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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K
---------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 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
(State or other jurisdiction of 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)
75-1155922
(I.R.S. Employer Identification No.)
Registrant's telephone number, including area code: (316) 727-2700
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------- -----------------------------------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
COMMON STOCK SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. [ ]
ON AUGUST 29, 1997, THERE WERE 11,718,458 SHARES OF THE REGISTRANT'S COMMON
STOCK AND COMMON STOCK SHARE PURCHASE RIGHTS OUTSTANDING. THE AGGREGATE MARKET
VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT
(BASED UPON THE CLOSING PRICE) ON AUGUST 29, 1997, WAS APPROXIMATELY
$225,580,317.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 1997 ANNUAL
STOCKHOLDERS' MEETING ARE INCORPORATED BY REFERENCE INTO PARTS III AND IV.
================================================================================
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REPUBLIC GROUP INCORPORATED
FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
PART I
ITEM 1. BUSINESS.
GENERAL
Republic Group Incorporated (the "Company") was incorporated in Delaware
in August of 1961, as Republic Gypsum Company. The stockholders of the Company
approved a change of corporate name on October 26, 1995. Regular operations
began at its gypsum wallboard manufacturing plant in Duke, Oklahoma in January
1965. References to the Company herein, unless the context requires otherwise,
include Republic Group Incorporated and its subsidiaries.
The Company manufactures and sells 100% recycled paperboard, reclaimed
paper fiber, and gypsum wallboard. The Company sells recycled paperboard to
converter customers that manufacture composite cans, cores, tubes and other
consumer and industrial packaging products. The Company also uses its recycled
paperboard as a raw material in the production of its own gypsum wallboard, as
well as selling gypsum-grade paperboard to other gypsum wallboard
manufacturers. Reclaimed paper fiber is a raw material sold to and used by
other recycled paper and paperboard mills as well as the Company's mills. It is
the principal component used in the production of recycled paper and recycled
paperboard. Gypsum wallboard is a primary building material used by the
residential and commercial construction industries.
The strategic direction of the Company began shifting to the recycled
paperboard industry when, in December 1983, the Company purchased two recycled
paperboard mills at Hutchinson, Kansas and Commerce City, Colorado, a suburb of
Denver, to diversify and to ensure a supply of quality gypsum-grade paperboard
for its gypsum wallboard operations. During 1994, the Company purchased two
paper recycling centers in Kansas City, Missouri and Topeka, Kansas. During
fiscal 1996, the Company started a paper recycling production operation in
Denver, Colorado. These facilities ensure additional supplies of paper fiber
for its paperboard mills. On June 30, 1995, the Company purchased from Old
Dominion Box Company substantially all of the operating assets of Halltown
Paperboard Company, Halltown, West Virginia. The acquisition of Halltown
furthered the Company's strategic objective to add new operations which will
complement its current business. Because Halltown does not make paperboard for
the gypsum wallboard industry, the facility strengthens the portion of the
Company's recycled paperboard operations that targets manufacturers of consumer
and industrial packaging products as well as providing geographical
diversification. The Company is now a manufacturer of recycled paperboard
products with an integrated gypsum wallboard manufacturing operation. By
increasing the emphasis on its recycled paperboard business, the Company has
attempted to become less subject to the cyclical influences of the construction
and housing industries. See NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR INFORMATION CONCERNING THE COMPANY'S (I) WALLBOARD AND (II)
RECYCLED PAPERBOARD BUSINESS SEGMENTS.
RECYCLED PAPERBOARD OPERATIONS
Manufacturing. The Company's recycled paperboard manufacturing operations
are conducted at mills located near Hutchinson, Kansas, Commerce City,
Colorado, a suburb of Denver, and Halltown, West Virginia. The rated productive
capacity of the Company's paperboard mills is generally adjusted yearly to
reflect new equipment installations and modifications, current operating
procedures and product mix. All of the paperboard products manufactured at the
Company's mills are produced from 100% reclaimed secondary paper fiber and are
classified by the industry as recycled paperboard. These recycled paperboard
products include the facing paper used in the manufacture of wallboard, and
recycled paperboard utilized by manufacturers of consumer and industrial
paperboard products such as fiber cans, fiber tubes, fiber cores, partitions,
puzzles and games.
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Recycled paperboard is manufactured in a continuous process during which
recycled paper fiber is mixed with water and pulped to separate the individual
fibers. The slurry is then applied to a series of rotating wire-covered
cylinders, not unlike making a sandwich, so that a multi-ply sheet of paper is
formed as excess water is drained through the rotating wire. The multi-ply
paper mat is then mechanically pressed, dried, trimmed to size and packaged.
The finished product can either be packaged in roll form, or in sheets
according to customer specifications.
The Company has completed the fifth year of a five-year strategic plan
begun in 1993 to expand and develop its recycled paperboard business, while
maintaining its presence in the gypsum industry and evaluating expansion
opportunities into other integrated manufacturing operations. The Company's
initial plan included spending $14,000,000 to $18,000,000 for capital
improvements to expand the productive capacity at two of its recycled
paperboard mills in Hutchinson, Kansas and Commerce City, Colorado by
approximately one-third or 40,000 tons per year during the five fiscal years
ending June 30, 1997. The mills have been operating at near capacity the last
two years and, to date, approximately 75% of the goal has been realized. The
expansion will be completed as production schedules and time permit.
Sales, Marketing and Distribution. The recycled paperboard products
manufactured by the Company are sold to wallboard manufacturers and to
converters that manufacture composite cans, cores, tubes and other packaging
products. During fiscal 1997, approximately 16% of the paperboard manufactured
and shipped by the mills was consumed by the Company's wallboard manufacturing
operations, another 19% was shipped to other wallboard manufacturers, and the
balance was shipped to over 150 different converter customers. During fiscal
1997, no individual customer accounted for more than 10% of consolidated gross
sales.
The Company has attempted to diversify its operations from the
construction industry by increasing paperboard sales. The Company's primary
acquisition focus has been in the paperboard segment. This is evidenced by the
acquisition of the recycling centers in Kansas City, Missouri and Topeka,
Kansas during 1994, the startup of a recycling center in Denver, Colorado
during fiscal 1996, and the acquisition of the assets of Halltown Paperboard
Company, Halltown, West Virginia on June 30, 1995. The Halltown recycled
paperboard mill does not market products to the construction industry.
The Company's reclaimed paper fiber recycling operations sell reclaimed
fiber to the Company's mills (approximately 41% of total shipments) and to
external customers. Most shipments are to customers located within 600 miles of
a recycling operation. The company's operations have capabilities to sort and
bale paper fiber purchased from generators and haulers. In addition, the
Company's reclaimed fiber operations act as a broker for certain generators of
reclaimed fiber by arranging for direct shipments from the generator to the
purchaser of the fiber.
Sales of paperboard and reclaimed paper fiber are typically made on credit
terms in accordance with normal industry practice. Paperboard production
normally occurs after an order is received. Paperboard is rarely produced for
general inventory purposes. The backlog of orders for paperboard is usually not
significant. Deliveries of paperboard and reclaimed paper fiber are made to
customers by common carriers, as well as by rail. Some customers pick up their
orders at the mills.
Raw Materials. The principal raw materials utilized by the Company's
paperboard mills are reclaimed paper fiber, water and chemicals. Reclaimed
paper fiber is currently purchased from several sources and from the Company's
own recycling centers. Management believes that adequate supplies of reclaimed
paper fiber will continue to be available from wholesalers located in cities
near the paperboard mills and from its own recycling centers. The demand and
pricing for this raw material during most of fiscal 1997 has been relatively
stable. This is in direct contrast to fiscal 1995, when unprecedented demand
and other factors caused sharp increases in the cost of this raw material and
fiscal 1996, which saw a rapid decline in the cost of this raw material. Since
reclaimed paper fiber is a commodity, pricing for the product is subject to
quick pricing corrections due to supply and demand.
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Chemicals, including size, retention aids and bactericides, used by the
paperboard operations, are also readily available from several manufacturers at
competitive prices. Size is used principally as a water resisting agent or
strength enhancer in the production of paperboard. Retention aids are agents
used to retain fiber and chemicals in the papermaking process and not lose
them into the waste stream. Bactericides are agents used to control bacteria
and other organisms in the papermaking process.
The manufacture of recycled paperboard involves the use of large volumes
of water for the production process and for cooling purposes. In the areas of
Kansas and Colorado, where two of the Company's paperboard mills are located,
the appropriation of water is regulated by state laws. The Hutchinson
paperboard mill uses large volumes of water pumped from wells located on owned
or controlled property near the Company's plant. The Company is authorized to
appropriate water from those wells for beneficial use, subject to vested rights
and prior appropriations, under state permits and orders. Paperboard production
at the Commerce City paperboard mill uses water pumped from wells located on,
or adjacent to, the Company's property. In connection with the purchase of the
Commerce City mill, the Company acquired an 80% interest in certain water wells
as tenant-in-common with Packaging Corporation of America (now Tenneco
Packaging) and the right to use up to 80% of the water produced by the wells.
Most of these wells have been in use by the mill for more than 20 years. The
Company's water rights are subject, however, to the legal rights of prior
appropriators from the same water resource and to limitations on the permitted
uses for such water, as decreed by the Colorado courts. The Company's West
Virginia mill uses water from a stream running through its property and has
done so for over 100 years. The Company's rights to use the water from the
stream is subject to the riparian rights of other property owners in the area.
Although adequate sources of water have historically been available to all of
the Company's mills, an extended period of general water shortages, legal
curtailment of any mill's current water sources or uses, or deterioration of
the current quality of water sources could affect that mill's operations and
limit its productive capacity. See "ENVIRONMENTAL REGULATION."
Electricity, natural gas and other utilities are available to the plants
at standard industrial rates in adequate supplies, subject to standard
industrial curtailment provisions. There are adequate supplies of coal
available to the Halltown mill on either a contracted or spot basis. The
Company's Hutchinson paperboard mill generates approximately 44% of the
electricity it uses, and the Company's West Virginia mill generates
approximately one-third of its total requirements. During periods of natural
gas curtailment, the Hutchinson and Denver mills are equipped to use fuel oil.
The Halltown mill can use either coal or fuel oil.
The prevailing market price for natural gas and coal was stable to
slightly higher during the Company's last fiscal year compared to fiscal 1996.
All plants periodically contract fuel supplies in advance for varying time
limits to hedge against fluctuations in the market. The Company has been
successful at contracting future supplies at favorable rates. However, there is
always the possibility of contracting future requirements at higher than actual
spot prices because natural gas and coal are commodities.
Competition. In selling the portion of its production not consumed by its
own wallboard manufacturing operations, the Company competes with approximately
nine other manufacturers of gypsum-grade paperboard, six of which have
wallboard manufacturing operations. Substantially all of these competitors have
greater financial resources than the Company. During periods of peak demand for
wallboard, the demand for paperboard typically matches or exceeds the
productive capacities of the gypsum-grade paperboard producers. During periods
of reduced demand for wallboard, the demand for gypsum-grade paperboard falls,
and selling prices may decrease. In selling paperboard to the packaging
industry, the Company competes with approximately 75 producers, many of whom
have substantially greater financial resources than the Company. Management of
the Company believes that its sales constitute less than 5% of total sales of
recycled paperboard nationally.
