ITEM 1. BUSINESS.
GENERAL
Republic Group Incorporated (the "Company") was incorporated in Delaware in August of 1961, as Republic Gypsum Company. The stockholders of the Company approved a change of corporate name on October 26, 1995. Regular operations began at its gypsum wallboard manufacturing plant in Duke, Oklahoma in January 1965. References to the Company herein, unless the context requires otherwise, include Republic Group Incorporated and its subsidiaries.
The Company manufactures and sells 100% recycled paperboard, reclaimed paper fiber, and gypsum wallboard. The Company sells recycled paperboard to converter customers that manufacture composite cans, cores, tubes and other consumer and industrial packaging products. The Company also uses its recycled paperboard as a raw material in the production of its own gypsum wallboard, as well as selling gypsum-grade paperboard to other gypsum wallboard manufacturers. Reclaimed paper fiber is a raw material sold to and used by other recycled paper and paperboard mills as well as the Company's mills. It is the principal component used in the production of recycled paper and recycled paperboard. Gypsum wallboard is a primary building material used by the residential and commercial construction industries.
The strategic direction of the Company began shifting to the recycled paperboard industry when, in December 1983, the Company purchased two recycled paperboard mills to diversify and to ensure a supply of quality gypsum-grade paperboard for its gypsum wallboard operations. During 1994, the Company purchased two paper recycling centers in Kansas City, Missouri and Topeka, Kansas. During fiscal 1996, the Company started a greenfield paper recycling production operation in Denver, Colorado. These facilities ensure additional supplies of paper fiber for its paperboard mills. On June 30, 1995, the Company purchased from Old Dominion Box Company substantially all of the operating assets of Halltown Paperboard Company, Halltown, West Virginia. The acquisition of Halltown furthered the Company's strategic objective to add new operations which will complement its current business. Because Halltown does not make paperboard for the gypsum wallboard industry, the facility strengthens the portion of the Company's recycled paperboard operations that targets manufacturers of consumer and industrial packaging products as well as providing geographical diversification. The Company is now a manufacturer of recycled paperboard products with an integrated gypsum wallboard manufacturing operation. By increasing the emphasis on its recycled paperboard business, the Company has attempted to become less subject to the cyclical influences of the construction and housing industries.
The Company has completed the fourth year of a five-year strategic plan to expand and develop its recycled paperboard business, while maintaining its presence in the gypsum industry and evaluating expansion opportunities into other integrated manufacturing operations. The Company's initial plan included spending $14,000,000 to $18,000,000 for capital improvements and expansion at two of its recycled paperboard mills in Hutchinson, Kansas and Denver, Colorado during the five fiscal years ending June 30, 1997. In the fiscal year ended June 30, 1996, the Company spent approximately $3,883,000 pursuant to this strategy. The improvements from the Company's five-year strategic capital improvements and expansion plan are expected to increase the productive capacity of the Hutchinson and Denver mills, in total, approximately one-third. The Company is still on target to substantially achieve its goals, but business conditions could influence the timetable in the future. See NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR INFORMATION CONCERNING THE COMPANY'S (i) WALLBOARD AND (ii) RECYCLED PAPERBOARD BUSINESS SEGMENTS. RECYCLED PAPERBOARD OPERATIONS
Manufacturing. The Company's recycled paperboard manufacturing operations are conducted at mills located near Hutchinson, Kansas, Commerce City, Colorado, a suburb of Denver, and Halltown, West Virginia. The rated productive capacity of the Company's paperboard mills is generally adjusted yearly to reflect new equipment installations and modifications, current operating procedures and product mix. All of the paperboard products manufactured at the Company's mills are produced from 100% reclaimed secondary paper fiber and are classified by the industry as recycled paperboard. These recycled paperboard products include the facing paper used in the manufacture of wallboard, and recycled paperboard utilized by manufacturers of consumer and industrial paperboard products such as fiber cans, fiber tubes, fiber cores, partitions, puzzles and games.
Recycled paperboard is manufactured in a continuous process during which waste paper is mixed with water and pulped to separate the individual fibers. The slurry is then applied to a series of rotating wire-covered cylinders, not unlike making a sandwich, so that a multi-ply sheet of paper is formed as excess water is drained through the rotating wire. The multi-ply paper mat is then mechanically pressed, dried, trimmed to size and packaged. The finished product can either be packaged in roll form or in sheets according to customer specifications.
Sales, Marketing and Distribution. The recycled paperboard products manufactured by the Company are sold to wallboard manufacturers and to converters that manufacture composite cans, cores, tubes and other packaging products. During fiscal 1996, approximately 16% of the paperboard manufactured and shipped by the mills was consumed by the Company's wallboard manufacturing operations, another 18% was shipped to other wallboard manufacturers, and the balance was shipped to over 100 different converter customers. During fiscal 1996, Sonoco Products Company accounted for approximately 10% of consolidated gross sales. The loss of this customer could have a materially adverse effect on the Company. However, the Company sells several different products to over 25 different Sonoco locations in two operating divisions.
The Company has attempted to diversify its operations from the construction industry by increasing paperboard sales to converters that manufacture composite cans, cores, tubes and other consumer and industrial packaging products. Additionally, the Company's primary acquisition focus has been in the paperboard segment. This is evidenced by the acquisition of the recycling centers in Kansas City, Missouri and Topeka, Kansas during 1994, the startup of a recycling center in Denver, Colorado during fiscal 1996, and the acquisition of the assets of Halltown Paperboard Company, Halltown, West Virginia on June 30, 1995. The Halltown recycled paperboard mill does not market products to the construction industry.
The Company's reclaimed paper fiber collection centers sell reclaimed fiber to the Company's mills (approximately 40% of total shipments by the centers) and to external customers. Most shipments are to customers located within 600 miles of the center. The company's operations have capabilities to sort and bale paper fiber purchased from generators and haulers. In addition, the Company's reclaimed fiber operations act as a broker for certain generators of reclaimed fiber by arranging for direct shipments from the generator to the purchaser of the fiber.
Sales of paperboard and reclaimed paper fiber are typically made on credit terms in accordance with normal industry practice. Paperboard production normally occurs after an order is received. Paperboard is rarely produced for general inventory purposes. The backlog of orders for paperboard is usually not significant. Deliveries of paperboard and reclaimed paper fiber are made to customers by common carriers, as well as by rail. Some customers pick up their orders at the mills.
Raw Materials. The principal raw materials utilized by the Company's paperboard mills are reclaimed paper fiber, water and chemicals. Reclaimed paper fiber is currently purchased from several sources and from the Company's own recycling centers. Management believes that adequate supplies of reclaimed paper fiber will continue to be available from wholesalers located in cities near the paperboard mills and from its own recycling centers. The demand and pricing for this raw material during most of fiscal 1996 has been relatively stable. This is in direct contrast to fiscal 1995, when unprecedented demand and other factors caused sharp increases in the cost
of this raw material. Since reclaimed paper fiber is a commodity, pricing for the product is subject to quick pricing corrections due to supply and demand.
Chemicals, including size, retention aids and bactericides, used by the paperboard operations, are also readily available from several manufacturers at competitive prices. Size is used principally as a water resisting agent or strength enhancer in the production of paperboard. Retention aids are agents used to retain fiber and chemicals in the papermaking process and not lose them into the waste stream. Bactericides are agents used to control bacteria and other organisms in the papermaking process.
