<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
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 1-8634
TEMPLE-INLAND INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 75-1903917
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
303 SOUTH TEMPLE DRIVE
DIBOLL, TEXAS 75941
(Address of principal executive offices, including Zip code)
Registrant's telephone number, including area code: (409) 829-5511
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
COMMON STOCK, $1.00 PAR VALUE PER SHARE, NEW YORK STOCK EXCHANGE
NON-CUMULATIVE PACIFIC STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
---------------------
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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based on the closing sales price of the Common Stock on the New
York Stock Exchange on March 4, 1998, was $2,130,569,842. For purposes of this
computation, all officers, directors, and 5 percent beneficial owners of the
registrant (as indicated in Item 12) are deemed to be affiliates. Such
determination should not be deemed an admission that such directors, officers,
or 5 percent beneficial owners are, in fact, affiliates of the registrant.
As of March 4, 1998, 56,048,867 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report:
(a)Pages 25-34, 47, 49, and 50-61 of the Annual Report to Shareholders for
the fiscal year ended January 3, 1998 -- Parts I and II.
(b)The Company's definitive proxy statement, dated March 30, 1998, in
connection with the Annual Meeting of Stockholders to be held May 1,
1998 -- Part III.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTION:
Temple-Inland Inc. (the "Company") is a holding company that conducts all
of its operations through its subsidiaries. The Company holds interests in
corrugated packaging, bleached paperboard, building products, timber and
timberlands, and financial services. The Company's Paper Group consists of the
corrugated packaging and bleached paperboard operations. The corrugated
packaging operation is vertically integrated and consists of four linerboard
mills, three corrugating medium mills, 39 box plants, and nine specialty
converting plants. In February 1998, the Company announced its intention to
close, during the second quarter of 1998, one of its corrugating medium mills
and one of its box plants, both located in Newark, California. The bleached
paperboard operation consists of one large mill located in Evadale, Texas.
The Company's Building Products Group manufactures a wide range of building
products including lumber, plywood, particleboard, gypsum wallboard, and
fiberboard. Forest resources include approximately 2.2 million acres of
timberland in Texas, Louisiana, Georgia, and Alabama. The Company's Financial
Services Group consists of savings bank activities, mortgage banking, real
estate development, and insurance brokerage.
The Company is a Delaware corporation that was organized in 1983. Its
principal subsidiaries include Inland Paperboard and Packaging, Inc. ("Inland"),
Temple-Inland Forest Products Corporation ("Temple-Inland FPC"), Temple-Inland
Financial Services Inc. ("Financial Services"), Guaranty Federal Bank, F.S.B.
("Guaranty"), and Temple-Inland Mortgage Corporation ("Temple-Inland Mortgage").
The Company's principal executive offices are located at 303 South Temple
Drive, Diboll, Texas 75941. Its telephone number is (409) 829-5511.
1
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FINANCIAL INFORMATION:
The results of operations including information regarding the principal
business segments are shown in the following table:
TEMPLE-INLAND INC.
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
FOR THE YEAR
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues
Paper.................................... $2,062.9 $2,082.3 $2,198.4 $1,740.7 $1,571.2
Building products........................ 617.3 562.6 532.9 575.5 497.5
Other activities......................... -- -- -- 19.2 58.4
-------- -------- -------- -------- --------
Manufacturing net sales.......... 2,680.2 2,644.9 2,731.3 2,335.4 2,127.1
Financial services....................... 945.2 815.4 764.3 631.4 635.1
-------- -------- -------- -------- --------
Total revenues................... $3,625.4 $3,460.3 $3,495.6 $2,966.8 $2,762.2
======== ======== ======== ======== ========
Income before taxes
Paper.................................... $ (39.0) $ 113.0 356.6 $ 73.7 $ 5.6
Building products........................ 131.1 102.0 67.0 138.8 102.4
Other activities......................... -- -- -- 1.5 (1.9)
-------- -------- -------- -------- --------
Operating profit................. 92.1 215.0 423.6 214.0 106.1
Financial services....................... 132.1 63.1(a) 98.1 56.3 67.5
-------- -------- -------- -------- --------
224.2 278.1 521.7 270.3 173.6
Corporate expense........................ (24.6) (17.2) (21.7) (13.7) (11.2)
Parent company interest -- net........... (110.3) (109.6) (72.7) (67.1) (69.4)
Other income............................. 5.7 4.6 3.7 3.8 3.2
-------- -------- -------- -------- --------
Income before taxes.............. $ 95.0 $ 155.9 $ 431.0 $ 193.3 $ 96.2
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Includes SAIF assessment of $43.9 million.
For more information with respect to identifiable assets, capital
expenditures, depreciation, and depletion on a business segment basis, see pages
32-33 and 59 of the Company's 1997 Annual Report to Shareholders, which are
incorporated herein by reference.
2
<PAGE> 4
The following table shows the revenues of the Company:
REVENUES
<TABLE>
<CAPTION>
FOR THE YEAR
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Paper
Corrugated packaging(a)...................... $1,694.0 $1,760.6 $1,910.3 $1,499.2 $1,306.9
Bleached paperboard.......................... 366.0 300.5 249.0 217.4 228.7
Pulp and other............................... 2.9 21.2 39.1 24.1 35.6
-------- -------- -------- -------- --------
2,062.9 2,082.3 2,198.4 1,740.7 1,571.2
-------- -------- -------- -------- --------
Building products
Pine lumber.................................. 262.1 217.4 190.1 211.9 176.0
Fiber products............................... 66.2 73.3 59.7 66.3 62.9
Particleboard................................ 125.0 112.2 99.1 103.0 81.3
Plywood...................................... 55.2 52.1 49.3 56.8 54.0
Gypsum wallboard............................. 104.6 90.2 83.1 74.3 53.3
Retail distribution(b)....................... 4.2 17.1 51.3 58.4 60.0
Other........................................ -- .3 0.3 4.8 10.0
-------- -------- -------- -------- --------
617.3 562.6 532.9 575.5 497.5
-------- -------- -------- -------- --------
Other activities(c)............................ -- -- -- 19.2 58.4
-------- -------- -------- -------- --------
Manufacturing net sales...................... 2,680.2 2,644.9 2,731.3 2,335.4 2,127.1
Financial services............................. 945.2 815.4 764.3 631.4 635.1
-------- -------- -------- -------- --------
Total revenues....................... $3,625.4 $3,460.3 $3,495.6 $2,966.8 $2,762.2
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Reclassified to include revenues from Temple-Inland Food Service Corporation
("Food Service") for 1996, 1995, 1994, and 1993. In the fourth quarter of
1997, the Company sold substantially all of the assets of Food Service, a
subsidiary that manufactured and marketed paper products for the food
service industry. Related revenues were $66.3 million, $84.1 million, $80.9
million, $57.9 million, and $54.2 million for 1997, 1996, 1995, 1994, and
1993, respectively.
(b) In October 1995, the Company sold the largest two of its five retail
distribution outlets. Two more of these retail distribution outlets were
sold during December 1996, and the final outlet was sold during 1997.
(c) Includes the revenues from subsidiaries engaged in commercial, industrial,
and public works contracting until their operations were terminated in 1993
and the revenues from subsidiaries engaged in the construction and
maintenance of electrical distribution facilities until their operations
were terminated in 1994.
3
<PAGE> 5
The following table shows the rated annual capacities of the production
facilities for, and unit sales of, the principal manufactured products.
ANNUAL CAPACITIES/UNIT SALES
<TABLE>
<CAPTION>
RATED
ANNUAL
CAPACITY
AT UNIT SALES
JANUARY 3, -----------------------------------------
1998 1997 1996 1995 1994 1993
---------- ----- ----- ----- ----- -----
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C> <C>
Paper
Corrugated packaging.................. (a) 2,769 2,435 2,333 2,492 2,394
Bleached paperboard................... (b) 635 524 400 430 426
Pulp.................................. (b) 2 100 99 87 134
(IN MILLIONS OF BOARD FEET)
Building products
Pine lumber........................... 675 639 605 582 583 552
(IN MILLIONS OF SQUARE FEET)
Fiber products........................ 460 402 457 422 441 440
Particleboard(c)...................... 610 470 399 329 347 319
Plywood............................... 265 281 259 217 260 265
Gypsum wallboard...................... 866 843 838 813 796 782
</TABLE>
- ---------------
(a) The annual capacity of the box plants is not given because such annual
capacity is a function of the product mix, customer requirements, and the
type of converting equipment installed and operating at each plant, each of
which varies from time to time. The rated annual capacity of Inland's
corrugating medium mills is approximately 615,000 tons per year, including
the 70,000 tons of capacity at the Newark, California, mill, which the
Company intends to close during the second quarter of 1998. The rated
annual capacity of the linerboard mills is approximately 2.2 million tons
per year.
(b) The annual capacity of the four paper machines in operation at the
paperboard and pulp mill is approximately 690,000 tons, which excludes the
capacity of a cylinder machine at the mill that the Company decided to shut
down late in 1993 due to market conditions for the grade it produced. Such
capacity may vary to some degree, depending on product mix.
(c) The annual capacity for the particleboard plants includes the rated annual
capacity of the Hope, Arkansas, plant, which began operations late in 1995
but did not reach full production until the fourth quarter of 1996. The
capacity figures for 1996 reflect the increase at the Monroeville, Alabama,
plant that resulted from a renovation of this facility during 1996. The
1997 figures reflect an increase at the Diboll, Texas, and Thomson,
Georgia, plants due to similar renovations during 1997.
NARRATIVE DESCRIPTION OF THE BUSINESS:
The business of the Company is divided among three groups: (1) the Paper
Group, which consists of the corrugated packaging and bleached paperboard
operations, (2) the Building Products Group, and (3) the Financial Services
Group. In the year ended January 3, 1998, the Paper Group, Building Products
Group, and Financial Services Group provided 57 percent, 17 percent, and 26
percent, respectively, of the total consolidated net revenues of the Company.
Paper Group. This group is composed of two operations: corrugated packaging
and bleached paperboard.
(i) Corrugated Packaging. The corrugated packaging operation of the Company
manufactures containerboard that it converts into a complete line of corrugated
packaging and point-of-purchase displays. Approximately 84 percent of the
containerboard produced by Inland in 1997 was converted into corrugated
containers at its box plants. The Company's nationwide network of box plants
produces a wide range of
4
<PAGE> 6
products from commodity brown boxes to intricate die cut containers that can be
printed with multi-color graphics. Even though the corrugated box business is
characterized by commodity pricing, each order for each customer is a custom
order. Inland's corrugated boxes are sold to a variety of customers in the food,
paper, glass containers, chemical, appliance, and plastics industries, among
others. As of January 3, 1998, about 47 percent of the Company's box shipments
were sold directly for use in the food industry, including beverage containers.
The Company also manufactures litho-laminate corrugated packaging and high
graphics folding cartons. Other products manufactured by the Company include
bulk containers constructed of multi-wall corrugated board for extra strength,
which are used for bulk shipments of various materials, paper sealing tape, and
other tape specialties.
In the corrugated packaging operation, the Company services about 6,800
customers with approximately 11,000 shipping destinations. The largest single
customer accounted for approximately four percent and the 10 largest customers
accounted for approximately 26 percent of the 1997 corrugated packaging
revenues. Costs of freight and customer service requirements necessitate the
location of box plants relatively close to customers. Each plant tends to
service a market within a 150-mile radius of the plant.
Sales of corrugated shipping containers closely track changing population
patterns and other demographics. Historically, there has been a correlation
between the demand for containers and containerboard and real growth in the
United States gross domestic product, particularly the non-durable goods
segment.
(ii) Bleached Paperboard. The bleached paperboard operation of the Company
produces various grades and weights of coated and uncoated bleached paperboard,
bleached linerboard, and bleached bristols. These materials are used by other
paper companies and by manufacturers that buy paper in roll lots and convert it
into such items as paper cups, plates, file folders, folding cartons, paperback
book covers, and various other packaging and convenience products.
Bleached paperboard products are sold to a large number of customers. Sales
to the largest customer of this operation, with whom the Company has a
long-standing relationship, accounted for approximately 12 percent of bleached
paperboard sales in 1997. This level of sales is consistent with sales to this
customer over the past several years. Although the loss of this customer could
have a material adverse effect on this operation, it would not have a material
adverse effect on the Company taken as a whole . This customer is also a
customer of the corrugated packaging operation, but sales to this customer
represent less than four percent of the total sales of the corrugated packaging
operation. The 10 largest customers accounted for approximately 57 percent of
bleached paperboard sales in 1997. During 1997, sales were made to customers in
43 states, Mexico, and Puerto Rico, as well as to independent distributors
through which this operation's products were exported to Asia, Japan, Central
America, and South America. Contracts specifying annual tonnage quantities are
maintained with several major customers.
Demand for bleached paperboard products generally correlates with real
growth in retail sales of non-durable packaged products in the United States, as
well as the level of fast food restaurant activity for food service grades,
including cup and plate. Demand is also affected by inventory levels maintained
by paperboard converters as well as a number of other factors, including changes
in industry production capacity and the strength of international markets.
Substantially all of the assets of Temple-Inland Food Service Corporation
("Food Service") were sold to a third party during 1997. Food Service was an
integrated paper converter formed by the Company to manufacture and market paper
containers and products primarily for the food service industry. Its products
included paper plates and bowls, clamshells, carrying trays and boxes, nested
food trays, fry cartons, and pails. These products were sold to the fast food
industry, retail consumer stores, and restaurants and cafeterias for use in food
service. The Company determined that Food Service was not a good strategic fit
and would be better served as part of an organization committed to those product
lines. The Company continues to manufacture bleached paperboard grades for
conversion to paper cups and plates by outside customers.
5
<PAGE> 7
Building Products Group. The Building Products Group produces a wide
variety of building products, such as lumber, plywood, particleboard, gypsum
wallboard, hardboard siding, and fiberboard sheathing.
Sales of building products are concentrated in the southern United States.
No significant sales are generated under long-term contracts. Sales of most of
these products are made by account managers and representatives to distributors,
retailers, and O.E.M. (original equipment manufacturer) accounts. Almost 78
percent of particleboard sales are to commercial fabricators, such as
manufacturers of cabinets and furniture. The 10 largest customers accounted for
approximately 23 percent of the Building Products Group's 1997 sales.
The building products business is heavily dependent upon the level of
residential housing expenditures, including the repair and remodeling market.
During 1996, the Company completed an upgrade to its particleboard plant in
Monroeville, Alabama. Similar renovation projects were completed at the Diboll,
Texas, and Thomson, Georgia, particleboard plants during 1997.
The Building Products Group is a 50 percent owner in three joint ventures.
One of these joint ventures is currently scheduled to begin producing medium
density fiberboard in the second quarter of 1998 at a facility under
construction in Arkansas. Another of these joint ventures is expected to begin
producing cement fiberboard in the third quarter of 1998 at a plant under
construction in Texas. The third joint venture was the acquisition of an
existing facility for the production of gypsum wallboard and a related quarry.
This joint venture also began construction after year end of a wallboard plant
to be located in Tennessee, completion of which is anticipated by 2000.
Financial Services Group. The Financial Services Group operates a savings
bank and engages in mortgage banking, real estate development, and insurance
activities.
(i) Savings Bank. Guaranty is a federally-chartered stock savings bank
operated by the Company through its financial services subsidiaries. Guaranty
conducts its business in Texas through 110 banking centers located primarily in
the eastern third of Texas, including Houston, Dallas, San Antonio, and Austin.
Following the Company's acquisition of California Financial Holding Company
("CFHC") in the second quarter of 1997, Guaranty operates an additional 25
branches in the Central Valley of California. The primary activities of Guaranty
include attracting savings deposits from the general public, investing in loans
secured by mortgages on residential real estate, lending for the construction of
real estate projects, and providing a variety of loan products to consumers and
businesses.
Guaranty derives its income primarily from interest earned on real estate
mortgages, commercial and business loans, consumer loans, and investment
securities, as well as fees received in connection with loans and deposit
services. Its major expense is the interest it pays on consumer deposits and
other borrowings. The operations of Guaranty, like those of other savings
institutions, are significantly influenced by general economic conditions, by
the monetary, fiscal, and regulatory policies of the federal government, and by
the policies of financial institution regulatory authorities. Deposit flows and
costs of funds are influenced by interest rates on competing investments and
general market rates of interest. Lending activities are affected by the demand
for mortgage financing and for other types of loans as well as market
conditions. Guaranty primarily seeks assets with interest rates that adjust
periodically rather than assets with long-term fixed rates.
During the second quarter of 1997, the Company completed its acquisition of
CFHC, the parent corporation of Stockton Savings Bank, F.S.B. ("Stockton")
headquartered in Stockton, California. CFHC stockholders received total
consideration of approximately $143.4 million, or $30 per share, consisting of a
combination of the common stock of the Company and cash. The operations of
Stockton were subsequently merged into Guaranty.
During 1996, Congress adopted legislation to recapitalize the Savings
Association Insurance Fund ("SAIF"). This legislation imposed a one-time special
assessment on SAIF members equal to 65.7 basis points of insured deposits, or
approximately $44 million in the case of Guaranty. Under this legislation,
Guaranty will not currently be required to pay any deposit insurance premiums,
but will be required to pay
6
<PAGE> 8
approximately 6.5 basis points on insured deposits to fund certain Financial
Corporation (FICO) bond obligations. Based on the current level of Guaranty's
deposits, this legislation has reduced assessments by approximately $10 million.
The House and Senate are also discussing additional legislative proposals,
including changes to tax laws, related to the thrift industry. At this time, the
Company is not able to predict if any of these proposals will be adopted or, if
adopted, the ultimate impact they might have on the Company.
In addition to other minimum capital standards, regulations of the Office
of Thrift Supervision of the Department of the Treasury (the "OTS") established
to ensure capital adequacy of savings institutions currently require savings
institutions to maintain minimum amounts and ratios of total and Tier I capital
to risk-weighted assets and of Tier I capital to adjusted tangible assets.
Management believes that as of year end, Guaranty met all of its capital
adequacy requirements. In order to obtain the lowest level of FDIC insurance
premiums, Guaranty must meet a leverage capital ratio of at least 5 percent of
adjusted total assets. At year end, Guaranty had a leverage capital ratio of
5.48 percent of adjusted total assets. For additional information regarding
regulatory capital requirements, see Note M to Financial Services Group
Summarized Financial Statements on page 49 of the Company's 1997 Annual Report
to Shareholders, which is incorporated herein by reference.
Guaranty must meet or exceed certain regulatory requirements to continue
its current activities and to take certain deductions under the Internal Revenue
Code. At year end, Guaranty met or exceeded these regulatory requirements and
intends to continue meeting or exceeding these regulatory requirements.
(ii) Mortgage Banking. Temple-Inland Mortgage, a wholly-owned subsidiary of
Guaranty, headquartered in Austin, Texas, originates, warehouses, and services
FHA, VA, and conventional mortgage loans primarily on single family residential
property. Temple-Inland Mortgage originates mortgage loans for sale into the
secondary market. It typically retains the servicing rights on these loans, but
periodically sells some portion of its servicing to third parties. During 1997,
Temple-Inland Mortgage expanded its operations in the Midwest by acquiring
Knutson Mortgage Corporation of Minneapolis, a full-service mortgage bank with a
loan servicing portfolio of approximately $6 billion. At year end, Temple-Inland
Mortgage was servicing $26.1 billion in mortgage loans, including loans serviced
for affiliates and approximately $1.6 billion in mortgages serviced for a third
party. Temple-Inland Mortgage produced $3.2 billion in mortgage loans during
1997 compared with $1.9 billion during 1996.
(iii) Real Estate Development and Income Properties. Subsidiaries of
Financial Services are involved in the development of 34 residential
subdivisions in Texas, Arizona, California, Colorado, Florida, Georgia,
Missouri, Tennessee, and Utah. The real estate group of the Company also owns 18
commercial properties, including properties owned by joint ventures in which
subsidiaries of Financial Services are venture partners.
(iv) Insurance. Subsidiaries of Financial Services are engaged in the
brokerage of property, casualty, life, and group health insurance products. One
of these subsidiaries is an insurance agency that administers the marketing and
distribution of several mortgage-related personal life, accident, and health
insurance programs. This agency also acts as the risk management department of
the Company. An affiliate of the agency sells annuities through banks and
savings banks, including Guaranty.
(v) Statistical Disclosures. The following tables present various
statistical and financial information for the Financial Services Group.
