.5 --
-------- -------- --------
Income before extraordinary item.................... 24.2 20.1 1.0
Extraordinary loss on early extinguishment of debt,
net of income
tax benefit of $2.9................................ -- -- (6.7)
-------- -------- --------
Net income (loss)................................... $ 24.2 $ 20.1 $ (5.7)
======== ======== ========
Earnings (loss) per share of common stock:
Income before extraordinary item:
Basic earnings per share........................ $16.70 $12.64 $ 0.17
======== ======== ========
Diluted earnings per share...................... $ 6.23 $ 4.85 $ 0.12
======== ======== ========
Net income (loss):
Basic earnings (loss) per share................. $16.70 $12.64 $ (0.92)
======== ======== ========
Diluted earnings (loss) per share............... $ 6.23 $ 4.85 $ (0.65)
======== ======== ========
</TABLE>
See accompanying notes.
36
<PAGE>
KOPPERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 18.3 $ 16.6
Accounts receivable less allowance for doubtful accounts of
$1.1 in 1999
and $1.2 in 1998.......................................... 75.7 71.9
Inventories:
Raw materials............................................ 49.5 52.6
Work in process.......................................... 2.5 2.8
Finished goods........................................... 49.9 52.6
LIFO reserve............................................. (10.1) (12.3)
------- -------
Total inventories...................................... 91.8 95.7
Deferred tax benefit....................................... 7.0 7.7
Other...................................................... 1.5 1.6
------- -------
Total current assets................................... 194.3 193.5
Investments:
Tarconord.................................................. 11.8 12.6
Koppers Sherman-Abetong.................................... 3.9 5.4
Other...................................................... 1.6 1.7
------- -------
Total investments...................................... 17.3 19.7
Fixed assets:
Land....................................................... 6.7 6.5
Buildings.................................................. 15.0 15.0
Machinery and equipment.................................... 333.9 313.0
------- -------
355.6 334.5
Less: accumulated depreciation........................... (176.2) (153.1)
------- -------
Net fixed assets....................................... 179.4 181.4
Goodwill, net of accumulated amortization of $4.2 in 1999 and
$2.7 in 1998................................................ 28.0 29.4
Deferred tax benefit......................................... 42.0 36.0
Other assets................................................. 16.7 17.6
------- -------
Total assets........................................... $ 477.7 $ 477.6
======= =======
</TABLE>
See accompanying notes.
37
<PAGE>
KOPPERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(In millions except per share figures)
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 41.3 $ 45.9
Payroll and compensation costs............................... 11.0 7.9
Accrued liabilities.......................................... 25.4 22.2
Current portion of term loans................................ 19.3 12.6
------ ------
Total current liabilities.................................. 97.0 88.6
Long-term debt:
Revolving credit............................................. 2.0 2.3
Term loans................................................... 102.4 131.7
Senior Subordinated Notes due 2007........................... 175.0 175.0
Senior Notes due 2004........................................ 11.1 11.1
------ ------
Total long-term debt....................................... 290.5 320.1
Product warranty and insurance reserves........................ 18.4 18.4
Accrued other postretirement benefits obligation............... 19.2 20.0
Minority interest.............................................. 5.1 5.4
Other.......................................................... 14.1 12.6
------ ------
Total liabilities.......................................... 444.3 465.1
Commitments and contingencies--See Note 10
Common stock subject to redemption............................. 25.6 21.1
Senior convertible preferred stock, $.01 par value;
10.0 shares authorized; 2.3 shares issued in 1999 and 1998.. -- --
Voting common stock, $.01 par value:
37.0 shares authorized, 2.5 total shares issued in 1999 and
1998........................................................ -- --
Capital in excess of par value................................. 7.5 7.5
Receivable from Director for purchase of common stock.......... (0.6) --
Retained earnings.............................................. 24.6 4.9
Accumulated other comprehensive loss:
Foreign currency translation adjustment...................... (8.9) (7.8)
Treasury stock, at cost, 1.1 shares in 1999 and 1.0 shares in
1998.......................................................... (14.8) (13.2)
------ ------
Total liabilities and stockholders' equity................. $477.7 $477.6
====== ======
</TABLE>
See accompanying notes.
38
<PAGE>
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash provided by operating activities:
Net income (loss)............................... $ 24.2 $ 20.1 $ (5.7)
Adjustments to reconcile net income to net cash
provided by operating activities,
net of acquisitions:
Depreciation and amortization................. 27.1 30.6 23.5
Deferred income taxes......................... (5.3) (8.7) (27.0)
Equity income of affiliated companies, net of
dividends received........................... 0.6 (1.4) 13.2
Extraordinary loss on early extinguishment of
debt......................................... -- -- 6.7
Restructuring reserves.......................... (1.6) (12.5) 38.2
Increase in reserves............................ 0.3 1.7 3.3
Other........................................... 0.2 -- --
(Increase) decrease in working capital, net of
acquisitions:
Accounts receivable........................... (3.6) 11.1 4.2
Inventories................................... 4.3 (1.1) 4.4
Accounts payable.............................. (4.7) (2.3) 3.6
Payroll and compensation costs................ 3.1 (5.3) (0.4)
Accrued liabilities........................... 5.8 (7.6) (3.1)
Other working capital items................... 0.1 0.4 2.3
------- -------- --------
Net cash provided by operating activities... 50.5 25.0 63.2
------- -------- --------
Cash used in investing activities:
Acquisitions and related costs, net of cash
acquired....................................... (1.7) (2.6) (34.1)
Capital expenditures............................ (22.5) (20.2) (19.8)
Other........................................... 1.0 -- 1.0
------- -------- --------
Net cash used in investing activities....... (23.2) (22.8) (52.9)
------- -------- --------
Cash provided by (used in) financing activities,
net of acquisitions:
Borrowings of revolving credit.................. 58.7 102.5 170.8
Repayments of revolving credit.................. (59.0) (100.2) (213.8)
Proceeds from long term debt.................... 5.0 25.0 86.9
Repayments on long term debt.................... (28.1) (12.3) (50.5)
Purchase of Senior Notes due 2004............... -- -- (105.3)
Proceeds from issuance of Senior Subordinated
Notes due 2007................................. -- -- 175.0
Payments of deferred financing costs............ -- (0.4) (16.0)
Issuance of Senior Convertible Preferred Stock.. -- 2.0 --
Purchases of voting common stock................ (2.6) (9.4) (2.8)
Sales of voting common stock.................... 0.4 -- --
Purchases of non-voting common stock............ -- (11.4) (33.9)
Dividends on common stock....................... -- -- (2.2)
------- -------- --------
Net cash provided by (used in) financing
activities....................................... (25.6) (4.2) 8.2
------- -------- --------
Effect of exchange rates on cash.................. -- (1.4) --
------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 1.7 (3.4) 18.5
Cash and cash equivalents at beginning of year.... 16.6 20.0 1.5
------- -------- --------
Cash and cash equivalents at end of year.......... $ 18.3 $ 16.6 $ 20.0
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................... $ 28.8 $ 29.6 $ 20.2
Income taxes.................................. $ 0.3 $ 7.9 $ 7.9
</TABLE>
See accompanying notes.
39
<PAGE>
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Common Loan
Stock Convertible Voting Capital In Receivable
Subject to Preferred Common Excess of From
Redemption Stock Stock Par Value Director
---------- ----------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996............................................ $24.0 $ -- $ 0.1 $11.7 $ --
Net loss to common for 1997............................................. -- -- -- -- --
Foreign currency translation............................................ -- -- -- -- --
Comprehensive income (loss).............................................
Net change in common stock subject to redemption........................ 2.4 -- -- -- --
Options exercised, stock purchased and retired, 0.1 shares.............. -- -- -- -- --
Treasury stock purchases, 1.3 shares.................................... -- -- -- -- --
Treasury stock sales, 0.2 shares........................................ -- -- -- -- --
Conversion of voting and non-voting stock to senior convertible
preferred stock, 2.1 shares............................................ -- -- -- -- --
Non-voting common stock repurchased and retired, 2.7 shares............. -- -- -- (3.0) --
Dividends on common stock, net of equity interest....................... -- -- -- -- --
----- ---- ----- ----- -----
Balance at December 31, 1997............................................ 26.4 -- 0.1 8.7 --
Net income to common for 1998........................................... -- -- -- -- --
Foreign currency translation............................................ -- -- -- -- --
Comprehensive income....................................................
Net change in common stock subject to redemption........................ (5.3) -- -- -- --
Options exercised, 0.3 shares, stock purchased and retired, 0.1 shares.. -- -- -- 0.2 --
Treasury stock purchases, 0.5 shares.................................... -- -- (0.1) -- --
Treasury stock sales, 0.1 shares........................................ -- -- -- -- --
Issuance of senior convertible preferred stock, 0.1 shares.............. -- -- -- 2.0 --
Non-voting common stock repurchased and retired, 0.9 shares............. -- -- -- (1.0) --
Retirement of 2.3 shares held by Koppers Australia...................... -- -- -- (2.4) --
----- ---- ----- ----- -----
Balance at December 31, 1998............................................ 21.1 -- -- 7.5 --
Net income to common for 1999........................................... -- -- -- -- --
Foreign currency translation............................................ -- -- -- -- --
Comprehensive income....................................................
