<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-8634
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 EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
PACIFIC 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 10, 1999, was $1,866,578,995. 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 10, 1999, 55,663,155 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 25-69 of the Annual Report to Shareholders for the fiscal year
ended January 2, 1999 -- Parts I and I.
(b) The Company's definitive proxy statement, dated March 26, 1999, in
connection with the Annual Meeting of Shareholders to be held May 7,
1999 -- Part III.
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<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 business of the Company is
divided among three groups: (1) the Paper Group, (2) the Building Products
Group, and (3) the Financial Services Group. Forest resources include
approximately 2.2 million acres of timberland in Texas, Louisiana, Georgia, and
Alabama.
The Company's Paper Group, operated by Inland Paperboard and Packaging,
Inc. ("Inland"), consists of the corrugated packaging and bleached paperboard
operations. The corrugated packaging operation is vertically integrated and
consists of four linerboard mills, two corrugating medium mills, 41 box plants,
and eight specialty converting plants. The bleached paperboard operation
consists of one large mill located in Evadale, Texas.
The Company's Building Products Group, operated by Temple-Inland Forest
Products Corporation ("Temple-Inland FPC"), manufactures a wide range of
building products including lumber, plywood, particleboard, medium density
fiberboard, gypsum wallboard, fiber-cement siding, and fiberboard.
The Company's Financial Services Group consists of savings bank activities,
mortgage banking, real estate development, and insurance brokerage. The
Company's savings bank, Guaranty Federal Bank, F.S.B. ("Guaranty"), conducts its
business through 135 banking centers in Texas and California. Mortgage banking
is conducted through Temple-Inland Mortgage Corporation ("Temple-Inland
Mortgage"), a subsidiary of Guaranty that arranges financing of single-family
mortgage loans, then sells the loans into the secondary market (primarily FNMA,
FHLMC, and GNMA). Real estate operations include development of residential
subdivisions, as well as the management and sale of income properties.
The Company is a Delaware corporation that was organized in 1983. Its
principal subsidiaries include Inland, Temple-Inland FPC, Temple-Inland
Financial Services Inc. ("Financial Services"), Guaranty, and 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.
2
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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
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues
Paper................................... $2,017.6 $2,062.9 $2,082.3 $2,198.4 $1,740.7
Building products....................... 613.0 617.3 562.6 532.9 575.5
Other activities........................ -- -- -- -- 19.2
-------- -------- -------- -------- --------
Manufacturing net sales......... 2,630.6 2,680.2 2,644.9 2,731.3 2,335.4
Financial services........................ 1,109.5 945.2 815.4 764.3 631.4
-------- -------- -------- -------- --------
Total revenues.................. $3,740.1 $3,625.4 $3,460.3 $3,495.6 $2,966.8
======== ======== ======== ======== ========
Income before taxes
Paper................................... $ 32.5 $ (39.0) $ 113.0 $ 356.6 $ 73.7
Building products....................... 112.5 131.1 102.0 67.0 138.8
Other activities........................ -- -- -- -- 1.5
-------- -------- -------- -------- --------
145.0 92.1 215.0 423.6 214.0
Financial services...................... 154.1 132.1 63.1(a) 98.1 56.3
-------- -------- -------- -------- --------
Segment operating income........ 299.1 224.2 278.1 521.7 270.3
Corporate expense....................... (27.9) (24.6) (17.2) (21.7) (13.7)
Special charge(b)....................... (47.4) -- -- -- --
Parent company interest -- net.......... (106.0) (110.3) (109.6) (72.7) (67.1)
Other income............................ 6.6 5.7 4.6 3.7 3.8
-------- -------- -------- -------- --------
Income before taxes............. $ 124.4 $ 95.0 $ 155.9 $ 431.0 $ 193.3
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Includes SAIF assessment of $43.9 million.
(b) Includes nonrecurring charges related to (1) the impairment of the Paper
Group's investment in its South American corrugated packaging plants, (2)
severance costs from the restructuring efforts in the Paper Group, and (3)
the write-off of abandoned assets in the Paper Group and the Building
Products Group.
For more information with respect to total assets, capital expenditures,
depreciation, depletion, and amortization on a business segment basis, see pages
65 and 66 of the Company's 1998 Annual Report to Shareholders, which are
incorporated herein by reference.
3
<PAGE> 4
The following table shows the revenues of the Company by product:
REVENUES
<TABLE>
<CAPTION>
FOR THE YEAR
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Paper
Corrugated packaging(a).................. $1,641.5 $1,694.0 $1,760.6 $1,910.3 $1,499.2
Bleached paperboard...................... 376.1 366.0 300.5 249.0 217.4
Pulp and other........................... -- 2.9 21.2 39.1 24.1
-------- -------- -------- -------- --------
2,017.6 2,062.9 2,082.3 2,198.4 1,740.7
-------- -------- -------- -------- --------
Building Products
Pine lumber.............................. 222.7 262.1 217.4 190.1 211.9
Fiber products........................... 64.4 66.2 73.3 59.7 66.3
Particleboard............................ 141.5 125.0 112.2 99.1 103.0
Plywood.................................. 59.6 55.2 52.1 49.3 56.8
Gypsum wallboard......................... 115.5 104.6 90.2 83.1 74.3
Medium density fiberboard................ 9.3 -- -- -- --
Retail distribution(b)................... -- 4.2 17.1 51.3 58.4
Other.................................... -- -- .3 0.3 4.8
-------- -------- -------- -------- --------
613.0 617.3 562.6 532.9 575.5
-------- -------- -------- -------- --------
Other activities(c)........................ -- -- -- -- 19.2
-------- -------- -------- -------- --------
Manufacturing net sales.................. 2,630.6 2,680.2 2,644.9 2,731.3 2,335.4
Financial services......................... 1,109.5 945.2 815.4 764.3 631.4
-------- -------- -------- -------- --------
Total revenues................... $3,740.1 $3,625.4 $3,460.3 $3,495.6 $2,966.8
======== ======== ======== ======== ========
</TABLE>
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(a) Reclassified to include revenues for 1997, 1996, 1995, and 1994 from 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, and $57.9 million in 1997, 1996, 1995, and 1994, respectively. The
Company sold substantially all the assets of this subsidiary in the fourth
quarter of 1997.
(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 the construction and
maintenance of electrical distribution facilities until their operations
were terminated in 1994.
4
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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
YEAR END -------------------------------------
1998 1998 1997 1996 1995 1994
----------- ----- ----- ----- ----- -----
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C> <C>
Paper
Corrugated packaging........................... (a) 2,519 2,769 2,435 2,333 2,492
Bleached paperboard............................ (b) 623 635 524 400 430
Pulp........................................... (b) -- 2 100 99 87
(IN MILLIONS OF BOARD FEET)
Building products
Pine lumber.................................... 675 603 639 605 582 583
(IN MILLIONS OF SQUARE FEET)
Fiber products................................. 460 423 402 457 422 441
Particleboard(c)............................... 610 518 470 399 329 347
Plywood........................................ 265 289 281 259 217 260
Gypsum wallboard(d)............................ 866 858 843 838 813 796
Medium density fiberboard(d)(e)................ 260 35 -- -- -- --
</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 550,000 tons per year. The rated
annual capacity of the linerboard mills is approximately 2.2 million tons
per year. In the second quarter of 1998, the Company closed its corrugating
medium mill in Newark, California, the rated annual capacity of which was
70,000 tons.
(b) The annual capacity of the four paper machines in operation at the bleached
paperboard mill is approximately 670,000 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 unit sales for the particleboard plants includes the unit sales of the
Hope, Arkansas, plant, which began operations late in 1995 but did not
reach full production until the fourth quarter of 1996. The unit sales 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.
(d) The annual capacity and unit sales figures for these product lines do not
include the annual capacities and unit sales related to the Company's
interest in facilities owned through joint venture interests.
(e) The annual capacity for medium density fiberboard includes the rated annual
capacity for two medium density fiberboard plants acquired by the Company
in September 1998, both of which are in the start-up phase.
5
<PAGE> 6
NARRATIVE DESCRIPTION OF THE BUSINESS:
The business of the Company is divided among three groups: (1) the Paper
Group, (2) the Building Products Group, and (3) the Financial Services Group.
For 1998, the Paper Group, Building Products Group, and Financial Services Group
provided 53.9 percent, 16.4 percent, and 29.7 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 Inland
manufactures containerboard that it converts into a complete line of corrugated
packaging and point-of-purchase displays. Approximately 86 percent of the
containerboard produced by Inland in 1998 was converted into corrugated
containers at its box plants. Inland's nationwide network of box plants produces
a wide range of 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.
Inland also manufactures litho-laminate corrugated packaging, high graphics
folding cartons, and bulk containers constructed of multi-wall corrugated board
for extra strength, which are used for bulk shipments of various materials.
In the corrugated packaging operation, Inland services about 7,000
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 1998 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 produces
various grades and weights of coated and uncoated paperboard for use in
high-quality printing and publishing applications, greeting cards, office
supplies, and foodware.
Bleached paperboard products are sold to a large number of customers. Sales
to the largest customer of this operation accounted for approximately 13 percent
of bleached paperboard sales in 1998. 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 Paper Group or Temple-Inland 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 Paper Group. The 10 largest customers accounted for approximately 54
percent of bleached paperboard sales in 1998. During 1998, sales were made to
customers in 37 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.
BUILDING PRODUCTS GROUP. The Building Products Group produces a wide
variety of building products, such as lumber, plywood, particleboard, medium
density fiberboard, gypsum wallboard, fiber-cement siding, and fiberboard.
6
<PAGE> 7
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. Approximately
84 percent of particleboard sales are to commercial fabricators, such as
manufacturers of cabinets and furniture. The 10 largest customers accounted for
approximately 22 percent of the Building Products Group's 1998 sales. The
building products business is heavily dependent upon the level of residential
housing expenditures, including the repair and remodeling market.
In September 1998, the Building Products Group acquired two medium density
fiberboard plants from MacMillan Bloedel Limited for approximately $106 million.
The plants, each of which is capable of producing 130 million square feet
annually, are located in Clarion, Pennsylvania, and Pembroke, Ontario, Canada.
The Building Products Group is a 50 percent owner in three joint ventures.
One of these joint ventures recently began producing medium density fiberboard
at a facility in Arkansas. Another of these joint ventures began producing
fiber-cement products in the first quarter of 1999 at a plant 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 in the first quarter of 1998 of a wallboard plant to be
located in Tennessee, completion of which is anticipated during the second half
of 1999.
The Building Products Group intends during 1999 to cease operations at its
plywood plant and add a state-of-the-art sawmill at that site. This will permit
the Company to optimize the use of available sawtimber and produce a higher
value product.
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 that
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 its acquisition of California Financial Holding Company, the parent
company of Stockton Savings Bank, F.S.B., 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 fourth quarter of 1998, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement") with HF Bancorp, Inc. ("HFB"), the
parent corporation of Hemet Federal Savings and Loan Association ("Hemet")
headquartered in Hemet, California, by which HFB will be merged into the Company
or one of its subsidiaries. The transaction, which is subject to approval by the
HFB stockholders and by regulatory authorities, is expected to close during the
second quarter of 1999. Terms of the Merger Agreement provide for HFB
stockholders to receive a combination of common stock of the Company and cash
valued at $18.50 per share, for a total consideration of approximately $118
million. Subject to certain limitations, each HFB stockholder will be given the
election to have the consideration for their shares paid in Company common
stock, cash or a combination of the two. The Company, however, will issue no
more than 1,216,470 shares of common stock in the transaction. If the HFB
stockholders electing to receive shares of the Company's common stock do not
represent a sufficient portion of the total consideration in order for the
transaction to receive favorable tax treatment for the HFB stockholders, the
entire merger consideration will
7
<PAGE> 8
be paid in cash. When the transaction is completed, the operations of Hemet,
which has approximately $1.0 billion in assets and operates 18 branches in
Southern California, principally in Riverside County, Palm Springs, and San
Diego County, will be merged into Guaranty. In connection with execution of the
Merger Agreement, HFB granted the Company an option, exercisable under certain
circumstances, to purchase approximately 1,273,000 shares of HFB common stock,
representing approximately 19.9 percent of the shares presently outstanding, at
a price of approximately $16.00 per share.
The House and Senate are discussing 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
6.31 percent of adjusted total assets. Because of loan growth experienced by
Guaranty in 1998, changes in asset mix in Guaranty's balance sheet, and
prospective changes in Guaranty's risk-based capital calculation, Guaranty
expects an increase in its capital requirements. As a result, the Company
expects to increase capital in Guaranty by up to $160 million in the first
quarter of 1999 in order for Guaranty to maintain its classification of "well
capitalized" under OTS regulations. For additional information regarding
regulatory capital requirements, see Note L to Financial Services Group
Summarized Financial Statements on page 53 of the Company's 1998 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 through 78 offices located throughout the United States. 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. At the end of 1998,
Temple-Inland Mortgage was servicing $22.9 billion in mortgage loans, including
loans serviced for affiliates and approximately $1.0 billion in mortgages
subject to a call option. Temple-Inland Mortgage produced $6.0 billion in
mortgage loans during 1998 compared with $3.2 billion during 1997.
(iii) Real Estate Development and Income Properties. Subsidiaries of
Financial Services are involved in the development of 38 residential
subdivisions in Texas, Arizona, California, Colorado, Florida, Georgia,
Missouri, Tennessee, and Utah. The real estate group also owns 18 commercial
properties, including properties owned by subsidiaries through joint venture
interests.
(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 insurance 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.
8
<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 1996 through 1998:
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST SPREAD
<TABLE>
<CAPTION>
YEAR END 1998 YEAR END 1997 YEAR END 1996
----------------------------- ----------------------------- ----------------------------
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.................... $ 25.8 $ 1.4 5.27% $ 71.0 $ 4.1 5.71% $ 32.1 $ 2.1 6.42%
Mortgage-backed and investment
securities..................... 2,606.1 150.0 5.76% 2,802.2 161.3 5.75% 3,208.5 183.5 5.72%
Securities purchased under
agreements to resell, agency
discount notes, federal funds
sold, and commercial paper..... 61.4 3.4 5.47% 332.9 18.3 5.51% 339.4 18.4 5.41%
Loans receivable and mortgage
loans held for sale(1)......... 7,610.2 582.8 7.66% 6,618.4 524.9 7.93% 5,258.4 426.1 8.10%
Other............................ 13.0 .6 4.80% 6.9 .4 6.22% 26.0 .7 2.91%
--------- ------ --------- ------ -------- ------
Total interest-earning
assets................... 10,316.5 $738.2 7.16% 9,831.4 $709.0 7.21% 8,864.4 $630.8 7.12%
====== ====== ======
Cash............................... 100.4 100.1 90.6
Other FSLIC receivables............ -- -- .8
Other assets....................... 924.2 785.6 586.0
--------- --------- --------
Total assets............... $11,341.1 $10,717.1 $9,541.8
========= ========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand........ $ 1,176.8 $ 27.2 2.31% $ 1,099.6 $ 26.4 2.40% $1,087.2 $ 26.1 2.41%
Savings deposits............... 214.8 4.8 2.25% 212.4 4.7 2.22% 184.6 4.2 2.28%
Time deposits.................. 5,866.5 325.3 5.55% 5,416.4 300.1 5.54% 5,013.6 278.0 5.54%
--------- ------ --------- ------ -------- ------
Total interest-bearing
deposits................. 7,258.1 357.3 4.92% 6,728.4 331.2 4.92% 6,285.4 308.3 4.91%
Advances from the Federal Home
Loan Bank...................... 1,892.3 106.6 5.63% 1,276.6 79.0 6.19% 629.1 34.0 5.41%
Securities sold under repurchase
agreements..................... 349.2 19.6 5.62% 1,297.2 67.9 5.24% 1,484.3 83.5 5.62%
Other borrowings................. 202.8 11.2 5.53% 147.7 10.1 6.82% 131.9 9.5 7.24%
--------- ------ --------- ------ -------- ------
Total interest-bearing
liabilities.............. 9,702.4 $494.7 5.10% 9,449.9 $488.2 5.17% 8,530.7 $435.3 5.10%
====== ====== ======
Noninterest-bearing demand......... 63.1 61.1 46.4
Other liabilities.................. 726.3 475.6 361.8
Preferred stock issued by
subsidiary....................... 196.5 90.4 --
Shareholder's equity............... 652.8 640.1 602.9
--------- --------- --------
Total liabilities and
shareholder's equity..... $11,341.1 $10,717.1 $9,541.8
========= ========= ========
Net interest income................ $243.5 $220.8 $195.5
====== ====== ======
Net yield on interest-earning
assets........................... 2.36% 2.25% 2.20%
===== ===== =====
</TABLE>
- ---------------
(1) Nonaccruing loans are included in the average of loans receivable.
9
<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>
1998 COMPARED WITH 1997 1997 COMPARED WITH 1996
----------------------------- -------------------------------
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.............................. $ (2.4) $ (.3) $ (2.7) $ 2.2 $(0.2) $ 2.0
Mortgage-backed and investment
securities......................... (11.3) -- (11.3) (23.3) 1.1 (22.2)
Securities purchased under agreements
to resell, agency discount notes,
federal funds sold, and commercial
paper.............................. (14.8) (.1) (14.9) (0.4) 0.3 (0.1)
Loans receivable and mortgage loans
held for sale...................... 76.4 (18.5) 57.9 108.0 (9.2) 98.8
Other................................. .3 (.1) .2 (0.8) 0.5 (0.3)
------ ------ ------ ------ ----- ------
Total interest income......... $ 48.2 $(19.0) $ 29.2 $ 85.7 $(7.5) $ 78.2
====== ====== ====== ====== ===== ======
Interest expense:
Deposits:
Interest-bearing demand............ $ 1.8 $ (1.0) $ .8 $ 0.3 $ -- $ 0.3
Savings deposits................... .1 -- .1 0.6 (0.1) 0.5
Time deposits...................... 24.9 .3 25.2 22.3 (0.2) 22.1
------ ------ ------ ------ ----- ------
Total interest on deposits.... 26.8 (.7) 26.1 23.2 (0.3) 22.9
Advances from the Federal Home Loan
Bank............................... 35.2 (7.6) 27.6 39.4 5.5 44.9
Securities sold under repurchase
agreements......................... (53.0) 4.7 (48.3) (10.0) (5.5) (15.5)
Other borrowings...................... 3.3 (2.2) 1.1 1.1 (0.5) 0.6
------ ------ ------ ------ ----- ------
Total interest expense........ $ 12.3 $ (5.8) $ 6.5 $ 53.7 $(0.8) $ 52.9
====== ====== ====== ====== ===== ======
Net interest income (expense)........... $ 35.9 $(13.2) $ 22.7 $ 32.0 $(6.7) $ 25.3
====== ====== ====== ====== ===== ======
</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.
