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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-7210
REPUBLIC GROUP INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE
(State or other jurisdiction of incorporation or organization) 67502-4341
811 EAST 30TH AVENUE, HUTCHINSON, KANSAS (Zip Code)
(Address of principal executive offices) 67504-1307
POST OFFICE BOX 1307, HUTCHINSON, KANSAS (Zip Code)
(Mailing address)
</TABLE>
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:
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<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
<S> <C>
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
COMMON STOCK SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE, INC.
</TABLE>
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. X
---
ON AUGUST 28, 1998, THERE WERE 11,749,335 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 28, 1998, WAS APPROXIMATELY
$183,583,359.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 1998 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, 1998
PART I
ITEM 1. BUSINESS.
GENERAL
Founded in 1961, Republic Group Incorporated is an integrated manufacturer and
distributor of recycled paperboard and gypsum wallboard. Management believes the
Company is one of the leading producers of certain grades of recycled paperboard
sold to manufacturers of consumer and industrial paperboard products such as
tubes, cans, cores, spools, drums, partitions, puzzles and games as well as one
of the leading suppliers of gypsum-grade recycled paperboard to independent
gypsum wallboard producers. In addition, the Company sells reclaimed paper fiber
for use in its recycled paperboard business as well as for sale to third
parties. Republic sells its products to customers located in 43 states. In
addition to the Duke, Oklahoma gypsum wallboard plant, the Company has recycled
paperboard mills in Commerce City, Colorado, Hutchinson, Kansas and Halltown,
West Virginia and paper fiber recycling centers in Denver, Colorado, Topeka,
Kansas and Kansas City, Missouri. The Company had net sales and net income of
$128,285,000 and $17,799,000, respectively, in fiscal 1998. Before intercompany
eliminations, the Company's recycled paperboard (which includes reclaimed paper
fiber) and gypsum wallboard businesses accounted for approximately 57% and 43%,
respectively, of Republic's total net sales during fiscal 1998.
The following table summarizes the Company's businesses:
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PERCENT OF
FISCAL 1998
CONSOLIDATED
BUSINESS PRODUCT END-USE MARKET SITE(S) NET SALES
---------------- ---------------- ---------------- ------------- ----------------
(INCLUDING
INTERCOMPANY)
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Recycled Paperboard Gypsum-grade recycled Internal Commerce City, Colorado; 18%
paperboard (approximately 13% Hutchinson, Kansas
of fiscal 1998
recycled paperboard
net sales) and
third-party use in
the manufacture of
gypsum wallboard
Recycled paperboard Sale to Commerce City, Colorado; 35%
rolls and sheets manufacturers of Hutchinson, Kansas;
paperboard tubes, Halltown, West Virginia
cans, cores, spools,
drums, partitions,
puzzles and games
for sale to
third-parties
Reclaimed paper fiber Internal Denver, Colorado; 4%
(approximately 50% Topeka, Kansas;
of fiscal 1998 Kansas City, Missouri
reclaimed paper
fiber net sales) and
third-party use in
the manufacture of
recycled paperboard
Gypsum Wallboard Gypsum wallboard Gypsum wallboard Duke, Oklahoma 43%
distributors and
residential and
commercial builders
and remodelers
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Management has recently undertaken a number of important strategic initiatives
designed to increase Republic's production capabilities. The Company intends to
use the proceeds of the sale of $100,000,000 of 9.50% Senior Subordinated Notes
(the "Notes") issued July 15, 1998, together with proceeds of borrowings under a
new $85,000,000 credit facility ("New Credit Facility") entered into with a bank
syndicate on July 15, 1998, to construct a new recycled paperboard mill in
Lawton, Oklahoma. The Company intends to use the Lawton mill primarily for the
production of gypsum-grade recycled paperboard with weight and surface
characteristics superior to that currently available in the United States.
Management believes that the operation of the Lawton mill will position Republic
as the largest third-party supplier of gypsum-grade recycled paperboard in the
United States. The Lawton mill is expected to have a productive capacity of
approximately 220,000 tons per annum, which will approximately double Republic's
recycled paperboard capacity. The Company intends to sell approximately 50% of
the Lawton mill's output pursuant to a recently executed long-term supply
agreement (the "Hardie Agreement") with James Hardie Gypsum, Inc. ("Hardie"),
and to use approximately 25% of the Lawton mill's output to source its own
gypsum wallboard operations. Management estimates that the Lawton mill will cost
approximately $160,000,000 to $170,000,000, inclusive of related working capital
requirements and capitalized interest, and will achieve commercial production
during the first quarter of calendar year 2000.
The Company is also currently completing the second phase of a two-phase
expansion of the Duke plant that will increase its capacity from 570 million to
1.2 billion square feet per year by late fall, 1998. Management believes that,
after its expansion, the Duke plant will be one of the largest, most-efficient
gypsum wallboard manufacturing plants in the world. In addition, the Company has
just completed an expansion of the capacity of the Commerce City mill and the
Hutchinson mill by approximately 25% in the aggregate. Management believes that
these initiatives, together with the construction of the Lawton mill and the
continued expansion and incremental upgrading of its facilities, will
significantly increase Republic's overall production capabilities as well as
enhance its competitive position in both the recycled paperboard and gypsum
wallboard business.
COMPETITIVE STRENGTHS
The Company believes that it has the following competitive strengths:
Low Cost Production. The Company believes that its production costs are among
the lowest in the industry and continually seeks to improve efficiency and
allocate production in order to maximize capacity utilization. Management
believes that the use of high-speed manufacturing equipment in particular has
enabled the Company to significantly reduce labor costs, waste and production
time. In addition, management believes that the strategic locations of the
Company's facilities provide it with cost advantages, including reduced
transportation and warehousing costs.
Product Line and Geographic Diversification. The Company's growth in the
recycled paperboard business has reduced Republic's dependence on the
construction and housing industry in which gypsum wallboard is used. Management
believes that such diversification has lessened the effect of cyclical housing
and construction markets on the Company's overall operations. In addition, the
Company produces a number of specialty grades of recycled paperboard that are
sold to manufacturers of consumer and industrial paperboard products and used
for packaging and other products, thereby reducing its dependence on sales of
any one grade. Management believes that the various locations of the Company's
facilities reduce its dependence on any single geographic market.
Well-Integrated Operations. Management believes that the Company's
well-integrated operations reduce its dependence on third-parties and its
overall production costs. The Duke plant obtains substantially all of its
requirements for raw gypsum from quarries owned and operated by the Company and
purchases substantially all of its requirements for recycled paperboard from the
Commerce City mill and the Hutchinson mill. The Company's recycled paperboard
mills, in turn, purchase approximately 33% of their reclaimed paper fiber needs
from the Company's own reclaimed paper fiber operations. The Company also owns
and operates a short-line railroad that it uses to transport approximately
one-third of its gypsum wallboard to major carriers located 15 miles from the
Duke plant for distribution throughout the United States.
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High-Quality Products and Services; Strong Customer Relationships. The Company
has adopted strict quality control standards and procedures, which it regularly
reviews and updates. The Company believes that its ability to consistently
manufacture high quality products and to provide timely delivery and superior
customer service is an important element of the Company's success. As a result
of its focus on quality and customer service, the Company believes that it has
earned a reputation in the industry as a dependable supplier of products,
enabling the Company to develop long-standing customer relationships.
Management Experience. The Company, which was founded by its current president
and chief executive officer in 1961, has assembled a management team with a
strong track record and an average of approximately 16 years of service per
executive officer. The Company's current management team has successfully
diversified product lines, increased sales, strengthened customer and supplier
relationships, improved manufacturing efficiencies and productivity and selected
and integrated strategic acquisitions, all of which have enhanced the
competitive strength of the Company.
BUSINESS STRATEGY
The Company intends to take advantage of its competitive strengths by pursuing
the following business strategy:
Expand Productive Capabilities. Management believes that the operation of the
Lawton mill will position Republic as the largest third-party producer of
gypsum-grade recycled paperboard in the United States. The Company expects the
Lawton mill to produce gypsum-grade recycled paperboard that is 20-30% lighter,
superior in quality and equal in strength characteristics to the gypsum-grade
recycled paperboard that is otherwise currently available in the United States.
Management believes that being the first producer to bring a
technologically-improved gypsum-grade recycled paperboard to market will provide
Republic with a distinct competitive advantage and increase the ability of the
Company to sell its product in new markets. The Company intends to sell
approximately 50% of the Lawton mill's output pursuant to the Hardie Agreement
and expects to use an additional 25% of output to support its gypsum wallboard
business. Management also expects the operation of the Lawton mill to allow
Republic to redeploy some of its existing gypsum-grade paperboard capacity for
non-wallboard use, thereby allowing the Company to continue to grow and
diversify its recycled paperboard business. The Lawton mill will also be capable
of producing tube stock and other consumer and industrial paperboard products,
which management believes will help mitigate the impact of any future downturns
in the housing and construction industry.
Management also believes that the ongoing upgrades and expansions to its
existing facilities will further enhance and increase the Company's overall
productive capacity. The improvements to the existing production line, together
with the addition of a second production line at the Duke plant, will provide
the Company with the capability of producing both specialty products, such as
the Company's recently introduced 54-inch wallboard, and increased volumes of
its core products, which management believes will allow Republic to increase its
sales to existing customers as well as obtain new customers. The Company expects
to begin transitioning the Hutchinson mill to tube stock and other consumer and
industrial paperboard products before the Lawton mill comes on line. In
addition, management believes that the improvements made at the Commerce City
mill will produce a higher quality gypsum-grade paperboard that can be used in
conjunction with the output from the Lawton mill.
Continue to Operate as Low Cost Producer. In order to maintain and improve its
cost position, Republic expects to continue to identify opportunities for
ongoing cost reductions. The Lawton mill is expected to be an efficient
high-speed mill with lower than average operating costs as a result of its
design specifications. In addition, management expects the production of lighter
gypsum-grade paperboard at the Lawton mill to result in freight cost savings as
well as reduced drying and delivery costs to gypsum wallboard producers. The
expansions and improvements at the Duke plant, the Commerce City mill and the
Hutchinson mill should also provide increased economies of scale. The Company
continuously scrutinizes its manufacturing processes and overhead infrastructure
to conserve material and energy, reduce set-up time and lower overhead expenses.
To this end, the Company has identified additional cost-saving opportunities it
expects to implement in fiscal year 1999, including incremental process
equipment upgrades at the Company's existing recycled paperboard mills.
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Pursue Strategic Acquisitions. The Company may from time to time pursue small to
medium-sized strategic acquisitions, particularly in the recycled paperboard
business. Management believes that such acquisitions may provide opportunities
to further diversify its product lines as well as consolidate operations and
lower per unit costs.
COMPANY BACKGROUND AND HISTORY
The Company began manufacturing gypsum wallboard at the Duke plant in 1965, and,
for the next 18 years, the Company operated almost exclusively as a producer of
gypsum wallboard. Then, in 1983, in an effort to diversify and integrate its
operations so as to make the Company more resistant to cyclical downturns in the
construction industry, the Company began to shift its primary strategic focus
away from the production of gypsum wallboard and toward the production of
recycled paperboard. In 1983, the Company purchased the Commerce City mill and
the Hutchinson mill; in 1993, the Company began an expansion program to increase
the productive capacity of these mills; in 1994, the Company purchased paper
fiber recycling centers in Topeka, Kansas and Kansas City, Missouri; in 1995,
the Company acquired the Halltown mill; and, in 1996, the Company opened a paper
fiber recycling center in Denver. This shift in strategic focus diversified the
Company both geographically and in terms of productive business segments.
Moreover, by adding new operations that complement its core gypsum business, the
Company has become significantly more integrated vertically. The Company's
current operations provide it with access to both a steady supply of quality
gypsum-grade recycled paperboard for its gypsum wallboard operations and
additional supplies of reclaimed paper fiber for the Company's recycled
paperboard mills.
RECYCLED PAPERBOARD OPERATIONS
Manufacturing. The Company's recycled paperboard manufacturing operations are
conducted at the Commerce City mill, the Halltown mill and the Hutchinson mill.
All of the paperboard products manufactured at the Company's paperboard mills
are produced from 100% reclaimed paper fiber and are classified by the industry
as recycled paperboard. These recycled paperboard products include the facing
paper used in the manufacture of gypsum wallboard and recycled paperboard used
by manufacturers of consumer and industrial paperboard products such as tubes,
cans, cores, spools, drums, partitions, puzzles and games.
Recycled paperboard is manufactured at the Company's existing mills in a
continuous process during which reclaimed 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 be packaged either in
roll form or in sheets, according to customer specifications.
In 1998, the Company completed a program to expand and develop its recycled
paperboard business which involved the expenditure of approximately $16,000,000
and expanded the productive capacity of the Commerce City mill and the
Hutchinson mill by approximately 25% in the aggregate. As of June 30, 1998, the
rated productive capacity of the Company's three recycled paperboard mills was
213,500 tons per year.
