<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . to . . . . . . . . . . .
Commission file number 1-7210
REPUBLIC GROUP INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-1155922
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
811 East 30th Avenue, Hutchinson, Kansas 67502-4341
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Post Office Box 1307, Hutchinson, Kansas 67504-1307
- ---------------------------------------- ----------
(Mailing Address) (Zip code)
316-727-2700
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
--- ---
On November 6, 1998, there were 11,762,436 shares of the registrant's Common
Stock, $1.00 par value outstanding.
<PAGE> 2
REPUBLIC GROUP INCORPORATED
FORM 10-Q
Quarterly Report
For The Three Months Ended September 30, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Reference is made to pages 2 through 8 containing certain
consolidated financial statements of Registrant in accordance
with Part I of Form 10-Q.
The consolidated financial statements include the accounts of
Republic Group Incorporated and its wholly owned subsidiaries
(collectively referred to as the "Company").
<PAGE> 3
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended September 30, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Gross sales $38,196,000 $37,002,000
Less freight and discounts 5,011,000 5,113,000
----------- -----------
Net sales 33,185,000 31,889,000
Costs and expenses:
Cost of sales 22,586,000 21,383,000
Selling and administrative expenses 4,523,000 3,620,000
----------- -----------
27,109,000 25,003,000
----------- -----------
Operating profit 6,076,000 6,886,000
Other income (expense), net (776,000) 91,000
----------- -----------
Income before income taxes 5,300,000 6,977,000
Provision for income taxes 2,015,000 2,651,000
----------- -----------
NET INCOME $ 3,285,000 $ 4,326,000
=========== ===========
Basic earnings per share $ 0.28 $ 0.37
=========== ===========
Basic weighted average shares outstanding 11,748,000 11,685,000
=========== ===========
Diluted earnings per share $ 0.28 $ 0.37
=========== ===========
Diluted weighted average shares outstanding 11,827,000 11,808,000
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 4
REPUBLIC GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and June 30, 1998
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
--------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 75,645,000 $ 1,124,000
Accounts receivable, net 13,883,000 14,611,000
Income tax refunds receivable 247,000 652,000
Inventories:
Finished goods 2,340,000 2,621,000
Raw materials and supplies 5,697,000 5,829,000
------------ ------------
8,037,000 8,450,000
Prepaid expenses and other 735,000 851,000
Deferred income taxes 597,000 597,000
------------ ------------
TOTAL CURRENT ASSETS 99,144,000 26,285,000
Property, plant and equipment, at cost 173,304,000 151,503,000
Less accumulated depreciation, amortization
and depletion 55,253,000 53,683,000
------------ ------------
118,051,000 97,820,000
Unamortized debt issue costs 4,789,000 291,000
Other assets 1,080,000 1,079,000
------------ ------------
TOTAL ASSETS $223,064,000 $125,475,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,392,000 $ 10,632,000
Accrued payroll and employee benefits 2,650,000 2,919,000
Income taxes payable 1,616,000 --
Accrued interest payable 2,004,000 --
Other current liabilities 1,660,000 1,710,000
------------ ------------
TOTAL CURRENT LIABILITIES 16,322,000 15,261,000
Long-term debt due after one year 100,000,000 5,950,000
Deferred income taxes 11,475,000 11,475,000
Other long-term liabilities 610,000 610,000
STOCKHOLDERS' EQUITY:
Common stock, $1 par value 11,765,000 11,749,000
Additional paid-in capital 28,287,000 28,096,000
Retained earnings 54,764,000 52,544,000
Less: Treasury stock, at cost, 8,000 shares at
September 30, and 10,000 shares at June 30. (159,000) (210,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 94,657,000 92,179,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $223,064,000 $125,475,000
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,285,000 $ 4,326,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 2,095,000 1,806,000
Non-cash compensation expense 3,000 --
Loss on sale of assets 112,000 --
Changes in current assets and liabilities:
Accounts receivable (272,000) 452,000
Income tax refunds receivable 405,000 273,000
Inventories 413,000 (475,000)
Prepaid expenses 116,000 146,000
Accounts payable and accrued liabilities (2,509,000) (1,342,000)
Income taxes payable 1,616,000 2,651,000
Accrued interest payable 2,004,000 --
Other assets and liabilities (51,000) 21,000
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,217,000 7,858,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (22,350,000) (3,726,000)
Proceeds from sale of property, plant and equipment 32,000 --
Proceeds from life insurance policy 1,000,000 --
Purchases of investments -- (5,665,000)
Proceeds from sale of investments -- 1,171,000
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (21,318,000) (8,220,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,058,000) (1,052,000)
Net payments under lines of credit (5,950,000) --
Proceeds from issuance of senior subordinated notes 100,000,000 --
Payments for debt issue costs (4,618,000) --
Proceeds from stock options exercised including related
tax benefits 207,000 20,000
Issuance of common treasury stock 41,000 --
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 88,622,000 (1,032,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 74,521,000 (1,394,000)
Cash and cash equivalents at beginning of year 1,124,000 1,436,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 75,645,000 $ 42,000
============= =============
</TABLE>
See accompanying notes.