10
<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
------------------------------
1998 1997 1996
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Held-to-Maturity:
Mortgage-backed securities................................ $1,413.3 $1,768.3 $2,083.7
Available-for-Sale:
Mortgage-backed securities................................ 891.7 948.1 643.9
Debt securities
Corporate bonds........................................ 2.7 3.0 3.0
Equity securities
Federal Home Loan Bank Stock........................... 176.7 85.7 52.6
Other.................................................. .2 .5 .3
-------- -------- --------
176.9 86.2 52.9
-------- -------- --------
$2,484.6 $2,805.6 $2,783.5
======== ======== ========
</TABLE>
The table below sets forth the maturities of mortgage-backed and investment
securities as of year end 1998:
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....... $-- -- $-- -- $-- -- $ -- -- $1,413.3 5.16% $1,413.3
Available-for-Sale:
Mortgage-backed
securities....... -- -- -- -- -- -- -- -- 891.7 6.49% 891.7
Debt securities
Corporate
bonds.......... -- -- -- -- .5 6.58% 2.2 6.56% -- -- 2.7
Equity securities
Federal Home Loan
Bank stock..... -- -- -- -- -- -- -- -- 176.7 6.00% 176.7
Other............ -- -- -- -- -- -- -- -- .2 -- .2
--- --- --- ---- -------- --------
-- -- -- -- -- -- -- 176.9 176.9
--- --- --- ---- -------- --------
$-- $-- $.5 $2.2 $2,481.9 $2,484.6
=== === === ==== ======== ========
</TABLE>
11
<PAGE> 12
The following table shows the loan distribution for Financial Services:
TYPES OF LOANS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate mortgage...................... $ 4,632.9 $4,525.0 $4,206.3 $3,732.6 $3,147.1
Construction and development (including
residential)............................ 4,702.6 2,975.1 2,152.4 1,500.6 1,022.6
Commercial and business................... 1,887.1 1,142.1 651.0 393.7 219.4
Consumer and other........................ 877.3 590.2 467.2 416.0 366.0
--------- -------- -------- -------- --------
12,099.9 9,232.4 7,476.9 6,042.9 4,755.1
Less:
Unfunded portion of loans............... 3,927.7 2,709.7 2,002.8 1,211.8 1,027.7
Unearned discounts...................... -- -- -- -- .6
Unamortized purchase discounts.......... (19.2) (21.3) (11.8) (1.8) (5.1)
Net deferred fees....................... 3.9 2.0 3.6 3.0 3.2
Allowance for loan losses............... 86.6 91.1 68.4 65.5 53.9
--------- -------- -------- -------- --------
3,999.0 2,781.5 2,063.0 1,278.5 1,080.3
--------- -------- -------- -------- --------
$ 8,100.9 $6,450.9 $5,413.9 $4,764.4 $3,674.8
========= ======== ======== ======== ========
</TABLE>
Additionally, in the commercial and business category, $825 million was to
the mortgage finance industry.
The table below presents the maturity distribution of loans (excluding real
estate mortgage and consumer loans) outstanding at year end 1998, 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 TO 5 AFTER
1 YEAR YEARS 5 YEARS TOTAL
-------- -------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Construction and development (including
residential)........................................ $2,631.2 $2,071.2 $ .2 $4,702.6
Commercial and business............................... 966.7 901.1 19.3 1,887.1
-------- -------- ----- --------
$3,597.9 $2,972.3 $19.5 $6,589.7
======== ======== ===== ========
Loans maturing after 1 year with:
Fixed interest rates................................ $ -- $ 7.5 $10.7 $ 18.2
Variable interest rates............................. -- 2,964.8 8.8 2,973.6
-------- -------- ----- --------
$ -- $2,972.3 $19.5 $2,991.8
======== ======== ===== ========
</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 0.7 percent of total loans for 1998, 1.1 percent of total
loans for 1997, and less than two percent of total loans during 1996, 1995, and
1994. The aggregate amounts and the interest income foregone on such loans,
therefore, are immaterial and are not disclosed.
12
<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
----------------------------------------
1998 1997 1996 1995 1994
----- ----- ------ ----- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year...................... $91.1 $68.4 $ 65.5 $53.9 $ 47.9
Charge-offs:
Real estate mortgages........................... (6.5) (4.8) (5.8) (3.9) (4.4)(b)
Construction and development.................... (.2) (.1) (.1) -- --
Commercial...................................... -- (.9) (2.9) (.7) (1.1)
Consumer and other.............................. (1.5) (2.0) (4.4) (5.0) (4.7)(b)
----- ----- ------ ----- ------
(8.2) (7.8) (13.2) (9.6) (10.2)
Recoveries:
Real estate mortgages........................... 2.5 .9 2.1 1.1 .6
Construction and development.................... .1 -- -- -- --
Commercial...................................... -- -- -- .5 .1
Consumer and other.............................. .4 .9 .9 .8 1.4
----- ----- ------ ----- ------
3.0 1.8 3.0 2.4 2.1
----- ----- ------ ----- ------
Net charge-offs......................... (5.2) (6.0) (10.2) (7.2) (8.1)(b)
Additions charged to operations................... .6 (1.7) 13.8 14.6 6.5
Additions related to bulk purchases of loans, net
of adjustments.................................. .1 30.4(a) (.7) 4.2 7.6
----- ----- ------ ----- ------
Balance at end of year............................ $86.6 $91.1 $ 68.4 $65.5 $ 53.9
===== ===== ====== ===== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year....... .07% .10% .20% .16% .27%
===== ===== ====== ===== ======
</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
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995
----------------------- ----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT OF LOANS TO AMOUNT OF LOANS TO AMOUNT OF LOANS TO AMOUNT OF LOANS TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
mortgage............ 49.4 38% $54.1 49% $48.0 56% $52.5 61%
Construction and
development......... 3.6 39% 6.5 32% 1.9 29% 1.7 25%
Commercial and
business............ 13.6 16% 4.1 13% 1.6 9% .8 7%
Consumer and other... 3.4 7% 3.2 6% 3.8 6% 4.5 7%
Unallocated.......... 16.6 -- 23.2 -- 13.1 -- 6.0 --
----- --- ----- --- ----- --- ----- ---
$86.6 100% $91.1 100% $68.4 100% $65.5 100%
===== === ===== === ===== === ===== ===
<CAPTION>
AT YEAR END
-----------------------
1994
-----------------------
PERCENT OF
AMOUNT OF LOANS TO
ALLOWANCE TOTAL LOANS
--------- -----------
<S> <C> <C>
Real estate
mortgage............ $36.2 66%
Construction and
development......... 1.2 21%
Commercial and
business............ 8.6 5%
Consumer and other... 4.7 8%
Unallocated.......... 3.2 --
----- ---
$53.9 100%
===== ===
</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
13
<PAGE> 14
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions.
Loans receivable are assigned a risk rating to distinguish levels of credit
risk and identify higher or unacceptable credit risks and deteriorating loan
quality. These risk ratings are categorized as pass or criticized grade with the
resultant allowance for loan losses based on this distinction. Certain loan
portfolios are considered to be performance based and are graded by analyzing
performance through assessment of delinquency status. The allowance for loan
losses is comprised of an allowance based on criticized graded loans, a general
allowance based on pass graded loans, and an unallocated allowance based on
analysis of other environmental factors. The allowance for loan losses is
increased by charges to income and by the portion of the purchase price related
to credit risk on bulk purchases of loans and decreased by charge-offs, net of
recoveries.
Allowances established on the outstanding principal balance of criticized
graded loans range from 5 percent to 35 percent on Substandard classified loans,
36 percent to 70 percent on Doubtful classified loans, and 100 percent on Loss
classified loans, respectively. The Financial Services Group uses general
allowances for pools of loans with relatively similar risks based on
management's assessment of homogenous attributes, such as product types,
markets, aging, and collateral. The Financial Services Group uses information on
historic trends in delinquencies, charge-offs, and recoveries to identify
unfavorable trends. The analysis considers adverse trends in the migration of
classifications to be an early warning of potential problems that would indicate
a need to increase loss provisions over historic levels. The Financial Services
Group also establishes a level of unallocated allowance to support the portfolio
as a whole based on adverse conditions considered probable of resulting in
losses in the loan portfolios, including certain segments or as a whole. In this
category, management considers the level, severity, and trend of classified
assets; level and trend of delinquent and non-accrual loans; recent loss
experience trends; concentrations of credit; size of individual credit exposure;
current economic conditions; and trends in portfolio volume, maturity, and
composition.
Allowances for loan losses are allocated to loan categories based on loan
pools having relatively similar risks. The unallocated allowance for loan losses
addresses the portfolio as a whole and is based on identifiable and probable
adverse events, the occurrence of which would result in losses to the Company.
The amount of unallocated allowance is determined by management on a monthly
basis and is less than 20 percent of the total allowance for loan losses at
December 31, 1998.
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 9 hereof.
The amount of time deposits of $100,000 or more and related maturities at
year end 1998, are disclosed in Note E to Financial Services Group Summarized
Financial Statements on page 50 of the Company's 1998 Annual Report to
Shareholders.
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
---------------------------
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Return on average assets................................ 1.12% 1.04% .41%*
Return on average equity................................ 19.48% 17.41% 6.43%*
Dividend payout ratio................................... 47.17% 246.72% 128.96%*
Equity to assets ratio.................................. 5.76% 5.97% 6.32%
</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.
14
<PAGE> 15
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>
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
END OF INTEREST RATE AT DURING THE DURING THE DURING THE
PERIOD END OF PERIOD PERIOD PERIOD PERIOD
---------- ---------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1998
Securities sold under agreements
to repurchase................. -- -- $1,254.9 $ 349.2 5.6%
Short-term FHLB advances......... $2,252.0 4.9% $2,290.0 $1,382.0 5.4%
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%
</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 1998, wood
fiber required for the Company's paper and wood 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................................................. 61%
Pine Pulpwood............................................. 68%
Hardwood Pulpwood......................................... 18%
</TABLE>
The balance of the wood fiber required for these operations was purchased
from numerous landowners and other lumber companies. The Company also operates a
eucalyptus plantation in Mexico from which it expects to begin harvesting fiber
in approximately four 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, 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; 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 1998, OCC represented approximately 46
percent 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
15
<PAGE> 16
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 in
Fletcher, Oklahoma, from its own quarry located nearby, and from one outside
source through a long-term purchase contract. At its gypsum wallboard plant in
West Memphis, Arkansas, the Company 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 also 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 the synthetic gypsum
required by the joint venture plant and 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 60 percent of its energy requirements at its
mills in Rome, Georgia, Evadale, Texas, and Orange, Texas, during 1998. 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.
The natural gas needed to run the Company's natural gas fueled power
boilers, package boilers, and turbine is acquired pursuant to a multiple vendor
solicitation process that provides for the purchase of gas on an interruptible
basis at favorable rates.
16
<PAGE> 17
EMPLOYEES
At January 2, 1999, the Company and its subsidiaries had approximately
15,700 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(S) EMPLOYEES COVERED EXPIRATION DATES
- -------- ------------------------- ------------------------- ----------------
<S> <C> <C> <C>
Bleached Paperboard United Paperworkers 485 Hourly Production August 1, 2004
Mill, Evadale, Texas International Union Employees, 188 Hourly
("UPIU"), Local 801, Mechanical Maintenance
UPIU, Local 825, and Employees, and 67
International Brotherhood Electrical Maintenance
of Electrical Workers Employees
("IBEW"), Local 390
Linerboard Mill, UPIU, Local 1398, and 231 Hourly Production July 31, 1999
Orange, Texas UPIU, Local 391 Employees and 107 Hourly
Maintenance Employees
Linerboard Mill, UPIU, Local 804, IBEW, 313 Hourly Production August 28, 2000
Rome, Georgia Local 613, United Employees, 38 Electrical
Association of Journeymen Maintenance Employees,
& Apprentices of the and 164 Hourly
Plumbing & Pipefitting Maintenance Employees
Industry of the U.S. and
Canada, Local 766, and
International Association
of Machinists & Aerospace
Workers, Local 414
Evansville, Indiana, UPIU, Local 1046, UPIU, 106, 103, and 96 Hourly August 30, 2002
Louisville, Kentucky, Local 1737,and UPIU, Production Employees,
and Middletown, Ohio, Local 114, respectively respectively
Box Plants ("Northern
Multiple")
Rome, Georgia, and UPIU Local 838 and UPIU 153 and 107 Hourly December 1, 2003
Orlando, Florida, Box Local 834, respectively Production Employees,
Plants ("Southern respectively
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, 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
17
<PAGE> 18
compliance with applicable environmental regulations. Capital expenditures
directly related to environmental compliance totaled approximately $13 million
during 1998. 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
1999 through 2001 will average approximately $17 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. All persons subject to
the Cluster Rule, including the Company, must be in compliance with the initial
requirements by April 15, 2001. 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. The extent of such
benefits can increase these investments, but currently these expenditures are
not expected to exceed a total of $110 million by the initial compliance date
noted above.
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 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.
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
18
<PAGE> 19
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 7.9 percent of total industry shipments
during 1998. 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 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..................... 64 Chairman of the Board and Chief Executive
Officer
Kenneth M. Jastrow, II............... 51 President, Chief Operating Officer, and Chief
Financial Officer
William B. Howes..................... 61 Executive Vice President
Harold C. Maxwell.................... 58 Group Vice President
Jack C. Sweeny....................... 52 Group Vice President
Joseph E. Turk....................... 55 Group Vice President
David H. Dolben...................... 63 Vice President and Chief Accounting Officer
M. Richard Warner.................... 47 Vice President, General Counsel, and Secretary
David W. Turpin...................... 48 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 each of Temple-Inland FPC, Inland, Guaranty, and Financial Services.
Mr. Grum has announced his intention to retire from the Company and as a
Director at the end of 1999.
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, Chairman of the
Board of Guaranty, and a Director of each of Temple-Inland FPC and Inland.
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
19
<PAGE> 20
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.
Jack C. Sweeny became a Group Vice President of the Company in May 1996. He
also serves as Group Vice President -- Forest and a Director 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 and a Director 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 1998
LOCATION PRODUCT MACHINES CAPACITY PRODUCTION
- -------- ---------- -------- -------- ----------
(IN TONS)
<S> <C> <C> <C> <C>
Ontario, California................................ Linerboard 1 325,000 282,000
Rome, Georgia...................................... Linerboard 2 795,000 735,000
Orange, Texas...................................... Linerboard 2 640,000 551,000
Maysville, Kentucky................................ Linerboard 1 405,000 381,000
Newport, Indiana................................... Medium 1 285,000 270,000
New Johnsonville, Tennessee........................ Medium 1 265,000 254,000
</TABLE>
20
<PAGE> 21
BLEACHED PAPERBOARD MILL
<TABLE>
<CAPTION>
RATED
NO. OF ANNUAL 1998
LOCATION PRODUCT MIX MACHINES CAPACITY PRODUCTION
- -------- ----------- -------- -------- ----------
(IN TONS)
<S> <C> <C> <C> <C> <C>
Evadale, Texas.......................... Bleached Pulp 0.20% 4 670,000 1,322
Food Service 38.42 249,500
Packaging 32.73 212,574
Office Supplies 17.81 115,667
Specialties 9.22 59,847
Nodular Pulp 1.62 10,507
----- ------- -------
100% 4 670,000* 649,417
===== ======= =======
</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.
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" 1974
El Centro, California(1).................................... 87" 1990
Ontario, California......................................... 87" 1985
Santa Fe Springs, California................................ 97" 1973
Tracy, California**......................................... 87" 1979
Wheat Ridge, Colorado....................................... 87" 1970
Orlando, Florida............................................ 98" 1955
Rome, Georgia**............................................. 87" & 98" 1955
Chicago, Illinois........................................... 87" 1958
Crawfordsville, Indiana..................................... 98" 1972
Evansville, Indiana......................................... 98" 1938
Garden City, Kansas......................................... 98" 1981
Kansas City, Kansas......................................... 87" 1981
Louisville, Kentucky........................................ 92" 1958
Minden, Louisiana........................................... 98" 1978
Minneapolis, Minnesota...................................... 87" 1959
Hattiesburg, Mississippi.................................... 87" 1965
St. Louis, Missouri......................................... 87" 1963
Spotswood, New Jersey....................................... 87" 1964
Middletown, Ohio............................................ 98" 1929
Streetsboro, Ohio........................................... 98" 1997
Biglerville, Pennsylvania................................... 98" 1932
Hazleton, Pennsylvania...................................... 98" 1976
Vega Alta, Puerto Rico...................................... 87" 1977
Lexington, South Carolina................................... 98" 1973
Rock Hill, South Carolina................................... 87" 1972
Elizabethton, Tennessee..................................... 98" 1982
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
DATE
CORRUGATOR ACQUIRED OR
LOCATION SIZE CONSTRUCTED
- -------- ---------- -----------
<S> <C> <C>
Elizabethton, Tennessee(1)***............................... None 1990
Nashville, Tennessee(1)***.................................. None 1998
Dallas, Texas............................................... 98" 1962
Edinburg, Texas............................................. 87" 1988
Petersburg, Virginia........................................ 87" 1991
Petersburg, Virginia(1)***.................................. None 1998
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.
Additionally, Inland owns a graphics resource center in Indianapolis,
Indiana, that has a 100" preprint press and also leases 50 warehouses located
throughout much of the United States. 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. Operations at a tape manufacturing facility in Milwaukee,
Wisconsin, were discontinued by the Company during 1998.
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.
22
<PAGE> 23
<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
Medium Density Fiberboard.................... Clarion, Pennsylvania 130
Medium Density Fiberboard.................... Pembroke, Ontario, Canada 130
Medium Density Fiberboard*................... El Dorado, Arkansas 150
Fiber-cement*................................ Waxahachie, Texas 126
</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............................................ 1,431,824
Natural Pine................................................ 131,030
Hardwood.................................................... 133,489
Special Use/Non-Forested.................................... 465,147
---------
Total............................................. 2,161,490
=========
</TABLE>
- ---------------
* Includes approximately 268,729 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 150,000 square feet of space in Diboll, Texas, approximately
130,000 square feet in Indianapolis, Indiana, and 445,000 square feet of office
space 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 $3.6 million in
1998. Additionally, the Company owns 395,830 mineral acres in Alabama and
Georgia, which produced no lease or production revenue in 1998.
At year end 1998 property and equipment having a net book value of
approximately $60 million were subject to liens in connection with $87 million
of debt.
ITEM 3. LEGAL PROCEEDINGS
GENERAL:
The Company and its subsidiaries are involved in various 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.
23
<PAGE> 24
ENVIRONMENTAL:
The facilities of the Company are periodically inspected by environmental
authorities and must file periodic reports on the discharge of pollutants with
these authorities. 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 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 shareholders 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 36 of the Company's
1998 Annual Report to Shareholders furnished to the Securities and Exchange
Commission pursuant to Rule 14a-3(b).
24
<PAGE> 25
SHAREHOLDERS:
The Company's stock transfer records indicated that as of March 10, 1999,
there were approximately 6,726 holders of record of the Common Stock.
DIVIDEND POLICY:
On February 5, 1999, the Board of Directors declared a quarterly dividend
on the Common Stock of $.32 per share payable on March 15, 1999, to shareholders
of record on March 1, 1999. 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 36 of the Company's 1998 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 36 of the Company's 1998 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 contains
forward-looking statements that involve risks and uncertainties. The actual
results achieved by the Company 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 the
Company and its subsidiaries; the availability and price of raw materials used
by the Company and its subsidiaries; competitive actions by other companies;
changes in laws or regulations; and other factors, many of which are beyond the
control of the Company 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 adjustable rate debt and other borrowings, as well
as the lending and deposit gathering activities of the Financial Services Group.
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 at year end 1998, with comparative information at year end 1997:
<TABLE>
<CAPTION>
INCREASE/(DECREASE)
IN INCOME BEFORE TAXES
CHANGE IN ----------------------
INTEREST RATES 1998 1997
- -------------- ------ ------
(IN MILLIONS)
<S> <C> <C>
+2%............................................. $(26) $ 4
+1%............................................. $ (1) $ 9
0.............................................. $ -- $ --
- -1%............................................. $ 10 $(12)
- -2%............................................. $ 29 $(14)
</TABLE>
The change in exposure to interest rate risk from year end 1997 is due
primarily to the Financial Services Group entering into interest rate floor and
collar agreements to hedge the prepayment risk inherent in a portion of its
adjustable rate mortgage assets and an increase in the Company's adjustable rate
debt. At year
25
<PAGE> 26
end 1997, the sensitivity of the Financial Services Group's earnings to changes
in interest rates was inverse to the impact of interest changes on the Company's
adjustable rate debt. By substantially decreasing the earnings volatility of the
Financial Services Group to interest rate changes through the use of floor and
collar agreements, the Company's sensitivity to interest rate risk at the end of
1998 is primarily driven by changes in rates on the Company's adjustable rate
debt.
Additionally, the fair value (estimated at $244 million at year end 1998)
of the Financial Services Group's mortgage servicing rights is also affected by
changes in interest rates. The fair value of the servicing rights has declined
by $26 million (10 percent) since year end 1997, due to the recent decline in
interest rates, actual and estimated future prepayments, and the smaller size of
the servicing portfolio. The Company estimates that a one percent decline in
interest rates from current levels would decrease the fair value of the mortgage
servicing rights by an additional $41 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.