The manufacture of recycled paperboard involves the use of large volumes of water for the production process and for cooling purposes. In the areas of Kansas and Colorado, where two of the Company's paperboard mills are located, the appropriation of water is regulated by state laws. The Hutchinson paperboard mill uses large volumes of water pumped from wells located on owned or controlled property near the Company's plant. The Company is authorized to appropriate water from those wells for beneficial use, subject to vested rights and prior appropriations, under state permits and orders. Paperboard production at the Commerce City paperboard mill uses water pumped from wells located on, or adjacent to, the Company's property. In connection with the purchase of the Commerce City mill, the Company acquired an 80% interest in certain water wells as tenant-in-common with Packaging Corporation of America and the right to use up to 80% of the water produced by the wells. Most of these wells have been in use by the mill for more than 20 years. The Company's water rights are subject, however, to the legal rights of prior appropriators from the same water resource and to limitations on the permitted uses for such water, as decreed by the Colorado courts. The Company's West Virginia mill uses water from a stream running through its property and has done so for over 100 years. The Company's rights to use the water from the stream is subject to the riparian rights of other property owners in the area. Although adequate sources of water have historically been available to all of the Company's mills, an extended period of general water shortages, legal curtailment of either mill's current water sources or uses, or deterioration of the current quality of water sources could affect that mill's operations and limit its productive capacity. See "ENVIRONMENTAL REGULATION."
Electricity, natural gas and other utilities are available to the plants at standard industrial rates in adequate supplies, subject to standard industrial curtailment provisions. There are adequate supplies of coal available to the Halltown mill on either a contracted or spot basis. The Company's Hutchinson paperboard mill generates approximately one-half of the electricity it uses, and the Company's West Virginia mill generates approximately one- third of its total requirements. During periods of natural gas curtailment, the Hutchinson and Denver mills are equipped to use fuel oil, and the Halltown mill can use either coal or fuel oil.
The prevailing market price for natural gas was stable, if not slightly lower during the Company's last fiscal year, compared to fiscal 1995. It appears that adequate supplies of natural gas helped to stabilize fuel prices. The price of coal increased slightly from year to year. All plants periodically contract fuel supplies in advance for varying time limits to hedge against fluctuations in the market. The Company has been successful at contracting future supplies at favorable rates. However, there is always the possibility of contracting future requirements at higher than actual spot prices because natural gas and coal are commodities. After this past winter, the Company and many industries as a whole, have seen natural gas prices rise generally in relation to the natural gas futures market.
Competition. In selling the portion of its production not consumed by its own wallboard manufacturing operations, the Company competes with approximately nine other manufacturers of gypsum-grade paperboard, six of which have wallboard manufacturing operations. Substantially all of these competitors have greater financial resources than the Company. During periods of peak demand for wallboard, the demand for paperboard typically matches or exceeds the productive capacities of the gypsum-grade paperboard producers. During periods of reduced demand for wallboard, the demand for gypsum-grade paperboard falls, and selling prices may decrease. In selling paperboard to the packaging industry, the Company competes with approximately 75 producers, many of whom have substantially greater financial resources than the Company. Management of the Company believes that its sales constitute less than 5% of total sales of recycled paperboard nationally.
Price, quality and personal relationships are the principal methods of competition among paperboard producers. The locations of the paperboard mills allows the Company's paperboard operations to serve a variety of
markets, including several gypsum wallboard plants in the central and southwestern United States. The central location of two of the Company's mills also make some of the Company's operations farther from packaging, fiber tube, fiber can and fiber core customers located in or near the population centers of the east and west coasts. However, the Halltown, West Virginia recycled paperboard mill is within an hour and half from the metropolitan centers of Baltimore, Maryland and Washington, D.C. Additionally, many competitors are more vertically integrated than the Company and produce end-use products utilizing paperboard manufactured from their own recycled paperboard mills. See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RECYCLED PAPERBOARD."
GYPSUM WALLBOARD OPERATIONS
Manufacturing. The Company's wallboard manufacturing operations are conducted at its plant located in Duke in southwest Oklahoma near the Company's principal gypsum deposit. Based on the Company's historical product mix, the Duke plant's current rated productive capacity is 529 million square feet of wallboard per year, when operating three shifts per day and six and two-thirds days per week. This is an increase from 511 million square feet of rated capacity during fiscal 1995 due to upgrading and lengthening the gypsum wallboard production line. The plant operated at near capacity during fiscal 1996. See "SALES, MARKETING AND DISTRIBUTION."
The Company manufactures gypsum wallboard by the method common to most gypsum wallboard plants. Initially, crude gypsum is quarried by open-face mining methods and crushed on site by an impact crusher. The raw gypsum is hauled to the plant and pulverized. The powdered gypsum is then placed in kettles for a continuous calcining process that converts it into plaster of Paris. The plaster of Paris is cooked and then mixed with chemicals, other raw materials and water to produce a slurry that is placed on the production line between two continuous sheets of recycled paperboard and allowed to harden while in motion. After the slurry hardens between the paperboard, the sheet is cut into appropriate lengths, dried in kilns and packaged for sale. The Company has historically produced wallboard in standard industry thicknesses and varieties.
Sales, Marketing and Distribution. During the past fiscal year, approximately 60% of the Company's shipments of wallboard products were to customers located in its historical primary market in Texas, Oklahoma, Colorado and Kansas. The remaining 40% were made in other states, with an emphasis on the midwestern and southeastern regions of the United States. See "COMPETITION."
Wallboard is sold directly to building materials dealers and, in areas where custom of the trade dictates, to contractors and applicators. The Company's largest gypsum wallboard customer accounted for less than 5% of the Company's consolidated sales in fiscal 1996. Sales representatives, working in separate territories, market wallboard for the Company. Most of these sales representatives have significant experience in the building materials industry.
Sales are made on credit terms allowing a cash discount for prompt payment in accordance with normal industry practice. Typically, orders are filled upon receipt. The Company does produce to inventory, but does balance inventories with orders. The backlog of orders for the Company's wallboard generally is not significant.
The Company once operated a fleet of leased tractors and leased trailers for making a significant percentage of deliveries to its customers. This fleet was eliminated during 1993. Now, contract and common carriers have dedicated tractors and trailers to meet the majority of the Company's trucking delivery requirements. The Company supplements the services provided by these dedicated carriers with other common carriers in the same manner that it historically supplemented its own fleet with common carriers. The Company's strategy has enabled the Company to ship economically without affecting the timeliness of deliveries. Additionally, the Company ships approximately 30% of its product by rail. This mode of shipment is enhanced by the Company's Hollis & Eastern Railroad Company, a short-line railroad, which connects the Company's wallboard plant with three major rail lines that are 15 miles from the plant. This enables the Company to ship to distant markets economically. The Company also owns 75 rail cars, which are operating in, and dispatched through, the national rail system. The Company receives car hire revenues from these rail cars.
The Company also ships wallboard by rail to public warehouses located in Birmingham, Alabama and Cincinnati, Ohio. The warehouses unload and store the wallboard until the Company instructs them to arrange deliveries by truck to customers located in the region surrounding the warehouses. Freight cost savings can be achieved to many destinations in this manner because the majority of the shipping distance is by rail which, at these distances, is typically cheaper but slower than truck delivery.
Gypsum Supply. The Company owns in fee simple all surface rights and mineral rights to gypsum, gypsite and anhydrite with respect to 1,457 acres of land, located within six miles of its manufacturing plant. The Company estimates that the reserves of these gypsum deposits should be sufficient to supply the plant operating at capacity for approximately 15 years. The land on which the deposits are located is adjacent either to paved or rock-surfaced roads and near a paved state highway which can be used during inclement weather for transporting the raw gypsum to the plant site. In the Company's opinion, other gypsum deposits are located in the immediate area and may be obtained at a reasonable cost. Ordinarily, a four to six-week supply of crushed raw gypsum is maintained at the Duke plant. The Company also owns substantial non-producing gypsum reserves in Nova Scotia.
