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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ................... TO ......................
COMMISSION FILE NUMBER 1-7210
REPUBLIC GROUP INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(State or other jurisdiction of incorporation or organization)
811 EAST 30TH AVENUE, HUTCHINSON, KANSAS 67502-4341
(Address of principal executive offices) (Zip Code)
POST OFFICE BOX 1307, HUTCHINSON, KANSAS 67504-1307
(Mailing address) (Zip Code)
75-1155922
(I.R.S. Employer Identification No.)
Registrant's telephone number, including area code: (316) 727-2700
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
COMMON STOCK SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
ON AUGUST 31, 1999, THERE WERE 11,802,337 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 31, 1999, WAS APPROXIMATELY
$141,269,538.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 1999 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, 1999
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 at Commerce City, Colorado, Hutchinson, Kansas and Halltown,
West Virginia and is in the process of constructing a recycled paperboard mill
at Lawton, Oklahoma. Also, the Company operates paper fiber recycling centers at
Denver, Colorado, Topeka, Kansas and Kansas City, Missouri. The Company had net
sales and net income of $137,942,000 and $15,232,000, respectively, in fiscal
1999. Before intercompany eliminations, the Company's recycled paperboard (which
includes reclaimed paper fiber) and gypsum wallboard businesses accounted for
approximately 50% each of Republic's total net sales during fiscal 1999.
The following table summarizes the Company's businesses:
<TABLE>
<CAPTION>
PERCENT OF
FISCAL 1999
CONSOLIDATED
BUSINESS PRODUCT END-USE MARKET SITE(S) NET SALES
- ------------------- --------------------- -------------------- ------------------------ -------------
(INCLUDING
INTERCOMPANY)
<S> <C> <C> <C> <C>
Recycled Paperboard Gypsum-grade recycled Internal Commerce City, Colorado; 18%
paperboard (approximately 15% Hutchinson, Kansas
of fiscal 1999
recycled paperboard
net sales) and
third-party use in
the manufacture of
gypsum wallboard
Recycled paperboard Sale to Commerce City, Colorado; 29%
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; 3%
(approximately 46% Topeka, Kansas;
of fiscal 1999 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 50%
distributors and
residential and
commercial builders
and remodelers
</TABLE>
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Management has undertaken a number of important strategic initiatives designed
to increase Republic's production capabilities. The Company is using 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 an
$85,000,000 credit facility entered into with a bank syndicate on July 15, 1998,
to construct a new recycled paperboard mill at 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 one of the largest third-party
suppliers of gypsum-grade recycled paperboard in North America. The Lawton mill
is expected to have, after the start-up period, 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 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.
Presently, management estimates that the Lawton mill will cost approximately
$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, in late January 1999, completed the second phase of a two-phase
expansion of the Duke plant that will ultimately, after the start-up phase,
increase its theoretical capacity from 570 million to 1.2 billion square feet
per year. Theoretical design capacity assumes operating at optimum-rated
production line speeds over industry standard operating days producing only
1/2-inch gypsum wallboard. Based on the mix of actual products produced, the
Company believes its annual practical capacity is approximately 1.0 to 1.1
billion square feet. The start-up phase has been slower than initially
anticipated by the Company. In the June 1999 quarter, the first full quarter of
operations, the Duke plant operated at approximately 63% of theoretical capacity
or about 69% to 76% of practical capacity. The Company expects to see a gradual
increase in production output and efficiencies during fiscal 2000. In addition,
in fiscal year 1998, the Company 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 businesses.
COMPETITIVE STRENGTHS
The Company believes that it has the following competitive strengths:
LOW COST PRODUCTION. The Company strives to be a low cost producer 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. As production rates and
efficiencies improve at the Company's expanded Duke plant during its start-up
phase, management expects total per unit costs will decrease significantly due
to economies of scale. 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 a major portion 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 41% 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 17 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 one of the largest third-party producers
of gypsum-grade recycled paperboard in North America. 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, provides the
Company with the capability of producing both specialty products, such as the
Company's 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 transition the
Hutchinson mill to tube stock and other consumer and industrial paperboard
products before and during the ramp-up period of the Lawton mill. 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 short-term and longer-term
cost saving opportunities, including incremental process equipment upgrades at
the Company's existing recycled paperboard mills.
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.
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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 at 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 at 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 vertically integrated. 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, 1999, 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--Trends and
Developments.
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 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
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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 and Halltown mills have the capability
to generate approximately 45% of their electricity for internal use although, in
fiscal 1999, these mills purchased substantially all electricity requirements as
a cost reduction measure. 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.
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 1999, approximately 15% of the recycled paperboard
manufactured and shipped by the Company's recycled paperboard mills was consumed
by the Company's gypsum wallboard manufacturing operations, approximately
another 23% was shipped to other gypsum wallboard manufacturers and the balance
was shipped to over 150 different converter customers. When the Hardie Agreement
is fully implemented, Hardie is expected to account for a significant percentage
of consolidated gross sales. See--Item 1--The Hardie Agreement.
In fiscal 1999, approximately 46% 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.
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.
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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, currently under construction, is 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. The Company is aware of one other
competitor that has announced the possible conversion of an older, existing
paperboard mill that may be able to produce a light weight gypsum-grade
paperboard. 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 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, ultimately, 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. With the completion of the expansion of the Duke plant,
the Company's internal demand for gypsum-grade recycled paperboard is ultimately
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.
Presently, the Company estimates that the total cost of the Lawton mill,
inclusive of related working capital requirements and capitalized interest, will
be $170,000,000. Management expects that the Lawton mill will achieve commercial
production during the first quarter of calendar year 2000.
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The Company has 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 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
$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.
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 at 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 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. 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
7
<PAGE> 9
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. There can be no assurance that the Company will
be successful in obtaining supply agreements for the remainder of the output of
the Lawton mill, 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
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
8
<PAGE> 10
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 deposits. The
addition of the second production line will ultimately, after the start-up
phase, increase the Duke plant's theoretical design capacity from 570 million to
1.2 billion square feet of gypsum wallboard per year. Theoretical design
capacity assumes operating at optimum-rated production line speeds over industry
standard operating days producing only 1/2-inch gypsum wallboard. Based on the
mix of actual products produced, the Company believes its annual practical
capacity is approximately 1.0 to 1.1 billion square feet. Expenditures related
to the expansion of the Duke plant were approximately $29,000,000 inclusive of
capitalized interest. During the fourth quarter of fiscal 1999, the Company
shipped a record 189 million square feet of gypsum wallboard. The Company
expects a gradual increase in production and sales during fiscal year 2000.
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 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--Item 1--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 1999, approximately 63% 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 37% 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 5% of the
9
<PAGE> 11
Company's consolidated sales in 1999. 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,
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 155 railcars that operate in, and are
dispatched through, the national rail system. 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 presently its sales represent approximately 2%-3% of
the total gypsum wallboard sold nationally and approximately 10%-15% 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
that certain other gypsum wallboard manufacturers have recently completed
expansions of their gypsum wallboard plants or will complete construction of new
plants this year. Additionally, other gypsum manufacturers have announced or are
beginning the process of adding gypsum wallboard capacity and are expected to
complete this process during the next two years. 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 935 people. Approximately 615 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.
10
<PAGE> 12
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 risk
of liability or claims with respect to environmental and worker health and
safety matters. The Company believes that it is in material compliance with
applicable federal, state and local environmental laws and regulations governing
its operations. In 1997, the West Virginia Division of Environmental Quality
(the "DEQ") filed a complaint alleging that Republic Paperboard Company of West
Virginia (the "West Virginia Subsidiary") was in violation of certain provisions
of its wastewater discharge permit at the Halltown mill and an administrative
order entered into between the DEQ and the West Virginia Subsidiary. During
fiscal year 1999, the West Virginia subsidiary negotiated an agreement and
settlement with the DEQ of these allegations for a $25,000 payment which was
approved by the court. See--Item 3--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 has conducted its own investigations and the adjacent property
owners have conducted their own investigations. Also, the Company and the
adjacent owners have jointly sponsored investigations. As a result of the most
recent jointly sponsored investigation, the Company again substantially verified
the results obtained in earlier investigations. Additionally, the investigation
uncovered newly discovered environmental conditions that appear to stem from
underground storage tank use on the Company's property. The Company notified the
Oil Inspection Section of the Colorado Department of Labor and Employment of the
most recent results. Discussions among the parties continue. The Company has
completed the construction of the warehouse addition under approval of the
Colorado Department of Health. At this time, the Company has not ascertained the
future liability, if any, of the above matters. Environmental expenditures
directly related to these matters were not material for the last three fiscal
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 at Duke,
Oklahoma, three recycled paperboard mills located at Commerce City, Colorado,
Hutchinson, Kansas, and Halltown, West Virginia, and three reclaimed paper
recycling centers located at Kansas City, Missouri, Topeka, Kansas, and Denver,
Colorado. In addition, the Company owns an office building at Hutchinson,
Kansas, in which its corporate offices are located, and owns land at Lawton,
Oklahoma where construction is taking place for a new recycled paperboard mill.
The Company leases office space at Irving, Texas, for its Chairman. The table on
Page 12 sets forth certain information with respect to such significant
properties.
11
<PAGE> 13
PROPERTIES
The Company's principal properties are shown below.