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 9 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 11 through 17 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 5 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.
26
<PAGE> 27
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............................ 69
Consolidated Statements of Income -- for the years 1998,
1997, and 1996......................................... 54
Consolidating Balance Sheets at year end 1998 and 1997.... 56-57
Consolidated Statements of Shareholders' Equity -- for the
years 1998, 1997, and 1996............................. 58
Consolidated Statements of Cash Flows -- for the years
1998, 1997, and 1996................................... 55
Notes to Consolidated Financial Statements................ 59-68
Parent Company (Temple-Inland Inc.)
Summarized Statements of Income -- for the years 1998,
1997, and 1996......................................... 37
Summarized Balance Sheets at year end 1998 and 1997....... 38
Summarized Statements of Cash Flows -- for the years 1998,
1997, and 1996......................................... 39
Notes to the Parent Company (Temple-Inland Inc.)
Summarized Financial Statements........................ 40-41
Financial Services Group
Summarized Statements of Income -- for the years 1998,
1997, and 1996......................................... 42
Summarized Balance Sheets at year end 1998 and 1997....... 43
Summarized Statements of Cash Flows -- for the years 1998,
1997, and 1996......................................... 44
Notes to Financial Services Group Summarized Financial
Statements............................................. 45-53
</TABLE>
- ---------------
All financial statements listed in this item are incorporated herein by
reference from the Company's 1998 Annual Report to Shareholders for the fiscal
year ended January 2, 1999, and filed for purposes of those portions so
incorporated as Exhibit 13. Page numbers refer to page numbers in the Company's
1998 Annual Report to Shareholders.
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 2, 1999, 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.......... 34
</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.
27
<PAGE> 28
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 20, 1999, between the
Company and First Chicago Trust Company of New York, 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)
4.13 -- Form of Fixed-rate Medium Term Note, Series F, of the
Company(24)
4.14 -- Form of Floating-rate Medium Term Note, Series F, of the
Company(24)
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)
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)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
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)
10.24 -- Agreement and Plan of Merger by and among Temple-Inland
Inc., HF Bancorp, Inc., Guaranty Federal Bank, F.S.B.,
and Hemet Federal Savings and Loan Association, dated as
of November 14, 1998(25)
11 -- Statement re: Computation of Per Share Earnings for the
three years ended January 2, 1999(26)
13 -- Annual Report to Shareholders for the year ended January
2, 1999. 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.(26)
21 -- Subsidiaries of the Company(26)
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
23 -- Consent of Ernst & Young LLP(26)
27.1 -- Financial Data Schedule(26)
27.2 -- Restated 1998 Interim Financial Data Schedules(26)
</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 Registration Statement on Form
8A filed with the Commission on February 19, 1999.
(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.
(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.
30
<PAGE> 31
(24) Incorporated by reference to the Company's Form 8-K filed with the
Commission on June 2, 1998.
(25) Incorporated by reference to Registration Statement on Form S-4 (No.
333-71699) filed by the Company with the Commission.
(26) Filed herewith.
(b) Reports on Form 10-k
No reports on Form 8-K were filed during the fourth quarter of 1998.
31
<PAGE> 32
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
registration statement to be signed on its behalf by the undersigned thereunto
authorized, on March 26, 1999.
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, as
amended, 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 26, 1999
- ----------------------------------------------------- Board, and Chief Executive
Clifford J. Grum Officer
/s/ KENNETH M. JASTROW, II Director, President, Chief March 26, 1999
- ----------------------------------------------------- Operating Officer, and Chief
Kenneth M. Jastrow, II Financial Officer
/s/ DAVID H. DOLBEN Vice President and Chief March 26, 1999
- ----------------------------------------------------- Accounting Officer
David H. Dolben
/s/ ROBERT CIZIK Director March 26, 1999
- -----------------------------------------------------
Robert Cizik
Director March 1999
- -----------------------------------------------------
Anthony M. Frank
/s/ WILLIAM B. HOWES Director March 26, 1999
- -----------------------------------------------------
William B. Howes
/s/ BOBBY R. INMAN Director March 26, 1999
- -----------------------------------------------------
Bobby R. Inman
/s/ HERBERT A. SKLENAR Director March 26, 1999
- -----------------------------------------------------
Herbert A. Sklenar
/s/ WALTER P. STERN Director March 26, 1999
- -----------------------------------------------------
Walter P. Stern
/s/ ARTHUR TEMPLE III Director March 26, 1999
- -----------------------------------------------------
Arthur Temple III
/s/ CHARLOTTE TEMPLE Director March 26, 1999
- -----------------------------------------------------
Charlotte Temple
/s/ LARRY E. TEMPLE Director March 26, 1999
- -----------------------------------------------------
Larry E. Temple
</TABLE>
32
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Temple-Inland Inc.
as of January 2, 1999, and January 3, 1998, and for each of the three years in
the period ended January 2, 1999, and have issued our report thereon dated
January 29, 1999, which is incorporated by reference in this Annual Report (Form
10-K) from the 1998 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 29, 1999
33
<PAGE> 34
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 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts.................... $ 9.4 $ 5.7 $ 2.2(A) $ 12.9
Reserve for discounts and
allowances.................. 1.5 8.4(B) 9.3(C) 0.6
Allowance for loan losses..... 91.1 0.6 0.1(D) 5.2(A) 86.6
Allowance for unrealized
losses on available-for-sale
securities.................. 5.1 0.9 (8.7)(E) (2.7)
Allowance for unrealized
losses on mortgage loans
held for sale............... 0.4 0.0 0.3(A) 0.1
Allowance for mortgage
servicing rights............ 0.0 16.8 16.8
------ ----- ----- ----- ------
Totals................... $107.5 $24.0 ($0.2) $17.0 $114.3
====== ===== ===== ===== ======
For the year 1997:
Deducted from asset accounts:
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............... 0.0 0.4 0.4
------ ----- ----- ----- ------
Totals................... $ 91.4 $ 3.0 $33.6 $20.5 $107.5
====== ===== ===== ===== ======
For the year 1996:
Deducted from asset accounts:
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) 0.0
------ ----- ----- ----- ------
Totals................... $ 73.9 $16.9 $20.9 $20.3 $ 91.4
====== ===== ===== ===== ======
</TABLE>
- ---------------
(A) Uncollectible accounts written off, net of recoveries.
(B) Reduction of revenues for customer discounts.
(C) Customer discounts taken.
(D) Additions related to acquisitions and bulk purchases of loans, net of
adjustments.
(E) Unrealized gains/losses.
34
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
11 -- Statement re: Computation of Per Share Earnings for the
three years ended January 2, 1999
13 -- Annual Report to Shareholders for the year ended January
2, 1999. 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 Schedule
27.2 -- Restated 1998 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>
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator
Numerator for basic and
diluted earnings per share:
Income before accounting
change $ 67.7 $ 50.8 $ 132.8
Cumulative effect of accounting
change, net of tax (3.2) -- --
------ ------ -------
Net income $ 64.5 $ 50.8 $ 132.8
====== ====== =======
Denominator
Denominator for basic earnings
per share-weighted average
shares outstanding 55.8 56.0 55.5
Dilutive effect of stock options .1 .2 .1
------ ------ -------
Denominator for diluted earnings
per share-weighted average
shares outstanding 55.9 56.2 55.6
====== ====== =======
Earnings per share:
Basic:
Income before accounting change $ 1.22 $ .91 $ 2.39
Cumulative effect of accounting
change, net of tax (.06) -- --
------ ------ -------
Net Income $ 1.16 $ .91 $ 2.39
====== ====== =======
Diluted:
Income before accounting change $ 1.21 $ .90 $ 2.39
Cumulative effect of accounting
change, net of tax (.06) -- --
------ ------ -------
Net Income $ 1.15 $ .90 $ 2.39
====== ====== =======
</TABLE>
<PAGE> 1
EXHIBIT 13.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations
Results of operations, including information regarding the principal business
segments, are shown below.
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
For the year 1998 1997 1996 1995 1994 1993
- ------------ ------- ------- ------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Paper $ 2,018 $ 2,063 $ 2,082 $ 2,198 $ 1,740 $ 1,572
Building products 613 617 563 533 575 497
Other activities -- -- -- -- 20 58
------- ------- ------- ------- ------- -------
Manufacturing net sales 2,631 2,680 2,645 2,731 2,335 2,127
Financial services 1,109 945 815 764 632 635
------- ------- ------- ------- ------- -------
Total revenues $ 3,740 $ 3,625 $ 3,460 $ 3,495 $ 2,967 $ 2,762
------- ------- ------- ------- ------- -------
INCOME BEFORE TAXES
Paper $ 33 $ (39) $ 113 $ 357 $ 74 $ 6
Building products 112 131 102 67 139 102
Other activities -- -- -- -- 1 (2)
------- ------- ------- ------- ------- -------
145 92 215 424 214 106
Financial services 154 132 63(a) 98 56 68
------- ------- ------- ------- ------- -------
Segment operating income 299 224 278 522 270 174
Corporate expense (28) (25) (17) (22) (14) (11)
Special charge (47) -- -- -- -- --
Parent Company interest - net (106) (110) (110) (73) (67) (69)
Other income 6 6 5 4 4 2
------- ------- ------- ------- ------- -------
Income before taxes $ 124 $ 95 $ 156 $ 431 $ 193 $ 96
------- ------- ------- ------- ------- -------
<CAPTION>
For the year 1992 1991 1990 1989
- ------------ ------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
REVENUES
Paper $ 1,610 $ 1,519 $ 1,517 $ 1,506
Building products 409 311 305 320
Other activities 77 68 70 68
------- ------- ------- -------
Manufacturing net sales 2,096 1,898 1,892 1,894
Financial services 638 609 509(b) 49
------- ------- ------- -------
Total revenues $ 2,734 $ 2,507 $ 2,401 $ 1,943
------- ------- ------- -------
INCOME BEFORE TAXES
Paper $ 135 $ 156 $ 250 $ 323
Building products 40 5 9 24
Other activities (2) 1 (2) (1)
------- ------- ------- -------
173 162 257 346
Financial services 64 54 52(b) (2)
------- ------- ------- -------
Segment operating income 237 216 309 344
Corporate expense (15) (16) (21) (13)
Special charge -- -- -- --
Parent Company interest - net (48) (38) (26) (26)
Other income 3 5 7 7
------- ------- ------- -------
Income before taxes $ 177 $ 167 $ 269 $ 312
------- ------- ------- -------
</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.
[PICTURE] [PICTURE]
David H. Dolben M. Richard Warner
Vice President and Vice President,
Chief Accounting Officer, General Counsel and Secretary,
Temple-Inland Inc. Temple-Inland Inc.
25
<PAGE> 2
PAPER
The Paper Group is composed of two operations: corrugated packaging and bleached
paperboard. The following table provides information on the operating earnings
of this group, excluding the impact of the special charges discussed below.
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ -------- -------- --------
(in millions)
<S> <C> <C> <C>
Corrugated packaging $ 100.0 $ (11.0) $ 165.6
Bleached paperboard (6.4) 15.3 (8.2)
Group administration (61.1) (43.3) (44.4)
-------- -------- --------
Operating earnings $ 32.5 $ (39.0) $ 113.0
======== ======== ========
</TABLE>
CORRUGATED PACKAGING
The corrugated packaging operation manufactures linerboard and corrugating
medium at six mills and converts it into corrugated shipping containers at 41
corrugated packaging plants located throughout the United States, Puerto Rico,
Mexico and South America. In addition, it operates eight specialty converting
plants. Operation of the Newark, California, mill and box plant was discontinued
in May 1998, and the assets of the Rexford Paper Division were sold in October
1998. 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.
Early in 1998, the corrugated packaging operation undertook a broad-based study
of how to reduce its costs and improve margins. The outgrowth of these efforts,
formally referred to as Mplus 50, is an intensive program designed to decrease
total cost of goods sold, boost revenues and increase organizational efficiency
and effectiveness. As part of this program, this operation will measure
individual business unit - instead of total system - profitability and
streamline administrative support functions, while providing better management
of information through improved technology. Layers of management will be reduced
and some manufacturing assets will be displaced. This operation will also focus
on margin improvement by targeting a more select customer base as part of this
program.
A number of actions triggered by this study resulted in a special fourth quarter
1998 charge that included $13 million in severance costs and write-offs of $4.5
million of abandoned packaging assets. These initiatives, combined with a review
of the South American earnings prospects in light of the Brazilian economic
turmoil and competitive pricing environment, indicated the need for a $20
million impairment write-down of the South American operations that was also
recorded in the fourth quarter of 1998. The operation is committed to achieving
profitable operations in South America. Otherwise, this operation will consider
other alternatives, including liquidating these investments.
Before group administrative costs and the nonrecurring items discussed above,
the corrugated packaging operation had earnings of $100.0 million in 1998,
compared with a loss of $11.0 million in 1997. Revenues for this operation
decreased 3 percent in 1998, compared with 1997. Unit sales declined by 9
percent, more than offsetting the positive effect on revenues of improved
prices. Revenues for 1997 were down 4 percent compared with 1996, reflecting the
effect of a decline in prices and an improvement in volume.
Box prices in 1997 declined an average of 11 percent, following a 19 percent
decline in 1996. Prices, however, improved in the latter half of 1997 and early
1998, but started retreating in the third quarter of 1998, ending the year near
beginning-of-year levels. For the year, average 1998 box prices were 7 percent
higher than 1997 prices.
Tons of boxes sold were down 3 percent in 1998, compared with an increase of 4
percent in 1997. This reduced growth rate was a product of both slower industry
growth and the corrugated packaging operation's strategy to improve margins by
exiting some low-margin business.
The average cost of old corrugated containers (OCC), the principal raw material
used in approximately 46 percent of the group's containerboard production,
declined by $16 per ton in 1998 after having increased by $16 per ton in 1997.
As indicated in the table below, mill production totaled 2,499,000 tons in 1998,
a 262,000-ton decrease in production from 1997, of which 47,000 tons related to
the permanent closure of the Newark, California, corrugating medium mill.
Production of containerboard exceeded internal plant usage by 152,000 tons in
1998, 336,000 tons in 1997 and 275,000 tons in 1996. Excess production was sold
in the domestic and export markets. The company curtailed production by
approximately 236,000 tons in 1998, 36,000 tons in 1997 and 120,000 tons in
1996, to control inventory levels.
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ ---------- ---------- ----------
Mill production
<S> <C> <C> <C>
(in tons) 2,499,000 2,761,000 2,577,000
========== ========== ==========
</TABLE>
Board consumption at the Mexican, Puerto Rican and South American converting
facilities increased by 21,000 tons to 195,000 tons in 1998. While volumes
increased in Chile, Argentina and Sinaloa, Mexico, competitive pricing pressures
contributed to continued operating losses at these plants. The operations of the
other two Mexican plants, located in Guanajuato and Monterrey, continued to be
profitable in 1998.
26
<PAGE> 3
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 1998 1997 1996
---------- ---------- ----------
UNIT SALES
<S> <C> <C> <C>
(in thousands of tons)
1st Quarter 662 647 575
2nd Quarter 628 719 608
3rd Quarter 616 706 636
4th Quarter 613 697 616
---------- ---------- ----------
2,519 2,769 2,435
========== ========== ==========
NET SALES
(in millions)
1st Quarter $ 431.8 $ 411.9 $ 469.7
2nd Quarter 419.5 432.6 453.4
3rd Quarter 410.4 421.3 423.3
4th Quarter 379.8 428.2 414.2
---------- ---------- ----------
$ 1,641.5 $ 1,694.0 $ 1,760.6
========== ========== ==========
</TABLE>
In 1998, the company sold the operating assets of its Rexford Paper Division at
a small profit. Rexford had revenues of $15.2 million in 1998, $20.5 million in
1997, and $21.6 million in 1996. Also in 1998, the Newark, California, mill and
box plant were closed. These closures only nominally affected revenues and
earnings because the majority of the business was transferred to other
operations of the group.
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 and $84.1
million during 1997 and 1996, 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.
Before group administrative costs, the bleached paperboard operation reported a
loss of $6.4 million in 1998, compared with income of $15.3 million in 1997.
Average prices for bleached paperboard declined by 4 percent in 1998, compared
with 1997, after having been flat the prior year. Paperboard sales volume
declined by 2 percent in 1998 versus 1997, after having improved by 21 percent
in 1997. Production in both 1998 and 1997 was limited to control inventory
levels.
The earnings deterioration in 1998 was a direct result of the 4 percent decline
in selling price and, to a lesser extent, the decline in volume. The earnings
improvement in 1997 resulted primarily from the improved volume together with
manufacturing costs being below 1996 levels by $16 per ton as a result of
cost-reduction programs.
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 1998 1997 1996
- ------------ --------- --------- ---------
UNIT SALES
(in thousands of tons)
<S> <C> <C> <C>
PAPERBOARD
1st Quarter 158 155 108
2nd Quarter 158 178 125
3rd Quarter 168 169 149
4th Quarter 139 133 142
--------- --------- ---------
623 635 524
========= ========= =========
--------- --------- ---------
Pulp -- 2 100
========= ========= =========
NET SALES
(in millions)
PAPERBOARD
1st Quarter $ 95.9 $ 87.6 $ 66.1
2nd Quarter 95.8 95.0 73.6
3rd Quarter 102.0 96.9 83.3
4th Quarter 82.4 86.5 77.5
--------- --------- ---------
$ 376.1 $ 366.0 $ 300.5
========= ========= =========
--------- --------- ---------
Pulp and Other $ -- $ 2.9 $ 21.2
========= ========= =========
</TABLE>
GROUP ADMINISTRATION
The Paper Group's administrative costs were up by $17.8 million in 1998 compared
with 1997, after having declined in 1997 by $1.1 million from 1996 levels. The
1998 increase was largely related to consulting and internal costs related to
the company's margin-enhancement initiative and efforts related to Year 2000
compliance.
27
<PAGE> 4
BUILDING PRODUCTS
The Building Products Group manufactures a diversified line of construction and
commercial-grade building materials at 17 facilities (including three
joint-venture facilities and two medium density fiberboard [MDF] facilities
acquired September 30, 1998). In 1998, approximately 81 percent of its revenues
were generated from wood-based materials or log residues. These products, sold
to both residential and commercial market segments, include lumber, plywood,
particleboard, medium density fiberboard and fiberboard. 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.
Excluding the special charges discussed below, the group earned $112 million in
1998, the third-highest earnings level in its history, following 1994's record
earnings of $139 million and 1997's earnings of $131 million. Net manufacturing
revenues in 1998 decreased $4.3 million, less than 1 percent from 1997. This
slight decrease followed a 10 percent increase in 1997 over 1996. As a result of
improved residential and commercial construction levels, prices advanced in 1998
across all product lines, except for fiberboard and lumber.
The following table provides information on unit sales volumes and net sales for
each business unit.
BUILDING PRODUCTS
<TABLE>
<CAPTION>
For the year 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
UNIT SALES*
Pine lumber 603 639 605
Fiber products 423 402 457
Particleboard 518 470 399
Plywood 289 281 259
Gypsum wallboard 858 843 838
Medium density fiberboard 35 -- --
========= ========= =========
NET SALES
(in millions)
Pine lumber $ 222.7 $ 262.1 $ 217.4
Fiber products 64.4 66.2 73.3
Particleboard 141.5 125.0 112.2
Plywood 59.6 55.2 52.1
Gypsum wallboard 115.5 104.6 90.2
Medium density fiberboard 9.3 -- --
Retail distribution -- 4.2 17.1
Other -- -- 0.3
--------- --------- ---------
$ 613.0 $ 617.3 $ 562.6
========= ========= =========
</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 603 million board feet decreased 5.6 percent from 1997.
Two major modernization projects, one at the Buna, Texas, sawmill and the other
at the Diboll, Texas, sawmill, resulted in temporary production outages and
reduced shipments. The modernization resulted in the abandonment of $3.4 million
of machinery and equipment at the Diboll sawmill that is included in the special
charge. Both plants should return to full capacity by the middle of 1999.
