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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, 2000
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)
Pennsylvania 25-1588399
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
436 Seventh Avenue
Pittsburgh, Pennsylvania 15219
412-227-2001
(Addresses of principal executive offices)
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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9 7/8% Senior Notes due 2007 New York Stock Exchange
8 1/2% Senior Notes due 2004 New York Stock Exchange
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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]
Common Stock, par value $.01, outstanding at March 1, 2001 amounted to 1.3
million shares.
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TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Business........................................................... 1
2. Properties......................................................... 9
3. Legal Proceedings.................................................. 10
4. Submission of Matters to a Vote of Security Holders................ 10
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 10
6. Selected Financial Data............................................ 11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 12
7a. Market Risk........................................................ 18
8. Financial Statements and Supplementary Data........................ 19
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 19
PART III
10. Directors and Executive Officers of the Registrant................. 20
11. Executive Compensation............................................. 23
12. Security Ownership of Certain Beneficial Owners and Management..... 26
13. Certain Relationships and Related Transactions..................... 27
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 28
SIGNATURES
Signatures......................................................... 54
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. Including the May 2000 acquisition of the
remaining 50% of Tarconord A/S ("Tarconord", known as "Koppers Europe"
subsequent to the acquisition) the Company operates 39 facilities with
locations in the United States, the South Pacific (primarily Australia and New
Zealand), Europe and South Africa. In 2001 the Company also anticipates the
startup of an operating facility in China through its 60%-owned joint venture
(See "Carbon Materials & Chemicals-Business"). The Company also maintains an
indirect ownership interest in an additional facility in the United States
through its domestic joint venture KSA (as defined herein). The Company
recorded net sales and net income of $723.5 million and $14.7 million,
respectively, for the twelve months ended December 31, 2000. For the same
period, the Company's business segments, Carbon Materials & Chemicals and
Railroad & Utility Products, accounted for 58.2% and 41.8% 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) carbon black (and carbon black feedstock), used in the
production of rubber tires; and e) 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-assemblies, and disposal services; b) supplies
treated wood 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").
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. In 1998 Hanson PLC signed an
agreement 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)
are underwritten by subsidiaries of two of the world's largest reinsurance
companies, Centre Solutions (a member of the Zurich Group) and Swiss Re. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Environmental Matters."
1
Carbon Materials & Chemicals
The Company's Carbon Materials & Chemicals division manufactures five
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; d) carbon black (and carbon black
feedstock), used in the manufacture of rubber tires, and e) furnace coke, used
in steel production. Carbon pitch, PAA, creosote and carbon black 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, creosote and carbon black. The Company has four tar
distillation facilities in the United States, one in Australia, one in Denmark
and two in the United Kingdom, 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 2000, sales of carbon pitch, PAA, creosote,
carbon black (including carbon black feedstock) and coke accounted for
approximately 37%, 14%, 9%, 9% and 9% 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 global 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 eight coal tar distillation facilities and one carbon pitch importing
terminal (located in the northwest United States) give it the ability to offer
customers multiple sourcing and a consistent supply of high quality products.
In anticipation of potential reductions of United States coke capacity, the
Company has secured coal tar supply through long-term contracts and
acquisitions.
Coal tar distillation 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.
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 carbon pitch business in 2000, and
continued pricing pressures are anticipated in 2001. 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. There are currently no known
viable substitutes for carbon pitch in the production of carbon anodes.
However, in 2000 the Company's largest carbon pitch customer, Alcoa, Inc.
("Alcoa") announced that it was actively pursuing alternative anode technology
that would eliminate the need for carbon pitch as an anode binder. Although
management does not believe that this alternative technology will be developed
and used widely within the next five years, the potential development and
implementation of a substitute product could seriously impair the Company's
ability to profitably market carbon pitch and related co-products.
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.
2
Approximately 38% of Koppers' creosote production is sold to the Railroad &
Utility Products division, which 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 is sold to
railroads or to other wood treaters. The Company's principal competitor in the
creosote market is KMG Bernuth, Inc.
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, one Australian and three
European tar distillation facilities. 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.
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.
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 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; however, due to excess supplies of PAA during 2000,
margins did not increase proportionally despite high levels for orthoxylene
prices. Management does not expect market conditions for PAA to improve in
2001. Koppers' cost to produce naphthalene and PAA is primarily driven by its
cost to procure coal tar, which has historically remained stable. The other
four principal PAA producers, Exxon Chemical Company, Sunoco, Inc. (formerly
Aristech Chemical Corporation), BASF Corporation and Stepan Company, can use
only orthoxylene in the production of PAA.
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."
The Company's coke business consists of a coke facility located in Monessen,
Pennsylvania (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 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. In December 1999 the Company entered into an agreement with a
third party which resulted in substantially all 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 2000 and 1999
the Company earned $8.6 million and $0.8 million, respectively, for the
transfer of tax credits. Under current tax legislation, the tax credits expire
in 2002. Credits utilized for current and deferred tax benefits for the years
ended December 31, 2000, 1999 and 1998 were approximately $0.1 million, $10.2
million and $9.5 million, respectively.
Currently, LTV Steel Company, Inc. ("LTV") is the only customer for the
Company's furnace coke, with a contract to take 100% of the Company's coke
production in 2001. LTV sought protection under Chapter 11 of the Bankruptcy
Code in December 2000, resulting in a charge to bad debt expense for the
Company for
3
outstanding accounts receivable. The Company is currently selling its coke
production to LTV during LTV's Chapter 11 reorganization; if LTV or certain of
its production facilities were to cease operations, the Company may have
difficulty selling its coke without incurring significant margin reductions.
Additionally, if the Company becomes unable to sell its coke, it would not
receive cash for the energy tax credits. Pricing for furnace coke has declined
significantly over the past several years as a result of excess supply due to
higher levels of imported coke.
The Company also has a timber preservation chemicals business that operates
throughout Australia, 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, copper chrome arsenates ("CCA"), copper
co-biocides, sapstain control products and light organic solvent preservatives
("LOSP").
Roofing pitch and refined tars are produced in smaller quantities and are
sold into the commercial roofing and pavement sealer markets, respectively.
The Carbon Materials & Chemicals division's ten largest customers
represented approximately 40% of the division's net sales for 2000. The
Company's primary global competitor in the production of carbon pitch is VFT
Inc., headquartered in Germany.
Coal tar is purchased from a number of outside sources as well as from the
Monessen Facility. Primary suppliers are Bethlehem Steel Corporation, LTV, USX
Corporation ("USX"), China Steel Chemical Corporation, The Broken Hill
Proprietary Co. Limited, Corus and Wheeling-Pittsburgh Steel Corporation.
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 through its foreign operations,
as well as its research of petroleum feedstocks, will assist in securing an
uninterrupted supply of carbon pitch feedstocks.
During 2000 the Company purchased the remaining 50% of Tarconord from the
Company's joint venture partner (Tarconord is now known as "Koppers Europe"),
for a cash price of approximately $13 million and the assumption of certain
liabilities (the "Koppers Europe Acquisition"). Koppers Europe is a tar
distillation operation comprised of four operating locations, one in Denmark
and three in the United Kingdom, which generated approximately $90 million in
sales in 2000 including $56.5 million subsequent to the acquisition and
included in 2000 consolidated sales of the Company. Koppers Europe produces
products similar to the Company's other Carbon Materials & Chemicals
operations, with the primary product being carbon pitch. Additionally, in 1999
the Company entered into a joint venture agreement with Tangshan Iron & Steel
Co. and Jingtang Port Authority to rehabilitate and operate a tar distillation
facility in China. The joint venture, Koppers (China) Carbon and Chemical Co.,
Limited ("Koppers China") is 60% owned by the Company and is expected to begin
production of coal tar products in 2001. After contributions of cash,
engineering services and acquisition costs totaling $7.4 million as of December
31, 2000 the estimated remaining cash outlays for the Company in 2001 are
approximately $3.1 million. The joint venture agreement also includes a tar
supply contract.
Railroad & Utility Products
The Company markets treated wood products 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 and telephone 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
4
utilities and pilings used in industrial foundations, beach housing, docks and
piers. The Railroad & Utility Products division operates 20 wood treating
plants, one specialty trackwork facility, one co-generation facility and 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
15 million replacement crossties purchased per year. United States Class 1
railroads (defined as railroads with operating revenues in excess of $250
million) maintain approximately 170,000 miles of track, estimated to contain
approximately 500 million crossties. The Company currently has contracts with
four of the five 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 and consolidate their supplier base, have
enabled the Company to position itself for growth by offering certain products
and 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 2000, approximately
11% 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.
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 62% of a
finished crosstie'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 crossties 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 crossties are either air-
stacked for a period of six to twelve months or artificially dried by a process
called boultonizing. Once dried, the crossties are pressure treated with
creosote, a product of Koppers' Carbon Materials & Chemicals division.
The Company's top 10 Railroad & Utility Products accounts comprised
approximately 63% of Railroad & Utility Products' net sales for 2000 and are
serviced through long-term contracts ranging from one to seven 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.
5
The Company believes that the threat of substitution for the wood crosstie
is low due to the higher cost of alternative materials. Concrete crossties,
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 2000, an estimated one million concrete crossties, or 7%
of total tie insertions, were installed by Class 1 railroads. The Company
believes that concrete crossties will continue to command approximately this
level of market share. KSA produced approximately 170,000 concrete crossties in
2000, or 17% of the United States estimated concrete tie market. While the cost
of material and installation of a concrete crosstie is much higher than that of
a wood tie, the average life of wood and concrete crossties 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
small, 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. In recent years 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.
Pole products account 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, which consists of
regional wood treating companies operating small to medium size plants and
serving local markets.
Due to deteriorating market conditions resulting in increasing operating
losses over the past several years, in February 2001 the Company's Board of
Directors approved the closure of the utility pole facility located in Feather
River, California in March 2001. This is expected to result in a charge of $3.5
million in the first quarter of 2001. Completion of the closure is expected by
year-end 2001, with additional estimated charges of $1.1 million in operating
losses.
Equity Investments and Related Parties
Domestic Joint Venture: KSA
KSA, located in Portsmouth, Ohio, produces concrete crossties, a
complementary product to the Company's treated wood crosstie business.
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 entered into a contract with its major
customer in 2000 to supply a minimum of 450,000 concrete ties over a period of
five years. KSA also provides concrete turnouts, used in rail traffic
switching, and used crosstie rehabilitation.
