ITEM 1. BUSINESS
GENERAL
Koppers Industries, Inc. (the "Company" or "Koppers") is a leading integrated producer of carbon compounds and treated wood products for use in a variety of markets including the chemical, railroad, aluminum and steel industries. The "Koppers" name has been associated with the carbon compounds and wood treating businesses for over 70 years, and the Company has a leading position in most of its markets. The Company operates 21 facilities in the United States and, through its recent acquisition of the remaining outstanding equity of Koppers Australia Pty. Limited ("Koppers Australia") an additional 14 operating facilities in the South Pacific (primarily Australia and New Zealand). The Company also maintains indirect ownership interests in an additional facility in the United States through its domestic joint venture KSA (as defined herein) and in five facilities overseas (one in Denmark and four in the United Kingdom) through its Danish joint venture Tarconord A/S ("Tarconord"). The Company recorded net sales and net income before extraordinary items of $593.1 million and $1.0 million, respectively, for the twelve months ended December 31, 1997. For the same period, the Company's businesses, Carbon Materials & Chemicals, Railroad & Utility Products and Coke Products accounted for 41%, 43% and 16% of net sales, respectively. The Company's earnings results for 1997 were impacted by $45.4 million of restructuring charges related to the closure of its Woodward, Alabama coke facility (the "Woodward Facility") and the closure of a co-generation facility and write-down of assets at the adjacent wood treating facility located in Feather River, California.
Koppers' Carbon Materials & Chemicals division processes coal tar into a variety of intermediate products, including carbon pitch, phthalic anhydride ("PAA") and creosote, which are basic materials necessary in the production of aluminum, polyester resins and plasticizers, and the pressure treatment of wood, respectively. Koppers' Railroad & Utility Products division supplies treated wood products, primarily railroad crossties and utility poles, to United States railroads and the electric and telephone utility industries. Koppers' Coke Products division converts coal into coke for sale to integrated steel producers.
Products and services provided by Koppers Australia are similar to those provided by Koppers. Koppers Australia is Australia's largest manufacturer of carbon pitch, wood preservatives and treated wood products and it markets these products, as well as carbon black, a component in the manufacture of rubber tires, in Australia, New Zealand and other Pacific Rim nations. For its fiscal year ended June 30, 1997 Koppers Australia had operating revenues of approximately $120 million.
Saratoga Investment and Recapitalization
On October 15, 1997, KAP Investments, Inc. ("KAP", a wholly-owned subsidiary of Koppers Australia) and a group of approximately 120 individual investors who are either officers, Board members or current or former employees of either Koppers Industries, Inc. or one of its subsidiaries (the "Management Investors") (collectively, the "Offeree Stockholders") acquired from Cornerstone-Spectrum, Inc. (an affiliate of Beazer East, Inc. and Hanson PLC) its voting and non-voting shares of common stock of Koppers Industries, Inc. ("Common Stock"). The Offeree Stockholders utilized $52.5 million of financing from Koppers, Saratoga Partners III, L.P. ("Saratoga") and Saratoga Koppers Funding, Inc. ("Saratoga Koppers"). On December 1, 1997, Saratoga exchanged 2,145,624 shares of Common Stock it acquired as part of the financing of the acquisition of Common Stock from Cornerstone-Spectrum, Inc. for shares of a new series of senior convertible preferred stock of the Company (the "Preferred Shares"), which entitles Saratoga to elect a majority of the Board of Directors of the Company (the "Board of Directors") and to exercise a majority of the voting power over all outstanding stock of the Company with respect to all other matters subject to a stockholder vote.
The Company sold $175.0 million of 9 7/8% Senior Subordinated Notes (the "New Notes") due 2007 on December 1, 1997 in a private placement and established with Swiss Bank Corporation, Stamford Branch and
Mellon Bank, N.A. a total of $135.0 million of senior term loan facilities and a $140.0 million senior revolving credit facility ($40.0 million and $20.0 million of which was reserved for use in connection with a term loan and a revolving credit facility, respectively, of Koppers Australia) (the "New Credit Facilities"). The proceeds from the New Credit Facilities and the sale of the New Notes have been and are being used to complete the following transactions: (i) the acquisition of The Broken Hill Proprietary Company Limited's ("Broken Hill's") 50% interest in Koppers Australia; (ii) the repayment of $98.9 million of the 8 1/2% Senior Notes of Koppers Industries, Inc. due February 1, 2004 tendered pursuant to a tender offer and consent solicitation which was commenced October 20, 1997 and which expired on November 28, 1997 (the "Tender Offer"), plus $6.4 million of redemption premium thereof; (iii) the repayment of the outstanding indebtedness of approximately $88.1 million under the Company's term loan and revolving credit facilities (the "Bank Debt Refinancing"); (iv) the redemption of 1,813,200 shares of non-voting Common Stock owned by APT Holdings Corporation, an affiliate of Mellon Bank, N.A. for $22.9 million; (v) the redemption, at $17.00 per share, of up to 25% of the shares of common stock owned by the current officers of Koppers and Clayton A. Sweeney (a member of the Board of Directors) and the redemption of up to 100% of the shares of Common Stock owned by other Management Investors, in an aggregate amount not to exceed $15.0 million; (vi) the redemption of 436,508 non-voting shares of Common Stock from Saratoga Koppers; and (vii) the payment of approximately $16.0 million of related fees and expenses. The New Credit Facilities, the sale of the New Notes and the above transactions are collectively referred to herein as the "Recapitalization".
The Company was formed in October 1988 under the laws of the Commonwealth of Pennsylvania by management, Beazer, Inc. and KAP 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") for a purchase price of $226.8 million subject to closing adjustments. The assets acquired from Old Koppers included the Woodward Facility and certain assets of its Chemical & Allied Products Group which then became the Carbon Materials & Chemicals, Railroad & Utility Products and Coke Products divisions of the Company. The purchase was financed through (i) the issuance of $35.2 million of common and preferred stock, (ii) term and working capital loans of $161.6 million, with attached warrants, and (iii) a subordinated bridge loan of $30.0 million. In February 1994, the Company issued $110 million of 10-year unsecured notes (the "Senior Notes") to refinance existing indebtedness and to redeem $53.5 million of preferred stock.
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. See "Business-- Environmental Matters."
INDUSTRY OVERVIEW
CARBON MATERIALS & CHEMICALS
The coal tar distillation business involves the conversion of coal tar, a by-product of the transformation of coal into coke, into a variety of intermediate chemical products in processes beginning with distillation. During the distillation process, heat and vacuum are utilized to separate coal tar into three primary components: carbon pitch (approximately 50%), creosote oils (approximately 30%) and chemical oils (approximately 20%). The most critical element in producing high quality tar products is the ability to obtain and blend multiple coal tars, with various specifications, from several sources in order to achieve the consistent properties desired by the customer.
The aluminum industry is the largest user of carbon pitch, which acts as a binding material for the anodes used in the electrolysis process required in aluminum smelting. Because all coal tar products are produced in relatively fixed proportion to carbon pitch, the level of carbon pitch consumption generally determines the level of production of other coal tar products. The commercial carbon industry, the second largest user of carbon pitch, uses carbon pitch to produce electrodes and other specialty carbon products for the steel industry.
Creosote is used in the wood preservation industry as a preservative for railroad crossties and lumber, utility poles and pilings. Approximately two- thirds of the total United States market requirements are used for railroad construction and maintenance, with the remainder used primarily for utility poles and pilings. To the extent that creosote cannot be sold for use in treating wood products, distillate oils are sold into the carbon black market rather than being blended to creosote specifications.
Chemical oils resulting from the distillation of coal tars are further refined into naphthalene, which is the primary feedstock used by the Company for the production of PAA. The primary markets for PAA are in the production of plasticizers, polyester resins and alkyd resins. Roofing pitch and refined tars are also produced in smaller quantities and are sold into the commercial roofing and pavement sealer markets, respectively.
Because of the Clean Air Act Amendments and other environmental laws, future coal tar availability from United States coke production is expected to decline. Management believes that the Company's ability to source coal tar and carbon pitch from overseas markets, as well as its research of petroleum feedstocks, will assist in securing an uninterrupted supply of coal tar.
RAILROAD & UTILITY PRODUCTS
The Company's Railroad & Utility Products division consists of two businesses: Railroad Products & Services and Utility & Construction Products.
Railroad Products & Services
The major product of Railroad Products & Services is pressure-treated wood crossties, which are used in railroad track maintenance programs. Approximately 15 million crossties are replaced by railroads every year. United States Class 1 railroads (defined as the nine largest railroad systems in the United States) maintain approximately 177,000 miles of track, estimated to contain 540 million crossties. In addition to crossties, the division also offers services to the railroads, such as assembling 39-foot track panel sections, pre-plating ties, cleaning debris from cars, and disposing of discarded ties in an environmentally safe manner.
Historically, investment trends in track maintenance by railroads have been linked to general economic conditions in the country. During recessions, the railroads have typically deferred track maintenance until economic conditions improve. Demand has been relatively stable since 1993. Recently, several of the major Class 1 railroads have merged. Management believes these mergers will not have an adverse effect on the future demand for crossties.
Hardwoods, such as oak and other species, are the major raw materials in wood crossties. Hardwood prices, which account for approximately 60% of a finished tie's cost, fluctuate with the demand from competing hardwood lumber markets, such as oak flooring, pallets and other specialty lumber products. Normally, raw material price fluctuations are passed through to the customer according to the terms of the applicable contract. Weather conditions can be a factor in the supply of raw material, as unusually wet conditions may make it difficult to harvest timber. Creosote, the preservative used to treat crossties, accounts for approximately 10% of the finished tie's cost.
Hardwood lumber is procured by the division from hundreds of small sawmills throughout the northeastern, midwestern, and southern areas of the country. The ties are shipped via rail car or trucked directly to one of the division's thirteen treating plants, all of which are on line with a major railroad. The ties are either air-stacked for a period of six to twelve months or artificially dried by a process called boultonizing. Once dried, the ties are pressure treated with creosote, a product of Koppers' Carbon Materials & Chemicals division.
The Class 1 railroads have demonstrated a desire to outsource their non-core business activities. This desire, coupled with Koppers' long-standing relationships with the Class 1 railroads, has positioned the Company for a new growth opportunity. The Company is now offering new services to the railroads at a cost lower than the railroads' internal cost, and the Company believes that there is an opportunity for future growth in such related areas.
Utility & Construction Products
The Utility & Construction Products business treats utility poles and timber piling for sale to electric utilities, telephone companies and the construction industry. These products are produced from pine or fir trees. The trees are cut to length and shipped to peeling locations at one of the Company's seven pole treating facilities or a third party's site. The poles are then either dried in kilns or put directly into treating cylinders (autoclaves) and steam conditioned before treatment. Kiln drying and steam conditioning are processes that remove the water from the wood before treatment. The applicable preservative is then injected into the wood under pressure, after which a vacuum is used to remove any excess chemical.
Over the last two years, overall pole demand has dropped as utilities have reduced non-essential spending in anticipation of competitive pressure arising from deregulation. It is expected that deregulation will affect both new and replacement pole installation markets for the next several years.
Pricing of raw materials has been significantly impacted over the last five years due to a shortage of supply. Douglas fir availability has been affected by logging restrictions on public land, resulting in increased demand for southern yellow pine. According to Southern Pressure Treaters Association statistics, pole prices have gone up over 65% during the last five years.
COKE PRODUCTS
Coke is a carbon and fuel source required in the manufacture of steel and iron. 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."
Coke is consumed in three markets: steel mill blast furnaces, foundries and other industrial operations. There are two basic types of coke which are produced: furnace coke and foundry coke. Furnace coke, which is produced from different coal blends and requires different heating periods than foundry coke, is generally formed in smaller pieces than foundry coke and is used in blast furnaces to make steel by acting as a reducing agent for the iron ore. With the ceasing of operations at the Woodward Facility in January 1998 (see "--Description of Business--Coke Products"), the Company currently produces only furnace coke through its facility located in Monessen, Pennsylvania (the "Monessen Facility").
Coal is transformed into coke by a process beginning with the pulverizing, blending and mixing of various types of coal to produce coke with the appropriate chemical and physical specifications. The coal mixture is baked approximately 18 hours for furnace coke and 28 hours for foundry coke at temperatures reaching 2,000 degrees fahrenheit and is subsequently quenched and screened in accordance with contract specifications before being loaded for shipment. Volatile constituents, including gases, chemicals and coke oven tar, are extracted and sold for a variety of industrial uses, with a portion of the gas being returned to the coking chambers as heating fuel.
The quality of coke is determined by its chemical and physical properties. A high percentage of fixed carbon and low levels of sulfur, ash, and other volatile matter are essential to the effectiveness of coke in the iron and steel manufacturing processes. The most important physical properties of coke are its ability to withstand breakage and its resistance to abrasion during handling and use in blast furnaces.
Domestic coke production capacity has decreased over the last ten years due to high capital costs for coke oven maintenance and rebuilding, high operating costs and increased expenditures resulting from new environmental compliance standards. This reduction of United States coke production capacity is expected to continue, as several of the large integrated steel companies have recently shut down or announced plans to close their coke batteries, reducing domestic capacity. Integrated steel producers are employing various methods to displace a portion of the coke used in steel production to reduce their reliance on existing suppliers and decrease raw material costs. In some cases, companies have been successful in replacing a portion of their demand for coke with pulverized-coal-injection technology.
DESCRIPTION OF COMPANY'S BUSINESS
CARBON MATERIALS & CHEMICALS
The Company's Carbon Materials & Chemicals division manufactures three principal products: carbon pitch, PAA and creosote. These products, used in the production of aluminum, steel, plasticizers, polyester resins and the treatment of wood, respectively, are produced through the distillation of coal tar, a by-product of the transformation of coal into coke. The Carbon Materials & Chemicals division's profitability is impacted by its cost to purchase coal tar in relation to its prices realized for carbon pitch, PAA and creosote. The Company has five operating facilities in the United States 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 1997, sales of carbon pitch, PAA and creosote (to outside customers only) accounted for approximately 46%, 27% and 7% of the Carbon Materials & Chemicals division's net sales, respectively. Other significant products include roofing pitches and related products (10%), refined tar (5%), and other chemical and tar products (5%).
The Company believes it has a strategic advantage over its competitors based on its ability to access coal tar from many United States and foreign suppliers and subsequently blend such coal tars to produce carbon pitch with the consistent quality important in manufacturing quality anodes for the aluminum industry. The Company's four coal tar distillation facilities and one carbon pitch melting facility give it the ability to offer customers multiple sourcing and consistent supply of high quality products. In anticipation of potential shutdowns of United States coke capacity, the Company has secured coal tar supply through long-term contracts and acquisitions. The Company also benefits from its ability to refine chemical oil, a carbon pitch by-product, into naphthalene, for use as a low-cost feedstock for PAA production and from its ability to sell a large portion of its creosote production internally to the Railroad & Utility Products business.
Koppers' sales volume of carbon pitch increased by 45% from 1993 to 1997 due to improved aluminum market conditions and the acquisition of the Clairton, Pennsylvania coal tar distillation facility in April 1996. Overall, pricing has trended moderately upward from 1993 through December 31, 1997. Over 75% of Koppers' carbon pitch is sold to the aluminum industry under long-term contracts ranging from three to seven years. Demand for carbon pitch has fluctuated historically with United States production of primary aluminum. There are currently no known viable substitutes for carbon pitch in the production of carbon anodes. The Carbon Materials & Chemicals division's ten largest customers represented approximately 45% of the division's net sales for 1997. The Company's three main competitors in North America in the production of carbon pitch are AlliedSignal, Inc., VFT Canada, and Reilly Industries, Inc.
On a worldwide basis, naphthalene and orthoxylene, a petroleum derivative, can both be used in the manufacturing of PAA and are considered to be interchangeable. In the United States, however, the Company is the only PAA producer capable of utilizing both orthoxylene and naphthalene in its manufacturing process, with 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. Although the price of orthoxylene was relatively stable prior to 1994, due to increased demand, the price of orthoxylene increased from $0.14 per pound in March 1994 to $0.38 per pound in May 1995. As a result, PAA prices increased by approximately 101% during that period, providing Koppers with a significant cost advantage over its competition and a temporary expansion of margins. In 1996, however, the average price for orthoxylene declined to approximately $0.16 per pound, resulting in a corresponding decline in PAA prices and margins. At December 31, 1997, orthoxylene prices were $0.18 per pound. Koppers' cost to produce naphthalene and PAA is primarily driven by its cost to procure coal tar. Koppers' four principal PAA competitors, Exxon Chemical Company, Aristech Chemical Corporation ("Aristech"), BASF Corporation and Stepan Company, can use only orthoxylene in the production of PAA.
Approximately one-third of Koppers' creosote production is sold to the Railroad & Utility Products division. An additional one-third is sold to three Class 1 railroad customers, all of which take delivery of the creosote at one of Koppers' wood treating facilities. Over the last eight years, the Railroad & Utility Products division purchased all of its requirements of creosote from the Carbon Materials & Chemicals division. Koppers is the only competitor in this market that is integrated in this fashion. The remainder of its creosote materials are sold to railroads, to other wood treaters or into the carbon black market as a component in the manufacture of rubber tires. Principal competitors in the creosote market are AlliedSignal, Inc. and Reilly Industries, Inc.
Coal tar is purchased from a number of outside sources as well as from the Monessen Facility. Primary suppliers are Bethlehem Steel Corporation, LTV Steel Company, Inc. ("LTV"), USX Corporation ("USX") and Wheeling-Pittsburgh Steel Corporation. The Monessen Facility currently provides approximately 2% of Koppers' coal tar. On an annual basis, Koppers distills approximately 150 million gallons of coal tar representing approximately 76% of designed capacity.
Other Carbon Materials & Chemicals products include roofing pitch, used in the construction of built-up roofing systems, and refined tars, sold to manufacturers of pavement sealers for driveways and parking lots.
Koppers Australia and Tarconord are major regional producers of carbon pitch and related products and are strategically important to the Company because they enable the Company to access global markets for its carbon pitch and related products.
RAILROAD & UTILITY PRODUCTS
The Company markets treated wood products almost exclusively to the railroad and public utility markets, primarily in the United States and Australia. The Railroad & Utility Products division's profitability is primarily influenced by the demand for railroad products and services by Class 1 railroads, demand for transmission and distribution poles by electric utilities and its cost to procure wood. Historically, sales of railroad products and services have represented approximately two-thirds of the Railroad & Utility Products division's net sales. Railroad products include items such as crossties, switch ties and various types of lumber used for railroad bridges and crossings. Utility products include transmission and distribution poles for electric and telephone utilities and pilings used in industrial foundations, beach housing, docks and piers. The Railroad & Utility Products division operates 15 wood treating plants and 13 pole distribution yards located throughout the United States, and the Company also has one used crosstie burning cogeneration plant. 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.