Raw Materials. The principal raw materials used by the Company's recycled
paperboard mills are reclaimed paper fiber, water and chemicals. Reclaimed paper
fiber is currently purchased from several sources, including the Company's own
paper fiber recycling centers. Management believes that adequate supplies of
reclaimed paper fiber will continue to be available from wholesalers located in
cities near its recycled paperboard mills and its own paper fiber recycling
centers. Since reclaimed paper fiber is a commodity, its cost is subject to
quick corrections based on supply and demand. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Overview."
Chemicals, including size, retention aids and bactericides, used by the Company
in its recycled 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 recycled paperboard.
Retention aids are agents used
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to retain fiber and chemicals in the papermaking process and not to 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 both in the production process and for cooling purposes. In Colorado and
Kansas, where two of the Company's recycled paperboard mills are located, the
appropriation of water is regulated by state laws. The Commerce City mill uses
water pumped from wells located on, or adjacent to, the Company's property. Most
of these wells have been in use for more than 20 years. In connection with the
purchase of the Commerce City mill, the Company acquired an approximate 80%
interest in certain of these water wells as tenant-in-common with Packaging
Corporation of America (now Tenneco Packaging) and the right to use up to
approximately 80% of the water produced by the wells. The Company's water rights
are subject, however, to the legal rights of prior appropriators of the same
water source and to court-decreed limitations on the permitted uses for such
water. The Hutchinson mill uses large volumes of water pumped from wells located
on owned or controlled property near the mill. 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. The Halltown mill uses
water from a stream running through the Company's property and has done so for
over 100 years. The Company's rights to use the water from the stream are
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 recycled paperboard 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.
Electricity, natural gas and other utilities are available to the plants either
at contracted rates or at standard industrial rates in adequate supplies,
subject to standard industrial curtailment provisions. Management believes there
are adequate supplies of coal available to the Halltown mill on either a
contracted or spot basis. The Hutchinson mill generates approximately 42% of the
electricity it uses, and the Halltown Mill generates approximately 21% of its
total requirements. During periods of natural gas curtailment, the Commerce City
mill and the Hutchinson mill 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 in 1997 than in 1996 and has been moderately higher during 1998. All of
the Company's recycled paperboard mills periodically contract fuel supplies in
advance for varying time limits to hedge against fluctuations in the market. The
Company has historically been successful at contracting future supplies at
favorable rates. However, because natural gas and coal are commodities, there is
always the possibility of contracting future requirements at higher prices than
actual spot prices.
Sales, Marketing and Distribution. The recycled paperboard products manufactured
by the Company are sold to gypsum wallboard manufacturers and to converters that
manufacture composite cans, cores, tubes and other packaging and specialty
products. During fiscal 1998, approximately 14% of the recycled paperboard
manufactured and shipped by the Company's recycled paperboard mills was consumed
by the Company's gypsum wallboard manufacturing operations, another
approximately 20% was shipped to other gypsum wallboard manufacturers and the
balance was shipped to over 150 different converter customers. Sonoco Products
Company and Centex American Gypsum accounted for approximately 16% and 15%,
respectively, of the recycled paperboard segment's gross sales and approximately
9% each of consolidated gross sales. When the Hardie Agreement is fully
implemented, Hardie is expected to account for a significant percentage of
consolidated gross sales. See "The Hardie Agreement."
In fiscal 1998, approximately 50% of the Company's reclaimed paper fiber sales
were to the Company's recycled paperboard mills. The balance was sold to
external customers. Most customers are located within 600 miles of the
particular paper fiber recycling center. The Company's paper fiber recycling
centers have the capability to sort and bale reclaimed paper fiber purchased
from generators and haulers. In addition, the Company's paper fiber recycling
centers act as brokers for certain generators of reclaimed paper fiber by
arranging for direct shipments from the generator to the purchaser of the
reclaimed fiber.
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Sales of recycled paperboard and reclaimed paper fiber are typically made on
credit terms in accordance with normal industry practice. Currently, recycled
paperboard production normally occurs after an order is received, and recycled
paperboard is rarely produced for general inventory purposes. The backlog of
orders for recycled paperboard is usually not significant. Deliveries of
recycled paperboard and reclaimed paper fiber are made to customers by common
carriers, as well as by rail, although some customers pick up their orders at
the Company's facilities.
Competition. In selling the portion of its production not consumed by its own
gypsum wallboard manufacturing operations, the Company competes with
approximately eight other manufacturers of gypsum-grade paperboard, six of which
have gypsum wallboard manufacturing operations. Substantially all of these
competitors have greater financial resources than the Company. During periods of
peak demand for gypsum wallboard, the demand for recycled paperboard typically
matches or exceeds the productive capacities of the gypsum-grade paperboard
producers. During periods of reduced demand for gypsum wallboard, the demand for
recycled paperboard falls, and selling prices may decrease. In selling recycled
paperboard to the packaging industry, the Company competes with approximately 75
producers, many of whom have substantially greater financial resources than the
Company. Management believes that its sales constitute less than approximately
5% of total sales of recycled paperboard nationally.
Price, quality, personal relationships and timeliness of deliveries are the
principal methods of competition among paperboard producers. The locations of
the Company's recycled paperboard mills allow the Company to serve a variety of
markets, including several gypsum wallboard plants in the central southwest and
western United States. The Halltown mill is within an hour and a half from the
metropolitan centers of Baltimore, Maryland and Washington, D.C. The centralized
location of the Commerce City mill and the Hutchinson mill does, however, 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. Moreover, many of the Company's competitors are more vertically
integrated than the Company and produce end-user products utilizing recycled
paperboard manufactured from their own recycled paperboard mills.
THE LAWTON MILL
The Lawton mill will be located in southwestern Oklahoma. The Lawton mill is
designed to manufacture gypsum-grade recycled paperboard utilizing technologies
that have been successfully employed in recycled paper mills that manufacture
products other than recycled paperboard and in European gypsum-grade recycled
paperboard mills, but that have not yet been entirely incorporated into any
gypsum-grade recycled paperboard mills in the United States. These technologies
include (i) the use of an advanced paper forming section using the "Fourdrinier"
process, which has a pressurized headbox and forms paper sheets on a long wire
table that permits machine speeds to be increased two to three times that of
other formers, thereby allowing reduced labor costs per ton produced, (ii) an
advanced control system, which immediately senses changes in the paper as it is
being formed and adjusts the forming section of the paper machine to maintain
the uniformity of the paper and also monitors and adjusts the reclaimed paper
fiber cleaning process to maintain the quality of this raw material, (iii)
modern pressing technology, which permits water removal in a way that provides
more uniformity and enhances the properties of the paper, (iv) dryer felts on
all dryer sections, which improve drying efficiency and reduce shrinkage, and
(v) an enhanced cleaning and screening process for the reclaimed paper fiber
that enhances the strength, surface characteristics and overall surface
uniformity of the paperboard.
The Company expects that the Lawton mill will be able to produce recycled
paperboard that is superior in surface characteristics to and approximately
20%-30% lighter than that currently produced in the United States, but that has
equal strength characteristics. The Company believes that being the first to
produce higher quality, lower basis-weight recycled paperboard will give it a
competitive advantage over other recycled paperboard manufacturers until other
mills using similar technology come on-line. Because gypsum-grade recycled
paperboard generally is sold on the basis of surface area, manufacturing lighter
paper potentially translates into higher profit margins per ton for the recycled
paperboard manufacturer. Lighter recycled paperboard also reduces drying costs
associated with the production of gypsum wallboard by approximately 10% to 20%
and reduces inbound and outbound freight costs for
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both recycled paperboard and gypsum wallboard. In addition, because the Lawton
mill will be designed as an efficient, high-speed mill, operating costs are
expected to be lower than existing mills now producing recycled paperboard for
the wallboard industry. In addition to producing a product which should be more
attractive to customers, it is anticipated that the lighter weight, better
quality recycled paperboard from the Lawton mill will reduce production and
transportation costs at the Duke plant.
The Lawton mill is expected to have the capacity to produce approximately 11
billion square feet, or approximately 220,000 tons, of gypsum-grade recycled
paperboard annually. Production from the Lawton mill will be used both
internally at the Duke plant and sold externally to other gypsum wallboard
manufacturers. Upon completion of the expansion of the Duke plant, the Company's
internal demand for gypsum-grade recycled paperboard is expected to be
approximately 2.5 billion square feet, or approximately 50,000 to 60,000 tons
per year, which represents approximately 25% of the Lawton mill's capacity. An
additional 5.2 billion square feet, or approximately 100,000-110,000 tons,
comprising an additional approximate 50% of the Lawton mill's output, is
expected to be purchased by Hardie pursuant to a long-term "requirements"
agreement. The Company is actively pursuing potential customers for the Lawton
mill's remaining output. Although primarily designed for the production of
gypsum-grade recycled paperboard, the Lawton mill is also capable of producing
recycled paperboard for other uses.
The Company estimates that the total cost of the Lawton mill, inclusive of
related working capital requirements and capitalized interest, will be
$160,000,000 to $170,000,000. Management expects that the Lawton mill will
achieve commercial production by the first quarter of calendar year 2000.
The Company has entered into an agreement for the design and construction of the
Lawton mill with Fluor Daniel, Inc. ("Fluor Daniel"), an engineering and
construction firm with substantial background in the construction of recycled
paper mills. Fluor Daniel has entered into and will administer an agreement for
the paper machine to be used at the Lawton mill with Voith Sulzer, a
manufacturer with extensive experience in the design and fabrication of paper
machines using the Fourdrinier process. Of the estimated $160,000,000 to
$170,000,000 cost of the Lawton mill, approximately $42,000,000 represents the
cost of the paper machine.
The agreement with Fluor Daniel is a "cost plus" contract under which the
Company bears the cost of construction and pays fees to Fluor Daniel for its
services. Portions of Fluor Daniel's fee are tied to the successful completion
of the Lawton mill within a target cost and on schedule. If costs are below the
target, then Fluor Daniel's fee is increased, and, if the costs exceed the
target, then the fee is reduced. Similarly, if the Lawton mill is completed
ahead of schedule, then the fee is increased, and, if it is completed behind
schedule, then the fee is reduced. In addition, if Fluor Daniel identifies cost
savings that are used on the project, then a portion of the savings will be
shared with Fluor Daniel.
There can be no assurance that the construction of the Lawton mill will proceed
on schedule and without cost overruns. Construction of the Lawton mill may be
significantly delayed or may not be completed at all as a result of problems
frequently associated with construction projects, including delays in
construction, cost overruns, labor problems, the inability to obtain required
governmental approvals, licenses and permits or to obtain the funds required to
complete the project. Completion and operation of the Lawton mill may also be
affected by general economic conditions. In addition, no assurance can be given
that the Company will be able to successfully implement the technology to be
used in the operation of the Lawton mill into its operation. Other unforeseen
expenses, difficulties, complications or delays may be encountered in connection
with the construction and initial operations of the Lawton mill. Construction of
the Lawton mill is subject to the satisfaction of certain conditions, including
approval by various state and local regulatory agencies. There also can be no
assurance that the Company will have sufficient resources available to integrate
the Lawton mill successfully into its overall operations. In addition, after
construction of the Lawton mill is completed, it is expected that there will be
a period during which further testing and refinement of its recycled paperboard
products will occur and during which the Lawton mill's line speed will be
incrementally increased up to normal operating levels. During this transition
period, which is expected to last for approximately eight months, the Lawton
mill will not be able to contribute to earnings at its full potential. In
addition, if production problems or quality problems with the recycled
paperboard produced at the Lawton mill should occur, then the contribution to
earnings of the Lawton mill could be further delayed.
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When the Duke plant converts to the use of recycled paperboard supplied by the
Lawton mill, the Company will need to find replacement customers for that
portion of the productive capacity of the Hutchinson mill that presently
supplies the Duke plant. The Company expects to shift production at the
Hutchinson mill away from the manufacture of gypsum-grade recycled paperboard to
other grades of recycled paperboard and to continue concentrating the Commerce
City mill on the production of gypsum-grade recycled paperboard. However, the
Company may experience a significant lag time in converting production to such
other grades, prices available to the Company may be significantly lower, or the
Company might be unable to find replacement customers.
One factor in the decision to locate the new mill in Lawton was the incentive
package offered by the State of Oklahoma, Comanche County and the City of
Lawton, which includes the provision of the real property upon which the Lawton
mill is to be located, a cash incentive payment, certain income tax, sales tax
and property tax benefits, the construction of a rail spur and an additional
roadway to serve the site, the extension of a water line toward the site,
pricing advantages on fresh water supplies and sewage and employee training and
related services. In return for the incentive package, the Company has agreed
not to sell the Lawton mill for a period of 15 years from completion, other than
to an affiliate or successor, and to employ approximately 110 full time
employees at the Lawton mill during the first five years of operation, subject
to a reduction of up to 25% in the number of employees if technology and
manufacturing processes or market conditions dictate that such a reduction is
prudent.