6
Research and Development
As of December 31, 2000, the Company had eleven full-time employees engaged
in research and development and technical service activities. The Company's
research efforts are directed toward new product development regarding
alternate uses for coal tar and technical service efforts to promote the use of
creosote. The Company believes the research and technical efforts provided in
these areas are adequate to maintain a leadership position in the technology
related to these products. Expenditures for research and development for 2000,
1999 and 1998 were $2.5 million, $2.1 million and $2.3 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
The Company's operations and properties are subject to extensive federal,
state, local and foreign environmental laws and regulations, including those
concerning 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, as well as various
health and safety matters (collectively, "Environmental Laws"). In the United
States, the Clean Air Act and Clean Water Act, each as amended, impose
stringent standards on air emissions and water discharges, respectively. Under
the Resource Conservation and Recovery Act, as amended ("RCRA"), a facility
that treats, stores or disposes of hazardous waste on-site may be liable for
corrective action costs, and a facility that holds a RCRA permit may have to
incur costs relating to the closure of certain "hazardous" or "solid" waste
management units. Under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), and similar state laws, an
owner or operator of property at which releases of hazardous substances have
occurred may be liable for investigation and remediation of any resulting
contamination and related natural resource damages. In addition, under CERCLA,
the generator of hazardous substances may be strictly, and jointly and
severally, liable for any required investigation or remediation at third-party
sites. Environmental Laws are subject to frequent amendment and have
historically become more stringent. Failure to comply with Environmental Laws
can result in 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.
For the last three years, the Company's annual capital expenditures for
environmental matters averaged approximately $4.5 million, and annual operating
expenses for environmental matters, excluding depreciation, averaged
approximately $9.7 million. The Company currently estimates that capital
expenditures in connection with matters relating to environmental control
facilities will be approximately $5.4 million for 2001. The Company's
experience with environmental matters leads it to believe that it will have
continuing significant expenditures associated with compliance with
Environmental Laws and, to the extent not covered by insurance or available
recoveries under third party indemnification arrangements, for present and
future remediation efforts at waste and plant sites and other liabilities
associated with environmental matters. There can be no assurance that these
expenditures 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations---Environmental Matters".
7
Employees and Employee Relations
As of January 31, 2001, the Company employed 725 salaried employees and
1,430 hourly employees. Listed below is a breakdown of employees by business
segment, including administration.
Non-
Division Salaried Salaried Total
- -------- -------- -------- -----
Carbon Materials & Chemicals............................ 324 700 1,024
Railroad & Utility Products............................. 301 730 1,031
Administration.......................................... 100 -- 100
--- ----- -----
Total Employees....................................... 725 1,430 2,155
Of the Company's employees, approximately 56% are represented by 25
different unions and covered under numerous 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, with more than 250 employees at four facilities. Labor
contracts expiring in 2001 represent approximately 12% of total employees.
8
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 18 Carbon Materials & Chemicals facilities
and 21 Railroad & Utility Products facilities. See "Business--Carbon Materials
& Chemicals," and "Business --Railroad & Utility Products". As of December 31,
2000 vehicles, machinery 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:
Segment/Primary Product Description of
Line Location Acreage Property Interest
- ----------------------- -------- ------- -----------------
Carbon Materials &
Chemicals
Wood Preservation
Chemicals Auckland, New Zealand 1.3 Leased
Carbon Pitch Clairton, Pennsylvania 17 Owned
Carbon Pitch, Creosote,
Naphthalene Clarence, England 120 Owned
Wood Preservation
Chemicals Fiji .7 Owned
Carbon Pitch Follansbee, West Virginia 32 Owned
Carbon Black Kurnell, New South Wales, Australia 20 Leased
Carbon Pitch Mayfield, New South Wales, Australia 26 Owned
Furnace Coke Monessen, Pennsylvania 45 Owned
Carbon Pitch Nyborg, Denmark 36 26 Owned, 10 Leased
Wood Preservation
Chemicals Penang, Malaysia 3 Leased
Carbon Pitch Portland, Oregon 6 Leased
Carbon Pitch Portland, Victoria, Australia 1.1 Leased
Carbon Pitch Scunthorpe, England 27 Owned
Wood Preservation
Chemicals Port Shepstone, South Africa .3 Leased
Carbon Pitch, PAA Stickney, Illinois 38 Owned
PAA Totten, England 1 Owned
Wood Preservation
Chemicals Trentham, Victoria, Australia 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, 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, Australia 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 5 99 Year Lease
Utility Poles Logansport, Louisiana 30 Owned
Utility Poles Longford, Tasmania 16.5 Owned
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, Australia 75 Owned
Utility Poles Thornton, New South Wales, Australia 15 Owned
9
The Company's corporate offices are located in approximately 57,000 square
feet of leased office space in the Koppers Building, Pittsburgh, Pennsylvania.
The office space is leased from Koppers Building Holdings, Inc. (not affiliated
with the Company) with the lease term expiring on December 31, 2010.
ITEM 3. Legal Proceedings
The Company is involved in various proceedings relating to environmental
laws and regulations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--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
There were no matters submitted to a shareholder vote during the fourth
quarter of 2000.
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, 2001 the Company had 1.3 million shares of common
stock outstanding. Of the total, 1.0 million shares of common stock were owned
by approximately 200 current and former employees and Directors of the Company
(the "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
Partners III, L.P. ("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 senior convertible preferred stock ("preferred
stock") held by Saratoga which may at the time be outstanding.
10
ITEM 6. Selected Financial Data
Years Ended December 31,
-----------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(In millions, except share figures)
Income Statement Data:
Net sales........................... $ 723.5 $ 664.1 $ 670.6 $ 593.1 $ 588.5
Cost of sales..................... 598.8 548.9 553.5 501.4 496.1
Depreciation and amortization..... 30.0 27.1 30.6 23.5 21.8
Selling, general and
administrative................... 45.4 37.4 39.9 28.1 27.5
Restructuring charges (1)......... -- -- (1.0) 45.4 15.5
------- ------- ------- ------- -------
Operating profit (loss)............. 49.3 50.7 47.6 (5.3) 27.6
Equity in earnings of affiliates.... 2.2 1.7 2.4 5.3 9.6
Other income (expense) (2).......... 8.6 0.8 -- (1.4) (12.6)
Interest expense.................... 28.0 28.1 29.7 17.3 16.6
------- ------- ------- ------- -------
Income (loss) before income tax
provision (benefit), minority
interest and extraordinary item.... 32.1 25.1 20.3 (18.7) 8.0
Income tax provision (benefit) (3).. 16.6 0.2 (0.3) (19.7) (6.1)
Minority interest................... 0.8 0.7 0.5 -- --
------- ------- ------- ------- -------
Income before extraordinary item.... $ 14.7 $ 24.2 $ 20.1 $ 1.0 $ 14.1
------- ------- ------- ------- -------
Net income (loss) (4)............... $ 14.7 $ 24.2 $ 20.1 $ (5.7) $ 14.1
------- ------- ------- ------- -------
Earnings per share before
extraordinary item:
Basic earnings per share.......... $ 10.64 $ 16.70 $ 12.64 $ 0.17 $ 1.54
------- ------- ------- ------- -------
Diluted earnings per share........ $ 3.83 $ 6.23 $ 4.85 $ 0.12 $ 1.47
------- ------- ------- ------- -------
Earnings (loss) per share:
Basic earnings (loss) per share..... $ 10.64 $ 16.70 $ 12.64 $ (0.92) $ 1.54
------- ------- ------- ------- -------
Diluted earnings (loss) per share... $ 3.83 $ 6.23 $ 4.85 $ (0.65) $ 1.47
------- ------- ------- ------- -------
Balance Sheet Data (end of period):
Working capital..................... $ 107.4 $ 97.3 $ 104.9 $ 109.2 $ 77.7
Total assets........................ 483.9 477.7 477.6 500.2 411.2
Total debt (5)...................... 291.5 309.8 332.7 320.7 209.9
Common stock subject to redemption
(6)................................ 30.9 25.6 21.1 26.4 24.0
Common equity....................... 3.7 7.8 (8.6) (14.6) 54.1
Other Data:
Cash dividends per common share..... $ -- $ -- $ -- $ 0.26 $ 0.34
Capital expenditures................ 14.8 22.5 20.2 19.8 21.7
Acquisitions and related capital
expenditures....................... 15.3 1.7 2.6 34.1 39.5
- --------
(1) The 1997 charges were comprised of $39.9 million related to the closure of
the Company's coke facility in Woodward, Alabama in January 1998 ("Woodward
Coke") and $5.5 million related to the Feather River, California
cogeneration 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.
11
(2) Other income for 2000 and 1999 consists of proceeds from the monetization
of tax credits from the Monessen Facility based on coke production. See
Note 6 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, 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, and a $2.5 million legal settlement related to
environmental issues.
(3) In December 1999 the Company entered into an agreement with a third party
to transfer substantially all of the energy tax credits from the Monessen
Facility for cash. See Note 6 of the Notes to Consolidated Financial
Statements of the Company.
(4) Net income for 1997 includes extraordinary loss on early extinguishment of
debt of $6.7 million.
(5) The Company sold $175.0 million of Subordinated Notes on December 1, 1997
in a private placement and established with UBS Warburg 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 3
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 4 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:
Years Ended December
31,
------------------------
2000 1999 1998
------ ------ ------
Net sales (In millions):
Carbon Materials & Chemicals..................... $421.3 $356.2 $346.7
Railroad & Utility Products...................... 302.2 307.7 320.7
All Other........................................ -- 0.2 3.2
------ ------ ------
Total.......................................... $723.5 $664.1 $670.6
====== ====== ======
Segment sales as percent of total net sales:
Carbon Materials & Chemicals..................... 58.2% 53.6% 51.7%
Railroad & Utility Products...................... 41.8% 46.4% 47.8%
All Other........................................ 0.0% 0.0% 0.5%
------ ------ ------
Total.......................................... 100.0% 100.0% 100.0%
Gross margin by segment (after depreciation and
amortization):
Carbon Materials & Chemicals..................... 15.8% 14.1% 14.5%
Railroad & Utility Products...................... 9.6% 12.6% 11.3%
All Other........................................ (0.1)% (0.1)% (0.3)%
------ ------ ------
Total.......................................... 13.1% 13.3% 12.6%
Operating margin by segment:
Carbon Materials & Chemicals..................... 8.6% 8.0% 7.9%
Railroad & Utility Products...................... 4.6% 7.8% 7.0%
All Other........................................ (0.1)% (0.3)% (0.3)%
------ ------ ------
Total.......................................... 6.8% 7.6% 7.1%
12
Comparison of Results of Operations for the Years Ended December 31, 2000
and 1999.
