Amendment No. 1
Table of Contents

As filed with the Securities and Exchange Commission on October 19, 2005

Registration No. 333-128250


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Pre-Effective

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933


KI HOLDINGS INC.

(Exact name of registrant as specified in its charter)


Pennsylvania   2491   20-1878963

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

436 Seventh Avenue

Pittsburgh, Pennsylvania 15219

Telephone: (412) 227-2001

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Steven R. Lacy, Esq.

Senior Vice President, Administration, General Counsel and Secretary

KI Holdings Inc.

436 Seventh Avenue

Pittsburgh, Pennsylvania 15219

Telephone: (412) 227-2001

(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies of communications to:

Richard E. Farley, Esq.

Cahill Gordon & Reindel LLP

80 Pine Street

New York, New York 10005

Telephone: (212) 701-3000

 

William J. Whelan III, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019

Telephone: (212) 474-1000


Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨


CALCULATION OF REGISTRATION FEE


Title of each class of

securities to be registered

  Amount to be
registered
 

Proposed maximum
offering price

per share

  Proposed maximum
aggregate offering
price (1)(2)
  Amount of
registration fee (3)

Common stock, par value $0.01 per share

  —     —     $125,000,000   $14,712.50

(1) Includes              shares issuable upon exercise of the underwriters’ option to purchase additional shares of common stock.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
(3) Previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.



Table of Contents

The information in this prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 19, 2005

 

             Shares

 

LOGO

 

KI Holdings Inc.

 

Common Stock

 


 

We are selling              shares of common stock and the selling shareholders are selling             shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling shareholders.

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $             and $             per share. We will apply to list our common stock on the New York Stock Exchange under the symbol “KOP.”

 

The underwriters have an option to purchase a maximum of                      additional shares from us and the selling shareholders to cover over-allotments of shares.

 

Investing in our common stock involves risks. See “ Risk Factors” on page 12.

 

    

Price to

Public


  

Underwriting

Discounts and

Commissions


  

Proceeds to

Issuer


  

Proceeds to

Selling

Shareholders


Per Share

   $                $                $                $            

Total

   $                        $                        $                        $                    

 

Delivery of the shares of common stock will be made on or about                     , 2005.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Credit Suisse First Boston   UBS Investment Bank

 

The date of this prospectus is                     , 2005.


Table of Contents

 


 

TABLE OF CONTENTS

 

     Page

SUMMARY

   1

RISK FACTORS

   12

FORWARD-LOOKING STATEMENTS

   26

INDUSTRY AND MARKET DATA

   26

USE OF PROCEEDS

   27

CAPITALIZATION

   28

DIVIDEND POLICY

   29

DILUTION

   31

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

   32

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   36

BUSINESS

   57

MANAGEMENT

   71

EXECUTIVE COMPENSATION

   75
     Page

PRINCIPAL AND SELLING SHAREHOLDERS

   82

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   84

DESCRIPTION OF CERTAIN INDEBTEDNESS

   86

DESCRIPTION OF CAPITAL STOCK

   89

SHARES ELIGIBLE FOR FUTURE SALE

   91

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

   93

UNDERWRITING

   96

NOTICE TO CANADIAN RESIDENTS

   99

LEGAL MATTERS

   100

EXPERTS

   100

WHERE YOU CAN FIND MORE INFORMATION

   100

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

 


 

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

 

Dealer Prospectus Delivery Obligation

 

Until             ,             all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

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Table of Contents

SUMMARY

 

You should read the following summary together with the more detailed information appearing elsewhere in this prospectus and the financial statements and other information included in this prospectus. In this prospectus, unless otherwise indicated or the context requires otherwise, when we use the terms the “Company,” “we,” “our” or “us,” we mean Koppers Inc., formerly known as Koppers Industries, Inc., and its subsidiaries on a consolidated basis for periods up until November 18, 2004 and KI Holdings Inc., or KI Holdings, and its subsidiaries on a consolidated basis for periods from and including November 18, 2004, when KI Holdings became the parent of Koppers Inc. The use of these terms is not intended to imply that KI Holdings and Koppers Inc. are not separate and distinct legal entities.

 

Our Company

 

We are a leading integrated global provider of carbon compounds and commercial wood treatment products. Our products are used in a variety of niche applications in a diverse range of end-markets, including the aluminum, railroad, specialty chemical, utility, rubber and steel industries. We provide products which represent only a small portion of our customers’ costs but are essential inputs into the products they produce and the services they provide. In the aggregate, we believe that we maintain the number one market position by volume in a majority of our principal product lines in North America, Australia and Europe. Approximately 56% of our net sales for 2004 were generated from products in which we have the number one market share position by volume in those three geographic regions. We serve our customers through a comprehensive global manufacturing and distribution network, including 35 manufacturing facilities located in North America, Australasia, China, Europe and South Africa. We conduct business in 73 countries with over 2,600 customers, many of which are leading companies in their respective industries, including Alcoa Inc., CSX Transportation, Inc., Union Pacific Railroad Company, Norfolk Southern Corporation and Burlington Northern Santa Fe Railway. We believe that our customers place significant value on our industry-leading “Koppers” brand, which for more than 70 years has maintained a reputation for quality, reliability and customer service. We maintain long-standing relationships with many of our customers and have conducted business with our top ten customers for an average of 16 years. For the twelve months ended June 30, 2005, we generated net sales of $973.9 million, net income of $9.7 million and EBITDA of $100.0 million. For a reconciliation of EBITDA to net income, see footnote (6) under “—Summary Historical Consolidated Financial Data.”

 

We operate two principal businesses, Carbon Materials & Chemicals and Railroad & Utility Products. Through our Carbon Materials & Chemicals business (58% of 2004 net sales), we are the largest distiller of coal tar in North America, Australia, the United Kingdom and Scandinavia. We process coal tar into a variety of products, including carbon pitch, creosote and phthalic anhydride, which are critical intermediate materials in the production of aluminum, the pressure treatment of wood and the production of plasticizers and specialty chemicals, respectively. Through our Railroad & Utility Products business (42% of 2004 net sales), we are the largest North American supplier of railroad crossties. Our other commercial wood treatment products include the provision of utility poles to the electric and telephone utility industries.

 

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The following charts provide a breakdown of our 2004 net sales by product and industry:

 

LOGO   LOGO

 

Industry Overview

 

We believe that demand for aluminum and railroad track maintenance substantially drive growth in our two principal businesses. Through our leading market positions and global presence, we believe we are uniquely well-positioned to capitalize on favorable trends within our end-markets. According to the King Report, worldwide aluminum production increased 6.5% to 29.8 million metric tons in 2004 and is expected to grow by 7.6% in 2005 and 6.8% in 2006. Carbon pitch requirements for the aluminum industry were 2.8 million metric tons in 2004 and are expected to grow as a function of growth in aluminum production.

 

The railroad crosstie business is benefiting and will likely continue to benefit from positive general economic conditions in the railroad industry and from expected increases in spending on both new track and existing track maintenance. The Railway Tie Association, or RTA, estimates that approximately 13.7 million crossties for the seven largest railroads in North America, which we refer to as the Class 1 railroads, were installed in the United States in 2004 and approximately 14.0 million crossties are projected to be installed in 2005. The RTA projects demand to increase by 9.2% to 15.3 million crossties in 2006. In addition, on August 10, 2005, a federal transportation bill was signed into law which provides $286.5 billion of funding for various projects in the transportation industry. Although it is difficult to estimate the impact of this legislation on our business, we believe that it is likely to benefit us directly by increased sales related to projects identified in the legislation or indirectly as additional railroad capital can be reallocated to infrastructure maintenance priorities.

 

Key Competitive Strengths

 

We believe that we are distinguished by the following key competitive strengths:

 

Leading Market Positions Across Business Segments.    We are a leading integrated global provider of carbon compounds and commercial wood treatment products.

 

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The following table sets forth our leading market position for each of our principal product lines in our three major geographic regions:

 

     2004 Net Sales

  

Estimated % of

Market


    Market Position

     (in millions)           

North American Market

                 

Railroad Crossties (U.S.)

   $ 246.1    55 %   #1

Carbon Pitch (1)

     75.4    49 %   #1

Phthalic Anhydride (2)

     71.4    37 %   #1

Australian Market

                 

Carbon Pitch

   $ 53.8    81 %   #1

Wood Preservatives

     48.1    50 %   #1

Carbon Black

     30.1    80 %   #1

Utility Poles

     11.8    66 %   #1

European Market

                 

Carbon Pitch

   $ 47.6    14 %   #3
 
  (1) Only refers to carbon pitch sales to the aluminum industry.
  (2) Only refers to merchant market sales of phthalic anhydride.

 

Strong Customer Relationships Under Contract Arrangements.    Our reputation and industry-leading “Koppers” brand have enabled us to establish strong relationships with leading companies in their respective industries. All of our top ten customers are served under long-term contracts and approximately 56% of our 2004 net sales were made to customers with whom we have contract arrangements of two or more years.

 

Diverse End-Markets and Global Presence.    Our approximately 2,600 customers operate in diverse end-markets such as aluminum, railroads, specialty chemicals, including polyester resins, paints, coatings and plasticizers, steel, utilities, rubber, wood preservation, roofing and pavement sealers. We believe our global presence and our strategically located facilities enable us to capitalize on opportunities to increase sales of our existing product portfolio into higher-growth emerging economies, such as China, the Middle East, India and Eastern Europe.

 

Cost Advantage Through Vertical Integration.    The degree of vertical integration in our business enables us to utilize products produced in our Carbon Materials & Chemicals business in our manufacturing processes, providing us with significant cost and supply advantages. In addition, internally generated products provide a more reliable source of feedstock for our wood treatment and phthalic anhydride products.

 

Experienced and Incentivized Management Team.    Our senior management team has an average of 27 years of industry experience. Prior to the offering, our directors, management team and employees beneficially own approximately 24% of our equity.

 

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Our Business Strategy

 

The key elements of our strategy are:

 

Capitalize on Attractive Growth Opportunities.    We believe our existing key end-markets, especially the aluminum and railroad industries, and geographic focus provide attractive growth opportunities. We are well positioned to capitalize on these opportunities. In addition, we intend to pursue growth opportunities in three ways:

 

    New Regional Expansion:    We intend to leverage our global reach by capitalizing on opportunities in high-growth regions such as China, the Middle East and India and expect demand for our products in these regions to grow faster than in our core markets.

 

    Selective Acquisitions:    We intend to continue to selectively pursue complementary opportunities in areas that enable us to build upon our product portfolio, expand our customer base and leverage our existing customer relationships.

 

    Development of New Products:    We expect to expand many of our product lines through the development of related products to meet new end-use applications.

 

Maximize Cash Flow and Reduce Financial Leverage.    We expect to reduce our financial leverage by using a portion of our net proceeds from this offering and a portion of cash flow from operations after required capital expenditures.

 

Continue Productivity and Cost Reduction Initiatives.    We are focused on improving our profitability and cash flows by achieving productivity enhancements and by improving our cost platform. We have identified several opportunities available over the next two to three years to further enhance our productivity and profitability.

 

Risks Related to our Business and Strategy

 

Our business, including our ability to execute our strategy, is subject to certain risks. These risks include:

 

    the cyclical nature of the demand for our products;

 

    our dependence on certain major customers;

 

    fluctuations in the price, quality and availability of our primary raw materials; and

 

    the hazards associated with chemical manufacturing.

 

For additional risks related to our business or this offering, see “Risk Factors.”

 

Recent Developments

 

On August 8, 2005, the President signed the Energy Policy Act of 2005 into law. Included in this legislation are Section 29 Energy Tax Credits earned for the production and sale of coke to a third party. These credits against federal income tax will be earned in conjunction with the coke operations at our Monessen, Pennsylvania facility. The tax credit generated per ton of coke sold is tied to a per barrel of oil equivalent on a BTU basis and adjusted annually for inflation. The credits are effective January 2006, expire December 2009 and can be carried forward for 20 years. Based on our understanding of the legislation and subject to final determination of an oil price range, we could earn up to $4.0 million per year of credits that will reduce federal income taxes.

 

 

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Principal Shareholder

 

Saratoga Partners III, L.P. has informed us that it is a New York based investment firm managed by Saratoga Management Company LLC making private equity investments in partnership with management in the business services and manufacturing industries. Saratoga Partners was founded in 1984 as the corporate buyout group of Dillon, Read & Co. Inc. and has been independent since 1998. Saratoga Partners is an experienced firm, having led buyout investments in 33 companies.

 

Corporate Information

 

We are a Pennsylvania corporation. Our principal offices are located at 436 Seventh Avenue, Pittsburgh, Pennsylvania 15219-1800. Our telephone number is (412) 227-2001. We maintain a website at www.koppers.com. The information contained on or linked to from our website does not constitute a part of this prospectus and is not incorporated by reference herein.

 

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Table of Contents

The Offering

 

Shares of common stock offered by us

             shares.

 

Shares of common stock offered by the selling shareholders

             shares.

 

Shares of common stock to be outstanding following the offering

             shares.

 

Use of Proceeds

We estimate that the net proceeds to us of this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $            . We intend to use approximately $             of the net proceeds to redeem up to $             aggregate principal amount of Koppers Inc.’s 9 7/8% senior secured notes due 2013 at a price of 109 7/8% of the principal amount thereof plus accrued and unpaid interest and to use the balance for general corporate purposes. See “Use of Proceeds.”

 

 

We will not receive any proceeds from the sale of shares by the selling shareholders.

 

Dividend Policy

Our board of directors is expected to adopt a dividend policy, effective upon the closing of this offering, which reflects its judgment that our stockholders would be better served if we distributed to them, as regular quarterly dividends, a portion of the cash generated by our business in excess of our expected cash needs rather than retaining it or using the cash for other purposes. Our expected cash needs include operating expenses and working capital requirements, interest and principal payments on our indebtedness, capital expenditures, incremental costs associated with being a public company, taxes and certain other costs.

 

 

In accordance with our dividend policy, we currently intend to pay an initial dividend of $              per share on or about                     , 2005 and to continue to pay quarterly dividends at an annual rate of $              per share for the first full year following the closing of this offering, subject to our board of directors’ decision to declare these dividends and various restrictions on our ability to do so. We are not required to pay dividends, and our shareholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may decide, in its discretion, at any time, to decrease the amount of dividends, otherwise modify or repeal the dividend policy or discontinue entirely the payment of dividends.

 

 

Our ability to pay dividends will be restricted by current and future agreements governing our debt, including Koppers Inc.’s credit agreement, the indentures governing our senior discount notes and Koppers Inc.’s senior secured notes and by Pennsylvania law.

 

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Table of Contents
 

Since we are a holding company, substantially all of the assets shown on our consolidated balance sheet are held by our subsidiaries. Accordingly, our earnings and cash flow and our ability to pay dividends are largely dependent upon the earnings and cash flows of our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends. Koppers Inc., our largest operating subsidiary, is a party to a credit agreement that restricts its ability to pay dividends to us.

 

 

See “Risk Factors—Risks Relating to Our Dividend Policy—You may not receive dividends because our board of directors could, in its discretion, depart from or change our dividend policy at any time” and “Dividend Policy.”

 

Listing

We will apply to have our common stock listed on the New York Stock Exchange under the trading symbol “KOP.”

 

The calculation of shares of common stock to be outstanding after this offering as presented here and throughout this prospectus, unless otherwise indicated, is based on              shares of our common stock outstanding on                     , 2005 and:

 

    assumes the underwriters do not exercise their over-allotment option;

 

    assumes a             -for-one split of our common stock that will occur immediately prior to the consummation of this offering;

 

    excludes              shares of our common stock reserved for issuance under our existing stock option plan; and

 

    assumes the conversion of all of our senior convertible preferred stock into shares of common stock prior to the consummation of this offering.

 

Risk Factors

 

Before making an investment in our common stock, you should consider carefully the information included in the “Risk Factors” section beginning on page 12 of this prospectus, as well as any other information contained in this prospectus.

 

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Table of Contents

Summary Historical Consolidated Financial Data

 

The following table contains our summary historical consolidated financial data for the three years ended December 31, 2004 and as of and for the six months ended June 30, 2005 and 2004 and the twelve months ended June 30, 2005. The summary historical consolidated financial data for each of the years ended December 31, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements. The summary historical consolidated financial data as of and for the six months ended June 30, 2005 and 2004 have been derived from our unaudited consolidated financial statements, which were prepared on the same basis as our audited consolidated financial statements and, in our opinion, reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly present our results of operations and financial condition for such periods. The summary historical consolidated financial data for the twelve months ended June 30, 2005 have been derived by adding our historical consolidated financial data for the year ended December 31, 2004 to our unaudited consolidated financial data for the six months ended June 30, 2005 and subtracting our unaudited consolidated financial data for the six months ended June 30, 2004. This is only a summary and should be read in conjunction with our historical consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

   

Year ended

December 31,


   

Six months

ended

June 30,


   

Twelve

months

ended

June 30,

2005


 
    2002

    2003

    2004

    2004

    2005

   
                      (unaudited)

 
    (in millions, except for per share data)  

Statement of Operations Data:

                                               

Net sales

  $ 776.5     $ 842.9     $ 952.5     $ 476.9     $ 498.3     $ 973.9  

Operating expenses:

                                               

Cost of sales

    659.5       726.0       798.4       402.0       413.5       809.9  

Depreciation and amortization

    28.7       33.7       32.9       16.4       16.2       32.7  

Selling, general and administrative

    44.0       55.6       56.8       26.7       32.7       62.8  

Restructuring and impairment charges (1)

    —         8.5       —         —         —         —    
   


 


 


 


 


 


Total operating expenses

    732.2       823.8       888.1       445.1       462.4       905.4  
   


 


 


 


 


 


Operating profit

    44.3       19.1       64.4       31.8       35.9       68.5  

Equity in earnings (losses) of affiliates (2)

    —         (0.1 )     0.3       0.1       0.3       0.5  

Other income (3)

    9.8       0.1       0.1       —         0.3       0.4  

Interest expense

    22.9       37.7       38.5       17.9       25.3       45.9  
   


 


 


 


 


 


Income (loss) before income tax provision (benefit) and minority interest

    31.2       (18.6 )     26.3       14.0       11.2       23.5  

Income tax provision (benefit) (3)

    13.8       (1.3 )     13.3       7.4       5.8       11.7  

Minority interest

    0.9       1.7       3.4       1.9       0.6       2.1  
   


 


 


 


 


 


Net income (loss) before cumulative effect of accounting change

    16.5       (19.0 )     9.6       4.7       4.8       9.7  

Cumulative effect of change in accounting principle (4)

    —         (18.1 )     —         —         —         —    
   


 


 


 


 


 


Net income (loss)

  $ 16.5     $ (37.1 )   $ 9.6     $ 4.7     $ 4.8     $ 9.7  
   


 


 


 


 


 


Earnings (Loss) Per Share Data (5)

                                               

Basic

  $                  $                  $                  $                  $                  $               

Diluted

  $                  $                  $                  $                  $                  $               

Weighted average common shares outstanding (in millions):

                                               

Basic

                                               

Diluted

                                               

Other Data:

                                               

Operating cash flows

  $ 46.0     $ 12.4     $ 18.5     $ 2.1     $ 13.6     $ 30.0  

Investing cash flows

    (18.3 )     (18.5 )     (20.4 )     (8.4 )     (13.9 )     (25.9 )

Financing cash flows

    (24.6 )     5.0       33.6       1.8       (3.2 )     28.6  

Cash interest

    22.3       20.3       32.8       16.5       19.3       35.6  

Cash taxes

    7.0       8.9       10.1       4.7       4.7       10.1  

EBITDA (6)

    81.9       51.1       94.3       46.4       52.1       100.0  

Unusual items (increasing) decreasing EBITDA (7)

    (9.4 )     17.4       —         —         2.2       2.2  

Capital expenditures

    19.7       19.3       21.2       8.5       8.3       21.0  

Cash dividends declared per common share (8)

  $       $       $       $       $       $    

 

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     Actual

    As Adjusted

     As of June 30, 2005

     (unaudited)
     (in millions)
Balance Sheet Data:               
Cash and cash equivalents    $ 37.8     $             
Working capital      144.9        
Total assets      577.6        
Total debt      515.7        
Total stockholders’ (deficit) (9)      (168.4 )      

(1) Represents the 2003 charges related to (i) the curtailment of production at our carbon materials facility in Woodward, Alabama; (ii) the impairment of our carbon materials port facility in Portland, Oregon as the result of negotiations with a significant customer; (iii) the impairment of certain storage tanks which have been permanently idled; and (iv) the closure of our wood treating facility in Logansport, Louisiana.

 

(2) January 1, 2004 we changed our method of accounting for Koppers (China) Carbon and Chemical Co., Limited from the equity method to consolidation due to our resumption of operating control. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

(3) Other income consists primarily of proceeds from the monetization of tax credits relating to coke production and sales at our facility in Monessen, Pennsylvania. In December 1999, we entered into an agreement with a third party to transfer substantially all of the energy tax credits from our facility in Monessen, Pennsylvania for cash. In 2002 and 2003, we earned $9.8 million and $0.1 million, respectively, for the transfer of tax credits. These tax credits expired on December 31, 2002; the 2003 amount is a retroactive inflation adjustment.

 

(4) Effective January 1, 2003, we changed our method of accounting for asset retirement obligations in accordance with FASB Statement No. 143, Accounting for Asset Retirement Obligations. Previously, we had not been recognizing amounts related to asset retirement obligations. Under the new accounting method, we now recognize asset retirement obligations in the period in which they are incurred if a reasonable estimate of a fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.

 

(5) Earnings per share are calculated by dividing net income less preferred dividends by the weighted average shares outstanding after giving effect to the conversion of our outstanding senior convertible preferred stock into common stock and the             -for-one stock split. Unaudited pro forma as adjusted basic and diluted earnings per share have been calculated in accordance with the SEC rules for initial public offerings. These rules require that the weighted average share calculation give retroactive effect to any changes in our capital structure as well as the number of shares whose sale proceeds will be used to repay any debt as reflected in the pro forma adjustments.

 

(6) EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization and cumulative effect of change in accounting principle. EBITDA is not a presentation made in accordance with generally accepted accounting principles, or GAAP, is not a measure of financial condition or profitability and should not be considered as an alternative to, or more meaningful than, amounts determined in accordance with GAAP, including net income (loss) as an indicator of operating performance or net cash from operating activities as an indicator of liquidity. However, we believe that EBITDA is useful to an investor in evaluating our operating performance because:

 

    EBITDA is widely used by securities analysts and investors to measure a company’s operating performance without regard to items such as interest and debt expense, income tax expense and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired;

 

    EBITDA helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure, our asset base and the cumulative effect of change in accounting principle; and

 

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    EBITDA is used by our management for various purposes, including as a measure of operating performance to assist in comparing performance from period to period on a consistent basis, in presentations to our board of directors concerning our financial performance and as a basis for strategic planning and forecasting.

 

EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:

 

    EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    Although depreciation and amortization are noncash charges, the assets being depreciated will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements;

 

    EBITDA is not calculated identically by all companies; therefore, our presentation of EBITDA may not be comparable to similarly titled measures of other companies; and

 

    EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements.

 

Set forth below is a reconciliation of our net income (loss) to EBITDA:

    

Year ended

December 31,


  

Six months

ended

June 30,


  

Twelve

months

ended

June 30,

2005


     2002

   2003

    2004

   2004

   2005

  
     (in millions)

Net income (loss)

   $ 16.5    $ (37.1 )   $ 9.6    $ 4.7    $ 4.8    $ 9.7

Interest expense

     22.9      37.7       38.5      17.9      25.3      45.9

Depreciation and amortization

     28.7      33.7       32.9      16.4      16.2      32.7

Income tax provision (benefit)

     13.8      (1.3 )     13.3      7.4      5.8      11.7

Cumulative effect of accounting change, net of income taxes

     —        18.1       —        —        —        —  
    

  


 

  

  

  

EBITDA

   $ 81.9    $ 51.1     $ 94.3    $ 46.4    $ 52.1    $ 100.0
    

  


 

  

  

  

 

(7) Our net income (loss) was affected by the following unusual items:
    

Year ended

December 31,


  

Six months

ended

June 30,


  

Twelve

months

ended

June 30,
2005


       2002  

      2003  

    2004

   2004

   2005

  
     (in millions)

Selling, general and administrative expenses (a)

   $ 0.4     $ 2.7     $  —      $  —      $  —      $  —  

Cost of sales (b)

     —         6.3       —        —        2.2      2.2

Restructuring and impairment charges and related charges (c)

     —         8.5       —        —        —        —  

Other (income) (d)

     (9.8 )     (0.1 )     —        —        —        —  
    


 


 

  

  

  

Unusual items (increasing) decreasing EBITDA

   $ (9.4 )   $ 17.4     $ —      $ —      $ 2.2    $ 2.2
    


 


 

  

  

  

 

  (a) Selling, general and administrative expenses included $1.4 million of non-cash bad debt write-offs for customers for 2003. Additionally, selling, general and administrative expenses include $0.4 million and $1.3 million of cash severance charges for 2002 and 2003, respectively.

 

  (b) Cost of sales for 2003 included $6.1 million of cash asset retirement obligation charges related to plant closures and impairments, and $0.2 million of cash severance charges. For 2005, cost of sales includes $1.9 million for expected cash penalties related to the New Zealand anti-trust investigation and $0.3 million of non-cash impairment charges related to our wood treating facility in Montgomery, Alabama.

 

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  (c) Restructuring and impairment charges for 2003 included fourth quarter charges of $3.1 million for the ceasing of production at our carbon materials facility in Woodward, Alabama, $3.1 million for the impairment of assets at the Company’s carbon materials port operation in Portland, Oregon, and $1.0 million for the impairment of certain carbon materials storage tanks which were permanently idled. Additionally, $1.3 million of restructuring costs were incurred for the closure of our wood treating facility in Logansport, Louisiana in the third quarter of 2003. Of the $8.5 million of restructuring and impairment charges, $0.7 million were cash charges consisting primarily of severance charges.

 

  (d) Other income includes cash proceeds from the monetization of Section 29 tax credits of $9.8 million and $0.1 million for 2002 and 2003, respectively.

 

(8) Cash dividends declared per common share gives effect to the conversion of our outstanding senior convertible preferred stock into common stock and the             -for-one stock split.

 

(9) Total stockholders’ (deficit) refers to total assets less total liabilities less minority interest.

 

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RISK FACTORS

 

You should consider carefully each of the risks described below, together with all of the other information contained in this prospectus, before deciding to invest in our common stock.

 

Risks Relating to Our Business

 

We may not be able to compete successfully in any or all of the industry segments in which we operate.

 

The markets in which we operate are highly competitive, and this competition could harm our business, results of operations, cash flow and financial condition. If we are unable to respond successfully to changing competitive conditions, the demand for our products could be affected. We believe that the most significant competitive factor for our products is selling price. Additionally, some of the purchasers of our coke are capable of supplying a portion of their needs from their own coke production as well as from suppliers outside the United States who are able to import coke into the United States and sell it at prices competitive with those of U.S. suppliers. Some of our competitors have greater financial resources and larger capitalization than we do.

 

Demand for our products is cyclical and we may experience prolonged depressed market conditions for our products.

 

Our products are sold primarily in mature markets which historically have been cyclical, such as the aluminum, specialty chemical and utility industries.

 

    The principal consumers of our carbon pitch are primary aluminum smelters. Although the aluminum industry has experienced growth on a long-term basis, there may be cyclical periods of weak demand which could result in decreased primary aluminum production. Our pitch sales have historically declined during such cyclical periods of weak global demand for aluminum.

 

    The principal use of our phthalic anhydride is in the manufacture of plasticizers and flexible vinyl, which are used mainly in the housing and automobile industries. Therefore, a decline in remodeling and construction or global automobile production could reduce the demand for phthalic anhydride.

 

    The principal customers for our coke are U.S. integrated steel producers. The prices at which we will be able to sell our coke in the future will be greatly affected by the demand for coke from the steel industry and the supply of coke from the U.S. integrated steel producers’ own coke production and from foreign sources.

 

    Over the last several years, utility pole demand has declined as utilities in the United States and Australia have reduced spending due to competitive pressures arising from deregulation. Deregulation may continue to negatively affect both the new and replacement pole installation markets.

