<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 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-8634
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: (936) 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 THE PACIFIC EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
THE 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. [X]
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 8, 2000, was $1,691,965,581. 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 8, 2000, 52,668,387 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 37 through 75 of the Annual Report to Shareholders for the fiscal
year ended January 1, 2000 -- Parts I and II.
(b) The Company's definitive proxy statement, dated March 24, 2000, in
connection with the Annual Meeting of Shareholders to be held May 5,
2000 -- Part III.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Temple-Inland Inc. ("Temple-Inland" or the "Company") is a holding company
that conducts all of its operations through its subsidiaries. The business of
Temple-Inland is divided among three groups:
- the Paper Group, which manufactures corrugated packaging products,
- the Building Products Group, which manufactures a wide range of building
products and manages the Company's forest resources of approximately 2.2
million acres of timberland in Texas, Louisiana, Georgia, and Alabama,
and
- the Financial Services Group, which consists of savings bank, mortgage
banking, real estate, and insurance brokerage activities.
The Paper Group, which is operated by Inland Paperboard and Packaging, Inc.
("Inland"), is a vertically integrated corrugated packaging operation that
consists of:
- four linerboard mills,
- two corrugating medium mills,
- 40 box plants, and
- eight specialty converting plants.
The Building Products Group is operated by Temple-Inland Forest Products
Corporation (Temple-Inland FPC") and manufactures a wide range of building
products including:
- lumber,
- plywood,
- particleboard,
- medium density fiberboard,
- gypsum wallboard,
- fiber-cement products, and
- fiberboard.
The Financial Services Group is operated by subsidiaries of Temple-Inland
Financial Services Inc. ("Financial Services") and consists of
- savings bank,
- mortgage banking,
- real estate, and
- insurance brokerage activities.
The Company's savings bank, Guaranty Federal Bank, F.S.B. ("Guaranty"),
conducts its business through 155 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 (primarily Fannie Mae, FHLMC, and GNMA),
securitizes the loans, and sells the loans into the secondary market. Real
estate operations include development of residential subdivisions, as well as
the management and sale of income properties. Insurance brokerage activities
include selling a full range of insurance products.
The Company formerly manufactured bleached paperboard. In December 1999,
the Company sold its bleached paperboard mill in Evadale, Texas, and exited the
bleached paperboard business. The Company has classified its bleached paperboard
operation as a discontinued operation. The discussions in this Form 10-K are
based on the Company's continuing operations, except where the context indicates
otherwise.
2
<PAGE> 3
Temple-Inland is a Delaware corporation that was organized in 1983. Its
principal operating subsidiaries include
- Inland Paperboard and Packaging, Inc.,
- Temple-Inland Forest Products Corporation,
- Temple-Inland Financial Services Inc.,
- Guaranty Federal Bank, F.S.B., and
- Temple-Inland Mortgage Corporation.
Temple-Inland's principal executive offices are located at 303 South Temple
Drive, Diboll, Texas 75941. Its telephone number is (936) 829-5511.
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
--------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues
Paper................................... $1,798 $1,642 $1,694 $1,761 $1,910
Building products....................... 768 613 617 563 533
Financial services...................... 1,116 1,036 923 800 754
------ ------ ------ ------ ------
Total revenues.................. $3,682 $3,291 $3,234 $3,124 $3,197
====== ====== ====== ====== ======
Income before taxes
Paper................................... $ 103 $ 39 $ (54) $ 120 $ 333
Building products....................... 174 112 131 102 67
Financial services...................... 138 154 132 63(a) 98
------ ------ ------ ------ ------
Segment operating income........ 415 305 209 285 498
Corporate expense......................... (30) (28) (25) (17) (22)
Special charge(b)......................... -- (47) -- -- --
Parent company interest -- net............ (95) (78) (82) (82) (69)
Other income.............................. 16 6 6 5 4
------ ------ ------ ------ ------
Income from continuing operations before
taxes................................... $ 306 $ 158 $ 108 $ 191 $ 411
====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Includes SAIF assessment of $44 million.
(b) Includes nonrecurring charges related to (1) the impairment of the Paper
Group's investment in its Argentine box plant, (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
71 and 72 of the Company's 1999 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
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Paper(a).......................................... $1,798 $1,642 $1,694 $1,761 $1,910
------ ------ ------ ------ ------
Building Products
Pine lumber..................................... 254 223 262 218 190
Plywood......................................... 68 60 55 52 50
Particleboard................................... 171 141 125 113 99
Medium density fiberboard....................... 57 9 -- -- --
Gypsum wallboard................................ 147 116 105 90 83
Fiberboard...................................... 71 64 66 73 60
Retail distribution(b).......................... -- -- 4 17 51
------ ------ ------ ------ ------
768 613 617 563 533
------ ------ ------ ------ ------
Financial services................................ 1,116 1,036 923 800 754
------ ------ ------ ------ ------
Total revenues.......................... $3,682 $3,291 $3,234 $3,124 $3,197
====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Reclassified to include revenues for 1997, 1996, and 1995 from a subsidiary
that manufactured and marketed paper products for the food service
industry. Related revenues were $66 million, $84 million, and $81 million
in 1997, 1996, and 1995, 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.
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 -------------------------------------
1999 1999 1998 1997 1996 1995
----------- ----- ----- ----- ----- -----
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C> <C>
Paper
Corrugated packaging........................... (a) 2,802 2,519 2,769 2,435 2,333
(IN MILLIONS OF BOARD FEET)
Building products
Pine lumber.................................... 675 618 603 639 605 582
(IN MILLIONS OF SQUARE FEET)
Plywood........................................ 265 296 289 281 259 217
Particleboard(b)............................... 855 574 518 470 399 329
Medium density fiberboard(c)(d)................ 370 187 35 -- -- --
Gypsum wallboard(c)............................ 866 890 858 843 838 813
Fiberboard..................................... 460 439 423 402 457 422
</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
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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 2.1 million tons per year.
(b) 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. The annual capacity for particleboard includes the
200 million square feet design capacity of a particleboard plant in Mt.
Jewett, Pennsylvania, which the Company began operating in December 1999
pursuant to a lease agreement.
(c) 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.
(d) The annual capacity for medium density fiberboard includes the rated annual
capacity of 135 million square feet each for two medium density fiberboard
plants acquired by the Company in September 1998 and 100 million square
feet for a medium density fiberboard plant in Mt. Jewett, Pennsylvania,
which the Company began operating in December 1999 pursuant to a lease
agreement.
NARRATIVE DESCRIPTION OF THE BUSINESS
Temple-Inland is a holding company that conducts all of its operations
through its subsidiaries. The business of Temple-Inland is divided among three
groups:
- the Paper Group, which provided 49 percent of Temple-Inland's
consolidated net revenues for 1999;
- the Building Products Group, which provided 21 percent of Temple-Inland's
consolidated net revenues for 1999; and
- the Financial Services Group, which provided 30 percent of
Temple-Inland's consolidated net revenues for 1999.
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The following chart presents the ownership structure for the significant
subsidiaries of Temple-Inland. It does not contain all the subsidiaries of
Temple-Inland, many of which are dormant or immaterial special-purpose entities.
A complete list of the subsidiaries of Temple-Inland is filed as an exhibit to
this annual report on Form 10-K. Except for Guaranty Federal Bank, F.S.B., which
is jointly owned by Temple-Inland Financial Holdings Inc. and Guaranty Holdings
Inc. I, all subsidiaries shown are 100 percent owned by their immediate parent
company listed in the chart.
Temple-Inland Inc.
Selected Subsidiary Chart
[TEMPLE-INLAND CHART]
PAPER GROUP. The Paper Group manufactures containerboard that it converts
into a complete line of corrugated packaging and point-of-purchase displays.
Approximately 88 percent of the containerboard produced by the Paper Group in
1999 was converted into corrugated containers at its box plants. The Paper
Group'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. The Paper
Group's corrugated boxes are sold to a variety of customers in the food, paper,
glass containers, chemical, appliance, and plastics industries, among others.
The Paper Group's corrugated packaging operation 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, the Paper Group serves about 7,000
customers with approximately 11,000 shipping destinations. The largest single
customer accounted for approximately four percent and the ten largest customers
accounted for approximately 27 percent of the 1999 corrugated packaging
revenues.
6
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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. As e-commerce develops, the fulfillment and shipping of orders will be
of critical importance. This could result in a steepening of the demand curve
for boxes.
During 1999, the Company announced it had entered into a joint venture to
form a new company, Premier Boxboard Limited LLC, to own and operate
Temple-Inland's containerboard mill in Newport, Indiana. The joint venture is in
the process of a 14-month, $70 million project to modify the mill to produce a
lightweight gypsum facing paper. The conversion should be completed in the third
quarter of 2000 and will increase the group's integration level and diversify
its product lines.
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 products, and fiberboard. The
Building Products Group also manages the Company's 2.2 million acres of
timberland, which are located in Texas, Louisiana, Georgia, and Alabama.
The group sells building products throughout the continental United States
and in Canada, with the majority of sales occurring 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 original equipment manufacturer accounts.
Approximately 84 percent of particleboard sales are to commercial fabricators,
such as manufacturers of cabinets and furniture. The ten largest customers
accounted for approximately 26 percent of the Building Products Group's 1999
sales. The building products business is heavily dependent upon the level of
residential housing expenditures, including the repair and remodeling market.
In December 1999, the Company entered into a lease agreement with Allegheny
Particleboard L.P. and Allegheny MDF L.P. to operate, for a term of 20 years, a
particleboard facility and a medium density fiberboard (MDF) facility located in
Mt. Jewett, Pennsylvania. The particleboard facility has the design capacity to
produce approximately 200 million square feet annually, and the MDF facility has
the design capacity to produce approximately 100 million square feet annually.
The Building Products Group is a 50 percent owner in three joint ventures:
Del-Tin Fiber LLC, which produces medium density fiberboard at a facility in
Arkansas; Fortra Fiber-Cement LLC, which produces fiber-cement products at a
plant in Texas; and Standard Gypsum LLC, which produces gypsum wallboard at a
plant and related quarry in Texas and a plant in Tennessee.
During 1998, the Company announced its intention to change the focus of the
operations at its plywood plant. This plant will continue to produce veneer
products, and a state-of-the-art sawmill will be added to the site. This change,
which should be completed in the first half of 2001, will permit the Building
Products Group 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, and insurance brokerage
activities.
Savings Bank. Guaranty is a federally-chartered stock savings bank that
conducts its business through 155 banking centers. 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.
The California operations are concentrated in Southern California and the
Central Valley. 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.
In June 1999, the Company acquired HF Bancorp, Inc., the parent company of
Hemet Federal Savings & Loan Association ("Hemet") based in Hemet, California,
for approximately $119 million in cash. Hemet,
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<PAGE> 8
with $1.2 billion in assets and 18 branches, was merged into Guaranty. The
former Hemet branches are located in Southern California, primarily in San Diego
and Riverside Counties.
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 interest paid on consumer deposits and other
borrowings. The operations of Guaranty, like those of other savings
institutions, are significantly influenced by general economic conditions; the
monetary, fiscal, and regulatory policies of the federal government; and 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.
In addition to other minimum capital standards, regulations of the Office
of Thrift Supervision ("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 of Guaranty believes that as of
year end, Guaranty met all capital adequacy requirements. In order to remain in
the lowest tier of Federal Deposit Insurance Corporation insurance premiums,
Guaranty must meet a leverage capital ratio of at least 5 percent of adjusted
total assets. At year end 1999, Guaranty had a leverage capital ratio of 8.22
percent of adjusted total assets.
Mortgage Banking. The mortgage banking operation of the Financial Services
Group is headquartered in Austin, Texas, and originates, warehouses, and
services FHA, VA, and conventional mortgage loans primarily on single family
residential property. The mortgage banking operation originates mortgage loans
for sale into the secondary market through 62 offices located throughout the
United States. The Company typically retains the servicing rights on these
loans, but periodically sells some portion of its servicing to third parties.
Servicing operations are centralized in Austin, Texas. At the end of 1999, the
mortgage banking operation was servicing $22.2 billion in mortgage loans,
including loans serviced for affiliates. The mortgage banking operation produced
$3.7 billion in mortgage loans during 1999.
Real Estate. The Financial Services Group is involved in the development of
38 residential subdivisions in Texas, California, Colorado, Florida, Georgia,
Missouri, Tennessee, and Utah. Real estate activities also include ownership of
18 commercial properties, including properties owned by subsidiaries through
joint venture interests.
Insurance Brokerage. Subsidiaries of the Financial Services Group are
engaged in the brokerage of commercial and personal lines 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 a risk manager of Temple-Inland. An affiliate of the
insurance agency sells annuities through banks and savings banks, including
Guaranty.
Statistical Disclosures. The following tables present various statistical
and financial information for the Financial Services Group.
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The following schedule presents the average balances, interest
income/expense, and rates earned or paid by major balance sheet category for the
years 1997 through 1999:
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST SPREAD
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
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............................. $ 27 $ 1 5.36% $ 26 $ 1 5.27% $ 71 $ 4 5.71%
Mortgage-backed and other
securities........................ 2,347 126 5.36% 2,606 150 5.76% 2,802 162 5.75%
Securities purchased under
agreements to resell, agency
discount notes, federal funds
sold, and commercial paper........ 66 3 4.94% 62 3 5.47% 333 18 5.51%
Loans receivable and mortgage loans
held for sale(1).................. 9,377 705 7.52% 7,610 583 7.66% 6,618 525 7.93%
Other............................... 10 1 4.98% 13 1 4.80% 7 -- 6.22%
------- ---- ------- ---- ------- ----
Total interest-earning
assets....................... 11,827 $836 7.07% 10,317 $738 7.16% 9,831 $709 7.21%
==== ==== ====
Cash................................. 102 100 100
Other assets......................... 1,069 924 786
------- ------- -------
Total assets.................. $12,998 $11,341 $10,717
======= ======= =======
LIABILITIES AND SHAREHOLDERS EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand............. $ 1,851 $ 56 3.04% $ 1,177 $ 27 2.31% $ 1,100 $ 26 2.40%
Savings deposits.................... 215 5 2.17% 215 5 2.25% 212 5 2.22%
Time deposits....................... 6,052 318 5.25% 5,866 325 5.55% 5,416 300 5.54%
------- ---- ------- ---- ------- ----
Total interest-bearing
deposits..................... 8,118 379 4.66% 7,258 357 4.92% 6,728 331 4.92%
Advances from the Federal Home Loan
Bank.............................. 2,683 139 5.19% 1,892 107 5.63% 1,277 79 6.19%
Securities sold under repurchase
agreements........................ 112 5 4.98% 349 20 5.62% 1,297 68 5.24%
Other borrowings.................... 217 14 6.30% 203 11 5.53% 148 10 6.82%
------- ---- ------- ---- ------- ----
Total interest-bearing
liabilities.................. 11,130 $537 4.83% 9,702 $495 5.10% 9,450 $488 5.17%
==== ==== ====
Noninterest-bearing demand........... 111 63 61
Other liabilities.................... 620 726 476
Stock issued by subsidiary........... 227 197 90
Shareholder's equity................. 910 653 640
------- ------- -------
Total liabilities and
shareholder's equity......... $12,998 $11,341 $10,717
======= ======= =======
Net interest income.................. $299 $243 $221
==== ==== ====
Net yield on interest-earning
assets.............................. 2.53% 2.36% 2.25%
==== ==== ====
</TABLE>
- ---------------
(1) Nonaccruing loans are included in average loans receivable.
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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(1)
<TABLE>
<CAPTION>
1999 COMPARED WITH 1998 1998 COMPARED WITH 1997
-------------------------- --------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ----- ------ ------- ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-earning deposits in other
banks................................. $ -- $ -- $ -- $(2) $ -- $(2)
Mortgage-backed and other securities..... (14) (10) (24) (11) -- (11)
Securities purchased under agreements to
resell, agency discount notes, federal
funds sold, and commercial paper...... -- -- -- (15) -- (15)
Loans receivable and mortgage loans held
for sale.............................. 133 (11) 122 76 (19) 57
---- ---- ---- --- ---- ---
Total interest income............ $119 $(21) $ 98 $48 $(19) $29
==== ==== ==== === ==== ===
Interest expense:
Deposits:
Interest-bearing demand............... $ 19 $ 10 $ 29 $ 2 $ (1) $ 1
Time deposits......................... 10 (17) (7) 25 -- 25
---- ---- ---- --- ---- ---
Total interest on deposits....... 29 (7) 22 27 (1) 26
Advances from the Federal Home Loan
Bank.................................. 41 (9) 32 35 (8) 27
Securities sold under repurchase
agreements............................ (12) (2) (14) (53) 5 (48)
Other borrowings......................... 1 2 3 3 (2) 1
---- ---- ---- --- ---- ---
Total interest expense........... $ 59 $(16) $ 43 $12 $ (6) $ 6
==== ==== ==== === ==== ===
Net interest income........................ $ 60 $ (5) $ 55 $36 $(13) $23
==== ==== ==== === ==== ===
</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.
The following table sets forth the carrying amount of mortgage-backed and
other securities as of the dates indicated:
TYPES OF INVESTMENTS
<TABLE>
<CAPTION>
AT YEAR END
------------------------
1999 1998 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Held-to-Maturity:
Mortgage-backed securities................................ $1,061 $1,413 $1,768
Available-for-Sale:
Mortgage-backed securities................................ 1,256 892 948
Debt securities
U.S. government........................................ 7 -- --
Corporate.............................................. 2 3 3
Equity securities, primarily
Federal Home Loan Bank Stock........................... 166 177 86
------ ------ ------
$2,492 $2,485 $2,805
====== ====== ======
</TABLE>
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<PAGE> 11
The table below sets forth the maturities of mortgage-backed and other
securities as of year end 1999:
MATURITY DISTRIBUTION OF MORTGAGE-BACKED AND OTHER 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.............. $ -- -- $ -- -- $ -- -- $ -- -- $1,061 5.08% $1,061
Available-for-Sale:
Mortgage-backed
securities.............. -- -- -- -- -- -- -- -- 1,256 6.11% 1,256
Debt securities
U.S. Government......... 7 4.64% -- -- -- -- -- -- -- -- 7
Corporate............... -- -- -- -- 1 6.20% 1 7.02% -- -- 2
Equity securities,
primarily
Federal Home Loan Bank
stock................. -- -- -- -- -- -- -- -- 166 5.75% 166
----- ----- ----- ----- ------ ------
$ 7 $ -- $ 1 $ 1 $2,483 $2,492
===== ===== ===== ===== ====== ======
</TABLE>
The following table shows the loan distribution for the Financial Services
Group:
TYPES OF LOANS
<TABLE>
<CAPTION>
AT YEAR END
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate mortgage.............................. $3,763 $4,105 $3,997 $3,784 $3,506
Construction and development (including
residential).................................... 3,253 2,210 1,379 1,013 787
Commercial and business........................... 1,265 1,031 582 284 182
Consumer and other................................ 1,121 827 565 393 356
Premiums, discounts and deferred fees, net........ 7 15 19 8 (1)
------ ------ ------ ------ ------
9,409 8,188 6,542 5,482 4,830
Less:
Allowance for loan losses....................... 113 87 91 68 66
------ ------ ------ ------ ------
$9,296 $8,101 $6,451 $5,414 $4,764
====== ====== ====== ====== ======
</TABLE>
The table below presents the maturity distribution of loans (excluding real
estate mortgage and consumer and other loans) outstanding at year-end 1999,
based on scheduled repayments. The amounts due after one year, classified
according to the sensitivity to changes in interest rates, are also provided.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
MATURING
------------------------------------
WITHIN 1 1 TO 5 AFTER 5
YEAR YEARS YEARS TOTAL
-------- ------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Construction and development (including residential)........ $2,915 $332 $ 6 $3,253
Commercial and business..................................... 793 461 11 1,265
------ ---- --- ------
$3,708 $793 $17 $4,518
====== ==== === ======
Loans maturing after 1 year with:
Fixed interest rates...................................... $ -- $ 40 $16 $ 56
Variable interest rates................................... -- 753 1 754
------ ---- --- ------
$ -- $793 $17 $ 810
====== ==== === ======
</TABLE>
11
<PAGE> 12
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 1.0 percent of total loans at year-end 1999, 0.7 percent of
total loans at year-end 1998, 1.1 percent of total loans at year-end 1997, and
less than two percent of total loans at year-end 1996 and 1995. The aggregate
amounts and the interest income foregone on such loans are immaterial.
