<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 75-1155922
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
811 East 30th Avenue, Hutchinson, Kansas 67502-4341
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Post Office Box 1307, Hutchinson, Kansas 67504-1307
- ---------------------------------------- ----------
(Mailing Address) (Zip code)
316-727-2700
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
--- ---
On October 31, 1999, there were 11,817,966 shares of the registrant's Common
Stock, $1.00 par value outstanding.
<PAGE> 2
REPUBLIC GROUP INCORPORATED
FORM 10-Q
Quarterly Report
For The Three Months Ended September 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Reference is made to pages 2 through 9 containing certain consolidated
financial statements of Registrant in accordance with Part I of Form
10-Q.
The consolidated financial statements include the accounts of Republic
Group Incorporated and its wholly owned subsidiaries (collectively
referred to as the "Company").
<PAGE> 3
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended September 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Gross sales ................................... $ 53,232,000 $ 38,196,000
Less freight and discounts .................... 6,744,000 5,011,000
------------ ------------
Net sales ..................................... 46,488,000 33,185,000
Costs and expenses:
Cost of sales ............................ 30,230,000 22,586,000
Selling and administrative expenses ...... 5,646,000 4,523,000
------------ ------------
35,876,000 27,109,000
------------ ------------
Operating profit .............................. 10,612,000 6,076,000
Other expense, net ............................ (47,000) (776,000)
------------ ------------
Income before income taxes .................... 10,565,000 5,300,000
Provision for income taxes .................... 4,224,000 2,015,000
------------ ------------
NET INCOME .................................... $ 6,341,000 $ 3,285,000
============ ============
Basic earnings per share ...................... $ 0.54 $ 0.28
============ ============
Basic weighted average shares outstanding ..... 11,802,000 11,748,000
============ ============
Diluted earnings per share .................... $ 0.53 $ 0.28
============ ============
Diluted weighted average shares outstanding ... 11,869,000 11,827,000
============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 4
REPUBLIC GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and June 30, 1999
<TABLE>
<CAPTION>
Sept. 30, 1999 June 30, 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 3,797,000 $ 6,192,000
Accounts receivable, net ......................... 22,681,000 18,838,000
Income tax refunds receivable .................... 395,000 491,000
Inventories:
Finished goods ................................. 2,855,000 3,396,000
Raw materials and supplies ..................... 8,221,000 7,538,000
------------ ------------
11,076,000 10,934,000
Prepaid expenses and other ....................... 679,000 902,000
Deferred income taxes ............................ 630,000 630,000
------------ ------------
TOTAL CURRENT ASSETS ........................... 39,258,000 37,987,000
Property, plant and equipment, at cost ........... 323,384,000 285,938,000
Less accumulated depreciation, amortization and
depletion ...................................... 64,460,000 61,989,000
------------ ------------
258,924,000 223,949,000
Unamortized debt issue costs ........................ 4,619,000 4,780,000
Other assets ........................................ 1,637,000 1,452,000
------------ ------------
TOTAL ASSETS ........................................ $304,438,000 $268,168,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 15,319,000 $ 14,021,000
Accrued payroll and employee benefits ............ 3,641,000 3,475,000
Income taxes payable ............................. 3,308,000 1,333,000
Accrued interest payable ......................... 2,224,000 4,448,000
Other current liabilities ........................ 1,762,000 1,584,000
------------ ------------
TOTAL CURRENT LIABILITIES ...................... 26,254,000 24,861,000
Long-term debt due after one year ................... 154,000,000 125,000,000
Deferred income taxes ............................... 14,206,000 13,695,000
Other long-term liabilities ......................... 593,000 597,000
Commitments and contingencies-see notes
STOCKHOLDERS' EQUITY:
Common stock, $1 par value ....................... 11,808,000 11,800,000
Additional paid-in capital ....................... 28,641,000 28,568,000
Unrealized gain on marketable securities ......... 178,000 169,000
Retained earnings ................................ 68,758,000 63,478,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ..................... 109,385,000 104,015,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $304,438,000 $268,168,000
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 6,341,000 $ 3,285,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization ............. 2,723,000 2,095,000
Non-cash compensation expense ........................ -- 3,000
Deferred income taxes ................................ 511,000 --
Loss (gain) on sale of assets ........................ (13,000) 112,000
Changes in current assets and liabilities:
Accounts receivable ............................. (3,843,000) (272,000)