Other Raw Materials, Utilities and Fuel. Other than gypsum, the principal raw material used by the Company in manufacturing wallboard is recycled paperboard, which is manufactured by the Company's paperboard mills in Hutchinson, Kansas and Denver, Colorado. See "RECYCLED PAPERBOARD OPERATIONS."
Water, electricity and natural gas are also required for the Company's manufacturing process. Water wells located on the site produce sufficient quantities of water for current and anticipated plant requirements. A 125,000 gallon overhead water storage tank is situated adjacent to the plant. The plant can also purchase water from the public water supply system at Duke, Oklahoma. Electric power is supplied to the Company at standard industrial rates by an electric cooperative.
Competition. Each of the products sold by the Company competes with several different brands of the same product and with different products designed for the same purposes. There is very little differentiation between wallboard produced by the Company and its competitors. The Company believes that price, personal relationships with customers, quality, and timely deliveries are the principal methods of competition among wallboard producers.
There are approximately 12 manufacturers of gypsum wallboard in the United States, many of which have significantly greater total financial resources than the Company. Three of these companies, USG Corporation, National Gypsum Company, and Georgia-Pacific Corporation, sell, in the aggregate, an estimated 75% to 80% of the wallboard in the United States. The Company believes that its sales represent approximately 2% nationally and approximately 10% of the total wallboard sold in its primary markets. (See "SALES, MARKETING AND DISTRIBUTION" FOR PRIMARY MARKET INFORMATION.)
In many cases, the larger, multiple plant gypsum wallboard manufacturers have a competitive advantage in markets outside the Company's primary historical markets due to the strategic location of their plants, which results in lower costs. In addition, the larger producers may have other cost efficiencies available to them, such as spreading selling and administrative overhead across several plants. See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - GYPSUM WALLBOARD."
ENVIRONMENTAL REGULATION
The manufacture of paperboard involves the discharge of large volumes of waste water and solid waste. In addition, the Company quarries gypsum by open-face mining methods. The Company believes it is in compliance with applicable federal, state and local environmental laws and regulations governing the discharge of waste from its recycled paperboard mills and surface quarrying and reclamation of quarried property near its gypsum plant.
Environmental laws, rules and policies are changing constantly and the technology available to address matters of pollution control is developing rapidly. Accordingly, it is difficult to estimate the costs of future capital expenditures, if any, for environmental control facilities at the Company's manufacturing plants. Management currently anticipates that it will have adequate capital resources available to fund such capital expenditures.
The effect of compliance with environmental laws, rules and policies on the Company's operating results is also difficult to project. In general, management believes that such ongoing compliance is a cost of manufacturing which has widespread applicability to members of the industries in which the Company is competing. Historically, the Company has not incurred material costs or penalties with respect to the remediation of environmental problems; however, changing laws and requirements, unknown practices by prior owners, spills by neighboring facilities and numerous other factors can result in material environmental problems. There can be no assurance that such matters will not affect the Company's operating results or competitive position in the future.
In connection with the Company's preparation for a warehouse addition to its paperboard mill located in Commerce City, Colorado, a suburb of Denver, the Company discovered and has been investigating the presence of subsurface petroleum hydrocarbons. The Company retained an environmental consultant who concluded that fuel oil, jet fuel, and gasoline additives had migrated in the subsurface of the Company's property from an adjacent property. The Company has conducted its own investigations, and the adjacent property owner has conducted its own investigations. Additionally, the Company and the adjacent owner have jointly sponsored investigations. Discussions between the parties continue. The Company has completed the construction of the warehouse addition under approval of the Colorado Department of Health.
At this time, the Company has not ascertained the future liability, if any, of the above matter. Environmental expenditures directly related to this matter were $3,000 in fiscal 1996, $32,000 in fiscal 1995, and $37,000 in fiscal 1994. These costs are included in selling and administrative expenses. Due to the complexity of the environmental laws, rules and policies currently applicable to the Company and the uncertainty about future changes in such laws and regulations, the Company maintains accounting reserves for future unexpected expenses of the nature and magnitude incurred during the past three years.
SEASON AND CYCLICAL NATURE OF BUSINESS
Inclement weather anytime during the year can have an effect on construction activity in the Company's markets and, consequently, an effect on revenues and results of the Company's wallboard and to a lesser degree, the Company's recycled paperboard manufacturing operations.
EMPLOYEES AND EMPLOYEE RELATIONS
Republic Group Incorporated employs approximately 650 people, approximately 465 of whom are covered by collective bargaining agreements with four labor unions. The expirations of current collective bargaining agreements range from 1996 to 1999. The Company believes that its relations with employees are satisfactory.
ITEM 2.
ITEM 2. PROPERTIES.
The Company operates a gypsum wallboard manufacturing plant located near Duke, Oklahoma, three recycled paperboard mills located near Commerce City, Colorado, Hutchinson, Kansas, and Halltown, West Virginia, and three reclaimed paper recycling centers located in Kansas City, Missouri, Topeka, Kansas, and Denver, Colorado. In addition, the Company owns an office building in Hutchinson, Kansas, in which its corporate offices are located. The Company leases office space in Irving, Texas, for its Chairman. The table on Page 7 sets forth certain information with respect to such significant properties.
PROPERTIES The Company's principal properties are shown below.
- --------------- (1) Based on the Company's historical normal product mix operating a single production line 6-2/3 days per week, 24 hours per day. See Item 1. Business - Gypsum Wallboard Operations -- Manufacturing. (2) Estimated capacity during current fiscal year, based on 350 production days, 24 hours per day. (3) Based on a one or two shift operation, 6 days per week.
ITEM 3.
ITEM 3. 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 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders of the Company during the fourth quarter of fiscal year 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the executive officers of the Company. All of the officers, except James M. Britz, have been employed by the Company during the past five years. Each officer has continually served as an officer of the Company from the time he or she first became an officer. All officers were elected by the Board of Directors of the Company to serve until the next annual meeting of the Board of Directors. No family relationship exists between any of the officers.
Mr. Simpson has been Chairman of the Board of Directors, President and Chief Executive Officer for more than five years.
Mr. Gagnon was elected Executive Vice President in September 1992. In October 1992, Mr. Gagnon became a Director of the Company. From January 1992 to September 1992, he served as Senior Vice President and Chief Financial Officer of the Company. Prior thereto, he served as Vice President - Administration and Chief Financial Officer of the Company.
Mr. Ramsey was elected Vice President in September 1992 and was appointed to the additional post of Chief Financial Officer in October 1992. He served as Mill Manager of the Company's Hutchinson recycled paperboard mill from October 1991 to January 1993. Prior thereto, he was office manager and plant controller of the mill.
Mr. Brown was elected Vice President in September 1992. He is responsible for recycled paperboard operations. Prior thereto, he served as Mill Manager of the Company's Commerce City recycled paperboard mill.
Mr. Cribbs was elected Vice President in September 1992. He is responsible for gypsum operations. Mr. Cribbs has served as General Manager of the Company's Duke, Oklahoma complex, which includes gypsum wallboard manufacturing, quarrying and calcining operations and short-line railroad operations for more than five years.
Ms. Hall was elected Vice President in October 1993. She is responsible for gypsum sales. She served as Gypsum Sales Manager from October 1991 to October 1993. Prior thereto, she held various positions in the sales department since joining the Company in 1975.