 

We are dependent on major customers for a significant portion of our net sales, and the loss of one or more of our major customers could result in a significant reduction in our profitability.

 

For the year ended December 31, 2004, our top ten customers accounted for approximately 46% of our net sales. During this period, our two largest customers, Alcoa Inc. and CSX Transportation, Inc., each accounted for approximately 9% and 8%, respectively, of our total net sales. Additionally, an integrated steel company is the only customer for our furnace coke, with a contract to take 100% of our coke production in 2005. The permanent loss of, or a significant decrease in the level of purchases by, one or more of our major customers could result in a significant reduction in our profitability.

 

Fluctuations in the price, quality and availability of our primary raw materials could reduce our profitability.

 

Our operations depend on an adequate supply of quality raw materials being available on a timely basis. The loss of a key source of supply or a delay in shipments could cause a significant increase in our operating

 

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expenses. For example, our operations in Australia and Europe are highly dependent on a relatively small number of freight transportation services. Interruptions in such freight services could impair our ability to receive raw materials and ship finished products in a timely manner. We are also exposed to price and quality risks associated with raw material purchases. Such risks include:

 

    The primary raw material used by our Carbon Materials & Chemicals business is coal tar, a by-product of coke production. A shortage in the supply of domestic coal tar or a reduction in the quality of coal tar could require us to increase coal tar and carbon pitch imports, as well as the use of petroleum substitutes to meet future carbon pitch demand. This could cause a significant increase in our operating expenses.

 

    In certain circumstances coal tar may also be used as an alternative to fuel. Recent increases in energy prices could result in higher coal tar costs which would have to be passed through to our customers. If these costs cannot be passed through, it could result in margin reductions for our coal tar based products.

 

    The availability and cost of softwood and hardwood lumber are critical elements in our production of pole products and railroad crossties, respectively. The supply of trees of acceptable size for the production of utility poles has decreased in recent years in relation to the demand, and we accordingly have been required to pay a higher price for these materials. Historically, the supply and cost of hardwood for railroad crossties have also been subject to availability and price pressures. We may not be able to source wood raw materials at economical prices in the future.

 

    Metallurgical coal is the primary raw material used in the production of coke. An increase in the price of metallurgical coal, or a prolonged interruption in its supply, could increase our operating expenses.

 

    Our price realizations and profit margins for phthalic anhydride have historically fluctuated with the price of orthoxylene and its relationship to our cost to produce naphthalene; however, during periods of excess supplies of phthalic anhydride margins may be reduced despite high levels for orthoxylene prices.

 

If the costs of raw materials increase significantly and we are unable to offset the increased costs with higher selling prices, our profitability will decline.

 

Our products may be rendered obsolete or less attractive by changes in regulatory, legislative or industry requirements.

 

Changes in regulatory, legislative or industry requirements may render certain of our products obsolete or less attractive. Our ability to anticipate changes in these requirements, especially changes in regulatory standards, will be a significant factor in our ability to remain competitive. We may not be able to comply in the future with new regulatory, legislative and/or industrial standards that may be necessary for us to remain competitive and certain of our products may, as a result, become obsolete or less attractive to our customers.

 

The development of new technologies or changes in our customers’ products could reduce the demand for our products.

 

Our products are used for a variety of applications by our customers. Changes in our customers’ products or processes may enable our customers to reduce consumption of the products we produce or make our products unnecessary. Customers may also find alternative materials or processes that no longer require our products. For example, in 2000 our largest carbon pitch customer announced that it was actively pursuing alternative anode technology that would eliminate the need for carbon pitch as an anode binder. The potential development and

 

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implementation of this new technology could seriously impair our ability to profitably market carbon pitch and related co-products. Over 75% of our carbon pitch is sold to the aluminum industry under long-term contracts typically ranging from three to five years. If a new technology were developed that replaced the need for carbon pitch in the production of carbon anodes, it is possible that these contracts would not be renewed in the future.

 

Hazards associated with chemical manufacturing may cause suspensions or interruptions of our operations.

 

Due to the nature of our business, we are exposed to the hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes in our manufacturing facilities or our distribution centers, such as fires, explosions and accidents that could lead to an interruption or suspension of operations. Any disruption could reduce the productivity and profitability of a particular manufacturing facility or of our company as a whole. Other hazards include:

 

    piping and storage tank leaks and ruptures;

 

    mechanical failure;

 

    exposure to hazardous substances; and

 

    chemical spills and other discharges or releases of toxic or hazardous substances or gases.

 

These hazards, among others, may cause personal injury and loss of life, damage to property and contamination of the environment, which could lead to government fines or work stoppage injunctions, cleanup costs and lawsuits by injured persons. While we are unable to predict the outcome of such matters, if determined adversely to us, we may not have adequate insurance to cover related costs or liabilities and, if not, we may not have sufficient cash flow to pay for such costs or liabilities. Such outcomes could harm our customer goodwill and reduce our profitability.

 

We are subject to extensive environmental laws and regulations and may incur costs that have a material adverse effect on our financial condition as a result of continued compliance with, violations of or liabilities under environmental laws and regulations.

 

Like other companies involved in environmentally sensitive businesses, our 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 emission of substances into the air;

 

    the marketing, sale, use and registration of our chemical products, such as creosote; and

 

    other matters relating to environmental protection and various health and safety matters.

 

We have incurred, and expect to continue to incur, significant costs to comply with environmental laws and as a result of remedial obligations. We could incur material costs, including cleanup costs, fines, civil and criminal sanctions and claims by third parties for property damage and personal injury, as a result of violations of or liabilities under environmental laws and regulations. Contamination has been identified and is being investigated and remediated at many of our sites by us or other parties. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental and Other Liabilities Retained or Assumed by Others” and “—Other Environmental Matters.”

 

 

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Actual costs and liabilities to us may exceed forecasted amounts. Moreover, currently unknown environmental issues, such as the discovery of additional contamination or the imposition of additional cleanup obligations with respect to our sites or third party sites, may result in significant additional costs, and potentially significant expenditures could be required in order to comply with future changes to environmental laws and regulations or the interpretation or enforcement thereof. We also are involved in various litigation and proceedings relating to environmental matters and toxic tort claims. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legal Matters” and “Business—Legal Proceedings.”

 

Beazer East and Beazer Limited may not continue to meet their obligations to indemnify us.

 

Under the terms of the asset purchase agreement between us and Koppers Company, Inc. (now known as Beazer East, Inc.) upon the formation of Koppers Inc. in 1988, subject to certain limitations, Beazer East assumed the liability for and indemnified us against (among other things) certain clean-up liabilities for contamination occurring prior to the purchase date at sites acquired from Beazer East and third-party claims arising from such contamination, which we refer to herein as the Indemnity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental and Other Liabilities Retained by Other” and “Business—Legal Proceedings.” Beazer East and Beazer Limited may not continue to meet their obligations. In addition, Beazer East could in the future choose to challenge its obligations under the Indemnity or our satisfaction of the conditions to indemnification imposed on us thereunder. In addition, the government and other third parties also have the right under applicable environmental laws to seek relief directly from us for any and all such costs and liabilities. In July 2004, we entered into an agreement with Beazer East to amend the December 29, 1988 asset purchase agreement to provide, among other things, for the continued tender of pre-closing environmental liabilities to Beazer East under the Indemnity through July 2019. As consideration for the agreement, we agreed to pay Beazer East a total of $7.0 million in four installments over three years and to share toxic tort litigation defense costs arising from any sites acquired from Beazer East. The first two payments of $2.0 million each were made in July 2004 and 2005. Qualified expenditures under the Indemnity are not subject to a monetary limit.

 

Without reimbursement under the Indemnity, the obligation to pay the costs and assume the liabilities relating to these matters would have a material adverse effect on our business, financial condition, cash flow and results of operations. Furthermore, without reimbursement, we could be required to record a contingent liability on our balance sheets with respect to environmental matters covered by the Indemnity, which could result in our having significant additional negative net worth. Finally, the Indemnity does not afford us indemnification against environmental costs and liabilities attributable to acts or omissions occurring after the closing of the acquisition of assets from Beazer East under the asset purchase agreement, nor is the Indemnity applicable to liabilities arising in connection with other acquisitions by us after that closing.

 

The insurance that we maintain may not fully cover all potential exposures.

 

We maintain property, casualty and workers’ compensation insurance but such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage, of our insurance policies, including liabilities for environmental compliance and remediation. In addition, from time to time, various types of insurance for companies in our industry have not been available on commercially acceptable terms or, in some cases, have not been available at all. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.

 

Adverse, weather conditions may negatively affect our operating results.

 

Our quarterly operating results fluctuate due to a variety of factors that are outside our control, including inclement weather conditions, which in the past have affected negatively our operating results. For example, adverse weather conditions have at times negatively impacted our supply chain as wet conditions impacted

 

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logging operations, reducing our ability to procure crossties. In addition, adverse weather conditions have had a negative impact on our customers in the roofing and pavement sealer businesses, resulting in a negative impact on our sales of these products. Moreover, demand for many of our products declines during periods of inclement weather.

 

We are subject to risks inherent in foreign operations, including changes in social, political and economic conditions.

 

We have operations in the United States, Australasia, China, Europe and South Africa, and sell our products in many foreign countries. In 2003 and 2004, net sales from our products sold by Koppers Europe ApS and Koppers Australia Pty Ltd. accounted for approximately 34% of our total net sales in both years. Like other global companies, we are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates. Our international revenues could be reduced by currency fluctuations or devaluations. Changes in currency exchange rates could lower our reported revenues and could require us to reduce our prices to remain competitive in foreign markets, which could also reduce our profitability. We have not historically hedged our financial statement exposure and, as a result, we could incur unanticipated losses. We are also subject to potentially increasing transportation and shipping costs associated with international operations. Furthermore, we are also exposed to risks associated with changes in the laws and policies governing foreign investments in countries where we have operations as well as, to a lesser extent, changes in U.S. laws and regulations relating to foreign trade and investment.

 

Our strategy to selectively pursue complementary acquisitions may present unforeseen integration obstacles or costs.

 

Our business strategy includes the potential acquisition of businesses and entering into joint ventures and other business combinations that we expect would complement and expand our existing products and the markets where we sell our products and improve our market position. We may not be able to successfully identify suitable acquisition or joint venture opportunities or complete any particular acquisition, combination, joint venture or other transaction on acceptable terms. We cannot predict the timing and success of our efforts to acquire any particular business and integrate the acquired business into our existing operations. Also, efforts to acquire other businesses or the implementation of other elements of this business strategy may divert managerial resources away from our business operations. In addition, our ability to engage in strategic acquisitions may depend on our ability to raise substantial capital and we may not be able to raise the funds necessary to implement our acquisition strategy on terms satisfactory to us, if at all. Our failure to identify suitable acquisition or joint venture opportunities may restrict our ability to grow our business. In addition, we may not be able to successfully integrate businesses that we acquire in the future, which could have a material adverse effect on our business, results of operations and financial condition.

 

Our joint venture agreement for operations in China may require continued investment, limiting our ability to pursue other opportunities.

 

In 1999, we entered into a joint venture agreement with TISCO to rehabilitate and operate a tar distillation facility in China. Koppers (China) Carbon and Chemical Co., Limited, or Koppers China, is 60% owned by us and began production of coal tar products in 2001. TISCO has guaranteed a bank loan of Koppers China, and we have issued a cross-guarantee to it in the amount of approximately $1.5 million, representing 60% of the loan amount. This joint venture may require continued investment or credit support, which may limit our ability to invest in other attractive opportunities.

 

We are the subject of ongoing investigations regarding our competitive practices, which may result in a material adverse effect on our business, financial condition, cash flows or results of operations.

 

In April 2005, the New Zealand Commerce Commission, or the NZCC, filed a statement of claim in the High Court of New Zealand against a number of corporate and individual defendants, including Koppers

 

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ArchWood Protection (NZ) Limited, or KANZ. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legal Matters—Governmental Investigations.” KANZ is seeking to cooperate with the NZCC and has engaged in settlement discussions with the NZCC. Although such settlement discussions are continuing, a settlement has not yet been reached. It is likely that penalties will be paid as a result of the proceedings. Except as set forth above, we are not currently aware of any other claims (civil or governmental) related to competitive practices in New Zealand.

 

Koppers Arch Wood Protection (Aust) Pty Limited, or Koppers Arch Australia, has made an application for leniency under the Australian Competition and Consumer Commission’s, or the ACCC, policy for cartel conduct. The ACCC has granted immunity to Koppers Arch Australia, subject to the fulfillment of certain conditions, such as, but not limited to, continued cooperation. If the conditions are not fulfilled, Koppers Arch Australia may be penalized for any violations of the competition laws of Australia. We are not currently aware of any civil claims related to competitive practices in Australia.

 

We have reserved $1.9 million for these penalties as of June 30, 2005. This amount is included in cost of sales.

 

KANZ and Koppers Arch Australia are majority-owned subsidiaries of Koppers Arch Investments, which is an Australian joint venture owned 51% by World-Wide Ventures Corporation (our indirect subsidiary) and 49% by Hickson Nederland BV. KANZ and Koppers Arch Australia manufacture and market wood preservative products throughout New Zealand and Australia, respectively.

 

We are not currently aware of any other government investigations or other claims related to these investigations of industry competitive practices.

 

Litigation against us could be costly and time consuming to defend, and due to the nature of our business and products, we may be liable for damages arising out of our acts or omissions.

 

We produce hazardous chemicals that require appropriate procedures and care to be used in handling them or using them to manufacture other products. As a result of the hazardous nature of some of the products we use and produce, we may face product liability claims relating to incidents involving the handling, storage and use of and exposure to our products. For example:

 

    Koppers Inc., along with other defendants, has been named as a defendant in 19 cases filed in state court in Pennsylvania and three cases filed in state court in Texas in which the plaintiffs claim they suffered a variety of illnesses (including cancer) as a result of exposure to one or more of the defendants’ products, including coal tar pitch and solvents. The first of these cases was filed in April 2000 and the most recent was filed in September 2005. The other defendants vary from case to case and include companies such as Beazer East, Inc., USX Corporation, Honeywell, Inc., Reilly Industries, Inc., Dow Chemical Company, Rust-Oleum Corporation, UCAR Carbon Company, Inc., Exxon Mobil Corporation, Crompton Corporation, SGL Carbon Corporation, Alcoa, Inc. Henkel Corporation, Univar USA, Inc. and PPG Architectural Finishes Inc. Plaintiffs’ complaints seek compensatory and punitive damages in unspecified amounts in excess of the minimum jurisdictional limits of the applicable courts. The cases are in the early stages of discovery. Therefore, no determination can currently be made as to the likelihood or extent of any liability of Koppers Inc. Although Koppers Inc. is vigorously defending these cases, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

   

Koppers Inc., together with various co-defendants (including Beazer East), has been named as a defendant in five toxic tort lawsuits in state court in Mississippi and in two toxic tort lawsuits in federal court in Mississippi arising from the operation of the Grenada facility. The complaints allege that plaintiffs were exposed to harmful levels of various toxic chemicals, including creosote,

 

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pentachlorophenol and dioxin, as a result of soil, surface water and groundwater contamination and air emissions from the Grenada facility and, in four of the five state court cases, from an adjacent manufacturing facility operated by Heatcraft, Inc. In the state court actions, which include a total of approximately 225 plaintiffs, each plaintiff seeks compensatory damages from the defendants of at least $5.0 million for each of seven counts and punitive damages of at least $10.0 million for each of three counts. In the federal court action referred to as the Beck case, there were originally a total of approximately 110 plaintiffs. Pursuant to an order granting defendants’ Motion to Sever, the Court dismissed the claims of 98 plaintiffs without prejudice to their right to refile their complaints. Each plaintiff in the Beck case seeks compensatory damages from the defendants in an unspecified amount and punitive damages of $20.0 million for each of four counts. In the federal court action referred to as the Ellis case, there are approximately 1,130 plaintiffs. Each plaintiff in the Ellis case seeks compensatory damages from the defendants of at least $5.0 million for each of seven counts and punitive damages of at least $10.0 million for each of three counts. The Mississippi Supreme Court recently ruled in favor of Koppers Inc.’s motion to transfer venue of four of the five state court cases to Grenada County, Mississippi (the fifth case was already filed in Grenada County) and to sever the claims of the plaintiffs. All of the state court cases which were not originally filed in Grenada County are in the process of being transferred to Grenada County. After such cases have been transferred to Grenada County, the stay of discovery in such cases will likely be lifted. Discovery in the federal court cases also has been stayed, except with respect to 12 plaintiffs in the Beck federal case. The Court ordered that the claims of the 12 Beck plaintiffs must be tried separately. The first of these trials is scheduled to commence on April 17, 2006. The remaining 11 trials are scheduled to commence at the rate of approximately one trial per calendar quarter beginning upon the conclusion of the first trial. Three plaintiffs in these cases have also filed a motion for injunctive relief contending that their properties are no longer habitable. They have requested remediation or, alternatively, condemnation of their properties. Koppers Inc. is vigorously contesting the motion. Based on the experience of Koppers Inc. in defending previous toxic tort cases, we do not believe that the damages sought by the plaintiffs in the state court and federal court actions are supported by the facts of the cases. Although Koppers Inc. intends to vigorously defend these cases, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

In addition, we are regularly subject to legal proceedings and claims that arise in the ordinary course of business, such as workers’ compensation claims, governmental investigations, employment disputes, customer and supplier disputes, toxic tort claims and product liability claims arising out of the conduct of our business. Litigation could result in substantial costs and may divert management’s attention and resources, which could have a material adverse impact on our financial condition and results of operations.

 

Labor disputes could disrupt our operations and divert the attention of our management and may cause a decline in our production and a reduction in our profitability.

 

Of our employees, approximately 62% are represented by 22 different labor unions and covered under numerous labor contracts. The United Steelworkers of America, covering workers at six facilities, accounts for the largest membership, with more than 300 employees. Another significant affiliation is the Paper, Allied-Industrial, Chemical & Energy Workers’ International Union, with more than 200 employees at four facilities. Labor contracts that expire in 2005 cover approximately 21% of our total employees. We may not be able to reach new agreements without union action or on terms satisfactory to us. Any future labor disputes with any such unions could result in strikes or other labor protests which could disrupt our operations and divert the attention of our management from operating our business. If we were to experience a strike or work stoppage, it may be difficult for us to find a sufficient number of employees with the necessary skills to replace these employees. Any such labor disputes could cause a decline in our production and a reduction in our profitability.

 

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Our pension obligations are currently underfunded. We may have to make significant cash payments to our pension plans, which would reduce the cash available for our business.

 

As of December 31, 2004, our projected benefit obligation under our defined benefit pension plans exceeded the fair value of plan assets by approximately $49.5 million. The underfunding was caused, in part, by recent fluctuations in the financial markets that have caused the valuation of the assets in our defined benefit pension plans to decrease. During the year ended December 31, 2004, we contributed $14.7 million to our pension plans. For the year 2005, as of June 30, 2005, we contributed $5.2 million. Management expects that we will make an additional contribution in 2005 of approximately $5.0 million. Management expects that any future obligations under our pension plans that are not currently funded will be funded from our future cash flow from operations. If our contributions to our pension plans are insufficient to fund the pension plans adequately to cover our future pension obligations, the performance of the assets in our pension plans does not meet our expectations or other actuarial assumptions are modified, our contributions to our pension plans could be materially higher than we expect, which would reduce the cash available for our business.

 

This offering may cause us to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code, which may limit our ability to utilize our net operating loss benefit and certain other tax attributes.

 

As of December 31, 2004, our net operating loss benefit before valuation allowances was approximately $20.9 million. Under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change of control net operating loss benefit and other pre-change tax attributes against its post-change income may be limited. Although no definite determination can be made at this time, there is a significant possibility that this offering (along with other changes in ownership that have occurred within the past three years) will cause us to undergo an ownership change under the Internal Revenue Code. In addition, if we undergo an ownership change, we may be limited in our ability to use certain “built-in losses” or “built-in deductions” that exist at the time of the ownership change. These limitations may have the effect of reducing our after-tax cash flow. Even if this offering does not cause an ownership change to occur, we may undergo an ownership change after the offering due to subsequent changes in ownership of our common stock.

 

We have a substantial amount of indebtedness, which could harm our ability to operate our business, remain in compliance with debt covenants, make payments on our debt and pay dividends.

 

As of June 30, 2005, we and our subsidiaries had approximately $             million of indebtedness (excluding trade payables and intercompany indebtedness) after giving effect to this offering and the use of proceeds therefrom, consisting primarily of our senior discount notes, Koppers Inc.’s senior secured notes and $45.0 million of indebtedness under our senior secured credit facility.

 

The degree to which we are leveraged could have important consequences, including:

 

    our ability to satisfy our obligations under our debt could be affected and any failure to comply with the requirements, including financial and other restrictive covenants, of any of our debt agreements could result in an event of default under the agreements governing such indebtedness;

 

    substantial portion of our cash flow from operations will be required to make interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;

 

    our ability to obtain additional financing in the future may be impaired;

 

    we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage;

 

    our flexibility in planning for, or reacting to, changes in our business and industry may be limited;

 

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    our degree of leverage may make us more vulnerable in the event of a downturn in our business, our industry or the economy in general; and

 

    our ability to pay dividends to our shareholders.

 

Furthermore, we and our subsidiaries may be able to incur substantial additional indebtedness in the future. If we incur additional indebtedness, the risks associated with our substantial leverage, including our ability to service our debt, would increase. The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, cash flows and business prospects.

 

Restrictions in our debt agreements could limit our growth and our ability to respond to changing conditions and, in the event of a default, all of these borrowings become immediately due and payable.

 

Koppers Inc.’s senior secured credit facility and the indentures governing our senior discount notes and Koppers Inc.’s senior secured notes contain a number of significant covenants in addition to covenants restricting the incurrence of additional debt. These covenants limit our ability, among other things, to:

 

    incur or guarantee additional debt and issue certain types of preferred stock;

 

    pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated debt;

 

    make investments;

 

    create liens on our assets;

 

    enter into sale and leaseback transactions;

 

    sell assets;

 

    engage in transactions with our affiliates;

 

    create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;

 

    consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; and

 

    transfer or issue shares of stock of subsidiaries.

 

In addition, Koppers Inc.’s senior secured credit facility contains other and more restrictive covenants. Additionally, it requires us to maintain certain financial ratios and satisfy certain financial condition tests and require us to take action to reduce our debt or take some other action to comply with them.

 

These restrictions could limit our ability to obtain future financings, make needed capital expenditures, withstand a future downturn in our business or the economy in general or otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of the limitations that the restrictive covenants under Koppers Inc.’s senior secured credit facility and the indentures governing our senior discount notes and Koppers Inc.’s senior secured notes impose on us.

 

A breach of any of these covenants would result in a default under the applicable debt agreement. A default, if not waived, could result in acceleration of the debt outstanding under the agreement and in a default with respect to, and acceleration of, the debt outstanding under our other debt agreements and the indentures governing our senior discount notes and senior secured notes. The accelerated debt would become immediately due and payable. If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us. See “Description of Certain Indebtedness.”

 

Our substantial negative net worth may require us to maintain additional working capital.

 

As of June 30, 2005, on a pro forma basis after giving effect to this offering and the use of proceeds herefrom, we had negative net worth of approximately $            , resulting from the recent use of borrowings to

 

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fund dividends. See “Dividend Policy.” Our negative net worth may make it difficult for us to obtain credit from suppliers, vendors and other parties. In addition, some of our suppliers and vendors may require us to prepay for services or products or may impose less advantageous terms on timing of payment. Our ability to enter into hedging transactions may also be limited by our negative net worth. As a result, we may require additional working capital, which may negatively affect our cash flow and liquidity.

 

We may incur significant charges in the event we close all or part of a manufacturing plant or facility.

 

We periodically assess our manufacturing operations in order to manufacture and distribute our products in the most efficient manner. Based on our assessments, we may make capital improvements to modernize certain units, move manufacturing or distribution capabilities from one plant or facility to another plant or facility, discontinue manufacturing or distributing certain products or close all or part of a manufacturing plant or facility. For example, we incurred $8.5 million in restructuring and impairment charges which included the curtailment of production at our Woodward, Alabama facility and the closure of our Logansport, Louisiana facility. The closure of all or part of a manufacturing plant or facility could result in future charges which could be significant.

 

We depend on our senior management team and the loss of any member could adversely affect our operations.

 

Our success is dependent on the management, experience and leadership skills of our senior management team. Our senior management team has an average of 27 years of industry experience. The loss of any of these individuals or an inability to attract, retain and maintain additional personnel with similar industry experience could prevent us from implementing our business strategy. We cannot assure you that we will be able to retain our existing senior management personnel or to attract additional qualified personnel when needed.

 

Risks Relating to Our Common Stock and This Offering

 

You will incur immediate and substantial dilution as a result of this offering.

 

Investors purchasing shares of our common stock in this offering will incur immediate and substantial dilution in net tangible book value per share because the price that new investors pay will be substantially greater than the net tangible book value per share of the shares acquired. See “Dilution.” This dilution is due in large part to the fact that our existing investors paid substantially less than the initial public offering price of the shares of common stock being sold in this offering when they purchased their shares. To the extent that we raise additional capital by issuing equity securities or shares of our common stock are issued upon the exercise of stock options or under our employee stock purchase plan, investors may experience additional substantial dilution.

 

Our stock price may be extremely volatile, and you may not be able to resell your shares at or above the public offering price.

 

There has been significant volatility in the market price and trading volume of equity securities, which is unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our common stock. The initial public offering price for the shares of common stock being sold in this offering will be determined by negotiations between the representative of the underwriters and us and may not be indicative of prices that will prevail in the open market following this offering. You may not be able to resell your shares at or above the initial public offering price due to fluctuations in the market price of our common stock caused by changes in our operating performance or prospects and other factors.

 

Some specific factors that may have a significant effect on our common stock market price include:

 

    actual or anticipated fluctuations in our operating results or future prospects;

 

    the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission, or the SEC;

 

    strategic actions by us or our competitors, such as acquisitions or restructurings;

 

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    new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    adverse conditions in the financial markets or general economic conditions, including those resulting from war, incidents of terrorism and responses to such events;

 

    sales of common stock by us or members of our management team; and

 

    changes in stock market analyst recommendations or earnings estimates regarding our common stock, other comparable companies or the aluminum or railroad industry generally.

 

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the New York Stock Exchange or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering.

 

Future sales, or the perception of future sales, of a substantial amount of our common stock may depress the price of the shares of our common stock.

 

Future sales, or the perception or the availability for sale in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities at a time and price that we deem appropriate.

 

Upon consummation of this offering, there will be              shares of common stock outstanding. The shares of common stock sold by us and the selling shareholders in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining shares of common stock owned by our existing equity investors will be restricted securities within the meaning of Rule 144 under the Securities Act but will be eligible for resale subject to applicable volume, manner of sale, holding period and other limitations of Rule 144. We, our executive officers and directors and the selling shareholders have agreed to a “lock-up,” meaning that, subject to specified exceptions, neither we nor they will sell any shares or engage in any hedging transactions without the prior consent of the representatives of the underwriters for 180 days after the date of this prospectus. Following the expiration of this 180-day lock-up period, all of these              shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. Finally, our existing equity investors have certain registration rights with respect to the common stock that they will retain following this offering. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future.

 

We may issue shares of our common stock, or other securities, from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of our common stock or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. We may also grant registration rights covering those shares or other securities in connection with any such acquisitions and investments. Any additional capital raised through the sale of our equity securities may dilute your percentage ownership in us.

 

You may not receive dividends because our board of directors could, in its discretion, depart from or change our dividend policy at any time, because of restrictions in our debt agreements or because of restrictions imposed by Pennsylvania law.

