<PAGE>
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, 2000
------------------
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 incorporation (I.R.S. Employer Identification
or organization) 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, 2000, there were 11,855,637 shares of the registrant's Common
Stock, $1.00 par value outstanding.
<PAGE>
REPUBLIC GROUP INCORPORATED
FORM 10-Q
Quarterly Report
For The Three Months Ended September 30, 2000
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 (individually
and, together with its subsidiaries, the "Company").
<PAGE>
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 2000 and 1999 (Unaudited)
<TABLE>
2000 1999
---------------------- ----------------------
<S> <C> <C>
Gross sales.................................................... $ 48,334,000 $ 53,232,000
Less freight and discounts..................................... 6,881,000 6,744,000
---------------------- ----------------------
Net sales...................................................... 41,453,000 46,488,000
Costs and expenses:
Cost of sales................................................ 41,094,000 30,230,000
Selling and administrative expenses.......................... 4,774,000 5,646,000
---------------------- ----------------------
45,868,000 35,876,000
---------------------- ----------------------
Operating profit (loss)........................................ (4,415,000) 10,612,000
Other expense, net........................................... (4,839,000) (47,000)
---------------------- ----------------------
Income (loss) before income taxes.............................. (9,254,000) 10,565,000
Provision (benefit) for income taxes........................... (3,702,000) 4,224,000
---------------------- ----------------------
Net income (loss).............................................. $ (5,552,000) $ 6,341,000
====================== ======================
Basic earnings (loss) per share................................ $ (0.47) $ 0.54
====================== ======================
Basic weighted average shares outstanding...................... 11,847,000 11,802,000
====================== ======================
Diluted earnings (loss) per share.............................. $ (0.47) $ 0.53
====================== ======================
Diluted weighted average shares outstanding.................... 11,847,000 11,869,000
====================== ======================
</TABLE>
See accompanying notes.
2
<PAGE>
REPUBLIC GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and June 30, 2000
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
--------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 7,403,000 $ 7,414,000
Accounts receivable, net.................................... 18,312,000 22,020,000
Income tax refunds receivable............................... 6,602,000 16,945,000
Inventories:
Finished goods............................................. 9,334,000 7,200,000
Raw materials and supplies................................. 11,856,000 12,774,000
--------------------- ---------------------
21,190,000 19,974,000
Prepaid expenses and other.................................. 827,000 811,000
Deferred income taxes....................................... 952,000 952,000
--------------------- ---------------------
Total current assets....................................... 55,286,000 68,116,000
Property, plant and equipment, at cost...................... 333,950,000 332,386,000
Less accumulated depreciation, amortization and
depletion.................................................. 69,478,000 64,896,000
--------------------- ---------------------
264,472,000 267,490,000
Unamortized debt issue costs................................. 4,192,000 4,476,000
Other assets................................................. 9,163,000 9,081,000
--------------------- ---------------------
Total assets................................................. $ 333,113,000 $ 349,163,000
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 11,901,000 $ 14,483,000
Accrued payroll and employee benefits....................... 2,578,000 3,742,000
Accrued interest payable.................................... 2,533,000 4,741,000
Other current liabilities................................... 1,956,000 1,412,000
Short-term notes payable.................................... 1,500,000 1,500,000
Current portion of long-term debt........................... 9,000,000 7,500,000
--------------------- ---------------------
Total current liabilities.................................. 29,468,000 33,378,000
Long-term debt due after one year............................ 188,000,000 191,000,000
Deferred income taxes........................................ 17,743,000 21,431,000
Other long-term liabilities.................................. 455,000 442,000
Commitments and contingencies-see notes
Stockholders' equity:
Common stock, $1 par value.................................. 11,849,000 11,842,000
Additional paid-in capital.................................. 28,967,000 28,898,000
Unrealized gain on marketable securities.................... 201,000 190,000
Retained earnings........................................... 56,430,000 61,982,000
--------------------- ---------------------
Total stockholders' equity................................. 97,447,000 102,912,000
Total liabilities and stockholders' equity................... $ 333,113,000 $ 349,163,000
===================== =====================
</TABLE>
See accompanying notes.