<TABLE>
<CAPTION>
Nature of Date Company's Approx. Annual Productive Type
Location Business Acquired Interest No. of Acres Capacity Construction
- -------------------------- ----------- -------- --------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
30th Avenue Corporate 1992 Owned 3 -- Open span,
Hutchinson, Kansas 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 1.2 billion Open span,
Duke, Oklahoma gypsum Leased site; 2,374 sq. ft. steel
wallboard owned, 740 (after start-up
leased phase) (1)
gypsum
deposits (1)
- ----------------------------------------------------------------------------------------------------------------------------
Baddeck, Nova Scotia Gypsum 1971 Owned 492 Non-producing Reserves --
deposit
- ----------------------------------------------------------------------------------------------------------------------------
Halstead and Sherman Manufacture 1983 Owned 29 plant site 91,000 Open span,
Hutchinson, Kansas recycled 40 other tons (2) steel and
paperboard sites concrete
- ----------------------------------------------------------------------------------------------------------------------------
Brighton Boulevard Manufacture 1983 Owned 9 52,500 Open span,
Commerce City, Colorado recycled tons (2) steel and
paperboard concrete
- ----------------------------------------------------------------------------------------------------------------------------
Main Street Reclaimed 1994 Owned 2 30,000 Open span,
Kansas City, Missouri paper fiber tons (3) brick and
concrete
- ----------------------------------------------------------------------------------------------------------------------------
Adams Street Reclaimed 1994 Owned 1/2 15,000 Open span,
Topeka, Kansas paper fiber tons (3) steel and
concrete
- ----------------------------------------------------------------------------------------------------------------------------
Ironton Street Reclaimed 1995 Owned 1.7 10,000 Open span,
Denver, Colorado paper fiber tons (3) steel and
concrete
- ----------------------------------------------------------------------------------------------------------------------------
Old Route 340 Manufacture 1995 Owned 48 70,000 Open span,
Halltown, West Virginia recycled tons (2) steel, concrete,
paperboard and concrete
block
- ----------------------------------------------------------------------------------------------------------------------------
Lee Boulevard Manufacture 1998 Owned 69 220,000 Open span,
Lawton, Oklahoma recycled tons (4) steel, concrete,
(Under construction) paperboard (after start-up phase) and concrete
block
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on theoretical capacity operating at optimum-rated production line
speeds 6-2/3 days per week, 24 hours per day producing only 1/2-inch gypsum
wallboard. See Item 1--Business--Gypsum Wallboard Operations--Manufacturing
and Gypsum Supply.
(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.
(4) The Lawton mill, currently under construction, is expected to have a
productive annual capacity of 220,000 tons and is anticipated to begin
commercial production during the first quarter of calendar year 2000.
12
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS.
In October 1997, the DEQ filed a complaint against the West Virginia Subsidiary
in the Circuit Court of Jefferson County, West Virginia. The complaint alleged
that the West Virginia Subsidiary had violated and continued to violate a
previous order entered into between the West Virginia Subsidiary and the DEQ on
January 17, 1995 and further alleged that the West Virginia Subsidiary had
violated and continued 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 DEQ. 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 alleged 33 violations over a time period
from October 1995 to March 1997. The complaint also alleged that the earlier
administrative order had 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 DEQ was 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 DEQ also requested a civil monetary penalty of an unspecified
amount and its court costs including attorneys fees. During fiscal year 1999,
the West Virginia subsidiary negotiated an agreement and settlement with the DEQ
for a $25,000 payment which was approved by the court.
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 1999.
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 64 1961
Chief Executive Officer and Director
Doyle R. Ramsey Executive Vice President and 48 1992
Chief Financial Officer
Geary D. Cribbs Senior Vice President 56 1992
Todd T. Brown Vice President 45 1992
Susan G. Hall Vice President 53 1993
James M. Britz Vice President 48 1994
Janey L. Rife Vice President and Treasurer 54 1995
Lon D. Lewis Vice President 55 1996
Joe T. Brown, Jr. Vice President 55 1998
Michael W. Dirks Vice President and 37 1998
Principal Accounting Officer
</TABLE>
13
<PAGE> 15
Phil Simpson has been Chairman of the Board of Directors, President and Chief
Executive Officer for more than five years.
Doyle R. 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 the recycled paperboard business segment, finance,
treasury, credit and human resources. Prior thereto, he served as Vice
President-Finance and Chief Financial Officer from 1992 to 1998.
Geary D. 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.
Todd T. Brown was elected Vice President in September 1992. He is responsible
for recycled paperboard operations.
Susan G. Hall was elected Vice President in October 1993. She is responsible for
gypsum sales.
James M. 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.
Janey L. Rife was elected Vice President and Treasurer of the Company in August
1998. She has served as Treasurer and Secretary since May 1993.
Lon D. 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.
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.
Michael W. Dirks was elected Vice President and Principal Accounting Officer in
August 1998. He has overall 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
YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
1999 1998
------------------------------- --------------------------------
Price Range Dividends Price Range Dividends
High Low Paid High Low Paid
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
First quarter $20.88 $13.25 $0.09 $19.94 $18.00 $0.09
Second quarter 20.94 13.00 0.09 21.38 15.25 0.09
Third quarter 21.25 12.88 0.09 21.06 16.38 0.09
Fourth quarter 19.75 14.69 0.09 22.38 17.63 0.09
----- -----
$0.36 $0.36
===== =====
</TABLE>
Republic Group Incorporated common stock is traded on the New York Stock
Exchange under the symbol "RGC". At August 18, 1999, the number of stockholders
of record was approximately 859.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL REVIEW
In thousands, except per share, ratio and percent data
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $137,942 $128,285 $123,697 $117,902 $ 96,413
Income before income taxes 24,940 28,182 31,141 23,974 19,158
Net income 15,232 17,799 19,663 14,912 11,677
Total capital employed (1) 243,307 110,214 88,289 96,716 85,094
Stockholders' equity, at year-end 104,015 92,179 77,845 62,664 50,569
Total assets 268,168 125,475 100,400 106,124 95,442
Interest-bearing debt (including
current portion) 125,000 5,950 -- 24,840 28,000
PER SHARE DATA
Basic earnings per share (4) $ 1.29 $ 1.52 $ 1.68 $ 1.28 $ 1.01
Diluted earnings per share (4) 1.29 1.51 1.67 1.27 1.00
Common dividends (4) 0.360 0.360 0.344 0.259 0.209
Stockholders' equity, at year-end (4) 8.78 7.81 6.60 5.34 4.33
RATIO AND PERCENT DATA
Net operating profit after-tax
as a percent of net sales (2) 13% 14% 17% 13% 13%
Return on average capital
employed (percent) (2) 16 21 20 19 25
Return on average stockholders'
equity (percent) (3) 16 21 28 26 26
Interest-bearing debt as a percent
of total capital employed 51 5 -- 26 33
Ratio of current assets to
current liabilities 1.5 1.7 2.1 2.8 2.0
Ratio of year-end market value per
common share to diluted earnings
per share (4) 14.0 13.9 12.1 10.2 9.1
Ratio of average market value per share to
average book value per share (4) 2.0 2.7 2.5 2.4 2.3
Basic weighted-average
shares outstanding (4) 11,771 11,705 11,698 11,640 11,603
Diluted weighted-average
shares outstanding (4) 11,851 11,798 11,795 11,736 11,669
</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 federal statutory tax rates. Return on average capital
employed relates net operating profit after-tax to average total capital
employed. The acquisition of the Halltown, West Virginia paperboard mill
occurred on the last day of the fiscal year. As such, those assets are not
used in the calculation of average total capital employed in fiscal year
1995, as they would distort the year-to-year comparisons. Construction in
progress assets related to the expansion of the Duke, Oklahoma gypsum
wallboard plant and the construction of the Lawton, Oklahoma paperboard
mill began in fiscal year 1997. Those assets, along with excess cash
associated with the financing of these projects, are not used in the
calculation of average total capital employed for subsequent years, as they
also would distort year-to-year comparisons. Excess cash is defined as
cash, cash equivalents and investments in excess of $2,000,000.
(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.
15
<PAGE> 17
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, and
(ii) gypsum wallboard operations. Each segment accounted for approximately 50%
of the Company's total net sales in fiscal 1999 prior to intercompany
eliminations.
During fiscal 1999, the Company's gypsum wallboard business segment received a
high percentage of its recycled paperboard requirements (approximately 15% of
total recycled paperboard shipments) from its internal recycled paperboard
mills. Also in fiscal 1999, the Company's recycled paperboard operations
purchased approximately 41% of their requirements from the Company's reclaimed
paper fiber operations and the remainder from many non-affiliated suppliers. The
Company does enter into long-term contracts with its reclaimed paper fiber
suppliers for a portion of its requirements; however, the majority is purchased
month to month under long-standing relationships. The Company believes that its
sales of recycled paperboard and reclaimed paper fiber to third parties at
market prices partially hedge 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 segment have increased
significantly since 1994. In 1994, the Company purchased reclaimed paper fiber
operations at Kansas City, Missouri and Topeka, Kansas. These two facilities
provide the Hutchinson, Kansas recycled paperboard mill with a portion of its
reclaimed paper fiber needs along with sales to non-affiliated customers. In
1995, the Company purchased a 100% recycled paperboard mill at Halltown, West
Virginia giving the Company a presence in the East Coast region. The Company, in
early fiscal 1996, began operations at a paper fiber recycling center at Denver,
Colorado with a portion of its shipments used to supply the Commerce City,
Colorado recycled paperboard mill. In 1998, the Company completed a five-year
plan to increase its productive capacity of the Commerce City and Hutchinson
mills by 25%. As of June 30, 1999, the rated annual capacity of the Company's
three recycled paperboard mills was 213,500 tons.