 

We are not required to pay dividends, and our shareholders will not be guaranteed, or have contractual rights, to receive dividends. Our board of directors may decide at any time, in its discretion, to decrease the amount of dividends, otherwise change or revoke the dividend policy or discontinue entirely the payment of

 

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dividends. Our board of directors could depart from or change our dividend policy, for example, if it were to determine that we had insufficient cash to take advantage of other opportunities with attractive rates of return or if we failed to be profitable. In addition, if we do not pay dividends, for whatever reason, your shares of our common stock could become less liquid and the market price of our common stock could decline. The ability of Koppers Inc. and its subsidiaries to pay dividends or make other payments or distributions to us will depend on our operating results and may be restricted by, among other things, the covenants in Koppers Inc.’s senior secured credit facility, the covenants of any future outstanding indebtedness we or our subsidiaries incur and by Pennsylvania law. Furthermore, we are a holding company with no operations, and unless we receive dividends, distributions, advances, transfers of funds or other payments from our subsidiaries, we will be unable to pay dividends on our common stock. See “Dividend Policy.”

 

Our principal shareholder is in a position to affect our ongoing operations, corporate transactions and other matters and its interests may conflict with or differ from your interests as a shareholder.

 

Upon the consummation of this offering, Saratoga Partners III, L.P. and its affiliates will own approximately         % of our common stock. As a result, Saratoga Partners III, L.P. and its affiliates effectively will be able to control the outcome on virtually all matters submitted to a vote of our shareholders, including the election of directors. So long as Saratoga Partners III, L.P. and its affiliates continue to own a significant portion of the outstanding shares of our common stock, it will continue to be able to significantly influence the election of our directors, subject to compliance with applicable New York Stock Exchange requirements, our decisions, policies, management and affairs and corporate actions requiring shareholder approval, including the approval of transactions involving a change in control. The interests of Saratoga Partners III, L.P. and its affiliates may not coincide with the interests of our other shareholders. In particular, Saratoga Partners III, L.P. and its affiliates are in the business of making investments in companies and it may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Saratoga Partners III, L.P. and its affiliates may also pursue, for their own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

 

Provisions of our charter documents may inhibit a takeover, which could negatively affect our stock price.

 

Provisions of our charter documents and the Business Corporation Law of Pennsylvania, the state in which we are organized, could discourage potential acquisition proposals or make it more difficult for a third party to acquire control of our company, even if doing so might be beneficial to our shareholders. Our Articles of Incorporation and Bylaws provide for various procedural and other requirements that could make it more difficult for shareholders to effect certain corporate actions. For example, our Articles of Incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock without any vote or action by our shareholders. Our board of directors can therefore authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock. Additional provisions that could make it more difficult for shareholders to effect certain corporate actions include:

 

    Our board of directors will be classified into three classes. Each director will serve a three year term and will stand for re-election once every three years.

 

    Our shareholders will be able to remove directors only for cause by the affirmative vote of the holders of a majority of the outstanding shares of our capital stock entitled to vote in the election of directors. Vacancies on our board of directors may be filled only by our board of directors.

 

    Our Articles of Incorporation will not permit shareholder action without a meeting by consent except for the unanimous consent of all holders of our common stock. It also will provide that special meetings of our shareholders may be called only by the board of directors or the chairman of the board of directors.

 

    Our Bylaws will provide that shareholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of shareholders must provide timely notice of their proposal in writing to the corporate secretary.

 

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See “Description of Capital Stock.” These provisions may discourage acquisition proposals and may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting stock or may delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively affect our stock price.

 

We will need to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act of 2002 or if we fail to achieve and maintain adequate internal controls over financial reporting, our business, results of operations and financial condition could be materially adversely affected.

 

We are required to comply with the periodic reporting obligations of the Securities Exchange Act of 1934, or the Exchange Act, including preparing annual reports and quarterly reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, we are required under applicable law and regulations to integrate our systems of internal controls over financial reporting, and we are presently evaluating our existing internal controls with respect to the standards adopted by the Public Company Accounting Oversight Board. During the course of our evaluation, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. Although our review is not complete, we have taken steps to improve our internal control structure by engaging a consulting firm to assist us in the analysis of, and planning for, improving our internal controls, as well as the implementation of any such plans. However, we cannot be certain at this time that we will be able to comply with all of our reporting obligations and successfully complete the procedures, certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 by the time that we are required to file our Annual Report on Form 10-K for the year ended December 31, 2006. If we fail to achieve and maintain the adequacy of our internal controls and do not address the deficiencies identified in the letter received by our audit committee, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our common stock.

 

Our management and auditors have identified certain deficiencies in the design and operation of our internal controls which, if not properly remediated, could result in material misstatements in our financial statements in future periods and could lead to a material weakness or significant deficiency at the time we complete our initial assessment of internal controls under Section 404 of the Sarbanes-Oxley Act of 2002, or in future assessments under Section 404.

 

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not required to make an assessment of the effectiveness of our internal controls over financial reporting. Further, Ernst & Young LLP, our independent auditor, has not been engaged nor have they expressed an opinion on the effectiveness of our internal control over financial reporting. However, in connection with our financial statement audit, Ernst & Young LLP informed us that they have identified certain deficiencies in the design and operation of our internal controls related to information systems, including deficiencies in the program change management and information security procedures, and accounting for income taxes, including deficiencies in the tax account reconciliation procedures. We are taking steps to remedy the deficiencies, including hiring an information systems consultant to assist in the development and implementation of formal systems procedures, as well as implementing enhanced controls over accounting for taxes. We expect that these control improvements will be completed in 2006. These deficiencies may represent “significant deficiencies” as defined in Auditing Standard No. 2 of the Public Company Accounting Oversight Board (United States). A significant deficiency is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented

 

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or detected. A control deficiency exists when the design or operations of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

 

We are taking remedial measures to improve the effectiveness of our internal controls, and management believes that these efforts will not only address the internal control deficiencies identified above, but also improve the effectiveness of our disclosure and internal controls in the future. We plan to continue to assess our internal controls and procedures and will take further action as necessary or appropriate to address any other matters we identify, including to effect compliance with Section 404 of the Sarbanes-Oxley Act of 2002 when we are required to make an assessment of internal controls under Section 404 for fiscal 2006.

 

 

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FORWARD-LOOKING STATEMENTS

 

Some statements in this prospectus are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and may include, but are not limited to, statements about sales levels, profitability and anticipated expenses and cash outflows. Forward-looking statements can be identified by the use of terminology such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “continue,” “plans,” “intends,” “likely” or other similar words or phrases. We caution you that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from forward-looking statements. These risks and uncertainties include, without limitation, those identified under “Risk Factors” and elsewhere in this prospectus.

 

INDUSTRY AND MARKET DATA

 

Industry and market data used throughout this prospectus were obtained through internal company research, surveys and studies conducted by third parties and industry and general publications.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us of this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $            . We intend to use approximately $             of the net proceeds to purchase stock of Koppers Inc., which will use such proceeds to redeem up to $             aggregate principal amount of its 9 7/8% senior secured notes due 2013 at a price of 109 7/8% of the principal amount thereof plus accrued and unpaid interest, and to use the balance for general corporate purposes.

 

We will not receive any proceeds from the sale of shares by the selling shareholders.

 

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CAPITALIZATION

 

The following table sets forth our cash and capitalization as of June 30, 2005 on an actual basis and as adjusted to give effect to this offering and the use of proceeds. The table below should be read in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes included elsewhere in this prospectus.

 

The table set forth below is based on the number of shares of our common stock outstanding as of June 30, 2005. This table does not reflect              shares of our common stock issuable upon exercise of outstanding stock options and              shares of our common stock available for future issuance under our existing stock option plan as of June 30, 2005.

 

     As of June 30, 2005

     Actual

    As Adjusted

     (in millions)

Cash and cash equivalents (1)

   $ 37.8      
    


 

Long-term debt (including current portion):

            

Revolving credit facility (2)

   $ 53.5      

Other debt (3)

     8.9      

Koppers Inc. 9 7/8% senior secured notes due 2013

     320.0      

KI Holdings 9 7/8% senior discount notes due 2014

     133.3      
    


 

Total debt including current portion

     515.7      
    


 

Stockholders’ (deficit) (4)

     (168.4 )    
    


 

Total capitalization

   $ 347.3      
    


 

(1) Does not reflect a dividend of $35.0 million which was paid in August 2005.

 

(2) Our revolving credit facility had a maximum amount available of $100.0 million, subject to a borrowing base. As of June 30, 2005, we had approximately $36.2 million of additional availability under our revolving credit facility. The balance also includes $8.5 million of debt of Koppers Arch Investments Pty Ltd. In August 2005, Koppers Inc. amended and restated its senior secured credit facility to, among other things, provide for a revolving credit facility of up to $115.0 million and for a term loan of $10.0 million. As of July 31, 2005, the outstanding balance on our revolving credit facility was $58.0 million and we had approximately $31.3 million of additional availability under our revolving credit facility.

 

(3) Other debt consists of $6.4 million for Koppers Europe and $2.5 million of debt for Koppers China.

 

(4) Shareholders’ (deficit) refers to total assets less total liabilities less minority interest and includes (i) $10.7 million of capital in excess of par value, (ii) $(0.6) million for a loan to a director, (iii) $(168.1) million of retained earnings, (iv) $(8.9) million of accumulated other comprehensive loss and (v) $(1.5) million of treasury stock at cost.

 

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DIVIDEND POLICY

 

Our board of directors is expected to adopt a dividend policy, effective upon the closing of this offering, which reflects its judgment that our stockholders would be better served if we distributed to them, as regular quarterly dividends, a portion of the cash generated by our business in excess of our expected cash needs rather than retaining it or using the cash for other purposes. Our expected cash needs include operating expenses and working capital requirements, interest and principal payments on our indebtedness, capital expenditures, incremental costs associated with being a public company, taxes and certain other costs.

 

In accordance with our dividend policy, we currently intend to pay an initial dividend of $             per share on or about                      , 2005 and to continue to pay quarterly dividends at an annual rate of $             per share for the first full year following the closing of this offering, subject to our board of directors’ decision to declare these dividends and various restrictions on our ability to do so. We are not required to pay dividends, and our shareholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may decide, in its discretion, at any time, to decrease the amount of dividends, otherwise modify or repeal the dividend policy or discontinue entirely the payment of dividends.

 

Our ability to pay dividends will be restricted by current and future agreements governing our debt, including Koppers Inc.’s credit agreement, the indentures governing our senior discount notes and Koppers Inc.’s senior secured notes and by Pennsylvania law.

 

Since we are a holding company, substantially all of the assets shown on our consolidated balance sheet are held by our subsidiaries. Accordingly, our earnings and cash flow and our ability to pay dividends are largely dependent upon the earnings and cash flows of our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends. Koppers Inc., our largest operating subsidiary, is a party to a credit agreement that restricts its ability to pay dividends to KI Holdings Inc.

 

Koppers Inc.’s credit agreement prohibits it from making dividend payments to us unless (1) such dividend payments are permitted by the indenture governing Koppers Inc.’s senior secured notes, (2) no event of default or potential default has occurred or is continuing under the credit agreement and (3) Koppers Inc. has at least $15 million of undrawn availability under the credit agreement. See “Description of Indebtedness—Senior Secured Credit Facility of Koppers Inc.”

 

The indentures restrict our ability to pay dividends. As of June 30, 2005, we would have generated cash available to pay dividends of $47.7 million under the indentures. In addition, after November 15, 2009, we will be required to pay cash interest on our senior discount notes, which will decrease our cash available to pay dividends. See “Description of Indebtedness—9 7/8 Senior Secured Notes due 2013 of Koppers Inc.” and “9 7/8 Senior Discount Notes due 2014 of KI Holdings.”

 

Our ability to pay dividends is also restricted by Pennsylvania law. Under Pennsylvania law, a corporation has the power, subject to restrictions in its bylaws, to pay dividends or make other distributions to its shareholders unless, after giving effect thereto, (1) the corporation would not be able to pay its debts as they become due in the usual course of business or (2) the corporation’s assets would be less than the sum of its total liabilities plus (unless otherwise provided in its articles) the amount that would be needed upon the dissolution of the corporation to satisfy the preferential rights, if any, of the shareholders having superior preferential rights to the shareholders receiving the distribution. Under Pennsylvania law, a corporation’s board of directors may base its determination that a distribution is not prohibited by the second test on a number of valuation methods. Our board of directors may make a determination, based on a valuation other than book value, that a particular dividend may be paid notwithstanding our negative net worth. Our bylaws and articles contain no restrictions regarding dividends.

 

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Historically, we have used a combination of earnings and borrowings to fund dividends. More recently, beginning in October 2003, we primarily used borrowings to fund dividends, which resulted in our current negative net worth. Dividends declared and paid since October 2003 are as follows:

 

October 2003

  $45.0 million

December 2003

  $25.0 million

July 2004

  $  8.5 million

November 2004

  $95.0 million

July 2005

  $35.0 million

 

None of these dividends were paid pursuant to any agreement.

 

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DILUTION

 

If you purchase shares of our common stock, you will experience immediate and substantial dilution. Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering will exceed the net tangible book value per share of common stock after the offering. The net tangible book value per share presented below is equal to the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of our common stock outstanding as of June 30, 2005. Our net tangible book value as of June 30, 2005 would have been $            , or $             per share of common stock. This represents an immediate increase in net tangible book value of $             per share to the existing shareholders and an immediate dilution in net tangible book value of $             per share to new investors.

 

The following table illustrates this dilution on a per share basis:

 

     No Exercise of
Over-Allotment
Option


   Full Exercise of
Over-Allotment
Option


Assumed initial public offering price per share

   $                 $             

Net tangible book value per share before the offering at June 30, 2005

             

Increase in net tangible book value per share attributable to the offering

             

Pro forma as adjusted net tangible book value per share after the offering

             
    

  

Dilution per share to new investors

   $      $  

 

The following table summarizes, on the same pro forma as adjusted basis as of June 30, 2005, the total number of shares of common stock purchased from us or from the selling shareholders, the total consideration paid and the average price per share paid by the existing shareholders and by new investors purchasing shares in this offering:

 

       Shares Purchased

     Total Consideration

     Average Price
Per Share


       Number

     Percent

     Amount

     Percent

    

Existing shareholders

                        %      $                               %      $             

New investors

                                      
      
    

  

    

      

Total

            100.00 %    $        100.00 %       
      
    

  

    

      

 

The tables and calculations above give effect to the         -for-one stock split that will be effected prior to the consummation of this offering. The tables and calculations above assume no exercise of the underwriters’ over-allotment option.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following table contains our selected historical consolidated financial data for the five years ended December 31, 2004 and as of and for the six months ended June 30, 2005 and 2004. The selected historical consolidated financial data for each of the five years ended December 31, 2004, 2003, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements. The selected historical consolidated financial data as of and for the six months ended June 30, 2005 and 2004 have been derived from our unaudited consolidated financial statements, which were prepared on the same basis as our audited consolidated financial statements and, in our opinion, reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly present our results of operations and financial condition for such periods. The selected historical consolidated financial data for the twelve months ended June 30, 2005 have been derived by adding our historical consolidated financial data for the year ended December 31, 2004 to our unaudited consolidated financial data for the six months ended June 30, 2005 and subtracting our unaudited consolidated financial data for the six months ended June 30, 2004. This is only a summary and should be read in conjunction with our historical consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    Year ended December 31,

   

Six months

ended

June 30,


   

Twelve
months
ended
June 30,

2005


 
    2000

    2001

    2002

    2003

    2004

    2004

    2005

   
                                  (unaudited)

 
    (in millions, except for per share data)  

Statement of Operations Data:

                                                               

Net sales

  $ 770.6     $ 753.7     $ 776.5     $ 842.9     $ 952.5     $ 476.9     $ 498.3     $ 973.9  

Operating expenses:

                                                               

Cost of sales

    645.9       631.4       659.5       726.0       798.4       402.0       413.5       809.9  

Depreciation and amortization (1)

    30.0       30.4       28.7       33.7       32.9       16.4       16.2       32.7  

Selling, general and administrative

    45.4       46.3       44.0       55.6       56.8       26.7       32.7       62.8  

Restructuring and impairment charges (2)

    —         3.3       —         8.5       —         —         —         —    
   


 


 


 


 


 


 


 


Total operating expenses

    721.3       711.4       732.2       823.8       888.1       445.1       462.4       905.4  
   


 


 


 


 


 


 


 


Operating profit

    49.3       42.3       44.3       19.1       64.4       31.8       35.9       68.5  

Equity in earnings (losses) of affiliates (3)

    2.2       0.3       —         (0.1 )     0.3       0.1       0.3       0.5  

Other income (4)

    8.6       8.2       9.8       0.1       0.1       —         0.3       0.4  

Interest expense

    28.0       24.5       22.9       37.7       38.5       17.9       25.3       45.9  
   


 


 


 


 


 


 


 


Income (loss) before income tax provision (benefit) and minority interest

    32.1       26.3       31.2       (18.6 )     26.3       14.0       11.2       23.5  

Income tax provision (benefit) (4)

    16.6       12.1       13.8       (1.3 )     13.3       7.4       5.8       11.7  

Minority interest

    0.8       0.9       0.9       1.7       3.4       1.9       0.6       2.1  
   


 


 


 


 


 


 


 


Net income (loss) before cumulative effect of accounting change

    14.7       13.3       16.5       (19.0 )     9.6       4.7       4.8       9.7  

Cumulative effect of change in accounting principle (5)

    —         —         —         (18.1 )     —         —         —         —    
   


 


 


 


 


 


 


 


Net income (loss)

  $ 14.7     $ 13.3     $ 16.5     $ (37.1 )   $ 9.6     $ 4.7     $ 4.8     $ 9.7  
   


 


 


 


 


 


 


 


Earnings (Loss) Per Share Data (6)

                                                               

Basic

  $            $            $            $            $            $            $            $    

Diluted

  $       $            $            $            $            $            $            $    

Weighted average common shares outstanding (in millions):

                                                               

Basic

                                                               

Diluted

                                                               

Other Data:

                                                               

Operating cash flows

  $ 36.7     $ 59.5     $ 46.0     $ 12.4     $ 18.5     $ 2.1     $ 13.6     $ 30.0  

Investing cash flows

    (29.6 )     (18.3 )     (18.3 )     (18.5 )     (20.4 )     (8.4 )     (13.9 )     (25.9 )

Financing cash flows

    (17.2 )     (41.6 )     (24.6 )     5.0       33.6       1.8       (3.2 )     28.6  

Cash interest

    26.6       25.0       22.3       20.3       32.8       16.5       19.3       35.6  

Cash taxes

    9.4       8.6       7.0       8.9       10.1       4.7       4.7       10.1  

EBITDA (7)

    89.3       80.3       81.9       51.1       94.3       46.4       52.1       100.0  

Unusual items (increasing) decreasing EBITDA (8)

    (5.4 )     (1.9 )     (9.4 )     17.4       —         —         2.2       2.2  

Capital expenditures

    14.8       14.6       19.7       19.3       21.2       8.5       8.3       21.0  

Acquisitions (9)

    15.3       6.4       —         —         —         —         5.8       5.8  

Cash dividends declared per common share (10)

  $       $       $       $       $       $       $       $    

 

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Table of Contents
     Actual

    As Adjusted

     As of June 30, 2005

     (unaudited)
     (in millions)

Balance Sheet Data:

              

Cash and cash equivalents

   $ 37.8     $             

Working capital

     144.9        

Total assets

     577.6        

Total debt

     515.7        

Total stockholders’ (deficit) (11)

     (168.4 )      

 

(1) The 2002, 2003, 2004 and 2005 amounts do not include goodwill amortization as a result of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill amortization amounted to $1.3 million and $1.5 million for 2000 and 2001, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

(2) Represents the 2003 charges related to (i) the curtailment of production at our carbon materials facility in Woodward, Alabama; (ii) the impairment of our carbon materials port facility in Portland, Oregon as the result of negotiations with a significant customer; (iii) the impairment of certain storage tanks which have been permanently idled; and (iv) the closure of our wood treating facility in Logansport, Louisiana. The 2001 charges were related to the closure of our facility in Feather River, California.

 

(3) January 1, 2004 we changed our method of accounting for Koppers China from the equity method to consolidation due to our resumption of operating control. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

(4) Other income consists primarily of proceeds from the monetization of tax credits relating to coke production and sales at our facility in Monessen, Pennsylvania. In December 1999, we entered into an agreement with a third party to transfer substantially all of the energy tax credits from our facility in Monessen, Pennsylvania for cash. In 2000, 2001, 2002 and 2003, we earned $8.6 million, $8.2 million, $9.8 million and $0.1 million, respectively, for the transfer of tax credits. These tax credits expired on December 31, 2002; the 2003 amount is a retroactive inflation adjustment.

 

(5) Effective January 1, 2003, we changed our method of accounting for asset retirement obligations in accordance with FASB Statement No. 143, Accounting for Asset Retirement Obligations. Previously, we had not been recognizing amounts related to asset retirement obligations. Under the new accounting method, we now recognize asset retirement obligations in the period in which they are incurred if a reasonable estimate of a fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.

 

(6) Earnings per share are calculated by dividing net income less preferred dividends by the weighted average shares outstanding after giving effect to the conversion of our outstanding senior convertible preferred stock into common stock and the         -for-one stock split. Unaudited pro forma as adjusted basic and diluted earnings per share have been calculated in accordance with the SEC rules for initial public offerings. These rules require that the weighted average share calculation give retroactive effect to any changes in our capital structure as well as the number of shares whose sale proceeds will be used to repay any debt as reflected in the pro forma adjustments.

 

(7) EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization and cumulative effect of change in accounting principle. EBITDA is not a presentation made in accordance with generally accepted accounting principles, or GAAP, is not a measure of financial condition or profitability and should not be considered as an alternative to, or more meaningful than, amounts determined in accordance with GAAP, including net income (loss) as an indicator of operating performance or net cash from operating activities as an indicator of liquidity. However, we believe that EBITDA is useful to an investor in evaluating our operating performance because:

 

   

EBITDA is widely used by securities analysts and investors to measure a company’s operating performance without regard to items such as interest and debt expense, income tax expense and depreciation and

 

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Table of Contents
 

amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired;

 

    EBITDA helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure, our asset base and the cumulative effect of change in accounting principle; and

 

    EBITDA is used by our management for various purposes, including as a measure of operating performance to assist in comparing performance from period to period on a consistent basis, in presentations to our board of directors concerning our financial performance and as a basis for strategic planning and forecasting.

 

   EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:

 

    EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements;

 

    EBITDA is not calculated identically by all companies; therefore, our presentation of EBITDA may not be comparable to similarly titled measures of other companies; and

 

    EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements.

 

   Set forth below is a reconciliation of our net income (loss) to EBITDA:

 

    Year ended December 31,

  Six months
ended June 30,


 

Twelve
months
ended

June 30,

2005


      2000  

    2001  

    2002  

    2003  

      2004  

  2004

  2005

 
    (in millions)

Net income (loss)

  $ 14.7   $ 13.3   $ 16.5   $ (37.1 )   $ 9.6   $ 4.7   $ 4.8   $ 9.7

Interest expense

    28.0     24.5     22.9     37.7       38.5     17.9     25.3     45.9

Depreciation and amortization

    30.0     30.4     28.7     33.7       32.9     16.4     16.2     32.7

Income tax provision (benefit)

    16.6     12.1     13.8     (1.3 )     13.3     7.4     5.8     11.7

Cumulative effect of accounting change, net of income taxes

    —       —       —       18.1       —       —       —       —  
   

 

 

 


 

 

 

 

EBITDA

  $ 89.3   $ 80.3   $ 81.9   $ 51.1     $ 94.3   $ 46.4   $ 52.1   $ 100.0
   

 

 

 


 

 

 

 

 

(8) Our net income (loss) was affected by the following unusual items:

 

    Year ended December 31,

  Six months
ended June 30


 

Twelve

months
ended
June 30,

2005


      2000  

      2001  

      2002  

      2003  

      2004  

  2004

  2005

 
    (in millions)

Selling, general and administrative expenses (a)

  $ 3.2     $ 3.0     $ 0.4     $ 2.7     $   —     $   —     $   —     $   —  

Cost of sales (b)

    —         —         —         6.3       —       —       2.2     2.2

Restructuring and Impairment Charges and related charges (c)

    —         3.3       —         8.5       —       —       —       —  

Other (income) (d)

    (8.6 )     (8.2 )     (9.8 )     (0.1 )     —       —       —       —  
   


 


 


 


 

 

 

 

Unusual items (increasing) decreasing EBITDA

  $ (5.4 )   $ (1.9 )   $ (9.4 )   $ 17.4     $   —     $   —     $ 2.2   $ 2.2
   


 


 


 


 

 

 

 

 

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  (a) Selling, general and administrative expenses included $3.2 million, $2.1 million and $1.4 million of non-cash bad debt write-offs for customers for 2000, 2001 and 2003 respectively. Additionally, selling, general and administrative expenses include $0.9 million, $0.4 million and $1.3 million of cash severance charges for 2001, 2002 and 2003 respectively.

 

  (b) Cost of sales for 2003 included $6.1 million of cash asset retirement obligation charges related to plant closures and impairments, and $0.2 million of cash severance charges. For 2005, cost of sales includes $1.9 million for expected cash penalties related to the New Zealand anti-trust investigation and $0.3 million of non-cash impairment charges related to the Company’s wood treating facility in Montgomery, Alabama.

 

  (c) Restructuring and impairment charges for 2001 of $3.3 million (all of which were cash charges) are related to the closure of our facility in Feather River, California. Restructuring and impairment charges for 2003 included fourth quarter charges of $3.1 million for the ceasing of production at our carbon materials facility in Woodward, Alabama, $3.1 million for the impairment of assets at the Company’s carbon materials port operation in Portland, Oregon, and $1.0 million for the impairment of certain carbon materials storage tanks which were permanently idled. Additionally, $1.3 million of restructuring costs were incurred for the closure of our wood treating facility in Logansport, Louisiana in the third quarter of 2003. Of the $8.5 million of restructuring and impairment charges in 2003, $0.7 million were cash charges consisting primarily of severance charges.

 

  (d) Other income includes cash proceeds from the monetization of Section 29 tax credits of $8.6 million, $8.2 million, $9.8 million and $0.1 million for 2000, 2001, 2002 and 2003, respectively.

 

(9) Acquisitions include the purchase of the remaining 50% of our equity ownership in the European operations of Tarconord A/S, now known as Koppers Europe ApS, in May 2000 and the acquisition of the business and assets of Lambson Speciality Chemicals Limited, a subsidiary of Lambson Group Limited, in April 2005.

 

(10) Cash dividends declared per common share gives effect to the conversion of our outstanding senior convertible preferred stock into common stock and the             -for-one stock split.

 

(11) Total stockholders’ (deficit) refers to total assets less total liabilities less minority interest.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We are a leading integrated global provider of carbon compounds and commercial wood treatment products. Our products are used in a variety of niche applications in a diverse range of end-markets, including the aluminum, railroad, specialty chemical, utility, rubber and steel industries. We provide products which represent only a small portion of our customers’ costs but are essential inputs into the products they produce and the services they provide. In the aggregate, we believe that we maintain the number one market position by volume in a majority of our principal product lines in North America, Australia and Europe. Approximately 56% of our net sales for 2004 were generated from products in which we have the number one market share position by volume in those three geographic regions. We serve our customers through a comprehensive global manufacturing and distribution network, including 35 manufacturing facilities located in North America, Australasia, China, Europe and South Africa. We conduct business in 73 countries with over 2,600 customers, many of which are leading companies in their respective industries, including Alcoa Inc., CSX Transportation, Inc., Union Pacific Railroad Company, Norfolk Southern Corporation and Burlington Northern Santa Fe Railway. We believe that our customers place significant value on our industry-leading “Koppers” brand, which for more than 70 years has maintained a reputation for quality, reliability and customer service. We maintain long-standing relationships with many of our customers and have conducted business with our top ten customers for an average of 16 years. For the twelve months ended June 30, 2005, we generated net sales of $973.9 million and EBITDA of $100.0 million.

 

We operate two principal businesses, Carbon Materials & Chemicals and Railroad & Utility Products. Through our Carbon Materials & Chemicals business (58% of 2004 net sales), we are the largest distiller of coal tar in North America, Australia, the United Kingdom and Scandinavia. We process coal tar into a variety of products, including carbon pitch, creosote and phthalic anhydride, which are critical intermediate materials in the production of aluminum, the pressure treatment of wood and the production of plasticizers and specialty chemicals, respectively. Through our Railroad & Utility Products business (42% of 2004 net sales), we are the largest North American supplier of railroad crossties. Our other commercial wood treatment products include the provision of utility poles to the electric and telephone utility industries.