Railroad Products & Services
The Railroad Products & Services business supplies treated crossties and other products and services to the United States railroad industry. Railroad Products & Services' largest customer base is the Class 1 railroad market, which buys 77% of all crossties produced in the United States. Koppers is also expanding key relationships with the approximately 500 short-line and regional rail lines. The railroad crosstie market is a mature market with approximately 15.2 million replacement crossties purchased per year. The Company currently has contracts with eight of the nine United States Class 1 railroads and has enjoyed long-standing relationships, some of more than 50 years, with this important customer base. These relationships, coupled with a growing interest on the part of railroads to outsource non-core activities, have enabled the Company to position itself for growth by offering new services to railroads at a cost lower than the railroads' internal cost. Such new services include assembling 39-foot track sections and affixing fastening devices at the treating plant rather than field locations; removing debris from railroad freight cars; and disposing of discarded ties in an environmentally safe manner in high temperature boilers. In 1997, approximately 11% of Railroad Products & Services' 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, car cleaning and railroad tie disposal.
The Company's top 10 railroad accounts, which comprised approximately 58% of Railroad & Utility Products' net sales for 1997, are serviced through long- term contracts ranging from one to twelve years on a requirements basis. CSX Transportation, Inc. ("CSX") accounted for 18% of Railroad & Utility Products' net sales for 1997 and has a five-year treating agreement with the Company, expiring in December 2001, which calls for a minimum treating volume of 1.8 million crossties annually. Koppers' sales to the railroad industry are coordinated through its office in Pittsburgh, Pennsylvania. The Company's principal competitor in the railroad products market is Kerr-McGee Chemical Corp.
Hardwood lumber accounts for approximately 60% of a finished crosstie's cost. The Company obtains its hardwood supply from hundreds of small sawmills throughout the northeastern, midwestern and southern areas of the United States. Hardwood prices fluctuate with demand from competing hardwood lumber markets such as flooring and pallets. The wood is taken by either truck or rail from Company-operated collection points directly into its treating plants, where it is pressure treated with creosote, a product of the Carbon Materials & Chemicals division. Over the last eight years, Railroad & Utility Products purchased all of its creosote requirements from the Carbon Materials & Chemicals division. In addition, several railroads procure their own raw materials and ship them into the Company's plants for treating services.
The Company believes that the threat of substitution for the wood crosstie is low due to the higher cost of alternative materials. Concrete ties, however, have been identified by the railroads as a feasible alternative to wood crossties in limited circumstances. In 1991, the Company acquired a 50% partnership interest in KSA Limited Partnership ("KSA"), a concrete crosstie manufacturing facility in Portsmouth, Ohio, in order to take advantage of this growth opportunity. In 1997, an estimated 1.3 million concrete crossties, or 6% of total tie insertions, were installed by Class 1 railroads. The Company believes that concrete ties will continue to command approximately this level of market share. This facility produced approximately 152,000 concrete crossties in 1997, or 12% of the U.S. estimated concrete tie market. While the cost of material and installation of a concrete tie is much higher than that of a wood tie, the average life of wood and concrete ties are similar, although concrete generally performs better in high weight bearing, high traffic areas and is attractive to railroads for these purposes.
Utility & Construction Products
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"), chromated copper arsenate ("CCA") and creosote.
The market for utility pole products is characterized by a large number of smaller, highly competitive producers selling into a price-sensitive industry. The utility pole market is highly fragmented with over 300 investor-owned electric and telephone utilities and 1,800 smaller local utilities and Rural Electric Associations ("REAs"). Approximately 2.4 million poles are purchased annually. In 1996 and 1997, 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 for the next several years.
In 1997, pole products accounted for approximately one-third of Railroad & Utility Products' net sales. Koppers' sales to its ten largest pole customers accounted for approximately 8% of Railroad & Utility Products' net sales for 1997. Principal competitors in the utility products market are McFarland Cascade, North Pacific Lumber and Atlantic Wood Industries Inc. There are few barriers to entry in the utility products market, estimated by the Company to consist of mostly regional, wood treating companies which typically operate small to medium size plants and serve local clients.
COKE PRODUCTS
Since the closing of the Woodward Facility in January 1998, the Company's coke business consists of only the Monessen Facility, which produces furnace coke. Koppers has made capital expenditures of approximately $25.0 million to modernize the Monessen Facility since its purchase in 1995 for $5.0 million. The plant consists of two batteries with a total of 56 ovens and has a total capacity of approximately 350,000 tons of furnace coke per year. All of the ovens were rebuilt in 1980 and 1981, which, together with recent improvements, makes the Monessen Facility one of the most modern coking facilities in the United States. The Monessen Facility is self-sufficient in all its energy needs other than electricity.
The Monessen Facility qualifies for a tax credit based on its production of coke as a non-conventional fuel and the sale thereof to unrelated third parties. The tax credit generated per ton of coke is tied to a per-barrel of oil equivalent determined on a BTU basis and adjusted annually for inflation. In 1997, the approximate value of this tax credit per ton of coke was $26.00. The credit is available through December 31, 2002 and provided tax benefits to Koppers of approximately $9.0 million and $7.0 million in 1997 and 1996, respectively, and could provide up to $10.4 million per year thereafter, unadjusted for inflation and assuming the availability of taxable income and full production at the Monessen Facility. The Company may monetize some or all of these tax credits.
Koppers has a contract with LTV covering production at the Monessen Facility. The contract is a seven-year contract through 2002 and is for 240,000 tons per year, plus or minus 10% at LTV's option, at prices subject to periodic adjustments. In 1998, the Company expects LTV to take close to 100% of the Monessen Facility's production capacity.
Due to the advanced ages of the coke oven batteries, ongoing environmental compliance issues and significant capital expenditure requirements, all of which had combined to reduce productive capacity and increase per unit costs, the Company's Board of Directors authorized the Company to close the Woodward Facility in early 1998. This resulted in a charge to earnings in the fourth quarter of 1997 of $39.9 million, approximately $9.4 million of which are estimated to be 1998 cash charges primarily for dismantling and employee benefit costs. Sales and gross profit at the Woodward Facility for the twelve months ended December 31, 1997 amounted to $51.8 million and ($8.1) million, respectively.
Due to unanticipated disruptions in United States coke consumption during 1996, along with the increasing availability of lower-priced imported coke, the current market for coke remains relatively soft.
KOPPERS AUSTRALIA
Koppers Australia is a wholly-owned subsidiary of the Company and is Australia's largest manufacturer of carbon pitch, carbon black, wood preservatives and treated wood products, and markets these products in Australia, New Zealand and other Pacific Rim nations. Koppers Australia is the only coal tar distiller in Australia, providing it with a significant competitive advantage in serving the Australian aluminum smelting industry. Products and services provided by Koppers Australia's coal tar division are similar to those provided by the Company's Carbon Materials & Chemicals division, with the exception that Koppers Australia produces carbon black and does not have PAA production capabilities (see "--Carbon Materials & Chemicals").
Operations in coal tar processing, chemically treated wood products, and carbon black accounted for 36%, 17% and 19% of Koppers Australia's net sales, respectively, for its fiscal year ended June 30, 1997. Koppers Australia also has a 51% interest in a wood preservative chemicals company, Koppers-Hickson Investments Pty. Limited ("Koppers-Hickson"), which accounts for the remaining 28% of net sales. Koppers Australia has operations in five countries, enjoys sizable market shares in each of its businesses and is well-positioned to take advantage of anticipated growth in the aluminum industries in Australia, China and Southeast Asia. Koppers Australia has entered into a marketing agreement with a carbon pitch producer located in the People's Republic of China to export carbon pitch from China to world markets. The wood preservation operations of Koppers Australia are generally pole-related and are similar to those of the Company's Railroad & Utility Products division.
Historical operating results for Koppers Australia for the past three fiscal years are as follows (based on average month-end rates for income statement items and end of period rates for balance sheet items):
EQUITY INVESTMENTS AND RELATED PARTIES
Tarconord
Tarconord, located in Nyborg, Denmark, produces and markets carbon pitch, naphthalene and related products for the European and Middle Eastern markets. The Company's 50% partner in Tarconord is Tarco A/S, a road paving and industrial piping company also located in Denmark.
Tarconord markets its primary product, carbon pitch, to aluminum producers in Norway, the Netherlands, the states of the former Soviet Union and northern Germany. Coal tar supplies are primarily purchased from steel producers in Scandinavia, Poland, the states of the former Soviet Union and Germany. Tarconord has a strategic location with respect to its largest customer country, Norway, where liquid pitch shipments move directly by ship from Tarconord's tar distillation facility at Nyborg to Norwegian smelters located at deep water sites.
In 1996 Tarconord acquired 100% of the capital stock of Bitmac, a United Kingdom company engaged in tar distillation. Bitmac operates four plants in the United Kingdom, and management believes this acquisition has been strategically important in strengthening raw material supply and distillation capacity.
Tarconord helps to position the Company as not only one of the two largest carbon pitch suppliers in the world, but also as the only such supplier operating on three continents. Management believes that this global presence represents a significant competitive advantage in serving multinational and domestic aluminum manufacturers.
Domestic Joint Venture: KSA
KSA, located in Portsmouth, Ohio, produces concrete crossties, a complementary product to the Company's treated wood crosstie business.
Other interests are held by Sherman International Corp. (24%), Abetong America, Inc. (24%) and Sherman Abetong, Inc. (2%). KSA was formed to construct, own and operate a concrete railroad crosstie manufacturing facility located in Portsmouth, Ohio. KSA's major customer is CSX, which has a contract with the joint venture for 1.0 million concrete ties, approximately 0.75 million of which have been supplied since the start-up of operations in 1992. It has also expanded its product offerings to include concrete turnouts, used in rail traffic switching, and used crosstie rehabilitation.
The following table presents total sales, equity in earnings and dividends received with respect to each of the Company's joint ventures for fiscal years ended 1997, 1996 and 1995.
RESEARCH AND DEVELOPMENT
As of December 31, 1997, the Company had eleven full-time employees engaged in research and development and technical service activities. The Company's research efforts are directed toward further development and utilization of products and technology regarding products developed from coal tar and technical service efforts to promote further use of creosote. The Company believes the research and technical efforts currently expended in these areas are adequate to maintain a leadership position in the technology related to these products. Expenditures for research and development for fiscal 1997, 1996 and 1995 were $1.1 million, $1.0 million and $0.9 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 refuse burners, pitch quality controls (both in tar plants and aluminum plants), wood preservatives and additives, and tar refining.
ENVIRONMENTAL MATTERS
Like companies involved in similar environmentally sensitive businesses, the Company's operations and properties are subject to extensive federal, state, local and foreign environmental laws and regulations, including those concerning, among other things, the treatment, storage and disposal of wastes, the investigation and remediation of contaminated soil and groundwater, the discharge of effluents into waterways, the emissions of substances into the air or otherwise relating to environmental protection and various health and safety matters (collectively, "Environmental Laws"). The Clean Air Act and Clean Water Act, each as amended, impose stringent standards on air emissions and water discharges, respectively. Under the Resource Conservation and Recovery Act, as amended ("RCRA"), a facility that treats, stores or disposes of hazardous waste on-site may be liable for corrective action costs, and a facility that holds a RCRA permit may have to incur costs relating to the closure of certain "hazardous" or "solid" waste management units. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA") and similar state laws, an owner or operator of property at which releases of hazardous substances have occurred may be liable for investigation and remediation of any resulting contamination and related natural resource damages. In addition, under CERCLA, the generator of hazardous substances may be strictly, and jointly and severally liable for any required investigation or remediation at third-party disposal sites and related natural resource damages. The Environmental Laws are subject to frequent amendment. The sanction for failure to comply with such Environmental Laws can include significant civil penalties, criminal penalties, injunctive relief and denial or loss of, or imposition of significant restrictions on, environmental permits. In addition, the Company could be subject to suit by third parties in connection with violations of or liability under Environmental Laws.
The Jefferson County Department of Health ("Jefferson County") issued a notice of violation in March 1996 in connection with various alleged violations of Jefferson County's air pollution control regulations for emissions from coke oven batteries at the Company's Woodward Facility during the period May 26, 1992 through March 1, 1996. On February 14, 1997 the United States Environmental Protection Agency ("EPA") issued a notice of violation covering the same issues that were raised in the Jefferson County notice of violation. Thereafter, the Company discovered that certain benzene abatement equipment at the Woodward Facility had not been operational for several months. Following a preliminary investigation, the Company also discovered that certain reports and records contained incomplete and inaccurate information and that certain environmental reports and certifications were not filed when required. The Company has notified Jefferson County, the State of Alabama and the EPA of the environmental irregularities, and the environmental reporting status of the Woodward Facility has been brought up to date by the Company. Counsel and independent investigators were retained to conduct a complete and thorough investigation; and the benzene abatement equipment had been returned to service prior to the ceasing of operations in January 1998. However, the Company could be subject to significant liability in connection with these matters, including fines and civil and criminal penalties and the risk of third-party lawsuits. The Company and Jefferson County have negotiated a settlement agreement (the "Settlement Agreement") which would have required the Company to install monitoring and control equipment and institute operational changes; subsequent to the Settlement Agreement, the Company has permanently shut down all coke oven batteries at the Woodward Facility. The Settlement Agreement included both the original Jefferson County notice of violation and the self-reported benzene abatement violations. The Settlement Agreement, in addition to the changes listed above, also required the Company to pay a civil penalty in the amount of $450,000 to Jefferson County, which was paid in 1997. On February 9, 1998 Jefferson County proposed a modified settlement agreement to address alleged air exceedences from August 1997 through January 1998 which includes an additional penalty in the amount of $575,000. The Company is currently in the process of reviewing the proposed modification, and has entered into negotiations with Jefferson County regarding this matter. There can be no assurance that the settlement with Jefferson County will deter the EPA from pursuing its notice of violation and that the EPA will not seek additional actions or penalties that could have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company.
During the investigation of the Woodward Facility described above, it was also discovered that certain environmental records and reports relating to discharges of treated process water and treated storm water
contained incomplete and inaccurate information. Corrected reports have been submitted to the State of Alabama and the EPA. While no notice of violation has been issued in connection with this matter, it is believed likely that a notice of violation will be issued and substantial penalties may be sought by the State of Alabama or the EPA.
Koppers was served with a notice of violation from the Pennsylvania Department of Environmental Protection ("PADEP"), which alleged Koppers was not in compliance with a plan approval issued by PADEP for the Monessen Facility. The notice alleges that the Monessen Facility is emitting more nitrogen oxides than is allowed by the plan approval. Koppers also received a notice of violation in connection with a failure to conduct timely emission testing on the boilers at the Monessen Facility. Koppers has installed additional equipment and modified existing equipment to improve the quality of boiler emissions. Resolution of these matters could have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company. Koppers has submitted an amended plan approval application to PADEP that provides for limitations on the operation of the two boilers at the Monessen Facility. PADEP is currently reviewing this application. As a result of the failure to meet the original nitrogen oxide emission limitations, it is expected that PADEP will propose a civil penalty in an amount of approximately $100,000. However, there can be no assurance that a higher penalty will not be sought.
On June 12, 1996 PADEP issued a notice of violation in connection with an alleged noncompliance with the terms of a consent agreement between the Company and PADEP regarding liability for environmental conditions existing at the time the Company purchased the Monessen Facility ("Consent Agreement"). The notice of violation alleged that the Company had not implemented the corrective actions required under the Consent Agreement in a timely fashion. The Company has completed the implementation of the corrective actions at issue and has settled this matter by payment of a fine in the amount of $261,000 in January 1998.
In June 1997, during a routine environmental compliance audit of the Logansport, Louisiana wood treating facility, it was discovered that certain records and reports relating to discharges of treated process water contained incomplete and inaccurate information. Corrected reports have been submitted to the local municipality, the State of Louisiana and the EPA. While no notice of violation has been issued in conjunction with this issue, it is likely that a notice of violation will be issued and substantial penalties will be sought by the local municipality, the State of Louisiana or the EPA.
For each of the last three fiscal years, the Company's average capital expenditures and operating expenses for environmental matters, including depreciation, amounted to approximately $7.0 million and $16.0 million, respectively. The Company believes that environmental operating costs will not change materially from those incurred during the past three years. The Company currently estimates that capital expenditures in connection with matters relating to environmental control will be approximately $6.9 million for 1998. Because Environmental Laws have historically become increasingly more stringent, costs and expenses relating to environmental control and compliance may increase in the future. Also, Koppers may have to incur additional capital expenditures and compliance costs (which it is unable to estimate at this time) in connection with the resolution of the aforementioned notices of violations. As such, there can be no assurance that costs of compliance with existing and future Environmental Laws will not exceed current estimates and will not have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company.
Under the terms of the Asset Purchase Agreement between the Company and Old Koppers (now known as Beazer East, Inc.) at the formation of Koppers in 1988, Beazer East assumed the liability for and indemnified Koppers against (among other things) cleanup liabilities for contamination occurring prior to the purchase date at sites acquired from Beazer East, and third-party claims arising from such contamination under the Indemnity. Beazer East's performance of the Indemnity is unconditionally guaranteed by Beazer Limited under the Guarantee. The obligations of Beazer Limited under the Guarantee may be enforced directly against Beazer Limited without notice of default to Beazer East and without making any demand on, obtaining any judgment or order or commencing any legal proceeding against, or taking any other action against Beazer East. However, if such indemnification was not available for any reason, including the inability of Beazer East and/or Beazer Limited to make such indemnification payments, and if Koppers were required to pay such costs, it could have a
material adverse effect on the business, financial condition, cash flow and results of operations of the Company. Furthermore, if Koppers were required to record a contingent liability in respect of environmental matters covered by the Indemnity on its balance sheets, the result could be that Koppers would have significant negative net worth.
Five of the sites owned and/or operated by Koppers are listed on the National Priorities List ("NPL") promulgated under CERCLA. These sites are the Feather River, California wood treating facility, the Gainesville, Florida wood treating facility, the Galesburg, Illinois wood treating facility, the Florence, South Carolina wood treating facility, and the Follansbee, West Virginia carbon materials and chemicals facility. In addition, many of Koppers' sites are or have been operated under RCRA permits, and RCRA remedial and closure activities are being conducted on several such sites. Currently, at the properties acquired from Beazer East (which include all of the NPL sites and all but one of the RCRA-permitted sites), substantially all investigative, cleanup and closure activities are being conducted and paid for by Beazer East pursuant to the terms of the Indemnity. The Indemnity provides that, with certain limited exceptions, Beazer East will be responsible for and will indemnify Koppers against any liability, damage, loss, cost, expense and any related fine or penalty, including liabilities for personal injury to employees resulting from exposure to toxic or hazardous substances, arising under any federal, state or local Environmental Law in connection with any condition or activity at the sites purchased or leased from Beazer East existing on or prior to the Acquisition, provided that, within twelve years after the Acquisition (December 29, 2000) Beazer East either receives a claim asserted by Koppers or a third party or receives specific and particularized notice of a condition or activity that may give rise to a claim and such a claim is at any time actually brought. However, claims related to hazardous substances that were both generated at facilities owned or operated prior to the Acquisition and disposed of at third-party locations before the date of the Acquisition do not have to be asserted or identified before the twelfth anniversary. Also, Beazer East indemnifies Koppers for ninety percent (90%) of claims in excess of $100,000 in any year that are related to disposal of contaminated soil generated as a result of a voluntary decision by Koppers. In regard to personal injury environmental claims asserted by an employee alleging exposure to toxic substances in the workplace, such claims are allocated between Beazer East and Koppers according to how many months the employee making the claim worked for each entity.