The Company intends to use municipal water to supply the Lawton mill and
municipal sewer systems to discharge its waste water after it is processed and
treated at the mill. The Company believes that adequate supplies of electricity
and natural gas are available to the Lawton mill and is in the process of
negotiating for both electricity and natural gas requirements with several
potential suppliers. The Company believes that these utilities will be adequate
for operations at the Lawton mill under normal circumstances. The Lawton mill
will be served by a rail spur that will tie in to a major rail line operated by
Burlington Northern Santa Fe Corporation. Lawton is located on an interstate
highway and other major highways that will facilitate transportation by truck.
The Company believes that adequate supplies of reclaimed paper fiber are
available within reasonable distances from the Lawton mill.
THE HARDIE AGREEMENT
On May 14, 1998, the Company entered into the Hardie Agreement, pursuant to
which the Company has agreed to supply at least approximately 90% of the
gypsum-grade recycled paperboard requirements of Hardie's three gypsum wallboard
plants with the bulk of such sales beginning in October 2000-January 2001. The
Company expects the amount of paperboard supplied to Hardie pursuant to the
Hardie Agreement eventually to account for approximately 50% of the Lawton
mill's production. The Duke plant is expected to utilize another approximately
25% of the Lawton mill's output. Although it is actively pursuing several
potential customers, the Company does not yet have any other supply agreements
for the output of the Lawton mill. There can be no assurance that the Company
will be successful in obtaining any further supply agreements, and, in that
case, the Company would attempt to sell the excess production in the spot market
or under other short term arrangements.
Subject to earlier termination, the current term of the Hardie Agreement will
terminate on the later of October 1, 2010 or ten years after the start of
commercial production. The Hardie Agreement specifies that commercial production
has been achieved when the Lawton mill has produced, for two consecutive months,
recycled paperboard meeting the required product specifications in an amount
equal to or greater than approximately 30% of the Lawton mill's planned monthly
capacity. Under the Hardie Agreement, the Company has agreed to provide to
Hardie, and Hardie has agreed to purchase, the following volumes of recycled
gypsum-grade paperboard: (i) approximately 7% of the requirements of Hardie's
gypsum wallboard plant near Nashville, Arkansas until December 31, 2000; (ii) at
least 90% of the requirements of Hardie's gypsum wallboard plant near Nashville,
Arkansas beginning January 1, 2001; and (iii) at least 90% of the requirements
of Hardie's gypsum wallboard plants near Las Vegas, Nevada and Seattle,
Washington beginning October 1, 2000. Although the Company may be able to sell
additional quantities to Hardie prior to that time, there can be no assurance
that such sales will occur or that the Lawton mill will be able to produce the
quantities that Hardie might seek to purchase prior to commencement of its
8
<PAGE> 10
long-term commitment. Under the Hardie Agreement, the Company will maintain a
minimum inventory of 2,000 tons of gypsum-grade recycled paperboard at the
Lawton mill as to which Hardie will have priority of shipment.
Initially, each sale to Hardie will be made at a fixed base price determined at
the execution of the Hardie Agreement that is subject to adjustment based on
changes in the major variable costs of production of recycled paperboard,
including the cost of power, transportation and the primary raw materials, and
changes in the purchaser price index for industrial commodities and a reference
employment cost index. The Hardie Agreement also contains a "most favored
nations" clause requiring the Company to offer Hardie the lowest price that is
available from the Company to other third-party purchasers of its recycled
paperboard. The "most favored nations" clause requires the Company to offer the
same price on an equivalent volume as the volume being sold to the third party
at such price, but makes the price applicable to all sales while such
third-party pricing remains in effect if the third-party price offered is
pursuant to a long-term agreement of more than two years. As a result of the
pricing formula, Hardie may be able to make purchases at substantially below
market prices if market prices rise faster than the cost of production. Because
of the "most favored nations" clause, if the Company were unable to sell its
uncommitted production from the Lawton mill to third parties at prices equal to
or exceeding the pricing to Hardie, then it either would have to forego such
third party sales or lower the selling price to Hardie.
In addition, the Hardie Agreement is a "requirements" contract, and a
termination or reduction of Hardie's production of gypsum wallboard could have a
material adverse effect on the Company. If, after October 1, 2004, technology
changes make it substantially more economical for Hardie to utilize paperboard
of a kind not presently commercially available and that is not contemplated for
the Lawton mill, then Hardie and the Company are obligated to negotiate in good
faith to include such recycled paperboard within the scope of the Hardie
Agreement. However, any failure to reach an agreement on this point could result
in a reduction or termination of Hardie's purchases from the Lawton mill, and,
as a result, could have a material adverse effect on the Company.
The Hardie Agreement imposes detailed specifications for the gypsum-grade
recycled paperboard sold to Hardie. The Company believes that the production
from its Lawton mill will be able to meet such specifications. However, if the
Company were unable to produce gypsum-grade recycled paperboard meeting such
specifications or complete the Lawton mill or achieve satisfactory commercial
production in a timely fashion, then the Company would be obligated to supply
Hardie with gypsum-grade recycled paperboard from its other mills or from
purchases from third parties or otherwise compensate Hardie for its additional
costs in obtaining replacement gypsum-grade recycled paperboard. If Republic is
unable to give notice that commercial production has been achieved at the Lawton
mill by July 1, 2001, then Hardie may terminate the Hardie Agreement. The
inability of the Company to complete construction of, or to achieve commercial
production at, the Lawton mill could have a material adverse effect on the
Company.
The Hardie Agreement provides that, during the two year period beginning on the
later of October 1, 2005 or the fifth anniversary of commercial production, the
parties will negotiate in good faith toward a long-term extension of the
agreement past its initial term on mutually acceptable terms.
GYPSUM WALLBOARD OPERATIONS
Manufacturing. The Company's gypsum wallboard manufacturing operations are
conducted at the Duke plant 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 gypsum wallboard per year,
when operating three shifts per day and six and two-thirds days per week. This
represents an increase in rated capacity of approximately 40 million feet of
gypsum wallboard per year since 1996. The increase resulted largely from
incremental productivity improvements made at the Duke plant, which operated at
or near capacity during 1996, 1997 and 1998. The Company is also currently
completing a second phase expansion of the Duke plant that will increase its
capacity to 1.2 billion square feet per year by late fall, 1998. Construction is
progressing satisfactorily, and expenditures in connection with this project are
estimated to total approximately $26,000,000 for production equipment
improvements and $5,000,000 for additional railcars. See "Management's
Discussion and Analysis-Overview" and "Liquidity and Capital Resources."
9
<PAGE> 11
The Company produces gypsum wallboard by a method common to most gypsum
wallboard manufacturers. 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 Duke 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 recycled paperboard, the sheet is cut into
appropriate lengths, dried in kilns and packaged for sale. The Company produces
gypsum wallboard in standard industry thicknesses and varieties, and also
produces 54-inch wallboard, a premium product used in commercial and residential
applications with 9-foot ceilings, which management believes is currently
produced at only a limited number of manufacturing facilities in the United
States.
Gypsum Supply. The Company owns in fee simple all surface rights and mineral
rights to gypsum, gypsite and anhydride with respect to 2,374 acres of land near
the Duke plant. Additionally, approximately 740 acres of mineral rights for
gypsum, gypsite and anhydride are leased by the Company with an option to lease
approximately another 720 acres. The Company estimates that the reserves of
these gypsum deposits should be sufficient to supply the Duke plant, after the
completion of its present expansion and 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, Canada.
Other Raw Materials, Utilities and Fuel. Other than gypsum, the principal raw
material used by the Company in manufacturing gypsum wallboard is recycled
paperboard. The primary sources of this recycled paperboard currently are the
Commerce City mill and the Hutchinson mill. See "Business-Recycled Paperboard
Operations."
Water, electricity and natural gas are also required by the Company's
manufacturing process. Water wells located near the Duke plant produce
sufficient quantities of water for current and anticipated plant requirements. A
125,000 gallon overhead water storage tank is also situated adjacent to the Duke
Plant. In addition, the Duke plant can purchase water from the public water
supply system of the town of Duke, Oklahoma. Electric power is supplied to the
Company at standard industrial rates by a local electric cooperative.
Sales, Marketing and Distribution. In 1998, approximately 62% of the Company's
shipments of gypsum wallboard products went to customers located in its primary
historical markets of Texas, Oklahoma, Colorado and Kansas. The remaining 38% of
shipments went to customers in other states, with an emphasis on the midwestern
and southeastern regions of the United States.
Gypsum 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 4% of the
Company's consolidated sales in 1998. Sales representatives, working in separate
territories, market gypsum 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 gypsum 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 one-third of its product by rail. Rail shipments are
facilitated by the Company's subsidiary, the Hollis & Eastern Railroad Company,
10
<PAGE> 12
a short-line railroad that connects the Duke plant with major rail lines located
15 miles away, thus enabling the Company to ship to distant markets
economically. The Company also owns 115 railcars that operate in, and are
dispatched through, the national rail system. In order to effectively and
efficiently transport the additional product produced by the Duke plant, the
Company has ordered an additional 40 railcars that are expected to be delivered
in early fall, 1998. The Company receives car hire revenues from its railcars.
The Company also ships gypsum wallboard by rail to public warehouses located in
Birmingham, Alabama and Cincinnati, Ohio. The warehouses unload and store the
gypsum 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 than truck delivery.
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. Very little differentiation currently exists between the
gypsum wallboard produced by the Company and its competitors. The Company
believes, however, that the lower weight and the enhanced surface
characteristics of the recycled paperboard to be produced by the Lawton mill
will give the gypsum wallboard produced with it a competitive advantage. The
Company also believes that price, personal relationships with customers, quality
and timeliness of deliveries will continue to be important methods of
competition among gypsum wallboard manufacturers.
There are approximately 11 manufacturers of gypsum wallboard in the United
States, many of which have significantly greater financial resources than the
Company. Three of these companies, Georgia-Pacific, National and USG, 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% of the total
gypsum wallboard sold nationally and approximately 10% of the total gypsum
wallboard sold in its primary historical markets.
In addition to the Company's expansion of the Duke plant, the Company is aware
of at least two other gypsum wallboard manufacturers that have recently
completed expansions of their gypsum wallboard plants. Others have announced,
have begun or are beginning the process of adding gypsum wallboard capacity and
are expected to complete this process during 2000. As a result of these and
other expansions, the Company believes that a significant amount of new capacity
may be on line in the near future, which could have a material adverse effect on
gypsum wallboard selling prices. Furthermore, because high exit barriers exist
in the gypsum wallboard industry, plants which are contributing to the excess
capacity may not be dismantled during periods of low demand or low prices and
may, therefore, be capable of a quick reentry into the market when the market
improves.
Larger, multiple-plant gypsum wallboard manufacturers often have a competitive
advantage over the Company in markets outside the Company's primary markets
because of the strategic location of their plants as well as other cost
efficiencies, such as the ability to spread fixed costs over several plants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Gypsum Wallboard."
EMPLOYEES AND EMPLOYEE RELATIONS
The Company employs approximately 800 people. Approximately 590 are covered by
collective bargaining agreements with four labor unions. The expirations of
current collective bargaining agreements range from 1999 to 2003. The Company
believes that its relations with employees are satisfactory.
ENVIRONMENTAL REGULATION
The Company's operations are subject to various federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the storage, handling and disposal of wastes, the remediation
of contaminated soil and groundwater and the health and safety of employees. The
nature of the Company's operations, which include quarrying gypsum by open-face
mining methods and the manufacture of recycled paperboard, which involves the
discharge of large volumes of waste water and solid waste, expose it to the
11
<PAGE> 13
risk of liability or claims with respect to environmental and worker health and
safety matters. While the Company believes that it is in material compliance
with applicable federal, state and local environmental laws and regulations
governing surface quarrying and reclamation of quarried property near its
gypsum plant and the discharge of waste from its recycled paperboard mills, the
West Virginia Division of Environmental Protection (the "DEP") has filed a
complaint alleging that Republic Paperboard Company of West Virginia (the "West
Virginia Subsidiary") is in violation of certain provisions of its wastewater
discharge permit at the Halltown mill and an administrative order entered into
between the DEP and the West Virginia Subsidiary. See "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Environmental Matters."
A number of the Company's facilities have a history of industrial use. Under
certain environmental laws a current or previous owner or operator of property,
or the generator of wastes disposed of offsite, may be jointly and severally
liable for site cleanup costs, regardless of fault. Responsible parties may also
be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a site. In connection
with the Company's preparation for a warehouse addition to the Commerce City
mill, 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 and the adjacent property owner have both conducted their own
investigations and have additionally sponsored joint 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, resulting
from this matter. Environmental expenditures directly related to this matter
were $12,000 in 1998, $11,000 in 1997 and $3,000 in 1996. These costs have been
accounted for as 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.
Management believes that compliance with environmental laws and regulations is a
cost of manufacturing that has widespread applicability to the 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, the discovery of new facts and future events,
including changes in the law, unknown practices by prior owners and spills by
neighboring facilities, could result in material environmental problems, and
there can be no assurance that such matters will not adversely affect the
Company in the future.