4
<PAGE> 6
REPUBLIC GROUP INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1998 and 1997 (Unaudited)
(1) In the opinion of management of the Company, the accompanying
unaudited consolidated financial statements reflect all adjustments,
of a normal recurring nature, to fairly present the Company's
financial position as of September 30, 1998, and the results of
operations and cash flows for the periods ended September 30, 1998 and
1997. The operating results for the interim periods are not
necessarily indicative of the results to be expected for a full year.
It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the
notes included in the Company's Annual Report on Form 10-K as of June
30, 1998.
(2) Effective October 1, 1997 the Company adopted SFAS No. 128, "Earnings
Per Share".
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the
period. Diluted earnings per share are computed by dividing net income
by the sum of the weighted average number of shares and the number of
equivalent shares assumed outstanding under the Company's stock-based
compensation plans. Diluted earnings per share are computed as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------------------------
September 30, 1998 September 30, 1997
---------------------------------------- ---------------------------------------
(in thousands) (in thousands)
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
----------- ----------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share $ 3,285 11,748 $ .28 $ 4,326 11,685 $ .37
Effects of dilutive
securities-options -- 79 -- -- 123 --
----------- ------ -------- --------- ------ -------
Diluted earnings
per share $ 3,285 11,827 $ .28 $ 4,326 11,808 $ .37
----------- ------ -------- --------- ------ -------
</TABLE>
All periods prior to October 1, 1997 have been restated to conform
with the requirements of SFAS No. 128.
Options to purchase 116,300 shares of common stock at prices ranging
from $18.875 to $20.7625 were outstanding for the three months ended
September 30, 1998. These shares were not included in the diluted
earnings per share because the options exercise price was greater than
the average market price of the common shares for the above periods.
(3) 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.
5
<PAGE> 7
In October 1997, the West Virginia Division of Environmental Quality
(the "DEQ") filed a complaint against Republic Paperboard of West
Virginia (the "West Virginia Subsidiary") in the Circuit Court of
Jefferson County, West Virginia. The complaint alleged that the West
Virginia Subsidiary violated and continued to violate an order entered
into between the West Virginia Subsidiary and the DEQ on January 17,
1995. It further alleged that the West Virginia Subsidiary violated
and continued to violate certain provisions of its wastewater
discharge permit. The West Virginia Subsidiary has negotiated an
agreement with the DEQ to settle the complaint for a $25,000 payment
to the DEQ. This settlement has been finalized and approved by the
court.
(4) Reclassification: Certain prior year balances have been reclassified
to conform with current year presentation.
(5) Subsequent Event: On October 22, 1998, the Board of Directors of the
Company declared a quarterly cash dividend of $0.09 per share of
common stock to be paid on December 15, 1998 to stockholders of record
on November 30, 1998. Dividend payments will total approximately
$1,059,000.
(6) Income Taxes: The provisions for income taxes are based on estimated
annual effective tax rates, which differ from the federal statutory
rates principally due to state income taxes and certain non-deductible
expenses.
(7) Long Term Debt: On July 15, 1998, the Company received proceeds from
the issuance of $100,000,000 of 9.5% Senior Subordinated Notes (the
"Notes") with a maturity date of July 15, 2008. The proceeds from the
Notes, along with a new bank credit facility of up to $85,000,000
entered into with a bank syndicate on July 15, 1998, will be used
primarily to finance the construction of the Lawton, Oklahoma recycled
paperboard mill and for general and corporate purposes including
working capital. On July 15, 1998, the Company used a portion of the
proceeds from the Notes to repay the outstanding principal balance of
a then existing revolving credit facility dated as of June 30, 1995
(as amended) with NationsBank, N.A., along with accrued interest. Upon
repayment, the Company ended the NationsBank, N.A. revolving credit
facility. Absent prepayment or extension by mutual agreement, the
revolving credit facility would have expired on June 30, 1999.
