<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . to . . . . . .
Commission file number 1-7210
REPUBLIC GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 75-1155922
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
811 East 30th Avenue, Hutchinson, Kansas 67502-4341
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Post Office Box 1307, Hutchinson, Kansas 67504-1307
---------------------------------------- ----------
(Mailing Address) (Zip code)
316-727-2700
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On October 31, 1997, there were 11,694,402 shares of the registrant's Common
Stock, $1.00 par value outstanding.
<PAGE> 2
REPUBLIC GROUP INCORPORATED
FORM 10-Q
Quarterly Report
For the Quarter Ended September 30, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Reference is made to pages 2 through 5 hereof which set forth
certain consolidated financial statements of Registrant in
accordance with Part I of Form 10-Q.
The consolidated financial statements include the accounts of
Republic Group Incorporated and its wholly owned subsidiaries
(collectively referred to as the "Company").
<PAGE> 3
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended September 30, 1997 and 1996 (Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Gross sales ................................. $37,002,000 $33,880,000
Less freight and discounts .................. 5,113,000 4,876,000
----------- -----------
Net sales ................................... 31,889,000 29,004,000
Costs and expenses:
Cost of sales .......................... 21,383,000 17,611,000
Selling and administrative expenses .... 3,620,000 3,149,000
----------- -----------
25,003,000 20,760,000
----------- -----------
Operating profit ............................ 6,886,000 8,244,000
Other income (expense), net ................. 91,000 (329,000)
----------- -----------
Income before income taxes .................. 6,977,000 7,915,000
Provision for income taxes .................. 2,651,000 2,896,000
----------- -----------
NET INCOME .................................. $ 4,326,000 $ 5,019,000
=========== ===========
Income per common and common equivalent share $ 0.37 $ 0.43
=========== ===========
Weighted average shares outstanding ......... 11,832,000 11,768,000
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 4
REPUBLIC GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and June 30, 1997
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
------------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 42,000 $ 1,436,000
Investments and marketable securities, at market ............. 5,144,000 650,000
Accounts receivable, net ..................................... 13,441,000 13,893,000
Income tax refunds receivable ................................ 221,000 494,000
Inventories:
Finished goods ............................................. 2,300,000 2,246,000
Raw materials and supplies ................................. 5,516,000 5,095,000
------------ ------------
7,816,000 7,341,000
Prepaid expenses and other ................................... 514,000 660,000
Deferred income taxes ........................................ 576,000 576,000
------------ ------------
TOTAL CURRENT ASSETS ....................................... 27,754,000 25,050,000
Property, plant and equipment, at cost .......................... 125,186,000 121,460,000
Less accumulated depreciation, amortization
and depletion .............................................. 48,791,000 46,985,000
------------ ------------
76,395,000 74,475,000
Other assets .................................................... 854,000 875,000
------------ ------------
TOTAL ASSETS .................................................... $105,003,000 $100,400,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 6,540,000 $ 7,534,000
Accrued payroll and employee benefits ........................ 2,575,000 2,986,000
Income taxes payable ......................................... 2,854,000 203,000
Other current liabilities .................................... 1,451,000 1,388,000
------------ ------------
TOTAL CURRENT LIABILITIES .................................. 13,420,000 12,111,000
Deferred income taxes ........................................... 9,838,000 9,838,000
Other long-term liabilities ..................................... 606,000 606,000
Stockholders' equity:
Common stock, $1 par value ................................... 11,718,000 11,716,000
Additional paid-in capital ................................... 27,853,000 27,827,000
Retained earnings ............................................ 42,261,000 38,995,000
Less: Treasury stock, at cost, 33,000 shares ................ (693,000) (693,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................. 81,139,000 77,845,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $105,003,000 $100,400,000
------------ ------------
</TABLE>
See accompanying notes.