3
<PAGE>
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ (5,552,000) $ 6,341,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization................ 4,930,000 2,723,000
Deferred income taxes................................... (3,688,000) 511,000
Gain on sale of assets.................................. (18,000) (13,000)
Changes in current assets and liabilities:
Accounts receivable................................... 3,708,000 (3,843,000)
Income tax refunds receivable......................... 10,343,000 96,000
Inventories........................................... (1,216,000) (142,000)
Prepaid expenses...................................... (16,000) 223,000
Accounts payable and accrued liabilities.............. (3,202,000) 1,642,000
Income taxes payable.................................. -- 1,975,000
Accrued interest payable.............................. (2,208,000) (2,224,000)
Other assets and liabilities............................ (57,000) (180,000)
--------------------- ---------------------
Net cash provided by operating activities.................. 3,024,000 7,109,000
--------------------- ---------------------
Cash flows from investing activities:
Additions to property, plant and equipment................. (1,642,000) (37,550,000)
Proceeds from sale of property, plant and equipment........ 28,000 26,000
Net cash used by investing activities...................... (1,614,000) (37,524,000)
--------------------- ---------------------
Cash flows from financing activities:
Dividends paid............................................. -- (1,062,000)
Net proceeds (payments) under lines of credit.............. (1,500,000) 29,000,000
Payments for debt issue costs.............................. 4,000 --
Proceeds from exercised stock options including related
tax benefits............................................ 75,000 82,000
--------------------- ---------------------
Net cash provided (used) by financing activities........... (1,421,000) 28,020,000
--------------------- ---------------------
Net decrease in cash and cash equivalents.................... (11,000) (2,395,000)
Cash and cash equivalents at beginning of year............... 7,414,000 6,192,000
--------------------- ---------------------
Cash and cash equivalents at end of period................... $ 7,403,000 $ 3,797,000
===================== =====================
</TABLE>
<TABLE>
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the three months ended September 30 for:
Income taxes, net of refunds $ (10,357,000) $ 1,641,000
---------------------------------------------------------------------------------------------------------------
Interest $ 6,926,000 $ 5,326,000
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
REPUBLIC GROUP INCORPORATED
Notes to Consolidated Financial Statements
September 30, 2000 and 1999 (Unaudited)
(1) On August 11, 2000, Republic Group Incorporated ("Republic" or the
"Company") entered into an Agreement and Plan of Merger with Premier
Construction Products Statutory Trust ("Premier') and Premier Construction
Products Acquisition Corp. ("Acquisition Sub") (the "Premier Merger
Agreement") pursuant to which Acquisition Sub would be merged into the
Company, all outstanding shares of Common Stock of the Company would be
converted into the right to receive $19.00 in cash, and the Company would
become a wholly-owned subsidiary of Premier (the "Premier Merger"). The
Stockholders' meeting is scheduled for November 9th, 2000, with closing
anticipated to be soon thereafter.
(2) 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, 2000, and the results of operations and cash flows for the
periods ended September 30, 2000 and 1999. 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, 2000.
(3) Basic earnings (loss) per share are computed by dividing net income (loss)
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 dilutive
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, 2000 September 30, 1999
------------------------------------------------------------------------------------------------------------------
(in thousands) Per-Share (in thousands) Per-Share
Net Income (Loss) Shares Amount Net Income (Loss) Shares Amount
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
(loss) per share $ (5,552) 11,847 $ (0.47) $ 6,341 11,802 $ 0.54
Effects of dilutive
securities-options -- -- -- -- 67 (.01)
-----------------------------------------------------------------------------------
Diluted earnings
(loss) per share $ (5,552) 11,847 $ (0.47) $ 6,341 11,869 $ 0.53
------------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 596,443 shares of common stock at prices ranging from
$3.41 to $20.76 were outstanding for the three months ended September 30,
2000. 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. 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.
(4) Other Commitments and Contingent Liabilities: In connection with the
Company's construction of a warehouse addition to its paperboard mill
located at Commerce City, Colorado, a suburb of Denver, the Company
5
<PAGE>
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. The Company and a former owner of the Commerce City paper mill
have entered into a participation agreement to respond to those conditions
that appear to stem from historical underground storage tank use. Under the
participation agreement, Republic and the former owner will share costs
associated with the underground storage tank, if any, including studies and
remediation, 25% and 75%, respectively. At this time, the Company has not
ascertained the future liability, if any, of the above matters.
With the completion of the Lawton recycled paperboard mill, 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. This represents approximately 40% to 50% of the Lawton
mill's estimated annual productive capacity of 220,000 tons. Purchases in
significant volumes will not begin until after the end of the quarter and
are to phase in over a period of months.