Net change in common stock subject to redemption........................ 4.5 -- -- -- --
Treasury stock purchases, 0.1 shares.................................... -- -- -- -- --
Treasury stock sales, 0.1 shares........................................ -- -- -- -- (0.6)
----- ---- ----- ----- -----
Balance at December 31, 1999............................................ $25.6 $ -- $ -- $ 7.5 $(0.6)
- --------------------------------------------------
===== ==== ===== ===== =====
</TABLE>
See accompanying notes.
40
<PAGE>
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY, CONTINUED
(In millions)
<TABLE>
<CAPTION>
Accumulated
Other Compre-
Retained Comprehensive hensive Treasury
Earnings Income (Loss) Income Stock
-------- ------------- ------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996........... $ 45.8 $ 2.2 $ (5.7)
Net loss to common for 1997............ (5.7) -- $ (5.7) --
Foreign currency translation........... -- (6.6) (6.6) --
------
Comprehensive income (loss)............ $(12.3)
======
Net change in common stock subject to
redemption............................ (2.4) -- --
Options exercised, stock purchased and
retired, 0.1 shares................... (0.7) -- --
Treasury stock purchases, 1.3 shares... -- -- (18.2)
Treasury stock sales, 0.2 shares....... -- -- 1.1
Conversion of voting and non-voting
stock to senior convertible preferred
stock, 2.1 shares..................... -- -- --
Non-voting common stock repurchased and
retired, 2.7 shares................... (31.0) -- --
Dividends on common stock, net of
equity interest....................... (2.2) -- --
------ ----- ------
Balance at December 31, 1997........... 3.8 (4.4) (22.8)
Net income to common for 1998.......... 20.1 -- $ 20.1 --
Foreign currency translation........... -- (3.4) (3.4) --
------
Comprehensive income................... $ 16.7
======
Net change in common stock subject to
redemption............................ 5.3 -- --
Options exercised, 0.3 shares, stock
purchased and retired, 0.1 shares..... 0.7 -- --
Treasury stock purchases, 0.5 shares... -- -- (8.9)
Treasury stock sales, 0.1 shares....... -- -- 1.5
Issuance of senior convertible
preferred stock, 0.1 shares........... -- -- --
Non-voting common stock repurchased and
retired, 0.9 shares................... (10.4) -- --
Retirement of 2.3 shares held by
Koppers Australia..................... (14.6) -- 17.0
------ ----- ------
Balance at December 31, 1998........... 4.9 (7.8) (13.2)
Net income to common for 1999.......... 24.2 -- $ 24.2 --
Foreign currency translation........... -- (1.1) (1.1) --
------
Comprehensive income................... $ 23.1
======
Net change in common stock subject to
redemption............................ (4.5) -- --
Treasury stock purchases, 0.1 shares... -- -- (2.6)
Treasury stock sales, 0.1 shares....... -- -- 1.0
------ ----- ------
Balance at December 31, 1999........... $ 24.6 $(8.9) $(14.8)
====== ===== ======
</TABLE>
See accompanying notes.
41
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Business
Koppers Industries, Inc. (the "Company" or "Koppers") is a global integrated
producer of carbon compounds and treated wood products for use in a variety of
markets including the railroad, aluminum, chemical, utility and steel
industries. The Company's business is managed as two business segments, Carbon
Materials & Chemicals and Railroad & Utility Products.
The Company's Carbon Materials & Chemicals division is a supplier of a)
carbon pitch, which is used primarily by the aluminum industry as a binder in
the manufacture of anodes; b) phthalic anhydride ("PAA"), used in the
manufacture of plasticizers, resins, paints and dye making; c) creosote and
chemicals used in the protection of timber against termites, fungal decay and
weathering; d) roofing pitch, used in the manufacture of built-up roofing
systems; e) carbon black, used in the production of rubber tires; and f)
furnace coke, used in the manufacture of steel.
The Company's Railroad & Utility Products division a) provides various
products and services to railroads, including crossties (both wood and
concrete), track and switch pre-assembly, and disposal services; b) supplies
treated wood utility poles to electric and telephone utilities; and c)
performs various wood treating services for vineyards, construction and other
commercial applications.
Basis of Financial Statements
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany transactions
have been eliminated.
The Company's investments in 20% to 50% owned companies in which it has the
ability to exercise significant influence over operating and financial
policies are accounted for on the equity method. Accordingly, the Company's
share of the earnings of these companies is included in the accompanying
consolidated statement of operations.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all liquid investments with a maturity of 90 days or
less to be cash equivalents.
Inventories
In the United States, Carbon Materials & Chemicals and Railroad & Utility
Products inventories are valued at the lower of cost, utilizing the last-in,
first-out ("LIFO") basis, or market. Market represents replacement cost for
raw materials and net realizable value for work in process and finished goods.
LIFO inventories constituted approximately 74% of the first-in, first-out
("FIFO") inventory value at December 31, 1999 and 1998.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
42
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments
Following is a combined financial summary of the equity investments of the
Company for the year ended 1997. No amounts are shown for 1999 or 1998 because
equity investments taken as a whole do not constitute a significant portion of
consolidated assets or income as a result of the consolidation of Koppers
Australia. The fiscal year end for amounts shown for Koppers Australia are for
the year ended June 30.
<TABLE>
<CAPTION>
1997
-------------
(In millions)
<S> <C>
Net Sales...................................................... $254.3
Operating Profit............................................... 29.1
Net Income..................................................... 19.4
Equity in Earnings............................................. 8.4
</TABLE>
The following describes activity related to the Company's significant equity
investments as included in the consolidated statement of operations as of and
for each of the years ended December 31:
Koppers Australia Pty. Limited (Koppers Australia)
Prior to December 1, 1997 the Company held a 50% investment in Koppers
Australia.
<TABLE>
<CAPTION>
Equity Income Dividends Received
------------- ------------------
(In millions)
<S> <C> <C>
1997........................................ $2.4 $16.3
</TABLE>
Tarconord
The Company owns a 50% equity interest in Tarconord, a carbon materials
operation headquartered in Denmark, with operations in Denmark and the United
Kingdom.
<TABLE>
<CAPTION>
Equity Income Dividends Received
------------- ------------------
(In millions)
<S> <C> <C>
1999........................................ $0.9 $0.0
1998........................................ 0.0 0.6
1997........................................ 1.7 1.2
</TABLE>
KSA Limited Partnership (KSA)
The Company holds a 50% investment in KSA, a concrete crosstie operation
located in Ohio.
<TABLE>
<CAPTION>
Equity Income Dividends Received
------------- ------------------
(In millions)
<S> <C> <C>
1999........................................ $0.5 $2.0
1998........................................ 1.8 0.5
1997........................................ 1.2 1.3
</TABLE>
Depreciation and amortization
Buildings, machinery, and equipment are recorded at purchased cost and
depreciated over their estimated useful lives (5 to 20 years) using the
straight-line method.
43
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accrued insurance
The Company is insured for property, casualty and workers' compensation
insurance up to various stop loss coverages for its domestic operations.
Losses are accrued based upon the Company's estimates of the liability for the
related deductibles for claims incurred using certain actuarial assumptions
followed in the insurance industry and based on Company experience.
Disclosures About Fair Value of Financial Instruments
Cash and short-term investments: The carrying amount approximates fair value
because of the short maturity of those instruments.
Long-term debt: The fair value of the Company's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining
maturities.
Research and Development
Research and development costs, which are included in selling, general and
administrative expenses, amounted to $2.1 million for 1999, $2.3 million for
1998 and $1.8 million for 1997.
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the fair
value of the identifiable net assets acquired. Goodwill is amortized on a
straight line basis over periods ranging from 15 to 25 years. The Company
assesses the impairment of goodwill related to consolidated subsidiaries
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. A determination of impairment (if any) is made based
upon estimates of future cash flows. In instances where goodwill has been
recorded for assets that are subject to an impairment loss, the carrying
amount of goodwill is eliminated before any reduction is made to the carrying
amounts of impaired long-lived assets and identifiable intangibles.
Reclassification
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current year presentation. Such
reclassification had no effect on net income (loss).
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.
2. Restructuring Charges
Restructuring charges of $45.4 million for 1997 included $39.9 million for
the closing of the Company's Woodward, Alabama coke facility ("Woodward Coke")
and $5.5 million for the closing of a cogeneration
44
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
facility and the write-down of assets at an adjacent wood treating facility in
Feather River, California. Net sales for 1997 at Woodward Coke were
approximately $52.0 million and gross profit excluding plant closing charges
for 1997 was approximately $(8.1) million.
The total restructuring charges consisted of the following items for the
year ended December 31 (in millions):
<TABLE>
<CAPTION>
1997
-----
<S> <C>
Non-cash
Write-downs of equipment............................................ $21.0
Cash
Dismantling......................................................... 6.0
Severance........................................................... 8.3
Other............................................................... 10.1
-----
$45.4
=====
</TABLE>
At December 31, 1999 approximately $14.1 million of the cash charges for the
1997 restructuring had been expended, including $1.6 million for the year
ended December 31, 1999. The majority of the remaining cash expenditures
related to the 1997 restructuring are primarily pension and postretirement
benefits expected to be paid over approximately a ten-year period.