Price, quality and personal relationships are the principal methods of
competition among paperboard producers. The locations of the Company's
paperboard mills allows the Company to serve a variety of markets, including
several gypsum wallboard plants in the central and southwestern United States.
The central location of two of the Company's mills also make some of the
Company's operations farther from packaging, fiber tube, fiber can and fiber
core customers located in or near the population centers of the east and west
coasts. However, the
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Halltown, West Virginia recycled paperboard mill is within an hour and half
from the metropolitan centers of Baltimore, Maryland and Washington, D.C.
Additionally, many competitors are more vertically integrated than the Company
and produce end-use products utilizing paperboard manufactured from their own
recycled paperboard mills. See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RECYCLED PAPERBOARD."
GYPSUM WALLBOARD OPERATIONS
Manufacturing. The Company's wallboard manufacturing operations are
conducted at its plant located in Duke in southwest Oklahoma near the Company's
principal gypsum deposit. Based on the Company's historical product mix, the
Duke plant's current rated productive capacity is 570 million square feet of
wallboard per year, when operating three shifts per day and six and two-thirds
days per week. This is an increase from 529 million square feet of rated
capacity during fiscal 1996 due to incremental productivity improvements. The
plant operated at near capacity during fiscal 1997. On February 20, 1997, the
Company announced plans to double the productive capacity of its gypsum
wallboard manufacturing facilities in Duke, Oklahoma. Construction is
progressing satisfactorily and is scheduled to be completed by July, 1998.
Expenditures are estimated to total approximately $26,000,000 for production
equipment improvements and $5,000,000 for additional railcars. See "SALES,
MARKETING AND DISTRIBUTION."
The Company manufactures gypsum wallboard by the method common to most
gypsum wallboard plants. Initially, crude gypsum is quarried by open-face
mining methods and crushed on site by an impact crusher. The raw gypsum is
hauled to the plant and pulverized. The powdered gypsum is then placed in
kettles for a continuous calcining process that converts it into plaster of
Paris. The plaster of Paris is cooked and then mixed with chemicals, other raw
materials and water to produce a slurry that is placed on the production line
between two continuous sheets of recycled paperboard and allowed to harden
while in motion. After the slurry hardens between the paperboard, the sheet is
cut into appropriate lengths, dried in kilns and packaged for sale. The Company
has historically produced wallboard in standard industry thicknesses and
varieties.
Sales, Marketing and Distribution. During the past fiscal year,
approximately 61% of the Company's shipments of wallboard products were to
customers located in its historical primary market in Texas, Oklahoma, Colorado
and Kansas. The remaining 39% were shipped to customers in other states, with
an emphasis on the midwestern and southeastern regions of the United States.
See "COMPETITION."
Wallboard is sold directly to building materials dealers and, in areas
where custom of the trade dictates, to contractors and applicators. The
Company's largest gypsum wallboard customer accounted for less than 5% of the
Company's consolidated sales in fiscal 1997. Sales representatives, working in
separate territories, market wallboard for the Company. Most of these sales
representatives have significant experience in the building materials industry.
Sales are made on credit terms allowing a cash discount for prompt payment
in accordance with normal industry practice. Typically, orders are filled upon
receipt. The Company produces to inventory, but balances inventories with
orders. The backlog of orders for the Company's wallboard generally is not
significant.
The Company utilizes contract and common carriers with dedicated tractors
and trailers to meet the majority of the Company's trucking delivery
requirements. The Company supplements the services provided by these dedicated
carriers with other common carriers. The Company's strategy has enabled the
Company to ship economically without affecting the timeliness of deliveries.
Additionally, the Company ships approximately 23% of its product by rail. This
mode of shipment is enhanced by the Company's Hollis & Eastern Railroad
Company, a short-line railroad, which connects the Company's wallboard plant
with major rail lines that are 15 miles from the plant. This enables the
Company to ship to distant markets economically. The Company also owns 75
railcars, which are operating in, and dispatched through, the national rail
system. The Company receives car hire revenues from these railcars.
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The Company also ships wallboard by rail to public warehouses located in
Birmingham, Alabama and Cincinnati, Ohio. The warehouses unload and store the
wallboard until the Company instructs them to arrange deliveries by truck to
customers located in the region surrounding the warehouses. Freight cost
savings can be achieved to many destinations in this manner because the
majority of the shipping distance is by rail which, at these distances, is
typically cheaper but slower than truck delivery.
Gypsum Supply. The Company owns in fee simple all surface rights and
mineral rights to gypsum, gypsite and anhydrite with respect to 1,457 acres of
land near its manufacturing plant. The Company estimates that the reserves of
these gypsum deposits should be sufficient to supply the plant operating at
capacity for approximately 15 years. The land on which the deposits are
located is adjacent either to paved or rock-surfaced roads and near a paved
state highway which can be used during inclement weather for transporting the
raw gypsum to the plant site. In the Company's opinion, other gypsum deposits
are located in the immediate area and may be obtained at a reasonable cost.
Ordinarily, a four to six-week supply of crushed raw gypsum is maintained at
the Duke plant. The Company also owns substantial non-producing gypsum reserves
in Nova Scotia.
Other Raw Materials, Utilities and Fuel. Other than gypsum, the principal
raw material used by the Company in manufacturing wallboard is recycled
paperboard, which is manufactured primarily by the Company's paperboard mills
in Hutchinson, Kansas and Commerce City, Colorado. See "RECYCLED PAPERBOARD
OPERATIONS."
Water, electricity and natural gas are also required for the Company's
manufacturing process. Water wells located on the site produce sufficient
quantities of water for current and anticipated plant requirements. A 125,000
gallon overhead water storage tank is situated adjacent to the plant. The plant
can also purchase water from the public water supply system at Duke, Oklahoma.
Electric power is supplied to the Company at standard industrial rates by an
electric cooperative.
Competition. Each of the products sold by the Company competes with
several different brands of the same product and with different products
designed for the same purposes. There is very little differentiation between
wallboard produced by the Company and its competitors. The Company believes
that price, personal relationships with customers, quality, and timely
deliveries are the principal methods of competition among wallboard producers.
There are approximately 12 manufacturers of gypsum wallboard in the United
States, many of which have significantly greater total financial resources than
the Company. Three of these companies, USG Corporation, National Gypsum
Company, and Georgia-Pacific Corporation, sell, in the aggregate, an estimated
75% to 80% of the wallboard in the United States. The Company believes that its
sales represent approximately 2% nationally and approximately 10% of the total
wallboard sold in its primary markets. (See "SALES, MARKETING AND DISTRIBUTION"
FOR PRIMARY MARKET INFORMATION.)
In many cases, the larger, multiple plant gypsum wallboard manufacturers
have a competitive advantage in markets outside the Company's primary
historical markets due to the strategic location of their plants, which results
in lower costs. In addition, the larger producers may have other cost
efficiencies available to them, such as spreading selling and administrative
overhead across several plants. See ITEM 7. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - GYPSUM WALLBOARD."
ENVIRONMENTAL REGULATION
The manufacture of paperboard involves the discharge of large volumes of
waste water and solid waste. In addition, the Company quarries gypsum by
open-face mining methods. The Company believes it is in compliance with
applicable federal, state and local environmental laws and regulations
governing the discharge of waste from its recycled paperboard mills and surface
quarrying and reclamation of quarried property near its gypsum plant.
Environmental laws, rules and policies are changing constantly and the
technology available to address matters of pollution control is developing
rapidly. Accordingly, it is difficult to estimate the costs of future capital
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expenditures, if any, for environmental control facilities at the Company's
manufacturing plants. Management currently anticipates that it will have
adequate capital resources available to fund such capital expenditures.
The effect of compliance with environmental laws, rules and policies on
the Company's operating results is also difficult to project. In general,
management believes that such ongoing compliance is a cost of manufacturing
which has widespread applicability to members of the industries in which the
Company is competing. Historically, the Company has not incurred material costs
or penalties with respect to the remediation of environmental problems;
however, changing laws and requirements, unknown practices by prior owners,
spills by neighboring facilities and numerous other factors can result in
material environmental problems. There can be no assurance that such matters
will not affect the Company's operating results or competitive position in the
future.
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. Environmental expenditures directly related to this
matter were $11,000 in fiscal 1997, $3,000 in fiscal 1996, and $32,000 in
fiscal 1995. These costs are included in selling and administrative expenses.
Due to the complexity of the environmental laws, rules and policies currently
applicable to the Company and the uncertainty about future changes in such laws
and regulations, the Company maintains accounting reserves for future
unexpected expenses of the nature and magnitude incurred during the past three
years.
SEASONAL AND CYCLICAL NATURE OF BUSINESS
The construction industry is a cyclical business and inclement weather
anytime during the year can have an effect on construction activity in the
Company's markets and, consequently, an effect on revenues and results of the
Company's wallboard and to a lesser degree, the Company's recycled paperboard
manufacturing operations.
EMPLOYEES AND EMPLOYEE RELATIONS
Republic Group Incorporated employs approximately 675 people,
approximately 480 of whom are covered by collective bargaining agreements with
four labor unions. The expirations of current collective bargaining agreements
range from 1997 to 2000. The Company believes that its relations with employees
are satisfactory.
ITEM 2. PROPERTIES.
The Company operates a gypsum wallboard manufacturing plant located near
Duke, Oklahoma, three recycled paperboard mills located near Commerce City,
Colorado, Hutchinson, Kansas, and Halltown, West Virginia, and three reclaimed
paper recycling centers located in Kansas City, Missouri, Topeka, Kansas, and
Denver, Colorado. In addition, the Company owns an office building in
Hutchinson, Kansas, in which its corporate offices are located. The Company
leases office space in Irving, Texas, for its Chairman. The table on Page 7
sets forth certain information with respect to such significant properties.
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PROPERTIES
The Company's principal properties are shown below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Nature of Date Company's Approx. Annual Productive Type
Location Business Acquired Interest No. of Acres Capacity Construction
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
30th Avenue Corporate 1992 Owned 3 - Open span,
Hutchinson, Kansas Offices steel and
concrete
- ----------------------------------------------------------------------------------------------------------------------
Greenway Drive Chairman's 1993 Leased - - Open span,
Irving, Texas Office steel and
concrete
- ----------------------------------------------------------------------------------------------------------------------
Highway 62 Manufacture 1964 Owned 197 plant 570,000,000 (1) Open span,
Duke, Oklahoma gypsum site; 1,457 sq. ft. steel
wallboard gypsum
deposits
- ----------------------------------------------------------------------------------------------------------------------
Baddeck, Nova Scotia Gypsum 1971 Owned 492 N/A N/A
deposit
- ----------------------------------------------------------------------------------------------------------------------
Halstead and Sherman Manufacture 1983 Owned 29 plant 91,000 (2) Open span,
Hutchinson, Kansas recycled site tons steel and
paperboard 40 other concrete
sites
- ----------------------------------------------------------------------------------------------------------------------
Brighton Boulevard Manufacture 1983 Owned 9 52,500 (2) Open span,
Commerce City, recycled tons steel and
Colorado paperboard concrete
- ----------------------------------------------------------------------------------------------------------------------
Main Street Recycle 1994 Owned 2 30,000 (3) Open span,
Kansas City, Missouri waste paper tons brick and
concrete
- ----------------------------------------------------------------------------------------------------------------------
Adams Street Recycle 1994 Owned 1/2 15,000 (3) Open span,
Topeka, Kansas waste paper tons steel and
concrete
- ----------------------------------------------------------------------------------------------------------------------
Ironton Street Recycle 1995 Owned 1.7 10,000 (3) Open span,
Denver, Colorado waste paper tons steel and
concrete
- ----------------------------------------------------------------------------------------------------------------------
Old Route 340 Manufacture 1995 Owned 48 70,000 (2) Open span,
Halltown, West recycled tons steel,
Virginia paperboard concrete,
and concrete
block
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the Company's historical normal product mix operating a single
production line 6-2/3 days per week, 24 hours per day. See Item 1.