In 1997, the Company began a strategic initiative to effectively double the
productive capacity of both of its operating segments. The Company's gypsum
wallboard segment has experienced strong results in the last several years as a
result of the continued strong demand for gypsum wallboard primarily
attributable to the strength of the economy in general and the construction
industry in particular. During fiscal 1999, the Company completed the expansion
project at its Duke, Oklahoma gypsum wallboard plant that will, after the
start-up phase, ultimately increase its productive theoretical design capacity
from 570 million to 1.2 billion square feet annually. Theoretical design
capacity assumes operating at optimum-rated production line speeds over industry
standard operating days producing only 1/2-inch gypsum wallboard. Based on the
mix of actual products produced, the Company believes its annual practical
capacity is approximately 1.0 to 1.1 billion square feet.
In June 1998, the Company commenced construction of a new recycled paperboard
mill at Lawton, Oklahoma. The Lawton mill will produce primarily gypsum-grade
recycled paperboard. The Company expects the gypsum-grade paperboard will have
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 one of the largest third-party suppliers of gypsum-grade
recycled paperboard in North America. The Lawton mill is expected to have a
production capacity of approximately 220,000 tons per annum, which will
effectively double Republic's current recycled paperboard capacity. The Company
intends to sell approximately 50% of the Lawton mill's output pursuant to a
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 at 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 $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.
On July 15, 1998, the Company issued $100,000,000 of Senior Subordinated Notes
(the "Notes") and entered into an $85,000,000 credit facility with a bank
syndicate. The proceeds from these two sources of financing are primarily being
used to finance the construction of the Lawton mill and for general and
corporate purposes
16
<PAGE> 18
including working capital. Until operations commence, the Lawton mill will not
generate any revenues and will continue to incur interest expense associated
with the Notes and the credit facility and other non-capitalizable expenses
associated with adding management and staff infrastructure. The Company has
capitalized a significant amount of the interest expense on the Notes and the
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. Additionally, after
the Company has expended the proceeds of the Notes and borrowings under the
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 1999, 1998 and 1997
accounted for approximately 14%, 13% and 15%, 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 1999 COMPARED TO FISCAL 1998
GENERAL. In fiscal 1999, the Company recorded record net sales of $137,942,000,
an 8% increase from the $128,285,000 posted in fiscal 1998. The increase in
fiscal 1999 was principally the result of a 4% increase in gypsum wallboard
shipments and a 15% increase in selling prices of gypsum wallboard.
Consolidated operating profits in fiscal 1999 of $26,861,000 approximated the
$27,005,000 recorded in fiscal 1998. Selling and administrative expenses as a
percent of net sales increased to 14% in fiscal 1999 from 12% in fiscal 1998
mainly due to an increase of management and support staff related to expansion
projects at the Duke wallboard plant and the Lawton mill. Consolidated net
income was adversely affected by a $2,038,000 increase in interest expense, net
of interest income, in fiscal 1999 from fiscal 1998 primarily associated with
the Notes issued in July 1998. In fiscal 1998, consolidated net income was
augmented by $1,000,000 of non-taxable life insurance income from a policy owned
by the Company on an executive officer. A shift in state income tax liabilities
increased the Company's effective tax rate to 39% in fiscal 1999 from 37% in
fiscal 1998. The fiscal 1998 effective tax rate benefited from the
aforementioned non-taxable life insurance income. The Company anticipates its
effective tax rate to be approximately 40% in fiscal 2000 based on anticipated
state apportionments.
Primarily as a result of the factors stated above, the Company's consolidated
net income during fiscal 1999 decreased to $15,232,000 from $17,799,000 in
fiscal 1998, a decrease of 14%. Diluted earnings per share decreased in fiscal
1999 to $1.29 per share, down from $1.51 in fiscal 1998.
RECYCLED PAPERBOARD. Shipments of recycled paperboard decreased 3% from 190,614
tons in fiscal 1998 to 185,793 in fiscal 1999 chiefly as a result of weakness in
the East Coast uncoated recycled paperboard markets which adversely affected the
sales of certain primary products produced by the Company. The Company was able
to increase its overall shipments of recovered paper fiber by 23%. Additionally,
shipments to unaffiliated customers of recovered paper fiber increased to 95,161
tons from 78,441 in fiscal 1998, a 21% increase.
Net sales for the recycled paperboard segment decreased 6% to $74,474,000 in
fiscal 1999 from $79,228,000 in fiscal 1998 due to a 3% decrease in recycled
paperboard shipments and a 4% decline in per unit net selling prices of recycled
paperboard. The decline in per unit net selling prices was partially offset by a
4% decrease in per unit variable cost of sales, principally reclaimed paper
fiber. The segment's operating profits declined from $9,658,000 in fiscal 1998
to $6,530,000 in 1999. The reduction in shipments, weakness in East Coast
markets, and $1,123,000 of expenses related to the accelerated hiring and
training of new employees at the Lawton mill were the primary factors for the
decline in the segment's operating profits. Operating margins for the recycled
paperboard segment, excluding expenses associated with the Lawton mill, were 10%
and 12%, respectively, for fiscal 1999 and fiscal 1998.
17
<PAGE> 19
GYPSUM WALLBOARD. During the fourth quarter of fiscal 1999, the Company shipped
a record 189 million square feet of gypsum wallboard compared to 137 million
square feet in the June 1998 quarter. This was the first full quarter of
operations for the expanded Duke plant. Additionally, during fiscal 1999,
shipments of gypsum wallboard also increased to a record 590 million square feet
from the 566 million square feet shipped in fiscal 1998. This resulted primarily
from the expansion project at the Duke plant and the strong demand for gypsum
wallboard. The increased shipments and 15% increase in selling prices caused the
gypsum wallboard segment net sales to increase to $73,557,000 in fiscal 1999
compared to $59,462,000 in fiscal 1998, a 24% increase. Total per unit costs
increased 23% in fiscal 1999 from fiscal 1998. The principal factors affecting
the increase in per unit costs were (i) inefficiencies in operating the Duke
plant while constructing the second line, (ii) the addition and training of new
production and management employees several months in advance of start-up of the
second production line, (iii) inefficiencies with a slower than anticipated
start-up of the re-configured Duke plant, and (iv) additional depreciation
related to the expansion. As production rates increase at the Duke plant, the
Company believes total per unit costs will be similarly reduced. The increase in
shipments and selling prices more than offset the increase in costs. As a
result, operating profits increased to $28,478,000 in fiscal 1999 from
$24,342,000 in fiscal 1998. Operating margins for the gypsum wallboard segment
were 39% in fiscal 1999 compared to 41% in fiscal 1998.
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 5% in the 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.
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.
GYPSUM WALLBOARD. For fiscal 1998, shipments of gypsum wallboard were 566
million square feet compared to 570 million square feet 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
18
<PAGE> 20
demand for gypsum wallboard raised the selling price of gypsum wallboard by
approximately 5% 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.
TRENDS AND DEVELOPMENTS
RECYCLED PAPERBOARD. 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 generally
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, the Company becomes the beneficiary of slowly declining selling
prices and rapidly declining reclaimed paper fiber costs, resulting in improved
operating margins for the recycled paperboard segment. Reclaimed paper fiber
costs represented approximately 23%, 30% and 26%, respectively, of the total
operating costs for the recycled paperboard mills in fiscal 1999, fiscal 1998
and fiscal 1997. The fluctuation in the percentages reflects, primarily, the
change in the cost of reclaimed paper fiber. 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 started to
decline thus not allowing the implementation of a general price increase. As a
result, in fiscal 1998, the recycled paperboard segment operating margin
decreased to 12%. In fiscal 1999, reclaimed paper fiber costs declined or
remained steady during most of the year, but then began increasing during the
fourth quarter. Since May 1999, reclaimed paper fiber prices have increased
significantly. The Company is currently in the process of implementing selling
price increases although there is no assurance that such selling price increases
will be accepted in the market place.
The Company is aware of one other competitor that has announced the possible
conversion of an existing paperboard mill to produce gypsum-grade paperboard.
This new capacity could have a material adverse effect on the Company's
gypsum-grade paperboard business.
GYPSUM WALLBOARD. The price of and demand for 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 1997, 1998 and
1999. 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 and currently selling prices are at
all time highs.
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 or will complete construction of new plants
this year. Additionally, other gypsum manufacturers have announced or are
beginning the process of adding new gypsum wallboard capacity and are expected
to complete this process during the next two years. As a result of these and
other expansions, the Company expects that a significant amount of new capacity
may be on line in the near future which could have a material adverse effect on
shipments and selling prices of gypsum wallboard.
The expansion of the Duke plant will ultimately, after the start-up phase,
increase its theoretical capacity to 1.2 billion square feet annually. The
start-up phase has been slower than initially anticipated by the Company. In the
June 1999 quarter, the first full quarter of operations, the Duke plant operated
at approximately 63% of theoretical capacity or about 69% to 76% of practical
capacity. See--Management's Discussion And Analysis--Overview. The Company
expects to see a gradual increase in production output and efficiencies during
fiscal 2000. Additionally,
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<PAGE> 21
total per unit costs increased 23% in fiscal 1999 from fiscal 1998, primarily
related to the expansion as discussed previously. See--Management's Discussion
And Analysis--Fiscal 1999 Compared to Fiscal 1998--Gypsum Wallboard. As
production rates increase, the Company believes total per unit costs will be
similarly reduced due to economies of scale.