Approximately $1.0 million of plant closing reserves were credited to income
for 1998 as the result of a negotiated reduction in a contractual penalty
obligation related to the Feather River, California cogeneration facility.
3. Acquisitions
On December 1, 1997 the Company purchased shares of Koppers Australia for a
cash purchase price of approximately $48 million (after receipt of a dividend
of approximately $13.9 million). This acquisition resulted in Koppers
Australia being wholly-owned by the Company. The acquisition was accounted for
as a purchase, and the excess purchase price paid over the fair value of the
net assets acquired was approximately $17.6 million and has been recorded as
goodwill, which is being amortized on a straight-line basis over 20 years.
Prior to 1998, the results of operations for Koppers Australia are included
in the Company's results as a component of equity in earnings of affiliates
due to the Company's 50% ownership interest prior to the acquisition.
4. Debt
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(In millions)
<S> <C> <C>
Revolving credit.............................................. $ 2.0 $ 2.3
Term loans.................................................... 121.7 144.3
Senior Subordinated Notes due 2007............................ 175.0 175.0
Senior Notes due 2004......................................... 11.1 11.1
------ ------
$309.8 $332.7
====== ======
</TABLE>
Unscheduled Term Debt Repayments
In December 1999, the Company made unscheduled term debt repayments totaling
$15.6 million.
45
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Monessen Transaction
As part of the Monessen Transaction (as defined and described in Note 7),
the Company received a $5.0 million term loan which will be repaid over three
years at an interest rate of 9%.
Credit Facilities
In November 1997 the Company established credit facilities of $275.0 million
with Swiss Bank Corporation, Stamford Branch and Mellon Bank, N.A. The credit
facilities are syndicated among several lenders who are parties thereto. The
credit facilities provide for term loans totaling $135.0 million and revolving
credit facilities of $140.0 million (the "Revolving Credit Facility"), subject
to sublimits of $20.0 million aggregate for standby and trade letters of
credit and up to $40.0 million and $20.0 million for the Australian Term
Letter of Credit (as defined below) and the Australian Revolving Letter of
Credit (as defined below), respectively. National Australia Bank, Limited
provided an Australian dollar ("A$") denominated term loan to Koppers
Australia and certain of its subsidiaries in an aggregate principal amount
equivalent to US$40 million. An A$ denominated letter of credit (the
"Australian Term Letter of Credit") was issued under the Revolving Credit
Facility to such Australian lender in the amount of A$59.3 million.
Commonwealth Bank of Australia provided an A$ denominated revolving loan
facility for the benefit of Koppers Australia and certain of its subsidiaries
with availability of up to the equivalent of US$10 million. An A$ denominated
letter of credit (the "Australian Revolving Letter of Credit") was issued
under the Revolving Credit Facility to such Australian lender in the amount of
A$14.8 million. To the extent that currency fluctuations cause the face amount
of the Australian Term Letter of Credit or the Australian Revolving Letter of
Credit to exceed on a US$ equivalent basis their respective subfacility
limits, availability will be correspondingly reduced under the Revolving
Credit Facility. Commitment fees ranging from 0.2% to 0.5% per annum are
required on the undrawn portions of the Revolving Credit Facility and the term
loans.
The credit facilities provide for a $70.0 million Term Loan A, $31.5 million
of which was outstanding at December 31, 1999 and a $65.0 million Term Loan B,
$54.3 million of which was outstanding at December 31, 1999. In addition,
$30.9 million was outstanding on the $A denominated term loan at December 31,
1999.
The term loans and the Revolving Credit Facility under the credit facilities
provide for interest at variable rates. At December 31, 1999 the effective
rates on the term loans were 8.19% for Term Loan A, 8.71% for Term Loan B and
7.22% for the Australian term loan. The Revolving Credit Facility, Term Loan A
and the Australian term loan expire November 30, 2003, and Term Loan B expires
November 30, 2004.
Substantially all of the Company's assets, including the assets of
significant subsidiaries, are pledged as collateral for the credit facilities.
The credit facilities contain certain covenants which limit capital
expenditures by the Company and restrict its ability to incur additional
indebtedness, create liens on its assets, enter into leases, pay dividends and
make investments or acquisitions. In addition, such covenants give rise to
events of default upon the failure by the Company to meet certain financial
ratios.
At December 31, 1999 the aggregate debt maturities for the next five years
are as follows (in millions):
<TABLE>
<S> <C>
2000................................................................... $19.3
2001................................................................... 18.0
2002................................................................... 16.9
2003................................................................... 33.0
2004................................................................... 45.6
</TABLE>
46
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Senior Subordinated Notes Due 2007
On December 1, 1997 the Company issued $175.0 million of Senior Subordinated
Notes Due 2007 in a private placement transaction (the "Subordinated Notes").
The Subordinated Notes were subsequently registered with the Securities and
Exchange Commission effective January 23, 1998. The Subordinated Notes bear
interest at 9 7/8% per annum, with interest payable on June 1 and December 1
of each year, commencing June 1, 1998. The Subordinated Notes are unsecured
and rank junior to all existing and future senior debt of the Company, and are
effectively subordinated to all secured obligations to the extent of the
assets securing such obligations.
The Subordinated Notes are redeemable, at the Company's option, at any time
on or after December 1, 2002 and prior to maturity, at redemption prices
ranging from 104.938% of the principal amount in 2002 to 100.0% of the
principal amount in 2005. In addition, the Company may redeem up to 35% of the
aggregate principal amount of the Subordinated Notes with the net proceeds of
one or more issuances of common stock at a redemption price of 109.875% plus
accrued interest.
The prepayment of debt on December 1, 1997 resulted in an extraordinary loss
of $6.7 million on a net-of-tax basis, comprised of charges of $4.5 million
for purchase premium and $2.2 million for the write-off of deferred financing
costs. The purchase premium was from the repayment of $98.9 million of 8 1/2%
Senior Notes due 2004 tendered pursuant to a tender offer. Deferred financing
costs associated with the credit facilities and the issuance of the
Subordinated Notes totaled approximately $16.0 million and are being amortized
over the life of the related debt.
Deferred financing costs (net of accumulated amortization of $4.2 million at
December 31, 1999, $2.2 million at December 31, 1998 and $0.2 million at
December 31, 1997) were $12.4 million, $14.4 million and $16.0 million at
December 31, 1999, 1998 and 1997, respectively, and are included in other
assets.
At December 31, 1999, the Company had $11.2 million of standby letters of
credit outstanding, with terms ranging from one to two years.
5. Stock Activity
In 2000, a former Director resigned from the Company's Board of Directors.
The Company redeemed 25% of the Director's shares at the current value for a
total of approximately $1.5 million, with the remainder scheduled to be
redeemed in an equal amount of shares (at each year's current value) in 2001,
2002 and 2003. In July 1999 the Company redeemed all the outstanding shares of
a former Director for approximately $1.7 million.
In October 1999, a Director of the Company purchased 55,294 shares of common
stock of the Company for $0.9 million; 35,294 of the shares were financed
through an interest-free loan from the Company in the amount of $0.6 million
due in 2009. The shares related to the loan are restricted and vest at a rate
of 20% per year. At December 31, 1999 28,235 of such shares were restricted.
In the event that the Director no longer serves on the Board of Directors, the
loan must be repaid.
During 1998, the Company purchased approximately 0.5 million shares of
common stock from, and sold 0.1 million shares to, current and former
employees and directors of the Company for $8.8 million and $1.0 million,
respectively, related to a stock purchase and redemption plan.
During 1998, 2.2 million shares of common stock held by Koppers Australia
were retired, resulting in reductions to treasury stock, capital in excess of
par and retained earnings of the Company. The shares held by Koppers Australia
had previously been accounted for as treasury stock.
47
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 15, 1997, KAP Investments, Inc. (a wholly-owned subsidiary of
Koppers Australia) and a group of approximately 120 individual investors who
were either officers, Board members or current or former employees of either
Koppers or one of its subsidiaries (the "Management Investors") (collectively,
the "Offeree Stockholders") acquired from Cornerstone-Spectrum, Inc. (an
affiliate of Beazer East, Inc. and Hanson PLC) its voting and non-voting
shares of common stock of Koppers. The Offeree Stockholders utilized $52.5
million of financing from Koppers and Saratoga Partners III, L.P.
("Saratoga"). On December 1, 1997, Saratoga exchanged 2.1 million shares of
common stock it acquired as part of the financing of the acquisition of common
stock from Cornerstone-Spectrum, Inc. for shares of a new series of senior
convertible preferred stock of Koppers (the "Preferred Shares"), which
entitles Saratoga to elect a majority of the Board of Directors of Koppers
(the "Board of Directors") and to exercise a majority of the voting power over
all outstanding stock of the Company with respect to all other matters subject
to a stockholder vote.