The recorded investment in impaired loans was $78.9 million at December 31,
1999, and $13.4 at December 31, 1998, with a related allowance for loan losses
of $34.3 million and $8.0 million, respectively. The average recorded investment
in impaired loans during the years ended December 31, 1999 and 1998, was
approximately $34.3 million and $23.5 million, respectively. The related amount
of interest income recognized for the years ended December 31, 1999 and 1998, on
impaired loans was immaterial.
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>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............................... $ 87 $91 $68 $66 $54
Charge-offs:
Real estate mortgage..................................... (16) (6) (5) (6) (4)
Commercial and business.................................. (7) -- (1) (3) (1)
Consumer and other....................................... (2) (2) (2) (4) (5)
---- --- --- --- ---
(25) (8) (8) (13) (10)
Recoveries:
Real estate mortgage..................................... -- 3 1 2 1
Commercial and business.................................. -- -- -- -- 1
Consumer and other....................................... 1 -- 1 1 1
---- --- --- --- ---
1 3 2 3 3
---- --- --- --- ---
Net charge-offs.................................. (24) (5) (6) (10) (7)
Additions charged to operations............................ 38 1 (2) 13 15
Additions related to bulk purchases of loans, net of
adjustments.............................................. 12(a) -- 31(b) (1) 4
---- --- --- --- ---
Balance at end of year..................................... $113 $87 $91 $68 $66
==== === === === ===
Ratio of net charge-offs during the year to average loans
outstanding during the year.............................. .27% .07% .10% .20% .16%
==== === === === ===
</TABLE>
- ---------------
(a) Principally related to the loan portfolio from the acquisition of Hemet.
(b) Principally related to the loan portfolio from the acquisition of Stockton
Savings Bank, F.S.B.
12
<PAGE> 13
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AT YEAR END
-----------------------------------------------------------------------------------------------------
1999 1998 1997 1996
----------------------- ----------------------- ----------------------- -----------------------
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............ $ 80 40% $49 50% $54 61% $48 69%
Construction and
development......... 5 35% 4 27% 7 21% 2 19%
Commercial and
business............ 11 13% 14 13% 4 9% 1 5%
Consumer and other... 5 12% 3 10% 3 9% 4 7%
Unallocated.......... 12 -- 17 -- 23 -- 13 --
---- --- --- --- --- --- --- ---
$113 100% $87 100% $91 100% $68 100%
==== === === === === === === ===
<CAPTION>
AT YEAR END
-----------------------
1995
-----------------------
PERCENT OF
AMOUNT OF LOANS TO
ALLOWANCE TOTAL LOANS
--------- -----------
<S> <C> <C>
Real estate
mortgage............ $53 73%
Construction and
development......... 2 16%
Commercial and
business............ 1 4%
Consumer and other... 4 7%
Unallocated.......... 6 --
--- ---
$66 100%
=== ===
</TABLE>
The amount charged to operations and the related balance in the allowance
for loan losses are based on periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including without
limitation, past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current economic conditions.
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 a specific 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. 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 unallocated allowance for loan losses is
determined based on management's assessment of general economic conditions as
well as specific economic factors in individual markets. The evaluation of the
appropriate level of unallocated allowance considers current risk factors that
may not be reflected in historical trends used to determine the allowance on
criticized and pass graded loans. These factors may include inherent delays in
obtaining information regarding a borrower's financial condition or changes in
their unique business conditions; the judgmental nature of individual loan
evaluations, collateral assessments and the interpretation of economic trends;
volatility of economic or customer-specific conditions affecting the
identification and estimation of losses for larger non-homogenous loans; and the
sensitivity of assumptions used to establish general allowances for homogenous
groups of loans. In addition, the unallocated allowance recognizes that ultimate
knowledge of the loan portfolios may be incomplete.
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.
13
<PAGE> 14
The amount of time deposits of $100,000 or more and related maturities at
year end 1999, are disclosed in Note E to Financial Services Group Summarized
Financial Statements on page 57 of the Company's 1999 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>
1999 1998 1997
----- ----- ------
<S> <C> <C> <C>
Return on average assets.................................... 0.93% 1.12% 1.04%
Return on average equity.................................... 13.29% 19.48% 17.41%
Dividend payout ratio....................................... 57.85% 47.17% 246.72%
Equity to assets ratio...................................... 7.00% 5.76% 5.97%
</TABLE>
Short-term borrowings. The following table shows short-term borrowings
outstanding for the Financial Services Group:
SHORT-TERM BORROWINGS
(IN MILLIONS)
<TABLE>
<CAPTION>
WEIGHTED MAXIMUM AVERAGE WEIGHTED
AVERAGE AMOUNT AMOUNT AVERAGE
BALANCE AT INTEREST RATE AT OUTSTANDING OUTSTANDING INTEREST RATE
YEAR END YEAR END DURING THE YEAR DURING THE YEAR DURING THE YEAR
---------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1999
Securities sold under
agreements to
repurchase................ -- -- $ 223 $ 112 5.0%
Short-term FHLB advances.... $2,151 5.7% $3,431 $2,683 5.2%
1998
Securities sold under
agreements to
repurchase................ -- -- $1,255 $ 349 5.6%
Short-term FHLB advances.... $2,252 4.9% $2,290 $1,382 5.4%
1997
Securities sold under
agreements to
repurchase................ $ 270 5.9% $1,697 $1,297 5.2%
Short-term FHLB advances.... $1,129 5.9% $1,129 $ 871 6.1%
</TABLE>
- ---------------
Note: Certain short-term FHLB advances and securities sold under agreements to
repurchase generally mature within 30 days of the transaction date.
Average borrowings during the year were calculated based on daily
balances.
DISCONTINUED OPERATIONS. The Company's bleached paperboard operation
produced various grades and weights of coated and uncoated paperboard for use in
high-quality printing and publishing applications, greeting cards, office
supplies, and foodware. In December 1999, the Company sold its bleached
paperboard business, including the mill located in Evadale, Texas, to Westvaco
Corporation for approximately $658 million, including adjustments for working
capital. As part of the transaction, the Company entered into a long-term
agreement with Westvaco to provide fiber to the Evadale mill at market rates.
Based on current pricing, the Company expects revenue from this agreement to be
approximately $40 to $45 million per year. The eucalyptus fiber project in
Mexico, which was to be a source of hardwood fiber to the bleached paperboard
mill, is expected to be sold during 2000.
14
<PAGE> 15
The Company sold bleached paperboard products to a large number of
customers. During 1999, 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.
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 1999, 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 MATERIAL INTERNALLY
- ------------ ----------
<S> <C>
Sawtimber................................................ 60%
Pine Pulpwood............................................ 65%
Hardwood Pulpwood........................................ 35%
</TABLE>
The balance of the wood fiber required for these operations was purchased
from numerous landowners and other lumber companies. With the sale of the
bleached paperboard operation, the Company expects that the percentage of
internally-supplied pine pulpwood and hardwood pulpwood will increase.
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 1999, 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 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 one outside source through a long-term purchase
contract. At its gypsum wallboard plant in West Memphis, Arkansas, and the joint
venture gypsum wallboard plant in Cumberland City, Tennessee, synthetic gypsum
is used as a raw material. Synthetic gypsum is a by-product of coal-burning
electrical power plants. The Company has entered into a long-term supply
agreement for synthetic gypsum produced at a Tennessee Valley Authority
electrical plant located adjacent to the Cumberland City plant. Synthetic gypsum
acquired pursuant to this agreement will supply all the synthetic gypsum
required by the Cumberland City 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
15
<PAGE> 16
was able to generate approximately 60 percent of its energy requirements at its
mills in Rome, Georgia, and Orange, Texas, during 1999. 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.
EMPLOYEES
At January 1, 2000, the Company and its subsidiaries had approximately
14,400 employees. Approximately 4,400 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>
Linerboard Mill, Paper, Allied-Industrial, 230 hourly Production July 31, 2005
Orange, Texas Chemical and Energy Employees and 121 hourly
Workers Intl. ("PACE"), Maintenance Employees
Local 1398, and PACE,
Local 391
Linerboard Mill, PACE, Local 804, 312 hourly Production July 31, 2006
Rome, Georgia International Brotherhood Employees, 38 Electrical
of Electrical Workers, Maintenance Employees, and
Local 613, United 190 hourly Maintenance
Association of Journeymen Employees
& Apprentices of the
Plumbing & Pipefitting
Industry of the U.S. and
Canada, Local 72, and
International Association
of Machinists & Aerospace
Workers, Local 414
Evansville, Indiana, PACE, Local 1046, PACE, 112, 104, and 97 hourly April 30, 2002
Louisville, Kentucky, Local 1737,and PACE, Local Production Employees,
and Middletown, 114, respectively respectively
Ohio, Box Plants
("Northern Multiple")
Rome, Georgia, and PACE Local 838 and PACE 146 and 104 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,
16
<PAGE> 17
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"),
and Resource Conservation and Recovery Act ("RCRA"), has required the Company to
invest substantial funds to modify facilities to assure compliance with
applicable environmental regulations. Capital expenditures directly related to
environmental compliance totaled approximately $33 million during 1999. 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
2000 through 2002 will average approximately $20 million each year. The
estimated expenditures could be significantly higher if more stringent laws and
regulations are implemented.
On April 15, 1998, 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"). Compliance with various phases of the
Cluster Rule will be required at certain intervals over the next few years.
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 estimated capital expenditures
disclosed above do not include expenditures that may be needed to comply with
the Cluster Rule. Based upon its interpretation of the Cluster Rule as issued,
the Company currently estimates that compliance with the rule may require
modifications at several facilities. Some of these modifications can be included
in modernization projects that will provide economic benefits to the Company.
Excluding these investments, the Company has incurred approximately $1 million
toward Cluster Rule compliance through the end of 1999, excluding such
expenditures related to discontinued operations, and expects that remaining
expenditures related to Cluster Rule compliance will not exceed an additional
$20 million by the initial compliance deadline of April 15, 2001.
New effluent (water) quality standards for unbleached paper mills were not
included in the phase I Cluster Rule as promulgated. These standards are
expected to be promulgated between 2000 and 2002. Also not included in the phase
I Cluster Rule was the proposed Maximum Achievable Control Technology ("MACT")
II Standard for the control of hazardous air pollutant emissions from pulp and
paper mill combustion sources. The timeline for final promulgation of the MACT
II Standard for the control of hazardous air pollutant emissions is uncertain at
this time pending resolution of substantive issues raised during the public
comment period and as subsequently addressed by industry stakeholder groups.
Preliminary estimates indicate that the Company could be required to make total
capital expenditures of up to $40 million over the next few years following
issuance of these final rules.
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
17
<PAGE> 18
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 influencing the Company's competitive position vary depending on the
characteristics of the products involved. The primary factors are product
quality and performance, price, service, and product innovation.
The corrugated packaging industry is highly competitive with almost 1,500
box plants in the United States. Box plants operated by Inland and its
subsidiaries accounted for approximately 8.1 percent of total industry shipments
during 1999. 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.
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.
The Financial Services Group competes with commercial banks, savings and
loan associations, mortgage banks, and other lenders in its mortgage banking and
savings bank activities, and with real estate investment and management
companies in its real estate activities. The financial services industry is a
highly competitive business, and a number of entities with which the Company
competes have greater resources.
EXECUTIVE OFFICERS OF THE REGISTRANT
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>
Kenneth M. Jastrow, II................ 52 Chairman of the Board and Chief
Executive Officer
William B. Howes...................... 62 Executive Vice President
Harold C. Maxwell..................... 59 Executive Vice President
Bart J. Doney......................... 50 Group Vice President
Kenneth R. Dubuque.................... 51 Group Vice President
James C. Foxworthy.................... 48 Group Vice President
Jack C. Sweeny........................ 53 Group Vice President
M. Richard Warner..................... 48 Chief Administrative Officer, Vice
President, and General Counsel
Randall D. Levy....................... 49 Chief Financial Officer
David H. Dolben....................... 64 Vice President and Chief Accounting
Officer
Louis R. Brill........................ 58 Vice President, Controller
David W. Turpin....................... 49 Treasurer
Leslie K. O'Neal...................... 44 Assistant General Counsel and
Secretary
</TABLE>
Kenneth M. Jastrow, II became Chairman of the Board and Chief Executive
Officer of the Company on January 1, 2000. Mr. Jastrow previously served the
Company in various capacities since 1991, including Chief
18
<PAGE> 19
Financial Officer and Group Vice President. 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.
Harold C. Maxwell became Executive Vice President of the Company in
February 2000 after serving as Group Vice President since 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.
Bart J. Doney became Group Vice President of the Company in February 2000.
Mr. Doney has served Inland as Executive Vice President, Packaging since June
1998, Senior Vice President from 1996 until 1998, and Vice President, Sales and
Administration, Containerboard Division from 1990 to 1996.
Kenneth R. Dubuque became Group Vice President of the Company in February
2000. In October 1998, Mr. Dubuque was named President and Chief Executive
Officer of Guaranty. From 1996 until 1998, Mr. Dubuque served as Executive Vice
President and Manager -- International Trust and Investment of Mellon Bank
Corporation. From 1991 until 1996, he served as Chairman, President and Chief
Executive Officer of the Maryland, Virginia, and Washington, D.C., operating
subsidiary of Mellon Bank Corporation.
James C. Foxworthy became Group Vice President of the Company in February
2000. Mr. Foxworthy also serves as Executive Vice President, Paperboard of
Inland, a position he has held since June 1998. From 1995 until 1998, he served
as Senior Vice President of Inland.
Jack C. Sweeny became a Group Vice President of the Company in May 1996. He
also serves as Executive Vice President, Forest/Solid Wood 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.
M. Richard Warner became Vice President and General Counsel of the Company
in June 1994 and was named Chief Administrative Officer in May 1999.
Randall D. Levy became Chief Financial Officer of the Company in May 1999.
Mr. Levy joined Guaranty in 1989 serving in various capacities, including
Treasurer and most recently as Chief Operating Officer since 1994.
David H. Dolben became Vice President and Chief Accounting Officer 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.
Louis R. Brill became Vice President, Controller of the Company in December
1999. Before joining the Company in 1999, Mr. Brill was a partner of Ernst &
Young LLP for 25 years.
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.
Leslie K. O'Neal became Secretary of the Company in February 2000 after
serving as Assistant Secretary since 1995. Ms. O'Neal also serves as Assistant
General Counsel of the Company, a position she has held since 1985. Ms. O'Neal
also serves as Secretary of various subsidiaries of the Company.
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.
19
<PAGE> 20
ITEM 2. PROPERTIES
The Company owns and operates manufacturing facilities throughout the
United States, three box plants in Mexico, and box plants in 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 1999
LOCATION PRODUCT MACHINES CAPACITY PRODUCTION
- -------- ---------- -------- -------- ----------
(IN TONS)
<S> <C> <C> <C> <C>
Ontario, California................................ Linerboard 1 365,000 334,331
Rome, Georgia...................................... Linerboard 2 795,000 793,314
Orange, Texas...................................... Linerboard 2 545,000 593,593
Maysville, Kentucky................................ Linerboard 1 425,000 408,625
Newport, Indiana*.................................. Medium 1 285,000 267,028
New Johnsonville, Tennessee........................ Medium 1 265,000 259,340
</TABLE>
- ---------------
* As part of a joint venture, the Company is in the process of converting this
mill for the production of gypsum wallboard facing paper.
20
<PAGE> 21
CORRUGATED CONTAINER PLANTS*
<TABLE>
<CAPTION>
DATE
CORRUGATOR ACQUIRED OR
LOCATION SIZE CONSTRUCTED
- -------- ----------- -----------
<S> <C> <C>
Fort Smith, Arkansas........................................ 87inches 1978
Fort Smith, Arkansas(1)***.................................. None 1996
Bell, California............................................ 97inches 1974
El Centro, California(1).................................... 87inches 1990
Ontario, California......................................... 87inches 1985
Santa Fe Springs, California................................ 97inches 1973
Tracy, California**......................................... 87inches 1979
Wheat Ridge, Colorado....................................... 87inches 1970
Orlando, Florida............................................ 98inches 1955
87inches &
Rome, Georgia**............................................. 98inches 1955
Chicago, Illinois........................................... 87inches 1958
Crawfordsville, Indiana..................................... 98inches 1972
Evansville, Indiana......................................... 98inches 1938
Garden City, Kansas......................................... 98inches 1981
Kansas City, Kansas......................................... 87inches 1981
Louisville, Kentucky........................................ 92inches 1958
Minden, Louisiana........................................... 98inches 1978
Minneapolis, Minnesota...................................... 87inches 1959
Hattiesburg, Mississippi.................................... 87inches 1965
St. Louis, Missouri......................................... 87inches 1963
Middlesex, New Jersey(1)***................................. None 1999
Spotswood, New Jersey....................................... 87inches 1964
Middletown, Ohio............................................ 98inches 1929
Streetsboro, Ohio........................................... 98inches 1997
Biglerville, Pennsylvania................................... 98inches 1932
Hazleton, Pennsylvania...................................... 98inches 1976
Vega Alta, Puerto Rico...................................... 87inches 1977
Lexington, South Carolina................................... 98inches 1973
Rock Hill, South Carolina................................... 87inches 1972
Elizabethton, Tennessee..................................... 98inches 1982
Elizabethton, Tennessee(1)***............................... None 1990
Nashville, Tennessee(1)***.................................. None 1998
Dallas, Texas............................................... 98inches 1962
Edinburg, Texas............................................. 87inches 1988
Petersburg, Virginia........................................ 87inches 1991
Petersburg, Virginia(1)***.................................. None 1998
San Jose Iturbide, Mexico................................... 87inches 1994
Monterrey, Mexico........................................... 87inches 1994
Los Mochis, Sinaloa, Mexico................................. 80inches 1997
Santiago, Chile............................................. 87inches 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.
21
<PAGE> 22
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,
Santa Fe Springs, and Ontario, California; and Rural Hall, North Carolina.
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.
** During the first half of 2001, this facility will be replaced with a
state-of-the-art sawmill.