In November 1999, a former management employee of the Company's Halltown,
West Virginia recycled paperboard mill filed a civil action lawsuit in the
Circuit Court of Jefferson County West Virginia naming Republic Group
Incorporated, Republic Paperboard Company of West Virginia, d/b/a Halltown
Paperboard Company, and three others as defendants. The plaintiff alleges a
work related disability, retaliation, conspiracy and discrimination and is
seeking compensatory and punitive damages in an unspecified amount. The
Company is contesting the allegations and believes it has valid defenses
against the claim. The Court has scheduled a jury trial for January, 2001.
The Company has not ascertained the future liability, if any, of the above
matter.
(5) Reclassification: Certain prior year balances have been reclassified to
conform with current year presentation.
(6) Income Taxes: The provisions (benefits) for income taxes are based on
estimated annual effective tax rates, which rates differ from the federal
statutory rates principally due to state income taxes and certain non-
deductible expenses.
(7) 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 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, were 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
6
<PAGE>
with accrued interest. Upon repayment, the Company terminated the revolving
credit facility. Due to the expanded scope of the Company's business and
increased working capital requirements during fiscal year 2000, the Company
signed amendments to the existing credit facility on March 1, 2000 and June
27, 2000, increasing the amount available to $115,000,000.
Interest payment dates on the Notes are January 15 and July 15, and
commenced on January 15, 1999. Each semiannual 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 amended $115,000,000 credit facility includes a $60,000,000 term loan
effective March 1, 2000 and a $55,000,000 revolving credit facility. The
principal of the term loan is being paid quarterly over four years and
commenced on June 1, 2000 with payments of $1,500,000, $7,500,000,
$13,500,000, $19,500,000 and $18,000,000 due during fiscal years 2000,
2001, 2002, 2003 and 2004, respectively. At September 30, 2000, the Company
had borrowed $41,500,000 under the revolving credit facility. Borrowings in
excess of $40,000,000 are payable on April 2, 2001 and the balance will
mature on March 1, 2004. Consequently, the $1,500,000 payable on April 2,
2001 has been reflected as a short-term note payable in the accompanying
balance sheet. Availability under the credit facility is not subject to a
borrowing base. 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. During any period that 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) LIBOR, plus an agreed margin (ranging
from 75 to 225 basis points), which is to be established quarterly 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 100 basis
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 Company by its subsidiaries. The
Company had borrowings outstanding of $98,500,000 under the credit facility
at September 30, 2000 at a weighted-average interest rate of 9.22%.
(8) The following is the Company's segment information for the three months
ended September 30, 2000 and 1999:
7
<PAGE>
Three Months Ended September 30, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
2000 1999
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) 158,464 158,464 199,117 199,117
Recycled paperboard (tons) 70,819 (7,000) 63,819 42,236 (4,897) 37,339
Recovered paper fiber (tons) 62,122 (37,358) 24,764 60,497 (30,590) 29,907
-----------------------------------------------------------------------------------------------------------------------------------
Gross sales (in thousands):
Gypsum wallboard $ 20,436 $ $ $ 20,436 $ 35,284 $ $ $ 35,284
Recycled paperboard 25,438 25,438 15,165 15,165
Recovered paper fiber 5,760 (3,304) 2,456 5,780 (3,000) 2,780
Intrasegment fiber sales (3,304) 3,304 -- (3,000) 3,000 --
Intersegment paperboard sales 3,183 (3,183) -- 1,878 (1,878) --
Other 4 4 3 3
-----------------------------------------------------------------------------------------------------------------------------------
Gross sales 20,436 31,077 (3,179) 48,334 35,284 19,823 (1,875) 53,232
Less freight and discounts 4,932 1,949 -- 6,881 5,523 1,220 1 6,744
-----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 15,504 $ 29,128 $ (3,179) $ 41,453 $ 29,761 $ 18,603 $ (1,876) $ 46,488
-----------------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) $ 2,163 $ (4,358) $ (2,220) $ (4,415) $ 14,610 $ (1,826) $ (2,172) $ 10,612
Total assets 74,790 232,543 25,780 333,113 72,922 216,909 14,607 304,438
Capital expenditures 393 1,183 66 1,642 1,015 35,574 961 37,550
Depreciation, depletion and
amortization 1,192 3,217 521 4,930 1,034 1,309 380 2,723
-----------------------------------------------------------------------------------------------------------------------------------
</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
Lawton, Oklahoma, Hutchinson, Kansas, Commerce City, Colorado and Halltown,
West Virginia. The Company's primary markets for recycled paperboard are
generally within a 600 mile radius of the facilities. The Company operates
reclaimed paper fiber recycling centers at Kansas City, Missouri, Topeka,
Kansas, and Denver, Colorado with the corresponding markets within a 600
mile radius of the centers.