The Company purchased 2.7 million shares of non-voting common stock in 1997,
all of which were subsequently retired and cancelled in accordance with the
stockholders' agreement among the Company, Saratoga and the Management
Investors dated as of December 1, 1997 (as amended, the "Stockholders'
Agreement"). The remaining 0.9 million shares of non-voting common stock were
purchased from APT Holdings Corporation on January 5, 1998 for $11.4 million
and were subsequently retired and cancelled.
The Stockholders' Agreement provides for stock redemptions of up to 5% of
each stockholder's outstanding shares annually beginning in 1999 at the
Company's option, provided that all relevant covenants with the Company's
lenders and noteholders are met. There were no such redemptions during 1999.
Common Stock Subject to Redemption
The Stockholders' Agreement requires the Company, subject to cash payment
limitations under the terms of existing debt covenants, to redeem certain
shares of common stock owned by members of management upon a "termination
event" relative to a management employee. A termination event is defined as
retirement, death, disability or resignation. At December 31, 1999 and 1998
the maximum redemptions which could be paid under the Stockholders' Agreement,
subject to existing debt covenants, were $25.6 million and $21.2 million,
respectively. The value of shares subject to redemption under the terms of the
Stockholders' Agreement is segregated from other common stock on the face of
the balance sheet. There were approximately 1.1 million and 1.2 million shares
of Common Stock at December 31, 1999 and 1998, respectively, subject to the
redemption provisions of the Stockholders' Agreement.
The aggregate redemption amounts under the Stockholders' Agreement for the
next four years based on termination events of which the Company is aware, are
as follows:
<TABLE>
<S> <C>
2000............................................................ $1.8 million
2001............................................................ $1.8 million
2002............................................................ $1.6 million
2003............................................................ $1.6 million
</TABLE>
48
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Pension and Other Postretirement Benefit Plans
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year.................................. $ 82.0 $ 75.3 $ 14.4 $ 15.9
Service cost........................... 3.5 3.5 0.2 0.3
Interest cost.......................... 5.5 5.2 0.9 1.0
Amendments............................. 0.2 0.2 -- --
Actuarial gains (losses)............... (1.3) 2.0 (1.4) (2.1)
Benefits paid.......................... (4.3) (4.2) (0.7) (0.7)
-------- ------- ------- -------
Benefit obligation at end of year........ $ 85.6 $ 82.0 $ 13.4 $ 14.4
======== ======= ======= =======
Change in plan assets:
Fair value of plan assets at beginning
of year............................... $ 74.8 $ 66.9 $ -- $ --
Actual return on plan assets........... 3.8 11.4 -- --
Employer contribution.................. 1.4 0.7 0.8 0.7
Benefits paid.......................... (4.3) (4.2) (0.8) (0.7)
-------- ------- ------- -------
Fair value of plan assets at end of year. $ 75.7 $ 74.8 $ 0.0 $ 0.0
======== ======= ======= =======
Funded status of the plan.............. $ (9.9) $ (7.2) $ (13.4) $ (14.4)
Unrecognized actuarial (gain) loss..... (1.5) (3.2) (2.7) (1.4)
Unrecognized prior service cost........ 1.2 1.4 (3.6) (4.3)
-------- ------- ------- -------
Net amount recognized.................. $ (10.2) $ (9.0) $ (19.7) $ (20.1)
======== ======= ======= =======
Disclosures:
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability.............. $ (10.7) $ (9.8) $ (19.7) $ (20.1)
Intangible asset....................... 0.5 0.8 -- --
-------- ------- ------- -------
Net amount recognized.................... $ (10.2) $ (9.0) $ (19.7) $ (20.1)
======== ======= ======= =======
Weighted-average assumptions as of
December 31:
Discount rate............................ 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets........... 9.00% 9.00%
Rate of compensation increase............ 4.00% 4.00%
Initial medical trend rate............... 8.00% 9.00%
The 1999 initial medical trend rate was assumed to decrease gradually to
5.0% in 2005 and remain at that level thereafter.
Components of net periodic benefit cost:
Service cost........................... $ 3.5 $ 3.5 $ 0.2 $ 0.3
Interest cost.......................... 5.5 5.2 0.9 1.0
Expected return on plan assets......... (6.6) (5.8) -- --
Amortization of prior service cost..... 0.2 0.2 (0.8) (0.7)
-------- ------- ------- -------
Net periodic benefit cost................ $ 2.6 $ 3.1 $ 0.3 $ 0.6
======== ======= ======= =======
</TABLE>
The Company has two nonpension postretirement benefit plans. Health care
benefits are contributory except for hourly employees of Woodward Coke, which
was closed in January 1998. The contributions for health
49
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
benefits are adjusted annually; the life insurance plan is noncontributory.
The accounting for the health care plan anticipates future cost-sharing
changes to the written plan that are consistent with the Company's expressed
intent to increase retiree contributions each year by 50%-100% of any
increases in premium costs.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage-point change in the assumed health care
cost trend rate would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total of service and interest cost
components in 1999................................. $0.1 ($0.1)
Effect on postretirement benefit obligation as of
December 31, 1999.................................. $1.1 ($0.8)
</TABLE>
Incentive Plan--The Company has established a management incentive plan
based on established target award levels for each participant if certain
Company performance and individual goals are met. The charge to operating
expense for this Plan was $3.2 million in 1999, $0.8 million in 1998 and $2.6
million in 1997.
Employee Savings Plan--The Company has established an employee savings plan
for all eligible salaried employees that conforms to Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees can elect to
contribute up to 16% of their salaries with a regular Company matching
contribution equivalent to 100% of the first 1% plus 50% of the next 2% of
tax-saver contributions.
The Company's regular contributions amounted to $0.6 million in 1999 and
$0.5 million in 1998 and 1997. The Company may also make a supplemental
contribution at the end of each Plan Year subject to approval by the Board of
Directors. Expense for supplemental contributions amounted to $0.4 million,
$0.1 million, and $0.4 million in 1999, 1998 and 1997, respectively. All
regular and supplemental matching contributions were made in voting common
stock of the Company held in Treasury until October 1, 1998 at which time such
contributions were made in cash.
7. Income Taxes
Monessen Transaction
In December 1999 the Company entered into an agreement with a third party
which will result in substantially all future non-conventional fuel tax
credits generated as a result of the production and sale of coke at its coke
facility in Monessen, Pennsylvania (the "Monessen Facility") being transferred
to the third party (the "Monessen Transaction"). In 1999 the Company received
$0.8 million for the transfer of tax credits, which is recorded as other
income. The tax credits expire in 2002. Prior to the Monessen Transaction, the
Company earned non-conventional fuels credits on coke production at the
Monessen Facility. Credits utilized for the years ended December 31, 1999,
1998 and 1997 were approximately $10.2 million, $9.5 million and $9.3 million,
respectively.
50
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Components of the Company's income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Current:
Federal...................................... $ 1.3 $ 5.4 $ 6.3
State........................................ 0.2 0.6 1.0
Foreign...................................... 4.0 2.4 --
------- -------- --------
Total current tax provision................ 5.5 8.4 7.3
Deferred:
Federal...................................... (5.8) (11.5) (23.6)
State........................................ (0.6) 1.3 (3.4)
Foreign...................................... 1.1 1.5 --
------- -------- --------
Total deferred tax provision (benefit)..... (5.3) (8.7) (27.0)
------- -------- --------
Total income tax provision (benefit)........... $ 0.2 $ (0.3) $ (19.7)
======= ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December
31,
-----------
1999 1998
----- -----
(In
millions)
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credits............................... $15.6 $15.0
Other postretirement benefits obligation...................... 9.9 9.9
Reserves, including insurance and product warranty............ 16.0 18.1
Book/tax inventory accounting................................. 2.5 2.4
Accrued vacation.............................................. 2.7 1.8
Other......................................................... 2.2 2.0
Excess tax basis on Koppers Australia assets.................. 15.0 19.0
Monessen Transaction.......................................... 4.1 --
----- -----
Total deferred tax assets................................... 68.0 68.2
----- -----
Deferred tax liabilities:
Tax over book depreciation and amortization................... 15.0 19.8
Other......................................................... 4.0 4.7
----- -----
Total deferred tax liabilities................................ 19.0 24.5
----- -----
Net deferred tax assets....................................... $49.0 $43.7
===== =====
</TABLE>
Income before income taxes and extraordinary loss for 1999 and 1998 included
$15.1 million and $10.4 million, respectively, from foreign operations.