<TABLE>
<CAPTION>
RATED
ANNUAL
DESCRIPTION LOCATION CAPACITY
- ----------- -------- ---------------
(IN MILLIONS OF
SQUARE FEET)
<S> <C> <C>
Fiberboard............................. Diboll, Texas 460
Particleboard.......................... Monroeville, Alabama 150
Particleboard.......................... Thomson, Georgia 145
Particleboard.......................... Diboll, Texas 140
Particleboard.......................... Hope, Arkansas 220
Particleboard(1)....................... Mt. Jewett, Pennsylvania 200
Plywood................................ Pineland, Texas 265**
Gypsum Wallboard....................... West Memphis, Arkansas 400
Gypsum Wallboard....................... Fletcher, Oklahoma 466
Gypsum Wallboard*...................... McQueeney, Texas 380
Gypsum Wallboard*...................... Cumberland City, Tennessee 700
Medium Density Fiberboard.............. Clarion, Pennsylvania 135
Medium Density Fiberboard.............. Pembroke, Ontario, Canada 135
Medium Density Fiberboard*............. El Dorado, Arkansas 150
Medium Density Fiberboard(1)........... Mt. Jewett, Pennsylvania 100
Fiber-cement*.......................... Waxahachie, Texas 126
</TABLE>
- ---------------
* The table shows the full capacity of this facility that is owned by a joint
venture in which a subsidiary of the Company has a 50 percent interest.
** As part of the Company's plans for the Pineland complex, which are expected
to be completed in the first half of 2001, this facility will be limited to
the production of veneer.
(1) Leased facilities.
22
<PAGE> 23
TIMBER AND TIMBERLANDS*
(IN ACRES)
<TABLE>
<S> <C>
Pine Plantations............................................ 1,423,507
Natural Pine................................................ 123,083
Hardwood.................................................... 126,925
Special Use/Non-Forested.................................... 485,592
---------
Total............................................. 2,159,107
=========
</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 $5.4 million in
1999. Additionally, the Company owns 395,830 mineral acres in Alabama and
Georgia, which produced no lease or production revenue in 1999.
At year end 1999, property and equipment having a net book value of
approximately $56 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.
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. 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
23
<PAGE> 24
conducted investigations of the sites and in certain instances believe that
there is no basis for liability and have so informed the governmental entities.
The internal investigations of the remaining sites reveal that the portion of
the remediation costs for these sites to be allocated to the Company should be
relatively small and will have no material impact on the Company. There can be
no assurance that subsidiaries of the Company will not be named as potentially
responsible parties at additional Superfund sites in the future or that the
costs associated with the remediation of those sites would not be material.
All litigation has an element of uncertainty and the final outcome of any
legal proceeding cannot be predicted with any degree of certainty. With these
limitations in mind, the Company presently believes that any ultimate liability
from the legal proceedings discussed herein would not have a material adverse
effect on the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its 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 46 of the Company's
1999 Annual Report to Shareholders furnished to the Securities and Exchange
Commission pursuant to Rule 14a-3(b).
SHAREHOLDERS
The Company's stock transfer records indicated that as of March 8, 2000,
there were approximately 6,258 holders of record of the Common Stock.
DIVIDEND POLICY
On February 4, 2000, the Board of Directors declared a quarterly dividend
on the Common Stock of $0.32 per share payable on March 15, 2000, to
shareholders of record on March 1, 2000. The quarterly dividend has been $0.32
per share since the dividend paid 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 46 of the Company's 1999 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 37 through 46 of the Company's 1999 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 Temple-Inland may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such
differences include general economic, market, or business conditions; the
opportunities (or lack thereof) that may be presented to and pursued by Temple-
24
<PAGE> 25
Inland and its subsidiaries; the availability and price of raw materials used by
Temple-Inland and its subsidiaries; competitive actions by other companies;
changes in laws or regulations; and other factors, many of which are beyond the
control of Temple-Inland and its subsidiaries.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST
RATE RISK
The Company is subject to interest rate risk from the utilization of
financial instruments such as 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 1999, with comparative information at year end 1998:
<TABLE>
<CAPTION>
INCREASE/(DECREASE) IN
INCOME
BEFORE TAXES
CHANGE IN ----------------------
INTEREST RATES 1999 1998
- -------------- ------- -------
(IN MILLIONS)
<S> <C> <C>
+2%............................................... $ (1) $(26)
+1%............................................... $ -- $ (1)
0................................................ $ -- $ --
- -1%............................................... $ (1) $ 10
- -2%............................................... $(16) $ 29
</TABLE>
The change in exposure to interest rate risk from year end 1998 is due
primarily to a decrease in the Company's adjustable-rate debt obligations and
the diminishing impact at Guaranty of interest rate hedge contracts that have
matured or are significantly closer to maturity.
Additionally, the fair value of the Financial Services Group's mortgage
servicing rights (estimated at $329 million at year end 1999) is also affected
by changes in interest rates. The Company estimates that a one percent decline
in interest rates from year-end levels would decrease the fair value of the
mortgage servicing rights by approximately $47 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 significant 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.
25
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
from pages 5 through 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 12 through 19 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
pages 8 and 9 of the Company's Definitive Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Report.
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
ITEM NUMBER
- ---- ------
<S> <C>
Temple-Inland Inc. and Subsidiaries
Report of Independent Auditors............................ 75
Consolidated Statements of Income -- for the years 1999,
1998, and 1997......................................... 61
Consolidating Balance Sheets at year end 1999 and 1998.... 63
Consolidated Statements of Shareholders' Equity -- for the
years 1999, 1998, and 1997............................. 64
Consolidated Statements of Cash Flows -- for the years
1999, 1998, and 1997................................... 62
Notes to Consolidated Financial Statements................ 65-74
Parent Company (Temple-Inland Inc.)
Summarized Statements of Income -- for the years 1999,
1998, and 1997......................................... 47
Summarized Balance Sheets at year end 1999 and 1998....... 48
Summarized Statements of Cash Flows -- for the years 1999,
1998, and 1997......................................... 49
Notes to the Parent Company (Temple-Inland Inc.)
Summarized Financial Statements........................ 49-51
Financial Services Group
Summarized Statements of Income -- for the years 1999,
1998, and 1997......................................... 52
Summarized Balance Sheets at year end 1999 and 1998....... 53
Summarized Statements of Cash Flows -- for the years 1999,
1998, and 1997......................................... 53
Notes to Financial Services Group Summarized Financial
Statements............................................. 54-60
</TABLE>
All financial statements listed in this item are incorporated herein by
reference from the Company's 1999 Annual Report to Shareholders for the fiscal
year ended January 1, 2000, and filed for purposes of those
26
<PAGE> 27
portions so incorporated as Exhibit 13. Page numbers refer to page numbers in
the Company's 1999 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 1, 2000, 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.......... 33
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
inapplicable and, therefore, have been omitted.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.01 -- Certificate of Incorporation of the Company(1), as
amended effective May 4, 1987(2), as amended effective
May 4, 1990(3)
3.02 -- By-laws of the Company as amended and restated May 3,
1991(18)
4.01 -- Form of Specimen Common Stock Certificate of the
Company(4)
4.02 -- Indenture dated as of September 1, 1986, between the
Registrant and Chemical Bank, as Trustee(5), as amended
by First Supplemental Indenture dated as of April 15,
1988, as amended by Second Supplemental Indenture dated
as of December 27, 1990(12), and as amended by Third
Supplemental Indenture dated as of May 9, 1991(13)
4.03 -- Form of Specimen Medium-Term Note of the Company(5)
4.04 -- Form of Fixed-rate Medium Term Note, Series B, of the
Company(12)
4.05 -- Form of Floating-rate Medium Term Note, Series B, of the
Company(12)
4.06 -- Form of 9% Note due May 1, 2001, of the Company(15)
4.07 -- Form of Fixed-rate Medium Term Note, Series D, of the
Company(14)
4.08 -- Form of Floating-rate Medium Term Note, Series D, of the
Company(14)
4.09 -- Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock, dated
February 16, 1989(6)
4.10 -- Rights Agreement, dated February 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 (23)
4.14 -- Form of Floating-rate Medium Term Note, Series F, of the
Company (23)
10.01* -- 1988 Stock Option Plan for Key Employees and Directors of
Temple-Inland Inc. and its Subsidiaries(8)
10.02* -- Form of Nonqualified Option Agreement under the 1988
Stock Option Plan(8)
10.03* -- Temple-Inland Inc. Incentive Stock Plan(1), as amended
May 6, 1988(9), as amended February 7, 1992(18)
10.04* -- Form of Incentive Shares Agreement(10)
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.05 -- 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)
10.06* -- Temple-Inland Inc. 1993 Stock Option Plan(17)
10.07* -- Temple-Inland Inc. 1993 Restricted Stock Plan(17)
10.08 -- 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)
10.09 -- 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)
10.10 -- 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)
10.11 -- 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)
10.12 -- Holdback Escrow Agreement by and among LST, Guaranty, and
Bank One, Texas, N.A. dated as of November 12, 1993(19)
10.13 -- 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(20)
10.14 -- 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(20)
10.15 -- 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(20)
10.16 -- 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(20)
10.17 -- 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(21)
10.18* -- Temple-Inland Inc. 1997 Stock Option Plan(22), as amended
May 7, 1999(26)
10.19* -- Temple-Inland Inc. 1997 Restricted Stock Plan(22)
10.20 -- 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(24)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.21 -- Asset Purchase Agreement dated October 3, 1999, by and
among Westvaco Corporation and Temple-Inland Forest
Products Corporation, Inland Eastex Extrusion Company,
Temple-Inland Recaustisizing Company, Temple-Inland
Recovery Company, Temple-Inland Stores Company(25)
11 -- Statement re: Computation of Per Share Earnings for the
three years ended January 1, 2000(27)
13 -- Annual Report to Shareholders for the year ended January
1, 2000. 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(27)
21 -- Subsidiaries of the Company(27)
23 -- Consent of Ernst & Young LLP(27)
27 -- Financial Data Schedule(27)
</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-8 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.
29
<PAGE> 30
(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 Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
(21) Incorporated by reference to Registration Statement on Form S-4 (No.
333-21937) filed by the Company with the Commission.
(22) 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.
(23) Incorporated by reference to the Company's Form 8-K filed with the
Commission on June 2, 1998.
(24) Incorporated by reference to Registration Statement on Form S-4 (No.
333-71699) filed by the Company with the Commission.
(25) Incorporated by reference to the Company's Form 8-K filed with the
Commission on October 6, 1999.
(26) Incorporated by reference to the Company's Definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held May 7, 1999, and
filed with the Commission on March 26, 1999
(27) Filed herewith.
(b) Reports on Form 8-K.
On October 6, 1999, the Company filed a Current Report on Form 8-K to
report that it entered into an Asset Purchase Agreement to sell its bleached
paperboard business, including the mill located in Evadale, Texas, to Westvaco
Corporation.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned thereunto
authorized, on March 24, 2000.
TEMPLE-INLAND INC.
(Registrant)
By: /s/ KENNETH M. JASTROW, II
----------------------------------
Kenneth M. Jastrow, II
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/ KENNETH M. JASTROW, II Director, Chairman of the March 24, 2000
- ----------------------------------------------------- Board, and Chief Executive
Kenneth M. Jastrow, II Officer
/s/ RANDALL D. LEVY Chief Financial Officer March 24, 2000
- -----------------------------------------------------
Randall D. Levy
/s/ DAVID H. DOLBEN Vice President and Chief March 24, 2000
- ----------------------------------------------------- Accounting Officer
David H. Dolben
/s/ ROBERT CIZIK Director March 24, 2000
- -----------------------------------------------------
Robert Cizik
/s/ ANTHONY M. FRANK Director March 24, 2000
- -----------------------------------------------------
Anthony M. Frank
/s/ WILLIAM B. HOWES Director March 24, 2000
- -----------------------------------------------------
William B. Howes
/s/ BOBBY R. INMAN Director March 24, 2000
- -----------------------------------------------------
Bobby R. Inman
/s/ JAMES A. JOHNSON Director March 24, 2000
- -----------------------------------------------------
James A. Johnson
/s/ W. ALLEN REED Director March 24, 2000
- -----------------------------------------------------
W. Allen Reed
/s/ HERBERT A. SKLENAR Director March 24, 2000
- -----------------------------------------------------
Herbert A. Sklenar
/s/ WALTER P. STERN Director March 24, 2000
- -----------------------------------------------------
Walter P. Stern
/s/ ARTHUR TEMPLE III Director March 24, 2000
- -----------------------------------------------------
Arthur Temple III
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ CHARLOTTE TEMPLE Director March 24, 2000
- -----------------------------------------------------
Charlotte Temple
/s/ LARRY E. TEMPLE Director March 24, 2000
- -----------------------------------------------------
Larry E. Temple
</TABLE>
32
<PAGE> 33
SCHEDULE II
TEMPLE-INLAND INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS- AT END
PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
------------ ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
For the year 1999:
Deducted from accounts receivable:
Allowance for doubtful accounts.... $ 10 $ 6 $-- $ 6(A) $ 10
Allowance for loan losses.......... 87 38 13(B) 25(A) 113
Allowance for unrealized losses on
available-for-sale securities.... (3) -- -- (22)(D) 19
Allowance for mortgage servicing
rights........................... 17 (16) -- -- 1
---- --- --- ---- ----
Totals........................ $111 $28 $13 $ 9 $143
==== === === ==== ====
For the year 1998:
Deducted from accounts receivable:
Allowance for doubtful accounts.... $ 7 $ 5 -- $ 2(A) $ 10
Allowance for loan losses.......... 91 1 -- 5(A) 87
Allowance for unrealized losses on
available-for-sale securities.... 5 1 (9)(C) -- (3)
Allowance for mortgage servicing
rights........................... -- 17 -- -- 17
---- --- --- ---- ----
Totals........................ $103 $24 $(9) $ 7 $111
==== === === ==== ====
For the year 1997:
Deducted from accounts receivable:
Allowance for doubtful accounts.... $ 7 $ 7 -- $ 7(A) $ 7
Allowance for loan losses.......... 68 (1) 30(B) 6(A) 91
Allowance for unrealized losses on
available-for-sale securities.... 12 (2) (5)(C) -- 5
---- --- --- ---- ----
Totals........................ $ 87 $ 4 $25 $ 13 $103
==== === === ==== ====
</TABLE>
- ---------------
(A) Uncollectible accounts written off, net of recoveries.
(B) Additions related to acquisitions and bulk purchases of loans, net of
adjustments.
(C) Unrealized gains/losses.
(D) Net decrease in market value of available-for-sale securities.
33
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
11 -- Statement re: Computation of Per Share Earnings for the
three years ended January 1, 2000
13 -- Annual Report to Shareholders for the year ended January
1, 2000. 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 -- Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in millions, except for per share data)
<TABLE>
<CAPTION>
For the year 1999 1998 1997
------- ------- -------
(in millions)
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Income from continuing
operations $ 191 $ 88 $ 59
Discontinued operations (92) (21) (8)
Cumulative effect of
accounting change -- (3) --
------- ------- -------
Net income $ 99 $ 64 $ 51
======= ======= =======
Denominator for basic
earnings per share -
weighted average
shares outstanding 55.6 55.8 56.0
Dilutive effect of
stock options .2 .1 .2
------- ------- -------
Denominator for diluted
earnings per share 55.8 55.9 56.2
======= ======= =======
EARNINGS PER SHARE:
BASIC:
Income from continuing
operations $ 3.45 $ 1.60 $ 1.05
Discontinued operations (1.66) (.38) (.14)
Cumulative effect of
Accounting change -- (.06) --
------- ------- -------
Net income $ 1.79 $ 1.16 $ .91
======= ======= =======
DILUTED:
Income from continuing
operations $ 3.43 $ 1.59 $ 1.04
Discontinued operations (1.65) (.38) (.14)
Cumulative effect of
Accounting change -- (.06) --
------- ------- -------
Net income $ 1.78 $ 1.15 $ .90
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations and Financial Condition
Results of continuing operations, including information regarding the
principal business segments, are shown below. Additional information regarding
business segments is included in Note 10 to the Consolidated Financial
Statements.
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
For the year 1999 1998 1997 1996 1995
- ------------- ---------- ---------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C> <C>
REVENUES
Paper $ 1,798 $ 1,642 $ 1,694 $ 1,761 $ 1,910
Building Products 768 613 617 563 533
Financial Services 1,116 1,036 923 800 754
---------- ---------- ---------- ---------- ----------
Total revenues $ 3,682 $ 3,291 $ 3,234 $ 3,124 $ 3,197
========== ========== ========== ========== ==========
INCOME BEFORE TAXES
Paper $ 103 $ 39 $ (54) $ 120 $ 333
Building Products 174 112 131 102 67
Financial Services 138 154 132 63(a) 98
---------- ---------- ---------- ---------- ----------
Segment operating income 415 305 209 285 498
Corporate expense (30) (28) (25) (17) (22)
Special charge -- (47) -- -- --
Parent Company interest - net (95) (78) (82) (82) (69)
Other income 16 6 6 5 4
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before taxes $ 306 $ 158 $ 108 $ 191 $ 411
========== ========== ========== ========== ==========
</TABLE>
(a) Includes a one-time assessment of $44 million to recapitalize the Savings
Association Insurance Fund (SAIF).
37
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
PAPER
The Paper Group manufactures linerboard and corrugating medium at six mills
and converts it into corrugated packaging at 40 corrugated packaging plants
located throughout the United States, and in Puerto Rico, Mexico and Chile.
During the third quarter of 1999, the company decided to discontinue its
bleached paperboard operation. Accordingly, the results of the bleached
paperboard operation have been classified as discontinued operations and prior
periods have been restated.
Revenues for the Paper Group increased to $1,798 million in 1999, compared
with $1,642 million in 1998 and $1,694 million in 1997. The Paper Group reported
operating income of $103 million in 1999, compared with $39 million (before the
special charges discussed below) in 1998 and a loss of $54 million in 1997.
The following table shows the quarterly sales of the corrugated packaging
operation in tons and dollars. The totals presented include both boxes sold and
open market sales of linerboard.
<TABLE>
<CAPTION>
For the Year 1999 1998 1997
- ---------------------- ---------- ---------- ----------
UNIT SALES
(in thousands of tons)
<S> <C> <C> <C>
1st Quarter 704 662 647
2nd Quarter 720 628 719
3rd Quarter 701 616 706
4th Quarter 677 613 697
---------- ---------- ----------
2,802 2,519 2,769
========== ========== ==========
NET REVENUES
(in millions)
1st Quarter $ 420 $ 432 $ 412
2nd Quarter 444 420 433
3rd Quarter 462 410 421
4th Quarter 472 380 428
---------- ---------- ----------
$ 1,798 $ 1,642 $ 1,694
========== ========== ==========
</TABLE>
Average box prices in 1999 were up 3 percent following a 7 percent increase
in 1998 and an 11 percent decrease in 1997. The increase in 1999 reversed the
downward movement of prices in the last half of 1998. Tons of boxes sold
increased 5 percent in 1999, compared with a decrease of 3 percent in 1998 and
an increase of 4 percent in 1997.
The average cost of old corrugated containers (OCC), the principal raw
material used in approximately 46 percent of the Paper Group's containerboard
production, increased by $4 per ton in 1999. OCC cost decreased by $16 per ton
in 1998 and increased by $16 per ton in 1997. Year-end OCC cost was $89 per ton
in 1999, $85 per ton in 1998, and $101 per ton in 1997.