YEAR 2000 COMPLIANCE
The Company uses a number of computer software programs, operating systems, and
types of equipment with embedded computer chips in its internal operations,
including applications used in the Company's financial business systems,
manufacturing processes and administrative functions. To the extent that the
programs, operating systems, and equipment contain source code or embedded
computer chips that are unable to interpret appropriately the upcoming calendar
year 2000, some level of modification or possible replacement will be necessary.
A team of employees from various areas within the Company was appointed to
address the Year 2000 issue during fiscal year 1998. This committee completed
the Year 2000 Compliance program during the June 1999 quarter and presently
expects that all of its core operations and essential functions will be ready
for the Year 2000 transition.
STATE OF READINESS. In order to establish priorities for assessment and
remediation of Year 2000 issues, all computerized systems were inventoried and
classified as follows:
Level 1: These are the most critical systems. They include items that
could have a material adverse effect through extended production
interruptions, potential revenue losses, or significant expenditures.
(e.g., utilities, manufacturing and financial functions)
Level 2: These are systems that should not have a material adverse
effect on the Company but are needed to remain competitive. (e.g.,
telephones and computers)
Level 3: These are systems that are desirable and enable employees to
work more efficiently. (e.g., voice mail, pagers, and copiers)
Although the Company's Year 2000 initial compliance program is complete, these
processes will continue to be in effect up to and into the Year 2000. To date,
the Company believes that the items which it has identified as level 1 or level
2 will be compliant with no material impact on the Company's operations,
liquidity, or capital resources. Additionally, the Company anticipates those
items identified as Level 3 will be compliant.
As part of its Year 2000 compliance program, the Company requested information
from a majority of its customers and vendors concerning their Year 2000
compliance. Responses were received from many key customers indicating that they
do not presently anticipate any significant Year 2000 problems. Although
possible Year 2000 interruptions in customers' operations could result in
reduced sales, increased inventory or receivable levels and reduction in cash
flow, the Company believes that its customer base is broad enough to minimize
the effects of such occurrences.
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company executed its Year 2000 program
primarily with internal resources. The principal costs associated with these
internal resources were payroll and employee benefits of the members of the Year
2000 committee and the Company's information technology ("IT") department, third
party consultants, and hardware and software upgrades. The Company does not
separately track the internal costs attributable to the Year 2000 program.
Internal costs related to payroll, employee benefits, and third party
consultants are estimated to be approximately $250,000 through June 30, 1999.
The Company estimates the total cost of its Year 2000 project will be less than
$350,000. Starting in fiscal year 1995, the Company replaced substantially all
of its business systems hardware and software. The Company estimates
expenditures of approximately $300,000 in fiscal year 2000 for periodic,
scheduled upgrades of hardware and software. All costs of Year 2000 compliance
are recorded as an expense in the period incurred and are not expected to be
material to the Company's operations, liquidity, or capital resources.
CONTINGENCY PLANS. Contingency plans were drafted for potential risks that could
have a material adverse effect through extended production interruptions,
potential revenue losses or significant expenditures. These plans have been
developed and are being managed at each facility depending on their
requirements, customers, vendors and service providers. Examples of contingency
plans that are being considered and may be implemented are stockpiling certain
raw materials, use of manual processing procedures in the event of computer
failure, alternate energy sources and internal generation of electricity. These
contingency plans should help ensure that the Company can continue operations
with minimal financial loss.
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<PAGE> 22
RISKS OF YEAR 2000 ISSUES. Although the Company believes that it has a
compliance plan that will limit the risk that the Year 2000 issue will have a
material adverse effect on the Company, the ultimate impact of this issue on the
Company is uncertain. Suppliers' failure to deliver raw materials and third
parties' failure to supply power and/or telecommunications systems to
manufacturing plants could result in delayed delivery of products to customers,
which could have a material adverse effect on earnings and cash flow. In
addition, customers' non-compliance could result in the loss of customers or a
customer's inability to purchase or pay for products, which would have a
material adverse effect on earnings and cash flow.
This disclosure is provided pursuant to Securities Exchange Act Release No.
34-40277. This disclosure is subject to protection under the Year 2000
Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year
2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein.
ENVIRONMENTAL MATTERS
In connection with the Company's preparation for a warehouse addition to its
paperboard mill located at 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 owners have conducted
their own investigations. Also, the Company and the adjacent owners have jointly
sponsored investigations. As a result of the most recent jointly sponsored
investigation, the Company again substantially verified the results obtained in
earlier investigations. Additionally, the investigation uncovered newly
discovered environmental conditions that appear to stem from historical
underground storage tank use on the Company's property. The Company notified the
Oil Inspection Section of the Colorado Department of Labor and Employment of the
most recent results. Discussions among the parties continue. The Company has
completed the construction of the warehouse addition under approval of the
Colorado Department of Health. At this time, the Company has not ascertained the
future liability, if any, of the above matters. Environmental expenditures
directly related to these matters were not material during the last three fiscal
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 operations 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 following is a summary of certain financial
statistics and balances related to the liquidity and financial condition of the
Company for the three fiscal years ended June 30.
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<PAGE> 23
<TABLE>
<CAPTION>
$ in thousands 1999 1998 1997
- -------------------------------------------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
Working capital $ 13,126 $ 11,024 $ 12,939
Current ratio 1.5:1 1.7:1 2.1:1
Cash and cash equivalents plus investments and marketable securities $ 6,192 $ 1,124 $ 2,086
Net cash provided by operating activities $ 29,031 $ 28,299 $ 28,690
Additions to property, plant and equipment $ 135,471 $ 31,191 $ 11,556
Dividends paid $ 4,238 $ 4,215 $ 4,020
Long-term debt $ 125,000 $ 5,950 $ --
Total capital employed
(total assets less noninterest-bearing current liabilities) $ 243,307 $ 110,214 $ 88,289
</TABLE>
On July 15, 1998, the Company received proceeds from the sale 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 credit facility of up to
$85,000,000 entered into with a bank syndicate on July 15, 1998, is being used
primarily 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 sale of the Notes to repay the
outstanding principal balance ($5,950,000) of a then existing revolving credit
facility along with accrued interest. Upon repayment, the Company terminated the
revolving credit facility. Outstanding balances under that facility bore
interest at a rate equal to LIBOR plus an agreed margin (ranging from 50 to 150
basis points) or the bank lender's prime rate less 0.75%.
Interest payment dates on the Notes are January 15 and July 15, and commenced on
January 15, 1999. Each semi-annual interest payment is $4,750,000. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after July 15, 2003, at a redemption price of 104.75% which reduces to 100% on
or after July 15, 2005. In addition, prior to July 15, 2001, the Company may
redeem up to 35% of the principal amount of the Notes with the net cash proceeds
received by the Company from one or more public equity offerings, at a
redemption price of 109.50%. The Notes include financial and other covenants of
the kind generally included in such indebtedness.
The $85,000,000 credit facility is being used as a revolving line of credit
until the conversion date. The conversion date is defined as the earlier of July
15, 2000 or start-up of the Lawton mill which is currently expected to occur
during the first quarter of calendar year 2000. 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 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 credit facility are guaranteed by each of the Company's
material subsidiaries and are secured by a mortgage on the Lawton mill, a pledge
of stock of the Company's subsidiaries and security interests in substantially
all other personal property of the Company and its subsidiaries. At such time,
if any, as outstanding loans under the credit facility exceed $50,000,000, the
lenders may require that other real property and improvements of the Company and
its subsidiaries be mortgaged as security for the credit facility. Outstanding
principal amounts on the credit facility bear interest at a variable rate equal
to, at the election of the Company, (i) the LIBOR, plus an agreed margin
(ranging from 75 to 175 points), which is to be established annually based upon
the Company's leverage ratio or (ii) the higher of (a) Bank of America 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 credit facility are payable quarterly. Under the 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 (earnings
before interest, taxes, depreciation and amortization) ratio, interest coverage
ratio, minimum EBITDA, and limitations on capital expenditures and dividends.
The credit facility does not restrict the transfer of funds to the parent by the
subsidiaries. The Company had borrowings outstanding of $25,000,000 under the
credit facility as of June 30, 1999 at a weighted-average interest rate of
6.73%.
22
<PAGE> 24
During fiscal 1999, the Company used the $29,031,000 of cash generated from
operations and $119,050,000 of net debt borrowings to fund $135,471,000 of
additions to property, plant and equipment, $5,105,000 of debt issue costs
associated with the Notes and credit facility, and to pay $4,238,000 in
dividends to shareholders. Capital expenditures relating to the construction of
the Lawton mill and the expansion of the Duke plant, including the purchase of
related railcars were approximately $108,000,000 and $18,000,000, respectively,
during fiscal 1999. Management estimates that the Lawton mill will cost,
including capitalized interest and related working capital requirements,
approximately $170,000,000. The Company estimates that it will spend
approximately $54,000,000 in fiscal year 2000 to complete and provide working
capital for the Lawton mill and approximately $14,000,000 to $18,000,000 to
upgrade equipment at the Company's other facilities. The credit facility imposes
limits on the Company's ability to make capital expenditures, but the Company
expects that those limits will not prevent it from implementing its capital
expenditure program.
As of June 30, 1999, the Company had available for borrowing, $60,000,000 of the
$85,000,000 credit facility. The Company believes that the remaining portion
available under the credit facility, together with cash generated by operations
in fiscal 2000, will be sufficient (i) to complete the construction of the
Lawton mill, (ii) to fund the other capital expenditure requirements identified
above, (iii) to fund the Company's working capital requirements including
interest payments, (iv) to pay dividends to stockholders and (v) to fund other
general and corporate requirements.