Costs and liabilities associated with investigative, cleanup and closure activities at the NPL sites and RCRA-permitted facilities acquired from Beazer East are expected to be significant. While Beazer East has retained and accepted responsibility for investigative, cleanup and closure activities relating to pre-Acquisition contamination at such properties (including being the signatory on several consent agreements relating to such sites) and has paid, to date, for substantially all such investigative, remedial and closure costs, the government has the right under applicable Environmental Laws to seek relief directly from Koppers for any and all such pre-Acquisition obligations and liabilities at or on sites owned or operated by Koppers. Although Beazer East and Beazer Limited have performed their respective obligations since 1989, there can be no assurances that Beazer East and Beazer Limited will continue to meet their obligations under the Indemnity and the Guarantee, respectively. Since 1991, Beazer East and Beazer Limited have been wholly-owned indirect subsidiaries of Hanson PLC.
Beazer East is actively fulfilling its obligations to conduct investigative, cleanup and closure programs at the properties which Koppers acquired from Beazer East in accordance with the requirements of regulatory authorities. The Indemnity is not applicable to sites acquired since the formation of Koppers, for which separate indemnifications have been negotiated where appropriate.
In the event that Beazer East and Beazer Limited do not continue to fulfill their commitments under the Indemnity and the Guarantee, Koppers may be required to pay costs covered by the Indemnity. Koppers has been informed by Beazer East that for the last three years, amounts paid by Beazer East under the Indemnity have averaged approximately $14.0 million per year. The requirement to pay such costs without reimbursement would have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company. Furthermore, if Koppers were required to record a liability regarding environmental matters covered by the Indemnity on its balance sheets, the result could be that Koppers would have significant negative net worth.
In addition, Beazer East has defended and is presently defending certain toxic tort actions arising from the pre-Acquisition operation of assets which the Company acquired from Beazer East. These tort actions were not assumed by Koppers under the Asset Purchase Agreement and are within the scope of the Indemnity.
As a result of a lawsuit among CSX, Beazer East and the Company, CSX has assumed Beazer East's obligations under the Indemnity in connection with Koppers' facility located in Green Spring, West Virginia. There can be no assurance that CSX will perform its obligations and if Koppers were required to pay such costs, it could have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company.
The Indemnity does not afford Koppers indemnification against environmental costs and liabilities relating to activities or conditions occurring or arising after the Acquisition, nor does the Indemnity cover liabilities arising in connection with post-Acquisition acquisitions.
In the summer of 1997, Koppers evaluated the environmental liabilities related to the manufacturing sites associated with the Acquisition. The evaluation was based on a report prepared by an independent consultant, which utilized site-specific public information to the extent available, as supplemented by (among other things) its technical knowledge and expertise, published resources regarding costing of remediation techniques and specified technical cost and regulatory assumptions. The evaluation and report estimated that approximately $111.1 million would be expended at these sites for environmental remediation during the period of 1998 to 2042. Koppers estimates that approximately $92.9 million of this amount is covered under the Indemnity, that it is responsible for $135,000, and that identified third parties are responsible for the remaining $18.1 million. There can be no assurance, however, that the actual liabilities associated with the investigation, cleanup and closure of these sites will not exceed this estimate. The factors that could affect the continuing validity of the estimate include: new information about the contamination at the sites that is contrary to previous assumptions, new interpretations of existing Environmental Laws, new and more stringent Environmental Laws, and more vigorous enforcement policies of regulatory authorities. Further, in the event that Beazer East does not fulfill it commitments under the Indemnity or the identified third parties do not fulfill their commitments, Koppers may be required to pay costs that would have a material adverse effect on the business, financial condition, cash flow and results of operation of the Company.
Koppers purchased a wood treating facility located in Somerville, Texas from Atchison, Topeka & Santa Fe Railway Company ("Santa Fe") in March 1995. At the time of the purchase there were several existing environmental issues at the facility. Santa Fe retained responsibility for remediating and monitoring all closed solid waste units and surface impoundments at the facility that were in existence at the time of the sale. Santa Fe indemnified Koppers for all violations of Environmental Laws or releases of hazardous substances or petroleum products that occurred before the sale. In addition, for the first twelve years following the sale, Santa Fe is obligated to indemnify Koppers for costs that exceed a specified annual cap ($50,000) when such costs arise from a construction project that Koppers voluntarily initiates and also arise from complying with Environmental Laws governing containment, disposal or monitoring of hazardous substances at the site.
Koppers purchased a tar distillation facility located in Clairton, Pennsylvania from Aristech in April 1996. This tar distillation facility is located within the boundaries of a coke facility owned and operated by U.S. Steel Group, Inc. ("U.S. Steel"). U.S. Steel Group had sold the tar distillation facility to Aristech in 1986. At the time of the purchase there were several existing environmental issues at the tar distillation facility. When USX sold the tar distillation facility to Aristech, it provided Aristech with a broad indemnity for environmental contamination that predated the 1986 sale of the tar distillation facility to Aristech. When Koppers purchased the tar distillation facility from Aristech, it assumed Aristech's obligations and gained Aristech's protections under the USX indemnity agreement. The principal obligation is that Koppers must pay for ten percent (10%) of the environnmental remediation costs incurred by USX in implementing a consent decree concerning the tar distillation facility and USX's surrounding coke facility, up to a maximum combined payment by both Koppers and Aristech of $500,000. Prior to Koppers' purchase of the tar distillation facility, Aristech had made payments of approximately $175,000 under the USX indemnity agreement. To date, Koppers has not made any payments
under this indemnity provision. As part of the agreement with Aristech, Koppers agreed to indemnify Aristech for environmental claims arising from operations at the tar distillation facility. However, the requirement for Koppers to indemnify Aristech has several exceptions, including but not limited to: claims for which USX will provide indemnification, personal injury claims arising from a pre-sale chemical release, and any incident listed on a schedule to the asset purchase agreement.
At the Clairton facility, the Somerville facility and the Monessen Facility (all of which Koppers acquired subsequent to the acquisition of the Beazer East properties), remedial actions are being performed in accordance with applicable regulations and all indemnification obligations are being honored at the Clairton and Somerville facilities. The Company believes that the sellers (or their predecessors) at both of these sites will conduct and finance most investigative and cleanup activities directly. Although the Company is not aware of any reason why such indemnification obligations will not be performed, if Koppers were required to pay costs associated with environmental contamination at these two sites, it could have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company. The Monessen Facility was purchased pursuant to a bankruptcy sale. Although an environmental indemnification was provided by the seller of that facility to Koppers, Koppers does not expect that such indemnification obligations will be honored. If contamination at the Monessen Facility should be discovered which has not been identified pursuant to the a consent order and agreement with the EPA (the "Monessen Consent Order"), or if the EPA should require cleanup above the $550,000 "cap" contained in the Monessen Consent Order, the costs associated with such events could have a material adverse effect on the Company's business, financial condition, cash flow and results of operations.
Koppers has made other asset acquisitions that involved purchase of real property. While environmental indemnifications were obtained as part of the transactions, the limited financial resources of the selling parties makes fulfillment of these indemnifications unlikely. Material pre-purchase environmental conditions identified during the due diligence leading up to these acquisitions were addressed either before the purchase or immediately afterwards.
From time to time, Koppers is served with notices of violation and requests for information relating to environmental compliance matters at the various facilities it owns and operates. In November 1996, Koppers received an information request from the EPA in regard to water discharges from its facilities. Subsequent to this initial request, Koppers has received two additional information requests from the EPA. The initial request, the first supplemental request and the second supplemental request have been answered. While the EPA has not issued a notice of violation in connection with these requests, there can be no assurance that civil penalties or the requirement to expend capital resources will not arise.
In September 1996, the Company was served with a notice of violation from the Illinois Environmental Protection Agency ("IEPA") relating to 16 releases of hazardous materials which occurred at or from its facility located in Stickney, Illinois between January 24, 1990 and May 3, 1996. The Company has entered into negotiations with the IEPA to investigate four of the releases which had the potential to cause groundwater contamination. Although the Company believes that all such releases were remediated when they occurred, there can be no assurances that the IEPA will not require additional action in connection with this matter.
In addition to the environmental issues discussed above, the Company has received or expects to receive notices of violations and requests for information at its Monessen Facility and the Stickney, Illinois and Follansbee, West Virginia tar distillation and chemicals facilities that relate to matters which the Company does not believe will have a material impact on the business, financial condition, cash flow and results of operations of the Company.
On occasion, Koppers Australia has been served with notices relating to environmental compliance issues arising in connection with its operations. Koppers Australia was served with a notice by the Tasmanian Department of Environment and Land Management ("DELM") which alleged that the Longford, Tasmania facility was not in compliance with certain water discharge requirements. Koppers Australia is currently in negotiations with the DELM with respect to this issue. In addition, historic operations conducted at the Koppers
Australia facilities have resulted in identified and potential soil and groundwater contamination of varying degrees. The Trentham, Victoria facility is listed on the Victorian Register of Contaminated Sites. The Rockhampton and Takura, Queensland facilities are listed on the Queensland Register of Contaminated Sites as "probable sites". In addition, Koppers Australia has identified various levels of groundwater contamination at the Mayfield, New South Wales and Bunbury, Western Australia facilities. Although the relevant regulatory authorities have not required the investigation or remediation of these or other Koppers Australia facilities to date, these authorities may require such work if Koppers Australia does not undertake such activities itself. Costs associated with these activities may be material and there can be no assurance that such costs will not have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company.
EMPLOYEES AND EMPLOYEE RELATIONS
As of January 31, 1998, the Company employed 661 salaried employees and 1,329 hourly employees. Listed below is a breakdown of employees by business segment, including administration.
Of the Company's 1,990 employees, approximately 1,200 are represented by 17 different unions and covered under 29 separate labor contracts. The United Steelworkers of America, covering workers at six facilities, accounts for the largest membership with more than 500 employees. Another significant affiliation is the Oil, Chemical, and Atomic Workers Union, with approximately 300 employees at four facilities. Labor negotiations are conducted on a plant- by-plant basis and approximately one-fourth of the outstanding contracts are renegotiated in any one year.
In the last five years, the Company has had three work stoppages due to strikes at its Follansbee, Somerville and Galesburg facilities. The Follansbee strike occurred in November 1993 and the Somerville and Galesburg strikes occurred in March 1996. In each instance, the Company was able to continue operation of the respective facilities at approximately 85% of capacity and to reach agreement with each of the unions on terms satisfactory to the Company. There can be no assurance that the Company would be able to continue operating facilities in the event of further work stoppages or union disputes in the future.
ITEM 2.
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 five Carbon Materials & Chemicals facilities, 15 wood treating facilities, 14 facilities in the South Pacific and the Monessen Facility. See "--Carbon Materials & Chemicals," "--Railroad & Utility Products," "--Coke Products" and "--Koppers Australia." As of December 31, 1997, vehicles and equipment represented approximately 31% of the Company's total assets, as reflected in its consolidated balance sheet. The following chart sets forth information regarding the Company's facilities:
The Company's corporate headquarters are located in approximately 50,000 square feet of leased office space in the Koppers Building, Pittsburgh, Pennsylvania. The office space is leased from Axiom Real Estate Management, Inc. pursuant to an 11-year lease, with the initial term expiring December 31, 2003. The lease provides for an additional five-year renewal option.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Jefferson County issued a notice of violation on March 11, 1996 in connection with various alleged violations of Jefferson County's air pollution control rules and regulations for emissions from coke oven batteries at Koppers' Woodward Facility. On February 14, 1997, the EPA sent a notice of violation to Koppers that covered the same issues identified in the Jefferson County notice of violation. Koppers has entered into a settlement agreement with Jefferson County which resulted in a payment of $450,000 by the Company in 1997. On February 9, 1998 Jefferson County proposed a modified settlement agreement to address alleged air exceedences from August 1997 through January 1998 which includes an additional penalty in the amount of $575,000; however, there can be no assurance that the EPA will not seek additional actions or penalties that could have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company. See "Business-- Environmental Matters."
Koppers was served with a notice of violation from PADEP, which alleged Koppers was not in compliance with a plan approval issued by PADEP for the Monessen Facility. The notice alleges that the Monessen Facility is emitting more nitrogen oxides than is allowed by the plan approval. Koppers also received a notice of violation in connection with a failure to conduct timely emission monitoring testing on the boilers at the facility. Koppers has installed additional equipment and modified existing equipment to improve the quality of boiler emissions. Resolution of these matters could have a negative effect on the business, financial condition, cash flow and results of operations of the Company. Koppers has submitted an amended plan approval application to PADEP that provides for limitations on the operation of the two boilers at the Monessen Facility. PADEP is currently reviewing this application. As a result of the failure to meet the original nitrogen oxide emission limitations, it is expected that PADEP will propose a civil penalty in an amount of approximately $100,000. See "Business--Environmental Matters."
On June 12, 1996, PADEP issued a notice of violation in connection with an alleged noncompliance with the terms of a Consent Agreement between the Company and PADEP regarding liability for environmental conditions existing at the time Koppers purchased the Monessen Facility. The notice of violation alleged that Koppers had not implemented the corrective actions required under the Consent Agreement in a timely fashion. PADEP has calculated a stipulated penalty in the amount of $261,000, which was paid in January 1998. See "Business--Environmental Matters."
The Company is involved in various other proceedings relating to environmental laws and regulations. See "Business--Environmental Matters."
The Company is involved in various other proceedings incidental to the ordinary conduct of its business. The Company believes that none of these other proceedings will have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A meeting of the shareholders of the Company was held on November 13, 1997 at the corporate offices of the Company. The shareholders unanimously elected Christian L. Oberbeck to serve on the Board of Directors of the Company; Robert K. Wagner, Brooks C. Wilson, N. H. Prater, and Clayton A. Sweeney were the continuing Directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Currently, there is no established public trading market for the Common Stock. At March 1, 1998 the Company had 1,706,014 shares of Common Stock $.01 par value outstanding. All of the Common Stock was owned by 118 Management Investors. The terms and conditions of ownership, including voting rights and dividends, are governed by the Restated Articles of Incorporation of the Company and the stockholders' agreement by and among the Company, Saratoga and the Management Investors, dated December 1, 1997 (as amended, the "New Stockholders' Agreement"). See "Directors and Officers of the Registrant--New 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 therefor 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 New Notes, are subject to the supermajority vote requirements of the New Stockholders' Agreement, and are subject to the provisions of any series of preferred stock, including the Preferred Shares held by Saratoga, which may, at the time, be outstanding. On February 25, May 30, and August 29, 1997 the Company declared dividends of $0.085 per common share and common share equivalent.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- -------- (1) The 1994 results reflect a $1.4 million reduction in depreciation expense for change in estimate of useful lives of certain assets effective July 1, 1994. See Note 1 of the Notes to Consolidated Financial Statements of the Company.
(2) The 1997 results reflect $45.4 million of restructuring charges comprised of $39.9 million related to the closure of the Woodward Facility, and $5.5 million related to the Feather River, California co-generation and treating plant. The 1996 results reflect $7.4 million of plant closing charges, 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 the Woodward Facility, and $2.6 million of severance charges for salaried employees as a result of workforce reductions at various locations. The 1994 results reflect severance
charges for salaried employees as a result of workforce reductions at various locations. See Note 2 of the Notes to Consolidated Financial Statements of the Company.
(3) 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 (the "OCF Settlement"), and a $2.5 million legal settlement to CSX. See Note 12 of the Notes to Consolidated Financial Statements of the Company.
(4) Net income for 1997 and 1994 include extraordinary losses on early extinguishments of debt, net of tax, of $6.6 million and $1.8 million, respectively. See Note 5 of the Notes to Consolidated Financial Statements of the Company. Net income for 1993 includes effects of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" of $(5.2 million) net of tax, and SFAS No. 109, "Accounting for Income Taxes" of $(0.5 million).
(5) Earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further information regarding earnings per share and the impact of Statement No. 128, see Notes 1 and 10 of the Notes to Consolidated Financial Statements of the Company.
(6) The Company sold $175.0 million of 9 7/8% Senior Subordinated Notes due 2007 on December 1, 1997 in a private placement and established with Swiss Bank Corporation, Stamford Branch and Mellon Bank, N.A. a total of $135.0 million of senior term loan facilities and a $140.0 million senior revolving credit facility ($40.0 million and $20.0 million of which was reserved for use in connection with a term loan and a revolving credit facility, respectively, of Koppers Australia).
(7) On December 1, 1997 the Company converted 2,117,952 shares of voting Common Stock and 27,672 shares of non-voting Common Stock held by Saratoga into 2,145,624 Preferred Shares, which entitles Saratoga to elect a majority of the Board of Directors and to exercise a majority of the voting power over all outstanding stock of Koppers Industries, Inc. with respect to all other matters subject to a stockholder vote. See Notes 2 and 6 of the Notes to Consolidated Financial Statements of the Company. On February 10, 1994 the Company issued $110.0 million of unsecured ten-year, 8 1/2% senior notes, of which $53.5 million was used to redeem all the Series A exchangeable preferred stock of the Company which had been issued at the inception of the Company.
(8) Represents the amount necessary to redeem stock held by Management Investors upon termination of their employment with the Company pursuant to the New Stockholders' Agreement. See Note 7 of the Notes to Consolidated Financial Statements of the Company.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a leading integrated producer of carbon compounds and treated wood products for use in a variety of markets. The Company's products and operations are divided into three businesses prior to the acquisition of Koppers Australia: Carbon Materials & Chemicals, Railroad & Utility Products and Coke Products.
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:
Comparison of Results of Operations for the Years Ended December 31, 1997 and 1996.
NET SALES. Net sales for the year ended December 31, 1997 were 0.8% higher than in 1996. Net sales for Carbon Materials & Chemicals increased by 0.8% due primarily to increases in volumes and prices for PAA of 18.2% and 6.2%, respectively. The increase in net sales of 6.4% for Railroad & Utility Products was due to higher railroad crosstie volumes and prices, which more than offset a 5.7% reduction in sales volumes for utility poles. Net sales for Coke Products decreased by 11.5% due to lower production and shipments primarily as the result of capacity rationalization at the Woodward Facility.
GROSS PROFIT AFTER DEPRECIATION. As a percent of net sales, gross profit after depreciation decreased to 11.5% for the year ended December 31, 1997 from 12.0% last year. Gross margin for Carbon Materials & Chemicals increased to 18.5% from 17.0% in the prior year primarily as the result of increases in volumes and pricing of PAA in 1997 as noted above. Gross margin for Railroad & Utility Products increased to 11.1% from 10.9% in the prior year primarily as the result of higher revenues for railroad crossties. Gross margin for Coke Products decreased to (3.6%) from 4.6% due to higher unit costs incurred as the result of reduced production at the Woodward Facility, coupled with costs associated with unusual returns and credits issued to customers.
DEPRECIATION AND AMORTIZATION. The increase in depreciation and amortization for 1997 as compared to the prior year was due primarily to the Company's ongoing capital expenditures program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense for the year ended December 31, 1997 amounted to 4.7% of net sales, which was consistent with the prior year period, as lower expenses for salaries and benefits were offset by modest increases in various other expenses in 1997.