Net Sales. Net sales for the year ended December 31, 2000 were higher than
the same period in 1999 due primarily to $56.5 million of sales as a result of
the Koppers Europe Acquisition. Eliminating the effect of the Koppers Europe
Acquisition, 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, which more than offset lower carbon pitch volumes and lower pricing
for furnace coke. Net sales for Railroad & Utility Products decreased compared
to the prior year due to reductions in sales volumes for utility poles and
reductions in pricing for railroad crossties.
Gross Margin after Depreciation and Amortization. Gross margin after
depreciation and amortization decreased slightly as higher margins for Carbon
Materials & Chemicals were offset by lower margins for Railroad & Utility
Products. Gross margin for Carbon Materials & Chemicals increased primarily as
a result of higher PAA prices. Gross margin for Railroad & Utility Products
decreased due primarily to lower prices for railroad crossties.
Depreciation and Amortization. Depreciation and amortization for 2000
increased compared to the prior year due to the Koppers Europe Acquisition.
Selling, General and Administrative Expense. Selling, general and
administrative expense as a percent of net sales increased primarily as a
result of an increase in bad debt expense.
Equity in Earnings of Affiliates. Equity earnings for 2000 were higher than
the prior year due primarily to an increase in earnings for Tarconord prior to
the Koppers Europe Acquisition.
Income Taxes. The Company's effective income tax rate for the year ended
December 31, 2000 increased due primarily to the reduction in available tax
credits as a result of the Monessen Transaction. The reduction from statutory
rates for 1999 was due primarily to tax credits related to the Monessen
Facility.
Net Income. Net income for 2000 compared to the same period last year
decreased due primarily to higher income tax expense as a result of the
Monessen Transaction.
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 Margin after Depreciation and Amortization. Gross margin 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.
13
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.
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 at least 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, 2000 the Company had $66.8 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, 2000, $10.6 million of commitments were utilized by outstanding
standby letters of credit.
Substantially all of the Company's assets, including the assets of
significant subsidiaries other than the Danish operations of Koppers Europe,
are pledged as collateral for the Company's 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.
Cash provided by operating activities decreased due to lower earnings in
2000 and an increase in working capital requirements of approximately $21
million as compared to the prior year. Cash provided by operating activities in
1999 increased due to higher earnings 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 decreased due primarily to the
completion of certain large projects and the Company's use of cash for
acquisitions and debt repayment. The Koppers Europe Acquisition was financed
primarily by cash from operations.
For fiscal year 2001 the Company anticipates capital expenditures of $17.4
million excluding acquisitions. This amount includes environmental capital
expenditures of approximately $5.4 million, with the remainder for capital
maintenance and improvements. The Company expects to finance 2001 capital
expenditures primarily through cash flow generated from operations. The
Company's projection of 2001 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.
14
Cash used for financing activities in 2000 was due primarily to term debt
repayments of $24.0 million, $9.2 million of which was unscheduled prepayment.
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 common stock.
Plant Closure. In February 2001 the Company's Board of Directors approved
the closure of the utility pole facility located in Feather River, California
in March 2001. This is expected to result in a charge of $3.5 million in the
first quarter of 2001. Completion of the closure is expected by year-end 2001,
with additional estimated charges of $1.1 million in operating losses.
Substantially all of the charges will be cash charges.
Stock Redemptions. In 2001, anticipated stock redemptions for retirees total
$2.4 million.
Impact of Deferred Taxes. Energy tax credits from the Monessen Facility
provided tax benefits to Koppers of approximately $0.1 million, $10.2 million
and $9.5 million in 2000, 1999 and 1998, 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, 2000 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. During 2000, the Company
completed the Koppers Europe Acquisition, which has operations in Denmark and
the United Kingdom. Exchange rate fluctuations in 2000 and 1999 resulted in
charges to comprehensive income of $11.2 million and $1.1 million,
respectively.
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.
Impact of Recently Issued Accounting Standards
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative (i.e.,
gains and losses) depends on the intended use of the derivative and the
resulting designation. Statement No. 133 is effective for fiscal years
beginning after June 15, 2000. The Company adopted Statement No. 133 on January
1, 2001; the impact of the adoption of this statement was not material.
Environmental Matters
The Company is subject to federal, state and local laws and regulations and
potential liabilities relating to, 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. The Company
expects to incur substantial costs for ongoing compliance with such laws and
regulations. The Company may also face governmental or third-party claims for
cleanup or for injuries resulting from contamination at sites associated with
past and present operations.
15
Environmental Liabilities Retained or Assumed by Others
The Company has agreements with former owners of certain of its operating
locations under which the former owners retained or assumed and agreed to
indemnify the Company against certain environmental liabilities. The most
significant of these agreements was entered into at the Company's inception in
1988 with Beazer East. Under the terms of the agreement, Beazer East retained
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 against third-party claims arising from such past
contamination and claims (including toxic tort claims) relating to operations
conducted at those properties prior to the formation of the Company (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 in 1991. In
1998 Hanson PLC signed an agreement 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) are 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 provides four different mechanisms by which Beazer East is to
indemnify Koppers with regard to environmental claims or environmental cleanup
liabilities. 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
is required to indemnify Koppers regardless of when the claim or liability is
asserted. Second, if the claim involves a personal injury and is 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 is required to
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 is required to indemnify Koppers if the
claim or liability is a pre-Acquisition environmental claim or a pre-
Acquisition environmental cleanup liability. A claim or liability can have pre-
Acquisition status in one of two ways. It can be asserted by a third party
(someone other than Koppers) before December 29, 2000, or Beazer East must have
received (including from Koppers) "specific and particularized notice with
respect to acts, omissions, conditions or circumstances that may give rise" to
the claim or liability before December 29, 2000. The Company has taken
appropriate steps to satisfy these conditions.
Five 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 (which is being closed), 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 of these 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.
The Company has been named in a toxic tort action, along with other
defendants, arising from the operation of the wood treating facility in Green
Spring, West Virginia ("Green Spring"). Allegations include personal injury and
property damage related to the operations of Green Spring from the mid-1940's
through 1992. As a result of litigation among CSX, Beazer East and the Company,
CSX has assumed a portion of Beazer East's obligations under the Indemnity in
connection with Green Spring. The Company is currently unable to estimate a
range of potential loss, if any, related to this matter. Although management
believes that
16
some of the matters associated with this claim 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.
The Company has also been named in a toxic tort action that arises from
operations at its wood treating facility in North Little Rock, Arkansas.
Allegations include personal injury and property damage 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 this matter. Although
management believes that some of the matters associated with this claim 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.
To date, the parties that retained, assumed or agreed to indemnify the
Company against the liabilities referred to above have performed their
obligations. The Company believes that for the last three years amounts paid by
Beazer East that are the subject of the Indemnity have averaged approximately
$9 million per year. If for any reason (including financial incapability) one
or more of such parties failed to do so and the Company were held liable for or
otherwise required to pay all or part of such liabilities without
reimbursement, the Company may be unable to do so, and the imposition of such
liabilities on the Company would have a material adverse effect on the
Company's business, financial condition, cash flow and results of operations.
In addition, if the Company were required to record a liability with respect to
all or a portion of such matters on its balance sheet, the amount of its total
liabilities could exceed the book value of its assets by an amount that could
be significant.
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 on discharge permits,
applications for discharge permits, discharge monitoring reports, and the
analytical data in support of the reports and applications. The EPA
subsequently alleged that the Company violated various provisions of the Clean
Water Act. In July 2000 the Company received a settlement demand from the EPA
requesting $4.5 million in settlement of alleged civil violations of the Clean
Water Act. The Company has entered into negotiations with the EPA regarding
possible settlement. There can be no assurance that any additional monetary
penalty would 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 related to the discharge of treated process water contained
incomplete and inaccurate information. Corrected reports were submitted to the
State of Alabama and the EPA. The United States Department of Justice and the
EPA have been investigating this matter, which has led to a settlement demand
in 2001 of $5 million and certain admissions. The Company intends to enter into
negotiations with the EPA regarding possible settlement. There can be no
assurance that any such monetary penalty 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 facilities. In
addition, historic operations conducted at the facilities of Koppers Australia
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. The Mayfield plant has notified the environmental authorities that
it is a "contaminated site." Although the relevant regulatory authorities in
Australia have not required the
17
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. There can be no assurance that the incurrence by the
Company of any such costs would not have a material adverse effect on the
business, financial condition, cash flow and results of operations of the
Company.
In May 2000 the Company purchased the remaining 50% of Koppers Europe, which
has one operating location in Denmark and three operating locations (plus one
closed site which is being dismantled) in the United Kingdom. Although there
are ongoing environmental compliance and legacy issues at each of these
locations, there are currently no outstanding notices of violation or consent
decrees regarding compliance or remediation issues. However, if issues
regarding compliance and remediation are identified, resulting costs could be
substantial 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.
Other Matters
There are currently no known viable substitutes for carbon pitch in the
production of carbon anodes. However, in 2000 the Company's largest carbon
pitch customer announced that it was actively pursuing alternative anode
technology that would eliminate the need for carbon pitch as an anode binder.
Although management does not believe that this alternative technology will be
developed and used widely within the next five years, the potential development
and implementation of a substitute product could seriously impair the Company's
ability to profitably market carbon pitch and related co-products.
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 carbon pitch business in 2000, and
continued pricing pressures are anticipated in 2001.
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; however, due to excess supplies of PAA during 2000,
margins did not increase proportionally despite high levels for orthoxylene
prices. Management does not expect market conditions for PAA to improve in
2001.
Pricing for furnace coke has declined significantly over the past several
years as a result of excess supply due to higher levels of imported coke.