In keeping with its focus of maximizing the value of its timber holdings through
conversion to high-value products, the Building Products Group decided to cease
plywood production at the Pineland complex and add a state-of-the-art sawmill.
This will allow the group to optimize the use of available sawtimber and result
in an improved return on its timberland assets. As a result, the company
recorded a write-down of $6.5 million related to certain plywood assets.
Economic recession in the Far East forced West Coast lumber producers to reduce
exports and market additional products in North America. This created an
oversupply in the industry and, as a result, lumber prices were negatively
affected. Although first quarter lumber prices were only 1 percent below those
experienced in the first quarter of 1997, second quarter prices were down 13.6
percent, third quarter prices were down 18.9 percent, and fourth quarter prices
were down 9.3 percent from previous year levels. The average selling price for
the year was down 10 percent from 1997.
Fiber products revenues decreased $1.8 million, or 3 percent, from 1997 despite
a 5 percent increase in shipments. Weaker demand due to competition from other
products led to lower pricing. Average prices for all fiber products were 7
percent lower than 1997 levels. TrimCraft(TM), the company's alternative lumber
trim product, continued to gain market acceptance and shipments of the product
were 28 percent higher than 1997 levels.
During 1998, construction continued on a new joint-venture fiber-cement plant in
Waxahachie, Texas. The $60 million facility is designed to produce 126 million
square feet of fiber-cement products annually. This state-of-the-art facility
will offer a full line of fiber-cement products marketed under the trade name
FORTRA(TM), to be used by builders as siding, soffit, trim, tile backer and a
variety of other applications. Fiber-cement siding is a weather-stable product
with increasing acceptance in the marketplace.
During 1998, construction was completed on the 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. Production began in May and the facility
was still operating in the start-up phase at year end, producing only 41 percent
of capacity during the last quarter of the year. This mill is anticipated to
operate at almost 90 percent of capacity during 1999. MDF products are
high-grade composite panels that serve as a suitable alternative to high-quality
millwork lumber and as flooring substrates.
The Building Products Group purchased two MDF facilities from MacMillan Bloedel
Limited in September 1998, located in Clarion, Pennsylvania, and Pembroke,
Ontario, Canada. Each of these facilities has a continuous press and the design
capacity to produce approximately 130 million square feet of MDF annually. Each
of these mills is currently producing at less than design capacity, but should
attain these levels by year end. The company's three MDF plants will be capable
of supplying a major share of the growing thin MDF market due to their
continuous press capabilities.
28
<PAGE> 5
Using by-products of lumber processing, the group manufactures particleboard at
four plants in Texas, Alabama, Arkansas and Georgia. The Texas and Georgia
facilities experienced lost production in 1997 due to ten-week shutdowns for
modernization, but were back to normal production in 1998. As a result,
particleboard shipments increased 10 percent over 1997. The group also
experienced an increase in the sales average for the year due to an improved
product mix. Due to the increase in shipments and sales averages, revenues from
particleboard rose $16.5 million, or 13 percent, from 1997. In 1997, shipments
were 18 percent above, and prices were 6 percent below, 1996 levels.
Record earnings were achieved by the group's gypsum wallboard operations in 1998
as prices continued the recovery that began in 1994 and the mix of products
manufactured continued to improve. Gypsum wallboard shipments of 858 million
square feet were only slightly above 1997 levels, but revenues increased by
$10.9 million due to an 8.5 percent increase in sales averages for the year.
While gypsum wallboard demand improved in both 1996 and 1997, 1998 was a year of
record demand levels as capacity utilization ratios reached 99 percent for the
year. This dictated operating in a managed distribution environment for most of
the year. 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, sustained its market
share in 1998. Specialty panels in 1998 accounted for 39 percent of total
shipments, compared with 40 percent in 1997.
In 1998, construction began on the gypsum wallboard plant in Cumberland City,
Tennessee. The plant will operate under the Standard Gypsum LLC joint venture,
an equal partnership with Caraustar Industries, Inc. This state-of-the-art
facility 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 is being constructed 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 was about 40 percent complete at the end of 1998, and
production is expected to begin during the third quarter of 1999.
TIMBER AND TIMBERLANDS
The company controls approximately 2.2 million acres of timberland in Texas,
Louisiana, Georgia and Alabama. In 1998, this renewable resource provided
approximately 63 percent of the pine fiber requirements necessary to operate the
company's paper and solid wood 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 1998 1997 1996
---------- ---------- ----------
(in millions)
<S> <C> <C> <C>
INCOME
Savings bank $ 113.5 $ 106.6 $37.5b
Mortgage banking 21.8 24.0 23.0
Real estate 13.2(a) (3.4) (1.7)
Insurance 5.6 4.8 4.3
---------- ---------- ----------
Income before taxes 154.1 132.0 63.1
Taxes on income 26.9 20.6 24.3
---------- ---------- ----------
Net income $ 127.2 $ 111.4 $ 38.8
========== ========== ==========
ASSETS
Savings bank $ 11,947.4 $ 10,370.6 $ 8,945.9
Mortgage banking 441.9 385.6 241.4
Real estate 319.2 280.4 287.4
Insurance 31.9 32.4 26.3
Other activities -- -- 0.1
Eliminations (340.8) (284.3) (166.0)
---------- ---------- ----------
Total assets $ 12,399.6 $ 10,784.7 $ 9,335.1
========== ========== ==========
LIABILITIES
Savings bank $ 11,163.9 $ 9,798.1 $ 8,509.9
Mortgage banking 358.0 303.4 177.1
Real estate 270.8 222.0 204.7
Insurance 14.5 19.7 17.7
Other activities -- -- (0.1)
Preferred stock
issued by
subsidiary 225.1 150.0 --
Eliminations (340.8) (284.3) (166.0)
---------- ---------- ----------
Total liabilities $ 11,691.5 $ 10,208.9 $ 8,743.3
========== ========== ==========
EQUITY
Savings bank $ 558.4 $ 422.5 $ 436.0
Mortgage banking 83.9 82.2 64.3
Real estate 48.4 58.4 82.7
Insurance 17.4 12.7 8.6
Other activities -- -- 0.2
---------- ---------- ----------
Total equity $ 708.1 $ 575.8 $ 591.8
========== ========== ==========
</TABLE>
(a) Includes $10.0 million gain from sale of an investment property.
(b) 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 branch 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 single-family adjustable-rate 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 1998 1997 1996
---------- ---------- ----------
(dollars in millions)
<S> <C> <C> <C>
INCOME AND EXPENSE
Net interest income $ 245.3 $ 222.3 $ 193.0
Noninterest income 30.4 17.8 22.2
Noninterest expense 148.6 128.5 163.9(a)
Minority interest in
income of subsidiary 13.8 6.5 --
Income before taxes 113.3 106.6 37.5
AVERAGE BALANCE SHEET
Total earning assets 10,389.9 9,919.1 8,889.0
Loans receivable
and mortgage loans
held for sale 7,440.4 6,530.9 5,215.1
Mortgage-backed and
investment securities 2,601.8 2,721.6 3,204.3
Deposits 7,579.3 7,090.5 6,423.9
Securities sold
under repurchase
agreements and
FHLB advances 2,241.5 2,573.9 2,113.5
KEY RATIOS
Yield on earning assets 7.02% 7.06% 6.96%
Cost of funds 4.82% 4.95% 4.91%
---------- ---------- ----------
Net interest spread 2.20% 2.11% 2.05%
========== ========== ==========
</TABLE>
(a) Includes a one-time SAIF assessment of $43.9 million.
At year end 1998, loans receivable constituted 81 percent of earning assets,
compared with 71 percent in the prior year. During 1998, Guaranty continued to
securitize portions of its mortgage loans held in its portfolio. At year end
1998, the ratio of loans receivable to earning assets, with the inclusion of the
balance of $657 million in loans securitized, was 87 percent.
Net interest income for 1998 increased $23.0 million from 1997, due primarily to
the growth of net earning assets. 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 above 1996, principally due to the acquisition of Stockton Savings
Bank, F.S.B. (SSB) discussed below, combined with the improved asset mix of
loans.
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. In 1998, despite overall loan portfolio growth, the allowance for
loan losses as a percentage of loans receivable decreased from 1.41 percent to
1.06 percent, or 24 percent from 1997. The decrease was driven primarily by a 30
percent decline in the purchased loan portfolios over the same period and the
reduction in the related allowances for those loans, as losses were less than
anticipated. In 1997, the allowance for loan losses as a percentage of loans
receivable increased from 1.26 percent to 1.41 percent, or 11 percent from 1996,
principally due to the acquisition of SSB. The provision for loan loss decreased
$15.5 million during 1997, compared with 1996, primarily related to the
securitization of approximately $1 billion of mortgage loans, payoff of other
notes and favorable net charge-off experience.
Management periodically reviews and adjusts pass loan loss factors in response
to historical net charge-off experience. The commercial real estate portfolios
currently have pass loan loss factors that exceed the historical loss
experience. This results from these loans being relatively new and, as a result,
they have not reached the state where charge-offs would have been recorded for a
seasoned loan portfolio.
Noninterest income primarily includes fees collected, including service charges
on deposits. In 1997, losses on the sale of certain loans and mortgage
securities resulted in a net noninterest income reduction of $4.4 million from
1996. In 1998, net noninterest income increased $12.6 million from 1997
primarily because similar loan and security sales did not recur and Guaranty
sold certain assets resulting in gains.
Noninterest expense for 1998 increased $20.1 million from 1997 primarily as the
result of the new operations in California from the SSB acquisition and the
related increase in compensation and benefits. 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,
which is also a result of the increased California operations, offset by reduced
insurance premiums on deposits as a result of the SAIF recapitalization.
30
<PAGE> 7
[PICTURE]
BIF/SAIF LEGISLATION
On September 30, 1996, President William J. 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.
Effective January 1, 1997, Guaranty was 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 interest on certain Financial Corporation
(FICO) bond obligations. Prior to the special assessment, Guaranty was paying 23
basis points of insured deposits for insurance premiums.
ACQUISITIONS
On November 14, 1998, the company signed a definitive merger agreement to
acquire all of the outstanding stock of HF Bancorp, Inc., for $18.50 per share.
Total assets of HF Bancorp, Inc., the majority of which are held by its
subsidiary, Hemet Federal Savings & Loan Association (Hemet), are approximately
$1 billion and consist primarily of residential, consumer and construction
loans, mortgage-backed securities and short-term investments. Hemet operates 18
branches in the Southern California markets of Riverside County, Palm Springs
and Northern San Diego County. The purchase price of $118 million will consist
of either all cash or a combination of company common stock and cash and is to
be accounted for as a purchase business combination. The transaction, subject to
the approval of regulatory authorities and HF Bancorp, Inc. shareholders, is
anticipated to close during the second quarter of 1999.
On June 27, 1997, the company acquired all of the outstanding stock of
California Financial Holding Company, the parent company of 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 91
percent of Guaranty's assets at year end 1998 have adjustable rates, this risk
is significantly mitigated.
Guaranty is also subject to prepayment risk inherent in a portion of its
single-family adjustable-rate mortgage assets. 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.
On May 28, 1997, a newly formed subsidiary of Guaranty, which 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.
The REIT issued an additional $75 million of noncumulative floating-rate
preferred stock on May 28, 1998.
OTS regulations require savings institutions to maintain certain minimum levels
of capital. Guaranty's regulatory capital exceeded all applicable capital
requirements at year end 1998. Because of loan growth experienced by Guaranty in
1998, changes in asset mix in Guaranty's balance sheet and prospective changes
in Guaranty's risk-based capital calculation, Guaranty expects an increase in
its capital requirements. As a result, the company expects to increase capital
in Guaranty by up to $160 million in order to maintain its classification of
"well capitalized" under OTS regulations. Note L on page 53 contains additional
information concerning Guaranty's capital requirements.
31
<PAGE> 8
MORTGAGE BANKING
Mortgage banking is conducted through Temple-Inland Mortgage Corporation (TIMC),
which arranges financing of single-family mortgage loans, then sells the loans
in 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 1998 1997 1996
---------- ---------- ----------
(dollars in millions)
<S> <C> <C> <C>
Revenues $ 226 $ 136 $ 95
Income before taxes 22 24 23
---------- ---------- ----------
PORTFOLIO
ROLL-FORWARD
(Including loans
serviced for affiliates)
Beginning servicing $ 26,082 $ 17,851 $ 13,460
Purchased servicing 3,536 9,497 4,888
New loans added,
net of flow releases 3,375 2,600 2,265
Portfolio releases (3,210) -- --
Run-off (6,897) (3,866) (2,762)
---------- ---------- ----------
Ending servicing $ 22,886 $ 26,082 $ 17,851
========== ========== ==========
Portfolio growth rate (12.3)% 46.1% 32.6%
Run-off factor 28.9% 16.8% 15.9%
Ending number
of loans serviced 256,300 351,600 225,700
========== ========== ==========
</TABLE>
Mortgage loan originations increased to a record $6 billion in 1998, almost
double the volume in 1997. Portfolio run-off accelerated from 16.8 percent in
1997 to 28.9 percent in 1998. In order to reduce exposure to accelerated
prepayments, the servicing rights of approximately $4.5 billion ($1.3 billion of
which was not transferred until 1999) of primarily seasoned and relatively
high-rate loans were sold during 1998 to third parties resulting in gains of
$27.6 million. At year end 1998, the reserve for impairment of the servicing
portfolio was $16.8 million. No reserve for impairment was required in 1997 and
1996.
Acquisitions of servicing totaled $3.5 billion in 1998. Overall, the servicing
portfolio declined in 1998 by $3.2 billion to $22.9 billion. Servicing totaling
$9.5 billion was acquired during 1997, of which $6.4 billion was 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 1998, $1 billion of the servicing portfolio was
subject to the call option. The call option price, if exercised, would exceed
the carrying value.
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 38 residential subdivisions in
Texas, Arizona, California, Colorado, Florida, Georgia, Missouri, Tennessee and
Utah. At the end of 1998, land development inventory included 1,401 residential
lots (1,175 under contract), 1,803 lots under development and 5,721 acres of
land. Lot sales for 1998 were 1,594, compared with 1,422 in 1997 and 1,082 in
1996.
Commercial income, shown in the table below, includes a $10 million gain in 1998
from the sale of a commercial investment property. The company owns 18
commercial properties, including two hotels, one retail center, two business
parks, five parcels of commercial land, and properties owned through
joint-venture interests.
Selected financial information related to these activities is shown below.
REAL ESTATE GROUP
OPERATIONS SUMMARY
<TABLE>
<CAPTION>
For the year 1998 1997 1996
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
REVENUES
Residential $ 58.4 $ 43.4 $ 35.9
Commercial 45.7 21.4 18.2
Interest and other 3.2 3.7 7.0
--------- --------- ---------
Total $ 107.3 $ 68.5 $ 61.1
========= ========= =========
INCOME (LOSS)
BEFORE TAXES
Residential $ 8.9 $ 2.2 $ 3.0
Commercial 19.0 4.5 2.2
Interest and other (14.7) (10.1) (6.9)
--------- --------- ---------
Total $ 13.2 $ (3.4) $ (1.7)
========= ========= =========
</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 and business insurance, as
well as 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, Dallas-Fort Worth, El Paso and San Antonio, Texas.
32
<PAGE> 9
A summary of revenues and income before taxes is shown below.
INSURANCE
OPERATIONS SUMMARY
<TABLE>
<CAPTION>
For the year 1998 1997 1996
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
REVENUES $ 33.5 $ 30.4 $ 24.9
INCOME BEFORE TAXES 5.6 4.8 4.3
========= ========= =========
</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 technological advances. Given these uncertainties, the
company estimates that capital expenditures for environmental purposes during
the period 1999 through 2001 will average $17 million each year, exclusive of
the expenditures for the Cluster Rule compliance discussed below.
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
Cluster 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. All persons subject to
the Cluster Rule, including the company, must be in compliance with the initial
requirements by April 15, 2001. 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 Cluster 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, service existing debt, pay
dividends and meet normal working capital requirements. See Note 10 on pages 65
and 66 for a summary of capital expenditures for years 1998, 1997 and 1996.
Capital expenditures of approximately $300 million are projected for 1999.
Net interest expense incurred by the Parent Company is shown below.
<TABLE>
<CAPTION>
For the year 1998 1997 1996
--------- --------- ---------
(in millions)
PARENT COMPANY
INTEREST - NET
<S> <C> <C> <C>
Interest expense $ 107.5 $ 112.3 $ 112.9
Capitalized interest (1.5) (2.0) (3.3)
--------- --------- ---------
Interest expense - net $ 106.0 $ 110.3 $ 109.6
========= ========= =========
</TABLE>
Interest expense decreased from $112.3 million to $107.5 million in 1998,
primarily as a result of lower average rates. During 1998, $90.0 million of
notes payable, with interest rates averaging approximately 9 percent, and
private placement debt of $80.0 million, with interest rates averaging 7
percent, were paid off and replaced with commercial paper and short-term
borrowings with interest rates averaging 5.77 percent at year end 1998. Parent
Company interest paid during 1998, 1997 and 1996 was $100.6 million, $104.5
million and $105.9 million, respectively.
In June 1998, the company filed a shelf registration statement registering the
issuance of $500 million of its medium-term notes, Series F. The company issued
approximately $300 million of these medium-term notes during the first quarter
of 1999. The issued notes have a 10-year term and bear interest at approximately
6.8 percent per annum. Proceeds from the notes will be used to refund
approximately $70 million of existing senior debt maturing in 1999, and to fund
the cash portion of the purchase price in the Hemet transaction and the capital
contribution the company will make to Guaranty.
In August 1995, the Board of Directors approved a stock repurchase program
allowing the company to repurchase up to 2.5 million shares. In May 1998, the
Board of Directors increased the stock repurchase program by an additional 2.5
million shares. At year end 1998, 2,718,400 shares had been repurchased under
this program.
INCOME TAXES
The company's effective tax rate for the years 1998 and 1997 was 46 percent. The
difference in the statutory rate and annual effective tax rate was primarily
attributable to losses in foreign operations for which no financial benefit was
recognized, and on non-deductible goodwill associated with prior years'
acquisitions.
The Internal Revenue Service is examining the company's consolidated tax returns
for the years 1987 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.
33
<PAGE> 10
YEAR 2000 COMPLIANCE
The company's three lines of business, the Paper, Building Products and
Financial Services Groups, are dependent upon computer technology and programs
for conducting business. Each line of business has been working for the past two
years to ensure that the Year 2000 has no significant effect on its information,
financial and manufacturing systems.
To date, the company has spent $6.7 million on Year 2000 compliance and
estimates the total spending will be approximately $13.0 million. These costs
are being expensed as incurred and are not expected to have a material impact on
the company's financial position.
Year 2000 readiness for the operations in the Financial Services Group is
subject to review and oversight of various regulatory agencies. All critical
systems have completed testing and implementation will be completed by June 30,
1999. The critical systems are those that service its portfolio of loans,
mortgages and customer deposits. Based upon project progress, the company is
confident all regulatory requirements will be met and that any Year 2000
disruption is unlikely. If any disruption were to occur that significantly
affected operations or customer service, the group would implement its disaster
recovery contingency plans.
The Paper and Building Products Groups have found few instances of
date-dependent information within their manufacturing processes. There is no
indication at this time that production could be affected by date-required
fields that cannot be overridden or entered manually.
A potential risk is that an external provider could have a Year 2000 related
problem that would affect the ability of the company to manufacture its products
or serve its customers. For instance, should a utility provider not be able to
supply power needs to a facility, some impact to normal operations would be
expected. Larger facilities with self-power generation would be able to continue
operations with a decline in production rates until outside power is restored.
The company has the flexibility to produce products in multiple geographic
locations, which allows for scheduling production and shipping from alternate
locations should disruptions occur.
Communications with these and other suppliers are ongoing to assess the risk to
the organization and identify the company's exposure to such outside influences.
The company has not identified any such risk at this time.