RESTRUCTURING CHARGES. Restructuring charges for 1997 included $39.9 million related to the closing of the Woodward Facility and $5.5 million related to the closing of the co-generation facility and write-down of assets at the adjacent wood treating facility located in Feather River, California. Restructuring charges for 1996 were comprised of plant closing charges of $7.4 million, capacity rationalization charges of $5.4 million and severance charges of $2.6 million. Plant closing charges included $6.5 million for the Houston carbon materials facility and $0.9 million for the Carrollton, Ohio refractory materials facility. The plant closing charges consisted primarily of write-downs of property and equipment, environmental remediation and severance costs. Capacity rationalization charges of $5.4 million at the Woodward Facility primarily included property and equipment write-downs. See "--Liquidity and Capital Resources--Restructuring Charges."
EQUITY IN EARNINGS OF AFFILIATES. Equity earnings for the year ended December 31, 1997 were $4.3 million lower than the prior year period primarily as a result of lower earnings from Koppers Australia. The lower earnings were due to higher maintenance and repair expenses, a stronger U.S. currency rate, and costs related to the acquisition of Koppers Australia by the Company in 1997.
OTHER EXPENSE. Other expense for the year ended December 31, 1997 consisted of the write-off of $1.4 million of deferred expenses related to the Initial Public Offering which was withdrawn in the second quarter. Other expense for the prior-year period consisted of litigation charges related to the OCF Settlement and CSX. See Note 12 of the Notes to Consolidated Financial Statements of the Company.
INCOME TAXES. The effective income tax rate for the year ended December 31, 1997 was (80.1)% as compared to (77.1)% in the prior year period due to restructuring charges in 1997 and restructuring and litigation charges in 1996, coupled with the utilization of $9.0 million and $7.0 million of energy tax credits from the Monessen Facility in 1997 and 1996, respectively. The credit is based on its production of coke as a non-conventional fuel source and the sale thereof to unrelated third parties. The credit is available through December 31, 2002 and, based on current production levels at the Monessen Facility, could provide up to a maximum $10.4 million of tax credits annually, unadjusted for inflation and assuming full production at the Monessen Facility. Use of the tax credits is limited to the availability of taxable income.
NET INCOME. Net income for the year ended December 31, 1997 as compared to the prior year decreased by $19.7 million due primarily to restructuring charges of $45.4 million and extraordinary charges of $6.6 million exceeding 1996 restructuring charges of $15.5 million and litigation charges of $12.6 million.
Comparison of Results of Operations for the Years Ended December 31, 1996 and 1995.
NET SALES. Net sales for the year ended December 31, 1996 were 11.9% higher than the same period in 1995, due primarily to the effect of acquisitions in the Carbon Materials & Chemicals and Coke Products businesses. Net sales for Carbon Materials & Chemicals increased by 21.2% due primarily to sales of approximately $44 million from the Clairton facility acquired April 1, 1996. The effect of the acquisition was offset to some extent by a net reduction in PAA sales due to a 31.9% reduction in average PAA prices. Net sales for Railroad & Utility Products decreased by 3.3% due to a 12.2% reduction in sales volumes for utility poles as a result of public utility deregulation and its impact on maintenance programs and due to disruptions in shipments as a result of severe weather conditions in the first quarter of 1996. Net sales for Coke Products increased by 36.5% due primarily to sales of approximately $44 million from the Monessen Facility in its first full year of operation. This increase was offset to some extent by a 10.6% reduction in sales at the Woodward Facility resulting primarily from suspensions of shipments to U.S. Steel Group, a unit of USX Corporation, (due to an
explosion at one of their blast furnaces) and McLouth Steel Products Corp. (due to its filing of a bankruptcy petition and its cessation of business) in 1996, as well as reduced production in the first quarter of 1996 as a result of severe weather conditions.
GROSS PROFIT AFTER DEPRECIATION. As a percent of net sales, gross profit after depreciation decreased to 12.0% for the year ended December 31, 1996 from 12.8% for the prior year. Gross margin decreased to 17.0% from 18.0% for Carbon Materials & Chemicals and to 10.9% from 12.4% for Railroad & Utility Products, while gross margin for Coke Products increased to 4.6% from 2.5%. The decrease for Carbon Materials & Chemicals was due to a 31.9% reduction in PAA prices, which more than offset the positive margin effect of the Clairton acquisition. The decrease in gross profit for Railroad & Utility Products was due to higher unit costs for utility poles as a result of a 12.2% decline in sales volumes and $0.6 million of costs associated with labor disruptions and increased operating expenses as a result of severe winter weather in the first quarter of 1996. The increase for Coke Products was due primarily to higher coke prices of 2.8% coupled with higher volumes of 33.2%, as an increase in volumes due to a full twelve months of operations at the Monessen Facility was partially offset by volume reductions at the Woodward Facility.
DEPRECIATION AND AMORTIZATION. The increase in depreciation and amortization for 1996 as compared to the prior year was due primarily to the acquisition of the Clairton tar distillation facility in April 1996, and the Monessen Facility which started production in November 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense for 1996 decreased to 4.7% of net sales from 5.3% of net sales in the prior year, primarily due to a reduction in management incentive accruals.
RESTRUCTURING CHARGES. Restructuring charges were comprised of plant closing charges of $7.4 million, capacity rationalization charges of $5.4 million and severance charges of $2.6 million. Plant closing charges included $6.5 million for the Houston carbon materials facility and $0.9 million for the Carrollton, Ohio refractory materials facility. The plant closing charges consisted primarily of write-downs of property and equipment, environmental remediation and severance costs. Capacity rationalization charges of $5.4 million at the Woodward Facility primarily included property and equipment write-downs. Severance charges totaling $2.6 million were incurred as a result of workforce reductions of approximately 90 salaried employees at various field locations and at corporate headquarters.
EQUITY IN EARNINGS OF AFFILIATES. Equity in earnings of affiliates increased to $9.6 million for 1996 from $9.2 million in the prior year as higher earnings from Koppers Australia and KSA (as defined herein) were partially offset by lower earnings from Tarconord as a result of weaker European market conditions.
LITIGATION CHARGES. Litigation charges for 1996 consisted of a $10.1 million charge related to the OCF Settlement and a $2.5 million legal settlement payment to CSX.
INTEREST EXPENSE. Interest expense increased $1.6 million for 1996 compared to the prior year primarily as a result of the additional $40.0 million in indebtedness to finance the acquisition of the Clairton facility.
INCOME TAXES. The effective income tax rate for 1996 was a benefit of (77.1)% as compared to an effective rate of 29.0% in the prior year as a result of lower pretax earnings in 1996 coupled with the utilization of a 1996 energy tax credit for the Monessen Facility.
NET INCOME. Net income for 1996 as compared to the prior year decreased by $10.3 million primarily as a result of $15.5 million of restructuring charges and $12.6 million of litigation charges. These charges were offset in part by lower tax expense of $16.1 million in 1996 as compared to the prior year. Earnings from the recently acquired Monessen Facility and the Clairton facility were offset by lower PAA prices and the suspension of coke shipments to U.S. Steel Group and McLouth Steel Products Corp. for the reasons indicated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs are primarily for debt service and capital maintenance. The Company believes that its cash flows from operations and available borrowings under its bank credit facilities will be sufficient to fund its anticipated liquidity requirements for the next twelve months. In the event that the foregoing sources are not sufficient to fund the Company's expenditures and service its indebtedness, the Company would be required to raise additional funds.
As of December 31, 1997 the Company had $92.7 million of revolving credit availability under the New Credit Facilities for working capital purposes, subject to restrictions imposed under the Indenture related to the New Notes. As of December 31, 1997, $9.0 million of commitments were utilized by outstanding standby letters of credit.
The Company sold $175.0 million of 9 7/8% Senior Subordinated Notes (the "New Notes") due 2007 on December 1, 1997 in a private placement and established with Swiss Bank Corporation, Stamford Branch and Mellon Bank, N.A. a total of $135.0 million of senior term loan facilities and a $140.0 million senior revolving credit facility ($40.0 million and $20.0 million of which was reserved for use in connection with a term loan and a revolving credit facility, respectively, of Koppers Australia) (the "New Credit Facilities"). The proceeds from the New Credit Facilities and the sale of the Old Notes have been and are being used to complete the following transactions: (i) the acquisition of The Broken Hill Proprietary Company Limited's ("Broken Hill's") 50% interest in Koppers Australia; (ii) the repayment of $98.9 million of the 8 1/2% Senior Notes of Koppers Industries, Inc. due February 1, 2004 tendered pursuant to a tender offer and consent solicitation which was commenced October 20, 1997 and which expired on November 28, 1997 (the "Tender Offer"), plus $6.4 million of redemption premium thereof; (iii) the repayment of the outstanding indebtedness of approximately $88.1 million under the Company's term loan and revolving credit facilities (the "Bank Debt Refinancing"); (iv) the redemption of 1,813,200 shares of non-voting Common Stock owned by APT Holdings Corporation, an affiliate of Mellon Bank, N.A. for $22.9 million; (v) the redemption, at $17.00 per share, of up to 25% of the shares of common stock owned by the current officers of Koppers and Clayton A. Sweeney (a member of the Board of Directors) and the redemption of up to 100% of the shares of Common Stock owned by other Management Investors, in an aggregate amount not to exceed $15.0 million; (vi) the redemption of 436,508 non-voting shares of Common Stock from Saratoga Koppers; and (vii) the payment of related fees and expenses of approximately $16.0 million.
The New Credit Facilities provide for a $70.0 million Term Loan A, $26.0 million of which was outstanding at December 31, 1997 and a $65.0 million Term Loan B, all of which was outstanding at December 31, 1997. The term loans and the revolving credit facility under the New Credit Facilities provide for interest at variable rates. At December 31, 1997 the effective rates on the term loans were 7.69% for Term Loan A, 8.19% for Term Loan B and 5.27% for the Australian term loan.
Substantially all of the Company's assets, including the assets of any significant subsidiary, are pledged as collateral for the New Credit Facilities. The New Credit Facilities contain certain covenants which limit capital expenditures by the Company and restrict its ability to incur additional indebtedness, create liens on its assets, enter into leases, 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 totaled $63.2 million for the year ended December 31, 1997, compared to $44.7 million for the same period last year, as lower earnings and higher deferred taxes in 1997 were more than offset by higher dividends from affiliated companies, higher restructuring reserves and lower working capital requirements in 1997 as compared to the prior year.
Capital expenditures for the Company were $19.8 million for 1997 versus $21.7 million (excluding acquisitions for both years) for the same period last year, with the decrease in 1997 due primarily to significant 1996 capital improvements at the Stickney PAA plant and the Monessen Facility. In April 1996, Koppers
purchased the coal chemical business of Aristech Chemical Corporation ("Aristech") located in Clairton, Pennsylvania for approximately $40.0 million cash and the assumption of certain liabilities. See Note 4 of the Notes to Consolidated Financial Statements of the Company.
For the year ended December 31, 1998 the Company anticipates capital expenditures of $25.0 million. This amount includes environmental capital expenditures of $6.9 million, with the remaining amount for capital maintenance and improvements.
Financing activities provided $8.2 million in cash for the year ended December 31, 1997 compared to providing $16.1 million for the same period last year. Cash provided in 1997 consisted primarily of net proceeds from the Refinancing of approximately $119.0 million, which was used for i) the acquisition of Koppers Australia for $63.0 million; ii) the purchase of $34.0 million of non-voting Common Stock; iii) $16.0 million of fees and expenses related to the Refinancing and the acquisition of Koppers Australia; and iv) $6.4 million of premium payments related to the redemption of the 8 1/2% Senior Notes due 2004. Cash supplied by financing activities in 1996 was largely the result of the $35.0 million term loan for the Clairton acquisition coupled with a net increase of $14.0 million in the revolving credit facility, used in part to provide for a $14.0 million term loan repayment and a $12.3 million purchase of non-voting Common Stock of the Company. See Note 6 of the Notes to Consolidated Financial Statements of the Company.
In 1997, the Company paid three quarterly dividends totaling $2.3 million.
Foreign Operations and Foreign Currency Transactions. The Company is subject to foreign currency translation fluctuations due to its foreign operations, the most significant of which is Koppers Australia, which has operations in Australia and various Pacific Rim nations.
Subsequent Events. The remaining 906,600 shares of non-voting Common Stock were purchased from APT Holdings Corporation on January 5, 1998 for $11.4 million and were subsequently retired and cancelled. In addition, in January 1998 Saratoga purchased 142,857 Preferred Shares for a price of $14.00 per share. The Company is offering to redeem, at $17.00 per share, up to 25% of the shares of common stock owned by the current officers of Koppers and Clayton A. Sweeney, and up to 100% of the shares of Common Stock owned by other Management Investors, in an aggregate amount not exceeding $15.0 million. Additionally, all salaried employees of the Company may purchase Common Stock of the Company at the price of $14.00 per share. Management Investors may redeem shares at $17.00 or purchase shares at $14.00, but may not do both simultaneously. The results of the redemption and purchase offers will be known in early April 1998. The New Stockholders' Agreement provides for stock redemptions of up to 5% of each stockholders' outstanding shares annually beginning in 1999 at the Company's option, provided that all relevant covenants with the Company's lenders and noteholders are met.
Restructuring Charges. Restructuring charges of $45.4 million for 1997 consisted of approximately $24.4 million of cash charges, $11.4 million of which are expected to be incurred in 1998. The remaining cash charges are primarily for pension and postretirement benefits. Working capital reductions at the Woodward Facility are expected to generate approximately $6.4 million of cash flow in 1998, reducing the estimated 1998 net cash outlays from restructuring charges to $5.0 million. Restructuring charges for 1996 consisted of $11.4 million and $4.1 million of cash and non-cash charges, respectively. At December 31, 1997, none of the cash charges for the 1997 restructuring and substantially all of the cash charges for the 1996 restructuring had been expended.
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 many 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 Year 2000. Most of the Company's computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at approximately $3.0 million (including Koppers Australia), the majority of which is expected to be expensed when incurred. To date, the Company has incurred and expensed approximately $0.2 million, primarily for assessment of the Year 2000 issue and the development of a modification plan.
The project is estimated to be completed by March 31, 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. There can be no assurance that the systems of other companies on which the Company's systems rely will be corrected on a timely basis and will not have an adverse effect on the Company's systems.
The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share", and Statement No. 129, "Disclosure of Information About Capital Structure". Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported earnings per share for the Company. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to Statement No. 128 requirements. Statement No. 129 requires disclosures about an entity's capital structure including liquidation preferences of preferred stock, information about the pertinent rights and privileges of the outstanding equity securities, and the redemption amounts for all issues of capital stock that are redeemable at fixed or determinable prices on fixed or determinable dates. The Company has complied with all of the disclosure requirements of Statement No. 129.
The following statements have been issued during 1997 and are effective for fiscal years beginning after December 15, 1997:
Statement No. 130, "Reporting Comprehensive Income", requires enterprises to classify items of comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital.
Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information" changes the way companies report segment information in annual reports and in interim financial statements.
The Company does not expect the effect of adoption of these statements to be material.
ENVIRONMENTAL MATTERS
Like companies involved in similar environmentally sensitive businesses, the Company's operations and properties are subject to extensive Environmental Laws. The Clean Air Act and Clean Water Act, each as amended, impose stringent standards on air emissions and water discharges, respectively. Under RCRA, a facility that treats, stores or disposes of hazardous waste on-site may be liable for corrective action costs, and a facility that holds a RCRA permit may have to incur costs relating to the closure of certain "hazardous" or "solid" waste management units. Under CERCLA and similar state laws, an owner or operator of property at which releases of hazardous substances have occurred may be liable for investigation and remediation of any resulting contamination and related natural resource damages. In addition, under CERCLA, the generator of hazardous substances may be strictly, and jointly and severally liable for any required investigation or remediation at third-party disposal sites and related natural resource damages. The Environmental Laws are subject to frequent amendment. The sanction for failure to comply with such Environmental Laws can include significant civil penalties, criminal penalties, injunctive relief and denial or loss of, or imposition of significant restrictions on, environmental permits. In addition, the Company could be subject to suit by third parties in connection with violations of or liability under Environmental Laws.
Jefferson County issued a notice of violation in March 1996 in connection with various alleged violations of Jefferson County's air pollution control regulations for emissions from coke oven batteries at the Company's Woodward Facility during the period May 26, 1992 through March 1, 1996. On February 14, 1997 the EPA issued a notice of violation covering the same issues that were raised in the Jefferson County notice of violation. Thereafter, the Company discovered that certain benzene abatement equipment at the Woodward Facility had not been operational for several months. Following a preliminary investigation, the Company also discovered that certain environmental reports and records contained incomplete and inaccurate information and that certain environmental reports and certifications were not filed when required. The Company has notified Jefferson County, the State of Alabama and the EPA of the environmental irregularities, and the environmental reporting status of the Woodward Facility has been brought up to date by the Company. Counsel and independent investigators were retained to conduct a complete and thorough investigation; and the benzene abatement equipment had been returned to service prior to the ceasing of operations in January 1998. However, the Company could be subject to significant liability in connection with these matters, including fines and civil and criminal penalties and the risk of third-party lawsuits. The Company and Jefferson County have negotiated a settlement agreement (the "Settlement Agreement") which would have required the Company to install monitoring and control equipment and institute operational changes; subsequent to the Settlement Agreement, the Company has permanently shut down all coke oven batteries at the Woodward Facility. The Settlement Agreement included both the original Jefferson County notice of violation and the self-reported benzene abatement violations. The Settlement Agreement, in addition to the changes listed above, also required the Company to pay a civil penalty in the amount of $450,000 to Jefferson County, which was paid in 1997. On February 9, 1998 Jefferson County proposed a modified settlement agreement to address alleged air exceedences from August 1997 through January 1998 which includes an additional penalty in the amount of $575,000. The Company is currently in the process of reviewing the proposed modification, and has entered into negotiations with Jefferson County regarding this matter. There can be no assurance that the settlement with Jefferson County will deter the EPA from pursuing its notice of violation and that the EPA will not seek additional actions or penalties that could have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company.
During the investigation of the Woodward Facility described above, it was also discovered that certain environmental records and reports relating to discharges of treated process water and treated storm water
contained incomplete and inaccurate information. Corrected reports have been submitted to the State of Alabama and the EPA. While no notice of violation has been issued in connection with this matter, it is believed likely that a notice of violation will be issued and substantial penalties may be sought by the State of Alabama or the EPA.
PADEP previously issued a notice of violation alleging that the boilers at the Monessen Facility are emitting greater quantities of nitrogen oxides than allowed under a plan approved by PADEP. The Company also received a notice of violation in connection with a failure to conduct timely emission monitoring testing on the boilers at the Monessen Facility. The Company has installed additional equipment and modified existing equipment to improve the quality of boiler emissions. Resolution of these matters could have a negative effect on the business, financial condition, cash flow and results of operations of the Company. The Company has submitted an amended plan approval application to PADEP that provides for limitations on the operation of the two boilers at the Monessen Facility. PADEP is currently reviewing this application. As a result of the failure to meet the original nitrogen oxide emission limitations, it is expected that PADEP will propose a civil penalty in an amount of approximately $100,000. However, there can be no assurance that a higher penalty will not be sought.
On June 12, 1996 PADEP issued a notice of violation in connection with an alleged noncompliance with the terms of a consent agreement between the Company and PADEP regarding liability for environmental conditions existing at the time the Company purchased the Monessen Facility ("Consent Agreement"). The notice of violation alleged that the Company had not implemented the corrective actions required under the Consent Agreement in a timely fashion. The Company has completed the implementation of the corrective actions at issue and has settled this matter by payment of a fine in the amount of $261,000 in January 1998.