Currently, LTV is the only customer for the Company's furnace coke, with a
contract to take 100% of the Company's coke production in 2001. LTV sought
protection under Chapter 11 of the Bankruptcy Code in December 2000, resulting
in a charge to bad debt expense for the Company for outstanding accounts
receivable. The Company is currently selling its coke production to LTV during
LTV's Chapter 11 reorganization; if LTV or certain of its production facilities
were to cease operations, the Company may have difficulty selling its coke
without incurring significant margin reductions. Additionally, if the Company
becomes unable to sell its coke, it would not receive cash for the energy tax
credits.
Over the last several years, utility pole demand has dropped as utilities in
the United States and Australia 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.
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,
18
the Company enters into foreign currency debt instruments that are held by its
foreign subsidiaries. This reduces the impact of fluctuating currencies on net
income and equity. The Company also uses forward exchange contracts to hedge
firm commitments up to twelve months.
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, 2000. 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
that 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
debt obligations. As described in Note 3 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, 2000 the Company had $191.1 million of fixed rate debt and
$100.4 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 $1.0
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,
Denmark and the United Kingdom. Holding other variables constant, if there were
a ten percent reduction in all relevant exchange rates, the effect on earnings
of the Company, based on actual earnings from foreign operations in 2000, would
be a reduction of approximately $1.5 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 28 and are listed
in Item 14 hereof.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
19
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, 2001 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.
Name Age Position with Company
---- --- ---------------------
Robert Cizik..................... 69 Non-Executive Chairman and Director
Walter W. Turner................. 54 President and Chief Executive Officer
and Director
Clayton A. Sweeney............... 69 Director
N. H. Prater..................... 72 Director
Christian L. Oberbeck............ 40 Director
David M. Hillenbrand............. 53 Director
Donald E. Davis.................. 44 Vice President and Chief Financial
Officer
Thomas D. Loadman................ 46 Vice President and General Manager,
Railroad Products & Services
Kevin J. Fitzgerald.............. 48 Vice President and General Manager,
Carbon Materials & Chemicals
Ernest S. Bryon.................. 55 Vice President, Australasian Operations
and Managing Director, Koppers
Australia Pty. Limited
David Whittle.................... 58 Vice President, European Operations
Randall D. Collins............... 48 Vice President, Safety, Health &
Environmental Affairs and Corporate
Secretary
Joseph E. Boan................... 54 Vice President, Human Resources
Robert H. Wombles................ 49 Vice President, Technology
M. Claire Schaming............... 47 Treasurer and Assistant Secretary
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 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 prior to that time.
Mr. Sweeney has been a Director of Koppers since January 1989. Mr. Sweeney
is counsel to Schnader Harrison Segal & Lewis LLP. He had been the President
and a member of Sweeney Metz Fox McGrann & Schermer L.L.C from 1998 to 2000.
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
also served 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.
20
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 visiting Professor at the
University of Virginia after retiring 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 Warburg Dillon Read Inc. and its
predecessor entity Dillon, Read & Co. Inc. where he was a Managing Director
responsible for the management of the Saratoga funds. Mr. Oberbeck is a
Director of Equality Specialties, Inc., EUR Systems, Inc., 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 is Chairman of the Board of Representatives of the Gustafson Partnership.
In addition he is Chairman of the 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 is also a Director of Koppers-Hickson. Mr. Davis is a certified
public accountant.
Mr. Loadman was elected Vice President and General Manager, Railroad
Products & Services in November 1994. After serving as plant manager of the
Susquehanna, Pennsylvania treating and cogeneration plants from 1985 to 1988,
Mr. Loadman was appointed Railroad Plants Operations Manager of the Railroad &
Utility Products division in January 1989. Mr. Loadman is a Director of KSA and
is a member of the Railway Tie Association and American Wood Preservers
Association.
Mr. Fitzgerald was elected 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 was Product Manager Industrial Pitches from 1991
to 1995. Mr. Fitzgerald is a Director of Koppers China and is a Director of the
Coke & Coal Chemicals Institute.
Mr. Bryon was elected 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.
Dr. Whittle was elected Vice President, European Operations in May 2000. Dr.
Whittle had served as Managing Director of the United Kingdom operations of
Tarconord since the acquisition of Bitmac, Ltd. by Tarconord in 1996. From 1986
until 1996 Dr. Whittle had been Managing Director and Chief Executive Officer
of Bitmac Ltd. Dr. Whittle is active in industry associations and has served as
president of the International Tar Association and Lincolnshire Iron & Steel
Institute, and is currently president of the Coke Oven Managers' Association.
Mr. Collins was elected Vice President, Safety, Health and Environmental
Affairs in November 1994, and has been Corporate Secretary since January 1989.
Currently Mr. Collins serves the Company as Vice President, Safety, Health &
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.
21
Mr. Boan was elected Vice President, Human Resources in January 1989.
Mr. Wombles joined Koppers in June 1997 at which time he was elected Vice
President, Technology. Prior to joining Koppers, Mr. Wombles was Vice
President, Research, Applications and Development for Ashland Petroleum
Company. Mr. Wombles' area of expertise is the chemistry and processing of high
molecular weight hydrocarbons. He is the author of several technical
publications in this area and has been granted ten United States patents in the
area of hydrocarbon processing.
Ms. Schaming was elected Treasurer in May 1992. Her previous position was
Assistant Treasurer and Manager of Cash Operations. 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 their 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, 2000, Koppers was obligated to purchase approximately 0.2
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.
Consulting Agreements
The Company entered into a consulting agreement with Mr. Cizik in 1999 in
which the Company pays a fee of $12,500 per month to Mr. Cizik for consulting
services. 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, 2000 21,176 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.
22
Koppers has 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.
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, 2000, 1999 and
1998, of those persons who were at December 31, 2000 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
2000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual
Compensation (1) Long-Term Compensation (2)
---------------------- ---------------------------------
(a) (b) (c) (d) (g) (i)
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options/SARS (#) Compensation (3)
- ------------------ ---- -------- -------- ---------------- ----------------
Walter W. Turner........ 2000 $352,440 $199,000 6,000 $49,375
President and Chief 1999 325,000 148,080 -- 77,397
Executive Officer 1998 278,060 -- 40,000 64,920
Donald E. Davis......... 2000 216,600 102,000 3,000 32,359
Vice President and Chief 1999 201,820 79,876 -- 47,286
Financial Officer 1998 188,560 -- 15,000 41,892
Thomas D. Loadman....... 2000 181,200 52,258 2,000 28,082
Vice President and
General Manager, 1999 170,400 83,883 -- 43,066
Railroad Products &
Services 1998 152,400 28,602 15,000 36,303
Kevin J. Fitzgerald..... 2000 160,200 73,525 8,000 25,666
Vice President and
General Manager, 1999 138,000 46,680 -- 46,395
Carbon Materials &
Chemicals 1998 116,550 -- 10,500 28,203
Ernest S. Bryon......... 2000 132,472 101,273 4,000 --
Vice President,
Australasian Operations
and 1999 131,200 71,163 -- --
Managing Director,
Koppers Australia 1998 117,180 19,916 7,000 95,224(4)
- --------
(1) Column (e) "Other Annual Compensation" has been omitted since there are no
amounts to report. The aggregate amount of perquisites and other personal
benefits for any Named Executive Officer does not exceed $50,000 or 10% of
the total of annual salary and bonus for any such Named Executive Officer.
(2) Columns (f) "Restricted Stock Awards" and (h) "LTIP Payouts" have been
omitted because there are no amounts to report.
(3) All other compensation consists of regular and supplemental matches to the
Company's 401(k) plan and earned credit for the Company's Supplemental
Executive Retirement Plan except as noted below.
(4) Consists of payments from the Koppers Australia Senior Executive Unit
Trust, which was liquidated due to a change of control upon the
acquisition of Koppers Australia by the Company.
23
Stock Options
The following table sets forth information regarding the grant of stock
options during 2000 under the Company's stock option plan to each of the
executive officers named in the Summary Compensation Table.
Option/SAR Grants in Last Fiscal Year
Individual Grants (1)
Number of % of Total
Securities Options Exercise
Underlying Granted to or Base Present
Options Employees in Price Expiration Value of
Name Granted (#) Fiscal Year ($/share) Date Options (2)
- ---- ----------- ------------ --------- ---------- -----------
Walter W. Turner........ 6,000 11.0% $23.00 05/31/10 $41,400
Donald E. Davis......... 3,000 5.5% 23.00 05/31/10 20,700
Thomas D. Loadman....... 2,000 3.7% 23.00 05/31/10 13,800
Kevin J. Fitzgerald..... 8,000 14.7% 23.00 05/31/10 55,200
Ernest S. Bryon......... 4,000 7.3% 23.00 05/31/10 27,600
- --------
(1) Options become exercisable over a five-year period. Any unexercised
options expire after ten years. The stock option price is equal to the
fair market value of a share of common stock on the grant date.
(2) Option values reflect Black-Scholes model output for options. The
assumptions used in the model were risk-free interest rate of 5.56%,
dividend yield of 0.0%, volatility factor of .2, and an expected option
life of ten years.
Option Exercises and Fiscal Year-End Values
Shown below is information with respect to unexercised options at the end of
the fiscal year under the Company's stock option plans. No SARS were granted to
any of the Named Executive Officers and none of the Named Executive Officers
held any unexercised SARS at the end of the fiscal year.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Number of Securities
Number of Underlying Unexercised Value of Unexercised
Securities Options/SARS at FY- In-the-money Options/
Underlying End (#) SARS at FY-End ($) (1)
Options/SARS Value ------------------------- -------------------------
Name Exercised Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Walter W. Turner........ 10,350 $209,904 34,667 23,333 $540,122 $245,667
Donald E. Davis......... -- -- 26,100 12,000 509,586 114,000
Thomas D. Loadman....... -- -- 19,200 11,000 315,080 109,000
Kevin J. Fitzgerald..... 2,925 56,801 6,500 14,000 79,000 106,000
Ernest S. Bryon......... -- -- 2,800 8,200 30,800 66,200
- --------
(1) The value of unexercised in-the-money options was calculated by
subtracting the exercise price from the adjusted fair value as of January
31, 2001 as determined by the Board of Directors pursuant to the
provisions of the Stockholders' Agreement.
Benefit Plans
Pension Plan. All executive officers of the Company located in the United
States 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.