7
<PAGE> 9
The following schedule presents the average balances, interest
income/expense, and rates earned or paid by major balance sheet category for the
years 1995 through 1997:
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST SPREAD
<TABLE>
<CAPTION>
YEAR END 1997 YEAR END 1996 YEAR END 1995
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- ------ --------- --------- ------ --------- --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning deposits in
other
banks...................... $ 71.0 $ 4.1 5.71% $ 32.1 $ 2.1 6.42% $ 41.4 $ 2.4 5.90%
Mortgage-backed and
investment securities...... 2,802.2 161.3 5.75% 3,208.5 183.5 5.72% 3,650.4 208.6 5.72%
Securities purchased under
agreements to resell,
agency discount notes,
federal funds sold, and
commercial paper........... 332.9 18.3 5.51% 339.4 18.4 5.41% 324.2 19.1 5.88%
Loans receivable and mortgage
loans held for sale(1)..... 6,618.4 524.9 7.93% 5,258.4 426.1 8.10% 4,490.2 368.6 8.21%
Covered assets............... -- -- -- -- -- -- 298.5 18.3 6.14%
Other........................ 6.9 .4 6.22% 26.0 .7 2.91% 25.6 1.9 7.42%
--------- ------ -------- ------ -------- ------
Total interest-earning
assets............... 9,831.4 $709.0 7.21% 8,864.4 $630.8 7.12% 8,830.3 $618.9 7.01%
====== ====== ======
Cash........................... 100.1 90.6 90.2
Other FSLIC receivables........ -- .8 (10.7)
Other assets................... 785.6 586.0 537.3
--------- -------- --------
Total assets........... $10,717.1 $9,541.8 $9,447.1
========= ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand.... $ 1,099.6 $ 26.4 2.40% $1,087.2 $ 26.1 2.41% $1,212.7 $ 29.9 2.47%
Savings deposits........... 212.4 4.7 2.22% 184.6 4.2 2.28% 216.2 4.9 2.25%
Time deposits.............. 5,416.4 300.1 5.54% 5,013.6 278.0 5.54% 5,037.6 278.1 5.52%
--------- ------ -------- ------ -------- ------
Total interest-bearing
deposits............. 6,728.4 331.2 4.92% 6,285.4 308.3 4.91% 6,466.5 312.9 4.84%
Advances from the Federal
Home Loan Bank............. 1,276.6 79.0 6.19% 629.1 34.0 5.41% 383.6 21.7 5.66%
Securities sold under
repurchase agreements...... 1,297.2 67.9 5.24% 1,484.3 83.5 5.62% 1,490.3 92.1 6.18%
Other borrowings............. 147.7 10.1 6.82% 131.9 9.5 7.24% 95.9 7.2 7.49%
--------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities.......... 9,449.9 $488.2 5.17% 8,530.7 $435.3 5.10% 8,436.3 $433.9 5.14%
====== ====== ======
Noninterest-bearing demand..... 61.1 46.4 79.3
Other liabilities.............. 475.6 361.8 331.3
Preferred Stock issued by
subsidiary................... 90.4 -- --
Shareholder's equity........... 640.1 602.9 600.2
--------- -------- --------
Total liabilities and
shareholder's
equity............... $10,717.1 $9,541.8 $9,447.1
========= ======== ========
Net interest income.... $220.8 $195.5 $185.0
====== ====== ======
Net yield on
interest-earning
assets............... 2.25% 2.20% 2.10%
===== ===== =====
</TABLE>
- ---------------
(1) Nonaccruing loans are included in the average of loans receivable.
8
<PAGE> 10
The following table provides an analysis of the changes in net interest
income attributable to changes in volume of interest-earning assets or
interest-bearing liabilities and to changes in rates earned or paid:
VOLUME/RATE VARIANCE ANALYSIS
<TABLE>
<CAPTION>
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
------------------------------- -----------------------------
INCREASE (DECREASE) DUE TO(1) INCREASE (DECREASE) DUE TO(1)
------------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------- -------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-earning deposits in other
banks............................ $ 2.2 $(0.2) $ 2.0 $ (.5) $ .2 $ (.3)
Mortgage-backed and investment
securities....................... (23.3) 1.1 (22.2) (25.3) .2 (25.1)
Securities purchased under
agreements to resell, agency
discount notes, federal funds
sold, and commercial paper....... (0.4) 0.3 (0.1) .9 (1.6) (.7)
Loans receivable and mortgage loans
held for sale.................... 108.0 (9.2) 98.8 62.3 (4.8) 57.5
Covered assets...................... -- -- -- (18.3) -- (18.3)
Other............................... (0.8) 0.5 (0.3) -- (1.2) (1.2)
------ ----- ------ ------ ------ ------
Total interest income....... $ 85.7 $(7.5) $ 78.2 $ 19.1 $ (7.2) $ 1.9
====== ===== ====== ====== ====== ======
Interest expense:
Deposits:
Interest-bearing demand.......... $ 0.3 $ -- $ 0.3 $ (3.1) $ (.7) $ (3.8)
Savings deposits................. 0.6 (0.1) 0.5 (.8) .1 (.7)
Time deposits.................... 22.3 (0.2) 22.1 (1.3) 1.2 (.1)
------ ----- ------ ------ ------ ------
Total interest on
deposits.................. 23.2 (0.3) 22.9 (5.2) .6 (4.6)
Advances from the Federal Home Loan
Bank............................. 39.4 5.5 44.9 13.3 (1.0) 12.3
Securities sold under repurchase
agreements....................... (10.0) (5.5) (15.5) (0.4) (8.2) (8.6)
Other borrowings.................... 1.1 (0.5) 0.6 2.5 (.2) 2.3
------ ----- ------ ------ ------ ------
Total interest expense...... $ 53.7 $(0.8) $ 52.9 $ 10.2 $ (8.8) $ 1.4
====== ===== ====== ====== ====== ======
Net interest income (expense)....... $ 32.0 $(6.7) $ 25.3 $ 8.9 $ 1.6 $ 10.5
====== ===== ====== ====== ====== ======
</TABLE>
- ---------------
(1) The change in interest income and expense due to both rate and volume has
been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
9
<PAGE> 11
The following table sets forth the carrying amount of mortgage-backed and
investment securities as of the dates indicated:
TYPES OF INVESTMENTS
<TABLE>
<CAPTION>
AT YEAR END
--------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Held-to-Maturity:
Mortgage-backed securities.................................. $1,768.3 $2,083.7 $2,412.8
Debt securities
U.S. Government securities (including agencies)........... -- -- .3
Corporate securities...................................... -- -- --
Other..................................................... -- -- .1
-------- -------- --------
-- -- .4
-------- -------- --------
Available-for-Sale:
Mortgage-backed securities.................................. 948.1 643.9 949.6
Debt securities
Corporate bonds........................................... 3.0 3.0 1.4
Equity securities
Federal Home Loan Bank Stock.............................. 85.7 52.6 57.7
Other..................................................... .5 .3 1.7
-------- -------- --------
86.2 52.9 59.4
-------- -------- --------
$2,805.6 $2,783.5 $3,423.6
======== ======== ========
</TABLE>
The table below sets forth the maturities of mortgage-backed and investment
securities as of year end 1997:
MATURITY DISTRIBUTION OF MORTGAGE-BACKED AND INVESTMENT SECURITIES
<TABLE>
<CAPTION>
MATURING
----------------------------------------------------------------- VARIABLE/NO
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS MATURITY TOTAL
-------------- -------------- -------------- -------------- ---------------- CARRYING
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD VALUE
------ ----- ------ ----- ------ ----- ------ ----- -------- ----- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
Mortgage-backed
securities............... $ -- -- $ -- -- $ -- -- $ -- -- $1,768.3 5.61% $1,768.3
Available-for-Sale:
Mortgage-backed
securities............... -- -- -- -- -- -- -- -- 948.1 7.40% 948.1
Debt securities
Corporate securities..... -- -- -- -- 2.0 6.34% 1.0 5.79% -- -- 3.0
Equity securities
Federal Home Loan Bank
stock.................. -- -- -- -- -- -- -- -- 85.7 6.00% 85.7
Other.................... -- -- -- -- -- -- -- -- .5 -- .5
------ ------ ---- ---- -------- --------
-- -- -- -- -- -- -- 86.2 86.2
------ ------ ---- ---- -------- --------
$ -- $ -- $2.0 $1.0 $2,802.6 $2,805.6
====== ====== ==== ==== ======== ========
</TABLE>
10
<PAGE> 12
The following table shows the loan distribution for Financial Services:
TYPES OF LOANS
<TABLE>
<CAPTION>
AT YEAR END
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate mortgage................... $4,414.1 $4,198.5 $3,720.0 $3,137.5 $2,302.9
Construction and development (including
residential)......................... 2,975.1 2,152.4 1,500.6 1,022.6 643.7
Commercial and business................ 1,253.0 658.8 406.3 229.0 80.7
Consumer and other..................... 590.2 467.2 416.0 366.0 404.1
-------- -------- -------- -------- --------
9,232.4 7,476.9 6,042.9 4,755.1 3,431.4
Less:
Unfunded portion of loans............ 2,709.7 2,002.8 1,211.8 1,027.7 614.0
Unearned discounts................... -- -- -- .6 3.0
Unamortized purchase discounts....... (21.3) (11.8) (1.8) (5.1) 8.9
Net deferred fees.................... 2.0 3.6 3.0 3.2 2.2
Allowance for loan losses............ 91.1 68.4 65.5 53.9 47.9
-------- -------- -------- -------- --------
2,781.5 2,063.0 1,278.5 1,080.3 676.0
-------- -------- -------- -------- --------
$6,450.9 $5,413.9 $4,764.4 $3,674.8 $2,755.4
======== ======== ======== ======== ========
</TABLE>
The table below presents the maturity distribution of loans (excluding real
estate mortgage and consumer loans) outstanding at year end 1997, based on
scheduled repayments. The amounts due after one year, classified according to
the sensitivity to changes in interest rates, are also provided.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
MATURING
-------------------------------------------
WITHIN 1 1 TO 5 AFTER 5
YEAR YEARS YEARS TOTAL
-------- -------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Construction and development (including
residential)............................. $1,790.1 $1,185.0 $ -- $2,975.1
Commercial and business.................... 577.1 542.9 133.0 1,253.0
-------- -------- ------ --------
$2,367.2 $1,727.9 $133.0 $4,228.1
======== ======== ====== ========
Loans maturing after 1 year with:
Variable interest rates.................. $1,704.9 $102.8 $1,807.7
======== ====== ========
</TABLE>
Loans accounted for on a nonaccrual basis, accruing loans that are
contractually past due 90 days or more, and restructured or other potential
problem loans were less than two percent of total loans during 1997, 1996, 1995,
1994, and 1993. The aggregate amounts and the interest income foregone on such
loans, therefore, are immaterial and are not disclosed.
11
<PAGE> 13
The following tables summarize activity in the allowance for loan losses
and show the allocation of the allowance for loan losses by loan type:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
AT YEAR END
--------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.................... $68.4 $65.5 $53.9 $47.9 $20.8
Charge-offs:
Real estate mortgages......................... (4.8) (5.8) (3.9) (4.4)(b) (.7)
Construction and development.................. (.1) (.1) -- -- --
Commercial.................................... (.9) (2.9) (.7) (1.1) --
Consumer and other............................ (2.0) (4.4) (5.0) (4.7)(b) (1.8)
----- ----- ----- ----- -----
(7.8) (13.2) (9.6) (10.2) (2.5)
Recoveries:
Real estate mortgages......................... .9 2.1 1.1 .6 .2
Commercial.................................... -- -- .5 .1 --
Consumer and other............................ .9 .9 .8 1.4 .6
----- ----- ----- ----- -----
1.8 3.0 2.4 2.1 .8
----- ----- ----- ----- -----
Net charge-offs....................... (6.0) (10.2) (7.2) (8.1)(b) (1.7)
Additions charged to operations................. (1.7) 13.8 14.6 6.5 4.8
Additions related to bulk purchases of loans,
net of adjustments............................ 30.4(a) (.7) 4.2 7.6 24.0(b)
----- ----- ----- ----- -----
Balance at end of year.......................... $91.1 $68.4 $65.5 $53.9 $47.9
===== ===== ===== ===== =====
Ratio of net charge-offs during the year to
average loans outstanding during the year..... .10% .20% .16% .27% .10%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(a) Principally related to the loan portfolio from the acquisition of Stockton
Savings Bank, F.S.B.
(b) Principally related to the loan portfolio from the acquisition of American
Federal Bank, F.S.B.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AT YEAR END
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO LOANS TO
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
mortgage........... $58.0 48% $59.6 56% $57.9 61% $46.1 66%
Construction and
development........ 25.1 32% 1.9 29% 1.7 25% 1.4 21%
Commercial and
business........... 4.1 14% 2.5 9% 1.0 7% 1.5 5%
Consumer and other... 3.9 6% 4.4 6% 4.9 7% 4.9 8%
----- ---- ----- ---- ----- ---- ----- ----
$91.1 100% $68.4 100% $65.5 100% $53.9 100%
===== ==== ===== ==== ===== ==== ===== ====
<CAPTION>
AT YEAR END
----------------------
1993
----------------------
PERCENT OF
LOANS TO
AMOUNT OF TOTAL
ALLOWANCE LOANS
--------- ----------
<S> <C> <C>
Real estate
mortgage........... $39.4 67%
Construction and
development........ 1.0 19%
Commercial and
business........... 1.1 2%
Consumer and other... 6.4 12%
----- ----
$47.9 100%
===== ====
</TABLE>
The amount charged to operations and the related balance in the allowance
for loan losses are based on periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including without
limitation, past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current economic conditions.
12
<PAGE> 14
Deposits. The average amount of deposits and the average rates paid on
noninterest-bearing demand deposits, interest-bearing demand deposits, savings
deposits, and time deposits are presented on the schedule of average balance
sheets and analysis of net interest spread of the Financial Services Group on
page 8 hereof.
The amount of time deposits of $100,000 or more and related maturities at
year end 1997, are disclosed in Note F to Financial Services Group Summarized
Financial Statements on page 47 of the Company's 1997 Annual Report.
Return on Equity and Assets. The following table shows operating and
capital ratios of the Financial Services Group for each of the last three years:
OPERATING AND CAPITAL RATIOS
<TABLE>
<CAPTION>
YEAR END
--------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Return on average assets................................ 1.04% .41%* .75%
Return on average equity................................ 17.41% 6.43%* 11.79%
Dividend payout ratio................................... 246.72% 128.96%* 70.66%
Equity to assets ratio.................................. 5.97% 6.32% 6.35%
</TABLE>
- ---------------
* Includes SAIF assessment of $43.9 million. If the SAIF assessment is excluded
from 1996, the operating and capital ratios for 1996 would have been .74%,
11.63%, and 70.48% for return on average assets, return on average equity, and
dividend payout ratio, respectively.
Short-term borrowings. The following table shows short-term borrowings
outstanding for the Financial Services Group at the end of the reported period:
SHORT TERM BORROWINGS
(IN MILLIONS)
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE MAXIMUM AVERAGE AVERAGE
INTEREST AMOUNT AMOUNT INTEREST
BALANCE AT RATE AT OUTSTANDING OUTSTANDING RATE
END OF END OF DURING THE DURING THE DURING THE
PERIOD PERIOD PERIOD PERIOD PERIOD
---------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1997
Securities sold under agreements to
repurchase............................ $ 270.0 5.9% $1,696.6 $1,297.2 5.2%
Short-term FHLB advances................ $1,128.5 5.9% $1,128.5 $ 871.1 6.1%
1996
Securities sold under agreements to
repurchase............................ $ 959.3 5.5% $1,992.4 $1,484.3 5.6%
Short-term FHLB advances................ $ 977.6 5.5% $1,022.6 $ 559.9 5.0%
1995
Securities sold under agreements to
repurchase............................ $1,573.7 5.8% $1,864.1 $1,490.3 6.2%
Short-term FHLB advances................ $ 30.0 5.8% $ 50.0 $ 228.9 5.3%
</TABLE>
- ---------------
Note: Certain short-term FHLB advances and securities sold under agreements to
repurchase generally mature within thirty days of the transaction date.
Average borrowings during the year were calculated based on daily average.
RAW MATERIALS
The Company's main resource is timber, with approximately 2.2 million acres
of timberland located in Texas, Louisiana, Alabama, and Georgia. In 1997, wood
fiber required for the Company's paper and wood
13
<PAGE> 15
products operations was produced from these lands and as a by-product of its
solid wood operations to the extent shown on the following chart:
WOOD FIBER REQUIREMENTS
<TABLE>
<CAPTION>
PERCENTAGE
SUPPLIED
RAW MATERIALS INTERNALLY
------------- ----------
<S> <C>
Sawtimber......................................... 58%
Pine Pulpwood..................................... 63%
Hardwood Pulpwood................................. 35%
</TABLE>
The balance of the wood fiber required for these operations was purchased
from numerous landowners and other lumber companies. In an effort to provide an
alternative for a portion of its projected need for hardwood fiber, the Company
operates a eucalyptus plantation in Mexico. The Company expects to begin
receiving fiber from this project in approximately five years.
Linerboard and corrugating medium are the principal materials used by
Inland to make corrugated boxes. The mills at Rome, Georgia, and Orange, Texas,
are solely linerboard mills. The Ontario, California, and Maysville, Kentucky,
mills are traditionally linerboard mills, but can be used to manufacture
corrugating medium. The Newport, Indiana; Newark, California; and New
Johnsonville, Tennessee, mills are solely corrugating medium mills. The
principal raw material used by the Rome, Georgia, and Orange, Texas, mills is
virgin fiber. The Ontario, California; Newark, California; Newport, Indiana; and
Maysville, Kentucky, mills use only old corrugated containers ("OCC"). The mill
at New Johnsonville, Tennessee, uses a combination of virgin fiber and OCC. In
1997, OCC represented approximately 44% of the total fiber needs of the
Company's containerboard operations. The price of OCC may exhibit volatility due
to normal supply and demand fluctuations for the raw material and for the
finished product. OCC is purchased by the Company and its competitors on the
open market from numerous suppliers. Price fluctuations reflect the
competitiveness of these markets. The Company's historical grade patterns
produce more linerboard and less corrugating medium than is converted at the
Company's box plants. The deficit of corrugating medium is obtained through open
market purchases and/or trades and the excess linerboard is sold in the open
market.
Temple-Inland FPC obtains the gypsum for its wallboard operations from its
own quarry near Fletcher, Oklahoma, and from one outside source through a
long-term purchase contract. At its gypsum wallboard plant in West Memphis,
Arkansas, the Company also uses synthetic gypsum as a raw material. Synthetic
gypsum is a by-product of coal-burning electrical power plants. The joint
venture gypsum wallboard plant being built in Cumberland City, Tennessee, will
use only synthetic gypsum in its operations. The Company has entered into a
long-term supply agreement for synthetic gypsum produced at a TVA electrical
plant located adjacent to the joint venture plant. Synthetic gypsum acquired
pursuant to this agreement will supply all of the synthetic gypsum required by
the joint venture plant and a portion of the requirements for the West Memphis
plant.
In the opinion of management, the sources outlined above will be sufficient
to supply the Company's raw material needs for the foreseeable future.
ENERGY
Electricity and steam requirements at the Company's manufacturing
facilities are either supplied by a local utility or generated internally
through the use of a variety of fuels, including natural gas, fuel oil, coal,
wood bark, and in some instances, waste products resulting from the
manufacturing process. By utilizing these waste products and other wood
by-products as a biomass fuel to generate electricity and steam, the Company was
able to generate approximately 50 percent of its energy requirements at its
mills in Rome, Georgia; Evadale, Texas; and Orange, Texas, during 1997. The
Ontario, California, mill operates a cogeneration power plant that sells to an
electric utility excess electricity generated. In most cases where natural gas
or fuel oil is used as a fuel, the Company's facilities possess a dual capacity
enabling the use of either fuel as a source of energy.
14
<PAGE> 16
The natural gas needed to run the Company's natural gas fueled power
boilers is acquired pursuant to multiple gas contracts that provide for the
purchase of gas on an interruptible basis at favorable rates.
EMPLOYEES
At January 3, 1998, the Company and its subsidiaries had approximately
15,000 employees. Approximately 4,900 of these employees are covered by
collective bargaining agreements. These agreements generally run for a term of
three to six years and have varying expiration dates. The following table
summarizes certain information about the collective bargaining agreements that
cover a significant number of employees:
<TABLE>
<CAPTION>
LOCATION BARGAINING UNIT(A) EMPLOYEES COVERED EXPIRATION DATES
-------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Bleached United Paperworkers 489 Hourly Production August 1, 2004
Paperboard Mill, International Union Employees, 193 Hourly
Evadale, Texas ("UPIU"), Local 801, UPIU, Mechanical Maintenance
Local 825, and Employees, and 70
International Brotherhood Electrical Maintenance
of Electrical Workers Employees
("IBEW"), Local 390
Linerboard Mill, UPIU, Local 1398, and 242 Hourly Production July 31, 1999
Orange, Texas UPIU, Local 391 Employees and 102 Hourly
Maintenance Employees
Linerboard Mill, UPIU, Local 804, IBEW, 355 Hourly Production August 28, 2000
Rome, Georgia Local 613, United Employees, 43 Electrical
Association of Journeymen Maintenance Employees, and
& Apprentices of the 137 Hourly Maintenance
Plumbing & Pipefitting Employees
Industry of the U.S. and
Canada, Local 766, and
International Association
of Machinists & Aerospace
Workers, Local 414
Evansville, UPIU, Local 1046, UPIU, 103, 102, and 96 Hourly August 30, 2002
Indiana, Local 1737, and UPIU, Production Employees,
Louisville, Local 114, respectively respectively
Kentucky, and
Middletown,
Ohio, Box Plants
("Northern
Multiple")
Rome, Georgia, and UPIU Local 838 and UPIU 135 and 103 Hourly December 1, 2003
Orlando, Local 634, respectively Production Employees,
Florida, Box respectively
Plants
("Southern
Multiple")
</TABLE>
The Company has additional collective bargaining agreements with the
employees of various of its other box plants, mills, and building products
plants. These agreements each cover a relatively small number of employees and
are negotiated on an individual basis at each such facility.