Business - Gypsum Wallboard Operations -- Manufacturing.
(2) Estimated capacity during current fiscal year, based on 350 production
days, 24 hours per day.
(3) Based on a one or two shift operation, 6 days per week.
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ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings involving the Company
or any of its subsidiaries, other than ordinary routine litigation incidental
to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders of the Company
during the fourth quarter of fiscal year 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the
executive officers of the Company. All of the officers, except James M. Britz,
Lon D. Lewis and Larry F. Huser, have been employed by the Company during the
past five years. Each officer has continually served as an officer of the
Company from the time he or she first became an officer. All officers were
elected by the Board of Directors of the Company to serve until the next annual
meeting of the Board of Directors. No family relationship exists between any of
the officers.
<TABLE>
<CAPTION>
First
Position with Became an
Name the Company Age Officer
---- ----------- --- -------
<S> <C> <C> <C>
Phil Simpson Chairman of the 62 1961
Board, President,
Chief Executive
Officer and Director
Stephen L. Gagnon Executive Vice 44 1990
President and Director
Doyle R. Ramsey Vice President and 46 1992
Chief Financial
Officer
Todd T. Brown Vice President 43 1992
Geary D. Cribbs Vice President 54 1992
Susan G. Hall Vice President 51 1993
James M. Britz Vice President 46 1994
Janey L. Rife Treasurer and Secretary 52 1995
Lon D. Lewis Vice President 53 1996
Larry F. Huser Controller and 44 1997
Principal Accounting Officer
</TABLE>
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Mr. Simpson has been Chairman of the Board of Directors, President and
Chief Executive Officer for more than five years.
Mr. Gagnon was elected Executive Vice President in September 1992. In
October 1992, Mr. Gagnon became a Director of the Company. From January 1992 to
September 1992, he served as Senior Vice President and Chief Financial Officer
of the Company.
Mr. Ramsey was elected Vice President in September 1992 and was appointed
to the additional post of Chief Financial Officer in October 1992.
Additionally, he is responsible for the Company's recovered paper fiber
recycling operations. He served as Mill Manager of the Company's Hutchinson
recycled paperboard mill from October 1991 to January 1993.
Mr. Brown was elected Vice President in September 1992. He is responsible
for recycled paperboard operations. Prior thereto, he served as Mill Manager of
the Company's Commerce City, Colorado and Hutchinson, Kansas recycled
paperboard mills.
Mr. Cribbs was elected Vice President in September 1992. He is responsible
for gypsum operations. Prior thereto, Mr. Cribbs served as General Manager of
the Company's gypsum wallboard operations at Duke, Oklahoma.
Ms. Hall was elected Vice President in October 1993. She is responsible
for gypsum sales. She served as Gypsum Sales Manager from October 1991 to
October 1993.
Mr. Britz was elected Vice President in August 1994. He is responsible for
environmental compliance, safety and human resource functions of the Company.
He served as Director of Environmental, Safety and Health, and Human Resources
from February 1993 to August 1994. Prior thereto, he held similar positions
with the Genlyte Group, Inc.
Ms. Rife was elected an executive officer of the Company in October 1995.
She has served as Treasurer and Secretary since May 1993. Prior thereto, she
served as Credit Manager.
Mr. Lon D. Lewis was elected Vice President in September 1996. He is
responsible for recycled paperboard sales. He served as Director of Engineering
from March 1996 to October 1996. Prior thereto, he held various management
positions with Simkins Industries Inc. and Jefferson Smurfit Corporation.
Mr. Larry F. Huser was elected Controller and Principal Accounting Officer
in August 1997. He managed his own public accounting practice from 1994 to
1997. Prior thereto, he was a Senior Accountant with Kedre D. Mellor, C.P.A.,
P.A. and Bartlett, Settle and Edgerle, P. A.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PER SHARE MARKET PRICE AND DIVIDENDS
FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
=====================================================================================================================
Price Range Dividends Price Range Dividends
High Low Paid High Low Paid
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter $13.38 $11.88 $ 0.082 $11.50 $ 8.63 $ 0.055
- ---------------------------------------------------------------------------------------------------------------------
Second quarter 16.75 12.88 0.082 12.88 9.75 0.068
- ---------------------------------------------------------------------------------------------------------------------
Third quarter 17.38 14.50 0.090 13.75 11.50 0.068
- ---------------------------------------------------------------------------------------------------------------------
Fourth quarter 21.63 11.88 0.090 13.13 11.75 0.068
- ---------------------------------------------------------------------------------------------------------------------
$ 0.344 $ 0.259
=====================================================================================================================
</TABLE>
Republic Group Incorporated common stock is traded on the New York Stock
Exchange under the symbol "RGC". At August 22, 1997, the number of stockholders
of record was approximately 792.
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL REVIEW
In thousands, except per share, ratio and percent data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
=====================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $123,697 $117,902 $96,413 $63,200 $49,189
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 31,141 23,974 19,158 12,436 4,450
- ---------------------------------------------------------------------------------------------------------------------
Net income 19,663 14,912 11,677 7,739 3,235
- ---------------------------------------------------------------------------------------------------------------------
Total capital employed (1) 88,289 96,716 85,094 46,551 38,861
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity, at year-end 77,845 62,664 50,569 41,173 35,058
- ---------------------------------------------------------------------------------------------------------------------
Total assets 100,400 106,124 95,442 53,796 44,097
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing debt (including
current portion) -- 24,840 28,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
- ---------------------------------------------------------------------------------------------------------------------
Income per common and
common equivalent share (5) $ 1.67 $ 1.27 $ 1.00 $ 0.66 $ 0.28
- ---------------------------------------------------------------------------------------------------------------------
Common dividends (2) (5) 0.344 0.259 0.209 0.155 0.191
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity, at year-end (5) 6.60 5.34 4.33 3.53 3.02
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
RATIO AND PERCENT DATA
- ---------------------------------------------------------------------------------------------------------------------
Net operating profit after-tax
as a percent of net sales (3) 17% 13% 13% 13% 6%
- ---------------------------------------------------------------------------------------------------------------------
Return on average capital
employed (percent) (3) 20 19 25 19 8
- ---------------------------------------------------------------------------------------------------------------------
Return on average stockholders'
equity (percent) (4) 28 26 26 20 9
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing debt as a percent
of total capital employed -- 26 33 -- --
- ---------------------------------------------------------------------------------------------------------------------
Ratio of current assets to
current liabilities 2.1 2.8 2.0 2.1 3.0
- ---------------------------------------------------------------------------------------------------------------------
Ratio of year-end market value per
common share to income
per common and common
equivalent share 12.1 10.2 9.1 12.5 24.6
- ---------------------------------------------------------------------------------------------------------------------
Ratio of average market value per share
to average book value per share 2.7 2.4 2.2 3.1 2.1
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON AND
COMMON EQUIVALENT
SHARES (5) 11,795 11,736 11,669 11,667 11,617
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) Total capital employed is equivalent to total assets less
noninterest-bearing current liabilities.
(2) The Company paid a special dividend of $ .091 per share during fiscal
1993.
(3) Net operating profit after-tax is equivalent to operating profit reduced
by taxes computed using statutory tax rates. Return on average capital
employed relates net operating profit after-tax to average total capital
employed.
(4) Return on average stockholders' equity is net income divided by average
stockholders' equity employed during the year.
(5) All references to share amounts, per share amounts, and stock prices
reflect a 10% stock dividend distributed in March, 1997.
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General - Consolidated Results
The Company has now experienced six years of continuous solid growth.
Fiscal 1997 was a record year for consolidated net sales, operating profit and
net income. The table below summarizes the steady improvements from year to
year:
<TABLE>
<CAPTION>
($ in thousands) 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Net sales $123,697 $117,902 $96,413
Operating profit $ 31,756 $ 25,405 $19,008
Operating margin 26% 22% 20%
Net income $ 19,663 $ 14,912 $11,677
Income per share $ 1.67 $ 1.27 $ 1.00
Return on average
capital employed 20% 19% 25%
- -----------------------------------------------------------
</TABLE>
Consolidated net sales increased 22% and net income 28% from 1995 to 1996
and 5% and 32%, respectively, from 1996 to 1997. Since June 30, 1992, the
compound growth rate for the above selected results are: net sales - 24%,
operating profit - 71%, and net income - 59%. Dividends have increased at a
compound rate of 80% during the same period.
Recycled Paperboard Operations
1997 Compared to 1996
Segment results for the Company's recycled paperboard operations include
both the Company's recycled paperboard mills and reclaimed paper recycling
operations. Shipments of recycled paperboard increased 4% to 187,845 tons from
1996 to 1997, a new record, due principally to a 4% increase in shipments to
unaffiliated customers. Shipments of reclaimed paper fiber also increased 4%
from year to year to 120,414 tons, also a new record, with the improvement due
to a higher level of vertical integration.
Net sales for the segment prior to intercompany eliminations decreased 7%.
This was caused primarily by a 9% decline in net selling prices of recycled
paperboard and a 24% decrease in net selling prices of reclaimed paper fiber
during the year. This decline in net selling prices of both products was
partially offset by a decrease in raw material per unit costs. Raw material
costs, which is primarily reclaimed paper fiber, utilized in the production of
recycled paperboard declined 15% from 1996 to 1997. Per unit variable costs,
other than raw materials, in the production of recycled paperboard also
decreased 3% from 1996 to 1997.
The Company's reclaimed paper recycling operations had a similar
experience. Net selling prices eroded during the year, while the cost of baled
and unbaled paper also declined but not to the full extent of net selling
prices.
During fiscal 1997, 59% of the Company's total consolidated net sales
before eliminations were contributed by the recycled paperboard segment.
Operating profits for the segment were $17,668,000 in 1996 and $15,244,000 in
1997.
1996 Compared to 1995
Shipments of recycled paperboard increased 44% from 1995 to 1996. The
increase in shipments was primarily due to the acquisition of Halltown
Paperboard Company, Halltown, West Virginia, on June 30, 1995. Shipments of
reclaimed paper fiber increased 16% from 1995 to 1996 due essentially to the
start-up of a new production facility in Denver, Colorado in early fiscal 1996.
Net sales of the recycled paperboard segment as a whole increased 36% from
1995 to 1996. The Halltown Paperboard Company acquisition was, again, the
primary factor influencing net sales. During 1996, one factor which affected
adversely net sales was a reduction in net selling prices of reclaimed paper
fiber sold by the Company's paper recycling centers.