24
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 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
Years of Credited Service at Retirement
Terminal -------------------------------------------------------------------------
Salary 5 10 15 20 25 30
- -------- ------- ------- -------- -------- -------- --------
$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
The following describes the Terminal Salary and Years of Service,
respectively, accrued as of December 31, 2000 for each participating Named
Executive Officer: Walter W. Turner, $248,264 and 12 years of service; Donald
E. Davis, $203,683 and 12 years of service; Thomas D. Loadman, $173,964 and 12
years of service; and Kevin J. Fitzgerald, $123,836 and 12 years of service.
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. Prater, Mr. Oberbeck and Mr. Hillenbrand 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.
25
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 common stock and preferred stock as of March 1, 2001
by (i) each person known to the Company to beneficially own more than 5% of the
outstanding shares of either common stock or preferred stock; (ii) each
Director of the Company; (iii) each Named Executive Officer; and (iv) all
officers and Directors of the Company as a group.
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
- ------------------------ ------------ ------------ ------------ ------------
Saratoga (3)............... 2,288,481 100.0%
Management Investors
(4)(5).................... 1,609,803 100.0%
Robert K. Wagner (6)....... 131,917 8.2%
Walter W. Turner (7)....... 72,896 4.5%
Clayton A. Sweeney (7)..... 101,572 6.3%
N. H. Prater (8)........... 32,569 2.0%
Christian L. Oberbeck (3).. -- * 2,288,481 100.0%
Robert Cizik (9)........... 55,294 3.4%
David M. Hillenbrand (10).. 7,000 *
Donald E. Davis (11)....... 54,265 3.4%
Thomas D. Loadman (12)..... 35,695 2.2%
Ernest S. Bryon (13)....... 2,800 *
Kevin J. Fitzgerald (14)... 17,550 1.1%
David Whittle.............. -- *
All Directors and officers
as a group (14 persons)... 545,207 33.9%
Total shares outstanding,
including vested options.. 1,609,803 100.0% 2,288,481 100.0%
- --------
* 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 shares of preferred stock, 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
stock has voting (except as described below) and dividend rights equal to
voting common stock, and has a liquidation preference equal to par value.
The preferred stock is convertible into common stock at any time on a one-
for-one basis. The holders of the preferred stock 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
stock 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.
26
(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. 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 Schnader Harrison Segal & Lewis LLP, 120 Fifth Avenue,
Pittsburgh, PA 15222.
(5) Includes vested options held by the Management Investors to acquire
308,970 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. Mr. Wagner resigned from the Board of
Directors in February 2000. The Company redeemed 65,418 shares of common
stock held by Mr. Wagner in February 2001 for approximately $1.8 million.
The redemption represented 25% of Mr. Wagner's shares at the date of
resignation; the remaining shares held by Mr. Wagner will be redeemed in
equal amounts of shares over the next two 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 1,300,833 shares held by the Management Investors and consequently
may be deemed to have voting control of such shares (which include 29,896
shares directly owned by Mr. Turner and 101,572 shares directly owned by
Mr. Sweeney).
(8) Includes vested options to purchase 6,000 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 21,176 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 6,000 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 19,800 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.
(12) Includes vested options to purchase 19,200 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 2,800 shares.
(14) Includes vested options to purchase 6,500 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
Schnader Harrison Segal & Lewis LLP provided counsel to the Company during
2000. Previously, Sweeney Metz Fox McGrann & Schermer L.L.C. was general
counsel to Koppers. Clayton A. Sweeney, a shareholder and Director of the
Company, is also a member of Schnader Harrison Segal & Lewis LLP and was the
President and a member of Sweeney Metz Fox McGrann & Schermer L.L.C. During
2000 and 1999, respectively, the Company paid a total of $0.8 million and $1.1
million in legal fees to these firms. 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."
27
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 included
in Item 8:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Koppers Industries, Inc.
Consolidated Financial Statements for the Years Ended
December 31, 2000, 1999 and 1998
Report of Independent Auditors.................................... 29
Consolidated Statement of Operations for the Years Ended
December 31, 2000, 1999 and 1998................................. 30
Consolidated Balance Sheet at December 31, 2000 and 1999.......... 31
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998................................. 33
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998................................. 34
Notes to Consolidated Financial Statements........................ 36
2. Schedules for the Years Ended December 31, 2000, 1999 and 1998
Schedule II--Valuation and Qualifying Accounts........................ 57
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.
3. See Exhibit Index on page 55 hereof.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed in the fourth quarter of 2000.
28
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, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, 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 26, 2001
29
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions except per share figures)
Years Ended December
31,
--------------------
2000 1999 1998
------ ------ ------
Net sales................................................ $723.5 $664.1 $670.6
Operating expenses:
Cost of sales.......................................... 598.8 548.9 553.5
Depreciation and amortization.......................... 30.0 27.1 30.6
Selling, general and administrative.................... 45.4 37.4 39.9
Restructuring charges.................................. -- -- (1.0)
------ ------ ------
Total operating expenses............................. 674.2 613.4 623.0
------ ------ ------
Operating profit......................................... 49.3 50.7 47.6
Equity in earnings of affiliates......................... 2.2 1.7 2.4
Other income............................................. 8.6 0.8 --
------ ------ ------
Income before interest expense, income tax provision
(benefit), and minority interest........................ 60.1 53.2 50.0
Interest expense......................................... 28.0 28.1 29.7
------ ------ ------
Income before income tax provision (benefit), and
minority interest....................................... 32.1 25.1 20.3
Income tax provision (benefit)........................... 16.6 0.2 (0.3)
Minority interest........................................ 0.8 0.7 0.5
------ ------ ------
Net income............................................... $ 14.7 $ 24.2 $ 20.1
====== ====== ======
Earnings per share:
Basic earnings per share............................... $10.64 $16.70 $12.64
====== ====== ======
Diluted earnings per share............................. $ 3.83 $ 6.23 $ 4.85
====== ====== ======
See accompanying notes.
30
KOPPERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
December 31,
----------------
2000 1999
------- -------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 6.8 $ 18.3
Accounts receivable less allowance for doubtful accounts of
$0.9 in 2000 and $1.1 in 1999............................. 97.9 75.7
Inventories:
Raw materials............................................ 56.6 49.5
Work in process.......................................... 3.8 2.5
Finished goods........................................... 57.2 49.9
LIFO reserve............................................. (11.9) (10.1)
------- -------
Total inventories...................................... 105.7 91.8
Deferred tax benefit....................................... 7.7 7.0
Other...................................................... 3.8 1.5
------- -------
Total current assets................................... 221.9 194.3
Investments:
Tarconord A/S.............................................. -- 11.8
KSA Limited Partnership.................................... 4.0 3.9
Other...................................................... 1.7 1.6
------- -------
Total investments...................................... 5.7 17.3
Fixed assets:
Land....................................................... 7.2 6.7
Buildings.................................................. 15.3 15.0
Machinery and equipment.................................... 370.4 333.9
------- -------
392.9 355.6
Less: accumulated depreciation........................... (217.1) (176.2)
------- -------
Net fixed assets....................................... 175.8 179.4
Goodwill, net of accumulated amortization of $5.6 in 2000 and
$4.2 in 1999................................................ 28.9 28.0
Deferred tax benefit......................................... 34.2 42.0
Other assets................................................. 17.4 16.7
------- -------
Total assets........................................... $ 483.9 $ 477.7
======= =======
See accompanying notes.
31
KOPPERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(In millions except per share figures)
December 31,
--------------
2000 1999
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 54.3 $ 41.3
Payroll and compensation costs............................... 10.7 11.0
Accrued liabilities.......................................... 35.2 25.4
Current portion of term loans................................ 14.3 19.3
------ ------
Total current liabilities.................................. 114.5 97.0
Long-term debt:
Revolving credit............................................. 11.1 2.0
Term loans................................................... 80.0 102.4
Senior Subordinated Notes due 2007........................... 175.0 175.0
Senior Notes due 2004........................................ 11.1 11.1
------ ------
Total long-term debt....................................... 277.2 290.5
Product warranty and insurance reserves........................ 18.0 18.4
Accrued other postretirement benefits obligation............... 18.3 19.2
Other.......................................................... 16.5 14.1
------ ------
Total liabilities.......................................... 444.5 439.2
Commitments and contingencies--See Note 9
Minority interest.............................................. 4.8 5.1
Common stock subject to redemption............................. 30.9 25.6
Senior convertible preferred stock, $.01 par value;
10.0 shares authorized; 2.3 shares issued in 2000 and 1999.... -- --
Common stock, $.01 par value:
37.0 shares authorized, 2.6 shares issued in 2000 and 2.5 in
1999......................................................... -- --
Capital in excess of par value................................. 9.1 8.2
Receivable from Director for purchase of common stock.......... (0.6) (0.6)
Retained earnings.............................................. 33.3 23.9
Accumulated other comprehensive loss:
Foreign currency translation adjustment...................... (20.1) (8.9)
Treasury stock, at cost, 1.2 shares in 2000 and 1.1 shares in
1999.......................................................... (18.0) (14.8)
------ ------
Total liabilities and stockholders' equity................. $483.9 $477.7
====== ======
See accompanying notes.