 

Our businesses and results of operations are impacted by various competitive and other factors including (i) raw materials pricing and availability, in particular the amount and quality of coal tar available in global markets, which could be negatively impacted by the relative increase in the value of coal tar as a fuel source as a result of higher fuel prices; (ii) global restructuring in the Carbon Materials & Chemicals business, including the curtailment of aluminum production in the Northwestern U.S. in part as a result of historically high energy prices; (iii) competitive conditions in global carbon pitch markets, particularly the United States and European carbon pitch markets; and (iv) low margins in the utility pole business.

 

Trend Overview.    Prior to 2004, our gross margins, operating margins, net income and operating cash flows deteriorated. This deterioration resulted primarily from changes in the U.S. economy that have negatively affected our business, including (i) reduced consumption resulting in excess capacity in the U.S. carbon materials and chemicals businesses, due in part to the idling of aluminum smelters in the Northwestern U.S. as a result of higher energy costs; (ii) an increase in imports of furnace coke resulting in reduced pricing and profitability for our coke business; and (iii) highly competitive conditions in the utility pole business partly as the result of deregulation, resulting in reduced margins for us.

 

Although there can be no assurances, we believe some of these trends began to reverse during 2004 and will continue to do so in the future due to certain factors we believe have enhanced our profitability, including (i) the rationalization of capacity in our U.S. carbon materials facilities, which has resulted in lower operating costs; (ii) the resumption of operating control of our Chinese joint venture as of January 1, 2004; (iii) a contract with Mittal Steel Company, N.V. (formerly International Steel Group) in 2004 for 100% of our coke production for a three-year term, resulting in substantially higher pricing for furnace coke in 2004 and 2005, which has resulted in increased

 

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Table of Contents

profitability in our coke business; (iv) the exit from the wood treating business of our largest competitor in the railroad crosstie business, which has resulted in increased volumes of railroad crossties for us in 2004 and 2005 and has provided us with higher profits; and (v) increases in pricing for phthalic anhydride in the U.S.

 

Results of Operations

 

The following table sets forth certain sales and operating data, net of all intersegment transactions, for our businesses for the periods indicated:

 

     Year ended December 31,

    Six months ended June 30,

 
     2002

    2003

    2004

       2004   

       2005   

 

Net sales (in millions):

                                        

Carbon Materials & Chemicals

   $ 438.4     $ 484.1     $ 553.4     $ 276.9     $ 301.4  

Railroad & Utility Products

     338.1       358.8       399.1       200.0       196.9  
    


 


 


 


 


Total

   $ 776.5     $ 842.9     $ 952.5     $ 476.9     $ 498.3  
    


 


 


 


 


Segment sales as percentage of total net sales:

                                        

Carbon Materials & Chemicals

     56.5 %     57.4 %     58.1 %     58.1 %     60.5 %

Railroad & Utility Products

     43.5 %     42.6 %     41.9 %     41.9 %     39.5 %
    


 


 


 


 


Total

     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
    


 


 


 


 


Gross margin by segment (after depreciation and amortization):

                                        

Carbon Materials & Chemicals

     13.4 %     10.9 %     15.1 %     14.1 %     15.4 %

Railroad & Utility Products

     9.2 %     8.9 %     9.3 %     9.8 %     11.2 %
    


 


 


 


 


Total

     11.4 %     9.9 %     12.7 %     12.3 %     13.8 %
    


 


 


 


 


Operating margin by segment:

                                        

Carbon Materials & Chemicals

     6.7 %     1.6 %     8.1 %     7.6 %     7.8 %

Railroad & Utility Products

     5.0 %     3.6 %     4.9 %     5.6 %     6.3 %
    


 


 


 


 


Total

     5.7 %     2.3 %     6.8 %     6.7 %     7.2 %
    


 


 


 


 


 

Comparison of Results of Operations for the Six Months Ended June 30, 2005 and 2004.

 

Net Sales.    Net sales for the six months ended June 30, 2005 were higher than 2004 as higher sales for Carbon Materials & Chemicals more than offset lower sales for Railroad & Utility Products. Net sales for Carbon Materials & Chemicals increased due in part to approximately $4.5 million in sales from Australian and European operations as a result of the strength of these currencies relative to the dollar. Additionally, net sales for Carbon Materials & Chemicals increased as pricing increases of $10.2 million, or 34%, for phthalic anhydride and $7.2 million, or 33%, for furnace coke, primarily as the result of higher raw material costs, more than offset volume reductions of $6.1 million, or 17% for phthalic anhydride and $1.2 million, or 5%, for furnace coke. The volume reductions for phthalic anhydride were due primarily to the conversion of phthalic anhydride to naphthalene in Europe as a result of market conditions and profit optimization. The reduction in coke volumes was due to a temporary production outage by the plant’s largest customer in the second quarter of 2005. Net sales for Railroad & Utility Products decreased compared to the prior year due primarily to weather-related difficulties in procuring raw materials in the first quarter of 2005, and a temporary reduction in requirements of untreated crossties by one of our Class I railroad customers, which resulted in a reduction in the volume of untreated crosstie sales amounting to $9.9 million, or 18%. This reduction was partially offset by an increase in volumes of treated crossties amounting to $5.6 million, or 12%, and an increase in pricing of treated crossties amounting to $1.9 million, or 8%.

 

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Gross Margin After Depreciation and Amortization.    As a percentage of net sales, gross profit after depreciation and amortization increased in total as both business segments reported higher margins. Gross margin for Carbon Materials & Chemicals increased as the increases in pricing for phthalic anhydride and furnace coke noted above were partially offset by lower volumes for both products, as well as higher raw material and logistics costs. Additionally, margins were negatively impacted as the result of a $1.9 million charge related to the anti-trust investigation in New Zealand and $0.8 million of additional environmental reserves for cleanup costs associated with contamination in Australia. Gross margin for Railroad & Utility Products increased due primarily to a reduction in the ratio of low margin untreated crossties to higher margin crosstie treating services due to weather-related difficulties in procuring raw materials.

 

Depreciation and Amortization.    Depreciation and amortization for 2005 decreased compared to the prior year due primarily to certain assets becoming fully depreciated during 2004.

 

Selling, General and Administrative Expense.    Selling, general and administrative expense as a percentage of net sales increased primarily as a result of $1.4 million of increased legal expenses in Australasian operations primarily related to the New Zealand anti-trust investigation and a bad debt recovery of approximately $0.4 million in the first quarter of 2004.

 

Interest Expense.    Interest expense increased due to higher average debt levels as a result of the issuance of our senior discount notes in November 2004.

 

Income Taxes.    Our effective income tax rate for the six months ended June 30, 2005 was relatively unchanged as the effect of the composition of earnings among U.S. and foreign operations (as a result of the earnings of U.S. operations increasing relative to foreign earnings) was largely offset by the effect of higher interest expense.

 

Net Income.    Net income for 2005 compared to the same period last year increased due primarily to higher gross margins as noted above. These changes more than offset higher selling, general and administrative costs related primarily to legal expenses in Australasia, as well as higher interest expense.

 

Comparison of Results of Operations for the Years Ended December 31, 2004 and 2003.

 

Net Sales.    Net sales for the year ended December 31, 2004 were higher than 2003 as both business segments reported sales increases. Net sales for Carbon Materials & Chemicals increased due in part to approximately $30.4 million in sales from Australian and European operations as a result of the strength of these foreign currencies relative to the dollar. Also, the consolidation of Koppers China as of January 1, 2004 resulted in incremental sales of $25.5 million compared to the prior year. Additionally, sales pricing for phthalic anhydride and furnace coke increased by $15.3 million and $9.7 million, or 27% and 25%, respectively. These increases were partially offset by reductions in volumes and prices for carbon pitch amounting to $4.4 million and $2.1 million, respectively, and reductions in pricing for naphthalene of $10.6 million, which was more than the volume increase of $8.4 million for naphthalene. The increase in prices for phthalic anhydride is due to the fact that the primary feedstock is a petroleum derivative which reflects higher oil prices. The increase in prices for furnace coke is related to a reduction in Asian imports as a result of higher demand for steel in Asian markets due to economic expansions in China and other Asian nations. Net sales for Railroad & Utility Products increased compared to the prior year due primarily to increases of $6.3 million and $8.2 million, or 3% and 7%, in volumes and prices, respectively, for railroad crossties. In addition, other products and services including utility poles resulted in volume increases amounting to $8.5 million. Ancillary crosstie products and services revenues also increased by approximately $12.5 million in conjunction with the increased crosstie volumes. The increase in volumes for railroad crossties was due in part to the exit from the wood treating business of our largest competitor.

 

Gross Margin After Depreciation and Amortization.    As a percentage of net sales, gross profit after depreciation and amortization increased for both Carbon Materials & Chemicals and Railroad & Utility Products. Gross margin for Carbon Materials & Chemicals increased due to $4.7 million of charges for asset retirement obligations in 2003 due to restructuring, coupled with $1.7 million of gains on settlements of asset retirement obligations during 2004. Gross margin for Carbon Materials & Chemicals also increased due to the increases in

 

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pricing for phthalic anhydride and furnace coke noted above. These increases more than offset a $0.5 million charge for the settlement of a contract dispute with a customer. Gross margin for Railroad & Utility Products increased due primarily to higher volumes for railroad crossties.

 

Depreciation and Amortization.    Depreciation and amortization for 2004 decreased compared to the prior year due primarily to restructuring activities in 2003 which reduced depreciation expense that would have been incurred on impaired assets by approximately $1.2 million in 2004.

 

Selling, General and Administrative Expense.    Selling, general and administrative expense as a percentage of net sales decreased primarily as a result of higher sales in the current year, plus $1.4 million of bad debt write-offs and $1.3 million of severance charges in the prior year, which offset an increase of $3.0 million as a result of foreign exchange rates and an increase of $2.2 million of management incentive and restricted stock compensation expense in the current year.

 

Restructuring and Impairment Charges.    During the fourth quarter of 2003 we determined that capacity rationalization was required in our U.S. Carbon Materials & Chemicals business to increase competitiveness. Accordingly, in December 2003 we ceased production at our carbon materials facility in Woodward, Alabama, resulting in a restructuring charge to fourth quarter pre-tax income of $3.1 million. Additionally, during the fourth quarter of 2003 we concluded that our carbon materials port operation in Portland, Oregon was an impaired facility based on its current and long-term economic prospects. The impairment charge for this facility resulted in a charge to fourth quarter pre-tax income of $3.1 million. We also incurred a $1.0 million charge for the impairment of certain storage tanks which were permanently idled due to reduced demand for carbon materials products in U.S. markets. In September 2003, we closed our Logansport, Louisiana wood treating plant due to deteriorating local market conditions. The closure resulted in a $1.3 million restructuring charge in the third quarter. We believe the U.S. market for wood treated utility poles suffers from overcapacity, and will continue to evaluate future productivity and cost reduction initiatives in this and all of our other businesses.

 

Interest Expense.    Interest expense increased due to higher debt levels in 2004 which more than offset $14.2 million of additional interest expense in 2003 due to the refinancing of our debt. The additional interest expense in 2003 from the refinancing included a call premium, the write-off of deferred financing costs, and additional interest for the period between the receipt of proceeds from Koppers Inc.’s $320 million 9 7/8% senior secured notes due 2013, or the Senior Secured Notes, and the redemption of the $175 million 9 7/8% senior subordinated notes due 2007.

 

Income Taxes.    Our effective income tax rate for the year ended December 31, 2004 increased due primarily to the composition of earnings among U.S. and foreign operations.

 

Cumulative Effect of Accounting Change.    Effective January 1, 2003, we changed our method of accounting for asset retirement obligations in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations. Previously, we had not been recognizing amounts related to asset retirement obligations. Under the new accounting method, Koppers Inc. now recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The cumulative effect of the change on prior years resulted in a charge to income of $18.1 million, net of income taxes of $11.7 million.

 

Net Income.    Net income for 2004 compared to the same period last year increased due primarily to the January 1, 2003 adoption of SFAS No. 143, Accounting for Asset Retirement Obligations, which resulted in a cumulative effect adjustment for 2003. Additionally, net income before the cumulative effect of accounting change was higher in 2004 due to higher volumes and pricing of certain products, $2.7 million of net income from the consolidation of China which included improved operating results and $1.7 million of net income as a result of higher exchange rates, while net income in 2003 was adversely affected due to certain restructuring, impairment and related charges.

 

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Comparison of Results of Operations for the Years Ended December 31, 2003 and 2002.

 

Net Sales.    Net sales for the year ended December 31, 2003 were higher than 2002 as both business segments reported sales increases. Net sales for Carbon Materials & Chemicals increased due primarily to approximately $39.8 million in sales from Australian and European operations as a result of the strength of these foreign currencies relative to the dollar. Additionally, sales volumes and pricing for phthalic anhydride increased by $3.1 million and $4.4 million or 7% and 8%, respectively, while a reduction in volumes for furnace coke of $4.3 million or 11% more than offset an increase in pricing for furnace coke of $2.7 million or 8%. The increases in pricing and volumes for phthalic anhydride were due to an increase in domestic demand. The reduction in volumes for furnace coke was due primarily to unusually high volumes in 2002 as a result of selling 2001 production for which shipment was delayed due to a temporary shutdown by our only coke customer at that time. The increase in pricing for furnace coke was due to a reduction in foreign imports as a result of increased foreign demand. Net sales for Railroad & Utility Products increased compared to the prior year due primarily to a $14.8 million or 12% increase in prices for railroad crossties which more than offset a $6.3 million or 5% reduction in volumes for railroad crossties. The increase in prices for railroad crossties was due to rising raw material prices as a result of higher demand for housing lumber; the reduction in volumes for railroad crossties was primarily due to reduced sales volumes to short-line railroads, as the demand for housing lumber reduced raw material availability and resulted in a higher proportion of our sales to the Class 1 railroad customer base. In addition, other products and services including utility poles resulted in volume decreases and pricing increases of $6.2 million and $11.9 million, respectively.

 

Gross Margin After Depreciation and Amortization.    As a percent of net sales, gross profit after depreciation and amortization decreased for both segments. Gross margin for Carbon Materials & Chemicals decreased primarily as a result of approximately $3.1 million of accelerated asset retirement obligations and $1.4 million for the settlement of a lease obligation, all related to the restructuring of the U.S. Carbon Materials & Chemicals operations (see “—Restructuring and Impairment Charges”). These items more than offset the profit realized as a result of the pricing increase for furnace coke noted above and a reversal to profit of approximately $0.7 million of environmental reserves as a result of a reassessment of exposure at one of our facilities. Gross margin as compared to the prior year was also impacted by an increase of approximately $1.7 million in insurance expense for Carbon Materials & Chemicals as a result of lower expense in the prior year due to favorable loss experience. Gross margin for Railroad & Utility Products decreased due to $1.6 million of accelerated asset retirement obligations related to the closure of the Logansport facility. Additionally, insurance expense for Railroad & Utility Products increased approximately $1.7 million as a result of lower expense in the prior year due to favorable loss experience. These additional costs more than offset the effect of the increase in prices for railroad crossties noted above.

 

Depreciation and Amortization.    Depreciation and amortization for 2003 increased compared to the prior year due to the adoption of SFAS No. 143, Accounting for Asset Retirement Obligations, which resulted in an increase of $3.3 million, and an additional $1.3 million as a result of higher foreign exchange rates which resulted in higher depreciation expense in Australian and European operations.

 

Selling, General and Administrative Expense.    Selling, general and administrative expense as a percent of net sales increased primarily as a result of approximately $1.3 million in severance charges, $1.4 million of bad debt expense, $2.0 million of higher legal and consulting costs, and $1.5 million of reduced expense in the prior year as a result of retiree health insurance settlements.

 

Restructuring and Impairment Charges.    During the fourth quarter of 2003 we determined that capacity rationalization was required in our U.S. Carbon Materials & Chemicals business to increase competitiveness. Accordingly, in December 2003 we ceased production at our carbon materials facility in Woodward, Alabama, resulting in a restructuring charge to fourth quarter pre-tax income of $3.1 million. The Woodward facility generated approximately $27.5 million of revenue during 2003. Additionally, during the fourth quarter of 2003 we concluded that our carbon materials port operation in Portland, Oregon is an impaired facility based on its current and long-term economic prospects as a result of recent negotiations with a significant customer. The impairment charge for this facility resulted in a charge to fourth quarter pre-tax income of $3.1 million. We also incurred a $1.0 million charge for the impairment of certain storage tanks which were permanently idled due to

 

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reduced demand for carbon materials products in U.S. markets. In September 2003, we closed our Logansport, Louisiana wood treating plant due to deteriorating local market conditions and their impact on volumes and profitability. The closure resulted in a $1.3 million restructuring charge in the third quarter. We believe the U.S. market for wood treated utility poles suffers from overcapacity, and will continue to evaluate future productivity and cost reduction initiatives in this and all of our other businesses. Our Logansport facility generated approximately $2.0 million of revenue during 2003.

 

Other Income.    Other income consists of the energy tax credits as a result of the transaction at our Monessen, Pennsylvania facility. The reduction for 2003 was due to the expiration of the tax credits at the end of 2002.

 

Interest Expense.    Interest expense increased due to a call premium of $5.8 million on our old bonds, the write-off of deferred financing charges of $6.4 million, and additional interest of $2.0 million for the period between the receipt of proceeds from the Senior Secured Notes and the redemption of the $175 million 9 7/8% Senior Subordinated Notes due 2007. (See “—Liquidity and Capital Resources.”)

 

Income Taxes.    Our effective income tax rate for the year ended December 31, 2003 decreased due primarily to domestic pre-tax losses, which resulted in an increase in foreign tax expense as a percentage of total taxes. Due to our legal structure, foreign tax credits are not fully available to offset taxable income generated by Australian operations.

 

Cumulative Effect of Accounting Change.    Effective January 1, 2003, we changed our method of accounting for asset retirement obligations in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations. Previously, we had not been recognizing amounts related to asset retirement obligations. Under the new accounting method, we now recognize asset retirement obligations in the period in which they are incurred if a reasonable estimate of a fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The cumulative effect of the change on prior years resulted in a charge to income of $18.1 million, net of income taxes of $11.7 million.

 

Net Income.    Net income for 2003 compared to the same period last year decreased due to (i) restructuring, impairment and capacity rationalization charges in the U.S. segments as a result of weakened business conditions in the carbon materials and utility pole businesses; (ii) the write-off of deferred financing charges and the payment of a call premium due to the refinancing of our debt; (iii) an increase in bad debt expense; (iv) a decrease in other income due to the expiration of the energy tax credits; and (v) the adoption of SFAS No. 143, Accounting for Asset Retirement Obligations, which resulted in a cumulative effect adjustment.

 

Liquidity and Capital Resources

 

On November 12, 2004, KI Holdings was incorporated. On November 18, 2004, all of the common and preferred stock of Koppers Inc. was converted into shares of common and preferred stock of KI Holdings.

 

On November 18, 2004, KI Holdings issued and sold $203.0 million aggregate principal amount at maturity ($125.5 million gross proceeds) of 9 7/8% Senior Discount Notes due 2014, or the Senior Discount Notes. A portion of the cash proceeds was used to pay a $95.0 million dividend to KI Holdings’ shareholders. KI Holdings has no direct operations and no significant assets other than approximately $24.2 million of cash (at June 30, 2005, prior to the payment of a $35.0 million dividend by us to our shareholders in August 2005) and the stock of Koppers Inc. No cash interest is required to be paid prior to November 15, 2009. The accreted value of each Senior Discount Note will increase from the date of issuance until November 15, 2009, at a rate of 9 7/8% per annum compounded semiannually such that on November 19, 2009 the accreted value will equal $203 million, the principal amount due at maturity. Subsequent to November 19, 2009 cash interest on the Senior Discount Notes will accrue and be payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2010. The Senior Discount Notes are effectively subordinated to our existing and future

 

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secured indebtedness, and are structurally subordinated to all of the existing and future indebtedness and other liabilities and preferred equity of our subsidiaries. The Senior Discount Notes include customary covenants that restrict, among other things, the ability to incur additional debt, pay dividends or make certain other restricted payments, incur liens, merge or sell all or substantially all of the assets or enter into various transactions with affiliates. We are currently in compliance with all covenants in the indenture governing the Senior Discount Notes.

 

In August 2005, Koppers Inc. amended and restated its senior secured credit facility to, among other things, provide for a revolving credit facility of up to $115.0 million and for a term loan of $10.0 million. The senior secured credit facility is for a period of over four years, and the loans are secured by substantially all of Koppers Inc.’s assets, with revolving credit availability based on receivables and inventory as well as the attainment of certain ratios and covenants.

 

The covenants that affect availability of the revolving credit facility and which may restrict the ability of Koppers Inc. to pay dividends include the following financial ratios:

 

    The fixed charge coverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, shall not be less than 1.05 to 1.0. The fixed charge coverage ratio at June 30, 2005 was 1.54 to 1.0.

 

    The total leverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, shall not exceed the ratios set forth below for the periods specified below:

 

Fiscal Quarters Ended


   Ratio

August 15, 2005 through March 31, 2008

   5.0 to 1.0

June 30, 2008 and thereafter

   4.5 to 1.0

 

    The total leverage ratio at June 30, 2005 was 4.0 to 1.0.

 

Concurrent with this offering, Koppers Inc. intends to amend the senior secured credit facility to increase the term loan facility from $10 million to $20 million to provide additional liquidity in connection with the dividend policy. Amortization of the amended term loan will commence in 2006 with quarterly payments of $1.0 million.

 

On October 15, 2003 Koppers Inc. issued $320.0 million aggregate principal amount of 9 7/8% Senior Secured Notes due 2013, or the Senior Secured Notes. Interest is payable semiannually in arrears on April 15 and October 15 of each year. The Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by some of our current and future subsidiaries.

 

The Senior Secured Notes include customary covenants that restrict, among other things, the ability to incur additional debt, pay dividends or make certain other restricted payments, incur liens, merge or sell all or substantially all of the assets or enter into various transactions with affiliates.

 

Koppers Inc. is currently in compliance with all covenants in the indenture governing the Senior Secured Notes and the agreement governing the senior secured credit facility.

 

KI Holdings depends on the dividends from the earnings of Koppers Inc. and its subsidiaries to generate the funds necessary to meet its financial obligations, including payments of principal, interest and other amounts on the Senior Discount Notes. The terms of Koppers Inc.’s senior secured credit facility as well as the terms of the indenture governing the Senior Secured Notes significantly restrict Koppers Inc. from paying dividends and otherwise transferring assets to KI Holdings. The amount of permitted dividends under both debt facilities is governed by a formula based on 50% of consolidated net income, among other things. Cash equity contributions from the sale of stock increase the amount available for dividends. At the time of the payment of the dividend, no

 

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event of default shall have occurred or be continuing under the indenture or the senior secured credit facility. Under the Senior Secured Note indenture Koppers Inc. must have an EBITDA (as defined in the indenture governing the Senior Secured Notes) to consolidated interest expense ratio of at least 2.0 to 1.0. Additionally the senior secured credit facility requires compliance with all financial covenants and availability of at least $15 million under the revolving credit facility after giving effect to the dividend. Significant reductions in net income or increases to indebtedness affecting compliance with financial covenants or availability under the revolving credit line would restrict Koppers Inc.’s ability to pay dividends. Koppers was able to pay a $13 million dividend to us in August 2005.

 

Our liquidity needs are primarily for our estimated contractual obligations totaling $220.7 million for 2005 which include debt service, purchase commitments and operating leases, as well as for working capital, capital maintenance and acquisitions. We believe that our cash flow from operations and available borrowings under Koppers Inc.’s senior secured credit facility will be sufficient to fund our anticipated liquidity requirements for at least the next twelve months. In the event that the foregoing sources are not sufficient to fund our expenditures and service our indebtedness, we would be required to raise additional funds.

 

As of June 30, 2005, we had $37.8 million of cash and cash equivalents and $36.2 million of unused revolving credit availability for working capital purposes after restrictions by various debt covenants and letter of credit commitments. As of June 30, 2005, $18.8 million of commitments were utilized by outstanding standby letters of credit.

 

In August 2005, we received a dividend payment of $13.0 million from Koppers Inc. which was borrowed under the revolving credit facility. Using these proceeds and cash available from the proceeds of our Senior Discount Notes, we declared a dividend totaling $35.0 million ($11.68 per share to common and preferred) on July 28, 2005 to holders of record as of August 1, 2005 which was paid on or about August 5, 2005.

 

Overview of Operating Cash Flows. From fiscal 2002 through fiscal 2004, operating cash flows declined by $27.5 million. The primary reasons for this decline were an increase in inventories of $19.4 million and an increase in pension funding of $7.9 million. Although we expect that inventory levels will not return to 2002 levels, and that pension contributions will remain at high levels for the next several years, we do not believe the deterioration in our operating cash flows between 2002 and 2004 is a trend which will continue prospectively. Pension funding is expected to stabilize or decline as a result of an amendment to our U.S. salaried pension plan which reduced benefits; our expected calendar year 2005 funding is $10.2 million after contributing $14.7 in 2004. Additionally, inventory at June 30, 2005 was $7.4 million lower than at December 31, 2004 partly as a result of our efforts to improve cash flow. We believe our overall efforts to improve cash flow are reflected in the increase in cash flow from operations of $11.5 million for the six months ended June 30, 2005 compared to the same period in 2004.

 

Net cash provided by operating activities for the six months ended June 30, 2005 increased compared to the prior year due primarily to higher net income net of non-cash interest expense and an increase in working capital in 2005 of $17.3 million compared to an increase in working capital in 2004 of $21.4 million. Net cash provided by operating activities increased for full year 2004 as compared to the prior year as higher net income before cumulative effect of accounting change and an increase in the utilization of deferred taxes were partially offset by an increase in working capital in 2004 of $16.0 million compared to an increase in working capital in 2003 of $7.5 million, an $8.6 million increase in pension funding in 2004, and a $2.0 million payment for the extension of the indemnity agreement with Beazer. See “—Environmental and Other Liabilities Retained or Assumed by Others”. The reduction in net cash provided by operating activities in 2003 compared to the prior year was the result of lower earnings as a result of restructuring combined with a higher increase in working capital as compared to the prior year.

 

Net cash used in investing activities for the six months ended June 30, 2005 increased primarily as a result of the acquisition in the United Kingdom described herein and related capital expenditures. Capital expenditures were higher in calendar 2004 than in 2003 due primarily to an increase in capital expenditures in the U.S. carbon

 

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materials business. Capital expenditures were lower in 2003 than in 2002 due to efforts to conserve cash and delays in certain projects due to severe winter weather earlier in the year.

 

Planned expansion at our carbon black facility in Australia is expected to result in capital expenditures of $8-10 million in 2006. Additionally capital expenditures may be incurred in the future due to growth opportunities in existing markets in China.

 

Net cash used in financing activities in 2005 was for debt repayments on the revolving credit facility and the Monessen term loan, offset by new borrowing in the United Kingdom for the acquisition of a chemicals business. Net cash used in financing activities in 2004 related to revolver borrowings of $33.1 million to provide for the payment of $25.0 million in dividends, the repayment of $4.0 million of the term loan and the purchase of $2.1 million of common stock.

 

Net cash used in financing activities in the year ended December 31, 2004 related to the issuance of our Senior Discount Notes to pay a $94.5 million dividend, revolver borrowings of $49.9 million to provide for the payment of $33.4 million in dividends, the repayment of $8.0 million of the term loan, the purchase of $1.5 million of common stock, and the payment of $5.6 million of deferred financing costs. Net cash provided by financing activities in 2003 related to the issuance of $320 million of Koppers Inc.’s Senior Secured Notes to provide for the redemption of $175 million of notes due in 2007, a reduction in the amount of bank debt, payment of $48.1 million of dividends, $9.0 million of purchases of stock from retirees, and the payment of $16.1 million of deferred financing costs. Net cash used in financing activities in 2002 was comprised of term debt repayments of $30.4 million ($6.9 million of which was unscheduled repayment), $9.8 million of dividends and $6.2 million of common stock redemptions. Approximately $22.0 million of net revolver borrowings were necessary to maintain working capital levels.