The Company considers its relations with its employees to be good.
ENVIRONMENTAL PROTECTION
The operations conducted by the subsidiaries of the Company are subject to
federal, state, and local provisions regulating the discharge of materials into
the environment and otherwise related to the protection of the environment.
Compliance with these provisions, primarily the Federal Clean Air Act, Clean
Water Act,
15
<PAGE> 17
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"),
and Resource Conservation and Recovery Act ("RCRA"), has required the Company to
invest substantial funds to modify facilities to assure compliance with
applicable environmental regulations. Capital expenditures directly related to
environmental compliance totaled approximately $16 million during 1997. This
amount does not include capital expenditures for environmental control
facilities made as part of major mill modernizations and expansions or capital
expenditures made for another purpose that have an indirect benefit on
environmental compliance.
The Company is committed to protecting the health and welfare of its
employees, the public, and the environment and strives to maintain compliance
with all state and federal environmental regulations in a manner that is also
cost effective. In the construction of new facilities and the modernization of
existing facilities, the Company has used state of the art technology for its
air and water emissions. These forward-looking programs are intended to minimize
the impact that changing regulations have on capital expenditures for
environmental compliance.
Future expenditures for environmental control facilities will depend on new
laws and regulations and other changes in legal requirements and agency
interpretations thereof, as well as technological advances. The Company expects
the trend toward more stringent environmental regulation to continue for the
foreseeable future. The trend in interpretation and application of existing
regulations by regulatory authorities also appears to be toward increasing
stringency particularly under RCRA with respect to certain solid wastes
generated at kraft mills. Given these uncertainties, the Company currently
estimates that capital expenditures for environmental purposes during the period
1998 through 2000 will average approximately $15 million each year. The
estimated expenditures could be significantly higher if more stringent laws and
regulations are implemented.
On November 14, 1997, the U.S. Environmental Protection Agency (the "EPA")
issued extensive regulations governing air and water emissions from the pulp and
paper industry (the "Cluster Rule"). According to the EPA, the technology
standards in the Cluster Rule will cut the industry's toxic air pollutant
emissions by almost 60 percent from current levels and virtually eliminate all
dioxin discharged from pulp, paper, and paperboard mills into rivers and other
surface waters. The rule also provides incentives for individual mills to adopt
technologies that will lead to further reductions in toxic pollutant discharges.
The EPA estimates that the industry will need to invest approximately $1.8
billion in capital expenditures and approximately $277 million per year in
operating expenditures to comply with the Cluster Rule. The initial compliance
period is three years from the date these regulations are published in the
Federal Register. The estimated expenditures of the Company that are disclosed
above do not include expenditures that may be needed to comply with the Cluster
Rule. Based upon its interpretation of the Cluster Rule as issued, the Company
currently estimates that compliance with the rule may require modifications at
several facilities. Some of these modifications can be included in modernization
projects that will provide economic benefits to the Company. The extent of such
benefits can increase these investments, but currently these expenditures are
not expected to exceed $110 million over the next three years.
RCRA establishes a regulatory program for the treatment, storage,
transportation, and disposal of solid and hazardous wastes. Under RCRA,
subsidiaries of the Company have prepared hazardous waste closure plans to
address land disposal units containing hazardous wastes formerly managed at
various facilities. These closure plans are in various states of implementation,
with most sites simply awaiting state certification. The Company believes that
the costs associated with these plans will not have a material impact on the
earnings or competitive position of the Company.
In addition to these capital expenditures, the Company incurs significant
ongoing maintenance costs to maintain compliance with environmental regulation.
The Company, however, does not believe that these capital expenditures or
maintenance costs will have a material adverse effect on the earnings of the
Company. In addition, expenditures for environmental compliance should not have
a material impact on the competitive position of the Company, because other
companies are also subject to these regulations.
16
<PAGE> 18
COMPETITION
All of the industries in which the Company operates are highly competitive.
The level of competition in a given product or market may be affected by the
strength of the dollar and other market factors including geographic location,
general economic conditions, and the operating efficiencies of competitors.
Factors influencing the Company's competitive position vary depending on the
characteristics of the products involved. The primary factors are product
quality and performance, price, service, and product innovation.
The corrugated packaging industry is highly competitive with almost 1,500
box plants in the United States. Box plants operated by Inland and its
subsidiaries accounted for approximately 8.3 percent of total industry shipments
during 1997. Although corrugated packaging is dominant in the national
distribution process, Inland's products also compete with various other
packaging materials, including products made of paper, plastics, wood, and
metals.
Bleached paperboard produced by the Paper Group has a variety of ultimate
uses and, therefore, serves diversified markets. The Company competes with
larger paper producers with greater resources.
In the building materials markets, the Building Products Group competes
with many companies that are substantially larger and have greater resources in
the manufacturing of commodity building materials.
Financial Services competes with commercial banks, savings and loan
associations, mortgage bankers, and other lenders in its mortgage banking and
consumer savings bank activities, and with real estate investment and management
companies in its development activities. Mortgage banking, real estate
development, and consumer savings banks are highly competitive businesses, and a
number of entities with which the Company competes have greater resources.
EXECUTIVE OFFICERS
Set forth below are the names, ages, and titles of the persons who serve as
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Clifford J. Grum...... 63 Chairman of the Board and Chief Executive Officer
Kenneth M. Jastrow,
II.................. 50 President, Chief Operating Officer, and Chief Financial Officer
William B. Howes...... 60 Executive Vice President
Harold C. Maxwell..... 57 Group Vice President
Ted A. Owens.......... 59 Group Vice President
Jack C. Sweeny........ 51 Group Vice President
Joseph E. Turk........ 54 Group Vice President
David H. Dolben....... 62 Vice President and Chief Accounting Officer
M. Richard Warner..... 46 Vice President, General Counsel, and Secretary
David W. Turpin....... 47 Treasurer
</TABLE>
Clifford J. Grum became Chairman of the Board, Chief Executive Officer, and
a Director of the Company in February 1991 after serving as President, Chief
Executive Officer, and a Director since October 1983. He also serves as a
Director of Temple-Inland FPC, a Director of Inland, Chairman of the Board of
Guaranty, and a Director of Financial Services.
Kenneth M. Jastrow, II was named President, Chief Operating Officer, and a
Director of the Company in February 1998, and continues to serve as the Chief
Financial Officer of the Company, a position he has held since November 1991.
Before being named President and Chief Operating Officer, Mr. Jastrow was a
Group Vice President of the Company since 1995. He also serves as Chairman of
the Board and Chief Executive Officer of Financial Services, President and Chief
Executive Officer of Guaranty, and Chairman of the Board and Chief Executive
Officer of Temple-Inland Mortgage.
William B. Howes, who was named Executive Vice President and a Director in
August 1996, became a Group Vice President of the Company and the Chairman of
the Board and Chief Executive Officer of Inland in July 1993 after serving as
the President and Chief Operating Officer of Inland since April 1992. From
August 1990 until April 1992, Mr. Howes was the Executive Vice President of
Inland. Before joining Inland in
17
<PAGE> 19
1990, Mr. Howes was an employee of Union Camp Corporation for 28 years, serving
most recently as Senior Vice President.
Harold C. Maxwell became Group Vice President of the Company in May 1989.
In March 1998, Mr. Maxwell was named Chairman of the Board, President, and Chief
Executive Officer of Temple-Inland FPC after having served as Group Vice
President -- Building Products of Temple-Inland FPC since November 1982.
Ted A. Owens became a Group Vice President of the Company in August 1996.
He also serves as Executive Vice President of Inland. Mr. Owens has been
employed by Inland since 1976. During that time he has served in various
positions, including Group Vice President -- Containerboard, and Vice President
Sales, Administration, and Engineering.
Jack C. Sweeny became a Group Vice President of the Company in May 1996. He
also serves as Group Vice President -- Forests Division of Temple-Inland FPC.
From November 1982 through May 1996, Mr. Sweeny served as Vice
President -- Operations of the Building Products Division of Temple-Inland FPC.
Joseph E. Turk became a Group Vice President of the Company in August 1996.
He also serves as Executive Vice President of Inland. Mr. Turk has been employed
by Inland since 1967 and has served in various capacities including Group Vice
President -- Container Division and Division Vice President Manufacturing
Services.
David H. Dolben became Vice President of the Company in May 1987. Mr.
Dolben also serves as Vice President, Treasurer, and a Director of Temple-Inland
FPC and a Director of Inland.
M. Richard Warner became Vice President, General Counsel and Secretary of
the Company in June 1994. From 1991 to 1994, Mr. Warner was an attorney in
private practice in Lufkin, Texas. Mr. Warner served as Treasurer of the Company
from January 1986 to 1990 and as Vice Chairman of Guaranty from 1990 to 1991.
David W. Turpin became Treasurer of the Company in June 1991. Mr. Turpin
also serves as the Executive Vice President and Chief Financial Officer of
Lumbermen's Investment Corporation, a real estate subsidiary of the Company. Mr.
Turpin was first employed by the Company in December 1990 as the Senior Vice
President and Treasurer of Lumbermen's Investment Corporation.
Officers are elected at the Company's Annual Meeting of Directors to serve
until their successors have been elected and have qualified or as otherwise
provided in the Company's Bylaws.
ITEM 2. PROPERTIES
The Company owns and operates plants, mills, and manufacturing facilities
throughout the United States, three box plants in Mexico, and box plants in
Argentina, Chile, and Puerto Rico. Additional descriptions as of year-end of
selected properties are set forth in the following charts:
CONTAINERBOARD MILLS
<TABLE>
<CAPTION>
RATED
NO. OF ANNUAL 1997
LOCATION PRODUCT MACHINES CAPACITY PRODUCTION
-------- ------- -------- -------- ----------
(IN TONS)
<S> <C> <C> <C> <C>
Ontario, California............................. Linerboard 1 300,000 288,000
Rome, Georgia................................... Linerboard 2 835,000 849,000
Orange, Texas................................... Linerboard 2 630,000 608,000
Maysville, Kentucky............................. Linerboard 1 390,000 397,000
Newark, California(1)........................... Medium 2 70,000 73,000
Newport, Indiana................................ Medium 1 280,000 284,000
New Johnsonville, Tennessee..................... Medium 1 265,000 262,000
</TABLE>
- ---------------
(1) In February 1998, the Company announced its intention to close this mill
during the second quarter of 1998.
18
<PAGE> 20
BLEACHED PAPERBOARD MILL
<TABLE>
<CAPTION>
RATED
NO. OF ANNUAL 1997
LOCATION PRODUCT MIX MACHINES CAPACITY PRODUCTION
-------- ----------- -------- -------- ----------
(IN TONS)
<S> <C> <C> <C> <C> <C>
Evadale, Texas......................... Bleached Pulp .6% 4 3,734
Food Service 35.9% 243,652
Packaging 38.4% 260,568
Office Supplies 15.3% 103,736
Specialties 7.0% 47,363
Nodular Pulp 2.8% 18,750
----- ------- -------
100% 4 690,000* 677,803
===== =======
</TABLE>
- ---------------
* The production capacity may vary to some degree depending on product mix. Due
to market conditions for the grade it was designed to produce, the Company
decided in 1993 to no longer operate a cylinder machine at the mill.
19
<PAGE> 21
CORRUGATED CONTAINER PLANTS*
<TABLE>
<CAPTION>
DATE
CORRUGATOR ACQUIRED OR
LOCATION SIZE CONSTRUCTED
-------- ---------- -----------
<S> <C> <C>
Fort Smith, Arkansas........................................ 87" 1978
Fort Smith, Arkansas(1)***.................................. None 1996
Bell, California............................................ 97" 1972
El Centro, California(1).................................... 87" 1990
Newark, California (2)...................................... 87" 1974
Ontario, California......................................... 87" 1985
Santa Fe Springs, California................................ 98" 1972
Tracy, California**......................................... 87" 1986
Wheat Ridge, Colorado....................................... 87" 1977
Orlando, Florida............................................ 98" 1955
Rome, Georgia**............................................. 87" & 98" 1955
Chicago, Illinois........................................... 87" 1957
Crawfordsville, Indiana..................................... 98" 1971
Evansville, Indiana......................................... 98" 1958
Garden City, Kansas......................................... 96" 1981
Kansas City, Kansas......................................... 87" 1981
Louisville, Kentucky........................................ 87" 1958
Minden, Louisiana........................................... 98" 1986
Minneapolis, Minnesota...................................... 87" 1986
Hattiesburg, Mississippi.................................... 87" 1965
St. Louis, Missouri......................................... 87" 1963
Spotswood, New Jersey....................................... 87" 1963
Middletown, Ohio............................................ 98" 1930
Streetsboro, Ohio........................................... 98" 1997
Biglerville, Pennsylvania................................... 98" 1955
Hazleton, Pennsylvania...................................... 98" 1976
Vega Alta, Puerto Rico...................................... 87" 1977
Lexington, South Carolina................................... 98" 1980
Rock Hill, South Carolina................................... 87" 1972
Elizabethton, Tennessee..................................... 98" 1982
Elizabethton, Tennessee(1)***............................... None 1990
Dallas, Texas............................................... 98" 1962
Edinburg, Texas............................................. 87" 1989
Petersburg, Virginia........................................ 87" 1991
San Jose Iturbide, Mexico................................... 87" 1994
Monterrey, Mexico........................................... 87" 1994
Los Mochis, Sinaloa, Mexico................................. 80" 1997
Buenos Aires, Argentina..................................... 98" 1994
Santiago, Chile............................................. 87" 1995
</TABLE>
- ---------------
* The annual capacity of Inland's box plants is not given because such
annual capacity is a function of the product mix, customer requirements
and the type of converting equipment installed and operating at each
plant, each of which varies from time to time.
** The Tracy, California and Rome, Georgia plants each contain two
corrugators.
*** Sheet plants.
(1) Leased facilities.
(2) In February 1998, the Company announced its intention to close this box
plant during the second quarter of 1998.
20
<PAGE> 22
Inland owns specialty converting plants in Santa Fe Springs, California;
Harrington, Delaware; Indianapolis, Indiana; and Leominster, Massachusetts, and
leases specialty converting plants in Buena Park, California; Santa Fe Springs,
California; Ontario, California; and Rural Hall, North Carolina. Additionally,
Inland owns a graphics resource center in Indianapolis, Indiana, that has a 100"
preprint press and a tape manufacturing facility in Milwaukee, Wisconsin, and
also leases 50 warehouses located throughout much of the United States.
BUILDING PRODUCTS
<TABLE>
<CAPTION>
RATED
ANNUAL
DESCRIPTION LOCATION CAPACITY
----------- -------- ---------------
(IN MILLIONS OF
BOARD FEET)
<S> <C> <C>
Lumber........................................... Diboll, Texas 150*
Lumber........................................... Pineland, Texas 95
Lumber........................................... Buna, Texas 170
Lumber........................................... Rome, Georgia 115
Lumber........................................... DeQuincy, Louisiana 145
</TABLE>
- ---------------
* Includes separate finger jointing capacity of 10 million board feet.
<TABLE>
<CAPTION>
RATED
ANNUAL
DESCRIPTION LOCATION CAPACITY
----------- -------- ---------------
(IN MILLIONS OF
SQUARE FEET)
<S> <C> <C>
Fiberboard................................... Diboll, Texas 460
Particleboard................................ Monroeville, Alabama 145
Particleboard................................ Thomson, Georgia 145
Particleboard................................ Diboll, Texas 140
Particleboard................................ Hope, Arkansas 180
Plywood...................................... Pineland, Texas 265
Gypsum Wallboard............................. West Memphis, Arkansas 400
Gypsum Wallboard............................. Fletcher, Oklahoma 466
Gypsum Wallboard*............................ McQueeney, Texas 300
</TABLE>
- ---------------
* This facility is owned by a joint venture in which a subsidiary of the
Company has a 50 percent interest.
TIMBER AND TIMBERLANDS*
(IN ACRES)
<TABLE>
<S> <C>
Pine Plantations......................................... 1,510,779
Natural Pine............................................. 323,738
Hardwood................................................. 215,826
Special Use/Non-Forested................................. 107,913
---------
TOTAL.................................................... 2,158,256
=========
</TABLE>
- ---------------
* Includes approximately 243,000 acres of leased land.
In the opinion of management, the Company's plants, mills, and
manufacturing facilities are suitable for their purpose and adequate for the
Company's business.
Through its subsidiaries, the Company owns certain of the office buildings
in which various of its corporate offices are headquartered. This includes
approximately 76,000 square feet of space in Diboll, Texas, approximately
130,000 square feet in Indianapolis, Indiana, and 270,000 square feet of office
space in Austin,
21
<PAGE> 23
Texas. Construction is currently in progress for a 175,000 square foot addition
to the Company's office complex in Austin, Texas.
The Company also owns 381,000 mineral acres in Texas and Louisiana. Revenue
from lease and production activities on these acres totaled $10.8 million in
1997. Additionally, the Company owns 395,830 mineral acres in Alabama and
Georgia, which produced no lease or production revenue in 1997.
At year end 1997 property and equipment having a net book value of
approximately $48.4 million were subject to liens in connection with $71.6
million of debt.
ITEM 3. LEGAL PROCEEDINGS
General:
During the year, the Company disclosed that a former employee of the
Company ("Employee") filed a wrongful termination lawsuit against the Company on
August 4, 1995, which is currently pending in state district court in Angelina
County, Texas. Employee alleges that his employment was terminated for refusing
to participate in alleged illegal activity consisting of underpayment of the
Company's federal income taxes and filing with the Securities and Exchange
Commission (the "Commission") financial reports that were misleading because of
the understatement of income. Although the Company does not consider this
litigation to be material, the Company has publicly denied the allegations made
by Employee in response to media attention given to the litigation. The Company
remains confident that upon the ultimate trial of the issues raised, the
allegations will be found to have no merit or grounds whatsoever. As a result of
the allegations made by Employee, the Commission began a non-public
investigation into the allegations. The Company has provided information to the
Commission in response to a subpoena issued in this investigation and will
continue to cooperate with the Commission in resolving this matter.
The Company and its subsidiaries are involved in various other legal
proceedings that have arisen from time to time in the ordinary course of
business. In the opinion of the Company's management, such proceedings will not
be material to the business or financial condition of the Company and its
subsidiaries.
Environmental:
The facilities of the Company are periodically inspected by environmental
authorities, with whom the Company must file periodic reports on the discharge
of pollutants. Occasionally, one or more of these facilities have operated in
violation of applicable pollution control standards, which could subject the
facilities to fines or penalties in the future. Management believes that any
fines or penalties that may be imposed as a result of these violations will not
have a material adverse effect on the Company's earnings or competitive
position. The Company, however, has noticed an increase in the number and dollar
amount of fines and penalties imposed by environmental authorities. No assurance
can be given, therefore, that any fines levied against the Company in the future
for any such violations will not be material.
Subsidiaries of the Company are involved in regulatory enforcement actions
concerning the management of solid wastes at various facilities. These
proceedings are representative of a trend the Company has observed toward more
stringent application of RCRA regulations to solid wastes generated at kraft
mills. In July 1993, a subsidiary's facility in Rome, Georgia, experienced a
significant upset in its wastewater treatment process. This upset caused the
Georgia environmental agency to order a temporary cessation of production. The
Company's subsidiary has resolved its potential liability to the State of
Georgia by paying a $100,000 monetary penalty and agreeing to perform certain
work, but remains exposed to potential claims of the U.S. EPA and private
citizens. Management believes, however, that these matters will not result in
liability to an extent that would have a material adverse effect on the business
or financial condition of the Company.
Under CERCLA, liability for the cleanup of a Superfund site may be imposed
on waste generators, site owners and operators, and others regardless of fault
or the legality of the original waste disposal activity. While joint and several
liability is authorized under CERCLA, as a practical matter, the cost of cleanup
is generally allocated among the many waste generators. Subsidiaries of the
Company are parties to numerous proceedings relating to the cleanup of hazardous
waste sites under CERCLA and similar state laws. The subsidiaries have
22
<PAGE> 24
conducted investigations of the sites and in certain instances believe that
there is no basis for liability and have so informed the governmental entities.
The internal investigations of the remaining sites reveal that the portion of
the remediation costs for these sites to be allocated to the Company should be
relatively small and will have no material impact on the Company. There can be
no assurance that subsidiaries of the Company will not be named as potentially
responsible parties at additional Superfund sites in the future or that the
costs associated with the remediation of those sites would not be material.