32
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Years Ended December
31,
------------------------
2000 1999 1998
------- ------ -------
Cash provided by operating activities:
Net income........................................ $ 14.7 $ 24.2 $ 20.1
Adjustments to reconcile net income to net cash
provided
by operating activities, net of acquisitions:
Depreciation and amortization.................... 30.0 27.1 30.6
Bad debt expense................................. 3.4 0.1 0.6
Deferred income taxes............................ 6.9 (5.3) (8.7)
Equity income of affiliated companies, net of
dividends received.............................. (1.4) 0.6 (1.4)
Restructuring reserves............................ (0.8) (1.6) (12.5)
Increase in reserves.............................. 3.7 0.3 1.7
Other............................................. 1.0 0.2 --
(Increase) decrease in working capital, net of
acquisitions:
Accounts receivable.............................. (12.6) (3.7) 10.5
Inventories...................................... (8.7) 4.3 (1.1)
Accounts payable................................. (2.4) (4.7) (2.3)
Payroll and compensation costs................... (0.5) 3.1 (5.3)
Accrued liabilities.............................. 2.9 5.8 (7.6)
Other working capital items...................... 0.5 0.1 0.4
------- ------ -------
Net cash provided by operating activities...... 36.7 50.5 25.0
------- ------ -------
Cash used in investing activities:
Acquisitions and related costs, net of cash
acquired......................................... (15.3) (1.7) (2.6)
Capital expenditures.............................. (14.8) (22.5) (20.2)
Other............................................. 0.5 1.0 --
------- ------ -------
Net cash used in investing activities.......... (29.6) (23.2) (22.8)
------- ------ -------
Cash provided by (used in) financing activities, net
of acquisitions:
Borrowings of revolving credit.................... 122.3 58.7 102.5
Repayments of revolving credit.................... (112.9) (59.0) (100.2)
Proceeds from long-term debt...................... -- 5.0 25.0
Repayments on long-term debt...................... (24.0) (28.1) (12.3)
Payments of deferred financing costs.............. -- -- (0.4)
Issuance of senior convertible preferred stock.... -- -- 2.0
Purchases of common stock......................... (2.6) (2.6) (9.4)
Sales of common stock............................. -- 0.4 --
Purchases of non-voting common stock.............. -- -- (11.4)
------- ------ -------
Net cash (used in) financing activities............. (17.2) (25.6) (4.2)
------- ------ -------
Effect of exchange rates on cash.................... (1.4) -- (1.4)
------- ------ -------
Net increase (decrease) in cash and cash
equivalents........................................ (11.5) 1.7 (3.4)
Cash and cash equivalents at beginning of year...... 18.3 16.6 20.0
------- ------ -------
Cash and cash equivalents at end of year............ $ 6.8 $ 18.3 $ 16.6
======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................... $ 26.6 $ 28.8 $ 29.6
Income taxes..................................... $ 9.4 $ 0.3 $ 7.9
See accompanying notes.
33
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In millions)
Common Loan
Stock Convertible Voting Capital In Receivable
Subject to Preferred Common Excess of From
Redemption Stock Stock Par Value Director
---------- ----------- ------ ---------- ----------
Balance at December 31,
1997...................... $26.4 $-- $ 0.1 $ 8.7 $ --
Net income 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....... -- -- -- 0.9 --
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 -- -- 8.2 --
Net income 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 -- -- 8.2 (0.6)
Net income for 2000........ -- -- -- -- --
Foreign currency
translation............... -- -- -- -- --
Comprehensive income.......
Net change in common stock
subject to redemption..... 5.3 -- -- -- --
Options exercised, 0.1
shares.................... -- -- -- 0.3 --
Treasury stock purchases,
0.1 shares................ -- -- -- 0.6 --
----- --- ----- ----- -----
Balance at December 31,
2000...................... $30.9 $-- $ -- $ 9.1 $(0.6)
===== === ===== ===== =====
See accompanying notes.
34
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In millions)
Accumulated
Other Compre-
Retained Comprehensive hensive Treasury
Earnings Income (Loss) Income Stock
-------- ------------- ------- --------
Balance at December 31, 1997........... $ 3.8 $ (4.4) $(22.8)
Net income 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..... -- -- --
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........... 4.2 (7.8) (13.2)
Net income 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........... 23.9 (8.9) (14.8)
Net income for 2000.................... 14.7 -- $ 14.7 --
Foreign currency translation........... -- (11.2) (11.2) --
------
Comprehensive income................... $ 3.5
======
Net change in common stock subject to
redemption............................ (5.3) -- --
Options exercised, 0.1 shares.......... -- -- --
Treasury stock purchases, 0.1 shares... -- -- (3.2)
------ ------ ------
Balance at December 31, 2000........... $ 33.3 $(20.1) $(18.0)
====== ====== ======
See accompanying notes.
35
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 68% and 74% of the first-in, first-
out ("FIFO") inventory value at December 31, 2000 and 1999, respectively.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
Shipping and handling costs are included as a component of cost of sales and
as net sales if paid by the customer.
36
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments
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:
Tarconord A/S (Tarconord)
Prior to its acquisition in May 2000, the Company held a 50% equity interest
in Tarconord.
Equity Income Dividends Received
------------- ------------------
(In millions)
2000......................................... $0.9 $0.0
1999......................................... 0.9 0.0
1998......................................... 0.0 0.6
KSA Limited Partnership (KSA)
The Company holds a 50% investment in KSA, a concrete crosstie operation
located in Ohio.
Equity Income Dividends Received
------------- ------------------
(In millions)
2000......................................... $0.9 $0.8
1999......................................... 0.5 2.0
1998......................................... 1.8 0.5
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.
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 $2.5 million for 2000, $2.1 million for
1999 and $2.3 million for 1998.
37
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 undiscounted 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.
Derivatives
The Company hedges certain firm commitments denominated in foreign
currencies for periods up to twelve months, depending on the anticipated
settlement dates of the related transactions. Forward exchange contracts are
utilized to hedge these transactions, and all such contracts are marked to
market with the recognition of a gain or loss at each reporting period.
Therefore, at December 31, 2000 there were no deferred gains or losses on
hedging of foreign currencies.
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.
Impact of Recently Issued Accounting Standards
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative (i.e.,
gains and losses) depends on the intended use of the derivative and the
resulting designation. Statement No. 133 is effective for fiscal years
beginning after June 15, 2000. The Company adopted Statement No. 133 on January
1, 2001; the impact of the adoption of this statement was not material.
2. Acquisitions
In May of 2000 the Company purchased the remaining 50% of Tarconord from the
Company's joint venture partner for a cash purchase price of approximately $13
million and the assumption of certain liabilities. Tarconord (now known as
Koppers Europe) thus became a wholly owned subsidiary. 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 $3 million and has been
recorded as goodwill, which is being amortized on a straight-line basis over 20
years. The allocation of purchase price is preliminary and will be finalized
prior to May 2001. Prior to the purchase, the results of operations for Koppers
Europe 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. The following table presents the pro forma results of the Company
as if the Koppers Europe acquisition had taken place on January 1, 1999:
38
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended
December 31,
-------------------
2000 1999
--------- ---------
(In millions except
earnings per share)
Revenues as reported.................................... $ 723.5 $ 664.1
Revenues pro forma...................................... 766.2 752.3
Net income as reported.................................. 14.7 24.2
Net income pro forma.................................... 15.5 25.0
Basic earnings per share as reported.................... 10.64 16.70
Basic earnings per share pro forma...................... 11.25 17.28
Diluted earnings per share as reported.................. 3.83 6.23
Diluted earnings per share pro forma.................... 4.05 6.45
In 1999 the Company entered into a joint venture agreement with Tangshan
Iron & Steel Co. ("TISCO") and Jingtang Port Authority to rehabilitate and
operate a tar distillation facility in China for a Company contribution of
approximately $10.5 million, which includes $2.2 million of technical
assistance (primarily engineering) and acquisition costs. The joint venture
entity, Koppers (China) Carbon and Chemical Co. Ltd. ("Koppers China"), which
is 60% owned by the Company, is expected to begin production of coal tar
products during 2001. Contributions to the joint venture including technical
assistance and acquisition costs for the Company as of December 31, 2000
totaled approximately $7.4 million.
3. Debt
December 31,
-------------
2000 1999
------ ------
(In millions)
Revolving credit.............................................. $ 11.1 $ 2.0
Term loans.................................................... 94.3 121.7
Senior Subordinated Notes due 2007............................ 175.0 175.0
Senior Notes due 2004......................................... 11.1 11.1
------ ------
$291.5 $309.8
====== ======
Unscheduled Term Debt Repayments
In 2000 and 1999, the Company made unscheduled term debt repayments totaling
$9.2 million and $15.6 million, respectively.
Monessen Transaction
As part of the Monessen Transaction (as defined and described in Note 6),
the Company executed a $5.0 million term loan that will be repaid over three
years at an interest rate of 9%.
Credit Facilities
The Company has credit facilities of $275.0 million with UBS Warburg and
Mellon Bank, N.A. that are syndicated among several lenders. 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 $20.0 million for the Australian Term Letter of
Credit (as defined below) and the Australian Revolving Letter of Credit (as
defined
39
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
below), respectively. National Australia Bank, Limited provided an Australian
dollar ("A$") 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$59.3 million. National Australia Bank, Limited provided an A$
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, $21.5
million of which was outstanding at December 31, 2000 and a $65.0 million Term
Loan B, $51.0 million of which was outstanding at December 31, 2000. In
addition, $16.8 million was outstanding on the A$ denominated term loan at
December 31, 2000.
The term loans and the Revolving Credit Facility under the credit
facilities provide for interest at variable rates. At December 31, 2000 the
effective rates on the term loans were 8.28% for Term Loan A, 8.77% for Term
Loan B and 6.31% 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 other than Koppers Europe, are pledged as collateral
for the credit facilities. The credit facilities contain certain covenants
that 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, 2000 the aggregate debt maturities for the next five years
are as follows (in millions):
2001................................................................... $14.3
2002................................................................... 14.3
2003................................................................... 43.9
2004................................................................... 44.0
2005................................................................... --
Senior Subordinated Notes Due 2007
The Company has $175.0 million of Senior Subordinated Notes Due 2007 (the
"Subordinated Notes"). The Subordinated Notes bear interest at 9 7/8% per
annum, with interest payable on June 1 and December 1 of each year. 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
40
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a redemption price of 109.875% plus accrued interest. 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 $6.2 million at
December 31, 2000, $4.2 million at December 31, 1999 and $2.2 million at
December 31, 1998) were $10.4 million, $12.4 million and $14.4 million at
December 31, 2000, 1999 and 1998, respectively, and are included in other
assets.
At December 31, 2000 the Company had $10.6 million of standby letters of
credit outstanding, with terms ranging from one to two years.
4. 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, 2000 21,176 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.
The Stockholders' Agreement provides for annual stock redemptions at the
Company's option, provided that all relevant covenants with the Company's
lenders and noteholders are met.
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, 2000 and 1999 the
maximum redemptions that could be paid under the Stockholders' Agreement,
subject to existing debt covenants, were $34.7 million and $25.6 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 shares of common stock
at December 31, 2000 subject to the redemption provisions of the Stockholders'
Agreement.