Income tax refunds receivable ................... 96,000 405,000
Inventories ..................................... (142,000) 413,000
Prepaid expenses ................................ 223,000 116,000
Accounts payable and accrued liabilities ........ 1,642,000 (2,509,000)
Income taxes payable ............................ 1,975,000 1,616,000
Accrued interest payable ........................ (2,224,000) 2,004,000
Other assets and liabilities ......................... (180,000) (51,000)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 7,109,000 7,217,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............... (37,550,000) (22,350,000)
Proceeds from sale of property, plant and equipment ...... 26,000 32,000
Proceeds from life insurance policy ...................... -- 1,000,000
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES .................... (37,524,000) (21,318,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ........................................... (1,062,000) (1,058,000)
Net proceeds (payments) under lines of credit ............ 29,000,000 (5,950,000)
Proceeds from issuance of debt ........................... -- 100,000,000
Payments for debt issue costs ............................ -- (4,618,000)
Proceeds from stock options exercised including related
tax benefits ......................................... 82,000 207,000
Issuance of common treasury stock ........................ -- 41,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................ 28,020,000 88,622,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... (2,395,000) 74,521,000
Cash and cash equivalents at beginning of year ................ 6,192,000 1,124,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 3,797,000 $ 75,645,000
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the three months ended September 30 for:
Income taxes, net of refunds ............................. $ 1,641,000 $ (6,000)
------------- -------------
Interest ................................................. $ 5,326,000 $ 3,000
------------- -------------
</TABLE>
See accompanying notes.
4
<PAGE> 6
REPUBLIC GROUP INCORPORATED
Notes to Consolidated Financial Statements
September 30, 1999 and 1998 (Unaudited)
(1) In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements reflect all adjustments, of a normal
recurring nature, to fairly present the Company's financial position as of
September 30, 1999, and the results of operations and cash flows for the
periods ended September 30, 1999 and 1998. The operating results for the
interim periods are not necessarily indicative of the results to be
expected for a full year. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's Annual Report on Form
10-K as of June 30, 1999.
(2) Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed by dividing net income by the sum
of the weighted average number of shares and the number of equivalent
shares assumed outstanding under the Company's stock-based compensation
plans. Diluted earnings per share are computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------------------------------------------------------------
September 30, 1999 September 30, 1998
---------------------------------------------------------------------------------
(in thousands) (in thousands)
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share $ 6,341 11,802 $ .54 $ 3,285 11,748 $ .28
Effects of dilutive
securities-options -- 67 (.01) -- 79 --
-------- ------ ------ -------- ------ ------
Diluted earnings
per share $ 6,341 11,869 $ .53 $ 3,285 11,827 $ .28
======== ====== ====== ======== ====== ======
</TABLE>
Options to purchase 149,525 shares of common stock at prices ranging from
$17.75 to $20.76 were outstanding for the three months ended September 30,
1999. Options to purchase 116,300 shares of common stock at prices ranging
from $18.88 to $20.76 were outstanding for the three months ended September
30, 1998. These shares were not included in the diluted earnings per share
calculation because the options' exercise prices were greater than the
average market price of the common shares for the above periods.
(3) Other Commitments and Contingent Liabilities: In connection with the
Company's preparation for a warehouse addition to its paperboard mill
located 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
5
<PAGE> 7
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.
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 to $175,000,000 inclusive of capitalized interest and working
capital requirements. Of that amount, the Company believes, as of September
30, 1999, it will spend $20,000,000 to $25,000,000 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.
(4) Reclassification: Certain prior year balances have been reclassified to
conform with current year presentation.
(5) Subsequent Event: On October 28, 1999, the Board of Directors of the
Company declared a quarterly cash dividend of $0.09 per share of common
stock to be paid on December 15, 1999 to stockholders of record on November
30, 1999. Dividend payments will total approximately $1,064,000.
(6) Income Taxes: The provisions for income taxes are based on estimated annual
effective tax rates, which differ from the federal statutory rates
principally due to state income taxes and certain non-deductible expenses.