Outstanding balances under the facility bore interest at a rate equal
to LIBOR plus an agreed margin (ranging from 50 to 150 basis points)
or the bank lender's prime rate less 0.75%.
Interest payment dates on the Notes are January 15 and July 15,
commencing on January 15, 1999. Each interest payment will be
$4,750,000. The Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after July 15, 2003, at a
redemption price of 104.75% which reduces to 100% on or after July 15,
2005. In addition, prior to July 15, 2001, the Company may redeem up
to 35% of the principal amount of the Notes with the net cash proceeds
received by the Company from one or more Public Equity Offerings, at a
redemption price of 109.50%. The Notes include financial and other
covenants of the kind generally included in such indebtedness.
The $85,000,000 new credit facility will be used as a revolving line
of credit until the conversion date. The conversion date is defined as
the earlier of July 15, 2000 or start-up of the Lawton mill. At that
time the facility will convert into a term loan with a principal
amount of up to $50,000,000 and a revolving credit facility with a
$35,000,000 maximum principal amount. After the conversion, the
principal of the term loan will amortize over four years with 10% due
during the first year, 20% during the second year, 30% during the
third year and 40% during the fourth year. The revolving credit
facility will mature in four years. Availability under the new
6
<PAGE> 8
credit facility is not subject to a borrowing base but is subject to,
among other things, a condition that the lenders receive certain
assurances that the construction of the Lawton mill is progressing on
a satisfactory schedule and within agreed-upon cost parameters. The
borrowings under the new credit facility are guaranteed by each of the
Company's material subsidiaries and are secured by a mortgage on the
Lawton mill, a pledge of stock of the Company's subsidiaries and
security interests in substantially all other personal property of the
Company and its subsidiaries. At such time, if any, as outstanding
loans under the new credit facility exceed $50,000,000, the lenders
may require that other real property and improvements of the Company
and its subsidiaries be mortgaged as security for the new credit
facility. Outstanding principal amounts on the new credit facility
bear interest at a variable rate equal to, at the election of the
Company, (i) the London Interbank Offered Rate, plus an agreed margin
(ranging from 75 to 175 points), which is to be established annually
based upon the Company's leverage ratio or (ii) the higher of (a) the
bank's corporate prime rate and (b) the sum of 1/2 of 1% plus the
federal funds rate, plus, in each case, an agreed margin (ranging from
0 to 75 points). Interest payments under the new credit facility will
be payable quarterly. Under the new credit facility, the Company is
required to adhere to a number of financial and other covenants,
including covenants relating to excess cash flow, debt to EBITDA
ratio, interest coverage ratio, minimum EBITDA, and limitations on
capital expenditures and dividends. The Company may pay cash dividends
and/or redeem its stock in aggregate amounts of not more than (a)
$5,300,000 in each fiscal year ending on or before the conversion
date, (b) $5,500,000 in each of the first and second fiscal years
ending after the conversion date, and (c) $6,000,000 in each of the
third and fourth fiscal years ending after the conversion date. The
new credit facility does not restrict the transfer of funds to the
parent by the subsidiaries.
(8) Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
<TABLE>
<CAPTION>
QUARTERS
ENDED SEPTEMBER 30 (Unaudited) 1998 1997
------------------------------------------- -------------------------------------------
Gypsum Recycled Elim's. Gypsum Recycled Elim's.