Mr. Britz was elected Vice President in August 1994. He is responsible for environmental compliance, safety and human resource functions of the Company. He served as Director of Environmental, Safety and Health, and Human Resources from February 1993 to August 1994. Prior thereto, he held similar positions with the Genlyte Group, Inc.
Mr. McCracken was elected Controller and Principal Accounting Officer in June 1993. He served as Accounting Manager from September 1991 until June 1993 and as Assistant Controller from September 1990 to September 1991.
Mrs. Rife was elected an executive officer of the Company in October 1995. She has served as Treasurer and Secretary since May 1993. Prior thereto, she served as Credit Manager.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PER SHARE MARKET PRICE AND DIVIDENDS FISCAL YEARS ENDED JUNE 30, 1996 AND 1995
Republic Group Incorporated common stock is traded on the New York Stock Exchange under the symbol "RGC". At August 27, 1996, the number of stockholders of record was approximately 867.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL REVIEW In thousands, except per share, ratio and percent data
Notes: (1) Total capital employed is equivalent to total assets less noninterest-bearing current liabilities. (2) The Company paid a special dividend of $ .10 per share during fiscal 1993. (3) Net operating profit after-tax is equivalent to operating profit reduced by taxes computed using statutory tax rates. Return on average capital employed relates net operating profit after-tax to average total capital employed. (4) Return on average stockholders' equity is net income divided by average stockholders' equity employed during the year.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General - Consolidated Results
During fiscal 1996, the Company achieved record results in consolidated net sales, operating profits, and net income. Net sales increased 22% and net income 28% from 1995 to 1996. The Company has now enjoyed five years of continuous improvement and solid growth in its results of operations. These improvements are reflected in the following selected financial data:
Recycled Paperboard Operations
The Company's recycled paperboard segment includes recycled paperboard mills at Hutchinson, Kansas, Commerce City, Colorado and Halltown, West Virginia. Additionally, the segment includes reclaimed paper fiber recycling centers at Kansas City, Missouri, Topeka, Kansas and Denver, Colorado.
Total shipments of recycled paperboard from the Company's recycled paperboard mills increased 44% from 1995 to 1996 and 2% from 1994 to 1995. The increase in shipments from 1995 to 1996 was primarily due to the acquisition of Halltown Paperboard Company, Halltown, West Virginia, on June 30, 1995. This mill is currently operating at approximately 70% of capacity or about 50,000 tons per year. The facility has the capability to produce approximately 70,000 tons per year. The Company recently installed new production equipment at the Halltown mill to enable it to produce recycled paperboard for a new product market previously untapped by the mill. This market includes composite cans, tubes, and cores as well as other consumer and industrial packaging products similar to those produced by the Company's other recycled paperboard mills. Shipments by the company's other recycled paperboard mills increased 4% from 1995 to 1996 due to greater shipments of gypsum linerboard to external and intercompany customers. From 1994 to 1995, even though there was only a 2% increase in total shipments, shipments to unaffiliated customers increased 10%.
Net sales of the entire recycled paperboard segment increased 36% from 1995 to 1996 and 53% from 1994 to 1995. The Halltown Paperboard Company acquisition was, again, the primary factor influencing net sales from 1995 to 1996. The acquisition of two reclaimed paper recycling centers in Kansas City, Missouri and Topeka, Kansas during 1994 resulted in a large portion of the increase from 1994 to 1995. The recycled paperboard segment now accounts for approximately 66% of net sales prior to eliminations. Net sales during fiscal 1996 were affected adversely by a reduction in the average net selling prices of reclaimed paper fiber sold by the Company's paper recycling centers. Conversely, the large increase in net sales of recycled paperboard from 1994 to 1995 was, in large part, the result of rising selling prices for the product in response to sharp increases in the cost of reclaimed paper, the principal raw material component utilized in the manufacture of recycled paperboard.
Operating profits for the segment were $17,668 in 1996, as compared to $8,907 in 1995 and $8,141 in 1994. A significant improvement in operating margins and the contribution of the Halltown mill were the major factors affecting 1996. In 1995, it was operating profit at the reclaimed fiber centers that accounted for the improvement from the prior year.
The relationship between average variable per unit manufacturing costs and average net selling prices for recycled paperboard improved significantly from fiscal 1995 to 1996. Raw material costs, principally reclaimed paper fiber, increased approximately 45%, during fiscal 1995. Even though the Company was able to raise selling
prices during fiscal 1995, there was generally a one to three month delay between rising material costs and subsequent selling price increases. Conversely, during fiscal 1996, the Company enjoyed a significant reduction in the cost of reclaimed fiber, approximately 29%. Overall, recycled paperboard per unit variable production costs declined 14% from fiscal 1995 to 1996. According to one industry publication, from June 1995 through June 1996, the price for old corrugated containers (OCC) and double lined kraft (DLK), two principal reclaimed fiber grades utilized by recycled paperboard mills, decreased from $165 per ton and $240 per ton, respectively, to $35 per ton and $60 per ton. This compares to $85 per ton for OCC and $110 per ton for DLK in June 1994. As there was a lag in raising selling prices in fiscal 1995 to cover the increases in raw material costs, there also was a lag in selling price reduction as raw material costs declined. This resulted in operating margins of 21% for the recycled paperboard segment in fiscal 1996 versus 14% in fiscal 1995. Management anticipates that the relationship between average net selling prices and average variable per unit manufacturing costs for recycled paperboard will be less favorable in fiscal 1997 than it was during 1996.
As denoted earlier, the recycled paperboard operations segment includes the results of three reclaimed paper recycling centers located in Kansas City, Missouri, Topeka, Kansas and Denver, Colorado. The Denver facility began operations early this year. These integrated operations ensure that adequate supplies of raw materials are available to the recycled paperboard mills. In fiscal 1996, the reclaimed paper recycling centers supplied approximately 23% of the Company's reclaimed paper requirements for the paperboard mills. This compares to 19% in 1995 and 2% in 1994. The recycling centers in Kansas City, Missouri and Topeka, Kansas operated only one quarter of fiscal 1994. The recycling operations shipped 87% of its total production to outside customers in fiscal 1994, 74% in 1995, and 61% in 1996. The Company will continue to sell a major portion of its reclaimed paper fiber to unaffiliated customers. The Company believes that each paper recycling facility should operate as a profit center and ship its products to the markets most favorable to the center, while the Company's paperboard mills purchase a significant portion of their raw material requirements from other nearby suppliers at delivered costs which are equal to or less than is available from internal sources of supply.
Uncertainties about reclaimed paper fiber costs and supply are two primary factors which could affect the Company's results in the future. During fiscal 1995, demand was strong throughout the entire paper industry for reclaimed paper fiber. The Company, even during this period of extreme demand, was able to procure adequate supplies for its operations. During fiscal 1996, reclaimed paper supplies were again plentiful. During periods of short supply, the recycling centers help to ensure the availability of adequate reclaimed paper supplies for the Company's recycled paperboard mills.
According to statistics compiled by the American Forest and Paper Association, an industry trade association, production of recycled paperboard grew at an annual rate of 5.5% during calendar year 1995. This compares to an overall growth rate of .1% for the entire paper industry. The demand for recycled paperboard continues to rise, perhaps fueled by greater environmental awareness by the public. This demand has spurred the construction of several new recycled paperboard mills in the last few years. However, these mills were designed and built to produce recycled containerboard. Historically, even during periods of excess capacity in the container board segment of the industry, there has not been much crossover competition by these mills for shipments to the Company's traditional product markets. There can be no assurance this will continue to be the case. Additionally, the construction of these new recycled paperboard mills, coupled with the ever increasing use of recycled paper fiber by traditional wood pulp mills, could further restrict the supply of reclaimed paper fiber available to the Company. Substitution of plastics and even virgin paperboard for recycled paperboard are additional possibilities which could affect the Company's results in the future.