(7) Long Term Debt: On July 15, 1998, the Company received proceeds from the
issuance of $100,000,000 of 9.5% Senior Subordinated Notes (the "Notes")
with a maturity date of July 15, 2008. The proceeds from the Notes, along
with a new bank credit facility of up to $85,000,000 entered into with a
bank syndicate on July 15, 1998, will be used primarily to finance the
construction of the Lawton, Oklahoma recycled paperboard mill and for
general and corporate purposes including working capital. On July 15, 1998,
the Company used a portion of the proceeds from the Notes to repay the
outstanding principal balance of a then existing revolving credit facility
dated as of June 30, 1995 (as amended) with NationsBank, N.A., along with
accrued interest. Upon repayment, the Company ended the NationsBank, N.A.
revolving credit facility.
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,
6
<PAGE> 8
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 $54,000,000
under the credit facility as of September 30, 1999 at a weighted-average
interest rate of 6.94%.
(8) Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The following is
the Company's segment information for the quarter ended September 30, 1999
and 1998.
7
<PAGE> 9
QUARTERS ENDED SEPTEMBER 30 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------- ----------------------------------------------
Gypsum Recycled Elim.'s Gypsum Recycled Elim.'s
Wallboard Paperboard And Other Consolidated Wallboard Paperboard And Other Consolidated
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shipment units:
Wallboard (MSF) 199,117 199,117 138,955 138,955
Recycled paperboard (tons) 42,236 (4,897) 37,339 46,316 (4,630) 41,686
Recovered paper fiber (tons) 60,497 (30,590) 29,907 42,779 (20,378) 22,401
--------- -------- -------- -------- --------- --------- --------- ---------
Gross sales (in thousands):
Gypsum wallboard $ 35,284 $ $ $ 35,284 $ 19,634 $ $ $ 19,634
Recycled paperboard 15,165 15,165 16,953 16,953
Recovered paper fiber 5,780 (3,000) 2,780 2,935 (1,327) 1,608
Intrasegment fiber sales (3,000) 3,000 -- (1,327) 1,327 --
Intersegment paperboard 1,878 (1,878) -- 1,694 (1,694) --
sales
Other 3 3 1 1
--------- -------- -------- -------- --------- --------- --------- ---------
Gross sales 35,284 19,823 (1,875) 53,232 19,634 20,255 (1,693) 38,196
Less freight and discounts 5,523 1,220 1 6,744 3,655 1,356 -- 5,011
--------- -------- -------- -------- --------- --------- --------- ---------
Net sales $ 29,761 $ 18,603 $ (1,876) $ 46,488 $ 15,979 $ 18,899 $ (1,693) $ 33,185
--------- -------- -------- -------- --------- --------- --------- ---------
Operating profit $ 14,610 $ (1,826) $ (2,172) $ 10,612 $ 6,440 $ 1,706 $ (2,070) $ 6,076
Identifiable assets 72,922 216,909 14,607 304,438 52,473 84,931 85,660 223,064
Capital expenditures 1,015 35,574 961 37,550 8,576 13,652 122 22,350
Depreciation, depletion and
amortization 1,034 1,309 380 2,723 486 1,290 319 2,095
--------- -------- -------- -------- --------- --------- --------- ---------
</TABLE>
The Company's operations within the gypsum industry consist of the
manufacture and sale of gypsum wallboard. Operations within the paperboard
industry consist of (i) the manufacture and sale of recycled paperboard to
the gypsum industry and other paperboard converters which manufacture
composite cans, cores, tubes and other packaging products, and (ii) the
collection and sale of recovered paper fiber. The Company's gypsum
wallboard operations are located 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 which is expected to commence commercial production during the
first quarter of calendar year 2000. The Company's primary markets for
recycled paperboard are generally within a 600 mile radius of the
facilities. The Company operates reclaimed paper fiber recycling centers at
Kansas City, Missouri, Topeka, Kansas, and Denver, Colorado with the
corresponding markets within a 600 mile radius of the centers.
Republic Group Incorporated employs approximately 1,030 people,
approximately 665 of whom are covered by collective bargaining units with
four labor unions. The expirations of current bargaining agreements range
from 2000 to 2004. The Company believes its relations with employees are
satisfactory.