Wallboard Paperboard And Other Consolidated Wallboard Paperboard And Other Consolidated
--------- --------- -------- ---------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shipment Units:
Wallboard (MSF) 138,955 138,955 143,143 143,143
Recycled paperboard(Tons) 46,316 (4,630) 41,686 48,048 (6,515) 41,533
Recovered paper fiber(Tons) 42,779 (20,378) 22,401 38,730 (16,568) 22,162
--------- --------- --------- ---------- -------- --------- -------- -----------
Gross Sales (in Thousands):
Gypsum wallboard $ 19,634 $ $ $ 19,634 $ 18,316 $ $ $ 18,316
Recycled paperboard 16,953 16,953 16,841 16,841
Recovered paper fiber 2,935 (1,327) 1,608 3,679 (1,835) 1,844
Intrasegment fiber sales (1,327) 1,327 -- (1,835) 1,835 --
Intersegment paperboard sales 1,694 (1,694) -- 2,488 (2,488) --
Other 1 1 1 1
--------- --------- -------- ---------- -------- --------- -------- -----------
Gross Sales 19,634 20,255 (1,693) 38,196 18,316 21,173 (2,487) 37,002
Less freight and discounts 3,655 1,356 -- 5,011 3,878 1,235 -- 5,113
--------- --------- -------- ---------- -------- --------- -------- -----------
Net sales $ 15,979 $ 18,899 $ (1,693) $ 33,185 $ 14,438 $ 19,938 $ (2,487) $ 31,889
--------- --------- -------- ---------- -------- --------- -------- -----------
Operating profit $ 6,440 $ 1,706 $ (2,070) $ 6,076 $ 6,102 $ 2,385 $ (1,601) $ 6,886
Identifiable assets 52,473 84,931 85,660 223,064 30,696 62,887 11,420 105,003
Capital expenditures 8,576 13,652 122 22,350 2,246 1,308 172 3,726
Depreciation, depletion and
amortization 486 1,290 319 2,095 373 1,253 180 1,806
--------- --------- -------- ---------- -------- --------- -------- -----------
</TABLE>
The Company's 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
7
<PAGE> 9
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 and is in the
process of constructing a recycled paperboard mill in Lawton, Oklahoma which is
expected to be completed at the end of calendar year 1999. 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 centers.
Republic Group Incorporated employs approximately 830 people, approximately 615
of whom are covered by collective bargaining units with four labor unions. The
expirations of current bargaining agreements range from 1999 to 2003. 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 period-end. Eliminations and other include
general corporate assets, principally cash, securities, property and equipment
and expenses.
8
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters ended September 30, 1998 and 1997
Consolidated Results. Consolidated net income was $3,285,000 or $0.28
diluted earnings per share on record net sales of $33,185,000 for the first
quarter ended September 30, 1998. This compares to consolidated net income of
$4,326,000 or $0.37 diluted earnings per share on net sales of $31,889,000 for
the first quarter ended September 30, 1997.
The 4% increase in consolidated net sales from the 1997 quarter to the
1998 quarter was primarily attributable to a 14% increase in gypsum wallboard
selling prices. The selling price increase was partially offset by a 3%
reduction in gypsum wallboard shipments. The decrease in wallboard shipments
from the 1997 quarter resulted mainly from manufacturing interruptions caused by
construction of the second production line at the Duke, Oklahoma wallboard
plant. Both shipments to unaffiliated customers and net selling prices of
recycled paperboard were essentially unchanged from the 1997 quarter to the 1998
quarter. The 24% decline in consolidated net income from the 1997 quarter to the
1998 quarter resulted primarily from poor operating profits at the Company's
Halltown, West Virginia paperboard mill and an $867,000 net increase in other
expense. Substantially all of the change in other expense was related to an
increase in net interest expense. The Company is permitted to capitalize only
the interest expense associated with actual capital expenditures as construction
of the Lawton, Oklahoma paperboard mill and Duke, Oklahoma wallboard plant
expansion progress. The Company's selling and administrative costs as a
percentage of net sales increased from 11.4% in the 1997 quarter to 13.6% in the
1998 quarter. This was due primarily to the need to increase the management and
support staff in anticipation of the startup of the second production line at
the Duke plant and in connection with the construction of the Lawton mill.
Gypsum Wallboard Segment Results. Operating profits of the gypsum
wallboard segment increased 6% from the 1997 quarter to the 1998 quarter. Net
sales for the segment increased 11% compared to the 1997 quarter primarily due
to a 14% increase in gypsum wallboard selling prices. A portion of the increase
in net sales was offset by an 18% increase in per unit operating costs for the
segment. The increase in per unit operating costs relate to inefficiencies
attributable to operating the Duke plant while effecting the changes necessary
to add the second production line and adding and training new employees for the
new production line.
Recycled Paperboard Segment Results. Operating profits of the recycled
paperboard segment decreased 28% from the 1997 quarter to the 1998 quarter
principally due to poor operating results at the Halltown mill. Although the
segment's gypsum-grade paperboard shipments, including inter-company shipments
to the Duke wallboard plant, increased 10% from the September 1997 quarter,
non gypsum-grade paperboard shipments decreased 11%. Total paperboard shipments,
including inter-company shipments, decreased 4% from the 1997 quarter, primarily
due to factors affecting the Halltown mill. Shipments from the Halltown mill,
which produces only non gypsum-grade paperboard, decreased 11% from the
September 1997 quarter. The primary factors contributing to the decline in
shipments from the Halltown mill were a general slowdown in business for the
types of non gypsum-grade paperboard products produced and a later start in the
usual demand for a seasonal paperboard product. While there was also a slight
decrease in demand for certain types of non gypsum-grade paperboard products
produced at the Hutchinson mill, the Company was able to offset this decrease
with increased shipments of gypsum-grade paperboard products at that mill.