Over 50% of the Company's employees are covered by collective bargaining
agreements with four labor unions. The expirations of current bargaining
agreements range from 2002 to 2004. The Company believes its relations with
employees are satisfactory.
Operating profit is net sales less operating expenses. Intersegment and
intrasegment sales 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>
(9) The following components are included in other expense, net:
Quarters Ended
--------------
September 30
------------
2000 1999
---- ----
Interest expense $ (5,012,000) $ (3,263,000)
Less: Capitalized portion -- 3,132,000
-------------------------------
Net interest expense (5,012,000) (131,000)
Interest income 211,000 66,000
Miscellaneous income (expense) (38,000) 18,000
-------------------------------
Other expense, net $ (4,839,000) $ (47,000)
===============================
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>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Recent Developments
-------------------
On August 11, 2000, the Company entered into an Agreement and Plan of Merger
(the "Premier Merger Agreement") with Premier Construction Products Statutory
Trust ("Premier') and Premier Construction Products Acquisition Corp.
("Acquisition Sub"), pursuant to which Acquisition Sub would be merged into the
Company, all outstanding shares of Common Stock of the Company would be
converted into the right to receive $19.00 in cash, and the Company would become
a wholly-owned subsidiary of Premier (the "Premier Merger"). A stockholders'
meeting related to the Premier Merger is currently scheduled to be held on
November 9, 2000, and the Company expects to complete the Premier Merger shortly
after that stockholders' meeting.
The Premier Merger Agreement provides for a liquidated damages payment of $12
million by Premier if it fails to complete its financing arrangements and close
the Premier Merger and in certain other situations. Premier's obligations under
the liquidated damages provision are backed by a letter of credit in the amount
of $12 million. The Premier Merger Agreement also provides for the Company to
pay a break-up fee of $10 million if the Premier Merger Agreement is terminated
in connection with another third-party acquisition proposal and in certain other
circumstances.
The directors and executive officers of the Company, including our Chairman,
Phil Simpson, and some members of Mr. Simpson's family, who collectively own
approximately 3.3 million shares or 27.3% of the Company's outstanding stock,
have executed Stockholder Agreements pursuant to which they have agreed to vote
their shares of the Company's stock in favor of the Premier Merger, against
other competing proposals and in certain other respects, to grant proxies to
Premier's nominees to so vote their shares, and not to dispose of or encumber
their shares of the Company's stock during the pendency of the Premier Merger
Agreement. The Stockholder Agreements will terminate upon a termination of the
Premier Merger Agreement in accordance with the terms of that agreement.
On August 11, 2000, the Company also entered into a back-up agreement with
Centex Construction Products, Inc. ("CXP") (the "CXP Agreement") pursuant to
which the Company would be acquired by CXP if the Premier Merger Agreement were
terminated for reasons other than (1) a termination by the Company, in the
exercise of its Board of Directors' fiduciary duties, to pursue a superior
proposal from a third party or (2) a termination by the Company or Premier
because the Premier Merger Agreement is not adopted by the Company's
stockholders and no takeover proposal has been made or announced. If the Premier
Merger Agreement were terminated for one of these enumerated reasons, the
Company and CXP have agreed to execute and deliver a merger agreement pursuant
to which a subsidiary of CXP would make a cash tender offer to acquire all the
outstanding shares of the Company's stock (the "CXP Tender Offer") and, whether
or not the CXP Tender Offer were consummated, merge with the Company. Pursuant
to the merger agreement with CXP, a subsidiary of CXP would be merged into the
Company, and the Company would become a wholly-owned subsidiary of CXP. The per
share consideration in both the CXP Tender Offer and the merger would be equal
to $17.50 in
10
<PAGE>
cash plus a cash amount equal to a proportionate share (based on common and
common equivalent shares) of any termination fees received by the Company from
Premier. It is a condition to CXP's obligation to enter into the merger
agreement that the Company make the same representations and warranties to CXP
that it made to Premier in the Premier Merger Agreement except where not
material and that stockholder agreements like those in favor of the Premier
Merger be executed in favor of CXP by the same stockholders. The Company is
obligated to use its reasonable best efforts and take all actions within its
control to cause such conditions to be satisfied.