Mill production totaled 2,656,000 tons in 1999, 2,499,000 tons in 1998 and
2,761,000 tons in 1997. In 1999, approximately 88 percent of the containerboard
produced was converted into corrugated containers by the Paper Group's box
plants. The remainder was sold in the domestic and export markets. The Paper
Group curtailed production by approximately 236,000 tons in 1998 and 36,000 tons
in 1997 to control inventory levels.
During 1998, the Paper Group closed and dismantled its 70,000 ton corrugating
medium mill in Newark, California, and recognized a gain of $13 million in 1999
from the sale of the real estate. In 1999, the company announced it had entered
into a joint venture to convert its 285,000 ton containerboard mill in Newport,
Indiana, to produce a lightweight gypsum facing paper. The conversion is
expected to cost approximately $70 million and is scheduled for completion in
the third quarter of 2000. This conversion will increase the group's integration
level and diversify its product line.
During 1999, the Paper Group continued implementing its Mplus 50 program, the
goal of which is to improve average return on investment to target levels over a
cycle. The focus of the program is to create a distinctly market-driven culture
in which customer demand determines the products, operating levels and capital
investment necessary to achieve the goal. Employee compensation is tied to
return on investment.
A key to Mplus 50 is improving margins by targeting a more select customer
base. In 1998, this group exited many low-value accounts faster than they could
be replaced, and the Paper Group's volume in 1998 trailed the industry. This
trend, however, reversed in 1999, and volume increases exceeded the industry
average. The increase was predominantly in higher-value accounts.
Installing a new information system is also an important part of the Mplus 50
program. This effort includes configuring new processes, installing a new
technical infrastructure and software, and training users. This system, which is
anticipated to be completed in 2001 and to cost approximately $70 million, will
allow the Paper Group to improve performance to the customer and capture the
benefits of e-commerce.
The Mplus 50 program was initiated in 1998 and resulted in a special 1998
charge that included $13 million in severance costs, write-offs of $4 million of
abandoned packaging assets, and a $20 million impairment write-down of the
Argentine box plant. Half of the 250 employees affected by the work force
reduction accepted an early retirement offer in December 1998. The remaining
work force reductions were made during 1999. Substantially all of the charge for
work force reductions was paid in 1999. During the second quarter of 1999, the
Argentine box plant was sold for $12 million, which approximated its adjusted
carrying value.
38
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
Discontinued Operations
During the third quarter of 1999, the company decided to discontinue its
bleached paperboard operation. The bleached paperboard mill was sold in December
1999 to Westvaco Corporation for approximately $658 million, which included $576
million in cash and the assumption of $82 million of debt. The eucalyptus fiber
project in Mexico, which was to be a source of hardwood to the bleached
paperboard mill, is expected to be sold during 2000. Revenues of the
discontinued operations were $381 million in 1999, $376 million in 1998 and $369
million in 1997. The losses from discontinued operations were $92 million in
1999 (including a loss on disposal of $71 million), $21 million in 1998 and $8
million in 1997. Interest expense of $28 million per year was allocated to the
discontinued operations based on debt allocated to these operations. The loss
from operations is net of income tax benefits of $13 million in 1999, $13
million in 1998 and $5 million in 1997. The loss on disposal is net of income
tax benefits of $44 million. Included in the loss on disposal are estimated
operating losses of the eucalyptus fiber project through the anticipated date of
disposal of $2 million.
BUILDING PRODUCTS
The Building Products Group manufactures a diverse line of construction and
commercial grade building products at 20 facilities located in Texas, Louisiana,
Oklahoma, Arkansas, Alabama, Georgia, Pennsylvania, Tennessee and Canada. These
facilities include four joint venture facilities and two facilities -- a
particleboard plant and a medium density fiberboard (MDF) plant -- operated
under long-term lease agreements that began during December 1999. The products
manufactured are lumber, plywood, particleboard, MDF, gypsum wallboard,
fiberboard and fiber-cement products.
Operating income for the Building Products Group was $174 million in 1999, an
all-time record, exceeding the previous record of $139 million achieved in 1994.
Operating income was $112 million in 1998, excluding the special charge
discussed below, and $131 million in 1997. Revenues increased $155 million, or
25 percent, to $768 million in 1999, compared with $613 million in 1998 and $617
million in 1997. Housing starts were up 3 percent in 1999, reaching the highest
level since 1986. As a result, prices advanced in 1999 across all product lines.
Lumber, plywood and MDF prices were up more than 10 percent, and gypsum prices
were up almost 25 percent from 1998.
The following table provides information on unit sales and net revenues for
each product line.
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ---------- ---------- ----------
UNIT SALES(a)
<S> <C> <C> <C>
Pine lumber 618 603 639
Plywood 296 289 281
Particleboard 574 518 470
MDF 187 35 --
Gypsum wallboard 890 858 843
Fiberboard 439 423 402
========== ========== ==========
NET REVENUES(b)
(in millions)
Pine lumber $ 254 $ 223 $ 262
Plywood 68 60 55
Particleboard 171 141 125
MDF 57 9 --
Gypsum wallboard 147 116 105
Fiberboard 71 64 66
Retail -- -- 4
---------- ---------- ----------
Totals $ 768 $ 613 $ 617
========== ========== ==========
</TABLE>
(a) Unit sales are in millions of square feet,except pine lumber, which is in
millions of board feet, and do not include units sold from joint venture
operations.
(b) Net revenues do not include revenues from joint venture operations.
The solid wood operation manufactures lumber and plywood and manages the
company's timber resources. Pine lumber shipments of 618 million board feet
increased 2 percent from 1998, but decreased 3 percent from 1997. The Asian
economy began to recover in 1999, resulting in increased industry exports of
solid wood products and higher prices. For the year, the average sales price for
the solid wood operation increased 7 percent for lumber and 11 percent for
plywood, resulting in an increase in revenues for the solid wood operation of
$39 million, or 14 percent.
The major modernization project at the Buna, Texas, sawmill was completed in
1998, but modernization at the Diboll, Texas, sawmill continued through the
first quarter of 1999 and resulted in temporary production outages and reduced
shipments. The modernization at the Diboll sawmill resulted in the abandonment
of $3 million of equipment, which was included in the 1998 special charge. Both
plants are now operating at full capacity. During 1998, the company announced
its intention to change the focus of the operations at its plywood plant. This
plant will continue to produce veneer products, and a state-of-the-art sawmill
will be added to the site. This change will permit the Building Products Group
to optimize the use of available sawtimber and produce a higher value product.
The construction of the new sawmill in Pineland, Texas, is anticipated to be
completed in early 2001. This effort resulted in the write-down of $7 million
related to certain plywood assets, which was also included in the 1998 special
charge.
39
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
The solid wood operation also manages the company's 2.2 million acres of
timberland, which are located in Texas, Louisiana, Georgia and Alabama. In 1999,
this renewable resource provided approximately 60 percent of the company's
sawtimber requirements and roughly 55 percent of the fiber necessary to operate
the company's paper, particleboard and fiberboard converting operations. In
connection with the sale of the bleached paperboard operation, the company
entered into a long-term agreement with Westvaco Corporation to provide fiber at
market rates. Based on current pricing, the company expects revenue from this
agreement to approximate $40 million to $45 million per year,
Using by-products of lumber processing, the group manufactures particleboard
at five plants in Texas, Alabama, Arkansas, Georgia and Pennsylvania.
Particleboard shipments increased 11 percent, and sales averages increased 9
percent over 1998. The improvement in sales averages is due primarily to the
higher percentage of high-margin substrate for flooring in the product mix.
Shipments of this substrate, produced at the Georgia and Alabama facilities,
were more than triple 1998 shipments, contributing to a $30 million, or 21
percent, rise in particleboard revenues for the year. This compares with a 13
percent increase in 1998 and an 18 percent increase in 1997.
In its first full year of operation, MDF was not profitable. However, MDF
markets improved significantly throughout the year with sales averages at the
end of 1999 exceeding year end 1998 levels by 19 percent. A strengthening MDF
market, coupled with the natural progression up the production learning curve,
should enable this operation to be profitable in 2000.
On December 28, 1999, the Building Products Group leased for a term of 20
years an MDF facility and a particleboard facility located in Mt. Jewett,
Pennsylvania. The lease includes an option to purchase these facilities in the
fifteenth year of the lease term and at the end of the lease. The MDF facility
has an annual capacity of approximately 100 million square feet, and the
particleboard facility has an annual capacity of approximately 200 million
square feet. The addition of these two mills will allow the Building Products
Group to meet customers' increasing demand for particleboard and strengthen its
position in the growing MDF market.
Record revenues of $147 million were achieved by the gypsum wallboard
operation in 1999. Gypsum wallboard shipments of 890 million square feet were
only 4 percent above 1998 levels, but revenues increased by $31 million, or 27
percent, due to the 23 percent increase in sales averages for the year. Demand
reached record levels in 1999. A slight weakening of demand during November was
followed by a more dramatic decline in December. Demand slowdown, combined with
increased gypsum industry capacity and increased imports, put downward pressure
on shipments and sales averages at year end. The company expects this downward
pressure to continue throughout 2000.
Production began at the new gypsum wallboard facility in Cumberland City,
Tennessee, during the fourth quarter of 1999. The plant operates as a part of
Standard Gypsum LLC, a joint venture in which the company owns a 50 percent
interest. This state-of-the-art facility has the capacity to produce
approximately 700 million square feet of gypsum wallboard annually, and utilizes
100 percent flue gas desulphurization (synthetic) gypsum. The plant is located
adjacent to a coal-fired steam electric generation plant, which produces
synthetic gypsum as a by-product of its air cleaning system. Independent of the
joint venture, the company has negotiated a long-term contract for the synthetic
gypsum produced at this electric generation plant. Synthetic gypsum acquired
pursuant to this contract will supply the Cumberland City plant and the
company's plant at West Memphis, Arkansas.
Fiber products revenues increased $7 million, or 11 percent, from 1998 due to
a 4 percent increase in shipments and a 7 percent increase in the overall sales
average. High demand for Fiber Brace(TM), an intermediate-grade fiberboard
sheathing used for corner bracing, was responsible for the improved product mix.
This product grew to represent 51 percent of the softboard mix and now commands
a 45 percent share of the 1/2-inch structural fiberboard market. TrimCraft(TM),
the company's alternative lumber trim product, continued to gain market
acceptance, with shipments of the product advancing 17 percent over 1998, the
second consecutive year of double-digit growth. As a result, the company now
holds a 25 percent share of the hardboard engineered trim market.
In its first year of operation, Fortra Fiber Cement LLC, a 50 percent joint
venture located in Waxahachie, Texas, was not profitable due to higher than
expected production costs and lower than anticipated sales averages. FORTRA(TM),
the joint venture's brand-name fiber-cement product, provides numerous benefits,
including: ease of cutting, fastening and finishing; low maintenance; immunity
to water damage, salt spray and termite attack; and non-flammability. Management
is undertaking a review of the operations to establish an appropriate course of
action to achieve profitability at the venture. Alternatives being explored
include, but are not limited to, an evaluation of the manufacturing processes,
including the equipment and its use, to determine if modifications or changes
can be made to enhance product offerings or improve operating efficiencies.
40
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL SERVICES
The Financial Services Group includes savings bank, mortgage banking, real
estate and insurance brokerage operations. Selected financial information for
each of these operations is presented below.
FINANCIAL SERVICES GROUP
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C>
REVENUES
Savings bank $ 841 $ 743 $ 711
Mortgage banking 131 153 113
Real estate 111 107 69
Insurance brokerage 33 33 30
---------- ---------- ----------
Total revenues $ 1,116 $ 1,036 $ 923
========== ========== ==========
INCOME
Savings bank $ 109 $ 113 $ 107
Mortgage banking 19 22 24
Real estate 4 13 (4)
Insurance brokerage 6 6 5
---------- ---------- ----------
Operating income 138 154 132
Taxes on income 17 27 21
---------- ---------- ----------
Net income $ 121 $ 127 $ 111
========== ========== ==========
ASSETS
Savings bank $ 12,892 $ 11,947 $ 10,371
Mortgage banking 363 442 385
Real estate 313 295 268
Insurance brokerage 33 32 32
Eliminations (280) (340) (284)
---------- ---------- ----------
Total assets $ 13,321 $ 12,376 $ 10,772
========== ========== ==========
EQUITY
Savings bank $ 857 $ 559 $ 423
Mortgage banking 91 84 82
Real estate 53 48 58
Insurance brokerage 22 17 13
---------- ---------- ----------
Total equity $ 1,023 $ 708 $ 576
========== ========== ==========
</TABLE>
Savings Bank
Guaranty Federal Bank, F.S.B. (Guaranty), conducts business through 155
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. The California
operations are concentrated in the Central Valley and Southern California. The
primary business of Guaranty is attracting savings deposits from the general
public, investing in single-family adjustable-rate mortgages, lending for the
construction of real estate projects and providing a variety of loan products to
consumers and businesses.
On October 26, 1999, Guaranty signed a definitive agreement to acquire all of
the outstanding stock of American Finance Group, Inc. (AFG). AFG is a commercial
finance company engaged in the leasing and secured financing of a variety of
equipment for investment-grade "Fortune 1000" companies and creditworthy
middle-market companies. AFG markets its products nationally through sales
offices located in Boston, Massachusetts; Houston, Texas; Chicago, Illinois;
Charlotte, North Carolina; and Minneapolis/St. Paul, Minnesota. At December 31,
1999, AFG had total assets of approximately $188 million and total liabilities
of approximately $157 million. This transaction is expected to close in the
first quarter of 2000, with an anticipated purchase price of approximately $32
million in cash.
On June 29, 1999, the company acquired all of the outstanding stock of HF
Bancorp, Inc., the parent company of Hemet Federal Savings and Loan Association
(Hemet), and merged the operations of Hemet into Guaranty. The consideration
paid was approximately $119 million in cash. Hemet operated 18 branches in the
Southern California markets of Riverside County, Palm Springs and northern San
Diego County, and had assets at acquisition totaling approximately $1.2 billion,
consisting primarily of loans and securities.
On June 11, 1999, Guaranty acquired the assets of Fidelity Funding Financial
Group (Fidelity) for $18 million in cash. Fidelity, an asset-based lending
operation, had assets at acquisition of approximately $111 million, consisting
primarily of loans.
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.
Consideration for the transaction was $143 million, consisting of approximately
1,614,000 shares of Temple-Inland Inc. common stock and cash of $47 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.
41
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected financial information for the Savings Bank operation is provided
below.
SAVINGS BANK
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- --------------------- ---------- ---------- ----------
(dollars in millions)
<S> <C> <C> <C>
INCOME BEFORE TAXES
Net interest income $ 306 $ 246 $ 222
Provision for loan losses (38) (1) 2
Noninterest income 30 31 18
Noninterest expense (174) (149)
Minority interest in income
of subsidiary (15) (14) (7)
---------- ---------- ----------
Income before taxes $ 109 $ 113 $ 107
========== ========== ==========
AVERAGE BALANCE SHEET
Total earning assets $ 12,005 $ 10,390 $ 9,919
Loans receivable and
mortgage loans held for sale 9,308 7,440 6,531
Mortgage-backed and
other securities 2,344 2,602 2,722
Deposits 8,416 7,579 7,091
Securities sold under
repurchase agreements
and FHLB advances 2,795 2,242 2,574
KEY RATIOS
Yield on earning assets 6.91% 7.02% 7.06%
Cost of funds 4.58% 4.82% 4.95%
---------- ---------- ----------
Net interest spread 2.33% 2.20% 2.11%
========== ========== ==========
</TABLE>
During 1999, average loans receivable and mortgage loans held for sale
constituted 78 percent of earning assets, compared with 72 percent during 1998.
Guaranty continued to securitize portions of the mortgage loans held in its
portfolio during 1999, ending the year with $601 million in securitized mortgage
loans. During 1999, the ratio of average loans receivable, mortgage loans held
for sale and securitized mortgage loans to earning assets was 83 percent,
compared with 78 percent during 1998.
Guaranty continued to increase the size and alter the mix of its loan
portfolio through an increased focus on construction and development lending,
commercial and business lending, and consumer lending, and the introduction of
new products. In addition, real estate mortgage loans outstanding decreased in
1999. The change in the mix of the loan portfolio contributed to an increase in
the provision for loan losses. These loans provide further geographic and
product diversification and the opportunity for improved earnings in 2000.
The allowance for loan losses is comprised of specific allowances (assessed
for loans that have known credit weaknesses), general allowances and an
unallocated allowance. Management continuously evaluates the allowance for loan
losses to ensure the level is adequate to absorb losses inherent in the loan
portfolio. 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.
Specific allowances are established based on a thorough review of the
financial condition of the borrower, general economic conditions affecting the
borrower, collateral values and other factors. General allowances are
established based on historical loss trends and management's judgment concerning
those trends and other relevant factors, including delinquency rates, current
economic conditions, loan size, industry competition and consolidation, and the
effect of government regulation. The unallocated allowance is established for
inherent loss exposures that are not yet specifically identified in the loan
portfolio. The evaluation of the appropriate level of unallocated allowance
considers current risk factors that may not be reflected in historical factors
used to determine the specific and general allowances.
Guaranty recorded a $38 million provision for loan losses in 1999, compared
with $1 million in 1998 and a $2 million negative provision in 1997. The
increase in the provision in 1999 was primarily related to the growth in, and
the alteration of the mix of, the loan portfolio.
At year end 1999, the allowance for loan losses as a percentage of loans
receivable increased to 1.20 percent from 1.06 percent at year end 1998. The
increase was primarily driven by the changes in the portfolio discussed above
and the acquisition of Hemet. At year end 1998, the allowance for loan losses as
a percentage of loans receivable decreased to 1.06 percent from 1.41 percent at
year end 1997. The decrease in 1998 compared with 1997 was primarily driven by a
30 percent decline in the purchased loan portfolios and a reduction in the
related allowance for loan losses.
Net interest income for 1999 increased $60 million from 1998 as earning
assets increased. A large portion of the growth was the result of the Hemet
acquisition discussed above. Net interest income for 1998 increased $24 million
from 1997, due primarily to average earning asset growth related to the
acquisition of SSB discussed above.
Noninterest income, which primarily consists of service charges on deposits
and gains or losses on the sale of loans, totaled $30 million in 1999, down from
$31 million in 1998 and up significantly from $18 million in 1997. The increase
from 1997 is primarily due to losses incurred on the sale of loans and
securities in 1997, compared with gains on similar activity in 1998 and 1999.
42
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
Noninterest expense for 1999 increased $25 million from 1998, primarily as
the result of the Hemet acquisition. Noninterest expense in 1998 increased $21
million, compared with 1997, primarily due to the SSB acquisition.
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 88 percent of Guaranty's assets at year end 1999 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 number 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 to better match assets and
liabilities.
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 1999. The company expects to maintain Guaranty's
capital at a level that exceeds the minimum required for designation as "well
capitalized" under OTS regulations. Additional information concerning Guaranty's
capital requirements is included in the Notes to the Summarized Financial
Statements of the Financial Services Group.
Mortgage Banking
Mortgage banking is conducted primarily through Temple-Inland Mortgage
Corporation (TIMC), which arranges financing of single-family mortgage loans,
securitizes the loans and sells them in the secondary market (primarily Fannie
Mae, FHLMC and GNMA securities).
Selected financial information is provided below.