All litigation has an element of uncertainty and the final outcome of any
legal proceeding cannot be predicted with any degree of certainty. With these
limitations in mind, the Company presently believes that any ultimate liability
from the legal proceedings discussed herein would not have a material adverse
effect on the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its stockholders during
the fourth quarter of its last fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information:
The information concerning market prices of the Company's Common Stock
required by this item is incorporated by reference from page 34 of the Company's
1997 Annual Report to Shareholders furnished to the Securities and Exchange
Commission pursuant to Rule 14a-3(b).
Stockholders:
The Company's stock transfer records indicated that as of March 4, 1998,
there were approximately 7,240 holders of record of the Common Stock.
Dividend Policy:
On February 6, 1998, the Board of Directors declared a quarterly dividend
on the Common Stock of $.32 per share payable on March 13, 1998, to stockholders
of record on February 27, 1998. During the first two quarters of 1995, the
Company paid a quarterly dividend of $.27 per share. The quarterly dividend was
increased to $.30 per share beginning with the dividend payable September 15,
1995, and was increased again to $.32 per share beginning with the dividend
payable September 13, 1996. The Board will review its dividend policy
periodically, and the declaration of dividends will necessarily depend upon
earnings and financial requirements of the Company and other factors within the
discretion of its Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from
page 34 of the Company's 1997 Annual Report to Shareholders furnished to the
Securities and Exchange Commission pursuant to Rule 14a-3(b).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference from
pages 25 through 33 of the Company's 1997 Annual Report to Shareholders
furnished to the Securities and Exchange Commission pursuant to Rule 14a-3(b).
Management's Discussion and Analysis of Financial Condition and Results of
Operations that is incorporated by reference into this item and the Market Risk
Disclosures set forth in item 7A contain forward-looking statements that involve
risks and uncertainties. The actual results achieved by Temple-Inland
23
<PAGE> 25
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include general economic,
market, or business conditions; the opportunities (or lack thereof) that may be
presented to and pursued by Temple-Inland and its subsidiaries; the availability
and price of raw materials used by Temple-Inland and its subsidiaries;
competitive actions by other companies; changes in laws or regulations; and
other factors, many of which are beyond the control of Temple-Inland and its
subsidiaries.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk:
The Company is subject to interest rate risk from the utilization of
financial instruments such as term debt and other borrowings, as well as the
lending and deposit gathering activities of the Financial Services Group.
Historically, the exposure of income to interest rate risk has been maintained
at a relatively moderate level due to the high correlation between changes in
the rates earned on the group's adjustable rate assets (which comprise over 90%
of earning assets) and changes in the aggregate cost of the group's funding
sources. The Company has many options to mitigate the earnings impact of a
significant change in interest rates. Potential options include selling assets,
executing hedges, and modifying the maturity or repricing characteristics of
assets and/or liabilities.
The Company routinely utilizes a simulation model to measure the
sensitivity of income to movements in interest rates. The model incorporates the
maturity and repricing characteristics of interest rate sensitive assets and
liabilities, as well as assumptions regarding the impact of changing interest
rates on the prepayment rates of certain assets. The following table illustrates
the estimated impact on pre-tax income of immediate, parallel, and sustained
shifts in interest rates for the subsequent 12 month period:
<TABLE>
<CAPTION>
CHANGE IN INCREASE/(DECREASE) IN
INTEREST RATES INCOME BEFORE TAXES
- -------------- ----------------------
(IN MILLIONS)
<S> <C>
+2% $ 4
+1% $ 9
0 $ 0
-1% $(12)
-2% $(14)
</TABLE>
Additionally, the fair value (estimated at $270 million as of the end of
1997) of the Financial Services Group's mortgage servicing rights is also
affected by changes in interest rates. The Company estimates that a one
percentage point decrease in interest rates from current levels would decrease
the fair value of the mortgage servicing rights by approximately $40 million.
Foreign Currency Risk:
The Company's exposure to foreign currency fluctuations on its financial
instruments is not material because most of these instruments are denominated in
U.S. dollars.
Commodity Price Risk:
The Company has no financial instruments subject to commodity price risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and its subsidiaries required to be
included in this Item 8 are set forth in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with its independent
auditors to report under this item.
24
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
from pages 5 through 8 of the Company's definitive proxy statement, involving
the election of directors, to be filed pursuant to Regulation 14A with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K (the "Definitive Proxy Statement").
Information required by this item concerning executive officers is included in
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
pages 10 through 16 of the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
pages 2 through 4 of the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
page 8 of the Company's Definitive Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Report.
1. FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
ITEM NUMBER
---- ------
<S> <C>
Temple-Inland Inc. and Subsidiaries
Report of Independent Auditors*............................. 61
Consolidated Statements of Income -- for the years 1997,
1996, and 1995*........................................... 50
Consolidating Balance Sheets at year end 1997 and 1996*..... 52-53
Consolidated Statements of Shareholders' Equity -- for the
years 1997, 1996, and 1995*............................... 54
Consolidated Statements of Cash Flows -- for the years 1997,
1996, and 1995*........................................... 51
Notes to Consolidated Financial Statements*................. 55-60
</TABLE>
- ---------------
* Incorporated herein by reference from the Company's Annual Report to
Shareholders for the fiscal year ended January 3, 1998, and filed for purposes
of those portions so incorporated as Exhibit 13. Page numbers refer to page
numbers in the Company's 1997 Annual Report to Shareholders.
25
<PAGE> 27
2. FINANCIAL STATEMENT SCHEDULE:
The following Financial Statement Schedule of the Company required by
Regulation S-X and excluded from the Annual Report to Shareholders for the year
ended January 3, 1998, is filed herewith at the page indicated.
<TABLE>
<CAPTION>
PAGE
ITEM NUMBER
---- ------
<S> <C>
Temple-Inland Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts.......... 32
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
inapplicable and, therefore, have been omitted.
3. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.01 -- Certificate of Incorporation of the Company(1), as
amended effective May 4, 1987(2), as amended effective
May 4, 1990(3)
3.02 -- By-laws of the Company as amended and restated May 3,
1991(18)
4.01 -- Form of Specimen Common Stock Certificate of the
Company(4)
4.02 -- Indenture dated as of September 1, 1986, between the
Registrant and Chemical Bank, as Trustee(5), as amended
by First Supplemental Indenture dated as of April 15,
1988, as amended by Second Supplemental Indenture dated
as of December 27, 1990(12), and as amended by Third
Supplemental Indenture dated as of May 9, 1991(13)
4.03 -- Form of Specimen Medium-Term Note of the Company(5)
4.04 -- Form of Fixed-rate Medium Term Note, Series B, of the
Company(12)
4.05 -- Form of Floating-rate Medium Term Note, Series B, of the
Company(12)
4.06 -- Form of 9% Note due May 1, 2001, of the Company(15)
4.07 -- Form of Fixed-rate Medium Term Note, Series D, of the
Company(14)
4.08 -- Form of Floating-rate Medium Term Note, Series D, of the
Company(14)
4.09 -- Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock, dated
February 16, 1989(6)
4.10 -- Rights Agreement, dated February 3, 1989, between the
Company and NCNB Texas National Bank, Dallas, Texas, as
Rights Agent(7)
4.11 -- Form of 7.25% Note due September 15, 2004, of the
Company(16)
4.12 -- Form of 8.25% Debenture due September 15, 2022, of the
Company(16)
10.01* -- 1988 Stock Option Plan for Key Employees and Directors of
Temple-Inland Inc. and its Subsidiaries(8)
10.02* -- Form of Incentive Option Agreement under the 1988 Stock
Option Plan(8)
10.03* -- Form of Nonqualified Option Agreement under the 1988
Stock Option Plan(8)
10.04* -- Temple-Inland Inc. Incentive Stock Plan(1), as amended
May 6, 1988(9), as amended February 7, 1992(18)
10.05* -- Form of Incentive Shares Agreement(10)
10.06* -- 1988 Performance Unit Plan for Key Employees of
Temple-Inland Inc. and its Subsidiaries(9), as amended
February 4, 1994(20)
10.07* -- Form of Performance Unit Rights Agreement under the
Performance Unit Plan(6)
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.08 -- Assistance Agreement dated September 30, 1988, among the
Federal Savings and Loan Insurance Corporation; Guaranty
Federal Savings Bank, Dallas, Texas; Guaranty Holdings
Inc. I; Guaranty Holdings Inc. II; Temple-Inland Inc.;
Mason Best Company; and Trammell Crow Ventures 3,
Ltd.(11)
10.09* -- Temple-Inland Inc. 1993 Stock Option Plan(17)
10.10* -- Temple-Inland Inc. 1993 Restricted Stock Plan(17)
10.11* -- Temple-Inland Inc. 1993 Performance Unit Plan(17), as
amended February 4, 1994(20)
10.12 -- Stock Purchase Agreement and Agreement and Plan of
Reorganization by and among Guaranty, Guaranty Holdings
Inc. I ("GHI"), Lone Star Technologies, Inc. ("LST"), and
LSST Financial Services Corporation ("LSST Financial"),
dated as of February 16, 1993(19)
10.13 -- First Amendment to Stock Purchase agreement and Agreement
and Plan of Reorganization by and among Guaranty, GHI,
LST and LSST Financial, dated as of April 2, 1993(19)
10.14 -- Second Amendment to Stock Purchase Agreement and
Agreement and Plan of Reorganization by and among
Guaranty, GHI, LST and LSST Financial, dated as of August
31, 1993(19)
10.15 -- Third Amendment to Stock Purchase Agreement and Agreement
and Plan of Reorganization by and among Guaranty, GHI,
LST and LSST Financial, dated as of September 30,
1993(19)
10.16 -- Holdback Escrow Agreement by and among LST, Guaranty, and
Bank One, Texas, N.A. dated as of November 12, 1993(19)
10.17 -- Termination Agreement by and among Federal Deposit
Insurance Corporation, as Manager of the FSLIC Resolution
Fund, Guaranty Federal Bank, F.S.B., Guaranty Holdings
Inc. I, and Temple-Inland Inc., dated as of October 31,
1995(21)
10.18 -- GFB Tax Agreement by and among Federal Deposit Insurance
Corporation, as Manager of the FSLIC Resolution Fund,
Guaranty Federal Bank, F.S.B., Guaranty Holdings Inc. I,
and Temple-Inland Inc., dated as of October 31, 1995(21)
10.19 -- Termination Agreement by and among Federal Deposit
Insurance Corporation, as Manager of the FSLIC Resolution
Fund, Guaranty Federal Bank, F.S.B., the surviving
institution resulting from the merger of American Federal
Bank, F.S.B. with and into Guaranty, which subsequently
became the successor-in-interest to LSST Financial
Services Corporation, Guaranty Holdings Inc. I, and
Temple-Inland Inc., dated as of October 31, 1995(21)
10.20 -- AFB Tax Agreement by and among Federal Deposit Insurance
Corporation, as Manager of the FSLIC Resolution Fund,
Guaranty Federal Bank, F.S.B., the surviving institution
resulting from the merger of American Federal Bank,
F.S.B. with and into Guaranty, which subsequently became
the successor-in-interest to LSST Financial Services
Corporation, Guaranty Holdings Inc. I, and Temple-Inland
Inc., dated as of October 31, 1995(21)
10.21 -- Agreement and Plan of Merger by and among Temple-Inland
Inc., California Financial Holding Company, Guaranty
Federal Bank, F.S.B., and Stockton Savings Bank, F.S.B.,
dated as of December 8, 1996(22)
10.22* -- Temple-Inland Inc. 1997 Stock Option Plan(23)
10.23* -- Temple-Inland Inc. 1997 Restricted Stock Plan(23)
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
11 -- Statement re: Computation of Per Share Earnings for the
three years ended January 3, 1998(24)
13 -- Annual Report to Shareholders for the year ended January
3, 1998. Such Report is not deemed to be filed with the
Commission as part of this Annual Report on Form 10-K,
except for the portions thereof expressly incorporated by
reference.(24)
21 -- Subsidiaries of the Company(24)
23 -- Consent of Ernst & Young LLP(24)
27.1 -- Financial Data Schedules(24)
27.2 -- Restated 1995 and 1996 Annual Financial Data
Schedules(24)
27.3 -- Restated 1997 Interim Financial Data Schedules(24)
27.4 -- Restated 1996 Interim Financial Data Schedules(24)
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Registration Statement No. 2-87570 on Form
S-1 filed by the Company with the Commission.
(2) Incorporated by reference to Post-effective Amendment No. 2 to
Registration Statement No. 2-88202 on Form S-1 filed by the Company with
the Commission.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement No. 33-25650 on Form S-8 filed by the Company with
the Commission.
(4) Incorporated by reference to Registration Statement No. 33-27286 on Form
S-8 filed by the Company with the Commission.
(5) Incorporated by reference to Registration Statement No. 33-8362 on Form
S-1 filed by the Company with the Commission.
(6) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1988.
(7) Incorporated by reference to the Company's Form 8-K filed with the
Commission on February 16, 1989.
(8) Incorporated by reference to Registration Statement No. 33-23132 on Form
S-8 filed by the Company with the Commission.
(9) Incorporated by reference to the Company's Definitive Proxy Statement
filed with the Commission on March 18, 1988.
(10) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1983.
(11) Incorporated by reference to the Company's Form 8-K filed with the
Commission on October 14, 1988.
(12) Incorporated by reference to the Company's Form 8-K filed with the
Commission on December 27, 1990.
(13) Incorporated by reference to Registration Statement No. 33-40003 on Form
S-3 filed by the Company with the Commission.
(14) Incorporated by reference to Registration Statement No. 33-43978 on Form
S-3 filed by the Company with the Commission.
(15) Incorporated by reference to the Company's Form 8-K filed with the
Commission on May 2, 1991.
28
<PAGE> 30
(16) Incorporated by reference to Registration Statement No. 33-50880 on Form
S-3 filed by the Company with the Commission.
(17) Incorporated by reference to the Company's Definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held May 6, 1994, and
filed with the Commission on March 21, 1994.
(18) Incorporated by reference to the Company's Form 10-K for the year ended
January 2, 1993.
(19) Incorporated by reference to the Company's Form 8-K filed with the
Commission on November 24, 1993.
(20) Incorporated by reference to the Company's Form 10-K for the year ended
January 1, 1994.
(21) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
(22) Incorporated by reference to Registration Statement on Form S-4 (No.
333-21937) filed by the Company with the Commission.
(23) Incorporated by reference to the Company's Definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held May 2, 1997, and
filed with the Commission on March 17, 1997.
(24) Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1997.
29
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto authorized, on March 30,
1998.
TEMPLE-INLAND INC.
(Registrant)
By: /s/ CLIFFORD J. GRUM
----------------------------------
Clifford J. Grum,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ CLIFFORD J. GRUM Director, Chairman of the March 30, 1998
- ----------------------------------------------------- Board, Chief Executive
Clifford J. Grum Officer
/s/ KENNETH M. JASTROW, II Director, President, Chief March 30, 1998
- ----------------------------------------------------- Operating Officer, and
Kenneth M. Jastrow, II Chief Financial Officer
/s/ DAVID H. DOLBEN Vice President and Chief March 30, 1998
- ----------------------------------------------------- Accounting Officer
David H. Dolben
/s/ PAUL M. ANDERSON Director March 30, 1998
- -----------------------------------------------------
Paul M. Anderson
/s/ ROBERT CIZIK Director March 30, 1998
- -----------------------------------------------------
Robert Cizik
/s/ ANTHONY M. FRANK Director March 30, 1998
- -----------------------------------------------------
Anthony M. Frank
/s/ WILLIAM B. HOWES Director March 30, 1998
- -----------------------------------------------------
William B. Howes
/s/ BOBBY R. INMAN Director March 30, 1998
- -----------------------------------------------------
Bobby R. Inman
/s/ HERBERT A. SKLENAR Director March 30, 1998
- -----------------------------------------------------
Herbert A. Sklenar
/s/ WALTER P. STERN Director March 30, 1998
- -----------------------------------------------------
Walter P. Stern
/s/ ARTHUR TEMPLE III Director March 30, 1998
- -----------------------------------------------------
Arthur Temple III
/s/ CHARLOTTE TEMPLE Director March 30, 1998
- -----------------------------------------------------
Charlotte Temple
/s/ LARRY E. TEMPLE Director March 30, 1998
- -----------------------------------------------------
Larry E. Temple
</TABLE>
30
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Temple-Inland Inc.
as of January 3, 1998 and December 28, 1996, and for each of the three years in
the period ended January 3, 1998, and have issued our report thereon dated
January 30, 1998 which is incorporated by reference in this Annual Report (Form
10-K) from the 1997 Annual Report to Shareholders of Temple-Inland Inc. Our
audits also included the financial statement schedule listed in Item 14(a) of
this Form 10-K. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Houston, Texas
January 30, 1998
31
<PAGE> 33
SCHEDULE II
TEMPLE-INLAND INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING OF COSTS AND ACCOUNTS -- DEDUCTIONS -- AT END
PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
------------ ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
For the year 1997:
Deducted from accounts
receivable:
Allowance for doubtful
accounts.................... $ 9.4 $ 6.8 $-- $6.8 (A) $ 9.4
Reserve for discounts and
allowances.................. 1.4 -- 7.8 (B) 7.7 (C) 1.5
Allowance for loan losses..... 68.4 (1.7) 30.4 (D) 6.0 (A) 91.1
Allowance for unrealized
losses on available-for-sale
securities.................. 12.2 (2.5) (4.6) (E) -- 5.1
Allowance for unrealized
losses on mortgage loans
held for sale............... -- 0.4 -- -- 0.4
----- ----- ----- ----- ------
Totals................... $91.4 $ 3.0 $33.6 $20.5 $107.5
===== ===== ===== ===== ======
For the year 1996:
Deducted from accounts
receivable:
Allowance for doubtful
accounts.................... $ 8.3 $ 3.1 $-- $2.0 (A) $ 9.4
Reserve for discounts and
allowances.................. 1.5 -- 7.0 (B) 7.1 (C) 1.4
Allowance for loan losses..... 65.5 13.8 -- 10.9 (A) 68.4
Allowance for unrealized
losses on available-for-sale
securities.................. (1.7) -- 13.9 (E) -- 12.2
Allowance for unrealized
losses on mortgage loans
held for sale............... 0.3 -- -- 0.3 (A) --
----- ----- ----- ----- ------
Totals................... $73.9 $16.9 $20.9 $20.3 $ 91.4
===== ===== ===== ===== ======
For the year 1995:
Deducted from accounts
receivable:
Allowance for doubtful
accounts.................... $ 8.4 $ 1.9 $-- $2.0 (A) $ 8.3
Reserve for discounts and
allowances.................. 0.7 -- 7.9 (B) 7.1 (C) 1.5
Allowance for loan losses..... 53.9 14.6 4.2 (D) 7.2 (A) 65.5
Allowance for unrealized
losses on available-for-sale
securities.................. 0.7 (0.7) (1.7)(E) -- (1.7)
Allowance for unrealized
losses on mortgage loans
held for sale............... 0.8 -- -- 0.5 (A) 0.3
----- ----- ----- ----- ------
Totals................... $64.5 $15.8 $10.4 $16.8 $ 73.9
===== ===== ===== ===== ======
</TABLE>
- ---------------
(A) Uncollectible accounts written off, net of recoveries.
(B) Reduction of revenues for customer discounts.
(C) Customer discounts taken.
(D) Additions related to bulk purchases of loans.
(E) Unrealized gains/losses.
32
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
11 -- Statement re: Computation of Per Share Earnings for the
three years ended January 3, 1998
13 -- Annual Report to Shareholders for the year ended January
3, 1998. Such Report is not deemed to be filed with the
Commission as part of this Annual Report on Form 10-K,
except for the portions thereof expressly incorporated by
reference.
21 -- Subsidiaries of the Company
23 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedules
27.2 -- Restated 1995 and 1996 Annual Financial Data Schedules
(24)
27.3 -- Restated 1997 Interim Financial Data Schedules
27.4 -- Restated 1996 Interim Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT (11)
TEMPLE-INLAND INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN MILLIONS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Basic
Weighted average shares outstanding......................... 56.0 55.5 56.0
===== ====== ======
Net income.................................................. $50.8 $132.8 $281.0
===== ====== ======
Earnings per share.......................................... $0.91 $ 2.39 $ 5.02
===== ====== ======
Diluted
Weighted average shares outstanding......................... 56.0 55.5 56.0
Dilutive effect of stock options............................ 0.2 0.1 0.1
----- ------ ------
Total weighted average shares outstanding................... 56.2 55.6 56.1
===== ====== ======
Net income.................................................. $50.8 $132.8 $281.0
===== ====== ======
Earnings per share.......................................... $0.90 $ 2.39 $ 5.01
===== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations and Financial Condition
Results of operations, including information regarding the principal business
segments, are shown below.