Operating profit is net sales less operating expenses. Sales between
segments are made at approximately market price. Identifiable assets by
industry segment are those used in each segment at period-end. Eliminations
and other include general corporate assets, principally cash, securities,
property and equipment and expenses.
8
<PAGE> 10
(9) The following components are included in other expense, net:
<TABLE>
<CAPTION>
Quarters Ended
--------------
September 30
------------
1999 1998
------------- --------------
<S> <C> <C>
Interest expense $ (3,263,000) $ (2,094,000)
Less: Capitalized portion 3,132,000 603,000
------------- --------------
Net interest expense (131,000) (1,491,000)
Interest income 66,000 811,000
Miscellaneous income (expense) 18,000 (96,000)
------------- --------------
Other expense, net $ (47,000) $ (776,000)
============= ==============
</TABLE>
Components of interest expense include interest associated with the Notes
and bank credit facility, commitment fees based on the unused portion of
the bank credit facility and amortization of debt issue costs.
9
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters Ended September 30, 1999 and 1998.
Consolidated Results. Consolidated net income increased 93% to $6,341,000 or
$0.53 per diluted share from $3,285,000 or $0.28 per diluted share posted in the
September 1998 quarter. For the September 1999 quarter, net sales increased 40%
to $46,488,000 compared to $33,185,000 recorded in the September 1998 quarter.
The Company posted operating profits of $10,612,000 in the September 1999
quarter--a 75% improvement over the same quarter one year ago. The principal
factors influencing the Company's achievements for the current quarter were
record shipments of 199 million square feet of gypsum wallboard--an increase of
43%--and a 25% increase in selling prices of gypsum wallboard from the September
1998 quarter. Consolidated net income in the September 1999 quarter was
augmented by a $615,000 decrease in interest expense (net of interest income)
from the September 1998 quarter. Substantially all of the Company's interest
expense was capitalized during the September 1999 quarter as
construction-in-progress because the investment in the Lawton, Oklahoma recycled
paperboard mill, currently under construction, was approximately the same as
outstanding debt. A shift in apportionments of income between the states caused
the Company's effective income tax rate to increase to approximately 40% for
fiscal year 2000 versus 38% and 39% for the September 1998 quarter and fiscal
year 1999, respectively.
Gypsum Wallboard Segment Results. Operating profits of $14,610,000 for the
gypsum wallboard segment improved 127% from $6,440,000 recorded in the September
1998 quarter. Those factors listed above related to increased shipments and
selling prices of gypsum wallboard were the primary contributors for the
improved results in the Company's gypsum wallboard segment. The September 1999
quarter was the second full quarter of operations for the expanded Duke,
Oklahoma gypsum wallboard plant. The segment's increase in net sales was
partially offset by an 11% increase in total per unit operating costs compared
to the September 1998 quarter. This was substantially due to inefficiencies with
the slower than anticipated start-up of the expanded plant and additional
depreciation related to the expansion. Total per unit operating costs decreased
approximately 2% from the June 1999 quarter primarily as the result of a 5%
increase in shipments. The Company anticipates continued improvements in per
unit costs, production output and efficiency gains throughout this fiscal year.
Based on the mix of actual products produced, the Company believes its annual
practical capacity of the expanded plant is approximately 1.0 to 1.1 billion
square feet. Demand for gypsum wallboard continues to be strong, and the Company
implemented its second selling price increase of this fiscal year at the
beginning of October.
Recycled Paperboard Segment Results. The Company's recycled paperboard segment
recorded an operating loss of $1,826,000 in the September 1999 quarter compared
to an operating profit of $1,706,000 in the September 1998 quarter. During the
September 1999 quarter, operating profits were negatively affected by a 34%
increase in per unit reclaimed paper fiber costs, the principal raw material
used in the manufacture of recycled paperboard, and a significant increase in
pre-operating costs associated with its new paperboard mill being constructed at
Lawton, Oklahoma.
10
<PAGE> 12
The increase in pre-operating expenses of the Lawton mill project was mainly due
to fully staffing and training new employees in anticipation of start-up. In
response to the rise in fiber costs, the Company started implementing selling
price increases late in the September 1999 quarter. There is generally a
60-to-90 day lag between the incidence of fiber cost changes and selling price
adjustments. Additionally, shipments of recycled paperboard fell 9% from 46,316
tons in the September 1998 quarter to 42,236 tons in the September 1999 quarter.