The Company paid cash dividends of $4,238,000, $4,215,000 and $4,020,000 in
fiscal 1999, 1998 and 1997 respectively. Quarterly dividends historically have
been paid in September, December, March and June. Both the schedule and payment
of cash dividends are subject to the approval of the Company's Board of
Directors. The credit facility and the Indenture impose limits on the Company's
ability to pay dividends, but the Company does not anticipate that such limits
will prevent the payment of dividends at historical levels. In most cases, the
limits imposed by the credit facility are the most restrictive. Under those
limits, the Company may pay cash dividends and/or redeem its stock in aggregate
amounts of not more than (a) $5,300,000 in each fiscal year ending on or before
the conversion date, (b) $5,500,000 in each of the first and second fiscal years
ending after the conversion date, (c) $6,000,000 in each of the third and fourth
fiscal years ending after the conversion date and (d) without limitation
thereafter.
MARKET RISK EXPOSURE
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities. The
Company does not use financial instruments for trading or other speculative
purposes and is not a party to any derivative financial instruments. In general,
the Company does not engage in hedging of commodities or other contracts that
would cause material exposure to market risk relating to commodity prices or
foreign currency exchange rates.
The Company is exposed to interest rate risk primarily through its borrowing
activities. As of June 30, 1999, the Company had outstanding $100,000,000 of
Notes carrying a 9.5% fixed interest rate. This fixed rate obligation does not
expose the Company to risk of earnings or cash flow loss due to the changes in
market interest rates; however, the fair value of the Notes is sensitive to
changes in interest rates. A hypothetical 100 basis point change in interest
rates would result in a corresponding change of approximately $5,900,000 in the
fair value of the Notes assuming a July 15, 2008 redemption.
As of June 30, 1999, the Company had $25,000,000 of borrowings outstanding under
its credit facility under which any outstanding balance bears interest at
variable rates. With respect to all borrowings under the credit facility,
interest rate changes generally do not affect the fair value thereof, but do
impact future earnings and cash flows. A hypothetical 100 basis point change in
interest rates would not have a material impact on the Company's future earnings
and cash flows based on the Company's outstanding variable rate borrowings as of
June 30, 1999. See--Management's Discussion And Analysis of Financial Condition
And Results of Operations--Liquidity and Capital Resources for additional
discussion of the terms of the Notes and the credit facility.
23
<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. The Company is generally aware of other manufacturers constructing or
expanding their gypsum wallboard plants or recycled paperboard mills. These
plants may compete in the Company's product and market areas which could
have a negative impact on the Company's results. See--Management's
Discussion And Analysis--Trends and Developments.
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 and, as specifically
discussed above concerning environmental matters at the Company's Commerce
City, Colorado paperboard mill. See--Management's Discussion And
Analysis--Environmental Matters.
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. There is no assurance that the start-up curve of the second production line
and the newly configured original production line at the Company's Duke,
Oklahoma gypsum wallboard plant will meet management's expectations or that
the plant will ultimately reach its theoretical design capacity of 1.2
billion square feet annually.
11. The Company's inability to successfully and timely complete, without cost
overruns, the construction of the Lawton, Oklahoma recycled paperboard
mill, could have a material adverse effect on the Company. As this capital
project nears completion, the Company has no assurance on the cost of or
availability of raw materials or the operating results thereof.
12. 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.
24
<PAGE> 26
13. 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.
14. The preceding comments regarding the Company's year 2000 plans represent
the Company's best faith estimates of what reasonable steps it has taken 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 process
will have identified or resolved 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The response to this item is set forth in Item 7 of this Form 10-K.
See--Management's Discussion and Analysis--Market Risk Exposure.
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
June 30, 1999, 1998, and 1997 26
Consolidated Balance Sheets at June 30, 1999 and 1998 27
Consolidated Statements of Cash Flows for the years
ended June 30, 1999, 1998, and 1997 28
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1999, 1998, and 1997 29
Notes to Consolidated Financial Statements 30-38
Report of Independent Public Accountants--Consolidated
Financial Statements 39
Report of Management 39
Report of Independent Public Accountants--Report on
Form 10-K S-1
Schedule II--Valuation and Qualifying Accounts and Reserves S-2
</TABLE>
25
<PAGE> 27
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Gross sales $ 158,886,000 $ 148,627,000 $ 144,234,000
Less freight and discounts 20,944,000 20,342,000 20,537,000
-------------- -------------- --------------
Net sales 137,942,000 128,285,000 123,697,000
Costs and expenses:
Cost of sales 92,128,000 85,339,000 77,596,000
Selling and administrative expenses 18,953,000 15,941,000 14,345,000
-------------- -------------- --------------
111,081,000 101,280,000 91,941,000
-------------- -------------- --------------
Operating profit 26,861,000 27,005,000 31,756,000
Other income (expense):
Interest expense (4,271,000) (5,000) (1,476,000)
Interest income 2,410,000 182,000 874,000
Miscellaneous, net (60,000) 1,000,000 (13,000)
-------------- -------------- --------------
(1,921,000) 1,177,000 (615,000)
-------------- -------------- --------------
Income before income taxes 24,940,000 28,182,000 31,141,000
Provision for income taxes 9,708,000 10,383,000 11,478,000
-------------- -------------- --------------
Net income $ 15,232,000 $ 17,799,000 $ 19,663,000
============== ============== ==============
Basic earnings per share $ 1.29 $ 1.52 $ 1.68
============== ============== ==============
Basic weighted-average
shares outstanding 11,771,000 11,705,000 11,698,000
-------------- -------------- --------------
Diluted earnings per share $ 1.29 $ 1.51 $ 1.67
============== ============== ==============
Diluted weighted-average
shares outstanding 11,851,000 11,798,000 11,795,000
-------------- -------------- --------------
</TABLE>
See accompanying notes
26
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,192,000 $ 1,124,000
Accounts receivable, less allowance for doubtful
accounts of $520,000 in 1999 and $681,000 in 1998 18,838,000 14,611,000
Income tax refunds receivable 491,000 652,000
Inventories:
Finished goods 3,396,000 2,621,000
Raw materials and supplies 7,538,000 5,829,000
------------- -------------
10,934,000 8,450,000
Prepaid expenses and other 902,000 851,000
Deferred income taxes 630,000 597,000
------------- -------------
TOTAL CURRENT ASSETS 37,987,000 26,285,000
Property, plant and equipment, at cost:
Land, land improvements and mineral deposits 5,055,000 4,929,000
Buildings and leasehold improvements 20,621,000 15,375,000
Equipment 141,052,000 104,205,000
Construction in progress 119,210,000 26,994,000
------------- -------------
285,938,000 151,503,000
Less accumulated depreciation, amortization and depletion 61,989,000 53,683,000
------------- --------------
223,949,000 97,820,000
Unamortized debt issue costs 4,780,000 291,000
Other assets 1,452,000 1,079,000
------------- --------------
TOTAL ASSETS $ 268,168,000 $ 125,475,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,021,000 $ 10,632,000
Accrued payroll and employee benefits 3,475,000 2,919,000
Income taxes payable 1,333,000 --
Accrued interest payable 4,448,000 --
Other current liabilities 1,584,000 1,710,000
------------- -------------
TOTAL CURRENT LIABILITIES 24,861,000 15,261,000
Long-term debt due after one year 125,000,000 5,950,000
Deferred income taxes 13,695,000 11,475,000
Other long-term liabilities 597,000 610,000
Commitments and contingencies - see notes
STOCKHOLDERS' EQUITY:
No par preferred stock issuable in series; 487,000
authorized; none issued and outstanding -- --
Common stock, $1 par value; 35,000,000 authorized;
issued 11,800,000 in 1999 and 11,749,000 in 1998 11,800,000 11,749,000
Additional paid-in capital 28,568,000 28,096,000
Unrealized gain on marketable securities 169,000 --
Retained earnings 63,478,000 52,544,000
Less: Treasury stock, at cost, 10,000 shares in 1998 -- (210,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 104,015,000 92,179,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 268,168,000 $ 125,475,000
============= =============
</TABLE>
See accompanying notes.