The cost of fuel, principally natural gas and coal, is also a potential concern to the Company because of its relative importance as a component of the variable cost of production. From fiscal 1994 to fiscal 1995, variable utility costs per unit decreased slightly. From fiscal 1995 to fiscal 1996 utility costs again decreased, approximately 8%. The prevailing market price for natural gas rose during the last half of fiscal 1996 and may continue that upward trend. Some analysts have indicated the late 1996 increase was due to a harsh winter in many areas of the country. However, the Company's manufacturing facilities are located in areas of the country where natural gas or coal is plentiful. The Company believes its fuel cost, on average, should at least be comparable to its competitors.
The Company began in fiscal 1993, a five-year plan for capital expansion and upgrades at two of its recycled paperboard mills located in Hutchinson, Kansas and Denver, Colorado. The plan included the necessary equipment to increase productivity at the two mills by one-third or an increase of approximately 40,000 tons per year. Additionally, the plan focused on improved product quality expectations as well as efficiency improvements. This capital upgrade program is scheduled to be completed by the end of fiscal 1997.
Gypsum Wallboard Operations
The Company's gypsum wallboard operations include a gypsum wallboard manufacturing facility located in Duke, Oklahoma as well as remote public warehouses located in Birmingham, Alabama and Cincinnati, Ohio. Additionally, the Company operates a short-line railroad which connects to three major carriers 15 miles from its plant, enabling the Company to ship economically to distant markets.
The gypsum wallboard segment of the Company enjoyed a 7% increase in total shipments from fiscal 1995 to 1996, a new record. Shipments grew from 494 MMSF in 1995 to 529 MMSF in 1996. The increase in shipments is attributable to a capital expansion upgrade to the production line in fiscal 1995, with additional fine tuning in 1996. Net selling prices for gypsum wallboard were essentially unchanged from period to period. This compares to a 4% increase in shipments and 19% increase in net selling prices from 1994 to 1995. The following table indicates a strong housing construction industry which strongly influences wallboard shipments.
Although housing starts nationally decreased from 1994 to 1995, the Company did not experience any reduction in shipments to its traditional markets. Housing start estimates for 1996 and 1997 generally approximate the 1995 levels. Recently, interest rates have risen slightly. The construction industry, and particularly the single/multi-family sector, is sensitive to interest rate changes.
Strong demand continued to influence operating profits in 1996. Operating margins averaged 32% during fiscal 1996 compared to 36% in 1995 and 25% in 1994. Operating profits in this segment decreased slightly from $14.9 million in fiscal 1995 to $14.3 million in 1996. This compares to an operating profit of $7.8 million in fiscal 1994. Manufacturing costs per unit were slightly higher in 1996 compared to 1995. Per unit variable costs rose 12% from 1994 to 1995 primarily caused by a sharp increase in the cost of recycled gypsum paperboard, the largest single component in the variable per unit cost of production.
There are items which could adversely affect the gypsum wallboard segment. As with the recycled paperboard operations utility costs, principally natural gas, are a significant cost factor in the production of gypsum wallboard. Variable per unit utility costs decreased 9% from 1994 to 1995 and 4% from 1995 to 1996. The cost of natural gas, as previously stated under Recycled Paperboard Operations has risen as of late. Additionally, mining costs influence manufacturing costs. The Company believes it has sufficient gypsum reserves but costs associated with removal and quality of ore may increase as quarrying operations continue in the current quarry location. Other factors which may influence future results include the possibility that new gypsum wallboard manufacturing facilities may be constructed to take advantage of the currently strong demand for wallboard. Two previously idled gypsum wallboard plants have been re-opened in the last three years. The Company believes it operates one of the most efficient gypsum manufacturing facilities in North America due to line speed, mining and ore costs, and location. The Company will continue striving to improve the quality and efficiencies of the facility, in order to remain competitive under all construction market conditions.
Other
During fiscal 1996, selling and administrative expenses as a percent of net sales were 12% as compared to 10% in 1995 and 12% in 1994. Increased costs associated with the acquisition of Halltown Paperboard Company, Halltown, West Virginia in June of 1995 and the start-up of a reclaimed paper fiber production facility in Denver, Colorado in early fiscal 1996 contributed significantly to the overhead burden of the Company. Additionally, a 22% increase in net sales from fiscal 1995 to fiscal 1996 added certain costs such as sales commissions and incentives.
A substantial increase in interest expense totalling $1,937,000 in 1996 is associated with a $28,000,000 loan for the purchase of substantially all the assets of Halltown Paperboard Company, Halltown, West Virginia on June 30, 1995. The Company's effective tax rate was 38% in fiscal 1994, 39% in 1995 and 38% in 1996. The Company anticipates an effective income tax rate during fiscal 1997 near the range experienced the prior three years.
Environmental Matters
In connection with the Company's preparation for a warehouse addition to its paperboard mill located in Commerce City, Colorado, a suburb of Denver, the Company discovered and has been investigating the presence of subsurface petroleum hydrocarbons. The Company retained an environmental consultant who concluded that fuel oil, jet fuel and gasoline additives had migrated in the subsurface of the Company's property from an adjacent property. The Company has conducted its own investigations, and the adjacent property owner has conducted its own investigations. Additionally, the Company and the adjacent owner have jointly sponsored investigations. Discussions between the parties continue. The Company has completed the construction of the warehouse addition under approval of the Colorado Department of Health.
At this time, the Company has not ascertained the future liability, if any, of the above matter. Environmental expenditures directly related to this matter were $3,000 in fiscal 1996, $32,000 in fiscal 1995, and $37,000 in fiscal 1994. These costs were included in selling and administrative expenses. Due to the complexity of the environmental laws, rules and policies currently applicable to the Company and the uncertainty about future changes in such laws and regulations, the Company maintains accounting reserves for future unexpected expenses of the nature and magnitude incurred during the past three years.
Effect of Inflation
Management believes that general inflation has not had a material impact on the Company's net sales or operating income the last three fiscal years. The cost of reclaimed paper fiber, which is the principle raw material component utilized in the manufacture of recycled paperboard rose significantly during fiscal years 1994 and 1995. Conversely, the cost of reclaimed fiber decreased substantially during fiscal 1996. The Company believes these shifts were caused by changes in supply and demand and not general inflation or deflation.
Liquidity and Capital Resources
The following is a summary of certain financial statistics related to the liquidity and financial condition of the Company for the three fiscal years ended June 30, 1996.
The Company's working capital increased $9.0 million from fiscal 1995 to fiscal 1996. Cash, cash equivalents, investments and marketable securities increased $8.4 million from 1995 to 1996. Net cash provided by operations increased from $14.0 million in 1995 to $23.3 million in 1996. Additions to plant, property and equipment, excluding the acquisitions of the Kansas City, Missouri and Topeka, Kansas recycling centers in fiscal 1994 and Halltown Paperboard Company, Halltown, West Virginia in fiscal 1995, were $11.8 million in 1994, $8.8 million in 1995 and $9.1 million in fiscal 1996.
On June 30, 1995, the Company purchased substantially all the assets of Halltown Paperboard Company, Halltown, West Virginia and financed the acquisition by securing $28.0 million in long-term bank financing, which is to be repaid in semiannual installments over the next six years. At the same time, the Company entered into a $7.0 million revolving credit facility. To date, no amounts have been borrowed against the credit facility which expires June 30, 1998. Management believes that cash and investments, internally generated funds, supplemented as needed by advances under the working capital line of credit, will be sufficient to meet the Company's short-term working capital requirements.