The aggregate redemption amounts under the Stockholders' Agreement for the
next three years based on termination events of which the Company is aware are
as follows:
2001............................................................ $2.4 million
2002............................................................ $2.2 million
2003............................................................ $2.1 million
41
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Pension and Other Postretirement Benefit Plans
Pension Other
Benefits Benefits
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
(In millions) (In millions)
Change in benefit obligation:
Benefit obligation at beginning of year..... $ 85.6 $ 82.0 $ 13.4 $ 14.4
Service cost................................ 3.7 3.5 0.2 0.2
Interest cost............................... 5.9 5.5 0.8 0.9
Amendments.................................. 0.9 0.2 -- --
Actuarial gains (losses).................... (1.2) (1.3) (2.2) (1.4)
Benefits paid............................... (4.6) (4.3) (0.9) (0.7)
Acquisitions................................ 26.5 -- -- --
------ ------ ------ ------
Benefit obligation at end of year............. $116.8 $ 85.6 $ 11.3 $ 13.4
====== ====== ====== ======
Change in plan assets:
Fair value of plan assets at beginning of
year....................................... $ 75.7 $ 74.8 $ -- $ --
Actual return on plan assets................ 1.1 3.8 -- --
Employer contribution....................... 1.4 1.4 0.9 0.7
Benefits paid............................... (4.6) (4.3) (0.9) (0.7)
Acquisitions................................ 29.8 -- -- --
------ ------ ------ ------
Fair value of plan assets at end of year...... $103.4 $ 75.7 $ 0.0 $ 0.0
====== ====== ====== ======
Funded status of the plan..................... $(13.4) $ (9.9) $(11.3) $(13.4)
Unrecognized transitional (asset)/obligation.. (3.3) -- -- --
Unrecognized actuarial (gain) loss............ 2.5 (1.5) (4.6) (2.7)
Unrecognized prior service cost............... 1.7 1.2 (2.9) (3.6)
------ ------ ------ ------
Net amount recognized......................... $(12.5) $(10.2) $(18.8) $(19.7)
====== ====== ====== ======
Disclosures:
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability................... $(12.5) $(10.7) $(18.8) $(19.7)
Intangible asset............................ -- 0.5 -- --
------ ------ ------ ------
Net amount recognized......................... $(12.5) $(10.2) $(18.8) $(19.7)
====== ====== ====== ======
Weighted-average assumptions as of December
31:
Discount rate................................. 7.25% 7.00% 7.25% 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% 8.00%
The 2000 initial medical trend rate was assumed to decrease gradually to
5.0% in 2006 and remain at that level thereafter.
Components of net periodic benefit cost:
Service cost................................ $ 3.7 $ 3.5 $ 0.2 $ 0.2
Interest cost............................... 5.9 5.5 0.8 0.9
Expected return on plan assets.............. (6.5) (6.6) -- --
Amortization of prior service cost.......... 0.5 0.2 (0.9) (0.8)
------ ------ ------ ------
Net periodic benefit cost..................... $ 3.6 $ 2.6 $ 0.1 $ 0.3
====== ====== ====== ======
42
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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:
1% Increase 1% Decrease
----------- -----------
Effect on total of service and interest cost
components in 2000................................. $0.1 ($0.1)
Effect on postretirement benefit obligation as of
December 31, 2000.................................. $0.6 ($0.5)
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 $2.5 million in 2000, $3.2 million in 1999 and $0.8
million in 1998.
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
contributions.
The Company's regular contributions amounted to $0.6 million in 2000 and
1999 and $0.5 million in 1998. 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 $0.2 million,
$0.4 million, and $0.1 million in 2000, 1999 and 1998, respectively. All
regular and supplemental matching contributions were made in common stock of
the Company held in Treasury until October 1, 1998. Subsequently such
contributions have been made in cash.
6. Income Taxes
Monessen Transaction
In December 1999 the Company entered into an agreement to transfer
substantially all future non-conventional fuel tax credits generated as a
result of the production and sale of coke at the coke facility in Monessen,
Pennsylvania (the "Monessen Facility") to a third party (the "Monessen
Transaction"). For the years ended December 31, 2000 and 1999 the Company
received $8.6 million and $0.8 million, respectively, for the transfer of tax
credits, which is recorded as other income. Under current tax legislation, the
tax credits expire in 2002. Prior to the Monessen Transaction, the Company
earned these credits. Credits utilized for current and deferred tax benefits
for the years ended December 31, 2000, 1999 and 1998 amounted to $0.1 million,
$10.2 million and $9.5 million, respectively.
43
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Components of the Company's income tax provision (benefit) are as follows:
Years Ended
December 31,
--------------------
2000 1999 1998
----- ----- ------
(In millions)
Current:
Federal............................................. $ 1.8 $ 1.3 $ 5.4
State............................................... -- 0.2 0.6
Foreign............................................. 7.9 4.0 2.4
----- ----- ------
Total current tax provision....................... 9.7 5.5 8.4
Deferred:
Federal............................................. 6.7 (5.8) (11.5)
State............................................... 0.3 (0.6) 1.3
Foreign............................................. (0.1) 1.1 1.5
----- ----- ------
Total deferred tax provision (benefit)............ 6.9 (5.3) (8.7)
----- ----- ------
Total income tax provision (benefit).................. $16.6 $ 0.2 $ (0.3)
===== ===== ======
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:
December
31,
-----------
2000 1999
----- -----
(In
millions)
Deferred tax assets:
Alternative minimum tax credits............................... $14.0 $15.6
Other postretirement benefits obligation...................... 9.6 9.9
Reserves, including insurance and product warranty............ 14.3 16.0
Book/tax inventory accounting................................. 3.1 2.5
Accrued vacation.............................................. 2.6 2.7
Excess tax basis on Koppers Australia assets.................. 13.7 15.0
Monessen Transaction.......................................... 3.5 4.1
Other......................................................... 2.8 2.2
----- -----
Total deferred tax assets................................... 63.6 68.0
----- -----
Deferred tax liabilities:
Tax over book depreciation and amortization................... 17.0 15.0
Other......................................................... 4.7 4.0
----- -----
Total deferred tax liabilities................................ 21.7 19.0
----- -----
Net deferred tax assets....................................... $41.9 $49.0
===== =====
Income before income taxes for 2000 and 1999 included $21.4 million and
$15.1 million, respectively, from foreign operations.
44
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes is reconciled with the federal
statutory rate as follows:
Years Ended
December 31,
------------------
2000 1999 1998
---- ----- -----
Federal................................................. 35.0% 35.0% 35.0%
State, net of federal tax benefit..................... 0.5 (1.0) 6.9
Equity in earnings of foreign affiliates.............. (0.9) (1.2) (0.1)
Foreign taxes......................................... 12.6 11.8 4.0
Section 29 credits.................................... (0.3) (40.5) (46.8)
Non-deductible environmental fines.................... 5.2 -- 0.1
Other................................................. (0.4) (3.5) (0.5)
---- ----- -----
51.7% 0.6% (1.4)%
==== ===== =====
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, 2000 consolidated retained earnings of the Company included
approximately $10 million of undistributed earnings from these investments. The
Company has an alternative minimum tax credit carryforward of approximately
$14.0 million. The credit has no expiration date.
7. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Years Ended December
31,
--------------------
2000 1999 1998
------ ------ ------
(In millions except
per share figures)
Numerator for basic and diluted:
Net income.......................................... $ 14.7 $ 24.2 $ 20.1
Denominators:
Weighted-average common shares...................... 1.4 1.4 1.6
Effect of dilutive securities:
Convertible preferred stock......................... 2.3 2.3 2.3
Employee stock options.............................. 0.1 0.2 0.3
------ ------ ------
Dilutive potential common shares...................... 2.4 2.5 2.6
Denominators for diluted earnings per share-adjusted
weighted-average shares and assumed conversions...... 3.8 3.9 4.2
Net income:
Basic earnings per share............................ $10.64 $16.70 $12.64
Diluted earnings per share.......................... $ 3.83 $ 6.23 $ 4.85
8. 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 2000, 1999 and 1998 the
45
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company recognized $0.3 million, $0.2 million and $1.5 million of expense
related to the redemption of stock options by terminated employees. Included in
capital in excess of par value, the Company also recorded tax benefits of
approximately $0.6 million and $0.7 million for stock option exercises in 2000
and 1998, respectively, for active employees.
The pro forma effect on net income and earnings per share for 2000, 1999 and
1998 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: Risk-free interest rate of 5.56%,
dividend yield of 0.0%, volatility factor of .2, and an expected option life of
10 years.
Approximately 0.5 million options were outstanding at December 31, 2000, to
purchase shares of 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 2000, 1999 and 1998, 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:
2000 1999 1998
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------- --------- ------- --------- ------- ---------
Outstanding at beginning
of year................. 510 $10 511 $10 626 $ 5
Granted.................. 55 23 15 17 149 17
Exercised................ (95) 4 (16) 4 (264) 3
--- --- ----
Outstanding at end of
year.................... 470 $13 510 $10 511 $10
=== === ====
Exercisable at end of
year.................... 321 $10 379 $ 8 362 $ 7
=== === ====
Weighted-average fair
value of options granted
during the year......... $ 7 $ 5 $ 5
Exercise prices for options outstanding as of December 31, 2000 ranged from
$2.00 to $23.00, and the weighted-average remaining contractual life of those
options was 5.6 years. The following table indicates the number of options
outstanding for each respective exercise price (options in thousands):
Options outstanding
Exercise Price at December 31, 2000
-------------- --------------------
$ 2.00 2
2.77 22
3.59 68
3.57 27
10.56 56
14.00 102
17.00 121
17.25 17
23.00 55
---
470
46
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Commitments and Contingencies
General
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 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 Matters
The Company is subject to federal, state and local laws and regulations and
potential liabilities relating to, 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. The Company
expects to incur substantial costs for ongoing compliance with such laws and
regulations. The Company may also face governmental or third-party claims for
cleanup or for injuries resulting from contamination at sites associated with
past and present operations.
Environmental Liabilities Retained or Assumed by Others
The Company has agreements with former owners of certain of its operating
locations under which the former owners retained or assumed and agreed to
indemnify the Company against certain environmental liabilities. The most
significant of these agreements was entered into at the Company's inception in
1988 with Beazer East, Inc. ("Beazer East"). Under the terms of the agreement,
Beazer East retained 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 against third-party claims
arising from such past contamination and claims (including toxic tort claims)
relating to operations conducted at those properties prior to the formation of
the Company (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 in 1991.