51
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes is reconciled with the federal
statutory rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal......................................... 35.0% 35.0% (35.0)%
State, net of federal tax benefit............. (1.0) 6.9 (7.5)
Equity in earnings of foreign affiliates...... (1.2) (0.1) (5.1)
Foreign taxes................................. 11.8 4.0 3.8
Section 29 credits............................ (40.5) (46.8) (37.9)
Other......................................... (3.5) (0.4) 1.6
-------- -------- --------
0.6% (1.4)% (80.1)%
======== ======== ========
</TABLE>
The Company has not provided any U.S. tax on undistributed earnings of
foreign subsidiaries or joint ventures that are reinvested indefinitely. At
December 31, 1999 consolidated retained earnings of the Company included
approximately $9 million of undistributed earnings from these investments. The
Company has an alternative minimum tax credit carryforward of approximately
$15.6 million. The credit has no expiration date.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
(In millions except per share figures)
<S> <C> <C> <C>
Numerator for basic and diluted:
Net income to common stockholders before
extraordinary item............................. $ 24.2 $ 20.1 $ 1.1
Net income (loss) to common stockholders...... 24.2 20.1 (5.7)
Denominators:
Weighted-average voting common shares......... 1.4 1.6 3.0
Weighted-average non-voting common shares..... -- -- 3.2
------------ ------------ ------------
Denominators for basic earnings per share....... 1.4 1.6 6.2
Effect of dilutive securities:
Convertible preferred stock................... 2.3 2.3 2.1
Employee stock options........................ 0.2 0.3 0.4
------------ ------------ ------------
Dilutive potential common shares................ 2.5 2.6 2.5
Denominators for diluted earnings per share--
adjusted
weighted-average shares and assumed conversions. 3.9 4.2 8.7
Income before extraordinary item:
Basic earnings per share...................... $ 16.70 $ 12.64 $ 0.17
Diluted earnings per share.................... $ 6.23 $ 4.85 $ 0.12
Extraordinary item:
Basic earnings per share...................... $ -- $ -- $ (1.09)
Diluted earnings per share.................... $ -- $ -- $ (0.77)
Net income (loss):
Basic earnings per share...................... $ 16.70 $ 12.64 $ (0.92)
Diluted earnings per share.................... $ 6.23 $ 4.85 $ (0.65)
</TABLE>
52
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Options
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, recognizes no compensation expense for stock
option grants. In 1999 and 1998, respectively, the Company recognized $0.2
million and $1.5 million of expense related to the redemption of stock
options.
The pro forma effect on net income and earnings per share for 1999, 1998 and
1997 of the fair value method required by Statement No. 123, "Accounting for
Stock-Based Compensation" is immaterial. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: (a) for 1999 and 1998, risk-free
interest rate of 5.56%, dividend yield of 0.0%, volatility factor of .2, and
an expected option life of 10 years; (b) for 1997, risk-free interest rate of
5.75%, dividend yield of 0.0%, volatility factor of .14, and an expected
option life of 10 years.
The Company's Board of Directors has awarded a total of 1.1 million options,
approximately 0.5 million of which were outstanding at December 31, 1999, to
purchase shares of voting common stock to certain key executives at various
exercise prices. All options granted have 10-year terms; all vest and become
fully exercisable at the end of three years of continued employment, except
for options granted in 1998 and 1999, which have a vesting period of five
years.
A summary of the Company's stock option activity and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 511 $10 626 $ 5 650 $ 4
Granted.................. 15 17 149 17 88 14
Exercised................ (16) 4 (264) 3 (111) 6
Forfeited................ -- -- -- -- (1) 11
--- ---- ----
Outstanding at end of
year.................... 510 $10 511 $10 626 $ 5
=== ==== ====
Exercisable at end of
year.................... 379 $ 8 362 $ 7 626 $ 5
=== ==== ====
Weighted-average fair
value of options granted
during the year......... $5 $5
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 ranged from
$2.00 to $17.25, and the weighted-average remaining contractual life of those
options was 5.6 years. Pursuant to the provisions of the Company's stock
option plan, all options granted prior to December 1, 1997 became vested in
1997 due to a change of control.
10. Commitments and Contingencies
From time to time lawsuits, claims and proceedings are asserted against the
Company relating to the conduct of its business, including those pertaining to
product liability, warranties, employment and employee benefits. While the
outcome of litigation cannot be predicted with certainty, and some of these
lawsuits, claims or proceedings may be determined adversely to the Company,
management does not believe that the disposition of
53
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
any such pending matters is likely to have a material adverse effect on the
Company's financial condition or liquidity, although the resolution in any
reporting period of one or more of these matters could have a material adverse
effect on the Company's results of operations for that period.
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 agreements was entered into at the Company's inception in 1988 between
the Company and Beazer East, Inc. ("Beazer East", formerly known as Koppers
Company, Inc.) (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 $11 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 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 two toxic tort actions. The first action
arises from the Company's operations at its wood treating facility in Green
Spring, West Virginia ("Green Spring"). Plaintiff allegations include various
personal injury and property damage theories related to plant operations from
the mid-1940's through 1992. As a result of a lawsuit among CSX
Transportation, Inc. ("CSX"), Beazer East and the Company, CSX has assumed
Beazer East's obligations under the Indemnity in connection with Green Spring.
There can be
54
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
no assurance that CSX will perform its obligations and if Koppers was required
to pay such costs, it could have a material adverse effect on the business,
financial condition, cash flow and results of operations of the Company. The
Company has also been informed that it has been named in a toxic tort action
that arises from its operation at its wood treating facility in North Little
Rock, Arkansas. Plaintiff allegations include various property damage and
personal injury theories related to plant operations for an unspecified period
of time. The Company is currently unable to estimate a range of potential
loss, if any, related to these matters, and the Company's insurance carriers
have been notified. Although management believes that some or all of the
claims in these matters are within the scope of the Indemnity, 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 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. The Company has
provided all requested information and appropriate technical information
clarifying a number of issues leading to allegations of violation by the EPA.
The Company remains in discussions with the EPA. The EPA has not proposed a
penalty or suggested a range in which a penalty, if any, might be sought.
While the Company has prepared 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 prior to its
closure in January 1998, 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, Louisiana wood treating
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.
At the acquisition of 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. In
December 1999, the Monessen Consent Order was amended to substitute new duties
for certain of the old duties specified in the original order as part of the
procedure to have PADEP recognize the impact of the Monessen Transaction on
the Monessen Facility. Although an environmental indemnification was provided
to the Company by the seller of that facility, the
55
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. As recommended in a recently completed environmental audit, and
from comments made by the environmental authorities, the Mayfield plant is now
required to notify that it is a "contaminated site" under a Section 60
notification to the environmental authorities. This notification is expected
to be made by March 31, 2000. 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.
Rents
Rent expense for 1999, 1998 and 1997 was $19.6 million, $23.3 million and
$13.5 million, respectively. Commitments during the next five years under
operating leases aggregate to approximately $31 million, ranging from $11.2
million in 2000 to $1.8 million in 2004.
11. Operations by Business Segment
Description of the Types of Products and Services From Which Each Reportable
Segment Derives Its Revenues.
The Company has two reportable segments, Carbon Materials & Chemicals and
Railroad & Utility Products. The Company's Carbon Materials & Chemicals
division consists of four basic product lines: carbon pitch, which is sold
primarily to aluminum smelters for use in the production of anodes; PAA, which
is sold to the reinforced plastics industry and is used in plasticizers,
resins, paints and dye making; creosote, used in the treatment of wood; and
furnace coke, used in steel production. The Company's Railroad & Utility
Products division produces railroad crossties and performs various services
for the railroad industry, and produces treated utility poles for the electric
and telephone utilities, as well as various other treating services. All Other
includes Woodward Coke, which ceased operations in January 1998.
Measurement of Segment Profit or Loss and Segment Assets.
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest and income taxes. The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies.
Factors Management Used to identify the Company's Reportable Segments.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products with different
56
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
production processes. The business units have been aggregated into two
reportable segments since management believes the long-term financial
performance of these reportable segments is affected by similar economic
conditions.
<TABLE>
<CAPTION>
Business Segments
---------------------
Carbon Railroad
Materials & Utility
& Chemicals Products All Other Total
----------- --------- --------- ------
(In millions)
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenues from external customers....... $356.2 $307.7 $ 0.2 $664.1
Intersegment revenues.................. 13.4 -- -- 13.4
Depreciation and amortization.......... 16.7 8.0 2.4 27.1
Operating profit (loss)................ 28.6 24.0 (1.9) 50.7
Segment assets......................... 299.9 122.1 55.7 477.7
Capital expenditures................... 17.0 6.6 0.6 24.2
Year ended December 31, 1998:
Revenues from external customers....... $346.7 $320.7 $ 3.2 $670.6
Intersegment revenues.................. 16.6 -- -- 16.6
Depreciation and amortization.......... 19.6 8.9 2.1 30.6
Operating profit (loss)................ 27.3 22.1 (1.8) 47.6
Segment assets......................... 255.7 132.8 89.1 477.6
Capital expenditures................... 12.5 9.2 1.1 22.8
Year ended December 31, 1997:
Revenues from external customers....... $285.9 $255.2 $52.0 $593.1
Intersegment revenues.................. 11.2 -- 2.0 13.2
Restructuring charges.................. -- 5.5 39.9 45.4
Non-cash portion of restructuring
charges............................... -- 3.3 17.7 21.0
Depreciation and amortization.......... 11.7 6.9 4.9 23.5
Operating profit (loss)................ 32.0 10.2 (47.5) (5.3)
Segment assets......................... 273.3 126.6 100.3 500.2
Capital expenditures................... 39.6 11.7 2.6 53.9
</TABLE>
57
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Revenues
Total external revenues for reportable segments.. $ 663.9 $ 667.4 $ 541.1
Intersegment revenues for reportable segments.... 13.4 16.6 11.2
Revenues from Woodward Coke...................... 0.2 3.2 54.0
Elimination of intersegment revenues............. (13.4) (16.6) (13.2)
-------- -------- --------
Total consolidated revenues.................... $ 664.1 $ 670.6 $ 593.1
======== ======== ========
Profit or Loss
Operating profit for reportable segments......... $ 52.6 $ 49.4 $ 42.2
Corporate depreciation and amortization.......... (2.4) (2.1) (1.2)
Equity in earnings of affiliates................. 1.7 2.4 5.3
Woodward Coke.................................... -- -- (47.6)
Other income (expense)........................... 1.3 0.3 (0.1)
-------- -------- --------
Income (loss) before interest expense, income
tax provision (benefit), minority interest and
extraordinary item............................ $ 53.2 $ 50.0 $ (1.4)
======== ======== ========
Assets
Total assets for reportable segments............. $ 392.1 $ 388.5 $ 399.9
Equity investments............................... 17.3 18.0 16.6
Deferred financing............................... 12.4 14.4 16.0
Deferred taxes................................... 49.0 43.7 35.0
Fixed assets..................................... 1.7 2.2 1.4
Other............................................ 2.5 3.6 (0.5)
Cash and short-term investments.................. 4.9 11.7 15.2
Woodward Coke.................................... -- 0.9 14.4
Elimination of intercompany receivables.......... (2.2) (5.4) (1.8)
-------- -------- --------
Total consolidated assets...................... $ 477.7 $ 477.6 $ 496.2
======== ======== ========
Geographic Information
Australia and Pacific Rim:
Revenues from external customers................. $ 110.6 $ 105.5 $ --
Long-lived assets................................ 53.1 55.8 60.7
</TABLE>
All other revenues and long-lived assets are related to operations based in the
United States.