No interruption of services is expected within the administrative support
systems. Most software for meeting business needs is purchased and Year 2000
modifications and testing is performed by the supplier. The company also tests
these purchased systems for Year 2000 readiness.
While there can be no guarantee that Year 2000 problems will not occur, the
company believes its efforts have addressed the risks and that contingency plans
are in place for the unexpected.
NEW ACCOUNTING PRONOUNCEMENTS
Effective with the beginning of year 1998, the company adopted AICPA Statement
of Position 98-5, Reporting on the Costs of Start-Up Activities, which requires
that cost of start-up and training activities be expensed as incurred.
Previously, the company had capitalized these costs and amortized them over a
five-year period. The cumulative effect of adopting this change was to reduce
first quarter 1998 income by $3.2 million, net of tax benefit of $2.1 million.
If start-up costs had been expensed in prior years, net income would not have
been materially different.
Also during 1998, the company adopted Statements of Financial Accounting
Standards No. 130, Reporting Comprehensive Income; No. 131, Disclosures About
Segments; and No. 132, Disclosures About Pensions and Other Postretirement
Benefits. Adoption of these standards did not materially affect the company's
financial statements as these standards dealt primarily with disclosure and
presentation of financial information.
During 1999, the company will adopt AICPA Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use, which
requires the capitalization of qualifying internal and external costs incurred
during the application development stage. All costs incurred during the
preliminary project stage and post-implementation stage are to be expensed as
incurred. The company does not believe that adoption of this statement will have
a material effect on its earnings or financial position.
The company plans to adopt Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective
beginning of 2000. This statement will require derivative positions to be
recognized in the balance sheet at fair value. The company presently utilizes
derivatives to manage interest rate risk and risk in its mortgage loan
production operations. The company has not yet determined the effect upon
adoption of this statement on earnings or financial position.
34
<PAGE> 11
[PICTURE]
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 adjustable-rate debt and other borrowings, as well as the
lending and deposit-gathering activities of the Financial Services Group. The
following table illustrates the estimated impact on pretax income of immediate,
parallel and sustained shifts in interest rates for the subsequent 12-month
period at year end 1998, with comparative information at year end 1997:
<TABLE>
<CAPTION>
Increase (Decrease) in
Change in Interest Rates Income before Taxes
-----------------------
(in millions)
1998 1997
<S> <C> <C>
+2% $ (26) $ 4
+1% $ (1) $ 9
0% $ -- $ --
-1% $ 10 $ (12)
-2 % $ 29 $ (14)
========= =========
</TABLE>
The change in exposure to interest rate risk from year end 1997 is due primarily
to the Financial Services Group entering into interest rate floor and collar
agreements to hedge the prepayment risk inherent in a portion of its
adjustable-rate mortgage assets and an increase in the company's adjustable-
rate debt. At year end 1997, the sensitivity of the Financial Services Group's
earnings to changes in interest rates was inverse to the impact of interest rate
changes on the company's adjustable-rate debt. By substantially decreasing the
earnings volatility of the Financial Services Group to interest rate changes
through the use of floor and collar agreements, the company's sensitivity to
interest rate risk at the end of 1998 is primarily driven by changes in rates on
the company's adjustable-rate debt.
Additionally, the fair value (estimated at $244 million at year end 1998) of the
Financial Services Group's mortgage servicing rights is also affected by changes
in interest rates. The fair value of the servicing rights has declined by $26
million (10 percent) since year end 1997, due to the recent decline in interest
rates, actual and estimated future prepayments, and the smaller size of the
servicing portfolio. The company estimates that a 1 percent decline in interest
rates from current levels would decrease the fair value of the mortgage
servicing rights by an additional $41 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.
35
<PAGE> 12
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the year 1998 1997* 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 3,740 $ 3,625 $ 3,460 $ 3,495 $ 2,967 $ 2,762
Manufacturing net sales 2,631 2,680 2,645 2,731 2,335 2,127
Net income 64(a) 51 133 281 131 117(b)
Capital expenditures:
Manufacturing 175 233 275 386 463 340
Financial services 39 18 15 34 20 14
Depreciation and depletion:
Manufacturing 261 255 244 208 200 191
Financial services 14 13 12 8 8 6
Earnings per share:
Basic 1.16(a) 0.91 2.39 5.02 2.35 2.12(b)
Diluted 1.15(a) 0.90 2.39 5.01 2.35 2.11(b)
Dividends per common share 1.28 1.28 1.24 1.14 1.02 1.00
Weighted average shares outstanding:
Basic 55.8 56.0 55.5 56.0 55.8 55.3
Diluted 55.9 56.2 55.6 56.1 55.9 55.5
Common shares outstanding at year end 55.6 56.3 55.4 55.7 56.0 55.5
--------- --------- --------- --------- --------- ---------
At year end
Total assets $ 15,990 $ 14,364 $ 12,947 $ 12,764 $ 12,251 $ 11,959
Long-term debt:
Parent Company 1,583 1,438 1,522 1,489 1,316 1,045
Financial services 210 167 133 113 82 76
Preferred stock issued by subsidiary 225 150 -- -- -- --
Ratio of total debt to total capitalization -
Parent Company 44% 41% 43% 43% 43% 38%
Shareholders' equity 1,998 2,045 2,015 1,975 1,783 1,700
========= ========= ========= ========= ========= =========
<CAPTION>
For the year 1992 1991 1990 1989
--------- --------- --------- ---------
(dollars in millions, except per share data)
<S> <C> <C> <C> <C>
Total revenues $ 2,734 $ 2,507 $ 2,401(c) $ 1,943
Manufacturing net sales 2,096 1,898 1,892 1,894
Net income 147 138 232(c) 207
Capital expenditures:
Manufacturing 359 378 324 260
Financial services 11 9 4 9
Depreciation and depletion:
Manufacturing 167 158 140 126
Financial services 5 4 5 2
Earnings per share:
Basic 2.66 2.53 4.24(c) 3.78
Diluted 2.65 2.51 4.20(c) 3.75
Dividends per common share 0.96 0.88 0.80 0.58
Weighted average shares outstanding:
Basic 55.1 54.8 54.9 54.9
Diluted 55.5 55.2 55.4 55.3
Common shares outstanding at year end 55.2 54.9 54.6 54.9
--------- --------- --------- ---------
At year end
Total assets $ 10,766 $ 10,068 $ 7,834(d) $ 2,380
Long-term debt:
Parent Company 964 864 501 399
Financial services 99 76 94 30
Preferred stock issued by subsidiary -- -- -- --
Ratio of total debt to total capitalization -
Parent Company 38% 36% 26% 24%
Shareholders' equity 1,633 1,532 1,439 1,259
========= ========= ========= =========
</TABLE>
* Includes effects of acquiring Stockton Savings Bank and Knutson
Mortgage Company.
(a) Includes a special after-tax charge of $28.9 million, or $0.52 per
share, and a $3.2 million after-tax charge, or $0.06 per share, from
cumulative effect of accounting change.
(b) Includes a credit of $50 million, or $0.90 per share, from cumulative
effect of accounting changes.
(c) Includes operating results from consolidation of Guaranty Federal Bank,
F.S.B., beginning January 1, 1990.
(d) 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>
1998 1997
------------------------------------ ------------------------------------
PRICE RANGE Price Range
HIGH LOW DIVIDENDS High Low Dividends
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 64-15/16 $ 50 $ 0.32 $ 57 $ 52 $ 0.32
2nd Quarter 67-1/4 52-1/8 0.32 62-1/8 49-5/8 0.32
3rd Quarter 55-15/16 42-11/16 0.32 69-7/16 56-1/8 0.32
4th Quarter 59-5/8 45-1/16 0.32 65-7/8 49-11/16 0.32
---------- ---------- ---------- ---------- ---------- ----------
For the year $ 67-1/4 $ 42-11/16 $ 1.28 $ 69-7/16 $ 49-5/8 $ 1.28
========== ========== ========== ========== ========== ==========
</TABLE>
36
<PAGE> 13
SUMMARIZED STATEMENTS OF INCOME
PARENT COMPANY (TEMPLE-INLAND INC.)
<TABLE>
<CAPTION>
For the year 1998 1997 1996
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
REVENUES
Net sales $ 2,631 $ 2,680 $ 2,645
Financial services earnings 154 132 63
--------- --------- ---------
2,785 2,812 2,708
--------- --------- ---------
COSTS AND EXPENSES
Cost of sales 2,236 2,348 2,198
Selling and administrative 278 265 249
Special charge 47 -- --
--------- --------- ---------
2,561 2,613 2,447
--------- --------- ---------
OPERATING INCOME 224 199 261
Interest expense - net (106) (110) (110)
Other 6 6 5
--------- --------- ---------
INCOME BEFORE TAXES 124 95 156
Taxes on income 57 44 23
--------- --------- ---------
INCOME BEFORE ACCOUNTING CHANGE 67 51 133
Cumulative effect of accounting change, net of tax (3) -- --
--------- --------- ---------
NET INCOME $ 64 $ 51 $ 133
========= ========= =========
</TABLE>
See the notes to the Parent Company summarized financial statements.
37
<PAGE> 14
SUMMARIZED BALANCE SHEETS
PARENT COMPANY (TEMPLE-INLAND INC.)
<TABLE>
<CAPTION>
At year end 1998 1997
--------- ---------
(in millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 15 $ 13
Receivables, less allowances of
$13 in 1998 and $9 in 1997 297 281
Inventories:
Work in process and finished goods 93 109
Raw materials 242 230
--------- ---------
335 339
Prepaid expenses 14 15
--------- ---------
Total current assets 661 648
--------- ---------
INVESTMENT IN TEMPLE-INLAND FINANCIAL SERVICES 708 576
--------- ---------
PROPERTY AND EQUIPMENT
Buildings 574 554
Machinery and equipment 3,829 3,689
Construction in progress 104 115
Less allowances for depreciation (2,242) (2,086)
--------- ---------
2,265 2,272
Timber and timberlands - less depletion 499 507
Land 35 34
--------- ---------
Total property and equipment 2,799 2,813
Other Assets 174 163
--------- ---------
TOTAL ASSETS $ 4,342 $ 4,200
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 138 $ 135
Accrued expenses 171 150
Employee compensation and benefits 28 23
Current portion of long-term debt 2 3
--------- ---------
Total current liabilities 339 311
--------- ---------
LONG-TERM DEBT 1,583 1,438
DEFERRED INCOME TAXES 266 252
POSTRETIREMENT BENEFITS 145 140
OTHER LIABILITIES 11 14
SHAREHOLDERS' EQUITY 1,998 2,045
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,342 $ 4,200
========= =========
</TABLE>
See the notes to the Parent Company summarized financial statements.
38
<PAGE> 15
<TABLE>
<CAPTION>
SUMMARIZED STATEMENTS OF CASH FLOWS
PARENT COMPANY (TEMPLE-INLAND INC.)
For the year 1998 1997 1996
----- ----- -----
(in millions)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 64 $ 51 $ 133
Adjustments to reconcile net income to net cash:
Cumulative effect of accounting change, net of tax 3 -- --
Special charge 47 -- --
Depreciation and depletion 261 255 244
Deferred taxes 17 18 (29)
Unremitted earnings from financial services (127) (111) (39)
Receivables (12) 7 (11)
Inventories 9 (30) 23
Accounts payable and accrued expenses (11) (7) (27)
Other 13 (12) 19
----- ----- -----
264 171 313
----- ----- -----
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures for property
and equipment (175) (233) (275)
Proceeds from sale of property and equipment 6 52 5
Acquisitions and joint ventures, net (121) (9) (27)
Acquisition of California Financial
Holding Company, net of cash acquired -- (22) --
Capital contributions to financial services (44) (25) --
Dividends from financial services 44 275 50
----- ----- -----
(290) 38 (247)
----- ----- -----
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt 319 36 213
Payments of debt (175) (125) (198)
Purchase of stock for treasury (48) (59) (16)
Cash dividends paid to shareholders (71) (71) (69)
Other 3 9 3
----- ----- -----
28 (210) (67)
----- ----- -----
Net increase (decrease) in cash 2 (1) (1)
Cash at beginning of year 13 14 15
----- ----- -----
Cash at end of year $ 15 $ 13 $ 14
===== ===== =====
</TABLE>
See the notes to the Parent Company summarized financial statements.
39
<PAGE> 16
NOTES TO THE PARENT COMPANY
(TEMPLE-INLAND INC.) SUMMARIZED
FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The summarized financial statements include the accounts of the Parent Company
(Temple-Inland Inc.) and its manufacturing subsidiaries. Temple-Inland Financial
Services, including the savings bank, mortgage banking and real estate
development operations, is reflected in the summarized financial statements on
the equity basis, except that related earnings are presented before tax to be
consistent with the consolidated financial statements. All material intercompany
amounts and transactions have been eliminated. These financial statements should
be read in conjunction with Temple-Inland Inc. consolidated financial statements
and Temple-Inland Financial Services summarized financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market.
Cost of inventories amounting to $109.5 million at year end 1998 and $118.5
million at year end 1997 was determined by the last-in, first-out method (LIFO).
The cost of the remaining inventories was determined principally by the average
cost method, which approximates the first-in, first-out method (FIFO).
If the FIFO method of accounting had been applied to those inventories that were
costed on the LIFO method, inventories would have been $6.9 million and $19.3
million higher than reported at year end 1998 and 1997, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less allowances for accumulated
depreciation and depletion. Depreciation is provided on the straight-line method
based on estimated useful lives as follows:
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIVES
- -------------- ----------------------
<S> <C>
Buildings 15 to 40 years
Machinery and equipment:
Manufacturing and production equipment 3 to 25 years
Transportation equipment 3 to 10 years
Office and other equipment 2 to 10 years
</TABLE>
Certain machinery and production equipment is depreciated based on operating
hours or units of production because depreciation occurs primarily through use
rather than through elapsed time.
Timberlands are stated at cost, less accumulated cost of timber harvested. The
portion of the cost of timberlands attributed to standing timber is charged
against income as timber is harvested at rates determined annually, based on the
relationship of unamortized timber costs to the estimated volume of recoverable
timber. The costs of seedlings and reforestation of timberlands are capitalized.
The cost of additions and betterments is capitalized and the cost of maintenance
and repairs is expensed.
START-UP COSTS
Effective with the beginning of the year 1998, start-up costs, including
training activities, are expensed as incurred instead of being deferred and
amortized over a five-year period. The cumulative effect of applying this change
was $3.2 million, net of tax benefit of $2.1 million, and was recognized as of
the beginning of the year 1998. Had start-up costs been expensed in prior years,
net income would not have been materially different.
ENVIRONMENTAL LIABILITIES
Environmental expenditures resulting in additions to property and equipment are
capitalized, while other environmental expenditures are expensed. Environmental
remediation liabilities are recorded on an undiscounted basis when environmental
assessments or cleanups are probable, and the costs can be reasonably estimated
and are adjusted as further information develops or circumstances change. The
estimated costs to close and remediate company-operated landfills are accrued
over the estimated useful life of the landfill.
REVENUE RECOGNITION
Revenue is recognized upon passage of title to the customer, which is generally
at the time of shipment.
40
<PAGE> 17
[PICTURE]
NOTE B - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
At year end 1998 1997
-------- --------
(in millions)
<S> <C> <C>
Commercial Paper, other
short-term borrowings,
and borrowings under bank
credit agreements -- Average
interest rate was 5.77% in
1998 and 5.66% in 1997 $ 264.2 $ 13.5
8.85% to 9.0% Notes
Payable due 1998 -- 90.0
9.0% Notes Payable due 2001 200.0 200.0
8.125% to 8.38% Notes
Payable due 2006 100.0 100.0
7.25% Notes Payable due 2004 100.0 100.0
8.25% Debentures due 2022 150.0 150.0
Private placement debt --
6.59% to 7.31% Notes
due 1998 through 2007 258.0 338.0
Term Note due 2002 --
Average interest rate was 5.81%
in 1998 and 5.86% in 1997 200.0 200.0
Revenue Bonds due 2007 through
2028 -- Average interest rate was
3.89% in 1998 and 3.94% in 1997 201.1 191.1
Other indebtedness due through
2006 -- Average interest rate was
6.30% in 1998 and 6.37% in 1997 111.3 58.0
-------- --------
1,584.6 1,440.6
LESS:
Current portion of long-term debt (1.7) (2.5)
-------- --------
$1,582.9 $1,438.1
======== ========
</TABLE>
At year end 1998, the Parent Company had bank credit agreements totaling $580
million, with final maturities at various dates in 2000 and 2001, that support
commercial paper and other short-term borrowings. In June 1998, the company
filed a shelf registration statement registering the sale of up to $500 million
in debt securities and issued approximately $300 million in the first quarter of
1999. Commercial paper, other short-term borrowings and borrowings under bank
credit agreements totaling $264.2 million, and current maturities of medium-term
notes totaling $70.0 million, are classified as long-term debt in accordance
with the company's intent and ability to refinance such obligations on a
long-term basis.
Maturities of the Parent Company's long-term debt during the next five years are
as follows (in millions): 1999 - $65; 2000 - $90; 2001 - $466; 2002 - $256; and
2003 - $65. For an analysis of net interest expense, see page 33.
NOTE C - SPECIAL CHARGE
During the fourth quarter of 1998, the Parent Company recorded a special charge
of $47.4 million, which included $13.0 million related to work force reductions
in the Paper Group; $24.5 million related to asset impairments, principally
related to the Paper Group's South American operations; and $9.9 million of
asset impairments related to the Building Products Group. This charge was a
result of the Paper Group's reorganization of its plant and mill operations and
an assessment of its South American operations, due in part to the recent
economic turmoil in that region, and the Building Products Group's sawmill
conversion and modernization program.
The work force reductions affected approximately 250 employees, half of which
accepted an early retirement incentive offer in December 1998. The terminated
employees worked in the Paper Group's corrugated packaging operations. The
special charge includes termination benefits associated with the early
retirement offer and severance amounts for the involuntary terminations, most of
which are expected to be paid during the first quarter of 1999.
The asset impairments represent the difference between the estimated discounted
future cash flows and the asset carrying amounts. Of the total asset impairment,
$7.9 million is for abandoned manufacturing assets, $6.5 million is for plant
and equipment that will continue to be used, and $20.0 million is for the South
American operations.
41
<PAGE> 18
SUMMARIZED STATEMENTS OF INCOME
FINANCIAL SERVICES GROUP
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ -------- -------- --------
(in millions)
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable and mortgage
loans held for sale $ 584 $ 526 $ 426
Mortgage-backed and investment securities 150 161 184
Other earning assets, including
covered assets in 1996 4 22 21
-------- -------- --------
Total interest income 738 709 631
-------- -------- --------
INTEREST EXPENSE
Deposits 357 331 308
Borrowed funds 137 157 127
-------- -------- --------
Total interest expense 494 488 435
-------- -------- --------
NET INTEREST INCOME 244 221 196
Provision for loan losses 1 (2) 14
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 243 223 182
NONINTEREST INCOME
Loan origination, marketing and servicing fees 208 127 87
Other 163 109 97
-------- -------- --------
Total noninterest income 371 236 184
-------- -------- --------
NONINTEREST EXPENSE
Compensation and benefits 174 134 105
Other 272 186 154
SAIF assessment expense -- -- 44
-------- -------- --------
Total noninterest expense 446 320 303
-------- -------- --------
INCOME BEFORE TAXES AND MINORITY INTEREST 168 139 63
Minority interest in income of
consolidated subsidiary (14) (7) --
-------- -------- --------
INCOME BEFORE TAXES 154 132 63
Taxes on income 27 21 24
-------- -------- --------
NET INCOME $ 127 $ 111 $ 39
======== ======== ========
</TABLE>
See the notes to Financial Services Group summarized financial statements.