MORTGAGE BANKING
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- --------------------- ---------- ---------- ----------
(dollars in millions)
<S> <C> <C> <C>
PORTFOLIO ROLL-FORWARD
Beginning servicing $ 22,886 $ 26,082 $ 17,851
Purchased servicing 3,884 3,536 9,497
New loans added, net of
flow releases 2,383 3,375 2,600
Portfolio releases (2,155) (3,210) --
Run-off (4,815) (6,897) (3,866)
---------- ---------- ----------
Ending servicing $ 22,183 $ 22,886 $ 26,082
========== ========== ==========
Portfolio growth rate (3.1)% (12.3)% 46.1%
Run-off factor 21.0% 28.9% 16.8%
Ending number of
loans serviced 241,400 256,300 351,600
========== ========== ==========
</TABLE>
Rising interest rates during 1999 resulted in a significant industrywide
reduction in mortgage refinancing activity, contributing to a reduction in both
mortgage origination volume and prepayments. Mortgage origination volume fell to
$3.7 billion in 1999, compared with $6.1 billion in 1998. Portfolio run-off
declined to 21.0 percent, compared with 28.9 percent in 1998.
The mortgage servicing portfolio fell to $22.2 billion at year end 1999,
compared with $22.9 billion at year end 1998. TIMC continued its program of
strategic acquisition and sales of servicing portfolios, resulting in
significantly improved portfolio characteristics. The value of the servicing
portfolio improved during 1999, as rising interest rates reduced actual and
estimated future prepayment speeds, allowing for the reversal of $16 million of
the mortgage servicing valuation allowance provided in 1998.
The decline in mortgage origination volume has necessitated staff reductions,
branch closures and consolidations. The number of staff positions was reduced by
approximately 300 during 1999.
Real Estate
Real estate operations conducted primarily by Lumbermen's Investment
Corporation (Lumbermen's) include the development of residential subdivisions
and the management and sale of income properties. Land development projects
include 38 residential subdivisions in Texas, California, Colorado, Florida,
Georgia, Missouri, Tennessee and Utah. At year end 1999, land development
inventory included 2,238 residential lots, 585 lots under development and 6,371
acres of land.
Lot sales for 1999 were 1,512, compared with 1,594 for 1998 and 1,422 for
1997. Revenues from residential operations, which includes lot sales, tract
sales and other income, were $79 million in 1999, $58 million in 1998 and $43
million in 1997.
43
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
Revenues from commercial operations were $29 million in 1999, $46 million in
1998 and $21 million in 1997. Commercial revenues include a $10 million gain in
1998 from the sale of a commercial investment property. Lumbermen's 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. These properties are located in Texas, New Mexico, Florida
and California.
Insurance Brokerage
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 a
risk manager of Temple-Inland Inc. Timberline currently has offices in Austin,
Houston, Dallas/Fort Worth, El Paso and San Antonio, Texas.
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. When constructing new
facilities or modernizing existing facilities, the company uses state-of-the-art
technology for controlling air and water emissions. These forward-looking
programs should minimize the effect 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 2000 through 2002 will average approximately $20
million each year, exclusive of the expenditures for compliance discussed below.
On April 15, 1998, 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). Compliance with various phases of the Cluster Rule
will be required at certain intervals over the next few years. 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 estimated capital expenditures disclosed above do not include
expenditures that may be needed to comply with the Cluster Rule. Based on 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, the company has incurred approximately $1 million toward Cluster
Rule compliance through the end of 1999, excluding such expenditures related to
discontinued operations, and expects that remaining expenditures related to
Cluster Rule compliance will not exceed an additional $20 million by the initial
compliance deadline of April 15, 2001.
New effluent (water) quality standards for unbleached paper mills were not
included in the phase I Cluster Rule as promulgated. These standards are
expected to be promulgated between 2000 and 2002. Also not included in the phase
I Cluster Rule was the proposed Maximum Achievable Control Technology (MACT) II
Standard for the control of hazardous air pollutant emissions from pulp and
paper mill combustion sources. The timeline for final promulgation of the MACT
II Standard for the control of hazardous air pollutant emissions is uncertain at
this time pending resolution of substantive issues raised during the public
comment period and as subsequently addressed by industry stakeholder groups.
Preliminary estimates indicate that the company could be required to make total
capital expenditures of up to $40 million over the next few years following
issuance of these final rules.
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.
Capital expenditures of approximately $230 million are projected for 2000.
Parent Company interest expense was $95 million in 1999, $78 million in 1998
and $82 million in 1997. The increase in 1999 is primarily due to higher levels
of debt outstanding during the year. The decrease in 1998 was primarily due to
lower average rates.
On December 29, 1999, proceeds from the sale of the bleached paperboard
operation were used to pay off the $200 million term note due 2002 with interest
rates averaging 5.44 percent in 1999, and $309 million of short-term borrowings
with interest rates averaging 5.71 percent in 1999.
During 1998, $90 million of notes payable with interest rates averaging
approximately 9 percent and private placement debt of $80 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.
At year end 1999, the Parent Company had credit agreements with banks
totaling $560 million, with final maturities at various dates in 2001 and 2002,
that support commercial paper and other short-term borrowings. Current
maturities of debt totaling $79 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.
44
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
In the fourth quarter of 1999, the Board of Directors authorized a stock
repurchase program of up to 6.0 million shares. At year end 1999, approximately
1.65 million shares had been repurchased at a cost of approximately $100
million.
INCOME TAXES
The company's effective tax rate on continuing operations was 38 percent in
1999, 44 percent in 1998, and 45 percent in 1997. The 1999 effective tax rate
was lower than the statutory tax rate due to a one-time financial benefit
realized from the sale of a foreign subsidiary. In 1998 and 1997, the
differences between the statutory rate and the annual effective tax rate were
primarily attributable to operating losses in foreign operations for which no
financial benefit was recognized and nondeductible goodwill associated with
acquisitions.
The Internal Revenue Service (IRS) has concluded its examination of the
company's consolidated tax returns for the years 1987 through 1992. As a result,
the company has agreed to pay approximately $36 million in taxes and interest
for those years, of which $19 million was paid in 1999. The IRS is currently
examining the company's consolidated tax returns for the years 1993 through
1996. The resolution of these examinations is not expected to have an adverse
effect on the company's financial condition or results of operations.
EFFECTS OF INFLATION
Inflationary increases in operating costs since 1997 have not been
significant. The Parent Company's fixed assets, including timber and
timberlands, are reflected at their historical costs. At current replacement
costs, depreciation expense and the cost of timber harvested would be
significantly higher than amounts reported.
YEAR 2000 COMPLIANCE
The company completed all Year 2000 (Y2K) readiness preparations prior to
year end 1999. Contingency plans were developed for handling potential business
and operational disruptions. No Y2K occurrence required the execution of any
contingency plan.
As expected, no significant business or production operations were affected
by Y2K. A few minor incorrect dates were identified on internal company reports,
all of which were corrected immediately. The company has declared the Y2K
efforts complete and successful.
No additional Y2K exposures are anticipated in the future. Company operations
continue without interruptions.
Cost for Y2K concerns was $12 million and these expenditures had no material
effect on business operations. No material future costs are expected to be
incurred.
NEW ACCOUNTING PRONOUNCEMENTS
The company will be required to adopt Statement of Financial Accounting
Standards No. 133, Accounting for Derivatives Instruments and Hedging
Activities, beginning 2001. This statement will require derivative positions to
be recognized on the balance sheet at fair value. The company has not yet
determined the effect on earnings or financial position of adopting this
statement.
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 1999, with comparative information at year end 1998:
<TABLE>
<CAPTION>
Increase/(Decrease) in Income
Change in Interest Rates Before Taxes
- ------------------------ -----------------------------
(in millions)
1999 1998
<S> <C> <C>
+2% $ (1) $ (26)
+1% $ -- $ (1)
0% $ -- $ --
-1% $ (1) $ 10
-2% $ (16) $ 29
</TABLE>
The change in exposure to interest rate risk from year end 1998 is due
primarily to a decrease in the Parent Company's adjustable-rate debt obligations
and the diminishing impact at Guaranty of interest rate hedge contracts that
have matured or are significantly closer to maturity.
Additionally, the fair value (estimated at $329 million at year end 1999) of
the Financial Services Group's mortgage servicing rights is also affected by
changes in interest rates. The company estimates that a 1 percent decline in
interest rates from year-end levels would decrease the fair value of the
mortgage servicing rights by approximately $47 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 significant financial instruments subject to commodity
price risks.
45
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the year 1999 1998 1997 1996 1995
- ------------------------------------ -------- -------- -------- -------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
REVENUES
Paper $ 1,798 $ 1,642 $ 1,694 $ 1,761 $ 1,910
Building Products 768 613 617 563 533
Financial Services 1,116 1,036 923 800 754
Other activities -- -- -- -- --
-------- -------- -------- -------- --------
Total revenues $ 3,682 $ 3,291 $ 3,234 $ 3,124 $ 3,197
======== ======== ======== ======== ========
SEGMENT OPERATING INCOME
Paper $ 103 $ 39 $ (54) $ 120 $ 333
Building Products 174 112 131 102 67
Financial Services 138 154 132 63(a) 98
Other activities -- -- -- -- --
-------- -------- -------- -------- --------
Segment operating income $ 415 $ 305 $ 209 $ 285 $ 498
======== ======== ======== ======== ========
Income from continuing operations $ 191 $ 88(b) $ 59 $ 155 $ 269
Discontinued operations (92) (21) (8) (22) 12
Cumulative effect of accounting
change -- (3) -- -- --
-------- -------- -------- -------- --------
Net income $ 99 $ 64 $ 51 $ 133 $ 281
======== ======== ======== ======== ========
Capital expenditures:
Manufacturing $ 178 $ 157 $ 213 $ 250 $ 245
Financial Services 26 39 18 15 34
Depreciation and depletion:
Manufacturing 200 192 187 178 166
Financial Services 17 14 13 12 8
Earnings per share - continuing operations:
Basic 3.45 1.60 1.05 2.79 4.81
Diluted 3.43 1.59 1.04 2.79 4.80
Earnings per share - net income:
Basic 1.79 1.16(c) 0.91 2.39 5.02
Diluted 1.78 1.15(c) 0.90 2.39 5.01
Dividends per common share 1.28 1.28 1.28 1.24 1.14
Weighted average shares outstanding:
Basic 55.6 55.8 56.0 55.5 56.0
Diluted 55.8 55.9 56.2 55.6 56.1
Common shares outstanding at
year end 54.2 55.6 56.3 55.4 55.7
======== ======== ======== ======== ========
At Year End
Total assets $ 16,186 $ 15,868 $ 14,257 $ 12,858 $ 12,682
Long-term debt:
Parent Company 1,253 1,501 1,356 1,440 1,407
Financial Services 212 210 167 133 113
Stock issued by subsidiary 226 225 150 -- --
Shareholders' equity 1,927 1,998 2,045 2,015 1,975
Ratio of total debt to total
capitalization - Parent Company 39% 43% 40% 42% 42%
======== ======== ======== ======== ========
<CAPTION>
For the year 1994 1993 1992 1991 1990
- ------------------------------------ -------- -------- -------- -------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
REVENUES
Paper $ 1,498 $ 1,308 $ 1,31 1,179 $ 1,144
Building Products 575 497 409 311 305
Financial Services 628 631 634 607 509
Other activities 20 58 77 68 70
-------- -------- -------- -------- --------
Total revenues $ 2,721 $ 2,494 $ 2,430 $ 2,165 $ 2,028
======== ======== ======== ======== ========
SEGMENT OPERATING INCOME
Paper $ 89 $ 10 $ 107 $ 72 $ 146
Building Products 139 102 40 5 9
Financial Services 56 68 64 54 52
Other activities 1 (2) (2) 1 (2)
-------- -------- -------- -------- --------
Segment operating income $ 285 $ 178 $ 209 $ 132 $ 205
======== ======== ======== ======== ========
Income from continuing operations $ 142 $ 70 $ 130 $ 87 $ 169
Discontinued operations (11) (3) 17 51 63
Cumulative effect of accounting
change -- 50 -- -- --
-------- -------- -------- -------- --------
Net income $ 131 $ 117 $ 147 $ 138 $ 232
======== ======== ======== ======== ========
Capital expenditures:
Manufacturing $ 190 $ 145 $ 273 $ 281 $ 260
Financial Services 20 14 11 9 4
Depreciation and depletion:
Manufacturing 160 155 138 130 112
Financial Services 8 6 5 4 5
Earnings per share - continuing operations:
Basic 2.55 1.27 2.35 1.60 3.09
Diluted 2.55 1.26 2.34 1.59 3.06
Earnings per share - net income:
Basic 2.35 2.12(d) 2.66 2.53 4.24
Diluted 2.35 2.11(d) 2.65 2.51 4.20
Dividends per common share 1.02 1.00 0.96 0.88 0.80
Weighted average shares outstanding:
Basic 55.8 55.3 55.1 54.8 54.9
Diluted 55.9 55.5 55.5 55.2 55.4
Common shares outstanding at
year end 56.0 55.5 55.2 54.9 54.6
======== ======== ======== ======== ========
At Year End
Total assets $ 12,169 $ 11,877 $ 10,732 $ 10,034 $ 7,800
Long-term debt:
Parent Company 1,234 963 930 830 467
Financial Services 82 76 99 76 94
Stock issued by subsidiary -- -- -- -- --
Shareholders' equity 1,783 1,700 1,633 1,532 1,439
Ratio of total debt to total
capitalization - Parent Company 41% 36% 36% 35% 25%
======== ======== ======== ======== ========
</TABLE>
(a) Includes a one-time assessment of $44 million to recapitalize the Savings
Association Insurance Fund (SAIF).
(b) Includes a pre-tax special charge of $47 million.
(c) Includes a $3 million after-tax charge, or $0.06 per share, from cumulative
effect of accounting change.
(d) Includes a credit of $50 million, or $0.90 per share, from cumulative effect
of accounting change.
COMMON STOCK PRICES AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
1999 1998
---------------------------------- -----------------------------------------
Price Range Price Range
High Low Dividends High Low Dividends
--------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 67-3/4 $ 56-7/16 $ 0.32 $ 64-15/16 $ 50 $ 0.32
Second Quarter 77-1/2 61-3/8 0.32 67-1/4 52-1/8 0.32
Third Quarter 73-7/16 58 0.32 55-15/16 42-11/16 0.32
Fourth Quarter 66-1/16 53-5/8 0.32 59-5/8 45-1/16 0.32
--------- --------- ------- ---------- ---------- --------
For the Year $ 77-1/2 $ 53-5/8 $ 1.28 $ 67-1/4 $ 42-11/16 $ 1.28
========= ========= ======= ========== ========== ========
</TABLE>
46
<PAGE> 11
PARENT COMPANY
SUMMARIZED STATEMENTS OF INCOME
PARENT COMPANY (TEMPLE-INLAND INC.)
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- -------- -------- --------
(in millions)
<S> <C> <C> <C>
REVENUES
Net revenues $ 2,566 $ 2,255 $ 2,311
Financial Services earnings 138 154 132
-------- -------- --------
2,704 2,409 2,443
======== ======== ========
COSTS AND EXPENSES
Cost of sales 2,052 1,868 2,007
Selling and administrative 267 264 252
Special charge -- 47 --
-------- -------- --------
2,319 2,179 2,259
======== ======== ========
OPERATING INCOME 385 230 184
Interest - net (95) (78) (82)
Other 16 6 6
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 306 158 108
Taxes on income 115 70 49
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 191 88 59
Discontinued operations (92) (21) (8)
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 99 67 51
Cumulative effect of accounting change -- (3) --
-------- -------- --------
NET INCOME $ 99 $ 64 $ 51
======== ======== ========
</TABLE>
See the notes to the Parent Company summarized financial statements.
47
<PAGE> 12
PARENT COMPANY
SUMMARIZED BALANCE SHEETS
PARENT COMPANY (TEMPLE-INLAND INC.)
<TABLE>
<CAPTION>
At year end 1999 1998
- ------------- ---------- ----------
(in millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 51 $ 15
Receivables, less allowances of $9 in 1999
and $10 in 1998 328 264
Inventories:
Work in process and finished goods 71 61
Raw materials 216 222
---------- ----------
287 283
Net assets of discontinued operations -- 677
Prepaid expenses 16 14
---------- ----------
Total current assets 682 1,253
---------- ----------
INVESTMENT IN TEMPLE-INLAND FINANCIAL SERVICES 1,023 708
---------- ----------
PROPERTY AND EQUIPMENT
Buildings 431 428
Machinery and equipment 2,743 2,706
Construction in progress 102 88
Less allowances for depreciation (1,759) (1,646)
---------- ----------
1,517 1,576
Timber and timberlands - less depletion 502 499
Land 33 34
---------- ----------
Total property and equipment 2,052 2,109
OTHER ASSETS 184 174
---------- ----------
TOTAL ASSETS $ 3,941 $ 4,244
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 156 $ 126
Accrued expenses 186 167
Employee compensation and benefits 38 28
Current portion of long-term debt 1 2
---------- ----------
Total current liabilities 381 323
---------- ----------
LONG-TERM DEBT 1,253 1,501
DEFERRED INCOME TAXES 226 266
POSTRETIREMENT BENEFITS 143 145
OTHER LIABILITIES 11 11
SHAREHOLDERS' EQUITY 1,927 1,998
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,941 $ 4,244
========== ==========
</TABLE>
See the notes to the Parent Company summarized financial statements.
48
<PAGE> 13
PARENT COMPANY
SUMMARIZED STATEMENTS OF CASH FLOWS
PARENT COMPANY (TEMPLE-INLAND INC.)
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ------- ------- -------
(in millions)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 99 $ 64 $ 51
Adjustments to reconcile
net income to net cash:
Loss on disposal of
discontinued operations 77 -- --
Cumulative effect of
accounting change -- 3 --
Special charge -- 47 --
Depreciation and depletion 200 192 187
Deferred taxes 10 17 17
Unremitted earnings from
financial services (121) (127) (111)
Receivables (74) (11) 13
Inventories (4) 2 (15)
Accounts payable and
accrued expenses 42 (16) (12)
Change in net assets of
discontinued operations 23 63 34
Other (5) 12 (13)
------- ------- -------
247 246 151
------- ------- -------
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures for
property, plant and equipment (178) (157) (213)
Proceeds from sale of
discontinued operations 576 -- --
Proceeds from sale of
property and equipment 55 6 52
Acquisitions, net of cash
acquired, and joint ventures (48) (121) (31)
Capital contributions to
financial services (279) (44) (25)
Dividends from
financial services 70 44 275
------- ------- -------
196 (272) 58
------- ------- -------
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt 312 319 36
Payments of debt (560) (175) (125)
Purchase of stock for treasury (100) (48) (59)
Cash dividends paid
to shareholders (71) (71) (71)
Other 12 3 9
------- ------- -------
(407) 28 (210)
------- ------- -------
Net increase (decrease) in
cash and cash equivalents 36 2 (1)
Cash and cash equivalents
at beginning of year 15 13 14
------- ------- -------
Cash and cash equivalents
at end of year $ 51 $ 15 $ 13
======= ======= =======
</TABLE>
See the notes to the Parent Company summarized financial statements.
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, real estate
and insurance brokerage 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 the Temple-Inland Inc.
consolidated financial statements and the Temple-Inland Financial Services
summarized financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market.