For each of the last three fiscal years, the Company's average capital expenditures and operating expenses for environmental matters, including depreciation, amounted to approximately $7.0 million and $16.0 million, respectively. The Company believes that environmental operating costs as a percentage of total operating costs will not change materially from those incurred during the past three years. The Company currently estimates that capital expenditures in connection with matters relating to environmental control will be approximately $6.9 million for 1998. Because Environmental Laws have historically become increasingly more stringent, costs and expenses relating to environmental control and compliance may increase in the future. Also, Koppers may have to incur additional capital expenditures and compliance costs (which it is unable to estimate at this time) in connection with the resolution of the aforementioned notices of violations. As such, there can be no assurance that costs of compliance with existing and future Environmental Laws will not exceed current estimates and will not have a material adverse effect on the Company's business, financial condition, cash flow and results of operations.
Under the terms of the Asset Purchase Agreement between Koppers Industries, Inc. and Old Koppers (now known as Beazer East, Inc.) at the formation of the Company in 1988, Beazer East assumed the liability for and indemnified Koppers against (among other things) cleanup liabilities for contamination occurring prior to the purchase date at sites acquired from Beazer East, and third-party claims arising from such contamination in the Indemnity. Beazer East's performance of the Indemnity is unconditionally guaranteed by Beazer Limited under the Guarantee. Contamination identified at sites owned and/or operated by Koppers is being investigated and remediated under CERCLA, RCRA or state cleanup programs. Currently, at the sites acquired from Beazer East (which include all of the CERCLA sites and all but one of the RCRA sites), substantially all investigation and remediation activities are being conducted and paid for by Beazer East pursuant to the terms of the Indemnity; however, there can be no assurance that Beazer East and Beazer Limited will continue to meet their obligations. In the event they do not, Koppers may be required to pay such costs which are believed to have averaged approximately $14.0 million per year for the last three years. In addition, the government and other third parties have the right under applicable Environmental Laws to seek relief directly from Koppers for any and all such costs and liabilities. The requirements to pay such costs and assume such liabilities without reimbursement would have a material adverse affect on the business, financial condition, cash flow and results of operations of the Company. Furthermore, if Koppers were required to record a contingent liability in respect of environmental
matters covered by the Indemnity on its balance sheets, the result could be that the Company would have significant negative net worth.
The Indemnity does not afford Koppers indemnification against environmental costs and liabilities relating to activities or conditions occurring or arising after the Acquisition, nor is the Indemnity applicable to liabilities arising in connection with post-closing acquisitions. At the Clairton facility, the Somerville facility and the Monessen Facility (each of which Koppers acquired subsequent to the acquisition of the Beazer East sites), investigations and remediations are being performed. All applicable indemnification obligations are being honored at the Clairton and Somerville facilities and Koppers believes that the sellers (or their predecessors) at both of these facilities will continue to conduct and finance most activities directly. Although the Company is not aware of any reason why such environmental indemnification obligations will not be performed, if Koppers were required to pay costs associated with these two sites, it could have a material adverse effect on the Company's business, financial condition, cash flow and results of operations. At the Monessen Facility, Koppers has entered into the Monessen Consent Order with PADEP pursuant to which Koppers' liabilities for environmental cleanup have been capped at $550,000 for matters identified pursuant to the Monessen Consent Order. Although an environmental indemnification was provided to Koppers by the seller of that facility, the Company does not expect that such obligations will be honored. If contamination at the Monessen Facility should be discovered which is not identified pursuant to the Monessen Consent Order or if the EPA should require cleanup above the $550,000 "cap" contained therein, costs associated with such events could have a material adverse effect on the Company's business, financial position, cash flow and results of operations. See "Business-- Environmental Matters."
OTHER MATTERS
As a result of an internal investigation, the Company discovered in March 1997 that certain reports relating to the moisture of coke contained incomplete and inaccurate information. Because of these discrepancies, certain customers who purchased the coke were overbilled. Upon discovery of the overbilling, refunds were made available to all the affected customers.
For a fee, the Company treats waste water produced by Beazer East during Beazer East's remediation of certain of the Company's facilities. Beazer East performs these remediation activities pursuant to the Indemnity. During the summer of 1997, Beazer East challenged the amounts of the charges for waste water treatment services at the Florence and Follansbee facilities. Beazer East alleged they had been overcharged by approximately $2.2 million at Florence and by approximately $3.1 million at Follansbee. The Company has contested these allegations and believes that if an overcharge occurred, the amount of the overcharge is less than Beazer East has alleged.
Due to the advanced ages of the coke oven batteries, ongoing environmental compliance issues and significant capital expenditure requirements, all of which have combined to reduce productive capacity and increase per unit costs, the Company's Board of Directors authorized the Company to close the Woodward Facility in early 1998. This resulted in a charge to earnings in the fourth quarter of 1997 of $39.9 million, $9.4 million of which will be cash charges in 1998, primarily for dismantling and severance costs. Net sales and gross profit at the Woodward Facility for the year ended December 31, 1997 amounted to $51.8 million and ($8.1) million, respectively.
The Feather River, California Utility & Construction Products facility ("Feather River") includes both a wood treating and now-dormant wood-fired cogeneration facility. The Company has found it difficult to compete in the California utility pole market due to Feather River's limited treatment capabilities, a shrinking product demand and the high cost of raw materials. The Feather River cogeneration facility has been dormant for three years while the Company explored potential opportunities for developing a treated wood burning and disposal facility. The Company has been unable to locate a customer for this process. The Company has taken a charge to earnings for 1997 of $5.5 million for the closing of the cogeneration facility and the write- down of assets at the adjacent wood treating facility.
ITEM 8.
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 40 and are listed in Item 14 hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
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 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.
Mr. Wagner served as President and Chief Executive Officer of the Company from 1989 through November 1994, Chairman and Chief Executive Officer from November 1994 through February 1996, and non-executive Chairman since February 1996. He served as Acting Chief Executive Officer from June 1997 through February 1998, at which time a new President and Chief Executive Officer was elected. Mr. Wagner will retain his responsibilities as Chairman and Director. He has been a Director of Koppers since January 1989. He joined Old Koppers in 1953 and after an early career in communications, moved into the forest products business in 1968 and held sales, marketing and raw materials posts until being appointed Vice President and Manager of the Pressure-Treated Products unit in 1975. Mr. Wagner became Vice President and General Manager of this unit in 1978 and was named Vice President and General Manager of the Tar and Wood Products Sector in 1986. Mr. Wagner also served as a Director of Integra Financial Corporation of Pittsburgh, Pennsylvania from 1992 until 1996 and as a Director of Trion, Inc. of Sanford, North Carolina from 1978 until his resignation in April 1995. He is also a Director of Koppers Australia and, until March 1, 1996, was a Director of Tarconord.
Mr. Turner was elected President, Chief Executive Officer and Director in February 1998. Mr. Turner had been appointed Vice President and General Manager, Carbon Materials & Chemicals division in early 1995. Mr. Turner had been elected Vice President and Manager, Marketing & Development, Industrial Pitches and Related Products in February 1992. Mr. Turner was Marketing Manager, Industrial Pitches and Creosote Oils for Old Koppers' Tar and Wood Products Sector. Mr. Turner joined Old Koppers in 1969 and has served in various positions in the controller's department and as Product Manager, Tar Operations. Mr. Turner is also Chairman of the Board of Directors of Tarconord.
Mr. Sweeney has been a Director of Koppers since January 1989. Mr. Sweeney is the President and a member of Sweeney Metz Fox McGrann & Schermer L.L.C. Mr. Sweeney had been a shareholder and Director of Dickie, McCamey & Chilcote, P.C. since 1987 and served as Managing Director from 1988 to September 1993. Mr. Sweeney previously served as Executive Vice President, Chief Administrative Officer, Vice Chairman, and a Director of Allegheny International, Inc., as Senior Vice President and a Director of Allegheny Ludlum Industries, and as a Director of Wilkinson Sword Group, Ltd. U.K., Landmark Savings and Loan Association, Halbouty Energy Company and Liquid Air Corporation. Mr. Sweeney currently serves as a Director of Schaefer Manufacturing Inc., Schaefer Equipment, Inc., and Schaefer Marine Inc., and as Chairman of the Boards of St. Francis Health System and St. Francis Medical Center.
Mr. Wilson has been a Director of Koppers since January 1989. Mr. Wilson has been the Managing Director of Koppers Australia since 1970 having joined Old Koppers in 1965 as a member of the Koppers International Far East Office (Sydney, Australia). He is currently a Director of Pacific Power, Pacific Power International and Pacific Solar. He is also Chairman of Knox Grammar School, Opportunity International Australia and Deputy Chairman of North Shore Heart Research Foundation and a member of the Advisory Council, Australian Graduate School of Management, University of New South Wales.
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 currently serves as a Director of Calgon Carbon Corporation, Melamine Chemical Inc. and Harsco Corporation. He is a member of the Board of Trustees of Robert Morris College, Georgia Institute of Technology, a special trustee of the University of Pittsburgh and a Director of the University of Pittsburgh Medical Center, Pittsburgh Presbyterian Hospital, and is Chairman of the Board of Visitors of the University of Pittsburgh Graduate School of Public and International Affairs.
Mr. Oberbeck has been a Director of Koppers since October 20, 1997. Mr. Oberbeck has been a Managing Director of SBC Warburg Dillon Read Inc. since September 1997. Previously, he was a Managing Director of Dillon, Read & Co. Inc. from February 1995 to September 1997. Prior to joining Dillon, Read & Co. Inc., Mr. Oberbeck was a Managing Director of Castle Harlan, Inc. where he worked from October 1987 until February 1995. Mr. Oberbeck is a member of the Saratoga Partners Investment Committee and a Director of Equality Specialties, Inc., J&W Scientific Incorporated, Scovill Fasteners Inc., and USI Holdings Corporation.
Mr. Davis was elected Vice President and Chief Financial Officer of Koppers in November 1994. Mr. Davis had been General Manager of Koppers' Recovery Resources Group from June 1992 to March 1996 and served as Treasurer from 1988 until 1992. He joined Old Koppers in 1978 and held various positions in the corporate accounting and auditing departments until being named General Manager of the Chemical Systems Sector at Old Koppers in 1988. He is also a Director of Koppers Australia. Mr. Davis is a certified public accountant.
Mr. Loadman was appointed Vice President and General Manager, Railroad & Utility Products in March 1998. Mr. Loadman had been elected Vice President and General Manager, Railroad Products & Services in November 1994, and had been the Transportation Plants Operations Manager of the Railroad & Utility Products division since January 1989. He joined Old Koppers in 1979 and served in various management assignments including plant manager and cogeneration plant manager. Mr. Loadman is a Director of Koppers Sherman Abetong, a Director of Koppers Timber Preservation Pty. Limited, a subsidiary of Koppers Australia, and a Director and President of Koppers Concrete Products Inc. He is also a member of the American Wood Preservers Association and the Railway Tie Association.
Mr. Fitzgerald was appointed Vice President and General Manager, Carbon Materials & Chemicals division in March 1998. After serving as plant manager of the Stickney, Illinois Carbon Materials & Chemicals plant in 1996 and 1997, Mr. Fitzgerald was appointed Vice President and Manager, Carbon Materials & Chemicals in January 1998. He joined Old Koppers in 1975 and had several operations and office positions at the Stickney plant before being named as plant manager of the Houston, Texas Carbon Materials facility in 1988. He was Product Manager Industrial Pitches from 1991 to 1995.
Mr. Donley was appointed Vice President, Total Quality, Productivity and Strategic Planning in March 1998. Mr. Donley had been appointed General Manager of Utility & Construction Products in September 1995 and elected Vice President in November 1995. He joined Old Koppers in 1979, serving the Company in positions of increasing responsibility within the Railroad & Utility Products business. Mr. Donley is a board member of the American Wood Preservers Institute and serves on its Governmental Affairs Committee.
Mr. Collins was elected Vice President and Secretary in November 1994, and has been Secretary of Koppers since January 1989. Mr. Collins was Manager of Loss Control for Old Koppers. He joined Old Koppers in 1974 and held various line and staff assignments including personnel, industrial relations, and plant operations. Currently Mr. Collins serves the Company as Vice President, Corporate Services. His responsibilities include establishing policy and assuring regulatory compliance for environmental, safety and health matters, coordination of legal affairs and shareholder relations. Mr. Collins is a member of the American Society of Corporate Secretaries.
Mr. Boan has been Vice President, Human Resources since January 1989. Mr. Boan was Manager, Labor Relations for Old Koppers. He joined Old Koppers in 1969. Prior to 1987, Mr. Boan held the position of Director, Human Resources, for three Old Koppers subsidiaries in the Construction Materials and Services Group. In 1987, he was named Manager, Labor Relations for Old Koppers. Mr. Boan is a member of the Pennsylvania Bar.
Mr. Wombles joined the Company in June 1997 and was elected Vice President, Technology. Prior to joining Koppers, Mr. Wombles was Vice President, Research, Applications and Development for Ashland Oil, Inc. Mr. Wombles has published a series of technical articles on hydrocarbon processing and holds five patents on related methodologies.
Ms. Schaming was elected Treasurer in May 1992. Her previous position was Assistant Treasurer and Manager of Cash Operations. Ms. Schaming joined Old Koppers in 1976, where she held various positions in corporate and Chemical Systems Sector accounting, including controller for the Polyester Resins Division. Ms. Schaming is a certified cash manager.
NEW STOCKHOLDERS' AGREEMENT
The Company is a party to a stockholders' agreement by and among the Company, Saratoga and each Management Investor dated as of December 1, 1997 (as amended, the "New Stockholders' Agreement"). The Management Investors are a group of 118 individual stockholders (each, a "Management Investor") with various ownership interests in the Common Stock and collectively comprising 100% of the total outstanding shares of the voting Common Stock of the Company. Saratoga owns 100% of the total outstanding Preferred Shares of the Company. Each Management Investor is an officer, Board member or current or former employee of either Koppers Industries, Inc. or one of its subsidiaries. Pursuant to the New Stockholders' Agreement, each of the Management Investors has appointed Walter W. Turner, who was elected as a Director along with being elected President and Chief Executive Officer in February 1998, 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 New Stockholders' Agreement to vote all his or her voting shares.
As of December 31, 1997, Koppers was obligated to purchase approximately 136,000 shares of Common Stock from Management Investors no longer affiliated with the Company.
The New 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 and changes in certain senior management. Saratoga is entitled to nominate a majority of the Board of Directors. The New Stockholders' Agreement requires the Company to redeem shares upon a Management Investor's ceasing for any reason to be employed by the Company.
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. Additionally, Robert K. Wagner receives $25,000 annually related to chairman's duties.
ITEM 11.
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, 1997, 1996 and 1995, of those persons who were at December 31, 1997 the current and former Chief Executive Officers 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 1997 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
- -------- (1) In February 1998 Mr. Turner was elected President, Chief Executive Officer and Director of the Company. On June 1, 1997 Mr. Traviss had resigned his position as President and Chief Executive Officer and Mr. Wagner was named Acting Chief Executive Officer. Previously, on March 1, 1996 Mr. Wagner had retired from the Company and resigned as Chief Executive Officer and was succeeded by Mr. Traviss.
(2) All other compensation consists of regular and supplemental matches to 401(k) plan except as noted below.
(3) Includes $116,410 of reimbursement of moving expenses under Company relocation program.
(4) For 1997, includes $22,000 for director fees, $25,000 for chairman fees and the remainder for consulting fees to the Company. For 1996, includes $17,500 for director fees, $16,667 for chairman fees and the remainder for consulting fees to the Company in accordance with the terms of his consulting contract. See "--Employment Contracts".
(5) Includes $771,458 related to termination settlement and $155,000 of net proceeds from stock option redemptions.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information with respect to options exercised in 1997 and unexercised options granted in 1997 and prior years under the Stock Option Plan. 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
- -------- (1) The value of unexercised in-the-money options is calculated by subtracting the exercise price from the market value at December 31, 1997 as determined by the Board of Directors pursuant to the provisions of the New Stockholders' Agreement. Pursuant to the provisions of the Company's stock option plan, all options were vested at December 31, 1997 due to a change of control in 1997.
BENEFIT PLANS
Pension Plan. All executive officers of the Company are covered by the Retirement Plan of Koppers Industries, Inc. and Subsidiaries for Salaried Employees (the "Salaried Plan"). The following table contains approximate retirement benefits payable under the Salaried Plan, assuming retirement at age 65, payments made on the straight-life annuity basis and no election of a co-annuitant option. Annual retirement benefits are computed at the rate of 1.2% of Terminal Salary (as defined below) not in excess of $16,000, plus 1.6% of Terminal Salary in excess of $16,000, all multiplied by years of Credited Service (as defined below). Terminal Salary is determined based on the average annual salary (defined as salary plus one half of any incentive payments) for the five highest consecutive years of the last ten years of credited service, or during all years of such credited service if less than five. Credited Service includes all accumulated service as a salaried employee of the Company (excluding its predecessors) except for any period of layoff or leave of absence.
ESTIMATED ANNUAL RETIREMENT BENEFIT UNDER THE SALARIED RETIREMENT PLAN
The following describes the Terminal Salary and Years of Service, respectively, accrued as of December 31, 1997 for each Named Executive Officer: Robert K. Wagner, $402,635 and 7 years of service; Donald P. Traviss, $324,551 and 2 years of service; Donald E. Davis, $146,460 and 9 years of service; Walter W. Turner, $127,334 and 9 years of service; Thomas D. Loadman, $117,239 and 9 years of service; and Joseph E. Boan, $130,834 and 9 years of service.
Effective December 1, 1997 the Board of Directors established a Supplemental Executive Retirement Plan ("SERP") for each 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.
Employment Contracts. In February 1996 the Company entered into an agreement with Robert K. Wagner, Chairman and Director, under which in exchange for consulting services and continuing in the position as Chairman of the Board of Directors, the Company will pay consulting fees totaling $109,000 per year, chairman fees totaling $25,000 per year, and director fees totaling $22,000 per year. The initial contract term is one year; however, the contract will automatically renew for four additional one year periods unless either party elects to cancel the contract. Mr. Wagner has agreed not to engage in any business activity that competes with the Company during the term of this consulting agreement. Upon his assumption of the position of Acting Chief Executive Officer of the Company in June 1997, the consulting fees were increased to $359,000 per year, plus participation in the Company's incentive compensation program.
In October 1994, the Company entered into an agreement with Donald P. Traviss, President and Chief Executive Officer, which provided for an initial base salary of $230,000, an incentive bonus of up to 60% of base salary, and a one time bonus of $40,000 paid in Common Stock of the Company in lieu of 1994 incentive. Additionally, he received a grant of options to purchase 45,000 shares of Common Stock vesting over a three year period in accordance with the terms of the Company's Stock Option Plan, and an interest free loan of $115,000 to be repaid over a five year period, the proceeds of which were used to purchase shares of Common Stock at the market value of $10.56 per share. The loan was repaid in full in early 1997. Upon his resignation in June 1997, Mr. Traviss received $155,000 for the redemption of all stock options, $285,418 for the redemption of all shares of Common Stock, and $771,458 for termination pay including severance and benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Sweeney, Mr. Wilson and Mr. Prater serve on the Human Resources and Compensation Committee of the Board of Directors of the Company, which establishes compensation levels for the Company's three most highly paid executive officers.