42
<PAGE> 19
SUMMARIZED BALANCE SHEETS
FINANCIAL SERVICES GROUP
<TABLE>
<CAPTION>
At year end 1998 1997
- ------------- -------- --------
(in millions)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 229 $ 175
Mortgage loans held for sale 621 439
Loans receivable 8,101 6,451
Mortgage-backed and investment securities 2,485 2,806
Other assets 964 914
-------- --------
TOTAL ASSETS $ 12,400 $ 10,785
-------- --------
LIABILITIES
Deposits $ 7,338 $ 7,375
Securities sold under repurchase agreements -- 270
Federal Home Loan Bank advances 3,221 1,685
Other borrowings 210 167
Other liabilities 698 562
Preferred stock issued by subsidiary 225 150
-------- --------
TOTAL LIABILITIES 11,692 10,209
-------- --------
SHAREHOLDERS' EQUITY 708 576
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,400 $ 10,785
======== ========
</TABLE>
See the notes to Financial Services Group summarized financial statements.
43
<PAGE> 20
SUMMARIZED STATEMENTS OF CASH FLOWS
FINANCIAL SERVICES GROUP
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------- -------- -------- --------
(in millions)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 127 $ 111 $ 39
Adjustments to reconcile net income to net cash:
Provision for amortization,
depreciation and accretion 108 43 33
Gain on sales of securities available-for-sale -- 3 --
Mortgage loans held for sale (183) (99) (88)
Collections and remittances on loans
serviced for others, net 129 193 (7)
Other (99) (70) (65)
-------- -------- --------
82 181 (88)
-------- -------- --------
CASH PROVIDED BY (USED FOR) INVESTMENTS
Purchases of securities available-for-sale (208) (121) (4)
Maturities of securities available-for-sale 300 210 98
Maturities and redemptions of securities
held-to-maturity 349 308 322
Loans originated or acquired, net of
principal collected on loans (1,852) (1,084) (672)
Proceeds from sale of securities
available-for-sale 53 844 206
Acquisitions -- (13) (11)
Capital expenditures for property and equipment (39) (18) (15)
Other 28 28 2
-------- -------- --------
(1,369) 154 (74)
-------- -------- --------
CASH PROVIDED BY (USED FOR) FINANCING
Net increase (decrease) in deposits (36) 128 (112)
Securities sold under repurchase agreements
and short-term borrowings, net 788 (609) 285
Additions to debt 770 411 68
Payments of debt (251) (204) (151)
Capital contributions from Parent Company 44 25 --
Proceeds from sale of subsidiary preferred stock 75 150 --
Dividends paid to Parent Company (44) (275) (50)
Other (5) -- (7)
-------- -------- --------
1,341 (374) 33
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 54 (39) (129)
Cash and cash equivalents at beginning of year 175 214 343
-------- -------- --------
Cash and cash equivalents at end of year $ 229 $ 175 $ 214
======== ======== ========
</TABLE>
See the notes to Financial Services Group summarized financial statements.
44
<PAGE> 21
NOTES TO FINANCIAL
SERVICES GROUP SUMMARIZED
FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Temple-Inland Financial Services Group (group) summarized financial statements
include savings bank, mortgage banking, real estate development activities and
insurance operations. All material intercompany amounts and transactions have
been eliminated. Certain amounts have been reclassified to conform with current
year's classification. These financial statements should be read in conjunction
with Temple-Inland Inc.'s consolidated financial statements.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated and held for sale are carried at the lower of cost or
estimated market in the aggregate. Net unrealized losses are recognized in a
valuation allowance by charges to income.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are stated at unpaid net principal balances, less the allowance
for loan losses and net deferred loan origination fees and costs. The allowance
for loan losses is increased by charges to income and by the portion of the
purchase price related to credit risk on bulk purchases of loans, and decreased
by charge-offs, net of recoveries. Management's periodic evaluation of the
adequacy of the allowance is based on the group's 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.
Loans receivable are assigned a risk rating to distinguish levels of credit risk
and identify higher or unacceptable credit risks and deteriorating loan quality.
These risk ratings are categorized as pass or criticized grade, with the
resultant allowance for loan losses based on this distinction. Certain loan
portfolios are considered to be performance based and are graded by analyzing
performance through assessment of delinquency status. The allowance for loan
losses is comprised of an allowance based on criticized graded loans, an
allowance based on pass graded loans and an unallocated allowance based on
analysis of other environmental factors.
Allowances established on the net outstanding principal balance of criticized
graded loans range from 5 percent to 35 percent on Substandard classified loans,
36 percent to 70 percent on Doubtful classified loans, and 100 percent on Loss
classified loans, respectively. The group uses general allowances for pools of
loans with relatively similar risks based on management's assessment of
homogeneous attributes, such as product types, markets, aging and collateral.
The group uses information on historic trends in delinquencies, charge-offs and
recoveries to identify unfavorable trends. The analysis considers adverse trends
in the migration of classifications to be an early warning of potential problems
that would indicate a need to increase loss provisions over historic levels. The
group also establishes a level of unallocated allowance to support the portfolio
as a whole based on adverse conditions considered probable of resulting in
losses in the loan portfolios, including certain segments or as a whole. For
this portion of the allowance, group management considers the level, severity
and trend of classified assets; level and trend of delinquent and non-accrual
loans; recent loss experience trends; concentrations of credit; size of
individual credit exposure; current economic conditions; and trends in portfolio
volume, maturity and composition.
Interest on loans receivable is credited to income as earned. The accrual of
interest ceases when collection becomes doubtful. When interest accrual ceases,
uncollected interest previously credited to income is reversed. Certain loan
fees and direct loan origination costs are deferred. These net fees or costs, as
well as premiums and discounts on loans, are amortized to income using the
interest method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Any unamortized loan fees or costs, premiums, or
discounts are taken to income in the event a loan is sold or repaid.
45
<PAGE> 22
MORTGAGE-BACKED AND INVESTMENT SECURITIES
The group determines the appropriate classification of mortgage-backed and
investment securities at the time of purchase and confirms the designation of
these debt securities as of each balance sheet date. Debt securities are
classified as held-to-maturity and stated at amortized cost when the group has
both the intent and ability to hold the securities to maturity. Otherwise, debt
securities and marketable equity securities are classified as available-for-sale
and are stated at fair value with any unrealized gains and losses, net of tax,
reported as a component of shareholders' equity.
The cost of securities classified as held-to-maturity or available-for-sale is
adjusted for amortization of premiums and accretion of discounts by a method
that approximates the interest method over the estimated lives of the
securities. Should such assets be sold, gains and losses are recognized based on
the specific-identification method.
DERIVATIVE FINANCIAL INSTRUMENTS
The operations of Guaranty Federal Bank (Guaranty) are subject to the risk of
interest rate fluctuations to the extent that interest-earning assets and
interest-bearing liabilities mature or reprice at different times or in
differing amounts. Guaranty is also subject to prepayment risk inherent on a
portion of its adjustable-rate mortgage assets. To maintain acceptable levels of
interest rate and liquidity risk, Guaranty enters into various types of interest
rate contracts for purposes other than trading.
The net amount payable or receivable on interest rate contracts is recorded as
an adjustment to interest income or expense (the accrual accounting method).
Premiums paid for interest rate contracts, net of premiums received for those
sold, are included in the carrying value of the related interest-earning assets
or interest-bearing liabilities, and amortized as an adjustment to the yield of
the designated assets or liabilities over the contract periods. These interest
rate contracts had no significant impact on the group's effective interest yield
for the years 1998, 1997 and 1996.
The company plans to adopt Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective
beginning of 2000. This statement will require derivative positions to be
recognized in the balance sheet at fair value. The company presently utilizes
derivatives to manage interest rate risk and risk in its mortgage loan
production operations. The company has not determined the effect of this
statement on earnings or financial position upon adoption.
REAL ESTATE
Real estate consists primarily of land and commercial properties held for
development and sale, although the operation also holds certain properties for
the production of income. Interest on indebtedness and property taxes during the
development period, as well as improvements and other development costs, are
generally capitalized. The cost of land sales is determined using the relative
sales value method. Real estate also includes properties acquired through loan
foreclosure by Guaranty and Temple-Inland Mortgage Corporation (TIMC).
Real estate held for future development and real estate projects that are being
developed are evaluated for impairment in accordance with the recognition and
measurement provisions governing long-lived assets to be held and used in
operations. Real estate projects that are substantially completed and ready for
their intended use are measured at the lower of carrying amount or estimated
fair value less cost to sell in accordance with the provisions governing
long-lived assets that are to be disposed of.
MORTGAGE LOAN SERVICING RIGHTS
The group allocates a portion of the cost of originating a mortgage loan to the
mortgage servicing right based on its fair value relative to the loan as a
whole. Capitalized mortgage loan servicing rights are amortized in proportion
to, and over the period of, estimated net servicing revenues.
The fair market value of originated mortgage servicing rights is estimated using
buyers' quoted prices for servicing rights with similar attributes, such as loan
type, principal balance, escrow and geographic location. Purchased mortgage
servicing rights are recorded at cost.
To evaluate possible impairment of mortgage servicing rights, the portfolio is
periodically stratified based on predominant risk characteristics and the
capitalized basis of each stratum is compared to fair value. Predominant risk
characteristics considered include loan type and interest rate. Should the
capitalized mortgage servicing rights, net of amortization, exceed fair value,
impairment is recognized through a valuation allowance.
46
<PAGE> 23
[PICTURE]
FEDERAL INCOME TAXES
The group is included in the consolidated income tax return filed by the
company. Under an agreement with the company, the group provides a current
income tax provision that takes into account the separate taxable income of the
group. Deferred income taxes are recorded by the group.
NOTE B - ACQUISITIONS
On November 14, 1998, the company signed a definitive merger agreement to
acquire all of the outstanding stock of HF Bancorp, Inc. for $18.50 per share.
Total assets, the majority of which are held by its subsidiary, Hemet Federal
Savings & Loan Association (Hemet), are approximately $1 billion and consist
primarily of residential, consumer and construction loans, mortgage-backed
securities and short-term investments. Total liabilities approximate $0.9
billion and consist primarily of deposits. Hemet operates 18 branches in
California. The purchase price of $118 million will consist of either all cash
or a combination of company common stock and cash, and will be accounted for as
a purchase business combination. The transaction, subject to the approval of
regulatory authorities and HF Bancorp, Inc. shareholders, is anticipated to
close during the second quarter of 1999.
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. Total assets
and liabilities of SSB at acquisition were approximately $1.4 billion (primarily
loans and securities) and $1.3 billion (primarily deposits and FHLB advances),
respectively. At closing, the company issued approximately 1,614,000 shares of
common stock valued at $96.1 million and paid approximately $47.3 million in
cash. The excess of purchase price over the fair market value of net assets
acquired of approximately $63 million is being amortized on the straight-line
method over 25 years.
Effective May 31, 1997, TIMC acquired 100 percent of the common stock of Knutson
Mortgage Corporation, a corporation engaged in mortgage banking activities, for
a purchase price of approximately $14.6 million. Effective February 1, 1996,
TIMC acquired all of the stock of Western Cities Mortgage Corporation, a
California-based mortgage banking entity, for a purchase price of $11.5 million.
These transactions in 1997 and 1996 increased the production branch network by a
total of 50 branches and the principal balance of the loan servicing portfolio
by approximately $6.4 billion and $875 million, respectively.
The consummated acquisitions were accounted for under the purchase method of
accounting and, accordingly, the acquired assets and liabilities were adjusted
to their estimated fair values at the date of the acquisitions. The operating
results of the consummated acquisitions are included in the accompanying
summarized financial statements from the acquisition dates. The unaudited pro
forma results of operations, assuming the acquisitions had been effected as of
the beginning of the applicable fiscal year, would not have been materially
different from those reported.
NOTE C - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
At year end 1998 1997
- ------------- --------- ---------
(in millions)
<S> <C> <C>
Real estate mortgage $ 4,632.9 $ 4,525.0
Construction and development
(including residential) 4,702.6 2,975.1
Commercial and business 1,887.1 1,142.1
Consumer and other 877.3 590.2
--------- ---------
12,099.9 9,232.4
LESS:
Unfunded portion of loans 3,927.7 2,709.7
Unamortized purchase
premiums and discounts (19.2) (21.3)
Net deferred fees 3.9 2.0
Allowance for loan losses 86.6 91.1
--------- ---------
3,999.0 2,781.5
--------- ---------
$ 8,100.9 $ 6,450.9
========= =========
</TABLE>
47
<PAGE> 24
Mortgages are primarily single-family adjustable-rate loans secured by
properties located throughout the United States. Construction and development
loans consist primarily of office, multi-family, retail, industrial and assisted
living and are predominantly located in Texas, California, Florida, Georgia,
Colorado, Illinois and Arizona. At year end 1998, the group had commitments to
originate or purchase primarily variable-rate loans totaling approximately $2.0
billion. The amount to be ultimately funded is uncertain. See Note D below for
information regarding mortgage loans securitized during 1998 and 1997.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------- ------- ------- -------
(in millions)
<S> <C> <C> <C>
Balance, beginning of year $ 91.1 $ 68.4 $ 65.5
Provision for loan losses 0.6 (1.7) 13.8
Additions related to acquisitions and bulk
purchases of loans, net of adjustments 0.1 30.4* (0.7)
Charge-offs, net of recoveries (5.2) (6.0) (10.2)
------- ------- -------
Balance, end of year $ 86.6 $ 91.1 $ 68.4
======= ======= =======
</TABLE>
*Principally related to the acquisition of the loan portfolio of Stockton
Savings Bank, F.S.B.
NOTE D - MORTGAGE-BACKED AND INVESTMENT SECURITIES
The amortized cost and fair values of mortgage-backed and investment securities
consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
At year end 1998 Cost Gains Losses Value
- ---------------- ---------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Mortgage-backed securities:
FNMA certificates $ 781.7 $ -- $ (18.1) $ 763.6
FHLMC certificates 157.7 -- (3.6) 154.1
Collateralized mortgage
obligations 184.0 -- (6.4) 177.6
Private issuer
pass-through securities 290.0 -- (8.3) 281.7
---------- ---------- ---------- ----------
1,413.4 -- (36.4) 1,377.0
---------- ---------- ---------- ----------
AVAILABLE-FOR-SALE
Mortgage-backed securities:
FNMA certificates 752.1 6.6 (2.0) 756.7
FHLMC certificates 1.7 -- -- 1.7
GNMA certificates 0.1 -- -- 0.1
Collateralized mortgage
obligations 120.1 0.2 (0.1) 120.2
Private issuer
pass-through securities 14.9 -- (2.0) 12.9
---------- ---------- ---------- ----------
888.9 6.8 (4.1) 891.6
Debt securities:
Corporate securities 2.8 -- -- 2.8
Equity securities, primarily
Federal Home Loan Bank stock 176.9 -- -- 176.9
---------- ---------- ---------- ----------
$ 1,068.6 $ 6.8 $ (4.1) $ 1,071.3
========== ========== ========== ==========
</TABLE>
48
<PAGE> 25
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
At year end 1997 Cost Gains Losses Value
- ---------------- ---------- ---------- ---------- -----------
(in millions)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Mortgage-backed securities:
FNMA certificates $ 924.8 $ 0.1 $ (27.3) $ 897.6
FHLMC certificates 186.9 -- (5.7) 181.2
Collateralized mortgage
obligations 253.1 -- (8.7) 244.4
Private issuer
pass-through securities 403.5 -- (10.1) 393.4
---------- -------- -------- ----------
1,768.3 0.1 (51.8) 1,716.6
========== ======== ======== ==========
AVAILABLE-FOR-SALE
Mortgage-backed securities:
FNMA certificates 892.3 2.8 (5.7) 889.4
FHLMC certificates 2.3 -- -- 2.3
GNMA certificates 0.1 -- -- 0.1
Collateralized mortgage
obligations 1.0 0.1 -- 1.1
Private issuer
pass-through securities 57.8 -- (2.6) 55.2
---------- -------- -------- ----------
953.5 2.9 (8.3) 948.1
Debt securities:
Corporate securities 3.0 -- -- 3.0
Equity securities, primarily
Federal Home Loan Bank stock 85.8 0.4 -- 86.2
---------- -------- -------- ----------
$ 1,042.3 $ 3.3 $ (8.3) $ 1,037.3
========== ======== ======== ==========
</TABLE>
The mortgage loans underlying mortgage-backed securities have adjustable
interest rates and generally have contractual maturities ranging from 15 to 40
years, with principal and interest installments due monthly. The actual
maturities of mortgage-backed securities may differ from the contractual
maturities of the underlying loans because issuers or mortgagors may have the
right to call or prepay their securities or loans.
Certain mortgage-backed and investment securities are guaranteed directly or
indirectly by the U.S. government or its agencies. Other mortgage-backed
securities, which are not guaranteed by the U.S. government or its agencies, are
senior subordinated securities considered investment-grade quality by
third-party rating agencies. The collateral underlying these securities is
primarily residential properties located in California.
Guaranty securitized $164 million and $962 million of mortgage loans previously
held in portfolio during 1998 and 1997, respectively. The transfer to
mortgage-backed securities was recorded at the carrying value of the mortgage
loans at the time of securitization. The group held $657 million and $768
million in such securities at year end 1998 and 1997, respectively.
49
<PAGE> 26
[PICTURE]
NOTE E - DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
At year end 1998 1997
- ----------- ------------------------ ------------------------
STATED Stated
RATE AMOUNT Rate Amount
------ ---------- ------ ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Noninterest-bearing demand --% $ 152.1 --% $ 160.0
Interest-bearing demand 2.08% 1,135.0 2.55% 1,107.7
Savings deposits 2.21% 207.3 2.27% 205.9
Time deposits 5.39% 5,843.7 5.63% 5,900.3
Deposit premium 0.3 0.9
---------- ----------
$ 7,338.4 $ 7,374.8
========== ==========
</TABLE>
Scheduled maturities of time deposits at year end 1998 are as follows:
<TABLE>
<CAPTION>
$100,000 LESS THAN
Time deposits OR MORE $ 100,000 TOTAL
- ------------- -------- --------- ---------
(in millions)
<S> <C> <C> <C>
3 months or less $ 240.3 $ 1,353.5 $ 1,593.8
Over 3 through 6 months 192.3 1,125.2 1,317.5
Over 6 through 12 months 226.8 1,396.6 1,623.4
Over 12 months 178.9 1,130.1 1,309.0
-------- --------- ---------
$ 838.3 $ 5,005.4 $ 5,843.7
======== ========= =========
</TABLE>
A summary of interest paid by the group is shown below:
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ -------- -------- --------
(in millions)
<S> <C> <C> <C>
Interest on deposits $ 356.9 $ 333.4 $ 310.8
Interest on borrowed funds 137.1 160.5 128.7
-------- -------- --------
$ 494.0 $ 493.9 $ 439.5
======== ======== ========
</TABLE>
At year end 1998, time deposits maturity dates were as follows (in millions):
1999 - $4,534.7; 2000 - $626.2; 2001 - $374.0; 2002 - $265.9; 2003 - $40.6; 2004
and thereafter - $2.3.
50
<PAGE> 27
NOTE F - SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS
Securities sold under repurchase agreements were delivered to brokers/dealers
who retained such securities as collateral for the borrowings and have agreed to
resell the same securities back to Guaranty at the maturities of the agreements.
The agreements generally mature within 30 days.
Information concerning borrowings under repurchase agreements is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(dollars in millions)
<S> <C> <C>
AT YEAR END:
Weighted average interest rate -- 5.90%
Mortgage-backed securities
pledged to secure the agreements:
Carrying value $ -- $ 287.8
Estimated market value -- 281.3
FOR THE YEAR:
Average daily balance 349.2 1,297.2
Maximum month-end balance 1,254.9 1,696.6
</TABLE>
NOTE G - FEDERAL HOME LOAN BANK ADVANCES
Pursuant to collateral agreements with the Federal Home Loan Bank of Dallas
(FHLB), advances are secured by a blanket floating lien on Guaranty's assets and
by securities on deposits at the FHLB. The weighted average interest rate of the
advances was 5.09 percent and 6.01 percent at year end 1998 and 1997,
respectively. At year end 1998, the advances had calendar year maturity dates as
follows (in millions): 1999 - $3,194.1; 2000 - $10.0; 2001 - $5.0; 2002 - $0;
2003 - $12.0; 2004 and thereafter - $0.