Cost of inventories amounting to $85 million at year end 1999 and $78 million
at year end 1998 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 $21 million and $2
million higher than reported at year end 1999 and 1998, 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>
49
<PAGE> 14
PARENT COMPANY
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 AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective with the beginning of the year 1998, start-up costs are expensed as
incurred instead of being deferred and amortized over a five-year period. The
cumulative effect of applying this change was $3 million, net of tax benefit of
$2 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.
NOTE B - Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
At year end 1999 1998
- ------------- -------- --------
(in millions)
<S> <C> <C>
Commercial paper, other
short-term borrowings,
and borrowings under bank
credit agreements -- Average
interest rate was 5.71% in 1999
and 5.75% in 1998 $ -- $ 264
9.0% Notes Payable due 2001 200 200
8.125% to 8.38% Notes Payable due 2006 100 100
7.25% Notes Payable due 2004 100 100
8.25% Debentures due 2022 150 150
6.75% Notes Payable due 2009 300 --
Private placement debt --
6.59% to 7.31% Notes due
1998 through 2007 188 258
Term Note due 2002 --
Average interest rate was 5.44% in 1999
and 5.81% in 1998 -- 200
Revenue Bonds due 2007 through 2028 --
Average interest rate was 4.58% in 1999
and 4.05% in 1998 119 119
Other indebtedness due through 2006 --
Average interest rate was 5.96% in 1999
and 6.30% in 1998 97 112
-------- --------
1,254 1,503
LESS:
Current portion of long-term debt (1) (2)
-------- --------
$ 1,253 $ 1,501
======== ========
</TABLE>
At year end 1999, the Parent Company had credit agreements with banks
totaling $560 million with final maturities at various dates in 2001 and 2002
that support commercial paper and other short-term borrowings. In June 1998, the
company filed a shelf registration statement to issue up to $500 million in debt
securities, of which $300 million were issued in the first quarter of 1999.
Current maturities of debt totaling $79 million are classified as long-term debt
in accordance with the company's intent and ability to
50
<PAGE> 15
PARENT COMPANY
refinance such obligations on a long-term basis. On December 29, 1999, proceeds
from the sale of the bleached paperboard operation were used to pay off the $200
million term note due 2002 and $309 million of short-term borrowings.
Maturities of the Parent Company's long-term debt during the next five years
are as follows (in millions): 2000 -- $80; 2001 -- $202; 2002 -- $56; 2003 --
$62; and 2004 -- $101.
Interest on funds borrowed during the construction period on certain assets
is capitalized. Capitalized interest in 1999, 1998 and 1997 was $2 million, $1
million and $2 million, respectively, and is netted against interest expense.
Parent Company interest paid during 1999, 1998 and 1997 was $117 million, $101
million and $105 million, respectively.
NOTE C - Special Charge
During the fourth quarter of 1998, the Parent Company recorded a special
charge of $47 million. The charge included $13 million related to work force
reductions in the Paper Group, $24 million related to asset impairments
principally related to the Paper Group's Argentine box plant, and $10 million of
asset impairments related to the Building Products Group.
The work force reductions affected approximately 250 employees, half of whom
accepted an early retirement offer in December 1998. The remaining work force
reductions were made during 1999. Of the $13 million charge for work force
reductions, which included termination benefits associated with the early
retirement offer and severance amounts for the involuntary terminations,
substantially all was paid in 1999.
During the second quarter of 1999, the company sold its Argentine box plant
for an amount that approximated its adjusted carrying value. The sale proceeds
included $1 million in cash and $11 million in promissory notes. The promissory
notes were subsequently sold with recourse. In addition, the company expects to
collect $8 million of working capital and other items over the next two years.
The company does not believe that any issues arising from the resolution of
these matters will have a material adverse effect on its operations or financial
position.
Of the $34 million in asset impairments provided for in 1998, $20 million was
for the Argentine box plant, $8 million was for manufacturing assets abandoned
in 1998 and $6 million was for property and equipment that is still in use.
NOTE D - Discontinued Operations
During the third quarter of 1999, the company decided to discontinue its
bleached paperboard operation. Accordingly, the results of the bleached
paperboard operation have been classified as discontinued operations, and prior
periods have been restated. The bleached paperboard mill was sold in December
1999 for approximately $658 million, which included $576 million in cash and the
assumption of $82 million of debt. The eucalyptus fiber project in Mexico, which
was to be a source of hardwood to the bleached paperboard mill, is expected to
be sold during 2000.
Information related to the discontinued operations follows:
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ------- ------- -------
(in millions)
<S> <C> <C> <C>
Revenues $ 381 $ 376 $ 369
Loss from operations (21) (21) (8)
Loss on disposal (71) -- --
</TABLE>
Interest expense of $28 million per year was allocated to the discontinued
operations based on debt allocated to the operations. The loss from operations
is net of income tax benefits of $13 million in 1999, $13 million in 1998 and $5
million in 1997.
The loss on disposal is net of income tax benefits of $44 million. Included
in the loss on disposal are $2 million of estimated operating losses of the
eucalyptus fiber project through the anticipated date of disposal.
In connection with the sale of the bleached paperboard mill, the company has
agreed, subject to certain limitations, to indemnify the purchaser from certain
liabilities and contingencies associated with the company's operation and
ownership of the mill. The company does not believe that the resolution of these
matters will have a material adverse effect on its operations or financial
position.
NOTE E - Commitments
Subsidiaries of the Parent Company lease timberlands, equipment and
facilities under operating lease agreements. Future minimum rental commitments,
exclusive of related expenses, under non-cancelable operating leases having a
remaining term in excess of one year are as follows (in millions): 2000 -- $31;
2001 -- $26; 2002 -- $20; 2003 -- $17; 2004 -- $16; 2005 and thereafter -- $250.
Total rent expense was $34 million, $30 million and $29 million during 1999,
1998 and 1997, respectively.
In connection with its joint venture operations, the Parent Company has
guaranteed certain obligations or issued standby letters of credit aggregating
$123 million at year end 1999.
The Parent Company has unconditional purchase obligations, principally for
timber, aggregating $56 million at year end 1999.
51
<PAGE> 16
FINANCIAL SERVICES GROUP
SUMMARIZED STATEMENTS OF INCOME
FINANCIAL SERVICES GROUP
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ------ ------ ------
(in millions)
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable and mortgage
loans held for sale $ 705 $ 584 $ 526
Mortgage-backed and other
securities available-for-sale 78 77 62
Mortgage-backed and other
securities held-to-maturity 48 73 99
Other earning assets 5 4 22
------ ------ ------
Total interest income 836 738 709
------ ------ ------
INTEREST EXPENSE
Deposits 379 357 331
Borrowed funds 158 137 157
------ ------ ------
Total interest expense 537 494 488
------ ------ ------
NET INTEREST INCOME 299 244 221
Provision for loan losses 38 1 (2)
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 261 243 223
------ ------ ------
NONINTEREST INCOME
Loan origination, marketing
and servicing fees, net 115 135 105
Other 165 163 109
------ ------ ------
Total noninterest income 280 298 214
------ ------ ------
NONINTEREST EXPENSE
Compensation and benefits 166 174 134
Other 222 199 164
------ ------ ------
Total noninterest expense 388 373 298
------ ------ ------
INCOME BEFORE TAXES
AND MINORITY INTEREST 153 168 139
Minority interest in income
of consolidated subsidiary (15) (14) (7)
------ ------ ------
INCOME BEFORE TAXES 138 154 132
Taxes on income 17 27 21
------ ------ ------
NET INCOME $ 121 $ 127 $ 111
====== ====== ======
</TABLE>
See the notes to the Financial Services Group summarized financial statements.
52
<PAGE> 17
FINANCIAL SERVICES GROUP
SUMMARIZED BALANCE SHEETS
FINANCIAL SERVICES GROUP
<TABLE>
<CAPTION>
At year end 1999 1998
- ------------- ---------- ----------
(in millions)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 233 $ 229
Mortgage loans held for sale 252 621
Loans receivable, net of allowance
for loan losses of $113 in 1999
and $87 in 1998 9,296 8,101
Mortgage-backed and other
securities available-for-sale 1,431 1,071
Mortgage-backed and other
securities held-to-maturity 1,061 1,414
Other assets 1,048 940
---------- ----------
TOTAL ASSETS $ 13,321 $ 12,376
========== ==========
LIABILITIES
Deposits $ 9,027 $ 7,338
Federal Home Loan Bank advances 2,403 3,221
Other borrowings 212 210
Other liabilities 430 674
Stock issued by subsidiary 226 225
---------- ----------
TOTAL LIABILITIES 12,298 11,668
---------- ----------
SHAREHOLDERS' EQUITY 1,023 708
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 13,321 $ 12,376
========== ==========
</TABLE>
See the notes to the Financial Services Group summarized financial statements.
SUMMARIZED STATEMENTS OF CASH FLOWS
FINANCIAL SERVICES GROUP
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 121 $ 127 $ 111
Adjustments to reconcile net income to net cash:
Amortization, depreciation and accretion 62 108 43
Mortgage loans held for sale 369 (183) (99)
Collections and remittances on loans serviced
for others, net (251) 129 193
Other 82 (86) (61)
---------- ---------- ----------
383 95 187
---------- ---------- ----------
CASH PROVIDED BY (USED FOR) INVESTMENTS
Purchases of securities available-for-sale (294) (208) (121)
Maturities of securities available-for-sale 279 300 210
Sales of securities available-for-sale 145 53 844
Maturities and redemptions of securities
held-to-maturity 351 349 308
Loans originated or acquired,
net of principal collected on loans (1,163) (1,852) (1,084)
Sales of loans 299 16 29
Acquisitions, net of cash acquired
of $29 in 1999 (108) -- (13)
Capital expenditures (26) (39) (18)
Other (17) 12 (1)
---------- ---------- ----------
(534) (1,369) 154
---------- ---------- ----------
CASH PROVIDED BY (USED FOR) FINANCING
Net increase (decrease) in deposits 808 (36) 128
Securities sold under repurchase agreements
and short-term borrowings, net (121) 788 (609)
Additions to debt 35 770 411
Payments of debt (775) (251) (204)
Sale of subsidiary stock 1 75 150
Capital contributions from Parent Company 279 44 25
Dividends paid to Parent Company (70) (44) (275)
Other (2) (18) (6)
---------- ---------- ----------
155 1,328 (380)
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 4 54 (39)
Cash and cash equivalents at beginning of year 229 175 214
---------- ---------- ----------
Cash and cash equivalents at end of year $ 233 $ 229 $ 175
========== ========== ==========
</TABLE>
See the notes to the Financial Services Group summarized financial statements.
53
<PAGE> 18
FINANCIAL SERVICES GROUP
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 and insurance
brokerage 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 the Temple-Inland Inc. (the company) 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 value 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. Interest on loans receivable is credited to income as
earned. The accrual of interest ceases when collection of principal or interest
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.
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 borrowers' 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 specific allowances for criticized graded loans, general
allowances for pass graded loans and an unallocated allowance based on analysis
of other environmental factors.
Specific 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. These allowance percentages are based in part
on estimated cash flows to be received on the loans or estimated market values
of the underlying collateral. 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 unallocated allowance for inherent loan losses is determined based on
management's assessment of general economic conditions, as well as specific
economic factors in individual markets. The evaluation of the appropriate level
of unallocated allowance considers current risk factors that may not be
reflected in historical trends used to determine the allowance on criticized and
pass graded loans. These factors may include inherent delays in obtaining
information regarding a borrower's financial condition or changes in their
unique business conditions; the judgmental nature of individual loan
evaluations, collateral assessments and the interpretation of economic trends;
volatility of economic or customer-specific conditions affecting the
identification and estimation of losses for larger, non-homogeneous loans; and
the sensitivity of assumptions used to establish general allowances for
homogeneous groups of loans.
MORTGAGE-BACKED AND OTHER SECURITIES
The group determines the appropriate classification of mortgage-backed and
other securities at the time of purchase and confirms the designation of these
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 any such assets be sold, gains and losses are recognized
based on the specific-identification method.
54
<PAGE> 19
FINANCIAL SERVICES GROUP
DERIVATIVE FINANCIAL INSTRUMENTS
The operations of Guaranty Federal Bank, F.S.B. (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. 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. 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.
REAL ESTATE
Real estate consists primarily of land and commercial properties held for
development and sale, although certain properties are held 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, size,
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, exceed fair value, impairment is
recognized through a valuation allowance.
Amortization expense and changes to the valuation allowance are included in
loan origination, marketing and servicing fees, net, in the summarized
statements of income.
FEDERAL INCOME TAXES
The group is included in the consolidated income tax return filed by the
Parent Company. Under an agreement with the Parent 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 October 26, 1999, Guaranty signed a definitive agreement to acquire all of
the outstanding stock of American Finance Group, Inc. (AFG), a company engaged
in industrial and commercial equipment leasing and financing. At December 31,
1999, AFG had total assets (primarily financing leases, loans and equipment
under operating leases) of approximately $188 million and total liabilities
(primarily debt) of approximately $157 million. The transaction is expected to
close in the first quarter of 2000, with an anticipated purchase price of
approximately $32 million in cash.
On June 29, 1999, the group acquired all of the outstanding stock of HF
Bancorp, Inc., the parent company of Hemet Federal Savings & Loan Association
(Hemet), and merged the operations of Hemet into Guaranty. Total assets and
liabilities of Hemet at acquisition were approximately $1.2 billion (primarily
loans and securities) and $1.1 billion (primarily deposits), respectively. At
closing, the group paid approximately $119 million in cash for all of the
outstanding stock of HF Bancorp, Inc. The excess of the purchase price over the
fair value of the identifiable net assets acquired of approximately $39 million
is being amortized on the straight-line method over 25 years.
On June 11, 1999, Guaranty, through a wholly owned subsidiary, acquired the
assets of Fidelity Funding Financial Group, Inc. (Fidelity) for $18 million in
cash. Fidelity, an asset-based lending operation, had assets (primarily loans)
of approximately $111 million. The excess of the purchase price over the fair
value of the identifiable net assets acquired of approximately $18 million is
being amortized on the straight-line method over 10 years.
On June 27, 1997, Temple-Inland Inc. 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, Temple-Inland Inc. issued approximately 1.6 million
shares of common stock valued at $96 million and paid approximately $47 million
in cash. The excess of purchase price over the fair value of identifiable net
assets acquired of approximately $63 million is being amortized on the
straight-line method over 25 years.
55
<PAGE> 20
FINANCIAL SERVICES GROUP
Effective May 31, 1997, TIMC acquired 100 percent of the common stock of
Knutson Mortgage Corporation, a corporation engaged in mortgage banking
activities, for approximately $15 million in cash. This transaction increased
the production branch network by a total of 34 branches and the principal
balance of the loan servicing portfolio by approximately $6.4 billion.
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
The outstanding principal balances of loans receivable consisted of the
following:
<TABLE>
<CAPTION>
At year end 1999 1998
- ------------- ---------- ----------
(in millions)
<S> <C> <C>
Real estate mortgage $ 3,763 $ 4,105
Construction and development 3,253 2,210
Commercial and business 1,265 1,031
Consumer and other 1,121 827
Premiums, discounts and deferred fees, net 7 15
---------- ----------
9,409 8,188
LESS:
Allowance for loan losses (113) (87)
---------- ----------
$ 9,296 $ 8,101
========== ==========
</TABLE>
Real estate mortgages are primarily single-family adjustable-rate loans
secured by properties located throughout the United States, primarily in
California and Texas. 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. Commercial and business loans include working capital, equipment
financing, and other business loans primarily in Texas. Consumer and other loans
include a variety of products and are primarily secured by real estate and
automobiles.
At year end 1999, the group had unfunded commitments on outstanding loans
totaling approximately $4.2 billion. In addition, at year end 1999, the group
had issued letters of credit totaling approximately $105 million. The amount to
be ultimately funded is uncertain.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- -------- -------- --------
(in millions)
<S> <C> <C> <C>
Balance, beginning of year $ 87 $ 91 $ 69
Provision for loan losses 38 1 (2)
Additions related to acquisitions
and bulk purchases of loans 12 -- 30
Charge-offs, net of recoveries (24) (5) (6)
-------- -------- --------
Balance, end of year $ 113 $ 87 $ 91
======== ======== ========
</TABLE>
NOTE D - Mortgage-Backed and Other Securities
The amortized cost and fair values of mortgage-backed and other securities
consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
At year end 1999 Cost Gains Losses Value
- ---------------- ---------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
Mortgage-backed securities:
FNMA certificates $ 963 $ 2 $ (15) $ 950
FHLMC certificates 84 -- (1) 83
GNMA certificates 96 -- -- 96
Collateralized mortgage
obligations 120 -- (3) 117
Private issuer pass-
through securities 12 -- (2) 10
---------- ---------- ---------- ----------
1,275 2 (21) 1,256
Debt securities:
U.S. Government 7 -- -- 7
Corporate 2 -- -- 2
Equity securities,
primarily Federal Home
Loan Bank stock 166 -- -- 166
---------- ---------- ---------- ----------
$ 1,450 $ 2 $ (21) $ 1,431
========== ========== ========== ==========
HELD-TO-MATURITY
Mortgage-backed securities:
FNMA certificates $ 647 $ -- $ (31) $ 616
FHLMC certificates 125 -- (6) 119
Collateralized mortgage
obligations 131 -- (6) 125
Private issuer pass-
through securities 158 -- (9) 149
---------- ---------- ---------- ----------
$ 1,061 $ -- $ (52) $ 1,009
========== ========== ========== ==========
</TABLE>
56
<PAGE> 21
FINANCIAL SERVICES GROUP
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
At year end 1998 Cost Gains Losses Value
- ---------------- --------- ---------- ---------- -------
(in millions)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
Mortgage-backed securities:
FNMA certificates $ 752 $ 7 $ (2) $ 757
FHLMC certificates 2 -- -- 2
Collateralized mortgage
obligations 120 -- -- 120
Private issuer pass-
through securities 15 -- (2) 13
------- ------- ------- -------
889 7 (4) 892
Debt securities:
Corporate 3 -- -- 3
Equity securities,
primarily Federal Home
Loan Bank stock 176 -- -- 176
------- ------- ------- -------
$ 1,068 $ 7 $ (4) $ 1,071
======= ======= ======= =======
HELD-TO-MATURITY
Mortgage-backed securities:
FNMA certificates $ 782 $ -- $ (18) $ 764
FHLMC certificates 158 -- (4) 154
Collateralized mortgage
obligations 184 -- (6) 178
Private issuer pass-
through securities 290 -- (8) 282
------- ------- ------- -------
$ 1,414 $ -- $ (36) $ 1,378
======= ======= ======= =======
</TABLE>
The amortized cost and estimated fair value by maturity of mortgage-backed
and other securities are shown in the following table. Securities are classified
according to their contractual maturities without consideration of principal
amortization, potential prepayments or call options. Accordingly, actual
maturities may differ from contractual maturities.
<TABLE>
<CAPTION>
Amortized Fair
At year end 1999 Cost Value
- ---------------- --------- -------
(in millions)
<S> <C> <C>
Due in 1 year or less $ 1 $ 1
Due after 1 year through 5 years 5 3
Due after 5 years through 10 years 147 143
Due after 10 years 2,358 2,293
------ ------
Total mortgage-backed and other securities $2,511 $2,440
====== ======
</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 other securities are guaranteed directly or
indirectly by the U.S. government or its agencies. Other mortgage-backed
securities that 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 $217 million, $164 million and $962 million of mortgage
loans previously held in the loan portfolio during 1999, 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 $601 million and $657 million in such securities at year end 1999 and 1998,
respectively.