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, and owns land in Lawton,
Oklahoma where construction has commenced for a new recycled paperboard mill.
The Company leases office space in Irving, Texas, for its Chairman. The table on
Page 13 sets forth certain information with respect to such significant
properties.
12
<PAGE> 14
PROPERTIES
The Company's principal properties are shown below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Nature of Date Company's Approx. Type
Location Business Acquired Interest No. of Acres Annual Productive Construction
Capacity
- --------------------------- -------------- ----------- ------------- --------------- ----------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
30th Avenue Corporate 1992 Owned 3 - Open span,
Hutchinson, Kansas office 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 Leased site; 2,374 sq. ft. steel
wallboard owned, 740
leased
gypsum
deposits
- --------------------------- -------------- ----------- ------------- --------------- ----------------------- ------------------
Baddeck, Nova Scotia Gypsum 1971 Owned 492 N/A N/A
deposit
- --------------------------- -------------- ----------- ------------- --------------- ----------------------- ------------------
Halstead and Sherman Manufacture 1983 Owned 29 plant site 91,000 (2) Open span,
Hutchinson, Kansas recycled 40 other sites tons steel and
paperboard concrete
- --------------------------- -------------- ----------- ------------- --------------- ----------------------- ------------------
Brighton Boulevard Manufacture 1983 Owned 9 52,500 (2) Open span,
Commerce City, Colorado recycled tons steel and
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 Virginia recycled tons steel, concrete,
paperboard and concrete
block
- --------------------------- -------------- ----------- ------------- --------------- ----------------------- ------------------
Lee Boulevard Manufacture 1998 Owned 69 N/A Under
Lawton, Oklahoma recycled construction
paperboard
- --------------------------- -------------- ----------- ------------- --------------- ----------------------- ------------------
</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.
13
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS.
In October 1997, the DEP filed a complaint against the West Virginia Subsidiary
in the Circuit Court of Jefferson County, West Virginia. The complaint alleges
that the West Virginia Subsidiary has violated and continues to violate a
previous order entered into between the West Virginia Subsidiary and the DEP on
January 17, 1995 and further alleges that the West Virginia Subsidiary has
violated and continues to violate certain provisions of its wastewater discharge
permit. The West Virginia Subsidiary discharges treated process wastewater into
a creek running through the Halltown mill pursuant to a permit issued to the
West Virginia Subsidiary by the DEP. The permit requires that the quality of the
water that may be discharged into the creek under the permit comply with certain
effluent limitations. The complaint alleges 33 violations over a time period
from October 1995 to March 1997. The complaint also alleges that the earlier
administrative order has been violated because of the failure of the West
Virginia Subsidiary to pay a stipulated penalty of $1,000 for two alleged
violations of the permit that occurred between January 1995 and October 1995.
The DEP is seeking by virtue of the complaint to require the West Virginia
Subsidiary to enter into a consent agreement that sets forth a compliance
schedule for correcting the alleged deficiencies in the wastewater treatment
facilities of the West Virginia Subsidiary that have led to the alleged effluent
excesses. The DEP is also requesting a civil monetary penalty of unspecified
amount but which, according to the complaint, may not exceed $10,000 per day for
each of the alleged violations many of which involved monthly limitations and
may be treated as involving the entire number of days in the month in question.
The DEP is also seeking to recover all of its costs of court including attorneys
fees. The West Virginia Subsidiary has responded in a timely manner to the
allegations of the complaint. At this time, the Company has not ascertained the
future liability, if any, of the above matter.
Other than as set forth above there are no material pending legal proceedings
involving the Company, other than ordinary routine litigation incidental to the
business of the Company.
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 1998.
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 Lon D. Lewis, Joe T. Brown,
Jr., and Michael W. Dirks, 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>
Name Position with the Company Age First Became an Officer
- ------ ---------------------------- ------ -----------------------------
<S> <C> <C> <C>
Phil Simpson Chairman of the Board, President, 63 1961
Chief Executive Officer and Director
Doyle R. Ramsey Executive Vice President and 47 1992
Chief Financial Officer
Geary D. Cribbs Senior Vice President 55 1992
Todd T. Brown Vice President 44 1992
Susan G. Hall Vice President 52 1993
James M. Britz Vice President 47 1994
Janey L. Rife Vice President and Treasurer 53 1995
Lon D. Lewis Vice President 54 1996
Joe T. Brown, Jr. Vice President 54 1998
Michael W. Dirks Vice President and 36 1998
Principal Accounting Officer
</TABLE>
14
<PAGE> 16
Mr. Simpson has been Chairman of the Board of Directors, President and Chief
Executive Officer for more than five years.
Mr. Ramsey was elected Executive Vice President in August 1998 and continues to
hold the position of Chief Financial Officer. Mr. Ramsey has overall
responsibility for finance, treasury and credit, accounting, management
information services and human resources. Prior thereto, he served as Vice
President - Finance and Chief Financial Officer from 1992 to 1998.
Mr. Cribbs was elected Senior Vice President in March 1998. He is responsible
for the Company's gypsum wallboard operations. Prior thereto, Mr. Cribbs served
as Vice President from 1992 to 1998, and as General Manager of the Company's
gypsum wallboard operations at Duke, Oklahoma.
Mr. Todd T. Brown was elected Vice President in September 1992. He is
responsible for recycled paperboard operations.
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 Vice President and Treasurer of the Company in August 1998.
She has served as Treasurer and Secretary since May 1993. Prior thereto, she
served as Credit Manager.
Mr. Lewis was elected Vice President in September 1996. He is responsible for
recycled paperboard sales and assumed responsibilities for the Company's
recovered fiber operations in August 1998. 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. Joe T. Brown was elected Vice President in March 1998. He is responsible for
the Company's gypsum wallboard manufacturing operations. Prior thereto, he held
senior management positions in manufacturing with Temple-Inland, Inc. and its
affiliates since 1986.
Mr. Dirks was elected Vice President and Principal Accounting Officer in August
1998. He has direct responsibility for accounting and management information
services. Since 1991 Mr. Dirks has held the positions of Mill Controller,
Corporate Accounting Manager, Special Projects Manager, and Manager of Internal
Audit and Management Information Services. From May 1995 to December 1996, Mr.
Dirks was employed by a public accounting and consulting firm.
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, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Price Range Dividends Price Range Dividends
High Low Paid High Low Paid
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter $19.94 $18.00 $0.090 $13.38 $11.88 $ 0.082
- ---------------------------------------------------------------------------------------------------------------------
Second quarter 21.38 15.25 0.090 16.75 12.88 0.082
- ---------------------------------------------------------------------------------------------------------------------
Third quarter 21.06 16.38 0.090 17.38 14.50 0.090
- ---------------------------------------------------------------------------------------------------------------------
Fourth quarter 22.38 17.63 0.090 21.63 15.00 0.090
- ---------------------------------------------------------------------------------------------------------------------
$0.360 $ 0.344
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Republic Group Incorporated common stock is traded on the New York Stock
Exchange under the symbol "RGC". At August 20, 1998, the number of stockholders
of record was approximately 759.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL REVIEW
In thousands, except per share, ratio and percent data
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 128,285 $ 123,697 $ 117,902 $ 96,413 $ 63,200
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 28,182 31,141 23,974 19,158 12,436
- ------------------------------------------------------------------------------------------------------------------------------
Net income 17,799 19,663 14,912 11,677 7,739
- ------------------------------------------------------------------------------------------------------------------------------
Total capital employed (1) 110,214 88,289 96,716 85,094 46,551
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, at year-end 92,179 77,845 62,664 50,569 41,173
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 125,475 100,400 106,124 95,442 53,796
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing debt (including
current portion) 5,950 -- 24,840 28,000 --
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share (4) $ 1.52 $ 1.68 $ 1.28 $ 1.01 $ 0.67
- ------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share (4) 1.51 1.67 1.27 1.00 0.66
- ------------------------------------------------------------------------------------------------------------------------------
Common dividends (4) 0.360 0.344 0.259 0.209 0.155
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, at year-end (4) 7.81 6.60 5.34 4.33 3.53
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIO AND PERCENT DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net operating profit after-tax
as a percent of net sales (2) 14% 17% 13% 13% 13%
- ------------------------------------------------------------------------------------------------------------------------------
Return on average capital
employed (percent) (2) 18 20 19 25 19
- ------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders'
equity (percent) (3) 21 28 26 26 20
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing debt as a percent
of total capital employed 5 -- 26 33 --
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of current assets to
current liabilities 1.7 2.1 2.8 2.0 2.1
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of year-end market value per
common share to diluted earnings
per share (4) 13.9 12.1 10.2 9.1 12.5
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of average market value per share
to average book value per share (4) 2.6 2.7 2.4 2.2 3.1
- ------------------------------------------------------------------------------------------------------------------------------
Basic weighted average
shares outstanding (4) 11,705 11,698 11,640 11,603 11,590
- ------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average
shares outstanding (4) 11,798 11,795 11,736 11,669 11,667
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) Total capital employed is equivalent to total assets less
noninterest-bearing current liabilities.
(2) 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.
(3) Return on average stockholders' equity is net income divided by average
stockholders' equity employed during the year.
(4) All references to share amounts, per share amounts, and stock prices
reflect a 10% stock dividend distributed in March, 1997.
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Republic Group Incorporated is an integrated manufacturer and distributor of
gypsum wallboard and recycled paperboard and also sells reclaimed paper fiber.
The Company's operations are split into two operating segments: (i) recycled
paperboard operations (which includes its reclaimed paper fiber operations),
which accounted for approximately 57% of the Company's total net sales in fiscal
1998 prior to intercompany eliminations and (ii) gypsum wallboard operations,
which accounted for approximately 43% of the Company's total net sales in fiscal
1998 prior to intercompany eliminations.
During fiscal 1998, the Company's gypsum wallboard business segment received
substantially all of its recycled paperboard requirements (approximately 14% of
total recycled paperboard shipments) from the Commerce City, Colorado and
Hutchinson, Kansas recycled paperboard mills. Also in fiscal 1998, the Company's
recycled paperboard operations purchased approximately 33% of their needs from
the Company's reclaimed paper fiber operations and the remainder from several
non-affiliated suppliers. The Company generally has not entered into long-term
or forward contracts with its reclaimed paper fiber suppliers. The Company
believes that its sales of recycled paperboard and reclaimed paper fiber to
third parties at market prices partially hedges against increased costs of these
products incurred by the Company's gypsum wallboard and recycled paperboard
operations, respectively.
The Company's revenues from its recycled paperboard business segment have
increased significantly in recent years as a result of the Company's 1995
acquisition of the Halltown, West Virginia recycled paperboard mill and recent
increases in the productive capacity of the Commerce City mill and the
Hutchinson mill pursuant to a capital expansion plan implemented over the course
of the previous five years. The Commerce City mill and Hutchinson mill have been
operating at near capacity the last three years, and management expects that
further incremental upgrades and expansions will be completed as production
schedules and time permit. The Company's Halltown mill operated at 87% of
capacity during fiscal 1998, compared to 75% in fiscal 1997.
The Company's gypsum wallboard segment has experienced strong results in the
last several years as a result of the continued strength of the economy in
general and the construction industry in particular. The Duke plant has been
operating at near capacity the last five years. As a result of the strong
performance of this segment, the Company undertook a capital expenditure program
in fiscal 1997 to effectively double the productive capacity of the Duke plant.
Construction is scheduled to be completed by late fall of calendar year 1998.
Expenditures related to the expansion of the Company's gypsum wallboard
operations are estimated to total approximately $26,000,000 for construction and
production equipment improvements and $5,000,000 for additional railcars.
On May 20, 1998, the Company announced its intent to construct and operate a
recycled paperboard mill in Lawton, Oklahoma that will be used primarily for the
production of gypsum-grade recycled paperboard and believes that the weight and
surface characteristics of the paperboard from the Lawton mill will be superior
to that currently available in the United States. Construction of the Lawton
mill commenced June 29, 1998. Management believes that the operation of the
Lawton mill will position Republic as the largest third-party supplier of
gypsum-grade recycled paperboard in the United States. The Lawton mill is
expected to have a production capacity of approximately 220,000 tons per annum,
which will approximately double Republic's current recycled paperboard capacity.
The Company intends to sell approximately 50% of the Lawton mill's output
pursuant to a recently executed long-term supply agreement with James Hardie
Gypsum, Inc. and to use approximately 25% of the Lawton mill's output to source
its own gypsum wallboard operations in Duke, Oklahoma. The Company will need to
find customers for approximately 25% of the Lawton mill's capacity and
replacement customers for that portion of its existing sales that will be
switched to the Lawton mill. Management estimates that the Lawton mill will cost
approximately $160,000,000 to $170,000,000 inclusive of related working capital
requirements and capitalized interest.