NOTE H - OTHER BORROWINGS
Other borrowings, which represent borrowings of non-savings bank entities,
consisted of the following:
<TABLE>
<CAPTION>
At year end 1998 1997
- ----------- ------- -------
(in millions)
<S> <C> <C>
Long-term debt with an average
rate of 7.47% and 7.16%
during 1998 and 1997,
respectively, due through 2001 $ 170.0 $ 147.0
Long-term debt at various rates
that approximate prime,
secured primarily by real estate 39.8 20.5
------- -------
$ 209.8 $ 167.5
======= =======
</TABLE>
At year end 1998, a non-savings bank subsidiary had a $190 million credit
facility that expires in 2001, with $20 million remaining unused.
Maturities of other borrowings are as follows (in millions): 1999 - $2.6; 2000 -
$2.3; 2001 - $171.8; 2002 - $1.1; 2003 - $1.1; 2004 and thereafter - $30.9.
51
<PAGE> 28
NOTE I - PREFERRED STOCK ISSUED BY SUBSIDIARY
In May 1997, Guaranty Preferred Capital Corporation (GPCC), a wholly owned
subsidiary of Guaranty, issued 150,000 shares of noncumulative floating-rate
preferred stock, with a liquidation preference of $1,000 per share. GPCC is a
real estate investment trust (REIT) established for the purpose of acquiring,
holding and managing real estate mortgage assets. Dividends on preferred stock
are noncumulative and are payable when declared. If redeemed within a specified
time after the tenth anniversary, the preferred stock may be redeemed for cash
at the option of GPCC, in whole or in part, at a redemption price of $1,000 per
share. The preferred stock is convertible to Guaranty preferred stock upon the
occurrence of certain regulatory events. GPCC issued an additional $75 million
of noncumulative floating-rate preferred stock on May 28, 1998.
NOTE J - MORTGAGE LOAN SERVICING
The group services mortgage loans that are owned primarily by independent
investors. The group serviced approximately 256,300 and 351,600 mortgage loans
aggregating $22.9 billion and $26.1 billion in outstanding principal balance as
of year end 1998 and 1997, respectively.
This group is required to advance, from company funds, escrow and foreclosure
costs on loans that it services. The majority of these advances are recoverable,
except for certain amounts for loans serviced for GNMA, which are reserved.
Market risk is assumed related to disposing of certain foreclosed VA loans. No
significant losses were incurred during 1998, 1997 or 1996 in connection with
this risk.
Capitalized mortgage loan servicing rights, net of accumulated amortization,
were as follows:
<TABLE>
<CAPTION>
Purchased Originated Reserve
Loan Servicing Loan Servicing For
At year end 1998 Rights, Net Rights, Net Impairment Total
- ---------------- -------------- -------------- ---------- ------
(in millions)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 159.0 $ 42.3 $ -- $ 201.3
Additions 46.5 71.7 -- 118.2
Scheduled amortization (40.2) (15.8) -- (56.0)
Basis in servicing sold (23.6) (8.8) -- (32.4)
------- ------ ------ -------
141.7 89.4 -- 231.1
Reserve for impairment -- -- (16.8) (16.8)
------- ------ ------ -------
Balance, end of year $ 141.7 $ 89.4 $(16.8) $ 214.3
======= ====== ====== =======
At year end 1997
- ----------------
(in millions)
Balance, beginning of year $ 84.1 $ 24.7 -- $ 108.8
Additions 92.3(a) 22.8 -- 115.1
Scheduled amortization (17.0) (5.2) -- (22.2)
Basis in servicing sold (0.4) -- -- (0.4)
------- ------ ------ -------
Balance, end of year $ 159.0 $ 42.3 -- $ 201.3
======= ====== ====== =======
</TABLE>
(a) Includes approximately $74 million relating to the acquisition of Knutson
Mortgage Corporation.
During 1998, the group sold servicing rights on mortgage loans with
approximately $4.5 billion in outstanding principal balance ($1.3 billion of
which was not transferred until 1999), resulting in gains of $27.6 million. The
estimated fair value of the capitalized mortgage servicing rights at year end
1998 was $217 million. Fair value was determined utilizing market-driven
assumptions for prepayment speeds, discount rates and other variables.
NOTE K - INTEREST RATE RISK MANAGEMENT
In 1998, Guaranty entered into interest rate floor and collar agreements to
minimize the effect a decline in interest rates might have on earnings due to
acceleration of prepayments on Guaranty's mortgage assets. At year end 1998,
Guaranty was a party to interest rate floors with a notional amount of $850
million and interest rate collars with a notional amount of $850 million.
The interest rate floor agreements will generate interest payments to Guaranty
if the variable rate based on various Constant Maturity Swap (CMS) indices falls
below the average strike rate of 5.25 percent. The interest rate collar
agreements incorporate a floor from which Guaranty would receive payments if the
CMS indices fall below the average strike rate of 5.02 percent and a cap that
would require Guaranty to pay if the CMS indices exceed the average strike rate
of 5.60 percent. The average of the CMS indices at year end 1998 was
approximately 5.44 percent. These agreements mature in 1999.
Guaranty is also a party to various interest rate corridor agreements to reduce
the impact of increases in interest rates on its investments in adjustable-rate
mortgage-backed securities that have lifetime interest rate caps. Under these
agreements with notional amounts totaling $319 million and
52
<PAGE> 29
$379 million at year end 1998 and 1997, respectively, Guaranty simultaneously
purchased and sold caps whereby it receives interest if the variable rate based
on the FHLB Eleventh District Cost of Funds (EDCOF) Index (4.69 percent at year
end 1998) exceeds an average strike rate of 8.80 percent, and pays interest if
the same variable rate exceeds a strike rate of 11.75 percent. These agreements
mature through 2003.
Guaranty is also a party to an interest rate cap agreement to reduce the impact
of interest rate increases on certain adjustable-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 L - 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 additional 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 1998,
Guaranty met all its capital adequacy requirements.
As of year end 1998, 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. Because of loan growth
experienced by Guaranty in 1998, changes in asset mix in Guaranty's balance
sheet and prospective changes in Guaranty's risk-based capital calculation,
Guaranty expects an increase in its capital requirements. As a result, the
company expects to increase capital in Guaranty by up to $160 million in order
to maintain its classification of "well capitalized."
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 year end
1998 or 1997.
<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 1998:
Total Risk-Based Ratio
(Risk-based capital/total risk-weight assets) $ 828.8 10.17% >=$651.9 >=8.0% >=$814.7 >=10.0%
Tier I (Core) Risk-Based Ratio
(Core capital/total risk-weight assets) $ 755.5 9.27% >=$325.9 >=4.0% >=$488.8 >= 6.0%
Tier I (Core) Leverage Ratio
(Core capital/adjusted tangible assets) $ 755.5 6.31% >=$479.2 >=4.0% >=$599.0 >= 5.0%
Tangible Ratio
(Tangible capital/tangible assets) $ 755.5 6.31% >=$179.7 >=1.5% N/A N/A
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
</TABLE>
53
<PAGE> 30
CONSOLIDATED STATEMENTS OF INCOME
TEMPLE-INLAND INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ ------- ------- -------
(in millions, except per share data)
<S> <C> <C> <C>
Revenues
Manufacturing $ 2,631 $ 2,680 $ 2,645
Financial services 1,109 945 815
------- ------- -------
3,740 3,625 3,460
------- ------- -------
Costs and Expenses
Manufacturing 2,514 2,613 2,447
Special charge 47 -- --
Financial services 955 813 752
------- ------- -------
3,516 3,426 3,199
------- ------- -------
Operating Income 224 199 261
Parent Company interest, net (106) (110) (110)
Other 6 6 5
------- ------- -------
Income before Taxes 124 95 156
------- ------- -------
Taxes on income 57 44 23
Income before Accounting Change 67 51 133
Cumulative effect of accounting change, net of tax (3) -- --
------- ------- -------
Net Income $ 64 $ 51 $ 133
------- ------- -------
Earnings Per Share
Basic:
Income before accounting change $ 1.22 $ 0.91 $ 2.39
Cumulative effect of accounting change,
net of tax (.06) -- --
------- ------- -------
Net Income $ 1.16 $ 0.91 $ 2.39
------- ------- -------
Diluted:
Income before accounting change $ 1.21 $ 0.90 $ 2.39
Cumulative effect of accounting change,
net of tax (.06) -- --
------- ------- -------
Net Income $ 1.15 $ 0.90 $ 2.39
------- ------- -------
</TABLE>
See the notes to the consolidated financial statements.
54
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMPLE-INLAND INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ ------- ------- -------
(in millions)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 64 $ 51 $ 133
Adjustments to reconcile net income to net cash:
Special charge 47 -- --
Cumulative effect of accounting change,
net of tax 3 -- --
Depreciation and depletion 275 268 256
Amortization of goodwill 7 6 4
Deferred taxes 18 21 (11)
Amortization and accretion on
financial instruments 90 26 20
Mortgage loans held for sale (183) (99) (88)
Receivables (12) 7 (11)
Inventories 9 (30) 23
Accounts payable and accrued expenses (11) (7) (27)
Collections and remittances on loans
serviced for others, net 129 193 (7)
Originated mortgage servicing rights (72) (23) (18)
Other (18) (61) (48)
------- ------- -------
346 352 226
------- ------- -------
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures for property
and equipment (214) (251) (290)
Proceeds from sale of property and equipment 28 53 7
Purchases of securities available-for-sale (208) (121) (4)
Maturities of securities available-for-sale 300 210 98
Maturities and redemptions of securities held-to-maturity 349 308 322
Loans originated or acquired, net of
principal collected on loans (1,852) (1,084) (672)
Proceeds from sale of securities
available-for-sale 53 844 206
Acquisitions and joint ventures, net (121) (22) (38)
Acquisition of California Financial Holding
Company, net of cash acquired -- (22) --
Other 6 27 (1)
------- ------- -------
(1,659) (58) (372)
------- ------- -------
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt 1,089 447 281
Payments of debt (426) (329) (349)
Securities sold under repurchase agreements
and short-term borrowings, net 788 (609) 285
Purchase of stock for treasury (48) (59) (16)
Cash dividends paid to shareholders (71) (71) (69)
Net increase (decrease) in deposits (36) 128 (112)
Proceeds from sale of subsidiary preferred stock 75 150 --
Other (2) 9 (4)
------- ------- -------
1,369 (334) 16
------- ------- -------
Net increase (decrease) in cash and cash equivalents 56 (40) (130)
Cash and cash equivalents at beginning of year 188 228 358
------- ------- -------
Cash and cash equivalents at end of year $ 244 $ 188 $ 228
------- ------- -------
</TABLE>
See the notes to the consolidated financial statements.
55
<PAGE> 32
CONSOLIDATING BALANCE SHEETS
TEMPLE-INLAND INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Parent Financial
At year end 1998 Company Services Consolidated
- ---------------- ------- -------- ------------
(in millions)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 15 $ 229 $ 244
Mortgage loans held for sale -- 621 621
Loans receivable -- 8,101 8,101
Mortgage-backed and investment securities -- 2,485 2,485
Trade and other receivables 297 -- 290
Inventories 335 -- 335
Property and equipment 2,799 129 2,928
Other assets 188 835 986
Investment in Financial Services 708 -- --
------- ------- --------
TOTAL ASSETS $ 4,342 $12,400 $ 15,990
------- ------- --------
LIABILITIES
Deposits $ -- $ 7,338 $ 7,338
Federal Home Loan Bank advances -- 3,221 3,221
Other liabilities 350 698 1,028
Long-term debt 1,583 210 1,793
Deferred income taxes 266 -- 242
Postretirement benefits 145 -- 145
Preferred stock issued by subsidiary -- 225 225
------- ------- --------
TOTAL LIABILITIES $ 2,344 $11,692 $ 13,992
------- ------- --------
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 357
Accumulated other comprehensive income (loss) (17)
Retained earnings 1,810
--------
2,211
Cost of shares held in the treasury: 5,785,139 shares (213)
TOTAL SHAREHOLDERS' EQUITY 1,998
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,990
--------
</TABLE>
See the notes to the consolidated financial statements.
56
<PAGE> 33
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
Accumulated other comprehensive income (loss) (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.
57
<PAGE> 34
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TEMPLE-INLAND INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-in Comprehensive Retained Treasury
Stock Capital Income Earnings Stock Total
----- ------- ------ -------- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT YEAR END 1995 $ 61 $ 306 $ (14) $ 1,773 $ (151) $ 1,975
------- ------- ------- ------- ------- -------
Comprehensive Income
Net income -- -- -- 133 -- 133
Other comprehensive income:
Unrealized gains on securities -- -- (9) -- -- (9)
Foreign currency translation adjustments -- -- (1) -- -- (1)
-------
Total comprehensive income -- -- -- -- -- 123
-------
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 YEAR END 1996 $ 61 $ 305 $ (24) $ 1,837 $ (164) $ 2,015
------- ------- ------- ------- ------- -------
Comprehensive Income
Net income -- -- -- 51 -- 51
Other comprehensive income:
Unrealized gains on securities of $3.0 million,
net of reclassification adjustment for gains
included in net income of $1.0 million -- -- 4 -- -- 4
-------
Total comprehensive income -- -- -- -- -- 55
-------
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 YEAR END 1997 $ 61 $ 356 $ (20) $ 1,817 $ (169) $ 2,045
------- ------- ------- ------- ------- -------
Comprehensive Income
Net income -- -- -- 64 -- 64
Other comprehensive income:
Unrealized gains on securities of $6.0 million,
net of reclassification adjustment for gains
included in net income of $1.0 million -- -- 5 -- -- 5
Minimum pension liability -- -- (2) -- -- (2)
-------
Total comprehensive income -- -- -- -- -- 67
-------
Dividends paid on common stock --
$1.28 per share -- -- -- (71) -- (71)
Stock issued for stock plans --
134,430 shares -- 1 -- -- 4 5
Stock reacquired for treasury --
850,558 shares -- -- -- -- (48) (48)
------- ------- ------- ------- ------- -------
BALANCE AT YEAR END 1998 $ 61 $ 357 $ (17) $ 1,810 $ (213) $ 1,998
======= ======= ======= ======= ======= =======
</TABLE>
See the notes to the consolidated financial statements.
58
<PAGE> 35
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.
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 recorded at the lower of carrying
value or estimated fair value, less costs to sell.
59
<PAGE> 36
NOTE 2 - TAXES ON INCOME
Taxes on income from continuing operations consisted of the following:
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
Current Tax Provision:
U.S. Federal $ 30.8 $ 21.9 $ 27.2
State and other 7.6 2.2 6.5
------- ------- -------
38.4 24.1 33.7
======= ======= =======
Deferred Tax Provision:
U.S. Federal 15.5 15.2 (16.5)
State and other 0.8 4.9 5.9
------- ------- -------
16.3 20.1 (10.6)
======= ======= =======
Provision for
Income Taxes $ 54.7 $ 44.2 $ 23.1
======= ======= =======
</TABLE>
Earnings or losses from continuing operations consisted of the following:
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
Earnings (Losses):
U.S. $ 149.7 $ 104.1 $ 163.6
Non-U.S. (30.6) (9.1) (7.6)
------- ------- -------
$ 119.1 $ 95.0 $ 156.0
======= ======= =======
</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 1998 1997 1996
- ------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
Taxes on income
at statutory rate $ 41.7 $ 33.3 $ 54.6
FDIC tax-sharing
settlement -- -- (31.5)
Book benefit of FDIC
assistance and other
permanent items 1.2 (0.8) (11.6)
State and other taxes 4.6 5.1 8.1
Foreign losses
not benefited 5.7 3.2 2.6
Goodwill 1.5 3.4 0.9
------- ------- -------
$ 54.7 $ 44.2 $ 23.1
======= ======= =======
</TABLE>
Significant components of the company's consolidated deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
At year end 1998 1997
- ----------- ---- ----
(in millions)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $ 399.9 $ 396.4
Timber and timberlands 40.0 41.9
Pensions 28.4 20.6
Other 69.0 63.3
-------- --------
Total deferred tax liabilities 537.3 522.2
-------- --------
Deferred Tax Assets:
Alternative minimum tax credits 292.9 264.3
Net operating loss carryforwards 31.6 78.0
OPEB obligations 55.7 54.6
Other 74.3 54.9
-------- --------
Total deferred tax assets 454.5 451.8
-------- --------
Valuation Allowance (158.9) (152.9)
-------- --------
Net deferred tax liability $ 241.7 $ 223.3
======== ========
</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.
Income tax payments, net of refunds received, were $39 million, $21 million and
$38 million during 1998, 1997 and 1996, respectively.
The company has domestic net operating loss carryforwards of $43 million that
expire in 2009. In addition, the company has foreign net operating loss
carryforwards of $35 million that expire from the year 2000 through the year
2008, and $13 million that may be carried forward indefinitely. Alternative
minimum tax credits may be carried forward indefinitely.
As a result of the sale of Temple-Inland Food Service Corporation in 1997, the
company realized a $2.3 million one-time increase in tax expense from
non-deductible goodwill.
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.
The Internal Revenue Service is examining the company's consolidated tax returns
for the years 1987 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.
60
<PAGE> 37
[PICTURE]
NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair value of financial instruments were as follows:
<TABLE>
<CAPTION>
At year end 1998 1997
- ----------- ---------------------- ------------------------
(in millions)
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets:
Loans receivable $ 8,100.9 $ 8,126.4 $ 6,450.9 $ 6,454.9
Mortgage-backed
and investment
securities 2,484.6 2,448.8 2,805.7 2,754.0
---------- ---------- ---------- ----------
Financial
Liabilities:
Deposits 7,338.4 7,369.0 7,374.8 7,380.2
FHLB advances 3,220.9 3,223.1 1,685.0 1,687.9
Total debt 1,794.4 1,850.8 1,608.1 1,675.8
---------- ---------- ---------- ----------
Off-Balance-Sheet
Instruments:
Interest rate contracts -- (4.9) -- (2.3)
Commitments to
extend credit -- (1.6) -- (0.7)
---------- ---------- ---------- ----------
</TABLE>
Differences between fair value and carrying amount are primarily due 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 1999, the Board of Directors extended the company's Shareholder Rights
Plan in which one-half of a preferred stock purchase right (Right) was declared
as a dividend for each common share outstanding. Each Right entitles
shareholders to purchase, under certain conditions, one 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 tenth business day following public announcement that a 20 percent position
has been acquired. The Rights will expire on February 20, 2009.
NOTE 5 - EMPLOYEE BENEFIT PLANS
The company has pension plans covering substantially all employees. Plans
covering salaried and non-union 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.
The company provides medical and insurance benefits to certain eligible salaried
and hourly employees who reach retirement age while employed by the company.