Mr. Wagner, Chairman and a Director of the Company, is a member of the Compensation Committee of the Board of Directors of Koppers Australia. This Committee reviews the compensation of Mr. Wilson, the Managing Director of Koppers Australia.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the Company's voting Common Stock and Senior Convertible Preferred Stock as of March 1, 1998 by (i) each person known to the Company to beneficially own more than 5% of the outstanding shares of voting Common Stock, (ii) each Director of the Company, (iii) each officer named in the Summary Compensation Table under the heading "Management--Executive Compensation," and (iv) all officers and Directors of the Company as a group.
- -------- *1% or less.
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting and/or investment power with respect to the shares shown as beneficially owned.
(2) On December 1, 1997 2,117,952 shares of voting Common Stock and 27,672 shares of non-voting Common Stock held by Saratoga were converted into 2,145,624 Preferred Shares, entitling Saratoga to elect a majority of the Board of Directors of the Company and to exercise a majority of the voting power over all outstanding stock of the Company with respect to all matters subject to a stockholder vote. The Preferred Shares have voting (except as described below) and dividend rights equal to voting Common Stock, and have a liquidation preference equal to par value. The Preferred Shares are convertible into voting Common Stock at any time on a one-for- one basis. The holders of the Preferred Shares vote as a separate series from all other classes of stock, and are entitled to elect a majority of the Board of Directors. In addition, in January 1998 Saratoga purchased 142,857 Preferred Shares for a price of $14.00 per share to be held in trust for Brown University.
(3) Saratoga is a private investment fund. Saratoga Koppers is an affiliate of Saratoga. The address for Saratoga and Saratoga Koppers is 535 Madison Avenue, New York, NY 10022. Saratoga and Saratoga Koppers have generally authorized Mr. Oberbeck, a Director of the Company, to vote the shares of the Company held by Saratoga and Saratoga Koppers. Mr. Oberbeck disclaims beneficial ownership of the Preferred Shares
owned by Saratoga and Saratoga Koppers. Saratoga is entitled to elect a majority of the Board of Directors and to exercise a majority of the voting power of all outstanding stock of the Company.
(4) Pursuant to the New Stockholders' Agreement, Mr. Turner and Mr. Sweeney were appointed as Representatives of the approximately 120 Management Investors and granted irrevocable proxies to vote the shares of Common Stock owned by the Management Investors for the term of the New Stockholders' Agreement. Upon consummation of the share redemption and purchase offer by the Company, new proxies will be executed by the current shareholder employees appointing Mr. Turner and Mr. Sweeney as representatives of the Management Investors. See "Directors and Executive Officers of the Registrant--New Stockholders' Agreement". The address for Mr. Turner is Koppers Industries, Inc., 436 Seventh Avenue, Pittsburgh, PA 15219. The address for Mr. Sweeney is Sweeney Metz Fox McGrann & Schermer L.L.C., 11 Stanwix Street, Pittsburgh, PA 15222.
(5) Includes vested options held by the Management Investors to acquire 571,307 shares of Common Stock which are exercisable at any time.
(6) Mr. Turner and Mr. Sweeney, as Representatives of the Management Investors pursuant to the New Stockholders' Agreement, have the authority to vote the 1,706,014 shares held by the Management Investors and consequently may be deemed to have voting control of such shares (which include 21,886 shares directly owned by Mr. Turner and 138,960 shares directly owned by Mr. Sweeney).
(7) Pursuant to the New Stockholders' Agreement, Mr. Wagner has granted an irrevocable proxy to the Representatives of the Management Investors to vote the shares owned by him.
(8) Mr. Traviss resigned his position as President and Chief Executive Officer in June 1997. As part of his termination agreement, Mr. Traviss redeemed 20,387 shares and 45,000 options of the Company.
(9) Includes vested options to purchase 26,400 shares. Pursuant to the New Stockholders' Agreement, Mr. Davis has granted an irrevocable proxy to the Representatives of the Management Investors to vote the shares owned by him.
(10) Includes vested options to purchase 19,950 shares. Pursuant to the New Stockholders' Agreement, Mr. Loadman 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 27,900 shares. Pursuant to the New Stockholders' Agreement, Mr. Boan has granted an irrevocable proxy to the Representatives of the Management Investors to vote the shares owned by him.
(12) Pursuant to the New Stockholders' Agreement, Mr. Prater has granted an irrevocable proxy to the Representatives of the Management Investors to vote the shares owned by him.
(13) Mr. Wilson directly owns 96,579 shares. Pursuant to the New Stockholders' Agreement, Mr. Wilson has granted an irrevocable proxy to the Representatives of the Management Investors to vote the shares owned by him.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sweeney Metz Fox McGrann & Schermer L.L.C. of Pittsburgh, Pennsylvania, has been retained as general counsel to the Company. Clayton A. Sweeney, a shareholder and Director of the Company, is also the President and a member of Sweeney Metz Fox McGrann & Schermer L.L.C. Mr. Sweeney is one of two Representatives of the Management Investors appointed pursuant to the New Stockholders' Agreement and, as such, was granted an irrevocable proxy for the term of the New Stockholders' Agreement to vote the shares of the Management Investors. See "--Stockholders' Agreement."
Pursuant to a resolution of the Board of Directors, Koppers redeemed, on April 2, 1996, 25% of the shares of Common Stock then held by Mr. Wagner at $12.33 per share.
On March 13, 1996, Cornerstone-Spectrum, Inc. converted all of its shares of Series B Junior Convertible Preferred Stock into shares of non-voting Common Stock, $.01 par value, in accordance with Section 8(e) of the Certificate of Designation of the Series B Preferred Stock. On March 22 and March 25, 1996, Koppers redeemed 1,050,000 shares of the non-voting Common Stock at $11.67 per share, 525,000 shares each from Cornerstone-Spectrum, Inc. and APT Holdings Corporation. In October 1997, all shares of Common Stock held by Cornerstone- Spectrum, Inc. were purchased by the Offeree Stockholders and subsequently transferred to the Company, Saratoga and Saratoga Koppers. In addition, all shares of Common Stock held by APT Holdings Corporation were redeemed as part of the Recapitalization.
In connection with the Recapitalization, the Company paid a transaction fee of $1.4 million to an affiliate of Saratoga, and a financial advisory fee of $1.4 million to SBC Warburg Dillon Read Inc., in consideration for advisory services related to the structuring and financing of the Saratoga Investment and the Recapitalization.
Koppers has entered into an advisory and consulting agreement with Saratoga pursuant to which the Company will pay a management fee of $150,000 per quarter to Saratoga. In addition, Saratoga will provide the Company with advisory services in connection with significant business transactions, such as acquisitions, for which the Company will pay Saratoga compensation comparable to compensation paid for such services by similarly situated companies.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1.FINANCIAL STATEMENTS
The following financial statements of Koppers Industries, Inc. are required to be filed by Part II, Item 8:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
3.SEE EXHIBIT INDEX ON PAGE 95 HEREOF.
(B)REPORTS ON FORM 8-K.
The Company filed a Form 8-K on December 15, 1997 relating to (i) The purchase of the remaining 50% of Koppers Australia Pty. Limited from the Broken Hill Proprietary Company Limited, and (ii) The closing of the Company's Woodward, Alabama coke facility.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Koppers Industries, Inc.
We have audited the consolidated financial statements and schedule of Koppers Industries, Inc. listed in the accompanying Index to Consolidated Financial Statements [Item 14]. 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 generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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 30, 1998
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (In thousands except per share figures)
See accompanying notes.
KOPPERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET (In thousands)
See accompanying notes.
KOPPERS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET (In thousands)
See accompanying notes.
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
See accompanying notes.
KOPPERS INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except shares figures)
See accompanying notes.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
Koppers Industries, Inc. (the "Company") is an integrated producer of carbon compounds and treated wood products for use in a variety of industrial applications. The Company's Carbon Materials & Chemicals division is a supplier of carbon pitch, which is used primarily by the aluminum industry as a binder in the manufacture of anodes. Carbon Materials & Chemicals also produces several by-products, including creosote, a chemical preservative used to pressure treat wood for the railroad and utility markets; phthalic anhydride, used in the production of plasticizers and polyester resins; and roofing pitch, used in the manufacture of built-up roofing systems. The Company's Railroad & Utility Products division treats railroad crossties, utility poles and pilings with preservatives for various uses. The Company's Coke Products division produces foundry and furnace coke for sales to steel mill blast furnaces and foundries; and coke by-products, including coal tars, gases, oils and chemicals for sale to other industrial operations.
The Company's recent acquisition, Koppers Australia Pty. Limited ("Koppers Australia"), is headquartered in Sydney, Australia and has carbon materials, wood treating and wood preserving chemical operations. Koppers Australia uses coal tar from Australia's steel mills to make carbon pitch for aluminum smelting, carbon black for rubber tire production, and naphthalene for use in the manufacture of plasticizers, resins, paints and dye making. It also manufactures chemicals for the protection of timber against termites, fungal decay and weathering. It produces a wide range of preservative treated timber products including utility poles, pilings, railroad crossties, landscaping logs and rural fencing.
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.
Earnings Per Share/Capital Structure
In 1997, the Financial Accounting Standards Board issued Statements No. 128, "Earnings Per Share", and Statement No. 129, "Disclosure of Information About Capital Structure". Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported earnings per share for the Company. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to Statement No. 128 requirements. Statement No. 129 requires disclosures about an entity's capital structure including liquidation preferences of preferred stock, information about the pertinent rights and
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) privileges of the outstanding equity securities, and the redemption amounts for all issues of capital stock that are redeemable at fixed or determinable prices on fixed or determinable dates. The Company has complied with all of the disclosure requirements of Statement No. 129.
Inventories
The Company utilizes both the last-in first-out ("LIFO") and first-in, first-out ("FIFO") methods of inventory valuation. Carbon Materials & Chemicals and Railroad & Utility Products inventories are valued at the lower of cost, utilizing the LIFO method, or market. Market represents replacement cost for raw materials and net realizable value for work in process and finished goods. LIFO inventories constituted approximately 60% of total inventory value at December 31, 1997.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
Investments
Following is a combined financial summary of the equity investments of the Company for their respective years ended 1997, 1996 and 1995. The fiscal year end for amounts shown for Koppers Australia are as of and for the year ended June 30.
The following describes activity related to the Company's significant equity investments as included in the consolidated statement of operations as of and for each of the years ended December 31:
KOPPERS AUSTRALIA PTY. LIMITED (KOPPERS AUSTRALIA)
Prior to December 1, 1997 the Company held a 50% investment in Koppers Australia.
TARCONORD
The Company owns a 50% equity interest in Tarconord, a carbon materials operation headquartered in Denmark, with operations in Denmark and the United Kingdom.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
KSA LIMITED PARTNERSHIP (KSA)
The Company holds a 50% investment in KSA, a concrete crosstie operation located in Ohio.
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 self-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 aggregate liability 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 carrying value of the Company's long-term debt is equal to the fair value 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 $1.1 million for 1997, $1.0 million for 1996, and $0.9 million for 1995.
Reclassification
Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassification had no effect on net income (loss).
Impact of Recently Issued Accounting Standards
The following statements have been issued during 1997 and are effective for fiscal years beginning after December 15, 1997:
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement No. 130, "Reporting Comprehensive Income", requires enterprises to classify items of comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital.
Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information" changes the way companies report segment information in annual reports and in interim financial statements.
The Company does not expect the effect of adoption of these statements to be material.
2. SARATOGA INVESTMENT AND RECAPITALIZATION
On October 15, 1997, KAP Investments, Inc. (a wholly-owned subsidiary of Koppers Australia) and a group of approximately 120 individual investors who are either officers, Board members or current or former employees of either Koppers Industries, Inc. or one of its subsidiaries (the "Management Investors") (collectively, the "Offeree Stockholders") acquired from Cornerstone-Spectrum, Inc. (an affiliate of Beazer East, Inc. and Hanson PLC) its voting and non-voting shares of common stock of Koppers Industries, Inc. ("Common Stock"). The Offeree Stockholders utilized $52.5 million of financing from Koppers, Saratoga Partners III, L.P. ("Saratoga") and Saratoga Koppers Funding, Inc. ("Saratoga Koppers"). On December 1, 1997, Saratoga exchanged 2,145,624 shares of Common Stock it acquired as part of the financing of the acquisition of Common Stock from Cornerstone-Spectrum, Inc. for shares of a new series of senior convertible preferred stock of Koppers Industries, Inc. (the "Preferred Shares"), which entitles Saratoga to elect a majority of the Board of Directors of Koppers Industries, Inc. (the "Board of Directors") and to exercise a majority of the voting power over all outstanding stock of Koppers Industries, Inc. with respect to all other matters subject to a stockholder vote.
The Company sold $175.0 million of 9 7/8% Senior Subordinated Notes (the "New Notes") due 2007 on December 1, 1997 in a private placement and established with Swiss Bank Corporation, Stamford Branch and Mellon Bank, N.A. a total of $135.0 million of senior term loan facilities and a $140.0 million senior revolving credit facility ($40.0 million and $20.0 million of which was reserved for use in connection with a term loan and a revolving credit facility, respectively, of Koppers Australia) (the "New Credit Facilities"). The proceeds from the New Credit Facilities and the sale of the Old Notes have been and are being used to complete the following transactions: (i) the acquisition of The Broken Hill Proprietary Company Limited's ("Broken Hill's") 50% interest in Koppers Australia; (ii) the repayment of $98.9 million of the 8 1/2% Senior Notes of Koppers Industries, Inc. due February 1, 2004 tendered pursuant to a tender offer and consent solicitation which was commenced October 20, 1997 and which expired on November 28, 1997 (the "Tender Offer"), plus $6.4 million of redemption premium thereof; (iii) the repayment of the outstanding indebtedness of approximately $88.1 million under the Company's term loan and revolving credit facilities (the "Bank Debt Refinancing"); (iv) the redemption of 1,813,200 shares of non-voting Common Stock owned by APT Holdings Corporation, an affiliate of Mellon Bank, N.A. for $22.9 million; (v) the redemption, at $17.00 per share, of up to 25% of the shares of common stock owned by the current officers of Koppers and Clayton A. Sweeney (a member of the Board of Directors) and the redemption of up to 100% of the shares of Common Stock owned by other Management Investors, in an aggregate amount not to exceed $15.0 million; (vi) the redemption of 436,508 non-voting shares of Common Stock from Saratoga Koppers; and (vii) the payment of related fees and expenses of approximately $16.0 million.
3. RESTRUCTURING CHARGES
Restructuring charges of $45.4 million for 1997 included $39.9 million for the closing of the Company's Woodward, Alabama coke facility (the "Woodward Facility") and $5.5 million for the closing of a co-generation facility and the write-down of assets at an adjacent wood treating facility in Feather River, California. Net sales for 1997 and 1996 at the Woodward Facility were approximately $51.8 million and $67.0 million, respectively, and gross profit totals excluding plant closing and capacity rationalization charges for 1997 and 1996 were approximately $(8.1) million and $1.0 million, respectively.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The restructuring charges of $15.5 million for 1996 included $6.5 million for the closing of a tar distillation facility in Houston, Texas; $0.9 million related to the closing of a refractory materials facility in Carrollton, Ohio; $5.4 million related to the idling of part of the coke operations at the Company's Woodward Facility; $2.6 million for severance charges; and $0.1 million for other.
The total restructuring charges consist of the following cash and non-cash charges for each of the years ended December 31 (in millions):
At December 31, 1997 none of the cash charges for the 1997 restructuring and substantially all of the cash charges from the 1996 restructuring had been expended. Cash expenditures for 1998 related to the 1997 restructuring are estimated to be approximately $11.4 million, while working capital liquidations at the Woodward Facility in 1998 are expected to generate approximately $6.4 million of cash flow.
4. ACQUISITIONS
On December 1, 1997 the Company purchased the shares of Koppers Australia that the Company did not already own for a cash purchase price of approximately $48 million (after receipt of a dividend of approximately $13.9 million). This acquisition resulted in Koppers Australia being wholly-owned by the Company. The acquisition was accounted for as a purchase, and the excess purchase price paid over the fair value of the net assets acquired, based on a preliminary allocation of purchase price, was approximately $17.6 million and has been recorded as goodwill, which is being amortized on a straight-line basis over 20 years.
The results of operations for Koppers Australia are included in the Company's 1997 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 Australia acquisition had taken place on January 1, 1996:
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 1, 1996 the Company purchased a tar distillation plant and certain assets located in Clairton, Pennsylvania for a cash purchase price of approximately $40.0 million and the assumption of approximately $8.0 million of liabilities, primarily for employee benefits, tank cleaning and dismantling of idle equipment. The acquisition was accounted for as a purchase and, accordingly, operating results of this business subsequent to the date of acquisition are included in the Company's consolidated financial statements. The excess purchase price over fair value of the net assets acquired was approximately $12.0 million and has been recorded as goodwill which is being amortized on a straight-line basis over 25 years.
5. DEBT
New Credit Facilities
In November 1997 the Company established New Credit Facilities of $275.0 million with Swiss Bank Corporation, Stamford Branch and Mellon Bank, N.A. The New Credit Facilities are syndicated among several lenders who are parties thereto. The New Credit Facilities provide for term loans totaling $135.0 million and revolving credit facilities of $140.0 million (the "Revolving Credit Facility"), subject to sublimits of $20.0 million aggregate for standby and trade letters of credit and up to $40.0 million and $20.0 million for the Australian Term Letter of Credit (as defined below) and the Australian Revolving Letter of Credit (as defined below), respectively. National Australia Bank, Limited provided an Australian dollar ("A$") denominated term loan to Koppers Australia and certain of its subsidiaries in an aggregate principal amount equivalent to US$40 million. An A$ denominated letter of credit (the "Australian Term Letter of Credit") was issued under the Revolving Credit Facility to such Australian lender in the amount of A$59.3 million. Commonwealth Bank of Australia provided an A$ denominated revolving loan facility for the benefit of Koppers Australia and certain of its subsidiaries with availability of up to the equivalent of US$10 million. An A$ denominated letter of credit (the "Australian Revolving Letter of Credit") was issued under the Revolving Credit Facility to such Australian lender in the amount of A$14.8 million. To the extent that currency fluctuations cause the face amount of the Australian Term Letter of Credit or the Australian Revolving Letter of Credit to exceed on a US$ equivalent basis their respective subfacility limits, availability will be correspondingly reduced under the Revolving Credit Facility. Commitment fees ranging from 0.2% to 0.5% per annum are required on the undrawn portions of the Revolving Credit Facility and the term loans.
The New Credit Facilities provide for a $70.0 million Term Loan A, $26.0 million of which was outstanding at December 31, 1997 and a $65.0 million Term Loan B, all of which was outstanding at December 31, 1997. The term loans and the Revolving Credit Facility under the New Credit Facilities provide for interest at variable rates. At December 31, 1997 the effective rates on the term loans were 7.69% for Term Loan A, 8.19% for Term Loan B and 5.30% for the Australian term loan.