11
<PAGE> 13
Operating profits for the segment were $8,907,000 in 1995 compared to
$17,668,000 in 1996. The contribution provided by the Halltown Mill as well as
improved operating margins at the Company's other mills were two principal
factors for the improved results in 1996. Additionally, the spread between net
selling prices of recycled paperboard and variable per unit manufacturing costs
improved significantly from 1995 to 1996.
Trends and Developments
During 1995, variable recycled paperboard manufacturing per unit costs, a
majority of which is reclaimed paper fiber, increased 45%. The Company was able
to raise its recycled paperboard selling prices during 1995, however there was
a time lag between rising material costs and subsequent selling price
increases. This time lag reduced overall margins. During 1996, this trend
reversed and the Company became the beneficiary of slowly declining selling
prices and rapidly declining raw material costs. This resulted in operating
margins for the recycled paperboard segment of 21% in fiscal 1996 compared to
14% in 1995. During 1997, raw material costs declined more slowly early in the
year and actually began to increase again later in the year. Meanwhile, net
selling prices continued to decline to make up for the more rapid decline of
raw material costs in 1996. Early indications are that reclaimed paper fiber
costs will rise in 1998. Accordingly, the Company will have to increase net
selling prices in 1998 to maintain or improve upon the operating margin of 19%
achieved by the recycled paperboard segment in 1997.
Capital Expansion
A five-year capital expansion plan was implemented in fiscal 1993 to
improve product quality and to increase the productive capacity of its
Hutchinson, Kansas and Commerce City, Colorado mills by one-third or
approximately 40,000 tons per year. The mills have been operating at near
capacity the last two years and approximately 75% of the goal has been
realized. The expansion will be completed as production schedules and time
permit.
Gypsum Wallboard Operations
1997 compared to 1996
The Company's gypsum wallboard operations include gypsum wallboard
manufacturing facilities located in Duke, Oklahoma as well as remote public
warehouses located in Birmingham, Alabama and Cincinnati, Ohio. Additionally,
the Company operates a short-line railroad which connects to major carriers 15
miles from its plant, enabling the Company to ship economically to distant
markets.
Shipments of gypsum wallboard increased 8% from 1996 to 1997, or from 529
MMSF in 1996 to 570 MMSF in 1997, a new record for the Company. The
manufacturing facility operated at near capacity during 1996 and 1997 with the
increase in 1997 due essentially to incremental manufacturing improvements. The
following table denoting housing starts from 1994 to 1996 suggests a robust
construction industry which significantly influences the demand for gypsum
wallboard industry:
<TABLE>
<CAPTION>
(in millions)
- ----------------------------------------
Year Ended Housing
December 31 Starts
----------- -------
<S> <C>
1996 1.47
1995 1.35
1994 1.46
</TABLE>
Net sales for the gypsum wallboard segment increased 26% from fiscal 1996
to 1997. This was attributable to a 17% increase in net selling prices and an
8% increase in shipments of gypsum wallboard from year to year.
Gypsum wallboard per unit variable manufacturing costs were essentially
unchanged from 1996 to 1997. Segment operating profit margins increased from
32% in 1996 to 41% in 1997. In 1997, the Company experienced strong demand for
its gypsum wallboard products. This precipitated rising selling prices and with
stable manufacturing costs, provided excellent results for the Company and the
gypsum industry as a whole.
12
<PAGE> 14
1996 Compared to 1995
Gypsum wallboard shipments increased 7% from fiscal 1995 to 1996.
Shipments grew from 494 MMSF in 1995 to 529 MMSF in 1996. The facility operated
at near capacity both years. The increase in shipments was due to an upgrade to
the production process in fiscal 1995 with other adjustments in 1996.
Net selling prices of gypsum wallboard were virtually unchanged from 1995
to 1996. Manufacturing per unit costs were 5% higher in 1996 compared to 1995.
Materials, labor, and fixed manufacturing costs all increased slightly from
year to year. Segment operating profit margins declined from 36% in 1995 to 32%
in 1996 due primarily to those aforementioned cost increases. Operating profits
were $14.9 million in 1995 compared to $14.3 million in 1996.
Capital Expansion
On February 20, 1997, the Company announced plans to double the productive
capacity of its gypsum wallboard manufacturing facilities in Duke, Oklahoma
from the current capacity of approximately 570 million square feet.
Construction is progressing satisfactorily and is scheduled to be completed by
July, 1998. Expenditures are estimated to total approximately $26,000,000 for
production equipment improvements and $5,000,000 for additional railcars. The
update and expansion complements the Company's strategy to grow its recycled
paperboard segment both by internal and external means while maintaining an
adequate level of integration.
Trends and Developments
Low interest rates and a strong domestic economy caused demand for gypsum
wallboard to be very strong throughout 1995, 1996 and 1997. New construction
activity has continued to be robust while repair and remodel demand for
wallboard also has remained very good. Several gypsum plant expansions by other
manufacturers either were completed recently or are scheduled for completion
during the next two years. In addition, the construction of four new gypsum
plants by other manufacturers has been announced with completions scheduled
during 1998 and 1999. The addition of a significant amount of gypsum wallboard
capacity could have a materially adverse impact on gypsum selling prices.
Rising interest rates and a weakening in the economy also could adversely
affect wallboard demand and selling prices.
Other
Selling and administrative expenses as a percent of net sales were 10% in
1995, and 12% in 1996 and 1997. The increase in fiscal 1996 was primarily
caused by the acquisition of Halltown Paperboard Company in June 1995, and the
start-up of a reclaimed fiber production facility in Denver, Colorado in early
fiscal 1996.
Interest expense totaled $1,937,000 in 1996 and $1,476,000 in 1997. The
Company repaid all interest-bearing debt prior to June 30, 1997. The Company's
effective tax rate was 39% in fiscal 1995, 38% in 1996, and 37% in 1997. The
Company believes its effective tax rate for fiscal 1998 will be in the range
experienced the prior three years.
Environmental Matters
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. Environmental expenditures directly related to this
matter were $11,000 in fiscal 1997, $3,000 in fiscal 1996, and $32,000 in
fiscal 1995. These costs were included in selling and administrative expenses.
Due to the complexity of the environmental laws, rules and policies currently
applicable to the Company and the uncertainty about future
13
<PAGE> 15
changes in such laws and regulations, the Company maintains accounting
reserves for future unexpected expenses of the nature and magnitude incurred
during the past three years.
Effect of Inflation
Management believes that general inflation has not had a material
impact on the Company's net sales or operating income the last three fiscal
years. The cost of reclaimed paper fiber, which is the principle raw material
component utilized in the manufacture of recycled paperboard, rose
significantly during fiscal years 1994 and 1995. Conversely, the cost of
reclaimed fiber decreased substantially during fiscal 1996 and was relatively
stable through fiscal 1997. The Company believes these shifts were caused by
changes in supply and demand and not general inflation or deflation.
Liquidity and Capital Resources
The following is a summary of certain financial statistics related to
the liquidity and financial condition of the Company for the three fiscal years
ended June 30, 1997.
<TABLE>
<CAPTION>
($ in thousands) 1997 1996 1995
============================================================================
<S> <C> <C> <C>
Working capital $12,939 $22,485 $13,520
- ----------------------------------------------------------------------------
Current ratio 2.1:1 2.8:1 2.0:1
- ----------------------------------------------------------------------------
Cash and cash equivalents,
plus investments & marketable
securities $ 2,086 $14,568 $ 6,131
- ----------------------------------------------------------------------------
Net cash provided by
operating activities $28,690 $23,252 $14,038
- ----------------------------------------------------------------------------
Additions to property,
plant and equipment $11,556 $ 9,062 $33,553
- ----------------------------------------------------------------------------
Dividends paid $ 4,020 $ 3,018 $ 2,426
- ----------------------------------------------------------------------------
Long-term debt (including
current portion) $ -- $24,840 $28,000
- ----------------------------------------------------------------------------
Total capital employed $88,289 $96,716 $85,094
- ----------------------------------------------------------------------------
</TABLE>
The Company's working capital increased $9.0 million from 1995 to 1996 and
decreased $9.5 million from 1996 to 1997. Cash, cash equivalents, investments
and marketable securities increased $8.4 million from 1995 to 1996 and
decreased $12.5 million from 1996 to 1997. The decreases in working capital and
corresponding cash, cash equivalents, investments and marketable securities
were due to repayment of the Company's long-term debt as exhibited in the
table. Net cash provided by operations increased from $14.0 million in 1995 to
$23.3 million in 1996 and to $28.7 million in 1997. Additions to plant,
property and equipment, excluding the acquisition of the Halltown Paperboard
Company, Halltown, West Virginia in fiscal 1995, were $8.8 million in 1995,
$9.1 million in fiscal 1996 and $11.6 million in fiscal 1997.
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 June 30, 1997, no amounts were
borrowed against the credit facility which expires June 30, 1998. The Company
plans to increase its revolving line of credit limit primarily due to the
expansion at the Company's wallboard production facilities as detailed below.
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.
Cash dividends paid to common stockholders were $4.0 million in 1997, $3.0
million in 1996, and $2.4 million in 1995. Quarterly dividends have
historically been paid in the months of September, December, March, and June,
but are, in each case, subject to Board approval.
14
<PAGE> 16
On February 20, 1997, the Company announced plans to double the productive
capacity of the Company's gypsum wallboard manufacturing facilities in Duke,
Oklahoma. Expenditures will approximate $26,000,000 for new manufacturing
equipment and $5,000,000 for railcars. Additionally, the Board of Directors of
the Company has approved new budgeted capital expenditures of $8.0 million for
fiscal 1998. Cash provided by operations, existing cash balances and advances
under a revolving credit facility should be sufficient to fund these
expenditures.
Forward-Looking and Other Statements
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 results. These include, but are not limited to, the following:
1. In the recent past the Company and the industry as a whole have seen, due
to supply and demand extremes,severe fluctuations in the cost of reclaimed
paper fiber. A rapid rise in the cost of this raw material would restrict
margins at the Company's recycled paperboard mills. This is due generally
to a 30 to 90 day time lag between increased raw material costs and
subsequent selling price increases. Additionally, selling price increases
may only be achievable if recycled paperboard demand allows industry
operating rates to remain at or above historical levels.
2. The Company's recycled paperboard mills and gypsum wallboard manufacturing
facilities utilize large amounts of either natural gas or coal. Increases
in either of these two commodities may be detrimental to sustaining the
profit margins experienced in fiscal 1997. The Company's manufacturing
operations are located in areas of the country where natural gas and coal
are plentiful. The Company believes, discounting a short-term variation,
that over the long-term its fuel costs will at least be comparable to its
competitors.
3. Construction or expansion of new gypsum wallboard plants or recycled paper
mills which compete in the Company's product and market areas can be
expected to have a negative impact on the Company's results.
4. Substitution of other raw materials such as plastics, aluminum or even
virgin paperboard for recycled paperboard or other substitutions for
gypsum wallboard could affect the Company's future results.
5. The Company believes it has sufficient reserves of gypsum ore but there
are still risks associated with mining the ore such as removal costs,
quality of ore, and possible future environmental regulations.
6. Impact on the Company due to industry consolidation is unknown.
7. The Company's future results could be affected negatively by unknown
consequences of present and future governmental laws and regulations,
including those relating to environmental compliance.