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
For the year 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------
(in millions)
REVENUES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Paper $ 2,063 $2,082 $2,198 $1,740 $1,572 $ 1,610 $1,519 $1,517 $1,506 $1,429
Building products 617 563 533 575 497 409 311 305 320 312
Other activities -- -- -- 20 58 77 68 70 68 33
- --------------------------------------------------------------------------------------------------------------------------
Manufacturing net sales 2,680 2,645 2,731 2,335 2,127 2,096 1,898 1,892 1,894 1,774
Financial services 945 815 764 632 635 638 609 509(b) 49 40
- --------------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,625 $3,460 $3,495 $2,967 $2,762 $ 2,734 $2,507 $2,401 $1,943 $1,814
==========================================================================================================================
INCOME BEFORE TAXES
Paper $ (39) $ 113 $ 357 $ 74 $ 6 $ 135 $ 156 $ 250 $ 323 $ 304
Building products 131 102 67 139 102 40 5 9 24 25
Other activities -- -- -- 1 (2) (2) 1 (2) (1) 1
- --------------------------------------------------------------------------------------------------------------------------
Operating profit 92 215 424 214 106 173 162 257 346 330
Financial services 132 63(a) 98 56 68 64 54 52(b) (2) --
- --------------------------------------------------------------------------------------------------------------------------
224 278 522 270 174 237 216 309 344 330
Corporate expense (25) (17) (22) (14) (11) (15) (16) (21) (13) (20)
Parent Company interest - net (110) (110) (73) (67) (69) (48) (38) (26) (26) (23)
Other income 6 5 4 4 2 3 5 7 7 17
- --------------------------------------------------------------------------------------------------------------------------
Income before taxes $ 95 $ 156 $ 431 $ 193 $ 96 $ 177 $ 167 $ 269 $ 312 $ 304
==========================================================================================================================
</TABLE>
(a) Includes a one-time assessment of $44 million to recapitalize the Savings
Association Insurance Fund (SAIF).
(b) Includes operating results from the consolidation of Guaranty Federal Bank,
F.S.B., beginning January 1, 1990.
25
<PAGE> 2
PAPER
The Paper Group is composed of two units: corrugated packaging and bleached
paperboard. The following table provides information on the operating earnings
of this group.
<TABLE>
<CAPTION>
For the year(*) 1997 1996 1995
- ------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Corrugated packaging $ (11.0) $ 165.6 $ 386.3
Bleached paperboard 15.3 (8.2) 24.7
Group administration (43.3) (44.4) (54.4)
- ------------------------------------------------------------------------------
Operating Earnings $ (39.0) $ 113.0 $ 356.6
==============================================================================
</TABLE>
(*) Food Service operating earnings reclassified to corrugated packaging from
bleached paperboard.
CORRUGATED PACKAGING
The corrugated packaging operation manufactures linerboard and corrugating
medium at seven paper mills and converts it into corrugated packaging at 39 box
plants located throughout the United States, Puerto Rico, Mexico and South
America. In addition, it operates nine specialty converting plants. Operation of
the Erie, Pennsylvania, box plant was discontinued in the second half of 1997.
During 1997, two state-of-the-art corrugated packaging plants began
operations--one in Sinaloa, Mexico; the other in Streetsboro, Ohio.
Before administrative costs, the corrugated packaging operation lost $11.0
million in 1997, compared with $165.6 million earned in 1996. Revenues for this
operation decreased 4 percent in 1997, compared with 1996, as average product
prices continued to decline from 1996 levels. Revenues for 1996 were down 8
percent, compared with 1995. Increased sales volumes in both 1997 and 1996 were
able to offset some of the effect of significantly lower product prices.
The weak demand for corrugated packaging that developed
in late 1995 and additional industry capacity completed in 1996 resulted in
unstable market conditions throughout 1996. As a result, box prices declined by
19 percent on average in 1996. Although demand improved in the second half of
1996, markets were unable to stabilize and inventories were higher than normal
in early 1997. Pricing continued to decline in 1997 with an additional 8 percent
reduction by August before beginning a slow rebound. By year end, box prices had
almost recovered from the deterioration that occurred earlier in the year.
Tons of boxes sold were up 4.1 percent in 1997, slightly ahead of the 3.5
percent increase in 1996. While the 1997 earnings decline was moderated by the
increased sales volume, the cost of old corrugated containers (OCC), the
principal raw material used in approximately 44 percent of the group's
containerboard production, more than offset this gain. The cost of OCC was up
$16 per ton in 1997, compared with 1996. This increase followed a $71 per ton
decrease in 1996 versus 1995.
As indicated in the table below, mill production totaled 2,761,000 tons in 1997,
a 184,000-ton increase in production over 1996. Production of containerboard
exceeded internal box plant usage by 336,000 tons in 1997, 275,000 tons in 1996,
and 317,000 tons in 1995. Excess production was sold in the domestic and export
markets. The company curtailed production by approximately 35,000 tons in 1997
and 120,000 tons in 1996 to control inventory levels.
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
MILL PRODUCTION
<S> <C> <C> <C>
(in tons) 2,761,000 2,577,000 2,514,000
================================================================================
</TABLE>
Box production at the Mexican, Puerto Rican and South American converting
facilities increased by 50,000 tons to 174,000 tons in 1997. While volumes
increased in Chile and Argentina, competitive pricing pressures contributed to
continued operating losses at these plants. Additionally, the Sinaloa, Mexico,
box plant was unprofitable. The operations of the other two Mexican plants, in
Guanajuato and Monterrey, were stabilized in 1997 and reported improved
earnings. The net operating losses in Argentina, Chile and Sinaloa, Mexico,
served to increase the effective tax rate for the corporation, since the company
did not accrue a tax benefit for these losses.
The following table shows the quarterly sales of the corrugated packaging
operation in tons and dollars. The totals presented include not only boxes sold,
but also open market sales of linerboard and related products.
CORRUGATED PACKAGING
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
UNIT SALES
(in thousands of tons)
1st Quarter 647 575 602
2nd Quarter 719 608 614
3rd Quarter 706 636 564
4th Quarter 697 616 553
- --------------------------------------------------------------------------------
2,769 2,435 2,333
================================================================================
NET SALES(*)
(in millions)
1st Quarter $ 411.9 $ 469.7 $ 452.8
2nd Quarter 432.6 453.4 499.5
3rd Quarter 421.3 423.3 487.9
4th Quarter 428.2 414.2 470.1
- --------------------------------------------------------------------------------
$1,694.0 $1,760.6 $1,910.3
================================================================================
</TABLE>
(*) Reclassified to include Food Service sales for 1996 and 1995.
26
<PAGE> 3
In October 1997, the company sold substantially all of the operating assets of
its subsidiary, Temple-Inland Food Service Corporation (Food Service), for
approximately book value. Food Service had revenues of $66.3 million, $84.1
million and $80.9 million during 1997, 1996 and 1995, respectively.
BLEACHED PAPERBOARD
The bleached paperboard operation manufactures bleached paperboard at one mill
in Evadale, Texas. Its products are sold to commercial printers and paperboard
converters, including those serving packaging, food service and office product
markets.
The mill completed a major modernization and expansion program during 1995. The
cornerstone of this project was a new 550-ton-per-day paperboard machine capable
of producing low-density, lightweight bleached paperboard and bleached bristols.
Other key elements of the expansion project included major technological
upgrades on three existing paperboard machines, a pine fiberline, a coating
plant, a power boiler, an extruder plant, a lime kiln and a concentrator. One of
the mill's recovery boilers was also rebuilt.
Before administrative costs, the bleached paperboard operation reported income
of $15.3 million in 1997, compared with a loss of $8.2 million in 1996. Average
prices for bleached paperboard were basically flat in 1997, compared with 1996,
after having declined by 12 percent in 1996. Paperboard sales volume increased
by 21 percent in 1997 versus 1996 as demand improved. Paperboard sales volume
increased 31 percent in 1996. Production in both 1997 and 1996 was limited to
control inventory levels.
Most of the earnings improvement in 1997 was achieved through a reduction in
manufacturing costs of $16 per ton as the efficiencies from the increased level
of production and the effect of a cost-reduction program were realized.
Manufacturing costs for 1996 were relatively unchanged from 1995 levels.
The following table lists the quarterly sales of the bleached paperboard
operation in tons and dollars. Changes in product mix from period to period may
make historical comparisons difficult.
BLEACHED PAPERBOARD
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
UNIT SALES
(in thousands of tons)
PAPERBOARD
1st Quarter 155 108 120
2nd Quarter 178 125 97
3rd Quarter 169 149 83
4th Quarter 133 142 100
- --------------------------------------------------------------------------------
635 524 400
================================================================================
- --------------------------------------------------------------------------------
PULP 2 100 99
================================================================================
NET SALES
(in millions)
PAPERBOARD
1st Quarter $ 87.6 $ 66.1 $ 70.7
2nd Quarter 95.0 73.6 56.8
3rd Quarter 96.9 83.3 54.4
4th Quarter 86.5 77.5 67.1
- --------------------------------------------------------------------------------
$ 366.0 $ 300.5 $ 249.0
================================================================================
- --------------------------------------------------------------------------------
PULP AND OTHER $ 2.9 $ 21.2 $ 39.1
================================================================================
</TABLE>
The Paper Group's administrative costs were down slightly in 1997, compared with
1996. These costs decreased $10 million in 1996 from 1995, primarily because the
company paid significantly lower bonuses to its managers in 1996 as a result of
the lower level of profitability.
27
<PAGE> 4
BUILDING PRODUCTS
The Building Products Group manufactures a diversified line of construction and
commercial grade building materials at 13 facilities (including one
joint-venture facility) located in Texas, Louisiana, Oklahoma, Arkansas, Alabama
and Georgia. In 1997, almost 82 percent of its revenues were generated from
wood-based materials made from Southern Pine logs or log residues. These
products, sold to both residential and commercial market segments, include
lumber, plywood, fiber products and particleboard. The non-wood-based business
unit manufactures a variety of gypsum wallboard products that are sold to the
same market segments as wood-based materials.
The group earned $131.1 million in 1997, the second-highest earnings level in
its history, following earnings of $139 million in 1994. Net manufacturing
revenues in 1997 increased $54 million, or 10 percent, over 1996. This 10
percent increase followed a 6 percent increase in 1996. As a result of improved
residential and commercial construction levels, prices advanced in 1997 across
all product lines, except for particleboard
and plywood.
During 1997, the group completed its exit from the retail building products
distribution business. Retail operations accounted for less than 1 percent of
group net revenues in 1997, compared with about 3 percent in 1996 and 10 percent
in 1995. The group began its exit from this business during the fourth quarter
of 1995 by selling its two major Houston-area retail locations. Late in 1996,
two of the three remaining locations were sold and the last location was sold in
December 1997.
The following table provides information on unit sales volumes and net sales for
each business unit.
BUILDING PRODUCTS
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
UNIT SALES(*)
Pine lumber 639 605 582
Fiber products 402 457 422
Particleboard 470 399 329
Plywood 281 259 217
Gypsum wallboard 843 838 813
================================================================================
NET SALES
(in millions)
Pine lumber $ 262.1 $ 217.4 $ 190.1
Fiber products 66.2 73.3 59.7
Particleboard 125.0 112.2 99.1
Plywood 55.2 52.1 49.3
Gypsum wallboard 104.6 90.2 83.1
Retail distribution 4.2 17.1 51.3
Other -- 0.3 0.3
- --------------------------------------------------------------------------------
$ 617.3 $ 562.6 $ 532.9
================================================================================
</TABLE>
(*)Unit sales amounts shown are in millions of square feet, except pine lumber,
which is in millions of board feet.
Pine lumber shipments of 639 million board feet increased 6 percent over 1996.
Lumber prices improved during the first three quarters of the year, ranging from
11 percent in the third quarter to 26 percent in the first quarter, above the
same periods in 1996. By the fourth quarter, the price level was virtually
identical to the level sustained in the fourth quarter of 1996. However, the
average selling price experienced for the year was 12 percent higher than the
average selling price for 1996.
Fiber products revenues decreased 10 percent from 1996 due to a 12 percent
decrease in shipments. Shipments were lower due to a shift in product mix in
order to manufacture more siding products rather than traditional sheathing.
TrimCraft(TM) , the company's alternative lumber trim product, continued to gain
market acceptance, and shipments of this product advanced 4 percent over 1996
levels. Shipment of TrimCraft increased 30 percent in 1996, compared with 1995.
During 1997, construction continued on a new medium density fiberboard (MDF)
plant in El Dorado, Arkansas. The $97 million facility, a joint-venture
operation, is designed to produce 150 million square feet of MDF annually and is
projected to begin operations in the second quarter of 1998. MDF products are
high-grade composite panels that serve as suitable alternatives to high-quality
millwork lumber and as flooring substrates.
Also during 1997, the group, through a joint venture, began construction on a
new cement fiberboard plant in Waxahachie, Texas. This $60 million facility is
designed to produce 126 million square feet of cement fiberboard annually. This
plant is expected to start operations during the third quarter of 1998. Cement
fiberboard is a weather-stable product with increasing acceptance for
applications such as exterior sidings, tile backing and roofing.
Using by-products of lumber processing, the group manufactures particleboard at
four plants in Texas, Alabama, Arkansas and Georgia. The Arkansas plant,
completed late in the fourth quarter of 1995 at a cost of $65 million, increased
overall particleboard capacity by about 50 percent. Particleboard shipments
increased 18 percent over 1996, despite lost production at the Texas and Georgia
plants, each of which incurred a ten-week outage for a major modernization. Due
to the increase in shipments, the particleboard group's revenues rose $13
million, or 11 percent, from 1996, despite an average price decline of 6 percent
from 1996 levels. In 1996, shipments were 21 percent above, and prices were 6
percent below, 1995 levels.
28
<PAGE> 5
Record earnings were achieved by the group's gypsum wallboard operation in 1997
as prices continued the recovery begun in 1994, and the mix of products
manufactured continued to improve. Gypsum wallboard shipments of 843 million
square feet were slightly above 1996 levels, but revenues increased by $14
million due to a 15 percent increase in average sales price. Gypsum wallboard
demand improved in both 1996 and 1997 as a result of the increased level of
construction, including both residential and commercial. In addition to a strong
market, specialty products, including the group's Stretch 54(R) product,
pre-sized to reduce material waste and application labor in houses with
nine-foot-high ceilings, continued to gain market share. Specialty panels in
1997 accounted for 40 percent of total shipments, compared with 38 percent in
1996.
In 1997, plans were announced to construct another gypsum wallboard plant near
Cumberland City, Tennessee. The plant will be operated by the Standard Gypsum
LLC joint venture, of which a subsidiary of the company is a 50 percent partner.
This state-of-the-art plant is expected to produce in excess of 700 million
square feet of gypsum wallboard annually, and will utilize 100 percent flue gas
desulphurization (synthetic) gypsum. This plant will be adjacent to the
Cumberland Fossil Plant, the Tennessee Valley Authority's (TVA) largest
coal-fired steam electric plant, which will supply 100 percent of the synthetic
gypsum for use in the production of the wallboard at this facility. The
synthetic gypsum is produced as a by-product of the TVA plant's air-cleaning
system. Construction of this $60 million facility will begin in 1998, and
production is expected to begin by 2000.
TIMBER AND TIMBERLANDS
The company controls approximately 2.2 million acres of timberland in Texas,
Louisiana, Georgia and Alabama. In 1997, this renewable resource provided
approximately 58 percent of the company's sawtimber requirements and roughly 57
percent of the fiber necessary to operate the company's paper, particleboard and
fiberboard converting operations.
FINANCIAL SERVICES
The company's Financial Services Group includes savings bank, mortgage banking,
real estate development and insurance operations. The following selected
financial information provides a detailed description of these operations.
FINANCIAL SERVICES GROUP
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
For the year or
at year end 1997 1996 1995
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
INCOME
Savings bank $ 106.6 $ 37.5 (a) $ 78.1
Mortgage banking 24.0 23.0 20.3
Real estate (3.4) (1.7) (3.8)
Insurance 4.8 4.3 3.5
- --------------------------------------------------------------------------------
Income before taxes 132.0 63.1 98.1
Taxes on income 20.6 24.3 27.3
- --------------------------------------------------------------------------------
Net income $ 111.4 $ 38.8 $ 70.8
================================================================================
ASSETS
Savings bank $10,370.6 $ 8,945.9 $ 8,881.7
Mortgage banking 385.6 241.4 157.0
Real estate 280.4 287.4 238.4
Insurance 32.4 26.3 19.1
Other activities -- 0.1 1.6
Eliminations (284.3) (166.0) (86.7)
- --------------------------------------------------------------------------------
Total assets $10,784.7 $ 9,335.1 $ 9,211.1
================================================================================
LIABILITIES
Savings bank $ 9,798.1 $ 8,509.9 $ 8,405.2
Mortgage banking 303.4 177.1 113.5
Real estate 222.0 204.7 156.2
Insurance 19.7 17.7 13.2
Other activities -- (0.1) 4.6
Preferred stock
issued by
subsidiary 150.0 -- --
Eliminations (284.3) (166.0) (86.7)
- --------------------------------------------------------------------------------
Total liabilities $10,208.9 $ 8,743.3 $ 8,606.0
================================================================================
EQUITY
Savings bank $ 422.5 $ 436.0 $ 476.5
Mortgage banking 82.2 64.3 43.5
Real estate 58.4 82.7 82.2
Insurance 12.7 8.6 5.9
Other activities -- 0.2 (3.0)
- --------------------------------------------------------------------------------
Total equity $ 575.8 $ 591.8 $ 605.1
================================================================================
</TABLE>
(a) Includes a one-time SAIF assessment of $43.9 million.
29
<PAGE> 6
SAVINGS BANK
The company's savings bank, Guaranty Federal Bank, F.S.B. (Guaranty), conducts
its business through 135 banking centers in Texas and California. The Texas
operations are concentrated in the metropolitan areas of Houston, Dallas/Fort
Worth, San Antonio and Austin, as well as the Central and Eastern regions of the
state. All of Guaranty's deposit locations in California are in the Central
Valley area. The primary business of Guaranty is to attract savings deposits
from the general public, to invest in loans secured by real estate mortgages, to
be a major construction lender to the commercial and residential real estate
industry, and to provide a variety of loan products to consumers and businesses.
GUARANTY FEDERAL BANK, F.S.B.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C>
INCOME AND EXPENSE
Net interest income $ 222.3 $ 193.0 $ 179.5
Noninterest income 17.8 22.2 37.7
Noninterest expense 128.5 163.9 (a) 124.6
Minority interest in
income of subsidiary 6.5 -- --
Income before taxes 106.6 37.5 78.1
AVERAGE BALANCE SHEET
Total earning assets 9,919.1 8,889.0 8,819.5
Loans receivable
and mortgage loans
held for sale 6,530.9 5,215.1 4,453.6
Mortgage-backed and
investment securities 2,721.6 3,204.3 3,647.1
Covered assets -- -- 298.6
Deposits 7,090.5 6,423.9 6,721.3
Securities sold
under repurchase
agreements and
FHLB advances 2,573.9 2,113.5 1,873.0
KEY RATIOS
Yield on earning assets 7.06% 6.96% 6.87%
Cost of funds 4.95% 4.91% 4.96%
- --------------------------------------------------------------------------------
Net interest spread 2.11% 2.05% 1.91%
================================================================================
</TABLE>
(a) Includes a one-time SAIF assessment of $43.9 million.
At year end 1997, loans receivable comprised 71 percent of earning assets,
compared with 67 percent in the prior year. For increased flexibility during
1997, Guaranty securitized a portion of its mortgage loans held in its
portfolio. At year end 1997, the ratio of loans receivable to earning assets,
with the inclusion of the balance of $768 million in loans securitized, was 79
percent.
Net interest income for 1997 increased $29.3 million from 1996. This was a
result of an increase in average earning assets of $1 billion from 1996,
principally due to the acquisition of Stockton Savings Bank, F.S.B. (SSB)
discussed below, combined with the improved asset mix of loans.
Net interest income for 1996 increased $13.5 million from 1995. Although the
average balance of total earning assets remained virtually constant with 1995,
the improved mix of loans receivable to securities improved the net interest
spread by 14 basis points.
When new loans are originated, an estimated allowance for losses is provided.
Thereafter, this provision is adjusted for actual net charge-off experience and
other factors. The provision for loan loss decreased $15.5 million during 1997,
compared with 1996, primarily related to the securitization of about $1 billion
of mortgage loans, payoff of other notes, as well as favorable net charge-off
experience.
Noninterest income is composed primarily of fees collected, including service
charges on deposits. Losses on the sale of certain mortgage securities resulted
in a net noninterest income reduction of $4.4 million. In 1995, Guaranty
recognized a $9 million gain, representing its portion of gains on certain asset
dispositions (see Note C on page 44 for additional information). Excluding the
gain recognized in 1995, noninterest income decreased by $6.5 million in 1996.
Excluding $43.9 million related to the 1996 one-time Savings Association
Insurance Fund (SAIF) assessment discussed below, noninterest expense for 1997
increased $8.5 million from 1996. The assessment reduced insurance premiums on
deposits by $9.8 million in 1997. Primarily as the result of new operations in
California, other noninterest expense was up $18.3 million in 1997, compared
with a decrease of $4.6 million in 1996.