NOTE E - Deposits
Deposits consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
Average Average
Stated Stated
Rate Amount Rate Amount
------ ------ ------- ------
<S> <C> <C> <C> <C>
(in millions)
Noninterest bearing demand $ 329 $ 152
Interest bearing demand 3.46% 2,035 2.08% 1,135
Savings deposits 1.96% 214 2.21% 207
Time deposits 5.36% 6,449 5.39% 5,844
----- ------ ------ ------
$9,027 $7,338
====== ======
</TABLE>
Scheduled maturities of time deposits at year end 1999 are as follows:
<TABLE>
<CAPTION>
$100,000 Less Than
or More $100,000 Total
-------- --------- ------
(in millions)
<S> <C> <C> <C>
3 months or less $ 280 $1,280 $1,560
Over 3 months through 6 months 242 1,264 1,506
Over 6 months through 12 months 230 1,162 1,392
Over 12 months 355 1,636 1,991
------ ------ ------
$1,107 $5,342 $6,449
====== ====== ======
</TABLE>
At year end 1999, time deposits maturity dates were as follows (in millions):
2000 -- $4,458; 2001 -- $1,452; 2002 -- $360; 2003 -- $107; 2004 -- $68; 2005
and thereafter -- $4.
57
<PAGE> 22
FINANCIAL SERVICES GROUP
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>
For the year: 1999 1998
- ------------- ------ -------
(in millions)
<S> <C> <C>
Average daily balance $ 112 $ 349
Maximum month-end balance $ 223 $ 1,255
====== =======
</TABLE>
There were no securities sold under repurchase agreements outstanding at year
end 1999 or 1998.
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 deposit at the FHLB. The weighted average interest rate of FHLB
advances was 5.75 percent and 5.09 percent at year end 1999 and 1998,
respectively. At year end 1999, the advances had maturity dates as follows (in
millions): 2000 -- $2,276; 2001 -- $115; and 2003 -- $12.
NOTE H - Other Borrowings
Other borrowings, which represent borrowings of non-savings bank entities,
consisted of the following:
<TABLE>
<CAPTION>
At year end 1999 1998
- ------------- ---- ----
(in millions)
<S> <C> <C>
Long-term debt with an average rate of
6.75% and 7.47% during 1999 and 1998,
respectively, due through 2001 $175 $170
Long-term debt at various rates which
approximate prime, secured primarily
by real estate 37 40
---- ----
$212 $210
==== ====
</TABLE>
At year end 1999, a non-savings bank subsidiary had a $210 million credit
facility that expires in 2001, with $35 million remaining unused.
At year end 1999, maturities of other borrowings are as follows (in
millions): 2000 -- $2; 2001 -- $176; 2002 -- $2; 2003 -- $1; 2004 -- $1; 2005
and thereafter -- $30.
NOTE I - Preferred Stock Issued by Subsidiary
In May 1997, Guaranty Preferred Capital Corporation (GPCC), a 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. Within 10 years after issuance, 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 in May 1998.
NOTE J - Mortgage Loan Servicing
The group services mortgage loans that are owned primarily by independent
investors. The group serviced approximately 241,400 and 256,300 mortgage loans
aggregating $22.2 billion and $22.9 billion as of year end 1999 and 1998,
respectively.
The group is required to advance from group 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. A reserve has been
established for unrecoverable advances. Market risk is assumed related to
disposing of certain foreclosed VA loans. No significant losses were incurred
during 1999, 1998 or 1997 in connection with this risk.
Capitalized mortgage loan servicing rights, net of accumulated amortization,
were as follows:
<TABLE>
<CAPTION>
Purchased Originated
Loan Loan
Servicing Servicing
For the year 1999 Rights Rights Total
- ----------------- --------- ---------- -----
(in millions)
<S> <C> <C> <C>
Balance, beginning of year $ 142 $ 89 $ 231
Additions 42 55 97
Amortization expense (29) (20) (49)
Sales -- (11) (11)
----- ----- -----
Subtotal $ 155 $ 113 268
Valuation allowance (1)
-----
Balance, end of year $ 267
=====
For the year 1998
(in millions)
Balance, beginning of year $ 159 $ 42 $ 201
Additions 47 71 118
Amortization expense (40) (16) (56)
Sales (24) (8) (32)
----- ----- -----
Subtotal $ 142 $ 89 231
Valuation allowance (17)
-----
Balance, end of year $ 214
=====
</TABLE>
58
<PAGE> 23
FINANCIAL SERVICES GROUP
Amortization expense related to mortgage loan servicing rights totaled $49
million, $56 million and $22 million for 1999, 1998 and 1997, respectively. The
valuation allowance was increased $17 million in 1998 by a charge to operations
and reduced $16 million in 1999 by a credit to operations. There was no other
activity in the valuation allowance during 1999, 1998 or 1997.
During 1998, the group recognized a $28 million gain in connection with the
sale of servicing rights on mortgage loans with approximately $4.5 billion in
outstanding principal balance, $1.3 billion of which was not transferred until
1999.
The estimated fair value of the capitalized mortgage servicing rights at year
end 1999 was approximately $329 million. Fair value was determined utilizing
market-driven assumptions for prepayment speeds, discount rates and other
variables.
NOTE K - Interest Rate Risk Management
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 generated interest payments to Guaranty as
the variable rate based on various Constant Maturity Swap (CMS) indices fell
below the average strike rate of 5.25 percent. The interest rate collar
agreements incorporated a floor from which Guaranty received payments as the CMS
indices fell below the average strike rate of 5.02 percent and a cap that
required Guaranty to pay as the CMS indices exceeded the average strike rate of
5.60 percent. These agreements matured in 1999 and were not renewed.
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 $291 million and
$319 million at December 31, 1999 and 1998, respectively, Guaranty
simultaneously purchased and sold caps whereby it receives interest if the
variable rate based on FHLB Eleventh District Cost of Funds (EDCOF) Index (4.77
percent at year end 1999) exceeds an average strike rate of 8.81 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. This agreement matures in 2004.
The amounts subject to credit risk are the streams of payments receivable by
Guaranty under the terms of the contracts and not the notional amounts used to
express the principal amounts underlying these transactions. Guaranty minimizes
its exposure to credit risk by entering into contracts with major U.S.
securities firms.
NOTE L - Commitments
The group leases equipment and facilities under various operating lease
agreements. Future minimum rental payments, net of related sublease income and
exclusive of related expenses, under non-cancelable operating leases with a
remaining term in excess of one year are as follows (in millions): 2000 -- $11;
2001 -- $7; 2002 -- $6; 2003 -- $5; 2004 -- $4; 2005 and thereafter -- $8.
Total rent expense under these lease agreements was $14 million, $15 million
and $14 million for 1999, 1998 and 1997, respectively.
At year end 1999, the group had commitments to originate or purchase loans
totaling approximately $1.1 billion and commitments to sell loans of
approximately $298 million. To the extent mortgage loans at the appropriate
rates are not available to fulfill the sales commitments, the group is subject
to market risk resulting from interest rate fluctuations.
NOTE M - Regulatory Capital Matters
Guaranty is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly 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
following table) of total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to adjusted tangible assets. Management believes, at year end
1999, Guaranty met all its capital adequacy requirements.
59
<PAGE> 24
FINANCIAL SERVICES GROUP
At year end 1999, the most recent notification from regulators categorized
Guaranty as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," Guaranty must
maintain minimum total risk-based, Tier 1 (Core) risk-based and Tier 1 (Core)
leverage capital ratios as set forth in the table. Guaranty's actual capital
amounts and ratios are also presented. No amounts were deducted from capital for
interest-rate risk at year end 1999 or 1998.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
------------- ------------------------------ ---------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- -------------- --------------- ---------------- ----------------
(dollars in millions)
At year end 1999:
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based Ratio
(Risk-based capital / Total risk-weight assets) $1,139 10.33% > or = to $882 > or = to 8.00% > or = to $1,102 > or = to 10.00%
Tier 1 (Core) Risk-Based Ratio
(Core capital / Total risk-weight assets) $1,058 9.60% > or = to $441 > or = to 4.00% > or = to $ 661 > or = to 6.00%
Tier 1 (Core) Leverage Ratio
(Core capital / Adjusted tangible assets) $1,058 8.22% > or = to $515 > or = to 4.00% > or = to $ 643 > or = to 5.00%
Tangible Ratio
(Tangible equity / Tangible assets) $1,058 8.22% > or = to $257 > or = to 2.00% Not applicable
At year end 1998:
Total Risk-Based Ratio
(Risk-based capital / Total risk-weight assets) $ 829 10.17% > or = to $652 > or = to 8.00% > or = to $ 815 > or = to 10.00%
Tier 1 (Core) Risk-Based Ratio
(Core capital / Total risk-weight assets) $ 756 9.27% > or = to $326 > or = to 4.00% > or = to $ 489 > or = to 6.00%
Tier 1 (Core) Leverage Ratio
(Core capital / Adjusted tangible assets) $ 756 6.31% > or = to $479 > or = to 4.00% > or = to $ 599 > or = to 5.00%
Tangible Ratio
(Tangible equity / Tangible assets) $ 756 6.31% > or = to $240 > or = to 2.00% Not applicable
------ ----- -------------- --------------- ---------------------------------
</TABLE>
60
<PAGE> 25
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
TEMPLE-INLAND INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------------------------------ ------- ------- -------
(in millions, except per share data)
<S> <C> <C> <C>
REVENUES
Manufacturing $ 2,566 $ 2,255 $ 2,311
Financial Services 1,116 1,036 923
------- ------- -------
3,682 3,291 3,234
------- ------- -------
COSTS AND EXPENSES
Manufacturing 2,319 2,132 2,259
Special charge -- 47 --
Financial Services 978 882 791
------- ------- -------
3,297 3,061 3,050
------- ------- -------
OPERATING INCOME 385 230 184
Parent Company
interest - net (95) (78) (82)
Other 16 6 6
------- ------- -------
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES 306 158 108
Taxes on income 115 70 49
------- ------- -------
INCOME FROM
CONTINUING OPERATIONS 191 88 59
Discontinued operations (92) (21) (8)
------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 99 67 51
Cumulative effect of
accounting change -- (3) --
------- ------- -------
NET INCOME $ 99 $ 64 $ 51
======= ======= =======
EARNINGS PER SHARE
Basic:
Income from
continuing operations $ 3.45 $ 1.60 $ 1.05
Discontinued operations (1.66) (0.38) (0.14)
Cumulative effect of
accounting change -- (0.06) --
------- ------- -------
NET INCOME $ 1.79 $ 1.16 $ 0.91
======= ======= =======
Diluted:
Income from
continuing operations $ 3.43 $ 1.59 $ 1.04
Discontinued operations (1.65) (0.38) (0.14)
Cumulative effect of
accounting change -- (0.06) --
------- ------- -------
NET INCOME $ 1.78 $ 1.15 $ 0.90
======= ======= =======
</TABLE>
See the notes to the consolidated financial statements.
61
<PAGE> 26
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMPLE-INLAND INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ------- ------- -------
(in millions)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 99 $ 64 $ 51
Adjustments to reconcile net income to net cash:
Loss on disposal of discontinued operations 77 -- --
Special charge -- 47 --
Cumulative effect of accounting change -- 3 --
Depreciation and depletion 217 206 200
Amortization of goodwill 8 7 6
Deferred taxes 14 18 20
Amortization and accretion on financial instruments 40 90 26
Mortgage loans held for sale 369 (183) (99)
Receivables (74) (11) 13
Inventories (4) 2 (15)
Accounts payable and accrued expenses 42 (16) (12)
Collections and remittances on loans serviced for others, net (251) 129 193
Change in net assets of discontinued operations 23 63 34
Other 70 (78) (79)
------- ------- -------
630 341 338
------- ------- -------
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures on property, plant and equipment (204) (196) (231)
Proceeds from sale of discontinued operations 576 -- --
Proceeds from sale of property and equipment 55 28 53
Purchases of securities available-for-sale (294) (208) (121)
Maturities of securities available-for-sale 279 300 210
Proceeds from sale of securities available-for-sale 145 53 844
Maturities and redemptions of securities held-to-maturity 351 349 308
Loans originated or acquired, net of principal collected on loans (1,163) (1,852) (1,084)
Proceeds from sale of loans 299 16 29
Acquisitions, net of cash acquired, and joint ventures (156) (121) (44)
Other (17) (10) (2)
------- ------- -------
(129) (1,641) (38)
------- ------- -------
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt 347 1,089 447
Payments of debt (1,335) (426) (329)
Securities sold under repurchase agreements and short-term borrowings, net (121) 788 (609)
Net increase (decrease) in deposits 808 (36) 128
Purchase of stock for treasury (100) (48) (59)
Cash dividends paid to shareholders (71) (71) (71)
Proceeds from sale of subsidiary preferred stock 1 75 150
Other 10 (15) 3
------- ------- -------
(461) 1,356 (340)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 40 56 (40)
Cash and cash equivalents at beginning of year 244 188 228
------- ------- -------
Cash and cash equivalents at end of year $ 284 $ 244 $ 188
======= ======= =======
</TABLE>
See the notes to the consolidated financial statements.
62
<PAGE> 27
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS
Temple-Inland Inc. and Subsidiaries
<TABLE>
<CAPTION>
Parent Financial
At year end 1999 Company Services Consolidated
- ---------------- -------- -------- ---=--------
(in millions)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 51 $ 233 $ 284
Mortgage loans held for sale -- 252 252
Loans receivable -- 9,296 9,296
Mortgage-backed and other
securities available-for-sale -- 1,431 1,431
Mortgage-backed and other
securities held-to-maturity -- 1,061 1,061
Trade and other receivables 328 -- 319
Inventories 287 -- 287
Property and equipment 2,052 145 2,197
Other assets 200 903 1,059
Investment in
Financial Services 1,023 -- --
-------- -------- --------
TOTAL ASSETS $ 3,941 $ 13,321 $ 16,186
======== ======== ========
LIABILITIES
Deposits $ -- $ 9,027 $ 9,027
Federal Home Loan
Bank advances -- 2,403 2,403
Other liabilities 392 430 799
Long-term debt 1,253 212 1,465
Deferred income taxes 226 -- 196
Postretirement benefits 143 -- 143
Stock issued by subsidiary -- 226 226
-------- -------- --------
TOTAL LIABILITIES $ 2,014 $ 12,298 14,259
-------- -------- --------
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 61
Additional paid-in capital 364
Accumulated other comprehensive income (loss) (31)
Retained earnings 1,838
--------
2,232
Cost of shares held in the treasury: 7,177,592 shares (305)
--------
TOTAL SHAREHOLDERS' EQUITY 1,927
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,186
========
</TABLE>
<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 other
securities available-for-sale -- 1,071 1,071
Mortgage-backed and other
securities held-to-maturity -- 1,414 1,414
Trade and other receivables 264 -- 257
Inventories 283 -- 283
Net assets of
discontinued operations 677 -- 677
Property and equipment 2,109 129 2,238
Other assets 188 811 962
Investment in
Financial Services 708 -- --
-------- -------- --------
TOTAL ASSETS $ 4,244 $ 12,376 $ 15,868
======== ======== ========
LIABILITIES
Deposits $ -- $ 7,338 $ 7,338
Federal Home Loan
Bank advances -- 3,221 3,221
Other liabilities 334 674 988
Long-term debt 1,501 210 1,711
Deferred income taxes 266 -- 242
Postretirement benefits 145 -- 145
Stock issued by subsidiary -- 225 225
-------- -------- --------
TOTAL LIABILITIES $ 2,246 $ 11,668 13,870
-------- -------- --------
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 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 $ 15,868
========
</TABLE>
See the notes to the consolidated financial statements
63
<PAGE> 28
CONSOLIDATED FINANCIAL STATEMENTS
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 1996 $ 61 $ 305 $ (24) $ 1,837 $ (164) $ 2,015
======= ===== ===== ======= ======= =======
Comprehensive Income
Net income -- -- -- 51 -- 51
Other comprehensive income:
Unrealized gains on securities -- -- 4 -- -- 4
-------
Total comprehensive income 55
-------
Dividends paid on common stock - $1.28 per share -- -- -- (71) -- (71)
Stock issued for acquisition - 1,613,546 shares -- 48 -- -- 48 96
Stock issued for stock plans - 253,075 shares -- 3 -- -- 6 9
Stock acquired 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 -- -- 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 acquired for treasury - 850,558 shares -- -- -- -- (48) (48)
------- ----- ----- ------- ------- -------
BALANCE AT YEAR END 1998 61 357 (17) 1,810 (213) 1,998
======= ===== ===== ======= ======= =======
Comprehensive Income
Net income -- -- -- 99 -- 99
Other comprehensive income:
Unrealized gains on securities -- -- (15) -- -- (15)
Foreign currency translation adjustment -- -- 1 -- -- 1
-------
Total comprehensive income 85
-------
Dividends paid on common stock - $1.28 per share -- -- -- (71) -- (71)
Stock issued for stock plans - 256,599 shares -- 7 -- -- 8 15
Stock acquired for treasury - 1,649,052 shares -- -- -- -- (100) (100)
------- ----- ----- ------- ------- -------
BALANCE AT YEAR END 1999 $ 61 $ 364 $ (31) $ 1,838 $ (305) $ 1,927
======= ===== ===== ======= ======= =======
</TABLE>
See the notes to the consolidated financial statements.
64
<PAGE> 29
CONSOLIDATED FINANCIAL STATEMENTS
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 a 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, and 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 on assets held for use 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.
CAPITALIZED SOFTWARE
The company capitalizes purchased software costs, as well as the direct
costs, both internal and external, associated with software developed for
internal use. These costs are amortized using the straight-line method over
estimated useful lives of three to seven years.
NEW ACCOUNTING PRONOUNCEMENTS
The company will be required to adopt Statement of Financial Accounting
Standards No. 133, Accounting for Derivatives Instruments and Hedging
Activities, beginning 2001. This statement will require derivative positions to
be recognized in the balance sheet at fair value. The company has not yet
determined the effect on earnings or financial position of adopting this
statement.
65
<PAGE> 30
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Taxes on Income
Taxes on income from continuing operations consisted of the following:
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ---- ---- ----
(in millions)
<S> <C> <C> <C>
CURRENT TAX PROVISION:
U.S. Federal $ 89 $ 38 $ 24
State and other 12 10 3
---- ---- ----
101 48 27
---- ---- ----
DEFERRED TAX PROVISION:
U.S. Federal 14 21 17
State and other -- 1 5
---- ---- ----
14 22 22
---- ---- ----
PROVISION FOR INCOME TAXES $115 $ 70 $ 49
==== ==== ====
</TABLE>
Earnings or losses from continuing operations consisted of the following:
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------- ---- ---- ----
(in millions)
<S> <C> <C> <C>
EARNINGS (LOSSES):
U.S $311 $189 $117
Non-U.S (5) (31) (9)
---- ---- ----
$306 $158 $108
==== ==== ====
</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 1999 1998 1997
- ------------- ---- ---- ----
(in millions)
<S> <C> <C> <C>
Taxes on income
at statutory rate $107 $ 56 $ 38
State, net of federal benefit 8 6 5
Foreign losses and
taxes not benefited 3 6 3
Sale of foreign subsidiary (7) -- --
Goodwill 2 1 4
Other 2 1 (1)
---- ---- ----
$115 $ 70 $ 49
==== ==== ====
</TABLE>
Significant components of the company's consolidated deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
At year end 1999 1998
- ------------- ----- -----
(in millions)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Depreciation $ 254 $ 400
Timber and timberlands 37 40
Pensions 26 28
Other 34 69
----- -----
Total deferred tax liabilities 351 537
----- -----
DEFERRED TAX ASSETS:
Alternative minimum tax credits 185 293
Net operating loss carryforwards 12 31
OPEB obligations 56 56
Other 56 74
----- -----
Total deferred tax assets 309 454
VALUATION ALLOWANCE (154) (159)
----- -----
Net deferred tax liability $ 196 $ 242
===== =====
</TABLE>
The valuation allowance represents accruals for deductions that are uncertain
and accordingly have not been recognized for financial reporting purposes. The
decrease in the valuation allowance is primarily the result of the sale of a
foreign subsidiary.