8. The Company's business segments could be affected by recessive and
expansionary trends in the economy, as well as increases in prevailing
interest rates. Specifically, the Company's results can be influenced by
the general state of the construction industry, which includes housing
starts, commercial construction and the repair and remodel segment of the
industry.
Other uncertainties and risks which could affect the Company can be found
in other sections of this report as well as in other filings with the
Securities and Exchange Commission.
15
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements, along with the Financial Statement Schedule filed
herewith, are listed in the Index below.
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
Consolidated Statements of Income for the years ended 17
June 30, 1997, 1996, and 1995
Consolidated Balance Sheets at June 30, 1997 and 1996 18
Consolidated Statements of Cash Flows for the years 19
ended June 30, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the 20
years ended June 30, 1997, 1996, and 1995
Notes to Consolidated Financial Statements 21-29
Report of Independent Public Accountants - Consolidated 30
Financial Statements
Report of Management 31
Report of Independent Public Accountants - Report on S-1
Form 10-K
Schedule II - Valuation and Qualifying Accounts and Reserves S-2
</TABLE>
16
<PAGE> 18
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
=========================================================================================================
<S> <C> <C> <C>
Gross sales $ 144,234,000 $ 135,626,000 $ 112,400,000
Less freight and discounts 20,537,000 17,724,000 15,987,000
- ---------------------------------------------------------------------------------------------------------
Net sales 123,697,000 117,902,000 96,413,000
Costs and expenses:
Cost of sales 77,596,000 78,665,000 67,966,000
Selling and administrative expenses 14,345,000 13,832,000 9,439,000
- ---------------------------------------------------------------------------------------------------------
91,941,000 92,497,000 77,405,000
- ---------------------------------------------------------------------------------------------------------
Operating profit 31,756,000 25,405,000 19,008,000
Other income (expense):
Interest expense (1,476,000) (1,937,000) (7,000)
Interest income 874,000 506,000 131,000
Miscellaneous, net (13,000) -- 26,000
- ---------------------------------------------------------------------------------------------------------
(615,000) (1,431,000) 150,000
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 31,141,000 23,974,000 19,158,000
Provision for income taxes 11,478,000 9,062,000 7,481,000
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 19,663,000 $ 14,912,000 $ 11,677,000
=========================================================================================================
Income per common and common
equivalent share $ 1.67 $ 1.27 $ 1.00
=========================================================================================================
Weighted average shares outstanding 11,795,000 11,736,000 11,669,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
17
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
=====================================================================================================================
ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,436,000 $ 2,243,000
Investments and marketable securities, at market 650,000 12,325,000
Accounts receivable, less allowance for doubtful
accounts of $748,000 in 1997 and $633,000 in 1996 13,893,000 11,727,000
Income tax refunds receivable 494,000 902,000
Inventories:
Finished goods 2,246,000 2,095,000
Raw materials and supplies 5,095,000 4,638,000
- ---------------------------------------------------------------------------------------------------------------------
7,341,000 6,733,000
Prepaid expenses and other 660,000 583,000
Deferred income taxes 576,000 790,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 25,050,000 35,303,000
Property, plant and equipment, at cost:
Land, land improvements and mineral deposits 4,521,000 4,218,000
Buildings and leasehold improvements 13,982,000 12,574,000
Equipment 97,725,000 90,570,000
Construction in progress 5,232,000 2,881,000
- ---------------------------------------------------------------------------------------------------------------------
121,460,000 110,243,000
Less accumulated depreciation, amortization and depletion 46,985,000 40,134,000
- ---------------------------------------------------------------------------------------------------------------------
74,475,000 70,109,000
Other assets 875,000 712,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 100,400,000 $106,124,000
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 7,534,000 $ 5,114,000
Accrued payroll and employee benefits 2,986,000 2,666,000
Other current liabilities 1,591,000 1,628,000
Current portion of long-term debt -- 3,410,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 12,111,000 12,818,000
Long-term debt due after one year -- 21,430,000
Deferred income taxes 9,838,000 8,592,000
Other long-term liabilities 606,000 620,000
Commitments and contingencies - see notes
STOCKHOLDERS' EQUITY:
No par preferred stock issuable in series; 487,000 shares authorized;
none issued and outstanding -- --
Common stock, $1 par value; 35,000,000 authorized in 1997 and 25,000,000
in 1996; issued 11,716,000 in 1997 and 10,607,000
in 1996 11,716,000 10,607,000
Additional paid-in capital 27,827,000 12,462,000
Retained earnings 38,995,000 39,595,000
Less: Treasury stock, at cost, 33,000 shares in 1997 (693,000) --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 77,845,000 62,664,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,400,000 $106,124,000
=====================================================================================================================
</TABLE>
See accompanying notes.
18
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
=============================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,663,000 $ 14,912,000 $ 11,677,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, amortization and depletion 7,080,000 6,203,000 3,633,000
Non-cash compensation expense 360,000 -- --
Deferred income taxes 1,460,000 2,786,000 1,301,000
Loss on sale of assets 44,000 138,000 38,000
Changes in current assets and liabilities
net of effects from acquisition in 1995:
Accounts receivable (2,166,000) (504,000) (3,237,000)
Income tax refunds receivable 408,000 (725,000) 42,000
Inventories (608,000) 1,524,000 (2,609,000)
Prepaid expenses and other (77,000) (66,000) 26,000
Accounts payable and accrued liabilities 2,703,000 (940,000) 3,103,000
Other assets and liabilities (177,000) (76,000) 64,000
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,690,000 23,252,000 14,038,000
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Halltown Paperboard Company:
Working capital -- -- (1,271,000)
Property, plant and equipment -- -- (24,753,000)
Other assets -- -- (215,000)
- -------------------------------------------------------------------------------------------------------------
-- -- (26,239,000)
Additions to property, plant and equipment (11,556,000) (9,062,000) (8,800,000)
Proceeds from sale of property, plant
and equipment 66,000 224,000 3,000
Purchases of investments (22,510,000) (17,750,000) (2,500,000)
Proceeds from sales of investments 34,185,000 7,925,000 500,000
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 185,000 (18,663,000) (37,036,000)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (4,020,000) (3,018,000) (2,426,000)
Proceeds from issuance of debt -- -- 28,000,000
Payment on long-term debt (24,840,000) (3,160,000) --
Pension liability adjustment -- -- 26,000
Proceeds from exercised stock options 247,000 201,000 119,000
Purchase of common treasury stock (1,069,000) -- --
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (29,682,000) (5,977,000) 25,719,000
- -------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (807,000) (1,388,000) 2,721,000
Cash and cash equivalents at beginning of year 2,243,000 3,631,000 910,000
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,436,000 $ 2,243,000 $ 3,631,000
=============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes, net of refunds $ 9,407,000 $ 7,077,000 $ 6,032,000
Interest $ 1,759,000 $ 1,654,000 $ 10,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
19
<PAGE> 21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Treasury Stock
-----------------------
Common Additional Pension
stock, $1 paid-in Retained Amount liability
In Thousands of Dollars par value capital earnings Shares at cost adjustment Total
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1994 $10,538 $12,211 $18,450 -- $ -- $ (26) $41,173
Net income -- -- 11,677 -- -- -- 11,677
Cash dividends on common
stock, $.209 per share -- -- (2,426) -- -- -- (2,426)
Exercise of stock options 22 97 -- -- -- -- 119
Pension liability adjustment -- -- -- -- -- 26 26
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 10,560 12,308 27,701 -- -- -- 50,569
Net income -- -- 14,912 -- -- -- 14,912
Cash dividends on common
stock, $.259 per share -- -- (3,018) -- -- -- (3,018)
Exercise of stock options 47 154 -- -- -- -- 201
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 10,607 12,462 39,595 -- -- -- 62,664
Net Income -- -- 19,663 -- -- -- 19,663
Cash dividends on common
stock, $.344 per share -- -- (4,020) -- -- -- (4,020)
10% stock dividend 1,064 15,163 (16,227) -- -- -- --
Purchase of treasury stock -- -- -- (51) (1,069) -- (1,069)
Shares issued under
ESOP Plan -- -- (16) 18 376 -- 360
Exercise of stock options 45 202 -- -- -- -- 247
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 $11,716 $27,827 $38,995 (33) $ (693) $ -- $77,845
=====================================================================================================================
</TABLE>
See accompanying notes.
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Republic
Group Incorporated and its subsidiaries (the "Company"). All intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain assets
and liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the period. Actual results could differ from these estimates.
CASH EQUIVALENTS
Short-term investments that are highly liquid and have original
maturity dates of three months or less are considered cash equivalents for the
purpose of the Consolidated Statements of Cash Flows. These investments are
carried at market.
CONCENTRATION OF CREDIT RISK
The majority of the Company's sales are to retailers, manufacturers
and wholesalers. The Company conducts ongoing credit evaluations of its
customers' financial conditions and limits the amount of trade credit extended
when necessary. The Company maintains allowances for expected credit losses.
INVENTORIES
Inventories are stated at the lower of cost (average or first-in,
first-out) or market and include the appropriate elements of materials, labor
and manufacturing overhead expenses.
PROPERTY, PLANT AND EQUIPMENT
Plant and equipment assets are recorded at cost and depreciated
generally by the straight-line method over the estimated useful lives of the
assets. Expenditures for additions and improvements are capitalized, and costs
for repairs and maintenance are charged to operations as incurred.
REVENUE RECOGNITION
Revenue is recognized at the time products are shipped to the customer
or, in the case of rail services, at the time service is rendered.
INCOME TAXES
The provision for income taxes includes federal and state taxes
currently payable (receivable) and deferred taxes arising from temporary
differences in determining income for financial statement and tax purposes. The
Company files a consolidated federal return which includes the results for all
of its subsidiaries. Deferred tax assets, liabilities and related expense
accounts are adjusted annually for any changes in statutory tax rates.
PER SHARE COMPUTATIONS
Per share computations are based on the weighted average number of
common shares outstanding during the year, adjusted for the effect of dilutive
common share equivalents (i.e., common stock options). Earnings per common
share on a fully diluted basis are substantially the same as earnings per share
as presented.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the
current year presentation.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental expenditures are expensed or capitalized, as
appropriate. Liabilities are recorded when assessments and/or remedial efforts
are probable and the cost can be reasonably estimated.