 

We intend to use the net proceeds of the offering, among other uses, to redeem up to 35% of the aggregate principal amount of Koppers Inc.’s Senior Secured Notes. We plan to use cash from operations for growth opportunities, dividends and to delever.

 

Legal Matters

 

We are involved in litigation and various proceedings relating to environmental laws and regulations and antitrust, toxic tort, product liability and other matters.

 

Government Investigations.    In late 2002, Koppers Inc. contacted the Canadian Competition Bureau, or the CCB, and offered its cooperation with respect to industry competitive practices concerning the production, supply and sales of coal tar pitch, naphthalene, creosote oil and carbon black feedstock. As a result of such cooperation, in April 2003 the CCB granted Koppers Inc. a provisional guarantee of immunity from fines under the Canadian Competition Act with respect to the supply and sale of coal tar pitch, naphthalene, creosote oil and carbon black feedstock prior to 2001. There have been no recent communications with the CCB. Similar investigations of industry competitive practices by the European Commission and the United States Department of Justice have been terminated. Although the CCB has not indicated that its investigation has been terminated, the Company does not currently anticipate any adverse consequences from the CCB’s investigation based on the lack of recent communications from the CCB and the termination of the concurrent investigations by the European Commission and the United States Department of Justice.

 

In April 2005, the New Zealand Commerce Commission, or the NZCC, filed a Statement of Claim in the High Court of New Zealand against a number of corporate and individual defendants, including Koppers Arch Wood Protection (NZ) Limited, or KANZ, Koppers Arch Investments Pty Limited, or Koppers Arch Investments, Koppers Australia Pty Limited, TPL Limited, Nufarm Limited, Nufarm Australia Limited, Osmose New Zealand Limited, Osmose Australia Pty Limited and a number of current and former employees of such companies. This followed an investigation by the NZCC into the competitive practices of the wood preservative industry in New Zealand. The Statement of Claim contains a number of separate causes of action relating to alleged violations of the New Zealand Commerce Act of 1986, or the Act. The statement of claim seeks, among other things, (i) pecuniary penalties for each cause of action in an unspecified amount pursuant to the Act, (ii)

 

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injunctions restraining defendants from further anticompetitive conduct, (iii) orders barring the named individual defendants from certain future corporate positions and (iv) reimbursement of legal costs. The Act provides that the NZCC may seek pecuniary penalties against each corporate defendant for each cause of action not to exceed the higher of $NZ10,000,000 or three times the commercial gain from the contravention or if the commercial gain cannot be readily ascertained, 10% of the turnover of the corporate defendant and all interconnected companies. KANZ is seeking to cooperate with the NZCC and has engaged in settlement discussions with the NZCC. Although such settlement discussions are continuing, a settlement has not yet been reached. It is likely that penalties will be paid as a result of the proceedings. Such penalties could have a material adverse effect on the business, financial condition, cash flows and results of operations of those companies. Except as set forth above, we are not currently aware of any other claims (civil or governmental) related to competitive practices in New Zealand. Such other claims, if asserted and resolved unfavorably, could have a material adverse effect on the business, financial condition, cash flows and results of operations of KANZ and its interconnected companies.

 

Koppers Arch Australia has made an application for leniency under the Australian Competition and Consumer Commission’s, or the ACCC, policy for cartel conduct. The ACCC has granted immunity to Koppers Arch Australia, subject to the fulfillment of certain conditions, such as, but not limited to, continued cooperation. If the conditions are not fulfilled, Koppers Arch Australia may be penalized for any violations of the competition laws of Australia. Such penalties, if assessed against Koppers Arch Australia, could have a material adverse effect on its business, financial condition, cash flows and results of operations. We are not currently aware of any civil claims related to competitive practices in Australia. Such civil claims, if asserted and resolved unfavorably, could have a material adverse effect on the business, financial condition, cash flows and results of operations of Koppers Arch Australia.

 

We have reserved $1.9 million for these penalties as of June 30, 2005. This amount is included in cost of sales.

 

KANZ and Koppers Arch Australia are majority-owned subsidiaries of Koppers Arch Investments, which is an Australian joint venture owned 51% by World-Wide Ventures Corporation (our indirect subsidiary) and 49% by Hickson Nederland BV. KANZ and Koppers Arch Australia manufacture and market wood preservative products throughout New Zealand and Australia, respectively.

 

Pacific Century.    On October 10, 2002, Koppers Timber Preservation Pty Ltd, a subsidiary of Koppers Australia, was named as a defendant in a breach of contract and negligence lawsuit filed by Pacific Century Production Pty Ltd in the Supreme Court of Queensland, Australia related to the sale of approximately 127,000 vineyard trellis posts. The Complaint claimed that certain posts were defective in that they had either decay or excessive bark or were less than the minimum specified size. In addition, plaintiff alleged violations of the Australian Timber Utilization and Marketing Act. Plaintiff sought damages in the amount of AU$6.6 million (approximately US$5.0 million) for, among other things, the costs of removing and replacing the trellis posts. Plaintiff also filed a lawsuit against the constructor of the vineyard trellises, which lawsuit was consolidated with its claim against our subsidiary. Koppers Australia has settled with Pacific Century and is engaged in settlement discussions with Taylor’s Contracting Services Pty, Ltd, the constructor of the trellises; a provision of approximately AU$1.1 million (approximately US$0.8 million) has been made for this matter, of which AU$1.0 million (US$0.7 million) was provided in 2004.

 

Product Liability Cases.    Koppers Inc., along with other defendants, has been named as a defendant in 19 cases filed in state court in Pennsylvania and three cases filed in state court in Texas in which the plaintiffs claim they suffered a variety of illnesses (including cancer) as a result of exposure to one or more of the defendants’ products, including coal tar pitch and solvents. The first of these cases was filed in April 2000 and the most recent was filed in September 2005. The other defendants vary from case to case and include companies such as Beazer East, Inc., USX Corporation, Honeywell, Inc., Reilly Industries, Inc., Dow Chemical Company, Rust-Oleum

 

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Corporation, UCAR Carbon Company, Inc., Exxon Mobil Corporation, Crompton Corporation, SGL Carbon Corporation, Alcoa, Inc. Henkel Corporation, Univar USA, Inc. and PPG Architectural Finishes Inc. Plaintiffs’ complaints seek compensatory and punitive damages in unspecified amounts in excess of the minimum jurisdictional limits of the applicable courts. The cases are in the early stages of discovery. Therefore, no determination can currently be made as to the likelihood or extent of any liability to Koppers Inc. Although Koppers Inc. is vigorously defending these cases, an unfavorable resolution of these matters may have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

Grenada.    Koppers Inc., together with various co-defendants, has been named as a defendant in five toxic tort lawsuits in state court in Mississippi and in two toxic tort lawsuits in federal court in Mississippi arising from the operations of the Company’s wood treating plant in Grenada, Mississippi. See “Environmental and Other Liabilities Retained or Assumed by Others.”

 

Somerville.    Koppers Inc. has been served with a putative class action lawsuit which was filed in June 2005 in federal court in Austin, Texas against it and other defendants including the Burlington Northern Santa Fe Railway Company, Monsanto Company, Dow Chemical Company and Vulcan Materials Company. The lawsuit alleges that several classes of past and present property owners and residents in the Somerville, Texas area numbering in excess of 2,500 have suffered unspecified property damage and risk of personal injury as a result of exposure to various chemicals from the operations of the Somerville, Texas wood treatment plant of Koppers Inc. See “Environmental and Other Liabilities Retained or Assumed by Others.”

 

Other Matters

 

Impairment and Restructuring.    During the second quarter of 2005, we incurred an impairment charge of $0.3 million related to assets at the wood treating facility in Montgomery, Alabama. The impairment charge is related to our expectation that the facility will cease production in September 2005. The planned ceasing of production and closure of the facility is expected to increase capacity utilization at certain other wood treating plants and provide for improved operating efficiencies and profitability for the business. Additional impairment and closure charges of approximately $1.0 million are anticipated for the third quarter of 2005. During 2003 we incurred restructuring and impairment charges of $8.5 million, of which $0.7 were cash charges for severance and related charges. During the second quarter of 2005, approximately $0.2 million of asset retirement obligation reserves related to the Logansport, Louisiana wood treating facility, which was closed in the third quarter of 2003, were reversed to profit as a result of the completion of the closure. At June 30, 2005, all of the cash charges have been paid and there are no remaining reserves.

 

Acquisition of Specialty Chemicals Business.    On April 14, 2005, our subsidiary located in the United Kingdom entered into an agreement to purchase the specialty chemicals business and certain related assets of Lambson Speciality Chemicals Limited. The purchased assets consist primarily of certain assets related to production (excluding land), customer contracts and a non-compete agreement. The purchase price was approximately $10.6 million plus contingent consideration based on earnings of the business over the next two years. The purchase, which was financed by a loan from a lending institution in the United Kingdom, was completed during the second quarter of 2005. The initial purchase price allocation resulted in approximately $6.3 million of property, plant and equipment and $4.9 million of amortizable intangible assets. Additionally, approximately $0.6 million of liabilities were assumed. Bank loans outstanding related to this purchase amounted to $6.4 million at June 30, 2005, and the purchase price also includes $4.5 million of seller financing. Approximately $0.3 million of acquisition costs were incurred prior to 2005. Operating results are included in the statement of operations from the acquisition forward. The pro forma effect of the acquisition for each of the three and six month periods ended June 30, 2005 was immaterial.

 

Stock Purchases by Directors/Restricted Stock Grants to Senior Management.    In August 2004 three members of our board of directors each purchased 5,000 shares of the Company’s common stock at the then current fair value of $13.14 per share. Additionally, in August 2004 we also granted 135,000 restricted stock

 

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units with a fair value of $13.14 per share to certain officers, of which 20% vested August 31, 2004 and 20% vested August 31, 2005. The remaining units will vest annually at a rate of 20% per year. We recorded $0.2 million of compensation expense for the vesting of restricted stock grants during the six months ended June 30, 2005 and $0.7 million of compensation expense for the vesting of restricted stock grants and the issuance of 8,000 shares of common stock with a fair value of $32.00 per share to certain officers in the fourth quarter of 2004.

 

Pension Funding.    We contributed approximately $14.7 million to our U.S. defined benefit pension plans in 2004. Our estimates of our defined benefit pension plan contributions reflect the provisions of the Pension Funding Equity Act of 2004, which was enacted in April 2004. We expect to make contributions of approximately $10.2 million during 2005.

 

Consolidation of Koppers China.    In 1999, we entered into a joint venture agreement with TISCO to rehabilitate and operate a tar distillation facility in China. Koppers China is 60% owned by us and began production of coal tar products in 2001. Contributions of cash, engineering services and acquisition costs for the joint venture total $10.5 million to date. In June 2001, we entered into an agreement with TISCO whereby TISCO assumed control of Koppers China through December 31, 2003. We chose to delay development of the carbon pitch export market due to the restructuring of the North American aluminum smelting capacity. In the interim, TISCO assumed responsibility for the joint venture to develop the domestic Chinese market. During this period, TISCO bore all responsibility for the operations and management of the facility, as well as the net income or loss, except for our pro rata share of depreciation, amortization and income taxes of the joint venture. Accordingly, we changed our method of accounting from consolidation to the equity method effective June 2001 to reflect this change in our ability to control Koppers China.

 

On January 1, 2004, we resumed control of Koppers China, which resulted in the consolidation of Koppers China in our financial statements beginning in the first quarter of 2004. For the six months ended June 30, 2005, net sales and net income for Koppers China amounted to $11.1 million and $1.8 million, respectively. For the twelve months ended December 31, 2004 sales and net income for Koppers China were $25.5 million and $2.7 million, respectively. We anticipate that the profitability of Koppers China will be negatively impacted by the slowing of the Chinese economy and lower selling prices for certain products in the near term.

 

Interest Rate Swap.    In January 2004, we entered into an interest rate swap agreement for $50.0 million of the Senior Secured Notes in order to protect a portion of the debt against changes in fair value due to changes in the benchmark interest rate. The agreement is designed to receive fixed 9.875% and pay floating six-month LIBOR rates plus a spread of 5.395% with semiannual settlements through October 2013. Changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the Senior Secured Notes. The impact on the six months ended June 30, 2005 was to lower interest expense by approximately $0.4 million. The fair value of the swap agreement at June 30, 2005 was a liability of approximately $0.4 million. The impact on the twelve months ended December 31, 2004 was to lower interest expense by approximately $1.1 million. The fair value of the swap agreement at December 31, 2004 was a liability of $0.9 million.

 

Stock Redemptions.    For the six months ended June 30, 2005 and the year ended December 31, 2004, stock redemptions for terminated management investors for which we were not contractually obligated to redeem shares, including retirees, totaled $0.2 million and $1.3 million, respectively. On February 27, 2004 the Stockholders’ Agreement was amended to make the redemption of common stock from the Management Investors at our option after the effective date of the amendment. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”

 

Impact of Deferred Taxes.    Based on our earnings history, along with the implementation of various tax planning strategies, we believe the deferred tax assets on our condensed consolidated balance sheet at June 30, 2005 and on our consolidated balance sheet at December 31, 2004 are realizable.

 

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Foreign Operations and Foreign Currency Transactions.    We are subject to foreign currency translation fluctuations due to our foreign operations. For the six months ended June 30, 2005, exchange rate fluctuations resulted in a decrease to comprehensive income of $4.9 million. Exchange rate fluctuations for fiscal years 2004, 2003 and 2002 resulted in increases to comprehensive income of $5.6 million, $22.6 million and $9.7 million, respectively. We economically hedge certain firm commitments denominated in foreign currencies for periods up to twelve months, depending on the anticipated settlement dates of the related transactions. Forward exchange contracts are utilized to hedge these transactions, and all such contracts are marked to market with the recognition of a gain or loss at each reporting period. Therefore, at June 30, 2005 and at December 31, 2004 and 2003 there were no deferred gains or losses on hedging of foreign currencies. The fair value of derivatives at June 30, 2005 and at December 31, 2004 and 2003 was $0.0 million, $0.1 million and $0.3 million, respectively, and is included in Other Current Assets and Other Current Liabilities. For the six months ended June 30, 2005, $0.1 million of gains on forward exchange contracts are included in costs of sales. For the years ended December 31, 2004, 2003 and 2002, $0.0 million, $0.2 million and $0.0 million, respectively, of losses on forward exchange contracts are included in cost of sales. Realized foreign exchange gains for the six months ended June 30, 2005 and for the years ended December 31, 2004, 2003 and 2002 amounted to, $0.1 million, $0.4 million, $0.3 million and $0.1 million, respectively.

 

Seasonality; Effects of Weather.    Our quarterly operating results fluctuate due to a variety of factors that are outside our control, including inclement weather conditions, which in the past have affected operating results. Operations at several facilities have been halted for short periods of time during the winter months. Moreover, demand for some of our products declines during periods of inclement weather. As a result of the foregoing, we anticipate that we may experience material fluctuations in quarterly operating results.

 

Schedule of Certain Contractual Obligations

 

The following table details our projected payments for our significant contractual obligations as of December 31, 2004. The table is based upon available information and certain assumptions we believe are reasonable.

 

     Payments Due by Period

     Total

   Less than
1 year


   1-3 years

   4-5 years

   After 5
years


     (in millions)

Long-Term Debt

   $ 588.8    $ 23.1    $ 33.7    $ —      $ 532.0

Operating Leases

     94.3      23.5      35.3      22.2      13.3

Environmental Fines

     1.5      1.5      —        —        —  

Beazer Indemnity Extension

     5.0      2.0      3.0      —        —  

Interest on Debt

     388.5      35.0      67.0      64.3      222.2

Pension Funding (1)

     45.7      11.1      20.9      13.7      —  

Purchase Commitments (2)

     536.1      124.1      227.7      134.9      49.4

Stock Liability (3)

     0.8      0.4      0.4      —        —  
    

  

  

  

  

Total Contractual Cash Obligations

   $ 1,660.7    $ 220.7    $ 388.0    $ 235.1    $ 816.9
    

  

  

  

  


(1) Based on projected global contribution requirement for 2005 and projected U.S. contributions only for years beyond 2005.

 

(2) Consists primarily of raw materials purchase contracts. These are typically not fixed price arrangements; the prices are based on the prevailing market prices. As a result we generally expect to be able to hedge the purchases with sales at those future prices.

 

(3) Represents commitments to purchase common stock at December 31, 2004. On February 27, 2004, the stockholders’ agreement was amended to make the redemption of common stock from the Management Investors at our option, after the effective date of the amendment.

 

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The following table details our projected payments for our significant contractual obligations as of December 31, 2004 on a pro forma basis after giving effect to this offering and the use of proceeds here from. The table is based upon available information and certain assumptions we believe are reasonable.

 

     Payments Due by Period

     Total

   Less than
1 year


  

1-3

years


  

4-5

years


   After 5
years


     (in millions)

Long-Term Debt

   $                 $                 $                 $                 $             

Operating Leases

                                  

Environmental Fines

                                  

Beazer Indemnity Extension

                                  

Interest on Debt

                                  

Pension Funding (1)

                                  

Purchase Commitments (2)

                                  

Stock Liability (3)

                                  
    

  

  

  

  

Total Contractual Cash Obligations

   $      $      $      $      $  
    

  

  

  

  


(1) Based on projected global contribution requirement for 2005 and projected U.S. contributions only for years beyond 2005.

 

(2) Consists primarily of raw materials purchase contracts. These are typically not fixed price arrangements; the prices are based on the prevailing market prices. As a result we generally expect to be able to hedge the purchases with sales at those future prices.

 

(3) Represents commitments to purchase common stock at December 31, 2004. On February 27, 2004, the stockholders’ agreement was amended to make the redemption of common stock from the Management Investors at our option, after the effective date of the amendment.

 

Schedule of Certain Other Commercial Commitments

 

The following table details our projected payments for other significant commercial commitments as of December 31, 2004. The table is based upon available information and certain assumptions we believe are reasonable.

 

     Payments Due by Period

     Total

   Less than 1
year


   1-3
years


   4-5
years


   After 5
years


     (in millions)

Lines of Credit (Unused)

   $ 36.9    $ 31.4    $ —      $ —      $ 5.5

Standby Letters of Credit

     18.9      18.9      —        —        —  
    

  

  

  

  

Total Other Commercial Commitments

   $ 55.8    $ 50.3    $ —      $ —      $ 5.5
    

  

  

  

  

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of revenues and expenses, assets and liabilities, and the disclosure of contingent liabilities. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Our management’s estimates are based on the relevant information available at the end of each period.

 

Long-Lived Assets.    Our management periodically evaluates the net realizable value of long-lived assets, including property, plant and equipment, based on a number of factors including operating results, projected

 

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future cash flows and business plans. We record long-lived assets at the lower of cost or fair value, with fair value based on assumptions concerning the amount and timing of estimated future cash flows. Since judgment is involved in determining the fair value of fixed assets, there is a risk that the carrying value of our long-lived assets may be overstated.

 

Goodwill.    Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, under which goodwill is no longer amortized but is assessed for impairment at least on an annual basis. In making this assessment, management relies on various factors, including operating results, estimated future cash flows, and business plans. There are inherent uncertainties related to these factors and in our management’s judgment in applying them to the analysis of goodwill impairment. Since management’s judgment is involved in performing goodwill impairment analyses, there is risk that the carrying value of goodwill is overstated.

 

Goodwill valuations are performed using an average of actual and projected operating results of the relevant reporting units. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods. Additionally, disruptions to our business such as prolonged recessionary periods or unexpected significant declines in operating results of the relevant reporting units could result in charges for goodwill and other asset impairments in future periods.

 

Revenue Recognition.    We recognize revenue from product sales at the time of shipment or when title passes to the customer. We recognize revenue related to the procurement of certain untreated railroad crossties upon transfer of title, which occurs upon delivery to our plant and acceptance by the customer. Service revenue, consisting primarily of wood treating services, is recognized at the time the service is provided.

 

Inventories.    In the United States, Carbon Materials & Chemicals (excluding furnace coke) and Railroad & Utility Products inventories are valued at the lower of cost, utilizing the last-in, first-out basis, or market. Inventories outside the United States are valued at the lower of cost, utilizing the first in, first-out basis, or market. Market represents replacement cost for raw materials and net realizable value for work in process and finished goods. Last-in, first-out inventories constituted approximately 59% and 55% of the first-in, first-out inventory value at December 31, 2004 and 2003, respectively.

 

Accrued Insurance.    We are insured for property, casualty and workers’ compensation insurance up to various stop loss amounts after meeting required retention levels. Losses are accrued based upon estimates of the liability for the related retentions for claims incurred using certain actuarial assumptions followed in the insurance industry and based on our experience. In the event we incur a significant number of losses beyond the coverage retention limits, additional expense beyond the actuarial projections would be required.

 

Pension and Postretirement Benefits.    Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided far into the future and allocating that cost over the time period each employee works. This calculation requires extensive use of assumptions regarding inflation, investment returns, mortality, medical costs, employee turnover and discount rates. In determining the expected return on plan assets assumptions, we evaluate long-term actual return information, the mix of investments that comprise plan assets and estimates of future investment returns. In selecting rates for current and long-term health care assumptions, we take into consideration a number of factors including our actual health care cost increases, the design of our benefit programs, the characteristics of our active and retiree populations and expectations of inflation rates. Since these items require our management’s judgment, the related liabilities currently recorded by us could be lower or higher than amounts ultimately required to be paid.

 

Accounts Receivable.    We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts is recorded against amounts due. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

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Environmental Liabilities.    We are subject to federal, state, local and foreign laws and regulations and potential liabilities relating to the protection of the environment and human health and safety, including, among other things, the cleanup of contaminated sites, 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. We expect to incur substantial costs for ongoing compliance with such laws and regulations. We may also incur costs as a result of governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with past and present operations. We accrue for environmental liabilities when a determination can be made that they are probable and reasonably estimable. Total environmental reserves at June 30, 2005, December 31, 2004 and December 31, 2003 were approximately $3.5 million, $4.7 million and $7.5 million, respectively, which include provisions primarily for environmental fines and remediation matters.

 

Legal Matters.    We record liabilities related to legal matters when an adverse outcome is probable and reasonably estimable. To the extent we anticipate favorable outcomes to these matters which ultimately result in adverse outcomes, we could incur material adverse impacts on earnings and cash flows. Since such matters require significant judgments on the part of management, the recorded liabilities could be lower than what is ultimately required.

 

Asset Retirement Obligations.    We measure asset retirement obligations based upon the applicable accounting guidance, using certain assumptions including estimates regarding the recovery of residues in storage tanks. In the event that operational or regulatory issues vary from our estimates, we could incur additional significant charges to income and increases in cash expenditures related to the disposal of those residues.

 

Deferred Tax Assets.    At June 30, 2005 and at December 31, 2004, our balance sheet includes $55.8 million and $60.3 million, respectively, of deferred tax assets. We have determined that a reserve of $6.9 million is required for these deferred tax assets, based on future earnings projections. To the extent that we encounter unexpected difficulties in market conditions, adverse changes in regulations affecting our businesses and operations, adverse outcomes in legal and environmental matters, or any other unfavorable conditions, the projections for future taxable income may be overstated and we may be required to record an increase in the valuation allowance related to these deferred tax assets which could have a material adverse effect on income in the future.

 

Recently Issued Accounting Guidance

 

In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, Accounting Changes and Error Corrections, or SFAS 154. SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle, and requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, and early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS 154 is issued. SFAS 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS 154.

 

In April 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, or FIN No. 47. FIN No. 47 clarifies that the term conditional obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 requires that the uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation be factored into the measurement of the liability when sufficient

 

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information exists. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is effective for fiscal years ending after December 15, 2005. The Company has not yet determined the impact, if any, of the adoption of FIN No. 47 on its financial statements.

 

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payments, or SFAS 123R. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We are required to adopt the new standard in the first interim period beginning after December 15, 2005. We have not yet determined the impact, if any, of the adoption of SFAS 123R on our financial statements.

 

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion 29, or SFAS 153. SFAS 153 requires that exchanges of nonmonetary assets be measured based on the fair values of the assets exchanged, and eliminates the exception to this principle under APB Opinion 29 for exchanges of similar productive assets. We are required to adopt the new standard in the first interim period beginning after June 15, 2005. We do not expect the adoption of SFAS 153 to have a material effect on our financial statements.

 

In December 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, or SFAS 151. SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. We are required to adopt the new standard in the fiscal year beginning after June 15, 2005. We have not yet determined the impact, if any, of the adoption of SFAS 151 on our financial statements.

 

American Jobs Creation Act of 2004.    In October 2004, the American Jobs Creation Act of 2004, or the AJCA, was signed into law. The AJCA allows companies to repatriate earnings from foreign subsidiaries at a reduced U.S. tax rate through December 31, 2005. The FASB issued FASB Staff Position 109-2 to provide accounting and disclosure guidance for the repatriation provision. We are evaluating the consequences of repatriating up to $3.0 million with a related range of income tax effects that cannot be reasonably estimated currently. We expect to complete our review by December 31, 2005, and will recognize the income tax effect, if any, in the period when a decision whether to repatriate is made.

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, or FIN No. 46. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued a revision to FIN No. 46; for us, the revised provisions of FIN No. 46 must be applied for the first interim or annual period beginning after December 15, 2004. The adoption of FIN No. 46 did not have a material impact on our financial position, cash flows or results of operations.

 

Environmental and Other Liabilities Retained or Assumed by Others

 

We have agreements with former owners of certain of our operating locations under which the former owners retained, assumed and/or agreed to indemnify us against certain environmental and other liabilities. The most significant of these agreements was entered into at Koppers Inc.’s formation on December 29, 1988, which we refer to as the Acquisition. Under the related asset purchase agreement between us and Beazer East, subject to certain limitations, Beazer East retained the responsibility for and agreed to indemnify us against certain liabilities, damages, losses and costs, including, with certain limited exceptions, liabilities under and costs to comply with environmental laws to the extent attributable to acts or omissions occurring prior to the Acquisition, which we refer to as the Indemnity. Beazer Limited unconditionally guaranteed Beazer East’s performance of the

 

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Indemnity pursuant to a guarantee, which we refer to as the Guarantee. Beazer Limited became a wholly owned indirect subsidiary of Hanson PLC on December 4, 1991. In 1998, Hanson PLC purchased an insurance policy under which the funding and risk of certain environmental and other liabilities relating to the former Koppers Company, Inc. operations of Beazer East (which includes locations purchased from Beazer East by us) are underwritten by Centre Solutions (a member of the Zurich Group) and Swiss Re.

 

The Indemnity provides different mechanisms, subject to certain limitations, by which Beazer East is obligated to indemnify us with regard to certain environmental and other liabilities and imposes certain conditions on us before receiving such indemnification, including certain limitations regarding the time period as to which claims for indemnification can be brought. In July 2004, we entered into an agreement with Beazer East to amend the December 29, 1988 asset purchase agreement to provide, among other things, for the continued tender of pre-closing environmental liabilities to Beazer East under the Indemnity through July 2019. As consideration for the agreement, we agreed to pay Beazer East a total of $7.0 million in four installments over three years and to share toxic tort litigation defense costs arising from any sites acquired from Beazer East. The first two payments of $2.0 million each were made in July 2004 and 2005. Qualified expenditures under the Indemnity are not subject to a monetary limit.

 

Contamination has been identified at most of our manufacturing and other sites. Three sites owned and operated by us in the United States, as well as one former site, are listed on the National Priorities List promulgated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or CERCLA. The sites include our Gainesville, Florida wood treating facility; our Galesburg, Illinois wood treating facility; our Florence, South Carolina wood treating facility; and our former Feather River, California wood treating facility. Currently, at the properties acquired from Beazer East (which include all of the National Priorities List sites and all but one of the sites permitted under the Resource Conservation and Recovery Act, or RCRA, substantially all investigative, cleanup and closure activities are being conducted and paid for by Beazer East pursuant to the terms of the Indemnity. In addition, other of our sites are or have been operated under RCRA and various other environmental permits, and remedial and closure activities are being conducted at some of these sites.