On July 15, 1998, the Company issued $100,000,000 of Senior Subordinated Notes
(the "Notes") and entered into a new $85,000,000 credit facility (the "New
Credit Facility") with a bank syndicate. The proceeds from these two sources of
financing will primarily be used to finance the construction of the Lawton mill
and for general and corporate purposes including working capital. The Company
anticipates that the Lawton mill will begin commercial
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<PAGE> 19
production by the first quarter of calendar year 2000. Until such time, the
Lawton mill will not generate any revenues but the Company will incur interest
expense associated with the Notes and the New Credit Facility and other
non-capitalizable expenses associated with building management and employee
infrastructure prior to commencement of commercial operation. The Company
expects to capitalize a significant amount of the cash interest expense of the
Notes and the New Credit Facility as a cost of the construction of the Lawton
mill, mitigating the impact of such interest expense on the Company's net
income. However, payment of such interest will have an adverse effect on the
Company's cash flows in the near term. Additionally, after the Company has
expended the proceeds of the Notes and borrowings under the New Credit Facility
toward the construction of the Lawton mill and until the Lawton mill begins
commercial production and can be accretive to earnings for a period of time, the
Company's additional leverage will make it more vulnerable to economic pressures
from any delays in the project or cost overruns or from other factors that may
produce adverse changes in the results of operations generally.
PRESENTATION OF FINANCIAL INFORMATION
In the following discussion of the Company's results of operations, segment
results are presented prior to intercompany eliminations. Sales of recycled
paperboard to the Duke plant are accounted for as sales by the recycled
paperboard segment and included in cost of sales by the gypsum wallboard
segment. These intersegment sales during fiscal years 1998, 1997 and 1996
accounted for approximately 13%, 15% and 14%, respectively, of the recycled
paperboard segment's net sales. Unless otherwise stated, sales of reclaimed
paper fiber within the recycled paperboard segment are eliminated in determining
recycled paperboard segment results of operations. The Company believes that its
intercompany sales approximate prevailing market prices. In determining
operating profits for each segment, corporate general and administrative
expenses have not been allocated to that segment.
FISCAL 1998 COMPARED TO FISCAL 1997
General. In fiscal 1998, consolidated net sales increased approximately 4% to
$128,285,000, from $123,697,000 for fiscal 1997. This increase in fiscal 1998
resulted largely from an increase of approximately 7% in the net selling price
of gypsum wallboard and an increase of approximately 4% in shipments of recycled
paperboard to unaffiliated customers.
The Company had operating profits of $27,005,000 in fiscal 1998, compared with
operating profits of $31,756,000 in fiscal 1997. In fiscal 1998, the operating
margins of the gypsum wallboard operations were generally similar to those
experienced in fiscal 1997. However, operating margins of the recycled
paperboard segment decreased from approximately 19% in fiscal 1997 to
approximately 12% in fiscal 1998. The segment's paperboard operations
experienced a significant reduction in operating profits due primarily to higher
variable per unit costs for raw materials (up 18%), principally reclaimed paper
fiber, and utilities (up 12%) and, to a lesser extent, to downtime experienced
at one of the Company's mills in connection with unscheduled equipment
maintenance. Selling and administrative expenses as a percent of net sales
remained at 12% in fiscal 1998.
In fiscal 1998, net income was affected by $1,000,000 of non-taxable life
insurance income from a policy owned by the Company on an executive officer.
During fiscal 1998, the Company had minimal interest-bearing debt and, as a
result, realized a $1,471,000 decrease in interest expense, which was partially
offset by a $692,000 decrease in interest income compared to fiscal 1997. The
Company's effective tax rate remained at 37% in fiscal 1998.
As a result of the factors listed above, the Company's net income decreased to
$17,799,000 in fiscal 1998 from $19,663,000 in fiscal 1997, a decrease of
approximately 9%. Diluted earnings per share decreased in fiscal 1998 to $1.51
per share, down from $1.67 per share in fiscal 1997.
Recycled Paperboard. In fiscal 1998, shipments of recycled paperboard to
unaffiliated customers increased approximately 4% from fiscal 1997, primarily as
a result of a significant improvement in shipments of recycled paperboard from
the Halltown mill. Total paperboard shipments increased to 190,614 tons from
187,845 tons in fiscal 1997. While overall reclaimed paper fiber operating
results improved substantially during fiscal 1998, shipments of reclaimed paper
fiber to unaffiliated customers dropped approximately 15% from fiscal 1997 as a
result of the loss of two large suppliers of reclaimed paper fiber to the
Company's reclaimed paper fiber operations.
18
<PAGE> 20
Net sales for the recycled paperboard segment decreased slightly to $79,228,000
in fiscal 1998 from $79,496,000 in fiscal 1997. Total costs for the segment
increased approximately 8%, to $69,570,000 in fiscal 1998 from $64,637,000 in
fiscal 1997. The segment's paperboard operations experienced (i) an increase of
approximately 22% in reclaimed paper fiber per unit manufacturing costs, (ii) an
increase of approximately 12% in the variable per unit costs of utilities,
mainly natural gas, and (iii) the overall increase in shipments of recycled
paperboard. Both reclaimed paper fiber and utilities per unit costs have receded
in recent months.
Gypsum Wallboard. For fiscal 1998, shipments of gypsum wallboard were 566 MMSF
compared to 570 MMSF in fiscal 1997. The slight decrease in shipments was due
primarily to the inherent difficulty of operating a plant when such a large
expansion project is occurring in the same facility. The continued strong demand
for gypsum wallboard raised the net selling price of gypsum wallboard by
approximately 7% in fiscal 1998, which, in turn, caused net sales to increase
approximately 6%, to $59,462,000 in fiscal 1998 from $56,194,000 in fiscal 1997.
Total costs for the Company's gypsum wallboard operations also increased to
$35,120,000 in fiscal 1998 from $33,006,000 in fiscal 1997, primarily from
increased labor, overhead, and selling and administrative costs incurred in
connection with the expansion of the Duke plant. Nevertheless, the increase in
net sales outpaced the increase in total costs and, as a result, operating
profits increased to $24,342,000 in fiscal 1998 from $23,188,000 in fiscal 1997.
Operating margins for the gypsum wallboard segment were 41% in fiscal 1998 and
fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
General. In fiscal 1997, consolidated net sales were $123,697,000, as compared
to $117,902,000 in fiscal 1996. The increase of approximately 5% in consolidated
net sales resulted largely from an increase of approximately 17% in the net
selling price of gypsum wallboard and an increase of approximately 4% in
shipments of recycled paperboard to unaffiliated customers. Selling and
administrative expenses as a percent of net sales were flat at approximately 12%
in fiscal 1997 and in fiscal 1996.
The Company had operating profits of $31,756,000 in fiscal 1997, as compared
with operating profits of $25,405,000 in fiscal 1996. This increase of
approximately 25% in operating profits resulted largely from a large increase in
operating profits in the gypsum wallboard operations partially offset by a
reduction in operating profits in recycled paperboard operations.
Interest expense totaled $1,476,000 in fiscal 1997 compared to $1,937,000 in
fiscal 1996, and the Company repaid all interest-bearing debt by fiscal year-end
1997. The Company's effective tax rate was 38% in fiscal 1996 and 37% in fiscal
1997.
As a result of the factors described above, the Company's net income increased
to $19,663,000 in fiscal 1997 from $14,912,000 in fiscal 1996, an increase of
approximately 32%. Diluted earnings per share also increased in fiscal 1997 to
$1.67 per share from $1.27 per share in fiscal 1996.
Recycled Paperboard. During fiscal 1997, approximately 59% of the Company's
total consolidated net sales before eliminations were contributed by the
recycled paperboard segment. Operating profits for the segment were $17,328,000
in fiscal 1996 and $14,859,000 in fiscal 1997, a decrease of approximately 14%.
Operating margins for recycled paperboard operations were approximately 19% in
fiscal 1997 as compared to approximately 20% in fiscal 1996. The decrease in
operating margins was primarily the result of a decrease in net selling prices
that was only partially offset by a decrease in raw material and variable
production costs.
Both the Commerce City mill and the Hutchinson mill operated at near capacity in
fiscal 1997. Shipments of recycled paperboard increased approximately 4% from
fiscal 1996 to fiscal 1997, to 187,845 tons, primarily as a result of an
increase of approximately 4% in shipments to unaffiliated customers. Over this
same period, shipments of reclaimed paper fiber increased approximately 37%, to
153,321 tons, largely due to a higher level of vertical integration within the
Company.
Net sales for the segment prior to intercompany eliminations decreased
approximately 7% in fiscal 1997. This decrease resulted primarily from a decline
of approximately 9% in net selling prices of recycled paperboard and a decrease
of
19
<PAGE> 21
approximately 24% in net selling prices of reclaimed paper fiber during the
year. The decline in net selling prices resulted primarily from a decline in raw
material costs. Raw material costs, consisting primarily of the cost of
reclaimed paper fiber used in the production of recycled paperboard, declined
approximately 15% from fiscal 1996 to fiscal 1997. Per unit variable production
costs, other than the cost of raw materials, also decreased approximately 3%
from fiscal 1996 to fiscal 1997.
The Company's reclaimed paper fiber operations had a similar experience. Net
selling prices eroded during the year, while the acquisition cost of baled and
unbaled paper also declined, but not to the same extent as net selling prices.
Gypsum Wallboard. The Duke plant operated at near capacity during fiscal 1997.
Shipments of gypsum wallboard increased approximately 8%, to 570 MMSF in fiscal
1997 from 529 MMSF in fiscal 1996. Incremental improvements in the Company's
manufacturing process and continued strong growth in the construction industry
constituted the primary causes of the increase in shipments of gypsum wallboard
in fiscal 1997.
Net sales for the gypsum wallboard segment increased approximately 26% from
fiscal 1996 to fiscal 1997 due primarily to an increase of approximately 17% in
net selling prices and an increase of approximately 8% in shipments of gypsum
wallboard.
The Company's cost per unit for gypsum wallboard remained essentially unchanged
from fiscal 1996 to fiscal 1997. Segment operating profit margins increased to
approximately 41% in fiscal 1997 from approximately 32% in fiscal 1996. In
fiscal 1997, the Company, like other producers, experienced strong demand for
its gypsum wallboard products, precipitating a rise in selling prices and which,
when combined with stable manufacturing costs, provided improved results for the
Company and the gypsum industry as a whole.
TRENDS AND DEVELOPMENTS
Recycled Paperboard. In recent years, the primary variable affecting the results
of the Company's recycled paperboard segment has been the price of reclaimed
paper fiber. The price of reclaimed paper fiber can fluctuate quickly and
significantly. Historically, except for increases of short duration, the Company
has been able to raise its recycled paperboard selling prices as the cost of
reclaimed paper fiber increases, but there is usually a 30 to 90 day time lag
which causes recycled paperboard operating margins to be adversely impacted.
Conversely, during fiscal year 1996, the Company became the beneficiary of
slowly declining selling prices and rapidly declining reclaimed paper fiber
costs, resulting in operating margins for the recycled paperboard segment of
approximately 20%. In fiscal 1997, reclaimed paper fiber costs declined slowly
in the year and began to increase again later in the year while net selling
prices continued to decline, resulting in operating margins of approximately
19%. Reclaimed paper fiber costs rose sharply during the first quarter of fiscal
1998 but gradually declined during the remainder of the fiscal year. As the
Company commenced to increase net selling prices during the first half of fiscal
1998, the cost of reclaimed paper fiber costs started to decline thus not
allowing the implementation of the pricing increases. As a result, in fiscal
1998, the Company's operating margin in its recycled paperboard segment declined
to 12% from 19% in fiscal 1997 and 20% in fiscal 1996. The cost of reclaimed
paper fiber seems to have stabilized in recent months.
Gypsum Wallboard. The price and demand of gypsum wallboard depends on the level
of new construction and home repair and remodel activity, which, in turn,
depends on general economic conditions, interest rates and the availability of
short and long-term financing. Low interest rates and a strong domestic economy
caused demand for gypsum wallboard to be very strong throughout 1996, 1997 and
1998. New construction activity continues to be robust as does the demand for
gypsum wallboard in the repair and remodel segment of the industry. As a result
of consistent demand for gypsum wallboard, prevailing selling prices have
generally increased during the same periods.
In addition to the Company's expansion of the Duke plant, the Company is aware
of other gypsum wallboard manufacturers that have recently completed expansions
of their gypsum wallboard plants. Others are also in the process of adding new
gypsum wallboard capacity and are expected to complete this process during 1999
and 2000. Completion of these expansions may reduce prevailing selling prices.
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<PAGE> 22
YEAR 2000 COMPLIANCE
The Company uses a number of computer software programs, operating systems, and
equipment with computer processing 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 inventory/assessment phase with some
remediation and testing taking place. The inventory phase is estimated to be
completed during the third quarter of calendar year 1998. Contingency planning
is scheduled to begin 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
upgrades of hardware and software as well as a portion for year 2000 compliance.
The Company believes that internally generated cash along with the availability
of proceeds from its credit facility will be sufficient to fund the
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.