Cash dividends paid to common stockholders were $3.0 million in fiscal 1996, $2.4 million in fiscal 1995, and $1.8 million in fiscal 1994. Quarterly dividends have historically been paid in the months of September, December, March, and June, but are, in each case, subject to Board approval.
The Board of Directors of the Company has approved new budgeted capital expenditures of $8.6 million for fiscal 1997. Cash provided by operations and existing cash balances should be sufficient to fund these expenditures.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements, along with the Financial Statement Schedule filed herewith, are listed in the Index below.
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1996, 1995 AND 1994
See accompanying notes.
CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1995
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1995 AND 1994
See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1996, 1995 AND 1994
See accompanying notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION The consolidated financial statements include the accounts of Republic Group Incorporated and its subsidiaries (the "Company"). All intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES IN FINANCIAL STATEMENTS The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates.
CASH EQUIVALENTS Short-term investments that are highly liquid and have original maturity dates of three months or less are considered cash equivalents for the purpose of the Consolidated Statements of Cash Flows. These investments are carried at market.
CONCENTRATION OF CREDIT RISK The majority of the Company's sales are to retailers, manufacturers and wholesalers. The Company conducts ongoing credit evaluations of its customers' financial conditions and limits the amount of trade credit extended when necessary. The Company maintains allowances for expected credit losses.
INVENTORIES Inventories are stated at the lower of cost (average or first-in, first-out) or market and include the appropriate elements of materials, labor and manufacturing overhead expenses.
PROPERTY, PLANT AND EQUIPMENT Plant and equipment assets are recorded at cost and depreciated generally by the straight-line method over the estimated useful lives of the assets. Expenditures for additions and improvements are capitalized, and costs for repairs and maintenance are charged to operations as incurred.
REVENUE RECOGNITION Revenue is recognized at the time products are shipped to the customer or, in the case of rail services, at the time service is rendered.
INCOME TAXES The provision for income taxes includes federal and state taxes currently payable (receivable) and deferred taxes arising from temporary differences in determining income for financial statement and tax purposes. The Company files a consolidated federal return which includes the results for all of its subsidiaries. Deferred tax assets, liabilities and related expense accounts are adjusted annually for any changes in statutory tax rates.
PER SHARE COMPUTATIONS Per share computations are based on the weighted average number of common shares outstanding during the year, adjusted for the effect of dilutive common share equivalents (i.e., common stock options). Earnings per common share on a fully diluted basis are substantially the same as earnings per share as presented.
RECLASSIFICATION Certain prior year balances have been reclassified to conform with the current year presentation.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE Environmental expenditures are expensed or capitalized, as appropriate. Liabilities are recorded when assessments and/or remedial efforts are probable and the cost can be reasonably estimated.
NAME CHANGE In October 1995, the Company changed its name from Republic Gypsum Company to Republic Group Incorporated. The Company's trading symbol on the New York Stock Exchange remains "RGC".
2. INDUSTRY SEGMENTS
Certain information with regard to industry segments, within which the Company operates, is as follows (in thousands):
Operations within the gypsum industry consist of the manufacture and sale of gypsum wallboard. Operations within the paperboard industry consist of (i) the manufacture and sale of recycled paperboard to the gypsum industry and other paperboard converters which manufacture composite cans, cores, tubes and other packaging products, and (ii) the collection and sale of recovered paper fiber. The Company's gypsum wallboard operations are located in Duke, Oklahoma. The Company's primary markets for gypsum wallboard are Texas, Oklahoma, Colorado and Kansas with additional secondary emphasis in the midwestern and southeastern regions of the United States. The Company operates recycled paperboard mills in Hutchinson, Kansas, Commerce City, Colorado, and Halltown, West Virginia. The Company's primary markets for recycled paperboard are generally
within a 600 mile radius of the facilities. The Company operates reclaimed paper fiber recycling centers in Kansas City, Missouri, Topeka, Kansas, and Denver, Colorado with the corresponding markets within a 600 mile radius of the facilities.
During fiscal 1996, approximately 16% of the recycled paperboard shipped by the mills was consumed by the Company's wallboard operations. Another 18% was shipped to other unaffiliated gypsum wallboard manufacturers. An adverse change in the construction industry could have a material effect on the earnings of the Company. Sonoco Products Company accounted for approximately 10% of consolidated gross sales. The loss of this customer could have a materially adverse effect on the Company. However, the Company sells several different products to over 25 different Sonoco locations in two operating divisions.
Republic Group Incorporated employs approximately 650 people, approximately 465 of whom are covered by collective bargaining units with four labor unions. The expirations of current bargaining agreements range from 1996 to 1999. The Company believes its relations with employees are satisfactory.
Operating profit is net sales less operating expenses. Sales between segments are made at approximately market price. Identifiable assets by industry segment are those used in each segment at year-end. Eliminations and other include general corporate assets, principally cash, securities, property and equipment and expenses.
3. EMPLOYEE STOCK OWNERSHIP PLAN
In February 1986, the Company guaranteed a $2,996,000 bank note on behalf of its Employee Stock Ownership Plan (the "ESOP"), in which salaried employees participate. The ESOP used the proceeds to purchase the Company's common stock. In February 1991, the Company purchased the note for the outstanding principal balance. Because the Company was the payee of the note, such contributions did not require cash outlays. Compensation expense was recognized as the note principal was retired. The note was retired during fiscal 1994. During 1996 and 1995, the board of directors of the Company approved ESOP contributions of $360,000 and $187,000, respectively, and the compensation expense was recognized in the financial statements.
The following table presents the ESOP contributions for the years ended June 30, 1996, 1995 and 1994:
4. ACQUISITION - HALLTOWN PAPERBOARD COMPANY
On June 30, 1995, the Company acquired substantially all of the assets of Halltown Paperboard Company of Halltown, West Virginia for $26.2 million. Halltown Paperboard Company manufactures products of 100% recycled paperboard made from reclaimed paper fiber which are similar to the Company's other recycled paperboard mills. The following table presents the 1996 operating results of the Company compared to proforma operating results for 1995. The unaudited proforma information shows consolidated operating results for 1995 presented as though the Company's Halltown acquisition occurred at the beginning of the period. No goodwill was recorded in this transaction.
5. MISCELLANEOUS OTHER INCOME (EXPENSE)
The components of miscellaneous other income (expense) for the years ended June 30, 1996, 1995, and 1994 are summarized as follows:
6. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
The Company's long-term debt and revolving credit facility consists of the following:
Amounts of long-term maturities for each of the next six fiscal years 1997 through 2002, respectively, are: $3,410,000, $3,670,000, $3,955,000, $4,260,000, $4,595,000, and $4,950,000.
The Company obtained a $28,000,000 term loan from a commercial bank for the purchase of Halltown Paperboard Company pursuant to a loan agreement dated June 30, 1995. The term loan matures in June 2002. The Halltown facility was used as collateral for the loan. The net book value of the assets collateralized was $25,552,000 at year-end. The effective interest rate for the year averaged 7.01%.
The Company also obtained a $ 7,000,000 line of credit from a commercial bank pursuant to a loan agreement dated June 30, 1995. The revolving credit facility is for two years, renewable every year for an additional year. To date, no amounts have been borrowed against the revolving credit facility.