 

To date, the parties that retained, assumed and/or agreed to indemnify us against the liabilities referred to above, including Beazer East, have performed their obligations in all material respects. We believe that, for the last three years, amounts paid by Beazer East as a result of its environmental remediation obligations under the Indemnity have averaged in total approximately $11.6 million per year. If for any reason (including disputed coverage or financial incapability) one or more of such parties fail to perform their obligations and we are held liable for or otherwise required to pay all or part of such liabilities without reimbursement, the imposition of such liabilities on us could have a material adverse effect on our business, financial condition, cash flows and results of operations. Furthermore, we could be required to record a contingent liability on our balance sheets with respect to such matters, which could result in our having significant additional negative net worth.

 

Also, contamination has been detected at certain of our Australian facilities. These sites include our tar distillation facility in Mayfield, NSW, Australia and certain property adjacent to such facility and our wood protection chemicals facility in Trentham, Victoria, Australia, which has been listed on the Victorian register of contaminated sites. Our total reserves include $1.7 million for estimated remediation costs at these sites.

 

Grenada.    Koppers Inc., together with various co-defendants (including Beazer East), has been named as a defendant in five toxic tort lawsuits in state court in Mississippi and in two toxic tort lawsuits in federal court in Mississippi arising from the operation of the Grenada facility. The complaints allege that plaintiffs were exposed to harmful levels of various toxic chemicals, including creosote, pentachlorophenol and dioxin, as a result of soil, surface water and groundwater contamination and air emissions from the Grenada facility and, in four of the five state court cases, from an adjacent manufacturing facility operated by Heatcraft, Inc. In the state court actions, which include a total of approximately 225 plaintiffs, each plaintiff seeks compensatory damages from the defendants of at least $5.0 million for each of seven counts and punitive damages of at least $10.0 million for each

 

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of three counts. In the federal court action referred to as the Beck case, there were originally a total of approximately 110 plaintiffs. Pursuant to an order granting defendants’ Motion to Sever, the Court dismissed the claims of 98 plaintiffs without prejudice to their right to refile their complaints. Each plaintiff in the Beck case seeks compensatory damages from the defendants in an unspecified amount and punitive damages of $20.0 million for each of four counts. In the federal court action referred to as the Ellis case, there are approximately 1,130 plaintiffs. Each plaintiff in the Ellis case seeks compensatory damages from the defendants of at least $5 million for each of seven counts and punitive damages of at least $10.0 million for each of three counts. The Mississippi Supreme Court recently granted Koppers Inc.’s motions to transfer venue of four of the five state court cases to Grenada County, Mississippi (the fifth case was already filed in Grenada County) and to sever the claims of the plaintiffs. All of the state court cases which were not originally filed in Grenada County are in the process of being transferred to Grenada County. After such cases have been transferred to Grenada County, the stay of discovery in such cases will likely be lifted. Discovery in the federal court cases also has been stayed, except with respect to 12 plaintiffs in the Beck federal case. The Court ordered that the claims of the 12 Beck plaintiffs must be tried separately. The first of these trials is scheduled to commence on April 17, 2006. The remaining 11 trials are scheduled to commence at the rate of approximately one trial per calendar quarter beginning upon the conclusion of the first trial. Three plaintiffs in these cases have also filed a motion for injunctive relief contending that their properties are no longer habitable. They have requested remediation or, alternatively, condemnation of their properties. Koppers Inc. is vigorously contesting the motion. Based on the experience of Koppers Inc. in defending previous toxic tort cases, we do not believe that the damages sought by the plaintiffs in the state court and federal court actions are supported by the facts of the cases. Although Koppers Inc. intends to vigorously defend these cases, there can be no assurance that an unfavorable resolution of these matters will not have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

Somerville.    Koppers Inc. has been served with a putative class action lawsuit which was filed in June 2005 in federal court in Austin, Texas against it and other defendants including the Burlington Northern Santa Fe Railway Company, Monsanto Company, Dow Chemical Company and Vulcan Materials Company. The lawsuit alleges that several classes of past and present property owners and residents in the Somerville, Texas area numbering in excess of 2,500 have suffered property damage and risk of personal injury as a result of exposure to various chemicals from the operations of the Somerville, Texas wood treatment plant of Koppers Inc. The complaint seeks certification of these classes and further seeks to recover unspecified damages for alleged injuries to property, medical monitoring costs, punitive damages, remediation of contamination, injunctive relief, and attorney’s fees and costs. Although Koppers Inc. intends to vigorously defend this case, there can be no assurance that an unfavorable resolution of this matter will not have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

Stickney.    The Illinois Environmental Protection Agency, or the IEPA, has requested that Koppers Inc. conduct a voluntary investigation of soil and groundwater at its Stickney, Illinois carbon materials and chemicals facility. The IEPA advised Koppers Inc. that it made such request as a result of a reported release of oil-like material from Koppers Inc.’s property into an adjacent river canal. Koppers Inc. has agreed to conduct such investigation in cooperation with Beazer East and intends to seek contribution and/or indemnification from third parties with respect to a portion of such costs.

 

Additionally, the United States Environmental Protection Agency, or the EPA, has issued a notice of violation to the Stickney plant alleging certain violations of the Clean Air Act relating to fugitive emissions. The EPA has proposed a fine of $146,000 plus an undetermined amount of stipulated penalties for any past, similar violations. We intend to cooperate with the EPA, including conducting an audit of relevant operations, and are currently unable to estimate a range of loss, if any, regarding the stipulated penalties.

 

Other Environmental Matters

 

In October 1996, we received a Clean Water Act information request from the EPA. This information request asked for comprehensive information on discharge permits, applications for discharge permits, discharge monitoring reports and the analytical data in support of the reports and applications. The EPA alleged that we

 

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violated various provisions of the Clean Water Act. We subsequently agreed, among other things, to a $2.9 million settlement, payable in three annual installments. The first two payments, totaling $1 million each, were made in April 2004 and 2003, respectively. The final payment of $0.9 million was made in April 2005.

 

In August 2005, Koppers Inc. received a similar Clean Water Act information request from Region 4 of the EPA. Region 4 encompasses six of our facilities. This information request asked for comprehensive information on discharge permits, applications for discharge permits, discharge monitoring reports and the analytical data in support of the reports and applications as well as engineering studies and a limited number of specific inspection records. We intend to cooperate with the EPA and are currently unable to estimate a range of loss, if any, regarding this matter.

 

Additionally, during an investigation we initiated at our Woodward Coke facility prior to its closure in January 1998, it was discovered that certain environmental records and reports related to the discharge of treated process water contained incomplete and inaccurate information. Corrected reports were submitted to the State of Alabama and EPA, which resulted in a complaint against us by EPA alleging certain civil and criminal violations of applicable environmental laws. We subsequently entered into a plea agreement and a related compliance agreement addressing this matter, which together provide, among other things, for the payment by us of a $2.1 million fine to the government and $0.9 million in restitution payable to the Black Warrior-Cahaba Rivers Land Trust in three equal annual installments beginning in December 2002. Our plea was entered in August 2002 and the sentencing occurred in December 2002. At the sentencing, the court, among other things, approved the terms of the plea agreement previously negotiated between us and EPA. The first two payments, totaling $1.0 million each, were made in December 2003 and 2002, respectively. The final payment of $1.0 million was completed in January 2005. A failure on our part to comply with the terms of the compliance agreement, plea agreement and probation could lead to significant additional costs and sanctions, including the potential for our suspension or debarment from governmental contracts.

 

In August 2005, the Pennsylvania Department of Environment Protection, or the PADEP, proposed a fine of $1.3 million related to alleged water discharge exceedances from a storm water sewer pipe at our tar distillation facility in Clairton, Pennsylvania. We have proposed to undertake certain engineering steps at a cost of approximately $1.7 million to address this matter pursuant to a consent order we are currently discussing with the PADEP. We intend to cooperate with the PADEP to resolve this matter. We have not accrued any amount related to this matter pending the outcome of discussions with the PADEP.

 

Other Business Matters

 

There are currently no known viable substitutes for carbon pitch in the production of carbon anodes. However, in 2000, our largest carbon pitch customer announced that it was actively pursuing alternative anode technology that would eliminate the need for carbon pitch as an anode binder. No commercial development of this technology has occurred since this announcement. Although management does not believe that this alternative technology will be developed and used widely within the next five years, the potential development and implementation of this new technology could seriously impair our ability to profitably market carbon pitch and related co-products. Approximately 75% of our carbon pitch is sold to the aluminum industry under long-term contracts typically ranging from three to four years.

 

Global restructuring in the electrode and aluminum markets has resulted in reduced consumption volumes of carbon pitch in domestic markets. As a result, during 2003 we ceased production at our carbon materials facility in Woodward, Alabama and also determined that our port facility in Portland, Oregon is an impaired facility. As a result, restructuring and impairment charges of $7.2 million and related charges of $4.9 million were recorded to pre-tax income in the fourth quarter of 2003 for the Carbon Materials and Chemicals segment.

 

Over the last several years, utility pole demand has dropped as utilities in the United States and Australia have reduced spending due to competitive pressures arising from excess capacity and deregulation. It is expected that excess capacity and deregulation will continue to negatively affect both new and replacement pole installation markets.

 

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Quantitative and Qualitative Disclosures About Market Risk

 

Like other global companies, we are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates. The objective of our financial risk management is to minimize the negative impact of interest rate and foreign exchange rate fluctuations on our earnings, cash flows and equity.

 

To manage the interest rate risks, we use a combination of fixed and variable rate debt. This reduces the impact of short-term fluctuations in interest rates. To manage foreign currency exchange rate risks, we enter into foreign currency debt instruments that are held by our foreign subsidiaries. This reduces the impact of fluctuating currencies on net income and equity. We also use forward exchange contracts to hedge firm commitments up to twelve months and all such contracts are marked to market with the recognition of a gain or loss at each reporting period.

 

As required by SEC rules, the following analyses present the sensitivity of the market value, earnings and cash flows of our financial instruments and foreign operations to hypothetical changes in interest and exchange rates as if these changes occurred at December 31, 2004 and 2003. The range of changes chosen for these analyses reflects our view of changes which are reasonably possible over a one-year period. Market values are the present values of projected future cash flows based on the interest rate and exchange rate assumptions. These forward-looking statements are selective in nature and only address the potential impacts from financial instruments and foreign operations. They do not include other potential effects that could impact our business as a result of these changes.

 

Interest Rate and Debt Sensitivity Analysis.    Our exposure to market risk for changes in interest rates relates primarily to our debt obligations. As described in Note 3 of our Notes to Consolidated Financial Statements, we have both fixed and variable rate debt to manage interest rate risk and to minimize borrowing costs. In January 2004, we also entered into an interest rate swap arrangement with respect to $50.0 million of the Senior Secured Notes. (See “—Liquidity and Capital Resources.”)

 

At December 31, 2004, we had $400.8 million of fixed rate debt and $112.0 million of variable rate debt (including the swap). At December 31, 2003 we had $273.8 million of fixed rate debt and $66.9 million of variable rate debt (including the swap referred to above). Our ratio of variable rate debt at December 31, 2004, including the interest rate swap referred to above, was approximately 22%, reflecting a small increase in the ratio from 20% in the previous period. For fixed rate debt, interest rate changes affect the fair market value but do not impact earnings or cash flows. For variable rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant.

 

Holding other variables constant (such as debt levels and foreign exchange rates), a one percentage point decrease in interest rates at December 31, 2004 and 2003 would have increased the unrealized fair market value of the fixed rate debt by approximately $24.0 million and $19.4 million, respectively. The earnings and cash flows for the next year assuming a one percentage point increase in interest rates would decrease approximately $1.1 million, holding other variables constant.

 

Exchange Rate Sensitivity Analysis.    Our exchange rate exposures result primarily from our investment and ongoing operations in Australia, Denmark and the United Kingdom. Holding other variables constant, if there were a ten percent reduction in all relevant exchange rates, the effect on our earnings, based on actual earnings from foreign operations for the years ended December 31, 2004 and 2003, would be reductions of approximately $1.6 million and $1.5 million, respectively.

 

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BUSINESS

 

General

 

We are a leading integrated global provider of carbon compounds and commercial wood treatment products. Our products are used in a variety of niche applications in a diverse range of end-markets, including the aluminum, railroad, specialty chemical, utility, rubber and steel industries. We provide products which represent only a small portion of our customers’ costs but are essential inputs into the products they produce and the services they provide. In the aggregate, we believe that we maintain the number one market position by volume in a majority of our principal product lines in North America, Australia and Europe. Approximately 56% of our net sales for 2004 were generated from products in which we have the number one market share position by volume in those three geographic regions. We serve our customers through a comprehensive global manufacturing and distribution network, including 35 manufacturing facilities located in North America, Australasia, China, Europe and South Africa. We conduct business in 73 countries with over 2,600 customers, many of which are leading companies in their respective industries, including Alcoa Inc., CSX Transportation, Inc., Union Pacific Railroad Company, Norfolk Southern Corporation and Burlington Northern Santa Fe Railway. We believe that our customers place significant value on our industry-leading “Koppers” brand, which for more than 70 years has maintained a reputation for quality, reliability and customer service. We maintain long-standing relationships with many of our customers and have conducted business with our top ten customers for an average of 16 years. For the twelve months ended June 30, 2005, we generated net sales of $973.9 million, net income of $9.7 million and EBITDA of $100.0 million. For a reconciliation of EBITDA to net income, see footnote (6) under “Summary—Summary Historical Consolidated Financial Data.”

 

We operate two principal businesses, Carbon Materials & Chemicals and Railroad & Utility Products. Through our Carbon Materials & Chemicals business (58% of 2004 net sales), we are the largest distiller of coal tar in North America, Australia, the United Kingdom and Scandinavia. We process coal tar into a variety of products, including carbon pitch, creosote and phthalic anhydride, which are critical intermediate materials in the production of aluminum, the pressure treatment of wood and the production of plasticizers and specialty chemicals, respectively. Through our Railroad & Utility Products business (42% of 2004 net sales), we are the largest North American supplier of railroad crossties. Our other commercial wood treatment products include the provision of utility poles to the electric and telephone utility industries.

 

The following charts provide a breakdown of our 2004 net sales by product and industry:

 

LOGO   LOGO

 

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Our operations are, to a substantial extent, vertically integrated and employ a variety of processes, as illustrated in the following flow diagram:

 

LOGO

 

We were formed in November 2004 by Saratoga Partners III, L.P. and its affiliates and certain of our employees and members of our board of directors as a holding company for Koppers Inc. in a transaction in which all of the capital stock of Koppers Inc. was converted into shares of common and preferred stock of KI Holdings and Koppers Inc. became a wholly owned subsidiary of KI Holdings. KI Holdings does not have any operations independent of Koppers Inc., except as to administrative matters and except that KI Holdings is the sole obligor on its Senior Discount Notes due 2014. Koppers Inc. was formed in 1988 to facilitate the acquisition of certain assets of the company now known as Beazer East, Inc. Our principal shareholders are Saratoga Partners III, L.P. and its affiliates, a New York based investment firm managed by Saratoga Management Company LLC, and certain of our employees and members of our board of directors.

 

Industry Overview

 

Coal tar is a by-product generated through the processing of coal into coke for use in steel and iron manufacturing. We produce and distribute a variety of intermediate chemical products derived from the coal tar distillation process, including the co-products of the distillation process. 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%). 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.

 

We believe that demand for aluminum and railroad track maintenance substantially drive growth in our two principal businesses. Through our leading market positions and global presence, we believe we are uniquely well-positioned to capitalize on favorable trends within our end-markets. According to the King Report, worldwide aluminum production increased 6.5% to 29.8 million metric tons in 2004 and is expected to grow by 7.6% in 2005 and 6.8% in 2006. Carbon pitch requirements for the aluminum industry were 2.8 million metric tons in 2004 and are expected to grow as a function of growth in aluminum production.

 

The North American phthalic anhydride industry has production capacity of approximately 1.2 billion pounds and is a feedstock for plasticizers, unsaturated polyester resins, alkyd resins and other miscellaneous chemicals.

 

The railroad crosstie business is benefiting and will likely continue to benefit from positive general economic conditions in the railroad industry and from expected increases in spending on both new track and existing track maintenance. The RTA estimates that approximately 13.7 million crossties for Class 1 railroads,

 

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were installed in the United States in 2004 and approximately 14.0 million crossties are projected to be installed in 2005. The RTA projects demand to increase by 9.2% to 15.3 million crossties in 2006.

 

The U.S. market for treated wood utility pole products is characterized by a large number of small producers selling into a price-sensitive industry. The utility pole market is highly fragmented domestically with over 200 investor-owned electric and telephone utilities and 2,800 smaller municipal utilities and rural electric associations.

 

On August 10, 2005, the President signed a federal transportation bill into law that provides $286.5 billion of funding for various projects in the transportation industry. This legislation is the most comprehensive legislation for the transportation industry since the last transportation bill expired in 2003. Although it is difficult to estimate the impact of this legislation on our business, we believe that it is likely to benefit us directly by increased sales related to projects identified in the legislation or indirectly as additional railroad capital can be reallocated to infrastructure maintenance priorities.

 

Key Competitive Strengths

 

Leading Market Positions Across Business Segments.    We are a leading integrated global provider of carbon compounds and commercial wood treatment products. With respect to coal tar distillation, we believe that we account for approximately 55% of the total North American capacity and 100% of the total capacity of each of Australia and the United Kingdom. We believe our leading market positions and excellent reputation provide us with significant advantages in gaining new business, sourcing raw materials cost-effectively and reliably providing products to our customers.

 

The following table sets forth our leading market position for each of our principal product lines in our three major geographic regions:

 

     2004 Net Sales

   Estimated % of
Market


    Market Position

     (in millions)           

North American Market

                 

Railroad Crossties (U.S.)

   $ 246.1    55 %   #1

Carbon Pitch (1)

     75.4    49 %   #1

Phthalic Anhydride (2)

     71.4    37 %   #1

Australian Market

                 

Carbon Pitch

   $ 53.8    81 %   #1

Wood Preservatives

     48.1    50 %   #1

Carbon Black

     30.1    80 %   #1

Utility Poles

     11.8    66 %   #1

European Market

                 

Carbon Pitch

   $ 47.6    14 %   #3
 
  (1) Only refers to carbon pitch sales to the aluminum industry.

 

  (2) Only refers to merchant market sales of phthalic anhydride.

 

Strong Customer Relationships Under Contract Arrangements.    Our reputation and industry-leading “Koppers” brand have enabled us to establish strong relationships with leading companies in their respective industries. We sell our products to six of the seven Class 1 railroads and to three of the five largest aluminum producers globally. All of our top ten customers are served under long-term contracts with an average length of six years, typically with provisions for periodic pricing reviews. Approximately 56% of our 2004 net sales were made to customers with whom we have contract arrangements of two or more years. Our global presence and

 

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strategically located facilities make us a preferred provider of our customers’ requirements. For example, we believe that in 2004 we provided, on average, a majority of the carbon materials and commercial wood treatment product requirements of our top ten customers.

 

Diverse End-Markets and Global Presence.    We sell our carbon materials and wood treatment products to diverse markets. Our approximately 2,600 customers operate in diverse end-markets such as aluminum, railroads, specialty chemicals, including polyester resins, paints, coatings and plasticizers, steel, utilities, rubber, wood preservation, roofing and pavement sealers. During 2004, North America, Australasia, including China, and Europe represented 66%, 21% and 13% of our net sales, respectively. Our global presence enables us to capitalize on opportunities to increase sales of our existing product portfolio into higher-growth emerging economies, such as China, the Middle East, India and Eastern Europe. We believe that our broad product line, geographic presence and end-markets allow us to reduce our exposure to any one geographic region or end-market and to generate stable growth. Over the last five fiscal years, our revenues have grown at a compound annual growth rate of 5.4%.

 

Cost Advantage Through Vertical Integration.    The degree of vertical integration in our business enables us to utilize products produced in our Carbon Materials & Chemicals business in our manufacturing processes, providing us with significant cost and supply advantages. In 2004, we used approximately 75% of our creosote, a major co-product of the coal tar distillation process, as a raw material in the treatment of wood by our Railroad & Utility Products business. We also believe that we have a significant cost advantage over our competitors as a result of our ability to use internally generated naphthalene as a primary feedstock in the production of phthalic anhydride. All of our domestic competitors currently use orthoxylene, which is generally a higher-cost feedstock than naphthalene, in the production of phthalic anhydride. In addition, internally generated products provide a more reliable source of feedstock for our wood treatment and phthalic anhydride products.

 

Experienced and Incentivized Management Team.    Our senior management team has an average of 27 years of industry experience. Our president and chief executive officer, Walter W. Turner, has over 36 years of industry experience. Prior to the offering, our directors, management team and employees beneficially own approximately 24% of our equity.

 

Our Business Strategy

 

Capitalize on Attractive Growth Opportunities.    We believe our existing key end-markets, especially the aluminum and railroad industries, and geographic focus provide attractive growth opportunities. We are well positioned to capitalize on these opportunities. In addition, we intend to pursue growth opportunities in three ways:

 

    New Regional Expansion:    We intend to leverage our global reach by capitalizing on opportunities in high-growth regions such as China, the Middle East, India and Eastern Europe and expect demand for our products in these regions to grow faster than in our core markets. For example, in 1999 we entered into a joint venture with TISCO in Tangshan, China to establish a platform in the fast growing Asian markets.

 

    Selective Acquisitions:    We intend to continue to selectively pursue complementary opportunities in areas that enable us to build upon our product portfolio, expand our customer base and leverage our existing customer relationships. For example, in April 2005, we acquired the business and assets of U.K. based Lambson Speciality Chemicals Limited. This acquisition provides us with an opportunity to expand and enhance our relationships with existing suppliers and customers and enables us to further diversify our product lines through the production and sale of various specialty chemicals.

 

    Development of New Products:    We expect to expand many of our product lines through the development of related products to meet new end-use applications. For example, we have introduced a coal tar and petroleum pitch blend that results in up to a 60% reduction in the regulated constituents in air emissions from aluminum smelters utilizing the Soderberg process. In addition, we will soon introduce a new carbon foam product that has wide-ranging applications in the telecommunication and transportation markets. We also have patents pending for, and we are in the developmental stage of, new pitch products to be used in friction materials (brakes), carbon, graphite and rubber products.

 

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Maximize Cash Flow and Reduce Financial Leverage.    We expect to reduce our financial leverage by using a portion of our net proceeds from this offering and a portion of cash flow from operations after required capital expenditures. We will maintain a disciplined approach to our capital spending and working capital management in order to maximize free cash flow, while continuing to support our well maintained fixed asset base and deliver superior service to our customers. We have historically generated substantial cash flow from operations and have funded our capital expenditure and working capital requirements through internal cash flow generation.

 

Continue Productivity and Cost Reduction Initiatives.    We are focused on improving our profitability and cash flows by achieving productivity enhancements and by improving our cost platform. For example, in 2003 we implemented a number of initiatives to rationalize our capacity, streamline operations and improve productivity.

 

During the fourth quarter of 2003 we determined that capacity rationalization was required in our U.S. Carbon Materials & Chemicals business to increase competitiveness within the North American aluminum market. Accordingly, in December 2003 we ceased production at our carbon materials facility in Woodward, Alabama. Additionally, during the fourth quarter of 2003 we concluded that our carbon materials port operation in Portland, Oregon was an impaired facility based on its current and long-term economic prospects as a result of recent negotiations with a significant customer. In September 2003, we closed our Logansport, Louisiana wood treating plant due to deteriorating local market conditions for utility products. These initiatives were completed on schedule and within budget and have improved our annual profitability by approximately $4.9 million.

 

During the second quarter of 2005, we incurred an impairment charge of $0.3 million related to assets at our wood treating facility in Montgomery, Alabama. The impairment charge is related to the closure of the facility in September 2005. The ceasing of production and closure of the facility is expected to increase capacity utilization at certain other wood treating plants and provide for improved operating efficiencies and profitability for the business. We continually review under-performing assets with the purpose of improving productivity and enhancing our return on invested capital. We have identified several opportunities available over the next two to three years to further enhance our productivity and profitability.

 

Carbon Materials & Chemicals

 

Our Carbon Materials & Chemicals business manufactures five principal products: (a) carbon pitch, used in the production of aluminum and steel; (b) phthalic anhydride, used in the production of plasticizers and polyester resins; (c) creosote, used in the treatment of wood; (d) carbon black (and carbon black feedstock), used in the manufacture of rubber tires; and (e) furnace coke, used in steel production. Carbon pitch, phthalic anhydride, creosote and carbon black feedstock are produced through the distillation of coal tar, a by-product of the transformation of coal into coke. The Carbon Materials & Chemicals business’ profitability is impacted by its cost to purchase coal tar in relation to its prices realized for carbon pitch, phthalic anhydride, creosote and carbon black. We have three tar distillation facilities in the United States, one in Australia, one in China, one in Denmark and two in the United Kingdom, strategically located to provide access to coal tar and to facilitate better service to our customers with a consistent supply of high-quality products. For 2004, 2003 and 2002, respectively, principal products comprised the following percentages of net sales for Carbon Materials & Chemicals (excluding intercompany sales): (i) carbon pitch, 36%, 38% and 39%; (ii) phthalic anhydride, 14%, 12% and 12%; (iii) carbon black (and carbon black feedstock), 9%, 10% and 9%; (iv) furnace coke, 9%, 8% and 9%; and (v) creosote, 3%, 4% and 5%.

 

We believe we have a strategic advantage over our competitors based on our ability to access coal tar from many global suppliers and subsequently blend such coal tars to produce carbon pitch with the consistent quality important in the manufacturing of quality anodes for the aluminum industry. Our eight coal tar distillation facilities, four of which have port access, and three carbon pitch terminals give us the ability to offer customers multiple sourcing and a consistent supply of high quality products. In anticipation of potential reductions of U.S. coke capacity, we have secured coal tar supply through long-term contracts.

 

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Coal tar distillation involves the conversion of coal tar 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%).

 

Our Carbon Materials & Chemicals business manufactures its primary products and sells them directly to our customers through long-term contracts and purchase orders negotiated by our regional sales personnel and coordinated through our global marketing officer at corporate headquarters. We maintain inventories at our plant locations and do not factor our inventories or receivables to third parties.

 

LOGO

 

Carbon Pitch

 

We produce carbon pitch through the tar distillation process. Sales terms are negotiated by centralized sales departments in the United States, Australia and Europe and are generally evidenced by long-term sales contracts and purchase orders which are coordinated through our global marketing group at corporate headquarters.

 

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Over 75% of our carbon pitch is sold to the aluminum industry under long-term contracts typically ranging from three to five years, many with provisions for periodic pricing reviews. Demand for carbon pitch generally has fluctuated with production of primary aluminum. However, global restructuring in the electrode and aluminum markets during the past several years has resulted in reduced volumes in domestic markets. Because all coal tar products are produced in relatively fixed proportion to carbon pitch, the level of carbon pitch consumption generally determines the level of production of other coal tar products. The commercial carbon industry, the second largest user of carbon pitch, uses carbon pitch to produce electrodes and other specialty carbon products for the steel industry. There are currently no known viable substitutes for carbon pitch in the production of carbon anodes used in the aluminum production process.

 

Creosote

 

We produce creosote as a co-product of the tar distillation process. Sales terms for external creosote sales are negotiated by centralized sales departments in the United States and Europe and are generally evidenced by long-term sales contracts and purchase orders.

 

Creosote is used as a commercial wood treatment to preserve railroad crossties and lumber, utility poles and piling. To the extent that we have excess creosote that is not sold for use in treating wood products, distillate oils are sold into the carbon black market rather than being blended to creosote specifications.

 

Globally, approximately 75% of our total creosote production was sold to our Railroad & Utility Products business in 2004. The Railroad & Utility Products business purchases substantially all of its creosote from the Carbon Materials & Chemicals business. We are the only competitor in this market that is integrated in this fashion. The remainder of our creosote is sold to railroads or to other wood treaters. We have several competitors in the creosote market.

 

Carbon Black

 

Carbon black is manufactured in Australia at a carbon black facility using both petroleum oil and coal tar based feedstocks, which are subjected to heat and rapid cooling within a reactor. Additionally, tar-based carbon black feedstock is manufactured as a co-product of the tar distillation process and can be produced at our three domestic, one Australian, one Chinese, and three European tar distillation facilities. Sales terms are negotiated by centralized sales departments in Australia, the United States and Europe and are generally evidenced by long-term sales contracts and purchase orders.