27
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,232,000 $ 17,799,000 $ 19,663,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Income receivable - life insurance proceeds -- (1,000,000) --
Depreciation, amortization and depletion 9,706,000 7,738,000 7,080,000
Non-cash compensation expense 3,000 320,000 360,000
Deferred income taxes 2,187,000 1,616,000 1,460,000
Loss on sale of assets 124,000 52,000 44,000
Changes in current assets and liabilities:
Accounts receivable (5,227,000) 282,000 (2,166,000)
Income tax refunds receivable 161,000 (158,000) 408,000
Inventories (2,484,000) (1,109,000) (608,000)
Prepaid expenses (51,000) (191,000) (77,000)
Accounts payable and accrued liabilities 3,819,000 3,353,000 2,783,000
Income taxes payable 1,333,000 (203,000) 203,000
Accrued interest payable 4,448,000 -- (283,000)
Other assets and liabilities (220,000) (200,000) (177,000)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,031,000 28,299,000 28,690,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (135,471,000) (31,191,000) (11,556,000)
Proceeds from sale of property, plant and equipment 128,000 56,000 66,000
Proceeds from life insurance policy 1,000,000 -- --
Purchases of investments -- (11,470,000) (22,510,000)
Proceeds from sale of investments -- 12,120,000 34,185,000
------------- ------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (134,343,000) (30,485,000) 185,000
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (4,238,000) (4,215,000) (4,020,000)
Net proceeds under lines of credit 19,050,000 5,950,000 --
Net proceeds (payments) from issuance of debt 100,000,000 -- (24,840,000)
Payments for debt issue costs (5,105,000) (291,000) --
Proceeds from stock options exercised including related
tax benefits 523,000 302,000 247,000
Purchase of common treasury stock -- -- (1,069,000)
Issuance of common treasury stock 150,000 128,000 --
------------- ------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 110,380,000 1,874,000 (29,682,000)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,068,000 (312,000) (807,000)
Cash and cash equivalents at beginning of year 1,124,000 1,436,000 2,243,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,192,000 $ 1,124,000 $ 1,436,000
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for
Income taxes, net of refunds $ 6,027,000 $ 9,127,000 $ 9,407,000
Interest $ 5,172,000 $ 5,000 $ 1,759,000
------------- ------------- -------------
</TABLE>
See accompanying notes
28
<PAGE> 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Treasury Stock
Common Additional Unrealized Gain ----------------------- Total
Stock, $1 Paid-In Retained On Marketable Amount Stockholders' Comprehensive
In thousands Par Value Capital Earnings Securities Shares at cost Equity Income
--------- ---------- -------- --------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $ 10,607 $ 12,462 $ 39,595 $ -- -- $ -- $ 62,664
--------- --------- --------- --------- --------- --------- ---------
Net income -- -- 19,663 -- -- -- 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) --
Issuance of treasury shares -- -- (16) -- (18) 376 360 --
Exercise of stock options 45 202 -- -- -- -- 247 --
Total comprehensive income -- -- -- -- -- -- -- $ 19,663
--------- --------- --------- --------- --------- --------- --------- =========
BALANCE AT JUNE 30, 1997 $ 11,716 $ 27,827 $ 38,995 $ -- 33 $ (693) $ 77,845
--------- --------- --------- --------- --------- --------- ---------
Net income -- -- 17,799 -- -- -- 17,799 $ 17,799
Cash dividends on common
stock, $.36 per share -- -- (4,215) -- -- -- (4,215) --
Issuance of treasury shares -- -- (35) -- (23) 483 448 --
Exercise of stock options 33 269 -- -- -- -- 302 --
---------
Total comprehensive income -- -- -- -- -- -- -- $ 17,799
--------- --------- --------- --------- --------- --------- --------- =========
BALANCE AT JUNE 30, 1998 $ 11,749 $ 28,096 $ 52,544 $ -- 10 $ (210) $ 92,179
--------- --------- --------- --------- --------- --------- ---------
Net income -- -- 15,232 -- -- -- 15,232 $ 15,232
Cash dividends on common
stock, $.36 per share -- -- (4,238) -- -- -- (4,238) --
Issuance of treasury shares -- -- (60) -- (10) 210 150 --
Exercise of stock options 51 472 -- -- -- -- 523 --
Unrealized gain on
marketable securities -- -- -- 169 -- -- 169 169
---------
Total comprehensive income -- -- -- -- -- -- -- $ 15,401
--------- --------- --------- --------- --------- --------- --------- =========
BALANCE AT JUNE 30, 1999 $ 11,800 $ 28,568 $ 63,478 $ 169 -- $ -- $ 104,015
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, 1998, and 1997
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.
INVESTMENTS IN MARKETABLE SECURITIES
The Company's investments in marketable securities are classified as
available-for-sale securities and are reported at fair value with unrealized
gains excluded from earnings and reported as a separate component of
stockholders' equity, net of tax.
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.
State income tax credits earned in conjunction with plant construction or
expansion are recognized ratably over the average life of the related property.
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>
1999
Shipment units:
Gypsum wallboard (MSF) 589,894 -- -- 589,894
Recycled paperboard (tons) -- 185,793 (27,567) 158,226
Recovered paper fiber (tons) -- 179,286 (84,125) 95,161
========== ========== ========== ==========
Gross sales (in thousands)
Gypsum wallboard $ 89,678 $ -- $ -- $ 89,678
Recycled paperboard -- 62,927 -- 62,927
Recovered paper fiber -- 11,556 (5,281) 6,275
Intrasegment fiber sales -- (5,281) 5,281 --
Intersegment paperboard sales -- 10,095 (10,095) --
Other -- -- 6 6
---------- ---------- ---------- ----------
Gross sales 89,678 79,297 (10,089) 158,886
Less freight and discounts 16,121 4,823 -- 20,944
---------- ---------- ---------- ----------
Net sales $ 73,557 $ 74,474 $ (10,089) $ 137,942
---------- ---------- ---------- ----------
Operating profit $ 28,478 $ 6,530 $ (8,147) $ 26,861
Identifiable assets 70,497 181,258 16,413 268,168
Capital expenditures 22,732 112,285 454 135,471
Depreciation, depletion and amortization 2,981 5,239 1,486 9,706
========== ========== ========== ==========
1998
Shipment units:
Gypsum 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 73,212 8,270 125,475
Capital expenditures 16,612 13,979 600 31,191
Depreciation, depletion and amortization 1,641 5,301 796 7,738
========== ========== ========== ==========
1997
Shipment units:
Gypsum 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
========== ========== ========== ==========
</TABLE>
31
<PAGE> 33
Operations within the gypsum industry consist of the manufacture and sale of
gypsum wallboard. Operations within the paperboard industry consist of (i) the
manufacture and sale of recycled paperboard to the gypsum industry and other
paperboard converters which manufacture composite cans, cores, tubes and other
packaging products, and (ii) the collection and sale of reclaimed paper fiber.
The Company's gypsum wallboard operations are located at 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 at
Hutchinson, Kansas, Commerce City, Colorado, and Halltown, West Virginia and is
in the process of constructing a recycled paperboard mill at Lawton, Oklahoma.
The Lawton mill is anticipated to begin commercial production in the first
quarter of calendar year 2000. The Company's primary markets for recycled
paperboard generally lie within a 600 mile radius of each facility. The Company
operates reclaimed paper fiber recycling centers at Kansas City, Missouri,
Topeka, Kansas, and Denver, Colorado.
During fiscal 1999, approximately 15% of the recycled paperboard shipped by the
mills was consumed by the Company's wallboard operations compared to 14% and 16%
respectively in fiscal 1998 and 1997. Another 23% was shipped to other
unaffiliated gypsum wallboard manufacturers in fiscal 1999 compared to 20% and
19%, respectively, in fiscal 1998 and 1997. An adverse change in the
construction industry could have a material effect on the earnings of the
Company. The Company has no customer in either the gypsum segment or the
paperboard segment who accounted for more than 8% of consolidated gross sales in
fiscal 1999.
Republic Group Incorporated employs approximately 935 people. Approximately 615
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. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
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 sale of the Notes, along with a
credit facility of up to $85,000,000 entered into with a bank syndicate on July
15, 1998, is being used primarily to finance the construction of a new recycled
paperboard mill at Lawton, Oklahoma and for general and corporate purposes
including working capital. On July 15, 1998, the Company used a portion of the
proceeds from the sale of the Notes to repay the outstanding principal balance
of a then existing revolving credit facility along with accrued interest. Upon
repayment, the Company terminated the revolving credit facility. Outstanding
balances under that facility bore interest at a rate equal to LIBOR plus an
agreed margin (ranging from 50 to 150 basis points) or the bank lender's prime
rate less 0.75%.
Interest payment dates on the Notes are January 15 and July 15 and commenced on
January 15, 1999. Each interest payment is $4,750,000. The Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after July
15, 2003, at a redemption price of 104.75% which reduces to 100% on or after
July 15, 2005. In addition, prior to July 15, 2001, the Company may redeem up to
35% of the principal amount of the Notes with the net cash proceeds received by
the Company from one or more public equity offerings, at a redemption price of
109.50%. The Notes include financial and other covenants, and as of June 30,
1999, the fair value of the Notes was approximately $98,500,000.
The $85,000,000 credit facility is being used as a revolving line of credit
until the conversion date. The conversion date is defined as the earlier of July
15, 2000 or start-up of the Lawton mill, which is currently expected to occur
during the first quarter of calendar year 2000. 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 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 credit facility are guaranteed by each of the Company's
material subsidiaries and are secured by a mortgage on the Lawton mill, a pledge
of stock of the Company's subsidiaries and security interests in substantially
all other personal property of the Company and its subsidiaries. At such time,
if any, as outstanding loans under the credit facility
32
<PAGE> 34
exceed $50,000,000, the lenders may require that other real property and
improvements of the Company and its subsidiaries be mortgaged as security for
the credit facility. Outstanding principal amounts on the credit facility bear
interest at a variable rate equal to, at the election of the Company, (i) the
LIBOR, plus an agreed margin (ranging from 75 to 175 points), which is to be
established annually based upon the Company's leverage ratio or (ii) the higher
of (a) Bank of America 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 credit facility are payable quarterly.
Under the 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 (earnings before interest, taxes, depreciation and amortization)
ratio, interest coverage ratio, minimum EBITDA, and limitations on capital
expenditures and dividends. The Company may pay cash dividends and/or redeem its
stock in aggregate amounts of not more than (a) $5,300,000 in each fiscal year
ending on or before the conversion date, (b) $5,500,000 in each of the first and
second fiscal years ending after the conversion date, (c) $6,000,000 in each of
the third and fourth fiscal years ending after the conversion date, and (d)
without limitation thereafter. The credit facility does not restrict the
transfer of funds to the parent by the subsidiaries. As of June 30, 1999, the
Company had outstanding borrowings of $25,000,000 under the credit facility at a
weighted-average interest rate of 6.73%.