3
<PAGE> 5
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1997 and 1996 (Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 4,326,000 $ 5,019,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and depletion ....................... 1,806,000 1,637,000
Deferred income taxes .......................................... -- 485,000
Loss on sale of assets ......................................... -- 20,000
Changes in current assets and liabilities:
Accounts receivable ....................................... 452,000 (498,000)
Income tax refunds receivable ............................. 273,000 20,000
Inventories ............................................... (475,000) (175,000)
Prepaid expenses .......................................... 146,000 123,000
Accounts payable and accrued liabilities .................. (1,342,000) (426,000)
Income taxes payable ...................................... 2,651,000 2,442,000
Other assets and liabilities ................................... 21,000 (161,000)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 7,858,000 8,486,000
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ......................... (3,726,000) (2,037,000)
Proceeds from sale of property, plant and equipment ................ -- 1,000
Purchases of investments ........................................... (5,665,000) (7,915,000)
Proceeds from sale of investments .................................. 1,171,000 7,200,000
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES .............................. (8,220,000) (2,751,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ..................................................... (1,052,000) (955,000)
Proceeds from exercised stock options .............................. 20,000 69,000
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES .............................. (1,032,000) (886,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... (1,394,000) 4,849,000
Cash and cash equivalents at beginning of year .......................... 1,436,000 2,243,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................. $ 42,000 $ 7,092,000
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 6
REPUBLIC GROUP INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1997 and 1996 (Unaudited)
(1) In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements reflect all adjustments, of a normal recurring
nature, to fairly present the Company's financial position as of September 30,
1997, and the results of operations and cash flows for the periods ended
September 30, 1997 and 1996. The operating results for the interim periods are
not necessarily indicative of the results to be expected for a full year. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K as of June 30, 1997.
(2) Per Share Computations: Per share computations are based on the
weighted average number of common shares outstanding during each period. Income
per common and common equivalent share on a diluted basis is substantially the
same as basic income per share as presented. The number of shares used in the
per share computations were 11,832,000 for the three-month period ended
September 30, 1997 and 11,768,000 for the comparable 1996 period.
(3) Other Commitments and Contingent Liabilities: In connection with
its preparations for a warehouse addition to its paperboard mill located in
Commerce City, Colorado, a suburb of Denver, the Company discovered and has been
investigating the presence of subsurface petroleum hydrocarbons. The Company
retained an environmental consultant who concluded that fuel oil, jet fuel, and
gasoline additives had migrated in the subsurface of the Company's property from
an adjacent property. The Company has conducted its own investigations, and the
adjacent property owner has conducted its own investigations. Additionally, the
Company and the adjacent property owner have jointly sponsored investigations.
Discussions between the parties continue. The Company has completed the
construction of the warehouse addition under approval of the Colorado Department
of Health. At this time, the Company has not ascertained the future liability,
if any, of the above matter.
Other commitments of the Company include non-cancelable contracts to
purchase property, plant, and equipment relating to the expansion of the Duke,
Oklahoma wallboard facility. These commitments totaled approximately $15,300,000
at September 30, 1997.
(4) Reclassification: Certain prior year balances have been reclassified to
conform with current year presentation.
(5) Subsequent Event: On October 23, 1997, the Board of Directors of the
Company declared a quarterly cash dividend of $.09 per share of common stock to
be paid on December 15, 1997 to stockholders of record on November 28, 1997.
Dividend payments will total approximately $1,053,000.
(6) Income Taxes: The provisions for income taxes are based on
estimated annual effective tax rates, which differ from the federal statutory
rates principally due to state income taxes and certain non-deductible expenses.
These estimates are updated quarterly.
(7) All references to share amounts, per share amounts and stock prices
reflect a 10% stock dividend distributed in March 1997.
5
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Quarters ended September 30, 1997 and 1996. Consolidated net income was
$4,326,000 or $.37 per share on net sales of $31,889,000 for the first quarter
ended September 30, 1997. This compares to consolidated net income of $5,019,000
or $.43 per share on net sales of $29,004,000 for the first quarter ended
September 30, 1996.