 

Phthalic Anhydride

 

We manufacture phthalic anhydride using both internally-sourced naphthalene, a by-product of the tar distillation process, and externally-sourced orthoxylene. Sales terms are negotiated by a centralized sales department in the United States and are generally evidenced by long-term sales contracts and purchase orders.

 

Chemical oils resulting from the distillation of coal tars are further refined by us into naphthalene, which is the primary feedstock used by us for the production of phthalic anhydride. The primary markets for phthalic anhydride are in the production of plasticizers, unsaturated polyester resins and alkyd resins. Naphthalene is also sold into the industrial sulfonate market for use as dispersants in the concrete additive and gypsum board markets. Additional end-uses include oil field additives, agricultural emulsifiers, synthetic tanning agents and dyestuffs.

 

On a worldwide basis, naphthalene and orthoxylene, a refined petroleum derivative, are both used as feedstock for the production of phthalic anhydride. We are the only North American phthalic anhydride producer capable of utilizing both orthoxylene and naphthalene for this production. Our ability to utilize naphthalene as a by-product of coal tar distillation gives us a stable supply of feedstock. We believe that our ability to utilize our

 

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internally produced naphthalene gives us a lower-cost feedstock for the production of phthalic anhydride since historically our cost to produce naphthalene has been lower than our cost to purchase orthoxylene. However, prior to 2004 there were difficult market conditions and corresponding low operating rates for most producers. Market conditions for phthalic anhydride improved in 2004 and are expected to remain stable during 2005.

 

Furnace Coke

 

We produce furnace coke using its primary raw material, coal. Sales terms are negotiated by a centralized sales department in the United States, and all coke is currently sold to one customer under a three year sales contract.

 

Furnace coke is a carbon and fuel source required in the manufacturing of steel. Coal, the primary raw material, is carbonized in oxygen-free ovens to obtain the finished product. Coke manufacturers are either an integrated part of a steel company or, as in our case, operate independently and are known as “merchant producers.”

 

Our coke business consists of one production facility located in Monessen, Pennsylvania, which produces furnace coke. The plant consists of two batteries with a total of 56 ovens and has a total capacity of approximately 350,000 tons of furnace coke per year. All of the ovens were rebuilt in 1980 and 1981, which, together with recent improvements, makes our Monessen facility one of the most modern coking facilities in the United States.

 

Before the expiration of the related tax law at December 31, 2002, our Monessen facility qualified 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 sold was tied to a per barrel of oil equivalent determined on a BTU basis and adjusted annually for inflation. The value of this tax credit per ton of coke was approximately $28.00 in 2002. In December 1999, we entered into a transaction with a third party which resulted in substantially all tax credits generated as a result of the production and sale of coke at our Monessen facility being transferred to the third party. In 2003 and 2002, we earned $0.1 million and $9.8 million, respectively, for the transfer of tax credits (the 2003 amount was a retroactive inflation adjustment). The tax credits expired at the end of 2002. Prior to the Monessen transaction, we earned these credits.

 

Other Products

 

We are also a 51% owner of a timber preservation chemicals business that operates throughout Australia, New Zealand, Southeast Asia and South Africa. Timber preservation chemicals are used to impart durability to timber products used in building/construction, agricultural and heavy-duty industrial markets. The most commonly used chemicals are copper chrome arsenates, light organic solvent preservatives, copper co-biocides, sapstain control products and creosote.

 

Roofing pitch and refined tars are also produced in smaller quantities and are sold into the commercial roofing and pavement sealer markets, respectively.

 

 

On August 8, 2005, the President signed the Energy Policy Act of 2005 into law. Included in this legislation are Section 29 Energy Tax Credits earned for the production and sale of coke to a third party. These credits against federal income tax will be earned in conjunction with the coke operations at our Monessen, Pennsylvania facility. The tax credit generated per ton of coke sold is tied to a per barrel of oil equivalent on a BTU basis and adjusted annually for inflation. The credits are effective January 2006, expire December 2009 and can be carried forward for 20 years. Based on our understanding of the legislation and subject to final determination of an oil price range, we expect to earn up to $4 million per year of credits that will reduce federal income taxes.

 

The Carbon Materials & Chemicals business’ ten largest customers represented approximately 44%, 44% and 47% of the business’ net sales for 2004, 2003 and 2002, respectively. We have a number of global competitors in the carbon pitch market.

 

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Coal tar is purchased from a number of outside sources as well as from our Monessen facility. Primary suppliers are United States Steel Corporation, International Steel Group, China Steel Chemical Corporation, Bluescope Steel (AIS) Pty. Limited, OneSteel Manufacturing Pty. Ltd., Corus Group PLC and Wheeling-Pittsburgh Steel Corporation.

 

Management believes that our ability to source coal tar and carbon pitch from overseas markets through our foreign operations, as well as our research of petroleum feedstocks, will assist in securing an uninterrupted supply of carbon pitch feedstocks.

 

In 1999, we entered into a joint venture agreement with TISCO to rehabilitate and operate a tar distillation facility in China. The joint venture, Koppers China, is 60% owned by us and began production of coal tar products in 2001. On January 1, 2004, we resumed operating control of Koppers China and began to consolidate its results in the first quarter of 2004. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Matters.”

 

Railroad & Utility Products

 

We market commercial wood treatment products primarily to the railroad and public utility markets, primarily in the United States and Australasia. The Railroad & Utility Products business’ profitability is influenced by the demand for railroad products by Class 1 railroads, demand for transmission and distribution poles by electric and telephone utilities and its cost to procure wood. For the year ended December 31, 2004, sales of railroad products represented approximately 80% of the Railroad & Utility Products business’ net sales. Railroad products include procuring and treating 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 piling used in industrial foundations, beach housing, docks and piers. The Railroad & Utility Products business operates 17 wood treating plants, one specialty trackwork facility, one co-generation facility and pole distribution yards located throughout the United States and Australia. Our network of plants is strategically located near timber supplies to enable us to access raw materials and service customers effectively. In addition, our crosstie treating plants typically abut railroad customers’ track lines, and our pole distribution yards are typically located near our utility customers.

 

Our Railroad & Utility Products business manufactures its primary products and sells them directly to our customers through long-term contracts and purchase orders negotiated by our regional sales personnel and coordinated through our marketing group at corporate headquarters. We maintain inventories at our plant locations and procurement yards and do not factor our inventories or receivables to third parties.

 

The Railroad & Utility Products business’ largest customer base is the Class 1 railroad market, which buys 79% of all crossties produced in the United States. We have also been expanding key relationships with some of the approximately 550 short-line and regional rail lines. The railroad crosstie market is a mature market with approximately 20 million replacement crossties purchased during 2004, representing an estimated $560.0 million in sales. We currently have contracts with six of the seven North American Class 1 railroads and have enjoyed long-standing relationships with this important customer base. These relationships have been further strengthened recently due to our ability to absorb additional treating volumes into our existing infrastructure, with such additional volumes resulting from the exit of a major competitor from the wood treating business. We intend to focus on integrating this additional treating volume while capitalizing on our relationships with railroads by offering an expanded list of complementary product offerings that the railroads may be interested in outsourcing.

 

Historically, investment trends in track maintenance by domestic railroads have been linked to general economic conditions in the country. During recessions, the railroads have typically deferred track maintenance until economic conditions improve. Recently, however, the Class 1 railroads have increased their spending on track maintenance, which has caused an increase in demand for railroad crossties. Management believes this increase in demand will continue for the near term.

 

Hardwoods, such as oak and other species, are the major raw materials in wood crossties. Hardwood prices, which account for approximately 68% of a finished crosstie’s cost, fluctuate with the demand from competing hardwood lumber markets, such as oak flooring, pallets and other specialty lumber products. Normally, raw

 

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material price fluctuations are passed through to the customer according to the terms of the applicable contract. Weather conditions can be a factor in the supply of raw material, as unusually wet conditions may make it difficult to harvest timber.

 

In the United States, hardwood lumber is procured by us from hundreds of small sawmills throughout the northeastern, midwestern and southern areas of the country. The crossties are shipped via rail car or trucked directly to one of our eleven crosstie treating plants, all of which are on line with a major railroad. The crossties are either air-stacked for a period of six to twelve months or artificially dried by a process called boultonizing. Once dried, the crossties are pressure treated with creosote, a product of our Carbon Materials & Chemicals business.

 

Our top ten Railroad & Utility Products accounts comprised approximately 68%, 70% and 66% of Railroad & Utility Products’ net sales for 2004, 2003 and 2002, respectively, and many are serviced through long-term contracts ranging from one to seven years on a requirements basis. Our sales to the railroad industry are coordinated through our office in Pittsburgh, Pennsylvania. There are several principal regional competitors in this market.

 

We believe that the threat of substitution for the wood crosstie is low due to the higher cost of alternative materials. Concrete crossties, however, have been identified by the railroads as a feasible alternative to wood crossties in limited circumstances. In 1991, we acquired a 50% partnership interest in KSA Limited Partnership, a concrete crosstie manufacturing facility in Portsmouth, Ohio, in order to take advantage of this growth opportunity. In 2004, an estimated 0.7 million concrete crossties, or 4% of total tie insertions, were installed by Class 1 railroads. We believe that concrete crossties will continue to command approximately this level of market share. While the cost of material and installation of a concrete crosstie is much higher than that of a wood crosstie, the average lives of wood and concrete crossties are similar.

 

Utility poles are produced mainly from softwoods such as pine and fir in the United States and from hardwoods of the eucalyptus species in Australia. Most of these poles are purchased from large timber owners and individual landowners and shipped to one of our pole-peeling facilities. While crossties are treated exclusively with creosote, we treat poles with a variety of preservatives, including pentachlorophenol, copper chrome arsenates and creosote.

 

In the United States the market for utility pole products is characterized by a large number of small, highly competitive producers selling into a price-sensitive industry. The utility pole market is highly fragmented domestically, with over 200 investor-owned electric and telephone utilities and 2,800 smaller municipal utilities and rural electric associations. Approximately 2.25 million poles are purchased annually in the United States, with a smaller market in Australia. In recent years we have seen our utility pole volumes decrease due to industry deregulation, its impact on maintenance programs, and overcapacity in the pole treating business. We expect demand for utility poles to remain at low levels. In Australia, in addition to utility poles, we market smaller poles to the agricultural, landscape and vineyard markets.

 

During 2004, sales of pole products accounted for approximately 20% of Railroad & Utility Products’ net sales. We have nine principal competitors in the utility products market. There are few barriers to entry in the utility products market, which consists of regional wood treating companies operating small to medium-size plants and serving local markets.

 

Equity Investments and Related Parties

 

Domestic Joint Venture: KSA Limited Partnership

 

KSA Limited Partnership, located in Portsmouth, Ohio, produces concrete crossties, a complementary product to our wood treatment crosstie business. We own 50% of KSA, with the other 50% owned by subsidiaries of Lehigh Cement Company. KSA Limited Partnership entered into a contract with its major customer in 2000 to supply a minimum of 450,000 concrete ties over a period of five years. KSA Limited Partnership also provides concrete turnouts, used in rail traffic switching, and used crosstie rehabilitation.

 

Research and Development

 

As of December 31, 2004, we had 11 full-time employees engaged in research and development and technical service activities. Our research efforts are directed toward new product development regarding alternate

 

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uses for coal tar and technical service efforts to promote the use of creosote. We believe the research and technical efforts provided in these areas are adequate to maintain a leadership position in the technology related to these products. Expenditures for research and development for 2004, 2003 and 2002 were $2.2 million, $2.3 million and $2.9 million, respectively.

 

Technology and Licensing

 

In 1988, we acquired certain assets from Koppers Company, Inc., 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 our company, as it represents long-standing, high quality products. As long as we continue to use the name “Koppers” and comply with applicable registration requirements, our right to use the name “Koppers” should continue without expiration. The expiration of other intellectual property rights is not expected to materially affect our business.

 

Environmental Matters

 

Our operations and properties are subject to extensive federal, state, local and foreign environmental laws and regulations relating to protection of the environment and human health and safety, including those concerning the treatment, storage and disposal of wastes, the investigation and remediation of contaminated soil and groundwater, the discharge of effluents into waterways, the emission of substances into the air, as well as various health and safety matters. Environmental laws and regulations are subject to frequent amendment and have historically become more stringent. We have incurred and could incur in the future significant costs as the result of our failure to comply with, and liabilities under, environmental laws and regulations, including cleanup costs, civil and criminal penalties, injunctive relief and denial or loss of, or imposition of significant restrictions on, environmental permits. In addition, we have been and could in the future be subject to suit by private parties in connection with alleged violations of or liabilities under environmental laws and regulations.

 

We accrue for environmental liabilities when a determination can be made that they are probable and reasonably estimable. Total environmental reserves at June 30, 2005, December 31, 2004 and December 31, 2003 were approximately $3.5 million, $4.7 million and $7.5 million, respectively, which include provisions primarily for environmental fines and soil remediation. For the last three years, our annual capital expenditures in connection with environmental control facilities averaged approximately $5.5 million, and annual operating expenses for environmental matters, excluding depreciation, averaged approximately $9.1 million. Management estimates that capital expenditures in connection with matters relating to environmental control facilities will be approximately $12.0 million for 2005. We believe that we will have continuing significant expenditures associated with compliance with environmental laws and regulations and, to the extent not covered by insurance or available recoveries under third-party indemnification arrangements, for present and future remediation efforts at plant sites and third-party waste sites and other liabilities associated with environmental matters. There can be no assurance that these expenditures will not exceed current estimates and will not have a material adverse effect on our business, financial condition, cash flow and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental and Other Liabilities Retained or Assumed by Others” and “—Other Environmental Matters.”

 

Employees and Employee Relations

 

As of December 31, 2004, we employed 690 salaried employees and 1,339 non-salaried employees. Listed below is a breakdown of employees by our businesses, including administration.

 

Business


   Salaried

   Non-Salaried

   Total

Carbon Materials & Chemicals

   356    607    963

Railroad & Utility Products

   243    732    975

Administration

   91    0    91
    
  
  

Total Employees

   690    1,339    2,029
    
  
  

 

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Of our employees, approximately 62% are represented by 22 different labor unions and covered under numerous labor contracts. The United Steelworkers of America, or the USWA, covering workers at six facilities, accounts for the largest membership, with more than 300 employees. Another significant affiliation is the Paper, Allied-Industrial, Chemical & Energy Workers’ International Union, or PACE, with more than 200 employees at four facilities. Labor contracts that expire in 2005 cover approximately 21% of our total employees. Our relationships with our hourly employees and the labor unions that represent them have been satisfactory.

 

The labor contract between us and PACE for the hourly production and maintenance employees at our Follansbee, West Virginia tar distillation plant is scheduled to expire on November 4, 2005. We are currently engaged in negotiations with PACE for a new contract. The labor contract between us and the USWA for the hourly clerical employees at our Follansbee, West Virginia tar distillation plant is also scheduled to expire on November 4, 2005. Since there is only one clerical employee at our Follansbee plant, the past practice has been for the USWA to accept the same contract that we negotiate with PACE for our Follansbee production and maintenance employees. We expect to follow this past practice in the 2005 negotiations. The labor contract between us and PACE for our hourly employees at our Green Spring, West Virginia wood preservation plant is scheduled to expire on December 9, 2005. We have not yet commenced negotiations with PACE regarding this contract. In addition, the labor contracts with the Australian Workers Union, the Australian Manufacturing Workers Union and the Electrical Trade Union covering the hourly and maintenance employees at our carbon black plant located in Kurnell, New South Wales, Australia is scheduled to expire on November 1, 2005.

 

Properties

 

Our principal fixed assets consist of our production, treatment, and storage facilities and our transportation and plant vehicles. Our production facilities consist of 17 Carbon Materials & Chemicals facilities and 18 Railroad & Utility Products facilities. As of December 31, 2004, the net book value of vehicles, machinery and equipment represented approximately 23% of our total assets, as reflected in our consolidated balance sheet. The following chart sets forth information regarding our production facilities:

 

Primary Product Line


  

Location


   Acreage

   Description of
Property Interest


Carbon Materials & Chemicals

              

Wood Preservation Chemicals

   Auckland, New Zealand    1    Leased

Carbon Pitch

   Clairton, Pennsylvania    17    Owned

Carbon Pitch, Creosote, Naphthalene

   Pt. Clarence, United Kingdom    120    Owned

Wood Preservation Chemicals

   Lautoka, Fiji    1    Owned

Carbon Pitch

   Follansbee, West Virginia    32    Owned

Carbon Black

   Kurnell, New South Wales, Australia    20    Leased

Carbon Pitch

   Newcastle, New South Wales, Australia    27    26 Owned,
1 Leased

Furnace Coke

   Monessen, Pennsylvania    45    Owned

Carbon Pitch

   Nyborg, Denmark    36    26 Owned,
10 Leased

Wood Preservation Chemicals

   Kuala Lumpur, Malaysia    3    Leased

Carbon Pitch

   Portland, Oregon    6    Leased

Carbon Pitch

   Scunthorpe, United Kingdom    27    Owned

Wood Preservation Chemicals

   Port Shepstone, South Africa    1    Leased

Carbon Pitch

   Tangshan, China    9    Leased

Carbon Pitch, Phthalic Anhydride

   Stickney, Illinois    38    Owned

Wood Preservation Chemicals

   Trentham, Victoria, Australia    24    Owned

Carbon Pitch

   Woodward, Alabama    23    Owned

 

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Primary Product Line


  

Location


   Acreage

   Description of
Property Interest


Railroad & Utility Products

              

Specialty Trackwork

   Alorton, Illinois    12    6 Owned,
6 Leased

Utility Poles, Railroad Crossties

   Bunbury, Western Australia, Australia    41    26 Owned,
15 Leased

Utility Poles, Railroad Crossties

   Denver, Colorado    64    Owned

Utility Poles, Railroad Crossties

   Florence, South Carolina    200    Owned

Utility Poles

   Gainesville, Florida    86    Owned

Railroad Crossties

   Galesburg, Illinois    125    Leased

Utility Poles

   Grafton, New South Wales, Australia    100    Owned

Railroad Crossties

   Green Spring, West Virginia    98    Owned

Utility Poles, Railroad Crossties

   Grenada, Mississippi    154    Owned

Railroad Crossties

   Guthrie, Kentucky    122    Owned

Utility Poles

   Longford, Tasmania    17    Owned

Railroad Crossties

   N. Little Rock, Arkansas    148    Owned

Railroad Crossties

   Roanoke, Virginia    91    Owned

Railroad Crossties

   Somerville, Texas    244    Owned

Railroad Crossties

   Superior, Wisconsin    120    Owned

Railroad Crossties

   Muncy, Pennsylvania    109    Owned

Pine Products

   Takura, Queensland, Australia    77    Leased

Utility Poles

   Thornton, New South Wales, Australia    15    Owned

 

Our corporate offices are located in approximately 60,000 square feet of leased office space in the Koppers Building, Pittsburgh, Pennsylvania. The office space is leased from Axiom Real Estate Management, Inc. with the lease term expiring on December 31, 2010.

 

Legal Proceedings

 

We are involved in litigation and various proceedings relating to environmental laws and regulations and antitrust, toxic tort and other matters. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Environmental Matters” and “—Legal Matters.”

 

Pacific Century.    On October 10, 2002, Koppers Timber Preservation Pty Ltd., a subsidiary of Koppers Australia Pty Ltd. was named as a defendant in a breach of contract and negligence lawsuit filed by Pacific Century Production Pty Ltd. in the Supreme Court of Queensland, Australia related to the sale of vineyard trellis posts.

 

Grenada.    We, together with various co-defendants, have been named as a defendant in five toxic tort lawsuits in various state courts in Mississippi and in two toxic tort lawsuits in federal court in Mississippi arising from the operations of our wood treating plant in Grenada, Mississippi.

 

Somerville.    Koppers Inc. has been served with a putative class action lawsuit which was filed in June 2005 in federal court in Austin, Texas against it and other defendants, including the Burlington Northern Santa Fe Railway Company, Monsanto Company, Dow Chemical Company and Vulcan Materials Company. The lawsuit alleges that several categories of past and present property owners and residents in the Somerville, Texas area numbering in excess of 2,500 have suffered property damage and risk of personal injury as a result of exposure to various chemicals from the operations of the Somerville, Texas wood treatment plant of Koppers Inc.

 

Government Investigations.    The New Zealand Commerce Commission and the Canadian Competition Bureau are conducting investigations related to competitive practices for some of our products.

 

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Product Liability Cases.    Koppers Inc., along with other defendants, has been named as a defendant in 19 cases in Pennsylvania and three cases in Texas in which the plaintiffs claim they suffered a variety of illnesses as a result of exposure to one or more of the defendants’ products, including coal tar pitch and solvents. Koppers Inc. has been served with process in six additional cases in Pennsylvania that may involve claims related to coal tar pitch.

 

Stickney.    The Illinois Environmental Protection Agency, or the IEPA, has requested that Koppers Inc. conduct a voluntary investigation of soil and groundwater at its Stickney, Illinois carbon materials and chemicals facility. The IEPA advised Koppers Inc. that it made such request as a result of a reported release of oil-like material from Koppers Inc.’s property into an adjacent river canal. Additionally, the United States Environmental Protection Agency, or the EPA, has issued a notice of violation to the Stickney plant alleging certain violations of the Clean Air Act relating to fugitive emissions.

 

Clairton.    In August 2005, the Pennsylvania Department of Environment Protection, or PADEP, proposed a fine of $1.3 million related to alleged water discharge exceedances from a storm water sewer pipe at our tar distillation facility in Clairton, Pennsylvania.

 

We are involved in various other proceedings incidental to the ordinary conduct of our business. We believe that none of these other proceedings will have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table sets forth the names, ages and positions of our and Koppers Inc.’s directors and executive officers as of June 30, 2005. Directors hold their positions until the annual meeting of the shareholders at which their term expires or until their respective successors are elected and qualified. Executive officers hold their positions until the annual meeting of the board of directors or until their respective successors are elected and qualified.

 

Name


   Age

  

Position


Robert Cizik

   74   

Non-Executive Chairman and Director of KI Holdings Inc. and Koppers Inc.

Walter W. Turner

   58   

President and Chief Executive Officer of KI Holdings Inc. and Koppers Inc. and Director of KI Holdings Inc. and Koppers Inc.

Clayton A. Sweeney

   73   

Director of KI Holdings Inc. and Koppers Inc.

Christian L. Oberbeck

   45   

Director of KI Holdings Inc. and Koppers Inc.

David M. Hillenbrand

   58   

Director of KI Holdings Inc. and Koppers Inc.

Brian H. McCurrie

   44   

Vice President and Chief Financial Officer, KI Holdings Inc. and Koppers Inc.

Steven R. Lacy

   49   

Senior Vice President, Administration, General Counsel and Secretary, KI Holdings Inc. and Koppers Inc.

Thomas D. Loadman

   50   

Vice President and General Manager, Railroad Products & Services Division, Koppers Inc.

Kevin J. Fitzgerald

   52   

Vice President and General Manager, Carbon Materials & Chemicals Division, Koppers Inc.

Ernest S. Bryon

   59   

Vice President, Australasian Operations, Koppers Inc. and Managing Director, Koppers Australia Pty Ltd.

David Whittle

   63   

Vice President, European Operations, Koppers Inc.

David T. Bryce

   58   

Vice President and General Manager, Utility Poles & Piling Products, Koppers Inc.

Mark R. McCormack

   46   

Vice President and General Manager, Global Marketing, Sales and Development Group, Koppers Inc.

Leslie S. Hyde

   45   

Vice President, Safety and Environmental Affairs

Robert H. Wombles

   53   

Vice President, Technology, Koppers Inc.

M. Claire Schaming

   52   

Treasurer and Assistant Secretary, KI Holdings Inc. and Koppers Inc.

 

Mr. Cizik was elected Non-Executive Chairman of KI Holdings in November 2004. He has served as Non-Executive Chairman of Koppers Inc. since July 1999 and has been a director of Koppers Inc. since January 1999. Mr. Cizik retired from Cooper Industries, Inc., where he served as President, Chief Executive Officer and Chairman of the Board from 1973 to 1996. Since June 2004 Mr. Cizik has been Non-Executive Chairman of Advanced Lighting Technologies, Inc.

 

Mr. Turner was elected President and Chief Executive Officer in, and has been a director of KI Holdings since, November 2004. He has been President and Chief Executive Officer and director of Koppers Inc. since February 1998. Mr. Turner was appointed Vice President and General Manager, Carbon Materials & Chemicals business of Koppers Inc. in early 1995. Mr. Turner was 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 of Koppers Inc. prior to that time.

 

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Mr. Sweeney has been a director of KI Holdings since November 2004 and a director of Koppers Inc. since January 1989. Mr. Sweeney has been counsel to Schnader Harrison Segal & Lewis LLP since 2000. Mr. Sweeney was the President and a member of Sweeney Metz Fox McGrann & Schermer L.L.C. from 1998 to 2000. Mr. Sweeney was a shareholder and director of Dickie, McCamey & Chilcote, P.C. from 1987 to 2000 and served as Managing Director from 1988 to September 1993.

 

Mr. Oberbeck has been a director of KI Holdings since November 2004 and a director of Koppers Inc. since October 1997. Mr. Oberbeck is one of the founders of Saratoga Partners III, L.P. where he has been a Managing Director since its formation as an independent entity in September 1998. Prior to that time Mr. Oberbeck was a Managing Director of Warburg Dillon Read Inc. and its predecessor entity, Dillon, Read & Co. Inc., where he was responsible for the management of the Saratoga funds. Mr. Oberbeck is also a director of Advanced Lighting Technologies, Inc. and other private companies.

 

Dr. Hillenbrand has been a director of KI Holdings since November 2004 and has been a director of Koppers Inc. since February 1999. Dr. Hillenbrand retired from Bayer AG in August 2003, where he was Executive Vice President, Bayer Polymers, since July 2002. Dr. Hillenbrand previously had been President and Chief Executive Officer of Bayer, Inc. for eight years. In July 2005 Dr. Hillenbrand was appointed President of the Carnegie Museums of Pittsburgh.

 

Mr. McCurrie was elected Vice President and Chief Financial Officer of KI Holdings in November 2004 and has been Vice President and Chief Financial Officer of Koppers Inc. since October 2003. Mr. McCurrie, a Certified Public Accountant, was the Chief Financial Officer of Pittsburgh-based Union Switch & Signal, Inc. from 1996 to October 2003. Mr. McCurrie was employed by Union Switch & Signal, Inc. from 1992 to October 2003.

 

Mr. Lacy was elected Senior Vice President, Administration, General Counsel and Secretary of KI Holdings in November 2004 and has been Senior Vice President, Administration, General Counsel and Secretary of Koppers Inc. since January 2004. Mr. Lacy had previously been elected Vice President, Law and Human Resources and Secretary of Koppers Inc. in July 2002 and Vice President, General Counsel and Corporate Secretary of Koppers Inc. in July 2001. Mr. Lacy worked in the corporate legal department for Wheeling-Pittsburgh Steel Corporation from July 1998 through June 2001, most recently as Vice President, General Counsel and Secretary.

 

Mr. Loadman was elected Vice President and General Manager, Railroad Products & Services of Koppers Inc. in November 1994. After serving as plant manager of the Susquehanna, Pennsylvania treating and cogeneration plants from 1985 to 1988, Mr. Loadman was appointed Railroad Plants Operations Manager of the Railroad & Utility Products business of Koppers Inc. in January 1989. Mr. Loadman is a member of the Railway Tie Association and American Wood Preservers Association.

 

Mr. Fitzgerald was elected Vice President and General Manager, Carbon Materials & Chemicals of Koppers Inc. 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 of Koppers Inc. in January 1998. He was Product Manager, Industrial Pitches of Koppers Inc. from 1991 to 1995. Mr. Fitzgerald is a director of the American Coke & Coal Chemicals Institute.

 

Mr. Bryon was elected Vice President, Australasian Operation of Koppers Inc. in October 1998. Mr. Bryon served as General Manager of Koppers Inc. Carbon & Chemicals Pty Ltd. (a subsidiary of Koppers Inc. Australia Pty Ltd. and previously known as Koppers Inc. Coal Tar Products Pty Ltd.) since 1993.