Substantially all of the Company's assets, including the assets of any significant subsidiary, are pledged as collateral for the New Credit Facilities. The New Credit Facilities contain certain covenants which limit capital expenditures by the Company and restrict its ability to incur additional indebtedness, create liens on its assets, enter into leases, 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.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997 the aggregate debt maturities for the next five years are as follows:
Senior Subordinated Notes Due 2007
On December 1, 1997 the Company issued $175.0 million of 9 7/8% Senior Subordinated Notes (the "New Notes") in a private placement transaction. The New Notes were subsequently registered with the Securities and Exchange Commission effective January 23, 1998. The New Notes bear interest at 9 7/8% per annum, with interest payable on June 1 and December 1 of each year, commencing June 1, 1998. The New 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 New 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 New Notes with the net proceeds of one or more issuances of common stock at a redemption price of 109.875% plus accrued interest.
The prepayment of debt on December 1, 1997 resulted in an extraordinary loss of $6.7 million on a net-of-tax basis, comprised of charges of $4.5 million for purchase premium and $2.2 million for write-off of deferred financing costs. Deferred financing costs associated with the New Credit Facilities and the issuance of the New 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 $0.2 million at December 31, 1997, $2.4 million at December 31, 1996 and $1.6 million at December 31, 1995) were $16.0 million, $4.4 million and $4.3 million at December 31, 1997, 1996 and 1995, respectively, and are included in other assets.
At December 31, 1997, the Company had $8.5 million of standby letters of credit outstanding, with terms ranging from one to two years.
6. STOCK ACTIVITY
On December 1, 1997 2,117,952 shares of voting Common Stock and 27,672 shares of non-voting Common Stock held by Saratoga were converted into 2,145,624 Preferred Shares, entitling Saratoga to elect a majority of the Board of Directors of the Company and to exercise a majority of the voting power over all outstanding stock of the Company with respect to all matters subject to a stockholder vote. The Preferred Shares have voting (except as described below) and dividend rights equal to voting Common Stock, and have a liquidation preference equal to par value. The Preferred Shares are convertible into voting Common Stock at any time on a one-for-one basis. The holders of the Preferred Shares vote as a separate series from all other classes of stock, and are entitled to elect a majority of the Board of Directors.
The Company purchased 2,693,928 shares of non-voting Common Stock in 1997, all of which were subsequently retired and cancelled in accordance with the stockholders' agreement among the Company, Saratoga and the Management Investors dated December 1, 1997 (as amended, the "New Stockholders'
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Agreement"). The remaining 906,600 shares of non-voting Common Stock were purchased from APT Holdings Corporation on January 5, 1998 for $11.4 million and were subsequently retired and cancelled. In addition, in January 1998 Saratoga purchased 142,857 Preferred Shares for $14.00 per share. If these transactions had occurred on January 1, 1997 the effect on earnings per share for 1997 would have been $(0.16) and $(0.06) for basic earnings per share and diluted earnings per share, respectively.
The Company is offering to redeem, at $17.00 per share, up to 25% of the shares of Common Stock owned by the current officers of the Company and Clayton A. Sweeney, and up to 100% of the shares of Common Stock owned by other Management Investors, in an aggregate amount not exceeding $15.0 million. Additionally, all salaried employees of the Company may purchase Common Stock of the Company at the price of $14.00 per share. Management Investors may redeem shares at $17.00 or purchase shares at $14.00, but may not do both simultaneously. The results of the redemption and purchase offers will be known in early April 1998. The New Stockholders' Agreement provides for stock redemptions of up to 5% of each stockholders' outstanding shares annually beginning in 1999 at the Company's option, provided that all relevant covenants with the Company's lenders and noteholders are met.
In March 1996, Cornerstone-Spectrum, Inc. exercised its option to convert all of the Series B Convertible Preferred Stock into 2,340,000 shares of non- voting Common Stock of the Company. Subsequent to the exercise, the Company purchased and retired 1,050,000 shares of non-voting Common Stock of the Company in equal amounts from Cornerstone-Spectrum, Inc. and APT Holdings Corporation, a wholly-owned subsidiary of Mellon Bank Corporation, the parent of Mellon Bank, N.A. The effect of the purchase on stockholders' equity was to decrease retained earnings and capital in excess of par value by $10.3 million and $1.9 million, respectively.
7. COMMON STOCK SUBJECT TO REDEMPTION
The New 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, 1997 and 1996 the maximum redemptions which could be paid under the New Stockholders' Agreement, subject to existing debt covenants, were $26.4 million and $24.0 million, respectively. The value of shares subject to redemption under the terms of the New Stockholders' Agreement is segregated from other Common Stock on the face of the balance sheet. There were approximately 1.6 million and 1.7 million shares of Common Stock at December 31, 1997 and 1996, respectively, subject to the redemption provisions of the New Stockholders' Agreement.
The aggregate redemption amounts under the New Stockholders' Agreement for the next three years based on termination events which have already occurred are as follows:
8. BENEFIT PLANS
Pension--The Company has established benefit plans for its salaried employees and is the sponsor of single employer defined benefit plans for the hourly employees. Benefits under the plans are based upon employees' compensation and years of service.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The funded status of the pension plans is as follows:
The components of pension expense are as follows:
In determining the projected benefit obligation for funded status purposes, a discount rate of 7.5% was used for both 1997 and 1996. In 1997 and 1996, the assumed increase in future compensation was 4.0% for salaried employees and 3.5% for hourly employees. The long-term rate of return on plan assets is assumed to be 9.0% annually. Plan assets consist of common stock, fixed income securities and short-term investments. The Company currently funds the plans based on ERISA requirements. The net increase in the accumulated benefit obligation reflects the additional liabilities assumed by the Company primarily as a result of the Koppers Australia acquisition and the closing of the Woodward Facility in 1997.
Postretirement Benefits--The Company sponsors a defined postretirement benefit plan to provide medical and life insurance benefits to employees who retire after attaining the required years of service with the Company, including their spouses. Medical benefits are provided through a comprehensive indemnity plan and community-rated health maintenance organizations.
Currently, the Company pays a portion of the cost of such plans, but reserves the right to modify cost-sharing provisions in the future. Life insurance benefits are based primarily on the employee's compensation and are also partially paid for by retiree contributions, which vary based upon coverage chosen by the retiree.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In determining the accumulated postretirement benefit obligation for both 1997 and 1996, the Company used discount rates of 7.5%. Inflation factors for the different types of medical costs were assumed to range from 9.7% to 13.0% for 1997 and to decrease gradually to 6.7% per year within 14 years.
The following summarizes the Company's accrued postretirement benefit obligation:
Net periodic postretirement benefit cost includes the following components:
An increase of 1% in the assumed medical cost inflation rate as of the beginning of the projection period would increase the accumulated postretirement benefit obligation by 6.2% and would increase the net postretirement benefit cost (excluding curtailment costs) by 20.6%.
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 $2.6 million in 1997, $2.9 million in 1996, and $4.1 million in 1995. For incentive related to 1995 and 1996 results, participating employees were able to elect to receive up to 50% of their incentive compensation in voting Common Stock of the Company.
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 the employees' contributions to the plan.
The Company's regular contributions amounted to $0.5 million in 1997 and $0.6 million in 1996 and 1995. The Company may also make a supplemental contribution at the end of each Plan Year subject to Board
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) approval. Expense for supplemental contributions amounted to $0.4 million, $0.5 million and $1.1 million in 1997, 1996 and 1995, respectively. All regular and supplemental matching contributions are made in voting Common Stock of the Company held in Treasury.
9. INCOME TAXES
Components of the Company's income tax (benefit) provision are as follows:
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 (including deferred items reflected as extraordinary loss) are as follows:
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The (benefit) provision for income taxes is reconciled with the federal statutory rate as follows:
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, 1997 consolidated retained earnings of the Company included approximately $6.0 million of undistributed earnings from these investments.
The Company began earning non-conventional fuels credits on coke production at its Monessen, Pennsylvania facility during 1995. Credits utilized for the years ended December 31, 1997 and 1996 were approximately $9.0 million and $7.0 million, respectively.
The Company has an alternative minimum tax credit carryforward of approximately $10.6 million. The credit has no expiration date.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
11. 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.
The pro forma effect on net income and earnings per share for 1997, 1996 and 1995 of the fair value method required by Statement No. 123, "Accounting for Stock-Based Compensation" is not substantially different than the method utilized by the Company. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: (a) for 1997, risk-free interest rate of 5.75%, dividend yield of 0.0%, volatility factor of .14, and an expected option life of 10 years; (b) for 1995, risk-free interest rate of 6%; dividend yield of 2.7%; volatility factor of .18; and an expected option life of 10 years.
The Company's Board of Directors has awarded 802,800 options, approximately 626,000 of which were outstanding at December 31, 1997, to purchase shares of voting common stock to certain key executives, at various exercise prices. All options granted have 10-year terms and vest and become fully exercisable at the end of three years of continued employment.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
Exercise prices for options outstanding as of December 31, 1997 ranged from $1.11 to $14.00, and the weighted-average remaining contractual life of those options was 4.7 years. Pursuant to the provisions of the Company's stock option plan, all options became vested in 1997 due to a change of control.
12. COMMITMENTS AND CONTINGENCIES
A number of lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its business, including those pertaining to product liability, warranties, employment and employee benefits. 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 Indemnity and Guarantee
The facilities of the Company are subject to a number of federal, state and local laws and regulations governing, among other things, the treatment, storage and disposal of wastes, the discharge of effluent into waterways, the emission of substances into the air and various health and safety matters. These laws and regulations are subject to frequent amendment. The Company expects to incur substantial costs for ongoing compliance with such laws and regulations. In addition, it is possible that the Company may face third-party claims for cleanup or for injuries resulting from contamination.
The Company has several environmental indemnification agreements related to the various former owners of its operating locations. The most significant of these indemnifications was obtained at the Company's inception. Under the terms of the asset purchase agreement between Koppers Industries, Inc. and Koppers Company, Inc. at the formation of the Company in 1988 (the "Asset Purchase Agreement") Beazer East, Inc. ("Beazer East") assumed the liability for and indemnified the Company against cleanup liabilities for past contamination occurring prior to the purchase date at properties acquired from Beazer East, as well as third-party claims arising from such past contamination (the "Indemnity"). Beazer Limited unconditionally guaranteed Beazer East's performance of the Indemnity pursuant to a guarantee (the "Guarantee"). However, if such indemnification was not available for any reason, including the inability of Beazer East and/or Beazer Limited to make such indemnification payments, the Company may not have sufficient resources to meet such liabilities.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Beazer East has adhered to the terms of the Indemnity agreement and is actively fulfilling its obligations to conduct investigative and remedial programs at the properties which the Company acquired from Beazer East in accordance with the requirements of regulatory authorities. The Indemnity is not applicable to sites acquired since the formation of the Company, for which separate indemnifications have been negotiated where appropriate. At the properties which the Company acquired subsequent to the acquisition of the Beazer East properties, all remedial actions are being performed in accordance with applicable regulations and all indemnification obligations are being honored.
In the event that Beazer East and Beazer Limited do not continue to fulfill their commitment under the Indemnity and the Guarantee, the Company may be required to pay costs covered by the Indemnity. The Company believes that for the last three years amounts paid by Beazer East under the Indemnity have averaged approximately $14 million per year. The requirement to pay such costs without reimbursement would have a material adverse effect on the business, financial condition and results of operations of the Company. Furthermore, if the Company were required to record a contingent liability in respect of matters covered by the Indemnity on its balance sheet the result could be that the Company would have significant negative net worth.
In addition, Beazer East is presently defending certain toxic tort actions arising from the pre-Closing operation of assets which the Company acquired from Beazer East. These tort actions were not assumed by the Company under the Asset Purchase Agreement and, in any event, are within the scope of the Indemnity.
The Company recently evaluated the environmental liabilities related to the manufacturing sites acquired by the Company at its formation in 1988, primarily located in the United States. The evaluation was based on a report prepared by an independent consultant, which in turn was based on public documents that had been submitted to various federal and state regulatory entities on specific sites. In addition to the public documents, the evaluation and report were also based on assumptions about the course of future regulatory remediation requirements and the technical knowledge of the Company and the independent consultant. The evaluation and report estimated that approximately $111.1 million will be expended at these sites for environmental remediation during the period of 1998 to 2042. The Company estimates that approximately $92.9 million of this amount is covered under the Indemnity, that it is responsible for approximately $0.1 million, and that identified third parties are responsible for the remaining $18.1 million. Information derived from the independent consultant's report indicates that, for the years ending December 31, 1998, 1999, 2000, 2001, and 2002 environmental expenses will total approximately $3.8 million, $8.1 million, $6.9 million, $9.1 million and $10.8 million, respectively. There can be no assurance, however, that the actual liabilities associated with the investigation and remediation of these sites will not exceed this estimate. The factors that could affect the estimate include: new information about the contamination at these sites, new interpretations of existing environmental laws, new environmental laws, and more vigorous enforcement policies of regulatory authorities. Further, in the event that Beazer East does not fulfill its commitments, the Company may be required to pay costs that could have a material adverse effect on the business, financial condition, cash flow, and results of operations of the Company.
Other Environmental Matters
The Jefferson County Department of Health ("Jefferson County") issued a notice of violation in March 1996 in connection with various alleged violations of Jefferson County's air pollution control regulations for emissions from coke oven batteries at the Company's Woodward Facility during the period May 26, 1992 through March 1, 1996. On February 14, 1997 the United States Environmental Protection Agency ("EPA") issued a notice of violation covering the same issues that were raised in the Jefferson County notice of violation. Thereafter, the Company discovered that certain benzene abatement equipment at the Woodward Facility had not been operational for several months. Following a preliminary investigation, the Company also discovered that certain reports and records contained incomplete and inaccurate information and that certain environmental
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) reports and certifications were not filed when required. The Company has notified Jefferson County, the State of Alabama and the EPA of the environmental irregularities, and the environmental reporting status of the Woodward Facility has been brought up to date by the Company. Counsel and independent investigators were retained to conduct a complete and thorough investigation; and the benzene abatement equipment had been returned to service prior to the ceasing of operations in January 1998. However, the Company could be subject to significant liability in connection with these matters, including fines and civil and criminal penalties and the risk of third-party lawsuits. The Company and Jefferson County have negotiated a settlement agreement (the "Settlement Agreement") which would have required the Company to install monitoring and control equipment and institute operational changes; subsequent to the Settlement Agreement, the Company has permanently shut down all coke oven batteries at the Woodward Facility. The Settlement Agreement included both the original Jefferson County notice of violation and the self-reported benzene abatement violations. The Settlement Agreement, in addition to the changes listed above, also required the Company to pay a civil penalty in the amount of $450,000 to Jefferson County, which was paid in 1997. On February 9, 1998 Jefferson County proposed a modified settlement agreement to address alleged air exceedences from August 1997 through January 1998 which includes an additional penalty in the amount of $575,000. The Company is currently in the process of reviewing the proposed modification, and has entered into negotiations with Jefferson County regarding this matter. There can be no assurance that the settlement with Jefferson County will deter the EPA from pursuing its notice of violation and that the EPA will not seek additional actions or penalties that could have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company.
During the investigation of the Woodward Facility described above, it was also discovered that certain environmental records and reports relating to discharges of treated process water and treated storm water contained incomplete and inaccurate information. Corrected reports have been submitted to the State of Alabama and the EPA. While no notice of violation has been issued in connection with this matter, it is believed likely that a notice of violation will be issued and substantial penalties may be sought by the State of Alabama or the EPA.
The Pennsylvania Department of Environmental Protection ("PADEP") previously issued a notice of violation alleging that the boilers at the Monessen, Pennsylvania coke facility (the "Monessen Facility") are emitting greater quantities of nitrogen oxides than allowed under a plan approved by PADEP. The Company also received a notice of violation in connection with a failure to conduct timely emission monitoring testing on the boilers at the Monessen Facility. The Company has installed additional equipment and modified existing equipment to improve the quality of boiler emissions. Resolution of these matters could have a negative effect on the business, financial condition, cash flow and results of operations of the Company. The Company has submitted an amended plan approval application to PADEP that provides for limitations on the operation of the two boilers at the Monessen Facility. PADEP is currently reviewing this application. As a result of the failure to meet the original nitrogen oxide emission limitations, it is expected that PADEP will propose a civil penalty in an amount of approximately $100,000. However, there can be no assurance that a higher penalty will not be sought.
On June 12, 1996 PADEP issued a notice of violation in connection with an alleged noncompliance with the terms of a consent agreement between the Company and PADEP regarding liability for environmental conditions existing at the time the Company purchased the Monessen Facility (the "Consent Agreement"). The notice of violation alleged that the Company had not implemented the corrective actions required under the Consent Agreement in a timely fashion. The Company has completed the implementation of the corrective actions at issue and has settled this matter by payment of a fine in the amount of $261,000 in January 1998. At the Monessen Facility, the Company has entered into a consent order and agreement with the EPA (the "Monessen Consent Order") pursuant to which the Company's liabilities for environmental cleanup have been
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) capped at $550,000 for matters identified pursuant to the Monessen Consent Order. Although an environmental indemnification was provided to the Company by the seller of that facility, the Company does not expect that such obligations will be honored. If contamination at the Monessen Facility should be discovered which has not been identified pursuant to the Monessen Consent Order, or if the EPA should require cleanup above the $550,000 "cap" contained in the Monessen Consent Order, the costs associated with such events could have a material adverse effect on the Company's business, financial condition, cash flow and results of operations.
In June 1997, during a routine environmental compliance audit of the Logansport, Louisiana wood treating plant, it was discovered that certain records and reports relating to discharges of treated process water contained incomplete and inaccurate information. Corrected reports have been submitted to the local municipality, the State of Louisiana and the EPA. While no notice of violation has been issued in connection with this matter, it is believed that it is likely a notice of violation will be issued and civil penalties will be sought by the local municipality, the State of Louisiana and the EPA.
In September 1996, the Company was served with a notice of violation from the Illinois Environmental Protection Agency ("IEPA") relating to 16 releases of hazardous materials which occurred at or from its facility located in Stickney, Illinois between January 24, 1990 and May 3, 1996. The Company has entered into negotiations with the IEPA to investigate four of the releases which had the potential to cause groundwater contamination. Although the Company believes that all such releases were remediated when they occurred, there can be no assurances that the IEPA will not require additional action in connection with this matter.
In addition to the environmental issues discussed above, the Company has received or expects to receive notices of violations and requests for information at its Monessen Facility and the Stickney, Illinois and Follansbee, West Virginia tar distillation and chemicals facilities that relate to matters which the Company does not believe will have a material impact on the business, financial condition, cash flow and results of operations of the Company.
On occasion, Koppers Australia has been served with notices relating to environmental compliance issues arising in connection with its operations. Koppers Australia was served with a notice by the Tasmanian Department of Environment and Land Management ("DELM") which alleged that the Longford, Tasmania facility was not in compliance with certain water discharge requirements. Koppers Australia is currently in negotiations with the DELM with respect to this issue. In addition, historic operations conducted at the Koppers Australia facilities have resulted in identified and potential soil and groundwater contamination of varying degrees. The Trentham, Victoria facility is listed on the Victorian Register of Contaminated Sites as "probable sites". In addition, Koppers Australia has identified various levels of groundwater contamination at the Mayfield, New South Wales and Bunbury, Western Australia facilities. Although the relevant regulatory authorities have not required the investigation or remediation of these or other Koppers Australia facilities to date, these authorities may require such work if Koppers Australia does not undertake such activities itself. Costs associated with these activities may be material and there can be no assurance that such costs will not have a material adverse effect on the business, financial condition, cash flow and results of operations of the Company.