Outstanding principal amounts on both the term loan and revolving credit facility bear interest at a variable rate equal to (i) the London Interbank Offered Rate, plus an agreed margin (ranging from 75 to 175 basis points for the term loan and 50 to 150 points for the revolving credit facility), which is to be established annually based upon the Company's coverage of fixed charges or (ii) the bank's corporate prime rate, less 0.5% for the term loan and less 0.75% for the revolving credit facility. Under the term loan and revolving credit facility, the Company is required to adhere to several financial covenants some of which involve working capital, current ratio, net worth and fixed charge coverage minimums. The revolving credit facility expires June 30, 1998.
7. PENSION AND OTHER BENEFIT PLANS
The Company maintains pension plans (the "Plans") for its hourly employees at its paperboard mills. Normal monthly retirement benefits are based on negotiated benefit levels and the employee's years of credited service. Contributions to the Plans are based on actuarial calculations of amounts necessary to cover normal costs and to amortize prior service costs.
Pension expense included the following components:
The actuarial assumptions used to determine pension expense and the funded status of the Plans were a settlement rate on benefit obligations of 7.75% for 1996 and 7.25% for 1995 and an expected long-term rate of return on plan assets of 6.0% for 1996 and 1995. The unrecognized prior service costs and unrecognized net gain are being amortized over approximately 15 years. The assets of the Plans at June 30, 1996, consist mostly of bonds, both corporate and government, and also stocks and cash or cash equivalents.
Effective December 31, 1994, Republic Group Incorporated changed the retirement benefits at its Commerce City, Colorado paperboard mill, resulting in the freezing of benefits under the defined pension plan. The Duke Oklahoma facility employee savings plan was also discontinued on December 31, 1994 and benefits were frozen. Such benefits will be paid in accordance with the terms of each plan. These plans were replaced with a voluntary 401(k) Plan (the "401(k) Plan"). Additionally, the same 401(k) Plan was installed at the Company's
Topeka, Kansas, and Kansas City, Missouri facility locations on January 1, 1995 and the Halltown, West Virginia facility on April 1, 1996. The participants in the 401(k) Plan include eligible employees at the above locations, as well as all salaried employees company-wide. Although there is one 401(k) Plan for all Company locations, there are various employee and employer contribution limits, employer matching percentages, and employer vesting schedules for each location.
Contributions to the 401(k) and employee savings plan were:
Other employee benefit plans include a Key Employee Continuation Plan to encourage the continued attention and dedication of key employees. A description of the plan is available in the Company's Proxy Statement.
8. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
In connection with the Company's preparation for a warehouse addition to its paperboard mill located in Commerce City, Colorado, a suburb of Denver, the Company discovered and has been investigating the presence of subsurface petroleum hydrocarbons. The Company retained an environmental consultant who concluded that fuel oil, jet fuel and gasoline additives had migrated in the subsurface of the Company's property from an adjacent property. The Company has conducted its own investigations, and the adjacent property owner has conducted its own investigations. Additionally, the Company and the adjacent owner have jointly sponsored investigations. Discussions between the parties continue. The Company has completed the construction of the warehouse addition under approval of the Colorado Department of Health.
At this time, the Company has not ascertained the future liability, if any, of the above matter. Environmental expenditures directly related to this matter were $3,000 in fiscal 1996, $32,000 in fiscal 1995, and $37,000 in fiscal 1994. These costs were included in selling and administrative expenses. Due to the complexity of the environmental laws, rules and policies currently applicable to the Company and the uncertainty about future changes in such laws and regulations, the Company maintains accounting reserves for future unexpected expenses of the nature and magnitude incurred during the past three years.
9. STOCK OPTIONS
Options have been granted to key employees at prices which represent fair market value at dates of grant, have terms ranging from five to ten years and are exercisable at 20% to 25% per year on a cumulative basis beginning one year from date of grant. In addition, some grants are only exercisable if certain Company performance targets are attained. The Company is authorized to grant 420,000 shares of common stock to key employees in the 1989 Plan, and 105,000 shares to directors in the Non-Employee Director Plan. A summary of transactions for the years ended June 30, 1996, 1995 and 1994 is set forth in the following table:
The 1979 Stock Option Plan terminated June 30, 1989. All remaining options expired in October 1993 with the remaining 2,000 shares exercised in fiscal 1994.
The 1989 Long-Term Incentive Plan (the "Incentive Plan") was approved by stockholders at the Company's Annual Meeting held October 26, 1989. The Incentive Plan is unlimited in duration and, unless it is modified or terminated, will remain in effect as long as any options, restricted stock awards, or performance unit awards remain outstanding. The Incentive Plan is administered by the Board of Directors.
On August 7, 1989, the Board of Directors approved the Non-Employee Director Stock Option Plan (the "Director Plan"). Each non-employee member of the Board of Directors was granted an option to purchase 10,500 shares of Common Stock. The options do not have fixed terms but will automatically terminate 12 months after the director ceases to be a director by reason of his death or permanent disability or 6 months after he ceases to be a director for any other reason. On the date any new non-employee director becomes a member of the Board of Directors, such director will be granted an option (exercisable after completion of three calendar years of service on the Board of Directors) to purchase 10,500 shares of Common Stock at a price equal to the fair market value on the date of grant. The Director Plan is administered by a committee of the Board of Directors composed of all employee directors.
On May 16, 1996, the Board of Directors of the Company declared a dividend distribution of one Common Stock Share Purchase Right (the "Right") on each outstanding share of its common stock. The Rights replace existing common stock share purchase rights that expired on May 16, 1996. The Rights will be exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the common stock. Each Right will entitle stockholders to buy one share of common stock of the Company at an exercise price of $45.00. If the Company is acquired in a merger or other business combination transaction after a person has acquired 15% or more of the Company's outstanding common stock, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such price. In addition, if a person or group acquires 15% or more of the Company's outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to purchase at the Right's then-current exercise price, a number of the Company's common shares having a market value of twice such price. The Rights exempt from the 15% threshold the current ownership, which exceeds such threshold, by Phil Simpson, members of his family, family trusts and entities controlled by them. Following the acquisition by a person or group of beneficial ownership of 15% or more of the Company's common stock and prior to an acquisition of 50% or more of the common stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, for shares of common stock at an exchange ratio of one share of common stock per Right. Prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Company's common stock, the Rights are redeemable for $.01 per Right at the option of the Board of Directors. The Board of Directors is also authorized to reduce the 15% threshold referred to above to not less than 10%. The Rights will expire on May 16, 2006. The Rights distribution is not taxable to stockholders.
10. INCOME TAXES
The components of the provision for income taxes are:
The differences between income taxes computed using the statutory federal income tax rate and that shown in the Consolidated Statements of Income are summarized as follows:
Deferred income taxes reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial reporting basis.
As of June 30, 1996 and 1995, deferred tax assets (liabilities) as determined under the provisions of SFAS 109, were comprised of the following:
The Company does not provide for a valuation reserve on deferred tax assets based on the assumption of future taxable income.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and estimated fair values of the Company's financial instruments as of June 30, 1996.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
CASH AND CASH EQUIVALENTS The carrying amount is assumed to approximate fair value because of the short maturities of those instruments.
CURRENT INVESTMENTS AND MARKETABLE SECURITIES The estimated fair value of current investments and marketable securities is based on quoted market prices for those or similar investments. Costs approximate market value.
LONG-TERM INVESTMENTS The estimated fair value of long-term investments is based on quoted market prices for those or similar investments.
NOTES RECEIVABLE The estimated fair value of notes receivable is based on discounting future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities.
LONG-TERM DEBT All the Company's long-term debt is at a short-term variable rate; therefore the carrying value approximates market prices.