BIF/SAIF LEGISLATION
On September 30, 1996, President Clinton signed the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the Act). Among its many provisions,
the Act provided for (i) the recapitalization of the SAIF to an amount
sufficient to increase the SAIF's net worth to 1.25 percent of SAIF-insured
deposits, (ii) the reduction of SAIF insurance assessments to parity with those
of the Bank Insurance Fund (BIF), and (iii) the eventual merger of the SAIF and
BIF. Specifically, the statute required a one-time special assessment of SAIF
members, calculated at 65.7 basis points of insured deposits, or $43.9 million
for Guaranty.
30
<PAGE> 7
Effective January 1, 1997, Guaranty is not required to pay any deposit insurance
assessments, but is required to pay approximately 6.5 basis points on its
insured deposits annually to repay certain Financial Corporation (FICO) bond
obligations. Prior to the special assessment, Guaranty was paying 23 basis
points of insured deposits for insurance premiums, as compared with the
approximate 6.5 basis points of insured deposits currently being paid to repay
FICO bond obligations.
ACQUISITIONS
On June 27, 1997, the company acquired all of the outstanding stock of
California Financial Holding Company, the parent company of Stockton Savings
Bank, F.S.B. (SSB), and merged the operations of SSB into Guaranty. The
consideration for the transaction was $143.4 million, consisting of
approximately 1,614,000 shares of Temple-Inland Inc. common stock and cash of
$47.3 million. SSB operated 25 banking centers in the Central Valley area of
California and had assets at acquisition totaling approximately $1.4 billion,
consisting primarily of loans and securities.
LIQUIDITY, INTEREST RATE RISK MANAGEMENT AND CAPITAL
Guaranty is required by the Office of Thrift Supervision (OTS) to maintain
average daily balances of statutorily defined liquid assets. During 1997, the
liquid assets requirement was decreased from 5 percent to 4 percent of net
withdrawable deposits and short-term borrowings.
The operations of Guaranty are subject to a risk of interest rate fluctuation to
the extent that interest-earning assets and interest-bearing liabilities mature
or reprice at different times or in differing amounts. Because approximately 94
percent of Guaranty's assets at year end 1997 have adjustable rates, this risk
is significantly mitigated. A substantial portion of Guaranty's investments in
adjustable-rate mortgage-backed securities have annual or lifetime caps that
subject Guaranty to interest rate risk should rates rise above certain levels.
To optimize net interest income while maintaining acceptable levels of interest
rate and liquidity risk, Guaranty, from time to time, will enter into various
interest rate contracts for purposes other than trading. See Note L on page 48
for additional information.
On May 28, 1997, a newly formed subsidiary of Guaranty that qualifies as a real
estate investment trust (REIT) issued $150 million of noncumulative floating
rate preferred stock in a private placement. The preferred stock qualifies for
inclusion in regulatory capital, subject to certain limitations.
OTS regulations require savings institutions to maintain certain minimum levels
of capital. Guaranty's regulatory capital exceeded all applicable capital
requirements at year end 1997. Note M on page 49 contains additional information
concerning Guaranty's capital requirements.
MORTGAGE BANKING
Mortgage banking is conducted through Temple-Inland Mortgage Corporation (TIMC).
TIMC arranges financing of single-family mortgage loans, then sells the loans
into the secondary market (primarily FNMA, FHLMC and GNMA securities). TIMC
generally retains the servicing of these loans.
A summary of selected financial information is provided below.
MORTGAGE BANKING
OPERATIONS SUMMARY
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- ------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C>
Revenues $ 136 $ 95 $ 71
Income before taxes 24 23 20
==============================================================================
PORTFOLIO
ROLL-FORWARD
(Including loans
serviced for affiliates)
Beginning servicing $ 17,851 $ 13,460 $ 10,068
Purchased servicing 9,497 4,888 3,782
New loans added,
net of servicing
released 2,600 2,265 948
Run-off (3,866) (2,762) (1,338)
- ------------------------------------------------------------------------------
Ending servicing $ 26,082 $ 17,851 $ 13,460
- ------------------------------------------------------------------------------
Portfolio growth rate 46.1% 32.6% 33.7%
Run-off factor 16.8% 15.9% 10.9%
Ending number
of loans serviced 351,600 225,700 184,800
==============================================================================
</TABLE>
The servicing portfolio grew from both internal production and acquisition to a
record $26.1 billion during 1997. Servicing totaling $9.5 billion was acquired
during 1997, of which $6.4 billion is associated with the acquisition of Knutson
Mortgage Corporation (KMC). Servicing totaling $4.9 billion was acquired during
1996, a portion of which was acquired subject to a call option. At the end of
1997, $1.6 billion of the servicing portfolio was subject to the call option.
The call option price, if exercised, would exceed the carrying value. The
mortgage origination network increased during 1997 from 41 branch offices to 80.
The volume of originations increased to $3.2 billion.
REAL ESTATE GROUP
Real estate operations conducted by Lumbermen's Investment Corporation include
development of residential subdivisions, as well as management and sale of
income properties. Land development projects include 34 residential subdivisions
in Texas, Arizona, California, Colorado, Florida, Georgia, Missouri, Tennessee
and Utah. At the end of 1997, land development inventory included 2,190
residential lots (1,437 under contract) and 5,664 acres of land. Lot sales for
1997 were 1,422, compared with 1,082 in 1996, and 467 in 1995.
31
<PAGE> 8
The company owns 12 commercial properties consisting of two hotels, two office
buildings, one retail center, two business parks and five parcels of commercial
land. The company is also a financial partner in joint ventures that are
constructing six apartment projects.
Selected financial information related to these activities is shown below.
REAL ESTATE GROUP
OPERATIONS SUMMARY
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
REVENUES
Residential $ 43.4 $ 35.9 $ 12.7
Commercial 21.4 18.2 19.4
Interest and other 3.7 7.0 4.9
- -------------------------------------------------------------------------------
Total $ 68.5 $ 61.1 $ 37.0
===============================================================================
INCOME (LOSS)
BEFORE TAXES
Residential $ 2.2 $ 3.0 $ (1.9)
Commercial 4.5 2.2 2.0
Interest and other (10.1) (6.9) (3.9)
- -------------------------------------------------------------------------------
Total $ (3.4) $ (1.7) $ (3.8)
- -------------------------------------------------------------------------------
</TABLE>
INSURANCE
Timberline Insurance Managers, Inc. (Timberline), one of the largest insurance
agencies in Texas, operates as a general agency selling a full range of
insurance products, including automobile, homeowners, business insurance,
annuities, and life and health products. The agency also acts as the risk
management department of the company. Timberline currently has offices in
Austin, Houston, El Paso and San Antonio, Texas.
A summary of revenues and income before taxes is shown below.
INSURANCE
OPERATIONS SUMMARY
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
REVENUES $ 30.4 $ 24.9 $ 16.5
INCOME BEFORE TAXES 4.8 4.3 3.5
================================================================================
</TABLE>
ENVIRONMENTAL MATTERS
The company is committed to protecting the health and welfare of its employees,
the public and the environment, and strives to maintain compliance with all
state and federal environmental regulations in a cost-effective manner. In the
construction of new facilities and the modernization of existing facilities, the
company installed state-of-the-art technology for controlling air and water
emissions. These forward-looking programs should minimize the impact that
changing regulations have on capital expenditures for environmental compliance.
Future expenditures for environmental-control facilities will depend on changing
laws and regulations and techno-logical advances. Given these uncertainties, the
company estimates that capital expenditures for environmental purposes during
the period 1998 through 2000 will average $15 million each year, exclusive of
the expenditures for the Cluster Rule compliance discussed below.
On November 14, 1997, the U.S. Environmental Protection Agency (EPA) issued
extensive regulations governing air and water emissions from the pulp and paper
industry (the Cluster Rule). According to the EPA, the technology standards in
the Cluster Rule will cut the industry's toxic air pollutant emissions by almost
60 percent from current levels and virtually eliminate all dioxin discharged
from pulp, paper and paperboard mills into rivers and other surface waters. The
rule also provides incentives for individual mills to adopt technologies that
will lead to further reductions in toxic pollutant discharges. The EPA estimates
that the industry will need to invest approximately $1.8 billion in capital
expenditures and approximately $277 million per year in operating expenditures
to comply with the Cluster Rule. The initial compliance period is three years
from the date the regulations are published in the Federal Register. The
estimated expenditures disclosed above do not include expenditures that may be
needed to comply with the Cluster Rule. Based upon its interpretation of the
Cluster Rule as issued, the company currently estimates that compliance with the
rule may require modifications at several facilities. Some of these
modifications can be included in modernization projects that will provide
economic benefits to the company. Excluding these investments, environmental
expenditures are not expected to exceed $110 million over the next three years.
CAPITAL RESOURCES AND LIQUIDITY
The company's financial condition continues to be strong. Internally generated
funds, existing credit facilities and the capacity to issue long-term debt are
sufficient to fund projected capital expenditures, to service existing debt, to
pay dividends and to meet normal working capital requirements.
A summary of capital expenditures is shown below.
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Paper $ 155.8 $ 147.7 $ 299.1
Building products 53.4 52.0 67.6
Timber and
timberlands 20.5 74.7 19.1
Other activities 3.0 0.9 0.3
- --------------------------------------------------------------------------------
Total manufacturing
group $ 232.7 $ 275.3 $ 386.1
================================================================================
</TABLE>
32
<PAGE> 9
Capital expenditures of approximately $250 million are projected for 1998.
Commitments on construction projects totaled $31.6 million at the end of 1997.
Net interest expense incurred by the Parent Company is shown below.
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
PARENT COMPANY
INTEREST - NET
Interest expense $ 112.3 $ 112.9 $ 111.3
Capitalized interest (2.0) (3.3) (38.6)
- -------------------------------------------------------------------------------
Interest expense - net $ 110.3 $ 109.6 $ 72.7
===============================================================================
</TABLE>
Interest expense increased in 1996, compared with 1995, due to the levels of
debt outstanding. The higher amount of capitalized interest in 1995 was due to
higher levels of construction in progress associated primarily with the
modernization and expansion project at Evadale, Texas. Since this project was
completed in 1995, capitalized interest in 1997 and 1996 decreased to $2.0
million and $3.3 million, respectively. Parent Company interest paid during
1997, 1996 and 1995 was $104.5 million, $105.9 million and $95.4 million,
respectively.
In August 1995, the Board of Directors approved a stock repurchase program
allowing the company to repurchase up to 2.5 million shares. At year end 1997,
approximately 75 percent of this program had been completed.
INCOME TAXES
The effective tax rate for the year was 46 percent, compared with a normalized
rate of 35 percent in the previous year. The increase in the annual tax rate was
primarily attributable to a decrease in the book benefit of Federal Deposit
Insurance Corporation assistance, increased taxes incurred on non-deductible
goodwill associated with the disposition of Temple-Inland Food Service and
losses in foreign operations for which no financial benefit was recognized.
IMPACT OF YEAR 2000 ISSUES
In 1996, the company began to address the forthcoming millennium date and what
is frequently referred to in data processing as the "year 2000 problem."
Discussions were initiated with major suppliers, customers and financial
institutions to ensure that those parties have appropriate plans to remediate
year 2000 issues, where their systems interface with the company's systems or
otherwise impact its operations.
Comprehensive year 2000 initiatives are being directed and managed by both
internal and external resources. These initiatives are designed to effect an
orderly transition into the new millennium without adversely affecting the
company's core operations and to ensure that transactions with customers,
suppliers and financial institutions are fully supported.
The company is well under way with its project plans and expects to complete
business systems corrections by December 31, 1998. Test environments are fully
operational and will be available for testing to begin in 1998 and continue into
1999 in order to implement ongoing business and manufacturing changes with no
negative impact on previous year 2000 corrections.
The company has evaluated the year 2000 readiness of the control systems used in
manufacturing. No significant problems were discovered, but work plans have been
detailed with tasks and resources identified for becoming year 2000 ready in
these operations.
The total cost of year 2000 readiness is expected to be $12.8 million, of which
$2.2 million has been expended. This cost is not material to the company's
results of operations or financial position.
PENDING ACCOUNTING POLICY CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which establishes new standards for reporting information about operating
segments in both annual and interim financial statements. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The company will adopt the new requirements retroactively
in 1998. Management has not completed its review of Statement 131, but does not
anticipate that the adoption of this statement will have a significant effect on
the company's reported segments.
In June 1997, the FASB issued Statement 130, Reporting Comprehensive Income,
which establishes new rules for the reporting and display of comprehensive
income and its components, effective first quarter 1998. Under the new
statement, the company would be required to include unrealized gains or losses
on the company's available-for-sale securities and foreign currency translation
adjustments that are currently reported in shareholders' equity, in other
comprehensive income and to disclose the total comprehensive income. If the
company adopted Statement 130 for the year 1997, the total of other
comprehensive income would be $55 million.
33
<PAGE> 10
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the year 1997(*) 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenues $ 3,625 $ 3,460 $ 3,495 $ 2,967 $ 2,762
Manufacturing net sales 2,680 2,645 2,731 2,335 2,127
Net income 51 133 281 131 117(b)
Capital expenditures:
Manufacturing 233 275 386 463 340
Financial services 18 15 34 20 14
Depreciation and depletion:
Manufacturing 255 244 208 200 191
Financial services 13 10 8 8 6
Earnings per share:
Basic 0.91 2.39 5.02 2.35 2.12(b)
Diluted 0.90 2.39 5.01 2.35 2.11(b)
Dividends per common share 1.28 1.24 1.14 1.02 1.00
Weighted average shares outstanding:
Basic 56.0 55.5 56.0 55.8 55.3
Diluted 56.2 55.6 56.1 55.9 55.5
Common shares
outstanding at year end 56.3 55.4 55.7 56.0 55.5
- ------------------------------------------------------------------------------------------------------------
AT YEAR END
Total assets $14,364 $12,947 $12,764 $12,251 $11,959
Long-term debt:
Parent Company 1,438 1,522 1,489 1,316 1,045
Financial services 167 133 113 82 76
Preferred stock issued by subsidiary 150 -- -- -- --
Ratio of total debt to
total capitalization -
Parent Company 41% 43% 43% 43% 38%
Shareholders' equity 2,045 2,015 1,975 1,783 1,700
============================================================================================================
<CAPTION>
For the year 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,734 $ 2,507 $ 2,401(a) $ 1,943 $ 1,814
Manufacturing net sales 2,096 1,898 1,892 1,894 1,774
Net income 147 138 232(a) 207 199
Capital expenditures:
Manufacturing 359 378 324 260 219
Financial services 11 9 4 9 4
Depreciation and depletion:
Manufacturing 167 158 140 126 112
Financial services 5 4 5 2 2
Earnings per share:
Basic 2.66 2.53 4.24(a) 3.78 3.61
Diluted 2.65 2.51 4.20(a) 3.75 3.58
Dividends per common share 0.96 0.88 0.80 0.58 0.42
Weighted average shares outstanding:
Basic 55.1 54.8 54.9 54.9 55.2
Diluted 55.5 55.2 55.4 55.3 55.7
Common shares
outstanding at year end 55.2 54.9 54.6 54.9 55.2
- ------------------------------------------------------------------------------------------------------------
AT YEAR END
Total assets $10,766 $10,068 $ 7,834(c) $ 2,380 $ 2,247
Long-term debt:
Parent Company 964 864 501 399 417
Financial services 99 76 94 30 25
Preferred stock issued by subsidiary -- -- -- -- --
Ratio of total debt to
total capitalization -
Parent Company 38% 36% 26% 24% 29%
Shareholders' equity 1,633 1,532 1,439 1,259 1,096
============================================================================================================
</TABLE>
(*) Includes effects of acquiring Stockton Savings Bank and Knutson Mortgage
Company.
(a) Includes operating results from consolidation of Guaranty Federal Bank,
F.S.B., beginning January 1, 1990.
(b) Includes a credit of $50 million or $0.90 per share from cumulative effect
of accounting changes.
(c) Includes savings bank assets from consolidation of Guaranty Federal Bank,
F.S.B., beginning January 1, 1990.
COMMON STOCK PRICES AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------
PRICE RANGE Price Range
HIGH LOW DIVIDENDS High Low Dividends
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 57 $ 52 $ 0.32 $ 48-1/4 $ 39-3/4 $ 0.30
2nd Quarter 62-1/8 49-5/8 0.32 51-7/8 45-1/2 0.30
3rd Quarter 69-7/16 56-1/8 0.32 53-1/8 47 0.32
4th Quarter 65-7/8 49-11/16 0.32 55-3/8 48-3/8 0.32
For the year $ 69-7/16 $ 49-5/8 $ 1.28 $ 55-3/8 $ 39-3/4 $ 1.24
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 11
NOTE F - Deposits
Deposits consisted of the following:
<TABLE>
<CAPTION>
At year end 1997 1996
- ------------------------------------------------------------------------------------
Stated Stated
Rate Amount Rate Amount
- ------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C>
Noninterest-bearing demand -- $ 160.0 -- % $ 123.7
Interest-bearing demand 2.55% 1,107.7 2.70% 970.6
Savings deposits 2.27% 205.9 2.29% 174.8
Time deposits 5.63% 5,900.3 5.53% 4,992.8
7,373.9 6,261.9
- ------------------------------------------------------------------------------------
Deposit premium 0.9 1.2
- ------------------------------------------------------------------------------------
$ 7,374.8 $ 6,263.1
====================================================================================
</TABLE>
Scheduled maturities of time deposits at year end 1997 are as follows:
<TABLE>
<CAPTION>
$100,000 Less than
Time deposits or more $100,000 Total
- --------------------------------------------------------------------------------
(in millions)
<C> <C> <C> <C>
3 months or less $ 160.8 $ 870.7 $1,031.5
Over 3 through 6 months 158.4 1,069.6 1,228.0
Over 6 through 12 months 198.1 1,220.0 1,418.1
Over 12 months 295.7 1,927.0 2,222.7
- --------------------------------------------------------------------------------
$ 813.0 $5,087.3 $5,900.3
================================================================================
</TABLE>
A summary of interest paid by the group is shown below:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Interest on deposits $ 333.4 $ 310.8 $ 317.7
Interest on borrowed funds 160.5 128.7 115.9
- --------------------------------------------------------------------------------
$ 493.9 $ 439.5 $ 433.6
================================================================================
</TABLE>
At year end 1997, time deposits maturity dates were as follows (in millions):
1998--$3,677.6; 1999--$1,227.9; 2000--$400.2; 2001--$336.6; 2002--$253.5; 2003
and thereafter--$4.5.
47
<PAGE> 12
Guaranty is also a party to an interest rate cap agreement to reduce the impact
of interest rate increases on certain adjust-able rate investments with lifetime
caps. Under this agreement, with a notional amount of $29 million, Guaranty
would receive payments if the EDCOF exceeds the strike rate of 10 percent. The
agreement matures in 2004.
The amounts potentially subject to credit risks are the streams of payments
receivable by Guaranty under the terms of the contracts and not the notional
amounts used to express the volumes of these transactions. Guaranty minimizes
its exposure to such credit risk by entering into contracts with major U.S.
securities firms.
NOTE M - REGULATORY CAPITAL MATTERS
Guaranty is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly discretionary, actions by regulators
that, if undertaken, could have a direct material effect on Guaranty's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Guaranty must meet specific capital guidelines that
involve quantitative measures of Guaranty's assets, liabilities and certain
off-balance-sheet items, as calculated under regulatory accounting practices.
Guaranty's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
The payment of dividends from Guaranty is subject to proper regulatory
notification.
Quantitative measures established by regulation to ensure capital adequacy
require Guaranty to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to adjusted tangible assets. Management believes, as of year end 1997,
Guaranty met all its capital adequacy requirements.
As of year end 1997, the most recent notification from regulators categorized
Guaranty as well capitalized under the regulatory framework for prompt
corrective action. To be so categorized as well capitalized, Guaranty must
maintain minimum total risk-based, Tier I (Core) risk-based, and Tier I (Core)
leverage capital ratios, as set forth in the table. There are no conditions or
events since that notification that management believes have changed Guaranty's
category.