58
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------- ------------- ------------- -------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ------ ------ ------ ------
(In millions, except per share figures)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $157.4 $156.5 $172.8 $174.2 $170.8 $181.2 $163.1 $158.7
Operating profit........ $ 6.7 $ 7.2 $ 14.6 $ 14.8 $ 16.7 $ 14.8 $ 12.7 $ 10.8
Net income (loss)....... $ (0.2) $ (0.2) $ 8.6 $ 6.8 $ 11.1 $ 9.7 $ 4.7 $ 3.8
Income (loss) per share
of Common Stock:
Basic earnings (loss)
per share............ $(0.11) $(0.10) $ 5.71 $ 4.48 $ 7.95 $ 6.38 $ 3.40 $ 2.46
Diluted earnings
(loss) per share..... $(0.11) $(0.10) $ 2.18 $ 1.67 $ 2.90 $ 2.42 $ 1.23 $ 0.93
</TABLE>
13. Financial Information for Subsidiary Guarantors
The Company's payment obligations under the 9 7/8% Senior Subordinated Notes
due 2007 are fully and unconditionally guaranteed on a joint and several basis
by Koppers Industries, Inc. (parent), Koppers Industries International Trade
Corporation, Koppers Australia Pty. Limited, Koppers Industries of Delaware,
Inc. and Koppers Industries B.W., Inc. (collectively, the "Guarantor
Subsidiaries"). The New Notes have not been guaranteed by KHC Assurance, Inc.,
Tarconord A/S, and KSA Limited Partnership (collectively, the "Non-Guarantor
Subsidiaries"). In accordance with previous positions established by the
Securities and Exchange Commission, the following summarized financial
information illustrates separately the composition of the Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries. Separate complete financial
statements of the respective Guarantor Subsidiaries are not presented because
management has determined that they would not provide additional material
information that would be useful in assessing the financial composition of the
guarantors and non-guarantors. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions.
Summarized Condensed Financial Information
For the year ended December 31, 1999
(In millions)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets.......... $163.4 $103.9 $123.0 $(196.0) $194.3
Non-current assets...... 253.7 53.1 42.0 (65.4) 283.4
Current liabilities..... 218.4 29.5 45.1 (196.0) 97.0
Non-current liabilities. 300.4 29.5 17.4 -- 347.3
Net sales............... 550.4 122.5 8.9 (17.7) 664.1
Gross profit (after
depreciation &
amortization).......... 53.7 45.5 (5.4) (5.7) 88.1
Net income (loss)....... 10.6 22.7 (6.1) (3.0) 24.2
</TABLE>
59
<PAGE>
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized Condensed Financial Information
For the year ended December 31, 1998
(In millions)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets.......... $140.3 $ 84.1 $105.6 $(136.5) $193.5
Non-current assets...... 324.4 54.8 88.3 (179.4) 288.1
Current liabilities..... 189.9 19.5 15.9 (136.7) 88.6
Non-current liabilities. 338.9 44.8 0.8 (4.0) 380.5
Net sales............... 565.2 117.4 -- (12.0) 670.6
Gross profit (after
depreciation,
amortization
& restructuring........ 55.9 35.1 1.5 (7.2) 85.3
Net income (loss)....... 6.7 15.7 3.5 (5.8) 20.1
</TABLE>
Summarized Condensed Financial Information
For the year ended December 31, 1997
(In millions)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets.......... $169.2 $99.0 $55.0 $(97.7) $225.5
Non-current assets...... 288.6 99.7 16.1 (129.7) 274.7
Current liabilities..... 156.4 25.9 31.6 (97.6) 116.3
Non-current liabilities. 309.1 79.3 11.5 (27.8) 372.1
Net sales............... 592.9 12.6 7.2 (19.6) 593.1
Gross profit (after
depreciation,
amortization
& restructuring)....... 10.0 12.7 1.2 (1.1) 22.8
Net income (loss) before
extraordinary item..... (12.5) 11.3 2.6 (0.4) 1.0
Net income (loss)....... (19.2) 11.3 2.6 (0.4) (5.7)
</TABLE>
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Koppers Industries, Inc. has duly caused
this annual report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
Koppers Industries, Inc.
<TABLE>
<S> <C>
By: /s/ Donald E. Davis
...................................
Donald E. Davis,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this annual report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
/s/ Robert Cizik
............................. Non-Executive Chairman
Robert Cizik and Director
March 22, 2000
/s/ Walter W. Turner
............................. President, Chief March 22, 2000
Walter W. Turner Executive
Officer and Director
(Principal Executive
Officer)
/s/ Donald E. Davis
............................. Chief Financial March 22, 2000
Donald E. Davis Officer
(Principal Financial
Officer,
Principal Accounting
Officer)
/s/ Clayton A. Sweeney
............................. Director March 22, 2000
Clayton A. Sweeney
/s/ Christian L. Oberbeck
............................. Director March 22, 2000
Christian L. Oberbeck
/s/ N.H. Prater
............................. Director March 22, 2000
N.H. Prater
/s/ David M. Hillenbrand
.............................
David M. Hillenbrand Director March 22, 2000
</TABLE>
61
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*3.1 Restated and Amended Articles of Incorporation of the Company
(Incorporated by reference from Exhibit 4.1 of the Company's Form S-8
Registration Statement filed December 22, 1997.
*3.2 Restated and Amended By-Laws of the Company (Incorporated by reference
from Exhibit 4.2 of the Company's Form S-8 Registration Statement
filed December 22, 1997).
*4.1 Indenture between the Company and Integra Trust Company, National
Association, as Trustee (Incorporated by reference to respective
exhibits to the Company's Form 10-K for the year ended December 31,
1993).
*4.2 Indenture, dated as of December 1, 1997 between the Company and PNC
Bank, National Association (the "Trustee") (Incorporated by reference
to respective exhibits to the Company's Form S-4 Registration
Statement filed December 22, 1997 in connection with an Exchange Offer
for $175 million of 9 7/8% Senior Subordinated Notes due 2007).
*9.1 Stockholders' Agreement by and among Koppers Industries, Inc., KAP
Investments, Inc., Cornerstone-Spectrum, Inc., APT Holdings
Corporation and the Management Investors referred to therein, the most
recent amendment dated as of August 16, 1995 (Incorporated by
reference to respective exhibits to the Company's Amendment No. 1 to
Form S-1 Registration Statement filed June 18, 1996 in connection with
the offering of 7,001,922 shares of Common Stock).
*9.2 Stock Subscription Agreement dated as of December 26, 1988
(Incorporated by reference to respective exhibits to the Company's
Prospectus filed February 7, 1994 pursuant to Rule 424(b) of the
Securities Act of 1933, as amended, in connection with the offering of
the 8 1/2% Senior Notes due 2004).
*9.3 Stockholders' Agreement by and among Koppers Industries, Inc.,
Saratoga Partners III, L. P. and the Management Investors referred to
therein, dated December 1, 1997 (Incorporated by reference from
Exhibit 4.3 of the Company's Form S-8 Registration Statement filed
December 22, 1997).
*10.1 Asset Purchase Agreement, dated as of December 28, 1988, between the
Company and Koppers Company, Inc. (Incorporated by reference to
respective exhibits to the Company's Prospectus filed February 7, 1994
pursuant to Rule 424(b) of the Securities Act of 1933, as amended, in
connection with the offering of the 8 1/2% Senior Notes due 2004).