The Board of Directors has unanimously approved both the Premier Merger and the
CXP Agreement. In connection with the Premier Merger, the Company filed a proxy
statement with the Securities and Exchange Commission.
The foregoing description of the Premier Merger Agreement, the Stockholder
Agreements and the CXP Agreement is qualified in its entirety by reference to
the full text of such agreements, copies of which were filed previously with the
Securities and Exchange Commission.
Results of Operations
---------------------
Quarters Ended September 30, 2000 and 1999.
-------------------------------------------
Consolidated Results. The Company recorded a consolidated net loss of
$5,552,000, or a loss of $0.47 per share, on net sales of $41,453,000 for the
September 2000 quarter. This compares to consolidated net income of $6,341,000,
or $0.53 per diluted share, on net sales of $46,488,000 for the September 1999
quarter. Interest expense, net of interest income, increased $4,736,000 from the
September 1999 quarter. The majority of the increase in net interest expense was
attributable to the Company's newly constructed Lawton, Oklahoma recycled
paperboard mill that commenced commercial operations earlier this calendar year.
Prior to commencement of commercial operations, the Company capitalized a
significant portion of its interest expense as a cost of constructing the mill.
Gypsum Wallboard Segment Results. The Company's gypsum wallboard segment
realized a 20% decline in shipments and a 35%, or nearly $52 per MSF, decrease
in net selling prices of gypsum wallboard when comparing the two quarters. The
decreases in shipments and selling prices caused net sales to decline from
$29,761,000 in the September 1999 quarter to $15,504,000 in the September 2000
quarter. Additionally, operating profits declined from $14,610,000 to
$2,163,000. Weaker demand and increasing industry productive capacity has
continued to adversely affect the Company's gypsum wallboard segment.
Recycled Paperboard Segment Results. Shipments of recycled paperboard increased
68% to 70,819 tons in the September 2000 quarter. This was due to the
commencement of commercial operations at the Lawton mill during the last half of
fiscal year 2000. Excluding shipments from the Lawton mill, recycled paperboard
shipments declined 5%. Net sales for the segment increased 57% to
$29,128,000[,]; however, operating losses increased from $1,826,000 in the
September 1999 quarter to $4,358,000 in the September 2000 quarter. The most
significant factor in the increase in the segment's operating loss was operating
results posted at the Lawton mill. During the September 2000 quarter, the Lawton
mill produced and sold other, lower-margined, paperboard products in addition to
gypsum-grade paperboard. Additionally, the Lawton mill continued to experience
inefficiencies associated with the fine-tuning of
11
<PAGE>
its paperboard machine and trials of gypsum-grade paperboard for multiple gypsum
wallboard plants. Also, purchases in significant volumes under the long-term
paperboard supply agreement with James Hardie Gypsum did not commerce during the
quarter. Other factors adversely impacting the recycled paperboard segment's
operating results for the September 2000 quarter include higher natural gas
costs, continued weakness in East Coast markets for its products and the
transition of approximately one-third of the Hutchinson, Kansas recycled
paperboard mill's capacity to non gypsum-grade paperboard. The Company has
shifted the majority of gypsum-grade paperboard that has historically been
produced at the Hutchinson mill to the Lawton mill.
Environmental Matters
---------------------
In connection with the Company's construction of 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 into 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. The Company and a former owner of the Commerce City paper
mill have entered into a participation agreement to respond to those conditions
that appear to stem from historical underground storage tank use. Under the
participation agreement, Republic and the former owner will share costs
associated with the underground storage tank including studies and remediation,
if any, 25% and 75%, respectively. 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.
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, 2000
and June 30, 2000.
($ in thousands) September 30, 2000 June 30, 2000
--------------------------------------------------------------
Working capital $ 25,818 $ 34,738
Current ratio 1.9:1 2.0:1
Cash and cash equivalents $ 7,403 $ 7,414
Interest-bearing debt $198,500 $200,000
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
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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, were 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.
Due to the expanded scope of the Company's business and increased working
capital requirements during fiscal year 2000, the Company signed amendments to
the existing credit facility on March 1, 2000 and June 27, 2000, increasing the
amount available to $115,000,000.