21
<PAGE> 23
2. INDUSTRY SEGMENTS
Certain information with regard to industry segments, within which the
Company operates, is as follows (in thousands):
<TABLE>
<CAPTION>
Recycled Eliminations
Gypsum Paperboard and other Consolidated
===========================================================================================================
<S> <C> <C> <C> <C>
1997
Sales to unaffiliated customers $ 71,406 $ 72,817 $ 11 $ 144,234
Intersegment sales -- 12,004 (12,004) --
- -----------------------------------------------------------------------------------------------------------
71,406 84,821 (11,993) 144,234
Less freight and discounts 15,212 5,325 -- 20,537
- -----------------------------------------------------------------------------------------------------------
Net sales $ 56,194 $ 79,496 $ (11,993) $ 123,697
===========================================================================================================
Operating profit $ 23,317 $ 15,244 $ (6,805) $ 31,756
Identifiable assets 29,352 62,399 8,649 100,400
Capital expenditures 5,284 5,498 774 11,556
Depreciation, depletion and amortization 1,472 4,877 731 7,080
===========================================================================================================
1996
Sales to unaffiliated customers $ 58,439 $ 77,179 $ 8 $ 135,626
Intersegment sales -- 12,285 (12,285) --
- -----------------------------------------------------------------------------------------------------------
58,439 89,464 (12,277) 135,626
Less freight and discounts 13,779 3,945 -- 17,724
- -----------------------------------------------------------------------------------------------------------
Net sales $ 44,660 $ 85,519 $ (12,277) $ 117,902
===========================================================================================================
Operating profit $ 14,345 $ 17,668 $ (6,608) $ 25,405
Identifiable assets 23,328 60,785 22,011 106,124
Capital expenditures 733 7,478 851 9,062
Depreciation, depletion and amortization 1,370 4,243 590 6,203
===========================================================================================================
1995
Sales to unaffiliated customers $ 54,748 $ 57,642 $ 10 $ 112,400
Intersegment sales -- 8,738 (8,738) --
--------
- -----------------------------------------------------------------------------------------------------------
54,748 66,380 (8,728) 112,400
Less freight and discounts 12,683 3,304 -- 15,987
- -----------------------------------------------------------------------------------------------------------
Net sales $ 42,065 $ 63,076 $ (8,728) $ 96,413
===========================================================================================================
Operating profit $ 14,939 $ 8,907 $ (4,838) $ 19,008
Identifiable assets 23,747 59,823 11,872 95,442
Capital expenditures 2,364 29,810 1,379 33,553
Depreciation, depletion and amortization 1,274 1,994 365 3,633
===========================================================================================================
</TABLE>
Operations within the gypsum industry consist of the manufacture and
sale of gypsum wallboard. Operations within the paperboard industry consist of
(i) the manufacture and sale of recycled paperboard to the gypsum industry and
other paperboard converters which manufacture composite cans, cores, tubes and
other packaging products, and (ii) the collection and sale of recovered paper
fiber. The Company's gypsum wallboard operations are located in Duke, Oklahoma.
The Company's primary markets for gypsum wallboard are Texas, Oklahoma,
Colorado and Kansas with additional secondary emphasis in the midwestern and
southeastern regions of the United States. The Company operates recycled
paperboard mills in Hutchinson, Kansas, Commerce City, Colorado, and Halltown,
West Virginia. The Company's primary markets for recycled paperboard are
generally within a 600 mile radius of the facilities. The Company operates
reclaimed paper fiber recycling centers in Kansas City, Missouri, Topeka,
Kansas, and Denver, Colorado with the corresponding markets within a 600 mile
radius of the facilities.
During fiscal 1997, approximately 16% of the recycled paperboard
shipped by the mills was consumed by the Company's wallboard operations.
Another 19% was shipped to other unaffiliated gypsum wallboard manufacturers.
An adverse change in the construction industry could have a material effect on
the earnings of the
22
<PAGE> 24
Company. Sonoco Products Company accounted for approximately 9% of consolidated
gross sales. The loss of this customer could have a materially adverse effect
on the Company. However, the Company sells several different products to over
25 different Sonoco locations in two operating divisions.
Republic Group Incorporated employs approximately 675 people,
approximately 480 of whom are covered by collective bargaining units with four
labor unions. The expirations of current bargaining agreements range from 1997
to 2000. The Company believes its relations with employees are satisfactory.
Operating profit is net sales less operating expenses. Sales between
segments are made at approximately market price. Identifiable assets by
industry segment are those used in each segment at year-end. Eliminations and
other include general corporate assets, principally cash, securities, property
and equipment and expenses.
3. EMPLOYEE STOCK OWNERSHIP PLAN
During 1997, 1996 and 1995, the Board of Directors of the Company
approved ESOP contributions of $360,000, $360,000 and $187,000, respectively,
and the compensation expense was recognized in the financial statements. The
contributions consisted of common stock issued from treasury valued at $360,000
in 1997 and cash in 1996 and 1995.
The following table presents the ESOP contributions for the years ended June
30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
=================================================================================================
<S> <C> <C> <C>
Compensation expense $ 360,000 $ 360,000 $ 187,000
Other -- 21,000 10,000
Trustee's fees 46,000 37,000 29,000
- -------------------------------------------------------------------------------------------------
COMPANY CONTRIBUTIONS $ 406,000 $ 418,000 $ 226,000
=================================================================================================
</TABLE>
4. ACQUISITION - HALLTOWN PAPERBOARD COMPANY
On June 30, 1995, the Company acquired substantially all of the assets
of Halltown Paperboard Company of Halltown, West Virginia for $26.2 million.
Halltown Paperboard Company manufactures products of 100% recycled paperboard
made from reclaimed paper fiber which are similar to the Company's other
recycled paperboard mills. The following table presents the 1997 and 1996
operating results of the Company compared to pro forma operating results for
1995. The unaudited pro forma information shows consolidated operating results
for 1995 presented as though the Company's Halltown acquisition occurred at the
beginning of the period. No goodwill was recorded in this transaction.
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
==============================================================================================================
<S> <C> <C> <C>
Net sales $ 123,697,000 $ 117,902,000 $ 121,052,000
- --------------------------------------------------------------------------------------------------------------
Net income 19,663,000 14,912,000 12,781,000
- --------------------------------------------------------------------------------------------------------------
Net income per share $ 1.67 $ 1.27 $ 1.09
==============================================================================================================
</TABLE>
5. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
The Company's long-term debt and revolving credit facility consists of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
====================================================================================================
<S> <C> <C> <C>
Term loan $ -- $ 24,840,000 $ 28,000,000
Revolving credit facility -- -- --
- ---------------------------------------------------------------------------------------------------
Total long-term debt -- 24,840,000 28,000,000
- ---------------------------------------------------------------------------------------------------
Less: current maturities -- 3,410,000 3,160,000
LONG-TERM DEBT, NET OF CURRENT MATURITIES $ -- $ 21,430,000 $ 24,840,000
====================================================================================================
</TABLE>
23
<PAGE> 25
The Company obtained a $28,000,000 term loan from a commercial bank
for the purchase of Halltown Paperboard Company pursuant to a loan agreement
dated June 30, 1995. The term loan, which was scheduled to mature in 2002, was
paid in full in the fourth quarter of fiscal year 1997. The Halltown facility
was used as collateral for the loan. The effective interest rate for the year
was approximately 6.53%.
The Company has a $7,000,000 line of credit from a commercial bank
pursuant to a loan agreement dated June 30, 1995. The revolving credit facility
is renewable annually. To date, no amounts have been borrowed against the
revolving credit facility.
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 charge
coverage minimums. The revolving credit facility expires June 30, 1998.
6. PENSION AND OTHER BENEFIT PLANS
The Company maintains a pension plan (the "Plan") for its hourly
employees at its Hutchinson, Kansas paperboard mill. Normal monthly retirement
benefits are based on negotiated benefit levels and the employee's years of
credited service. Contributions to the Plan, historically, have been based on
the maximum tax deductible contribution. For year ending June 30, 1996, the
following table includes the Commerce City, Colorado pension plan which was
terminated on December 31, 1996. The pension plan assets of the Commerce City,
Colorado plan were distributed to the participants at termination of the Plan.
<TABLE>
<CAPTION>
Years Ended June 30
- ----------------------------------------------------------------------------------------------------------
1997 1996
==========================================================================================================
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested Portion $ (1,232,000) $ (1,369,000)
Non-vested portion (107,000) (87,000)
- ----------------------------------------------------------------------------------------------------------
Total (1,339,000) (1,456,000)
Effect of future compensation -- --
- ----------------------------------------------------------------------------------------------------------
Projected benefit obligation (1,339,000) (1,456,000)
Fair value of plan assets 1,482,000 1,569,000
- ----------------------------------------------------------------------------------------------------------
Excess of fair value of plan assets
over projected benefit obligation 143,000 113,000
Unrecognized obligation at transition 47,000 56,000
Unrecognized prior service costs 312,000 224,000
Unrecognized net gain (266,000) (314,000)
Minimum liability -- --
- ----------------------------------------------------------------------------------------------------------
NET PREPAID PENSION COST $ 236,000 $ 79,000
==========================================================================================================
</TABLE>
24
<PAGE> 26
Pension expense included the following components:
<TABLE>
<CAPTION>
Years Ended June 30
- ------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Benefits earned by employees $ 45,000 $ 46,000
Interest cost on projected benefit obligation 85,000 106,000
Actual return on plan assets (115,000) (86,000)
Net amortization and deferral 65,000 29,000
- ------------------------------------------------------------------------------------------------------
NET PENSION COST $ 80,000 $ 95,000
======================================================================================================
</TABLE>
The actuarial assumptions used to determine pension expense and the
funded status of the Plans were a settlement rate on benefit obligations of
7.50% for 1997 and 7.75% for 1996 and an expected long-term rate of return on
plan assets of 6% for 1997 and 1996. The unrecognized prior service costs and
unrecognized net gain are being amortized over approximately 15 years. The
assets of the Plans at June 30, 1997, consist mostly of bonds, both corporate
and government, and also stocks and cash or cash equivalents.
Effective December 31, 1994, Republic Group Incorporated changed the
retirement benefits at its Commerce City, Colorado paperboard mill, resulting
in the freezing of benefits under the defined pension plan. This plan
terminated December 31, 1996. The Duke, Oklahoma facility employee savings plan
was also discontinued on December 31, 1994, and benefits were frozen. Such
benefits will be paid in accordance with the terms of each plan. These plans
were replaced with a voluntary 401(k) Plan (the "401(k) Plan"). Additionally,
the same 401(k) Plan was installed at the Company's other facilities excluding
the Hutchinson, Kansas paperboard mill. The participants in the 401(k) Plan
include eligible employees at the above locations, as well as all salaried
employees company-wide. Although there is one 401(k) Plan for all Company
locations, there are various employee and employer contribution limits,
employer matching percentages, and employer vesting schedules for each
location.
Contributions to the 401(k) and employee savings plan were:
<TABLE>
<CAPTION>
Years Ended June 30
- -----------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee savings plan $ -- $ -- $ 15,000
401(k) Plan contributions 499,000 422,000 354,000
- -----------------------------------------------------------------------------------------------
Total contributions $ 499,000 $ 422,000 $ 369,000
===============================================================================================
</TABLE>
Other employee benefit plans include a Key Employee Continuation Plan
to encourage the continued attention and dedication of key employees. A
description of the plan is available in the Company's Proxy Statement.
7. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
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. Environmental expenditures directly related to this
matter were $11,000 in fiscal 1997, $3,000 in fiscal 1996, and $32,000 in
fiscal 1995. These costs were included in selling and administrative expenses.
Due to the complexity of
25
<PAGE> 27
the environmental laws, rules and policies currently applicable to the Company
and the uncertainty about future changes in such laws and regulations, the
Company maintains accounting reserves for future unexpected expenses of the
nature and magnitude incurred during the past three years.
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 approximating $15,000,000 at June 30, 1997.