12. SELECTED QUARTERLY FINANCIAL DATA
The following tabulation presents selected unaudited results of operations for the years ended June 30, 1996 and 1995 (in thousands, except for per share data):
13. NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." As a result of this statement, the Company will begin to provide additional disclosures related to its stock based compensation plans in its fiscal 1997 financial statements. Adoption of SFAS No. 123 will not have a material effect on the Company's financial position or results of operations. The Company has adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-lived Assets," which did not have a material effect on the Company's financial position or results of operations.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Republic Group Incorporated:
We have audited the accompanying consolidated balance sheets of Republic Group Incorporated (a Delaware corporation) and subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Republic Group Incorporated and subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas August 2, 1996
REPORT OF MANAGEMENT
The management of Republic Group Incorporated is responsible for preparing the consolidated financial statements and other information contained in this annual report. Management believes that the consolidated financial statements fairly reflect, in all material respects, the form and substance of events and transactions and that the consolidated financial statements present the Company's financial position and results of operations in conformity with generally accepted accounting principles. Management has included in the Company's consolidated financial statements amounts that are based on informed judgments and estimates which it believes are reasonable under the circumstances.
Republic Group Incorporated maintains a system of internal accounting policies, procedures and controls intended to provide reasonable assurance, at appropriate cost, that transactions are processed in accordance with Company authorization and are properly recorded and reported in the consolidated financial statements, and that assets are adequately safeguarded.
Arthur Andersen LLP, the Company's independent public accountants, audits the Company's consolidated financial statements in accordance with generally accepted auditing standards, which provide the basis of its report on the consolidated financial statements.
The Board of Directors of the Company has an Audit Committee composed of outside directors. The Committee meets with financial management and the independent public accountants to review internal accounting controls and accounting, auditing and financial reporting matters. In addition, Arthur Andersen LLP has full and free access to the Audit Committee, without management present, to discuss the results of its audits, the adequacy of the Company's internal accounting controls and the quality of its financial reporting.
Phil Simpson Chairman of the Board and President August 26, 1996
Doyle R. Ramsey Vice President-Finance and Chief Financial Officer August 26, 1996
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections entitled "Nominees for Directors" and "Compliance with Section 16(a) of the Exchange Act" appearing in the Registrant's proxy statement for the annual meeting of the stockholders to be held on October 24, 1996 sets forth certain information with respect to the directors of the Registrant and is incorporated herein by reference. Certain information with respect to persons who are or may be deemed to be executive officers of the Registrant is set forth under the caption "Executive Officers of the Registrant" in Item 4A of Part I of this report and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The sections entitled "Executive Compensation" and "Compensation of Directors" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on October 24, 1996 sets forth certain information with respect to the compensation of management of the Registrant and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is incorporated herein by reference the information in the Company's 1996 Proxy Statement regarding beneficial ownership of shares of the Company's Common Stock as of August 31, 1996 by each person known by the Company to own beneficially more than 5% of the outstanding shares of such Common Stock, by each director of the Company, and by certain executive officers of the Company and by all directors and executive officers as a group under the caption "Security Ownership".
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the captions "Nominees for Directors" in the Company's 1996 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements See Index to Financial Statements and Schedules of Registrant contained in Item 8, page 16.
2. Financial Statement Schedules See Index to Financial Statements and Schedules of Registrant contained in Item 8, page 16.
3. The following documents are filed or incorporated by reference as exhibits to this Report as required by Item 601 of Regulation S-K:
3(a) Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the period year ended September 30, 1995, SEC File Number 1-7210).
3(b) Bylaws of the Company, as amended.
4(a) Revolving and Term Credit Agreements (with related Promissory Notes, Security Agreement, Mortgage, Deed of Trust, Guaranties attached as Exhibits hereto) dated as of June 30, 1995, among Republic Gypsum Company, Republic Paperboard Company, and Republic Paperboard Company of West Virginia and Boatmen's First National Bank of Kansas City (incorporated by reference to Exhibit 4(i) of the Company's current report on Form 8-K filed July 17, 1995, SEC File Number 1-7210).
4(b) Amendments One, Two and Three to Revolving and Term Credit Agreements, in reference to the Agreements and Exhibits in 4(a) above, relating to the Company's name change from Republic Gypsum Company to Republic Group Incorporated and to extend the Revolving Credit Agreement one year.
10(a) The 1989 Long-Term Incentive Plan (incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989, SEC File Number 1-7210), which is a "management contract or compensatory plan or arrangement."
10(b) Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989, SEC File Number 1-7210), which is a "management contract or compensatory plan or arrangement."
10(c) Non-Employee Directors' Retirement Compensation Arrangement (incorporated by reference to the description set forth under the caption "Executive Compensation - Director Retirement Compensation Arrangement" in the Company's Proxy Statement for the Annual Meeting of Stockholders held October 26, 1989, SEC File Number 1-7210), which is a "management contract or compensatory plan or arrangement."
10(d) Tenancy in Common Agreement dated December 29, 1983, between Packaging Corporation of America and Republic Paperboard Company (incorporated by reference to Exhibit 10(d) to the Company's Annual Report on 10-K for the year ended June 30, 1994, SEC File Number 1-7210).
10(e) Shared Facilities and Shared Service Agreement dated December 28, 1983, between Packaging Corporation of America and Republic Paperboard Company (incorporated by reference to Exhibit 10(e) to the Company's Annual Report on 10-K for the year ended June 30, 1994, SEC File Number 1-7210).
10(f) Key Employee Continuation Plan (incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, SEC File Number 1-7210), which is a "management contract or compensatory plan or arrangement".
10(g) Asset Purchase Agreement, dated as of June 30, 1995, between Old Dominion Box Company, Inc., Halltown Paperboard Company, Dillard Investment Corporation, and Republic Gypsum Company and Republic Paperboard Company of West Virginia (incorporated by reference to Exhibit 2(i) and 2(ii) to the Company's Current Report on Form 8-K, dated July 17, 1995, SEC File Number 1-7210).
21 Significant Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
24 Power of Attorney on Page 35 of this Report.
27 Article 5 of Regulation S-X.
(b) Reports on Form 8-K. The Company filed a form 8-K, dated May 16, 1996 (date of earliest event reported), and filed May 21, 1996, stating that on April 30, 1996, the Board of Directors of the Company declared a dividend distribution of one common stock purchase right (a "Right") for each outstanding share of common stock $1.00 per value (the "Common Stock"), of the Company. The distribution was paid on May 16, 1996 to the stockholders of record on that date. The form 8-K includes Item 5, Other Events, and Item 7, Financial Statements and Exhibits in support of Item 5.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors and officers of Republic Group Incorporated hereby constitutes Phil Simpson, Stephen L. Gagnon and Doyle R. Ramsey his true and lawful attorneys-in- fact and agents, for his and in his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Annual Report on Form 10-K, and to file each such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has fully caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 9, 1996
REPUBLIC GROUP INCORPORATED
By: /s/ Phil Simpson ---------------------------------- Phil Simpson, Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: The Stockholders and Board of Directors of Republic Group Incorporated
We have audited in accordance with generally accepted auditing standards the consolidated financial statements of Republic Group Incorporated and subsidiaries included in this Form 10-K and have issued our report thereon dated August 2, 1996. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II, Valuation and Qualifying Accounts and Reserves, is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas August 2, 1996
S-1
REPUBLIC GROUP INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years ended June 30, 1994, 1995, and 1996
(A) Uncollectible accounts charged off, net of recoveries.
S-2 INDEX TO EXHIBITS