The gypsum wallboard division continued to experience strong demand
during the current quarter. The 10% increase in consolidated net sales from the
September 1996 quarter to the September 1997 quarter was primarily attributable
to an 11% increase in gypsum wallboard net selling prices. Additionally,
consolidated net sales were influenced by a 2% increase in net sales recorded by
the Company's recycled paperboard segment which includes the Company's recycled
paperboard mills and recovered paper fiber recycling operations. Although both
of the Company's segments operated at higher operating rates in the September
1997 quarter compared to the 1996 quarter, this was not sufficient to offset a
46% increase in raw material costs at the Company's recycled paperboard mills
(principally reclaimed paper fiber). Typically, reclaimed paper fiber costs to
the Company's recycled paperboard mills are almost immediately affected by
changes in the relationship between the supply of and demand for reclaimed paper
fiber. As a result, consolidated operating profits decreased $1,358,000 for the
current quarter compared to the 1996 quarter.
The Company began implementing recycled paperboard selling price
increases during September and October, 1997. However, the lag between raw
material cost increases and subsequent selling price increases and difficulties
obtaining all of the announced selling price increases severely restricted
margins in the Company's recycled paperboard division. The cost of recovered
paper fiber for the paperboard division appears to have stabilized and even
retreated to some extent recently. The Company's future results could be
affected adversely by the cost of fuel, principally natural gas and coal. The
prevailing market price of natural gas is a potential concern to the Company
because of its relative importance as a major variable cost component in the
manufacture of gypsum wallboard and recycled paperboard. The cost of natural gas
on the spot market is, on the average, significantly higher now than during this
same period last year. A portion of the Company's natural gas requirements is
under contract with the remainder purchased on the spot market. It is important
to note that natural gas is a commodity and pricing is influenced by supply and
demand.
Statements in this report that are not historical facts are
forward-looking statements pursuant to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. Investors should be aware of factors
and uncertainties that could have a material, negative impact on the Company's
results. Other uncertainties and risks which could affect the Company can be
found in the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1997.
Environmental Matters
On October 17, 1997, the West Virginia Division of Environmental
Protection ("DEP") filed a complaint against Republic Paperboard Company of West
Virginia (the "West Virginia Subsidiary") in the Circuit Court of Jefferson
County, West Virginia. The complaint alleges that the West Virginia Subsidiary
has violated and continues to violate a previous order entered into between the
West Virginia Subsidiary and DEP on January 17, 1995 and further alleges that
the West Virginia Subsidiary has violated and
6
<PAGE> 8
continues to violate certain provisions of its wastewater discharge permit. The
West Virginia Subsidiary discharges treated process wastewater into a creek
running through its Halltown, West Virginia facility (the "Facility") pursuant
to a permit issued to the West Virginia Subsidiary by DEP. The permit requires
that the quality of the water that may be discharged into the creek under the
permit comply with certain effluent limitations. The complaint alleges that the
West Virginia Subsidiary has violated this permit by discharging wastewater
into the creek that contained effluents in excess of the permit limitations.
The complaint alleges 33 violations over a time period from October 1995 to
March 1997. The complaint also alleges that the earlier administrative order
has been violated because of the failure of the West Virginia Subsidiary to pay
a stipulated penalty of $1,000 for two alleged violations of the permit that
occurred between January 1995 and October 1995. DEP is seeking by virtue of the
complaint to require the West Virginia Subsidiary to enter into a consent
agreement that sets forth a compliance schedule for correcting the alleged
deficiencies in the wastewater treatment facilities of the West Virginia
Subsidiary that have led to the alleged effluent exceedances. DEP is also
requesting a civil monetary penalty of an unspecified amount but which,
according to the complaint, may not exceed $10,000 per day for each of the
alleged violations. DEP is also seeking to recover all of its costs of court
including attorneys fees. The West Virginia Subsidiary intends to file and
answer by the December 4, 1997 deadline contesting the allegations of the
complaint.