*10.2 Asset Purchase Agreement Guarantee, dated as of December 28, 1988,
provided by Beazer PLC (Incorporated by reference to respective
exhibits to the Company's Prospectus filed February 7, 1994 pursuant
to Rule 424(b) of the Securities Act of 1933, as amended, in
connection with the offering of the 8 1/2% Senior Notes due 2004).
*10.3 Credit Agreement, dated as of February 10, 1994 by and between the
Company, the Banks from time to time parties thereto and Mellon Bank,
N.A., as agent (Incorporated by reference to respective exhibits to
the Company's Form 10-K for the year ended December 31, 1993).
*10.4 Revolving Credit Agreement, dated as of February 10, 1994, from the
Company to the Banks and Mellon Bank, N.A. (Incorporated by reference
to respective exhibits to the Company's Form 10-K for the year ended
December 31, 1993).
*10.5 Term Loan Agreement, dated as of February 10, 1994, from the Company
to the Banks and Mellon Bank, N.A. (Incorporated by reference to
respective exhibits to the Company's Form 10-K for the year ended
December 31, 1993).
*10.6 Retirement Plan of Koppers Industries, Inc. and Subsidiaries for
Salaried Employees (Incorporated by reference to respective exhibits
to the Company's Prospectus filed February 7, 1994 pursuant to Rule
424(b) of the Securities Act of 1933, as amended, in connection with
the offering of the 8 1/2% Senior Notes due 2004).
*10.7 Koppers Industries, Inc. Non-contributory Long Term Disability Plan
for Salaried Employees (Incorporated by reference to respective
exhibits to the Company's Prospectus filed February 7, 1994 pursuant
to Rule 424(b) of the Securities Act of 1933, as amended, in
connection with the offering of the 8 1/2% Senior Notes due 2004).
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*10.8 Koppers Industries, Inc. Employee Savings Plan (Incorporated by
reference to respective exhibits to the Company's Prospectus filed
February 7, 1994 in connection with the offering of the 8 1/2% Senior
Notes due 2004).
*10.10 Koppers Industries, Inc. Survivor Benefit Plan (Incorporated by
reference to respective exhibits to the Company's Prospectus filed
February 7, 1994 pursuant to Rule 424(b) of the Securities Act of
1933, as amended, in connection with the offering of the 8 1/2% Senior
Notes due 2004).
*10.11 Koppers Industries, Inc. Stock Option Plan, as Restated and Amended as
of February 21, 1996 (Incorporated by reference to respective exhibits
to the Company's Amendment No. 1 to Form S-1 Registration Statement
filed June 18, 1996 in connection with the offering of 7,001,922
shares of Common Stock).
*10.15 LTV Steel Company, Inc. Coke Sales Agreement dated as of December 10,
1993 (Incorporated by reference to the Company's Prospectus filed
February 7, 1994 pursuant to Rule 424(b) of the Securities Act of 1933
in connection with the offering of the 8 1/2% Senior Notes due 2004).
*10.16 Alcoa/Koppers Solid Pitch Supply Agreement Warrick, Indiana; Rockdale,
Texas; Point Comfort, Texas; and Wenatchee, Washington dated as of
January 1, 1994 (Incorporated by reference to respective exhibits to
the Company's Form 10-K for the year ended December 31, 1993).
*10.18 Employment Contract for Donald P. Traviss dated October 17, 1994
(Incorporated by reference to respective exhibits to the Company's
Form 10-K for the year ended December 31, 1995).
*10.19 Employment Contract for Robert K. Wagner dated February 29, 1996
(Incorporated by reference to respective exhibits to the Company's
Form 10-K for the year ended December 31, 1995).
*10.20 Standby Term Loan Note, dated as of March 31, 1995 from the Company to
the Banks and Mellon Bank, N.A. (Incorporated by reference to
respective exhibits to the Company's Form 10-K for the year ended
December 31, 1995).
*10.21 Amendment to Standby Term Loan Note, dated as of March 18, 1996 from
the Company to the Banks and Mellon Bank, N.A. (Incorporated by
reference to respective exhibits to the Company's Form 10-K for the
year ended December 31, 1995).
*10.22 Amendment to Revolving Credit Notes, dated as of March 18, 1996 from
the Company to the Banks and Mellon Bank, N.A. (Incorporated by
reference to respective exhibits to the Company's Form 10-K for the
year ended December 31, 1995).
*10.23 Asset Purchase Agreement, dated as of March 11, 1996, between the
Company and Aristech Chemicals Corporation (Incorporated by reference
to respective exhibits to the Company's Form 10-K for the year ended
December 31, 1995).
*10.24 Term Loan Agreement, dated as of March 18, 1996 from the Company to
the Banks and Mellon Bank, N.A. (Incorporated by reference to
respective exhibits to the Company's Form 10-K for the year ended
December 31, 1995).
*10.25 Restated and Amended Employee Stock Option Plan (Incorporated by
reference to respective exhibits to the Company's Amendment No. 1 to
Form S-1 Registration Statement filed June 18, 1996 in connection with
the offering of 7,001,922 shares of Common Stock).
*10.26 Employment contract for Donald N. Sweet dated August 1, 1996
(Incorporated by reference to respective exhibits to the Company's
Form 10-Q for the quarterly period ended September 30, 1996).
*10.27 Volume Treatment Agreement CSX-Koppers dated as of January 30, 1997
(Incorporated by reference to respective exhibits to the Company's
Form 10-K for the year ended December 31, 1996).
*10.28 Credit Agreement, dated as of December 1, 1997 by and among the
Company, the Banks from time to time parties thereto and Swiss Bank
Corporation and Mellon Bank, N.A. (Incorporated by reference to
respective exhibits to the Company's Form S-4 Registration Statement
filed December 22, 1997 in connection with an Exchange Offer for $175
million of 9 7/8% Senior Subordinated Notes due 2007).
*10.29 Advisory Services Agreement between the Company and Saratoga Partners
III, L.P. (Incorporated by reference to respective exhibits to the
Company's Form S-4 Registration Statement filed December 22, 1997 in
connection with an Exchange Offer for $175 million of 9 7/8% Senior
Subordinated Notes due 2007).
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.30 Compensation contracts and Promissory Note for Robert Cizik.
*21.1 Amended List of Subsidiaries of the Company (Incorporated by reference
to respective exhibits to the Company's Form S-4 Registration
Statement filed December 22, 1997 in connection with an Exchange Offer
for $175 million of 9 7/8% Senior Subordinated Notes due 2007).
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed.
64
<PAGE>
KOPPERS INDUSTRIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In millions)
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Balance at Additions Koppers Balance
beginning charged Australia at close
of year to Expense Acquisition Deductions of year
---------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1999
Allowance for doubtful
accounts............... $1.2 $0.1 $ -- $0.2 $1.1
==== ==== ==== ==== ====
1998
Allowance for doubtful
accounts............... $0.8 $0.6 $ -- $0.2 $1.2
==== ==== ==== ==== ====
1997
Allowance for doubtful
accounts............... $0.2 $ -- $0.6 $ -- $0.8
==== ==== ==== ==== ====
</TABLE>
65
<PAGE>
Exhibit 10.30
December 16, 1999
Robert Cizik
Cizik LLC
Texas Commerce Tower
600 Travis, Suite 3628
Houston, Texas 77002
Dear Bob:
This letter agreement (the "Agreement") outlines the terms relating to Koppers
Industries, Inc.'s ("Koppers" or the "Company") retention of you in your
capacity as Senior Advisor to the Company.
Title: Senior Advisor (Commencing January 1, 1999).
Scope of
Retention: The Company hereby retains you to advise the Company"s Board
of Directors and its management with respect to, and to
provide leadership and oversight in connection with, the
establishment and execution of strategic and tactical business
plans, operating and management policies, and acquisition
strategies and opportunities to help position the Company for
the future and to provide any other advice, service and
consultations as you and the Company may mutually agree upon
from time to time, subject to your reasonable and convenient
availability.
Compensation: (a) Monthly compensation for your activities as Senior Advisor
for the Company shall be at the rate of $12,500 per month
beginning January 1, 1999 and lasting for the period you also
continue to serve as Non-Executive Chairman of the Board of
Directors.
Term: This Agreement shall be effective as of January 1, 1999 and
shall continue for the period in which you continue to serve
as Non-Executive Chairman of the Board of Directors of the
Company. This Agreement shall automatically terminate
effective upon the date you no longer serve as Non-Executive
Chairman of the Board of Directors of the Company.
Expense
Reimbursement: You will receive reimbursement of all reasonable out-of-pocket
expenses including (a) reimbursement of first class travel
expenses and (b)
<PAGE>
Exhibit 10.30
reimbursement of overnight stays in New York City at the
applicable rate for a suite at the Carlisle Hotel in Manhattan
(currently $550 per night).
Termination: In the event of the termination of this Agreement, you will be
entitled to a $75,000 lump sum payment for consulting services
provided to the Company for a six month period. At the end of
said six-month period, your services on behalf of the Company
shall terminate and no other compensation shall be due or
payable.