The change in benefit obligation, plan assets and the funded status of employee
benefit plans follows:
61
<PAGE> 38
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
At year end 1998 1997 1998 1997
- ----------- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 507.3 $ 455.0 $ 114.9 $ 104.9
Service cost 14.7 13.7 3.0 2.7
Interest cost 37.0 35.5 8.3 8.3
Plan amendments 2.0 (0.4) -- (1.6)
Actuarial (gain) loss 58.3 28.5 11.5 6.7
Termination benefits 5.8 1.3 0.8 --
Benefits paid (28.6) (26.3) (6.6) (7.0)
Retiree contributions -- -- 0.9 0.9
-------- -------- -------- --------
Benefit obligation at end of year $ 596.5 $ 507.3 $ 132.8 $ 114.9
-------- -------- -------- --------
Fair value of plan assets
at beginning of year $ 628.3 $ 528.2 $ -- $ --
Actual return 15.3 126.0 -- --
Benefits paid (28.6) (26.3) -- --
Contributions 0.5 0.4 -- --
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 615.5 $ 628.3 $ -- $ --
-------- -------- -------- --------
Funded status $ 19.0 $ 121.0 $ (132.8) $ (114.9)
Unrecognized net loss (gain) 41.3 (61.1) (3.0) (15.1)
Prior service costs not yet recognized 3.2 1.4 (9.1) (9.9)
Unrecognized net transition
obligation (asset) (8.2) (12.6) -- --
Additional minimum liability (5.3) -- -- --
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 50.0 $ 48.7 $ (144.9) $ (139.9)
-------- -------- -------- --------
</TABLE>
62
<PAGE> 39
The net prepaid pension benefit cost of $50.0 million at year end 1998 is
comprised of pension plans with prepaid benefit cost totaling $75.4 million and
accrued benefit liability totaling $25.4 million. Amounts applicable to the
company's pension plans with accumulated benefit obligations in excess of plan
assets are as follows:
<TABLE>
<CAPTION>
At year end 1998 1997
- ----------- ---- ----
(in millions)
<S> <C> <C>
Projected benefit obligation $ 236.2 $ 12.8
Accumulated benefit obligation $ 221.1 $ 9.9
Fair value of plan assets $ 201.6 $ 0.9
</TABLE>
Significant assumptions used for the employee benefit plans follow:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
For the year 1998 1997 1996 1998 1997 1996
- ------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions:
Discount rate 6.75% 7.50% 8.00% 6.75% 7.50% 8.00%
Expected long-term rate of return 9.00% 9.00% 9.00% -- -- --
Rate of compensation increase 2.75% 3.50% 4.00% -- -- --
</TABLE>
For measurement purposes, an 8.75 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 6.0 percent for 2010, and remain at that level
thereafter.
Net periodic benefit cost (credit) for pension and postretirement plans include
the following:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
For the year 1998 1997 1996 1998 1997 1996
- ------------ ---- ---- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
CHARGES (CREDITS)
Service cost -- benefits earned during the period $ 14.7 $ 13.7 $ 12.8 $ 3.0 $ 2.7 $ 2.7
Interest cost on projected benefit obligation $ 37.0 35.5 32.2 8.3 8.3 8.5
Expected return on plan assets (55.4) (46.5) (41.6) -- -- --
Net amortization and deferral (4.9) (4.7) (4.3) (1.0) (1.3) (0.4)
------- ------- ------- ------- ------ -------
Net periodic benefit cost (credit)* $ (8.6) $ (2.0) $ (0.9) $ 10.3 $ 9.7 $ 10.8
------- ------- ------- ------- ------ -------
</TABLE>
*In addition, in 1998 the company recognized an additional $2.7 million relating
to pension benefits and $0.8 million relating to postretirement benefits for
curtailments resulting from employee terminations.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement benefits. A 1 percentage point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total of
service and interest
cost components
for the year 1998 $ 1.1 $ (1.0)
Effect on postretirement benefit
obligation at year end 1998 $ 11.2 $ (10.9)
</TABLE>
63
<PAGE> 40
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 granting of
stock appreciation rights with all or part of any options so granted. Options
granted after 1995 have primarily a ten-year term and become exercisable in
steps from one to five years.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ ------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(shares in thousands)
Outstanding
beginning of year 1,430 $ 47 1,626 $ 45 1,404 $ 45
Granted 654 56 201 56 456 43
Exercised (139) 38 (303) 41 (144) 32
Forfeited (53) 50 (94) 50 (90) 48
----- ---- ----- ---- ----- ----
Outstanding
end of year 1,892 $ 51 1,430 $ 47 1,626 $ 45
===== ==== ===== ==== ===== ====
Weighted average
fair value of
options granted
during the year $ 17.68 $ 18.24 $ 13.07
======= ======= =======
</TABLE>
Options exercisable at year end were (in thousands):
1998 - 737; 1997 - 658; and 1996 - 769. The weighted average exercise price for
options exercisable at year end 1998 was $48 per share, and $46 per share for
year end 1997. Exercise prices for options outstanding at year end 1998 range
from $12 to $66. The weighted average remaining contractual life of these
options is seven years. An additional 2,182,000 and 3,284,000 shares of common
stock were available for grants at year end 1998 and 1997, 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 1998, awards of
152,123 shares of restricted common stock were outstanding at an average price
of $49.50 per share.
The fair value of the options granted in 1998, 1997 and 1996 was estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
For the year 1998 1997 1996
- ------------ ---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 2.0% 2.1% 2.6%
Expected stock
price volatility 28.7% 27.3% 26.5%
Risk-free interest rate 4.8% 5.6% 6.5%
Expected life
of options 7.0 years 8.0 years 7.0 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
$61.7 million and $1.10 per diluted share in 1998; $49.1 million and $0.87 per
diluted share in 1997; and $131.5 million and $2.37 per diluted share in 1996.
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 1998 1997 1996
- ------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
Numerator for basic
and diluted earnings
per share:
Income before
accounting change $ 67.7 $ 50.8 $ 132.8
Accounting change,
net of tax $ (3.2) $ -- $ --
------- ------- --------
Net income $ 64.5 $ 50.8 $ 132.8
======= ======= ========
Denominator for basic
earnings per share--
weighted average
shares outstanding 55.8 56.0 55.5
Dilutive effect of
stock options 0.1 0.2 0.1
------- ------- --------
Denominator for diluted
earnings per share 55.9 56.2 55.6
======= ======= ========
</TABLE>
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Unrealized
Currency Gains on Minimum
Translation Available-for- Pension
Adjustments Sale Securities Liability Total
----------- --------------- --------- -----
<S> <C> <C> <C> <C>
Balance at
year end 1996 $ (17) $ (7) $ -- $ (24)
----- ----- ----- -----
Unrealized gains on
available-for-sale securities -- 7 -- 7
Deferred taxes relating to
unrealized gains on available-
for-sale securities -- (3) -- (3)
----- ----- ----- -----
Balance at year end 1997 (17) (3) -- (20)
----- ----- ----- -----
Unrealized gains on available-
for-sale securities -- 8 -- 8
Deferred taxes relating to
unrealized gains on available-
for-sale securities -- (3) -- (3)
Minimum pension liability -- -- (4) (4)
Deferred taxes relating to
minimum pension liability -- -- 2 2
----- ----- ----- -----
Balance at
year end 1998 $ (17) $ 2 $ (2) $ (17)
===== ===== ===== =====
</TABLE>
64
<PAGE> 41
NOTE 9 - COMMITMENTS AND CONTINGENCIES
There are pending against the company and its subsidiaries 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.
NOTE 10 - SEGMENT INFORMATION
The company has three reportable segments: paper, building products and
financial services. The paper segment manufactures corrugated packaging and
bleached paperboard products. The building products segment manufactures a
variety of building materials and manages the company's timber resources. The
financial services segment operates a savings bank and also engages in mortgage
banking, real estate development and insurance activities.
These segments are managed as separate business units. The company evaluates
performance based on operating income before special charges, corporate expenses
and income taxes. Corporate interest expense is not allocated to business
segments. The accounting policies of the segments are the same as those
described in the accounting policy notes to the financial statements. Corporate
and other includes corporate expenses and special charges.
<TABLE>
<CAPTION>
Building Financial Corporate
For the year or at year end 1998 Paper Products Services and Other Total
- -------------------------------- ----- -------- -------- --------- -----
(in millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 2,017.6 $ 613.0 $ 1,109.5 $ -- $ 3,740.1
Depreciation, depletion and
amortization 206.6 52.9 18.2 4.1 281.8
Operating income 32.5 112.5 154.1 (75.3)* 223.8
Financial Services,
net interest income -- -- 243.5 -- 243.5
Total assets 2,486.6 1,043.2 12,399.6 60.9 15,990.3
Investment in equity method
investees 7.7 29.4 2.8 -- 39.9
Capital expenditures 96.5 73.1 38.9 5.6 214.1
</TABLE>
*Includes a special charge of $47.4 million, of which $37.5 million applies to
the paper segment and $9.9 million applies to the building products segment.
65
<PAGE> 42
<TABLE>
<CAPTION>
Building Financial Corporate
Paper Products Services and Other Total
----- -------- -------- --------- -----
(in millions)
<S> <C> <C> <C> <C> <C>
For the year or at year end 1997:
Revenues from external customers $ 2,062.9 $ 617.3 $ 945.2 $ -- $ 3,625.4
Depreciation, depletion and
amortization 204.7 50.2 15.5 3.4 273.8
Operating income (39.0) 131.1 132.1 (24.6) 199.6
Financial Services, net interest income -- -- 220.7 -- 220.7
Total assets 2,609.9 913.7 10,784.7 55.7 14,364.0
Investment in equity method
investees 7.1 19.2 3.8 -- 30.1
Capital expenditures 150.6 68.7 17.7 13.5 250.5
---------- ------- ----------- ------- -----------
For the year or at year end 1996:
Revenues from external customers $ 2,082.3 $ 562.6 $ 815.4 $ -- $ 3,460.3
Depreciation, depletion and
amortization 197.9 45.8 12.4 3.9 260.0
Operating income 113.0 102.0 63.1 (17.2) 260.9
Financial Services, net interest income -- -- 195.5 -- 195.5
Total assets 2,701.7 870.5 9,335.1 39.8 12,947.1
Investment in equity method
investees 6.2 21.2 0.9 -- 28.3
Capital expenditures 143.8 122.6 15.1 8.9 290.4
---------- ------- ----------- ------- -----------
</TABLE>
66
<PAGE> 43
[PICTURE]
The following table of data includes revenues, property and equipment based on
the location of the operation.
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
FOR THE YEAR:
Revenues from
external customers
United States $ 3,629.8 $ 3,535.9 $ 3,391.0
Canada 3.6 -- --
Mexico 64.2 49.7 41.8
South America 42.5 39.8 27.5
---------- ---------- ----------
Total $ 3,740.1 $ 3,625.4 $ 3,460.3
========== ========== ==========
AT YEAR END:
Property
and equipment
United States $ 2,805.9 $ 2,847.5 $ 2,871.3
Canada 55.6 -- --
Mexico 26.6 27.9 18.5
South America 39.6 40.9 41.1
---------- ---------- ----------
Total $ 2,927.7 $ 2,916.3 $ 2,930.9
========== ========== ==========
</TABLE>
67
<PAGE> 44
NOTE 11 - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly financial results for the years 1998 and 1997 are summarized
below:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
1998*
Total revenues $ 944.6 $ 940.7 $ 943.7 $ 911.1
Manufacturing net sales 682.2 671.2 667.4 609.8
Manufacturing gross profit 98.0 108.4 104.1 84.1
Financial Services
operating income before taxes 36.7 41.0 36.1 40.3(a)
Net income:
Income before accounting change 26.4 34.6 24.4 (17.7)(b)
Accounting change, net of tax (3.2) -- -- --
----------- ----------- ----------- -----------
Net Income $ 23.2 34.6 24.4 (17.7)
----------- ----------- ----------- -----------
Earnings per share:
Basic:
Income before accounting change $ 0.47 $ 0.62 $ 0.44 $ (0.32)
Accounting change, net of tax (0.06) -- -- --
----------- ----------- ----------- -----------
Basic earnings per share $ 0.41 $ 0.62 $ 0.44 $ (0.32)
Diluted:
Income before accounting change $ 0.47 $ 0.62 $ 0.44 $ (0.32)
Accounting change, net of tax (0.06) -- -- --
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.41 $ 0.62 $ 0.44 $ (0.32)
=========== =========== =========== ===========
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
</TABLE>
* First quarter 1998 restated for the cumulative after-tax effect of the change
in method of accounting for start-up costs.
(a) Includes $10.0 million gain on sale of investment property.
(b) Includes special charge of $47.4 million.
68
<PAGE> 45
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 2, 1999, and January 3, 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended January 2, 1999. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Temple-Inland Inc.
and subsidiaries at January 2, 1999, and January 3, 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
As discussed in Note A to the financial statements, in 1998 the company changed
its method of accounting for start-up costs.
/s/ ERNST & YOUNG LLP
Houston, Texas
January 29, 1999
69
<PAGE> 46
Appendix to Exhibit 13
Page 31 Picture of family shopping for greeting cards.
Page 35 Picture of forester measuring tree.
Page 41 Picture of man standing by stack of gypsum wallboard at a
construction site.
Page 47 Picture of couple in newly remodeled kitchen showing cabinets and
laminate flooring.
Page 50 Picture of family at kitchen table with mortgage loan officer.
Page 61 Picture of family with sporting goods in high-graphic corrugated
packaging.
Page 67 Picture of customer in pet store with pet food in high-graphic
corrugated packaging.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF TEMPLE-INLAND INC.
Name (Jurisdiction of Incorporation)
All Subsidiaries are wholly-owned unless noted otherwise.
INLAND CONTAINER CORPORATION I (DELAWARE)
Inland Paperboard and Packaging, Inc.(Delaware)
El Morro Corrugated Box Corporation (Delaware)
El Morro Corrugated Box Corporation (Puerto Rico)
Georgia Kraft Company (Delaware)
Sabine River & Northern Railroad Company (Texas)
Inland Argentina, Inc. (Delaware)
Inland Argentina S.A. (Argentina)
Inland Chile I, Inc. (Delaware)
Manufacturas y Embalajes Inland Chile Limitada (Chile)
Inland Chile II, Inc. (Delaware)
Inland Container FSC, Inc. (U.S. Virgin Islands)
Inland International Holding Company (Delaware)
Inland Corrugados de Mexico, S.A. de C.V. (Mexico)
Inland Corrugados de Guanajato, S.A. de C.V. (Mexico)
Inland Corrugados de Monterrey, S.A. de C.V. (Mexico)
Inland Corrugados de Sinaloa, S.A. de C.V. (Mexico)
TinCorr S.A. (Uruguay)
Inland Paper Company, Inc. (Indiana)
Wesland Container LLC (Arkansas) (50% interest)
TEMPLE-INLAND FINANCIAL HOLDINGS INC. (NEVADA)
TEMPLE-INLAND FOREST PRODUCTS CORPORATION (DELAWARE)
The Angelina Free Press, Inc. (Texas)
Del-Tin Fiber L.L.C. (Arkansas) (50% interest)
Eastex Incorporated (Texas)
Evadale Realty Company (Delaware)
Bestile Manufacturing Company (California)
Fortra Fiber-Cement L.L.C. (Delaware)(50% interest)
Home Owners Trust Company (Texas)
Inland Eastex Extrusion Company (Delaware)
Sabine Investment Company of Texas, Inc. (Texas)
Scotch Investment Company (Texas)
Scotch Properties Management Inc. (Delaware)
Southern Pine Lumber Company (Texas)
Southern Pine Plywood Co. (Texas)
Standard Gypsum L.L.C. (Texas)(50% interest)
Templar Essex Inc. (Delaware)
Temple Associates, Inc. (Texas)
Temple-Eastex Incorporated (Delaware)
Temple Industries, Inc. (Texas)
Temple-Inland Food Service Corporation (Delaware)
Temple-Inland Forest Products International Inc. (Delaware)
Planfosur S. de R.L. de C.V. (Mexico)
Plantaciones Forestales del Sureste, S.A. de C.V. (Mexico)
Temple Pembroke Inc. (New Brunswick, Canada)
507789 N.B. Inc. (New Brunswick, Canada)
Temple-Inland Recaustisizing Company (Delaware)
Temple-Inland Recovery Company (Delaware)
Temple-Inland Stores Company (Delaware)
Temple-Inland Trading Company (Delaware)
Temple Lumber Company (Texas)(100%)
Texas Southeastern Railroad Company (Texas)
Topaz Oil Company (Texas)
<PAGE> 2
EXHIBIT 21 (PAGE 2)
SUBSIDIARIES OF TEMPLE-INLAND INC. (CONTINUED)
Name (Jurisdiction of Incorporation)
All Subsidiaries are wholly-owned unless noted otherwise.
TEMPLE-INLAND FINANCIAL SERVICES INC. (DELAWARE)
Guaranty Holdings Inc. I (Delaware)
Guaranty Federal Bank, F.S.B. (Federal)
Guaranty Group Inc. (Texas)
MBHC Inc. (Nevada)
Temple-Inland Mortgage Corporation (Nevada)
Knutson Mortgage Corporation (Delaware)
Western Cities Mortgage Corporation
(California)
Participation Purchase Corporation (Nevada)
RWHC Inc.(Nevada)
Guaranty Preferred Capital Corporation (Nevada)
Stockton Financial Corporation (California)
Stockton Service Corporation (California)
501 Weber Bldg., Inc. (California)
Temple-Inland Properties Inc. (Delaware)
Texas Mezzanine Fund Inc. (Texas)
Stanford Realty Advisors, Inc. (Delaware)
LIC Investments Inc. (Delaware)
IBHC Inc. (Delaware)
Lumbermen's Investment Corporation (Delaware)
Brehm-Aviara Group LLC (California)
CNB/LIC Investors Ltd. (Texas)
LIC Financial Corporation (Delaware)
LIC Ventures, Inc. (Delaware)
Tampa Palms Apartments, Ltd. (Florida) (69% interest)
Onion Creek Wastewater Corporation (Texas)
Olympia Joint Venture (Texas) (50% interest)
Sunbelt Insurance Company (Texas)
TEEC Inc. (Texas)
Timberline Insurance Managers, Inc. (Texas)
Premium Acceptance Corporation (Texas)
Rubiola, Blair & Associates, Inc. (Texas)
The Insurance Marketplace, Inc. (Texas)
West Houston Residential Development Partners (Texas)
(60% interest)
Temple-Inland Capital Inc. (Delaware)
Temple-Inland Life Inc. (Nevada)
Temple-Inland Insurance Corporation (Delaware)
EB Holdings Inc. (Delaware)
Temple-Inland Realty Inc. (Delaware)
Temco Associates (Georgia)(50% interest)
<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 29, 1999, included in
the 1998 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 29, 1999, 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 2, 1999,
and our report dated January 29, 1999, with respect to the financial statement
schedule included in this Annual Report (Form 10-K) for the year ended January
2, 1999.
<TABLE>
<CAPTION>
REGISTRATION
STATEMENT NO. PURPOSE
- ------------- -------
<S> <C>
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
No. 333-52189 Registration Statement on Form S-3
No. 333-71699 Registration Statement on Form S-4
</TABLE>
/s/ ERNST & YOUNG LLP
Houston, Texas
March 25, 1999
<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>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 244
<SECURITIES> 0
<RECEIVABLES> 290
<ALLOWANCES> 0
<INVENTORY> 335
<CURRENT-ASSETS> 0
<PP&E> 2,928
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,990
<CURRENT-LIABILITIES> 0
<BONDS> 1,793
0
0
<COMMON> 61
<OTHER-SE> 1,937
<TOTAL-LIABILITY-AND-EQUITY> 15,990
<SALES> 2,631
<TOTAL-REVENUES> 3,740
<CGS> 2,561
<TOTAL-COSTS> 3,516
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 124
<INCOME-TAX> 57
<INCOME-CONTINUING> 67
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3
<NET-INCOME> 64
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
</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>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JAN-02-1999 JAN-02-1999 JAN-02-1999
<PERIOD-END> APR-04-1998 JUL-04-1998 OCT-03-1998
<CASH> 196 272 192
<SECURITIES> 0 0 0
<RECEIVABLES> 323 312 314
<ALLOWANCES> 0 0 0
<INVENTORY> 345 339 324
<CURRENT-ASSETS> 0 0 0
<PP&E> 2,891 2,869 2,961
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 14,909 14,690 14,933
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 1,743 1,763 1,804
0 0 0
0 0 0
<COMMON> 61 61 61
<OTHER-SE> 1,977 1,966 1,975
<TOTAL-LIABILITY-AND-EQUITY> 14,909 14,690 14,933
<SALES> 682 1,353 2,021
<TOTAL-REVENUES> 945 1,885 2,829
<CGS> 649 1,278 1,912
<TOTAL-COSTS> 875 1,732 2,607
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 26 53 79
<INCOME-PRETAX> 44 103 147
<INCOME-TAX> 18 42 62
<INCOME-CONTINUING> 26 61 85
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 3 3 3
<NET-INCOME> 23 58 82
<EPS-PRIMARY> .41 1.03 1.47
<EPS-DILUTED> .41 1.03 1.47
</TABLE>