This was chiefly due to continued weakness in the East Coast uncoated recycled
paperboard market and scheduled down-time at two of the Company's recycled
paperboard mills for routine annual maintenance and new equipment installations.
Expansion Project - Lawton, Oklahoma Recycled Paperboard Mill
Construction of the Company's new recycled paperboard mill at Lawton, Oklahoma
continues to be on schedule with commercial production targeted to commence
during the first quarter of calendar year 2000. Portions of the new plant are
already going through the commissioning phase. The capacity of the Lawton mill
is expected to ultimately reach approximately 220,000 tons annually, after the
start-up phase, and will be used primarily for the production of gypsum-grade
recycled paperboard. The addition of the Lawton mill will essentially double the
Company's current recycled paperboard capacity. Management estimates that the
Lawton mill will cost approximately $170,000,000 to $175,000,000 including
related working capital requirements and capitalized interest.
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)
11
<PAGE> 13
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 $275,000 through September 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.
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.
12
<PAGE> 14
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.
Liquidity and Capital Resources
The following is a summary of certain financial statistics and balances related
to the liquidity and financial condition of the Company at September 30 and June
30, 1999.
<TABLE>
<CAPTION>
$ in thousands September 30, 1999 June 30, 1999
- -------------- ------------------ -------------
<S> <C> <C>
Working capital $ 13,004 $ 13,126
Current ratio 1.5:1 1.5:1
Cash and cash equivalents $ 3,797 $ 6,192
Interest-bearing debt $ 154,000 $ 125,000
</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.
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,
13
<PAGE> 15
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 $54,000,000 under the
credit facility as of September 30, 1999 at a weighted-average interest rate of
6.94%.
The Company funded $37,550,000 of additions to property, plant and equipment and
$1,062,000 in dividends to shareholders with cash generated from operations and
borrowings from its bank credit facility during the three months ended September
30, 1999. Capital expenditures relating to the construction of the Lawton mill
were approximately $34,000,000 during the three-month period. Management
estimates that the Lawton mill will cost, including capitalized interest and
related working capital requirements, approximately $170,000,000 to
$175,000,000. Of that amount, the Company estimates that it will spend
approximately $20,000,000 to $25,000,000 to complete and provide working capital
for the Lawton mill during the remainder of fiscal year 2000. Additionally, the
Company anticipates that it will spend approximately $15,000,000 to $20,000,000
to upgrade equipment at the Company's other facilities during fiscal year 2000.
As of September 30, 1999, the Company had available for borrowing, $31,000,000
of the $85,000,000
14
<PAGE> 16
credit facility. The Company believes that the remaining portion available under
the credit facility, together with cash generated by operations during fiscal
year 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.
On October 28, 1999, the Board of Directors of the Company declared a quarterly
cash dividend of $0.09 per share of common stock to be paid on December 15, 1999
to stockholders of record on November 30, 1999. Dividend payments will total
approximately $1,064,000. 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.
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements within the meaning of the
federal securities laws. These forward-looking statements are based on current
expectations and entail various risks and uncertainties that could cause actual
results to differ materially from those contemplated by the forward-looking
statements due to a number of factors, including general economic conditions,
competition, market acceptance of selling price increases, raw material costs,
facility fuel costs, timely completion and successful operation thereafter of
the on-going capital projects at the Company's Duke, Oklahoma gypsum wallboard
plant and the Lawton, Oklahoma recycled paperboard mill, and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission, including its annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K.
15
<PAGE> 17
Item 3. Quantitative and Qualitative Disclosures About Market Risks
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. At September 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 $5,800,000 in the
fair value of the Notes, assuming a full redemption at July 15, 2008.
At September 30, 1999, the Company had $54,000,000 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 have a $540,000 annual impact on the Company's future
earnings and cash flows based on the Company's outstanding variable rate
borrowings as of September 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.