Operating profits from the Hutchinson mill increased slightly from the September
1997 quarter. Operating profits from the Commerce City mill, which produces
principally gypsum-grade paperboard products, were also slightly higher than the
same quarter one year ago. Per unit material costs of recycled paperboard,
principally reclaimed paper fiber, decreased approximately 20% from the 1997
quarter. The decrease in per unit material costs was partially offset by
9
<PAGE> 11
higher per unit utility costs, primarily natural gas, and a 10% increase in
manufacturing overhead costs, principally related to repair and maintenance
costs exceeding similar costs in the 1997 quarter. All of the Company's
paperboard mills took varying amounts of scheduled downtime in the September
1998 quarter for annually scheduled repairs and maintenance and installation of
capital projects.
Expansion Projects
Duke, Oklahoma Wallboard Plant. The Company is currently in the
process of adding a second production line at its Duke, Oklahoma wallboard
plant. The second production line is expected to be operational by the end of
calendar year 1998 and is estimated to ultimately increase the annual capacity
of the plant from 570 million square feet to 1.2 billion square feet. The
Company estimates the expansion of the Duke plant will total approximately
$26,000,000 for production equipment improvements and approximately $5,000,000
for the purchase of 80 additional railcars. Nearly all of the new railcars have
been received with the remainder to be delivered throughout November, 1998. The
80 additional railcars will increase the Company's fleet to 155 railcars.
Lawton, Oklahoma Recycled Paperboard Mill. On May 20, 1998, the
Company announced its intent to construct and operate a recycled paperboard mill
in Lawton, Oklahoma. The Lawton mill will be used primarily for the production
of gypsum-grade recycled paperboard. Construction commenced on June 29, 1998.
The Lawton mill is expected to have a productive capacity of 220,000 tons
annually, which will approximately double the Company's current recycled
paperboard capacity. Management estimates that the Lawton mill will cost
approximately $160,000,000 to $170,000,000 including related working capital
requirements and capitalized interest. Construction of the mill continues to be
on schedule with commercial production anticipated to begin in the first
quarter of calendar year 2000.
Year 2000 Compliance
The Company uses a number of computer software programs, operating
systems, and types of equipment with computer chips in its internal operations,
including applications used in the Company's financial business systems,
manufacturing processes and administrative functions. To the extent that the
programs, operating systems, and equipment contain source code or computer chips
that are unable to interpret appropriately the upcoming calendar year 2000, some
level of modification or possible replacement will be necessary. The costs
necessary to modify or replace the items mentioned above, or the interruption of
administrative or manufacturing processes resulting from compliance failure, may
have a material adverse effect on the Company's business and financial condition
or its results of operations.
The Company has appointed a team of employees to address the year 2000
issue. The Company is following a six-step process evaluating critical software,
operating systems and equipment for year 2000 compliance-awareness, inventory,
assessment, remediation, testing, and risk management (contingency planning).
Currently, the Company is in the assessment phase with some remediation and
testing taking place. The inventory phase is substantially complete. The Company
does not yet have a contingency plan in place to deal with the most reasonably
likely worst-case scenario. The Company will begin devising its contingency plan
in the first quarter of calendar year 1999. The Company has established a goal
of July 1, 1999 for completing the entire process. The Company has received a
certification from the vendor of its financial and payroll software that such
software is year 2000 compliant. However, this software will be analyzed by the
same processes outlined above.
To date, expenses associated with year 2000 compliance have been
minimal. However, from fiscal 1995 through the present, the Company, in its
normal course of business, replaced substantially all of its business systems
hardware and software. The Company estimates expenditures of approximately
$300,000 in fiscal year 1999 and approximately $200,000 in fiscal year 2000 for
periodic, scheduled
10
<PAGE> 12
upgrades of hardware and software as well as a portion for year 2000 compliance.
The Company believes that internally generated cash together with proceeds from
the new credit facility will be sufficient to fund these expenditures.