8. STOCK OPTIONS
Options have been granted to key employees at prices which represent
fair market value at dates of grant, have terms ranging from five to ten years
and are exercisable at 20% to 25% per year on a cumulative basis beginning one
year from date of grant. In addition, some grants are only exercisable if
certain Company performance targets are attained. The Company is authorized to
grant 1,265,000 shares of common stock to key employees in the 1989 Plan of
which 874,000 common shares were unissued as of June 30, 1997, and 219,000
shares to directors in the Non-Employee Director Plan of which 96,000 common
shares were unissued as of June 30, 1997. A summary of transactions for the
years ended June 30, 1997, 1996 and 1995 is set forth in the following table:
<TABLE>
<CAPTION>
Non-Employee
Shares Rounded to Thousands 1989 Plan Director Plan
- ---------------------------------------------------------------------------------------------------------------------------
Number of Option price Number of Option price
Options: shares range shares range
<S> <C> <C> <C> <C>
===========================================================================================================================
Outstanding at June 30, 1994 165,000 $ 4.33 - 8.18 80,000 $ 3.41 - 12.61
- ---------------------------------------------------------------------------------------------------------------------------
Granted 71,000 8.07 -- --
Cancelled (8,000) 5.00 - 8.18 -- --
Expired -- -- -- --
Exercised (19,000) 4.43 - 8.18 (3,000) 4.65
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1995 209,000 $ 4.33 - 8.18 77,000 $ 3.41 - 12.61
Granted 83,000 10.91 -- --
Cancelled -- -- -- --
Expired -- -- -- --
Exercised (37,000) 4.33 - 8.18 (26,000) 4.65
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1996 255,000 $ 4.43 - 10.91 51,000 $ 3.41 - 12.61
===========================================================================================================================
Granted 95,000 15.23 - 16.75 31,000 12.84 - 15.23
Cancelled (21,000) 5.00 - 15.23 -- --
Expired -- -- -- --
Exercised (45,000) 4.43 - 10.91 (16,000) 4.65
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1997 284,000 $ 5.00 - 16.75 66,000 $ 3.41 - 15.23
===========================================================================================================================
Exercisable at June 30, 1997 74,000 35,000
===========================================================================================================================
</TABLE>
The Company accounts for the stock option plans under APB Opinion No.
25, under which no compensation cost has been recognized. Had compensation
costs for these plans been determined consistent with SFAS Statement No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Twelve months ending:
- -----------------------------------------------------------------------------------------------------------------------
June 30, 1997 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 19,663,000 $ 14,912,000
Pro forma $ 19,455,000 $ 14,872,000
- -----------------------------------------------------------------------------------------------------------------------
Primary earnings per share:
As reported $ 1.67 $ 1.27
Pro forma $ 1.65 $ 1.27
=======================================================================================================================
</TABLE>
26
<PAGE> 28
Because the SFAS Statement No. 123 method of accounting has not been
applied to options granted prior to July 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions and results:
<TABLE>
<CAPTION>
Twelve months ending:
- -----------------------------------------------------------------------------------------------------------------------
Weighted Average June 30, 1997 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Risk free interest rate 6.21% 6.38%
Expected life 3 years 3 years
Expected volatility 60% 60%
Fair value of options granted $6.20 $4.51
=======================================================================================================================
</TABLE>
The 1989 Long-Term Incentive Plan (the "Incentive Plan") was approved
by stockholders at the Company's Annual Meeting held October 26, 1989. The Plan
was amended to increase the number of authorized plan shares and was approved
by the stockholders at the Company's Annual Meeting held October 24, 1996. The
Incentive Plan is unlimited in duration and, unless it is modified or
terminated, will remain in effect as long as any options, restricted stock
awards, or performance unit awards remain outstanding. The Incentive Plan is
administered by the non-employee members of the Board of Directors.
On August 7, 1989, the Board of Directors approved the Non-Employee
Director Stock Option Plan (the "Director Plan") and at the Company's Annual
Meeting held October 24, 1996, the stockholders of the Company approved certain
amendments. Each non-employee member of the Board of Directors was granted an
option to purchase 11,550 shares of Common Stock. The amendments provided each
non-employee member of the Board of Directors an annual grant on the day
following the Annual Meeting, options to purchase 2,200 shares of common stock,
exercisable 12 months from date of grant. The options do not have fixed terms
but will automatically terminate 12 months after the director ceases to be a
director by reason of his death or permanent disability or 6 months after he
ceases to be a director for any other reason. On the date any new non-employee
director becomes a member of the Board of Directors, such director will be
granted an option (exercisable after completion of three calendar years of
service on the Board of Directors) to purchase 11,550 shares of Common Stock at
a price equal to the fair market value on the date of grant. The Director Plan
is administered by a committee of the Board of Directors composed of all
employee directors.
On May 16, 1996, the Board of Directors of the Company declared a
dividend distribution of one Common Stock Share Purchase Right (the "Right") on
each outstanding share of its common stock. The Rights replace existing common
stock share purchase rights that expired on May 16, 1996. The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
common stock or announces a tender offer the consummation of which would result
in ownership by a person or group of 15% or more of the common stock. Each
Right will entitle stockholders to buy one share of common stock of the Company
at an exercise price of $40.91. If the Company is acquired in a merger or other
business combination transaction after a person has acquired 15% or more of the
Company's outstanding common stock, each Right will entitle its holder to
purchase, at the Right's then-current exercise price, a number of the acquiring
company's common shares having a market value of twice such price. In addition,
if a person or group acquires 15% or more of the Company's outstanding common
stock, each Right will entitle its holder (other than such person or members of
such group) to purchase at the Right's then-current exercise price, a number of
the Company's common shares having a market value of twice such price. The
Rights exempt from the 15% threshold the current ownership, which exceeds such
threshold, by Phil Simpson, members of his family, family trusts and entities
controlled by them. Following the acquisition by a person or group of
beneficial ownership of 15% or more of the Company's common stock and prior to
an acquisition of 50% or more of the common stock, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group), in whole
or in part, for shares of common stock at an exchange ratio of one share of
common stock per Right. Prior to the acquisition by a person or group of
beneficial ownership of 15% or more of the Company's common stock, the Rights
are redeemable for $.01 per Right at the option of
27
<PAGE> 29
the Board of Directors. The Board of Directors is also authorized to reduce the
15% threshold referred to above to not less than 10%. The Rights will expire on
May 16, 2006. The Rights distribution is not taxable to stockholders.
9. INCOME TAXES
The components of the provision for income taxes are:
<TABLE>
<CAPTION>
1997 1996 1995
==================================================================================================
<S> <C> <C> <C>
Current:
Federal $ 8,799,000 $ 5,329,000 $ 5,631,000
State 1,219,000 947,000 549,000
- --------------------------------------------------------------------------------------------------
10,018,000 6,276,000 6,180,000
- --------------------------------------------------------------------------------------------------
Deferred income tax 1,460,000 2,786,000 1,301,000
- --------------------------------------------------------------------------------------------------
Total Provision $ 11,478,000 $ 9,062,000 $ 7,481,000
==================================================================================================
</TABLE>
The differences between income taxes computed using the statutory
federal income tax rate and that shown in the Consolidated Statements of Income
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
==============================================================================================================================
<S> <C> <C> <C>
Computed federal tax at statutory rate $ 10,899,000 $ 8,390,000 $ 6,705,000
State taxes, net of federal tax benefit 792,000 616,000 356,000
Other (213,000) 56,000 420,000
- ------------------------------------------------------------------------------------------------------------------------------
$ 11,478,000 $ 9,062,000 $ 7,481,000
==============================================================================================================================
</TABLE>
Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax basis of assets and liabilities and their
financial reporting basis.
As of June 30, 1997 and 1996, deferred tax assets (liabilities) as
determined under the provisions of SFAS 109, were comprised of the following:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
============================================================================================================================
<S> <C> <C>
Gross deferred tax liability:
Depreciation/amortization $ (9,838,000) $ (8,592,000)
Gross deferred tax assets:
Employee benefit accruals 177,000 122,000
Accounts receivable reserves 262,000 214,000
Other accrued reserves 137,000 454,000
- ----------------------------------------------------------------------------------------------------------------------------
Gross deferred assets 576,000 790,000
- ----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation reserve -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (9,262,000) $ (7,802,000)
============================================================================================================================
</TABLE>
The Company does not provide for a valuation reserve on deferred tax
assets based on the assumption of future taxable income.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of all financial instruments, including cash and cash
equivalents, marketable securities, long-term investments, and notes
receivable, approximates their fair value as of June 30, 1997.
28
<PAGE> 30
11. NEW ACCOUNTING STANDARDS
The Company will adopt the provisions of SFAS No. 128, "Earnings Per
Share," in the second quarter of fiscal 1998. SFAS No. 128, issued in February
1997, replaced the primary earnings per share calculation with a basic earnings
per share calculation and modifies the calculation of diluted earnings per
share. Had the Company adopted the provisions of SFAS No. 128 during fiscal
1997, the impact of the adoption on the calculation of net income per share
would have been to increase primary earnings per share of $1.67 to basic
earnings per share of $1.68. There would have been no effect on diluted
earnings per share for the fiscal year ended June 30, 1997.
12. STOCK DIVIDEND
On January 28, 1997, the Company declared a 10% stock dividend on the
Company's common stock which was paid on March 14, 1997 to stockholders of
record on February 28, 1997. The dividend was charged to retained earnings in
the amount of $16.2 million, which was based on the fair value of the Company's
common stock. In addition to the 10% stock dividend, the Company increased the
number of stock options and purchase rights under the 1989 Plan and the
Non-Employee Director Plan by 10% and reduced the exercise prices accordingly.
All references to weighted average shares outstanding, per share amounts, stock
purchase rights, option shares, and exercise prices included in the
accompanying consolidated financial statements and notes reflect the 10% stock
dividend and its retroactive effect.
13. SELECTED QUARTERLY FINANCIAL DATA
The following tabulation presents selected unaudited results of
operations for the years ended June 30, 1997 and 1996 (in thousands, except for
per share data):
<TABLE>
<CAPTION>
Quarters ended
================================================================================================================
Sept. 30 Dec. 31 Mar. 31 June 30
================================================================================================================
<S> <C> <C> <C> <C>
1997
Gross Sales $ 33,880 $ 36,286 $ 35,747 $ 38,321
Less freight and discounts 4,876 5,317 5,019 5,325
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 29,004 $ 30,969 $ 30,728 $ 32,996
================================================================================================================
Operating profit $ 8,244 $ 7,921 $ 7,432 $ 8,159
Net income 5,019 4,929 4,676 5,039
Income per common and common
equivalent share 0.43 0.42 0.40 0.43
================================================================================================================
1996
Gross Sales $ 36,623 $ 33,955 $ 33,860 $ 31,188
Less freight and discounts 4,351 4,227 4,674 4,472
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 32,272 $ 29,728 $ 29,186 $ 26,716
================================================================================================================
Operating profit $ 5,515 $ 7,234 $ 7,275 $ 5,381
Net income 3,168 4,130 4,158 3,456
Income per common and common
equivalent share 0.27 0.35 0.35 0.29
================================================================================================================
</TABLE>
29
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Republic Group Incorporated:
We have audited the accompanying consolidated balance sheets of
Republic Group Incorporated (a Delaware corporation) and subsidiaries as of
June 30, 1997 and 1996, and the related consolidated statements of income, cash
flows and stockholders' equity for each of the three years in the period ended
June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Republic Group
Incorporated and subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 5, 1997
30
<PAGE> 32
REPORT OF MANAGEMENT
The Management of Republic Group Incorporated is responsible for
preparing the consolidated financial statements and other information contained
in this annual report. Management believes that the consolidated financial
statements fairly reflect, in all material respects, the form and substance of
events and transactions and that the consolidated financial statements present
the Company's financial position and results of operations in conformity with
generally accepted accounting principles. Management has included in the
Company's consolidated financial statements amounts that are based on informed
judgments and estimates which it believes are reasonable under the
circumstances.