On October 17, 1997, the West Virginia Division of Environmental Protection
("DEP") filed a complaint against Republic Paperboard Company of West Virginia
(the "West Virginia Subsidiary") in the Circuit Court of Jefferson County, West
Virginia. The complaint alleges that the West Virginia Subsidiary has violated
and continues to violate a previous order entered into between the West Virginia
Subsidiary and DEP on January 17, 1995 and further alleges that the West
Virginia Subsidiary has violated and continues to violate certain provisions of
its wastewater discharge permit. The West Virginia Subsidiary discharges treated
process wastewater into a creek running through its Halltown, West Virginia
facility (the "Facility") pursuant to a permit issued to the West Virginia
Subsidiary by DEP.
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<PAGE> 23
The permit requires that the quality of the water that may be
discharged into the creek under the permit comply with certain effluent
limitations. The complaint alleges that the West Virginia Subsidiary has
violated this permit by discharging wastewater into the creek that contained
effluents in excess of the permit limitations. The complaint alleges 33
violations over a time period from October 1995 to March 1997. The complaint
also alleges that the earlier administrative order has been violated because of
the failure of the West Virginia Subsidiary to pay a stipulated penalty of
$1,000 for two alleged violations of the permit that occurred between January
1995 and October 1995. DEP is seeking by virtue of the complaint to require the
West Virginia Subsidiary to enter into a consent agreement that sets forth a
compliance schedule for correcting the alleged deficiencies in the wastewater
treatment facilities of the West Virginia Subsidiary that have led to the
alleged effluent exceedances. DEP is also requesting a civil monetary penalty of
an unspecified amount but which, according to the complaint, may not exceed
$10,000 per day for each of the alleged violations many of which involved
monthly limitations and may be treated as involving the entire number of days in
the month in question. DEP is also seeking to recover all of its costs of court
including attorneys fees. The West Virginia Subsidiary has responded in a timely
manner to the allegations of the complaint.
At this time, the Company has not ascertained the future liability, if any, of
the above matters. Environmental expenditures directly related to these matters
were $12,000 in fiscal 1998, $11,000 in fiscal 1997, and $3,000 in fiscal 1996.
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 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.
Management believes that compliance with environmental laws and regulations is a
cost of manufacturing that has widespread applicability to the 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, the discovery of new facts and future events,
including changes in the law, unknown practices by prior owners and spills by
neighboring facilities, could result in material environmental problems, and
there can be no assurance that such matters will not adversely affect the
Company's financial condition, results of operation or competitive position in
the future.
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 principal raw material component used in the
manufacture of recycled paperboard, has both increased and decreased
significantly during the past three years. The Company believes these shifts
were caused by changes in supply and demand and not general inflation or
deflation.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's operations have generated sufficient cash for
working capital purposes, and the Company has borrowed only for acquisitions and
major capital improvements. The Company generated $28,008,000, $28,690,000 and
$23,252,000 in cash from operations during fiscal 1998, 1997 and 1996,
respectively. On May 15, 1998, in order to provide funds primarily for the
construction of the recycled paperboard mill in Lawton, Oklahoma until permanent
financing could be obtained, the Company increased its existing revolving line
of credit with NationsBank, N.A. to $50,000,000. As of June 30, 1998, the
outstanding balance under that line of credit was $5,950,000.
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 (the "New Credit Facility") of up to $85,000,000 entered into with a
bank syndicate on July 15, 1998, will primarily be used 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 the NationsBank revolving credit facility, along with accrued
interest. Upon repayment, the Company terminated the NationsBank bank credit
facility. 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.
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<PAGE> 24
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 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 will be guaranteed
by each of the Company's material subsidiaries and will be secured by a mortgage
on the Lawton mill, a pledge of the 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 all 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 per annum 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 expects that its principal capital and liquidity needs during the
next several years will consist of (i) capital expenditures, including
construction of the Lawton mill, expansion of the Duke plant and other capital
improvements of its facilities, (ii) interest payments on the Notes and payments
of principal and interest under the New Credit Facility, (iii) dividend payments
to stockholders, and, (iv) working capital.
The Company invested $31,191,000 in capital expenditures in fiscal 1998,
including approximately $8,000,000 on construction of the Lawton mill and
approximately $16,600,000 on the expansion of the Duke plant and a related
purchase of additional railcars. 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 the related railcars, and an additional
$10,500,000 to be used principally for equipment upgrades (including an
estimated $4,500,000 for capital expenditures associated with routine
replacement of existing production equipment). The Company estimates that it
will spend $30,000,000 to $40,000,000 in fiscal 2000 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 paid cash dividends of $4,215,000, $4,020,000 and $3,018,000 in
fiscal 1998, 1997 and 1996 respectively. 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 Notes 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.
The Company believes that the net proceeds from the Notes of approximately
$97,300,000 and the $85,000,000 made available under the New Credit Facility
together with cash generated by operations will be sufficient to (i) finance the
construction of the Lawton mill, (ii) finance the other capital expenditure
requirements identified above, (iii) finance the Company's working capital
requirements and (iv) pay dividends to stockholders.
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<PAGE> 25
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 profit margins.
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 recessionary 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.
9. The Company's degree of leverage and the restrictions imposed by financial
covenants could have a material adverse effect on the Company's ability to
service its debt, withstand competitive pressures or adverse economic
conditions, make material capital investments or acquisitions, obtain
future financing or take advantage of business opportunities that may
arise.
10. The Company's inability to successfully and timely complete, without cost
overruns, the Duke, Oklahoma wallboard plant expansion and the construction
of the Lawton, Oklahoma recycled paperboard mill, could have a material
adverse effect on the Company. As these capital projects near completion,
the Company has no assurance on the cost of or availability of raw
materials, labor, or the operating results thereof.
11. There is no assurance that the Company's Duke, Oklahoma gypsum wallboard
plant can convert to the use of recycled paperboard supplied by the Lawton
mill, or that the Company will be able to find replacement customers for
that portion of the productive capacity of the Hutchinson mill that
presently supplies the Duke plant. The Company expects to shift
approximately one-third of the production at the Hutchinson mill currently
used for the manufacture of gypsum-grade recycled paperboard to other
grades of recycled paperboard and to continue concentrating the Commerce
City mill on the production of gypsum-grade recycled paperboard.
12. The Company expects that the amount of paperboard supplied to James Hardie
Gypsum, Inc. ("Hardie") pursuant to a long-term supply agreement will
eventually account for approximately 50% of the Lawton mill's productive
capacity. Additionally, approximately 25% of the Lawton mill's productive
capacity will be used by the Company's Duke, Oklahoma gypsum wallboard
plant. There is no assurance the Company can sell the remaining 25% of
productive capacity. There is no assurance the Company will be able to
produce paperboard meeting Hardie's specifications and requirements. A loss
of Hardie or any key customer could have an adverse effect on the Company's
operations. If the Company is unable to give notice that commercial
production has been achieved at the Lawton mill by July 1, 2001, Hardie may
terminate the agreement.
24
<PAGE> 26
13. The preceding comments regarding the Company's year 2000 plans represent
the Company's best faith estimates of what reasonable steps it should take
to achieve year 2000 compliance. However, there can be no assurance that
the Company's assessment of this risk will be accurate, or that its
six-step process will timely identify or resolve problems associated with
the year 2000 issue. As a result, the Company cannot ensure that the year
2000 issue will not materially affect its operations and business, or
expose it to third-party liability.
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.
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 26
June 30, 1998, 1997, and 1996
Consolidated Balance Sheets at June 30, 1998 and 1997 27
Consolidated Statements of Cash Flows for the years 28
ended June 30, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity for the 29
years ended June 30, 1998, 1997, and 1996
Notes to Consolidated Financial Statements 30-38
Report of Independent Public Accountants - Consolidated 39
Financial Statements
Report of Management 39
Report of Independent Public Accountants - Report on S-1
Form 10-K
Schedule II - Valuation and Qualifying Accounts and Reserves S-2
</TABLE>
25
<PAGE> 27
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross sales $ 148,627,000 $ 144,234,000 $ 135,626,000
Less freight and discounts 20,342,000 20,537,000 17,724,000
- --------------------------------------------------------------------------------------------------------------
Net sales 128,285,000 123,697,000 117,902,000
Costs and expenses:
Cost of sales 85,339,000 77,596,000 78,665,000
Selling and administrative expenses 15,941,000 14,345,000 13,832,000
- --------------------------------------------------------------------------------------------------------------
101,280,000 91,941,000 92,497,000
- --------------------------------------------------------------------------------------------------------------
Operating profit 27,005,000 31,756,000 25,405,000
Other income (expense):
Interest expense (5,000) (1,476,000) (1,937,000)
Interest income 182,000 874,000 506,000
Life insurance income and other, net 1,000,000 (13,000) --
- --------------------------------------------------------------------------------------------------------------
1,177,000 (615,000) (1,431,000)
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 28,182,000 31,141,000 23,974,000
Provision for income taxes 10,383,000 11,478,000 9,062,000
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 17,799,000 $ 19,663,000 $ 14,912,000
- --------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.52 $ 1.68 $ 1.28
- --------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 11,705,000 11,698,000 11,640,000
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.51 $ 1.67 $ 1.27
- --------------------------------------------------------------------------------------------------------------
Diluted weighted average shares
outstanding 11,798,000 11,795,000 11,736,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
26
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,124,000 $ 1,436,000
Investments and marketable securities, at market -- 650,000
Accounts receivable, less allowance for doubtful
accounts of $681,000 in 1998 and $748,000 in 1997 14,611,000 13,893,000
Income tax refunds receivable 652,000 494,000
Inventories:
Finished goods 2,621,000 2,246,000
Raw materials and supplies 5,829,000 5,095,000
- -------------------------------------------------------------------------------------------------------------------------
8,450,000 7,341,000
Prepaid expenses and other 851,000 660,000
Deferred income taxes 597,000 576,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 26,285,000 25,050,000
Property, plant and equipment, at cost:
Land, land improvements and mineral deposits 4,929,000 4,521,000
Buildings and leasehold improvements 15,375,000 13,982,000
Equipment 104,205,000 97,725,000
Construction in progress 26,994,000 5,232,000
- -------------------------------------------------------------------------------------------------------------------------
151,503,000 121,460,000
Less accumulated depreciation, amortization and depletion 53,683,000 46,985,000
- -------------------------------------------------------------------------------------------------------------------------
97,820,000 74,475,000
Other assets 1,370,000 875,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 125,475,000 $ 100,400,000
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 10,632,000 $ 7,534,000
Accrued payroll and employee benefits 2,919,000 2,986,000
Other current liabilities 1,710,000 1,591,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 15,261,000 12,111,000
Long-term debt due after one year 5,950,000 --
Deferred income taxes 11,475,000 9,838,000
Other long-term liabilities 610,000 606,000
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;
issued 11,749,000 in 1998 and 11,716,000 in 1997 11,749,000 11,716,000
Additional paid-in capital 28,096,000 27,827,000
Retained earnings 52,544,000 38,995,000
Less: Treasury stock, at cost, 10,000 shares in 1998 and 33,000 in 1997 (210,000) (693,000)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 92,179,000 77,845,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 125,475,000 $ 100,400,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
27
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,799,000 $ 19,663,000 $ 14,912,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Income receivable - life insurance proceeds (1,000,000) -- --
Depreciation, amortization and depletion 7,738,000 7,080,000 6,203,000
Non-cash compensation expense 320,000 360,000 --
Deferred income taxes 1,616,000 1,460,000 2,786,000
Loss on sale of assets 52,000 44,000 138,000
Changes in current assets and liabilities:
Accounts receivable 282,000 (2,166,000) (504,000)
Income tax refunds receivable (158,000) 408,000 (725,000)
Inventories (1,109,000) (608,000) 1,524,000
Prepaid expenses (191,000) (77,000) (66,000)
Accounts payable and accrued liabilities 3,150,000 2,703,000 (940,000)
Other assets and liabilities (491,000) (177,000) (76,000)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,008,000 28,690,000 23,252,000
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (31,191,000) (11,556,000) (9,062,000)
Proceeds from sale of property, plant and equipment 56,000 66,000 224,000
Purchases of investments (11,470,000) (22,510,000) (17,750,000)
Proceeds from sale of investments 12,120,000 34,185,000 7,925,000
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (30,485,000) 185,000 (18,663,000)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (4,215,000) (4,020,000) (3,018,000)
Proceeds from issuance of debt 9,200,000 -- --
Payment on long-term debt (3,250,000) (24,840,000) (3,160,000)
Proceeds from stock options exercised including related
tax benefits 302,000 247,000 201,000
Purchase of common treasury stock -- (1,069,000) --
Issuance of common treasury stock 128,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,165,000 (29,682,000) (5,977,000)
- ---------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (312,000) (807,000) (1,388,000)
Cash and cash equivalents at beginning of year 1,436,000 2,243,000 3,631,000
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,124,000 $ 1,436,000 $ 2,243,000
- ---------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes, net of refunds $ 9,127,000 $ 9,407,000 $ 7,077,000
Interest $ 5,000 $ 1,759,000 $ 1,654,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
28
<PAGE> 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Treasury Stock
-------------------------
Common Additional
stock, $1 paid-in Retained Amount
In thousands par value capital earnings Shares at cost Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 dividend 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)
Treasury 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
Net Income -- -- 17,799 -- -- 17,799
Treasury shares issued under
Dividend Reinvestment Plan -- -- (1) 1 31 30
Treasury shares issued under
Employee Stock Purchase Plan -- -- (25) 6 123 98
Treasury shares issued under
ESOP Plan -- -- (9) 16 329 320
Cash dividends on common stock,
$.360 per share -- -- (4,215) -- -- (4,215)
Exercise of stock options 33 269 -- -- -- 302
- --------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $ 11,749 $ 28,096 $ 52,544 (10) $ (210) $ 92,179
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997, AND 1996
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.