In connection with the Company's preparation for a warehouse addition
to its paperboard mill located in Commerce City, Colorado, a suburb of Denver,
the Company discovered and has been investigating the presence of subsurface
petroleum hydrocarbons. The Company retained an environmental consultant who
concluded that fuel oil, jet fuel and gasoline additives had migrated in the
subsurface of the Company's property from an adjacent property. The Company has
conducted its own investigations, and the adjacent property owner has conducted
its own investigations. Additionally, the Company and the adjacent owner have
jointly sponsored investigations. Discussions between the parties continue. The
Company has completed the construction of the warehouse addition under approval
of the Colorado Department of Health. At this time, the Company has not
ascertained the future liability, if any, of the above matter.
Liquidity and Capital Resources
The following is a summary of certain financial statistics related to
the liquidity of the Company at September 30, 1997, and at June 30, 1997.
<TABLE>
<CAPTION>
September 30,
1997 June 30, 1997
----------- -----------
<S> <C> <C>
Cash, cash equivalents and investments $ 5,186,000 $ 2,086,000
Working capital $14,334,000 $12,939,000
Ratio of current assets to current liabilities 2.1:1 2.1:1
</TABLE>
On June 30, 1995, the Company purchased substantially all the assets of
Halltown Paperboard Company, Halltown, West Virginia and financed the
acquisition by securing $28.0 million in long-term bank financing, which was
scheduled to mature in the year 2002. However, all interest-bearing debt was
repaid during June 1997. On June 30, 1995, the Company entered into a $7.0
million revolving line of credit. Through September 30, 1997, no amounts were
borrowed against the credit facility which expires June 30, 1998. Outstanding
principal amounts on the revolving credit facility bear interest at a variable
rate equal to (i) the London Interbank Offered Rate, plus an agreed margin
(ranging from 50 to 150 points), which is to be established annually based upon
the Company's coverage of fixed charges or (ii) the bank's corporate prime rate,
less 0.75%. Under the revolving credit facility, the Company is required to
adhere to several financial covenants some of which involve working capital,
current ratio, net worth and fixed
7
<PAGE> 9
charge coverage minimums. The revolving credit facility expires June 30, 1998.
The Company plans to increase its revolving line of credit limit primarily due
to the ongoing expansion at the Company's wallboard production facilities.
This project will double the productive capacity of the facility at an
estimated cost of $26,000,000. Management believes that cash and investments,
internally generated funds, supplemented as needed by advances under a
revolving credit facility, will be sufficient to meet the Company's short-term
working capital requirements.
The Board of Directors of the Company has approved new budgeted capital
expenditures of $8.0 million for fiscal 1998. There have been approximately
$3,726,000 million in fixed asset additions through September 30, 1997. This
amount includes some capital projects carried over from fiscal 1997. Cash
provided by operations, existing cash balances and the Company's line of credit
facility should be sufficient to fund all planned capital expenditures.
On October 23, 1997, the Board of Directors of the Company declared a
quarterly cash dividend of $.09 per share of common stock to be paid on December
15, 1997 to stockholders of record on November 28, 1997. Dividend payments will
total approximately $1,053,000.