Guaranty's actual capital amounts and ratios are also presented in the table
below. No amounts were deducted from capital for interest rate risk at December
31, 1997, or 1996.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- --------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
At year end 1997:
Total Risk-Based Ratio
(Risk-based capital/total risk-weight assets) $ 651.0 10.14% >$513.7 >8.0% >$641.9 >10.0%
- - - -
Tier I (Core) Risk-Based Ratio
(Core capital/total risk-weight assets) $ 570.7 8.89% >$256.8 >4.0% >$385.2 >6.0%
- - - -
Tier I (Core) Leverage Ratio
(Core capital/adjusted tangible assets) $ 570.7 5.48% >$416.4 >4.0% >$520.5 >5.0%
- - - -
Tangible Ratio
(Tangible capital/tangible assets) $ 570.7 5.48% >$156.2 >1.5% N/A N/A
- -
At year end 1996:
Total Risk-Based Ratio
(Risk-based capital/total risk-weight assets) $ 533.8 10.39% >$411.1 >8.0% >$513.8 >10.0%
- - - -
Tier I (Core) Risk-Based Ratio
(Core capital/total risk-weight assets) $ 498.2 9.70% >$205.5 >4.0% >$308.3 >6.0%
- - - -
Tier I (Core) Leverage Ratio
(Core capital/adjusted tangible assets) $ 498.2 5.52% >$361.1 >4.0% >$451.4 >5.0%
- - - -
Tangible Ratio
(Tangible capital/tangible assets) $ 498.2 5.52% >$135.4 >1.5% N/A N/A
- -
==========================================================================================================================
</TABLE>
49
<PAGE> 13
CONSOLIDATED STATEMENTS OF INCOME
Temple-Inland Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
(in millions, except per share data)
<S> <C> <C> <C>
REVENUES
Manufacturing $ 2,680 $ 2,645 $ 2,731
Financial services 945 815 764
- -------------------------------------------------------------------------------
3,625 3,460 3,495
- -------------------------------------------------------------------------------
COSTS AND EXPENSES
Manufacturing 2,613 2,447 2,329
Financial services 813 752 666
- -------------------------------------------------------------------------------
3,426 3,199 2,995
- -------------------------------------------------------------------------------
OPERATING INCOME 199 261 500
Parent Company interest, net (110) (110) (73)
Other 6 5 4
- -------------------------------------------------------------------------------
INCOME BEFORE TAXES 95 156 431
Taxes on income 44 23 150
- -------------------------------------------------------------------------------
NET INCOME $ 51 $ 133 $ 281
- -------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 0.91 $ 2.39 $ 5.02
Diluted $ 0.90 $ 2.39 $ 5.01
===============================================================================
</TABLE>
See the notes to the consolidated financial statements.
50
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
Temple-Inland Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- ------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 51 $ 133 $ 281
Adjustments to reconcile net income to net cash:
Depreciation and depletion 268 254 216
Deferred taxes 21 (11) 53
Amortization and accretion 29 23 18
Receivable from FDIC -- 7 (18)
Mortgage loans held for sale (99) (88) 24
Receivables 7 (11) (42)
Inventories (30) 23 (71)
Accounts payable and accrued expenses (7) (27) (46)
Collections and remittances on loans
serviced for others, net 193 (7) 96
Other (81) (70) (36)
- ------------------------------------------------------------------------------------------
352 226 475
- ------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures (251) (290) (420)
Proceeds from sale of property and equipment 53 7 16
Purchases of securities available-for-sale (121) (4) (54)
Maturities of securities available-for-sale 210 98 12
Maturities of securities held-to-maturity 308 322 391
Loans originated or acquired, net of
principal collected on loans (1,084) (672) (1,009)
Proceeds from sale of securities
available-for-sale 844 206 192
Reduction in covered assets -- -- 343
Acquisitions and joint ventures (22) (38) (2)
Acquisition of California Financial Holding
Company, net of cash acquired (22) -- --
Other 27 (1) (23)
- ------------------------------------------------------------------------------------------
(58) (372) (554)
- ------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt 447 281 356
Payments of debt (329) (349) (165)
Securities sold under repurchase agreements
and short-term borrowings, net (609) 285 239
Purchase of stock for treasury (59) (16) (24)
Cash dividends paid to shareholders (71) (69) (64)
Net increase (decrease) in deposits 128 (112) (217)
Proceeds from sale of subsidiary preferred stock 150 -- --
Other 9 (4) (3)
- ------------------------------------------------------------------------------------------
(334) 16 122
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (40) (130) 43
Cash and cash equivalents at beginning of year 228 358 315
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 188 $ 228 $ 358
==========================================================================================
</TABLE>
See the notes to the consolidated financial statements.
51
<PAGE> 15
CONSOLIDATING BALANCE SHEETS
Temple-Inland Inc. and Subsidiaries
<TABLE>
<CAPTION>
Parent Financial
At year end 1997 Company Services Consolidated
- ------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 13 $ 175 $ 188
Mortgage loans held for sale -- 439 439
Loans receivable -- 6,451 6,451
Mortgage-backed and investment securities -- 2,806 2,806
Trade and other receivables 281 -- 277
Inventories 339 -- 339
Property and equipment 2,813 103 2,916
Other assets 178 811 948
Investment in Financial Services 576 -- --
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,200 $ 10,785 $ 14,364
================================================================================================
LIABILITIES
Deposits $ -- $ 7,375 $ 7,375
Securities sold under repurchase
agreements and Federal Home Loan
Bank advances -- 1,955 1,955
Other liabilities 325 562 871
Long-term debt 1,438 167 1,605
Deferred income taxes 252 -- 223
Postretirement benefits 140 -- 140
Preferred stock issued by subsidiary -- 150 150
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 2,155 $ 10,209 $ 12,319
================================================================================================
SHAREHOLDERS' EQUITY
Preferred stock - par value $1 per share: authorized
25,000,000 shares; none issued --
Common stock - par value $1 per share: authorized
200,000,000 shares; issued 61,389,552 shares
including shares held in the treasury 61
Additional paid-in capital 356
Translation and other adjustments (20)
Retained earnings 1,817
- ------------------------------------------------------------------------------------------------
2,214
Cost of shares held in the treasury: 5,069,011 shares (169)
- ------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,045
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,364
================================================================================================
</TABLE>
See the notes to the consolidated financial statements.
52
<PAGE> 16
CONSOLIDATING BALANCE SHEETS
Temple-Inland Inc. and Subsidiaries
<TABLE>
<CAPTION>
Parent Financial
At year end 1996 Company Services Consolidated
- ------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 14 $ 214 $ 228
Mortgage loans held for sale -- 244 244
Loans receivable -- 5,414 5,414
Mortgage-backed and investment securities -- 2,783 2,783
Trade and other receivables 295 -- 292
Inventories 327 -- 327
Property and equipment 2,850 81 2,931
Other assets 174 599 728
Investment in Financial Services 592 -- --
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,252 $ 9,335 $ 12,947
================================================================================================
LIABILITIES
Deposits $ -- $ 6,263 $ 6,263
Securities sold under repurchase
agreements and Federal Home Loan
Bank advances -- 1,992 1,992
Other liabilities 345 355 685
Long-term debt 1,522 133 1,655
Deferred income taxes 234 -- 201
Postretirement benefits 136 -- 136
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 2,237 $ 8,743 $ 10,932
================================================================================================
SHAREHOLDERS' EQUITY
Preferred stock - par value $1 per share: authorized
25,000,000 shares; none issued --
Common stock - par value $1 per share: authorized
200,000,000 shares; issued 61,389,552 shares
including shares held in the treasury 61
Additional paid-in capital 305
Translation and other adjustments (24)
Retained earnings 1,837
- ------------------------------------------------------------------------------------------------
2,179
Cost of shares held in the treasury: 5,940,802 shares (164)
- ------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,015
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,947
================================================================================================
</TABLE>
See the notes to the consolidated financial statements.
53
<PAGE> 17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Temple-Inland Inc. and Subsidiaries
<TABLE>
<CAPTION>
Additional
Common Paid-in Other Equity Retained Treasury
Stock Capital Adjustments Earnings Stock Total
- ----------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ 61 $ 305 $ (10) $ 1,556 $ (129) $ 1,783
Net income -- -- -- 281 -- 281
Translation and other adjustments -- -- (4) -- -- (4)
Dividends paid on common stock --
$1.14 per share -- -- -- (64) -- (64)
Stock issued for stock plans --
154,109 shares -- 1 -- -- 2 3
Stock reacquired for treasury --
514,544 shares -- -- -- -- (24) (24)
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 30, 1995 $ 61 $ 306 $ (14) $ 1,773 $ (151) $ 1,975
================================================================================================================
Net income -- -- -- 133 -- 133
Translation and other adjustments -- -- (10) -- -- (10)
Dividends paid on common stock --
$1.24 per share -- -- -- (69) -- (69)
Stock issued for stock plans --
149,232 shares -- (1) -- -- 3 2
Stock reacquired for treasury --
358,623 shares -- -- -- -- (16) (16)
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 1996 $ 61 $ 305 $ (24) $ 1,837 $ (164) $ 2,015
================================================================================================================
Net income -- -- -- 51 -- 51
Translation and other adjustments -- -- 4 -- -- 4
Dividends paid on common stock --
$1.28 per share -- -- -- (71) -- (71)
Stock issued for acquisition
of California Financial
Holding Company --
1,613,546 shares -- 48 -- -- 48 96
Stock issued for stock plans --
253,075 shares -- 3 -- -- 6 9
Stock reacquired for treasury --
994,830 shares -- -- -- -- (59) (59)
================================================================================================================
BALANCE AT JANUARY 3, 1998 $ 61 $ 356 $ (20) $ 1,817 $ (169) $ 2,045
================================================================================================================
</TABLE>
See the notes to the consolidated financial statements.
54
<PAGE> 18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Temple-Inland Inc.
and all subsidiaries in which the company has more than a 50 percent equity
ownership. Investments in joint ventures and other subsidiaries in which the
company has between a 20 percent and 50 percent equity ownership are reflected
using the equity method. However, because certain assets and liabilities are in
separate corporate entities, the consolidated assets are not available to
satisfy all consolidated liabilities. All material intercompany amounts and
transactions have been eliminated. Certain amounts have been reclassified to
conform with current year's classification.
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the amounts reported in
the financial statements and accompanying notes, including disclosures related
to contingencies. Actual results could differ from these estimates.
Included as an integral part of the consolidated financial statements are
separate summarized financial statements and notes for the company's primary
business groups, as well as the significant accounting policies unique to each
group.
EARNINGS PER SHARE
In 1997, the company adopted FASB Statement No. 128, Earnings Per Share, which
requires the presentation of basic and diluted earnings per share. Under the new
statement, the dilutive effect of stock options will be excluded from basic
earnings per share, but included in the computation of diluted earnings per
share. Earnings per share amounts for all periods presented have been restated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks,
commercial paper, agency discount notes, federal funds sold and other short-term
liquid instruments with original maturities of three months or less.
TRANSLATION OF INTERNATIONAL CURRENCIES
Balance sheets of the company's international operations
where the functional currency is other than the U.S. dollar are translated into
U.S. dollars at year end exchange rates. Adjustments resulting from financial
statement translation are reported as a component of shareholders' equity. For
other international operations where the functional currency is the U.S. dollar,
inventories, property, plant and equipment are translated at the historical rate
of exchange, while other assets and liabilities are translated at year end
exchange rates. Translation adjustments for these operations are included in
earnings and are not material.
Income and expense items are translated into U.S. dollars at average rates of
exchange prevailing during the year. Gains and losses resulting from foreign
currency transactions are included in earnings and are not material.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax purposes computed using current tax rates.
STOCK-BASED COMPENSATION
The company uses the intrinsic value method in accounting for its stock-based
employee compensation plans.
LONG-LIVED ASSETS
Impairment losses are recognized when indicators of impairment are present, and
the estimated undiscounted cash flows are not sufficient to recover the assets'
carrying amount. Assets held for disposal are measured at the lower of carrying
value or estimated fair value less costs to sell.
55
<PAGE> 19
NOTE 2 - TAXES ON INCOME
Taxes on income from continuing operations consisted of the following:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
CURRENT TAX PROVISION:
Federal $ 21.9 $ 27.2 $ 87.2
State and other 2.2 6.5 11.9
24.1 33.7 99.1
DEFERRED TAX PROVISION:
Federal 15.2 (16.5) 48.2
State and other 4.9 5.9 2.7
- --------------------------------------------------------------------------------
20.1 (10.6) 50.9
================================================================================
PROVISION FOR
INCOME TAXES $ 44.2 $ 23.1 $ 150.0
================================================================================
</TABLE>
Earnings or losses from continuing operations consisted of the following:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
EARNINGS (LOSSES):
U.S. $ 104.1 $ 163.6 $ 435.0
Non-U.S (9.1) (7.6) (4.0)
- -------------------------------------------------------------------------------
$ 95.0 $ 156.0 $ 431.0
===============================================================================
</TABLE>
The differences between the consolidated effective income tax rate and the
federal statutory income tax rate include the following:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Taxes on income
at statutory rate $ 33.3 $ 54.6 $ 150.9
FDIC tax-sharing
settlement -- (31.5) --
Book benefit of FDIC
assistance and other
permanent items (0.8) (11.6) (12.1)
State and other taxes 5.1 8.1 8.9
Foreign losses
not benefited 3.2 2.6 1.4
Goodwill 3.4 0.9 0.9
- -------------------------------------------------------------------------------
$ 44.2 $ 23.1 $ 150.0
===============================================================================
</TABLE>
Significant components of the company's consolidated deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
At year end 1997 1996
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Depreciation $ 396.4 $ 346.3
Timber and timberlands 41.9 36.8
Pensions 20.6 18.5
Other 63.3 42.2
- -------------------------------------------------------------------------------
Total deferred tax liabilities 522.2 443.8
- -------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Alternative minimum tax credits 264.3 215.6
Net operating loss carryforwards 78.0 96.7
OPEB obligations 54.6 47.8
Other 54.9 30.0
- -------------------------------------------------------------------------------
Total deferred tax assets 451.8 390.1
- -------------------------------------------------------------------------------
VALUATION ALLOWANCE (152.9) (147.4)
- -------------------------------------------------------------------------------
Net deferred tax liability $ 223.3 $ 201.1
- -------------------------------------------------------------------------------
</TABLE>
The valuation allowance represents accruals for deductions that are uncertain
and, accordingly, have not been recognized for financial reporting purposes. The
change in the valuation allowance is primarily the result of increased foreign
net operating losses, the future realization of which is not assured. Deferred
taxes increased $2.5 million as a result of the current year increase in equity
under SFAS No. 115 and decreased by $0.4 million due to acquisitions.
Income tax payments, net of refunds received, were $21 million, $38 million and
$74 million during 1997, 1996 and 1995, respectively.
The company has domestic net operating loss carryforwards of $187 million that
expire in 2009 and foreign net operating loss carryforwards of $36 million that
expire from the year 2000 through the year 2007. Alternative minimum tax credits
may be carried forward indefinitely.
In connection with the acquisition of Guaranty in 1988, the company entered into
an assistance agreement (Assistance Agreement) with the Federal Savings and Loan
Insurance Corporation. Pursuant to the Assistance Agreement, the company
received various tax benefits to be shared with the FDIC when the cash benefits
were realized by the company. During the term of the Assistance Agreement, the
company recorded these tax-sharing liabilities on an undiscounted basis. The
company and the FDIC terminated the Assistance Agreement. As a part of this
termination, the company and the FDIC agreed to a one-time payment that was
based on the present value of the future liabilities. In 1996, the company
recognized a credit to its tax provision of $31.5 million as a result of the
completion of this transaction.
As a result of the sale of Temple-Inland Food Service Corporation, the company
realized a $2.3 million one-time increase in 1997 tax expense from nondeductible
goodwill.
The Internal Revenue Service is examining the company's consolidated tax returns
for the years 1984 through 1992. The resolution of these examinations is not
expected to have a significant impact on the company's financial condition or
results of operations.
56
<PAGE> 20
NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
At year end 1997 1996
- ---------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Loans receivable $6,450.9 $6,454.9 $5,413.9 $5,417.0
Mortgage-backed
and investment
securities 2,805.7 2,754.0 2,783.5 2,707.2
=================================================================================
FINANCIAL
LIABILITIES
Deposits 7,374.8 7,380.2 6,263.1 6,262.7
FHLB advances 1,685.0 1,687.9 1,032.9 1,036.5
Long-term debt 1,605.6 1,673.3 1,654.9 1,717.1
=================================================================================
OFF-BALANCE-SHEET
INSTRUMENTS
Commitments to
extend credit -- (0.7) -- (1.8)
=================================================================================
</TABLE>
Differences between fair value and carrying amounts are due primarily to
instruments that provide fixed interest rates or contain fixed interest rate
elements. Inherently, such instruments are subject to fluctuations in fair value
due to subsequent movements in interest rates. The fair value of cash and cash
equivalents, trade and other receivables, securities sold under agreements to
repurchase and mortgage loans held for sale consistently approximate the
carrying amount due to their short-term nature and are excluded from the above
table. The fair value of mortgage-backed and investment securities and
off-balance-sheet instruments are based on quoted market prices. Other financial
instruments are valued using discounted cash flows. The discount rates used
represent current rates for similar instruments.
NOTE 4 - SHAREHOLDER RIGHTS PLAN
During 1989, the Board of Directors adopted a Shareholder Rights Plan in which
one preferred stock purchase right (Right) was declared as a dividend for each
common share outstanding. Each one-half Right entitles shareholders to purchase,
under certain conditions, one-hundredth of a share of newly issued Series A
Junior Participating Preferred Stock at an exercise price of $200. Rights will
be exercisable only if a person or group acquires beneficial ownership of 20
percent or more of the common shares or commences a tender or exchange offer,
upon consummation of which such person or group would beneficially own 25
percent or more of the common shares. The company will generally be entitled to
redeem the Rights at $0.01 per Right at any time until the 10th business day
following public announcement that a 20 percent position has been acquired.
Rights will expire on February 20, 1999.
NOTE 5 - EMPLOYEE BENEFIT PLANS
PENSIONS
The company has pension plans covering substantially all employees. Plans
covering salaried and nonunion hourly employees provide benefits based on
compensation and years of service, while union hourly plans are based on
negotiated benefits and years of service. The company's policy is to fund
amounts on an actuarial basis to accumulate assets sufficient to meet the
benefits to be paid in accordance with the requirements of ERISA. Contributions
to the plans are made to trusts for the benefit of plan participants.
Net pension costs include the following:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
CHARGES (CREDITS)
Service cost - benefits
earned during the period $ 13.5 $ 12.8 $ 11.6
Interest cost on projected
benefit obligation 35.4 32.2 30.6
Actual return on plan assets (125.7) (71.2) (72.0)
Net amortization and deferral 74.8 25.3 31.0
- -------------------------------------------------------------------------------
Net pension cost (credit) $ (2.0) $ (0.9) $ 1.2
===============================================================================
</TABLE>
Significant assumptions used to develop net pension cost for the defined benefit
pension plans follow:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate for
determining projected
benefit obligation 7.50% 8.00% 7.75%
Expected long-term
rate of return on
plan assets 9.00% 9.00% 9.00%
Average increase in
compensation levels 3.50% 4.00% 4.75%
===============================================================================
</TABLE>
57
<PAGE> 21
The funded status of employee pension plans follows:
<TABLE>
<CAPTION>
At year end 1997 1996
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Actuarial present value of
projected benefit obligations:
Vested $ 440.4 $ 379.4
Nonvested 32.2 28.5
- -------------------------------------------------------------------------------
Accumulated projected
benefit obligation $ 472.6 $ 407.9
===============================================================================
Plan assets at fair value,
primarily stocks and bonds $ 628.3 $ 528.2
Projected benefit obligation
for service rendered to date (507.3) (455.0)
- -------------------------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 121.0 73.2
Unrecognized prior service cost 1.4 1.3
Unrecognized net gain from
past experience different
from that assumed (61.1) (9.6)
Unrecognized net asset at
beginning of period,
less amortization to date (12.6) (17.0)
- -------------------------------------------------------------------------------
Net pension asset included
in the consolidated
balance sheet $ 48.7 $ 47.9
===============================================================================
</TABLE>
POSTRETIREMENT BENEFITS
The company provides medical and insurance benefits to certain eligible salaried
and hourly employees who reach retirement age while employed by the company.
Net postretirement benefit costs include the following:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Service cost
for benefits $ 2.7 $ 2.7 $ 2.6
Interest cost 8.3 8.5 8.7
Net amortization
and deferral (1.3) (0.4) (0.4)
- -------------------------------------------------------------------------------
Net postretirement cost $ 9.7 $ 10.8 $ 10.9
===============================================================================
</TABLE>
Significant assumptions used to develop net postretirement cost for the
postretirement benefit plan follow:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate for
determining
postretirement
benefit obligation 7.50% 8.00% 7.75%
Health care
cost trend rate 9.50% 10.00% 11.00%
===============================================================================
</TABLE>
Summary information for the plan follows:
<TABLE>
<CAPTION>
At year end 1997 1996
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
ACCUMULATED POSTRETIREMENT
BENEFIT OBLIGATION
Retirees $ 61.8 $ 53.4
Active participants,
eligible to retire 19.3 19.1
All other participants 33.8 32.4
- --------------------------------------------------------------------------------
Accrued postretirement
benefit obligation 114.9 104.9
Unrecognized net gains 15.1 22.4
Unrecognized prior service cost 9.9 9.1
- --------------------------------------------------------------------------------
Postretirement benefit
obligation included in the
consolidated balance sheet $ 139.9 $ 136.4
================================================================================
</TABLE>
The health care trend rate of 9.5 percent in 1997 is expected to decline to 6.0
percent by 2010 and remain constant there-after. If such rate increased by 1
percent, the accumulated postretirement obligation would increase by 7.9
percent, and the 1997 net postretirement cost would increase by 9.4 percent.