Other Matters
As a result of an internal investigation, the Company discovered in March 1997 that certain reports relating to the moisture of coke contained incomplete and inaccurate information. Because of these discrepancies, certain customers who purchased the coke were overbilled. Upon discovery of the overbilling, refunds were made to all the affected customers.
For a fee, the Company treats waste water produced by Beazer East during Beazer East's remediation of certain of the Company's facilities. Beazer East performs these remediation activities pursuant to the Indemnity.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During the summer of 1997, Beazer East challenged the amounts of the charges for waste water treatment services at the Florence, South Carolina wood treating facililty and the Follansbee, West Virginia carbon materials and chemicals facility. Beazer East alleged they had been overcharged by approximately $2.2 million at Florence and by approximately $3.1 million at Follansbee. The Company has contested these allegations and believes that if an overcharge occurred, the amount of the overcharge is substantially less than Beazer East has alleged.
Litigation Settlements
The Company settled litigation with CSX Transportation, Inc. ("CSX") related to a Complaint served by CSX on May 24, 1996 which alleged that the Company failed to fulfill environmental obligations under two contracts executed by CSX and the Company's predecessor in 1988 and performed by the Company. The Complaint also sought reimbursement of any damages incurred in connection with a 1992 lawsuit filed by Beazer East against CSX in which Beazer East sought contribution for environmental cleanup at certain facilities including some presently owned by the Company. The settlement agreement requires the Company to pay certain amounts over a five year period. The Company recorded a $2.5 million charge to pretax earnings in the fourth quarter of 1996 as a result of the agreement.
On October 4, 1996 the Company settled litigation with Owens-Corning Fiberglas Corporation ("OCF") which involved matters which occurred before the Company came into existence. The case went to trial in early 1996 and, in April 1996 resulted in a jury verdict against the Company for $10.3 million plus legal fees and claims for pre-trial and post-trial interest. The Company entered into a confidential settlement with OCF under which the Company paid $12.7 million, in settlement of all claims. The charge to earnings for 1996 for the settlement and related legal fees was $10.2 million, as $3 million had been provided for previously.
Rents
Rent expense for 1997, 1996 and 1995 was $13.5 million, $13.5 million, and $11.1 million, respectively. Commitments during the next five years under operating leases approximate $15 million per year.
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. OPERATIONS BY BUSINESS SEGMENT
The Company's operations have been carried out in three business segments prior to the acquisition of Koppers Australia. Financial information about each business segment is provided in the following table:
Intersegment sales of $13.2 million, $13.9 million and $12.1 million have been eliminated in 1997, 1996 and 1995, respectively, from the schedule of segment information.
Sales to LTV Steel Company, Inc. by the Coke Products business amounted to 10.8% of the Company's total net sales for 1996.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996:
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15. 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 International Trade Corporation, Koppers Australia Pty. Limited, Koppers Industries of Delaware, Inc. and Koppers Industries B.W., Inc. (collectively, the "Guarantor Subsidiaries"). The New Notes have not been guaranteed by KHC Assurance, Inc., Tarconord A/S, and KSA Limited Partnership (collectively, the "Non-Guarantor Subsidiaries"). In accordance with previous positions established by the Securities and Exchange Commission, the following summarized financial information illustrates separately the composition of the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. Separate complete financial statements of the respective Guarantor Subsidiaries, other than Koppers Australia Pty. Limited, are not presented because management has determined that they would not provide additional material information that would be useful in assessing the financial composition of the guarantors and non-guarantors. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
SUMMARIZED CONDENSED FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 (In thousands)
SUMMARIZED CONDENSED FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996 (In thousands)
KOPPERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUMMARIZED CONDENSED FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands)
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of KOPPERS AUSTRALIA PTY. LIMITED
We audited the accompanying consolidated balance sheets of Koppers Australia Pty. Limited as of June 30, 1997 and June 30, 1996, and the related consolidated statements of profit and loss and cash flows for the two years ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards 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 referred to above, present fairly, in all material respects, the consolidated financial position of Koppers Australia Pty. Limited at June 30, 1997 and 1996 and the consolidated results of their operations and their cash flows for the years ended June 30, 1997 and 1996 in conformity with generally accepted accounting principles in the United States.
As discussed in Note 1 to the financial statements, in fiscal 1997, the Company changed its method of accounting for investments in associates.
/s/ Ernst & Young
Sydney, Australia August 25, 1997
KOPPERS AUSTRALIA PTY. LIMITED
(ACN 000 566 629)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
YEARS ENDED 30 JUNE 1997 AND 1996
The Profit and Loss Account should be read in conjunction with the accompanying notes.
KOPPERS AUSTRALIA PTY. LIMITED
(ACN 000 566 629)
CONSOLIDATED BALANCE SHEET
AT 30 JUNE 1997 AND 1996
The Balance Sheet should be read in conjunction with the accompanying notes.
KOPPERS AUSTRALIA PTY. LIMITED
(ACN 000 566 629)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED 30 JUNE 1997 AND 1996
The Statement of Cash Flows should be read in conjunction with the accompanying notes.
KOPPERS AUSTRALIA PTY. LIMITED
(ACN 000 566 629)
PROFIT AND LOSS ACCOUNT
YEARS ENDED 30 JUNE 1997 AND 1996
The Profit and Loss Account should be read in conjunction with the accompanying notes.
KOPPERS AUSTRALIA PTY. LIMITED
(ACN 000 566 629)
BALANCE SHEET
AT 30 JUNE 1997 AND 1996
The Balance Sheet should be read in conjunction with the accompanying notes.
KOPPERS AUSTRALIA PTY. LIMITED
(ACN 000 566 629)
STATEMENT OF CASH FLOWS
YEARS ENDED 30 JUNE 1997 AND 1996
The Statement of Cash Flows should be read in conjunction with the accompanying notes.
KOPPERS AUSTRALIA PTY. LIMITED
(ACN 000 566 629)
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
30 JUNE 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of accounting
The financial statements are general purpose financial statements which have been made out in accordance with the requirements of the Corporations Law which include disclosures required by Schedule 5 and applicable Accounting Standards and other mandatory professional reporting requirements (Urgent Issues Group Consensus Views).
The accounting policies adopted are consistent with those of the previous year except as outlined below.
In accordance with ASC Class Order 97/0798, the directors have elected to adopt the provisions of Proposed Revised Accounting Standard AASB1016 Accounting for Investments in Associates. The effect is that investments in associates are brought to account using the equity method of accounting under which the carrying amount of the investment is increased or decreased to recognise the investor's share of the post-acquisition profits or losses and other changes in net assets of the associate. The investor's share of the post-acquisition profits or losses of the associate is included in the consolidated profit or loss account of the investor.
Investments in associates were previously brought to account at cost. (Refer Note 12)
b) Foreign currencies
Translation of foreign currency transactions
Transactions in foreign currencies of entities within the economic entity are converted to local currency at the rate of exchange ruling at the date of the transaction.
Amounts payable to and by the entities within the economic entity that are outstanding at the balance date and are denominated in foreign currencies have been converted to local currency using rates of exchange ruling at the end of the financial year.
Except for certain specific hedges and hedges of foreign currency operations, all resulting exchange differences arising on settlement or restatement are brought to account in determining the profit or loss for the financial year, and transaction costs, premiums and discounts on forward currency contracts are deferred and amortized over the life of the contract.
Specific hedges
Where a purchase or sale is specifically hedged, exchange gains or losses on the hedging transaction arising up to the date of purchase or sale and costs, premiums and discounts relative to the hedging transaction are included with the purchase or sale. Exchange gains and losses arising on the hedge transaction after that date are taken to the profit and loss account.
Hedges of foreign operations
Exchange gains and losses on transactions hedging investments in foreign operations are taken to the foreign currency translation reserve on consolidation.
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED) Translation of accounts of overseas operations
All overseas operations are deemed self-sustaining as each is financially and operationally independent of Koppers Australia Pty. Limited. The accounts of overseas operations are translated using the current rate method and any exchange differences are taken directly to the foreign currency translation reserve.
c) Cash
For the purposes of the statement of cash flows, cash includes cash on hand and in banks, and money market investments readily convertible to cash within two working days, net of outstanding bank overdrafts.
d) Inventories
Inventories are valued at the lower of cost and net realisable value.
Costs incurred in bringing each product to its present location and condition are accounted for as follows:
* Raw materials--purchase cost on a first-in-first-out basis; and
* Finished goods and work-in-progress--cost of direct material and labour and a proportion of manufacturing overheads based on operating capacity.
e) Recoverable amount
Non-current assets are not revalued to an amount above their recoverable amount, and where carrying values exceed this recoverable amount assets are written down. In determining recoverable amount the expected net cash flows have not been discounted to their present value.
f) Property, plant and equipment
Cost and valuation
Items of property, plant and equipment comprising a class of non-current assets are revalued at the same date on a consistent basis. Assets under construction are brought to account at cost.
Where assets have been revalued, the potential effect of the capital gains tax on disposal has not been taken into account in the determination of the revalued carrying amount.
Depreciation
Depreciation is provided on a straight line basis on all property, plant and equipment, other than freehold land.
Major depreciation periods are:
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
g) Intangibles
Goodwill
Goodwill is amortised by the straight line method over the period during which benefits are expected to be received. This is taken as being 20 years.
h) Other non-current assets
Expenditure carried forward
Significant items of carry forward expenditure having a benefit or relationship to more than one period are written off over the periods to which such expenditure relates.
i) Employee entitlements
A number of companies in the economic entity offer an employee incentive scheme to full time permanent employees. Benefits based on growth in earnings, are payable after a qualifying period of six years service and three years membership in the plan. Provision for these employee entitlements, based on the estimated amount payable to employees is charged to the profits annually.
A trust has been established which offers benefits based on growth in earnings to full time permanent staff. Benefits are payable after three years membership in the plan. Provision for these employee entitlements, based on the estimated amount payable to employees, is charged to the profits annually.
Employee-contributory superannuation funds exist to provide benefits for the economic entity's employees and their dependents on retirement, disability or death. The contributions made to these funds by entities within the economic entity are charged against profits.
In respect of the economic entity's defined benefits superannuation plans, any contributions made to the superannuation funds by entities within the economic entity are charged against profits when due.
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED) 2. OPERATING REVENUE & OPERATING PROFIT
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAX
- -------- *The prima facie tax has been arrived at using tax rates applicable in the country of operation.
5. CONTRIBUTIONS TO PROFIT
6. DIVIDENDS PAID OR PROVIDED
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
7. RECEIVABLES (CURRENT)
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
9. OTHER CURRENT ASSETS
Included in investments at cost is an investment of A$3 in respect of 60% of the issued capital of Koppers SEUT Pty. Limited. As this company acts solely as the trustee for the Koppers Senior Executive Unit Trust, it is not controlled by Koppers Australia Pty. Limited and has not been consolidated.
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
Investment in unlisted controlled entities comprises:
Overseas controlled entities carry on business in the country of incorporation.
(i) Controlled entities which are audited by other member firms of Ernst & Young International.
(ii) Pursuant to Class Order 95/1530, relief has been granted to this controlled entity of Koppers Australia Pty. Limited from the Corporations Law requirements for preparation, audit and publication of accounts.
As a condition of the Class Order, Koppers Australia Pty. Limited and the controlled entities subject to the Class Order, have entered into a deed of indemnity on 18 May 1995. Continental Carbon Australia Pty Ltd was joined to this deed of cross guarantee by a deed of assumption executed on 20 May 1996. The effect of the deed is that Koppers Australia Pty. Limited has guaranteed to pay any deficiency in the event of winding up of the controlled entity. The controlled entities have also given a similar guarantee in the event that Koppers Australia Pty. Limited is wound up. The aggregate assets and liabilities of the companies subject to the deed, and the aggregate result of these companies are as follows:
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
Investment in unlisted associated entities comprises:
- -------- *The investment in Koppers Industries, Inc. was previously brought to account at cost, but is now brought to account using the equity method of accounting. This represents a change in accounting policy as outlined in note 1. (Accordingly comparatives have not been included in the following disclosures).
Koppers-Coastchem
The interest in the partnership is carried at cost, plus the economic entity's share of the partnership's result for the year. The economic entity's share in the partnership's result is included in the economic entity's profit.
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
The balance date of Koppers Industries, Inc. is 31 December
The issued capital of Koppers Industries, Inc. includes redeemable shares issued to management investors. In addition, options to acquire shares have also been issued to the management of Koppers Industries, Inc. Accordingly, the percentages shown above may be subject to variations in the future through redemptions of shares or exercise of options. The maximum dilution through exercise of options as at 30 June 1997 is less than 2%.
Koppers Industries, Inc. holds 100.0% of the issued capital of Koppers Australia Pty. Limited.
Principal activities of Koppers Industries, Inc. are:
. Producer of Tar Products carbon pitch; creosote; phthalic anhydride (PAA); roofing pitch/bitumen
. Producer of Wood Products treats railroad crossties, poles and pilings for various uses
. Producer of Coke Products foundry & furnace coke and marketable by- products including coal tars, gases, oils and chemicals
No adjustment has been made to reflect the dissimilar accounting policy adopted by the associate company in relation to valuation of inventory. In particular the last-in-first-out method of inventory valuation has been adopted by Koppers Industries, Inc.
Koppers Australia Pty. Limited paid dividends to Koppers Industries, Inc. during the year totalling A$3,250,294 (1996 A$4,499,900) during the year.
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
13. PROPERTY, PLANT AND EQUIPMENT
Valuations
All valuations are estimates of the amounts for which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm's length transaction at the valuation date. The economic entity does not have a set policy for regular revaluation of freehold land and buildings.
14. INTANGIBLES
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
15. OTHER NON-CURRENT ASSETS
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED) 20. BORROWINGS (NON-CURRENT)
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
24. OUTSIDE EQUITY INTEREST
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
Superannuation Commitments
All employees are entitled to varying levels of benefits on retirement, disability or death. The superannuation plan provides defined benefits based on years of service and final average salary. Employees contribute to the plans at various percentages of their wages and salaries. Up until the year ended 30 June 1994, the economic entity did not contribute to the plan. Commencing this year, the economic entity has contributed to the plan amounts advised by the plan manager. These contributions are not of a systematic and long-term nature as the plan has sufficient funds to satisfy all benefits vested under the plan as at 30 June 1997.
Details of the superannuation fund as extracted from the fund's most recent annual report (31 August 1996) are as follows:
Actuarial assessment of the plan was made in February 1995 by Watson Wyatt Worldwide.
28. CONTINGENT LIABILITIES
Koppers Australia Pty. Limited and related companies, namely Koppers Power Poles (Australia) Pty. Limited, Koppers Coal Tar Products Pty. Ltd., Continental Carbon Australia Pty. Limited, Koppers Timber Preservation Pty. Ltd. and Koppers Investments (Aust.) Pty. Limited have collectively unrestricted access to borrowing facilities to a maximum of A$47,850,000.
The amount of credit unused at 30 June 1997 totaled A$36,350,000.
The securities held by the bank over the above facilities comprise:
1. Guarantee (unlimited) by Koppers Power Poles (Australia) Pty. Limited, Koppers Investments (Aust.) Pty. Limited, Koppers Timber Preservation Pty. Ltd., Koppers Coal Tar Products Pty. Ltd., Koppers Australia Pty. Limited and Continental Carbon Australia Pty. Limited.
2. Letter of Comfort by BHP and Koppers Industries, Inc.
3. Negative Pledge dated 2 July 1990.
In addition, a fully interlocking guarantee has been provided by the above- mentioned related companies, to provide security over the borrowing facilities of the company and its related companies. Under the terms of an ASC Class Order these above mentioned companies have guaranteed any deficiency of funds if any of the companies is wound up. No such deficiency exists. Refer to Note 12.
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
29. AUDITORS' REMUNERATION
30. SUBSEQUENT EVENTS
There has been no significant event since balance date which requires disclosure or adjustment in the financial statements of the entity.
31. RELATED PARTY DISCLOSURES
The directors of Koppers Australia Pty. Limited during the financial year were:
D.P. Traviss (Resigned 24 June 1997); E.S. Bryon; M.J. Burns; D.R. Zimmerman; B.K. Jensen; P.J. Laver; R.K. Wagner; C.R. Newell; A.K. Purnell (Resigned 22 May 1997); B.C. Wilson
The following related party transactions occurred during the financial year:
Transactions with other related parties:
i) Dividends received of A$980,769. (1996: A$986,193)
Transactions with the Directors of Koppers Australia Pty. Limited and the economic entity:
Since 1992 Koppers Australia Pty. Limited has issued units in a management incentive scheme to various executives of the group. Unit holders are entitled, but not obliged, to exchange all or some of their units for cash after holding units for a qualifying period of three years. The executives are obliged to exchange all units for cash on their resignation, retirement or dismissal from employment.
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED)
The growth in value of these units, and the resulting benefit to the executives, is determined by reference to the profitability after tax of the Koppers Australia group. Benefits from this scheme are funded by companies within the Koppers Australia group. Three directors of Koppers Australia Pty. Limited have been issued units in this scheme in accordance with the plan rules. As at 30 June 1997, the combined value of the units issued to the above directors is A$358,270 (1996: A$291,840).
There have been no other transaction concerning shares between entities in the reporting entity and directors of the reporting entity or their director- related entities.
All financial benefits provided by Koppers Australia Pty. Limited or its controlled entities to related parties were provided at arms' length terms.
Koppers Australia Pty. Limited is the ultimate Australian holding company.
32. SEGMENT INFORMATION
The economic entity operates predominantly in four industries--timber preservation, chemicals, carbon black and coal tar products, and in four geographical areas--Australia, P.N.G., New Zealand and Fiji and South East Asia. The manufacturing operations comprise the refinement and distribution of coal tar products, the manufacture of wood preservation chemicals, the preservation of timber products and carbon black.
KOPPERS AUSTRALIA PTY. LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(CONTINUED) 33. REMUNERATION OF DIRECTORS
In the opinion of the directors, remuneration paid to directors is considered reasonable.
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.
/s/ Donald E. Davis By: ................................. 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 K. Wagner ............................. Chairman and Director March 24, ROBERT K. WAGNER 1998
/s/ Walter W. Turner ............................. President, Chief Executive Officer and Director (Principal Executive Officer) March 26, WALTER W. TURNER 1998
/s/ Donald E. Davis ............................. Chief Financial Officer(Principal Financial Officer, Principal Accounting Officer) March 19, DONALD E. DAVIS 1998
/s/ Clayton A. Sweeney ............................. Director March 18, CLAYTON A. SWEENEY 1998
/s/ Christian L. Oberbeck ............................. Director March 19, CHRISTIAN L. OBERBECK 1998
/s/ Brooks C. Wilson ............................. Director March 19, BROOKS C. WILSON 1998
/s/ N.H. Prater ............................. N.H. PRATER Director March 24,
EXHIBIT INDEX
- -------- *Previously filed
KOPPERS INDUSTRIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995