Interest expense for the years ending June 30, 1999, 1998 and 1997 was
$4,271,000, $5,000 and $1,476,000 respectively. Additionally, the Company
capitalized interest of approximately $5,904,000 for the year ended June 30,
1999 and none in fiscal years 1998 and 1997. The components of interest include
interest associated with the Notes and credit facility, commitment fees based on
the unused portion of the credit facility and amortization of debt issue costs.
Debt issue costs are being amortized over the lives of the Notes and the credit
facility.
4. 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.
Participants are neither required nor 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. All
contributions to the Plan are subject to a vesting schedule based on years of
service.
During 1999, 1998 and 1997, the Board of Directors of the Company approved
contributions of $348,000, $320,000 and $360,000 respectively, and the
compensation expense was recognized in the financial statements. The 1999
contribution was a cash contribution. The contributions for 1998 and 1997
consisted of common stock issued from treasury shares valued at $320,000 and
$360,000 respectively.
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, in accordance with Financial
Accounting Standard ("FAS") 132, present financial statement disclosures
associated with the Plan.
<TABLE>
<CAPTION>
Years Ended June 30
-----------------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Components of Net Periodic Cost
Service cost $ 65,000 $ 54,000 $ 45,000
Interest cost 114,000 99,000 85,000
Expected return on assets (104,000) (87,000) (71,000)
Amortization of unrecognized net asset at compliance 9,000 9,000 9,000
Amortization of unrecognized prior service cost 28,000 27,000 21,000
Amortization of net gain -- (7,000) (9,000)
--------- -------- --------
Net periodic cost $ 112,000 $ 95,000 $ 80,000
========= ======== ========
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
Years Ended June 30
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,655,000 $ 1,339,000
Service cost 65,000 54,000
Interest cost 114,000 99,000
Actuarial (gain)/loss (126,000) 213,000
Benefits paid (53,000) (50,000)
----------- -----------
Benefit obligation at end of year $ 1,655,000 $ 1,655,000
=========== ===========
Change in Plan Assets
Fair value of assets at beginning of year $ 1,762,000 $ 1,482,000
Actual return on assets 164,000 155,000
Employer contributions 99,000 175,000
Benefits paid (53,000) (50,000)
----------- -----------
Fair value of assets at end of year $ 1,972,000 $ 1,762,000
=========== ===========
Funded Status
Accumulated and projected benefit obligation $(1,655,000) $(1,655,000)
Fair value of assets 1,972,000 1,762,000
Unrecognized net asset 29,000 38,000
Unrecognized prior service cost 257,000 284,000
Unrecognized net gain (299,000) (113,000)
----------- -----------
Prepaid pension cost $ 304,000 $ 316,000
=========== ===========
Weighted-average assumptions as of June 30
Discount rate 7.50% 7.00%
Expected return on plan assets 8.00% 6.00%
</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, 1999
were invested in corporate and government bonds, equities, cash, and cash
equivalents.
Additionally, the Company has a voluntary 401(k) Plan at all Company facilities,
excluding the Hutchinson, Kansas paperboard mill. The 401(k) Plan also includes
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 $516,000, $493,000 and $499,000 during
1999, 1998 and 1997, respectively.
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 is sold to participants is 90% of the
fair market value on the exercise date. Other employee benefit plans include a
Key Employee Continuation Plan to encourage the continued attention and
dedication of key employees.
6. 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 632,000 common
shares were unissued as of June 30, 1999, and is authorized to grant 219,000
shares to directors in the Non-Employee Director Plan of which 68,000 common
shares were unissued as of June 30, 1999. A summary of transactions for the
years ended June 30, 1999, 1998 and 1997 is set forth in the following table:
34
<PAGE> 36
<TABLE>
<CAPTION>
Non-Employee
Shares Rounded to Thousands 1989 Plan Director Plan
-------------------------- ---------------------------
Weighted- Weighted-
Options: Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
-------- -------------- --------- --------------
<S> <C> <C> <C> <C>
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 -- --
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 -- --
Exercised (46,000) 8.94 (1,000) 4.65
-------- -------- -------- --------
Outstanding at June 30, 1998 298,000 $ 13.95 81,000 $ 11.70
-------- -------- -------- --------
Granted 204,000 15.79 15,000 14.63
Cancelled (24,000) 16.19 (2,000) 18.94
Exercised (44,000) 9.78 (16,000) 12.84
-------- -------- -------- --------
Outstanding at June 30, 1999 434,000 $ 15.11 78,000 $ 11.84
======== ======== ======== ========
Exercisable options-June 30, 1999 124,000 $ 12.31 63,000 $ 11.15
======== ======== ======== ========
</TABLE>
The following tables summarize information about stock options outstanding at
June 30, 1999.
<TABLE>
<CAPTION>
1989 Plan
- -----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------- ---------------------------------
Outstanding Weighted-Average Exercisable
Range of as of Remaining Weighted-Average as of Weighted-Average
Exercise Prices June 30, 1999 Contractual Life Exercise Price June 30, 1999 Exercise Price
- ------------------- ------------- ---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 6.23 - $ 8.31 51,000 1.4 $ 8.14 51,000 $ 8.14
10.38 - 12.46 32,000 1.3 10.91 20,000 10.91
14.53 - 16.61 210,000 3.7 15.03 31,000 15.23
16.61 - 18.69 44,000 8.9 17.98 -- --
18.69 - 20.76 97,000 3.9 19.08 22,000 19.10
------- ----- ---------- -------- ---------
434,000 3.8 $ 15.11 124,000 $ 12.31
======= ===== ========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Non-Employee Director Plan
- -----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------- ---------------------------------
Outstanding Weighted-Average Exercisable
Range of as of Remaining Weighted-Average as of Weighted-Average
Exercise Prices June 30, 1999 Contractual Life Exercise Price June 30, 1999 Exercise Price
- ------------------- ------------- ---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.08 - $ 4.15 23,000 19.1 $ 3.41 23,000 $ 3.41
12.46 - 14.53 13,000 12.5 12.84 13,000 12.84
14.53 - 16.61 29,000 13.4 14.90 14,000 15.23
18.69 - 20.76 13,000 12.7 18.94 13,000 18.94
------- ----- ---------- -------- ---------
78,000 14.8 $ 11.84 63,000 $ 11.15
======= ===== ========== ======== =========
</TABLE>
The weighted-average fair value at date of grant for options granted during
1999, 1998 and 1997 was $5.21, $5.97 and $6.20 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
-----------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate 5.75% 5.58% 6.21%
Expected life 4 years 3 years 3 years
Expected volatility 45% 43% 60%
Dividend yield 1.9% 1.8% 1.8%
</TABLE>
35
<PAGE> 37
The Company has adopted the disclosure only provisions of FAS 123, Accounting
for Stock-Based Compensation. Accordingly, no compensation expense has been
recognized for the stock options granted in years ended June 30, 1999, 1998 and
1997. 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
---------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported $ 15,232 $ 17,799 $ 19,663
---------- ---------- ----------
Pro forma 14,885 17,579 19,455
---------- ---------- ----------
Basic earnings per share:
As reported 1.29 1.52 1.68
---------- ---------- ----------
Pro forma 1.26 1.50 1.66
---------- ---------- ----------
Diluted earnings per share:
As reported 1.29 1.51 1.67
---------- ---------- ----------
Pro forma 1.26 1.49 1.65
========== ========== ===========
</TABLE>
The Non-Employee Director Plan provides 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.
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 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.
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 Rights will expire on May 16, 2006.
7. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
In connection with the Company's preparation for a warehouse addition to its
paperboard mill located at 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 owners have
conducted their own investigations. Also, the Company and the adjacent owners
have jointly sponsored investigations. As a result of the most recent jointly
sponsored investigation, the Company again substantially verified the results
obtained in earlier investigations. Additionally, the investigation uncovered
newly discovered environmental conditions that appear to stem from historical
underground storage tank use on the Company's property. The Company notified the
Oil Inspection Section of the Colorado Department of Labor and Employment of the
most recent results. Discussions among the parties continue. The Company has
completed the construction of the warehouse addition under approval of the
Colorado Department of Health. At this time, the Company has not ascertained the
future liability, if any, of the above matters. Environmental expenditures
directly related to these matters were not material during the last three fiscal
years.
36
<PAGE> 38
The Company is in the process of constructing a new recycled paperboard mill at
Lawton, Oklahoma that is expected to cost approximately $170,000,000 inclusive
of capitalized interest and working capital requirements. As of June 30, 1999,
the Company believes it will spend approximately $54,000,000 to complete
construction and begin operations of the Lawton mill. Furthermore, the Company
has a ten year supply agreement with James Hardie Gypsum, Inc. to supply at
least 90% of their requirements of gypsum-grade recycled paperboard from the
Lawton mill beginning in the period between October 2000 and January 2001. This
represents approximately 50% of the Lawton mill's estimated annual productive
capacity of 220,000 tons.