NOTE 6 - STOCK OPTION PLANS
The company has established stock option plans for key employees and directors.
The plans provide for the granting of nonqualified stock options and/or
incentive stock options, and, prior to 1994, the plans permitted the grant of
stock appreciation rights with all or part of any options so granted. Options
granted after 1995 have primarily a 10-year term and become exercisable in steps
from one to five years.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- ------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------
(shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning of year 1,626 $ 45 1,404 $ 45 1,275 $ 43
Granted 201 56 456 43 326 46
Exercised (303) 41 (144) 32 (146) 30
Forfeited (94) 50 (90) 48 (51) 48
- ------------------------------------------------------------------------------------------
Outstanding
end of year 1,430 $ 47 1,626 $ 45 1,404 $ 45
- ------------------------------------------------------------------------------------------
Weighted average
fair value of
options granted
during the year $18.24 $13.07 $13.55
==========================================================================================
</TABLE>
58
<PAGE> 22
Options exercisable at year end were (in thousands): 1997--658; 1996--769; and
1995--718. The weighted average price for options exercisable at year end 1997
was $46 per share and $44 per share for year end 1996. Exercise prices for
options outstanding at January 3, 1998, range from $12 to $66. The weighted
average remaining contractual life of these options is eight years. An
additional 3,283,654 and 1,065,422 shares of common stock were available for
grants at year end 1997 and 1996, respectively. A restricted stock plan also
provides for a maximum of 300,000 shares of restricted common stock to be
reserved for awards. At year end 1997, awards of 140,532 shares of common stock
were outstanding at an average price of $47.70 per share.
The fair value of the options granted in 1997, 1996 and 1995 was estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 2.1% 2.6% 2.3%
Expected stock
price volatility 27.3% 26.5% 27.0%
Risk-free interest rate 5.6% 6.5% 6.7%
Expected life
of options 8.0 years 7.0 years 5.25 years
===================================================================================
</TABLE>
Assuming that the company had accounted for its employee stock options using the
fair value method and amortized such to expense over the options' vesting
period, pro forma net income and diluted earnings per share would have been
$49.1 million and $0.87 per diluted share in 1997, $131.5 million and $2.37 per
diluted share in 1996, and $280.4 million and $5.00 per diluted share in 1995.
The pro forma disclosures may not be indicative of future amounts due to changes
in subjective input assumptions and because the options vest over several years
with additional future option grants expected.
NOTE 7 - EARNINGS PER SHARE
Numerators and denominators used in computing earnings per share are as follows:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Numerator for basic
and diluted
earnings
per share--
net income $ 50.8 $ 132.8 $ 281.0
Denominator for basic
earnings per share--
weighted average
shares outstanding 56.0 55.5 56.0
Dilutive effect of
stock options 0.2 0.1 0.1
- --------------------------------------------------------------------------------
Denominator for diluted
earnings per share 56.2 55.6 56.1
================================================================================
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As a result of allegations made by a former employee in a wrongful termination
lawsuit, the Securities and Exchange Commission began a non-public investigation
into the allegations. The company has denied these allegations, stating that
they are without merit or grounds whatsoever, and that the resolution of such
will not have an adverse effect on the company's consolidated financial
statements.
There are pending against the company and its subsidiaries other lawsuits,
claims and environmental matters arising in the regular course of business.
In the opinion of management, recoveries, if any, by plaintiffs or claimants
that may result from the foregoing litigation and claims will not be material in
relation to the consolidated financial statements of the company and its
subsidiaries.
See page 33 for a discussion of commitments on construction projects.
NOTE 9 - BUSINESS SEGMENT INFORMATION
Refer to "Business Segments" on page 25 for information relating to Revenues and
Income Before Taxes, and page 32 for information relating to Capital
Expenditures for the business segments for the years 1997, 1996 and 1995.
Identifiable assets by business segment are those assets specifically used in
each segment's operations. The results of the timber and timberlands operations
are allocated to the manufacturing groups based upon fiber usage. Corporate
assets are principally cash and office buildings.
Additional business segment information is presented below:
<TABLE>
<CAPTION>
For the year 1997 1996 1995
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Paper $ 2,630.4 $ 2,715.7 $ 2,762.4
Building products 369.7 346.4 297.8
Timber and
timberlands 564.5 538.1 490.6
Corporate and other
activities 46.9 49.0 44.7
- -------------------------------------------------------------------------------
3,611.5 3,649.2 3,595.5
Financial services 10,784.7 9,335.1 9,211.1
Reclassifications
and eliminations (32.2) (37.2) (42.2)
- -------------------------------------------------------------------------------
Total $14,364.0 $12,947.1 $12,764.4
===============================================================================
DEPRECIATION
AND DEPLETION
Paper $ 203.0 $ 197.6 $ 171.0
Building products 32.2 29.4 24.0
Timber and
timberlands 19.4 16.9 12.2
Corporate and other
activities 0.6 0.5 0.4
- -------------------------------------------------------------------------------
255.2 244.4 207.6
Financial services 13.2 9.6 8.1
- -------------------------------------------------------------------------------
Total $ 268.4 $ 254.0 $ 215.7
===============================================================================
</TABLE>
59
<PAGE> 23
NOTE 10 - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly financial results for the years 1997 and 1996 are summarized
below:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
1997
Total revenues $ 850.9 $ 907.9 $ 938.4 $ 928.2
Manufacturing net sales 649.0 687.1 678.2 665.9
Manufacturing gross profit 81.9 84.9 75.8 89.8
Financial services
operating income before taxes 29.5 32.4 37.4 32.8
Net income 13.2 15.6 12.6 9.4
Earnings per share(*):
Basic $ 0.24 $ 0.28 $ 0.22 $ 0.17
Diluted $ 0.24 $ 0.28 $ 0.22 $ 0.17
============================================================================================
1996
Total revenues $ 868.7 $ 883.4 $ 862.5 $ 845.7
Manufacturing net sales 670.4 677.9 658.1 638.5
Manufacturing gross profit 137.3 124.6 97.5 87.5
Financial services
operating income before taxes 24.7 29.7 (17.6) 26.3
Net income 46.4 35.4 32.7 18.3
Earnings per share*:
Basic $ 0.84 $ 0.63 $ 0.59 $ 0.33
Diluted $ 0.84 $ 0.63 $ 0.59 $ 0.33
============================================================================================
</TABLE>
(*) Earnings per share amounts have been restated to comply with FASB Statement
No. 128, Earnings Per Share.
60
<PAGE> 24
REPORT OF MANAGEMENT
MANAGEMENT REPORT ON FINANCIAL STATEMENTS
Management has prepared and is responsible for the company's financial
statements, including the notes thereto. They have been prepared in accordance
with generally accepted accounting principles and necessarily include amounts
based on judgments and estimates by management. All financial information in
this annual report is consistent with that in the financial statements.
The company maintains internal accounting control systems and related policies
and procedures designed to provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and properly recorded, and that accounting records may be relied
upon for the preparation of financial statements and other financial
information. The design, monitoring and revision of internal accounting control
systems involve, among other things, management's judgment with respect to the
relative cost and expected benefits of specific control measures. The company
also maintains an internal auditing function that evaluates and formally reports
on the adequacy and effectiveness of internal accounting controls, policies and
procedures.
The company's financial statements have been examined by Ernst & Young LLP,
independent auditors, who have expressed their opinion with respect to the
fairness of the presentation of the statements.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets with the independent auditors and internal auditors to evaluate
the effectiveness of the work performed by them in discharging their respective
responsibilities and to assure their independent and free access to the
committee.
/s/ CLIFFORD J. GRUM
Clifford J. Grum
Chairman of the Board and
Chief Executive Officer
/s/ DAVID H. DOLBEN
David H. Dolben
Vice President and
Chief Accounting Officer
REPORT OF
INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS OF TEMPLE-INLAND INC.:
We have audited the accompanying consolidated balance sheets of Temple-Inland
Inc. and subsidiaries as of January 3, 1998, and December 28, 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended January 3, 1998. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
mis-statement. 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 consolidated financial position of Temple-Inland Inc.
and subsidiaries at January 3, 1998, and December 28, 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 3, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Houston, Texas
January 30, 1998
61
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF TEMPLE-INLAND INC.
(Including Joint Ventures & Partnerships)
(State of Incorporation) (Percentage of Ownership by Immediate Parent)
(Federal Tax I.D. Number)
<TABLE>
<S> <C>
INLAND CONTAINER CORPORATION I (DELAWARE) (100%) (75-2042862)
Inland Paperboard and Packaging, Inc.(Delaware)(100%)(13-2946332)
El Morro Corrugated Box Corporation (Delaware)(100%)(35-1323144)
El Morro Corrugated Box Corporation (Puerto Rico)(100%)(66-0274059)
Georgia Kraft Company (Delaware)(100%)(75-2212491)
Sabine River & Northern Railroad Company (Texas)(100%)(34-0969790)
Inland Argentina, Inc. (Delaware) (100%)(75-2559834)
Inland Argentina S.A. (Argentina) (99.9%)
Inland Chile I, Inc. (Delaware) (100%)(75-2559831)
Manufacturas y Embalajes Inland Chile Limitada (90%; 10% Inland Chile II)(Chile)
Inland Chile II, Inc. (Delaware) (100%)(75-2559773)
Inland Container FSC, Inc. (U.S. Virgin Islands)(100%)(66-0412023)
Inland International Holding Company (Delaware)(100%)(75-2559772)
Inland Corrugados de Mexico, S.A. de C.V. (Mexico)(100%)
Inland Corrugados de Guanajato, S.A. de C.V. (Mexico)(100%)
Inland Corrugados de Monterrey, S.A. de C.V. (Mexico)(100%)
Inland Corrugados de Sinaloa, S.A. de C.V. (Mexico)(100%)
TinCorr S.A. (Uruguay) (100%)
Inland Paper Company, Inc. (Indiana)(100%)(35-1343720)
Wesland Container LLC (Arkansas) (50%)
TEMPLE-INLAND FINANCIAL HOLDINGS INC. (NEVADA)(100%)(PENDING)
TEMPLE-INLAND FOREST PRODUCTS CORPORATION (DELAWARE) (100%) (75-1462427)
The Angelina Free Press, Inc. (Texas)(100%)(75-1080101)
Del-Tin Fiber, L.L.C. (Arkansas) (50%) (71-0772548)
Eastex Incorporated (Texas)(100%)(74-1180064)
Evadale Realty Company (Delaware)(100%)(74-6047398)
Bestile Manufacturing Company (California) (100%)(95-1608040)
Home Owners Trust Company (Texas)(100%)(74-1482976)
Sabine Investment Company of Texas, Inc. (Texas)(100%)(75-1308206)
Scotch Investment Company (Texas)(100%)(74-1463738)
Scotch Properties Management Inc. (Delaware)(100%)(75-2242094)
Southern Pine Lumber Company (Texas)(100%)(75-1183646)
Southern Pine Plywood Co. (Texas)(100%)(75-1159301)
Standard Gypsum L.L.C. (Texas)(50%)
Templar Essex Inc. (Delaware)(100%)(75-2459426)
Temple Associates, Inc. (Texas)(100%)(75-0777257)
Temple-Eastex Incorporated (Delaware) (100%)(75-2248412)
Temple Industries, Inc. (Texas)(100%)(75-0571180)
Temple-Inland Food Service Corporation (Delaware)(100%)(75-2285370)
Temple Inland Forest Products of Canada Inc. (New Brunswick, Canada)(100%)
Temple-Inland Forest Products International Inc. (Delaware)(100%)(75-1462427)
Planfosur S. de R.L. de C.V. (Mexico) (51%; 49% owned by TIFPC)
Temple-Inland Paperboard Specialty Company (Delaware) (100%)(75-2504953)
Temple-Inland Recaustisizing Company (Delaware)(100%)(75-2468479)
Temple-Inland Recovery Company (Delaware)(100%)(75-2468476)
Temple-Inland Stores Company (Delaware)(100%)(75-2468477)
Temple-Inland Trading Company (Delaware)(100%)(75-2604111)
Temple Lumber Company (Texas)(100%)(75-6018597)
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Temple/Re-Con Inc. (Delaware)(50%)(Pending)
Texas Southeastern Railroad Company (Texas)(100%)(75-6002614)
Topaz Oil Company (Texas)(100%)(75-1053707)
TEMPLE-INLAND FINANCIAL SERVICES INC. (DELAWARE) (100%) (74-2421034)
Guaranty Holdings Inc. I (Delaware) (100%)(75-2244180)
Guaranty Federal Bank, F.S.B. (Federal) (79.1%; 20.9% owned by
Temple-Inland Financial Holdings)
Guaranty Group Inc. (Texas)(100%)(75-2515512)
Participation Purchase Corporation (Nevada)(100%)(74-2676327)
RWHC Inc.(Nevada)(100%)(74-2829164)
Guaranty Preferred Capital Corporation (Nevada)(100%)(74-2829164)
MBHC Inc. (Nevada)(100%)(86-0881894)
Knutson Mortgage Corporation (100%)(Delaware)
Knutson Title Company (100%)(Minnesota)
Temple-Inland Mortgage Corporation (Nevada)(100%)(74-1878850)
Western Cities Mortgage Corporation (California)(100%)(95-3836552)
Stockton Financial Corporation (100%)(California)
Stockton Service Corporation (100%)(California)
501 Weber Bldg., Inc. (100%)(California)
Temple-Inland Properties Inc. (Delaware)(100%)(74-2431999)
Stanford Realty Advisors, Inc. (Delaware)(100%)(75-2426395)
LIC Investments Inc. (Delaware)(100%)(74-2366105)
Lumbermen's Investment Corporation (Delaware)(100%)(74-1213624)
Brehm-Aviara Group LLC (California)( %)
CNB/LIC Ventures Inc. (98.4%)
LIC Financial Corporation (Delaware)(100%)(74-2553548)
LIC Ventures, Inc. (100%)(Delaware)(74-2772874)
Landon Alma Partners Limited (49%)
Landon Prairie Creek Partners Limited (49%)
Landon Legacy Partners Limited (49%)
Red Hawk Business Park Limited Partnership (49%)
Tampa Palms Apartments, Ltd. (Florida) (69%)
Turnbury Park Apartments, Ltd. (69%)
Onion Creek Wastewater Corporation (Texas)(100%)(74-2733721)
Olympia Joint Venture (San Antonio)(50%)
Sunbelt Insurance Company (Texas)(100%)(74-1950814)
TEEC Inc. (Texas)(100%)(75-1962795)
Timberline Insurance Managers, Inc. (Texas)(100%)(74-1550763)
Capline Marketing Group (Texas)(50%)
Premium Acceptance Corporation (Texas)(100%)(74-2438963)
Rubiola, Blair & Associates, Inc. (Texas)(100%)
The Insurance Marketplace, Inc. (Texas)(100%)(74-2333654)
West Houston Residential Development Partners (60%)
Temple-Inland Capital Inc. (Delaware)(100%)(75-2555146)
Temple-Inland Life Inc. (Nevada)(100%)(74-2387096)
Temple-Inland Insurance Corporation (Delaware)(100%)(75-2045626)
Temple-Inland Realty Inc. (Delaware) (100%)(75-2370575)
Temco Associates (50%)
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Temple-Inland Inc. of our report dated January 30, 1998, included in
the 1997 Annual Report to Shareholders of Temple-Inland Inc.
We consent to the incorporation by reference in each of the following
Registration Statements filed by Temple-Inland Inc. and in each related
Prospectus of our report dated January 30, 1998, with respect to the
consolidated financial statements of Temple-Inland Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended January 3, 1998,
and our report dated January 30, 1998, with respect to the financial statement
schedule included in this Annual Report (Form 10-K) for the year ended January
3, 1998.
<TABLE>
<CAPTION>
REGISTRATION
STATEMENT NO. PURPOSE
- ------------- -------
<S> <C>
No. 2-88202 Post-Effective Amendment Number 3 on Form S-8
No. 33-23132 Registration Statement on Form S-8
No. 33-25650 Post-Effective Amendment Number 1 on Form S-8
No. 33-27286 Post-Effective Amendment Number 1 on Form S-8
No. 33-32124 Post-Effective Amendment Number 2 on Form S-8
No. 33-43802 Registration Statement on Form S-8
No. 33-48034 Registration Statement on Form S-8
No. 33-54388 Registration Statement on Form S-8
No. 33-63104 Registration Statement on Form S-8
No. 333-27469 Registration Statement on Form S-8
</TABLE>
/s/ ERNST & YOUNG LLP
Houston, Texas
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR TEMPLE-INLAND INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 188
<SECURITIES> 0
<RECEIVABLES> 277
<ALLOWANCES> 0
<INVENTORY> 339
<CURRENT-ASSETS> 0
<PP&E> 2,916
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,364
<CURRENT-LIABILITIES> 0
<BONDS> 1,605
0
0
<COMMON> 61
<OTHER-SE> 1,984
<TOTAL-LIABILITY-AND-EQUITY> 14,364
<SALES> 2,680
<TOTAL-REVENUES> 3,625
<CGS> 2,613
<TOTAL-COSTS> 3,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110
<INCOME-PRETAX> 95
<INCOME-TAX> 44
<INCOME-CONTINUING> 51
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51
<EPS-PRIMARY> .91
<EPS-DILUTED> .90
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR TEMPLE-INLAND INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-28-1996 DEC-31-1995
<PERIOD-END> DEC-28-1996 DEC-31-1995
<CASH> 228 358
<SECURITIES> 0 0
<RECEIVABLES> 292 283
<ALLOWANCES> 0 0
<INVENTORY> 327 338
<CURRENT-ASSETS> 0 0
<PP&E> 2,931 2,864
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 12,947 12,764
<CURRENT-LIABILITIES> 0 0
<BONDS> 1,655 1,602
0 0
0 0
<COMMON> 61 61
<OTHER-SE> 1,954 1,914
<TOTAL-LIABILITY-AND-EQUITY> 12,947 12,764
<SALES> 2,645 2,731
<TOTAL-REVENUES> 3,460 3,495
<CGS> 2,447 2,329
<TOTAL-COSTS> 3,199 2,995
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 110 73
<INCOME-PRETAX> 156 431
<INCOME-TAX> 23 150
<INCOME-CONTINUING> 133 281
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 133 281
<EPS-PRIMARY> 2.39 5.02
<EPS-DILUTED> 2.39 5.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
balance sheets and consoliodated income statements for Temple-Inland Inc. and
subsidiaries and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-03-1998 JAN-03-1998 JAN-03-1998
<PERIOD-END> MAR-29-1997 JUN-28-1997 SEP-27-1997
<CASH> 136 188 220
<SECURITIES> 0 0 0
<RECEIVABLES> 302 319 319
<ALLOWANCES> 0 0 0
<INVENTORY> 347 332 322
<CURRENT-ASSETS> 0 0 0
<PP&E> 2,944 2,957 2,944
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 13,151 14,932 14,976
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 1,758 1,724 1,653
0 0 0
0 0 0
<COMMON> 61 61 61
<OTHER-SE> 1,939 2,023 2,007
<TOTAL-LIABILITY-AND-EQUITY> 13,151 14,932 14,976
<SALES> 649 1,336 2,014
<TOTAL-REVENUES> 851 1,759 2,697
<CGS> 630 1,297 1,965
<TOTAL-COSTS> 802 1,658 2,549
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 28 56 83
<INCOME-PRETAX> 22 48 69
<INCOME-TAX> 9 19 28
<INCOME-CONTINUING> 13 29 41
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 13 29 41
<EPS-PRIMARY> 0.24 0.52 0.74
<EPS-DILUTED> 0.24 0.52 0.74
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
balance sheets and consolidated income statements for Temple-Inland Inc. and
subsidiaries and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-28-1996 DEC-28-1996 DEC-28-1996
<PERIOD-END> MAR-30-1996 JUN-29-1996 SEP-28-1996
<CASH> 310 377 436
<SECURITIES> 0 0 0
<RECEIVABLES> 302 313 312
<ALLOWANCES> 0 0 0
<INVENTORY> 357 328 323
<CURRENT-ASSETS> 0 0 0
<PP&E> 2,883 2,928 2,917
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 13,013 13,121 13,195
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 1,684 1,726 1,665
0 0 0
0 0 0
<COMMON> 61 61 61
<OTHER-SE> 1,932 2,100 1,952
<TOTAL-LIABILITY-AND-EQUITY> 13,013 13,121 13,195
<SALES> 662 1,328 1,975
<TOTAL-REVENUES> 860 1,732 2,583
<CGS> 588 1,204 1,806
<TOTAL-COSTS> 762 1,553 2,377
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 27 54 82
<INCOME-PRETAX> 71 126 128
<INCOME-TAX> 25 44 13
<INCOME-CONTINUING> 46 82 115
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 46 82 115
<EPS-PRIMARY> 0.84 1.47 2.06
<EPS-DILUTED> 0.84 1.47 2.06
</TABLE>