Furthermore, there can be no assurance that the Company's customers
and suppliers are, or will be, year 2000 compliant. The Company believes the
most reasonably likely worst-case year 2000 scenario would be the failure of key
customers to achieve year 2000 compliance, resulting in the loss of sales to
such customers for an indefinite period of time. Currently, the Company is not
aware of any customers that are not year 2000 compliant. In order to address the
potential non-compliance with the year 2000 by the Company's customers and
suppliers, the Company is in the process of distributing and collecting
questionnaires to its customers and vendors asking them to respond with their
year 2000 plans. Until this process is substantially complete, the Company will
not be in a position to fully assess its year 2000 risks.
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.
In October 1997, the West Virginia Division of Environmental Quality
(the "DEQ") filed a complaint against Republic Paperboard of West Virginia (the
"West Virginia Subsidiary") in the Circuit Court of Jefferson County, West
Virginia. The complaint alleged that the West Virginia Subsidiary violated and
continued to violate an order entered into between the West Virginia Subsidiary
and the DEQ on January 17, 1995. It further alleged that the West Virginia
Subsidiary violated and continued to violate certain provisions of its
wastewater discharge permit. The West Virginia Subsidiary has negotiated an
agreement with the DEQ to settle the complaint for a $25,000 payment to the
DEQ. This settlement has been finalized and approved by the court.
Liquidity and Capital Resources
The following is a summary of certain financial statistics related to
the liquidity of the Company at September 30, 1998, and at June 30, 1998.
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
<S> <C> <C>
Cash, cash equivalents and investments $ 75,645,000 $ 1,124,000
Working capital $ 82,822,000 $ 11,024,000
Ratio of current assets to current liabilities 6.1:1 1.7:1
</TABLE>
On July 15, 1998, the Company received proceeds from the issuance of
$100,000,000 of 9.5% Senior Subordinated Notes (the "Notes") with a maturity
date of July 15, 2008. The proceeds from the Notes, along with a new bank credit
facility of up to $85,000,000 entered into with a bank syndicate on July 15,
1998, will be used primarily to finance the construction of the Lawton, Oklahoma
recycled paperboard mill and for general and corporate purposes including
working capital. On July 15, 1998, the Company used a portion of the proceeds
from the Notes to repay the outstanding principal balance of a
11
<PAGE> 13
then existing revolving credit facility dated as of June 30, 1995 (as amended)
with NationsBank, N.A., along with accrued interest. Upon repayment, the Company
ended the NationsBank, N.A. revolving credit facility. Absent prepayment or
extension by mutual agreement, the revolving credit facility would have expired
on June 30, 1999. Outstanding balances under the facility bore interest at a
rate equal to LIBOR plus an agreed margin (ranging from 50 to 150 basis points)
or the bank lender's prime rate less 0.75%.
Interest payment dates on the Notes are January 15 and July 15,
commencing on January 15, 1999. Each interest payment will be $4,750,000. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after July 15, 2003, at a redemption price of 104.75% which reduces
to 100% on or after July 15, 2005. In addition, prior to July 15, 2001, the
Company may redeem up to 35% of the principal amount of the Notes with the net
cash proceeds received by the Company from one or more Public Equity Offerings,
at a redemption price of 109.50%. The Notes include financial and other
covenants of the kind generally included in such indebtedness.
The $85,000,000 new credit facility will be used as a revolving line
of credit until the conversion date. The conversion date is defined as the
earlier of July 15, 2000 or start-up of the Lawton mill. At that time the
facility will convert into a term loan with a principal amount of up to
$50,000,000 and a revolving credit facility with a $35,000,000 maximum principal
amount. After the conversion, the principal of the term loan will amortize over
four years with 10% due during the first year, 20% during the second year, 30%
during the third year and 40% during the fourth year. The revolving credit
facility will mature in four years. Availability under the new credit facility
is not subject to a borrowing base but is subject to, among other things, a
condition that the lenders receive certain assurances that the construction of
the Lawton mill is progressing on a satisfactory schedule and within agreed-upon
cost parameters. The borrowings under the new credit facility are guaranteed by
each of the Company's material subsidiaries and are secured by a mortgage on the
Lawton mill, a pledge of stock of the Company's subsidiaries and security
interests in substantially all other personal property of the Company and its
subsidiaries. At such time, if any, as outstanding loans under the new credit
facility exceed $50,000,000, the lenders may require that other real property
and improvements of the Company and its subsidiaries be mortgaged as security
for the new credit facility. Outstanding principal amounts on the new credit
facility bear interest at a variable rate equal to, at the election of the
Company, (i) the London Interbank Offered Rate, plus an agreed margin (ranging
from 75 to 175 points), which is to be established annually based upon the
Company's leverage ratio or (ii) the higher of (a) the bank's corporate prime
rate and (b) the sum of 1/2 of 1% plus the federal funds rate, plus, in each
case, an agreed margin (ranging from 0 to 75 points). Interest payments under
the new credit facility will be payable quarterly. Under the new credit
facility, the Company is required to adhere to a number of financial and other
covenants, including covenants relating to excess cash flow, debt to EBITDA
ratio, interest coverage ratio, minimum EBITDA, and limitations on capital
expenditures and dividends. The new credit facility does not restrict the
transfer of funds to the parent by the subsidiaries.