Interest payment dates on the Notes are January 15 and July 15, and commenced on
January 15, 1999. Each semiannual 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 amended $115,000,000 credit facility includes a $60,000,000 term loan
effective March 1, 2000 and a $55,000,000 revolving credit facility. The
principal of the term loan is being paid quarterly over four years and commenced
on June 1, 2000 with payments of $1,500,000, $7,500,000, $13,500,000,
$19,500,000 and $18,000,000 due during fiscal years 2000, 2001, 2002, 2003 and
2004, respectively. At September 30, 2000, the Company had borrowed $41,500,000
under the revolving credit facility. Borrowings in excess of $40,000,000 are
payable on April 2, 2001 and the balance will mature on March 1, 2004.
Consequently, the $1,500,000 payable on April 2, 2001 has been reflected as a
short-term note payable in the accompanying balance sheet. Availability under
the credit facility is not subject to a borrowing base. 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. During any period that
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) LIBOR, plus an agreed margin (ranging
from 75 to 225 basis points), which is to be established quarterly 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 100 basis 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
Company by its subsidiaries. The Company had borrowings outstanding of
$98,500,000 under the credit facility at September 30, 2000 at a weighted-
average interest rate of 9.22%.
For the three months ended September 30, 2000, the Company funded $1,642,000 of
additions to property, plant and equipment and repaid $1,500,000 of the term
loan with $3,024,000 of cash generated from operations and existing cash
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balances. 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.
At September 30, 2000, the Company had available for borrowing $13,500,000 of
the $55,000,000 revolving credit facility. The Company believes that the
remaining portion available under the credit facility, together with cash
generated by operations, including tax refunds, in fiscal 2001, and existing
cash balances will be sufficient (i) to fund the capital expenditure
requirements identified above, (ii) to fund the Company's working capital
requirements, including interest payments, (iii) to meet its debt repayment
obligations and (iv) to fund other general and corporate requirements.
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 which considers the Company's
general financial condition and projected cash flows when approving the level of
dividend payment, if any. The credit facility and the Indenture impose limits on
the Company's ability to pay dividends. The Premier Merger Agreement requires
the Company to suspend dividend payments to its stockholders.
Forward-Looking and Other 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, successful attainment of designed production capacity
levels at the Company's Duke, Oklahoma gypsum wallboard plant and the Lawton,
Oklahoma recycled paperboard mill, consummation of the Premier or CXP Merger,
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.
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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, 2000, 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 $5,400,000 in the
fair value of the Notes, assuming a full redemption at July 15, 2008.
At September 30, 2000, the Company had $98,500,000 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 $985,000 annual impact on the Company's future
earnings and cash flows based on the Company's outstanding variable rate
borrowings at September 30, 2000. 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.
15
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1999, a former management employee of the Company's
Halltown, West Virginia recycled paperboard mill filed a civil action
lawsuit in the Circuit Court of Jefferson County West Virginia naming
Republic Group Incorporated, Republic Paperboard Company of West
Virginia, d/b/a Halltown Paperboard Company, and three others as
defendants. The plaintiff alleges a work-related disability,
retaliation, conspiracy and discrimination and is seeking compensatory
and punitive damages in an unspecified amount. The Company is
contesting the allegations and believes it has valid defenses against
the claim. The Court has scheduled a jury trial for January, 2001. The
Company has not ascertained the future liability, if any, of the above
matter.
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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Article 5 of Regulation S-X-Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated August 11, 2000 (date of
earliest event reported), and filed August 21, 2000, announcing
an Agreement and Plan of Merger among the Company, Premier
Construction Products Statutory Trust and Premier Construction
Products Acquisition Corp. The Company filed a Form 8-K/A, dated
August 11, 2000 (date of earliest event reported), and filed
September 12, 2000, correcting certain typographical errors
contained in the Agreement and Plan of Merger among the Company,
Premier Construction Products Statutory Trust and Premier
Construction Products Acquisition Corp.
16
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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 8, 2000 /s/Doyle R. Ramsey
--------------------------------------------
Doyle R. Ramsey
Executive Vice President and
Chief Financial Officer
November 8, 2000 /s/Michael W. Dirks
--------------------------------------------
Michael W. Dirks
Vice President - Finance and
Chief Accounting Officer
17
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INDEX TO EXHIBITS
Exhibit Description
------- -----------
27 Financial Data Schedule for the first quarter of 2001 (for SEC
use only)
18