16
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings involving the
Company or any of its subsidiaries, other than ordinary routine
litigation incidental to the Company's business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on October 28,
1999. The votes cast on each item in order of the listing in the
Proxy was as follows:
1. Election of Directors
<TABLE>
<CAPTION>
Votes Votes To Broker
For Withhold Authority Non-Votes
--- ------------------ ---------
<S> <C> <C> <C>
C. William Claypool 10,789,228 38,535 0
Bert A. Nelson 10,788,948 38,815 0
Talbot Rain 10,782,153 45,610 0
Gerald L. Ray 10,783,173 44,590 0
Robert F. Sexton 10,789,448 38,315 0
Phil Simpson 10,795,055 32,708 0
L. L. Wallace 10,779,593 48,170 0
David B. Yarbrough 10,779,293 48,470 0
</TABLE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Article 5 of Regulation S-X-Financial Data Schedule.
(b) Reports on Form 8-K.
None
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REPUBLIC GROUP INCORPORATED
November 9, 1999 /s/ DOYLE R. RAMSEY
-----------------------------------------
Doyle R. Ramsey
Executive Vice President and
Chief Financial Officer
November 9, 1999 /s/ MICHAEL W. DIRKS
-----------------------------------------
Michael W. Dirks
Vice President - Finance and
Chief Accounting Officer
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27.999 Financial Data Schedule for the first quarter of 2000 (for SEC use
only)
27.998 Financial Data Schedule for the first quarter of 1999 (for SEC use
only)
27.997 Financial Data Schedule for the first quarter of 1998 (for SEC use
only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 3,797,000
<SECURITIES> 0
<RECEIVABLES> 23,284,000
<ALLOWANCES> 603,000
<INVENTORY> 11,076,000
<CURRENT-ASSETS> 39,258,000
<PP&E> 323,384,000
<DEPRECIATION> 64,460,000
<TOTAL-ASSETS> 304,438,000
<CURRENT-LIABILITIES> 26,254,000
<BONDS> 0
0
0
<COMMON> 11,808,000
<OTHER-SE> 97,577,000
<TOTAL-LIABILITY-AND-EQUITY> 304,438,000
<SALES> 53,232,000
<TOTAL-REVENUES> 53,232,000
<CGS> 30,230,000
<TOTAL-COSTS> 30,230,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,000
<INCOME-PRETAX> 10,565,000
<INCOME-TAX> 4,224,000
<INCOME-CONTINUING> 6,341,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,341,000
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 75,645,000
<SECURITIES> 0
<RECEIVABLES> 14,568,000
<ALLOWANCES> 685,000
<INVENTORY> 8,037,000
<CURRENT-ASSETS> 99,144,000
<PP&E> 173,304,000
<DEPRECIATION> 55,253,000
<TOTAL-ASSETS> 223,064,000
<CURRENT-LIABILITIES> 16,322,000
<BONDS> 0
0
0
<COMMON> 11,765,000
<OTHER-SE> 82,892,000
<TOTAL-LIABILITY-AND-EQUITY> 223,064,000
<SALES> 38,196,000
<TOTAL-REVENUES> 38,196,000
<CGS> 22,586,000
<TOTAL-COSTS> 22,586,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,491,000
<INCOME-PRETAX> 5,300,000
<INCOME-TAX> 2,015,000
<INCOME-CONTINUING> 3,285,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,285,000
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 42,000
<SECURITIES> 5,144,000
<RECEIVABLES> 14,191,000
<ALLOWANCES> 750,000
<INVENTORY> 7,816,000
<CURRENT-ASSETS> 27,754,000
<PP&E> 125,186,000
<DEPRECIATION> 48,791,000
<TOTAL-ASSETS> 105,003,000
<CURRENT-LIABILITIES> 13,420,000
<BONDS> 0
0
0
<COMMON> 11,718,000
<OTHER-SE> 69,421,000
<TOTAL-LIABILITY-AND-EQUITY> 105,003,000
<SALES> 37,002,000
<TOTAL-REVENUES> 37,002,000
<CGS> 21,383,000
<TOTAL-COSTS> 21,383,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> 6,977,000
<INCOME-TAX> 2,651,000
<INCOME-CONTINUING> 4,326,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,326,00
<EPS-BASIC> .37
<EPS-DILUTED> .37
</TABLE>