The Company generated $7,217,000 of net cash from operations and
received proceeds of $100,000,000 from the issuance of the Notes in the
September 1998 quarter. These additions to cash were partially used to fund
$22,350,000 of capital expenditures, $4,618,000 of debt issue costs, $1,058,000
of dividends and repayment of the $5,950,000 principal balance under the old
revolving credit facility in the September 1998 quarter. Capital expenditures
relating to the construction of the Lawton mill and Duke plant expansion were
approximately $12,700,000 and $7,500,000 respectively during the quarter.
Management continues to estimate that the Lawton mill will cost, including
capitalized interest and related working capital requirements, approximately
$160,000,000 to $170,000,000. The Company estimates that capital expenditures
for fiscal 1999 will total approximately $145,500,000, including approximately
$122,000,000 on the Lawton mill, $13,000,000 to complete the expansion of the
Duke plant and the purchase of related railcars and an additional $10,500,000 to
be used principally for equipment upgrades at all facilities. The Company
estimates that it will spend $30,000,000 to $40,000,000 in fiscal year 2000
12
<PAGE> 14
to complete the Lawton mill and to provide working capital for the mill. The new
credit facility imposes limits on the Company's ability to make capital
expenditures, but the Company believes that those limits will not prevent it
from implementing its capital expenditure program.
The Company believes that the net proceeds from the Notes and the
$85,000,000 made available under the new credit facility together with cash
generated by operations will be sufficient to (i) complete the construction of
the Lawton mill, (ii) fund the other capital expenditure requirements identified
above, (iii) fund the Company's working capital requirements including interest
payments, (iv) pay dividends to stockholders and (v) fund other general and
corporate requirements.
On October 22, 1998, the Board of Directors of the Company declared a
quarterly cash dividend of $.09 per share of common stock to be paid on December
15, 1998 to stockholders of record on November 30, 1998. Dividend payments will
total approximately $1,059,000. Quarterly dividends historically have been paid
in September, December, March and June. The schedule and payment of cash
dividends is subject to the approval of the Company's Board of Directors. The
new credit facility and the Indenture impose limits on the Company's ability to
pay dividends, but the Company does not anticipate that such limits will prevent
the payment of dividends at historical levels. In most cases, the limits imposed
by the new credit facility are the most restrictive. Under those limits, the
Company may pay cash dividends and/or redeem its stock in aggregate amounts of
not more than (a) $5,300,000 in each fiscal year ending on or before the
conversion date, (b) $5,500,000 in each of the first and second fiscal years
ending after the conversion date, and (c) $6,000,000 in each of the third and
fourth fiscal years ending after the conversion date.
Forward-Looking Statements
Certain matters discussed in this Securities and Exchange Commission
Report on Form 10-Q may constitute forward-looking statements within the meaning
of the federal securities laws. These forward-looking statements are based on
current expectations and entail various risks and uncertainties that cause
actual results to differ materially from those contemplated by the
forward-looking statements due to a number of factors, including general
economic conditions, competition, market acceptance of selling price increases,
raw material costs, facility fuel costs, timely completion and successful
operation thereafter of the on-going capital projects at the Company's Duke,
Oklahoma wallboard plant and the Lawton, Oklahoma recycled paperboard mill, and
other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission, including its annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K.