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.
30
<PAGE> 32
2. INDUSTRY SEGMENTS
Certain information with regard to industry segments, within which the Company
operates, is as follows:
<TABLE>
<CAPTION>
Recycled Eliminations
Gypsum Paperboard and other Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Shipment units:
Wallboard (MSF) 566,424 -- -- 566,424
Recycled paperboard (tons) -- 190,614 (27,108) 163,506
Recovered paper fiber (tons) -- 145,553 (67,112) 78,441
- -----------------------------------------------------------------------------------------------------------------------
Gross sales (in thousands)
Gypsum wallboard $ 74,755 $ -- $ -- $ 74,755
Recycled paperboard -- 67,677 -- 67,677
Recovered paper fiber -- 12,415 (6,227) 6,188
Intrasegment fiber sales -- (6,227) 6,227 --
Intersegment paperboard sales -- 10,412 (10,412) --
Other -- -- 7 7
- -----------------------------------------------------------------------------------------------------------------------
Gross sales 74,755 84,277 (10,405) 148,627
Less freight and discounts 15,293 5,049 -- 20,342
- -----------------------------------------------------------------------------------------------------------------------
Net sales $ 59,462 $ 79,228 $ (10,405) $ 128,285
- -----------------------------------------------------------------------------------------------------------------------
Operating profit $ 24,342 $ 9,658 $ (6,995) $ 27,005
Identifiable assets 43,993 73,189 8,293 125,475
Capital expenditures 16,612 13,956 623 31,191
Depreciation, depletion and amortization 1,641 5,301 796 7,738
- -----------------------------------------------------------------------------------------------------------------------
1997
Shipment units:
Wallboard (MSF) 570,068 -- -- 570,068
Recycled paperboard (tons) -- 187,845 (30,293) 157,552
Recovered paper fiber (tons) -- 153,321 (61,072) 92,249
- -----------------------------------------------------------------------------------------------------------------------
Gross sales (in thousands)
Gypsum wallboard $ 71,406 $ -- $ -- $ 71,406
Recycled paperboard -- 66,381 -- 66,381
Recovered paper fiber -- 11,126 (4,690) 6,436
Intrasegment fiber sales -- (4,690) 4,690 --
Intersegment paperboard sales -- 12,004 (12,004) --
Other -- -- 11 11
- -----------------------------------------------------------------------------------------------------------------------
Gross sales 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 $ 23,188 $ 14,859 $ (6,291) $ 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
Shipment units:
Wallboard (MSF) 529,351 -- -- 529,351
Recycled paperboard (tons) -- 180,854 (29,065) 151,789
Recovered paper fiber (tons) -- 111,733 (43,882) 67,851
- -----------------------------------------------------------------------------------------------------------------------
Gross sales (in thousands)
Gypsum wallboard $ 58,439 $ -- $ -- $ 58,439
Recycled paperboard -- 69,853 -- 69,853
Recovered paper fiber -- 11,387 (4,061) 7,326
Intrasegment fiber sales -- (4,061) 4,061 --
Intersegment paperboard sales -- 12,285 (12,285) --
Other -- -- 8 8
- -----------------------------------------------------------------------------------------------------------------------
Gross sales 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 $ 14,241 $ 17,328 $ (6,164) $ 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
- -----------------------------------------------------------------------------------------------------------------------
</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
31
<PAGE> 33
other paperboard converters which manufacture composite cans, cores, tubes and
other packaging products, and (ii) the collection and sale of reclaimed 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 generally within a
600 mile radius of the facilities.
During fiscal 1998, approximately 14% of the recycled paperboard shipped by the
mills was consumed by the Company's wallboard operations compared to 16% in
both fiscal years 1997 and 1996. Another 20% was shipped to other unaffiliated
gypsum wallboard manufacturers in fiscal 1998 compared to 19% and 18%,
respectively, in fiscal 1997 and 1996. An adverse change in the construction
industry could have a material effect on the earnings of the Company. Sonoco
Products Company accounted for approximately 9% of consolidated gross sales in
fiscal 1998. They accounted for approximately 9% and 10% respectively in fiscal
years 1997 and 1996. 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 800 people. Approximately 590
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 year-end. Eliminations and other include
general corporate assets, principally cash, securities, property and equipment
and expenses.
3. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan (the "Plan") for all salaried
employees of the Company. They become eligible to participate in the Plan on
July 1 following the calendar year in which they are hired. The Plan is a
defined contribution stock bonus plan. The Board of Directors of the Company
determines if a contribution will be made and the amount of the contribution.
The Company is not obligated or required to contribute for any particular year,
and there is no guarantee that the Company will make a contribution each year.
Effective July 1, 1993 participants are neither required or permitted to make
contributions under the Plan. The Company contribution for a particular year is
allocated to the Company Stock Account of each participant who is employed on
the last day of that plan year and each participant whose employment terminated
during that plan year because of death, retirement at or after age 65, or
disability. Effective July 1, 1993 the amount allocated to a participant's
account shall be determined by the ratio of their compensation paid by the
Company for the preceding calendar year to the total compensation paid by the
Company during the preceding calendar year to all participants who are entitled
to an allocation. The Company does limit the amount of participants
compensation used in allocating the contribution. All contributions to the Plan
are subject to a vesting schedule based on years of service.
During 1998, 1997 and 1996, the Board of Directors of the Company approved
contributions of $320,000, $360,000 and $360,000 respectively, and the
compensation expense was recognized in the financial statements. The
contributions consisted of common stock issued from treasury shares valued at
$320,000 and $360,000 for 1998 and 1997, respectively. The 1996 contribution
was a cash contribution.
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
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. Additionally, on June 30, 1995,
the Company signed a loan agreement with a commercial bank for a $7,000,000
line of credit. On May 15, 1998, the Company signed an amendment to increase
its existing line of credit to $50,000,000 in order to provide funds primarily
for the construction of the recycled paperboard mill in Lawton, Oklahoma until
permanent financing could be obtained.
32
<PAGE> 34
On July 15, 1998, the Company received proceeds from the issuance of
$100,000,000 of 9.50% 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 (the "New Credit Facility") of up to $85,000,000 entered into
with a bank syndicate on July 15, 1998, will primarily be used to finance the
construction of the Lawton 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 the
revolving credit facility agreement dated June 30, 1995, which had a balance of
$5,950,000 on June 30, 1998, along with accrued interest. Upon repayment, the
Company terminated the agreement. The carrying value of the long-term debt
approximated its fair value on June 30, 1998. Interest payment dates on the
Notes are January 15 and July 15, commencing on January 15, 1999. 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 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 will be guaranteed by each of the Company's material subsidiaries and
will be secured by a mortgage on the Lawton mill, a pledge of the 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 all 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 per annum 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.
5. 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. The following tables summarize the funded
status, components of pension costs and actuarial assumptions.
<TABLE>
<CAPTION>
Years Ended June 30
- -----------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested portion $ (1,558,000) $ (1,232,000)
Non-vested portion (97,000) (107,000)
- -----------------------------------------------------------------------------------------------------------------------
Total (1,655,000) (1,339,000)
Effect of future compensation -- --
- -----------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (1,655,000) (1,339,000)
Fair value of plan assets 1,762,000 1,482,000
- -----------------------------------------------------------------------------------------------------------------------
Excess of fair value of plan assets over projected benefit obligation 107,000 143,000
Unrecognized obligation at transition 38,000 47,000
Unrecognized prior service costs 284,000 312,000
Unrecognized net gain (113,000) (266,000)
Minimum liability -- --
- -----------------------------------------------------------------------------------------------------------------------
NET PREPAID PENSION COST $ 316,000 $ 236,000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 35
For the year ended 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. Pension expense included the following
components:
<TABLE>
<CAPTION>
Years Ended June 30
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Benefits earned by employees $ 54,000 $ 45,000 $ 46,000
Interest cost on projected benefit obligation 99,000 85,000 106,000
Actual return on plan assets (155,000) (115,000) (86,000)
Net amortization and deferral 97,000 65,000 29,000
- --------------------------------------------------------------------------------------------------------------------
NET PENSION COST $ 95,000 $ 80,000 $ 95,000
- --------------------------------------------------------------------------------------------------------------------
Actuarial assumptions:
- --------------------------------------------------------------------------------------------------------------------
Discount rate 7.50% 7.50% 7.75%
Expected return rate 6% 6% 6%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The unrecognized prior service costs and unrecognized net gain are being
amortized over approximately 15 years. The assets of the Plan at June 30, 1998
were invested primarily in corporate and government bonds, with smaller amounts
invested in equities, cash, and 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. All benefits have
been 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) Plan were:
<TABLE>
<CAPTION>
Years Ended June 30
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
401(k) Plan contributions $ 493,000 $ 499,000 $ 422,000
- ------------------------------------------------------------------------------------------------------------------------
</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.
Effective July 1, 1997, the Company adopted the "Republic Group Incorporated
Employee Stock Purchase Plan." All salaried and hourly employees are eligible
to participate in the plan after meeting the eligibility requirements.
Percentage limitations and dollar limitations are in effect for each calendar
year. The price per share for which common stock will be sold to participants
shall be 90% of the fair market value on the exercise date.
6. 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.
On October 17, 1997, the West Virginia Division of Environmental Protection
("DEP") filed a complaint against Republic Paperboard Company of West Virginia
(the "West Virginia Subsidiary") in the Circuit Court of Jefferson County, West
Virginia. The complaint alleges that the West Virginia Subsidiary has violated
and continues to violate a previous order entered into between the West
Virginia Subsidiary and DEP on January 17, 1995 and
34
<PAGE> 36
further alleges that the West Virginia Subsidiary has violated and continues to
violate certain provisions of its wastewater discharge permit. The West
Virginia Subsidiary has responded in a timely manner to the allegations of the
complaint.
At this time, the Company has not ascertained the future liability, if any, of
the above matters. Environmental expenditures directly related to these matters
were $12,000 in fiscal 1998, $11,000 in fiscal 1997, and $3,000 in fiscal 1996.
These costs were included in selling and administrative expenses.
7. 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
814,000 common shares were unissued as of June 30, 1998, and is authorized to
grant 219,000 shares to directors in the Non-Employee Director Plan of which
81,000 common shares were unissued as of June 30, 1998. A summary of
transactions for the years ended June 30, 1998, 1997 and 1996 is set forth in
the following table:
<TABLE>
<CAPTION>
Non-Employee
Shares Rounded to Thousands 1989 Plan Director Plan
- -----------------------------------------------------------------------------------------------------------------------
Number of Weighted Average Number of Weighted Average
Options: shares Exercise Price shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1995 209,000 $ 7.56 78,000 $ 5.43
- -----------------------------------------------------------------------------------------------------------------------
Granted 83,000 10.91 -- --
Cancelled -- -- -- --
Expired -- -- -- --
Exercised (37,000) 6.22 (26,000) 4.65
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1996 255,000 $ 8.84 52,000 $ 5.83
- -----------------------------------------------------------------------------------------------------------------------
Granted 95,000 15.23 31,000 14.03
Cancelled (21,000) 10.55 -- --
Expired -- -- -- --
Exercised (45,000) 7.47 (16,000) 4.65
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1997 284,000 $ 11.07 67,000 $ 9.86
- -----------------------------------------------------------------------------------------------------------------------
Granted 112,000 19.05 15,000 18.94
Cancelled (52,000) 13.73 -- --
Expired -- -- -- --
Exercised (46,000) 8.94 (1,000) 4.65
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1998 298,000 $ 13.95 81,000 $ 11.70
- -----------------------------------------------------------------------------------------------------------------------
Exercisable options -
June 30, 1996 66,000 $ 7.72 40,000 $ 3.94
June 30, 1997 85,000 8.57 36,000 6.32
June 30, 1998 106,000 10.07 65,000 9.99
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The range of exercise prices for the year ended June 30, 1998 was $3.41 to
$20.76. The weighted average fair value at date of grant for options granted
for years ended June 30, 1998, 1997 and 1996 was $5.97, $6.20 and $4.51 per
option, respectively. The fair value of options at grant date was estimated
using the Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Years Ended:
- -----------------------------------------------------------------------------------------------------------------------
June 30, 1998 June 30, 1997 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.58% 6.21% 6.38%
Expected life 3 years 3 years 3 years
Expected volatility 43% 60% 60%
Dividend yield 1.8% 1.8% 1.8%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Options have been granted to non-employee directors and do not have fixed
terms. These options were not included in the following computation.