Current income tax payments, net of refunds received, were $52 million, $39
million and $21 million during 1999, 1998 and 1997, respectively.
The company has domestic net operating loss carryforwards of $3 million that
expire in 2005. In addition, the company has foreign net operating loss
carryforwards of $16 million that expire from the year 2005 through the year
2010, and $16 million that may be carried forward indefinitely. Alternative
minimum tax credits may be carried forward indefinitely. In accordance with
generally accepted accounting principles, the company has not provided deferred
taxes on approximately $31 million of pre-1988 tax bad debt reserves.
As a result of the sale of a foreign subsidiary in 1999, the company realized
a $7 million one-time decrease in tax expense.
The Internal Revenue Service (IRS) has concluded its examination of the
company's consolidated tax returns for the years 1987 through 1992. As a result
of this examination, the company has agreed to pay approximately $36 million in
taxes and interest for those years, of which $19 million was paid in 1999. The
IRS is currently examining the company's consolidated tax returns for the years
1993 through 1996. The resolution of these examinations is not expected to have
a material adverse impact on the company's financial condition or results of
operations.
66
<PAGE> 31
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Fair Value of Financial Instruments
The carrying amounts and the estimated fair values of financial instruments
were as follows:
<TABLE>
<CAPTION>
At year end 1999 1998
- ------------- ------------------- -------------------
(in millions)
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Loans receivable $9,296 $9,248 $8,101 $8,126
Mortgage-backed and
other securities 2,492 2,440 2,485 2,448
------ ------ ------ ------
FINANCIAL LIABILITIES:
Deposits 9,027 8,987 7,338 7,369
FHLB advances 2,403 2,403 3,221 3,223
Total debt 1,466 1,443 1,713 1,769
------ ------ ------ ------
OFF-BALANCE-SHEET INSTRUMENTS:
Interest rate contracts -- 2 -- (5)
Commitments to extend credit -- 2 -- (2)
------ ------ ------ ------
</TABLE>
Differences between fair value and carrying amounts 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, trade payables, 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 other 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.
The Parent Company has guaranteed certain joint venture obligations
principally related to variable-rate debt instruments at year end 1999. It is
not practicable to estimate the fair value of these guarantees.
67
<PAGE> 32
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Shareholder Rights Plan
The company has a 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 company's 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 company's 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 nonunion hourly employees provide benefits based on
compensation and years of service, while union hourly plans are based on
negotiated benefits and years of service. The company's policy is to fund
amounts on an actuarial basis to accumulate assets sufficient to meet the
benefits to be paid in accordance with the requirements of ERISA. Contributions
to the plans are made to trusts for the benefit of plan participants.
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:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
At year end 1999 1998 1999 1998
- ------------- ----- ----- ----- -----
(in millions)
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year $ 597 $ 507 $ 133 $ 115
Service cost 17 15 3 3
Interest cost 39 37 8 8
Change in assumptions (50) 15 -- --
Plan amendments 3 2 (2) --
Actuarial (gain) loss 4 44 (21) 12
Termination benefits -- 6 -- 1
Benefits paid (28) (29) (11) (7)
Retiree contributions -- -- 1 1
----- ----- ----- -----
Benefit obligation at end
of year $ 582 $ 597 $ 111 $ 133
===== ===== ===== =====
Fair value of plan assets
at beginning of year $ 616 $ 628 $ -- $ --
Actual return 122 15 -- --
Benefits paid (28) (28) -- --
Contributions 1 1 -- --
----- ----- ----- -----
Fair value of plan assets
at end of year $ 711 $ 616 $ -- $ --
===== ===== ===== =====
Funded status $ 129 $ 19 $(111) $ (133)
Unrecognized net loss (gain) (69) 41 (24) (3)
Prior service costs not yet
recognized 5 3 (8) (9)
Unrecognized net transition
obligation (asset) (4) (8) -- --
Additional minimum liability (4) (5) -- --
----- ----- ----- -----
Prepaid (accrued) benefit cost $ 57 $ 50 $(143) $(145)
===== ===== ===== =====
</TABLE>
The net prepaid benefit cost of $57 million at year end 1999 is comprised of
pension plans with prepaid benefit cost totaling $78 million and accrued benefit
liability totaling $21 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 1999 1998
- ------------- ---- ----
(in millions)
<S> <C> <C>
Projected benefit obligation $ 16 $236
Accumulated benefit obligation $ 14 $221
Fair value of plan assets $ -- $202
==== ====
</TABLE>
68
<PAGE> 33
CONSOLIDATED FINANCIAL STATEMENTS
Significant assumptions used for the employee benefit plans follow:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
For the year 1999 1998 1997 1999 1998 1997
- ------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions:
Discount rate 7.50% 6.75% 7.50% 7.50% 6.75% 7.50%
Expected long-term rate of return 9.00% 9.00% 9.00% -- -- --
Rate of compensation increase 4.75% 4.00% 4.75% -- -- --
==== ==== ==== ==== ==== ====
</TABLE>
For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. 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 1999 1998 1997 1999 1998 1997
- ------------- ---- ---- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
CHARGES (CREDITS)
Service cost - benefits
earned during the period $ 17 $ 15 $ 14 $ 3 $ 3 $ 3
Interest cost on projected benefit obligation 39 37 36 8 8 8
Expected return on plan assets (54) (56) (47) -- -- --
Net amortization and deferral (3) (5) (5) (1) (1) (1)
---- ---- ---- ---- ---- ----
Net periodic benefit cost (credit)a $ (1) $ (9) $ (2) $ 10 $ 10 $ 10
==== ==== ==== ==== ==== ====
</TABLE>
(a)In addition to the above, in 1999 the company recognized an additional $4
million credit relating to pension benefits and a $2 million credit relating to
postretirement benefits for curtailments resulting from the sale of the bleached
paperboard operation. In 1998, the company recognized an additional $3 million
credit relating to pension benefits and a $1 million credit 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 one 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
-------------- --------------
(in millions)
<S> <C> <C>
Effect on total of service and
interest cost components in 1999 $ 1 $(1)
Effect on postretirement benefit
obligation at year end 1999 $10 $(8)
=== ===
</TABLE>
69
<PAGE> 34
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Stock Option Plans
The company has established stock option plans for key employees and
directors. The plans provide for the granting of nonqualified stock options
and/or incentive stock options and, prior to 1994, the plans permitted the grant
of stock appreciation rights with all or part of any options so granted. Options
granted after 1995 have primarily a 10-year term and become exercisable in steps
from one to five years.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
For the year 1999 1998 1997
- ------------ ------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning
of year 1,892 $ 51 1,430 $ 47 1,626 $ 45
Granted 455 61 654 56 201 56
Exercised (315) 47 (139) 38 (303) 41
Forfeited (58) 53 (53) 50 (94) 50
------- -------- ------- -------- ------- --------
Outstanding
end of year 1,974 $ 53 1,892 $ 51 1,430 $ 47
======= ======== ======= ======== ======= ========
Weighted average
fair value of options
granted during the year $23.06 $17.68 $18.24
=================== =================== ===================
</TABLE>
Options exercisable at year end were (in thousands): 1999 -- 691; 1998 --
737; and 1997 -- 658. The weighted average exercise price for options
exercisable was $49 per share and $48 per share for year end 1999 and 1998,
respectively. Exercise prices for options outstanding at year end 1999 range
from $12 to $75. The weighted average remaining contractual life of these
options is eight years. An additional 1,727,156 and 2,182,000 shares of common
stock were available for grants at year end 1999 and 1998, 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 1999, awards of
111,342 shares of restricted common stock were outstanding.
The fair value of the options granted in 1999, 1998 and 1997 was estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
For the year 1999 1998 1997
- ------------ --------- --------- ----------
<S> <C> <C> <C>
Expected dividend yield 2.0% 2.0% 2.1%
Expected stock price
volatility 29.4% 28.7% 27.3%
Risk-free interest rate 6.8% 4.8% 5.6%
Expected life of options 8.0 years 7.0 years 8.0 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 $96
million and $1.73 per diluted share in 1999; $62 million and $1.10 per diluted
share in 1998; and $49 million and $0.87 per diluted share in 1997. 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>
For the year 1999 1998 1997
- ------------ ------ ------ ------
(in millions)
<S> <C> <C> <C>
Numerator for basic and
diluted earnings per share:
Income from continuing
operations $ 191 $ 88 $ 59
Discontinued operations (92) (21) (8)
Cumulative effect of
accounting change -- (3) --
------ ------ ------
Net income $ 99 $ 64 $ 51
====== ====== ======
Denominator for basic
earnings per share:
Weighted average
shares outstanding 55.6 55.8 56.0
Dilutive effect of
stock options 0.2 0.1 0.2
------ ------ ------
Denominator for diluted
earnings per share 55.8 55.9 56.2
====== ====== ======
</TABLE>
70
<PAGE> 35
CONSOLIDATED FINANCIAL STATEMENTS
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
----------- --------------- ---------- ----------
(in millions)
<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)
---------- ---------- ---------- ----------
Unrealized gains on available-
for-sale securities -- (22) -- (22)
Deferred taxes relating to
unrealized gains on available-
for-sale securities -- 7 -- 7
Foreign currency translation
adjustment 1 -- -- 1
---------- ---------- ---------- ----------
Balance at year end 1999 $ (16) $ (13) $ (2) $ (31)
========== ========== ========== ==========
</TABLE>
NOTE 9 - 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 have a
material adverse effect on its operations or financial position 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. 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 engages in mortgage banking, real estate and insurance
brokerage activities. All prior periods have been restated to reflect the
discontinued operations of the bleached paperboard operation.
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, special charges and discontinued
operations.
Refer to the tables on the following page.
71
<PAGE> 36
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Corporate
Building Financial and Other
For the year or at year end 1999: Paper Products Services Eliminations Total
- --------------------------------- ---------- ---------- ---------- ------------ ----------
(in millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 1,798 $ 768 $ 1,116 $ -- $ 3,682
Depreciation, depletion and amortization 138 59 22 6 225
Operating income 103 174 138 (30) 385
Financial Services, net interest income -- -- 299 -- 299
Total assets 1,676 1,090 13,321 99 16,186
Investment in equity method investees 8 27 14 -- 49
Capital expenditures 80 92 26 6 204
========== ========== ========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
For the year or at year end 1998:
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 1,642 $ 613 $ 1,036 $ -- $ 3,291
Depreciation, depletion and amortization 138 53 18 4 213
Operating income 39 112 154 (75)(a) 230
Financial Services, net interest income -- -- 244 -- 244
Total assets 1,728 1,043 12,376 721(b) 15,868
Investment in equity method investees 8 29 3 -- 40
Capital expenditures 79 73 39 5 196
========== ========== ========== ============ ==========
</TABLE>
<TABLE>
For the year or at year end 1997:
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers$ 1,694 $ 617 $ 923 $ -- $ 3,234
Depreciation, depletion and amortization 137 50 16 3 206
Operating income (54) 131 132 (25) 184
Financial Services, net interest income -- -- 221 -- 221
Total assets 1,792 914 10,772 779b 14,257
Investment in equity method investees 7 19 4 -- 30
Capital expenditures 131 69 18 13 231
========== ========== ========== ============ ==========
</TABLE>
(a)Includes a special charge of $47 million, of which $37 million applies to the
paper segment and $10 million applies to the building products segment.
(b)Includes net assets of discontinued operations.
The following table includes revenues and property and equipment based on the
location of the operation:
<TABLE>
<CAPTION>
GEOGRAPHIC INFORMATION 1999 1998 1997
- ---------------------- ------ ------ ------
(in millions)
<S> <C> <C> <C>
For the year:
Revenues from external customers
United States $3,552 $3,181 $3,145
Canada 27 4 --
Mexico 77 64 50
South America 26 42 39
------ ------ ------
Total $3,682 $3,291 $3,234
====== ====== ======
At year end:
Property and equipment
United States $2,090 $2,115 $2,105
Canada 61 56 --
Mexico 28 27 28
South America 18 40 41
------ ------ ------
Total $2,197 $2,238 $2,174
====== ====== ======
</TABLE>
72
<PAGE> 37
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Summary of Quarterly Results of Operations (Unaudited)
Selected quarterly financial results for the years 1999 and 1998 are
summarized below. Quarterly financial results have been restated to reflect
discontinued operations.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions, except per share amounts)
1999
<S> <C> <C> <C> <C>
Total revenues $ 850 $ 904 $ 955 $ 973
Manufacturing net revenues 592 642 668 664
Manufacturing gross profit 101 128 143 142
Financial Services operating
income before taxes 27 34 41 36
Income from continuing operations $ 26 $ 48 $ 60 $ 57
Discontinued operations (7) (7) (80) 2
------- ------- ------- -------
Net income $ 19 $ 41 $ (20) $ 59
------- ------- ------- -------
Earnings per share:
Basic:
Income from continuing operations $ 0.47 $ 0.88 $ 1.07 $ 1.03
Discontinued operations (0.13) (0.14) (1.43) 0.04
------- ------- ------- -------
Net income $ 0.34 $ 0.74 $ (0.36) $ 1.07
------- ------- ------- -------
Diluted:
Income from continuing operations $ 0.46 $ 0.87 $ 1.07 $ 1.03
Discontinued operations (0.13) (0.13) (1.43) 0.04
------- ------- ------- -------
Net income $ 0.33 $ 0.74 $ (0.36) $ 1.07
======= ======= ======= =======
</TABLE>
73
<PAGE> 38
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions, except per share amounts)
1998
<S> <C> <C> <C> <C>
Total revenues $ 837 $ 835 $ 821 $ 798
Manufacturing net revenues 586 576 566 527
Manufacturing gross profit 102 108 95 82
Financial Services operating
income before taxes 37 41 36 40
Income from continuing operations $ 35 $ 39 $ 25 $ (11)(a)
Discontinued operations (9) (4) (1) (7)
Cumulative effect of accounting change (3) -- -- --
------- ------- ------- -------
Net income $ 23 $ 35 $ 24 $ (18)
------- ------- ------- -------
Earnings per share:
Basic:
Income from continuing operations $ 0.62 $ 0.70 $ 0.47 $ (0.20)
Discontinued operations (0.15) (0.08) (0.03) (0.12)
Cumulative effect of accounting change (0.06) -- -- --
------- ------- ------- -------
Net income $ 0.41 $ 0.62 $ 0.44 $ (0.32)
------- ------- ------- -------
Diluted:
Income from continuing operations $ 0.62 $ 0.70 $ 0.47 $ (0.20)
Discontinued operations (0.15) (0.08) (0.03) (0.12)
Cumulative effect of accounting change (0.06) -- -- --
------- ------- ------- -------
Net income $ 0.41 $ 0.62 $ 0.44 $ (0.32)
======= ======= ======= =======
</TABLE>
(a)Includes a pre-tax special charge of $47 million.
74
<PAGE> 39
CONSOLIDATED FINANCIAL STATEMENTS
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/ KENNETH M. JASTROW, II
Kenneth M. Jastrow, II
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 1, 2000, and January 2, 1999, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended January 1, 2000. 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 auditing standards generally
accepted in the United States. 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 1, 2000, and January 2, 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Houston, Texas
January 28, 2000
75
<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 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)
Inland Eastex (Nevada) Inc. (Nevada)
Inland Eastex LP (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 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 Engineered Lumber Products Inc. (Yukon, Canada)
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)
Texas Southeastern Railroad Company (Texas)
Topaz Oil Company (Texas)
<PAGE> 2
EXHIBIT 21
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)
TMF Holding Inc. (Delaware)
Temple-Inland Properties Inc. (Delaware)
Stanford Realty Advisors, Inc. (Delaware)
LIC Investments Inc. (Delaware)
IBHC Inc. (Delaware)
Lumbermen's Investment Corporation (Delaware)
CNB/LIC Investors Ltd. (Texas)
LIC Financial Corporation (Delaware)
LIC Ventures, Inc. (100%)
Onion Creek Wastewater Corporation (Texas)
Olympia Joint Venture (Texas) (50% interest)
Stoneleigh In Spring Creek Limited Partnership (59.0%
interest)
Tampa Palms Apartments, Ltd. (Florida) (69.0% interest)
Town Place Apartment Limited Partnership (69.0% interest)
Town Place Apartment - Phase II Limited Partnership (69.0%
interest)
Turnbury Park Apartments, Ltd. (69.0% interest)
Sunbelt Insurance Company (Texas)
Timberline Insurance Managers, Inc. (Texas)
Premium Acceptance Corporation (Texas)
The Insurance MarketPlace Agency, 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)
TEMPLE-INLAND RESOURCE COMPANY (NEVADA)
<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 28, 2000, included in
the 1999 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 28, 2000, 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 1, 2000,
and our report dated January 28, 2000, with respect to the financial statement
schedule included in this Annual Report (Form 10-K) for the year ended January
1, 2000.
<TABLE>
<CAPTION>
REGISTRATION
STATEMENT NO. PURPOSE
------------- -------
<S> <C>
No. 2-88202 Post-Effective Amendment Number 3 on Form S-8
No. 33-23132 Registration Statement on Form S-8
No. 33-25650 Post-Effective Amendment Number 1 on Form S-8
No. 33-27286 Post-Effective Amendment Number 1 on Form S-8
No. 33-32124 Post-Effective Amendment Number 2 on Form S-8
No. 33-43802 Registration Statement on Form S-8
No. 33-48034 Registration Statement on Form S-8
No. 33-54388 Registration Statement on Form S-8
No. 33-63104 Registration Statement on Form S-8
No. 333-27469 Registration Statement on Form S-8
No. 333-52189 Registration Statement on Form S-3
</TABLE>
/s/ ERNST & YOUNG LLP
Houston, Texas
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
balance sheets and consolidated income statements for Temple-Inland Inc. and
subsidiaries and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 284
<SECURITIES> 0
<RECEIVABLES> 319
<ALLOWANCES> 0
<INVENTORY> 287
<CURRENT-ASSETS> 0
<PP&E> 2,197
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,186
<CURRENT-LIABILITIES> 0
<BONDS> 1,465
0
0
<COMMON> 61
<OTHER-SE> 1,866
<TOTAL-LIABILITY-AND-EQUITY> 16,186
<SALES> 2,566
<TOTAL-REVENUES> 3,682
<CGS> 2,319
<TOTAL-COSTS> 3,297
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> 306
<INCOME-TAX> 115
<INCOME-CONTINUING> 191
<DISCONTINUED> 92
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99
<EPS-BASIC> 1.79
<EPS-DILUTED> 1.78
</TABLE>