In 1998 Hanson PLC signed an agreement 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) are 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 provides four different mechanisms by which Beazer East is to
indemnify Koppers with regard to environmental claims or environmental cleanup
liabilities. 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
is required to indemnify Koppers regardless of when the claim or liability is
asserted. Second, if the claim involves a personal injury and is 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 is required to
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
47
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for conditions occurring or existing prior to the Acquisition, then Beazer East
is required to indemnify Koppers if the claim or liability is a pre-Acquisition
environmental claim or a pre-Acquisition environmental cleanup liability. A
claim or liability can have pre-Acquisition status in one of two ways. It can
be asserted by a third party (someone other than Koppers) before December 29,
2000, or Beazer East must have received (including from Koppers) "specific and
particularized notice with respect to acts, omissions, conditions or
circumstances that may give rise" to the claim or liability before December 29,
2000. The Company has taken appropriate steps to satisfy these conditions.
Five 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 of these 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.
The Company has been named in a toxic tort action, along with other
defendants, arising from the operation of the wood treating facility in Green
Spring, West Virginia ("Green Spring"). Allegations include personal injury and
property damage related to the operations of Green Spring from the mid-1940's
through 1992. As a result of litigation among CSX Transportation, Inc. ("CSX"),
Beazer East and the Company, CSX has assumed a portion of Beazer East's
obligations under the Indemnity in connection with Green Spring. The Company is
currently unable to estimate a range of potential loss, if any, related to this
matter. Although management believes that some of the matters associated with
this claim 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.
The Company has also been named in a toxic tort action that arises from
operations at its wood treating facility in North Little Rock, Arkansas.
Allegations include personal injury and property damage 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 this matter. Although
management believes that some of the matters associated with this claim 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.
To date, the parties that retained, assumed or agreed to indemnify the
Company against the liabilities referred to above have performed their
obligations. The Company believes that for the last three years amounts paid by
Beazer East that are the subject of the Indemnity have averaged approximately
$9 million per year. If for any reason (including financial incapability) one
or more of such parties failed to do so and the Company were held liable for or
otherwise required to pay all or part of such liabilities without
reimbursement, the Company may be unable to do so, and the imposition of such
liabilities on the Company would have a material adverse effect on the
Company's business, financial condition, cash flow and results of operations.
In addition, if the Company were required to record a liability with respect to
all or a portion of such matters on its balance sheet, the amount of its total
liabilities could exceed the book value of its assets by an amount that could
be significant.
48
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 on discharge permits,
applications for discharge permits, discharge monitoring reports, and the
analytical data in support of the reports and applications. The EPA
subsequently alleged that the Company violated various provisions of the Clean
Water Act. In July 2000 the Company received a settlement demand from the EPA
requesting $4.5 million in settlement of alleged civil violations of the Clean
Water Act. The Company has entered into negotiations with the EPA regarding
possible settlement. There can be no assurance that any additional monetary
penalty would not have a material adverse effect on the business, financial
condition, cash flow and results of operations of the Company.
During a Company-initiated investigation at the Company's coke facility in
Woodward, Alabama ("Woodward Coke") prior to its closure in January 1998, it
was discovered that certain environmental records and reports related to the
discharge of treated process water contained incomplete and inaccurate
information. Corrected reports were submitted to the State of Alabama and the
EPA. The United States Department of Justice and the EPA have been
investigating this matter, which has led to a settlement demand in 2001 of $5
million and certain admissions. The Company intends to enter into negotiations
with the EPA regarding possible settlement. There can be no assurance that any
such monetary penalty 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 facilities. In
addition, historic operations conducted at the facilities of Koppers Australia
Pty. Limited ("Koppers Australia") 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. The Mayfield plant has notified the
environmental authorities that it is a "contaminated site." 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. There can be no assurance that the incurrence by the
Company of any such costs would not have a material adverse effect on the
business, financial condition, cash flow and results of operations of the
Company.
In May 2000 the Company purchased the remaining 50% of Koppers Europe, which
has one operating location in Denmark and three operating locations (plus one
closed site which is being dismantled) in the United Kingdom. Although there
are ongoing environmental compliance and legacy issues at each of these
locations, there are currently no outstanding notices of violation or consent
decrees regarding compliance or remediation issues. However, costs associated
with compliance and remediation may be substantial 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 2000, 1999 and 1998 was $19.9 million, $19.6 million and
$23.3 million, respectively. Commitments during the next five years under
operating leases aggregate to approximately $73 million, ranging from $15.2
million in 2001 to $13.6 million in 2005.
49
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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 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.
Business Segments
---------------------
Carbon Railroad
Materials & Utility
& Chemicals Products All Other Total
----------- --------- --------- ------
(In millions)
Year ended December 31, 2000:
Revenues from external customers......... $421.3 $302.2 $-- $723.5
Intersegment revenues.................... 18.7 -- -- 18.7
Depreciation and amortization............ 19.8 8.0 2.2 30.0
Operating profit (loss).................. 36.3 13.9 (0.9) 49.3
Segment assets........................... 305.8 127.4 50.7 483.9
Capital expenditures..................... 23.3 6.5 0.3 30.1
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........................... 263.9 130.1 83.7 477.7
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
50
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended
December 31,
---------------------
2000 1999 1998
------ ------ -----
(In millions)
Profit or Loss
Operating profit for reportable segments................ $ 50.2 $ 52.6 $49.4
Corporate depreciation and amortization................. (2.2) (2.4) (2.1)
Equity in earnings of affiliates........................ 2.2 1.7 2.4
Other income............................................ 9.9 1.3 0.3
------ ------ -----
Income before interest expense, income tax provision
and minority interest................................ $ 60.1 $ 53.2 $50.0
====== ====== =====
Assets
Total assets for reportable segments.................... $433.2 $394.0
Equity investments...................................... -- 12.8
Deferred financing...................................... 10.4 12.4
Deferred taxes.......................................... 41.7 49.0
Fixed assets............................................ 1.6 1.7
Other................................................... 7.3 5.7
Cash and short-term investments......................... 0.4 4.9
Elimination of intercompany receivables................. (10.7) (2.8)
------ ------
Total consolidated assets............................. $483.9 $477.7
====== ======
Geographic Information
United States:
Revenues from external customers........................ $551.3 $553.5
Long-lived assets....................................... 200.3 228.3
Australia and Pacific Rim:
Revenues from external customers........................ $115.7 $110.6
Long-lived assets....................................... 44.8 55.1
Europe:
Revenues from external customers........................ $ 56.5 $ --
Long-lived assets....................................... 16.9 --
11. 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 (known as Koppers Europe subsequent to the Koppers Europe
Acquisition), and KSA Limited Partnership (collectively, the "Non-Guarantor
Subsidiaries"). The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
51
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized Condensed Financial Information
For the Year Ended December 31, 2000
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Current assets.......... $170.3 $107.3 $170.5 $(226.2) $221.9
Non-current assets...... 267.5 46.7 49.1 (101.3) 262.0
Current liabilities..... 219.9 28.7 92.5 (226.6) 114.5
Non-current liabilities. 244.1 18.0 76.0 (3.3) 334.8
Net sales............... 526.7 127.4 93.5 (24.1) 723.5
Gross profit (after
depreciation and
amortization).......... 51.3 45.2 9.6 (11.4) 94.7
Net income (loss)....... (3.5) 20.4 6.5 (8.7) 14.7
Summarized Condensed Financial Information
For the Year Ended December 31, 1999
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
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 and
amortization).......... 53.7 45.5 (5.4) (5.7) 88.1
Net income (loss)....... 10.6 22.7 (6.1) (3.0) 24.2
Summarized Condensed Financial Information
For the Year Ended December 31, 1998
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
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 and
restructuring)......... 55.9 35.1 1.5 (7.2) 85.3
Net income (loss)....... 6.7 15.7 3.5 (5.8) 20.1
52
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, 2000 and 1999:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- ------------- ------------- -------------
2000 1999 2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------ ------ ------
(In millions, except per share figures)
Net sales.............. $160.9 $157.4 $179.8 $172.8 $194.9 $170.8 $187.9 $163.1
Operating profit....... $ 8.0 $ 6.7 $ 15.7 $ 14.6 $ 15.6 $ 16.7 $ 10.0 $ 12.7
Net income (loss)...... $ 2.1 $ (0.2) $ 6.0 $ 8.6 $ 5.8 $ 11.1 $ 0.8 $ 4.7
Income (loss) per share of
Common Stock:
Basic earnings (loss)
per share........... $ 1.49 $(0.11) $ 4.39 $ 5.71 $ 4.19 $ 7.95 $ 0.58 $ 3.40
Diluted earnings
(loss) per share.... $ 0.54 $(0.11) $ 1.58 $ 2.18 $ 1.51 $ 2.90 $ 0.21 $ 1.23
13. Subsequent Event (Unaudited)
In February 2001 the Company's Board of Directors approved the closure of
the utility pole facility located in Feather River, California in March 2001.
This is expected to result in a charge of $3.5 million in the first quarter of
2001. Completion of the closure is expected by year-end 2001, with additional
estimated charges of $1.1 million in operating losses. Substantially all of the
charges will be cash charges.
53
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.
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 March 21, 2001
Robert Cizik and Director
/s/ Walter W. Turner
............................. President, Chief March 21, 2001
Walter W. Turner Executive
Officer and Director
(Principal Executive
Officer)
/s/ Donald E. Davis
............................. Chief Financial March 21, 2001
Donald E. Davis Officer
(Principal Financial
Officer,
Principal Accounting
Officer)
/s/ Clayton A. Sweeney
............................. Director March 21, 2001
Clayton A. Sweeney
/s/ Christian L. Oberbeck
............................. Director March 21, 2001
Christian L. Oberbeck
/s/ N.H. Prater
............................. Director March 21, 2001
N.H. Prater
/s/ David M. Hillenbrand
.............................
David M. Hillenbrand Director March 21, 2001
54
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
*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).
*10.6 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).
*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).
55
Exhibit
No. Description
------- -----------
*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).
*10.25 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).
*10.27 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).
*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
- --------
* Previously filed.
56
KOPPERS INDUSTRIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In millions)
For the years ended December 31, 2000, 1999 and 1998
Balance at Additions Balance
beginning charged at close
of year to Expense Deductions of year
---------- ---------- ---------- --------
2000
Allowance for doubtful accounts....... $1.1 $3.3 $3.5 $0.9
==== ==== ==== ====
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
==== ==== ==== ====
57