The Company has adopted the disclosure only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense
has been recognized for the stock options granted in years
35
<PAGE> 37
ended June 30, 1998, 1997 and 1996. Had compensation been determined based on
fair value at grant date consistent with the provisions of this statement, the
Company's pro forma net income and earnings per share would have been as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended:
- -----------------------------------------------------------------------------------------------------------------------
June 30, 1998 June 30, 1997 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 17,799 $ 19,663 $ 14,912
- -----------------------------------------------------------------------------------------------------------------------
Pro forma 17,579 19,455 14,872
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported 1.52 1.68 1.28
- -----------------------------------------------------------------------------------------------------------------------
Pro forma 1.50 1.66 1.28
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
As reported 1.51 1.67 1.27
- -----------------------------------------------------------------------------------------------------------------------
Pro forma 1.49 1.65 1.27
- -----------------------------------------------------------------------------------------------------------------------
</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 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.
36
<PAGE> 38
8. INCOME TAXES
The components of the provision for income taxes are:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 7,955,000 $ 8,799,000 $ 5,329,000
State 812,000 1,219,000 947,000
- ----------------------------------------------------------------------------------------------------------------------
8,767,000 10,018,000 6,276,000
- ----------------------------------------------------------------------------------------------------------------------
Deferred income tax 1,616,000 1,460,000 2,786,000
- ----------------------------------------------------------------------------------------------------------------------
Total provision $ 10,383,000 $ 11,478,000 $ 9,062,000
- ----------------------------------------------------------------------------------------------------------------------
</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>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed federal tax at statutory rate $ 9,864,000 $ 10,899,000 $ 8,390,000
State taxes, net of federal tax 815,000 792,000 616,000
benefit
Other (296,000) (213,000) 56,000
- ----------------------------------------------------------------------------------------------------------------------
$ 10,383,000 $ 11,478,000 $ 9,062,000
- ----------------------------------------------------------------------------------------------------------------------
</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. The Company does not provide for a valuation reserve on
deferred tax assets based on the assumption of future taxable income. As of
June 30, 1998 and 1997, deferred tax assets (liabilities) as determined under
the provisions of SFAS No. 109, were comprised of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred tax liability:
Depreciation/amortization $ (11,475,000) $ (9,838,000)
Gross deferred tax assets:
Employee benefit accruals 215,000 177,000
Accounts receivable reserves 258,000 262,000
Other accrued reserves 124,000 137,000
- ----------------------------------------------------------------------------------------------------------------------
Gross deferred assets 597,000 576,000
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation reserve -- --
- ----------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (10,878,000) $ (9,262,000)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
9. EARNINGS PER SHARE
Effective October 1, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share" and all periods prior to October 1, 1997 have been restated to conform
with the requirements of SFAS No. 128. 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>
Years Ended June 30
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) Income Shares Per Share Amount
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Basic earnings per share $ 17,799 11,705 $ 1.52
Effects of dilutive securities-options -- 93 (.01)
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 17,799 11,798 $ 1.51
- ----------------------------------------------------------------------------------------------------------------------
1997
Basic earnings per share $ 19,663 11,698 $ 1.68
Effects of dilutive securities-options -- 97 (.01)
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 19,663 11,795 $ 1.67
- ----------------------------------------------------------------------------------------------------------------------
1996
Basic earnings per share $ 14,912 11,640 $ 1.28
Effects of dilutive securities options -- 96 (.01)
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 14,912 11,736 $ 1.27
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 10,541 shares of common stock at the price of $20.763 were
outstanding for the year ended June 30, 1998. Options to purchase 90,750 shares
of common stock at the price of $15.228 were outstanding for the
37
<PAGE> 39
year ended June 30, 1997. Options to purchase 11,550 shares of common stock at
the price of $12.61 were outstanding for the year ended June 30, 1996. 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.
10. 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.
11. SELECTED QUARTERLY FINANCIAL DATA
The following tabulation presents selected unaudited results of operations for
the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands, except per share amounts): Quarters Ended
- ----------------------------------------------------------------------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Gross sales $ 37,002 $ 37,430 $ 37,018 $ 37,177
Less freight and discounts 5,113 5,001 5,105 5,123
- ----------------------------------------------------------------------------------------------------------------------
Net sales $ 31,889 $ 32,429 $ 31,913 $ 32,054
- ----------------------------------------------------------------------------------------------------------------------
Operating profit $ 6,886 $ 6,353 $ 6,809 $ 6,957
Net income 4,326 3,967 4,236 5,270
Basic earnings per share 0.37 0.34 0.36 0.45
Diluted earnings per share 0.37 0.34 0.36 0.45
- ----------------------------------------------------------------------------------------------------------------------
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
Basic earnings per share 0.43 0.42 0.40 0.43
Diluted earnings per share 0.43 0.42 0.40 0.43
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 40
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, 1998 and
1997, and the related consolidated statements of income, cash flows and
stockholders' equity for each of the three years in the period ended June 30,
1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
July 31, 1998
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 Doyle R. Ramsey
Chairman of the Board Executive Vice President and
and President Chief Financial Officer
August 28, 1998 August 28, 1998
39
<PAGE> 41
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 22, 1998 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 22, 1998 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 1998
Proxy Statement regarding beneficial ownership of shares of the Company's Common
Stock as of August 28, 1998 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 1998
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 25.
2. Financial Statement Schedules
See Index to Financial Statements and Schedules of Registrant contained in Item
8, page 25.
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 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 Agreement (with related Promissory
Notes, Security Agreement, Mortgage, Deed of Trust and
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
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
Agreement, in reference 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).
40
<PAGE> 42
4(c) Fourth Amendment to Loan Documents dated as of April 28, 1998,
in reference to increasing the Revolving Credit Promissory
Note principal amount to $50,000,000 and to extend the
revolving credit facility one year, (incorporated by reference
to Exhibit 4(c) to the Company's Registration Statement on
Form S-4 filed September 11, 1998, SEC File Number 1-7210).
4(d) Credit Agreement (with related forms of Note, Pledge
Agreement, Security Agreement, Mortgage, and Subsidiary
Guarantee attached as Exhibits hereto) dated as of July 15,
1998, among the Company, Morgan Guaranty Trust Company of New
York, as Syndication Agent and NationsBank, N.A., as
Administrative Agent, and the Banks and LC Issuing Banks, as
defined therein, (incorporated by reference to Exhibit 99(a)
to the Company's Current Report on Form 8-K filed September
11, 1998, SEC File Number 1-7210).
4(e) 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 (incorporated by reference
to Exhibit 99(b) to the Company's Current Report on Form 8-K
dated September 11, 1998, SEC File Number 1-7210).
4(f) Registration Rights Agreement dated July 15, 1998, among the
Company, J.P. Morgan Securities, Inc., Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated, and A.G. Edwards &
Sons, Inc., (incorporated by reference to Exhibit 4(f) to the
Company's Registration Statement on Form S-4 filed September
11, 1998, SEC File Number 1-7210).
10(a) The 1989 Long-Term Incentive Plan (As Restated and Amended
Effective August 16, 1996) (incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1996, SEC File Number
1-7210).
10(b) Non-Employee Director Stock Option Plan (As Amended Effective
August 16, 1996) (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).
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).
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).
10(g) Paperboard Supply Agreement, dated May 14, 1998, between the
Company, Republic Paperboard Company and James Hardie Gypsum,
Inc. (incorporated by reference to Exhibit 99(c) to the
Company's Current Report on Form 8-K, dated September 11,
1998, SEC File Number 1-7210). Portions of this Exhibit were
omitted pursuant to a request for confidential treatment filed
with the Office of the Secretary of the Commission.
10(h) Amended and Restated Agreement for Engineering, Procurement
and Construction dated as of June 26, 1998 between Republic
Paperboard Company and Fluor Daniel, Inc. relating to the
Lawton mill (incorporated by reference to Exhibit 99(d) to the
Company's Current Report on Form 8-K, dated September 11,
1998, SEC File Number 1-7210). Portions of this Exhibit were
omitted pursuant to a request for confidential treatment filed
with the Office of the Secretary of the Commission.
41
<PAGE> 43
10(i) Amended and Restated Parent Company Guarantee effective as of
June 26, 1998 from the Company to Fluor Daniel, Inc. relating
to the Lawton mill (incorporated by reference to Exhibit 99(e)
to the Company's Current Report on Form 8-K, dated September
11, 1998, SEC File Number 1-7210).
21 Significant Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
24 Power of Attorney on Page 45 of this Report.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated May 20, 1998 (date of earliest
event reported), and filed May 28, 1998, announcing that its Board of
Directors had approved plans to build and operate a new, 100% recycled
paperboard mill with annual capacity exceeding 220,000 tons in Lawton,
Oklahoma. In connection with the Lawton mill announcement, the Company
announced that James Hardie Gypsum, Inc. had signed a long-term
contract for a significant portion of the Lawton mill's output.
Additionally, the Company signed the Fourth Amendment to Loan Documents
with NationsBank, N.A. increasing the Company's line of credit to
$50,000,000. The Form 8-K includes Item 5, Other Events, and Item 7,
Financial Statements and Exhibits.
The Company filed a Form 8-K, dated June 22, 1998 (date of earliest
event reported), and filed June 26, 1998, announcing that Stephen L.
Gagnon, Executive Vice President since September 1992, had died on June
19, 1998 from complications during treatment for leukemia. 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 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 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.
42
<PAGE> 44
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 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 4, 1998
REPUBLIC GROUP INCORPORATED
By: /s/ Phil Simpson
-----------------------------
Phil Simpson, Chairman of the
Board and President
43
<PAGE> 45
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 4, 1998
- ------------------------------------ President and Director
Phil Simpson (principal executive
officer)
/s/ DOYLE R. RAMSEY Executive Vice President and September 4, 1998
- ------------------------------------ Chief Financial Officer
Doyle R. Ramsey (principal financial officer)
/s/ MICHAEL W. DIRKS Vice President - Finance September 4, 1998
- ------------------------------------ (principal accounting officer)
Michael W. Dirks
/s/ C. WILLIAM CLAYPOOL Director September 8, 1998
- ------------------------------------
C. William Claypool
/s/ BERT A. NELSON Director September 8, 1998
- ------------------------------------
Bert A. Nelson
/s/ TALBOT RAIN Director September 8, 1998
- ------------------------------------
Talbot Rain
/s/ GERALD L. RAY Director September 8, 1998
- ------------------------------------
Gerald L. Ray
/s/ ROBERT F. SEXTON Director September 8, 1998
- ------------------------------------
Robert F. Sexton
/s/ L. L. WALLACE Director September 8, 1998
- ------------------------------------
L. L. Wallace
/s/ DAVID B. YARBROUGH Director September 8, 1998
- ------------------------------------
David B. Yarbrough
</TABLE>
44
<PAGE> 46
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
July 31, 1998. 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
July 31, 1998
S-1
<PAGE> 47
REPUBLIC GROUP INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended June 30, 1996, 1997, and 1998
<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>
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
======== ========= ============ ========= ========
1998:
Allowance for
doubtful
accounts $748,000 $ -- $ -- $ (67,000) $681,000
======== ========= ============ ========= ========
</TABLE>
(A) Uncollectible accounts charged off, net of recoveries.
S-2
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
21 Significant Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</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.
Subsidiaries State of Incorporation
------------ ----------------------
Republic Gypsum Company Oklahoma
Republic Paperboard Company Kansas
Republic Paperboard Company of West Virginia West Virginia
Hollis & Eastern Railroad Company Oklahoma
<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. 4 to
the Form S-8 Registration Statement File No. 2-66025, into the Company's
previously filed S-8 Registration Statement File No. 33-37366, into the
Company's previously filed Form S-8 Registration Statement File No. 33-37367,
into the Company's previously filed Form S-8 Registration Statement File No.
333-16725, into the Company's previously filed Form S-8 Registration Statement
File No. 333-28839, and into the Company's previously filed Post Effective
Amendment No. 1 to the Form S-3 Registration Statement File No. 333-39559.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,124,000
<SECURITIES> 0
<RECEIVABLES> 15,292,000
<ALLOWANCES> 681,000
<INVENTORY> 8,450,000
<CURRENT-ASSETS> 26,285,000
<PP&E> 151,503,000
<DEPRECIATION> 53,683,000
<TOTAL-ASSETS> 125,475,000
<CURRENT-LIABILITIES> 15,261,000
<BONDS> 0
0
0
<COMMON> 11,749,000
<OTHER-SE> 80,430,000
<TOTAL-LIABILITY-AND-EQUITY> 125,475,000
<SALES> 148,627,000
<TOTAL-REVENUES> 148,627,000
<CGS> 85,339,000
<TOTAL-COSTS> 85,339,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,000
<INCOME-PRETAX> 28,182,000
<INCOME-TAX> 10,383,000
<INCOME-CONTINUING> 17,799,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,799,000
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.51
</TABLE>