13
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In October 1997, the West Virginia Division of Environmental
Quality (the "DEQ") filed a complaint against Republic Paperboard
of West Virginia (the "West Virginia Subsidiary") in the Circuit
Court of Jefferson County, West Virginia. The complaint alleged
that the West Virginia Subsidiary violated and continued to
violate an order entered into between the West Virginia Subsidiary
and the DEQ on January 17, 1995. It further alleged that the West
Virginia Subsidiary violated and continued to violate certain
provisions of its wastewater discharge permit. The West Virginia
Subsidiary has negotiated an agreement with the DEQ to settle the
complaint for a $25,000 payment to the DEQ. This settlement has
been finalized and approved by the court.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on October 22,
1998. The votes cast on each item in order of the listing in the
Proxy was as follows:
<TABLE>
<CAPTION>
1. Election of Directors
Votes Votes To Broker
----- -------- ------
For Withhold Authority Non-Votes
--------- ------------------ ---------
<S> <C> <C> <C>
C. William Claypool 9,718,631 28,441 0
Bert A. Nelson 9,723,523 23,549 0
Talbot Rain 9,707,431 39,641 0
Gerald L. Ray 9,719,448 27,624 0
Robert F. Sexton 9,723,523 23,549 0
Phil Simpson 9,725,223 21,849 0
L. L. Wallace 9,710,057 37,015 0
David B. Yarbrough 9,710,057 37,015 0
</TABLE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Article 5 of Regulation S-X-Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated July 15, 1998 (date of
earliest event reported), and filed July 17, 1998, announcing
$100,000,000 principal amount of its 9 1/2% Senior
Subordinated Notes due 2008 were sold in a private transaction
pursuant to Rule 144A under the Securities Act of 1933. The
Form 8-K includes Item 5, Other Events, and Item 7, Financial
Statements and Exhibits.
The Company filed a Form 8-K, dated July 17, 1998 (date of
earliest event reported), and filed July 20, 1998, announcing
that a new credit facility of up to $85,000,000 in
14
<PAGE> 16
aggregate principal amount was entered into by the Company
with a bank syndicate. The Company additionally announced it
had entered into an agreement with Fluor Daniel, Inc. for the
design and construction of the Lawton mill and released
additional details with respect to the long-term supply
contract with James Hardie Gypsum, Inc. The Form 8-K includes
Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
The Company filed a Form 8-K, dated May 14, 1998 (date of
earliest event reported) and filed September 11, 1998,
pursuant to which the following exhibits were voluntarily
filed: (i) the Paperboard Supply Agreement among the Company,
Republic Paperboard Company and James Hardie Gypsum, Inc.,
dated May 14, 1998, (ii) the Amended and Restated Agreement
for Engineering, Procurement and Construction entered into as
of June 26, 1998 between Republic Paperboard Company and Fluor
Daniel, Inc. relating to the Lawton mill, (iii) the Amended
and Restated Parent Company Guarantee effective as of June 26,
1998 from the Company to Fluor Daniel, Inc. relating to the
Lawton mill, (iv) the Indenture dated as of July 15, 1998
between the Company and UMB Bank, N.A. as trustee relating to
the Company's 9 1/2% Senior Subordinated Notes due 2008, and
(v) the $85,000,000 Credit Agreement dated July 15, 1998 among
the Company, Morgan Guaranty Trust Company of New York, as
Syndication Agent, NationsBank, N.A., as Administrative Agent,
and the Banks and LC Issuing Banks, as defined therein. The
Form 8-K includes Item 5, Other Events, and Item 7, Financial
Statements and Exhibits.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC GROUP INCORPORATED
November 13, 1998 /s/ Doyle R. Ramsey
------------------
Doyle R. Ramsey
Executive Vice President and
Chief Financial Officer
November 13, 1998 /s/ Michael W. Dirks
-------------------
Michael W. Dirks
Vice President - Finance and
Chief Accounting Officer
16
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Article 5 of Regulation S-X-Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 75,645,000
<SECURITIES> 0
<RECEIVABLES> 14,568,000
<ALLOWANCES> 685,000
<INVENTORY> 8,037,000
<CURRENT-ASSETS> 99,144,000
<PP&E> 173,304,000
<DEPRECIATION> 55,253,000
<TOTAL-ASSETS> 223,064,000
<CURRENT-LIABILITIES> 16,322,000
<BONDS> 0
0
0
<COMMON> 11,765,000
<OTHER-SE> 82,892,000
<TOTAL-LIABILITY-AND-EQUITY> 223,064,000
<SALES> 38,196,000
<TOTAL-REVENUES> 38,196,000
<CGS> 22,586,000
<TOTAL-COSTS> 22,586,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,491,000
<INCOME-PRETAX> 5,300,000
<INCOME-TAX> 2,015,000
<INCOME-CONTINUING> 3,285,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,285,000
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