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended June 30
--------------------------------------------------------
1999 1998 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ 6,817,000 $ 7,955,000 $ 8,799,000
State 812,000 812,000 1,219,000
-------------- ---------------- ----------------
7,629,000 8,767,000 10,018,000
-------------- ---------------- ----------------
Deferred income tax 2,079,000 1,616,000 1,460,000
-------------- ---------------- ----------------
Total provision $ 9,708,000 $ 10,383,000 $ 11,478,000
============== ================ ================
</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>
Years Ended June 30
-------------------------------------------------------
1999 1998 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Computed federal tax at statutory rate $ 8,729,000 $ 9,864,000 $ 10,899,000
State taxes, net of federal tax benefit 1,108,000 815,000 792,000
Other (129,000) (296,000) (213,000)
-------------- ---------------- ----------------
$ 9,708,000 $ 10,383,000 $ 11,478,000
============== ================ ================
</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, 1999 and 1998, deferred tax assets (liabilities) as determined under the
provisions of FAS 109, were comprised of the following:
<TABLE>
<CAPTION>
Years Ended June 30
------------------ ------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Gross deferred tax liability:
Depreciation and amortization $ (13,695,000) $ (11,475,000)
Gross deferred tax assets:
Employee benefit accruals 301,000 215,000
Accounts receivable reserves 102,000 258,000
Other 227,000 124,000
---------------- ----------------
Gross deferred assets 630,000 597,000
----------------- ----------------
Net deferred tax liability $ (13,065,000) $ (10,878,000)
================= ================
</TABLE>
9. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net income by the sum of the
weighted-average number of shares and the number of equivalent shares assumed
outstanding under the Company's stock-based compensation plans. Diluted earnings
per share are computed as follows:
<TABLE>
<CAPTION>
Years Ended June 30
---------------------------------------------------
(in thousands, except per share amounts) Income Shares Per-Share Amount
----------- ------ ----------------
<S> <C> <C> <C>
1999
Basic earnings $ 15,232 11,771 $ 1.29
Effects of dilutive securities-options -- 80 --
----------- ------ ----------
Diluted earnings $ 15,232 11,851 $ 1.29
----------- ------ ----------
</TABLE>
37
<PAGE> 39
<TABLE>
<S> <C> <C> <C>
1998
Basic earnings $ 17,799 11,705 $ 1.52
Effects of dilutive securities-options -- 93 (.01)
----------- ------ ----------
Diluted earnings $ 17,799 11,798 $ 1.51
----------- ------ ----------
1997
Basic earnings $ 19,663 11,698 $ 1.68
Effects of dilutive securities-options -- 97 (.01)
----------- ------ ----------
Diluted earnings $ 19,663 11,795 $ 1.67
=========== ====== ==========
</TABLE>
Options to purchase 152,425 shares of common stock at prices ranging from $17.75
to $20.76 were outstanding for the year ended June 30, 1999. Options to purchase
10,541 shares of common stock at the price of $20.76 were outstanding for the
year ended June 30, 1998. Options to purchase 90,750 shares of common stock at
the price of $15.23 were outstanding for the year ended June 30, 1997. These
shares were not included in the calculation of diluted earnings per share due to
the options exercise price being 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 (UNAUDITED)
The following tabulation presents selected results of operations for the years
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands, except per share amounts): Quarters Ended
---------------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
1999
Gross sales $ 38,196 $ 36,722 $ 35,576 $ 48,392
Less freight and discounts 5,011 4,477 4,686 6,770
------------ ------------- ------------ ------------
Net sales $ 33,185 $ 32,245 $ 30,890 $ 41,622
============ ============= ============ ============
Operating profit $ 6,076 $ 6,633 $ 4,234 $ 9,918
Net income 3,285 3,778 2,394 5,775
Basic earnings per share 0.28 0.32 0.20 0.49
Diluted earnings per share 0.28 0.32 0.20 0.49
============ ============= ============ ============
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
============ ============= ============ ============
</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, 1999 and
1998, and the related consolidated statements of income, cash flows and
stockholders' equity for each of the three years in the period ended June 30,
1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
July 29, 1999
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 President and Chief Financial Officer
August 23, 1999 August 23, 1999
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 1999 Proxy
Statement for the annual meeting of the stockholders to be held on October 28,
1999 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 1999 Proxy Statement for the annual meeting of
stockholders to be held on October 28, 1999 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 1999
Proxy Statement regarding beneficial ownership of shares of the Company's Common
Stock as of August 31, 1999 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 caption "Election of Directors" in the Company's 1999
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--Item 8--Index to Financial Statements and Schedules of Registrant.
2. Financial Statement Schedules
See--Item 8--Index to Financial Statements and Schedules of Registrant.
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 "Compensation of Directors--Director Retirement
Compensation Arrangement" in the Company's Proxy Statement for the
Annual Meeting of Stockholders held October 22, 1998, 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(c) 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(c) 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 43 of this Report.
27 Article 5 of Regulation S-X.
(b) Reports on Form 8-K.
None
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 8, 1999
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 8, 1999
- ---------------------------------------- President and Director
Phil Simpson (principal executive officer)
/s/ Doyle R. Ramsey Executive Vice President and September 8, 1999
- ---------------------------------------- Chief Financial Officer
Doyle R. Ramsey (principal financial officer)
/s/ Michael W. Dirks Vice President - Finance September 8, 1999
- ---------------------------------------- (principal accounting officer)
Michael W. Dirks
/s/ C. William Claypool Director September 10, 1999
- ----------------------------------------
C. William Claypool
/s/ Bert A. Nelson Director September 10, 1999
- ----------------------------------------
Bert A. Nelson
/s/ Talbot Rain Director September 10, 1999
- ----------------------------------------
Talbot Rain
/s/ Gerald L. Ray Director September 10, 1999
- ----------------------------------------
Gerald L. Ray
/s/ Robert F. Sexton Director September 10, 1999
- ----------------------------------------
Robert F. Sexton
/s/ L. L. Wallace Director September 10, 1999
- ----------------------------------------
L. L. Wallace
/s/ David B. Yarbrough Director September 10, 1999
- ----------------------------------------
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 29, 1999. 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 29, 1999
S-1
<PAGE> 47
REPUBLIC GROUP INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended June 30, 1997, 1998, and 1999
<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>
1997:
Allowance for
doubtful
accounts $ 633,000 $ 117,000 $ -- $ (2,000) $748,000
========= ========= ========= ======== ========
1998:
Allowance for
doubtful
accounts $ 748,000 $ -- $ -- $(67,000) $681,000
========= ========= ========= ======== ========
1999:
Allowance for
doubtful
accounts $ 681,000 $ -- $(155,000) $ (6,000) $520,000
========= ========= ========= ======== ========
</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
27.699 Financial Data Schedule for the fourth quarter of 1999 (for SEC use only)
27.698 Financial Data Schedule for the fourth quarter of 1998 (for SEC use only)
27.697 Financial Data Schedule for the fourth quarter of 1997 (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES OF REGISTRANT
The following list indicates each subsidiary of the Company; all are
wholly-owned by the Company, except for the Hollis & Eastern Railroad Company,
of which the Company owns 99.3% of the Common Stock. Republic Paperboard Company
of West Virginia is a subsidiary of Republic Paperboard Company. Republic
Paperboard Company of West Virginia does business under the name Halltown
Paperboard Company. Each other subsidiary does business under its corporate
name. The Consolidated financial statements filed herewith include the accounts
of each of such subsidiaries.
<TABLE>
<CAPTION>
Subsidiaries State of Incorporation
------------ ----------------------
<S> <C>
Republic Gypsum Company Oklahoma
Republic Paperboard Company Kansas
Republic Paperboard Company of West Virginia West Virginia
Hollis & Eastern Railroad Company Oklahoma
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Post-Effective Amendment No. 6 to the Form S-8 Registration Statement File No.
2-69991, into the Company's previously filed Post-Effective Amendment No. 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, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,192,000
<SECURITIES> 0
<RECEIVABLES> 19,358,000
<ALLOWANCES> 520,000
<INVENTORY> 10,934,000
<CURRENT-ASSETS> 37,987,000
<PP&E> 285,938,000
<DEPRECIATION> 61,989,000
<TOTAL-ASSETS> 268,168,000
<CURRENT-LIABILITIES> 24,861,000
<BONDS> 0
0
0
<COMMON> 11,800,000
<OTHER-SE> 92,215,000
<TOTAL-LIABILITY-AND-EQUITY> 268,168,000
<SALES> 158,886,000
<TOTAL-REVENUES> 158,886,000
<CGS> 92,128,000
<TOTAL-COSTS> 92,128,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,271,000
<INCOME-PRETAX> 24,940,000
<INCOME-TAX> 9,708,000
<INCOME-CONTINUING> 15,232,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,232,000
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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
11,749,000
0
<COMMON> 0
<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-BASIC> 1.52
<EPS-DILUTED> 1.51
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,436,000
<SECURITIES> 650,000
<RECEIVABLES> 14,641,000
<ALLOWANCES> 748,000
<INVENTORY> 7,341,000
<CURRENT-ASSETS> 25,050,000
<PP&E> 121,460,000
<DEPRECIATION> 46,985,000
<TOTAL-ASSETS> 100,400,000
<CURRENT-LIABILITIES> 12,111,000
<BONDS> 0
0
0
<COMMON> 11,716,000
<OTHER-SE> 66,129,000
<TOTAL-LIABILITY-AND-EQUITY> 100,400,000
<SALES> 144,234,000
<TOTAL-REVENUES> 144,234,000
<CGS> 77,596,000
<TOTAL-COSTS> 77,596,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,476,000
<INCOME-PRETAX> 31,141,000
<INCOME-TAX> 11,478,000
<INCOME-CONTINUING> 19,663,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,663,000
<EPS-BASIC> 1.68
<EPS-DILUTED> 1.67
</TABLE>