8
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 17, 1997, the West Virginia Division of Environmental
Protection ("DEP") filed a complaint against Republic Paperboard
Company of West Virginia (the "West Virginia Subsidiary") in the
Circuit Court of Jefferson County, West Virginia. The complaint
alleges that the West Virginia Subsidiary has violated and
continues to violate a previous order entered into between the
West Virginia Subsidiary and DEP on January 17, 1995 and further
alleges that the West Virginia Subsidiary has violated and
continues to violate certain provisions of its wastewater
discharge permit. The West Virginia Subsidiary discharges treated
process wastewater into a creek running through its Halltown, West
Virginia facility (the "Facility") pursuant to a permit issued to
the West Virginia Subsidiary by DEP. The permit requires that the
quality of the water that may be discharged into the creek under
the permit comply with certain effluent limitations. The complaint
alleges that the West Virginia Subsidiary has violated this permit
by discharging wastewater into the creek that contained effluents
in excess of the permit limitations. The complaint alleges 33
violations over a time period from October 1995 to March 1997. The
complaint also alleges that the earlier administrative order has
been violated because of the failure of the West Virginia
Subsidiary to pay a stipulated penalty of $1,000 for two alleged
violations of the permit that occurred between January 1995 and
October 1995. DEP is seeking by virtue of the complaint to require
the West Virginia Subsidiary to enter into a consent agreement
that sets forth a compliance schedule for correcting the alleged
deficiencies in the wastewater treatment facilities of the West
Virginia Subsidiary that have led to the alleged effluent
exceedances. DEP is also requesting a civil monetary penalty of an
unspecified amount but which, according to the complaint, may not
exceed $10,000 per day for each of the alleged violations. DEP is
also seeking to recover all of its costs of court including
attorneys fees. The West Virginia Subsidiary intends to file and
answer by the December 4, 1997 deadline contesting the allegations
of the complaint.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on October 23,
1997. The votes cast on each item in order of the listing in the
Proxy was as follows:
1. Election of Directors
<TABLE>
<CAPTION>
Votes To
Votes Withhold Broker
For Authority Non-Votes
-------- ------ ---------
<S> <C> <C> <C>
Stephen L. Gagnon 9,579,732 47,096 0
Bert A. Nelson 9,594,865 31,963 0
Talbot Rain 9,571,320 55,508 0
Gerald L. Ray 9,589,510 37,318 0
Robert F. Sexton 9,595,085 31,743 0
David P. Simpson 9,570,862 55,966 0
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C> <C> <C>
Phil Simpson 9,593,644 33,184 0
L. L. Wallace 9,561,006 65,822 0
David B. Yarbrough 9,560,775 66,053 0
</TABLE>
2. Approval of Republic Group Incorporated Employee Stock
Purchase Plan (as more particularly described in the Company's
Proxy Statement).
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--------- --------- --------- ---------
<S> <C> <C> <C>
9,369,023 199,350 58,455 0
</TABLE>
3. In their discretion on any other matters as may properly come
before the meeting or any adjournment(s) thereof.
<TABLE>
For Against Abstain Broker Non-Votes
--------- --------- --------- ---------
<S> <C> <C> <C>
9,626,828 0 0 0
</TABLE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Article 5 of Regulation S-X-Financial Data
Schedule.
(b) Reports on Form 8-K.
None.
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC GROUP INCORPORATED
November 10, 1997 /s/ Doyle R. Ramsey
-------------------------------
Doyle R. Ramsey
Vice President and Chief
Financial Officer
November 10, 1997 /s/ Larry F. Huser
-------------------------------
Larry F. Huser
Controller and Principal
Accounting Officer
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Article 5 of Regulation S-X-Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 42,000
<SECURITIES> 5,144,000
<RECEIVABLES> 14,191,000
<ALLOWANCES> 750,000
<INVENTORY> 7,816,000
<CURRENT-ASSETS> 27,754,000
<PP&E> 125,186,000
<DEPRECIATION> 48,791,000
<TOTAL-ASSETS> 105,003,000
<CURRENT-LIABILITIES> 13,420,000
<BONDS> 0
0
0
<COMMON> 11,718,000
<OTHER-SE> 69,421,000
<TOTAL-LIABILITY-AND-EQUITY> 105,003,000
<SALES> 37,002,000
<TOTAL-REVENUES> 37,002,000
<CGS> 21,383,000
<TOTAL-COSTS> 21,383,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> 6,977,000
<INCOME-TAX> 2,651,000
<INCOME-CONTINUING> 4,326,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,326,000
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