 

Dr. Whittle was elected Vice President, European Operations of Koppers Inc. in May 2000. Prior to May 2000, Dr. Whittle served as Managing Director of the United Kingdom operations of Tarconord since the acquisition of Bitmac, Ltd. by Tarconord in 1996. From 1986 until 1996, Dr. Whittle was Managing Director and Chief Executive Officer of Bitmac Ltd. Dr. Whittle is active in industry associations and has served as president

 

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of the International Tar Association and Lincolnshire Iron & Steel Institute. Dr. Whittle is currently Vice President of the CEFIC Coal Tar Sector Group.

 

Mr. Bryce was elected Vice President and General Manager, Utility Poles & Piling Products, of Koppers Inc. in February 2002. Prior to joining Koppers Inc., Mr. Bryce worked for Atlantic Wood Industries and is a past chairman of the American Wood Preservers Institute and the Southern Pressure Treaters Association.

 

Mr. McCormack was elected Vice President and General Manager, Global Marketing, Sales and Development Group, Carbon Materials & Chemicals of Koppers Inc., in February 2002. Mr. McCormack had been Vice President, Marketing and Corporate Development for Koppers Inc. Europe ApS since January 2001 and General Manager of Carbon Materials & Chemicals for Koppers Inc. Australia Pty Ltd. since 1998.

 

Ms. Hyde was elected Vice President, Safety and Environmental Affairs in September 2005. Ms. Hyde joined Koppers Inc. in 1999 as Manager of the Environmental Department after spending 18 years as a plant manager for a specialty chemicals manufacturer, as a consulting engineer and as a military officer.

 

Mr. Wombles joined Koppers Inc. in June 1997, at which time he was elected Vice President, Technology. Prior to joining Koppers Inc., Mr. Wombles was Vice President, Research, Applications and Development for Ashland Petroleum Company. Mr. Wombles’ area of expertise is the chemistry and processing of high molecular weight hydrocarbons. Mr. Wombles is the author of several technical publications in this area and has been granted ten U.S. patents in the area of hydrocarbon processing.

 

Ms. Schaming was elected Treasurer and Assistant Secretary of KI Holdings in November 2004 and has been Treasurer and Assistant Secretary of Koppers Inc. since May 1992. Ms. Schaming’s previous position was Assistant Treasurer and Manager of Cash Operations of Koppers Inc. Ms. Schaming is a certified cash manager.

 

Composition of the Board of Directors

 

Our board of directors currently consists of five directors. The board of directors has determined that Dr. Hillenbrand,                                  and                                  are independent in accordance with the currently effective listing standards of the New York Stock Exchange.

 

Under the New York Stock Exchange rules, we will be required to have a majority of independent directors on our board of directors within 12 months of the completion of our IPO and to have our audit committee be composed entirely of independent directors at the completion of our IPO. Our human resources and compensation committee and our nominating and corporate governance committee will be required to be composed of a majority of independent directors within 90 days following the completion of our IPO and entirely of independent directors within one year following the completion of our IPO.

 

Committees of the Board of Directors

 

Our board of directors currently has an audit committee, a human resources and compensation committee, a safety, health and environmental committee and a nominating and corporate governance committee.

 

Audit Committee

 

Our audit committee after the completion of our IPO will be composed of Dr. Hillenbrand,                      and                 . Dr. Hillenbrand is our audit committee “financial expert” as such term is defined in Item 401(h) of Regulation S-K. The purpose of the audit committee is to assist the board of directors in its oversight of:

 

    The integrity of our financial statements;
    Our compliance with legal and regulatory requirements;
   

Our independent auditor’s qualifications and independence;

 

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    The performance of our internal audit function and independent auditors; and
    The effectiveness of our disclosure and accounting controls.

 

The audit committee has approved and adopted a Code of Business Conduct and Ethics for all directors, officers and employees, a copy of which will be available on our website and upon written request by our shareholders at no cost.

 

Human Resources and Compensation Committee

 

Our current human resources and compensation committee consists of Mr. Oberbeck, Chairman; Dr. Hillenbrand; and Mr. Cizik. The human resources and compensation committee is responsible for establishing and reviewing staffing and compensation criteria at the executive level. The committee seeks to ensure that management is rewarded appropriately for its contributions to our growth and profitability and that our compensation and benefit strategy supports organization objectives and shareholder interests.

 

Nominating and Corporate Governance Committee

 

Our current nominating and corporate governance committee consists of Mr. Cizik, Chairman; Mr. Oberbeck; and Mr. Turner. The nominating and corporate governance committee is responsible for reviewing and administering the overall effectiveness of corporate governance and the management of the board of directors. The committee makes recommendations to the board of directors and to management on their respective organization and practices and participates in identifying and recruiting directors and, when appropriate, officer candidates.

 

Safety, Health and Environmental Committee

 

Our current safety, health and environmental committee consists of Mr. Sweeney, Chairman; Dr. Hillenbrand; Mr. Oberbeck; Mr. Turner; and Mr. Cizik (ex-officio). The safety, health and environmental committee is responsible for reviewing (i) our policies and practices that address safety, health and environmental concerns and (ii) significant legislative, regulatory and social trends and developments concerning safety, health and environmental issues.

 

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EXECUTIVE COMPENSATION

 

Summary of Cash and Certain Other Compensation

 

The following table sets forth information concerning the compensation for services in all capacities to us, including options and stock appreciation rights, SARS, for the years ended December 31, 2004, 2003 and 2002, of those persons who were at December 31, 2004 the current Chief Executive Officer and each of the other four most highly compensated executive officers who earned more than $100,000 in salary and bonus in 2004, collectively known as the Named Executive Officers.

 

Summary Compensation Table

 

    Annual Compensation

  Long-Term Compensation

Name and Principal Position


  Year

  Salary

  Bonus

  Securities
Underlying
Options/
SARs (#)


  Restricted
Stock (1)


  All Other
Compensation (2)


Walter W. Turner

President and

Chief Executive Officer

  2004
2003
2002
  $
 
 
440,000
400,000
381,250
  $
 
 
440,000
344,000
175,000
  —  
—  
15,000
  $
 
 
525,600
—  
—  
  $
 
 
160,521
111,268
133,259

Steven R. Lacy (3)

Senior Vice President, Administration

General Counsel and Secretary

  2004
2003
2002
   
 
 
272,640
250,020
237,315
   
 
 
318,000
157,000
82,500
  —  
—  
10,000
   
 
 
262,800
—  
—  
   
 
 
101,804
71,798
73,600

Brian H. McCurrie (4)

Vice President and

Chief Financial Officer

  2004
2003
   
 
228,000
74,728
   
 
328,000
25,000
  —  
—  
    262,800    
 
85,090
—  

David Whittle (5)

Vice President, European Operations,

Koppers Europe ApS

  2004
2003
2002
   
 
 
271,294
235,289
209,880
   
 
 
173,405
127,073
145,890
  —  
—  
—  
   
 
 
—  
—  
—  
   
 
 
36,682
36,621
22,264

Kevin J. Fitzgerald

Vice President and General Manager,

Carbon Materials & Chemical Division,

Koppers Inc.

  2004
2003
2002
   
 
 
212,400
200,400
190,500
   
 
 
122,560
88,000
40,706
  —  
—  
3,000
   
 
 
262,800
—  
—  
   
 
 
80,669
58,739
69,527

(1) Amounts set forth in the restricted stock award column represent the grant-date value of time-based restricted stock units that were granted to Mr. Turner, Mr. Lacy, Mr. McCurrie and Mr. Fitzgerald in August 2004. The vesting schedule for these units to shares of KI Holdings is 20% in August 2004, 20% in August 2005, 20% in August 2006, 20% in August 2007 and 20% in November 2008. Non-vested restricted stock units do not have voting rights nor are they entitled to receive dividends. The total number of restricted stock units granted to the Named Executive Officers is as follows: Mr. Turner, 40,000 shares; Mr. Lacy, 20,000 shares; Mr. McCurrie, 20,000 shares; and Mr. Fitzgerald, 20,000 shares.

 

(2) With the exception of Dr. Whittle, all other compensation consists of regular and supplemental matches to our 401(k) plan and earned credit for our Supplemental Executive Retirement Plan, or SERP. For Mr. Turner, 401(k) matches for 2004, 2003 and 2002 were $6,150, $6,000 and $6,000, respectively, and SERP credits for 2004, 2003 and 2002 were $154,371, $105,268 and $127,259, respectively. For Mr. Lacy, 401(k) matches for 2004, 2003 and 2002 were $6,150, $6,000 and $6,000, respectively, and SERP credits for 2003, 2002 and 2001 were $96,654, $65,798 and $67,600, respectively. For Mr. McCurrie, 401(k) match for 2004 was $6,150 and SERP credits for 2004 were $78,940. For Mr. Fitzgerald, 401(k) matches for 2004, 2003 and 2002 were $6,150, $6,000 and $6,000, respectively, and SERP credits for 2004, 2003 and 2002 were $74,519, $52,739 and $63,527, respectively. All other compensation for Dr. Whittle consists of automobile allowances.

 

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(3) Mr. Lacy’s bonus for 2004 includes the fair value of a stock grant amounting to 4,000 shares.

 

(4) Mr. McCurrie’s bonus for 2004 includes the fair value of a stock grant amounting to 4,000 shares; for 2003, Mr. McCurrie’s salary represents approximately two and one-half months of service.

 

(5) For 2004, Dr. Whittle’s bonus includes $33,333 that represents the vested portion of a $100,000 bonus he received in lieu of restricted stock. The remaining $66,667 vests in two additional equal installments over the next two years.

 

Stock Options

 

There were no grants of stock appreciation rights, or SARs, or stock options during 2004.

 

Option Exercises and Fiscal Year-End Values

 

Shown below is information with respect to stock options exercised during 2004. There were no unexercised stock options held by any Named Executive Officers at December 31, 2004. 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/SARs Exercised in Last Fiscal Year and Fiscal Year-End Options/SARs Values

 

Name


  

Number of

Securities

Underlying

Options/

SARs

Exercised


  

Value

Realized

($)


  

Number of Securities

Underlying Unexercised

Options/SARs at

FY-End (#)


  

Value of Unexercised

in-the-money Options/

SARs at

FY-End ($)


         Exercisable

   Unexercisable

   Exercisable

   Unexercisable

Walter W. Turner

   17,400    $ 148,800    —      —      $ —      $ —  

Steven R. Lacy

   8,000      54,800    —      —        —        —  

Brian H. McCurrie

   —        —      —      —        —        —  

David Whittle

   3,000      27,000    —      —        —        —  

Kevin J. Fitzgerald

   5,600      45,240    —      —        —        —  

 

Benefit Plans

 

Pension Plan.    All our executive officers located in the U.S. are covered by the Retirement Plan of Koppers Inc. and Subsidiaries for Salaried Employees, which we refer to as the Salaried Plan. Prior to June 1, 2004, annual retirement benefits were 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 was determined based on the average annual salary (defined as salary plus 50% 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 included all accumulated service as a salaried employee except for any period of layoff or leave of absence. In 1998, we amended the Salaried Plan to provide a minimum pension equal to 1.2% of Terminal Salary multiplied by years of Credited Service up to 35 years reduced by any pension benefit paid by the pension plan of the former Koppers Company, Inc., now known as Beazer East, Inc. (“Old Koppers” for the period prior to December 29, 1988). For purposes of the minimum pension calculations, Terminal Salary was determined based on the average annual salary (defined as salary plus 75% of any incentive payments) for the five highest consecutive years of the last ten years of Credited Service, or during all years of Credited Service if less than five.

 

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The following table contains approximate retirement benefits for Credited Service before June 1, 2004 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.

 

Estimated Annual Retirement Benefit Under the Salaried Retirement Plan for Pre-June 1, 2004

Credited Service

 

Terminal

Salary


   Years of Credited Service at Retirement

   5

   10

   15

   20

   25

   30

$100,000

   $  7,680    $15,360    $  23,040    $  30,720    $  38,400    $  46,080

  150,000

     11,680      23,360        35,040        46,720        58,400        70,080

  200,000

     15,680      31,360        47,040        62,720        78,400        94,080

  250,000

     19,680      39,360        59,040        78,720        98,400      118,080

  300,000

     23,680      47,360        71,040        94,720      118,400      142,080

  350,000

     27,680      55,360        83,040      110,720      138,400      166,080

  400,000

     31,680      63,360        95,040      126,720      158,400      190,080

  450,000

     35,680      71,360      107,040      142,720      178,400      214,080

  500,000

     39,680      79,360      119,040      158,720      198,400      238,080

  550,000

     43,680      87,360      131,040      174,720      218,400      262,080

 

Effective June 1, 2004 we further amended the Salaried Plan. For Credited Service after May 31, 2004, annual retirement benefits are computed at the rate of 1.0% of Terminal Salary multiplied by years of Credited Service after May 31, 2004. Effective June 1, 2004 we also amended the definition of Terminal Salary to mean the average annual salary (defined as salary plus 100% of any incentive payments) for the five highest consecutive years of the last ten years of Credited Service or during all years of Credited Service if less than five.

 

The following table contains approximate retirement benefits for Credited Service after May 31, 2004 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.

 

Estimated Annual Retirement Benefit Under the Salaried Retirement Plan for Post-May 31, 2004

Credited Service

 

Terminal

Salary


   Years of Credited Service at Retirement

   5

   10

   15

   20

   25

   30

$100,000

   $  5,000    $  10,000    $  15,000    $  20,000    $  25,000    $  30,000

  150,000

       7,500        15,000        22,500        30,000        37,500        45,000

  200,000

     10,000        20,000        30,000        40,000        50,000        60,000

  250,000

     12,500        25,000        37,500        50,000        62,500        75,000

  300,000

     15,000        30,000        45,000        60,000        75,000        90,000

  350,000

     17,500        35,000        52,500        70,000        87,500      105,000

  400,000

     20,000        40,000        60,000        80,000      100,000      120,000

  450,000

     22,500        45,000        67,500        90,000      112,500      135,000

  500,000

     25,000        50,000        75,000      100,000      125,000      150,000

  550,000

     27,500        55,000        82,500      110,000      137,500      165,000

 

The following describes the Terminal Salary and Years of Service, respectively, accrued as of December 31, 2004 for each participating Named Executive Officer: Walter W. Turner, $518,392 and 16 years of service; Steven R. Lacy, $289,787 and four years of service; Brian H. McCurrie, $270,000 and one year of service; and Kevin J. Fitzgerald, $227,440 and 16 years of service.

 

Effective December 1, 1997, the board of directors established a Supplemental Executive Retirement Plan for each participating Named Executive Officer and all our other participating elected officers. 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 us; (ii) pension benefits received from Old Koppers; (iii) one half of any Social Security benefits; and (iv) the value of our paid common stock in the individual’s Employee Savings Plan account.

 

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Equity Compensation Plan Information

 

Plan Category


   Number of securities
to be issued upon
vesting


   Weighted-average
price of outstanding
non-vested shares


   Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)


Equity compensation plans approved by security holders (1)

   81,000    $  —      15,000

(1) Includes our Restricted Stock Unit Plan.

 

2005 Long-Term Incentive Plan

 

Prior to the completion of this offering, our board of directors and shareholders will adopt the 2005 Long-Term Incentive Plan, or the Incentive Plan.

 

General.    The purposes of the Incentive Plan are to encourage selected of our salaried employees, and those of our subsidiaries and selected affiliates, to acquire a proprietary interest in our growth and performance, to generate an increased incentive to contribute to our future success and to enhance our ability and that of our subsidiaries and affiliates to attract and retain qualified individuals.

 

Eligibility and Administration.    Our and our subsidiaries’ and selected affiliates’ salaried employees will be eligible to be granted awards under the Incentive Plan. The Incentive Plan will be administered by our compensation committee or such other board committee (or the entire board of directors) as may be designated by the board, which we refer to as the Committee. Unless otherwise determined by the board, the Committee will consist of two or more members of the board of directors who are “nonemployee directors” within the meaning of Rule 16b-3 of the Exchange Act and “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. The Committee will determine, among other things, which eligible employees receive awards, the types of awards to be received and the terms and conditions thereof and will have authority to make any other determination or take any other action that it deems necessary or desirable for such administration.

 

Awards.    The Incentive Plan provides for the grant to eligible persons of stock options, restricted stock, restricted stock units, or RSUs, performance shares, performance awards, dividend equivalents and other stock-based awards, which we refer to collectively as the awards. An aggregate of                      shares of our outstanding common stock on a fully diluted basis upon completion of this offering have been reserved for issuance under the Incentive Plan. In addition, during any one calendar year grants to any one participant which represent or are designated in common stock shall not exceed                    . These stock amounts are subject to anti-dilution adjustments in the event of certain changes in our capital structure, as described below.

 

Stock Options.    Incentive stock options, or ISOs, which are intended to qualify for special tax treatment in accordance with the Code, and nonqualified stock options, which are not intended to qualify for special tax treatment under the Code, may be granted under the Incentive Plan. The Committee is authorized to set the terms relating to an option, including exercise price and the time and method of exercise.

 

Restricted Stock.    Awards of restricted stock and restricted stock units, or RSUs, will be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose on the date of grant or thereafter. Such restrictions will lapse under circumstances as the Committee may deem appropriate, including, without limitation, upon a specified period of continued employment. Except as otherwise determined by the Committee, eligible participants granted restricted stock will have all of the rights of a shareholder, including the right to vote restricted stock and receive dividends thereon. Unvested restricted stock and RSUs will be forfeited upon termination of employment during the applicable restriction period, unless the Committee decides to waive, in whole or in part, any or all remaining restrictions.

 

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Performance Shares and Performance Units.    The Committee is authorized to grant performance awards to participants. Subject to the terms of the Incentive Plan and any applicable award agreement, a performance award granted under the Incentive Plan (i) may be denominated or payable in cash, stock (including, without limitation, restricted stock or RSUs), other securities, other awards or other property and (ii) shall confer on the holder thereof rights valued as determined by the Committee and payable to, or exercisable by, the holder of the performance award, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Incentive Plan and any applicable award agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any performance award granted and the amount of any payment or transfer to be made pursuant to any performance award shall be determined by the Committee, provided that a performance period shall be at least one year except upon a change of control.

 

Change of Control.    Unless otherwise provided by the board of directors or the Committee prior to a change of control, in the event of a change in control (as defined in the Incentive Plan), all outstanding awards granted under the Incentive Plan shall become immediately exercisable, all restrictions or limitations shall lapse, and any performance criteria and other conditions to payment shall be deemed satisfied.

 

Capital Structure Changes.    In the event that the Committee determines that any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of common stock or other of our securities, issuance of warrants or other rights to purchase common stock or other of our securities, or other similar corporate transaction or event affects the stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits intended to be made available under the Incentive Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of common stock (or other securities or property) which thereafter may be made the subject of awards, (ii) the number and type of common stock (or other securities or property) subject to outstanding awards, (iii) the grant, purchase or exercise price with respect to any award, or, if the Committee deems it appropriate, make provision for a cash payment to the holder of an outstanding award and (iv) the limitation on grants of common stock exceeding              shares in any one calendar year. Notwithstanding the foregoing, a Participant to whom dividend equivalents or dividend units have been awarded shall not be entitled to receive a special or extraordinary dividend or distribution unless the Committee shall have expressly authorized such receipt.

 

Amendment and Termination.    The board of directors (or any authorized committee thereof) may amend, suspend, discontinue or terminate the Incentive Plan, including, without limitation, any amendment, suspension, discontinuation or termination that would impair the rights of any participant, or any other holder or beneficiary of any award theretofore granted, without the consent of any shareholder, participant, other holder or beneficiary of an award, or other person, but may not, without the approval of the shareholders, make any such amendment, suspension, discontinuation or termination that would (i) amend the definition of “Participant” or the definition of “Salaried Employee” to include non-employee directors, (ii) except for the adjustments described in “—Capital Structure Changes”, increase the number of shares available for issuance under the Incentive Plan, or (iii) permit any award encompassing rights to purchase common stock to be granted with per share purchase or exercise prices of less than the Fair Market Value (as defined in the Incentive Plan) of our common stock on the date of grant thereof.

 

Effective Date and Term.    The Incentive Plan will be effective as of the completion of this offering. The Incentive Plan will terminate as to future awards on                     .

 

Employment Agreements

 

Employment Agreement with Brian H. McCurrie.    We entered into an employment agreement with Mr. McCurrie in October 2003 that contains the terms of Mr. McCurrie’s employment with Koppers Inc. The employment agreement provides that Mr. McCurrie will serve as Vice President and Chief Financial Officer at a

 

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beginning annual salary of $225,000, subject to annual adjustments. The employment agreement provides for a signing bonus of $50,000 and participation in our corporate senior management incentive pool with an annual incentive target of 55% of base salary, and provides for a stock option grant to purchase a total of 7,500 shares of our common stock. The employment agreement also provides for participation in all our benefits plans. The agreement provides that in the event of termination by us other than for cause, Mr. McCurrie shall be entitled to severance payments for a minimum of one year and a maximum of two years, based on the years of service to us prior to termination. In the event Mr. McCurrie is terminated (other than for cause) due to a change in control, his employment agreement provides for the following payments (i) all of his accrued salary to the date of his termination, (ii) a pro-rata bonus for the year in which his termination occurs, (iii) a lump sum payment equal to twice the sum of his base salary plus 50% of the amount awarded to him under certain bonus and incentive plans for the two years preceding the change in control, (iv) a lump sum payment equal to the value of an additional two years of service under our supplemental and qualified pension plans, (v) life, disability, accident and group health benefits for two years or until he receives comparable benefits from a third party, (vi) reasonable legal fees and expenses incurred by Mr. McCurrie as a result of his termination and (vii) continued indemnification for pre-termination acts and omissions. The term of the agreement began October 13, 2003 and continues in effect until October 12, 2005, and each October 12 thereafter, the term is automatically extended for one additional year unless, at least one hundred eighty days prior to such renewal, we or Mr. McCurrie shall have given notice to the other party that such party does not wish to extend such term; however, if a change of control shall have occurred during the original or extended term, the term shall continue for period of not less than twenty-four months following the month in which such change of control occurred. Neither Mr. McCurrie nor we provided timely notice of termination 180 days in advance of October 12, 2005. Therefore, Mr. McCurrie’s agreement has been automatically extended until at least October 12, 2006.

 

Employment Agreement with Steven R. Lacy.    We entered into an employment agreement with Mr. Lacy in April 2002 that contains the terms of Mr. Lacy’s employment with Koppers Inc. The employment agreement provides that Mr. Lacy will serve as Vice President, General Counsel and Corporate Secretary. The term of the agreement commenced on April 5, 2002 and continued until April 4, 2004; thereafter, on April 4 of each year the term is automatically extended for one additional year unless notice is given 180 days in advance by us or Mr. Lacy that such party does not wish to extend the term. Neither Mr. Lacy nor we provided timely notice of termination 180 days in advance of April 4, 2005. Therefore, Mr. Lacy’s agreement has been automatically extended until at least April 4, 2006. The employment agreement provides that Mr. Lacy will receive a base salary at an annual rate of no less than $250,000, and that such base salary will be subject to periodic review by the Chief Executive Officer. The employment agreement provides for participation in our corporate senior management incentive pool with an annual incentive target of 40% of base salary, and provides for a stock option grant to purchase a total of 7,500 shares of our common stock. The employment agreement also provides for participation in all of our benefits plans. In the event of termination by us other than for cause, Mr. Lacy is entitled to receive the following payments: (i) 104 weeks of salary and benefits continuation; (ii) an additional number of weeks of salary and benefits continuation equal to the number of full years of service with us; (iii) a lump sum severance payment equal to one-half of the sum of the amounts awarded to him under the applicable incentive plan and bonus plans in respect of each of the two calendar years preceding that in which occurs the date of termination; and (iv) a lump sum severance payment equal to the value of certain payments he is entitled to receive in the event of a change of control, whether or not a change of control occurs.

 

Employment Agreement with David Whittle.    We entered into an employment agreement with Dr. Whittle in August 2000 that contains the terms of Dr. Whittle’s employment with Koppers Inc. The employment agreement provides that Dr. Whittle will serve as Vice President and General Manager of Koppers Europe at a beginning annual salary of 131,000 pounds sterling, subject to annual adjustments. The agreement also provides for participation in our incentive plan based on the attainment of certain operating results for Koppers Europe. The agreement provides that in the event of termination for any reason other than gross misconduct, Dr. Whittle shall be given twelve months’ notice of termination or, at our option, pay in lieu of notice. The agreement provides that in exchange for the terms of the employment agreement, Dr. Whittle agrees to an immediate termination of the service agreement entered into with Bitmac Limited (predecessor company to the United Kingdom operations of Koppers Europe ApS).

 

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Director Compensation

 

We do not pay compensation to directors who are also employees. In 2004, each director who is not an employee was paid a retainer fee of $40,000 per year plus $5,000 for each board committee (with the exception of the audit committee, which chair received $10,000 in 2004) chaired, except the Saratoga Partners III, L.P. director is paid under the advisory services agreement between Koppers Inc. and an affiliate of Saratoga Partners III, L.P. in lieu of director’s fees. See “Certain Relationships and Related Transactions.”

 

Compensation Committee Interlocks and Insider Participation

 

Mr. Oberbeck, a principal for Saratoga Partners, serves on and is chairman of the human resources and compensation committee of the board of directors, which, among other things, establishes compensation levels for our five most highly paid executive officers. We also have an advisory services agreement with an affiliate of Saratoga Partners III, L.P. pursuant to which we pay a management fee of $150,000 per quarter to Saratoga in lieu of director’s fees to Mr. Oberbeck. The advisory services agreement will be terminated in connection with this offering for an aggregate consideration of $             million. In addition, affiliates of Saratoga Partners III, L.P. may provide us with financial advisory services in connection with significant business transactions, such as acquisitions, for which we will pay compensation comparable to compensation paid for such services by similarly situated companies. During 2004 and 2003 we paid an affiliate of Saratoga Partners III, L.P. $0.5 million and $1.6 million, respectively, for advisory services in connection with refinancing activities.

 

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PRINCIPAL AND SELLING SHAREHOLDERS

 

In November 2004, KI Holdings was created to be the direct parent company of Koppers Inc. KI Holdings has no material assets or operations other than cash from the issuance of the Senior Discount Notes and its 100% ownership of Koppers Inc. Pursuant to an agreement and plan of merger, shareholders and option holders of Koppers Inc. became shareholders and option holders of KI Holdings on November 18, 2004 and are no longer shareholders and option holders of Koppers Inc.

 

The following table sets forth certain information regarding the beneficial ownership of the common stock and preferred stock of KI Holdings as of September 1, 2005 by (i) each person known to us to beneficially own more than 5% of the outstanding shares of either common stock or preferred stock; (ii) each of KI Holdings’ directors; (iii) each of the Named Executive Officers; and (iv) all of KI Holdings’ directors and executive officers as a group.

 

Except as otherwise indicated, the address for each of the named individuals is c/o KI Holdings Inc., 436 Seventh Avenue, Pittsburgh, PA 15219.

 

<

Name of Beneficial Owner


  Shares of
Common Stock
Beneficially
Owned Prior to
the Offering


   

Shares of
Convertible
Preferred Stock
Beneficially

Owned Prior to

the Offering (2)


    Shares Offered Hereby

  Shares Beneficially Owned
After Offering


      Assuming No
Exercise of
Over-
Allotment
Option


  Assuming Full
Exercise of
Over-
Allotment
Option


  Assuming No
Exercise of
Over-
Allotment
Option


  Assuming Full
Exercise of
Over-
Allotment
Option


  Number (1)

  % (1)

    Number

  %

    Number

  Number

  Number

  %

  Number

  %

Saratoga Partners III, L.P. (3)

            2,288,481   100.0 %                        

Walter W. Turner (4)

  674,137   91.8 %                                  

Randall D. Collins (4)

  674,137   91.8 %                                  

Clayton A. Sweeney (5)

  5,000   *                                    

Christian L. Oberbeck (3)

            2,288,481   100.0 %                        

Robert Cizik (6)

  60,294   8.2 %                                  

David M. Hillenbrand (7)

  20,000   2.7 %                                  

Steven R. Lacy (8)

  38,000   5.2 %                                  

Brian H. McCurrie (9)

  12,000   1.6 %                                  

David Whittle

  —     *                                    

Kevin J. Fitzgerald (10)

  24,925   3.4 %