Republic Group Incorporated maintains a system of internal accounting
policies, procedures and controls intended to provide reasonable assurance, at
appropriate cost, that transactions are processed in accordance with Company
authorization and are properly recorded and reported in the consolidated
financial statements, and that assets are adequately safeguarded.
Arthur Andersen LLP, the Company's independent public accountants,
audits the Company's consolidated financial statements in accordance with
generally accepted auditing standards, which provides the basis of its report
on the consolidated financial statements.
The Board of Directors of the Company has an Audit Committee composed
of outside directors. The Committee meets with financial management and the
independent public accountants to review internal accounting controls and
accounting, auditing and financial reporting matters. In addition, Arthur
Andersen LLP has full and free access to the Audit Committee, without
management present, to discuss the results of its audits, the adequacy of the
Company's internal accounting controls and the quality of its financial
reporting.
Phil Simpson
Chairman of the Board
and President
August 27, 1997
Doyle R. Ramsey
Vice President-Finance and
Chief Financial Officer
August 27, 1997
31
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the Registrant's proxy
statement for the annual meeting of the stockholders to be held on October 23,
1997 sets forth certain information with respect to the directors of the
Registrant and is incorporated herein by reference. Certain information with
respect to persons who are or may be deemed to be executive officers of the
Registrant is set forth under the caption "Executive Officers of the
Registrant" in Item 4A of Part I of this report and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The sections entitled "Executive Compensation" and "Compensation of
Directors" appearing in the Registrant's proxy statement for the annual meeting
of stockholders to be held on October 23, 1997 sets forth certain information
with respect to the compensation of management of the Registrant and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is incorporated herein by reference the information in the
Company's 1997 Proxy Statement regarding beneficial ownership of shares of the
Company's Common Stock as of August 29, 1997 by each person known by the
Company to own beneficially more than 5% of the outstanding shares of such
Common Stock, by each director of the Company, and by certain executive
officers of the Company and by all directors and executive officers as a group
under the caption "Security Ownership".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the captions "Election of Directors" in the
Company's 1997 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
See Index to Financial Statements and Schedules of Registrant contained in Item
8, page 16.
2. Financial Statement Schedules
See Index to Financial Statements and Schedules of Registrant contained in Item
8, page 16.
3. The following documents are filed or incorporated by
reference as exhibits to this Report as required by Item 601 of Regulation S-K:
3(a) Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3(a) to the Company's
Quarterly Report on Form 10-Q for the period year ended
September 30, 1996, SEC File Number 1-7210).
3(b) Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3(b) to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1996, SEC File Number
1-7210).
4(a) Revolving and Term Credit Agreements (with related Promissory
Notes, Security Agreement, Mortgage, Deed of Trust,
Guaranties attached as Exhibits hereto) dated as of June 30,
1995, among Republic Gypsum Company, Republic Paperboard
Company, and Republic Paperboard Company of West Virginia and
Boatmen's First National Bank of Kansas City (incorporated by
32
<PAGE> 34
reference to Exhibit 4(i) of the Company's current report on
Form 8-K filed July 17, 1995, SEC File Number 1-7210).
4(b) Amendments One, Two and Three to Revolving and Term Credit
Agreements, in reference to the Agreements and Exhibits in
4(a) above, relating to the Company's name change from
Republic Gypsum Company to Republic Group Incorporated and to
extend the Revolving Credit Agreement one year (incorporated
by reference to Exhibit 4(b) to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996, SEC File
Number 1-7210).
10(a) The 1989 Long-Term Incentive Plan (incorporated by reference
to Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1996, SEC File Number
1-7210), which is a "management contract or compensatory plan
or arrangement."
10(b) Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1996, SEC
File Number 1-7210), which is a "management contract or
compensatory plan or arrangement."
10(c) Non-Employee Directors' Retirement Compensation Arrangement
(incorporated by reference to the description set forth under
the caption "Executive Compensation - Director Retirement
Compensation Arrangement" in the Company's Proxy Statement
for the Annual Meeting of Stockholders held October 26, 1989,
SEC File Number 1-7210), which is a "management contract or
compensatory plan or arrangement."
10(d) Tenancy in Common Agreement dated December 29, 1983, between
Packaging Corporation of America and Republic Paperboard
Company (incorporated by reference to Exhibit 10(d) to the
Company's Annual Report on Form 10-K for the year ended June
30, 1994, SEC File Number 1-7210).
10(e) Shared Facilities and Shared Service Agreement dated December
28, 1983, between Packaging Corporation of America and
Republic Paperboard Company (incorporated by reference to
Exhibit 10(e) to the Company's Annual Report on Form 10-K for
the year ended June 30, 1994, SEC File Number 1-7210).
10(f) Key Employee Continuation Plan (incorporated by reference to
Exhibit 10(i) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1992, SEC File Number 1-7210),
which is a "management contract or compensatory plan or
arrangement".
10(g) Asset Purchase Agreement, dated as of June 30, 1995, between
Old Dominion Box Company, Inc., Halltown Paperboard Company,
Dillard Investment Corporation, and Republic Gypsum Company
and Republic Paperboard Company of West Virginia
(incorporated by reference to Exhibit 2(i) and 2(ii) to the
Company's Current Report on Form 8-K, dated July 17, 1995,
SEC File Number 1-7210).
21 Significant Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
24 Power of Attorney on Page 34 of this Report.
27 Article 5 of Regulation S-X.
(b) Reports on Form 8-K.
None.
33
<PAGE> 35
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors
and officers of Republic Group Incorporated hereby constitutes Phil Simpson,
Stephen L. Gagnon and Doyle R. Ramsey his true and lawful attorneys-in-fact and
agents, for his and in his name, place and stead, in any and all capacities,
with full power to act alone, to sign any and all amendments to this Annual
Report on Form 10-K, and to file each such amendment to the Report, with all
exhibits thereto, and any and all other documents in connection therewith, with
the Securities and Exchange Commission, hereby granting unto said
attorneys-in-fact and agents full power and authority to do and perform any and
all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has fully caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: September 2, 1997
REPUBLIC GROUP INCORPORATED
By: /s/ Phil Simpson
-----------------------------
Phil Simpson, Chairman of the
Board and President
34
<PAGE> 36
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Phil Simpson Chairman of the Board, September 2, 1997
- ---------------------------- President and Director
(principal executive
officer)
/s/ Stephen L. Gagnon Executive Vice President September 2, 1997
- ---------------------------- and Director
/s/ Doyle R. Ramsey Vice President and September 2, 1997
- ---------------------------- Chief Financial Officer
(principal financial officer)
/s/ Larry F. Huser Controller (principal September 2, 1997
- ---------------------------- accounting officer)
/s/ Bert A. Nelson Director September 5, 1997
- ----------------------------
/s/ Talbot Rain Director September 5, 1997
- ----------------------------
/s/ Gerald L. Ray Director September 5, 1997
- ----------------------------
/s/ Robert F. Sexton Director September 5, 1997
- ----------------------------
/s/ David P. Simpson Director September 5, 1997
- ----------------------------
/s/ L. L. Wallace Director September 5, 1997
- ----------------------------
/s/ David B. Yarbrough Director September 5, 1997
- ----------------------------
</TABLE>
35
<PAGE> 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: The Stockholders and Board of Directors of
Republic Group Incorporated
We have audited in accordance with generally accepted auditing standards the
consolidated financial statements of Republic Group Incorporated and
subsidiaries included in this Form 10-K and have issued our report thereon
dated August 5, 1997. Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole.
Schedule II, Valuation and Qualifying Accounts and Reserves, is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 5, 1997
S-1
<PAGE> 38
REPUBLIC GROUP INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended June 30, 1995, 1996, and 1997
<TABLE>
<CAPTION>
Additions Charged to
Balance at ----------------------- Balance
beginning Cost and Other at end
of year expenses accounts Deductions (A) of year
---------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
1995:
Allowance for
doubtful
accounts $255,000 $428,000 $ -- $ 69,000 $614,000
======== ======== =========== ======== ========
1996:
Allowance for
doubtful
accounts $614,000 $ 1,000 $ -- $(18,000) $633,000
======== ======== =========== ======== ========
1997:
Allowance for
doubtful
accounts $633,000 $117,000 $ -- $ 2,000 $748,000
======== ======== =========== ======== ========
</TABLE>
(A) Uncollectible accounts charged off, net of recoveries.
S-2
<PAGE> 39
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
21 Significant Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
24 Power of Attorney on Page 34 of this Report.
27 Article 5 of Regulation S-X.
</TABLE>
<PAGE> 1
Exhibit 21
SIGNIFICANT SUBSIDIARIES OF REGISTRANT
The following list indicates each subsidiary of the Company; all are
wholly-owned by the Company, except for the Hollis & Eastern Railroad Company,
of which the Company owns 99.3% of the Common Stock. Republic Paperboard
Company of West Virginia is a subsidiary of Republic Paperboard Company.
Republic Paperboard Company of West Virginia does business under the name
Halltown Paperboard Company. Each other subsidiary does business under its
corporate name. The Consolidated financial statements filed herewith include
the accounts of each of such subsidiaries.
<TABLE>
<CAPTION>
Subsidiaries State of Incorporation
------------ ----------------------
<S> <C>
Republic Gypsum Company Oklahoma
Republic Paperboard Company Kansas
Republic Paperboard Company of West Virginia West Virginia
Hollis & Eastern Railroad Company Oklahoma
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Post-Effective Amendment No. 6 to the Form S-8 Registration Statement File No.
2-69991, into the Company's previously filed Post-Effective Amendment No. 5 to
the Form S-8 Registration Statement File No. 2-69991, into the Company's
previously filed Post-Effective Amendment No. 3 to the Form S-8 Registration
Statement File No. 2-66025, into the Company's previously filed Form S-8
Registration Statement File No. 33-37366 and into the Company's previously
filed Form S-8 Registration Statement File No. 33-37367.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,436,000
<SECURITIES> 650,000
<RECEIVABLES> 14,641,000
<ALLOWANCES> 748,000
<INVENTORY> 7,341,000
<CURRENT-ASSETS> 25,050,000
<PP&E> 121,460,000
<DEPRECIATION> 46,985,000
<TOTAL-ASSETS> 100,400,000
<CURRENT-LIABILITIES> 12,111,000
<BONDS> 0
0
0
<COMMON> 11,716,000
<OTHER-SE> 66,129,000
<TOTAL-LIABILITY-AND-EQUITY> 100,400,000
<SALES> 144,234,000
<TOTAL-REVENUES> 144,234,000
<CGS> 77,596,000
<TOTAL-COSTS> 77,596,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,476,000
<INCOME-PRETAX> 331,141,000
<INCOME-TAX> 11,478,000
<INCOME-CONTINUING> 19,663,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,663,000
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.67
</TABLE>