Confidentiality: You agree to maintain all information related to the Company
in confidence and not to divulge any confidential information
to any third party without the prior consent of the Company.
Indemnification: The Company will indemnify you for any actions taken by you in
accordance with the indemnification provisions of the
Company's Bylaws and as permitted by the applicable
Pennsylvania business corporation laws.
Should the above meet with your approval, please be kind enough to sign and
return a copy of this letter to me.
Sincerely,
/s/ Walter W. Turner
- ---------------------
Walter W. Turner
Chief Executive Officer
Accepted & Agreed to:
/s/ Robert Cizik
- -----------------
Robert Cizik
<PAGE>
Exhibit 10.30
December 16, 1999
Robert Cizik
Cizik Interests
Texas Commerce Tower
600 Travis, Suite 3628
Houston, Texas 77002
Dear Bob:
This letter agreement (the "Agreement") outlines the terms relating to your
involvement with Koppers Industries, Inc. ("Koppers" or the "Company") as a
member of the Board of Directors and Non-Executive Chairman of the Board of
Directors.
Title: Member of the Board of Directors (Commencing January 1, 1999).
Non-Executive Chairman of the Board of Directors (Commencing
July 1, 1999).
Scope of
Retention: The Company hereby retains you to serve as a Member of the
Board of Directors and Non-Executive Chairman of the Board of
Directors of the Company and to perform the following services
in connection therewith:
(a) advise the Company"s Board of Directors and its management
with respect to, and to provide leadership and oversight in
connection with, the establishment and execution of strategic
and tactical business plans, operating and management
policies, and acquisition strategies and opportunities to help
position the Company for the future.
(b) provide any other advice, service and consultations as you
and the Company may mutually agree upon from time to time,
subject to your reasonable and convenient availability.
Compensation: (a) Applicable director fee per annum.
(b) 35,294 shares purchased at $17.00 per share, under a 5-
year vesting schedule, financed by a 10-year note.
<PAGE>
Exhibit 10.30
Term: This Agreement shall be effective as of January 1, 1999 and
shall continue, as applicable, for the period in which you
continue to serve as a member of the Board of Directors and as
Non-Executive Chairman of the Board of Directors of the
Company. This Agreement shall automatically terminate
effective upon the date you no longer serve as a member of the
Board of Directors or as Non-Executive Chairman of the Board
of Directors of the Company.
Investment: You will have the option to make an initial investment of
$340,000 to purchase 20,000 shares of Koppers" common stock at
$17.00 per share.
Expense
Reimbursement: Reimbursement of all reasonable out-of-pocket expenses
including (a) reimbursement of first class travel expenses and
(b) reimbursement of overnight stays in New York City at the
applicable rate for a suite at the Carlisle Hotel in Manhattan
(currently $550 per night).
Confidentiality: You agree to maintain all information related to the Company
in confidence and not to divulge any confidential information
to any third party without the prior consent of the Company.
Indemnification: The Company will indemnify you for any actions taken by you in
accordance with the indemnification provisions of the
Company's Bylaws and as permitted by the applicable
Pennsylvania business corporation laws.
Should the above meet with your approval, please be kind enough to sign and
return a copy of this letter to me.
Sincerely,
/s/ Walter W. Turner
- ------------------------
Walter W. Turner
Chief Executive Officer
Accepted & Agreed to:
/s/ Robert Cizik
- -----------------
Robert Cizik
<PAGE>
Exhibit 10.30
PROMISSORY NOTE
---------------
$600,000 October 15, 1999
FOR VALUE RECEIVED, the undersigned, ROBERT CIZIK ("Borrower"), HEREBY PROMISES
TO PAY to the order of KOPPERS INDUSTRIES, INC., a Pennsylvania corporation
("Lender"), the principal sum of SIX HUNDRED THOUSAND DOLLARS ($600,000) (the
"Principal Amount") upon the terms and conditions contained herein.
1. Maturity Date. The entire unpaid Principal Amount (together with
--------------
any accrued but unpaid interest thereon) under this Note shall be due and
payable upon the first to occur of (a) August , 2009 or (b) the date that
----
Borrower sells, transfers or otherwise disposes of the beneficial ownership of
the shares of common stock of the Lender (the AShares@) purchased with the
proceeds of this Note (the AMaturity Date@).
2. Interest Rate. No interest will accrue on the unpaid Principal Amount of
--------------
this Note from the date upon which the Borrower receives such Principal Amount
until such Principal Amount is paid in full, provided that the Borrower remains
as the Non-Executive Chairman of the Lender. In the event that Borrower
relinquishes the role of Non-Executive Chairman of the Lender, Borrower, in his
discretion, may elect to repay this Note in either of the following manners:
(a) Borrower may repay the outstanding Principal Amount in its entirety at that
time;
or
(b) Borrower may repay the outstanding Principal Amount on or before the
Maturity Date with interest beginning to accrue on the date Borrower
relinquishes the role of Non-Executive Chairman of Lender, at the
applicable federal rate published in accordance with Section 1274 of the
Internal Revenue Code of 1986, as amended.
3. Limited Recourse. Borrower shall be personally liable for payment of thirty
-----------------
percent (30%) of the Principal Amount and any interest thereon (the ARecourse
Amount@). Borrower shall not be personally liable for payment of the remaining
seventy percent (70%) of the Principal Amount (the ANonrecourse Amount@). In
the event of a failure by Borrower to pay any portion of the Nonrecourse Amount,
Lender will look solely to the Shares given to secure payment of this Note. The
foregoing limitation of liability shall not impair or otherwise affect the
validity or enforceability of (a) the debt evidenced by the Note or (b) Lender's
liens, security interests, rights and remedies with respect to the Shares.
4. Manner and Place of Payments. All amounts due and payable by the Borrower
-----------------------------
to the Lender under this Note shall be paid in lawful money of the United States
of America at 436 Seventh Avenue, Pittsburgh, Pennsylvania, 15219, or at such
other place as the Lender may from time to time designate in writing.
5. Prepayment. The Borrower may, at any time prior to the Maturity Date,
-----------
prepay all or any part of the Principal Amount without penalty.
6. Waivers. The Borrower and all parties becoming a party to this Note, or any
--------
endorser or guarantor of this Note, expressly waive demand, presentment for
payment, protest, and notice of dishonor.
<PAGE>
Exhibit 10.30
7. Successors and Assigns; Amendment. The provisions of this Note shall bind
---------------------------------
Borrower and his successors and assigns and inure to the benefit of Lender and
its successors and assigns. This Note may not be changed, amended, modified or
discharged orally, but only by an instrument signed by Borrower and Lender.
8. Notices. All notices required or permitted by this Note shall be in writing
--------
and shall be deemed to have been duly given when delivered against receipt, or
deposited in the United States mails, registered mail, postage prepaid, return
receipt requested, addressed to the Borrower at his address as it appears on the
records of the Lender and addressed to the Lender at its principal place of
business. Either party may change the address to which notices are to be sent
by giving notice of such change of address in conformity with the foregoing
provision.
9. Rights and Remedies; Non-Waiver. Each right, power and remedy of the Lender
--------------------------------
under this Note or under applicable law shall be cumulative and concurrent and
the exercise of any one or more of them shall not preclude the simultaneous or
later exercise by the Lender of any or all such other rights, powers or
remedies. No failure or delay by the Lender to insist upon the strict
performance of any one or more provisions of this Note, or to exercise any
right, power or remedy consequent upon a breach of or default under this Note
shall constitute a waiver of performance or preclude the Lender from exercising
any such right, power or remedy.
10. Governing Law. This Note shall be governed, construed and enforced in
--------------
strict accordance with the laws of the Commonwealth of Pennsylvania without
regard to any conflicts of laws principles which would cause the substantive law
of another jurisdiction to apply. Borrower hereby consents to the jurisdiction
of the courts of the Commonwealth of Pennsylvania and agrees that venue shall be
proper in any county within the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, Borrower has executed and delivered this Note as of the
day and year first written above.
WITNESS: BORROWER:
/s/ Robert Cizik
-----------------
ROBERT CIZIK
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITOR
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-59121) pertaining to Koppers Industries, Inc. Employee Stock
Purchase Plan of our report dated January 28, 2000 with respect to the
consolidated financial statements and schedule of Koppers Industries, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31,
1999.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
March 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,300
<SECURITIES> 0
<RECEIVABLES> 76,800
<ALLOWANCES> 1,100
<INVENTORY> 91,800
<CURRENT-ASSETS> 194,300
<PP&E> 355,600
<DEPRECIATION> 176,000
<TOTAL-ASSETS> 477,700
<CURRENT-LIABILITIES> 97,000
<BONDS> 186,100
0
0
<COMMON> 0
<OTHER-SE> 33,400
<TOTAL-LIABILITY-AND-EQUITY> 477,700
<SALES> 664,100
<TOTAL-REVENUES> 664,100
<CGS> 548,900
<TOTAL-COSTS> 613,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,100
<INCOME-PRETAX> 25,100
<INCOME-TAX> 200
<INCOME-CONTINUING> 24,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,200
<EPS-BASIC> 16.70
<EPS-DILUTED> 6.23
</TABLE>
